What changed in this filing

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Item 2. Management’s Discussion and Analysis

2020-08-07 compared with 2020-05-08 · 436 added, 233 removed, 533 unchanged (56% of the section changed)

Item 2 – Management's Discussion and Analysis of Financial Condition

and Results of Operations

Item 2 – Management's Discussion and Analysis of Financial Condition and Results of Operations

The First Bancorp, Inc.

72 unchanged sentences

A Federal Income Tax rate of 21.0% was used in 2020 and 2019.

For the three months ended March 31,

For the six months ended June 30, For the quarter ended June 30,

Dollars in thousands

2020 2019 2020 2019

Net interest income as presented $ 29,409 $ 25,849 $ 14,491 $ 12,950

5 unchanged sentences

The following table provides a reconciliation between the GAAP and non-GAAP efficiency ratio:

For the three months ended March 31,

For the six months ended June 30, For the quarter ended June 30,

Dollars in thousands

2020 2019 2020 2019

Non-interest expense, as presented $ 19,960 $ 17,128 $ 8,917 $ 8,730

11 unchanged sentences

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,

For the six months ended June 30, For the quarter ended June 30,

Dollars in thousands

2020 2019 2020 2019

Average shareholders' equity as presented $ 217,661 $ 198,411 $ 218,191 $ 201,384

2 unchanged sentences

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.

Net income for the six months ended June 30, 2020 was $13.1 million, up $513,000 or 4.1% from the same period in 2019.

Earnings per common share on a fully diluted basis were $1.20 for the six months ended June 30, 2020, up $0.05 or 4.3% from the $1.15 posted for the same period in 2019.

For the quarter ended June 30, 2020, net income was $6.6 million, up $174,000 or 2.7% from the same period in 2019.

Earnings per common share on a fully diluted basis were $0.60 for the quarter ended June 30, 2020, up $0.01 or 1.7% from the $0.59 posted in 2019.

Compared to the first quarter of 2020, net income was up 74,000 or 1.1% and earnings per common share on a fully diluted basis were level with the prior quarter.

Despite the ongoing operational and business climate challenges brought about by the coronavirus disease (COVID-19), the Company posted strong operating results during the second quarter of 2020.

Net income of $6.6 million was achieved by successes across all business lines.

Growth in earning assets combined with stable interest rate margins led to a $1.5 million, or 11.9%, increase in net interest income before loan loss provision.

Non-interest revenue increased, year-over-year, driven largely by a surge in mortgage refinance activity.

Also of note was further asset quality improvement.

Based upon the strength of the Company's earnings, a dividend of 31 cents per share was declared in the second quarter, representing a payout to our shareholders of 50.83% of net income for the period.

Net interest income on a tax-equivalent basis was up $3.6 million or 13.2% in the six months ended June 30, 2020 compared to the same period in 2019.

This increase is attributable to growth in earning assets, stable interest rate margins and the recovery of interest on resolved problem loans during the first quarter of 2020.

The tax equivalent net interest margin as of June 30, 2020, was 2.99%, up from 2.90% for the same period in 2019.

For the quarter ended June 30, 2020, net interest income on a tax-equivalent basis increased $1.5 million or 11.3% compared to the same period in 2019, with the net interest margin down a modest two basis points to 2.86%.

Non-interest income for the six months ended June 30, 2020 was $8.8 million, up $2.1 million or 30.7%, from the six months ended June 30, 2019.

Strong refinance volume led to mortgage banking revenue increasing $1.2 million or 190.0%.

Revenue at First National Wealth Management increased $166,000 and net gains on securities added $1.2 million, while service charge income and other income were both negatively impacted by lower transaction volume related to COVID-19.

Non-interest expense for the six months ended June 30, 2020 was $20.0 million, up $2.8 million or 16.5% from the six months ended June 30, 2019.

The year-to-year change was impacted by charges taken during the first quarter of 2020, to restructure interest rate swap positions, as well as increases in employee expenses and furniture and equipment expense.

Asset quality continued to trend positively in the second quarter.

Non-performing assets stood at 0.41% of total assets as of June 30, 2020 - down from 0.83% of total assets as of June 30, 2019 and 0.82% as of December 31, 2019.

Total past-due loans were 0.66% of total loans as of June 30, 2020, down from 1.16% of total loans as of December 31, 2019 and 0.98% as of June 30, 2019.

The provision for loan losses for the first six months of 2020 was $2.8 million, up from the $625,000 provisioned in the same period in 2019.

Despite continued improvement in non-performing asset levels, continued positive charge-off metrics, and lower levels of past due loans, the uncertainties resulting from COVID-19 led management to substantially increase the second quarter provision based upon the potential impact of current economic conditions to borrowers.

Net loan chargeoffs for the six months ended June 30, 2020 were $278,000 or 0.04% of average loans on an annualized basis.

This was down from net chargeoffs of $386,000 or 0.06% of average loans on an annualized basis for the six months ended June 30, 2019.

The allowance for loan losses increased $2.5 million between December 31, 2019 and June 30, 2020, and now stands at 0.97% of loans outstanding as of June 30, 2020, up from 0.90% and 0.92% of loans outstanding at December 31, 2019 and June 30, 2019, respectively.

The Company's balance sheet continued to expand in the first six months of 2020 as total assets increased $198.3 million or 9.6% year-to-date.

The loan portfolio increased $154.5 million or 11.9% in the six months ended June 30, 2020 and $202.5 million or 16.2% from a year ago.

Loan growth in the second quarter of 2020 was centered in the commercial loan portfolio, which was up $107.4 million due primarily to Payroll Protection Program (PPP) loan originations, with over $95 million in loans granted to Maine small businesses.

Second quarter loan growth outside of PPP was tempered by COVID-19 which caused a slowdown of the local and national economy.The investment portfolio has increased $12.9 million year-to-date and increased $29.9 million or 4.7% from a year ago.

On the liability side of the balance sheet, low-cost deposits have increased $114.0

million or 14.3% year-to-date, with much of the growth attributable to various economic stimulus programs, including proceeds of PPP loans, being deposited back to the Bank.

Year-over-year, low-cost deposits increased $165.7 million or 22.2%.

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.

Local certificates of deposit ("CDs") decreased $12.6 million and wholesale CDs decreased $20.7 million year-to-date.

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.

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%.

The Company's total risk-based capital ratio was 15.03% as of June 30, 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.

The Company's operating ratios remain good, with a return on average tangible common equity of 13.99% for the six months ended June 30, 2020 compared to 15.03% for the same period in 2019.

Based upon March 31, 2020 data, our return on average tangible common equity was in the top 12% of all banks in the UBPR peer group, which had an average return on equity of 8.78%.

Our efficiency ratio continues to be an important component in our overall performance and stood at 52.13% for the six months ended June 30, 2020 compared to 50.63% for the same period in 2019.

The Company's efficiency ratio was elevated in the first quarter of 2020 due to charges taken to restructure several interest rate swap positions.

In the absence of these charges, the non-GAAP efficiency ratio for the first six months of 2020 would have been 47.35%.

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 .

Total interest income of $39.5 million for the six months ended June 30, 2020 was an increase of $390,000 or 1.0% compared to total interest income of $39.1 million for the same period of 2019.

Total interest expense of $10.1 million for the six months ended June 30, 2020 was a decrease of $3.2 million or 23.9% compared to total interest expense for the six months ended June 30, 2019.

As a result, net interest income of $29.4 million for the six months ended June 30, 2020 was an increase of $3.6 million or 13.8% compared to net interest income of $25.8 million for the same period ended June 30, 2019.

This increase is attributable to growth in earning assets, stable margins, and the recovery of interest on resolved problem loans during the first quarter of 2020.

The Company's net interest margin on a tax-equivalent basis for the six months ended June 30, 2020 was 2.99%, up from 2.90% for the first six months of 2019.

Tax-exempt interest income amounted to $4.3 million for the six months ended June 30, 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

For the six months ended

June 30, 2020 June 30, 2019

Dollars in thousands

Amount of interest

interest Average

Yield/Rate Amount of interest Average

Interest on earning assets

Interest-bearing deposits $ 79 0.68 % $ 97 2.49 %

Investments 10,378 3.17 % 10,500 3.45 %

Loans held for sale 24 3.13 % 4 3.79 %

Loans 30,153 4.42 % 29,640 4.77 %

Total interest income 40,634 3.97 % 40,241 4.33 %

Interest expense

Deposits 8,747 1.17 % 11,756 1.65 %

Other borrowings 1,324 1.08 % 1,485 1.58 %

3 unchanged sentences

Net interest margin 2.99 % 2.90 %

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 .

For the quarters ended

June 30, 2020 June 30, 2019

Dollars in thousands

interest Average

Yield/Rate Amount of

interest Average

Interest on earning assets

Interest-bearing deposits $ 5 0.08 % $ 29 2.30 %

Investments 5,125 3.09 % 5,390 3.44 %

Loans held for sale 19 2.78 % 2 3.41 %

Loans 14,219 4.02 % 14,990 4.79 %

Total interest-earning assets 19,368 3.68 % 20,411 4.34 %

Interest expense

Deposits 3,561 0.96 % 6,179 1.70 %

Other borrowings 734 0.98 % 693 1.55 %

Total interest expense 4,295 0.96 % 6,872 1.68 %

Net interest income $ 15,073 $ 13,539

Interest rate spread 2.72 % 2.66 %

Net interest margin 2.86 % 2.88 %

Interest income in the second quarter of 2020 included a net $356,000 in origination fees recognized on PPP loans;

as of June 30, 2020 net unrecognized PPP origination fees totaled $3.1 million.

No such fees were recognized in 2019 or in the first quarter of 2020.

The following tables present changes in interest income and expense attributable to changes in interest rates and volume for interest-earning assets and liabilities for the six months and quarters ended June 30, 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

For the six months ended June 30, 2020 compared to 2019

Dollars in thousands

Rate/Volume 1

Volume Rate Rate/Volume 1

Interest on earning assets

2 unchanged sentences

Loans held for sale 25 (1) (4) 20

Loans 2,819 (2,106) (200) 513

Change in interest income 3,792 (2,996) (403) 393

Interest expense

Deposits 578 (3,419) (168) (3,009)

Other borrowings 450 (469) (142) (161)

2 unchanged sentences

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

For the quarter ended June 30, 2020 compared to 2019

Dollars in thousands

Volume Rate Rate/Volume 1

Interest on earning assets

Interest-bearing deposits $ 115 $ (28) $ (111) $ (24)

Investment securities 326 (557) (34) (265)

Loans held for sale 21 — (4) 17

Loans 1,998 (2,443) (326) (771)

Change in interest income 2,460 (3,028) (475) (1,043)

Interest expense

Deposits 150 (2,702) (66) (2,618)

Other borrowings 470 (256) (173) 41

Change in interest expense 620 (2,958) (239) (2,577)

Change in net interest income $ 1,840 $ (70) $ (236) $ 1,534

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

The following table shows the Company's average daily balance sheets for the six months and quarters ended June 30, 2020 and 2019.

For the six months ended For the quarters ended

Dollars in thousands

2020 June 30,

2019 June 30,

2020 June 30,

Cash and cash equivalents $ 18,318 $ 15,516 $ 20,214 $ 15,634

4 unchanged sentences

Loans held for sale 1,540 213 2,745 235

Loans 1,372,445 1,253,234 1,421,277 1,254,105

Allowance for loan losses (11,989) (11,415) (12,231) (11,526)

Net loans 1,360,456 1,241,819 1,409,046 1,242,579

Accrued interest receivable 8,738 8,190 9,533 8,785

1 unchanged sentence

Other real estate owned 366 545 422 507

Goodwill 29,805 29,805 29,805 29,805

Other assets 50,648 45,275 53,399 45,579

Total Assets $ 2,172,837 $ 1,985,209 $ 2,238,425 $ 1,998,885

Liabilities & Shareholders' Equity

Demand deposits $ 180,170 $ 148,755 $ 199,037 $ 146,399

NOW deposits 402,438 366,217 422,726 363,169

Money market deposits 165,213 137,617 165,442 131,296

8 unchanged sentences

Shareholders' Equity:

Common stock 109 109 109 109

Additional paid-in capital 64,233 62,997 64,385 63,139

7 unchanged sentences

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 income of $8.8 million for the six months ended June 30, 2020 is an increase of $2.1 million compared to the same period in 2019.

Strong refinance volume led to mortgage banking revenue increasing $1.2 million or 190.0%.

Non-interest income of $4.6 million for the quarter ended June 30, 2020 is an increase of $996,000 compared to the same period in 2019, due to the reasons mentioned above.

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 on operating earnings were $1.2 million for the three months ended March 31, 2020 , up $87,000 from the same period in 2019 .

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 .

Non-interest expense of $20.0 million for the six months ended June 30, 2020 is an increase of 16.5% or $2.8 million compared to non-interest expense of $17.1 million for the same period in 2019.

The year-to-year change was impacted by charges taken during the first quarter of 2020 to restructure interest rate swap positions, as well as increases in employee expenses and furniture and equipment expense.

The Company's non-GAAP efficiency ratio stood at 52.13% for the six months ended June 30, 2020, up from 50.63% for the same period in 2019.

The ratio was elevated in the first quarter of 2020 due to charges taken to restructure several interest rate swap positions.

In the absence of these charges, the non-GAAP efficiency ratio for the first six months of 2020 would have been 47.35%.

Non-interest expense of $8.9 million for the quarter ended June 30, 2020 is an increase of 2.1% compared to non-interest expense of $8.7 million for the same period in 2019 due to the reasons mentioned above.

Income taxes on operating earnings were $2.5 million for the six months ended June 30, 2020, up $163,000 from the same period in 2019.

The Company's investment portfolio increased by $12.9 million between December 31, 2019 and June 30, 2020.

As of June 30, 2020, mortgage-backed securities had a carrying value of $326.5 million and a fair value of $327.5 million.

Of this total, securities with a fair value of $142.3 million or 43.4% of the mortgage-backed portfolio were issued by the Government National Mortgage Association and securities with a fair value of $185.3 million or 56.6% of the mortgage-backed portfolio were issued by the Federal Home Loan Mortgage Corporation ("Freddie Mac") and the Federal National Mortgage Association ("Fannie Mae").

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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.

The remaining unamortized balance of the net unrealized losses for the securities transferred from available for sale to held to maturity was $146,000 at June 30, 2020.

This compares to $182,000 and $190,000, net of taxes, at December 31, 2019 and June 30, 2019, respectively.

These securities were transferred as a part of the Company's overall investment and balance sheet strategies.

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 .

The following table sets forth the Company's investment securities at their carrying amounts as of June 30, 2020 and 2019 and December 31, 2019.

Dollars in thousands

2020 December 31,

2019 June 30,

Securities available for sale

2 unchanged sentences

State and political subdivisions 20,453 26,505 4,933

$ 311,500 $ 360,520 $ 322,570

Securities to be held to maturity

3 unchanged sentences

Corporate securities 14,750 14,750 13,750

$ 341,962 $ 281,606 $ 302,527

Restricted equity securities

1 unchanged sentence

Federal Reserve Bank Stock 1,037 1,037 1,037

$ 10,545 $ 8,982 $ 8,982

Total securities $ 664,007 $ 651,108 $ 634,079

The following table sets forth yields and contractual maturities of the Company's investment securities as of March 31, 2020 .

The following table sets forth yields and contractual maturities of the Company's investment securities as of June 30, 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

Available For Sale Held to Maturity

Dollars in thousands

Yield to maturity

Amortized Cost

Yield to maturity

Value Yield to maturity Amortized Cost Yield to maturity

Government-Sponsored Agencies

3 unchanged sentences

Due after 10 years 15,556 2.48 % 7,998 2.88 %

Total 15,556 2.48 % 31,144 2.79 %

Mortgage-Backed Securities

3 unchanged sentences

Due after 10 years 193,474 2.54 % 29,951 2.66 %

Total 275,491 2.57 % 50,983 2.69 %

State & Political Subdivisions

3 unchanged sentences

Due after 10 years 9,012 5.39 % 89,973 4.08 %

Total 20,453 5.10 % 245,085 4.45 %

Corporate Securities

3 unchanged sentences

Due after 10 years — 0.00 % — 0.00 %

Total — 0.00 % 14,750 5.05 %

$ 311,500 2.73 % $ 341,962 4.06 %

Held To Maturity Sales

During the second quarter of 2020, 28 municipal securities were sold that had been designated as Held to Maturity.

Proceeds from these sales totaled $8.6 million against a cumulative book value of $8.3 million resulting in a net realized gain of $268,000.

The potential economic impact of COVID-19 is considered to be an isolated and unusual event that could not be reasonably anticipated as outlined in ASC Section 320-10-25.

Management conducted a review of its municipal bond portfolio in conjunction with risk mitigation efforts related to the onset of the COVID-19 virus;

the intent of the review was to identify investment exposures with lower relative credit ratings, locales with perceived above average economic risk, municipal entities with reliance upon sales tax or income tax revenue, or any combination of these factors.

Each of the sold positions met one or more of the criteria.

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.

The securities portfolio contains certain securities where the amortized cost of which exceeds fair value, which at June 30, 2020 amounted to $347,000, or 0.06% 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.

2 unchanged sentences

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:

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.

1 unchanged sentence

The Company's assumptions include but are not limited to delinquencies, foreclosure levels and constant default rates on the underlying collateral, loss severity ratios, and constant prepayment rates.

If the Company does not expect to receive 100% of

future contractual principal and interest, an other-than-temporary impairment charge is recognized.

If the Company does not expect to receive 100% of 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 .

As of June 30, 2020, the Company had temporarily impaired securities with a fair value of $48.5 million and unrealized losses of $347,000, as identified in the table below.

Securities in a continuous unrealized loss position more than twelve months amounted to $4.8 million as of June 30, 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

The following table summarizes temporarily impaired securities and their approximate fair values at June 30, 2020:

Less than 12 months 12 months or more Total

Dollars in thousands

Value (Estimated)

Value (Estimated) Unrealized

Government-sponsored agencies $ 7,988 $ (12) $ — $ — $ 7,988 $ (12)

Mortgage-backed securities 28,116 (160) 4,771 (143) 32,887 (303)

State and political subdivisions 7,623 (32) — — 7,623 (32)

$ 43,727 $ (204) $ 4,771 $ (143) $ 48,498 $ (347)

For securities with unrealized losses, the following information was considered in determining that the securities were not other-than-temporarily impaired:

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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 .

As of June 30, 2020, there were $12,000 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.

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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 .

As of June 30, 2020, there were $303,000 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.

2 unchanged sentences

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 .

Management believes that the unrealized losses at June 30, 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 June 30, 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 .

As of June 30, 2020, there were $32,000 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 .

At June 30, 2020, all municipal bond issuers were current on contractually obligated interest and principal payments.

The Company attributes the unrealized losses at June 30, 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 June 30, 2020.

Corporate securities.

As of March 31, 2020 and December 31, 2019, there were no unrealized losses on these securities.

As of June 30, 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.

At June 30, 2020, all corporate bond issuers were current on contractually obligated interest and principal payments.

Federal Home Loan Bank Stock

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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-

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 .

As of June 30, 2020, the Bank's investment in FHLB stock totaled $9.5 million.

This compares to $7.9 million as of December 31, 2019 and June 30, 2019.

FHLB stock is a non-marketable equity security and therefore is reported at cost, subject to adjustments for any observable market transactions on the same or similar instruments of the investee.

No impairment losses have been recorded through June 30, 2020.

The Company will continue to monitor its investment in FHLB stock.

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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 .

As of June 30, 2020, the Bank had $5.0 million in loans held for sale.

This compares to $154,000 loans held for sale at December 31, 2019 and no loans held for sale at June 30, 2019.

The Bank participates in FHLB's Mortgage Partnership Finance Program ("MPF"), selling loans with recourse.

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therefore, there was minimum impact on the reserve.

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 .

The loan portfolio increased during the first six months of 2020, with total loans at $1.45 billion at June 30, 2020, up $154.5 million or 11.9% from total loans of $1.30 billion at December 31, 2019.

Commercial loans increased $142.6 million or 22.7% between December 31, 2019 and June 30, 2020, municipal loans increased $8.4 million or 20.2%, residential term loans increased $7.2 million and home equity lines of credit decreased $5.3 million.

Loans made under the U.S.

Small Business Adminstration's Payroll Protection Program (PPP) added $96.0 million to commercial loans in the second quarter of 2020.

Commercial loans are comprised of three major classes:

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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 .

Construction loans, both commercial and residential, at 31.1% of capital are well under the regulatory guidance of 100.0% of capital at June 30, 2020.

Construction loans and non-owner-occupied commercial real estate loans are at 125.8% of total capital, well under the regulatory guidance of 300.0% of capital at June 30, 2020.

The following table summarizes the loan portfolio, by class, at June 30, 2020 and 2019 and December 31, 2019.

Dollars in thousands

March 31, 2020

December 31, 2019

March 31, 2019

June 30, 2020 December 31, 2019 June 30, 2019

Real estate $ 397,155 27.4 % $ 372,810 28.7 % $ 359,581 28.8 %

Construction 47,169 3.2 % 38,084 3.0 % 32,785 2.6 %

Other 327,967 22.6 % 218,773 16.9 % 205,910 16.5 %

Municipal 49,644 3.4 % 41,288 3.2 % 36,113 2.9 %

Term 499,693 34.4 % 492,455 37.9 % 481,349 38.5 %

Construction 14,707 1.1 % 14,813 1.2 % 13,239 1.1 %

Home equity line of credit 87,019 6.0 % 92,349 7.1 % 94,763 7.6 %

The following table sets forth certain information regarding the contractual maturities of the Bank's loan portfolio as of March 31, 2020 .

Consumer 28,269 1.9 % 26,503 2.0 % 25,392 2.0 %

Total loans $ 1,451,623 100.0 % $ 1,297,075 100.0 % $ 1,249,132 100.0 %

The following table sets forth certain information regarding the contractual maturities of the Bank's loan portfolio as of June 30, 2020.

Dollars in thousands

< 1 Year 1 - 5 Years 5 - 10 Years > 10 Years Total

Real estate $ 151 $ 24,289 $ 37,894 $ 334,821 $ 397,155

Construction 202 7,814 2,670 36,483 47,169

Other 864 187,033 74,370 65,700 327,967

Municipal 3,250 24,970 10,621 10,803 49,644

Term — 9,105 39,427 451,161 499,693

Construction — 614 — 14,093 14,707

Home equity line of credit — 624 522 85,873 87,019

The following table provides a listing of loans by class, between variable and fixed rates as of March 31, 2020 .

Adjustable-Rate

Consumer 7,783 6,418 7,478 6,590 28,269

Total loans $ 12,250 $ 260,867 $ 172,982 $ 1,005,524 $ 1,451,623

The following table provides a listing of loans by class, between variable and fixed rates as of June 30, 2020.

Fixed-Rate Adjustable-Rate Total

Dollars in thousands

Amount % of total Amount % of total Amount % of total

Real estate $ 266,387 18.4 % $ 130,768 9.0 % $ 397,155 27.4 %

Construction 42,808 2.9 % 4,361 0.3 % 47,169 3.2 %

Other 273,163 18.8 % 54,804 3.8 % 327,967 22.6 %

Municipal 48,729 3.3 % 915 0.1 % 49,644 3.4 %

Term 416,256 28.7 % 83,437 5.7 % 499,693 34.4 %

Construction 14,707 1.0 % — 0.1 % 14,707 1.1 %

Home equity line of credit 1,657 0.1 % 85,362 5.9 % 87,019 6.0 %

Consumer 20,854 1.4 % 7,415 0.5 % 28,269 1.9 %

Total loans $ 1,084,561 74.7 % $ 367,062 25.4 % $ 1,451,623 100.0 %

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.

As of June 30, 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

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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

period in which they were determined to be necessary.

While Management uses available information to assess possible losses on loans, future additions to the allowance may be necessary based on increases in non-performing loans, changes in economic

conditions, growth in loan portfolios, or for other reasons.

Any future additions to the allowance would be recognized in the period in which they were determined to be necessary.

In addition, various regulatory agencies periodically review the Company's allowance for loan losses as an integral part of their examination process.

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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.

2020 , impaired loans with specific reserves totaled $4.7 million and the amount of such reserves was $1.0 million .

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 June 30, 2020, impaired loans with specific reserves totaled $4.7 million and the amount of such reserves was $917,000.

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.

Several impaired loans at December 31, 2019 were paid off or otherwise resolved in the six months ended June 30, 2020, accounting for the $9.3 million decrease in impaired loans and the $1.3 million reduction in specific reserves.

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.

Our total allowance at June 30, 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 following table summarizes our allocation of allowance by loan class as of June 30, 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

June 30, 2020 December 31, 2019 June 30, 2019

Real estate $ 4,511 27.4 % $ 3,742 28.7 % $ 3,609 28.8 %

Construction 524 3.2 % 365 3.0 % 309 2.6 %

Other 3,689 22.6 % 3,329 16.9 % 3,281 16.5 %

Municipal 110 3.4 % 27 3.2 % 25 2.9 %

Term 2,261 34.4 % 1,024 37.9 % 1,106 38.5 %

Construction 64 1.1 % 25 1.2 % 23 1.1 %

Home equity line of credit 1,284 6.0 % 1,078 7.1 % 633 7.6 %

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 .

Consumer 658 1.9 % 867 2.0 % 649 2.0 %

Unallocated 1,009 — % 1,182 — % 1,836 — %

Total $ 14,110 100.0 % $ 11,639 100.0 % $ 11,471 100.0 %

The allowance for loan losses totaled $14.1 million at June 30, 2020, compared to $11.6 million as of December 31, 2019 and $11.5 million as of June 30, 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 .

These specific reserves decreased $1.3 million in the first six months of 2020 from $2.2 million at December 31, 2019 to $917,000 at June 30, 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.

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:

The portion of the reserve based upon homogeneous pools of loans decreased by $169,000 in the first six months of 2020.

The portion of the reserve based on qualitative factors increased $4.1 million in the first six months of 2020 due to a mix of factors.

These included initial impacts of the COVID-19 pandemic on various macroeconomic measures used in the qualitative model, as well as top down and unit level analysis of the loan portfolio for factors such as COVID-19 related modifications and industry segments particularly vulnerable to social distancing.

Unallocated reserves of $1.2 million, or 10.2% of the total reserve at December 31, 2019, decreased to $1.0 million, or 7.2% as of June 30, 2020.

After consideration of the shifts in specific, pooled and qualitative reserves, Management determined that the unallocated portion of the reserve at June 30, 2020 adequately addresses general imprecision related to loan portfolio growth, along with other underlying credit risks not yet captured in loan specific or qualitative metrics the Company uses to estimate its allowance.

A breakdown of the allowance for loan losses as of June 30, 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

Total Reserves

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

Real estate $ 199 $ 631 $ 3,681 $ — $ 4,511

Construction 20 74 430 — 524

Other 132 521 3,036 — 3,689

Municipal — — 110 — 110

Term 269 285 1,707 — 2,261

Construction — 9 55 — 64

Home equity line of credit 292 99 893 — 1,284

Consumer 5 195 458 — 658

Unallocated — — — 1,009 1,009

$ 917 $ 1,814 $ 10,370 $ 1,009 $ 14,110

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 .

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 :

The provision for loan losses to maintain the allowance was $2.8 million for the first six months of 2020 and $625,000 the first six months of 2019.

Net chargeoffs were $279,000 in the first six months of 2020, down from $386,000 in the first six months of 2019.

Our allowance as a percentage of outstanding loans was 0.97% as of June 30, 2020, up from 0.90% as of December 31, 2019, and 0.92% as of June 30, 2019.

The following table summarizes the activities in our allowance for loan losses for the six months ended June 30, 2020 and 2019 and for the year ended December 31, 2019:

Dollars in thousands

March 31, 2020

December 31, 2019

March 31, 2019

June 30, 2020 December 31, 2019 June 30, 2019

Balance at the beginning of year $ 11,639 $ 11,232 $ 11,232

Loans charged off:

Real estate — 89 53

Construction — — —

Other 17 179 109

Municipal — — —

Term 46 445 93

Construction — — —

Home equity line of credit 153 69 38

Consumer 201 338 187

Total 417 1,120 480

Recoveries on loans previously charged off

Real estate — 15 13

Construction — — —

Other 20 73 2

Municipal — — —

Construction — — —

Home equity line of credit 19 4 2

Consumer 73 128 71

Total 138 277 94

Net loans charged off 279 843 386

2 unchanged sentences

Ratio of net loans charged off to average loans outstanding 1

0.04 % 0.07 % 0.06 %

Ratio of allowance for loan losses to total loans outstanding 0.97 % 0.90 % 0.92 %

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.

COVID-19 Impact on Loan Portfolio

The Company is actively working with borrowers impacted by the COVID-19 outbreak.

As of June 30, 2020, a total of 867 loan modification requests have been completed in conformance with the Interagency Statement on Loan Modifications and Reporting issued March 23, 2020 and/or Section 4013 of the Coronavirus Aid, Relief, and Economic Security (CARES) Act, representing $239.5 million in loan balances, or approximately 16.5% of the overall loan portfolio.

None of these modifications are classified as Troubled Debt Restructures, are not included in past due loan totals so long as modified terms are met, and continue to accrue interest.

First National Bank is a designated SBA preferred lender and had processed 1,618 Paycheck Protection Program loan requests totaling $96.0 million in funds disbursed to qualified small businesses as of June 30, 2020.

The ultimate impact of the consequences of COVID-19 upon borrowers and ultimately the Company's loan portfolio metrics remains difficult to estimate or ascertain.

The State of Maine, where most of the Bank's customers reside and/or operate has gradually re-opened its economy, however, quarantines for visitors from most states and limits on the size of public gatherings remain in place.

As of June 30, 2020 approximately 8.7% of the Company’s loan portfolio consisted of hospitality or restaurant industry borrowers, considered amongst the most impacted by COVID-19.

As of June 30, 2020, 83 COVID-19 related loan modifications have been completed within the hospitality and restaurant segments representing $64.8 million in loan balances, or 51.5% of total hospitality and restaurant industry loans.

The Company regularly monitors activity on open credit lines and to date credit line utilization has not increased as a result of COVID-19's impact on the economy.

Commercial credit line balances decreased in the second quarter of 2020 with an average utilization rate of 51.0%, down from an average utilization rate of 61.5% in the first quarter of 2020 and down from an average of 56.8% in the second quarter of 2019.

Home equity line of credit balances also decreased in the second quarter of 2020 resulting in an average utilization rate for the quarter of 51.1%, down slightly from 51.6% in the first quarter of 2020 and down from 52.2% in the second quarter of 2020.

Nonperforming Loans

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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.

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.

A loan is "in the process of collection" if collection of the loan is proceeding in due course either (1) through legal action, including judgment enforcement procedures, or, (2) in appropriate circumstances, through collection efforts not involving legal action which are reasonably expected to result in repayment of the debt or in its restoration to a current status in the near future.

Generally, when a loan becomes 90 days past due it is evaluated for collateral dependency based upon the most recent appraisal or other evaluation method.

If the collateral value is lower than the outstanding loan balance plus accrued interest and estimated selling costs, the loan is placed on non-accrual status, all accrued interest is reversed from interest income, and a specific reserve is established for the difference between the loan balance and the collateral value less selling costs, or, in certain situations, the difference between the loan balance and the collateral value less selling costs is written off.

1 unchanged sentence

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.

On an ongoing basis, appraisals or valuations may be done periodically on collateral dependent nonperforming loans and an additional specific reserve or write down will be made, if appropriate, based on the new collateral value.

Once a loan is placed on nonaccrual, it remains in nonaccrual status until the loan is current as to payment of both principal and interest and the borrower demonstrates the ability to pay and remain current.

All payments made on nonaccrual loans are applied to the principal balance of the loan.

Nonperforming loans, expressed as a percentage of total loans, totaled 0.75% 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 :

Nonperforming loans, expressed as a percentage of total loans, totaled 0.57% at June 30, 2020 compared to 1.28% at December 31, 2019 and 1.23% at June 30, 2019.

The following table shows the distribution of nonperforming loans by class as of June 30, 2020 and 2019 and December 31, 2019:

Dollars in thousands

2020 December 31,

2019 June 30,

Real estate $ 1,245 $ 1,784 $ 1,532

Construction 232 256 261

Other 323 6,534 7,014

Municipal — — —

Term 4,685 5,899 5,892

Construction — — —

Home equity line of credit 1,854 2,171 694

Consumer 5 5 —

Total nonperforming loans $ 8,344 $ 16,649 $ 15,393

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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.

As of June 30, 2020, loans 90 or more days past due and still accruing interest totaled $1.5 million, compared to $1.6 million at December 31, 2019 and $672,000 at June 30, 2019.

Troubled Debt Restructured

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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.

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

As of June 30, 2020, we had 78 loans with a balance of $14.0 million that have been restructured.

This compares to 81 loans with a balance of $21.4 million and 83 loans with a balance of $24.5 million classified as TDRs as of December 31, 2019 and June 30, 2019, respectively.

The following table shows the activity in loans classified as TDRs between December 31, 2019 and June 30, 2020:

Balance in Thousands of Dollars Number of Loans Aggregate Balance

Total at December 31, 2019 81 $ 21,424

Added in 2020 2 190

Principal reduction on loans added in 2020 (2)

Net added in 2020 188

Loans paid off in 2020 (5) (6,234)

Repayments in 2020 — (1,365)

Total at March 31, 2020

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.

Total at June 30, 2020 78 $ 14,013

As of June 30, 2020, 53 loans with an aggregate balance of $11.3 million were performing under the modified terms, two loans with an aggregate balance of $334,000 were more than 30 days past due and accruing and 23 loans with an aggregate balance of $2.3 million were on nonaccrual.

As a percentage of aggregate outstanding balance, 80.9% were performing under the modified terms, 2.4% were more than 30 days past due and accruing and 16.7% 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.

The performance status of all TDRs as of June 30, 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

30+ Days Past Due

As Modified 30+ Days Past Due

and Accruing On

Nonaccrual All

Real estate $ 4,504 $ — $ 81 $ 4,585

Construction 701 — — 701

Other 530 — 247 777

Municipal — — — —

Term 5,292 334 1,851 7,477

Construction — — — —

Home equity line of credit 307 — 166 473

Consumer — — — —

$ 11,334 $ 334 $ 2,345 $ 14,013

Percent of balance 80.9 % 2.4 % 16.7 % 100.0 %

1 unchanged sentence

Associated specific reserve $ 318 $ — $ 225 $ 543

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.

Residential TDRs (including home equity lines of credit) as of June 30, 2020 included 54 loans with an aggregate balance of $8.0 million, and the modifications granted fell into five major categories.

Loans totaling $5.3 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.

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Rate concessions were granted on loans totaling $1.6 million.

Loans with an aggregate balance of $1.0 million were involved in bankruptcy.

Loans with an aggregate balance of $868,000 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.

Commercial TDRs as of June 30, 2020 were comprised of 24 loans with a balance of $6.0 million.

Of this total, six loans with an aggregate balance of $1.3 million had an extended period of interest-only payments, deferring the start of principal repayment.

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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 .

As of June 30, 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 23 loans with an outstanding balance of $2.3 million that were classified as TDRs and on non-accrual status, of which two loans with an outstanding balance of $431,000 were in the process of foreclosure.

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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 :

Impaired loans totaled $20.0 million at June 30, 2020, and have decreased $9.3 million from December 31, 2019.

There were 143 impaired loans at June 30, 2020 down from 150 loans at December 31, 2019.

Impaired commercial loans decreased $6.8 million between December 31, 2019 and June 30, 2020.

The specific allowance for impaired commercial loans decreased from $1.5 million at December 31, 2019 to $351,000 as of June 30, 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 June 30, 2020, impaired residential loans decreased $2.1 million and impaired home equity lines of credit decreased $327,000.

The following table sets forth impaired loans as of June 30, 2020 and 2019 and December 31, 2019:

Dollars in thousands

2020 December 31,

2019 June 30,

Real estate $ 5,749 $ 6,309 $ 8,961

Construction 934 958 982

Other 853 7,075 7,582

Municipal — — —

Term 10,311 12,439 12,636

Construction — — —

Home equity line of credit 2,161 2,488 1,019

Consumer 5 5 —

Total $ 20,013 $ 29,274 $ 31,180

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 :

The Bank's overall loan delinquency ratio was 0.66% at June 30, 2020 compared to 1.16% at December 31, 2019 and 0.98% at June 30, 2019.

Loans 90 days delinquent and accruing decreased from $1.6 million at December 31, 2019 to $1.5 million as of June 30, 2020.

The following table sets forth loan delinquencies as of June 30, 2020 and 2019 and December 31, 2019:

Dollars in thousands

2020 December 31,

2019 June 30,

Real estate $ 1,258 $ 1,774 $ 1,068

Construction — 271 15

Other 1,924 5,028 2,295

Municipal — — —

Term 3,533 4,640 7,279

Construction — — —

Home equity line of credit 2,581 2,957 1,242

Consumer 261 347 375

Total $ 9,557 $ 15,017 $ 12,274

Loans 30-89 days past due to total loans 0.23 % 0.63 % 0.55 %

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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.

At June 30, 2020, there were two potential problem loans with a balance of $61,000 or 0.004% 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 .

As of June 30, 2020, there were 17 loans in the process of foreclosure with a total balance of $2.5 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.

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.

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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.

Other Real Estate Owned

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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 .

At June 30, 2020 there were five properties owned with an OREO balance of $851,000, compared to December 31, 2019 when there were two properties owned with an OREO balance of $279,000 and June 30, 2019 when there were three properties owned with an OREO balance of $289,000.

There were no allowance losses in any period.

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Dollars in thousands

2020 December 31,

2019 June 30,

Carrying Value

Real estate $ 221 $ — $ —

Construction — — —

Municipal — — —

Term 630 279 289

Construction — — —

Home equity line of credit — — —

Consumer — — —

Total $ 851 $ 279 $ 289

Related Allowance

Real estate $ — $ — $ —

Construction — — —

Municipal — — —

Construction — — —

Home equity line of credit — — —

Consumer — — —

Total $ — $ — $ —

Real estate $ 221 $ — $ —

Construction — — —

Municipal — — —

Term 630 279 289

Construction — — —

Home equity line of credit — — —

Consumer — — —

Total $ 851 $ 279 $ 289

Liquidity Management

As of March 31, 2020 , the Bank had primary sources of liquidity of $844.3 million .

As of June 30, 2020, the Bank had primary sources of liquidity of $889.7 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

bank lines of credit.

The Bank has an additional $344.8 million in contingent sources of liquidity, including the Federal Reserve Borrower in Custody program, municipal and corporate securities, and correspondent 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.

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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.

The Bank's primary source of liquidity is deposits, which funded 77.6% of total average assets in the first six 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.

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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.

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% .

In the second quarter of 2020 the Bank enrolled in the Paycheck Protection Program Liquidity Facility (PPPLF) offered by the Federal Reserve Bank of Boston.

PPPLF offers the ability to obtain advances dollar for dollar against the value of pledged PPP loans.

The facility will be available to draw upon until December 31, 2020;

no PPPLF advances have been taken to date.

During the first six months of 2020, total deposits increased by $89.7 million or 5.4% from December 31, 2019 levels.

Low-cost deposits (demand, NOW, and savings accounts) increased by $114.0 million or 14.3% in the first six months of 2020, money market deposits increased $9.0 million or 5.6%, and certificates of deposit decreased $33.3 million or 4.8%.

Between June 30, 2019 and June 30, 2020, total deposits increased by $147.2 million or 9.2%.

Low-cost deposits increased by $165.7 million or 22.2%, money market accounts increased $41.8 million or 32.6%, and certificates of deposit decreased $60.4 million or 8.4%.

The decrease in low-cost deposits year-to-date is consistent with our normal seasonal fluctuation.

The increase in low-cost deposits and further utilization of borrowed funds allowed for a decrease in higher cost Certificates of Deposit.

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.

The Company uses funding from the Federal Home Loan Bank of Boston (FHLB), the Federal Reserve Bank of Boston (FRB) 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.

During the six months ended June 30, 2020, borrowed funds increased $93.9 million or 50.7% from December 31, 2019.

Between June 30, 2019 and June 30, 2020, borrowed funds increased by $96.9 million or 53.3%.

Factors in the year-to-date and year-to-year increases include a $50 million short term advance from the FRB Discount Window in the first quarter of 2020, subsequently renewed, and an increase of $24 million in repurchase agreement balances in the second quarter of 2020.

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.

Shareholders' equity as of June 30, 2020 was $216.6 million, compared to $212.5 million as of December 31, 2019 and $204.6 million as of June 30, 2019.

The Company's earnings in the first six 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 $7.1 million as of June 30, 2020 compared to $3.7 million as of December 31, 2019.

The net unrealized loss on cash flow hedging derivative instruments now stands at $6.2 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 .

A cash dividend of $0.31 per share was declared in the second quarter of 2020.

The dividend payout ratio, which is calculated by dividing dividends declared per share by diluted earnings per share, was 50.83% for the first six months of 2020 compared to 50.86% 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.

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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

The net unrealized gain or loss on available-for-sale securities is generally not included in computing regulatory capital.

During the first quarter of 2015, the Company adopted the new Basel III regulatory capital framework as approved by the federal banking agencies.

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.

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.

1 unchanged sentence

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

Common Equity Tier 1

Total Risk-Based

The Company met each of the well-capitalized ratio guidelines at June 30, 2020.

The following tables indicate the capital ratios for the Bank and the Company at June 30, 2020 and December 31, 2019.

As of June 30, 2020 Leverage Tier 1 Common Equity Tier 1 Total Risk-Based

Bank 8.38 % 13.86 % 13.86 % 14.93 %

Company 8.42 % 13.96 % 13.96 % 15.03 %

Adequately capitalized ratio 4.00 % 6.00 % 4.50 % 8.00 %

1 unchanged sentence

Well capitalized ratio (Bank only) 5.00 % 8.00 % 6.50 % 10.00 %

As of December 31, 2019

Common Equity Tier 1

Total Risk-Based

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 %

1 unchanged sentence

Well capitalized ratio (Bank only) 5.00 % 8.00 % 6.50 % 10.00 %

The Bank maintains and annually updates a capital plan over a five year horizon;

the capital plan was updated in the second quarter of 2020.

Based upon reasonable assumptions of growth and operating performance, the base capital plan model projects that the Bank will be well capitalized throughout the five year period.

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

In each stress scenario, the Bank maintained well capitalized status.

To further validate its internal results, the Bank engaged a third party consultant during the second quarter of 2020 to conduct credit stress tests on its loan portfolio under six scenarios.

Three of the scenarios emulated the Federal Reserve's Dodd Frank Act Stress Tests (DFAST), two were pandemic scenarios developed in response to COVID-19 by a leading forecasting firm, and a final severe Coronavirus pandemic scenario developed by the consultant.

The consultant's report applied projected credit losses over a thirteen quarter horizon to the Bank's capital position with immediate effect.

In each of the six scenarios the Bank remained well capitalized.

Off-Balance Sheet Financial Instruments and Contractual Obligations

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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.

At June 30, 2020, the Bank had 11 outstanding off-balance sheet, derivative instruments designated as cash flow hedges.

These derivative instruments were interest rate swap agreements, with notional principal amounts totaling $260.0 million and an unrealized loss of $6.2 million, net of taxes.

2 unchanged sentences

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.

At June 30, 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 terms of the three 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.

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.

The Bank is exposed to credit loss only to the extent that either counter-party defaults in its responsibility to pay interest under the terms of the agreements.

Credit risk is mitigated by prudent underwriting of the loan customer and financial institution counterparties.

As of March 31, 2020 , the Bank had customer loan swap contracts in place with a total notional value of $32.6 million.

As of June 30, 2020, the Bank had customer loan swap contracts in place with a total notional value of $49.8 million.

Contractual Obligations

The following table sets forth the contractual obligations of the Company as of March 31, 2020 :

The following table sets forth the contractual obligations of the Company as of June 30, 2020:

Dollars in thousands

Less than 1 year

More than 5 years

Total Less than 1 year 1-3 years 3-5 years More than 5 years

Borrowed funds $ 278,805 $ 223,703 $ — $ 55,102 $ —

1 unchanged sentence

Certificates of deposit 656,633 457,379 161,688 37,566 —

Total $ 935,501 $ 681,098 $ 161,721 $ 92,682 $ —

Total loan commitments and unused lines of credit $ 219,397 $ 219,397 $ — $ — $ —

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis