What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2023-08-04 compared with 2023-05-09 · 280 added, 259 removed, 580 unchanged (48% of the section changed)

4 unchanged sentences

Forward-Looking Statements

This report contains statements that are "forward-looking statements." We may also make written or oral forward-looking statements in other documents we file with the Securities and Exchange Commission ("SEC"), in our annual reports to shareholders, in press releases and other written materials, and in oral statements made by our officers, directors or employees.

This report contains statements that are "forward-looking statements." We may also make written or oral forward-looking statements in other documents we file with the SEC, in our annual reports to shareholders, in press releases and other written materials, and in oral statements made by our officers, directors or employees.

You can identify forward-looking statements by the use of the words "believe," "expect," "anticipate," "intend," "estimate," "assume," "outlook," "will," "should," and other expressions that predict or indicate future events and trends and which do not relate to historical matters.

21 unchanged sentences

The use of different estimates or assumptions could produce different provisions for credit losses.

Management utilizes numerous techniques to estimate the value of various assets held by the Company, including methods to determine the appropriate carrying value of goodwill as required under Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") Topic 350 "Intangibles – Goodwill and Other." In addition,

goodwill from a purchase acquisition is subject to ongoing periodic impairment tests, which include an evaluation of the ongoing assets, liabilities and revenues from the acquisition and an estimation of the impact of business conditions.

Management utilizes numerous techniques to estimate the value of various assets held by the Company, including methods to determine the appropriate carrying value of goodwill as required under FASB ASC Topic 350 "Intangibles – Goodwill and Other." In addition, goodwill from a purchase acquisition is subject to ongoing periodic

impairment tests, which include an evaluation of the ongoing assets, liabilities and revenues from the acquisition and an estimation of the impact of business conditions.

Mortgage Servicing Rights.

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

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

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

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

2 unchanged sentences

Risks and Uncertainties.

As of March 31, 2023, local and state governments in the US have eased or eliminated most restrictions imposed to curtail the spread of the global pandemic, COVID-19.

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

Accordingly, it is possible that this matter may have a further financial impact on the Company's financial position and results

of future operations, such potential impact of which cannot be reasonably estimated.

Government has announced that the public health emergency declared in response to COVID-19 will end on May 11, 2023.

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

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

To address the inflation problem, the Federal Reserve has removed accommodative monetary policies and aggressively increased short-term interest rates.

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

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

The recent failures of several regional banks have further roiled markets and introduced a new source of uncertainty.

The nation's economy continues to demonstrate areas of strength and areas of weakness post-pandemic.

Inflation is beginning to moderate as evidenced by recent trends in the Consumer Price Index, which had risen at levels not experienced since the 1980s.

The labor market remains very tight with very low rates of unemployment and strong job creation, each contributing to inflationary pressure.

To address the inflation problem, the FOMC has removed accommodative monetary policies and aggressively increased short-term interest rates throughout 2022 and into 2023.

pace of increase by the FOMC has slowed and there is ongoing debate as to how close to the end of the rate hiking cycle the FOMC may be.

If the FOMC does not increase rates enough, it risks an ongoing inflation problem;

an overshoot on rate increases risks entering the economy into a recession.

There is developing concern nationally on the commercial real estate market given high vacancy numbers in some locations.

The conflict between Russia and Ukraine is ongoing and has generally added to economic uncertainty and geopolitical instability.

The failures in 2023 of several regional banks further roiled markets and introduced new sources of uncertainty.

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

Use of Non-GAAP Financial Measures

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

Certain information in this release contains financial information determined by methods other than in accordance with GAAP.

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

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A Federal Income Tax rate of 21.0% was used in 2023 and 2022.

For the three months ended March 31,

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

Dollars in thousands

2023 2022 2023 2022

Net interest income as presented $ 33,400 $ 37,318 $ 15,925 $ 18,698

5 unchanged sentences

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

For the three months ended March 31,

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

Dollars in thousands

2023 2022 2023 2022

Non-interest expense, as presented $ 21,565 $ 20,822 $ 10,715 $ 10,172

3 unchanged sentences

Effect of non-interest tax-exempt income 86 84 43 43

Net securities gains — (2)

Net securities (gains) losses — (1) — 1

Adjusted net interest income plus non-interest income $ 42,205 $ 46,840 $ 20,499 $ 23,392

4 unchanged sentences

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

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

For the three months ended March 31,

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

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

Dollars in thousands

2023 2022 2023 2022

Average shareholders' equity as presented $ 235,242 $ 239,267 $ 232,991 $ 231,980

1 unchanged sentence

Average tangible shareholders' common equity $ 204,392 $ 208,357 $ 202,138 $ 201,061

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

Period Ending

In thousands of dollars, except per share data March 31, 2023 March 31, 2022

Shareholders' Equity $ 228,461 $ 233,646

Intangible Assets (30,849) (30,856)

Tangible Common Equity 197,612 202,790

Unrealized Losses on Available for Sale Securities, net of tax 40,537 20,061

Adjusted Tangible Common Equity $ 238,149 $ 222,851

Adjusted Tangible Book Value Per Share $21.50 $20.21

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

The following table provides a reconciliation to Net Income:

For the three months ended March 31,

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

Dollars in thousands 2023 2022 2023 2022

Net Income, as presented $ 15,365 $ 19,702 $ 7,394 $ 9,997

provision for loan losses 550 450

provision for credit losses 701 900 151 450

income taxes expense 3,208 4,206 1,535 2,159

1 unchanged sentence

Executive Summary

Net income for the three months ended March 31, 2023 was $8.0 million, down $1.7 million or 17.9% from the same period in 2022.

Earnings per common share on a fully diluted basis were $0.72 for the three months ended March 31, 2023, down $0.16 or 18.2% from the $0.88 posted for the same period in 2022.

Net income for the six months ended June 30, 2023 was $15.4 million, down $4.3 million or 22.0% from the same period in 2022.

Earnings per common share on a fully diluted basis were $1.39 for the six months ended June 30, 2023, down $0.40 or 22.3% from the $1.79 posted for the same period in 2022.

Dividends totaling $0.69 per share have been declared year-to-date, representing a payout to our shareholders of 49.29% of basic earnings per share for the period.

Net interest income on a tax-equivalent basis was down $1.1 million or 5.6% in the three months ended March 31, 2023 compared to the same period in 2022.

The tax equivalent net interest margin for the three months ended March 31, 2023, was 2.78%, down from 3.24% for the same period in 2022.

The period to period change in net interest margin is attributable to $1.1 million in PPP revenue earned in the first quarter of 2022 which was non-continuing, coupled with rising funding costs.

Non-interest income for the three months ended March 31, 2023 was $3.6 million, down $663,000 or 15.7%, from the three months ended March 31, 2022.

Revenue at First National Wealth Management decreased $51,000 or 4.3% over the same period, debit card revenue was down $245,000 or 17.1% due to timing of program incentive payments, and mortgage banking revenue decreased $306,000.0 or 61.4% on lower volume of mortgage sales and negative marks taken against mortgage servicing rights valuation.

Non-interest expense for the three months ended March 31, 2023 was $10.9 million, up $200,000 or 1.9% from the three months ended March 31, 2022.

Salaries and employee benefits decreased 3.7% from the same period in 2022, while other operating expense has increased 8.0% over the same period.

For the quarter ended June 30, 2023, net income was $7.4 million, down $2.6 million or 26.0% from the same period in 2022.

Earnings per common share on a fully diluted basis were $0.67 for the quarter ended June 30, 2023, down $0.24 or 26.4% from the $0.91 posted for the same period in 2022.

Net interest income on a tax-equivalent basis was down $3.8 million or 9.8% in the six months ended June 30, 2023 compared to the same period in 2022.

The tax equivalent net interest margin for the six months ended June 30, 2023, was 2.62%, down from 3.18% for the same period in 2022.

The period to period change in net interest income and net interest margin is primarily attributable to increased funding costs;

also contributing was $1.1 million in PPP revenue earned in 2022

which was non-continuing.

For the quarter ended June 30, 2023, net interest income on a tax-equivalent basis decreased $2.7 million or 13.9% compared to the same period in 2022, with a net interest margin of 2.46% compared to 3.13% for the same period in 2022.

Non-interest income for the six months ended June 30, 2023 was $7.4 million, down $873,000 or 10.5%, from the six months ended June 30, 2022.

As compared to the prior year period, mortgage banking revenue decreased $491,000 or 55.9% on lower volume of mortgage sales and negative marks taken against mortgage servicing rights valuation.

Debit card revenue was down $280,000 or 10.2% due to timing of program incentive payments, and revenue at First National Wealth Management decreased $71,000 or 2.9%.

Non-interest expense for the six months ended June 30, 2023 was $21.6 million, up $743,000 or 3.6% from the six months ended June 30, 2022.

Salaries and employee benefits decreased 3.9% from the same period in 2022, while other operating expense increased 10.1% over the same period.

Asset quality continues to be strong and stable.

Non-performing assets stood at 0.06% of total assets as of March 31, 2023, down from 0.20% of total assets as of March 31, 2022 and even with December 31, 2022.

Total past-due loans were 0.10% of total loans as of March 31, 2023, up slightly from 0.08% of total loans as of December 31, 2022 and down from 0.25% as of March 31, 2022.

The provision for credit losses for the first three months of 2023 was $550,000, up from the $450,000 provisioned in the same period in 2022.

Net loan chargeoffs for the three months ended March 31, 2023 were $25,000 or 0.01% of average loans on an annualized basis, down from net charge-offs of $205,000 or 0.05% of total loans for the three months ended March 31, 2022.

Due to CECL adoption, the allowance for credit losses increased $6.7 million between December 31, 2022 and March 31, 2023, and now stands at 1.18% of loans outstanding as of March 31, 2023, up from 0.87% at December 31, 2022 and 0.92% at March 31, 2022.

The Company has modeled its ACL using a discounted cash flow approach applied to each segment of the loan portfolio.

The Company's balance sheet continued to expand in the first three months of 2023 as total assets increased $72.6 million or 2.7% year-to-date.

The loan portfolio increased $68.2 million or 3.6% in the three months ended March 31, 2023 and $275.5 million or 16.1% from a year ago.

Loan growth in the first three months of 2023 was centered in the commercial and residential portfolios.

Non-performing assets stood at 0.06% of total assets as of June 30, 2023, down from 0.18% of total assets as of June 30, 2022 and level with December 31, 2022.

Total past-due loans were 0.14% of total loans as of June 30, 2023, up slightly from 0.08% of total loans as of December 31, 2022 and down from 0.18% as of June 30, 2022.

The provision for credit losses - loans for the first six months of 2023 was $580,000, down from the $900,000 provisioned in the same period in 2022.

Net loan chargeoffs for the six months ended June 30, 2023 were $48,000 or 0.005% of average loans on an annualized basis, down from net charge-offs of $220,000 or 0.030% of total loans for the six months ended June 30, 2022.

The ACL for loans increased $6.7 million between December 31, 2022 and June 30, 2023, and now stands at 1.14% of loans outstanding as of June 30, 2023, up from 0.87% at December 31, 2022 and 0.91% at June 30, 2022.

Most of the dollar increase in the ACL is the result of CECL adoption.

The Company's balance sheet continued to expand in the first six months of 2023 as total assets increased $135.6 million or 5.0% year-to-date.

The loan portfolio increased $146.3 million or 7.6% in the six months ended June 30, 2023 and $272.6 million or 15.2% from a year ago.

Loan growth in the first six months of 2023 was centered in the commercial and residential portfolios.

Commercial loans increased by $94.2 million during the period, led by increases in owner-occupied commercial real estate of $44.7 million, non-owner occupied commercial real estate of $32.7 million and commercial & industrial loans of $32.5 million;

commercial construction balances decreased by $29.8 million as a number of projects converted to permanent financing.

Residential term loans increased by $9.4 million in the first quarter while residential construction loans increased by $2.8 million.

Commercial & industry loans include PPP loan balances of $11,000.

The investment portfolio increased $1.7 million year-to-date and decreased $11.6 million from a year ago based upon changes in the carrying value of Available-for-Sale securities.

Residential term loans increased by $47.7 million in the first six months of 2023, while residential construction loans decreased by $19.1 million.

The investment portfolio decreased $8.7 million year-to-date and decreased $12.6 million from a year ago based upon cash flow of amortizing securities, limited reinvestment or new purchases, and changes in the carrying value of AFS securities.

On the liability side of the balance sheet total deposits have increased $121.0 million, or 5.1%, year-to-date to $2.50 billion.

The Company typically experiences a modest decline in local deposit balances in the first quarter of each year due to seasonal factors.

In the three months ended March 31, 2023 total local deposits fell by $18.4 million, or 1.1%, well within a normal range.

Low-cost deposits (Demand, NOW, Savings) decreased $55.7 million or 4.2% during the period, while Money Market balances increased $21.2 million and certificates of deposit ("CDs") increased $45.3 million as depositors shifted balances to higher cost product types.

To balance the seasonal runoff and to support earning asset growth, wholesale CDs have increased $96.7 million year-to-date, while borrowings have decreased by $19.6 million.

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

The Company's total risk-based capital ratio was 13.72% as of March 31, 2023, solidly above the well-capitalized threshold of 10.0% set by the Federal Deposit Insurance Corporation, the Federal Reserve Board, and the Office of the Comptroller of the Currency.

The Company's operating ratios remained favorable in the first three months of 2023, with a return on average tangible common equity of 15.64% for the three months ended March 31, 2023 compared to 18.25% for the same period in 2022.

Our non-GAAP efficiency ratio continues to be an important component in the Company's overall performance and stood at 49.98% for the three months ended March 31, 2023 compared to 45.42% for the same period in 2022.

In the six months ended June 30, 2023 total local deposits fell by $4.4 million, or 0.3%, well within a normal range.

Low-cost deposits (Demand, NOW, Savings) decreased $76.6 million or 5.8% during the period, while Money Market balances increased $15.6 million and CDs increased $182.0 million, as depositors shifted balances to higher cost product types.

To balance the seasonal runoff and to support earning asset growth, wholesale CDs have increased $140.7 million year-to-date, while borrowings have increased by $11.0 million.

Remaining well capitalized is a top priority for The Company.

The Company's total risk-based capital ratio was 13.66% as of June 30, 2023, solidly above the well-capitalized threshold of 10.0% set by the FDIC, the FRB, and the OCC.

Among the Company's operating ratios, the return on average assets was 1.10% and return on average tangible common equity of 15.16% for the six months ended June 30, 2023 compared to 1.55% and 19.07%, respectively, for the same period in 2022.

Our non-GAAP efficiency ratio continues to be an important component in the Company's overall performance and stood at 51.10% for the six months ended June 30, 2023 compared to 44.45% for the same period in 2022.

Net Interest Income

Total interest income of $28.9 million for the three months ended March 31, 2023 was an increase of $8.4 million or 40.8% compared to total interest income of $20.5 million for the same period of 2022, which included $1.1 million of non-recurring PPP revenue.

Total interest income of $60.1 million for the six months ended June 30, 2023 was an increase of $18.1 million or 43.2% compared to total interest income of $42.0 million for the same period of 2022;

interest income for the prior period included $1.1 million of non-recurring PPP revenue.

Growth in earning assets coupled with higher interest rates resulted in the period to period increase.

Higher interest rates coupled with changing customer product preferences to money market and CD accounts led to total interest expense of $11.4 million for the three months ended March 31, 2023, an increase of $9.5 million or 498.0% compared to total interest expense for the three months ended March 31, 2022.

As a result, net interest income of $17.5 million for the three months ended March 31, 2023 was a decrease of $1.1 million or 6.1% compared to net interest income of $18.6 million for the same period ended March 31, 2022.

The Company's net interest margin on a tax-equivalent basis for the three months ended March 31, 2023 was 2.78%, down from 3.24% for the first three months of 2022.

Tax-exempt interest income amounted to $2.3 million for the three months ended March 31, 2023 compared to $2.1 million for the three months ended March 31, 2022.

The following tables present the amount of interest earned or paid, as well as the average yield or rate on an annualized basis, for each major category of assets or liabilities for the three months ended March 31, 2023 and 2022.

Higher market interest rates resulting from FOMC actions coupled with changing customer product preferences to higher cost money market and CD products led to total interest expense of $26.7 million for the six months ended June 30, 2023, an increase of $22.1 million or 474.6% compared to total interest expense for the six months ended June 30, 2022.

As a result, net interest income of $33.4 million for the six months ended June 30, 2023 was a decrease of $3.9 million or 10.5% compared to net interest income of $37.3 million for the same period ended June 30, 2022;

excluding the PPP income, the period-to-period change would have been 7.7%.

The Company's net interest margin on a tax-equivalent basis for the six months ended June 30, 2023 was 2.62%, down from 3.18% for the first six months of 2022.

Tax-exempt interest income amounted to $4.8 million for the six months ended June 30, 2023 compared to $4.2 million for the six months ended June 30, 2022.

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

For the three months ended

March 31, 2023 March 31, 2022

For the six months ended

June 30, 2023 June 30, 2022

Dollars in thousands

14 unchanged sentences

Net interest margin 2.62 % 3.18 %

The following tables present changes in interest income and expense attributable to changes in interest rates and volume for interest-earning assets and liabilities for the three months ended March 31, 2023 compared to 2022.

For the quarters ended

June 30, 2023 June 30, 2022

Dollars in thousands

interest Average

Yield/Rate Amount of

interest Average

Interest on earning assets

Interest-bearing deposits $ 49 5.45 % $ 62 0.87 %

Investments 5,264 3.10 % 4,577 2.67 %

Loans held for sale — 0.00 % 6 5.36 %

Loans 26,532 5.26 % 17,356 3.97 %

Total interest-earning assets 31,845 4.72 % 22,001 3.57 %

Interest expense

Deposits 14,475 2.68 % 2,401 0.51 %

Other borrowings 784 2.33 % 332 1.01 %

Total interest expense 15,259 2.66 % 2,733 0.54 %

Net interest income $ 16,586 $ 19,268

Interest rate spread 2.06 % 3.03 %

Net interest margin 2.46 % 3.13 %

The following tables present changes in interest income and expense attributable to changes in interest rates and volume for interest-earning assets and liabilities for the six months and quarters ended June 30, 2023 compared to 2022.

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

For the three months ended March 31, 2023 compared to 2022

For the six months ended June 30, 2023 compared to 2022

Dollars in thousands

12 unchanged sentences

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

For the quarter ended June 30, 2023 compared to 2022

Dollars in thousands

Volume Rate Rate/Volume 1

Interest on earning assets

Interest-bearing deposits $ (54) $ 327 $ (286) $ (13)

Investment securities (41) 735 (7) 687

Loans held for sale (5) (6) 5 (6)

Loans 2,646 5,666 864 9,176

Change in interest income 2,546 6,722 576 9,844

Interest expense

Deposits 331 10,321 1,422 12,074

Other borrowings 8 433 11 452

Change in interest expense 339 10,754 1,433 12,526

Change in net interest income $ 2,207 $ (4,032) $ (857) $ (2,682)

Average Daily Balance Sheets

The following table shows the Company's average daily balance sheets for the three months ended March 31, 2023 and 2022.

For the three months ended

The following table shows the Company's average daily balance sheets for the six months and quarters ended June 30, 2023 and 2022:

For the six months ended For the quarters ended

Dollars in thousands

2023 March 31,

June 30, 2023 June 30, 2022 June 30, 2023 June 30, 2022

Cash and cash equivalents $ 22,993 $ 22,271 $ 23,236 $ 24,676

Interest-bearing deposits in other banks 3,671 27,378 3,608 28,646

Securities available for sale (includes tax exempt securities of $36,636 and $34,879 at March 31, 2023 and 2022, respectively)

Securities available for sale (includes tax exempt securities of $36,630 and $34,751 at June 30, 2023 and 2022, respectively)

286,004 311,281 284,047 302,850

Securities to be held to maturity, net of allowance for credit losses of $438 at March 31, 2023 1 (included tax exempt securities of $257,279 and $250,145 at March 31, 2023 and 2022, respectively)

Securities to be held to maturity, net of allowance for credit losses of $428 at June 30, 2023 1 (included tax exempt securities of $256,942 and $252,312 at June 30, 2023 and 2022, respectively)

391,948 375,461 390,907 379,111

6 unchanged sentences

Premises and equipment 28,163 29,017 28,122 29,086

Other real estate owned 2 1 4 1

Goodwill 30,646 30,646 30,646 30,646

19 unchanged sentences

Net unrealized loss on securities transferred from available for sale to held to maturity (61) (81) (60) (75)

Net unrealized gain on cash flow hedging derivative instruments 796 —

Net unrealized loss on cash flow hedging derivative instruments (546) (5) (1,873) (10)

Net unrealized gain on postretirement benefit costs 273 105 273 105

1 unchanged sentence

Total Liabilities & Shareholders' Equity $ 2,809,494 $ 2,560,362 $ 2,842,838 $ 2,602,634

1 March 31, 2022 had no allowance for credit losses

1 June 30, 2022 had no allowance for credit losses

Non-Interest Income

Non-interest income of $3.6 million for the three months ended March 31, 2023 is a decrease of $663,000 compared to the same period in 2022.

Revenue at First National Wealth Management decreased $51,000 or 4.3% over the same period, and debit card revenue was down $245,000 or 17.1%.

Debit card interchange revenue has been reasonably steady, and revenue changes are mostly attributable to the timing of annual incentive payments.

Mortgage banking revenue was down $306,000, or 61.4%;

Non-interest income of $7.4 million for the six months ended June 30, 2023 is a decrease of $873,000 compared to the same period in 2022.

The primary change period-to-period was Mortgage Banking revenue which was down $491,000, or 55.9%;

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

Debit card revenue was down $280,000 or 10.2%.

Debit card interchange revenue has been reasonably steady year-over-year, and revenue changes are mostly attributable to the timing of annual incentive payments.

Revenue at First National Wealth Management decreased $71,000 or 2.9% over the same period.

Non-interest income of $3.9 million for the quarter ended June 30, 2023 is a decrease of $210,000 compared to the same period in 2022;

the decrease is primarily attributable to Mortgage Banking revenue due to the reasons mentioned above.

Non-Interest Expense

Non-interest expense of $10.9 million for the three months ended March 31, 2023 is an increase of 1.9% or $200,000 compared to non-interest expense of $10.7 million for the same period in 2022.

Non-interest expense of $21.6 million for the six months ended June 30, 2023 is an increase of 3.6% or $743,000 compared to non-interest expense of $20.8 million for the same period in 2022.

Salaries and employee benefits decreased $438,000 or 3.9%, while other operating expense increased $501,000 or 10.1%.

Income taxes on operating earnings were $1.7 million for the three months ended March 31, 2023, down $374,000 from the same period in 2022.

The carrying value of the Company's investment portfolio increased by $1.7 million between December 31, 2022 and March 31, 2023.

As of March 31, 2023, mortgage-backed securities had a carrying value of $290.6 million and a fair value of $280.2 million.

Of this total, securities with a fair value of $82.1 million or 29.3% of the mortgage-backed portfolio were issued by the Government National Mortgage Association and securities with a fair value of $198.2 million or 70.7% of the mortgage-backed portfolio were issued by the Federal Home Loan Mortgage Corporation ("Freddie Mac") and the Federal National Mortgage Association ("Fannie Mae").

FDIC insurance premiums increased by $438,000 due to a base rate increase impacting all banks.

Non-interest expense of $10.7 million for the quarter ended June 30, 2023 is an increase of 5.3% compared to non-interest expense of $10.2 million for the same period in 2022 due to the reasons mentioned.

Income taxes on operating earnings were $3.2 million for the six months ended June 30, 2023, down $1.0 million from the same period in 2022.

The carrying value of the Company's investment portfolio decreased by $8.7 million between December 31, 2022 and June 30, 2023 from $682.3 million to $673.6 million.

The change in value of the portfolio is attributable to a combination of incoming cash flow from amortizing investments, limited re-investment or new purchases, the effects of interest rate movement on the fair value of AFS holdings, and the establishment of an ACL for HTM securities.

As of June 30, 2023, mortgage-backed securities had a carrying value of $280.7 million and a fair value of $269.7 million.

Of this total, securities with a fair value of $78.3 million or 29.0% of the mortgage-backed portfolio were issued by GNMA and securities with a fair value of $191.4 million or 71.0% of the mortgage-backed portfolio were issued by FHLMC and FNMA.

The Company's investment securities are classified into two categories:

3 unchanged sentences

Securities to be held to maturity consist primarily of debt securities that the Company has acquired solely for long-term investment purposes, rather than potential future sale.

For securities to be categorized as held to maturity, Management must have the intent and the Company must have the ability to hold such investments until their respective maturity dates.

For securities to be categorized as HTM, Management must have the intent and the Company must have the ability to hold such investments until their respective maturity dates.

The Company does not hold trading account securities.

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

During the third quarter of 2014, the Company transferred securities with a total amortized cost of $89,780,000 and a corresponding fair value of $89,757,000 from available for sale to held to maturity.

During the third quarter of 2014, the Company transferred securities with a total amortized cost of $89,780,000 and a corresponding fair value of $89,757,000 from AFS to HTM.

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 $60,000 at March 31, 2023.

This compares to $64,000 and $78,000, net of taxes, at December 31, 2022 and March 31, 2022, respectively.

The net unrealized holding loss at the time of transfer continues to be reported in AOCI, 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 AOCI 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 AFS to HTM was $59,000 at June 30, 2023.

This compares to $64,000 and $73,000, net of taxes, at December 31, 2022 and June 30, 2022, respectively.

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

The following table sets forth the Company's investment securities at their carrying amounts as of March 31, 2023 and 2022 and December 31, 2022.

The following table sets forth the Company's investment securities at their carrying amounts as of June 30, 2023 and 2022 and December 31, 2022.

Dollars in thousands

2023 December 31,

2022 March 31,

June 30, 2023 December 31, 2022 June 30, 2022

Securities available for sale

19 unchanged sentences

In conjunction with adoption, holdings of AFS Securities and HTM securities were evaluated to determine the need to establish an allowance for credit losses, if any.

The total ACL for HTM securities was $438,000 as of March 31, 2023;

there was no reserve as of December 31, 2022 and March 31, 2022.

The total ACL for HTM securities was $428,000 as of June 30, 2023;

there was no reserve as of December 31, 2022 and June 30, 2022.

Further details are included in Notes 2 and 16 of the accompanying financial statements.

The following table sets forth yields and contractual maturities of the Company's investment securities as of March 31, 2023.

The following table sets forth yields and contractual maturities of the Company's investment securities as of June 30, 2023.

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

35 unchanged sentences

Debt Securities in an Unrealized Loss Position

The securities portfolio contains certain securities where the amortized cost of which exceeds fair value, which at March 31, 2023 amounted to $100.1 million, or 14.07% of the amortized cost of the total securities portfolio.

The securities portfolio contains certain securities where the amortized cost of which exceeds fair value, which at June 30, 2023 amounted to $110.1 million, or 15.64% of the amortized cost of the total securities portfolio.

At December 31, 2022, this amount was $111.7 million, or 15.65% of the amortized cost of total securities portfolio.

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

As of March 31, 2023, the Company had debt securities available-for-sale in an unrealized loss position with a fair value of $544.7 million and unrealized losses of $100.1 million, as identified in the table below.

Securities in a continuous unrealized loss position more than twelve months amounted to $451.1 million as of March 31, 2023, compared with $310.2 million at December 31, 2022.

As of June 30, 2023, the Company had debt securities in an unrealized loss position with a fair value of $551.0 million and unrealized losses of $110.1 million, as identified in the table below.

Securities in a continuous unrealized loss position more than twelve months amounted to a fair value $453.3 million as of June 30, 2023, compared with $310.2 million at December 31, 2022.

The Company has concluded that these securities are fully collectible and that no charge against the allowance is required.

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

The following table summarizes debt securities available-for-sale in an unrealized loss position for which an allowance for credit losses has not been recorded at March 31, 2023:

The following table summarizes debt securities available-for-sale in an unrealized loss position for which an allowance for credit losses has not been recorded at June 30, 2023:

Less than 12 months 12 months or more Total

12 unchanged sentences

Government-sponsored agencies and enterprises.

As of March 31, 2023, there were $16.6 million unrealized losses on these securities compared to $17.4 million unrealized losses as of December 31, 2022.

As of June 30, 2023, there were $16.8 million unrealized losses on these securities compared to $17.4 million unrealized losses as of December 31, 2022.

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

4 unchanged sentences

Government-sponsored enterprises.

As of March 31, 2023, there were $49.2 million of unrealized losses on these securities compared with $53.8 million at December 31, 2022.

As of June 30, 2023, there were $52.9 million of unrealized losses on these securities compared with $53.8 million at December 31, 2022.

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

2 unchanged sentences

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

Management believes that the unrealized losses at March 31, 2023 were attributable to changes in current market yields and spreads since the date the underlying securities were purchased, and that 100% of the amounts contractually due will be realized.

Management believes that the unrealized losses at June 30, 2023 were attributable to changes in current market yields and spreads since the date the underlying securities were purchased, and that 100% of the amounts contractually due will be realized.

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

Obligations of state and political subdivisions.

As of March 31, 2023, there were $31.5 million of unrealized losses on these securities compared to $38.0 million at December 31, 2022.

As of June 30, 2023, there were $36.4 million of unrealized losses on these securities compared to $38.0 million at December 31, 2022.

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

At March 31, 2023, all municipal bond issuers were current on contractually obligated interest and principal payments.

The Company attributes the unrealized losses at March 31, 2023 to changes in prevailing market yields and pricing spreads since the date the underlying securities were purchased, combined with current market liquidity conditions and disruption in the financial markets in general.

At June 30, 2023, all municipal bond issuers were current on contractually obligated interest and principal payments.

The Company attributes the unrealized losses at June 30, 2023 to changes in prevailing market yields and pricing spreads since the date the underlying securities were purchased, combined with current market liquidity conditions and disruption in the financial markets in general.

The Company has the ability and intent to hold these securities until a recovery of their amortized cost, which may be at maturity, and believes that 100% of the amounts contractually due will be realized.

Asset-backed securities.

As of March 31, 2023, there were $63,000 of unrealized losses on these securities compared to $53,000 at December 31, 2022.

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

As of June 30, 2023, there were $47,000 of unrealized losses on these securities compared to $53,000 at December 31, 2022.

These securities consist of U.S.

Government backed student loans along with other credit enhancements.

Corporate securities.

As of March 31, 2023, there were $2.8 million of unrealized losses on these securities compared to $2.5 million at December 31, 2022.

As of June 30, 2023, there were $3.9 million of unrealized losses on these securities compared to $2.5 million at December 31, 2022.

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

At March 31, 2023, all corporate bond issuers were current on contractually obligated interest and principal payments.

Federal Home Loan Bank Stock

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 much of its wholesale funding needs.

As of March 31, 2023, the Bank's investment in FHLB stock totaled $2.8 million.

This compares to $2.8 million as of December 31, 2022 and $4.4 million as of March 31, 2022.

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

No impairment losses have been recorded through March 31, 2023.

At June 30, 2023, all corporate bond issuers were current on contractually obligated interest and principal payments.

FHLBB and FRBB Stock

The Bank is a member of the FHLBB, a cooperatively owned wholesale bank for housing and finance in the six New England States.

As a requirement of membership in the FHLBB, the Bank must own a minimum required amount of FHLBB stock, calculated periodically based primarily on its level of borrowings from the FHLBB.

The Bank uses the FHLBB for a portion of its wholesale funding needs.

As of June 30, 2023, the Bank's investment in FHLBB stock totaled $4.2 million.

This compares to $2.8 million as of December 31, 2022 and $3.7 million as of June 30, 2022.

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

No impairment losses have been recorded through June 30, 2023.

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

The Bank is also a member of the FRBB.

As a requirement for membership in the FRBB, the Bank must own a minimum required amount of FRBB stock.

The Bank uses FRBB for certain correspondent banking services and maintains borrowing capacity at its discount window.

The Bank's investment in FRBB stock totaled $1,037,000 at June 30, 2023 and 2022 and December 31, 2022.

The Company periodically evaluates its investment in FHLBB and FRBB 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 June 30, 2023.

The Bank will continue to monitor its investment in these restricted equity securities.

Loans Held for Sale

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

As of March 31, 2023, the Bank had no loans held for sale.

This compares to $275,000 loans held for sale at December 31, 2022 and $400,000 loans held for sale at March 31, 2022.

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

As of June 30, 2023, the Bank had no loans held for sale.

This compares to $275,000 loans held for sale at December 31, 2022 and $689,000 loans held for sale at June 30, 2022.

The Bank participates in FHLB's MPF, selling loans with recourse.

The volume of loans sold to date through the MPF program is de minimis;

therefore, there was minimum impact on the reserve.

therefore, there was minimal impact on the reserve.

The Company provides loans to customers within our market area, the State of Maine, with very limited exposures outside of Maine.

Loans are originated primarily via our network of branch offices, along with an online channel for residential mortgage loans.

The loan portfolio increased during the first three months of 2023, with total loans at $1.98 billion at March 31, 2023, up $68.2 million or 3.6% from total loans of $1.91 billion at December 31, 2022.

Commercial loans increased $50.6 million or 7.5% between December 31, 2022 and March 31, 2023, municipal loans increased $6.5 million or 16.1%, residential term loans increased $9.4 million, residential construction increased $2.8 million, and home equity lines of credit increased $447,000.

Loans made under the U.S.

Small Business Administration's PPP accounted for only $11,000 of commercial loans as of March 31, 2023.

The loan portfolio increased during the first six months of 2023, with total loans at $2.06 billion at June 30, 2023, up $146.3 million or 7.6% from total loans of $1.91 billion at December 31, 2022.

Commercial loans increased $94.2 million or 14.1% between December 31, 2022 and June 30, 2023, municipal loans increased $17.6 million or 43.4%, residential term loans increased $47.7 million, residential construction decreased $19.1 million, and home equity lines of credit increased $6.6 million.

The loan portfolio is segmented into ten classes.

5 unchanged sentences

Further descriptions of each class, and the risk factors associated with each, are included in Note 4 of the accompanying financial statements.

The following table summarizes the loan portfolio, by class, at March 31, 2023 and 2022 and December 31, 2022.

The following table summarizes the loan portfolio, by class, at June 30, 2023 and 2022 and December 31, 2022.

Dollars in thousands

March 31, 2023 December 31, 2022 March 31, 2022

June 30, 2023 December 31, 2022 June 30, 2022

Real estate owner occupied $ 301,320 14.6 % $ 256,623 13.4 % $ 242,161 13.5 %

9 unchanged sentences

Total loans $ 2,060,953 100.0 % $ 1,914,674 100.0 % $ 1,788,355 100.0 %

The following table sets forth certain information regarding the contractual maturities of the Bank's loan portfolio as of March 31, 2023.

The following table sets forth certain information regarding the contractual maturities of the Bank's loan portfolio as of June 30, 2023.

Dollars in thousands

11 unchanged sentences

Total loans $ 11,044 $ 232,356 $ 238,699 $ 1,578,854 $ 2,060,953

The following table provides a listing of loans by class, between variable and fixed rates as of March 31, 2023.

The following table provides a listing of loans by class, between variable and fixed rates as of June 30, 2023.

Fixed-Rate Adjustable-Rate Total

13 unchanged sentences

Loan Concentrations

As of March 31, 2023 and 2022, the Bank had one concentration of loans that exceeded 10% of its total loan portfolio.

Loans to hotels (except Casino hotels) and motels totaled $223.5 million, or 11.27% of total loans and $206.7 million, or 10.79% of total loans, respectfully.

As of June 30, 2023, the Bank had one concentration of loans that exceeded 10% of its total loan portfolio.

Loans to hotels (except Casino hotels) and motels totaled $225.9 million, or 10.96% of total loans.

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

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

Credit Risk Management and Allowance for Credit Losses on Loans

8 unchanged sentences

Prior to adoption of ASC 326, under the incurred loss methodology, the Company evaluated portfolio risk characteristics largely on loan purpose.

The Company provides for loan losses through the allowance for credit losses which represents an estimated reserve for losses in the loan portfolio.

The Company provides for loan losses through the ACL which represents an estimated reserve for losses in the loan portfolio.

To determine an appropriate level for general reserves, a discounted cash flow approach is applied to each portfolio segment implementing a probability of default and loss given default estimate based upon a number of factors including historical losses over an economic cycle, economic forecasts, loan prepayment speeds and curtailment rates.

1 unchanged sentence

Adoption of ASC 326 added $6.2 million to the ACL on loans, recorded as a charge to retained earnings.

The allowance for credit losses is increased by provisions charged against current earnings.

The ACL is increased by provisions charged against current earnings.

Loan losses are charged against the allowance when Management believes that the collectibility of the loan principal is unlikely.

3 unchanged sentences

Any future additions to the allowance would be recognized in the period in which they were determined to be necessary.

In addition, various regulatory agencies periodically review the Company's allowance for loan losses as an integral part of their examination process.

In addition, various regulatory agencies periodically review the Company's ACL as an integral part of their examination process.

Such agencies may require the Company to record additions to the allowance based on judgments different from those of Management.

The allowance for credit losses includes reserve amounts assigned to individually analyzed loans.

This includes loans that had been reported as TDR loans prior to adoption of ASU 2022-02 and loans placed on non-accrual.

The ACL includes reserve amounts assigned to individually analyzed loans.

This includes loans placed on non-accrual and loans reported as TDR prior to adoption of ASU 2022-02, with balances of $250,000 or more.

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

At March 31, 2023, individually analyzed loans with specific reserves totaled $2.0 million and the amount of such reserves was $388,000.

At June 30, 2023, individually analyzed loans with specific reserves totaled $886,000 and the amount of such reserves was $186,000.

This compares to individually analyzed loans with specific reserves of $1.8 million at December 31, 2022 and the amount of such reserves was $398,000.

Additional detail on individually analyzed loans may be found in Note 3 of the financial statements.

The total ACL on loans at March 31, 2023 is considered by Management to be appropriate to address the credit losses inherent in the loan portfolio at that date.

The total ACL on loans at June 30, 2023 is considered by Management to be appropriate to address the potential for credit losses inherent in the loan portfolio at that date.

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

Thus, there can be no assurance charge-offs in future periods will not exceed the ACL or that additional increases in the ACL will not be necessary.

The following table summarizes the allocation of allowance by loan class as of March 31, 2023 and 2022 and December 31, 2022.

The following table summarizes the allocation of allowance by loan class as of June 30, 2023 and 2022 and December 31, 2022.

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

Dollars in thousands

March 31, 2023 December 31, 2022 March 31, 2022

June 30, 2023 December 31, 2022 June 30, 2022

Real estate owner occupied $ 4,719 14.6 % $ 6,116 36.5 % $ 5,480 34.5 %

10 unchanged sentences

Total $ 23,465 100.0 % $ 16,723 100.0 % $ 16,201 100.0 %

The ACL totaled $23.5 million at March 31, 2023, compared to $16.7 million as of December 31, 2022 and $15.8 million as of March 31, 2022.

The increase in the total allowance from December 31, 2022 to March 31, 2023 is attributable to the adoption of CECL.

A breakdown of the ACL on loans as of March 31, 2023, by loan class and allowance element, is presented in the following table:

The ACL totaled $23.5 million at June 30, 2023, compared to $16.7 million as of December 31, 2022 and $16.2 million as of June 30, 2022.

The increase in the total allowance from December 31, 2022 to June 30, 2023 is attributable to the adoption of CECL, along with normal provision and loan charge-off activity.

A breakdown of the ACL on loans as of June 30, 2023, by loan class and allowance element, is presented in the following table:

Dollars in thousands

12 unchanged sentences

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

The provision for credit losses to maintain the allowance was $550,000 for the first three months of 2023 and $450,000 the first three months of 2022.

Net charge-offs were $25,000 in the first three months of 2023, down from $205,000 in the first three months of 2022.

Our ACL as a percentage of outstanding loans was 1.18% as of March 31, 2023, up from 0.87% as of December 31, 2022, and up from 0.92% as of March 31, 2022.

The following table summarizes the activities in our allowance for credit losses for the three months ended March 31, 2023 and 2022 and for the year ended December 31, 2022:

The provision for credit losses to maintain the allowance was $580,000 for the first six months of 2023 and $900,000 the first six months of 2022.

Net charge-offs were $48,000 in the first six months of 2023, down from $220,000 in the first six months of 2022.

The ACL as a percentage of outstanding loans was 1.14% as of June 30, 2023, up from 0.87% as of December 31, 2022, and up from 0.91% as of June 30, 2022.

The following table summarizes the activities in our allowance for credit losses for the six months ended June 30, 2023 and 2022 and for the year ended December 31, 2022:

Dollars in thousands

March 31, 2023 December 31, 2022 March 31, 2022

June 30, 2023 December 31, 2022 June 30, 2022

Balance at the beginning of period $ 16,723 $ 15,521 $ 15,521

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Adoption of CECL resulted in an increase in the Company's ACL for unfunded commitments.

Our modeling methodology applies the same class level credit loss factors used in the ACL on loans model to applicable classes of unfunded commitments to determine an appropriate ACL level.

Our modeling methodology applies the same class level credit loss factors used in the ACL for loans model to applicable classes of unfunded commitments to determine an appropriate ACL level.

Utilization assumptions are based upon an independent analysis of the Bank's historical data.

The ACL for unfunded commitments is reported on the Company's balance within other liabilities and totaled $1.4 million as of March 31, 2023.

The ACL for unfunded commitments is reported on the Company's consolidated balance sheets within other liabilities and totaled $1.5 million as of June 30, 2023.

Nonperforming Loans

9 unchanged sentences

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

Nonperforming loans, expressed as a percentage of total loans, totaled 0.09% at March 31, 2023 and December 31, 2022 compared to 0.30% at March 31, 2022.

The following table shows the distribution of nonperforming loans by class as of March 31, 2023 and 2022 and December 31, 2022:

Nonperforming loans, expressed as a percentage of total loans, totaled 0.08% at June 30, 2023 compared to 0.09% at December 31, 2022 and 0.27% at June 30, 2022.

The following table shows the distribution of nonperforming loans by class as of June 30, 2023 and 2022 and December 31, 2022:

Dollars in thousands

2023 December 31,

2022 March 31,

June 30, 2023 December 31, 2022 June 30, 2022

Real estate owner occupied $ — $ 193 $ 197

12 unchanged sentences

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

As of March 31, 2023, there were loans totaling $208,000 that were 90 or more days past due and still accruing interest compared to $241,000 at December 31, 2022 and $46,000 at March 31, 2022.

As of June 30, 2023, there were

loans totaling $318,000 that were 90 or more days past due and still accruing interest compared to $241,000 at December 31, 2022 and $76,000 at June 30, 2022.

Loan Modifications Made to Borrowers Experiencing Financial Difficulty

1 unchanged sentence

Reporting of loan modifications subject to ASU 2022-02 may be found in Note 3 of the financial statements.

Troubled Debt Restructured

Prior to adoption of ASU 2022-02 the Company evaluated loan modifications and other transactions to determine if classification as a TDR was necessary.

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

To determine whether or not a loan was to be classified as a TDR, Management evaluated 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.

The following table shows the activity in loans previously classified as TDRs between December 31, 2022 and March 31, 2023:

Balance in Thousands of Dollars Number of Loans Aggregate Balance

Total at December 31, 2022

Loans paid off in 2023

Repayments in 2023

Total at March 31, 2023

As of March 31, 2023, 23 loans with an aggregate balance of $3.7 million were performing under the modified terms, five loans with an aggregate balance of $334,000 were on nonaccrual and no loans were more than 30 days past due and accruing.As a percentage of aggregate outstanding balance, 91.73% were performing under the modified terms, 8.27% were on nonaccrual and 0.00% were past due and still accruing.

The performance status of all loans previously classified as TDRs, as of March 31, 2023, is summarized by type of loan in the following table.

In thousands of dollars

As Modified 30+ Days Past Due

and Accruing On

Nonaccrual All

Real estate $ 1,031 $ — $ — $ 1,031

Construction — — — —

Other 176 — 175 351

Municipal — — — —

Term 2,498 — 159 2,657

Construction — — — —

Home equity line of credit — — — —

Consumer — — — —

$ 3,705 $ — $ 334 $ 4,039

Percent of balance 91.7 % — % 8.3 % 100.0 %

Number of loans 23 — 5 28

Residential TDRs as of March 31, 2023 included 20 loans with an aggregate balance of $2.7 million and the modifications granted fell into four major categories.

Loans totaling $1.5 million had an extension of term, allowing the borrower to repay over an extended number of years and lowering the monthly payment to a level the borrower can afford.

Loans totaling $1.0 million had interest capitalized, allowing the borrower to become current after unpaid interest was added to the balance of the loan and re-amortized over the remaining life of the loan.

Short-term rate concessions were granted on loans totaling $220,000.

Loans with an aggregate balance of $521,000 were involved in bankruptcy.

Certain residential TDRs had more than one modification.

Commercial TDRs as of March 31, 2023 were comprised of eight loans with a balance of $1.4 million.

Of this total, three loans with an aggregate balance of $929,000 had an extended period of interest-only payments, deferring the start of principal repayment.

One loan with an aggregate balance of $46,000 had a deferral of payment.

The remaining four loans with an aggregate balance of $406,000 had several different modifications.

As of March 31, 2023, Management is aware of four loans previously classified as TDRs that are involved in bankruptcy proceedings with an aggregate outstanding balance of $545,000.

There were also five loans with an outstanding balance of $334,000 that were previously classified as TDRs and on non-accrual status, of which no loans were in the process of foreclosure.

Past Due Loans

The Bank's overall loan delinquency ratio was 0.10% at March 31, 2023 compared to 0.08% at December 31, 2022 and 0.25% at March 31, 2022.

Loans 90 days delinquent and accruing decreased from $241,000 at December 31, 2022 to $208,000 as of March 31, 2023.

The following table sets forth loan delinquencies as of March 31, 2023 and 2022 and December 31, 2022:

The Bank's overall loan delinquency ratio was 0.14% at June 30, 2023 compared to 0.08% at December 31, 2022 and 0.18% at June 30, 2022.

Loans 90 days delinquent and accruing increased from $241,000 at December 31, 2022 to $318,000 as of June 30, 2023.

The following table sets forth loan delinquencies as of June 30, 2023 and 2022 and December 31, 2022:

Dollars in thousands

2023 December 31,

2022 March 31,

June 30, 2023 December 31, 2022 June 30, 2022

Real estate owner occupied $ 37 $ 193 $ 197

17 unchanged sentences

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

At March 31, 2023, there was one potential problem loan with a balance of $12,000 or 0.001% of total loans.

At December 31, 2022, there were no potential problem loans.

As of March 31, 2023, there were two residential loans in the process of foreclosure with a total balance of $166,000.

At June 30, 2023 and December 31, 2022 there were no potential problem loans to report.

As of June 30, 2023, there were no residential loans in the process of foreclosure.

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

1 unchanged sentence

An authorized Bank officer signs the affidavit certifying the validity of the documents and verification of the past due amount which is then forwarded to the court.

Once a Motion for Summary Judgment is granted, a Period of Redemption (POR) begins which gives the customer 90 days to cure the default.

Once a Motion for Summary Judgment is granted, a POR begins which gives the customer 90 days to cure the default.

A foreclosure auction date is then set 30 days from the POR expiration date if the default is not cured.

As of March 31, 2023, there was one commercial loan in the process of foreclosure with a balance of $151,000.

As of June 30, 2023, there were no commercial loans in the process of foreclosure.

The Bank's commercial foreclosure process begins when a loan becomes 60 days past due, at which time a default letter is issued.

7 unchanged sentences

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

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

Servicing for others includes loans sold to FHLMC, FNMA, and the FHLB through its MPF program.

The Bank follows the published guidelines of each investor.

Loans serviced for Freddie Mac and Fannie Mae have been sold without recourse, and the Bank has no liability for

these loans in the event of foreclosure.

Loans serviced for FHLMC and FNMA have been sold without recourse, and the Bank has no liability for these loans in the event of foreclosure.

A de minimis volume of loans has been sold to and serviced for MPF to date.

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Other Real Estate Owned

Other real estate owned and repossessed assets ("OREO") are comprised of properties or other assets acquired through a foreclosure proceeding, or acceptance of a deed or title in lieu of foreclosure.

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

At March 31, 2023, 2022 and December 31, 2022 there were no OREO properties owned and no allowance for OREO losses.

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

The Bank's lead source of liquidity is deposits, including brokered deposits, which funded 86.7% of total average assets in the first three months of 2023, up from 84.2% a year ago.

OREO and repossessed assets are comprised of properties or other assets acquired through a foreclosure proceeding, or acceptance of a deed or title in lieu of foreclosure.

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

At June 30, 2023 there was one property owned with an OREO balance of $64,000, with no allowance for OREO losses.

This compares to December 31, 2022, when there were no OREO properties, and June 30, 2022, when there were two properties owned with an OREO balance of $51,000, with no allowance for losses.

The table below presents the composition of OREO at June 30, 2023 and 2022, and December 31, 2022:

Dollars in thousands

June 30, 2023 December 31, 2022 June 30, 2022

Carrying Value

Term $ 64 $ — $ 51

Construction — — —

Revolving and Term — — —

Consumer — — —

Total 64 — 51

Related Allowance

Construction — — —

Revolving and Term — — —

Consumer — — —

Construction — — —

Revolving and Term — — —

Consumer — — —

Total $ 64 $ — $ 51

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

The Bank's lead source of liquidity is deposits, including brokered deposits, which funded 86.4% of total average assets in the first six months of 2023, up from 84.8% a year ago.

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

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

Stress testing analysis of liquidity resources under various scenarios is conducted no less than quarterly and results are reported to the Bank's Asset/Liability Committee ("ALCO").

Stress testing analysis of liquidity resources under various scenarios is conducted no less than quarterly and results are reported to the ALCO.

Borrowings supplement deposits as a source of liquidity;

our borrowings typically consist of customer repurchase agreements and FHLB advances.

The Bank tests its borrowing capacity with the Federal Reserve Bank of Boston, the FHLB and Fed Funds lines with other correspondent no less than annually.

The Company defines its primary sources of contingent liquidity as cash & equivalents, unencumbered US Government or Agency bond collateral, available capacity at FHLB, and available authorized brokered deposit issuance capacity.

As of March 31, 2023, the Bank had primary sources of contingent liquidity of $830.0 million or 29.9% of its total assets.

The Bank tests its borrowing capacity with the FRBB, the FHLB and Fed Funds lines with other correspondent no less than annually;

each has been tested within the past six months.

The Company defines its primary sources of contingent liquidity as cash & equivalents, unencumbered U.S.

Government or Agency bond collateral, available capacity at FHLB, and available authorized brokered deposit issuance capacity.

As of June 30, 2023, the Bank had primary sources of contingent liquidity of $773.0 million or 27.1% of its total assets.

It is Management's opinion that this is an appropriate level.

In addition, the Bank has $180.0 in borrowing capacity under the Federal Reserve Borrower in Custody program, $51.0 million in credit lines with correspondent banks, and $177.0 million in other unencumbered securities available as collateral for borrowing.

In addition, the Bank has $179.0 million in borrowing capacity under the FRBB's Borrower in Custody program, $51.0 million in credit lines with correspondent banks, and $181.0 million in other unencumbered securities available as collateral for borrowing.

These bring the Bank's total sources of liquidity to $1.184 billion or 41.6% of its total assets.

The Bank established borrowing capacity of an additional $47 million at the FRB of Boston under the Bank Term Funding Program ("BTFP") introduced in March 2023, which is included in the primary sources of contingent liquidity total above.

The Bank established borrowing capacity of an additional $47.1 million at the FRBB under the BTFP introduced in March 2023, which is included in the primary sources of contingent liquidity total above.

To date, no advances have been made under BTFP.

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As the sole shareholder of the Bank, the Company is entitled to such dividends when and as declared by the Bank's Board of Directors from legally available funds.

For the periods ended March 31, 2023, 2022 and December 31, 2022 the Bank declared dividends to the Company of $3.6 million, $3.4 million, and $3.4 million, respectively.

For the six-month periods ended June 30, 2023 and 2022 the Bank declared dividends to the Company of $7.3 million and $6.9 million, respectively.

The Bank's regulator, the OCC, may limit the amount of dividends declared and paid in a calendar year based upon certain factors.

Further discussion may be found Shareholder's Equity below.

During the first three months of 2023, total deposits increased by $87.8 million or 3.7% from December 31, 2022 levels.

Low-cost deposits (demand, NOW, and savings accounts) decreased by $55.7 million or 4.2% in the first three months of 2023, money market deposits increased $1.6 million or 0.8%, and certificates of deposit increased $142.0 million or 16.4%.

Between March 31, 2022 and March 31, 2023, total deposits increased by $308.2 million or 14.3%.

Low-cost deposits decreased by $88.6 million or 6.6%, money market accounts decreased $3.0 million or 1.5%, and certificates of deposit increased $399.7 million or 65.5%.

Estimated uninsured deposits totaled $404.5 million or 16.4% of total deposits as of March 31, 2023, and $451.6 million or 19.0% of total deposits of December 31, 2022.

Further discussion may be found in Shareholder's Equity below.

During the first six months of 2023, total deposits increased by $121.0 million or 5.1% from December 31, 2022 levels.

Low-cost deposits (demand, NOW, and savings accounts) decreased by $76.6 million or 5.8% in the first six months of 2023.

Money market deposits increased $15.6 million or 8.1%, and certificates of deposit increased $182.0 million or 21.0% as depositors shifted balances to higher cost product types and brokered certificates of deposit were issued to support earning asset growth.

Between June 30, 2022 and June 30, 2023, total deposits increased by $247.8 million or 11.0%.

Low-cost deposits decreased by $99.3 million or 7.4%, money market accounts increased $1.9 million or 0.9%, and certificates of deposit increased $345.2 million or 49.0%.

Estimated uninsured deposits totaled $408.9 million or 16.4% of total deposits as of June 30, 2023, and $501.6 million or 21.1% of total deposits as of December 31, 2022.

The company has pledged assets as collateral covering certain deposits;

these amounts were $324.7 million and $350.4 million as of March 31, 2023 and December 31, 2022, respectively.

these amounts were $329.6 million and $350.4 million as of June 30, 2023 and December 31, 2022, respectively.

Borrowed Funds

The Company uses funding from the FHLB, the FRB and repurchase agreements enabling it to grow its balance sheet and its revenues.

The Company uses funding from the FHLBB, the FRBB and repurchase agreements enabling it to grow its balance sheet and its revenues.

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

During the three months ended March 31, 2023, borrowed funds decreased $19.6 million or 18.9% from December 31, 2022, primarily in customer repurchase agreements.

Between March 31, 2022 and March 31, 2023, borrowed funds decreased by $49.8 million or 37.3%;

the reduction was a combination of repayment of FHLB borrowings and lower balances in customer repurchase agreements.

During the six months ended June 30, 2023, borrowed funds increased $11.0 million or 10.6% from December 31, 2022, primarily due to FHLBB advances.

Between June 30, 2022 and June 30, 2023, borrowed funds decreased by $12.1 million or 9.6%;

the reduction was primarily due to lower balances in customer repurchase agreements.

Capital Resources

Shareholders' equity as of March 31, 2023 was $228.5 million, compared to $228.9 million as of December 31, 2022 and $233.6 million as of March 31, 2022.

The Company's earnings in the first three months of 2023, net of dividends declared, added $4.2 million to shareholders' equity.

The net unrealized loss on available-for-sale securities, net of tax, presented in accordance with FASB ASC Topic 320 "Investments – Debt and Equity Securities" stands at $40.5 million as of March 31, 2023 and was $44.7 million as of December 31, 2022.

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

A cash dividend of $0.34 per share was declared in the first quarter of 2023.

The dividend payout ratio, which is calculated by dividing dividends declared per share by basic earnings per share, was 46.58% for the first three months of 2023 compared to 35.96% for the same period in 2022.

Shareholders' equity as of June 30, 2023 was $232.0 million, compared to $228.9 million as of December 31, 2022 and $227.7 million as of June 30, 2022.

The Company's earnings in the first six months of 2023, net of dividends declared, added $7.7 million to shareholders' equity.

The net unrealized loss on AFS securities, net of tax, presented in accordance with FASB ASC Topic 320 "Investments – Debt and Equity Securities" stands at $43.8 million as of June 30, 2023 and was $44.7 million as of December 31, 2022.

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

A cash dividend of $0.35 per share was declared in the second quarter of 2023, one cent more than the $0.34 paid the previous four quarters.

The dividend payout ratio, which is calculated by dividing dividends declared per share by basic earnings per share, was 49.29% for the first six months of 2023 compared to 36.67% for the same period in 2022.

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

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

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

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

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

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

The Company met each of the well-capitalized ratio guidelines at March 31, 2023.

The following tables indicate the capital ratios for the Bank and the Company at March 31, 2023 and December 31, 2022.

As of March 31, 2023 Leverage Common Equity Tier 1 Tier 1 Total Risk-Based

The Company met each of the well-capitalized ratio guidelines at June 30, 2023.

The following tables indicate the capital ratios for the Bank and the Company at June 30, 2023 and December 31, 2022.

As of June 30, 2023 Leverage Common Equity Tier 1 Tier 1 Total Risk-Based

Bank 8.52 % 12.37 % 12.37 % 13.62 %

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

To further validate its internal results, the Bank engaged a third party consultant during the second quarter of 2022 to conduct credit stress tests on its loan portfolio under six scenarios.

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

The consultant's report applied projected credit losses over a thirteen quarter horizon to the Bank's capital position with immediate effect.

To further validate its internal results, the Bank engaged a third party consultant during the first quarter of 2023 to conduct credit stress tests on its loan portfolio under six scenarios.

Three of the scenarios emulated the Federal Reserve's DFAST, and three were developed by a leading forecasting firm.

The consultant's report applied projected credit losses over a thirteen quarter horizon to the Bank's capital position as of March 31, 2023 with immediate effect.

In each of the six scenarios the Bank remained well capitalized.

4 unchanged sentences

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

At March 31, 2023, the Bank had four outstanding off-balance sheet, derivative instruments, designated as cash flow hedges and three off-balance sheet, derivative instruments, designated as asset hedges.

These derivative instruments were interest rate swap agreements, with notional principal amounts totaling $105.0 million and $100.0 million, respectively, and an unrealized loss of $2.2 million, net of taxes.

At June 30, 2023, the Bank had four outstanding off-balance sheet, derivative instruments, designated as cash flow hedges and three off-balance sheet, derivative instruments, designated as asset hedges.

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

1 unchanged sentence

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

At March 31, 2023, the Bank's derivative instrument counterparties had a composite credit rating of “A-” based upon the ratings of several major credit rating agencies.

At June 30, 2023, the Bank's derivative instrument counterparties had a composite credit rating of “A-” based upon the ratings of several major credit rating agencies.

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

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

The terms of the contracts are designed to offset one another resulting in their being neither a net gain or a loss.

The terms of the contracts are designed to offset one another resulting in there being neither a net gain or a loss.

The notional amounts of the financial derivative instruments do not represent exposure to credit loss.

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

As of March 31, 2023, the Bank had six loan swap agreements in place with a total notional value of $74.3 million.

As of June 30, 2023, the Bank had six loan swap agreements in place with a total notional value of $73.7 million.

Contractual Obligations

The following table sets forth the contractual obligations of the Company as of March 31, 2023:

The following table sets forth the contractual obligations of the Company as of June 30, 2023:

Dollars in thousands

6 unchanged sentences

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

What changed 10-Q

Item 2. Management’s Discussion and Analysis