What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2023-11-03 compared with 2023-08-04 · 190 added, 202 removed, 658 unchanged (37% of the section changed)

72 unchanged sentences

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 ongoing conflict between Russia and Ukraine and the recent tensions arising from the Middle East have added to economic uncertainty and geopolitical instability.

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

17 unchanged sentences

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

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

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

Dollars in thousands

7 unchanged sentences

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

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

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

Dollars in thousands

5 unchanged sentences

Effect of non-interest tax-exempt income 131 127 44 43

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

Net securities gains — (7) — (6)

Adjusted net interest income plus non-interest income $ 62,780 $ 71,548 $ 20,574 $ 24,708

5 unchanged sentences

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,

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

Dollars in thousands

5 unchanged sentences

The following table provides a reconciliation to Net Income:

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

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

Dollars in thousands 2023 2022 2023 2022

Net Income, as presented $ 22,839 $ 29,793 $ 7,474 $ 10,091

provision for credit losses 701 900 151 450

provision (reduction) for credit losses 501 1,300 (200) 400

income taxes expense 4,773 6,423 1,565 2,217

1 unchanged sentence

Executive Summary

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.

Net income for the nine months ended September 30, 2023 was $22.8 million, down $7.0 million or 23.3% from the same period in 2022 due to a decrease in net interest income resulting from higher funding costs.

Earnings per common share on a fully diluted basis were $2.06 for the nine months ended September 30, 2023, down $0.64 or 23.7% from the $2.70 posted for the same period in 2022.

Dividends totaling $1.04 per share have been declared year-to-date, representing a payout to our shareholders of 50.00% of basic earnings per share for the 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.

For the quarter ended September 30, 2023, net income was $7.5 million, down $2.6 million or 25.9% from the same period in 2022.

Earnings per common share on a fully diluted basis were $0.67 for the quarter ended September 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 $7.1 million or 12.1% in the nine months ended September 30, 2023 compared to the same period in 2022.

The tax equivalent net interest margin for the nine months ended September 30, 2023, was 2.54%, down from 3.17% 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 September 30, 2023, net interest income on a tax-equivalent basis decreased $3.3 million or 16.6% compared to the same period in 2022, with a net interest margin of 2.40% compared to 3.14% for the same period in 2022.

Non-interest income for the nine months ended September 30, 2023 was $11.3 million, down $1.7 million or 13.0%, from the nine months ended September 30, 2022.

As compared to the prior year period, mortgage banking revenue decreased $623,000 or 50.5% 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.

Debit card revenue was down $1.0 million or 21.3% due primarily to timing of program incentive payments;

year-to-date revenue at First National Wealth Management was essentially unchanged in 2023 from that earned in 2022.

Non-interest expense for the nine months ended September 30, 2023 was $32.6 million, up $378,000 or 1.2% from the nine months ended September 30, 2022.

FDIC insurance premiums increased $691,000 from the same period in 2022, while salaries and employee benefits decreased 3.9% and other operating expense decreased 0.9% over the same period.

Asset quality continues to be strong and stable.

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.

Non-performing assets stood at 0.09% of total assets as of September 30, 2023, up slightly from 0.07% of total assets as of September 30, 2022 and 0.06% of total assets as of December 31, 2022.

Total past-due loans remain low and were 0.10% of total loans as of September 30, 2023, up slightly from 0.08% of total loans as of December 31, 2022 and September 30, 2022.

The provision for credit losses on loans for the first nine months of 2023 was $419,000, down from the $1.3 million provisioned in the same period in 2022.

A reversal in the provision for credit losses on loans of $161,000 was recorded in the third quarter of 2023 under the CECL methodology.

Net loan chargeoffs for the nine months ended September 30, 2023 were $30,000 or 0.002% of average loans on an annualized basis, down from net charge-offs of $434,000 or 0.030% of total loans for the nine months ended September 30, 2022.

The ACL for loans increased $6.6 million between December 31, 2022 and September 30, 2023, and now stands at 1.12% of loans outstanding as of September 30, 2023, up from 0.87% at December 31, 2022 and 0.88% at September 30, 2022.

Most of the dollar increase in the ACL for loans is the result of CECL adoption and associated one-time adjustments.

The Company's balance sheet continued to expand in the first nine months of 2023 as total assets increased $205.0 million or 7.5% year-to-date.

The loan portfolio increased $165.2 million or 8.6% in the nine months ended September 30, 2023 and $221.9 million or 11.9% from a year ago.

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

Commercial loans increased by $98.4 million during the period, led by increases in owner-occupied commercial real estate of $43.3 million, non-owner occupied commercial real estate of $33.4 million and commercial & industrial loans of $31.2 million;

commercial construction balances decreased by $21.5 million as a number of projects converted to permanent financing.

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.

Residential term loans increased by $62.6 million in the first nine months of 2023, while residential construction loans decreased by $20.9 million.

The investment portfolio decreased $6.1 million year-to-date and increased $6.5 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 $221.1 million, or 9.3%, year-to-date to $2.60 billion.

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.

Low-cost deposits increased $1.1 million during the nine-month period as growth in Demand and NOW balances was offset by a decline in Savings balances.

Money Market balances increased $78.4 million and CDs increased $141.5 million.

A majority of the deposit growth generated YTD has been in local deposits which have increased by $120.8 million, or 7.00%, year-to-date.

To balance the seasonal changes and to support earning asset growth, wholesale CDs have increased $94.4 year-to-date, while borrowings have decreased by $20.5 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.

The Company's total risk-based capital ratio was 13.76% as of September 30, 2023, solidly above the well-capitalized threshold of 10.0% set by the FDIC, the FRBB, and the OCC.

Among the Company's operating ratios, the return on average assets was 1.08% and return on average tangible common equity of 14.97% for the nine months ended September 30, 2023 compared to 1.54% and 19.29%, 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 51.88% for the nine months ended September 30, 2023 compared to 44.99% for the same period in 2022.

Net Interest Income

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;

Total interest income of $93.4 million for the nine months ended September 30, 2023 was an increase of $27.4 million or 41.5% compared to total interest income of $66.0 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 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;

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 $44.0 million for the nine months ended September 30, 2023, an increase of $34.7 million or 374.5% compared to total interest expense for the nine months ended September 30, 2022.

As a result, net interest income of $49.4 million for the nine months ended September 30, 2023 was a decrease of $7.3 million or 12.9% compared to net interest income of $56.7 million for the same period ended September 30, 2022;

excluding the PPP income, the period-to-period change would have been 11.2%.

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.

The following tables present the amount of interest earned or paid, as well as the average yield or rate on an annualized basis, for each major category of assets or liabilities for the six months and quarters ended June 30, 2023 and 2022.

The Company's net interest margin on a

tax-equivalent basis for the nine months ended September 30, 2023 was 2.54%, down from 3.17% for the first nine months of 2022.

Tax-exempt interest income amounted to $7.4 million for the nine months ended September 30, 2023 compared to $6.5 million for the nine months ended September 30, 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 nine months and quarters ended September 30, 2023 and 2022.

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

For the six months ended

June 30, 2023 June 30, 2022

For the nine months ended

September 30, 2023 September 30, 2022

Dollars in thousands

15 unchanged sentences

For the quarters ended

June 30, 2023 June 30, 2022

September 30, 2023 September 30, 2022

Dollars in thousands

15 unchanged sentences

Net interest margin 2.40 % 3.14 %

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.

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

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

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

For the nine months ended September 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

For the quarter ended September 30, 2023 compared to 2022

Dollars in thousands

12 unchanged sentences

Average Daily Balance Sheets

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

For the six months ended For the quarters ended

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

For the nine months ended For the quarters ended

Dollars in thousands

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

September 30, 2023 September 30, 2022 September 30, 2023 September 30, 2022

Cash and cash equivalents $ 25,355 $ 23,926 $ 29,993 $ 27,062

Interest-bearing deposits in other banks 7,567 23,405 15,241 15,711

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

Securities available for sale (includes tax exempt securities of $40,442 and $35,457 at September 30, 2023 and 2022, respectively)

281,935 308,297 273,930 302,428

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)

Securities to be held to maturity, net of allowance for credit losses of $432 at September 30, 2023 1 (included tax exempt securities of $257,421 and $253,554 at September 30, 2023 and 2022, respectively)

390,828 377,163 388,623 380,512

28 unchanged sentences

Net unrealized loss on securities transferred from available for sale to held to maturity (60) (77) (58) (70)

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

Net unrealized gain (loss) on cash flow hedging derivative instruments (58) 67 901 209

Net unrealized gain on postretirement benefit costs 273 105 273 105

1 unchanged sentence

Total Liabilities & Shareholders' Equity $ 2,839,908 $ 2,592,807 $ 2,899,742 $ 2,656,645

1 June 30, 2022 had no allowance for credit losses

1 September 30, 2022 had no allowance for credit losses

Non-Interest Income

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%.

Non-interest income of $11.3 million for the nine months ended September 30, 2023 is a decrease of $1.7 million compared to the same period in 2022.

Mortgage Banking revenue was down $623,000, or 50.5%;

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

Debit card revenue was down $1.0 million or 21.3%.

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.

Revenue at First National Wealth Management increased $2,000 or 0.1% over the same period.

Non-interest income of $3.9 million for the quarter ended September 30, 2023 is a decrease of $824,000 compared to the same period in 2022;

the decrease is primarily attributable to debit card revenue due to the reasons mentioned above.

Non-Interest Expense

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%.

Non-interest expense of $32.6 million for the nine months ended September 30, 2023 is an increase of 1.2% or $378,000 compared to non-interest expense of $32.2 million for the same period in 2022.

Salaries and employee benefits decreased $672,000 or 3.9%, and other operating expense decreased $74,000 or 0.9%.

FDIC insurance premiums increased by $691,000 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.

Non-interest expense of $11.0 million for the quarter ended September 30, 2023 is a decrease of 3.2% compared to non-interest expense of $11.4 million for the same period in 2022 due to the reasons mentioned.

Income taxes on operating earnings were $4.8 million for the nine months ended September 30, 2023, down $1.7 million from the same period in 2022.

The carrying value of the Company's investment portfolio decreased by $6.1 million between December 31, 2022 and September 30, 2023 from $682.3 million to $676.2 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.

As of September 30, 2023, mortgage-backed securities had a carrying value of $270.1 million and a fair value of $256.7 million.

Of this total, securities with a fair value of $73.6 million or 28.7% of the mortgage-backed portfolio were issued by GNMA and securities with a fair value of $183.1 million or 71.3% of the mortgage-backed portfolio were issued by FHLMC and FNMA.

15 unchanged sentences

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.

The remaining unamortized balance of the net unrealized losses for the securities transferred from AFS to HTM was $58,000 at September 30, 2023.

This compares to $64,000 and $67,000, net of taxes, at December 31, 2022 and September 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 June 30, 2023 and 2022 and December 31, 2022.

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

Dollars in thousands

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

September 30, 2023 December 31, 2022 September 30, 2022

Securities available for sale

Government-sponsored agencies $ 19,361 $ 19,147 $ 21,067

Treasury & Agency securities $ 38,252 $ 19,147 $ 19,144

Mortgage-backed securities 212,846 228,676 229,178

3 unchanged sentences

Securities to be held to maturity

Government-sponsored agencies $ 40,100 $ 40,100 $ 38,100

Treasury & Agency securities $ 40,100 $ 40,100 $ 38,100

Mortgage-backed securities 57,224 60,497 56,423

9 unchanged sentences

Total securities $ 676,206 $ 682,288 $ 669,688

The Company adopted ASC 326, the CECL standard in the current reporting period.

The Company adopted ASC 326, the CECL standard in the first quarter of 2023.

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 $428,000 as of June 30, 2023;

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

The total ACL for HTM securities was $432,000 as of September 30, 2023;

there was no reserve as of December 31, 2022 and September 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 June 30, 2023.

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

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

3 unchanged sentences

Value Yield to maturity Amortized Cost Yield to maturity

Government-Sponsored Agencies

Treasury & Agency Securities

Due in 1 year or less $ 19,819 5.20 % $ — 0.00 %

29 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 June 30, 2023 amounted to $110.1 million, or 15.64% of the amortized cost of the total securities portfolio.

The securities portfolio contains certain securities where the amortized cost of which exceeds fair value, which at September 30, 2023 amounted to $144.1 million, or 20.00% 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.

7 unchanged sentences

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

As of June 30, 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.

As of September 30, 2023, the Company had debt securities in an unrealized loss position with a fair value of $550.2 million and unrealized losses of $144.1 million, as identified in the table below.

Securities in a continuous unrealized loss position more than twelve months amounted to a fair value $453.7 million as of September 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 June 30, 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 September 30, 2023:

Less than 12 months 12 months or more Total

3 unchanged sentences

Losses Fair Value (Estimated) Unrealized

Government-sponsored agencies $ 1,981 $ (19) $ 47,330 $ (16,799) $ 49,311 $ (16,818)

Treasury & Agency securities $ 11,842 $ (40) $ 44,577 $ (19,555) $ 56,419 $ (19,595)

Mortgage-backed securities 18,017 (441) 238,150 (63,825) 256,167 (64,266)

4 unchanged sentences

For securities with unrealized losses, the following information was considered in determining that no charge against the allowance for decline in fair value was required in the current reporting period:

Securities issued by U.S.

Government-sponsored agencies and enterprises.

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.

Securities issued by the U.S.

Treasury and U.S.

Government-sponsored agencies & enterprises.

As of September 30, 2023, there were $19.6 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.

Management believes that securities issued by U.S.

Government-sponsored agencies and enterprises have minimal credit risk, and that 100% of the amounts contractually due will be collected.

Management believes that securities issued by the U.S.

Treasury and U.S.

Government-sponsored agencies and enterprises carry zero or near-zero credit risk, and that 100% of the amounts contractually due will be collected.

Mortgage-backed securities issued by U.S.

1 unchanged sentence

Government-sponsored enterprises.

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.

As of September 30, 2023, there were $64.3 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 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.

Management believes that the unrealized losses at September 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 June 30, 2023, there were $36.4 million of unrealized losses on these securities compared to $38.0 million at December 31, 2022.

As of September 30, 2023, there were $56.4 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 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.

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

The Company attributes the unrealized losses at September 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 June 30, 2023, there were $47,000 of unrealized losses on these securities compared to $53,000 at December 31, 2022.

As of September 30, 2023, there were $4,000 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 June 30, 2023, there were $3.9 million of unrealized losses on these securities compared to $2.5 million at December 31, 2022.

As of September 30, 2023, there were $3.8 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 June 30, 2023, all corporate bond issuers were current on contractually obligated interest and principal payments.

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

FHLBB and FRBB Stock

2 unchanged sentences

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.

As of September 30, 2023, the Bank's investment in FHLBB stock totaled $2.8 million.

This compares to $2.8 million as of December 31, 2022 and $3.5 million as of September 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.

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

The Bank is also a member of the FRBB.

1 unchanged sentence

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 Bank's investment in FRBB stock totaled $1.0 million at September 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.

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

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

1 unchanged sentence

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

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 minimal impact on the reserve.

As of September 30, 2023, the Bank had $268,000 in loans held for sale.

This compares to $275,000 in loans held for sale at December 31, 2022 and no loans held for sale at September 30, 2022.

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 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 increased during the first nine months of 2023, with total loans at $2.08 billion at September 30, 2023, up $165.2 million or 8.6% from total loans of $1.91 billion at December 31, 2022.

Commercial loans increased $98.4 million or 14.7% between December 31, 2022 and September 30, 2023, municipal loans increased $17.8 million or 43.9%, residential term loans increased $62.6 million, residential construction decreased $20.9 million, and home equity lines of credit increased $8.9 million.

The loan portfolio is segmented into ten classes.

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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 June 30, 2023 and 2022 and December 31, 2022.

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

Dollars in thousands

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

September 30, 2023 December 31, 2022 September 30, 2022

Real estate owner occupied $ 299,943 14.4 % $ 256,623 13.4 % $ 251,410 13.6 %

9 unchanged sentences

Total loans $ 2,079,860 100.0 % $ 1,914,674 100.0 % $ 1,857,975 100.0 %

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

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

Dollars in thousands

11 unchanged sentences

Total loans $ 7,713 $ 240,704 $ 237,417 $ 1,594,026 $ 2,079,860

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

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

Fixed-Rate Adjustable-Rate Total

13 unchanged sentences

Loan Concentrations

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.

As of September 30, 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 $226.4 million, or 10.88% and $201.5 million, or 10.84% of total loans, respectfully.

Credit Risk Management and Allowance for Credit Losses on Loans

22 unchanged sentences

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

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 September 30, 2023, individually analyzed loans with specific reserves totaled $929,000 and the amount of such reserves was $266,000.

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 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.

The total ACL on loans at September 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 June 30, 2023 and 2022 and December 31, 2022.

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

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

Dollars in thousands

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

September 30, 2023 December 31, 2022 September 30, 2022

Real estate owner occupied $ 4,511 14.4 % $ 6,116 36.5 % $ 5,575 34.5 %

10 unchanged sentences

Total $ 23,322 100.0 % $ 16,723 100.0 % $ 16,387 100.0 %

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:

The ACL totaled $23.3 million at September 30, 2023, compared to $16.7 million as of December 31, 2022 and $16.4 million as of September 30, 2022.

The increase in the total allowance from December 31, 2022 to September 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 September 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 $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:

The provision for credit losses to maintain the allowance was $419,000 for the first nine months of 2023 and $1.3 million the first nine months of 2022.

A reversal in the provision for credit losses on loans of $161,000 was recorded in the third quarter of 2023 under CECL methodology.

Net charge-offs were $30,000 in the first nine months of 2023, down from $434,000 in the first nine months of 2022.

The ACL as a percentage of outstanding loans was 1.12% as of September 30, 2023, up from 0.87% as of December 31, 2022, and up from 0.88% as of September 30, 2022.

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

Dollars in thousands

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

September 30, 2023 December 31, 2022 September 30, 2022

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

3 unchanged sentences

Construction — — —

C&I 16 309 272

Multifamily — — —

10 unchanged sentences

Municipal — — —

Term 10 29 27

Construction — — —

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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 consolidated balance sheets within other liabilities and totaled $1.5 million as of June 30, 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 September 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 0.08% 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:

Nonperforming loans, expressed as a percentage of total loans, totaled 0.12% at September 30, 2023 compared to 0.09% at December 31, 2022 and 0.10% at September 30, 2022.

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

Dollars in thousands

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

September 30, 2023 December 31, 2022 September 30, 2022

Real estate owner occupied $ — $ 193 $ 195

12 unchanged sentences

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

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.

As of September 30, 2023, loans 90 days or more day past due and still accruing interest totaled $11,000, compared to $241,000 at December 31, 2022 and none at September 30, 2022.

Loan Modifications Made to Borrowers Experiencing Financial Difficulty

2 unchanged sentences

Past Due Loans

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:

The Bank's overall loan delinquency ratio was 0.10% at September 30, 2023 compared to 0.08% at December 31, 2022 and 0.08% at September 30, 2022.

Loans 90 days delinquent and accruing decreased from $241,000 at December 31, 2022 to $11,000 as of September 30, 2023.

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

Dollars in thousands

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

September 30, 2023 December 31, 2022 September 30, 2022

Real estate owner occupied $ — $ 193 $ 195

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 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.

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

As of September 30, 2023, there were four residential loans in the process of foreclosure totaling $459,000.

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

3 unchanged sentences

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

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

As of September 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.

1 unchanged sentence

A Notice of Statutory Power of Sale is then prepared.

This notice must be published for three consecutive weeks in a newspaper located in the county in which the property is located.

This notice must be

published for three consecutive weeks in a newspaper located in the county in which the property is located.

A notice also must be issued to the mortgagor and all parties of interest 21 days prior to the sale.

3 unchanged sentences

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

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

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

The Bank follows the published guidelines of each investor.

6 unchanged sentences

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

At September 30, 2023, 2022 and December 31, 2022, there were no OREO properties and no allowance for losses.

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.

The Bank's lead source of liquidity is deposits, including brokered deposits, which funded 86.9% of total average assets in the first nine months of 2023, up from 85.0% a year ago.

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

Securities designated as available for sale may also be sold in response to short-term or long-term liquidity needs, although Management has no intention to do so at this time.

9 unchanged sentences

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 FRBB, the FHLB and Fed Funds lines with other correspondent no less than annually;

each has been tested within the past six months.

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

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

each has been tested within the past nine 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.

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

As of September 30, 2023, the Bank had primary sources of contingent liquidity of $891.0 million or 30.6% of its total assets.

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

1 unchanged sentence

These bring the Bank's total sources of liquidity to $1.263 billion or 43.4% of its total assets.

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.

The Bank established borrowing capacity of $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.

3 unchanged sentences

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 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.

For the nine-months periods ended September 30, 2023 and 2022 the Bank declared dividends to the

Company of $11.0 million and $10.4 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 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.

During the first nine months of 2023, total deposits increased by $221.1 million or 9.3% from December 31, 2022 levels.

Low-cost deposits (demand, NOW, and savings accounts) increased by $1.1 million or 0.1% in the first nine months of 2023.

Money market deposits increased $78.4 million or 40.7%, and certificates of deposit increased $141.5 million or 16.3% 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%.

Between September 30, 2022 and September 30, 2023, total deposits increased by $230.0 million or 9.7%.

Low-cost deposits decreased by $75.3 million or 5.4%, money market accounts increased $82.3 million or 43.6%, and certificates of deposit increased $223.0 million or 28.4%.

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.

Estimated uninsured deposits totaled $480.5 million or 18.5% of total deposits as of September 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 $329.6 million and $350.4 million as of June 30, 2023 and December 31, 2022, respectively.

these amounts were $383.9 million and $350.4 million as of September 30, 2023 and December 31, 2022, respectively.

Borrowed Funds

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

The Company uses funding from the FHLBB, the FRBB and customer 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 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.

During the nine months ended September 30, 2023, borrowed funds decreased $20.5 million or 19.8% from December 31, 2022, split nearly evenly between FHLB advances and customer repurchase agreements .

Between September 30, 2022 and September 30, 2023, borrowed funds decreased by $35.4 million or 29.9%;

a majority of this reduction was in FHLB advances.

Capital Resources

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.

Shareholders' equity as of September 30, 2023 was $226.7 million, compared to $228.9 million as of December 31, 2022 and $219.9 million as of September 30, 2022.

The Company's earnings in the first nine months of 2023, net of dividends declared, added $11.3 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 $53.9 million as of September 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.

A cash dividend of $0.35 per share was declared in the third quarter of 2023.

The dividend payout ratio, which is calculated by dividing dividends declared per share by basic earnings per share, was 50.00% for the first nine months of 2023 compared to 36.63% 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.

6 unchanged sentences

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

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

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

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

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

Bank 8.48 % 12.47 % 12.47 % 13.72 %

10 unchanged sentences

The Bank maintains and annually updates a capital plan over a five year horizon;

the capital plan was last updated in the second quarter of 2022.

the capital plan was last updated in the third quarter of 2023.

Based upon reasonable assumptions of growth and operating performance, the base capital plan model projects that the Bank will be well capitalized throughout the five year period.

10 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 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.

These derivative instruments were interest rate swap agreements, with notional principal amounts totaling $105.0 million and $100.0 million, respectively, and an unrealized gain of $680,000, net of taxes.

At September 30, 2023, the Bank had four outstanding off-balance sheet, derivative instruments, designated as cash flow hedges and four off-balance sheet, derivative instruments, designated as fair value hedges.

These derivative instruments were interest rate swap agreements, with notional principal amounts totaling $105.0 million and $150.0 million, respectively, and an unrealized gain of $2.0 million, net of taxes.

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 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.

At September 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 there 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.

1 unchanged sentence

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

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

As of September 30, 2023, the Bank had six loan swap agreements in place with a total notional value of $73.1 million.

Contractual Obligations

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

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