What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2022-11-04 compared with 2022-08-05 · 216 added, 228 removed, 751 unchanged (37% of the section changed)

64 unchanged sentences

Risks and Uncertainties.

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.

As of September 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.

2 unchanged sentences

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.

To address the inflation problem, the Federal Reserve has removed 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.

2 unchanged sentences

Use of Non-GAAP Financial Measures

Certain information in Management's Discussion and Analysis of Financial Condition and Results of Operations and elsewhere in this Report contains financial information determined by methods other than in accordance with GAAP.

Management uses these "non-GAAP" measures in its analysis of the Company's performance and believes that these non-GAAP financial measures provide a greater understanding of ongoing operations and enhance comparability of results with prior periods as well as demonstrating the effects of significant gains and charges in the current period.

Certain information in this release contains financial information determined by methods other than in accordance with accounting principles generally accepted in the United States of America (“GAAP”).

Management uses these “non-GAAP” measures in its analysis of the Company's performance (including for purposes of determining the compensation of certain executive officers and other Company employees) and believes that these non-GAAP financial measures provide a greater understanding of ongoing operations and enhance comparability of results with prior periods and with other financial institutions, as well as demonstrating the effects of significant gains and charges in the current period, in light of the disclosure practices employed by many other publicly-traded financial institutions.

The Company believes that a meaningful analysis of its financial performance requires an understanding of the factors underlying that performance.

1 unchanged sentence

These disclosures should not be viewed as a substitute for operating results determined in accordance with GAAP, nor are they necessarily comparable to non-GAAP performance measures that may be presented by other companies.

In several places net interest income is presented on a fully taxable-equivalent basis.

In several places net interest income is calculated on a fully tax-equivalent basis.

Specifically included in interest income was tax-exempt interest income from certain investment securities and loans.

2 unchanged sentences

Other financial institutions commonly present net interest income on a tax-equivalent basis.

This adjustment is considered helpful in the comparison of one financial institution's net interest income to that of another, as each will have a different proportion of tax-exempt interest from its earning assets.

This adjustment is considered helpful in the comparison of one financial institution's net interest income to that of another institution, as each will have a different proportion of tax-exempt interest from its earning assets.

Moreover, net interest income is a component of a second financial measure commonly used by financial institutions, net interest margin, which is the ratio of net interest income to average earning assets.

3 unchanged sentences

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

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

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

Dollars in thousands

4 unchanged sentences

The Company presents its efficiency ratio using non-GAAP information which is most commonly used by financial institutions.

The GAAP-based efficiency ratio is noninterest expenses divided by net interest income plus noninterest income from the Consolidated Statements of Income and Comprehensive Income (Loss).

The non-GAAP efficiency ratio excludes securities losses and other-than-temporary impairment charges from noninterest expenses, excludes securities gains from noninterest income, and adds the tax-equivalent adjustment to net interest income.

The GAAP-based efficiency ratio is non-interest expenses divided by net interest income plus non-interest income from the Consolidated Statements of Income.

The non-GAAP efficiency ratio excludes securities losses and other-than-temporary impairment charges from non-interest expenses, excludes securities gains from non-interest income, and adds the tax-equivalent adjustment to net interest income.

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

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

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

Dollars in thousands

9 unchanged sentences

GAAP efficiency ratio 46.18 % 46.37 % 47.22 % 46.44 %

The Company presents certain information based upon average tangible shareholders' common equity instead of total average shareholders' equity.

The difference between these measures is the Company's intangible assets, specifically goodwill from prior acquisitions.

The Company presents certain information based upon tangible common equity instead of total shareholders' equity.

The difference between these two measures is the Company's intangible assets, specifically goodwill from prior acquisitions.

Management, banking regulators and many stock analysts use the tangible common equity ratio and the tangible book value per common share in conjunction with more traditional bank capital ratios to compare the capital adequacy of banking organizations with significant amounts of goodwill or other intangible assets, typically stemming from the use of the purchase accounting method in accounting for mergers and acquisitions .

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

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

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

Dollars in thousands

3 unchanged sentences

Average tangible shareholders' common equity $ 206,511 $ 202,792 $ 202,879 $ 208,678

The following table provides a reconciliation of period ending tangible common equity to the Company's consolidated financial statements, adjusted to remove unrealized losses:

Period Ending

In thousands of dollars, except per share data September 30, 2022 September 30, 2021

Shareholders' Equity $ 219,917 $ 238,737

Intangible Assets (30,873) (30,942)

Tangible Common Equity 189,044 207,795

Unrealized Losses on Available for Sale Securities, net of tax 47,661 627

Adjusted Tangible Common Equity $ 236,705 $ 208,422

Adjusted Tangible Book Value Per Share $21.44 $18.96

To provide period-to-period comparison of operating results prior to consideration of credit loss provision and income taxes, the non-GAAP measure of Pre-Tax, Pre-Provision Net Income is presented.

The following table provides a reconciliation to Net Income:

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

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

Dollars in thousands 2022 2021 2022 2021

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Executive Summary

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 $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 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 0.18% 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.

Net income for the nine months ended September 30, 2022 was $29.8 million, up $3.1 million or 11.5% from the same period in 2021.

Earnings per common share on a fully diluted basis were $2.70 for the nine months ended September 30, 2022, up $0.27 or 11.1% from the $2.43 posted for the same period in 2021.

For the quarter ended September 30, 2022, net income was $10.1 million, up $1.1 million or 11.9% from the same period in 2021.

Earnings per common share on a fully diluted basis were $0.91 for the quarter ended September 30, 2022, up $0.09 or 11.0% from the $0.82 posted for the same period in 2021.

The Company continues to perform very strongly in 2022, posting record earnings in each of the three quarters.

Growth in net interest income, predominantly from a combination of strong earning asset growth and expanded net interest margin, has been a primary driver of performance year-to-date .

Based upon the strength of the Company's earnings, dividends totaling $1.00 per share have been declared year-to-date, representing a payout to our shareholders of 36.63% of basic earnings per share for the period.

Net interest income on a tax-equivalent basis was up $8.0 million or 15.9% in the nine months ended September 30, 2022 compared to the same period in 2021.

This increase is attributable primarily to growth in earning assets and a wider net interest margin.

The tax equivalent net interest margin for the nine months ended September 30, 2022, was 3.17%, up from 2.94% for the same period in 2021.

For the quarter ended September 30, 2022, net interest income on a tax-equivalent basis increased $2.4 million or 13.5% compared to the same period in 2021, with the net interest margin at 3.14% compared to 2.96% for the same period in 2021.

Non-interest income for the nine months ended September 30, 2022 was $13.0 million, down $1.6 million or 10.7%, from the nine months ended September 30, 2021.

Revenue at First National Wealth Management increased $161,000 or 4.8% over the same period, debit card revenue was up $1.0 million or 26.0%, and service charge revenue increased $226,000 or 20.0%.

Conversely, mortgage banking revenue decreased $3.1 million or 71.6%.

Non-interest expense for the nine months ended September 30, 2022 was $32.2 million, up $2.9 million or 9.9% from the nine months ended September 30, 2021.

Salaries and employee benefits year-to-date in 2022 have increased 9.6% from the same period in 2021.

Other operating expense has increased 12.3% over the same period largely attributable to one-time charges associated with the sale of a block of residential mortgage loans.

Asset quality has further improved year-to-date in 2022 and continues to be strong and stable.

Non-performing assets stood at 0.07% of total assets as of September 30, 2022, down from 0.25% of total assets as of September 30, 2021 and 0.23% as of December 31, 2021.

Total past-due loans were 0.08% of total loans as of September 30, 2022, down from 0.26% of total loans as of December 31, 2021 and 0.25% as of September 30, 2021.

The provision for loan losses for the first nine months of 2022 was $1.3 million, down from the $1.6 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 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.

Net loan chargeoffs for the nine months ended September 30, 2022 were $434,000 or 0.03% of average loans on an annualized basis, unchanged in percentage terms to net charge-offs of $321,000 or 0.03% of total loans for the nine months ended September 30, 2021.

The allowance for loan losses increased $866,000 between December 31, 2021 and September 30, 2022, and now stands at 0.88% of loans outstanding as of September 30, 2022, down from 0.94% at December 31, 2021 and 1.08% at September 30, 2021.

The Company's balance sheet continued to expand in the first nine months of 2022 as total assets increased $208.0 million or 8.2% year-to-date.

The loan portfolio increased $210.3 million or 12.8% in the nine months ended September 30, 2022 and $240.8 million or 14.9% from a year ago.

Loan growth in the first nine months of 2022 was centered in commercial real estate and construction loans, up $112.2 million, and other commercial loans, up $45.5 million.

Other commercial loans include PPP loan balances of $14,000, 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%.

The investment portfolio decreased $26.3 million year-to-date and decreased $24.1 million 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 increased $44.9 million or 3.3% year-to-date, with growth centered in Demand and NOW account balances.

Year-over-year, low-cost deposits have increased $66.8 million

Local certificates of deposit ("CDs") increased $19.5 million and wholesale CDs increased $200.5 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 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.

The Company's total risk-based capital ratio was 13.59% as of September 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 nine months of 2022, with a return on average tangible common equity of 19.29% for the nine months ended September 30, 2022 compared to 17.62% 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 44.99% for the nine months ended September 30, 2022 compared to 45.04% for the same period in 2021.

Net Interest Income

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.

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 six months and quarters ended June 30, 2022 and 2021.

Total interest income of $66.0 million for the nine months ended September 30, 2022 was an increase of $8.9 million or 15.5% compared to total interest income of $57.1 million for the same period of 2021, with growth in earning assets primarily responsible for the increase.

Total interest expense of $9.3 million for the nine months ended September 30, 2022 was an increase of $798,000 or 9.4% compared to total interest expense for the nine months ended September 30, 2021.

As a result, net interest income of $56.7 million for the nine months ended September 30, 2022 was an increase of $8.1 million or 16.6% compared to net interest income of $48.6 million for the same period ended September 30, 2021.

The Company's net interest margin on a tax-equivalent basis for the nine months ended September 30, 2022 was 3.17%, up from 2.94% for the first nine months of 2021.

Tax-exempt interest income amounted to $6.5 million for the nine months ended September 30, 2022 compared to $6.6 million for the nine months ended September 30, 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 nine months and quarters ended September 30, 2022 and 2021.

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

For the six months ended

June 30, 2022 June 30, 2021

For the nine months ended

September 30, 2022 September 30, 2021

Dollars in thousands

15 unchanged sentences

For the quarters ended

June 30, 2022 June 30, 2021

September 30, 2022 September 30, 2021

Dollars in thousands

15 unchanged sentences

Net interest margin 3.14 % 2.96 %

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.

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

as of June 30, 2022, net unrecognized PPP origination fees were zero, therefore no fees were recognized during the third quarter 2022.

Interest income in the first nine months of 2021 included $2.9 million in net origination fees recognized on PPP loans;

as of September 30, 2021, net unrecognized PPP origination fees totaled $2.4 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 nine months and quarters ended September 30, 2022 compared to 2021.

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

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

For the nine months ended September 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

For the quarter ended September 30, 2022 compared to 2021

Dollars in thousands

12 unchanged sentences

Average Daily Balance Sheets

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

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

For the nine months ended For the quarters ended

Dollars in thousands

2022 June 30,

2021 June 30,

2022 June 30,

September 30,

2022 September 30,

2021 September 30,

2022 September 30,

Cash and cash equivalents $ 23,926 $ 23,152 $ 27,062 $ 25,195

Interest-bearing deposits in other banks 23,405 53,251 15,711 59,939

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

Securities available for sale (includes tax exempt securities of $35,457 and $34,762 at September 30, 2022 and 2021, respectively)

308,297 306,007 302,428 311,212

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

Securities to be held to maturity (included tax exempt securities of $253,554 and $251,417 at September 30, 2022 and 2021, respectively)

377,163 378,526 380,512 377,879

28 unchanged sentences

Net unrealized loss on securities transferred from available for sale to held to maturity (77) (120) (70) (108)

Net unrealized loss on cash flow hedging derivative instruments (5) (2,880) (10) (1,964)

Net unrealized gain (loss) on cash flow hedging derivative instruments 67 (2,736) 209 (2,453)

Net unrealized gain on postretirement benefit costs 105 28 105 28

2 unchanged sentences

Non-Interest Income

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%.

Non-interest income of $13.0 million for the nine months ended September 30, 2022 is a decrease of $1.6 million compared to the same period in 2021.

Revenue at First National Wealth Management increased $161,000 or 4.8% over the same period, debit card revenue was up $1.0 million or 26.0% due primarily to receipt of one-time program incentive payments, and service charge revenue was up 20.0%.

As expected, mortgage banking revenues continued to trend down from the heights of the past two years, down $3.1 million, or 71.6%;

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.

the decrease is attributable to a significant year-to-year decrease in mortgage refinance activity and two marks against mortgage servicing rights.

Non-interest income of $4.7 million for the quarter ended September 30, 2022 is an increase of $340,000 compared to the same period in 2021, due primarily to debit card revenue.

Non-Interest Expense

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.

Non-interest expense of $32.2 million for the nine months ended September 30, 2022 is an increase of 9.9% or $2.9 million compared to non-interest expense of $29.3 million for the same period in 2021.

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

Other Operating Expenses increased $906,000 or 12.3%, largely attributable to one-time charges totaling $681,000 incurred in a sale of residential mortgage loans in the third quarter of 2022 .

Non-interest expense of $11.4 million for the quarter ended September 30, 2022 is an increase of 14.5% compared to non-interest expense of $9.9 million for the same period in 2021 due to the reasons mentioned.

The Company's non-GAAP efficiency ratio stood at 44.99% for the nine months ended September 30, 2022, down from 45.04% for the same period in 2021.

Income taxes on operating earnings were $6.4 million for the nine months ended September 30, 2022, up $832,000 from the same period in 2021.

The carrying value of the Company's investment portfolio decreased by $26.3 million between December 31, 2021 and September 30, 2022.

As of September 30, 2022, mortgage-backed securities had a carrying value of $285.6 million and a fair value of $273.9 million.

Of this total, securities with a fair value of $75.9 million or 27.7% of the mortgage-backed portfolio were issued by the Government National Mortgage Association and securities with a fair value of $197.9 million or 72.3% 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 $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.

The remaining unamortized balance of the net unrealized losses for the securities transferred from available for sale to held to maturity was $67,000 at September 30, 2022.

This compares to $87,000 and $99,000, net of taxes, at December 31, 2021 and September 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 June 30, 2022 and 2021 and December 31, 2021.

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

Dollars in thousands

September 30,

2022 December 31,

2021 June 30,

2021 September 30,

Securities available for sale

15 unchanged sentences

Total securities $ 669,688 $ 695,971 $ 693,762

The following table sets forth yields and contractual maturities of the Company's investment securities as of June 30, 2022.

The following table sets forth yields and contractual maturities of the Company's investment securities as of September 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 June 30, 2022 amounted to $85.7 million, or 12.21% 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 September 30, 2022 amounted to $128.5 million, or 18.24% 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 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.

As of September 30, 2022, the Company had temporarily impaired securities with a fair value of $561.1 million and unrealized losses of $128.5 million, as identified in the table below.

Securities in a continuous unrealized loss position more than twelve months amounted to $223.6 million as of September 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 June 30, 2022:

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

Less than 12 months 12 months or more Total

12 unchanged sentences

Government-sponsored agencies and enterprises.

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.

As of September 30, 2022, there were $17.3 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 June 30, 2022.

Mortgage-backed securities issued by U.S.

1 unchanged sentence

Government-sponsored enterprises.

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.

As of September 30, 2022, there were $55.8 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 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.

Management believes that the unrealized losses at September 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 September 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 June 30, 2022, there were $34.3 million of unrealized losses on these securities compared to $390,000 at December 31, 2021.

As of September 30, 2022, there were $53.3 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 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 June 30, 2022.

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

The Company attributes the unrealized losses at September 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 September 30, 2022.

Asset-backed securities.

As of June 30, 2022, there were $88,000 of unrealized losses on these securities compared to none at December 31, 2021.

As of September 30, 2022, there were $32,000 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 June 30, 2022, there were $544,000 of unrealized losses on these securities compared to $66,000 at December 31, 2021.

As of September 30, 2022, there were $2.1 million 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 June 30, 2022, all corporate bond issuers were current on contractually obligated interest and principal payments.

At September 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 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.

As of September 30, 2022, the Bank's investment in FHLB stock totaled $3.5 million.

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

No impairment losses have been recorded through September 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 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.

As of September 30, 2022, the Bank had no loans held for sale.

This compares to $835,000 loans held for sale at December 31, 2021 and $1.4 million loans held for sale at September 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 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.

The loan portfolio increased during the first nine months of 2022, with total loans at $1.86 billion at September 30, 2022, up $210.3 million or 12.8% from total loans of $1.65 billion at December 31, 2021.

Commercial loans increased $157.7 million or 17.1% between December 31, 2021 and September 30, 2022, municipal loans increased $340,000 or 0.7%, residential term loans increased $44.2 million, residential construction increased $9.9 million, and home equity lines of credit increased $306,000.

Loans made under the U.S.

Small Business Administration's PPP accounted for $56,000 of commercial loans as of June 30, 2022.

Small Business Administration's PPP accounted for $14,000 of commercial loans as of September 30, 2022.

Commercial loans are comprised of three major classes:

9 unchanged sentences

During the construction phase, commercial construction loans are primarily paid by cash flow generated from the construction project or other operating cash flows from the borrower or guarantors, if applicable.

At the end of the construction period, loan repayment typically comes from a third party source in the event that the Company will not be providing permanent term financing.

At the end of the construction period, loan

repayment typically comes from a third party source in the event that the Company will not be providing permanent term financing.

Collateral valuation and loan-to-value guidelines follow those for commercial real estate loans.

27 unchanged sentences

Consumer loans may be secured or unsecured.

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.

Construction loans, both commercial and residential, at 67.9% of total Bank capital are well under the regulatory guidance of 100.0% of capital at September 30, 2022.

Construction loans and non-owner-occupied commercial real estate loans are at 221.4% of total Bank capital, well under the regulatory guidance of 300.0% of capital at September 30, 2022.

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

Dollars in thousands

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

September 30, 2022 December 31, 2021 September 30, 2021

Real estate $ 638,708 34.5 % $ 576,198 35.0 % $ 550,077 34.0 %

7 unchanged sentences

Total loans $ 1,857,975 100.0 % $ 1,647,649 100.0 % $ 1,617,212 100.0 %

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

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

Dollars in thousands

9 unchanged sentences

Total loans $ 7,322 $ 197,979 $ 218,386 $ 1,434,288 $ 1,857,975

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

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

Fixed-Rate Adjustable-Rate Total

11 unchanged sentences

Loan Concentrations

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.

As of September 30, 2022 and 2021, the Bank had one concentration of loans that exceeded 10% of its total loan portfolio.

Loans to hotels (except Casino hotels) and motels totaled $201.5 million, or 10.84% of total loans and $165.6 million, or 10.23% of total loans, respectfully.

In September 2022, the Bank sold a block of mixed-performing residential mortgage loans.

The block consisted of 41 units with a total carrying value of $5.2 million, and included past-due, non-accrual, and Troubled Debt Restructure loans.

One-time charges associated with the sale totaling $681,000 were recognized in the third quarter.

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:

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

At September 30, 2022, impaired loans with specific reserves totaled $2.5 million and the amount of such reserves was $420,000.

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 June 30, 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 September 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 June 30, 2022 and 2021 and December 31, 2021.

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

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

Dollars in thousands

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

September 30, 2022 December 31, 2021 September 30, 2021

Real estate $ 5,575 34.5 % $ 5,367 35.0 % $ 6,499 34.0 %

8 unchanged sentences

Total $ 16,387 100.0 % $ 15,521 100.0 % $ 17,507 100.0 %

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.

The allowance for loan losses totaled $16.4 million at September 30, 2022, compared to $15.5 million as of December 31, 2021 and $17.5 million as of September 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 $37,000 in the first six months of 2022 from $576,000 at December 31, 2021 to $613,000 at June 30, 2022.

These specific reserves decreased $156,000 in the first nine months of 2022 from $576,000 at December 31, 2021 to $420,000 at September 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 $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.

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 $35,000 in the first nine months of 2022.

The portion of the reserve based on qualitative factors increased $832,000 in the first nine 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:

Unallocated reserves of $1.8 million, or 11.5% of the total reserve at December 31, 2021, increased to $1.9 million, or 11.8% as of September 30, 2022.

After consideration of the shifts in specific, pooled and qualitative reserves, Management determined that the unallocated portion of the reserve at September 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 September 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 $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:

The provision for loan losses to maintain the allowance was $1.3 million for the first nine months of 2022 and $1.6 million the first nine months of 2021.

Net charge-offs were $434,000 in the first nine months of 2022, up from $321,000 in the first nine months of 2021.

Our allowance as a percentage of outstanding loans was 0.88% as of September 30, 2022, down marginally from 0.94% as of December 31, 2021, and down from 1.08% as of September 30, 2021.

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

Dollars in thousands

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

September 30, 2022 December 31, 2021 September 30, 2021

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

11 unchanged sentences

Construction — — —

Other 11 84 83

Municipal — — —

Term 27 66 12

Construction — — —

14 unchanged sentences

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.

As of September 30, 2022, remaining PPP balances totaled $14,000.

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

12 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 0.27% 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:

Nonperforming loans, expressed as a percentage of total loans, totaled 0.10% at September 30, 2022 compared to 0.35% at December 31, 2021 and 0.39% at September 30, 2021.

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

Dollars in thousands

September 30,

2022 December 31,

2021 June 30,

2021 September 30,

Real estate $ 195 $ 242 $ 604

10 unchanged sentences

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

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.

As of September 30, 2022, there were no loans 90 or more days past due and still accruing interest compared to $32,000 at December 31, 2021 and $229,000 at September 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 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:

As of September 30, 2022, we had 31 loans with a balance of $4.9 million that have been restructured.

This compares to 60 loans with a balance of $8.3 million and 64 loans with a balance of $10.1 million classified as TDRs as of December 31, 2021 and September 30, 2021, respectively.

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

Balance in Thousands of Dollars Number of Loans Aggregate Balance

3 unchanged sentences

Repayments in 2022

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.

Total at September 30, 2022

As of September 30, 2022, 25 loans with an aggregate balance of $4.5 million were performing under the modified terms, six loans with an aggregate balance of $430,000 were on nonaccrual and no loans were more than 30 days past due and accruing.

As a percentage of aggregate outstanding balance, 91.27% were performing under the modified terms, 8.73% were on nonaccrual and 0.00% were past due and still accruing.

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.

The performance status of all TDRs as of September 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 $ 106 $ — $ 83 $ 189

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.

Residential and consumer TDRs as of September 30, 2022 included 20 loans with an aggregate balance of $2.7 million, and the modifications granted fell into four major categories.

Loans totaling $1.5 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 $1.8 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.

Loans totaling $945,000 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 $108,000.

1 unchanged sentence

Certain residential TDRs had more than one modification.

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.

Commercial TDRs as of September 30, 2022 were comprised of 11 loans with a balance of $2.2 million.

Of this total, four loans with an aggregate balance of $1.0 million had an extended period of interest-only payments, deferring the start of

principal repayment.

Three loans with an aggregate balance of $249,000 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 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.

As of September 30, 2022, Management is aware of four loans classified as TDRs that are involved in bankruptcy with an outstanding balance of $558,000.

There were also 6 loans with an outstanding balance of $430,000 that were classified as TDRs and on non-accrual status, of which no loans were in the process of foreclosure.

Impaired Loans

2 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 $11.0 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:

Impaired loans totaled $6.4 million at September 30, 2022, and have decreased $5.7 million from December 31, 2021.

There were 59 impaired loans at September 30, 2022 down from 107 loans at December 31, 2021.

Impaired commercial loans decreased $488,000 between December 31, 2021 and September 30, 2022.

The specific allowance for impaired commercial loans decreased from $439,000 at December 31, 2021 to $321,000 as of September 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 September 30, 2022, impaired residential loans decreased $5.0 million and impaired home equity lines of credit decreased $210,000.

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

Dollars in thousands

September 30,

2022 December 31,

2021 June 30,

2021 September 30,

Real estate $ 1,295 $ 1,428 $ 2,800

8 unchanged sentences

Past Due Loans

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:

The Bank's overall loan delinquency ratio was 0.08% at September 30, 2022 compared to 0.26% at December 31, 2021 and 0.25% at September 30, 2021.

Loans 90 days delinquent and accruing decreased from $32,000 at December 31, 2021 to zero as of September 30, 2022.

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

Dollars in thousands

September 30,

2022 December 31,

2021 June 30,

2021 September 30,

Real estate $ 195 $ 440 $ 259

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

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

As of September 30, 2022, there were three loans in the process of foreclosure with a total balance of $356,000.

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 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:

Dollars in thousands

2022 December 31,

2021 June 30,

Carrying Value

Real estate $ — $ — $ 224

Construction — — —

Municipal — — —

Construction — — —

Home equity line of credit — — —

Consumer — — —

Total 51 — 224

Related Allowance

Real estate — — —

Construction — — —

Municipal — — —

Construction — — —

Home equity line of credit — — —

Consumer — — —

Real estate — — 224

Construction — — —

Municipal — — —

Construction — — —

Home equity line of credit — — —

Consumer — — —

Total $ 51 $ — $ 224

At September 30, 2022, 2021 and December 31, 2021 there were no OREO properties owned and no allowance for OREO losses.

Liquidity Management

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

As of September 30, 2022, the Bank had primary sources of liquidity of $901.0 million.

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

3 unchanged sentences

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 84.8% of total average assets in the first six months of 2022, up from 79.6% a year ago.

The Bank's primary source of liquidity is deposits, which funded 85.0% of total average assets in the first nine months of 2022, up from 79.8% 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.

4 unchanged sentences

In Management's estimation, risks are concentrated in two major categories:

runoff of in-market deposit balances and the inability to renew wholesale sources of funding.

runoff of in-market deposit balances and the inability to access or renew wholesale sources of funding.

Of the two categories, potential runoff of deposit balances would have the most significant impact on contingent liquidity.

2 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 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.

During the first nine months of 2022, total deposits increased by $246.7 million or 11.6% from December 31, 2021 levels.

Low-cost deposits (demand, NOW, and savings accounts) increased by $44.9 million or 3.3% in the first nine months of 2022, money market deposits decreased $18.2 million or 8.8%, and certificates of deposit increased $220.0 million or 38.9%.

Between September 30, 2021 and September 30, 2022, total deposits increased by $336.7 million or 16.6%.

Low-cost deposits increased by $66.8 million or 5.0%, money market accounts decreased $1.7 million or 0.9%, and certificates of deposit increased $271.6 million or 52.8%.

Estimated uninsured deposits totaled $194.0 million, $202.3 million and $228.4 million at September 30, 2022, 2021 and December 31, 2021, respectively.

Borrowed Funds

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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 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%;

During the nine months ended September 30, 2022, borrowed funds decreased $18.0 million or 13.2% from December 31, 2021, primarily in customer repurchase agreements.

Between September 30, 2021 and September 30, 2022, borrowed funds decreased by $114.9 million or 49.3%;

this decrease resulted primarily from repayment of various FHLB borrowings.

Shareholders' Equity

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.

Shareholders' equity as of September 30, 2022 was $219.9 million, compared to $245.7 million as of December 31, 2021 and $238.7 million as of September 30, 2021.

The Company's earnings in the first nine months of 2022, net of dividends declared, added $18.8 million 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 $47.7 million as of September 30, 2022 and was $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 $0.34 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.

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

The dividend payout ratio, which is calculated by dividing dividends declared per share by basic earnings per share, was 36.63% for the first nine months of 2022 compared to 38.78% 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.

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

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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 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

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

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

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

Bank 8.84 % 12.64 % 12.64 % 13.52 %

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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 first quarter of 2022 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 second 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.

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

At September 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 $500,000, net of taxes.

3 unchanged sentences

limiting the amount of exposure to each counter-party.

At June 30, 2022, the Bank's derivative instrument counterparties

At September 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.

5 unchanged sentences

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

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

As of September 30, 2022, the Bank had six loan swap agreements in place with a total notional value of $77.3 million.

Contractual Obligations

The following table sets forth the contractual obligations of the Company as of June 30, 2022:

The following table sets forth the contractual obligations of the Company as of September 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