The Company's lending activities are primarily conducted in and around Dover, New Hampshire and in the areas surrounding its branches. The Company grants commercial real estate loans, multifamily 5+ dwelling unit loans, commercial and industrial loans, acquisition, development and land loans, 1–4 family residential loans, home equity line of credit loans and consumer loans. Most loans are collateralized by real estate. The ability and willingness of real estate, commercial and construction loan borrowers to honor their repayment commitments is generally dependent on the health of the real estate sector in the borrowers’ geographic area and the general economy.

Effective January 1, 2023, the Company adopted the new accounting standard for credit losses, ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, as amended ("ASU 2016-13"). This new accounting standard, commonly referred to as "CECL," significantly changed the methodology for accounting for reserves on loans and unfunded off-balance sheet credit exposures, including certain unfunded loan commitments and standby guarantees. ASU 2016-13 replaced the "incurred loss" methodology used to establish an allowance on loans and off-balance sheet credit exposures, with an "expected loss" approach. Under CECL, the ACL at each reporting period serves as a best estimate of projected credit losses over the contractual life of certain assets, adjusted for expected prepayments, given an expectation of economic conditions and forecasts as of the valuation date. Upon adoption of CECL, the Company made the following elections regarding accrued interest receivable: (i) present accrued interest receivable balances separately on the balance sheet on the consolidated statements of condition; (ii) exclude accrued interest from the measurement of the ACL, including investments and loans; and (iii) continue to write-off accrued interest receivable by reversing interest income. The Company has a policy in place to write-off accrued interest when a loan is placed on non-accrual. Accrued interest is written-off by reversing previously recorded interest income. For loans, write-off typically occurs when a loan has been in default for 90 days or more. An immaterial amount of accrued interest on non-accrual loans was written off during the three and six months ended June 30, 2023, by reversing interest income. Historically, the Company has not experienced uncollectible accrued interest receivable on its securities available-for-sale.

The ACL is the sum of various components including the following: (a) historical loss experience, (b) a reasonable and supportable forecast, (c) loans evaluated individually, and (d) changes in relevant environmental factors. The historical loss component is segmented by loan type and serves as the core of the ACL adequacy methodology. The Company has selected the Weighted Average Remaining Maturity Model (“WARM”), for the loss calculation of each of the Bank’s loan pools utilizing a third-party software application. The WARM uses a quarterly loss rate and future expectations of loan balances to calculate an ACL. A loss rate is applied to pool balances over time.

CECL may create more volatility in the ACL, specifically the ACL on loans and ACL on off-balance sheet credit exposures. Under CECL, the ACL may increase or decrease period to period based on many factors, including, but not limited to: (i) macroeconomic forecasts and conditions; (ii) forecast period and reversion speed; (iii) prepayment speed assumption; (iv) loan portfolio volumes and changes in mix; (v) credit quality; and (vi) various qualitative factors outlined in ASU 2016-13.

The significant key assumptions used with the ACL calculation at June 30, 2023 using the CECL methodology, included:

•Macroeconomic factors (loss drivers): Monitoring and assessing local and national unemployment, changes in national GDP and other macroeconomic factors which may be the most predictive indicator of losses within the loan portfolio. The macroeconomic factors considered in determining the ACL may change from time to time.

•Forecast Period and Reversion speed: ASU 2016-13 requires a company to use a reasonable and supportable forecast period in developing the ACL, which represents the time period that management believes it can reasonably forecast the identified loss drivers. Generally, the forecast period management believes to be reasonable and supportable will be set annually and validated through an assessment of economic leading indicators. In periods of greater volatility and uncertainty, such as the current interest rate environment, management will likely use a shorter forecast period, whereas when markets, economies, interest rate environment, political matters, and other factors are considered to be more stable and certain, a longer forecast period may be used. Also, in times of greater uncertainty, management may consider a range of possible forecasts and evaluate the probability of each scenario. Generally, the forecasted period is expected to range from one to three years. Once the reasonable and supportable forecast period is determined, ASU 2016-13 requires a company to revert its loss expectations to the long-run historical mean for the remainder of the contract life of the asset, adjusted for prepayments. In determining the length of time over which the reversion will take place (i.e. "reversion speed"), factors such as, historical credit loss experience over previous economic cycles, as well as where the Company believes it is within the current economic cycle, will be considered. The Company has chosen a forecast period of six quarters which will be similar to the historical loss period between September 2007 and March 2009 and then reverting to the long-term average over the following six quarters using the straight-line reversion method. The Company believes this historical forecast period to be representative of potential economic conditions over the next eighteen months.

•Prepayment speeds: Prepayment speeds are determined for each loan segment utilizing the Company's historical loan data, as well as consideration of current environmental factors. The prepayment speed assumption is utilized with the WARM method to forecast expected cash flows over the contractual life of the loan, adjusted for expected prepayments. A higher prepayment speed assumption will drive a lower ACL, and vice versa.

•Qualitative factors: As within previous accounting guidance used for the "incurred loss" model, ASU 2016-13 requires companies to consider various qualitative factors that may impact expected credit losses. The Company continues to consider qualitative factors in determining and arriving at an ACL at each reporting period such as: (i) actual or expected changes in economic trends and conditions, (ii) changes in the value of underlying collateral for loans, (iii) changes to lending policies, underwriting standards and/or management personnel performing such functions, (iv) delinquency and other credit quality trends, (v) credit risk concentrations, if any, (vi) changes to the nature of the Company's business impacting the loan portfolio, (vii) and other external factors, that may include, but are not limited to, results of internal loan reviews and examinations by bank regulatory agencies.

Certain loans which may not share similar risk characteristics with other loans in the portfolio may be tested individually for estimated credit losses, including (i) loans classified as special mention, substandard or doubtful and are on non-accrual, (ii) a loan modified for a borrower experiencing financial difficulty or (iii) loans that have other unique characteristics. Factors considered in measuring the extent of the expected credit loss for these loans may include payment status, collateral value, borrower's financial condition, guarantor support and the probability of collecting scheduled principal and interest payments when due.

Changes in the ACL for the three and six months ended June 30, 2023, under the CECL model, by portfolio segment, are summarized as follows:


(Dollars in thousands)	CRE			MF			C+I			ADL			RES			HELOC			CON			Unallocated			Total
Balance, March 31, 2023	$	725		$	49		$	281		$	96		$	1,904		$	88		$	119		$	25		$	3,287
Provision for credit losses on loans		81			—			(4	)		(26	)		6			(3	)		(7	)		(12	)		35
Charge-offs		—			—			—			—			—			—			(4	)		—			(4	)
Recoveries		—			—			—			—			—			—			1			—			1
Balance, June 30, 2023	$	806		$	49		$	277		$	70		$	1,910		$	85		$	109		$	13		$	3,319
Balance, December 31, 2022, Prior to Adoption of ASC 326	$	942		$	54		$	184		$	138		$	2,048		$	81		$	100		$	34		$	3,581
Impact of adopting ASC 326		(154	)		1			89			(18	)		(201	)		7			14			(33	)		(295	)
Provision for credit losses on loans		18			(6	)		4			(50	)		63			(3	)		(3	)		12			35
Charge-offs		—			—			—			—			—			—			(4	)		—			(4	)
Recoveries		—			—			—			—			—			—			2			—			2
Balance, June 30, 2023	$	806		$	49		$	277		$	70		$	1,910		$	85		$	109		$	13		$	3,319

Changes in the allowance for credit losses on loans for the three and six months ended June 30, 2022, under the incurred loss model, by portfolio segment, are summarized as follows:


(Dollars in thousands)	CRE		MF			C+I			ADL			RES			HELOC		CON			Unallocated			Total
Balance, March 31, 2022	$	894	$	78		$	218		$	116		$	2,188		$	62	$	86		$	—		$	3,642
Provision for loan losses		125		(21	)		(11	)		(6	)		(163	)		25		24			27			—
Charge-offs		—		—			—			—			—			—		—			—			—
Recoveries		—		—			1			—			—			—		1			—			2
Balance, June 30, 2022	$	1,019	$	57		$	208		$	110		$	2,025		$	87	$	111		$	27		$	3,644
Balance, December 31, 2021	$	833	$	80		$	194		$	178		$	2,139		$	63	$	75		$	28		$	3,590
Provision for loan losses		186		(23	)		13			(68	)		(114	)		24		43			(1	)		60
Charge-offs		—		—			—			—			—			—		(9	)		—			(9	)
Recoveries		—		—			1			—			—			—		2			—			3
Balance, June 30, 2022	$	1,019	$	57		$	208		$	110		$	2,025		$	87	$	111		$	27		$	3,644

As of June 30, 2023 and December 31, 2022, information about loans, the ACL and the ALL, by portfolio segment, are summarized below:


(Dollars in thousands)	CRE		MF		C+I		ADL		RES		HELOC		CON		Unallocated		Total
June 30, 2023 Loan Balances
Individually evaluated to determine expected credit losses	$	—	$	—	$	—	$	—	$	185	$	—	$	3	$	—	$	188
Collectively evaluated to determine expected credit losses		88,051		7,787		24,168		14,999		259,377		12,121		7,821		—		414,324
Total	$	88,051	$	7,787	$	24,168	$	14,999	$	259,562	$	12,121	$	7,824	$	—	$	414,512
ACL related to the loans
Individually evaluated to determine expected credit losses	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Collectively evaluated to determine expected credit losses		806		49		277		70		1,910		85		109		13		3,319
Total	$	806	$	49	$	277	$	70	$	1,910	$	85	$	109	$	13	$	3,319
December 31, 2022 Loan Balances
Individually evaluated for impairment	$	—	$	—	$	—	$	—	$	273	$	—	$	5	$	—	$	278
Collectively evaluated for impairment		80,506		8,185		24,059		18,490		251,193		10,161		7,184		—		399,778
Total	$	80,506	$	8,185	$	24,059	$	18,490	$	251,466	$	10,161	$	7,189	$	—	$	400,056
ALL related to the loans
Individually evaluated for impairment	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Collectively evaluated for impairment		942		54		184		138		2,048		81		100		34		3,581
Total	$	942	$	54	$	184	$	138	$	2,048	$	81	$	100	$	34	$	3,581

Interest income recognized on non-accrual loans during three and six months ended June 30, 2023 was $-0-.

The Company's one collateral-dependent non-accrual RES loan had an amortized cost basis of $84,000 and was secured by real estate with an appraised value of $422,000. The property was sold in April 2023 and the loan was repaid. There were no loans collateralized by residential real estate property in the process of foreclosure at June 30, 2023 or December 31, 2022.

There were no loans modified for borrowers experiencing financial difficulty during the six months ended June 30, 2023. An assessment of whether a borrower is experiencing financial difficulty is made on the date of a modification, if applicable. The ACL incorporates an estimate of lifetime expected credit losses and is recorded on each asset upon origination. Because the effect of most modifications made to borrowers experiencing financial difficulty would already be included in the ACL as a result of the measurement methodologies used to estimate the allowance, a change in the ACL is generally not recorded upon modification. There were no loans modified and determined to be a troubled debt restructuring during the year ended December 31, 2022.

The Company utilizes a ten-grade internal loan rating system for its commercial real estate, multifamily, commercial and industrial and acquisition, development, and land loans. Residential real estate, home equity line of credit and consumer loans are considered “pass” rated loans until they become delinquent. Once delinquent, loans can be rated an 8, 9 or 10 as applicable.

Loans rated 1 through 6: Loans in these categories are considered “pass” rated loans with low to average risk.

Loans rated 7: Loans in this category are considered “special mention.” These loans are starting to show signs of potential weakness and are being closely monitored by management.

Loans rated 8: Loans in this category are considered “substandard.” Generally, a loan is considered substandard if it is inadequately protected by the current net worth and paying capacity of the obligors and/or the collateral pledged. There is a distinct possibility that the Bank will sustain some loss if the weakness is not corrected.

Loans rated 9: Loans in this category are considered “doubtful.” Loans classified as doubtful have all the weaknesses inherent in those classified substandard with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, highly questionable and improbable.

Loans rated 10: Loans in this category are considered uncollectible (“loss”) and of such little value that their continuance as loans is not warranted and should be charged off.

On an annual basis, or more often if needed, the Company formally reviews the ratings on its commercial and industrial, commercial real estate and multifamily loans. On a periodic basis, the Company engages an independent third party to review a significant portion of loans within these segments and to assess the credit risk management practices of its commercial lending department. Management uses the results of these reviews as part of its annual review process, adequacy of the ACL on loans and overall credit risk administration.

On a quarterly basis, the Company formally reviews the ratings on its applicable residential real estate and home equity loans if they have become classified as non-accrual. Criteria used to determine ratings consist of loan-to-value ratios and days delinquent.

Based upon the most recent analysis performed, the risk category of loans by portfolio segment by vintage, reported under the CECL methodology, was as follows as of June 30, 2023:


(Dollars in thousands)	2023		2022		2021		2020		2019		Prior		Revolving Loans Amortized Cost Basis		Revolving Loans Converted to Term		Total
CRE:
Risk rating:
Pass	$	9,216	$	10,387	$	8,254	$	2,878	$	4,909	$	17,284	$	32,177	$	—	$	85,105
Special mention		—		—		—		—		—		—		2,946		—		2,946
Substandard		—		—		—		—		—		—		—		—		—
Total CRE		9,216		10,387		8,254		2,878		4,909		17,284		35,123		—		88,051
MF:
Risk rating:
Pass		—		152		5,243		1,104		—		1,288		—		—		7,787
Special mention		—		—		—		—		—		—		—		—		—
Substandard		—		—		—		—		—		—		—		—		—
Total MF		—		152		5,243		1,104		—		1,288		—		—		7,787
C+I:
Risk rating:
Pass		2,580		7,271		4,621		3,137		1,734		2,592		2,233		—		24,168
Special mention		—		—		—		—		—		—		—		—		—
Substandard		—		—		—		—		—		—		—		—		—
Total C+I		2,580		7,271		4,621		3,137		1,734		2,592		2,233		—		24,168
ADL:
Risk rating:
Pass		3,943		7,144		2,336		—		1,576		—		—		—		14,999
Special mention		—		—		—		—		—		—		—		—		—
Substandard		—		—		—		—		—		—		—		—		—
Total ADL		3,943		7,144		2,336		—		1,576		—		—		—		14,999
RES:
Risk rating:
Pass		5,802		40,201		64,447		53,797		20,329		74,986		—		—		259,562
Special mention		—		—		—		—		—		—		—		—		—
Substandard		—		—		—		—		—		—		—		—		—
Total RES		5,802		40,201		64,447		53,797		20,329		74,986		—		—		259,562
HELOC:
Risk rating:
Pass		—		—		—		—		—		—		12,121		—		12,121
Special mention		—		—		—		—		—		—		—		—		—
Substandard		—		—		—		—		—		—		—		—		—
Total HELOC		—		—		—		—		—		—		12,121		—		12,121
CON:
Risk rating:
Pass		1,322		2,646		1,901		1,456		251		245		—		—		7,821
Special mention		—		—		—		—		—		—		—		—		—
Substandard		—		—		—		—		—		3		—		—		3
Total CON		1,322		2,646		1,901		1,456		251		248		—		—		7,824
Total	$	22,863	$	67,801	$	86,802	$	62,372	$	28,799	$	96,398	$	49,477	$	—	$	414,512

Certain directors and executive officers of the Company and entities in which they have significant ownership interests are customers of the Bank. Loans outstanding to these persons and entities at June 30, 2023 and December 31, 2022 were $5.5 million and $4.4 million, respectively.