What changed in this filing

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Item 2. Management’s Discussion and Analysis

2021-11-05 compared with 2021-08-06 · 205 added, 194 removed, 793 unchanged (33% of the section changed)

29 unchanged sentences

The use of different estimates or assumptions could produce different provisions for loan losses.

Management utilizes numerous techniques to estimate the value of various assets held by the Company, including methods to determine the appropriate carrying value of goodwill as required under FASB ASC Topic 350 "Intangibles – Goodwill and Other." In addition, goodwill from a purchase acquisition is subject to ongoing periodic

impairment tests, which include an evaluation of the ongoing assets, liabilities and revenues from the acquisition and an estimation of the impact of business conditions.

Management utilizes numerous techniques to estimate the value of various assets held by the Company, including methods to determine the appropriate carrying value of goodwill as required under Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") Topic 350 "Intangibles – Goodwill and Other." In addition,

goodwill from a purchase acquisition is subject to ongoing periodic impairment tests, which include an evaluation of the ongoing assets, liabilities and revenues from the acquisition and an estimation of the impact of business conditions.

Mortgage Servicing Rights.

33 unchanged sentences

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.

As of September 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 September 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 six months ended June 30, For the quarter ended June 30,

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

Dollars in thousands

7 unchanged sentences

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

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

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

Dollars in thousands

5 unchanged sentences

Effect of non-interest tax-exempt income 124 124 41 41

Net securities gains (164) (1,179) (45) (427)

Net securities (gains) losses (22) (1,179) 142 —

Adjusted net interest income plus non-interest income $ 65,055 $ 58,467 $ 22,143 $ 20,177

5 unchanged sentences

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

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

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

Dollars in thousands

5 unchanged sentences

The following table provides a reconciliation to Net Income:

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

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

Dollars in thousands 2021 2020 2021 2020

4 unchanged sentences

Executive Summary

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 for the nine months ended September 30, 2021 was $26.7 million, up $6.6 million or 32.6% from the same period in 2020.

Earnings per common share on a fully diluted basis were $2.43 for the nine months ended September 30, 2021, up $0.59 or 32.1% from the $1.84 posted for the same period in 2020.

For the quarter ended September 30, 2021, net income was $9.0 million, up $1.9 million or 27.0% from the same period in 2020.

Earnings per common share on a fully diluted basis were $0.82 for the quarter ended September 30, 2021, up $0.17 or 26.2% from the $0.65 posted for the same period in 2020.

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

Net income of $26.7 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 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 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.

Based upon the strength of the Company's earnings, dividends totaling 95 cents per share have been declared year-to-date, representing a payout to our shareholders of 38.78% of basic earnings per share for the period.

Net interest income on a tax-equivalent basis was up $4.47 million or 9.7% in the nine months ended September 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 Payroll Protection Plan ("PPP") loans.

The tax equivalent net interest margin for the nine months ended September 30, 2021, was 2.94%, slightly up from 2.93% for the same period in 2020.

For the quarter ended September 30, 2021, net interest income on a tax-equivalent basis increased $2.3 million or 14.7% compared to the same period in 2020, with the net interest margin at 2.96% compared to 2.82% for the same period in 2020.

Non-interest income for the nine months ended September 30, 2021 was $14.6 million, up $1.0 million or 7.0%, from the nine months ended September 30, 2020.

Revenue at First National Wealth Management increased $640,000 or 23.6% over the same period, debit card revenue was up $834,000 or 27.4% and mortgage banking revenue increased $549,000 or 14.4%.

Net gains on sales of securities for the nine months ended September 30, 2021 were down $1.2 million, or 98.1% from the prior year period.

Non-interest expense for the nine months ended September 30, 2021 was $29.3 million, up $66,000 or 0.2% from the nine months ended September 30, 2020.

Salaries and employee benefits increased while other operating expense decreased over the same period.

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.

Non-performing assets stood at 0.25% of total assets as of September 30, 2021, down from 0.43% of total assets as of September 30, 2020 and 0.32% as of December 31, 2020.

Total past-due loans were 0.25% of total loans as of September 30, 2021, down from 0.66% of total loans as of December 31, 2020 and 0.89% as of September 30, 2020.

The provision for loan losses for the first nine months of 2021 was $1.6 million, down from the $4.6 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 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.

Net loan chargeoffs for the nine months ended September 30, 2021 were $321,000 or 0.03% of average loans on an annualized basis.

This was down from net chargeoffs of $818,000 for the nine months ended September 30, 2020.

The allowance for loan losses increased $1.3 million between December 31, 2020 and September 30, 2021, and now stands at 1.08% of loans outstanding as of September 30, 2021, down slightly from 1.10% at December 31, 2020 and up slightly from 1.07% of loans outstanding September 30, 2020.

The Company's balance sheet continued to expand in the first nine months of 2021 as total assets increased $168.4 million or 7.1% year-to-date.

The loan portfolio increased $140.5 million or 9.5% in the nine months ended September 30, 2021 and $180.6 million or 12.6% from a year ago.

Loan growth in the first nine months of 2021 was centered in commercial real estate and construction loans, up $124.7 million, and other commercial loans, up $3.1 million.

Other commercial loans include PPP loan balances of $39.6 million, a decrease of $20.5 million since December 31, 2020.

The investment portfolio has increased $4.2 million year-to-date and increased $11.1 million or 1.6% 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.

On the liability side of the balance sheet, low-cost deposits have increased $253.0 million or 23.5% year-to-date;

this growth is attributed to a combination of inflows from economic stimulus programs, new customer acquisition, and an anecdotally strong summer tourism season in the Bank's market area.

Year-over-year, low-cost deposits have increased $312.0 million or 30.7%.

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

Local certificates of deposit ("CDs") decreased $12.1 million and wholesale CDs decreased $78.9 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 14.55% 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%.

The Company's total risk-based capital ratio was 14.48% as of September 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 nine months of 2021, with a return on average tangible common equity of 17.62% for the nine months ended September 30, 2021 compared to 14.27% for the same period in 2020.

Our non-GAAP efficiency ratio continues to be an important component in the Company's overall performance and stood at 45.04% for the nine months ended September 30, 2021 compared to 50.00% 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 nine months of 2020 would have been 46.87%.

Net Interest Income

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 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.

The following tables present the amount of interest earned or paid, as well as the average yield or rate on an annualized basis, for each major category of assets or liabilities for the six months and quarters ended June 30, 2021 and 2020.

Total interest income of $57.1 million for the nine months ended September 30, 2021 was a decrease of $904,000 or 1.6% compared to total interest income of $58.0 million for the same period of 2020.

Earning asset growth, along with increased fee recognition from PPP loans, mitigated a reduction in average earning asset yields of 0.38 percentage points.

Total interest expense of $8.5 million for the nine months ended September 30, 2021 was a decrease of $5.4 million or 38.7% compared to total interest expense for the nine months ended September 30, 2020, a function of a reduction in average cost of 0.43 percentage points.

As a result, net interest income of $48.6 million for the nine months ended September 30, 2021 was an increase of $4.5 million or 10.1% compared to net interest income of $44.2 million for the same period ended September 30, 2020.

The Company's net interest margin on a tax-equivalent basis for the nine months ended September 30, 2021 was 2.94%, up slightly from 2.93% for the first nine months of 2020.

Tax-exempt interest income amounted to $6.6 million for the nine months ended September 30, 2021 compared to $6.5 million for the nine months ended September 30, 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 nine months and quarters ended September 30, 2021 and 2020.

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

For the six months ended

June 30, 2021 June 30, 2020

For the nine months ended

September 30, 2021 September 30, 2020

Dollars in thousands

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For the quarters ended

June 30, 2021 June 30, 2020

September 30, 2021 September 30, 2020

Dollars in thousands

15 unchanged sentences

Net interest margin 2.96 % 2.82 %

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.

Interest income includes $2.9 million in net origination fees recognized during the first nine months of 2021, attributable to PPP loans;

as of September 30, 2021, net unrecognized PPP origination fees totaled $2.4 million.

Interest income in the first nine months of 2020 (program commenced in the second quarter) included a net $788,000 in origination fees recognized on PPP loans;

as of September 30, 2020 net unrecognized PPP origination fees totaled $2.7 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 nine months and quarters ended ended September 30, 2021 compared to 2020.

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

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

For the nine months ended September 30, 2021 compared to 2020

Dollars in thousands

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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

For the quarter ended September 30, 2021 compared to 2020

Dollars in thousands

12 unchanged sentences

Average Daily Balance Sheets

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

For the six months ended For the quarters ended

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

For the nine months ended For the quarters ended

Dollars in thousands

2021 June 30,

2020 June 30,

2021 June 30,

September 30,

2021 September 30,

2020 September 30,

2021 September 30,

Cash and cash equivalents $ 23,152 $ 19,336 $ 25,195 $ 24,995

36 unchanged sentences

Non-Interest Income

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 income of $14.6 million for the nine months ended September 30, 2021 is an increase of $1.0 million compared to the same period in 2020.

Revenue at First National Wealth Management increased $640,000 or 23.6% over the same period, debit card revenue was up $834,000 or 27.4%, and mortgage banking revenue increased $549,000, or 14.4%;

net securities gains decreased $1.2 million year-over year.

Non-interest income of $4.4 million for the quarter ended September 30, 2021 is a decrease of $430,000 compared to the same period in 2020;

wealth management revenue increased $226,000 or 24.9% from the prior year quarter and debit card income increased $268,000, or 25.2%;

the gains were offset by a decrease in mortgage banking revenue of $884,000, or 46.2% year-over-year, and a decrease in net securities gains of $142,000.

The period-to-period decrease in mortgage banking revenue is a reflection of extraordinary results in the third quarter of 2020;

quarterly mortgage banking revenue remains well above pre-pandemic norms.

Non-Interest Expense

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 45.14% 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.

Non-interest expense of $29.3 million for the nine months ended September 30, 2021 is an increase of 0.2% or $66,000 compared to non-interest expense of $29.2 million for the same period in 2020.

Salaries and employee benefits increased while other operating expense decreased over the same period.

The Company's non-GAAP efficiency ratio stood at 45.04% for the nine months ended September 30, 2021, down from 50.00% 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 interest rate swap positions.

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

Income taxes on operating earnings were $5.6 million for the nine months ended September 30, 2021, up $1.8 million from the same period in 2020.

The Company's investment portfolio increased by $4.2 million between December 31, 2020 and September 30, 2021.

As of September 30, 2021, mortgage-backed securities had a carrying value of $311.9 million and a fair value of $310.6 million.

Of this total, securities with a fair value of $65.6 million or 21.1% of the mortgage-backed portfolio were issued by the Government National Mortgage Association and securities with a fair value of $244.9 million or 78.9% of the mortgage-backed portfolio were issued by the Federal Home Loan Mortgage Corporation ("Freddie Mac") and the Federal National Mortgage Association ("Fannie Mae").

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

The remaining unamortized balance of the net unrealized losses for the securities transferred from available for sale to held to maturity was $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.

The remaining unamortized balance of the net unrealized losses for the securities transferred from available for sale to held to maturity was $99,000 at September 30, 2021.

This compares to $133,000 and $139,000, net of taxes, at December 31, 2020 and September 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 June 30, 2021 and 2020 and December 31, 2020.

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

Dollars in thousands

September 30,

2021 December 31,

2020 June 30,

2020 September 30,

Securities available for sale

15 unchanged sentences

Total securities $ 693,762 $ 689,534 $ 682,647

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

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

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

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Impaired Securities

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.

The securities portfolio contains certain securities where the amortized cost of which exceeds fair value, which at September 30, 2021 amounted to $8.5 million, or 1.27% 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.

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

As of June 30, 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.

As of September 30, 2021, the Company had temporarily impaired securities with a fair value of $332.0 million and unrealized losses of $8.5 million, as identified in the table below.

Securities in a continuous unrealized loss position more than twelve months amounted to $33.5 million as of September 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 June 30, 2021:

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

Less than 12 months 12 months or more Total

11 unchanged sentences

Government-sponsored agencies and enterprises.

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.

As of September 30, 2021, there were $2.3 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 June 30, 2021.

Mortgage-backed securities issued by U.S.

1 unchanged sentence

Government-sponsored enterprises.

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

As of September 30, 2021, there were $4.8 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 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.

Management believes that the unrealized losses at September 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 September 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 June 30, 2021, there were $187,000 of unrealized losses on these securities compared to $3,000 at December 31, 2020.

As of September 30, 2021, there were $1.3 million 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 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.

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

The Company attributes the unrealized losses at September 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 September 30, 2021.

Corporate securities.

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

As of September 30, 2021, there were $35,000 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 June 30, 2021, all corporate bond issuers were current on contractually obligated interest and principal payments.

At September 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 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.

As of September 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 September 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 June 30, 2021.

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

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

1 unchanged sentence

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

As of June 30, 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.

As of September 30, 2021, the Bank had $1.4 million in loans held for sale.

This compares to $5.9 million loans held for sale at December 31, 2020 and $6.4 million loans held for sale at September 30, 2020.

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

1 unchanged sentence

therefore, there was minimum impact on the reserve.

The loan portfolio increased during the first six months of 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.

The loan portfolio increased during the first nine months of 2021, with total loans at $1.62 billion at September 30, 2021, up $140.5 million or 9.5% from total loans of $1.48 billion at December 31, 2020.

Commercial loans increased $127.8 million or 16.3% between December 31, 2020 and September 30, 2021, municipal loans decreased $3.2 million or 7.2%, residential term loans increased $15.7 million, residential construction increased $7.8 million, and home equity lines of credit decreased $5.2 million.

Loans made under the U.S.

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

Small Business Administration's PPP accounted for $39.6 million of commercial loans as of September 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.

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.

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Consumer loans may be secured or unsecured.

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.

Construction loans, both commercial and residential, at 45.4% of Bank capital are well under the regulatory guidance of 100.0% of capital at September 30, 2021.

Construction loans and non-owner-occupied commercial real estate loans are at 191.7% of Bank total capital, well under the regulatory guidance of 300.0% of capital at September 30, 2021.

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

Dollars in thousands

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

September 30, 2021 December 31, 2020 September 30, 2020

Real estate $ 550,077 34.0 % $ 442,121 29.9 % $ 407,128 28.3 %

7 unchanged sentences

Total loans $ 1,617,212 100.0 % $ 1,476,761 100.0 % $ 1,436,646 100.0 %

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

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

Dollars in thousands

9 unchanged sentences

Total loans $ 11,307 $ 211,298 $ 192,061 $ 1,202,546 $ 1,617,212

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

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

Fixed-Rate Adjustable-Rate Total

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Loan Concentrations

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

As of September 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 $165.6 million, or 10.23% of total loans.

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

At September 30, 2021, impaired loans with specific reserves totaled $3.8 million and the amount of such reserves was $682,000.

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 June 30, 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 September 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 June 30, 2021 and 2020 and December 31, 2020.

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

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

Dollars in thousands

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

September 30, 2021 December 31, 2020 September 30, 2020

Real estate $ 6,499 34.0 % $ 5,178 29.9 % $ 4,761 28.3 %

8 unchanged sentences

Total $ 17,507 100.0 % $ 16,253 100.0 % $ 15,371 100.0 %

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.

The allowance for loan losses totaled $17.5 million at September 30, 2021, compared to $16.3 million as of December 31, 2020 and $15.4 million as of September 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 $245,000 in the first six months of 2021 from $462,000 at December 31, 2020 to $707,000 at June 30, 2021.

These specific reserves increased $220,000 in the first nine months of 2021 from $462,000 at December 31, 2020 to $682,000 at September 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 $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:

The portion of the reserve based upon homogeneous pools of loans increased by $142,000 in the first nine months of 2021.

The portion of the reserve based on

qualitative factors increased $1.5 million in the first nine 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 $1.5 million, or 8.5% as of September 30, 2021.

After consideration of the shifts in specific, pooled and qualitative reserves, Management determined that the unallocated portion of the reserve at September 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 September 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 $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:

The provision for loan losses to maintain the allowance was $1.6 million for the first nine months of 2021 and $4.6 million the first nine months of 2020.

Net charge-offs were $321,000 in the first nine months of 2021, down from $818,000 in the first nine months of 2020.

Our allowance as a percentage of outstanding loans was 1.08% as of September 30, 2021, down slightly from 1.10% as of December 31, 2020, and up from 1.07% as of September 30, 2020.

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

Dollars in thousands

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

September 30, 2021 December 31, 2020 September 30, 2020

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

14 unchanged sentences

Municipal — — —

Term 12 34 31

Construction — — —

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

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.

As of September 30, 2021, a total of 1051 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 $287.9 million in loan balances, or approximately 18.3% 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 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.

As of September 30, 2021, 59 loans totaling $6.6 million remained in their original modification or had had a subsequent modification, representing 0.41% 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 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.

as of September 30, 2021, PPP1 balances had been reduced to $656,000.

Under PPP2, 1,263 loans totaling $52.1 million had been granted as of September 30, 2021, and the outstanding balances had been reduced to $39.0 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 largely re-opened it's economy;

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

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

Nonperforming Loans

9 unchanged sentences

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

Nonperforming loans, expressed as a percentage of total loans, totaled 0.44% 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:

Nonperforming loans, expressed as a percentage of total loans, totaled 0.39% at September 30, 2021 compared to 0.46% at December 31, 2020 and 0.63% at September 30, 2020.

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

Dollars in thousands

September 30,

2021 December 31,

2020 June 30,

2020 September 30,

Real estate $ 604 $ 543 $ 1,771

9 unchanged sentences

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

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.

As of September 30, 2021, loans 90 or more days past due and still accruing interest totaled $229,000, compared to $1.5 million at December 31, 2020 and $1.5 million at September 30, 2020.

Troubled Debt Restructured

5 unchanged sentences

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

As of June 30, 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:

As of September 30, 2021, we had 64 loans with a balance of $10.1 million that have been restructured.

This compares to 74 loans with a balance of $11.5 million and 78 loans with a balance of $13.4 million classified as TDRs as of December 31, 2020 and September 30, 2020, respectively.

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

Balance in Thousands of Dollars Number of Loans Aggregate Balance

3 unchanged sentences

Repayments in 2021 — (268)

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.

Total at September 30, 2021 64 $ 10,051

As of September 30, 2021, 42 loans with an aggregate balance of $8.1 million were performing under the modified terms, 19 loans with an aggregate balance of $1.6 million were on nonaccrual and three loans with an aggregate balance of $261,000 were more than 30 days past due and accruing.

As a percentage of aggregate outstanding balance, 80.9% were performing under the modified terms, 16.4% were on nonaccrual and 2.7% 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.

The performance status of all TDRs as of September 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

14 unchanged sentences

Associated specific reserve $ 227 $ 261 $ 148 $ 636

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.

Residential, HELOC and consumer TDRs as of September 30, 2021 included 47 loans with an aggregate balance of $6.2 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.

Loans totaling $2.5 million had interest capitalized, allowing the borrower to become current after unpaid interest was added to the balance of the loan and re-amortized over the remaining life of the loan.

Loans with an aggregate balance of $197,000 were converted from interest-only to regular principal-and-interest payments based on the borrowers' ability to service the higher payment amount.

Rate concessions were granted on loans totaling $1.2 million.

1 unchanged sentence

Certain residential TDRs had more than one modification.

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.

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.

Commercial TDRs as of September 30, 2021 were comprised of 17 loans with a balance of $3.8 million.

Of this total, five loans with an aggregate balance of $1.2 million had an extended period of interest-only payments, deferring the start of principal repayment.

Three loans with an aggregate balance of $303,000 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.

Three loans with an aggregate balance of $404,000 had a deferral of payment.

The remaining six loans with an aggregate balance of $1.9 million had several different modifications.

1 unchanged sentence

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.

As of September 30, 2021, Management is aware of eight loans classified as TDRs that are involved in bankruptcy with an outstanding balance of $961,000.

There were also 19 loans with an outstanding balance of $1.6 million that were classified as TDRs and on non-accrual status, of which no loans were in the process of foreclosure.

3 unchanged sentences

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

Impaired loans totaled $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:

Impaired loans totaled $14.5 million at September 30, 2021, and have decreased $1.5 million from December 31, 2020.

There were 122 impaired loans at September 30, 2021 down from 140 loans at December 31, 2020.

Impaired commercial loans decreased $318,000 between December 31, 2020 and September 30, 2021.

The specific allowance for impaired commercial loans increased from $299,000 at December 31, 2020 to $553,000 as of September 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 September 30, 2021, impaired residential loans decreased $632,000 and impaired home equity lines of credit decreased $536,000.

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

Dollars in thousands

September 30,

2021 December 31,

2020 June 30,

2020 September 30,

Real estate $ 2,800 $ 3,029 $ 4,753

8 unchanged sentences

Past Due Loans

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:

The Bank's overall loan delinquency ratio was 0.25% at September 30, 2021 compared to 0.66% at December 31, 2020 and 0.89% at September 30, 2020.

Loans 90 days delinquent and accruing decreased from $1.5 million at December 31, 2020 to $229,000 as of September 30, 2021.

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

Dollars in thousands

September 30,

2021 December 31,

2020 June 30,

2020 September 30,

Real estate $ 259 $ 555 $ 2,909

15 unchanged sentences

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

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

At September 30, 2021, there was one potential problem loan with a balance of $261,000 or 0.02% of total loans.

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

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.

As of September 30, 2021, there were 13 loans in the process of foreclosure with a total balance of $1,140,000.

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

the borrower.

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

An authorized Bank officer signs the affidavit

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

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

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

9 unchanged sentences

There were no issues requiring management attention in the most recent review.

Servicing for others includes loans sold to Freddie Mac, Fannie Mae, and the Federal Home Loan Bank of Boston through its Mortgage Partnership Finance (MPF) program.

Servicing for others includes loans sold to Freddie Mac, Fannie Mae, and the Federal Home Loan Bank of Boston through its MPF program.

The Bank follows the published guidelines of each investor.

6 unchanged sentences

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

At June 30, 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.

At September 30, 2021, there were no OREO properties, 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 September 30, 2020 when there were five properties owned with an OREO balance of $777,000, net of an allowance for loan losses of 45,000.

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

Dollars in thousands

September 30,

2021 December 31,

2020 June 30,

2020 September 30,

Carrying Value

24 unchanged sentences

Liquidity Management

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

As of September 30, 2021, the Bank had primary sources of liquidity of $1.0 billion.

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

3 unchanged sentences

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

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

The Bank's primary source of liquidity is deposits, which funded 79.8% of total average assets in the first nine 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

9 unchanged sentences

In addition to these unexpected outflow risks, several other "business as usual" factors enter into the calculation of the adequacy of contingent liquidity including payment proceeds from loans and investment securities, maturing debt obligations and maturing time deposits.

The Bank has established collateralized borrowing capacity with the Federal Reserve Bank of Boston and also maintains additional collateralized borrowing capacity with the FHLB in excess of levels used in the ordinary course of business as well as Fed Funds lines with two correspondent banks and availability through the Federal Reserve Bank Borrower in Custody program.

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.

The Bank has established collateralized borrowing capacity with the Federal Reserve Bank ("FRB") of Boston and also maintains additional collateralized borrowing capacity with the FHLB in excess of levels used in the ordinary course of business as well as Fed Funds lines with two correspondent banks and availability through the FRB Borrower in Custody program.

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

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

1 unchanged sentence

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%.

During the first nine months of 2021, total deposits increased by $188.6 million or 10.2% from December 31, 2020 levels.

Low-cost deposits (demand, NOW, and savings accounts) increased by $253.0 million or 23.5% in the first nine months of 2021, money market deposits increased $26.6 million or 16.2%, and certificates of deposit decreased $91.0 million or 15.0%.

Between September 30, 2020 and September 30, 2021, total deposits increased by $270.2 million or 15.3%.

Low-cost deposits increased by $312.0 million or 30.7%, money market accounts increased $33.5 million or 21.3%, and certificates of deposit decreased $75.4 million or 12.8%.

1 unchanged sentence

Borrowed Funds

The Company uses funding from the Federal Home Loan Bank of Boston (FHLB), the Federal Reserve Bank of Boston (FRB) and repurchase agreements enabling it to grow its balance sheet and its revenues.

The Company uses funding from the FHLB, the FRB and repurchase agreements enabling it to grow its balance sheet and its revenues.

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

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

During the nine months ended September 30, 2021, borrowed funds decreased $28.8 million or 11.0% from December 31, 2020;

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

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.

Between September 30, 2020 and September 30, 2021, borrowed funds decreased by $50.6 million or 17.8%, also centered in repayment of funds advanced from FRB.

Shareholders' Equity

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.

Shareholders' equity as of September 30, 2021 was $238.7 million, compared to $223.7 million as of December 31, 2020 and $219.4 million as of September 30, 2020.

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

The net unrealized loss on available-for-sale securities, net of tax, presented in accordance with FASB ASC Topic 320 "Investments – Debt and Equity Securities" stands at $627,000 as of September 30, 2021 compared to a gain of $5.0 million as of December 31, 2020.

The net unrealized loss on cash flow hedging derivative instruments, net of tax, stands at $1.5 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.

A cash dividend of $0.32 per share was declared in the third quarter of 2021 bringing the year-to-date total to $0.95 per share.

The dividend payout ratio, which is calculated by dividing dividends declared per share by diluted earnings per share, was 38.78% for the first nine months of 2021 compared to 49.46% 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.

8 unchanged sentences

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

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

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

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

Bank 8.51 % 13.25 % 13.25 % 14.37 %

14 unchanged sentences

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

To further validate its internal results, the Bank engaged a third party consultant during the first quarter of 2021 to conduct credit stress tests on its loan portfolio under six scenarios.

To further validate its internal results, the Bank engaged a third party consultant during the third quarter of 2021 to conduct credit stress tests under six economic scenarios on its June 30, 2021 loan portfolio.

Three of the scenarios emulated the Federal Reserve's Dodd Frank Act Stress Tests (DFAST), and three were developed by a leading forecasting firm.

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

At September 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 $1.5 million, net of taxes.

2 unchanged sentences

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

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

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

As of September 30, 2021, the Bank had six loan swap agreements in place with a total notional value of $81.3 million.

Contractual Obligations

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

The following table sets forth the contractual obligations of the Company as of September 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