What changed in this filing

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Item 2. Management’s Discussion and Analysis

2024-05-07 compared with 2023-11-03 · 220 added, 287 removed, 561 unchanged (47% of the section changed)

17 unchanged sentences

Critical Accounting Policies

Management's discussion and analysis of the Company's financial condition is based on the consolidated financial statements which are prepared in accordance with GAAP.

Management's discussion and analysis of the Company's financial condition and results of operations is based on the consolidated financial statements which are prepared in accordance with accounting principles generally accepted in the United States of America.

The preparation of such financial statements requires Management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosure of contingent assets and liabilities.

On an ongoing basis, Management evaluates its estimates, including those related to the allowance for credit losses on loans, the fair value of securities and allowance for credit losses on securities, the allowance for credit losses on off balance sheet commitments, goodwill, and the valuation of mortgage servicing rights.

Management bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis in making judgments about the carrying values of assets that are not readily apparent from other sources.

Actual results could differ from the amount derived from Management's estimates and assumptions under different assumptions or conditions.

On an ongoing basis, Management evaluates its estimates, including those related to the ACL, fair value of securities, goodwill, the valuation of mortgage servicing rights, derivative financial instruments, and credit losses on securities.

Management bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets that are not readily apparent from other sources.

Actual results could differ from the amounts derived from Management's estimates and assumptions under different assumptions or conditions

Allowance for Credit Losses.

Management believes the allowance for credit losses requires the most significant estimates and assumptions used in the preparation of the consolidated financial statements.

The allowance for credit losses is based on Management's evaluation of the level of the allowance required in relation to the estimated loss exposure in the loan and investment portfolios.

The allowance is comprised of the allowance for credit losses on loans, the allowance for credit losses on off-balance sheet commitments, and the allowance for credit losses on held to maturity securities.

Management regularly evaluates the allowance, typically monthly, to determine the appropriate level by taking into consideration factors such as the size and growth trajectory of the portfolios, quality trends as measured by key indicators, prior loan loss experience in each loan portfolio segment, local and national business and economic conditions, and other factors contributing to Management's estimation of potential losses.

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

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.

The valuation of mortgage servicing rights is a critical accounting policy which requires significant estimates and assumptions.

The Bank often sells mortgage loans it originates and retains the ongoing servicing of such loans, receiving a fee for these services, generally 0.25% of the outstanding balance of the loan per annum.

Mortgage servicing rights are recognized at fair value when they are acquired through the sale of loans, and are reported in other assets.

They are amortized into non-interest income in proportion to, and over the period of, the estimated future net servicing income of the underlying financial assets.

The rights are subsequently carried at the lower of amortized cost or fair value.

Management uses an independent firm which specializes in the valuation of mortgage servicing rights to determine the fair value which is recorded on the balance sheet.

The most important assumption is the anticipated loan prepayment rate, and increases in prepayment speed results in lower valuations of mortgage servicing rights.

The valuation also includes an evaluation for impairment based upon the fair value of the rights, which can vary depending upon current interest rates and prepayment expectations, as compared to amortized cost.

Impairment is determined by stratifying rights by predominant characteristics, such as interest rates and terms.

The use of different assumptions could produce a different valuation.

All of the assumptions are based on standards the Company believes would be utilized by market participants in valuing mortgage servicing rights and are consistently derived and/or benchmarked against independent public sources.

Management believes the ACL requires the most significant estimates and assumptions used in the preparation of the consolidated financial statements.

The ACL is based on Management's evaluation of the level of the allowance required in relation to the estimated loss exposure in the loan portfolio, off-balance sheet commitments, and investment portfolio.

Management regularly evaluates the allowance, typically monthly, to determine the appropriate level by taking into consideration factors such as the size and growth trajectory of the portfolio, quality trends as measured by key indicators, prior loan loss experience in major portfolio segments, local and national business conditions, economic forecasts, the results of any stress testing undertaken during the period, and Management's estimation of potential losses.

Period-to-period changes to any or all of these of these factors could change the level of ACL required, in turn impacting our level of provision expense and ultimately our net income.

Similarly, the use of different estimates or assumptions could produce different provisions for credit losses which would likely result in changes to the Company's net income.

In the current period the ACL-Loans increased by $177,000, the ACL-Off-Balance Commitments decreased by $360,000 and the ACL-HTM Securities decreased by $252,000.

Further discussion of the ACL may be found in Note 2, "Investment Securities", Note 3, "Loans", and Note 4, "Allowance for Credit Losses", to the consolidated financial statements contained in Item 1 of the Form 10-Q.

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.

Fair Value of Securities.

3 unchanged sentences

It also validates the values provided by the pricing service no less frequently than quarterly by measuring against security prices provided by a secondary source.

Results of the validation are reported to the Bank's Asset Liability Committee each quarter and any variances between the two sources above defined thresholds are investigated by management.

Results of the validation are reported to the ALCO each quarter and any variances between the two sources above defined thresholds are investigated by management.

A finding that the Company's methodology for valuation of its investment securities is materially incorrect could result in changes to the carrying value of securities on its balance sheet and corresponding changes in shareholders equity position.

As of March 31, 2024 the fair value of AFS securities decreased by $7.6 million and the fair value of HTM securities decreased by $10.8 million from that of December 31, 2023.

These decreases are due to a combination of higher interest rates leading to lower market prices for the underlying securities and incoming cash flow from these investments being re-deployed to other segments of the balance sheet.

Further discussion of the fair value of securities may be found in Note 2, "Investment Securities", to the consolidated financial statements contained in Item 1 of the Form 10-Q.

Credit Loss Recognition on Securities.

Another significant estimate related to investment securities is the evaluation of potential credit losses on investment securities.

The evaluation of securities for potential credit losses is a quantitative and qualitative process, which is subject to risks and uncertainties and is intended to determine whether declines in the fair value of investments should be recognized as a charge to the allowance for credit losses.

The risks and uncertainties include changes in general economic conditions, the issuer's financial condition and/or future prospects, the effects of changes in interest rates or credit spreads and the expected recovery period of unrealized losses.

1 unchanged sentence

The primary factors considered in this evaluation (a) the length of time and extent to which the fair value has been less than cost or amortized cost and the expected recovery period of the security, (b) the financial condition, credit rating and future prospects of the issuer, (c) whether the debtor is current on contractually obligated interest and principal payments, (d) the volatility of the securities' market price, (e) the intent and ability of the Company to retain the investment for a period of time sufficient to allow for recovery, which may be at maturity and (f) any other information and observable data considered relevant, including the expectation of receipt of all principal and interest when due.

The Bank invests only in investment grade securities and no credit losses have been recognized on securities currently held.

Further discussion of credit loss recognition on securities may be found in Note 2, "Investment Securities", to the consolidated financial statements contained in Item 1 of the Form 10-Q.

Derivative Financial Instruments Designated as Hedges.

7 unchanged sentences

Hedge accounting is discontinued when it is determined that the derivative is no longer effective in offsetting changes in the cash flows of the hedged item, that it is unlikely that the forecasted transaction will occur, or that the designation of the derivative as a hedging instrument is no longer appropriate.

Among the factors that may influence the fair value of a derivative instrument are changes in market interest rates, changes in the time remaining to maturity of the instrument, or credit quality of the counter-party.

Further information, including period-to-period changes in the fair value of derivatives, may be found in Note 10, "Financial Derivative Instruments", to the consolidated financial statements contained in Item 1 of the Form 10-Q.

Risks and Uncertainties.

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 nation's economy continues to demonstrate areas of strength and areas of weakness.

The high inflation experienced post-pandemic has moderated, yet continues to run above the FOMC's 2% target, and the pace of progress has slowed as evidenced by higher than expected readings of the Consumer Price Index in the first quarter of 2024.

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 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.

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

To address the inflation problem, FOMC aggressively increased short-term interest rates throughout 2022 and into 2023, and has been on hold since the summer of 2023.

The FOMC has signaled rate reductions beginning later this year, however recent discussion has pushed the timing of cuts out further and at less depth than initial guidance suggested.

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

an overshoot on maintaining elevated interest rates risks entering the economy into a recession.

Concern continues to be expressed nationally on the commercial real estate market given high vacancy numbers in some locations.

The ongoing conflicts between Russia and Ukraine, and Israel and Hamas, continue to contribute to geopolitical instability and add to economic uncertainty particularly in the energy sector.

The recent near-failure and subsequent recapitalization of a large regional bank rekindled concerns that followed the failures in 2023 of several regional banks, which roiled markets and introduced new sources of uncertainty.

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

Use of Non-GAAP Financial Measures

15 unchanged sentences

A Federal Income Tax rate of 21.0% was used in 2024 and 2023.

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

For the three months ended March 31,

Dollars in thousands

2023 2022 2023 2022

Net interest income as presented $ 14,880 $ 17,475

3 unchanged sentences

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

The non-GAAP efficiency ratio excludes securities losses and provision for credit losses on securities from non-interest expenses, excludes securities gains from non-interest income, and adds the tax-equivalent adjustment to net interest income.

The non-GAAP efficiency ratio excludes any losses on sales of securities from non-interest expenses, excludes any gains on sales of securities from non-interest income, and adds the tax-equivalent adjustment to net interest income.

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

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

For the three months ended March 31,

Dollars in thousands

2023 2022 2023 2022

Non-interest expense, as presented $ 11,761 $ 10,850

3 unchanged sentences

Effect of non-interest tax-exempt income 45 44

Net securities gains — (7) — (6)

Adjusted net interest income plus non-interest income $ 19,234 $ 21,708

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

For the three months ended March 31,

Dollars in thousands

2023 2022 2023 2022

Average shareholders' equity as presented $ 244,083 $ 237,518

3 unchanged sentences

The following table provides a reconciliation to Net Income:

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

For the three months ended March 31,

Dollars in thousands 2024 2023

4 unchanged sentences

Executive Summary

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.

Net income for the three months ended March 31, 2024 was $6.0 million, down $2.0 million or 24.5% from the same period in 2023 due primarily to a decrease in net interest income resulting from higher funding costs.

Earnings per common share on a fully diluted basis were $0.54 for the three months ended March 31, 2024, down $0.18 or 25.0% from the $0.72 posted for the same period in 2023.

Dividends totaling $0.35 per share have been declared year-to-date, representing a payout to our shareholders of 63.64% of basic earnings per share for the period.

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.

Net interest income on a tax-equivalent basis was down $2.5 million or 14.1% in the three months ended March 31, 2024 compared to the same period in 2023.

The tax equivalent net interest margin for the three months ended March 31, 2024, was 2.22%, down from 2.78% for the same period in 2023.

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

Non-interest income for the three months ended March 31, 2024 was $3.6 million, up $71,000 or 2.0%, from the three months ended March 31, 2023.

As compared to the prior year period, mortgage banking revenue decreased $62,000 or 32.3% on lower volume of mortgage sales and negative marks taken against mortgage servicing rights valuation.

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.

Service charges on deposit accounts were up $62,000, or 14.2%, while debit card revenue was even with the three months ended March 31, 2024.

Revenue at First National Wealth Management increased $42,000 or 3.7% over the same period.

Non-interest expense for the three months ended March 31, 2024 was $11.8 million, up $911,000 or 8.4% from the three months ended March 31, 2023.

FDIC insurance premiums increased $220,000 from the same period in 2023, salaries and employee benefits increased 5.9% and other operating expense increased 10.4% over the same period.

Asset quality continues to be strong and stable.

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;

Non-performing assets stood at 0.09% of total assets as of March 31, 2024, up slightly from 0.07% of total assets as of December 31, 2023 and 0.06% of total assets as of March 31, 2023.

Total past-due loans remain low and were 0.09% of total loans as of March 31, 2024, down from 0.18% and 0.10% of total loans as of December 31, 2023 and March 31, 2023, respectively.

The provision for credit losses on loans for the first three months of 2024 was $99,000, down from the $550,000 provisioned in the same period in 2023.

The effects of improved economic projections and strong asset quality offset the effects of loan growth and other factors in the first quarter model, resulting in lower provision expense for the current period as compared to the prior period.

Recoveries in the first quarter of prior period loan charge-offs outpaced current period charge-offs, resulting in a net addition to the allowance for credit losses on loans.

Net recoveries for the three months ended March 31, 2024 was $78,000 or 0.015% of average loans on an annualized basis, compared to net charge-offs of $25,000 or 0.010% of three months ended March 31, 2023.

The ACL for loans increased $177,000 between December 31, 2023 and March 31, 2024, and now stands at 1.11% of loans outstanding as of March 31, 2024, down from 1.13% at December 31, 2023 and 1.18% at March 31, 2023.

The Company's balance sheet continued to expand in the first three months of 2024 as total assets increased $31.5 million or 1.1% year-to-date.

The loan portfolio increased $44.3 million or 2.1% in the three months ended March 31, 2024 and $190.9 million or 9.6% from a year ago.

Loan growth in the first three months of 2024 was centered in the commercial and residential portfolios.

Commercial loans increased by $34.0 million during the period, led by increases in owner-occupied commercial real estate of $12.7 million, non-owner occupied commercial real estate of $9.5 million, commercial & industrial loans of $6.8 million and multifamily of $7.9 million;

commercial construction balances decreased by $2.9 million as a number of projects converted to permanent financing.

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.

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.

Residential term loans increased by $3.2 million in the first three months of 2024 and residential construction loans increased by $2.5 million during the same period.

The investment portfolio decreased $10.8 million year-to-date and decreased $24.1 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 decreased $50.7 million, or 1.9%, year-to-date to $2.55 billion.

Low-cost deposits decreased $61.7 million, in line with seasonal deposit patterns.

Money market balances increased $15.9 million and local CDs decreased $10.2 million.

To balance the seasonal changes and to support earning asset growth, wholesale CDs increased $5.4 year-to-date and borrowings increased by $85.1 million.

Remaining well capitalized is a top priority for The Company.

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.

The Company's total risk-based capital ratio was 13.54% as of March 31, 2024, 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 0.82% and return on average tangible common equity of 11.36% for the three months ended March 31, 2024 compared to 1.16% and 15.64%, respectively, for the same period in 2023.

Our non-GAAP efficiency ratio continues to be an important component in the Company's overall performance and stood at 61.15% for the three months ended March 31, 2024 compared to 49.98% for the same period in 2023.

Net Interest Income

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.

Total interest income of $35.0 million for the three months ended March 31, 2024 was an increase of $6.1 million or 21.0% compared to total interest income of $28.9 million for the same period of 2023.

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 $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 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.

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 $20.1 million for the three months ended March 31, 2024, an increase of $8.7 million or 75.8% compared to total interest expense for the three months ended March 31, 2023.

As a result, net interest income of $14.9 million for the three months ended March 31, 2024 was a decrease of $2.6 million or 14.8% compared to net interest income of $17.5 million for the same period ended March 31, 2023.

The Company's net interest margin on a tax-equivalent basis for the three months ended March 31, 2024 was 2.22%, down from 2.78% for the first three months of 2023.

Tax-exempt interest income amounted to $2.5 million for the three months ended March 31, 2024 compared to $2.3 million for the three months ended March 31, 2023.

The following table presents 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, 2024 and 2023.

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

For the nine months ended

September 30, 2023 September 30, 2022

For the three months ended

March 31, 2024 March 31, 2023

Dollars in thousands

14 unchanged sentences

Net interest margin 2.22 % 2.78 %

For the quarters ended

September 30, 2023 September 30, 2022

Dollars in thousands

interest Average

Yield/Rate Amount of

interest Average

Interest on earning assets

Interest-bearing deposits $ 211 5.49 % $ 92 2.32 %

Investments 5,249 3.12 % 4,849 2.80 %

Loans held for sale — 0.00 % 2 4.84 %

Loans 28,479 5.45 % 19,640 4.29 %

Total interest-earning assets 33,939 4.89 % 24,583 3.87 %

Interest expense

Deposits 16,992 3.02 % 4,164 0.86 %

Other borrowings 308 1.32 % 463 1.40 %

Total interest expense 17,300 2.96 % 4,627 0.89 %

Net interest income $ 16,639 $ 19,956

Interest rate spread 1.93 % 2.97 %

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 nine months and quarters ended September 30, 2023 compared to 2022.

The following table presents 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, 2024 compared to 2023.

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

For the nine months ended September 30, 2023 compared to 2022

For the three months ended March 31, 2024 compared to 2023

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 September 30, 2023 compared to 2022

Dollars in thousands

Volume Rate Rate/Volume 1

Interest on earning assets

Interest-bearing deposits $ (3) $ 126 $ (4) $ 119

Investment securities (148) 565 (17) 400

Loans held for sale (1) (2) 1 (2)

Loans 2,753 5,338 748 8,839

Change in interest income 2,601 6,027 728 9,356

Interest expense

Deposits 670 10,474 1,684 12,828

Other borrowings (136) (27) 8 (155)

Change in interest expense 534 10,447 1,692 12,673

Change in net interest income $ 2,067 $ (4,420) $ (964) $ (3,317)

Average Daily Balance Sheets

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

The following table shows the Company's average daily balance sheets for the three months ended March 31, 2024 and 2023:

For the three months ended

Dollars in thousands

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

March 31, 2024 March 31, 2023

Cash and cash equivalents $ 23,520 $ 23,122

Interest-bearing deposits in other banks 5,704 3,360

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

Securities available for sale (includes tax exempt securities of $36,490 and $36,636 at March 31, 2024 and 2023, respectively)

275,897 287,984

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)

Securities to be held to maturity, net of ACL (included tax exempt securities of $253,412 and $257,279 at March 31, 2024 and 2023, respectively)

382,899 393,001

6 unchanged sentences

Premises and equipment 28,690 28,204

Other real estate owned 8 12 19 33

Goodwill 30,646 30,646

19 unchanged sentences

Net unrealized loss on securities transferred from available for sale to held to maturity (55) (62)

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

Net unrealized gain on cash flow hedging derivative instruments 455 796

Net unrealized gain on postretirement benefit costs 303 273

1 unchanged sentence

Total Liabilities & Shareholders' Equity $ 2,955,062 $ 2,775,779

1 September 30, 2022 had no allowance for credit losses

Non-Interest Income

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.

Non-interest income of $3.6 million for the three months ended March 31, 2024 is an increase of $71,000 compared to the same period in 2023.

Mortgage banking revenue was down $62,000, or 32.3%;

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.

Service charges on deposit accounts were up $62,000, or 14.2%, while debit card revenue was even with the three months ended March 31, 2024.

Revenue at First National Wealth Management increased $42,000 or 3.7% 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 $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%.

Non-interest expense of $11.8 million for the three months ended March 31, 2024 is an increase of 8.4% or $911,000 compared to non-interest expense of $10.9 million for the same period in 2023.

Salaries and employee benefits increased $337,000 or 5.9%, and other operating expense increased $270,000 or 10.4%.

FDIC insurance premiums increased by $220,000 due to a base rate increase impacting all banks.

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

Income taxes on operating earnings were $1.3 million for the three months ended March 31, 2024, down $422,000 from the same period in 2023.

The carrying value of the Company's investment portfolio decreased by $10.8 million between December 31, 2023 and March 31, 2024 from $670.7 million to $659.8 million.

As of March 31, 2024, mortgage-backed securities had a carrying value of $273.5 million and a fair value of $262.2 million.

Of this total, securities with a fair value of $74.8 million or 28.7% of the mortgage-backed portfolio were issued by GNMA and securities with a fair value of $185.7 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 $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.

The remaining unamortized balance of the net unrealized losses for the securities transferred from AFS to HTM was $54,000 at March 31, 2024.

This compares to $56,000 and $60,000, net of taxes, at December 31, 2023 and March 31, 2023, 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 September 30, 2023 and 2022 and December 31, 2022.

The following table sets forth the Company's investment securities at their carrying amounts as of March 31, 2024 and 2023 and December 31, 2023.

Dollars in thousands

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

March 31, 2024 December 31, 2023 March 31, 2023

Securities available for sale

17 unchanged sentences

Total securities $ 659,837 $ 670,673 $ 683,961

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 $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 September 30, 2023.

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

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

The total ACL for HTM securities was $182,000 as of March 31, 2024, $434,000 as of December 31, 2023 and $438,000 March 31, 2023.

Further details are included in Note 2 of the accompanying financial statements.

The following table sets forth yields and contractual maturities of the Company's investment securities as of March 31, 2024.

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

34 unchanged sentences

$ 274,451 2.52 % $ 379,635 2.64 %

Debt Securities in an Unrealized Loss Position

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.

AFS Debt Securities in an Unrealized Loss Position

The securities portfolio contains certain AFS securities where the amortized cost of which exceeds fair value, which at March 31, 2024 amounted to $54.3 million, or 16.35% of the amortized cost of the total securities portfolio.

At December 31, 2023, this amount was $50.4 million, or 15.18% of the amortized cost of total securities portfolio.

The Company's evaluation of securities for impairment is a quantitative and qualitative process intended to determine whether declines in the fair value of investment securities should be recognized as a charge against the allowance for credit losses.

The primary factors considered in evaluating whether a loss should be recognized include:

(a) the length of time and extent to which the fair value has been less than cost or amortized cost and the expected recovery period of the security, (b) the financial condition, credit rating and future prospects of the issuer, (c) whether the debtor is current on contractually obligated interest and principal payments, (d) the volatility of the securities market price, (e) the intent and ability of the Company to retain the investment for a period of time sufficient to allow for recovery, which may be at maturity, and (f) any other

information and observable data considered relevant in determining whether full collection of amounts contractually due will be realized.

The Company's best estimate of cash flows uses severe economic recession assumptions due to market uncertainty.

The Company's assumptions include but are not limited to delinquencies, foreclosure levels and constant default rates on the underlying collateral, loss severity ratios, and constant prepayment rates.

If the Company does not expect to receive 100% of future contractual principal and interest, a charge against the allowance for credit losses is recognized.

If the Company does not expect to receive 100% of future contractual principal and interest, a charge against the ACL is recognized.

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 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.

As of March 31, 2024, the Company had AFS debt securities in an unrealized loss position with a fair value of $260.7 million and unrealized losses of $54.3 million, as identified in the table below.

AFS Securities in a continuous unrealized loss position more than twelve months amounted to a fair value of $251.6 million as of March 31, 2024, compared with $257.7 million at December 31, 2023.

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 September 30, 2023:

The following table summarizes AFS debt securities in an unrealized loss position for which an ACL has not been recorded at March 31, 2024:

Less than 12 months 12 months or more Total

6 unchanged sentences

State and political subdivisions 4,520 (30) 29,161 (6,308) 33,681 (6,338)

Asset-backed securities — — 1,510 (4) 1,510 (4)

Corporate Securities — — 21,677 (3,823) 21,677 (3,823)

$ 9,113 $ (46) $ 251,590 $ (54,270) $ 260,703 $ (54,316)

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 the U.S.

For AFS 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:

AFS 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.

As of March 31, 2024, there were $6.3 million of unrealized losses on these securities compared to $6.2 million at December 31, 2023.

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

2 unchanged sentences

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.

AFS Mortgage-backed securities issued by U.S.

Government agencies and U.S.

Government-sponsored enterprises.

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.

As of March 31, 2024, there were $41.6 million of unrealized losses on these securities compared with $38.5 million at December 31, 2023.

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 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.

Management believes that the unrealized losses at March 31, 2024 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 September 30, 2023, there were $56.4 million of unrealized losses on these securities compared to $38.0 million at December 31, 2022.

AFS Obligations of state and political subdivisions.

As of March 31, 2024, there were $6.3 million of unrealized losses on these securities compared to $5.7 million at December 31, 2023.

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 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.

At March 31, 2024, all municipal bond issuers were current on contractually obligated interest and principal payments.

The Company attributes the unrealized losses at March 31, 2024 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 September 30, 2023, there were $4,000 of unrealized losses on these securities compared to $53,000 at December 31, 2022.

AFS Asset-backed securities.

As of March 31, 2024, there were no unrealized losses on these securities compared to $9,000 at December 31, 2023.

These securities consist of U.S.

Government backed student loans along with other credit enhancements.

Corporate securities.

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 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 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.

As of March 31, 2024, the Bank's investment in FHLBB stock totaled $4.9 million.

This compares to $2.3 million as of December 31, 2023 and $2.8 million as of March 31, 2023.

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 September 30, 2023.

No impairment losses have been recorded through March 31, 2024.

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 $1.0 million at September 30, 2023 and 2022 and December 31, 2022.

The Bank's investment in FRBB stock totaled $1.0 million at March 31, 2024 and 2023, and December 31, 2023.

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 September 30, 2023.

No impairment losses have been recorded through March 31, 2024.

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 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.

There were no loans held for sale as of March 31, 2024 and 2023 and December 31, 2023.

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 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.

Commercial loans comprise five of the classes:

commercial real estate owner occupied, commercial real estate non-owner occupied, commercial construction, C&I and multifamily.

The loan portfolio increased during the first three months of 2024, with total loans at $2.17 billion at March 31, 2024, up $44.3 million or 2.1% from total loans of $2.13 billion at December 31, 2023.

Commercial loans increased $34.0 million or 2.8% between December 31, 2023 and March 31, 2024, municipal loans increased $3.3 million or 6.5%, residential term loans increased $3.2 million, residential construction increased $2.5 million, and home equity lines of credit increased $1.8 million.

The loan portfolio is segmented into eleven classes.

Commercial loans comprise six of the classes:

commercial real estate owner occupied, commercial real estate non-owner occupied, commercial construction, C&I, multifamily and agriculture.

Residential mortgage loans comprise two of the classes:

2 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 September 30, 2023 and 2022 and December 31, 2022.

The following table summarizes the loan portfolio, by class, at March 31, 2024 and 2023 and December 31, 2023.

Dollars in thousands

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

March 31, 2024 December 31, 2023 March 31, 2023

Real estate owner occupied $ 327,496 15.1 % $ 314,819 14.8 % $ 285,224 14.4 %

3 unchanged sentences

Multifamily 101,344 4.7 % 93,476 4.4 % 81,089 4.1 %

Agriculture 45,064 2.1 % 45,230 2.1 % 48,338 2.4 %

Municipal 54,746 2.5 % 51,423 2.4 % 47,166 2.4 %

4 unchanged sentences

Total loans $ 2,173,746 100.0 % $ 2,129,454 100.0 % $ 1,982,847 100.0 %

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

The following table sets forth certain information regarding the contractual maturities of the Bank's loan portfolio as of March 31, 2024.

Dollars in thousands

5 unchanged sentences

Multifamily — 4,721 208 96,415 101,344

Agriculture 8 7,858 12,994 24,204 45,064

Municipal — 15,113 12,113 27,520 54,746

4 unchanged sentences

Total loans $ 9,795 $ 286,619 $ 236,335 $ 1,640,997 $ 2,173,746

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

The following table provides a listing of loans by class, between variable and fixed rates as of March 31, 2024.

Fixed-Rate Adjustable-Rate Total

6 unchanged sentences

Multifamily 4,326 0.2 % 97,018 4.5 % 101,344 4.7 %

Agriculture 8,118 0.4 % 36,946 1.7 % 45,064 2.1 %

Municipal 54,513 2.5 % 233 0.0 % 54,746 2.5 %

5 unchanged sentences

Loan Concentrations

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.

As of March 31, 2024, the Bank had two concentration of loans in two particular industries that exceeded 10% of its total loan portfolio:

(1) loans to hotels (except Casino hotels) and motels, totaling $231.5 million, or 10.65% of total loans;

and (2) loans to lessors of residential buildings and dwellings, totaling $229.5 million, or 10.56% of total loans.

This compares to one concentration of loans in one particular industry that exceeded 10% of its total loan portfolio, hotels (except Casino hotels) and motels, totaling $223.5 million, or 11.27% of total loans, as of March 31, 2023.

Credit Risk Management and Allowance for Credit Losses on Loans

Upon adoption of the CECL standard, in the first quarter of 2023, the Company replaced the incurred loss model that recognized loan losses when it became probable that a credit loss would be incurred, with a requirement to recognize lifetime expected credit losses immediately when a financial asset is originated or purchased.

Upon adoption of the CECL standard, in 2023, the Company replaced the incurred loss model that recognized loan losses when it became probable that a credit loss would be incurred, with a requirement to recognize lifetime expected credit losses immediately when a financial asset is originated or purchased.

The ACL is a valuation amount that is deducted from the amortized cost basis of loans to present the net amount expected to be collected on the loans.

9 unchanged sentences

To determine an appropriate level for qualitative reserves various factors are considered including underwriting policies, credit administration practices, experience, ability and depth of lending management, and economic factors not captured in the general reserve calculation.

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

The ACL is increased by provisions charged against current earnings.

2 unchanged sentences

The adequacy of the ACL is overseen by the ACL Committee whose membership includes senior level personnel from the Executive, Lending, Credit Administration, and Finance functions of the Bank.

While Management uses available information to assess possible losses on loans, future additions to the allowance may be necessary based on increases in non-performing loans, changes in economic conditions, growth in loan portfolios, or for other reasons.

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

1 unchanged sentence

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

The ACL includes reserve amounts assigned to individually analyzed loans.

The ACL includes reserve amounts assigned to IAL.

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 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 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.

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, 2024, IAL with specific reserves totaled $606,000 and the amount of such reserves was $243,000.

This compares to IAL with specific reserves of $919,000 at December 31, 2023 and the amount of such reserves was $264,000.

The total ACL on loans at March 31, 2024 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 September 30, 2023 and 2022 and December 31, 2022.

The following table summarizes the allocation of allowance by loan class as of March 31, 2024 and 2023 and December 31, 2023.

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

Dollars in thousands

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

March 31, 2024 December 31, 2023 March 31, 2023

Real estate owner occupied $ 5,180 15.1 % $ 4,633 14.8 % $ 4,470 14.4 %

3 unchanged sentences

Multifamily 1,507 4.7 % 1,318 4.4 % 1,206 4.1 %

Agriculture 392 2.1 % — — % — — %

Municipal 194 2.5 % 334 2.4 % 307 2.4 %

3 unchanged sentences

Consumer 173 0.9 % 246 0.9 % 271 1.0 %

Unallocated — — % 1,678 — % 1,937 — %

Total $ 24,207 100.0 % $ 24,030 100.0 % $ 23,458 100.0 %

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:

The ACL totaled $24.2 million at March 31, 2024, compared to $24.0 million as of December 31, 2023 and $23.5 million as of March 31, 2023.

A breakdown of the ACL on loans as of March 31, 2024, by loan class and allowance element, is presented in the following table:

Dollars in thousands

5 unchanged sentences

Multifamily — 1,348 159 1,507

Agriculture — 358 34 392

Municipal — 38 156 194

5 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 $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:

The provision for credit losses to maintain the allowance was $99,000 for the first three months of 2024 and $550,000 the first three months of 2023.

Net recoveries were $78,000 in the first three months of 2024, compared to net charge-offs of $25,000 in the first three months of 2023.

The ACL as a percentage of outstanding loans was 1.11% as of March 31, 2024, down from 1.13% as of December 31, 2023, and down from 1.18% as of March 31, 2023.

The following table summarizes the activities in our ACL for the three months ended March 31, 2024 and 2023 and for the year ended December 31, 2023:

Dollars in thousands

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

March 31, 2024 December 31, 2023 March 31, 2023

Balance at the beginning of period $ 24,030 $ 16,723 $ 16,723

3 unchanged sentences

Construction — — —

C&I 16 309 272

Multifamily — — —

Agriculture — — —

Municipal — — —

8 unchanged sentences

Multifamily — — —

Agriculture — — —

Municipal — — —

Term 10 29 27

Construction — — —

2 unchanged sentences

Total 174 204 51

Net loans charged off 30 548 434

Net loans (recovered) charged off (78) 233 25

Provision for credit losses 99 1,330 550

2 unchanged sentences

Balance at end of period $ 24,207 $ 24,030 $ 23,458

Ratio of net loans charged off to average loans outstanding 1

Ratio of net loans (recovered) charged off to average loans outstanding 1

(0.015) % 0.011 % 0.010 %

Ratio of allowance for credit losses to total loans outstanding 1.11 % 1.13 % 1.18 %

1 Annualized using a 365-day basis for both 2023 and 2022.

1 Annualized using a 366-day basis in 2024 and a 365-day basis in 2023.

ACL for Unfunded Commitments

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 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 consolidated balance sheets within other liabilities and totaled $1.5 million as of September 30, 2023.

The ACL for unfunded commitments is reported on the Company's consolidated balance sheets within other liabilities and totaled $895,000 as of March 31, 2024.

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 0.12% 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:

Nonperforming loans, expressed as a percentage of total loans, totaled 0.12% at March 31, 2024 compared to 0.10% at December 31, 2023 and 0.09% at March 31, 2023.

The following table shows the distribution of nonperforming loans by class as of March 31, 2024 and 2023 and December 31, 2023:

Dollars in thousands

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

March 31, 2024 December 31, 2023 March 31, 2023

Real estate owner occupied $ — $ — $ 152

3 unchanged sentences

Multifamily — — —

Agriculture 33 — —

Municipal — — —

Residential —

Term 1,959 1,315 443

Construction — — —

Home Equity —

Revolving and term 304 296 534

1 unchanged sentence

Total nonperforming loans $ 2,710 $ 2,178 $ 1,800

Allowance for credit losses as a percentage of nonperforming loans 913.5 % 952.9 % 881.0 %

Allowance for credit losses on loans as a percentage of nonperforming loans 893.2 % 1103.3 % 1303.2 %

The amounts shown for total nonperforming loans do not include loans 90 or more days past due and still accruing interest.

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

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.

As of March 31, 2024, loans 90 days or more day past due and still accruing interest totaled $50,000, compared to $429,000 at December 31, 2023 and $208,000 at March 31, 2023.

Loan Modifications Made to Borrowers Experiencing Financial Difficulty

The Company adopted ASU 2022-02 effective January 1, 2023.

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

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

Past Due Loans

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:

The Bank's overall loan delinquency ratio was 0.09% at March 31, 2024 compared to 0.18% at December 31, 2023 and 0.10% at March 31, 2023.

Loans 90 days delinquent and accruing decreased from $429,000 at December 31, 2023 to $50,000 as of March 31, 2024.

The following table sets forth loan delinquencies as of March 31, 2024 and 2023 and December 31, 2023:

Dollars in thousands

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

March 31, 2024 December 31, 2023 March 31, 2023

Real estate owner occupied $ 447 $ — $ 152

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Multifamily — — —

Agriculture 119 — —

Municipal — 31 —

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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 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.

At March 31, 2024, there were no potential problem loans reported.

This compares to three potential problem loans with a balance of $180,000 or 0.01% of total loans at December 31, 2023.

As of March 31, 2024, there were four residential loans in the process of foreclosure totaling $510,000.

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.

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

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

As of March 31, 2024, 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.

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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.

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The Bank follows the published guidelines of each investor.

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.

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

At March 31, 2024 and 2023, and December 31, 2023, 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 86.9% of total average assets in the first nine months of 2023, up from 85.0% a year ago.

The Bank's lead source of liquidity is deposits, including brokered deposits, which funded 86.5% of total average assets in the first three months of 2024, down slightly from 86.7% 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.

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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.

each has been tested within the past five months.

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

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.

As of March 31, 2024, the Bank had primary sources of contingent liquidity of $804.0 million or 27.3% of its total assets.

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

In addition, the Bank has $169.0 million in borrowing capacity under the FRBB's Borrower in Custody program, $51.0 million in credit lines with correspondent banks, and $152.0 million in other unencumbered securities available as collateral for borrowing.

In addition, the Bank has $201.0 million in borrowing capacity at FRBB under the FRBB's Borrower in Custody program as well as securities available as collateral, $76.0 million in credit lines with correspondent banks, and $166.0 million in other unencumbered securities available as collateral for borrowing.

These bring the Bank's total sources of liquidity to $1.247 billion or 42.3% of its total assets.

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.

The ALCO establishes guidelines for liquidity in its Asset/Liability policy and monitors internal liquidity measures to manage liquidity exposure.

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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 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.

For the three-months periods ended March 31, 2024 and 2023 the Bank declared dividends to the Company of $3.9 million and $3.8 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 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 September 30, 2022 and September 30, 2023, total deposits increased by $230.0 million or 9.7%.

During the first three months of 2024, total deposits decreased by $50.7 million or 1.9% from December 31, 2023 levels.

Low-cost deposits (demand, NOW, and savings accounts) decreased by $61.7 million or 5.0% in the first three months of 2024.

Money market deposits increased $15.9 million or 5.2%, and certificates of deposit decreased $4.8 million or 0.5% as depositors shifted balances to higher cost product types and brokered certificates of deposit were issued to support earning asset growth.

The decrease in total deposits for the period was consistent with Management's estimates based upon historical seasonal deposit behaviors.

Between March 31, 2023 and March 31, 2024, total deposits increased by $82.3 million or 3.3%.

Low-cost deposits decreased by $101.1 million or 8.0%, money market accounts increased $127.6 million or 65.7%, and certificates of deposit increased $55.8 million or 5.5%.

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.

Estimated uninsured deposits totaled $417.2 million or 16.4% of total deposits as of March 31, 2024, and $407.4 million or 15.7% of total deposits as of December 31, 2023.

The company has pledged assets as collateral covering certain deposits;

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

these amounts were $314.2 million and $340.5 million as of March 31, 2024 and December 31, 2023, respectively.

Borrowed Funds

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

During the 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.

During the three months ended March 31, 2024, borrowed funds increased $85.1 million or 122.2% from December 31, 2023.

This included a $61.9 million increase in FHLBB advances, and a $25.0 million advance under the FRBB's BTFP, both at rates more favorable than other funding alternatives.

Between March 31, 2023 and March 31, 2024, borrowed funds increased by $70.9 million or 84.5%.

Capital Resources

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 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.

Shareholders' equity as of March 31, 2024 was $242.6 million, compared to $243.1 million as of December 31, 2023 and $228.5 million as of March 31, 2023.

The Company's earnings in the first three months of 2024, net of dividends declared, added $2.1 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 $42.8 million as of March 31, 2024 and was $39.6 million as of December 31, 2023.

Additional information about the net unrealized loss on AFS securities was provided in Note 2 of the Consolidated Financial Statements and in the AFS 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 first quarter of 2024.

The dividend payout ratio, which is calculated by dividing dividends declared per share by basic earnings per share, was 63.64% for the first three months of 2024 compared to 46.58% for the same period in 2023.

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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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 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

The Company met each of the well-capitalized ratio guidelines at March 31, 2024.

The following tables indicate the capital ratios for the Bank and the Company at March 31, 2024 and December 31, 2023.

As of March 31, 2024 Leverage Common Equity Tier 1 Tier 1 Total Risk-Based

Bank 8.52 % 12.27 % 12.27 % 13.49 %

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

To further validate its internal results, the Bank engaged a third party consultant during the first quarter of 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.

Off-Balance Sheet Financial Credit Exposures and Contractual Obligations

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As part of its overall asset and liability management strategy, the Bank periodically uses derivative instruments to minimize significant unplanned fluctuations in earnings and cash flows caused by interest rate volatility.

The Bank's interest rate risk management strategy involves modifying the re-pricing characteristics of certain assets and/or liabilities so that change in interest rates does not have a significant adverse effect on net interest income.

The Bank's interest rate risk management strategy involves modifying the re-pricing characteristics of certain assets and/or liabilities to mitigate adverse impacts upon net interest income resulting from interest rate changes.

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 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.

At March 31, 2024, the Bank had two 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 $85.0 million and $150.0 million, respectively, and an unrealized gain of $488,000, net of taxes.

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

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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 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.

At March 31, 2024, 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.

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

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

As of March 31, 2024, the Bank had seven loan swap agreements in place with a total notional value of $81.2 million.

Contractual Obligations

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

The following table sets forth the contractual obligations of the Company as of March 31, 2024:

Dollars in thousands

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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