What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2022-05-06 compared with 2021-11-05 · 215 added, 284 removed, 714 unchanged (41% of the section changed)

10 unchanged sentences

changes in general national, regional or international economic conditions or conditions affecting the banking or financial services industries or financial capital markets, volatility and disruption in national and international financial markets, government intervention in the U.S.

financial system, reductions in net interest income resulting from interest rate volatility as well as changes in the balance and mix of loans and deposits, reductions in the market value of wealth management assets under administration, changes in the value of securities and other assets, reductions in loan demand, changes in loan collectability, default and charge-off rates, changes in the size and nature of the Company's competition, changes in legislation or regulation and accounting principles, policies and guidelines, uncertainties with respect to the duration, nature, and extent of the COVID-19 pandemic and its consequences, and changes in the assumptions used in making such forward-looking statements.

In addition, the factors described under "Risk Factors" in Item 1A of our Annual Report on Form 10-K for the fiscal year ended December 31, 2020, as filed with the SEC, may result in these differences, as well as the "Risk Factors" in Part II, Item 1A listed below.

financial system, reductions in net interest income resulting from interest rate volatility as well as changes in the balance and mix of loans and deposits, reductions in the market value of wealth management assets under administration, changes in the value of securities and other assets, reductions in loan demand, changes in loan collectability, default and charge-off rates, changes in the size and nature of the Company's competition, changes in legislation or regulation and accounting principles, policies and guidelines, uncertainties with respect to the nature, the extent and the duration of the COVID-19 pandemic and its consequences (including in our market areas or affecting our customers such as protracted adverse effects on the tourism and hospitality industries), and changes in the assumptions used in making such forward-looking statements.

In addition, the factors described under "Risk Factors" in Item 1A of this Annual Report on Form 10-K for the fiscal year ended December 31, 2021, as filed with the SEC, may result in these differences, as well as the "Risk Factors" in Part II, Item 1A listed below.

You should carefully review all of these factors, and you should be aware that there may be other factors that could cause these differences.

1 unchanged sentence

Although the Company believes that the expectations reflected in such forward-looking statements are reasonable, actual results may differ materially from the results discussed in these forward-looking statements.

Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof.

The Company undertakes no obligation to republish revised forward-looking statements to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.

Readers are also urged to carefully review and consider the various disclosures made by the Company, which attempt to advise interested parties of the facts that affect the Company's business.

Readers are also urged to carefully review and consider the various disclosures made by the Company, which attempt to advise interested parties of the factors that affect the Company's business.

Critical Accounting Policies

38 unchanged sentences

The Company recognizes all derivatives in the consolidated balance sheets at fair value.

On the date the Company enters into the derivative contract, the Company designates the derivative as a hedge of either a forecasted transaction or the variability of cash flows to be received or paid related to a recognized asset or liability (“cash flow hedge”), a hedge of the fair value of a recognized asset or liability or of an unrecognized firm commitment (“fair value hedge”), or a held for trading instrument (“trading instrument”).

The Company formally documents relationships between hedging instruments and hedged items, as well as its risk management objectives and strategy for undertaking various hedge transactions.

The Bank also assesses, both at the hedge’s inception and on an ongoing basis, whether the derivatives that are used in hedging transactions are effective in offsetting changes in cash flows or fair values of hedged items.

On the date a derivative contract is entered into, the derivative is designated as a hedge of either a forecasted transaction or the variability of cash flows to be received or paid related to a recognized asset or liability (“cash flow hedge”), a hedge of the fair value of a recognized asset or liability or of an unrecognized firm commitment (“fair value hedge”), or a held for trading instrument (“trading instrument”).

The relationships between hedging instruments and hedged items is formally documented, as is the risk management objectives and strategy for undertaking various hedge transactions.

Both at the hedge’s inception and on an ongoing basis, determination is made as to whether the derivatives that are used in hedging transactions are effective in offsetting changes in cash flows or fair values of hedged items.

Changes in fair value of a derivative that is effective and that qualifies as a cash flow hedge are recorded in other comprehensive income (loss) and are reclassified into earnings when the forecasted transaction or related cash flows affect earnings.

Changes in fair value of a derivative that qualifies as a fair value hedge and the change in fair value of the hedged item are both recorded in earnings and offset each other when the transaction is effective.

Those derivatives that are classified as trading instruments include customer loan swaps, are recorded at fair value with changes in fair value recorded in earnings.

The Company discontinues hedge accounting when it determines that the derivative is no longer effective in offsetting changes in the cash flows of the hedged item, that it is unlikely that the forecasted transaction will occur, or that the designation of the derivative as a hedging instrument is no longer appropriate.

Those derivatives that are classified as trading instruments, including customer loan swaps, are recorded at fair value with changes in fair value recorded in earnings.

Hedge accounting is discontinued when it is determined that the derivative is no longer effective in offsetting changes in the cash flows of the hedged item, that it is unlikely that the forecasted transaction will occur, or that the designation of the derivative as a hedging instrument is no longer appropriate.

Risks and Uncertainties.

As of September 30, 2021, local and state governments in the US have eased most restrictions imposed to curtail the spread of the global pandemic, coronavirus disease (COVID-19), however limitations in some sectors

remain in place and are expected to remain in place in some form subsequent to September 30, 2021.

As of March 31, 2022, local and state governments in the US have eased most restrictions imposed to curtail the spread of the global pandemic, COVID-19, however, limitations in some sectors remain in place and are expected to remain in place in some form subsequent to March 31, 2022.

There continues to be uncertainty surrounding the duration of the pandemic, its potential economic ramifications, and any further government actions to mitigate them.

17 unchanged sentences

A Federal Income Tax rate of 21.0% was used in 2022 and 2021.

For the nine months ended September 30, For the quarter ended September 30,

For the quarter ended

Dollars in thousands

2021 2020 2021 2020

March 31, 2022 December 31, 2021 March 31, 2021

Net interest income as presented $ 18,620 $ 17,696 $ 15,873

5 unchanged sentences

The following table provides a reconciliation between the GAAP and non-GAAP efficiency ratio:

For the nine months ended September 30, For the quarter ended September 30,

For the quarter ended

Dollars in thousands

2021 2020 2021 2020

March 31, 2022 December 31, 2021 March 31, 2021

Non-interest expense, as presented $ 10,650 $ 12,846 $ 9,874

3 unchanged sentences

Effect of non-interest tax-exempt income 42 44 41

Net securities (gains) losses (22) (1,179) 142 —

Net securities gains (2) (1) (119)

Adjusted net interest income plus non-interest income $ 23,449 $ 23,101 $ 21,690

5 unchanged sentences

The following table provides a reconciliation of average tangible shareholders' common equity to the Company's consolidated financial statements, which have been prepared in accordance with GAAP:

For the nine months ended September 30, For the quarter ended September 30,

For the quarter ended

Dollars in thousands

2021 2020 2021 2020

March 31, 2022 December 31, 2021 March 31, 2021

Average shareholders' equity as presented $ 246,635 $ 244,874 $ 228,276

3 unchanged sentences

The following table provides a reconciliation to Net Income:

For the nine months ended September 30, For the quarter ended September 30,

Dollars in thousands 2021 2020 2021 2020

For the quarter ended

Dollars in thousands March 31, 2022 December 31, 2021 March 31, 2021

Net Income, as presented $ 9,705 $ 9,546 $ 8,922

provision for loan losses 1,575 4,550 525 1,800

provision (credit) for loan losses 450 (1,950) 525

income taxes expense 2,047 2,053 1,850

1 unchanged sentence

Executive Summary

Net income for the nine months ended September 30, 2021 was $26.7 million, up $6.6 million or 32.6% from the same period in 2020.

Earnings per common share on a fully diluted basis were $2.43 for the nine months ended September 30, 2021, up $0.59 or 32.1% from the $1.84 posted for the same period in 2020.

For the quarter ended September 30, 2021, net income was $9.0 million, up $1.9 million or 27.0% from the same period in 2020.

Earnings per common share on a fully diluted basis were $0.82 for the quarter ended September 30, 2021, up $0.17 or 26.2% from the $0.65 posted for the same period in 2020.

The Company posted very positive operating results during the first nine months of 2021.

Net income of $26.7 million was achieved from a combination of increased net interest income before loan loss provision, continued strong non-interest revenue and controlled operating expenses.

Asset quality is strong and stable.

Net income for the three months ended March 31, 2022 was $9.7 million, up $783,000 or 8.8% from the same period in 2021.

Earnings per common share on a fully diluted basis were $0.88 for the three months ended March 31, 2022, up $0.07 or 8.6% from the $0.81 posted for the same period in 2021.

The Company posted a record earnings quarter during the first quarter of 2022.

Earning asset growth, in particular high-quality loan growth, continues to be a key performance driver.

Higher interest income from both the loan and investment portfolios, combined with lower funding costs, led to increased net interest income.

Based upon the strength of the Company's earnings, dividends totaling 32 cents per share have been declared year-to-date, representing a payout to our shareholders of 35.96% of basic earnings per share for the period.

Net interest income on a tax-equivalent basis was up $4.47 million or 9.7% in the nine months ended September 30, 2021 compared to the same period in 2020.

This increase is attributable primarily to growth in earning assets along with recognition of origination fees on Payroll Protection Plan ("PPP") loans.

The tax equivalent net interest margin for the nine months ended September 30, 2021, was 2.94%, slightly up from 2.93% for the same period in 2020.

For the quarter ended September 30, 2021, net interest income on a tax-equivalent basis increased $2.3 million or 14.7% compared to the same period in 2020, with the net interest margin at 2.96% compared to 2.82% for the same period in 2020.

Non-interest income for the nine months ended September 30, 2021 was $14.6 million, up $1.0 million or 7.0%, from the nine months ended September 30, 2020.

Revenue at First National Wealth Management increased $640,000 or 23.6% over the same period, debit card revenue was up $834,000 or 27.4% and mortgage banking revenue increased $549,000 or 14.4%.

Net gains on sales of securities for the nine months ended September 30, 2021 were down $1.2 million, or 98.1% from the prior year period.

Non-interest expense for the nine months ended September 30, 2021 was $29.3 million, up $66,000 or 0.2% from the nine months ended September 30, 2020.

Net interest income on a tax-equivalent basis was up $2.71 million or 16.4% in the three months ended March 31, 2022 compared to the same period in 2021.

This increase is attributable primarily to growth in earning assets and reduced funding

The tax equivalent net interest margin for the three months ended March 31, 2022, was 3.24%, up from 2.99% for the same period in 2021.

Non-interest income for the three months ended March 31, 2022 was $4.2 million, down $1.1 million or 20.1%, from the three months ended March 31, 2021.

Revenue at First National Wealth Management increased $132,000 or 12.4% over the same period, debit card revenue was up $177,000 or 14.1%, while mortgage banking revenue decreased $1.5 million or 74.7%.

Net gains on sales of securities for the three months ended March 31, 2022 were down $117,000, or 98.3% from the prior year period.

Non-interest expense for the three months ended March 31, 2022 was $10.7 million, up $776,000 or 7.9% from the three months ended March 31, 2021.

Salaries and employee benefits increased while other operating expense decreased over the same period.

Asset quality continues to be strong and stable.

Non-performing assets stood at 0.25% of total assets as of September 30, 2021, down from 0.43% of total assets as of September 30, 2020 and 0.32% as of December 31, 2020.

Total past-due loans were 0.25% of total loans as of September 30, 2021, down from 0.66% of total loans as of December 31, 2020 and 0.89% as of September 30, 2020.

The provision for loan losses for the first nine months of 2021 was $1.6 million, down from the $4.6 million provisioned in the same period in 2020.

Non-performing assets stood at 0.20% of total assets as of March 31, 2022, down from 0.30% of total assets as of March 31, 2021 and 0.23% as of December 31, 2021.

Total past-due loans were 0.25% of total loans as of March 31, 2022, down slightly from 0.26% of total loans as of December 31, 2021 and 0.37% as of March 31, 2021.

The provision for loan losses for the first three months of 2022 was $450,000, down from the $525,000 provisioned in the same period in 2021.

The Company continues to view it prudent to consider the uncertainties brought about by COVID-19 and the potential impact to borrowers in its provision analysis.

Net loan chargeoffs for the nine months ended September 30, 2021 were $321,000 or 0.03% of average loans on an annualized basis.

This was down from net chargeoffs of $818,000 for the nine months ended September 30, 2020.

The allowance for loan losses increased $1.3 million between December 31, 2020 and September 30, 2021, and now stands at 1.08% of loans outstanding as of September 30, 2021, down slightly from 1.10% at December 31, 2020 and up slightly from 1.07% of loans outstanding September 30, 2020.

The Company's balance sheet continued to expand in the first nine months of 2021 as total assets increased $168.4 million or 7.1% year-to-date.

The loan portfolio increased $140.5 million or 9.5% in the nine months ended September 30, 2021 and $180.6 million or 12.6% from a year ago.

Loan growth in the first nine months of 2021 was centered in commercial real estate and construction loans, up $124.7 million, and other commercial loans, up $3.1 million.

Net loan chargeoffs for the three months ended March 31, 2022 were $205,000 or 0.05% of average loans on an annualized basis.

This was up slightly from net chargeoffs of $184,000 for the three months ended March 31, 2021.

The allowance for loan losses increased $245,000 between December 31, 2021 and March 31, 2022, and now stands at 0.92% of loans outstanding as of March 31, 2022, down from 0.94% at December 31, 2021 and 1.09% at March 31, 2021.

The Company's balance sheet continued to expand in the first three months of 2022 as total assets increased $21.5 million or 0.9% year-to-date.

The loan portfolio increased $59.7 million or 3.6% in the three months ended March 31, 2022 and $190.6 million or 12.6% from a year ago.

Loan growth in the first three months of 2022 was centered in commercial real estate and construction loans, up $35.7 million, and other commercial loans, up $3.1 million.

Other commercial loans include PPP loan balances of $2.6 million, a decrease of $19.5 million since December 31, 2021.

The investment portfolio has increased $4.2 million year-to-date and increased $11.1 million or 1.6% from a year ago.

On the liability side of the balance sheet, low-cost deposits have increased $253.0 million or 23.5% year-to-date;

this growth is attributed to a combination of inflows from economic stimulus programs, new customer acquisition, and an anecdotally strong summer tourism season in the Bank's market area.

The investment portfolio decreased $371,000 year-to-date and increased $5.6 million or 0.8% from a year ago.

On the liability side of the balance sheet, low-cost deposits have increased $1.2 million or 0.1% year-to-date, with a modest decrease in checking account balances being offset by increases in NOW and savings balances.

Year-over-year, low-cost deposits have increased $208.1 million or 18.2%.

Local certificates of deposit ("CDs") decreased $12.1 million and wholesale CDs decreased $78.9 million year-to-date.

Local certificates of deposit ("CDs") decreased $3.7 million and wholesale CDs increased $47.4 million year-to-date.

Remaining well capitalized is a top priority for The First Bancorp, Inc.

The Company's total risk-based capital ratio was 14.48% as of September 30, 2021, solidly above the well-capitalized threshold of 10.0% set by the Federal Deposit Insurance Corporation, the Federal Reserve Board, and the Office of the Comptroller of the Currency.

The Company's operating ratios were strong in the first nine months of 2021, with a return on average tangible common equity of 17.62% for the nine months ended September 30, 2021 compared to 14.27% for the same period in 2020.

Our non-GAAP efficiency ratio continues to be an important component in the Company's overall performance and stood at 45.04% for the nine months ended September 30, 2021 compared to 50.00% for the same period in 2020.

The Company's efficiency ratio was elevated in the first quarter of 2020 due to charges taken to restructure several interest rate swap positions.

In the absence of these charges, the non-GAAP efficiency ratio for the first nine months of 2020 would have been 46.87%.

The Company's total risk-based capital ratio was 14.08% as of March 31, 2022, solidly above the well-capitalized threshold of 10.0% set by the Federal Deposit Insurance Corporation, the Federal Reserve Board, and the Office of the Comptroller of the Currency.

The Company's operating ratios were strong in the first three months of 2022, with a return on average tangible common equity of 18.25% for the three months ended March 31, 2022 compared to 18.34% for the same period in 2021.

Our non-GAAP efficiency ratio continues to be an important component in the Company's overall performance and stood at 45.42% for the three months ended March 31, 2022 compared to 45.52% for the same period in 2021.

Net Interest Income

Total interest income of $57.1 million for the nine months ended September 30, 2021 was a decrease of $904,000 or 1.6% compared to total interest income of $58.0 million for the same period of 2020.

Earning asset growth, along with increased fee recognition from PPP loans, mitigated a reduction in average earning asset yields of 0.38 percentage points.

Total interest expense of $8.5 million for the nine months ended September 30, 2021 was a decrease of $5.4 million or 38.7% compared to total interest expense for the nine months ended September 30, 2020, a function of a reduction in average cost of 0.43 percentage points.

As a result, net interest income of $48.6 million for the nine months ended September 30, 2021 was an increase of $4.5 million or 10.1% compared to net interest income of $44.2 million for the same period ended September 30, 2020.

The Company's net interest margin on a tax-equivalent basis for the nine months ended September 30, 2021 was 2.94%, up slightly from 2.93% for the first nine months of 2020.

Tax-exempt interest income amounted to $6.6 million for the nine months ended September 30, 2021 compared to $6.5 million for the nine months ended September 30, 2020.

The following tables present the amount of interest earned or paid, as well as the average yield or rate on an annualized basis, for each major category of assets or liabilities for the nine months and quarters ended September 30, 2021 and 2020.

Total interest income of $20.5 million for the three months ended March 31, 2022 was an increase of $1.6 million or 8.3% compared to total interest income of $19.0 million for the same period of 2021, with growth in earning assets responsible for the increase.

Total interest expense of $1.9 million for the three months ended March 31, 2022 was a decrease of $1.2 million or 37.9% compared to total interest expense for the three months ended March 31, 2021.

As a result, net interest income of $18.6 million for the three months ended March 31, 2022 was an increase of $2.7 million or 17.3% compared to net interest income of $15.9 million for the same period ended March 31, 2021.

The Company's net interest margin on a tax-equivalent basis for the three months ended March 31, 2022 was 3.24%, up from 2.99% for the first three months of 2021.

Tax-exempt interest income amounted to $2.1 million for the three months ended March 31, 2022 compared to $2.2 million for the three months ended March 31, 2021.

Tax-exempt income is calculated on a tax-equivalent basis, using a 21.0% Federal Income Tax rate.

For the nine months ended

September 30, 2021 September 30, 2020

For the three months ended

March 31, 2022 March 31, 2021

Dollars in thousands

14 unchanged sentences

Net interest margin 3.24 % 2.99 %

For the quarters ended

September 30, 2021 September 30, 2020

Dollars in thousands

interest Average

Yield/Rate Amount of

interest Average

Interest on earning assets

Interest-bearing deposits $ 21 0.14 % $ 8 0.12 %

Investments 4,168 2.37 % 4,898 2.88 %

Loans held for sale 3 0.97 % 19 1.51 %

Loans 15,970 3.96 % 14,167 3.88 %

Total interest-earning assets 20,162 3.39 % 19,092 3.52 %

Interest expense

Deposits 1,650 0.40 % 2,866 0.75 %

Other borrowings 927 1.57 % 895 1.27 %

Total interest expense 2,577 0.54 % 3,761 0.83 %

Net interest income $ 17,585 $ 15,331

Interest rate spread 2.85 % 2.69 %

Net interest margin 2.96 % 2.82 %

Interest income includes $2.9 million in net origination fees recognized during the first nine months of 2021, attributable to PPP loans;

as of September 30, 2021, net unrecognized PPP origination fees totaled $2.4 million.

Interest income in the first nine months of 2020 (program commenced in the second quarter) included a net $788,000 in origination fees recognized on PPP loans;

as of September 30, 2020 net unrecognized PPP origination fees totaled $2.7 million.

The following tables present changes in interest income and expense attributable to changes in interest rates and volume for interest-earning assets and liabilities for the nine months and quarters ended ended September 30, 2021 compared to 2020.

Interest income includes $1.1 million in net origination fees recognized during the first three months of 2022, attributable to PPP loans;

as of March 31, 2022, net unrecognized PPP origination fees totaled $137,000.

Interest income in the first three months of 2021 included a net $1.2 million in origination fees recognized on PPP loans;

as of March 31, 2021 net unrecognized PPP origination fees totaled $3.3 million.

The following tables present changes in interest income and expense attributable to changes in interest rates and volume for interest-earning assets and liabilities for the three months ended March 31, 2022 compared to 2021.

Tax-exempt income is calculated on a tax-equivalent basis, using a 21% Federal Income Tax rate.

For the nine months ended September 30, 2021 compared to 2020

For the three months ended March 31, 2022 compared to 2021

Dollars in thousands

12 unchanged sentences

1 Represents the change attributable to a combination of change in rate and change in volume.

For the quarter ended September 30, 2021 compared to 2020

Dollars in thousands

Volume Rate Rate/Volume 1

Interest on earning assets

Interest-bearing deposits $ 11 $ 1 $ 1 $ 13

Investment securities 153 (856) (27) (730)

Loans held for sale (14) (7) 5 (16)

Loans 1,429 340 34 1,803

Change in interest income 1,579 (522) 13 1,070

Interest expense

Deposits 249 (1,348) (117) (1,216)

Other borrowings (151) 220 (37) 32

Change in interest expense 98 (1,128) (154) (1,184)

Change in net interest income $ 1,481 $ 606 $ 167 $ 2,254

Average Daily Balance Sheets

The following table shows the Company's average daily balance sheets for the nine months and quarters ended September 30, 2021 and 2020.

For the nine months ended For the quarters ended

The following table shows the Company's average daily balance sheets for the three months ended March 31, 2022 and 2021.

For the three months ended

Dollars in thousands

September 30,

2021 September 30,

2020 September 30,

2021 September 30,

2022 March 31,

Cash and cash equivalents $ 22,285 $ 23,344

Interest-bearing deposits in other banks 23,650 46,659

Securities available for sale 306,007 321,834 311,212 318,080

Securities to be held to maturity 378,526 332,467 377,879 348,185

Securities available for sale (includes tax exempt securities of $34,879 and $36,829 at March 31, 2022 and 2021, respectively)

319,805 303,063

Securities to be held to maturity (included tax exempt securities of $250,145 and $247,432 at March 31, 2022 and 2021, respectively)

371,771 377,518

Restricted equity securities, at cost 5,385 10,335

25 unchanged sentences

Retained earnings 186,297 163,262

Net unrealized gain on securities available for sale 2,047 6,772 1,740 6,942

Net unrealized gain (loss) on securities available for sale (6,749) 3,399

Net unrealized loss on securities transferred from available for sale to held to maturity (87) (130)

4 unchanged sentences

Non-Interest Income

Non-interest income of $14.6 million for the nine months ended September 30, 2021 is an increase of $1.0 million compared to the same period in 2020.

Revenue at First National Wealth Management increased $640,000 or 23.6% over the same period, debit card revenue was up $834,000 or 27.4%, and mortgage banking revenue increased $549,000, or 14.4%;

net securities gains decreased $1.2 million year-over year.

Non-interest income of $4.4 million for the quarter ended September 30, 2021 is a decrease of $430,000 compared to the same period in 2020;

wealth management revenue increased $226,000 or 24.9% from the prior year quarter and debit card income increased $268,000, or 25.2%;

the gains were offset by a decrease in mortgage banking revenue of $884,000, or 46.2% year-over-year, and a decrease in net securities gains of $142,000.

The period-to-period decrease in mortgage banking revenue is a reflection of extraordinary results in the third quarter of 2020;

quarterly mortgage banking revenue remains well above pre-pandemic norms.

Non-interest income of $4.2 million for the three months ended March 31, 2022 is a decrease of $1.1 million compared to the same period in 2021.

Revenue at First National Wealth Management increased $132,000 or 12.4% over the same period, debit card revenue was up $177,000 or 14.1%, and service charge revenue was up 29.7%.

As expected, mortgage banking revenues continued to trend down from the heights of the past two years, down $1.5 million, or 74.7%.

This period-to-period decrease is a reflection of extraordinary results in the first quarter of 2021 and reversion to a more typical outcome.

Non-Interest Expense

Non-interest expense of $29.3 million for the nine months ended September 30, 2021 is an increase of 0.2% or $66,000 compared to non-interest expense of $29.2 million for the same period in 2020.

Non-interest expense of $10.7 million for the three months ended March 31, 2022 is an increase of 7.9% or $776,000 compared to non-interest expense of $9.9 million for the same period in 2021.

Salaries and employee benefits increased while other operating expense decreased over the same period.

The Company's non-GAAP efficiency ratio stood at 45.04% for the nine months ended September 30, 2021, down from 50.00% for the same period in 2020.

The Company's efficiency ratio was elevated in the first quarter of 2020 due to the charges taken to restructure interest rate swap positions.

In the absence of these charges, the non-GAAP efficiency ratio for the first nine months of 2020 would have been 46.87%.

Income taxes on operating earnings were $5.6 million for the nine months ended September 30, 2021, up $1.8 million from the same period in 2020.

The Company's investment portfolio increased by $4.2 million between December 31, 2020 and September 30, 2021.

As of September 30, 2021, mortgage-backed securities had a carrying value of $311.9 million and a fair value of $310.6 million.

The Company's non-GAAP efficiency ratio stood at 45.42% for the three months ended March 31, 2022, down from 45.52% for the same period in 2021.

Income taxes on operating earnings were $2.0 million for the three months ended March 31, 2022, up $197,000 from the same period in 2021.

The Company's investment portfolio decreased by $371,000 between December 31, 2021 and March 31, 2022.

As of March 31, 2022, mortgage-backed securities had a carrying value of $330.3 million and a fair value of $306.5 million.

Of this total, securities with a fair value of $73.3 million or 23.9% of the mortgage-backed portfolio were issued by the Government National Mortgage Association and securities with a fair value of $233.2 million or 76.1% of the mortgage-backed portfolio were issued by the Federal Home Loan Mortgage Corporation ("Freddie Mac") and the Federal National Mortgage Association ("Fannie Mae").

9 unchanged sentences

The portfolio is currently invested primarily in U.S.

Government agency securities and tax-exempt obligations of states and political subdivisions.

Government agency securities, mortgage-backed securities and tax-exempt obligations of states and political subdivisions.

The individual securities have been selected to enhance the portfolio's overall yield while not materially adding to the Company's level of interest rate risk.

3 unchanged sentences

The amortization of the net unrealized loss reported in accumulated other comprehensive income (loss) will offset the effect on interest income of the discount for the transferred securities.

The remaining unamortized balance of the net unrealized losses for the securities transferred from available for sale to held to maturity was $99,000 at September 30, 2021.

This compares to $133,000 and $139,000, net of taxes, at December 31, 2020 and September 30, 2020, respectively.

The remaining unamortized balance of the net unrealized losses for the securities transferred from available for sale to held to maturity was $78,000 at March 31, 2022.

This compares to $87,000 and $124,000, net of taxes, at December 31, 2021 and March 31, 2021, respectively.

These securities were transferred as a part of the Company's overall investment and balance sheet strategies.

The following table sets forth the Company's investment securities at their carrying amounts as of September 30, 2021 and 2020 and December 31, 2020.

The following table sets forth the Company's investment securities at their carrying amounts as of March 31, 2022 and 2021 and December 31, 2021.

Dollars in thousands

September 30,

2022 December 31,

2020 September 30,

2021 March 31,

Securities available for sale

15 unchanged sentences

Total securities $ 695,600 $ 695,971 $ 689,994

The following table sets forth yields and contractual maturities of the Company's investment securities as of September 30, 2021.

The following table sets forth yields and contractual maturities of the Company's investment securities as of March 31, 2022.

Yields on tax-exempt securities have been computed on a tax-equivalent basis using a tax rate of 21%.

35 unchanged sentences

Impaired Securities

The securities portfolio contains certain securities where the amortized cost of which exceeds fair value, which at September 30, 2021 amounted to $8.5 million, or 1.27% of the amortized cost of the total securities portfolio.

The securities portfolio contains certain securities where the amortized cost of which exceeds fair value, which at March 31, 2022 amounted to $51.5 million, or 7.42% of the amortized cost of the total securities portfolio.

At December 31, 2021, this amount was $8.4 million, or 1.26% of the amortized cost of total securities portfolio.

The position change since 2021 year-end is the result of the significant increase in market interest rates during the period.

As a part of the Company's ongoing security monitoring process, the Company identifies securities in an unrealized loss position that could potentially be other-than-temporarily impaired.

2 unchanged sentences

The primary factors considered in evaluating whether a decline in the fair value of securities is other-than-temporary include:

(a) the length of time and extent to which the fair value has been less than cost or amortized cost and the expected recovery period of the security, (b)

the financial condition, credit rating and future prospects of the issuer, (c) whether the debtor is current on contractually obligated interest and principal payments, (d) the volatility of the securities market price, (e) the intent and ability of the Company to retain the investment for a period of time sufficient to allow for recovery, which may be at maturity, and (f) any other information and observable data considered relevant in determining whether other-than-temporary impairment has occurred.

(a) the length of time

and extent to which the fair value has been less than cost or amortized cost and the expected recovery period of the security, (b) the financial condition, credit rating and future prospects of the issuer, (c) whether the debtor is current on contractually obligated interest and principal payments, (d) the volatility of the securities market price, (e) the intent and ability of the Company to retain the investment for a period of time sufficient to allow for recovery, which may be at maturity, and (f) any other information and observable data considered relevant in determining whether other-than-temporary impairment has occurred.

The Company's best estimate of cash flows uses severe economic recession assumptions due to market uncertainty.

2 unchanged sentences

Estimating future cash flows is a quantitative and qualitative process that incorporates information received from third party sources along with certain internal assumptions and judgments regarding the future performance of the underlying collateral.

As of September 30, 2021, the Company had temporarily impaired securities with a fair value of $332.0 million and unrealized losses of $8.5 million, as identified in the table below.

Securities in a continuous unrealized loss position more than twelve months amounted to $33.5 million as of September 30, 2021, compared with $3.9 million at December 31, 2020.

As of March 31, 2022, the Company had temporarily impaired securities with a fair value of $502.1 million and unrealized losses of $51.5 million, as identified in the table below.

Securities in a continuous unrealized loss position more than twelve months amounted to $163.0 million as of March 31, 2022, compared with $55.9 million at December 31, 2021.

The Company has concluded that these securities were not other-than-temporarily impaired.

This conclusion was based on the issuer's continued satisfaction of the securities obligations in accordance with their contractual terms and the expectation that the issuer will continue to do so, Management's intent and ability to hold these securities for a period of time sufficient to allow for any anticipated recovery in fair value which may be at maturity, the expectation that the Company will receive 100% of future contractual cash flows, as well as the evaluation of the fundamentals of the issuer's financial condition and other objective evidence.

The following table summarizes temporarily impaired securities and their approximate fair values at September 30, 2021:

The following table summarizes temporarily impaired securities and their approximate fair values at March 31, 2022:

Less than 12 months 12 months or more Total

6 unchanged sentences

State and political subdivisions 141,305 (17,850) 3,405 (1,029) 144,710 (18,879)

Asset-backed securities 4,340 (18) — — 4,340 (18)

Corporate Securities 11,151 (349) — — 11,151 (349)

3 unchanged sentences

Government-sponsored agencies and enterprises.

As of September 30, 2021, there were $2.3 million unrealized losses on these securities compared to $333,000 unrealized losses as of December 31, 2020.

As of March 31, 2022, there were $8.2 million unrealized losses on these securities compared to $2.3 million unrealized losses as of December 31, 2021.

All of these securities were credit rated "AAA" or "AA+" by the major credit rating agencies.

Management believes that securities issued by U.S.

Government-sponsored agencies and enterprises have minimal credit risk, as these agencies and enterprises play a vital role in the nation's financial markets and does not consider these securities to be other-than-temporarily impaired at September 30, 2021.

Mortgage-backed securities issued by U.S.

1 unchanged sentence

Government-sponsored enterprises.

As of September 30, 2021, there were $4.8 million of unrealized losses on these securities compared with $812,000 at December 31, 2020.

As of March 31, 2022, there were $24.1 million of unrealized losses on these securities compared with $5.7 million at December 31, 2021.

All of these securities were credit rated "AAA" or "AA+" by the major credit rating agencies.

2 unchanged sentences

Government-sponsored enterprises have minimal credit risk, as these agencies and enterprises play a vital role in the nation's financial markets.

Management believes that the unrealized losses at September 30, 2021 were attributable to changes in current market yields and spreads since the date the underlying securities were purchased, and does not consider these securities to be other-than-temporarily impaired at September 30, 2021.

Management believes that the unrealized losses at March 31, 2022 were attributable to changes in current market yields and spreads since the date the underlying securities were purchased, and does not consider these securities to be other-than-temporarily impaired at March 31, 2022.

The Company also has the ability and intent to hold these securities until a recovery of their amortized cost, which may be at maturity.

Obligations of state and political subdivisions.

As of September 30, 2021, there were $1.3 million of unrealized losses on these securities compared to $3,000 at December 31, 2020.

As of March 31, 2022, there were $18.9 million of unrealized losses on these securities compared to $390,000 at December 31, 2021.

Municipal securities are supported by the general taxing authority of the municipality or a dedicated revenue stream, and, in the case of school districts, are generally supported by state aid.

At September 30, 2021, all municipal bond issuers were current on contractually obligated interest and principal payments.

The Company attributes the unrealized losses at September 30, 2021 to changes in prevailing market yields and pricing spreads

since the date the underlying securities were purchased, combined with current market liquidity conditions and the disruption in the financial markets in general.

Accordingly, the Company does not consider these municipal securities to be other-than-temporarily impaired at September 30, 2021.

At March 31, 2022, all municipal bond issuers were current on contractually obligated interest and principal payments.

The Company attributes the unrealized losses at March 31, 2022 to changes in prevailing market yields and pricing spreads since the date the underlying securities were purchased, combined with current market liquidity conditions and disruption in the financial

markets in general.

Accordingly, the Company does not consider these municipal securities to be other-than-temporarily impaired at March 31, 2022.

Asset-backed securities.

As of March 31, 2022, there were $18,000 of unrealized losses on these securities compared to none at December 31, 2021.

These securities consist of U.S Government backed student loans along with other credit enhancements.

Corporate securities.

As of September 30, 2021, there were $35,000 of unrealized losses on these securities compared to $2,000 at December 31, 2020.

As of March 31, 2022, there were $349,000 of unrealized losses on these securities compared to $66,000 at December 31, 2021.

Corporate securities are dependent on the operating performance of the issuers.

At September 30, 2021, all corporate bond issuers were current on contractually obligated interest and principal payments.

At March 31, 2022, all corporate bond issuers were current on contractually obligated interest and principal payments.

Federal Home Loan Bank Stock

2 unchanged sentences

The Bank uses the FHLB for much of its wholesale funding needs.

As of September 30, 2021, the Bank's investment in FHLB stock totaled $7.8 million.

This compares to $9.5 million as of December 31, 2020 and $9.5 million as of September 30, 2020.

As of March 31, 2022, the Bank's investment in FHLB stock totaled $4.4 million.

This compares to $4.3 million as of December 31, 2021 and $9.1 million as of March 31, 2021.

FHLB stock is a non-marketable equity security and therefore is reported at cost, subject to adjustments for any observable market transactions on the same or similar instruments of the investee.

No impairment losses have been recorded through September 30, 2021.

No impairment losses have been recorded through March 31, 2022.

The Company will continue to monitor its investment in FHLB stock.

1 unchanged sentence

Loans held for sale are carried at the lower of cost or market value.

As of September 30, 2021, the Bank had $1.4 million in loans held for sale.

This compares to $5.9 million loans held for sale at December 31, 2020 and $6.4 million loans held for sale at September 30, 2020.

As of March 31, 2022, the Bank had $400,000 in loans held for sale.

This compares to $835,000 loans held for sale at December 31, 2021 and $3.5 million loans held for sale at March 31, 2021.

The Bank participates in FHLB's Mortgage Partnership Finance Program ("MPF"), selling loans with recourse.

1 unchanged sentence

therefore, there was minimum impact on the reserve.

The loan portfolio increased during the first nine months of 2021, with total loans at $1.62 billion at September 30, 2021, up $140.5 million or 9.5% from total loans of $1.48 billion at December 31, 2020.

Commercial loans increased $127.8 million or 16.3% between December 31, 2020 and September 30, 2021, municipal loans decreased $3.2 million or 7.2%, residential term loans increased $15.7 million, residential construction increased $7.8 million, and home equity lines of credit decreased $5.2 million.

The loan portfolio increased during the first three months of 2022, with total loans at $1.71 billion at March 31, 2022, up $59.7 million or 3.6% from total loans of $1.65 billion at December 31, 2021.

Commercial loans increased $38.8 million or 4.2% between December 31, 2021 and March 31, 2022, municipal loans increased $2.5 million or 5.2%, residential term loans increased $15.5 million, residential construction increased $4.5 million, and home equity lines of credit decreased $769,000.

Loans made under the U.S.

Small Business Administration's PPP accounted for $39.6 million of commercial loans as of September 30, 2021.

Small Business Administration's PPP accounted for $2.6 million of commercial loans as of March 31, 2022.

Commercial loans are comprised of three major classes:

39 unchanged sentences

Consumer loans may be secured or unsecured.

Construction loans, both commercial and residential, at 45.4% of Bank capital are well under the regulatory guidance of 100.0% of capital at September 30, 2021.

Construction loans and non-owner-occupied commercial real estate loans are at 191.7% of Bank total capital, well under the regulatory guidance of 300.0% of capital at September 30, 2021.

The following table summarizes the loan portfolio, by class, at September 30, 2021 and 2020 and December 31, 2020.

Construction loans, both commercial and residential, at 58.7% of Bank capital are well under the regulatory guidance of 100.0% of capital at March 31, 2022.

Construction loans and non-owner-occupied commercial real estate loans are at 211.8% of total Bank capital, well under the regulatory guidance of 300.0% of capital at March 31, 2022.

The following table summarizes the loan portfolio, by class, at March 31, 2022 and 2021 and December 31, 2021.

Dollars in thousands

September 30, 2021 December 31, 2020 September 30, 2020

March 31, 2022 December 31, 2021 March 31, 2021

Real estate $ 588,301 34.5 % $ 576,198 35.0 % $ 469,974 31.0 %

7 unchanged sentences

Total loans $ 1,707,348 100.0 % $ 1,647,649 100.0 % $ 1,516,772 100.0 %

The following table sets forth certain information regarding the contractual maturities of the Bank's loan portfolio as of September 30, 2021.

The following table sets forth certain information regarding the contractual maturities of the Bank's loan portfolio as of March 31, 2022.

Dollars in thousands

9 unchanged sentences

Total loans $ 9,129 $ 184,198 $ 207,487 $ 1,306,534 $ 1,707,348

The following table provides a listing of loans by class, between variable and fixed rates as of September 30, 2021.

The following table provides a listing of loans by class, between variable and fixed rates as of March 31, 2022.

Fixed-Rate Adjustable-Rate Total

11 unchanged sentences

Loan Concentrations

As of September 30, 2021, the Bank had one concentration of loans in one particular industry that exceeded 10% of its total loan portfolio.

As of March 31, 2022, the Bank had one concentration of loans in one particular industry that exceeded 10% of its total loan portfolio.

Loans to hotels (except Casino hotels) and motels totaled $193.4 million, or 11.33% of total loans.

As of March 31, 2021, the Bank did not have any concentration of loans in one particular industry that exceeded 10% of its total loan portfolio.

Credit Risk Management and Allowance for Loan Losses

60 unchanged sentences

A specific reserve is allocated to an individual loan when that loan has been deemed impaired and when the amount of a probable loss is estimable on the basis of its collateral value, the present value of anticipated future cash flows, or its net realizable value.

At September 30, 2021, impaired loans with specific reserves totaled $3.8 million and the amount of such reserves was $682,000.

At March 31, 2022, impaired loans with specific reserves totaled $3.2 million and the amount of such reserves was $712,000.

This compares to impaired loans with specific reserves of $3.1 million at December 31, 2021 and the amount of such reserves was $576,000.

All of these analyses are reviewed and discussed by the Directors' Loan Committee, and recommendations from these processes provide Management and the Board of Directors with independent information on loan portfolio condition.

Our total allowance at September 30, 2021 is considered by Management to be appropriate to address the credit losses inherent in the loan portfolio at that date.

Our total allowance at March 31, 2022 is considered by Management to be appropriate to address the credit losses inherent in the loan portfolio at that date.

However, our determination of the appropriate allowance level is based upon a number of assumptions we make about future events, which we believe are reasonable, but which may or may not prove valid.

Thus, there can be no assurance that our charge-offs in future periods will not exceed our allowance for loan losses or that we will not need to make additional increases in our allowance for loan losses.

The following table summarizes our allocation of allowance by loan class as of September 30, 2021 and 2020 and December 31, 2020.

The following table summarizes our allocation of allowance by loan class as of March 31, 2022 and 2021 and December 31, 2021.

The percentages are the portion of each loan class to total loans.

Dollars in thousands

September 30, 2021 December 31, 2020 September 30, 2020

March 31, 2022 December 31, 2021 March 31, 2021

Real estate $ 5,369 34.5 % $ 5,367 35.0 % $ 5,741 31.0 %

8 unchanged sentences

Total $ 15,766 100.0 % $ 15,521 100.0 % $ 16,594 100.0 %

The allowance for loan losses totaled $17.5 million at September 30, 2021, compared to $16.3 million as of December 31, 2020 and $15.4 million as of September 30, 2020.

The allowance for loan losses totaled $15.8 million at March 31, 2022, compared to $15.5 million as of December 31, 2021 and $16.6 million as of March 31, 2021.

Management's ongoing application of methodologies to establish the allowance include an evaluation of impaired loans for specific reserves.

These specific reserves increased $220,000 in the first nine months of 2021 from $462,000 at December 31, 2020 to $682,000 at September 30, 2021.

These specific reserves increased $136,000 in the first three months of 2022 from $576,000 at December 31, 2021 to $712,000 at March 31, 2022.

The specific loans that make up those categories change from period to period.

Impairment on those loans, which would be reflected in the allowance for loan losses, might or might not exist, depending on the specific circumstances of each loan.

The portion of the reserve based upon homogeneous pools of loans increased by $142,000 in the first nine months of 2021.

The portion of the reserve based on

qualitative factors increased $1.5 million in the first nine months of 2021 due to a mix of factors.

These included changes in various macroeconomic measures used in the qualitative model, updated analysis of the loan portfolio in multiple stress scenarios, and performance of COVID-19 related loan modifications.

Unallocated reserves of $2.1 million, or 13.1% of the total reserve at December 31, 2020, decreased to $1.5 million, or 8.5% as of September 30, 2021.

After consideration of the shifts in specific, pooled and qualitative reserves, Management determined that the unallocated portion of the reserve at September 30, 2021 adequately addresses general imprecision related to loan portfolio growth, along with other underlying credit risks not yet captured in loan specific or qualitative metrics the Company uses to estimate its allowance.

A breakdown of the allowance for loan losses as of September 30, 2021, by loan class and allowance element, is presented in the following table:

The portion of the reserve based upon homogeneous pools of loans increased by $22,000 in the first three months of 2022.

The portion of the reserve based on qualitative factors increased $137,000 in the first three months of 2022 due to a mix of factors.

These included changes in various

macroeconomic measures used in the qualitative model, updated analysis of the loan portfolio in multiple stress scenarios, and performance of COVID-19 related loan modifications.

Unallocated reserves of $1.8 million, or 11.5% of the total reserve at December 31, 2021, decreased to $1.7 million, or 11.0% as of March 31, 2022.

After consideration of the shifts in specific, pooled and qualitative reserves, Management determined that the unallocated portion of the reserve at March 31, 2022 adequately addresses general imprecision related to loan portfolio growth, along with other underlying credit risks not yet captured in loan specific or qualitative metrics the Company uses to estimate its allowance.

A breakdown of the allowance for loan losses as of March 31, 2022, by loan class and allowance element, is presented in the following table:

Dollars in thousands

12 unchanged sentences

Based upon Management's evaluation, provisions are made to maintain the allowance as a best estimate of inherent losses within the portfolio.

The provision for loan losses to maintain the allowance was $1.6 million for the first nine months of 2021 and $4.6 million the first nine months of 2020.

Net charge-offs were $321,000 in the first nine months of 2021, down from $818,000 in the first nine months of 2020.

Our allowance as a percentage of outstanding loans was 1.08% as of September 30, 2021, down slightly from 1.10% as of December 31, 2020, and up from 1.07% as of September 30, 2020.

The following table summarizes the activities in our allowance for loan losses for the nine months ended September 30, 2021 and 2020 and for the year ended December 31, 2020:

The provision for loan losses to maintain the allowance was $450,000 for the first three months of 2022 and $525,000 the first three months of 2021.

Net charge-offs were $205,000 in the first three months of 2022, up from $184,000 in the first three months of 2021.

Our allowance as a percentage of outstanding loans was 0.92% as of March 31, 2022, down slightly from 0.94% as of December 31, 2021, and down from 1.09% as of March 31, 2021.

The following table summarizes the activities in our allowance for loan losses for the three months ended March 31, 2022 and 2021 and for the year ended December 31, 2021:

Dollars in thousands

September 30, 2021 December 31, 2020 September 30, 2020

March 31, 2022 December 31, 2021 March 31, 2021

Balance at the beginning of period $ 15,521 $ 16,253 $ 16,253

4 unchanged sentences

Municipal — — —

Term 41 66 46

Construction — — —

5 unchanged sentences

Construction — — —

Other 83 37 24

Municipal — — —

Term 12 34 31

Construction — — —

3 unchanged sentences

Net loans charged off 205 357 184

Provision for loan losses 1,575 6,050 4,550

Provision (credit) for loan losses 450 (375) 525

Balance at end of period $ 15,766 $ 15,521 $ 16,594

2 unchanged sentences

Ratio of allowance for loan losses to total loans outstanding 0.92 % 0.94 % 1.09 %

1 Annualized using a 365-day basis for 2021 and a 366-day basis for 2020.

1 Annualized using a 365-day basis for both 2022 and 2021.

In Management's opinion, the level of the provision for loan losses is directionally consistent with the overall credit quality of our loan portfolio and corresponding levels of nonperforming loans, as well as with the performance of the national and local economies, including effects of the COVID-19 pandemic.

COVID-19 Impact on Loan Portfolio

The Company continues to actively work with borrowers impacted by the COVID-19 outbreak.

As of September 30, 2021, a total of 1051 loan modification requests for interest-only payments or deferred payments have been completed in conformance with the Interagency Statement on Loan Modifications and Reporting issued March 23, 2020, Section 4013 of the Coronavirus Aid, Relief, Economic Security ("CARES") Act, or H.R.

133 signed December 27, 2020, which was extended by the Supplemental Appropriations Act, representing $287.9 million in loan balances, or approximately 18.3% of the overall loan portfolio.

One of these modifications of a de minimis amount has been classified as a Troubled Debt Restructure since being

So long as modified terms are met, loans in an active modification are not included in past due loan totals and continue to accrue interest.

As of September 30, 2021, 59 loans totaling $6.6 million remained in their original modification or had had a subsequent modification, representing 0.41% of the overall portfolio.

Refer to Note 3 of the financial statements for further detail.

First National Bank is a designated SBA preferred lender and has participated in both the 2020 (PPP1) and 2021 (PPP2) rounds of the Payroll Protection Program.

First National Bank is a designated SBA preferred lender and has participated in both the 2020 (PPP1) and 2021 (PPP2) rounds of the PPP.

Under PPP1, 1,718 loans were granted totaling $97.8 million in funds disbursed to qualified small businesses.

The Bank has been actively working with these borrowers to process applications for forgiveness per PPP guidelines;

as of September 30, 2021, PPP1 balances had been reduced to $656,000.

Under PPP2, 1,263 loans totaling $52.1 million had been granted as of September 30, 2021, and the outstanding balances had been reduced to $39.0 million.

The impact of the consequences of COVID-19 upon borrowers and ultimately the Company's loan portfolio metrics remains difficult to estimate or ascertain.

as of March 31, 2022, PPP1 balances had been reduced to $5,000.

Under PPP2, 1,263 loans totaling $52.1 million had been granted;

as of March 31, 2022, PPP2 balances had been reduced to $2.6 million.

It is expected that most of the remaining PPP1 and PPP2 balances will be forgiven or otherwise paid in the second quarter of 2022.

The State of Maine, where most of the Bank's customers reside and/or operate businesses, has largely re-opened its economy;

quarantines for out of state visitors and limits on the size of public gatherings have been lifted.

The emergence of the Delta variant of the COVID-19 virus has not yet resulted in new restrictions or curtailment of economic activity, but remains a threat to economic normalization and could ultimately have a negative impact on the Bank's borrowers.

The emergence of the Delta and Omicron variants of the COVID-19 virus did not result in new restrictions or curtailment of economic activity, but COVID-19 remains a threat to economic normalization and could ultimately have a negative impact on the Bank's borrowers.

The Company regularly monitors activity on open credit lines and has not observed increased utilization related to COVID-19.

Nonperforming Loans

9 unchanged sentences

All payments made on nonaccrual loans are applied to the principal balance of the loan.

Nonperforming loans, expressed as a percentage of total loans, totaled 0.39% at September 30, 2021 compared to 0.46% at December 31, 2020 and 0.63% at September 30, 2020.

The following table shows the distribution of nonperforming loans by class as of September 30, 2021 and 2020 and December 31, 2020:

Nonperforming loans, expressed as a percentage of total loans, totaled 0.30% at March 31, 2022 compared to 0.35% at December 31, 2021 and 0.46% at March 31, 2021.

The following table shows the distribution of nonperforming loans by class as of March 31, 2022 and 2021 and December 31, 2021:

Dollars in thousands

September 30,

2022 December 31,

2020 September 30,

2021 March 31,

Real estate $ 604 $ 242 $ 748

7 unchanged sentences

Total nonperforming loans $ 5,049 $ 5,602 $ 6,941

Allowance for loan losses as a percentage of nonperforming loans 312.3 % 277.1 % 239.1 %

The amounts shown for total nonperforming loans do not include loans 90 or more days past due and still accruing interest.

These are loans for which we expect to collect all amounts due, including past-due interest.

As of September 30, 2021, loans 90 or more days past due and still accruing interest totaled $229,000, compared to $1.5 million at December 31, 2020 and $1.5 million at September 30, 2020.

As of March 31, 2022, loans 90 or more days past due and still accruing interest totaled $46,000, compared to $32,000 at December 31, 2021 and $85,000 at March 31, 2021.

Troubled Debt Restructured

A troubled debt restructured ("TDR") constitutes a restructuring of debt if the Company, for economic or legal reasons related to the borrower's financial difficulties, grants a concession to the borrower that it would not otherwise consider.

A TDR constitutes a restructuring of debt if the Company, for economic or legal reasons related to the borrower's financial difficulties, grants a concession to the borrower that it would not otherwise consider.

To determine whether or not a loan should be classified as a TDR, Management evaluates a loan based upon the following criteria:

3 unchanged sentences

common concession types include maturity date extension, interest rate adjustments to below market pricing, and deferment of payments.

As of September 30, 2021, we had 64 loans with a balance of $10.1 million that have been restructured.

This compares to 74 loans with a balance of $11.5 million and 78 loans with a balance of $13.4 million classified as TDRs as of December 31, 2020 and September 30, 2020, respectively.

The following table shows the activity in loans classified as TDRs between December 31, 2020 and September 30, 2021:

As of March 31, 2022, we had 56 loans with a balance of $7.8 million that have been restructured.

This compares to 60 loans with a balance of $8.3 million and 73 loans with a balance of $11.3 million classified as TDRs as of December 31, 2021 and March 31, 2021, respectively.

The following table shows the activity in loans classified as TDRs between December 31, 2021 and March 31, 2022:

Balance in Thousands of Dollars Number of Loans Aggregate Balance

3 unchanged sentences

Repayments in 2022 — (107)

Total at September 30, 2021 64 $ 10,051

As of September 30, 2021, 42 loans with an aggregate balance of $8.1 million were performing under the modified terms, 19 loans with an aggregate balance of $1.6 million were on nonaccrual and three loans with an aggregate balance of $261,000 were more than 30 days past due and accruing.

Total at March 31, 2022 56 $ 7,790

As of March 31, 2022, 38 loans with an aggregate balance of $6.2 million were performing under the modified terms, 17 loans with an aggregate balance of $1.6 million were on nonaccrual and one loan with an aggregate balance of $3,000 was more than 30 days past due and accruing.

As a percentage of aggregate outstanding balance, 79.60% were performing under the modified terms, 20.36% were on nonaccrual and 0.04% were past due and still accruing.

The performance status of all TDRs as of September 30, 2021, as well as the associated specific reserve in the allowance for loan losses, is summarized by type of loan in the following table.

The performance status of all TDRs as of March 31, 2022, as well as the associated specific reserve in the allowance for loan losses, is summarized by type of loan in the following table.

In thousands of dollars

14 unchanged sentences

Associated specific reserve $ 131 $ — $ 368 $ 499

Residential, HELOC and consumer TDRs as of September 30, 2021 included 47 loans with an aggregate balance of $6.2 million, and the modifications granted fell into five major categories.

Residential and consumer TDRs as of March 31, 2022 included 42 loans with an aggregate balance of $5.2 million, and the modifications granted fell into four major categories.

Loans totaling $2.9 million had an extension of term, allowing the borrower to repay over an extended number of years and lowering the monthly payment to a level the borrower can afford.

Loans totaling $2.0 million had interest capitalized, allowing the borrower to become current after unpaid interest was added to the balance of the loan and re-amortized over the remaining life of the loan.

Rate concessions were granted on loans totaling $1.2 million.

Rate concessions were granted on loans totaling $365,000.

Loans with an aggregate balance of $783,000 were involved in bankruptcy.

Certain residential TDRs had more than one modification.

Commercial TDRs as of September 30, 2021 were comprised of 17 loans with a balance of $3.8 million.

Of this total, five loans with an aggregate balance of $1.2 million had an extended period of interest-only payments, deferring the start of principal repayment.

Commercial TDRs as of March 31, 2022 were comprised of 14 loans with a balance of $2.6 million.

Of this total, four loans with an aggregate balance of $1.1 million had an extended period of interest-only payments, deferring the start of

principal repayment.

Three loans with an aggregate balance of $280,000 had an extension of term, allowing the borrower to repay over an extended number of years and lowering the monthly payment to a level the borrower can afford.

Three loans with an aggregate balance of $254,000 had a deferral of payment.

The remaining six loans with an aggregate balance of $1.9 million had several different modifications.

The remaining four loans with an aggregate balance of $1.0 million had several different modifications.

In each case when a loan was modified, Management determined it was in the Bank's best interest to work with the borrower with modified terms rather than to proceed to foreclosure.

Once a loan is classified as a TDR it generally remains classified as such until the balance is fully repaid, whether or not the loan is performing under the modified terms.

As of September 30, 2021, Management is aware of eight loans classified as TDRs that are involved in bankruptcy with an outstanding balance of $961,000.

As of March 31, 2022, Management is aware of eight loans classified as TDRs that are involved in bankruptcy with an outstanding balance of $938,000.

There were also 17 loans with an outstanding balance of $1.6 million that were classified as TDRs and on non-accrual status, of which no loans were in the process of foreclosure.

3 unchanged sentences

If the measure of an impaired loan is lower than the recorded investment in the loan, a specific reserve is established for the difference.

Impaired loans totaled $14.5 million at September 30, 2021, and have decreased $1.5 million from December 31, 2020.

There were 122 impaired loans at September 30, 2021 down from 140 loans at December 31, 2020.

Impaired commercial loans decreased $318,000 between December 31, 2020 and September 30, 2021.

The specific allowance for impaired commercial loans increased from $299,000 at December 31, 2020 to $553,000 as of September 30, 2021, which represented the fair value deficiencies for loans where the fair value of the collateral or net present value of expected cash flows was estimated at less than our carrying amount of the loan.

From December 31, 2020 to September 30, 2021, impaired residential loans decreased $632,000 and impaired home equity lines of credit decreased $536,000.

The following table sets forth impaired loans as of September 30, 2021 and 2020 and December 31, 2020:

Impaired loans totaled $11.3 million at March 31, 2022, and have decreased $798,000 from December 31, 2021.

There were 97 impaired loans at March 31, 2022 down from 107 loans at December 31, 2021.

Impaired commercial loans increased $276,000 between December 31, 2021 and March 31, 2022.

The specific allowance for impaired commercial loans increased from $439,000 at December 31, 2021 to $587,000 as of March 31, 2022, which represented the fair value deficiencies for loans where the fair value of the collateral or net present value of expected cash flows was estimated at less than our carrying amount of the loan.

From December 31, 2021 to March 31, 2022, impaired residential loans decreased $907,000 and impaired home equity lines of credit decreased $166,000.

The following table sets forth impaired loans as of March 31, 2022 and 2021 and December 31, 2021:

Dollars in thousands

September 30,

2022 December 31,

2020 September 30,

2021 March 31,

Real estate $ 1,775 $ 1,428 $ 3,201

8 unchanged sentences

Past Due Loans

The Bank's overall loan delinquency ratio was 0.25% at September 30, 2021 compared to 0.66% at December 31, 2020 and 0.89% at September 30, 2020.

Loans 90 days delinquent and accruing decreased from $1.5 million at December 31, 2020 to $229,000 as of September 30, 2021.

The following table sets forth loan delinquencies as of September 30, 2021 and 2020 and December 31, 2020:

The Bank's overall loan delinquency ratio was 0.25% at March 31, 2022 compared to 0.26% at December 31, 2021 and 0.37% at March 31, 2021.

Loans 90 days delinquent and accruing increased from $32,000 at December 31, 2021 to $46,000 as of March 31, 2022.

The following table sets forth loan delinquencies as of March 31, 2022 and 2021 and December 31, 2021:

Dollars in thousands

September 30,

2022 December 31,

2020 September 30,

2021 March 31,

Real estate $ 563 $ 440 $ 469

15 unchanged sentences

Based on historical experience, the credit quality of some of these loans may improve due to improvements in the economy as well as changes in collateral values or the financial condition of the borrowers, while the credit quality of other loans may deteriorate, resulting in some amount of loss.

At September 30, 2021, there was one potential problem loan with a balance of $261,000 or 0.02% of total loans.

This compares to five loans with a balance of $195,000 or 0.01% of total loans at December 31, 2020.

As of September 30, 2021, there were 13 loans in the process of foreclosure with a total balance of $1,140,000.

The Bank's residential foreclosure process begins when a loan becomes 75 days past due at which time a Demand/Breach Letter is sent to

the borrower.

At March 31, 2022, there were two potential problem loans with a balance of $16,000 or 0.001% of total loans.

At December 31, 2021, there were no potential problem loans.

As of March 31, 2022, there were 11 loans in the process of foreclosure with a total balance of $1.4 million.

The Bank's residential foreclosure process begins when a loan becomes 75 days past due at which time a Demand/Breach Letter is sent to the borrower.

If the loan becomes 120 days past due, copies of the promissory note and mortgage deed are forwarded to the Bank's attorney for review and a complaint for foreclosure is then prepared.

11 unchanged sentences

There were no issues requiring management attention in the most recent review.

Servicing for others includes loans sold to Freddie Mac, Fannie Mae, and the Federal Home Loan Bank of Boston through its MPF program.

Servicing for others includes loans sold to Freddie Mac, Fannie Mae, and the FHLB through its MPF program.

The Bank follows the published guidelines of each investor.

6 unchanged sentences

Real estate acquired through foreclosure is carried at the lower of fair value less estimated cost to sell or the cost of the asset and is not included as part of the allowance for loan loss totals.

At September 30, 2021, there were no OREO properties, compared to December 31, 2020 when there were four properties owned with an OREO balance of $908,000, net of an allowance for loan losses of $45,000 and September 30, 2020 when there were five properties owned with an OREO balance of $777,000, net of an allowance for loan losses of 45,000.

At March 31, 2022 and December 31, 2021, there were no OREO properties, compared to March 31, 2021 when there were two properties owned with an OREO balance of $401,000, net of an allowance for loan losses of $45,000.

The following table presents the composition of other real estate owned:

Dollars in thousands

September 30,

2022 December 31,

2020 September 30,

2021 March 31,

Carrying Value

2 unchanged sentences

Municipal — — —

Term — 508 600

Construction — — —

9 unchanged sentences

Consumer — — —

Total — 45 45

Real estate — — 401

1 unchanged sentence

Municipal — — —

Term — 508 600

Construction — — —

3 unchanged sentences

Liquidity Management

As of September 30, 2021, the Bank had primary sources of liquidity of $1.0 billion.

As of March 31, 2022, the Bank had primary sources of liquidity of $965.0 million.

It is Management's opinion this is sufficient to meet liquidity needs under a broad range of scenarios.

The Bank has an additional $505.0 million in contingent sources of liquidity, including the Federal Reserve Borrower in Custody program, municipal and corporate securities, and correspondent bank lines of credit.

The Bank has $469.0 million in contingent sources of liquidity, including the Federal Reserve Borrower in Custody program, municipal and corporate securities, and correspondent bank lines

The Asset/Liability Committee ("ALCO") establishes guidelines for liquidity in its Asset/Liability policy and monitors internal liquidity measures to manage liquidity exposure.

1 unchanged sentence

Liquidity is the ability of a financial institution to meet maturing liability obligations and customer loan demand.

The Bank's primary source of liquidity is deposits, which funded 79.8% of total average assets in the first nine months of 2021, up from 77.6% a year ago.

While the generally preferred funding strategy is to attract and retain low-cost deposits, the ability to do

so is affected by competitive interest rates and terms in the marketplace.

The Bank's primary source of liquidity is deposits, which funded 84.2% of total average assets in the first three months of 2022, up from 79.2% a year ago.

While the generally preferred funding strategy is to attract and retain low-cost deposits, the ability to do so is affected by competitive interest rates and terms in the marketplace.

Other sources of funding include discretionary use of purchased liabilities (e.g., FHLB term advances and other borrowings), cash flows from the securities portfolios and loan repayments.

7 unchanged sentences

In addition to these unexpected outflow risks, several other "business as usual" factors enter into the calculation of the adequacy of contingent liquidity including payment proceeds from loans and investment securities, maturing debt obligations and maturing time deposits.

The Bank has established collateralized borrowing capacity with the Federal Reserve Bank ("FRB") of Boston and also maintains additional collateralized borrowing capacity with the FHLB in excess of levels used in the ordinary course of business as well as Fed Funds lines with two correspondent banks and availability through the FRB Borrower in Custody program.

In the second quarter of 2020, the Bank enrolled in the Paycheck Protection Program Liquidity Facility ("PPPLF") offered by the FRB of Boston.

PPPLF offered the ability to obtain advances dollar for dollar against the value of pledged PPP loans;

per FRB rules, the facility terminated on July 30, 2021.

No PPP loans were pledged and no PPPLF advances were taken while the facility was open.

During the first nine months of 2021, total deposits increased by $188.6 million or 10.2% from December 31, 2020 levels.

Low-cost deposits (demand, NOW, and savings accounts) increased by $253.0 million or 23.5% in the first nine months of 2021, money market deposits increased $26.6 million or 16.2%, and certificates of deposit decreased $91.0 million or 15.0%.

Between September 30, 2020 and September 30, 2021, total deposits increased by $270.2 million or 15.3%.

The Bank has established collateralized borrowing capacity with the FRB of Boston and also maintains additional collateralized borrowing capacity with the FHLB in excess of levels used in the ordinary course of business as well as Fed Funds lines with two correspondent banks and availability through the FRB Borrower in Custody program.

During the first three months of 2022, total deposits increased by $35.2 million or 1.7% from December 31, 2021 levels.

Low-cost deposits (demand, NOW, and savings accounts) increased by $1.2 million or 0.1% in the first three months of 2022, money market deposits decreased $9.7 million or 4.7%, and certificates of deposit increased $43.7 million or 7.7%.

Between March 31, 2021 and March 31, 2022, total deposits increased by $205.0 million or 10.5%.

Low-cost deposits increased by $208.1 million or 18.2%, money market accounts increased $21.3 million or 12.1%, and certificates of deposit decreased $24.4 million or 3.8%.

The increase in low-cost deposits allowed for a decrease in higher cost certificates of deposit and Borrowed Funds.

Estimated uninsured deposits totaled $232.7 million, $165.3 million and $228.4 million at March 31, 2022, 2021 and December 31, 2021, respectively.

Borrowed Funds

1 unchanged sentence

This funding may also be used to balance seasonal deposit flows or to carry out interest rate risk management strategies, and may be used to replace or supplement other sources of funding, including core deposits and certificates of deposit.

During the nine months ended September 30, 2021, borrowed funds decreased $28.8 million or 11.0% from December 31, 2020;

the reduction is centered in the paydown to zero of funds advanced from FRB.

Between September 30, 2020 and September 30, 2021, borrowed funds decreased by $50.6 million or 17.8%, also centered in repayment of funds advanced from FRB.

During the three months ended March 31, 2022, borrowed funds decreased $2.6 million or 1.9% from December 31, 2021, all in customer repurchase agreements.

Between March 31, 2021 and March 31, 2022, borrowed funds decreased by $95.9 million or 41.8%;

this decrease resulted primarily from repayment of short-term FHLB borrowings.

Shareholders' Equity

Shareholders' equity as of September 30, 2021 was $238.7 million, compared to $223.7 million as of December 31, 2020 and $219.4 million as of September 30, 2020.

The Company's earnings in the first nine months of 2021, net of dividends declared, added to shareholders' equity.

The net unrealized loss on available-for-sale securities, net of tax, presented in accordance with FASB ASC Topic 320 "Investments – Debt and Equity Securities" stands at $627,000 as of September 30, 2021 compared to a gain of $5.0 million as of December 31, 2020.

The net unrealized loss on cash flow hedging derivative instruments, net of tax, stands at $1.5 million, compared $4.9 million as of December 31, 2020.

A cash dividend of $0.32 per share was declared in the third quarter of 2021 bringing the year-to-date total to $0.95 per share.

The dividend payout ratio, which is calculated by dividing dividends declared per share by diluted earnings per share, was 38.78% for the first nine months of 2021 compared to 49.46% for the same period in 2020.

Shareholders' equity as of March 31, 2022 was $233.6 million, compared to $245.7 million as of December 31, 2021 and $228.2 million as of March 31, 2021.

The Company's earnings in the first three months of 2022, net of dividends declared, added to shareholders' equity.

The net unrealized loss on available-for-sale securities, net of tax, presented in accordance with FASB ASC Topic 320 "Investments – Debt and Equity Securities" stands at $20.1 million as of March 31, 2022 and $1.7 million as of December 31, 2021.

Additional information about the net unrealized loss on available-for-sale securities was provided in Note 2 of the Consolidated Financial Statements and in the Impaired Securities section of Management's Discussion and Analysis of Financial Condition and Results of Operations.

A cash dividend of $0.32 per share was declared in the first quarter of 2022.

The dividend payout ratio, which is calculated by dividing dividends declared per share by basic earnings per share, was 35.96% for the first three months of 2022 compared to 37.80% for the same period in 2021.

In determining future dividend payout levels, the Board of Directors carefully analyzes capital requirements and earnings retention, as set forth in the Company's Dividend Policy.

2 unchanged sentences

The amount available for dividends in 2022 is this year's net income plus $38.2 million.

Financial institution regulators have established guidelines for minimum capital ratios for banks and bank holding

The net unrealized gain or loss on available for sale securities is generally not included in computing regulatory

Financial institution regulators have established guidelines for minimum capital ratios for banks and bank holding companies.

The net unrealized gain or loss on available for sale securities is generally not included in computing regulatory capital.

During the first quarter of 2015, the Company adopted the new Basel III regulatory capital framework as approved by

the federal banking agencies.

In order to avoid limitations on capital distributions, including dividend payments, the Company

must hold a capital conservation buffer of 2.5% above the adequately capitalized risk-based capital ratios.

The Company met each of the well-capitalized ratio guidelines at September 30, 2021.

The following tables indicate the capital ratios for the Bank and the Company at September 30, 2021 and December 31, 2020.

As of September 30, 2021 Leverage Tier 1 Common Equity Tier 1 Total Risk-Based

In order to avoid limitations on capital distributions, including dividend payments, the Company must hold a capital conservation buffer of 2.5% above the adequately capitalized risk-based capital ratios.

The Company met each of the well-capitalized ratio guidelines at March 31, 2022.

The following tables indicate the capital ratios for the Bank and the Company at March 31, 2022 and December 31, 2021.

As of March 31, 2022 Leverage Tier 1 Common Equity Tier 1 Total Risk-Based

Bank 8.88 % 13.07 % 13.07 % 14.01 %

14 unchanged sentences

In each stress scenario, the Bank maintained well capitalized status.

To further validate its internal results, the Bank engaged a third party consultant during the third quarter of 2021 to conduct credit stress tests under six economic scenarios on its June 30, 2021 loan portfolio.

To further validate its internal results, the Bank engaged a third party consultant during the fourth quarter of 2021 to conduct credit stress tests on its loan portfolio under six scenarios.

Three of the scenarios emulated the Federal Reserve's Dodd Frank Act Stress Tests (DFAST), and three were developed by a leading forecasting firm.

6 unchanged sentences

Derivative instruments that Management periodically uses as part of its interest rate risk management strategy may include interest rate swap agreements, interest rate floor agreements, and interest rate cap agreements.

At September 30, 2021, the Bank had nine outstanding off-balance sheet, derivative instruments designated as cash flow hedges.

These derivative instruments were interest rate swap agreements, with notional principal amounts totaling $210.0 million and an unrealized loss of $1.5 million, net of taxes.

The notional amounts and net unrealized gain (loss) of the financial derivative instruments do not represent exposure to credit loss.

The Bank is exposed to credit loss only to the extent the counter-party defaults in its responsibility to pay interest under the terms of the agreements.

The credit risk in derivative instruments is mitigated by entering into transactions with highly-rated counterparties that Management believes to be creditworthy and by limiting the amount of exposure to each counter-party.

At September 30, 2021, the Bank's derivative instrument counterparties were credit rated “A” by the major credit rating agencies.

The interest rate swap agreements were entered into by the Bank to limit its exposure to rising interest rates.

At March 31, 2022, the Bank had no outstanding off-balance sheet, derivative instruments designated as cash flow hedges.

The Bank also enters into swap arrangements with qualified loan customers as a means to provide these customers with access to long-term fixed interest rates for borrowings, and simultaneously enters into a swap contract with an approved third- party financial institution.

3 unchanged sentences

Credit risk is mitigated by prudent underwriting of the loan customer and financial institution counterparties.

As of September 30, 2021, the Bank had six loan swap agreements in place with a total notional value of $81.3 million.

As of March 31, 2022, the Bank had six loan swap agreements in place with a total notional value of $78.3 million.

Contractual Obligations

The following table sets forth the contractual obligations of the Company as of September 30, 2021:

The following table sets forth the contractual obligations of the Company as of March 31, 2022:

Dollars in thousands

6 unchanged sentences

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis