What changed in this filing

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Item 2. Management’s Discussion and Analysis

2021-08-06 compared with 2021-05-07 · 246 added, 199 removed, 741 unchanged (38% of the section changed)

21 unchanged sentences

The preparation of such financial statements requires Management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosure of contingent assets and liabilities.

On an ongoing basis, Management evaluates its estimates, including those related to the allowance for loan losses, goodwill, the valuation of mortgage servicing rights, and other-than-temporary impairment on securities.

On an ongoing basis, Management evaluates its estimates, including those related to the allowance for loan losses, the fair value of securities, goodwill, the valuation of mortgage servicing rights, and other-than-temporary impairment on securities.

Management bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis in making judgments about the carrying values of assets that are not readily apparent from other sources.

26 unchanged sentences

Other-Than-Temporary Impairment on Securities.

Another significant estimate related to investment securities is the evaluation of other-than-temporary impairments.

The evaluation of securities for other-than-temporary impairments is a quantitative and qualitative process, which is subject to risks and uncertainties and is intended to determine whether declines in the fair value of investments should be recognized in current period earnings.

Another significant estimate related to investment securities is the evaluation of other-than-temporary impairment.

The evaluation of securities for other-than-temporary impairment is a quantitative and qualitative process, which is subject to risks and uncertainties and is intended to determine whether declines in the fair value of investments should be recognized in current period earnings.

The risks and uncertainties include changes in general economic conditions, the issuer's financial condition and/or future prospects, the effects of changes in interest rates or credit spreads and the expected recovery period of unrealized losses.

6 unchanged sentences

The Company formally documents relationships between hedging instruments and hedged items, as well as its risk management objectives and strategy for undertaking various hedge transactions.

The Company also assesses, both at the hedge’s inception and on an ongoing basis, whether the derivatives that are used in hedging transactions are effective in offsetting changes in cash flows or fair values of hedged items.

The Bank also assesses, both at the hedge’s inception and on an ongoing basis, whether the derivatives that are used in hedging transactions are effective in offsetting changes in cash flows or fair values of hedged items.

Changes in fair value of a derivative that is effective and that qualifies as a cash flow hedge are recorded in other comprehensive income (loss) and are reclassified into earnings when the forecasted transaction or related cash flows affect earnings.

2 unchanged sentences

The Company discontinues hedge accounting when it determines that the derivative is no longer effective in offsetting changes in the cash flows of the hedged item, that it is unlikely that the forecasted transaction will occur, or that the designation of the derivative as a hedging instrument is no longer appropriate.

Risks & Uncertainties.

As of March 31, 2021, local, U.S., and world governments have begun to ease restrictions imposed to curtail the spread of the global pandemic, coronavirus disease (COVID-19), however limitations in many sectors remain in

place and are expected to remain in place in some form subsequent to March 31, 2021.

Risks and Uncertainties.

As of June 30, 2021, local and state governments in the US have eased most restrictions imposed to curtail the spread of the global pandemic, coronavirus disease (COVID-19), however limitations in some sectors remain in

place and are expected to remain in place in some form subsequent to June 30, 2021.

There continues to be uncertainty surrounding the duration of the pandemic, its potential economic ramifications, and any further government actions to mitigate them.

17 unchanged sentences

A Federal Income Tax rate of 21.0% was used in 2021 and 2020.

For the three months ended March 31,

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

Dollars in thousands

2021 2020 2021 2020

Net interest income as presented $ 31,596 $ 29,409 $ 15,723 $ 14,491

5 unchanged sentences

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

For the three months ended March 31,

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

Dollars in thousands

2021 2020 2021 2020

Non-interest expense, as presented $ 19,370 $ 19,960 $ 9,496 $ 8,917

11 unchanged sentences

The following table provides a reconciliation of average tangible shareholders' common equity to the Company's consolidated financial statements, which have been prepared in accordance with GAAP:

For the three months ended March 31,

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

Dollars in thousands

2021 2020 2021 2020

Average shareholders' equity as presented $ 230,760 $ 217,661 $ 233,214 $ 218,191

3 unchanged sentences

The following table provides a reconciliation to Net Income:

For the three months ended March 31,

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

Dollars in thousands 2021 2020 2021 2020

1 unchanged sentence

provision for loan losses 1,050 2,750 525 2,350

income taxes 1,850 1,201

income taxes expense 3,676 2,457 1,826 1,256

Pre-tax, pre-provision net income $ 22,435 $ 18,271 $ 11,138 $ 10,175

Executive Summary

Net income for the three months ended March 31, 2021 was $8.9 million, up $2.4 million or 37.4% from the same period in 2020.

Earnings per common share on a fully diluted basis were $0.81 for the three months ended March 31, 2021, up $0.21 or 35.0% from the $0.60 posted for the same period in 2020.

The Company posted record operating results during the first quarter of 2021.

Net income for the six months ended June 30, 2021 was $17.7 million, up $4.6 million or 35.6% from the same period in 2020.

Earnings per common share on a fully diluted basis were $1.61 for the six months ended June 30, 2021, up $0.41 or 34.2% from the $1.20 posted for the same period in 2020.

For the quarter ended June 30, 2021, net income was $8.8 million, up $2.2 million or 33.8% from the same period in 2020.

Earnings per common share on a fully diluted basis were $0.80 for the quarter ended June 30, 2021, up $0.20 or 33.3% from the $0.60 posted for the same period in 2020.

The Company posted very positive operating results during the first half of 2021.

Net income of $17.7 million was achieved from a combination of increased net interest income before loan loss provision, continued strong non-interest revenue and controlled operating expenses.

Asset quality continues to trend positively as improvements noted over the course of 2020 have been sustained and are ongoing.

Based upon the strength of the Company's earnings, a dividend of 31 cents per share was declared in the first quarter, representing a payout to our shareholders of 37.80% of net income for the period.

Net interest income on a tax-equivalent basis was up $1.0 million or 6.3% in the three months ended March 31, 2021 compared to the same period in 2020.

This increase is attributable to growth in earning assets and recognition of origination fees on PPP loans.

The tax equivalent net interest margin for the three months ended March 31, 2021, was 2.99%, down from 3.12% for the same period in 2020.

Non-interest income for the three months ended March 31, 2021 was $5.3 million, up $1.1 million or 25.5%, from the three months ended March 31, 2020.

Strong demand for both purchase and refinance loans, along with a favorable mortgage servicing right valuation, led to mortgage banking revenue increasing $1.5 million or 290.3% in the first quarter of 2021 versus the prior year.

Asset quality is strong and stable.

Based upon the strength of the Company's earnings,

dividends totaling 63 cents per share have been declared year-to-date, representing a payout to our shareholders of 38.65% of basic earnings per share for the period.

Net interest income on a tax-equivalent basis was up $2.2 million or 7.3% in the six months ended June 30, 2021 compared to the same period in 2020.

This increase is attributable primarily to growth in earning assets along with recognition of origination fees on PPP loans.

The tax equivalent net interest margin for the six months ended June 30, 2021, was 2.93%, down from 2.99% for the same period in 2020.

For the quarter ended June 30, 2021, net interest income on a tax-equivalent basis increased $1.2 million or 8.2% compared to the same period in 2020, with the net interest margin staying the same at 2.86%.

Non-interest income for the six months ended June 30, 2021 was $10.2 million, up $1.4 million or 15.7%, from the six months ended June 30, 2020.

Strong demand for both purchase and refinance loans, along with favorable mortgage servicing right valuations, led to mortgage banking revenue increasing $1.4 million or 75.9% in the first half of 2021 versus the prior year.

Revenue at First National Wealth Management increased $414,000 or 23.0% over the same period, while other income was up $718,000 or 23.4%, centered in debit card revenue.

Non-interest expense for the three months ended March 31, 2021 was $9.9 million, down $1.2 million or 10.6% from the three months ended March 31, 2020.

Non-interest expense for the six months ended June 30, 2021 was $19.4 million, down $590,000 or 3.0% from the six months ended June 30, 2020.

The year-to-year change is primarily the result of charges taken during the first quarter of 2020, to restructure interest rate swap positions, partially offset by increases in employee expenses and furniture and equipment expense.

Asset quality continued to trend positively in the first quarter.

Non-performing assets stood at 0.30% of total assets as of March 31, 2021, down from 0.49% of total assets as of March 31, 2020 and 0.32% as of December 31, 2020.

Total past-due loans were 0.37% of total loans as of March 31, 2021, down from 0.66% of total loans as of December 31, 2020 and 1.62% as of March 31, 2020.

The provision for loan losses for the first three months of 2021 was $525,000, up from the $400,000 provisioned in the same period in 2020.

Asset quality continues to be strong and stable.

Non-performing assets stood at 0.30% of total assets as of June 30, 2021, down from 0.41% of total assets as of June 30, 2020 and 0.32% as of December 31, 2020.

Total past-due loans were 0.22% of total loans as of June 30, 2021, down from 0.66% of total loans as of December 31, 2020 and 0.66% as of June 30, 2020.

The provision for loan losses for the first six months of 2021 was $1.1 million, down from the $2.8 million provisioned in the same period in 2020.

The Company continues to view it prudent to consider the uncertainties brought about by COVID-19 and the potential impact to borrowers in its provision analysis.

Net loan chargeoffs for the three months ended March 31, 2021 were $184,000 or 0.05% of average loans on an annualized basis.

This was up slightly from net chargeoffs of $181,000 for the three months ended March 31, 2020.

The allowance for loan losses increased $341,000 between December 31, 2020 and March 31, 2021, and now stands at 1.09% of loans outstanding as of March 31, 2021, down slightly from 1.10% at December 31, 2020 and up from 0.88% of loans outstanding March 31, 2020.

The Company's balance sheet continued to expand in the first three months of 2021 as total assets increased $75.6 million or 3.2% year-to-date.

The loan portfolio increased $40.0 million or 2.7% in the three months ended March 31, 2021 and $172.6 million or 12.8% from a year ago.

Loan growth in the first quarter was centered in commercial real estate and construction loans, up $24.7 million, and other commercial loans, up $12.5 million.

Other commercial loans include Payroll Protection Program (PPP) loan balances of $62.7 million, an increase of $2.5 million in the first quarter.

The investment portfolio has increased $460,000 year-to-date and increased $25.5 million or 3.8% from a year ago.

On the liability side of the balance sheet, low-cost deposits have increased $68.1 million or 6.3% year-to-date, with much of the growth attributable to various economic stimulus programs, including proceeds of PPP loans, being deposited back to the Bank.

Net loan chargeoffs for the six months ended June 30, 2021 were $269,000 or 0.04% of average loans on an annualized basis.

This was down slightly from net chargeoffs of $279,000 for the six months ended June 30, 2020.

The allowance for loan losses increased $781,000 between December 31, 2020 and June 30, 2021, and now stands at 1.07% of loans outstanding as of June 30, 2021, down slightly from 1.10% at December 31, 2020 and up from 0.97% of loans outstanding June 30, 2020.

The Company's balance sheet continued to expand in the first six months of 2021 as total assets increased $89.2 million or 3.8% year-to-date.

The loan portfolio increased $111.5 million or 7.6% in the six months ended June 30, 2021 and $136.6 million or 9.4% from a year ago.

Loan growth in the first six months of 2021 was centered in commercial real estate and construction loans, up $94.5 million, and other commercial loans, up $13.7 million.

Other commercial loans include Payroll Protection Program (PPP) loan balances of $54.4 million, a decrease of $5.8 million since December 31, 2020.

The investment portfolio has increased $1.7 million year-to-date and increased $27.3 million or 4.1% from a year ago.

On the liability side of the balance sheet, low-cost deposits have increased $114.1 million or 10.6% year-to-date, with much of the growth attributable to various economic stimulus programs.

Year-over-year, low-cost deposits have increased $275.8 million or 30.2%.

Local certificates of deposit ("CDs") decreased $3.3 million and wholesale CDs increased $32.0 million year-to-date.

Local certificates of deposit ("CDs") increased $6.8 million and wholesale CDs decreased $16.2 million year-to-date.

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

The Company's total risk-based capital ratio was 14.83% as of March 31, 2021, solidly above the well-capitalized threshold of 10.0% set by the Federal Deposit Insurance Corporation, the Federal Reserve Board, and the Office of the Comptroller of the Currency.

The Company's operating ratios were strong in the first quarter, with a return on average tangible common equity of 18.34% for the three months ended March 31, 2021 compared to 13.95% for the same period in 2020.

Our non-GAAP efficiency ratio continues to be an important component in our overall performance and stood at 45.52% for the three months ended March 31, 2021 compared to 58.12% for the same period in 2020.

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

In the absence of these charges, the non-GAAP efficiency ratio for the first three months of 2020 would have been 48.49%.

The Company's total risk-based capital ratio was 14.55% as of June 30, 2021, solidly above the well-capitalized threshold of 10.0% set by the Federal Deposit Insurance Corporation, the Federal Reserve Board, and the Office of the Comptroller of the Currency.

The Company's operating ratios were strong in the first half of 2021, with a return on average tangible common equity of 17.88% for the six months ended June 30, 2021 compared to 13.99% for the same period in 2020.

Our non-GAAP efficiency ratio continues to be an important component in our overall performance and stood at 45.14% for the six months ended June 30, 2021 compared to 52.13% for the same period in 2020.

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

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

Net Interest Income

Total interest income of $19.0 million for the three months ended March 31, 2021 was a decrease of $1.7 million or 8.4% compared to total interest income of $20.7 million for the same period of 2020.

Total interest expense of $3.1 million for the three months ended March 31, 2021 was a decrease of $2.7 million or 46.7% compared to total interest expense for the three months ended March 31, 2020.

As a result, net interest income of $15.9 million for the three months ended March 31, 2021 was an increase of $1.0 million or 6.4% compared to net interest income of $14.9 million for the same period ended March 31, 2020.

Total interest income of $37.5 million for the six months ended June 30, 2021 was a decrease of $2.0 million or 5.0% compared to total interest income of $39.5 million for the same period of 2020.

Total interest expense of $5.9 million for the six months ended June 30, 2021 was a decrease of $4.2 million or 41.4% compared to total interest expense for the six months ended June 30, 2020.

As a result, net interest income of $31.6 million for the six months ended June 30, 2021 was an increase of $2.2 million or 7.4% compared to net interest income of $29.4 million for the same period ended June 30, 2020.

This increase is attributable to growth in earning assets.

The Company's net interest margin on a tax-equivalent basis for the three months ended March 31, 2021 was 2.99%, down from 3.12% for the first three months of 2020.

Tax-exempt interest income amounted to $2.4 million for the three months ended March 31, 2021 compared to $2.3 million for the three months ended March 31, 2020.

The following tables present the amount of interest earned or paid, as well as the average yield or rate on an annualized basis, for each major category of assets or liabilities for the three months ended March 31, 2021 and 2020.

The Company's net interest margin on a tax-equivalent basis for the six months ended June 30, 2021 was 2.93%, down from 2.99% for the first six months of 2020.

Tax-exempt interest income amounted to $4.5 million for the six months ended June 30, 2021 compared to $4.3 million for the six months ended June 30, 2020.

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

For the three months ended

March 31, 2021 March 31, 2020

For the six months ended

June 30, 2021 June 30, 2020

Dollars in thousands

14 unchanged sentences

Net interest margin 2.93 % 2.99 %

Interest income includes $1.2 million in net origination fees recognized in the first quarter of 2021, attributable to PPP loans;

as of March 31, 2021, net unrecognized PPP origination fees totaled $3.3 million.

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

The following tables present changes in interest income and expense attributable to changes in interest rates and volume for interest-earning assets and liabilities for the three months ended March 31, 2021 compared to 2020.

For the quarters ended

June 30, 2021 June 30, 2020

Dollars in thousands

interest Average

Yield/Rate Amount of

interest Average

Interest on earning assets

Interest-bearing deposits $ 12 0.09 % $ 5 0.08 %

Investments 4,204 2.43 % 5,125 3.09 %

Loans held for sale 8 1.62 % 5 0.73 %

Loans 14,909 3.88 % 14,233 4.03 %

Total interest-earning assets 19,133 3.36 % 19,368 3.68 %

Interest expense

Deposits 1,948 0.47 % 3,561 0.96 %

Other borrowings 870 1.54 % 734 0.98 %

Total interest expense 2,818 0.60 % 4,295 0.96 %

Net interest income $ 16,315 $ 15,073

Interest rate spread 2.75 % 2.72 %

Net interest margin 2.86 % 2.86 %

Interest income includes $1.9 million in net origination fees recognized during the first six months of 2021, attributable to PPP loans;

as of June 30, 2021, net unrecognized PPP origination fees totaled $3.6 million.

Interest income in the first six months of 2020 (program commenced in the second quarter) included a net $356,000 in origination fees recognized on PPP loans;

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

The following tables present changes in interest income and expense attributable to changes in interest rates and volume for interest-earning assets and liabilities for the six months and quarters ended ended June 30, 2021 compared to 2020.

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

For the three months ended March 31, 2021 compared to 2020

For the six months ended June 30, 2021 compared to 2020

Dollars in thousands

12 unchanged sentences

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

For the quarter ended June 30, 2021 compared to 2020

Dollars in thousands

Volume Rate Rate/Volume 1

Interest on earning assets

Interest-bearing deposits $ 5 $ 1 $ 1 $ 7

Investment securities 201 (1,080) (42) (921)

Loans held for sale (1) 6 (2) 3

Loans 1,186 (471) (39) 676

Change in interest income 1,391 (1,544) (82) (235)

Interest expense

Deposits 366 (1,794) (185) (1,613)

Other borrowings (180) 419 (103) 136

Change in interest expense 186 (1,375) (288) (1,477)

Change in net interest income $ 1,205 $ (169) $ 206 $ 1,242

Average Daily Balance Sheets

The following table shows the Company's average daily balance sheets for the three months ended March 31, 2021 and 2020.

For the three months ended

The following table shows the Company's average daily balance sheets for the six months and quarters ended June 30, 2021 and 2020.

For the six months ended For the quarters ended

Dollars in thousands

2021 March 31,

2021 June 30,

2020 June 30,

2021 June 30,

Cash and cash equivalents $ 22,362 $ 18,318 $ 21,881 $ 20,214

36 unchanged sentences

Non-Interest Income

Non-interest income of $5.3 million for the three months ended March 31, 2021 is an increase of $1.1 million compared to the same period in 2020.

Non-interest income of $10.2 million for the six months ended June 30, 2021 is an increase of $1.4 million compared to the same period in 2020.

Strong demand for both purchase and refinance loans, along with favorable mortgage servicing right valuations and release of impairment reserves, led to mortgage banking revenue increasing $1.4 million or 75.9% in the first half of 2021 versus the prior year.

Revenue at First National Wealth Management increased $414,000 or 23.0% over the same period, while other income was up $718,000 or 23.4%, centered in debit card revenue.

Non-interest income of $4.9 million for the quarter ended June 30, 2021 is an increase of $310,000 compared to the same period in 2020.

Non-Interest Expense

Non-interest expense of $9.9 million for the three months ended March 31, 2021 is a decrease of 10.6% or $1.2 million compared to non-interest expense of $11.0 million for the same period in 2020.

Non-interest expense of $19.4 million for the six months ended June 30, 2021 is a decrease of 3.0% or $590,000 compared to non-interest expense of $20.0 million for the same period in 2020.

The Company's non-GAAP efficiency ratio stood at 45.52% for the three months ended March 31, 2021, down from 58.12% for the same period in 2020.

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

In the absence of these charges, the non-GAAP efficiency ratio for the first three months of 2020 would have been 48.49%.

Income taxes on operating earnings were $1.9 million for the three months ended March 31, 2021, up $649,000 from the same period in 2020.

The Company's investment portfolio increased by $460,000 between December 31, 2020 and March 31, 2021.

As of March 31, 2021, mortgage-backed securities had a carrying value of $304.3 million and a fair value of $302.6 million.

The Company's non-GAAP efficiency ratio stood at 45.14% for the six months ended June 30, 2021, down from 52.13% for the same period in 2020.

Without the swap related charges, the non-GAAP efficiency ratio for the first six months of 2020 would have been 47.35%.

Income taxes on operating earnings were $3.7 million for the six months ended June 30, 2021, up $1.2 million from the same period in 2020.

The Company's investment portfolio increased by $1.7 million between December 31, 2020 and June 30, 2021.

As of June 30, 2021, mortgage-backed securities had a carrying value of $315.4 million and a fair value of $314.4 million.

Of this total, securities with a fair value of $63.5 million or 20.2% of the mortgage-backed portfolio were issued by the Government National Mortgage Association and securities with a fair value of $250.8 million or 79.8% of the mortgage-backed portfolio were issued by the Federal Home Loan Mortgage Corporation ("Freddie Mac") and the Federal National Mortgage Association ("Fannie Mae").

15 unchanged sentences

The amortization of the net unrealized loss reported in accumulated other comprehensive income (loss) will offset the effect on interest income of the discount for the transferred securities.

The remaining unamortized balance of the net unrealized losses for the securities transferred from available for sale to held to maturity was $124,000 at March 31, 2021.

This compares to $133,000 and $174,000, net of taxes, at December 31, 2020 and March 31, 2020, respectively.

The remaining unamortized balance of the net unrealized losses for the securities transferred from available for sale to held to maturity was $113,000 at June 30, 2021.

This compares to $133,000 and $146,000, net of taxes, at December 31, 2020 and June 30, 2020, respectively.

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

The following table sets forth the Company's investment securities at their carrying amounts as of March 31, 2021 and 2020 and December 31, 2020.

The following table sets forth the Company's investment securities at their carrying amounts as of June 30, 2021 and 2020 and December 31, 2020.

Dollars in thousands

2021 December 31,

2020 March 31,

2020 June 30,

Securities available for sale

15 unchanged sentences

Total securities $ 691,267 $ 689,534 $ 664,007

The following table sets forth yields and contractual maturities of the Company's investment securities as of March 31, 2021.

The following table sets forth yields and contractual maturities of the Company's investment securities as of June 30, 2021.

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

35 unchanged sentences

Impaired Securities

The securities portfolio contains certain securities where the amortized cost of which exceeds fair value, which at March 31, 2021 amounted to $10.0 million, or 1.51% of the amortized cost of the total securities portfolio.

The securities portfolio contains certain securities where the amortized cost of which exceeds fair value, which at June 30, 2021 amounted to $5.5 million, or 0.84% of the amortized cost of the total securities portfolio.

At December 31, 2020, this amount was $1.2 million, or 0.18% of the amortized cost of total securities portfolio.

9 unchanged sentences

Estimating future cash flows is a quantitative and qualitative process that incorporates information received from third party sources along with certain internal assumptions and judgments regarding the future performance of the underlying collateral.

As of March 31, 2021, the Company had temporarily impaired securities with a fair value of $268.0 million and unrealized losses of $10.0 million, as identified in the table below.

Securities in a continuous unrealized loss position more than twelve months amounted to $3.7 million as of March 31, 2021, compared with $3.9 million at December 31, 2020.

As of June 30, 2021, the Company had temporarily impaired securities with a fair value of $281.6 million and unrealized losses of $5.5 million, as identified in the table below.

Securities in a continuous unrealized loss position more than twelve months amounted to $5.2 million as of June 30, 2021, compared with $3.9 million at December 31, 2020.

The Company has concluded that these securities were not other-than-temporarily impaired.

This conclusion was based on the issuer's continued satisfaction of the securities obligations in accordance with their contractual terms and the expectation that the issuer will continue to do so, Management's intent and ability to hold these securities for a period of time sufficient to allow for any anticipated recovery in fair value which may be at maturity, the expectation that the Company will receive 100% of future contractual cash flows, as well as the evaluation of the fundamentals of the issuer's financial condition and other objective evidence.

The following table summarizes temporarily impaired securities and their approximate fair values at March 31, 2021:

The following table summarizes temporarily impaired securities and their approximate fair values at June 30, 2021:

Less than 12 months 12 months or more Total

11 unchanged sentences

Government-sponsored agencies and enterprises.

As of March 31, 2021, there were $3.6 million unrealized losses on these securities compared to $333,000 unrealized losses as of December 31, 2020.

As of June 30, 2021, there were $1.7 million unrealized losses on these securities compared to $333,000 unrealized losses as of December 31, 2020.

All of these securities were credit rated "AAA" or "AA+" by the major credit rating agencies.

Management believes that securities issued by U.S.

Government-sponsored agencies and enterprises have minimal credit risk, as these agencies and enterprises play a vital role in the nation's financial markets and does not consider these securities to be other-than-temporarily impaired at March 31, 2021.

Mortgage-backed securities issued by U.S.

1 unchanged sentence

Government-sponsored enterprises.

As of March 31, 2021, there were $5.5 million of unrealized losses on these securities compared with $812,000 at December 31, 2020.

As of June 30, 2021, there were $3.6 million of unrealized losses on these securities compared with $812,000 at December 31, 2020.

All of these securities were credit rated "AAA" or "AA+" by the major credit rating agencies.

2 unchanged sentences

Government-sponsored enterprises have minimal credit risk, as these agencies and enterprises play a vital role in the nation's financial markets.

Management believes that the unrealized losses at March 31, 2021 were attributable to changes in current market yields and spreads since the date the underlying securities were purchased, and does not consider these securities to be other-than-temporarily impaired at March 31, 2021.

Management believes that the unrealized losses at June 30, 2021 were attributable to changes in current market yields and spreads since the date the underlying securities were purchased, and does not consider these securities to be other-than-temporarily impaired at June 30, 2021.

The Company also has the ability and intent to hold these securities until a recovery of their amortized cost, which may be at maturity.

Obligations of state and political subdivisions.

As of March 31, 2021, there were $808,000 of unrealized losses on these securities compared to $3,000 at December 31, 2020.

As of June 30, 2021, there were $187,000 of unrealized losses on these securities compared to $3,000 at December 31, 2020.

Municipal securities are supported by the general taxing authority of the municipality or a dedicated revenue stream, and, in the case of school districts, are generally supported by state aid.

At March 31, 2021, all municipal bond issuers were current on contractually obligated interest and principal payments.

The Company attributes the unrealized losses at March 31, 2021 to changes in prevailing market yields and pricing spreads since the date the underlying securities were purchased, combined with current market liquidity conditions and the disruption in the financial markets in general.

Accordingly, the Company does not consider these municipal securities to be other-than-temporarily impaired at March 31, 2021.

At June 30, 2021, all municipal bond issuers were current on contractually obligated interest and principal payments.

The Company attributes the unrealized losses at June 30, 2021 to changes in prevailing market yields and pricing spreads since the date the underlying securities were purchased, combined with current market liquidity conditions and the disruption in the financial markets in general.

Accordingly, the Company does not consider these municipal securities to be other-than-temporarily impaired at June 30, 2021.

Corporate securities.

As of March 31, 2021, there were $86,000 of unrealized losses on these securities compared to $2,000 at December 31, 2020.

As of June 30, 2021, there were $22,000 of unrealized losses on these securities compared to $2,000 at December 31, 2020.

Corporate securities are dependent on the operating performance of the issuers.

At March 31, 2021, all corporate bond issuers were current on contractually obligated interest and principal payments.

At June 30, 2021, all corporate bond issuers were current on contractually obligated interest and principal payments.

Federal Home Loan Bank Stock

2 unchanged sentences

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

As of March 31, 2021, the Bank's investment in FHLB stock totaled $9.1 million.

This compares to $9.5 million as of December 31, 2020 and $9.0 million as of March 31, 2020.

As of June 30, 2021, the Bank's investment in FHLB stock totaled $7.8 million.

This compares to $9.5 million as of December 31, 2020 and $9.5 million as of June 30, 2020.

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

No impairment losses have been recorded through March 31, 2021.

No impairment losses have been recorded through June 30, 2021.

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

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

As of March 31, 2021, the Bank had $3.5 million in loans held for sale.

This compares to $5.9 million loans held for sale at December 31, 2020 and $561,000 loans held for sale at March 31, 2020.

As of June 30, 2021, the Bank had $1.1 million in loans held for sale.

This compares to $5.9 million loans held for sale at December 31, 2020 and $5.0 million loans held for sale at June 30, 2020.

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

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therefore, there was minimum impact on the reserve.

The loan portfolio increased during the first three months of 2021, with total loans at $1.52 billion at March 31, 2021, up $40.0 million or 2.7% from total loans of $1.48 billion at December 31, 2020.

Commercial loans increased $37.2 million or 4.7% between December 31, 2020 and March 31, 2021, municipal loans increased $5.7 million or 13.0%, residential term loans decreased $1.8 million and home equity lines of credit decreased $2.5 million.

The loan portfolio increased during the first six months of 2021, with total loans at $1.59 billion at June 30, 2021, up $111.5 million or 7.6% from total loans of $1.48 billion at December 31, 2020.

Commercial loans increased $108.3 million or 13.8% between December 31, 2020 and June 30, 2021, municipal loans decreased $2.7 million or 6.2%, residential term loans increased $1.3 million, residential construction increased $8.2 million, and home equity lines of credit decreased $2.0 million.

Loans made under the U.S.

Small Business Administration's PPP accounted for $62.7 million to commercial loans as of March 31, 2021.

Small Business Administration's PPP accounted for $54.4 million to commercial loans as of June 30, 2021.

Commercial loans are comprised of three major classes:

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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 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.

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Consumer loans may be secured or unsecured.

Construction loans, both commercial and residential, at 36.6% of capital are well under the regulatory guidance of 100.0% of capital at March 31, 2021.

Construction loans and non-owner-occupied commercial real estate loans are at 155.2% of total capital, well under the regulatory guidance of 300.0% of capital at March 31, 2021.

The following table summarizes the loan portfolio, by class, at March 31, 2021 and 2020 and December 31, 2020.

Construction loans, both commercial and residential, at 43.5% of capital are well under the regulatory guidance of 100.0% of capital at June 30, 2021.

Construction loans and non-owner-occupied commercial real estate loans are at 171.1% of total capital, well under the regulatory guidance of 300.0% of capital at June 30, 2021.

The following table summarizes the loan portfolio, by class, at June 30, 2021 and 2020 and December 31, 2020.

Dollars in thousands

March 31, 2021 December 31, 2020 March 31, 2020

June 30, 2021 December 31, 2020 June 30, 2020

Real estate $ 527,415 33.2 % $ 442,121 29.9 % $ 397,155 27.4 %

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Total loans $ 1,588,264 100.0 % $ 1,476,761 100.0 % $ 1,451,623 100.0 %

The following table sets forth certain information regarding the contractual maturities of the Bank's loan portfolio as of March 31, 2021.

The following table sets forth certain information regarding the contractual maturities of the Bank's loan portfolio as of June 30, 2021.

Dollars in thousands

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Total loans $ 17,315 $ 219,446 $ 193,268 $ 1,158,235 $ 1,588,264

The following table provides a listing of loans by class, between variable and fixed rates as of March 31, 2021.

The following table provides a listing of loans by class, between variable and fixed rates as of June 30, 2021.

Fixed-Rate Adjustable-Rate Total

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Loan Concentrations

As of March 31, 2021, the Bank did not have any concentration of loans in one particular industry that exceeded 10% of its total loan portfolio.

As of June 30, 2021, the Bank had one concentration of loans in one particular industry that exceeded 10% of its total loan portfolio.

Loans to hotels (except Casino hotels) and motels totaled $160.4 million, or 10.10% of total loans.

Credit Risk Management and Allowance for Loan Losses

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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.

Approximately 60% of commercial loan outstanding balances, excluding SBA PPP loans, are 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.

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In response to the consequences of COVID-19, we have increased the rigor and frequency of our loan portfolio monitoring and borrower contact, particularly within those industry groups thought to be most vulnerable, including the lodging, restaurant and hospitality sectors.

as additional information becomes available, an increase to our Allowance for Loan Losses is likely.

As the economy has re-opened initial experience within these sectors has been generally favorable;

our Allowance for Loan Losses will be evaluated as additional information continues to become available.

The judgmental aspects involved in applying the risk grading criteria, analyzing the quality of individual loans, and assessing collateral values can also contribute to undetected, but probable, losses.

Consequently, there maybe underlying credit risks that have not yet surfaced in the loan- specific or qualitative metrics the Company uses to estimate its allowance for loan losses.

Consequently, there may be underlying credit risks that have not yet surfaced in the loan-specific or qualitative metrics the Company uses to estimate its allowance for loan losses.

The allowance for loan losses includes reserve amounts assigned to individual loans on the basis of loan impairment.

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A specific reserve is allocated to an individual loan when that loan has been deemed impaired and when the amount of a probable loss is estimable on the basis of its collateral value, the present value of anticipated future cash flows, or its net realizable value.

At March 31, 2021, impaired loans with specific reserves totaled $4.4 million and the amount of such reserves was $900,000.

At June 30, 2021, impaired loans with specific reserves totaled $3.7 million and the amount of such reserves was $707,000.

This compares to impaired loans with specific reserves of $3.9 million at December 31, 2020 and the amount of such reserves was $462,000.

All of these analyses are reviewed and discussed by the Directors' Loan Committee, and recommendations from these processes provide Management and the Board of Directors with independent information on loan portfolio condition.

Our total allowance at March 31, 2021 is considered by Management to be appropriate to address the credit losses inherent in the loan portfolio at that date.

Our total allowance at June 30, 2021 is considered by Management to be appropriate to address the credit losses inherent in the loan portfolio at that date.

However, our determination of the appropriate allowance level is based upon a number of assumptions we make about future events, which we believe are reasonable, but which may or may not prove valid.

Thus, there can be no assurance that our charge-offs in future periods will not exceed our allowance for loan losses or that we will not need to make additional increases in our allowance for loan losses.

The following table summarizes our allocation of allowance by loan class as of March 31, 2021 and 2020 and December 31, 2020.

The following table summarizes our allocation of allowance by loan class as of June 30, 2021 and 2020 and December 31, 2020.

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

Dollars in thousands

March 31, 2021 December 31, 2020 March 31, 2020

June 30, 2021 December 31, 2020 June 30, 2020

Real estate $ 6,088 33.2 % $ 5,178 29.9 % $ 4,511 27.4 %

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Total $ 17,034 100.0 % $ 16,253 100.0 % $ 14,110 100.0 %

The allowance for loan losses totaled $16.6 million at March 31, 2021, compared to $16.3 million as of December 31, 2020 and $11.9 million as of March 31, 2020.

The allowance for loan losses totaled $17.0 million at June 30, 2021, compared to $16.3 million as of December 31, 2020 and $14.1 million as of June 30, 2020.

Management's ongoing application of methodologies to establish the allowance include an evaluation of impaired loans for specific reserves.

These specific reserves increased $438,000 in the first three months of 2021 from $462,000 at December 31, 2020 to $900,000 at March 31, 2021.

These specific reserves increased $245,000 in the first six months of 2021 from $462,000 at December 31, 2020 to $707,000 at June 30, 2021.

The specific loans that make up those categories change from period to period.

Impairment on those loans, which would be reflected in the allowance for loan losses, might or might not exist, depending on the specific circumstances of each loan.

The portion of the reserve based upon homogeneous pools of loans increased by $214,000 in the first three months of 2021.

The portion of the reserve based on qualitative factors increased $796,000 in the first three months of 2021 due to a mix of factors.

These included changes in various macroeconomic measures used in the qualitative model, updated analysis of the loan portfolio in multiple stress scenarios, and

performance of COVID-19 related loan modifications.

Unallocated reserves of $2.1 million, or 13.1% of the total reserve at December 31, 2020, decreased to $1.0 million, or 6.2% as of March 31, 2021.

After consideration of the shifts in specific, pooled and qualitative reserves, Management determined that the unallocated portion of the reserve at March 31, 2021 adequately addresses general imprecision related to loan portfolio growth, along with other underlying credit risks not yet captured in loan specific or qualitative metrics the Company uses to estimate its allowance.

A breakdown of the allowance for loan losses as of March 31, 2021, by loan class and allowance element, is presented in the following table:

The portion of the reserve based upon homogeneous pools of loans increased by $190,000 in the first six months of 2021.

The portion of the reserve based on qualitative factors increased $1.1 million in the first six months of 2021 due to a mix of factors.

These included changes in various macroeconomic measures

used in the qualitative model, updated analysis of the loan portfolio in multiple stress scenarios, and performance of COVID-19 related loan modifications.

Unallocated reserves of $2.1 million, or 13.1% of the total reserve at December 31, 2020, decreased to $1.3 million, or 7.9% as of June 30, 2021.

After consideration of the shifts in specific, pooled and qualitative reserves, Management determined that the unallocated portion of the reserve at June 30, 2021 adequately addresses general imprecision related to loan portfolio growth, along with other underlying credit risks not yet captured in loan specific or qualitative metrics the Company uses to estimate its allowance.

A breakdown of the allowance for loan losses as of June 30, 2021, by loan class and allowance element, is presented in the following table:

Dollars in thousands

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Based upon Management's evaluation, provisions are made to maintain the allowance as a best estimate of inherent losses within the portfolio.

The provision for loan losses to maintain the allowance was $525,000 for the first three months of 2021 and $400,000 the first three months of 2020.

Net charge-offs were $184,000 in the first three months of 2021, up slightly from $181,000 in the first three months of 2020.

Our allowance as a percentage of outstanding loans was 1.09% as of March 31, 2021, down slightly from 1.10% as of December 31, 2020, and up from 0.88% as of March 31, 2020.

The following table summarizes the activities in our allowance for loan losses for the three months ended March 31, 2021 and 2020 and for the year ended December 31, 2020:

The provision for loan losses to maintain the allowance was $1.1 million for the first six months of 2021 and $2.8 million the first six months of 2020.

Net charge-offs were $269,000 in the first six months of 2021, down slightly from $279,000 in the first six months of 2020.

Our allowance as a percentage of outstanding loans was 1.07% as of June 30, 2021, down slightly from 1.10% as of December 31, 2020, and up from 0.97% as of June 30, 2020.

The following table summarizes the activities in our allowance for loan losses for the six months ended June 30, 2021 and 2020 and for the year ended December 31, 2020:

Dollars in thousands

March 31, 2021 December 31, 2020 March 31, 2020

Balance at the beginning of year $ 16,253 $ 11,639 $ 11,639

June 30, 2021 December 31, 2020 June 30, 2020

Balance at the beginning of period $ 16,253 $ 11,639 $ 11,639

Loans charged off:

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Municipal — — —

Term 41 66 46

Construction — — —

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The Company continues to actively work with borrowers impacted by the COVID-19 outbreak.

As of March 31, 2021, a total of 1037 loan modification requests for interest-only payments or deferred payments have been completed in conformance with the Interagency Statement on Loan Modifications and Reporting issued March 23, 2020, Section 4013 of the Coronavirus Aid, Relief, Economic Security (CARES) Act, or H.R.

As of June 30, 2021, a total of 1050 loan modification requests for interest-only payments or deferred payments have been completed in conformance with the Interagency Statement on Loan Modifications and Reporting issued March 23, 2020, Section 4013 of the Coronavirus Aid, Relief, Economic Security (CARES) Act, or H.R.

133 signed December 27, 2020, which was extended by the Supplemental Appropriations Act, representing $291.7 million in loan balances, or approximately 19.0% of the overall loan portfolio.

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

As of March 31, 2021, loans totaling $50.6 remained in their original modification or had had a subsequent modification, representing 3.3% of the overall portfolio.

As of June 30, 2021, loans totaling $22.0 million remained in their original modification or had had a subsequent modification, representing 1.4% of the overall portfolio.

Refer to Note 3 of the financial statements for further detail.

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The Bank has been actively working with these borrowers to process applications for forgiveness per PPP guidelines;

as of March 31, 2021, PPP1 balances had been reduced to $17.6 million.

Under PPP2, 955 loans totaling $45.1 million had been granted as of March 31, 2021.

as of June 30, 2021, PPP1 balances had been reduced to $5.3 million.

Under PPP2, 1,263 loans totaling $52.1 million had been granted as of June 30, 2021, and the outstanding balances had been reduced to $49.1 million.

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

The State of Maine, where most of the Bank's customers reside and/or operate businesses has gradually re-opened its economy.

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

Quarantines for visitors from many states and limits on the size of public gatherings remain in place, but are expected to be lifted in coming months.

As of March 31, 2021, approximately 11% of the Company’s loan portfolio consisted of hospitality or restaurant industry borrowers, considered amongst the most impacted by COVID-19.

The State of Maine, where most of the Bank's customers reside and/or operate businesses has largely re-opened it's economy;

quarantines for out of state visitors and limits on the size of public gatherings have been lifted.

The recent emergence of the Delta variant of the COVID-19 virus has not yet resulted in new restrictions or curtailment of economic activity, but is a threat to the re-opening of the economy and could ultimately have a negative impact on the Bank's borrowers.

Nonperforming Loans

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

Nonperforming loans, expressed as a percentage of total loans, totaled 0.46% at March 31, 2021 and December 31, 2020, and 0.75% at March 31, 2020.

The following table shows the distribution of nonperforming loans by class as of March 31, 2021 and 2020 and December 31, 2020:

Nonperforming loans, expressed as a percentage of total loans, totaled 0.44% at June 30, 2021 compared to 0.46% at December 31, 2020 and 0.57% at June 30, 2020.

The following table shows the distribution of nonperforming loans by class as of June 30, 2021 and 2020 and December 31, 2020:

Dollars in thousands

2021 December 31,

2020 March 31,

2020 June 30,

Real estate $ 1,029 $ 543 $ 1,245

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

As of March 31, 2021, loans 90 or more days past due and still accruing interest totaled $85,000, compared to $1.5 million at December 31, 2020 and $3.8 million at March 31, 2020.

As of June 30, 2021, loans 90 or more days past due and still accruing interest totaled $104,000, compared to $1.5 million at December 31, 2020 and $1.5 million at June 30, 2020.

Troubled Debt Restructured

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

As of March 31, 2021, we had 73 loans with a balance of $11.3 million that have been restructured.

This compares to 74 loans with a balance of $11.5 million and 81 loans with a balance of $15.0 million classified as TDRs as of December 31, 2020 and March 31, 2020, respectively.

The following table shows the activity in loans classified as TDRs between December 31, 2020 and March 31, 2021:

As of June 30, 2021, we had 72 loans with a balance of $10.8 million that have been restructured.

This compares to 74 loans with a balance of $11.5 million and 78 loans with a balance of $14.0 million classified as TDRs as of December 31, 2020 and June 30, 2020, respectively.

The following table shows the activity in loans classified as TDRs between December 31, 2020 and June 30, 2021:

Balance in Thousands of Dollars Number of Loans Aggregate Balance

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Repayments in 2021 — (174)

Total at March 31, 2021 73 $ 11,306

As of March 31, 2021, 52 loans with an aggregate balance of $9.4 million were performing under the modified terms, 21 loans with an aggregate balance of $1.9 million were on nonaccrual and there were no loans more than 30 days past due and accruing.

As a percentage of aggregate outstanding balance, 83.1% were performing under the modified terms and 16.9% were on nonaccrual.

The performance status of all TDRs as of March 31, 2021, as well as the associated specific reserve in the allowance for loan losses, is summarized by type of loan in the following table.

Total at June 30, 2021 72 $ 10,782

As of June 30, 2021, 50 loans with an aggregate balance of $9.0 million were performing under the modified terms, 21 loans with an aggregate balance of $1.8 million were on nonaccrual and one loan with an aggregate balance of $6,000 was more than 30 days past due and accruing.

As a percentage of aggregate outstanding balance, 83.2% were performing under the modified terms, 16.7% were on nonaccrual and 0.1% were past due and still accruing.

The performance status of all TDRs as of June 30, 2021, as well as the associated specific reserve in the allowance for loan losses, is summarized by type of loan in the following table.

In thousands of dollars

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Associated specific reserve $ 504 $ — $ 156 $ 660

Residential, HELOC and consumer TDRs as of March 31, 2021 included 52 loans with an aggregate balance of $7.1 million, and the modifications granted fell into five major categories.

Residential, HELOC and consumer TDRs as of June 30, 2021 included 50 loans with an aggregate balance of $6.6 million, and the modifications granted fell into five major categories.

Loans totaling $4.4 million had an extension of term, allowing the borrower to repay over an extended number of years and lowering the monthly payment to a level the borrower can afford.

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Certain residential TDRs had more than one modification.

Commercial TDRs as of March 31, 2021 were comprised of 21 loans with a balance of $4.2 million.

Commercial TDRs as of June 30, 2021 were comprised of 22 loans with a balance of $4.2 million.

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

Three loans with an aggregate balance of $334,000 had an extension of term, allowing the borrower to repay over an extended number of years and lowering the monthly payment to a level the borrower can afford.

Four loans with an aggregate balance of $405,000 had an extension of term, allowing the borrower to repay over an extended number of years and lowering the monthly payment to a level the borrower can afford.

Six loans with an aggregate balance of $623,000 had a deferral of payment.

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In each case when a loan was modified, Management determined it was in the Bank's best interest to work with the borrower with modified terms rather than to proceed to foreclosure.

Once a loan is classified as a TDR it remains classified as such until the balance is fully repaid, despite whether the loan is performing under the modified terms.

As of March 31, 2021, Management is aware of six loans classified as TDRs that are involved in bankruptcy with an outstanding balance of $708,000.

There were also 21 loans with an outstanding balance of $1.9 million that were classified as TDRs and on non-accrual status, of which one loan with an outstanding balance of $92,000 was in the process of foreclosure.

Once a loan is classified as a TDR it generally remains classified as such until the balance is fully repaid, whether or not the loan is performing under the modified terms.

As of June 30, 2021, Management is aware of eight loans classified as TDRs that are involved in bankruptcy with an outstanding balance of $993,000.

There were also 21 loans with an outstanding balance of $1.8 million that were classified as TDRs and on non-accrual status, of which no loans were in the process of foreclosure.

Impaired Loans

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If the measure of an impaired loan is lower than the recorded investment in the loan, a specific reserve is established for the difference.

Impaired loans totaled $16.3 million at March 31, 2021, and have increased $301,000 from December 31, 2020.

There were 144 impaired loans at March 31, 2021 up from 140 loans at December 31, 2020.

Impaired commercial loans increased $613,000 between December 31, 2020 and March 31, 2021.

The specific allowance for impaired commercial loans increased from $299,000 at December 31, 2020 to $758,000 as of March 31, 2021, which represented the fair value deficiencies for loans where the fair value of the collateral or net present value of expected cash flows was estimated at less than our carrying amount of the loan.

From December 31, 2020 to March 31, 2021, impaired residential loans decreased $147,000 and impaired home equity lines of credit decreased $164,000.

The following table sets forth impaired loans as of March 31, 2021 and 2020 and December 31, 2020:

Impaired loans totaled $15.6 million at June 30, 2021, and have decreased $461,000 from December 31, 2020.

There were 133 impaired loans at June 30, 2021 down from 140 loans at December 31, 2020.

Impaired commercial loans increased $272,000 between December 31, 2020 and June 30, 2021.

The specific allowance for impaired commercial loans increased from $299,000 at December 31, 2020 to $589,000 as of June 30, 2021, which represented the fair value deficiencies for loans where the fair value of the collateral or net present value of expected cash flows was estimated at less than our carrying amount of the loan.

From December 31, 2020 to June 30, 2021, impaired residential loans decreased $288,000 and impaired home equity lines of credit decreased $443,000.

The following table sets forth impaired loans as of June 30, 2021 and 2020 and December 31, 2020:

Dollars in thousands

2021 December 31,

2020 March 31,

2020 June 30,

Real estate $ 3,074 $ 3,029 $ 5,749

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Past Due Loans

The Bank's overall loan delinquency ratio was 0.37% at March 31, 2021 compared to 0.66% at December 31, 2020 and 1.62% at March 31, 2020.

Loans 90 days delinquent and accruing decreased from $1.5 million at December 31, 2020 to $85,000 as of March 31, 2021.

The following table sets forth loan delinquencies as of March 31, 2021 and 2020 and December 31, 2020:

The Bank's overall loan delinquency ratio was 0.22% at June 30, 2021 compared to 0.66% at December 31, 2020 and 0.66% at June 30, 2020.

Loans 90 days delinquent and accruing decreased from $1.5 million at December 31, 2020 to $104,000 as of June 30, 2021.

The following table sets forth loan delinquencies as of June 30, 2021 and 2020 and December 31, 2020:

Dollars in thousands

2021 December 31,

2020 March 31,

2020 June 30,

Real estate $ 266 $ 555 $ 1,258

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Based on historical experience, the credit quality of some of these loans may improve due to improvements in the economy as well as changes in collateral values or the financial condition of the borrowers, while the credit quality of other loans may deteriorate, resulting in some amount of loss.

At March 31, 2021, there were two potential problem loans with a balance of $187,000 or 0.012% of total loans.

At June 30, 2021, there were no potential problem loans.

This compares to five loans with a balance of $195,000 or 0.01% of total loans at December 31, 2020.

As of March 31, 2021, there were 17 loans in the process of foreclosure with a total balance of $1.4 million.

As of June 30, 2021, there were 15 loans in the process of foreclosure with a total balance of $1.2 million.

The Bank's residential foreclosure process begins when a loan becomes 75 days past due at which time a Demand/Breach Letter is sent to the borrower.

If the loan becomes 120 days past due, copies of the promissory note and mortgage deed are forwarded to the

Bank's attorney for review and a complaint for foreclosure is then prepared.

An authorized Bank officer signs the affidavit certifying the validity of the documents and verification of the past due amount which is then forwarded to the court.

If the loan becomes 120 days past due, copies of the promissory note and mortgage deed are forwarded to the Bank's attorney for review and a complaint for foreclosure is then prepared.

An authorized Bank officer signs the affidavit

certifying the validity of the documents and verification of the past due amount which is then forwarded to the court.

Once a Motion for Summary Judgment is granted, a Period of Redemption (POR) begins which gives the customer 90 days to cure the default.

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Real estate acquired through foreclosure is carried at the lower of fair value less estimated cost to sell or the cost of the asset and is not included as part of the allowance for loan loss totals.

At March 31, 2021, there were two properties owned with an OREO balance of $401,000, net of an allowance for losses of $45,000, compared to December 31, 2020 when there were four properties owned with an OREO balance of $908,000, net of an allowance for loan losses of $45,000 and March 31, 2020 when there were three properties owned with an OREO balance of $316,000, with no allowance for losses.

At June 30, 2021, there was one property owned with an OREO balance of $224,000, with no allowance for losses, compared to December 31, 2020 when there were four properties owned with an OREO balance of $908,000, net of an allowance for loan losses of $45,000 and June 30, 2020 when there were five properties owned with an OREO balance of $851,000, with no allowance for losses.

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

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2021 December 31,

2020 March 31,

2020 June 30,

Carrying Value

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Liquidity Management

As of March 31, 2021, the Bank had primary sources of liquidity of $925.6 million.

As of June 30, 2021, the Bank had primary sources of liquidity of $948.3 million.

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

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Liquidity is the ability of a financial institution to meet maturing liability obligations and customer loan demand.

The Bank's primary source of liquidity is deposits, which funded 79.2% of total average assets in the first three months of 2021.

While the generally preferred funding strategy is to attract and retain low-cost deposits, the ability to do so is affected by

competitive interest rates and terms in the marketplace.

The Bank's primary source of liquidity is deposits, which funded 79.6% of total average assets in the first six months of 2021, up from 77.6% a year ago.

While the generally preferred funding strategy is to attract and retain low-cost deposits, the ability to do

so is affected by competitive interest rates and terms in the marketplace.

Other sources of funding include discretionary use of purchased liabilities (e.g., FHLB term advances and other borrowings), cash flows from the securities portfolios and loan repayments.

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

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

The facility will be available to draw upon until June 30.

no PPP loans have been pledged and no PPPLF advances have been taken to date.

During the first three months of 2021, total deposits increased by $108.9 million or 5.9% from December 31, 2020 levels.

Low-cost deposits (demand, NOW, and savings accounts) increased by $68.1 million or 6.3% in the first three months of 2021, money market deposits increased $12.1 million or 7.4%, and certificates of deposit increased $28.7 million or 4.7%.

Between March 31, 2020 and March 31, 2021, total deposits increased by $308.9 million or 18.8%.

PPPLF offered the ability to obtain advances dollar for dollar against the value of pledged PPP loans;

per FRB rules, the facility terminated on July 30, 2021.

No PPP loans were pledged and no PPPLF advances were taken while the facility was open.

During the first six months of 2021, total deposits increased by $116.7 million or 6.3% from December 31, 2020 levels.

Low-cost deposits (demand, NOW, and savings accounts) increased by $114.1 million or 10.6% in the first six months of 2021, money market deposits increased $12.0 million or 7.3%, and certificates of deposit decreased $9.4 million or 1.5%.

Between June 30, 2020 and June 30, 2021, total deposits increased by $221.2 million or 12.7%.

Low-cost deposits increased by $275.8 million or 30.2%, money market accounts increased $5.9 million or 3.4%, and certificates of deposit decreased $60.4 million or 9.2%.

The increase in low-cost deposits allowed for a decrease in higher cost Borrowed Funds.

The increase in low-cost deposits allowed for a decrease in higher cost certificates of deposit and Borrowed Funds.

Borrowed Funds

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This funding may also be used to balance seasonal deposit flows or to carry out interest rate risk management strategies, and may be used to replace or supplement other sources of funding, including core deposits and certificates of deposit.

During the three months ended March 31, 2021, borrowed funds decreased $32.4 million or 12.4% from December 31, 2020;

During the six months ended June 30, 2021, borrowed funds decreased $33.4 million or 12.7% from December 31, 2020;

the reduction is centered in the paydown to zero of funds advanced from FRB.

Between March 31, 2020 and March 31, 2021, borrowed funds decreased by $18.4 million or 7.4% as maturing advances from FHLB were repaid rather than renewed.

Between June 30, 2020 and June 30, 2021, borrowed funds decreased by $50.2 million or 18.0%, also centered in repayment of funds advanced from FRB.

Shareholders' Equity

Shareholders' equity as of March 31, 2021 was $228.2 million, compared to $223.7 million as of December 31, 2020 and $215.3 million as of March 31, 2020.

The Company's earnings in the first three months of 2021, net of dividends declared, added to shareholders' equity.

The net unrealized gain on available-for-sale securities, presented in accordance with FASB ASC Topic 320 "Investments – Debt and Equity Securities" now stands at $219,000 as of March 31, 2021 compared to $5.0 million as of December 31, 2020.

The net unrealized loss on cash flow hedging derivative instruments now stands at $1.5 million, compared $4.9 million as of December 31, 2020.

A cash dividend of $0.31 per share was declared in the first quarter of 2021.

The dividend payout ratio, which is calculated by dividing dividends declared per share by diluted earnings per share, was 37.80% for the first three months of 2021 compared to 50.00% for the same period in 2020.

Shareholders' equity as of June 30, 2021 was $234.2 million, compared to $223.7 million as of December 31, 2020 and $216.6 million as of June 30, 2020.

The Company's earnings in the first six months of 2021, net of dividends declared, added to shareholders' equity.

The net unrealized gain on available-for-sale securities, net of tax, presented in accordance with FASB ASC Topic 320 "Investments – Debt and Equity Securities" stands at $1.2 million as of June 30, 2021 compared to $5.0 million as of December 31, 2020.

The net unrealized loss on cash flow hedging derivative instruments, net of tax, stands at $2.1 million, compared $4.9 million as of December 31, 2020.

A cash dividend of $0.32 per share was declared in the second quarter of 2021.

The dividend payout ratio, which is calculated by dividing dividends declared per share by diluted earnings per share, was 38.65% for the first six months of 2021 compared to 50.83% for the same period in 2020.

In determining future dividend payout levels, the Board of Directors carefully analyzes capital requirements and earnings retention, as set forth in the Company's Dividend Policy.

2 unchanged sentences

The amount available for dividends in 2021 is this year's net income plus $28.0 million.

Financial institution regulators have established guidelines for minimum capital ratios for banks and bank holding companies.

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

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

In order to avoid limitations on capital distributions, including dividend payments, the Company must hold a capital conservation buffer of 2.5% above the adequately capitalized risk-based capital ratios.

The Company met each of the well-capitalized ratio guidelines at March 31, 2021.

The following tables indicate the capital ratios for the Bank and the Company at March 31, 2021 and December 31, 2020.

As of March 31, 2021 Leverage Tier 1 Common Equity Tier 1 Total Risk-Based

Financial institution regulators have established guidelines for minimum capital ratios for banks and bank holding

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

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

the federal banking agencies.

In order to avoid limitations on capital distributions, including dividend payments, the Company

must hold a capital conservation buffer of 2.5% above the adequately capitalized risk-based capital ratios.

The Company met each of the well-capitalized ratio guidelines at June 30, 2021.

The following tables indicate the capital ratios for the Bank and the Company at June 30, 2021 and December 31, 2020.

As of June 30, 2021 Leverage Tier 1 Common Equity Tier 1 Total Risk-Based

Bank 8.53 % 13.32 % 13.32 % 14.45 %

23 unchanged sentences

Derivative instruments that Management periodically uses as part of its interest rate risk management strategy may include interest rate swap agreements, interest rate floor agreements, and interest rate cap agreements.

At March 31, 2021, the Bank had 11 outstanding off-balance sheet, derivative instruments designated as cash flow hedges.

At June 30, 2021, the Bank had nine outstanding off-balance sheet, derivative instruments designated as cash flow hedges.

These derivative instruments were interest rate swap agreements, with notional principal amounts totaling $210.0 million and an unrealized loss of $2.1 million, net of taxes.

2 unchanged sentences

The credit risk in derivative instruments is mitigated by entering into transactions with highly-rated counterparties that Management believes to be creditworthy and by limiting the amount of exposure to each counter-party.

At March 31, 2021, the Bank's derivative instrument counterparties were credit rated “A” by the major credit rating agencies.

At June 30, 2021, the Bank's derivative instrument counterparties were credit rated “A” by the major credit rating agencies.

The interest rate swap agreements were entered into by the Bank to limit its exposure to rising interest rates.

4 unchanged sentences

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

As of March 31, 2021, the Bank had six loan swap agreements in place with a total notional value of $83.7 million.

As of June 30, 2021, the Bank had six loan swap agreements in place with a total notional value of $82.9 million.

Contractual Obligations

The following table sets forth the contractual obligations of the Company as of March 31, 2021:

The following table sets forth the contractual obligations of the Company as of June 30, 2021:

Dollars in thousands

6 unchanged sentences

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

What changed 10-Q

Item 2. Management’s Discussion and Analysis