First Bancorp, Inc /ME/ 10-Q

Item 1 – Financial Statements Report of Independent Registered Public Accounting Firm The Board of Directors and Shareholders The First Bancorp, Inc. We have reviewed the accompanying interim consolidated financial information of The First Bancorp, Inc. and Subsidiary as of September 30, 2020 and 2019 and for the three-month and nine-month periods then ended. These financial statements are the responsibility of the Company's management. We conducted our reviews in accordance with standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit in accordance with standards of the Public Company Accounting Oversight Board (United States), the objective of which is to express an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our reviews, we are not aware of any material modifications that should be made to the accompanying interim consolidated financial statements for them to be in conformity with accounting principles generally accepted in the United States of America. /s/ Berry Dunn McNeil & Parker, LLC Portland, Maine November 6, 2020 2 Consolidated Balance Sheets (Unaudited) The First Bancorp, Inc. and Subsidiary September 30, 2020 December 31, 2019 September 30, 2019 Assets Cash and cash equivalents $ 22,742,000 $ 14,433,000 $ 21,418,000 Interest bearing deposits in other banks 48,111,000 11,310,000 16,714,000 Securities available for sale 340,140,000 360,520,000 326,798,000 Securities to be held to maturity (fair value of $ 342,062,000 at September 30, 2020, $ 287,045,000 at December 31, 2019 and $ 306,647,000 at September 30, 2019) 331,962,000 281,606,000 298,786,000 Restricted equity securities, at cost 10,545,000 8,982,000 8,982,000 Loans held for sale 6,387,000 154,000 852,000 Loans 1,436,646,000 1,297,075,000 1,263,459,000 Less allowance for loan losses 15,371,000 11,639,000 11,765,000 Net loans 1,421,275,000 1,285,436,000 1,251,694,000 Accrued interest receivable 10,249,000 7,167,000 7,636,000 Premises and equipment, net 27,110,000 21,305,000 21,232,000 Other real estate owned 777,000 279,000 279,000 Goodwill 29,805,000 29,805,000 29,805,000 Other assets 47,523,000 47,799,000 49,031,000 Total assets $ 2,296,626,000 $ 2,068,796,000 $ 2,033,227,000 Liabilities Demand deposits $ 248,444,000 $ 169,777,000 $ 171,623,000 NOW deposits 492,223,000 393,569,000 400,514,000 Money market deposits 156,948,000 161,000,000 148,689,000 Savings deposits 275,513,000 236,141,000 240,691,000 Certificates of deposit 589,931,000 689,979,000 661,773,000 Total deposits 1,763,059,000 1,650,466,000 1,623,290,000 Borrowed funds – short term 228,687,000 174,850,000 171,310,000 Borrowed funds – long term 55,100,000 10,105,000 10,107,000 Other liabilities 30,340,000 20,867,000 20,031,000 Total liabilities 2,077,186,000 1,856,288,000 1,824,738,000 Shareholders' equity Common stock, one cent par value per share 109,000 109,000 109,000 Additional paid-in capital 64,943,000 63,964,000 63,602,000 Retained earnings 154,783,000 144,839,000 141,509,000 Accumulated other comprehensive income (loss) Net unrealized gain on securities available for sale 5,520,000 3,657,000 3,686,000 Net unrealized loss on securities transferred from available for sale to held to maturity ( 139,000 ) ( 182,000 ) ( 189,000 ) Net unrealized gain (loss) on cash flow hedging derivative instruments ( 5,800,000 ) 97,000 ( 265,000 ) Net unrealized gain on postretirement costs 24,000 24,000 37,000 Total shareholders' equity 219,440,000 212,508,000 208,489,000 Total liabilities & shareholders' equity $ 2,296,626,000 $ 2,068,796,000 $ 2,033,227,000 Common Stock Number of shares authorized 18,000,000 18,000,000 18,000,000 Number of shares issued and outstanding 10,942,959 10,899,210 10,896,331 Book value per common share $ 20.05 $ 19.50 $ 19.13 Tangible book value per common share $ 17.32 $ 16.75 $ 16.39 See Report of Independent Registered Public Accounting Firm. The accompanying notes are an integral part of these consolidated financial statements. 3 Consolidated Statements of Income and Comprehensive Income (Unaudited) The First Bancorp, Inc. and Subsidiary For the nine months ended September 30, For the quarter ended September 30, 2020 2019 2020 2019 Interest income Interest and fees on loans (includes tax-exempt income of $ 899,000 YTD September 30, 2020 and $ 1,001,000 YTD September 30, 2019) $ 44,124,000 $ 44,450,000 $ 14,109,000 $ 14,993,000 Interest on deposits with other banks 87,000 145,000 8,000 48,000 Interest and dividends on investments (includes tax-exempt income of $ 5,649,000 YTD September 30, 2020 and $ 5,480,000 YTD September 30, 2019) 13,775,000 14,399,000 4,389,000 4,863,000 Total interest income 57,986,000 58,994,000 18,506,000 19,904,000 Interest expense Interest on deposits 11,613,000 17,739,000 2,866,000 5,983,000 Interest on borrowed funds 2,219,000 2,180,000 895,000 695,000 Total interest expense 13,832,000 19,919,000 3,761,000 6,678,000 Net interest income 44,154,000 39,075,000 14,745,000 13,226,000 Provision for loan losses 4,550,000 875,000 1,800,000 250,000 Net interest income after provision for loan losses 39,604,000 38,200,000 12,945,000 12,976,000 Non-interest income Investment management and fiduciary income 2,712,000 2,459,000 909,000 822,000 Service charges on deposit accounts 1,257,000 1,747,000 375,000 577,000 Net securities gains 1,179,000 15,000 — 15,000 Mortgage origination and servicing income, net of amortization 3,802,000 1,227,000 1,914,000 576,000 Other operating income 4,677,000 4,833,000 1,607,000 1,542,000 Total non-interest income 13,627,000 10,281,000 4,805,000 3,532,000 Non-interest expense Salaries and employee benefits 14,719,000 13,698,000 5,032,000 4,865,000 Occupancy expense 2,117,000 1,931,000 709,000 644,000 Furniture and equipment expense 3,438,000 2,969,000 1,184,000 969,000 FDIC insurance premiums 548,000 439,000 189,000 — Amortization of identified intangibles 32,000 32,000 10,000 10,000 Other operating expense 8,382,000 7,099,000 2,152,000 2,552,000 Total non-interest expense 29,236,000 26,168,000 9,276,000 9,040,000 Income before income taxes 23,995,000 22,313,000 8,474,000 7,468,000 Income tax expense 3,836,000 3,474,000 1,379,000 1,180,000 NET INCOME $ 20,159,000 $ 18,839,000 $ 7,095,000 $ 6,288,000 Basic earnings per common share $ 1.86 $ 1.74 $ 0.65 $ 0.58 Diluted earnings per common share $ 1.84 $ 1.73 $ 0.65 $ 0.58 Other comprehensive income (loss) net of tax Net unrealized gain (loss) on securities available for sale $ 1,863,000 $ 8,737,000 $ ( 1,580,000 ) $ 936,000 Net unrealized gain on securities transferred from available for sale to held to maturity, net of amortization 43,000 8,000 7,000 1,000 Net unrealized gain (loss) on cash flow hedging derivative instruments ( 5,897,000 ) ( 1,703,000 ) 387,000 ( 340,000 ) Other comprehensive gain (loss) ( 3,991,000 ) 7,042,000 ( 1,186,000 ) 597,000 Comprehensive income $ 16,168,000 $ 25,881,000 $ 5,909,000 $ 6,885,000 See Report of Independent Registered Public Accounting Firm. The accompanying notes are an integral part of these consolidated financial statements. 4 Consolidated Statements of Changes in Shareholders' Equity (Unaudited) The First Bancorp, Inc. and Subsidiary Common stock and additional paid-in capital Retained earnings Accumulated other comprehensive income (loss) Total shareholders' equity Shares Amount Balance at December 31, 2018 10,862,651 $ 62,855,000 $ 132,460,000 $ ( 3,773,000 ) $ 191,542,000 Net income — — 18,839,000 — 18,839,000 Net unrealized gain on securities available for sale, net of tax — — — 8,737,000 8,737,000 Net unrealized loss on cash flow hedging derivative instruments, net of tax — — — ( 1,703,000 ) ( 1,703,000 ) Net unrealized gain on securities transferred from available for sale to held to maturity, net of tax — — — 8,000 8,000 Comprehensive income — — 18,839,000 7,042,000 25,881,000 Cash dividends declared ($ 0.89 per share) — — ( 9,694,000 ) — ( 9,694,000 ) Equity compensation expense — 368,000 — — 368,000 Payment to repurchase common stock ( 4,179 ) — ( 96,000 ) ( 96,000 ) Issuance of restricted stock 19,087 — — — — Proceeds from sale of common stock 18,772 488,000 — — 488,000 Balance at September 30, 2019 10,896,331 $ 63,711,000 $ 141,509,000 $ 3,269,000 $ 208,489,000 Balance at December 31, 2019 10,899,210 $ 64,073,000 $ 144,839,000 $ 3,596,000 $ 212,508,000 Net income — — 20,159,000 — 20,159,000 Net unrealized gain on securities available for sale, net of tax — — — 1,863,000 1,863,000 Net unrealized loss on cash flow hedging derivative instruments, net of tax — — ( 5,897,000 ) ( 5,897,000 ) Net unrealized gain on securities transferred from available for sale to held to maturity, net of tax — — 43,000 43,000 Comprehensive income (loss) — — 20,159,000 ( 3,991,000 ) 16,168,000 Cash dividends declared ($ 0.92 per share) — — ( 10,058,000 ) — ( 10,058,000 ) Equity compensation expense — 482,000 — — 482,000 Payment to repurchase common stock ( 5,447 ) — ( 157,000 ) — ( 157,000 ) Issuance of restricted stock 27,345 — — — — Proceeds from sale of common stock 21,851 497,000 — — 497,000 Balance at September 30, 2020 10,942,959 $ 65,052,000 $ 154,783,000 $ ( 395,000 ) $ 219,440,000 See Report of Independent Registered Public Accounting Firm. The accompanying notes are an integral part of these consolidated financial statements. 5 Consolidated Statements of Cash Flows (Unaudited) The First Bancorp, Inc. and Subsidiary For the nine months ended September 30, 2020 September 30, 2019 Cash flows from operating activities Net income $ 20,159,000 $ 18,839,000 Adjustments to reconcile net income to net cash provided by operating activities Depreciation 1,670,000 1,398,000 Change in deferred taxes ( 24,000 ) 232,000 Provision for loan losses 4,550,000 875,000 Loans originated for resale ( 53,772,000 ) ( 14,177,000 ) Proceeds from sales and transfers of loans 49,941,000 13,732,000 Net gain on sales of loans ( 2,402,000 ) ( 407,000 ) Net gain on sale or call of securities ( 1,179,000 ) ( 15,000 ) Net amortization of premiums on investments 1,425,000 752,000 Net (gain) loss on sale of other real estate owned 5,000 ( 113,000 ) Provision for losses on other real estate owned 45,000 — Equity compensation expense 482,000 368,000 Net increase in other assets and accrued interest ( 9,757,000 ) ( 9,743,000 ) Net increase in other liabilities 9,579,000 2,036,000 Net (gain) loss on disposal of premises and equipment ( 3,000 ) 386,000 Amortization of investment in limited partnership 313,000 230,000 Net acquisition amortization 32,000 32,000 Net cash provided by operating activities 21,064,000 14,425,000 Cash flows from investing activities Increase in interest-bearing deposits in other banks ( 36,801,000 ) ( 4,635,000 ) Proceeds from sales of securities available for sale 70,869,000 3,835,000 Proceeds from maturities, payments and calls of securities available for sale 90,809,000 51,633,000 Proceeds from maturities, payments, calls and sales of securities to be held to maturity 62,916,000 17,963,000 Proceeds from sales of other real estate owned 279,000 418,000 Purchases of securities available for sale ( 139,353,000 ) ( 54,553,000 ) Purchases of securities to be held to maturity ( 113,052,000 ) ( 61,051,000 ) Redemption of restricted equity securities — 2,604,000 Purchase of restricted equity securities ( 1,563,000 ) — Net increase in loans ( 141,216,000 ) ( 25,518,000 ) Capital expenditures ( 7,475,000 ) ( 960,000 ) Proceeds from disposal of premises and equipment 3,000 — Net cash used by investing activities ( 214,584,000 ) ( 70,264,000 ) Cash flows from financing activities Net increase in demand, savings, and money market accounts 212,641,000 25,821,000 Net increase (decrease) in certificates of deposit ( 100,048,000 ) 70,384,000 Net increase in short-term borrowings 53,837,000 — Advances on long-term borrowings 55,000,000 — Repayment on long-term borrowings ( 10,005,000 ) ( 28,900,000 ) Payment to repurchase common stock ( 157,000 ) ( 96,000 ) Proceeds from sale of common stock 497,000 488,000 Dividends paid ( 9,936,000 ) ( 9,574,000 ) Net cash provided by financing activities 201,829,000 58,123,000 Net increase in cash and cash equivalents 8,309,000 2,284,000 Cash and cash equivalents at beginning of period 14,433,000 19,134,000 Cash and cash equivalents at end of period $ 22,742,000 $ 21,418,000 6 For the nine months ended September 30, 2020 September 30, 2019 Interest paid $ 14,066,000 $ 19,858,000 Income taxes paid 3,917,000 3,390,000 Non-cash transactions Net transfer from loans to other real estate owned $ 827,000 $ — See Report of Independent Registered Public Accounting Firm. The accompanying notes are an integral part of these consolidated financial statements. 7 Notes to Consolidated Financial Statements The First Bancorp, Inc. and Subsidiary Note 1 – Basis of Presentation The First Bancorp, Inc. ("the Company") is a financial holding company that owns all of the common stock of First National Bank ("the Bank"). The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP") for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of Management, all adjustments (consisting of normally recurring accruals) considered necessary for a fair presentation have been included. All significant intercompany transactions and balances are eliminated in consolidation. The income reported for the 2020 period is not necessarily indicative of the results that may be expected for the year ending December 31, 2020. For further information, refer to the consolidated financial statements and notes included in the Company's annual report on Form 10-K for the year ended December 31, 2019. Risks and Uncertainties The impact of the coronavirus disease (COVID-19) continues to cause disruption and uncertainty in the local, national, and world economies. To curtail spread of the virus, governments at all levels have encouraged social distancing and many have imposed restrictions on travel and group meetings, and/or mandated shut-downs of all but essential businesses. The pace of re-opening varies across the United States, and some locations have considered or proceeded with reimposed restrictions after experiencing increases in infection rates. Much of the unprecedented uncertainty surrounding the duration of the pandemic, its potential economic ramifications, and any government actions to mitigate them initially experienced in the first two quarters of 2020 has continued in the third quarter and early stages of the the fourth quarter. The Company’s business, financial condition and results of operations generally rely upon the ability of the Bank’s borrowers to repay their loans, the value of collateral underlying the Bank’s secured loans, and demand for loans and other products and services the Bank offers, which are highly dependent on the business environment in the Bank’s primary markets where it operates and in the United States as a whole. The Bank's primary market is the State of Maine, which relies upon tourism for a significant percentage of its economic activity. COVID-19 has adversely impacted the tourism industry to a greater degree than other industries, however, it remains the case that an assessment of the impact cannot be completed with a high degree of certainty at this time. In addition to loans, demand for other products and services could be impacted by COVID-19. Depositors and other funding sources may be unwilling to renew certificates of deposit or other types of funding, or may only be willing to do so on terms, including higher interest rates, that are materially less favorable than the Bank has experienced in the recent past. Certain fee based activities such as service charges, interchange revenues, and wealth management activity, could be impacted due to lower activity or market declines. Accordingly, while management expects this matter may have a negative impact on the Company's financial position and results of future operations, the materiality of such potential impact cannot be reasonably estimated as of the date of this report, November 6, 2020. Subsequent Events Events occurring subsequent to September 30, 2020, have been evaluated as to their potential impact to the financial statements. 8 Note 2 – Investment Securities The following table summarizes the amortized cost and estimated fair value of investment securities at September 30, 2020: Amortized Cost Unrealized Gains Unrealized Losses Fair Value (Estimated) Securities available for sale U.S. Government-sponsored agencies $ 27,545,000 $ 180,000 $ ( 228,000 ) $ 27,497,000 Mortgage-backed securities 270,336,000 6,737,000 ( 649,000 ) 276,424,000 State and political subdivisions 35,271,000 1,240,000 ( 292,000 ) 36,219,000 $ 333,152,000 $ 8,157,000 $ ( 1,169,000 ) $ 340,140,000 Securities to be held to maturity U.S. Government-sponsored agencies $ 26,146,000 $ 294,000 $ — $ 26,440,000 Mortgage-backed securities 43,414,000 844,000 ( 119,000 ) 44,139,000 State and political subdivisions 245,152,000 8,660,000 ( 69,000 ) 253,743,000 Corporate securities 17,250,000 490,000 — 17,740,000 $ 331,962,000 $ 10,288,000 $ ( 188,000 ) $ 342,062,000 Restricted equity securities Federal Home Loan Bank Stock $ 9,508,000 $ — $ — $ 9,508,000 Federal Reserve Bank Stock 1,037,000 — — 1,037,000 $ 10,545,000 $ — $ — $ 10,545,000 The following table summarizes the amortized cost and estimated fair value of investment securities at December 31, 2019: Amortized Cost Unrealized Gains Unrealized Losses Fair Value (Estimated) Securities available for sale U.S. Government-sponsored agencies $ 7,500,000 $ — $ ( 102,000 ) $ 7,398,000 Mortgage-backed securities 323,277,000 4,173,000 ( 833,000 ) 326,617,000 State and political subdivisions 25,113,000 1,392,000 — 26,505,000 $ 355,890,000 $ 5,565,000 $ ( 935,000 ) $ 360,520,000 Securities to be held to maturity U.S. Government-sponsored agencies $ 32,840,000 $ 47,000 $ ( 26,000 ) $ 32,861,000 Mortgage-backed securities 14,431,000 450,000 ( 16,000 ) 14,865,000 State and political subdivisions 219,585,000 4,936,000 ( 109,000 ) 224,412,000 Corporate securities 14,750,000 157,000 — 14,907,000 $ 281,606,000 $ 5,590,000 $ ( 151,000 ) $ 287,045,000 Restricted equity securities Federal Home Loan Bank Stock $ 7,945,000 $ — $ — $ 7,945,000 Federal Reserve Bank Stock 1,037,000 — — 1,037,000 $ 8,982,000 $ — $ — $ 8,982,000 9 The following table summarizes the amortized cost and estimated fair value of investment securities at September 30, 2019: Amortized Cost Unrealized Gains Unrealized Losses Fair Value (Estimated) Securities available for sale Mortgage-backed securities $ 317,553,000 $ 5,327,000 $ ( 690,000 ) $ 322,190,000 State and political subdivisions 4,580,000 28,000 — 4,608,000 $ 322,133,000 $ 5,355,000 $ ( 690,000 ) $ 326,798,000 Securities to be held to maturity U.S. Government-sponsored agencies $ 32,840,000 $ 93,000 $ — $ 32,933,000 Mortgage-backed securities 15,584,000 502,000 ( 16,000 ) 16,070,000 State and political subdivisions 236,612,000 7,136,000 ( 48,000 ) 243,700,000 Corporate securities 13,750,000 194,000 — 13,944,000 $ 298,786,000 $ 7,925,000 $ ( 64,000 ) $ 306,647,000 Restricted equity securities Federal Home Loan Bank Stock $ 7,945,000 $ — $ — $ 7,945,000 Federal Reserve Bank Stock 1,037,000 — — 1,037,000 $ 8,982,000 $ — $ — $ 8,982,000 The following table summarizes the contractual maturities of investment securities at September 30, 2020: Securities available for sale Securities to be held to maturity Amortized Cost Fair Value (Estimated) Amortized Cost Fair Value (Estimated) Due in 1 year or less $ 7,097,000 $ 7,159,000 $ 2,454,000 $ 2,462,000 Due in 1 to 5 years 23,789,000 24,260,000 32,595,000 33,683,000 Due in 5 to 10 years 58,430,000 60,086,000 176,400,000 182,370,000 Due after 10 years 243,836,000 248,635,000 120,513,000 123,547,000 $ 333,152,000 $ 340,140,000 $ 331,962,000 $ 342,062,000 The following table summarizes the contractual maturities of investment securities at December 31, 2019: Securities available for sale Securities to be held to maturity Amortized Cost Fair Value (Estimated) Amortized Cost Fair Value (Estimated) Due in 1 year or less $ 127,000 $ 127,000 $ 1,334,000 $ 1,338,000 Due in 1 to 5 years 36,534,000 36,778,000 25,860,000 26,323,000 Due in 5 to 10 years 93,134,000 95,014,000 179,133,000 182,834,000 Due after 10 years 226,095,000 228,601,000 75,279,000 76,550,000 $ 355,890,000 $ 360,520,000 $ 281,606,000 $ 287,045,000 10 The following table summarizes the contractual maturities of investment securities at September 30, 2019: Securities available for sale Securities to be held to maturity Amortized Cost Fair Value (Estimated) Amortized Cost Fair Value (Estimated) Due in 1 year or less $ 189,000 $ 189,000 $ 1,241,000 $ 1,245,000 Due in 1 to 5 years 36,304,000 36,703,000 23,460,000 23,920,000 Due in 5 to 10 years 91,242,000 93,419,000 184,234,000 188,811,000 Due after 10 years 194,398,000 196,487,000 89,851,000 92,671,000 $ 322,133,000 $ 326,798,000 $ 298,786,000 $ 306,647,000 At September 30, 2020, securities with a fair value of $ 285,253,000 were pledged to secure public deposits, repurchase agreements, and for other purposes as required by law. This compares to securities with a fair value of $ 214,173,000 as of December 31, 2019 and $ 216,903,000 at September 30, 2019, pledged for the same purposes. Gains and losses on the sale of securities are computed by subtracting the amortized cost at the time of sale from the security's selling price, net of accrued interest to be received. The following table shows securities gains and losses for the nine months and quarters ended September 30, 2020 and 2019: For the nine months ended September 30, For the quarter ended September 30, 2020 2019 2020 2019 Proceeds from sales of securities $ 79,469,000 $ 4,725,000 $ — $ 4,725,000 Gross realized gains 1,526,000 82,000 — 82,000 Gross realized losses ( 347,000 ) ( 67,000 ) — ( 67,000 ) Net gain $ 1,179,000 $ 15,000 $ — $ 15,000 Related income taxes $ 248,000 $ 3,000 $ — $ 3,000 Sales include 28 municipal securities sold in the second quarter of 2020 that had been designated as Held to Maturity. Proceeds from these sales totaled $ 8,600,000 against a cumulative book value of $ 8,313,000 resulting in a net realized gain of $ 268,000 . The economic potential impact of COVID-19 is considered to be an isolated and unusual event that could not be reasonably anticipated as outlined in Accounting Standards Codification (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. Management reviews securities with unrealized losses for other than temporary impairment. As of September 30, 2020, there were 75 securities with unrealized losses held in the Company's portfolio. These securities were temporarily impaired as a result of changes in interest rates reducing their fair value, of which 10 had been temporarily impaired for 12 months or more. The Company has the ability and intent to hold its impaired securities until a recovery of their amortized cost, which may be at maturity. Information regarding securities temporarily impaired as of September 30, 2020 is summarized below: Less than 12 months 12 months or more Total Fair Value (Estimated) Unrealized Losses Fair Value (Estimated) Unrealized Losses Fair Value (Estimated) Unrealized Losses U.S. Government-sponsored agencies $ 16,817,000 $ ( 228,000 ) $ — $ — $ 16,817,000 $ ( 228,000 ) Mortgage-backed securities 79,816,000 ( 654,000 ) 4,216,000 ( 114,000 ) 84,032,000 ( 768,000 ) State and political subdivisions 19,201,000 ( 361,000 ) — — 19,201,000 ( 361,000 ) $ 115,834,000 $ ( 1,243,000 ) $ 4,216,000 $ ( 114,000 ) $ 120,050,000 $ ( 1,357,000 ) 11 As of December 31, 2019, there were 86 securities with unrealized losses held in the Company's portfolio. These securities were temporarily impaired as a result of changes in interest rates reducing their fair value, of which 28 had been temporarily impaired for 12 months or more. Information regarding securities temporarily impaired as of December 31, 2019 is summarized below: Less than 12 months 12 months or more Total Fair Value (Estimated) Unrealized Losses Fair Value (Estimated) Unrealized Losses Fair Value (Estimated) Unrealized Losses U.S. Government-sponsored agencies $ 12,372,000 $ ( 128,000 ) $ — $ — $ 12,372,000 $ ( 128,000 ) Mortgage-backed securities 54,244,000 ( 359,000 ) 18,696,000 ( 490,000 ) 72,940,000 ( 849,000 ) State and political subdivisions 10,532,000 ( 101,000 ) 304,000 ( 8,000 ) 10,836,000 ( 109,000 ) $ 77,148,000 $ ( 588,000 ) $ 19,000,000 $ ( 498,000 ) $ 96,148,000 $ ( 1,086,000 ) As of September 30, 2019, there were 60 securities with unrealized losses held in the Company's portfolio. These securities were temporarily impaired as a result of changes in interest rates reducing their fair value, of which 29 had been temporarily impaired for 12 months or more. In the first quarter of 2019, one issuer of securities held in the portfolio was downgraded by a rating agency to less than investment grade. These securities totaled approximately 0.13 % of overall state and municipal security holdings and were subsequently sold during the third quarter 2019. Information regarding securities temporarily impaired as of September 30, 2019 is summarized below: Less than 12 months 12 months or more Total Fair Value (Estimated) Unrealized Losses Fair Value (Estimated) Unrealized Losses Fair Value (Estimated) Unrealized Losses Mortgage-backed securities $ 30,249,000 $ ( 233,000 ) $ 22,569,000 $ ( 473,000 ) $ 52,818,000 $ ( 706,000 ) State and political subdivisions 5,073,000 ( 42,000 ) 306,000 ( 6,000 ) 5,379,000 ( 48,000 ) $ 35,322,000 $ ( 275,000 ) $ 22,875,000 $ ( 479,000 ) $ 58,197,000 $ ( 754,000 ) During the third quarter of 2014, the Company transferred securities with a total amortized cost of $ 89,780,000 with a corresponding fair value of $ 89,757,000 from available for sale to held to maturity. The net unrealized loss, net of taxes, on these securities at the date of the transfer was $ 15,000 . The net unrealized holding loss at the time of transfer continues to be reported in accumulated other comprehensive income (loss), net of tax and is amortized over the remaining lives of the securities as an adjustment of the yield. The amortization of the net unrealized loss reported in accumulated other comprehensive income (loss) will offset the effect on interest income of the discount for the transferred securities. The remaining unamortized balance of the net unrealized losses for the securities transferred from available for sale to held to maturity was $ 139,000 , net of tax, 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 Bank is a member of the Federal Home Loan Bank ("FHLB") of Boston, a cooperatively owned wholesale bank for housing and finance in the six New England States. As a requirement of membership in the FHLB, the Bank must own a minimum required amount of FHLB stock, calculated periodically based primarily on its level of borrowings from the FHLB. The Bank uses the FHLB for a portion of its wholesale funding needs. As of September 30, 2020 and 2019, and December 31, 2019, the Bank's investment in FHLB stock totaled $ 9,508,000 , $ 7,945,000 and $ 7,945,000 , respectively. FHLB stock is a non-marketable equity security and therefore is reported at cost, which equals par value. The Company periodically evaluates its investment in FHLB stock for impairment based on, among other factors, the capital adequacy of the FHLB and its overall financial condition. No impairment losses have been recorded through September 30, 2020. The Company will continue to monitor its investment in FHLB stock. 12 Note 3 – Loans The following table shows the composition of the Company's loan portfolio as of September 30, 2020 and 2019 and at December 31, 2019: September 30, 2020 December 31, 2019 September 30, 2019 Commercial Real estate $ 407,128,000 28.3 % $ 372,810,000 28.7 % $ 368,165,000 29.1 % Construction 52,038,000 3.6 % 38,084,000 3.0 % 37,242,000 2.9 % Other 309,297,000 21.5 % 218,773,000 16.9 % 201,859,000 16.0 % Municipal 44,110,000 3.1 % 41,288,000 3.2 % 36,522,000 2.9 % Residential Term 497,667,000 34.6 % 492,455,000 37.9 % 485,490,000 38.4 % Construction 16,101,000 1.2 % 14,813,000 1.2 % 14,118,000 1.1 % Home equity line of credit 82,982,000 5.8 % 92,349,000 7.1 % 94,144,000 7.5 % Consumer 27,323,000 1.9 % 26,503,000 2.0 % 25,919,000 2.1 % Total $ 1,436,646,000 100.0 % $ 1,297,075,000 100.0 % $ 1,263,459,000 100.0 % Loan balances include net deferred loan costs of $ 5,323,000 as of September 30, 2020, $ 7,419,000 as of December 31, 2019, and $ 7,181,000 as of September 30, 2019. The decrease in net deferred loan costs year-over-year and year-to-date is attributable to PPP loans originated during the second and third quarters of 2020. These loans generated gross origination fee income of $ 3,797,000 and deferred loan costs of $ 299,000 ; year-to-date a net of $ 788,000 in PPP fees was recognized in interest income. Pursuant to collateral agreements, qualifying first mortgage loans and commercial real estate loans, which totaled $ 379,387,000 at September 30, 2020, were used to collateralize borrowings from the FHLB. This compares to qualifying loans which totaled $ 296,871,000 at December 31, 2019, and $ 308,163,000 at September 30, 2019. In addition, commercial, construction and home equity loans totaling $ 271,905,000 at September 30, 2020, $ 240,133,000 at December 31, 2019, and $ 254,076,000 at September 30, 2019, were used to collateralize a standby line of credit at the Federal Reserve Bank of Boston. For all loan classes, loans over 30 days past due are considered delinquent. Information on the past-due status of loans by class of financing receivable as of September 30, 2020, is presented in the following table: 30-59 Days Past Due 60-89 Days Past Due 90+ Days Past Due All Past Due Current Total 90+ Days & Accruing Commercial Real estate $ 2,397,000 $ 58,000 $ 454,000 $ 2,909,000 $ 404,219,000 $ 407,128,000 $ — Construction — — 80,000 80,000 51,958,000 52,038,000 — Other 547,000 258,000 1,871,000 2,676,000 306,621,000 309,297,000 1,464,000 Municipal — — — — 44,110,000 44,110,000 — Residential Term 2,550,000 357,000 1,602,000 4,509,000 493,158,000 497,667,000 — Construction — — — — 16,101,000 16,101,000 — Home equity line of credit 868,000 65,000 1,392,000 2,325,000 80,657,000 82,982,000 — Consumer 219,000 28,000 30,000 277,000 27,046,000 27,323,000 30,000 Total $ 6,581,000 $ 766,000 $ 5,429,000 $ 12,776,000 $ 1,423,870,000 $ 1,436,646,000 $ 1,494,000 On March 22, 2020, banking regulators issued an Interagency Statement on Loan Modifications and Reporting in response to the onset of COVID-19; shortly thereafter, on March 30, 2020, the Coronavirus Aid, Relief, and Economic Security (CARES) Act was passed. Both the Interagency Statement and the CARES Act provided an exemption for qualified modifications from Troubled Debt Restructure (TDR) designation. The Company actively worked with borrowers impacted by the COVID-19 outbreak and as of September 30, 2020, a total of 996 loan modification requests for interest-only payments or deferred payments had been completed in conformance with the Interagency Statement or CARES Act, representing $ 279,700,000 in loan balances, or approximately 20.8 % of the loan portfolio excluding PPP balances. One of these modifications of 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. 13 As of September 30, 2020, loans totaling $ 81.0 million, or 6.0 % of all loans, remained in either their original modification or a subsequent modification. Modification statuses by portfolio segment are summarized below: Commercial/Municipal Loan Modifications Units Percentage Balance Percentage Paid Off 34 6.0 % $ 6,031,000 3.0 % Subsequent Modification 41 7.0 % 20,443,000 9.0 % Still in Original Modification 55 9.0 % 30,188,000 13.0 % Out of Modification 452 78.0 % 171,407,000 75.0 % Total 582 100.0 % $ 228,069,000 100.0 % Residential Real Estate Modifications Units Percentage Balance Percentage Paid Off 17 5.0 % $ 3,102,000 6.0 % Subsequent Modification 97 28.0 % 13,857,000 27.0 % Still in Original Modification 125 35.0 % 15,565,000 31.0 % Out of Modification 111 32.0 % 17,949,000 36.0 % Total 350 100.0 % $ 50,473,000 100.0 % Consumer Loan Modifications Units Percentage Balance Percentage Paid Off 8 13.0 % $ 95,000 9.0 % Subsequent Modification — — % — — % Still in Original Modification 52 81.0 % 967,000 86.0 % Out of Modification 4 6.0 % 58,000 5.0 % Total 64 100.0 % $ 1,120,000 100.0 % Information on the past-due status of loans by class of financing receivable as of December 31, 2019, is presented in the following table: 30-59 Days Past Due 60-89 Days Past Due 90+ Days Past Due All Past Due Current Total 90+ Days & Accruing Commercial Real estate $ 786,000 $ 377,000 $ 611,000 $ 1,774,000 $ 371,036,000 $ 372,810,000 $ — Construction — 14,000 257,000 271,000 37,813,000 38,084,000 — Other 2,764,000 465,000 1,799,000 5,028,000 213,745,000 218,773,000 1,464,000 Municipal — — — — 41,288,000 41,288,000 — Residential Term 1,129,000 1,132,000 2,379,000 4,640,000 487,815,000 492,455,000 86,000 Construction — — — — 14,813,000 14,813,000 — Home equity line of credit 1,169,000 58,000 1,730,000 2,957,000 89,392,000 92,349,000 — Consumer 291,000 46,000 10,000 347,000 26,156,000 26,503,000 10,000 Total $ 6,139,000 $ 2,092,000 $ 6,786,000 $ 15,017,000 $ 1,282,058,000 $ 1,297,075,000 $ 1,560,000 14 Information on the past-due status of loans by class of financing receivable as of September 30, 2019, is presented in the following table: 30-59 Days Past Due 60-89 Days Past Due 90+ Days Past Due All Past Due Current Total 90+ Days & Accruing Commercial Real estate $ 305,000 $ 233,000 $ 661,000 $ 1,199,000 $ 366,966,000 $ 368,165,000 $ — Construction 14,000 279,000 — 293,000 36,949,000 37,242,000 — Other 35,000 289,000 339,000 663,000 201,196,000 201,859,000 — Municipal — — — — 36,522,000 36,522,000 — Residential Term 650,000 767,000 3,806,000 5,223,000 480,267,000 485,490,000 — Construction — — — — 14,118,000 14,118,000 — Home equity line of credit 693,000 306,000 868,000 1,867,000 92,277,000 94,144,000 — Consumer 234,000 317,000 18,000 569,000 25,350,000 25,919,000 18,000 Total $ 1,931,000 $ 2,191,000 $ 5,692,000 $ 9,814,000 $ 1,253,645,000 $ 1,263,459,000 $ 18,000 For all classes, loans are placed on non-accrual status when, based on current information and events, it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement or when principal and interest is 90 days or more past due unless the loan is both well secured and in the process of collection (in which case the loan may continue to accrue interest in spite of its past due status). A loan is "well secured" if it is secured (1) by collateral in the form of liens on or pledges of real or personal property, including securities, that have a realizable value sufficient to discharge the debt (including accrued interest) in full, or (2) by the guarantee of a financially responsible party. A loan is "in the process of collection" if collection of the loan is proceeding in due course either (1) through legal action, including judgment enforcement procedures, or, (2) in appropriate circumstances, through collection efforts not involving legal action which are reasonably expected to result in repayment of the debt or in its restoration to a current status in the near future. Cash payments received on non-accrual loans, which are included in impaired loans, are applied to reduce the loan's principal balance until the remaining principal balance is deemed collectible, after which interest is recognized when collected. As a general rule, a loan may be restored to accrual status when payments are current for a substantial period of time, generally six months, and repayment of the remaining contractual amounts is expected, or when it otherwise becomes well secured and in the process of collection. Information on nonaccrual loans as of September 30, 2020 and 2019 and at December 31, 2019 is presented in the following table: September 30, 2020 December 31, 2019 September 30, 2019 Commercial Real estate $ 1,771,000 $ 1,784,000 $ 1,807,000 Construction 307,000 256,000 256,000 Other 503,000 6,534,000 6,871,000 Municipal — — — Residential Term 4,467,000 5,899,000 6,840,000 Construction — — — Home equity line of credit 2,063,000 2,171,000 1,078,000 Consumer — 5,000 6,000 Total $ 9,111,000 $ 16,649,000 $ 16,858,000 Impaired loans include TDR loans and loans placed on non-accrual. These loans are measured at the present value of expected future cash flows discounted at the loan's effective interest rate or at the fair value of the collateral if the loan is collateral dependent. If the measure of an impaired loan is lower than the recorded investment in the loan and estimated selling costs, a specific reserve is established for the difference, or, in certain situations, if the measure of an impaired loan is lower than the recorded investment in the loan and estimated selling costs, the difference is written off. 15 A breakdown of impaired loans by class of financing receivable as of and for the periods ended September 30, 2020 is presented in the following table: For the nine months ended September 30, 2020 For the quarter ended September 30, 2020 Recorded Investment Unpaid Principal Balance Related Allowance Average Recorded Investment Recognized Interest Income Average Recorded Investment Recognized Interest Income With No Related Allowance Commercial Real estate $ 3,730,000 $ 4,528,000 $ — $ 4,673,000 $ 117,000 $ 4,068,000 $ 33,000 Construction 308,000 337,000 — 402,000 — 256,000 — Other 862,000 887,000 — 796,000 19,000 814,000 6,000 Municipal — — — — — — — Residential Term 7,783,000 9,058,000 — 9,173,000 123,000 8,024,000 31,000 Construction — — — — — — — Home equity line of credit 1,478,000 1,551,000 — 1,284,000 10,000 1,438,000 2,000 Consumer — — — — — — — $ 14,161,000 $ 16,361,000 $ — $ 16,328,000 $ 269,000 $ 14,600,000 $ 72,000 With an Allowance Recorded Commercial Real estate $ 1,023,000 $ 1,047,000 $ 135,000 $ 1,032,000 $ 32,000 $ 1,027,000 $ 11,000 Construction 701,000 701,000 19,000 546,000 25,000 701,000 8,000 Other 161,000 183,000 128,000 1,523,000 — 143,000 — Municipal — — — — — — — Residential Term 2,399,000 2,466,000 204,000 2,002,000 63,000 2,207,000 27,000 Construction — — — — — — — Home equity line of credit 886,000 886,000 403,000 981,000 1,000 870,000 1,000 Consumer 10,000 10,000 1,000 10,000 — 3,000 — $ 5,180,000 $ 5,293,000 $ 890,000 $ 6,094,000 $ 121,000 $ 4,951,000 $ 47,000 Total Commercial Real estate $ 4,753,000 $ 5,575,000 $ 135,000 $ 5,705,000 $ 149,000 $ 5,095,000 $ 44,000 Construction 1,009,000 1,038,000 19,000 948,000 25,000 957,000 8,000 Other 1,023,000 1,070,000 128,000 2,319,000 19,000 957,000 6,000 Municipal — — — — — — — Residential Term 10,182,000 11,524,000 204,000 11,175,000 186,000 10,231,000 58,000 Construction — — — — — — — Home equity line of credit 2,364,000 2,437,000 403,000 2,265,000 11,000 2,308,000 3,000 Consumer 10,000 10,000 1,000 10,000 — 3,000 — $ 19,341,000 $ 21,654,000 $ 890,000 $ 22,422,000 $ 390,000 $ 19,551,000 $ 119,000 Substantially all interest income recognized on impaired loans for all classes of financing receivables was recognized on a cash basis as received. 16 A breakdown of impaired loans by class of financing receivable as of and for the year ended December 31, 2019 is presented in the following table: Recorded Investment Unpaid Principal Balance Related Allowance Average Recorded Investment Recognized Interest Income With No Related Allowance Commercial Real estate $ 5,235,000 $ 5,492,000 $ — $ 7,611,000 $ 228,000 Construction 958,000 970,000 — 936,000 47,000 Other 756,000 786,000 — 965,000 29,000 Municipal — — — — — Residential Term 10,176,000 11,931,000 — 10,033,000 269,000 Construction — — — — — Home equity line of credit 1,087,000 1,151,000 — 997,000 20,000 Consumer — — — — — $ 18,212,000 $ 20,330,000 $ — $ 20,542,000 $ 593,000 With an Allowance Recorded Commercial Real estate $ 1,074,000 $ 1,093,000 $ 251,000 $ 1,528,000 $ 60,000 Construction — — — — — Other 6,319,000 6,925,000 1,273,000 6,778,000 — Municipal — — — — — Residential Term 2,263,000 2,412,000 237,000 2,424,000 82,000 Construction — — — — — Home equity line of credit 1,401,000 1,412,000 447,000 283,000 — Consumer 5,000 6,000 5,000 2,000 — $ 11,062,000 $ 11,848,000 $ 2,213,000 $ 11,015,000 $ 142,000 Total Commercial Real estate $ 6,309,000 $ 6,585,000 $ 251,000 $ 9,139,000 $ 288,000 Construction 958,000 970,000 — 936,000 47,000 Other 7,075,000 7,711,000 1,273,000 7,743,000 29,000 Municipal — — — — — Residential Term 12,439,000 14,343,000 237,000 12,457,000 351,000 Construction — — — — — Home equity line of credit 2,488,000 2,563,000 447,000 1,280,000 20,000 Consumer 5,000 6,000 5,000 2,000 — $ 29,274,000 $ 32,178,000 $ 2,213,000 $ 31,557,000 $ 735,000 17 A breakdown of impaired loans by class of financing receivable as of and for the periods ended September 30, 2019 is presented in the following table: For the nine months ended September 30, 2019 For the quarter ended September 30, 2019 Recorded Investment Unpaid Principal Balance Related Allowance Average Recorded Investment Recognized Interest Income Average Recorded Investment Recognized Interest Income With No Related Allowance Commercial Real estate $ 7,332,000 $ 7,630,000 $ — $ 7,929,000 $ 266,000 $ 7,242,000 $ 83,000 Construction 978,000 990,000 — 929,000 35,000 980,000 12,000 Other 892,000 930,000 — 997,000 22,000 921,000 8,000 Municipal — — — — — — — Residential Term 10,664,000 12,305,000 — 9,877,000 202,000 10,487,000 63,000 Construction — — — — — — — Home equity line of credit 827,000 883,000 — 965,000 16,000 917,000 6,000 Consumer — — — — — — — $ 20,693,000 $ 22,738,000 $ — $ 20,697,000 $ 541,000 $ 20,547,000 $ 172,000 With an Allowance Recorded Commercial Real estate $ 1,717,000 $ 1,732,000 $ 258,000 $ 1,538,000 $ 72,000 $ 1,721,000 $ 23,000 Construction — — — — — — — Other 6,440,000 6,949,000 1,275,000 6,918,000 1,000 6,465,000 1,000 Municipal — — — — — — — Residential Term 2,782,000 3,121,000 337,000 2,306,000 61,000 2,858,000 25,000 Construction — — — — — — — Home equity line of credit 571,000 590,000 184,000 99,000 — 248,000 — Consumer 6,000 6,000 6,000 1,000 — 2,000 — $ 11,516,000 $ 12,398,000 $ 2,060,000 $ 10,862,000 $ 134,000 $ 11,294,000 $ 49,000 Total Commercial Real estate $ 9,049,000 $ 9,362,000 $ 258,000 $ 9,467,000 $ 338,000 $ 8,963,000 $ 106,000 Construction 978,000 990,000 — 929,000 35,000 980,000 12,000 Other 7,332,000 7,879,000 1,275,000 7,915,000 23,000 7,386,000 9,000 Municipal — — — — — — — Residential Term 13,446,000 15,426,000 337,000 12,183,000 263,000 13,345,000 88,000 Construction — — — — — — — Home equity line of credit 1,398,000 1,473,000 184,000 1,064,000 16,000 1,165,000 6,000 Consumer 6,000 6,000 6,000 1,000 — 2,000 — $ 32,209,000 $ 35,136,000 $ 2,060,000 $ 31,559,000 $ 675,000 $ 31,841,000 $ 221,000 18 Troubled Debt Restructured A "TDR" constitutes a restructuring of debt if the Company, for economic or legal reasons related to the borrower's financial difficulties, grants a concession to the borrower that it would not otherwise consider. To determine whether or not a loan should be classified as a TDR, Management evaluates a loan based upon the following criteria: • The borrower demonstrates financial difficulty; common indicators include past due status with bank obligations, substandard credit bureau reports, or an inability to refinance with another lender, and • The Company has granted a concession; common concession types include maturity date extension, interest rate adjustments to below market pricing, and deferment of payments. As of September 30, 2020, the Company had 78 loans with a balance of $ 13,390,000 that have been classified as TDRs. This compares to 81 loans with a balance of $ 21,424,000 and 82 loans with a balance of $ 24,281,000 classified as TDRs as of December 31, 2019 and September 30, 2019, respectively. The impairment carried as a specific reserve in the allowance for loan losses is calculated by present valuing the expected cash flows on the loan at the original interest rate, or, for collateral-dependent loans, using the fair value of the collateral less costs to sell. The following table shows TDRs by class and the specific reserve as of September 30, 2020: Number of Loans Balance Specific Reserves Commercial Real estate 16 $ 4,054,000 $ 130,000 Construction 1 701,000 19,000 Other 6 729,000 92,000 Municipal — — — Residential Term 51 7,430,000 153,000 Construction — — — Home equity line of credit 3 466,000 — Consumer 1 10,000 1,000 78 $ 13,390,000 $ 395,000 The following table shows TDRs by class and the specific reserve as of December 31, 2019: Number of Loans Balance Specific Reserves Commercial Real estate 17 $ 4,836,000 $ 246,000 Construction 1 701,000 — Other 8 6,932,000 1,231,000 Municipal — — — Residential Term 52 8,472,000 200,000 Construction — — — Home equity line of credit 3 483,000 — Consumer — — — 81 $ 21,424,000 $ 1,677,000 19 The following table shows TDRs by class and the specific reserve as of September 30, 2019: Number of Loans Balance Specific Reserves Commercial Real estate 19 $ 7,559,000 $ 249,000 Construction 1 721,000 — Other 7 6,951,000 1,232,000 Municipal — — — Residential Term 52 8,563,000 202,000 Construction — — — Home equity line of credit 3 487,000 — Consumer — — — 82 $ 24,281,000 $ 1,683,000 As of September 30, 2020, 15 of the loans classified as TDRs with a total balance of $ 2,814,000 were more than 30 days past due. Of these loans, two had been placed on TDR status in the previous 12 months. The following table shows these TDRs by class and the associated specific reserves included in the allowance for loan losses as of September 30, 2020: Number of Loans Balance Specific Reserves Commercial Real estate 3 $ 1,472,000 $ — Construction — — — Other 4 424,000 92,000 Municipal — — — Residential Term 6 743,000 — Construction — — — Home equity line of credit 1 165,000 — Consumer 1 10,000 1,000 15 $ 2,814,000 $ 93,000 20 As of September 30, 2019, nine of the loans classified as TDRs with a total balance of $ 1,084,000 were more than 30 days past due. Of these loans, four had been placed on TDR status in the previous 12 months. The following table shows these TDRs by class and the associated specific reserves included in the allowance for loan losses as of September 30, 2019: Number of Loans Balance Specific Reserves Commercial Real estate — $ — $ — Construction — — — Other 3 251,000 131,000 Municipal — — — Residential Term 5 666,000 11,000 Construction — — — Home equity line of credit 1 167,000 — Consumer — — — 9 $ 1,084,000 $ 142,000 For the nine months ended September 30, 2020, three loans were placed on TDR status. The following table shows these TDRs, by class and the associated specific reserves included in the allowance for loan losses as of September 30, 2020: Number of Loans Pre-Modification Outstanding Recorded Investment Post-Modification Outstanding Recorded Investment Specific Reserves Commercial Real estate — $ — $ — $ — Construction — — — — Other — — — — Municipal — — — — Residential Term 2 235,000 187,000 23,000 Construction — — — — Home equity line of credit — — — — Consumer 1 10,000 10,000 1,000 3 $ 245,000 $ 197,000 $ 24,000 21 For the nine months ended September 30, 2019, 10 loans were placed on TDR status. The following table shows these TDRs by class and associated specific reserves included in the allowance for loan losses as of September 30, 2019: Number of Loans Pre-Modification Outstanding Recorded Investment Post-Modification Outstanding Recorded Investment Specific Reserves Commercial Real estate 2 $ 110,000 $ 95,000 $ 95,000 Construction — — — — Other — — — — Municipal — — — — Residential Term 8 998,000 882,000 73,000 Construction — — — — Home equity line of credit — — — — Consumer — — — — 10 $ 1,108,000 $ 977,000 $ 168,000 For the quarter ended September 30, 2020, one loan was placed on TDR status. The following table shows these TDRs by class and the associated specific reserves included in the allowance for loan losses as of September 30, 2020: Number of Loans Pre-Modification Outstanding Recorded Investment Post-Modification Outstanding Recorded Investment Specific Reserves Commercial Real estate — $ — $ — $ — Construction — — — — Other — — — — Municipal — — — — Residential Term — — — — Construction — — — — Home equity line of credit — — — — Consumer 1 10,000 10,000 1,000 1 $ 10,000 $ 10,000 $ 1,000 22 For the quarter ended September 30, 2019, two loans were placed on TDR status. The following table shows these TDRs by class and the associated specific reserves included in the allowance for loan losses as of September 30, 2019: Number of Loans Pre-Modification Outstanding Recorded Investment Post-Modification Outstanding Recorded Investment Specific Reserves Commercial Real estate — $ — $ — $ — Construction — — — — Other — — — — Municipal — — — — Residential Term 2 317,000 276,000 — Construction — — — — Home equity line of credit — — — — Consumer — — — — 2 $ 317,000 $ 276,000 $ — 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 $ 3,159,000 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. Residential Mortgage Loans in Process of Foreclosure As of September 30, 2020, there were 17 mortgage loans collateralized by residential real estate in the process of foreclosure with a total balance of $ 2,083,000 . This compares to 15 mortgage loans collateralized by residential real estate in the process of foreclosure with a total balance of $ 1,649,000 as of September 30, 2019. 23 Note 4. Allowance for Loan Losses The Company provides for loan losses through the establishment of an allowance for loan losses which represents an estimated reserve for existing losses in the loan portfolio. A systematic methodology is used for determining the allowance that includes a quarterly review process, risk rating changes, and adjustments to the allowance. The loan portfolio is classified in eight classes and credit risk is evaluated separately in each class. Major risk characteristics relevant to each portfolio segment are as follows: Commercial Real Estate - Commercial real estate loans are impacted by factors such as competitive market forces, vacancy rates, cap rates, net operating incomes, lease renewals and overall economic demand. In addition, loans in the recreational and tourism sector can be affected by weather conditions, such as unseasonably low winter snowfalls. Commercial real estate lending also carries a higher degree of environmental risk than other real estate lending. Commercial Construction - Commercial construction loans are impacted by factors similar to those for commercial real estate loans in addition to risks related to contractor financial capacity and ability to complete a project within acceptable time frames and within budget. Commercial Other - A weakened economy, soft consumer spending, and the rising cost of labor or raw materials are examples of issues that can impact the credit quality in this segment. Municipal Loans - The overall health of the economy, including unemployment rates and housing prices, has an impact on the credit quality of this segment. Residential Real Estate Term - The overall health of the economy, including unemployment rates and housing prices, has an impact on the credit quality of this segment. Residential Real Estate Construction - Residential construction loans are impacted by factors similar to those for residential real estate term loans in addition to risks related to contractor financial capacity and ability to complete a project within acceptable time frames and within budget. Home Equity Line of Credit - The overall health of the economy, including unemployment rates and housing prices, has an impact on the credit quality of this segment. Consumer - The overall health of the economy, including unemployment rates, has an impact on the credit quality of this segment. The appropriate level of the allowance is evaluated continually based on a review of significant loans, with a particular emphasis on nonaccruing, past due, and other loans that may require special attention. Other factors include general conditions in local and national economies; loan portfolio composition and asset quality indicators; and internal factors such as changes in underwriting policies, credit administration practices, experience, ability and depth of lending management, among others. The allowance consists of four elements: (1) specific reserves for loans evaluated individually for impairment; (2) general reserves for each portfolio segment based on historical loan loss experience, (3) qualitative reserves judgmentally adjusted for local and national economic conditions, concentrations, portfolio composition, volume and severity of delinquencies and nonaccrual loans, trends of criticized and classified loans, changes in credit policies and underwriting standards, credit administration practices, and other factors as applicable for each portfolio segment; and (4) unallocated reserves. All outstanding loans are considered in evaluating the appropriateness of the allowance. A breakdown of the allowance for loan losses as of September 30, 2020, December 31, 2019, and September 30, 2019, by class of financing receivable and allowance element, is presented in the following tables: As of September 30, 2020 Specific Reserves on Loans Evaluated Individually for Impairment General Reserves on Loans Based on Historical Loss Experience Reserves for Qualitative Factors Unallocated Reserves Total Reserves Commercial Real estate $ 135,000 $ 686,000 $ 3,940,000 $ — $ 4,761,000 Construction 19,000 87,000 501,000 — 607,000 Other 128,000 521,000 2,993,000 — 3,642,000 Municipal — — 139,000 — 139,000 Residential Term 204,000 275,000 2,037,000 — 2,516,000 Construction — 10,000 71,000 — 81,000 Home equity line of credit 403,000 79,000 975,000 — 1,457,000 Consumer 1,000 168,000 423,000 — 592,000 Unallocated — — — 1,576,000 1,576,000 $ 890,000 $ 1,826,000 $ 11,079,000 $ 1,576,000 $ 15,371,000 24 As of December 31, 2019 Specific Reserves on Loans Evaluated Individually for Impairment General Reserves on Loans Based on Historical Loss Experience Reserves for Qualitative Factors Unallocated Reserves Total Reserves Commercial Real estate $ 251,000 $ 729,000 $ 2,762,000 $ — $ 3,742,000 Construction — 76,000 289,000 — 365,000 Other 1,273,000 430,000 1,626,000 — 3,329,000 Municipal — — 27,000 — 27,000 Residential Term 237,000 153,000 634,000 — 1,024,000 Construction — 5,000 20,000 — 25,000 Home equity line of credit 447,000 130,000 501,000 — 1,078,000 Consumer 5,000 460,000 402,000 — 867,000 Unallocated — — — 1,182,000 1,182,000 $ 2,213,000 $ 1,983,000 $ 6,261,000 $ 1,182,000 $ 11,639,000 As of September 30, 2019 Specific Reserves on Loans Evaluated Individually for Impairment General Reserves on Loans Based on Historical Loss Experience Reserves for Qualitative Factors Unallocated Reserves Total Reserves Commercial Real estate $ 258,000 $ 792,000 $ 2,745,000 $ — $ 3,795,000 Construction — 79,000 274,000 — 353,000 Other 1,275,000 436,000 1,509,000 — 3,220,000 Municipal — — 26,000 — 26,000 Residential Term 337,000 185,000 615,000 — 1,137,000 Construction — 5,000 18,000 — 23,000 Home equity line of credit 184,000 155,000 485,000 — 824,000 Consumer 6,000 285,000 389,000 — 680,000 Unallocated — — — 1,707,000 1,707,000 $ 2,060,000 $ 1,937,000 $ 6,061,000 $ 1,707,000 $ 11,765,000 Qualitative adjustment factors are taken into consideration when determining reserve estimates. These adjustment factors are based upon Management's evaluation of various current conditions, including those listed below. • General economic conditions. • Credit quality trends with emphasis on loan delinquencies, nonaccrual levels and classified loans. • Recent loss experience in particular segments of the portfolio. • Loan volumes and concentrations, including changes in mix. • Other factors, including changes in quality of the loan origination; loan policy changes; changes in credit risk management processes; Bank regulatory and external loan review examination results. Qualitative factors applied to the portfolio or segments of the portfolio may include judgments concerning general economic conditions that may affect credit quality, credit concentrations, the pace of portfolio growth, the direction of risk rating movements, policy exception levels, and delinquency levels; these qualitative factors are also considered in connection with the unallocated portion of our allowance for loan losses. The qualitative portion of the allowance for loan losses was 0.77 % of related loans as of September 30, 2020, compared to 0.48 % of related loans as of December 31, 2019. The qualitative portion increased $ 4,818,000 between December 31, 2019 and September 30, 2020 due to a mix of factors. These included the impacts of the COVID-19 pandemic on various macroeconomic 25 measures used in the qualitative model, as well as analysis of the loan portfolio conducted under both top down and unit level approaches for factors such as levels of credit extended to industry segments particularly vulnerable to social distancing, and performance of COVID-19 related modifications . The unallocated component of the allowance totaled $ 1,576,000 at September 30, 2020, or 10.3 % of the total reserve. This compares to $ 1,182,000 or 10.2 % as of December 31, 2019. While year to date growth in the qualitative portion of the reserve directionally reflects potential impacts of COVID-19 on the loan portfolio, it remains likely that there are other underlying credit risks not yet captured in loan specific or qualitative metrics the Company uses to estimate its allowance. This uncertainty along with general imprecision related to portfolio growth experienced year-to-date supports the continued inclusion of an unallocated component. The allowance for loan losses as a percent of total loans stood at 1.07 % as of September 30, 2020, 0.90 % at December 31, 2019 and 0.93 % as of September 30, 2019. Commercial loans are comprised of three major classes, commercial real estate loans, commercial construction loans and other commercial loans. Commercial real estate loans consist of mortgage loans to finance investments in real property such as multi-family residential, commercial/retail, office, industrial, hotels, educational and other specific or mixed use properties. Commercial real estate loans are typically written with amortizing payment structures. Collateral values are determined based on appraisals and evaluations in accordance with established policy and regulatory guidelines. Commercial real estate loans typically have a loan-to-value ratio of up to 80 % based upon current valuation information at the time the loan is made. Commercial real estate loans are primarily paid by the cash flow generated from the real property, such as operating leases, rents, or other operating cash flows from the borrower. Commercial construction loans consist of loans to finance construction in a mix of owner- and non-owner occupied commercial real estate properties. Commercial construction loans typically have maturities of less than two years. Payment structures during the construction period are typically on an interest only basis, although principal payments may be established depending on the type of construction project being financed. During the construction phase, commercial construction loans are primarily paid by cash flow generated from the construction project or other operating cash flows from the borrower or guarantors, if applicable. At the end of the construction period, loan repayment typically comes from a third party source in the event that the Company will not be providing permanent term financing. Collateral valuation and loan-to-value guidelines follow those for commercial real estate loans. Other commercial loans consist of revolving and term loan obligations extended to business and corporate enterprises for the purpose of financing working capital and or capital investment. Collateral generally consists of pledges of business assets including, but not limited to, accounts receivable, inventory, plant and equipment, and/or real estate, if applicable. Commercial loans are primarily paid by the operating cash flow of the borrower. Commercial loans may be secured or unsecured. Municipal loans are comprised of loans to municipalities in Maine for capitalized expenditures, construction projects or tax anticipation notes. All municipal loans are considered general obligations of the municipality and are collateralized by the taxing ability of the municipality for repayment of debt. Residential loans are comprised of two classes: term loans and construction loans. Residential term loans consist of residential real estate loans held in the Company's loan portfolio made to borrowers who demonstrate the ability to make scheduled payments with full consideration to underwriting factors. Borrower qualifications include favorable credit history combined with supportive income requirements and loan-to-value ratios within established policy and regulatory guidelines. Collateral values are determined based on appraisals and evaluations in accordance with established policy and regulatory guidelines. Residential loans typically have a loan-to-value ratio of up to 80 % based on appraisal information at the time the loan is made. Collateral consists of mortgage liens on one- to four-family residential properties. Loans are offered with fixed or adjustable rates with amortization terms of up to thirty years . Residential construction loans typically consist of loans for the purpose of constructing single family residences to be owned and occupied by the borrower. Borrower qualifications include favorable credit history combined with supportive income requirements and loan-to-value ratios within established policy and regulatory guidelines. Residential construction loans normally have construction terms of one year or less and payment during the construction term is typically on an interest only basis from sources including interest reserves, borrower liquidity and/or income. Residential construction loans will typically convert to permanent financing from the Company or have another financing commitment in place from an acceptable mortgage lender. Collateral valuation and loan-to-value guidelines are consistent with those for residential term loans. Home equity lines of credit are made to qualified individuals and are secured by senior or junior mortgage liens on owner occupied one- to four-family homes, condominiums, or vacation homes. The home equity line of credit typically has a variable interest rate and is billed as interest-only payments during the draw period. At the end of the draw period, the home equity line of credit is billed as a percentage of the principal balance plus all accrued interest. Loan maturities are normally 300 months. Borrower qualifications include favorable credit history combined with supportive income requirements and combined loan-to- value ratios usually not exceeding 80 % inclusive of priority liens. Collateral valuation guidelines follow those for residential real estate loans. Consumer loan products including personal lines of credit and amortizing loans made to qualified individuals for various purposes such as auto, recreational vehicles, debt consolidation, personal expenses or overdraft protection. Borrower qualifications 26 include favorable credit history combined with supportive income and collateral requirements within established policy guidelines. Consumer loans may be secured or unsecured. Construction, land and land development loans, both commercial and residential, comprise a small portion of the portfolio, and at 33.4 % of capital are below the regulatory guidance limit 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, below the regulatory limit of 300.0 % of capital at September 30, 2020. The process of establishing the allowance with respect to the commercial loan portfolio begins when a Loan Officer or Senior Officer (or designate) initially assigns each loan a risk rating, using established credit criteria. Approximately 60 % of a trailing four quarter average gross commercial portfolio is subject to review and validation annually by an independent consulting firm. Additionally, commercial loan relationships with exposure greater than or equal to $500,000 are subject to review annually by the Company's internal credit review function. The methodology employs Management's judgment as to the level of losses on existing loans based on internal review of the loan portfolio, including an analysis of a borrower's current financial position, and the consideration of current and anticipated economic conditions and their potential effects on specific borrowers and or lines of business. In determining the Company's ability to collect certain loans, Management also considers the fair value of underlying collateral. The risk rating system has eight levels, defined as follows: 1 Strong Credits rated "1" are characterized by borrowers fully responsible for the credit with excellent capacity to pay principal and interest. Loans rated "1" may be secured with acceptable forms of liquid collateral. 2 Above Average Credits rated "2" are characterized by borrowers that have better than average liquidity, capitalization, earnings and/or cash flow with a consistent record of solid financial performance. 3 Satisfactory Credits rated "3" are characterized by borrowers with favorable liquidity, profitability and financial condition with adequate cash flow to pay debt service. 4 Average Credits rated "4" are characterized by borrowers that present risk more than 1, 2 and 3 rated loans and merit an ordinary level of ongoing monitoring. Financial condition is on par or somewhat below industry averages while cash flow is generally adequate to meet debt service requirements. 5 Watch Credits rated "5" are characterized by borrowers that warrant greater monitoring due to financial condition or unresolved and identified risk factors. 6 Other Assets Especially Mentioned (OAEM) Loans in this category are currently protected but are potentially weak and constitute an undue and unwarranted credit risk, but not to the point of justifying a classification of substandard. OAEM have potential weaknesses which may, if not checked or corrected, weaken the asset or inadequately protect the Company's credit position at some future date. 7 Substandard Loans in this category are inadequately protected by the paying capacity of the borrower or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. Substandard loans are characterized by the distinct possibility that the Company may sustain some loss if the deficiencies are not corrected. 8 Doubtful Loans classified "Doubtful" have the same weaknesses as those classified substandard with the added characteristic that the weaknesses make collection or liquidation in full, based on currently existing facts, conditions, and values, highly questionable and improbable. The possibility of loss is high, but because of certain important and reasonably specific pending factors which may work to the advantage and strengthening of the asset, its classification as an estimated loss is deferred until its more exact status may be determined. 27 The following table summarizes the risk ratings for the Company's commercial real estate, commercial construction, commercial other, and municipal loans as of September 30, 2020: Commercial Real Estate Commercial Construction Commercial Other Municipal Loans All Risk- Rated Loans 1 Strong $ — $ — $ 2,251,000 $ 23,000 $ 2,274,000 2 Above Average 8,492,000 1,627,000 5,361,000 42,262,000 57,742,000 3 Satisfactory 84,178,000 3,145,000 140,360,000 369,000 228,052,000 4 Average 230,954,000 27,907,000 107,552,000 1,456,000 367,869,000 5 Watch 68,565,000 18,919,000 46,211,000 — 133,695,000 6 OAEM 2,028,000 — 1,291,000 — 3,319,000 7 Substandard 12,911,000 440,000 6,271,000 — 19,622,000 8 Doubtful — — — — — Total $ 407,128,000 $ 52,038,000 $ 309,297,000 $ 44,110,000 $ 812,573,000 The following table summarizes the risk ratings for the Company's commercial real estate, commercial construction, commercial other, and municipal loans as of December 31, 2019: Commercial Real Estate Commercial Construction Commercial Other Municipal Loans All Risk- Rated Loans 1 Strong $ — $ — $ 4,258,000 $ 32,000 $ 4,290,000 2 Above Average 12,393,000 794,000 6,187,000 38,290,000 57,664,000 3 Satisfactory 74,709,000 2,305,000 41,527,000 379,000 118,920,000 4 Average 205,510,000 19,017,000 107,389,000 2,587,000 334,503,000 5 Watch 63,582,000 15,488,000 47,152,000 — 126,222,000 6 OAEM 1,160,000 — 1,988,000 — 3,148,000 7 Substandard 15,456,000 480,000 10,272,000 — 26,208,000 8 Doubtful — — — — — Total $ 372,810,000 $ 38,084,000 $ 218,773,000 $ 41,288,000 $ 670,955,000 The following table summarizes the risk ratings for the Company's commercial real estate, commercial construction, commercial other, and municipal loans as of September 30, 2019: Commercial Real Estate Commercial Construction Commercial Other Municipal Loans All Risk- Rated Loans 1 Strong $ — $ — $ 3,835,000 $ 35,000 $ 3,870,000 2 Above Average 12,595,000 34,000 5,836,000 33,768,000 52,233,000 3 Satisfactory 84,567,000 2,154,000 45,742,000 386,000 132,849,000 4 Average 186,605,000 20,931,000 85,485,000 2,333,000 295,354,000 5 Watch 67,674,000 13,867,000 48,498,000 — 130,039,000 6 OAEM 504,000 — 2,070,000 — 2,574,000 7 Substandard 16,220,000 256,000 10,393,000 — 26,869,000 8 Doubtful — — — — — Total $ 368,165,000 $ 37,242,000 $ 201,859,000 $ 36,522,000 $ 643,788,000 Commercial loans are generally charged off when all or a portion of the principal amount is determined to be uncollectible. This determination is based on circumstances specific to a borrower including repayment ability, analysis of collateral and other factors as applicable. Residential loans are comprised of two classes: term loans, which include traditional amortizing home mortgages, and construction loans, which include loans for owner-occupied residential construction. Residential loans typically have a 75 % to 80 % loan to value based upon current appraisal information at the time the loan is made. Home equity loans and lines of credit are typically written to the same underwriting standards. Consumer loans are primarily amortizing loans to individuals collateralized by automobiles, pleasure craft and recreation vehicles, typically with a maximum loan to value of 80 % to 90 % of the purchase price of the collateral. Consumer loans also include a small amount of unsecured short-term time notes to individuals. 28 Residential loans, consumer loans and home equity lines of credit are segregated into homogeneous pools with similar risk characteristics. Trends and current conditions are analyzed and historical loss experience is adjusted accordingly. Quantitative and qualitative adjustment factors for these segments are consistent with those for the commercial and municipal classes. Certain loans in the residential, home equity lines of credit and consumer classes identified as having the potential for further deterioration are analyzed individually to confirm impairment status, and to determine the need for a specific reserve; however there is no formal rating system used for these classes. Consumer loans greater than 120 days past due are generally charged off. Residential loans 90 days or more past due are placed on non-accrual status unless the loans are both well secured and in the process of collection. One- to four-family residential real estate loans and home equity loans are written down or charged-off no later than 180 days past due, or for residential real estate secured loans having a borrower in bankruptcy, within 60 days of receipt of notification of filing from the bankruptcy court, whichever is sooner. This is subject to completion of a current assessment of the value of the collateral with any outstanding loan balance in excess of the fair value of the property, less costs to sell, written down or charged-off. There were no changes to the Company's accounting policies or methodology used to estimate the allowance for loan losses during the nine months ended September 30, 2020. The following table presents allowance for loan losses activity by class for the nine months and quarter ended September 30, 2020, and allowance for loan loss balances by class and related loan balances by class as of September 30, 2020: Commercial Municipal Residential Home Equity Line of Credit Consumer Unallocated Total Real Estate Construction Other Term Construction For the nine months ended September 30, 2020 Beginning balance $ 3,742,000 $ 365,000 $ 3,329,000 $ 27,000 $ 1,024,000 $ 25,000 $ 1,078,000 $ 867,000 $ 1,182,000 $ 11,639,000 Charge offs 532,000 — 24,000 — 46,000 — 153,000 238,000 — 993,000 Recoveries — — 24,000 — 31,000 — 20,000 100,000 — 175,000 Provision (credit) 1,551,000 242,000 313,000 112,000 1,507,000 56,000 512,000 ( 137,000 ) 394,000 4,550,000 Ending balance $ 4,761,000 $ 607,000 $ 3,642,000 $ 139,000 $ 2,516,000 $ 81,000 $ 1,457,000 $ 592,000 $ 1,576,000 $ 15,371,000 For the three months ended September 30, 2020 Beginning balance $ 4,511,000 $ 524,000 $ 3,689,000 $ 110,000 $ 2,261,000 $ 64,000 $ 1,284,000 $ 658,000 $ 1,009,000 $ 14,110,000 Charge offs 532,000 — 7,000 — — — — 37,000 — 576,000 Recoveries — — 4,000 — 5,000 — 1,000 27,000 — 37,000 Provision (credit) 782,000 83,000 ( 44,000 ) 29,000 250,000 17,000 172,000 ( 56,000 ) 567,000 1,800,000 Ending balance $ 4,761,000 $ 607,000 $ 3,642,000 $ 139,000 $ 2,516,000 $ 81,000 $ 1,457,000 $ 592,000 $ 1,576,000 $ 15,371,000 Allowance for loan losses as of September 30, 2020 Ending balance specifically evaluated for impairment $ 135,000 $ 19,000 $ 128,000 $ — $ 204,000 $ — $ 403,000 $ 1,000 $ — $ 890,000 Ending balance collectively evaluated for impairment $ 4,626,000 $ 588,000 $ 3,514,000 $ 139,000 $ 2,312,000 $ 81,000 $ 1,054,000 $ 591,000 $ 1,576,000 $ 14,481,000 Related loan balances as of September 30, 2020 Ending balance $ 407,128,000 $ 52,038,000 $ 309,297,000 $ 44,110,000 $ 497,667,000 $ 16,101,000 $ 82,982,000 $ 27,323,000 $ — $ 1,436,646,000 Ending balance specifically evaluated for impairment $ 4,753,000 $ 1,009,000 $ 1,023,000 $ — $ 10,182,000 $ — $ 2,364,000 $ 10,000 $ — $ 19,341,000 Ending balance collectively evaluated for impairment $ 402,375,000 $ 51,029,000 $ 308,274,000 $ 44,110,000 $ 487,485,000 $ 16,101,000 $ 80,618,000 $ 27,313,000 $ — $ 1,417,305,000 29 The following table presents allowance for loan losses activity by class for the year ended December 31, 2019 and allowance for loan loss balances by class and related loan balances by class as of December 31, 2019: Commercial Municipal Residential Home Equity Line of Credit Consumer Unallocated Total Real Estate Construction Other Term Construction For the year ended December 31, 2019 Beginning balance $ 3,567,000 $ 255,000 $ 3,541,000 $ 24,000 $ 1,235,000 $ 34,000 $ 730,000 $ 630,000 $ 1,216,000 $ 11,232,000 Charge offs 89,000 — 179,000 — 445,000 — 69,000 338,000 — 1,120,000 Recoveries 15,000 — 73,000 — 57,000 — 4,000 128,000 — 277,000 Provision (credit) 249,000 110,000 ( 106,000 ) 3,000 177,000 ( 9,000 ) 413,000 447,000 ( 34,000 ) 1,250,000 Ending balance $ 3,742,000 $ 365,000 $ 3,329,000 $ 27,000 $ 1,024,000 $ 25,000 $ 1,078,000 $ 867,000 $ 1,182,000 $ 11,639,000 Allowance for loan losses as of December 31, 2019 Ending balance specifically evaluated for impairment $ 251,000 $ — $ 1,273,000 $ — $ 237,000 $ — $ 447,000 $ 5,000 $ — $ 2,213,000 Ending balance collectively evaluated for impairment $ 3,491,000 $ 365,000 $ 2,056,000 $ 27,000 $ 787,000 $ 25,000 $ 631,000 $ 862,000 $ 1,182,000 $ 9,426,000 Related loan balances as of December 31, 2019 Ending balance $ 372,810,000 $ 38,084,000 $ 218,773,000 $ 41,288,000 $ 492,455,000 $ 14,813,000 $ 92,349,000 $ 26,503,000 $ — $ 1,297,075,000 Ending balance specifically evaluated for impairment $ 6,309,000 $ 958,000 $ 7,075,000 $ — $ 12,439,000 $ — $ 2,488,000 $ 5,000 $ — $ 29,274,000 Ending balance collectively evaluated for impairment $ 366,501,000 $ 37,126,000 $ 211,698,000 $ 41,288,000 $ 480,016,000 $ 14,813,000 $ 89,861,000 $ 26,498,000 $ — $ 1,267,801,000 30 The following table presents allowance for loan losses activity by class for the nine months and quarter ended September 30, 2019, and allowance for loan loss balances by class and related loan balances by class as of September 30, 2019: Commercial Municipal Residential Home Equity Line of Credit Consumer Unallocated Total Real Estate Construction Other Term Construction For the nine months ended September 30, 2019 Beginning balance $ 3,567,000 $ 255,000 $ 3,541,000 $ 24,000 $ 1,235,000 $ 34,000 $ 730,000 $ 630,000 $ 1,216,000 $ 11,232,000 Charge offs 53,000 — 123,000 — 93,000 — 38,000 235,000 — 542,000 Recoveries 15,000 — 70,000 — 10,000 — 3,000 102,000 — 200,000 Provision (credit) 266,000 98,000 ( 268,000 ) 2,000 ( 15,000 ) ( 11,000 ) 129,000 183,000 491,000 875,000 Ending balance $ 3,795,000 $ 353,000 $ 3,220,000 $ 26,000 $ 1,137,000 $ 23,000 $ 824,000 $ 680,000 $ 1,707,000 $ 11,765,000 For the three months ended September 30, 2019 Beginning balance $ 3,609,000 $ 309,000 $ 3,281,000 $ 25,000 $ 1,106,000 $ 23,000 $ 633,000 $ 649,000 $ 1,836,000 $ 11,471,000 Charge offs — — 14,000 — — — — 48,000 — 62,000 Recoveries 2,000 — 68,000 — 4,000 — 1,000 31,000 — 106,000 Provision (credit) 184,000 44,000 ( 115,000 ) 1,000 27,000 — 190,000 48,000 ( 129,000 ) 250,000 Ending balance $ 3,795,000 $ 353,000 $ 3,220,000 $ 26,000 $ 1,137,000 $ 23,000 $ 824,000 $ 680,000 $ 1,707,000 $ 11,765,000 Allowance for loan losses as of September 30, 2019 Ending balance specifically evaluated for impairment $ 258,000 $ — $ 1,275,000 $ — $ 337,000 $ — $ 184,000 $ 6,000 $ — $ 2,060,000 Ending balance collectively evaluated for impairment $ 3,537,000 $ 353,000 $ 1,945,000 $ 26,000 $ 800,000 $ 23,000 $ 640,000 $ 674,000 $ 1,707,000 $ 9,705,000 Related loan balances as of September 30, 2019 Ending balance $ 368,165,000 $ 37,242,000 $ 201,859,000 $ 36,522,000 $ 485,490,000 $ 14,118,000 $ 94,144,000 $ 25,919,000 $ — $ 1,263,459,000 Ending balance specifically evaluated for impairment $ 9,049,000 $ 978,000 $ 7,332,000 $ — $ 13,446,000 $ — $ 1,398,000 $ 6,000 $ — $ 32,209,000 Ending balance collectively evaluated for impairment $ 359,116,000 $ 36,264,000 $ 194,527,000 $ 36,522,000 $ 472,044,000 $ 14,118,000 $ 92,746,000 $ 25,913,000 $ — $ 1,231,250,000 31 Note 5 – Stock-Based Compensation At the 2010 Annual Meeting, shareholders approved the 2010 Equity Incentive Plan (the "2010 Plan"). This reserved 400,000 shares of common stock for issuance in connection with stock options, restricted stock awards and other equity based awards to attract and retain the best available personnel, provide additional incentive to officers, employees and non-employee Directors and promote the success of the Company. Such grants and awards were structured in a manner that did not encourage the recipients to expose the Company to undue or inappropriate risk. Options issued under the 2010 Plan qualified for treatment as incentive stock options for purposes of Section 422 of the Internal Revenue Code. Other compensation under the 2010 Plan qualified as performance-based for purposes of Section 162(m) of the Internal Revenue Code, and satisfied NASDAQ guidelines relating to equity compensation. The 2010 Plan expired on April 28, 2020, leaving 215,513 shares not issued. At the 2020 Annual Meeting, shareholders approved the 2020 Equity Incentive Plan (the "2020 Plan"). This reserves 400,000 shares of common stock for issuance in connection with stock options, restricted stock awards and other equity based awards to attract and retain the best available personnel, provide additional incentive to officers, employees and non-employee Directors and promote the success of the Company. Such grants and awards will be structured in a manner that does not encourage the recipients to expose the Company to undue or inappropriate risk. Options issued under the 2020 Plan qualify for treatment as incentive stock options for purposes of Section 422 of the Internal Revenue Code. Other compensation under the 2020 Plan will qualify as performance-based for purposes of Section 162(m) of the Internal Revenue Code, and will satisfy NASDAQ guidelines relating to equity compensation. As of September 30, 2020, 184,487 shares of restricted stock had been granted under the 2010 Plan and 5,750 shares under the 2020 Plan, of which 76,597 shares remain restricted as of September 30, 2020 as detailed in the following table: Year Granted Vesting Term (In Years) Shares Remaining Term (In Years) 2016 5.0 10,874 0.3 2017 5.0 7,017 1.3 2018 3.0 5,371 0.4 2018 4.0 2,068 1.3 2018 5.0 6,184 2.3 2019 2.0 1,484 0.3 2019 3.0 16,254 1.3 2020 1.0 5,809 0.5 2020 2.0 694 1.3 2020 3.0 20,842 2.3 76,597 1.5 The compensation cost related to these nonvested restricted stock grants is $ 1,978,000 and is recognized over the vesting terms of each grant. In the nine months ended September 30, 2020, $ 482,000 of expense was recognized for these restricted shares, leaving $ 864,000 in unrecognized expense as of September 30, 2020. In the nine months ended September 30, 2019, $ 368,000 of expense was recognized for restricted shares, leaving $ 797,000 in unrecognized expense as of September 30, 2019. Note 6 – Common Stock Proceeds from sale of common stock totaled $ 497,000 and $ 488,000 for the nine months ended September 30, 2020 and 2019, respectively. 32 Note 7 – Earnings Per Share The following table sets forth the computation of basic and diluted earnings per share (EPS) for the nine months ended September 30, 2020 and 2019: Income (Numerator) Shares (Denominator) Per-Share Amount For the nine months ended September 30, 2020 Net income as reported $ 20,159,000 Basic EPS: Income available to common shareholders 20,159,000 10,854,384 $ 1.86 Effect of dilutive securities: restricted stock 73,285 Diluted EPS: Income available to common shareholders plus assumed conversions $ 20,159,000 10,927,669 $ 1.84 For the nine months ended September 30, 2019 Net income as reported $ 18,839,000 Basic EPS: Income available to common shareholders 18,839,000 10,811,233 $ 1.74 Effect of dilutive securities: restricted stock 75,013 Diluted EPS: Income available to common shareholders plus assumed conversions $ 18,839,000 10,886,246 $ 1.73 The following table sets forth the computation of basic and diluted earnings per share (EPS) for the quarters ended September 30, 2020 and 2019: Income (Numerator) Shares (Denominator) Per-Share Amount For the quarter ended September 30, 2020 Net income as reported $ 7,095,000 Less dividends and amortization of premium on preferred stock — Basic EPS: Income available to common shareholders 7,095,000 10,863,315 $ 0.65 Effect of dilutive securities: restricted stock 76,544 Diluted EPS: Income available to common shareholders plus assumed conversions $ 7,095,000 10,939,859 $ 0.65 For the quarter ended September 30, 2019 Net income as reported $ 6,288,000 Less dividends and amortization of premium on preferred stock — Basic EPS: Income available to common shareholders 6,288,000 10,818,423 $ 0.58 Effect of dilutive securities: restricted stock 75,493 Diluted EPS: Income available to common shareholders plus assumed conversions $ 6,288,000 10,893,916 $ 0.58 Note 8 – Employee Benefit Plans 401(k) Plan The Bank has a defined contribution plan available to substantially all employees who have completed 3 months of service. Employees may contribute up to Internal Revenue Service ("IRS") determined limits and the Bank may match employee contributions not to exceed 3.0 % of compensation depending on contribution level. Subject to a vote of the Board of Directors, the Bank may also make a profit-sharing contribution to the Plan. Such contribution equaled 2.0 % of each eligible employee's compensation in 2019. The Company adopted the safe harbor form of 401(k) plan for 2020 and will follow safe harbor guidelines when determining the level of discretionary contribution. The expense related to the 401(k) plan was $ 653,000 and $ 464,000 for the nine months ended September 30, 2020 and 2019, respectively. 33 Deferred Compensation and Supplemental Retirement Benefits The Bank also provides unfunded supplemental retirement benefits for certain officers, payable in installments over 20 years upon retirement or death. The agreements consist of individual contracts with differing characteristics that, when taken together, do not constitute a postretirement plan. The costs for these benefits are recognized over the service periods of the participating officers in accordance with Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") Topic 712 "Compensation – Nonretirement Postemployment Benefits". The expense of these supplemental retirement benefits was $ 119,000 for the nine months ended September 30, 2020 and 2019. As of September 30, 2020, the associated accrued liability included in other liabilities in the balance sheet was $ 2,708,000 compared to $ 2,828,000 and $ 2,831,000 at December 31, 2019 and September 30, 2019, respectively. Post-Retirement Benefit Plans The Bank sponsors two post-retirement benefit plans. One plan currently provides a subsidy for health insurance premiums to certain retired employees and a future subsidy for six active employees who were age 50 and over in 1996. These subsidies are based on years of service and range between $ 40 and $ 1,200 per month per person. The other plan provides life insurance coverage to certain retired employees and health insurance for retired directors. None of these plans are pre-funded. The Company utilizes FASB ASC Topic 712 to recognize the overfunded or underfunded status of a defined benefit postretirement plan as an asset or liability in its balance sheet and to recognize changes in the funded status in the year in which the changes occur through comprehensive income (loss). The following table sets forth the accumulated postretirement benefit obligation and funded status: At or for the nine months ended September 30, 2020 2019 Change in benefit obligation Benefit obligation at beginning of year $ 1,581,000 $ 1,599,000 Interest cost 48,000 50,000 Benefits paid ( 81,000 ) ( 85,000 ) Benefit obligation at end of period $ 1,548,000 $ 1,564,000 Funded status Benefit obligation at end of period $ ( 1,548,000 ) $ ( 1,564,000 ) Unamortized gain ( 31,000 ) ( 47,000 ) Accrued benefit cost at end of period $ ( 1,579,000 ) $ ( 1,611,000 ) The following table sets forth the net periodic pension cost: For the nine months ended September 30, For the quarter ended September 30, 2020 2019 2020 2019 Components of net periodic benefit cost Interest cost $ 48,000 $ 50,000 $ 16,000 $ 17,000 Net periodic benefit cost $ 48,000 $ 50,000 $ 16,000 $ 17,000 Amounts not yet reflected in net periodic benefit cost and included in accumulated other comprehensive income are as follows: September 30, 2020 December 31, 2019 September 30, 2019 Unamortized net actuarial gain $ 31,000 $ 31,000 $ 47,000 Deferred tax expense ( 7,000 ) ( 7,000 ) ( 10,000 ) Net unrecognized postretirement benefits included in accumulated other comprehensive income $ 24,000 $ 24,000 $ 37,000 34 A weighted average discount rate of 3.00 % was used in determining the accumulated benefit obligation and the net periodic benefit cost. The assumed health care cost trend rate is 7.0 %. The measurement date for benefit obligations was as of year-end for prior years presented. The expected benefit payments for all of 2020 are $ 108,000 . Plan expense for 2020 is estimated to be $ 64,000 . A 1% change in trend assumptions would create an approximate change in the same direction of $ 100,000 in the accumulated benefit obligation, $ 7,000 in the interest cost and $ 1,000 in the service cost. Note 9 - Other Comprehensive Income (Loss) The following table summarizes activity in the unrealized gain or loss on available for sale securities included in other comprehensive income (loss) for the nine months and quarter ended September 30, 2020 and 2019. For the nine months ended September 30, For the quarter ended September 30, 2020 2019 2020 2019 Balance at beginning of period $ 3,657,000 $ ( 5,051,000 ) $ 7,100,000 $ 2,750,000 Unrealized gains (losses) arising during the period 3,537,000 11,074,000 ( 2,000,000 ) 1,199,000 Reclassification of net realized gains during the period ( 1,179,000 ) ( 15,000 ) — ( 15,000 ) Related deferred taxes ( 495,000 ) ( 2,322,000 ) 420,000 ( 248,000 ) Net change 1,863,000 8,737,000 ( 1,580,000 ) 936,000 Balance at end of period $ 5,520,000 $ 3,686,000 $ 5,520,000 $ 3,686,000 The reclassification of realized gains is included in the net securities gains line of the consolidated statements of income and comprehensive income and the tax effect is included in the income tax expense line of the same statement. The following table summarizes activity in the unrealized loss on securities transferred from available for sale to held to maturity included in other comprehensive income (loss) for the nine months and quarter ended September 30, 2020 and 2019. For the nine months ended September 30, For the quarter ended September 30, 2020 2019 2020 2019 Balance at beginning of period $ ( 182,000 ) $ ( 197,000 ) $ ( 146,000 ) $ ( 190,000 ) Amortization of net unrealized gains 54,000 10,000 9,000 1,000 Related deferred taxes ( 11,000 ) ( 2,000 ) ( 2,000 ) — Net change 43,000 8,000 7,000 1,000 Balance at end of period $ ( 139,000 ) $ ( 189,000 ) $ ( 139,000 ) $ ( 189,000 ) The following table presents the effect of the Company's derivative financial instruments included in other comprehensive income (loss) for the nine months and quarter ended September 30, 2020 and 2019. For the nine months ended September 30, For the quarter ended September 30, 2020 2019 2020 2019 Balance at beginning of period $ 97,000 $ 1,438,000 $ ( 6,187,000 ) $ 75,000 Unrealized gains (losses) on cash flow hedging derivatives arising during the period ( 7,465,000 ) ( 2,156,000 ) 490,000 ( 430,000 ) Related deferred taxes 1,568,000 453,000 ( 103,000 ) 90,000 Net change ( 5,897,000 ) ( 1,703,000 ) 387,000 ( 340,000 ) Balance at end of period $ ( 5,800,000 ) $ ( 265,000 ) $ ( 5,800,000 ) $ ( 265,000 ) 35 The following table summarizes activity in the unrealized gain or loss on postretirement benefits included in other comprehensive income (loss) for the nine months and quarter ended September 30, 2020 and 2019. For the nine months ended September 30, For the quarter ended September 30, 2020 2019 2020 2019 Unrecognized postretirement benefits at beginning of period $ 24,000 $ 37,000 $ 24,000 $ 37,000 Amortization of unrecognized transition obligation — — — — Change in unamortized net actuarial gain (loss) — — — — Related deferred taxes — — — — Unrecognized postretirement benefits at end of period $ 24,000 $ 37,000 $ 24,000 $ 37,000 Note 10 - Financial Derivative Instruments The Bank uses derivative financial instruments for risk management purposes and not for trading or speculative purposes. As part of its overall asset and liability management strategy, the Bank periodically uses derivative instruments to minimize significant unplanned fluctuations in earnings and cash flows caused by interest rate volatility. The Bank’s interest rate risk management strategy involves modifying the re-pricing characteristics of certain assets or liabilities so that changes in interest rates do not have a significant effect on net interest income. The Bank recognizes its derivative instruments in the consolidated balance sheet at fair value. On the date the derivative instrument is entered into, the Bank designates whether the derivative is part of a hedging relationship (i.e., cash flow or fair value hedge). The Bank formally documents relationships between hedging instruments and hedged items, as well as its risk management objective and strategy for undertaking hedge transactions. The Bank also assesses, both at the hedge’s inception and on an ongoing basis, whether the derivatives used in hedging transactions are highly effective in offsetting the changes in cash flows or fair values of hedged items. Changes in fair value of derivative instruments that are highly effective and qualify as cash flow hedges are recorded in other comprehensive income or loss. Any ineffective portion is recorded in earnings. The Bank discontinues hedge accounting when it is determined that the derivative is no longer highly effective in offsetting changes of the hedged risk on the hedged item, or management determines that the designation of the derivative as a hedging instrument is no longer appropriate. 36 The details of the interest rate swap agreements are as follows: September 30, 2020 December 31, 2019 September 30, 2019 Effective Date Maturity Date Variable Index Received Fixed Rate Paid Presentation on Consolidated Balance Sheet Notional Amount Fair Value Notional Amount Fair Value Notional Amount Fair Value 06/05/2018 12/05/2019 1-Month USD LIBOR 2.466 % Other Liabilities $ — $ — $ — $ — $ 25,000,000 $ ( 23,000 ) 06/27/2016 06/27/2021 1-Month USD LIBOR 0.893 % Other (Liabilities) Assets 20,000,000 ( 112,000 ) 20,000,000 199,000 20,000,000 214,000 06/28/2016 06/28/2021 1-Month USD LIBOR 0.940 % Other (Liabilities) Assets 30,000,000 ( 179,000 ) 30,000,000 278,000 30,000,000 296,000 06/05/2018 06/05/2020 1-Month USD LIBOR 2.547 % Other Liabilities — — 25,000,000 ( 96,000 ) 25,000,000 ( 140,000 ) 06/05/2018 12/05/2020 1-Month USD LIBOR 2.603 % Other Liabilities — — 25,000,000 ( 234,000 ) 25,000,000 ( 300,000 ) 12/05/2019 12/05/2022 3-Month USD LIBOR 1.779 % Other Liabilities — — 25,000,000 ( 98,000 ) 25,000,000 ( 217,000 ) 08/02/2019 08/02/2024 1-Month USD LIBOR 1.590 % Other Liabilities 12,500,000 ( 692,000 ) 12,500,000 ( 11,000 ) 12,500,000 ( 133,000 ) 08/05/2019 08/05/2024 1-Month USD LIBOR 1.420 % Other (Liabilities) Assets 12,500,000 ( 611,000 ) 12,500,000 85,000 12,500,000 ( 32,000 ) 02/12/2020 02/12/2023 3-Month USD LIBOR 1.486 % Other Liabilities 25,000,000 ( 762,000 ) — — — — 02/12/2020 02/12/2024 3-Month USD LIBOR 1.477 % Other Liabilities 25,000,000 ( 1,044,000 ) — — — — 06/28/2021 06/28/2026 1-Month USD LIBOR 1.158 % Other Liabilities 50,000,000 ( 2,162,000 ) — — — — 03/13/2020 03/13/2025 3-Month USD LIBOR 0.855 % Other Liabilities 25,000,000 ( 621,000 ) — — — — 03/13/2020 03/13/2030 3-Month USD LIBOR 1.029 % Other Liabilities 20,000,000 ( 690,000 ) — — — — 04/07/2020 04/07/2023 3-Month USD Libor 0.599 % Other Liabilities 20,000,000 ( 194,000 ) — — — — 04/07/2020 04/07/2024 3-Month USD Libor 0.643 % Other Liabilities 20,000,000 ( 275,000 ) — — — — $ 260,000,000 $ ( 7,342,000 ) $ 150,000,000 $ 123,000 $ 175,000,000 $ ( 335,000 ) During the first quarter of 2020, the Bank took advantage of market opportunities to restructure several interest rate swap positions and extend funding at favorable interest rates; one-time charges totaling $ 1.76 million were incurred and expensed in the first quarter of 2020 in connection with the restructuring. The Company would reclassify unrealized gains or losses accounted for within accumulated other comprehensive income (loss) into earnings if the interest rate swaps were to become ineffective or the swaps were to terminate. In the next 12 months, the Company does not believe it will be required to reclassify any unrealized gains or losses accounted for within accumulated other comprehensive income (loss) into earnings as a result of ineffectiveness or swap termination. Amounts paid or received under the swaps are reported in interest expense in the consolidated statement of income, and in interest paid in the consolidated statement of cash flows. 37 Customer loan derivatives The Bank will enter into interest rate swaps with qualified commercial customers. Through these arrangements, the Bank is able to provide a means for a loan customer to obtain a long-term fixed rate, while it simultaneously contracts with an approved, highly-rated, third-party financial institution as counterparty to swap the fixed rate for a variable rate. Such loan level arrangements are not designated as hedges for accounting purposes, and are recorded at fair value in the Company’s consolidated balance sheet. At September 30, 2020, there were four customer loan swap arrangements in place, detailed below: September 30, 2020 December 31, 2019 September 30, 2019 Presentation on Consolidated Balance Sheet Number of Positions Notional Amount Fair Value Number of Positions Notional Amount Fair Value Number of Positions Notional Amount Fair Value Pay Fixed, Receive Variable Other Liabilities 4 $ 28,541,000 $ ( 3,311,000 ) 2 $ 16,374,000 $ ( 1,205,000 ) 1 $ 12,914,000 $ ( 1,643,000 ) Receive Fixed, Pay Variable Other Assets 4 28,541,000 3,311,000 2 16,374,000 1,205,000 1 12,914,000 1,643,000 Total 8 $ 57,082,000 $ — 4 $ 32,748,000 $ — 2 $ 25,828,000 $ — Derivative collateral The Bank has entered into a master netting arrangement with its counterparty and settles payments with the counterparty as necessary. The Bank's arrangement with its institutional counterparty requires it to post cash or other assets as collateral for its various loan swap contracts in a net liability position based on their fair values and the Bank's credit rating or receive cash collateral for contracts in a net asset position as requested. At September 30, 2020, the Bank posted to the counterparty $ 3,100,000 of cash and $ 10,000,000 in securities as collateral on its swap contracts. The required amount to be pledged was $ 9,322,000 . Cessation of LIBOR The Company is aware that LIBOR may no longer be published after December 31, 2021. The Federal Reserve formed the Alternative Reference Rates Committee (ARRC) to guide the transition process in the United States. ARRC has issued a number of recommendations including the adoption of the Secured Overnight Financing Rate (SOFR) as a replacement for LIBOR. The International Swap and Derivatives Association (ISDA), the organization that oversees and guides swap and derivatives markets and participants, continues to work on transitions and replacement rates, including having replacement rates in place before the possible cessation of LIBOR at the end of 2021, and has committed to providing more definitive recommendations later in 2020. The Company has formed a working group to address the change away from LIBOR. Management intends to continue to monitor developments from ARRC and ISDA closely, and expects to pursue the steps ultimately recommended to provide for an orderly transition to a post-LIBOR environment. Of the interest rate swap contracts the Bank has in place as of September 30, 2020, two contracts carrying a total notional amount of $ 50 million are set to mature prior to December 31, 2021; nine contracts with a total notional amount of $ 210 million have maturity dates beyond December 31, 2021. The four customer loan swap contracts shown in the table immediately above have maturity dates of December 19, 2029, August 21, 2030, July 1, 2035 and October 1, 2039. 38 Note 11 – Mortgage Servicing Rights FASB ASC Topic 860 "Transfers and Servicing" requires all separately recognized servicing assets and servicing liabilities to be initially measured at fair value, if practicable. The Company's servicing assets and servicing liabilities are reported using the amortization method and carried at the lower of amortized cost or fair value by strata. In evaluating the carrying values of mortgage servicing rights, the Company obtains third party valuations based on loan level data including note rate, type and term of the underlying loans. The model utilizes several assumptions, the most significant of which is loan prepayments, calculated using a three -months moving average of weekly prepayment data published by the Public Securities Association (PSA) and modeled against the serviced loan portfolio, and the discount rate to discount future cash flows. As of September 30, 2020, the prepayment assumption using the PSA model was 323, which translates into an anticipated prepayment rate of 19.38 %. The discount rate is 9.00 %. Other assumptions include delinquency rates, foreclosure rates, servicing cost inflation, and annual unit loan cost. All assumptions are adjusted periodically to reflect current circumstances. Amortization of mortgage servicing rights, as well as write-offs due to prepayments of the related mortgage loans, are recorded as a charge against mortgage servicing fee income. For the nine months ended September 30, 2020 and 2019, servicing rights capitalized totaled $ 926,000 and $ 267,000 , respectively. Servicing rights amortized for the nine-months periods ended September 30, 2020 and 2019 were $ 252,000 and $ 170,000 , respectively. The fair value of servicing rights was $ 2,013,000 , $ 2,089,000 and $ 2,083,000 at September 30, 2020, December 31, 2019 and September 30, 2019, respectively. The Bank serviced loans for others totaling $ 321,813,000 , $ 266,173,000 and $ 261,685,000 at September 30, 2020, December 31, 2019, and September 30, 2019, respectively. The Bank recorded an impairment reserve as of September 30, 2020 for strata with a fair value lower than cost. Mortgage servicing rights are included in other assets and detailed in the following table: September 30, 2020 December 31, 2019 September 30, 2019 Mortgage servicing rights $ 7,066,000 $ 6,140,000 $ 5,985,000 Accumulated amortization ( 4,846,000 ) ( 4,594,000 ) ( 4,534,000 ) Amortized Cost 2,220,000 1,546,000 1,451,000 Impairment reserve ( 258,000 ) — — Carrying Value $ 1,962,000 $ 1,546,000 $ 1,451,000 Note 12 – Income Taxes FASB ASC Topic 740 "Income Taxes" defines the criteria that an individual tax position must satisfy for some or all of the benefits of that position to be recognized in a company's financial statements. Topic 740 prescribes a recognition threshold of more-likely-than-not, and a measurement attribute for all tax positions taken or expected to be taken on a tax return, in order for those tax positions to be recognized in the financial statements. The Company is currently open to audit under the statute of limitations by the IRS for the years ended December 31, 2017 through 2019. Note 13 - Certificates of Deposit The following table represents the breakdown of certificates of deposit at September 30, 2020 and 2019, and at December 31, 2019: September 30, 2020 December 31, 2019 September 30, 2019 Certificates of deposit < $100,000 $ 252,461,000 $ 277,225,000 $ 319,292,000 Certificates $100,000 to $250,000 269,881,000 345,241,000 278,050,000 Certificates $250,000 and over 67,589,000 67,513,000 64,431,000 $ 589,931,000 $ 689,979,000 $ 661,773,000 Note 14 – Reclassifications Certain items from the prior year were reclassified in the consolidated financial statements to conform with the current year presentation. These do not have a material impact on the consolidated balance sheet or statement of income and comprehensive income presentations. 39 Note 15 – Fair Value Certain assets and liabilities are recorded at fair value to provide additional insight into the Company's quality of earnings. Some of these assets and liabilities are measured on a recurring basis while others are measured on a nonrecurring basis, with the determination based upon applicable existing accounting pronouncements. For example, securities available for sale are recorded at fair value on a recurring basis. Other assets, such as, other real estate owned and impaired loans, are recorded at fair value on a nonrecurring basis using the lower of cost or market methodology to determine impairment of individual assets. The Company groups assets and liabilities which are recorded at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value. A financial instrument's level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement (with level 1 considered highest and level 3 considered lowest). A brief description of each level follows: Level 1 - Valuation is based upon quoted prices for identical instruments in active markets. Level 2 - Valuation is based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market. Level 3 - Valuation is generated from model-based techniques that use at least one significant assumption not observable in the market. These unobservable assumptions reflect estimates that market participants would use in pricing the asset or liability. Valuation includes use of discounted cash flow models and similar techniques. The fair value methods and assumptions for the Company's financial instruments and other assets measured at fair value are set forth below. Investment Securities The fair values of investment securities are estimated by independent providers using a market approach with observable inputs, including matrix pricing and recent transactions. In obtaining such valuation information from third parties, the Company has evaluated their valuation methodologies used to develop the fair values in order to determine whether the valuations are representative of an exit price in the Company's principal markets. The Company's principal markets for its securities portfolios are the secondary institutional markets, with an exit price that is predominantly reflective of bid level pricing in those markets. Fair values are calculated based on the value of one unit without regard to any premium or discount that may result from concentrations of ownership of a financial instrument, possible tax ramifications, or estimated transaction costs. If these considerations had been incorporated into the fair value estimates, the aggregate fair value could have been changed. Loans Fair values are estimated for portfolios of loans based on exit pricing notion. The fair values of performing loans are calculated by discounting scheduled cash flows through the estimated maturity using estimated market discount rates that reflect the credit and interest risk inherent in the loan. The estimates of maturity are based on the Company's historical experience with repayments for each loan classification, modified, as required, by an estimate of the effect of current economic and lending conditions, and the effects of estimated prepayments. Assumptions regarding credit risk, cash flows, and discount rates are judgmentally determined using available market information and specific borrower information. Management has made estimates of fair value using discount rates that it believes to be reasonable. However, because there is no market for many of these financial instruments, Management has no basis to determine whether the fair value presented above would be indicative of the value negotiated in an actual sale. As such, the Company classifies loans as Level 3, except for certain collateral-dependent impaired loans. Fair values of impaired loans are based on estimated cash flows and are discounted using a rate commensurate with the risk associated with the estimated cash flows, or if collateral dependent, discounted to the appraised value of the collateral as determined by reference to sale prices of similar properties, less costs to sell. As such, the Company classifies collateral dependent impaired loans for which a specific reserve results in a fair value measure as Level 2. All other impaired loans are classified as Level 3. Other Real Estate Owned Real estate acquired through foreclosure is initially recorded at fair value. The fair value of other real estate owned is based on property appraisals and an analysis of similar properties currently available. As such, the Company records other real estate owned as nonrecurring Level 2. Mortgage Servicing Rights Mortgage servicing rights represent the value associated with servicing residential mortgage loans. Servicing assets and servicing liabilities are reported using the amortization method and compared to fair value for impairment. In evaluating the fair values of mortgage servicing rights, the Company obtains third party valuations based on loan level data including note rate, type and term of the underlying loans. As such, the Company classifies mortgage servicing rights as Level 2. 40 Time Deposits The fair value of maturity deposits is based on the discounted value of contractual cash flows using a replacement cost of funds approach. The discount rate is estimated using the cost of funds borrowing rate in the market. As such, the Company classifies deposits as Level 2. Borrowed Funds The fair value of borrowed funds is based on the discounted value of contractual cash flows. The discount rate is estimated using the rates currently available for borrowings of similar remaining maturities. As such, the Company classifies borrowed funds as Level 2. Derivatives The fair value of interest rate swaps is determined using inputs that are observable in the market place obtained from third parties including yield curves, publicly available volatilities, and floating indexes and, accordingly, are classified as Level 2 inputs. The credit value adjustments associated with derivatives utilize Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default by the Company and its counterparties. As of September 30, 2020 and 2019, and December 31, 2019, the Company has assessed the significance of the impact of the credit valuation adjustments on the overall valuation of its derivative positions and has determined that the credit valuation adjustments are not significant to the overall valuation of its derivatives due to collateral postings. Customer Loan Derivatives The valuation of the Company’s customer loan derivatives is obtained from a third-party pricing service and is determined using a discounted cash flow analysis on the expected cash flows of each derivative. The pricing analysis is based on observable inputs for the contractual terms of the derivatives, including the period to maturity and interest rate curves. The Company incorporates credit valuation adjustments to appropriately reflect both its own nonperformance risk and the respective counterparty’s nonperformance risk in the fair value measurements. In adjusting the fair value of its derivative contracts for the effect of nonperformance risk, the Company has considered the impact of master netting arrangements and any applicable credit enhancements, such as collateral postings. Limitations Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument. These values do not reflect any premium or discount that could result from offering for sale at one time the Company's entire holdings of a particular financial instrument. Because no market exists for a significant portion of the Company's financial instruments, fair value estimates are based on Management's judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments, and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates. Fair value estimates are based on existing on- and off-balance-sheet financial instruments without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments. Other significant assets and liabilities that are not considered financial instruments include the deferred tax asset, premises and equipment, and other real estate owned. In addition, tax ramifications related to the realization of the unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in any of the estimates. Assets and Liabilities Recorded at Fair Value on a Recurring Basis The following tables present the balances of assets and liabilities that were measured at fair value on a recurring basis as of September 30, 2020, December 31, 2019 and September 30, 2019. At September 30, 2020 Level 1 Level 2 Level 3 Total Securities available for sale U.S. Government-sponsored agencies $ — $ 27,497,000 $ — $ 27,497,000 Mortgage-backed securities — 276,424,000 — 276,424,000 State and political subdivisions — 36,219,000 — 36,219,000 Total securities available for sale — 340,140,000 — 340,140,000 Customer loan interest swap agreements — 3,311,000 — 3,311,000 Total interest rate swap agreements — 3,311,000 — 3,311,000 Total assets $ — $ 343,451,000 $ — $ 343,451,000 41 At September 30, 2020 Level 1 Level 2 Level 3 Total Interest rate swap agreements $ — $ 7,342,000 $ — $ 7,342,000 Customer loan interest swap agreements — 3,311,000 — 3,311,000 Total liabilities $ — $ 10,653,000 $ — $ 10,653,000 At December 31, 2019 Level 1 Level 2 Level 3 Total Securities available for sale U.S. Government-sponsored agencies $ — $ 7,398,000 $ — $ 7,398,000 Mortgage-backed securities — 326,617,000 — 326,617,000 State and political subdivisions — 26,505,000 — 26,505,000 Total securities available for sale — 360,520,000 — 360,520,000 Interest rate swap agreements — 562,000 — 562,000 Customer loan interest swap agreements — 1,205,000 — 1,205,000 Total interest rate swap agreements — 1,767,000 — 1,767,000 Total assets $ — $ 362,287,000 $ — $ 362,287,000 At December 31, 2019 Level 1 Level 2 Level 3 Total Interest rate swap agreements $ — $ 439,000 $ — $ 439,000 Customer loan interest swap agreements — 1,205,000 — 1,205,000 Total liabilities $ — $ 1,644,000 $ — $ 1,644,000 At September 30, 2019 Level 1 Level 2 Level 3 Total Securities available for sale Mortgage-backed securities $ — $ 322,190,000 $ — $ 322,190,000 State and political subdivisions — 4,608,000 — 4,608,000 Total securities available for sale — 326,798,000 — 326,798,000 Interest rate swap agreements — 510,000 — 510,000 Customer loan interest swap agreements — 1,643,000 — 1,643,000 Total interest swap agreements — 2,153,000 — 2,153,000 Total assets $ — $ 328,951,000 $ — $ 328,951,000 At September 30, 2019 Level 1 Level 2 Level 3 Total Interest rate swap agreements $ — $ 845,000 $ — $ 845,000 Customer loan interest swap agreements — 1,643,000 — 1,643,000 Total liabilities $ — $ 2,488,000 $ — $ 2,488,000 Assets Recorded at Fair Value on a Non-Recurring Basis The following tables include assets measured at fair value on a nonrecurring basis that have had a fair value adjustment since their initial recognition. Mortgage servicing rights are presented net of an impairment reserve of $ 258,000 at September 30, 42 2020 and $ 0 at December 31, 2019 and September 30, 2019. Other real estate owned is presented net of an allowance of $ 45,000 at September 30, 2020 and $ 0 at December 31, 2019 and September 30, 2019. Only collateral-dependent impaired loans with a related specific allowance for loan losses or a partial charge off are included in impaired loans for purposes of fair value disclosures. Impaired loans below are presented net of specific allowances of $ 633,000 , $ 1,916,000 and $ 1,763,000 at September 30, 2020, December 31, 2019, and September 30, 2019, respectively. At September 30, 2020 Level 1 Level 2 Level 3 Total Mortgage servicing rights $ — $ 2,013,000 $ — $ 2,013,000 Other real estate owned — 777,000 — 777,000 Impaired loans — 789,000 — 789,000 Total assets $ — $ 3,579,000 $ — $ 3,579,000 At December 31, 2019 Level 1 Level 2 Level 3 Total Mortgage servicing rights $ — $ 2,089,000 $ — $ 2,089,000 Other real estate owned — 279,000 — 279,000 Impaired loans — 6,579,000 — 6,579,000 Total assets $ — $ 8,947,000 $ — $ 8,947,000 At September 30, 2019 Level 1 Level 2 Level 3 Total Mortgage servicing rights $ — $ 2,083,000 $ — $ 2,083,000 Other real estate owned — 279,000 — 279,000 Impaired loans — 7,143,000 — 7,143,000 Total assets $ — $ 9,505,000 $ — $ 9,505,000 43 Fair Value of Financial Instruments FASB ASC Topic 825 "Financial Instruments" requires disclosures of fair value information about financial instruments, whether or not recognized in the balance sheet, if the fair values can be reasonably determined. Fair value is best determined based upon quoted market prices. However, in many instances, there are no quoted market prices for the Company's various financial instruments. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques using observable inputs when available. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. Accordingly, the fair value estimates may not be realized in an immediate settlement of the instrument. Topic 825 excludes certain financial instruments and all nonfinancial instruments from its disclosure requirements. Accordingly, the aggregate fair value amounts presented may not necessarily represent the underlying fair value of the Company. This summary excludes financial assets and liabilities for which carrying value approximates fair values and financial instruments that are recorded at fair value on a recurring basis. Financial instruments for which carrying values approximate fair value include cash equivalents, interest-bearing deposits in other banks, demand, NOW, savings and money market deposits. The estimated fair value of demand, NOW, savings and money market deposits is the amount payable on demand at the reporting date. Carrying value is used because the accounts have no stated maturity and the customer has the ability to withdraw funds immediately. The carrying amount and estimated fair values for financial instruments as of September 30, 2020 were as follows: Carrying value Estimated fair value Level 1 Level 2 Level 3 Financial assets Securities to be held to maturity $ 331,962,000 $ 342,062,000 $ — $ 342,062,000 $ — Loans (net of allowance for loan losses) Commercial Real estate 401,822,000 406,575,000 — 13,000 406,562,000 Construction 51,362,000 51,970,000 — — 51,970,000 Other 305,239,000 302,600,000 — 33,000 302,567,000 Municipal 43,955,000 44,203,000 — — 44,203,000 Residential Term 494,864,000 505,357,000 — 277,000 505,080,000 Construction 16,011,000 16,178,000 — — 16,178,000 Home equity line of credit 81,359,000 80,160,000 — 457,000 79,703,000 Consumer 26,663,000 24,686,000 — 9,000 24,677,000 Total loans 1,421,275,000 1,431,729,000 — 789,000 1,430,940,000 Mortgage servicing rights 2,220,000 2,013,000 — 2,013,000 — Financial liabilities Local certificates of deposit $ 253,863,000 $ 255,553,000 $ — $ 255,553,000 $ — National certificates of deposit 336,068,000 343,022,000 — 343,022,000 — Total certificates of deposits 589,931,000 598,575,000 — 598,575,000 — Repurchase agreements 66,087,000 55,085,000 — 55,085,000 — Federal Home Loan Bank and Federal Reserve Bank borrowings 217,700,000 197,527,000 — 197,527,000 — Total borrowed funds 283,787,000 252,612,000 — 252,612,000 — 44 The carrying amounts and estimated fair values for financial instruments as of December 31, 2019 were as follows: Carrying value Estimated fair value Level 1 Level 2 Level 3 Financial assets Securities to be held to maturity $ 281,606,000 $ 287,045,000 $ — $ 287,045,000 $ — Loans (net of allowance for loan losses) Commercial Real estate 368,645,000 364,626,000 — 2,000 364,624,000 Construction 37,678,000 37,366,000 — — 37,366,000 Other 215,068,000 212,548,000 — 5,046,000 207,502,000 Municipal 41,258,000 40,552,000 — — 40,552,000 Residential Term 491,315,000 491,359,000 — 577,000 490,782,000 Construction 14,785,000 14,786,000 — — 14,786,000 Home equity line of credit 91,149,000 90,959,000 — 954,000 90,005,000 Consumer 25,538,000 23,489,000 — — 23,489,000 Total loans 1,285,436,000 1,275,685,000 — 6,579,000 1,269,106,000 Mortgage servicing rights 1,546,000 2,089,000 — 2,089,000 — Financial liabilities Local certificates of deposit $ 285,602,000 $ 281,480,000 $ — $ 281,480,000 $ — National certificates of deposit 404,377,000 412,337,000 — 412,337,000 — Total deposits 689,979,000 693,817,000 — 693,817,000 — Repurchase agreements 37,450,000 37,450,000 — 37,450,000 — Federal Home Loan Bank advances 147,505,000 140,063,000 — 140,063,000 — Total borrowed funds 184,955,000 177,513,000 — 177,513,000 — 45 The carrying amount and estimated fair values for financial instruments as of September 30, 2019 were as follows: Carrying value Estimated fair value Level 1 Level 2 Level 3 Financial assets Securities to be held to maturity $ 298,786,000 $ 306,647,000 $ — $ 306,647,000 $ — Loans (net of allowance for loan losses) Commercial Real estate 363,725,000 360,061,000 — 622,000 359,439,000 Construction 36,829,000 36,458,000 — — 36,458,000 Other 198,093,000 196,674,000 — 5,142,000 191,532,000 Municipal 36,492,000 36,192,000 — — 36,192,000 Residential Term 484,160,000 482,121,000 — 992,000 481,129,000 Construction 14,091,000 14,032,000 — — 14,032,000 Home equity line of credit 93,180,000 90,289,000 — 387,000 89,902,000 Consumer 25,124,000 23,318,000 — — 23,318,000 Total loans 1,251,694,000 1,239,145,000 — 7,143,000 1,232,002,000 Mortgage servicing rights 1,451,000 2,083,000 — 2,083,000 — Financial liabilities Local certificates of deposit $ 283,119,000 $ 285,598,000 $ — $ 285,598,000 $ — National certificates of deposit 378,654,000 379,995,000 — 379,995,000 — Total certificates of deposits 661,773,000 665,593,000 — 665,593,000 — Repurchase agreements 41,310,000 40,004,000 — 40,004,000 — Federal Home Loan Bank advances 140,107,000 140,008,000 — 140,008,000 — Total borrowed funds 181,417,000 180,012,000 — 180,012,000 — 46 Note 16 – Impact of Recently Issued Accounting Standards In June 2016, the FASB issued Accounting Standards Update (ASU) No. 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. Under the new guidance, which will replace the existing incurred loss model for recognizing credit losses, banks and other lending institutions will be required to recognize the full amount of expected credit losses. The new guidance, which is referred to as the current expected credit loss model, requires that expected credit losses for financial assets held at the reporting date that are accounted for at amortized cost be measured and recognized based on historical experience and current and reasonably supportable forecasted conditions to reflect the full amount of expected credit losses. A modified version of these requirements also applies to debt securities classified as available for sale. The ASU was to be effective for all SEC registrants for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. On October 16, 2019, FASB voted to finalize a proposal issued in August 2019 under which the effective implementation date was changed for SEC registrants meeting the definition of a Smaller Reporting Company to fiscal years beginning after December 15, 2022. Early adoption is permitted for fiscal years beginning after December 15, 2018, including interim periods within such years. The Company qualifies as a Smaller Reporting Company. It continues to evaluate the impact of the adoption of the ASU on its consolidated financial statements, and continues to anticipate that it may have a material impact upon adoption. The Bank has formed an implementation committee for ASU No. 2016-13. To date, committee members have participated in educational seminars on the new standards, identified the historical data sets that will be necessary to implement the new standard, and have chosen a third-party vendor who provides software solutions for ASU No. 2016-13 modeling and calculation. The Bank is in the late stages of implementing this software and plans to run incurred loss and current expected credit models in parallel until adoption of ASU No. 2016-13. In January 2017, the FASB issued ASU No. 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. The ASU was issued to reduce the cost and complexity of the goodwill impairment test. To simplify the subsequent measurement of goodwill, step two of the goodwill impairment test was eliminated. Instead, a Company will recognize an impairment of goodwill should the carrying value of a reporting unit exceed its fair value (i.e. step one). The ASU was effective for the Company on January 1, 2020 and will be applied prospectively. Implementation of this ASU did not have a material effect on the Company's consolidated financial statements. In August 2018, the FASB issued ASU No. 2018-13, Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement. This ASU eliminates, adds and modifies certain disclosure requirements for fair value measurements. Among the changes, entities will no longer be required to disclose the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, but will be required to disclose the range and weighted average used to develop significant unobservable inputs for Level 3 fair value measurements. ASU No. 2018-13 is effective for interim and annual reporting periods beginning after December 15, 2019; early adoption is permitted. Entities are also allowed to elect early adoption for the eliminated or modified disclosure requirements and delay adoption of the new disclosure requirements until their effective date. As ASU No. 2018-13 only revises disclosure requirements, it did not have a material impact on the Company’s consolidated financial statements. In August 2018, the FASB issued ASU No. 2018-14, Disclosure Framework - Changes to the Disclosure Requirements for Defined Benefit Plans . This ASU makes minor changes to the disclosure requirements for employers that sponsor defined benefit pension and/or other postretirement benefit plans. ASU 2018-14 is effective for fiscal years ending after December 15, 2020; early adoption is permitted. As ASU 2018-14 only revises disclosure requirements, it will not have a material impact on the Company’s consolidated financial statements. 47 Note 17 – Commitment 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. 48