What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2020-11-06 compared with 2020-08-07 · 227 added, 199 removed, 770 unchanged (36% 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 six months ended June 30, For the quarter ended June 30,

For the nine months ended September 30, For the quarter ended September 30,

Dollars in thousands

7 unchanged sentences

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

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

For the nine months ended September 30, For the quarter ended September 30,

Dollars in thousands

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

For the nine months ended September 30, For the quarter ended September 30,

Dollars in thousands

3 unchanged sentences

Average tangible shareholders' common equity $ 188,683 $ 171,692 $ 190,531 $ 178,062

To provide period-to-period comparison of operating results prior to consideration of credit loss provision and income taxes, the non-GAAP measure of Pre-Tax, Pre-Provision Net Income is presented.

The following table provides a reconciliation to Net Income:

For the nine months ended September 30, For the quarters ended September 30,

Dollars in thousands 2020 2019 2020 2019

Net Income, as presented $ 20,159 $ 18,839 $ 7,095 $ 6,288

provision for loan losses 4,550 875 1,800 250

income taxes 3,836 3,474 1,379 1,180

Pre-Tax, pre-provision net income $ 28,545 $ 23,188 $ 10,274 $ 7,718

Executive Summary

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.

Net income for the nine months ended September 30, 2020 was $20.2 million, up $1.3 million or 7.0% from the same period in 2019.

Earnings per common share on a fully diluted basis were $1.84 for the nine months ended September 30, 2020, up $0.11 or 6.4% from the $1.73 posted for the same period in 2019.

For the quarter ended September 30, 2020, net income was $7.1 million, up $807,000 or 12.8% from the same period in 2019.

Earnings per common share on a fully diluted basis were $0.65 for the quarter ended September 30, 2020, up $0.07 or 12.1% from the $0.58 posted in 2019.

Compared to the second quarter of 2020, net income was up $526,000 or 8.0% and earnings per common share on a fully diluted basis were $0.65, up $0.05 from the prior quarter.

The Company posted record operating results during the third quarter of 2020 despite the continued operational and business climate challenges brought about by the coronavirus disease (COVID-19).

Net income of $7.1 million was achieved via an increase in net interest income before loan loss provision, continued strong non-interest revenue and controlled operating expenses.

Asset quality remained stable as improvements noted over the first two quarters of 2020 were sustained.

Based upon the strength of the Company's earnings, a dividend of 31 cents per share was declared in the third quarter, representing a payout to our shareholders of 47.69 o f net income for the period.

Net interest income on a tax-equivalent basis was up $5.1 million or 12.5% in the nine months ended September 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%.

The tax equivalent net interest margin for the nine months ended September 30, 2020, was 2.93%, up from 2.90% for the same period in 2019.

For the quarter ended September 30, 2020, net interest income on a tax-equivalent basis increased $1.5 million or 11.1% compared to the same period in 2019, with the net interest margin down six basis points to 2.82%.

Non-interest income for the nine months ended September 30, 2020 was $13.6 million, up $3.3 million or 32.5%, from the nine months ended September 30, 2019.

Strong demand for both purchase and refinance loans led to mortgage banking revenue increasing $2.6 million or 209.9%.

Revenue at First National Wealth Management increased $253,000 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.

Non-interest expense for the nine months ended September 30, 2020 was $29.2 million, up $3.1 million or 11.7% from the nine months ended September 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.

Asset quality held steady in the third quarter.

Non-performing assets stood at 0.43% of total assets as of September 30, 2020, down from 0.84% of total assets as of September 30, 2019 and 0.82% as of December 31, 2019.

Total past-due loans

were 0.89% of total loans as of September 30, 2020, down from 1.16% of total loans as of December 31, 2019 and up from 0.78% as of September 30, 2019.

The provision for loan losses for the first nine months of 2020 was $4.6 million, up from the $875,000 provisioned in the same period in 2019.

Despite year-to-date improvement in non-performing asset levels, continued positive charge-off metrics, and stable levels of past due loans, the uncertainties resulting from COVID-19 led management to provision at elevated levels in the second and third quarters based upon the potential impact of current economic conditions to borrowers.

Net loan chargeoffs for the nine months ended September 30, 2020 were $817,000 or 0.08% of average loans on an annualized basis.

This was up from net chargeoffs of $342,000 or 0.04% of average loans on an annualized basis for the nine months ended September 30, 2019.

The allowance for loan losses increased $3.7 million between December 31, 2019 and September 30, 2020, and now stands at 1.07% of loans outstanding as of September 30, 2020, up from 0.90% and 0.93% of loans outstanding at December 31, 2019 and September 30, 2019, respectively.

The Company's balance sheet continued to expand in the first nine months of 2020 as total assets increased $227.8 million or 11.0% year-to-date.

The loan portfolio increased $139.6 million or 10.8% in the nine months ended September 30, 2020 and $173.2 million or 13.7% from a year ago.

Loan growth year to date has been centered in commercial real estate and construction loans, up $48.3 million, and other commercial loans, up $90.5 million.

Other commercial loans include Payroll Protection Program (PPP) loan balances of $97.3 million.

Overall loan balances were down $15.0 million in the third quarter, the result of payoffs of large individual credits in the other commercial loans segment of the portfolio.

The investment portfolio has increased $31.5 million year-to-date and increased $48.1 million or 7.6% from a year ago.

On the liability side of the balance sheet, low-cost deposits have increased $216.7 million or 27.1% 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 $203.4 million or 25.0%.

Local certificates of deposit ("CDs") decreased $29.3 million and wholesale CDs decreased $70.8 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 15.03% 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.

Remaining well capitalized is a top priority for The First Bancorp, Inc.

The Company's total risk-based capital ratio was 15.44% as of September 30, 2020, solidly 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 14.27% for the nine months ended September 30, 2020 compared to 14.67% for the same period in 2019.

Based upon June 30, 2020 data, our return on average tangible common equity was in the top 17% of all banks in the UBPR peer group, which had an average return on equity of 9.79%.

Our non-GAAP efficiency ratio continues to be an important component in our overall performance and stood at 50.00% for the nine months ended September 30, 2020 compared to 51.12% 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%.

In the absence of these charges, the non-GAAP efficiency ratio for the first nine months of 2020 would have been 46.87%.

Net Interest Income

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.

Total interest income of $58.0 million for the nine months ended September 30, 2020 was a decrease of $1.0 million or 1.7% compared to total interest income of $59.0 million for the same period of 2019.

Total interest expense of $13.8 million for the nine months ended September 30, 2020 was a decrease of $6.1 million or 30.6% compared to total interest expense for the nine months ended September 30, 2019.

As a result, net interest income of $44.2 million for the nine months ended September 30, 2020 was an increase of $5.1 million or 13.0% compared to net interest income of $39.1 million for the same period ended September 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.

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 six months ended June 30, 2020 and 2019.

The Company's net interest margin on a tax-equivalent basis for the nine months ended September 30, 2020 was 2.93%, up from 2.90% for the first nine months of 2019.

Tax-exempt interest income amounted to $6.5 million for the nine months ended September 30, 2020 and 2019.

Tax-exempt income is calculated on a tax-equivalent basis, using a 21.0% Federal Income Tax rate.

For the six months ended

June 30, 2020 June 30, 2019

For the nine months ended

September 30, 2020 September 30, 2019

Dollars in thousands

15 unchanged sentences

For the quarters ended

June 30, 2020 June 30, 2019

September 30, 2020 September 30, 2019

Dollars in thousands

15 unchanged sentences

Net interest margin 2.82 % 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.

Interest income includes $788,000 in net origination fees recognized year-to-date attributable to PPP loans;

as of September 30, 2020, net unrecognized PPP origination fees totaled $2.7 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.

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 nine months and quarters ended September 30, 2020 compared to 2019.

Tax-exempt income is calculated on a tax-equivalent basis, using a 21% Federal Income Tax rate.

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

For the nine months ended September 30, 2020 compared to 2019

Dollars in thousands

12 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

For the quarter ended September 30, 2020 compared to 2019

Dollars in thousands

12 unchanged sentences

Average Daily Balance Sheets

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

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

For the nine months ended For the quarters ended

Dollars in thousands

2020 June 30,

2019 June 30,

2020 June 30,

September 30,

2020 September 30,

2019 September 30,

2020 September 30,

Cash and cash equivalents $ 19,336 $ 16,462 $ 24,995 $ 18,325

36 unchanged sentences

Non-Interest Income

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 $13.6 million for the nine months ended September 30, 2020 is an increase of $3.3 million compared to the same period in 2019.

Strong purchase and refinance volume led to mortgage banking revenue increasing $2.6 million or 209.9%.

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 income of $4.8 million for the quarter ended September 30, 2020 is an increase of $1.3 compared to the same period in 2019, due primarily to mortgage banking revenue.

Non-Interest Expense

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.

Non-interest expense of $29.2 million for the nine months ended September 30, 2020 is an increase of 11.7% or $3.1 million compared to non-interest expense of $26.2 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 Company's non-GAAP efficiency ratio stood at 50.00% for the nine months ended September 30, 2020, down from 51.12% 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.

In the absence of these charges, the non-GAAP efficiency ratio for the first nine months of 2020 would have been 46.87%.

Non-interest expense of $9.3 million for the quarter ended September 30, 2020 is an increase of 2.6% compared to non-interest expense of $9.0 million for the same period in 2019 due to the reasons mentioned above along with the application of FDIC assessment credits in third quarter of 2019.

Income taxes on operating earnings were $3.8 million for the nine months ended September 30, 2020, up $362,000 from the same period in 2019.

The Company's investment portfolio increased by $31.5 million between December 31, 2019 and September 30, 2020.

As of September 30, 2020, mortgage-backed securities had a carrying value of $319.8 million and a fair value of $320.6 million.

Of this total, securities with a fair value of $122.3 million or 38.1% of the mortgage-backed portfolio were issued by the Government National Mortgage Association and securities with a fair value of $198.3 million or 61.9% of the mortgage-backed portfolio were issued by the Federal Home Loan Mortgage Corporation ("Freddie Mac") and the Federal National Mortgage Association ("Fannie Mae").

15 unchanged sentences

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 $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.

The remaining unamortized balance of the net unrealized losses for the securities transferred from available for sale to held to maturity was $139,000 at September 30, 2020.

This compares to $182,000 and $189,000, net of taxes, at December 31, 2019 and September 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 June 30, 2020 and 2019 and December 31, 2019.

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

Dollars in thousands

September 30,

2020 December 31,

2019 June 30,

2019 September 30,

Securities available for sale

14 unchanged sentences

Total securities $ 682,647 $ 651,108 $ 634,566

The following table sets forth yields and contractual maturities of the Company's investment securities as of June 30, 2020.

The following table sets forth yields and contractual maturities of the Company's investment securities as of September 30, 2020.

Yields on tax-exempt securities have been computed on a tax-equivalent basis using a tax rate of 21%.

36 unchanged sentences

Impaired Securities

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.

The securities portfolio contains certain securities where the amortized cost of which exceeds fair value, which at September 30, 2020 amounted to $1.4 million, or 0.21% 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.

9 unchanged sentences

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 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.

As of September 30, 2020, the Company had temporarily impaired securities with a fair value of $120.1 million and unrealized losses of $1.4 million, as identified in the table below.

Securities in a continuous unrealized loss position more than twelve months amounted to $4.2 million as of September 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 June 30, 2020:

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

Less than 12 months 12 months or more Total

Dollars in thousands

Value (Estimated) Unrealized

Fair Value (Estimated) Unrealized

Losses Fair Value (Estimated Unrealized

Government-sponsored agencies $ 16,817 $ (228) $ — $ — $ 16,817 $ (228)

5 unchanged sentences

Government-sponsored agencies and enterprises.

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.

As of September 30, 2020, there were $228,000 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 June 30, 2020.

Mortgage-backed securities issued by U.S.

1 unchanged sentence

Government-sponsored enterprises.

As of June 30, 2020, there were $303,000 of unrealized losses on these securities compared with $849,000 at December 31, 2019.

As of September 30, 2020, there were $768,000 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 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.

Management believes that the unrealized losses at September 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 September 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 June 30, 2020, there were $32,000 of unrealized losses on these securities compared to $109,000 at December 31, 2019.

As of September 30, 2020, there were $361,000 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 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.

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

The Company attributes the unrealized

losses at September 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 September 30, 2020.

Corporate securities.

As of June 30, 2020 and December 31, 2019, there were no unrealized losses on these securities.

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

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

Federal Home Loan Bank Stock

2 unchanged sentences

The Bank uses the FHLB for much of its wholesale funding needs.

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.

As of September 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 September 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.

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

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

1 unchanged sentence

Loans held for sale are carried at the lower of cost or market value.

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.

As of September 30, 2020, the Bank had $6.4 million in loans held for sale.

This compares to $154,000 loans held for sale at December 31, 2019 and $852,000 loans held for sale at September 30, 2019.

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

1 unchanged sentence

therefore, there was minimum impact on the reserve.

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.

The loan portfolio increased during the first nine months of 2020, with total loans at $1.44 billion at September 30, 2020, up $139.6 million or 10.8% from total loans of $1.30 billion at December 31, 2019.

Commercial loans increased $138.8 million or 22.0% between December 31, 2019 and September 30, 2020, municipal loans increased $2.8 million or 6.8%, residential term loans increased $5.2 million and home equity lines of credit decreased $9.4 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.

Small Business Administration's Payroll Protection Program (PPP) added $96.0 million to commercial loans in the second quarter of 2020, and $1.3 million in the third quarter.

Commercial loans are comprised of three major classes:

39 unchanged sentences

Consumer loans may be secured or unsecured.

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.

Construction loans, both commercial and residential, at 33.4% of capital are well under the regulatory guidance of 100.0% of capital at September 30, 2020.

Construction loans and non-owner-occupied commercial real estate loans are at 129.4% of total capital, well under the regulatory guidance of 300.0% of capital at September 30, 2020.

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

Dollars in thousands

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

September 30, 2020 December 31, 2019 September 30, 2019

Real estate $ 407,128 28.3 % $ 372,810 28.7 % $ 368,165 29.1 %

7 unchanged sentences

Total loans $ 1,436,646 100.0 % $ 1,297,075 100.0 % $ 1,263,459 100.0 %

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

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

Dollars in thousands

9 unchanged sentences

Total loans $ 9,970 $ 239,213 $ 183,073 $ 1,004,390 $ 1,436,646

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

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

Fixed-Rate Adjustable-Rate Total

11 unchanged sentences

Loan Concentrations

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.

As of September 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

21 unchanged sentences

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.

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.

21 unchanged sentences

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.

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.

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.

9 unchanged sentences

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

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 September 30, 2020, impaired loans with specific reserves totaled $5.2 million and the amount of such reserves was $890,000.

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 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.

Several impaired loans at December 31, 2019 were paid off or otherwise resolved in the nine months ended September 30, 2020, accounting for the $5.9 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 June 30, 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 September 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 June 30, 2020 and 2019 and December 31, 2019.

The following table summarizes our allocation of allowance by loan class as of September 30, 2020 and 2019 and December 31, 2019.

The percentages are the portion of each loan class to total loans.

Dollars in thousands

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

September 30, 2020 December 31, 2019 September 30, 2019

Real estate $ 4,761 28.3 % $ 3,742 28.7 % $ 3,795 29.1 %

8 unchanged sentences

Total $ 15,371 100.0 % $ 11,639 100.0 % $ 11,765 100.0 %

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.

The allowance for loan losses totaled $15.4 million at September 30, 2020, compared to $11.6 million as of December 31, 2019 and $11.8 million as of September 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 $1.3 million in the first six months of 2020 from $2.2 million at December 31, 2019 to $917,000 at June 30, 2020.

These specific reserves decreased $1.3 million in the first nine months of 2020 from $2.2 million at December 31, 2019 to $890,000 at September 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 $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.

The portion of the reserve based

upon homogeneous pools of loans decreased by $157,000 in the first nine months of 2020.

The portion of the reserve based on qualitative factors increased $4.8 million in the first nine 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:

Unallocated reserves of $1.2 million, or 10.2% of the total reserve at December 31, 2019, increased to $1.6 million, or 10.3% as of September 30, 2020.

After consideration of the shifts in specific, pooled and qualitative reserves, Management determined that the unallocated portion of the reserve at September 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 September 30, 2020, by loan class and allowance element, is presented in the following table:

Dollars in thousands

12 unchanged sentences

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 $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:

The provision for loan losses to maintain the allowance was $4.6 million for the first nine months of 2020 and $875,000 the first nine months of 2019.

Net charge-offs were $818,000 in the first nine months of 2020, up from $342,000 in the first nine months of 2019.

Our allowance as a percentage of outstanding loans was 1.07% as of September 30, 2020, up from 0.90% as of December 31, 2019, and 0.93% as of September 30, 2019.

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

Dollars in thousands

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

September 30, 2020 December 31, 2019 September 30, 2019

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

14 unchanged sentences

Municipal — — —

Term 31 57 10

Construction — — —

12 unchanged sentences

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.

As of September 30, 2020, a total of 966 loan modification requests for interest-only payments or deferred payments 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 $279.7 million in loan balances, or approximately 20.8% of the overall loan portfolio.

One of these modifications of a de minimis amount has been classified as a Troubled Debt

Restructure since being modified.

So long as modified terms are met, loans in an active modification are not included in past due loan totals and continue to accrue interest.

As of September 30, 2020, loans totaling $81.0 remained in their original modification or had had a subsequent modification, representing 6.0% of the overall portfolio.

Refer to Note 4 of the financial statements for further detail.

First National Bank is a designated SBA preferred lender and had processed 1,710 Paycheck Protection Program (PPP) loan requests totaling $97.3 million in funds disbursed to qualified small businesses as of September 30, 2020.

The Bank is now actively working with these PPP borrowers to process applications for forgiveness per PPP guidelines.

The 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 businesses has gradually re-opened its economy.

Impacts upon economic activity has been mixed with some sectors, such as residential real estate and outdoor recreation, performing strongly while others such as hospitality and indoor dining have been negatively impacted.

Quarantines for visitors from many states and limits on the size of public gatherings remain in place.

As of September 30, 2020, approximately 9% of the Company’s loan portfolio consisted of hospitality or restaurant industry borrowers, considered amongst the most impacted by COVID-19.

The Company regularly monitors activity on open credit lines and has not observed increased utilization related to COVID-19.

Commercial credit line balances decreased $19.4 million in the third quarter of 2020 following the payoff of a large participation credit.

The average utilization rate in the third quarter was 42.3%, down from an average utilization rate of 51.0% in the second quarter of 2020 and down from an average of 54.2% in the third quarter of 2019.

Home equity line of credit balances decreased $4.5 million in the third quarter of 2020 resulting in an average utilization rate for the quarter of 49.4%, down slightly from 51.1% in the second quarter of 2020 and down from 51.9% in the third quarter of 2020.

Nonperforming Loans

9 unchanged sentences

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 0.57% 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:

Nonperforming loans, expressed as a percentage of total loans, totaled 0.63% at September 30, 2020 compared to 1.28% at December 31, 2019 and 1.33% at September 30, 2019.

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

Dollars in thousands

September 30,

2020 December 31,

2019 June 30,

2019 September 30,

Real estate $ 1,771 $ 1,784 $ 1,807

9 unchanged sentences

These are loans for which we expect to collect all amounts due, including past-due interest.

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.

As of September 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 $18,000 at September 30, 2019.

Troubled Debt Restructured

5 unchanged sentences

common concession types include maturity date extension, interest rate adjustments to below market pricing, and deferment of payments.

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:

As of September 30, 2020, we had 78 loans with a balance of $13.4 million that have been restructured.

This compares to 81 loans with a balance of $21.4 million and 82 loans with a balance of $24.3 million classified as TDRs as of December 31, 2019 and September 30, 2019, respectively.

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

Balance in Thousands of Dollars Number of Loans Aggregate Balance

1 unchanged sentence

Added in 2020 3 197

Principal reduction on loans added in 2020 (2)

Net added in 2020 188

Loans paid off in 2020 (6) (7,000)

Repayments in 2020 — (1,231)

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.

Total at September 30, 2020 78 $ 13,390

As of September 30, 2020, 51 loans with an aggregate balance of $9.5 million were performing under the modified terms, five loans with an aggregate balance of $703,000 were more than 30 days past due and accruing and 22 loans with an aggregate balance of $3.2 million were on nonaccrual.

As a percentage of aggregate outstanding balance, 71.2% were performing under the modified terms, 5.3% were more than 30 days past due and accruing and 23.6% were on nonaccrual.

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.

The performance status of all TDRs as of September 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

14 unchanged sentences

Associated specific reserve $ 285 $ 2 $ 108 $ 395

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.

Residential TDRs (including home equity lines of credit) as of September 30, 2020 included 54 loans with an aggregate balance of $7.9 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.

4 unchanged sentences

Certain residential TDRs had more than one modification.

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

Consumer TDR's as of September 30, 2020 included one loan with a balance of $10,000 due to 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.

Commercial TDRs as of September 30, 2020 were comprised of 23 loans with a balance of $5.5 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.

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 $2.0 million had several different modifications.

Five loans with an aggregate balance of $1.2 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.

Six loans with an aggregate balance of $937,000 had a deferral of payment.

The remaining six loans with an aggregate balance of $2.0 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 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.

As of September 30, 2020, Management is aware of eight loans classified as TDRs that are involved in bankruptcy with an outstanding balance of $911,000.

There were also 22 loans with an outstanding balance of $3.2 million that were classified as TDRs and on non-accrual status, of which two loans with an outstanding balance of $430,000 were in the process of foreclosure.

3 unchanged sentences

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 $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:

Impaired loans totaled $19.3 million at September 30, 2020, and have decreased $9.9 million from December 31, 2019.

There were 145 impaired loans at September 30, 2020 down from 150 loans at December 31, 2019.

Impaired commercial loans decreased $7.6 million between December 31, 2019 and September 30, 2020.

The specific allowance for impaired commercial loans decreased from $1.5 million at December 31, 2019 to $282,000 as of September 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 September 30, 2020, impaired residential loans decreased $2.3 million and impaired home equity lines of credit decreased $124,000.

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

Dollars in thousands

September 30,

2020 December 31,

2019 June 30,

2019 September 30,

Real estate $ 4,753 $ 6,309 $ 9,049

8 unchanged sentences

Past Due Loans

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:

The Bank's overall loan delinquency ratio was 0.89% at September 30, 2020 compared to 1.16% at December 31, 2019 and 0.78% at September 30, 2019.

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

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

Dollars in thousands

September 30,

2020 December 31,

2019 June 30,

2019 September 30,

Real estate $ 2,909 $ 1,774 $ 1,199

15 unchanged sentences

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

At September 30, 2020, there were nine potential problem loans with a balance of $1.4 million or 0.09% 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 June 30, 2020, there were 17 loans in the process of foreclosure with a total balance of $2.5 million.

As of September 30, 2020, there were 19 loans in the process of foreclosure with a total balance of $2.6 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.

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.

18 unchanged sentences

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 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.

At September 30, 2020, there were five properties owned with an OREO balance of $777,000, net of an allowance for losses of $45,000, compared to December 31, 2019 and September 30, 2019 when there were two properties owned with an OREO balance of $279,000, with no allowance for loan losses.

The following table presents the composition of other real estate owned:

Dollars in thousands

September 30,

2020 December 31,

2019 June 30,

2019 September 30,

Carrying Value

24 unchanged sentences

Liquidity Management

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

As of September 30, 2020, the Bank had primary sources of liquidity of $938.7 million.

It is Management's opinion this is sufficient to meet liquidity needs under a broad range of scenarios.

3 unchanged sentences

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 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.

The Bank's primary source of liquidity is deposits, which funded 77.3% of total average assets in the first nine 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.

12 unchanged sentences

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%.

During the first nine months of 2020, total deposits increased by $112.6 million or 6.8% from December 31, 2019 levels.

Low-cost deposits (demand, NOW, and savings accounts) increased by $216.7 million or 27.1% in the first nine months of 2020, money market deposits decreased $4.1 million or 2.5%, and certificates of deposit decreased $100.0 million or 14.5%.

Between September 30, 2019 and September 30, 2020, total deposits increased by $139.8 million or 8.6%.

Low-cost deposits increased by $203.4 million or 25.0%, money market accounts increased $8.3 million or 5.6%, and certificates of deposit decreased $71.8 million or 10.9%.

3 unchanged sentences

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 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.

During the nine months ended September 30, 2020, borrowed funds increased $98.8 million or 53.4% from December 31, 2019.

Between September 30, 2019 and September 30, 2020, borrowed funds increased by $102.4 million or 56.4%.

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 $28.2 million in repurchase agreement balances over the second and third quarters of 2020.

Shareholders' Equity

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.

Shareholders' equity as of September 30, 2020 was $219.4 million, compared to $212.5 million as of December 31, 2019 and $208.5 million as of September 30, 2019.

The Company's earnings in the first nine 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 $5.5 million as of September 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 $5.8 million, compared to the $97,000 gain as of December 31, 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.

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

The dividend payout ratio, which is calculated by dividing dividends declared per share by diluted earnings per share, was 49.46% for the first nine months of 2020 compared to 51.15% 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.

10 unchanged sentences

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 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

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

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

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

Bank 8.38 % 14.17 % 14.17 % 15.33 %

24 unchanged sentences

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

At September 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 $5.8 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 June 30, 2020,

At September 30,

2020, the Bank's derivative instrument counterparties were credit rated “A” by the major credit rating agencies.

1 unchanged sentence

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 three contracts are designed to offset one another resulting in their being neither a net gain or a loss.

The terms of the 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.

1 unchanged sentence

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

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

As of September 30, 2020, the Bank had four loan swap agreements in place with a total notional value of $57.1 million.

Contractual Obligations

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

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

Dollars in thousands

5 unchanged sentences

Total loan commitments and unused lines of credit $ 243,639 $ 243,639 $ — $ — $ —

In addition to the above, on September 3, 2020 the Bank entered into a Branch Purchase & Assumption Agreement with Bangor Savings Bank (BSB) to acquire a branch location in Belfast, ME currently owned and operated by Damariscotta Bank & Trust (DB&T);

BSB has an agreement in place to purchase DB&T.

The acquisition will be the Bank's first branch location in Waldo County, and is expected to add $16.5 million in deposits and $23.5 million in loans to its balance sheet.

The final value of the transaction is estimated to be $24.8 million which includes the loans, an assignment of a ground lease, leasehold improvements, furniture and equipment, and the premium paid for the deposits.

The Bank has received regulatory approval for the purchase, and the transaction is expected to be closed in the fourth quarter.

A copy of the Agreement is included as Exhibit 10.4.

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