First Bancorp, Inc /ME/ 10-Q

Item 1 – Financial Statements Report of Independent Registered Public Accounting Firm The Board of Directors and Shareholders The First Bancorp, Inc. Results of Review of Interim Financial Information We have reviewed the accompanying interim consolidated financial information of The First Bancorp, Inc. and Subsidiary as of September 30, 2022 and 2021 and for the three-month and nine-months periods then ended, and the related notes (collectively referred to as the "interim financial information"). Based on our reviews, we are not aware of any material modifications that should be made to the accompanying interim financial information for them to be in conformity with accounting principles generally accepted in the United States of America. Basis for Review Results This consolidated interim financial information is the responsibility of the Company's management. We conducted our review in accordance with the standards of the Public Company Accounting Oversight Board (United States) ("PCAOB"). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the PCAOB, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. /s/ Berry Dunn McNeil & Parker, LLC Portland, Maine November 4, 2022 2 Consolidated Balance Sheets (Unaudited) The First Bancorp, Inc. and Subsidiary September 30, 2022 December 31, 2021 September 30, 2021 Assets Cash and cash equivalents $ 27,408,000 $ 20,634,000 $ 27,126,000 Interest bearing deposits in other banks 65,786,000 66,678,000 93,779,000 Securities available for sale 283,268,000 320,566,000 309,224,000 Securities to be held to maturity (fair value of $ 313,796,000 at September 30, 2022, $ 375,327,000 at December 31, 2021 and $ 379,797,000 at September 30, 2021) 381,906,000 370,040,000 375,699,000 Restricted equity securities, at cost 4,514,000 5,365,000 8,839,000 Loans held for sale — 835,000 1,437,000 Loans 1,857,975,000 1,647,649,000 1,617,212,000 Less allowance for loan losses 16,387,000 15,521,000 17,507,000 Net loans 1,841,588,000 1,632,128,000 1,599,705,000 Accrued interest receivable 8,176,000 7,544,000 8,380,000 Premises and equipment, net 28,548,000 28,949,000 29,106,000 Goodwill 30,646,000 30,646,000 30,646,000 Other assets 63,225,000 43,714,000 45,650,000 Total assets $ 2,735,065,000 $ 2,527,099,000 $ 2,529,591,000 Liabilities Demand deposits $ 356,867,000 $ 334,945,000 $ 354,899,000 NOW deposits 656,865,000 655,061,000 625,294,000 Money market deposits 188,729,000 206,901,000 190,420,000 Savings deposits 381,312,000 360,185,000 348,033,000 Certificates of deposit 786,176,000 566,205,000 514,567,000 Total deposits 2,369,949,000 2,123,297,000 2,033,213,000 Borrowed funds – short term 118,258,000 81,252,000 178,109,000 Borrowed funds – long term 85,000 55,090,000 55,092,000 Other liabilities 26,856,000 21,803,000 24,440,000 Total liabilities 2,515,148,000 2,281,442,000 2,290,854,000 Shareholders' equity Common stock, one cent par value per share 110,000 110,000 110,000 Additional paid-in capital 68,028,000 66,830,000 66,471,000 Retained earnings 198,902,000 180,417,000 174,391,000 Accumulated other comprehensive income (loss) Net unrealized loss on securities available for sale ( 47,661,000 ) ( 1,718,000 ) ( 627,000 ) Net unrealized loss on securities transferred from available for sale to held to maturity ( 67,000 ) ( 87,000 ) ( 99,000 ) Net unrealized gain (loss) on cash flow hedging derivative instruments 500,000 — ( 1,537,000 ) Net unrealized gain on postretirement costs 105,000 105,000 28,000 Total shareholders' equity 219,917,000 245,657,000 238,737,000 Total liabilities & shareholders' equity $ 2,735,065,000 $ 2,527,099,000 $ 2,529,591,000 Common Stock Number of shares authorized 18,000,000 18,000,000 18,000,000 Number of shares issued and outstanding 11,038,224 10,998,765 10,992,950 Book value per common share $ 19.92 $ 22.33 $ 21.72 Tangible book value per common share $ 17.13 $ 19.52 $ 18.90 See Report of Independent Registered Public Accounting Firm. The accompanying notes are an integral part of these consolidated financial statements. 3 Consolidated Statements of Income and Comprehensive Income (Loss) (Unaudited) The First Bancorp, Inc. and Subsidiary For the nine months ended September 30, For the quarter ended September 30, 2022 2021 2022 2021 Interest income Interest and fees on loans (includes YTD tax-exempt income of $ 879,000 for September 30, 2022 and $ 832,000 for September 30, 2021) $ 53,463,000 $ 45,864,000 $ 19,564,000 $ 15,905,000 Interest on deposits with other banks 163,000 45,000 92,000 21,000 Interest and dividends on investments (includes YTD tax-exempt income of $ 5,588,000 for September 30, 2022 and $ 5,798,000 for September 30, 2021) 12,329,000 11,173,000 4,335,000 3,662,000 Total interest income 65,955,000 57,082,000 23,991,000 19,588,000 Interest expense Interest on deposits 8,190,000 5,796,000 4,164,000 1,650,000 Interest on borrowed funds 1,083,000 2,679,000 463,000 927,000 Total interest expense 9,273,000 8,475,000 4,627,000 2,577,000 Net interest income 56,682,000 48,607,000 19,364,000 17,011,000 Provision for loan losses 1,300,000 1,575,000 400,000 525,000 Net interest income after provision for loan losses 55,382,000 47,032,000 18,964,000 16,486,000 Non-interest income Investment management and fiduciary income 3,513,000 3,352,000 1,087,000 1,135,000 Service charges on deposit accounts 1,358,000 1,132,000 454,000 413,000 Net securities gains (losses) 7,000 22,000 6,000 ( 142,000 ) Mortgage origination and servicing income, net of amortization 1,234,000 4,351,000 356,000 1,030,000 Debit card income 4,884,000 3,875,000 2,128,000 1,332,000 Other operating income 2,031,000 1,852,000 684,000 607,000 Total non-interest income 13,027,000 14,584,000 4,715,000 4,375,000 Non-interest expense Salaries and employee benefits 17,092,000 15,600,000 5,757,000 5,424,000 Occupancy expense 2,298,000 2,148,000 720,000 735,000 Furniture and equipment expense 3,740,000 3,535,000 1,266,000 1,135,000 FDIC insurance premiums 738,000 600,000 298,000 209,000 Amortization of identified intangibles 52,000 52,000 17,000 17,000 Other operating expense 8,273,000 7,367,000 3,313,000 2,412,000 Total non-interest expense 32,193,000 29,302,000 11,371,000 9,932,000 Income before income taxes 36,216,000 32,314,000 12,308,000 10,929,000 Income tax expense 6,423,000 5,591,000 2,217,000 1,915,000 NET INCOME $ 29,793,000 $ 26,723,000 $ 10,091,000 $ 9,014,000 Basic earnings per common share $ 2.73 $ 2.45 $ 0.92 $ 0.83 Diluted earnings per common share $ 2.70 $ 2.43 $ 0.91 $ 0.82 Other comprehensive income (loss) net of tax Net unrealized loss on securities available for sale, net of taxes $ ( 45,943,000 ) $ ( 5,636,000 ) $ ( 14,866,000 ) $ ( 1,817,000 ) Net unrealized gain on transferred securities, net of taxes 20,000 34,000 6,000 14,000 Net unrealized gain on cash flow hedging derivative instruments 500,000 3,395,000 354,000 546,000 Other comprehensive loss ( 45,423,000 ) ( 2,207,000 ) ( 14,506,000 ) ( 1,257,000 ) Comprehensive income (loss) $ ( 15,630,000 ) $ 24,516,000 $ ( 4,415,000 ) $ 7,757,000 See Report of Independent Registered Public Accounting Firm. The accompanying notes are an integral part of these consolidated financial statements. 4 Consolidated Statements of Changes in Shareholders' Equity (Unaudited) The First Bancorp, Inc. and Subsidiary Nine Month Period Ended September 30, 2022 and 2021 Common stock and additional paid-in capital Retained earnings Accumulated other comprehensive loss Total shareholders' equity Shares Amount Balance at December 31, 2020 10,950,289 $ 65,395,000 $ 158,359,000 $ ( 28,000 ) $ 223,726,000 Net income — — 26,723,000 — 26,723,000 Net unrealized loss on securities available for sale, net of tax — — — ( 5,636,000 ) ( 5,636,000 ) Net unrealized gain on securities transferred from available for sale to held to maturity, net of tax — — — 34,000 34,000 Net unrealized gain on cash flow hedging derivative instruments, net of tax — — — 3,395,000 3,395,000 Comprehensive income (loss) — — 26,723,000 ( 2,207,000 ) 24,516,000 Cash dividends declared ($ 0.95 per share) — — ( 10,438,000 ) — ( 10,438,000 ) Equity compensation expense — 672,000 — — 672,000 Payment to repurchase common stock ( 10,252 ) — ( 253,000 ) — ( 253,000 ) Issuance of restricted stock 34,689 — — — — Proceeds from sale of common stock 18,224 514,000 — — 514,000 Balance at September 30, 2021 10,992,950 $ 66,581,000 $ 174,391,000 $ ( 2,235,000 ) $ 238,737,000 Balance at December 31, 2021 10,998,765 $ 66,940,000 $ 180,417,000 $ ( 1,700,000 ) $ 245,657,000 Net income — — 29,793,000 — 29,793,000 Net unrealized loss on securities available for sale, net of tax — — — ( 45,943,000 ) ( 45,943,000 ) Net unrealized gain on securities transferred from available for sale to held to maturity, net of tax — — — 20,000 20,000 Net unrealized gain on cash flow hedging derivative instruments, net of tax — — — 500,000 500,000 Comprehensive income (loss) — — 29,793,000 ( 45,423,000 ) ( 15,630,000 ) Cash dividends declared ($ 1.00 per share) — — ( 11,032,000 ) — ( 11,032,000 ) Equity compensation expense — 610,000 — — 610,000 Payment to repurchase common stock ( 8,640 ) — ( 276,000 ) — ( 276,000 ) Issuance of restricted stock 28,745 — — — — Proceeds from sale of common stock 19,354 588,000 — — 588,000 Balance at September 30, 2022 11,038,224 $ 68,138,000 $ 198,902,000 $ ( 47,123,000 ) $ 219,917,000 5 Three Month Period Ended September 30, 2022 and 2021 Common stock and additional paid-in capital Retained earnings Accumulated other comprehensive loss Total shareholders' equity Shares Amount Balance at June 30, 2021 10,987,680 $ 66,225,000 $ 168,908,000 $ ( 978,000 ) $ 234,155,000 Net income — — 9,014,000 — 9,014,000 Net unrealized loss on securities available for sale, net of tax — — — ( 1,817,000 ) ( 1,817,000 ) Net unrealized gain on securities transferred from available for sale to held to maturity, net of tax — — — 14,000 14,000 Net unrealized gain on cash flow hedging derivative instruments, net of tax — — — 546,000 546,000 Comprehensive income (loss) — — 9,014,000 ( 1,257,000 ) 7,757,000 Cash dividends declared ($ 0.32 per share) — — ( 3,518,000 ) — ( 3,518,000 ) Equity compensation expense — 183,000 — — 183,000 Payment to repurchase common stock ( 691 ) — ( 13,000 ) — ( 13,000 ) Proceeds from sale of common stock 5,961 173,000 — — 173,000 Balance at September 30, 2021 10,992,950 $ 66,581,000 $ 174,391,000 $ ( 2,235,000 ) $ 238,737,000 Balance at June 30, 2022 11,030,236 $ 67,737,000 $ 192,565,000 $ ( 32,617,000 ) $ 227,685,000 Net income — — 10,091,000 — 10,091,000 Net unrealized loss on securities available for sale, net of tax — — — ( 14,866,000 ) ( 14,866,000 ) Net unrealized gain on securities transferred from available for sale to held to maturity, net of tax — — — 6,000 6,000 Net unrealized gain on cash flow hedging derivative instruments, net of tax — — — 354,000 354,000 Comprehensive income (loss) — — 10,091,000 ( 14,506,000 ) ( 4,415,000 ) Cash dividends declared ($ 0.34 per share) — — ( 3,754,000 ) — ( 3,754,000 ) Equity compensation expense — 198,000 — — 198,000 Amortization of premium for preferred stock issuance — — — — — Payment to repurchase preferred stock — — — — — Payment to repurchase common stock — — — — — Tax benefit from vesting of restricted stock — — — — — Issuance of restricted stock 1,250 — — — — Proceeds from sale of common stock 6,738 203,000 — — 203,000 Balance at September 30, 2022 11,038,224 $ 68,138,000 $ 198,902,000 $ ( 47,123,000 ) $ 219,917,000 See Report of Independent Registered Public Accounting Firm. The accompanying notes are an integral part of these consolidated financial statements. 6 Consolidated Statements of Cash Flows (Unaudited) The First Bancorp, Inc. and Subsidiary For the nine months ended September 30, 2022 2021 Cash flows from operating activities Net income $ 29,793,000 $ 26,723,000 Adjustments to reconcile net income to net cash provided by operating activities Depreciation 1,495,000 1,540,000 Change in deferred taxes 19,000 483,000 Provision for loan losses 1,300,000 1,575,000 Loans originated for resale ( 20,152,000 ) ( 89,166,000 ) Proceeds from sales and transfers of loans 21,372,000 96,227,000 Net gain on sales of loans ( 385,000 ) ( 2,643,000 ) Net gain on sale or call of securities ( 7,000 ) ( 22,000 ) Net amortization of premiums on investments 763,000 1,801,000 Net (gain) loss on sale of other real estate owned 1,000 ( 91,000 ) Equity compensation expense 610,000 672,000 Net (increase) decrease in other assets and accrued interest ( 11,362,000 ) 14,364,000 Net increase (decrease) in other liabilities 8,720,000 ( 6,522,000 ) Net (gain) loss on disposal of premises and equipment ( 15,000 ) 2,000 Amortization of investment in limited partnership 229,000 232,000 Net acquisition amortization 52,000 52,000 Net cash provided by operating activities 32,433,000 45,227,000 Cash flows from investing activities (Increase) decrease in interest-bearing deposits in other banks 892,000 ( 37,628,000 ) Proceeds from sales of securities available for sale 1,301,000 19,435,000 Proceeds from maturities, payments and calls of securities available for sale 35,633,000 85,989,000 Proceeds from maturities, payments, calls and sales of securities to be held to maturity 15,073,000 70,217,000 Proceeds from sales of other real estate owned 50,000 999,000 Purchases of securities available for sale ( 58,324,000 ) ( 109,835,000 ) Purchases of securities to be held to maturity ( 27,138,000 ) ( 80,610,000 ) Redemption of restricted equity securities 851,000 1,706,000 Net increase in loans ( 210,811,000 ) ( 140,772,000 ) Capital expenditures ( 1,165,000 ) ( 3,412,000 ) Proceeds from disposal of premises and equipment 38,000 — Net cash used by investing activities ( 243,600,000 ) ( 193,911,000 ) Cash flows from financing activities Net increase in demand, savings, and money market accounts 26,681,000 279,620,000 Net increase (decrease) in certificates of deposit 219,971,000 ( 91,018,000 ) Net increase (decrease) in short-term borrowings 37,006,000 ( 28,831,000 ) Repayment on long-term borrowings ( 55,005,000 ) ( 6,000 ) Payment to repurchase common stock ( 276,000 ) ( 253,000 ) Proceeds from sale of common stock 588,000 514,000 Dividends paid ( 11,024,000 ) ( 10,428,000 ) Net cash provided by financing activities 217,941,000 149,598,000 Net increase in cash and cash equivalents 6,774,000 914,000 Cash and cash equivalents at beginning of period 20,634,000 26,212,000 Cash and cash equivalents at end of period $ 27,408,000 $ 27,126,000 7 For the nine months ended September 30, 2022 2021 Interest paid $ 9,061,000 $ 8,887,000 Income taxes paid 5,745,000 4,573,000 Non-cash transactions Change in net unrealized loss on available for sale securities, net of tax 45,943,000 5,636,000 See Report of Independent Registered Public Accounting Firm. The accompanying notes are an integral part of these consolidated financial statements. 8 Notes to Consolidated Financial Statements The First Bancorp, Inc. and Subsidiary Note 1 – Basis of Presentation The First Bancorp, Inc. ("the Company") is a financial holding company that owns all of the common stock of First National Bank ("the Bank"). The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP") for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of Management, all adjustments (consisting of normally recurring accruals) considered necessary for a fair presentation have been included. All significant intercompany transactions and balances are eliminated in consolidation. The income reported for the 2022 period is not necessarily indicative of the results that may be expected for the year ending December 31, 2022. For further information, refer to the consolidated financial statements and notes included in the Company's annual report on Form 10-K for the year ended December 31, 2021. Risks and Uncertainties In March 2020, the World Health Organization declared a worldwide pandemic as a result of the outbreak of coronavirus disease 2019 ("COVID-19"). To curtail spread of the virus, governments at all levels encouraged social distancing and many imposed restrictions on travel and group meetings, and/or mandated shut-downs of all but essential businesses. Vaccination efforts have led to a general re-opening of the economy with few remaining restrictions. The Company’s business, financial condition, and results of operations generally rely upon the ability of the Bank’s borrowers to repay their loans, the value of collateral underlying the Bank’s secured loans, and demand for loans and other products and services the Bank offers, which are highly dependent on the business environment in the Bank’s primary markets where it operates and in the United States as a whole. The Bank's primary market is the State of Maine, which relies upon tourism for a significant percentage of its economic activity. In 2020, COVID-19 adversely impacted the tourism industry to a greater degree than other industries; in 2021, the tourism industry rebounded to enjoy a strong year, and anecdotal evidence points to a good year for the industry in 2022. Milder variants of COVID-19 have become the dominant strains with outbreaks resulting in modest levels of disruption. The severity of any potential future outbreaks could have an impact on the Company's operating results, though the degree is indeterminable at this time. 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 to additional inflationary pressure. 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, with a resulting risk of the economy entering into a recession. The ongoing 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. Subsequent Events Events occurring subsequent to September 30, 2022, have been evaluated as to their potential impact to the financial statements. 9 Note 2 – Investment Securities The following table summarizes the amortized cost and estimated fair value of investment securities at September 30, 2022: Amortized Cost Unrealized Gains Unrealized Losses Fair Value (Estimated) Securities available for sale U.S. Government-sponsored agencies $ 26,023,000 $ — $ ( 6,879,000 ) $ 19,144,000 Mortgage-backed securities 273,215,000 4,000 ( 44,041,000 ) 229,178,000 State and political subdivisions 40,489,000 — ( 9,383,000 ) 31,106,000 Asset-backed securities 3,872,000 — ( 32,000 ) 3,840,000 $ 343,599,000 $ 4,000 $ ( 60,335,000 ) $ 283,268,000 Securities to be held to maturity U.S. Government-sponsored agencies $ 38,100,000 $ — $ ( 10,428,000 ) $ 27,672,000 Mortgage-backed securities 56,423,000 48,000 ( 11,784,000 ) 44,687,000 State and political subdivisions 257,633,000 38,000 ( 43,899,000 ) 213,772,000 Corporate securities 29,750,000 — ( 2,085,000 ) 27,665,000 $ 381,906,000 $ 86,000 $ ( 68,196,000 ) $ 313,796,000 Restricted equity securities Federal Home Loan Bank Stock $ 3,477,000 $ — $ — $ 3,477,000 Federal Reserve Bank Stock 1,037,000 — — 1,037,000 $ 4,514,000 $ — $ — $ 4,514,000 The following table summarizes the amortized cost and estimated fair value of investment securities at December 31, 2021: Amortized Cost Unrealized Gains Unrealized Losses Fair Value (Estimated) Securities available for sale U.S. Government-sponsored agencies $ 23,045,000 $ — $ ( 1,146,000 ) $ 21,899,000 Mortgage-backed securities 256,992,000 1,803,000 ( 3,895,000 ) 254,900,000 State and political subdivisions 38,127,000 1,083,000 ( 88,000 ) 39,122,000 Asset-backed securities 4,577,000 68,000 — 4,645,000 $ 322,741,000 $ 2,954,000 $ ( 5,129,000 ) $ 320,566,000 Securities to be held to maturity U.S. Government-sponsored agencies $ 35,600,000 $ 2,000 $ ( 1,149,000 ) $ 34,453,000 Mortgage-backed securities 60,646,000 261,000 ( 1,795,000 ) 59,112,000 State and political subdivisions 250,544,000 7,925,000 ( 302,000 ) 258,167,000 Corporate securities 23,250,000 411,000 ( 66,000 ) 23,595,000 $ 370,040,000 $ 8,599,000 $ ( 3,312,000 ) $ 375,327,000 Restricted equity securities Federal Home Loan Bank Stock $ 4,328,000 $ — $ — $ 4,328,000 Federal Reserve Bank Stock 1,037,000 — — 1,037,000 $ 5,365,000 $ — $ — $ 5,365,000 10 The following table summarizes the amortized cost and estimated fair value of investment securities at September 30, 2021: Amortized Cost Unrealized Gains Unrealized Losses Fair Value (Estimated) Securities available for sale U.S. Government-sponsored agencies $ 23,045,000 $ — $ ( 1,106,000 ) $ 21,939,000 Mortgage-backed securities 247,606,000 2,751,000 ( 3,104,000 ) 247,253,000 State and political subdivisions 34,590,000 895,000 ( 306,000 ) 35,179,000 Asset-backed securities 4,777,000 76,000 — 4,853,000 $ 310,018,000 $ 3,722,000 $ ( 4,516,000 ) $ 309,224,000 Securities to be held to maturity U.S. Government-sponsored agencies $ 35,600,000 $ 17,000 $ ( 1,161,000 ) $ 34,456,000 Mortgage-backed securities 64,651,000 354,000 ( 1,701,000 ) 63,304,000 State and political subdivisions 254,198,000 7,251,000 ( 1,042,000 ) 260,407,000 Corporate securities 21,250,000 415,000 ( 35,000 ) 21,630,000 $ 375,699,000 $ 8,037,000 $ ( 3,939,000 ) $ 379,797,000 Restricted equity securities Federal Home Loan Bank Stock $ 7,802,000 $ — $ — $ 7,802,000 Federal Reserve Bank Stock 1,037,000 — — 1,037,000 $ 8,839,000 $ — $ — $ 8,839,000 The following table summarizes the contractual maturities of investment securities at September 30, 2022: Securities available for sale Securities to be held to maturity Amortized Cost Fair Value (Estimated) Amortized Cost Fair Value (Estimated) Due in 1 year or less $ 4,000 $ 4,000 $ 1,346,000 $ 1,343,000 Due in 1 to 5 years 3,640,000 3,427,000 15,235,000 14,644,000 Due in 5 to 10 years 18,064,000 14,436,000 75,492,000 68,704,000 Due after 10 years 321,891,000 265,401,000 289,833,000 229,105,000 $ 343,599,000 $ 283,268,000 $ 381,906,000 $ 313,796,000 The following table summarizes the contractual maturities of investment securities at December 31, 2021: Securities available for sale Securities to be held to maturity Amortized Cost Fair Value (Estimated) Amortized Cost Fair Value (Estimated) Due in 1 year or less $ — $ — $ 2,515,000 $ 2,521,000 Due in 1 to 5 years 5,004,000 5,173,000 17,624,000 18,338,000 Due in 5 to 10 years 52,782,000 53,057,000 174,982,000 180,081,000 Due after 10 years 264,955,000 262,336,000 174,919,000 174,387,000 $ 322,741,000 $ 320,566,000 $ 370,040,000 $ 375,327,000 11 The following table summarizes the contractual maturities of investment securities at September 30, 2021: Securities available for sale Securities to be held to maturity Amortized Cost Fair Value (Estimated) Amortized Cost Fair Value (Estimated) Due in 1 year or less $ — $ — $ 3,788,000 $ 3,763,000 Due in 1 to 5 years 6,285,000 6,529,000 18,616,000 19,426,000 Due in 5 to 10 years 37,971,000 38,400,000 171,039,000 176,007,000 Due after 10 years 265,762,000 264,295,000 182,256,000 180,601,000 $ 310,018,000 $ 309,224,000 $ 375,699,000 $ 379,797,000 At September 30, 2022, securities with a carrying value of $ 343,677,000 were pledged to secure public deposits, repurchase agreements, and for other purposes as required by law. This compares to securities with a carrying value of $ 297,456,000 as of December 31, 2021 and $ 299,978,000 at September 30, 2021, pledged for the same purposes. Gains and losses on the sale of securities are computed by subtracting the amortized cost at the time of sale from the security's selling price, net of accrued interest to be received. The following table shows securities gains and losses for the nine months and quarters ended September 30, 2022 and 2021: For the nine months ended September 30, For the quarter ended September 30, 2022 2021 2022 2021 Proceeds from sales of securities $ 1,301,000 $ 19,435,000 $ 1,301,000 $ 3,743,000 Gross realized gains 8,000 627,000 6,000 1,000 Gross realized losses ( 1,000 ) ( 605,000 ) ( 1,000 ) ( 143,000 ) Net gain (loss) $ 7,000 $ 22,000 $ 5,000 $ ( 142,000 ) Related income taxes $ 1,000 $ 5,000 $ 1,000 $ ( 29,000 ) Management reviews securities with unrealized losses for other than temporary impairment. As of September 30, 2022, there were 912 securities with unrealized losses held in the Company's portfolio. These securities were temporarily impaired as a result of changes in interest rates reducing their fair value, of which 138 had been temporarily impaired for 12 months or more. The Company has the ability and intent to hold its impaired securities until a recovery of their amortized cost, which may be at maturity. Information regarding securities temporarily impaired as of September 30, 2022 is summarized below: Less than 12 months 12 months or more Total Fair Value (Estimated) Unrealized Losses Fair Value (Estimated) Unrealized Losses Fair Value (Estimated) Unrealized Losses U.S. Government-sponsored agencies $ 7,364,000 $ ( 1,264,000 ) $ 39,452,000 $ ( 16,043,000 ) $ 46,816,000 $ ( 17,307,000 ) Mortgage-backed securities 109,041,000 ( 13,868,000 ) 162,979,000 ( 41,957,000 ) 272,020,000 ( 55,825,000 ) State and political subdivisions 197,145,000 ( 44,277,000 ) 17,902,000 ( 9,005,000 ) 215,047,000 ( 53,282,000 ) Asset-backed securities 3,840,000 ( 32,000 ) — — 3,840,000 ( 32,000 ) Corporate securities 20,186,000 ( 1,814,000 ) 3,229,000 ( 271,000 ) 23,415,000 ( 2,085,000 ) $ 337,576,000 $ ( 61,255,000 ) $ 223,562,000 $ ( 67,276,000 ) $ 561,138,000 $ ( 128,531,000 ) 12 As of December 31, 2021, there were 163 securities with unrealized losses held in the Company's portfolio. These securities were temporarily impaired as a result of changes in interest rates reducing their fair value, of which 27 had been temporarily impaired for 12 months or more. Information regarding securities temporarily impaired as of December 31, 2021 is summarized below: Less than 12 months 12 months or more Total Fair Value (Estimated) Unrealized Losses Fair Value (Estimated) Unrealized Losses Fair Value (Estimated) Unrealized Losses U.S. Government-sponsored agencies $ 24,030,000 $ ( 920,000 ) $ 29,170,000 $ ( 1,375,000 ) $ 53,200,000 $ ( 2,295,000 ) Mortgage-backed securities 216,461,000 ( 4,768,000 ) 26,772,000 ( 922,000 ) 243,233,000 ( 5,690,000 ) State and political subdivisions 29,528,000 ( 390,000 ) — — 29,528,000 ( 390,000 ) Corporate securities 3,434,000 ( 66,000 ) — — 3,434,000 ( 66,000 ) $ 273,453,000 $ ( 6,144,000 ) $ 55,942,000 $ ( 2,297,000 ) $ 329,395,000 $ ( 8,441,000 ) As of September 30, 2021, there were 184 securities with unrealized losses held in the Company's portfolio. These securities were temporarily impaired as a result of changes in interest rates reducing their fair value, of which 19 had been temporarily impaired for 12 months or more. Information regarding securities temporarily impaired as of September 30, 2021 is summarized below: Less than 12 months 12 months or more Total Fair Value (Estimated) Unrealized Losses Fair Value (Estimated) Unrealized Losses Fair Value (Estimated) Unrealized Losses U.S. Government-sponsored agencies $ 37,054,000 $ ( 1,396,000 ) $ 16,174,000 $ ( 871,000 ) $ 53,228,000 $ ( 2,267,000 ) Mortgage-backed securities 207,951,000 ( 4,207,000 ) 17,337,000 ( 598,000 ) 225,288,000 ( 4,805,000 ) State and political subdivisions 50,050,000 ( 1,348,000 ) — — 50,050,000 ( 1,348,000 ) Corporate securities 3,465,000 ( 35,000 ) — — 3,465,000 ( 35,000 ) $ 298,520,000 $ ( 6,986,000 ) $ 33,511,000 $ ( 1,469,000 ) $ 332,031,000 $ ( 8,455,000 ) During the third quarter of 2014, the Company transferred securities with a total amortized cost of $ 89,780,000 with a corresponding fair value of $ 89,757,000 from available for sale to held to maturity. The net unrealized loss, net of taxes, on these securities at the date of the transfer was $ 15,000 . The net unrealized holding loss at the time of transfer continues to be reported in accumulated other comprehensive income (loss), net of tax and is amortized over the remaining lives of the securities as an adjustment of the yield. 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 $ 67,000 , net of taxes, 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 Bank is a member of the Federal Home Loan Bank ("FHLB") of Boston, a cooperatively owned wholesale bank for housing and finance in the six New England States. As a requirement of membership in the FHLB, the Bank must own a minimum required amount of FHLB stock, calculated periodically based primarily on its level of borrowings from the FHLB. The Bank uses the FHLB for a portion of its wholesale funding needs. As of September 30, 2022 and 2021, and December 31, 2021, the Bank's investment in FHLB stock totaled $ 3,477,000 , $ 7,802,000 and $ 4,328,000 , respectively. FHLB stock is a non-marketable equity security and therefore is reported at cost, which equals par value. The Bank is also a member of the Federal Reserve Bank ("FRB") of Boston. As a requirement for membership in the FRB, the Bank must own a minimum required amount of FRB stock. The Bank uses FRB for certain correspondent banking services and maintains borrowing capacity at its discount window. The Bank's investment in FRB stock totaled $ 1,037,000 at September 30, 2022 and 2021 and December 31, 2021, respectively. The Company periodically evaluates its investment in FHLB and FRB stock for impairment based on, among other factors, the capital adequacy of the Banks and their overall financial condition. No impairment losses have been recorded through September 30, 2022. The Bank will continue to monitor its investment in these restricted equity securities. 13 Note 3 – Loans The following table shows the composition of the Company's loan portfolio by class of financing receivable as of September 30, 2022 and 2021 and at December 31, 2021: September 30, 2022 December 31, 2021 September 30, 2021 Commercial Real estate $ 638,708,000 34.5 % $ 576,198,000 35.0 % $ 550,077,000 34.0 % Construction 129,036,000 6.9 % 79,365,000 4.8 % 73,302,000 4.6 % Other 310,110,000 16.7 % 264,570,000 16.1 % 288,121,000 17.8 % Municipal 48,702,000 2.6 % 48,362,000 2.9 % 40,616,000 2.5 % Residential Term 595,031,000 32.0 % 550,783,000 33.4 % 537,811,000 33.3 % Construction 41,631,000 2.2 % 31,763,000 1.9 % 29,358,000 1.8 % Home equity line of credit 73,938,000 4.0 % 73,632,000 4.5 % 74,594,000 4.6 % Consumer 20,819,000 1.1 % 22,976,000 1.4 % 23,333,000 1.4 % Total $ 1,857,975,000 100.0 % $ 1,647,649,000 100.0 % $ 1,617,212,000 100.0 % Loan balances include net deferred loan costs of $ 9,978,000 as of September 30, 2022, $ 7,890,000 as of December 31, 2021, and $ 6,597,000 as of September 30, 2021. Net deferred loan costs have increased from a year ago and year-to-date due to loan origination unit volume over the period. Unearned fees and deferred costs associated with US Small Business Administration ("SBA") Payroll Protection Program ("PPP") loans originated in 2020 and 2021 were fully recognized as of June 30, 2022. Pursuant to collateral agreements, qualifying first mortgage loans and commercial real estate loans, which totaled $ 464,069,000 at September 30, 2022, were used to collateralize borrowings from the FHLB. This compares to qualifying loans which totaled $ 364,968,000 at December 31, 2021, and $ 356,517,000 at September 30, 2021. In addition, commercial, residential construction and home equity loans totaling $ 327,551,000 at September 30, 2022, $ 295,090,000 at December 31, 2021, and $ 291,188,000 at September 30, 2021, were used to collateralize a standby line of credit at the FRB. In September 2022 the Bank sold a block of 41 mixed performing residential mortgage loans. This block of loans carried general ledger balances that totaled $ 5.2 million and included a number of past-due, non-accrual, and Troubled Debt Restructure ("TDR") loans. The impact of the sale on the portfolio is included in the information presented herein. For all loan classes, loans over 30 days past due are considered delinquent. Information on the past-due status of loans by class of financing receivable as of September 30, 2022, is presented in the following table: 30-59 Days Past Due 60-89 Days Past Due 90+ Days Past Due All Past Due Current Total 90+ Days & Accruing Commercial Real estate $ — $ 4,000 $ 191,000 $ 195,000 $ 638,513,000 $ 638,708,000 $ — Construction — — — — 129,036,000 129,036,000 — Other 172,000 16,000 83,000 271,000 309,839,000 310,110,000 — Municipal — — — — 48,702,000 48,702,000 — Residential Term 79,000 77,000 166,000 322,000 594,709,000 595,031,000 — Construction — — — — 41,631,000 41,631,000 — Home equity line of credit 473,000 29,000 — 502,000 73,436,000 73,938,000 — Consumer 143,000 28,000 0 171,000 20,648,000 20,819,000 — Total $ 867,000 $ 154,000 $ 440,000 $ 1,461,000 $ 1,856,514,000 $ 1,857,975,000 — On March 22, 2020, banking regulators issued an Interagency Statement on Loan Modifications and Reporting in response to the onset of COVID-19; shortly thereafter, on March 30, 2020, the Coronavirus Aid, Relief, and Economic Security ("CARES") Act was passed. Both the Interagency Statement and the CARES Act provided an exemption for qualified modifications from TDR designation, which was extended by the Coronavirus Preparedness and Response Supplemental Appropriations Act, 2020. So long as modified terms were met, loans in an active modification were not included in past due loan totals and continued to accrue interest. As of September 30, 2022, COVID-19 related loan modifications have all been resolved. 14 Information on the past-due status of loans by class of financing receivable as of December 31, 2021, is presented in the following table: 30-59 Days Past Due 60-89 Days Past Due 90+ Days Past Due All Past Due Current Total 90+ Days & Accruing Commercial Real estate $ 249,000 $ — $ 191,000 $ 440,000 $ 575,758,000 $ 576,198,000 $ — Construction 12,000 — 12,000 24,000 79,341,000 79,365,000 — Other 30,000 23,000 104,000 157,000 264,413,000 264,570,000 — Municipal — — — — 48,362,000 48,362,000 — Residential Term 348,000 169,000 1,780,000 2,297,000 548,486,000 550,783,000 — Construction — — — — 31,763,000 31,763,000 — Home equity line of credit 741,000 159,000 135,000 1,035,000 72,597,000 73,632,000 — Consumer 168,000 192,000 32,000 392,000 22,584,000 22,976,000 32,000 Total $ 1,548,000 $ 543,000 $ 2,254,000 $ 4,345,000 $ 1,643,304,000 $ 1,647,649,000 $ 32,000 Information on the past-due status of loans by class of financing receivable as of September 30, 2021, is presented in the following table: 30-59 Days Past Due 60-89 Days Past Due 90+ Days Past Due All Past Due Current Total 90+ Days & Accruing Commercial Real estate $ 33,000 $ — $ 226,000 $ 259,000 $ 549,818,000 $ 550,077,000 $ 36,000 Construction 13,000 15,000 — 28,000 73,274,000 73,302,000 — Other 92,000 359,000 225,000 676,000 287,445,000 288,121,000 — Municipal — — — — 40,616,000 40,616,000 — Residential Term 549,000 918,000 986,000 2,453,000 535,358,000 537,811,000 190,000 Construction — — — — 29,358,000 29,358,000 — Home equity line of credit 251,000 25,000 131,000 407,000 74,187,000 74,594,000 — Consumer 90,000 202,000 3,000 295,000 23,038,000 23,333,000 3,000 Total $ 1,028,000 $ 1,519,000 $ 1,571,000 $ 4,118,000 $ 1,613,094,000 $ 1,617,212,000 $ 229,000 For all classes, loans are placed on non-accrual status when, based on current information and events, it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement or when principal and interest is 90 days or more past due unless the loan is both well secured and in the process of collection (in which case the loan may continue to accrue interest in spite of its past due status). A loan is "well secured" if it is secured (1) by collateral in the form of liens on or pledges of real or personal property, including securities, that have a realizable value sufficient to discharge the debt (including accrued interest) in full, or (2) by the guarantee of a financially responsible party. A loan is "in the process of collection" if collection of the loan is proceeding in due course either (1) through legal action, including judgment enforcement procedures, or, (2) in appropriate circumstances, through collection efforts not involving legal action which are reasonably expected to result in repayment of the debt or in its restoration to a current status in the near future. 15 Cash payments received on non-accrual loans, which are included in impaired loans, are applied to reduce the loan's principal balance until the remaining principal balance is deemed collectible, after which interest is recognized when collected. As a general rule, a loan may be restored to accrual status when payments are current for a substantial period of time, generally six months, and repayment of the remaining contractual amounts is expected, or when it otherwise becomes well secured and in the process of collection. Information on nonaccrual loans as of September 30, 2022 and 2021 and at December 31, 2021 is presented in the following table: September 30, 2022 December 31, 2021 September 30, 2021 Commercial Real estate $ 195,000 $ 242,000 $ 604,000 Construction 25,000 27,000 23,000 Other 756,000 1,068,000 1,251,000 Municipal — — — Residential Term 637,000 3,808,000 3,785,000 Construction — — — Home equity line of credit 247,000 457,000 482,000 Consumer — — — Total $ 1,860,000 $ 5,602,000 $ 6,145,000 Impaired loans include TDR loans and loans placed on non-accrual. These loans are measured at the present value of expected future cash flows discounted at the loan's effective interest rate or at the fair value of the collateral if the loan is collateral dependent. If the measure of an impaired loan is lower than the recorded investment in the loan and estimated selling costs, a specific reserve is established for the difference, or, in certain situations, if the measure of an impaired loan is lower than the recorded investment in the loan and estimated selling costs, the difference is written off. 16 A breakdown of impaired loans by class of financing receivable as of and for the period ended September 30, 2022 is presented in the following table: For the nine months ended September 30, 2022 For the quarter ended September 30, 2022 Recorded Investment Unpaid Principal Balance Related Allowance Average Recorded Investment Recognized Interest Income Average Recorded Investment Recognized Interest Income With No Related Allowance Commercial Real estate $ 1,295,000 $ 1,607,000 $ — $ 1,497,000 $ 42,000 $ 1,314,000 $ 14,000 Construction 25,000 27,000 — 26,000 — 25,000 — Other 399,000 459,000 — 432,000 10,000 405,000 2,000 Municipal — — — — — — — Residential Term 1,912,000 2,139,000 — 5,381,000 40,000 4,666,000 ( 9,000 ) Construction — — — — — — — Home equity line of credit 247,000 279,000 — 298,000 — 249,000 — Consumer — — — 1,000 — — — $ 3,878,000 $ 4,511,000 $ — $ 7,635,000 $ 92,000 $ 6,659,000 $ 7,000 With an Allowance Recorded Commercial Real estate $ — $ — $ — $ 14,000 $ — $ — $ — Construction 661,000 661,000 6,000 661,000 27,000 661,000 16,000 Other 552,000 647,000 315,000 745,000 — 679,000 — Municipal — — — — — — — Residential Term 1,264,000 1,267,000 99,000 1,562,000 34,000 1,384,000 9,000 Construction — — — — — — — Home equity line of credit — — — 11,000 — — — Consumer — — — — — — — $ 2,477,000 $ 2,575,000 $ 420,000 $ 2,993,000 $ 61,000 $ 2,724,000 $ 25,000 Total Commercial Real estate $ 1,295,000 $ 1,607,000 $ — $ 1,511,000 $ 42,000 $ 1,314,000 $ 14,000 Construction 686,000 688,000 6,000 687,000 27,000 686,000 16,000 Other 951,000 1,106,000 315,000 1,177,000 10,000 1,084,000 2,000 Municipal — — — — — — — Residential Term 3,176,000 3,406,000 99,000 6,942,000 74,000 6,050,000 — Construction — — — — — — — Home equity line of credit 247,000 279,000 — 310,000 — 249,000 — Consumer — — — 1,000 — — — $ 6,355,000 $ 7,086,000 $ 420,000 $ 10,628,000 $ 153,000 $ 9,383,000 $ 32,000 Substantially all interest income recognized on impaired loans for all classes of financing receivables was recognized on a cash basis as received. 17 A breakdown of impaired loans by class of financing receivable as of and for the year ended December 31, 2021 is presented in the following table: Recorded Investment Unpaid Principal Balance Related Allowance Average Recorded Investment Recognized Interest Income With No Related Allowance Commercial Real estate $ 1,386,000 $ 1,689,000 $ — $ 1,590,000 $ 63,000 Construction 28,000 28,000 — 22,000 — Other 917,000 1,009,000 — 1,051,000 15,000 Municipal — — — — — Residential Term 6,178,000 7,238,000 — 6,429,000 87,000 Construction — — — — — Home equity line of credit 457,000 487,000 — 461,000 — Consumer 2,000 2,000 — — 1,000 $ 8,968,000 $ 10,453,000 $ — $ 9,553,000 $ 166,000 With an Allowance Recorded Commercial Real estate $ 42,000 $ 71,000 $ 42,000 $ 614,000 $ — Construction 661,000 661,000 16,000 661,000 22,000 Other 386,000 411,000 381,000 396,000 — Municipal — — — — — Residential Term 1,995,000 2,164,000 137,000 1,897,000 54,000 Construction — — — — — Home equity line of credit — — — — — Consumer — — — — — $ 3,084,000 $ 3,307,000 $ 576,000 $ 3,568,000 $ 76,000 Total Commercial Real estate $ 1,428,000 $ 1,760,000 $ 42,000 $ 2,204,000 $ 63,000 Construction 689,000 689,000 16,000 683,000 22,000 Other 1,303,000 1,420,000 381,000 1,447,000 15,000 Municipal — — — — — Residential Term 8,173,000 9,402,000 137,000 8,326,000 141,000 Construction — — — — — Home equity line of credit 457,000 487,000 — 461,000 — Consumer 2,000 2,000 — — 1,000 $ 12,052,000 $ 13,760,000 $ 576,000 $ 13,121,000 $ 242,000 18 A breakdown of impaired loans by class of financing receivable as of and for the period ended September 30, 2021 is presented in the following table: For the nine months ended September 30, 2021 For the quarter ended September 30, 2021 Recorded Investment Unpaid Principal Balance Related Allowance Average Recorded Investment Recognized Interest Income Average Recorded Investment Recognized Interest Income With No Related Allowance Commercial Real estate $ 1,906,000 $ 2,257,000 $ — $ 2,215,000 $ 50,000 $ 2,053,000 $ 15,000 Construction 24,000 25,000 — 69,000 — 24,000 — Other 1,353,000 1,459,000 — 1,534,000 12,000 1,372,000 4,000 Municipal — — — — — — — Residential Term 7,021,000 8,181,000 — 7,231,000 101,000 7,180,000 33,000 Construction — — — 9,000 — — — Home equity line of credit 482,000 516,000 — 725,000 — 546,000 — Consumer 4,000 4,000 — 6,000 — 4,000 — $ 10,790,000 $ 12,442,000 $ — $ 11,789,000 $ 163,000 $ 11,179,000 $ 52,000 With an Allowance Recorded Commercial Real estate $ 894,000 $ 923,000 $ 138,000 $ 940,000 $ 30,000 $ 910,000 $ 10,000 Construction 681,000 681,000 18,000 681,000 17,000 681,000 6,000 Other 402,000 421,000 397,000 466,000 10,000 403,000 5,000 Municipal — — — — — — — Residential Term 1,761,000 1,923,000 129,000 1,753,000 32,000 1,641,000 9,000 Construction — — — — — — — Home equity line of credit 21,000 21,000 — 15,000 — 21,000 — Consumer — — — 1,000 — 3,000 — $ 3,759,000 $ 3,969,000 $ 682,000 $ 3,856,000 $ 89,000 $ 3,659,000 $ 30,000 Total Commercial Real estate $ 2,800,000 $ 3,180,000 $ 138,000 $ 3,155,000 $ 80,000 $ 2,963,000 $ 25,000 Construction 705,000 706,000 18,000 750,000 17,000 705,000 6,000 Other 1,755,000 1,880,000 397,000 2,000,000 22,000 1,775,000 9,000 Municipal — — — — — — — Residential Term 8,782,000 10,104,000 129,000 8,984,000 133,000 8,821,000 42,000 Construction — — — 9,000 — — — Home equity line of credit 503,000 537,000 — 740,000 — 567,000 — Consumer 4,000 4,000 — 7,000 — 7,000 — $ 14,549,000 $ 16,411,000 $ 682,000 $ 15,645,000 $ 252,000 $ 14,838,000 $ 82,000 19 Troubled Debt Restructured A "TDR" constitutes a restructuring of debt if the Company, for economic or legal reasons related to the borrower's financial difficulties, grants a concession to the borrower that it would not otherwise consider. To determine whether or not a loan should be classified as a TDR, Management evaluates a loan based upon the following criteria: • The borrower demonstrates financial difficulty; common indicators include past due status with bank obligations, substandard credit bureau reports, or an inability to refinance with another lender; and • The Company has granted a concession; common concession types include maturity date extension, interest rate adjustments to below market pricing, and deferment of payments. As of September 30, 2022, the Company had 31 loans with a balance of $ 4,926,000 that have been classified as TDRs. This compares to 60 loans with a balance of $ 8,341,000 and 64 loans with a balance of $ 10,051,000 classified as TDRs as of December 31, 2021 and September 30, 2021, respectively. The impairment carried as a specific reserve in the allowance for loan losses is calculated by present valuing the expected cash flows on the loan at the original interest rate, or, for collateral-dependent loans, using the fair value of the collateral less costs to sell. The following table shows TDRs by class and the specific reserve as of September 30, 2022: Number of Loans Balance Specific Reserves Commercial Real estate 6 $ 1,100,000 $ — Construction 1 661,000 6,000 Other 4 461,000 83,000 Municipal — — — Residential Term 20 2,704,000 100,000 Construction — — — Home equity line of credit — — — Consumer — — — 31 $ 4,926,000 $ 189,000 The following table shows TDRs by class and the specific reserve as of December 31, 2021: Number of Loans Balance Specific Reserves Commercial Real estate 8 $ 1,227,000 $ 42,000 Construction 1 661,000 16,000 Other 5 765,000 337,000 Municipal — — — Residential Term 45 5,686,000 137,000 Construction — — — Home equity line of credit — — — Consumer 1 2,000 — 60 $ 8,341,000 $ 532,000 20 The following table shows TDRs by class and the specific reserve as of September 30, 2021: Number of Loans Balance Specific Reserves Commercial Real estate 10 $ 2,238,000 $ 138,000 Construction 1 681,000 18,000 Other 6 883,000 351,000 Municipal — — — Residential Term 45 6,224,000 129,000 Construction — — — Home equity line of credit 1 21,000 — Consumer 1 4,000 — 64 $ 10,051,000 $ 636,000 As of September 30, 2022, one of the loans classified as TDR with a total balance of $ 83,000 was more than 30 days past due. This loan had not been placed on TDR status in the previous 12 months. The following table shows this TDR by class and the associated specific reserves included in the allowance for loan losses as of September 30, 2022: Number of Loans Balance Specific Reserves Commercial Real estate — $ — $ — Construction — — — Other 1 83,000 — Municipal — — — Residential Term — — — Construction — — — Home equity line of credit — — — Consumer — — — 1 $ 83,000 $ — As of September 30, 2021, 12 of the loans classified as TDRs with a total balance of $ 1,095,000 were more than 30 days past due. Of these loans, two had been placed on TDR status in the previous 12 months. The following table shows these TDRs by class and the associated specific reserves included in the allowance for loan losses as of September 30, 2021: Number of Loans Balance Specific Reserves Commercial Real estate — $ — $ — Construction — — Other 5 641,000 351,000 Municipal — — Residential Term 6 450,000 — Construction — — — Home equity line of credit — — — Consumer 1 4,000 — 12 $ 1,095,000 $ 351,000 21 For the nine months ended September 30, 2022, one loan was placed on TDR status. The following table shows this TDR by class and associated specific reserves included in the allowance for loan losses as of September 30, 2022: Number of Loans Pre-Modification Outstanding Recorded Investment Post-Modification Outstanding Recorded Investment Specific Reserves Commercial Real estate — $ — $ — $ — Construction — — — — Other — — — — Municipal — — — — Residential Term 1 38,000 38,000 — Construction — — — — Home equity line of credit — — — — Consumer — — — — 1 $ 38,000 $ 38,000 $ — For the nine months ended September 30, 2021, three loans were placed on TDR status. The following table shows these TDRs by class and associated specific reserves included in the allowance for loan losses as of September 30, 2021: Number of Loans Pre-Modification Outstanding Recorded Investment Post-Modification Outstanding Recorded Investment Specific Reserves Commercial Real estate — $ — $ — $ — Construction 1 80,000 80,000 — Other 1 261,000 261,000 261,000 Municipal — — — — Residential Term 1 9,000 4,000 — Construction — — — — Home equity line of credit — — — — Consumer — — — — 3 $ 350,000 $ 345,000 $ 261,000 22 For the quarter ended September 30, 2022, one loan was placed on TDR status. The following table shows this TDR by class and the associated specific reserves included in the allowance for loan losses as of September 30, 2022: Number of Loans Pre-Modification Outstanding Recorded Investment Post-Modification Outstanding Recorded Investment Specific Reserves Commercial Real estate — $ — $ — $ — Construction — — — — Other — — — — Municipal — — — — Residential Term 1 38,000 38,000 — Construction — — — — Home equity line of credit — — — — Consumer — — — — 1 $ 38,000 $ 38,000 $ — For the quarter ended September 30, 2021, no loans were placed on TDR status. 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 six 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. Residential Mortgage Loans in Process of Foreclosure As of September 30, 2022, there were two mortgage loans collateralized by residential real estate in the process of foreclosure with a total balance of $ 166,000 . This compares to 10 mortgage loans collateralized by residential real estate in the process of foreclosure with a total balance of $ 839,000 as of September 30, 2021. 23 Note 4. Allowance for Loan Losses The Company provides for loan losses through the establishment of an allowance for loan losses which represents an estimated reserve for existing losses in the loan portfolio. A systematic methodology is used for determining the allowance that includes a quarterly review process, risk rating changes, and adjustments to the allowance. The loan portfolio is classified in eight classes and credit risk is evaluated separately in each class. Major risk characteristics relevant to each portfolio segment are as follows: Commercial Real Estate - Commercial real estate loans are impacted by factors such as competitive market forces, vacancy rates, cap rates, net operating incomes, lease renewals, and overall economic demand. In addition, loans in the recreational and tourism sector can be affected by weather conditions, such as unseasonably low winter snowfalls. Commercial real estate lending also carries a higher degree of environmental risk than other real estate lending. Commercial Construction - Commercial construction loans are impacted by factors similar to those for commercial real estate loans in addition to risks related to contractor financial capacity and ability to complete a project within acceptable time frames and within budget. Commercial Other - A weakened economy, soft consumer spending, and the rising cost of labor or raw materials are examples of issues that can impact the credit quality in this segment. Municipal Loans - The overall health of the economy, including unemployment rates and housing prices, has an impact on the credit quality of this segment. Residential Real Estate Term - The overall health of the economy, including unemployment rates and housing prices, has an impact on the credit quality of this segment. Residential Real Estate Construction - Residential construction loans are impacted by factors similar to those for residential real estate term loans in addition to risks related to contractor financial capacity and ability to complete a project within acceptable time frames and within budget. Home Equity Line of Credit - The overall health of the economy, including unemployment rates and housing prices, has an impact on the credit quality of this segment. Consumer - The overall health of the economy, including unemployment rates, has an impact on the credit quality of this segment. The appropriate level of the allowance is evaluated continually based on a review of significant loans, with a particular emphasis on nonaccruing, past due, and other loans that may require special attention. Other factors include general conditions in local and national economies; loan portfolio composition and asset quality indicators; and internal factors such as changes in underwriting policies, credit administration practices, experience, ability and depth of lending management, among others. The allowance consists of four elements: (1) specific reserves for loans evaluated individually for impairment; (2) general reserves for each portfolio segment based on historical loan loss experience; (3) qualitative reserves judgmentally adjusted for local and national economic conditions, concentrations, portfolio composition, volume and severity of delinquencies and nonaccrual loans, trends of criticized and classified loans, changes in credit policies and underwriting standards, credit administration practices, and other factors as applicable for each portfolio segment; and (4) unallocated reserves. All outstanding loans are considered in evaluating the appropriateness of the allowance. 24 A breakdown of the allowance for loan losses as of September 30, 2022, December 31, 2021, and September 30, 2021, by class of financing receivable and allowance element, is presented in the following tables: As of September 30, 2022 Specific Reserves on Loans Evaluated Individually for Impairment General Reserves on Loans Based on Historical Loss Experience Reserves for Qualitative Factors Unallocated Reserves Total Reserves Commercial Real estate $ — $ 867,000 $ 4,708,000 $ — $ 5,575,000 Construction 6,000 173,000 942,000 — 1,121,000 Other 315,000 420,000 2,279,000 — 3,014,000 Municipal — — 160,000 — 160,000 Residential Term 99,000 102,000 2,346,000 — 2,547,000 Construction — 7,000 161,000 — 168,000 Home equity line of credit — 106,000 887,000 — 993,000 Consumer — 216,000 656,000 — 872,000 Unallocated — — — 1,937,000 1,937,000 $ 420,000 $ 1,891,000 $ 12,139,000 $ 1,937,000 $ 16,387,000 As of December 31, 2021 Specific Reserves on Loans Evaluated Individually for Impairment General Reserves on Loans Based on Historical Loss Experience Reserves for Qualitative Factors Unallocated Reserves Total Reserves Commercial Real estate $ 42,000 $ 831,000 $ 4,494,000 $ — $ 5,367,000 Construction 16,000 114,000 616,000 — 746,000 Other 381,000 382,000 2,067,000 — 2,830,000 Municipal — — 157,000 — 157,000 Residential Term 137,000 175,000 2,421,000 — 2,733,000 Construction — 10,000 138,000 — 148,000 Home equity line of credit — 101,000 824,000 — 925,000 Consumer — 243,000 590,000 — 833,000 Unallocated — — — 1,782,000 1,782,000 $ 576,000 $ 1,856,000 $ 11,307,000 $ 1,782,000 $ 15,521,000 25 As of September 30, 2021 Specific Reserves on Loans Evaluated Individually for Impairment General Reserves on Loans Based on Historical Loss Experience Reserves for Qualitative Factors Unallocated Reserves Total Reserves Commercial Real estate $ 138,000 $ 864,000 $ 5,497,000 $ — $ 6,499,000 Construction 18,000 117,000 744,000 — 879,000 Other 397,000 452,000 2,878,000 — 3,727,000 Municipal — — 189,000 — 189,000 Residential Term 129,000 189,000 2,443,000 — 2,761,000 Construction — 10,000 132,000 — 142,000 Home equity line of credit — 109,000 847,000 — 956,000 Consumer — 263,000 604,000 — 867,000 Unallocated — — — 1,487,000 1,487,000 $ 682,000 $ 2,004,000 $ 13,334,000 $ 1,487,000 $ 17,507,000 Qualitative adjustment factors are taken into consideration when determining reserve estimates. These adjustment factors are based upon Management's evaluation of various current conditions, including those listed below. • General economic conditions. • Credit quality trends with emphasis on loan delinquencies, nonaccrual levels, and classified loans. • Recent loss experience in particular segments of the portfolio. • Loan volumes and concentrations, including changes in mix. • Other factors, including changes in quality of the loan origination; loan policy changes; changes in credit risk management processes; Bank regulatory and external loan review examination results. Qualitative factors applied to the portfolio or segments of the portfolio may include judgments concerning general economic conditions that may affect credit quality, credit concentrations, the pace of portfolio growth, the direction of risk rating movements, policy exception levels, and delinquency levels; these qualitative factors are also considered in connection with the unallocated portion of our allowance for loan losses. The qualitative portion of the allowance for loan losses was 0.65 % of related loans as of September 30, 2022, compared to 0.69 % of related loans as of December 31, 2021. The qualitative portion increased $ 832,000 between December 31, 2021 and September 30, 2022 due to a mix of factors. These factors included changes in various macroeconomic measures used in the qualitative model, volume changes in certain portfolio segments, ongoing analysis of the loan portfolio in multiple stress scenarios, and performance of COVID-19 related loan modifications. The unallocated component of the allowance totaled $ 1,937,000 at September 30, 2022, or 11.8 % of the total reserve. This compares to $ 1,782,000 or 11.5 % as of December 31, 2021. Maintenance of an unallocated component reflects general imprecision related to portfolio growth along with lingering uncertainty regarding the potential impacts of COVID-19 and wind-down of related government stimulus programs on the loan portfolio. The allowance for loan losses as a percent of total loans stood at 0.88 % as of September 30, 2022, 0.94 % at December 31, 2021 and 1.08 % as of September 30, 2021. Commercial loans are comprised of three major classes; commercial real estate loans, commercial construction loans, and other commercial loans. Commercial real estate loans consist of mortgage loans to finance investments in real property such as multi-family residential, commercial/retail, office, industrial, hotels, educational, and other specific or mixed use properties. Commercial real estate loans are typically written with amortizing payment structures. Collateral values are determined based on appraisals and evaluations in accordance with established policy and regulatory guidelines. Commercial real estate loans typically have a loan-to-value ratio of up to 80 % based upon current valuation information at the time the loan is made. Commercial real estate loans are primarily paid by the cash flow generated from the real property, such as operating leases, rents, or other operating cash flows from the borrower. Commercial construction loans consist of loans to finance construction in a mix of owner- and non-owner occupied commercial real estate properties. Commercial construction loans typically have maturities of less than two years . Payment structures during the construction period are typically on an interest only basis, although principal payments may be established depending on the type of construction project being financed. During the construction phase, commercial construction loans are 26 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. Collateral valuation and loan-to-value guidelines follow those for commercial real estate loans. Other commercial loans consist of revolving and term loan obligations extended to business and corporate enterprises for the purpose of financing working capital and or capital investment. Collateral generally consists of pledges of business assets including, but not limited to, accounts receivable, inventory, plant and equipment, and/or real estate, if applicable. Commercial loans are primarily paid by the operating cash flow of the borrower. Commercial loans may be secured or unsecured. Other commercial loans also include loans made under the SBA PPP. These loans are unsecured and carry a 100% guarantee from the SBA. Municipal loans are comprised of loans to municipalities in Maine for capitalized expenditures, construction projects, or tax anticipation notes. All municipal loans are considered either general obligations of the municipality and are collateralized by the taxing ability of the municipality for repayment of debt. Residential loans are comprised of two classes: term loans and construction loans. Residential term loans consist of residential real estate loans held in the Company's loan portfolio made to borrowers who demonstrate the ability to make scheduled payments with full consideration to underwriting factors. Borrower qualifications include favorable credit history combined with supportive income requirements and loan-to-value ratios within established policy and regulatory guidelines. Collateral values are determined based on appraisals and evaluations in accordance with established policy and regulatory guidelines. Residential loans typically have a loan-to-value ratio of up to 80 % based on appraisal information at the time the loan is made. Collateral consists of mortgage liens on one- to four-family residential properties. Loans are offered with fixed or adjustable rates with amortization terms of up to thirty years . Residential construction loans typically consist of loans for the purpose of constructing single family residences to be owned and occupied by the borrower. Borrower qualifications include favorable credit history combined with supportive income requirements and loan-to-value ratios within established policy and regulatory guidelines. Residential construction loans normally have construction terms of one year or less and payment during the construction term is typically on an interest only basis from sources including interest reserves, borrower liquidity, and/or income. Residential construction loans will typically convert to permanent financing from the Company or have another financing commitment in place from an acceptable mortgage lender. Collateral valuation and loan-to-value guidelines are consistent with those for residential term loans. Home equity lines of credit are made to qualified individuals and are secured by senior or junior mortgage liens on owner occupied one- to four-family homes, condominiums, or vacation homes. The home equity line of credit typically has a variable interest rate and is billed as interest-only payments during the draw period. At the end of the draw period, the home equity line of credit is billed as a percentage of the principal balance plus all accrued interest. Loan maturities are normally 300 months. Borrower qualifications include favorable credit history combined with supportive income requirements and combined loan-to- value ratios usually not exceeding 80 % inclusive of priority liens. Collateral valuation guidelines follow those for residential real estate loans. Consumer loan products including personal lines of credit and amortizing loans made to qualified individuals for various purposes such as auto, recreational vehicles, debt consolidation, personal expenses, or overdraft protection. Borrower qualifications include favorable credit history combined with supportive income and collateral requirements within established policy guidelines. Consumer loans may be secured or unsecured. Construction, land, and land development (CLLD) loans, both commercial and residential, comprise a growing portion of the portfolio. CLLD loans represented 67.9 % of total Bank capital as of September 30, 2022 and remain below the regulatory guidance of 100.0 % of total Bank capital. Construction loans and non-owner-occupied commercial real estate loans represented 221.4 % of total Bank capital at September 30, 2022 , below the regulatory guidance of 300.0 % of total Bank capital. The process of establishing the allowance with respect to the commercial loan portfolio begins when a Loan Officer or Senior Officer (or designee) 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. 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. The methodology employs Management's judgment as to the level of losses on existing loans based on internal review of the loan portfolio, including an analysis of a borrower's current financial position, and the consideration of current and anticipated economic conditions and their potential effects on specific borrowers and or lines of business. 27 In determining the Company's ability to collect certain loans, Management also considers the fair value of underlying collateral. The risk rating system has eight levels, defined as follows: 1 Strong Credits rated "1" are characterized by borrowers fully responsible for the credit with excellent capacity to pay principal and interest. Loans rated "1" may be secured with acceptable forms of liquid collateral. 2 Above Average Credits rated "2" are characterized by borrowers that have better than average liquidity, capitalization, earnings, and/or cash flow with a consistent record of solid financial performance. 3 Satisfactory Credits rated "3" are characterized by borrowers with favorable liquidity, profitability, and financial condition with adequate cash flow to pay debt service. 4 Average Credits rated "4" are characterized by borrowers that present risk more than 1, 2 and 3 rated loans and merit an ordinary level of ongoing monitoring. Financial condition is on par or somewhat below industry averages while cash flow is generally adequate to meet debt service requirements. 5 Watch Credits rated "5" are characterized by borrowers that warrant greater monitoring due to financial condition or unresolved and identified risk factors. 6 Other Assets Especially Mentioned (OAEM) Loans in this category are currently protected but are potentially weak and constitute an undue and unwarranted credit risk, but not to the point of justifying a classification of substandard. OAEM have potential weaknesses which may, if not checked or corrected, weaken the asset or inadequately protect the Company's credit position at some future date. 7 Substandard Loans in this category are inadequately protected by the paying capacity of the borrower or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. Substandard loans are characterized by the distinct possibility that the Company may sustain some loss if the deficiencies are not corrected. 8 Doubtful Loans classified "Doubtful" have the same weaknesses as those classified substandard with the added characteristic that the weaknesses make collection or liquidation in full, based on currently existing facts, conditions, and values, highly questionable and improbable. The possibility of loss is high, but because of certain important and reasonably specific pending factors which may work to the advantage and strengthening of the asset, its classification as an estimated loss is deferred until its more exact status may be determined. The following table summarizes the risk ratings for the Company's commercial real estate, commercial construction, commercial other, and municipal loans as of September 30, 2022: Commercial Real Estate Commercial Construction Commercial Other Municipal Loans All Risk- Rated Loans 1 Strong $ — $ — $ 2,266,000 $ — $ 2,266,000 2 Above Average 7,506,000 141,000 23,364,000 45,998,000 77,009,000 3 Satisfactory 116,378,000 1,802,000 40,189,000 1,204,000 159,573,000 4 Average 423,914,000 85,195,000 202,337,000 1,500,000 712,946,000 5 Watch 89,568,000 41,898,000 40,338,000 — 171,804,000 6 OAEM 955,000 — 62,000 — 1,017,000 7 Substandard 387,000 — 1,554,000 — 1,941,000 8 Doubtful — — — — — Total $ 638,708,000 $ 129,036,000 $ 310,110,000 $ 48,702,000 $ 1,126,556,000 28 The following table summarizes the risk ratings for the Company's commercial real estate, commercial construction, commercial other, and municipal loans as of December 31, 2021: Commercial Real Estate Commercial Construction Commercial Other Municipal Loans All Risk- Rated Loans 1 Strong $ — $ — $ 2,118,000 $ — $ 2,118,000 2 Above Average 6,977,000 169,000 7,328,000 46,547,000 61,021,000 3 Satisfactory 98,473,000 2,589,000 60,787,000 349,000 162,198,000 4 Average 378,147,000 47,196,000 154,247,000 1,466,000 581,056,000 5 Watch 88,679,000 29,411,000 37,942,000 — 156,032,000 6 OAEM 3,482,000 — 52,000 — 3,534,000 7 Substandard 440,000 — 2,096,000 — 2,536,000 8 Doubtful — — — — — Total $ 576,198,000 $ 79,365,000 $ 264,570,000 $ 48,362,000 $ 968,495,000 The following table summarizes the risk ratings for the Company's commercial real estate, commercial construction, commercial other, and municipal loans as of September 30, 2021: Commercial Real Estate Commercial Construction Commercial Other Municipal Loans All Risk- Rated Loans 1 Strong $ — $ — $ 2,434,000 $ 8,000 $ 2,442,000 2 Above Average 9,220,000 175,000 7,144,000 38,787,000 55,326,000 3 Satisfactory 92,596,000 1,831,000 79,693,000 354,000 174,474,000 4 Average 355,252,000 47,003,000 155,189,000 1,467,000 558,911,000 5 Watch 79,885,000 24,293,000 38,505,000 — 142,683,000 6 OAEM 3,899,000 — 32,000 — 3,931,000 7 Substandard 9,225,000 — 5,124,000 — 14,349,000 8 Doubtful — — — — — Total $ 550,077,000 $ 73,302,000 $ 288,121,000 $ 40,616,000 $ 952,116,000 Commercial loans are generally charged off when all or a portion of the principal amount is determined to be uncollectible. This determination is based on circumstances specific to a borrower including repayment ability, analysis of collateral, and other factors as applicable. Residential loans are comprised of two classes: term loans, which include traditional amortizing home mortgages, and construction loans, which include loans for owner-occupied residential construction. Residential loans typically have a 75 % to 80 % loan to value based upon current appraisal information at the time the loan is made. Home equity loans and lines of credit are typically written to the same underwriting standards. Consumer loans are primarily amortizing loans to individuals collateralized by automobiles, pleasure craft, and recreation vehicles, typically with a maximum loan to value of 80 % to 90 % of the purchase price of the collateral. Consumer loans also include a small amount of unsecured short-term time notes to individuals. Residential loans, consumer loans, and home equity lines of credit are segregated into homogeneous pools with similar risk characteristics. Trends and current conditions are analyzed and historical loss experience is adjusted accordingly. Quantitative and qualitative adjustment factors for these segments are consistent with those for the commercial and municipal classes. Certain loans in the residential, home equity lines of credit, and consumer classes identified as having the potential for further deterioration are analyzed individually to confirm impairment status, and to determine the need for a specific reserve; however, there is no formal rating system used for these classes. Consumer loans greater than 120 days past due are generally charged off. Residential loans 90 days or more past due are placed on non-accrual status unless the loans are both well secured and in the process of collection. One- to four-family residential real estate loans and home equity loans are written down or charged-off no later than 180 days past due, or for residential real estate secured loans having a borrower in bankruptcy, within 60 days of receipt of notification of filing from the bankruptcy court, whichever is sooner. This is subject to completion of a current assessment of the value of the collateral with any outstanding loan balance in excess of the fair value of the property, less costs to sell, written down or charged-off. There were no changes to the Company's accounting policies or methodology used to estimate the allowance for loan losses during the nine months ended September 30, 2022. 29 The following table presents allowance for loan losses activity by class for the nine months and quarter ended September 30, 2022, and allowance for loan loss balances by class and related loan balances by class as of September 30, 2022: Commercial Municipal Residential Home Equity Line of Credit Consumer Unallocated Total Real Estate Construction Other Term Construction For the nine months ended September 30, 2022 Beginning balance $ 5,367,000 $ 746,000 $ 2,830,000 $ 157,000 $ 2,733,000 $ 148,000 $ 925,000 $ 833,000 $ 1,782,000 $ 15,521,000 Charge offs — — 272,000 — — — 29,000 318,000 — 619,000 Recoveries 16,000 — 11,000 — 27,000 — 3,000 128,000 — 185,000 Provision (credit) 192,000 375,000 445,000 3,000 ( 213,000 ) 20,000 94,000 229,000 155,000 1,300,000 Ending balance $ 5,575,000 $ 1,121,000 $ 3,014,000 $ 160,000 $ 2,547,000 $ 168,000 $ 993,000 $ 872,000 $ 1,937,000 $ 16,387,000 For the three months ended September 30, 2022 Beginning balance $ 5,480,000 $ 1,151,000 $ 2,948,000 $ 157,000 $ 2,592,000 $ 191,000 $ 966,000 $ 866,000 $ 1,850,000 $ 16,201,000 Charge offs — — 229,000 — — — — 31,000 — 260,000 Recoveries ( 1,000 ) — 9,000 — 16,000 — 2,000 20,000 — 46,000 Provision (credit) 96,000 ( 30,000 ) 286,000 3,000 ( 61,000 ) ( 23,000 ) 25,000 17,000 87,000 400,000 Ending balance $ 5,575,000 $ 1,121,000 $ 3,014,000 $ 160,000 $ 2,547,000 $ 168,000 $ 993,000 $ 872,000 $ 1,937,000 $ 16,387,000 Allowance for loan losses as of September 30, 2022 Ending balance specifically evaluated for impairment $ — $ 6,000 $ 315,000 $ — $ 99,000 $ — $ — $ — $ — $ 420,000 Ending balance collectively evaluated for impairment $ 5,575,000 $ 1,115,000 $ 2,699,000 $ 160,000 $ 2,448,000 $ 168,000 $ 993,000 $ 872,000 $ 1,937,000 $ 15,967,000 Related loan balances as of September 30, 2022 Ending balance $ 638,708,000 $ 129,036,000 $ 310,110,000 $ 48,702,000 $ 595,031,000 $ 41,631,000 $ 73,938,000 $ 20,819,000 $ — $ 1,857,975,000 Ending balance specifically evaluated for impairment $ 1,295,000 $ 686,000 $ 951,000 $ — $ 3,176,000 $ — $ 247,000 $ — $ — $ 6,355,000 Ending balance collectively evaluated for impairment $ 637,413,000 $ 128,350,000 $ 309,159,000 $ 48,702,000 $ 591,855,000 $ 41,631,000 $ 73,691,000 $ 20,819,000 $ — $ 1,851,620,000 30 The following table presents allowance for loan losses activity by class for the year ended December 31, 2021 and allowance for loan loss balances by class and related loan balances by class as of December 31, 2021: Commercial Municipal Residential Home Equity Line of Credit Consumer Unallocated Total Real Estate Construction Other Term Construction For the year ended December 31, 2021 Beginning balance $ 5,178,000 $ 662,000 $ 3,438,000 $ 171,000 $ 2,579,000 $ 102,000 $ 1,211,000 $ 778,000 $ 2,134,000 $ 16,253,000 Charge offs 106,000 — 288,000 — 42,000 — — 312,000 — 748,000 Recoveries 95,000 — 84,000 — 66,000 — 61,000 85,000 — 391,000 Provision (credit) 200,000 84,000 ( 404,000 ) ( 14,000 ) 130,000 46,000 ( 347,000 ) 282,000 ( 352,000 ) ( 375,000 ) Ending balance $ 5,367,000 $ 746,000 $ 2,830,000 $ 157,000 $ 2,733,000 $ 148,000 $ 925,000 $ 833,000 $ 1,782,000 $ 15,521,000 Allowance for loan losses as of December 31, 2021 Ending balance specifically evaluated for impairment $ 42,000 $ 16,000 $ 381,000 $ — $ 137,000 $ — $ — $ — $ — $ 576,000 Ending balance collectively evaluated for impairment $ 5,325,000 $ 730,000 $ 2,449,000 $ 157,000 $ 2,596,000 $ 148,000 $ 925,000 $ 833,000 $ 1,782,000 $ 14,945,000 Related loan balances as of December 31, 2021 Ending balance $ 576,198,000 $ 79,365,000 $ 264,570,000 $ 48,362,000 $ 550,783,000 $ 31,763,000 $ 73,632,000 $ 22,976,000 $ — $ 1,647,649,000 Ending balance specifically evaluated for impairment $ 1,428,000 $ 689,000 $ 1,303,000 $ — $ 8,173,000 $ — $ 457,000 $ 2,000 $ — $ 12,052,000 Ending balance collectively evaluated for impairment $ 574,770,000 $ 78,676,000 $ 263,267,000 $ 48,362,000 $ 542,610,000 $ 31,763,000 $ 73,175,000 $ 22,974,000 $ — $ 1,635,597,000 31 The following table presents allowance for loan losses activity by class for the nine months and quarter ended September 30, 2021, and allowance for loan loss balances by class and related loan balances by class as of September 30, 2021: Commercial Municipal Residential Home Equity Line of Credit Consumer Unallocated Total Real Estate Construction Other Term Construction For the nine months ended September 30, 2021 Beginning balance $ 5,178,000 $ 662,000 $ 3,438,000 $ 171,000 $ 2,579,000 $ 102,000 $ 1,211,000 $ 778,000 $ 2,134,000 $ 16,253,000 Charge offs 71,000 — 286,000 — 41,000 — — 239,000 — 637,000 Recoveries 95,000 — 83,000 — 12,000 — 60,000 66,000 — 316,000 Provision (credit) 1,297,000 217,000 492,000 18,000 211,000 40,000 ( 315,000 ) 262,000 ( 647,000 ) 1,575,000 Ending balance $ 6,499,000 $ 879,000 $ 3,727,000 $ 189,000 $ 2,761,000 $ 142,000 $ 956,000 $ 867,000 $ 1,487,000 $ 17,507,000 For the three months ended September 30, 2021 Beginning balance $ 6,088,000 $ 750,000 $ 3,757,000 $ 187,000 $ 2,896,000 $ 160,000 $ 959,000 $ 892,000 $ 1,345,000 $ 17,034,000 Charge offs 66,000 — — — — — — 92,000 — 158,000 Recoveries — — 81,000 — 3,000 — 12,000 10,000 — 106,000 Provision (credit) 477,000 129,000 ( 111,000 ) 2,000 ( 138,000 ) ( 18,000 ) ( 15,000 ) 57,000 142,000 525,000 Ending balance $ 6,499,000 $ 879,000 $ 3,727,000 $ 189,000 $ 2,761,000 $ 142,000 $ 956,000 $ 867,000 $ 1,487,000 $ 17,507,000 Allowance for loan losses as of September 30, 2021 Ending balance specifically evaluated for impairment $ 138,000 $ 18,000 $ 397,000 $ — $ 129,000 $ — $ — $ — $ — $ 682,000 Ending balance collectively evaluated for impairment $ 6,361,000 $ 861,000 $ 3,330,000 $ 189,000 $ 2,632,000 $ 142,000 $ 956,000 $ 867,000 $ 1,487,000 $ 16,825,000 Related loan balances as of September 30, 2021 Ending balance $ 550,077,000 $ 73,302,000 $ 288,121,000 $ 40,616,000 $ 537,811,000 $ 29,358,000 $ 74,594,000 $ 23,333,000 $ — $ 1,617,212,000 Ending balance specifically evaluated for impairment $ 2,800,000 $ 705,000 $ 1,755,000 $ — $ 8,782,000 $ — $ 503,000 $ 4,000 $ — $ 14,549,000 Ending balance collectively evaluated for impairment $ 547,277,000 $ 72,597,000 $ 286,366,000 $ 40,616,000 $ 529,029,000 $ 29,358,000 $ 74,091,000 $ 23,329,000 $ — $ 1,602,663,000 32 Note 5 – Stock-Based Compensation At the 2010 Annual Meeting, shareholders approved the 2010 Equity Incentive Plan (the "2010 Plan"). The 2010 Plan expired on April 28, 2020, leaving 215,513 shares not issued. At the 2020 Annual Meeting, shareholders approved the 2020 Equity Incentive Plan (the "2020 Plan"). The 2020 Plan reserves 400,000 shares of common stock for issuance in connection with stock options, restricted stock awards, and other equity based awards to attract and retain the best available personnel, provide additional incentive to officers, employees, and non-employee Directors, and promote the success of the Company. Such grants and awards will be structured in a manner that does not encourage the recipients to expose the Company to undue or inappropriate risk. Options issued under the 2020 Plan qualify for treatment as incentive stock options for purposes of Section 422 of the Internal Revenue Code. Other compensation under the 2020 Plan qualifies as performance-based for purposes of Section 162(m) of the Internal Revenue Code, and satisfies NASDAQ guidelines relating to equity compensation. As of September 30, 2022, 184,487 shares of restricted stock had been granted under the 2010 Plan and 68,934 shares under the 2020 Plan, of which 81,777 shares remain restricted as of September 30, 2022 as detailed in the following table: Year Granted Vesting Term (In Years) Shares Remaining Term (In Years) 2018 5.0 6,184 0.3 2020 3.0 20,342 0.3 2021 3.0 27,172 1.3 2022 3.0 24,829 2.3 2022 2.5 1,250 2.3 2022 1.0 2,000 0.3 81,777 1.3 The compensation cost related to these non-vested restricted stock grants is $ 2,319,000 and is recognized over the vesting terms of each grant. In the nine months ended September 30, 2022, $ 610,000 of expense was recognized for these restricted shares, leaving $ 994,000 in unrecognized expense as of September 30, 2022. In the nine months ended September 30, 2021, $ 672,000 of expense was recognized for restricted shares, leaving $ 855,000 in unrecognized expense as of September 30, 2021. Note 6 – Common Stock Proceeds from sale of common stock totaled $ 588,000 and $ 514,000 for the nine months ended September 30, 2022 and 2021, respectively. 33 Note 7 – Earnings Per Share The following table sets forth the computation of basic and diluted earnings per share (EPS) for the nine months ended September 30, 2022 and 2021: Income (Numerator) Shares (Denominator) Per-Share Amount For the nine months ended September 30, 2022 Net income as reported $ 29,793,000 Basic EPS: Income available to common shareholders 29,793,000 10,927,920 $ 2.73 Effect of dilutive securities: restricted stock 98,651 Diluted EPS: Income available to common shareholders plus assumed conversions $ 29,793,000 11,026,571 $ 2.70 For the nine months ended September 30, 2021 Net income as reported $ 26,723,000 Basic EPS: Income available to common shareholders 26,723,000 10,901,793 $ 2.45 Effect of dilutive securities: restricted stock 82,157 Diluted EPS: Income available to common shareholders plus assumed conversions $ 26,723,000 10,983,950 $ 2.43 The following table sets forth the computation of basic and diluted earnings per share (EPS) for the quarters ended September 30, 2022 and 2021: Income (Numerator) Shares (Denominator) Per-Share Amount For the quarter ended September 30, 2022 Net income as reported $ 10,091,000 Basic EPS: Income available to common shareholders 10,091,000 10,934,492 $ 0.92 Effect of dilutive securities: restricted stock 100,899 Diluted EPS: Income available to common shareholders plus assumed conversions $ 10,091,000 11,035,391 $ 0.91 For the quarter ended September 30, 2021 Net income as reported $ 9,014,000 Basic EPS: Income available to common shareholders 9,014,000 10,909,338 $ 0.83 Effect of dilutive securities: restricted stock 81,811 Diluted EPS: Income available to common shareholders plus assumed conversions $ 9,014,000 10,991,149 $ 0.82 Note 8 – Employee Benefit Plans 401(k) Plan The Bank has a defined contribution plan available to substantially all employees who have completed three months of service. Employees may contribute up to Internal Revenue Service ("IRS") determined limits and the Bank may match employee contributions not to exceed 3.0 % of compensation depending on contribution level. The Plan is a safe harbor plan whereby the Bank also contributes a minimum 3.0 % of annual compensation to the plan for all eligible employees. The expense related to the 401(k) plan was $ 752,000 and $ 593,000 for the nine months ended September 30, 2022 and 2021, respectively. 34 Deferred Compensation and Supplemental Retirement Benefits The Bank also provides unfunded supplemental retirement benefits for certain officers, payable in installments over 20 years upon retirement or death. The agreements consist of individual contracts with differing characteristics that, when taken together, do not constitute a postretirement plan. There are no active officers eligible for these benefits. The costs for these benefits are recognized over the service periods of the participating officers in accordance with Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") Topic 712 "Compensation – Nonretirement Postemployment Benefits". The expense of these supplemental retirement benefits was $ 231,000 and $ 126,000 for the nine months ended September 30, 2022 and 2021, respectively. As of September 30, 2022, the associated accrued liability included in other liabilities in the balance sheet was $ 2,888,000 compared to $ 2,872,000 and $ 2,902,000 at December 31, 2021 and September 30, 2021, respectively. Postretirement Benefit Plans The Bank sponsors two postretirement benefit plans. One plan currently provides a subsidy for health insurance premiums to certain retired employees; these subsidies are based on years of service and range between $ 40 and $ 1,200 per month per person. The other plan provides life insurance coverage to certain retired employees and health insurance for retired directors. None of these plans are prefunded. The Company utilizes FASB ASC Topic 712 to recognize the overfunded or underfunded status of a defined benefit postretirement plan as an asset or liability in its balance sheet and to recognize changes in the funded status in the year in which the changes occur through comprehensive income (loss). The following table sets forth the accumulated postretirement benefit obligation and funded status: At or for the nine months ended September 30, 2022 2021 Change in benefit obligation Benefit obligation at beginning of year $ 1,353,000 $ 1,523,000 Interest cost 24,000 21,000 Benefits paid ( 66,000 ) ( 72,000 ) Benefit obligation at end of period $ 1,311,000 $ 1,472,000 Funded status Benefit obligation at end of period $ ( 1,311,000 ) $ ( 1,472,000 ) Unamortized gain ( 133,000 ) ( 35,000 ) Accrued benefit cost at end of period $ ( 1,444,000 ) $ ( 1,507,000 ) The following table sets forth the net periodic pension cost: For the nine months ended September 30, For the quarter ended September 30, 2022 2021 2022 2021 Components of net periodic benefit cost Interest cost $ 24,000 $ 21,000 $ 7,000 $ 6,000 Net periodic benefit cost $ 24,000 $ 21,000 $ 7,000 $ 6,000 Amounts not yet reflected in net periodic benefit cost and included in accumulated other comprehensive income are as follows: September 30, 2022 December 31, 2021 September 30, 2021 Unamortized net actuarial gain $ 133,000 $ 133,000 $ 35,000 Deferred tax expense ( 28,000 ) ( 28,000 ) ( 7,000 ) Net unrecognized postretirement benefits included in accumulated other comprehensive income $ 105,000 $ 105,000 $ 28,000 A weighted average discount rate of 2.00 % was used in determining the accumulated benefit obligation and the net periodic benefit cost. The assumed health care cost trend rate is 7.00 %. The measurement date for benefit obligations was as of year-end for prior years presented. The expected benefit payments for all of 2022 are $ 87,000 . Plan expense for 2022 is estimated to be $ 33,000 . A 1.00% change in trend assumptions would create an approximate change in the same direction of $ 100,000 in the accumulated benefit obligation, $ 7,000 in the interest cost, and $ 1,000 in the service cost. 35 Note 9 - Other Comprehensive Income (Loss) The following table summarizes activity in the unrealized gain or loss on available for sale securities included in other comprehensive income (loss) for the nine months and quarters ended September 30, 2022 and 2021. For the nine months ended September 30, For the quarter ended September 30, 2022 2021 2022 2021 Balance at beginning of period $ ( 1,718,000 ) $ 5,009,000 $ ( 32,795,000 ) $ 1,190,000 Unrealized losses arising during the period ( 58,149,000 ) ( 7,112,000 ) ( 18,812,000 ) ( 2,442,000 ) Reclassification of net realized (gains) losses during the period ( 7,000 ) ( 22,000 ) ( 6,000 ) 142,000 Related deferred taxes 12,213,000 1,498,000 3,952,000 483,000 Net change ( 45,943,000 ) ( 5,636,000 ) ( 14,866,000 ) ( 1,817,000 ) Balance at end of period $ ( 47,661,000 ) $ ( 627,000 ) $ ( 47,661,000 ) $ ( 627,000 ) The reclassification of realized gains is included in the net securities gains line of the consolidated statements of income and comprehensive income and the tax effect is included in the income tax expense line of the same statement. The following table summarizes activity in the unrealized loss on securities transferred from available for sale to held to maturity included in other comprehensive income for the nine months and quarters ended September 30, 2022 and 2021. For the nine months ended September 30, For the quarter ended September 30, 2022 2021 2022 2021 Balance at beginning of period $ ( 87,000 ) $ ( 133,000 ) $ ( 73,000 ) $ ( 113,000 ) Amortization of net unrealized gains 25,000 43,000 7,000 18,000 Related deferred taxes ( 5,000 ) ( 9,000 ) ( 1,000 ) ( 4,000 ) Net change 20,000 34,000 6,000 14,000 Balance at end of period $ ( 67,000 ) $ ( 99,000 ) $ ( 67,000 ) $ ( 99,000 ) The following table presents the effect of the Company's derivative financial instruments included in other comprehensive income (loss) for the nine months and quarters ended September 30, 2022 and 2021. For the nine months ended September 30, For the quarter ended September 30, 2022 2021 2022 2021 Balance at beginning of period $ — $ ( 4,932,000 ) $ 146,000 $ ( 2,083,000 ) Unrealized gains on cash flow hedging derivatives arising during the period 633,000 4,297,000 448,000 691,000 Related deferred taxes ( 133,000 ) ( 902,000 ) ( 94,000 ) ( 145,000 ) Net change 500,000 3,395,000 354,000 546,000 Balance at end of period $ 500,000 $ ( 1,537,000 ) $ 500,000 $ ( 1,537,000 ) There was no activity in the unrealized gain or loss on postretirement benefits included in other comprehensive income (loss) for the nine months and quarters ended September 30, 2022 and 2021. Note 10 - Financial Derivative Instruments The Bank uses derivative financial instruments for risk management purposes and not for trading or speculative purposes. As part of its overall asset and liability management strategy, the Bank periodically uses derivative instruments to minimize significant unplanned fluctuations in earnings and cash flows caused by interest rate volatility. The Bank’s interest rate risk management strategy involves modifying the re-pricing characteristics of certain assets or liabilities so that changes in interest rates do not have a significant effect on net interest income. 36 The Bank recognizes its derivative instruments in the consolidated balance sheet at fair value. On the date the derivative instrument is entered into, the Bank designates whether the derivative is part of a hedging relationship (i.e., cash flow or fair value hedge). The Bank formally documents relationships between hedging instruments and hedged items, as well as its risk management objective and strategy for undertaking hedge transactions. The Bank also assesses, both at the hedge’s inception and on an ongoing basis, whether the derivatives used in hedging transactions are highly effective in offsetting the changes in cash flows or fair values of hedged items. Changes in fair value of derivative instruments that are highly effective and qualify as cash flow hedges are recorded in other comprehensive income (loss). Any ineffective portion is recorded in earnings. The Bank discontinues hedge accounting when it is determined that the derivative is no longer highly effective in offsetting changes of the hedged risk on the hedged item, or management determines that the designation of the derivative as a hedging instrument is no longer appropriate. The details of the interest rate swap agreements are as follows: September 30, 2022 December 31, 2021 September 30, 2021 Effective Date Maturity Date Variable Index Received Fixed Rate Paid Presentation on Consolidated Balance Sheet Notional Amount Fair Value Notional Amount Fair Value Notional Amount Fair Value 08/02/2019 08/02/2024 1-Month USD Libor 1.590 % Other Liabilities — — — — 12,500,000 ( 381,000 ) 08/05/2019 08/05/2024 1-Month USD Libor 1.420 % Other Liabilities — — — — 12,500,000 ( 320,000 ) 02/12/2020 02/12/2023 3-Month USD Libor 1.486 % Other Liabilities — — — — 25,000,000 ( 438,000 ) 02/12/2020 02/12/2024 3-Month USD Libor 1.477 % Other Liabilities — — — — 25,000,000 ( 601,000 ) 06/28/2021 06/28/2026 1-Month USD Libor 1.158 % Other Liabilities — — — — 50,000,000 ( 594,000 ) 03/13/2020 03/13/2025 3-Month USD Libor 0.855 % Other Liabilities — — — — 25,000,000 ( 85,000 ) 03/13/2020 03/13/2030 3-Month USD Libor 1.029 % Other Assets — — — — 20,000,000 644,000 04/07/2020 04/07/2023 3-Month USD Libor 0.599 % Other Liabilities — — — — 20,000,000 ( 106,000 ) 04/07/2020 04/07/2024 3-Month USD Libor 0.643 % Other Liabilities — — — — 20,000,000 ( 64,000 ) 04/27/2022 10/27/2023 USD-SOFR-COMPOUND 2.498 % Other Assets 10,000,000 179,000 — — — — 04/27/2022 01/27/2024 USD-SOFR-COMPOUND 2.576 % Other Assets 10,000,000 212,000 — — — — 04/27/2022 04/27/2024 USD-SOFR-COMPOUND 2.619 % Other Assets 10,000,000 242,000 — — — — $ 30,000,000 $ 633,000 $ — $ — $ 210,000,000 $( 1,945,000 ) The Company would reclassify unrealized gains or losses accounted for within accumulated other comprehensive income (loss) into earnings if the interest rate swaps were to become ineffective or the swaps were to terminate. In the fourth quarter 2021, the Bank terminated its then open interest rate swap positions in order to de-lever the balance sheet and reset wholesale funding costs. A one-time gain of $ 336,000 was recognized in non-interest income in the fourth quarter 2021. Amounts paid or received under the swaps are reported in interest expense in the consolidated statement of income, and in interest paid in the consolidated statement of cash flows. 37 Customer loan derivatives The Bank will enter into interest rate swaps with qualified commercial customers. Through these arrangements, the Bank is able to provide a means for a loan customer to obtain a long-term fixed rate, while it simultaneously contracts with an approved, highly-rated, third-party financial institution as counterparty to swap the fixed rate for a variable rate. Such loan level arrangements are not designated as hedges for accounting purposes, and are recorded at fair value in the Company’s consolidated balance sheet. At September 30, 2022 and 2021, and December 31, 2021, there were six customer loan swap arrangements in place, detailed below: September 30, 2022 December 31, 2021 September 30, 2021 Presentation on Consolidated Balance Sheet Number of Positions Notional Amount Fair Value Number of Positions Notional Amount Fair Value Number of Positions Notional Amount Fair Value Pay Fixed, Receive Variable Other Assets 6 $ 38,628,000 $ 5,365,000 3 $ 15,765,000 $ 789,000 3 $ 15,885,000 $ 801,000 Pay Fixed, Receive Variable Other Liabilities — — — 3 24,604,000 ( 1,802,000 ) 3 24,768,000 ( 1,862,000 ) 6 38,628,000 5,365,000 6 40,369,000 ( 1,013,000 ) 6 40,653,000 ( 1,061,000 ) Receive Fixed, Pay Variable Other Assets — — — 3 24,604,000 1,802,000 3 24,768,000 1,862,000 Receive Fixed, Pay Variable Other Liabilities 6 38,628,000 ( 5,365,000 ) 3 15,765,000 ( 789,000 ) 3 15,885,000 ( 801,000 ) 6 38,628,000 ( 5,365,000 ) 6 40,369,000 1,013,000 6 40,653,000 1,061,000 Total 12 $ 77,256,000 $ — 12 $ 80,738,000 $ — 12 $ 81,306,000 $ — Derivative collateral The Bank has entered into a master netting arrangement with its counterparty and settles payments with the counterparty as necessary. The Bank's arrangement with its institutional counterparty requires it to post cash or other assets as collateral for its various loan swap contracts in a net liability position based on their fair values and the Bank's credit rating or receive cash collateral for contracts in a net asset position as requested. At September 30, 2022, there was no collateral posted on its swap contracts or required amount to be pledged. Cessation of LIBOR The Company is aware that 1) certain tenors of US Dollar ("USD") denominated London Interbank Offering Rate ("LIBOR") indices ceased to be published after December 31, 2021, while other tenors are expected to continue being published until June 30, 2023, and 2) no new contracts referencing LIBOR are to be written after December 31, 2021. The Federal Reserve formed the Alternative Reference Rates Committee ("ARRC") to guide the transition process in the United States. ARRC has issued a number of recommendations including the adoption of the Secured Overnight Financing Rate ("SOFR") as a replacement for LIBOR. The International Swap and Derivatives Association ("ISDA"), the organization that oversees and guides swap and derivatives markets and participants, continues to work on transitions and has issued a voluntary fallback protocol for market participants. The Company has adopted SOFR as its replacement reference rate index for new transactions. Each of the customer loan interest rate swap contracts the Company has in place as of September 30, 2022 is tied to a LIBOR tenor expected to be published until June 2023. The six contracts shown in the table immediately above have maturity dates of December 19, 2029, August 21, 2030, April 1, 2031, July 1, 2035, October 1, 2035 and October 1, 2039. It is anticipated that necessary actions to amend these legacy contracts and designate a replacement reference rate index will be undertaken in late 2022. 38 Note 11 – Mortgage Servicing Rights FASB ASC Topic 860 "Transfers and Servicing", requires all separately recognized servicing assets and servicing liabilities to be initially measured at fair value, if practicable. The Company's servicing assets and servicing liabilities are reported using the amortization method and carried at the lower of amortized cost or fair value by strata. In evaluating the carrying values of mortgage servicing rights, the Company obtains third party valuations based on loan level data including note rate, type, and term of the underlying loans. The model utilizes several assumptions, the most significant of which is loan prepayments, calculated using a three-months moving average of weekly prepayment data published by the Public Securities Association (PSA) and modeled against the serviced loan portfolio, and the discount rate to discount future cash flows. As of September 30, 2022, the prepayment assumption using the PSA model was 135, which translates into an anticipated prepayment rate of 6.48 %. The discount rate is 9.00 %. Other assumptions include delinquency rates, foreclosure rates, servicing cost inflation, and annual unit loan cost. All assumptions are adjusted periodically to reflect current circumstances. Amortization of mortgage servicing rights, as well as write-offs due to prepayments of the related mortgage loans, are recorded as a charge against mortgage servicing fee income. For the nine months ended September 30, 2022 and 2021, servicing rights capitalized totaled $ 299,000 and $ 859,000 , respectively. Servicing rights amortized for the nine-month periods ended September 30, 2022 and 2021 were $ 402,000 and $ 485,000 , respectively. The fair value of servicing rights was $ 3,789,000 , $ 3,041,000 , and $ 2,757,000 at September 30, 2022, December 31, 2021 and September 30, 2021, respectively. The Bank serviced loans for others totaling $ 348,589,000 , $ 356,522,000 , and $ 353,633,000 at September 30, 2022, December 31, 2021, and September 30, 2021, respectively. The Bank recorded an impairment reserve as of September 30, 2021 and December 31, 2021 for strata with a fair value lower than cost. There was no impairment reserve as of September 30, 2022. Mortgage servicing rights are included in other assets and detailed in the following table: September 30, 2022 December 31, 2021 September 30, 2021 Mortgage servicing rights $ 8,640,000 $ 8,341,000 $ 8,158,000 Accumulated amortization ( 6,046,000 ) ( 5,644,000 ) ( 5,470,000 ) Amortized cost 2,594,000 2,697,000 2,688,000 Impairment reserve — ( 26,000 ) ( 91,000 ) Carrying value $ 2,594,000 $ 2,671,000 $ 2,597,000 Note 12 – Income Taxes FASB ASC Topic 740 "Income Taxes" defines the criteria that an individual tax position must satisfy for some or all of the benefits of that position to be recognized in a company's financial statements. Topic 740 prescribes a recognition threshold of more-likely-than-not, and a measurement attribute for all tax positions taken or expected to be taken on a tax return, in order for those tax positions to be recognized in the financial statements. The Company is currently open to audit under the statute of limitations by the IRS for the years ended December 31, 2019 through 2021. Note 13 - Certificates of Deposit The following table represents the breakdown of certificates of deposit at September 30, 2022 and 2021, and at December 31, 2021: September 30, 2022 December 31, 2021 September 30, 2021 Certificates of deposit < $100,000 $ 407,344,000 $ 252,568,000 $ 194,373,000 Certificates $100,000 to $250,000 295,112,000 258,211,000 263,860,000 Certificates $250,000 and over 83,720,000 55,426,000 56,334,000 $ 786,176,000 $ 566,205,000 $ 514,567,000 Note 14 – Reclassifications Certain items from the prior year were reclassified in the consolidated financial statements to conform with the current year presentation. These do not have a material impact on the consolidated balance sheet or statement of income and comprehensive income presentations. 39 Note 15 – Fair Value Certain assets and liabilities are recorded at fair value to provide additional insight into the Company's quality of earnings. Some of these assets and liabilities are measured on a recurring basis while others are measured on a nonrecurring basis, with the determination based upon applicable existing accounting pronouncements. For example, securities available for sale are recorded at fair value on a recurring basis. Other assets, such as other real estate owned and impaired loans, are recorded at fair value on a nonrecurring basis using the lower of cost or market methodology to determine impairment of individual assets. The Company groups assets and liabilities, which are recorded at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value. A financial instrument's level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement (with level 1 considered highest and level 3 considered lowest). A brief description of each level follows: Level 1 - Valuation is based upon quoted prices for identical instruments in active markets. Level 2 - Valuation is based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market. Level 3 - Valuation is generated from model-based techniques that use at least one significant assumption not observable in the market. These unobservable assumptions reflect estimates that market participants would use in pricing the asset or liability. Valuation includes use of discounted cash flow models and similar techniques. The fair value methods and assumptions for the Company's financial instruments and other assets measured at fair value are set forth below. Investment Securities The fair values of investment securities are estimated by independent providers using a market approach with observable inputs, including matrix pricing and recent transactions. In obtaining such valuation information from third parties, the Company has evaluated their valuation methodologies used to develop the fair values in order to determine whether the valuations are representative of an exit price in the Company's principal markets. The Company's principal markets for its securities portfolios are the secondary institutional markets, with an exit price that is predominantly reflective of bid level pricing in those markets. Fair values are calculated based on the value of one unit without regard to any premium or discount that may result from concentrations of ownership of a financial instrument, possible tax ramifications, or estimated transaction costs. If these considerations had been incorporated into the fair value estimates, the aggregate fair value could have been changed. The carrying values of restricted equity securities approximate fair values. As such, the Company classifies investment securities as Level 2. Loans Fair values are estimated for portfolios of loans are based on an exit pricing notion. The fair values of performing loans are calculated by discounting scheduled cash flows through the estimated maturity using estimated market discount rates that reflect the credit and interest risk inherent in the loan. The estimates of maturity are based on the Company's historical experience with repayments for each loan classification, modified, as required, by an estimate of the effect of current economic and lending conditions, and the effects of estimated prepayments. Assumptions regarding credit risk, cash flows, and discount rates are judgmentally determined using available market information and specific borrower information. Management has made estimates of fair value using discount rates that it believes to be reasonable. However, because there is no market for many of these financial instruments, Management has no basis to determine whether the fair value presented above would be indicative of the value negotiated in an actual sale. As such, the Company classifies loans as Level 3, except for certain collateral-dependent impaired loans. Fair values of impaired loans are based on estimated cash flows and are discounted using a rate commensurate with the risk associated with the estimated cash flows, or if collateral dependent, discounted to the appraised value of the collateral as determined by reference to sale prices of similar properties, less costs to sell. As such, the Company classifies collateral dependent impaired loans for which a specific reserve results in a fair value measure as Level 2. All other impaired loans are classified as Level 3. Other Real Estate Owned Real estate acquired through foreclosure is initially recorded at fair value. The fair value of other real estate owned is based on property appraisals and an analysis of similar properties currently available. As such, the Company records other real estate owned as nonrecurring Level 2. Mortgage Servicing Rights Mortgage servicing rights represent the value associated with servicing residential mortgage loans. Servicing assets and servicing liabilities are reported using the amortization method and compared to fair value for impairment. In evaluating the fair 40 values of mortgage servicing rights, the Company obtains third party valuations based on loan level data including note rate, type, and term of the underlying loans. As such, the Company classifies mortgage servicing rights as Level 2. Time Deposits The fair value of maturity deposits is based on the discounted value of contractual cash flows using a replacement cost of funds approach. The discount rate is estimated using the cost of funds borrowing rate in the market. As such, the Company classifies time deposits as Level 2. Borrowed Funds The fair value of borrowed funds is based on the discounted value of contractual cash flows. The discount rate is estimated using the rates currently available for borrowings of similar remaining maturities. As such, the Company classifies borrowed funds as Level 2. Derivatives The fair value of interest rate swaps is determined using inputs that are observable in the market place obtained from third parties including yield curves, publicly available volatilities, and floating indexes and, accordingly, are classified as Level 2 inputs. The credit value adjustments associated with derivatives utilize Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default by the Company and its counterparties. As of September 30, 2022 and 2021, and December 31, 2021, the Company has assessed the significance of the impact of the credit valuation adjustments on the overall valuation of its derivative positions and has determined that the credit valuation adjustments are not significant to the overall valuation of its derivatives due to collateral postings. Customer Loan Derivatives The valuation of the Company’s customer loan derivatives is obtained from a third-party pricing service and is determined using a discounted cash flow analysis on the expected cash flows of each derivative. The pricing analysis is based on observable inputs for the contractual terms of the derivatives, including the period to maturity and interest rate curves. The Company incorporates credit valuation adjustments to appropriately reflect both its own nonperformance risk and the respective counterparty’s nonperformance risk in the fair value measurements. In adjusting the fair value of its derivative contracts for the effect of nonperformance risk, the Company has considered the impact of master netting arrangements and any applicable credit enhancements, such as collateral postings. Limitations Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument. These values do not reflect any premium or discount that could result from offering for sale at one time the Company's entire holdings of a particular financial instrument. Because no market exists for a significant portion of the Company's financial instruments, fair value estimates are based on Management's judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments, and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates. Fair value estimates are based on existing on- and off-balance-sheet financial instruments without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments. Other significant assets and liabilities that are not considered financial instruments include the deferred tax asset, premises and equipment, and other real estate owned. In addition, tax ramifications related to the realization of the unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in any of the estimates. 41 Assets and Liabilities Recorded at Fair Value on a Recurring Basis The following tables present the balances of assets and liabilities that were measured at fair value on a recurring basis as of September 30, 2022, December 31, 2021 and September 30, 2021. At September 30, 2022 Level 1 Level 2 Level 3 Total Securities available for sale U.S. Government-sponsored agencies $ — $ 19,144,000 $ — $ 19,144,000 Mortgage-backed securities — 229,178,000 — 229,178,000 State and political subdivisions — 31,106,000 — 31,106,000 Asset-backed securities — 3,840,000 — 3,840,000 Total securities available for sale — 283,268,000 — 283,268,000 Interest rate swap agreements — 633,000 — 633,000 Customer loan interest swap agreements — 5,364,000 — 5,364,000 Total interest rate swap agreements — 5,997,000 — 5,997,000 Total assets $ — $ 289,265,000 $ — $ 289,265,000 At September 30, 2022 Level 1 Level 2 Level 3 Total Customer loan interest swap agreements $ — $ 5,364,000 $ — $ 5,364,000 Total liabilities $ — $ 5,364,000 $ — $ 5,364,000 At December 31, 2021 Level 1 Level 2 Level 3 Total Securities available for sale U.S. Government-sponsored agencies $ — $ 21,899,000 $ — $ 21,899,000 Mortgage-backed securities — 254,900,000 — 254,900,000 State and political subdivisions — 39,122,000 — 39,122,000 Asset-backed securities — 4,645,000 — 4,645,000 Total securities available for sale — 320,566,000 — 320,566,000 Customer loan interest swap agreements — 2,591,000 — 2,591,000 Total assets $ — $ 323,157,000 $ — $ 323,157,000 At December 31, 2021 Level 1 Level 2 Level 3 Total Customer loan interest swap agreements $ — $ 2,591,000 $ — $ 2,591,000 Total liabilities $ — $ 2,591,000 $ — $ 2,591,000 42 At September 30, 2021 Level 1 Level 2 Level 3 Total Securities available for sale U.S. Government-sponsored agencies $ — $ 21,939,000 $ — $ 21,939,000 Mortgage-backed securities — 247,253,000 — 247,253,000 State and political subdivisions — 35,179,000 — 35,179,000 Asset-backed securities — 4,853,000 — 4,853,000 Total securities available for sale — 309,224,000 — 309,224,000 Interest rate swap agreements — 644,000 — 644,000 Customer loan interest swap agreements — 2,663,000 — 2,663,000 Total interest swap agreements — 3,307,000 — 3,307,000 Total assets $ — $ 312,531,000 $ — $ 312,531,000 At September 30, 2021 Level 1 Level 2 Level 3 Total Interest rate swap agreements $ — $ 2,589,000 $ — $ 2,589,000 Customer loan interest swap agreements — 2,663,000 — 2,663,000 Total liabilities $ — $ 5,252,000 $ — $ 5,252,000 Assets Recorded at Fair Value on a Non-Recurring Basis The following tables include assets measured at fair value on a nonrecurring basis that have had a fair value adjustment since their initial recognition. Mortgage servicing rights are presented net of an impairment reserve of $ 26,000 at December 31, 2021 and $ 91,000 at September 30, 2021. There was no impairment reserve as of September 30, 2022. The Company had no other real estate owned or related allowance at September 30, 2022, 2021 and December 31, 2021. Only collateral-dependent impaired loans with a related specific allowance for loan losses or a partial charge off are included in impaired loans for purposes of fair value disclosures. Impaired loans below are presented net of specific allowances of $ 151,000 , $ 441,000 and $ 457,000 at September 30, 2022, December 31, 2021, and September 30, 2021, respectively. At September 30, 2022 Level 1 Level 2 Level 3 Total Mortgage servicing rights $ — $ 3,789,000 $ — $ 3,789,000 Impaired loans — 5,000 — 5,000 Total assets $ — $ 3,794,000 $ — $ 3,794,000 At December 31, 2021 Level 1 Level 2 Level 3 Total Mortgage servicing rights $ — $ 3,041,000 $ — $ 3,041,000 Impaired loans — 224,000 — 224,000 Total assets $ — $ 3,265,000 $ — $ 3,265,000 At September 30, 2021 Level 1 Level 2 Level 3 Total Mortgage servicing rights $ — $ 2,757,000 $ — $ 2,757,000 Impaired loans — 224,000 — 224,000 Total assets $ — $ 2,981,000 $ — $ 2,981,000 43 Fair Value of Financial Instruments FASB ASC Topic 825 "Financial Instruments" requires disclosures of fair value information about financial instruments, whether or not recognized in the balance sheet if the fair values can be reasonably determined. Fair value is best determined based upon quoted market prices. However, in many instances, there are no quoted market prices for the Company's various financial instruments. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques using observable inputs when available. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. Accordingly, the fair value estimates may not be realized in an immediate settlement of the instrument. Topic 825 excludes certain financial instruments and all nonfinancial instruments from its disclosure requirements. Accordingly, the aggregate fair value amounts presented may not necessarily represent the underlying fair value of the Company. This summary excludes financial assets and liabilities for which carrying value approximates fair values and financial instruments that are recorded at fair value on a recurring basis. Financial instruments for which carrying values approximate fair value include cash equivalents, interest-bearing deposits in other banks, demand, NOW, savings, and money market deposits. The estimated fair value of demand, NOW, savings, and money market deposits is the amount payable on demand at the reporting date. Carrying value is used because the accounts have no stated maturity and the customer has the ability to withdraw funds immediately. The carrying amount and estimated fair values for financial instruments as of September 30, 2022 were as follows: Carrying value Estimated fair value Level 1 Level 2 Level 3 Financial assets Securities to be held to maturity $ 381,906,000 $ 313,796,000 $ — $ 313,796,000 $ — Loans (net of allowance for loan losses) Commercial Real estate 632,385,000 615,560,000 — — 615,560,000 Construction 127,765,000 124,366,000 — — 124,366,000 Other 306,692,000 304,024,000 — 5,000 304,019,000 Municipal 48,521,000 46,475,000 — — 46,475,000 Residential Term 592,143,000 543,378,000 — — 543,378,000 Construction 41,440,000 37,263,000 — — 37,263,000 Home equity line of credit 72,812,000 76,287,000 — — 76,287,000 Consumer 19,830,000 18,172,000 — — 18,172,000 Total loans 1,841,588,000 1,765,525,000 — 5,000 1,765,520,000 Mortgage servicing rights 2,594,000 3,789,000 — 3,789,000 — Financial liabilities Local certificates of deposit $ 252,211,000 $ 239,377,000 $ — $ 239,377,000 $ — National certificates of deposit 533,965,000 525,169,000 — 525,169,000 — Total certificates of deposits 786,176,000 764,546,000 — 764,546,000 — Repurchase agreements 68,258,000 59,208,000 — 59,208,000 — Federal Home Loan Bank advances 50,085,000 50,071,000 — 50,071,000 — Total borrowed funds 118,343,000 109,279,000 — 109,279,000 — 44 The carrying amounts and estimated fair values for financial instruments as of December 31, 2021 were as follows: Carrying value Estimated fair value Level 1 Level 2 Level 3 Financial assets Securities to be held to maturity $ 370,040,000 $ 375,327,000 $ — $ 375,327,000 $ — Loans (net of allowance for loan losses) Commercial Real estate 570,134,000 570,187,000 — — 570,187,000 Construction 78,522,000 78,529,000 — — 78,529,000 Other 261,373,000 261,759,000 — 5,000 261,754,000 Municipal 48,185,000 48,634,000 — — 48,634,000 Residential Term 548,530,000 553,098,000 — 219,000 552,879,000 Construction 31,596,000 31,966,000 — — 31,966,000 Home equity line of credit 72,587,000 72,381,000 — — 72,381,000 Consumer 22,035,000 20,591,000 — — 20,591,000 Total loans 1,632,962,000 1,637,145,000 — 224,000 1,636,921,000 Mortgage servicing rights 2,671,000 3,041,000 — 3,041,000 — Financial liabilities Local certificates of deposit $ 232,724,000 $ 231,265,000 $ — $ 231,265,000 $ — National certificates of deposit 333,481,000 337,025,000 — 337,025,000 — Total deposits 566,205,000 568,290,000 — 568,290,000 — Repurchase agreements 81,251,000 79,065,000 — 79,065,000 — Federal Home Loan Bank advances 55,091,000 55,998,000 — 55,998,000 — Total borrowed funds 136,342,000 135,063,000 — 135,063,000 — 45 The carrying amount and estimated fair values for financial instruments as of September 30, 2021 were as follows: Carrying value Estimated fair value Level 1 Level 2 Level 3 Financial assets Securities to be held to maturity $ 375,699,000 $ 379,797,000 $ — $ 379,797,000 $ — Loans (net of allowance for loan losses) Commercial Real estate 542,975,000 537,937,000 — — 537,937,000 Construction 72,341,000 71,670,000 — — 71,670,000 Other 284,048,000 283,585,000 — 5,000 283,580,000 Municipal 40,409,000 40,133,000 — — 40,133,000 Residential Term 536,231,000 540,586,000 — 219,000 540,367,000 Construction 29,203,000 29,593,000 — — 29,593,000 Home equity line of credit 73,549,000 71,591,000 — — 71,591,000 Consumer 22,386,000 20,578,000 — — 20,578,000 Total loans 1,601,142,000 1,595,673,000 — 224,000 1,595,449,000 Mortgage servicing rights 2,597,000 2,757,000 — 2,757,000 — Financial liabilities Local certificates of deposit $ 238,170,000 $ 239,239,000 $ — $ 239,239,000 $ — National certificates of deposit 276,397,000 279,653,000 — 279,653,000 — Total certificates of deposits 514,567,000 518,892,000 — 518,892,000 — Repurchase agreements 88,109,000 86,114,000 — 86,114,000 — Federal Home Loan Bank advances 145,092,000 146,411,000 — 146,411,000 — Total borrowed funds 233,201,000 232,525,000 — 232,525,000 — 46 Note 16 – Impact of Recently Issued Accounting Standards In June 2016, the FASB issued Accounting Standards Update (ASU) No. 2016-13, Financial Instruments-Credit Losse s (Topic 326): Measurement of Credit Losses on Financial Instruments . Under the new guidance, which will replace the existing incurred loss model for recognizing credit losses, banks and other lending institutions will be required to recognize the full amount of expected credit losses. The new guidance, which is referred to as the current expected credit loss model, requires that expected credit losses for financial assets, held at the reporting date that are accounted for at amortized cost, be measured and recognized based on historical experience and current and reasonably supportable forecasted conditions to reflect the full amount of expected credit losses. A modified version of these requirements also applies to debt securities classified as available for sale. The ASU was to be effective for all SEC registrants for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. On October 16, 2019, FASB voted to finalize a proposal issued in August 2019 under which the effective implementation date was changed for SEC registrants meeting the definition of a Smaller Reporting Company to fiscal years beginning after December 15, 2022. Early adoption is permitted for fiscal years beginning after December 15, 2018, including interim periods within such years. The Company qualifies as a Smaller Reporting Company. It continues to evaluate the impact of the adoption of the ASU on its consolidated financial statements, and continues to anticipate that it may have a material impact upon adoption. The Bank formed an implementation committee for ASU No. 2016-13. Committee members participated in educational seminars on the new standards, identified the historical data sets that will be necessary to implement the new standard, and chose a third-party vendor who provides software solutions for ASU No. 2016-13 modeling and calculation. An Allowance for Credit Loss Committee has been formed to guide the late stages of implementing the software and eventual adoption of the new standard. The Bank plans to run incurred loss and current expected credit loss models in parallel until adoption of ASU No. 2016-13 on January 1, 2023. In March 2022, the FASB issued ASU No. 2022-01 Derivatives and Hedging (Topic 815): Fair Value Hedging – Portfolio Layer Method . This ASU expands upon hedge accounting concepts introduced in ASU 2017-12 by allowing multiple hedged layers to be designated for a single closed portfolio of financial assets which may allow a greater proportion of interest rate risk inherent in the assets to be hedged. The last of layer method outlined in ASU 2017-12 is renamed the portfolio layer method in ASU 2022-01. ASU 2022-01 also allows, upon adoption, the reclassification of debt securities classified as held to maturity to the available for sale category provided the reclassification takes place within thirty days of adoption and the same debt securities are included in a portfolio layer method hedge within the thirty day period. ASU 2022-01 is effective for fiscal years beginning after December 15, 2022. Early adoption is permitted for entities, such as the Company, that have adopted ASU 2017-12. This ASU is not expected to have a material impact on the consolidated financial statements of the Company. Also in March 2022, the FASB issued ASU No. 2022-02 Financial Instruments - Credit Losses (Topic 326): Troubled Debt Restructurings (TDRs) and Vintage Disclosures . The ASU eliminates the current guidance in ASC Subtopic 310-40 regarding troubled debt restructures in its entirety. After adoption, loan modifications will be determined to be a new loan or a continuation of an existing loan in accordance with current ASC guidance. Disclosure will consist of information on modifications to debtors experiencing financial difficulty that were in the form of principal forgiveness, an interest rate reduction, an other than insignificant payment delay, a term extension, or any combination of the foregoing. The ASU will also require disclosure of current-period gross write-offs by year of origination. ASU 2022-02 is effective for fiscal years beginning after December 15, 2022. This ASU is not expected to have a material impact on the consolidated financial statements of the Company. 47