What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2022-08-05 compared with 2022-05-06 · 244 added, 194 removed, 735 unchanged (37% of the section changed)

64 unchanged sentences

Risks and Uncertainties.

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.

As of June 30, 2022, local and state governments in the US have eased or eliminated most restrictions imposed to curtail the spread of the global pandemic, COVID-19.

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

Accordingly, while management has considered the effect of the pandemic on collectability of loans receivable and other business impacts, it is possible that this matter may have a further financial impact on the Company's financial position and results of future operations, such potential impact of which cannot be reasonably estimated.

Government economic programs intended to backstop and bolster the economy through the pandemic, such as the Payroll Protection Program (PPP) have ended, and the nation's economy has entered an inflationary phase.

The Consumer Price Index has risen at levels not experienced since the 1980s while the labor market remains very tight, contributing additional inflationary pressure.

To address the inflation problem, the Federal Reserve has reversed course on its previously accommodative monetary policies and aggressively increased short-term interest rates.

These actions are intended to slow overall economic activity and risk entering the economy into a recession.

The conflict between Russia and Ukraine has exacerbated pandemic-related supply chain issues, upset numerous global markets including energy and certain raw materials, and generally added to economic uncertainty and geopolitical instability.

Any or all could have negative downstream effects on the Company's operating results, the extent of which is indeterminable at this time.

Use of Non-GAAP Financial Measures

15 unchanged sentences

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

For the quarter ended

For the six months ended June 30, For the quarter ended June 30,

Dollars in thousands

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

2022 2021 2022 2021

Net interest income as presented $ 37,318 $ 31,596 $ 18,698 $ 15,723

5 unchanged sentences

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

For the quarter ended

For the six months ended June 30, For the quarter ended June 30,

Dollars in thousands

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

2022 2021 2022 2021

Non-interest expense, as presented $ 20,822 $ 19,370 $ 10,172 $ 9,496

3 unchanged sentences

Effect of non-interest tax-exempt income 84 83 43 41

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

Net securities (gains) losses (1) (164) 1 (45)

Adjusted net interest income plus non-interest income $ 46,840 $ 42,912 $ 23,392 $ 21,222

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 quarter ended

For the six months ended June 30, For the quarter ended June 30,

Dollars in thousands

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

2022 2021 2022 2021

Average shareholders' equity as presented $ 239,267 $ 230,760 $ 231,980 $ 233,214

3 unchanged sentences

The following table provides a reconciliation to Net Income:

For the quarter ended

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

For the six months ended June 30, For the quarter ended June 30,

Dollars in thousands 2022 2021 2022 2021

Net Income, as presented $ 19,702 $ 17,709 $ 9,997 $ 8,787

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

provision for loan losses 900 1,050 450 525

income taxes expense 4,206 3,676 2,159 1,826

1 unchanged sentence

Executive Summary

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.

Net income for the six months ended June 30, 2022 was $19.7 million, up $2.0 million or 11.3% from the same period in 2021.

Earnings per common share on a fully diluted basis were $1.79 for the six months ended June 30, 2022, up $0.18 or 11.2% from the $1.61 posted for the same period in 2021.

For the quarter ended June 30, 2022, net income was $10.0 million, up $1.2 million or 13.8% from the same period in 2021.

Earnings per common share on a fully diluted basis were $0.91 for the quarter ended June 30, 2022, up $0.11 or 13.8% from the $0.80 posted for the same period in 2021.

The Company started 2022 very strongly, posting record earnings in each of the first two quarters.

Growth in net interest income, predominantly from earning asset growth, was a primary driver year-to-date, more than offsetting the effects of decreased mortgage activity and the wind-down of the Payroll Protection Program (PPP) .

Based upon the strength of the Company's earnings, dividends totaling 66 cents per share have been declared year-to-date, representing a payout to our shareholders of 36.67% of basic earnings per share for the period.

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.

Net interest income on a tax-equivalent basis was up $5.7 million or 17.3% in the six months ended June 30, 2022 compared to the same period in 2021.

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

The tax equivalent net interest margin for the six months ended June 30, 2022, was 3.18%, up from 2.93% for the same period in 2021.

For the quarter ended June 30, 2022, net interest income on a tax-equivalent basis increased $3.0 million or 18.1% compared to the same period in 2021, with the net interest margin at 3.13% compared to 2.86% for the same period in 2021.

Non-interest income for the six months ended June 30, 2022 was $8.3 million, down $1.9 million or 18.6%, from the six months ended June 30, 2021.

Revenue at First National Wealth Management increased $209,000 or 9.4% over the same period, debit card revenue was up $213,000 or 8.4%, while mortgage banking revenue decreased $2.4 million or 73.6%.

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.

Net gains on sales of securities for the six months ended June 30, 2022 were down $163,000, or 99.4% from the prior year period.

Non-interest expense for the six months ended June 30, 2022 was $20.8 million, up $1.5 million or 7.5% from the six months ended June 30, 2021.

Salaries and employee benefits increased as well as occupancy expense, over the same period.

Asset quality continues to be strong and stable.

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.

Non-performing assets stood at 0.18% of total assets as of June 30, 2022, down from 0.30% of total assets as of June 30, 2021 and 0.23% as of December 31, 2021.

Total past-due loans were 0.18% of total loans as of June 30, 2022, down from 0.26% of total loans as of December 31, 2021 and 0.22% as of June 30, 2021.

The provision for loan losses for the first six months of 2022 was $900,000, down from the $1.1 million 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 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 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.

Net loan chargeoffs for the six months ended June 30, 2022 were $220,000 or 0.03% of average loans on an annualized basis.

This was down slightly from net charge-offs of $269,000 for the six months ended June 30, 2021.

The allowance for loan losses increased $680,000 between December 31, 2021 and June 30, 2022, and now stands at 0.91% of loans outstanding as of June 30, 2022, down from 0.94% at December 31, 2021 and 1.07% at June 30, 2021.

The Company's balance sheet continued to expand in the first six months of 2022 as total assets increased $103.3 million or 4.1% year-to-date.

The loan portfolio increased $140.7 million or 8.5% in the six months ended June 30, 2022 and $200.1 million or 12.6% from a year ago.

Loan growth in the first six months of 2022 was centered in commercial real estate and construction loans, up $90.9 million, and other commercial loans, up $11.1 million.

Other commercial loans include PPP loan balances of $56,467, a decrease of $22.0 million since December 31, 2021.

The investment portfolio decreased $9.8 million year-to-date and decreased $5.1 million or 0.7% from a year ago based upon changes in the carrying value of Available-for-Sale securities.

On the liability side of the balance sheet, low-cost deposits have decreased $8.9 million or 0.7% year-to-date, with decreases in checking account, NOW, partially offset by increases in demand and savings account balances.

Year-over-year, low-cost deposits have increased $152.0 million or 12.8%.

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

Local certificates of deposit ("CDs") increased $22.0 million and wholesale CDs increased $116.2 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 14.08% 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.

The Company's total risk-based capital ratio was 13.63% as of June 30, 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 six months of 2022, with a return on average tangible common equity of 19.07% for the six months ended June 30, 2022 compared to 17.88% 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 44.45% for the six months ended June 30, 2022 compared to 45.14% for the same period in 2021.

Net Interest Income

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.

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 three months ended March 31, 2022 and 2021.

Total interest income of $42.0 million for the six months ended June 30, 2022 was an increase of $4.5 million or 11.9% compared to total interest income of $37.5 million for the same period of 2021, with growth in earning assets primarily responsible for the increase.

Total interest expense of $4.6 million for the six months ended June 30, 2022 was a decrease of $1.3 million or 21.2% compared to total interest expense for the six months ended June 30, 2021.

As a result, net interest income of $37.3 million for the six months ended June 30, 2022 was an increase of $5.7 million or 18.1% compared to net interest income of $31.6 million for the same period ended June 30, 2021.

The Company's net interest margin on a tax-equivalent basis for the six months ended June 30, 2022 was 3.18%, up from 2.93% for the first six months of 2021.

Tax-exempt interest income amounted to $4.2 million for the six months ended June 30, 2022 compared to $4.5 million for the six months ended June 30, 2021.

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

For the three months ended

March 31, 2022 March 31, 2021

For the six months ended

June 30, 2022 June 30, 2021

Dollars in thousands

14 unchanged sentences

Net interest margin 3.18 % 2.93 %

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.

For the quarters ended

June 30, 2022 June 30, 2021

Dollars in thousands

interest Average

Yield/Rate Amount of

interest Average

Interest on earning assets

Interest-bearing deposits $ 62 0.87 % $ 12 0.09 %

Investments 4,577 2.67 % 4,204 2.43 %

Loans held for sale 6 5.36 % 8 1.62 %

Loans 17,356 3.97 % 14,909 3.88 %

Total interest-earning assets 22,001 3.57 % 19,133 3.36 %

Interest expense

Deposits 2,401 0.51 % 1,948 0.47 %

Other borrowings 332 1.01 % 870 1.54 %

Total interest expense 2,733 0.54 % 2,818 0.60 %

Net interest income $ 19,268 $ 16,315

Interest rate spread 3.03 % 2.76 %

Net interest margin 3.13 % 2.86 %

Interest income includes $137,000 in net origination fees recognized during the second quarter of 2022, attributable to PPP loans;

as of June 30, 2022, net unrecognized PPP origination fees were zero.

Interest income in the second quarter of 2021 included a net $641,000 in origination fees recognized on PPP loans;

as of June 30, 2021 net unrecognized PPP origination fees totaled $3.4 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 six months and quarters ended June 30, 2022 compared to 2021.

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

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

For the six months ended June 30, 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 June 30, 2022 compared to 2021

Dollars in thousands

Volume Rate Rate/Volume 1

Interest on earning assets

Interest-bearing deposits $ (5) $ 101 $ (46) $ 50

Investment securities (39) 416 (4) 373

Loans held for sale (6) 18 (14) (2)

Loans 2,082 320 45 2,447

Change in interest income 2,032 855 (19) 2,868

Interest expense

Deposits 302 131 20 453

Other borrowings (367) (295) 124 (538)

Change in interest expense (65) (164) 144 (85)

Change in net interest income $ 2,097 $ 1,019 $ (163) $ 2,953

Average Daily Balance Sheets

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

The following table shows the Company's average daily balance sheets for the six months and quarters ended June 30, 2022 and 2021.

For the six months ended For the quarters ended

Dollars in thousands

2022 March 31,

2022 June 30,

2021 June 30,

2022 June 30,

Cash and cash equivalents $ 22,271 $ 22,362 $ 24,676 $ 21,881

Interest-bearing deposits in other banks 27,378 49,604 28,646 52,026

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

Securities available for sale (includes tax exempt securities of $34,751 and $35,378 at June 30, 2022 and 2021, respectively)

311,281 303,362 302,850 303,658

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

Securities to be held to maturity (included tax exempt securities of $252,312 and $250,235 at June 30, 2022 and 2021, respectively)

375,461 378,854 379,111 380,177

33 unchanged sentences

Non-Interest Income

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.

Non-interest income of $8.3 million for the six months ended June 30, 2022 is a decrease of $1.9 million compared to the same period in 2021.

Revenue at First National Wealth Management increased $209,000 or 9.4% over the same period, debit card revenue was up $213,000 or 8.4%, and service charge revenue was up 25.7%.

As expected, mortgage banking revenues continued to trend down from the heights of the past two years, down $2.4 million, or 73.6%;

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

the decrease is attributable to a significant year-to-year decrease in mortgage refinance activity and a $40,000 mark against mortgage servicing rights recognized in the second quarter of 2022.

Non-interest income of $4.1 million for the quarter ended June 30, 2022 is a decrease of $831,000 compared to the same period in 2021, due primarily to mortgage banking revenue.

Non-Interest Expense

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 45.42% 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.

Non-interest expense of $20.8 million for the six months ended June 30, 2022 is an increase of 7.5% or $1.5 million compared to non-interest expense of $19.4 million for the same period in 2021.

Salaries and employee benefits increased as well as occupancy expense, over the same period.

Non-interest expense of $10.2 million for the quarter ended June 30, 2022 is an increase of 7.1% compared to non-interest expense of $9.5 million for the same period in 2021 due to the reasons mentioned.

The Company's non-GAAP efficiency ratio stood at 44.45% for the six months ended June 30, 2022, down from 45.14% for the same period in 2021.

Income taxes on operating earnings were $4.2 million for the six months ended June 30, 2022, up $530,000 from the same period in 2021.

The carrying value of the Company's investment portfolio decreased by $9.8 million between December 31, 2021 and June 30, 2022.

As of June 30, 2022, mortgage-backed securities had a carrying value of $332.4 million and a fair value of $294.1 million.

Of this total, securities with a fair value of $76.3 million or 25.9% of the mortgage-backed portfolio were issued by the Government National Mortgage Association and securities with a fair value of $217.8 million or 74.1% of the mortgage-backed portfolio were issued by the Federal Home Loan Mortgage Corporation ("Freddie Mac") and the Federal National Mortgage Association ("Fannie Mae").

15 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 $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.

The remaining unamortized balance of the net unrealized losses for the securities transferred from available for sale to held to maturity was $73,000 at June 30, 2022.

This compares to $87,000 and $113,000, net of taxes, at December 31, 2021 and June 30, 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 March 31, 2022 and 2021 and December 31, 2021.

The following table sets forth the Company's investment securities at their carrying amounts as of June 30, 2022 and 2021 and December 31, 2021.

Dollars in thousands

2022 December 31,

2021 March 31,

2021 June 30,

Securities available for sale

15 unchanged sentences

Total securities $ 686,150 $ 695,971 $ 691,267

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

The following table sets forth yields and contractual maturities of the Company's investment securities as of June 30, 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 March 31, 2022 amounted to $51.5 million, or 7.42% 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 June 30, 2022 amounted to $85.7 million, or 12.21% 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.

10 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 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.

As of June 30, 2022, the Company had temporarily impaired securities with a fair value of $554.9 million and unrealized losses of $85.7 million, as identified in the table below.

Securities in a continuous unrealized loss position more than twelve months amounted to $161.7 million as of June 30, 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 March 31, 2022:

The following table summarizes temporarily impaired securities and their approximate fair values at June 30, 2022:

Less than 12 months 12 months or more Total

12 unchanged sentences

Government-sponsored agencies and enterprises.

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.

As of June 30, 2022, there were $12.3 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 March 31, 2022.

Mortgage-backed securities issued by U.S.

1 unchanged sentence

Government-sponsored enterprises.

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.

As of June 30, 2022, there were $38.4 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 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.

Management believes that the unrealized losses at June 30, 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 June 30, 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 March 31, 2022, there were $18.9 million of unrealized losses on these securities compared to $390,000 at December 31, 2021.

As of June 30, 2022, there were $34.3 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 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

At June 30, 2022, all municipal bond issuers were current on contractually obligated interest and principal payments.

The Company attributes the unrealized losses at June 30, 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.

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

As of June 30, 2022, there were $88,000 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 March 31, 2022, there were $349,000 of unrealized losses on these securities compared to $66,000 at December 31, 2021.

As of June 30, 2022, there were $544,000 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 March 31, 2022, all corporate bond issuers were current on contractually obligated interest and principal payments.

At June 30, 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 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.

As of June 30, 2022, the Bank's investment in FHLB stock totaled $3.7 million.

This compares to $4.3 million as of December 31, 2021 and $7.8 million as of June 30, 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 March 31, 2022.

No impairment losses have been recorded through June 30, 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 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.

As of June 30, 2022, the Bank had $689,000 in loans held for sale.

This compares to $835,000 loans held for sale at December 31, 2021 and $1.1 million loans held for sale at June 30, 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 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.

The loan portfolio increased during the first six months of 2022, with total loans at $1.79 billion at June 30, 2022, up $140.7 million or 8.5% from total loans of $1.65 billion at December 31, 2021.

Commercial loans increased $102.0 million or 11.1% between December 31, 2021 and June 30, 2022, municipal loans decreased $1.5 million or 3.2%, residential term loans increased $31.5 million, residential construction increased $12.2 million, and home equity lines of credit decreased $1.9 million.

Loans made under the U.S.

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

Small Business Administration's PPP accounted for $56,000 of commercial loans as of June 30, 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 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.

Construction loans, both commercial and residential, at 70.7% of total Bank capital are well under the regulatory guidance of 100.0% of capital at June 30, 2022.

Construction loans and non-owner-occupied commercial real estate loans are at 223.8% of total Bank capital, well under the regulatory guidance of 300.0% of capital at June 30, 2022.

The following table summarizes the loan portfolio, by class, at June 30, 2022 and 2021 and December 31, 2021.

Dollars in thousands

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

June 30, 2022 December 31, 2021 June 30, 2021

Real estate $ 617,488 34.5 % $ 576,198 35.0 % $ 527,415 33.2 %

7 unchanged sentences

Total loans $ 1,788,355 100.0 % $ 1,647,649 100.0 % $ 1,588,264 100.0 %

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

The following table sets forth certain information regarding the contractual maturities of the Bank's loan portfolio as of June 30, 2022.

Dollars in thousands

9 unchanged sentences

Total loans $ 9,836 $ 187,019 $ 204,056 $ 1,387,444 $ 1,788,355

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

The following table provides a listing of loans by class, between variable and fixed rates as of June 30, 2022.

Fixed-Rate Adjustable-Rate Total

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Loan Concentrations

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.

As of June 30, 2022, the Bank had two concentrations of loans that exceeded 10% of its total loan portfolio.

Loans to hotels (except Casino hotels) and motels totaled $200.5 million, or 11.21% of total loans and loans to lessors of residential buildings and dwellings totaled $181.3 million, or 10.13% of total loans.

As of June 30, 2021, the Bank had one concentration that exceeded 10% of its total loan portfolio, loans to hotels (except Casino hotels) and motels, that totaled $160.4 million, or 10.10% of total loans.

Credit Risk Management and Allowance for Loan Losses

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We classify our portfolios as either commercial or residential and consumer and monitor credit risk separately as discussed below.

We evaluate the appropriateness of our allowance continually based on a review of all significant loans, with a particular emphasis on nonaccruing, past due, and other loans that we believe require special attention.

We evaluate the appropriateness of our

allowance continually based on a review of all significant loans, with a particular emphasis on nonaccruing, past due, and other loans that we believe require special attention.

The allowance consists of four elements:

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The process of establishing the allowance with respect to the commercial loan portfolio begins when a Loan Officer or Senior Officer (or designate) initially assigns each loan a risk rating, using established credit criteria.

Approximately 60% of commercial loan outstanding balances, excluding SBA PPP loans, are subject to review and validation annually by an independent consulting firm.

Approximately 60% of commercial loan outstanding balances are subject to review and validation annually by an independent consulting firm.

Additionally, commercial loan relationships with exposure greater than or equal to $500,000 are subject to review annually by the Company's internal credit review function.

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Residential loans and home equity lines of credit that are greater than 90 days past due are evaluated for collateral adequacy and if deficient are placed on non-accrual status.

The unallocated portion of the allowance is intended to provide for losses that are not identified when establishing the specific and general portions of the allowance and is based upon Management's evaluation of various conditions that are not directly

measured in the determination of the portfolio and loan specific allowances.

Such conditions may include general economic and business conditions affecting our lending area, credit quality trends (including trends in delinquencies and nonperforming loans expected to result from existing conditions), loan volumes and concentrations, duration of the current business cycle, bank regulatory examination results, findings of external loan review examiners, and Management's judgment with respect to various other conditions including loan administration and management and the quality of risk identification systems.

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

At June 30, 2022, impaired loans with specific reserves totaled $2.9 million and the amount of such reserves was $613,000.

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

Our total allowance at June 30, 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 March 31, 2022 and 2021 and December 31, 2021.

The following table summarizes our allocation of allowance by loan class as of June 30, 2022 and 2021 and December 31, 2021.

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

Dollars in thousands

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

June 30, 2022 December 31, 2021 June 30, 2021

Real estate $ 5,480 34.5 % $ 5,367 35.0 % $ 6,088 33.2 %

8 unchanged sentences

Total $ 16,201 100.0 % $ 15,521 100.0 % $ 17,034 100.0 %

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.

The allowance for loan losses totaled $16.2 million at June 30, 2022, compared to $15.5 million as of December 31, 2021 and $17.0 million as of June 30, 2021.

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

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.

These specific reserves increased $37,000 in the first six months of 2022 from $576,000 at December 31, 2021 to $613,000 at June 30, 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 $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:

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 $110,000 in the first six months of 2022.

The portion of the reserve based on qualitative factors increased $465,000 in the first six 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 after exit of COVID-19 related loan modifications.

Unallocated reserves of $1.8 million, or 11.5% of the total reserve at December 31, 2021, increased to $1.9 million, or 11.4% as of June 30, 2022.

After consideration of the shifts in specific, pooled and qualitative reserves, Management determined that the unallocated portion of the reserve at June 30, 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 June 30, 2022, by loan class and allowance element, is presented in the following table:

Dollars in thousands

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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 $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:

The provision for loan losses to maintain the allowance was $900,000 for the first six months of 2022 and $1.1 million the first six months of 2021.

Net charge-offs were $220,000 in the first six months of 2022, down from $269,000 in the first six months of 2021.

Our allowance as a percentage of outstanding loans was 0.91% as of June 30, 2022, down marginally from 0.94% as of December 31, 2021, and down from 1.07% as of June 30, 2021.

The following table summarizes the activities in our allowance for loan losses for the six months ended June 30, 2022 and 2021 and for the year ended December 31, 2021:

Dollars in thousands

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

June 30, 2022 December 31, 2021 June 30, 2021

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

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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 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 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.

Under PPP1, 1,718 loans were granted totaling $97.8 million in funds disbursed to qualified small businesses and under PPP2 there were 1,263 loans granted totaling $52.1 million.

The Bank worked actively with borrowers to process applications for forgiveness per PPP guidelines.

As of June 30, 2022, remaining PPP1 & PPP2 balances totaled $56,000.

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

The emergence of COVID-19 variants virus has not resulted 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.

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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 0.30% 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:

Nonperforming loans, expressed as a percentage of total loans, totaled 0.27% at June 30, 2022 compared to 0.35% at December 31, 2021 and 0.44% at June 30, 2021.

The following table shows the distribution of nonperforming loans by class as of June 30, 2022 and 2021 and December 31, 2021:

Dollars in thousands

2022 December 31,

2021 March 31,

2021 June 30,

Real estate $ 197 $ 242 $ 1,029

10 unchanged sentences

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

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.

As of June 30, 2022, loans 90 or more days past due and still accruing interest totaled $76,000, compared to $32,000 at December 31, 2021 and $104,000 at June 30, 2021.

Troubled Debt Restructured

5 unchanged sentences

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

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:

As of June 30, 2022, we had 53 loans with a balance of $7.5 million that have been restructured.

This compares to 60 loans with a balance of $8.3 million and 72 loans with a balance of $10.8 million classified as TDRs as of December 31, 2021 and June 30, 2021, respectively.

The following table shows the activity in loans classified as TDRs between December 31, 2021 and June 30, 2022:

Balance in Thousands of Dollars Number of Loans Aggregate Balance

3 unchanged sentences

Repayments in 2022

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.

Total at June 30, 2022

As of June 30, 2022, 36 loans with an aggregate balance of $6.1 million were performing under the modified terms, 14 loans with an aggregate balance of $1.3 million were on nonaccrual and three loans with an aggregate balance of $64,000 were more than 30 days past due and accruing.

As a percentage of aggregate outstanding balance, 81.23% were performing under the modified terms, 17.92% were on nonaccrual and 0.86% were past due and still accruing.

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.

The performance status of all TDRs as of June 30, 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 $ 112 $ — $ 316 $ 428

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.

Residential and consumer TDRs as of June 30, 2022 included 41 loans with an aggregate balance of $5.0 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.

3 unchanged sentences

Certain residential TDRs had more than one modification.

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.

Commercial TDRs as of June 30, 2022 were comprised of 12 loans with a balance of $2.5 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.

One loan with an aggregate balance of $230,000 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 $252,000 had a deferral of payment.

2 unchanged sentences

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

As of June 30, 2022, Management is aware of six loans classified as TDRs that are involved in bankruptcy with an outstanding balance of $885,000.

There were also 14 loans with an outstanding balance of $1.3 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 $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:

Impaired loans totaled $11.0 million at June 30, 2022, and have decreased $1.1 million from December 31, 2021.

There were 92 impaired loans at June 30, 2022 down from 107 loans at December 31, 2021.

Impaired commercial loans decreased $222,000 between December 31, 2021 and June 30, 2022.

The specific allowance for impaired commercial loans increased from $439,000 at December 31, 2021 to $510,000 as of June 30, 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 June 30, 2022, impaired residential loans decreased $671,000 and impaired home equity lines of credit decreased $203,000.

The following table sets forth impaired loans as of June 30, 2022 and 2021 and December 31, 2021:

Dollars in thousands

2022 December 31,

2021 March 31,

2021 June 30,

Real estate $ 1,352 $ 1,428 $ 3,074

8 unchanged sentences

Past Due Loans

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:

The Bank's overall loan delinquency ratio was 0.18% at June 30, 2022 compared to 0.26% at December 31, 2021 and 0.22% at June 30, 2021.

Loans 90 days delinquent and accruing increased from $32,000 at December 31, 2021 to $76,000 as of June 30, 2022.

The following table sets forth loan delinquencies as of June 30, 2022 and 2021 and December 31, 2021:

Dollars in thousands

2022 December 31,

2021 March 31,

2021 June 30,

Real estate $ 197 $ 440 $ 266

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

At June 30, 2022, there were two potential problem loans with a balance of $111,000 or 0.006% 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.

As of June 30, 2022, there were six loans in the process of foreclosure with a total balance of $727,000.

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.

21 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 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.

At June 30, 2022 there were two properties owned with an OREO balance of $51,000, with no allowance for losses.

This compares to December 31, 2021, when there were no OREO properties, and June 30, 2021 when there was one property owned with an OREO balance of $224,000, with no allowance for losses.

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

1 unchanged sentence

2022 December 31,

2021 March 31,

2021 June 30,

Carrying Value

21 unchanged sentences

Liquidity Management

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

As of June 30, 2022, the Bank had primary sources of liquidity of $964.0 million.

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

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 Bank has $482.0 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 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 84.2% of total average assets in the first three months of 2022, up from 79.2% a year ago.

The Bank's primary source of liquidity is deposits, which funded 84.8% of total average assets in the first six months of 2022, up from 79.6% 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.

9 unchanged sentences

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%.

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

During the first six months of 2022, total deposits increased by $128.7 million or 6.1% from December 31, 2021 levels.

Low-cost deposits (demand, NOW, and savings accounts) decreased by $8.9 million or 0.7% in the first six months of 2022, money market deposits decreased $588,000 or 0.3%, and certificates of deposit increased $138.2 million or 24.4%.

Between June 30, 2021 and June 30, 2022, total deposits increased by $290.7 million or 14.8%.

Low-cost deposits increased by $152.0 million or 12.8%, money market accounts increased $30.5 million or 17.3%, and certificates of deposit increased $108.2 million or 18.1%.

Estimated uninsured deposits totaled $222.8 million, $172.3 million and $228.4 million at June 30, 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 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.

During the six months ended June 30, 2022, borrowed funds decreased $9.8 million or 7.2% from December 31, 2021, all in customer repurchase agreements.

Between June 30, 2021 and June 30, 2022, borrowed funds decreased by $102.1 million or 44.6%;

this decrease resulted primarily from repayment of various FHLB borrowings.

Shareholders' Equity

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.

Shareholders' equity as of June 30, 2022 was $227.7 million, compared to $245.7 million as of December 31, 2021 and $234.2 million as of June 30, 2021.

The Company's earnings in the first six 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 $32.8 million as of June 30, 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.

A cash dividend of $0.34 per share was declared in the second quarter of 2022.

The dividend payout ratio, which is calculated by dividing dividends declared per share by basic earnings per share, was 36.67% for the first six months of 2022 compared to 38.65% 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.

The ability of the Company to pay cash dividends to its shareholders depends on receipt of dividends from its subsidiary, the Bank.

The subsidiary may pay dividends to its parent out of so much of its net profits as the Bank's directors deem appropriate, subject to the limitation that the total of all dividends declared by the Bank in any calendar year may not exceed the total of its net profits of that year combined with its retained net profits of the preceding two years.

of that year combined with its retained net profits of the preceding two years.

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

1 unchanged sentence

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.

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 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

The Company met each of the well-capitalized ratio guidelines at June 30, 2022.

The following tables indicate the capital ratios for the Bank and the Company at June 30, 2022 and December 31, 2021.

As of June 30, 2022 Leverage Tier 1 Common Equity Tier 1 Total Risk-Based

Bank 8.78 % 12.66 % 12.66 % 13.56 %

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 fourth quarter of 2021 to conduct credit stress tests on its loan portfolio under six scenarios.

To further validate its internal results, the Bank engaged a third party consultant during the first quarter of 2022 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 March 31, 2022, the Bank had no outstanding off-balance sheet, derivative instruments designated as cash flow hedges.

At June 30, 2022, the Bank had three outstanding off-balance sheet, derivative instruments designated as cash flow hedges.

These derivative instruments were interest rate swap agreements, with notional principal amounts totaling $30.0 million and an unrealized gain of $146,000, 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 counterparty 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 June 30, 2022, the Bank's derivative instrument counterparties

had a composite credit rating of “A-” based upon the ratings of several major credit rating agencies.

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

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

As of June 30, 2022, the Bank had six loan swap agreements in place with a total notional value of $77.8 million.

Contractual Obligations

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

The following table sets forth the contractual obligations of the Company as of June 30, 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