Financial Performance - Net income for Q1 2023 was $7,971,000, down 17.9% from $9,705,000 in Q1 2022[18]. - Basic earnings per common share decreased to $0.73 in Q1 2023 from $0.89 in Q1 2022, a decline of 17.9%[18]. - Net interest income after provision for credit losses was $16,925,000 for Q1 2023, compared to $18,170,000 for Q1 2022, a decrease of 6.9%[18]. - Total non-interest income fell to $3,569,000 in Q1 2023, down 15.7% from $4,232,000 in Q1 2022[18]. - Net income for the three months ended March 31, 2023, was $8.0 million, down $1.7 million or 17.9% from the same period in 2022[195]. - Earnings per common share on a fully diluted basis were $0.72 for the three months ended March 31, 2023, down $0.16 or 18.2% from $0.88 in the same period in 2022[195]. Asset and Loan Growth - Total assets increased to $2,811,820,000 as of March 31, 2023, up from $2,739,178,000 at December 31, 2022, representing a growth of 2.6%[17]. - Net loans reached $1,959,389,000, an increase of 3.2% from $1,897,951,000 at December 31, 2022[17]. - The loan portfolio as of March 31, 2023, amounted to $1,982,847,000, reflecting an increase from $1,914,674,000 at December 31, 2022, and $1,707,348,000 at March 31, 2022[55]. - Total deposits rose to $2,466,701,000, up 3.7% from $2,378,877,000 at the end of 2022[17]. - Total past-due loans as of March 31, 2023, were $1,946,000, with $737,000 being 90 days or more past due[56]. Credit Losses and Allowances - The total reserves for credit losses as of March 31, 2023, amounted to $23,458,000, with specific reserves of $388,000 and general reserves of $20,216,000[88]. - The allowance for credit losses (ACL) for held-to-maturity debt securities totaled $438,000, with $229,000 for state and political subdivisions and $209,000 for corporate securities as of March 31, 2023[48]. - The provision for credit losses for Q1 2023 was $550,000, compared to a provision of $1,750,000 for the year ended December 31, 2022, reflecting a decrease of approximately 69%[113]. - The allowance for credit losses on loans increased by $6,210,000 upon the adoption of the CECL methodology, impacting retained earnings by a net decrease of $6,277,000[169]. Interest Income and Expense - Total interest income for Q1 2023 was $28.9 million, an increase of $8.4 million or 40.8% compared to Q1 2022, while total interest expense rose by $9.5 million or 498.0% to $11.4 million[205]. - Net interest income for Q1 2023 was $17.5 million, a decrease of $1.1 million or 6.1% compared to $18.6 million in Q1 2022, with a net interest margin of 2.78%, down from 3.24%[205]. - The average yield on loans increased to 5.04% in Q1 2023 from 4.04% in Q1 2022, while the average yield on deposits rose to 2.10% from 0.37%[207]. Securities and Investments - The fair value of securities available for sale was $288,242,000, with unrealized losses of $(51,397,000) as of March 31, 2023[34]. - The total amortized cost of securities available for sale was $339,555,000 with an estimated fair value of $288,242,000 as of March 31, 2023[40]. - The total unrealized losses for debt securities available-for-sale as of March 31, 2023, amounted to $100,067,000, with $3,948,000 in losses for securities held for less than 12 months[44]. - The fair value of mortgage servicing rights was reported at $3,505,000 as of March 31, 2023, compared to $3,734,000 at December 31, 2022[138]. Dividends and Shareholder Equity - The company declared cash dividends of $0.34 per share for Q1 2023, compared to $0.32 per share in Q1 2022[21]. - The total shareholders' equity decreased to $228,461,000 as of March 31, 2023, from $228,923,000 at December 31, 2022[17]. - The book value per common share was $20.63 as of March 31, 2023, slightly down from $20.73 at December 31, 2022[17]. Operational Efficiency - Non-interest expense for the three months ended March 31, 2023, was $10.9 million, up $200,000 or 1.9% from the same period in 2022[198]. - Return on average tangible common equity was 15.64% for Q1 2023, down from 18.25% in Q1 2022, while the non-GAAP efficiency ratio increased to 49.98% from 45.42%[204]. - The expense related to the 401(k) plan was $326,000 for Q1 2023, slightly up from $324,000 in Q1 2022[119]. Market and Economic Conditions - The company’s primary market is the State of Maine, which is heavily reliant on tourism, indicating potential vulnerability to economic fluctuations[30]. - The company’s financial condition is influenced by various factors, including economic conditions and changes in interest rates, which may affect future performance[172].

Financial Performance and Risks - The company had $284.5 million in available for sale investment securities and $393.9 million in held to maturity investment securities as of December 31, 2022[87]. - The company’s net interest income could be adversely affected if interest rates on deposits increase faster than those on loans[86]. - A significant decline in market interest rates could lead to prepayment risk on higher-rate loans, negatively impacting the net interest margin[86]. - Loss of lower-cost funding sources could lead to margin compression and decreased net interest income[89]. - The company’s investment management revenues are directly tied to the asset values of investments, which may fluctuate due to market conditions[92]. - The company faces potential financial liability and reputational damage from claims and litigation, which could adversely affect its financial condition and results of operations[101]. - The company's reputation is crucial for attracting and retaining customers, and significant harm to its reputation could arise from various factors including employee misconduct and regulatory outcomes[102]. - The company may face lower return on equity compared to competitors due to high capital levels if capital management strategies are not effectively implemented[121]. - Fluctuations in operating and financial results may occur, impacting investor expectations and market performance[120]. - The company may face adverse effects on stock price due to macroeconomic concerns impacting the financial services industry[120]. Funding and Capital Management - The company relies primarily on commercial and retail deposits for funding, with potential adverse effects from decreased business activity or increased competition for funding[88]. - The company has complied with Basel III capital requirements well in advance of the completion date, as of December 31, 2022[114]. - Federal banking laws limit the amount of dividends that the Bank can pay, which could affect the company's ability to service debt and pay dividends on its common stock[120]. - The company’s ability to raise additional capital may be necessary if capital ratios fall below required minimums[122]. - Additional equity securities may be issued, potentially diluting book value and adversely affecting the market price of common stock[122]. - The company is not restricted from issuing additional shares, which could lead to dilution for existing shareholders[122]. Operational and Regulatory Risks - The company faces operational risks from the soundness of other financial institutions, which could adversely affect its funding transactions[91]. - The company is subject to risks related to technological changes and security breaches, which could impact its operations and reputation[97]. - The company operates in a highly regulated environment, and changes in laws and regulations could adversely affect its financial condition and results[112]. - The company’s internal control systems may have inherent limitations, potentially leading to undetected errors or fraud[94]. - Climate change poses immediate and long-term risks to the company's operations and financial performance, potentially increasing compliance and operational costs[103]. - Natural disasters could disrupt the company's operations and negatively impact the value of collateral for loans, leading to adverse economic effects[104]. - Changes in accounting standards and regulations could affect financial reporting and operational strategies[120]. Market and Competitive Environment - The average monthly trading volume of the company's common stock was 317,421 shares for the year ended December 31, 2022, indicating limited trading activity[117]. - The company's common stock price is subject to significant fluctuations due to various factors beyond its control, including economic conditions and interest rate changes[119]. - The company may face increased competition from larger financial institutions, which could impact its market share and income from financial products[116]. - Environmental, social, and governance (ESG) factors are increasingly influencing investment decisions, which could impact the company's stock price if ESG actions are deemed unsatisfactory[124]. - Increased compliance costs related to ESG oversight may raise overall operational costs for the company[124]. - Potential acquisitions may disrupt business operations and dilute shareholder value, with risks including payment of premiums over book and market values[125]. Management and Talent - The company’s ability to attract and retain qualified management is critical for future success, with competition for talent being intense[93].

Financial Performance - Net income for the nine months ended September 30, 2022, was $29,793,000, a 11.5% increase from $26,723,000 in the prior year[16]. - Basic earnings per common share increased to $2.73 for the nine months ended September 30, 2022, compared to $2.45 in the same period of 2021[16]. - Net interest income for the nine months ended September 30, 2022, was $56,682,000, up 16.6% from $48,607,000 in the same period of 2021[16]. - Non-interest income decreased to $13,027,000 for the nine months ended September 30, 2022, down from $14,584,000 in the previous year[16]. - Total non-interest expense increased to $32,193,000 for the nine months ended September 30, 2022, compared to $29,302,000 in the same period of 2021[16]. - The efficiency ratio for the nine months ended September 30, 2022, was 44.99%, slightly improved from 45.04% in the same period of 2021[204]. - The provision for loan losses for the first nine months of 2022 was $1.3 million, down from $1.6 million in the same period in 2021[189]. Asset and Loan Growth - Total assets increased to $2,735,065,000 as of September 30, 2022, up from $2,527,099,000 at December 31, 2021, representing an 8.2% growth[15]. - Net loans rose to $1,841,588,000, a 12.8% increase from $1,632,128,000 in the previous year[15]. - Total deposits reached $2,369,949,000, reflecting a 11.6% increase compared to $2,123,297,000 at the end of 2021[15]. - The loan portfolio totaled $1,857,975,000 as of September 30, 2022, an increase from $1,647,649,000 at December 31, 2021[42]. - The total number of common shares outstanding as of September 30, 2022, was 11,038,224, an increase from 10,992,950 shares as of September 30, 2021[19]. Investment and Securities - The company reported a net unrealized loss on securities available for sale of $45,943,000 for the nine months ended September 30, 2022[16]. - As of September 30, 2022, the amortized cost of investment securities was $343,599,000, with an estimated fair value of $283,268,000, reflecting unrealized losses of $60,335,000[30]. - The total investment securities held to maturity amounted to $381,906,000, with a fair value of $313,796,000, indicating unrealized losses of $68,196,000[30]. - The Company reported a significant increase in the fair value of mortgage-backed securities from $254,900,000 on December 31, 2021, to $229,178,000 by September 30, 2022, despite unrealized losses[30]. - The fair value of performing loans is estimated using market discount rates, with impaired loans showing specific allowances of $151,000, $441,000, and $457,000 at September 30, 2022, December 31, 2021, and September 30, 2021, respectively[150]. Loan Quality and Allowance for Losses - The total allowance for loan losses was $16,387,000 as of September 30, 2022, with specific reserves on loans evaluated individually at $420,000 and general reserves based on historical loss experience at $1,891,000[67]. - The allowance for loan losses as a percentage of total loans was 0.88% as of September 30, 2022, down from 0.94% at December 31, 2021, and 1.08% at September 30, 2021[72]. - Total past-due loans amounted to $1,461,000 as of September 30, 2022, with $867,000 in the 30-59 days category and $440,000 in the 90+ days category[43]. - Non-accrual loans as of September 30, 2022, totaled $1,860,000, a significant decrease from $5,602,000 as of December 31, 2021[45]. - The company reported that COVID-19 related loan modifications have all been resolved as of September 30, 2022[43]. Economic and Market Conditions - The Federal Reserve has aggressively increased short-term interest rates to combat inflation, which has reached levels not seen since the 1980s, potentially impacting the Company's operating results[27]. - The ongoing geopolitical instability, particularly due to the conflict between Russia and Ukraine, adds to economic uncertainty that may negatively impact the Company[27]. - The labor market remains tight, contributing to inflationary pressures that could affect the Company’s financial condition and results of operations[27]. - The Company noted ongoing uncertainties related to the COVID-19 pandemic and its potential economic ramifications, which could impact future financial results[174]. Employee Compensation and Benefits - The company recognized $610,000 in expense for restricted stock grants in the nine months ended September 30, 2022, with $994,000 remaining in unrecognized expense[103]. - The expense related to the 401(k) plan increased to $752,000 for the nine months ended September 30, 2022, from $593,000 in 2021, reflecting a growth of 26.9%[107]. - The expense for supplemental retirement benefits rose to $231,000 for the nine months ended September 30, 2022, compared to $126,000 in 2021, marking an increase of 83.3%[109]. - The accumulated postretirement benefit obligation decreased to $1,311,000 as of September 30, 2022, down from $1,472,000 in 2021, a reduction of 10.9%[111]. Derivatives and Interest Rate Management - The Company recognizes all derivatives at fair value, with changes in fair value recorded in earnings or other comprehensive income depending on the type of hedge[173]. - The Bank's interest rate risk management strategy aims to minimize fluctuations in earnings and cash flows due to interest rate volatility, utilizing derivative instruments for this purpose[117]. - The total notional amount of interest rate swaps as of September 30, 2022, was $30,000,000 with a fair value of $633,000[119]. - The Company has six customer loan swap arrangements in place with a total notional amount of $38,628,000 and a fair value of $5,365,000 as of September 30, 2022[122].

[Part I. Financial Information](index=4&type=section&id=Part%20I.%20Financial%20Information) [Selected Financial Data (Unaudited)](index=4&type=section&id=Selected%20Financial%20Data%20(Unaudited)) This section presents key financial performance and position data for the six months ended June 30, 2022 Selected Financial Data (in thousands, except per share and ratio data) | Metric | 6 Months Ended June 30, 2022 | 6 Months Ended June 30, 2021 | | :--- | :--- | :--- | | Net Income | $19,702 | $17,709 | | Basic Earnings per Share | $1.80 | $1.63 | | Diluted Earnings per Share | $1.79 | $1.61 | | Net Interest Margin Tax-Equivalent | 3.18% | 2.93% | | Total Assets | $2,630,354 | $2,450,443 | | Total Loans | $1,788,355 | $1,588,264 | [Item 1 – Financial Statements](index=5&type=section&id=Item%201%20%E2%80%93%20Financial%20Statements) This section contains the unaudited consolidated financial statements and accompanying detailed notes - The financial statements are unaudited and prepared in accordance with **GAAP** for interim financial information[26](index=26&type=chunk) - All significant intercompany transactions and balances are eliminated in consolidation[26](index=26&type=chunk) - The income reported for the 2022 period is not necessarily indicative of full-year results[26](index=26&type=chunk) [Report of Independent Registered Public Accounting Firm](index=5&type=section&id=Report%20of%20Independent%20Registered%20Public%20Accounting%20Firm) The independent accounting firm's review found no material modifications needed for GAAP conformity - The firm reviewed the interim consolidated financial information for the three-month and six-month periods ended June 30, 2022 and 2021[11](index=11&type=chunk) - Based on the review, **no material modifications** were found to be necessary for the interim financial information to conform with GAAP[11](index=11&type=chunk) - The review is substantially less in scope than an audit, and therefore, no opinion regarding the financial statements as a whole is expressed[12](index=12&type=chunk) [Consolidated Balance Sheets (Unaudited)](index=6&type=section&id=Consolidated%20Balance%20Sheets%20(Unaudited)) The balance sheets show asset and loan growth, offset by decreased shareholders' equity from security losses Consolidated Balance Sheets (in thousands) | Metric | June 30, 2022 | December 31, 2021 | June 30, 2021 | | :--- | :--- | :--- | :--- | | Total Assets | $2,630,354 | $2,527,099 | $2,450,443 | | Loans (net of allowance) | $1,772,154 | $1,632,128 | $1,571,230 | | Total Deposits | $2,252,022 | $2,123,297 | $1,961,321 | | Total Shareholders' Equity | $227,685 | $245,657 | $234,155 | | Net unrealized gain (loss) on securities available for sale | $(32,795) | $(1,718) | $1,190 | [Consolidated Statements of Income and Comprehensive Income (Unaudited)](index=7&type=section&id=Consolidated%20Statements%20of%20Income%20and%20Comprehensive%20Income%20(Unaudited)) The statements reflect increased net income driven by higher net interest income, despite a comprehensive loss Consolidated Statements of Income and Comprehensive Income (in thousands, except per share data) | Metric | 6 Months Ended June 30, 2022 | 6 Months Ended June 30, 2021 | 3 Months Ended June 30, 2022 | 3 Months Ended June 30, 2021 | | :--- | :--- | :--- | :--- | :--- | | Total Interest Income | $41,964 | $37,494 | $21,431 | $18,541 | | Total Interest Expense | $4,646 | $5,898 | $2,733 | $2,818 | | Net Interest Income | $37,318 | $31,596 | $18,698 | $15,723 | | Net Income | $19,702 | $17,709 | $9,997 | $8,787 | | Basic Earnings per common share | $1.80 | $1.63 | $0.91 | $0.81 | | Diluted Earnings per common share | $1.79 | $1.61 | $0.91 | $0.80 | | Other comprehensive income (loss) | $(30,917) | $(950) | $(12,583) | $362 | | Comprehensive income (loss) | $(11,215) | $16,759 | $(2,586) | $9,149 | [Consolidated Statements of Changes in Shareholders' Equity (Unaudited)](index=8&type=section&id=Consolidated%20Statements%20of%20Changes%20in%20Shareholders'%20Equity%20(Unaudited)) Shareholders' equity decreased in 2022 due to unrealized security losses offsetting net income Consolidated Statements of Changes in Shareholders' Equity (in thousands) | Metric | June 30, 2022 (6 Months) | June 30, 2021 (6 Months) | | :--- | :--- | :--- | | Balance at beginning of period (Dec 31, 2021/2020) | $245,657 | $223,726 | | Net income | $19,702 | $17,709 | | Net unrealized loss on securities available for sale, net of tax | $(31,077) | $(3,819) | | Cash dividends declared | $(7,278) | $(6,920) | | Equity compensation expense | $412 | $490 | | Balance at end of period | $227,685 | $234,155 | [Consolidated Statements of Cash Flows (Unaudited)](index=10&type=section&id=Consolidated%20Statements%20of%20Cash%20Flows%20(Unaudited)) Net cash increased as financing activities offset cash used in investing and reduced operating cash flow Consolidated Statements of Cash Flows (in thousands) | Metric | 6 Months Ended June 30, 2022 | 6 Months Ended June 30, 2021 | | :--- | :--- | :--- | | Net cash provided by operating activities | $19,255 | $32,341 | | Net cash used by investing activities | $(128,246) | $(107,971) | | Net cash provided by financing activities | $111,810 | $76,510 | | Net increase in cash and cash equivalents | $2,819 | $880 | | Cash and cash equivalents at end of period | $23,453 | $27,092 | [Notes to Consolidated Financial Statements](index=12&type=section&id=Notes%20to%20Consolidated%20Financial%20Statements) These notes detail accounting policies, financial instrument breakdowns, and risks from the economic environment [Note 1 – Basis of Presentation](index=12&type=section&id=Note%201%20%E2%80%93%20Basis%20of%20Presentation) This note clarifies the interim statements' GAAP basis and highlights economic risks like inflation - Unaudited consolidated financial statements are prepared in accordance with **GAAP** for interim financial information and instructions to Form 10-Q[26](index=26&type=chunk) - The Company's primary market is the State of Maine, which relies upon **tourism** for a significant percentage of its economic activity[28](index=28&type=chunk) - The nation's economy has entered an **inflationary phase**, with the Federal Reserve aggressively increasing short-term interest rates, which are intended to slow economic activity and risk a recession[29](index=29&type=chunk) [Note 2 – Investment Securities](index=13&type=section&id=Note%202%20%E2%80%93%20Investment%20Securities) This note details the investment portfolio, highlighting increased unrealized losses on securities Investment Securities Portfolio (in thousands) | Category | June 30, 2022 (Fair Value) | December 31, 2021 (Fair Value) | June 30, 2021 (Fair Value) | | :--- | :--- | :--- | :--- | | Securities available for sale | $301,737 | $320,566 | $306,247 | | Securities to be held to maturity | $335,950 | $375,327 | $383,454 | | Restricted equity securities | $4,720 | $5,365 | $8,839 | - At June 30, 2022, there were **773 securities with unrealized losses**, of which 83 had been temporarily impaired for 12 months or more, primarily due to changes in interest rates[36](index=36&type=chunk) - Management has the ability and intent to hold its impaired securities until a recovery of their amortized cost and does **not consider them other-than-temporarily impaired**[36](index=36&type=chunk) [Note 3 – Loans](index=17&type=section&id=Note%203%20%E2%80%93%20Loans) This note breaks down the loan portfolio by class and details non-accrual and restructured loans Loan Portfolio by Class (in thousands) | Loan Class | June 30, 2022 | December 31, 2021 | June 30, 2021 | | :--- | :--- | :--- | :--- | | Commercial Real Estate | $617,488 | $576,198 | $527,415 | | Commercial Construction | $128,927 | $79,365 | $65,794 | | Other Commercial | $275,714 | $264,570 | $298,747 | | Residential Term | $582,313 | $550,783 | $523,344 | | Total Loans | $1,788,355 | $1,647,649 | $1,588,264 | Nonaccrual Loans (in thousands) | Nonaccrual Loans | June 30, 2022 | December 31, 2021 | June 30, 2021 | | :--- | :--- | :--- | :--- | | Total | $4,812 | $5,602 | $6,981 | Troubled Debt Restructured (TDRs) (balance in thousands) | Troubled Debt Restructured (TDRs) | June 30, 2022 | December 31, 2021 | June 30, 2021 | | :--- | :--- | :--- | :--- | | Number of Loans | 53 | 60 | 72 | | Balance | $7,484 | $8,341 | $10,782 | [Note 4 – Allowance for Loan Losses](index=26&type=section&id=Note%204%20%E2%80%93%20Allowance%20for%20Loan%20Losses) This note details the methodology and composition of the allowance for loan losses (ALL) Allowance for Loan Losses (ALL) by Component (in thousands) | ALL Component | June 30, 2022 | December 31, 2021 | June 30, 2021 | | :--- | :--- | :--- | :--- | | Specific Reserves | $613 | $576 | $707 | | General Reserves | $1,966 | $1,856 | $2,052 | | Qualitative Factors | $11,772 | $11,307 | $12,930 | | Unallocated Reserves | $1,850 | $1,782 | $1,345 | | Total Allowance for Loan Losses | $16,201 | $15,521 | $17,034 | | ALL as % of Total Loans | 0.91% | 0.94% | 1.07% | - The qualitative portion of the allowance for loan losses **increased $465,000** between December 31, 2021, and June 30, 2022, due to changes in macroeconomic measures and portfolio volume[72](index=72&type=chunk) - **Net charge-offs** for the six months ended June 30, 2022, were **$220,000**, down from $269,000 in the same period in 2021[262](index=262&type=chunk) [Note 5 – Stock-Based Compensation](index=35&type=section&id=Note%205%20%E2%80%93%20Stock-Based%20Compensation) This note outlines the company's equity incentive plans and associated compensation expenses - The 2020 Equity Incentive Plan reserves **400,000 shares** of common stock for issuance in connection with stock options, restricted stock awards, and other equity-based awards[105](index=105&type=chunk) - As of June 30, 2022, 80,527 restricted shares remain restricted, with **$1,155,000 in unrecognized compensation expense**[106](index=106&type=chunk) Equity Compensation Expense (in thousands) | Metric | 6 Months Ended June 30, 2022 | 6 Months Ended June 30, 2021 | | :--- | :--- | :--- | | Equity compensation expense | $412 | $490 | [Note 6 – Common Stock](index=35&type=section&id=Note%206%20%E2%80%93%20Common%20Stock) This note states the proceeds from the sale of common stock for the six months ended June 30 Proceeds from Common Stock Sale (in thousands) | Metric | 6 Months Ended June 30, 2022 | 6 Months Ended June 30, 2021 | | :--- | :--- | :--- | | Proceeds from sale of common stock | $385 | $340 | [Note 7 – Earnings Per Share](index=36&type=section&id=Note%207%20%E2%80%93%20Earnings%20Per%20Share) This note provides the computation of basic and diluted earnings per share (EPS), showing an increase Earnings Per Share Calculation (Net Income in thousands) | Metric | 6 Months Ended June 30, 2022 | 6 Months Ended June 30, 2021 | 3 Months Ended June 30, 2022 | 3 Months Ended June 30, 2021 | | :--- | :--- | :--- | :--- | :--- | | Net Income | $19,702 | $17,709 | $9,997 | $8,787 | | Basic EPS | $1.80 | $1.63 | $0.91 | $0.81 | | Diluted EPS | $1.79 | $1.61 | $0.91 | $0.80 | [Note 8 – Employee Benefit Plans](index=36&type=section&id=Note%208%20%E2%80%93%20Employee%20Benefit%20Plans) This note describes the company's employee benefit plans and details the related expenses Employee Benefit Plan Expenses (in thousands) | Metric | 6 Months Ended June 30, 2022 | 6 Months Ended June 30, 2021 | | :--- | :--- | :--- | | 401(k) plan expense | $550 | $405 | | Deferred compensation expense | $154 | $84 | - The accumulated postretirement benefit obligation at June 30, 2022, was **$1,326,000**[114](index=114&type=chunk) [Note 9 - Other Comprehensive Income (Loss)](index=38&type=section&id=Note%209%20-%20Other%20Comprehensive%20Income%20(Loss)) This note summarizes activity in other comprehensive income, highlighting significant unrealized security losses Other Comprehensive Income (Loss) Activity (in thousands) | Metric | 6 Months Ended June 30, 2022 | 6 Months Ended June 30, 2021 | | :--- | :--- | :--- | | Net unrealized gain (loss) on securities available for sale, net of taxes | $(31,077) | $(3,819) | | Net unrealized gain on transferred securities, net of taxes | $14 | $20 | | Net unrealized gain (loss) on cash flow hedging derivative instruments, net of taxes | $146 | $2,849 | | Balance at end of period (securities available for sale) | $(32,795) | $1,190 | [Note 10 - Financial Derivative Instruments](index=38&type=section&id=Note%2010%20-%20Financial%20Derivative%20Instruments) This note explains the use of derivative instruments for risk management, not speculation - The Bank uses derivative financial instruments for **risk management purposes** and not for trading or speculative purposes[120](index=120&type=chunk) - As of June 30, 2022, the Bank had three outstanding cash flow hedges with notional principal amounts totaling **$30.0 million** and an unrealized gain of $146,000 (net of taxes)[123](index=123&type=chunk)[119](index=119&type=chunk) - The Bank also had six customer loan swap arrangements in place with a total notional value of **$77.8 million** at June 30, 2022[125](index=125&type=chunk)[126](index=126&type=chunk) - The Company has adopted **SOFR** as its replacement reference rate index for new transactions, with legacy LIBOR contracts expected to be amended in late 2022[127](index=127&type=chunk) [Note 11 – Mortgage Servicing Rights](index=40&type=section&id=Note%2011%20%E2%80%93%20Mortgage%20Servicing%20Rights) This note describes the accounting for mortgage servicing rights (MSRs), which are carried at lower of cost or fair value Mortgage Servicing Rights Activity (in thousands) | Metric | 6 Months Ended June 30, 2022 | 6 Months Ended June 30, 2021 | | :--- | :--- | :--- | | Servicing rights capitalized | $237 | $646 | | Servicing rights amortized | $291 | $319 | Mortgage Servicing Rights Valuation (in thousands) | Metric | June 30, 2022 | December 31, 2021 | June 30, 2021 | | :--- | :--- | :--- | :--- | | Fair value of servicing rights | $3,751 | $3,041 | $2,777 | | Carrying value | $2,644 | $2,671 | $2,548 | - There was **no impairment reserve** recorded for mortgage servicing rights as of June 30, 2022[131](index=131&type=chunk) [Note 12 – Income Taxes](index=41&type=section&id=Note%2012%20%E2%80%93%20Income%20Taxes) This note states the company is open to IRS audit for tax years 2019 through 2021 - The Company is currently open to audit by the IRS for the years ended **December 31, 2019 through 2021**[132](index=132&type=chunk) [Note 13 - Certificates of Deposit](index=41&type=section&id=Note%2013%20-%20Certificates%20of%20Deposit) This note provides a breakdown of certificates of deposit by amount, showing an overall increase Certificates of Deposit by Category (in thousands) | CD Category | June 30, 2022 | December 31, 2021 | June 30, 2021 | | :--- | :--- | :--- | :--- | | Certificates of deposit < $100,000 | $340,876 | $252,568 | $226,924 | | Certificates $100,000 to $250,000 | $282,180 | $258,211 | $310,068 | | Certificates $250,000 and over | $81,354 | $55,426 | $59,210 | | Total Certificates of Deposit | $704,410 | $566,205 | $596,202 | [Note 14 – Reclassifications](index=41&type=section&id=Note%2014%20%E2%80%93%20Reclassifications) This note indicates prior-year items were reclassified to conform with current presentation without material impact - Certain items from the prior year were reclassified in the consolidated financial statements to conform with the current year presentation[134](index=134&type=chunk) - These reclassifications did **not have a material impact** on the consolidated balance sheet or statement of income and comprehensive income presentations[134](index=134&type=chunk) [Note 15 – Fair Value Disclosures](index=42&type=section&id=Note%2015%20%E2%80%93%20Fair%20Value%20Disclosures) This note provides fair value disclosures for financial instruments, categorized by input observability levels - Fair value measurements are grouped into three levels: **Level 1** (quoted prices), **Level 2** (observable inputs), and **Level 3** (unobservable inputs)[136](index=136&type=chunk)[137](index=137&type=chunk)[138](index=138&type=chunk) - Investment securities, mortgage servicing rights, time deposits, and borrowed funds are generally classified as **Level 2**[139](index=139&type=chunk)[143](index=143&type=chunk)[144](index=144&type=chunk)[145](index=145&type=chunk) - Loans are generally classified as **Level 3**, except for certain collateral-dependent impaired loans which are classified as Level 2[140](index=140&type=chunk) Assets Measured at Fair Value on a Recurring Basis (in thousands) | Metric | June 30, 2022 (Total Fair Value) | | :--- | :--- | | Securities available for sale | $301,737 | | Interest rate swap agreements | $185 | | Customer loan interest swap agreements | $3,440 | | Total assets measured at fair value on a recurring basis | $305,362 | [Note 16 – Impact of Recently Issued Accounting Standards](index=49&type=section&id=Note%2016%20%E2%80%93%20Impact%20of%20Recently%20Issued%20Accounting%20Standards) This note discusses the anticipated impact of new accounting standards, particularly CECL - ASU No 2016-13 (**CECL**) will be effective for the Company on **January 1, 2023**, and is anticipated to have a **material impact** upon adoption[163](index=163&type=chunk) - ASU No 2022-01 (Derivatives and Hedging) and ASU No 2022-02 (TDRs and Vintage Disclosures) are **not expected to have a material impact** on the consolidated financial statements[164](index=164&type=chunk)[165](index=165&type=chunk) - The Company qualifies as a **Smaller Reporting Company**, which changed the effective implementation date for CECL to fiscal years beginning after December 15, 2022[163](index=163&type=chunk) [Item 2 – Management's Discussion and Analysis of Financial Condition and Results of Operations](index=50&type=section&id=Item%202%20%E2%80%93%20Management's%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) Management discusses financial performance, condition, risk management, and critical accounting policies - **Net income** for the six months ended June 30, 2022, was **$19.7 million**, up $2.0 million or 11.3% from the same period in 2021, primarily driven by growth in net interest income[185](index=185&type=chunk)[186](index=186&type=chunk) - **Total assets increased $103.3 million** or 4.1% year-to-date, with the loan portfolio increasing $140.7 million or 8.5% in the first six months of 2022[192](index=192&type=chunk) - Asset quality remains strong and stable, with **non-performing assets at 0.18%** of total assets as of June 30, 2022, down from 0.30% a year ago[190](index=190&type=chunk) [Forward-Looking Statements](index=50&type=section&id=Forward-Looking%20Statements) This section cautions readers about forward-looking statements and associated risks and uncertainties - Forward-looking statements are identified by words such as 'believe,' 'expect,' 'anticipate,' 'intend,' 'estimate,' 'assume,' and 'outlook'[167](index=167&type=chunk) - **Actual results may differ materially** from anticipated results due to known and unknown risks, uncertainties, and other factors beyond the Company's control[167](index=167&type=chunk) - Factors causing differences include changes in economic conditions, interest rates, credit quality, competition, and the **COVID-19 pandemic**[168](index=168&type=chunk) [Critical Accounting Policies](index=50&type=section&id=Critical%20Accounting%20Policies) This section outlines accounting policies requiring significant management estimates and assumptions - The **Allowance for Loan Losses** requires the most significant estimates and assumptions, based on portfolio size, quality trends, historical losses, and economic conditions[171](index=171&type=chunk) - The valuation of **Mortgage Servicing Rights** is a critical policy, with the anticipated loan prepayment rate being the most important assumption[174](index=174&type=chunk) - **Fair Value of Securities** is estimated by independent pricing services and validated quarterly, subject to changes in market interest rates and risk tolerance[175](index=175&type=chunk) - **Other-Than-Temporary Impairment on Securities** is evaluated quarterly based on fair value declines, issuer's financial condition, and management's intent to retain the investment[176](index=176&type=chunk) [Use of Non-GAAP Financial Measures](index=52&type=section&id=Use%20of%20Non-GAAP%20Financial%20Measures) This section explains the use of non-GAAP measures to enhance comparability and understanding of performance - Non-GAAP measures are used to provide a greater understanding of ongoing operations and **enhance comparability** of results with prior periods[180](index=180&type=chunk) - **Tax-equivalent net interest income** adjusts for tax-exempt interest income, improving clarity for financial analysis[181](index=181&type=chunk) - The **non-GAAP efficiency ratio** excludes securities losses/gains and adds the tax-equivalent adjustment to net interest income[182](index=182&type=chunk) - **Tangible common equity ratios** are used by management, regulators, and analysts to compare capital adequacy, excluding goodwill and other intangible assets[183](index=183&type=chunk) [Executive Summary](index=53&type=section&id=Executive%20Summary) The company reported record earnings for the first half of 2022, driven by net interest income growth Key Performance Metrics | Metric | 6 Months Ended June 30, 2022 | 6 Months Ended June 30, 2021 | | :--- | :--- | :--- | | Net Income | $19.7 million | $17.7 million | | Diluted EPS | $1.79 | $1.61 | | Tax-equivalent Net Interest Income | $38.4 million | $32.8 million | | Tax-equivalent Net Interest Margin | 3.18% | 2.93% | | Non-GAAP Efficiency Ratio | 44.45% | 45.14% | - Total assets increased **$103.3 million (4.1%)** year-to-date, and the loan portfolio grew **$140.7 million (8.5%)** in the first six months of 2022[192](index=192&type=chunk) - Non-performing assets stood at **0.18% of total assets** as of June 30, 2022, down from 0.30% a year ago, indicating strong asset quality[190](index=190&type=chunk) [Net Interest Income](index=54&type=section&id=Net%20Interest%20Income) Net interest income increased significantly due to earning asset growth and reduced funding costs Net Interest Income Summary (in millions) | Metric | 6 Months Ended June 30, 2022 | 6 Months Ended June 30, 2021 | | :--- | :--- | :--- | | Total Interest Income | $42.0 | $37.5 | | Total Interest Expense | $4.6 | $5.9 | | Net Interest Income | $37.3 | $31.6 | | Net Interest Margin (tax-equivalent) | 3.18% | 2.93% | - The increase in net interest income was primarily attributable to **growth in earning assets** and **reduced funding costs**[195](index=195&type=chunk) - Interest income included **$137,000** in net origination fees from PPP loans in Q2 2022, down from $641,000 in Q2 2021[198](index=198&type=chunk) [Average Daily Balance Sheets](index=57&type=section&id=Average%20Daily%20Balance%20Sheets) Average daily balances show growth in total assets, net loans, and total deposits Average Daily Balance Sheets (in thousands) | Metric | 6 Months Ended June 30, 2022 | 6 Months Ended June 30, 2021 | | :--- | :--- | :--- | | Average Total Assets | $2,560,362 | $2,381,273 | | Average Net Loans | $1,699,472 | $1,497,791 | | Average Total Deposits | $2,171,151 | $1,896,524 | | Average Total Shareholders' Equity | $239,267 | $230,760 | [Non-Interest Income](index=58&type=section&id=Non-Interest%20Income) Non-interest income decreased due to a significant decline in mortgage banking revenues - Non-interest income for the six months ended June 30, 2022, was **$8.3 million**, a decrease of $1.9 million or 18.6% compared to the same period in 2021[205](index=205&type=chunk) - **Mortgage banking revenue decreased by $2.4 million** or 73.6%, primarily due to a significant year-to-year decrease in mortgage refinance activity[205](index=205&type=chunk) - Revenue at First National Wealth Management **increased $209,000 (9.4%)**, debit card revenue was up $213,000 (8.4%), and service charge revenue was up 25.7%[205](index=205&type=chunk) [Non-Interest Expense](index=58&type=section&id=Non-Interest%20Expense) Non-interest expense increased, mainly due to higher salaries, benefits, and occupancy expenses - Non-interest expense for the six months ended June 30, 2022, was **$20.8 million**, an increase of $1.5 million or 7.5% compared to the same period in 2021[206](index=206&type=chunk) - Increases were observed in **salaries and employee benefits**, as well as occupancy expense[206](index=206&type=chunk) - The Company's non-GAAP **efficiency ratio stood at 44.45%** for the six months ended June 30, 2022, down from 45.14% for the same period in 2021[206](index=206&type=chunk) [Income Taxes](index=58&type=section&id=Income%20Taxes) Income taxes on operating earnings increased for the first six months of 2022 - Income taxes on operating earnings were **$4.2 million** for the six months ended June 30, 2022, up $530,000 from the same period in 2021[207](index=207&type=chunk) [Investments](index=58&type=section&id=Investments) The investment portfolio's carrying value decreased, with significant unrealized losses from rising interest rates - The carrying value of the Company's investment portfolio **decreased by $9.8 million** between December 31, 2021, and June 30, 2022[208](index=208&type=chunk) - The portfolio is primarily invested in U.S. Government agency securities, mortgage-backed securities, and tax-exempt obligations of states and political subdivisions[210](index=210&type=chunk) - The remaining unamortized balance of net unrealized losses for securities transferred from available for sale to held to maturity was **$73,000** (net of taxes) at June 30, 2022[211](index=211&type=chunk) [Impaired Securities](index=60&type=section&id=Impaired%20Securities) Unrealized losses on securities increased substantially due to rising rates but are not deemed other-than-temporarily impaired Temporarily Impaired Securities (in thousands) | Metric | June 30, 2022 (Fair Value) | June 30, 2022 (Unrealized Losses) | | :--- | :--- | :--- | | Temporarily impaired securities | $554,911 | $(85,708) | | U.S. Government-sponsored agencies | $51,778 | $(12,344) | | Mortgage-backed securities | $286,288 | $(38,404) | | State and political subdivisions | $194,851 | $(34,328) | - The increase in unrealized losses since 2021 year-end is a result of the **significant increase in market interest rates** during the period[217](index=217&type=chunk) - Management concluded that these securities were **not other-than-temporarily impaired** based on the issuer's performance and the intent to hold them until recovery[222](index=222&type=chunk)[223](index=223&type=chunk) [Federal Home Loan Bank Stock](index=62&type=section&id=Federal%20Home%20Loan%20Bank%20Stock) The company's investment in Federal Home Loan Bank (FHLB) stock decreased and is reported at cost Investment in FHLB Stock (in thousands) | Metric | June 30, 2022 | December 31, 2021 | June 30, 2021 | | :--- | :--- | :--- | :--- | | Investment in FHLB stock | $3,700 | $4,300 | $7,800 | - FHLB stock is a non-marketable equity security and is **reported at cost**[228](index=228&type=chunk) - **No impairment losses** have been recorded through June 30, 2022[228](index=228&type=chunk) [Loans and Loans Held for Sale](index=62&type=section&id=Loans%20and%20Loans%20Held%20for%20Sale) The loan portfolio expanded significantly, driven by commercial real estate and construction loans Loan Portfolio Growth (in thousands) | Metric | June 30, 2022 | December 31, 2021 | | :--- | :--- | :--- | | Total loans | $1,788,355 | $1,647,649 | | Commercial loans increase | $102,000 | N/A | | Loans held for sale | $689 | $835 | - Loan growth in the first six months of 2022 was centered in **commercial real estate and construction loans**, up $90.9 million[192](index=192&type=chunk) - At June 30, 2022, loan concentrations exceeding 10% of total loans included **hotels ($200.5 million, 11.21%)** and lessors of residential buildings ($181.3 million, 10.13%)[246](index=246&type=chunk) - The loan portfolio at June 30, 2022, was comprised of **43.1% fixed-rate loans** and **56.9% adjustable-rate loans**[245](index=245&type=chunk) [Credit Risk Management and Allowance for Loan Losses](index=64&type=section&id=Credit%20Risk%20Management%20and%20Allowance%20for%20Loan%20Losses) Credit risk is managed through systematic evaluation and a four-element allowance for loan losses (ALL) methodology - Credit risk is managed by evaluating the borrower's risk profile, repayment sources, and collateral, with primary reliance on **borrower cash flow**[247](index=247&type=chunk) - The allowance for loan losses (ALL) consists of **specific, general, qualitative, and unallocated reserves**[250](index=250&type=chunk) Allowance for Loan Losses Summary (in thousands) | Metric | June 30, 2022 | December 31, 2021 | June 30, 2021 | | :--- | :--- | :--- | :--- | | Total Allowance for Loan Losses | $16,201 | $15,521 | $17,034 | | ALL as a percentage of total loans | 0.91% | 0.94% | 1.07% | | Net loans charged off (6 months) | $220 | $357 (year) | $269 (6 months) | [Non-Performing Loans and Troubled Debt Restructured](index=69&type=section&id=Non-Performing%20Loans%20and%20Troubled%20Debt%20Restructured) Nonperforming loans (NPLs) and Troubled Debt Restructured (TDRs) both decreased, reflecting improved asset quality Nonperforming Loans (NPLs) (in thousands) | Metric | June 30, 2022 | December 31, 2021 | June 30, 2021 | | :--- | :--- | :--- | :--- | | Total Nonperforming Loans | $4,812 | $5,602 | $6,981 | | Nonperforming loans as % of total loans | 0.27% | 0.35% | 0.44% | Troubled Debt Restructured (TDRs) (balance in thousands) | Metric | June 30, 2022 | December 31, 2021 | June 30, 2021 | | :--- | :--- | :--- | :--- | | TDRs (Number of Loans) | 53 | 60 | 72 | | TDRs (Balance) | $7,484 | $8,341 | $10,782 | - As of June 30, 2022, **81.2% of TDRs were performing** under modified terms, 17.9% were on nonaccrual, and 0.86% were past due and accruing[271](index=271&type=chunk)[273](index=273&type=chunk) [Impaired Loans](index=71&type=section&id=Impaired%20Loans) Impaired loans decreased, though the specific allowance for impaired commercial loans increased Impaired Loans Summary (in thousands) | Metric | June 30, 2022 | December 31, 2021 | June 30, 2021 | | :--- | :--- | :--- | :--- | | Total Impaired Loans | $10,955 | $12,052 | $15,578 | - The number of impaired loans **decreased to 92** at June 30, 2022, from 107 at December 31, 2021[277](index=277&type=chunk) - The specific allowance for impaired commercial loans **increased from $439,000 to $510,000** as of June 30, 2022, reflecting fair value deficiencies[277](index=277&type=chunk) [Past Due Loans](index=72&type=section&id=Past%20Due%20Loans) The overall loan delinquency ratio improved, though loans 90 days delinquent and accruing increased slightly Past Due Loans Summary (in thousands) | Metric | June 30, 2022 | December 31, 2021 | June 30, 2021 | | :--- | :--- | :--- | :--- | | Total Past Due Loans | $3,147 | $4,345 | $3,420 | | Overall loan delinquency ratio | 0.18% | 0.26% | 0.22% | | Loans 90+ days past due and accruing | $76 | $32 | $104 | [Potential Problem Loans and Loans in Process of Foreclosure](index=72&type=section&id=Potential%20Problem%20Loans%20and%20Loans%20in%20Process%20of%20Foreclosure) Potential problem loans emerged in 2022, and six loans were in the process of foreclosure - Potential problem loans totaled **$111,000** (0.006% of total loans) across two loans at June 30, 2022, compared to none at December 31, 2021[280](index=280&type=chunk) - As of June 30, 2022, there were **six loans in the process of foreclosure** with a total balance of $727,000[281](index=281&type=chunk) - The Bank follows specific residential and commercial foreclosure processes, which are subject to annual review by its internal audit provider[281](index=281&type=chunk)[282](index=282&type=chunk)[283](index=283&type=chunk) [Other Real Estate Owned](index=73&type=section&id=Other%20Real%20Estate%20Owned) Other Real Estate Owned (OREO) assets totaled $51,000 across two properties with no loss allowance OREO Summary (in thousands) | Metric | June 30, 2022 | December 31, 2021 | June 30, 2021 | | :--- | :--- | :--- | :--- | | OREO balance | $51 | $0 | $224 | | Number of properties | 2 | 0 | 1 | - **No allowance for losses** was recorded for OREO at June 30, 2022[284](index=284&type=chunk) [Liquidity Management](index=74&type=section&id=Liquidity%20Management) The company maintains strong liquidity with substantial primary and contingent funding sources - Primary sources of liquidity totaled **$964.0 million** at June 30, 2022[287](index=287&type=chunk) - Contingent sources of liquidity totaled **$482.0 million** at June 30, 2022[287](index=287&type=chunk) - Deposits funded **84.8% of total average assets** in the first six months of 2022, up from 79.6% a year ago[288](index=288&type=chunk) - The Bank has established collateralized borrowing capacity with the **FRB of Boston and FHLB**, as well as Fed Funds lines with correspondent banks[289](index=289&type=chunk) [Deposits](index=74&type=section&id=Deposits) Total deposits increased, driven by a significant rise in certificates of deposit - Total deposits **increased by $128.7 million** or 6.1% in the first six months of 2022 from December 31, 2021 levels[290](index=290&type=chunk) - Low-cost deposits (demand, NOW, and savings accounts) **decreased by $8.9 million** or 0.7% year-to-date[290](index=290&type=chunk) - Certificates of deposit **increased $138.2 million** or 24.4% year-to-date[290](index=290&type=chunk) - Estimated uninsured deposits totaled **$222.8 million** at June 30, 2022[290](index=290&type=chunk) [Borrowed Funds](index=74&type=section&id=Borrowed%20Funds) Borrowed funds decreased due to a reduction in customer repurchase agreements and FHLB repayments - Borrowed funds **decreased $9.8 million** or 7.2% during the six months ended June 30, 2022, from December 31, 2021, all in customer repurchase agreements[291](index=291&type=chunk) - Between June 30, 2021, and June 30, 2022, borrowed funds **decreased by $102.1 million** or 44.6%, primarily from repayment of various FHLB borrowings[291](index=291&type=chunk) [Shareholders' Equity](index=74&type=section&id=Shareholders'%20Equity) Shareholders' equity decreased due to unrealized security losses, though the company remains well-capitalized Shareholders' Equity Summary (in millions) | Metric | June 30, 2022 | December 31, 2021 | | :--- | :--- | :--- | | Shareholders' equity | $227.7 | $245.7 | | Net unrealized loss on available-for-sale securities, net of tax | $32.8 | $1.7 | | Dividend payout ratio (6 months) | 36.67% | 38.65% | - The Company's total risk-based capital ratio was **13.63%** as of June 30, 2022, solidly above the well-capitalized threshold of 10.0%[193](index=193&type=chunk)[297](index=297&type=chunk) - The Bank's capital plan projects it will **remain well-capitalized** throughout a five-year horizon, even under various stress scenarios[297](index=297&type=chunk) [Off-Balance Sheet Financial Instruments and Contractual Obligations](index=75&type=section&id=Off-Balance%20Sheet%20Financial%20Instruments%20and%20Contractual%20Obligations) The company uses off-balance sheet derivatives for risk management and has various contractual obligations - At June 30, 2022, the Bank had three outstanding off-balance sheet derivative instruments designated as cash flow hedges, with notional principal amounts totaling **$30.0 million**[299](index=299&type=chunk) - The Bank had six customer loan swap agreements in place with a total notional value of **$77.8 million** as of June 30, 2022[301](index=301&type=chunk) Contractual Obligations Summary | Obligation Type | Total (Thousands) | Less than 1 year (Thousands) | 1-3 years (Thousands) | 3-5 years (Thousands) | More than 5 years (Thousands) | | :--- | :--- | :--- | :--- | :--- | :--- | | Borrowed funds | $126,588 | $126,501 | $87 | $— | $— | | Operating leases | $919 | $113 | $207 | $154 | $445 | | Certificates of deposit | $704,410 | $437,726 | $183,394 | $83,290 | $— | | Total | $831,917 | $564,340 | $183,688 | $83,444 | $445 | [Item 3 – Quantitative and Qualitative Disclosures About Market Risk](index=77&type=section&id=Item%203%20%E2%80%93%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk) This section details market risk management, focusing on interest rate risk analysis and modeling - The Company's market risk is composed primarily of **interest rate risk**, managed by the Bank's Asset/Liability Committee (ALCO)[303](index=303&type=chunk) - Interest rate risk is monitored through **static gap analysis** and **earnings simulation modeling**[304](index=304&type=chunk) - The Company's cumulative one-year gap at June 30, 2022, was **(2.93)% of total assets**, compared to 7.09% at December 31, 2021[305](index=305&type=chunk) - Earnings simulation projects net interest income would be unchanged if rates decrease by 1.0% and decrease by approximately **3.8% if rates increase by 2.0%**, both within ALCO's policy limits[309](index=309&type=chunk)[310](index=310&type=chunk) [Market-Risk Management](index=77&type=section&id=Market-Risk%20Management) Market risk, primarily interest rate risk, is managed by the ALCO through policies and monitoring - Market risk is defined as the risk of loss arising from adverse changes in the fair value of financial instruments due to **changes in interest rates**[303](index=303&type=chunk) - The Bank's **ALCO** is responsible for reviewing the interest rate sensitivity position and establishing policies to monitor and limit exposure to interest rate risk[303](index=303&type=chunk) [Asset/Liability Management](index=77&type=section&id=Asset/Liability%20Management) Asset/liability management aims to maximize net interest income within established interest rate risk limits - The primary goal of asset/liability management is to **maximize net interest income** within the interest rate risk limits set by ALCO[304](index=304&type=chunk) - The Company's cumulative one-year gap at June 30, 2022, was **(2.93)% of total assets**, compared to 7.09% of total assets at December 31, 2021[305](index=305&type=chunk) - The earnings simulation model projects net interest income changes are **within ALCO's policy limit of 10.0%** for various rate scenarios[309](index=309&type=chunk)[310](index=310&type=chunk) [Interest Rate Risk Management](index=78&type=section&id=Interest%20Rate%20Risk%20Management) The company uses financial instruments like interest rate swaps to manage interest rate sensitivity - A variety of financial instruments, including investment securities and **interest rate swaps**, are used to manage interest rate sensitivity[312](index=312&type=chunk) - As of June 30, 2022, the Company was using interest rate swaps for interest rate risk management[312](index=312&type=chunk) - An independent consultant periodically reviews the Company's interest rate risk position, and Management believes the current level of interest risk is **acceptable**[313](index=313&type=chunk) [Cessation of LIBOR](index=78&type=section&id=Cessation%20of%20LIBOR) The company is actively managing the transition away from LIBOR by adopting SOFR for new transactions - Certain USD denominated LIBOR indices ceased publication after December 31, 2021, with other tenors expected to continue until **June 30, 2023**[314](index=314&type=chunk) - The Company has adopted **SOFR** as its replacement reference rate index for new transactions[314](index=314&type=chunk) - Necessary actions to amend legacy LIBOR-tied customer loan interest rate swap contracts are anticipated to be undertaken in **late 2022**[314](index=314&type=chunk) [Item 4 - Controls and Procedures](index=79&type=section&id=Item%204%20-%20Controls%20and%20Procedures) Management concluded that disclosure controls and procedures were effective as of June 30, 2022 - The Company's management, including the CEO and CFO, concluded that disclosure controls and procedures were **effective** at the reasonable assurance level as of June 30, 2022[315](index=315&type=chunk) - **No material changes** to the Company's internal control over financial reporting occurred during the quarter ended June 30, 2022[315](index=315&type=chunk) [Part II. Other Information](index=80&type=section&id=Part%20II.%20Other%20Information) [Item 1 – Legal Proceedings](index=80&type=section&id=Item%201%20%E2%80%93%20Legal%20Proceedings) The company was not involved in any material legal proceedings during the reporting period - The Company was **not involved in any legal proceedings** requiring disclosure under Item 103 of Regulation S-K during the reporting period[316](index=316&type=chunk) [Item 1a – Risk Factors](index=80&type=section&id=Item%201a%20%E2%80%93%20Risk%20Factors) This section updates risk factors, emphasizing ongoing uncertainties from the COVID-19 pandemic - Ongoing effects of **COVID-19** on the broader economy and the markets served remain uncertain[318](index=318&type=chunk) - Potential adverse impacts include declines in loan demand, reduced consumer spending, and **declines in credit quality** leading to increased provisions for loan losses[319](index=319&type=chunk) - The significant contribution of **tourism and hospitality** businesses to the State of Maine's economy may result in a disproportionate effect on the Company[318](index=318&type=chunk) [Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds](index=82&type=section&id=Item%202%20%E2%80%93%20Unregistered%20Sales%20of%20Equity%20Securities%20and%20Use%20of%20Proceeds) This section reports the company's repurchases of common stock during the first half of 2022 Common Stock Repurchases | Metric | 6 Months Ended June 30, 2022 | | :--- | :--- | | Total shares purchased | 8,640 | | Average Price Per Share | $31.15 | [Item 3 – Default Upon Senior Securities](index=82&type=section&id=Item%203%20%E2%80%93%20Default%20Upon%20Senior%20Securities) This section states there were no defaults upon senior securities during the reporting period - **No defaults** upon senior securities were reported during the period[321](index=321&type=chunk) [Item 4 – Other Information](index=82&type=section&id=Item%204%20%E2%80%93%20Other%20Information) This section indicates there is no other information to report under this item - No other information to report under this item[322](index=322&type=chunk)[323](index=323&type=chunk) [Item 5 – Exhibits](index=83&type=section&id=Item%205%20%E2%80%93%20Exhibits) This section lists the exhibits filed with the Form 10-Q, including corporate amendments and certifications - Exhibits include amendments to the Registrant's **Articles of Incorporation and Bylaws**[325](index=325&type=chunk)[326](index=326&type=chunk) - The list includes Director and Executive Split Dollar Insurance Plans and amendments to Restricted Stock Agreements[327](index=327&type=chunk)[328](index=328&type=chunk) - **Certifications of the Chief Executive Officer and Chief Financial Officer** (Exhibits 31.1, 31.2, 32.1, 32.2) are included[330](index=330&type=chunk) [Signatures](index=84&type=section&id=Signatures) This section contains the certifying signatures of the CEO and CFO - The report is signed by **Tony C. McKim**, President & Chief Executive Officer[333](index=333&type=chunk) - The report is signed by **Richard M. Elder**, Executive Vice President & Chief Financial Officer[333](index=333&type=chunk)

Financial Performance - Net income for the quarter was $9,705,000, up from $9,546,000 in the same quarter last year, showing a growth of 1.67%[16] - Net income for the three months ended March 31, 2022, was $9,705,000, an increase of 8.8% compared to $8,922,000 for the same period in 2021[21] - Basic earnings per common share increased to $0.89, compared to $0.87 in the previous quarter, reflecting a growth of 2.3%[16] - Basic earnings per share (EPS) for the three months ended March 31, 2022, was $0.89, compared to $0.82 for the same period in 2021, reflecting an increase of 8.5%[106] - The company reported a comprehensive income of $7,610,000 for the three months ended March 31, 2022, compared to a comprehensive income of $8,922,000 for the same period in 2021[18] Asset and Loan Growth - Total assets increased to $2,548,607,000 as of March 31, 2022, compared to $2,527,099,000 at December 31, 2021, reflecting a growth of 0.85%[15] - Net loans rose to $1,691,582,000, up from $1,632,128,000 at the end of 2021, marking an increase of 3.6%[15] - The company experienced a net increase in loans of $59,904,000 during the three months ended March 31, 2022, compared to an increase of $40,195,000 in the same period of 2021[21] - The total loan portfolio amounted to $1,707,348,000, an increase from $1,647,649,000 as of December 31, 2021, and $1,516,772,000 as of March 31, 2021[43] Deposits and Equity - Total deposits reached $2,158,539,000, a rise from $2,123,297,000, indicating a growth of 1.66%[15] - Total shareholders' equity increased to $233,646,000 as of March 31, 2022, up from $228,184,000 at the end of the previous quarter[18] - Cash dividends declared were $3,520,000 for the three months ended March 31, 2022, compared to $3,394,000 for the same period in 2021, reflecting a dividend per share increase from $0.31 to $0.32[21] Interest Income and Expenses - Net interest income for the quarter was $18,620,000, compared to $17,696,000 in the previous quarter, representing an increase of 5.2%[16] - Net interest income rose to $18.6 million in Q1 2022, an increase of $2.7 million or 17.3% compared to $15.9 million in Q1 2021[193] - Non-interest income decreased to $4,232,000 from $4,799,000 in the previous quarter, a decline of 11.8%[16] - Non-interest income for Q1 2022 was $4.2 million, down $1.1 million or 20.1% from Q1 2021[186] - Non-interest expense was $10,650,000, down from $12,846,000 in the previous quarter, indicating a reduction of 17.1%[16] - Non-interest expense increased by 7.9% to $10.7 million in Q1 2022 compared to $9.9 million in Q1 2021, driven by higher salaries and employee benefits[203] Loan Losses and Allowances - The allowance for loan losses was $15,766,000, slightly up from $15,521,000 at the end of 2021, an increase of 1.58%[15] - The allowance for loan losses as of March 31, 2022, totaled $15,766,000, which includes specific reserves of $712,000 and general reserves of $1,878,000[68] - The allowance for loan losses as a percentage of total loans was 0.92% as of March 31, 2022, down from 0.94% at December 31, 2021, and 1.09% as of March 31, 2021[73] - The provision for loan losses decreased to $450,000 in Q1 2022 from $525,000 in Q1 2021, reflecting ongoing considerations of COVID-19 uncertainties[189] Securities and Investments - The total amortized cost of investment securities was $338,408,000, with an estimated fair value of $313,015,000, reflecting unrealized losses of $25,837,000[31] - The fair value of securities pledged to secure public deposits and other purposes was $288,761,000 as of March 31, 2022, compared to $297,456,000 at December 31, 2021[34] - The company reported a net unrealized loss on securities available for sale of $18,343,000 for the three months ended March 31, 2022, compared to a loss of $4,790,000 for the same period in 2021[22] - The total fair value of securities temporarily impaired as of March 31, 2022, was $502,089,000, with total unrealized losses amounting to $51,507,000[36] Risk Management and Loan Quality - Non-performing assets were 0.20% of total assets as of March 31, 2022, down from 0.30% a year earlier[188] - Total past-due loans were 0.25% of total loans as of March 31, 2022, down from 0.37% a year earlier[188] - The company maintains a rigorous risk rating system with eight levels, where loans rated "1" are characterized by excellent capacity to pay principal and interest[86] - The company employs management's judgment in determining the level of losses on existing loans based on internal reviews and anticipated economic conditions[84] Changes in Accounting and Regulations - The company is in the late stages of implementing ASU No. 2016-13, which will require recognition of expected credit losses based on historical experience and forecasted conditions[160] - The company has formed an implementation committee to address the changes required by the new accounting standards[160]

Employee Management and Development - As of December 31, 2021, the company had 269 employees, with a full-time equivalency of 267 employees, primarily located in Maine[66] - The company emphasizes employee development, providing extensive training and development opportunities, including participation in industry seminars and advanced education programs[68] - The company has a comprehensive annual incentive compensation plan aimed at attracting and retaining employees, which has been in place since 1994[67] - The company views succession planning as a priority, updating plans annually for all management roles to identify short and long-term successors[71] Financial Condition and Risks - The company had $320.6 million in available-for-sale investment securities and $370.0 million in held-to-maturity investment securities as of December 31, 2021[89] - The company relies on commercial and retail deposits for funding, with a significant risk of losing low-cost funding sources, which could lead to margin compression and decreased net interest income[91] - The company faces risks related to interest rate volatility, which could materially affect its financial condition and results of operations[88] - The company’s loan portfolio is largely secured by real estate collateral, making it vulnerable to declines in real estate values in its primary market area[95] - The company’s ability to fund operations may be jeopardized by illiquidity, which could have a substantial negative effect on its financial condition[90] - Economic conditions, including the impact of COVID-19, have created uncertainty regarding the company's loan portfolio and potential charge-offs[109] - The company is subject to risks associated with global economic events, which could negatively impact liquidity and financial condition[110] - The transition from LIBOR to alternative reference rates like SOFR may disrupt financial markets and impact the company's financial condition[111] Investment and Market Risks - The company’s investment management revenues are directly tied to the asset values of investments managed for clients, which may fluctuate due to market conditions[96] - The company faces risks of stock price fluctuations due to various factors, including quarterly operating results and changes in investor expectations[119] - The market price of the company's common stock is subject to volatility due to extreme price and volume fluctuations in the stock market[120] Regulatory and Compliance Issues - The company faces increased regulatory scrutiny and compliance costs due to changes in consumer protection laws and the Dodd-Frank Act[113] - The company complied with Basel III capital requirements well in advance of the completion date as of December 31, 2021[114] - Regulatory restrictions limit the amount of dividends that the Bank can pay, impacting the company's cash flow[121] Security and Fraud Risks - The company has made substantial investments in communications and information systems to support business operations, with a focus on preventing security breaches and fraud attacks[101] - There has been no material adverse effect on the company's business or operations due to security risks to date, but costs related to preventing and addressing such threats continue to increase[103] - The company issues EMV/Chip debit cards to minimize fraud risk, but online fraud and fallback transactions still pose potential liabilities[104] - The company maintains reserves for claims and legal actions, which could adversely affect financial condition and results of operations if not resolved favorably[105] Corporate Strategy and Shareholder Value - The company operates in a highly competitive financial services industry, facing pressure from larger institutions and recent mergers[116] - The average monthly trading volume of the company's common stock for the year ended December 31, 2021, was 356,686 shares, representing approximately 3.25% of the average number of outstanding shares[117] - The inability to receive dividends from the Bank could negatively impact the company's ability to pay dividends to shareholders[121] - The company may issue additional equity securities, which could dilute book value and adversely affect the market price of common stock[123] - Potential acquisitions may disrupt the company's business and dilute shareholder value, with risks including exposure to unknown liabilities and integration challenges[124] - The company aims to generate a competitive return on average equity, but failure to manage excess capital strategically could delay this goal[122] - The company may face challenges in estimating the value of assets and liabilities during potential acquisitions, which could affect financial performance[125] - The company is not restricted from issuing additional shares of common stock, which could lead to dilution for existing shareholders[123]

Financial Performance - Net income for the nine months ended September 30, 2021, was $26,723,000, a 32.5% increase compared to $20,159,000 for the same period in 2020[13]. - Basic earnings per common share increased to $2.45 for the nine months ended September 30, 2021, compared to $1.86 for the same period in 2020[13]. - Net interest income for the nine months ended September 30, 2021, was $48,607,000, up 10.3% from $44,154,000 for the same period in 2020[13]. - Non-interest income totaled $14,584,000 for the nine months ended September 30, 2021, an increase of 7.0% from $13,627,000 in the same period of 2020[13]. - The non-GAAP efficiency ratio for the nine months ended September 30, 2021, improved to 45.04%, compared to 50.00% for the same period in 2020[176]. - The GAAP efficiency ratio for the quarter ended September 30, 2021, was 46.44%, down from 47.45% in the same quarter of 2020[176]. - Net income for the nine months ended September 30, 2021 was $26.7 million, up $6.6 million or 32.6% from the same period in 2020[179]. - Earnings per common share on a fully diluted basis were $2.43 for the nine months ended September 30, 2021, up $0.59 or 32.1% from $1.84 in 2020[179]. Asset and Loan Growth - Total assets increased to $2,529,591,000 as of September 30, 2021, up from $2,361,236,000 at December 31, 2020, representing a growth of 7.1%[12]. - Net loans reached $1,599,705,000, an increase of 9.5% compared to $1,460,508,000 at the end of 2020[12]. - Total deposits rose to $2,033,213,000, reflecting a 10.2% increase from $1,844,611,000 at December 31, 2020[12]. - The loan portfolio totaled $1,617,212,000 as of September 30, 2021, reflecting an increase from $1,476,761,000 at December 31, 2020[36]. - The company reported a net increase in demand, savings, and money market accounts of $279,620,000 for the nine months ended September 30, 2021, compared to $212,641,000 in the same period of 2020[17]. Loan Loss Provisions and Credit Quality - The provision for loan losses decreased to $1,575,000 for the nine months ended September 30, 2021, down from $4,550,000 in the same period of 2020[13]. - The total allowance for loan losses as of September 30, 2021, was $17,507,000, which includes specific reserves of $682,000 and general reserves of $2,004,000[64]. - The total past-due loans amounted to $4,118,000 as of September 30, 2021, with 90+ days past due loans totaling $229,000[37]. - Non-accrual loans as of September 30, 2021, totaled $6,145,000, a decrease from $6,721,000 at December 31, 2020[40]. - The company noted that the tourism industry in its primary market, the State of Maine, is showing signs of a strong rebound in 2021 following the adverse impacts of COVID-19 in 2020[22]. Securities and Investments - As of September 30, 2021, the fair value of investment securities was $309,224,000, with an amortized cost of $310,018,000, resulting in unrealized losses of $4,516,000[25]. - The fair value of mortgage-backed securities available for sale was $247,253,000 as of September 30, 2021, down from $243,406,000 at December 31, 2020[25]. - The total amortized cost of securities available for sale was $307,036,000, with a fair value of $313,376,000 as of December 31, 2020[26]. - The company reported gross realized gains of $627,000 and gross realized losses of $605,000 for the nine months ended September 30, 2021[29]. - The company’s investment securities included $8,839,000 in restricted equity securities as of September 30, 2021[25]. Capital and Equity - Total shareholders' equity increased to $238,737,000 as of September 30, 2021, up from $219,440,000 at September 30, 2020, reflecting a growth of 8.7%[15]. - The company's total risk-based capital ratio was 14.48% as of September 30, 2021, above the well-capitalized threshold of 10.0%[187]. - The return on average tangible common equity was 17.62% for the nine months ended September 30, 2021, compared to 14.27% for the same period in 2020[188]. Expenses and Dividends - Total non-interest expense remained relatively stable at $29,302,000 for the nine months ended September 30, 2021, compared to $29,236,000 in the same period of 2020[13]. - Cash dividends declared per share increased to $0.95 for the nine months ended September 30, 2021, compared to $0.92 for the same period in 2020[15]. - The expense related to the 401(k) plan was $593,000 for the nine months ended September 30, 2021, down from $653,000 in the same period in 2020[105]. Interest Rate and Risk Management - The Bank's interest rate risk management strategy aims to minimize significant fluctuations in earnings and cash flows due to interest rate volatility[114]. - The anticipated prepayment rate for mortgage servicing rights was 12.48%, with a discount rate of 9.00% as of September 30, 2021[124]. - The fair value of interest rate swaps is determined using observable market inputs and classified as Level 2[140]. Regulatory and Compliance - The company is in the late stages of implementing a software solution for the new accounting standard ASU No. 2016-13, which may have a material impact on its consolidated financial statements[157]. - The company continues to evaluate the impact of the adoption of ASU No. 2016-13 on its financial statements, indicating proactive management of potential changes in credit loss recognition[157].

Financial Performance - Net income for the six months ended June 30, 2021, was $17,709,000, compared to $13,064,000 for the same period in 2020, an increase of 35.5%[13] - Basic earnings per common share increased to $1.63 for the six months ended June 30, 2021, up from $1.20 in the prior year, representing a growth of 35.8%[13] - Net interest income after provision for loan losses was $30,546,000 for the six months ended June 30, 2021, up from $26,659,000 in the same period of 2020, reflecting a growth of 14.0%[13] - Non-interest income for the six months ended June 30, 2021, was $10,209,000, compared to $8,822,000 in the same period of 2020, reflecting a growth of 15.7%[13] - Total comprehensive income for the six months ended June 30, 2021, was $16,759,000, compared to $10,259,000 for the same period in 2020, indicating a growth of 63.5%[15] Asset Growth - Total assets increased to $2,450,443,000 as of June 30, 2021, up from $2,361,236,000 at December 31, 2020, representing a growth of 3.7%[12] - Total deposits reached $1,961,321,000 as of June 30, 2021, an increase of 6.3% from $1,844,611,000 at the end of 2020[12] - The company reported a net increase in demand, savings, and money market accounts of $126,093,000 for the six months ended June 30, 2021[18] - Cash and cash equivalents at the end of the period were $27,092,000, compared to $22,143,000 at the end of June 30, 2020, representing a year-over-year increase of 22.4%[18] Loan Portfolio - Net loans rose to $1,571,230,000, compared to $1,460,508,000 at the end of 2020, marking an increase of 7.6%[12] - The company's loan portfolio totaled $1,588,264,000 as of June 30, 2021, reflecting a year-over-year increase from $1,451,623,000[37] - Real estate loans accounted for 33.2% of the total loan portfolio as of June 30, 2021, up from 29.9% at December 31, 2020[37] - The company completed 1,050 loan modification requests, representing $291,668,000 in loan balances, or approximately 19.0% of the loan portfolio excluding PPP balances[39] Loan Losses and Provisions - The allowance for loan losses was $17,034,000 as of June 30, 2021, compared to $16,253,000 at the end of 2020, indicating a slight increase of 4.8%[12] - The provision for loan losses decreased to $1,050,000 for the six months ended June 30, 2021, down from $2,750,000 in the same period of 2020[18] - The total past-due loans as of December 31, 2020, were $9,722,000, with current loans totaling $1,467,039,000, leading to a total of $1,476,761,000[41] - Non-accrual loans as of June 30, 2021, totaled $6,981,000, compared to $6,721,000 at December 31, 2020, and $8,344,000 at June 30, 2020[42] Securities and Investments - As of June 30, 2021, the fair value of investment securities was $306,247,000, compared to $313,376,000 as of December 31, 2020, indicating a decrease of approximately 2.9%[26] - The total amortized cost of securities available for sale was $304,740,000, with unrealized gains of $4,542,000 and unrealized losses of $3,035,000[26] - The company pledged securities with a fair value of $291,913,000 to secure public deposits and other purposes as of June 30, 2021, down from $297,326,000 as of December 31, 2020[29] - The total carrying value of securities to be held to maturity rose from $365,613,000 at December 31, 2020, to $376,181,000 at June 30, 2021, indicating an increase of 1.5%[154][156] Efficiency and Expenses - Total non-interest expense decreased to $19,370,000 for the six months ended June 30, 2021, from $19,960,000 in the same period of 2020, a reduction of 2.9%[13] - The efficiency ratio, calculated using non-GAAP measures, excludes securities losses and other-than-temporary impairment charges, providing a clearer view of operational efficiency[175] - The non-GAAP efficiency ratio stood at 45.14% for the six months ended June 30, 2021, compared to 52.13% for the same period in 2020[190] - The expense related to the 401(k) plan was $405,000 for the six months ended June 30, 2021, down from $453,000 in 2020, a decrease of 10.6%[106] Capital and Shareholder Equity - Total shareholders' equity increased to $234,155,000 as of June 30, 2021, up from $216,584,000 at June 30, 2020, reflecting a growth of 8.1%[15] - The Company's total risk-based capital ratio was 14.55% as of June 30, 2021, above the well-capitalized threshold of 10.0%[189] - The company declared cash dividends of $6,910,000 for the six months ended June 30, 2021, compared to $6,666,000 in the same period of 2020[18] Risk Management - The Bank's interest rate risk management strategy involves using derivative instruments to minimize fluctuations in earnings and cash flows due to interest rate volatility[118] - The company utilizes a systematic methodology for determining the allowance for loan losses, including a quarterly review process and risk rating changes[57] - The company continues to monitor loans placed on non-accrual status, which are deemed collectible based on current information and events[42] COVID-19 Impact - As of June 30, 2021, uncertainties related to the COVID-19 pandemic continue to pose risks to the Company's financial position and future operations[172]

[Part I. Financial Information](index=4&type=section&id=Part%20I.%20Financial%20Information) [Selected Financial Data (Unaudited)](index=4&type=section&id=Selected%20Financial%20Data%20(Unaudited)) The First Bancorp, Inc. reported significant Q1 2021 year-over-year improvements, with net income up 37.4% to $8.9 million, diluted EPS at $0.81, and improved asset quality and efficiency Q1 2021 vs Q1 2020 Financial Highlights (in thousands USD) | Metric | Q1 2021 | Q1 2020 | Change | | :--- | :--- | :--- | :--- | | Net Income | $8,922,000 | $6,495,000 | +37.4% | | Diluted EPS | $0.81 | $0.60 | +35.0% | | Cash Dividends Declared | $0.31 | $0.30 | +3.3% | | Total Assets | $2,436,868,000 | $2,136,396,000 | +14.1% | | Total Loans | $1,516,772,000 | $1,344,208,000 | +12.8% | | Total Deposits | $1,953,557,000 | $1,644,612,000 | +18.8% | Q1 2021 vs Q1 2020 Key Ratios | Ratio | Q1 2021 | Q1 2020 | | :--- | :--- | :--- | | Return on Average Equity | 15.85% | 12.03% | | Return on Average Assets | 1.54% | 1.24% | | Net Interest Margin (Tax-Equivalent) | 2.99% | 3.12% | | Non-Performing Loans to Total Loans | 0.46% | 0.75% | | Efficiency Ratio (Non-GAAP) | 45.52% | 58.12% | [Financial Statements (Unaudited)](index=5&type=section&id=Item%201%20%E2%80%93%20Financial%20Statements) Unaudited Q1 2021 consolidated financial statements show significant growth and improved profitability, with total assets at $2.44 billion, net income at $8.9 million, and strong cash flows [Consolidated Balance Sheets](index=6&type=section&id=Consolidated%20Balance%20Sheets) As of March 31, 2021, total assets increased 14.1% to $2.44 billion, driven by growth in net loans to $1.50 billion and total deposits to $1.95 billion Balance Sheet Summary (in thousands) | Account | March 31, 2021 | December 31, 2020 | March 31, 2020 | | :--- | :--- | :--- | :--- | | Total Assets | $2,436,868 | $2,361,236 | $2,136,396 | | Net Loans | $1,500,178 | $1,460,508 | $1,332,350 | | Total Deposits | $1,953,557 | $1,844,611 | $1,644,612 | | Total Shareholders' Equity | $228,184 | $223,726 | $215,257 | [Consolidated Statements of Income and Comprehensive Income](index=7&type=section&id=Consolidated%20Statements%20of%20Income%20and%20Comprehensive%20Income) For Q1 2021, net income increased 37.4% to $8.9 million, driven by a 6.4% rise in net interest income to $15.9 million and a 25.5% increase in non-interest income to $5.3 million Income Statement Summary (in thousands) | Account | Q1 2021 | Q1 2020 | | :--- | :--- | :--- | | Net Interest Income | $15,873 | $14,918 | | Provision for Loan Losses | $525 | $400 | | Total Non-Interest Income | $5,298 | $4,221 | | Total Non-Interest Expense | $9,874 | $11,043 | | **Net Income** | **$8,922** | **$6,495** | | Diluted EPS | $0.81 | $0.60 | [Consolidated Statements of Cash Flows](index=9&type=section&id=Consolidated%20Statements%20of%20Cash%20Flows) In Q1 2021, net cash from operating activities significantly increased to $19.0 million, while investing activities used $98.4 million, and financing activities provided $73.1 million, primarily from deposits Cash Flow Summary (in thousands) | Activity | Q1 2021 | Q1 2020 | | :--- | :--- | :--- | | Net Cash from Operating Activities | $19,044 | $2,852 | | Net Cash used by Investing Activities | ($98,353) | ($50,132) | | Net Cash from Financing Activities | $73,126 | $53,964 | | **Net (Decrease) in Cash** | **($6,183)** | **$6,684** | [Notes to Consolidated Financial Statements](index=11&type=section&id=Notes%20to%20Consolidated%20Financial%20Statements) Notes detail accounting policies and disclosures, covering the $690 million investment portfolio, improved $1.52 billion loan portfolio credit quality, COVID-19 impacts, and the upcoming LIBOR transition - The company's primary market, the State of Maine, relies significantly on tourism, which was adversely impacted by COVID-19 in 2020. The ongoing impact remains uncertain[25](index=25&type=chunk) - The company is preparing for the cessation of LIBOR, with a working group formed to manage the transition. Several derivative contracts with notional values totaling **$165 million** have maturity dates beyond the LIBOR phase-out in June 2023[125](index=125&type=chunk)[305](index=305&type=chunk) - The company has deferred the adoption of the new Current Expected Credit Loss (CECL) model (ASU 2016-13) as a Smaller Reporting Company, with implementation planned for fiscal years beginning after December 15, 2022[159](index=159&type=chunk) [Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A)](index=50&type=section&id=Item%202%20%E2%80%93%20Management%27s%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) Management reported record Q1 2021 operating results, with net income of $8.9 million, 37.4% YoY growth, improved asset quality, and a well-capitalized balance sheet with $2.44 billion in assets - Net income for Q1 2021 was a record **$8.9 million**, up **37.4%** from Q1 2020, driven by increased net interest income, strong non-interest revenue, and controlled operating expenses[181](index=181&type=chunk)[182](index=182&type=chunk) - Asset quality showed positive trends, with non-performing assets at **0.30% of total assets** as of March 31, 2021, down from 0.49% a year prior[186](index=186&type=chunk) - The company's non-GAAP efficiency ratio improved significantly to **45.52%** for Q1 2021, compared to 58.12% for the same period in 2020, which was elevated due to one-time charges[188](index=188&type=chunk) [Critical Accounting Policies](index=50&type=section&id=Critical%20Accounting%20Policies) Management identifies critical accounting policies requiring significant estimates, including allowance for loan losses, goodwill, MSRs, and derivatives, with MSR valuation sensitive to prepayment rates and ongoing COVID-19 risks - The most significant estimates and assumptions are related to the Allowance for Loan Losses, Goodwill, Mortgage Servicing Rights, Fair Value of Securities, and Derivative Financial Instruments[166](index=166&type=chunk)[167](index=167&type=chunk)[168](index=168&type=chunk)[170](index=170&type=chunk)[171](index=171&type=chunk) - The valuation of mortgage servicing rights is highly dependent on the anticipated loan prepayment rate assumption; an increase in prepayment speed lowers the MSR valuation[170](index=170&type=chunk) [Results of Operations](index=54&type=section&id=Results%20of%20Operations) In Q1 2021, net interest income rose 6.4% to $15.9 million, non-interest income surged 25.5% to $5.3 million driven by mortgage banking, and non-interest expense decreased 10.6% to $9.9 million - Net interest income on a tax-equivalent basis increased by **$1.0 million (6.3%)** YoY, driven by earning asset growth and recognition of PPP loan origination fees[183](index=183&type=chunk) - Non-interest income increased by **$1.1 million (25.5%)** YoY, led by a **$1.5 million (290.3%)** increase in mortgage banking revenue[184](index=184&type=chunk)[197](index=197&type=chunk) - Non-interest expense decreased by **$1.2 million (10.6%)** YoY, mainly due to **$1.76 million** in one-time charges in Q1 2020 related to restructuring interest rate swaps[185](index=185&type=chunk)[120](index=120&type=chunk)[198](index=198&type=chunk) [Financial Condition](index=57&type=section&id=Financial%20Condition) As of March 31, 2021, financial condition strengthened with total assets at $2.44 billion, loan portfolio growth of 2.7%, improved credit quality, strong liquidity from 18.8% deposit growth, and well-capitalized ratios - The loan portfolio increased by **$40.0 million (2.7%)** in Q1 2021, with growth centered in commercial real estate and other commercial loans, including PPP loans[187](index=187&type=chunk)[218](index=218&type=chunk) - Low-cost deposits (demand, NOW, savings) grew by **$68.1 million (6.3%)** in Q1 2021 and **$370.9 million (48.0%)** year-over-year, largely due to economic stimulus programs[187](index=187&type=chunk)[284](index=284&type=chunk) - The company remains well-capitalized, with a total risk-based capital ratio of **14.83%** as of March 31, 2021, comfortably exceeding the 10.0% well-capitalized threshold[187](index=187&type=chunk)[289](index=289&type=chunk)[290](index=290&type=chunk) [Quantitative and Qualitative Disclosures About Market Risk](index=77&type=section&id=Item%203%20%E2%80%93%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk) The company manages interest rate risk via ALCO, using gap analysis and simulations; a 200 basis point rate increase projects a 0.1% rise in net interest income, while a 100 basis point decrease projects a 1.5% decline Interest Rate Sensitivity Analysis (Change in Net Interest Income) | Scenario | Year 1 Projection | Year 2 Projection | | :--- | :--- | :--- | | Rates Decrease by 1.0% | -1.5% | -9.3% | | Rates Increase by 2.0% | +0.1% | +1.0% | - The company's interest rate risk exposure is considered reasonable and is well within the ALCO's policy limit of a maximum **10.0%** decrease in net interest income for a **2.0%** rate move[301](index=301&type=chunk) [Controls and Procedures](index=79&type=section&id=Item%204%20-%20Controls%20and%20Procedures) As of March 31, 2021, management concluded the company's disclosure controls and procedures were effective at a reasonable assurance level, with no material changes to internal control over financial reporting - Management concluded that the Company's disclosure controls and procedures were effective at the reasonable assurance level as of March 31, 2021[307](index=307&type=chunk) - There were no changes in the Company's internal control over financial reporting during the quarter that materially affected, or are reasonably likely to materially affect, these controls[307](index=307&type=chunk) [Part II. Other Information](index=80&type=section&id=Part%20II.%20Other%20Information) [Risk Factors](index=80&type=section&id=Item%201A%20%E2%80%93%20Risk%20Factors) The primary risk factor is the ongoing COVID-19 pandemic, posing risks to business operations, loan quality, and the investment portfolio, particularly impacting Maine's tourism-reliant economy - The COVID-19 pandemic continues to pose significant risks, including potential declines in credit quality, reduced loan demand, and negative impacts on the investment portfolio[310](index=310&type=chunk)[311](index=311&type=chunk)[313](index=313&type=chunk) - The company's primary market in Maine is heavily reliant on tourism, which makes the regional economy particularly vulnerable to pandemic-related disruptions, potentially leading to a disproportionate adverse effect on the company[312](index=312&type=chunk) [Unregistered Sales of Equity Securities and Use of Proceeds](index=81&type=section&id=Item%202%20%E2%80%93%20Unregistered%20Sales%20of%20Equity%20Securities%20and%20Use%20of%20Proceeds) During Q1 2021, the company repurchased 8,557 shares of common stock at an average price of $25.03 per share, outside of a publicly announced plan Common Stock Repurchases Q1 2021 | Month | Shares Purchased | Average Price Per Share | | :--- | :--- | :--- | | January 2021 | 5,776 | $24.40 | | February 2021 | 1,175 | $25.10 | | March 2021 | 1,606 | $28.70 | | **Total** | **8,557** | **$25.03** |

Employment and Workforce - As of December 31, 2020, the Company had 255 employees and a full-time equivalency of 250 employees[64]. Financial Position and Investments - The Company had $313.4 million in available for sale investment securities and $365.6 million in held to maturity investment securities as of December 31, 2020[80]. - The Company’s investment management revenues are directly tied to the asset values of investments managed, which may fluctuate due to market conditions[86]. - The company has complied with the fully phased Basel III capital requirements well in advance of the completion date as of December 31, 2020[105]. Market and Economic Risks - Changes in interest rates could adversely affect net interest income and profitability, impacting earnings if interest rates on deposits rise faster than those on loans[79]. - A decline in real estate values in the primary market area could negatively impact the quality of the loan portfolio and demand for products and services[85]. - The Company may experience margin compression and decreased net interest income if lower-cost funding sources are lost due to customer behavior[82]. - The Company has experienced limited impact from COVID-19 on its loan portfolio to date, but uncertainty remains regarding future effects on borrowers and delinquencies[100]. - The company may face adverse effects from the transition away from LIBOR, which could impact its financial assets and liabilities linked to this benchmark[102]. Regulatory and Compliance Issues - The company is subject to increased regulatory scrutiny and potential changes in laws, particularly due to the Dodd-Frank Act, which may increase operational costs[104]. - The company operates in a highly regulated environment, and failure to meet minimum regulatory capital guidelines could adversely affect its financial condition[103]. - Regulatory restrictions on the payment of dividends by the Bank could impact the Company's ability to service debt and pay obligations[111]. Competition and Market Dynamics - The company faces significant competition from various financial service providers, including commercial banks, credit unions, and asset managers, which may impact its market share and income[107]. - The soundness of other financial institutions could adversely affect the Company due to interrelated financial services relationships[83]. Operational Risks - The Company faces risks related to technological changes, which could increase costs and impact competitiveness if not effectively managed[89]. - The company is exposed to risks associated with data breaches and cyberattacks, which could lead to financial liability and reputational harm[93]. - The company has ongoing information security training programs and works with third-party consultants to mitigate risks related to information security[93]. - The Company faces risks from quarterly fluctuations in operating and financial results, which may vary from investor expectations[111]. Capital Management and Shareholder Impact - If the Company does not manage its capital position strategically, the return on equity could be lower compared to competitors, potentially delaying the goal of increasing earnings per share and book value per share[112]. - The Company may issue additional equity securities, which could dilute book value and adversely affect the market price of common stock[113]. - The Company is not restricted from issuing additional shares of common stock, which could lead to dilution for existing shareholders[113]. - The Board of Directors has the authority to issue preferred stock, which could have preferences over common stock and adversely affect common shareholders[113]. - The inability to receive dividends from the Bank could hinder the Company's ability to pay dividends to shareholders, as dividends from the Bank are the principal source of funds for common stock dividends[111]. Acquisitions and Business Strategy - Potential acquisitions may disrupt business operations and dilute shareholder value, with risks including the payment of premiums over book and market values[114]. - Acquisitions may not realize expected revenue increases or cost savings, potentially having a material adverse effect on the Company[114]. - The company has maintained reserves for certain claims and legal actions, which could impact its earnings and reputation if not resolved favorably[95].