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First Bancorp, Inc /ME/ - Quarter Report: 2020 March (Form 10-Q)



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549




FORM 10-Q

Quarterly Report Pursuant to Section 13 or 15(d) of The Securities Exchange Act of 1934
For the quarterly period ended March 31, 2020

Commission File Number 0-26589



THE FIRST BANCORP, INC.
(Exact name of Registrant as specified in its charter)

Maine
01-0404322
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)

Main Street
Damariscotta
Maine
04543
(Address of principal executive offices)
 (Zip code)

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


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

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

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

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

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

Indicate the number of shares outstanding of each of the registrant's classes of common stock as of May 1, 2020
Common Stock: 10,926,008 shares




Table of Contents
Note 10 - Financial Derivative Instruments








Part I. Financial Information
Selected Financial Data (Unaudited)
The First Bancorp, Inc. and Subsidiary
Dollars in thousands,
As of and for the three months ended March 31,
 
except for per share amounts
2020
 
2019
 
Summary of Operations
 
 
 
 
Interest Income
$
20,694

 
$
19,268

 
Interest Expense
5,776

 
6,369

 
Net Interest Income
14,918

 
12,899

 
Provision for Loan Losses
400

 
375

 
Non-Interest Income
4,221

 
3,144

 
Non-Interest Expense
11,043

 
8,398

 
Net Income
6,495

 
6,156

 
Per Common Share Data
 
 
 
 
Basic Earnings per Share
$
0.60

 
$
0.57

 
Diluted Earnings per Share
0.60

 
0.57

 
Cash Dividends Declared
0.30

 
0.29

 
Book Value per Common Share
19.71

 
18.17

 
Tangible Book Value per Common Share2
16.97

 
15.42

 
Market Value
22.00

 
24.92

 
Financial Ratios
 
 
 
 
Return on Average Equity1
12.03

%
12.78

%
Return on Average Tangible Common Equity1,2
13.95

%
15.09

%
Return on Average Assets1
1.24

%
1.27

%
Average Equity to Average Assets
10.30

%
9.91

%
Average Tangible Equity to Average Assets2
8.88

%
8.39

%
Net Interest Margin Tax-Equivalent1,2
3.12

%
2.93

%
Dividend Payout Ratio
50.00

%
50.88

%
Allowance for Loan Losses/Total Loans
0.88

%
0.91

%
Non-Performing Loans to Total Loans
0.75

%
1.09

%
Non-Performing Assets to Total Assets
0.49

%
0.77

%
Efficiency Ratio2
58.12

%
50.45

%
At Period End
 
 
 
 
Total Assets
$
2,136,396

 
$
1,991,402

 
Total Loans
1,344,208

 
1,264,639

 
Total Investment Securities
664,514

 
615,477

 
Total Deposits
1,644,612

 
1,606,875

 
Total Shareholders' Equity
215,257

 
197,787

 
1Annualized using a 366-day basis in 2020 and a 365-day basis in 2019.
2These ratios use non-GAAP financial measures. See Management's Discussion and Analysis of Financial Condition and Results of Operations for additional disclosures and information.

Page 1



Item 1 – Financial Statements










Report of Independent Registered Public Accounting Firm

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

We have reviewed the accompanying interim consolidated financial information of The First Bancorp, Inc. and Subsidiary as of March 31, 2020 and 2019 and for the three-month periods then ended. These financial statements are the responsibility of the Company's management.
We conducted our reviews in accordance with standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit in accordance with standards of the Public Company Accounting Oversight Board (United States), the objective of which is to express an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our reviews, we are not aware of any material modifications that should be made to the accompanying  interim consolidated financial statements for them to be in conformity with accounting principles generally accepted in the United States of America.


/s/ Berry Dunn McNeil & Parker, LLC
Portland, Maine
May 8, 2020

Page 2



Consolidated Balance Sheets (Unaudited)
The First Bancorp, Inc. and Subsidiary
 
March 31,
2020
 
December 31, 2019
 
March 31,
2019
Assets
 
 
 
 
 
Cash and cash equivalents
$
21,117,000

 
$
14,433,000

 
$
15,270,000

Interest bearing deposits in other banks
6,047,000

 
11,310,000

 
231,000

Securities available for sale
312,928,000

 
360,520,000

 
325,276,000

Securities to be held to maturity (fair value of $349,248,000 at March 31, 2020, $287,045,000 at December 31, 2019 and $282,568,000 at March 31, 2019)
341,592,000

 
281,606,000

 
281,219,000

Restricted equity securities, at cost
9,994,000

 
8,982,000

 
8,982,000

Loans held for sale
561,000

 
154,000

 
436,000

Loans
1,344,208,000

 
1,297,075,000

 
1,264,639,000

Less allowance for loan losses
11,858,000

 
11,639,000

 
11,490,000

Net loans
1,332,350,000

 
1,285,436,000

 
1,253,149,000

Accrued interest receivable
9,648,000

 
7,167,000

 
9,307,000

Premises and equipment, net
21,156,000

 
21,305,000

 
21,767,000

Other real estate owned
316,000

 
279,000

 
584,000

Goodwill
29,805,000

 
29,805,000

 
29,805,000

Other assets
50,882,000

 
47,799,000

 
45,376,000

Total assets
$
2,136,396,000

 
$
2,068,796,000

 
$
1,991,402,000

Liabilities
 
 
 
 
 
Demand deposits
$
153,477,000

 
$
169,777,000

 
$
148,500,000

NOW deposits
382,307,000

 
393,569,000

 
371,305,000

Money market deposits
161,184,000

 
161,000,000

 
137,700,000

Savings deposits
236,706,000

 
236,141,000

 
236,894,000

Certificates of deposit
710,938,000

 
689,979,000

 
712,476,000

Total deposits
1,644,612,000

 
1,650,466,000

 
1,606,875,000

Borrowed funds – short term
192,937,000

 
174,850,000

 
160,309,000

Borrowed funds – long term
55,103,000

 
10,105,000

 
10,110,000

Other liabilities
28,487,000

 
20,867,000

 
16,321,000

Total liabilities
1,921,139,000

 
1,856,288,000

 
1,793,615,000

Shareholders' equity
 
 
 
 
 
Common stock, one cent par value per share
109,000

 
109,000

 
109,000

Additional paid-in capital
64,277,000

 
63,964,000

 
63,037,000

Retained earnings
147,904,000

 
144,839,000

 
135,364,000

Accumulated other comprehensive income (loss)
 
 
 
 
 
Net unrealized gain (loss) on securities available for sale
7,890,000

 
3,657,000

 
(1,539,000
)
Net unrealized loss on securities transferred from available for sale to held to maturity
(174,000
)
 
(182,000
)
 
(194,000
)
    Net unrealized (loss) gain on cash flow hedging derivative instruments
(4,773,000
)
 
97,000

 
973,000

 Net unrealized gain on postretirement costs
24,000

 
24,000

 
37,000

Total shareholders' equity
215,257,000

 
212,508,000

 
197,787,000

Total liabilities & shareholders' equity
$
2,136,396,000

 
$
2,068,796,000

 
$
1,991,402,000

Common Stock
 
 
 
 
 
Number of shares authorized
18,000,000

 
18,000,000

 
18,000,000

Number of shares issued and outstanding
10,921,206

 
10,899,210

 
10,884,381

Book value per common share
$
19.71

 
$
19.50

 
$
18.17

Tangible book value per common share
$
16.97

 
$
16.75

 
$
15.42

See Report of Independent Registered Public Accounting Firm. The accompanying notes are an integral part of these consolidated financial statements.

Page 3



Consolidated Statements of Income and Comprehensive Income (Unaudited)
The First Bancorp, Inc. and Subsidiary
 
For the three months ended March 31,
 
 
2020
 
2019
 
Interest income
 
 
 
 
Interest and fees on loans (includes tax-exempt income of $310,000 as of March 31, 2020 and $358,000 as of March 31, 2019)
$
15,856,000

 
$
14,557,000

 
Interest on deposits with other banks
74,000

 
68,000

 
Interest and dividends on investments (includes tax-exempt income of $1,841,000 as of March 31, 2020 and $1,755,000 as of March 31, 2019)
4,764,000

 
4,643,000

 
     Total interest income
20,694,000

 
19,268,000

 
Interest expense
 
 
 
 
Interest on deposits
5,186,000

 
5,577,000

 
Interest on borrowed funds
590,000

 
792,000

 
     Total interest expense
5,776,000

 
6,369,000

 
Net interest income
14,918,000

 
12,899,000

 
Provision for loan losses
400,000

 
375,000

 
Net interest income after provision for loan losses
14,518,000

 
12,524,000

 
Non-interest income
 
 
 
 
Investment management and fiduciary income
894,000

 
773,000

 
Service charges on deposit accounts
577,000

 
561,000

 
Net securities gains
752,000

 

 
Mortgage origination and servicing income, net of amortization
504,000

 
296,000

 
Other operating income
1,494,000

 
1,514,000

 
     Total non-interest income
4,221,000

 
3,144,000

 
Non-interest expense
 
 
 
 
Salaries and employee benefits
5,025,000

 
4,410,000

 
Occupancy expense
713,000

 
652,000

 
Furniture and equipment expense
1,116,000

 
975,000

 
FDIC insurance premiums
173,000

 
208,000

 
Amortization of identified intangibles
11,000

 
11,000

 
Other operating expense
4,005,000

 
2,142,000

 
     Total non-interest expense
11,043,000

 
8,398,000

 
Income before income taxes
7,696,000

 
7,270,000

 
Income tax expense
1,201,000

 
1,114,000

 
NET INCOME
$
6,495,000

 
$
6,156,000

 
Basic earnings per common share
$
0.60

 
$
0.57

 
Diluted earnings per common share
$
0.60

 
$
0.57

 
Other comprehensive income (loss) net of tax
 
 
 
 
Net unrealized gain on securities available for sale
4,233,000

 
3,512,000

 
Net unrealized gain on securities transferred from available for sale to held to maturity, net of amortization
8,000

 
3,000

 
Net unrealized loss on cash flow hedging derivative instruments
(4,870,000
)
 
(465,000
)
 
      Other comprehensive income (loss)
(629,000
)
 
3,050,000

 
Comprehensive income
$
5,866,000

 
$
9,206,000

 
See Report of Independent Registered Public Accounting Firm.
The accompanying notes are an integral part of these consolidated financial statements.

Page 4



Consolidated Statements of Changes in Shareholders' Equity (Unaudited)
The First Bancorp, Inc. and Subsidiary
 
 
Common stock and
additional paid-in capital
 
Retained
earnings
 
Accumulated
other
comprehensive
income (loss)
 
Total
shareholders'
equity
 
 
Shares
 
Amount
 
 
 
Balance at December 31, 2018
 
10,862,651

 
$
62,855,000

 
$
132,460,000

 
$
(3,773,000
)
 
$
191,542,000

Net income
 

 

 
6,156,000

 

 
6,156,000

Net unrealized gain on securities available for sale, net of tax
 

 

 

 
3,512,000

 
3,512,000

Net unrealized loss on cash flow hedging derivative instruments, net of tax
 

 

 

 
(465,000
)
 
(465,000
)
Net unrealized gain on securities transferred from available for sale to held to maturity, net of tax
 

 

 

 
3,000

 
3,000

Comprehensive income
 

 

 
6,156,000

 
3,050,000

 
9,206,000

Cash dividends declared ($0.29 per share)
 

 

 
(3,156,000
)
 

 
(3,156,000
)
Equity compensation expense
 

 
123,000

 

 

 
123,000

Payment to repurchase common stock
 
(3,804
)
 

 
(96,000
)
 


 
(96,000
)
Issuance of restricted stock
 
19,087

 

 

 

 

Proceeds from sale of common stock
 
6,447

 
168,000

 

 

 
168,000

Balance at March 31, 2019
 
10,884,381

 
$
63,146,000

 
$
135,364,000

 
$
(723,000
)
 
$
197,787,000

 
 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2019
 
10,899,210

 
$
64,073,000

 
$
144,839,000

 
$
3,596,000

 
$
212,508,000

Net income
 

 

 
6,495,000

 

 
6,495,000

Net unrealized gain on securities available for sale, net of tax
 

 

 

 
4,233,000

 
4,233,000

Net unrealized loss on cash flow hedging derivative instruments, net of tax
 

 

 

 
(4,870,000
)
 
(4,870,000
)
Net unrealized gain on securities transferred from available for sale to held to maturity, net of tax
 

 

 

 
8,000

 
8,000

Comprehensive income (loss)
 

 

 
6,495,000

 
(629,000
)
 
5,866,000

Cash dividends declared ($0.30 per share)
 

 

 
(3,276,000
)
 

 
(3,276,000
)
Equity compensation expense
 

 
150,000

 

 

 
150,000

Payment to repurchase common stock
 
(5,297
)
 

 
(154,000
)
 

 
(154,000
)
Issuance of restricted stock
 
21,595

 

 

 

 

Proceeds from sale of common stock
 
5,698

 
163,000

 

 

 
163,000

Balance at March 31, 2020
 
10,921,206

 
$
64,386,000

 
$
147,904,000

 
$
2,967,000

 
$
215,257,000

See Report of Independent Registered Public Accounting Firm.
The accompanying notes are an integral part of these consolidated financial statements.

Page 5



Consolidated Statements of Cash Flows (Unaudited)
The First Bancorp, Inc. and Subsidiary
 
For the three months ended
 
March 31, 2020
 
March 31, 2019
Cash flows from operating activities
 
 
 
     Net income
$
6,495,000

 
$
6,156,000

Adjustments to reconcile net income to net cash provided by operating activities
 
 
 
Depreciation
538,000

 
449,000

Change in deferred taxes
52,000

 
203,000

Provision for loan losses
400,000

 
375,000

Loans originated for resale
(11,637,000
)
 
(4,661,000
)
Proceeds from sales and transfers of loans
11,417,000

 
4,305,000

Net gain on sales of loans
(187,000
)
 
(80,000
)
Net gain on sale or call of securities
(752,000
)
 

Net amortization of premiums on investments
369,000

 
261,000

Equity compensation expense
150,000

 
123,000

Net increase in other assets and accrued interest
(11,811,000
)
 
(6,055,000
)
Net increase (decrease) in other liabilities
7,729,000

 
(435,000
)
Net loss on disposal of premises and equipment

 
1,000

Amortization of investment in limited partnership
78,000

 
77,000

Net acquisition amortization
11,000

 
11,000

     Net cash provided by operating activities
2,852,000

 
730,000

Cash flows from investing activities
 
 
 
Increase in interest-bearing deposits in other banks
5,263,000

 
11,848,000

Proceeds from sales of securities available for sale
68,620,000

 

Proceeds from maturities, payments and calls of securities available for sale
21,890,000

 
11,622,000

Proceeds from maturities, payments, calls and sales of securities to be held to maturity
27,275,000

 
2,804,000

Purchases of securities available for sale
(37,173,000
)
 
(15,325,000
)
Purchases of securities to be held to maturity
(87,255,000
)
 
(28,328,000
)
Redemption of restricted equity securities

 
2,604,000

Purchase of restricted equity securities
(1,012,000
)
 

Net increase in loans
(47,351,000
)
 
(26,473,000
)
Capital expenditures
(389,000
)
 
(161,000
)
     Net cash used by investing activities
(50,132,000
)
 
(41,409,000
)
Cash flows from financing activities
 
 
 
Net decrease in demand, savings, and money market accounts
(26,813,000
)
 
(41,277,000
)
Net increase in certificates of deposit
20,959,000

 
121,067,000

Net increase in short-term borrowings
18,087,000

 

Advances on long-term borrowings
44,998,000

 

Repayment on long-term borrowings

 
(39,898,000
)
Payment to repurchase common stock
(154,000
)
 
(96,000
)
Proceeds from sale of common stock
163,000

 
168,000

Dividends paid
(3,276,000
)
 
(3,149,000
)
     Net cash provided by financing activities
53,964,000

 
36,815,000

Net increase in cash and cash equivalents
6,684,000

 
(3,864,000
)
Cash and cash equivalents at beginning of period
14,433,000

 
19,134,000

     Cash and cash equivalents at end of period
$
21,117,000

 
$
15,270,000

Interest paid
$
5,777,000

 
$
6,221,000

Income taxes paid

 

Non-cash transactions
 
 
 
Net transfer from loans to other real estate owned
$
37,000

 
$

See Report of Independent Registered Public Accounting Firm.
The accompanying notes are an integral part of these consolidated financial statements.

Page 6



Notes to Consolidated Financial Statements
The First Bancorp, Inc. and Subsidiary
                          
Note 1 – Basis of Presentation
The First Bancorp, Inc. ("the Company") is a financial holding company that owns all of the common stock of First National Bank ("the Bank"). The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP") for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of Management, all adjustments (consisting of normally recurring accruals) considered necessary for a fair presentation have been included. All significant intercompany transactions and balances are eliminated in consolidation. The income reported for the 2020 period is not necessarily indicative of the results that may be expected for the year ending December 31, 2020. For further information, refer to the consolidated financial statements and notes included in the Company's annual report on Form 10-K for the year ended December 31, 2019.

Risks and Uncertainties
Local, U.S., and world governments have encouraged self–isolation to curtail the spread of the global pandemic, coronavirus disease (COVID–19) by mandating the temporary shut–down of business in many sectors and imposing limitations on travel and size and duration of group meetings. Most industries are experiencing disruption to business operations and the impact of reduced consumer spending. There is unprecedented uncertainty surrounding the duration of the pandemic, its potential economic ramifications, and any government actions to mitigate them.
The Company’s business, financial condition and results of operations generally rely upon the ability of the Bank’s borrowers to repay their loans, the value of collateral underlying the Bank’s secured loans, and demand for loans and other products and services the Bank offers, which are highly dependent on the business environment in the Bank’s primary markets where it operates and in the United States as a whole. The Bank's primary market is the State of Maine, which relies upon tourism for a significant percentage of its economic activity. COVID-19 is expected to adversely impact the tourism industry to a greater degree than other industries, however, an overall impact of COVID-19 on the Maine economy cannot be assessed with any degree of certainty at this time. In addition to loans, demand for other products and services could be impacted by COVID-19. Depositors and other funding sources may be unwilling to renew certificates of deposit or other types of funding, or may only be willing to do so on terms, including higher interest rates, that are materially less favorable than the Bank has experienced in the recent past. Certain fee based activities such as debit card interchange and wealth management activity, could be impacted due to lower activity or market declines. Accordingly, while management expects this matter is likely to have a negative financial impact on the Company's financial position and results of future operations, such potential impact cannot be reasonably estimated as of the date of this report, May 8, 2020.

Subsequent Events
Events occurring subsequent to March 31, 2020, have been evaluated as to their potential impact to the financial statements.


Page 7



Note 2 – Investment Securities
The following table summarizes the amortized cost and estimated fair value of investment securities at March 31, 2020:
 
Amortized
Cost
 
Unrealized Gains
 
Unrealized Losses
 
Fair Value (Estimated)
Securities available for sale
 
 
 
 
 
 
 
U.S. Government-sponsored agencies
$
7,500,000

 
$
52,000

 
$

 
$
7,552,000

Mortgage-backed securities
276,235,000

 
9,106,000

 
(189,000
)
 
285,152,000

State and political subdivisions
19,206,000

 
1,018,000

 

 
20,224,000

 
$
302,941,000

 
$
10,176,000

 
$
(189,000
)
 
$
312,928,000

Securities to be held to maturity
 
 
 
 
 
 
 
U.S. Government-sponsored agencies
$
35,981,000

 
$
207,000

 
$

 
$
36,188,000

Mortgage-backed securities
51,142,000

 
1,392,000

 
(7,000
)
 
52,527,000

State and political subdivisions
239,719,000

 
5,819,000

 
(345,000
)
 
245,193,000

Corporate securities
14,750,000

 
590,000

 

 
15,340,000

 
$
341,592,000

 
$
8,008,000

 
$
(352,000
)
 
$
349,248,000

Restricted equity securities
 
 
 
 
 
 
 
Federal Home Loan Bank Stock
$
8,957,000

 
$

 
$

 
$
8,957,000

Federal Reserve Bank Stock
1,037,000

 

 

 
1,037,000

 
$
9,994,000

 
$

 
$

 
$
9,994,000


The following table summarizes the amortized cost and estimated fair value of investment securities at December 31, 2019:
 
Amortized
Cost
 
Unrealized Gains
 
Unrealized Losses
 
Fair Value (Estimated)
Securities available for sale
 
 
 
 
 
 
 
U.S. Government-sponsored agencies

$
7,500,000

 
$

 
$
(102,000
)
 
$
7,398,000

Mortgage-backed securities
323,277,000

 
4,173,000

 
(833,000
)
 
326,617,000

State and political subdivisions
25,113,000

 
1,392,000

 

 
26,505,000

 
$
355,890,000

 
$
5,565,000

 
$
(935,000
)
 
$
360,520,000

Securities to be held to maturity
 
 
 
 
 
 
 
U.S. Government-sponsored agencies
$
32,840,000

 
$
47,000

 
$
(26,000
)
 
$
32,861,000

Mortgage-backed securities
14,431,000

 
450,000

 
(16,000
)
 
14,865,000

State and political subdivisions
219,585,000

 
4,936,000

 
(109,000
)
 
224,412,000

Corporate securities
14,750,000

 
157,000

 

 
14,907,000

 
$
281,606,000

 
$
5,590,000

 
$
(151,000
)
 
$
287,045,000

Restricted equity securities
 
 
 
 
 
 
 
Federal Home Loan Bank Stock
$
7,945,000

 
$

 
$

 
$
7,945,000

Federal Reserve Bank Stock
1,037,000

 

 

 
1,037,000

 
$
8,982,000

 
$

 
$

 
$
8,982,000


Page 8




The following table summarizes the amortized cost and estimated fair value of investment securities at March 31, 2019:
 
Amortized
Cost
 
Unrealized Gains
 
Unrealized Losses
 
Fair Value (Estimated)
Securities available for sale
 
 
 
 
 
 
 
U.S. Government-sponsored agencies
$
5,000,000

 
$
16,000

 
$

 
$
5,016,000

Mortgage-backed securities
317,269,000

 
1,394,000

 
(3,240,000
)
 
315,423,000

State and political subdivisions
4,955,000

 
4,000

 
(122,000
)
 
4,837,000

 
$
327,224,000

 
$
1,414,000

 
$
(3,362,000
)
 
$
325,276,000

Securities to be held to maturity
 
 
 
 
 
 
 
U.S. Government-sponsored agencies
$
31,155,000

 
$
48,000

 
$
(280,000
)
 
$
30,923,000

Mortgage-backed securities
17,560,000

 
372,000

 
(146,000
)
 
17,786,000

State and political subdivisions
225,204,000

 
3,162,000

 
(1,801,000
)
 
226,565,000

Corporate securities
7,300,000

 

 
(6,000
)
 
7,294,000

 
$
281,219,000

 
$
3,582,000

 
$
(2,233,000
)
 
$
282,568,000

Restricted equity securities
 
 
 
 
 
 
 
Federal Home Loan Bank Stock
$
7,945,000

 
$

 
$

 
$
7,945,000

Federal Reserve Bank Stock
1,037,000

 

 

 
1,037,000

 
$
8,982,000

 
$

 
$

 
$
8,982,000


The following table summarizes the contractual maturities of investment securities at March 31, 2020:
 
Securities available for sale
 
Securities to be held to maturity
 
Amortized
Cost
 
Fair Value (Estimated)
 
Amortized
Cost
 
Fair Value (Estimated)
Due in 1 year or less
$
66,000

 
$
66,000

 
$
1,331,000

 
$
1,337,000

Due in 1 to 5 years
25,221,000

 
26,159,000

 
27,854,000

 
28,361,000

Due in 5 to 10 years
62,462,000

 
65,032,000

 
184,037,000

 
189,214,000

Due after 10 years
215,192,000

 
221,671,000

 
128,370,000

 
130,336,000

 
$
302,941,000

 
$
312,928,000

 
$
341,592,000

 
$
349,248,000


The following table summarizes the contractual maturities of investment securities at December 31, 2019:
 
Securities available for sale
 
Securities to be held to maturity
 
Amortized
Cost
 
Fair Value (Estimated)
 
Amortized
Cost
 
Fair Value (Estimated)
Due in 1 year or less
$
127,000

 
$
127,000

 
$
1,334,000

 
$
1,338,000

Due in 1 to 5 years
36,534,000

 
36,778,000

 
25,860,000

 
26,323,000

Due in 5 to 10 years
93,134,000

 
95,014,000

 
179,133,000

 
182,834,000

Due after 10 years
226,095,000

 
228,601,000

 
75,279,000

 
76,550,000

 
$
355,890,000

 
$
360,520,000

 
$
281,606,000

 
$
287,045,000











Page 9



The following table summarizes the contractual maturities of investment securities at March 31, 2019:
 
Securities available for sale
 
Securities to be held to maturity
 
Amortized
Cost
 
Fair Value (Estimated)
 
Amortized
Cost
 
Fair Value (Estimated)
Due in 1 year or less
$

 
$

 
$
1,429,000

 
$
1,431,000

Due in 1 to 5 years
15,670,000

 
15,736,000

 
21,096,000

 
21,203,000

Due in 5 to 10 years
107,978,000

 
108,698,000

 
176,967,000

 
178,044,000

Due after 10 years
203,576,000

 
200,842,000

 
81,727,000

 
81,890,000

 
$
327,224,000

 
$
325,276,000

 
$
281,219,000

 
$
282,568,000


At March 31, 2020, securities with a fair value of $208,376,000 were pledged to secure public deposits, repurchase agreements, and for other purposes as required by law. This compares to securities with a fair value of $214,173,000 as of December 31, 2019 and $189,711,000 at March 31, 2019, pledged for the same purposes.
Gains and losses on the sale of securities are computed by subtracting the amortized cost at the time of sale from the security's selling price, net of accrued interest to be received. The following table shows securities gains and losses for the three months ended March 31, 2020 and 2019:
 
For the three months ended March 31,
 
 
2020
 
2019
 
Proceeds from sales of securities
$
68,620,000

 
$

 
Gross realized gains
1,098,000

 

 
Gross realized losses
(346,000
)
 

 
Net gain
$
752,000

 
$

 
Related income taxes
$
158,000

 
$

 

Management reviews securities with unrealized losses for other than temporary impairment. As of March 31, 2020, there were 70 securities with unrealized losses held in the Company's portfolio. These securities were temporarily impaired as a result of changes in interest rates reducing their fair value, of which 14 had been temporarily impaired for 12 months or more. The Company has the ability and intent to hold its impaired securities until a recovery of their amortized cost, which may be at maturity.
Information regarding securities temporarily impaired as of March 31, 2020 is summarized below:
 
Less than 12 months
 
12 months or more
 
Total
 
Fair Value (Estimated)
 
Unrealized Losses
 
Fair Value (Estimated)
 
Unrealized Losses
 
Fair Value (Estimated)
 
Unrealized Losses
Mortgage-backed securities
$
2,963,000

 
$
(27,000
)
 
$
7,424,000

 
$
(169,000
)
 
$
10,387,000

 
$
(196,000
)
State and political subdivisions
19,556,000

 
(345,000
)
 

 

 
19,556,000

 
(345,000
)
 
$
22,519,000

 
$
(372,000
)
 
$
7,424,000

 
$
(169,000
)
 
$
29,943,000

 
$
(541,000
)


Page 10



As of December 31, 2019, there were 86 securities with unrealized losses held in the Company's portfolio. These securities were temporarily impaired as a result of changes in interest rates reducing their fair value, of which 28 had been temporarily impaired for 12 months or more. Information regarding securities temporarily impaired as of December 31, 2019 is summarized below:
 
Less than 12 months
 
12 months or more
 
Total
 
Fair Value (Estimated)
 
Unrealized Losses
 
Fair Value (Estimated)
 
Unrealized Losses
 
Fair Value (Estimated)
 
Unrealized Losses
U.S. Government-sponsored agencies
$
12,372,000

 
$
(128,000
)
 
$

 
$

 
$
12,372,000

 
$
(128,000
)
Mortgage-backed securities
54,244,000

 
(359,000
)
 
18,696,000

 
(490,000
)
 
72,940,000

 
(849,000
)
State and political subdivisions
10,532,000

 
(101,000
)
 
304,000

 
(8,000
)
 
10,836,000

 
(109,000
)
 
$
77,148,000

 
$
(588,000
)
 
$
19,000,000

 
$
(498,000
)
 
$
96,148,000

 
$
(1,086,000
)

As of March 31, 2019, there were 291 securities with unrealized losses held in the Company's portfolio. These securities were temporarily impaired as a result of changes in interest rates reducing their fair value, of which 274 had been temporarily impaired for 12 months or more. In the first quarter of 2019, one issuer of securities held in the portfolio was downgraded by a rating agency to less than investment grade. These securities totaled approximately 0.09% of overall state and municipal security holdings and were subsequently sold during the third quarter 2019. Information regarding securities temporarily impaired as of March 31, 2019 is summarized below:
 
Less than 12 months
 
12 months or more
 
Total
 
Fair Value (Estimated)
 
Unrealized Losses
 
Fair Value (Estimated)
 
Unrealized Losses
 
Fair Value (Estimated)
 
Unrealized Losses
U.S. Government-sponsored agencies
$

 
$

 
$
10,875,000

 
$
(280,000
)
 
$
10,875,000

 
$
(280,000
)
Mortgage-backed securities
24,525,000

 
(138,000
)
 
198,272,000

 
(3,248,000
)
 
222,797,000

 
(3,386,000
)
State and political subdivisions
1,264,000

 
(3,000
)
 
58,168,000

 
(1,920,000
)
 
59,432,000

 
(1,923,000
)
Corporate securities
2,994,000

 
(6,000
)
 

 

 
2,994,000

 
(6,000
)
 
$
28,783,000

 
$
(147,000
)
 
$
267,315,000

 
$
(5,448,000
)
 
$
296,098,000

 
$
(5,595,000
)

During the third quarter of 2014, the Company transferred securities with a total amortized cost of $89,780,000 with a corresponding fair value of $89,757,000 from available for sale to held to maturity. The net unrealized loss, net of taxes, on these securities at the date of the transfer was $15,000. The net unrealized holding loss at the time of transfer continues to be reported in accumulated other comprehensive income (loss), net of tax and is amortized over the remaining lives of the
securities as an adjustment of the yield. The amortization of the net unrealized loss reported in accumulated other comprehensive income (loss) will offset the effect on interest income of the discount for the transferred securities. The remaining unamortized balance of the net unrealized losses for the securities transferred from available for sale to held to maturity was $174,000, net of tax, at March 31, 2020. This compares to $182,000 and $194,000, net of taxes, at December 31, 2019 and March 31, 2019, respectively. These securities were transferred as a part of the Company's overall investment and balance sheet strategies.
The Bank is a member of the Federal Home Loan Bank ("FHLB") of Boston, a cooperatively owned wholesale bank for housing and finance in the six New England States. As a requirement of membership in the FHLB, the Bank must own a minimum required amount of FHLB stock, calculated periodically based primarily on its level of borrowings from the FHLB. The Bank uses the FHLB for a portion of its wholesale funding needs. As of March 31, 2020 and 2019, and December 31, 2019, the Bank's investment in FHLB stock totaled $8,957,000, $7,945,000 and $7,945,000, respectively. FHLB stock is a non-marketable equity security and therefore is reported at cost, which equals par value. The Company periodically evaluates its investment in FHLB stock for impairment based on, among other factors, the capital adequacy of the FHLB and its overall financial condition. No impairment losses have been recorded through March 31, 2020. The Company will continue to monitor its investment in FHLB stock.

Page 11



Note 3 – Loans
The following table shows the composition of the Company's loan portfolio as of March 31, 2020 and 2019 and at December 31, 2019:
 
March 31, 2020
 
December 31, 2019
 
March 31, 2019
 
Commercial
 
 
 
 
 
 
 
 
 
 
 
 
   Real estate
$
382,753,000

 
28.5
%
$
372,810,000

 
28.7
%
$
357,760,000

 
28.3
%
   Construction
43,913,000

 
3.3
%
38,084,000

 
3.0
%
34,231,000

 
2.7
%
   Other
237,896,000

 
17.7
%
218,773,000

 
16.9
%
205,462,000

 
16.2
%
Municipal
43,537,000

 
3.2
%
41,288,000

 
3.2
%
54,246,000

 
4.3
%
Residential
 
 
 
 
 
 
 
 
 
 
 
 
   Term
500,971,000

 
37.3
%
492,455,000

 
37.9
%
474,241,000

 
37.5
%
   Construction
15,202,000

 
1.1
%
14,813,000

 
1.2
%
18,450,000

 
1.5
%
Home equity line of credit
90,674,000

 
6.7
%
92,349,000

 
7.1
%
95,692,000

 
7.6
%
Consumer
29,262,000

 
2.2
%
26,503,000

 
2.0
%
24,557,000

 
1.9
%
Total
$
1,344,208,000

 
100.0
%
$
1,297,075,000

 
100.0
%
$
1,264,639,000

 
100.0
%

Loan balances include net deferred loan costs of $7,551,000 as of March 31, 2020, $7,419,000 as of December 31, 2019, and $6,878,000 as of March 31, 2019. Pursuant to collateral agreements, qualifying first mortgage loans and commercial real estate loans, which totaled $401,555,000 at March 31, 2020, were used to collateralize borrowings from the FHLB. This compares to qualifying loans which totaled $296,871,000 at December 31, 2019, and $321,290,000 at March 31, 2019. In addition, commercial, construction and home equity loans totaling $260,703,000 at March 31, 2020, $240,133,000 at December 31, 2019, and $251,591,000 at March 31, 2019, were used to collateralize a standby line of credit at the Federal Reserve Bank of Boston that is currently unused.
For all loan classes, loans over 30 days past due are considered delinquent. Information on the past-due status of loans by class of financing receivable as of March 31, 2020, is presented in the following table:
 
30-59 Days
Past Due
 
60-89 Days
Past Due
 
90+ Days
Past Due
 
All
Past Due
 
Current
 
Total
 
90+ Days
& Accruing
Commercial
 
 
 
 
 
 
 
 
 
 
 
 
 
   Real estate
$
2,935,000

 
$
2,000

 
$
1,297,000

 
$
4,234,000

 
$
378,519,000

 
$
382,753,000

 
$
22,000

   Construction
59,000

 

 
246,000

 
305,000

 
43,608,000

 
43,913,000

 

   Other
1,678,000

 
295,000

 
3,895,000

 
5,868,000

 
232,028,000

 
237,896,000

 
3,536,000

Municipal

 

 

 

 
43,537,000

 
43,537,000

 

Residential
 
 
 
 
 
 
 
 
 
 
 
 
 
   Term
4,270,000

 
171,000

 
3,320,000

 
7,761,000

 
493,210,000

 
500,971,000

 
192,000

   Construction

 

 

 

 
15,202,000

 
15,202,000

 

Home equity line of credit
1,566,000

 
264,000

 
1,481,000

 
3,311,000

 
87,363,000

 
90,674,000

 

Consumer
250,000

 
18,000

 
82,000

 
350,000

 
28,912,000

 
29,262,000

 
20,000

Total
$
10,758,000

 
$
750,000

 
$
10,321,000

 
$
21,829,000

 
$
1,322,379,000

 
$
1,344,208,000

 
$
3,770,000


Page 12



Information on the past-due status of loans by class of financing receivable as of December 31, 2019, is presented in the following table:
 
30-59 Days
Past Due
 
60-89 Days
Past Due
 
90+ Days
Past Due
 
All
Past Due
 
Current
 
Total
 
90+ Days
& Accruing
Commercial
 
 
 
 
 
 
 
 
 
 
 
 
 
   Real estate
$
786,000

 
$
377,000

 
$
611,000

 
$
1,774,000

 
$
371,036,000

 
$
372,810,000

 
$

   Construction

 
14,000

 
257,000

 
271,000

 
37,813,000

 
38,084,000

 

   Other
2,764,000

 
465,000

 
1,799,000

 
5,028,000

 
213,745,000

 
218,773,000

 
1,464,000

Municipal

 

 

 

 
41,288,000

 
41,288,000

 

Residential
 
 
 
 
 
 
 
 
 
 
 
 
 
   Term
1,129,000

 
1,132,000

 
2,379,000

 
4,640,000

 
487,815,000

 
492,455,000

 
86,000

   Construction

 

 

 

 
14,813,000

 
14,813,000

 

Home equity line of credit
1,169,000

 
58,000

 
1,730,000

 
2,957,000

 
89,392,000

 
92,349,000

 

Consumer
291,000

 
46,000

 
10,000

 
347,000

 
26,156,000

 
26,503,000

 
10,000

Total
$
6,139,000

 
$
2,092,000

 
$
6,786,000

 
$
15,017,000

 
$
1,282,058,000

 
$
1,297,075,000

 
$
1,560,000

Information on the past-due status of loans by class of financing receivable as of March 31, 2019, is presented in the following table:
 
30-59 Days
Past Due
 
60-89 Days
Past Due
 
90+ Days
Past Due
 
All
Past Due
 
Current
 
Total
 
90+ Days
& Accruing
Commercial
 
 
 
 
 
 
 
 
 
 
 
 
 
   Real estate
$
282,000

 
$
825,000

 
$
621,000

 
$
1,728,000

 
$
356,032,000

 
$
357,760,000

 
$

   Construction
47,000

 

 
286,000

 
333,000

 
33,898,000

 
34,231,000

 

   Other
664,000

 
63,000

 
303,000

 
1,030,000

 
204,432,000

 
205,462,000

 

Municipal

 

 

 

 
54,246,000

 
54,246,000

 

Residential
 
 
 
 
 
 
 
 
 
 
 
 
 
   Term
2,659,000

 
1,153,000

 
1,434,000

 
5,246,000

 
468,995,000

 
474,241,000

 

   Construction

 

 

 

 
18,450,000

 
18,450,000

 

Home equity line of credit
1,985,000

 
11,000

 
369,000

 
2,365,000

 
93,327,000

 
95,692,000

 

Consumer
411,000

 
163,000

 
4,000

 
578,000

 
23,979,000

 
24,557,000

 
4,000

Total
$
6,048,000

 
$
2,215,000

 
$
3,017,000

 
$
11,280,000

 
$
1,253,359,000

 
$
1,264,639,000

 
$
4,000


For all classes, loans are placed on non-accrual status when, based on current information and events, it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement or when principal and interest is 90 days or more past due unless the loan is both well secured and in the process of collection (in which case the loan may continue to accrue interest in spite of its past due status). A loan is "well secured" if it is secured (1) by collateral in the form of liens on or pledges of real or personal property, including securities, that have a realizable value sufficient to discharge the debt (including accrued interest) in full, or (2) by the guarantee of a financially responsible party. A loan is "in the process of collection" if collection of the loan is proceeding in due course either (1) through legal action, including judgment enforcement procedures, or, (2) in appropriate circumstances, through collection efforts not involving legal action which are reasonably expected to result in repayment of the debt or in its restoration to a current status in the near future.

Page 13



Cash payments received on non-accrual loans, which are included in impaired loans, are applied to reduce the loan's principal balance until the remaining principal balance is deemed collectible, after which interest is recognized when collected. As a general rule, a loan may be restored to accrual status when payments are current for a substantial period of time, generally six months, and repayment of the remaining contractual amounts is expected, or when it otherwise becomes well secured and in the process of collection. Information on nonaccrual loans as of March 31, 2020 and 2019 and at December 31, 2019 is presented in the following table:
 
March 31, 2020
 
December 31, 2019
 
March 31, 2019
Commercial
 
 
 
 
 
   Real estate
$
1,748,000

 
$
1,784,000

 
$
1,468,000

   Construction
246,000

 
256,000

 
286,000

   Other
457,000

 
6,534,000

 
7,067,000

Municipal

 

 

Residential
 
 
 
 
 
   Term
5,615,000

 
5,899,000

 
4,211,000

   Construction

 

 

Home equity line of credit
1,916,000

 
2,171,000

 
702,000

Consumer
66,000

 
5,000

 
2,000

Total
$
10,048,000

 
$
16,649,000

 
$
13,736,000


Impaired loans include troubled debt restructured ("TDR") and loans placed on non-accrual. These loans are measured at the present value of expected future cash flows discounted at the loan's effective interest rate or at the fair value of the collateral if the loan is collateral dependent. If the measure of an impaired loan is lower than the recorded investment in the loan and estimated selling costs, a specific reserve is established for the difference, or, in certain situations, if the measure of an impaired loan is lower than the recorded investment in the loan and estimated selling costs, the difference is written off.


Page 14



A breakdown of impaired loans by class of financing receivable as of and for the period ended March 31, 2020 is presented in the following table:
 
 
 
 
 
 
 
For the three months ended March 31, 2020
 
 
Recorded Investment
 
Unpaid Principal Balance
 
Related Allowance
 
Average Recorded Investment
 
Recognized Interest Income
 
With No Related Allowance
Commercial
 
 
 
 
 
 
 
 
 
 
  Real estate
$
5,162,000

 
$
5,421,000

 
$

 
$
5,157,000

 
$
47,000

 
  Construction
246,000

 
265,000

 

 
717,000

 

 
  Other
818,000

 
848,000

 

 
793,000

 
3,000

 
Municipal

 

 

 

 

 
Residential
 
 
 
 
 
 
 
 
 
 
  Term
10,378,000

 
12,135,000

 

 
10,015,000

 
67,000

 
  Construction

 

 

 

 

 
Home equity line of credit
1,232,000

 
1,306,000

 

 
1,185,000

 
4,000

 
Consumer

 

 

 

 

 
 
$
17,836,000

 
$
19,975,000

 
$

 
$
17,867,000

 
$
121,000

 
With an Allowance Recorded
Commercial
 
 
 
 
 
 
 
 
 
 
  Real estate
$
1,061,000

 
$
1,082,000

 
$
230,000

 
$
1,064,000

 
$
8,000

 
  Construction
701,000

 
701,000

 
3,000

 
234,000

 
10,000

 
  Other
172,000

 
194,000

 
172,000

 
4,269,000

 

 
Municipal

 

 

 

 

 
Residential
 
 
 
 
 
 
 
 
 
 
  Term
1,660,000

 
1,755,000

 
233,000

 
1,999,000

 
13,000

 
  Construction

 

 

 

 

 
Home equity line of credit
996,000

 
1,002,000

 
296,000

 
1,124,000

 

 
Consumer
67,000

 
67,000

 
58,000

 
26,000

 

 
 
$
4,657,000

 
$
4,801,000

 
$
992,000

 
$
8,716,000

 
$
31,000

 
Total
Commercial
 
 
 
 
 
 
 
 
 
 
  Real estate
$
6,223,000

 
$
6,503,000

 
$
230,000

 
$
6,221,000

 
$
55,000

 
  Construction
947,000

 
966,000

 
3,000

 
951,000

 
10,000

 
  Other
990,000

 
1,042,000

 
172,000

 
5,062,000

 
3,000

 
Municipal

 

 

 

 

 
Residential
 
 
 
 
 
 
 
 
 
 
  Term
12,038,000

 
13,890,000

 
233,000

 
12,014,000

 
80,000

 
  Construction

 

 

 

 

 
Home equity line of credit
2,228,000

 
2,308,000

 
296,000

 
2,309,000

 
4,000

 
Consumer
67,000

 
67,000

 
58,000

 
26,000

 

 
 
$
22,493,000

 
$
24,776,000

 
$
992,000

 
$
26,583,000

 
$
152,000

 
Substantially all interest income recognized on impaired loans for all classes of financing receivables was recognized on a cash basis as received.

Page 15



A breakdown of impaired loans by class of financing receivable as of and for the year ended December 31, 2019 is presented in the following table:
 
Recorded Investment
 
Unpaid Principal Balance
 
Related Allowance
 
Average Recorded Investment
 
Recognized Interest Income
With No Related Allowance
Commercial
 
 
 
 
 
 
 
 
 
  Real estate
$
5,235,000

 
$
5,492,000

 
$

 
$
7,611,000

 
$
228,000

  Construction
958,000

 
970,000

 

 
936,000

 
47,000

  Other
756,000

 
786,000

 

 
965,000

 
29,000

Municipal

 

 

 

 

Residential
 
 
 
 
 
 
 
 
 
  Term
10,176,000

 
11,931,000

 

 
10,033,000

 
269,000

  Construction

 

 

 

 

Home equity line of credit
1,087,000

 
1,151,000

 

 
997,000

 
20,000

Consumer

 

 

 

 

 
$
18,212,000

 
$
20,330,000

 
$

 
$
20,542,000

 
$
593,000

With an Allowance Recorded
Commercial
 
 
 
 
 
 
 
 
 
  Real estate
$
1,074,000

 
$
1,093,000

 
$
251,000

 
$
1,528,000

 
$
60,000

  Construction

 

 

 

 

  Other
6,319,000

 
6,925,000

 
1,273,000

 
6,778,000

 

Municipal

 

 

 

 

Residential
 
 
 
 
 
 
 
 
 
  Term
2,263,000

 
2,412,000

 
237,000

 
2,424,000

 
82,000

  Construction

 

 

 

 

Home equity line of credit
1,401,000

 
1,412,000

 
447,000

 
283,000

 

Consumer
5,000

 
6,000

 
5,000

 
2,000

 

 
$
11,062,000

 
$
11,848,000

 
$
2,213,000

 
$
11,015,000

 
$
142,000

Total
Commercial
 
 
 
 
 
 
 
 
 
  Real estate
$
6,309,000

 
$
6,585,000

 
$
251,000

 
$
9,139,000

 
$
288,000

  Construction
958,000

 
970,000

 

 
936,000

 
47,000

  Other
7,075,000

 
7,711,000

 
1,273,000

 
7,743,000

 
29,000

Municipal

 

 

 

 

Residential
 
 
 
 
 
 
 
 
 
  Term
12,439,000

 
14,343,000

 
237,000

 
12,457,000

 
351,000

  Construction

 

 

 

 

Home equity line of credit
2,488,000

 
2,563,000

 
447,000

 
1,280,000

 
20,000

Consumer
5,000

 
6,000

 
5,000

 
2,000

 

 
$
29,274,000

 
$
32,178,000

 
$
2,213,000

 
$
31,557,000

 
$
735,000



Page 16



A breakdown of impaired loans by class of financing receivable as of and for the period ended March 31, 2019 is presented in the following table:
 
 
 
 
 
 
 
For the three months ended March 31, 2019
 
 
Recorded Investment
 
Unpaid Principal Balance
 
Related Allowance
 
Average Recorded Investment
 
Recognized Interest Income
 
With No Related Allowance
Commercial
 
 
 
 
 
 
 
 
 
 
  Real estate
$
8,391,000

 
$
8,779,000

 
$

 
$
8,741,000

 
$
90,000

 
  Construction
1,007,000

 
1,007,000

 

 
817,000

 
12,000

 
  Other
709,000

 
734,000

 

 
1,207,000

 
6,000

 
Municipal

 

 

 

 

 
Residential
 
 
 
 
 
 
 
 
 
 
  Term
8,926,000

 
10,345,000

 

 
9,007,000

 
68,000

 
  Construction

 

 

 

 

 
Home equity line of credit
1,009,000

 
1,071,000

 

 
976,000

 
5,000

 
Consumer

 

 

 

 

 
 
$
20,042,000

 
$
21,936,000

 
$

 
$
20,748,000

 
$
181,000

 
With an Allowance Recorded
Commercial
 
 
 
 
 
 
 
 
 
 
  Real estate
$
1,566,000

 
$
1,583,000

 
$
233,000

 
$
1,215,000

 
$
26,000

 
  Construction

 

 

 

 

 
  Other
6,944,000

 
7,315,000

 
1,485,000

 
7,511,000

 

 
Municipal

 

 

 

 

 
Residential
 
 
 
 
 
 
 
 
 
 
  Term
1,993,000

 
2,131,000

 
348,000

 
1,845,000

 
17,000

 
  Construction

 

 

 

 

 
Home equity line of credit
21,000

 
25,000

 
7,000

 
29,000

 

 
Consumer
2,000

 
2,000

 
2,000

 
1,000

 

 
 
$
10,526,000

 
$
11,056,000

 
$
2,075,000

 
$
10,601,000

 
$
43,000

 
Total
Commercial
 
 
 
 
 
 
 
 
 
 
  Real estate
$
9,957,000

 
$
10,362,000

 
$
233,000

 
$
9,956,000

 
$
116,000

 
  Construction
1,007,000

 
1,007,000

 

 
817,000

 
12,000

 
  Other
7,653,000

 
8,049,000

 
1,485,000

 
8,718,000

 
6,000

 
Municipal

 

 

 

 

 
Residential
 
 
 
 
 
 
 
 
 
 
  Term
10,919,000

 
12,476,000

 
348,000

 
10,852,000

 
85,000

 
  Construction

 

 

 

 

 
Home equity line of credit
1,030,000

 
1,096,000

 
7,000

 
1,005,000

 
5,000

 
Consumer
2,000

 
2,000

 
2,000

 
1,000

 

 
 
$
30,568,000

 
$
32,992,000

 
$
2,075,000

 
$
31,349,000

 
$
224,000

 








Page 17



Troubled Debt Restructured
A "TDR" constitutes a restructuring of debt if the Company, for economic or legal reasons related to the borrower's financial difficulties, grants a concession to the borrower that it would not otherwise consider. To determine whether or not a loan should be classified as a TDR, Management evaluates a loan based upon the following criteria:
The borrower demonstrates financial difficulty; common indicators include past due status with bank obligations, substandard credit bureau reports, or an inability to refinance with another lender, and
The Company has granted a concession; common concession types include maturity date extension, interest rate adjustments to below market pricing, and deferment of payments.
As of March 31, 2020, the Company had 81 loans with a balance of $14,968,000 that have been classified as TDRs. This compares to 81 loans with a balance of $21,424,000 and 80 loans with a balance of $25,386,000 classified as TDRs as of December 31, 2019 and March 31, 2019, respectively. The impairment carried as a specific reserve in the allowance for loan losses is calculated by present valuing the expected cash flows on the loan at the original interest rate, or, for collateral-dependent loans, using the fair value of the collateral less costs to sell.
The following table shows TDRs by class and the specific reserve as of March 31, 2020:
 
Number of Loans
 
Balance
 
Specific Reserves
Commercial
 
 
 
 
 
   Real estate
16

 
$
4,688,000

 
$
225,000

   Construction
1

 
701,000

 
3,000

   Other
7

 
779,000

 
131,000

Municipal

 

 

Residential
 
 
 
 
 
   Term
54

 
8,321,000

 
197,000

   Construction

 

 

Home equity line of credit
3

 
479,000

 

Consumer

 

 

 
81

 
$
14,968,000

 
$
556,000

The following table shows TDRs by class and the specific reserve as of December 31, 2019:
 
Number of Loans
 
Balance
 
Specific Reserves
Commercial
 
 
 
 
 
   Real estate
17

 
$
4,836,000

 
$
246,000

   Construction
1

 
701,000

 

   Other
8

 
6,932,000

 
1,231,000

Municipal

 

 

Residential
 
 
 
 
 
   Term
52

 
8,472,000

 
200,000

   Construction

 

 

Home equity line of credit
3

 
483,000

 

Consumer

 

 

 
81

 
$
21,424,000

 
$
1,677,000

     






Page 18



The following table shows TDRs by class and the specific reserve as of March 31, 2019:
 
Number of Loans
 
Balance
 
Specific Reserves
Commercial
 
 
 
 
 
   Real estate
17

 
$
8,583,000

 
$
107,000

   Construction
1

 
721,000

 

   Other
10

 
7,257,000

 
1,275,000

Municipal

 

 

Residential
 
 
 
 
 
   Term
49

 
8,331,000

 
225,000

   Construction

 

 

Home equity line of credit
3

 
494,000

 

Consumer

 

 

 
80

 
$
25,386,000

 
$
1,607,000


As of March 31, 2020, 22 of the loans classified as TDRs with a total balance of $3,622,000 were more than 30 days past due. Of these loans, one had been placed on TDR status in the previous 12 months. The following table shows these TDRs by class and the associated specific reserves included in the allowance for loan losses as of March 31, 2020:
 
Number of Loans
 
Balance
 
Specific Reserves
Commercial
 
 
 
 
 
   Real estate
2

 
$
618,000

 
$

   Construction

 

 

   Other
4

 
540,000

 
131,000

Municipal

 

 

Residential
 
 
 
 
 
   Term
15

 
2,297,000

 
24,000

   Construction

 

 

Home equity line of credit
1

 
167,000

 

Consumer

 

 

 
22

 
$
3,622,000

 
$
155,000






















Page 19



As of March 31, 2019, 10 of the loans classified as TDRs with a total balance of $1,129,000 were more than 30 days past due. Of these loans, three had been placed on TDR status in the previous 12 months. The following table shows these TDRs by class and the associated specific reserves included in the allowance for loan losses as of March 31, 2019:
 
Number of Loans
 
Balance
 
Specific Reserves
Commercial
 
 
 
 
 
   Real estate

 
$

 
$

   Construction

 

 

   Other
4

 
261,000

 
134,000

Municipal

 

 

Residential
 
 
 
 
 
   Term
5

 
701,000

 
36,000

   Construction

 

 

Home equity line of credit
1

 
167,000

 

Consumer

 

 

 
10

 
$
1,129,000

 
$
170,000


For the three months ended March 31, 2020, two loans were placed on TDR status. The following table shows these TDRs by class and the associated specific reserves included in the allowance for loan losses as of March 31, 2020:
 
Number of Loans
 
Pre-Modification
Outstanding
Recorded Investment
 
Post-Modification Outstanding
Recorded
Investment
 
Specific Reserves
Commercial
 
 
 
 
 
 
 
   Real estate

 
$

 
$

 
$

   Construction

 

 

 

   Other

 

 

 

Municipal

 

 

 

Residential
 
 
 
 
 
 
 
   Term
2

 
235,000

 
190,000

 

   Construction

 

 

 

Home equity line of credit

 

 

 

Consumer

 

 

 

 
2

 
$
235,000

 
$
190,000

 
$

















Page 20



For the three months ended March 31, 2019, five loans were placed on TDR status. The following table shows these TDRs by class and associated specific reserves included in the allowance for loan losses as of March 31, 2019:
 
Number of Loans
 
Pre-Modification
Outstanding
Recorded Investment
 
Post-Modification Outstanding
Recorded
Investment
 
Specific Reserves
Commercial
 
 
 
 
 
 
 
   Real estate

 
$

 
$

 
$

   Construction

 

 

 

   Other

 

 

 

Municipal

 

 

 

Residential
 
 
 
 
 
 
 
   Term
5

 
573,000

 
554,000

 
74,000

   Construction

 

 

 

Home equity line of credit

 

 

 

Consumer

 

 

 

 
5

 
$
573,000

 
$
554,000

 
$
74,000


As of March 31, 2020, Management is aware of nine loans classified as TDRs that are involved in bankruptcy with an outstanding balance of $978,000. There were also 24 loans with an outstanding balance of $2,525,000 that were classified as TDRs and on non-accrual status, of which two loans with an outstanding balance of $350,000 were in the process of foreclosure.
Residential Mortgage Loans in Process of Foreclosure
As of March 31, 2020, there were 15 mortgage loans collateralized by residential real estate in the process of foreclosure with a total balance of $2,284,000. This compares to 10 mortgage loans collateralized by residential real estate in the process of foreclosure with a total balance of $1,101,000 as of March 31, 2019.
Note 4. Allowance for Loan Losses
The Company provides for loan losses through the establishment of an allowance for loan losses which represents an estimated reserve for existing losses in the loan portfolio. A systematic methodology is used for determining the allowance that includes a quarterly review process, risk rating changes, and adjustments to the allowance. The loan portfolio is classified in eight classes and credit risk is evaluated separately in each class. Major risk characteristics relevant to each portfolio segment are as follows: 
Commercial Real Estate - Commercial real estate loans are impacted by factors such as competitive market forces, vacancy rates, cap rates, net operating incomes, lease renewals and overall economic demand. In addition, loans in the recreational and tourism sector can be affected by weather conditions, such as unseasonably low winter snowfalls. Commercial real estate lending also carries a higher degree of environmental risk than other real estate lending.
Commercial Construction - Commercial construction loans are impacted by factors similar to those for commercial real estate loans in addition to risks related to contractor financial capacity and ability to complete a project within acceptable time frames and within budget.
Commercial Other - A weakened economy, soft consumer spending, and the rising cost of labor or raw materials are examples of issues that can impact the credit quality in this segment.
Municipal Loans - The overall health of the economy, including unemployment rates and housing prices, has an impact on the credit quality of this segment. 
Residential Real Estate Term - The overall health of the economy, including unemployment rates and housing prices, has an impact on the credit quality of this segment.
Residential Real Estate Construction - Residential construction are impacted by factors similar to those for residential real estate term in addition to risks related to contractor financial capacity and ability to complete a project within acceptable time frames and within budget.
Home Equity Line of Credit - The overall health of the economy, including unemployment rates and housing prices, has an impact on the credit quality of this segment. 
Consumer -The overall health of the economy, including unemployment rates, has an impact on the credit quality of this segment.




Page 21



The appropriate level of the allowance is evaluated continually based on a review of significant loans, with a particular emphasis on nonaccruing, past due, and other loans that may require special attention. Other factors include general conditions in local and national economies; loan portfolio composition and asset quality indicators; and internal factors such as changes in underwriting policies, credit administration practices, experience, ability and depth of lending management, among others.
The allowance consists of four elements: (1) specific reserves for loans evaluated individually for impairment; (2) general reserves for each portfolio segment based on historical loan loss experience, (3) qualitative reserves judgmentally adjusted for local and national economic conditions, concentrations, portfolio composition, volume and severity of delinquencies and nonaccrual loans, trends of criticized and classified loans, changes in credit policies and underwriting standards, credit administration practices, and other factors as applicable for each portfolio segment; and (4) unallocated reserves. All outstanding loans are considered in evaluating the appropriateness of the allowance.
A breakdown of the allowance for loan losses as of March 31, 2020, December 31, 2019, and March 31, 2019, by class of financing receivable and allowance element, is presented in the following tables:
As of March 31, 2020
Specific Reserves on Loans Evaluated Individually for Impairment
 
General Reserves on Loans Based on Historical Loss Experience
 
Reserves for Qualitative Factors
 
Unallocated
Reserves
 
Total Reserves
Commercial
 
 
 
 
 
 
 
 
 
   Real estate
$
230,000

 
$
687,000

 
$
2,945,000

 
$

 
$
3,862,000

   Construction
3,000

 
80,000

 
341,000

 

 
424,000

   Other
172,000

 
426,000

 
1,829,000

 

 
2,427,000

Municipal

 

 
29,000

 

 
29,000

Residential
 
 
 
 
 
 
 
 
 
   Term
233,000

 
300,000

 
693,000

 

 
1,226,000

   Construction

 
10,000

 
22,000

 

 
32,000

Home equity line of credit
296,000

 
168,000

 
548,000

 

 
1,012,000

Consumer
58,000

 
228,000

 
439,000

 

 
725,000

Unallocated

 

 

 
2,121,000

 
2,121,000

 
$
992,000

 
$
1,899,000

 
$
6,846,000

 
$
2,121,000

 
$
11,858,000

As of December 31, 2019
Specific Reserves on Loans Evaluated Individually for Impairment
 
General Reserves on Loans Based on Historical Loss Experience
 
Reserves for Qualitative Factors
 
Unallocated
Reserves
 
Total Reserves
Commercial
 
 
 
 
 
 
 
 
 
   Real estate
$
251,000

 
$
729,000

 
$
2,762,000

 
$

 
$
3,742,000

   Construction

 
76,000

 
289,000

 

 
365,000

   Other
1,273,000

 
430,000

 
1,626,000

 

 
3,329,000

Municipal

 

 
27,000

 

 
27,000

Residential
 
 
 
 
 
 
 
 
 
   Term
237,000

 
153,000

 
634,000

 

 
1,024,000

   Construction

 
5,000

 
20,000

 

 
25,000

Home equity line of credit
447,000

 
130,000

 
501,000

 

 
1,078,000

Consumer
5,000

 
460,000

 
402,000

 

 
867,000

Unallocated

 

 

 
1,182,000

 
1,182,000

 
$
2,213,000

 
$
1,983,000

 
$
6,261,000

 
$
1,182,000

 
$
11,639,000



Page 22



As of March 31, 2019
Specific Reserves on Loans Evaluated Individually for Impairment
 
General Reserves on Loans Based on Historical Loss Experience
 
Reserves for Qualitative Factors
 
Unallocated
Reserves
 
Total Reserves
Commercial
 
 
 
 
 
 
 
 
 
   Real estate
$
233,000

 
$
790,000

 
$
2,609,000

 
$

 
$
3,632,000

   Construction

 
76,000

 
249,000

 

 
325,000

   Other
1,485,000

 
452,000

 
1,493,000

 

 
3,430,000

Municipal

 

 
25,000

 

 
25,000

Residential
 
 
 
 
 
 
 
 
 
   Term
348,000

 
182,000

 
584,000

 

 
1,114,000

   Construction

 
7,000

 
23,000

 

 
30,000

Home equity line of credit
7,000

 
158,000

 
465,000

 

 
630,000

Consumer
2,000

 
290,000

 
368,000

 

 
660,000

Unallocated

 

 

 
1,644,000

 
1,644,000

 
$
2,075,000

 
$
1,955,000

 
$
5,816,000

 
$
1,644,000

 
$
11,490,000

Qualitative adjustment factors are taken into consideration when determining reserve estimates. These adjustment factors are based upon Management's evaluation of various current conditions, including those listed below.
General economic conditions.
Credit quality trends with emphasis on loan delinquencies, nonaccrual levels and classified loans.
Recent loss experience in particular segments of the portfolio.
Loan volumes and concentrations, including changes in mix.
Other factors, including changes in quality of the loan origination; loan policy changes; changes in credit risk management processes; Bank regulatory and external loan review examination results.
Qualitative factors applied to the portfolio or segments of the portfolio may include judgments concerning general economic conditions that may affect credit quality, credit concentrations, the pace of portfolio growth, the direction of risk rating movements, policy exception levels, and delinquency levels; these qualitative factors are also considered in connection with the unallocated portion of our allowance for loan losses.
The qualitative portion of the allowance for loan losses was 0.51% of related loans as of March 31, 2020, compared to 0.48% of related loans as of December 31, 2019. The qualitative portion increased $585,000 between December 31, 2019 and March 31, 2020 due to a mix of factors, including initial macroeconomic impacts of the COVID-19 pandemic.
The unallocated component of the allowance totaled $2,121,000 at March 31, 2020, or 17.9% of the total reserve. This compares to $1,182,000 or 10.2% as of December 31, 2019. The change supports general imprecision related to portfolio growth and supports general economic uncertainty resulting from the COVID-19 pandemic. The beginnings of COVID-19's impact upon the economy are captured in several factors considered in the qualitative portion of the reserve, however the depth and duration of the economic impact is unknown. Consequently, it is likely that there are underlying credit risks that have not yet surfaced in the loan specific or qualitative metrics the Company uses to estimate its allowance for loan losses, supporting an increase in the unallocated component.
The allowance for loan losses as a percent of total loans stood at 0.88% as of March 31, 2020, 0.90% at December 31, 2019 and 0.91% as of March 31, 2019.
Commercial loans are comprised of three major classes, commercial real estate loans, commercial construction loans and other commercial loans.
Commercial real estate loans consist of mortgage loans to finance investments in real property such as multi-family residential, commercial/retail, office, industrial, hotels, educational and other specific or mixed use properties. Commercial real estate loans are typically written with amortizing payment structures. Collateral values are determined based on appraisals and evaluations in accordance with established policy and regulatory guidelines. Commercial real estate loans typically have a loan-to-value ratio of up to 80% based upon current valuation information at the time the loan is made. Commercial real estate loans are primarily paid by the cash flow generated from the real property, such as operating leases, rents, or other operating cash flows from the borrower.
Commercial construction loans consist of loans to finance construction in a mix of owner- and non-owner occupied commercial real estate properties. Commercial construction loans typically have maturities of less than two years. Payment structures during the construction period are typically on an interest only basis, although principal payments may be established

Page 23



depending on the type of construction project being financed. During the construction phase, commercial construction loans are primarily paid by cash flow generated from the construction project or other operating cash flows from the borrower or guarantors, if applicable. At the end of the construction period, loan repayment typically comes from a third party source in the event that the Company will not be providing permanent term financing. Collateral valuation and loan-to-value guidelines follow those for commercial real estate loans.
Other commercial loans consist of revolving and term loan obligations extended to business and corporate enterprises for the purpose of financing working capital and or capital investment. Collateral generally consists of pledges of business assets including, but not limited to, accounts receivable, inventory, plant and equipment, and/or real estate, if applicable. Commercial loans are primarily paid by the operating cash flow of the borrower. Commercial loans may be secured or unsecured.
Municipal loans are comprised of loans to municipalities in Maine for capitalized expenditures, construction projects or tax anticipation notes. All municipal loans are considered general obligations of the municipality and are collateralized by the taxing ability of the municipality for repayment of debt.
Residential loans are comprised of two classes: term loans and construction loans.
Residential term loans consist of residential real estate loans held in the Company's loan portfolio made to borrowers who demonstrate the ability to make scheduled payments with full consideration to underwriting factors. Borrower qualifications include favorable credit history combined with supportive income requirements and loan-to-value ratios within established policy and regulatory guidelines. Collateral values are determined based on appraisals and evaluations in accordance with established policy and regulatory guidelines. Residential loans typically have a loan-to-value ratio of up to 80% based on appraisal information at the time the loan is made. Collateral consists of mortgage liens on one- to four-family residential properties. Loans are offered with fixed or adjustable rates with amortization terms of up to thirty years.
Residential construction loans typically consist of loans for the purpose of constructing single family residences to be owned and occupied by the borrower. Borrower qualifications include favorable credit history combined with supportive income requirements and loan-to-value ratios within established policy and regulatory guidelines. Residential construction loans normally have construction terms of one year or less and payment during the construction term is typically on an interest only basis from sources including interest reserves, borrower liquidity and/or income. Residential construction loans will typically convert to permanent financing from the Company or have another financing commitment in place from an acceptable mortgage lender. Collateral valuation and loan-to-value guidelines are consistent with those for residential term loans.
Home equity lines of credit are made to qualified individuals and are secured by senior or junior mortgage liens on owner occupied one- to four-family homes, condominiums, or vacation homes. The home equity line of credit typically has a variable interest rate and is billed as interest-only payments during the draw period. At the end of the draw period, the home equity line of credit is billed as a percentage of the principal balance plus all accrued interest. Loan maturities are normally 300 months. Borrower qualifications include favorable credit history combined with supportive income requirements and combined loan-to- value ratios usually not exceeding 80% inclusive of priority liens. Collateral valuation guidelines follow those for residential real estate loans.
Consumer loan products including personal lines of credit and amortizing loans made to qualified individuals for various purposes such as auto, recreational vehicles, debt consolidation, personal expenses or overdraft protection. Borrower qualifications include favorable credit history combined with supportive income and collateral requirements within established policy guidelines. Consumer loans may be secured or unsecured.
Construction, land and land development loans, both commercial and residential, comprise a small portion of the portfolio, and at 30.6% of capital are below the regulatory guidance limit of 100.0% of capital at March 31, 2020. Construction loans and non-owner-occupied commercial real estate loans are at 126.5% of total capital, below the regulatory limit of 300.0% of capital at March 31, 2020.
The process of establishing the allowance with respect to the commercial loan portfolio begins when a Loan Officer or Senior Officer (or designate) initially assigns each loan a risk rating, using established credit criteria. Approximately 60% of a trailing four quarter average gross commercial portfolio is subject to review and validation annually by an independent consulting firm. Additionally, commercial loan relationships with exposure greater than or equal to $500,000 are subject to review annually by the Company's internal credit review function. The methodology employs Management's judgment as to the level of losses on existing loans based on internal review of the loan portfolio, including an analysis of a borrower's current financial position, and the consideration of current and anticipated economic conditions and their potential effects on specific borrowers and or lines of business.







Page 24



In determining the Company's ability to collect certain loans, Management also considers the fair value of underlying collateral. The risk rating system has eight levels, defined as follows:
1    Strong
Credits rated "1" are characterized by borrowers fully responsible for the credit with excellent capacity to pay principal and interest. Loans rated "1" may be secured with acceptable forms of liquid collateral.
2    Above Average
Credits rated "2" are characterized by borrowers that have better than average liquidity, capitalization, earnings and/or cash flow with a consistent record of solid financial performance.
3    Satisfactory
Credits rated "3" are characterized by borrowers with favorable liquidity, profitability and financial condition with adequate cash flow to pay debt service.
4    Average
Credits rated "4" are characterized by borrowers that present risk more than 1, 2 and 3 rated loans and merit an ordinary level of ongoing monitoring. Financial condition is on par or somewhat below industry averages while cash flow is generally adequate to meet debt service requirements.
5    Watch
Credits rated "5" are characterized by borrowers that warrant greater monitoring due to financial condition or unresolved and identified risk factors.
6    Other Assets Especially Mentioned (OAEM)
Loans in this category are currently protected but are potentially weak and constitute an undue and unwarranted credit risk, but not to the point of justifying a classification of substandard. OAEM have potential weaknesses which may, if not checked or corrected, weaken the asset or inadequately protect the Company's credit position at some future date.
7    Substandard
Loans in this category are inadequately protected by the paying capacity of the borrower or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. Substandard loans are characterized by the distinct possibility that the Company may sustain some loss if the deficiencies are not corrected.
8    Doubtful
Loans classified "Doubtful" have the same weaknesses as those classified substandard with the added characteristic that the weaknesses make collection or liquidation in full, based on currently existing facts, conditions, and values, highly questionable and improbable. The possibility of loss is high, but because of certain important and reasonably specific pending factors which may work to the advantage and strengthening of the asset, its classification as an estimated loss is deferred until its more exact status may be determined.
The following table summarizes the risk ratings for the Company's commercial real estate, commercial construction, commercial other, and municipal loans as of March 31, 2020:
 
Commercial
Real Estate
 
Commercial
Construction
 
Commercial
Other
 
Municipal
Loans
 
All Risk-
Rated Loans
1 Strong
$

 
$

 
$
4,559,000

 
$
28,000

 
$
4,587,000

2 Above Average
10,222,000

 
842,000

 
5,933,000

 
40,340,000

 
57,337,000

3 Satisfactory
83,905,000

 
1,873,000

 
40,255,000

 
372,000

 
126,405,000

4 Average
203,263,000

 
26,029,000

 
131,664,000

 
2,797,000

 
363,753,000

5 Watch
68,618,000

 
14,702,000

 
46,357,000

 

 
129,677,000

6 OAEM
1,834,000

 

 
2,824,000

 

 
4,658,000

7 Substandard
14,911,000

 
467,000

 
6,304,000

 

 
21,682,000

8 Doubtful

 

 

 

 

Total
$
382,753,000

 
$
43,913,000

 
$
237,896,000

 
$
43,537,000

 
$
708,099,000


Page 25



The following table summarizes the risk ratings for the Company's commercial real estate, commercial construction, commercial other, and municipal loans as of December 31, 2019:
 
Commercial
Real Estate
 
Commercial
Construction
 
Commercial
Other
 
Municipal
Loans
 
All Risk-
Rated Loans
1 Strong
$

 
$

 
$
4,258,000

 
$
32,000

 
$
4,290,000

2 Above Average
12,393,000

 
794,000

 
6,187,000

 
38,290,000

 
57,664,000

3 Satisfactory
74,709,000

 
2,305,000

 
41,527,000

 
379,000

 
118,920,000

4 Average
205,510,000

 
19,017,000

 
107,389,000

 
2,587,000

 
334,503,000

5 Watch
63,582,000

 
15,488,000

 
47,152,000

 

 
126,222,000

6 OAEM
1,160,000

 

 
1,988,000

 

 
3,148,000

7 Substandard
15,456,000

 
480,000

 
10,272,000

 

 
26,208,000

8 Doubtful

 

 

 

 

Total
$
372,810,000

 
$
38,084,000

 
$
218,773,000

 
$
41,288,000

 
$
670,955,000

The following table summarizes the risk ratings for the Company's commercial real estate, commercial construction, commercial other, and municipal loans as of March 31, 2019:
 
Commercial
Real Estate
 
Commercial
Construction
 
Commercial
Other
 
Municipal
Loans
 
All Risk-
Rated Loans
1 Strong
$

 
$

 
$
3,630,000

 
$
43,000

 
$
3,673,000

2 Above Average
10,097,000

 
36,000

 
4,447,000

 
51,806,000

 
66,386,000

3 Satisfactory
82,595,000

 
2,352,000

 
43,963,000

 
450,000

 
129,360,000

4 Average
179,290,000

 
23,267,000

 
89,825,000

 
1,947,000

 
294,329,000

5 Watch
63,503,000

 
8,290,000

 
50,619,000

 

 
122,412,000

6 OAEM
2,847,000

 

 
1,993,000

 

 
4,840,000

7 Substandard
19,305,000

 
286,000

 
10,985,000

 

 
30,576,000

8 Doubtful
123,000

 

 

 

 
123,000

Total
$
357,760,000

 
$
34,231,000

 
$
205,462,000

 
$
54,246,000

 
$
651,699,000



Commercial loans are generally charged off when all or a portion of the principal amount is determined to be uncollectible. This determination is based on circumstances specific to a borrower including repayment ability, analysis of collateral and other factors as applicable.
Residential loans are comprised of two classes: term loans, which include traditional amortizing home mortgages, and construction loans, which include loans for owner-occupied residential construction. Residential loans typically have a 75% to 80% loan to value based upon current appraisal information at the time the loan is made. Home equity loans and lines of credit are typically written to the same underwriting standards. Consumer loans are primarily amortizing loans to individuals collateralized by automobiles, pleasure craft and recreation vehicles, typically with a maximum loan to value of 80% to 90% of the purchase price of the collateral. Consumer loans also include a small amount of unsecured short-term time notes to individuals.
Residential loans, consumer loans and home equity lines of credit are segregated into homogeneous pools with similar risk characteristics. Trends and current conditions are analyzed and historical loss experience is adjusted accordingly. Quantitative and qualitative adjustment factors for these segments are consistent with those for the commercial and municipal classes. Certain loans in the residential, home equity lines of credit and consumer classes identified as having the potential for further deterioration are analyzed individually to confirm impairment status, and to determine the need for a specific reserve; however there is no formal rating system used for these classes. Consumer loans greater than 120 days past due are generally charged off. Residential loans 90 days or more past due are placed on non-accrual status unless the loans are both well secured and in the process of collection. One- to  four-family residential real estate loans and home equity loans are written down or charged-off no later than 180 days past due, or for residential real estate secured loans having a borrower in bankruptcy, within 60 days of receipt of notification of filing from the bankruptcy court, whichever is sooner. This is subject to completion of a current assessment of the value of the collateral with any outstanding loan balance in excess of the fair value of the property, less costs to sell, written down or charged-off. 
There were no changes to the Company's accounting policies or methodology used to estimate the allowance for loan losses during the three months ended March 31, 2020.

Page 26



The following table presents allowance for loan losses activity by class for the three months ended March 31, 2020, and allowance for loan loss balances by class and related loan balances by class as of March 31, 2020:
 
Commercial
Municipal
Residential
Home Equity Line of Credit
Consumer
Unallocated
Total
 
Real Estate
Construction
Other
 
Term
Construction
 
 
 
 
For the three months ended March 31, 2020
Beginning balance
$
3,742,000

$
365,000

$
3,329,000

$
27,000

$
1,024,000

$
25,000

$
1,078,000

$
867,000

$
1,182,000

$
11,639,000

Charge offs




2,000


153,000

100,000


255,000

Recoveries


20,000


10,000


1,000

43,000


74,000

Provision (credit)
120,000

59,000

(922,000
)
2,000

194,000

7,000

86,000

(85,000
)
939,000

400,000

Ending balance
$
3,862,000

$
424,000

$
2,427,000

$
29,000

$
1,226,000

$
32,000

$
1,012,000

$
725,000

$
2,121,000

$
11,858,000

Allowance for loan losses as of March 31, 2020
Ending balance specifically evaluated for impairment
$
230,000

$
3,000

$
172,000

$

$
233,000

$

$
296,000

$
58,000

$

$
992,000

Ending balance collectively evaluated for impairment
$
3,632,000

$
421,000

$
2,255,000

$
29,000

$
993,000

$
32,000

$
716,000

$
667,000

$
2,121,000

$
10,866,000

Related loan balances as of March 31, 2020
Ending balance
$
382,753,000

$
43,913,000

$
237,896,000

$
43,537,000

$
500,971,000

$
15,202,000

$
90,674,000

$
29,262,000

$

$
1,344,208,000

Ending balance specifically evaluated for impairment
$
6,223,000

$
947,000

$
990,000

$

$
12,038,000

$

$
2,228,000

$
67,000

$

$
22,493,000

Ending balance collectively evaluated for impairment
$
376,530,000

$
42,966,000

$
236,906,000

$
43,537,000

$
488,933,000

$
15,202,000

$
88,446,000

$
29,195,000

$

$
1,321,715,000



Page 27



The following table presents allowance for loan losses activity by class for the year ended December 31, 2019 and allowance for loan loss balances by class and related loan balances by class as of December 31, 2019:
 
Commercial
Municipal
Residential
Home Equity Line of Credit
Consumer
Unallocated
Total
 
Real Estate
Construction
Other
 
Term
Construction
 
 
 
 
For the year ended December 31, 2019
Beginning balance
$
3,567,000

$
255,000

$
3,541,000

$
24,000

$
1,235,000

$
34,000

$
730,000

$
630,000

$
1,216,000

$
11,232,000

Charge offs
89,000


179,000


445,000


69,000

338,000


1,120,000

Recoveries
15,000


73,000


57,000


4,000

128,000


277,000

Provision (credit)
249,000

110,000

(106,000
)
3,000

177,000

(9,000
)
413,000

447,000

(34,000
)
1,250,000

Ending balance
$
3,742,000

$
365,000

$
3,329,000

$
27,000

$
1,024,000

$
25,000

$
1,078,000

$
867,000

$
1,182,000

$
11,639,000

Allowance for loan losses as of December 31, 2019
Ending balance specifically evaluated for impairment
$
251,000

$

$
1,273,000

$

$
237,000

$

$
447,000

$
5,000

$

$
2,213,000

Ending balance collectively evaluated for impairment
$
3,491,000

$
365,000

$
2,056,000

$
27,000

$
787,000

$
25,000

$
631,000

$
862,000

$
1,182,000

$
9,426,000

Related loan balances as of December 31, 2019
Ending balance
$
372,810,000

$
38,084,000

$
218,773,000

$
41,288,000

$
492,455,000

$
14,813,000

$
92,349,000

$
26,503,000

$

$
1,297,075,000

Ending balance specifically evaluated for impairment
$
6,309,000

$
958,000

$
7,075,000

$

$
12,439,000

$

$
2,488,000

$
5,000

$

$
29,274,000

Ending balance collectively evaluated for impairment
$
366,501,000

$
37,126,000

$
211,698,000

$
41,288,000

$
480,016,000

$
14,813,000

$
89,861,000

$
26,498,000

$

$
1,267,801,000


Page 28




The following table presents allowance for loan losses activity by class for the three months ended March 31, 2019, and allowance for loan loss balances by class and related loan balances by class as of March 31, 2019:
 
Commercial
Municipal
Residential
 Home Equity Line of Credit
Consumer
Unallocated
Total
 
Real Estate
Construction
Other
 
Term
Construction
 
 
 
 
For the three months ended March 31, 2019
Beginning balance
$
3,567,000

$
255,000

$
3,541,000

$
24,000

$
1,235,000

$
34,000

$
730,000

$
630,000

$
1,216,000

$
11,232,000

Charge offs


1,000


49,000


38,000

63,000


151,000

Recoveries
8,000


1,000


3,000


1,000

21,000


34,000

Provision (credit)
57,000

70,000

(111,000
)
1,000

(75,000
)
(4,000
)
(63,000
)
72,000

428,000

375,000

Ending balance
$
3,632,000

$
325,000

$
3,430,000

$
25,000

$
1,114,000

$
30,000

$
630,000

$
660,000

$
1,644,000

$
11,490,000

Allowance for loan losses as of March 31, 2019
Ending balance specifically evaluated for impairment
$
233,000

$

$
1,485,000

$

$
348,000

$

$
7,000

$
2,000

$

$
2,075,000

Ending balance collectively evaluated for impairment
$
3,399,000

$
325,000

$
1,945,000

$
25,000

$
766,000

$
30,000

$
623,000

$
658,000

$
1,644,000

$
9,415,000

Related loan balances as of March 31, 2019
Ending balance
$
357,760,000

$
34,231,000

$
205,462,000

$
54,246,000

$
474,241,000

$
18,450,000

$
95,692,000

$
24,557,000

$

$
1,264,639,000

Ending balance specifically evaluated for impairment
$
9,957,000

$
1,007,000

$
7,653,000

$

$
10,919,000

$

$
1,030,000

$
2,000

$

$
30,568,000

Ending balance collectively evaluated for impairment
$
347,803,000

$
33,224,000

$
197,809,000

$
54,246,000

$
463,322,000

$
18,450,000

$
94,662,000

$
24,555,000

$

$
1,234,071,000



Note 5 – Stock-Based Compensation
At the 2010 Annual Meeting, shareholders approved the 2010 Equity Incentive Plan (the "2010 Plan"). This reserves 400,000 shares of common stock for issuance in connection with stock options, restricted stock awards and other equity based awards to attract and retain the best available personnel, provide additional incentive to officers, employees and non-employee Directors and promote the success of the Company. Such grants and awards will be structured in a manner that does not encourage the recipients to expose the Company to undue or inappropriate risk. Options issued under the 2010 Plan will qualify for treatment as incentive stock options for purposes of Section 422 of the Internal Revenue Code. Other compensation under the 2010 Plan will qualify as performance-based for purposes of Section 162(m) of the Internal Revenue Code, and will satisfy NASDAQ guidelines relating to equity compensation.



Page 29



As of March 31, 2020, 184,487 shares of restricted stock had been granted under the 2010 Plan, of which 71,374 shares remain restricted as of March 31, 2020 as detailed in the following table:
Year
Granted
Vesting Term
(In Years)
Shares
Remaining Term
(In Years)
2015
5.0
527

0.3
2016
5.0
10,874

0.8
2017
5.0
7,017

1.8
2018
3.0
5,371

0.9
2018
4.0
2,068

1.8
2018
5.0
6,184

2.8
2019
2.0
1,484

0.8
2019
3.0
16,254

1.8
2020
1.0
2,309

0.8
2020
2.0
694

1.8
2020
3.0
18,592

2.8
 
 
71,374

2.0

The compensation cost related to these restricted stock grants is $1,785,000 and is recognized over the vesting terms of each grant. In the three months ended March 31, 2020, $150,000 of expense was recognized for these restricted shares, leaving $1,087,000 in unrecognized expense as of March 31, 2020. In the three months ended March 31, 2019, $123,000 of expense was recognized for restricted shares, leaving $1,046,000 in unrecognized expense as of March 31, 2019.
The 2010 Plan expired on April 28, 2020. At the 2020 Annual Meeting, shareholders approved the 2020 Equity Incentive Plan (the "2020 Plan"). The 2020 Plan reserves 400,000 shares of common stock of the Company for issuance in connection with stock options, restricted stock awards and other equity based awards for the same purpose and under the same terms as the 2010 Plan. No awards have been granted to date under the 2020 Plan.

Note 6 – Common Stock
Proceeds from sale of common stock totaled $163,000 and $168,000 for the three months ended March 31, 2020 and 2019, respectively.


Page 30



Note 7 – Earnings Per Share
The following table sets forth the computation of basic and diluted earnings per share (EPS) for the three months ended March 31, 2020 and 2019:
 
Income (Numerator)
 
Shares (Denominator)
 
Per-Share Amount
For the three months ended March 31, 2020
 
 
 
 
 
Net income as reported
$
6,495,000

 
 
 
 
Basic EPS: Income available to common shareholders
6,495,000

 
10,844,600

 
$
0.60

Effect of dilutive securities: restricted stock
 
 
69,753

 
 
Diluted EPS: Income available to common shareholders plus assumed conversions
$
6,495,000

 
10,914,353

 
$
0.60

For the three months ended March 31, 2019
 
 
 
 
 
Net income as reported
$
6,156,000

 
 
 
 
Basic EPS: Income available to common shareholders
6,156,000

 
10,802,782

 
$
0.57

Effect of dilutive securities: restricted stock
 
 
73,953

 
 
Diluted EPS: Income available to common shareholders plus assumed conversions
$
6,156,000

 
10,876,735

 
$
0.57


 
 
 
 
 
 



Note 8 – Employee Benefit Plans
401(k) Plan
The Bank has a defined contribution plan available to substantially all employees who have completed 3 months of service. Employees may contribute up to Internal Revenue Service ("IRS") determined limits and the Bank may match employee contributions not to exceed 3.0% of compensation depending on contribution level. Subject to a vote of the Board of Directors, the Bank may also make a profit-sharing contribution to the Plan. Such contribution equaled 2.0% of each eligible employee's compensation in 2019. The amount for 2020 has not been established. The expense related to the 401(k) plan was $255,000 and $185,000 for the three months ended March 31, 2020 and 2019, respectively.

Deferred Compensation and Supplemental Retirement Benefits
The Bank also provides unfunded supplemental retirement benefits for certain officers, payable in installments over 20 years upon retirement or death. The agreements consist of individual contracts with differing characteristics that, when taken together, do not constitute a postretirement plan. The costs for these benefits are recognized over the service periods of the participating officers in accordance with Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") Topic 712 "Compensation – Nonretirement Postemployment Benefits". The expense of these supplemental retirement benefits was $40,000 for the three months ended March 31, 2020 and 2019. As of March 31, 2020, the associated accrued liability included in other liabilities in the balance sheet was $2,772,000 compared to $2,828,000 and $2,894,000 at December 31, 2019 and March 31, 2019, respectively.

Post-Retirement Benefit Plans
The Bank sponsors two post-retirement benefit plans. One plan currently provides a subsidy for health insurance premiums to certain retired employees and a future subsidy for six active employees who were age 50 and over in 1996. These subsidies are based on years of service and range between $40 and $1,200 per month per person. The other plan provides life insurance coverage to certain retired employees and health insurance for retired directors. None of these plans are pre-funded. The Company utilizes FASB ASC Topic 712 to recognize the overfunded or underfunded status of a defined benefit postretirement plan as an asset or liability in its balance sheet and to recognize changes in the funded status in the year in which the changes occur through comprehensive income (loss).





Page 31



The following table sets forth the accumulated postretirement benefit obligation and funded status:
 
At or for the three months ended March 31,
 
2020
 
2019
Change in benefit obligation
 
 
 
Benefit obligation at beginning of year
$
1,581,000

 
$
1,599,000

Interest cost
16,000

 
17,000

Benefits paid
(27,000
)
 
(28,000
)
Benefit obligation at end of period
$
1,570,000

 
$
1,588,000

Funded status
 
 
 
Benefit obligation at end of period
$
(1,570,000
)
 
$
(1,588,000
)
Unamortized gain
(31,000
)
 
(47,000
)
Accrued benefit cost at end of period
$
(1,601,000
)
 
$
(1,635,000
)

The following table sets forth the net periodic pension cost:
 
For the three months ended March 31,
 
2020
 
2019
Components of net periodic benefit cost
 
 
 
Interest cost
$
16,000

 
$
17,000

Net periodic benefit cost
$
16,000

 
$
17,000


Amounts not yet reflected in net periodic benefit cost and included in accumulated other comprehensive income are as follows:
 
March 31,
2020
 
December 31, 2019
 
March 31,
2019
Unamortized net actuarial gain
$
31,000

 
$
31,000

 
$
47,000

Deferred tax expense
(7,000
)
 
(7,000
)
 
(10,000
)
Net unrecognized postretirement benefits included in accumulated other comprehensive income
$
24,000

 
$
24,000

 
$
37,000


    
A weighted average discount rate of 3.00% was used in determining the accumulated benefit obligation and the net periodic benefit cost. The assumed health care cost trend rate is 7.0%. The measurement date for benefit obligations was as of year-end for prior years presented. The expected benefit payments for all of 2020 are $108,000. Plan expense for 2020 is estimated to be $64,000. A 1% change in trend assumptions would create an approximate change in the same direction of $100,000 in the accumulated benefit obligation, $7,000 in the interest cost and $1,000 in the service cost.



Page 32



Note 9 - Other Comprehensive Income (Loss)

The following table summarizes activity in the unrealized gain or loss on available for sale securities included in other comprehensive income (loss) for the three months ended March 31, 2020 and 2019.
 
For the three months ended March 31,
 
2020
2019
Balance at beginning of period
$
3,657,000

$
(5,051,000
)
Unrealized gains arising during the period
6,109,000

4,446,000

Reclassification of net realized gains during the period
(752,000
)

Related deferred taxes
(1,124,000
)
(934,000
)
Net change
4,233,000

3,512,000

Balance at end of period
$
7,890,000

$
(1,539,000
)


The reclassification of realized gains is included in the net securities gains line of the consolidated statements of income and comprehensive income and the tax effect is included in the income tax expense line of the same statement.
The following table summarizes activity in the unrealized loss on securities transferred from available for sale to held to maturity included in other comprehensive income (loss) for the three months ended March 31, 2020 and 2019.
 
For the three months ended March 31,
 
2020
2019
Balance at beginning of period
$
(182,000
)
$
(197,000
)
Amortization of net unrealized gains
10,000

4,000

Related deferred taxes
(2,000
)
(1,000
)
Net change
8,000

3,000

Balance at end of period
$
(174,000
)
$
(194,000
)


The following table presents the effect of the Company's derivative financial instruments included in other comprehensive income (loss) for the three months ended March 31, 2020 and 2019.
 
For the three months ended March 31,
 
2020
2019
Balance at beginning of period
$
97,000

$
1,438,000

Unrealized losses on cash flow hedging derivatives arising during the period
(6,165,000
)
(589,000
)
Related deferred taxes
1,295,000

124,000

Net change
(4,870,000
)
(465,000
)
Balance at end of period
$
(4,773,000
)
$
973,000



Page 33



The following table summarizes activity in the unrealized gain or loss on postretirement benefits included in other comprehensive income (loss) for the three months ended March 31, 2020 and 2019.
 
For the three months ended March 31,
 
2020
2019
Unrecognized postretirement benefits at beginning of period
$
24,000

$
37,000

Amortization of unrecognized transition obligation


Change in unamortized net actuarial gain (loss)


Related deferred taxes


Unrecognized postretirement benefits at end of period
$
24,000

$
37,000




Note 10 - Financial Derivative Instruments

The Bank uses derivative financial instruments for risk management purposes and not for trading or speculative purposes. As part of its overall asset and liability management strategy, the Bank periodically uses derivative instruments to minimize significant unplanned fluctuations in earnings and cash flows caused by interest rate volatility. The Bank’s interest rate risk management strategy involves modifying the re-pricing characteristics of certain assets or liabilities so that changes in interest rates do not have a significant effect on net interest income.
The Bank recognizes its derivative instruments in the consolidated balance sheet at fair value.  On the date the derivative instrument is entered into, the Bank designates whether the derivative is part of a hedging relationship (i.e., cash flow or fair value hedge). The Bank formally documents relationships between hedging instruments and hedged items, as well as its risk management objective and strategy for undertaking hedge transactions. The Bank also assesses, both at the hedge’s inception and on an ongoing basis, whether the derivatives used in hedging transactions are highly effective in offsetting the changes in cash flows or fair values of hedged items. Changes in fair value of derivative instruments that are highly effective and qualify as cash flow hedges are recorded in other comprehensive income or loss. Any ineffective portion is recorded in earnings. The Bank discontinues hedge accounting when it is determined that the derivative is no longer highly effective in offsetting changes of the hedged risk on the hedged item, or management determines that the designation of the derivative as a hedging instrument is no longer appropriate.


Page 34



The details of the interest rate swap agreements are as follows:
 
 
 
 
 
March 31, 2020
December 31, 2019
March 31, 2019
Effective Date
Maturity Date
Variable Index Received
Fixed Rate Paid
Presentation on Consolidated Balance Sheet
Notional Amount
Fair Value
Notional Amount
Fair Value
Notional Amount
Fair Value
06/05/2018
12/05/2019
1-Month USD LIBOR
2.466
%
Other Liabilities
$

$

$

$

$
25,000,000

$
(7,000
)
06/27/2016
06/27/2021
1-Month USD LIBOR
0.893
%
Other (Liabilities) Assets
20,000,000

(151,000
)
20,000,000

199,000

20,000,000

586,000

06/28/2016
06/28/2021
1-Month USD LIBOR
0.940
%
Other (Liabilities) Assets
30,000,000

(244,000
)
30,000,000

278,000

30,000,000

847,000

06/05/2018
06/05/2020
1-Month USD LIBOR
2.547
%
Other Liabilities


25,000,000

(96,000
)
25,000,000

(57,000
)
06/05/2018
12/05/2020
1-Month USD LIBOR
2.603
%
Other Liabilities


25,000,000

(234,000
)
25,000,000

(137,000
)
12/05/2019
12/05/2022
3-Month USD LIBOR
1.779
%
Other Liabilities


25,000,000

(98,000
)


08/02/2019
08/02/2024
1-Month USD LIBOR
1.590
%
Other Liabilities
12,500,000

(663,000
)
12,500,000

(11,000
)


08/05/2019
08/05/2024
1-Month USD LIBOR
1.420
%
Other (Liabilities) Assets
12,500,000

(571,000
)
12,500,000

85,000



02/12/2020
02/12/2023
3-Month USD LIBOR
1.486
%
Other Liabilities
25,000,000

(748,000
)




02/12/2020
02/12/2024
3-Month USD LIBOR
1.477
%
Other Liabilities
25,000,000

(972,000
)




06/28/2021
06/28/2026
1-Month USD LIBOR
1.158
%
Other Liabilities
50,000,000

(1,569,000
)




03/13/2020
03/13/2025
3-Month USD LIBOR
0.855
%
Other Liabilities
25,000,000

(463,000
)




03/13/2020
03/13/2030
3-Month USD LIBOR
1.029
%
Other Liabilities
20,000,000

(661,000
)




 
 
 
 
 
$
220,000,000

$
(6,042,000
)
$
150,000,000

$
123,000

$
125,000,000

1,232,000


During the first quarter of 2020, the Bank took advantage of market opportunities to restructure several interest rate swap positions and extend funding at favorable interest rates; one-time charges totaling $1.76 million were incurred and expensed in the quarter in connection with the restructuring. The Company would reclassify unrealized gains or losses accounted for within accumulated other comprehensive income (loss) into earnings if the interest rate swaps were to become ineffective or the swaps were to terminate. In the next 12 months, the Company does not believe it will be required to reclassify any unrealized gains or losses accounted for within accumulated other comprehensive income (loss) into earnings as a result of ineffectiveness or swap termination. Amounts paid or received under the swaps are reported in interest expense in the statement of income, and in interest paid in the statement of cash flows.

Customer loan derivatives
The Bank will enter into interest rate swaps with qualified commercial customers. Through these arrangements, the Bank is able to provide a means for a loan customer to obtain a long-term fixed rate, while it simultaneously contracts with an approved, highly-rated, third-party financial institution as counterparty to swap the fixed rate for a variable rate. Such loan level arrangements are not designated as hedges for accounting purposes, and are recorded at fair value in the Company’s consolidated balance sheet.

Page 35



At March 31, 2020 there were two customer loan swap arrangements in place, detailed below:
 
 
March 31, 2020
December 31, 2019
March 31, 2019
 
Presentation on Consolidated Balance Sheet
Number of Positions
Notional Amount
Fair Value
Number of Positions
Notional Amount
Fair Value
Number of Positions
Notional Amount
Fair Value
Pay Fixed, Receive Variable
Other Liabilities
2
$
16,394,000

$
(3,280,000
)
2
$
16,374,000

$
(1,205,000
)

$

$

Receive Fixed, Pay Variable
Other Assets
2
16,394,000

3,280,000

2
16,374,000

1,205,000




Total
 
4
$
32,588,000

$

4
$
32,748,000

$


$

$


Derivative collateral
The Bank has entered into a master netting arrangement with its counterparty and settles payments with the counterparty as necessary. The Bank's arrangement with its institutional counterparty requires it to post cash or other assets as collateral for its various loan swap contracts in a net liability position based on their fair values and the Bank's credit rating or receive cash collateral for contracts in a net asset position as requested. At March 31, 2020, the Bank posted to the counterparty $3,100,000 of cash and $10,000,000 in securities as collateral on its swap contracts. The required amount to be pledged was $9,322,000.
Cessation of LIBOR
The Company is aware that LIBOR may no longer be published after December 31, 2021. The International Swap and Derivatives Association ("ISDA"), the organization that oversees and guides swap and derivatives markets and participants, continues to work on transitions and replacement rates, including having replacement rates in place before the possible cessation of LIBOR at the end of 2021, and has committed to providing more definitive recommendations later in 2020. The Bank intends to continue to monitor these developments closely and expects to pursue the steps ultimately recommended by ISDA to provide for an orderly transition to a post-LIBOR environment. Of the interest rate swap contracts the Bank has in place as of March 31, 2020, two contracts carrying a total notional amount of $50 million are set to mature prior to December 31, 2021; seven contracts with a total notional amount of $170 million have maturity dates beyond December 31, 2021. The two customer loan swap contracts shown in the table immediately above have maturity dates of December 19, 2029 and October 1, 2039.
Note 11 – Mortgage Servicing Rights

FASB ASC Topic 860 "Transfers and Servicing" requires all separately recognized servicing assets and servicing liabilities to be initially measured at fair value, if practicable. The Company's servicing assets and servicing liabilities are reported using the amortization method and carried at the lower of amortized cost or fair value by strata. In evaluating the carrying values of mortgage servicing rights, the Company obtains third party valuations based on loan level data including note rate, type and term of the underlying loans. The model utilizes several assumptions, the most significant of which is loan prepayments, calculated using a three-months moving average of weekly prepayment data published by the Public Securities Association (PSA) and modeled against the serviced loan portfolio, and the discount rate to discount future cash flows. As of March 31, 2020, the prepayment assumption using the PSA model was 209, which translates into an anticipated prepayment rate of 12.54%. The discount rate is 9.00%. Other assumptions include delinquency rates, foreclosure rates, servicing cost inflation, and annual unit loan cost. All assumptions are adjusted periodically to reflect current circumstances. Amortization of mortgage servicing rights, as well as write-offs due to prepayments of the related mortgage loans, are recorded as a charge against mortgage servicing fee income.
For the three months ended March 31, 2020 and 2019, servicing rights capitalized totaled $129,000 and $58,000, respectively. Servicing rights amortized for the three-month periods ended March 31, 2020 and 2019 were $66,000 and $56,000, respectively. The fair value of servicing rights was $2,126,000, $2,089,000 and $2,410,000 at March 31, 2020, December 31, 2019 and March 31, 2019, respectively. The Bank serviced loans for others totaling $268,077,000, $266,173,000 and $260,553,000 at March 31, 2020, December 31, 2019, and March 31, 2019, respectively.



Page 36




Mortgage servicing rights are included in other assets and detailed in the following table:
 
March 31,
2020
 
December 31,
2019
 
March 31,
2019
Mortgage servicing rights
$
6,269,000

 
$
6,140,000

 
$
5,776,000

Accumulated amortization
(4,660,000
)
 
(4,594,000
)
 
(4,420,000
)
 
$
1,609,000

 
$
1,546,000

 
$
1,356,000


 
Note 12 – Income Taxes
FASB ASC Topic 740 "Income Taxes" defines the criteria that an individual tax position must satisfy for some or all of the benefits of that position to be recognized in a company's financial statements. Topic 740 prescribes a recognition threshold of more-likely-than-not, and a measurement attribute for all tax positions taken or expected to be taken on a tax return, in order for those tax positions to be recognized in the financial statements. The Company is currently open to audit under the statute of limitations by the IRS for the years ended December 31, 2016 through 2019.

Note 13 - Certificates of Deposit
The following table represents the breakdown of certificates of deposit at March 31, 2020 and 2019, and at December 31, 2019:
 
March 31, 2020
 
December 31, 2019
 
March 31, 2019
Certificates of deposit < $100,000
$
274,621,000

 
$
277,225,000

 
$
398,689,000

Certificates $100,000 to $250,000
364,530,000

 
345,241,000

 
238,429,000

Certificates $250,000 and over
71,787,000

 
67,513,000

 
75,358,000

 
$
710,938,000

 
$
689,979,000

 
$
712,476,000


Note 14 – Reclassifications
Certain items from the prior year were reclassified in the financial statements to conform with the current year presentation. These do not have a material impact on the consolidated balance sheet or statement of income and comprehensive income presentations.

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

The fair value methods and assumptions for the Company's financial instruments and other assets measured at fair value are set forth below.


Page 37



Investment Securities
The fair values of investment securities are estimated by independent providers using a market approach with observable inputs, including matrix pricing and recent transactions. In obtaining such valuation information from third parties, the Company has evaluated their valuation methodologies used to develop the fair values in order to determine whether the valuations are representative of an exit price in the Company's principal markets. The Company's principal markets for its securities portfolios are the secondary institutional markets, with an exit price that is predominantly reflective of bid level pricing in those markets. Fair values are calculated based on the value of one unit without regard to any premium or discount that may result from concentrations of ownership of a financial instrument, possible tax ramifications, or estimated transaction costs. If these considerations had been incorporated into the fair value estimates, the aggregate fair value could have been changed.

Loans
Fair values are estimated for portfolios of loans based on exit pricing notion. The fair values of performing loans are calculated by discounting scheduled cash flows through the estimated maturity using estimated market discount rates that reflect the credit and interest risk inherent in the loan. The estimates of maturity are based on the Company's historical experience with repayments for each loan classification, modified, as required, by an estimate of the effect of current economic and lending conditions, and the effects of estimated prepayments. Assumptions regarding credit risk, cash flows, and discount rates are judgmentally determined using available market information and specific borrower information. Management has made estimates of fair value using discount rates that it believes to be reasonable. However, because there is no market for many of these financial instruments, Management has no basis to determine whether the fair value presented above would be indicative of the value negotiated in an actual sale. As such, the Company classifies loans as Level 3, except for certain collateral-dependent impaired loans. Fair values of impaired loans are based on estimated cash flows and are discounted using a rate commensurate with the risk associated with the estimated cash flows, or if collateral dependent, discounted to the appraised value of the collateral as determined by reference to sale prices of similar properties, less costs to sell. As such, the Company classifies collateral dependent impaired loans for which a specific reserve results in a fair value measure as Level 2. All other impaired loans are classified as Level 3.

Other Real Estate Owned
Real estate acquired through foreclosure is initially recorded at fair value. The fair value of other real estate owned is based on property appraisals and an analysis of similar properties currently available. As such, the Company records other real estate owned as nonrecurring Level 2.

Mortgage Servicing Rights
Mortgage servicing rights represent the value associated with servicing residential mortgage loans. Servicing assets and servicing liabilities are reported using the amortization method and compared to fair value for impairment. In evaluating the fair values of mortgage servicing rights, the Company obtains third party valuations based on loan level data including note rate, type and term of the underlying loans. As such, the Company classifies mortgage servicing rights as Level 2.

Time Deposits
The fair value of maturity deposits is based on the discounted value of contractual cash flows using a replacement cost of funds approach. The discount rate is estimated using the cost of funds borrowing rate in the market. As such, the Company classifies deposits as Level 2.

Borrowed Funds
The fair value of borrowed funds is based on the discounted value of contractual cash flows. The discount rate is estimated using the rates currently available for borrowings of similar remaining maturities. As such, the Company classifies borrowed funds as Level 2.

Derivatives
The fair value of interest rate swaps is determined using inputs that are observable in the market place obtained from third parties including yield curves, publicly available volatilities, and floating indexes and, accordingly, are classified as Level 2 inputs. The credit value adjustments associated with derivatives utilize Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default by the Company and its counterparties. As of March 31, 2020 and 2019, and December 31, 2019, the Company has assessed the significance of the impact of the credit valuation adjustments on the overall valuation of its derivative positions and has determined that the credit valuation adjustments are not significant to the overall valuation of its derivatives due to collateral postings.



Page 38



Customer Loan Derivatives
The valuation of the Company’s customer loan derivatives is obtained from a third-party pricing service and is determined using a discounted cash flow analysis on the expected cash flows of each derivative. The pricing analysis is based on observable inputs for the contractual terms of the derivatives, including the period to maturity and interest rate curves.  The Company incorporates credit valuation adjustments to appropriately reflect both its own nonperformance risk and the respective counterparty’s nonperformance risk in the fair value measurements. In adjusting the fair value of its derivative contracts for the effect of nonperformance risk, the Company has considered the impact of master netting arrangements and any applicable credit enhancements, such as collateral postings.

Limitations
Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument. These values do not reflect any premium or discount that could result from offering for sale at one time the Company's entire holdings of a particular financial instrument. Because no market exists for a significant portion of the Company's financial instruments, fair value estimates are based on Management's judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments, and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates. Fair value estimates are based on existing on- and off-balance-sheet financial instruments without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments. Other significant assets and liabilities that are not considered financial instruments include the deferred tax asset, premises and equipment, and other real estate owned. In addition, tax ramifications related to the realization of the unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in any of the estimates.

Assets and Liabilities Recorded at Fair Value on a Recurring Basis
The following tables present the balances of assets and liabilities that were measured at fair value on a recurring basis as of March 31, 2020, December 31, 2019 and March 31, 2019.
 
At March 31, 2020
 
Level 1
 
Level 2
 
Level 3
 
Total
Securities available for sale
 
 
 
 
 
 
 
   U.S. Government-sponsored agencies
$

 
$
7,552,000

 
$

 
$
7,552,000

   Mortgage-backed securities

 
285,152,000

 

 
285,152,000

   State and political subdivisions

 
20,224,000

 

 
20,224,000

Total securities available for sale

 
312,928,000

 

 
312,928,000

  Customer loan interest swap agreements

 
3,280,000

 

 
3,280,000

Total interest rate swap agreements
$

 
$
3,280,000

 
$

 
$
3,280,000

Total assets
$

 
$
316,208,000

 
$

 
$
316,208,000

 
At March 31, 2020
 
Level 1
 
Level 2
 
Level 3
 
Total
Interest rate swap agreements
$

 
$
9,322,000

 
$

 
$
9,322,000

Total liabilities
$

 
$
9,322,000

 
$

 
$
9,322,000


Page 39



 
At December 31, 2019
 
Level 1
 
Level 2
 
Level 3
 
Total
Securities available for sale
 
 
 
 
 
 
 
   U.S. Government-sponsored agencies
$

 
$
7,398,000

 
$

 
$
7,398,000

   Mortgage-backed securities

 
326,617,000

 

 
326,617,000

   State and political subdivisions

 
26,505,000

 

 
26,505,000

Total securities available for sale

 
360,520,000

 

 
360,520,000

  Interest rate swap agreements

 
562,000

 

 
562,000

  Customer loan interest swap agreements

 
1,205,000

 
 
 
1,205,000

Total interest rate swap agreements
 
 
1,767,000

 
 
 
1,767,000

Total assets
$

 
$
362,287,000

 
$

 
$
362,287,000


 
At December 31, 2019
 
Level 1
 
Level 2
 
Level 3
 
Total
Interest rate swap agreements
$

 
$
439,000

 
$

 
$
439,000

Customer loan interest swap agreements
 
 
$
1,205,000

 
 
 
$
1,205,000

Total liabilities
$

 
$
1,644,000

 
$

 
$
1,644,000


 
At March 31, 2019
 
Level 1
 
Level 2
 
Level 3
 
Total
Securities available for sale
 
 
 
 
 
 
 
   U.S. Treasury and agency
$

 
$
5,016,000

 
$

 
$
5,016,000

   Mortgage-backed securities

 
315,423,000

 

 
315,423,000

   State and political subdivisions

 
4,837,000

 

 
4,837,000

Total securities available for sale

 
325,276,000

 

 
325,276,000

Interest rate swap agreements

 
1,433,000

 

 
1,433,000

Total assets
$

 
$
326,709,000

 
$

 
$
326,709,000


 
At March 31, 2019
 
Level 1
 
Level 2
 
Level 3
 
Total
Interest rate swap agreements
$

 
$
201,000

 
$

 
$
201,000

Total liabilities
$

 
$
201,000

 
$

 
$
201,000



Assets Recorded at Fair Value on a Non-Recurring Basis
The following tables include assets measured at fair value on a nonrecurring basis that have had a fair value adjustment since their initial recognition. Other real estate owned is presented net of an allowance of $0 at March 31, 2020, 2019
and December 31, 2019. Only collateral-dependent impaired loans with a related specific allowance for loan losses or a partial charge off are included in impaired loans for purposes of fair value disclosures. Impaired loans below are presented net of specific allowances of $706,000, $1,916,000 and $1,822,000 at March 31, 2020, December 31, 2019, and March 31, 2019, respectively.
 
At March 31, 2020
 
Level 1
 
Level 2
 
Level 3
 
Total
Other real estate owned
$

 
$
316,000

 
$

 
$
316,000

Impaired loans

 
1,051,000

 

 
1,051,000

Total assets
$

 
$
1,367,000

 
$

 
$
1,367,000


Page 40



 
At December 31, 2019
 
Level 1
 
Level 2
 
Level 3
 
Total
Other real estate owned
$

 
$
279,000

 
$

 
$
279,000

Impaired loans

 
6,579,000

 

 
6,579,000

Total assets
$

 
$
6,858,000

 
$

 
$
6,858,000

 
At March 31, 2019
 
Level 1
 
Level 2
 
Level 3
 
Total
Other real estate owned
$

 
$
584,000

 
$

 
$
584,000

Impaired loans

 
6,519,000

 

 
6,519,000

Total assets
$

 
$
7,103,000

 
$

 
$
7,103,000



Page 41



Fair Value of Financial Instruments
FASB ASC Topic 825 "Financial Instruments" requires disclosures of fair value information about financial instruments, whether or not recognized in the balance sheet, if the fair values can be reasonably determined. Fair value is best determined based upon quoted market prices. However, in many instances, there are no quoted market prices for the Company's various financial instruments. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques using observable inputs when available. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. Accordingly, the fair value estimates may not be realized in an immediate settlement of the instrument. Topic 825 excludes certain financial instruments and all nonfinancial instruments from its disclosure requirements. Accordingly, the aggregate fair value amounts presented may not necessarily represent the underlying fair value of the Company.
This summary excludes financial assets and liabilities for which carrying value approximates fair values and financial instruments that are recorded at fair value on a recurring basis. Financial instruments for which carrying values approximate fair value include cash equivalents, interest-bearing deposits in other banks, demand, NOW, savings and money market deposits. The estimated fair value of demand, NOW, savings and money market deposits is the amount payable on demand at the reporting date. Carrying value is used because the accounts have no stated maturity and the customer has the ability to withdraw funds immediately.
The carrying amount and estimated fair values for financial instruments as of March 31, 2020 were as follows:
 
Carrying value
 
Estimated fair value
 
Level 1
 
Level 2
 
Level 3
Financial assets
 
 
 
 
 
 
 
 
 
Securities to be held to maturity
$
341,592,000

 
$
349,248,000

 
$

 
$
349,248,000

 
$

Loans (net of allowance for loan losses)
 
 
 
 
 
 
 
 
 
Commercial
 
 
 
 
 
 
 
 
 
   Real estate
378,049,000

 
371,916,000

 

 
7,000

 
371,909,000

   Construction
43,397,000

 
42,693,000

 

 

 
42,693,000

   Other
234,940,000

 
233,411,000

 

 

 
233,411,000

Municipal
43,502,000

 
41,909,000

 

 

 
41,909,000

Residential
 
 
 
 
 
 
 
 
 
   Term
499,478,000

 
503,098,000

 

 
335,000

 
502,763,000

   Construction
15,163,000

 
15,304,000

 

 

 
15,304,000

Home equity line of credit
89,442,000

 
89,407,000

 

 
700,000

 
88,707,000

Consumer
28,379,000

 
26,933,000

 

 
9,000

 
26,924,000

Total loans
1,332,350,000

 
1,324,671,000

 

 
1,051,000

 
1,323,620,000

Mortgage servicing rights
1,609,000

 
2,126,000

 

 
2,126,000

 

Financial liabilities
 
 
 
 
 
 
 
 
 
Local certificates of deposit
$
290,440,000

 
$
290,886,000

 
$

 
$
290,886,000

 
$

National certificates of deposit
420,498,000

 
429,110,000

 

 
429,110,000

 

Total certificates of deposits
710,938,000

 
719,996,000

 

 
719,996,000

 

Repurchase agreements
37,937,000

 
37,494,000

 

 
37,494,000

 

Federal Home Loan Bank advances
210,103,000

 
211,228,000

 

 
211,228,000

 

Total borrowed funds
248,040,000

 
248,722,000

 

 
248,722,000

 











Page 42



The carrying amounts and estimated fair values for financial instruments as of December 31, 2019 were as follows:
 
Carrying value
 
Estimated fair value
 
Level 1
 
Level 2
 
Level 3
Financial assets
 
 
 
 
 
 
 
 
 
Securities to be held to maturity
$
281,606,000

 
$
287,045,000

 
$

 
$
287,045,000

 
$

Loans (net of allowance for loan losses)
 
 
 
 
 
 
 
 
 
Commercial
 
 
 
 
 
 
 
 
 
   Real estate
368,645,000

 
364,626,000

 

 
2,000

 
364,624,000

   Construction
37,678,000

 
37,366,000

 

 

 
37,366,000

   Other
215,068,000

 
212,548,000

 

 
5,046,000

 
207,502,000

Municipal
41,258,000

 
40,552,000

 

 

 
40,552,000

Residential
 
 
 
 
 
 
 
 
 
   Term
491,315,000

 
491,359,000

 

 
577,000

 
490,782,000

   Construction
14,785,000

 
14,786,000

 

 

 
14,786,000

Home equity line of credit
91,149,000

 
90,959,000

 

 
954,000

 
90,005,000

Consumer
25,538,000

 
23,489,000

 

 

 
23,489,000

Total loans
1,285,436,000

 
1,275,685,000

 

 
6,579,000

 
1,269,106,000

Mortgage servicing rights
1,546,000

 
2,089,000

 

 
2,089,000

 

Financial liabilities
 
 
 
 
 
 
 
 
 
Local certificates of deposit
$
285,602,000

 
$
281,480,000

 
$

 
$
281,480,000

 
$

National certificates of deposit
404,377,000

 
412,337,000

 

 
412,337,000

 

Total deposits
689,979,000

 
693,817,000

 

 
693,817,000

 

Repurchase agreements
37,450,000

 
37,450,000

 

 
37,450,000

 

Federal Home Loan Bank advances
147,505,000

 
140,063,000

 

 
140,063,000

 

Total borrowed funds
184,955,000

 
177,513,000

 

 
177,513,000

 

























Page 43



The carrying amount and estimated fair values for financial instruments as of March 31, 2019 were as follows:
 
Carrying value
 
Estimated fair value
 
Level 1
 
Level 2
 
Level 3
Financial assets
 
 
 
 
 
 
 
 
 
Securities to be held to maturity
$
281,219,000

 
$
282,568,000

 
$

 
$
282,568,000

 
$

Loans (net of allowance for loan losses)
 
 
 
 
 
 
 
 
 
Commercial
 
 
 
 
 
 
 
 
 
   Real estate
353,521,000

 
347,398,000

 

 
422,000

 
346,976,000

   Construction
33,852,000

 
33,266,000

 

 

 
33,266,000

   Other
201,459,000

 
199,700,000

 

 
5,458,000

 
194,242,000

Municipal
54,217,000

 
53,179,000

 

 

 
53,179,000

Residential
 
 
 
 
 
 
 
 
 
   Term
472,941,000

 
463,150,000

 

 
625,000

 
462,525,000

   Construction
18,415,000

 
18,034,000

 

 

 
18,034,000

Home equity line of credit
94,957,000

 
92,834,000

 

 
14,000

 
92,820,000

Consumer
23,787,000

 
22,124,000

 

 

 
22,124,000

Total loans
1,253,149,000

 
1,229,685,000

 

 
6,519,000

 
1,223,166,000

Mortgage servicing rights
1,356,000

 
2,410,000

 

 
2,410,000

 

Financial liabilities
 
 
 
 
 
 
 
 
 
Local certificates of deposit
293,980,000

 
293,325,000

 

 
293,325,000

 

National certificates of deposit
418,496,000

 
419,285,000

 

 
419,285,000

 

Total certificates of deposits
712,476,000

 
712,610,000

 

 
712,610,000

 

Repurchase agreements
30,309,000

 
30,276,000

 

 
30,276,000

 

Federal Home Loan Bank advances
140,110,000

 
139,565,000

 

 
139,565,000

 

Total borrowed funds
170,419,000

 
169,841,000

 

 
169,841,000

 


Note 16 – Impact of Recently Issued Accounting Standards
In June 2016, the FASB issued Accounting Standards Update (ASU) No. 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. Under the new guidance, which will replace the existing incurred loss model for recognizing credit losses, banks and other lending institutions will be required to recognize the full amount of expected credit losses. The new guidance, which is referred to as the current expected credit loss model, requires that expected credit losses for financial assets held at the reporting date that are accounted for at amortized cost be measured and recognized based on historical experience and current and reasonably supportable forecasted conditions to reflect the full amount of expected credit losses. A modified version of these requirements also applies to debt securities classified as available for sale. The ASU was to be effective for all SEC registrants for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. On October 16, 2019 FASB voted to finalize a proposal issued in August 2019 under which the effective implementation date was changed for SEC registrants meeting the definition of a Smaller Reporting Company to fiscal years beginning after December 15, 2022. Early adoption is permitted for fiscal years beginning after December 15, 2018, including interim periods within such years. The Company qualifies as a Smaller Reporting Company. It continues to evaluate the impact of the adoption of the ASU on its consolidated financial statements, and continues to anticipates that it may have a material impact upon adoption. The Bank has formed an implementation committee for ASU No. 2016-13. To date, committee members have participated in educational seminars on the new standards, identified the historical data sets that will be necessary to implement the new standard, and have chosen a third-party vendor who provides software solutions for ASU No. 2016-13 modeling and calculation. The Bank is in the late stages of implementing this software and plans to run incurred loss and current expected credit models in parallel until adoption of ASU No. 2016-13.
In January 2017, the FASB issued ASU No. 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. The ASU was issued to reduce the cost and complexity of the goodwill impairment test. To simplify the subsequent measurement of goodwill, step two of the goodwill impairment test was eliminated. Instead, a Company will recognize an impairment of goodwill should the carrying value of a reporting unit exceed its fair value (i.e. step one). The ASU was effective for the Company on January 1, 2020 and will be applied prospectively. Implementation of this ASU did not have a material effect on the Company's consolidated financial statements.
In August 2018, the FASB issued ASU No. 2018-13, Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement. This ASU eliminates, adds and modifies certain disclosure requirements for fair value measurements. Among the changes, entities will no longer be required to disclose the amount of and reasons for transfers between Level 1 and

Page 44



Level 2 of the fair value hierarchy, but will be required to disclose the range and weighted average used to develop significant unobservable inputs for Level 3 fair value measurements. ASU No. 2018-13 is effective for interim and annual reporting periods beginning after December 15, 2019; early adoption is permitted. Entities are also allowed to elect early adoption for the eliminated or modified disclosure requirements and delay adoption of the new disclosure requirements until their effective date. As ASU No. 2018-13 only revises disclosure requirements, it did not have a material impact on the Company’s consolidated financial statements.
In August 2018, the FASB issued ASU No. 2018-14, Disclosure Framework - Changes to the Disclosure Requirements for Defined Benefit Plans. This ASU makes minor changes to the disclosure requirements for employers that sponsor defined benefit pension and/or other postretirement benefit plans. ASU 2018-14 is effective for fiscal years ending after December 15, 2020; early adoption is permitted. As ASU 2018-14 only revises disclosure requirements, it will not have a material impact on the Company’s consolidated financial statements.




Page 45



Item 2 – Management's Discussion and Analysis of Financial Condition
and Results of Operations
The First Bancorp, Inc. and Subsidiary
Forward-Looking Statements
This report contains statements that are "forward-looking statements." We may also make written or oral forward-looking statements in other documents we file with the Securities and Exchange Commission ("SEC"), in our annual reports to shareholders, in press releases and other written materials, and in oral statements made by our officers, directors or employees. You can identify forward-looking statements by the use of the words "believe," "expect," "anticipate," "intend," "estimate," "assume," "outlook," "will," "should," and other expressions that predict or indicate future events and trends and which do not relate to historical matters. You should not rely on forward-looking statements, because they involve known and unknown risks, uncertainties and other factors, some of which are beyond the control of the Company. These risks, uncertainties and other factors may cause the actual results, performance or achievements of the Company to be materially different from the anticipated future results, performance or achievements expressed or implied by the forward-looking statements.
Some of the factors that might cause these differences include the following: changes in general national, regional or international economic conditions or conditions affecting the banking or financial services industries or financial capital markets, volatility and disruption in national and international financial markets, government intervention in the U.S. financial system, reductions in net interest income resulting from interest rate volatility as well as changes in the balance and mix of loans and deposits, reductions in the market value of wealth management assets under administration, changes in the value of securities and other assets, reductions in loan demand, changes in loan collectability, default and charge-off rates, changes in the size and nature of the Company's competition, changes in legislation or regulation and accounting principles, policies and guidelines, uncertainties with respect to the duration, nature, and extent of the COVID-19 pandemic and its consequences, and changes in the assumptions used in making such forward-looking statements. In addition, the factors described under "Risk Factors" in Item 1A of our Annual Report on Form 10-K for the fiscal year ended December 31, 2019, as filed with the SEC, may result in these differences, as well as the "Risk Factors" in Part II, Item 1A listed below. You should carefully review all of these factors, and you should be aware that there may be other factors that could cause these differences. These forward-looking statements were based on information, plans and estimates at the date of this quarterly report, and we assume no obligation to update any forward-looking statements to reflect changes in underlying assumptions or factors, new information, future events or other changes.
Although the Company believes that the expectations reflected in such forward-looking statements are reasonable, actual results may differ materially from the results discussed in these forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. The Company undertakes no obligation to republish revised forward-looking statements to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events. Readers are also urged to carefully review and consider the various disclosures made by the Company, which attempt to advise interested parties of the facts that affect the Company's business.
Critical Accounting Policies
Management's discussion and analysis of the Company's financial condition is based on the consolidated financial statements which are prepared in accordance with GAAP. The preparation of such financial statements requires Management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosure of contingent assets and liabilities. On an ongoing basis, Management evaluates its estimates, including those related to the allowance for loan losses, goodwill, the valuation of mortgage servicing rights, and other-than-temporary impairment on securities. Management bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis in making judgments about the carrying values of assets that are not readily apparent from other sources. Actual results could differ from the amount derived from Management's estimates and assumptions under different assumptions or conditions.
Allowance for Loan Losses. Management believes the allowance for loan losses requires the most significant estimates and assumptions used in the preparation of the consolidated financial statements. The allowance for loan losses is based on Management's evaluation of the level of the allowance required in relation to the estimated loss exposure in the loan portfolio. Management believes the allowance for loan losses is a significant estimate and therefore regularly evaluates it to determine the appropriate level by taking into consideration factors such as prior loan loss experience, the character and size of the loan portfolio, business and economic conditions and Management's estimation of potential losses. The use of different estimates or assumptions could produce different provisions for loan losses.
Goodwill. Management utilizes numerous techniques to estimate the value of various assets held by the Company, including methods to determine the appropriate carrying value of goodwill as required under FASB ASC Topic 350 "Intangibles – Goodwill and Other." In addition, goodwill from a purchase acquisition is subject to ongoing periodic impairment tests, which include an evaluation of the ongoing assets, liabilities and revenues from the acquisition and an estimation of the impact of business conditions.

Page 46



Mortgage Servicing Rights. The valuation of mortgage servicing rights is a critical accounting policy which requires significant estimates and assumptions. The Bank often sells mortgage loans it originates and retains the ongoing servicing of such loans, receiving a fee for these services, generally 0.25% of the outstanding balance of the loan per annum. Mortgage servicing rights are recognized at fair value when they are acquired through the sale of loans, and are reported in other assets. They are amortized into non-interest income in proportion to, and over the period of, the estimated future net servicing income of the underlying financial assets. The rights are subsequently carried at the lower of amortized cost or fair value. Management uses an independent firm which specializes in the valuation of mortgage servicing rights to determine the fair value which is recorded on the balance sheet. The most important assumption is the anticipated loan prepayment rate, and increases in prepayment speed results in lower valuations of mortgage servicing rights. The valuation also includes an evaluation for impairment based upon the fair value of the rights, which can vary depending upon current interest rates and prepayment expectations, as compared to amortized cost. Impairment is determined by stratifying rights by predominant characteristics, such as interest rates and terms. The use of different assumptions could produce a different valuation. All of the assumptions are based on standards the Company believes would be utilized by market participants in valuing mortgage servicing rights and are consistently derived and/or benchmarked against independent public sources.
Other-Than-Temporary Impairment on Securities. One of the significant estimates related to investment securities is the evaluation of other-than-temporary impairments. The evaluation of securities for other-than-temporary impairments is a quantitative and qualitative process, which is subject to risks and uncertainties and is intended to determine whether declines in the fair value of investments should be recognized in current period earnings. The risks and uncertainties include changes in general economic conditions, the issuer's financial condition and/or future prospects, the effects of changes in interest rates or credit spreads and the expected recovery period of unrealized losses. Securities that are in an unrealized loss position are reviewed at least quarterly to determine if other-than-temporary impairment is present based on certain quantitative and qualitative factors and measures. The primary factors considered in evaluating whether a decline in value of securities is other-than-temporary include: (a) the length of time and extent to which the fair value has been less than cost or amortized cost and the expected recovery period of the security, (b) the financial condition, credit rating and future prospects of the issuer, (c) whether the debtor is current on contractually obligated interest and principal payments, (d) the volatility of the securities' market price, (e) the intent and ability of the Company to retain the investment for a period of time sufficient to allow for recovery, which may be at maturity and (f) any other information and observable data considered relevant in determining whether other-than-temporary impairment has occurred, including the expectation of receipt of all principal and interest when due.
Derivative Financial Instruments. The Bank recognizes all derivatives in the consolidated balance sheets at fair value. On the date the Bank enters into the derivative contract, the Bank designates the derivative as a hedge of either a forecasted transaction or the variability of cash flows to be received or paid related to a recognized asset or liability (“cash flow hedge”), a hedge of the fair value of a recognized asset or liability or of an unrecognized firm commitment (“fair value hedge”), or a held for trading instrument (“trading instrument”). The Bank formally documents relationships between hedging instruments and hedged items, as well as its risk management objectives and strategy for undertaking various hedge transactions. The Bank also assesses, both at the hedge’s inception and on an ongoing basis, whether the derivatives that are used in hedging transactions are effective in offsetting changes in cash flows or fair values of hedged items. Changes in fair value of a derivative that is effective and that qualifies as a cash flow hedge are recorded in other comprehensive income (loss) and are reclassified into earnings when the forecasted transaction or related cash flows affect earnings. Changes in fair value of a derivative that qualifies as a fair value hedge and the change in fair value of the hedged item are both recorded in earnings and offset each other when the transaction is effective. Those derivatives that are classified as trading instruments, including customer loan swaps, are recorded at fair value with changes in fair value recorded in earnings. The Bank discontinues hedge accounting when it determines that the derivative is no longer effective in offsetting changes in the cash flows of the hedged item, that it is unlikely that the forecasted transaction will occur, or that the designation of the derivative as a hedging instrument is no longer appropriate.

Use of Non-GAAP Financial Measures
Certain information in Management's Discussion and Analysis of Financial Condition and Results of Operations and elsewhere in this Report contains financial information determined by methods other than in accordance with GAAP. Management uses these "non-GAAP" measures in its analysis of the Company's performance and believes that these non-GAAP financial measures provide a greater understanding of ongoing operations and enhance comparability of results with prior periods as well as demonstrating the effects of significant gains and charges in the current period. The Company believes that a meaningful analysis of its financial performance requires an understanding of the factors underlying that performance. Management believes that investors may use these non-GAAP financial measures to analyze financial performance without the impact of unusual items that may obscure trends in the Company's underlying performance. These disclosures should not be viewed as a substitute for operating results determined in accordance with GAAP, nor are they necessarily comparable to non-GAAP performance measures that may be presented by other companies.

Page 47



In several places net interest income is presented on a fully taxable-equivalent basis. Specifically included in interest income was tax-exempt interest income from certain investment securities and loans. An amount equal to the tax benefit derived from this tax exempt income has been added back to the interest income total which, as adjusted, increased net interest income accordingly. Management believes the disclosure of tax-equivalent net interest income information improves the clarity of financial analysis, and is particularly useful to investors in understanding and evaluating the changes and trends in the Company's results of operations. Other financial institutions commonly present net interest income on a tax-equivalent basis. This adjustment is considered helpful in the comparison of one financial institution's net interest income to that of another, as each will have a different proportion of tax-exempt interest from its earning assets. Moreover, net interest income is a component of a second financial measure commonly used by financial institutions, net interest margin, which is the ratio of net interest income to average earning assets. For purposes of this measure as well, other financial institutions generally use tax-equivalent net interest income to provide a better basis of comparison from institution to institution. The Company follows these practices. The following table provides a reconciliation of tax-equivalent financial information to the Company's consolidated financial statements prepared in accordance with GAAP. A Federal Income Tax rate of 21.0% was used in 2020 and 2019.
 
For the three months ended March 31,
Dollars in thousands
2020
 
2019
Net interest income as presented
$
14,918

 
$
12,899

Effect of tax-exempt income
572

 
562

Net interest income, tax equivalent
$
15,490

 
$
13,461

The Company presents its efficiency ratio using non-GAAP information which is most commonly used by financial institutions. The GAAP-based efficiency ratio is noninterest expenses divided by net interest income plus noninterest income from the Consolidated Statements of Income and Comprehensive Income (Loss). The non-GAAP efficiency ratio excludes securities losses and other-than-temporary impairment charges from noninterest expenses, excludes securities gains from noninterest income, and adds the tax-equivalent adjustment to net interest income. The following table provides a reconciliation between the GAAP and non-GAAP efficiency ratio:
 
For the three months ended March 31,
Dollars in thousands
2020
 
2019
Non-interest expense, as presented
$
11,043

 
$
8,398

Net interest income, as presented
14,918

 
12,899

Effect of tax-exempt interest income
572

 
562

Non-interest income, as presented
4,221

 
3,144

Effect of non-interest tax-exempt income
41

 
41

Net securities gains
(752
)
 

Adjusted net interest income plus non-interest income
$
19,000

 
$
16,646

Non-GAAP efficiency ratio
58.12
%
 
50.45
%
GAAP efficiency ratio
57.70
%
 
52.35
%
The Company presents certain information based upon average tangible shareholders' common equity instead of total average shareholders' equity. The difference between these measures is the Company's intangible assets, specifically goodwill from prior acquisitions. Management, banking regulators and many stock analysts use the tangible common equity ratio and the tangible book value per common share in conjunction with more traditional bank capital ratios to compare the capital adequacy of banking organizations with significant amounts of goodwill or other intangible assets, typically stemming from the use of the purchase accounting method in accounting for mergers and acquisitions.







Page 48



The following table provides a reconciliation of average tangible shareholders' common equity to the Company's consolidated financial statements, which have been prepared in accordance with GAAP:
 
For the three months ended March 31,
 Dollars in thousands
2020
 
2019
Average shareholders' equity as presented
$
217,130

 
$
195,405

  Less average intangible assets
(29,931
)
 
(29,974
)
Average tangible shareholders' common equity
$
187,199

 
$
165,431


Executive Summary
Net income for the three months ended March 31, 2020 was $6.5 million, up $339,000 or 5.5% from the same period in 2019. Earnings per common share on a fully diluted basis were $0.60 for the three months ended March 31, 2020, up $0.03 or 5.3% from the $0.57 posted for the same period in 2019.
Against a backdrop of unprecedented challenges brought about by the outbreak of the coronavirus disease (COVID-19), the Company posted strong operating results during the first quarter of 2020. Earning asset growth was again a driving factor in the Company's performance, as was growth in non-interest income. Earning assets increased $55.8 million in the first quarter and are $135.2 million or 7.1% higher than a year ago. The Bank also took advantage of market opportunities to restructure several interest rate swap positions and extend funding at favorable interest rates. Based upon the strength of the Company's earnings, a dividend of 30 cents per share was declared in the first quarter, representing a payout to our shareholders of 50.00% of net income for the period. While first quarter results were not significantly impacted by the consequences of COVID-19, the Company does expect more severe impacts in the second quarter and beyond, the duration of which cannot be reasonably measured at this time.
Net interest income on a tax-equivalent basis was up $2.0 million or 15.1% in the three months ended March 31, 2020 compared to the same period in 2019. This increase is attributable to growth in earning assets, improved margins, and the recovery of interest on resolved problem loans. The tax equivalent net interest margin in the first quarter of 2020 was 3.12%, up from 2.93% in the first quarter of 2019.
Non-interest income for the three months ended March 31, 2020 was $4.2 million, up $1.1 million or 34.3%, from the three months ended March 31, 2019. Income was up year-over-year in all major categories, including a 15.7% increase in investment management income and a 70.3% increase in mortgage banking revenue.
Non-interest expense for the three months ended March 31, 2020 was $11.0 million, up $2.6 million or 31.5% from the three months ended March 31, 2019. The year-to-year change was impacted primarily by charges taken to restructure interest rate swap positions, which totaled $1.8 million.
Asset quality improved in the first quarter, largely due to the resolution of a large commercial credit that was a non-performing asset for several years. Non-performing assets stood at 0.49% of total assets as of March 31, 2020 - down from 0.77% of total assets as of March 31, 2019 and 0.82% as of December 31, 2019. Total past-due loans were 1.62% of total loans as of March 31, 2020, up from 1.16% of total loans as of December 31, 2019 and 0.89% as of March 31, 2019.
The provision for loan losses for the first three months of 2020 was $400,000, up from the $375,000 provisioned in the same period in 2019. Net loan chargeoffs for the three months ended March 31, 2020 were $181,000 or 0.05% of average loans on an annualized basis. This was up slightly from net chargeoffs of $117,000 or 0.04% of average loans on an annualized basis for the three months ended March 31, 2019. The allowance for loan losses increased $219,000 between December 31, 2019 and March 31, 2020, and is 0.88% of loans outstanding as of March 31, 2020, in-line with 0.90% and 0.91% of loans outstanding at December 31, 2019 and March 31, 2019, respectively.
The Company's balance sheet continued to expand in the first three months of 2020 as total assets increased $67.6 million or 3.3% year-to-date. The loan portfolio increased $47.1 million or 3.6% in the three months ended March 31, 2020 and $79.6 million or 6.3% from a year ago. Loan growth in the first quarter of 2020 was centered in the commercial loan portfolio, which was up $34.9 million and in residential mortgages which increased $8.9 million. The investment portfolio has increased $13.4 million year-to-date and increased $49.0 million or 8.0% from a year ago. On the liability side of the balance sheet, low-cost deposits have decreased $27.0 million or 3.4% year-to-date, in-line with our normal seasonal deposit flow pattern. Year-over-year, low-cost deposits increased $15.8 million or 2.1%. Local certificates of deposit ("CDs") increased $4.8 million and wholesale CDs increased $16.1 million year-to-date. Lower interest rates resulted in borrowed funds becoming the favored vehicle to support earning asset growth, increasing $63.1 million in the first quarter and $77.6 million year-over-year.
Remaining well capitalized remains a top priority for The First Bancorp, Inc. The Company's total risk-based capital ratio was 15.08% as of March 31, 2020, well above the well-capitalized threshold of 10.0% set by the Federal Deposit Insurance Corporation, the Federal Reserve Board, and the Office of the Comptroller of the Currency.

Page 49



The Company's operating ratios remain good, with a return on average tangible common equity of 13.95% for the three months ended March 31, 2020 compared to 15.09% for the same period in 2019. Based upon December 31, 2019 data, our return on average tangible common equity was in the top 16% of all banks in the UBPR peer group, which had an average return on equity of 11.30%. Our efficiency ratio continues to be an important component in our overall performance and stood at 58.12% for the three months ended March 31, 2020 compared to 50.45% for the same period in 2019, due to charges taken to restructure several interest rate swap positions. In the absence of these charges, the non-GAAP efficiency ratio in the first quarter of 2020 would have been 48.49%.

Net Interest Income
Total interest income of $20.7 million for the three months ended March 31, 2020 was an increase of $1.4 million or 7.4% compared to total interest income of $19.3 million for the same period of 2019. Total interest expense of $5.8 million for the three months ended March 31, 2020 was a decrease of $593,000 or 9.3% compared to total interest expense for the three months ended March 31, 2019. As a result, net interest income of $14.9 million for the three months ended March 31, 2020 was an increase of $2.0 million or 15.7% compared to net interest income of $12.9 million for the same period ended March 31, 2019. This increase is attributable to growth in earning assets, improved margins, and the recovery of interest on resolved problem loans. The Company's net interest margin on a tax-equivalent basis for the three months ended March 31, 2020 was 3.12%, up from 2.93% in the first quarter of 2019. Tax-exempt interest income amounted to $2.2 million for the three months ended March 31, 2020 and $2.1 million for the same period of 2019.
The following tables present the amount of interest earned or paid, as well as the average yield or rate on an annualized basis, for each major category of assets or liabilities for the three months ended March 31, 2020 and 2019. Tax-exempt income is calculated on a tax-equivalent basis, using a 21.0% Federal Income Tax rate.
 
For the three months ended
 
March 31, 2020
 
March 31, 2019
 
Dollars in thousands
Amount of
interest
 
Average
Yield/Rate
 
Amount of interest
 
Average
Yield/Rate
 
Interest on earning assets
 
 
 
 
 
 
 
 
Interest-bearing deposits
$
74

 
1.43
%
$
68

 
2.64
%
Investments
5,253

 
3.25
%
5,110

 
3.46
%
Loans held for sale
5

 
5.99
%
3

 
6.34
%
Loans
15,934

 
4.84
%
14,649

 
4.74
%
   Total interest income
21,266

 
4.29
%
19,830

 
4.32
%
Interest expense
 
 
 
 
 
 
 
 
Deposits
5,186

 
1.37
%
5,577

 
1.60
%
Other borrowings
590

 
1.23
%
792

 
1.61
%
   Total interest expense
5,776

 
1.36
%
6,369

 
1.60
%
Net interest income
$
15,490

 
 
 
$
13,461

 
 
 
Interest rate spread
 
 
2.93
%
 
 
2.72
%
Net interest margin
 
 
3.12
%
 
 
2.93
%
 
 
 
 
 
 
 
 
 












Page 50



The following tables present changes in interest income and expense attributable to changes in interest rates and volume for interest-earning assets and liabilities for the three months ended March 31, 2020 compared to 2019. Tax-exempt income is calculated on a tax-equivalent basis, using a 21% Federal Income Tax rate.
For the three months ended March 31, 2020 compared to 2019
 
 
 
 
Dollars in thousands
Volume
 
Rate
 
Rate/Volume1
 
Total
Interest on earning assets
 
 
 
 
 
 
 
Interest-bearing deposits
$
68

 
$
(31
)
 
$
(31
)
 
$
6

Investment securities
430

 
(264
)
 
(22
)
 
144

Loans held for sale
2

 

 
(1
)
 
1

Loans
834

 
427

 
24

 
1,285

   Change in interest income
1,334

 
132

 
(30
)
 
1,436

Interest expense
 
 
 
 
 
 
 
Deposits
420

 
(754
)
 
(57
)
 
(391
)
Other borrowings
(28
)
 
(180
)
 
6

 
(202
)
   Change in interest expense
392

 
(934
)
 
(51
)
 
(593
)
   Change in net interest income
$
942

 
$
1,066

 
$
21

 
$
2,029

1 Represents the change attributable to a combination of change in rate and change in volume.
 
 
 
 
 
 
 
 

Page 51



Average Daily Balance Sheets
The following table shows the Company's average daily balance sheets for the three months ended March 31, 2020 and 2019.
 
For the three months ended
 Dollars in thousands
March 31,
2020
 
March 31,
2019
Assets
 
 
 
Cash and cash equivalents
$
17,336

 
$
15,630

Interest-bearing deposits in other banks
20,845

 
10,436

Securities available for sale
337,096

 
322,257

Securities to be held to maturity
303,439

 
266,726

Restricted equity securities, at cost
9,096

 
10,164

Loans held for sale
336

 
192

Loans
1,323,612

 
1,252,353

Allowance for loan losses
(11,747
)
 
(11,303
)
     Net loans
1,311,865

 
1,241,050

Accrued interest receivable
7,943

 
7,589

Premises and equipment
21,279

 
21,984

Other real estate owned
310

 
584

Goodwill
29,805

 
29,805

Other assets
47,902

 
44,965

        Total Assets
$
2,107,252

 
$
1,971,382

 
 
 
 
Liabilities & Shareholders' Equity
 
 
 
Demand deposits
$
161,273

 
$
151,382

NOW deposits
382,150

 
369,299

Money market deposits
164,985

 
144,009

Savings deposits
235,678

 
237,835

Certificates of deposit
734,544

 
659,910

     Total deposits
1,678,630

 
1,562,435

Borrowed funds – short term
127,881

 
189,852

Borrowed funds – long term
65,103

 
10,110

Dividends payable
791

 
1,156

Other liabilities
17,717

 
12,424

     Total Liabilities
1,890,122

 
1,775,977

Shareholders' Equity:
 
 
 
Common stock
109

 
109

Additional paid-in capital
64,080

 
62,854

Retained earnings
148,425

 
135,635

Net unrealized gain (loss) on securities available for sale
5,751

 
(4,389
)
Net unrealized loss on securities transferred from available for sale to held to maturity
(179
)
 
(196
)
Net unrealized gain (loss) on cash flow hedging derivative instruments
(1,080
)
 
1,355

Net unrealized gain on postretirement benefit costs
24

 
37

    Total Shareholders' Equity
217,130

 
195,405

       Total Liabilities & Shareholders' Equity
$
2,107,252

 
$
1,971,382


Page 52



Non-Interest Income
Non-interest income of $4.2 million for the three months ended March 31, 2020 is an increase of $1.1 million compared to the same period in 2019. Income was up year-over-year in all major categories, including a 15.7% increase in investment management income and a 70.3% increase in mortgage banking revenue. Net gains on securities sold contributed $752,000 to non-interest income in the quarter.
Non-Interest Expense
Non-interest expense of $11.0 million for the three months ended March 31, 2020 is an increase of 31.5% or $2.6 million compared to non-interest expense of $8.4 million for the same period in 2019. The year-to-year change was impacted primarily by charges taken to restructure interest rate swap positions, which totaled $1.8 million. Other period to period changes included employee expenses which increased $615,000 or 13.9% from the prior year, and furniture & equipment expense up $141,000 or 14.5%. The Company's efficiency ratio stood at 58.12% for the three months ended March 31, 2020, up from 50.45% for the same period in 2019. In the absence of the swap restructure charges, the non-GAAP efficiency ratio in the first quarter of 2020 would have been 48.49%.
Income Taxes
Income taxes on operating earnings were $1.2 million for the three months ended March 31, 2020, up $87,000 from the same period in 2019.
Investments
The Company's investment portfolio increased by $13.4 million between December 31, 2019 and March 31, 2020. As of March 31, 2020, mortgage-backed securities had a carrying value of $336.3 million and a fair value of $337.7 million. Of this total, securities with a fair value of $138.7 million or 41.1% of the mortgage-backed portfolio were issued by the Government National Mortgage Association and securities with a fair value of $199.0 million or 58.9% of the mortgage-backed portfolio were issued by the Federal Home Loan Mortgage Corporation ("Freddie Mac") and the Federal National Mortgage Association ("Fannie Mae").
The Company's investment securities are classified into two categories: securities available for sale and securities to be held to maturity. Securities available for sale consist primarily of debt securities which Management intends to hold for indefinite periods of time. They may be used as part of the Company's funds management strategy, and may be sold in response to changes in interest rates, prepayment risk and liquidity needs, to increase capital ratios, or for other similar reasons. Securities to be held to maturity consist primarily of debt securities that the Company has acquired solely for long-term investment purposes, rather than potential future sale. For securities to be categorized as held to maturity, Management must have the intent and the Company must have the ability to hold such investments until their respective maturity dates. The Company does not hold trading account securities.
All investment securities are managed in accordance with a written investment policy adopted by the Board of Directors. It is the Company's general policy that investments for either portfolio be limited to government debt obligations, time deposits, and corporate bonds or commercial paper with one of the three highest ratings given by a nationally recognized rating agency. The portfolio is currently invested primarily in U.S. Government agency securities and tax-exempt obligations of states and political subdivisions. The individual securities have been selected to enhance the portfolio's overall yield while not materially adding to the Company's level of interest rate risk.
During the third quarter of 2014, the Company transferred securities with a total amortized cost of $89,780,000 and a corresponding fair value of $89,757,000 from available for sale to held to maturity. The net unrealized loss, net of taxes, on these securities at the date of the transfer was $15,000. The net unrealized holding loss at the time of transfer continues to be reported in accumulated other comprehensive income (loss), net of tax and is amortized over the remaining lives of the securities as an adjustment of the yield. The amortization of the net unrealized loss reported in accumulated other comprehensive income (loss) will offset the effect on interest income of the discount for the transferred securities. The remaining unamortized balance of the net unrealized losses for the securities transferred from available for sale to held to maturity was $174,000 at March 31, 2020. This compares to $182,000 and $194,000, net of taxes, at December 31, 2019 and March 31, 2019, respectively. These securities were transferred as a part of the Company's overall investment and balance sheet strategies. These securities were transferred as a part of the Company's overall investment and balance sheet strategies.


Page 53



The following table sets forth the Company's investment securities at their carrying amounts as of March 31, 2020 and 2019 and December 31, 2019.
Dollars in thousands
March 31,
2020
 
December 31,
2019
 
March 31,
2019
Securities available for sale
 
 
 
 
 
U.S. Government-sponsored agencies
$
7,552

 
$
7,398

 
$
5,016

Mortgage-backed securities
285,152

 
326,617

 
315,423

State and political subdivisions
20,224

 
26,505

 
4,837

 
$
312,928

 
$
360,520

 
$
325,276

Securities to be held to maturity
 
 
 
 
 
U.S. Government-sponsored agencies
$
35,981

 
$
32,840

 
$
31,155

Mortgage-backed securities
51,142

 
14,431

 
17,560

State and political subdivisions
239,719

 
219,585

 
225,204

Corporate securities
14,750

 
14,750

 
7,300

 
$
341,592

 
$
281,606

 
$
281,219

Restricted equity securities
 
 
 
 
 
Federal Home Loan Bank Stock
$
8,957

 
$
7,945

 
$
7,945

Federal Reserve Bank Stock
1,037

 
1,037

 
1,037

 
$
9,994

 
$
8,982

 
$
8,982

Total securities
$
664,514

 
$
651,108

 
$
615,477





Page 54



The following table sets forth yields and contractual maturities of the Company's investment securities as of March 31, 2020. Yields on tax-exempt securities have been computed on a tax-equivalent basis using a tax rate of 21%. Mortgage-backed securities are presented according to their final contractual maturity date, while the calculated yield takes into effect the intermediate cash flows from repayment of principal which results in a much shorter average life.
 
Available For Sale
 
Held to Maturity
 
 Dollars in thousands
Fair
Value
 
Yield to maturity
 
Amortized Cost
 
Yield to maturity
 
 U.S. Government-Sponsored Agencies
 
 
 
 
 
 
 
 
 Due in 1 year or less
$

 
0.00

%
$

 
0.00

%
 Due in 1 to 5 years

 
0.00

%

 
0.00

%
 Due in 5 to 10 years

 
0.00

%
17,168

 
2.88

%
 Due after 10 years
7,552

 
2.99

%
18,813

 
2.86

%
  Total
7,552

 
2.99

%
35,981

 
2.87

%
 Mortgage-Backed Securities
 
 
 
 
 
 
 
 
 Due in 1 year or less
66

 
3.43

%
13

 
85.49

%
 Due in 1 to 5 years
26,159

 
2.82

%
6,697

 
2.51

%
 Due in 5 to 10 years
55,420

 
2.85

%
13,555

 
2.95

%
 Due after 10 years
203,507

 
2.68

%
30,877

 
2.56

%
  Total
285,152

 
2.72

%
51,142

 
2.68

%
 State & Political Subdivisions
 
 
 
 
 
 
 
 
 Due in 1 year or less

 
0.00

%
1,318

 
5.53

%
 Due in 1 to 5 years

 
0.00

%
16,407

 
5.67

%
 Due in 5 to 10 years
9,612

 
4.81

%
143,314

 
4.54

%
 Due after 10 years
10,612

 
5.36

%
78,680

 
4.23

%
  Total
20,224

 
5.10

%
239,719

 
4.52

%
 Corporate Securities
 
 
 
 
 
 
 
 
 Due in 1 year or less

 
0.00

%

 
0.00

%
 Due in 1 to 5 years

 
0.00

%
4,750

 
4.91

%
 Due in 5 to 10 years

 
0.00

%
10,000

 
5.11

%
 Due after 10 years

 
0.00

%

 
0.00

%
  Total

 
0.00

%
14,750

 
5.05

%
 
$
312,928

 
2.88

%
$
341,592

 
4.09

%
Impaired Securities
The securities portfolio contains certain securities where the amortized cost of which exceeds fair value, which at March 31, 2020 amounted to $541,000, or 0.09% of the amortized cost of the total securities portfolio. At December 31, 2019, this amount was $1.1 million, or 0.18% of the amortized cost of total securities portfolio. As a part of the Company's ongoing security monitoring process, the Company identifies securities in an unrealized loss position that could potentially be other-than-temporarily impaired. If a decline in the fair value of a debt security is judged to be other-than-temporary, the decline related to credit loss is recorded in net realized securities losses while the decline attributable to other factors is recorded in other comprehensive income or loss.
The Company's evaluation of securities for impairment is a quantitative and qualitative process intended to determine whether declines in the fair value of investment securities should be recognized in current period earnings. The primary factors considered in evaluating whether a decline in the fair value of securities is other-than-temporary include: (a) the length of time and extent to which the fair value has been less than cost or amortized cost and the expected recovery period of the security, (b) the financial condition, credit rating and future prospects of the issuer, (c) whether the debtor is current on contractually obligated interest and principal payments, (d) the volatility of the securities market price, (e) the intent and ability of the Company to retain the investment for a period of time sufficient to allow for recovery, which may be at maturity, and (f) any other information and observable data considered relevant in determining whether other-than-temporary impairment has occurred.
The Company's best estimate of cash flows uses severe economic recession assumptions due to market uncertainty. The Company's assumptions include but are not limited to delinquencies, foreclosure levels and constant default rates on the underlying collateral, loss severity ratios, and constant prepayment rates. If the Company does not expect to receive 100% of

Page 55



future contractual principal and interest, an other-than-temporary impairment charge is recognized. Estimating future cash flows is a quantitative and qualitative process that incorporates information received from third party sources along with certain internal assumptions and judgments regarding the future performance of the underlying collateral.
As of March 31, 2020, the Company had temporarily impaired securities with a fair value of $29.9 million and unrealized losses of $541,000, as identified in the table below. Securities in a continuous unrealized loss position more than twelve months amounted to $7.4 million as of March 31, 2020, compared with $19.0 million at December 31, 2019. The Company has concluded that these securities were not other-than-temporarily impaired. This conclusion was based on the issuer's continued satisfaction of the securities obligations in accordance with their contractual terms and the expectation that the issuer will continue to do so, Management's intent and ability to hold these securities for a period of time sufficient to allow for any anticipated recovery in fair value which may be at maturity, the expectation that the Company will receive 100% of future contractual cash flows, as well as the evaluation of the fundamentals of the issuer's financial condition and other objective evidence. The following table summarizes temporarily impaired securities and their approximate fair values at March 31, 2020:
 
Less than 12 months
 
12 months or more
 
Total
Dollars in thousands
Fair
Value (Estimated)
 
Unrealized
Losses
 
Fair
Value (Estimated)
 
Unrealized
Losses
 
Fair
Value (Estimated)
 
Unrealized
Losses
Mortgage-backed securities
$
2,963

 
$
(27
)
 
$
7,424

 
$
(169
)
 
$
10,387

 
$
(196
)
State and political subdivisions
19,556

 
(345
)
 

 

 
19,556

 
(345
)
 
$
22,519

 
$
(372
)
 
$
7,424

 
$
(169
)
 
$
29,943

 
$
(541
)

For securities with unrealized losses, the following information was considered in determining that the securities were not other-than-temporarily impaired:
Securities issued by U.S. Government-sponsored agencies and enterprises. As of March 31, 2020, there were no unrealized losses on these securities compared to $128,000 unrealized losses as of December 31, 2019. All of these securities were credit rated "AAA" or "AA+" by the major credit rating agencies. Management believes that securities issued by U.S. Government-sponsored agencies and enterprises have minimal credit risk, as these agencies and enterprises play a vital role in the nation's financial markets and does not consider these securities to be other-than-temporarily impaired at March 31, 2020.
Mortgage-backed securities issued by U.S. Government agencies and U.S. Government-sponsored enterprises. As of March 31, 2020, there were $196,000 of unrealized losses on these securities compared with $849,000 at December 31, 2019. All of these securities were credit rated "AAA" or "AA+" by the major credit rating agencies. Management believes that securities issued by U.S. Government agencies bear no credit risk because they are backed by the full faith and credit of the United States and that securities issued by U.S. Government-sponsored enterprises have minimal credit risk, as these agencies and enterprises play a vital role in the nation's financial markets. Management believes that the unrealized losses at March 31, 2020 were attributable to changes in current market yields and spreads since the date the underlying securities were purchased, and does not consider these securities to be other-than-temporarily impaired at March 31, 2020. The Company also has the ability and intent to hold these securities until a recovery of their amortized cost, which may be at maturity.
Obligations of state and political subdivisions. As of March 31, 2020, there were $345,000 of unrealized losses on these securities compared to $109,000 at December 31, 2019. Municipal securities are supported by the general taxing authority of the municipality and, in the cases of school districts, are generally supported by state aid. At March 31, 2020, all municipal bond issuers were current on contractually obligated interest and principal payments. The Company attributes the unrealized losses at March 31, 2020 to changes in prevailing market yields and pricing spreads since the date the underlying securities were purchased, combined with current market liquidity conditions and the disruption in the financial markets in general. Accordingly, the Company does not consider these municipal securities to be other-than-temporarily impaired at March 31, 2020.
Corporate securities. As of March 31, 2020 and December 31, 2019, there were no unrealized losses on these securities. Corporate securities are dependent on the operating performance of the issuers. At March 31, 2020, all corporate bond issuers were current on contractually obligated interest and principal payments.

Federal Home Loan Bank Stock
The Bank is a member of the Federal Home Loan Bank ("FHLB") of Boston, a cooperatively owned wholesale bank for housing and finance in the six New England States. As a requirement of membership in the FHLB, the Bank must own a minimum required amount of FHLB stock, calculated periodically based primarily on its level of borrowings from the FHLB. The Bank uses the FHLB for much of its wholesale funding needs. As of March 31, 2020, the Bank's investment in FHLB stock totaled $9.0 million. This compares to $7.9 million as of December 31, 2019 and March 31, 2019. FHLB stock is a non-

Page 56



marketable equity security and therefore is reported at cost, subject to adjustments for any observable market transactions on the same or similar instruments of the investee. No impairment losses have been recorded through March 31, 2020. The Company will continue to monitor its investment in FHLB stock.
Loans Held for Sale
Loans held for sale are carried at the lower of cost or market value. As of March 31, 2020, the Bank had $561,000 in loans held for sale. This compares to $154,000 loans held for sale at December 31, 2019 and $436,000 in loans held for sale at March 31, 2019. The Bank participates in FHLB's Mortgage Partnership Finance Program ("MPF"), selling loans with recourse. The volume of loans sold to date through the MPF program is de minimis; therefore, there was minimum impact on the reserve.
Loans
The loan portfolio increased during the first three months of 2020, with total loans at $1.34 billion at March 31, 2020, up $47.1 million or 3.6% from total loans of $1.30 billion at December 31, 2019. Commercial loans increased $34.9 million or 5.5% between December 31, 2019 and March 31, 2020, municipal loans increased $2.2 million or 5.4%, residential term loans increased $8.5 million and home equity lines of credit decreased $1.7 million.
Commercial loans are comprised of three major classes: commercial real estate loans, commercial construction loans and other commercial loans.
Commercial real estate loans consist of mortgage loans to finance investments in real property such as multi-family residential, commercial/retail, office, industrial, hotels, educational and other specific or mixed use properties. Commercial real estate loans are typically written with amortizing payment structures. Collateral values are determined based on appraisals and evaluations in accordance with established policy and regulatory guidelines. Commercial real estate loans typically have a loan-to-value ratio of up to 80% based upon current valuation information at the time the loan is made. Commercial real estate loans are primarily paid by the cash flow generated from the real property, such as operating leases, rents, or other operating cash flows from the borrower.
Commercial construction loans consist of loans to finance construction in a mix of owner- and non-owner occupied commercial real estate properties. Commercial construction loans typically have a construction phase of less than two years, followed by a repayment phase. Payment structures during the construction period are typically on an interest only basis, although principal payments may be established depending on the type of construction project being financed. During the construction phase, commercial construction loans are primarily paid by cash flow generated from the construction project or other operating cash flows from the borrower or guarantors, if applicable. At the end of the construction period, loan repayment typically comes from a third party source in the event that the Company will not be providing permanent term financing. Collateral valuation and loan-to-value guidelines follow those for commercial real estate loans.
Other commercial loans consist of revolving and term loan obligations extended to business and corporate enterprises for the purpose of financing working capital and or capital investment. Collateral generally consists of pledges of business assets including, but not limited to, accounts receivable, inventory, plant and equipment, and/or real estate, if applicable. Commercial loans are primarily paid by the operating cash flow of the borrower. Commercial loans may be secured or unsecured.
Municipal loans are comprised of loans to municipalities in Maine for capitalized expenditures, construction projects or tax-anticipation notes. All municipal loans are considered general obligations of the municipality and are collateralized by the taxing ability of the municipality for repayment of debt.
Residential loans are comprised of two classes: term loans and construction loans.
Residential term loans consist of residential real estate loans held in the Company's loan portfolio made to borrowers who demonstrate the ability to make scheduled payments with full consideration to underwriting factors. Borrower qualifications include favorable credit history combined with supportive income requirements and loan-to-value ratios within established policy and regulatory guidelines. Collateral values are determined based on appraisals and evaluations in accordance with established policy and regulatory guidelines. Residential loans typically have a loan-to-value ratio of up to 80% based on appraisal information at the time the loan is made. Collateral consists of mortgage liens on one- to four-family residential properties. Loans are offered with fixed or adjustable rates with amortization terms of up to thirty years.
Residential construction loans typically consist of loans for the purpose of constructing single family residences to be owned and occupied by the borrower. Borrower qualifications include favorable credit history combined with supportive income requirements and loan-to-value ratios within established policy and regulatory guidelines. Residential construction loans normally have construction terms of one year or less and payment during the construction term is typically on an interest only basis from sources including interest reserves, borrower liquidity and/or income. Residential construction loans will typically convert to permanent financing from the Company or have another financing commitment in place from an acceptable mortgage lender. Collateral valuation and loan-to-value guidelines are consistent with those for residential term loans.
Home equity lines of credit are made to qualified individuals and are secured by senior or junior mortgage liens on owner-occupied one- to four-family homes, condominiums, or vacation homes. The home equity line of credit typically has a variable interest rate and is billed as interest-only payments during the draw period. At the end of the draw period, the home equity line of credit is billed as a percentage of the principal balance plus all accrued interest. Loan maturities are normally 300 months.

Page 57



Borrower qualifications include favorable credit history combined with supportive income requirements and combined loan-to-value ratios usually not exceeding 80% inclusive of priority liens. Collateral valuation guidelines follow those for residential real estate loans.
Consumer loan products including personal lines of credit and amortizing loans made to qualified individuals for various purposes such as auto, recreational vehicles, debt consolidation, personal expenses or overdraft protection. Borrower qualifications include favorable credit history combined with supportive income and collateral requirements within established policy guidelines. Consumer loans may be secured or unsecured.
Construction loans, both commercial and residential, at 30.6% of capital are well under the regulatory guidance of 100.0% of capital at March 31, 2020. Construction loans and non-owner-occupied commercial real estate loans are at 126.5% of total capital, well under the regulatory guidance of 300.0% of capital at March 31, 2020.
The following table summarizes the loan portfolio, by class, at March 31, 2020 and 2019 and December 31, 2019.
Dollars in thousands
March 31, 2020
 
December 31, 2019
 
March 31, 2019
 
Commercial
 
 
 
 
 
 
 
 
 
 
 
 
   Real estate
$
382,753

 
28.5
%
$
372,810

 
28.7
%
$
357,760

 
28.3
%
   Construction
43,913

 
3.3
%
38,084

 
3.0
%
34,231

 
2.7
%
   Other
237,896

 
17.7
%
218,773

 
16.9
%
205,462

 
16.2
%
Municipal
43,537

 
3.2
%
41,288

 
3.2
%
54,246

 
4.3
%
Residential
 
 
 
 
 
 
 
 
 
 
 
 
   Term
500,971

 
37.3
%
492,455

 
37.9
%
474,241

 
37.5
%
   Construction
15,202

 
1.1
%
14,813

 
1.2
%
18,450

 
1.5
%
Home equity line of credit
90,674

 
6.7
%
92,349

 
7.1
%
95,692

 
7.6
%
Consumer
29,262

 
2.2
%
26,503

 
2.0
%
24,557

 
1.9
%
Total loans
$
1,344,208

 
100.0
%
$
1,297,075

 
100.0
%
$
1,264,639

 
100.0
%

The following table sets forth certain information regarding the contractual maturities of the Bank's loan portfolio as of March 31, 2020.
Dollars in thousands
< 1 Year
 
1 - 5 Years
 
5 - 10 Years
 
> 10 Years
 
Total
Commercial
 
 
 
 
 
 
 
 
 
   Real estate
$
380

 
$
20,688

 
$
37,819

 
$
323,866

 
$
382,753

   Construction
253

 
7,125

 
2,333

 
34,202

 
43,913

   Other
7,243

 
90,906

 
68,873

 
70,874

 
237,896

Municipal
24

 
24,123

 
11,165

 
8,225

 
43,537

Residential
 
 
 
 
 
 
 
 
 
   Term

 
8,953

 
25,706

 
466,312

 
500,971

   Construction

 
479

 

 
14,723

 
15,202

Home equity line of credit
24

 
827

 
466

 
89,357

 
90,674

Consumer
7,572

 
6,427

 
4,030

 
11,233

 
29,262

Total loans
$
15,496

 
$
159,528

 
$
150,392

 
$
1,018,792

 
$
1,344,208


Page 58



The following table provides a listing of loans by class, between variable and fixed rates as of March 31, 2020.
 
Fixed-Rate
 
Adjustable-Rate
 
Total
 
Dollars in thousands
Amount
 
% of total
 
Amount
 
% of total
 
Amount
 
% of total
 
Commercial
 
 
 
 
 
 
 
 
 
 
 
 
   Real estate
$
190,716

 
14.2
%
$
192,037

 
14.3
%
$
382,753

 
28.5
%
   Construction
36,372

 
2.7
%
7,541

 
0.6
%
43,913

 
3.3
%
   Other
173,640

 
12.9
%
64,256

 
4.8
%
237,896

 
17.7
%
Municipal
42,454

 
3.1
%
1,083

 
0.1
%
43,537

 
3.2
%
Residential
 
 
 
 
 
 
 
 
 
 
 
 
   Term
403,373

 
30.0
%
97,598

 
7.3
%
500,971

 
37.3
%
   Construction
15,202

 
1.0
%

 
0.1
%
15,202

 
1.1
%
Home equity line of credit
1,817

 
0.1
%
88,857

 
6.6
%
90,674

 
6.7
%
Consumer
22,194

 
1.7
%
7,068

 
0.5
%
29,262

 
2.2
%
Total loans
$
885,768

 
65.7
%
$
458,440

 
34.3
%
$
1,344,208

 
100.0
%

Loan Concentrations
As of March 31, 2020, the Bank did not have any concentration of loans in one particular industry that exceeded 10% of its total loan portfolio.
Credit Risk Management and Allowance for Loan Losses
Credit risk is the risk of loss arising from the inability of a borrower to meet its obligations. We manage credit risk by evaluating the risk profile of the borrower, repayment sources, the nature of the underlying collateral, and other support given current events, conditions, and expectations. We attempt to manage the risk characteristics of our loan portfolio through various control processes, such as credit evaluation of borrowers, establishment of lending limits, and application of lending procedures, including the holding of adequate collateral and the maintenance of compensating balances. However, we seek to rely primarily on the cash flow of our borrowers as the principal source of repayment. Although credit policies and evaluation processes are designed to minimize our risk, Management recognizes that loan losses will occur and the amount of these losses will fluctuate depending on the risk characteristics of our loan portfolio, as well as general and regional economic conditions.
We provide for loan losses through the establishment of an allowance for loan losses which represents an estimated reserve for existing losses in the loan portfolio. We deploy a systematic methodology for determining our allowance that includes a quarterly review process, risk rating, and adjustment to our allowance. We classify our portfolios as either commercial or residential and consumer and monitor credit risk separately as discussed below. We evaluate the appropriateness of our allowance continually based on a review of all significant loans, with a particular emphasis on nonaccruing, past due, and other loans that we believe require special attention.
The allowance consists of four elements: (1) specific reserves for loans evaluated individually for impairment; (2) general reserves for types or portfolios of loans based on historical loan loss experience; (3) qualitative reserves judgmentally adjusted for local and national economic conditions, concentrations, portfolio composition, volume and severity of delinquencies and nonaccrual loans, trends of criticized and classified loans, changes in credit policies, and underwriting standards, credit administration practices, and other factors as applicable; and (4) unallocated reserves. All outstanding loans are considered in evaluating the appropriateness of the allowance.
Appropriateness of the allowance for loan losses is determined using a consistent, systematic methodology, which analyzes the risk inherent in the loan portfolio. In addition to evaluating the collectibility of specific loans when determining the appropriateness of the allowance for loan losses, Management also takes into consideration other factors such as changes in the mix and size of the loan portfolio, historic loss experience, the amount of delinquencies and loans adversely classified, economic trends, changes in credit policies, and experience, ability and depth of lending management. The appropriateness of the allowance for loan losses is assessed by an allocation process whereby specific reserve allocations are made against certain adversely classified loans, and general reserve allocations are made against segments of the loan portfolio which have similar attributes. The Company's historical loss experience, industry trends, and the impact of the local and regional economy on the Company's borrowers, are considered by Management in determining the appropriateness of the allowance for loan losses.
The allowance for loan losses is increased by provisions charged against current earnings. Loan losses are charged against the allowance when Management believes that the collectibility of the loan principal is unlikely. Recoveries on loans previously charged off are credited to the allowance. While Management uses available information to assess possible losses on loans, future additions to the allowance may be necessary based on increases in non-performing loans, changes in economic conditions, growth in loan portfolios, or for other reasons. Any future additions to the allowance would be recognized in the

Page 59



period in which they were determined to be necessary. In addition, various regulatory agencies periodically review the Company's allowance for loan losses as an integral part of their examination process. Such agencies may require the Company to record additions to the allowance based on judgments different from those of Management.

Commercial
Our commercial portfolio includes all secured and unsecured loans to borrowers for commercial purposes, including commercial lines of credit and commercial real estate. Our process for evaluating commercial loans includes performing updates on loans that we have rated for credit risk. Our non-performing commercial loans are generally reviewed individually to determine impairment, accrual status, and the need for specific reserves. Our methodology incorporates a variety of risk considerations, both qualitative and quantitative. Quantitative factors include our historical loss experience by loan type, collateral values, financial condition of borrowers, and other factors. Qualitative factors applied to the portfolio or segments of the portfolio may include judgments concerning general economic conditions that may affect credit quality, credit concentrations, the pace of portfolio growth, the direction of risk rating movements, policy exception levels, and delinquency levels; these qualitative factors are also considered in connection with the unallocated portion of our allowance for loan losses.
The process of establishing the allowance with respect to the commercial loan portfolio begins when a Loan Officer or Senior Officer (or designate) initially assigns each loan a risk rating, using established credit criteria. Approximately 60% of a trailing four quarter average gross commercial portfolio is subject to review and validation annually by an independent consulting firm. Additionally, commercial loan relationships with exposure greater than or equal to $500,000 are subject to review annually by the Company's internal credit review function. Our methodology employs Management's judgment as to the level of losses on existing loans based on our internal review of the loan portfolio, including an analysis of the borrowers' current financial position, and the consideration of current and anticipated economic conditions and their potential effects on specific borrowers and or lines of business. In determining our ability to collect certain loans, we also consider the fair value of any underlying collateral. We also evaluate credit risk concentrations, including trends in large dollar exposures to related borrowers, industry and geographic concentrations, and economic and environmental factors.

Residential, Home Equity and Consumer
Consumer, home equity and residential mortgage loans are generally segregated into homogeneous pools with similar risk characteristics. Trends and current conditions in these pools are analyzed and historical loss experience is adjusted accordingly. Quantitative and qualitative adjustment factors for the consumer, home equity and residential mortgage portfolios are consistent with those for the commercial portfolios. Certain loans in the consumer and residential portfolios identified as having the potential for further deterioration are analyzed individually to confirm the appropriate risk status and accrual status, and to determine the need for a specific reserve. Consumer loans that are greater than 120 days past due are generally charged off. Residential loans and home equity lines of credit that are greater than 90 days past due are evaluated for collateral adequacy and if deficient are placed on non-accrual status.

Unallocated
The unallocated portion of the allowance is intended to provide for losses that are not identified when establishing the specific and general portions of the allowance and is based upon Management's evaluation of various conditions that are not directly measured in the determination of the portfolio and loan specific allowances. Such conditions may include general economic and business conditions affecting our lending area, credit quality trends (including trends in delinquencies and nonperforming loans expected to result from existing conditions), loan volumes and concentrations, duration of the current business cycle, bank regulatory examination results, findings of external loan review examiners, and Management's judgment with respect to various other conditions including loan administration and management and the quality of risk identification systems. Management reviews these conditions quarterly. We have risk management practices designed to ensure timely identification of changes in loan risk profiles; however, undetected losses may exist inherently within the loan portfolio. In response to the consequences of COVID-19 we have increased the rigor and frequency of our loan portfolio monitoring and borrower contact, particularly within those industry groups thought to be most vulnerable, including the lodging, restaurant and hospitality sectors; as additional information becomes available, an increase to our Allowance for Loan Losses is likely. The judgmental aspects involved in applying the risk grading criteria, analyzing the quality of individual loans, and assessing collateral values can also contribute to undetected, but probable, losses. Consequently, there maybe underlying credit risks that have not yet surfaced in the loan- specific or qualitative metrics the Company uses to estimate its allowance for loan losses.

The allowance for loan losses includes reserve amounts assigned to individual loans on the basis of loan impairment. Certain loans are evaluated individually and are judged to be impaired when Management believes it is probable that the Company will not collect all of the contractual interest and principal payments as scheduled in the loan agreement. Under this method, loans are selected for evaluation based on non-accrual and/or troubled debt restructure status. A specific reserve is allocated to an individual loan when that loan has been deemed impaired and when the amount of a probable loss is estimable on the basis of its collateral value, the present value of anticipated future cash flows, or its net realizable value. At March 31,

Page 60



2020, impaired loans with specific reserves totaled $4.7 million and the amount of such reserves was $1.0 million. This compares to impaired loans with specific reserves of $11.1 million at December 31, 2019 and the amount of such reserves was $2.2 million. Several impaired loans at December 31, 2019 were paid off during the quarter ended March 31, 2020, accounting for $6.8 million of the decrease in impaired loans and $1.2 million of the reduction in the specific reserve.
All of these analyses are reviewed and discussed by the Directors' Loan Committee, and recommendations from these processes provide Management and the Board of Directors with independent information on loan portfolio condition. Our total allowance at March 31, 2020 is considered by Management to be appropriate to address the credit losses inherent in the loan portfolio at that date. However, our determination of the appropriate allowance level is based upon a number of assumptions we make about future events, which we believe are reasonable, but which may or may not prove valid. Thus, there can be no assurance that our charge-offs in future periods will not exceed our allowance for loan losses or that we will not need to make additional increases in our allowance for loan losses.
The following table summarizes our allocation of allowance by loan class as of March 31, 2020 and 2019 and December 31, 2019. The percentages are the portion of each loan class to total loans.
Dollars in thousands
March 31, 2020
 
December 31, 2019
 
March 31, 2019
 
Commercial
 
 
 
 
 
 
 
 
 
 
 
 
   Real estate
$
3,862

 
28.5
%
$
3,742

 
28.7
%
$
3,632

 
28.3
%
   Construction
424

 
3.3
%
365

 
3.0
%
325

 
2.7
%
   Other
2,427

 
17.7
%
3,329

 
16.9
%
3,430

 
16.2
%
Municipal
29

 
3.2
%
27

 
3.2
%
25

 
4.3
%
Residential
 
 
 
 
 
 
 
 
 
 
 
 
   Term
1,226

 
37.2
%
1,024

 
37.9
%
1,114

 
37.5
%
   Construction
32

 
1.2
%
25

 
1.2
%
30

 
1.5
%
Home equity line of credit
1,012

 
6.7
%
1,078

 
7.1
%
630

 
7.6
%
Consumer
725

 
2.2
%
867

 
2.0
%
660

 
1.9
%
Unallocated
2,121

 
%
1,182

 
%
1,644

 
%
Total
$
11,858

 
100.0
%
$
11,639

 
100.0
%
$
11,490

 
100.0
%

The allowance for loan losses totaled $11.9 million at March 31, 2020, compared to $11.6 million as of December 31, 2019 and $11.5 million as of March 31, 2019. Management's ongoing application of methodologies to establish the allowance include an evaluation of impaired loans for specific reserves. These specific reserves decreased $1.2 million in the first three months of 2020 from $2.2 million at December 31, 2019 to $1.0 million at March 31, 2020. The specific loans that make up those categories change from period to period. Impairment on those loans, which would be reflected in the allowance for loan losses, might or might not exist, depending on the specific circumstances of each loan. The portion of the reserve based upon homogeneous pools of loans decreased by $84,000 in the first three months of 2020. The portion of the reserve based on qualitative factors increased $585,000 in the first three months of 2020 due to a mix of factors, including initial macroeconomic impacts of the COVID-19 pandemic. After consideration of the shifts in specific, pooled and qualitative reserves, Management determined that the change in unallocated reserves from $1.2 million, or 10.2% of the total reserve at December 31, 2019, to $2.1 million, or 17.9% as of March 31, 2020, supports general imprecision related to portfolio growth and supports general economic uncertainty resulting from the COVID-19 pandemic. The beginnings of COVID-19's impact upon the economy are captured in several factors considered in the qualitative portion of the reserve, however the depth and duration of the economic impact is unknown. Consequently, it is likely that there are underlying credit risks that have not yet surfaced in the loan specific or qualitative metrics the Company uses to estimate its allowance for loan losses, supporting an increase in the unallocated component.

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A breakdown of the allowance for loan losses as of March 31, 2020, by loan class and allowance element, is presented in the following table:
 Dollars in thousands
Specific Reserves on Loans Evaluated Individually for Impairment
 
General Reserves on Loans Based on Historical Loss Experience
 
Reserves for Qualitative Factors
 
Unallocated
Reserves
 
Total Reserves
Commercial
 
 
 
 
 
 
 
 
 
   Real estate
$
230

 
$
687

 
$
2,945

 
$

 
$
3,862

   Construction
3

 
80

 
341

 

 
424

   Other
172

 
426

 
1,829

 

 
2,427

Municipal

 

 
29

 

 
29

Residential
 
 
 
 
 
 
 
 
 
   Term
233

 
300

 
693

 

 
1,226

   Construction

 
10

 
22

 

 
32

Home equity line of credit
296

 
168

 
548

 

 
1,012

Consumer
58

 
228

 
439

 

 
725

Unallocated

 

 

 
2,121

 
2,121

 
$
992

 
$
1,899

 
$
6,846

 
$
2,121

 
$
11,858

Based upon Management's evaluation, provisions are made to maintain the allowance as a best estimate of inherent losses within the portfolio. The provision for loan losses to maintain the allowance was $400,000 for the first three months of 2020 and $375,000 the first three months of 2019. Net chargeoffs were $181,000 in the first three months of 2020, up from $117,000 in the first three months of 2019. Our allowance as a percentage of outstanding loans was 0.88% as of March 31, 2020, slightly down from 0.90% as of December 31, 2019, and down from 0.91% as of March 31, 2019.

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The following table summarizes the activities in our allowance for loan losses for the three months ended March 31, 2020 and 2019 and for the year ended December 31, 2019:
Dollars in thousands
March 31, 2020
 
December 31, 2019
 
March 31, 2019
 
Balance at the beginning of year
$
11,639

 
$
11,232

 
$
11,232

 
Loans charged off:
 
 
 
 
 
 
Commercial
 
 
 
 
 
 
   Real estate

 
89

 

 
   Construction

 

 

 
   Other

 
179

 
1

 
Municipal

 

 

 
Residential
 
 
 
 
 
 
   Term
2

 
445

 
49

 
   Construction

 

 

 
Home equity line of credit
153

 
69

 
38

 
Consumer
100

 
338

 
63

 
Total
255

 
1,120

 
151

 
Recoveries on loans previously charged off
 
 
 
 
 
 
Commercial
 
 
 
 
 
 
   Real estate

 
15

 
8

 
   Construction

 

 

 
   Other
20

 
73

 
1

 
Municipal

 

 

 
Residential
 
 
 
 
 
 
   Term
10

 
57

 
3

 
   Construction

 

 

 
Home equity line of credit
1

 
4

 
1

 
Consumer
43

 
128

 
21

 
Total
74

 
277

 
34

 
Net loans charged off
181

 
843

 
117

 
Provision for loan losses
400

 
1,250

 
375

 
Balance at end of period
$
11,858

 
$
11,639

 
$
11,490

 
Ratio of net loans charged off to average loans outstanding1
0.05

%
0.07

%
0.04

%
Ratio of allowance for loan losses to total loans outstanding
0.88

%
0.90

%
0.91

%
1 Annualized using a 366-day basis for 2020 and a 365-day basis for 2019.
In Management's opinion, the level of the provision for loan losses is directionally consistent with the overall credit quality of our loan portfolio and corresponding levels of nonperforming loans, as well as with the performance of the national and local economies.
Nonperforming Loans
Nonperforming loans are comprised of loans, for which based on current information and events, it is probable that we will be unable to collect all amounts due according to the contractual terms of the loan agreement or when principal and interest is 90 days or more past due unless the loan is both well secured and in the process of collection (in which case the loan may continue to accrue interest in spite of its past due status). A loan is "well secured" if it is secured (1) by collateral in the form of liens on or pledges of real or personal property, including securities, that have a realizable value sufficient to discharge the debt including accrued interest) in full, or (2) by the guarantee of a financially responsible party. A loan is "in the process of collection" if collection of the loan is proceeding in due course either (1) through legal action, including judgment enforcement

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procedures, or, (2) in appropriate circumstances, through collection efforts not involving legal action which are reasonably expected to result in repayment of the debt or in its restoration to a current status in the near future.
When a loan becomes nonperforming (generally 90 days past due), it is evaluated for collateral dependency based upon the most recent appraisal or other evaluation method. If the collateral value is lower than the outstanding loan balance plus accrued interest and estimated selling costs, the loan is placed on non-accrual status, all accrued interest is reversed from interest income, and a specific reserve is established for the difference between the loan balance and the collateral value less selling costs, or, in certain situations, the difference between the loan balance and the collateral value less selling costs is written off. Concurrently, a new appraisal or valuation may be ordered, depending on collateral type, currency of the most recent valuation, the size of the loan, and other factors appropriate to the loan. Upon receipt and acceptance of the new valuation, the loan may have an additional specific reserve or write down based on the updated collateral value. On an ongoing basis, appraisals or valuations may be done periodically on collateral dependent non-performing loans and an additional specific reserve or write down will be made, if appropriate, based on the new collateral value.
Once a loan is placed on nonaccrual, it remains in nonaccrual status until the loan is current as to payment of both principal and interest and the borrower demonstrates the ability to pay and remain current. All payments made on nonaccrual loans are applied to the principal balance of the loan.
Nonperforming loans, expressed as a percentage of total loans, totaled 0.75% at March 31, 2020 compared to 1.28% at December 31, 2019 and 1.09% at March 31, 2019. The following table shows the distribution of nonperforming loans by class as of March 31, 2020 and 2019 and December 31, 2019:
Dollars in thousands
March 31,
2020
 
December 31,
2019
 
March 31,
2019
Commercial
 
 
 
 
 
   Real estate
$
1,748

 
$
1,784

 
$
1,468

   Construction
246

 
256

 
286

   Other
457

 
6,534

 
7,067

Municipal

 

 

Residential
 
 
 
 
 
   Term
5,615

 
5,899

 
4,211

   Construction

 

 

Home equity line of credit
1,916

 
2,171

 
702

Consumer
66

 
5

 
2

Total nonperforming loans
$
10,048

 
$
16,649

 
$
13,736

The amounts shown for total nonperforming loans do not include loans 90 or more days past due and still accruing interest. These are loans for which we expect to collect all amounts due, including past-due interest. As of March 31, 2020, loans 90 or more days past due and still accruing interest totaled $3.8 million, compared to $1.6 million at December 31, 2019 and $4,000 at March 31, 2019. The year-to-date increase in loans 90 days or more past due and still accruing as of March 31, 2020, was due primarily to one loan in the amount of $1.9 million.

Troubled Debt Restructured
A troubled debt restructured ("TDR") constitutes a restructuring of debt if the Company, for economic or legal reasons related to the borrower's financial difficulties, grants a concession to the borrower that it would not otherwise consider. To determine whether or not a loan should be classified as a TDR, Management evaluates a loan based upon the following criteria:
The borrower demonstrates financial difficulty; common indicators include past due status with bank obligations, substandard credit bureau reports, or an inability to refinance with another lender, and
The Company has granted a concession; common concession types include maturity date extension, interest rate adjustments to below market pricing, and deferment of payments.
As of March 31, 2020, we had 81 loans with a balance of $15.0 million that have been restructured. This compares to 81 loans with a balance of $21.4 million and 80 loans with a balance of $25.4 million classified as TDRs as of December 31, 2019 and March 31, 2019, respectively.

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The following table shows the activity in loans classified as TDRs between December 31, 2019 and March 31, 2020:
Balance in Thousands of Dollars
Number of Loans
Aggregate Balance
Total at December 31, 2019
81

$
21,424

Added in 2020
2

190

Loans paid off in 2020
(2
)
(6,234
)
Repayments in 2020

(412
)
Total at March 31, 2020
81

$
14,968


As of March 31, 2020, 50 loans with an aggregate balance of $10.7 million were performing under the modified terms, seven loans with an aggregate balance of $1.7 million were more than 30 days past due and accruing and 24 loans with an aggregate balance of $2.5 million were on nonaccrual. As a percentage of aggregate outstanding balance, 71.5% were performing under the modified terms, 11.6% were more than 30 days past due and accruing and 16.9% were on nonaccrual. The performance status of all TDRs as of March 31, 2020, as well as the associated specific reserve in the allowance for loan losses, is summarized by type of loan in the following table.
 In thousands of dollars
Performing
As Modified
30+ Days Past Due
and Accruing
On
Nonaccrual
All
TDRs
Commercial
 
 
 
 
   Real estate
$
3,857

$
618

$
213

$
4,688

   Construction
701



701

   Other
239

293

247

779

Municipal




Residential
 
 
 
 
   Term
5,600

823

1,898

8,321

   Construction




Home equity line of credit
312


167

479

Consumer




 
$
10,709

$
1,734

$
2,525

$
14,968

Percent of balance
71.5
%
11.6
%
16.9
%
100.0
%
Number of loans
50

7

24

81

Associated specific reserve
$
314.6

$
0.4

$
241

$
556


Residential TDRs (including home equity lines of credit) as of March 31, 2020 included 57 loans with an aggregate balance of $8.8 million, and the modifications granted fell into five major categories. Loans totaling $5.8 million had an extension of term, allowing the borrower to repay over an extended number of years and lowering the monthly payment to a level the borrower can afford. Loans totaling $3.1 million had interest capitalized, allowing the borrower to become current after unpaid interest was added to the balance of the loan and re-amortized over the remaining life of the loan. Loans with an aggregate balance of $498,000 were converted from interest-only to regular principal-and-interest payments based on the borrowers' ability to service the higher payment amount. Rate concessions were granted on loans totaling $1.8 million. Loans with an aggregate balance of $1.0 million were involved in bankruptcy. Certain residential TDRs had more than one modification.
Commercial TDRs as of March 31, 2020 were comprised of 24 loans with a balance of $6.2 million. Of this total, six loans with an aggregate balance of $1.4 million had an extended period of interest-only payments, deferring the start of principal repayment. Three loans with an aggregate balance of $1.6 million had an extension of term, allowing the borrower to repay over an extended number of years and lowering the monthly payment to a level the borrower can afford. Eight loans with an aggregate balance of $1.1 million had a deferral of payment. The remaining seven loans with an aggregate balance of $2.1 million had several different modifications.
In each case when a loan was modified, Management determined it was in the Bank's best interest to work with the borrower with modified terms rather than to proceed to foreclosure. Once a loan is classified as a TDR it remains classified as such until the balance is fully repaid, despite whether the loan is performing under the modified terms. As of March 31, 2020, Management is aware of nine loans classified as TDRs that are involved in bankruptcy with an outstanding balance of $1.0 million. There were also 24 loans with an outstanding balance of $2.5 million that were classified as TDRs and on non-accrual status, of which two loans with an outstanding balance of $350,000 were in the process of foreclosure.


Page 65



Impaired Loans
Impaired loans include restructured loans and loans placed on non-accrual status. These loans are measured at the present value of expected future cash flows discounted at the loan's effective interest rate or at the fair value of the collateral less estimated selling costs if the loan is collateral dependent. If the measure of an impaired loan is lower than the recorded investment in the loan, a specific reserve is established for the difference. Impaired loans totaled $22.5 million at March 31, 2020, and have decreased $6.8 million from December 31, 2019. There were 151 impaired loans at March 31, 2020 up from 150 loans at December 31, 2019. Impaired commercial loans decreased $6.2 million between December 31, 2019 and March 31, 2020. The specific allowance for impaired commercial loans decreased from $1.5 million at December 31, 2019 to $405,000 as of March 31, 2020, which represented the fair value deficiencies for loans where the fair value of the collateral or net present value of expected cash flows was estimated at less than our carrying amount of the loan. From December 31, 2019 to March 31, 2020, impaired residential loans decreased $401,000 and impaired home equity lines of credit decreased $260,000.
The following table sets forth impaired loans as of March 31, 2020 and 2019 and December 31, 2019:
Dollars in thousands
March 31,
2020
 
December 31,
2019
 
March 31,
2019
Commercial
 
 
 
 
 
   Real estate
$
6,223

 
$
6,309

 
$
9,957

   Construction
947

 
958

 
1,007

   Other
990

 
7,075

 
7,653

Municipal

 

 

Residential
 
 
 
 
 
   Term
12,038

 
12,439

 
10,919

   Construction

 

 

Home equity line of credit
2,228

 
2,488

 
1,030

Consumer
67

 
5

 
2

Total
$
22,493

 
$
29,274

 
$
30,568

Past Due Loans
The Bank's overall loan delinquency ratio was 1.62% at March 31, 2020 compared to 1.16% at December 31, 2019 and 0.89% at March 31, 2019. Loans 90 days delinquent and accruing increased from $1,560,000 at December 31, 2019 to $3,770,000 as of March 31, 2020 due primarily to one loan in the amount of $1.9 million. The following table sets forth loan delinquencies as of March 31, 2020 and 2019 and December 31, 2019:
Dollars in thousands
March 31,
2020
 
December 31,
2019
 
March 31,
2019
 
Commercial
 
 
 
 
 
 
   Real estate
$
4,234

 
$
1,774

 
$
1,728

 
   Construction
305

 
271

 
333

 
   Other
5,868

 
5,028

 
1,030

 
Municipal

 

 

 
Residential
 
 
 
 
 
 
   Term
7,761

 
4,640

 
5,246

 
   Construction

 

 

 
Home equity line of credit
3,311

 
2,957

 
2,365

 
Consumer
350

 
347

 
578

 
Total
$
21,829

 
$
15,017

 
$
11,280

 
Loans 30-89 days past due to total loans
0.86

%
0.63

%
0.65

%
Loans 90+ days past due and accruing to total loans
0.28

%
0.12

%
0.00

%
Loans 90+ days past due on non-accrual to total loans
0.49

%
0.40

%
0.24

%
Total past due loans to total loans
1.62

%
1.16

%
0.89

%


Page 66



Potential Problem Loans and Loans in Process of Foreclosure
Potential problem loans consist of classified, accruing commercial and commercial real estate loans that were between 30 and 89 days past due. Such loans are characterized by weaknesses in the financial condition of borrowers or collateral deficiencies. Based on historical experience, the credit quality of some of these loans may improve due to improvements in the economy as well as changes in collateral values or the financial condition of the borrowers, while the credit quality of other loans may deteriorate, resulting in some amount of loss. At March 31, 2020, there were eleven potential problem loans with a balance of $1.9 million or 0.14% of total loans. This compares to nine loans with a balance of $1.3 million or 0.10% of total loans at December 31, 2019.
As of March 31, 2020, there were 17 loans in the process of foreclosure with a total balance of $3.0 million. The Bank's residential foreclosure process begins when a loan becomes 75 days past due at which time a Demand/Breach Letter is sent to the borrower. If the loan becomes 120 days past due, copies of the promissory note and mortgage deed are forwarded to the Bank's attorney for review and a complaint for foreclosure is then prepared. An authorized Bank officer signs the affidavit certifying the validity of the documents and verification of the past due amount which is then forwarded to the court. Once a Motion for Summary Judgment is granted, a Period of Redemption (POR) begins which gives the customer 90 days to cure the default. A foreclosure auction date is then set 30 days from the POR expiration date if the default is not cured.
The Bank's commercial foreclosure process begins when a loan becomes 60 days past due, at which time a default letter is issued. At expiration of the period to cure default, which lasts 12 days after the issuing of the default letter, copies of the promissory note and mortgage deed are forwarded to the Bank's attorney for review. A Notice of Statutory Power of Sale is then prepared. This notice must be published for three consecutive weeks in a newspaper located in the county in which the property is located. A notice also must be issued to the mortgagor and all parties of interest 21 days prior to the sale. The foreclosure auction occurs and the Affidavit of Sale is recorded within the appropriate county within 30 days of the sale.
The Bank’s written policies and procedures for foreclosures, along with implementation of same, are subject to annual review by its internal audit provider.  The scope of this review includes loans held in portfolio and loans serviced for others.  There were no issues requiring management attention in the most recent review.  Servicing for others includes loans sold to Freddie Mac, Fannie Mae, and the Federal Home Loan Bank of Boston through its Mortgage Partnership Finance (MPF) program.  The Bank follows the published guidelines of each investor.  Loans serviced for Freddie Mac and Fannie Mae have been sold without recourse, and the Bank has no liability for these loans in the event of foreclosure.  A de minimis volume of loans has been sold to and serviced for MPF to date.  The Bank retains a second loss layer credit enhancement obligation; no losses have been recorded on this credit enhancement obligation since the Bank started selling loans to MPF in 2013.

COVID-19 Impact on Loan Portfolio
The Company is actively working with borrowers impacted by the COVID-19 outbreak. As of May 8, 2020 a total of 747 loan modification requests have been completed in conformance with inter-agency guidance issued in March, representing $201.7 million in loan balances, or approximately 15.0% of the overall loan portfolio. First National Bank is a designated SBA preferred lender and has processed 1,445 Paycheck Protection Program loan requests totaling $105.4 million in funds disbursed to qualified small businesses to date. At this point in time the impact of the consequences of COVID-19 upon borrowers and ultimately the Company's loan portfolio metrics cannot be reasonably estimated or ascertained. The State of Maine, where most of the Bank's customers reside and/or operate has issued guidelines for a gradual re-opening of the economy, however, the guidelines are fluid and as of this writing maintain limits on public gatherings above certain size limits. Also unknown is the willingness of the general public to participate in the typical activities of a summer and fall tourism season even if business operations were allowed to return to normal.
As of March 31, 2020 approximately 8.5% of the Company’s loan portfolio consisted of hospitality or restaurant industry borrowers, considered amongst the most impacted by COVID-19. Stress testing of credits and frequent contact with borrowers is ongoing in these segments. To date 42 COVID-19 related loan modifications have been completed within the hospitality and restaurant segments representing $48.5 million in loan balances, or 42.6% of total hospitality and restaurant industry loans.
The Company is also actively monitoring activity on open credit lines. The utilization rate of commercial credit lines increased from an average of 55.6% in the first quarter of 2019 to an average of 61.5% in the first quarter of 2020; average utilization of home equity credit lines decreased slightly from 52.3% to 51.6% over these same periods. There was no meaningful variance in the month-end March 2020 utilization rates from the first quarter 2020 average in either commercial or home equity lines.


Page 67



Other Real Estate Owned
Other real estate owned and repossessed assets ("OREO") are comprised of properties or other assets acquired through a foreclosure proceeding, or acceptance of a deed or title in lieu of foreclosure. Real estate acquired through foreclosure is carried at the lower of fair value less estimated cost to sell or the cost of the asset and is not included as part of the allowance for loan loss totals. At March 31, 2020 there were three properties owned with an OREO balance of $316,000, compared to December 31, 2019 when there were two properties owned with an OREO balance of $279,000 and March 31, 2019 when there were five properties owned with an OREO balance of $584,000. There were no allowance losses in any period.
The following table presents the composition of other real estate owned:
Dollars in thousands
March 31,
2020
 
December 31,
2019
 
March 31,
2019
Carrying Value
 
 
 
 
 
Commercial
 
 
 
 
 
   Real estate
$

 
$

 
$

   Construction

 

 

   Other

 

 

Municipal

 

 

Residential


 
 
 


   Term
316

 
279

 
584

   Construction

 

 

Home equity line of credit

 

 

Consumer

 

 

Total
$
316

 
$
279

 
$
584

Related Allowance
 
 
 
 
 
Commercial
 
 
 
 
 
   Real estate
$

 
$

 
$

   Construction

 

 

   Other

 

 

Municipal

 

 

Residential


 
 
 


   Term

 

 

   Construction

 

 

Home equity line of credit

 

 

Consumer

 

 

Total
$

 
$

 
$

Net Value
 
 
 
 
 
Commercial
 
 
 
 
 
   Real estate
$

 
$

 
$

   Construction

 

 

   Other

 

 

Municipal

 

 

Residential


 
 
 


   Term
316

 
279

 
584

   Construction

 

 

Home equity line of credit

 

 

Consumer

 

 

Total
$
316

 
$
279

 
$
584

Liquidity Management
As of March 31, 2020, the Bank had primary sources of liquidity of $844.3 million. It is Management's opinion this is sufficient to meet liquidity needs under a broad range of scenarios. The Bank has an additional $349.7 million in contingent sources of liquidity, including the Federal Reserve Borrower in Custody program, municipal and corporate securities, and correspondent

Page 68



bank lines of credit. The Asset/Liability Committee ("ALCO") establishes guidelines for liquidity in its Asset/Liability policy and monitors internal liquidity measures to manage liquidity exposure. Based on its assessment of the liquidity considerations described above, Management believes the Company's sources of funding will meet anticipated funding needs.
Liquidity is the ability of a financial institution to meet maturing liability obligations and customer loan demand.  The Bank's primary source of liquidity is deposits, which funded 79.7% of total average assets in the first three months of 2020. While the generally preferred funding strategy is to attract and retain low-cost deposits, the ability to do so is affected by competitive interest rates and terms in the marketplace. Other sources of funding include discretionary use of purchased liabilities (e.g., FHLB term advances and other borrowings), cash flows from the securities portfolios and loan repayments. Securities designated as available for sale may also be sold in response to short-term or long-term liquidity needs although Management has no intention to do so at this time.
The Bank has a detailed liquidity funding policy and a contingency funding plan that provide for the prompt and comprehensive response to unexpected demands for liquidity. Management has developed quantitative models to estimate needs for contingent funding that could result from unexpected outflows of funds in excess of "business as usual" cash flows. In Management's estimation, risks are concentrated in two major categories: runoff of in-market deposit balances and the inability to renew wholesale sources of funding. Of the two categories, potential runoff of deposit balances would have the most significant impact on contingent liquidity. Our modeling attempts to quantify deposits at risk over selected time horizons. In addition to these unexpected outflow risks, several other "business as usual" factors enter into the calculation of the adequacy of contingent liquidity including payment proceeds from loans and investment securities, maturing debt obligations and maturing time deposits. The Bank has established collateralized borrowing capacity with the Federal Reserve Bank of Boston and also maintains additional collateralized borrowing capacity with the FHLB in excess of levels used in the ordinary course of business as well as Fed Funds lines with two correspondent banks and availability through the Federal Reserve Bank Borrower in Custody program.
Deposits
During the first three months of 2020, total deposits decreased by $5.9 million or 0.4% from December 31, 2019 levels. Low-cost deposits (demand, NOW, and savings accounts) decreased by $27.0 million or 3.4% in the first three months of 2020, money market deposits increased $184,000 or 0.1%, and certificates of deposit increased $21.0 million or 3.0%. Between March 31, 2019 and March 31, 2020, total deposits increased by $37.7 million or 2.3%. Low-cost deposits increased by $15.8 million or 2.1%, money market accounts increased $23.5 million or 17.1%, and certificates of deposit decreased $1.5 million or 0.2%. The decrease in low-cost deposits year-to-date is consistent with our normal seasonal fluctuation.
Borrowed Funds
The Company uses funding from the FHLB of Boston, the Federal Reserve Bank of Boston and repurchase agreements enabling it to grow its balance sheet and its revenues. This funding may also be used to balance seasonal deposit flows or to carry out interest rate risk management strategies, and may be used to replace or supplement other sources of funding, including core deposits and certificates of deposit. During the three months ended March 31, 2020, borrowed funds increased $63.1 million or 34.1% from December 31, 2019. Between March 31, 2019 and March 31, 2020, borrowed funds increased by $77.6 million or 45.5%. Lower interest rates on borrowings resulted in borrowed funds becoming the favored vehicle to support earning asset growth.
Shareholders' Equity
Shareholders' equity as of March 31, 2020 was $215.3 million, compared to $212.5 million as of December 31, 2019 and $197.8 million as of March 31, 2019. The Company's earnings in the first three months of 2020, net of dividends declared, added to shareholders' equity. The net unrealized gain on available-for-sale securities, presented in accordance with FASB ASC Topic 320 "Investments – Debt and Equity Securities" now stands at $7.9 million as of March 31, 2020 compared to $3.7 million as of December 31, 2019. The net unrealized loss on cash flow hedging derivative instruments now stands at $4.8 million, compared to the $97,000 gain as of December 31, 2019.
A cash dividend of $0.30 per share was declared in the first quarter of 2020. The dividend payout ratio, which is calculated by dividing dividends declared per share by diluted earnings per share, was 50.00% for the first three months of 2020 compared to 50.88% for the same period in 2019. In determining future dividend payout levels, the Board of Directors carefully analyzes capital requirements and earnings retention, as set forth in the Company's Dividend Policy. The ability of the Company to pay cash dividends to its shareholders depends on receipt of dividends from its subsidiary, the Bank. The subsidiary may pay dividends to its parent out of so much of its net profits as the Bank's directors deem appropriate, subject to the limitation that the total of all dividends declared by the Bank in any calendar year may not exceed the total of its net profits of that year combined with its retained net profits of the preceding two years. The amount available for dividends in 2020 is this year's net income plus $26.1 million.
Financial institution regulators have established guidelines for minimum capital ratios for banks and bank holding companies. The net unrealized gain or loss on available-for-sale securities is generally not included in computing regulatory

Page 69



capital. During the first quarter of 2015, the Company adopted the new Basel III regulatory capital framework as approved by the federal banking agencies. The adoption of this new framework modified the calculation of the various capital ratios, added a new ratio, common equity tier 1, and revised the adequately and well capitalized thresholds. Additionally, under the new rule, in order to avoid limitations on capital distributions, including dividend payments, the Company must hold a capital conservation buffer above the adequately capitalized risk-based capital ratios. The capital conservation buffer was phased in from 0.0% for 2015 to 2.50% in 2019. The amounts shown below as the adequately capitalized ratio plus capital conservation buffer include the fully phased-in 2.50% buffer.
The Company met each of the well-capitalized ratio guidelines at March 31, 2020. The following tables indicate the capital ratios for the Bank and the Company at March 31, 2020 and December 31, 2019.
As of March 31, 2020
Leverage
 
Tier 1
 
Common Equity Tier 1
 
Total Risk-Based
 
Bank
8.74

%
14.06

%
14.06

%
14.99

%
Company
8.78

%
14.16

%
14.16

%
15.08

%
Adequately capitalized ratio
4.00

%
6.00

%
4.50

%
8.00

%
Adequately capitalized ratio plus capital conservation buffer
4.00

%
8.50

%
7.00

%
10.50

%
Well capitalized ratio (Bank only)
5.00

%
8.00

%
6.50

%
10.00

%
As of December 31, 2019
Leverage
 
Tier 1
 
Common Equity Tier 1
 
Total Risk-Based
 
Bank
8.84

%
14.25

%
14.25

%
15.19

%
Company
8.88

%
14.34

%
14.34

%
15.27

%
Adequately capitalized ratio
4.00

%
6.00

%
4.50

%
8.00

%
Adequately capitalized ratio plus capital conservation buffer
4.00

%
8.50

%
7.00

%
10.50

%
Well capitalized ratio (Bank only)
5.00

%
8.00

%
6.50

%
10.00

%

Off-Balance Sheet Financial Instruments and Contractual Obligations

Derivative Financial Instruments Designated as Hedges
As part of its overall asset and liability management strategy, the Bank periodically uses derivative instruments to minimize significant unplanned fluctuations in earnings and cash flows caused by interest rate volatility. The Bank's interest rate risk management strategy involves modifying the re-pricing characteristics of certain assets and/or liabilities so that change in interest rates does not have a significant adverse effect on net interest income. Derivative instruments that Management periodically uses as part of its interest rate risk management strategy may include interest rate swap agreements, interest rate floor agreements, and interest rate cap agreements. 

During the first quarter of 2020, the Bank took advantage of market opportunities to restructure several interest rate swap positions and extend funding at favorable interest rates. At March 31, 2020, the Bank had nine outstanding off-balance sheet, derivative instruments designated as cash flow hedges. These derivative instruments were interest rate swap agreements, with notional principal amounts totaling $220.0 million and an unrealized loss of $4.8 million, net of taxes. The notional amounts and net unrealized gain (loss) of the financial derivative instruments do not represent exposure to credit loss. The Bank is exposed to credit loss only to the extent the counter-party defaults in its responsibility to pay interest under the terms of the agreements. The credit risk in derivative instruments is mitigated by entering into transactions with highly-rated counterparties that Management believes to be creditworthy and by limiting the amount of exposure to each counter-party. At March 31, 2020, the Bank's derivative instrument counterparties were credit rated “A” by the major credit rating agencies. The interest rate swap agreements were entered into by the Bank to limit its exposure to rising interest rates.

The Bank also enters into swap arrangements with qualified loan customers as a means to provide these customers with access to long-term fixed interest rates for borrowings, and simultaneously enters into a swap contract with an approved third- party financial institution. The terms of the two contracts are designed to offset one another resulting in their being neither a net gain or a loss. The notional amounts of the financial derivative instruments do not represent exposure to credit loss. The Bank is

Page 70



exposed to credit loss only to the extent that either counter-party defaults in its responsibility to pay interest under the terms of the agreements. Credit risk is mitigated by prudent underwriting of the loan customer and financial institution counterparties. As of March 31, 2020, the Bank had customer loan swap contracts in place with a total notional value of $32.6 million.


Contractual Obligations
The following table sets forth the contractual obligations of the Company as of March 31, 2020:
Dollars in thousands
Total
 
Less than 1 year
 
1-3 years
 
3-5 years
 
More than 5 years
Borrowed funds
$
248,040

 
$
182,937

 
$
10,000

 
$
55,103

 
$

Operating leases
66

 
16

 
33

 
17

 

Certificates of deposit
710,938

 
510,070

 
138,949

 
61,919

 

Total
$
959,044

 
$
693,023

 
$
148,982

 
$
117,039

 
$

Total loan commitments and unused lines of credit
$
183,049

 
$
183,049

 
$

 
$

 
$


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Item 3 – Quantitative and Qualitative Disclosures About Market Risk

Market-Risk Management
Market risk is the risk of loss arising from adverse changes in the fair value of financial instruments due to changes in interest rates. The First Bancorp, Inc.'s market risk is composed primarily of interest rate risk. The Bank's Asset/Liability Committee (ALCO) is responsible for reviewing the interest rate sensitivity position of the Company and establishing policies to monitor and limit exposure to interest rate risk. All guidelines and policies established by ALCO have been approved by the Board of Directors.
Asset/Liability Management
The primary goal of asset/liability management is to maximize net interest income within the interest rate risk limits set by ALCO. Interest rate risk is monitored through the use of two complementary measures: static gap analysis and earnings simulation modeling. While each measurement has limitations, taken together they represent a reasonably comprehensive view of the magnitude of interest rate risk in the Company, the level of risk through time, and the amount of exposure to changes in certain interest rate relationships.
Static gap analysis measures the amount of repricing risk embedded in the balance sheet at a point in time. It does so by comparing the differences in the repricing characteristics of assets and liabilities. A gap is defined as the difference between the principal amount of assets and liabilities that reprice within a specified time period. The Company's cumulative one-year gap at March 31, 2020 was -5.08% of total assets compared to -5.96% of total assets at December 31, 2019. Core deposits with non-contractual maturities are presented based upon historical patterns of balance attrition and pricing behavior, which are reviewed at least annually.
The gap repricing distributions include principal cash flows from residential mortgage loans and mortgage-backed securities in the time frames in which they are expected to be received. Mortgage prepayments are estimated by applying industry median projections of prepayment speeds to portfolio segments based on coupon range and loan age.
A summary of the Company's static gap, as of March 31, 2020, is presented in the following table:
 
0-90
 
90-365
 
1-5
 
5+
 
Dollars in thousands 
Days
 
Days
 
Years
 
Years
 
Investment securities at amortized cost (HTM) and fair value (AFS)
$
76,340

 
$
125,844

 
$
255,451

 
$
196,885

 
Restricted stock, at cost
8,957

 

 

 
1,037

 
Loans held for sale

 

 

 
561

 
Loans
422,729

 
195,264

 
537,612

 
188,603

 
Other interest-earning assets

 
24,275

 

 

 
Non-rate-sensitive assets
14,331

 

 

 
88,507

 
 Total assets
522,357

 
345,383

 
793,063

 
475,593

 
Interest-bearing deposits
521,333

 
267,409

 
201,441

 
539,462

 
Borrowed funds
145,000

 
35,000

 
30,103

 

 
Non-rate-sensitive liabilities and equity
1,900

 
5,700

 
34,100

 
354,948

 
 Total liabilities and equity
668,233

 
308,109

 
265,644

 
894,410

 
Period gap
$
(145,876
)
 
$
37,274

 
$
527,419

 
$
(418,817
)
 
Percent of total assets
(6.83
)
%
1.74

%
24.69

%
(19.60
)
%
Cumulative gap (current)
$
(145,876
)
 
$
(108,602
)
 
$
418,817

 
$

 
Percent of total assets
(6.83
)
%
(5.08
)
%
19.60

%

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

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The Company's most recent simulation model projects net interest income would decrease by approximately 0.6% of stable-rate net interest income if short-term rates affected by Federal Open Market Committee actions fall gradually by one percentage point over the next year, and decrease by approximately 1.0% if rates rise gradually by two percentage points. Both scenarios are well within ALCO's policy limit of a decrease in net interest income of no more than 10.0% given a 2.0% move in interest rates, up or down. Management believes this reflects a reasonable interest rate risk position. In year two, and assuming no additional movement in rates, the model forecasts that net interest income would be lower than that earned in a stable rate environment by 3.2% in a falling-rate scenario, and lower than that earned in a stable rate environment by 5.7% in a rising rate scenario, when compared to the year-one base scenario. A summary of the Bank's interest rate risk simulation modeling, as of March 31, 2020 and December 31, 2019 is presented in the following table:
Changes in Net Interest Income
March 31, 2020
December 31, 2019
Year 1
 
 
Projected change if rates decrease by 1.0%
-0.6%
0.2%
Projected change if rates increase by 2.0%
-1.0%
-4.3%
Year 2
 
 
Projected change if rates decrease by 1.0%
-3.2%
-0.9%
Projected change if rates increase by 2.0%
-5.7%
-10.1%
This dynamic simulation model includes assumptions about how the balance sheet is likely to evolve through time and in different interest rate environments. Loans and deposits are projected to maintain stable balances. All maturities, calls and prepayments in the securities portfolio are assumed to be reinvested in similar assets. Mortgage loan prepayment assumptions are developed from industry median estimates of prepayment speeds for portfolios with similar coupon ranges and seasoning. Non-contractual deposit volatility and pricing are assumed to follow historical patterns. The sensitivities of key assumptions are analyzed annually and reviewed by ALCO.
This sensitivity analysis does not represent a Company forecast and should not be relied upon as being indicative of expected operating results. These hypothetical estimates are based upon numerous assumptions including, among others, the nature and timing of interest rate levels, yield curve shape, prepayments on loans and securities, pricing decisions on loans and deposits, and reinvestment/ replacement of asset and liability cash flows. While assumptions are developed based upon current economic and local market conditions, the Company cannot make any assurances as to the predictive ability of these assumptions, including how customer preferences or competitor influences might change.

Interest Rate Risk Management
A variety of financial instruments can be used to manage interest rate sensitivity. These may include investment securities, interest rate swaps, and interest rate caps and floors. Frequently called interest rate derivatives, interest rate swaps, caps and floors have characteristics similar to securities but possess the advantages of customization of the risk-reward profile of the instrument, minimization of balance sheet leverage and improvement of liquidity. As of March 31, 2020, the Company was using interest rate swaps for interest rate risk management.
The Company engages an independent consultant to periodically review its interest rate risk position, as well as the effectiveness of simulation modeling and reasonableness of assumptions used. As of March 31, 2020, there were no significant differences between the views of the independent consultant and Management regarding the Company's interest rate risk exposure. In response the the COVID-19 pandemic, the Federal Open Market Committee in March 2020 lowered its short-term benchmark interest rate by 150 basis points to a range of 0.00% to 0.25%. Management expects that short-term interest rates are likely to remain in this range for at least the next several quarters, and believes that the current level of interest rate risk is acceptable.
Cessation of LIBOR
The Company is aware that LIBOR may no longer be published after December 31, 2021. The International Swap and Derivatives Association ("ISDA"), the organization that oversees and guides swap and derivatives markets and participants, continues to work on transitions and replacement rates, including having replacement rates in place before the possible cessation of LIBOR at the end of 2021, and has committed to providing more definitive recommendations later in 2020. The Company intends to continue to monitor these developments closely and expects to pursue the steps ultimately recommended by ISDA to provide for an orderly transition to a post-LIBOR environment. Of the interest rate swap contracts the Bank has in place as of March 31, 2020, two contracts carrying a total notional amount of $50 million are set to mature prior to December 31, 2021; seven contracts with a total notional amount of $170 million have maturity dates beyond December 31, 2021. The two customer loan swap contracts have maturity dates of December 19, 2029 and October 1, 2039.


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Item 4: Controls and Procedures
As required by Rule 13a-15 under the Securities Exchange Act of 1934, as of March 31, 2020, the end of the quarter covered by this report, the Company carried out an evaluation under the supervision and with the participation of the Company's management, including the Company's Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures. In designing and evaluating the Company's disclosure controls and procedures, the Company and its management recognize that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and the Company's management necessarily was required to apply its judgment in evaluating and implementing possible controls and procedures. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures were effective at the reasonable assurance level to ensure that information required to be disclosed by the Company in the reports it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission's rules and forms. There was no change in the Company's internal control over financial reporting that occurred during the quarter ended March 31, 2020 that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting. The Company reviews its disclosure controls and procedures, which may include its internal controls over financial reporting on an ongoing basis, and may from time to time make changes aimed at enhancing their effectiveness and to ensure that the Company's systems evolve with its business.

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Part II – Other Information

Item 1 – Legal Proceedings

The Company was not involved in any legal proceedings requiring disclosure under Item 103 of Regulation S-K during the reporting period.

Item 1A – Risk Factors

The Company's Form 10-K for the year ended December 31, 2019 provides information on risk factors at that time and mentions the potential economic consequences associated with the COVID-19 outbreak. Since the 10-K was published, the COVID-19 outbreak has evolved into a worldwide pandemic with a myriad of adverse impacts upon society as a whole. The spread of COVID-19 has caused illness, quarantines, cancellation of events and travel, business and school shutdowns, reduction in business activity and financial transactions, supply chain interruptions and overall economic and financial market instability. In response to the COVID-19 pandemic, Federal, State and Local governments have taken preventative or protective actions, such as imposing restrictions on travel and business operations, advising or requiring individuals to limit or forgo their time outside of their homes, and ordering temporary closures of businesses that have been deemed to be non-essential. These restrictions and other consequences of the pandemic have resulted in significant adverse effects for many different types of businesses, including, among others, those in the travel, hospitality and food and beverage industries, and have resulted in a significant number of layoffs and furloughs of employees nationwide and in the markets in which we operate.
The ultimate effects of COVID-19 on the broader economy and the markets that we serve are not known nor is the ultimate length of the restrictions described above and any accompanying effects. Moreover, the Federal Reserve has taken action to lower the Federal Funds rate, which may negatively affect our interest income and, therefore, earnings, financial condition and results of operations. Additional impacts of COVID-19 on our business could be widespread and material, and may include, or exacerbate, among other consequences, the following:

employees contracting COVID-19
unavailability of key personnel necessary to conduct our business activities
disruption resulting from having a majority of employees work remotely
sustained closures of our branch lobbies
declines in demand for loans and other banking services
reduced consumer spending due to job losses or other impacts of the virus
adverse conditions in financial markets may have a negative impact on our investment portfolio
decline in credit quality of our loan portfolio leading to increased provisions for loan losses
declines in the value of loan collateral, including residential and commercial real estate
decline in the liquidity of borrowers and guarantors impairing their ability to honor financial commitments
actions of governmental entities to limit business activities

The significant contribution of tourism to the State of Maine's overall economy, and the Company's primary market areas in particular, may result in a disproportionate effect relative to other regions. These factors, together or in combination with other events or occurrences that may not yet be known or anticipated, may materially and adversely affect our business, financial condition and results of operations.












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

a. None

b. None

c. The Company made the following repurchases of its common stock in the three months ended March 31, 2020:
Month
Shares Purchased
Average Price Per Share
Total shares purchased as part of publicly announced repurchase plans
Maximum number of shares that may be purchased under the plans
January 2020
3,491

29.33



February 2020
1,806

28.47



March 2020




 
5,297

$
28.83




Item 3 – Default Upon Senior Securities

None.
Item 4 – Other Information

A.  None.

B.  None.

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Item 5 – Exhibits

Exhibit 3.2 Amendment to the Registrant's Articles of Incorporation (incorporated by reference to Exhibit 3.1 to the Company's Form 8-K filed under item 5.03 on May 1, 2008).
Exhibit 3.3 Amendment to the Registrant's Articles of Incorporation (incorporated by reference to the Definitive Proxy Statement for the Company's 2008 Annual Meeting filed on March 14, 2008).
Exhibit 3.4 Amendment to the Registrant's Articles of Incorporation authorizing issuance of preferred stock (incorporated by reference to Exhibit 3.1 to Current Report on Form 8-K filed on December 29, 2008).
Exhibit 3.5 Conformed Copy of the Company's Bylaws (incorporated by reference to Exhibit 3.5 to the Company's Form 10-K filed March 10, 2017).
Exhibit 10.1 Director Split Dollar Insurance Plan and Specimen Agreement dated January 1, 2016, attached as Exhibit 10.1 to the Company's Form 8-K filed under item 1.01 on October 25, 2017.
Exhibit 10.2 Executive Split Dollar Insurance Plan and Specimen Agreement dated January 1, 2016, attached as Exhibit 10.2 to the Company's Form 8-K filed under item 1.01 on October 25, 2017.
Exhibit 10.3 Amendments dated November 8, 2019 to the Restricted Stock Agreements of an Executive Officer dated January 29, 2015, January 28, 2016, January 26, 2017 and January 4, 2018 attached as Exhibit 10.3 to the Company’s Form 10-Q filed under Part II Item 4A on November 12, 2019.
Exhibit 14.1 Code of Ethics for Senior Financial Officers, adopted by the Board of Directors on September 19, 2003. Incorporated by reference to Exhibit 14.1 to the Company's Annual Report on Form 10-K filed on March 15, 2006.
Exhibit 14.2 Code of Business Conduct and Ethics, adopted by the Board of Directors on April 15, 2004. Incorporated by reference to Exhibit 14.2 to the Company's Annual Report on Form 10-K filed on March 15, 2006.
Exhibit 23.1 Consent of Independent Registered Public Accounting firm on Form 10-K filed on March 6, 2020.
Exhibit 31.1 Certification of Chief Executive Officer Pursuant to Rule 13A-14(A) of The Securities Exchange Act of 1934
Exhibit 31.2 Certification of Chief Financial Officer Pursuant to Rule 13A-14(A) of The Securities Exchange Act of 1934
Exhibit 32.1 Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of The Sarbanes-Oxley Act of 2002
Exhibit 32.2 Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of The Sarbanes-Oxley Act of 2002
Exhibit 101.INS XBRL Instance Document
Exhibit 101.SCH XBRL Taxonomy Extension Schema Document
Exhibit 101.CAL XBRL Taxonomy Extension Calculation Linkbase Document
Exhibit 101.LAB XBRL Taxonomy Extension Label Linkbase Document
Exhibit 101.PRE XBRL Taxonomy Extension Presentation Linkbase Document
Exhibit 101.DEF XBRL Taxonomy Extension Definitions Linkbase

Page 77


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



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

Date: May 8, 2020


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

Date: May 8, 2020




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