Companies: 10,786     total market cap: A$192.956 T
$USD๐Ÿ‡บ๐Ÿ‡ธโ‚ฌEUR๐Ÿ‡ช๐Ÿ‡บโ‚นINR๐Ÿ‡ฎ๐Ÿ‡ณยฃGBP๐Ÿ‡ฌ๐Ÿ‡ง$CAD๐Ÿ‡จ๐Ÿ‡ฆ$NZD๐Ÿ‡ณ๐Ÿ‡ฟ$HKD๐Ÿ‡ญ๐Ÿ‡ฐ$SGD๐Ÿ‡ธ๐Ÿ‡ฌ
First Bancorp
FNLC
#7912
Rank
A$0.45 B
Marketcap
๐Ÿ‡บ๐Ÿ‡ธ United States
Country
A$40.38
Share price
-0.67%
Change (1 day)
5.75%
Change (1 year)
๐Ÿฆ Banks๐Ÿ’ณ Financial services
Categories
  1. First Bancorp
  2. Quarterly Reports (10-Q)
  3. Financial Year FY2023 Q2

First Bancorp - 10-Q quarterly report FY2023 Q2


Text size:
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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549


FORM 10-Q

☒ Quarterly Report Pursuant to Section 13 or 15(d) of The Securities Exchange Act of 1934
For the quarterly period ended June 30, 2023

Commission File Number 0-26589



THE FIRST BANCORP, INC.
(Exact name of Registrant as specified in its charter)
Maine01-0404322
(State or other jurisdiction of incorporation or organization)(I.R.S. Employer Identification No.)
Main StreetDamariscottaMaine04543
(Address of principal executive offices) (Zip code)

(207) 563-3195
Registrant's telephone number, including area code

Securities registered pursuant to Section 12(b) of the Act:
 Title of Each ClassTrading SymbolName of each exchange on which registered
Common Stock, par value $0.01 per shareFNLCNASDAQ Global Select Market

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes ☒    No ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site,
 if any, every, Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes ☒    No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, non-accelerated filer, or a smaller
reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule
12b-2 of the Exchange Act. (Check one):

Large accelerated filer ☐ Accelerated filer ☒ Non-accelerated filer ☐ Smaller reporting company ☐
Emerging growth company ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended
transition period for complying with any new or revised financial accounting standards provided pursuant to
Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).
Yes ☐    No ☒

Indicate the number of shares outstanding of each of the registrant's classes of common stock as of August 1, 2023
Common Stock: 11,086,007 shares



Table of Contents
1
1
2
2
3
4
5
7
9
9
10
15
25
34
34
35
35
37
Note 10 – Financial Derivative Instruments
37
39
39
40
40
40
48
49
49
49
51
52
53
56
57
57
57
57
Debt Securities-Unrealized Loss Position
59
61
61
63
67
Individually Analyzed Loans
#
68
68
69
69
70
70



Capital Resources
71
72
73
73
73
74
Item 4 - Controls and Procedures
75
76
76
76
76
76
Item 4 – Mine Safety Disclosures
76
Item 5 – Other Information
76
77
78




Part I. Financial Information
Selected Financial Data (Unaudited)
The First Bancorp, Inc. and Subsidiary
Dollars in thousands,
As of and for the six months ended June 30,As of and for the quarter ended June 30,
except for per share amounts
2023202220232022
Summary of Operations
Interest Income$60,098 $41,964 $31,184 $21,431 
Interest Expense26,698 4,646 15,259 2,733 
Net Interest Income33,400 37,318 15,925 18,698 
Provision for Credit Losses701 900 151 450 
Non-Interest Income7,439 8,312 3,870 4,080 
Non-Interest Expense21,565 20,822 10,715 10,172 
Net Income15,365 19,702 7,394 9,997 
Per Common Share Data
Basic Earnings per Share$1.40 $1.80 $0.67 $0.91 
Diluted Earnings per Share1.39 1.79 0.67 0.91 
Cash Dividends Declared0.69 0.66 0.35 0.34 
Book Value per Common Share20.94 20.64 20.94 20.64 
Tangible Book Value per Common Share2
18.15 17.84 18.15 17.84 
Market Value24.34 30.13 24.34 30.13 
Financial Ratios
Return on Average Equity1
13.17 %16.61 %12.73 %17.29 %
Return on Average Tangible Common Equity1,2
15.16 %19.07 %14.67 %19.94 %
Return on Average Assets1
1.10 %1.55 %1.04 %1.54 %
Average Equity to Average Assets8.37 %9.35 %8.20 %8.91 %
Average Tangible Equity to Average Assets2
7.28 %8.14 %7.11 %7.73 %
Net Interest Margin Tax-Equivalent1,2
2.62 %3.18 %2.46 %3.13 %
Dividend Payout Ratio49.29 %36.67 %52.24 %37.36 %
Allowance for Credit Losses/Total Loans1.14 %0.91 %1.14 %0.91 %
Non-Performing Loans to Total Loans0.08 %0.27 %0.08 %0.27 %
Non-Performing Assets to Total Assets0.06 %0.18 %0.06 %0.18 %
Efficiency Ratio2
51.10 %44.45 %52.27 %43.49 %
At Period End
Total Assets$2,874,815 $2,630,354 $2,874,815 $2,630,354 
Total Loans2,060,953 1,788,355 2,060,953 1,788,355 
Total Investment Securities673,569 686,150 673,569 686,150 
Total Deposits2,499,862 2,252,022 2,499,862 2,252,022 
Total Shareholders' Equity232,003 227,685 232,003 227,685 
1Annualized using a 365-day basis in both 2023 and 2022.
2These ratios use non-GAAP financial measures. See Management's Discussion and Analysis of Financial Condition and Results of Operations for additional disclosures and information.
1


Item 1 – Financial Statements










Report of Independent Registered Public Accounting Firm

The Board of Directors and Shareholders
The First Bancorp, Inc.

Results of Review of Interim Financial Information

We have reviewed the accompanying interim consolidated financial information of The First Bancorp, Inc. and Subsidiary as of June 30, 2023 and 2022 and for the three-month and six-month periods then ended, and the related notes (collectively referred to as the "interim financial information"). Based on our reviews, we are not aware of any material modifications that should be made to the accompanying interim financial information for them to be in conformity with accounting principles generally accepted in the United States of America.

Basis for Review Results

This consolidated interim financial information is the responsibility of the Company's management. We conducted our review in accordance with the standards of the Public Company Accounting Oversight Board (United States) ("PCAOB"). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the PCAOB, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.


/s/ Berry Dunn McNeil & Parker, LLC
Portland, Maine
August 4, 2023
2


Consolidated Balance Sheets (Unaudited) The First Bancorp, Inc. and Subsidiary
June 30, 2023December 31, 2022June 30, 2022
Assets
Cash and cash equivalents$25,077,000 $22,728,000 $23,453,000 
Interest bearing deposits in other banks3,978,000 3,693,000 22,871,000 
Securities available for sale278,355,000 284,509,000 301,737,000 
Securities held-to-maturity, net of allowance for credit losses of $428,000 at June 30, 20231 (fair value of $336,007,000 at June 30, 2023, $339,011,000 at December 31, 2022 and $335,950,000 at June 30, 2022)
389,987,000 393,896,000 379,693,000 
Restricted equity securities, at cost5,227,000 3,883,000 4,720,000 
Loans held for sale— 275,000 689,000 
Loans2,060,953,000 1,914,674,000 1,788,355,000 
Less allowance for credit losses23,465,000 16,723,000 16,201,000 
Net loans2,037,488,000 1,897,951,000 1,772,154,000 
Accrued interest receivable13,598,000 9,829,000 10,262,000 
Premises and equipment, net27,808,000 28,277,000 29,010,000 
Other real estate owned64,000 — 51,000 
Goodwill30,646,000 30,646,000 30,646,000 
Other assets62,587,000 63,491,000 55,068,000 
Total assets$2,874,815,000 $2,739,178,000 $2,630,354,000 
Liabilities
Demand deposits$296,950,000 $318,626,000 $324,354,000 
NOW deposits615,370,000 630,416,000 640,497,000 
Money market deposits208,262,000 192,632,000 206,313,000 
Savings deposits329,651,000 369,532,000 376,448,000 
Certificates of deposit1,049,629,000 867,671,000 704,410,000 
Total deposits2,499,862,000 2,378,877,000 2,252,022,000 
Borrowed funds – short term89,401,000 103,399,000 126,501,000 
Borrowed funds – long term25,080,000 84,000 87,000 
Other liabilities28,469,000 27,895,000 24,059,000 
Total liabilities2,642,812,000 2,510,255,000 2,402,669,000 
Shareholders' equity
Common stock, one cent par value per share
111,000 110,000 110,000 
Additional paid-in capital69,240,000 68,435,000 67,627,000 
Retained earnings205,539,000 204,343,000 192,565,000 
Accumulated other comprehensive income (loss)
Net unrealized loss on securities available-for-sale(43,781,000)(44,718,000)(32,795,000)
Net unrealized loss on securities transferred from available-for-sale to held-to-maturity(59,000)(64,000)(73,000)
Net unrealized gain on hedging derivative instruments680,000 544,000 146,000 
Net unrealized gain on postretirement costs273,000 273,000 105,000 
Total shareholders' equity232,003,000 228,923,000 227,685,000 
Total liabilities & shareholders' equity$2,874,815,000 $2,739,178,000 $2,630,354,000 
Common Stock
Number of shares authorized18,000,000 18,000,000 18,000,000 
Number of shares issued and outstanding11,081,800 11,045,186 11,030,236 
Book value per common share$20.94 $20.73 $20.64 
Tangible book value per common share$18.15 $17.93 $17.84 
1December 31, 2022 and June 30, 2022 had no allowance for credit losses
See Report of Independent Registered Public Accounting Firm. The accompanying notes are an integral part of these consolidated financial statements.
3


Consolidated Statements of Income and Comprehensive Income (Loss) (Unaudited)
The First Bancorp, Inc. and Subsidiary
For the six months ended June 30,For the quarter ended June 30,
2023202220232022
Interest income
Interest and fees on loans (includes YTD tax-exempt income of $801,000 for June 30, 2023 and $582,000 for June 30, 2022)
$50,531,000 $33,899,000 $26,406,000 $17,286,000 
Interest on deposits with other banks89,000 71,000 49,000 62,000 
Interest and dividends on investments (includes YTD tax-exempt income of $4,016,000 for June 30, 2023 and $3,657,000 for June 30, 2022)
9,478,000 7,994,000 4,729,000 4,083,000 
     Total interest income60,098,000 41,964,000 31,184,000 21,431,000 
Interest expense
Interest on deposits25,392,000 4,026,000 14,475,000 2,401,000 
Interest on borrowed funds1,306,000 620,000 784,000 332,000 
     Total interest expense26,698,000 4,646,000 15,259,000 2,733,000 
Net interest income33,400,000 37,318,000 15,925,000 18,698,000 
Provision for credit losses - loans580,000 900,000 30,000 450,000 
Reduction in provision for credit losses - debt securities held to maturity(10,000)— (10,000)— 
Provision for credit losses - off-balance sheet credit exposures131,000 — 131,000 — 
     Total provision for credit losses701,000 900,000 151,000 450,000 
Net interest income after provision for credit losses32,699,000 36,418,000 15,774,000 18,248,000 
Non-interest income
Investment management and fiduciary income2,355,000 2,426,000 1,209,000 1,229,000 
Service charges on deposit accounts934,000 904,000 497,000 467,000 
Net securities gains (losses)— 1,000 — (1,000)
Mortgage origination and servicing income, net of amortization387,000 878,000 195,000 380,000 
Debit card income2,476,000 2,756,000 1,291,000 1,326,000 
Other operating income1,287,000 1,347,000 678,000 679,000 
     Total non-interest income7,439,000 8,312,000 3,870,000 4,080,000 
Non-interest expense
Salaries and employee benefits10,897,000 11,335,000 5,177,000 5,398,000 
Occupancy expense1,710,000 1,578,000 842,000 749,000 
Furniture and equipment expense2,606,000 2,474,000 1,303,000 1,239,000 
FDIC insurance premiums878,000 440,000 534,000 222,000 
Amortization of identified intangibles13,000 35,000 6,000 18,000 
Other operating expense5,461,000 4,960,000 2,853,000 2,546,000 
     Total non-interest expense21,565,000 20,822,000 10,715,000 10,172,000 
Income before income taxes18,573,000 23,908,000 8,929,000 12,156,000 
Income tax expense3,208,000 4,206,000 1,535,000 2,159,000 
NET INCOME$15,365,000 $19,702,000 $7,394,000 $9,997,000 
Basic earnings per common share$1.40 $1.80 $0.67 $0.91 
Diluted earnings per common share$1.39 $1.79 $0.67 $0.91 
Other comprehensive income (loss) net of tax
Net unrealized gain (loss) on securities available for sale, net of taxes$937,000 $(31,077,000)$(3,244,000)$(12,734,000)
Net unrealized gain on transferred securities, net of taxes5,000 14,000 1,000 5,000 
Net unrealized gain on hedging derivative instruments136,000 146,000 2,872,000 146,000 
      Other comprehensive income (loss)1,078,000 (30,917,000)(371,000)(12,583,000)
Comprehensive income (loss)$16,443,000 $(11,215,000)$7,023,000 $(2,586,000)
See Report of Independent Registered Public Accounting Firm.
The accompanying notes are an integral part of these consolidated financial statements.
4


Consolidated Statements of Changes in Shareholders' Equity (Unaudited)
The First Bancorp, Inc. and Subsidiary
Six Month Period Ended June 30, 2023 and 2022
Common stock and
additional paid-in capital		Retained
earnings		Accumulated
other
comprehensive
income (loss)		Total
shareholders'
equity
SharesAmount
Balance at December 31, 202110,998,765 $66,940,000 $180,417,000 $(1,700,000)$245,657,000 
Net income— — 19,702,000 — 19,702,000 
Net unrealized loss on securities available for sale, net of tax— — — (31,077,000)(31,077,000)
Net unrealized gain on securities transferred from available for sale to held to maturity, net of tax— — — 14,000 14,000 
Net unrealized gain on cash flow hedging derivative instruments, net of tax— — — 146,000 146,000 
Comprehensive income (loss) — — 19,702,000 (30,917,000)(11,215,000)
Cash dividends declared ($0.66 per share)
— — (7,278,000)— (7,278,000)
Equity compensation expense— 412,000 — — 412,000 
Payment to repurchase common stock(8,643)— (276,000)— (276,000)
Issuance of restricted stock27,495 — — — — 
Proceeds from sale of common stock12,619 385,000 — — 385,000 
Balance at June 30, 202211,030,236$67,737,000 $192,565,000 $(32,617,000)$227,685,000 
Balance at December 31, 202211,045,186$68,545,000 $204,343,000 $(43,965,000)$228,923,000 
Net income— — 15,365,000 — 15,365,000 
Net unrealized gain on securities available for sale, net of tax— — — 937,000 937,000 
Net unrealized gain on securities transferred from available for sale to held to maturity, net of tax— — — 5,000 5,000 
Net unrealized gain on hedging derivative instruments, net of tax— — — 136,000 136,000 
Comprehensive income— — 15,365,000 1,078,000 16,443,000 
Cash dividends declared ($0.69 per share)
— — (7,643,000)— (7,643,000)
Equity compensation expense— 398,000 — — 398,000 
Payment to repurchase common stock(12,379)— (249,000)— (249,000)
Issuance of restricted stock33,610 — — — — 
Proceeds from sale of common stock15,383408,000 — — 408,000 
Adoption of ASU No. 2016-13—— (6,277,000)— (6,277,000)
Balance at June 30, 202311,081,800$69,351,000 $205,539,000 $(42,887,000)$232,003,000 

5


Three Month Period Ended June 30, 2023 and 2022
Common stock and
additional paid-in capital		Retained
earnings		Accumulated
other
comprehensive income (loss)		Total
shareholders'
equity
SharesAmount
Balance at March 31, 202211,024,086$67,356,000 $186,324,000 $(20,034,000)$233,646,000 
Net income— — 9,997,000 — 9,997,000 
Net unrealized loss on securities available for sale, net of tax— — — (12,734,000)(12,734,000)
Net unrealized gain on securities transferred from available for sale to held to maturity, net of tax— — — 5,000 5,000 
Net unrealized gain on cash flow hedging derivative instruments, net of tax— — — 146,000 146,000 
Comprehensive income (loss)— — 9,997,000 (12,583,000)(2,586,000)
Cash dividends declared ($0.34 per share)
— — (3,750,000)— (3,750,000)
Equity compensation expense— 195,000 — — 195,000 
Payment to repurchase common stock(199)— (6,000)— (6,000)
Proceeds from sale of common stock6,349 186,000 — — 186,000 
Balance at June 30, 202211,030,236 $67,737,000 $192,565,000 $(32,617,000)$227,685,000 
Balance at March 31, 202311,074,182$68,941,000 $202,036,000 $(42,516,000)$228,461,000 
Net income— — 7,394,000 — 7,394,000 
Net unrealized loss on securities available for sale, net of tax— — — (3,244,000)(3,244,000)
Net unrealized gain on securities transferred from available for sale to held to maturity, net of tax— — — 1,000 1,000 
Net unrealized gain on cash flow hedging derivative instruments, net of tax— — — 2,872,000 2,872,000 
Comprehensive income (loss) — — 7,394,000 (371,000)7,023,000 
Cash dividends declared ($0.35 per share)
— — (3,878,000)— (3,878,000)
Equity compensation expense— 213,000 — — 213,000 
Payment to repurchase common stock(555)— (13,000)— (13,000)
Proceeds from sale of common stock8,173 197,000 — — 197,000 
Balance at June 30, 202311,081,800$69,351,000 $205,539,000 $(42,887,000)$232,003,000 
See Report of Independent Registered Public Accounting Firm.
The accompanying notes are an integral part of these consolidated financial statements.
6


Consolidated Statements of Cash Flows (Unaudited)
The First Bancorp, Inc. and Subsidiary
For the six months ended June 30,
20232022
Cash flows from operating activities
     Net income$15,365,000 $19,702,000 
Adjustments to reconcile net income to net cash provided by operating activities
Depreciation1,012,000 996,000 
Change in deferred taxes(1,503,000)48,000 
Provision for credit losses701,000 900,000 
Loans originated for resale(1,679,000)(16,880,000)
Proceeds from sales and transfers of loans1,993,000 17,342,000 
Net gain on sales of loans(39,000)(316,000)
Net gain on sale or call of securities— (1,000)
Net amortization of premiums on investments263,000 508,000 
Equity compensation expense398,000 412,000 
Net increase in other assets and accrued interest(550,000)(5,732,000)
Net (decrease) increase in other liabilities(226,000)2,103,000 
Net (gain) loss on disposal of premises and equipment1,000 (14,000)
Amortization of investment in limited partnership152,000 152,000 
Net acquisition amortization13,000 35,000 
     Net cash provided by operating activities15,901,000 19,255,000 
Cash flows from investing activities
(Increase) decrease in interest-bearing deposits in other banks(285,000)43,807,000 
Proceeds from maturities, payments and calls of securities available for sale10,619,000 27,123,000 
Proceeds from maturities, payments, calls and sales of securities to be held to maturity3,441,000 12,907,000 
Purchases of securities available for sale(3,496,000)(47,998,000)
Purchases of securities to be held to maturity— (22,683,000)
Change in restricted equity securities(1,344,000)— 
Redemption of restricted equity securities— 645,000 
Net increase in loans(146,391,000)(140,977,000)
Capital expenditures(586,000)(1,107,000)
Proceeds from disposal of premises and equipment— 37,000 
     Net cash used by investing activities(138,042,000)(128,246,000)
Cash flows from financing activities
Net decrease in demand, savings, and money market accounts(60,973,000)(9,480,000)
Net increase in certificates of deposit181,958,000 138,205,000 
Net (decrease) increase in short-term borrowings(13,998,000)45,250,000 
Advances on long-term borrowings25,000,000 — 
Repayment on long-term borrowings(4,000)(55,004,000)
Payment to repurchase common stock(249,000)(276,000)
Proceeds from sale of common stock408,000 385,000 
Dividends paid(7,652,000)(7,270,000)
     Net cash provided by financing activities124,490,000 111,810,000 
Net increase in cash and cash equivalents2,349,000 2,819,000 
Cash and cash equivalents at beginning of period22,728,000 20,634,000 
     Cash and cash equivalents at end of period$25,077,000 $23,453,000 
7


For the six months ended June 30,
20232022
Interest paid$26,369,000 $4,503,000 
Income taxes paid3,170,000 3,216,000 
Non-cash transactions
    Change in net unrealized loss on available for sale securities, net of tax$(937,000)$31,077,000 
    Net transfer from loans to other real estate owned64,000 51,000 
See Report of Independent Registered Public Accounting Firm.
The accompanying notes are an integral part of these consolidated financial statements.
8


Notes to Consolidated Financial Statements
The First Bancorp, Inc. and Subsidiary

Note 1 – Basis of Presentation
The Company is a financial holding company that owns all of the common stock of the Bank. The accompanying unaudited consolidated financial statements have been prepared in accordance with GAAP for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of Management, all adjustments (consisting of normally recurring accruals) considered necessary for a fair presentation have been included. All significant intercompany transactions and balances are eliminated in consolidation. The income reported for the 2023 period is not necessarily indicative of the results that may be expected for the year ending December 31, 2023. For further information, refer to the consolidated financial statements and notes included in the Company's annual report on Form 10-K for the year ended December 31, 2022.

The acronyms, abbreviations and definitions identified below are used throughout this Form 10-Q, including Item 1 - Financial Statements and Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations. The following is provided to aid the reader and provide a reference page when reviewing these sections of the Form 10-Q.
AcronymDescriptionAcronymDescription
ACLAllowance for credit lossesGDPGross domestic product
AFSAvailable-for-saleGNMAGovernment National Mortgage Association
ALCOAsset/Liability CommitteeHTMHeld-to-maturity
AOCIAccumulated other comprehensive income (loss)IRSInternal Revenue Service
ASCAccounting Standards CodificationLIBORLondon Interbank Offered Rate
ASUAccounting Standards UpdateMPFMortgage Partnership Finance Program
BTFPBank Term Funding ProgramOAEMOther assets especially mentioned
C&ICommercial and IndustrialOCCOffice of the Comptroller of the Currency
CDsCertificates of depositOCIOther comprehensive income (loss)
CECLCurrent Expected Credit LossOISOvernight Indexed Swap
CLLDConstruction, land, and land developmentOREOOther real estate owned
DFASTDodd Frank Act Stress TestsPORPeriod of Redemption
EPSEarnings per sharePPPPaycheck Protection Program
FASBFinancial Accounting Standards BoardPSAPublic Securities Association
FDICFederal Deposit Insurance CorporationSBASmall Business Association
FHLBFederal Home Loan BankSECSecurities and Exchange Commission
FHLBBFederal Home Loan Bank of BostonSOFRSecured Overnight Financing Rate
FHLMCFederal Home Loan Mortgage CorporationTDRTroubled debt restructuring
FNMAFederal National Mortgage AssociationThe 2020 PlanThe 2020 Equity Incentive Plan
FOMCFederal Open Market CommitteeThe BankFirst National Bank
FRBFederal Reserve BoardThe CompanyThe First Bancorp, Inc.
FRBBFederal Reserve Bank of BostonU.S.United States of America
GAAPAccounting principles generally accepted in the U.S.USDU.S. Dollar

Risks and Uncertainties
The ongoing conflict between Russia and Ukraine has added to economic uncertainty and geopolitical instability. Concern is developing nationally about the commercial real estate market and the impact a downturn in this sector could have on the banking industry. The failures in 2023 of several regional banks in the U.S. caused further disruption in markets and could have a lingering impact. Any or all could have negative downstream effects on the Company's operating results, the extent of which is indeterminable at this time.
Subsequent Events
Events occurring subsequent to June 30, 2023, have been evaluated as to their potential impact to the financial statements.

9


Note 2 – Investment Securities
The following table summarizes the amortized cost and estimated fair value of investment securities at June 30, 2023:
Amortized
Cost		Unrealized GainsUnrealized LossesFair Value (Estimated)
Securities available for sale
U.S. Government-sponsored agencies$26,029,000 $— $(6,668,000)$19,361,000 
Mortgage-backed securities264,092,000 33,000 (41,933,000)222,192,000 
State and political subdivisions40,434,000 — (6,815,000)33,619,000 
Asset-backed securities3,218,000 12,000 (47,000)3,183,000 
$333,773,000 $45,000 $(55,463,000)$278,355,000 
Securities to be held to maturity
U.S. Government-sponsored agencies$40,100,000 $— $(10,150,000)$29,950,000 
Mortgage-backed securities58,484,000 31,000 (10,991,000)47,524,000 
State and political subdivisions257,081,000 159,000 (29,547,000)227,693,000 
Corporate securities34,750,000 — (3,910,000)30,840,000 
$390,415,000 $190,000 $(54,598,000)$336,007,000 
Less allowance for credit losses(428,000)— — — 
Net securities to be held to maturity$389,987,000 $— $— $— 
Restricted equity securities
Federal Home Loan Bank Stock$4,190,000 $— $— $4,190,000 
Federal Reserve Bank Stock1,037,000 — — 1,037,000 
$5,227,000 $— $— $5,227,000 
Allowance for Credit Losses: The Company adopted ASC 326, the CECL standard, in the first quarter of 2023. In conjunction with adoption, holdings of AFS and HTM securities were evaluated to determine the need to establish an allowance for credit losses, if any.
AFS securities, as shown in the table above, consist of securities issued by U.S. Government Agencies, U.S. Government Sponsored Entities, State or Local Municipal Governments, or are backed by collateral that is guaranteed by the U.S. Government. We monitor the credit quality of these investments through credit ratings issued by major rating providers and through substantial price changes not consistent with general market movements. Each of the AFS securities is deemed to be investment grade, and no ACL has been established for AFS securities.
Similarly, the agency and mortgage-backed securities in the HTM portfolio have been determined to all be investment grade with no ACL required. Municipal securities within HTM include two private activity bonds issued by well-known customers of the Bank with total balances of $19,877,000 as of June 30, 2023. These bonds carry similar risk characteristics to the commercial real estate - owner occupied segment of the Bank's loan portfolio described in Note 3; management has elected to apply a loss rate matching the loan segment to the balance of these bonds for purposes of establishing an ACL. Corporate securities in HTM consist of thirteen individual companies in the banking industry. Management reviewed the collectability of these securities taking into consideration such factors as the financial condition of the issuers, reported regulatory capital ratios of the issuers, and other performance factors. Aggregate credit risk of the corporate securities is considered very low and a small ACL has been established. 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.
Changes in the allowance for credit losses are recorded as credit loss expense, or reversal. Losses would be charged against the allowance when management believes collection of the full contractual amount due on a security is unlikely.
10


The following table summarizes the amortized cost and estimated fair value of investment securities at December 31, 2022:
Amortized
Cost		Unrealized GainsUnrealized LossesFair Value (Estimated)
Securities available for sale
U.S. Government-sponsored agencies
$26,025,000 $— $(6,878,000)$19,147,000 
Mortgage-backed securities271,068,000 55,000 (42,447,000)228,676,000 
State and political subdivisions40,472,000 2,000 (7,283,000)33,191,000 
Asset-backed securities3,548,000 — (53,000)3,495,000 
$341,113,000 $57,000 $(56,661,000)$284,509,000 
Securities to be held to maturity
U.S. Government-sponsored agencies$40,100,000 $4,000 $(10,477,000)$29,627,000 
Mortgage-backed securities60,497,000 42,000 (11,392,000)49,147,000 
State and political subdivisions258,549,000 154,000 (30,733,000)227,970,000 
Corporate securities34,750,000 — (2,483,000)32,267,000 
$393,896,000 $200,000 $(55,085,000)$339,011,000 
Restricted equity securities
Federal Home Loan Bank Stock$2,846,000 $— $— $2,846,000 
Federal Reserve Bank Stock1,037,000 — — 1,037,000 
$3,883,000 $— $— $3,883,000 
The following table summarizes the amortized cost and estimated fair value of investment securities at June 30, 2022:
Amortized
Cost		Unrealized GainsUnrealized LossesFair Value (Estimated)
Securities available for sale
U.S. Government-sponsored agencies$26,021,000 $— $(4,954,000)$21,067,000 
Mortgage-backed securities274,652,000 31,000 (30,001,000)244,682,000 
State and political subdivisions38,450,000 12,000 (6,512,000)31,950,000 
Asset-backed securities4,126,000 — (88,000)4,038,000 
$343,249,000 $43,000 $(41,555,000)$301,737,000 
Securities to be held to maturity
U.S. Government-sponsored agencies$38,100,000 $— $(7,390,000)$30,710,000 
Mortgage-backed securities57,739,000 107,000 (8,403,000)49,443,000 
State and political subdivisions256,104,000 303,000 (27,816,000)228,591,000 
Corporate securities27,750,000 — (544,000)27,206,000 
$379,693,000 $410,000 $(44,153,000)$335,950,000 
Restricted equity securities
Federal Home Loan Bank Stock$3,683,000 $— $— $3,683,000 
Federal Reserve Bank Stock1,037,000 — — 1,037,000 
$4,720,000 $— $— $4,720,000 

11


The following table summarizes the contractual maturities of investment securities at June 30, 2023:
Securities available for saleSecurities to be held to maturity
Amortized
Cost		Fair Value (Estimated)Amortized
Cost		Fair Value (Estimated)
Due in 1 year or less$— $— $2,440,000 $2,435,000 
Due in 1 to 5 years3,545,000 3,359,000 14,594,000 13,811,000 
Due in 5 to 10 years20,275,000 16,707,000 92,570,000 85,504,000 
Due after 10 years309,953,000 258,289,000 280,811,000 234,257,000 
$333,773,000 $278,355,000 $390,415,000 $336,007,000 
The following table summarizes the contractual maturities of investment securities at December 31, 2022:
Securities available for saleSecurities to be held to maturity
Amortized
Cost		Fair Value (Estimated)Amortized
Cost		Fair Value (Estimated)
Due in 1 year or less$— $— $1,787,000 $1,782,000 
Due in 1 to 5 years3,609,000 3,409,000 14,998,000 14,480,000 
Due in 5 to 10 years18,591,000 15,203,000 86,833,000 81,443,000 
Due after 10 years318,913,000 265,897,000 290,278,000 241,306,000 
$341,113,000 $284,509,000 $393,896,000 $339,011,000 
The following table summarizes the contractual maturities of investment securities at June 30, 2022:
Securities available for saleSecurities to be held to maturity
Amortized
Cost		Fair Value (Estimated)Amortized
Cost		Fair Value (Estimated)
Due in 1 year or less$12,000 $12,000 $1,792,000 $1,794,000 
Due in 1 to 5 years3,676,000 3,576,000 14,852,000 14,738,000 
Due in 5 to 10 years18,172,000 15,551,000 72,240,000 69,510,000 
Due after 10 years321,389,000 282,598,000 290,809,000 249,908,000 
$343,249,000 $301,737,000 $379,693,000 $335,950,000 

At June 30, 2023, securities with a carrying value of $329,615,000 were pledged to secure public deposits, repurchase agreements, and for other purposes as required by law. This compares to securities with a carrying value of $350,411,000 as of December 31, 2022 and $318,833,000 at June 30, 2022, pledged for the same purposes.
Gains and losses on the sale of securities are computed by subtracting the amortized cost at the time of sale from the security's selling price, net of accrued interest to be received. The following table shows securities gains and losses for the six months and quarters ended June 30, 2023 and 2022:
For the six months ended June 30,For the quarter ended June 30,
2023202220232022
Proceeds from sales of securities$— $— $— $— 
Gross realized gains— 2,000 — — 
Gross realized losses— (1,000)— (1,000)
Net gain (loss)$— $1,000 $— $(1,000)
Related income taxes$— $— $— $— 





12


As of June 30, 2023, there were 869 securities with unrealized losses held in the Company's portfolio. The Company has the ability and intent to hold its securities which are in an unrealized loss position until a recovery of their amortized cost, which may be at maturity.
The following table summarizes debt securities in an unrealized loss position for which an allowance for credit losses has not been recorded at June 30, 2023, aggregated by major security type and length of time in a continuous unrealized loss position:
Less than 12 months12 months or moreTotal
Fair Value (Estimated)Unrealized LossesFair Value (Estimated)Unrealized LossesFair Value (Estimated)Unrealized Losses
U.S. Government-sponsored agencies$1,981,000 $(19,000)$47,330,000 $(16,799,000)$49,311,000 $(16,818,000)
Mortgage-backed securities22,083,000 (1,435,000)241,009,000 (51,489,000)263,092,000 (52,924,000)
State and political subdivisions66,096,000 (1,995,000)149,378,000 (34,367,000)215,474,000 (36,362,000)
Asset-backed securities— — 1,516,000 (47,000)1,516,000 (47,000)
Corporate securities7,545,000 (1,955,000)14,045,000 (1,955,000)21,590,000 (3,910,000)
$97,705,000 $(5,404,000)$453,278,000 $(104,657,000)$550,983,000 $(110,061,000)
As of December 31, 2022, there were 869 securities with unrealized losses held in the Company's portfolio. These securities were temporarily impaired as a result of changes in interest rates reducing their fair value, of which 300 had been temporarily impaired for 12 months or more.
Information regarding securities temporarily impaired as of December 31, 2022 is summarized below:
Less than 12 months12 months or moreTotal
Fair Value (Estimated)Unrealized LossesFair Value (Estimated)Unrealized LossesFair Value (Estimated)Unrealized Losses
U.S. Government-sponsored agencies$4,804,000 $(675,000)$41,965,000 $(16,680,000)$46,769,000 $(17,355,000)
Mortgage-backed securities73,509,000 (6,486,000)197,102,000 (47,353,000)270,611,000 (53,839,000)
State and political subdivisions149,517,000 (13,769,000)67,932,000 (24,247,000)217,449,000 (38,016,000)
Asset-backed securities3,495,000 (53,000)— — 3,495,000 (53,000)
Corporate securities19,857,000 (2,143,000)3,160,000 (340,000)23,017,000 (2,483,000)
$251,182,000 $(23,126,000)$310,159,000 $(88,620,000)$561,341,000 $(111,746,000)
As of June 30, 2022, there were 773 securities with unrealized losses held in the Company's portfolio. These securities were temporarily impaired as a result of changes in interest rates reducing their fair value, of which 83 had been temporarily impaired for 12 months or more.
Information regarding securities temporarily impaired as of June 30, 2022 is summarized below:
Less than 12 months12 months or moreTotal
Fair Value (Estimated)Unrealized LossesFair Value (Estimated)Unrealized LossesFair Value (Estimated)Unrealized Losses
U.S. Government-sponsored agencies$7,996,000 $(631,000)$43,782,000 $(11,713,000)$51,778,000 $(12,344,000)
Mortgage-backed securities173,507,000 (17,645,000)112,781,000 (20,759,000)286,288,000 (38,404,000)
State and political subdivisions189,673,000 (32,189,000)5,178,000 (2,139,000)194,851,000 (34,328,000)
Asset-backed securities4,038,000 (88,000)— — 4,038,000 (88,000)
Corporate securities17,956,000 (544,000)— — 17,956,000 (544,000)
$393,170,000 $(51,097,000)$161,741,000 $(34,611,000)$554,911,000 $(85,708,000)


13


Credit Quality Indicators: Agency-backed and government-sponsored enterprise securities have a long history with no credit losses, including during times of severe stress. The principal and interest payments on agency-guaranteed debt is backed by the U.S. Government. Government-sponsored enterprises similarly guarantee principal and interest payments and carry an implicit guarantee from the U.S. Department of the Treasury. Additionally, government-sponsored enterprise securities are exceptionally liquid, readily marketable, and provide a substantial amount of price transparency and price parity, indicating a perception of zero credit losses. HTM municipal debt holdings are comprised primarily of high credit quality (rated A- or higher) state and municipal obligations. High credit quality state and municipal obligations have a history of zero to near-zero credit loss. HTM municipal debt holdings also include two unrated private activity bonds issued by well known customers of the Bank. These securities are regularly monitored as part of an overall credit relationship with the issuers; both issuers were in good standing as of June 30, 2023. HTM corporate debt holdings consist of thirteen individual companies in the banking industry. Management conducts periodic reviews of the collectability of these securities taking into consideration such factors as the financial condition of the issuers; each were in good standing as of June 30, 2023.

The following table presents the activity in the ACL for held-to-maturity debt securities by major security type for the six months ended June 30, 2023:

State and Political SubdivisionsCorporate SecuritiesTotal
Allowance for credit losses:
   Beginning balance$— $— $— 
   Impact of adopting ASC 326229,000 209,000 438,000 
   Credit loss expense (reduction)(5,000)(5,000)(10,000)
   Securities charged-off— — — 
   Recoveries— — — 
   Total ending allowance balance$224,000 $204,000 $428,000 
There was no ACL on U.S. Government-sponsored enterprise and agency securities as of June 30, 2023.

A security is considered to be past due once it is 30 days contractually past due under the terms of the agreement. As of June 30, 2023, none of the Company’s HTM debt securities were past due or on non-accrual status.
During the third quarter of 2014, the Company transferred securities with a total amortized cost of $89,780,000 with a corresponding fair value of $89,757,000 from available for sale to held to maturity. The net unrealized loss, net of taxes, on these securities at the date of the transfer was $15,000. The net unrealized holding loss at the time of transfer continues to be reported in AOCI, net of tax and is amortized over the remaining lives of the securities as an adjustment of the yield. The amortization of the net unrealized loss reported in AOCI will offset the effect on interest income of the discount for the transferred securities. The remaining unamortized balance of the net unrealized losses for the securities transferred from available for sale to held to maturity was $59,000, net of taxes, at June 30, 2023. This compares to $64,000 and $73,000, net of taxes, at December 31, 2022 and June 30, 2022, respectively. These securities were transferred as a part of the Company's overall investment and balance sheet strategies.
The Bank is a member of the FHLBB, a cooperatively owned wholesale bank for housing and finance in the six New England States. As a requirement of membership in the FHLBB, the Bank must own a minimum required amount of FHLBB stock, calculated periodically based primarily on its level of borrowings from the FHLBB. The Bank uses the FHLBB for a portion of its wholesale funding needs. As of June 30, 2023 and 2022, and December 31, 2022, the Bank's investment in FHLBB stock totaled $4,190,000, $3,683,000 and $2,846,000, respectively. FHLBB stock is a non-marketable equity security and therefore is reported at cost, which equals par value.
The Bank is also a member of the FRBB. As a requirement for membership in the FRBB, the Bank must own a minimum required amount of FRBB stock. The Bank uses FRBB for certain correspondent banking services and maintains borrowing capacity at its discount window. The Bank's investment in FRBB stock totaled $1,037,000 at June 30, 2023 and 2022 and December 31, 2022.
The Company periodically evaluates its investment in FHLBB and FRBB stock for impairment based on, among other factors, the capital adequacy of the Banks and their overall financial condition. No impairment losses have been recorded through June 30, 2023. The Bank will continue to monitor its investment in these restricted equity securities.
14


Note 3 – Loans
Upon adoption of ASU 2016-13/ASC 326, the CECL standard, as described in Notes 4 and 16 of these financial statements, the Company updated the segmentation of its loan portfolio. The updates primarily consist of reporting what had been a single class, commercial real estate loans, as three classes - commercial real estate owner occupied, commercial real estate non-owner occupied, and commercial multi-family. In addition home equity installment loans which had previously been included in the residential term class are now included in the home equity revolving and term class. Loan data as of June 30, 2023 is reported herein with the new class structure while certain prior period data retains the prior class structure.

Loan Portfolio by Class: The following table shows the composition of the Company's loan portfolio by class of financing receivable as of June 30, 2023 and 2022 and at December 31, 2022:
June 30, 2023December 31, 2022June 30, 2022
Commercial
   Real estate owner occupied$301,320,000 14.6 %$256,623,000 13.4 %$242,161,000 13.5 %
   Real estate non-owner occupied396,388,000 19.2 %363,660,000 19.0 %306,471,000 17.2 %
   Construction64,094,000 3.1 %93,907,000 4.9 %128,927,000 7.2 %
   C&I351,854,000 17.1 %319,359,000 16.7 %275,714,000 15.4 %
   Multifamily93,124,000 4.5 %79,057,000 4.1 %68,856,000 3.9 %
Municipal58,252,000 2.8 %40,619,000 2.1 %46,835,000 2.6 %
Residential
   Term645,127,000 31.4 %597,404,000 31.2 %571,111,000 31.9 %
   Construction30,812,000 1.5 %49,907,000 2.6 %44,011,000 2.5 %
Home Equity
   Revolving and term99,666,000 4.8 %93,075,000 4.9 %82,913,000 4.6 %
Consumer20,316,000 1.0 %21,063,000 1.1 %21,356,000 1.2 %
Total$2,060,953,000 100.0 %$1,914,674,000 100.0 %$1,788,355,000 100.0 %

Loan balances include net deferred loan costs of $10,824,000 as of June 30, 2023, $10,132,000 as of December 31, 2022, and $9,738,000 as of June 30, 2022. Net deferred loan costs have increased from a year ago and year-to-date due to loan origination unit volume over the period. Pursuant to collateral agreements, qualifying first mortgage loans and commercial real estate loans, which totaled $541,345,000 at June 30, 2023, were used to collateralize borrowings from the FHLB. This compares to qualifying loans which totaled $475,233,000 at December 31, 2022, and $461,756,000 at June 30, 2022. In addition, commercial, residential construction and home equity loans totaling $331,836,000 at June 30, 2023, $338,636,000 at December 31, 2022, and $345,798,000 at June 30, 2022, were used to collateralize a standby line of credit at the FRB.
15


Past Due Loans: For all loan classes, loans over 30 days past due are considered delinquent. Information on the past-due status of loans by class of financing receivable as of June 30, 2023, is presented in the following table:
30-59 Days
Past Due		60-89 Days
Past Due		90+ Days
Past Due		All
Past Due		CurrentTotal90+ Days
& Accruing
Commercial
    Real estate owner occupied$37,000 $— $— $37,000 $301,283,000 $301,320,000 $— 
    Real estate non-owner occupied — — — — 396,388,000 396,388,000 — 
    Construction — — 8,000 8,000 64,086,000 64,094,000 — 
    C&I346,000 43,000 147,000 536,000 351,318,000 351,854,000 — 
    Multifamily— — — — 93,124,000 93,124,000 — 
 Municipal — — — — 58,252,000 58,252,000 — 
 Residential
   Term 58,000 1,205,000 376,000 1,639,000 643,488,000 645,127,000 298,000 
   Construction — — — — 30,812,000 30,812,000 — 
Home equity
    Revolving and term 177,000 — 193,000 370,000 99,296,000 99,666,000 7,000 
Consumer 202,000 36,000 14,000 252,000 20,064,000 20,316,000 13,000 
Total$820,000 $1,284,000 $738,000 $2,842,000 $2,058,111,000 $2,060,953,000 $318,000 
Information on the past-due status of loans by class of financing receivable as of December 31, 2022, is presented in the following table:
30-59 Days
Past Due		60-89 Days
Past Due		90+ Days
Past Due		All
Past Due		CurrentTotal90+ Days
& Accruing
Commercial
   Real estate$— $3,000 $190,000 $193,000 $699,147,000 $699,340,000 $— 
   Construction— — — — 93,907,000 93,907,000 — 
   Other118,000 23,000 85,000 226,000 319,133,000 319,359,000 34,000 
Municipal— — — — 40,619,000 40,619,000 — 
Residential
   Term135,000 33,000 284,000 452,000 596,952,000 597,404,000 118,000 
   Construction— — — — 49,907,000 49,907,000 — 
Home equity line of credit241,000 29,000 151,000 421,000 92,654,000 93,075,000 86,000 
Consumer131,000 33,000 3,000 167,000 20,896,000 21,063,000 3,000 
Total$625,000 $121,000 $713,000 $1,459,000 $1,913,215,000 $1,914,674,000 $241,000 
Information on the past-due status of loans by class of financing receivable as of June 30, 2022, is presented in the following table:
30-59 Days
Past Due		60-89 Days
Past Due		90+ Days
Past Due		All
Past Due		CurrentTotal90+ Days
& Accruing
Commercial
   Real estate$— $6,000 $191,000 $197,000 $617,291,000 $617,488,000 $— 
   Construction— — — — 128,927,000 128,927,000 — 
   Other448,000 76,000 83,000 607,000 275,107,000 275,714,000 — 
Municipal— — — — 46,835,000 46,835,000 — 
Residential
   Term343,000 497,000 1,195,000 2,035,000 569,076,000 571,111,000 72,000 
   Construction— — — — 44,011,000 44,011,000 — 
Home equity line of credit186,000 — — 186,000 82,727,000 82,913,000 — 
Consumer54,000 64,000 4,000 122,000 21,234,000 21,356,000 4,000 
Total$1,031,000 $643,000 $1,473,000 $3,147,000 $1,785,208,000 $1,788,355,000 $76,000 
16


Non-Accrual Loans: For all classes, loans are placed on non-accrual status when, based on current information and events, it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement or when principal and interest is 90 days or more past due unless the loan is both well secured and in the process of collection (in which case the loan may continue to accrue interest in spite of its past due status). A loan is "well secured" if it is secured (1) by collateral in the form of liens on or pledges of real or personal property, including securities, that have a realizable value sufficient to discharge the debt (including accrued interest) in full, or (2) by the guarantee of a financially responsible party. A loan is "in the process of collection" if collection of the loan is proceeding in due course either (1) through legal action, including judgment enforcement procedures, or, (2) in appropriate circumstances, through collection efforts not involving legal action which are reasonably expected to result in repayment of the debt or in its restoration to a current status in the near future.
Cash payments received on non-accrual loans are applied to reduce the loan's principal balance until the remaining principal balance is deemed collectible, after which interest is recognized when collected. As a general rule, a loan may be restored to accrual status when payments are current for a substantial period of time, generally six months, and repayment of the remaining contractual amounts is expected, or when it otherwise becomes well secured and in the process of collection.
The following table presents the amortized costs basis of loans on nonaccrual status as of June 30, 2023, December 31, 2022 and June 30, 2022:
June 30, 2023December 31, 2022June 30, 2022
Nonaccrual with Allowance for Credit LossNonaccrual with no Allowance for Credit LossTotal NonaccrualTotal NonaccrualTotal Nonaccrual
Commercial
   Real estate owner occupied$— $— $— $193,000 $197,000 
   Real estate non-owner occupied— — — — — 
   Construction— 30,000 30,000 23,000 25,000 
   C&I372,000 283,000 655,000 663,000 953,000 
   Multifamily— — — — — 
Municipal— — — — — 
Residential
   Term— 533,000 533,000 572,000 3,383,000 
   Construction— — — — — 
Home equity
   Revolving and term— 458,000 458,000 304,000 254,000 
Consumer— — — — — 
Total$372,000 $1,304,000 $1,676,000 $1,755,000 $4,812,000 














17


Individually Analyzed Loans: Individually analyzed loans include loans placed on non-accrual and loans reported as TDR prior to adoption of ASU 2022-02 Troubled Debt Restructurings and Vintage Disclosures, with balances of $250,000 or more. These loans are measured at the present value of expected future cash flows discounted at the loan's effective interest rate or at the fair value of the collateral if the loan is collateral dependent. If the measure of an individually analyzed loan is lower than the recorded investment in the loan and estimated selling costs, a specific reserve is established for the difference, or, in certain situations, if the measure of an individually analyzed loan is lower than the recorded investment in the loan and estimated selling costs, the difference is written off.
The following table presents the amortized cost basis of collateral-dependent loans as of June 30, 2023 by collateral type:
Collateral Type
Commercial Real EstateResidential Real EstateTotal
Commercial
   Real estate owner occupied$— $— $— 
   Real estate non-owner occupied725,000—725,000
   Construction———
   C&I———
Residential
   Term—385,000385,000
Home Equity
   Revolving and term———
Total$725,000 $385,000 $1,110,000 
Collateral-dependent loans are loans for which the repayment is expected to be provided substantially by the underlying collateral and there are no other available and reliable sources of repayment.
18


A breakdown of individually analyzed loans by class of financing receivable as of and for the period ended June 30, 2023 is presented in the following table:
For the six months ended June 30, 2023For the quarter ended June 30, 2023
Recorded InvestmentUnpaid Principal BalanceRelated AllowanceAverage Recorded InvestmentRecognized Interest IncomeAverage Recorded InvestmentRecognized Interest Income
With No Related Allowance
Commercial
   Real estate owner occupied$— $— $— $214,000 $— $61,000 $— 
   Real estate non-owner occupied725,000 841,000 — 805,000 12,000 764,000 5,000 
   Construction— — — 235,000 — 8,000 — 
   C&I— — — 108,000 — 39,000 — 
   Multifamily— — — — — — — 
Municipal— — — — — — — 
Residential
   Term385,000 412,000 — 1,273,000 7,000 853,000 5,000 
   Construction— — — — — — — 
Home Equity
   Revolving and term— — — 357,000 — 179,000 — 
Consumer— — — — — — — 
$1,110,000 $1,253,000 $— $2,992,000 $19,000 $1,904,000 $10,000 
With an Allowance Recorded
Commercial
   Real estate owner occupied$— $— $— $— $— $— $— 
   Real estate non-owner occupied— — — — — — — 
   Construction— — — — — — — 
   C&I372,000 458,000 157,000 571,000 — 483,000 — 
   Multifamily— — — — — — — 
Municipal— — — — — — — 
Residential
   Term514,000 514,000 29,000 991,000 12,000 751,000 6,000 
   Construction— — — — — — — 
Home Equity
   Revolving and term— — — 14,000 — 7,000 — 
Consumer— — — — — — — 
$886,000 $972,000 $186,000 $1,576,000 $12,000 $1,241,000 $6,000 
Total
Commercial
   Real estate owner occupied$— $— $— $214,000 $— $61,000 $— 
   Real estate non-owner occupied725,000 841,000 — 805,000 12,000 764,000 5,000 
   Construction— — — 235,000 — 8,000 — 
   C&I372,000 458,000 157,000 679,000 — 522,000 — 
   Multifamily— — — — — — — 
Municipal— — — — — — — 
Residential
   Term899,000 926,000 29,000 2,264,000 19,000 1,604,000 11,000 
   Construction— — — — — — — 
Home Equity
   Revolving and term— — — 371,000 — 186,000 — 
Consumer— — — — — — — 
$1,996,000 $2,225,000 $186,000 $4,568,000 $31,000 $3,145,000 $16,000 
Substantially all interest income recognized on individually analyzed loans for all classes of financing receivables was recognized on a cash basis as received.
19


A breakdown of individually analyzed loans by class of financing receivable as of and for the year ended December 31, 2022 is presented in the following table:
Recorded InvestmentUnpaid Principal BalanceRelated AllowanceAverage Recorded InvestmentRecognized Interest Income
With No Related Allowance
Commercial
  Real estate$1,236,000 $1,532,000 $— $1,440,000 $50,000 
  Construction685,000 687,000 — 81,000 35,000 
  Other301,000 348,000 — 408,000 13,000 
Municipal— — — — — 
Residential
  Term1,833,000 2,035,000 — 4,507,000 56,000 
  Construction— — — — — 
Home equity line of credit304,000 340,000 — 295,000 — 
Consumer— — — 1,000 — 
$4,359,000 $4,942,000 $— $6,732,000 $154,000 
With an Allowance Recorded
Commercial
  Real estate$— $— $— $11,000 $— 
  Construction— — — 606,000 — 
  Other545,000 647,000 298,000 693,000 — 
Municipal— — — — — 
Residential
  Term1,256,000 1,259,000 100,000 1,486,000 50,000 
  Construction— — — — — 
Home equity line of credit— — — 8,000 — 
Consumer— — — — — 
$1,801,000 $1,906,000 $398,000 $2,804,000 $50,000 
Total
Commercial
  Real estate$1,236,000 $1,532,000 — $1,451,000 $50,000 
  Construction685,000 687,000 — 687,000 35,000 
  Other846,000 995,000 298,000 1,101,000 13,000 
Municipal— — — — — 
Residential
  Term3,089,000 3,294,000 100,000 5,993,000 106,000 
  Construction— — — — — 
Home equity line of credit304,000 340,000 — 303,000 — 
Consumer— — — 1,000 — 
$6,160,000 $6,848,000 $398,000 $9,536,000 $204,000 

20


A breakdown of individually analyzed loans by class of financing receivable as of and for the period ended June 30, 2022 is presented in the following table:
For the six months ended June 30, 2022For the quarter ended June 30, 2022
Recorded InvestmentUnpaid Principal BalanceRelated AllowanceAverage Recorded InvestmentRecognized Interest IncomeAverage Recorded InvestmentRecognized Interest Income
With No Related Allowance
Commercial
  Real estate$1,352,000 $1,661,000 $— $1,588,000 $28,000 $1,600,000 $15,000 
  Construction25,000 27,000 — 26,000 — 26,000 — 
  Other416,000 471,000 — 446,000 8,000 435,000 4,000 
Municipal— — — — — — — 
Residential
  Term6,053,000 7,189,000 — 5,738,000 49,000 5,682,000 26,000 
  Construction— — — — — — — 
Home equity line of credit254,000 283,000 — 323,000 — 324,000 — 
Consumer1,000 1,000 — 1,000 — — — 
$8,101,000 $9,632,000 $— $8,122,000 $85,000 $8,067,000 $45,000 
With an Allowance Recorded
Commercial
  Real estate$— $— $— $21,000 $— $— $— 
  Construction661,000 661,000 8,000 661,000 11,000 661,000 5,000 
  Other744,000 843,000 502,000 778,000 — 761,000 — 
Municipal— — — — — — — 
Residential
  Term1,449,000 1,483,000 103,000 1,650,000 25,000 1,566,000 13,000 
  Construction— — — — — — — 
Home equity line of credit— — — 17,000 — — — 
Consumer— — — — — — — 
$2,854,000 $2,987,000 $613,000 $3,127,000 $36,000 $2,988,000 $18,000 
Total
Commercial
  Real estate$1,352,000 $1,661,000 $— $1,609,000 $28,000 $1,600,000 $15,000 
  Construction686,000 688,000 8,000 687,000 11,000 687,000 5,000 
  Other1,160,000 1,314,000 502,000 1,224,000 8,000 1,196,000 4,000 
Municipal— — — — — — — 
Residential
  Term7,502,000 8,672,000 103,000 7,388,000 74,000 7,248,000 39,000 
  Construction— — — — — — — 
Home equity line of credit254,000 283,000 — 340,000 — 324,000 — 
Consumer1,000 1,000 — 1,000 — — — 
$10,955,000 $12,619,000 $613,000 $11,249,000 $121,000 $11,055,000 $63,000 





21


Loan Modifications: ASU 2022-02 amends ASC 326 for entities that have adopted ASU 2016-13, the CECL standard, such as the Company. ASU 2022-02 eliminates the accounting guidance for TDRs and introduces new guidance for enhanced reporting of certain loan modifications to borrowers experiencing financial difficulty. Loan modifications may include interest rate reduction, term extension, payment deferral, principle forgiveness or a combination thereof. It is the intent to minimize future losses while providing borrowers with financial relief.

The following table represents loan modifications made to borrowers experiencing financial difficulty by modification type and class of financing receivable, during the three months ended June 30, 2023:

Term Extension
Amortized Cost Basis at June 30, 2023
% of Total Class of Financing Receivable
C&I$4,0000.001%
  Total$4,000

The following table describes the financial effect of the modifications made to borrowers experiencing financial difficulty for the three months ended June 30, 2023:

Term Extension
Financial Effect
C&I
Extended Term 90 days

The Company monitors the performance of the loans that are modified to borrowers experiencing financial difficulty to understand the effectiveness of its modification efforts. The following table depicts the performance of loans that have been modified during the six months ended June 30, 2023:

Payment Status (Amortized Cost Basis)
Current30-59 Days
Past Due		60-89 Days
Past Due		90+ Days
Past Due
C&I$253,000$— $— $— 
Total$253,000$— $— $— 

Troubled Debt Restructured: Prior to adoption of ASU 2022-02, the Company evaluated loan modifications and other transactions to determine if classification as a TDR was necessary. A TDR constitutes a restructuring of debt if the Company, for economic or legal reasons related to the borrower's financial difficulties, grants a concession to the borrower that it would not otherwise consider. To determine whether or not a loan was to be classified as a TDR, Management evaluated a loan based upon the following criteria:
•The borrower demonstrates financial difficulty; common indicators include past due status with bank obligations, substandard credit bureau reports, or an inability to refinance with another lender; and
•The Company has granted a concession; common concession types include maturity date extension, interest rate adjustments to below market pricing, and deferment of payments.
As of December 31, 2022, the company had 29 loans with a balance of $4,744,000 that were classified as TDRs. The impairment carried as a specific reserve in the allowance for loan losses is calculated by present valuing the expected cash flows on the loan at the original interest rate, or, for collateral-dependent loans, using the fair value of the collateral less costs to sell.









22


The following table shows TDRs by class and the specific reserve as of December 31, 2022:
Number of LoansBalanceSpecific Reserves
Commercial
   Real estate5 $1,044,000 $— 
   Construction1 661,000 — 
   Other3 361,000 81,000 
Municipal— — — 
Residential
   Term20 2,678,000 100,000 
   Construction— — — 
Home equity line of credit— — — 
Consumer— — — 
29 $4,744,000 $181,000 
As of December 31, 2022, one of the loans classified as TDR with a total balance of $97,000 was more than 30 days past due and was not placed on TDR status in the previous 12 months. The following table shows past-due TDRs by class and the associated specific reserves included in the allowance for loan losses as of December 31, 2022:
Number of LoansBalanceSpecific Reserves
Commercial
   Real estate— $— $— 
   Construction— — — 
   Other1 97,000 — 
Municipal— — — 
Residential
   Term— — — 
   Construction— — — 
Home equity line of credit— — — 
Consumer— — — 
1 $97,000 $— 















23


For the year ended December 31, 2022, one loan was placed on TDR status. The following table shows this TDR by class and the associated specific reserves included in the allowance for loan losses as of December 31, 2022:
Number of LoansPre-Modification
Outstanding
Recorded Investment		Post-Modification Outstanding
Recorded
Investment		Specific Reserves
Commercial
   Real estate— $— $— $— 
   Construction— — — — 
   Other— — — — 
Municipal— — — — 
Residential
   Term1 38,000 38,000 — 
   Construction— — — — 
Home equity line of credit— — — — 
Consumer— — — — 
1 $38,000 $38,000 $— 
As of December 31, 2022, Management was aware of four loans classified as TDRs that are involved in bankruptcy with an outstanding balance of $550,000. As of December 31, 2022, there were five loans with an outstanding balance of $339,000 that were classified as TDRs and were on non-accrual status, of which none were in the process of foreclosure.

Residential Mortgage Loans in Process of Foreclosure
As of June 30, 2023, there were no mortgage loans collateralized by residential real estate in the process of foreclosure. This compares to two mortgage loans collateralized by residential real estate in the process of foreclosure with a total balance of $166,000 as of December 31, 2022, and five mortgage loans collateralized by residential real estate in the process of foreclosure with a total balance of $537,000 as of June 30, 2022.
24


Note 4. Allowance for Credit Losses
Upon adoption of ASC 326, the CECL standard, in the first quarter of 2023, the Company replaced the incurred loss model that recognized 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. Loans, or portions thereof, are charged off against the allowance when they are deemed uncollectible. The ACL consists of three elements: (1) specific reserves for loans individually analyzed; (2) general reserves for each portfolio segment; and, (3) qualitative reserves. All outstanding loans are considered in evaluating the appropriateness of the allowance. Loans are segmented by common risk characteristics as delineated in the paragraph below. Prior to adoption of ASC 326, under the incurred loss methodology, the Company evaluated portfolio risk characteristics largely on loan purpose. The Company provides for loan losses through the allowance for credit losses which represents an estimated reserve for losses in the loan portfolio. To determine an appropriate level for general reserves, a discounted cash flow approach is applied to each portfolio segment implementing a probability of default and loss given default estimate based upon a number of factors including historical losses over an economic cycle, economic forecasts, loan prepayment speeds and curtailment rates. 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 $6,210,000 to the Allowance for Credit Losses, recorded as a charge to retained earnings at January 1, 2023.

Loan Portfolio Composition & Risk Characteristics: The loan portfolio is segmented into ten classes and credit risk is evaluated separately in each class. Major risk characteristics relevant to each portfolio segment are as follows: 
Commercial Real Estate Owner Occupied - commercial real estate owner occupied loans consist of mortgage loans to finance investments in real property such as retail space, offices, industrial buildings, hotels, educational facilities, and other specific or mixed use properties. Loans are typically written with amortizing payment structures. Collateral values are determined based on appraisals and evaluations in accordance with established policy and regulatory guidelines. Loans typically have a loan-to-value ratio of up to 80% based upon current valuation information at the time the loan is made, and are primarily paid by the cash flow generated from the real property, typically the operating entity of owner occupant. Risk factors typically include competitive market forces, net operating incomes of the operating entity, and overall economic demand. Loans in the recreational and tourism sector can be affected by weather conditions, such as unseasonably low winter snowfalls. Commercial real estate lending also carries a higher degree of environmental risk than other types of lending.
Commercial Real Estate Non-Owner Occupied - commercial real estate loans non-owner occupied share many of the purpose, loan structure and risk characteristics of owner-occupied commercial real estate. Repayment is generally reliant upon cash flow generated from tenants with risk factors also influenced by vacancy rates, cap rates, lease renewals, and underlying financial health of lessees.
Commercial Construction - commercial construction loans consist of loans to finance construction in a mix of owner- and non-owner occupied commercial real estate properties. Loans typically have construction periods of less than two years, and payment structures during the construction period are typically on an interest only basis, although principal payments may be established depending on the type of construction project being financed. During the construction phase, commercial construction loans are primarily paid by cash flow generated from the construction project or other operating cash flows from the borrower or guarantors, if applicable. Commercial construction loans will typically convert to permanent financing from the Company, or loan repayment may come from a third party source in the event that the Company will not be providing permanent term financing. Collateral valuation and loan-to-value guidelines follow those for commercial real estate loans. Commercial construction loans are impacted by factors similar to those for commercial real estate loans in addition to risks related to contractor financial capacity and ability to complete a project within acceptable time frames and within budget.
Commercial and Industry- C&I loans consist of revolving and term loan obligations extended to business and corporate enterprises for the purpose of financing working capital and or capital investment. C&I loans may be secured or unsecured; when secured, collateral generally consists of pledges of business assets including, but not limited to, accounts receivable, inventory, equipment, and/or other tangible and intangible assets. C&I loans are primarily paid by the operating cash flow of the borrower. A weakened economy, soft consumer spending, and the rising cost of labor or raw materials are examples of issues that can impact the credit quality in this segment.
Commercial Multifamily - multifamily loans share structure and risk characteristics with non-owner occupied commercial real estate; underlying collateral is residential in nature rather than commercial, consisting of properties with five or more units.
Municipal Loans - municipal loans are comprised of loans to municipalities in Maine for capitalized expenditures, construction projects, or tax anticipation notes. All municipal loans are considered either general obligations of the municipality collateralized by the taxing ability of the municipality for repayment of debt or have a pledge of specific revenues. The overall health of the economy, including unemployment rates and housing prices, has an impact on the credit quality of this segment.

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Residential Real Estate Term - residential term loans consist of residential real estate loans held in the Company's loan portfolio made to borrowers who demonstrate the ability to make scheduled payments with full consideration to underwriting factors. Borrower qualifications include favorable credit history combined with supportive income requirements and loan-to-value ratios within established policy and regulatory guidelines. Collateral values are determined based on appraisals and evaluations in accordance with established policy and regulatory guidelines. Residential loans typically have a loan-to-value ratio of up to 80% based on appraisal information at the time the loan is made. Collateral consists of mortgage liens on one-to four-family residential properties. Loans are offered with fixed or adjustable rates with amortization terms of up to thirty years. The overall health of the economy, including unemployment rates and housing prices, has an impact on the credit quality of this segment.
Residential Real Estate Construction - residential construction loans typically consist of loans for the purpose of constructing single family residences to be owned and occupied by the borrower. Borrower qualifications include favorable credit history combined with supportive income requirements and loan-to-value ratios within established policy and regulatory guidelines. Residential construction loans normally have construction terms of one year or less and payment during the construction term is typically on an interest only basis from sources including interest reserves, borrower liquidity, and/or income. Residential construction loans will typically convert to permanent financing from the Company or have another financing commitment in place from an acceptable mortgage lender. Collateral valuation and loan-to-value guidelines are consistent with those for residential term loans. Residential construction loans are impacted by factors similar to those for residential real estate term loans in addition to risks related to contractor financial capacity and ability to complete a project within acceptable time frames and within budget.
Home Equity Revolving and Term - home equity revolving and term loans are made to qualified individuals and are secured by senior or junior mortgage liens on owner occupied one- to four-family homes, condominiums, or vacation homes. The home equity line of credit typically has a variable interest rate and is billed as interest-only payments during the draw period. At the end of the draw period, the home equity line of credit is billed as a percentage of the principal balance plus all accrued interest. Loan maturities are normally 300 months. Borrower qualifications include favorable credit history combined with supportive income requirements and combined loan-to-value ratios usually not exceeding 80% inclusive of priority liens. Collateral valuation guidelines follow those for residential real estate loans. The overall health of the economy, including unemployment rates and housing prices, has an impact on the credit quality of this segment. 
Consumer - consumer loans include personal lines of credit and amortizing loans made to qualified individuals for various purposes such as autos, recreational vehicles, debt consolidation, personal expenses, or overdraft protection. Borrower qualifications include favorable credit history combined with supportive income and collateral requirements within established policy guidelines. Consumer loans may be secured or unsecured. The overall health of the economy, including unemployment rates, has an impact on the credit quality of this segment.

Construction, land, and land development: CLLD loans, both commercial and residential, represented 35.5% of total Bank capital as of June 30, 2023 and remain below the regulatory guidance of 100.0% of total Bank capital. Construction loans and non-owner-occupied commercial real estate loans represented 217.0% of total Bank capital at June 30, 2023, below the regulatory guidance of 300.0% of total Bank capital.






















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Composition of the ACL: A breakdown of the allowance for credit losses as of June 30, 2023, by class of financing receivable and allowance element, is presented in the following table:
As of June 30, 2023Specific Reserves on Loans Evaluated Individually General Reserves on Loans Based on Historical Loss ExperienceReserves for Qualitative FactorsTotal Reserves
Commercial
   Real estate owner occupied$— $3,998,000 $721,000 $4,719,000 
   Real estate non-owner occupied— 3,947,000 545,000 4,492,000 
   Construction— 1,361,000 108,000 1,469,000 
   C&I157,000 3,886,000 678,000 4,721,000 
   Multifamily— 1,218,000 94,000 1,312,000 
Municipal— 360,000 39,000 399,000 
Residential
   Term29,000 4,020,000 782,000 4,831,000 
   Construction— 635,000 (26,000)609,000 
Home Equity
   Revolving and term— 477,000 158,000 635,000 
Consumer— 248,000 30,000 278,000 
$186,000 $20,150,000 $3,129,000 $23,465,000 
A breakdown of the allowance for loan losses as of December 31, 2022 under the incurred loss method, by class of financing receivable and allowance element, is presented in the following table:
As of December 31, 2022Specific Reserves on Loans Evaluated Individually for ImpairmentGeneral Reserves on Loans Based on Historical Loss ExperienceReserves for Qualitative FactorsUnallocated
Reserves		Total Reserves
Commercial
   Real estate$— $974,000 $5,142,000 $— $6,116,000 
   Construction— 131,000 690,000 — 821,000 
   Other298,000 446,000 2,353,000 — 3,097,000 
Municipal— — 162,000 — 162,000 
Residential
   Term100,000 83,000 2,376,000 — 2,559,000 
   Construction— 7,000 192,000 — 199,000 
Home equity line of credit— 101,000 928,000 — 1,029,000 
Consumer— 286,000 776,000 — 1,062,000 
Unallocated— — — 1,678,000 1,678,000 
$398,000 $2,028,000 $12,619,000 $1,678,000 $16,723,000 









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A breakdown of the allowance for loan losses as of June 30, 2022 under the incurred loss method, by class of financing receivable and allowance element, is presented in the following table:
As of June 30, 2022Specific Reserves on Loans Evaluated Individually for ImpairmentGeneral Reserves on Loans Based on Historical Loss ExperienceReserves for Qualitative FactorsUnallocated
Reserves		Total Reserves
Commercial
   Real estate$— $873,000 $4,607,000 $— $5,480,000 
   Construction8,000 182,000 961,000 — 1,151,000 
   Other502,000 390,000 2,056,000 — 2,948,000 
Municipal— — 157,000 — 157,000 
Residential
   Term103,000 164,000 2,325,000 — 2,592,000 
   Construction— 13,000 178,000 — 191,000 
Home equity line of credit— 104,000 862,000 — 966,000 
Consumer— 240,000 626,000 — 866,000 
Unallocated— — — 1,850,000 1,850,000 
$613,000 $1,966,000 $11,772,000 $1,850,000 $16,201,000 

The allowance for credit losses as a percent of total loans stood at 1.14% as of June 30, 2023, 0.87% at December 31, 2022 and 0.91% as of June 30, 2022.

Off-Balance Sheet Credit Exposures: In the ordinary course of business, the Company enters into commitments to extend credit, including commercial letters of credit and standby letters of credit. Such financial instruments are recorded as loans when they are funded.

Allowance for Credit Losses on Off-Balance Sheet Credit Exposures: The Company estimates expected credit losses over the contractual period in which the Company is exposed to credit risk via a contractual obligation to extend credit, unless that obligation is unconditionally cancellable by the Company. The ACL on off-balance sheet credit exposures is adjusted through credit loss expense and any adjustment is recognized in net income. To appropriately measure expected credit losses, management disaggregates the loan portfolio into similar risk characteristics, identical to those determined for the loan portfolio. An estimated funding rate is then applied to the qualifying unfunded loan commitments and letters of credit using the Company’s own historical experience to estimate the expected funded amount for each loan segment as of the reporting date. Once the expected funded amount for each loan segment is determined, the loss rate, which is the calculated expected loan loss as a percent of the amortized cost basis for each loan segment, is applied to calculate the ACL on off-balance sheet credit exposures as of the reporting date. The Company’s allowance for credit losses on unfunded commitments is recognized as a liability, included within other liabilities on the consolidated balance sheet.

The following table presents the activity in the ACL for off-balance sheet credit exposures for the six months ended June 30, 2023 :
Allowance for credit losses:
Beginning balance, prior to adoption of ASC 326$100,000 
Impact of adopting ASC 3261,297,000 
Credit loss expense131,000 
Total ending allowance balance$1,528,000 





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Credit Quality Indicators: To monitor the credit quality of its loan portfolio, management applies an internal risk rating system to categorize commercial loan segments. Approximately 60% of commercial loan outstanding balances are subject to review and validation annually by an independent consulting firm. Additionally, commercial loan relationships with exposure greater than or equal to 750,000 are subject to review annually by the Company's internal credit review function.

The risk rating system has eight levels, defined as follows:
1    Strong
Credits rated "1" are characterized by borrowers fully responsible for the credit with excellent capacity to pay principal and interest. Loans rated "1" may be secured with acceptable forms of liquid collateral.
2    Above Average
Credits rated "2" are characterized by borrowers that have better than average liquidity, capitalization, earnings, and/or cash flow with a consistent record of solid financial performance.
3    Satisfactory
Credits rated "3" are characterized by borrowers with favorable liquidity, profitability, and financial condition with adequate cash flow to pay debt service.
4    Average
Credits rated "4" are characterized by borrowers that present risk more than 1, 2 and 3 rated loans and merit an ordinary level of ongoing monitoring. Financial condition is on par or somewhat below industry averages while cash flow is generally adequate to meet debt service requirements.
5    Watch
Credits rated "5" are characterized by borrowers that warrant greater monitoring due to financial condition or unresolved and identified risk factors.
6    Other Assets Especially Mentioned
Loans in this category are currently protected but are potentially weak and constitute an undue and unwarranted credit risk, but not to the point of justifying a classification of substandard. OAEM have potential weaknesses which may, if not checked or corrected, weaken the asset or inadequately protect the Company's credit position at some future date.
7    Substandard
Loans in this category are inadequately protected by the paying capacity of the borrower or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. Substandard loans are characterized by the distinct possibility that the Company may sustain some loss if the deficiencies are not corrected.
8    Doubtful
Loans classified "Doubtful" have the same weaknesses as those classified substandard with the added characteristic that the weaknesses make collection or liquidation in full, based on currently existing facts, conditions, and values, highly questionable and improbable. The possibility of loss is high, but because of certain important and reasonably specific pending factors which may work to the advantage and strengthening of the asset, its classification as an estimated loss is deferred until its more exact status may be determined.

Most residential real estate, home equity, and consumer loans are not assigned ratings; therefore they are categorized as performing and non-performing loans. Performing loans include loans that are current and loans that are past due less than 90 days. Loans that are past due more than 90 days are considered non-performing.










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The following table summarizes the credit quality for the Company's portfolio by risk category of loans and by class by vintage as follows:
Term Loans Amortized Cost Basis by Origination Year
Dollars in thousands20232022202120202019PriorRevolving Loans Amortized Cost BasisRevolving Loans Converted to TermTotal
As of June 30, 2023
Commercial
  Real estate owner occupied
    Pass (risk rating 1-5)$35,091 $75,256 $42,611 $29,022 $36,714 $71,292 $10,432 $187 $300,605 
    Special Mention (risk rating 6)75 — — 12 503 — — — 590 
    Substandard (risk rating 7)— — — — — 125 — — 125 
    Doubtful (risk rating 8)— — — — — — — — — 
  Total Real Estate Owner Occupied35,166 75,256 42,611 29,034 37,217 71,417 10,432 187 301,320 
    Current period gross write-offs— — — — — 39 — — 39 
  Real estate non-owner occupied
    Pass (risk rating 1-5)23,092 71,871 131,461 49,505 28,265 87,469 4,662 — 396,325 
    Special Mention (risk rating 6)— — — — — — — — — 
    Substandard (risk rating 7)— — — — — 63 — — 63 
    Doubtful (risk rating 8)— — — — — — — — — 
  Total Real Estate Non-Owner Occupied23,092 71,871 131,461 49,505 28,265 87,532 4,662 — 396,388 
    Current period gross write-offs— — — — — — — — — 
  Construction
    Pass (risk rating 1-5)8,436 41,688 8,574 1,737 1,063 2,596 — — 64,094 
    Special Mention (risk rating 6)— — — — — — — — — 
    Substandard (risk rating 7)— — — — — — — — — 
    Doubtful (risk rating 8)— — — — — — — — — 
  Total Construction8,436 41,688 8,574 1,737 1,063 2,596 — — 64,094 
    Current period gross write-offs— — — — — — — — — 
  C&I
    Pass (risk rating 1-5)35,422 68,801 55,927 38,437 6,937 40,691 87,193 16,187 349,595 
    Special Mention (risk rating 6)— 105 316 — 43 12 419 — 895 
    Substandard (risk rating 7)100 372 35 — 214 575 68 — 1,364 
    Doubtful (risk rating 8)— — — — — — — — — 
  Total C&I35,522 69,278 56,278 38,437 7,194 41,278 87,680 16,187 351,854 
    Current period gross write-offs— — — — — — — — — 
  Multifamily
    Pass (risk rating 1-5)5,332 31,747 19,329 16,220 5,959 11,259 1,914 — 91,760 
    Special Mention (risk rating 6)— — 1,364 — — — — — 1,364 
    Substandard (risk rating 7)— — — — — — — — — 
    Doubtful (risk rating 8)— — — — — — — — — 
  Total Multifamily5,332 31,747 20,693 16,220 5,959 11,259 1,914 — 93,124 
    Current period gross write-offs— — — — — — — — — 
Municipal
    Pass (risk rating 1-5)20,516 6,991 4,352 11,036 5,691 9,666 — — 58,252 
    Special Mention (risk rating 6)— — — — — — — — — 
    Substandard (risk rating 7)— — — — — — — — — 
    Doubtful (risk rating 8)— — — — — — — — — 
  Total Municipal20,516 6,991 4,352 11,036 5,691 9,666 — — 58,252 
    Current period gross write-offs— — — — — — — — — 
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Term Loans Amortized Cost Basis by Origination Year
Dollars in thousands20232022202120202019PriorRevolving Loans Amortized Cost BasisRevolving Loans Converted to TermTotal
As of June 30, 2023
Residential
  Term
    Performing29,366 137,663 146,868 99,721 41,667 187,272 1,903 134 644,594 
    Non-performing— — — — 262 271 — — 533 
  Total Term29,366 137,663 146,868 99,721 41,929 187,543 1,903 134 645,127 
    Current period gross write-offs— — — — — — — — — 
  Construction
    Performing6,627 22,880 — 1,305 — — — — 30,812 
    Non-performing— — — — — — — — — 
  Total Construction6,627 22,880 — 1,305 — — — — 30,812 
    Current period gross write-offs— — — — — — — — — 
Home Equity Revolving and Term
    Performing5,632 9,504 2,188 1,253 744 1,836 67,376 10,675 99,208 
    Non-performing— — — — — 118 149 191 458 
  Total Home Equity Revolving and Term5,632 9,504 2,188 1,253 744 1,954 67,525 10,866 99,666 
    Current period gross write-offs— — — — — — — — — 
Consumer
    Performing2,411 2,684 1,425 2,207 643 4,705 6,241 — 20,316 
    Non-performing— — — — — — — — — 
  Total Consumer2,411 2,684 1,425 2,207 643 4,705 6,241 — 20,316 
    Current period gross write-offs1 17 22 14 3 26 — — 83 
Total loans$172,100 $469,562 $414,450 $250,455 $128,705 $417,950 $180,357 $27,374 $2,060,953 


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Loss Recognition: Commercial loans are generally charged off when all or a portion of the principal amount is determined to be uncollectible. This determination is based on circumstances specific to a borrower including repayment ability, analysis of collateral, and other factors as applicable. Consumer loans greater than 120 days past due are generally charged off. Residential loans 90 days or more past due are placed on non-accrual status unless the loans are both well secured and in the process of collection. One- to  four-family residential real estate loans and home equity loans are written down or charged-off no later than 180 days past due, or for residential real estate secured loans having a borrower in bankruptcy, within 60 days of receipt of notification of filing from the bankruptcy court, whichever is sooner. This is subject to completion of a current assessment of the value of the collateral with any outstanding loan balance in excess of the fair value of the property, less costs to sell, written down or charged-off.
The following table presents allowance for credit losses activity by class for the six months and quarter ended June 30, 2023:
Dollars in thousandsCommercialMunicipalResidentialHome EquityConsumerUnallocatedTotal
Real Estate Owner OccupiedReal Estate Non-Owner OccupiedConstructionC&IMultifamilyTermConstructionRevolving and term
For the six months ended June 30, 2023
Beginning balance, prior to adoption of ASC 326$6,116 $— $821 $3,097 $— $162 $2,559 $199 $1,029 $1,062 $1,678 $16,723 
Charge offs39 — — — — — — — — 83 — 122 
Recoveries— — — 3 — — 6 — 7 58 — 74 
Provision (credit)328 177 (295)(24)128 105 388 (325)55 43 — 580 
Impact of adopting ASC 326$(1,686)$4,315 $943 $1,645 $1,184 $132 $1,878 $735 $(456)$(802)$(1,678)$6,210 
Ending balance$4,719 $4,492 $1,469 $4,721 $1,312 $399 $4,831 $609 $635 $278 $— $23,465 
For the three months ended June 30, 2023
Beginning balance$4,470 $4,422 $1,784 $4,838 $1,206 $307 $4,608 $949 $603 $271 $— $23,458 
Charge offs— — — — — — — — — 46 — 46 
Recoveries— — — 1 — — 4 — 3 15 — 23 
Provision (credit)249 70 (315)(118)106 92 219 (340)29 38 — 30 
Ending balance$4,719 $4,492 $1,469 $4,721 $1,312 $399 $4,831 $609 $635 $278 $— $23,465 

As of June 30, 2023, the significant model inputs and assumptions used within the discounted cash flow model for purposes of estimating the ACL on loans were:

Macroeconomic (loss) drivers: The following loss drivers for each loan segment were used to calculate the expected Probability of Default over the forecast and reversion period:

•Commercial Real Estate Owner Occupied: FOMC median forecasts of national unemployment and change in national GDP
•Commercial Real Estate Non-Owner Occupied: FOMC median forecasts of national unemployment and change in national GDP
•Commercial Construction: FOMC median forecasts of national unemployment and change in national GDP
•Commercial & Industrial: FOMC median forecasts of national unemployment and change in national GDP
•Commercial Multifamily: FOMC median forecast of national unemployment and Case-Shiller National Home Price Index
•Municipal: FOMC median forecasts of national unemployment and change in national GDP
•Residential Real Estate Term: FOMC median forecasts of national unemployment and change in national GDP
•Residential Real Estate Construction: FOMC median forecast of national unemployment
•Home Equity Revolving & Term: FOMC median forecasts of national unemployment and change in national GDP
•Consumer: FOMC median forecasts of national unemployment and change in national GDP

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Reasonable and supportable forecast period: The ACL on loans estimate used a reasonable and supportable forecast period of one year.
Reversion period: The ACL on loans estimate used a reversion period of one year.
Prepayment speeds: The estimate of prepayment speed for each loan segment was derived using internally sourced prepayment data.
Qualitative factors: The ACL on loans estimate incorporated various qualitative factors into the calculation such as changes in lending policies, changes in the nature and volume and terms of loans, changes in the experience, depth and ability of lending management, and economic factors not captured in the quantitative model.

The following table presents allowance for loan losses activity by class for the year ended December 31, 2022:
Dollars in thousandsCommercialMunicipalResidentialHome Equity Line of CreditConsumerUnallocatedTotal
Real EstateConstructionOtherTermConstruction
For the year ended December 31, 2022
Beginning balance$5,367 $746 $2,830 $157 $2,733 $148 $925 $833 $1,782 $15,521 
Charge offs— — 309 — 8 — 29 412 — 758 
Recoveries20 — 13 — 29 — 4 144 — 210 
Provision (credit)729 75 563 5 (195)51 129 497 (104)1,750 
Ending balance$6,116 $821 $3,097 $162 $2,559 $199 $1,029 $1,062 $1,678 $16,723 
The following table presents allowance for loan losses activity by class for the six months and quarter ended June 30, 2022:
Dollars in thousandsCommercialMunicipalResidential Home Equity Line of CreditConsumerUnallocatedTotal
Real EstateConstructionOtherTermConstruction
For the six months ended June 30, 2022
Beginning balance$5,367 $746 $2,830 $157 $2,733 $148 $925 $833 $1,782 $15,521 
Charge offs— — 43 — — — 29 287 — 359 
Recoveries17 — 2 — 11 — 1 108 — 139 
Provision (credit)96 405 159 — (152)43 69 212 68 900 
Ending balance$5,480 $1,151 $2,948 $157 $2,592 $191 $966 $866 $1,850 $16,201 
For the three months ended June 30, 2022
Beginning balance$5,369 $939 $2,956 $156 $2,648 $161 $939 $866 $1,732 $15,766 
Charge offs$— $— $42 $— $— $— $— $70 $— $112 
Recoveries$1 $— $1 $— $3 $— $— $92 $— $97 
Provision (credit)$110 $212 $33 $1 $(59)$30 $27 $(22)$118 $450 
Ending balance$5,480 $1,151 $2,948 $157 $2,592 $191 $966 $866 $1,850 $16,201 

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Note 5 – Stock-Based Compensation
At the 2020 Annual Meeting, shareholders approved the 2020 Equity Incentive Plan. The 2020 Plan reserves 400,000 shares of common stock for issuance in connection with stock options, restricted stock awards, and other equity based awards to attract and retain the best available personnel, provide additional incentive to officers, employees, and non-employee Directors, and promote the success of the Company. Such grants and awards will be structured in a manner that does not encourage the recipients to expose the Company to undue or inappropriate risk. Options issued under the 2020 Plan qualify for treatment as incentive stock options for purposes of Section 422 of the Internal Revenue Code. Other compensation under the 2020 Plan qualifies as performance-based for purposes of Section 162(m) of the Internal Revenue Code, and satisfies NASDAQ guidelines relating to equity compensation.
As of June 30, 2023, 98,810 shares of restricted stock had been granted under the 2020 Plan, of which 83,377 shares remain restricted as of June 30, 2023 as detailed in the following table:
Year
Granted		Vesting Term
(In Years)		SharesRemaining Term
(In Years)
20213.025,968 0.6
20223.023,904 1.6
20222.51,250 1.6
20233.027,559 2.6
20232.02,946 1.6
20231.01,750 0.6
83,377 1.6
The compensation cost related to these non-vested restricted stock grants is $2,402,000 and is recognized over the vesting terms of each grant. In the six months ended June 30, 2023, $398,000 of expense was recognized for these restricted shares, leaving $1,287,000 in unrecognized expense as of June 30, 2023. In the six months ended June 30, 2022, $412,000 of expense was recognized for restricted shares, leaving $1,155,000 in unrecognized expense as of June 30, 2022.

Note 6 – Common Stock
Proceeds from sale of common stock totaled $408,000 and $385,000 for the six months ended June 30, 2023 and 2022, respectively.

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Note 7 – Earnings Per Share
The following table sets forth the computation of basic and diluted EPS for the six months ended June 30, 2023 and 2022:
Income (Numerator)Shares (Denominator)Per-Share Amount
For the six months ended June 30, 2023
Net income as reported$15,365,000 
Basic EPS: Income available to common shareholders15,365,000 10,995,399 $1.40 
Effect of dilutive securities: restricted stock83,888 
Diluted EPS: Income available to common shareholders plus assumed conversions$15,365,000 11,079,287 $1.39 
For the six months ended June 30, 2022
Net income as reported$19,702,000 
Basic EPS: Income available to common shareholders19,702,000 10,924,579 $1.80 
Effect of dilutive securities: restricted stock97,508 
Diluted EPS: Income available to common shareholders plus assumed conversions$19,702,000 11,022,087 $1.79 
The following table sets forth the computation of basic and diluted EPS for the quarters ended June 30, 2023 and 2022:
Income (Numerator)Shares (Denominator)Per-Share Amount
For the quarter ended June 30, 2023
Net income as reported$7,394,000 
Basic EPS: Income available to common shareholders7,394,000 10,989,302 $0.67 
Effect of dilutive securities: restricted stock83,501 
Diluted EPS: Income available to common shareholders plus assumed conversions$7,394,000 11,072,803 $0.67 
For the quarter ended June 30, 2022
Net income as reported$9,997,000 
Basic EPS: Income available to common shareholders9,997,000 10,927,887 $0.91 
Effect of dilutive securities: restricted stock100,142 
Diluted EPS: Income available to common shareholders plus assumed conversions$9,997,000 11,028,029 $0.91 

Note 8 – Employee Benefit Plans
401(k) Plan
The Bank has a defined contribution plan available to substantially all employees who have completed three months of service. Employees may contribute up to IRS determined limits and the Bank may match employee contributions not to exceed 3.0% of compensation depending on contribution level. The Plan is a safe harbor plan whereby the Bank also contributes a minimum 3.0% of annual compensation to the plan for all eligible employees. The expense related to the 401(k) plan was $584,000 and $550,000 for the six months ended June 30, 2023 and 2022, respectively.
Deferred Compensation and Supplemental Retirement Benefits
The Bank also provides unfunded supplemental retirement benefits for certain officers, payable in installments over 20 years upon retirement or death. The agreements consist of individual contracts with differing characteristics that, when taken together, do not constitute a postretirement plan. There are no active officers eligible for these benefits. The costs for these benefits are recognized over the service periods of the participating officers in accordance with FASB ASC Topic 712 "Compensation – Nonretirement Postemployment Benefits". The expense of these supplemental retirement benefits was $57,000 and $154,000 for the six months ended June 30, 2023 and 2022, respectively. As of June 30, 2023, the associated accrued liability included in other liabilities in the balance sheet was $2,807,000 compared to $2,893,000 and $2,882,000 at December 31, 2022 and June 30, 2022, respectively.


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Postretirement Benefit Plans
The Bank sponsors two postretirement benefit plans. One plan currently provides a subsidy for health insurance premiums to certain retired employees; these subsidies are based on years of service and range between $40 and $1,200 per month per person. The other plan provides life insurance coverage to certain retired employees and health insurance for retired directors. None of these plans are prefunded. The Company utilizes FASB ASC Topic 712 to recognize the overfunded or underfunded status of a defined benefit postretirement plan as an asset or liability in its balance sheet and to recognize changes in the funded status in the year in which the changes occur through comprehensive income (loss).
The following table sets forth the accumulated postretirement benefit obligation and funded status:
At or for the six months ended June 30,
20232022
Change in benefit obligation
Benefit obligation at beginning of year$1,050,000 $1,353,000 
Interest cost10,000 17,000 
Benefits paid(44,000)(44,000)
Benefit obligation at end of period$1,016,000 $1,326,000 
Funded status
Benefit obligation at end of period$(1,016,000)$(1,326,000)
Unamortized gain(345,000)(133,000)
Accrued benefit cost at end of period$(1,361,000)$(1,459,000)
The following table sets forth the net periodic pension cost:
For the six months ended June 30,For the quarter ended June 30,
2023202220232022
Components of net periodic benefit cost
Interest cost$10,000 $17,000 $5,000 $9,000 
Net periodic benefit cost$10,000 $17,000 $5,000 $9,000 
Amounts not yet reflected in net periodic benefit cost and included in AOCI are as follows:
June 30, 2023December 31, 2022June 30, 2022
Unamortized net actuarial gain$345,000 $345,000 $133,000 
Deferred tax expense(72,000)(72,000)(28,000)
Net unrecognized postretirement benefits included in AOCI$273,000 $273,000 $105,000 
A weighted average discount rate of 4.75% was used in determining the accumulated benefit obligation and the net periodic benefit cost. The assumed health care cost trend rate is 7.00%. The measurement date for benefit obligations was as of year-end for prior years presented. The expected benefit payments for all of 2023 are $88,000. Plan expense for 2023 is estimated to be $19,000. A 1.00% change in trend assumptions would create an approximate change in the same direction of $100,000 in the accumulated benefit obligation, $7,000 in the interest cost, and $1,000 in the service cost.

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Note 9 - Other Comprehensive Income (Loss)

The following table summarizes activity in the unrealized gain or loss on available for sale securities included in OCI for the six months and quarters ended June 30, 2023 and 2022.
For the six months ended June 30,For the quarter ended June 30,
2023202220232022
Balance at beginning of period$(44,718,000)$(1,718,000)$(40,537,000)$(20,061,000)
Unrealized gains (losses) arising during the period1,186,000 (39,337,000)(4,106,000)(16,120,000)
Reclassification of net realized (gains) losses during the period— (1,000)— 1,000 
Related deferred taxes(249,000)8,261,000 862,000 3,385,000 
Net change937,000 (31,077,000)(3,244,000)(12,734,000)
Balance at end of period$(43,781,000)$(32,795,000)$(43,781,000)$(32,795,000)
The reclassification of realized gains is included in the net securities gains line of the consolidated statements of income and comprehensive income and the tax effect is included in the income tax expense line of the same statement.
The following table summarizes activity in the unrealized loss on securities transferred from available for sale to held to maturity included in OCI for the six months and quarters ended June 30, 2023 and 2022.
For the six months ended June 30,For the quarter ended June 30,
2023202220232022
Balance at beginning of period$(64,000)$(87,000)$(60,000)$(78,000)
Amortization of net unrealized gains6,000 18,000 1,000 6,000 
Related deferred taxes(1,000)(4,000)— (1,000)
Net change5,000 14,000 1,000 5,000 
Balance at end of period$(59,000)$(73,000)$(59,000)$(73,000)

The following table presents the effect of the Company's derivative financial instruments included in OCI for the six months and quarters ended June 30, 2023 and 2022.
For the six months ended June 30,For the quarter ended June 30,
2023202220232022
Balance at beginning of period$544,000 $— $(2,192,000)$— 
Unrealized gains on cash flow hedging derivatives arising during the period172,000 185,000 3,635,000 185,000 
Related deferred taxes(36,000)(39,000)(763,000)(39,000)
Net change136,000 146,000 2,872,000 146,000 
Balance at end of period$680,000 $146,000 $680,000 $146,000 
There was no activity in the unrealized gain or loss on postretirement benefits included in OCI for the six months and quarters ended June 30, 2023 and 2022.

Note 10 - Financial Derivative Instruments

The Bank uses derivative financial instruments for risk management purposes and not for trading or speculative purposes. As part of its overall asset and liability management strategy, the Bank periodically uses derivative instruments to minimize
significant unplanned fluctuations in earnings and cash flows caused by interest rate volatility. The Bank’s interest rate risk management strategy involves modifying the re-pricing characteristics of certain assets or liabilities so that changes in interest rates do not have a significant effect on net interest income.
The Bank recognizes its derivative instruments in the consolidated balance sheets at fair value. On the date the derivative instrument is entered into, the Bank designates whether the derivative is part of a hedging relationship (i.e., cash flow or fair value hedge). The Bank formally documents relationships between hedging instruments and hedged items, as well as its risk
37


management objective and strategy for undertaking hedge transactions. The Bank also assesses, both at the hedge’s inception and on an ongoing basis, whether the derivatives used in hedging transactions are highly effective in offsetting the changes in cash flows or fair values of hedged items. Changes in fair value of derivative instruments that are highly effective and qualify as cash flow hedges are recorded in OCI. Any ineffective portion is recorded in earnings. The Bank discontinues hedge accounting when it is determined that the derivative is no longer highly effective in offsetting changes of the hedged risk on the hedged item, or management determines that the designation of the derivative as a hedging instrument is no longer appropriate.

The details of the interest rate swap agreements are as follows:
June 30, 2023December 31, 2022June 30, 2022
Effective DateMaturity DateVariable Index ReceivedFixed Rate PaidPresentation on Consolidated Balance SheetsNotional Amount
Fair Value
Notional Amount
Fair Value
Notional Amount
Fair Value
04/27/202210/27/2023USD-SOFR-COMPOUND2.498%Other Assets$10,000,000$89,000$10,000,000$187,000$10,000,000$65,000
04/27/202201/27/2024USD-SOFR-COMPOUND2.576%Other Assets10,000,000158,00010,000,000233,00010,000,00062,000
04/27/202204/27/2024USD-SOFR-COMPOUND2.619%Other Assets10,000,000219,00010,000,000269,00010,000,00058,000
01/10/202301/01/2026USD-SOFR-OIS COMPOUND3.836%Other Assets75,000,0001,154,000————
03/08/202303/01/2026USD-SOFR-OIS COMPOUND4.712%Other Liabilities40,000,000(231,000)————
03/08/202303/01/2027USD-SOFR-OIS COMPOUND4.402%Other Liabilities30,000,000(239,000)————
03/08/202303/01/2028USD-SOFR-OIS COMPOUND4.189%Other Liabilities30,000,000(289,000)————
$205,000,000$861,000$30,000,000$689,000$30,000,000$185,000

The Company would reclassify unrealized gains or losses accounted for within AOCI into earnings if the interest rate swaps were to become ineffective or the swaps were to terminate for cash flow hedges, or would amortize the gain or loss over the remaining life of the hedged instrument for fair value hedges. Amounts paid or received under the swaps are reported in interest income or interest expense in the consolidated statements of income, and reflected in net income in the consolidated statements of cash flows.
Customer loan derivatives
The Bank will enter into interest rate swaps with qualified commercial customers. Through these arrangements, the Bank is able to provide a means for a loan customer to obtain a long-term fixed rate, while it simultaneously contracts with an approved, highly-rated, third-party financial institution as counterparty to swap the fixed rate for a variable rate. Such loan level arrangements are not designated as hedges for accounting purposes, and are recorded at fair value in the Company’s consolidated balance sheets.
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At June 30, 2023 and 2022, and December 31, 2022, there were six customer loan swap arrangements in place, detailed below:
June 30, 2023December 31, 2022June 30, 2022
Presentation on Consolidated Balance SheetNumber of PositionsNotional AmountFair ValueNumber of PositionsNotional AmountFair ValueNumber of PositionsNotional AmountFair Value
Pay Fixed, Receive VariableOther Assets6$36,852,000 $4,715,000 6$37,411,000 $4,910,000 6 $38,903,000 $3,440,000 
636,852,000 4,715,000 637,411,000 4,910,000 6 38,903,000 3,440,000 
Receive Fixed, Pay VariableOther Liabilities636,852,000 (4,715,000)637,411,000 (4,910,000)6 38,903,000 (3,440,000)
636,852,000 (4,715,000)637,411,000 (4,910,000)6 38,903,000 (3,440,000)
Total12$73,704,000 $— 12$74,822,000 $— 12 $77,806,000 $— 
Derivative collateral
The Bank has entered into a master netting arrangement with its counterparty and settles payments with the counterparty as necessary. The Bank's arrangement with its institutional counterparty requires it to post cash or other assets as collateral for its various loan swap contracts in a net liability position based on their fair values and the Bank's credit rating or receive cash collateral for contracts in a net asset position as requested. At June 30, 2023, the Bank posted to the counterparty $750,000 of cash as collateral on its swap contracts. There was no required amount to be pledged.
Cessation of LIBOR
The Company adopted SOFR as its replacement reference rate index for each of the customer loan interest rate swap contracts that were tied to a LIBOR tenor. The six contracts shown in the table immediately above have maturity dates of December 19, 2029, August 21, 2030, April 1, 2031, July 1, 2035, October 1, 2035 and October 1, 2039. The necessary actions to amend these legacy contracts to incorporate the new replacement reference rate index were undertaken during the second quarter 2023.

Note 11 – Mortgage Servicing Rights
FASB ASC Topic 860 "Transfers and Servicing", requires all separately recognized servicing assets and servicing liabilities to be initially measured at fair value, if practicable. The Company's servicing assets and servicing liabilities are reported using the amortization method and carried at the lower of amortized cost or fair value by strata. In evaluating the carrying values of mortgage servicing rights, the Company obtains third party valuations based on loan level data including note rate, type, and term of the underlying loans. The model utilizes several assumptions, the most significant of which is loan prepayments, calculated using a three-months moving average of weekly prepayment data published by the PSA and modeled against the serviced loan portfolio, and the discount rate to discount future cash flows. As of June 30, 2023, the prepayment assumption using the PSA model was 106, which translates into an anticipated prepayment rate of 5.09%. The discount rate is 9.375%. Other assumptions include delinquency rates, foreclosure rates, servicing cost inflation, and annual unit loan cost. All assumptions are adjusted periodically to reflect current circumstances. Amortization of mortgage servicing rights, as well as write-offs due to prepayments of the related mortgage loans, are recorded as a charge against mortgage servicing fee income.
For the six months ended June 30, 2023 and 2022, servicing rights capitalized totaled $17,000 and $237,000, respectively. Servicing rights amortized for the six-month periods ended June 30, 2023 and 2022 were $197,000 and $291,000, respectively. The fair value of servicing rights was $3,639,000, $3,734,000, and $3,751,000 at June 30, 2023, December 31, 2022 and June 30, 2022, respectively. The Bank serviced loans for others totaling $332,993,000, $342,870,000, and $354,308,000 at June 30, 2023, December 31, 2022, and June 30, 2022, respectively.
Mortgage servicing rights are included in other assets and detailed in the following table:
June 30, 2023December 31, 2022June 30, 2022
Mortgage servicing rights$8,671,000 $8,654,000 $8,579,000 
Accumulated amortization(6,358,000)(6,161,000)(5,935,000)
Carrying value$2,313,000 $2,493,000 $2,644,000 

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Note 12 – Income Taxes
FASB ASC Topic 740 "Income Taxes" defines the criteria that an individual tax position must satisfy for some or all of the benefits of that position to be recognized in a company's financial statements. Topic 740 prescribes a recognition threshold of more-likely-than-not, and a measurement attribute for all tax positions taken or expected to be taken on a tax return, in order for those tax positions to be recognized in the financial statements. The Company is currently open to audit under the statute of limitations by the IRS for the years ended December 31, 2019 through 2022.

Note 13 - Certificates of Deposit
The following table represents the breakdown of certificates of deposit at June 30, 2023 and 2022, and at December 31, 2022:
June 30, 2023December 31, 2022June 30, 2022
Certificates of deposit < $100,000$667,552,000 $489,793,000 $340,876,000 
Certificates $100,000 to $250,000252,720,000 259,614,000 282,180,000 
Certificates $250,000 and over129,357,000 118,264,000 81,354,000 
$1,049,629,000 $867,671,000 $704,410,000 
Note 14 – Reclassifications
Certain items from the prior year were reclassified in the consolidated financial statements to conform with the current year presentation. These do not have a material impact on the consolidated balance sheet or statement of income and comprehensive income presentations.

Note 15 – Fair Value
Certain assets and liabilities are recorded at fair value to provide additional insight into the Company's quality of earnings. Some of these assets and liabilities are measured on a recurring basis while others are measured on a nonrecurring basis, with the determination based upon applicable existing accounting pronouncements. For example, securities available for sale are recorded at fair value on a recurring basis. Other assets, such as other real estate owned and individually analyzed loans, are recorded at fair value on a nonrecurring basis using the lower of cost or market methodology to determine impairment of individual assets. The Company groups assets and liabilities, which are recorded at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value. A financial instrument's level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement (with level 1 considered highest and level 3 considered lowest). A brief description of each level follows:
Level 1 - Valuation is based upon quoted prices for identical instruments in active markets.
Level 2 - Valuation is based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market.
Level 3 - Valuation is generated from model-based techniques that use at least one significant assumption not observable in the market. These unobservable assumptions reflect estimates that market participants would use in pricing the asset or liability. Valuation includes use of discounted cash flow models and similar techniques.
The fair value methods and assumptions for the Company's financial instruments and other assets measured at fair value are set forth below.

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Investment Securities
The fair values of investment securities are estimated by independent providers using a market approach with observable inputs, including matrix pricing and recent transactions. In obtaining such valuation information from third parties, the Company has evaluated their valuation methodologies used to develop the fair values in order to determine whether the valuations are representative of an exit price in the Company's principal markets. The Company's principal markets for its securities portfolios are the secondary institutional markets, with an exit price that is predominantly reflective of bid level pricing in those markets. Fair values are calculated based on the value of one unit without regard to any premium or discount that may result from concentrations of ownership of a financial instrument, possible tax ramifications, or estimated transaction costs. If these considerations had been incorporated into the fair value estimates, the aggregate fair value could have been changed. The carrying values of restricted equity securities approximate fair values. As such, the Company classifies investment securities as Level 2.
Loans
Fair values are estimated for portfolios of loans are based on an exit pricing notion. The fair values of performing loans are calculated by discounting scheduled cash flows through the estimated maturity using estimated market discount rates that reflect the credit and interest risk inherent in the loan. The estimates of maturity are based on the Company's historical experience with repayments for each loan classification, modified, as required, by an estimate of the effect of current economic and lending conditions, and the effects of estimated prepayments. Assumptions regarding credit risk, cash flows, and discount rates are judgmentally determined using available market information and specific borrower information. Management has made estimates of fair value using discount rates that it believes to be reasonable. However, because there is no market for many of these financial instruments, Management has no basis to determine whether the fair value presented above would be indicative of the value negotiated in an actual sale. As such, the Company classifies loans as Level 3, except for certain individually analyzed loans. Fair values of individually analyzed loans are based on estimated cash flows and are discounted using a rate commensurate with the risk associated with the estimated cash flows, or if collateral dependent, discounted to the appraised value of the collateral as determined by reference to sale prices of similar properties, less costs to sell. As such, the Company classifies individually analyzed loans for which a specific reserve results in a fair value measure as Level 2. All other individually analyzed loans are classified as Level 3.
Other Real Estate Owned
Real estate acquired through foreclosure is initially recorded at fair value. The fair value of other real estate owned is based on property appraisals and an analysis of similar properties currently available. As such, the Company records other real estate owned as nonrecurring Level 2.
Mortgage Servicing Rights
Mortgage servicing rights represent the value associated with servicing residential mortgage loans. Servicing assets and servicing liabilities are reported using the amortization method and compared to fair value for impairment. In evaluating the fair values of mortgage servicing rights, the Company obtains third party valuations based on loan level data including note rate, type, and term of the underlying loans. As such, the Company classifies mortgage servicing rights as Level 2.
Time Deposits
The fair value of maturity deposits is based on the discounted value of contractual cash flows using a replacement cost of funds approach. The discount rate is estimated using the cost of funds borrowing rate in the market. As such, the Company classifies time deposits as Level 2.
Borrowed Funds
The fair value of borrowed funds is based on the discounted value of contractual cash flows. The discount rate is estimated using the rates currently available for borrowings of similar remaining maturities. As such, the Company classifies borrowed funds as Level 2.
Derivatives
The fair value of interest rate swaps is determined using inputs that are observable in the market place obtained from third parties including yield curves, publicly available volatilities, and floating indexes and, accordingly, are classified as Level 2 inputs. The credit value adjustments associated with derivatives utilize Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default by the Company and its counterparties. As of June 30, 2023 and 2022, and December 31, 2022, the Company has assessed the significance of the impact of the credit valuation adjustments on the overall valuation of its derivative positions and has determined that the credit valuation adjustments are not significant to the overall valuation of its derivatives due to collateral postings.






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Customer Loan Derivatives
The valuation of the Company’s customer loan derivatives is obtained from a third-party pricing service and is determined using a discounted cash flow analysis on the expected cash flows of each derivative. The pricing analysis is based on observable inputs for the contractual terms of the derivatives, including the period to maturity and interest rate curves. The Company incorporates credit valuation adjustments to appropriately reflect both its own nonperformance risk and the respective counterparty’s nonperformance risk in the fair value measurements. In adjusting the fair value of its derivative contracts for the effect of nonperformance risk, the Company has considered the impact of master netting arrangements and any applicable credit enhancements, such as collateral postings.
Limitations
Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument. These values do not reflect any premium or discount that could result from offering for sale at one time the Company's entire holdings of a particular financial instrument. Because no market exists for a significant portion of the Company's financial instruments, fair value estimates are based on Management's judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments, and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates. Fair value estimates are based on existing on- and off-balance-sheet financial instruments without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments. Other significant assets and liabilities that are not considered financial instruments include the deferred tax asset, premises and equipment, and other real estate owned. In addition, tax ramifications related to the realization of the unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in any of the estimates.

Assets and Liabilities Recorded at Fair Value on a Recurring Basis
The following tables present the balances of assets and liabilities that were measured at fair value on a recurring basis as of June 30, 2023, December 31, 2022 and June 30, 2022.
At June 30, 2023
Level 1Level 2Level 3Total
Securities available for sale
   U.S. Government-sponsored agencies$— $19,361,000 $— $19,361,000 
   Mortgage-backed securities— 222,192,000 — 222,192,000 
   State and political subdivisions— 33,619,000 — 33,619,000 
   Asset-backed securities— 3,183,000 — 3,183,000 
Total securities available for sale— 278,355,000 — 278,355,000 
  Interest rate swap agreements— 1,620,000 — 1,620,000 
  Customer loan interest swap agreements— 4,715,000 — 4,715,000 
Total interest rate swap agreements— 6,335,000 — 6,335,000 
Total assets$— $284,690,000 $— $284,690,000 

At June 30, 2023
Level 1Level 2Level 3Total
Interest rate swap agreements $— $759,000 $— $759,000 
Customer loan interest swap agreements — 4,715,000 — 4,715,000 
Total liabilities$— $5,474,000 $— $5,474,000 

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At December 31, 2022
Level 1Level 2Level 3Total
Securities available for sale
   U.S. Government-sponsored agencies$— $19,147,000 $— $19,147,000 
   Mortgage-backed securities— 228,676,000 — 228,676,000 
   State and political subdivisions— 33,191,000 — 33,191,000 
   Asset-backed securities— 3,495,000 — 3,495,000 
Total securities available for sale— 284,509,000 — 284,509,000 
   Interest rate swap agreements— 689,000 — 689,000 
   Customer loan interest swap agreements— 4,910,000 — 4,910,000 
Total interest rate swap agreements— 5,599,000 — 5,599,000 
Total assets$— $290,108,000 $— $290,108,000 

At December 31, 2022
Level 1Level 2Level 3Total
Customer loan interest swap agreements$— $4,910,000 $— $4,910,000 
Total liabilities$— $4,910,000 $— $4,910,000 

At June 30, 2022
Level 1Level 2Level 3Total
Securities available for sale
   U.S. Government-sponsored agencies$— $21,067,000 $— $21,067,000 
   Mortgage-backed securities— 244,682,000 — 244,682,000 
   State and political subdivisions— 31,950,000 — 31,950,000 
   Asset-backed securities— 4,038,000 — 4,038,000 
Total securities available for sale— 301,737,000 — 301,737,000 
   Interest rate swap agreements— 185,000 — 185,000 
   Customer loan interest swap agreements— 3,440,000 — 3,440,000 
Total interest swap agreements— 3,625,000 — 3,625,000 
Total assets$— $305,362,000 $— $305,362,000 

At June 30, 2022
Level 1Level 2Level 3Total
Customer loan interest swap agreements$— $3,440,000 $— $3,440,000 
Total liabilities$— $3,440,000 $— $3,440,000 

Assets Recorded at Fair Value on a Non-Recurring Basis
The following tables include assets measured at fair value on a nonrecurring basis that have had a fair value adjustment since their initial recognition. Mortgage servicing rights are presented at fair value with no impairment reserve for each of the periods presented. OREO is presented net of no allowance at June 30, 2023 and 2022. There was no OREO or related allowance at December 31, 2022. Only collateral-dependent individually analyzed loans with a related specific allowance for credit losses or a partial charge off are included in individually analyzed loans for purposes of fair value disclosures.
Individually analyzed loans below are presented net of specific allowances of $157,000, $135,000 and $335,000 at June 30, 2023, December 31, 2022, and June 30, 2022, respectively.
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At June 30, 2023
Level 1Level 2Level 3Total
Mortgage servicing rights$— $3,639,000 $— $3,639,000 
OREO— 64,000 — 64,000 
Individually analyzed loans— 215,000 — 215,000 
Total assets$— $3,918,000 $— $3,918,000 

At December 31, 2022
Level 1Level 2Level 3Total
Mortgage servicing rights$— $3,734,000 $— $3,734,000 
Individually analyzed loans— 20,000 — 20,000 
Total assets$— $3,754,000 $— $3,754,000 

At June 30, 2022
Level 1Level 2Level 3Total
Mortgage servicing rights$— $3,751,000 $— $3,751,000 
OREO— 51,000 — 51,000 
Individually analyzed loans— 5,000 — 5,000 
Total assets$— $3,807,000 $— $3,807,000 

Fair Value of Financial Instruments
FASB ASC Topic 825 "Financial Instruments" requires disclosures of fair value information about financial instruments, whether or not recognized in the balance sheet if the fair values can be reasonably determined. Fair value is best determined based upon quoted market prices. However, in many instances, there are no quoted market prices for the Company's various financial instruments. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques using observable inputs when available. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. Accordingly, the fair value estimates may not be realized in an immediate settlement of the instrument. Topic 825 excludes certain financial instruments and all nonfinancial instruments from its disclosure requirements. Accordingly, the aggregate fair value amounts presented may not necessarily represent the underlying fair value of the Company.
This summary excludes financial assets and liabilities for which carrying value approximates fair values and financial instruments that are recorded at fair value on a recurring basis. Financial instruments for which carrying values approximate fair value include cash equivalents, interest-bearing deposits in other banks, demand, NOW, savings, and money market deposits. The estimated fair value of demand, NOW, savings, and money market deposits is the amount payable on demand at the reporting date. Carrying value is used because the accounts have no stated maturity and the customer has the ability to withdraw funds immediately.













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The carrying amount and estimated fair values for financial instruments as of June 30, 2023 were as follows:
Carrying valueEstimated fair valueLevel 1Level 2Level 3
Financial assets
Securities to be held to maturity (net of allowance for credit losses)$389,987,000 $336,007,000 $— $336,007,000 $— 
Loans (net of allowance for credit losses)
Commercial
   Real estate688,497,000 653,180,000 — — 653,180,000 
   Construction62,625,000 59,413,000 — — 59,413,000 
   Other438,945,000 427,185,000 — 215,000 426,970,000 
Municipal57,853,000 53,169,000 — — 53,169,000 
Residential
   Term640,296,000 572,873,000 — — 572,873,000 
   Construction30,203,000 30,089,000 — — 30,089,000 
Home equity line of credit99,031,000 99,975,000 — — 99,975,000 
Consumer20,038,000 17,984,000 — — 17,984,000 
Total loans2,037,488,000 1,913,868,000 — 215,000 1,913,653,000 
Mortgage servicing rights2,313,000 3,639,000 — 3,639,000 — 
Financial liabilities
Local certificates of deposit$332,390,000 $311,328,000 $— $311,328,000 $— 
National certificates of deposit717,239,000 719,323,000 — 719,323,000 — 
Total certificates of deposit1,049,629,000 1,030,651,000 — 1,030,651,000 — 
Repurchase agreements48,401,000 48,293,000 — 48,293,000 — 
Federal Home Loan Bank advances66,080,000 66,050,000 — 66,050,000 — 
Total borrowed funds114,481,000 114,343,000 — 114,343,000 — 






















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The carrying amounts and estimated fair values for financial instruments as of December 31, 2022 were as follows:
Carrying valueEstimated fair valueLevel 1Level 2Level 3
Financial assets
Securities to be held to maturity$393,896,000 $339,011,000 $— $339,011,000 $— 
Loans (net of allowance for loan losses)
Commercial
   Real estate692,541,000 669,752,000 — — 669,752,000 
   Construction92,994,000 89,934,000 — — 89,934,000 
   Other315,917,000 312,219,000 — 20,000 312,199,000 
Municipal40,439,000 38,069,000 — — 38,069,000 
Residential
   Term611,350,000 558,274,000 — — 558,274,000 
   Construction49,686,000 44,410,000 — — 44,410,000 
Home equity line of credit75,416,000 78,878,000 — — 78,878,000 
Consumer19,883,000 18,142,000 — — 18,142,000 
Total loans1,898,226,000 1,809,678,000 — 20,000 1,809,658,000 
Mortgage servicing rights2,493,000 3,734,000 — 3,734,000 — 
Financial liabilities
Local certificates of deposit$291,152,000 $275,658,000 $— $275,658,000 $— 
National certificates of deposit576,519,000 569,883,000 — 569,883,000 — 
Total certificates of deposit867,671,000 845,541,000 — 845,541,000 — 
Repurchase agreements64,409,000 64,289,000 — 64,289,000 — 
Federal Home Loan Bank advances39,074,000 39,064,000 — 39,064,000 — 
Total borrowed funds103,483,000 103,353,000 — 103,353,000 — 






















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The carrying amount and estimated fair values for financial instruments as of June 30, 2022 were as follows:
Carrying valueEstimated fair valueLevel 1Level 2Level 3
Financial assets
Securities to be held to maturity$379,693,000 $335,950,000 $— $335,950,000 $— 
Loans (net of allowance for loan losses)
Commercial
   Real estate611,302,000 610,394,000 — — 610,394,000 
   Construction127,628,000 127,438,000 — — 127,438,000 
   Other272,386,000 272,521,000 — 5,000 272,516,000 
Municipal46,658,000 47,414,000 — — 47,414,000 
Residential
   Term580,076,000 548,022,000 — — 548,022,000 
   Construction43,795,000 40,690,000 — — 40,690,000 
Home equity line of credit70,620,000 73,594,000 — — 73,594,000 
Consumer20,378,000 19,026,000 — — 19,026,000 
Total loans1,772,843,000 1,739,099,000 — 5,000 1,739,094,000 
Mortgage servicing rights2,644,000 3,751,000 — 3,751,000 — 
Financial liabilities
Local certificates of deposit$254,717,000 $246,032,000 $— $246,032,000 $— 
National certificates of deposit449,693,000 441,369,000 — 441,369,000 — 
Total certificates of deposit704,410,000 687,401,000 — 687,401,000 — 
Repurchase agreements71,501,000 71,448,000 — 71,448,000 — 
Federal Home Loan Bank advances55,087,000 55,072,000 — 55,072,000 — 
Total borrowed funds126,588,000 126,520,000 — 126,520,000 — 
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Note 16 – Impact of Recently Issued Accounting Standards
Adoption of New Accounting Standards: On January 1, 2023, the Company adopted ASU No. 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, as amended, which replaces the incurred loss methodology with an expected loss methodology that is referred to as the CECL methodology. The measurement of expected credit losses under the CECL methodology is applicable to financial assets measured at amortized cost, including loan receivables and held-to-maturity debt securities. It also applies to off-balance sheet credit exposures not accounted for as loans, such as loan commitments, standby letters of credit, certain lines of credit. In addition, ASC 326 made changes to the accounting for available-for-sale debt securities. One such change is to require credit losses to be presented as an allowance rather than as a write-down on available-for-sale debt securities management does not intend to sell or believes that it is more likely than not they will be required to sell.
The Company adopted ASC 326 using the modified retrospective method for all financial assets, measured at amortized cost, and off-balance-sheet credit exposures. Results for reporting periods beginning after January 1, 2023 are presented under ASC 326 while prior period amounts continue to be reported in accordance with previously applicable GAAP. On adoption, the Company recognized an increase in the allowance for credit losses on held to maturity securities of $438,000, an increase to the allowance for credit losses on loans of $6,210,000, and an increase to the reserve for off-balance sheet commitments of $1,297,000. The net, after-tax impact of the increases of the allowances for credit losses and reserve for off-balance sheet commitments was a net decrease to retained earnings of $6,277,000 shown in the Consolidated Statements of Changes in Stockholders Equity. Additional details can be found in Notes 3 and 4.

In March 2023, the FASB issued ASU No. 2023-02, Investments - Equity Method and Joint Ventures (Topic 323): Accounting for Investments in Tax Credit Structures Using the Proportional Amortization Method. This ASU expands the use of proportional amortization method of accounting — currently allowed only for investments in low-income housing tax credit (LIHTC) structures — to equity investments in other tax credit structures that meet certain criteria. The proportional amortization method results in (1) the tax credit investment being amortized in proportion to the allocation of tax credits and other tax benefits in each period and (2) net presentation within the income tax line item. The ASU is effective beginning in 2024 for calendar year-end public business entities. Adoption is not expected to have a material impact on the Company's consolidated financial statements.

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Item 2 – Management's Discussion and Analysis of Financial Condition
and Results of Operations
The First Bancorp, Inc. and Subsidiary
Forward-Looking Statements
This report contains statements that are "forward-looking statements." We may also make written or oral forward-looking statements in other documents we file with the SEC, in our annual reports to shareholders, in press releases and other written materials, and in oral statements made by our officers, directors or employees. You can identify forward-looking statements by the use of the words "believe," "expect," "anticipate," "intend," "estimate," "assume," "outlook," "will," "should," and other expressions that predict or indicate future events and trends and which do not relate to historical matters. You should not rely on forward-looking statements, because they involve known and unknown risks, uncertainties and other factors, some of which are beyond the control of the Company. These risks, uncertainties and other factors may cause the actual results, performance or achievements of the Company to be materially different from the anticipated future results, performance or achievements expressed or implied by the forward-looking statements.
Some of the factors that might cause these differences include the following: changes in general national, regional or international economic conditions or conditions affecting the banking or financial services industries or financial capital markets, volatility and disruption in national and international financial markets, government intervention in the U.S. financial system, reductions in net interest income resulting from interest rate volatility as well as changes in the balance and mix of loans and deposits, reductions in the market value of wealth management assets under administration, changes in the value of securities and other assets, reductions in loan demand, changes in loan collectability, default and charge-off rates, changes in the size and nature of the Company's competition, changes in legislation or regulation and accounting principles, policies and guidelines, and changes in the assumptions used in making such forward-looking statements. In addition, the factors described under "Risk Factors" in Item 1A of this Annual Report on Form 10-K for the fiscal year ended December 31, 2022, as filed with the SEC, may result in these differences, as well as the "Risk Factors" in Part II, Item 1A listed below. You should carefully review all of these factors, and you should be aware that there may be other factors that could cause these differences. These forward-looking statements were based on information, plans and estimates at the date of this quarterly report, and we assume no obligation to update any forward-looking statements to reflect changes in underlying assumptions or factors, new information, future events or other changes.
Although the Company believes that the expectations reflected in such forward-looking statements are reasonable, actual results may differ materially from the results discussed in these forward-looking statements. Readers are also urged to carefully review and consider the various disclosures made by the Company, which attempt to advise interested parties of the factors that affect the Company's business.

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. 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.
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.
Goodwill. 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
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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.
Fair Value of Securities. Determining a market price for securities carried at fair value is a critical accounting estimate in the Company's financial statements. Pricing of individual securities is subject to a number of factors including changes in market interest rates, changes in prepayment speeds and assumptions, changes in market tolerance for risk, and any changes in the risk profile of the security. The Company subscribes to a widely recognized, independent pricing service and updates carrying values no less frequently than monthly. 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.
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. Securities that are in an unrealized loss position are reviewed at least quarterly to determine if recognition of a loss is required. 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.
Derivative Financial Instruments Designated as Hedges. The Company recognizes all derivatives in the consolidated balance sheets at fair value. On the date a derivative contract is entered into, the derivative is designated as a hedge of either a forecasted transaction or the variability of cash flows to be received or paid related to a recognized asset or liability (“cash flow hedge”), a hedge of the fair value of a recognized asset or liability or of an unrecognized firm commitment (“fair value hedge”), or a held for trading instrument (“trading instrument”). The relationships between hedging instruments and hedged items is formally documented, as is the risk management objectives and strategy for undertaking various hedge transactions. Both at the hedge’s inception and on an ongoing basis, determination is made as to whether the derivatives that are used in hedging transactions are effective in offsetting changes in cash flows or fair values of hedged items. Changes in fair value of a derivative that is effective and that qualifies as a cash flow hedge are recorded in OCI and are reclassified into earnings when the forecasted transaction or related cash flows affect earnings. Changes in fair value of a derivative that qualifies as a fair value hedge and the change in fair value of the hedged item are both recorded in earnings and offset each other when the transaction is effective. Those derivatives that are classified as trading instruments, including customer loan swaps, are recorded at fair value with changes in fair value recorded in earnings. 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.
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 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. The
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pace of increase by the FOMC has slowed and there is ongoing debate as to how close to the end of the rate hiking cycle the FOMC may be. If the FOMC does not increase rates enough, it risks an ongoing inflation problem; an overshoot on rate increases risks entering the economy into a recession. There is developing concern nationally on the commercial real estate market given high vacancy numbers in some locations. The conflict between Russia and Ukraine is ongoing and has generally added to economic uncertainty and geopolitical instability. The failures in 2023 of several regional banks further roiled markets and introduced new sources of uncertainty. Any or all could have negative downstream effects on the Company's operating results, the extent of which is indeterminable at this time.

Use of Non-GAAP Financial Measures
Certain information in this release contains financial information determined by methods other than in accordance with GAAP. Management uses these “non-GAAP” measures in its analysis of the Company's performance (including for purposes of determining the compensation of certain executive officers and other Company employees) and believes that these non-GAAP financial measures provide a greater understanding of ongoing operations and enhance comparability of results with prior periods and with other financial institutions, as well as demonstrating the effects of significant gains and charges in the current period, in light of the disclosure practices employed by many other publicly-traded financial institutions. The Company believes that a meaningful analysis of its financial performance requires an understanding of the factors underlying that performance. Management believes that investors may use these non-GAAP financial measures to analyze financial performance without the impact of unusual items that may obscure trends in the Company's underlying performance. These disclosures should not be viewed as a substitute for operating results determined in accordance with GAAP, nor are they necessarily comparable to non-GAAP performance measures that may be presented by other companies.
In several places net interest income is calculated on a fully tax-equivalent basis. Specifically included in interest income was tax-exempt interest income from certain investment securities and loans. An amount equal to the tax benefit derived from this tax-exempt income has been added back to the interest income total which, as adjusted, increased net interest income accordingly. Management believes the disclosure of tax-equivalent net interest income information improves the clarity of financial analysis, and is particularly useful to investors in understanding and evaluating the changes and trends in the Company's results of operations. Other financial institutions commonly present net interest income on a tax-equivalent basis. This adjustment is considered helpful in the comparison of one financial institution's net interest income to that of another institution, as each will have a different proportion of tax-exempt interest from its earning assets. Moreover, net interest income is a component of a second financial measure commonly used by financial institutions, net interest margin, which is the ratio of net interest income to average earning assets. For purposes of this measure as well, other financial institutions generally use tax-equivalent net interest income to provide a better basis of comparison from institution to institution. The Company follows these practices.
The following table provides a reconciliation of tax-equivalent financial information to the Company's consolidated financial statements prepared in accordance with GAAP. 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,
Dollars in thousands
2023202220232022
Net interest income as presented$33,400 $37,318 $15,925 $18,698 
Effect of tax-exempt income1,280 1,127 661 570 
Net interest income, tax equivalent$34,680 $38,445 $16,586 $19,268 

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







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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,
Dollars in thousands
2023202220232022
Non-interest expense, as presented$21,565 $20,822 $10,715 $10,172 
Net interest income, as presented33,400 37,318 15,925 18,698 
Effect of tax-exempt interest income1,280 1,127 661 570 
Non-interest income, as presented7,439 8,312 3,870 4,080 
Effect of non-interest tax-exempt income86 84 43 43 
Net securities (gains) losses— (1)— 1 
Adjusted net interest income plus non-interest income$42,205 $46,840 $20,499 $23,392 
Non-GAAP efficiency ratio51.10 %44.45 %52.27 %43.49 %
GAAP efficiency ratio52.80 %45.63 %54.13 %44.66 %
The Company presents certain information based upon tangible common equity instead of total shareholders' equity. The difference between these two measures is the Company's intangible assets, specifically goodwill from prior acquisitions. Management, banking regulators and many stock analysts use the tangible common equity ratio and the tangible book value per common share in conjunction with more traditional bank capital ratios to compare the capital adequacy of banking organizations with significant amounts of goodwill or other intangible assets, typically stemming from the use of the purchase accounting method in accounting for mergers and acquisitions.
The following table provides a reconciliation of average tangible common equity to the Company's consolidated financial statements, which have been prepared in accordance with GAAP:
For the six months ended June 30,For the quarter ended June 30,
Dollars in thousands
2023202220232022
Average shareholders' equity as presented$235,242 $239,267 $232,991 $231,980 
  Less average intangible assets(30,850)(30,910)(30,853)(30,919)
Average tangible shareholders' common equity$204,392 $208,357 $202,138 $201,061 
To provide period-to-period comparison of operating results prior to consideration of credit loss provision and income taxes, the non-GAAP measure of Pre-Tax, Pre-Provision Net Income is presented. The following table provides a reconciliation to Net Income:
For the six months ended June 30,For the quarter ended June 30,
Dollars in thousands2023202220232022
Net Income, as presented$15,365 $19,702 $7,394 $9,997 
Add: provision for credit losses701 900 151 450 
Add: income taxes expense3,208 4,206 1,535 2,159 
Pre-tax, pre-provision net income$19,274 $24,808 $9,080 $12,606 

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. Dividends totaling $0.69 per share have been declared year-to-date, representing a payout to our shareholders of 49.29% of basic earnings per share for the period. 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
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which was non-continuing. For the quarter ended June 30, 2023, net interest income on a tax-equivalent basis decreased $2.7 million or 13.9% compared to the same period in 2022, with a net interest margin of 2.46% compared to 3.13% for the same period in 2022.
Non-interest income for the six months ended June 30, 2023 was $7.4 million, down $873,000 or 10.5%, from the six months ended June 30, 2022. As compared to the prior year period, mortgage banking revenue decreased $491,000 or 55.9% on lower volume of mortgage sales and negative marks taken against mortgage servicing rights valuation. Debit card revenue was down $280,000 or 10.2% due to timing of program incentive payments, and revenue at First National Wealth Management decreased $71,000 or 2.9%.
Non-interest expense for the six months ended June 30, 2023 was $21.6 million, up $743,000 or 3.6% from the six months ended June 30, 2022. Salaries and employee benefits decreased 3.9% from the same period in 2022, while other operating expense increased 10.1% over the same period.
Asset quality continues to be strong and stable. Non-performing assets stood at 0.06% of total assets as of June 30, 2023, down from 0.18% of total assets as of June 30, 2022 and level with December 31, 2022. Total past-due loans were 0.14% of total loans as of June 30, 2023, up slightly from 0.08% of total loans as of December 31, 2022 and down from 0.18% as of June 30, 2022.
The provision for credit losses - loans for the first six months of 2023 was $580,000, down from the $900,000 provisioned in the same period in 2022. Net loan chargeoffs for the six months ended June 30, 2023 were $48,000 or 0.005% of average loans on an annualized basis, down from net charge-offs of $220,000 or 0.030% of total loans for the six months ended June 30, 2022. The ACL for loans increased $6.7 million between December 31, 2022 and June 30, 2023, and now stands at 1.14% of loans outstanding as of June 30, 2023, up from 0.87% at December 31, 2022 and 0.91% at June 30, 2022. Most of the dollar increase in the ACL is the result of CECL adoption.
The Company's balance sheet continued to expand in the first six months of 2023 as total assets increased $135.6 million or 5.0% year-to-date. The loan portfolio increased $146.3 million or 7.6% in the six months ended June 30, 2023 and $272.6 million or 15.2% from a year ago. Loan growth in the first six months of 2023 was centered in the commercial and residential portfolios. Commercial loans increased by $94.2 million during the period, led by increases in owner-occupied commercial real estate of $44.7 million, non-owner occupied commercial real estate of $32.7 million and commercial & industrial loans of $32.5 million; commercial construction balances decreased by $29.8 million as a number of projects converted to permanent financing. Residential term loans increased by $47.7 million in the first six months of 2023, while residential construction loans decreased by $19.1 million. The investment portfolio decreased $8.7 million year-to-date and decreased $12.6 million from a year ago based upon cash flow of amortizing securities, limited reinvestment or new purchases, and changes in the carrying value of AFS securities.
On the liability side of the balance sheet total deposits have increased $121.0 million, or 5.1%, year-to-date to $2.50 billion. In the six months ended June 30, 2023 total local deposits fell by $4.4 million, or 0.3%, well within a normal range. Low-cost deposits (Demand, NOW, Savings) decreased $76.6 million or 5.8% during the period, while Money Market balances increased $15.6 million and CDs increased $182.0 million, as depositors shifted balances to higher cost product types. To balance the seasonal runoff and to support earning asset growth, wholesale CDs have increased $140.7 million year-to-date, while borrowings have increased by $11.0 million.
Remaining well capitalized is a top priority for The Company. The Company's total risk-based capital ratio was 13.66% as of June 30, 2023, solidly above the well-capitalized threshold of 10.0% set by the FDIC, the FRB, and the OCC.
Among the Company's operating ratios, the return on average assets was 1.10% and return on average tangible common equity of 15.16% for the six months ended June 30, 2023 compared to 1.55% and 19.07%, respectively, for the same period in 2022. Our non-GAAP efficiency ratio continues to be an important component in the Company's overall performance and stood at 51.10% for the six months ended June 30, 2023 compared to 44.45% for the same period in 2022.

Net Interest Income
Total interest income of $60.1 million for the six months ended June 30, 2023 was an increase of $18.1 million or 43.2% compared to total interest income of $42.0 million for the same period of 2022; interest income for the prior period included $1.1 million of non-recurring PPP revenue. Growth in earning assets coupled with higher interest rates resulted in the period to period increase. Higher market interest rates resulting from FOMC actions coupled with changing customer product preferences to higher cost money market and CD products led to total interest expense of $26.7 million for the six months ended June 30, 2023, an increase of $22.1 million or 474.6% compared to total interest expense for the six months ended June 30, 2022. As a result, net interest income of $33.4 million for the six months ended June 30, 2023 was a decrease of $3.9 million or 10.5% compared to net interest income of $37.3 million for the same period ended June 30, 2022; excluding the PPP income, the period-to-period change would have been 7.7%. The Company's net interest margin on a tax-equivalent basis for the six months ended June 30, 2023 was 2.62%, down from 3.18% for the first six months of 2022. Tax-exempt interest income amounted to $4.8 million for the six months ended June 30, 2023 compared to $4.2 million for the six months ended June 30, 2022.
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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. 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, 2023June 30, 2022
Dollars in thousands
Amount of
interest		Average
Yield/Rate		Amount of interestAverage
Yield/Rate
Interest on earning assets
Interest-bearing deposits$89 4.89 %$71 0.52 %
Investments10,546 3.11 %8,967 2.61 %
Loans held for sale— 0.00 %9 2.29 %
Loans50,743 5.15 %34,044 4.00 %
   Total interest income61,378 4.63 %43,091 3.57 %
Interest expense
Deposits25,392 2.40 %4,026 0.44 %
Other borrowings1,306 2.16 %620 0.94 %
   Total interest expense26,698 2.39 %4,646 0.47 %
Net interest income$34,680 $38,445 
Interest rate spread2.25 %3.10 %
Net interest margin2.62 %3.18 %

For the quarters ended
June 30, 2023June 30, 2022
Dollars in thousands
Amount of
interest		Average
Yield/Rate		Amount of
interest		Average
Yield/Rate
Interest on earning assets
Interest-bearing deposits$49 5.45 %$62 0.87 %
Investments5,264 3.10 %4,577 2.67 %
Loans held for sale— 0.00 %6 5.36 %
Loans26,532 5.26 %17,356 3.97 %
   Total interest-earning assets31,845 4.72 %22,001 3.57 %
Interest expense
Deposits14,475 2.68 %2,401 0.51 %
Other borrowings784 2.33 %332 1.01 %
   Total interest expense15,259 2.66 %2,733 0.54 %
Net interest income$16,586 $19,268 
Interest rate spread2.06 %3.03 %
Net interest margin2.46 %3.13 %








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The following tables present changes in interest income and expense attributable to changes in interest rates and volume for interest-earning assets and liabilities for the six months and quarters ended June 30, 2023 compared to 2022. Tax-exempt income is calculated on a tax-equivalent basis, using a 21% Federal Income Tax rate.
For the six months ended June 30, 2023 compared to 2022
Dollars in thousands
VolumeRate
Rate/Volume1
Total
Interest on earning assets
Interest-bearing deposits$(61)$592 $(513)$18 
Investment securities(115)1,716 (22)1,579 
Loans held for sale(9)(9)9 (9)
Loans5,365 9,791 1,543 16,699 
   Change in interest income5,180 12,090 1,017 18,287 
Interest expense
Deposits629 17,933 2,804 21,366 
Other borrowings(53)809 (70)686 
   Change in interest expense576 18,742 2,734 22,052 
   Change in net interest income$4,604 $(6,652)$(1,717)$(3,765)
1 Represents the change attributable to a combination of change in rate and change in volume.
For the quarter ended June 30, 2023 compared to 2022
Dollars in thousands
VolumeRate
Rate/Volume1
Total
Interest on earning assets
Interest-bearing deposits$(54)$327 $(286)$(13)
Investment securities(41)735 (7)687 
Loans held for sale(5)(6)5 (6)
Loans2,646 5,666 864 9,176 
  Change in interest income2,546 6,722 576 9,844 
Interest expense
Deposits331 10,321 1,422 12,074 
Other borrowings8 433 11 452 
   Change in interest expense339 10,754 1,433 12,526 
   Change in net interest income$2,207 $(4,032)$(857)$(2,682)
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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 endedFor the quarters ended
 Dollars in thousands
June 30, 2023June 30, 2022June 30, 2023June 30, 2022
Assets
Cash and cash equivalents$22,993 $22,271 $23,236 $24,676 
Interest-bearing deposits in other banks3,671 27,378 3,608 28,646 
Securities available for sale (includes tax exempt securities of $36,630 and $34,751 at June 30, 2023 and 2022, respectively)
286,004 311,281 284,047 302,850 
Securities to be held to maturity, net of allowance for credit losses of $428 at June 30, 20231 (included tax exempt securities of $256,942 and $252,312 at June 30, 2023 and 2022, respectively)
391,948 375,461 390,907 379,111 
Restricted equity securities, at cost5,050 5,113 5,642 4,845 
Loans held for sale35 792 42 449 
Loans1,985,507 1,715,229 2,022,252 1,754,773 
Allowance for credit losses(20,355)(15,757)(23,648)(15,954)
     Net loans1,965,152 1,699,472 1,998,604 1,738,819 
Accrued interest receivable13,123 9,597 14,420 10,329 
Premises and equipment28,163 29,017 28,122 29,086 
Other real estate owned2 1 4 1 
Goodwill30,646 30,646 30,646 30,646 
Other assets62,707 49,333 63,560 53,176 
        Total Assets$2,809,494 $2,560,362 $2,842,838 $2,602,634 
Liabilities & Shareholders' Equity
Demand deposits$293,648 $324,875 $286,432 $321,143 
NOW deposits617,586 645,566 628,900 634,251 
Money market deposits192,341 218,729 190,671 236,470 
Savings deposits346,546 369,373 333,872 372,088 
Certificates of deposit978,477 612,608 1,009,771 658,442 
     Total deposits2,428,598 2,171,151 2,449,646 2,222,394 
Borrowed funds – short term96,972 133,466 109,595 131,233 
Borrowed funds – long term25,080 87 25,080 87 
Dividends payable874 819 871 855 
Other liabilities22,728 15,572 24,655 16,085 
     Total Liabilities2,574,252 2,321,095 2,609,847 2,370,654 
Shareholders' Equity:
Common stock111 110 111 110 
Additional paid-in capital68,769 67,162 68,963 67,363 
Retained earnings208,241 189,500 206,953 192,668 
Net unrealized loss on securities available for sale(41,545)(17,524)(41,376)(28,181)
Net unrealized loss on securities transferred from available for sale to held to maturity(61)(81)(60)(75)
Net unrealized loss on cash flow hedging derivative instruments(546)(5)(1,873)(10)
Net unrealized gain on postretirement benefit costs273 105 273 105 
    Total Shareholders' Equity235,242 239,267 232,991 231,980 
       Total Liabilities & Shareholders' Equity$2,809,494 $2,560,362 $2,842,838 $2,602,634 
1June 30, 2022 had no allowance for credit losses
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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%. Debit card interchange revenue has been reasonably steady year-over-year, and revenue changes are mostly attributable to the timing of annual incentive payments. Revenue at First National Wealth Management decreased $71,000 or 2.9% over the same period. Non-interest income of $3.9 million for the quarter ended June 30, 2023 is a decrease of $210,000 compared to the same period in 2022; the decrease is primarily attributable to Mortgage Banking revenue due to the reasons mentioned above.

Non-Interest Expense
Non-interest expense of $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%. FDIC insurance premiums increased by $438,000 due to a base rate increase impacting all banks. Non-interest expense of $10.7 million for the quarter ended June 30, 2023 is an increase of 5.3% compared to non-interest expense of $10.2 million for the same period in 2022 due to the reasons mentioned.

Income Taxes
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.

Investments
The carrying value of the Company's investment portfolio decreased by $8.7 million between December 31, 2022 and June 30, 2023 from $682.3 million to $673.6 million. The change in value of the portfolio is attributable to a combination of incoming cash flow from amortizing investments, limited re-investment or new purchases, the effects of interest rate movement on the fair value of AFS holdings, and the establishment of an ACL for HTM securities. As of June 30, 2023, mortgage-backed securities had a carrying value of $280.7 million and a fair value of $269.7 million. Of this total, securities with a fair value of $78.3 million or 29.0% of the mortgage-backed portfolio were issued by GNMA and securities with a fair value of $191.4 million or 71.0% of the mortgage-backed portfolio were issued by FHLMC and FNMA.
The Company's investment securities are classified into two categories: securities available for sale and securities to be held to maturity. Securities available for sale consist primarily of debt securities which Management intends to hold for indefinite periods of time. They may be used as part of the Company's funds management strategy, and may be sold in response to changes in interest rates, prepayment risk and liquidity needs, to increase capital ratios, or for other similar reasons. Securities to be held to maturity consist primarily of debt securities that the Company has acquired solely for long-term investment purposes, rather than potential future sale. For securities to be categorized as HTM, Management must have the intent and the Company must have the ability to hold such investments until their respective maturity dates. The Company does not hold trading account securities.
All investment securities are managed in accordance with a written investment policy adopted by the Board of Directors. It is the Company's general policy that investments for either portfolio be limited to government debt obligations, time deposits, and corporate bonds or commercial paper with one of the three highest ratings given by a nationally recognized rating agency. The portfolio is currently invested primarily in U.S. Government agency securities, mortgage-backed securities and tax-exempt obligations of states and political subdivisions. The individual securities have been selected to enhance the portfolio's overall yield while not materially adding to the Company's level of interest rate risk.
During the third quarter of 2014, the Company transferred securities with a total amortized cost of $89,780,000 and a corresponding fair value of $89,757,000 from AFS to HTM. The net unrealized loss, net of taxes, on these securities at the date of the transfer was $15,000. The net unrealized holding loss at the time of transfer continues to be reported in AOCI, net of tax and is amortized over the remaining lives of the securities as an adjustment of the yield. The amortization of the net unrealized loss reported in AOCI will offset the effect on interest income of the discount for the transferred securities. The remaining unamortized balance of the net unrealized losses for the securities transferred from AFS to HTM was $59,000 at June 30, 2023. This compares to $64,000 and $73,000, net of taxes, at December 31, 2022 and June 30, 2022, respectively. These securities were transferred as a part of the Company's overall investment and balance sheet strategies.

57


The following table sets forth the Company's investment securities at their carrying amounts as of June 30, 2023 and 2022 and December 31, 2022.
Dollars in thousands
June 30, 2023December 31, 2022June 30, 2022
Securities available for sale
U.S. Government-sponsored agencies$19,361 $19,147 $21,067 
Mortgage-backed securities222,192 228,676 244,682 
State and political subdivisions33,619 33,191 31,950 
Asset-backed securities3,183 3,495 4,038 
$278,355 $284,509 $301,737 
Securities to be held to maturity
U.S. Government-sponsored agencies$40,100 $40,100 $38,100 
Mortgage-backed securities58,484 60,497 57,739 
State and political subdivisions257,081 258,549 256,104 
Corporate securities34,750 34,750 27,750 
$390,415 $393,896 $379,693 
Less allowance for credit losses(428)— — 
Net securities to be held to maturity$389,987 $393,896 $379,693 
Restricted equity securities
Federal Home Loan Bank Stock$4,190 $2,846 $3,683 
Federal Reserve Bank Stock1,037 1,037 1,037 
$5,227 $3,883 $4,720 
Total securities$673,569 $682,288 $686,150 
The Company adopted ASC 326, the CECL standard in the current reporting period. 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. Further details are included in Notes 2 and 16 of the accompanying financial statements.

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The following table sets forth yields and contractual maturities of the Company's investment securities as of June 30, 2023. Yields on tax-exempt securities have been computed on a tax-equivalent basis using a tax rate of 21%. Mortgage-backed securities are presented according to their final contractual maturity date, while the calculated yield takes into effect the intermediate cash flows from repayment of principal which results in a much shorter average life.
Available For SaleHeld to Maturity
 Dollars in thousands
Fair
Value		Yield to maturityAmortized CostYield to maturity
 U.S. Government-Sponsored Agencies
 Due in 1 year or less$— 0.00 %$— 0.00 %
 Due in 1 to 5 years2,806 1.83 %— 0.00 %
 Due in 5 to 10 years7,903 1.17 %13,500 1.78 %
 Due after 10 years8,652 2.00 %26,600 1.57 %
  Total19,361 1.64 %40,100 1.64 %
 Mortgage-Backed Securities
 Due in 1 year or less— 0.00 %— 0.00 %
 Due in 1 to 5 years188 2.68 %4 8.22 %
 Due in 5 to 10 years3,897 1.96 %152 7.16 %
 Due after 10 years218,107 2.26 %58,328 1.77 %
  Total222,192 2.26 %58,484 1.79 %
 State & Political Subdivisions
 Due in 1 year or less— 0.00 %1,690 3.92 %
 Due in 1 to 5 years365 5.06 %8,590 3.95 %
 Due in 5 to 10 years4,907 2.48 %50,918 3.47 %
 Due after 10 years28,347 3.28 %195,883 2.50 %
  Total33,619 3.18 %257,081 2.75 %
 Asset-Backed Securities
Due in 1 year or less— 0.00 %— 0.00 %
Due in 1 to 5 years— 0.00 %— 0.00 %
Due in 5 to 10 years— 0.00 %— 0.00 %
Due after 10 years3,183 6.32 %— 0.00 %
Total3,183 6.32 %— 0.00 %
 Corporate Securities
 Due in 1 year or less— 0.00 %750 1.50 %
 Due in 1 to 5 years— 0.00 %6,000 4.74 %
 Due in 5 to 10 years— 0.00 %28,000 4.62 %
 Due after 10 years— 0.00 %— 0.00 %
  Total— 0.00 %34,750 4.57 %
$278,355 2.37 %$390,415 2.65 %

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. At December 31, 2022, this amount was $111.7 million, or 15.65% 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
59


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. 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. 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:
Less than 12 months12 months or moreTotal
Dollars in thousands
Fair Value (Estimated)Unrealized
Losses		Fair Value (Estimated)Unrealized
Losses		Fair Value (Estimated)Unrealized
Losses
U.S. Government-sponsored agencies$1,981 $(19)$47,330 $(16,799)$49,311 $(16,818)
Mortgage-backed securities22,083 (1,435)241,009 (51,489)263,092 (52,924)
State and political subdivisions66,096 (1,995)149,378 (34,367)215,474 (36,362)
Asset-backed securities— — 1,516 (47)1,516 (47)
Corporate Securities7,545 (1,955)14,045 (1,955)21,590 (3,910)
$97,705 $(5,404)$453,278 $(104,657)$550,983 $(110,061)

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. 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.
Mortgage-backed securities issued by U.S. Government agencies and U.S. 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. 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 agencies bear no credit risk because they are backed by the full faith and credit of the United States and that securities issued by U.S. 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. 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. 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. 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.
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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. These securities consist of U.S. Government backed student loans along with other credit enhancements. 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.
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. 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. 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.

FHLBB and FRBB Stock
The Bank is a member of the FHLBB, a cooperatively owned wholesale bank for housing and finance in the six New England States. As a requirement of membership in the FHLBB, the Bank must own a minimum required amount of FHLBB stock, calculated periodically based primarily on its level of borrowings from the FHLBB. The Bank uses the FHLBB for a portion of its wholesale funding needs. As of June 30, 2023, the Bank's investment in FHLBB stock totaled $4.2 million. This compares to $2.8 million as of December 31, 2022 and $3.7 million as of June 30, 2022. FHLBB stock is a non-marketable equity security and therefore is reported at cost, subject to adjustments for any observable market transactions on the same or similar instruments of the investee. No impairment losses have been recorded through June 30, 2023. The Company will continue to monitor its investment in FHLB stock.
The Bank is also a member of the FRBB. As a requirement for membership in the FRBB, the Bank must own a minimum required amount of FRBB stock. The Bank uses FRBB for certain correspondent banking services and maintains borrowing capacity at its discount window. The Bank's investment in FRBB stock totaled $1,037,000 at June 30, 2023 and 2022 and December 31, 2022.
The Company periodically evaluates its investment in FHLBB and FRBB stock for impairment based on, among other factors, the capital adequacy of the Banks and their overall financial condition. No impairment losses have been recorded through June 30, 2023. The Bank will continue to monitor its investment in these restricted equity securities.

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

Loans
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 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. Residential mortgage loans comprise two of the classes: residential real estate term and residential real estate construction. The remaining classes are municipal loans, home equity loans, and consumer loans. Further descriptions of each class, and the risk factors associated with each, are included in Note 4 of the accompanying financial statements.


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The following table summarizes the loan portfolio, by class, at June 30, 2023 and 2022 and December 31, 2022.
Dollars in thousands
June 30, 2023December 31, 2022June 30, 2022
Commercial
   Real estate owner occupied$301,320 14.6 %$256,623 13.4 %$242,161 13.5 %
   Real estate non-owner occupied396,388 19.2 %363,660 19.0 %306,471 17.2 %
   Construction64,094 3.1 %93,907 4.9 %128,927 7.2 %
   C&I351,854 17.1 %319,359 16.7 %275,714 15.4 %
   Multifamily93,124 4.5 %79,057 4.1 %68,856 3.9 %
Municipal58,252 2.8 %40,619 2.1 %46,835 2.6 %
Residential
   Term645,127 31.4 %597,404 31.2 %571,111 31.9 %
   Construction30,812 1.5 %49,907 2.6 %44,011 2.5 %
Home Equity
   Revolving and term99,666 4.8 %93,075 4.9 %82,913 4.6 %
Consumer20,316 1.0 %21,063 1.1 %21,356 1.2 %
Total loans$2,060,953 100.0 %$1,914,674 100.0 %$1,788,355 100.0 %
The following table sets forth certain information regarding the contractual maturities of the Bank's loan portfolio as of June 30, 2023.
Dollars in thousands
< 1 Year1 - 5 Years5 - 10 Years> 10 YearsTotal
Commercial
   Real estate owner occupied$443 $12,869 $30,321 $257,687 $301,320 
   Real estate non-owner occupied1,315 16,396 60,582 318,095 396,388 
   Construction— 5,236 9,306 49,552 64,094 
   C&I1,997 161,221 82,034 106,602 351,854 
   Multifamily— 1,189 339 91,596 93,124 
Municipal1,000 16,498 9,957 30,797 58,252 
Residential
   Term— 6,321 38,424 600,382 645,127 
   Construction— — — 30,812 30,812 
Home Equity
   Revolving and term1,139 4,931 4,845 88,751 99,666 
Consumer5,150 7,695 2,891 4,580 20,316 
Total loans$11,044 $232,356 $238,699 $1,578,854 $2,060,953 
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The following table provides a listing of loans by class, between variable and fixed rates as of June 30, 2023.
Fixed-RateAdjustable-RateTotal
Dollars in thousands
Amount% of totalAmount% of totalAmount% of total
Commercial
   Real estate owner occupied$19,624 1.0 %$281,696 13.6 %$301,320 14.6 %
   Real estate non-owner occupied95,979 4.7 %300,409 14.5 %396,388 19.2 %
   Construction22,292 1.1 %41,802 2.0 %64,094 3.1 %
   C&I136,027 6.6 %215,827 10.5 %351,854 17.1 %
   Multifamily710 0.0 %92,414 4.5 %93,124 4.5 %
Municipal58,004 2.8 %248 0.0 %58,252 2.8 %
Residential
   Term453,133 22.1 %191,994 9.3 %645,127 31.4 %
   Construction21,112 1.0 %9,700 0.5 %30,812 1.5 %
Home Equity
    Revolving and Term10,802 0.5 %88,864 4.3 %99,666 4.8 %
Consumer14,145 0.7 %6,171 0.3 %20,316 1.0 %
Total loans$831,828 40.5 %$1,229,125 59.5 %$2,060,953 100.0 %

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.

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. 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. Loans, or portions thereof, are charged off against the allowance when they are deemed uncollectible. The ACL consists of three elements: (1) specific reserves for loans individually analyzed; (2) general reserves for each portfolio segment; and, (3) qualitative reserves. All outstanding loans are considered in evaluating the appropriateness of the allowance with similar risk characteristics in the portfolio. Prior to adoption of ASC 326, under the incurred loss methodology, the Company evaluated portfolio risk characteristics largely on loan purpose.
The Company provides for loan losses through the ACL which represents an estimated reserve for losses in the loan portfolio. To determine an appropriate level for general reserves, a discounted cash flow approach is applied to each portfolio segment implementing a probability of default and loss given default estimate based upon a number of factors including historical losses over an economic cycle, economic forecasts, loan prepayment speeds and curtailment rates. 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. Loan losses are charged against the allowance when Management believes that the collectibility of the loan principal is unlikely. Recoveries on loans previously charged off are credited to the allowance. 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. In addition, various regulatory agencies periodically review the Company's ACL as an integral part of their examination process. Such agencies may require the Company to record additions to the allowance based on judgments different from those of Management.
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The ACL includes reserve amounts assigned to individually analyzed loans. This includes loans placed on non-accrual and loans reported as TDR prior to adoption of ASU 2022-02, with balances of $250,000 or more. A specific reserve is allocated to an individual loan when the amount of a probable loss is estimable on the basis of its collateral value, the present value of anticipated future cash flows, or its net realizable value. At June 30, 2023, individually analyzed loans with specific reserves totaled $886,000 and the amount of such reserves was $186,000. This compares to individually analyzed loans with specific reserves of $1.8 million at December 31, 2022 and the amount of such reserves was $398,000. Additional detail on individually analyzed loans may be found in Note 3 of the financial statements.
The total ACL on loans at June 30, 2023 is considered by Management to be appropriate to address the potential for credit losses inherent in the loan portfolio at that date. However, determination of the appropriate allowance level is based upon a number of assumptions made about future events, which we believe are reasonable, but which may or may not prove valid. Thus, there can be no assurance charge-offs in future periods will not exceed the ACL or that additional increases in the ACL will not be necessary.
The following table summarizes the allocation of allowance by loan class as of June 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, 2023December 31, 2022June 30, 2022
Commercial
   Real estate owner occupied$4,719 14.6 %$6,116 36.5 %$5,480 34.5 %
   Real estate non-owner occupied4,492 19.2 %— — %$— — %
   Construction1,469 3.1 %821 4.9 %$1,151 7.2 %
   C&I4,721 17.1 %3,097 16.7 %$2,948 15.4 %
   Multifamily1,312 4.5 %— — %$— — %
Municipal399 2.8 %162 2.1 %$157 2.6 %
Residential
   Term4,831 31.4 %2,559 32.1 %$2,592 32.6 %
   Construction609 1.5 %199 2.6 %$191 2.5 %
Home Equity
   Revolving and term635 4.8 %1,029 4.7 %$966 4.0 %
Consumer278 1.0 %1,062 1.1 %$866 1.2 %
Unallocated— — %1,678 — %$1,850 — %
Total$23,465 100.0 %$16,723 100.0 %$16,201 100.0 %
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.


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A breakdown of the ACL on loans as of June 30, 2023, by loan class and allowance element, is presented in the following table:
 Dollars in thousands
Specific Reserves on Loans Evaluated Individually General Reserves on Loans Based on Historical Loss ExperienceReserves for Qualitative FactorsTotal Reserves
Commercial
   Real estate owner occupied$— $3,998 $721 $4,719 
   Real estate non-owner occupied— 3,947 545 4,492 
   Construction— 1,361 108 1,469 
   C&I157 3,886 678 4,721 
   Multifamily— 1,218 94 1,312 
Municipal— 360 39 399 
Residential
   Term29 4,020 782 4,831 
   Construction— 635 (26)609 
Home Equity
   Revolving and term— 477 158 635 
Consumer— 248 30 278 
$186 $20,150 $3,129 $23,465 
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.
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The following table summarizes the activities in our allowance for credit losses for the six months ended June 30, 2023 and 2022 and for the year ended December 31, 2022:
Dollars in thousands
June 30, 2023December 31, 2022June 30, 2022
Balance at the beginning of period$16,723 $15,521 $15,521 
Loans charged off:
Commercial
   Real estate owner occupied39 — — 
   Real estate non-owner occupied— — — 
   Construction— — — 
   C&I— 309 43 
   Multifamily— — 
Municipal— — — 
Residential
   Term— 8 — 
   Construction— — — 
Home Equity
   Revolving and term— 29 29 
Consumer83 412 287 
Total122 758 359 
Recoveries on loans previously charged off
Commercial
   Real estate owner occupied— 20 17 
   Real estate non-owner occupied— — — 
   Construction— — — 
   C&I3 13 2 
   Multifamily— — 
Municipal— — — 
Residential
   Term6 29 11 
   Construction— — — 
Home Equity
   Revolving and term7 4 1 
Consumer58 144 108 
Total74 210 139 
Net loans charged off48 548 220 
Provision for credit losses 580 1,750 900 
Adoption of ASU No. 2016-13$6,210 $— $— 
Balance at end of period$23,465 $16,723 $16,201 
Ratio of net loans charged off to average loans outstanding1
0.005 %0.030 %0.030 %
Ratio of allowance for credit losses to total loans outstanding1.14 %0.87 %0.91 %
1 Annualized using a 365-day basis for both 2023 and 2022.




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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 June 30, 2023.
Nonperforming Loans
Nonperforming loans are comprised of loans, for which based on current information and events, it is probable that we will be unable to collect all amounts due according to the contractual terms of the loan agreement or when principal and interest is 90 days or more past due unless the loan is both well secured and in the process of collection (in which case the loan may continue to accrue interest in spite of its past due status). A loan is "well secured" if it is secured (1) by collateral in the form of liens on or pledges of real or personal property, including securities, that have a realizable value sufficient to discharge the debt including accrued interest) in full, or (2) by the guarantee of a financially responsible party. A loan is "in the process of collection" if collection of the loan is proceeding in due course either (1) through legal action, including judgment enforcement procedures, or (2) in appropriate circumstances, through collection efforts not involving legal action which are reasonably expected to result in repayment of the debt or in its restoration to a current status in the near future.
Generally, when a loan becomes 90 days past due it is evaluated for collateral dependency based upon the most recent appraisal or other evaluation method. If the collateral value is lower than the outstanding loan balance plus accrued interest and estimated selling costs, the loan is placed on non-accrual status, all accrued interest is reversed from interest income, and a specific reserve is established for the difference between the loan balance and the collateral value less selling costs, or, in certain situations, the difference between the loan balance and the collateral value less selling costs is written off. Concurrently, a new appraisal or valuation may be ordered, depending on collateral type, currency of the most recent valuation, the size of the loan, and other factors appropriate to the loan. Upon receipt and acceptance of the new valuation, the loan may have an additional specific reserve or write down based on the updated collateral value. On an ongoing basis, appraisals or valuations may be done periodically on collateral dependent nonperforming loans and an additional specific reserve or write down will be made, if appropriate, based on the new collateral value.
Once a loan is placed on nonaccrual, it remains in nonaccrual status until the loan is current as to payment of both principal and interest and the borrower demonstrates the ability to pay and remain current. 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:
Dollars in thousands
June 30, 2023December 31, 2022June 30, 2022
Commercial
   Real estate owner occupied$— $193 $197 
   Real estate non-owner occupied— — — 
   Construction30 23 25 
   C&I655 663 953 
   Multifamily— — — 
Municipal— — — 
Residential
   Term533 572 3,383 
   Construction— — — 
Home Equity
   Revolving and term458 304 254 
Consumer— — — 
Total nonperforming loans$1,676 $1,755 $4,812 
Allowance for credit losses as a percentage of nonperforming loans1400.1 %952.9 %336.7 %

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 June 30, 2023, there were
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loans totaling $318,000 that were 90 or more days past due and still accruing interest compared to $241,000 at December 31, 2022 and $76,000 at June 30, 2022.
Loan Modifications Made to Borrowers Experiencing Financial Difficulty
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.
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:
Dollars in thousands
June 30, 2023December 31, 2022June 30, 2022
Commercial
   Real estate owner occupied$37 $193 $197 
   Real estate non-owner occupied— — — 
   Construction8 — — 
   C&I536 226 607 
   Multifamily— — — 
Municipal— — — 
Residential
   Term1,639 452 2,035 
   Construction— — — 
Home Equity
   Revolving and term370 421 186 
Consumer252 167 122 
Total$2,842 $1,459 $3,147 
Loans 30-89 days past due to total loans0.102 %0.039 %0.094 %
Loans 90+ days past due and accruing to total loans0.015 %0.013 %0.004 %
Loans 90+ days past due on non-accrual to total loans0.020 %0.025 %0.078 %
Total past due loans to total loans0.138 %0.077 %0.176 %
Potential Problem Loans and Loans in Process of Foreclosure
Potential problem loans consist of classified, accruing commercial and commercial real estate loans that were between 30 and 89 days past due. Such loans are characterized by weaknesses in the financial condition of borrowers or collateral deficiencies. 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. 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. If the loan becomes 120 days past due, copies of the promissory note and mortgage deed are forwarded to the Bank's attorney for review and a complaint for foreclosure is then prepared. An authorized Bank officer signs the affidavit certifying the validity of the documents and verification of the past due amount which is then forwarded to the court. Once a Motion for Summary Judgment is granted, a POR begins which gives the customer 90 days to cure the default. A foreclosure auction date is then set 30 days from the POR expiration date if the default is not cured.
As of June 30, 2023, there were no commercial loans in the process of foreclosure. The Bank's commercial foreclosure process begins when a loan becomes 60 days past due, at which time a default letter is issued. At expiration of the period to cure default, which lasts 12 days after the issuing of the default letter, copies of the promissory note and mortgage deed are forwarded to the Bank's attorney for review. 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. A notice also must be issued to the mortgagor and all parties of interest 21 days prior to the sale. The foreclosure auction occurs and the Affidavit of Sale is recorded within the appropriate county within 30 days of the sale.
The Bank’s written policies and procedures for foreclosures, along with implementation of same, are subject to annual review by its internal audit provider. The scope of this review includes loans held in portfolio and loans serviced for others.
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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. 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. A de minimis volume of loans has been sold to and serviced for MPF to date. The Bank retains a second loss layer credit enhancement obligation; no losses have been recorded on this credit enhancement obligation since the Bank started selling loans to MPF in 2013.

Other Real Estate Owned
OREO and repossessed assets are comprised of properties or other assets acquired through a foreclosure proceeding, or acceptance of a deed or title in lieu of foreclosure. Real estate acquired through foreclosure is carried at the lower of fair value less estimated cost to sell or the cost of the asset and is not included as part of the ACL totals. At June 30, 2023 there was one property owned with an OREO balance of $64,000, with no allowance for OREO losses. This compares to December 31, 2022, when there were no OREO properties, and June 30, 2022, when there were two properties owned with an OREO balance of $51,000, with no allowance for losses. The table below presents the composition of OREO at June 30, 2023 and 2022, and December 31, 2022:
Dollars in thousands
June 30, 2023December 31, 2022June 30, 2022
Carrying Value
Residential
    Term$64 $— $51 
    Construction— — — 
Home Equity
    Revolving and Term— — — 
Consumer— — — 
Total64 — 51 
Related Allowance
Residential
    Term— — — 
    Construction— — — 
Home Equity
    Revolving and Term— — — 
Consumer— — — 
Total— — — 
Net Value
Residential
    Term64 — 51 
    Construction— — — 
Home Equity
    Revolving and Term— — — 
Consumer— — — 
Total$64 $— $51 










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Liquidity
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. 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. While the generally preferred funding strategy is to attract and retain low cost deposits, our ability to do so is affected by competitive interest rates and terms in the marketplace.
The Bank has a detailed liquidity funding policy and a contingency funding plan that provide for prompt and comprehensive responses to unexpected demands for liquidity. Management has developed quantitative models to estimate needs for contingent funding that could result from unexpected outflows of funds in excess of "business as usual" cash flows. In Management's estimation, risks are concentrated amongst several major categories: runoff of in-market deposit balances, an inability to renew wholesale sources of funding, and materially increased utilization of available credit lines by borrowers. Of these, potential runoff of deposit balances would have the most significant impact on contingent liquidity. Our modeling attempts to quantify deposits at risk over selected time horizons. In addition to these outflow risks, several other "business as usual" factors enter into the calculation of the adequacy of contingent liquidity, including payment proceeds from loans and investment securities, maturing debt obligations and maturing time deposits. Stress testing analysis of liquidity resources under various scenarios is conducted no less than quarterly and results are reported to the ALCO. Borrowings supplement deposits as a source of liquidity; our borrowings typically consist of customer repurchase agreements and FHLB advances. The Bank tests its borrowing capacity with the FRBB, the FHLB and Fed Funds lines with other correspondent no less than annually; each has been tested within the past six months.
The Company defines its primary sources of contingent liquidity as cash & equivalents, unencumbered U.S. Government or Agency bond collateral, available capacity at FHLB, and available authorized brokered deposit issuance capacity. As of June 30, 2023, the Bank had primary sources of contingent liquidity of $773.0 million or 27.1% of its total assets. It is Management's opinion that this is an appropriate level. In addition, the Bank has $179.0 million in borrowing capacity under the FRBB's Borrower in Custody program, $51.0 million in credit lines with correspondent banks, and $181.0 million in other unencumbered securities available as collateral for borrowing. These bring the Bank's total sources of liquidity to $1.184 billion or 41.6% of its total assets. The Bank established borrowing capacity of an additional $47.1 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. Based on its assessment of the liquidity considerations described above, Management believes the Company's sources of funding will meet anticipated funding needs.
The Company is dependent upon the payment of cash dividends by the Bank to service its commitments. 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. 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.
Deposits
During the first six months of 2023, total deposits increased by $121.0 million or 5.1% from December 31, 2022 levels. Low-cost deposits (demand, NOW, and savings accounts) decreased by $76.6 million or 5.8% in the first six months of 2023. Money market deposits increased $15.6 million or 8.1%, and certificates of deposit increased $182.0 million or 21.0% as depositors shifted balances to higher cost product types and brokered certificates of deposit were issued to support earning asset growth.
Between June 30, 2022 and June 30, 2023, total deposits increased by $247.8 million or 11.0%. Low-cost deposits decreased by $99.3 million or 7.4%, money market accounts increased $1.9 million or 0.9%, and certificates of deposit increased $345.2 million or 49.0%.
Estimated uninsured deposits totaled $408.9 million or 16.4% of total deposits as of June 30, 2023, and $501.6 million or 21.1% of total deposits as of December 31, 2022. The company has pledged assets as collateral covering certain deposits; these amounts were $329.6 million and $350.4 million as of June 30, 2023 and December 31, 2022, respectively.




70



Borrowed Funds
The Company uses funding from the FHLBB, the FRBB and repurchase agreements enabling it to grow its balance sheet and its revenues. This funding may also be used to balance seasonal deposit flows or to carry out interest rate risk management strategies, and may be used to replace or supplement other sources of funding, including core deposits and certificates of deposit. During the six months ended June 30, 2023, borrowed funds increased $11.0 million or 10.6% from December 31, 2022, primarily due to FHLBB advances. Between June 30, 2022 and June 30, 2023, borrowed funds decreased by $12.1 million or 9.6%; the reduction was primarily due to lower balances in customer repurchase agreements.

Capital Resources
Shareholders' equity as of June 30, 2023 was $232.0 million, compared to $228.9 million as of December 31, 2022 and $227.7 million as of June 30, 2022. The Company's earnings in the first six months of 2023, net of dividends declared, added $7.7 million to shareholders' equity. The net unrealized loss on AFS securities, net of tax, presented in accordance with FASB ASC Topic 320 "Investments – Debt and Equity Securities" stands at $43.8 million as of June 30, 2023 and was $44.7 million as of December 31, 2022. Additional information about the net unrealized loss on AFS securities was provided in Note 2 of the Consolidated Financial Statements and in the Debit Securities section of Management's Discussion and Analysis of Financial Condition and Results of Operations.
A cash dividend of $0.35 per share was declared in the second quarter of 2023, one cent more than the $0.34 paid the previous four quarters. The dividend payout ratio, which is calculated by dividing dividends declared per share by basic earnings per share, was 49.29% for the first six months of 2023 compared to 36.67% for the same period in 2022. In determining future dividend payout levels, the Board of Directors carefully analyzes capital requirements and earnings retention, as set forth in the Company's Dividend Policy. The ability of the Company to pay cash dividends to its shareholders depends on receipt of dividends from its subsidiary, the Bank. The subsidiary may pay dividends to its parent out of so much of its net profits as the Bank's directors deem appropriate, subject to the limitation that the total of all dividends declared by the Bank in any calendar year may not exceed the total of its net profits of that year combined with its retained net profits of the preceding two years. The amount available for dividends in 2023 is this year's net income plus $49.6 million.
Financial institution regulators have established guidelines for minimum capital ratios for banks and bank holding companies. The net unrealized gain or loss on AFS securities is generally not included in computing regulatory capital. During the first quarter of 2015, the Company adopted the new Basel III regulatory capital framework as approved by the federal banking agencies. In order to avoid limitations on capital distributions, including dividend payments, the Company must hold a capital conservation buffer of 2.5% above the adequately capitalized risk-based capital ratios.
The Company met each of the well-capitalized ratio guidelines at 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, 2023LeverageCommon Equity Tier 1Tier 1Total Risk-Based
Bank8.52 %12.37 %12.37 %13.62 %
Company8.68 %12.42 %12.42 %13.66 %
Adequately capitalized ratio4.00 %4.50 %6.00 %8.00 %
Adequately capitalized ratio plus capital conservation buffer                          n/a%7.00 %8.50 %10.50 %
Well capitalized ratio (Bank only)5.00 %6.50 %8.00 %10.00 %
As of December 31, 2022LeverageCommon Equity Tier 1Tier 1Total Risk-Based
Bank8.81 %12.64 %12.64 %13.52 %
Company9.01 %12.70 %12.70 %13.58 %
Adequately capitalized ratio4.00 %4.50 %6.00 %8.00 %
Adequately capitalized ratio plus capital conservation buffer                          n/a%7.00 %8.50 %10.50 %
Well capitalized ratio (Bank only)5.00 %6.50 %8.00 %10.00 %


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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. 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. The base model is also stress tested for interest rate risk from increasing and decreasing rates, credit risk in normal, elevated and severe loss scenarios, and combinations of interest rate and credit risk. 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

Derivative Financial Instruments Designated as Hedges
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. 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. The notional amounts and net unrealized gain (loss) of the financial derivative instruments do not represent exposure to credit loss. The Bank is exposed to credit loss only to the extent the counterparty defaults in its responsibility to pay interest under the terms of the agreements. 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. 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 notional amounts of the financial derivative instruments do not represent exposure to credit loss. The Bank is exposed to credit loss only to the extent that either counter-party defaults in its responsibility to pay interest under the terms of the agreements. 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.

Contractual Obligations
The following table sets forth the contractual obligations of the Company as of June 30, 2023:
Dollars in thousands
TotalLess than 1 year1-3 years3-5 yearsMore than 5 years
Borrowed funds$114,481 $89,401 $80 $25,000 $— 
Operating leases806 110 195 84 417 
Certificates of deposit1,049,629 628,765 339,012 81,852 — 
Total$1,164,916 $718,276 $339,287 $106,936 $417 
Total loan commitments and unused lines of credit$313,910 $313,910 $— $— $— 


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Item 3 – Quantitative and Qualitative Disclosures About Market Risk
Market-Risk Management
Market risk is the risk of loss arising from adverse changes in the fair value of financial instruments due to changes in interest rates. The First Bancorp, Inc.'s market risk is composed primarily of interest rate risk. The Bank's ALCO is responsible for reviewing the interest rate sensitivity position of the Company and establishing policies to monitor and limit exposure to interest rate risk. All guidelines and policies established by ALCO have been approved by the Board of Directors.
Asset/Liability Management
The primary goal of asset/liability management is to maximize net interest income within the interest rate risk limits set by ALCO. Interest rate risk is monitored through the use of two complementary measures: static gap analysis and earnings simulation modeling. While each measurement has limitations, taken together they represent a reasonably comprehensive view of the magnitude of interest rate risk in the Company, the level of risk through time, and the amount of exposure to changes in certain interest rate relationships.
Static gap analysis measures the amount of repricing risk embedded in the balance sheet at a point in time. It does so by comparing the differences in the repricing characteristics of assets and liabilities. A gap is defined as the difference between the principal amount of assets and liabilities that reprice within a specified time period. The Company's cumulative one-year gap at June 30, 2023 was (3.76)% of total assets compared to (5.60)% of total assets at December 31, 2022. Core deposits with non-contractual maturities are presented based upon historical patterns of balance attrition and pricing behavior, which are reviewed at least annually.
The gap repricing distributions include principal cash flows from residential mortgage loans and mortgage-backed securities in the time frames in which they are expected to be received. Mortgage prepayments are estimated by applying industry median projections of prepayment speeds to portfolio segments based on coupon range and loan age.
A summary of the Company's static gap, as of June 30, 2023, is presented in the following table:
0-9090-3651-55+
Dollars in thousands 
DaysDaysYearsYears
Investment securities at amortized cost (HTM) and fair value (AFS)$35,621 $25,472 $143,109 $464,140 
Restricted stock, at cost4,190 — — 1,037 
Loans held for sale— — — — 
Loans587,613 228,029 932,231 313,079 
Other interest-earning assets— 26,345 — — 
Non-rate-sensitive assets13,350 — — 100,599 
 Total assets640,774 279,846 1,075,340 878,855 
Interest-bearing deposits512,082 450,677 498,730 790,168 
Borrowed funds66,000 — 80 — 
Non-rate-sensitive liabilities and equity— — — 557,078 
 Total liabilities and equity578,082 450,677 498,810 1,347,246 
Period gap$62,692 $(170,831)$576,530 $(468,391)
Percent of total assets2.18 %(5.94)%20.05 %(16.29)%
Cumulative gap (current)$62,692 $(108,139)$468,391 $— 
Percent of total assets2.18 %(3.76)%16.29 %— %

The earnings simulation model forecasts capture the impact of changing interest rates on one-year and two-year net interest income. The modeling process calculates changes in interest income received and interest expense paid on all interest-earning assets and interest-bearing liabilities reflected on the Company's consolidated balance sheet. None of the assets used in the simulation are held for trading purposes. The modeling is done for a variety of scenarios that incorporate changes in the absolute level of interest rates as well as basis risk, as represented by changes in the shape of the yield curve and changes in interest rate relationships. Management evaluates the effects on income of alternative interest rate scenarios against earnings in a stable interest rate environment. This analysis is also most useful in determining the short-run earnings exposures to changes in customer behavior involving loan payments and deposit additions and withdrawals.
The Company's most recent simulation model calculates projected impact on net interest income in scenarios where short-term interest rates gradually decrease by two percentage points, gradually decreases by one percentage point, and where short-
73


term rates gradually increase by two percentage points. The Company's modeling as of June 30, 2023 projects net interest income would increase by approximately 0.1% if short-term rates affected by FOMC actions fall gradually by two percentage points over the next year, and would increase by approximately 0.4% if short term rates gradually fall by one percentage point over the next year; net interest income would decrease by approximately 3.5% if rates rise gradually by two percentage points over the next year. Each scenario is well within ALCO's policy limit of a decrease in net interest income of no more than 10.0% given a 2.0% move in interest rates, up or down. Management believes this reflects a reasonable interest rate risk position. In year two, and assuming no additional movement in rates, the model forecasts that net interest income would be higher than that earned in the first year of a stable rate environment by 10.6% in the two percentage point falling-rate scenario, and higher by 10.6% in the one percentage point falling rate scenario; net interest income would be lower than that earned in a stable rate environment by 2.9% in a two percentage point rising rate scenario, when compared to the year-one base scenario. Each year two scenario is well within ALCO's policy limit of a decrease of no more than 20% given a 2.0% move in interest rates, up or down. A summary of the Bank's interest rate risk simulation modeling, as of June 30, 2023 and December 31, 2022 is presented in the following table:
Changes in Net Interest IncomeJune 30, 2023December 31, 2022
Year 1
Projected change if rates decrease by 1.0%0.4%0.2%
Projected change if rates decrease by 2.0%0.1%0.0%
Projected change if rates increase by 2.0%(3.5)%(3.8)%
Year 2
Projected change if rates decrease by 1.0%10.6%6.8%
Projected change if rates decrease by 2.0%10.6%5.7%
Projected change if rates increase by 2.0%(2.9)%(3.4)%
This dynamic simulation model includes assumptions about how the balance sheet is likely to evolve through time and in different interest rate environments. Loans and deposits are projected to maintain stable balances. All maturities, calls and prepayments in the securities portfolio are assumed to be reinvested in similar assets. Mortgage loan prepayment assumptions are developed from industry median estimates of prepayment speeds for portfolios with similar coupon ranges and seasoning. Non-contractual deposit volatility and pricing are assumed to follow historical patterns. The sensitivities of key assumptions are analyzed annually and reviewed by ALCO.
This sensitivity analysis does not represent a Company forecast and should not be relied upon as being indicative of expected operating results. These hypothetical estimates are based upon numerous assumptions including, among others, the nature and timing of interest rate levels, yield curve shape, prepayments on loans and securities, pricing decisions on loans and deposits, and reinvestment/ replacement of asset and liability cash flows. While assumptions are developed based upon current economic and local market conditions, the Company cannot make any assurances as to the predictive ability of these assumptions, including how customer preferences or competitor influences might change.
Interest Rate Risk Management
A variety of financial instruments can be used to manage interest rate sensitivity. These may include investment securities, interest rate swaps, and interest rate caps and floors. Frequently called interest rate derivatives, interest rate swaps, caps and floors have characteristics similar to securities but possess the advantages of customization of the risk-reward profile of the instrument, minimization of balance sheet leverage and improvement of liquidity. As of June 30, 2023, the Company was using interest rate swaps for interest rate risk management.
The Company engages an independent consultant to periodically review its interest rate risk position, as well as the effectiveness of simulation modeling and reasonableness of assumptions used. As of June 30, 2023, there were no significant differences between the views of the independent consultant and Management regarding the Company's interest rate risk exposure. Management expects interest rates will increase slightly in the next year and believes that the current level of interest risk is acceptable.
Cessation of LIBOR
The Company adopted SOFR as its replacement reference rate index for each of the customer loan interest rate swap contracts that were tied to a LIBOR tenor. The six contracts have maturity dates of December 19, 2029, August 21, 2030, April 1, 2031, July 1, 2035, October 1, 2035 and October 1, 2039. The necessary actions to amend these legacy contracts to incorporate the new replacement reference rate index was undertaken during the second quarter 2023.

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Item 4: Controls and Procedures
As required by Rule 13a-15 under the Securities Exchange Act of 1934, as of June 30, 2023, the end of the quarter covered by this report, the Company carried out an evaluation under the supervision and with the participation of the Company's management, including the Company's Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures. In designing and evaluating the Company's disclosure controls and procedures, the Company and its management recognize that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and the Company's management necessarily was required to apply its judgment in evaluating and implementing possible controls and procedures. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures were effective at the reasonable assurance level to ensure that information required to be disclosed by the Company in the reports it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission's rules and forms. There was no change in the Company's internal control over financial reporting that occurred during the quarter ended June 30, 2023 that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting. The Company reviews its disclosure controls and procedures, which may include its internal controls over financial reporting on an ongoing basis, and may from time to time make changes aimed at enhancing their effectiveness and to ensure that the Company's systems evolve with its business.
75


Part II – Other Information
Item 1 – Legal Proceedings
The Company was not involved in any legal proceedings requiring disclosure under Item 103 of Regulation S-K during the reporting period.

Item 1A – Risk Factors
There have been no material changes from the risk factors previously disclosed in the Company's Form 10-K for the year
ended December 31, 2022.

Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds

a. None

b. None

c. The Company made the following repurchases of its common stock in the six months ended June 30, 2023:
MonthShares PurchasedAverage Price Per ShareTotal shares purchased as part of publicly announced repurchase plansMaximum number of shares that may be purchased under the plans
January 20238,090 $29.41 — — 
February 2023— — — — 
March 2023— — — — 
April 2023— — — — 
May 2023555 23.22 — — 
June 2023— — — — 
8,645 $26.32 — 

Item 3 – Default Upon Senior Securities

None.

Item 4 – Mine Safety Disclosures

Not applicable.

Item 5 - Other Information

None.


76


Item 6 – Exhibits

Exhibit 3.2 Amendment to the Registrant's Articles of Incorporation (incorporated by reference to Exhibit 3.1 to the Company's Form 8-K filed on May 1, 2008).
Exhibit 3.3 Amendment to the Registrant's Articles of Incorporation (incorporated by reference to the Definitive Proxy Statement for the Company's 2008 Annual Meeting filed on March 14, 2008).
Exhibit 3.4 Amendment to the Registrant's Articles of Incorporation authorizing issuance of preferred stock (incorporated by reference to Exhibit 3.1 to Current Report on Form 8-K filed on December 29, 2008).
Exhibit 3.5 Conformed Copy of the Company's Bylaws (incorporated by reference to Exhibit 3.5 to the Company's Form 10-K filed March 10, 2017).
Exhibit 3.6 Amendment to the Company Bylaws (incorporated by reference to Exhibit 3.6 to the Company's Form 8-K filed under item 5.03 on December 20, 2019.
Exhibit 23.1 Consent of Independent Registered Public Accounting Firm (incorporated by reference to Exhibit 2.3 to the Company's Form 10-K filed March 10, 2023.
Exhibit 31.1 Certification of Chief Executive Officer Pursuant to Rule 13A-14(A) of The Securities Exchange Act of 1934, furnished within.
Exhibit 31.2 Certification of Chief Financial Officer Pursuant to Rule 13A-14(A) of The Securities Exchange Act of 1934, furnished within.
Exhibit 32.1 Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of The Sarbanes-Oxley Act of 2002, furnished within.
Exhibit 32.2 Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of The Sarbanes-Oxley Act of 2002, furnished within.
Exhibit 101.INS XBRL Instance Document
Exhibit 101.SCH XBRL Taxonomy Extension Schema Document
Exhibit 101.CAL XBRL Taxonomy Extension Calculation Linkbase Document
Exhibit 101.LAB XBRL Taxonomy Extension Label Linkbase Document
Exhibit 101.PRE XBRL Taxonomy Extension Presentation Linkbase Document
Exhibit 101.DEF XBRL Taxonomy Extension Definitions Linkbase
Exhibit 104.Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101).
77

Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
THE FIRST BANCORP, INC.



/s/ Tony C. McKim
Tony C. McKim
President & Chief Executive Officer

Date: August 4, 2023



/s/ Richard M. Elder
Richard M. Elder
Executive Vice President & Chief Financial Officer

Date: August 4, 2023



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