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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION 
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2021
OR
      TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File No.      0-28190
CAMDEN NATIONAL CORPORATION
(Exact name of registrant as specified in its charter)
 
Maine01-0413282
(State or other jurisdiction of(I.R.S. Employer
incorporation or organization)Identification No.)
  
2 ELM STREETCAMDENME04843
(Address of principal executive offices)(Zip Code)
 
Registrant's telephone number, including area code:  (207) 236-8821

Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading Symbol(s)Name of each exchange on which registered
Common Stock, without par valueCACThe NASDAQ Stock Market LLC
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter periods that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
 
Yes x          No ¨
 
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
 
Yes x          No ¨
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
 
Large accelerated filerAccelerated filer
Non-accelerated filerSmaller reporting company
Emerging growth company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨



 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
 
Yes          No
 
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practical date:
Outstanding at July 30, 2021:  Common stock (no par value) 14,951,200 shares.



CAMDEN NATIONAL CORPORATION

 FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 2021
TABLE OF CONTENTS OF INFORMATION REQUIRED IN REPORT
  PAGE
PART I.  FINANCIAL INFORMATION 
ITEM 1.FINANCIAL STATEMENTS 
 Consolidated Statements of Condition (unaudited) - June 30, 2021 and December 31, 2020
 Consolidated Statements of Income (unaudited) - Three and Six Months Ended June 30, 2021 and 2020
 Consolidated Statements of Comprehensive Income (unaudited) - Three and Six Months Ended June 30, 2021 and 2020
 Consolidated Statements of Changes in Shareholders’ Equity (unaudited) - Three and Six Months Ended June 30, 2021 and 2020
 Consolidated Statements of Cash Flows (unaudited) - Six Months Ended June 30, 2021 and 2020
 Notes to the Unaudited Consolidated Financial Statements
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
ITEM 3.QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
ITEM 4.CONTROLS AND PROCEDURES
PART II. OTHER INFORMATION 
ITEM 1.LEGAL PROCEEDINGS
ITEM 1A.RISK FACTORS
ITEM 2.UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
ITEM 3.DEFAULTS UPON SENIOR SECURITIES
ITEM 4.MINE SAFETY DISCLOSURES
ITEM 5.OTHER INFORMATION
ITEM 6.EXHIBITS
SIGNATURES
2


PART I. FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS

CONSOLIDATED STATEMENTS OF CONDITION
(unaudited)
(In thousands, except number of shares)June 30,
 2021
December 31,
 2020
ASSETS  
Cash and due from banks$46,326 $49,524 
Interest-bearing deposits in other banks (including restricted cash)57,407 96,250 
Total cash, cash equivalents and restricted cash103,733 145,774 
Investments:  
Trading securities4,354 4,161 
Available-for-sale securities, at fair value (book value of $1,381,864 and $1,078,474, respectively)
1,399,823 1,115,813 
Held-to-maturity securities, at amortized cost (fair value of $1,397 and $1,411, respectively)
1,294 1,297 
Other investments10,224 11,541 
Total investments1,415,695 1,132,812 
Loans held for sale, at fair value (book value of $14,887 and $40,499, respectively)
15,140 41,557 
Loans3,285,916 3,219,822 
Less: allowance for credit losses on loans(32,060)(37,865)
Net loans3,253,856 3,181,957 
Goodwill94,697 94,697 
Core deposit intangible assets2,516 2,843 
Bank-owned life insurance 96,062 94,877 
Premises and equipment, net39,050 39,884 
Deferred tax assets13,237 11,956 
Other assets118,083 152,388 
Total assets$5,152,069 $4,898,745 
LIABILITIES AND SHAREHOLDERS’ EQUITY  
Liabilities  
Deposits:  
Non-interest checking$1,183,403 $792,550 
Interest checking1,138,273 1,288,575 
Savings and money market1,355,316 1,282,886 
Certificates of deposit334,336 357,666 
Brokered deposits282,786 283,567 
Total deposits4,294,114 4,005,244 
Short-term borrowings170,413 162,439 
Long-term borrowings 25,000 
Subordinated debentures44,331 59,331 
Accrued interest and other liabilities97,663 117,417 
Total liabilities4,606,521 4,369,431 
Commitments and Contingencies
Shareholders’ Equity  
Common stock, no par value: authorized 40,000,000 shares, issued and outstanding 14,951,067 and 14,909,097 shares on June 30, 2021 and December 31, 2020, respectively
132,278 131,072 
Retained earnings404,602 377,502 
Accumulated other comprehensive income:  
Net unrealized gain on available-for-sale debt securities, net of tax14,097 29,310 
Net unrealized loss on cash flow hedging derivative instruments, net of tax(1,826)(4,626)
Net unrecognized loss on postretirement plans, net of tax(3,603)(3,944)
Total accumulated other comprehensive income8,668 20,740 
Total shareholders’ equity545,548 529,314 
Total liabilities and shareholders’ equity$5,152,069 $4,898,745 


The accompanying notes are an integral part of these consolidated financial statements.
3


CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
Three Months Ended
June 30,
Six Months Ended
June 30,
(In thousands, except number of shares and per share data)2021202020212020
Interest Income  
Interest and fees on loans$30,865 $33,120 $61,425 $67,165 
Taxable interest on investments
4,376 4,883 8,205 9,761 
Nontaxable interest on investments763 828 1,491 1,615 
Dividend income102 167 207 335 
Other interest income160 180 326 515 
Total interest income36,266 39,178 71,654 79,391 
Interest Expense    
Interest on deposits1,921 3,392 3,984 10,054 
Interest on borrowings176 359 332 1,197 
Interest on subordinated debentures640 888 1,445 1,775 
Total interest expense2,737 4,639 5,761 13,026 
Net interest income33,529 34,539 65,893 66,365 
(Credit) provision for credit losses(3,403)9,398 (5,359)11,173 
Net interest income after (credit) provision for credit losses36,932 25,141 71,252 55,192 
Non-Interest Income    
Mortgage banking income, net2,598 4,691 9,707 8,225 
Debit card income3,112 2,391 5,848 4,532 
Income from fiduciary services1,707 1,603 3,233 3,105 
Service charges on deposit accounts1,517 1,337 3,056 3,349 
Brokerage and insurance commissions939 622 1,892 1,279 
Bank-owned life insurance591 614 1,185 1,303 
Customer loan swap fees 57  171 
Other income856 745 1,614 1,499 
Total non-interest income11,320 12,060 26,535 23,463 
Non-Interest Expense    
Salaries and employee benefits15,318 13,627 29,840 27,954 
Furniture, equipment and data processing2,947 2,710 5,974 5,500 
Net occupancy costs1,805 1,997 3,756 4,000 
Debit card expense1,074 878 2,060 1,812 
Consulting and professional fees997 1,181 1,860 1,964 
Regulatory assessments487 299 990 461 
Amortization of core deposit intangible assets164 171 328 341 
Other real estate owned and collection (recoveries) costs, net(25)98 (216)199 
Other expenses2,823 2,548 5,897 5,839 
Total non-interest expense25,590 23,509 50,489 48,070 
Income before income tax expense22,662 13,692 47,298 30,585 
Income Tax Expense4,519 2,752 9,415 6,152 
Net Income$18,143 $10,940 $37,883 $24,433 
Per Share Data    
Basic earnings per share$1.21 $0.73 $2.53 $1.62 
Diluted earnings per share$1.21 $0.73 $2.52 $1.62 
Weighted average number of common shares outstanding14,943,486 14,959,851 14,930,017 15,031,525 
Diluted weighted average number of common shares outstanding15,007,471 14,997,611 14,994,138 15,069,132 
Cash dividends declared per share$0.36 $0.33 $0.72 $0.66 







The accompanying notes are an integral part of these consolidated financial statements.  
4


CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(unaudited)
Three Months Ended
June 30,
Six Months Ended
June 30,
(In thousands)2021202020212020
Net Income$18,143 $10,940 $37,883 $24,433 
Other comprehensive income (loss): 
Net change in unrealized gain on available-for-sale securities, net of tax2,296 7,130 (15,213)26,060 
Net change in unrealized loss on cash flow hedging derivatives, net of tax (2,364)

52 

2,800 

(702)
Net change in other comprehensive income for supplemental executive retirement plan and other postretirement benefit plan, net of tax171 133 341 266 
Other comprehensive income (loss)103 7,315 (12,072)25,624 
Comprehensive Income$18,246 $18,255 $25,811 $50,057 
 











































The accompanying notes are an integral part of these consolidated financial statements.
5


CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
(unaudited)
Three Months Ended
 Common StockRetained
Earnings
Accumulated
Other Comprehensive
Income (Loss)
Total Shareholders’
Equity
(In thousands, except number of shares and per share data)
Shares
Outstanding
Amount
Balance at March 31, 202014,951,597 $131,498 $349,141 $12,041 $492,680 
Net income— — 10,940 — 10,940 
Other comprehensive income, net of tax— — — 7,315 7,315 
Stock-based compensation expense— 530 — — 530 
Exercise of stock options and issuance of vested share awards, net of repurchase for tax withholdings
11,444 (47)— — (47)
Cash dividends declared ($0.33 per share)
— — (4,951)— (4,951)
Balance at June 30, 202014,963,041 $131,981 $355,130 $19,356 $506,467 
Balance at March 31, 202114,928,434 $131,695 $391,860 $8,565 $532,120 
Net income— — 18,143 — 18,143 
Other comprehensive income, net of tax— — — 103 103 
Stock-based compensation expense— 811 — — 811 
Exercise of stock options and issuance of vested share awards, net of repurchase for tax withholdings
22,633 (228)— — (228)
Cash dividends declared ($0.36 per share)
— — (5,401)— (5,401)
Balance at June 30, 202114,951,067 $132,278 $404,602 $8,668 $545,548 

Six Months Ended
 Common StockRetained
Earnings
Accumulated Other Comprehensive Income (Loss)Total Shareholders’
Equity
(In thousands, except number of shares and per share data)
Shares
Outstanding
Amount
Balance at December 31, 201915,144,719 $139,103 $340,580 $(6,268)$473,415 
Net income— — 24,433 — 24,433 
Other comprehensive income, net of tax— — — 25,624 25,624 
Stock-based compensation expense— 951 — — 951 
Exercise of stock options and issuance of vested share awards, net of repurchase for tax withholdings
35,353 (100)— — (100)
Common stock repurchased(217,031)(7,973)— — (7,973)
Cash dividends declared ($0.66 per share)
— — (9,883)— (9,883)
Balance at June 30, 202014,963,041 $131,981 $355,130 $19,356 $506,467 
Balance at December 31, 202014,909,097 $131,072 $377,502 $20,740 $529,314 
Net income— — 37,883 — 37,883 
Other comprehensive loss, net of tax— — — (12,072)(12,072)
Stock-based compensation expense— 1,514 — — 1,514 
Exercise of stock options and issuance of vested share awards, net of repurchase for tax withholdings
41,970 (308)— — (308)
Cash dividends declared ($0.72 per share)
— — (10,783)— (10,783)
Balance at June 30, 202114,951,067 $132,278 $404,602 $8,668 $545,548 

















The accompanying notes are an integral part of these consolidated financial statements.
6


CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
Six Months Ended
June 30,
(In thousands)20212020
Operating Activities  
Net Income$37,883 $24,433 
Adjustments to reconcile net income to net cash provided by (used in) operating activities:  
Originations of mortgage loans held for sale(277,778)(194,149)
Proceeds from the sale of mortgage loans312,474 176,250 
Gain on sale of mortgage loans, net of origination costs(9,084)(6,095)
(Credit) provision for credit losses(5,359)11,173 
Depreciation and amortization expense1,826 1,892 
Investment securities amortization and accretion, net3,733 1,755 
Stock-based compensation expense1,514 951 
Amortization of core deposit intangible assets328 341 
Purchase accounting accretion, net(435)(617)
Net decrease (increase) in derivative collateral posted22,090 (30,820)
Decrease (increase) in other assets3,385 (7,789)
(Decrease) increase in other liabilities(6,072)3,188 
Net cash provided by (used in) by operating activities84,505 (19,487)
Investing Activities  
Proceeds from available-for-sale debt securities175,036 108,396 
Purchase of available-for-sale debt securities(482,156)(206,496)
Net increase in loans(66,366)(231,369)
Purchase of Federal Home Loan Bank stock(12)(9,232)
Proceeds from sale of Federal Home Loan Bank stock1,329 7,754 
Purchase of premises and equipment(1,176)(2,261)
Recoveries of previously charged-off loans208 170 
Proceeds from the sale of other real estate owned465  
Net cash used in investing activities(372,672)(333,038)
Financing Activities 
Net increase in deposits288,870 458,624 
Net proceeds from (repayments of) borrowings less than 90 days7,974 (22,811)
Proceeds from Federal Home Loan Bank long-term advances 25,000 
Repayments of Federal Home Loan Bank long-term advances(25,000)(10,000)
Repayment of subordinated debt(15,000) 
Common stock repurchases(11)(7,973)
Exercise of stock options and issuance of restricted stock, net of repurchase for tax withholdings
(308)(100)
Cash dividends paid on common stock(10,323)(9,954)
Finance lease payments(76)(69)
Net cash provided by financing activities246,126 432,717 
Net (decrease) increase in cash, cash equivalents and restricted cash(42,041)80,192 
Cash, cash equivalents, and restricted cash at beginning of period145,774 75,636 
Cash, cash equivalents and restricted cash at end of period$103,733 $155,828 
Supplemental information  
Interest paid$5,874 $13,528 
Income taxes paid10,294 279 
Transfer from premises to other real estate owned204 24 








The accompanying notes are an integral part of these consolidated financial statements.
7


NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 – BASIS OF PRESENTATION
 
The accompanying unaudited consolidated interim financial statements were prepared in accordance with instructions for Form 10-Q and, therefore, do not include all disclosures required by accounting principles generally accepted in the United States of America for complete presentation of financial statements. In the opinion of management, the consolidated financial statements contain all adjustments (consisting only of normal recurring accruals) necessary to present fairly the consolidated statements of condition of Camden National Corporation (the "Company") as of June 30, 2021 and December 31, 2020, the consolidated statements of income for the three and six months ended June 30, 2021 and 2020, the consolidated statements of comprehensive income for the three and six months ended June 30, 2021 and 2020, the consolidated statements of changes in shareholders' equity for the three and six months ended June 30, 2021 and 2020, and the consolidated statements of cash flows for the six months ended June 30, 2021 and 2020. The consolidated financial statements include the accounts of the Company and Camden National Bank (the "Bank"), a wholly-owned subsidiary of the Company (which includes the consolidated accounts of Healthcare Professional Funding Corporation ("HPFC") and Property A, Inc. as of and for the three and six months ended June 30, 2021, and HPFC, Property A, Inc. and Property P, Inc. as of and for the three and six months ended June 30, 2020). All intercompany accounts and transactions have been eliminated in consolidation. Assets held by the Bank in a fiduciary capacity, through Camden National Wealth Management, a division of the Bank, are not assets of the Company and, therefore, are not included in the consolidated statements of condition. The Company also owns 100% of the common stock of Camden Capital Trust A and Union Bankshares Capital Trust I. These entities are unconsolidated subsidiaries of the Company. Certain reclassifications have been made to prior period amounts to conform to the current period presentation. Such reclassifications did not impact net income or shareholders' equity as previously reported. Net income reported for the three and six months ended June 30, 2021, is not necessarily indicative of the results that may be expected for the full year. The information in this report should be read in conjunction with the consolidated financial statements and accompanying notes included in the Company's Annual Report on Form 10-K for the year ended December 31, 2020.

8


The acronyms, abbreviations and definitions identified below are used throughout this Form 10-Q, including Part I. "Financial Information" and Part II. "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 these sections of the Form 10-Q.
AFS:Available-for-saleFRBB:Federal Reserve Bank of Boston
ALCO:Asset/Liability CommitteeGAAP:Generally accepted accounting principles in the United States
ACL:Allowance for credit lossesGDP:Gross domestic product
AOCI:Accumulated other comprehensive income (loss)HPFC:Healthcare Professional Funding Corporation, a wholly-owned subsidiary of Camden National Bank
ASC:Accounting Standards CodificationHTM:Held-to-maturity
ASU:Accounting Standards UpdateIRS:Internal Revenue Service
Bank:Camden National Bank, a wholly-owned subsidiary of Camden National CorporationLGD:Loss given default
BOLI:Bank-owned life insuranceLIBOR:London Interbank Offered Rate
Board ALCO:Board of Directors' Asset/Liability CommitteeLTIP:Long-Term Performance Share Plan
CARES Act:Coronavirus Aid, Relief, and Economic Security Act, signed into law in March 2020 in response to COVID-19Management ALCO:Management Asset/Liability Committee
CCTA:Camden Capital Trust A, an unconsolidated entity formed by Camden National CorporationMBS:Mortgage-backed security
CDs:Certificate of depositsMSPP:Management Stock Purchase Plan
CECL:Current Expected Credit LossesN/A:Not applicable
Company:Camden National CorporationN.M.:Not meaningful
CMO:Collateralized mortgage obligationOCC:Office of the Comptroller of the Currency
CUSIP:Committee on Uniform Securities Identification ProceduresOCI:Other comprehensive income (loss)
DCRP:Defined Contribution Retirement PlanOREO:Other real estate owned
EPS:Earnings per shareOTTI:Other-than-temporary impairment
FASB:Financial Accounting Standards BoardPD:Probability of default
FDIC:Federal Deposit Insurance CorporationSBA:U.S. Small Business Administration
FHLB:Federal Home Loan BankSBA PPPU.S. Small Business Administration Paycheck Protection Program
FHLBB:Federal Home Loan Bank of BostonSERP:Supplemental executive retirement plans
FHLMC:Federal Home Loan Mortgage CorporationTDR:Troubled-debt restructured loan
FNMA:Federal National Mortgage AssociationUBCT:Union Bankshares Capital Trust I, an unconsolidated entity formed by Union Bankshares Company that was subsequently acquired by Camden National Corporation
FRB:Federal Reserve System Board of GovernorsU.S.:United States of America

9


NOTE 2 – RECENT ACCOUNTING PRONOUNCEMENTS

Accounting Standards Adopted in 2021

The Company adopted and updated its accounting policy for the following accounting standards that have been applied to the Company's interim consolidated financial statements for the three and six months ended June 30, 2021:

ASU No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes ("ASU 2019-12"). The FASB issued ASU 2019-12 to simplify the accounting for income taxes by removing certain technical exceptions and by clarifying and amending certain areas. ASU 2019-12 is effective for interim and annual periods beginning after December 15, 2020, and as such the Company adopted effective January 1, 2021. There was no material impact on the Company's consolidated financial statements as a result of adopting ASU 2019-12.

ASU No. 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform ("ASU 2020-04"), as amended by ASU No. 2021-01, Reference Rate Reform (Topic 848) Scope ("ASU 2021-01"). On March 12, 2020, the FASB issued ASU 2020-04, which was subsequently amended by ASU 2021-01. The FASB issued these updates to ease the burden in accounting for the effects of reference rate reform on financial reporting. ASU 2020-04 and ASU 2021-01 contain optional expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform. The Company adopted ASU 2020-04 and ASU 2021-01 effective January 1, 2021, and there was no material impact on the Company's consolidated financial statements as a result of adopting this guidance.

NOTE 3 – INVESTMENTS

Trading Securities

Trading securities are reported on the Company's consolidated statements of condition at fair value. As of June 30, 2021 and December 31, 2020, the fair value of the Company's trading securities were $4.4 million and $4.2 million, respectively. These securities are held in a rabbi trust account and invested in mutual funds. The trading securities will be used for future payments associated with the Company's Executive Deferred Compensation Plan and Director Deferred Compensation Plan.

10


AFS Debt Securities

AFS debt securities are reported on the Company's consolidated statements of condition at fair value. The following table summarizes the amortized cost, estimated fair value, and unrealized gains (losses) of AFS debt securities, as of the dates indicated:
(In thousands)Amortized
Cost
Unrealized
Gains
Unrealized
Losses
Fair
Value
June 30, 2021    
Obligations of U.S. government sponsored enterprises$7,200 $2 $(119)$7,083 
Obligations of states and political subdivisions112,792 6,116 (255)118,653 
Mortgage-backed securities issued or guaranteed by U.S. government-sponsored enterprises829,611 13,290 (3,360)839,541 
Collateralized mortgage obligations issued or guaranteed by U.S. government-sponsored enterprises
423,244 5,782 (3,724)425,302 
Subordinated corporate bonds
9,017 245 (18)9,244 
Total AFS debt securities$1,381,864 $25,435 $(7,476)$1,399,823 
December 31, 2020    
Obligations of states and political subdivisions
$119,608 $7,627 $(115)$127,120 
Mortgage-backed securities issued or guaranteed by U.S. government-sponsored enterprises
547,396 19,796 (574)566,618 
Collateralized mortgage obligations issued or guaranteed by U.S. government-sponsored enterprises
399,937 10,652 (135)410,454 
Subordinated corporate bonds
11,533 186 (98)11,621 
Total AFS debt securities$1,078,474 $38,261 $(922)$1,115,813 

As of June 30, 2021 and December 31, 2020, there was no allowance carried on AFS debt securities in accordance with ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments ("ASU 2016-13").

The net unrealized gains on AFS debt securities reported within AOCI at June 30, 2021, were $14.1 million, net of a deferred tax liability of $3.9 million. The net unrealized gains on AFS investments reported within AOCI at December 31, 2020, were $29.3 million, net of a deferred tax liability of $8.0 million.

For the three and six months ended June 30, 2021 and 2020, the Company did not sell any AFS debt securities.
11



The following table presents the Company's AFS debt securities with gross unrealized losses, for which an ACL has not been recorded, segregated by the length of time the securities have been in a continuous loss position, as of the dates indicated:  
 Less Than 12 Months12 Months or MoreTotal
(In thousands, except number of holdings)
Number of
Holdings
Fair
Value
Unrealized
Losses
Fair
Value
Unrealized
Losses
Fair
Value
Unrealized
Losses
June 30, 2021      
Obligations of U.S. government sponsored enterprises3 $6,081 $(119)$ $ $6,081 $(119)
Obligations of states and political subdivisions2 1,294 (2)2,265 (253)3,559 (255)
Mortgage-backed securities issued or guaranteed by U.S. government-sponsored enterprises
54 329,607 (3,358)297 (2)329,904 (3,360)
Collateralized mortgage obligations issued or guaranteed by U.S. government-sponsored enterprises
42 211,308 (3,665)4,063 (59)215,371 (3,724)
Subordinated corporate bonds
2 1,982 (18)  1,982 (18)
Total AFS debt securities103 $550,272 $(7,162)$6,625 $(314)$556,897 $(7,476)
December 31, 2020      
Obligations of states and political subdivisions
1 $2,404 $(115)$ $ $2,404 $(115)
Mortgage-backed securities issued or guaranteed by U.S. government-sponsored enterprises
15 61,222 (568)980 (6)62,202 (574)
Collateralized mortgage obligations issued or guaranteed by U.S. government-sponsored enterprises9 39,107 (135)  39,107 (135)
Subordinated corporate bonds5 4,902 (98)  4,902 (98)
Total AFS debt securities30 $107,635 $(916)$980 $(6)$108,615 $(922)

For the three and six months ended June 30, 2021 and 2020, the unrealized losses on Company's AFS debt securities have not been recognized within income because management does not intend to sell and it is not more-likely-than-not it will be required to sell any of the AFS debt securities before recovery of its amortized cost basis. Furthermore, the unrealized losses were due to changes in interest rates and other market conditions and not reflective of credit events. The issuers continue to make timely principal and interest payments on the bonds.

At June 30, 2021 and December 31, 2020, total accrued interest receivable on AFS debt securities, which has been excluded from reported amortized cost basis on AFS debt securities, was $3.3 million and $3.1 million respectively and was reported within other assets on the consolidated statements of condition. An allowance was not carried on the accrued interest receivable at either date.
12


The amortized cost and estimated fair values of the Company's AFS debt securities by contractual maturity at June 30, 2021, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Mortgage-related securities are shown in total, as their maturities are highly variable.
(In thousands)Amortized
Cost
Fair
Value
Due in one year or less$3,018 $3,072 
Due after one year through five years4,276 4,641 
Due after five years through ten years74,599 77,814 
Due after ten years47,116 49,453 
Subtotal129,009 134,980 
Mortgage-related securities1,252,855 1,264,843 
Total$1,381,864 1381864000$1,399,823 

HTM Debt Securities

HTM debt securities are reported on the Company's consolidated statements of condition at amortized cost. The following table summarizes the amortized cost, estimated fair value and unrealized gains (losses) of HTM debt securities as of the dates indicated:
(In thousands)Amortized
Cost
Unrealized
Gains
Unrealized
Losses
Fair
Value
March 31, 2021        
Obligations of states and political subdivisions$1,294 $103 $ $1,397 
Total HTM debt securities$1,294 $103 $ $1,397 
December 31, 2020        
Obligations of states and political subdivisions$1,297 $114 $ $1,411 
Total HTM debt securities$1,297 $114 $ $1,411 

As of June 30, 2021 and December 31, 2020, the Company’s HTM debt securities portfolio was made up of three investment grade municipal debt securities, of which two securities also carried credit enhancements. The HTM debt securities portfolio was comprised solely of high credit quality (rated AA or higher) state and municipal obligations. High credit quality state and municipal obligations have a history of zero to near-zero credit loss. As a result, the Company determined that the expected credit loss on its HTM portfolio was immaterial, and therefore, an allowance was not carried on its HTM debt securities at June 30, 2021 or December 31, 2020.

As of June 30, 2021 and December 31, 2020, none of the Company's HTM debt securities were past due or on non-accrual status. For the three and six months ended June 30, 2021 and 2020, the Company did not recognize any interest income on non-accrual HTM debt securities. At June 30, 2021 and December 31, 2020, total accrued interest receivable on HTM debt securities, which has been excluded from reported amortized cost basis on HTM debt securities, was $10,000, and reported within other assets on the consolidated statements of condition. An allowance was not carried on the accrued interest receivable at either date.

13


The amortized cost and estimated fair values of HTM debt securities by contractual maturity at June 30, 2021 are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
(In thousands)Amortized
Cost
Fair
Value
Due in one year or less$ $ 
Due after one year through five years868 933 
Due after five years through ten years426 464 
Due after ten years  
Total$1,294 $1,397 

AFS and HTM Debt Securities Pledged

At June 30, 2021 and December 31, 2020, AFS and HTM debt securities with an amortized cost of $500.8 million and $485.0 million and estimated fair values of $512.9 million and $507.1 million, respectively, were pledged to secure FHLBB advances, public deposits, and securities sold under agreements to repurchase and for other purposes required or permitted by law.

Other Investments

The Company's FHLBB and FRB common stock are reported at cost within other investments on the consolidated statements of condition. The Company evaluates these investments for impairment based on the ultimate recoverability of the par value. The Company did not record any impairment on its FHLBB and FRB stock for the three and six months ended June 30, 2021 and 2020.

The following table summarizes the Company's investment in FHLBB stock and FRBB stock as presented within other investments on the consolidated statements of condition, as of the dates indicated:
(In thousands)June 30,
2021
December 31,
2020
FHLBB$4,850 $6,167 
FRB5,374 5,374 
Total other investments$10,224 $11,541 

14


NOTE 4 – LOANS AND ALLOWANCE FOR CREDIT LOSSES ON LOANS
 
Loans

The composition of the Company’s loan portfolio, excluding residential loans held for sale, was as follows for the dates indicated:
(In thousands)June 30,
2021
December 31,
2020
Commercial Loans:
Commercial real estate - non owner-occupied$1,127,200 $1,097,975 
Commercial real estate - owner-occupied296,697 271,495 
Commercial367,093 381,494 
SBA PPP126,064 135,095 
Total commercial loans1,917,054 1,886,059 
Retail Loans:
Residential real estate1,120,917 1,054,798 
Home equity228,690 258,573 
Consumer19,255 20,392 
Total retail loans1,368,862 1,333,763 
Total loans$3,285,916 $3,219,822 

The loan balances for each portfolio segment presented above are net of their respective unamortized fair value mark discount on acquired loans and net of unamortized loan origination costs for the dates indicated:
(In thousands)June 30,
2021
December 31,
2020
Net unamortized fair value mark discount on acquired loans$(857)$(1,291)
Net unamortized loan (fees) origination costs(1)
(2,012)856 
Total$(2,869)$(435)
(1)    The change in net unamortized loan (fees) origination costs from December 31, 2020 to June 30, 2021, was primarily driven by SBA PPP loan origination fees capitalized during the six months ended June 30, 2021. As of June 30, 2021 and December 31, 2020, unamortized loan fees on originated SBA PPP loans were $5.4 million and $2.2 million, respectively.

The Company's lending activities are primarily conducted in Maine, but also include loan production offices in Massachusetts and New Hampshire. The Company originates single- and multi-family residential loans, commercial real estate loans, business loans, municipal loans and a variety of consumer loans. In addition, the Company makes loans for the construction of residential homes, multi-family properties and commercial real estate properties. The ability and willingness of borrowers to honor their repayment commitments is generally dependent on the level of overall economic activity within the geographic area and the general economy.

Beginning in April 2020, the Company started funding SBA PPP loans issued to qualifying businesses as part of the federal stimulus package issued due to the COVID-19 pandemic. For the six months ended June 30, 2021, the Company originated 1,620 SBA PPP loans totaling $102.2 million to qualifying businesses across our markets in need of financial support due to the COVID-19 pandemic. For the year ended December 31, 2020, the Company originated 3,034 SBA PPP loans totaling $244.8 million. This program provided qualifying businesses a specialized low-interest loan by the U.S. Treasury Department and is administered by the SBA. The PPP provides borrower guarantees for lenders, as well as loan forgiveness incentives for borrowers that utilize the loan proceeds to cover employee compensation-related business operating costs, as well as certain other costs up to pre-established limits.

In the normal course of business, the Bank makes loans to certain officers, directors and their associated companies, under terms that are consistent with the Company's lending policies and regulatory requirements and that do not involve more than the normal risk of collectability or present other unfavorable features. At June 30, 2021 and December 31, 2020, outstanding loans to certain officers, directors and their associated companies was less than 5% of the Company's shareholders' equity.

15


Loan Sales

For the three months ended June 30, 2021 and 2020, the Company sold $110.8 million and $197.8 million, respectively, of fixed rate residential mortgage loans on the secondary market, which resulted in gains on the sale of loans (net of costs) of $2.9 million and $4.6 million, respectively. For the six months ended June 30, 2021 and 2020, the Company sold $303.4 million and $267.0 million, respectively, of fixed rate residential mortgage loans on the secondary market which resulted in gains on the sale of loans (net of costs) of $9.1 million and $6.1 million.

At June 30, 2021 and December 31, 2020, the Company had certain residential mortgage loans with a principal balance of $14.9 million and $40.5 million, respectively, designated as held for sale. The Company has elected the fair value option of accounting for its loans held for sale, and at June 30, 2021 and December 31, 2020, recorded an unrealized gain of $253,000 and $1.1 million, respectively. For the three months ended June 30, 2021 and 2020, the Company recorded an unrealized gain on loans held for sale recorded within mortgage banking income, net, on the Company's consolidated statements of income of $267,000 and $1.3 million, respectively. For the six months ended June 30, 2021 and 2020, the Company recorded an unrealized (loss) gain on loans held for sale recorded within mortgage banking income, net, on the Company's consolidated statements of income of ($804,000) and $742,000, respectively.

The Company has forward delivery commitments with a secondary market investor on each of its loans held for sale at June 30, 2021 and December 31, 2020. Refer to Note 8 for further discussion of the Company's forward delivery commitments.

ACL on Loans

Under CECL, effective January 1, 2020 but applied to interim reporting periods on or after October 1, 2020, the ACL on loans is management's estimate of expected credit losses within its loan portfolio as of each reporting date.

The Board of Directors monitors credit risk through: (i) the Directors' Credit Committee, which reviews large credit exposures, monitors external loan review reports, reviews the lending authority for individual loan officers when required, and has approval authority and responsibility for all matters regarding the loan policy and other credit-related policies, including reviewing and monitoring asset quality trends, and concentration levels; and (ii) the Audit Committee, which has approval authority and oversight responsibility for ACL adequacy and methodology.

Credit Risk Administration and the Credit Risk Policy Committee oversee the Company's systems and procedures to monitor the credit quality of its loan portfolio, conduct a loan review program, and maintain the integrity of the loan rating system. The adequacy of the ACL, including the ACL on loans, is overseen by the Management Provision Committee, which is an internal management committee comprised of various Company executives and senior managers across business lines, including Accounting and Finance, Credit Risk, Compliance, and Commercial and Retail Banking. The Management Provision Committee is further supported by other management-level committees to ensure the adequacy of the ACL. The Management Provision Committee supports the oversight efforts of the director-level committees discussed in the paragraph above and the Board of Directors. The Company's practice is to manage its loan portfolio proactively such that management can identify problem credits early, assess and implement effective work-out strategies, and take charge-offs as promptly as practical. In addition, the Company continuously reassesses its underwriting standards in response to credit risk posed by changes in economic conditions.

For purposes of determining the ACL on loans, the Company disaggregates its loans into portfolio segments. Each portfolio segment possesses unique risk characteristics that are considered when determining the appropriate level of allowance. As of June 30, 2021, the Company's loan portfolio segments, as determined based on the unique risk characteristics of each, include the following:

Commercial Real Estate - Non Owner-Occupied. Non-owner occupied commercial real estate loans are, in substance, all commercial real estate loans that are not categorized by the Company as owner-occupied commercial real estate loans. 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 loans are typically written with amortizing payment structures. Collateral values are determined based upon appraisals and
16


evaluations in accordance with established policy guidelines. Maximum loan-to-value ratios at origination are governed by established policy and regulatory guidelines.

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. Commercial real estate loans are typically written with amortizing payment structures. Collateral values are determined based upon appraisals and evaluations in accordance with established policy guidelines. Maximum loan-to-value ratios at origination are governed by established policy and regulatory guidelines.

Commercial. Commercial loans consist of revolving and term loan obligations extended to business and corporate enterprises for the purpose of financing working capital and/or capital investment. Collateral generally consists of pledges of business assets including, but not limited to, accounts receivable, inventory, plant and equipment, and/or real estate, if applicable. Commercial loans are primarily paid by the operating cash flow of the borrower. Commercial loans may be secured or unsecured.

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 during the year ended December 31, 2020 have terms of two or five years, and those made for the six months ended June 30, 2021 have a term of five years. SBA PPP loans 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.

Residential Real Estate. Residential real estate loans held in the Company's loan portfolio are made to borrowers who demonstrate the ability to make scheduled payments with full consideration to underwriting factors. Borrower qualifications include favorable credit history combined with supportive income requirements and combined loan-to-value ratios within established policy guidelines. Collateral consists of mortgage liens on one- to four-family residences, including for investment purposes.

Home Equity. Home equity loans and lines of credit are made to qualified individuals and are secured by senior or junior mortgage liens on owner-occupied one- to four-family homes, condominiums, or vacation homes. The home equity loan has a fixed rate and is billed as equal payments comprised of principal and interest. The home equity line of credit has a variable rate and is billed as interest-only payments during the draw period. At the end of the draw period, the home equity line of credit is billed as a percentage of the principal balance plus all accrued interest. Borrower qualifications include favorable credit history combined with supportive income requirements and combined loan-to-value ratios within established policy guidelines.

Consumer. Consumer loan products include personal lines of credit and amortizing loans made to qualified individuals for various purposes such as education, auto loans, debt consolidation, personal expenses or overdraft protection. Borrower qualifications include favorable credit history combined with supportive income and collateral requirements within established policy guidelines. Consumer loans may be secured or unsecured.

17


The following table presents the activity in the ACL on loans, as reported under CECL, for the periods indicated:
Commercial Real Estate
(In thousands)Non Owner-OccupiedOwner- OccupiedCommercialSBA PPPResidential Real EstateHome EquityConsumerTotal
At or For The Three Months Ended June 30, 2021
Beginning balance, March 31, 2021$22,473 $2,548 $5,170 $87 $3,093 $2,176 $228 $35,775 
Loans charged off  (259) (35)(107)(19)(420)
Recoveries 3 67  70  17 157 
(Credit) provision for loan losses(2,896)(35)(636)(21)77 (4)63 (3,452)
Ending balance, June 30, 2021$19,577 $2,516 $4,342 $66 $3,205 $2,065 $289 $32,060 
At or For The Six Months Ended June 30, 2021
Beginning balance, December 31, 2020$21,778 $2,832 $6,703 $69 $3,474 $2,616 $393 $37,865 
Loans charged off  (406) (88)(145)(68)(707)
Recoveries 5 110  70  23 208 
(Credit) provision for loan losses(2,201)(321)(2,065)(3)(251)(406)(59)(5,306)
Ending balance, June 30, 2021$19,577 $2,516 $4,342 $66 $3,205 $2,065 $289 $32,060 
At or For The Year Ended December 31, 2020
Beginning balance, December 31, 2019$10,924 $1,490 $3,985 $ $5,842 $2,423 $507 $25,171 
Impact of adopting CECL(1)
(668)(90)1,548  (1,129)792 (220)233 
Loans charged off(82)(21)(1,130) (121)(317)(167)(1,838)
Recoveries107 13 572  292 33 67 1,084 
Provision (credit) for loan losses11,497 1,440 1,728 69 (1,410)(315)206 13,215 
Ending balance, December 31, 2020$21,778 $2,832 $6,703 $69 $3,474 $2,616 $393 $37,865 
(1)    The Company adopted ASU 2016-13, "CECL," effective January 1, 2020 but applied to reporting periods on or after October 1, 2020.

During the six months ended June 30, 2021, there were no significant changes in our CECL modeling methodology to determine the ACL on loans at June 30, 2021. The significant key assumptions used with the ACL on loans calculation at June 30, 2021 and December 31, 2020, included: (i) Company-specific macroeconomic factors (i.e., loss drivers), (ii) our forecast period and reversion speed, (iii) prepayment speeds, and (iv) various qualitative factors.

The ACL on loans, as presented and accounted for under the CECL methodology, decreased $5.8 million during the six months ended June 30, 2021, to $32.1 million as of June 30, 2021. The decrease in the ACL on loans was driven by an overall improvement in management's forecast of macroeconomic factors over a one-year forecast period.

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The following table presents activity in the ACL on loans and select loan information by portfolio segment, under the incurred loss methodology, for the periods indicated:
(In thousands)
Commercial
Real Estate(1)
CommercialSBA PPPResidential
Real Estate
Home
Equity
ConsumerTotal
At or For The Three and Six Months Ended June 30, 2020
Allowance for the three months ended:      
Beginning balance$13,374 $4,297 $ $5,897 $2,480 $473 $26,521 
Loans charged off(21)(420)  (17)(26)(484)
Recoveries3 63  21  15 102 
Provision5,030 909 113 2,685 621 42 9,400 
Ending balance$18,386 $4,849 $113 $8,603 $3,084 $504 $35,539 
Allowance for the six months ended:
Beginning balance$12,414 $3,985 $ $5,842 $2,423 $507 $25,171 
Loans charged off(71)(673) (96)(51)(83)(974)
Recoveries7 116  23 4 20 170 
Provision(1)
6,036 1,421 113 2,834 708 60 11,172 
Ending balance$18,386 $4,849 $113 $8,603 $3,084 $504 $35,539 
Allowance balance attributable to loans:      
Individually evaluated for impairment$35 $ $ $338 $89 $ $462 
Collectively evaluated for impairment18,351 4,849 113 8,265 2,995 504 35,077 
Total ending allowance$18,386 $4,849 $113 $8,603 $3,084 $504 $35,539 
Loans:
      
Individually evaluated for impairment$461 $179 $ $3,153 $370 $ $4,163 
Collectively evaluated for impairment1,310,524 428,007 218,803 1,051,180 290,445 22,919 3,321,878 
Total ending loans balance
$1,310,985 $428,186 $218,803 $1,054,333 $290,815 $22,919 $3,326,041 
(1)    Includes both commercial real estate - non owner-occupied and owner-occupied loan segments.

The Company focuses on maintaining a well-balanced and diversified loan portfolio. Despite such efforts, it is recognized that credit concentrations may occasionally emerge as a result of economic conditions, changes in local demand, natural loan growth and runoff. To identify credit concentrations effectively, all commercial and commercial real estate loans are assigned Standard Industrial Classification codes, North American Industry Classification System codes, and state and county codes. Shifts in portfolio concentrations are monitored. As of June 30, 2021, the Company's total exposure to the lessors of nonresidential buildings' industry was 14% of total loans and 32% of total commercial real estate loans. There were no other industry exposures exceeding 10% of the Company's total loan portfolio as of June 30, 2021.

COVID-19 Loan Deferral Program

In response to the COVID-19 pandemic, the Company worked with businesses and consumers through the year ended 2020 to provide temporary debt payment relief that generally provided principal and/or interest payment deferrals for a period of 180 days or less. All loans that were granted temporary payment relief during the year ended 2020 complied with the terms of the CARES Act, which was signed into law in March 2020, and bank regulator guidance, and thus were not individually assessed, designated or accounted for as TDRs.

The Company did not issue or extend temporary debt relief to customers due to COVID-19 hardships during the six months ended June 30, 2021. However, the Company may do so on case-by-case under bank regulator guidance or the Consolidated Appropriations Act of 2021, which extended the provisions within the CARES Act that provided TDR accounting relief to the earlier of: (i) December 31, 2021 or (ii) the date that is 60 days after the date the national emergency concerning the COVID-19 pandemic declared by the President on March 13, 2020 terminates.

At June 30, 2021, the Company did not have any loans operating under temporary short-term payment deferral arrangements due to being impacted by the COVID-19 pandemic, compared to $26.5 million at December 31, 2020. The majority of these loans have returned to normal payment status or have since fully paid-off. Of those loans that were previously operating under a short-term deferral arrangement, $1.3 million were classified as non-accrual and $536,000 were 30-89 days past due as of June 30, 2021.
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Credit Quality Indicators

To further identify loans with similar risk profiles, the Company categorizes each portfolio segment into classes by credit risk characteristic and applies a credit quality indicator to each portfolio segment. The indicators for commercial real estate - non owner-occupied and owner-occupied, commercial and residential real estate portfolio segments are represented by Grades 1 through 10 as outlined below. In general, risk ratings are adjusted periodically throughout the year as updated analysis and review warrants. This process may include, but is not limited to, annual credit and loan reviews, periodic reviews of loan performance metrics, such as delinquency rates, and quarterly reviews of adversely risk rated loans. The Company uses the following definitions when assessing grades for the purpose of evaluating the risk and adequacy of the ACL on loans:

Grade 1 through 6 — Grades 1 through 6 represent groups of loans that are not subject to adverse criticism as defined in regulatory guidance. Loans in these groups exhibit characteristics that represent low to moderate risks, which is measured using a variety of credit risk criteria, such as cash flow coverage, debt service coverage, balance sheet leverage, liquidity, management experience, industry position, prevailing economic conditions, support from secondary sources of repayment and other credit factors that may be relevant to a specific loan. In general, these loans are supported by properly margined collateral and guarantees of principal parties.
Grade 7 — Loans with potential weakness (Special Mention). Loans in this category are currently protected based on collateral and repayment capacity and do not constitute undesirable credit risk, but have potential weakness that may result in deterioration of the repayment process at some future date. This classification is used if a negative trend is evident in the obligor’s financial situation. Special mention loans do not sufficiently expose the Company to warrant adverse classification.
Grade 8 — Loans with definite weakness (Substandard). Loans classified as substandard are inadequately protected by the current sound worth and paying capacity of the obligor or by collateral pledged. Borrowers experience difficulty in meeting debt repayment requirements. Deterioration is sufficient to cause the Company to look to the sale of collateral.
Grade 9 — Loans with potential loss (Doubtful). Loans classified as doubtful have all the weaknesses inherent in the substandard grade with the added characteristic that the weaknesses make collection or liquidation of the loan in full highly questionable and improbable. The possibility of some loss is extremely high, but because of specific pending factors that may work to the advantage and strengthening of the asset, its classification as an estimated loss is deferred until its more exact status may be determined.
Grade 10 — Loans with definite loss (Loss). Loans classified as loss are considered uncollectible. The loss classification does not mean that the asset has absolutely no recovery or salvage value, but rather that it is not practical or desirable to defer writing off the asset because recovery and collection time may be protracted.

Loans that were granted temporary debt relief due to the COVID-19 pandemic were not automatically downgraded into lower credit risk ratings.

The Company periodically reassesses asset quality indicators to reflect appropriately the risk composition of the Company’s loan portfolio. Home equity and consumer loans are not individually risk rated, but rather analyzed as groups taking into account delinquency rates and other economic conditions which may affect the ability of borrowers to meet debt service requirements, including interest rates and energy costs. Performing loans include loans that are current and loans that are past due less than 90 days. Loans that are past due over 90 days and non-accrual loans, including TDRs, are considered non-performing.

20


Based on the most recent analysis performed, the risk category of loans by portfolio segment by vintage, reported under the CECL methodology, was as follows as of the dates indicated:
(In thousands)20212020201920182017PriorRevolving Loans
Amortized Cost Basis
Revolving Loans
Converted to Term
Total
As of June 30, 2021
Commercial real estate - non owner-occupied      
Risk rating
Pass (Grades 1-6)$97,672 $195,046 $208,784 $126,420 $104,904 $337,990 $ $ $1,070,816 
Special mention (Grade 7)97 7,337 1,490  4,342 3,924   17,190 
Substandard (Grade 8)216 1,693 224 10,112 397 26,552   39,194 
Doubtful (Grade 9)         
Total commercial real estate - non owner-occupied97,985 204,076 210,498 136,532 109,643 368,466   1,127,200 
Commercial real estate - owner-occupied      
Risk rating
Pass (Grades 1-6)44,361 34,774 32,982 46,093 49,000 81,397   288,607 
Special mention (Grade 7)   3,458  1,444   4,902 
Substandard (Grade 8)  71  1,829 1,288   3,188 
Doubtful (Grade 9)         
Total commercial real estate - owner occupied44,361 34,774 33,053 49,551 50,829 84,129   296,697 
Commercial
      
Risk rating
Pass (Grades 1-6)49,954 51,324 57,039 34,303 17,277 37,592 83,722 31,487 362,698 
Special mention (Grade 7)  26 21 192 469  23 731 
Substandard (Grade 8) 323 966 325 121 1,342 24 563 3,664 
Doubtful (Grade 9)         
Total commercial49,954 51,647 58,031 34,649 17,590 39,403 83,746 32,073 367,093 
SBA PPP
Risk rating
Pass (Grades 1-6)96,794 29,270       126,064 
Special mention (Grade 7)         
Substandard (Grade 8)         
Doubtful (Grade 9)         
Total SBA PPP96,794 29,270       126,064 
Residential Real Estate      
Risk rating
Pass (Grades 1-6)261,642 316,822 136,803 83,561 59,003 257,481 882  1,116,194 
Special mention (Grade 7)    236   236 
Substandard (Grade 8)   144  4,343   4,487 
Doubtful (Grade 9)         
Total residential real estate261,642 316,822 136,803 83,705 59,003 262,060 882  1,120,917 
Home equity
      
Risk rating
Performing339 639 7,838 13,805 2,967 14,278 174,564 12,864 227,294 
Non-performing   42  196 818 340 1,396 
Total home equity
339 639 7,838 13,847 2,967 14,474 175,382 13,204 228,690 
Consumer
      
Risk rating
Performing4,364 4,873 4,664 1,859 890 1,998 579  19,227 
Non-performing 9 16   3   28 
Total consumer
4,364 4,882 4,680 1,859 890 2,001 579  19,255 
Total Loans$555,439 $642,110 $450,903 $320,143 $240,922 $770,533 $260,589 $45,277 $3,285,916 
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(In thousands)20202019201820172016PriorRevolving Loans
Amortized Cost Basis
Revolving Loans
Converted to Term
Total
As of December 31, 2020
Commercial real estate - non owner-occupied
Risk rating
Pass (Grades 1-6)$138,010 $224,148 $144,552 $119,409 $157,588 $264,253 $ $ $1,047,960 
Special mention (Grade 7)5,739   4,256 3,497 847   14,339 
Substandard (Grade 8)24 125 2,070 405 1,522 31,530   35,676 
Doubtful (Grade 9)         
Total commercial real estate - non owner-occupied143,773 224,273 146,622 124,070 162,607 296,630   1,097,975 
Commercial real estate - owner-occupied
Risk rating
Pass (Grades 1-6)35,948 29,217 48,312 47,065 25,507 76,098   262,147 
Special mention (Grade 7)  4,584   1,513   6,097 
Substandard (Grade 8)  891 462  1,898   3,251 
Doubtful (Grade 9)         
Total commercial real estate - owner occupied35,948 29,217 53,787 47,527 25,507 79,509   271,495 
Commercial
Risk rating
Pass (Grades 1-6)53,966 72,863 40,688 25,478 15,788 51,869 72,425 37,026 370,103 
Special mention (Grade 7) 22 313 4,924 117 400  867 6,643 
Substandard (Grade 8)187 1,012 211 51 42 2,081 65 1,099 4,748 
Doubtful (Grade 9)         
Total commercial54,153 73,897 41,212 30,453 15,947 54,350 72,490 38,992 381,494 
SBA PPP
Risk rating
Pass (Grades 1-6)135,095        135,095 
Special mention (Grade 7)         
Substandard (Grade 8)         
Doubtful (Grade 9)         
Total SBA PPP135,095        135,095 
Residential Real Estate
Risk rating
Pass (Grades 1-6)339,834 183,877 119,426 79,159 57,269 266,324 3,028  1,048,917 
Special mention (Grade 7)     398   398 
Substandard (Grade 8)  176 487  4,820   5,483 
Doubtful (Grade 9)         
Total residential real estate339,834 183,877 119,602 79,646 57,269 271,542 3,028  1,054,798 
Home equity
Risk rating
Performing855 9,415 17,281 3,478 1,339 17,664 194,065 12,480 256,577 
Non-performing     207 1,241 548 1,996 
Total home equity
855 9,415 17,281 3,478 1,339 17,871 195,306 13,028 258,573 
Consumer
Risk rating
Performing6,572 6,525 3,096 1,359 378 1,780 678  20,388 
Non-performing    4    4 
Total consumer
6,572 6,525 3,096 1,359 382 1,780 678  20,392 
Total Loans$716,230 $527,204 $381,600 $286,533 $263,051 $721,682 $271,502 $52,020 $3,219,822 


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Past Due and Non-Accrual Loans

The Company closely monitors the performance of its loan portfolio. A loan is placed on non-accrual status when the financial condition of the borrower is deteriorating, payment in full of both principal and interest is not expected as scheduled, or principal or interest has been in default for 90 days or more. Exceptions may be made if the asset is secured by collateral sufficient to satisfy both the principal and accrued interest in full and collection is reasonably assured. When one loan to a borrower is placed on non-accrual status, all other loans to the borrower are re-evaluated to determine if they should also be placed on non-accrual status. All previously accrued and unpaid interest is reversed at this time. A loan will return to accrual status when collection of principal and interest is assured and the borrower has demonstrated timely payments of principal and interest for a reasonable period, generally at least six months. Unsecured loans, however, are not normally placed on non-accrual status because they are generally charged-off once their collectability is in doubt.

All loans that were granted temporary payment relief due to the COVID-19 pandemic were current with payments in accordance with the terms of the CARES Act and bank regulatory guidance at the time of initial relief. As of June 30, 2021, all loans that were once granted temporary debt relief and had outstanding principal balances have returned to regular payment status. As of December 31, 2020, the payment status for loans that continued to operate under a payment deferral arrangement were reported based on payment status at the time the deferral was granted to the borrower. Of those loans operating under a short-term deferral arrangement, $1.3 million were classified as non-accrual and $536,000 were 30-89 days past due as of June 30, 2021, compared to $457,000 and $1.2 million, respectively, as of December 31, 2020.

The following is a loan aging analysis by portfolio segment (including loans past due over 90 days and non-accrual loans) and loans past due over 90 days and accruing as of the following dates:
(In thousands)30-59 Days
Past Due
60-89 Days
Past Due
90 Days or Greater
Past Due
Total
Past Due
CurrentTotal Loans
Outstanding
Loans > 90
Days Past
Due and
Accruing
June 30, 2021       
Commercial real estate - non owner-occupied$99 $ $63 $162 $1,127,038 $1,127,200 $ 
Commercial real estate - owner-occupied  47 47 296,650 296,697 
Commercial183  836 1,019 366,074 367,093  
SBA PPP    126,064 126,064  
Residential real estate489 155 1,570 2,214 1,118,703 1,120,917  
Home equity236  919 1,155 227,535 228,690  
Consumer35 9 28 72 19,183 19,255  
Total$1,042 $164 $3,463 $4,669 $3,281,247 $3,285,916 $ 
December 31, 2020       
Commercial real estate - non owner-occupied$ $50 $173 $223 $1,097,752 $1,097,975 $ 
Commercial real estate - owner-occupied99  47 146 271,349 271,495  
Commercial430  857 1,287 380,207 381,494  
SBA PPP    135,095 135,095  
Residential real estate1,406 1,103 2,535 5,044 1,049,754 1,054,798  
Home equity335 173 1,416 1,924 256,649 258,573  
Consumer92 67 4 163 20,229 20,392  
Total$2,362 $1,393 $5,032 $8,787 $3,211,035 $3,219,822 $ 

23


The following table presents the amortized cost basis of loans on non-accrual status (including non-accruing TDRs) by portfolio segment as of the dates indicated:
June 30,
2021
December 31,
2020
(In thousands)Non-Accrual Loans With an AllowanceNon-Accrual Loans Without an AllowanceTotal Non-Accrual LoansNon-Accrual Loans With an AllowanceNon-Accrual Loans Without an AllowanceTotal Non-Accrual Loans
Commercial real estate - non owner-occupied$71 $15 $86 $351 $15 $366 
Commercial real estate - owner-occupied89 47 136 99 47 146 
Commercial1,459 52 1,511 1,549 58 1,607 
Residential real estate2,432 293 2,725 3,136 341 3,477 
Home equity1,396  1,396 1,961 35 1,996 
Consumer28  28 4  4 
Total$5,475 $407 $5,882 $7,100 $496 $7,596 

The following table presents the amortized cost basis of collateral-dependent non-accrual loans (including non-accruing TDRs) by portfolio segment and collateral type, as of the dates indicated:
June 30,
2021
December 31,
2020
Collateral TypeTotal Collateral -Dependent
Non-Accrual Loans
Collateral TypeTotal Collateral -Dependent
Non-Accrual Loans
(In thousands)Real EstateGeneral Business AssetsReal Estate General Business Assets
Commercial$ $623 $623 $ $689 $689 
Residential real estate218  218 248  248 
Home equity88  88    
Total$306 $623 $929 $248 $689 $937 

Collateral-dependent loans are loans for which the repayment is expected to be provided substantially by the underlying collateral and there are no other available and reliable sources of repayment.

Interest income that would have been recognized if loans on non-accrual status had been current in accordance with their original terms is estimated to have been $67,000 and $87,000 for the three months ended June 30, 2021 and 2020, respectively. For the six months ended June 30, 2021 and 2020, the interest income that is estimated to have been recognized if loans on non-accrual status had been current in accordance with their original terms was $143,000 and $166,000, respectively.

The Company's policy is to reverse previously recorded interest income when a loan is placed on non-accrual, as such, the Company did not record any interest income on its non-accruals for the three or six months ended June 30, 2021 and 2020. An immaterial amount of accrued interest on non-accrual loans was written-off during the three and six months ended June 30, 2021 and 2020, by reversing interest income. At June 30, 2021 and December 31, 2020, total accrued interest receivable on loans, which has been excluded from reported amortized cost basis on loans, was $8.6 million and $10.2 million, respectively, and reported within other assets on the consolidated statements of condition. An allowance was not carried on the accrued interest receivable at either date.

TDRs

The Company takes a conservative approach with credit risk management and remains focused on community lending and reinvesting. The Company works closely with borrowers experiencing credit problems to assist in loan repayment or term modifications. TDRs consist of loans where the Company, for economic or legal reasons related to the borrower’s financial difficulties, granted a concession to the borrower that it would not otherwise consider. TDRs typically involve term modifications or a reduction of either interest or principal. Once such an obligation has been restructured, it will remain a TDR until paid in full, or until the loan is again restructured at current market rates and no concessions are granted.

24


The specific reserve allowance was determined by discounting the total expected future cash flows from the borrower at the original loan interest rate, or if the loan is currently collateral-dependent, using net realizable value, which was obtained through independent appraisals and internal evaluations. The following is a summary of TDRs, by portfolio segment, and the associated specific reserve included within the ACL for the dates indicated:
Number of ContractsRecorded InvestmentSpecific Reserve
(In thousands, except number of contracts)
June 30,
2021
December 31,
2020
June 30,
2021
December 31,
2020
June 30,
2021
December 31,
2020
Commercial real estate - owner-occupied1 2 $123 $328 $41 $37 
Commercial
2 2 89 100   
Residential real estate
19 21 2,383 2,638 364 364 
Consumer and home equity
2  231  23  
Total24 25 $2,826 $3,066 $428 $401 

At June 30, 2021, the Company had performing and non-performing TDRs with a recorded investment balance of $2.5 million and $306,000, respectively. At December 31, 2020, the Company had performing and non-performing TDRs with a recorded investment balance of $2.8 million and $248,000, respectively.

The following represents loan modifications that qualify as TDRs that occurred during the periods indicated:
Number of ContractsPre-Modification
Outstanding
Recorded Investment
Post-Modification
Outstanding
Recorded Investment
Specific Reserve
(In thousands, except number of contracts)20212020202120202021202020212020
For the Three Months Ended June 30,:
Home equity:
Maturity concession1  $144 $ $143 $ $6 $ 
Total1  $144 $ $143 $ $6 $ 
For the Six Months Ended June 30,:
Home equity:
Interest rate concession and payment deferral1  $159 $ $170 $ $56 $ 
Maturity concession1  144  143  6  
Total2  $303 $ $313 $ $62 $ 

As of June 30, 2021 and December 31, 2020, the Company did not have any material commitments to lend additional funds to borrowers with loans classified as TDRs.

For the three and six months ended June 30, 2021 and 2020, no loans were modified as TDRs within the previous 12 months for which the borrower subsequently defaulted.
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Impaired Loans

For periods prior to the adoption of CECL (i.e. periods before October 1, 2020), under the incurred loss methodology, impaired loans consisted of non-accrual loans and TDRs that were individually evaluated for impairment in accordance with the Company's policy. The following is a summary of impaired loan balances and the associated allowance by portfolio segment as of and for the periods indicated:
For the
Three Months Ended
For the
Six Months Ended
(In thousands)Recorded
Investment
Unpaid
Principal
Balance
Related
Allowance
Average
Recorded
Investment
Interest
Income
Recognized(1)
Average
Recorded
Investment
Interest
Income
Recognized
June 30, 2020:
With an allowance recorded:     
Commercial real estate$127 $127 $35 $128 $3 $128 $4 
Commercial   — — — — 
SBA PPP   — — — — 
Residential real estate2,304 2,304 338 2,262 22 2,306 46 
Home equity318 318 89 318 — 318 — 
Consumer   — — — — 
Ending balance2,749 2,749 462 2,708 25 2,752 50 
Without an allowance recorded:
     
Commercial real estate334 514  303 3 293 6 
Commercial179 242  239 1 266 3 
SBA PPP   — — — — 
Residential real estate849 972  957 (1)968 2 
Home equity52 189  52 — 53 — 
Consumer   — — — — 
Ending balance1,414 1,917  1,551 3 1,580 11 
Total impaired loans$4,163 $4,666 $462 $4,259 $28 $4,332 $61 
(1)    Negative interest income represents the re-allocation of income between "with an allowance recorded" and "without an allowance recorded" (or vice versa) during the period.

In-Process Foreclosure Proceedings

At June 30, 2021 and December 31, 2020, the Company had $1.3 million and $1.5 million, respectively, of consumer mortgage loans secured by residential real estate properties for which foreclosure proceedings were in process.

FHLB Advances

FHLB advances are those borrowings from the FHLBB greater than 90 days. FHLB advances are collateralized by a blanket lien on qualified collateral consisting primarily of loans with first mortgages secured by one- to four-family properties, certain commercial real estate loans, certain pledged investment securities and other qualified assets. The carrying value of residential real estate and commercial loans pledged as collateral was $1.3 billion at June 30, 2021 and December 31, 2020.

Refer to Notes 3 and 6 of the consolidated financial statements for discussion of securities pledged as collateral.

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NOTE 5 – BORROWINGS

The following summarizes the Company's short-term and long-term borrowed funds as presented on the consolidated statements of condition as of the dates indicated:
(In thousands)June 30,
2021
December 31,
2020
Short-Term Borrowings:    
Customer repurchase agreements$170,413 $162,439 
Total short-term borrowings$170,413 $162,439 
Long-Term Borrowings:    
FHLBB borrowings$ $25,000 
Total long-term borrowings$ $25,000 

As of June 30, 2021 and December 31, 2020, the Company's subordinated debentures were $44.3 million and $59.3 million, respectively. On April 16, 2021, the Company exercised its call option on its $15.0 million of subordinated debentures, at par plus accrued interest. As of June 30, 2021, the Company's remaining subordinated debentures were comprised of two tranches of junior subordinated debentures.

NOTE 6 – REPURCHASE AGREEMENTS

The Company can raise additional liquidity by entering into repurchase agreements at its discretion. In a security repurchase agreement transaction, the Company will generally sell a security, agreeing to repurchase either the same or a substantially identical security on a specified later date, at a greater price than the original sales price. The difference between the sale price and purchase price is the cost of the proceeds, which is recorded within interest on borrowings on the consolidated statements of income. The securities underlying the agreements are delivered to counterparties as collateral for the repurchase obligations. Since the securities are treated as collateral and the agreement does not qualify for a full transfer of effective control, the transactions do not meet the criteria to be classified as sales, and are therefore considered secured borrowing transactions for accounting purposes. Payments on such borrowings are interest only until the scheduled repurchase date. In a repurchase agreement the Company is subject to the risk that the purchaser may default at maturity and not return the securities underlying the agreements. In order to minimize this potential risk, the Company either deals with established firms when entering into these transactions, or with customers whose agreements stipulate that the securities underlying the agreement are not delivered to the customer and instead are held in segregated safekeeping accounts by the Company's safekeeping agents.

The table below sets forth information regarding the Company’s repurchase agreements accounted for as secured borrowings and types of collateral as of the dates indicated:
(In thousands)June 30,
2021
December 31,
2020
Customer Repurchase Agreements(1)(2):
Collateralized mortgage obligations issued or guaranteed by U.S. government-sponsored enterprises
$89,858 $90,015 
Mortgage-backed securities issued or guaranteed by U.S. government-sponsored enterprises
80,555 70,902 
Obligations of states and political subdivisions
 1,522 
Total
$170,413 $162,439 
(1)    Presented within short-term borrowings on the consolidated statements of condition.
(2)    All customer repurchase agreements mature continuously or overnight for the dates indicated.

At June 30, 2021 and December 31, 2020, certain customers held CDs totaling $1.0 million, that were collateralized by CMO and MBS securities that were overnight repurchase agreements.

Certain counterparties monitor collateral, and may request additional collateral to be posted from time to time.

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NOTE 7 – COMMITMENTS AND CONTINGENCIES

Commitments

In the normal course of business, the Company is a party to both on- and off-balance sheet financial instruments involving, to varying degrees, elements of credit risk and interest rate risk in addition to the amounts recognized in the consolidated statements of condition.

The following is a summary of the Company's contractual off-balance sheet commitments for the dates indicated:
(In thousands)June 30,
2021
December 31,
2020
Commitments to extend credit$753,052 $723,986 
Standby letters of credit6,441 4,735 
Total$759,493 $728,721 

The Company’s commitments to extend credit from its lending activities do not necessarily represent future cash requirements since certain of these instruments may expire without being funded and others may not be fully drawn upon. These commitments are subject to the Company’s credit approval process, including an evaluation of the customer’s creditworthiness and related collateral requirements. Commitments generally have fixed expiration dates or other termination clauses.

Standby letters of credit are conditional commitments issued to guarantee the performance of a borrower to a third party. In the event of nonperformance by the borrower, the Company would be required to fund the commitment and would be entitled to the underlying collateral, if applicable, which generally consists of pledges of business assets including, but not limited to, accounts receivable, inventory, plant and equipment, and/or real estate. The maximum potential future payments are limited to the contractual amount of the commitment.

The Company establishes an ACL on off-balance sheet credit exposures on its contractual off-balance sheet commitments, except those that are unconditionally cancellable by the Company, of $2.5 million and $2.6 million as of June 30, 2021 and December 31, 2020, respectively. The ACL on off-balance sheet credit exposures was presented within accrued interest and other liabilities on the consolidated statements of condition.

For the three months ended June 30, 2021 and 2020, the provision (credit) for credit losses on off-balance sheet credit exposures was $49,000 and ($2,000), respectively. For the six months ended June 30, 2021 and 2020, the (credit) provision for credit losses on off-balance sheet credit exposures was ($53,000) and $1,000.

Legal Contingencies

In the normal course of business, the Company and its subsidiaries are subject to pending and threatened litigation, claims investigations and legal and administrative cases and proceedings. Although the Company is not able to predict the outcome of such actions, after reviewing pending and threatened actions with counsel, management believes that, based on the information currently available, the outcome of such actions, individually or in the aggregate, will not have a material adverse effect on the Company’s 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. Assessments of litigation exposure are difficult because they involve inherently unpredictable factors including, but not limited to: whether the proceeding is in the early stages; whether damages are unspecified, unsupported, or uncertain; whether there is a potential for punitive or other pecuniary damages; whether the matter involves legal uncertainties, including novel issues of law; whether the matter involves multiple parties and/or jurisdictions; whether discovery has begun or is not complete; whether meaningful settlement discussions have commenced; and whether the lawsuit involves class allegations. 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. Assessments of class action litigation, which is generally more complex than other types of litigation, are particularly difficult, especially in the early stages of the proceeding when it is not known whether a class will be certified or how a potential class, if certified, will be defined. As a result, the Company may be unable to estimate reasonably possible losses with respect to every litigation matter it faces.

28


The Company did not have any material loss contingencies that were provided for and/or that are required to be disclosed as of June 30, 2021 and December 31, 2020.

NOTE 8 – DERIVATIVES AND HEDGING

The Company is exposed to certain risk arising from both its business operations and economic conditions. The Company principally manages its exposures to a wide variety of business and operational risks through management of its core business activities. The Company manages economic risks, including interest rate, liquidity, and credit risk primarily by managing the amount, sources, and duration of its assets and liabilities and the use of derivative financial instruments. Specifically, the Company enters into derivative financial instruments to manage exposures that arise from business activities that result in the receipt or payment of future known and uncertain cash amounts, the value of which are determined by interest rates.

Derivatives Designated as Hedging Instruments - Cash Flow Hedges of Interest Rate Risk

Interest Rate Contracts

The Company’s objectives in using interest rate derivatives are to add stability to interest income and expense and to manage its exposure to interest rate movements. To accomplish this objective, the Company primarily uses interest rate swaps as part of its interest rate risk management strategy. Interest rate swaps designated as cash flow hedges involve the receipt of variable amounts from a counterparty in exchange for the Company making fixed-rate payments or the receipt of fixed-rate amounts from a counterparty in exchange for the Company making variable-rate payments over the life of the agreements without exchange of the underlying notional amount. For the three and six months ended June 30, 2021 and 2020, such derivatives were used to hedge the variable cash flows associated with existing variable-rate assets or liabilities or forecasted issuances of debt.

For derivatives designated and that qualify as cash flow hedges of interest rate risk, the gain or loss on the derivative is recorded in AOCI and subsequently reclassified into interest expense or interest income in the same period(s) during which the hedged transaction affects earnings. Amounts reported in AOCI related to derivatives will be reclassified to interest expense or interest income as interest payments are made or received on the Company’s variable-rate liabilities or assets. The Company estimates that an additional $2.1 million will be reclassified as an increase to interest expense and an additional $1.6 million will be reclassified as an increase to interest income over the next 12 months.

Derivatives not Designated as Hedges

Customer Loan Swaps

Derivatives not designated as hedges are not speculative and result from a service the Company provides to certain customers. The Company executes interest rate swaps with commercial banking customers to facilitate their respective risk management strategies. Those interest rate swaps are simultaneously hedged by offsetting derivatives that the Company executes with a third party, such that the Company minimizes its net risk exposure resulting from such transactions. As the interest rate derivatives associated with this program do not meet the strict hedge accounting requirements, changes in the fair value of both the customer derivatives and the offsetting derivatives are recognized directly in earnings.

Fixed-Rate Mortgage Interest Rate Lock Commitments

As part of the origination process of a residential loan, the Company may enter into rate lock agreements with its borrower, which is considered an interest rate lock commitment. If the Company intends to sell the loan upon origination, it will account for the interest rate lock commitment as a derivative.

Forward Delivery Commitments

The Company typically enters into a forward delivery commitment with a secondary market investor, which has been approved by the Company within its normal governance process, at the onset of the loan origination process. The Company may enter into these arrangements with the secondary market investors on a "best effort" or "mandatory delivery" basis. The Company's normal practice is typically to enter into these arrangements on a "best effort" basis. The Company enters into these arrangements with the secondary market investors to manage its interest rate exposure. The Company accounts for the forward delivery commitment as a derivative upon origination of a loan identified as held for sale.
29


The following table presents the fair value of the Company's derivative financial instruments as well as their classification on the consolidated statements of condition as of the dates indicated:
Derivative AssetsDerivative Liabilities
(In thousands)Notional
Amount
 LocationFair
Value
Notional
Amount
LocationFair
Value
June 30, 2021    
Derivatives designated as hedging instruments
Interest rate contracts(1)
$160,000 Other assets$6,814 $83,000 Accrued interest and other liabilities$9,153 
Total derivatives designated as hedging instruments
$6,814 $9,153 
Derivatives not designated as hedging instruments
Customer loan swaps(1)
$364,977 Other assets$27,648 $364,977 Accrued interest and other liabilities$27,648 
Fixed-rate mortgage interest rate lock commitments37,771 Other assets870 6,331 Accrued interest and other liabilities54 
Forward delivery commitments11,797 Other assets145 3,089 Accrued interest and other liabilities17 
Total derivatives not designated as hedging instruments
$28,663 $27,719 
December 31, 2020    
Derivatives designated as hedging instruments
Interest rate contracts$110,000 Other assets$5,731 $143,000 Accrued interest and other liabilities$11,625 
Total derivatives designated as hedging instruments
$5,731 $11,625 
Derivatives not designated as hedging instruments
Customer loan swaps$376,290 Other assets$39,627 $376,290 Accrued interest and other liabilities$39,627 
Fixed-rate mortgage interest rate lock commitments58,574 Other assets608 28,346 Accrued interest and other liabilities248 
Forward delivery commitments24,951 Other assets311 15,548 Accrued interest and other liabilities196 
Total derivatives not designated as hedging instruments
$40,546 $40,071 
(1)    Reported fair values include accrued interest receivable and payable.




30


The table below presents the effect of cash flow hedge accounting, before tax, on AOCI for the periods indicated:
(Dollars in thousands)Amount of Gain (Loss) Recognized in OCI on DerivativeAmount of Gain (Loss) Recognized in OCI Included ComponentAmount of Gain (Loss) Recognized in OCI Excluded ComponentLocation of Gain (Loss) Recognized
from AOCI into Income
Amount of Gain (Loss) Reclassified from AOCI into IncomeAmount of Gain (Loss) Reclassified from AOCI into Income Included ComponentAmount of Gain (Loss) Reclassified from AOCI into Income Excluded Component
Derivatives in Cash Flow Hedge Relationships
For the Three Months Ended June 30, 2021
Interest rate contracts$66 $66 $ Interest and fees on loans$403 $403 $ 
Interest rate contracts(1,511)(1,511) Interest on deposits(164)(164) 
Interest rate contracts(1,758)(1,758) Interest on subordinated debentures(431)(431) 
Total$(3,203)$(3,203)$ $(192)$(192)$ 
For the Six Months Ended June 30, 2021
Interest rate contracts$(736)$(736)$ Interest and fees on loans$795 $795 $ 
Interest rate contracts1,952 1,952  Interest on deposits(320)(320) 
Interest rate contracts1,973 1,973  Interest on subordinated debentures(853)(853) 
Total$3,189 $3,189 $ $(378)$(378)$ 
For the Three Months Ended June 30, 2020
Interest rate contracts$765 $765 $ Interest and fees on loans$247 $247 $ 
Interest rate contracts(122)(122) Interest on deposits(22)(22) 
Interest rate contracts(365)(365) Interest on borrowings44 44  
Interest rate contracts(239)(239) Interest on subordinated debentures(297)(297) 
Total$39 $39 $ $(28)$(28)$ 
For the Six Months Ended June 30, 2020
Interest rate contracts$5,925 $5,925 $ Interest and fees on loans$299 $299 $ 
Interest rate contracts(978)(978) Interest on deposits(26)(26) 
Interest rate contracts(1,123)(1,123) Interest on borrowings48 48  
Interest rate contracts(4,934)(4,934) Interest on subordinated debentures(537)(537) 
Total$(1,110)$(1,110)$ $(216)$(216)$ 

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The table below presents the effect of cash flow hedge accounting on the consolidated statements of income for the periods indicated:
Location and Amount of Gain (Loss) Recognized in Income
Three Months Ended
June 30,
20212020
(Dollars in thousands)Interest and fees on loansInterest on depositsInterest on borrowingsInterest on subordinated debenturesInterest and fees on loansInterest on depositsInterest on borrowingsInterest on subordinated debentures
Total presented on the consolidated statements of income in which the effects of cash flow hedges are recorded$30,865 $1,921 $176 $640 $33,120 $3,392 $359 $888 
Gain (loss) on cash flow hedging relationships
Interest rate contracts:
Amount of gain (loss) reclassified from AOCI into income$403 $(164)$ $(431)$247 $(22)$44 $(297)
Amount of gain (loss) reclassified from AOCI into income - included component$403 $(164)$ $(431)$247 $(22)$44 $(297)
Amount of gain (loss) reclassified from AOCI into income - excluded component$ $ $ $ $ $ $ $ 

Location and Amount of Gain (Loss) Recognized in Income
Six Months Ended
June 30,
20212020
(Dollars in thousands)Interest and fees on loansInterest on depositsInterest on borrowingsInterest on subordinated debenturesInterest and fees on loansInterest on depositsInterest on borrowingsInterest on subordinated debentures
Total presented on the consolidated statements of income in which the effects of cash flow hedges are recorded$61,425 $3,984 $332 $1,445 $67,165 $10,054 $1,197 $1,775 
Gain (loss) on cash flow hedging relationships
Interest rate contracts:
Amount of gain (loss) reclassified from AOCI into income$795 $(320)$ $(853)$299 $(26)$48 $(537)
Amount of gain (loss) reclassified from AOCI into income - included component$795 $(320)$ $(853)$299 $(26)$48 $(537)
Amount of gain (loss) reclassified from AOCI into income - excluded component$ $ $ $ $ $ $ $ 

The table below presents the effect of the Company's derivative financial instruments that are not designated as hedging instruments on the consolidated statements of income for the periods indicated:
Location of Gain Recognized in IncomeAmount of Gain (Loss)
Recognized in Income
Three Months Ended
June 30,
Six Months Ended
June 30,
(Dollars in thousands)2021202020212020
Fixed-rate mortgage interest rate lock commitmentsMortgage banking income, net$(489)$(1,019)$456 $496 
Forward delivery commitmentsMortgage banking income, net(469)(1,014)13 (156)
Total $(958)$(2,033)$469 $340 
                                                        
Credit Risk-Related Contingent Features    

By using derivatives, the Company is exposed to credit risk to the extent that counterparties to the derivative contracts do not perform as required. Should a counterparty fail to perform under the terms of a derivative contract, the Company’s credit exposure on interest rate swaps is limited to the net positive fair value and accrued interest of all swaps with each counterparty. The Company seeks to minimize counterparty credit risk through credit approvals, limits, monitoring procedures, and obtaining
32


collateral, where appropriate. As such, management believes the risk of incurring credit losses on derivative contracts with institutional counterparties is remote.

The Company has agreements with its derivative counterparties that contain a provision where if the Company defaults on any of its indebtedness, including default where repayment of the indebtedness has not been accelerated by the lender, then the Company could also be declared in default on its derivative obligations. In addition, the Company also has agreements with certain of its derivative counterparties that contain a provision where if the Company fails to maintain its status as a well- capitalized institution, then the counterparty could terminate the derivative position(s) and the Company could be required to settle its obligations under the agreements.
As of June 30, 2021 and December 31, 2020, the fair value of derivatives in a net liability position, which includes accrued interest but excludes any adjustment for non-performance risk, related to these agreements was $35.2 million and $50.5 million, respectively. As of June 30, 2021 and December 31, 2020, the Company has minimum collateral posting thresholds with certain of its derivative counterparties and has posted cash collateral of $36.2 million and $57.5 million, respectively. If the Company had breached any of these provisions at June 30, 2021 or December 31, 2020, it could have been required to settle its obligations under the agreements at their termination value of $35.2 million and $50.5 million, respectively.

NOTE 9 – BALANCE SHEET OFFSETTING

The Company does not offset the carrying value for derivative instruments or repurchase agreements on the consolidated statements of condition. The Company does net the amount recognized for the right to reclaim cash collateral against the obligation to return cash collateral arising from instruments executed with the same counterparty under a master netting arrangement. Collateral legally required to be pledged or received is monitored and adjusted as necessary. Refer to Note 6 for further discussion of repurchase agreements and Note 8 for further discussion of derivative instruments.

33


The following table presents the Company's derivative positions and repurchase agreements, and the potential effect of netting arrangements on its financial position, as of the dates indicated:
Gross Amount Not Offset in the Consolidated Statements of Condition
(In thousands)Gross Amount Recognized in the Consolidated Statements of ConditionGross Amount Offset in the Consolidated Statements of ConditionNet Amount Presented in the Consolidated Statements of Condition
Financial Instruments Pledged (Received)(1)
Cash Collateral Pledged (Received)(1)
Net Amount
June 30, 2021
Derivative assets:
Customer loan swaps - commercial customer(2)
$27,648 $ $27,648 $ $ $27,648 
Interest rate contracts(3)
6,814  6,814  (6,662)152 
Total$34,462 $ $34,462 $ $(6,662)$27,800 
Derivative liabilities:
Customer loan swaps - dealer bank(3)
$27,648 $ $27,648 $ $27,648 $ 
Interest rate contracts(3)
9,153  9,153  9,153  
Total$36,801 $ $36,801 $ $36,801 $ 
Customer repurchase agreements
$170,413 $ $170,413 $170,413 $ $ 
December 31, 2020
Derivative assets:
Customer loan swaps - commercial customer(2)
$39,627 $ $39,627 $ $ $39,627 
Interest rate contracts(3)
5,731  5,731  (5,595)136 
Total$45,358 $ $45,358 $ $(5,595)$39,763 
Derivative liabilities:
Customer loan swaps - dealer bank(3)
$39,627 $ $39,627 $ $39,627 $ 
Interest rate contracts(3)
11,625  11,625  11,625  
Total$51,252 $ $51,252 $ $51,252 $ 
Customer repurchase agreements
$162,439 $ $162,439 $162,439 $ $ 
(1)    The amount presented was the lesser of the amount pledged (received) or the net amount presented in the consolidated statements of condition.
(2)    The Company manages its net exposure on its commercial customer loan swaps by obtaining collateral as part of the normal loan policy and underwriting practices.
(3)    Interest rate swap contracts were completed with the same dealer bank. The Company maintains a master netting arrangement and settles collateral requested or pledged on a net basis for all contracts.

NOTE 10 – REGULATORY CAPITAL REQUIREMENTS
 
The Company and Bank are subject to various regulatory capital requirements administered by the FRB and the OCC. Failure to meet minimum capital requirements can result in mandatory and possible additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s consolidated financial statements.

The Company and Bank are required to maintain certain levels of capital based on risk-adjusted assets. These capital requirements represent quantitative measures of their assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. The Company and Bank's capital classification is also subject to qualitative judgments by our regulators about components, risk weightings and other factors. The quantitative measures established to ensure capital adequacy require the Company and Bank to maintain minimum amounts and ratios of total capital, Tier 1 capital, and common equity Tier 1 capital to risk-weighted assets, and of Tier 1 capital to average assets, or the leverage ratio. These guidelines apply to the Company on a consolidated basis.

Under the current guidelines, banking organizations must have a minimum total risk-based capital ratio of 8.0%, a minimum Tier 1 risk-based capital ratio of 6.0%, a minimum common equity Tier 1 risk-based capital ratio of 4.5%, and a minimum leverage ratio of 4.0% in order to be "adequately capitalized." In addition to these requirements, banking organizations must maintain a capital conservation buffer consisting of common Tier 1 equity in an amount above the minimum
34


risk-based capital requirements for "adequately capitalized" institutions equal to 2.5% of total risk-weighted assets, resulting in a requirement for the Company and the Bank effectively to maintain common equity Tier 1, Tier 1 and total capital ratios of 7.0%, 8.5% and 10.5%, respectively. The Company and the Bank must maintain the capital conservation buffer to avoid restrictions on the ability to pay dividends, pay discretionary bonuses and to engage in share repurchases based on the amount of the shortfall and the institution's "eligible retained income" (that is, the greater of (i) net income for the preceding four quarters, net of distributions and associated tax effects not reflected in net income and (ii) average net income over the preceding four quarters).

The Company and Bank's risk-based capital ratios exceeded regulatory requirements, including the capital conservation buffer, at June 30, 2021 and December 31, 2020, and the Bank's capital ratios met the requirements for it to be considered "well capitalized" under prompt corrective action provisions for each period. There were no changes to the Company or Bank's capital ratios that occurred subsequent to June 30, 2021 that would change the Company or Bank's regulatory capital categorization. The following table presents the Company and Bank's regulatory capital ratios at the periods indicated:
June 30,
2021
Minimum Regulatory Capital Required for Capital Adequacy plus Capital Conservation BufferMinimum Regulatory Provision To Be "Well Capitalized" December 31,
2020
Minimum Regulatory Capital Required for Capital Adequacy plus Capital Conservation BufferMinimum Regulatory Provision To Be "Well Capitalized"
(Dollars in thousands)AmountRatioAmountRatio
Camden National Corporation:
Total risk-based capital ratio
$509,478 15.26 %10.50 %10.00 %$498,290 15.40 %10.50 %10.00 %
Tier 1 risk-based capital ratio
474,903 14.23 %8.50 %6.00 %445,858 13.78 %8.50 %6.00 %
Common equity Tier 1 risk-based capital ratio(1)
431,903 12.94 %7.00 %N/A402,858 12.45 %7.00 %N/A
Tier 1 leverage capital ratio(1)
474,903 9.48 %4.00 %N/A445,858 9.13 %4.00 %N/A
Camden National Bank:
Total risk-based capital ratio
$470,146 14.14 %10.50 %10.00 %$460,611 14.28 %10.50 %10.00 %
Tier 1 risk-based capital ratio
435,571 13.10 %8.50 %8.00 %420,294 13.03 %8.50 %8.00 %
Common equity Tier 1 risk-based capital ratio
435,571 13.10 %7.00 %6.50 %420,294 13.03 %7.00 %6.50 %
Tier 1 leverage capital ratio
435,571 8.72 %4.00 %5.00 %420,294 8.64 %4.00 %5.00 %
(1)    “Minimum Regulatory Provisions To Be ‘Well Capitalized’” are not formally defined under applicable banking regulations for bank holding companies.

In 2015, the Company issued $15.0 million of subordinated debentures, and in 2006 and 2008, it issued $43.0 million of junior subordinated debentures in connection with the issuance of trust preferred securities. Although the subordinated debentures and the junior subordinated debentures are recorded as liabilities on the Company's consolidated statements of condition, the Company is permitted, in accordance with applicable regulation, to include, subject to certain limits, each within its calculation of risk-based capital. The Company's $15.0 million of subordinated debentures became subject to phase-out of Tier 2 capital 20% annually beginning in October 2020, and 20% annually thereafter, until fully phased-out by 2024. At June 30, 2021 and December 31, 2020, $43.0 million of the junior subordinated debentures were included in Tier 1 and Tier 2 capital for the Company.

On April 16, 2021, the Company redeemed its $15.0 million of subordinated debentures in full, at par plus accrued and unpaid interest, and, thus, was no longer included as Tier 2 capital within the calculation of total risk-based capital at June 30, 2021. At December 31, 2020, $12.0 million, or 80%, of the subordinated debentures were included as Tier 2 capital within the calculation of the Company's total risk-based capital.

The Company and Bank's regulatory capital and risk-weighted assets fluctuate due to normal business, including profits and losses generated by the Company and Bank as well as changes to their asset mix. Of particular significance are changes within the Company and Bank's loan portfolio mix due to the differences in regulatory risk-weighting between retail and commercial loans. Furthermore, the Company and Bank's regulatory capital and risk-weighted assets are subject to change due to changes in GAAP and regulatory capital standards. The Company and Bank proactively monitor their regulatory capital and risk-weighted assets, and the impact of changes to their asset mix, and the impact of proposed and pending changes as a result of new and/or amended GAAP standards and regulatory changes.

35


NOTE 11 – OTHER COMPREHENSIVE INCOME (LOSS)

The following tables present a reconciliation of the changes in the components of other comprehensive income and loss for the periods indicated, including the amount of tax (expense) benefit allocated to each component:
Three Months Ended
June 30, 2021June 30, 2020
(In thousands)Pre-Tax
Amount
Tax (Expense)
Benefit
After-Tax
Amount
Pre-Tax
Amount
Tax (Expense)
Benefit
After-Tax
Amount
AFS Debt Securities:
Unrealized holdings gains$2,925 $(629)$2,296 $9,082 $(1,952)$7,130 
Net unrealized gains2,925 (629)2,296 9,082 (1,952)7,130 
Cash Flow Hedges:
Net (decrease) increase in fair value(3,203)689 (2,514)39 (8)31 
Less: reclassified AOCI loss into interest expense(1)
(595)128 (467)(274)59 (215)
Less: reclassified AOCI gain into interest income(2)
403 (86)317 247 (53)194 
Net (decrease) increase in fair value(3,011)647 (2,364)66 (14)52 
Postretirement Plans:
Amortization of settlement recognition of net loss and prior service credit(3)
217 (46)171 169 (36)133 
Other comprehensive income$131 $(28)$103 $9,317 $(2,002)$7,315 
(1)    Reclassified into interest on deposits, borrowings and/or subordinated debentures on the consolidated statements of income. Refer to Note 8 of the consolidated financial statements for further details.
(2)    Reclassified into interest and fees on loans on the consolidated statements of income. Refer to Note 8 of the consolidated financial statements for further details.
(3)    Reclassified into other expenses on the consolidated statements of income. Refer to Note 13 of the consolidated financial statements for further details.
Six Months Ended
June 30, 2021June 30, 2020
(In thousands)Pre-Tax
Amount
Tax (Expense)
Benefit
After-Tax
Amount
Pre-Tax
Amount
Tax (Expense)
Benefit
After-Tax
Amount
AFS Debt Securities:
Unrealized holdings (losses) gains$(19,380)$4,167 $(15,213)$33,197 $(7,137)$26,060 
Net unrealized (losses) gains(19,380)4,167 (15,213)33,197 (7,137)26,060 
Cash Flow Hedges:
Net increase (decrease) in fair value3,189 (685)2,504 (1,110)239 (871)
Less: reclassified AOCI loss into interest expense(1)
(1,173)252 (921)(515)111 (404)
Less: reclassified AOCI gain into interest income(2)
795 (170)625 299 (64)235 
Net increase (decrease) in fair value3,567 (767)2,800 (894)192 (702)
Postretirement Plans:
Amortization of settlement recognition of net loss and prior service credit(3)
435 (94)341 339 (73)266 
Other comprehensive (loss) income$(15,378)$3,306 $(12,072)$32,642 $(7,018)$25,624 
(1)    Reclassified into interest on deposits, borrowings and/or subordinated debentures on the consolidated statements of income. Refer to Note 8 of the consolidated financial statements for further details.
36


(2)    Reclassified into interest and fees on loans on the consolidated statements of income. Refer to Note 8 of the consolidated financial statements for further details.
(3)    Reclassified into other expenses on the consolidated statements of income. Refer to Note 13 of the consolidated financial statements for further details.

The following table presents the changes in each component of AOCI, after tax, for the periods indicated:
(In thousands)Net Unrealized Gains (Losses) on AFS Debt SecuritiesNet Unrealized Losses (Gains) on Cash Flow HedgesDefined Benefit Postretirement PlansAOCI
At or For the Three Months Ended June 30, 2021
Balance at March 31, 2021$11,801 $538 $(3,774)$8,565 
Other comprehensive income (loss) before reclassifications2,296 (2,514)175 (43)
Less: Amounts reclassified from AOCI (150)4 (146)
Other comprehensive income (loss)2,296 (2,364)171 103 
Balance at June 30, 2021$14,097 $(1,826)$(3,603)$8,668 
At or For the Six Months Ended June 30, 2021
Balance at December 31, 2020$29,310 $(4,626)$(3,944)$20,740 
Other comprehensive (loss) income before reclassifications(15,213)2,504 350 (12,359)
Less: Amounts reclassified from AOCI (296)9 (287)
Other comprehensive (loss) income(15,213)2,800 341 (12,072)
Balance at June 30, 2021$14,097 $(1,826)$(3,603)$8,668 
At or For the Three Months Ended June 30, 2020
Balance at March 31, 2020$22,180 $(6,802)$(3,337)$12,041 
Other comprehensive income (loss) before reclassifications7,130 31 137 7,298 
Less: Amounts reclassified from AOCI (21)4 (17)
Other comprehensive income (loss)7,130 52 133 7,315 
Balance at June 30, 2020$29,310 $(6,750)$(3,204)$19,356 
At or For the Six Months Ended June 30, 2020
Balance at December 31, 2019$3,250 $(6,048)$(3,470)$(6,268)
Other comprehensive income (loss) before reclassifications26,060 (871)275 25,464 
Less: Amounts reclassified from AOCI (169)9 (160)
Other comprehensive income (loss)26,060 (702)266 25,624 
Balance at June 30, 2020$29,310 $(6,750)$(3,204)$19,356 

NOTE 12 – REVENUE FROM CONTRACTS WITH CUSTOMERS

A portion of the Company's non-interest income is derived from contracts with customers, and, as such, the revenue recognized depicts the transfer of promised goods or services to its customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The Company considers the terms of the contract and all relevant facts and circumstances when applying this guidance.

37


The Company has disaggregated its revenue from contracts with customers into categories based on the nature of the revenue. The categorization of revenues from contracts with customers that are within the scope of ASC 606 closely aligns with the presentation of revenue categories presented within non-interest income on the consolidated statements of income. The following table presents the revenue streams within the scope of ASC 606 for the periods indicated:
Location on Consolidated Statements of IncomeThree Months Ended
June 30,
Six Months Ended
June 30,
(In thousands)2021202020212020
Debit card interchange incomeDebit card income$3,112 $2,391 $5,848 $4,532 
Services charges on deposit accountsService charges on deposit accounts1,517 1,337 3,056 3,349 
Fiduciary services incomeIncome from fiduciary services1,707 1,603 3,233 3,105 
Investment program incomeBrokerage and insurance commissions939 622 1,892 1,279 
Other non-interest incomeOther income447 423 847 806 
Total non-interest income within the scope of ASC 606
7,722 6,376 14,876 13,071 
Total non-interest income not in scope of ASC 606
3,598 5,684 11,659 10,392 
Total non-interest income$11,320 $12,060 $26,535 $23,463 

In each of the revenue streams identified above, there were no significant judgments made in determining or allocating the transaction price, as the consideration and services are generally explicitly identified in the associated contracts.

NOTE 13 – EMPLOYEE BENEFIT PLANS
 
The Company sponsors unfunded, non-qualified SERPs for certain officers and provides medical and life insurance to certain eligible retired employees.

The components of net periodic pension and postretirement benefit cost were as follow for the following periods:

Supplemental Executive Retirement Plan:
(In thousands)Location on Consolidated Statements of IncomeThree Months Ended
June 30,
Six Months Ended
June 30,
Net periodic pension cost2021202020212020
Service costSalaries and employee benefits$126 $116 $252 $232 
Interest costOther expenses98 115 195 230 
Recognized net actuarial lossOther expenses194 156 389 312 
Total$418 $387 $836 $774 

Other Postretirement Benefit Plan:
(In thousands)Location on Consolidated Statements of IncomeThree Months Ended
June 30,
Six Months Ended
June 30,
Net periodic postretirement benefit cost
2021202020212020
Service costSalaries and employee benefits$6 $7 $13 $14 
Interest costOther expenses25 31 51 62 
Recognized net actuarial lossOther expenses29 20 58 39 
Amortization of prior service creditOther expenses(6)(6)(12)(12)
Total$54 $52 $110 $103 

38


NOTE 14 – EPS
 
The following is an analysis of basic and diluted EPS, reflecting the application of the two-class method, as described below:
Three Months Ended
June 30,
Six Months Ended
June 30,
(In thousands, except number of shares and per share data)2021202020212020
Net income
$18,143 $10,940 $37,883 $24,433 
Dividends and undistributed earnings allocated to participating securities(1)
(51)(27)(105)(55)
Net income available to common shareholders
$18,092 $10,913 $37,778 $24,378 
Weighted-average common shares outstanding for basic EPS
14,943,486 14,959,851 14,930,017 15,031,525 
Dilutive effect of stock-based awards(2)
63,985 37,760 64,121 37,607 
Weighted-average common and potential common shares for diluted EPS
15,007,471 14,997,611 14,994,138 15,069,132 
Earnings per common share:  
Basic EPS$1.21 $0.73 $2.53 $1.62 
Diluted EPS$1.21 $0.73 $2.52 $1.62 
Awards excluded from the calculation of diluted EPS(3):
MSPP 6,748   
Performance-based awards 3,454  2,429 
Stock options 1,000  1,000 
(1)    Represents dividends paid and undistributed earnings allocated to nonvested stock-based awards that contain non-forfeitable rights to dividends.
(2)    Represents the assumed dilutive effect of unexercised and/or unvested stock options, restricted shares, restricted share units and contingently issuable performance-based awards utilizing the treasury stock method.
(3)    Represents stock-based awards not included in the computation of potential common shares for purposes of calculating diluted EPS as the exercise prices were greater than the average market price of the Company's common stock, and, therefore, are considered anti-dilutive.

Nonvested stock-based payment awards that contain non-forfeitable rights to dividends are participating securities and are included in the computation of EPS pursuant to the two-class method. The two-class method is an earnings allocation formula that determines EPS for each class of common stock and participating security according to dividends declared (or accumulated) and participation rights in undistributed earnings. Certain of the Company’s nonvested stock-based awards qualify as participating securities. 
  
Net income is allocated between the common stock and participating securities pursuant to the two-class method. Basic EPS is computed by dividing net income available to common shareholders by the weighted average number of common shares outstanding during the period, excluding participating nonvested stock-based awards. Diluted EPS is computed in a similar manner, except that the denominator includes the number of additional common shares that would have been outstanding if potentially dilutive common shares were issued using the treasury stock method.

NOTE 15 – FAIR VALUE MEASUREMENT AND DISCLOSURE

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value is best determined using quoted market prices. However, in many instances, quoted market prices are not available. In such instances, fair values are determined using various valuation techniques. Various assumptions and observable inputs must be relied upon in applying these techniques. GAAP establishes a fair value hierarchy for valuation inputs that gives the highest priority to quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs.
 
GAAP permits an entity to choose to measure eligible financial instruments and other items at fair value. The Company has elected the fair value option for its loans held for sale. Electing the fair value option for loans held for sale enables the Company’s financial position to more clearly align with the economic value of the actively traded asset.
39



The fair value hierarchy for valuation of an asset or liability is as follows:
 
Level 1:   Valuation is based upon unadjusted quoted prices in active markets for identical assets and liabilities that the entity has the ability to access as of the measurement date.
 
Level 2:   Valuation is determined from quoted prices for similar assets or liabilities in active markets, from quoted prices for identical or similar instruments in markets that are not active or by model-based techniques in which all significant inputs are observable in the market.
 
Level 3:   Valuation is derived from model-based and other techniques in which at least one significant input is unobservable and which may be based on the Company’s own estimates about the assumptions that market participants would use to value the asset or liability.
 
In general, fair value is based upon quoted market prices, where available. If such quoted market prices are not available, fair value is based upon model-based techniques incorporating various assumptions including interest rates, prepayment speeds and credit losses. Assets and liabilities valued using model-based techniques are classified as either Level 2 or Level 3, depending on the lowest level classification of an input that is considered significant to the overall valuation. A description of the valuation methodologies used for instruments measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy, is set forth below.

Financial Instruments Recorded at Fair Value on a Recurring Basis

Trading Securities: The fair value of trading securities is reported using market quoted prices and has been classified as Level 1 as they are actively traded and no valuation adjustments have been applied.

Debt Securities:  The fair value of investments in debt securities is reported utilizing prices provided by an independent pricing service based on recent trading activity and other observable information including, but not limited to, dealer quotes, market spreads, cash flows, market interest rate curves, market consensus prepayment speeds, credit information, and the bond’s terms and conditions. The fair value of debt securities is classified as Level 2.

Loans Held For Sale: The fair value of loans held for sale is determined on an individual loan basis using quoted secondary market prices and is classified as Level 2.

Derivatives:  The fair value of interest rate swaps is determined using inputs that are observable in the market place obtained from third parties including yield curves, publicly available volatilities, and floating indexes and, accordingly, are classified as Level 2 inputs. The credit value adjustments associated with derivatives utilize Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default by the Company and its counterparties. As of June30, 2021 and December 31, 2020, the Company has assessed the significance of the impact of the credit valuation adjustments on the overall valuation of its derivative positions and has determined that the credit valuation adjustments are not significant to the overall valuation of its derivatives as sufficient collateral exists, mitigating the credit risk.

The fair value of the Company's fixed-rate interest rate lock commitments were determined using secondary market pricing for loans with similar structures, including term, rate and borrower credit quality, adjusted for the Company's pull-through rate estimate (i.e. estimate of loans within its loan pipeline that will ultimately complete the origination process and be funded). The Company has classified its fixed-rate interest rate lock commitments as Level 2, as the quoted secondary market prices are the more significant input, and, although the Company's internal pull-through rate estimate is a Level 3 estimate, it is less significant to the ultimate valuation.

The fair value of the Company's forward delivery commitments is determined using secondary market pricing for loans with similar structures, including term, rate and borrower credit quality, and the locked and agreed to price with the secondary market investor. The Company has classified its fixed-rate interest rate lock commitments as Level 2.
40


The following table summarizes financial assets and financial liabilities measured at fair value on a recurring basis, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value, for the dates indicated:
(In thousands)Fair
Value
Readily
Available
Market
Prices
(Level 1)
Observable
Market
Data
(Level 2)
Company
Determined
Fair Value
(Level 3)
June 30, 2021   
Financial assets:   
Trading securities$4,354 $4,354 $ $ 
AFS debt securities:  
Obligations of U.S. government sponsored enterprises7,083  7,083  
Obligations of states and political subdivisions118,653  118,653  
Mortgage-backed securities issued or guaranteed by U.S. government-sponsored enterprises839,541  839,541  
Collateralized mortgage obligations issued or guaranteed by U.S. government-sponsored enterprises425,302  425,302  
Subordinated corporate bonds9,244  9,244  
Loans held for sale15,140  15,140  
Customer loan swaps27,648  27,648  
Interest rate contracts6,814  6,814  
Fixed-rate mortgage interest rate lock commitments870  870  
Forward delivery commitments145  145  
Financial liabilities:  
Trading securities$4,354 $4,354 $ $ 
Customer loan swaps27,648  27,648  
Interest rate contracts9,153 — 9,153  
Fixed-rate mortgage interest rate lock commitments54 — 54  
Forward delivery commitments17 — 17  
December 31, 2020   
Financial assets:   
Trading securities$4,161 $4,161 $ $ 
AFS debt securities:
Obligations of states and political subdivisions127,120  127,120  
Mortgage-backed securities issued or guaranteed by U.S. government-sponsored enterprises566,618  566,618  
Collateralized mortgage obligations issued or guaranteed by U.S. government-sponsored enterprises410,454  410,454  
Subordinated corporate bonds11,621  11,621  
Loans held for sale41,557  41,557  
Customer loan swaps39,627  39,627  
Interest rate contracts5,731  5,731  
Fixed-rate mortgage interest rate lock commitments608  608  
Forward delivery commitments311  311  
Financial liabilities:    
Trading securities$4,161 $4,161 $ $ 
Customer loan swaps39,627  39,627  
Interest rate contracts11,625  11,625  
Fixed-rate mortgage interest rate lock commitments248  248  
Forward delivery commitments196  196  

 The Company did not have any transfers between Level 1 and Level 2 of the fair value hierarchy during the six months ended June 30, 2021. The Company’s policy for determining transfers between levels occurs at the end of the reporting period when circumstances in the underlying valuation criteria change and result in transfer between levels.

41


Financial Instruments Recorded at Fair Value on a Nonrecurring Basis
 
The Company may be required, from time to time, to measure certain financial assets and financial liabilities at fair value on a nonrecurring basis in accordance with GAAP. These include assets that are measured at the lower of cost or market value that were recognized at fair value below cost at the end of the period.

Collateral-Dependent Loans:  Expected credit losses on individually assessed loans deemed to be collateral dependent are valued based upon the lower of amortized cost of fair value of the underlying collateral less costs to sell. Management estimates the fair values of these assets using Level 2 inputs, such as the fair value of collateral based on independent third-party market approach appraisals for collateral-dependent loans, and Level 3 inputs where circumstances warrant an adjustment to the appraised value based on the age of the appraisal and/or comparable sales, condition of the collateral, and market conditions.

Servicing Assets:  The Company accounts for mortgage servicing assets at cost, subject to impairment testing. When the carrying value of a tranche exceeds fair value, a valuation allowance is established to reduce the carrying cost to fair value. Fair value is based on a valuation model that calculates the present value of estimated net servicing income. The Company obtains a third-party valuation based upon loan level data including note rate, type and term of the underlying loans. The model utilizes two significant unobservable inputs, namely loan prepayment assumptions and the discount rate used, to calculate the fair value of each tranche, and, as such, the Company has classified the model within Level 3 of the fair value hierarchy.
 
Non-Financial Instruments Recorded at Fair Value on a Non-Recurring Basis

The Company has no non-financial assets or non-financial liabilities measured at fair value on a recurring basis. Non-financial assets measured at fair value on a non-recurring basis consist of OREO, goodwill and core deposit intangible assets. 

OREO: OREO properties acquired through foreclosure or deed in lieu of foreclosure are recorded at net realizable value, which is the fair value of the real estate, less estimated costs to sell. Any write-down of the recorded investment in the related loan is charged to the ACL upon transfer to OREO. Upon acquisition of a property, a current appraisal is used or an internal valuation is prepared to substantiate fair value of the property. After foreclosure, management periodically, but at least annually, obtains updated valuations of the OREO properties and, if additional impairments are deemed necessary, the subsequent write-downs for declines in value are recorded through a valuation allowance and a provision for credit losses charged to other non-interest expense within the consolidated statements of income. As management considers appropriate, adjustments are made to the appraisal obtained for the OREO property to account for recent sales activity of comparable properties, changes in the condition of the property, and changes in market conditions. These adjustments are not observable in an active market and are classified as Level 3.

Goodwill: Goodwill represents the excess cost of an acquisition over the fair value of the net assets acquired. The fair value of goodwill is estimated by utilizing several standard valuation techniques, including discounted cash flow analyses, bank merger multiples, and/or an estimation of the impact of business conditions and investor activities on the long-term value of the goodwill. Should an impairment occur, the associated goodwill is written-down to fair value and the impairment charge is recorded within non-interest expense in the consolidated statements of income. The Company conducts an annual impairment test of goodwill in the fourth quarter each year, or more frequently as necessary. There have been no indications or triggering events during the six months ended June 30, 2021, for which management believes it is more likely than not that goodwill is impaired.

Core Deposit Intangible Assets: The Company's core deposit intangible assets represent the estimated value of acquired customer relationships and are amortized over the estimated life of those relationships. Core deposit intangibles are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. There were no events or changes in circumstances for the six months ended June 30, 2021, that indicated the carrying amount may not be recoverable.

42


The table below highlights financial and non-financial assets measured and recorded at fair value on a non-recurring basis for the dates indicated:
(In thousands)Fair
Value
Readily
Available
Market
Prices
(Level 1)
Observable
Market
Data
(Level 2)
Company
Determined
Fair Value
(Level 3)
June 30, 2021   
Financial assets:   
Collateral-dependent loans$74 $ $ $74 
December 31, 2020   
Financial assets:   
Servicing assets$1,010 $ $ $1,010 
Non-financial assets:
OREO$236 $ $ $236 

The following table presents the valuation methodology and unobservable inputs for Level 3 assets measured at fair value on a non-recurring basis for the dates indicated:
(Dollars in thousands)
Fair ValueValuation MethodologyUnobservable InputDiscount
June 30, 2021    
Collateral-dependent loans:    
Specifically reserved$74 Market approach appraisal of
   collateral
Estimated selling costs11%
December 31, 2020
Servicing assets$1,010 Discounted cash flowWeighted-average constant prepayment rate19%
Weighted average discount rate10%
OREO$236 Market approach appraisal of
   collateral
Management adjustment of appraisal5%
Estimated selling cost11%


43


The estimated fair values and related carrying amounts for assets and liabilities for which fair value is only disclosed are shown below as of the dates indicated:
(In thousands)Carrying
Amount
Fair ValueReadily
Available
Market
Prices
(Level 1)
Observable
Market
Prices
(Level 2)
Company
Determined
Market
Prices
(Level 3)
June 30, 2021
Financial assets:     
HTM debt securities$1,294 $1,397 $ $1,397 $ 
Commercial real estate loans(1)(2)
1,401,804 1,360,353   1,360,353 
Commercial loans(2)
362,751 358,273   358,273 
SBA PPP loans(2)
125,998 131,418   131,418 
Residential real estate loans(2)
1,117,712 1,123,720   1,123,720 
Home equity loans(2)
226,625 224,569   224,569 
Consumer loans(2)
18,966 17,137   17,137 
Servicing assets2,498 3,030   3,030 
Financial liabilities:     
Time deposits$384,357 $385,620 $ $385,620 $ 
Short-term borrowings170,413 170,394  170,394  
Subordinated debentures44,331 32,583  32,583  
December 31, 2020
Financial assets:
HTM debt securities$1,297 $1,411 $ $1,411 $ 
Commercial real estate loans(1)(2)
1,344,860 1,307,132   1,307,132 
Commercial loans(2)
374,791 372,194   372,194 
SBA PPP loans(2)
135,026 137,209 137,209 
Residential real estate loans(2)
1,051,324 1,066,991   1,066,991 
Home equity loans(2)
255,957 253,276   253,276 
Consumer loans(2)
19,999 18,102   18,102 
Servicing assets2,196 1,437   1,437 
Financial liabilities:     
Time deposits$457,694 $460,278 $ $460,278 $ 
Short-term borrowings162,439 162,420  162,420  
Long-term borrowings25,000 25,442  25,442  
Subordinated debentures59,331 46,475  46,475  
(1)    Commercial real estate loan includes non owner-occupied and owner-occupied properties.
(2)    The presented carrying amount is net of the allocated ACL on loans.

Excluded from the summary were financial instruments measured at fair value on a recurring and nonrecurring basis, as previously described.

The Company considers its financial instruments' current use to be the highest and best use of the instruments.

44


ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS

FORWARD-LOOKING STATEMENTS
 
The discussions set forth below and in the documents we incorporate by reference herein contain certain statements that may be considered forward-looking statements under the Private Securities Litigation Reform Act of 1995, as amended, including certain plans, exceptions, goals, projections, and statements, which are subject to numerous risks, assumptions, and uncertainties. Forward-looking statements can be identified by the use of the words “believe,” “expect,” “anticipate,” “intend,” “estimate,” “assume,” “plan,” “target,” or “goal” or future or conditional verbs such as “will,” “may,” “might,” “should,” “could” and other expressions which predict or indicate future events or trends and which do not relate to historical matters. Forward-looking statements should not be relied on, because they involve known and unknown risks, uncertainties and other factors, some of which are beyond the control of the Company. These risks, uncertainties and other factors may cause the actual results, performance or achievements of the Company to be materially different from the anticipated future results, performance or achievements expressed or implied by the forward-looking statements.
 
The following factors, among others, could cause the Company’s financial performance to differ materially from the Company’s goals, plans, objectives, intentions, expectations and other forward-looking statements:
 
weakness in the United States economy in general and the regional and local economies within the New England region and Maine, which could result in a deterioration of credit quality, an increase in the allowance for credit losses or a reduced demand for the Company’s credit or fee-based products and services;
changes in trade, monetary, and fiscal policies and laws, including interest rate policies of the Board of Governors of the Federal Reserve System;
inflation, interest rate, market, and monetary fluctuations;
competitive pressures, including continued industry consolidation and the increased financial services provided by non-banks;
volatility in the securities markets that could adversely affect the value or credit quality of the Company’s assets, impairment of goodwill, the availability and terms of funding necessary to meet the Company’s liquidity needs, and which could lead to impairment in the value of securities in the Company's investment portfolio;
changes in information technology and other operational risks, including cybersecurity, that require increased capital spending;
changes in consumer spending and savings habits;
changes in tax, banking, securities and insurance laws and regulations; and
changes in accounting policies, practices and standards, as may be adopted by the regulatory agencies as well as the Financial Accounting Standards Board ("FASB"), and other accounting standard setters.

In addition, statements about the potential effects of the COVID-19 pandemic on the Company's businesses and results of operations and financial conditions may constitute forward-looking statements. Such statements may include, but are not limited to, statements concerning:

the continued effectiveness of our Pandemic Work Group;
the continuing ability of our employees to work remotely;
our continuing ability to staff our branches and keep our branches open;
the continuing strength of our capital and liquidity positions;
our continued ability to access sources of contingent liquidity;
the continuing strength of the asset quality in our lending portfolios; and
the potential effectiveness of relief measures and programs for customers affected by COVID-19.
45


These statements are subject to the risk that the actual effects may differ, possibly materially, from what is reflected in those forward-looking statements due to factors and future developments that are uncertain, unpredictable and in many cases beyond our control, including the scope and duration of the pandemic, actions taken by governmental authorities in response to the pandemic, and the direct and indirect impact of the pandemic on our customers, third parties and the Company.

You should carefully review all of these factors, and be aware that there may be other factors that could cause differences, including the risk factors listed in our Annual Report on Form 10-K for the year ended December 31, 2020, as updated by the Company's quarterly reports on Form 10-Q, including this report, and other filings with the Securities and Exchange Commission. Readers should carefully review the risk factors described therein and should not place undue reliance on our forward-looking statements.
 
These forward-looking statements were based on information, plans and estimates at the date of this report, and we undertake no obligation to update any forward-looking statements to reflect changes in underlying assumptions or factors, new information, future events or other changes, except to the extent required by applicable law or regulation.
46


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 the return on average tangible equity; efficiency ratio; net interest income (fully-taxable equivalent); pre-tax, pre-provision earnings; adjusted yield on interest-earning assets and adjusted net interest margin (fully-taxable equivalent); tangible book value per share; tangible common equity ratio; core deposits and average core deposits; and total loans, excluding SBA PPP loans. These non-GAAP financial measures are utilized for purposes of measuring performance against the Company's peer group and other financial institutions, as well as for analyzing its internal performance. The Company also believes these non-GAAP financial measures help investors better understand the Company's operating performance and trends and allows 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 (a) tax effected amortization of core deposit intangible assets and (b) goodwill impairment, 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 measure within the financial services industry.
Three Months Ended
June 30,
Six Months Ended
June 30,
(Dollars in thousands)2021202020212020
Net income, as presented$18,143 $10,940 $37,883 $24,433 
Add: amortization of core deposit intangible assets, net of tax(1)
130 135 259 269 
Net income, adjusted for amortization of core deposit intangible assets
$18,273 $11,075 $38,142 $24,702 
Average equity, as presented$538,947 $499,449 $536,311 $489,811 
Less: average goodwill and core deposit intangible assets
(97,292)(97,965)(97,377)(98,054)
Average tangible equity$441,655 $401,484 $438,934 $391,757 
Return on average equity13.50 %8.81 %14.24 %10.03 %
Return on average tangible equity16.60 %11.09 %17.52 %12.68 %
(1)     Assumed a 21% tax rate.

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 within the financial services industry 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, as necessary, to (ii) net interest income on a tax equivalent basis plus total non-interest income, adjusted for certain other income items, as necessary.
Three Months Ended
June 30,
Six Months Ended
June 30,
(Dollars in thousands)2021202020212020
Non-interest expense, as presented$25,590 $23,509 $50,489 $48,070 
Less: prepayment penalty on borrowings— — (514)— 
Adjusted non-interest expense$25,590 $23,509 $49,975 $48,070 
Net interest income, as presented$33,529 $34,539 $65,893 $66,365 
Add: effect of tax-exempt income(1)
265 295 536 574 
Non-interest income, as presented11,320 12,060 26,535 23,463 
Adjusted net interest income plus non-interest income$45,114 $46,894 $92,964 $90,402 
Ratio of non-interest expense to total revenues(2)
57.06 %50.45 %54.63 %53.51 %
Efficiency ratio56.72 %50.13 %53.76 %53.17 %
(1)     Assumed a 21% tax rate.
(2)    Revenue is the sum of net interest income and non-interest income.
47



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 within the financial services industry and is used within the calculation of net interest margin on a fully-taxable equivalent basis.
 Three Months Ended
June 30,
Six Months Ended
June 30,
(In thousands)2021202020212020
Net interest income, as presented$33,529 $34,539 $65,893 $66,365 
Add: effect of tax-exempt income(1)
265 295 536 574 
Net interest income (fully-taxable equivalent)$33,794 $34,834 $66,429 $66,939 
(1)     Assumed a 21% tax rate.

Pre-tax, Pre-provision Earnings. Pre-tax, pre-provision earnings is a supplemental measure of operating earnings and performance, and is calculated as net income before provision for credit losses and income tax expense. This supplemental measure has 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 differences in accounting methodology for the ACL across financial institutions.
Three Months Ended
June 30,
Six Months Ended
June 30,
(In thousands)2021202020212020
Net income, as presented$18,143 $10,940 $37,883 $24,433 
Add: (credit) provision for credit losses(3,403)9,398 (5,359)11,173 
Add: income tax expense4,519 2,752 9,415 6,152 
Pre-tax, pre-provision earnings$19,259 $23,090 $41,939 $41,758 

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 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.
Three Months Ended
June 30,
Six Months Ended
June 30,
2021202020212020
Yield on interest-earning assets, as presented3.06 %3.53 %3.10 %3.71 %
Add: effect of excess liquidity on yield on interest-earning assets0.12 %0.08 %0.11 %0.04 %
Less: effect of SBA PPP loans on yield on interest-earning assets(0.04)%(0.02)%(0.05)%(0.01)%
Adjusted yield on interest-earning assets3.14 %3.59 %3.16 %3.74 %

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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.
Three Months Ended
June 30,
Six Months Ended
June 30,
2021202020212020
Net interest margin (fully-taxable equivalent), as presented2.83 %3.11 %2.85 %3.10 %
Add: effect of excess liquidity on net interest margin (fully-taxable equivalent)0.11 %0.07 %0.10 %0.03 %
Less: effect of SBA PPP loans on net interest margin (fully-taxable equivalent)(0.05)%(0.03)%(0.05)%(0.02)%
Adjusted net interest margin (fully-taxable equivalent)2.89 %3.15 %2.90 %3.11 %

Tangible Book Value per Share. Tangible book value per share is the ratio of (i) shareholders’ equity less goodwill and other intangibles to (ii) total common shares outstanding at period end. Tangible book value per share is a common measure within the financial services industry to assess the value of a company, as it removes goodwill and other intangible assets generated within purchase accounting upon a business combination.

Tangible Common Equity Ratio. 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 the financial services industry to assess whether or not a company is highly leveraged.
(In thousands, except number of shares, per share data and ratios)June 30,
2021
December 31,
2020
Tangible Book Value Per Share:
Shareholders’ equity, as presented$545,548 $529,314 
Less: goodwill and other intangible assets(97,213)(97,540)
Tangible shareholders’ equity$448,335 $431,774 
Shares outstanding at period end14,951,067 14,909,097 
Book value per share$36.49 $35.50 
Tangible book value per share$29.99 $28.96 
Tangible Common Equity Ratio:
Total assets$5,152,069 $4,898,745 
Less: goodwill and other intangible assets(97,213)(97,540)
Tangible assets$5,054,856 $4,801,205 
Common equity ratio10.59 %10.81 %
Tangible common equity ratio8.87 %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.
(In thousands)June 30,
2021
December 31,
2020
Total deposits$4,294,114 $4,005,244 
Less: certificates of deposit(334,336)(357,666)
Less: brokered deposits(282,786)(283,567)
Core deposits$3,676,992 $3,364,011 

49


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 tables) less certificates of deposit. Management believes core deposits is a useful measure to assess the Company's deposit base, including its potential volatility.
Three Months Ended
March 31,
Six Months Ended
June 30,
(In thousands)2021202020212020
Total average deposits$3,984,113 $3,676,000 $3,877,803 $3,515,798 
Less: average certificates of deposit(338,595)(477,068)(345,039)(514,573)
Average core deposits$3,645,518 $3,198,932 $3,532,764 $3,001,225 

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.
(In thousands)June 30,
2021
December 31,
2020
Total loans, as presented$3,285,916 $3,219,822 
Less: SBA PPP loans(126,064)(135,095)
Total loans, excluding SBA PPP loans$3,159,852 $3,084,727 
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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.

There have been no material changes to the Company's critical accounting policies as disclosed within its Annual Report on Form 10-K for the year ended December 31, 2020. Refer to the Annual Report on Form 10-K for the year ended December 31, 2020, for discussion of the Company's critical accounting policies.

Refer to Note 2 of the consolidated financial statements for discussion of accounting pronouncements issued but yet to be adopted and implemented.

GENERAL OVERVIEW

Camden National Corporation (hereafter referred to as “we,” “our,” “us,” or the “Company”) is a publicly-held bank holding company, with approximately $5.2 billion in assets at June 30, 2021, incorporated under the laws of the State of Maine and headquartered in Camden, Maine. Camden National Bank (the "Bank"), a wholly-owned subsidiary of the Company, was founded in 1875. The Company was founded in 1984, went public in 1997 and is now registered with NASDAQ Global Market (“NASDAQ”) under the ticker symbol "CAC."

The primary business of the Company and the Bank is to attract deposits from, and to extend loans to, consumer, institutional, municipal, non-profit and commercial customers. The Company, through the Bank, provides a broad array of banking and other financial services, including wealth management and trust services, brokerage, investment advisory and insurance services, to consumer, business, non-profit and municipal customers.

The Company competes throughout Maine, and select areas of New Hampshire and Massachusetts. We operate in 13 of Maine's 16 counties, with our primary markets and presence being throughout coastal and central Maine. The Company and the Bank generally have effectively competed with other financial institutions by emphasizing customer service, highlighted by local decision-making, establishing long-term customer relationships, building customer loyalty and providing products and services designed to meet the needs of customers.

EXECUTIVE OVERVIEW
 
Operating Results. Net income for the second quarter of 2021 was $18.1 million, an increase of $7.2 million, or 66%, over the second quarter of 2020, and diluted EPS was $1.21 for the second quarter of 2021, an increase $0.48, or 66%, over the same period. Pre-tax, pre-provision earnings (non-GAAP) for the second quarter were $19.3 million, a decrease of $3.8 million, or 17%.

The key earnings drivers between periods were:
A release of provision for credit losses of $3.4 million for the second quarter of 2021, compared to a $9.4 million provision charge for the second quarter of 2020. The second quarter of 2020 marked the first full quarter of the COVID-19 pandemic, and, in response to the significant level of risk and uncertainty at that time, the Company increased its reserve levels on its loan portfolio using the incurred loss accounting model. Fast forward 12 months and there continues to be a degree of risk and uncertainty, however, as of June 30, 2021, the Company's asset quality remains very strong and current and forecasted economic conditions have improved considerably. As such, under the current expected credit loss accounting model, commonly referred to as "CECL," the Company has begun to release its loan reserves it built up in 2020.
Mortgage banking income for the second quarter of 2021 was $2.6 million, a decrease of $2.1 million, or 45%, compared to the second quarter of 2020. In the first quarter of 2021, the Company shifted its strategy to hold more residential mortgage loans within its loan portfolio, and, as a result, the Company sold 40% of its residential mortgage production during the second quarter of 2021, compared to 65% for the second quarter of 2020.
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Net interest income for the second quarter was $33.5 million, a decrease of $1.0 million, or 3%, compared to the second quarter of 2020. The decrease was driven by net interest margin (fully-taxable equivalent) compression of 28 basis points between periods to 2.83% for the second quarter of 2021 as interest rates dropped and average deposits grew considerably as consumers and businesses received federal government stimulus in response to the COVID-19 pandemic.
Debit card income for the second quarter of 2021 was $3.1 million, an increase of $721,000, or 30%, compared to the second quarter of 2020. The increase in revenue was driven by an increase in customer spending as consumers and businesses received proceeds from various government stimulus programs.
Salaries and employee benefit costs for the second quarter were $15.3 million, an increase of $1.7 million, or 12%, due to higher performance-based incentive accruals.

Net income for the six months ended June 30, 2021 was $37.9 million, an increase of $13.5 million, or 55%, over the six months ended June 30, 2020, and diluted EPS was $2.52 for the six months ended June 30, 2021, an increase of $0.90, or 56%, over the same period last year. Pre-tax, pre-provision earnings (non-GAAP) for the six months ended June 30, 2021 were $41.9 million, compared to $41.8 million for the same period last year..

The key earnings drivers between periods, and the reasons for such, were relatively consistent with the discussion above between quarters and included:
A release of provision for credit losses of $5.4 million for the first half of 2021, compared to a $11.2 million provision charge for the first half of 2020.
Mortgage banking income for the first half of 2021 was $9.7 million, an increase of $1.5 million, or 18%, over the first half of 2020.
Net interest income for the first half of 2021 was $65.9 million, a decrease of $472,000, or 1%, compared to the first half of 2020. The decrease was driven by net interest margin (fully-taxable equivalent) compression of 25 basis points between periods to 2.85% for the first half of 2021, which included SBA PPP loan income of $3.5 million for the six months ended June 30, 2021, compared to $1.7 million for the six months ended June 30, 2020.
Debit card income for the first half of 2021 was $5.8 million, an increase of $1.3 million, or 29%, compared to the first half of 2020.
Salaries and employee benefit costs for the first half of 2021 were $29.8 million, an increase of $1.9 million, or 7%.

Other key financial metrics for the periods indicated were as follows:
Three Months Ended
June 30,
Six Months Ended
June 30,
2021202020212020
Return on average assets1.42 %0.90 %1.52 %1.05 %
Return on average equity13.50 %8.81 %14.24 %10.03 %
Return on average tangible equity (non-GAAP)16.60 %11.09 %17.52 %12.68 %
Ratio of non-interest expense to total revenues57.06 %50.45 %54.63 %53.51 %
Efficiency ratio (non-GAAP)56.72 %50.13 %53.76 %53.17 %

Asset Quality. As of June 30, 2021, the Company's asset quality metrics remained very strong, continuing its trend from December 31, 2020. Non-performing assets were 0.17% of total assets and loans 30-89 days past due were 0.02% of total loans. In comparison, at December 31, 2020, non-performing assets were 0.22% of total assets and loans 30-89 days past due were 0.10% of total loans.

As of June 30, 2021, no loans were operating under a short-term deferral arrangement due to COVID-19, compared to $26.5 million at December 31, 2020 and $546.7 million as of June 30, 2020. The majority of these loans have returned to normal payment status or have since fully paid-off. Of those loans that were previously operating under a short-term deferral arrangement, $1.3 million were classified as non-accrual and $536,000 were 30-89 days past due as of June 30, 2021.

Capital Position. At June 30, 2021, the Company's capital position remained well in excess of regulatory capital requirements, including a total risk-based capital ratio of 15.26% and a Tier 1 leverage ratio of 9.48%. In April 2021, the Company called its $15.0 million of subordinated debt, at par plus accrued and unpaid interest, reducing Tier 2 risk-based
52


capital and reducing the Company's total risk-based capital ratio.

On June 29, 2021, the Company announced a cash dividend to shareholders of $0.36 per share, payable on July 30, 2021 to shareholders of record as of July 15, 2021. As of June 30, 2021, the Company's annualized dividend yield was 3.02% based on its closing share price of $47.76, as reported by NASDAQ. As of June 30, 2021, the Company's book value per share grew 8% to $36.49 and its tangible book value per share (non-GAAP) grew 10% to $29.99 over the last twelve months.

In the first quarter of 2021, the Company initiated a new share repurchase program for up to 750,000 shares of its common stock, or approximately 5% of the Company's shares outstanding. This share repurchase program replaces the program that terminated in January 2021. The Company did not repurchase any shares of its common stock during the first half of 2021.

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, adjusted for net loan fees, origination costs, and accretion or amortization of fair value marks on loans and/or CDs created in purchase accounting, less the interest paid on interest-bearing deposits and borrowings. Net interest income is our largest source of revenue, which is defined as the sum of net interest income and non-interest income. For the three and six months ended June 30, 2021, net interest income was $33.5 million, or 75% of total revenues, and $65.9 million, or 71% of total revenues, respectively, compared to $34.5 million, or 74% of total revenues, and $66.4 million, or 74% of total revenues, for the three and six months ended June 30, 2020, respectively. Net interest income is affected by several factors including, but not limited to, changes in interest rates, loan and deposit pricing strategies and competitive conditions, the volume and mix of interest-earning assets and liabilities, and the level of non-performing assets.

Net Interest Income

For the three months ended June 30, 2021, net interest income on a fully-taxable equivalent basis (non-GAAP) was $33.8 million, a decrease of $1.0 million, or 3%, compared to the three months ended June 30, 2020. The decrease was driven by a $2.9 million decrease in interest income on a fully-taxable equivalent basis between periods that was partially offset by a decrease in interest expense of $1.9 million between periods.
The decrease in interest income on a fully-taxable equivalent basis between periods was the result of a 47 basis point decrease in yield on average interest-earning assets driven by the lower interest rate environment and a change in the mix of average interest-earning assets as higher yield average loan balances were replaced with lower interest-earning assets, including cash and investments. Average loans balances decreased $59.3 million, or 2%, between periods while average interest-earning cash and investment balances increased $351.0 million, or 31%.
The decrease in interest expense between periods was the result of a 20 basis point decrease in our average cost of funds driven by lower interest rates and the change in funding mix as average deposits grew $308.1 million, or 8%, led by average core deposits (non-GAAP) growth of $446.6 million, or 14%, reducing the need for more costly borrowings. As a result, average borrowings decreased $64.8 million, or 11%, between periods. Average deposit growth between periods was fueled by the various federal government stimulus programs issued in response to the COVID-19 pandemic.

For the six months ended June 30, 2021, net interest income on a fully-taxable equivalent basis (non-GAAP) was $66.4 million, a decrease of $510,000, or 1%, compared to the six months ended June 30, 2020. The decrease was driven by a $7.8 million decrease in interest income on a fully-taxable equivalent basis between periods that was partially offset by a decrease in interest expense of $7.3 million between periods.
The decrease in interest income on a fully-taxable equivalent basis between periods was the result of a 61 basis point decrease in yield on average interest-earning assets driven by the lower interest rate environment and a change in the mix of average interest-earning assets as higher yield average loan balances were replaced with lower interest-earning assets, including cash and investments. Average loans balances increased $29.7 million, or 1%, between periods while average interest-earning cash and investment balances increased $317.6 million, or 30%.
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The decrease in interest expense between periods was the result of a 38 basis point decrease in our average cost of funds driven by lower interest rates and the change in funding mix as average deposits grew $362.0 million, or 10%, led by average core deposits (non-GAAP) growth of $531.5 million, or 18%, reducing the need for more costly borrowings. As a result, average borrowings decreased $51.8 million, or 9%, between periods. Average deposit growth between periods was fueled by the various federal government stimulus programs issued in response to the COVID-19 pandemic.

Net Interest Margin

For the three months ended June 30, 2021, net interest margin on a fully-taxable equivalent basis was 2.83%, a decrease of 28 basis points compared to the three months ended June 30, 2020. The Company's yield on average interest-earning assets compressed 47 basis points between periods to 3.06% for the three months ended June 30, 2021, while its cost of funds decreased 20 basis points between periods to 0.24% for the three months ended June 30, 2021.

The Company's adjusted net interest margin on a fully-taxable equivalent basis (non-GAAP), which excludes the impact of SBA PPP loans and excess cash, for the three months ended June 30, 2021, was 2.89%, compared to 3.15% for the three months ended June 30, 2020.

For the six months ended June 30, 2021, net interest margin on a fully-taxable equivalent basis was 2.85%, a decrease of 25 basis points compared to the six months ended June 30, 2020. The Company's yield on average interest-earning assets compressed 61 basis points between periods to 3.10% for the six months ended June 30, 2021, while its cost of funds decreased 38 basis points between periods to 0.26% for the six months ended June 30, 2021.

The Company's adjusted net interest margin on a fully-taxable equivalent basis (non-GAAP), which excludes the impact of SBA PPP loans and excess cash, for the six months ended June 30, 2021, was 2.90%, compared to 3.11% for the six months ended June 30, 2020.

The following table presents average balances, interest income, interest expense, and the corresponding average yields earned and cost of funds, as well as net interest income, net interest rate spread and net interest margin on a fully-taxable basis for the followings periods:
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Quarterly Average Balance, Interest and Yield/Rate Analysis
Three Months Ended
June 30, 2021June 30, 2020
(Dollars in thousands)Average BalanceInterestYield/RateAverage BalanceInterestYield/Rate
Assets
Interest-earning assets:
 Interest-bearing deposits in other banks and other interest-earning assets$235,676 $56 0.09 %$168,221 $26 0.06 %
Investments - taxable1,129,682 4,582 1.62 %836,885 5,203 2.49 %
Investments - nontaxable(1)
114,811 965 3.36 %124,101 1,049 3.38 %
Loans(2):
Commercial real estate1,407,374 12,792 3.60 %1,302,393 12,609 3.83 %
Commercial(1)
319,100 3,046 3.78 %404,545 3,868 3.78 %
SBA PPP158,258 1,660 4.15 %178,119 1,706 3.79 %
HPFC10,775 269 9.89 %17,659 414 9.28 %
Municipal(1)
26,137 212 3.26 %19,567 176 3.62 %
Residential real estate1,093,502 10,310 3.77 %1,084,931 11,002 4.06 %
Consumer and home equity253,825 2,639 4.17 %321,019 3,420 4.29 %
Total loans3,268,971 30,928 3.76 %3,328,233 33,195 3.97 %
Total interest-earning assets4,749,140 36,531 3.06 %4,457,440 39,473 3.53 %
Cash and due from banks53,048 49,777 
Other assets364,258 392,271 
Less: ACL(35,629)(27,823)
Total assets$5,130,817 $4,871,665 
Liabilities & Shareholders' Equity
Deposits:
Non-interest checking$970,446 $— — %$664,605 $— — %
Interest checking1,311,400 588 0.18 %1,298,468 906 0.28 %
Savings659,892 67 0.04 %518,803 76 0.06 %
Money market703,780 506 0.29 %717,056 659 0.37 %
Certificates of deposit338,595 449 0.53 %477,068 1,588 1.34 %
Total deposits3,984,113 1,610 0.16 %3,676,000 3,229 0.35 %
Borrowings:
Brokered deposits284,194 311 0.44 %234,823 163 0.28 %
Customer repurchase agreements184,663 176 0.38 %209,302 291 0.56 %
Subordinated debentures46,639 640 5.50 %59,194 888 6.03 %
Other borrowings— — — %76,983 68 0.35 %
Total borrowings515,496 1,127 0.88 %580,302 1,410 0.98 %
Total funding liabilities4,499,609 2,737 0.24 %4,256,302 4,639 0.44 %
Other liabilities92,261 115,914 
Shareholders' equity538,947 499,449 
Total liabilities & shareholders' equity$5,130,817 $4,871,665 
Net interest income (fully-taxable equivalent)33,794 34,834 
Less: fully-taxable equivalent adjustment(265)(295)
Net interest income$33,529 $34,539 
Net interest rate spread (fully-taxable equivalent)2.82 %3.09 %
Net interest margin (fully-taxable equivalent)2.83 %3.11 %
Adjusted net interest margin (fully-taxable equivalent) (non-GAAP)2.89 %3.15 %
(1)    Reported on tax-equivalent basis calculated using a 21% tax rate, including certain commercial loans.
(2)    Non-accrual loans and loans held for sale are included in total average loans.


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Year-To-Date Average Balance, Interest and Yield/Rate Analysis
Six Months Ended
June 30, 2021June 30, 2020
(Dollars in thousands)Average BalanceInterestYield/RateAverage BalanceInterestYield/Rate
Assets
Interest-earning assets:
 Interest-bearing deposits in other banks and other interest-earning assets$223,329 $102 0.09 %$117,201 $233 0.39 %
Investments - taxable1,038,575 8,636 1.66 %822,963 10,377 2.52 %
Investments - nontaxable(1)
116,630 1,887 3.24 %120,819 2,044 3.38 %
Loans(2):
Commercial real estate1,395,152 25,166 3.59 %1,287,965 26,255 4.03 %
Commercial(1)
326,240 6,167 3.76 %410,563 8,302 4.00 %
SBA PPP156,588 3,536 4.49 %89,033 1,706 3.79 %
HPFC11,657 495 8.44 %18,997 817 8.50 %
Municipal(1)
25,141 410 3.29 %18,279 331 3.64 %
Residential real estate1,088,330 20,388 3.75 %1,081,884 22,294 4.12 %
Consumer and home equity261,227 5,403 4.17 %327,895 7,606 4.66 %
Total loans3,264,335 61,565 3.76 %3,234,616 67,311 4.14 %
Total interest-earning assets4,642,869 72,190 3.10 %4,295,599 79,965 3.71 %
Cash and due from banks52,305 46,323 
Other assets376,234 364,544 
Less: ALL(36,771)(26,537)
Total assets$5,034,637 $4,679,929 
Liabilities & Shareholders' Equity
Deposits:
Non-interest checking$894,460 $— — %$597,053 $— — %
Interest checking1,300,516 1,200 0.19 %1,222,626 2,893 0.48 %
Savings643,333 130 0.04 %497,826 162 0.07 %
Money market694,455 1,029 0.30 %683,720 2,245 0.66 %
Certificates of deposit345,039 998 0.58 %514,573 3,796 1.48 %
Total deposits3,877,803 3,357 0.17 %3,515,798 9,096 0.52 %
Borrowings:
Brokered deposits284,406 627 0.44 %221,454 958 0.87 %
Customer repurchase agreements175,245 297 0.34 %222,827 925 0.83 %
Subordinated debentures52,950 1,445 5.50 %59,157 1,775 6.03 %
Other borrowings7,182 35 0.99 %68,120 272 0.80 %
Total borrowings519,783 2,404 0.93 %571,558 3,930 1.38 %
Total funding liabilities4,397,586 5,761 0.26 %4,087,356 13,026 0.64 %
Other liabilities100,740 102,762 
Shareholders' equity536,311 489,811 
Total liabilities & shareholders' equity$5,034,637 $4,679,929 
Net interest income (fully-taxable equivalent)66,429 66,939 
Less: fully-taxable equivalent adjustment(536)(574)
Net interest income$65,893 $66,365 
Net interest rate spread (fully-taxable equivalent)2.84 %3.07 %
Net interest margin (fully-taxable equivalent)2.85 %3.10 %
Adjusted net interest margin (fully-taxable equivalent) (non-GAAP)
2.90 %3.11 %
(1)    Reported on tax-equivalent basis calculated using a 21% tax rate, including certain commercial loans.
(2)    Non-accrual loans and loans held for sale are included in total average loans.

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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 period's rate), (b) changes in rates (change in rate multiplied prior period'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.
Three Months Ended
June 30, 2021 vs. June 30, 2020
Six Months Ended
June 30, 2021 vs. June 30, 2020
Increase (Decrease) Due to:Net Increase (Decrease)Increase (Decrease) Due to:Net Increase (Decrease)
(In thousands)VolumeRateVolumeRate
Interest-earning assets:            
Interest-bearing deposits in other banks and other interest-earning assets
$10 $20 $30 $207 $(338)$(131)
Investments – taxable
1,823 (2,444)(621)2,717 (4,458)(1,741)
Investments – nontaxable
(79)(5)(84)(71)(86)(157)
Commercial real estate
1,016 (833)183 2,184 (3,273)(1,089)
Commercial
(816)(6)(822)(1,705)(430)(2,135)
SBA PPP
(190)144 (46)1,294 536 1,830 
HPFC
(162)17 (145)(315)(7)(322)
Municipal
59 (23)36 124 (45)79 
Residential real estate
87 (779)(692)133 (2,039)(1,906)
Consumer and home equity
(717)(64)(781)(1,545)(658)(2,203)
Total interest income (fully-taxable equivalent)
1,031 (3,973)(2,942)3,023 (10,798)(7,775)
Interest-bearing liabilities:
Interest checking
(327)(318)186 (1,879)(1,693)
Savings
21 (30)(9)51 (83)(32)
Money market
(12)(141)(153)35 (1,251)(1,216)
Certificates of deposit
(461)(678)(1,139)(1,248)(1,550)(2,798)
Brokered deposits
34 114 148 272 (603)(331)
Customer repurchase agreements
(34)(81)(115)(197)(431)(628)
Subordinated debentures
(188)(60)(248)(186)(144)(330)
Other borrowings
(68)— (68)(242)(237)
Total interest expense(699)(1,203)(1,902)(1,329)(5,936)(7,265)
Net interest income (fully-taxable equivalent)
$1,730 $(2,770)$(1,040)$4,352 $(4,862)$(510)

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Net interest income on a fully-taxable equivalent basis included the following for the periods indicated:
Income Statement LocationThree Months Ended
June 30,
Six Months Ended
June 30,
(In thousands)2021202020212020
Loan fees(1)
Interest income$1,253 $1,023 $2,693 $689 
Net fair value mark accretion from purchase accounting
Interest income and Interest expense192 381 425 632 
Recoveries on previously charged-off acquired loans
Interest income108 23 133 55 
Total$1,553 $1,427 $3,251 $1,376 
(1)    As of June 30, 2021 and December 31, 2020, there were $5.4 million and $2.2 million of SBA PPP loan origination fees yet to be recognized, respectively.

Provision for Credit Losses

Effective January 1, 2020, but applied to interim reporting periods on or after October 1, 2020, the Company adopted ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments ("ASU 2016-13"), commonly referred to as "CECL," to account for the ACL. CECL requires the measurement of expected lifetime credit losses for financial assets measured at amortized cost, including loans and HTM debt investments, as well as certain off-balance sheet credit exposures. CECL requires that the ACL be calculated based on current expected credit losses over the remaining expected life of the financial asset and also considers expected changes in macroeconomic conditions. The (credit) provision for credit losses on the consolidated statements income for the three and six months June 30, 2021, was calculated using the CECL methodology, whereas the (credit) provision for credit losses for the three and six months ended June 30, 2020, was calculated using the incurred loss model, which relied on management's periodic assessment of the adequacy of the ACL.

The (credit) provision for credit losses was made up of the following components for the periods indicated:
Three Months Ended
June 30,
ChangeSix Months Ended
June 30,
Change
(Dollars in thousands)20212020$%20212020$%
CECL(Incurred Loss)CECL(Incurred Loss)
(Credit) provision for loan losses$(3,452)$9,400 $(12,852)(137)%$(5,306)$11,172 $(16,478)(147)%
Provision (Credit) for credit losses on off-balance sheet credit exposures49 (2)51 N.M.(53)(54)N.M.
(Credit) provision for credit losses$(3,403)$9,398 $(12,801)(136)%$(5,359)$11,173 $(16,532)(148)%

For the three and six months ended June 30, 2021, a release of provision for loan losses of $3.5 million and $5.4 million, respectively, was recorded. The release of provision for loan losses for the three and six months ended June 30, 2021, was primarily within the non owner-occupied commercial real estate and commercial loan segments. Collectively, the two loan segments made up 102% of the net change for three months ended June 30, 2021 and 80% of the net change for the six months ended June 30, 2021. The release of provision for loan losses with these two loan segments, and more broadly across the loan portfolio, reflects the Company's overall asset quality and an improvement in its macroeconomic outlook (i.e. loss drivers) over its four-quarter forecast period under CECL. The Company's provision for loan losses for the three and six months ended June 30, 2020, reflected the onset of the COVID-19 pandemic and an elevated qualitative factor adjustment ("Q-factor") under the incurred loss model.

For the three and six months ended June 30, 2021, annualized net charge-offs were 0.03% of average loans, compared to 0.05% of average loans for three and six months ended June 30, 2020.

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Non-Interest Income

The following table presents the components of non-interest income for the periods indicated:
 Three Months Ended
June 30,
ChangeSix Months Ended
June 30,
Change
(Dollars in thousands)20212020$%20212020$%
Mortgage banking income, net(1)
$2,598 $4,691 (2,093)(45)%$9,707 $8,225 $1,482 18 %
Debit card income(2)
3,112 2,391 721 30 %5,848 4,532 1,316 29 %
Income from fiduciary services
1,707 1,603 104 %3,233 3,105 128 %
Service charges on deposit accounts(3)
1,517 1,337 180 13 %3,056 3,349 (293)(9)%
Brokerage and insurance commissions
939 622 317 51 %1,892 1,279 613 48 %
Bank-owned life insurance
591 614 (23)(4)%1,185 1,303 (118)(9)%
Customer loan swap fees— 57 (57)(100)%— 171 (171)(100)%
Other income
856 745 111 15 %1,614 1,499 115 %
Total non-interest income$11,320 $12,060 $(740)(6)%$26,535 $23,463 $3,072 13 %
Non-interest income as a percentage of total revenues
25 %26 %29 %26 %
(1) Mortgage banking income, net: The decrease in mortgage banking income, net for the three months ended June 30, 2021, compared to the same period of 2020 was driven by a shift in the Company's strategy to hold more residential mortgage loans within its portfolio, and, as a result the company sold $110.8 million, or 40% of its residential mortgage loan originations, of its residential mortgage production during the second quarter of 2021, compared to $198.0 million, or 65% of its residential mortgage loan originations, for the second quarter of 2020.
The increase in mortgage banking income, net for the six months ended June 30, 2021, compared to the same period of 2020 was due to an increase in residential mortgage loan sales, compared to June 30, 2020. For the six months ended June 30, 2021, the Company sold $303.4 million of its residential mortgages, compared to $267.3 million for the six months ended June 30, 2020.
(2)    Debit card income: The increase for the three and six months ended June 30, 2021, compared to the same periods of 2020 was driven by an increase in customer spending driven by federal government stimulus in response to the COVID-19 pandemic.
(3)    Brokerage and insurance commissions: The increase for the three and six months ended June 30, 2021, compared to the same periods of 2020 was driven by assets under administration growth of 30% over the last twelve months.
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Non-Interest Expense

The following table presents the components of non-interest expense for the periods indicated:
 Three Months Ended
June 30,
ChangeSix Months Ended
June 30,
Change
(Dollars in thousands)20212020$%20212020$%
Salaries and employee benefits(1)
$15,318 $13,627 $1,691 12 %$29,840 $27,954 $1,886 %
Furniture, equipment and data processing(2)
2,947 2,710 237 %5,974 5,500 474 %
Net occupancy costs
1,805 1,997 (192)(10)%3,756 4,000 (244)(6)%
Debit card expense
1,074 878 196 22 %2,060 1,812 248 14 %
Consulting and professional fees
997 1,181 (184)(16)%1,860 1,964 (104)(5)%
Regulatory assessments(3)
487 299 188 63 %990 461 529 115 %
Amortization of core deposit intangible assets
164 171 (7)(4)%328 341 (13)(4)%
Other real estate owned and collection (recoveries) costs, net(4)
(25)98 (123)(126)%(216)199 (415)(209)%
Other expenses2,823 2,548 275 11 %5,897 5,839 58 %
Total non-interest expense
$25,590 $23,509 $2,081 %$50,489 $48,070 $2,419 %
Ratio of non-interest expense to total revenues57.06 %50.45 %54.63 %53.51 %
Efficiency ratio (non-GAAP)56.72 %50.13 %53.76 %53.17 %
(1)    Salaries and employee benefits: The increase for the three months ended June 30, 2021, compared to the same period of 2020 was driven by an increase in incentive compensation accruals of $1.9 million based on year-to-date performance to budget, and was partially offset by lower insurance costs of $177,000.
The increase for the six months ended June 30, 2021, compared to the same period of 2020 was driven by an increase in incentive compensation accruals of $2.2 million based on year-to-date performance to budget, and was partially offset by lower insurance costs of $236,000 and a one-time employer tax credit of $329,000 in the first quarter of 2021.
(2)    Furniture, equipment and data processing costs: The increase for the three and six months ended June 30, 2021, compared to the same periods of 2020 was driven by our continued investment in technology and data processing, which included transitioning our items' processing to an outsourced solution during 2020.
(3)     Regulatory assessments: The increase for the three and six months ended June 30, 2021, compared to the same periods of 2020 was driven by the receipt of the Small Bank Assessment Credit from the FDIC in the first and second quarters of 2020. The Company has no remaining Small Bank Assessment Credits, and its regulatory assessment costs for the first and second quarter of 2021 align with normal historical levels.
(4)    Other real estate owned and collection (recoveries) costs, net: The decrease for the three and six months ended June 30, 2021, compared to the same periods of 2020 reflects the Company's current asset quality position. Also, in the second quarter of 2021, the Company recognized a gain on the sale of an OREO property of $76,000, and for the six months ended June 30, 2021, it recouped $160,000 of costs previously incurred and recorded total gains upon the sale of OREO properties of $190,000.

FINANCIAL CONDITION

Cash and Cash Equivalents

Total cash and cash equivalents at June 30, 2021, were $103.7 million, compared to $145.8 million at December 31, 2020. The decrease in cash and cash equivalents balances of $42.0 million during the first half of 2021 was primarily driven by an increase in investments of $282.9 million and loans (including loans held for sale) of $39.7 million, net of an increase in total funding liabilities of $256.8 million. We continuously monitor our cash levels to ensure compliance with applicable regulatory requirements, including liquidity and FRB reserve requirements.

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For the reserve maintenance period beginning March 26, 2020, the FRB eliminated the cash reserve requirement for all depository institutions in response to COVID-19, by effectively reducing the required reserve ratio against net transaction deposits above and in the low reserve tranche to 0%.

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 June 30, 2021 and December 31, 2020, the Company’s investment portfolio generally consists of MBS, CMO, municipal and corporate debt securities, FHLBB and FRB common stock, and mutual funds held in a rabbi trust for its executive and director nonqualified retirement plans. We designate our debt securities as AFS or HTM based on our intent and investment strategy, FHLBB and FRB common stock is carried at cost, and mutual funds are trading securities.

At June 30, 2021, the Company's investments portfolio totaled $1.4 billion, an increase of $282.9 million, or 25%, since December 31, 2020. The increase during the first half of 2021 was driven by changes within its AFS debt securities portfolio, including:
Purchases of $482.1 million of debt securities in an effort to deploy excess liquidity that resulted from significant deposit growth over the past year, including the most recent six months, as consumers and businesses alike received proceeds from various government stimulus programs in response to the COVID-19 pandemic. The weighted-average life of investments purchased during the first half of 2021 was 5.7 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 June 30, 2021.
Partially offsetting the purchases during the first half of 2021 were (i) paydowns and calls of $175.0 million and (ii) a $19.4 million decrease in the fair value of certain securities, based on changes in market interest rates.

Our debt securities designated as AFS, which comprised 99% of our investment portfolio at June 30, 2021 and December 31, 2020, were carried at fair value using level 2 valuation techniques. Refer to Note 15 of the consolidated financial statements for further details on fair value. At June 30, 2021 and December 31, 2020, investments were 27% and 23% of total assets, respectively.

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 June 30, 2021 and December 31, 2020, these investments represented approximately 91%, of the investment portfolio. The majority of the municipal bonds, which represented 9% of the investment portfolio at June 30, 2021 and December 31, 2020, had a credit rating of "AA" or higher.

The Company's "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 June 30, 2021 and December 31, 2020, investment in FHLBB stock totaled $4.9 million and $6.2 million, respectively, and our investment in FRB stock was $5.4 million at each date.

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. Refer to Note 15 of the consolidated financial statements for further details on fair value.

Upon implementation of ASU 2016-13, effective January 1, 2020, but applied to reporting periods beginning on or after October 1, 2020, each reporting period 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. We did not record any allowances or write-down any of our AFS debt securities in an unrealized loss position as of June 30, 2021 or December 31, 2020.

Upon implementation of ASU 2016-13, effective January 1, 2020, but applied to reporting periods beginning on or after October 1, 2020, each reporting period our HTM debt securities are assessed to determine if an allowance should be recorded or if a write-down is required. We did not record any allowances or write-down any of our HTM debt securities as of June 30, 2021 or December 31, 2020.

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We continuously monitor and evaluate our investment portfolio to identify and assess risks within our portfolio, including, but not limited to, the impact of the current interest rate environment and the related prepayment risk, and review credit ratings. The overall mix of debt securities at June 30, 2021, compared to December 31, 2020, remains relatively unchanged and well positioned to provide a stable source of cash flow. At June 30, 2021 and December 31, 2020, the duration of our debt investment securities portfolio, adjusting for calls when appropriate and consensus prepayment speeds, was 4.7 years and 3.9 years, respectively.

Loans

The Company provides loans primarily to customers located within our geographic market area. Our primary market continues to be Maine, making up 72% and 73% of the loan portfolio as of June 30, 2021 and December 31, 2020, respectively. Massachusetts and New Hampshire are our second and third largest markets that we serve, making up 14% and 9%, respectively, of our total loan portfolio as of June 30, 2021, compared to 13% and 8% as of December 31, 2020. Our distribution channels include 57 branches within Maine, a residential mortgage lending office in Massachusetts, a branch and commercial loan production office in New Hampshire, and online residential mortgage and small commercial loan platforms.

The following table sets forth the composition of our loan portfolio as of the dates indicated:
Change
(Dollars in thousands)June 30,
2021
December 31,
2020
($)(%)
Commercial real estate - non owner-occupied$1,127,200 $1,097,975 $29,225 %
Commercial real estate - owner-occupied296,697 271,495 25,202 %
Commercial367,093 381,494 (14,401)(4)%
SBA PPP126,064 135,095 (9,031)(7)%
Residential real estate1,120,917 1,054,798 66,119 %
Consumer and home equity247,945 278,965 (31,020)(11)%
Total loans$3,285,916 $3,219,822 $66,094 %
Commercial Loan Portfolio$1,917,054 $1,886,059 $30,995 %
Retail Loan Portfolio1,368,862 1,333,763 35,099 %
Commercial Portfolio Mix58 %59 %
Retail Portfolio Mix42 %41 %

Beginning in April 2020, the Company started funding SBA PPP loans issued to qualifying small businesses as part of the federal stimulus package issued due to the COVID-19 pandemic. In the first quarter of 2021, the Company began originating SBA PPP loans again as a result of another round of federal stimulus that provided additional funding for the PPP program. The Company continues to participate in SBA PPP lending to customers and borrowers in need of funding due to the COVID-19 pandemic. Under the terms of the SBA PPP, loans issued may be forgiven in part or in full should the borrower meet certain conditions. In this instance, the Company will seek payment for the forgivable portion of the loan from the SBA. Loans made under the SBA PPP may have terms of two or five years, are fully guaranteed by the SBA, and have a fixed rate of 1.0%. For originating the loans, the Company receives an origination fee, paid by the SBA, based on a tiered structure that is dependent on each individual loan size. These fees were capitalized as origination fees and earned over the life of the loan in accordance with the Company's policy. As of June 30, 2021 and December 31, 2020, there were $5.4 million and $2.2 million of SBA PPP loan origination fees yet to be recognized, respectively. As SBA PPP loans are forgiven, these loan balances will decrease and unearned fees will be recognized.

Asset Quality
Asset quality is of the upmost importance and continues to be of great focus to the Company, particularly in light of COVID-19 and its impact on our markets and economies. The Company continues to dedicate significant resources to monitor and manage credit risk throughout our loan portfolio.

The Board of Directors monitors credit risk through: (i) the Directors' Credit Committee, which reviews large credit exposures, monitors external loan review reports, reviews the lending authority for individual loan officers when required, and has approval authority and responsibility for all matters regarding the loan policy and other credit-related policies, including
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reviewing and monitoring asset quality trends, and concentration levels; and (ii) the Audit Committee, which has approval authority and oversight responsibility for ACL adequacy and methodology.

Credit Risk Administration and the Credit Risk Policy Committee oversee the Company's systems and procedures to monitor the credit quality of its loan portfolio, conduct a loan review program, and maintain the integrity of the loan rating system. The adequacy of the ACL is overseen by the Management Provision Committee, which is an internal management committee comprised of various Company executives and senior managers across business lines, including Accounting and Finance, Credit Risk, Compliance, and Commercial and Retail Banking. The Management Provision Committee is further supported by other management-level committees to ensure the adequacy of the ACL. The Management Provision Committee supports the oversight efforts of the director-level committees discussed in the paragraph above and the Board of Directors. The Company's practice is to manage the portfolio proactively such that management can identify problem credits early, assess and implement effective work-out strategies, and take charge-offs as promptly as practical.

In response to the COVID-19 pandemic, we worked directly with businesses and consumers through 2020 to provide temporary debt relief that generally provided principal and/or interest payment deferrals for a period of 180 days or less. For loans that received temporary debt relief, we provided such relief under the guidance of the CARES Act and bank regulatory guidance that enabled such qualifying loans to be exempted from assessment under TDR accounting guidance. All loans granted temporary debt relief met the TDR exemption criteria under authoritative guidance, and, therefore, were not individually assessed, designated or accounted for as a TDR. In addition, those loans that were granted temporary debt relief were not automatically downgraded into lower credit risk ratings. Lastly, in order to qualify for temporary debt relief, those loans were required to be current with terms of payments in accordance with the CARES Act and bank regulatory guidance at the time of relief. At December 31, 2020, the payment status of loans operating under a temporary payment deferral arrangement were reported based on payment status at the time the deferral was granted to the borrower.

At June 30, 2021, the Company had no loans operating under a short-term deferral arrangement, whereas at December 31, 2020, the amortized cost of loans operating under a short-term temporary debt relief program was $26.5 million. In late-December 2020, another stimulus package was signed into law to provide additional COVID-19 relief for businesses and consumers. This stimulus package permits the Company the opportunity to again provide temporary debt relief to borrowers impacted by COVID-19. As of June 30, 2021, the Company had not provided any additional temporary debt relief to borrowers; however, such relief may be made in the future on a case-by-case basis.
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Non-Performing Assets

Non-performing assets include non-accrual loans, accruing loans 90 days or more past due, accruing TDRs, and property acquired through foreclosure or repossession. The following table sets forth the make-up and amount of our non-performing assets as of the dates indicated: 
(Dollars in thousands)June 30,
2021
December 31,
2020
Non-accrual loans:  
Commercial real estate - non owner-occupied$86 $366 
Commercial real estate - owner-occupied136 146 
Commercial1,511 1,607 
SBA PPP— — 
Residential real estate2,725 3,477 
Consumer and home equity 1,424 2,000 
Total non-accrual loans5,882 7,596 
Accruing TDRs not included above2,519 2,818 
Total non-performing loans8,401 10,414 
Other real estate owned165 236 
Total non-performing assets$8,566 $10,650 
Non-accrual loans to total loans0.18 %0.24 %
Non-performing loans to total loans0.26 %0.32 %
ACL on loans to non-performing loans381.62 %363.60 %
Non-performing assets to total assets0.17 %0.22 %
ACL on loans to non-performing assets374.27 %355.54 %

As of June 30, 2021 and December 31, 2020, $1.3 million and $457,000 of loan balances that were previously operating under a short-term deferral arrangement were classified as non-accrual, respectively.
 
Potential Problem Loans

Potential problem loans consist of classified accruing commercial and commercial real estate loans that were between 30 and 89 days past due. Such loans are characterized by weaknesses in the financial condition of borrowers or collateral deficiencies. Based on historical experience, the credit quality of some of these loans may improve due to changes in collateral values or the financial condition of the borrowers, while the credit quality of other loans may deteriorate, resulting in a loss. These loans are not included in the above analysis of non-accrual loans. At June 30, 2021, potential problem loans amounted to $107,000, or less than 0.01% of total loans.

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Past Due Loans

Past due loans consist of accruing loans that were between 30 and 89 days past due. The following table presents the recorded investment of past due loans as of the dates indicated:
(Dollars in thousands)June 30,
2021
December 31,
2020
Accruing loans 30-89 days past due:  
Commercial real estate - non owner-occupied$99 $50 
Commercial real estate - owner-occupied— — 
Commercial183 430 
SBA PPP— — 
Residential real estate303 2,297 
Consumer and home equity 214 440 
Total $799 $3,217 
Accruing loans 30-89 days past due to total loans0.02 %0.10 %

As of June 30, 2021 and December 31, 2020, $536,000 and $1.2 million of loan balances that were previously operating under a short-term deferral arrangement were 30-89 days past due, respectively.
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ACL

The following table sets forth information concerning the components of our ACL for the periods indicated:
At or For The
Three Months Ended
June 30,
At or For The
Six Months Ended
June 30,
At or For The
Year Ended
December 31, 2020
(Dollars in thousands)2021202020212020
(CECL)(Incurred Loss)(CECL)(Incurred Loss)(CECL)
ACL on loans at the beginning of the period$35,775 $26,521 $37,865 $25,171 $25,171 
Impact of CECL adoption— — — — 233 
(Credit) provision for loan losses(3,452)9,400 (5,306)11,172 13,215 
Charge-offs:  
Commercial real estate - non owner-occupied— — — — 82 
Commercial real estate - owner-occupied— 21 — 71 21 
Commercial259 420 406 673 1,130 
SBA PPP— — — — — 
Residential real estate35 — 88 96 121 
Consumer and home equity126 43 213 134 484 
Total charge-offs420 484 707 974 1,838 
Recoveries:  
Commercial real estate - non owner-occupied— — — 107 
Commercial real estate - owner-occupied13 
Commercial67 63 110 116 572 
SBA PPP— — — — — 
Residential real estate70 21 70 23 292 
Consumer and home equity17 15 23 24 100 
Total recoveries157 102 208 170 1,084 
Net charge-offs263 382 499 804 754 
ACL on loans at the end of the period$32,060 $35,539 $32,060 $35,539 $37,865 
Components of ACL:  
ACL on loans$32,060 $35,539 $32,060 $35,539 $37,865 
ACL on off-balance sheet credit exposures2,515 22 2,515 22 2,568 
ACL at end of the period$34,575 $35,561 $34,575 $35,561 $40,433 
Net charge-offs (annualized) to average loans
0.03 %0.05 %0.03 %0.05 %0.02 %
(Credit) provision for loan losses (annualized) to average loans(0.42)%1.13 %(0.33)%0.46 %0.40 %
ACL on loans to total loans0.98 %1.07 %0.98 %1.07 %1.18 %
ACL on loans to net charge-offs (annualized)3,047.53 %2,325.85 %3,212.42 %2,210.14 %5,021.88 %

ACL on Loans

During the first half of 2021, there were no significant changes in our modeling methodology to determine the ACL on loans at June 30, 2021. The significant key assumptions used with the ACL on loans calculation at June 30, 2021 and December 31, 2020, included: (i) Company-specific macroeconomic factors (i.e. loss drivers), (ii) our forecast period and reversion speed, (iii) prepayment speeds, and (iv) various qualitative factors.
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As of June 30, 2021 and December 31, 2020, the recorded ACL on loans was $32.1 million and $37.9 million, respectively, and represented our best estimate. The decrease in the ACL on loans between periods was primarily driven by an improvement in management's forecast of its macroeconomic factors over its one-year forecast period. Refer to "—Results of Operations-(Credit) Provision for Credit Losses" for further discussion of the drivers for change between periods.

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 on loans is reviewed periodically within a calendar quarter to assess trends in CECL key assumptions and asset quality, and consider their impact on the Company's financial condition.

ACL on Off-Balance Sheet Credit Exposures

During the first half of 2021, there were no significant changes in our modeling methodology to determine the ACL on off-balance sheet credit exposures. The model uses the credit loss factors for each segment calculated within the ACL on loans model described above. The decrease in the ACL on off-balance sheet credit exposures during the first half of 2021 of $53,000 was also driven by the improvement in management's forecast of its macroeconomic factors over its one-year forecast period, however, it was largely offset by an increase in unfunded commitments of $30.8 million, or 4%, over this period to $759.5 million at June 30, 2021.

The ACL on off-balance sheet credit exposures was presented within accrued interest and other liabilities on the consolidated statements of condition. (Decreases) increases to the ACL on off-balance sheet credit exposures were presented within (credit) provision for credit losses on the consolidated statements of income.

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.

Liabilities and Shareholders’ Equity

Deposits

At June 30, 2021, deposits totaled $4.3 billion, an increase of $288.9 million, or 7%, since December 31, 2020. The increase in deposits during the first half of 2021 was driven by an increase in core deposits (non-GAAP) of $313.0 million, or 9%. The increase was driven by seasonal inflows and another round of stimulus provided to businesses and consumers in response to the COVID-19 pandemic.

The Company's loan-to-deposit ratio was 77% at June 30, 2021, compared to 80% at December 31, 2020.

Borrowings

At June 30, 2021, total borrowings were $214.7 million, a decrease of $32.0 million since December 31, 2020. During the first quarter of 2021, in light of its liquidity position, the Company terminated a $25.0 million long-term borrowing contract with the FHLBB under which advances had an interest rate of 0.98%, and incurred a one-time prepayment penalty of $514,000.

On April 16, 2021, the Company redeemed in full $15.0 million of subordinated notes that had a 5.50% interest rate, at a redemption price equal to the principal amount of the notes plus accrued and unpaid interest.

Shareholders' Equity

On June 29, 2021, the Company announced a quarterly cash dividend to shareholders of $0.36 per share, payable on July 30, 2021 to shareholders of record as of July 15, 2021. As of June 30, 2021, the Company's annualized dividend yield was 3.02% based on Camden National's closing share price of $47.76, as reported by NASDAQ.

In the first quarter of 2021, the Company's Board of Directors authorized the purchase of up to 750,000 shares of our common stock, representing approximately 5.0% of the Company's issued and outstanding shares as of June 30, 2021. The Company did not repurchase any shares during the first six months of 2021.

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The following table presents certain information regarding shareholders’ equity as of or for the periods indicated:
At or For The
Three Months Ended
June 30,
At or For The
Six Months Ended
June 30,
At or For The
Year Ended
December 31,
2020
2021202020212020
Financial Ratios
Average equity to average assets
10.50 %10.25 %10.65 %10.47 %10.39 %
Common equity ratio
10.59 %10.21 %10.59 %10.21 %10.81 %
Tangible common equity ratio (non-GAAP)8.87 %8.41 %8.87 %8.41 %8.99 %
Dividend payout ratio
29.75 %45.21 %28.46 %40.74 %33.33 %
Per Share Data
Book value per share
$36.49 $33.85 $36.49 $33.85 $35.50 
Tangible book value per share (non-GAAP)29.99 27.31 29.99 27.31 28.96 
Dividends declared per share
0.36 0.33 0.72 0.66 1.32 

Refer to "—Capital Resources" and Note 10 of the consolidated financial statements for further discussion of the Company and Bank's capital resources and regulatory capital requirements.

LIQUIDITY
 
Our liquidity needs require the availability of cash to meet the withdrawal demands of depositors and credit commitments to borrowers. Liquidity is defined as our ability to maintain availability of funds to meet customer needs, as well as to support our asset base. The primary objective of liquidity management is to maintain a balance between sources and uses of funds to meet our cash flow needs in the most economical and expedient manner. Due to the potential for unexpected fluctuations in both deposits and loans, active management of liquidity is necessary. We maintain various sources of funding and levels of liquid assets in excess of regulatory guidelines in order to satisfy their varied liquidity demands. We monitor liquidity in accordance with internal guidelines and all applicable regulatory requirements. As of June 30, 2021 and December 31, 2020, our level of liquidity exceeded target levels. We believe that we currently have appropriate liquidity available to respond to liquidity demands. Sources of funds that we utilize consist of deposits, borrowings from the FHLBB and other sources, cash flows from operations, prepayments and maturities of outstanding loans, investments and mortgage-backed securities and the sale of mortgage loans.

Deposits continue to represent our primary source of funds. For the six months ended June 30, 2021, average deposits (excluding brokered deposits) of $3.9 billion increased $362.0 million, or 10%, compared to the same period last year. Average core deposits (non-GAAP) of $3.5 billion for the six months ended June 30, 2021, increased $531.5 million, or 18%, compared to the same period a year ago. Included within our average money market deposits for the six months ended June 30, 2021 and 2020, were $55.9 million and $86.6 million, respectively, of deposits from the Bank's wealth management department, Camden National Wealth Management, which represent client funds. These deposits fluctuate with changes in the portfolios of the clients of Camden National Wealth Management.

Borrowings are used to supplement deposits as a source of liquidity. In addition to borrowings and advances from the FHLBB, we utilize brokered deposits, purchase federal funds, and sell securities under agreements to repurchase. For the six months ended June 30, 2021, average total borrowings (including brokered deposits) decreased $51.8 million, or 9%, to $519.8 million compared to the same period last year. We secure borrowings from the FHLBB with qualified residential real estate loans, certain investment securities and certain other assets available to be pledged. Customer repurchase agreements are secured by mortgage-backed securities and government-sponsored enterprises. Through the Bank, we have available lines of credit with the FHLBB of $9.9 million, with a correspondent bank of $50.0 million, and with the FRB Discount Window of $66.2 million as of June 30, 2021. The Company also has a $10.0 million line of credit with a correspondent bank that matures on December 17, 2021.

We believe our investment portfolio and residential loan portfolio provide a significant amount of contingent liquidity that could be accessed in a reasonable time period through sales of those portfolios. We also believe that we have additional untapped access to the brokered deposit market, the wholesale reverse repurchase transaction market and the FRB discount window. These sources are considered as liquidity alternatives in our contingent liquidity plan. We believe that our current level
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of liquidity is sufficient to meet current and future funding requirements; however, changes in economic conditions, including consumer saving habits and the availability or access to the national brokered deposit and wholesale repurchase markets, whether as a result of the COVID-19 pandemic or otherwise, could significantly impact our liquidity position. 

CAPITAL RESOURCES

As part of our goal to operate a safe, sound and profitable financial organization, we are committed to maintaining a strong capital base. Shareholders’ equity totaled $545.5 million and $529.3 million at June 30, 2021 and December 31, 2020, respectively, which amounted to 11% of total assets as of the respective dates. Refer to "— Financial Condition — Liabilities and Shareholders' Equity" for discussion regarding changes in shareholders' equity for the six months ended June 30, 2021.

Our principal cash requirement is the payment of dividends on our common stock, as and when declared by the Company's Board of Directors. We declared dividends to shareholders in the aggregate amount of $10.8 million and $9.9 million for the six months ended June 30, 2021 and 2020, respectively. The Company's Board of Directors approves cash dividends on a quarterly basis after careful analysis and consideration of various factors, including the following: (i) capital position relative to total assets, (ii) risk-based assets, (iii) total classified assets, (iv) economic conditions, (v) growth rates for total assets and total liabilities, (vi) earnings performance and projections and (vii) strategic initiatives and related capital requirements. All dividends declared and distributed by the Company will be in compliance with applicable state corporate law and regulatory requirements.
 
We are primarily dependent upon the payment of cash dividends by the Bank, our wholly-owned subsidiary, to service our commitments. We, as the sole shareholder of the Bank, are entitled to dividends, when and as declared by the Bank's Board of Directors from legally available funds. For the six months ended June 30, 2021 and 2020, the Bank declared dividends payable to the Company in the amount of $24.8 million and $14.4 million, respectively. Under regulations prescribed by the OCC, the Bank may not declare dividends in excess of the Bank’s net income for the current year plus its retained net income for the prior two years without prior approval from the OCC. If we are required to use dividends from the Bank to service unforeseen commitments in the future, we may be required to reduce the dividends paid to our shareholders going forward.

Please refer to Note 10 of the consolidated financial statements for discussion and details of the Company and Bank's regulatory capital requirements. At June 30, 2021 and December 31, 2020, the Company and Bank exceeded all regulatory capital requirements, and the Bank continues to meet the capital requirements to be classified as "well capitalized" under applicable prompt corrective action provisions.

CONTRACTUAL OBLIGATIONS AND OFF-BALANCE SHEET COMMITMENTS
 
Off-Balance Sheet Financial Instruments

Credit Commitments and Standby Letters of Credit

In the normal course of business, we are a party to credit related financial instruments with off-balance sheet risk, which are not reflected in the consolidated statements of condition. These financial instruments include commitments to extend credit and standby letters of credit. Those instruments involve varying degrees of credit risk in excess of the amount recognized in the consolidated statements of condition. We follow the same credit policies in making commitments to extend credit and conditional obligations as we do for on-balance sheet instruments, including requiring similar collateral or other security to support financial instruments with credit risk. Our exposure to credit loss in the event of nonperformance by the borrower is represented by the contractual amount of those instruments. Many of the commitments will expire without being drawn upon, and thus, the total amount does not necessarily represent future cash requirements. In the event of nonperformance by the borrower, we are entitled to underlying collateral, as applicable, which generally consists of pledges of business assets including, but not limited to, accounts receivable, inventory, plant and equipment, and/or real estate.

Refer to Note 7 of the consolidated financial statements for additional details.

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Derivatives

We use derivative financial instruments for risk management purposes (primarily interest rate risk) and not for trading or speculative purposes. We control the credit risk of these instruments through collateral, credit approvals and monitoring procedures. Additionally, as part of our normal mortgage origination process, we provide the borrower with the option to lock their interest rate based on current market prices. During the period from commitment date to the loan closing date, we are subject to the risk of interest rate change. In an effort to mitigate such risk, we may enter into forward delivery sales commitments, typically on a "best effort" basis, with certain approved investors. We account for interest rate lock commitments on loans that will be held for sale as derivative instruments. Furthermore, we record a derivative for our "best effort" forward delivery commitments upon origination of a loan identified as held for sale. Should we enter into a forward delivery commitment on a mandatory delivery arrangement with an investor, we account for the forward delivery commitment as a derivative upon execution of the mandatory delivery contract.

Refer to Note 8 of the consolidated financial statements for additional details.

Hedge Instruments

From time to time, we may enter into derivative instruments as partial hedges against large fluctuations in interest rates. We may also enter into fixed-rate interest rate swaps and floor instruments to partially hedge against potentially lower yields on the variable prime rate loan category in a declining rate environment. If interest rates were to decline, resulting in reduced income on the adjustable rate loans, there would be an increased income flow from the interest rate swap and floor instrument. We may also enter into interest rate swaps and cap instruments to partially hedge against increases in short-term borrowing rates. If interest rates were to rise, resulting in an increased interest cost, there would be an increased income flow from the interest rate swaps and cap instruments. These financial instruments are factored into our overall interest rate risk position. We regularly review the credit quality of the counterparty from which the instruments have been purchased.

Refer to Note 8 of the consolidated financial statements for additional details.

At June 30, 2021, we had the following levels of off-balance sheet financial instruments:
(In thousands)Total AmountCommitment Expires in:
Off-Balance Sheet Financial InstrumentsCommitted<1 Year1 – 3 Years3 – 5 Years>5 Years
Commitments to extend credit
$753,052 $401,318 $53,157 $12,744 $285,833 
Standby letters of credit
6,441 5,522 367 — 552 
Customer loan swaps - notional value
729,954 11,581 55,287 186,088 476,998 
Interest rate contracts - notional value253,000 10,000 150,000 — 93,000 
Fixed-rate mortgage interest rate lock commitments - notional value
44,102 44,102 — — — 
Forward delivery commitments - notional value
14,886 14,886 — — — 
Total
$1,801,435 $487,409 $258,811 $198,832 $856,383 

Contractual Obligations and Commitments

We are a party to several contractual obligations through lease agreements on a number of branches. Renewal options within our various lease contracts, as applicable, are considered to determine the lease term and estimate the contractual obligation and commitment for the Company's operating and finance leases. Furthermore, certain lease contracts of the Company contain language that subject its rent payment to variability, such as those tied to an index or change in an index. As a result, the future contractual obligation and commitment may materially differ from that estimated and disclosed within the table below.

We enter into agreements routinely as part of our normal business to manage deposits and borrowings.

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At June 30, 2021, we had an obligation and commitment to make future payments under each of these contracts as follows:
(In thousands)Total AmountPayments Due per Period
Contractual obligations and commitmentsCommitted<1 Year1 – 3 Years3 – 5 Years>5 Years
Operating leases
$14,722 $1,380 $2,479 $1,918 $8,945 
Finance leases
7,584 307 623 606 6,048 
Retail repurchase agreements
170,413 170,413 — — — 
Junior subordinated debentures
44,331 — — — 44,331 
Other contractual obligations
2,787 2,787 — — — 
Total
$239,837 $174,887 $3,102 $2,524 $59,324 

We have an obligation and commitment to repay all short- and long-term borrowings. These commitments and borrowings and the related payments are made during the normal course of business.

RISK MANAGEMENT

The Company’s Board of Directors and management have identified significant risk categories which affect the Company. The risk categories include: credit; liquidity; market; interest rate; capital; operational and technology, including cybersecurity; vendor and third party; people and compensation; compliance and legal; and strategic alignment and reputation. The Board of Directors has approved an Enterprise Risk Management ("ERM") Policy that addresses each category of risk. The direct oversight and responsibility for the Company's risk management program has been delegated to the Company's Executive Vice President of Risk Management, who is a member of the Executive Committee and reports directly to the Chief Executive Officer.

The spread of the COVID-19 pandemic has increased many of the risks we face, including our credit, operational, vendor and third party, and technology risks. In response to the COVID-19 pandemic, the Company formed the Pandemic Work Group in 2020 to develop and oversee the Company’s response. The Pandemic Work Group: (i) developed employee practices, policies and playbooks to address pandemic related issues; (ii) implemented monitoring of all federal, state and local actions (e.g., stay-at-home orders) so that the Company can comply with all legal requirements; (iii) completed risk assessments and proactive monitoring over critical vendors, along with enhanced cybersecurity monitoring and reporting; (iv) created ongoing assessment and monitoring over employee availability, safety, workloads and access to tools (including technology needed to work from home effectively); (v) initiated and monitored the temporary loan relief programs; (vi) oversaw the roll out of the SBA PPP loan program and continues to monitor; (vii) developed our branch network plan, including determinations of which branches should be closed in order to best allocate resources; and (viii) developed a plan for, and oversaw the re-opening of branches in June 2020, which included ensuring health and safety protocols and practices were in place for our employees and customers. During the second quarter of 2021, the Pandemic Work Group formulated the Company's strategy to return its employees back to its locations safely in compliance with health officials' guidelines, along with enabling certain employees to work in a hybrid model (i.e. work from home part time and from one of our locations part time) and others to work fully remote. The Company's Executive Committee will monitor this strategy over the near term and re-evaluate its decision in early-2022.

The Pandemic Work Group continues to oversee areas of the Company’s response such as employee practices and assessment of employee availability, safety and workload. Members of the Pandemic Work Group include the Company’s executive team and other members of senior management. The Pandemic Work Group, through the Company's executive team, regularly reports to the Board of Directors to assist the Board of Directors with both its ongoing oversight of the Company’s response to COVID-19 as well as its management of all areas of risks the Company faces, which have been affected by the COVID-19 pandemic.

There have been no material changes to the Company's risk categories and risk management policies as described in Item 7 of the Company's Annual Report on Form 10-K for the year ended December 31, 2020. Please refer to Item 7 of the Company's Annual Report on Form 10-K for the year ended December 31, 2020 for further details regarding the Company's risk management.

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Interest rate risk

Interest rate risk represents the sensitivity of earnings to changes in market interest rates. As interest rates change, the interest income and expense streams associated with our financial instruments also change, thereby impacting net interest income, the primary component of our earnings. Board ALCO and Management ALCO utilize the results of a detailed and dynamic simulation model to quantify the estimated exposure of net interest income to sustained interest rate changes. While Board ALCO and Management ALCO routinely monitor simulated net interest income sensitivity over a rolling two-year horizon, they also utilize additional tools to monitor potential longer-term interest rate risk.

The simulation model captures the impact of changing interest rates on the interest income received and interest expense paid on all interest-earning assets and interest-bearing liabilities reflected on our consolidated statements of condition, as well as for derivative financial instruments. This sensitivity analysis is compared to ALCO policy limits, which specify a maximum tolerance level for net interest income exposure over a one- and two-year horizon, assuming no balance sheet growth, given a 200 basis point upward and downward shift in interest rates. Although our policy specifies a downward shift of 200 basis points, this would have resulted in negative rates as of June 30, 2021 and 2020, as many deposit and funding rates were below 2.00%. In this case, a downward shift of 100 basis points was the only down scenario performed. A parallel and pro rata shift in rates over a 12-month period is assumed. Using this approach, we are able to produce simulation results that illustrate the effect that both a gradual change of rates and a “rate shock” have on earnings expectations. In the down 100 and 200 basis points scenario, Federal Funds and Treasury yields are floored at 0.01% while Prime is floored at 3.00%. All other market rates are floored at the lesser of current levels or 0.25%.

As of June 30, 2021 and 2020, our net interest income sensitivity analysis reflected the following changes to net interest income assuming no balance sheet growth and a parallel shift in interest rates. All rate changes were “ramped” over the first 12-month period and then maintained at those levels over the remainder of the ALCO simulation horizon.
 Estimated Changes In 
Net Interest Income
Rate Change from Year 1 — BaseJune 30,
2021
June 30,
2020
Year 1  
+200 basis points0.81 %0.28 %
-100 basis points(1.27)%0.55 %
Year 2
+200 basis points5.86 %6.04 %
-100 basis points(11.41)%(4.44)%

The preceding sensitivity analysis does not represent a forecast and should not be relied upon as being indicative of expected operating results. These hypothetical estimates are based upon numerous assumptions including, among others, the nature and timing of interest rate levels, yield curve shape, prepayments on loans and securities, deposit decay rates, pricing decisions on loans and deposits and reinvestment/replacement of asset and liability cash flows. While assumptions are developed based upon current economic and local market conditions, we cannot make any assurances as to the predictive nature of these assumptions, including how customer preferences or competitor influences might change.

If rates remain at or near current levels, net interest income is projected to decrease over the next year. Asset cash flows reprice and replace into the low rate environment, and are more than offset by the positive impact of funding cost reductions, causing balance sheet spread to tighten. If rates decrease 100 basis points, net interest income is projected to continue to decrease as loans and investment cash flow reprice lower, prepayments increase and the ability to reduce cost of funds is limited. In the second year, net interest income is projected to decrease as asset yields continue to drop and the cost of funds reductions are exhausted. If rates increase 200 basis points, net interest income is projected to increase slightly in the first year due to asset yields outpacing funding cost increases. In the second year, net interest income is projected to continue to increase as loan and investment yields continue to reprice/reset into higher yields and funding cost increases lag.

Periodically, if deemed appropriate, we use back-to-back loan swaps, interest rate swaps, floors and caps, which are common derivative financial instruments, to hedge our interest rate risk position. The Board of Directors has approved hedging policy statements governing the use of these instruments. The Board and Management ALCO monitor derivative activities relative to their expectations and our hedging policies. Refer to "—Contractual Obligations and Off-Balance Sheet Commitments" and Note 8 of the consolidated financial statements for further discussion of these derivative instruments.
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LIBOR is a benchmark interest rate for certain floating rate loans, deposits and borrowings, and off-balance sheet exposures of the Company. In 2017, the U.K. Financial Conduct Authority, which regulates LIBOR, announced that it will not compel panel banks to contribute to LIBOR after 2021. As such, we have an internal project team that is focused on an orderly transition from LIBOR to alternative reference rates. The markets for alternative rates are developing. We will continue to assess the use of alternative rates, and expect to transition to alternative rates as the markets and best practices develop.


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ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
 
Information required by this Item 3 is included in Item 2. "Management's Discussion and Analysis of Financial Condition and Results of Operations - Risk Management." and such information is incorporated into this Item 3 by reference.

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ITEM 4.  CONTROLS AND PROCEDURES
 
As required by Rule 13a-15 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), the Company’s management conducted an evaluation with the participation of the Company’s Chief Executive Officer and Chief Financial Officer (Principal Financial & Accounting Officer), regarding the effectiveness of the Company’s disclosure controls and procedures, as of the end of the last fiscal quarter covered by this report. In designing and evaluating the Company’s disclosure controls and procedures, the Company and its management recognize that any controls and procedures, no matter how well designed and operated, can provide only a reasonable assurance of achieving the desired control objectives, and management necessarily was required to apply its judgment in evaluating and implementing possible controls and procedures. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer (Principal Financial & Accounting Officer) concluded that they believe the Company’s disclosure controls and procedures are effective to ensure that information required to be disclosed by the Company in the reports it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms.
 
Although a significant number of our employees continue to work from home as a result of the COVID-19 pandemic, we have concluded that these changes in work arrangements did not have a material effect on our internal controls over financial reporting during the second quarter of 2021. There was no change in the internal control over financial reporting that occurred during the period covered by this Quarterly Report on Form 10-Q that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting. 

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PART II.  OTHER INFORMATION

ITEM 1.  LEGAL PROCEEDINGS
 In the normal course of business, the Company and its subsidiaries are subject to pending and threatened legal actions. Although the Company is not able to predict the outcome of such actions, after reviewing pending and threatened actions with counsel, management believes that based on the information currently available the outcome of such actions, individually or in the aggregate, will not have a material adverse effect on the Company’s consolidated financial position as a whole.

ITEM 1A.  RISK FACTORS
There are a number of factors that may adversely affect the Company’s business, financial results or stock price. Refer to “Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020, for discussion of these risks.
ITEM 2.   UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
(a) None.
(b) None.
(c) None.

ITEM 3.  DEFAULTS UPON SENIOR SECURITIES
 None.

ITEM 4.  MINE SAFETY DISCLOSURES
Not applicable.

ITEM 5.  OTHER INFORMATION
None.

ITEM 6.  EXHIBITS
Exhibit No.Definition
101*iXBRL (Inline eXtensible Business Reporting Language).

The following materials from Camden National Corporation’s Quarterly Report on Form 10-Q for the period ended June 30, 2021, formatted in iXBRL: (i) Consolidated Statements of Condition - June 30, 2021 and December 31, 2020; (ii) Consolidated Statements of Income - Three and Six Months Ended June 30, 2021 and 2020; (iii) Consolidated Statements of Comprehensive Income - Three and Six Months Ended June 30, 2021 and 2020; (iv) Consolidated Statements of Changes in Shareholders’ Equity - Three and Six Months Ended June 30, 2021 and 2020; (v) Consolidated Statements of Cash Flows - Six Months Ended June 30, 2021 and 2020; and (vi) Notes to the Unaudited Consolidated Financial Statements.
104*Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101).
*Filed herewith.
**Furnished herewith.
+Management contract or a compensatory plan or arrangement.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
CAMDEN NATIONAL CORPORATION
(Registrant)
 
/s/ Gregory A. Dufour August 5, 2021
Gregory A. Dufour Date
President and Chief Executive Officer
(Principal Executive Officer)
  
   
/s/ Gregory A. White August 5, 2021
Gregory A. White Date
Chief Financial Officer and Principal Financial & Accounting Officer   
  
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