# Camden National Corp: Form 10-Q for the period ended Sep 30, 2023

- Company: [Camden National Corp](/companies/cac.md) (CIK 750686)
- Form: 10-Q
- Filed: 2023-11-07
- Accepted by EDGAR: Nov 7, 2023, 10:16 ET
- Period: 2023-09-30
- Accession: 0000750686-23-000285
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/750686/000075068623000285/cac-20230930.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/750686/000075068623000285/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2023-09-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2023-07-01 to 2023-09-30 | $8.5m | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Revenue | 9 months, 2023-01-01 to 2023-09-30 | $24.8m | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Interest expense | 3 months, 2023-07-01 to 2023-09-30 | $25.1m | us-gaap:InterestExpense |
| Interest expense | 9 months, 2023-01-01 to 2023-09-30 | $66.9m | us-gaap:InterestExpense |
| Income tax | 3 months, 2023-07-01 to 2023-09-30 | $2.2m | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 9 months, 2023-01-01 to 2023-09-30 | $8.7m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2023-07-01 to 2023-09-30 | $9.8m | us-gaap:NetIncomeLoss |
| Net income | 9 months, 2023-01-01 to 2023-09-30 | $34.9m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2023-07-01 to 2023-09-30 | $0.67 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 9 months, 2023-01-01 to 2023-09-30 | $2.39 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2023-07-01 to 2023-09-30 | $0.67 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 9 months, 2023-01-01 to 2023-09-30 | $2.39 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2023-07-01 to 2023-09-30 | 14,597,649 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 9 months, 2023-01-01 to 2023-09-30 | 14,607,031 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 9 months, 2023-01-01 to 2023-09-30 | $78.8m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 9 months, 2023-01-01 to 2023-09-30 | $1.7m | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Dividends paid | 9 months, 2023-01-01 to 2023-09-30 | $18.4m | us-gaap:PaymentsOfDividends |
| Share repurchases | 9 months, 2023-01-01 to 2023-09-30 | $2.0m | us-gaap:PaymentsForRepurchaseOfCommonStock |
| Total assets | at 2023-09-30 | $5.78bn | us-gaap:Assets |
| Total liabilities | at 2023-09-30 | $5.32bn | us-gaap:Liabilities |
| Short-term borrowings | at 2023-09-30 | $470.1m | us-gaap:ShortTermBorrowings |
| Shareholders' equity | at 2023-09-30 | $463.3m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 114,798 characters.

### AND RESULTS OF OPERATIONS

### FORWARD-LOOKING STATEMENTS

The discussions set forth below and in the documents we incorporate by reference herein contain certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, as amended, including certain plans, exceptions, goals, projections, and statements, which are subject to numerous risks, assumptions, and uncertainties. Forward-looking statements can be identified by the use of the words “believe,” “expect,” “anticipate,” “intend,” “estimate,” “assume,” “plan,” “target,” “potential” or “goal” or future or conditional verbs such as “will,” “may,” “might,” “should,” “could” and other expressions which predict or indicate future events or trends and which do not relate to historical matters. Forward-looking statements are not guarantees of future performance and involve risks, uncertainties and assumptions that are difficult for the Company to predict. The actual results, performance or achievements of the Company may differ materially from what is reflected in such forward-looking statements

Forward-looking statements should not be relied on, because they involve known and unknown risks, uncertainties and other factors, some of which are beyond the control of the Company. These risks, uncertainties and other factors may cause the actual results, performance or achievements of the Company to be materially different from the anticipated future results, performance or achievements expressed or implied by the forward-looking statements.

The following factors, among others, could cause the Company’s financial performance to differ materially from the Company’s goals, plans, objectives, intentions, expectations and other forward-looking statements:

- the impact of the COVID-19 pandemic;
- weakness in the United States economy in general and the regional and local economies within the New England region and Maine, which could result in a deterioration of credit quality, an increase in the allowance for credit losses or a reduced demand for the Company’s credit or fee-based products and services;
- changes in trade, monetary, and fiscal policies and laws, including interest rate policies of the Board of Governors of the Federal Reserve System;
- inflation, interest rate, market, and monetary fluctuations;
- ongoing competition in the labor markets and increased employee turnover;
- the adequacy of succession planning for key executives or other personnel, and the Company’s ability to transition effectively to new members of the senior executive team;
- competitive pressures, including continued industry consolidation and the increased financial services provided by non-banks;
- deterioration in the value of the Company's investment securities;
- commercial real estate vacancies and their impact on the ability of borrowers to repay their loans;
- volatility in the securities markets that could adversely affect the value or credit quality of the Company’s assets, impairment of goodwill, or the availability and terms of funding necessary to meet the Company’s liquidity needs;
- changes in information technology and other operational risks, including cybersecurity, that require increased capital spending;
- changes in consumer spending and savings habits;
- changes in tax, banking, securities and insurance laws and regulations;
- the outcome of pending and future litigation and governmental proceedings, including tax-related examinations and other matters;
- changes in accounting policies, practices and standards, as may be adopted by the regulatory agencies as well as the Financial Accounting Standards Board ("FASB"), and other accounting standard setters;
- the effects of climate change on the Company and its customers, borrowers or service providers;
- the effects of civil unrest, international hostilities, including the war in Ukraine and conflict in the Middle East, or other geopolitical events;
- turmoil and volatility in the financial services industry, including failures or rumors of failures of other depository institutions, which could affect the ability of depository institutions, including Camden National Bank, to attract and retain depositors, and could affect the ability of financial services providers, including the Company, to borrow or raise capital;
- actions taken by governmental agencies to stabilize the financial system and the effectiveness of such actions;
- increases in deposit insurance assessments due to bank failures;
- changes to regulatory capital requirements in response to recent development affecting the banking sector; and
- questions about the soundness of one or more financial institutions with which the Company does business.

In addition, statements regarding the potential effects of notable national and global current events on the Company’s business, financial condition, liquidity and results of operations may constitute forward-looking statements and are subject to the risk that the actual effects may differ, possibly materially, from what is reflected in those forward-looking statements due to factors and future developments that are uncertain, unpredictable and in many cases beyond the Company's control.

You should carefully review all of these factors, and be aware that there may be other factors that could cause differences, including the risk factors listed in our Annual Report on Form 10-K for the year ended December 31, 2022, as updated by the Company's quarterly reports on Form 10-Q, including this report, and other filings with the Securities and Exchange Commission. Readers should carefully review the risk factors described therein and should not place undue reliance on our forward-looking statements.

These forward-looking statements were based on information, plans and estimates at the date of this report, and we undertake no obligation to update any forward-looking statements to reflect changes in underlying assumptions or factors, new information, future events or other changes, except to the extent required by applicable law or regulation.

### NON-GAAP FINANCIAL MEASURES AND RECONCILIATION TO GAAP

In addition to evaluating the Company’s results of operations in accordance with GAAP, management supplements this evaluation with an analysis of certain non-GAAP financial measures such as: adjusted net income; adjusted diluted earnings per share; adjusted return on average assets; adjusted return on average equity; pre-tax, pre-provision income; adjusted pre-tax, pre-provision income; return on average tangible equity and adjusted return on average tangible equity; the efficiency and tangible common equity ratios; net interest income (fully-taxable equivalent); tangible book value per share; core deposits and average core deposits. We utilize these non-GAAP financial measures for purposes of measuring performance against the Company's peer group and other financial institutions, as well as for analyzing its internal performance. The Company also believes these non-GAAP financial measures help investors better understand the Company's operating performance and trends and allows for better performance comparisons to other banks. In addition, these non-GAAP financial measures remove the impact of unusual items that may obscure trends in the Company’s underlying performance. These disclosures should not be viewed as a substitute for GAAP operating results, nor are they necessarily comparable to non-GAAP performance measures that may be presented by other financial institutions.

**Adjusted Net Income; Adjusted Diluted Earnings per Share; Adjusted Return on Average Assets; and Adjusted Return on Average Equity.** The following table provides a reconciliation of net income, diluted EPS, return on average assets and return on average equity to adjusted net income, adjusted diluted EPS, adjusted return on average assets and adjusted return on average equity. Certain transactions have been excluded to calculate adjusted net income, adjusted diluted EPS, adjusted return on average assets and adjusted return on average equity. We believe the following adjusted financial metrics assist users of our financial statements with their financial analysis period-over-period as it adjusts for certain non-recurring items.

*(In thousands, except number of shares, per share data and ratios)*

| Adjusted Net Income: | For the Three Months Ended September 30, 2023 | September 30, 2022 | For the Nine Months Ended September 30, 2023 | September 30, 2022 |
| --- | ---: | ---: | ---: | ---: |
| Net income, as presented | $9,787 | $14,267 | $34,903 | $46,088 |
| Adjustment for net loss on sale of securities | 5,335 | — | 5,335 | 9 |
| Adjustment for Signature Bank bond write-off | — | — | 1,838 | — |
| Tax impact of above adjustments(1) | (1,120) | — | (1,506) | (2) |
| Adjusted net income | $14,002 | $14,267 | $40,570 | $46,095 |
| **Adjusted Diluted Earnings per Share:** |  |  |  |  |
| Diluted earnings per share, as presented | $0.67 | $0.97 | $2.39 | $3.12 |
| Adjustment for net loss on sale of securities | 0.37 | — | 0.37 | — |
| Adjustment for Signature Bank bond write-off | — | — | 0.13 | — |
| Tax impact of above adjustments(1) | (0.08) | — | (0.12) | — |
| Adjusted diluted earnings per share | $0.96 | $0.97 | $2.77 | $3.12 |
| **Adjusted Return on Average Assets:** |  |  |  |  |
| Return on average assets, as presented | 0.68% | 1.03% | 0.82% | 1.13% |
| Adjustment for net loss on sale of securities | 0.37% | — | 0.13% | — |
| Adjustment for Signature Bank bond write-off | — | — | 0.04% | — |
| Tax impact of above adjustments(1) | (0.08)% | — | (0.04)% |  |
| Adjusted return on average assets | 0.97% | 1.03% | 0.95% | 1.13% |
| **Adjusted Return on Average Equity:** |  |  |  |  |
| Return on average equity, as presented | 8.25% | 12.50% | 10.00% | 12.88% |
| Adjustment for net loss on sale of securities | 4.50% | — | 1.53% | — |
| Adjustment for Signature Bank bond write-off | — | — | 0.53% | — |
| Tax impact of above adjustments(1) | (0.95)% | — | (0.43)% | — |
| Adjusted return on average equity | 11.80% | 12.50% | 11.63% | 12.88% |

(1) Assumed a 21% tax rate.

***Pre-Tax, Pre-Provision Income and Adjusted Pre-Tax, Pre-Provision Income.*** Pre-tax, pre-provision income and adjusted pre-tax, pre-provision income are each a supplemental measure of operating earnings and performance. Pre-tax, pre-provision income is calculated as net income before provision for credit losses and income tax expense, and adjusted pre-tax, pre-provision income is calculated as net income before provision for credit losses, income tax expense, and adjusted for certain other items, as applicable. These supplemental measures became more widely used by financial institutions as a measure of financial performance for comparability across financial institutions.

*(Dollars in thousands)*

|  | Three Months Ended September 30, 2023 | 2022 | Nine Months Ended September 30, 2023 | 2022 |
| --- | ---: | ---: | ---: | ---: |
| Net income, as presented | $9,787 | $14,267 | $34,903 | $46,088 |
| Adjustment for (credit) provision for credit losses | (574) | 2,764 | 1,531 | 4,034 |
| Adjustment for income tax expense | 2,236 | 3,645 | 8,653 | 11,654 |
| Pre-tax, pre-provision income | 11,449 | 20,676 | 45,087 | 61,776 |
| Adjustment for net loss on sale of securities | 5,335 | — | 5,335 | 9 |
| Adjustment for SBA PPP loan income | (3) | (50) | (12) | (1,248) |
| Adjusted pre-tax, pre-provision income | $16,781 | $20,626 | $50,410 | $60,537 |

***Efficiency Ratio.*** The efficiency ratio represents an approximate measure of the cost required for the Company to generate a dollar of revenue. This is a common measure within the financial services industry and is a key ratio for evaluating Company performance. The efficiency ratio is calculated as the ratio of (i) total non-interest expense, adjusted for certain operating expenses, as necessary, to (ii) net interest income on a tax equivalent basis plus total non-interest income, adjusted for certain other income items, as necessary.

*(Dollars in thousands)*

|  | Three Months Ended September 30, 2023 | 2022 | Nine Months Ended September 30, 2023 | 2022 |
| --- | ---: | ---: | ---: | ---: |
| Non-interest expense, as presented | $26,207 | $27,091 | $79,515 | $79,856 |
| Net interest income, as presented | $32,584 | $37,813 | $99,554 | $110,712 |
| Adjustment for the effect of tax-exempt income(1) | 237 | 242 | 701 | 700 |
| Non-interest income, as presented | 5,072 | 9,954 | 25,048 | 30,920 |
| Adjustment for net loss on sale of securities | 5,335 | — | 5,335 | 9 |
| Adjusted net interest income plus non-interest income | $43,228 | $48,009 | $130,638 | $142,341 |
| Ratio of non-interest expense to total revenues(2) | 69.60% | 56.71% | 63.82% | 56.38% |
| Efficiency ratio | 60.63% | 56.43% | 60.87% | 56.10% |

(1) Assumed a 21% tax rate.

(2) Revenue is the sum of net interest income and non-interest income.

***Return on Average Tangible Equity:*** Return on average tangible equity is the ratio of (i) net income, adjusted for (a) amortization of core deposit intangible assets and the tax impact of the adjustment and (b) goodwill impairment, as necessary, to (ii) average shareholders' equity, adjusted for average goodwill and core deposit intangible assets. This adjusted financial ratio reflects a shareholder's return on tangible capital deployed in our business and is a common measure within the financial services industry.

***Adjusted Return on Average Tangible Equity:*** Adjusted return on average tangible equity is the ratio of (i) adjusted net income (as defined in the table above) adjusted for (a) amortization of core deposit intangible assets and the tax impact of the adjustment and (b) goodwill impairment, as necessary, to (ii) average shareholders' equity, adjusted for average goodwill and core deposit intangible assets.

*(Dollars in thousands)*

| Return on Average Tangible Equity: | Three Months Ended September 30, 2023 | 2022 | Nine Months Ended September 30, 2023 | 2022 |
| --- | ---: | ---: | ---: | ---: |
| Net income, as presented | $9,787 | $14,267 | $34,903 | $46,088 |
| Adjustment for amortization of core deposit intangible assets | 148 | 156 | 444 | 469 |
| Tax impact of above adjustment(1) | (31) | (33) | (93) | (98) |
| Net income, adjusted for amortization of core deposit intangible assets | $9,904 | $14,390 | $35,254 | $46,459 |
| Average equity, as presented | $470,750 | $452,815 | $466,563 | $478,420 |
| Adjustment for average goodwill and core deposit intangible assets | (95,888) | (96,493) | (96,037) | (96,651) |
| Average tangible equity | $374,862 | $356,322 | $370,526 | $381,769 |
| Return on average equity | 8.25% | 12.50% | 10.00% | 12.88% |
| Return on average tangible equity | 10.48% | 16.02% | 12.72% | 16.27% |
| **Adjusted Return on Average Tangible Equity:** |  |  |  |  |
| Adjusted net income (see "Adjusted Net Income" table above) | $14,002 | $14,267 | $40,570 | $46,095 |
| Adjustment for amortization of core deposit intangible assets | 148 | 156 | 444 | 469 |
| Tax impact of above adjustment(1) | (31) | (33) | (93) | (98) |
| Adjusted net income, adjusted for amortization of core deposit intangible assets | $14,119 | $14,390 | $40,921 | $46,466 |
| Adjusted return on average tangible equity | 14.94% | 16.02% | 14.77% | 16.27% |

(1) Assumed a 21% tax rate.

***Net Interest Income (Fully-Taxable Equivalent).*** Net interest income on a fully-taxable equivalent basis is net interest income plus the taxes that would have been paid had tax-exempt securities been taxable. This number attempts to enhance the comparability of the performance of assets that have different tax liabilities. This is a common measure within the financial services industry and is used within the calculation of net interest margin on a fully-taxable equivalent basis.

*(Dollars in thousands)*

|  | Three Months Ended September 30, 2023 | 2022 | Nine Months Ended September 30, 2023 | 2022 |
| --- | ---: | ---: | ---: | ---: |
| Net interest income, as presented | $32,584 | $37,813 | $99,554 | $110,712 |
| Adjustment for the effect of tax-exempt income(1) | 237 | 242 | 701 | 700 |
| Net interest income (fully-taxable equivalent) | $32,821 | $38,055 | $100,255 | $111,412 |

(1) Assumed a 21% tax rate.

***Tangible Book Value per Share.*** Tangible book value per share is the ratio of (i) shareholders’ equity less goodwill and other intangibles to (ii) total common shares outstanding at period end. Tangible book value per share is a common measure within the financial services industry to assess the value of a company, as it removes goodwill and other intangible assets generated within purchase accounting upon a business combination.

***Tangible Common Equity Ratio.*** Tangible common equity is the ratio of (i) shareholders’ equity less goodwill and other intangible assets to (ii) total assets less goodwill and other intangible assets. This ratio is a measure used within the financial services industry to assess a company's capital adequacy.

*(Dollars in thousands, except number of shares, per share data and ratios)*

| Tangible Book Value Per Share: | September 30, 2023 | December 31, 2022 |
| --- | ---: | ---: |
| Shareholders’ equity, as presented | $463,298 | $451,278 |
| Adjustment for goodwill and core deposit intangible assets | (95,816) | (96,260) |
| Tangible shareholders’ equity | $367,482 | $355,018 |
| Shares outstanding at period end | 14,558,137 | 14,567,325 |
| Book value per share | $31.82 | $30.98 |
| Tangible book value per share | $25.24 | $24.37 |
| **Tangible Common Equity Ratio:** |  |  |
| Total assets | $5,779,675 | $5,671,850 |
| Adjustment for goodwill and core deposit intangible assets | (95,816) | (96,260) |
| Tangible assets | $5,683,859 | $5,575,590 |
| Common equity ratio | 8.02% | 7.96% |
| Tangible common equity ratio | 6.47% | 6.37% |

***Core Deposits.*** Core deposits are used by management to measure the portion of the Company's total deposits that management believes to be more stable and at a lower interest rate cost. The Company calculates core deposits as total deposits (as reported on the consolidated statements of condition) less certificates of deposit and brokered deposits. Management believes core deposits is a useful measure to assess the Company's deposit base, including its potential volatility.

*(Dollars in thousands)*

|  | September 30, 2023 | December 31, 2022 |
| --- | ---: | ---: |
| Total deposits | $4,678,406 | $4,826,929 |
| Adjustment for certificates of deposit | (552,111) | (300,451) |
| Adjustment for brokered deposits | (133,885) | (181,253) |
| Core deposits | $3,992,410 | $4,345,225 |

***Average Core Deposits.*** Average core deposits are used by management to measure the portion of the Company's total deposits that management believes to be more stable and at a lower interest rate cost. The Company calculates average core deposits as total average deposits (excluding average brokered deposits, as disclosed on the Average Balance, Interest and Yield/Rate Analysis tables) less average certificates of deposit. Management believes core deposits is a useful measure to assess the Company's deposit base, including its potential volatility.

*(Dollars in thousands)*

|  | Three Months Ended September 31, 2023 | 2022 | Nine Months Ended September 30, 2023 | 2022 |
| --- | ---: | ---: | ---: | ---: |
| Total average deposits(1) | $4,483,614 | $4,531,019 | $4,476,668 | $4,431,837 |
| Adjustment average certificates of deposit | (497,301) | (290,043) | (409,909) | (297,646) |
| Average core deposits | $3,986,313 | $4,240,976 | $4,066,759 | $4,134,191 |

(1) Brokered deposits are excluded from total average deposits, as presented on the Average Balance, Interest and Yield/Rate analysis table.

### CRITICAL ACCOUNTING POLICIES

Critical accounting policies are defined as those that are reflective of significant judgments and uncertainties, and could potentially result in materially different results under different assumptions and conditions. In preparing the Company’s consolidated financial statements, management is required to make significant estimates and assumptions that affect assets, liabilities, revenues, and expenses reported. Actual results could differ materially from our current estimates as a result of changing conditions and future events. Several estimates are particularly critical and are susceptible to significant near-term change, including (i) the ACL, including the ACL on loans, off-balance sheet credit exposures and investments; (ii) accounting for acquisitions and the subsequent review of goodwill and intangible assets generated in an acquisition for impairment; (iii) income taxes; and (iv) accounting for defined benefit and postretirement plans.

There have been no material changes to the Company's critical accounting policies from those disclosed within its Annual Report on Form 10-K for the year ended December 31, 2022. Refer to the Company's Annual Report on Form 10-K for the year ended December 31, 2022, for discussion of the Company's critical accounting policies.

Refer to Note 2 of the consolidated financial statements for discussion of accounting pronouncements issued but yet to be adopted and implemented.

### GENERAL OVERVIEW

Camden National Corporation (hereafter referred to as “we,” “our,” “us,” or the “Company”) is a publicly-held bank holding company, with approximately $5.8 billion in assets at September 30, 2023, incorporated under the laws of the State of Maine and headquartered in Camden, Maine. Camden National Bank (the "Bank"), a wholly-owned subsidiary of the Company, was founded in 1875. The Company was founded in 1984, went public in 1997 and is registered with NASDAQ Global Market (“NASDAQ”) under the ticker symbol "CAC."

The primary business of the Company and the Bank is to attract deposits from, and to extend loans to, consumer, institutional, municipal, non-profit and commercial customers. The Company, through the Bank, provides a broad array of banking and other financial services, including wealth management and trust services, brokerage, investment advisory and insurance services, to consumer, business, non-profit and municipal customers.

The Company operates throughout Maine, with its primary markets and presence being throughout coastal and central Maine, and select areas of New Hampshire and Massachusetts. The Company and the Bank generally have effectively competed with other financial institutions by emphasizing customer service, highlighted by local decision-making, establishing long-term customer relationships, building customer loyalty and providing products and services designed to meet the needs of customers.

### EXECUTIVE OVERVIEW

The Company, and the broader banking industry, has now been operating in an inverted yield curve for over a year, driving a lower net interest margin, lower earnings, and lower profitability metrics, in comparison to the same periods last year. Additionally, in the first and second quarters of 2023, the banking industry dealt with a liquidity crisis as three well-known regional banks failed in fairly short order. The impact of these failings was felt by the banking industry as investors and depositors alike grew concerned with liquidity in the market as interest rates continued to rise. In response to these market dynamics the Company's short-term priorities shifted to deposit and net interest margin optimization, and to maintaining our strong credit quality position.

As of September 30, 2023, the Company's financial footing continued to be strong, supported by a diverse deposit base, a strong liquidity and capital position, and excellent asset quality. The following metrics highlight the Company's financial strength as of September 30, 2023:

- Uninsured deposits were 24% of total deposits and uninsured and uncollateralized1 deposits were 15% of total deposits, compared to 29% and 16%, respectively, as of December 31, 2022.
- Primary liquidity sources, which consists of cash, investment securities and FHLBB and FRB borrowing capacity, totaled $1.5 billion, which was approximately 1.4 times total uninsured deposits and 2.1 times total uninsured and uncollateralized deposits.

1 Uncollateralized deposits are customer deposit balances for which the Company has not pledged any of its assets, including investment securities, or provided any other type of guarantee.

- Annualized net charge-offs for the nine months ended September 30, 2023 were 0.03%, compared to 0.02% for the same period of 2022.
- Non-performing assets were 0.11% of total assets and past due loans were 0.09% of total loans, compared to 0.09% and 0.06%, respectively, as of December 31, 2022.
- Common equity ratio was 8.02% and tangible common equity ratio (non-GAAP) was 6.47%, compared to 7.96% and 6.37%, respectively, as of December 31, 2022.
- Common Equity Tier 1 risk-based capital ratio of 12.16% exceeded the minimum regulatory capital required for capital adequacy plus the capital conservation buffer by 5.16%.

Like many others across the banking industry, the Company's earnings have been greatly affected by the inverted yield curve, as deposit and other funding costs have risen at a faster pace than earning asset yields, which has resulted in net interest margin compression period-over-period. Our net interest margin for the nine months ended September 30, 2023 was 2.44%, compared to 2.86% for the same period of 2022, and for the third quarter of 2023 was 2.39%, compared to 2.88% for the third quarter of 2022. Through the nine months ended September 30, 2023, we have taken several actions to optimize the Company's net interest margin, including, but not limited to: (1) maintaining our disciplined approach to loan and deposit pricing, (2) utilizing interest rate swaps, (3) implementing various borrowing strategies, and (4) taking actions to adjust our balance sheet. Compared to the quarter ended September 30, 2022, these actions resulted in an improvement of the Company's net interest income at risk over a 12-month period in an up 200 basis points scenario, based on the Company's interest rate risk modeling, as discussed in "—*Risk Management—Interest Rate Risk," below.*

The Company's investment bond portfolio through investment cash flows, and the ability to pledge securities as collateral for funding continue to be primary sources of liquidity. As of September 30, 2023, the fair value of the Company's bond portfolio was $1.1 billion and was in a net unrealized loss position of $182.4 million, compared to a fair value of $1.2 billion and a net unrealized loss position of $141.5 million as of December 31, 2022. The net unrealized loss position as of each date reflects the increase in interest rates and was not reflective of perceived credit risk within the investment bond portfolio. The investment portfolio continues to be primarily made up of agency-backed MBS and CMO, but also contains corporate bonds and municipal securities as further described within "—*Financial Condition—Investments.*" As of September 30, 2023, the corporate bond portfolio was comprised of 20 different companies, of which 18 were differing banks. The banks in the portfolio range from the largest U.S. banks to community banks. The largest exposure, with a book value of $6.7 million as of September 30, 2023, was to a global systemically important bank, or “G-SIB”. The weighted-average life and duration of our bond portfolio as of September 30, 2023, was 7.5 years and 5.7 years, respectively, compared to 7.8 years and 5.8 years, respectively, as of December 31, 2022.

In the third quarter of 2023, the Company took action to adjust the position of its balance sheet by selling $66.7 million of investments with a weighted-average yield of 2.31% at a pre-tax loss of $5.3 million. The Company reinvested $30.0 million of the proceeds into investments yielding 6.06% and the remaining proceeds will be used to reduce higher cost funding sources. The estimated earn-back period on tangible book value (non-GAAP) dilution from the loss on sale of investments is less than three years, and the Company anticipates that the repositioning adjustments made to the balance sheet will enhance future net interest margin and earnings.

Discussed below is further information on the Company's financial performance for the third quarter of 2023 and its current financial position.

***Operating Results.*** Net income for the third quarter of 2023 was $9.8 million, a decrease of $4.5 million or 31%, compared to the third quarter of 2022, and diluted EPS decreased $0.30, or 31%, to $0.67 for the third quarter of 2023 compared to the same period last year. The Company's third quarter operating results include the impact from the sale of investment securities (described above). When adjusting net income for the loss on sale of securities, adjusted net income (non-GAAP) for the third quarter of 2023 was $14.0 million and adjusted EPS was $0.96, decreases of 2% and 1%, respectively, from the third quarter of 2022.

Net income for the nine months ended September 30, 2023 was $34.9 million, a decrease of $11.2 million or 24%, compared to the same period of 2022, and diluted EPS decreased $0.73, or 23%, to $2.39 compared to the same period of 2022. When adjusting net income for the loss on sale of securities and the write-off of a Signature Bank corporate bond during the first quarter of 2023, adjusted net income (non-GAAP) for the nine months ended September 30, 2023 was $40.6 million and adjusted EPS (non-GAAP) was $2.77, decreases of 12% and 11% from the same period in 2022.

Other key financial metrics for the periods indicated were as follows:

|  | Three Months Ended September 30, 2023 | 2022 | Nine Months Ended September 30, 2023 | 2022 |
| --- | ---: | ---: | ---: | ---: |
| Return on average assets (annualized) | 0.68% | 1.03% | 0.82% | 1.13% |
| Adjusted return on average assets (annualized) (non-GAAP) | 0.97% | 1.03% | 0.95% | 1.13% |
| Return on average equity (annualized) | 8.25% | 12.50% | 10.00% | 12.88% |
| Adjusted return on average equity (annualized) (non-GAAP) | 11.80% | 12.50% | 11.63% | 12.88% |
| Return on average tangible equity (annualized) (non-GAAP) | 10.48% | 16.02% | 12.72% | 16.27% |
| Adjusted return on average tangible equity (annualized) (non-GAAP) | 14.94% | 16.02% | 14.77% | 16.27% |
| Ratio of non-interest expense to total revenues | 69.60% | 56.71% | 63.82% | 56.38% |
| Efficiency ratio (non-GAAP) | 60.63% | 56.43% | 60.87% | 56.10% |
| Overhead ratio (non-interest expense divided by average assets) (annualized) | 1.83% | 1.96% | 1.86% | 1.95% |

***Asset Quality.*** As of September 30, 2023 and December 31, 2022, the Company's credit quality metrics were strong with non-performing loans totaling 0.16% and 0.13% of total loans, respectively. We continue to monitor the Company's loan portfolio closely for any leading indicators of potential stress.

***Shareholders' Equity.*** As of September 30, 2023, the Company's regulatory capital ratios were each well in excess of regulatory capital requirements.

The Company announced a cash dividend of $0.42 per share, payable on October 31, 2023, to shareholders of record on October 13, 2023, representing an annualized dividend yield of 5.95%, based on the Company's closing share price of $28.22, as reported by NASDAQ on September 29, 2023.

In January 2023, we announced a new share repurchase program was approved by the Company’s Board of Directors for up to 750,000 shares, or approximately 5% of total shares outstanding as of December 31, 2022, and the termination of our share repurchase program that was opened in 2022. The Company repurchased 65,692 shares of its outstanding common stock through the nine months ended September 30, 2023 at a weighted-average price of $30.44 per share. There were no repurchases made in the third quarter of 2023.

***President and CEO Transition.*** During the third quarter, the Company announced the upcoming retirement of the Company’s President and CEO, Gregory Dufour, effective December 31, 2023. The Company also announced that Mr. Dufour will be succeeded by Simon Griffiths, Executive Vice – Head of Core Banking at Citizens Bank. Mr. Dufour will remain with the Company as an advisor for several months following his retirement to assist with the CEO transition.

### RESULTS OF OPERATIONS

### Net Interest Income and Net Interest Margin

Net interest income is the interest earned on loans, securities, and other interest-earning assets, adjusted for net loan fees, origination costs, and accretion or amortization of fair value marks on loans and/or CDs created in purchase accounting, less the interest paid on interest-bearing deposits and borrowings. Net interest income is our largest source of revenue ("revenue" is defined as the sum of net interest income and non-interest income). For the quarter ended September 30, 2023, net interest income was 87% of total revenues, compared to 79% for the quarter ended September 30, 2022. For the nine months ended September 30, 2023, net interest income was 80% of total revenues, compared to 78% for the same period of 2022. The increase in net interest income as a percentage of total revenue for the three and nine months ended September 30, 2023, compared to the same periods of 2022, reflects the decrease in non-interest income of $4.9 million and $5.9 million, respectively, between periods, primarily due to the $5.3 million pre-tax investment loss recognized in the third quarter of 2023 as the Company executed a balance sheet repositioning strategy. Refer to "—*Non-Interest Income"* for further details.

Net interest income is affected by several factors including, but not limited to, changes in interest rates, loan and deposit pricing strategies and competitive conditions, the volume and mix of interest-earning assets and liabilities, and the level of non-performing assets.

Net interest margin is calculated as net interest income on a fully-taxable equivalent basis (non-GAAP) as a percentage of average interest-earning assets.

***Net Interest Income and Net Interest Margin.*** Net interest income on a fully-taxable equivalent basis for the quarter ended September 30, 2023 was $32.8 million, a decrease of $5.2 million, or 14%, compared to the third quarter of 2022. The decrease consisted of a $18.3 million increase in interest expense, partially offset by an increase in interest income on a fully-taxable equivalent basis of $13.1 million between periods. The sharp increase in interest expense and interest income between periods reflects the significant change in the interest rate environment between periods. The following discusses the drivers for the change in interest expense and interest income between periods:

- The increase in interest expense between periods was primarily the result of a 139 basis points increase in our average cost of funds to 1.93% for the third quarter of 2023. The Federal Funds Target Rate range at September 30, 2023 was 5.25% - 5.50%, compared to 3.00% - 3.25% at September 30, 2022.

Average deposit costs for the third quarter of 2023 were 1.67%, compared to 0.45% for the third quarter of 2022. The increase in average deposit costs between periods was driven by the change in the interest rate environment driving higher cost for deposit acquisition and retention, as well as a shift in deposit mix from lower cost deposit accounts, including checking and savings, to higher interest-bearing deposit accounts, such as money market and CDs.

Average borrowing costs grew to 3.70% for third quarter of 2023, compared to 1.38% for the third quarter of 2022, primarily due to the change in the interest rate environment. Average borrowings also increased between periods by $201.3 million, or 44%.

- The increase in interest income between periods was primarily driven by both interest-earning assets yield expansion of 83 basis points to 4.23% for the third quarter of 2023 and average interest-earning asset growth of $194.6 million, or 4%.

The Company's average loan yield for the third quarter of 2023 was 4.85%, compared to 3.91% for the third quarter of 2022. The increase was driven by the change in the interest rate environment between periods as new loans continue to be originated at current market rates, existing loan book continues to reprice, and older vintage loans at lower yields continue to run-off. In addition, in the first half of 2023, the Company executed five pay-fixed, receive-floating interest rate swaps, totaling $375.0 million of notional value on a designated pool of fixed rate residential real estate loans. The derivative transaction was designated as a “fair value hedge” under ASC 815, and was completed to reduce its near-term interest rate risk exposure to rising interest rates. For the third quarter of 2023, these interest rate swaps generated $1.4 million of interest income.

The Company's average investment yield for the third quarter of 2023 was 2.27%, compared to 2.02% for the third quarter of 2022. The increase in our average investment yield between periods reflects the balance sheet repositioning strategies the Company deployed in the fourth quarter of 2022 and third quarter of 2023 to sell lower yielding investment and reinvest the proceeds into higher yielding investments at current market rates and pay-down borrowings with any remaining proceeds. Refer to "—*Non-Interest Income"* for further details on the balance sheet repositioning strategy executed in the third quarter of 2023.

Average loan growth between periods was $287.5 million, or 8%, and was centered in residential real estate and commercial real estate each growing 12% and 7%, respectively.

Average investments decreased between periods by $117.6 million, or 8%. The decrease reflects the Company's strategy used consistently over the past year to redeploy cash flows on investment pay-downs to fund loan growth, as well as the sale of investment securities in the fourth quarter of 2022 and third quarter of 2023 as part of the Company's actions to adjust its balance sheet.

Net interest margin on a fully-taxable equivalent basis for the three months ended September 30, 2023 and 2022 was 2.39% and 2.88%, respectively.

For the nine months ended September 30, 2023, net interest income on a fully-taxable equivalent basis totaled $100.3 million, a decrease of $11.2 million, or 10%, compared to the same period in 2022. The decrease consisted of a $54.1 million increase in interest expense, partially offset by an increase in interest income on a fully-taxable equivalent basis of $43.0 million, or 35%, between periods. The sharp increase in interest expense and interest income between periods reflects the significant change in the interest rate environment between periods. The following discusses the drivers for the change in interest expense and interest income between periods:

- The increase in interest expense between periods was primarily driven by a 139 basis points increase in our average cost of funds to 1.74% for the nine months ended September 30, 2023. Average deposit costs increased 119 basis points between periods to 1.46% for the nine months ended September 30, 2023.
- The increase in interest income between periods was driven by both interest-earning assets yield expansion of 90 basis points to 4.09% for the nine months ended September 30, 2023, and average interest-earning asset growth of $258.5 million, or 5%. Between periods the Company's average loan yield expanded 94 basis points to 4.69% and its investment yield expanded 30 basis points to 2.22% for the nine months ended September 30, 2023.

For the nine months ended September 30, 2023, the Company executed five pay-fixed, receive-floating interest rate swaps, totaling $375.0 million of notional value on a designated pool of fixed rate residential real estate loans. The derivative transaction was designated as a “fair value hedge” under ASC 815, and was completed to reduce its near-term interest rate risk exposure to rising interest rates. For the nine months ended September 30, 2023, these interest rate swaps generated $3.1 million of interest income.

Net interest margin on a fully-taxable equivalent basis for the nine months ended September 30, 2023 and 2022 was 2.44% and 2.86%, respectively.

### Quarterly Average Balance, Interest and Yield/Rate Analysis

*(Dollars in thousands)*

| Assets Interest-earning assets: | Three Months Ended September 30, 2023 Average Balance | Interest | Yield/Rate | September 30, 2022 Average Balance | Interest | Yield/Rate |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Interest-bearing deposits in other banks and other interest-earning assets | $48,401 | $500 | 4.04% | $30,063 | $172 | 2.24% |
| Investments - taxable | 1,177,367 | 6,306 | 2.14% | 1,288,172 | 6,051 | 1.88% |
| Investments - nontaxable(1) | 102,872 | 947 | 3.68% | 109,661 | 1,001 | 3.65% |
| Loans(2): |  |  |  |  |  |  |
| Commercial real estate | 1,658,125 | 20,496 | 4.84% | 1,546,638 | 15,973 | 4.04% |
| Commercial(1) | 391,052 | 6,079 | 6.08% | 402,152 | 4,380 | 4.26% |
| SBA PPP | 439 | 3 | 2.40% | 1,254 | 50 | 15.67% |
| Municipal(1) | 18,888 | 210 | 4.41% | 22,574 | 171 | 3.01% |
| Residential real estate | 1,762,860 | 18,441 | 4.18% | 1,571,449 | 13,712 | 3.49% |
| Consumer and home equity | 252,357 | 4,924 | 7.74% | 252,145 | 3,313 | 5.21% |
| Total loans | 4,083,721 | 50,153 | 4.85% | 3,796,212 | 37,599 | 3.91% |
| **Total interest-earning assets** | **5,412,361** | **57,906** | **4.23%** | **5,224,108** | **44,823** | **3.40%** |
| Cash and due from banks | 75,633 |  |  | 52,693 |  |  |
| Other assets | 265,781 |  |  | 274,978 |  |  |
| Less: ACL | (36,975) |  |  | (34,698) |  |  |
| **Total assets** | **$5,716,800** |  |  | **$5,517,081** |  |  |
| **Liabilities & Shareholders' Equity** |  |  |  |  |  |  |
| **Deposits:** |  |  |  |  |  |  |
| Non-interest checking | $1,019,450 | $— | —% | $1,243,174 | $— | —% |
| Interest checking | 1,584,314 | 9,669 | 2.42% | 1,502,436 | 3,213 | 0.85% |
| Savings | 661,126 | 225 | 0.14% | 774,725 | 86 | 0.04% |
| Money market | 721,423 | 5,182 | 2.85% | 720,641 | 1,532 | 0.84% |
| Certificates of deposit | 497,301 | 3,828 | 3.05% | 290,043 | 326 | 0.45% |
| **Total deposits** | **4,483,614** | **18,904** | **1.67%** | **4,531,019** | **5,157** | **0.45%** |
| **Borrowings:** |  |  |  |  |  |  |
| Brokered deposits | 161,623 | 2,065 | 5.07% | 80,701 | 285 | 1.40% |
| Customer repurchase agreements | 193,297 | 822 | 1.69% | 228,495 | 328 | 0.57% |
| Junior subordinated debentures | 44,331 | 539 | 4.83% | 44,331 | 539 | 4.83% |
| Other borrowings | 263,705 | 2,755 | 4.14% | 108,084 | 459 | 1.68% |
| **Total borrowings** | 662,956 | 6,181 | 3.70% | 461,611 | 1,611 | 1.38% |
| **Total funding liabilities** | **5,146,570** | **25,085** | **1.93%** | **4,992,630** | **6,768** | **0.54%** |
| Other liabilities | 99,480 |  |  | 71,636 |  |  |
| Shareholders' equity | 470,750 |  |  | 452,815 |  |  |
| **Total liabilities & shareholders' equity** | **$5,716,800** |  |  | **$5,517,081** |  |  |
| Net interest income (fully-taxable equivalent) |  | 32,821 |  |  | 38,055 |  |
| Less: fully-taxable equivalent adjustment |  | (237) |  |  | (242) |  |
| Net interest income |  | $32,584 |  |  | $37,813 |  |
| **Net interest rate spread (fully-taxable equivalent)** |  |  | **2.30%** |  |  | **2.86%** |
| **Net interest margin (fully-taxable equivalent)** |  |  | **2.39%** |  |  | **2.88%** |

(1) Reported on tax-equivalent basis calculated using a 21% tax rate, including certain commercial loans.

(2) Non-accrual loans and loans held for sale are included in total average loans.

### Year-to-Date Average Balance, Interest and Yield/Rate Analysis

*(Dollars in thousands)*

| Assets Interest-earning assets: | Nine Months Ended September 30, 2023 Average Balance | Interest | Yield/Rate | September 30, 2022 Average Balance | Interest | Yield/Rate |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Interest-bearing deposits in other banks and other interest-earning assets | $30,002 | $1,088 | 4.78% | $60,105 | $260 | 0.57% |
| Investments - taxable | 1,209,000 | 18,996 | 2.09% | 1,354,339 | 18,161 | 1.79% |
| Investments - nontaxable(1) | 104,518 | 2,878 | 3.67% | 112,526 | 2,942 | 3.49% |
| Loans(2): |  |  |  |  |  |  |
| Commercial real estate | 1,658,188 | 59,494 | 4.73% | 1,512,285 | 43,675 | 3.81% |
| Commercial(1) | 401,817 | 17,669 | 5.80% | 391,540 | 11,357 | 3.82% |
| SBA PPP | 514 | 12 | 3.08% | 9,138 | 1,248 | 18.01% |
| Municipal(1) | 17,467 | 524 | 4.01% | 18,837 | 446 | 3.17% |
| Residential real estate | 1,742,340 | 52,371 | 4.01% | 1,459,659 | 37,825 | 3.46% |
| Consumer and home equity | 253,137 | 14,118 | 7.46% | 240,041 | 8,255 | 4.60% |
| Total loans | 4,073,463 | 144,188 | 4.69% | 3,631,500 | 102,806 | 3.75% |
| **Total interest-earning assets** | **5,416,983** | **167,150** | **4.09%** | **5,158,470** | **124,169** | **3.19%** |
| Cash and due from banks | 61,290 |  |  | 50,100 |  |  |
| Other assets | 264,665 |  |  | 275,074 |  |  |
| Less: ACL | (37,172) |  |  | (33,353) |  |  |
| **Total assets** | **$5,705,766** |  |  | **$5,450,291** |  |  |
| **Liabilities & Shareholders' Equity** |  |  |  |  |  |  |
| **Deposits:** |  |  |  |  |  |  |
| Non-interest checking | $1,031,700 | $— | —% | $1,214,263 | $— | —% |
| Interest checking | 1,637,231 | 27,339 | 2.23% | 1,448,146 | 5,024 | 0.46% |
| Savings | 693,468 | 526 | 0.10% | 759,053 | 239 | 0.04% |
| Money market | 704,360 | 13,226 | 2.51% | 712,729 | 2,796 | 0.52% |
| Certificates of deposit | 409,909 | 7,799 | 2.54% | 297,646 | 988 | 0.44% |
| **Total deposits** | **4,476,668** | **48,890** | **1.46%** | **4,431,837** | **9,047** | **0.27%** |
| **Borrowings:** |  |  |  |  |  |  |
| Brokered deposits | 206,206 | 7,156 | 4.64% | 133,928 | 738 | 0.74% |
| Customer repurchase agreements | 189,532 | 2,010 | 1.42% | 220,026 | 682 | 0.41% |
| Junior subordinated debentures | 44,331 | 1,600 | 4.83% | 44,331 | 1,600 | 4.83% |
| Other borrowings | 237,546 | 7,239 | 4.07% | 65,595 | 690 | 1.41% |
| **Total borrowings** | 677,615 | 18,005 | 3.55% | 463,880 | 3,710 | 1.07% |
| **Total funding liabilities** | **5,154,283** | **66,895** | **1.74%** | **4,895,717** | **12,757** | **0.35%** |
| Other liabilities | 84,920 |  |  | 76,154 |  |  |
| Shareholders' equity | 466,563 |  |  | 478,420 |  |  |
| **Total liabilities & shareholders' equity** | **$5,705,766** |  |  | **$5,450,291** |  |  |
| Net interest income (fully-taxable equivalent) |  | 100,255 |  |  | 111,412 |  |
| Less: fully-taxable equivalent adjustment |  | (701) |  |  | (700) |  |
| Net interest income |  | $99,554 |  |  | $110,712 |  |
| **Net interest rate spread (fully-taxable equivalent)** |  |  | **2.35%** |  |  | **2.84%** |
| **Net interest margin (fully-taxable equivalent)** |  |  | **2.44%** |  |  | **2.86%** |

(1) Reported on tax-equivalent basis calculated using a 21% tax rate, including certain commercial loans.

(2) Non-accrual loans and loans held for sale are included in total average loans.

The following table presents certain information on a fully-taxable equivalent basis regarding changes in interest income and interest expense for the periods indicated. For each category of interest-earning assets and interest-bearing liabilities, information is provided with respect to changes attributable to rate and volume. The (a) changes in volume (change in volume multiplied by prior period's rate), (b) changes in rates (change in rate multiplied prior period's volume), and (c) changes in rate/volume (change in rate multiplied by the change in volume), which is allocated to the change due to rate column.

*(In thousands)*

| Interest-earning assets: | Three Months Ended September 30, 2023 vs. September 30, 2022 Increase (Decrease) Due to: Volume | Rate | Net Increase (Decrease) Volume | Nine Months Ended September 30, 2023 vs. September 30, 2022 Increase (Decrease) Due to: Rate |  | Net Increase (Decrease) |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Interest-bearing deposits in other banks and other interest-earning assets | $159 | $169 | $328 | $(116) | $944 | $828 |
| Investments – taxable | (521) | 776 | 255 | (1,951) | 2,786 | 835 |
| Investments – nontaxable | (62) | 8 | (54) | (210) | 146 | (64) |
| Commercial real estate | 1,157 | 3,366 | 4,523 | 4,271 | 10,923 | 15,194 |
| Commercial | (107) | 1,806 | 1,699 | 298 | 6,034 | 6,332 |
| SBA PPP | (33) | (14) | (47) | (1,178) | (58) | (1,236) |
| Municipal | (28) | 67 | 39 | (32) | 110 | 78 |
| Residential real estate | 1,665 | 3,064 | 4,729 | 7,208 | 7,942 | 15,150 |
| Consumer and home equity | 3 | 1,608 | 1,611 | 451 | 5,412 | 5,863 |
| **Total interest income (fully-taxable equivalent)** | 2,233 | 10,850 | 13,083 | 8,741 | 34,239 | 42,980 |
| **Interest-bearing liabilities:** |  |  |  |  |  |  |
| Interest checking | 175 | 6,281 | 6,456 | 651 | 21,664 | 22,315 |
| Savings | (11) | 150 | 139 | (20) | 307 | 287 |
| Money market | 2 | 3,648 | 3,650 | (33) | 10,463 | 10,430 |
| Certificates of deposit | 235 | 3,267 | 3,502 | 369 | 6,442 | 6,811 |
| Brokered deposits | 286 | 1,494 | 1,780 | 400 | 6,018 | 6,418 |
| Customer repurchase agreements | (51) | 545 | 494 | (94) | 1,422 | 1,328 |
| Junior subordinated debentures | — | — | — | — | — | — |
| Other borrowings | 660 | 1,636 | 2,296 | 1,813 | 4,736 | 6,549 |
| **Total interest expense** | 1,296 | 17,021 | 18,317 | 3,086 | 51,052 | 54,138 |
| **Net interest income (fully-taxable equivalent)** | $937 | $(6,171) | $(5,234) | $5,655 | $(16,813) | $(11,158) |

Net interest income on a fully-taxable equivalent basis included the following for the periods indicated:

*(In thousands)*

|  | Income Statement Location 2023 | Three Months Ended September 30, 2022 | 2023 | Nine Months Ended September 30, 2022 |  |
| --- | --- | ---: | ---: | ---: | ---: |
| Loan fees (cost) | Interest income | $241 | $(297) | $(70) | $1,006 |
| Net fair value mark accretion from purchase accounting | Interest income and Interest expense | 29 | 71 | 110 | 197 |
| Recoveries on previously charged-off acquired loans | Interest income | 31 | 20 | 68 | 189 |
| Total |  | $301 | $(206) | $108 | $1,392 |

56

### Provision for Credit Losses

The provision for credit losses was made up of the following components for the periods indicated:

*(Dollars in thousands)*

|  | Three Months Ended September 30, 2023 2023 | 2022 | Change $% |  | Nine Months Ended September 30, 2023 2023 | 2022 | Change $% |  |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| (Credit) provision for loan losses(1) | $(456) | $2,513 | $(2,969) | (118)% | $288 | $3,788 | $(3,500) | 92% |
| (Credit) provision for credit losses on off-balance sheet credit exposures(2) | (118) | 251 | (369) | (147)% | (595) | 246 | (841) | (342)% |
| Provision for HTM debt securities | — | — | — | —% | 1,838 | — | 1,838 | N.M. |
| **Provision for credit losses** | $(574) | $2,764 | $(3,338) | (121)% | $1,531 | $4,034 | $(2,503) | (62)% |

**(1) (Credit) provision for loan losses:** The credit for loan losses for the three and nine months ended September 30, 2023, was driven by: (1) a 1% decrease in loans during the third quarter of 2023 and 1% loan growth for the nine months ended September 30, 2023, (2) total net loan charge-offs of $120,000, or 0.01% of average loans (annualized), and $803,000, or 0.03% of average loans (annualized), for the three and nine months ended September 30, 2023, and (3) further supported by strong asset quality metrics as of September 30, 2023, including non-performing loans of 0.16% of total loans and loans 30-89 days past due of 0.09% of total loans.

For the three and nine months ended September 30, 2022, a provision for credit losses on loans was recorded of $2.5 million and $3.8 million, respectively, and was driven by: (1) a softening overall economy and the continued increasing likelihood of an economic slowdown in the future, and (2) 4% loan growth for the quarter ended September 30, 2022 and 13% loan growth for the nine months of 2022, that offset (3) the release of $768,000 and $5.0 million for the three and nine months ended September 30, 2022, respectively, of additional reserves provided for certain commercial real estate loans at the onset of the COVID-19 pandemic due to the heightened credit risk at that time.

**(2) (Credit) provision for credit losses on off-balance sheet credit exposures:** The decrease in provisions for three and nine months ended September 30, 2023, compared to the same period of 2022, was driven by the decrease in unfunded commitments and credit lines during each period. At September 30, 2023 and December 31, 2022, total unfunded commitments and credit lines for which the Company carried an reserve for were $731.7 million and $810.8 million, respectively.

At September 30, 2023, the ACL on off-balance sheet credit exposures was $2.7 million, as compared to $3.3 million as of September 30, 2022.

**(3) Provision for HTM debt securities:** In the first quarter of 2023, the Company fully wrote-off of one Signature Bank corporate bond as Signature Bank failed. There were no necessary provisions recorded in the third quarter of 2023 or for the three and nine months ended September 30, 2022.

### Non-Interest Income

The following table presents the components of non-interest income for the periods indicated:

*(Dollars in thousands)*

|  | Three Months Ended September 30, 2023 | 2022 | Change $% |  | Nine Months Ended September 30, 2023 | 2022 | Change $% |  |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Debit card income | $3,130 | $3,234 | $(104) | (3)% | $9,147 | $9,371 | $(224) | (2)% |
| Service charges on deposit accounts | 2,040 | 1,941 | 99 | 5% | 5,737 | 5,705 | 32 | 1% |
| Income from fiduciary services | 1,641 | 1,535 | 106 | 7% | 5,016 | 4,847 | 169 | 3% |
| Brokerage and insurance commissions | 1,217 | 1,003 | 214 | 21% | 3,462 | 3,269 | 193 | 6% |
| Mortgage banking income, net(1) | 583 | 635 | (52) | (8)% | 1,889 | 3,186 | (1,297) | (41)% |
| Bank-owned life insurance | 644 | 374 | 270 | 72% | 1,849 | 1,519 | 330 | 22% |
| Net loss on sale of securities(2) | (5,335) | — | (5,335) | N.M. | (5,335) | (9) | (5,326) | N.M. |
| Other income | 1,152 | 1,232 | (80) | (6)% | 3,283 | 3,032 | 251 | 8% |
| **Total non-interest income** | $5,072 | $9,954 | $(4,882) | (49)% | $25,048 | $30,920 | $(5,872) | (19)% |
| Non-interest income as a percentage of total revenues | 13% | 21% |  |  | 20% | 22% |  |  |

(1) **Mortgage banking income, net:** The decrease for the nine months ended September 30, 2023, compared to the same period of 2022, was due to the decrease in net gains recognized on residential mortgage loan sales due to the change interest rate environment between periods as residential mortgages have increased sharply. For the nine months ended September 30, 2023, the Company sold $137.3 million, or 47%, of its residential mortgages at an average net gain of 1.33%, compared to $131.6 million, or 21%, at an average net gain of 2.49% for the nine months ended September 30, 2022. In response to the sharp increase in interest rates between periods, the Company shifted its strategy to sell more of its residential mortgages production by lowering its margins on residential mortgage sales.

(2) **Net loss on sale of securities:** In the third quarter of 2023, the Company took action to adjust its balance sheet by selling $66.7 million of investments with a weighted-average yield of 2.31% at a pre-tax loss of $5.3 million The Company expects these adjustments to improve future net interest margin, earnings and profitability metrics. The Company reinvested $30.0 million of the proceeds into investments yielding 6.06% and the remaining will be used to reduce higher cost funding alternatives.

### Non-Interest Expense

The following table presents the components of non-interest expense for the periods indicated:

*(Dollars in thousands)*

|  | Three Months Ended September 30, 2023 | 2022 | Change $% |  | Nine Months Ended September 30, 2023 | 2022 | Change $% |  |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Salaries and employee benefits(1) | $14,744 | $15,849 | $(1,105) | (7)% | $44,605 | $46,757 | $(2,152) | (5)% |
| Furniture, equipment and data processing | 3,382 | 3,305 | 77 | 2% | 9,772 | 9,639 | 133 | 1% |
| Net occupancy costs | 1,804 | 1,765 | 39 | 2% | 5,735 | 5,715 | 20 | N.M. |
| Debit card expense(2) | 1,318 | 1,210 | 108 | 9% | 3,781 | 3,410 | 371 | 11% |
| Consulting and professional fees | 897 | 814 | 83 | 10% | 3,327 | 3,114 | 213 | 7% |
| Regulatory assessments(3) | 861 | 575 | 286 | 50% | 2,574 | 1,745 | 829 | 48% |
| Amortization of core deposit intangible assets | 148 | 156 | (8) | (5)% | 444 | 469 | (25) | (5)% |
| Other real estate owned and collection costs (recoveries), net | (34) | 56 | (90) | (161)% | (25) | 9 | (34) | (378)% |
| Other expenses | 3,087 | 3,361 | (274) | (8)% | 9,302 | 8,998 | 304 | 3% |
| **Total non-interest expense** | $26,207 | $27,091 | $(884) | (3)% | $79,515 | $79,856 | $(341) | —% |
| Ratio of non-interest expense to total revenues | 69.60% | 56.71% |  |  | 63.82% | 56.38% |  |  |
| Efficiency ratio (non-GAAP) | 60.63% | 56.43% |  |  | 60.87% | 56.10% |  |  |

(1) **Salaries and employee benefits:** The decrease for the three and nine months ended September 30, 2023, compared to the same periods in 2022, was primarily driven by lower salary costs and incentive accruals. Through the nine months ended September 30, 2023, the Company has managed salary-related costs closely in response to declining revenues year-over-year due to the interest rate environment and the broader macro-environment. Incentive compensation has decreased between periods due to the decrease in net income between periods.

(2) **Debit card expense:** The increase for both the three months and nine months ended September 30, 2023, compared to the same periods in 2022, reflects inflationary processing and support costs between periods.

(3) **Regulatory assessments:** The increase for both the three months and nine months ended September 30, 2023, compared to the same periods in 2022, was driven by the increase in FDIC assessments rates, effective January 1, 2023.

As the Company works through the CEO transition over the next several months, the Company anticipates elevated non-recurring costs as a result. The current estimate for related costs for year ended December 31, 2023 is approximately $900,000 and another $1.2 million for year ended December 31, 2024. Through the nine months ended September 30, 2023, the Company has recognized approximately $600,000 of these transition-related expenses, including legal and consulting fees, recruiter fees, and other equity-related costs.

On May 11, 2023, the FDIC released a proposed rule that would impose special assessments to recover the losses to the deposit insurance fund resulting from the FDIC’s use of the systemic risk exception to the least-cost resolution test under the Federal Deposit Insurance Act in connection with the recent failures by other banking institutions. Under the proposed rule, the first $5 billion of estimated uninsured deposits would be excluded from the assessment base for the special assessments. As a result, the Bank would not be subject to the special assessment if the rule is implemented as proposed. The effect of the proposed rule on the Company and the Bank, if any, will depend on the final form of the FDIC’s rulemaking.

### FINANCIAL CONDITION

### Cash and Cash Equivalents

Total cash and cash equivalents at September 30, 2023, were $211.5 million, compared to $75.4 million at December 31, 2022. The increase in cash of $136.1 million between periods was driven by an increase in cash collateral received from our derivative counterparties of $32.7 million and an increase in normal operating cash flows of $100.0 million, primarily due to timing of redeployment of the proceeds received from the sale of investment securities during the third quarter and timing of normal investment and loan cash flows. We continually monitor our cash levels as part of our liquidity risk management practices. Refer to the "—*Liquidity"* section for additional details.

### Investments

The Company utilizes the investment portfolio to manage liquidity, interest rate risk, and regulatory capital, as well as to take advantage of market conditions to generate returns without undue risk. At September 30, 2023 and December 31, 2022, our investment portfolio consisted of MBS, CMO, municipal and corporate debt securities, FHLBB and FRB common stock, and mutual funds held in a rabbi trust for the executive and director nonqualified retirement plans. We designate our debt securities as AFS or HTM based on our intent and investment strategy and they are carried at fair value and amortized cost, respectively. Our FHLBB and FRB common stock is carried at cost, and our mutual funds are designated as trading securities and are carried at fair value.

During the third quarter of 2023, we sold $66.7 million of investment securities designated as AFS with a weighted-average yield of 2.31% in order to adjust the Company's balance sheet in response to the current interest rate environment. The sale of these securities resulted in a pre-tax loss of $5.3 million. We reinvested $30.0 million of the proceeds from the sale into primarily CMOs yielding 6.06%, and the remaining proceeds as of September 30, 2023 were held in cash due to timing of the transaction. Subsequent to September 30, 2023, the Company used the remaining proceeds to reduce borrowings.

In the second quarter of 2022, we transferred securities from AFS to HTM to help manage our capital position in a rising interest rate environment. The securities were reclassified at fair value at the time of the transfer, which was a non-cash transaction. At September 30, 2023, the net unrealized losses on the transferred securities reported within AOCI were $48.2 million, net of a deferred tax asset of $13.2 million, and the weighted-average life on these securities was 8.7 years. At December 31, 2022, the net unrealized losses on the transferred securities reported within AOCI were $52.2 million, net of a deferred tax asset of $14.3 million.

At September 30, 2023, the reported value of Company's total investments portfolio was $1.2 billion, a decrease of $101.5 million, or 8.1%, since December 31, 2022. This was driven by changes within our debt securities portfolio, including:

- Paydowns, calls and maturities of $75.9 million, sales proceeds of $61.3 million offset by purchases of $52.6 million, driven by the sale of securities as a result of our balance sheet repositioning in the third quarter of 2023.
- A net decrease in the fair value of the AFS debt securities portfolio of $14.9 million due to interest rate movements during the quarter.
- An increase of $1.7 million in FHLBB common stock due to increased borrowing levels during the first 9 months of 2023.
- The write-off a $1.8 million Signature Bank corporate bond as Signature Bank failed during the first quarter of 2023.

Our AFS debt securities portfolio, which comprised 51% and 55% of our investment portfolio at September 30, 2023 and December 31, 2022, was carried at fair value using Level 2 valuation techniques. Refer to Note 15 of the consolidated financial statements for further details on the Company's fair value techniques. Our HTM debt securities portfolio comprised 48% and 43% of our investment portfolio at September 30, 2023 and at December 31, 2022.

The book value of our debt securities as of September 30, 2023 and December 31, 2022, was $1.3 billion. Our debt securities portfolio has limited credit risk due to its composition, which includes securities backed by the U.S. government and government-sponsored agencies, and highly rated corporate and municipal bonds by nationally recognized rating agencies. The following table provides the make-up of the Company's investment portfolio as of September 30, 2023 and December 31, 2022, based on the book value of each security type as a percentage of total book value of the Company's debt securities:

*(Dollars in thousands)*

|  | September 30, 2023 | Percent of Total at September 30, 2023 | December 31, 2022 | Percent of Total at December 31, 2022 |
| --- | ---: | ---: | ---: | ---: |
| MBS - Agency-backed | $829,640 | 66% | $916,250 | 68% |
| CMO - Agency-backed | 278,212 | 22% | 267,828 | 20% |
| Municipal | 98,843 | 8% | 105,656 | 8% |
| Corporate | 40,726 | 3% | 46,350 | 3% |
| Other - Agency-backed | 7,559 | 1% | 7,457 | 1% |
| **Total** | **$1,254,980** | **100%** | **$1,343,541** | **100%** |

We continually monitor and evaluate our investment portfolio to identify and assess risks within our portfolio, including but not limited to, the impact of the current interest rate environment and the related prepayment risk, and the review of credit ratings. The overall mix of debt securities at September 30, 2023, compared to December 31, 2022, remains relatively unchanged and the Company expects it will continue to be well positioned to provide a stable source of cash flow. At September 30, 2023 and December 31, 2022, the duration of our debt investment securities portfolio, adjusting for calls when appropriate and consensus prepayment speeds, was 6.3 years and 5.8 years, respectively.

In the first quarter of 2023, we wrote-off a $1.8 million corporate bond issued by Signature Bank due to Signature Bank's failure. This corporate bond was designated as HTM and previously carried no ACL. We completed a review of our HTM and AFS investment portfolio as of September 30, 2023, and concluded that no ACL was warranted on any of the remaining bonds at this time. The fair value and book value of the Company's corporate bonds and municipal securities as of September 30, 2023 and December 31, 2022 was as follows:

*(Dollars in thousands)*

|  | September 30, 2023 Fair Value | Book Value | Net Unrealized (Loss) Gain | December 31, 2022 Fair Value | Book Value | Net Unrealized Loss |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Municipal bonds | $91,419 | $98,843 | $(7,424) | $104,025 | $105,656 | $(1,631) |
| Corporate bonds | 36,378 | 40,726 | (4,348) | 44,012 | 46,350 | (2,338) |
| **Total** | $127,797 | $139,569 | $(11,772) | $148,037 | $152,006 | $(3,969) |

At September 30, 2023, municipal bonds were 8% of the book value of the total bond portfolio. At September 30, 2023, all municipal bonds carried an investment-grade credit rating.

At September 30, 2023, corporate bonds were 3% of the book value of the total bond portfolio. At September 30, 2023, corporate bonds with a book value of $31.2 million, or 77% of the corporate bond portfolio, carried an investment-grade credit rating and the remaining $9.5 million of book value, or 23% of the corporate bond portfolio, were non-rated corporate bonds of community banks within our markets. As of September 30, 2023, the corporate bond portfolio was made up of 18 different companies, which included 16 different banks. The banks in the portfolio range from the largest U.S. banks to community banks, with 32% of our exposure as of September 30, 2023, being to global systemically important banks, or "G-SIBs." Since March 31, 2023, a limited number of our rated corporate bonds have been downgraded as a result of stress in the banking system, although all remain investment-grade as of September 30, 2023. We continue to monitor and analyze the performance of our corporate bond portfolio.

At September 30, 2023 and December 31, 2022, the Company did not carry an ACL on any of its corporate or municipal bonds.

Our other investments on the consolidated statements of condition consist of FHLBB and FRB common stock. These investments are carried at cost. We are required to maintain a certain level of investment in FHLBB stock based on our level of

FHLBB advances, and maintain a certain level of investment in FRB common stock based on the Bank's capital levels. As of September 30, 2023 and December 31, 2022, our investment in FHLBB stock totaled $9.1 million and $7.3 million, respectively, and our investment in FRB stock was $5.4 million at each date.

Our investments in mutual funds are designated as trading securities and carried at fair value. These investments are held within a rabbi trust and will be used for future payments associated with the Company’s Executive and Director Deferred Compensation Plan. These investments are carried at fair value using Level 1 valuation techniques. Refer to Note 15 of the consolidated financial statements for further details on fair value.

### Loans

The Company provides loans primarily to customers located within our geographic market area. Our primary market continues to be Maine, making up 69% of the loan portfolio as of September 30, 2023 and December 31, 2022. Massachusetts and New Hampshire are our second and third largest markets that we serve, making up 15% and 10%, respectively, of our total loan portfolio as of September 30, 2023, and 15% and 9% as of December 31, 2022. As of September 30, 2023, our distribution channels included 56 branches within Maine, two locations in New Hampshire, including a branch in Portsmouth and a commercial loan production office in Manchester, a mortgage loan production office in Braintree, Massachusetts, and an online residential mortgage and small business digital loan platform.

The following table sets forth the composition of our loan portfolio as of the dates indicated:

*(Dollars in thousands)*

|  | September 30, 2023 | December 31, 2022 | Change ($) | (%) |
| --- | ---: | ---: | ---: | ---: |
| Commercial real estate - non-owner-occupied | $1,349,463 | $1,292,443 | $57,020 | 4% |
| Commercial real estate - owner-occupied | 303,825 | 332,494 | (28,669) | (9)% |
| Commercial | 400,031 | 430,131 | (30,100) | (7)% |
| Residential real estate | 1,752,401 | 1,700,266 | 52,135 | 3% |
| Consumer and home equity | 252,693 | 255,019 | (2,326) | (1)% |
| Total loans | $4,058,413 | $4,010,353 | $48,060 | 1% |
| Commercial Loan Portfolio | $2,053,319 | $2,055,068 | $(1,749) | —% |
| Retail Loan Portfolio | $2,005,094 | $1,955,285 | $49,809 | 3% |
| Commercial Portfolio Mix | 51% | 51% |  |  |
| Retail Portfolio Mix | 49% | 49% |  |  |

For the nine months ended September 30, 2023, the Company held 53% of its funded residential mortgage production, which decreased from 79% for the same period of 2022.

At September 30, 2023, the non-residential building operators' industry (operators of commercial and industrial buildings, retail establishments, theaters, banks and insurance buildings) and lessors of residential buildings industry (lessors of buildings used as residences, such as single-family homes, apartments and town houses) concentrations were 33% and 28%, respectively, of our total commercial real estate portfolio and 13% and 12% of total loans. At December 31, 2022, the non-residential building operators' industry and lessors of residential buildings industry concentrations were 34% and 28%, respectively, of our total commercial real estate portfolio and 14% and 11% of total loans. At September 30, 2023, there were no other industry concentrations within our loan portfolio that exceeded 10% of total loans.

Through the nine months ended September 30, 2023, the banking industry has faced a heightened focus on commercial real estate and the office space sector specifically given the increase in vacant properties. As of September 30, 2023, the Company's commercial real estate office space loans totaled $203.0 million, or 5% of its total loans and 12% of its commercial real estate loan portfolio. In comparison, at December 31, 2022, commercial real estate office space loans totaled $207.5 million, or 5% of its total loans and 13% of its commercial real estate loan portfolio. As of September 30, 2023, all of the Company's commercial real estate office space loans were located in its primary markets — Maine, Massachusetts and New Hampshire. As of September 30, 2023, all of the Company's commercial real estate office space loan portfolio was performing and one loan, totaling $672,000, was past due 30-89 days.

### Asset Quality

Our practice is to manage the Company's loan portfolio proactively so that we are able to effectively identify problem credits and trends early, assess and implement effective work-out strategies, and take charge-offs as promptly as practical. In addition, the Company continually reassesses its underwriting standards in response to credit risk posed by changes in economic conditions. The Company continues to dedicate significant resources to monitor and manage credit risk throughout our loan portfolio and includes management and board-level oversight as follows:

- The Credit Risk and Special Assets team and the Credit Risk Policy Committee, which is an internal management committee comprised of various executives and senior managers across business lines, including Accounting and Finance, Credit Underwriting, Credit Risk and Special Assets, Risk, and Commercial and Retail Banking, oversee the Company's systems and procedures to monitor the credit quality of its loan portfolio, conduct a loan review program, and maintain the integrity of the loan ratings system.
- The adequacy of the ACL is overseen by the Management Provision Committee, which is an internal management committee comprised of various Company executives and senior managers across business lines, including Accounting and Finance, Credit Underwriting, Credit Risk and Special Assets, Compliance, and Commercial and Retail Banking. The Management Provision Committee supports the oversight efforts of the Audit Committee of the Board of Directors.
- The Directors Credit Committee of the Board of Directors reviews large credit exposures, monitors external loan review reports, reviews the lending authority for individual loan officers when required, and has approval authority and responsibility for all matters regarding the loan policy and other credit-related policies, including reviewing and monitoring asset quality trends, and concentration levels.
- The Audit Committee of the Board of Directors has approval authority and oversight responsibility for the ACL adequacy and methodology.

***Non-Performing Assets.*** Non-performing assets include non-accrual loans, accruing loans 90 days or more past due, accruing TDRs prior to the Company's adoption ASU 2022-02, and property acquired through foreclosure or repossession. The following table sets forth the composition and amounts of our non-performing loans as of the dates indicated:

*(Dollars in thousands)*

| Non-accrual loans: | September 30, 2023 | December 31, 2022 |
| --- | ---: | ---: |
| Commercial real estate - non-owner-occupied | $92 | $11 |
| Commercial real estate - owner-occupied | — | 46 |
| Commercial | 1,083 | 715 |
| Residential real estate | 2,775 | 1,733 |
| Consumer and home equity | 674 | 486 |
| **Total non-accrual loans** | **4,624** | **2,991** |
| Accruing TDRs prior to ASU 2022-02 adoption not included above | 1,997 | 2,114 |
| **Total non-performing loans** | **6,621** | **5,105** |
| Other real estate owned | — | — |
| **Total non-performing assets** | **$6,621** | **$5,105** |
| Total loans, excluding loans held for sale | $4,058,413 | $4,010,353 |
| Total assets | $5,779,675 | $5,671,850 |
| ACL on loans | $36,407 | $36,922 |
| ACL on loans to non-accrual loans | 787.35% | 1,234.44% |
| Non-accrual loans to total loans | 0.11% | 0.07% |
| Non-performing loans to total loans | 0.16% | 0.13% |
| Non-performing assets to total assets | 0.11% | 0.09% |

63

***Potential Problem Loans.*** Potential problem loans consist of classified accruing commercial and commercial real estate loans that were 30-89 days past due. Such loans are characterized by weaknesses in the financial condition of borrowers or collateral deficiencies. Based on historical experience, the credit quality of some of these loans may improve due to changes in collateral values or the financial condition of the borrowers, while the credit quality of other loans may deteriorate, resulting in a loss. These loans are not included in the above analysis of non-accrual loans. At September 30, 2023 and December 31, 2022, loans classified as potential problem loans totaled $631,000 and $50,000, respectively.

***Past Due Loans.*** Past due loans consist of accruing loans that were 30-89 days past due. The following table presents the recorded investment of past due loans as of the dates indicated:

*(Dollars in thousands)*

| Accruing loans 30-89 days past due: | September 30, 2023 | December 31, 2022 |
| --- | ---: | ---: |
| Commercial real estate - non-owner-occupied | $46 | $267 |
| Commercial real estate - owner-occupied | 142 | 55 |
| Commercial | 2,260 | 801 |
| Residential real estate | 751 | 1,038 |
| Consumer and home equity | 603 | 391 |
| **Total** | $3,802 | $2,552 |
| Total loans | $4,058,413 | $4,010,353 |
| Accruing loans 30-89 days past due to total loans | 0.09% | 0.06% |

64

***ACL.*** The following table sets forth information concerning the components of our ACL for the periods indicated:

*(Dollars in thousands)*

|  | At or For The Three Months Ended September 30, 2023 | 2022 | At or For The Nine Months Ended September 30, 2023 | 2022 | At or For The Year Ended December 31, 2022 |
| --- | ---: | ---: | ---: | ---: | ---: |
| **ACL on loans at the beginning of the period** | $36,983 | $34,244 | $36,922 | $33,256 | $33,256 |
| **(Credit) provision for loan losses** | (456) | 2,513 | 288 | 3,788 | 4,430 |
| **Net charge-offs (recoveries)1** |  |  |  |  |  |
| Commercial real estate | 41 | (1) | 39 | (4) | (5) |
| Commercial | 66 | 122 | 749 | 403 | 663 |
| Residential real estate | (5) | 49 | (20) | 65 | 66 |
| Consumer and home equity | 18 | 45 | 35 | 38 | 40 |
| **Total net charge-offs** | **120** | **215** | **803** | **502** | **764** |
| **ACL on loans at the end of the period** | **$36,407** | **$36,542** | **$36,407** | **$36,542** | **$36,922** |
| **Components of ACL:** |  |  |  |  |  |
| ACL on loans | $36,407 | $36,542 | $36,407 | $36,542 | $36,922 |
| ACL on off-balance sheet credit exposures | 2,670 | 3,441 | 2,670 | 3,441 | 3,265 |
| **ACL at end of the period** | **$39,077** | **$39,983** | **$39,077** | **$39,983** | **$40,187** |
| Total loans, excluding loans held for sale | $4,058,413 | $3,860,680 | $4,058,413 | $3,860,680 | $4,010,353 |
| Average Loans | $4,083,721 | $3,796,212 | $4,073,463 | $3,631,500 | $3,710,415 |
| Net charge-offs to average loans (annualized) | 0.01% | 0.02% | 0.03% | 0.02% | 0.02% |
| (Credit) provision for loan losses (annualized) to average loans | (0.04)% | 0.26% | 0.01% | 0.21% | 0.12% |
| ACL on loans to total loans | 0.90% | 0.95% | 0.90% | 0.95% | 0.92% |
| ACL on loans to non-performing loans | 549.87% | 588.28% | 549.87% | 588.28% | 723.25% |
| ACL on loans to net charge-offs (annualized) | 7,584.79% | 4,249.07% | 3,400.40% | 5,459.46% | 4,832.72% |

(1) Additional information related to net charge-offs (recoveries) is presented in the following table for the periods indicated:

*(Dollars in thousands)*

| 2023: | For The Three Months Ended September 30, Total Charge-offs | Total Recoveries | Net Charge-Offs (Recoveries) | Average Loans | Ratio of Net Charge-Offs (Recoveries) to Average Loans |
| --- | ---: | ---: | ---: | ---: | ---: |
| Commercial real estate | $58 | $17 | $41 | $1,658,125 | —% |
| Commercial | 255 | 189 | 66 | 410,379 | 0.02% |
| Residential real estate | — | 5 | (5) | 1,762,860 | —% |
| Consumer and home equity | 32 | 14 | 18 | 252,357 | 0.01% |
| **Total** | **$345** | **$225** | **$120** | **$4,083,721** | **0.01%** |
| **2022:** |  |  |  |  |  |
| Commercial real estate | $— | $1 | $(1) | $1,546,638 | —% |
| Commercial | 183 | 61 | 122 | 425,980 | 0.03% |
| Residential real estate | 49 | — | 49 | 1,571,449 | —% |
| Consumer and home equity | 46 | 1 | 45 | 252,145 | 0.02% |
| **Total** | **$278** | **$63** | **$215** | **$3,796,212** | **0.02%** |
|  | **For The Nine Months Ended September 30,** |  |  |  |  |
| **2023:** |  |  |  |  |  |
| Commercial real estate | $58 | $19 | $39 | $1,658,188 | —% |
| Commercial | 1,101 | 352 | 749 | 419,798 | 0.18% |
| Residential real estate | 18 | 38 | (20) | 1,742,340 | —% |
| Consumer and home equity | 63 | 28 | 35 | 253,137 | 0.01% |
| **Total** | **$1,240** | **$437** | **$803** | **$4,073,463** | **0.03%** |
| **2022:** |  |  |  |  |  |
| Commercial real estate | $— | $4 | $(4) | $1,512,285 | —% |
| Commercial | 744 | 341 | 403 | 419,515 | 0.10% |
| Residential real estate | 65 | — | 65 | 1,459,659 | —% |
| Consumer and home equity | 130 | 92 | 38 | 240,041 | 0.02% |
| **Total** | **$939** | **$437** | **$502** | **$3,631,500** | **0.02%** |
|  | **For the Year Ended December 31,** |  |  |  |  |
| **2022:** |  |  |  |  |  |
| Commercial real estate | $— | $5 | $(5) | $1,532,225 | —% |
| Commercial | 1,042 | 379 | 663 | 422,304 | 0.16% |
| Residential real estate | 66 | — | 66 | 1,511,985 | —% |
| Consumer and home equity | 134 | 94 | 40 | 243,901 | 0.02% |
| **Total** | **$1,242** | **$478** | **$764** | **$3,710,415** | **0.02%** |

***ACL on Loans.*** There were no significant changes in our modeling methodology to determine the ACL on loans during the nine months ended September 30, 2023. The significant key assumptions used with the ACL on loans calculation at September 30, 2023 and December 31, 2022, included: (i) Company-specific macroeconomic factors (i.e., loss drivers), (ii) our forecast period and reversion speed, (iii) prepayment speeds, and (iv) various qualitative factors.

As of September 30, 2023 and December 31, 2022, the recorded ACL on loans was $36.4 million, or 0.90% to total loans, and $36.9 million, or 0.92% of total loans, respectively, and represented our best estimate. Our ACL on loans estimate as of each date incorporated the ongoing risk of a potential downturn over the next 12 to 24 months.

The overall global and national markets continue to be volatile and carry a high degree of uncertainty, and any changes to our forecast or qualitative factors subject our ACL estimate to a higher risk of fluctuation between periods.

We may adjust our assumptions to account for differences between expected and actual losses from period to period. A future change of our assumptions likely will alter the level of allowance required and may have a material impact on future results of operations and financial condition. The ACL on loans is reviewed periodically within a calendar quarter to assess trends in CECL key assumptions and asset quality, and their effects on the Company's financial condition.

***ACL on Off-Balance Sheet Credit Exposures.*** There were no significant changes in our modeling methodology to determine the ACL on off-balance sheet credit exposures during the nine months ended September 30, 2023. The model uses the credit loss factors for each segment calculated within the ACL on loans model described above. The ACL on off-balance sheet credit exposures as of September 30, 2023 and December 31, 2022, was $2.7 million and $3.3 million, respectively.

The ACL on off-balance sheet credit exposures was presented within accrued interest and other liabilities on the consolidated statements of condition. Increases (decreases) to the ACL on off-balance sheet credit exposures were presented within (credit) provision for credit losses on the consolidated statements of income.

We may adjust our assumptions to account for differences between expected and actual losses from period to period. A future change to our assumptions will likely alter the level of allowance required and may have a material impact on future results of operations and financial condition.

***ACL on HTM Securities.*** Each quarter the Company evaluates its investment portfolio for potential credit risk, and, in the first quarter of 2023, the Company fully wrote-off one $1.8 million corporate bond issued by Signature Bank that was designated as HTM. As of September 30, 2023, we have evaluated our HTM debt securities and we have not identified any further credit concerns. As of September 30, 2023 and December 31, 2022, there was no ACL recorded on HTM investments. Refer to "—*Investments"* and Note 3 of the consolidated financial statements for further discussion.

### Liabilities

***Deposits.*** At September 30, 2023, deposits totaled $4.7 billion, a decrease of $148.5 million, or 3%, since December 31, 2022. The interest rate environment for the nine months ended September 30, 2023, coupled with the well-publicized failures of three larger regional banks in the first and second quarter of 2023, has created a highly competitive landscape for deposits across our markets as depositors looked to deploy excess liquidity into higher yielding, interest-bearing deposit accounts, and to ensure that their deposits are properly safeguarded. We continue manage our deposits closely with a focus on maintaining and enhancing existing depositor relationships and developing new ones, while balancing the Company's overall funding cost and liquidity position. Another factor impacting deposits through the nine months ended September 30, 2023, was the decrease in average consumer deposit balances, primarily checking and savings accounts, which, in part, was likely due to depositors redeploying excess liquidity given the current interest rate environment as described above, but also likely reflects the shift in the overall financial position of the consumer as average checking and savings account deposit balances from the onset of the COVID-19 pandemic in 2020 through mid-year 2022 steadily increased before reaching its peak. As of September 30, 2023, the Company's average monthly consumer checking and savings account deposit balances have decreased 16%, compared to the average for the month of September 30, 2022, but still remain significantly higher than pre-pandemic.

The decrease in deposits through the nine months ended September 30, 2023, was primarily within checking and savings account balances, which were lower $302.4 million, or 10%, and $111.4 million, or 15%, respectively, as depositors shifted from lower yielding to higher yielding deposit products, such as money markets and CDs. For the nine months ended September 30, 2023, CD balances grew $251.7 million, or 84% and money market deposit balances grew $60.9 million, or 9%. Throughout the first nine months of 2023, the Company has used a mix of deposit product offerings and promotions to attract new deposits and retain existing deposits at lower rates than overnight borrowings. Over this same period, brokered deposits decreased $47.4 million, or 26%, as brokered CDs matured and were not replaced as we utilized other funding sources and strategies.

The Company's loan-to-deposit ratio was 87% at September 30, 2023, compared to 83% at December 31, 2022.

At September 30, 2023, the Company had no customer relationships that exceeded 10% of total deposits.

***Uninsured and Uncollateralized Deposits.*** Total deposits that exceeded the FDIC deposit insurance limit of $250,000 were $1.1 billion, or 24% of total deposits, as of September 30, 2023, and $1.4 billion, or 29% of total deposits, as of December 31, 2022.

Total uninsured and uncollateralized deposits that exceeded the FDIC deposit insurance limit of $250,000 and were not secured by pledged assets or any other guarantee of the Company totaled $717.3 million, or 15% of total deposits, as of September 30, 2023 and $745.9 million, or 16% of total deposits, as of December 31, 2022.

The balance of CDs that exceeded the FDIC deposit insurance limit of $250,000 was $151.9 million, or 28% of CD balances, as of September 30, 2023, and $84.5 million, or 28% of CD balances, as of December 31, 2022. The total uninsured portion of these CDs was $86.8 million, or 16% and $62.5 million or 21% as of September 30, 2023 and December 31, 2022, respectively.

***Borrowings.*** At September 30, 2023, total borrowings were $514.5 million, an increase of $205.0 million, or 66%, since December 31, 2022. The increase reflects the need for additional funding to support asset growth of 2% and a decrease in deposits of 3% during the nine months ended September 30, 2023. Included in total borrowings at September 30, 2023, was:

- Customer repurchase agreements totaling $210.1 million, an increase of $13.7 million, or 7%, since December 31, 2023.
- Borrowings from the BTFP totaling $135.0 million, which the Company entered into in May 2023 to manage borrowing costs while obtaining favorable prepayment terms. The BTFP, which is secured by the Company's investment securities at par, is at a fixed rate of 4.70% and scheduled to mature in May 2024. Under the program, the Company may prepay the BTFP borrowing at any time without penalty.
- Short-term FHLBB advances of $125.0 million, an increase of $75.0 million since December 31, 2022. The Company has entered into entered into derivatives to swap the cash flows the interest payments on these FHLBB advances.

### Shareholders' Equity

Shareholders' equity at September 30, 2023, totaled $463.3 million, an increase of $12.0 million, or 3%, since December 31, 2022. The increase was driven by net income of $34.9 million for the nine months ended September 30, 2023, net of regular quarterly cash dividends of $18.4 million, and an decrease to AOCI of $4.3 million driven by a decrease in long-term interest rates between periods resulting in an improvement in valuation of the AFS bond portfolio.

On September 26, 2023, the Company announced a quarterly cash dividend to shareholders of $0.42 per share, payable on October 31, 2023 to shareholders of record as of October 13, 2023. As of September 30, 2023, the Company's annualized dividend yield was 5.95% based on Camden National's closing share price of $28.22, as reported by NASDAQ on September 30, 2023.

In January 2023, the Company's Board of Directors authorized the repurchase of up to 750,000 shares of the Company's common stock, representing approximately 5% of the Company's issued and outstanding shares of common stock as of December 31, 2022. During the nine months ended September 30, 2023, the Company repurchased 65,692 shares at a weighted average price of $30.44.

The following table presents certain information regarding shareholders’ equity as of and for the periods indicated:

| Financial Ratios | At or For The Three Months Ended September 30, 2023 | 2022 | At or For The Nine Months Ended September 30, 2023 | 2022 | At or For The Year Ended December 31, 2022 |
| --- | ---: | ---: | ---: | ---: | ---: |
| Average equity to average assets | 8.23% | 8.21% | 8.18% | 8.78% | 8.51% |
| Common equity ratio | 8.02% | 7.76% | 8.02% | 7.76% | 7.96% |
| Tangible common equity ratio (non-GAAP) | 6.47% | 6.13% | 6.47% | 6.13% | 6.37% |
| Dividend payout ratio | 62.69% | 41.24% | 52.72% | 38.34% | 38.76% |
| **Per Share Data** |  |  |  |  |  |
| Book value per share | $31.82 | $29.59 | $31.82 | $29.59 | $30.98 |
| Tangible book value per share (non-GAAP) | $25.24 | $22.97 | $25.24 | $22.97 | $24.37 |
| Dividends declared per share | $0.42 | $0.40 | $1.26 | $1.20 | $1.62 |

Refer to "—*Capital Resources"* and Note 10 of the consolidated financial statements for further discussion of the Company and Bank's capital resources and regulatory capital requirements.

### LIQUIDITY

Our liquidity needs require the availability of cash to meet the withdrawal demands of depositors and credit commitments to borrowers. Liquidity is defined as our ability to maintain availability of funds to meet customer needs, as well as to support our asset base. The primary objective of liquidity management is to maintain a balance between sources and uses of funds to meet our cash flow needs in the most economical and expedient manner. Due to the potential for unexpected fluctuations in both deposits and loans, active management of liquidity is necessary. We maintain various sources of funding and levels of liquid assets and monitor liquidity in accordance with internal guidelines and all applicable regulatory requirements. Sources of funds that we utilize consist of deposits; borrowings from the FHLBB and other sources; cash flows from loans and investments; and cash flows from operations, including other contractual obligations and commitments.

During the first half of 2023, the banking industry experienced three high-profile bank failures, which led to an industry-wide increase in concerns related to liquidity, deposit outflows and eroding customer confidence in the banking system. Despite these developments and related recent volatility in the banking industry, our liquidity position continued to exceed our target levels and we believe we currently have appropriate liquidity available to respond to demands.

As of September 30, 2023, our primary liquidity sources available were as follows:

*(In thousands)*

| Available primary liquidity: | Amount |
| --- | ---: |
| Excess cash1 | $118,805 |
| Unpledged investment securities | 470,301 |
| Over collateralized securities pledging position | 57,658 |
| FHLBB | 720,009 |
| Fed Discount Window | 39,456 |
| BTFP | 27,874 |
| Unsecured borrowing lines | 104,872 |
| **Total available primary liquidity** | **$1,538,975** |

(1) Excess cash represents cash held at the FRB that is above the minimum reserve requirement. At September 30, 2023 the minimum reserve requirement remains at zero.

Total available primary liquidity of $1.5 billion was 2.1 times uninsured and uncollateralized deposits as of September 30, 2023. Refer to "—*Financial Condition—Liabilities—Uninsured and Uncollateralized Deposits*" for further details.

In addition to the available primarily liquidity noted above, as of September 30, 2023, we may access additional funding through brokered deposits.

Although we believe that our level of liquidity is sufficient to meet current and future funding requirements, changes in current economic conditions, including consumer saving habits and the availability or access to the brokered deposit and wholesale repurchase markets, could significantly affect our liquidity position.

***Deposits.*** Deposits continue to represent our primary source of funds. As of September 30, 2023 and December 31, 2022, total deposits, including brokered deposits, were $4.7 billion and $4.8 billion, respectively, which included money market deposits of $62.5 million and $73.5 million, respectively, from Camden National Wealth Management, a division of the Bank, which represent client funds. These funds fluctuate with changes in the portfolios of the clients of Camden National Wealth Management. Time deposits are generally considered to be more interest rate sensitive than other deposits and, therefore, more likely to be withdrawn to obtain higher yields elsewhere if available.

The following is a summary of the scheduled maturities of CDs (not including brokered CDs) as of September 30, 2023:

*(In thousands)*

|  | CDs |
| --- | ---: |
| 1 year or less | $500,570 |
| \> 1 year | 51,541 |
| **Total** | **$552,111** |

70

Brokered deposits totaled $133.9 million at September 30, 2023, and consisted of $65.5 million of brokered CDs and $68.4 million of brokered money market accounts. As of September 30, 2023, all brokered CDs are schedule to mature within the next 12 months. At September 30, 2023, we also have access to additional brokered deposits.

***Borrowings***. Borrowings are used to supplement deposits as a source of liquidity, which may include borrowings and advances from the FHLBB, federal funds and repurchase agreements. As of September 30, 2023, total borrowings were $514.5 million, compared to $309.5 million as of December 31, 2022. We secure borrowings from the FHLBB with qualified residential real estate loans, certain investment securities and certain other assets available to be pledged. As of September 30, 2023, the Company had $720.0 million in this borrowing capacity from the FHLBB. In the second quarter of 2023, the Company borrowed $135.0 million from the BTFP for a period of one year at a fixed rate of 4.70%. The BTFP, which is secured by the Company's investment securities at par, is scheduled to mature in May 2024, however, under the program the Company may prepay this borrowing at any time without penalty. The Company utilized the BTFP to manage borrowing costs while obtaining favorable prepayment terms. Customer repurchase agreements are secured by mortgage-backed securities and government-sponsored enterprises. Through the Bank, we have available lines of credit with the FHLBB of $9.9 million, with three correspondent banks of $95.0 million, and with the FRB Discount Window of $39.5 million as of September 30, 2023. We also have access to the brokered deposit market and wholesale reverse repurchase transactions market. These sources are considered as liquidity alternatives in our contingent liquidity plan.

The following is a summary of the scheduled maturities of borrowings as of September 30, 2023:

*(In thousands)*

|  | FHLBB Advances | BTFP | Customer Repurchase Agreements | Junior Subordinated Debentures | Total |
| --- | ---: | ---: | ---: | ---: | ---: |
| 1 year or less | $125,000 | $135,000 | $210,140 | $— | $470,140 |
| \> 1 year | — | — | — | 44,331 | 44,331 |
| **Total** | **$125,000** | **$135,000** | **$210,140** | **$44,331** | **$514,471** |

***Loans***. Contractual loan repayments also affect our liquidity position. Actual speed and timing of repayment may differ materially from contract terms due to prepayments or nonpayment.

The Company's unpledged residential mortgage loan portfolio is also a source of contingent liquidity as it could be sold in a reasonable time period, at fair value, on the secondary market. As of September 30, 2023, qualifying residential mortgage loans with a book value of $1.7 billion were pledged as collateral to the FHLBB.

The following table presents the contractual maturities of loans at the date indicated:

*(Dollars in thousands)*

| Maturity Distribution(1): Fixed Rate: | September 30, 2023 Due in 1 Year or Less | Due after 1 Year Through 5 Years | Due After 5 Years Through 15 Years | Due in More than 15 Years | Total | Percent of Total Loans |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Commercial real estate(2) | $18,660 | $168,348 | $606,385 | $2,825 | $796,218 | 20% |
| Commercial | 5,766 | 95,250 | 78,569 | 411 | 179,996 | 4% |
| Residential real estate | 299 | 11,664 | 148,933 | 1,218,293 | 1,379,189 | 34% |
| Consumer and home equity | 2,221 | 12,121 | 21,667 | 162,436 | 198,445 | 5% |
| Total fixed rate | 26,946 | 287,383 | 855,554 | 1,383,965 | 2,553,848 | 63% |
| **Adjustable/Variable Rate:** |  |  |  |  |  |  |
| Commercial real estate(2) | 14,828 | 215,240 | 382,806 | 244,197 | 857,071 | 21% |
| Commercial | 46,197 | 117,439 | 47,300 | 9,098 | 220,034 | 6% |
| Residential real estate | 9 | 989 | 40,168 | 332,045 | 373,211 | 9% |
| Consumer and home equity | 51 | 2,361 | 11,821 | 40,016 | 54,249 | 1% |
| Total adjustable/variable rate | 61,085 | 336,029 | 482,095 | 625,356 | 1,504,565 | 37% |
| **Total loans** | **$88,031** | **$623,412** | **$1,337,649** | **$2,009,321** | **$4,058,413** | **100%** |

(1) Scheduled repayments are reported in the maturity category in which payment is due. Demand loans, loans having no stated schedule of repayments and no stated maturity, and overdrafts are reported as due in one year or less

(2) Commercial real estate loans includes non-owner-occupied and owner-occupied properties.

Additionally, we have active relationships with various secondary market investors that purchase residential mortgage loans we originate. In addition to managing our interest rate risk position and earnings through the sale of these loans, we are also able to manage our liquidity position through timely sales of residential mortgage loans to the secondary market.

***Investments.*** We generally invest in amortizing MBS and CMO debt securities that return cash flow at an accelerated rate in comparison to other types of debt securities that are of a bullet structure. MBS and CMO debt security cash flow will vary

depending on the interest rate environment because borrowers may have the right to call or prepay obligations with or without

prepayment penalties. The rise in interest rates during 2022 and through the nine months ended September 30, 2023 resulted in slowing cash flows. As of September 30, 2023 and December 31, 2022, the Company's MBS and CMO debt securities portfolio totaled 88% of book value for both periods, respectively, of the Company's investment portfolio.

The Company's unpledged AFS investment portfolio is also a source of contingent liquidity as it could be sold in a reasonable time period, at fair value, on the secondary market, which was $470.3 million at September 30, 2023.

The following is a summary of the scheduled cash flows from our debt securities portfolio, including investments designated as AFS and HTM, as of September 30, 2023:

*(In thousands)*

|  | Contractual Cash Flows(1) |
| --- | ---: |
| 1 year or less | $104,067 |
| \> 1 year | 1,034,897 |
| **Total** | **$1,138,964** |

(1) Expected contractual cash flows could differ as borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

***Other Liquidity Requirement***s. The Company generates cash flows from earnings through its normal course of business from earnings and, although not contractual, the Company has a history of paying a quarterly cash dividend to its shareholders and repurchasing its shares of common stock. For the nine months ended September 30, 2023, the Company reported net income of $34.9 million and paid cash dividends of $18.4 million to shareholders.

In addition, in the course of its normal operations the Company is party to several other contractual obligations not previously discussed, such as various lease agreements on a number of its branches. Renewal options within the various lease contracts, as applicable, were considered to determine the lease term and estimate the contractual obligation and commitment for the Company's operating and finance leases. Furthermore, certain lease contracts of the Company contain language that subject its rent payment to variability, such as those tied to an index or change in an index. As a result, the future contractual obligation and commitment may materially differ from that estimated and disclosed within the table below. At September 30, 2023, we had the following lease and other contractual obligations to make future payments under each of these contracts as follows:

*(In thousands)*

| Contractual obligations and commitments | Total Amount Committed | Payments Due per Period 1 Year or Less | \> 1 Year |
| --- | ---: | ---: | ---: |
| Operating leases | $12,764 | $1,375 | $11,389 |
| Finance leases | 6,888 | 314 | 6,574 |
| Other contractual obligations | 5,865 | 5,865 | — |
| **Total** | $25,517 | $7,554 | $17,963 |

The Company's estimated lease liability for its various operating and finance leases was reported within other liabilities on our consolidated statements of condition.

In the normal course of business, we are a party to credit related financial instruments with off-balance sheet risk, which are not reflected in the consolidated statements of condition. These financial instruments include commitments to extend credit and standby letters of credit. Many of the commitments will expire without being drawn upon, and thus, the total amount does not necessarily represent future cash requirements. Refer to Note 7 of the consolidated financial statements for additional details.

We use derivative financial instruments for risk management purposes (primarily interest rate risk) and not for trading or speculative purposes. These contracts with our various counterparties may subject the Company to various cash flow requirements, which may include posting of cash as collateral (or other assets) for arrangements that the Company is in a liability position (*i.e. “*underwater”). Refer to Note 8 of the consolidated financial statements for further discussion of our derivatives and hedge instruments.

### CAPITAL RESOURCES

As part of our goal to operate a safe, sound and profitable financial organization, we are committed to maintaining a strong capital base. Shareholders’ equity totaled $463.3 million and $451.3 million at September 30, 2023 and December 31, 2022, respectively, which amounted to 8% of total assets for both periods. Refer to "—*Financial Condition—Shareholders' Equity*" for further discussion on shareholders' equity for the nine months ended September 30, 2023.

Our principal cash requirement is the payment of dividends on our common stock, as and when declared by the Company's Board of Directors. We declared dividends to shareholders in the aggregate amount of $18.4 million and $17.6 million for the nine months ended September 30, 2023 and 2022, respectively. The Company's Board of Directors approves cash dividends on a quarterly basis after careful analysis and consideration of various factors, including the following: (i) capital position relative to total assets, (ii) risk-based assets, (iii) total classified assets, (iv) economic conditions, (v) growth rates for total assets and total liabilities, (vi) earnings performance and projections and (vii) strategic initiatives and related capital requirements. All dividends declared and distributed by the Company will be in compliance with applicable state corporate law and regulatory requirements.

We are primarily dependent upon the payment of cash dividends by the Bank, our wholly-owned subsidiary, to service our commitments. We, as the sole shareholder of the Bank, are entitled to dividends, when and as declared by the Bank's Board of Directors from legally available funds. For the nine months ended September 30, 2023 and 2022, the Bank declared dividends payable to the Company in the amount of $18.0 million and $23.9 million, respectively. Under regulations prescribed by the OCC, the Bank may not declare dividends in excess of the Bank’s net income for the current year plus its retained net income for the prior two years without prior approval from the OCC. If we are required to use dividends from the Bank to service unforeseen commitments in the future, we may be required to reduce the dividends paid to our shareholders going forward.

Please refer to Note 10 of the consolidated financial statements for discussion and details of the Company and Bank's regulatory capital requirements. At September 30, 2023 and December 31, 2022, the Company and Bank exceeded all regulatory capital requirements, and the Bank continues to meet the capital requirements to be classified as "well capitalized" under applicable prompt corrective action provisions.

### RISK MANAGEMENT

The Company’s Board of Directors and management have identified significant risk categories which affect the Company. The risk categories include: credit; liquidity; market; interest rate; capital; operational and technology, including cybersecurity; vendor and third party; people and compensation; compliance and legal; strategic alignment; and reputation. The Board of Directors has approved an Enterprise Risk Management ("ERM") Policy that addresses each category of risk. The direct oversight and responsibility for the Company's risk management program has been delegated to the Company's Executive Vice President, Chief Risk Officer, who is a member of the Executive Committee and reports directly to the Chief Executive Officer.

There have been no material changes to the Company's risk categories and risk management policies as described in Item 7 of the Company's Annual Report on Form 10-K for the year ended December 31, 2022. Please refer to Item 7 of the Company's Annual Report on Form 10-K for the year ended December 31, 2022 for further details regarding the Company's risk management.

### Interest rate risk

Interest rate risk represents the sensitivity of earnings to changes in market interest rates. As interest rates change, the interest income and expense streams associated with our financial instruments also change, thereby impacting net interest income, the primary component of our earnings. Board ALCO and Management ALCO utilize the results of a detailed and dynamic simulation model to quantify the estimated exposure of net interest income to sustained interest rate changes. While Board ALCO and Management ALCO routinely monitor simulated net interest income sensitivity over a rolling two-year horizon, they also utilize additional tools to monitor potential longer-term interest rate risk.

The simulation model captures the impact of changing interest rates on the interest income received and interest expense paid on all interest-earning assets and interest-bearing liabilities reflected on our consolidated statements of condition, as well as for derivative financial instruments. This sensitivity analysis is compared to ALCO policy limits, which specify a maximum tolerance level for net interest income exposure over a one- and two-year horizon, assuming a static balance sheet, given a 200 basis point upward and downward shift in interest rates. A parallel and pro rata shift in rates over a 12-month period is assumed. Using this approach, we are able to produce simulation results that illustrate the effect that both a gradual change of rates and a

“rate shock” have on earnings expectations. In the down 200 and 200 basis points scenarios, Federal Funds and Treasury yields are floored at 0.01% while Prime is floored at 3.00%. All other market rates are floored at the lesser of current levels or 0.25%.

The sensitivity analysis below does not represent a forecast and should not be relied upon as being indicative of expected operating results. These hypothetical estimates are based upon numerous assumptions including, among others, the nature and timing of interest rate levels, yield curve shape, prepayments on loans and securities, deposit decay rates, pricing decisions on loans and deposits and reinvestment/replacement of asset and liability cash flows. While assumptions are developed based upon current economic and local market conditions, we cannot make any assurances as to the predictive nature of these assumptions, including how customer preferences or competitor influences might change.

As of September 30, 2023 and 2022, our net interest income sensitivity analysis reflected the following changes to net interest income, as compared to our modeled Year 1 Base net interest income, assuming no balance sheet growth and a parallel shift in interest rates. All rate changes were “ramped” over the first 12-month period and then maintained at those levels over the remainder of the ALCO simulation horizon.

| Rate Change from Year 1 — Base Year 1 | Estimated Changes In Net Interest Income September 30, 2023 | September 30, 2022 |
| --- | ---: | ---: |
| +200 basis points | (1.26)% | (2.82)% |
| -200 basis points | 2.15% | 1.56% |
| **Year 2** |  |  |
| +200 basis points | 15.08% | 8.34% |
| -200 basis points | 17.06% | 5.09% |

If rates remain at or near current levels, net interest income is projected to increase in year two of the simulation. Asset cash flows reprice and replace into the current higher rate environment at rates above current portfolio averages more than offsetting the pressure from funding costs replacing into higher rates, causing balance sheet spread to expand.

If rates increase 200 basis points, net interest income is projected to decrease slightly in the first year of the simulation as the funding base adjusts into the higher rate environment to a greater degree than asset yields increase. In the second year, net interest income is projected to increase as loan and investment yields continue to reprice/reset into higher yields and funding cost increases slow.

If rates decrease 200 basis points, net interest income is projected to increase slightly in the first year of the simulation as reductions in funding costs are able to more than offset near-term asset yield deterioration. In the second year, net interest income is projected to increase as asset yields are supported by fixed rates and floors while cost of funds reductions continue.

In addition to using our investments portfolio to manage liquidity risk, we also use it to manage our interest rate risk and provide a natural hedge to our interest risk exposure created by loans, deposits and borrowings. Refer to "—*Financial Condition—Investments*" for further details of the Company's investment portfolio, including the duration of the bond portfolio as of September 30, 2023 and December 31, 2022.

Periodically, if deemed appropriate, we use back-to-back loan swaps, interest rate swaps, floors and caps, which are common derivative financial instruments, to hedge our interest rate risk position. The Board of Directors has approved hedging policy statements governing the use of these instruments. The Board and Management ALCO monitor derivative activities relative to their expectations and our hedging policies. Refer Note 8 of the consolidated financial statements for further discussion of these derivative instruments.

### LIBOR transition

LIBOR was a benchmark interest rate for certain floating rate loans, deposits and borrowings, and off-balance sheet exposures of the Company. The publication of all U.S. Dollar LIBOR settings ceased to be provided or ceased to be representative as of July 2, 2023. The Adjustable Interest Rate (LIBOR) Act (the “LIBOR Act”), and its implementing regulations, were finalized in December 2022. The LIBOR Act and its implementing regulations established a process for replacing LIBOR on existing LIBOR contracts that did not provide for the use of a clearly defined or practicable replacement benchmark rate with a benchmark replacement based on SOFR. The Company no longer offers new contracts that reference

LIBOR and all legacy contracts that were indexed to U.S. Dollar LIBOR have been transitioned to SOFR-based or other alternative reference rates in accordance with the fallback provisions of the LIBOR Act.

## Market risk

As filed, 234 characters.

Information required by this Item 3 is included in Item 2. *"Management's Discussion and Analysis of Financial Condition and Results of Operations - Risk Management"* and such information is incorporated into this Item 3 by reference.

## Controls and procedures

As filed, 1,929 characters.

As required by Rule 13a-15 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), the Company’s management conducted an evaluation with the participation of the Company’s Chief Executive Officer and Chief Operating Officer and Chief Financial Officer & Principal Financial and Accounting Officer, regarding the effectiveness of the Company’s disclosure controls and procedures, as of the end of the last fiscal year. In designing and evaluating the Company’s disclosure controls and procedures, the Company and its management recognize that any controls and procedures, no matter how well designed and operated, can provide only a reasonable assurance of achieving the desired control objectives, and management necessarily was required to apply its judgment in evaluating and implementing possible controls and procedures. Based upon that evaluation, the Chief Executive Officer and Chief Operating Officer and Chief Financial Officer & Principal Financial and Accounting Officer concluded that they believe the Company’s disclosure controls and procedures are effective to ensure that information required to be disclosed by the Company in the reports it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. We intend to continue to review and document our disclosure controls and procedures, including our internal controls and procedures for financial reporting, and we may from time to time make changes to the disclosure controls and procedures to enhance their effectiveness and to ensure that our systems evolve with our business.

There was no change in our internal control over financial reporting that occurred during the period covered by this Quarterly Report on Form 10-Q that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

## Risk factors

As filed, 250 characters.

There are a number of factors that may adversely affect the Company’s business, financial results or stock price. Refer to “Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022, for discussion of these risks.

Filed Nov 7, 2023.
Source: SEC EDGAR, the filing index for accession 0000750686-23-000285. Last ingested by Listed: Nov 5, 2026, 13:16 ET. No prices; not investment advice.