0000765207us-gaap:CarryingReportedAmountFairValueDisclosureMemberfnlc:HomeEquityLineOfCreditPortfolioMember2019-09-30


UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549




FORM 10-Q


FORM 10-Q

Quarterly Report Pursuant to Section 13 or 15(d) of The Securities Exchange Act of 1934
For the quarterly period ended September 30, 20192020


Commission File Number 0-26589
0-26589




THE FIRST BANCORP, INC.INC.
(Exact name of Registrant as specified in its charter)

Maine01-0404322
(State or other jurisdiction of incorporation or organization)(I.R.S. Employer Identification No.)

Main StreetDamariscottaMaine04543
(Address of principal executive offices) (Zip code)

(207) (207) 563-3195
Registrant's telephone number, including area code


Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes    No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site,
 if any, every, Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes    No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, non-accelerated filer, or a smaller
reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule
12b-2 of the Exchange Act. (Check one):

Large accelerated filer Accelerated filer Non-accelerated filer Smaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended
transition period for complying with any new or revised financial accounting standards provided pursuant to
Section 13(a) of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).
Yes    No

Indicate the number of shares outstanding of each of the registrant's classes of common stock as of November 1, 20192020
Common Stock: 10,899,78710,947,662 shares





Table of Contents
Note 10 - Financial Derivative Instruments





Item 4 - Controls and Procedures





Part I. Financial Information
Selected Financial Data (Unaudited)
The First Bancorp, Inc. and Subsidiary
Dollars in thousands,As of and for the nine months ended September 30, As of and for the quarter ended September 30, Dollars in thousands,As of and for the nine months ended September 30,As of and for the quarter ended September 30,
except for per share amounts2019 2018 2019 2018 except for per share amounts2020201920202019
Summary of Operations        Summary of Operations
Interest Income$58,994
 $51,742
 $19,904
 $18,086
 Interest Income$57,986 $58,994 $18,506 $19,904 
Interest Expense19,919
 14,528
 6,678
 5,550
 Interest Expense13,832 19,919 3,761 6,678 
Net Interest Income39,075
 37,214
 13,226
 12,536
 Net Interest Income44,154 39,075 14,745 13,226 
Provision for Loan Losses875
 1,333
 250
 333
 Provision for Loan Losses4,550 875 1,800 250 
Non-Interest Income10,281
 9,347
 3,532
 3,034
 Non-Interest Income13,627 10,281 4,805 3,532 
Non-Interest Expense26,168
 24,971
 9,040
 8,216
 Non-Interest Expense29,236 26,168 9,276 9,040 
Net Income18,839
 17,173
 6,288
 5,933
 Net Income20,159 18,839 7,095 6,288 
Per Common Share Data        Per Common Share Data
Basic Earnings per Share$1.74
 $1.59
 $0.58
 $0.55
 Basic Earnings per Share$1.86 $1.74 $0.65 $0.58 
Diluted Earnings per Share1.73
 1.58
 0.58
 0.55
 Diluted Earnings per Share1.84 1.73 0.65 0.58 
Cash Dividends Declared0.89
 0.82
 0.30
 0.29
 Cash Dividends Declared0.92 0.89 0.31 0.30 
Book Value per Common Share19.13
 17.01
 19.13
 17.01
 Book Value per Common Share20.05 19.13 20.05 19.13 
Tangible Book Value per Common Share2
16.39
 14.25
 16.39
 14.25
 
Tangible Book Value per Common Share2
17.32 16.39 17.32 16.39 
Market Value27.49
 28.97
 27.49
 28.97
 Market Value21.07 27.49 21.07 27.49 
Financial Ratios        Financial Ratios
Return on Average Equity1
12.49
%12.47
%11.99
%12.63
%
Return on Average Equity1
12.32 %12.49 %12.80 %11.99 %
Return on Average Tangible Common Equity1,2
14.67
%14.90
%14.01
%15.05
%
Return on Average Tangible Common Equity1,2
14.27 %14.67 %14.81 %14.01 %
Return on Average Assets1
1.26
%1.21
%1.24
%1.21
%
Return on Average Assets1
1.22 %1.26 %1.24 %1.24 %
Average Equity to Average Assets10.11
%9.72
%10.33
%9.59
%Average Equity to Average Assets9.89 %10.11 %9.65 %10.33 %
Average Tangible Equity to Average Assets2
8.61
%8.14
%8.84
%8.05
%
Average Tangible Equity to Average Assets2
8.54 %8.61 %8.34 %8.84 %
Net Interest Margin Tax-Equivalent1,2
2.90
%2.90
%2.88
%2.83
%
Net Interest Margin Tax-Equivalent1,2
2.93 %2.90 %2.82 %2.88 %
Dividend Payout Ratio51.15
%51.57
%51.72
%52.73
%Dividend Payout Ratio49.46 %51.15 %47.69 %51.72 %
Allowance for Loan Losses/Total Loans0.93
%0.94
%0.93
%0.94
%Allowance for Loan Losses/Total Loans1.07 %0.93 %1.07 %0.93 %
Non-Performing Loans to Total Loans1.33
%1.14
%1.33
%1.14
%Non-Performing Loans to Total Loans0.63 %1.33 %0.63 %1.33 %
Non-Performing Assets to Total Assets0.84
%0.74
%0.84
%0.74
%Non-Performing Assets to Total Assets0.43 %0.84 %0.43 %0.84 %
Efficiency Ratio2
51.12
%51.86
%52.08
%50.82
%
Efficiency Ratio2
50.00 %51.12 %45.97 %52.08 %
At Period End        At Period End
Total Assets$2,033,227
 $1,981,854
 $2,033,227
 $1,981,854
 Total Assets$2,296,626 $2,033,227 $2,296,626 $2,033,227 
Total Loans1,263,459
 1,243,558
 1,263,459
 1,243,558
 Total Loans1,436,646 1,263,459 1,436,646 1,263,459 
Total Investment Securities634,566
 571,168
 634,566
 571,168
 Total Investment Securities682,647 634,566 682,647 634,566 
Total Deposits1,623,290
 1,514,911
 1,623,290
 1,514,911
 Total Deposits1,763,059 1,623,290 1,763,059 1,623,290 
Total Shareholders' Equity208,489
 184,661
 208,489
 184,661
 Total Shareholders' Equity219,440 208,489 219,440 208,489 
1Annualized using a 366-day basis in 2020 and a 365-day basis for both 2019 and 2018.in 2019.
2These ratios use non-GAAP financial measures. See Management's Discussion and Analysis of Financial Condition and Results of Operations for additional disclosures and information.

1


Item 1 – Financial Statements










Report of Independent Registered Public Accounting Firm

The Board of Directors and Shareholders
The First Bancorp, Inc.

We have reviewed the accompanying interim consolidated financial information of The First Bancorp, Inc. and Subsidiary as of September 30, 20192020 and 20182019 and for the three-month and nine-month periods then ended. These financial statements are the responsibility of the Company's management.
We conducted our reviews in accordance with standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit in accordance with standards of the Public Company Accounting Oversight Board (United States), the objective of which is to express an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our reviews, we are not aware of any material modifications that should be made to the accompanying  interim consolidated financial statements for them to be in conformity with accounting principles generally accepted in the United States of America.


/s/ Berry Dunn McNeil & Parker, LLC
Bangor,Portland, Maine
November 12, 2019
6, 2020

2


Consolidated Balance Sheets (Unaudited)
The First Bancorp, Inc. and Subsidiary
September 30,
2019
 December 31, 2018 September 30,
2018
September 30,
2020
December 31, 2019September 30,
2019
Assets     Assets
Cash and cash equivalents$21,418,000
 $19,134,000
 $21,649,000
Cash and cash equivalents$22,742,000 $14,433,000 $21,418,000 
Interest bearing deposits in other banks16,714,000
 12,079,000
 51,045,000
Interest bearing deposits in other banks48,111,000 11,310,000 16,714,000 
Securities available for sale326,798,000
 317,416,000
 302,187,000
Securities available for sale340,140,000 360,520,000 326,798,000 
Securities to be held to maturity (fair value of $306,647,000 at September 30, 2019, $250,900,000 at December 31, 2018 and $249,890,000 at September 30, 2018)298,786,000
 255,663,000
 257,395,000
Securities to be held to maturity (fair value of $342,062,000 at September 30, 2020, $287,045,000 at December 31, 2019 and $306,647,000 at September 30, 2019)Securities to be held to maturity (fair value of $342,062,000 at September 30, 2020, $287,045,000 at December 31, 2019 and $306,647,000 at September 30, 2019)331,962,000 281,606,000 298,786,000 
Restricted equity securities, at cost8,982,000
 11,586,000
 11,586,000
Restricted equity securities, at cost10,545,000 8,982,000 8,982,000 
Loans held for sale852,000
 
 1,134,000
Loans held for sale6,387,000 154,000 852,000 
Loans1,263,459,000
 1,238,283,000
 1,243,558,000
Loans1,436,646,000 1,297,075,000 1,263,459,000 
Less allowance for loan losses11,765,000
 11,232,000
 11,682,000
Less allowance for loan losses15,371,000 11,639,000 11,765,000 
Net loans1,251,694,000
 1,227,051,000
 1,231,876,000
Net loans1,421,275,000 1,285,436,000 1,251,694,000 
Accrued interest receivable7,636,000
 6,660,000
 7,095,000
Accrued interest receivable10,249,000 7,167,000 7,636,000 
Premises and equipment, net21,232,000
 22,056,000
 21,451,000
Premises and equipment, net27,110,000 21,305,000 21,232,000 
Other real estate owned279,000
 584,000
 584,000
Other real estate owned777,000 279,000 279,000 
Goodwill29,805,000
 29,805,000
 29,805,000
Goodwill29,805,000 29,805,000 29,805,000 
Other assets49,031,000
 42,536,000
 46,047,000
Other assets47,523,000 47,799,000 49,031,000 
Total assets$2,033,227,000
 $1,944,570,000
 $1,981,854,000
Total assets$2,296,626,000 $2,068,796,000 $2,033,227,000 
Liabilities     Liabilities
Demand deposits$171,623,000
 $163,575,000
 $170,728,000
Demand deposits$248,444,000 $169,777,000 $171,623,000 
NOW deposits400,514,000
 382,923,000
 357,834,000
NOW deposits492,223,000 393,569,000 400,514,000 
Money market deposits148,689,000
 152,043,000
 129,516,000
Money market deposits156,948,000 161,000,000 148,689,000 
Savings deposits240,691,000
 237,135,000
 237,424,000
Savings deposits275,513,000 236,141,000 240,691,000 
Certificates of deposit661,773,000
 591,409,000
 619,409,000
Certificates of deposit589,931,000 689,979,000 661,773,000 
Total deposits1,623,290,000
 1,527,085,000
 1,514,911,000
Total deposits1,763,059,000 1,650,466,000 1,623,290,000 
Borrowed funds – short term171,310,000
 145,205,000
 200,160,000
Borrowed funds – short term228,687,000 174,850,000 171,310,000 
Borrowed funds – long term10,107,000
 65,112,000
 65,114,000
Borrowed funds – long term55,100,000 10,105,000 10,107,000 
Other liabilities20,031,000
 15,626,000
 17,008,000
Other liabilities30,340,000 20,867,000 20,031,000 
Total liabilities1,824,738,000
 1,753,028,000
 1,797,193,000
Total liabilities2,077,186,000 1,856,288,000 1,824,738,000 
Shareholders' equity     Shareholders' equity
Common stock, one cent par value per share109,000
 109,000
 109,000
Common stock, 1 cent par value per shareCommon stock, 1 cent par value per share109,000 109,000 109,000 
Additional paid-in capital63,602,000
 62,746,000
 62,497,000
Additional paid-in capital64,943,000 63,964,000 63,602,000 
Retained earnings141,509,000
 132,460,000
 129,247,000
Retained earnings154,783,000 144,839,000 141,509,000 
Accumulated other comprehensive income (loss)     Accumulated other comprehensive income (loss)
Net unrealized gain (loss) on securities available for sale3,686,000
 (5,051,000) (9,133,000)
Net unrealized gain on securities available for saleNet unrealized gain on securities available for sale5,520,000 3,657,000 3,686,000 
Net unrealized loss on securities transferred from available for sale to held to maturity(189,000) (197,000) (194,000)Net unrealized loss on securities transferred from available for sale to held to maturity(139,000)(182,000)(189,000)
Net unrealized gain (loss) on cash flow hedging derivative instruments(265,000) 1,438,000
 2,282,000
Net unrealized gain (loss) on cash flow hedging derivative instruments(5,800,000)97,000 (265,000)
Net unrealized gain (loss) on postretirement benefit costs37,000
 37,000
 (147,000)
Net unrealized gain on postretirement costsNet unrealized gain on postretirement costs24,000 24,000 37,000 
Total shareholders' equity208,489,000
 191,542,000
 184,661,000
Total shareholders' equity219,440,000 212,508,000 208,489,000 
Total liabilities & shareholders' equity$2,033,227,000
 $1,944,570,000
 $1,981,854,000
Total liabilities & shareholders' equity$2,296,626,000 $2,068,796,000 $2,033,227,000 
Common Stock     Common Stock
Number of shares authorized18,000,000
 18,000,000
 18,000,000
Number of shares authorized18,000,000 18,000,000 18,000,000 
Number of shares issued and outstanding10,896,331
 10,862,651
 10,857,116
Number of shares issued and outstanding10,942,959 10,899,210 10,896,331 
Book value per common share$19.13
 $17.63
 $17.01
Book value per common share$20.05 $19.50 $19.13 
Tangible book value per common share$16.39
 $14.87
 $14.25
Tangible book value per common share$17.32 $16.75 $16.39 
See Report of Independent Registered Public Accounting Firm. The accompanying notes are an integral part of these consolidated financial statements.

3


Consolidated Statements of Income and Comprehensive Income (Unaudited)
The First Bancorp, Inc. and Subsidiary
 For the nine months ended September 30, For the quarter ended September 30,
 2019 2018 2019 2018
Interest income       
Interest and fees on loans (includes tax-exempt income of $1,001,000 as of September 30, 2019 and $822,000 as of September 30, 2018)$44,450,000
 $39,164,000
 $14,993,000
 $13,735,000
Interest on deposits with other banks145,000
 132,000
 48,000
 115,000
Interest and dividends on investments (includes tax-exempt income of $5,480,000 as of September 30, 2019 and $5,208,000 as of September 30, 2018)14,399,000
 12,446,000
 4,863,000
 4,236,000
     Total interest income58,994,000
 51,742,000
 19,904,000
 18,086,000
Interest expense       
Interest on deposits17,739,000
 11,131,000
 5,983,000
 4,274,000
Interest on borrowed funds2,180,000
 3,397,000
 695,000
 1,276,000
     Total interest expense19,919,000
 14,528,000
 6,678,000
 5,550,000
Net interest income39,075,000
 37,214,000
 13,226,000
 12,536,000
Provision for loan losses875,000
 1,333,000
 250,000
 333,000
Net interest income after provision for loan losses38,200,000
 35,881,000
 12,976,000
 12,203,000
Non-interest income       
Investment management and fiduciary income2,459,000
 2,285,000
 822,000
 743,000
Service charges on deposit accounts1,747,000
 1,624,000
 577,000
 527,000
Net securities gains15,000
 137,000
 15,000
 1,000
Mortgage origination and servicing income, net of amortization1,227,000
 1,042,000
 576,000
 350,000
Other operating income4,833,000
 4,259,000
 1,542,000
 1,413,000
     Total non-interest income10,281,000
 9,347,000
 3,532,000
 3,034,000
Non-interest expense       
Salaries and employee benefits13,698,000
 13,230,000
 4,865,000
 4,460,000
Occupancy expense1,931,000
 1,871,000
 644,000
 574,000
Furniture and equipment expense2,969,000
 2,816,000
 969,000
 972,000
FDIC insurance premiums439,000
 950,000
 
 337,000
Amortization of identified intangibles32,000
 32,000
 10,000
 10,000
Other operating expense7,099,000
 6,072,000
 2,552,000
 1,863,000
     Total non-interest expense26,168,000
 24,971,000
 9,040,000
 8,216,000
Income before income taxes22,313,000
 20,257,000
 7,468,000
 7,021,000
Income tax expense3,474,000
 3,084,000
 1,180,000
 1,088,000
NET INCOME$18,839,000
 $17,173,000
 $6,288,000
 $5,933,000
Basic earnings per common share$1.74
 $1.59
 $0.58
 $0.55
Diluted earnings per common share$1.73
 $1.58
 $0.58
 $0.55
Other comprehensive income (loss) net of tax       
Net unrealized gain (loss) on securities available for sale8,737,000
 (6,232,000) 936,000
 (1,888,000)
Net unrealized gain (loss) on securities transferred from available for sale to held to maturity, net of amortization8,000
 (20,000) 1,000
 (5,000)
Net unrealized gain (loss) on cash flow hedging derivative instruments(1,703,000) 738,000
 (340,000) 216,000
      Other comprehensive income (loss)7,042,000
 (5,514,000) 597,000
 (1,677,000)
Comprehensive income$25,881,000
 $11,659,000
 $6,885,000
 $4,256,000
For the nine months ended September 30,For the quarter ended September 30,
2020201920202019
Interest income
Interest and fees on loans (includes tax-exempt income of $899,000 YTD September 30, 2020 and $1,001,000 YTD September 30, 2019)$44,124,000 $44,450,000 $14,109,000 $14,993,000 
Interest on deposits with other banks87,000 145,000 8,000 48,000 
Interest and dividends on investments (includes tax-exempt income of $5,649,000 YTD September 30, 2020 and $5,480,000 YTD September 30, 2019)13,775,000 14,399,000 4,389,000 4,863,000 
     Total interest income57,986,000 58,994,000 18,506,000 19,904,000 
Interest expense
Interest on deposits11,613,000 17,739,000 2,866,000 5,983,000 
Interest on borrowed funds2,219,000 2,180,000 895,000 695,000 
     Total interest expense13,832,000 19,919,000 3,761,000 6,678,000 
Net interest income44,154,000 39,075,000 14,745,000 13,226,000 
Provision for loan losses4,550,000 875,000 1,800,000 250,000 
Net interest income after provision for loan losses39,604,000 38,200,000 12,945,000 12,976,000 
Non-interest income
Investment management and fiduciary income2,712,000 2,459,000 909,000 822,000 
Service charges on deposit accounts1,257,000 1,747,000 375,000 577,000 
Net securities gains1,179,000 15,000 0 15,000 
Mortgage origination and servicing income, net of amortization3,802,000 1,227,000 1,914,000 576,000 
Other operating income4,677,000 4,833,000 1,607,000 1,542,000 
     Total non-interest income13,627,000 10,281,000 4,805,000 3,532,000 
Non-interest expense
Salaries and employee benefits14,719,000 13,698,000 5,032,000 4,865,000 
Occupancy expense2,117,000 1,931,000 709,000 644,000 
Furniture and equipment expense3,438,000 2,969,000 1,184,000 969,000 
FDIC insurance premiums548,000 439,000 189,000 
Amortization of identified intangibles32,000 32,000 10,000 10,000 
Other operating expense8,382,000 7,099,000 2,152,000 2,552,000 
     Total non-interest expense29,236,000 26,168,000 9,276,000 9,040,000 
Income before income taxes23,995,000 22,313,000 8,474,000 7,468,000 
Income tax expense3,836,000 3,474,000 1,379,000 1,180,000 
NET INCOME$20,159,000 $18,839,000 $7,095,000 $6,288,000 
Basic earnings per common share$1.86 $1.74 $0.65 $0.58 
Diluted earnings per common share$1.84 $1.73 $0.65 $0.58 
Other comprehensive income (loss) net of tax
Net unrealized gain (loss) on securities available for sale$1,863,000 $8,737,000 $(1,580,000)$936,000 
Net unrealized gain on securities transferred from available for sale to held to maturity, net of amortization43,000 8,000 7,000 1,000 
Net unrealized gain (loss) on cash flow hedging derivative instruments(5,897,000)(1,703,000)387,000 (340,000)
    Other comprehensive gain (loss)(3,991,000)7,042,000 (1,186,000)597,000 
Comprehensive income$16,168,000 $25,881,000 $5,909,000 $6,885,000 
See Report of Independent Registered Public Accounting Firm.
The accompanying notes are an integral part of these consolidated financial statements.

4


Consolidated Statements of Changes in Shareholders' Equity (Unaudited)
The First Bancorp, Inc. and Subsidiary
Common stock and
additional paid-in capital
Retained
earnings
Accumulated
other
comprehensive
income (loss)
Total
shareholders'
equity
 
Common stock and
additional paid-in capital
 
Retained
earnings
 
Accumulated
other
comprehensive
income (loss)
 
Total
shareholders'
equity
 Shares Amount 
Balance at December 31, 2017 10,829,918
 $61,855,000
 $121,144,000
 $(1,678,000) $181,321,000
Net income 
 
 17,173,000
 
 17,173,000
Net unrealized loss on securities available for sale, net of tax 
 
 
 (6,232,000) (6,232,000)
Net unrealized gain on cash flow hedging derivative instruments, net of tax 
 
 
 738,000
 738,000
Net unrealized loss on securities transferred from available for sale to held to maturity, net of tax 
 
 
 (20,000) (20,000)
Comprehensive income 
 
 17,173,000
 (5,514,000) 11,659,000
Cash dividends declared ($0.82 per share) 
 
 (8,902,000) 
 (8,902,000)
Equity compensation expense 
 285,000
 
 
 285,000
Payment to repurchase common stock (5,725) 
 (168,000) 

 (168,000)
Issuance of restricted stock 16,795
 
 
 
 
Proceeds from sale of common stock 16,128
 466,000
 
 
 466,000
Balance at September 30, 2018 10,857,116
 $62,606,000
 $129,247,000
 $(7,192,000) $184,661,000
          SharesAmountRetained
earnings
Accumulated
other
comprehensive
income (loss)
Total
shareholders'
equity
Balance at December 31, 2018 10,862,651
 $62,855,000
 $132,460,000
 $(3,773,000) $191,542,000
Balance at December 31, 201810,862,651$62,855,000 $191,542,000 
Net income 
 
 18,839,000
 
 18,839,000
Net income— — 18,839,000 — 18,839,000 
Net unrealized gain on securities available for sale, net of tax 
 
 
 8,737,000
 8,737,000
Net unrealized gain on securities available for sale, net of tax— — — 8,737,000 8,737,000 
Net unrealized loss on cash flow hedging derivative instruments, net of tax 
 
 
 (1,703,000) (1,703,000)Net unrealized loss on cash flow hedging derivative instruments, net of tax— — — (1,703,000)(1,703,000)
Net unrealized gain on securities transferred from available for sale to held to maturity, net of tax 
 
 
 8,000
 8,000
Net unrealized gain on securities transferred from available for sale to held to maturity, net of tax— — — 8,000 8,000 
Comprehensive income 
 
 18,839,000
 7,042,000
 25,881,000
Comprehensive income— — 18,839,000 7,042,000 25,881,000 
Cash dividends declared ($0.89 per share) 
 
 (9,694,000) 
 (9,694,000)Cash dividends declared ($0.89 per share)— — (9,694,000)— (9,694,000)
Equity compensation expense 
 368,000
 
 
 368,000
Equity compensation expense— 368,000 — — 368,000 
Payment to repurchase common stock (4,179) 
 (96,000) 
 (96,000)Payment to repurchase common stock(4,179)— (96,000)(96,000)
Issuance of restricted stock 19,087
 
 
 
 
Issuance of restricted stock19,087 — — — — 
Proceeds from sale of common stock 18,772
 488,000
 
 
 488,000
Proceeds from sale of common stock18,772 488,000 — — 488,000 
Balance at September 30, 2019 10,896,331
 $63,711,000
 $141,509,000
 $3,269,000
 $208,489,000
Balance at September 30, 201910,896,331$63,711,000 $141,509,000 $3,269,000 $208,489,000 
Balance at December 31, 2019Balance at December 31, 201910,899,210$64,073,000 $144,839,000 $3,596,000 $212,508,000 
Net incomeNet income— — 20,159,000 — 20,159,000 
Net unrealized gain on securities available for sale, net of taxNet unrealized gain on securities available for sale, net of tax— — — 1,863,000 1,863,000 
Net unrealized loss on cash flow hedging derivative instruments, net of taxNet unrealized loss on cash flow hedging derivative instruments, net of tax— — (5,897,000)(5,897,000)
Net unrealized gain on securities transferred from available for sale to held to maturity, net of taxNet unrealized gain on securities transferred from available for sale to held to maturity, net of tax— — 43,000 43,000 
Comprehensive income (loss)Comprehensive income (loss)— — 20,159,000 (3,991,000)16,168,000 
Cash dividends declared ($0.92 per share)Cash dividends declared ($0.92 per share)— — (10,058,000)— (10,058,000)
Equity compensation expenseEquity compensation expense— 482,000 — — 482,000 
Payment to repurchase common stockPayment to repurchase common stock(5,447)— (157,000)— (157,000)
Issuance of restricted stockIssuance of restricted stock27,345 — — — — 
Proceeds from sale of common stockProceeds from sale of common stock21,851 497,000 — — 497,000 
Balance at September 30, 2020Balance at September 30, 202010,942,959$65,052,000 $154,783,000 $(395,000)$219,440,000 
See Report of Independent Registered Public Accounting Firm.
The accompanying notes are an integral part of these consolidated financial statements.

5


Consolidated Statements of Cash Flows (Unaudited)
The First Bancorp, Inc. and Subsidiary
For the nine months ended
September 30, 2020September 30, 2019
Cash flows from operating activities
     Net income$20,159,000 $18,839,000 
Adjustments to reconcile net income to net cash provided by operating activities
Depreciation1,670,000 1,398,000 
Change in deferred taxes(24,000)232,000 
Provision for loan losses4,550,000 875,000 
Loans originated for resale(53,772,000)(14,177,000)
Proceeds from sales and transfers of loans49,941,000 13,732,000 
Net gain on sales of loans(2,402,000)(407,000)
Net gain on sale or call of securities(1,179,000)(15,000)
Net amortization of premiums on investments1,425,000 752,000 
Net (gain) loss on sale of other real estate owned5,000 (113,000)
Provision for losses on other real estate owned45,000 
Equity compensation expense482,000 368,000 
Net increase in other assets and accrued interest(9,757,000)(9,743,000)
Net increase in other liabilities9,579,000 2,036,000 
Net (gain) loss on disposal of premises and equipment(3,000)386,000 
Amortization of investment in limited partnership313,000 230,000 
Net acquisition amortization32,000 32,000 
     Net cash provided by operating activities21,064,000 14,425,000 
Cash flows from investing activities
Increase in interest-bearing deposits in other banks(36,801,000)(4,635,000)
Proceeds from sales of securities available for sale70,869,000 3,835,000 
Proceeds from maturities, payments and calls of securities available for sale90,809,000 51,633,000 
Proceeds from maturities, payments, calls and sales of securities to be held to maturity62,916,000 17,963,000 
Proceeds from sales of other real estate owned279,000 418,000 
Purchases of securities available for sale(139,353,000)(54,553,000)
Purchases of securities to be held to maturity(113,052,000)(61,051,000)
Redemption of restricted equity securities0 2,604,000 
Purchase of restricted equity securities(1,563,000)
Net increase in loans(141,216,000)(25,518,000)
Capital expenditures(7,475,000)(960,000)
Proceeds from disposal of premises and equipment3,000 
     Net cash used by investing activities(214,584,000)(70,264,000)
Cash flows from financing activities
Net increase in demand, savings, and money market accounts212,641,000 25,821,000 
Net increase (decrease) in certificates of deposit(100,048,000)70,384,000 
Net increase in short-term borrowings53,837,000 
Advances on long-term borrowings55,000,000 
Repayment on long-term borrowings(10,005,000)(28,900,000)
Payment to repurchase common stock(157,000)(96,000)
Proceeds from sale of common stock497,000 488,000 
Dividends paid(9,936,000)(9,574,000)
     Net cash provided by financing activities201,829,000 58,123,000 
Net increase in cash and cash equivalents8,309,000 2,284,000 
Cash and cash equivalents at beginning of period14,433,000 19,134,000 
     Cash and cash equivalents at end of period$22,742,000 $21,418,000 
6


 For the nine months ended
 September 30, 2019 September 30, 2018
Cash flows from operating activities   
     Net income$18,839,000
 $17,173,000
Adjustments to reconcile net income to net cash provided by operating activities   
Depreciation1,398,000
 1,347,000
Change in deferred taxes232,000
 (591,000)
Provision for loan losses875,000
 1,333,000
Loans originated for resale(14,177,000) (6,343,000)
Proceeds from sales and transfers of loans13,732,000
 5,895,000
Net gain on sales of loans(407,000) (300,000)
Net gain on sale or call of securities(15,000) (137,000)
Net amortization of premiums on investments752,000
 1,556,000
Net gain on sale of other real estate owned(113,000) (312,000)
Equity compensation expense368,000
 285,000
Net increase in other assets and accrued interest(9,743,000) (289,000)
Net increase in other liabilities2,036,000
 4,368,000
Net loss on disposal of premises and equipment386,000
 137,000
Amortization of investment in limited partnership230,000
 133,000
Net acquisition amortization32,000
 32,000
     Net cash provided by operating activities14,425,000
 24,287,000
Cash flows from investing activities   
Increase in interest-bearing deposits in other banks(4,635,000) (50,185,000)
Proceeds from sales of securities available for sale3,835,000
 459,000
Proceeds from maturities, payments and calls of securities available for sale51,633,000
 40,515,000
Proceeds from maturities, payments, calls and sales of securities to be held to maturity17,963,000
 10,171,000
Proceeds from sales of other real estate owned418,000
 904,000
Purchases of securities available for sale(54,553,000) (55,591,000)
Purchases of securities to be held to maturity(61,051,000) (10,987,000)
Redemption of restricted equity securities2,604,000
 
Purchase of restricted equity securities
 (1,228,000)
Net increase in loans(25,518,000) (79,963,000)
Capital expenditures(960,000) (433,000)
     Net cash used by investing activities(70,264,000) (146,338,000)
Cash flows from financing activities   
Net increase in demand, savings, and money market accounts25,821,000
 35,624,000
Net increase in certificates of deposit70,384,000
 60,408,000
Net increase in short-term borrowings
 116,516,000
Repayment on long-term borrowings(28,900,000) (80,000,000)
Payment to repurchase common stock(96,000) (168,000)
Proceeds from sale of common stock488,000
 466,000
Dividends paid(9,574,000) (8,353,000)
     Net cash provided by financing activities58,123,000
 124,493,000
Net increase in cash and cash equivalents2,284,000
 2,442,000
Cash and cash equivalents at beginning of period19,134,000
 19,207,000
     Cash and cash equivalents at end of period$21,418,000
 $21,649,000
Interest paid$19,858,000
 $14,349,000
Income taxes paid3,390,000
 1,762,000
Non-cash transactions   
Net transfer from loans to other real estate owned$
 $164,000
For the nine months ended
September 30, 2020September 30, 2019
Interest paid$14,066,000 $19,858,000 
Income taxes paid3,917,000 3,390,000 
Non-cash transactions
Net transfer from loans to other real estate owned$827,000 $0 
See Report of Independent Registered Public Accounting Firm.
The accompanying notes are an integral part of these consolidated financial statements.

7


Notes to Consolidated Financial Statements
The First Bancorp, Inc. and Subsidiary
Note 1 – Basis of Presentation
The First Bancorp, Inc. ("the Company") is a financial holding company that owns all of the common stock of First National Bank ("the Bank"). The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP") for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of Management, all adjustments (consisting of normally recurring accruals) considered necessary for a fair presentation have been included. All significant intercompany transactions and balances are eliminated in consolidation. The income reported for the 20192020 period is not necessarily indicative of the results that may be expected for the year ending December 31, 2019.2020. For further information, refer to the consolidated financial statements and notes included in the Company's annual report on Form 10-K for the year ended December 31, 20182019.

Risks and Uncertainties
The impact of the coronavirus disease (COVID-19) continues to cause disruption and uncertainty in the local, national, and world economies. To curtail spread of the virus, governments at all levels have encouraged social distancing and many have imposed restrictions on travel and group meetings, and/or mandated shut-downs of all but essential businesses. The pace of re-opening varies across the United States, and some locations have considered or proceeded with reimposed restrictions after experiencing increases in infection rates. Much of the unprecedented uncertainty surrounding the duration of the pandemic, its potential economic ramifications, and any government actions to mitigate them initially experienced in the first two quarters of 2020 has continued in the third quarter and early stages of the the fourth quarter.
The Company’s business, financial condition and results of operations generally rely upon the ability of the Bank’s borrowers to repay their loans, the value of collateral underlying the Bank’s secured loans, and demand for loans and other products and services the Bank offers, which are highly dependent on the business environment in the Bank’s primary markets where it operates and in the United States as a whole. The Bank's primary market is the State of Maine, which relies upon tourism for a significant percentage of its economic activity. COVID-19 has adversely impacted the tourism industry to a greater degree than other industries, however, it remains the case that an assessment of the impact cannot be completed with a high degree of certainty at this time. In addition to loans, demand for other products and services could be impacted by COVID-19. Depositors and other funding sources may be unwilling to renew certificates of deposit or other types of funding, or may only be willing to do so on terms, including higher interest rates, that are materially less favorable than the Bank has experienced in the recent past. Certain fee based activities such as service charges, interchange revenues, and wealth management activity, could be impacted due to lower activity or market declines. Accordingly, while management expects this matter may have a negative impact on the Company's financial position and results of future operations, the materiality of such potential impact cannot be reasonably estimated as of the date of this report, November 6, 2020.
.
Subsequent Events
Events occurring subsequent to September 30, 2019,2020, have been evaluated as to their potential impact to the financial statements.


8


Note 2 – Investment Securities
The following table summarizes the amortized cost and estimated fair value of investment securities at September 30, 20192020:
Amortized
Cost
Unrealized GainsUnrealized LossesFair Value (Estimated)
Securities available for sale
U.S. Government-sponsored agencies$27,545,000 $180,000 $(228,000)$27,497,000 
Mortgage-backed securities270,336,000 6,737,000 (649,000)276,424,000 
State and political subdivisions35,271,000 1,240,000 (292,000)36,219,000 
$333,152,000 $8,157,000 $(1,169,000)$340,140,000 
Securities to be held to maturity
U.S. Government-sponsored agencies$26,146,000 $294,000 $$26,440,000 
Mortgage-backed securities43,414,000 844,000 (119,000)44,139,000 
State and political subdivisions245,152,000 8,660,000 (69,000)253,743,000 
Corporate securities17,250,000 490,000 17,740,000 
$331,962,000 $10,288,000 $(188,000)$342,062,000 
Restricted equity securities
Federal Home Loan Bank Stock$9,508,000 $— $— $9,508,000 
Federal Reserve Bank Stock1,037,000 — — 1,037,000 
$10,545,000 $— $— $10,545,000 
:
 
Amortized
Cost
 Unrealized Gains Unrealized Losses Fair Value (Estimated)
Securities available for sale       
Mortgage-backed securities$317,553,000
 $5,327,000
 $(690,000) $322,190,000
State and political subdivisions4,580,000
 28,000
 
 4,608,000
 $322,133,000
 $5,355,000
 $(690,000) $326,798,000
Securities to be held to maturity       
U.S. Government-sponsored agencies$32,840,000
 $93,000
 $
 $32,933,000
Mortgage-backed securities15,584,000
 502,000
 (16,000) 16,070,000
State and political subdivisions236,612,000
 7,136,000
 (48,000) 243,700,000
Corporate securities13,750,000
 194,000
 
 13,944,000
 $298,786,000
 $7,925,000
 $(64,000) $306,647,000
Restricted equity securities       
Federal Home Loan Bank Stock$7,945,000
 $
 $
 $7,945,000
Federal Reserve Bank Stock1,037,000
 
 
 1,037,000
 $8,982,000
 $
 $
 $8,982,000



The following table summarizes the amortized cost and estimated fair value of investment securities at December 31, 20182019:
Amortized
Cost
Unrealized GainsUnrealized LossesFair Value (Estimated)
Securities available for sale
U.S. Government-sponsored agencies
$7,500,000 $$(102,000)$7,398,000 
Mortgage-backed securities323,277,000 4,173,000 (833,000)326,617,000 
State and political subdivisions25,113,000 1,392,000 26,505,000 
$355,890,000 $5,565,000 $(935,000)$360,520,000 
Securities to be held to maturity
U.S. Government-sponsored agencies$32,840,000 $47,000 $(26,000)$32,861,000 
Mortgage-backed securities14,431,000 450,000 (16,000)14,865,000 
State and political subdivisions219,585,000 4,936,000 (109,000)224,412,000 
Corporate securities14,750,000 157,000 14,907,000 
$281,606,000 $5,590,000 $(151,000)$287,045,000 
Restricted equity securities
Federal Home Loan Bank Stock$7,945,000 $— $— $7,945,000 
Federal Reserve Bank Stock1,037,000 — — 1,037,000 
$8,982,000 $— $— $8,982,000 
9


:
 
Amortized
Cost
 Unrealized Gains Unrealized Losses Fair Value (Estimated)
Securities available for sale       
U.S. Government-sponsored agencies

$5,000,000
 $7,000
 $
 $5,007,000
Mortgage-backed securities313,854,000
 571,000
 (6,732,000) 307,693,000
State and political subdivisions4,955,000
 
 (239,000) 4,716,000
 $323,809,000
 $578,000
 $(6,971,000) $317,416,000
Securities to be held to maturity       
U.S. Government-sponsored agencies$11,155,000
 $
 $(472,000) $10,683,000
Mortgage-backed securities18,250,000
 336,000
 (255,000) 18,331,000
State and political subdivisions221,958,000
 1,046,000
 (5,418,000) 217,586,000
Corporate securities4,300,000
 
 
 4,300,000
 $255,663,000
 $1,382,000
 $(6,145,000) $250,900,000
Restricted equity securities       
Federal Home Loan Bank Stock$10,549,000
 $
 $
 $10,549,000
Federal Reserve Bank Stock1,037,000
 
 
 1,037,000
 $11,586,000
 $
 $
 $11,586,000

The following table summarizes the amortized cost and estimated fair value of investment securities at September 30, 20182019:
Amortized
Cost
Unrealized GainsUnrealized LossesFair Value (Estimated)
Securities available for sale
Mortgage-backed securities$317,553,000 $5,327,000 $(690,000)$322,190,000 
State and political subdivisions4,580,000 28,000 4,608,000 
$322,133,000 $5,355,000 $(690,000)$326,798,000 
Securities to be held to maturity
U.S. Government-sponsored agencies$32,840,000 $93,000 $$32,933,000 
Mortgage-backed securities15,584,000 502,000 (16,000)16,070,000 
State and political subdivisions236,612,000 7,136,000 (48,000)243,700,000 
Corporate securities13,750,000 194,000 13,944,000 
$298,786,000 $7,925,000 $(64,000)$306,647,000 
Restricted equity securities
Federal Home Loan Bank Stock$7,945,000 $— $— $7,945,000 
Federal Reserve Bank Stock1,037,000 — — 1,037,000 
$8,982,000 $— $— $8,982,000 
:
 
Amortized
Cost
 Unrealized Gains Unrealized Losses Fair Value (Estimated)
Securities available for sale       
U.S. Government-sponsored agencies$5,000,000
 $
 $(21,000) $4,979,000
Mortgage-backed securities303,793,000
 77,000
 (11,300,000) 292,570,000
State and political subdivisions4,955,000
 
 (317,000) 4,638,000
 $313,748,000
 $77,000
 $(11,638,000) $302,187,000
Securities to be held to maturity       
U.S. Government-sponsored agencies$11,155,000
 $
 $(767,000) $10,388,000
Mortgage-backed securities19,244,000
 326,000
 (460,000) 19,110,000
State and political subdivisions222,696,000
 639,000
 (7,243,000) 216,092,000
Corporate securities4,300,000
 
 
 4,300,000
 $257,395,000
 $965,000
 $(8,470,000) $249,890,000
Restricted equity securities       
Federal Home Loan Bank Stock$10,549,000
 $
 $
 $10,549,000
Federal Reserve Bank Stock1,037,000
 
 
 1,037,000
 $11,586,000
 $
 $
 $11,586,000



The following table summarizes the contractual maturities of investment securities at September 30, 20192020:
Securities available for saleSecurities to be held to maturity
Amortized
Cost
Fair Value (Estimated)Amortized
Cost
Fair Value (Estimated)
Due in 1 year or less$7,097,000 $7,159,000 $2,454,000 $2,462,000 
Due in 1 to 5 years23,789,000 24,260,000 32,595,000 33,683,000 
Due in 5 to 10 years58,430,000 60,086,000 176,400,000 182,370,000 
Due after 10 years243,836,000 248,635,000 120,513,000 123,547,000 
$333,152,000 $340,140,000 $331,962,000 $342,062,000 
:
 Securities available for sale Securities to be held to maturity
 
Amortized
Cost
 Fair Value (Estimated) 
Amortized
Cost
 Fair Value (Estimated)
Due in 1 year or less$189,000
 $189,000
 $1,241,000
 $1,245,000
Due in 1 to 5 years36,304,000
 36,703,000
 23,460,000
 23,920,000
Due in 5 to 10 years91,242,000
 93,419,000
 184,234,000
 188,811,000
Due after 10 years194,398,000
 196,487,000
 89,851,000
 92,671,000
 $322,133,000
 $326,798,000
 $298,786,000
 $306,647,000

The following table summarizes the contractual maturities of investment securities at December 31, 20182019:
Securities available for saleSecurities to be held to maturity
Amortized
Cost
Fair Value (Estimated)Amortized
Cost
Fair Value (Estimated)
Due in 1 year or less$127,000 $127,000 $1,334,000 $1,338,000 
Due in 1 to 5 years36,534,000 36,778,000 25,860,000 26,323,000 
Due in 5 to 10 years93,134,000 95,014,000 179,133,000 182,834,000 
Due after 10 years226,095,000 228,601,000 75,279,000 76,550,000 
$355,890,000 $360,520,000 $281,606,000 $287,045,000 

:








10


 Securities available for sale Securities to be held to maturity
 
Amortized
Cost
 Fair Value (Estimated) 
Amortized
Cost
 Fair Value (Estimated)
Due in 1 year or less$
 $
 $1,432,000
 $1,433,000
Due in 1 to 5 years13,501,000
 13,518,000
 20,717,000
 20,778,000
Due in 5 to 10 years83,954,000
 83,326,000
 157,544,000
 155,313,000
Due after 10 years226,354,000
 220,572,000
 75,970,000
 73,376,000
 $323,809,000
 $317,416,000
 $255,663,000
 $250,900,000

The following table summarizes the contractual maturities of investment securities at September 30, 2018:2019:
 Securities available for sale Securities to be held to maturity
 
Amortized
Cost
 Fair Value (Estimated) 
Amortized
Cost
 Fair Value (Estimated)
Due in 1 year or less$
 $
 $1,796,000
 $1,800,000
Due in 1 to 5 years13,961,000
 13,886,000
 21,463,000
 21,468,000
Due in 5 to 10 years69,317,000
 67,434,000
 155,997,000
 152,154,000
Due after 10 years230,470,000
 220,867,000
 78,139,000
 74,468,000
 $313,748,000
 $302,187,000
 $257,395,000
 $249,890,000

Securities available for saleSecurities to be held to maturity
Amortized
Cost
Fair Value (Estimated)Amortized
Cost
Fair Value (Estimated)
Due in 1 year or less$189,000 $189,000 $1,241,000 $1,245,000 
Due in 1 to 5 years36,304,000 36,703,000 23,460,000 23,920,000 
Due in 5 to 10 years91,242,000 93,419,000 184,234,000 188,811,000 
Due after 10 years194,398,000 196,487,000 89,851,000 92,671,000 
$322,133,000 $326,798,000 $298,786,000 $306,647,000 
At September 30, 2019,2020, securities with a fair value of $216,903,000$285,253,000 were pledged to secure public deposits, repurchase agreements, and for other purposes as required by law. This compares to securities with a fair value of $222,829,000$214,173,000 as of December 31, 20182019 and $302,129,000$216,903,000 at September 30, 2018,2019, pledged for the same purposes.
Gains and losses on the sale of securities are computed by subtracting the amortized cost at the time of sale from the security's selling price, net of accrued interest to be received. The following table shows securities gains and losses for the nine months and quarters ended September 30, 20192020 and 2019:
For the nine months ended September 30,For the quarter ended September 30,
2020201920202019
Proceeds from sales of securities$79,469,000 $4,725,000 $0 $4,725,000 
Gross realized gains1,526,000 82,000 0 82,000 
Gross realized losses(347,000)(67,000)0 (67,000)
Net gain$1,179,000 $15,000 $0 $15,000 
Related income taxes$248,000 $3,000 $0 $3,000 
2018:
Sales include 28 municipal securities sold in the second quarter of 2020 that had been designated as Held to Maturity. Proceeds from these sales totaled $8,600,000 against a cumulative book value of $8,313,000 resulting in a net realized gain of $268,000. The economic potential impact of COVID-19 is considered to be an isolated and unusual event that could not be reasonably anticipated as outlined in Accounting Standards Codification (ASC) Section 320-10-25. Management conducted a review of its municipal bond portfolio in conjunction with risk mitigation efforts related to the onset of the COVID-19 virus; the intent of the review was to identify investment exposures with lower relative credit ratings, locales with perceived above average economic risk, municipal entities with reliance upon sales tax or income tax revenue, or any combination of these factors. Each of the sold positions met one or more of the criteria.
 For the nine months ended September 30, For the quarter ended September 30,
 2019 2018 20192018
Proceeds from sales of securities$4,725,000
 $459,000
 $4,725,000
$
Gross realized gains82,000
 137,000
 82,000
1,000
Gross realized losses(67,000) 
 (67,000)
Net gain$15,000
 $137,000
 $15,000
$1,000
Related income taxes$3,000
 $29,000
 $3,000
$






Management reviews securities with unrealized losses for other than temporary impairment. As of September 30, 2020, there were 75 securities with unrealized losses held in the Company's portfolio. These securities were temporarily impaired as a result of changes in interest rates reducing their fair value, of which 10 had been temporarily impaired for 12 months or more. The Company has the ability and intent to hold its impaired securities until a recovery of their amortized cost, which may be at maturity.
Information regarding securities temporarily impaired as of September 30, 2020 is summarized below:
Less than 12 months12 months or moreTotal
Fair Value (Estimated)Unrealized LossesFair Value (Estimated)Unrealized LossesFair Value (Estimated)Unrealized Losses
U.S. Government-sponsored agencies$16,817,000 $(228,000)$$$16,817,000 $(228,000)
Mortgage-backed securities79,816,000 (654,000)4,216,000 (114,000)84,032,000 (768,000)
State and political subdivisions19,201,000 (361,000)19,201,000 (361,000)
$115,834,000 $(1,243,000)$4,216,000 $(114,000)$120,050,000 $(1,357,000)

11


As of December 31, 2019, there were 86 securities with unrealized losses held in the Company's portfolio. These securities were temporarily impaired as a result of changes in interest rates reducing their fair value, of which 28 had been temporarily impaired for 12 months or more.
Information regarding securities temporarily impaired as of December 31, 2019 is summarized below:
Less than 12 months12 months or moreTotal
Fair Value (Estimated)Unrealized LossesFair Value (Estimated)Unrealized LossesFair Value (Estimated)Unrealized Losses
U.S. Government-sponsored agencies$12,372,000 $(128,000)$$$12,372,000 $(128,000)
Mortgage-backed securities54,244,000 (359,000)18,696,000 (490,000)72,940,000 (849,000)
State and political subdivisions10,532,000 (101,000)304,000 (8,000)10,836,000 (109,000)
$77,148,000 $(588,000)$19,000,000 $(498,000)$96,148,000 $(1,086,000)

As of September 30, 2019,, there were 60 securities with unrealized losses held in the Company's portfolio. These securities were temporarily impaired as a result of changes in interest rates reducing their fair value, of which 29 had been temporarily impaired for 12 months or more. In the first quarter of 2019, one issuer of securities held in the portfolio was downgraded by a rating agency to less than investment grade. These securities totaled approximately 0.13% of overall state and municipal security holdings and were subsequently sold during the third quarter. The Company has the ability and intent to hold its impaired securities until a recovery of their amortized cost, which may be at maturity.quarter 2019.
Information regarding securities temporarily impaired as of September 30, 2019 is summarized below:
 Less than 12 months 12 months or more Total
 Fair Value (Estimated) Unrealized Losses Fair Value (Estimated) Unrealized Losses Fair Value (Estimated) Unrealized Losses
Mortgage-backed securities$30,249,000
 $(233,000) $22,569,000
 $(473,000) $52,818,000
 $(706,000)
State and political subdivisions5,073,000
 (42,000) 306,000
 (6,000) 5,379,000
 (48,000)
 $35,322,000
 $(275,000) $22,875,000
 $(479,000) $58,197,000
 $(754,000)

Less than 12 months12 months or moreTotal
Fair Value (Estimated)Unrealized LossesFair Value (Estimated)Unrealized LossesFair Value (Estimated)Unrealized Losses
Mortgage-backed securities$30,249,000 $(233,000)$22,569,000 $(473,000)$52,818,000 $(706,000)
State and political subdivisions5,073,000 (42,000)306,000 (6,000)5,379,000 (48,000)
$35,322,000 $(275,000)$22,875,000 $(479,000)$58,197,000 $(754,000)
As of December 31, 2018, there were 511 securities with unrealized losses held in the Company's portfolio. These securities were temporarily impaired as a result of changes in interest rates reducing their fair value, of which
232 had been temporarily impaired for 12 months or more. Information regarding securities temporarily impaired as of December 31, 2018 is summarized below:
 Less than 12 months 12 months or more Total
 Fair Value (Estimated) Unrealized Losses Fair Value (Estimated) Unrealized Losses Fair Value (Estimated) Unrealized Losses
U.S. Government-sponsored agencies$
 $
 $10,683,000
 $(472,000) $10,683,000
 $(472,000)
Mortgage-backed securities76,050,000
 (1,061,000) 185,136,000
 (5,926,000) 261,186,000
 (6,987,000)
State and political subdivisions76,809,000
 (1,784,000) 45,052,000
 (3,873,000) 121,861,000
 (5,657,000)
 $152,859,000
 $(2,845,000) $240,871,000
 $(10,271,000) $393,730,000
 $(13,116,000)

As of September 30, 2018, there were 596 securities with unrealized losses held in the Company's portfolio. These securities were temporarily impaired as a result of changes in interest rates reducing their fair value, of which 185 had been temporarily impaired for 12 months or more. Information regarding securities temporarily impaired as of September 30, 2018 is summarized below:
 Less than 12 months 12 months or more Total
 Fair Value (Estimated) Unrealized Losses Fair Value (Estimated) Unrealized Losses Fair Value (Estimated) Unrealized Losses
U.S. Government-sponsored agencies$7,753,000
 $(247,000) $7,614,000
 $(541,000) $15,367,000
 $(788,000)
Mortgage-backed securities154,611,000
 (4,333,000) 143,771,000
 (7,427,000) 298,382,000
 (11,760,000)
State and political subdivisions105,233,000
 (3,255,000) 38,491,000
 (4,305,000) 143,724,000
 (7,560,000)
 $267,597,000
 $(7,835,000) $189,876,000
 $(12,273,000) $457,473,000
 $(20,108,000)

During the third quarter of 2014, the Company transferred securities with a total amortized cost of $89,780,000 with a corresponding fair value of $89,757,000 from available for sale to held to maturity. The net unrealized loss, net of taxes, on these securities at the date of the transfer was $15,000. The net unrealized holding loss at the time of transfer continues to be reported in accumulated other comprehensive income (loss), net of tax and is amortized over the remaining lives of the
securities as an adjustment of the yield. The amortization of the net unrealized loss reported in accumulated other comprehensive income (loss) will offset the effect on interest income of the discount for the transferred securities. The


remaining unamortized balance of the net unrealized losses for the securities transferred from available for sale to held to maturity was $189,000$139,000, net of tax, at September 30, 2019.2020. This compares to $182,000 and $189,000, net of taxes, at December 31, 2019 and September 30, 2019, respectively. These securities were transferred as a part of the Company's overall investment and balance sheet strategies.
The Bank is a member of the Federal Home Loan Bank ("FHLB") of Boston, a cooperatively owned wholesale bank for housing and finance in the 6 New England States. As a requirement of membership in the FHLB, the Bank must own a minimum required amount of FHLB stock, calculated periodically based primarily on its level of borrowings from the FHLB. The Bank uses the FHLB for a portion of its wholesale funding needs. As of September 30, 20192020 and 2018,2019, and December 31, 2018,2019, the Bank's investment in FHLB stock totaled $7,945,000, $10,549,000$9,508,000, $7,945,000 and $10,549,000,$7,945,000, respectively. FHLB stock is a non-marketable equity security and therefore is reported at cost, which equals par value. The Company periodically evaluates its investment in FHLB stock for impairment based on, among other factors, the capital adequacy of the FHLB and its overall financial condition. No impairment losses have been recorded through September 30, 2019.2020. The Company will continue to monitor its investment in FHLB stock.
12


Note 3 – Loans
The following table shows the composition of the Company's loan portfolio as of September 30, 20192020 and 20182019 and at December 31, 2018:2019:
 September 30, 2019 December 31, 2018 September 30, 2018 
Commercial            
   Real estate$368,165,000
 29.1%$353,243,000
 28.5%$366,390,000
 29.5%
   Construction37,242,000
 2.9%27,304,000
 2.2%23,889,000
 1.9%
   Other201,859,000
 16.0%196,391,000
 15.9%188,128,000
 15.1%
Municipal36,522,000
 2.9%51,128,000
 4.1%56,704,000
 4.6%
Residential            
   Term485,490,000
 38.4%469,145,000
 37.9%459,449,000
 36.8%
   Construction14,118,000
 1.1%17,743,000
 1.4%18,166,000
 1.5%
Home equity line of credit94,144,000
 7.5%98,469,000
 8.0%105,213,000
 8.5%
Consumer25,919,000
 2.1%24,860,000
 2.0%25,619,000
 2.1%
Total$1,263,459,000
 100.0%$1,238,283,000
 100.0%$1,243,558,000
 100.0%

September 30, 2020December 31, 2019September 30, 2019
Commercial
   Real estate$407,128,000 28.3 %$372,810,000 28.7 %$368,165,000 29.1 %
   Construction52,038,000 3.6 %38,084,000 3.0 %37,242,000 2.9 %
   Other309,297,000 21.5 %218,773,000 16.9 %201,859,000 16.0 %
Municipal44,110,000 3.1 %41,288,000 3.2 %36,522,000 2.9 %
Residential
   Term497,667,000 34.6 %492,455,000 37.9 %485,490,000 38.4 %
   Construction16,101,000 1.2 %14,813,000 1.2 %14,118,000 1.1 %
Home equity line of credit82,982,000 5.8 %92,349,000 7.1 %94,144,000 7.5 %
Consumer27,323,000 1.9 %26,503,000 2.0 %25,919,000 2.1 %
Total$1,436,646,000 100.0 %$1,297,075,000 100.0 %$1,263,459,000 100.0 %
Loan balances include net deferred loan costs of $7,181,000$5,323,000 as of September 30, 2019, $6,615,0002020, $7,419,000 as of December 31, 2018,2019, and $6,428,000$7,181,000 as of September 30, 2018.2019. The decrease in net deferred loan costs year-over-year and year-to-date is attributable to PPP loans originated during the second and third quarters of 2020. These loans generated gross origination fee income of $3,797,000 and deferred loan costs of $299,000; year-to-date a net of $788,000 in PPP fees was recognized in interest income. Pursuant to collateral agreements, qualifying first mortgage loans and commercial real estate loans, which totaled $308,163,000$379,387,000 at September 30, 2019,2020, were used to collateralize borrowings from the FHLB. This compares to qualifying loans which totaled $290,138,000$296,871,000 at December 31, 2018,2019, and $311,152,000$308,163,000 at September 30, 2018.2019. In addition, commercial, construction and home equity loans totaling $254,076,000$271,905,000 at September 30, 2020, $240,133,000 at December 31, 2019, and $254,076,000 at September 30, 2019,, $237,152,000 at December 31, 2018, and $229,769,000 at September 30, 2018, were used to collateralize a standby line of credit at the Federal Reserve Bank of Boston that is currently unused.Boston.
For all loan classes, loans over 30 days past due are considered delinquent. Information on the past-due status of loans by class of financing receivable as of September 30, 2019,2020, is presented in the following table:
30-59 Days
Past Due
60-89 Days
Past Due
90+ Days
Past Due
All
Past Due
CurrentTotal90+ Days
& Accruing
Commercial
   Real estate$2,397,000 $58,000 $454,000 $2,909,000 $404,219,000 $407,128,000 $
   Construction80,000 80,000 51,958,000 52,038,000 
   Other547,000 258,000 1,871,000 2,676,000 306,621,000 309,297,000 1,464,000 
Municipal44,110,000 44,110,000 
Residential
   Term2,550,000 357,000 1,602,000 4,509,000 493,158,000 497,667,000 
   Construction16,101,000 16,101,000 
Home equity line of credit868,000 65,000 1,392,000 2,325,000 80,657,000 82,982,000 
Consumer219,000 28,000 30,000 277,000 27,046,000 27,323,000 30,000 
Total$6,581,000 $766,000 $5,429,000 $12,776,000 $1,423,870,000 $1,436,646,000 $1,494,000 

On March 22, 2020, banking regulators issued an Interagency Statement on Loan Modifications and Reporting in response to the onset of COVID-19; shortly thereafter, on March 30, 2020, the Coronavirus Aid, Relief, and Economic Security (CARES) Act was passed. Both the Interagency Statement and the CARES Act provided an exemption for qualified modifications from Troubled Debt Restructure (TDR) designation. The Company actively worked with borrowers impacted by the COVID-19 outbreak and as of September 30, 2020, a total of 996 loan modification requests for interest-only payments or deferred payments had been completed in conformance with the Interagency Statement or CARES Act, representing $279,700,000 in loan balances, or approximately 20.8% of the loan portfolio excluding PPP balances. One of these modifications of de minimis amount has been classified as a Troubled Debt Restructure since being modified. So long as modified terms are met, loans in an active modification are not included in past due loan totals and continue to accrue interest.
13


 
30-59 Days
Past Due
 
60-89 Days
Past Due
 
90+ Days
Past Due
 
All
Past Due
 Current Total 
90+ Days
& Accruing
Commercial             
   Real estate$305,000
 $233,000
 $661,000
 $1,199,000
 $366,966,000
 $368,165,000
 $
   Construction14,000
 279,000
 
 293,000
 36,949,000
 37,242,000
 
   Other35,000
 289,000
 339,000
 663,000
 201,196,000
 201,859,000
 
Municipal
 
 
 
 36,522,000
 36,522,000
 
Residential             
   Term650,000
 767,000
 3,806,000
 5,223,000
 480,267,000
 485,490,000
 
   Construction
 
 
 
 14,118,000
 14,118,000
 
Home equity line of credit693,000
 306,000
 868,000
 1,867,000
 92,277,000
 94,144,000
 
Consumer234,000
 317,000
 18,000
 569,000
 25,350,000
 25,919,000
 18,000
Total$1,931,000
 $2,191,000
 $5,692,000
 $9,814,000
 $1,253,645,000
 $1,263,459,000
 $18,000
As of September 30, 2020, loans totaling $81.0 million, or 6.0% of all loans, remained in either their original modification or a subsequent modification. Modification statuses by portfolio segment are summarized below:


Commercial/Municipal Loan Modifications
UnitsPercentageBalancePercentage
Paid Off346.0 %$6,031,000 3.0 %
Subsequent Modification417.0 %20,443,000 9.0 %
Still in Original Modification559.0 %30,188,000 13.0 %
Out of Modification45278.0 %171,407,000 75.0 %
Total582100.0 %$228,069,000 100.0 %
Residential Real Estate Modifications
UnitsPercentageBalancePercentage
Paid Off175.0 %$3,102,000 6.0 %
Subsequent Modification9728.0 %13,857,000 27.0 %
Still in Original Modification12535.0 %15,565,000 31.0 %
Out of Modification11132.0 %17,949,000 36.0 %
Total350100.0 %$50,473,000 100.0 %

Consumer Loan Modifications
UnitsPercentageBalancePercentage
Paid Off813.0 %$95,000 9.0 %
Subsequent Modification%%
Still in Original Modification5281.0 %967,000 86.0 %
Out of Modification46.0 %58,000 5.0 %
Total64100.0 %$1,120,000 100.0 %

Information on the past-due status of loans by class of financing receivable as of December 31, 2018,2019, is presented in the following table:
30-59 Days
Past Due
60-89 Days
Past Due
90+ Days
Past Due
All
Past Due
CurrentTotal90+ Days
& Accruing
Commercial
   Real estate$786,000 $377,000 $611,000 $1,774,000 $371,036,000 $372,810,000 $
   Construction14,000 257,000 271,000 37,813,000 38,084,000 
   Other2,764,000 465,000 1,799,000 5,028,000 213,745,000 218,773,000 1,464,000 
Municipal41,288,000 41,288,000 
Residential
   Term1,129,000 1,132,000 2,379,000 4,640,000 487,815,000 492,455,000 86,000 
   Construction14,813,000 14,813,000 
Home equity line of credit1,169,000 58,000 1,730,000 2,957,000 89,392,000 92,349,000 
Consumer291,000 46,000 10,000 347,000 26,156,000 26,503,000 10,000 
Total$6,139,000 $2,092,000 $6,786,000 $15,017,000 $1,282,058,000 $1,297,075,000 $1,560,000 
14


 
30-59 Days
Past Due
 
60-89 Days
Past Due
 
90+ Days
Past Due
 
All
Past Due
 Current Total 
90+ Days
& Accruing
Commercial             
   Real estate$1,274,000
 $
 $777,000
 $2,051,000
 $351,192,000
 $353,243,000
 $
   Construction
 10,000
 
 10,000
 27,294,000
 27,304,000
 
   Other455,000
 5,000
 120,000
 580,000
 195,811,000
 196,391,000
 
Municipal
 
 
 
 51,128,000
 51,128,000
 
Residential             
   Term1,097,000
 3,518,000
 2,023,000
 6,638,000
 462,507,000
 469,145,000
 339,000
   Construction76,000
 
 
 76,000
 17,667,000
 17,743,000
 
Home equity line of credit2,819,000
 419,000
 493,000
 3,731,000
 94,738,000
 98,469,000
 
Consumer237,000
 25,000
 27,000
 289,000
 24,571,000
 24,860,000
 12,000
Total$5,958,000
 $3,977,000
 $3,440,000
 $13,375,000
 $1,224,908,000
 $1,238,283,000
 $351,000
Information on the past-due status of loans by class of financing receivable as of September 30, 2018,2019, is presented in the following table:
 
30-59 Days
Past Due
 
60-89 Days
Past Due
 
90+ Days
Past Due
 
All
Past Due
 Current Total 
90+ Days
& Accruing
Commercial             
   Real estate$305,000
 $
 $503,000
 $808,000
 $365,582,000
 $366,390,000
 $
   Construction
 
 
 
 23,889,000
 23,889,000
 
   Other440,000
 526,000
 416,000
 1,382,000
 186,746,000
 188,128,000
 
Municipal
 
 
 
 56,704,000
 56,704,000
 
Residential             
   Term838,000
 2,701,000
 1,566,000
 5,105,000
 454,344,000
 459,449,000
 199,000
   Construction
 
 
 
 18,166,000
 18,166,000
 
Home equity line of credit1,883,000
 403,000
 565,000
 2,851,000
 102,362,000
 105,213,000
 
Consumer161,000
 14,000
 52,000
 227,000
 25,392,000
 25,619,000
 50,000
Total$3,627,000
 $3,644,000
 $3,102,000
 $10,373,000
 $1,233,185,000
 $1,243,558,000
 $249,000

30-59 Days
Past Due
60-89 Days
Past Due
90+ Days
Past Due
All
Past Due
CurrentTotal90+ Days
& Accruing
Commercial
   Real estate$305,000 $233,000 $661,000 $1,199,000 $366,966,000 $368,165,000 $
   Construction14,000 279,000 293,000 36,949,000 37,242,000 
   Other35,000 289,000 339,000 663,000 201,196,000 201,859,000 
Municipal36,522,000 36,522,000 
Residential
   Term650,000 767,000 3,806,000 5,223,000 480,267,000 485,490,000 
   Construction14,118,000 14,118,000 
Home equity line of credit693,000 306,000 868,000 1,867,000 92,277,000 94,144,000 
Consumer234,000 317,000 18,000 569,000 25,350,000 25,919,000 18,000 
Total$1,931,000 $2,191,000 $5,692,000 $9,814,000 $1,253,645,000 $1,263,459,000 $18,000 
For all classes, loans are placed on non-accrual status when, based on current information and events, it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement or when principal and interest is 90 days or more past due unless the loan is both well secured and in the process of collection (in which case the loan may continue to accrue interest in spite of its past due status). A loan is "well secured" if it is secured (1) by collateral in the form of liens on or pledges of real or personal property, including securities, that have a realizable value sufficient to discharge the debt (including accrued interest) in full, or (2) by the guarantee of a financially responsible party. A loan is "in the process of collection" if collection of the loan is proceeding in due course either (1) through legal action, including judgment enforcement procedures, or, (2) in appropriate circumstances, through collection efforts not involving legal action which are reasonably expected to result in repayment of the debt or in its restoration to a current status in the near future.


Cash payments received on non-accrual loans, which are included in impaired loans, are applied to reduce the loan's principal balance until the remaining principal balance is deemed collectible, after which interest is recognized when collected. As a general rule, a loan may be restored to accrual status when payments are current for a substantial period of time, generally six months, and repayment of the remaining contractual amounts is expected, or when it otherwise becomes well secured and in the process of collection. Information on nonaccrual loans as of September 30, 20192020 and 20182019 and at December 31, 20182019 is presented in the following table:
 September 30, 2019 December 31, 2018 September 30, 2018
Commercial     
   Real estate$1,807,000
 $1,226,000
 $964,000
   Construction256,000
 
 
   Other6,871,000
 8,664,000
 9,330,000
Municipal
 
 
Residential     
   Term6,840,000
 4,062,000
 3,042,000
   Construction
 
 
Home equity line of credit1,078,000
 760,000
 834,000
Consumer6,000
 15,000
 2,000
Total$16,858,000
 $14,727,000
 $14,172,000

September 30, 2020December 31, 2019September 30, 2019
Commercial
   Real estate$1,771,000 $1,784,000 $1,807,000 
   Construction307,000 256,000 256,000 
   Other503,000 6,534,000 6,871,000 
Municipal0 
Residential
   Term4,467,000 5,899,000 6,840,000 
   Construction0 
Home equity line of credit2,063,000 2,171,000 1,078,000 
Consumer0 5,000 6,000 
Total$9,111,000 $16,649,000 $16,858,000 
Impaired loans include troubled debt restructured ("TDR")TDR loans and loans placed on non-accrual. These loans are measured at the present value of expected future cash flows discounted at the loan's effective interest rate or at the fair value of the collateral if the loan is collateral dependent. If the measure of an impaired loan is lower than the recorded investment in the loan and estimated selling costs, a specific reserve is established for the difference, or, in certain situations, if the measure of an impaired loan is lower than the recorded investment in the loan and estimated selling costs, the difference is written off.


15



A breakdown of impaired loans by class of financing receivable as of and for the periodperiods ended September 30, 20192020 is presented in the following table:
      For the nine months ended September 30, 2019 For the quarter ended September 30, 2019For the nine months ended September 30, 2020For the quarter ended September 30, 2020
Recorded Investment Unpaid Principal Balance Related Allowance Average Recorded Investment Recognized Interest Income Average Recorded Investment Recognized Interest IncomeRecorded InvestmentUnpaid Principal BalanceRelated AllowanceAverage Recorded InvestmentRecognized Interest IncomeAverage Recorded InvestmentRecognized Interest Income
With No Related AllowanceWith No Related AllowanceWith No Related Allowance
Commercial             Commercial
Real estate$7,332,000
 $7,630,000
 $
 $7,929,000
 $266,000
 $7,242,000
 $83,000
Real estate$3,730,000 $4,528,000 $— $4,673,000 $117,000 $4,068,000 $33,000 
Construction978,000
 990,000
 
 929,000
 35,000
 980,000
 12,000
Construction308,000 337,000 — 402,000 256,000 
Other892,000
 930,000
 
 997,000
 22,000
 921,000
 8,000
Other862,000 887,000 — 796,000 19,000 814,000 6,000 
Municipal
 
 
 
 
 
 
Municipal— 
Residential             Residential
Term10,664,000
 12,305,000
 
 9,877,000
 202,000
 10,487,000
 63,000
Term7,783,000 9,058,000 — 9,173,000 123,000 8,024,000 31,000 
Construction
 
 
 
 
 
 
Construction— 
Home equity line of credit827,000
 883,000
 
 965,000
 16,000
 917,000
 6,000
Home equity line of credit1,478,000 1,551,000 — 1,284,000 10,000 1,438,000 2,000 
Consumer
 
 
 
 
 
 
Consumer— 
$20,693,000
 $22,738,000
 $
 $20,697,000
 $541,000
 $20,547,000
 $172,000
$14,161,000 $16,361,000 $— $16,328,000 $269,000 $14,600,000 $72,000 
With an Allowance RecordedWith an Allowance RecordedWith an Allowance Recorded
Commercial             Commercial
Real estate$1,717,000
 $1,732,000
 $258,000
 $1,538,000
 $72,000
 $1,721,000
 $23,000
Real estate$1,023,000 $1,047,000 $135,000 $1,032,000 $32,000 $1,027,000 $11,000 
Construction
 
 
 
 
 
 
Construction701,000 701,000 19,000 546,000 25,000 701,000 8,000 
Other6,440,000
 6,949,000
 1,275,000
 6,918,000
 1,000
 6,465,000
 1,000
Other161,000 183,000 128,000 1,523,000 143,000 
Municipal
 
 
 
 
 
 
Municipal
Residential             Residential
Term2,782,000
 3,121,000
 337,000
 2,306,000
 61,000
 2,858,000
 25,000
Term2,399,000 2,466,000 204,000 2,002,000 63,000 2,207,000 27,000 
Construction
 
 
 
 
 
 
Construction
Home equity line of credit571,000
 590,000
 184,000
 99,000
 
 248,000
 
Home equity line of credit886,000 886,000 403,000 981,000 1,000 870,000 1,000 
Consumer6,000
 6,000
 6,000
 1,000
 
 2,000
 
Consumer10,000 10,000 1,000 10,000 3,000 
$11,516,000
 $12,398,000
 $2,060,000
 $10,862,000
 $134,000
 $11,294,000
 $49,000
$5,180,000 $5,293,000 $890,000 $6,094,000 $121,000 $4,951,000 $47,000 
TotalTotalTotal
Commercial             Commercial
Real estate$9,049,000
 $9,362,000
 $258,000
 $9,467,000
 $338,000
 $8,963,000
 $106,000
Real estate$4,753,000 $5,575,000 $135,000 $5,705,000 $149,000 $5,095,000 $44,000 
Construction978,000
 990,000
 
 929,000
 35,000
 980,000
 12,000
Construction1,009,000 1,038,000 19,000 948,000 25,000 957,000 8,000 
Other7,332,000
 7,879,000
 1,275,000
 7,915,000
 23,000
 7,386,000
 9,000
Other1,023,000 1,070,000 128,000 2,319,000 19,000 957,000 6,000 
Municipal
 
 
 
 
 
 
Municipal
Residential             Residential
Term13,446,000
 15,426,000
 337,000
 12,183,000
 263,000
 13,345,000
 88,000
Term10,182,000 11,524,000 204,000 11,175,000 186,000 10,231,000 58,000 
Construction
 
 
 
 
 
 
Construction
Home equity line of credit1,398,000
 1,473,000
 184,000
 1,064,000
 16,000
 1,165,000
 6,000
Home equity line of credit2,364,000 2,437,000 403,000 2,265,000 11,000 2,308,000 3,000 
Consumer6,000
 6,000
 6,000
 1,000
 
 2,000
 
Consumer10,000 10,000 1,000 10,000 3,000 
$32,209,000
 $35,136,000
 $2,060,000
 $31,559,000
 $675,000
 $31,841,000
 $221,000
$19,341,000 $21,654,000 $890,000 $22,422,000 $390,000 $19,551,000 $119,000 
Substantially all interest income recognized on impaired loans for all classes of financing receivables was recognized on a cash basis as received.

16



A breakdown of impaired loans by class of financing receivable as of and for the year ended December 31, 20182019 is presented in the following table:
Recorded InvestmentUnpaid Principal BalanceRelated AllowanceAverage Recorded InvestmentRecognized Interest Income
With No Related Allowance
Commercial
  Real estate$5,235,000 $5,492,000 $— $7,611,000 $228,000 
  Construction958,000 970,000 — 936,000 47,000 
  Other756,000 786,000 — 965,000 29,000 
Municipal— 
Residential
  Term10,176,000 11,931,000 — 10,033,000 269,000 
  Construction— 
Home equity line of credit1,087,000 1,151,000 — 997,000 20,000 
Consumer— 
$18,212,000 $20,330,000 $— $20,542,000 $593,000 
With an Allowance Recorded
Commercial
  Real estate$1,074,000 $1,093,000 $251,000 $1,528,000 $60,000 
  Construction
  Other6,319,000 6,925,000 1,273,000 6,778,000 
Municipal
Residential
  Term2,263,000 2,412,000 237,000 2,424,000 82,000 
  Construction
Home equity line of credit1,401,000 1,412,000 447,000 283,000 
Consumer5,000 6,000 5,000 2,000 
$11,062,000 $11,848,000 $2,213,000 $11,015,000 $142,000 
Total
Commercial
  Real estate$6,309,000 $6,585,000 $251,000 $9,139,000 $288,000 
  Construction958,000 970,000 936,000 47,000 
  Other7,075,000 7,711,000 1,273,000 7,743,000 29,000 
Municipal
Residential
  Term12,439,000 14,343,000 237,000 12,457,000 351,000 
  Construction
Home equity line of credit2,488,000 2,563,000 447,000 1,280,000 20,000 
Consumer5,000 6,000 5,000 2,000 
$29,274,000 $32,178,000 $2,213,000 $31,557,000 $735,000 

17


 Recorded Investment Unpaid Principal Balance Related Allowance Average Recorded Investment Recognized Interest Income
With No Related Allowance
Commercial         
  Real estate$8,718,000
 $9,161,000
 $
 $5,536,000
 $380,000
  Construction721,000
 721,000
 
 762,000
 43,000
  Other1,468,000
 1,555,000
 
 2,037,000
 32,000
Municipal
 
 
 
 
Residential         
  Term9,136,000
 10,317,000
 
 9,427,000
 289,000
  Construction
 
 
 
 
Home equity line of credit972,000
 1,035,000
 
 1,001,000
 20,000
Consumer15,000
 42,000
 
 13,000
 
 $21,030,000
 $22,831,000
 $
 $18,776,000
 $764,000
With an Allowance Recorded
Commercial         
  Real estate$1,042,000
 $1,059,000
 $260,000
 $3,477,000
 $42,000
  Construction
 
 
 
 
  Other7,791,000
 8,216,000
 1,696,000
 7,471,000
 5,000
Municipal
 
 
 
 
Residential         
  Term1,768,000
 1,998,000
 335,000
 1,982,000
 53,000
  Construction
 
 
 
 
Home equity line of credit120,000
 124,000
 17,000
 99,000
 
Consumer
 
 
 
 
 $10,721,000
 $11,397,000
 $2,308,000
 $13,029,000
 $100,000
Total
Commercial         
  Real estate$9,760,000
 $10,220,000
 $260,000
 $9,013,000
 $422,000
  Construction721,000
 721,000
 
 762,000
 43,000
  Other9,259,000
 9,771,000
 1,696,000
 9,508,000
 37,000
Municipal
 
 
 
 
Residential         
  Term10,904,000
 12,315,000
 335,000
 11,409,000
 342,000
  Construction
 
 
 
 
Home equity line of credit1,092,000
 1,159,000
 17,000
 1,100,000
 20,000
Consumer15,000
 42,000
 
 13,000
 
 $31,751,000
 $34,228,000
 $2,308,000
 $31,805,000
 $864,000



A breakdown of impaired loans by class of financing receivable as of and for the periodperiods ended September 30, 20182019 is presented in the following table:
For the nine months ended September 30, 2019For the quarter ended September 30, 2019
Recorded InvestmentUnpaid Principal BalanceRelated AllowanceAverage Recorded InvestmentRecognized Interest IncomeAverage Recorded InvestmentRecognized Interest Income
With No Related Allowance
Commercial
  Real estate$7,332,000 $7,630,000 $— $7,929,000 $266,000 $7,242,000 $83,000 
  Construction978,000 990,000 — 929,000 35,000 980,000 12,000 
  Other892,000 930,000 — 997,000 22,000 921,000 8,000 
Municipal— 
Residential
  Term10,664,000 12,305,000 — 9,877,000 202,000 10,487,000 63,000 
  Construction— 
Home equity line of credit827,000 883,000 — 965,000 16,000 917,000 6,000 
Consumer— 
$20,693,000 $22,738,000 $— $20,697,000 $541,000 $20,547,000 $172,000 
With an Allowance Recorded
Commercial
  Real estate$1,717,000 $1,732,000 $258,000 $1,538,000 $72,000 $1,721,000 $23,000 
  Construction
  Other6,440,000 6,949,000 1,275,000 6,918,000 1,000 6,465,000 1,000 
Municipal
Residential
  Term2,782,000 3,121,000 337,000 2,306,000 61,000 2,858,000 25,000 
  Construction
Home equity line of credit571,000 590,000 184,000 99,000 248,000 
Consumer6,000 6,000 6,000 1,000 2,000 
$11,516,000 $12,398,000 $2,060,000 $10,862,000 $134,000 $11,294,000 $49,000 
Total
Commercial
  Real estate$9,049,000 $9,362,000 $258,000 $9,467,000 $338,000 $8,963,000 $106,000 
  Construction978,000 990,000 929,000 35,000 980,000 12,000 
  Other7,332,000 7,879,000 1,275,000 7,915,000 23,000 7,386,000 9,000 
Municipal
Residential
  Term13,446,000 15,426,000 337,000 12,183,000 263,000 13,345,000 88,000 
  Construction
Home equity line of credit1,398,000 1,473,000 184,000 1,064,000 16,000 1,165,000 6,000 
Consumer6,000 6,000 6,000 1,000 2,000 
$32,209,000 $35,136,000 $2,060,000 $31,559,000 $675,000 $31,841,000 $221,000 
       For the nine months ended September 30, 2018 For the quarter ended September 30, 2018
 Recorded Investment Unpaid Principal Balance Related Allowance Average Recorded Investment Recognized Interest Income Average Recorded Investment Recognized Interest Income
With No Related Allowance
Commercial             
  Real estate$5,954,000
 $6,275,000
 $
 $5,099,000
 $194,000
 $5,966,000
 $84,000
  Construction741,000
 741,000
 
 773,000
 32,000
 741,000
 11,000
  Other1,926,000
 2,044,000
 
 2,146,000
 25,000
 1,865,000
 8,000
Municipal
 
 
 
 
 
 
Residential             
  Term9,019,000
 10,201,000
 
 9,515,000
 222,000
 9,200,000
 71,000
  Construction
 
 
 
 
 
 
Home equity line of credit1,068,000
 1,128,000
 
 1,014,000
 15,000
 1,033,000
 6,000
Consumer
 
 
 14,000
 
 10,000
 
 $18,708,000
 $20,389,000
 $
 $18,561,000
 $488,000
 $18,815,000
 $180,000
With an Allowance Recorded
Commercial             
  Real estate$3,456,000
 $3,474,000
 $265,000
 $3,700,000
 $97,000
 $3,461,000
 $30,000
  Construction
 
 
 
 
 
 
  Other7,923,000
 8,231,000
 1,890,000
 7,345,000
 
 7,682,000
 
Municipal
 
 
 
 
 
 
Residential             
  Term1,909,000
 2,085,000
 238,000
 2,054,000
 70,000
 2,108,000
 22,000
  Construction
 
 
 
 
 
 
Home equity line of credit100,000
 100,000
 7,000
 92,000
 
 100,000
 
Consumer2,000
 15,000
 2,000
 
 
 1,000
 
 $13,390,000
 $13,905,000
 $2,402,000
 $13,191,000
 $167,000
 $13,352,000
 $52,000
Total
Commercial             
  Real estate$9,410,000
 $9,749,000
 $265,000
 $8,799,000
 $291,000
 $9,427,000
 $114,000
  Construction741,000
 741,000
 
 773,000
 32,000
 741,000
 11,000
  Other9,849,000
 10,275,000
 1,890,000
 9,491,000
 25,000
 9,547,000
 8,000
Municipal
 
 
 
 
 
 
Residential             
  Term10,928,000
 12,286,000
 238,000
 11,569,000
 292,000
 11,308,000
 93,000
  Construction
 
 
 
 
 
 
Home equity line of credit1,168,000
 1,228,000
 7,000
 1,106,000
 15,000
 1,133,000
 6,000
Consumer2,000
 15,000
 2,000
 14,000
 
 11,000
 
 $32,098,000
 $34,294,000
 $2,402,000
 $31,752,000
 $655,000
 $32,167,000
 $232,000





18





Troubled Debt Restructured
A "TDR" constitutes a restructuring of debt if the Company, for economic or legal reasons related to the borrower's financial difficulties, grants a concession to the borrower that it would not otherwise consider. To determine whether or not a loan should be classified as a TDR, Management evaluates a loan based upon the following criteria:
The borrower demonstrates financial difficulty; common indicators include past due status with bank obligations, substandard credit bureau reports, or an inability to refinance with another lender, and
The Company has granted a concession; common concession types include maturity date extension, interest rate adjustments to below market pricing, and deferment of payments.
As of September 30, 2019,2020, the Company had 8278 loans with a balance of $24,281,000$13,390,000 that have been classified as TDRs. This compares to 7681 loans with a balance of $25,222,000$21,424,000 and 7182 loans with a balance of $25,661,000$24,281,000 classified as TDRs as of December 31, 20182019 and September 30, 2018,2019, respectively. The impairment carried as a specific reserve in the allowance for loan losses is calculated by present valuing the expected cash flows on the loan at the original interest rate, or, for collateral-dependent loans, using the fair value of the collateral less costs to sell.
The following table shows TDRs by class and the specific reserve as of September 30, 2019:2020:
Number of LoansBalanceSpecific Reserves
Commercial
   Real estate16 $4,054,000 $130,000 
   Construction701,000 19,000 
   Other729,000 92,000 
Municipal
Residential
   Term51 7,430,000 153,000 
   Construction
Home equity line of credit466,000 
Consumer10,000 1,000 
78 $13,390,000 $395,000 
 Number of Loans Balance Specific Reserves
Commercial     
   Real estate19
 $7,559,000
 $249,000
   Construction1
 721,000
 
   Other7
 6,951,000
 1,232,000
Municipal
 
 
Residential     
   Term52
 8,563,000
 202,000
   Construction
 
 
Home equity line of credit3
 487,000
 
Consumer
 
 
 82
 $24,281,000
 $1,683,000
The following table shows TDRs by class and the specific reserve as of December 31, 20182019:
Number of LoansBalanceSpecific Reserves
Commercial
   Real estate17 $4,836,000 $246,000 
   Construction701,000 
   Other6,932,000 1,231,000 
Municipal
Residential
   Term52 8,472,000 200,000 
   Construction
Home equity line of credit483,000 
Consumer
81 $21,424,000 $1,677,000 

:



19


 Number of Loans Balance Specific Reserves
Commercial     
   Real estate17
 $8,631,000
 $132,000
   Construction1
 721,000
 
   Other10
 7,298,000
 1,276,000
Municipal
 
 
Residential     
   Term45
 8,074,000
 160,000
   Construction
 
 
Home equity line of credit3
 498,000
 
Consumer
 
 
 76
 $25,222,000
 $1,568,000







The following table shows TDRs by class and the specific reserve as of September 30, 20182019:
Number of LoansBalanceSpecific Reserves
Commercial
   Real estate19 $7,559,000 $249,000 
   Construction721,000 
   Other6,951,000 1,232,000 
Municipal
Residential
   Term52 8,563,000 202,000 
   Construction
Home equity line of credit487,000 
Consumer
82 $24,281,000 $1,683,000 
:
As of September 30, 2020, 15 of the loans classified as TDRs with a total balance of $2,814,000 were more than 30 days past due. Of these loans, 2 had been placed on TDR status in the previous 12 months. The following table shows these TDRs by class and the associated specific reserves included in the allowance for loan losses as of September 30, 2020:
Number of Loans Balance Specific ReservesNumber of LoansBalanceSpecific Reserves
Commercial     Commercial
Real estate16
 $8,542,000
 $138,000
Real estate$1,472,000 $
Construction1
 741,000
 
Construction
Other5
 7,007,000
 1,100,000
Other424,000 92,000 
Municipal
 
 
Municipal
Residential     Residential
Term46
 8,869,000
 238,000
Term743,000 
Construction
 
 
Construction
Home equity line of credit3
 502,000
 
Home equity line of credit165,000 
Consumer
 
 
Consumer10,000 1,000 
71
 $25,661,000
 $1,476,000
15 $2,814,000 $93,000 



















20


As of September 30, 2019,, 9 of the loans classified as TDRs with a total balance of $1,084,000 were more than 30 days past due. Of these loans, 4 had been placed on TDR status in the previous 12 months. The following table shows these TDRs by class and the associated specific reserves included in the allowance for loan losses as of September 30, 2019:2019:
 Number of Loans Balance Specific Reserves
Commercial     
   Real estate
 $
 $
   Construction
 
 
   Other3
 251,000
 131,000
Municipal
 
 
Residential     
   Term5
 666,000
 11,000
   Construction
 
 
Home equity line of credit1
 167,000
 
Consumer
 
 
 9
 $1,084,000
 $142,000






















As of September 30, 2018, 10 of the loans classified as TDRs with a total balance of $1,271,000 were more than 30 days past due. Of these loans, 1 had been placed on TDR status in the previous 12 months. The following table shows these TDRs by class and the associated specific reserves included in the allowance for loan losses as of September 30, 2018:
 Number of Loans Balance Specific Reserves
Commercial     
   Real estate
 $
 $
   Construction
 
 
   Other1
 138,000
 
Municipal
 
 
Residential     
   Term8
 966,000
 5,000
   Construction
 
 
Home equity line of credit1
 167,000
 
Consumer
 
 
 10
 $1,271,000
 $5,000

Number of LoansBalanceSpecific Reserves
Commercial
   Real estate$$
   Construction
   Other251,000 131,000 
Municipal
Residential
   Term666,000 11,000 
   Construction
Home equity line of credit167,000 
Consumer
$1,084,000 $142,000 
For the nine months ended September 30, 2019, 102020, 3 loans were placed on TDR status. The following table shows these TDRs, by class and the associated specific reserves included in the allowance for loan losses as of September 30, 2019:2020:
Number of LoansPre-Modification
Outstanding
Recorded Investment
Post-Modification Outstanding
Recorded
Investment
Specific Reserves
Commercial
   Real estate$$$
   Construction
   Other
Municipal
Residential
   Term235,000 187,000 23,000 
   Construction
Home equity line of credit
Consumer10,000 10,000 1,000 
$245,000 $197,000 $24,000 
 Number of Loans Pre-Modification
Outstanding
Recorded Investment
 Post-Modification Outstanding
Recorded
Investment
 Specific Reserves
Commercial       
   Real estate2
 $110,000
 $95,000
 $95,000
   Construction
 
 
 
   Other
 
 
 
Municipal
 
 
 
Residential       
   Term8
 998,000
 882,000
 73,000
   Construction
 
 
 
Home equity line of credit
 
 
 
Consumer
 
 
 
 10
 $1,108,000
 $977,000
 $168,000














21




For the nine months ended September 30, 2018, 112019, 10 loans were placed on TDR status. The following table shows these TDRs by class and associated specific reserves included in the allowance for loan losses as of September 30, 2018:2019:
Number of LoansPre-Modification
Outstanding
Recorded Investment
Post-Modification Outstanding
Recorded
Investment
Specific Reserves
Commercial
   Real estate$110,000 $95,000 $95,000 
   Construction
   Other
Municipal
Residential
   Term998,000 882,000 73,000 
   Construction
Home equity line of credit
Consumer
10 $1,108,000 $977,000 $168,000 
For the quarter ended September 30, 2020, 1 loan was placed on TDR status. The following table shows these TDRs by class and the associated specific reserves included in the allowance for loan losses as of September 30, 2020:
Number of LoansPre-Modification Outstanding Recorded InvestmentPost-Modification Outstanding Recorded InvestmentSpecific Reserves
Commercial
Real estate$$$
Construction
Other
Municipal
Residential
Term
Construction
Home equity line of credit
Consumer10,000 10,000 1,000 
$10,000 $10,000 $1,000 













 Number of Loans Pre-Modification
Outstanding
Recorded Investment
 Post-Modification Outstanding
Recorded
Investment
 Specific Reserves
Commercial       
   Real estate8
 $1,608,000
 $1,606,000
 $42,000
   Construction
 
 
 
   Other1
 6,727,000
 6,487,000
 1,100,000
Municipal
 
 
 
Residential       
   Term2
 441,000
 436,000
 26,000
   Construction
 
 
 
Home equity line of credit
 
 
 
Consumer
 
 
 
 11
 $8,776,000
 $8,529,000
 $1,168,000
22


For the quarter ended September 30, 2019, 2 loans were placed on TDR status. The following table shows these TDRs by class and the associated specific reserves included in the allowance for loan losses as of September 30, 2019:
Number of LoansPre-Modification Outstanding Recorded InvestmentPost-Modification Outstanding Recorded InvestmentSpecific Reserves
Commercial
Real estate$$$
Construction
Other
Municipal
Residential
Term317,000 276,000 
Construction
Home equity line of credit
Consumer
$317,000 $276,000 $
 Number of Loans Pre-Modification
Outstanding
Recorded Investment
 Post-Modification Outstanding
Recorded
Investment
 Specific Reserves
Commercial       
   Real estate
 $
 $
 $
   Construction
 
 
 
   Other
 
 
 
Municipal
 
 
 
Residential       
   Term2
 317,000
 276,000
 
   Construction
 
 
 
Home equity line of credit
 
 
 
Consumer
 
 
 
 2
 $317,000
 $276,000
 $















For the quarter ended September 30, 2018, 1 loan was placed on TDR status. The following table shows these TDRs by class and the associated specific reserves included in the allowance for loan losses as of September 30, 2018:
 Number of Loans Pre-Modification
Outstanding
Recorded Investment
 Post-Modification Outstanding
Recorded
Investment
 Specific Reserves
Commercial       
   Real estate1
 $552,000
 $552,000
 $
   Construction
 
 
 
   Other
 
 
 
Municipal
 
 
 
Residential       
   Term
 
 
 
   Construction
 
 
 
Home equity line of credit
 
 
 
Consumer
 
 
 
 1
 $552,000
 $552,000
 $

As of September 30, 2019,2020, Management is aware of 98 loans classified as TDRs that are involved in bankruptcy with an outstanding balance of $1,004,000.$911,000. There were also 2622 loans with an outstanding balance of $8,932,000$3,159,000 that were classified as TDRs and on non-accrual status, of which 32 loans with an outstanding balance of $398,000$430,000 were in the process of foreclosure.

Residential Mortgage Loans in Process of Foreclosure
As of September 30, 2019,2020, there were 17 mortgage loans collateralized by residential real estate in the process of foreclosure with a total balance of $2,083,000. This compares to 15 mortgage loans collateralized by residential real estate in the process of foreclosure with a total balance of $1,649,000. This compares to 14 mortgage loans collateralized by residential real estate in the process of foreclosure with a total balance of $1,337,000$1,649,000 as of September 30, 2018.2019.
23


Note 4. Allowance for Loan Losses
The Company provides for loan losses through the establishment of an allowance for loan losses which represents an estimated reserve for existing losses in the loan portfolio. A systematic methodology is used for determining the allowance that includes a quarterly review process, risk rating changes, and adjustments to the allowance. The loan portfolio is classified in 8 classes and credit risk is evaluated separately in each class. Major risk characteristics relevant to each portfolio segment are as follows: 
Commercial Real Estate - Commercial real estate loans are impacted by factors such as competitive market forces, vacancy rates, cap rates, net operating incomes, lease renewals and overall economic demand. In addition, loans in the recreational and tourism sector can be affected by weather conditions, such as unseasonably low winter snowfalls. Commercial real estate lending also carries a higher degree of environmental risk than other real estate lending.
Commercial Construction - Commercial construction loans are impacted by factors similar to those for commercial real estate loans in addition to risks related to contractor financial capacity and ability to complete a project within acceptable time frames and within budget.
Commercial Other - A weakened economy, soft consumer spending, and the rising cost of labor or raw materials are examples of issues that can impact the credit quality in this segment.
Municipal Loans - The overall health of the economy, including unemployment rates and housing prices, has an impact on the credit quality of this segment. 
Residential Real Estate Term - The overall health of the economy, including unemployment rates and housing prices, has an impact on the credit quality of this segment.
Residential Real Estate Construction - Residential construction loans are impacted by factors similar to those for residential real estate term loans in addition to risks related to contractor financial capacity and ability to complete a project within acceptable time frames and within budget.
Home Equity Line of Credit - The overall health of the economy, including unemployment rates and housing prices, has an impact on the credit quality of this segment. 
Consumer -The overall health of the economy, including unemployment rates, has an impact on the credit quality of this segment.





The appropriate level of the allowance is evaluated continually based on a review of significant loans, with a particular emphasis on nonaccruing, past due, and other loans that may require special attention. Other factors include general conditions in local and national economies; loan portfolio composition and asset quality indicators; and internal factors such as changes in underwriting policies, credit administration practices, experience, ability and depth of lending management, among others.
The allowance consists of four elements: (1) specific reserves for loans evaluated individually for impairment; (2) general reserves for each portfolio segment based on historical loan loss experience, (3) qualitative reserves judgmentally adjusted for local and national economic conditions, concentrations, portfolio composition, volume and severity of delinquencies and nonaccrual loans, trends of criticized and classified loans, changes in credit policies and underwriting standards, credit administration practices, and other factors as applicable for each portfolio segment; and (4) unallocated reserves. All outstanding loans are considered in evaluating the appropriateness of the allowance.
A breakdown of the allowance for loan losses as of September 30, 2020, December 31, 2019, and September 30, 2019,, December 31, 2018, and September 30, 2018, by class of financing receivable and allowance element, is presented in the following tables:
As of September 30, 2020Specific Reserves on Loans Evaluated Individually for ImpairmentGeneral Reserves on Loans Based on Historical Loss ExperienceReserves for Qualitative FactorsUnallocated
Reserves
Total Reserves
Commercial
   Real estate$135,000 $686,000 $3,940,000 $— $4,761,000 
   Construction19,000 87,000 501,000 — 607,000 
   Other128,000 521,000 2,993,000 — 3,642,000 
Municipal139,000 — 139,000 
Residential
   Term204,000 275,000 2,037,000 — 2,516,000 
   Construction10,000 71,000 — 81,000 
Home equity line of credit403,000 79,000 975,000 — 1,457,000 
Consumer1,000 168,000 423,000 — 592,000 
Unallocated— — — 1,576,000 1,576,000 
$890,000 $1,826,000 $11,079,000 $1,576,000 $15,371,000 
24


As of December 31, 2019Specific Reserves on Loans Evaluated Individually for ImpairmentGeneral Reserves on Loans Based on Historical Loss ExperienceReserves for Qualitative FactorsUnallocated
Reserves
Total Reserves
Commercial
   Real estate$251,000 $729,000 $2,762,000 $— $3,742,000 
   Construction76,000 289,000 — 365,000 
   Other1,273,000 430,000 1,626,000 — 3,329,000 
Municipal27,000 — 27,000 
Residential
   Term237,000 153,000 634,000 — 1,024,000 
   Construction5,000 20,000 — 25,000 
Home equity line of credit447,000 130,000 501,000 — 1,078,000 
Consumer5,000 460,000 402,000 — 867,000 
Unallocated— — — 1,182,000 1,182,000 
$2,213,000 $1,983,000 $6,261,000 $1,182,000 $11,639,000 

As of September 30, 2019Specific Reserves on Loans Evaluated Individually for Impairment General Reserves on Loans Based on Historical Loss Experience Reserves for Qualitative Factors 
Unallocated
Reserves
 Total Reserves
Commercial         
   Real estate$258,000
 $792,000
 $2,745,000
 $
 $3,795,000
   Construction
 79,000
 274,000
 
 353,000
   Other1,275,000
 436,000
 1,509,000
 
 3,220,000
Municipal
 
 26,000
 
 26,000
Residential         
   Term337,000
 185,000
 615,000
 
 1,137,000
   Construction
 5,000
 18,000
 
 23,000
Home equity line of credit184,000
 155,000
 485,000
 
 824,000
Consumer6,000
 285,000
 389,000
 
 680,000
Unallocated
 
 
 1,707,000
 1,707,000
 $2,060,000
 $1,937,000
 $6,061,000
 $1,707,000
 $11,765,000
As of December 31, 2018Specific Reserves on Loans Evaluated Individually for Impairment General Reserves on Loans Based on Historical Loss Experience Reserves for Qualitative Factors 
Unallocated
Reserves
 Total Reserves
Commercial         
   Real estate$260,000
 $742,000
 $2,565,000
 $
 $3,567,000
   Construction
 57,000
 198,000
 
 255,000
   Other1,696,000
 414,000
 1,431,000
 
 3,541,000
Municipal
 
 24,000
 
 24,000
Residential         
   Term335,000
 326,000
 574,000
 
 1,235,000
   Construction
 12,000
 22,000
 
 34,000
Home equity line of credit17,000
 263,000
 450,000
 
 730,000
Consumer
 271,000
 359,000
 
 630,000
Unallocated
 
 
 1,216,000
 1,216,000
 $2,308,000
 $2,085,000
 $5,623,000
 $1,216,000
 $11,232,000



As of September 30, 2018Specific Reserves on Loans Evaluated Individually for Impairment General Reserves on Loans Based on Historical Loss Experience Reserves for Qualitative Factors 
Unallocated
Reserves
 Total Reserves
As of September 30, 2019As of September 30, 2019Specific Reserves on Loans Evaluated Individually for ImpairmentGeneral Reserves on Loans Based on Historical Loss ExperienceReserves for Qualitative FactorsUnallocated
Reserves
Total Reserves
Commercial         Commercial
Real estate$265,000
 $758,000
 $2,566,000
 $
 $3,589,000
Real estate$258,000 $792,000 $2,745,000 $— $3,795,000 
Construction
 49,000
 165,000
 
 214,000
Construction79,000 274,000 — 353,000 
Other1,890,000
 388,000
 1,313,000
 
 3,591,000
Other1,275,000 436,000 1,509,000 — 3,220,000 
Municipal
 
 23,000
 
 23,000
Municipal26,000 — 26,000 
Residential         Residential
Term238,000
 313,000
 541,000
 
 1,092,000
Term337,000 185,000 615,000 — 1,137,000 
Construction
 13,000
 23,000
 
 36,000
Construction5,000 18,000 — 23,000 
Home equity line of credit7,000
 280,000
 432,000
 
 719,000
Home equity line of credit184,000 155,000 485,000 — 824,000 
Consumer2,000
 397,000
 341,000
 
 740,000
Consumer6,000 285,000 389,000 — 680,000 
Unallocated
 
 
 1,678,000
 1,678,000
Unallocated— — — 1,707,000 1,707,000 
$2,402,000
 $2,198,000
 $5,404,000
 $1,678,000
 $11,682,000
$2,060,000 $1,937,000 $6,061,000 $1,707,000 $11,765,000 
Qualitative adjustment factors are taken into consideration when determining reserve estimates. These adjustment factors are based upon Management's evaluation of various current conditions, including those listed below.
General economic conditions.
Credit quality trends with emphasis on loan delinquencies, nonaccrual levels and classified loans.
Recent loss experience in particular segments of the portfolio.
Loan volumes and concentrations, including changes in mix.
Other factors, including changes in quality of the loan origination; loan policy changes; changes in credit risk management processes; Bank regulatory and external loan review examination results.
Qualitative factors applied to the portfolio or segments of the portfolio may include judgments concerning general economic conditions that may affect credit quality, credit concentrations, the pace of portfolio growth, the direction of risk rating movements, policy exception levels, and delinquency levels; these qualitative factors are also considered in connection with the unallocated portion of our allowance for loan losses.
The qualitative portion of the allowance for loan losses was 0.48%0.77% of related loans as of September 30, 2019,2020, compared to 0.45%0.48% of related loans as of December 31, 2018.2019. The qualitative portion increased $438,000$4,818,000 between December 31, 20182019 and September 30, 20192020 due to a mix of factors. These included the impacts of the COVID-19 pandemic on various macroeconomic
25


measures used in the qualitative model, as well as analysis of the loan portfolio conducted under both top down and unit level approaches for factors such as levels of credit extended to industry segments particularly vulnerable to social distancing, and performance of COVID-19 related modifications .
The unallocated component of the allowance totaled $1,707,000$1,576,000 at September 30, 2019,2020, or 14.5%10.3% of the total reserve. This compares to $1,216,000$1,182,000 or 10.8%10.2% as of December 31, 2018. The change supported general imprecision related2019. While year to portfoliodate growth and includes consideration of general economic and business conditions affecting our lending area, credit quality trends (including trends in delinquencies and nonperforming loans expected to result from existing conditions), loan volumes and concentrations, durationthe qualitative portion of the current business cycle, bank regulatory examination results, findingsreserve directionally reflects potential impacts of externalCOVID-19 on the loan review examiners, and Management's judgment with respect to variousportfolio, it remains likely that there are other conditions including loan administration and management and the quality of risk identification systems. Consequently, there maybe underlying credit risks that have not yet surfacedcaptured in the loan specific or qualitative metrics the Company uses to estimate its allowance for loan losses that are reflected inallowance. This uncertainty along with general imprecision related to portfolio growth experienced year-to-date supports the continued inclusion of an unallocated component.
The allowance for loan losses as a percent of total loans stood at 1.07% as of September 30, 2020, 0.90% at December 31, 2019 and 0.93% as of September 30, 2019, 0.91% at December 31, 2018 and 0.94% as of September 30, 2018.2019.
Commercial loans are comprised of 3 major classes, commercial real estate loans, commercial construction loans and other commercial loans.
Commercial real estate loans consist of mortgage loans to finance investments in real property such as multi-family residential, commercial/retail, office, industrial, hotels, educational and other specific or mixed use properties. Commercial real estate loans are typically written with amortizing payment structures. Collateral values are determined based on appraisals and evaluations in accordance with established policy and regulatory guidelines. Commercial real estate loans typically have a loan-to-value ratio of up to 80% based upon current valuation information at the time the loan is made. Commercial real estate loans are primarily paid by the cash flow generated from the real property, such as operating leases, rents, or other operating cash flows from the borrower.
Commercial construction loans consist of loans to finance construction in a mix of owner- and non-owner occupied commercial real estate properties. Commercial construction loans typically have maturities of less than two years. Payment


structures during the construction period are typically on an interest only basis, although principal payments may be established depending on the type of construction project being financed. During the construction phase, commercial construction loans are primarily paid by cash flow generated from the construction project or other operating cash flows from the borrower or guarantors, if applicable. At the end of the construction period, loan repayment typically comes from a third party source in the event that the Company will not be providing permanent term financing. Collateral valuation and loan-to-value guidelines follow those for commercial real estate loans.
Other commercial loans consist of revolving and term loan obligations extended to business and corporate enterprises for the purpose of financing working capital and or capital investment. Collateral generally consists of pledges of business assets including, but not limited to, accounts receivable, inventory, plant and equipment, and/or real estate, if applicable. Commercial loans are primarily paid by the operating cash flow of the borrower. Commercial loans may be secured or unsecured.
Municipal loans are comprised of loans to municipalities in Maine for capitalized expenditures, construction projects or tax anticipation notes. All municipal loans are considered general obligations of the municipality and are collateralized by the taxing ability of the municipality for repayment of debt.
Residential loans are comprised of 2 classes: term loans and construction loans.
Residential term loans consist of residential real estate loans held in the Company's loan portfolio made to borrowers who demonstrate the ability to make scheduled payments with full consideration to underwriting factors. Borrower qualifications include favorable credit history combined with supportive income requirements and loan-to-value ratios within established policy and regulatory guidelines. Collateral values are determined based on appraisals and evaluations in accordance with established policy and regulatory guidelines. Residential loans typically have a loan-to-value ratio of up to 80% based on appraisal information at the time the loan is made. Collateral consists of mortgage liens on one- to four-family residential properties. Loans are offered with fixed or adjustable rates with amortization terms of up to thirty years.
Residential construction loans typically consist of loans for the purpose of constructing single family residences to be owned and occupied by the borrower. Borrower qualifications include favorable credit history combined with supportive income requirements and loan-to-value ratios within established policy and regulatory guidelines. Residential construction loans normally have construction terms of one year or less and payment during the construction term is typically on an interest only basis from sources including interest reserves, borrower liquidity and/or income. Residential construction loans will typically convert to permanent financing from the Company or have another financing commitment in place from an acceptable mortgage lender. Collateral valuation and loan-to-value guidelines are consistent with those for residential term loans.
Home equity lines of credit are made to qualified individuals and are secured by senior or junior mortgage liens on owner occupied one- to four-family homes, condominiums, or vacation homes. The home equity line of credit typically has a variable interest rate and is billed as interest-only payments during the draw period. At the end of the draw period, the home equity line of credit is billed as a percentage of the principal balance plus all accrued interest. Loan maturities are normally 300 months. Borrower qualifications include favorable credit history combined with supportive income requirements and combined loan-to- value ratios usually not exceeding 80% inclusive of priority liens. Collateral valuation guidelines follow those for residential real estate loans.
Consumer loan products including personal lines of credit and amortizing loans made to qualified individuals for various purposes such as auto, recreational vehicles, debt consolidation, personal expenses or overdraft protection. Borrower qualifications
26


include favorable credit history combined with supportive income and collateral requirements within established policy guidelines. Consumer loans may be secured or unsecured.
Construction, land and land development loans, both commercial and residential, comprise a small portion of the portfolio, and at 27.6%33.4% of capital are below the regulatory guidance limit of 100.0% of capital at September 30, 2019.2020. Construction loans and non-owner-occupied commercial real estate loans are at 123.7%129.4% of total capital, below the regulatory limit of 300.0% of capital at September 30, 2019.2020.
The process of establishing the allowance with respect to the commercial loan portfolio begins when a Loan Officer or Senior Officer (or designate) initially assigns each loan a risk rating, using established credit criteria. Approximately 60% of a trailing four quarter average gross commercial portfolio is subject to review and validation annually by an independent consulting firm. Additionally, commercial loan relationships with exposure greater than or equal to $500,000 are subject to review annually by the Company's internal credit review function. The methodology employs Management's judgment as to the level of losses on existing loans based on internal review of the loan portfolio, including an analysis of a borrower's current financial position, and the consideration of current and anticipated economic conditions and their potential effects on specific borrowers and or lines of business.








In determining the Company's ability to collect certain loans, Management also considers the fair value of underlying collateral. The risk rating system has eight levels, defined as follows:
1    Strong
Credits rated "1" are characterized by borrowers fully responsible for the credit with excellent capacity to pay principal and interest. Loans rated "1" may be secured with acceptable forms of liquid collateral.
2    Above Average
Credits rated "2" are characterized by borrowers that have better than average liquidity, capitalization, earnings and/or cash flow with a consistent record of solid financial performance.
3    Satisfactory
Credits rated "3" are characterized by borrowers with favorable liquidity, profitability and financial condition with adequate cash flow to pay debt service.
4    Average
Credits rated "4" are characterized by borrowers that present risk more than 1, 2 and 3 rated loans and merit an ordinary level of ongoing monitoring. Financial condition is on par or somewhat below industry averages while cash flow is generally adequate to meet debt service requirements.
5    Watch
Credits rated "5" are characterized by borrowers that warrant greater monitoring due to financial condition or unresolved and identified risk factors.
6    Other Assets Especially Mentioned (OAEM)
Loans in this category are currently protected but are potentially weak and constitute an undue and unwarranted credit risk, but not to the point of justifying a classification of substandard. OAEM have potential weaknesses which may, if not checked or corrected, weaken the asset or inadequately protect the Company's credit position at some future date.
7    Substandard
Loans in this category are inadequately protected by the paying capacity of the borrower or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. Substandard loans are characterized by the distinct possibility that the Company may sustain some loss if the deficiencies are not corrected.
8    Doubtful
Loans classified "Doubtful" have the same weaknesses as those classified substandard with the added characteristic that the weaknesses make collection or liquidation in full, based on currently existing facts, conditions, and values, highly questionable and improbable. The possibility of loss is high, but because of certain important and reasonably specific pending factors which may work to the advantage and strengthening of the asset, its classification as an estimated loss is deferred until its more exact status may be determined.
27


The following table summarizes the risk ratings for the Company's commercial real estate, commercial construction, commercial other, and municipal loans as of September 30, 2019:2020:
Commercial
Real Estate
Commercial
Construction
Commercial
Other
Municipal
Loans
All Risk-
Rated Loans
1 Strong$$$2,251,000 $23,000 $2,274,000 
2 Above Average8,492,000 1,627,000 5,361,000 42,262,000 57,742,000 
3 Satisfactory84,178,000 3,145,000 140,360,000 369,000 228,052,000 
4 Average230,954,000 27,907,000 107,552,000 1,456,000 367,869,000 
5 Watch68,565,000 18,919,000 46,211,000 133,695,000 
6 OAEM2,028,000 1,291,000 3,319,000 
7 Substandard12,911,000 440,000 6,271,000 19,622,000 
8 Doubtful
Total$407,128,000 $52,038,000 $309,297,000 $44,110,000 $812,573,000 
 
Commercial
Real Estate
 
Commercial
Construction
 
Commercial
Other
 
Municipal
Loans
 
All Risk-
Rated Loans
1 Strong$
 $
 $3,835,000
 $35,000
 $3,870,000
2 Above Average12,595,000
 34,000
 5,836,000
 33,768,000
 52,233,000
3 Satisfactory84,567,000
 2,154,000
 45,742,000
 386,000
 132,849,000
4 Average186,605,000
 20,931,000
 85,485,000
 2,333,000
 295,354,000
5 Watch67,674,000
 13,867,000
 48,498,000
 
 130,039,000
6 OAEM504,000
 
 2,070,000
 
 2,574,000
7 Substandard16,220,000
 256,000
 10,393,000
 
 26,869,000
8 Doubtful
 
 
 
 
Total$368,165,000
 $37,242,000
 $201,859,000
 $36,522,000
 $643,788,000


The following table summarizes the risk ratings for the Company's commercial real estate, commercial construction, commercial other, and municipal loans as of December 31, 2018:2019:
Commercial
Real Estate
Commercial
Construction
Commercial
Other
Municipal
Loans
All Risk-
Rated Loans
1 Strong$$$4,258,000 $32,000 $4,290,000 
2 Above Average12,393,000 794,000 6,187,000 38,290,000 57,664,000 
3 Satisfactory74,709,000 2,305,000 41,527,000 379,000 118,920,000 
4 Average205,510,000 19,017,000 107,389,000 2,587,000 334,503,000 
5 Watch63,582,000 15,488,000 47,152,000 126,222,000 
6 OAEM1,160,000 1,988,000 3,148,000 
7 Substandard15,456,000 480,000 10,272,000 26,208,000 
8 Doubtful
Total$372,810,000 $38,084,000 $218,773,000 $41,288,000 $670,955,000 
 
Commercial
Real Estate
 
Commercial
Construction
 
Commercial
Other
 
Municipal
Loans
 
All Risk-
Rated Loans
1 Strong$
 $
 $3,444,000
 $
 $3,444,000
2 Above Average10,484,000
 37,000
 4,564,000
 48,800,000
 63,885,000
3 Satisfactory80,266,000
 2,231,000
 46,090,000
 518,000
 129,105,000
4 Average172,597,000
 18,780,000
 82,081,000
 1,810,000
 275,268,000
5 Watch66,325,000
 5,970,000
 45,546,000
 
 117,841,000
6 OAEM6,890,000
 
 1,805,000
 
 8,695,000
7 Substandard16,558,000
 286,000
 12,861,000
 
 29,705,000
8 Doubtful123,000
 
 
 
 123,000
Total$353,243,000
 $27,304,000
 $196,391,000
 $51,128,000
 $628,066,000
The following table summarizes the risk ratings for the Company's commercial real estate, commercial construction, commercial other, and municipal loans as of September 30, 2018:2019:
Commercial
Real Estate
Commercial
Construction
Commercial
Other
Municipal
Loans
All Risk-
Rated Loans
1 Strong$$$3,835,000 $35,000 $3,870,000 
2 Above Average12,595,000 34,000 5,836,000 33,768,000 52,233,000 
3 Satisfactory84,567,000 2,154,000 45,742,000 386,000 132,849,000 
4 Average186,605,000 20,931,000 85,485,000 2,333,000 295,354,000 
5 Watch67,674,000 13,867,000 48,498,000 130,039,000 
6 OAEM504,000 2,070,000 2,574,000 
7 Substandard16,220,000 256,000 10,393,000 26,869,000 
8 Doubtful
Total$368,165,000 $37,242,000 $201,859,000 $36,522,000 $643,788,000 
 
Commercial
Real Estate
 
Commercial
Construction
 
Commercial
Other
 
Municipal
Loans
 
All Risk-
Rated Loans
1 Strong$
 $
 $2,558,000
 $
 $2,558,000
2 Above Average10,710,000
 38,000
 4,845,000
 55,553,000
 71,146,000
3 Satisfactory78,794,000
 1,810,000
 44,888,000
 552,000
 126,044,000
4 Average196,883,000
 16,331,000
 80,171,000
 599,000
 293,984,000
5 Watch62,036,000
 5,424,000
 39,176,000
 
 106,636,000
6 OAEM1,387,000
 
 1,368,000
 
 2,755,000
7 Substandard16,457,000
 286,000
 15,122,000
 
 31,865,000
8 Doubtful123,000
 
 
 
 123,000
Total$366,390,000
 $23,889,000
 $188,128,000
 $56,704,000
 $635,111,000


Commercial loans are generally charged off when all or a portion of the principal amount is determined to be uncollectible. This determination is based on circumstances specific to a borrower including repayment ability, analysis of collateral and other factors as applicable.
Residential loans are comprised of 2 classes: term loans, which include traditional amortizing home mortgages, and construction loans, which include loans for owner-occupied residential construction. Residential loans typically have a 75% to 80% loan to value based upon current appraisal information at the time the loan is made. Home equity loans and lines of credit are typically written to the same underwriting standards. Consumer loans are primarily amortizing loans to individuals collateralized by automobiles, pleasure craft and recreation vehicles, typically with a maximum loan to value of 80% to 90% of the purchase price of the collateral. Consumer loans also include a small amount of unsecured short-term time notes to individuals.
28


Residential loans, consumer loans and home equity lines of credit are segregated into homogeneous pools with similar risk characteristics. Trends and current conditions are analyzed and historical loss experience is adjusted accordingly. Quantitative and qualitative adjustment factors for these segments are consistent with those for the commercial and municipal classes. Certain loans in the residential, home equity lines of credit and consumer classes identified as having the potential for further deterioration are analyzed individually to confirm impairment status, and to determine the need for a specific reserve; however there is no formal rating system used for these classes. Consumer loans greater than 120 days past due are generally charged off. Residential loans 90 days or more past due are placed on non-accrual status unless the loans are both well secured and in the process of collection. One- to  four-family residential real estate loans and home equity loans are written down or charged-off no later than 180 days past due, or for residential real estate secured loans having a borrower in bankruptcy, within 60 days of receipt of notification of filing from the bankruptcy court, whichever is sooner. This is subject to completion of a current assessment of the value of the collateral with any outstanding loan balance in excess of the fair value of the property, less costs to sell, written down or charged-off. 
There were no changes to the Company's accounting policies or methodology used to estimate the allowance for loan losses during the nine months ended September 30, 2019.2020.


The following table presents allowance for loan losses activity by class for the nine months and quarter ended September 30, 2019,2020, and allowance for loan loss balances by class and related loan balances by class as of September 30, 20192020:
CommercialMunicipalResidentialHome Equity Line of CreditConsumerUnallocatedTotal
Real EstateConstructionOtherTermConstruction
For the nine months ended September 30, 2020
Beginning balance$3,742,000 $365,000 $3,329,000 $27,000 $1,024,000 $25,000 $1,078,000 $867,000 $1,182,000 $11,639,000 
Charge offs532,000 24,000 46,000 153,000 238,000 993,000 
Recoveries24,000 31,000 20,000 100,000 175,000 
Provision (credit)1,551,000 242,000 313,000 112,000 1,507,000 56,000 512,000 (137,000)394,000 4,550,000 
Ending balance$4,761,000 $607,000 $3,642,000 $139,000 $2,516,000 $81,000 $1,457,000 $592,000 $1,576,000 $15,371,000 
For the three months ended September 30, 2020
Beginning balance$4,511,000 $524,000 $3,689,000 $110,000 $2,261,000 $64,000 $1,284,000 $658,000 $1,009,000 $14,110,000 
Charge offs532,000 7,000 37,000 576,000 
Recoveries4,000 5,000 1,000 27,000 37,000 
Provision (credit)782,000 83,000 (44,000)29,000 250,000 17,000 172,000 (56,000)567,000 1,800,000 
Ending balance$4,761,000 $607,000 $3,642,000 $139,000 $2,516,000 $81,000 $1,457,000 $592,000 $1,576,000 $15,371,000 
Allowance for loan losses as of September 30, 2020
Ending balance specifically evaluated for impairment$135,000 $19,000 $128,000 $$204,000 $$403,000 $1,000 $$890,000 
Ending balance collectively evaluated for impairment$4,626,000 $588,000 $3,514,000 $139,000 $2,312,000 $81,000 $1,054,000 $591,000 $1,576,000 $14,481,000 
Related loan balances as of September 30, 2020
Ending balance$407,128,000 $52,038,000 $309,297,000 $44,110,000 $497,667,000 $16,101,000 $82,982,000 $27,323,000 $$1,436,646,000 
Ending balance specifically evaluated for impairment$4,753,000 $1,009,000 $1,023,000 $$10,182,000 $$2,364,000 $10,000 $$19,341,000 
Ending balance collectively evaluated for impairment$402,375,000 $51,029,000 $308,274,000 $44,110,000 $487,485,000 $16,101,000 $80,618,000 $27,313,000 $$1,417,305,000 
:
29


 CommercialMunicipalResidentialHome Equity Line of CreditConsumerUnallocatedTotal
 Real EstateConstructionOther TermConstruction    
For the nine months ended September 30, 2019
Beginning balance$3,567,000
$255,000
$3,541,000
$24,000
$1,235,000
$34,000
$730,000
$630,000
$1,216,000
$11,232,000
Charge offs53,000

123,000

93,000

38,000
235,000

542,000
Recoveries15,000

70,000

10,000

3,000
102,000

200,000
Provision (credit)266,000
98,000
(268,000)2,000
(15,000)(11,000)129,000
183,000
491,000
875,000
Ending balance$3,795,000
$353,000
$3,220,000
$26,000
$1,137,000
$23,000
$824,000
$680,000
$1,707,000
$11,765,000
For the three months ended September 30, 2019
Beginning balance$3,609,000
$309,000
$3,281,000
$25,000
$1,106,000
$23,000
$633,000
$649,000
$1,836,000
$11,471,000
Charge offs

14,000




48,000

62,000
Recoveries2,000

68,000

4,000

1,000
31,000

106,000
Provision (credit)184,000
44,000
(115,000)1,000
27,000

190,000
48,000
(129,000)250,000
Ending balance$3,795,000
$353,000
$3,220,000
$26,000
$1,137,000
$23,000
$824,000
$680,000
$1,707,000
$11,765,000
Allowance for loan losses as of September 30, 2019
Ending balance specifically evaluated for impairment$258,000
$
$1,275,000
$
$337,000
$
$184,000
$6,000
$
$2,060,000
Ending balance collectively evaluated for impairment$3,537,000
$353,000
$1,945,000
$26,000
$800,000
$23,000
$640,000
$674,000
$1,707,000
$9,705,000
Related loan balances as of September 30, 2019
Ending balance$368,165,000
$37,242,000
$201,859,000
$36,522,000
$485,490,000
$14,118,000
$94,144,000
$25,919,000
$
$1,263,459,000
Ending balance specifically evaluated for impairment$9,049,000
$978,000
$7,332,000
$
$13,446,000
$
$1,398,000
$6,000
$
$32,209,000
Ending balance collectively evaluated for impairment$359,116,000
$36,264,000
$194,527,000
$36,522,000
$472,044,000
$14,118,000
$92,746,000
$25,913,000
$
$1,231,250,000



The following table presents allowance for loan losses activity by class for the year ended December 31, 20182019 and allowance for loan loss balances by class and related loan balances by class as of December 31, 2018:2019:
CommercialMunicipalResidentialHome Equity Line of CreditConsumerUnallocatedTotal
Real EstateConstructionOtherTermConstruction
For the year ended December 31, 2019
Beginning balance$3,567,000 $255,000 $3,541,000 $24,000 $1,235,000 $34,000 $730,000 $630,000 $1,216,000 $11,232,000 
Charge offs89,000 179,000 445,000 69,000 338,000 1,120,000 
Recoveries15,000 73,000 57,000 4,000 128,000 277,000 
Provision (credit)249,000 110,000 (106,000)3,000 177,000 (9,000)413,000 447,000 (34,000)1,250,000 
Ending balance$3,742,000 $365,000 $3,329,000 $27,000 $1,024,000 $25,000 $1,078,000 $867,000 $1,182,000 $11,639,000 
Allowance for loan losses as of December 31, 2019
Ending balance specifically evaluated for impairment$251,000 $$1,273,000 $$237,000 $$447,000 $5,000 $$2,213,000 
Ending balance collectively evaluated for impairment$3,491,000 $365,000 $2,056,000 $27,000 $787,000 $25,000 $631,000 $862,000 $1,182,000 $9,426,000 
Related loan balances as of December 31, 2019
Ending balance$372,810,000 $38,084,000 $218,773,000 $41,288,000 $492,455,000 $14,813,000 $92,349,000 $26,503,000 $$1,297,075,000 
Ending balance specifically evaluated for impairment$6,309,000 $958,000 $7,075,000 $$12,439,000 $$2,488,000 $5,000 $$29,274,000 
Ending balance collectively evaluated for impairment$366,501,000 $37,126,000 $211,698,000 $41,288,000 $480,016,000 $14,813,000 $89,861,000 $26,498,000 $$1,267,801,000 
30


 CommercialMunicipalResidentialHome Equity Line of CreditConsumerUnallocatedTotal
 Real EstateConstructionOther TermConstruction    
For the year ended December 31, 2018
Beginning balance$3,872,000
$434,000
$3,358,000
$20,000
$1,130,000
$36,000
$692,000
$545,000
$642,000
$10,729,000
Charge offs168,000

423,000

213,000

121,000
348,000

1,273,000
Recoveries52,000

40,000

64,000

24,000
96,000

276,000
Provision (credit)(189,000)(179,000)566,000
4,000
254,000
(2,000)135,000
337,000
574,000
1,500,000
Ending balance$3,567,000
$255,000
$3,541,000
$24,000
$1,235,000
$34,000
$730,000
$630,000
$1,216,000
$11,232,000
Allowance for loan losses as of December 31, 2018
Ending balance specifically evaluated for impairment$260,000
$
$1,696,000
$
$335,000
$
$17,000
$
$
$2,308,000
Ending balance collectively evaluated for impairment$3,307,000
$255,000
$1,845,000
$24,000
$900,000
$34,000
$713,000
$630,000
$1,216,000
$8,924,000
Related loan balances as of December 31, 2018
Ending balance$353,243,000
$27,304,000
$196,391,000
$51,128,000
$469,145,000
$17,743,000
$98,469,000
$24,860,000
$
$1,238,283,000
Ending balance specifically evaluated for impairment$9,760,000
$721,000
$9,259,000
$
$10,904,000
$
$1,092,000
$15,000
$
$31,751,000
Ending balance collectively evaluated for impairment$343,483,000
$26,583,000
$187,132,000
$51,128,000
$458,241,000
$17,743,000
$97,377,000
$24,845,000
$
$1,206,532,000



The following table presents allowance for loan losses activity by class for the nine months and quarter ended September 30, 2018,2019, and allowance for loan loss balances by class and related loan balances by class as of September 30, 2018:2019:
CommercialMunicipalResidential Home Equity Line of CreditConsumerUnallocatedTotal
Real EstateConstructionOtherTermConstruction
For the nine months ended September 30, 2019
Beginning balance$3,567,000 $255,000 $3,541,000 $24,000 $1,235,000 $34,000 $730,000 $630,000 $1,216,000 $11,232,000 
Charge offs53,000 123,000 93,000 38,000 235,000 542,000 
Recoveries15,000 70,000 10,000 3,000 102,000 200,000 
Provision (credit)266,000 98,000 (268,000)2,000 (15,000)(11,000)129,000 183,000 491,000 875,000 
Ending balance$3,795,000 $353,000 $3,220,000 $26,000 $1,137,000 $23,000 $824,000 $680,000 $1,707,000 $11,765,000 
For the three months ended September 30, 2019
Beginning balance$3,609,000 $309,000 $3,281,000 $25,000 $1,106,000 $23,000 $633,000 $649,000 $1,836,000 $11,471,000 
Charge offs14,000 48,000 62,000 
Recoveries2,000 68,000 4,000 1,000 31,000 106,000 
Provision (credit)184,000 44,000 (115,000)1,000 27,000 190,000 48,000 (129,000)250,000 
Ending balance$3,795,000 $353,000 $3,220,000 $26,000 $1,137,000 $23,000 $824,000 $680,000 $1,707,000 $11,765,000 
Allowance for loan losses as of September 30, 2019
Ending balance specifically evaluated for impairment$258,000 $$1,275,000 $$337,000 $$184,000 $6,000 $$2,060,000 
Ending balance collectively evaluated for impairment$3,537,000 $353,000 $1,945,000 $26,000 $800,000 $23,000 $640,000 $674,000 $1,707,000 $9,705,000 
Related loan balances as of September 30, 2019
Ending balance$368,165,000 $37,242,000 $201,859,000 $36,522,000 $485,490,000 $14,118,000 $94,144,000 $25,919,000 $$1,263,459,000 
Ending balance specifically evaluated for impairment$9,049,000 $978,000 $7,332,000 $$13,446,000 $$1,398,000 $6,000 $$32,209,000 
Ending balance collectively evaluated for impairment$359,116,000 $36,264,000 $194,527,000 $36,522,000 $472,044,000 $14,118,000 $92,746,000 $25,913,000 $$1,231,250,000 
 CommercialMunicipalResidential Home Equity Line of CreditConsumerUnallocatedTotal
 Real EstateConstructionOther TermConstruction    
For the nine months ended September 30, 2018
Beginning balance$3,872,000
$434,000
$3,358,000
$20,000
$1,130,000
$36,000
$692,000
$545,000
$642,000
$10,729,000
Charge offs

68,000

212,000

121,000
195,000

596,000
Recoveries52,000

33,000

45,000

13,000
73,000

216,000
Provision (credit)(335,000)(220,000)268,000
3,000
129,000

135,000
317,000
1,036,000
1,333,000
Ending balance$3,589,000
$214,000
$3,591,000
$23,000
$1,092,000
$36,000
$719,000
$740,000
$1,678,000
$11,682,000
For the three months ended September 30, 2018
Beginning balance$3,732,000
$399,000
$3,475,000
$21,000
$1,138,000
$29,000
$678,000
$575,000
$1,425,000
$11,472,000
Charge offs

51,000

116,000

6,000
50,000

223,000
Recoveries52,000

23,000

3,000


22,000

100,000
Provision (credit)(195,000)(185,000)144,000
2,000
67,000
7,000
47,000
193,000
253,000
333,000
Ending balance$3,589,000
$214,000
$3,591,000
$23,000
$1,092,000
$36,000
$719,000
$740,000
$1,678,000
$11,682,000
Allowance for loan losses as of September 30, 2018
Ending balance specifically evaluated for impairment$265,000
$
$1,890,000
$
$238,000
$
$7,000
$2,000
$
$2,402,000
Ending balance collectively evaluated for impairment$3,324,000
$214,000
$1,701,000
$23,000
$854,000
$36,000
$712,000
$738,000
$1,678,000
$9,280,000
Related loan balances as of September 30, 2018
Ending balance$366,390,000
$23,889,000
$188,128,000
$56,704,000
$459,449,000
$18,166,000
$105,213,000
$25,619,000
$
$1,243,558,000
Ending balance specifically evaluated for impairment$9,410,000
$741,000
$9,849,000
$
$10,928,000
$
$1,168,000
$2,000
$
$32,098,000
Ending balance collectively evaluated for impairment$356,980,000
$23,148,000
$178,279,000
$56,704,000
$448,521,000
$18,166,000
$104,045,000
$25,617,000
$
$1,211,460,000


31


Note 5 – Stock-Based Compensation
At the 2010 Annual Meeting, shareholders approved the 2010 Equity Incentive Plan (the "2010 Plan"). This reserves reserved 400,000 shares of common stock for issuance in connection with stock options, restricted stock awards and other equity based awards to attract and retain the best available personnel, provide additional incentive to officers, employees and non-employee Directors and promote the success of our business.the Company. Such grants and awards were structured in a manner that did not encourage the recipients to expose the Company to undue or inappropriate risk. Options issued under the 2010 Plan qualified for treatment as incentive stock options for purposes of Section 422 of the Internal Revenue Code. Other compensation under the 2010 Plan qualified as performance-based for purposes of Section 162(m) of the Internal Revenue Code, and satisfied NASDAQ guidelines relating to equity compensation. The 2010 Plan expired on April 28, 2020, leaving 215,513 shares not issued.
At the 2020 Annual Meeting, shareholders approved the 2020 Equity Incentive Plan (the "2020 Plan"). This reserves 400,000 shares of common stock for issuance in connection with stock options, restricted stock awards and other equity based awards to attract and retain the best available personnel, provide additional incentive to officers, employees and non-employee Directors and promote the success of the Company. Such grants and awards will be structured in a manner that does not encourage the recipients to expose the Company to undue or inappropriate risk. Options issued under the 20102020 Plan will qualify for treatment as incentive stock options for purposes of Section 422 of the Internal Revenue Code. Other compensation under the 20102020 Plan will qualify as performance-based for purposes of Section 162(m) of the Internal Revenue Code, and will satisfy NASDAQ guidelines relating to equity compensation.


As of September 30, 2019, 162,8922020, 184,487 shares of restricted stock had been granted under the 2010 Plan and 5,750 shares under the 2020 Plan, of which 75,25476,597 shares remain restricted as of September 30, 20192020 as detailed in the following table:
Year
Granted
Vesting Term
(In Years)
Shares
Remaining Term
(In Years)
20155.012,023
0.3
20165.015,015
1.3
20173.04,602
0.4
20175.09,972
2.3
20182.0932
0.3
20183.01,900
1.4
20184.02,068
2.3
20185.09,655
3.3
20191.01,349
0.3
20192.01,484
1.3
20193.016,254
2.3
  75,254
1.6

Year
Granted
Vesting Term
(In Years)
SharesRemaining Term
(In Years)
20165.010,874 0.3
20175.07,017 1.3
20183.05,371 0.4
20184.02,068 1.3
20185.06,184 2.3
20192.01,484 0.3
20193.016,254 1.3
20201.05,809 0.5
20202.0694 1.3
20203.020,842 2.3
76,597 1.5
The compensation cost related to these nonvested restricted stock grants is $1,785,000$1,978,000 and is recognized over the vesting terms of each grant. In the nine months ended September 30, 2019, $368,0002020, $482,000 of expense was recognized for these restricted shares, leaving $797,000$864,000 in unrecognized expense as of September 30, 2019.2020. In the nine months ended September 30, 2018, $285,0002019, $368,000 of expense was recognized for restricted shares, leaving $774,000$797,000 in unrecognized expense as of September 30, 20182019.
.

Note 6 – Preferred and Common Stock
Preferred Stock
The Company does not have any preferred stock.

Common Stock
Proceeds from sale of common stock totaled $488,000$497,000 and $466,000$488,000 for the nine months ended September 30, 20192020 and 2018,2019, respectively.


32


Note 7 – Earnings Per Share
The following table sets forth the computation of basic and diluted earnings per share (EPS) for the nine months ended September 30, 20192020 and 2018:2019:
Income (Numerator)Shares (Denominator)Per-Share Amount
For the nine months ended September 30, 2020
Net income as reported$20,159,000 
Basic EPS: Income available to common shareholders20,159,000 10,854,384 $1.86 
Effect of dilutive securities: restricted stock73,285 
Diluted EPS: Income available to common shareholders plus assumed conversions$20,159,000 10,927,669 $1.84 
For the nine months ended September 30, 2019
Net income as reported$18,839,000 
Basic EPS: Income available to common shareholders18,839,000 10,811,233 $1.74 
Effect of dilutive securities: restricted stock75,013 
Diluted EPS: Income available to common shareholders plus assumed conversions$18,839,000 10,886,246 $1.73 
 Income (Numerator) Shares (Denominator) Per-Share Amount
For the nine months ended September 30, 2019     
Net income as reported$18,839,000
    
Basic EPS: Income available to common shareholders18,839,000
 10,811,233
 $1.74
Effect of dilutive securities: restricted stock  75,013
  
Diluted EPS: Income available to common shareholders plus assumed conversions$18,839,000
 10,886,246
 $1.73
For the nine months ended September 30, 2018     
Net income as reported$17,173,000
    
Basic EPS: Income available to common shareholders17,173,000
 10,780,277
 $1.59
Effect of dilutive securities: restricted stock  69,515
  
Diluted EPS: Income available to common shareholders plus assumed conversions$17,173,000
 10,849,792
 $1.58


The following table sets forth the computation of basic and diluted EPSearnings per share (EPS) for the quarters ended September 30, 20192020 and 2018.2019:
 Income (Numerator) Shares (Denominator) Per-Share Amount
For the quarter ended September 30, 2019     
Net income as reported$6,288,000
    
Basic EPS: Income available to common shareholders6,288,000
 10,818,423
 $0.58
Effect of dilutive securities: restricted stock  75,493
  
Diluted EPS: Income available to common shareholders plus assumed conversions$6,288,000
 10,893,916
 $0.58
For the quarter ended September 30, 2018     
Net income as reported$5,933,000
    
Basic EPS: Income available to common shareholders5,933,000
 10,785,528
 $0.55
Effect of dilutive securities: restricted stock  69,515
  
Diluted EPS: Income available to common shareholders plus assumed conversions$5,933,000
 10,855,043
 $0.55


Income (Numerator)Shares (Denominator)Per-Share Amount
For the quarter ended September 30, 2020
Net income as reported$7,095,000 
Less dividends and amortization of premium on preferred stock— 
Basic EPS: Income available to common shareholders7,095,000 10,863,315 $0.65 
Effect of dilutive securities: restricted stock76,544 
Diluted EPS: Income available to common shareholders plus assumed conversions$7,095,000 10,939,859 $0.65 
For the quarter ended September 30, 2019
Net income as reported$6,288,000 
Less dividends and amortization of premium on preferred stock— 
Basic EPS: Income available to common shareholders6,288,000 10,818,423 $0.58 
Effect of dilutive securities: restricted stock75,493 
Diluted EPS: Income available to common shareholders plus assumed conversions$6,288,000 10,893,916 $0.58 


Note 8 – Employee Benefit Plans
401(k) Plan
The Bank has a defined contribution plan available to substantially all employees who have completed 3 months of service. Employees may contribute up to Internal Revenue Service ("IRS") determined limits and the Bank may match employee contributions not to exceed 3.0% of compensation depending on contribution level. Subject to a vote of the Board of Directors, the Bank may also make a profit-sharing contribution to the Plan. Such contribution equaled 2.0% of each eligible employee's compensation in 2018.2019. The amountCompany adopted the safe harbor form of 401(k) plan for 2019 has not been established.2020 and will follow safe harbor guidelines when determining the level of discretionary contribution. The expense related to the 401(k) plan was $464,000$653,000 and $414,000$464,000 for the nine months ended September 30, 20192020 and 2019, respectively.
2018, respectively.
33




Deferred Compensation and Supplemental Retirement Benefits
The Bank also provides unfunded supplemental retirement benefits for certain officers, payable in installments over 20 years upon retirement or death. The agreements consist of individual contracts with differing characteristics that, when taken together, do not constitute a postretirement plan. The costs for these benefits are recognized over the service periods of the participating officers in accordance with Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") Topic 712 "Compensation – Nonretirement Postemployment Benefits". The expense of these supplemental retirement benefits was $121,000$119,000 for the nine months ended September 30, 20192020 and $129,000 for the the same period in 2018.2019. As of September 30, 2019,2020, the associated accrued liability included in other liabilities in the balance sheet was $2,831,000$2,708,000 compared to $2,949,000$2,828,000 and $2,973,000$2,831,000 at December 31, 20182019 and September 30, 2018,2019, respectively.

Post-Retirement Benefit Plans
The Bank sponsors 2 post-retirement benefit plans. One plan currently provides a subsidy for health insurance premiums to certain retired employees and a future subsidy for 6 active employees who were age 50 and over in 1996. These subsidies are based on years of service and range between $40$40 and $1,200$1,200 per month per person. The other plan provides life insurance coverage to certain retired employees and health insurance for retired directors. None of these plans are pre-funded. The Company utilizes FASB ASC Topic 712 to recognize the overfunded or underfunded status of a defined benefit postretirement plan as an asset or liability in its balance sheet and to recognize changes in the funded status in the year in which the changes occur through comprehensive income (loss).

The following table sets forth the accumulated postretirement benefit obligation and funded status:
At or for the nine months ended September 30,
20202019
Change in benefit obligation
Benefit obligation at beginning of year$1,581,000 $1,599,000 
Interest cost48,000 50,000 
Benefits paid(81,000)(85,000)
Benefit obligation at end of period$1,548,000 $1,564,000 
Funded status
Benefit obligation at end of period$(1,548,000)$(1,564,000)
Unamortized gain(31,000)(47,000)
Accrued benefit cost at end of period$(1,579,000)$(1,611,000)
 At or for the nine months ended September 30,
 2019 2018
Change in benefit obligation   
Benefit obligation at beginning of year$1,599,000
 $1,874,000
Interest cost50,000
 57,000
Benefits paid(85,000) (84,000)
Benefit obligation at end of period$1,564,000
 $1,847,000
Funded status   
Benefit obligation at end of period$(1,564,000) $(1,847,000)
Unamortized (gain) loss(47,000) 186,000
Accrued benefit cost at end of period$(1,611,000) $(1,661,000)

The following table sets forth the net periodic pension cost:
For the nine months ended September 30,For the quarter ended September 30,
2020201920202019
Components of net periodic benefit cost
Interest cost$48,000 $50,000 $16,000 $17,000 
Net periodic benefit cost$48,000 $50,000 $16,000 $17,000 
 For the nine months ended September 30,For the quarter ended September 30,
 2019 20182019 2018
Components of net periodic benefit cost      
Interest cost$50,000
 $57,000
$17,000
 $19,000
Net periodic benefit cost$50,000
 $57,000
$17,000
 $19,000

Amounts not yet reflected in net periodic benefit cost and included in accumulated other comprehensive income (loss) are as follows:
September 30,
2020
December 31, 2019September 30,
2019
Unamortized net actuarial gain$31,000 $31,000 $47,000 
Deferred tax expense(7,000)(7,000)(10,000)
Net unrecognized postretirement benefits included in accumulated other comprehensive income$24,000 $24,000 $37,000 
 September 30,
2019
 December 31, 2018 September 30,
2018
Unamortized net actuarial gain (loss)$47,000
 $47,000
 $(186,000)
Deferred tax benefit (expense)(10,000) (10,000) 39,000
Net unrecognized postretirement benefits included in accumulated other comprehensive income (loss)$37,000
 $37,000
 $(147,000)
34





A weighted average discount rate of 4.25%3.00% was used in determining the accumulated benefit obligation and the net periodic benefit cost. The assumed health care cost trend rate is 7.0%. The measurement date for benefit obligations was as of year-end for prior years presented. The expected benefit payments for all of 20192020 are $113,000.$108,000. Plan expense for 20192020 is estimated to be $66,000.$64,000. A 1% change in trend assumptions would create an approximate change in the same direction of $100,000$100,000 in the accumulated benefit obligation, $7,000$7,000 in the interest cost and $1,000$1,000 in the service cost.


Note 9 - Other Comprehensive Income (Loss)

The following table summarizes activity in the unrealized gain or loss on available for sale securities included in other comprehensive income (loss) for the nine months and quarter ended September 30, 20192020 and 2018.2019.
For the nine months ended September 30,For the quarter ended September 30,
2020201920202019
Balance at beginning of period$3,657,000 $(5,051,000)$7,100,000 $2,750,000 
Unrealized gains (losses) arising during the period3,537,000 11,074,000 (2,000,000)1,199,000 
Reclassification of net realized gains during the period(1,179,000)(15,000)0 (15,000)
Related deferred taxes(495,000)(2,322,000)420,000 (248,000)
Net change1,863,000 8,737,000 (1,580,000)936,000 
Balance at end of period$5,520,000 $3,686,000 $5,520,000 $3,686,000 
 For the nine months ended September 30,For the quarter ended September 30,
 2019201820192018
Balance at beginning of period$(5,051,000)$(2,901,000)$2,750,000
$(7,245,000)
Unrealized gains (losses) arising during the period11,074,000
(7,753,000)1,199,000
(2,390,000)
Reclassification of net realized gains during the period(15,000)(137,000)(15,000)(1,000)
Related deferred taxes(2,322,000)1,658,000
(248,000)503,000
Net change8,737,000
(6,232,000)936,000
(1,888,000)
Balance at end of period$3,686,000
$(9,133,000)$3,686,000
$(9,133,000)


The reclassification of realized gains is included in the net securities gains line of the consolidated statements of income and comprehensive income and the tax effect is included in the income tax expense line of the same statement.
The following table summarizes activity in the unrealized loss on securities transferred from available for sale to held to maturity included in other comprehensive income (loss) for the nine months and quarter ended September 30, 20192020 and 2018.2019.
For the nine months ended September 30,For the quarter ended September 30,
2020201920202019
Balance at beginning of period$(182,000)$(197,000)$(146,000)$(190,000)
Amortization of net unrealized gains54,000 10,000 9,000 1,000 
Related deferred taxes(11,000)(2,000)(2,000)
Net change43,000 8,000 7,000 1,000 
Balance at end of period$(139,000)$(189,000)$(139,000)$(189,000)
 For the nine months ended September 30,For the quarter ended September 30,
 2019201820192018
Balance at beginning of period$(197,000)$(174,000)$(190,000)$(189,000)
Amortization of net unrealized gains (losses)10,000
(25,000)1,000
(6,000)
Related deferred taxes(2,000)5,000

1,000
Net change8,000
(20,000)1,000
(5,000)
Balance at end of period$(189,000)$(194,000)$(189,000)$(194,000)


The following table presents the effect of the Company's derivative financial instruments included in other comprehensive income (loss) for the nine months and quarter ended September 30, 20192020 and 2018.2019.
For the nine months ended September 30,For the quarter ended September 30,
2020201920202019
Balance at beginning of period$97,000 $1,438,000 $(6,187,000)$75,000 
Unrealized gains (losses) on cash flow hedging derivatives arising during the period(7,465,000)(2,156,000)490,000 (430,000)
Related deferred taxes1,568,000 453,000 (103,000)90,000 
Net change(5,897,000)(1,703,000)387,000 (340,000)
Balance at end of period$(5,800,000)$(265,000)$(5,800,000)$(265,000)

 For the nine months ended September 30,For the quarter ended September 30,
 2019201820192018
Balance at beginning of period$1,438,000
$1,544,000
$75,000
$2,066,000
Unrealized gains (losses) on cash flow hedging derivatives arising during the period(2,156,000)934,000
(430,000)273,000
Related deferred taxes453,000
(196,000)90,000
(57,000)
Net change(1,703,000)738,000
(340,000)216,000
Balance at end of period$(265,000)$2,282,000
$(265,000)$2,282,000
35





The following table summarizes activity in the unrealized gain or loss on postretirement benefits included in other comprehensive income (loss) for the nine months and quarter ended September 30, 20192020 and 2018.2019.
For the nine months ended September 30,For the quarter ended September 30,
2020201920202019
Unrecognized postretirement benefits at beginning of period$24,000 $37,000 $24,000 $37,000 
Amortization of unrecognized transition obligation0 0 0 
Change in unamortized net actuarial gain (loss)0 0 
Related deferred taxes0 0 
Unrecognized postretirement benefits at end of period$24,000 $37,000 $24,000 $37,000 
 For the nine months ended September 30,For the quarter ended September 30,
 2019201820192018
Unrecognized postretirement benefits at beginning of period$37,000
$(147,000)$37,000
$(147,000)
Amortization of unrecognized transition obligation



Change in unamortized net actuarial gain (loss)



Related deferred taxes



Unrecognized postretirement benefits at end of period$37,000
$(147,000)$37,000
$(147,000)



Note 10 - Financial Derivative Instruments

The Bank uses derivative financial instruments for risk management purposes and not for trading or speculative purposes. As part of its overall asset and liability management strategy, the Bank periodically uses derivative instruments to minimize significant unplanned fluctuations in earnings and cash flows caused by interest rate volatility. The Bank’s interest rate risk management strategy involves modifying the re-pricing characteristics of certain assets or liabilities so that changes in interest rates do not have a significant effect on net interest income.
The Bank recognizes its derivative instruments in the consolidated balance sheet at fair value.  On the date the derivative instrument is entered into, the Bank designates whether the derivative is part of a hedging relationship (i.e., cash flow or fair value hedge). The Bank formally documents relationships between hedging instruments and hedged items, as well as its risk management objective and strategy for undertaking hedge transactions. The Bank also assesses, both at the hedge’s inception and on an ongoing basis, whether the derivatives used in hedging transactions are highly effective in offsetting the changes in cash flows or fair values of hedged items. Changes in fair value of derivative instruments that are highly effective and qualify as cash flow hedges are recorded in other comprehensive income or loss. Any ineffective portion is recorded in earnings. The Bank discontinues hedge accounting when it is determined that the derivative is no longer highly effective in offsetting changes of the hedged risk on the hedged item, or management determines that the designation of the derivative as a hedging instrument is no longer appropriate.


36



The details of the interest rate swap agreements are as follows:
   September 30, 2019December 31, 2018September 30, 2020December 31, 2019September 30, 2019
Effective DateMaturity DateVariable Index ReceivedFixed Rate PaidPresentation on Consolidated Balance SheetNotional AmountFair ValueNotional AmountFair ValueEffective DateMaturity DateVariable Index ReceivedFixed Rate PaidPresentation on Consolidated Balance SheetNotional AmountFair ValueNotional AmountFair ValueNotional AmountFair Value
06/05/201806/05/201812/05/20191-Month USD LIBOR2.466 %Other Liabilities$$0 $$$25,000,000 $(23,000)
06/27/201606/27/20211-Month USD LIBOR0.893%Other Assets$20,000,000
$214,000
$20,000,000
$763,000
06/27/201606/27/20211-Month USD LIBOR0.893 %Other (Liabilities) Assets20,000,000 (112,000)20,000,000 199,000 20,000,000 214,000 
06/28/201606/28/20211-Month USD LIBOR0.940%Other Assets30,000,000
296,000
30,000,000
1,110,000
06/28/201606/28/20211-Month USD LIBOR0.940 %Other (Liabilities) Assets30,000,000 (179,000)30,000,000 278,000 30,000,000 296,000 
06/05/201812/05/20191-Month USD LIBOR2.466%Other Liabilities/Other Assets25,000,000
(23,000)25,000,000
16,000
06/05/201806/05/20201-Month USD LIBOR2.547%Other Liabilities25,000,000
(140,000)25,000,000
(9,000)06/05/201806/05/20201-Month USD LIBOR2.547 %Other Liabilities0 25,000,000 (96,000)25,000,000 (140,000)
06/05/201812/05/20201-Month USD LIBOR2.603%Other Liabilities25,000,000
(300,000)25,000,000
(60,000)06/05/201812/05/20201-Month USD LIBOR2.603 %Other Liabilities0 25,000,000 (234,000)25,000,000 (300,000)
12/05/201912/05/20223-Month USD LIBOR1.779%Other Liabilities25,000,000
(217,000)

12/05/201912/05/20223-Month USD LIBOR1.779 %Other Liabilities0 25,000,000 (98,000)25,000,000 (217,000)
08/02/201908/02/20241-Month USD Libor1.590%Other Liabilities12,500,000
(133,000)

08/02/201908/02/20241-Month USD LIBOR1.590 %Other Liabilities12,500,000 (692,000)12,500,000 (11,000)12,500,000 (133,000)
08/05/201908/05/20241-Month USD Libor1.420%Other Liabilities12,500,000
(32,000)

08/05/201908/05/20241-Month USD LIBOR1.420 %Other (Liabilities) Assets12,500,000 (611,000)12,500,000 85,000 12,500,000 (32,000)
02/12/202002/12/202002/12/20233-Month USD LIBOR1.486 %Other Liabilities25,000,000 (762,000)
02/12/202002/12/202002/12/20243-Month USD LIBOR1.477 %Other Liabilities25,000,000 (1,044,000)
06/28/202106/28/202106/28/20261-Month USD LIBOR1.158 %Other Liabilities50,000,000 (2,162,000)
03/13/202003/13/202003/13/20253-Month USD LIBOR0.855 %Other Liabilities25,000,000 (621,000)
03/13/202003/13/202003/13/20303-Month USD LIBOR1.029 %Other Liabilities20,000,000 (690,000)
04/07/202004/07/202004/07/20233-Month USD Libor0.599 %Other Liabilities20,000,000 (194,000)
04/07/202004/07/202004/07/20243-Month USD Libor0.643 %Other Liabilities20,000,000 (275,000)
   $175,000,000
$(335,000)$125,000,000
$1,820,000
 $260,000,000 $(7,342,000)$150,000,000 $123,000 $175,000,000 $(335,000)

During the first quarter of 2020, the Bank took advantage of market opportunities to restructure several interest rate swap positions and extend funding at favorable interest rates; one-time charges totaling $1.76 million were incurred and expensed in the first quarter of 2020 in connection with the restructuring. The Company would reclassify unrealized gains or losses accounted for within accumulated other comprehensive income (loss) into earnings if the interest rate swaps were to become ineffective or the swaps were to terminate. In the next 12 months, the Company does not believe it will be required to reclassify any unrealized gains or losses accounted for within accumulated other comprehensive income (loss) into earnings as a result of ineffectiveness or swap termination. Amounts paid or received under the swaps are reported in interest expense in the consolidated statement of income, and in interest paid in the consolidated statement of cash flows.



37


Customer loan derivatives
The CompanyBank will enter into interest rate swaps with qualified commercial customers. Through these arrangements, the Bank is able to provide a means for a loan customer to obtain a long-term fixed rate, while it simultaneously contracts with an approved, highly-rated, third-party financial institution as counterparty to swap the fixed rate for a variable rate. Such loan level arrangements are not designated as hedges for accounting purposes, and are recorded at fair value in the Company’s consolidated balance sheet.
At September 30, 2020, there were four customer loan swap arrangements in place, detailed below:
September 30, 2020December 31, 2019September 30, 2019
Presentation on Consolidated Balance SheetNumber of PositionsNotional AmountFair ValueNumber of PositionsNotional AmountFair ValueNumber of PositionsNotional AmountFair Value
Pay Fixed, Receive VariableOther Liabilities4$28,541,000 $(3,311,000)2$16,374,000 $(1,205,000)$12,914,000 $(1,643,000)
Receive Fixed, Pay VariableOther Assets428,541,000 3,311,000 216,374,000 1,205,000 12,914,000 1,643,000 
Total8$57,082,000 $0 4$32,748,000 $$25,828,000 $
Derivative collateral
The CompanyBank has entered into a master netting arrangement with its counterparty and settles payments with the counterparty as necessary. The Bank's arrangement with its institutional counterparty requires it to post cash or other assets as collateral for its customervarious loan swap contracts in a net liability position based on their fair values and the Bank's credit rating or receive cash collateral for contracts in a net asset position as requested. At September 30, 2019,2020, the Bank posted to the counterparty $3,050,000$3,100,000 of cash and $10,000,000 in securities as collateral on its customer loan swap contracts. The required amount to be pledged was $9,322,000.
At September 30, 2019 there was 1 customer loan swap arrangement in place, detailed below:
  September 30, 2019December 31, 2018
 Presentation on Consolidated Balance SheetNumber of PositionsNotional AmountFair ValueNumber of PositionsNotional AmountFair Value
Pay Fixed, Receive VariableOther Liabilities1
$12,914,000
$(1,643,000)


Receive Fixed, Pay VariableOther Assets1
12,914,000
1,643,000



Total 2
$25,828,000







Cessation of LIBOR
The Company is aware that LIBOR may no longer be published after December 31, 2021. The Federal Reserve formed the Alternative Reference Rates Committee (ARRC) to guide the transition process in the United States. ARRC has issued a number of recommendations including the adoption of the Secured Overnight Financing Rate (SOFR) as a replacement for LIBOR. The International Swap and Derivatives Association (ISDA), the organization that oversees and guides swap and derivatives markets and participants, continues to work on transitions and replacement rates, including having replacement rates in place before the possible cessation of LIBOR at the end of 2021, and is monitoringhas committed to providing more definitive recommendations later in 2020. The Company has formed a working group to address the introductionchange away from LIBOR. Management intends to continue to monitor developments from ARRC and market acceptance of replacement indices. Five ofISDA closely, and expects to pursue the steps ultimately recommended to provide for an orderly transition to a post-LIBOR environment. Of the interest rate swap contracts the CompanyBank has in place as of September 30, 2020, 2 contracts carrying a total notional amount of $50 million are set to mature byprior to December 31, 2021, three2021; 9 contracts with a total notional amount of $210 million have maturity dates beyond December 31, 2021. The one4 customer loan swap contract has acontracts shown in the table immediately above have maturity datedates of December 19, 2029, August 21, 2030, July 1, 2035 and October 1, 2039.
38


Note 11 – Mortgage Servicing Rights

FASB ASC Topic 860 "Transfers and Servicing" requires all separately recognized servicing assets and servicing liabilities to be initially measured at fair value, if practicable. The Company's servicing assets and servicing liabilities are reported using the amortization method and carried at the lower of amortized cost or fair value by strata. In evaluating the carrying values of mortgage servicing rights, the Company obtains third party valuations based on loan level data including note rate, type and term of the underlying loans. The model utilizes several assumptions, the most significant of which is loan prepayments, calculated using a three-monthsthree-months moving average of weekly prepayment data published by the Public Securities Association (PSA) and modeled against the serviced loan portfolio, and the discount rate to discount future cash flows. As of September 30, 2019,2020, the prepayment assumption using the PSA model was 204,323, which translates into an anticipated prepayment rate of 12.24%19.38%. The discount rate is 9.50%9.00%. Other assumptions include delinquency rates, foreclosure rates, servicing cost inflation, and annual unit loan cost. All assumptions are adjusted periodically to reflect current circumstances. Amortization of mortgage servicing rights, as well as write-offs due to prepayments of the related mortgage loans, are recorded as a charge against mortgage servicing fee income.
For the nine months ended September 30, 20192020 and 2018,2019, servicing rights capitalized totaled $267,000$926,000 and $184,000,$267,000, respectively. Servicing rights amortized for the nine-monthnine-months periods ended September 30, 2020 and 2019 were $252,000 and 2018 were $170,000, and $152,000, respectively. The fair value of servicing rights was $2,083,000, $2,586,000$2,013,000, $2,089,000 and $2,572,000$2,083,000 at September 30, 2019,2020, December 31, 20182019 and September 30, 2018,2019, respectively. The Bank serviced loans for others totaling $261,685,000, $261,654,000$321,813,000, $266,173,000 and $257,584,000$261,685,000 at September 30, 2019, 2020, December 31, 2018,2019, and September 30, 20182019, respectively.
, respectively.

The Bank recorded an impairment reserve as of September 30, 2020 for strata with a fair value lower than cost. Mortgage servicing rights are included in other assets and detailed in the following table:
 September 30,
2019
 December 31,
2018
 September 30,
2018
Mortgage servicing rights$5,985,000
 $5,718,000
 $5,611,000
Accumulated amortization(4,534,000) (4,364,000) (4,312,000)
 $1,451,000
 $1,354,000
 $1,299,000

September 30,
2020
December 31,
2019
September 30,
2019
Mortgage servicing rights$7,066,000 $6,140,000 $5,985,000 
Accumulated amortization(4,846,000)(4,594,000)(4,534,000)
Amortized Cost2,220,000 1,546,000 1,451,000 
Impairment reserve(258,000)
Carrying Value$1,962,000 $1,546,000 $1,451,000 
Note 12 – Income Taxes
FASB ASC Topic 740 "Income Taxes" defines the criteria that an individual tax position must satisfy for some or all of the benefits of that position to be recognized in a company's financial statements. Topic 740 prescribes a recognition threshold of more-likely-than-not, and a measurement attribute for all tax positions taken or expected to be taken on a tax return, in order for those tax positions to be recognized in the financial statements. The Company is currently open to audit under the statute of limitations by the IRS for the years ended December 31, 20162017 through 2018.2019.

Note 13 - Certificates of Deposit
The following table represents the breakdown of certificates of deposit at September 30, 20192020 and 2018,2019, and at December 31, 2018:2019:
September 30, 2020December 31, 2019September 30, 2019
Certificates of deposit < $100,000$252,461,000 $277,225,000 $319,292,000 
Certificates $100,000 to $250,000269,881,000 345,241,000 278,050,000 
Certificates $250,000 and over67,589,000 67,513,000 64,431,000 
$589,931,000 $689,979,000 $661,773,000 
 September 30, 2019 December 31, 2018 September 30, 2018
Certificates of deposit < $100,000$319,292,000
 $372,464,000
 $389,317,000
Certificates $100,000 to $250,000278,050,000
 162,185,000
 168,402,000
Certificates $250,000 and over64,431,000
 56,760,000
 61,690,000
 $661,773,000
 $591,409,000
 $619,409,000






Note 14 – Reclassifications
Certain items from the prior year were reclassified in the consolidated financial statements to conform with the current year presentation. These do not have a material impact on the consolidated balance sheet or statement of income and comprehensive income presentations.
39



Note 15 – Fair Value
Certain assets and liabilities are recorded at fair value to provide additional insight into the Company's quality of earnings. Some of these assets and liabilities are measured on a recurring basis while others are measured on a nonrecurring basis, with the determination based upon applicable existing accounting pronouncements. For example, securities available for sale are recorded at fair value on a recurring basis. Other assets, such as, other real estate owned and impaired loans, are recorded at fair value on a nonrecurring basis using the lower of cost or market methodology to determine impairment of individual assets. The Company groups assets and liabilities which are recorded at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value. A financial instrument's level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement (with level 1 considered highest and level 3 considered lowest). A brief description of each level follows:
Level 1 - Valuation is based upon quoted prices for identical instruments in active markets.
Level 2 - Valuation is based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market.
Level 3 - Valuation is generated from model-based techniques that use at least one significant assumption not observable in the market. These unobservable assumptions reflect estimates that market participants would use in pricing the asset or liability. Valuation includes use of discounted cash flow models and similar techniques.

The fair value methods and assumptions for the Company's financial instruments and other assets measured at fair value are set forth below.

Investment Securities
The fair values of investment securities are estimated by independent providers using a market approach with observable inputs, including matrix pricing and recent transactions. In obtaining such valuation information from third parties, the Company has evaluated their valuation methodologies used to develop the fair values in order to determine whether the valuations are representative of an exit price in the Company's principal markets. The Company's principal markets for its securities portfolios are the secondary institutional markets, with an exit price that is predominantly reflective of bid level pricing in those markets. Fair values are calculated based on the value of one unit without regard to any premium or discount that may result from concentrations of ownership of a financial instrument, possible tax ramifications, or estimated transaction costs. If these considerations had been incorporated into the fair value estimates, the aggregate fair value could have been changed. The carrying values of restricted equity securities approximate fair values. As such, the Company classifies investment securities as Level 2.

Loans
Fair values are estimated for portfolios of loans based on exit pricing notion. The fair values of performing loans are calculated by discounting scheduled cash flows through the estimated maturity using estimated market discount rates that reflect the credit and interest risk inherent in the loan. The estimates of maturity are based on the Company's historical experience with repayments for each loan classification, modified, as required, by an estimate of the effect of current economic and lending conditions, and the effects of estimated prepayments. Assumptions regarding credit risk, cash flows, and discount rates are judgmentally determined using available market information and specific borrower information. Management has made estimates of fair value using discount rates that it believes to be reasonable. However, because there is no market for many of these financial instruments, Management has no basis to determine whether the fair value presented above would be indicative of the value negotiated in an actual sale. As such, the Company classifies loans as Level 3, except for certain collateral-dependent impaired loans. Fair values of impaired loans are based on estimated cash flows and are discounted using a rate commensurate with the risk associated with the estimated cash flows, or if collateral dependent, discounted to the appraised value of the collateral as determined by reference to sale prices of similar properties, less costs to sell. As such, the Company classifies collateral dependent impaired loans for which a specific reserve results in a fair value measure as Level 2. All other impaired loans are classified as Level 3.



Other Real Estate Owned
Real estate acquired through foreclosure is initially recorded at fair value. The fair value of other real estate owned is based on property appraisals and an analysis of similar properties currently available. As such, the Company records other real estate owned as nonrecurring Level 2.

Mortgage Servicing Rights
Mortgage servicing rights represent the value associated with servicing residential mortgage loans. Servicing assets and servicing liabilities are reported using the amortization method and compared to fair value for impairment. In evaluating the fair values of mortgage servicing rights, the Company obtains third party valuations based on loan level data including note rate, type and term of the underlying loans. As such, the Company classifies mortgage servicing rights as Level 2.
40


Time Deposits
The fair value of maturity deposits is based on the discounted value of contractual cash flows using a replacement cost of funds approach. The discount rate is estimated using the cost of funds borrowing rate in the market. As such, the Company classifies deposits as Level 2.

Borrowed Funds
The fair value of borrowed funds is based on the discounted value of contractual cash flows. The discount rate is estimated using the rates currently available for borrowings of similar remaining maturities. As such, the Company classifies borrowed funds as Level 2.

Derivatives
The fair value of interest rate swaps is determined using inputs that are observable in the market place obtained from third parties including yield curves, publicly available volatilities, and floating indexes and, accordingly, are classified as Level 2 inputs. The credit value adjustments associated with derivatives utilize Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default by the Company and its counterparties. As of September 30, 20192020 and 2018,2019, and December 31, 2018,2019, the Company has assessed the significance of the impact of the credit valuation adjustments on the overall valuation of its derivative positions and has determined that the credit valuation adjustments are not significant to the overall valuation of its derivatives due to collateral postings.

Customer Loan Derivatives
The valuation of the Company’s customer loan derivatives is obtained from a third-party pricing service and is determined using a discounted cash flow analysis on the expected cash flows of each derivative. The pricing analysis is based on observable inputs for the contractual terms of the derivatives, including the period to maturity and interest rate curves.  The Company incorporates credit valuation adjustments to appropriately reflect both its own nonperformance risk and the respective counterparty’s nonperformance risk in the fair value measurements. In adjusting the fair value of its derivative contracts for the effect of nonperformance risk, the Company has considered the impact of master netting arrangements and any applicable credit enhancements, such as collateral postings.

Limitations
Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument. These values do not reflect any premium or discount that could result from offering for sale at one time the Company's entire holdings of a particular financial instrument. Because no market exists for a significant portion of the Company's financial instruments, fair value estimates are based on Management's judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments, and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates. Fair value estimates are based on existing on- and off-balance-sheet financial instruments without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments. Other significant assets and liabilities that are not considered financial instruments include the deferred tax asset, premises and equipment, and other real estate owned. In addition, tax ramifications related to the realization of the unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in any of the estimates.

Assets and Liabilities Recorded at Fair Value on a Recurring Basis
The following tables present the balances of assets and liabilities that were measured at fair value on a recurring basis as of September 30, 2019, 2020, December 31, 20182019 and September 30, 2018.2019.


At September 30, 2020
Level 1Level 2Level 3Total
Securities available for sale
   U.S. Government-sponsored agencies$$27,497,000 $$27,497,000 
   Mortgage-backed securities276,424,000 276,424,000 
   State and political subdivisions36,219,000 36,219,000 
Total securities available for sale340,140,000 340,140,000 
  Customer loan interest swap agreements3,311,000 3,311,000 
Total interest rate swap agreements3,311,000 3,311,000 
Total assets$$343,451,000 $$343,451,000 
41


 At September 30, 2019
 Level 1 Level 2 Level 3 Total
Securities available for sale       
   Mortgage-backed securities$
 $322,190,000
 $
 $322,190,000
   State and political subdivisions
 4,608,000
 
 4,608,000
Total securities available for sale
 326,798,000
 
 326,798,000
  Interest rate swap agreements
 510,000
 
 510,000
  Customer loan interest swap agreements
 1,643,000
 
 1,643,000
Total interest rate swap agreements$
 $2,153,000
 $
 $2,153,000
Total assets$
 $328,951,000
 $
 $328,951,000
 At September 30, 2019
 Level 1 Level 2 Level 3 Total
Interest rate swap agreements$
 $845,000
 $
 $845,000
Customer loan interest swap agreements
 1,643,000
 
 1,643,000
Total liabilities$
 $2,488,000
 $
 $2,488,000
 At December 31, 2018
 Level 1 Level 2 Level 3 Total
Securities available for sale       
   U.S. Government-sponsored agencies$
 $5,007,000
 $
 $5,007,000
   Mortgage-backed securities
 307,693,000
 
 307,693,000
   State and political subdivisions
 4,716,000
 
 4,716,000
Total securities available for sale
 317,416,000
 
 317,416,000
Interest rate swap agreements
 1,889,000
 
 1,889,000
Total assets$
 $319,305,000
 $
 $319,305,000

 At December 31, 2018
 Level 1 Level 2 Level 3 Total
Interest rate swap agreements$
 $69,000
 $
 $69,000
Total liabilities$
 $69,000
 $
 $69,000

 At September 30, 2018
 Level 1 Level 2 Level 3 Total
Securities available for sale       
   U.S. Treasury and agency$
 $4,979,000
 $
 $4,979,000
   Mortgage-backed securities$
 $292,570,000
 $
 $292,570,000
   State and political subdivisions
 4,638,000
 
 4,638,000
Total securities available for sale
 302,187,000
 
 302,187,000
Interest rate swap agreements
 2,888,000
 
 2,888,000
Total assets$
 $305,075,000
 $
 $305,075,000

At September 30, 2020
Level 1Level 2Level 3Total
Interest rate swap agreements$$7,342,000 $$7,342,000 
Customer loan interest swap agreements3,311,000 3,311,000 
Total liabilities$$10,653,000 $$10,653,000 

At December 31, 2019
Level 1Level 2Level 3Total
Securities available for sale
   U.S. Government-sponsored agencies$$7,398,000 $$7,398,000 
   Mortgage-backed securities326,617,000 326,617,000 
   State and political subdivisions26,505,000 26,505,000 
Total securities available for sale360,520,000 360,520,000 
   Interest rate swap agreements562,000 562,000 
   Customer loan interest swap agreements1,205,000 1,205,000 
Total interest rate swap agreements1,767,000 1,767,000 
Total assets$$362,287,000 $$362,287,000 

At December 31, 2019
Level 1Level 2Level 3Total
Interest rate swap agreements$$439,000 $$439,000 
Customer loan interest swap agreements1,205,000 1,205,000 
Total liabilities$$1,644,000 $$1,644,000 

At September 30, 2019
Level 1Level 2Level 3Total
Securities available for sale
   Mortgage-backed securities$$322,190,000 $$322,190,000 
   State and political subdivisions4,608,000 4,608,000 
Total securities available for sale326,798,000 326,798,000 
   Interest rate swap agreements510,000 510,000 
   Customer loan interest swap agreements1,643,000 1,643,000 
Total interest swap agreements2,153,000 2,153,000 
Total assets$$328,951,000 $$328,951,000 

At September 30, 2019
Level 1Level 2Level 3Total
Interest rate swap agreements$$845,000 $$845,000 
Customer loan interest swap agreements1,643,000 1,643,000 
Total liabilities$$2,488,000 $$2,488,000 

Assets Recorded at Fair Value on a Non-Recurring Basis
The following tables include assets measured at fair value on a nonrecurring basis that have had a fair value adjustment since their initial recognition. Mortgage servicing rights are presented net of an impairment reserve of $258,000 at September 30,
42


2020 and $0 at December 31, 2019 and September 30, 2019. Other real estate owned is presented net of an allowance of $0$45,000 at September 30, 2019, 20182020 and $0 at December 31, 2018.2019 and September 30, 2019. Only collateral-dependent impaired loans with a related specific allowance for loan losses or a partial


charge off are included in impaired loans for purposes of fair value disclosures. Impaired loans below are presented net of specific allowances of $1,763,000, $2,096,000633,000, $1,916,000 and $2,109,000$1,763,000 at September 30, 2020, December 31, 2019, and September 30, 2019,, December 31, 2018, and September 30, 2018, respectively.
At September 30, 2020
Level 1Level 2Level 3Total
Mortgage servicing rights$$2,013,000 $$2,013,000 
Other real estate owned777,000 777,000 
Impaired loans789,000 789,000 
Total assets$$3,579,000 $$3,579,000 
 At September 30, 2019
 Level 1 Level 2 Level 3 Total
Other real estate owned$
 $279,000
 $
 $279,000
Impaired loans
 7,143,000
 
 7,143,000
Total assets$
 $7,422,000
 $
 $7,422,000

At December 31, 2019
Level 1Level 2Level 3Total
Mortgage servicing rights$$2,089,000 $$2,089,000 
Other real estate owned279,000 279,000 
Impaired loans6,579,000 6,579,000 
Total assets$$8,947,000 $$8,947,000 

At September 30, 2019
Level 1Level 2Level 3Total
Mortgage servicing rights$$2,083,000 $$2,083,000 
Other real estate owned279,000 279,000 
Impaired loans7,143,000 7,143,000 
Total assets$$9,505,000 $$9,505,000 

43
 At December 31, 2018
 Level 1 Level 2 Level 3 Total
Other real estate owned$
 $584,000
 $
 $584,000
Impaired loans
 7,415,000
 
 7,415,000
Total assets$
 $7,999,000
 $
 $7,999,000


 At September 30, 2018
 Level 1 Level 2 Level 3 Total
Other real estate owned$
 $584,000
 $
 $584,000
Impaired loans
 7,024,000
 
 7,024,000
Total assets$
 $7,608,000
 $
 $7,608,000



Fair Value of Financial Instruments
FASB ASC Topic 825 "Financial Instruments" requires disclosures of fair value information about financial instruments, whether or not recognized in the balance sheet, if the fair values can be reasonably determined. Fair value is best determined based upon quoted market prices. However, in many instances, there are no quoted market prices for the Company's various financial instruments. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques using observable inputs when available. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. Accordingly, the fair value estimates may not be realized in an immediate settlement of the instrument. Topic 825 excludes certain financial instruments and all nonfinancial instruments from its disclosure requirements. Accordingly, the aggregate fair value amounts presented may not necessarily represent the underlying fair value of the Company.

This summary excludes financial assets and liabilities for which carrying value approximates fair values and financial instruments that are recorded at fair value on a recurring basis. Financial instruments for which carrying values approximate fair value include cash equivalents, interest-bearing deposits in other banks, demand, NOW, savings and money market deposits. The estimated fair value of demand, NOW, savings and money market deposits is the amount payable on demand at the reporting date. Carrying value is used because the accounts have no stated maturity and the customer has the ability to withdraw funds immediately.
The carrying amount and estimated fair values for financial instruments as of September 30, 20192020 were as follows:
Carrying valueEstimated fair valueLevel 1Level 2Level 3
Financial assets
Securities to be held to maturity$331,962,000 $342,062,000 $$342,062,000 $
Loans (net of allowance for loan losses)
Commercial
   Real estate401,822,000 406,575,000 13,000 406,562,000 
   Construction51,362,000 51,970,000 51,970,000 
   Other305,239,000 302,600,000 33,000 302,567,000 
Municipal43,955,000 44,203,000 44,203,000 
Residential
   Term494,864,000 505,357,000 277,000 505,080,000 
   Construction16,011,000 16,178,000 16,178,000 
Home equity line of credit81,359,000 80,160,000 457,000 79,703,000 
Consumer26,663,000 24,686,000 9,000 24,677,000 
Total loans1,421,275,000 1,431,729,000 789,000 1,430,940,000 
Mortgage servicing rights2,220,000 2,013,000 2,013,000 
Financial liabilities
Local certificates of deposit$253,863,000 $255,553,000 $$255,553,000 $
National certificates of deposit336,068,000 343,022,000 343,022,000 
Total certificates of deposits589,931,000 598,575,000 598,575,000 
Repurchase agreements66,087,000 55,085,000 55,085,000 
Federal Home Loan Bank and Federal Reserve Bank borrowings217,700,000 197,527,000 197,527,000 
Total borrowed funds283,787,000 252,612,000 252,612,000 









44


 Carrying value Estimated fair value Level 1 Level 2 Level 3
Financial assets         
Securities to be held to maturity$298,786,000
 $306,647,000
 $
 $306,647,000
 $
Loans (net of allowance for loan losses)         
Commercial         
   Real estate363,725,000
 360,061,000
 
 622,000
 359,439,000
   Construction36,829,000
 36,458,000
 
 
 36,458,000
   Other198,093,000
 196,674,000
 
 5,142,000
 191,532,000
Municipal36,492,000
 36,192,000
 
 
 36,192,000
Residential         
   Term484,160,000
 482,121,000
 
 992,000
 481,129,000
   Construction14,091,000
 14,032,000
 
 
 14,032,000
Home equity line of credit93,180,000
 90,289,000
 
 387,000
 89,902,000
Consumer25,124,000
 23,318,000
 
 
 23,318,000
Total loans1,251,694,000
 1,239,145,000
 
 7,143,000
 1,232,002,000
Mortgage servicing rights1,451,000
 2,083,000
 
 2,083,000
 
Financial liabilities         
Local certificates of deposit$283,119,000
 $285,598,000
 $
 $285,598,000
 $
National certificates of deposit378,654,000
 379,995,000
 
 379,995,000
 
Total certificates of deposits661,773,000
 665,593,000
 
 665,593,000
 
Repurchase agreements41,310,000
 40,004,000
 
 40,004,000
 
Federal Home Loan Bank advances140,107,000
 140,008,000
 
 140,008,000
 
Total borrowed funds181,417,000
 180,012,000
 
 180,012,000
 










The carrying amounts and estimated fair values for financial instruments as of December 31, 20182019 were as follows:
Carrying valueEstimated fair valueLevel 1Level 2Level 3
Financial assets
Securities to be held to maturity$281,606,000 $287,045,000 $$287,045,000 $
Loans (net of allowance for loan losses)
Commercial
   Real estate368,645,000 364,626,000 2,000 364,624,000 
   Construction37,678,000 37,366,000 37,366,000 
   Other215,068,000 212,548,000 5,046,000 207,502,000 
Municipal41,258,000 40,552,000 40,552,000 
Residential
   Term491,315,000 491,359,000 577,000 490,782,000 
   Construction14,785,000 14,786,000 14,786,000 
Home equity line of credit91,149,000 90,959,000 954,000 90,005,000 
Consumer25,538,000 23,489,000 23,489,000 
Total loans1,285,436,000 1,275,685,000 6,579,000 1,269,106,000 
Mortgage servicing rights1,546,000 2,089,000 2,089,000 
Financial liabilities
Local certificates of deposit$285,602,000 $281,480,000 $$281,480,000 $
National certificates of deposit404,377,000 412,337,000 412,337,000 
Total deposits689,979,000 693,817,000 693,817,000 
Repurchase agreements37,450,000 37,450,000 37,450,000 
Federal Home Loan Bank advances147,505,000 140,063,000 140,063,000 
Total borrowed funds184,955,000 177,513,000 177,513,000 





















 Carrying value Estimated fair value Level 1 Level 2 Level 3
Financial assets         
Securities to be held to maturity$255,663,000
 $250,900,000
 $
 $250,900,000
 $
Loans (net of allowance for loan losses)         
Commercial         
   Real estate349,243,000
 340,526,000
 
 423,000
 340,103,000
   Construction27,018,000
 26,344,000
 
 
 26,344,000
   Other192,420,000
 189,842,000
 
 6,096,000
 183,746,000
Municipal51,101,000
 50,965,000
 
 
 50,965,000
Residential         
   Term467,760,000
 451,323,000
 
 793,000
 450,530,000
   Construction17,705,000
 17,083,000
 
 
 17,083,000
Home equity line of credit97,650,000
 95,175,000
 
 103,000
 95,072,000
Consumer24,154,000
 22,530,000
 
 
 22,530,000
Total loans1,227,051,000
 1,193,788,000
 
 7,415,000
 1,186,373,000
Mortgage servicing rights1,354,000
 2,586,000
 
 2,586,000
 
Financial liabilities         
Local certificates of deposit$284,482,000
 $281,282,000
 $
 $281,282,000
 $
National certificates of deposit306,927,000
 307,508,000
 
 307,508,000
 
Total deposits591,409,000
 588,790,000
 
 588,790,000
 
Repurchase agreements40,205,000
 40,161,000
 
 40,161,000
 
Federal Home Loan Bank advances170,112,000
 169,240,000
 
 169,240,000
 
Total borrowed funds210,317,000
 209,401,000
 
 209,401,000
 
45



























The carrying amount and estimated fair values for financial instruments as of September 30, 20182019 were as follows:
Carrying valueEstimated fair valueLevel 1Level 2Level 3
Financial assets
Securities to be held to maturity$298,786,000 $306,647,000 $$306,647,000 $
Loans (net of allowance for loan losses)
Commercial
   Real estate363,725,000 360,061,000 622,000 359,439,000 
   Construction36,829,000 36,458,000 36,458,000 
   Other198,093,000 196,674,000 5,142,000 191,532,000 
Municipal36,492,000 36,192,000 36,192,000 
Residential
   Term484,160,000 482,121,000 992,000 481,129,000 
   Construction14,091,000 14,032,000 14,032,000 
Home equity line of credit93,180,000 90,289,000 387,000 89,902,000 
Consumer25,124,000 23,318,000 23,318,000 
Total loans1,251,694,000 1,239,145,000 7,143,000 1,232,002,000 
Mortgage servicing rights1,451,000 2,083,000 2,083,000 
Financial liabilities
Local certificates of deposit$283,119,000 $285,598,000 $$285,598,000 $
National certificates of deposit378,654,000 379,995,000 379,995,000 
Total certificates of deposits661,773,000 665,593,000 665,593,000 
Repurchase agreements41,310,000 40,004,000 40,004,000 
Federal Home Loan Bank advances140,107,000 140,008,000 140,008,000 
Total borrowed funds181,417,000 180,012,000 180,012,000 
 Carrying value Estimated fair value Level 1 Level 2 Level 3
Financial assets         
Securities to be held to maturity$257,395,000
 $249,890,000
 $
 $249,890,000
 $
Loans (net of allowance for loan losses)         
Commercial         
   Real estate362,199,000
 359,421,000
 
 423,000
 358,998,000
   Construction23,639,000
 23,458,000
 
 
 23,458,000
   Other183,935,000
 184,116,000
 
 6,033,000
 178,083,000
Municipal56,677,000
 56,981,000
 
 
 56,981,000
Residential         
   Term458,174,000
 459,561,000
 
 475,000
 459,086,000
   Construction18,124,000
 18,095,000
 
 
 18,095,000
Home equity line of credit104,373,000
 103,209,000
 
 93,000
 103,116,000
Consumer24,755,000
 24,126,000
 
 
 24,126,000
Total loans1,231,876,000
 1,228,967,000
 
 7,024,000
 1,221,943,000
Mortgage servicing rights1,299,000
 2,572,000
 
 2,572,000
 
Financial liabilities         
Local certificates of deposit252,440,000
 253,014,000
 
 253,014,000
 
National certificates of deposit366,969,000
 368,127,000
 
 368,127,000
 
Total certificates of deposits619,409,000
 621,141,000
 
 621,141,000
 
Repurchase agreements95,160,000
 90,311,000
 
 90,311,000
 
Federal Home Loan Bank advances170,114,000
 170,058,000
 
 170,058,000
 
Total borrowed funds265,274,000
 260,369,000
 
 260,369,000
 
46



Note 16 – Impact of Recently Issued Accounting Standards
The FASB issued Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers, in 2014 to replace the current plethora of industry-specific rules with a broad, principles-based framework for recognizing and measuring revenue. Due to the complexity of the new pronouncement and the anticipated effort required by entities in many industries to implement ASU No. 2014-09, FASB delayed the effective date. Public business entities, certain not-for-profit entities, and certain employee benefit plans should apply the guidance to annual reporting periods beginning after December 15, 2017, and all other entities should apply the guidance to annual reporting periods beginning after December 15, 2018. FASB formed a Transition Resource Group to assist it in identifying implementation issues that may require further clarification or amendment to ASU No. 2014-09. As a result of that group’s deliberations, FASB has issued the following amendments, which will be effectiveconcurrently with ASU No. 2014-09: ASU No. 2016-08, Principal versus Agent Considerations, which clarifies whether an entity should record the gross amount of revenue or only its ultimate share when a third party isalso involved in providing goods or services to a customer; ASU No. 2016-10, Identifying Performance Obligations and Licensing, which clarifies and simplifies the process for determining whether performance obligations to a customer should be segregated and accounted for individually, and clarifies how the new revenue rules apply to licenses of intellectual property; and ASU No. 2016-12, Narrow-Scope Improvements and Practical Expedients, which clarifies and simplifies the process of assessing collectability of consideration under a contract, presentation of sales taxes, accounting for noncash consideration received, and certain transitional issues. The new standard does not apply to revenue associated with financial instruments, including loans and securities that are accounted for under other U.S. GAAP. The Company has reviewed its various other revenue streams and concluded that the new standard will have minimal impact upon its consolidated financial statements. Adoption of ASU No. 2014-09 was made on January 1, 2018 utilizing the modified retrospective approach.
In January 2016, the FASB issued ASU No. 2016-01, Financial Instruments - Overall: Recognition and Measurement of Financial Assets and Financial Liabilities. The ASU was issued to enhance the reporting model for financial instruments to provide users of financial statements with more decision-useful information. This ASU changes how entities account for equity investments that do not result in consolidation and are not accounted for under the equity method of accounting. The ASU also changes certain disclosure requirements and other aspects of U.S. GAAP, including a requirement for public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes. The ASU became


effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The adoption of the ASU did not have a material effect on the Company's consolidated financial statements.
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). The ASU was issued to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. The ASU is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2018. The adoption of the ASU did not have a material effect on the Company's consolidated financial statements.
In June 2016, the FASB issued ASUAccounting Standards Update (ASU) No. 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. Under the new guidance, which will replace the existing incurred loss model for recognizing credit losses, banks and other lending institutions will be required to recognize the full amount of expected credit losses. The new guidance, which is referred to as the current expected credit loss model, requires that expected credit losses for financial assets held at the reporting date that are accounted for at amortized cost be measured and recognized based on historical experience and current and reasonably supportable forecasted conditions to reflect the full amount of expected credit losses. A modified version of these requirements also applies to debt securities classified as available for sale. The ASU was to be effective for all SEC registrants for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. On October 16, 2019, FASB voted to finalize a proposal issued in August 2019 under which the effective implementation date was changed for SEC registrants meeting the definition of a Smaller Reporting Company to fiscal years beginning after December 15, 2022. Early adoption is permitted for fiscal years beginning after December 15, 2018, including interim periods within such years. The Company qualifies as a Smaller Reporting Company. It continues to evaluate the impact of the adoption of the ASU on its consolidated financial statements, and continues to anticipatesanticipate that it may have a material impact upon adoption. The Bank has formed an implementation committee for ASU No. 2016-13. To date, committee members have participated in educational seminars on the new standards, identified the historical data sets that will be necessary to implement the new standard, and have chosen a third-party vendor who provides software solutions for ASU No. 2016-13 modeling and calculation. The Bank is in the late stages of implementing this software and plans to run incurred loss and current expected credit models in parallel until adoption of ASU No. 2016-13.
In January 2017, the FASB issued ASU No. 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. The ASU was issued to reduce the cost and complexity of the goodwill impairment test. To simplify the subsequent measurement of goodwill, step two of the goodwill impairment test was eliminated. Instead, a Company will recognize an impairment of goodwill should the carrying value of a reporting unit exceed its fair value (i.e. step one). The ASU will bewas effective for the Company on January 1, 2020 and will be applied prospectively. The Company does not expect the implementation to have a material effect on the Company's consolidated financial statements.
In March 2017, the FASB issued ASU No. 2017-08, Premium Amortization on Purchased Callable Debt Securities. This ASU shortens the amortization period for the premium on certain purchased callable debt securities to the earliest call date. Today, many entities amortize the premium over the contractual life of the security. The new guidance does not change the accounting for purchased callable debt securities held at a discount; the discount continues to be accreted to maturity. The ASU is effective for interim and annual reporting periods beginning after December 15, 2018; early adoption is permitted. The guidance calls for a modified retrospective transition approach under which a cumulative-effect adjustment will be made to retained earnings as of the beginning of the first reporting period in which the guidance is adopted. The Company's current practice aligns with the ASU therefore there was no impact on the Company's consolidated financial statements.
In May 2017, the FASB issued ASU No. 2017-09, Compensation-Stock Compensation (Topic 718): Scope of Modification Accounting. The ASU was issued to provide clarity and reduce both 1) diversity in practice and 2) cost and complexity when applying the guidance in Topic 718, Compensation-Stock Compensation, to a change to the terms or conditions of a shared-based payment award. The ASU includes guidance on determining which changes to the terms and conditions of share-based payment awards require and entity to apply modification accounting under Topic 718. The ASU is effective for the annual period, and interim periods within the annual periods, beginning after December 15, 2017. Early adoption is permitted, including adoption in any interim period. The ASU should be applied prospectively to an award modified on or after the adoption date. Adoption of the ASU did not have a material effect on the Company's consolidated financial statements.
In August 2017, the FASB issued ASU 2017-12, Derivatives and Hedging (Topic 815). The amendments in this ASU improve the financial reporting of hedging relationships to better portray the economic results of an entity's risk management activities in its financial statements. In addition, this ASU makes certain targeted improvements to simplify the application of the hedge accounting guidance in current US GAAP. The amendments in this ASU are effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early application is permitted in any interim period after issuance of the ASU. The adoptionImplementation of this ASU did not have a material effect on the Company's consolidated financial statements.
In February 2018, the FASB issued ASU No. 2018-02, Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income (Loss). This ASU was issued to allow a reclassification from accumulated other comprehensive income (loss) to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act. Consequently, the amendments eliminate the stranded tax effects resulting from the Tax Cuts and Jobs Act and will improve the usefulness of information reported to financial statement users. However, because the


amendments only relate to the reclassification of the income tax effects of the Tax Cuts and Jobs Act, the underlying guidance that requires that the effect of a change in tax laws or rates be included in income from continuing operations is not affected. The ASU is effective for fiscal years beginning after December 15, 2018, with early adoption permitted for financial statements which have not yet been issued. The Company adopted the ASU for the December 31, 2017 consolidated financial statements, which resulted in a reclassification adjustment on the Consolidated Statements of Changes in Shareholders' Equity of $297,000 from accumulated other comprehensive income (loss) to retained earnings. Refer to Note 9, Income Taxes, in the Company's December 31, 2017 Form 10-K for additional information.
In July 2018, the FASB issued ASU No. 2018-11, Leases - Targeted Improvements to provide entities with relief from the costs of implementing certain aspects of the new leasing standard, ASU No. 2016-02. Specifically, under the amendments in ASU 2018-11: (1) entities may elect not to recast the comparative periods presented when transitioning to the new leasing standard, and (2) lessors may elect not to separate lease and non-lease components when certain conditions are met. The amendments have the same effective date as ASU 2016-02. The Company expects to elect both transition options. The adoption of ASU 2018-11 did not have a material effect on the Company’s consolidated financial statements.
In August 2018, the FASB issued ASU No. 2018-13, Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement. This ASU eliminates, adds and modifies certain disclosure requirements for fair value measurements. Among the changes, entities will no longer be required to disclose the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, but will be required to disclose the range and weighted average used to develop significant unobservable inputs for Level 3 fair value measurements. ASU No. 2018-13 is effective for interim and annual reporting periods beginning after December 15, 2019; early adoption is permitted. Entities are also allowed to elect early adoption for the eliminated or modified disclosure requirements and delay adoption of the new disclosure requirements until their effective date. As ASU No. 2018-13 only revises disclosure requirements, it willdid not have a material impact on the Company’s consolidated financial statements.
In August 2018, the FASB issued ASU No. 2018-14, Disclosure Framework - Changes to the Disclosure Requirements for Defined Benefit Plans. This ASU makes minor changes to the disclosure requirements for employers that sponsor defined benefit pension and/or other postretirement benefit plans. ASU 2018-14 is effective for fiscal years ending after December 15, 2020; early adoption is permitted. As ASU 2018-14 only revises disclosure requirements, it will not have a material impact on the Company’s consolidated financial statements.




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Note 17 – Commitment
On September 3, 2020, the Bank entered into a Branch Purchase & Assumption Agreement with Bangor Savings Bank (BSB) to acquire a branch location in Belfast, ME currently owned and operated by Damariscotta Bank & Trust (DB&T); BSB has an agreement in place to purchase DB&T.
The acquisition will be the Bank's first branch location in Waldo County, and is expected to add $16.5 million in deposits and $23.5 million in loans to its balance sheet. The final value of the transaction is estimated to be $24.8 million which includes the loans, an assignment of a ground lease, leasehold improvements, furniture and equipment, and the premium paid for the deposits. The Bank has received regulatory approval for the purchase, and the transaction is expected to be closed in the fourth quarter. A copy of the Agreement is included as Exhibit 10.4.
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Item 2 – Management's Discussion and Analysis of Financial Condition
and Results of Operations
The First Bancorp, Inc. and Subsidiary
Forward-Looking Statements
This report contains statements that are "forward-looking statements." We may also make written or oral forward-looking statements in other documents we file with the Securities and Exchange Commission ("SEC"), in our annual reports to shareholders, in press releases and other written materials, and in oral statements made by our officers, directors or employees. You can identify forward-looking statements by the use of the words "believe," "expect," "anticipate," "intend," "estimate," "assume," "outlook," "will," "should," and other expressions that predict or indicate future events and trends and which do not relate to historical matters. You should not rely on forward-looking statements, because they involve known and unknown risks, uncertainties and other factors, some of which are beyond the control of the Company. These risks, uncertainties and other factors may cause the actual results, performance or achievements of the Company to be materially different from the anticipated future results, performance or achievements expressed or implied by the forward-looking statements.
Some of the factors that might cause these differences include the following: changes in general national, regional or international economic conditions or conditions affecting the banking or financial services industries or financial capital markets, volatility and disruption in national and international financial markets, government intervention in the U.S. financial system, reductions in net interest income resulting from interest rate volatility as well as changes in the balance and mix of loans and deposits, reductions in the market value of wealth management assets under administration, changes in the value of securities and other assets, reductions in loan demand, changes in loan collectability, default and charge-off rates, changes in the size and nature of the Company's competition, changes in legislation or regulation and accounting principles, policies and guidelines, uncertainties with respect to the duration, nature, and extent of the COVID-19 pandemic and its consequences, and changes in the assumptions used in making such forward-looking statements. In addition, the factors described under "Risk Factors" in Item 1A of our Annual Report on Form 10-K for the fiscal year ended December 31, 2018,2019, as filed with the SEC, may result in these differences.differences, as well as the "Risk Factors" in Part II, Item 1A listed below. You should carefully review all of these factors, and you should be aware that there may be other factors that could cause these differences. These forward-looking statements were based on information, plans and estimates at the date of this quarterly report, and we assume no obligation to update any forward-looking statements to reflect changes in underlying assumptions or factors, new information, future events or other changes.
Although the Company believes that the expectations reflected in such forward-looking statements are reasonable, actual results may differ materially from the results discussed in these forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. The Company undertakes no obligation to republish revised forward-looking statements to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events. Readers are also urged to carefully review and consider the various disclosures made by the Company, which attempt to advise interested parties of the facts that affect the Company's business.
Critical Accounting Policies
Management's discussion and analysis of the Company's financial condition is based on the consolidated financial statements which are prepared in accordance with GAAP. 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. 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. Actual results could differ from the amount derived from Management's estimates and assumptions under different assumptions or conditions.
Allowance for Loan Losses. Management believes the allowance for loan losses requires the most significant estimates and assumptions used in the preparation of the consolidated financial statements. The allowance for loan losses is based on Management's evaluation of the level of the allowance required in relation to the estimated loss exposure in the loan portfolio. Management believes the allowance for loan losses is a significant estimate and therefore regularly evaluates it to determine the appropriate level by taking into consideration factors such as prior loan loss experience, the character and size of the loan portfolio, business and economic conditions and Management's estimation of potential losses. The use of different estimates or assumptions could produce different provisions for loan losses.
Goodwill. 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.

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Mortgage Servicing Rights. The valuation of mortgage servicing rights is a critical accounting policy which requires significant estimates and assumptions. The Bank often sells mortgage loans it originates and retains the ongoing servicing of such loans, receiving a fee for these services, generally 0.25% of the outstanding balance of the loan per annum. Mortgage servicing rights are recognized at fair value when they are acquired through the sale of loans, and are reported in other assets. They are amortized into non-interest income in proportion to, and over the period of, the estimated future net servicing income of the underlying financial assets. The rights are subsequently carried at the lower of amortized cost or fair value. Management uses an independent firm which specializes in the valuation of mortgage servicing rights to determine the fair value which is recorded on the balance sheet. The most important assumption is the anticipated loan prepayment rate, and increases in prepayment speed results in lower valuations of mortgage servicing rights. The valuation also includes an evaluation for impairment based upon the fair value of the rights, which can vary depending upon current interest rates and prepayment expectations, as compared to amortized cost. Impairment is determined by stratifying rights by predominant characteristics, such as interest rates and terms. The use of different assumptions could produce a different valuation. All of the assumptions are based on standards the Company believes would be utilized by market participants in valuing mortgage servicing rights and are consistently derived and/or benchmarked against independent public sources.
Other-Than-Temporary Impairment on Securities. One of the significant estimates 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. 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. Securities that are in an unrealized loss position are reviewed at least quarterly to determine if other-than-temporary impairment is present based on certain quantitative and qualitative factors and measures. The primary factors considered in evaluating whether a decline in value of securities is other-than-temporary include: (a) the length of time and extent to which the fair value has been less than cost or amortized cost and the expected recovery period of the security, (b) the financial condition, credit rating and future prospects of the issuer, (c) whether the debtor is current on contractually obligated interest and principal payments, (d) the volatility of the securities' market price, (e) the intent and ability of the Company to retain the investment for a period of time sufficient to allow for recovery, which may be at maturity and (f) any other information and observable data considered relevant in determining whether other-than-temporary impairment has occurred, including the expectation of receipt of all principal and interest when due.
Derivative Financial Instruments. The CompanyBank recognizes all derivatives in the consolidated balance sheets at fair value. On the date the CompanyBank enters into the derivative contract, the CompanyBank designates the derivative as a hedge of either a forecasted transaction or the variability of cash flows to be received or paid related to a recognized asset or liability (“cash flow hedge”), a hedge of the fair value of a recognized asset or liability or of an unrecognized firm commitment (“fair value hedge”), or a held for trading instrument (“trading instrument”). The CompanyBank formally documents relationships between hedging instruments and hedged items, as well as its risk management objectives and strategy for undertaking various hedge transactions. The CompanyBank 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. Changes in fair value of a derivative that qualifies as a fair value hedge and the change in fair value of the hedged item are both recorded in earnings and offset each other when the transaction is effective. Those derivatives that are classified as trading instruments, including customer loan swaps, are recorded at fair value with changes in fair value recorded in earnings. The CompanyBank 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.

Use of Non-GAAP Financial Measures
Certain information in Management's Discussion and Analysis of Financial Condition and Results of Operations and elsewhere in this Report contains financial information determined by methods other than in accordance with GAAP. Management uses these "non-GAAP" measures in its analysis of the Company's performance and believes that these non-GAAP financial measures provide a greater understanding of ongoing operations and enhance comparability of results with prior periods as well as demonstrating the effects of significant gains and charges in the current period. The Company believes that a meaningful analysis of its financial performance requires an understanding of the factors underlying that performance. Management believes that investors may use these non-GAAP financial measures to analyze financial performance without the impact of unusual items that may obscure trends in the Company's underlying performance. These disclosures should not be viewed as a substitute for operating results determined in accordance with GAAP, nor are they necessarily comparable to non-GAAP performance measures that may be presented by other companies.

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In several places net interest income is presented on a fully taxable-equivalent basis. Specifically included in interest income was tax-exempt interest income from certain investment securities and loans. An amount equal to the tax benefit derived from this tax exempt income has been added back to the interest income total which, as adjusted, increased net interest income accordingly. Management believes the disclosure of tax-equivalent net interest income information improves the clarity of financial analysis, and is particularly useful to investors in understanding and evaluating the changes and trends in the Company's results of operations. Other financial institutions commonly present net interest income on a tax-equivalent basis. This adjustment is considered helpful in the comparison of one financial institution's net interest income to that of another, as each will have a different proportion of tax-exempt interest from its earning assets. Moreover, net interest income is a component of a second financial measure commonly used by financial institutions, net interest margin, which is the ratio of net interest income to average earning assets. For purposes of this measure as well, other financial institutions generally use tax-equivalent net interest income to provide a better basis of comparison from institution to institution. The Company follows these practices. The following table provides a reconciliation of tax-equivalent financial information to the Company's consolidated financial statements prepared in accordance with GAAP. A Federal Income Tax rate of 21.0% was used in 20192020 and 2018.2019.
For the nine months ended September 30, For the quarter ended September 30,For the nine months ended September 30,For the quarter ended September 30,
Dollars in thousands2019 2018 2019 2018Dollars in thousands2020201920202019
Net interest income as presented$39,075
 $37,214
 $13,226
 $12,536
Net interest income as presented$44,154 $39,075 $14,745 $13,226 
Effect of tax-exempt income1,723
 1,603
 572
 557
Effect of tax-exempt income1,741 1,723 586 572 
Net interest income, tax equivalent$40,798
 $38,817
 $13,798
 $13,093
Net interest income, tax equivalent$45,895 $40,798 $15,331 $13,798 
The Company presents its efficiency ratio using non-GAAP information which is most commonly used by financial institutions. The GAAP-based efficiency ratio is noninterest expenses divided by net interest income plus noninterest income from the Consolidated Statements of Income and Comprehensive Income (Loss). The non-GAAP efficiency ratio excludes securities losses and other-than-temporary impairment charges from noninterest expenses, excludes securities gains from noninterest income, and adds the tax-equivalent adjustment to net interest income. The following table provides a reconciliation between the GAAP and non-GAAP efficiency ratio:
For the nine months ended September 30,For the quarter ended September 30,
Dollars in thousands2020201920202019
Non-interest expense, as presented$29,236 $26,168 $9,276 $9,040 
Net interest income, as presented44,154 39,075 14,745 13,226 
Effect of tax-exempt interest income1,741 1,723 586 572 
Non-interest income, as presented13,627 10,281 4,805 3,532 
Effect of non-interest tax-exempt income124 124 41 41 
Net securities gains(1,179)(15) (15)
Adjusted net interest income plus non-interest income$58,467 $51,188 $20,177 $17,356 
Non-GAAP efficiency ratio50.00 %51.12 %45.97 %52.08 %
GAAP efficiency ratio50.60 %53.02 %47.45 %53.94 %
 For the nine months ended September 30,For the quarter ended September 30,
Dollars in thousands2019 20182019 2018
Non-interest expense, as presented$26,168
 $24,971
$9,040
 $8,216
Net interest income, as presented39,075
 37,214
13,226
 12,536
Effect of tax-exempt interest income1,723
 1,603
572
 557
Non-interest income, as presented10,281
 9,347
3,532
 3,034
Effect of non-interest tax-exempt income124
 124
41
 41
Net securities gains(15) (137)(15) (1)
Adjusted net interest income plus non-interest income$51,188
 $48,151
$17,356
 $16,167
Non-GAAP efficiency ratio51.12% 51.86%52.08% 50.82%
GAAP efficiency ratio53.02% 53.63%53.94% 52.77%

The Company presents certain information based upon average tangible shareholders' common equity instead of total average shareholders' equity. The difference between these measures is the Company's intangible assets, specifically goodwill from prior acquisitions. Management, banking regulators and many stock analysts use the tangible common equity ratio and the tangible book value per common share in conjunction with more traditional bank capital ratios to compare the capital adequacy of banking organizations with significant amounts of goodwill or other intangible assets, typically stemming from the use of the purchase accounting method in accounting for mergers and acquisitions.






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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 nine months ended September 30,For the quarter ended September 30,
Dollars in thousands2020201920202019
Average shareholders' equity as presented$218,603 $201,655 $220,465 $208,040 
  Less average intangible assets(29,920)(29,963)(29,934)(29,978)
Average tangible shareholders' common equity$188,683 $171,692 $190,531 $178,062 

To provide period-to-period comparison of operating results prior to consideration of credit loss provision and income taxes, the non-GAAP measure of Pre-Tax, Pre-Provision Net Income is presented. The following table provides a reconciliation to Net Income:
For the nine months ended September 30,For the quarters ended September 30,
Dollars in thousands2020201920202019
Net Income, as presented$20,159 $18,839 $7,095 $6,288 
Add: provision for loan losses4,550 875 1,800 250 
Add: income taxes3,836 3,474 1,379 1,180 
Pre-Tax, pre-provision net income$28,545 $23,188 $10,274 $7,718 

 For the nine months ended September 30,For the quarter ended September 30,
 Dollars in thousands2019 20182019 2018
Average shareholders' equity as presented$201,655
 $184,132
$208,040
 $186,399
  Less average intangible assets(29,963) (30,006)(29,978) (30,021)
Average tangible shareholders' common equity$171,692
 $154,126
$178,062
 $156,378

Executive Summary
Net income for the nine months ended September 30, 20192020 was $18.8$20.2 million,, up $1.7$1.3 million or 9.7%7.0% from the same period in 2018.2019. Earnings per common share on a fully diluted basis were $1.73$1.84 for the nine months ended September 30, 2019,2020, up $0.15$0.11 or 9.5%6.4% from the $1.58$1.73 posted for the same period in 2018.2019. For the quarter ended September 30, 2019,2020, net income was $6.3$7.1 million, up $355,000$807,000 or 6.0%12.8% from the same period in 2018.2019. Earnings per common share on a fully diluted basis were $0.58$0.65 for the quarter ended September 30, 2019,2020, up $0.03$0.07 or 5.5%12.1% from the $0.55$0.58 posted in 2018.2019. Compared to the previoussecond quarter of 2020, net income was down $107,000up $526,000 or 1.7%8.0% and earnings per common share on a fully diluted basis were down $0.01 or 1.7%.$0.65, up $0.05 from the prior quarter.
The Company continues to perform well in 2019. Continued growth in earning assets resulted in a year-over-year increase of 5.4% inposted record operating results during the third quarter tax equivalentof 2020 despite the continued operational and business climate challenges brought about by the coronavirus disease (COVID-19). Net income of $7.1 million was achieved via an increase in net interest income while margins have remained stable. The Company'sbefore loan loss provision, continued strong non-interest income increased from a year ago, led by mortgage banking revenue and wealth management income. Operating expenses remain controlled operating expenses. Asset quality remained stable as seen in our efficiency ratioimprovements noted over the first two quarters of 52.08% for the quarter.2020 were sustained. Based upon the strength of the Company's earnings, a dividend of 3031 cents per share was declared in the third quarter, representing a payout to our shareholders of 51.72% of 47.69 of net income for the period.
Net interest income on a tax-equivalent basis was up $2.0$5.1 million or 5.1%12.5% in the nine months ended September 30, 20192020 compared to the same period in 2018, with the2019. This increase primarilyis attributable to growth in earning assets.assets, stable interest rate margins and the recovery of interest on resolved problem loans during the first quarter of 2020. The tax equivalent net interest margin for the nine months ended September 30, 2020, was 2.93%, up from 2.90% for the same period in 2019. For the quarter ended September 30, 2019,2020, net interest income on a tax-equivalent basis increased $705,000$1.5 million or 5.4%11.1% compared to the same period in 2018. The tax equivalent2019, with the net interest margin in the third quarter of 2019 was 2.88%, up from 2.83% in the third quarter of 2018; through the first nine months of 2019 the margin is 2.90%, level with the first nine months of 2018.down six basis points to 2.82%.
Non-interest income for the nine months ended September 30, 20192020 was $13.6 million, up $934,000$3.3 million or 10.0%32.5%, from the nine months ended September 30, 2018; growth was2019. Strong demand for both purchase and refinance loans led byto mortgage banking revenue increasing $2.6 million or 209.9%. Revenue at First National Wealth Management increased $253,000 and wealth management income. net gains on securities added $1.2 million, while service charge income and other income were both negatively impacted by lower transaction volume related to COVID-19.
Non-interest expense for the nine months ended September 30, 20192020 was $29.2 million, up $1.2$3.1 million or 4.8%11.7% from the same period 2018. Increasesnine months ended September 30, 2019. The year-to-year change was impacted by charges taken during the first quarter of 2020, to restructure interest rate swap positions, as well as increases in employee expenses occupancy, and other operating expenses were partially offset by savings in FDIC Insurance premiumfurniture and equipment expense.
CreditAsset quality is stable and remains solid.held steady in the third quarter. Non-performing assets stood at 0.84% of total assets as of September 30, 2019 - up from 0.74%0.43% of total assets as of September 30, 20182020, down from 0.84% of total assets as of September 30, 2019 and 0.79%0.82% as of December 31, 2018.2019. Total past-due loans
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were 0.78%0.89% of total loans as of September 30, 2019,2020, down from 1.08%1.16% of total loans as of December 31, 20182019 and 0.83%up from 0.78% as of September 30, 2018.2019.
The provision for loan losses for the first nine months of 20192020 was $875,000, down$4.6 million, up from the $1.3 million$875,000 provisioned in the same period in 2018.2019. Despite year-to-date improvement in non-performing asset levels, continued positive charge-off metrics, and stable levels of past due loans, the uncertainties resulting from COVID-19 led management to provision at elevated levels in the second and third quarters based upon the potential impact of current economic conditions to borrowers. Net loan chargeoffs for the nine months ended September 30, 20192020 were $342,000$817,000 or 0.04%0.08% of average loans on an annualized basis. This was downup from net chargeoffs of $380,000$342,000 or 0.04% of average loans on an annualized basis for the nine months ended September 30, 2018.2019. The allowance for loan losses increased $533,000$3.7 million between December 31, 20182019 and September 30, 2019,2020, and is 0.93%now stands at 1.07% of loans outstanding as of September 30, 2019, in-line with 0.91%2020, up from 0.90% and 0.94%0.93% of loans outstanding at December 31, 20182019 and September 30, 2018,2019, respectively.
The Company's balance sheet continued to expand in the first nine months of 20192020 as total assets have increased $88.7$227.8 million or 4.6%11.0% year-to-date. The loan portfolio increased $25.2$139.6 million or 2.0%10.8% in the nine months ended September 30, 20192020 and $19.9$173.2 million or 1.6%13.7% from a year ago. Loan growth year to date has been centered in commercial real estate and construction loans, with modest growthup $48.3 million, and other commercial loans, up $90.5 million. Other commercial loans include Payroll Protection Program (PPP) loan balances of $97.3 million. Overall loan balances were down $15.0 million in residential mortgagethe third quarter, the result of payoffs of large individual credits in the other commercial loans while municipal loans decreased due to several expected large payoffs.segment of the portfolio. The investment portfolio has increased $49.9$31.5 million year-to-date and increased $63.4$48.1 million or 11.1%7.6% from a year ago. On the liability side of the balance sheet, low-cost deposits have increased $29.2$216.7 million or 3.7%27.1% year-to-date, in-line with our normal seasonal deposit flow pattern.much of the growth attributable to various economic stimulus programs, including proceeds of PPP loans, being deposited back to the Bank. Year-over-year, low-cost deposits increased $46.8$203.4 million or 6.1%25.0%. Local certificates of deposit ("CDs") increased $1.2decreased $29.3 million and wholesale CDs increased $69.2decreased $70.8 million year-to-date. A portion of the increase in wholesale CD's was used to reduce borrowed funds, which are down $28.9 million year to date.
Remaining well capitalized remainsis a top priority for The First Bancorp, Inc. Since December 31, 2008, theThe Company's total risk-based capital ratio has increased from 11.13% towas 15.44% as of September 30, 2019, well2020, solidly above the well-capitalized threshold of 10.0% set by the Federal Deposit Insurance Corporation, the Federal Reserve Board, and the Office of the Comptroller of the Currency.
The Company's operating ratios remain good, with a return on average tangible common equity of 14.67%14.27% for the nine months ended September 30, 20192020 compared to 14.90%14.67% for the same period in 2018.2019. Based upon June 30, 20192020 data, our return


on average tangible common equity was in the top 16%17% of all banks in the UBPR peer group, which had an average return on equity of 11.20%9.79%. Our non-GAAP efficiency ratio continues to be an important component in our overall performance and stood at 51.12%50.00% for the nine months ended September 30, 20192020 compared to 51.86%51.12% for the same period in 2018. As2019. The Company's efficiency ratio was elevated in the first quarter of June 30, 2019,2020 due to charges taken to restructure several interest rate swap positions. In the averageabsence of these charges, the non-GAAP efficiency ratio for our UBPR peer group was 62.40% which put us in the top 12%first nine months of all banks in the UBPR peer group.2020 would have been 46.87%.
Net Interest Income
Total interest income of $58.0 million for the nine months ended September 30, 2020 was a decrease of $1.0 million or 1.7% compared to total interest income of $59.0 million for the same period of 2019. Total interest expense of $13.8 million for the nine months ended September 30, 20192020 was an increasea decrease of $7.3$6.1 million or 14.0% compared to total interest income of $51.7 million for the same period of 2018. Total interest expense of $19.9 million for the nine months ended September 30, 2019 was a increase of $5.4 million or 37.1%30.6% compared to total interest expense for the nine months ended September 30, 2018.2019. As a result, net interest income of $44.2 million for the nine months ended September 30, 2020 was an increase of $5.1 million or 13.0% compared to net interest income of $39.1 million for the nine months ended September 30, 2019 was an increase of $1.9 million or 5.0% compared to net interest income of $37.2 million for the same period ended September 30, 2018.2019. This increase is attributable to growth in earning assets, stable margins, and the recovery of interest on resolved problem loans during the first quarter of 2020. The Company's net interest margin on a tax-equivalent basis for the nine months ended September 30, 20192020 was 2.90%2.93%, up from 2.90% for the same asfirst nine months of 2019. Tax-exempt interest income amounted to $6.5 million for the nine months ended September 30, 2018. Tax-exempt interest income amounted to $6.5 million for the nine months ended September 30, 20192020 and $6.0 million for the same period of 2018.2019.
Total interest income of $19.9 million for the quarter ended September 30, 2019 is a 10.1% increase from total interest
income of $18.1 million in the comparable period of 2018. Total interest expense of $6.7 million for the quarter ended
September 30, 2019 is a 20.3% increase from total interest expense of $5.6 million for the comparable period of 2018. As a
result, net interest income increased 5.5% or $690,000 to $13.2 million for the quarter ended September 30, 2019, from the
$12.5 million reported for the same period in 2018. The Company's net interest margin on a tax-equivalent basis increased
from 2.83% for the quarter ended September 30, 2018 to 2.88% for the quarter ended September 30, 2019. Tax-exempt interest
income amounted to $2.2 million for the quarter ended September 30, 2019 and $2.1 million for the quarter ended September 30, 2018.
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, 20192020 and 2018.2019. Tax-exempt income is calculated on a tax-equivalent basis, using a 21.0% Federal Income Tax rate.
53


For the nine months endedFor the nine months ended
September 30, 2019 September 30, 2018 September 30, 2020September 30, 2019
Dollars in thousands
Amount of
interest
 
Average
Yield/Rate
 Amount of interest 
Average
Yield/Rate
 Dollars in thousandsAmount of
interest
Average
Yield/Rate
Amount of interestAverage
Yield/Rate
Interest on earning assets    Interest on earning assets
Interest-bearing deposits$145
 2.34%$132
 1.95%Interest-bearing deposits$87 0.46 %$145 2.34 %
Investments15,856
 3.42%13,831
 3.22%Investments15,277 3.07 %15,856 3.42 %
Loans held for sale4
 1.77%5
 2.08%Loans held for sale25 1.24 %1.77 %
Loans44,712
 4.76%39,377
 4.37%Loans44,338 4.23 %44,712 4.76 %
Total interest income60,717
 4.31%53,345
 3.99% Total interest income59,727 3.81 %60,717 4.31 %
Interest expense    Interest expense
Deposits17,739
 1.65%11,131
 1.16%Deposits11,613 1.03 %17,739 1.65 %
Other borrowings2,180
 1.55%3,397
 1.69%Other borrowings2,219 1.15 %2,180 1.55 %
Total interest expense19,919
 1.64%14,528
 1.25% Total interest expense13,832 1.04 %19,919 1.64 %
Net interest income$40,798
 $38,817
 Net interest income$45,895 $40,798 
Interest rate spread  2.67%  2.74%Interest rate spread2.77 %2.67 %
Net interest margin  2.90%  2.90%Net interest margin2.93 %2.90 %

For the quarters ended
September 30, 2020September 30, 2019
Dollars in thousandsAmount of
interest
Average
Yield/Rate
Amount of
interest
Average
Yield/Rate
Interest on earning assets
Interest-bearing deposits$8 0.12 %$48 2.09 %
Investments4,898 2.88 %5,356 3.36 %
Loans held for sale19 1.51 %1.66 %
Loans14,167 3.88 %15,070 4.75 %
   Total interest-earning assets19,092 3.52 %20,476 4.27 %
Interest expense
Deposits2,866 0.75 %5,983 1.65 %
Other borrowings895 1.27 %695 1.50 %
   Total interest expense3,761 0.83 %6,678 1.63 %
Net interest income$15,331 $13,798 
Interest rate spread2.69 %2.64 %
Net interest margin2.82 %2.88 %

Interest income includes $788,000 in net origination fees recognized year-to-date attributable to PPP loans; as of September 30, 2020, net unrecognized PPP origination fees totaled $2.7 million. No such fees were recognized in 2019 or in the first quarter of 2020.












54

 For the quarters ended
 September 30, 2019 September 30, 2018 
Dollars in thousands
Amount of
interest
 
Average
Yield/Rate
 
Amount of
interest
 
Average
Yield/Rate
 
Interest on earning assets        
Interest-bearing deposits$48
 2.09%$115
 1.97%
Investments5,356
 3.36%4,700
 3.25%
Loans held for sale2
 1.66%2
 2.31%
Loans15,070
 4.75%13,826
 4.45%
   Total interest-earning assets20,476
 4.27%18,643
 4.04%
Interest expense        
Deposits5,983
 1.65%4,274
 1.30%
Other borrowings695
 1.50%1,276
 1.86%
   Total interest expense6,678
 1.63%5,550
 1.39%
Net interest income$13,798
   $13,093
   
Interest rate spread  2.64%  2.65%
Net interest margin  2.88%  2.83%

The following tables present changes in interest income and expense attributable to changes in interest rates and volume for interest-earning assets and liabilities for the nine months and quarters ended September 30, 20192020 compared to 2018.2019. Tax-exempt income is calculated on a tax-equivalent basis, using a 21% Federal Income Tax rate.
For the nine months ended September 30, 2020 compared to 2019
Dollars in thousandsVolumeRate
Rate/Volume1
Total
Interest on earning assets
Interest-bearing deposits$299 $(117)$(240)$(58)
Investment securities1,128 (1,594)(113)(579)
Loans held for sale32 (1)(10)21 
Loans5,146 (4,950)(570)(374)
   Change in interest income6,605 (6,662)(933)(990)
Interest expense
Deposits911 (6,693)(344)(6,126)
Other borrowings824 (570)(215)39 
   Change in interest expense1,735 (7,263)(559)(6,087)
   Change in net interest income$4,870 $601 $(374)$5,097 
For the nine months ended September 30, 2019 compared to 2018    
Dollars in thousandsVolume Rate 
Rate/Volume1
 Total
Interest on earning assets       
Interest-bearing deposits$(11) $26
 $(2) $13
Investment securities1,213
 747
 65
 2,025
Loans held for sale
 (1) 
 (1)
Loans1,660
 3,527
 148
 5,335
   Change in interest income2,862
 4,299
 211
 7,372
Interest expense       
Deposits1,352
 4,687
 569
 6,608
Other borrowings(1,025) (276) 84
 (1,217)
   Change in interest expense327
 4,411
 653
 5,391
   Change in net interest income$2,535
 $(112) $(442) $1,981
1 Represents the change attributable to a combination of change in rate and change in volume.
For the quarter ended September 30, 2019 compared to 2018    
Dollars in thousandsVolume Rate 
Rate/Volume1
 Total
Interest on earning assets       
Interest-bearing deposits$(70) $7
 $(4) $(67)
Investment securities480
 160
 16
 656
Loans held for sale1
 (1) 
 
Loans297
 927
 20
 1,244
  Change in interest income708
 1,093
 32
 1,833
Interest expense ��     
Deposits439
 1,152
 118
 1,709
Other borrowings(417) (243) 79
 (581)
   Change in interest expense22
 909
 197
 1,128
   Change in net interest income$686
 $184
 $(165) $705

For the quarter ended September 30, 2020 compared to 2019
Dollars in thousandsVolumeRate
Rate/Volume1
Total
Interest on earning assets
Interest-bearing deposits$86 $(45)$(81)$(40)
Investment securities373 (777)(54)(458)
Loans held for sale19 — (2)17 
Loans2,327 (2,798)(432)(903)
  Change in interest income2,805 (3,620)(569)(1,384)
Interest expense
Deposits329 (3,266)(180)(3,117)
Other borrowings370 (111)(59)200 
   Change in interest expense699 (3,377)(239)(2,917)
   Change in net interest income$2,106 $(243)$(330)$1,533 
55



Average Daily Balance Sheets
The following table shows the Company's average daily balance sheets for the nine months and quarters ended September 30, 20192020 and 2018.2019.
For the nine months endedFor the quarters ended
 Dollars in thousandsSeptember 30,
2020
September 30,
2019
September 30,
2020
September 30,
2019
Assets
Cash and cash equivalents$19,336 $16,462 $24,995 $18,325 
Interest-bearing deposits in other banks25,386 8,283 25,558 9,133 
Securities available for sale321,834 324,001 318,080 323,969 
Securities to be held to maturity332,467 287,051 348,185 299,742 
Restricted equity securities, at cost10,252 9,371 10,545 8,982 
Loans held for sale2,701 302 4,998 477 
Loans1,399,539 1,255,089 1,453,139 1,258,738 
Allowance for loan losses(12,850)(11,477)(14,552)(11,597)
     Net loans1,386,689 1,243,612 1,438,587 1,247,141 
Accrued interest receivable9,144 8,105 9,947 7,936 
Premises and equipment20,971 21,529 20,611 20,978 
Other real estate owned527 457 845 282 
Goodwill29,805 29,805 29,805 29,805 
Other assets51,482 45,896 53,131 47,124 
        Total Assets$2,210,594 $1,994,874 $2,285,287 $2,013,894 
Liabilities & Shareholders' Equity
Demand deposits$198,196 $153,824 $234,898 $163,803 
NOW deposits419,334 365,925 452,758 365,352 
Money market deposits165,465 137,988 165,964 138,717 
Savings deposits253,110 237,707 271,035 240,129 
Certificates of deposit673,005 695,504 631,581 697,913 
     Total deposits1,709,110 1,590,948 1,756,236 1,605,914 
Borrowed funds – short term203,385 177,459 225,897 173,318 
Borrowed funds – long term55,097 10,107 55,097 10,107 
Dividends payable813 1,160 848 1,207 
Other liabilities23,586 13,545 26,744 15,308 
     Total Liabilities1,991,991 1,793,219 2,064,822 1,805,854 
Shareholders' Equity:
Common stock109 109 109 109 
Additional paid-in capital64,396 63,138 64,720 63,416 
Retained earnings151,752 138,646 155,087 141,594 
Net unrealized gain (loss) on securities available for sale6,772 (652)6,942 3,169 
Net unrealized loss on securities transferred from available for sale to held to maturity(163)(192)(143)(187)
Net unrealized gain (loss) on cash flow hedging derivative instruments(4,287)569 (6,274)(98)
Net unrealized gain on postretirement benefit costs24 37 24 37 
    Total Shareholders' Equity218,603 201,655 220,465 208,040 
       Total Liabilities & Shareholders' Equity$2,210,594 $1,994,874 $2,285,287 $2,013,894 
56
 For the nine months ended For the quarters ended
 Dollars in thousandsSeptember 30,
2019
 September 30,
2018
 September 30,
2019
 September 30,
2018
Assets       
Cash and cash equivalents$16,462
 $18,443
 $18,325
 $22,244
Interest-bearing deposits in other banks8,283
 9,038
 9,133
 23,145
Securities available for sale324,001
 301,007
 323,969
 303,881
Securities to be held to maturity287,051
 257,798
 299,742
 258,282
Restricted equity securities, at cost9,371
 11,603
 8,982
 11,890
Loans held for sale302
 321
 477
 344
Loans1,255,089
 1,204,327
 1,258,738
 1,232,252
Allowance for loan losses(11,477) (11,207) (11,597) (11,605)
     Net loans1,243,612
 1,193,120
 1,247,141
 1,220,647
Accrued interest receivable8,105
 6,785
 7,936
 6,790
Premises and equipment21,529
 21,952
 20,978
 21,593
Other real estate owned457
 812
 282
 401
Goodwill29,805
 29,805
 29,805
 29,805
Other assets45,896
 43,343
 47,124
 44,215
        Total Assets$1,994,874
 $1,894,027
 $2,013,894
 $1,943,237
        
Liabilities & Shareholders' Equity       
Demand deposits$153,824
 $147,083
 $163,803
 $161,795
NOW deposits365,925
 304,032
 365,352
 309,979
Money market deposits137,988
 116,084
 138,717
 117,973
Savings deposits237,707
 232,314
 240,129
 232,926
Certificates of deposit695,504
 629,064
 697,913
 646,999
     Total deposits1,590,948
 1,428,577
 1,605,914
 1,469,672
Borrowed funds – short term177,459
 203,448
 173,318
 207,513
Borrowed funds – long term10,107
 65,114
 10,107
 65,114
Dividends payable1,160
 1,073
 1,207
 1,131
Other liabilities13,545
 11,683
 15,308
 13,408
     Total Liabilities1,793,219
 1,709,895
 1,805,854
 1,756,838
Shareholders' Equity:       
Common stock109
 108
 109
 109
Additional paid-in capital63,138
 62,095
 63,416
 62,342
Retained earnings138,646
 126,990
 141,594
 129,710
Net unrealized gain (loss) on securities available for sale(652) (6,697) 3,169
 (7,531)
Net unrealized loss on securities transferred from available for sale to held to maturity(192) (184) (187) (191)
Net unrealized gain (loss) on cash flow hedging derivative instruments569
 1,967
 (98) 2,107
Net unrealized gain (loss) on postretirement benefit costs37
 (147) 37
 (147)
    Total Shareholders' Equity201,655
 184,132
 208,040
 186,399
       Total Liabilities & Shareholders' Equity$1,994,874
 $1,894,027
 $2,013,894
 $1,943,237




Non-Interest Income
Non-interest income of $10.3$13.6 million for the nine months ended September 30, 20192020 is an increase of $934,000$3.3 million compared to the same period in 2018, attributable primarily2019. Strong purchase and refinance volume led to mortgage banking revenue increasing $2.6 million or 209.9%. Revenue at First National Wealth Management increased $253,000 and wealth management income.net gains on securities added $1.2 million, while service charge income and other income were both negatively impacted by lower transaction volume related to COVID-19. Non-interest income of $3.5$4.8 million for the quarter ended September 30, 20192020 is an increase of $498,000$1.3 compared to the same period in 2018,2019, due the same reasons mentioned above.primarily to mortgage banking revenue.
Non-Interest Expense
Non-interest expense of $26.2$29.2 million for the nine months ended September 30, 2019 is an increase of 4.8% or $1.2 million compared to non-interest expense of $25.0 million for the same period in 2018. Year-to-year increases in employee expenses, furniture and equipment expenses and other operating expenses were partially offset by savings in FDIC Insurance premium expense. The Company's efficiency ratio stood at 51.12% for the nine months ended September 30, 2019, down from 51.86%2020 is an increase of 11.7% or $3.1 million compared to non-interest expense of $26.2 million for the same period in 2018.2019. The year-to-year change was impacted by charges taken during the first quarter of 2020 to restructure interest rate swap positions, as well as increases in employee expenses and furniture and equipment expense. The Company's non-GAAP efficiency ratio stood at 50.00% for the nine months ended September 30, 2020, down from 51.12% for the same period in 2019. The ratio was elevated in the first quarter of 2020 due to charges taken to restructure several interest rate swap positions. In the absence of these charges, the non-GAAP efficiency ratio for the first nine months of 2020 would have been 46.87%. Non-interest expense of $9.0$9.3 million for the quarter ended September 30, 20192020 is an increase of 10.0%2.6% compared to non-interest expense of $8.2$9.0 million for the same period in 20182019 due to the reasons mentioned above.above along with the application of FDIC assessment credits in third quarter of 2019.
Income Taxes
Income taxes on operating earnings were $3.5$3.8 million for the nine months ended September 30, 2019,2020, up $390,000$362,000 from the same period in 2018.2019.
Investments
The Company's investment portfolio increased by $49.9$31.5 million between December 31, 20182019 and September 30, 2019.2020. As of September 30, 2019,2020, mortgage-backed securities had a carrying value of $337.8$319.8 million and a fair value of $338.3 million.$320.6 million. Of this total, securities with a fair value of $122.8$122.3 million or 36.3%38.1% of the mortgage-backed portfolio were issued by the Government National Mortgage Association and securities with a fair value of $215.4$198.3 million or 63.7%61.9% of the mortgage-backed portfolio were issued by the Federal Home Loan Mortgage Corporation ("Freddie Mac") and the Federal National Mortgage Association ("Fannie Mae").
The Company's investment securities are classified into two categories: securities available for sale and securities to be held to maturity. Securities available for sale consist primarily of debt securities which Management intends to hold for indefinite periods of time. They may be used as part of the Company's funds management strategy, and may be sold in response to changes in interest rates, prepayment risk and liquidity needs, to increase capital ratios, or for other similar reasons. Securities to be held to maturity consist primarily of debt securities that the Company has acquired solely for long-term investment purposes, rather than potential future sale. For securities to be categorized as held to maturity, Management must have the intent and the Company must have the ability to hold such investments until their respective maturity dates. The Company does not hold trading account securities.
All investment securities are managed in accordance with a written investment policy adopted by the Board of Directors. It is the Company's general policy that investments for either portfolio be limited to government debt obligations, time deposits, and corporate bonds or commercial paper with one of the three highest ratings given by a nationally recognized rating agency. The portfolio is currently invested primarily in U.S. Government agency securities and tax-exempt obligations of states and political subdivisions. The individual securities have been selected to enhance the portfolio's overall yield while not materially adding to the Company's level of interest rate risk.
During the third quarter of 2014, the Company transferred securities with a total amortized cost of $89,780,000 and a corresponding fair value of $89,757,000 from available for sale to held to maturity. The net unrealized loss, net of taxes, on these securities at the date of the transfer was $15,000. The net unrealized holding loss at the time of transfer continues to be reported in accumulated other comprehensive income (loss), net of tax and is amortized over the remaining lives of the securities as an adjustment of the yield. The amortization of the net unrealized loss reported in accumulated other comprehensive income (loss) will offset the effect on interest income of the discount for the transferred securities. The remaining unamortized balance of the net unrealized losses for the securities transferred from available for sale to held to maturity was $189,000$139,000 at September 30, 2019.2020. This compares to $182,000 and $189,000, net of taxes, at December 31, 2019 and September 30, 2019, respectively. These securities were transferred as a part of the Company's overall investment and balance sheet strategies.


57



The following table sets forth the Company's investment securities at their carrying amounts as of September 30, 20192020 and 20182019 and December 31, 20182019.
Dollars in thousandsSeptember 30,
2020
December 31,
2019
September 30,
2019
Securities available for sale
U.S. Government-sponsored agencies$27,497 $7,398 $— 
Mortgage-backed securities276,424 326,617 322,190 
State and political subdivisions36,219 26,505 4,608 
$340,140 $360,520 $326,798 
Securities to be held to maturity
U.S. Government-sponsored agencies$26,146 $32,840 $32,840 
Mortgage-backed securities43,414 14,431 15,584 
State and political subdivisions245,152 219,585 236,612 
Corporate securities17,250 14,750 13,750 
$331,962 $281,606 $298,786 
Restricted equity securities
Federal Home Loan Bank Stock$9,508 $7,945 $7,945 
Federal Reserve Bank Stock1,037 1,037 1,037 
$10,545 $8,982 $8,982 
Total securities$682,647 $651,108 $634,566 

.

58


Dollars in thousandsSeptember 30,
2019
 December 31,
2018
 September 30,
2018
Securities available for sale     
U.S. Government-sponsored agencies$
 $5,007
 $4,979
Mortgage-backed securities322,190
 307,693
 292,570
State and political subdivisions4,608
 4,716
 4,638
 $326,798
 $317,416
 $302,187
Securities to be held to maturity     
U.S. Government-sponsored agencies$32,840
 $11,155
 $11,155
Mortgage-backed securities15,584
 18,250
 19,244
State and political subdivisions236,612
 221,958
 222,696
Corporate securities13,750
 4,300
 4,300
 $298,786
 $255,663
 $257,395
Restricted equity securities     
Federal Home Loan Bank Stock$7,945
 $10,549
 $10,549
Federal Reserve Bank Stock1,037
 1,037
 1,037
 $8,982
 $11,586
 $11,586
Total securities$634,566
 $584,665
 $571,168





The following table sets forth yields and contractual maturities of the Company's investment securities as of September 30, 2019.2020. Yields on tax-exempt securities have been computed on a tax-equivalent basis using a tax rate of 21%. Mortgage-backed securities are presented according to their final contractual maturity date, while the calculated yield takes into effect the intermediate cash flows from repayment of principal which results in a much shorter average life.
Available For SaleHeld to Maturity
 Dollars in thousandsFair
Value
Yield to maturityAmortized CostYield to maturity
 U.S. Government-Sponsored Agencies
 Due in 1 year or less$— 0.00 %$— 0.00 %
 Due in 1 to 5 years— 0.00 %— 0.00 %
 Due in 5 to 10 years6,964 1.14 %18,147 2.74 %
 Due after 10 years20,533 2.36 %7,999 2.88 %
  Total27,497 2.05 %26,146 2.78 %
 Mortgage-Backed Securities
 Due in 1 year or less7,159 3.03 %— 0.00 %
 Due in 1 to 5 years24,260 2.47 %7,963 1.76 %
 Due in 5 to 10 years42,412 2.54 %13,149 2.74 %
 Due after 10 years202,593 2.13 %22,302 2.52 %
  Total276,424 2.24 %43,414 2.45 %
 State & Political Subdivisions
 Due in 1 year or less— 0.00 %1,704 5.52 %
 Due in 1 to 5 years— 0.00 %14,632 5.44 %
 Due in 5 to 10 years10,710 4.91 %138,604 4.54 %
 Due after 10 years25,509 4.04 %90,212 4.05 %
  Total36,219 4.30 %245,152 4.42 %
 Corporate Securities
 Due in 1 year or less— 0.00 %750 1.75 %
 Due in 1 to 5 years— 0.00 %10,000 5.43 %
 Due in 5 to 10 years— 0.00 %6,500 4.92 %
 Due after 10 years— 0.00 %— 0.00 %
  Total— 0.00 %17,250 5.08 %
$340,140 2.45 %$331,962 4.07 %

Held To Maturity Sales
 Available For Sale Held to Maturity 
 Dollars in thousands
Fair
Value
 Yield to maturity Amortized Cost Yield to maturity 
 U.S. Government-Sponsored Agencies        
 Due in 1 year or less$
 0.00
%$
 0.00
%
 Due in 1 to 5 years
 0.00
%
 0.00
%
 Due in 5 to 10 years
 0.00
%22,150
 3.55
%
 Due after 10 years
 0.00
%10,690
 3.87
%
  Total
 0.00
%32,840
 3.65
%
 Mortgage-Backed Securities        
 Due in 1 year or less189
 2.89
%25
 0.10
%
 Due in 1 to 5 years36,703
 2.72
%5,393
 2.88
%
 Due in 5 to 10 years88,811
 3.05
%6,731
 3.41
%
 Due after 10 years196,487
 2.76
%3,435
 5.15
%
  Total322,190
 2.84
%15,584
 3.60
%
 State & Political Subdivisions        
 Due in 1 year or less
 0.00
%1,216
 5.47
%
 Due in 1 to 5 years
 0.00
%17,317
 5.73
%
 Due in 5 to 10 years4,608
 4.38
%142,353
 4.63
%
 Due after 10 years
 0.00
%75,726
 4.76
%
  Total4,608
 4.38
%236,612
 4.75
%
 Corporate Securities        
 Due in 1 year or less
 0.00
%
 0.00
%
 Due in 1 to 5 years
 0.00
%750
 1.75
%
 Due in 5 to 10 years
 0.00
%13,000
 5.27
%
 Due after 10 years
 0.00
%
 0.00
%
  Total
 0.00
%13,750
 5.08
%
 $326,798
 0.00
%$298,786
 4.59
%

During the second quarter of 2020, 28 municipal securities were sold that had been designated as Held to Maturity. Proceeds from these sales totaled $8.6 million against a cumulative book value of $8.3 million resulting in a net realized gain of $268,000. The potential economic impact of COVID-19 is considered to be an isolated and unusual event that could not be reasonably anticipated as outlined in ASC Section 320-10-25. Management conducted a review of its municipal bond portfolio in conjunction with risk mitigation efforts related to the onset of the COVID-19 virus; the intent of the review was to identify investment exposures with lower relative credit ratings, locales with perceived above average economic risk, municipal entities with reliance upon sales tax or income tax revenue, or any combination of these factors. Each of the sold positions met one or more of the criteria.
Impaired Securities
The securities portfolio contains certain securities where the amortized cost of which exceeds fair value, which at September 30, 20192020 amounted to $754,000,$1.4 million, or 0.13%0.21% of the amortized cost of the total securities portfolio. At December 31, 20182019, this amount was $13.1$1.1 million,, or 2.30%0.18% of the amortized cost of total securities portfolio. As a part of the Company's ongoing security monitoring process, the Company identifies securities in an unrealized loss position that could potentially be other-than-temporarily impaired. If a decline in the fair value of a debt security is judged to be other-than-temporary, the decline related to credit loss is recorded in net realized securities losses while the decline attributable to other factors is recorded in other comprehensive income or loss.
The Company's evaluation of securities for impairment is a quantitative and qualitative process intended to determine whether declines in the fair value of investment securities should be recognized in current period earnings. The primary factors
59


considered in evaluating whether a decline in the fair value of securities is other-than-temporary include: (a) the length of time and extent to which the fair value has been less than cost or amortized cost and the expected recovery period of the security, (b) the financial condition, credit rating and future prospects of the issuer, (c) whether the debtor is current on contractually obligated interest and principal payments, (d) the volatility of the securities market price, (e) the intent and ability of the Company to retain the investment for a period of time sufficient to allow for recovery, which may be at maturity, and (f) any other information and observable data considered relevant in determining whether other-than-temporary impairment has occurred.
The Company's best estimate of cash flows uses severe economic recession assumptions due to market uncertainty. The Company's assumptions include but are not limited to delinquencies, foreclosure levels and constant default rates on the


underlying collateral, loss severity ratios, and constant prepayment rates. If the Company does not expect to receive 100% of future contractual principal and interest, an other-than-temporary impairment charge is recognized. 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 September 30, 2019,2020, the Company had temporarily impaired securities with a fair value of $58.2$120.1 million and unrealized losses of $754,000,$1.4 million, as identified in the table below. Securities in a continuous unrealized loss position more than twelve months amounted to $22.9$4.2 million as of September 30, 2019,2020, compared with $240.9$19.0 million at December 31, 2018.2019. The Company has concluded that these securities were not other-than-temporarily impaired. This conclusion was based on the issuer's continued satisfaction of the securities obligations in accordance with their contractual terms and the expectation that the issuer will continue to do so, Management's intent and ability to hold these securities for a period of time sufficient to allow for any anticipated recovery in fair value which may be at maturity, the expectation that the Company will receive 100% of future contractual cash flows, as well as the evaluation of the fundamentals of the issuer's financial condition and other objective evidence. The following table summarizes temporarily impaired securities and their approximate fair values at September 30, 2019:2020:
Less than 12 months12 months or moreTotal
Dollars in thousandsFair Value (Estimated)Unrealized
Losses
Fair Value (EstimatedUnrealized
Losses
Fair Value (EstimatedUnrealized
Losses
U.S. Government-sponsored agencies$16,817 $(228)$— $— $16,817 $(228)
Mortgage-backed securities79,816 (654)4,216 (114)84,032 (768)
State and political subdivisions19,201 (361)�� — 19,201 (361)
$115,834 $(1,243)$4,216 $(114)$120,050 $(1,357)
 Less than 12 months 12 months or more Total
Dollars in thousands
Fair
Value (Estimated)
 
Unrealized
Losses
 
Fair
Value (Estimated)
 
Unrealized
Losses
 
Fair
Value (Estimated)
 
Unrealized
Losses
Mortgage-backed securities$30,249
 $(233) $22,569
 $(473) $52,818
 $(706)
State and political subdivisions5,073
 (42) 306
 (6) 5,379
 (48)
 $35,322
 $(275) $22,875
 $(479) $58,197
 $(754)

For securities with unrealized losses, the following information was considered in determining that the securities were not other-than-temporarily impaired:
Securities issued by U.S. Government-sponsored agencies and enterprises. As of September 30, 2019,2020, there were no$228,000 unrealized losses on these securities compared to $472,000$128,000 unrealized losses as of December 31, 2018.2019. All of these securities were credit rated "AAA" or "AA+" by the major credit rating agencies. Management believes that securities issued by U.S. Government-sponsored agencies and enterprises have minimal credit risk, as these agencies and enterprises play a vital role in the nation's financial markets and does not consider these securities to be other-than-temporarily impaired at September 30, 2019.2020.
Mortgage-backed securities issued by U.S. Government agencies and U.S. Government-sponsored enterprises. As of September 30, 2019,2020, there were $706,000$768,000 of unrealized losses on these securities compared with $7.0 million$849,000 at December 31, 2018.2019. All of these securities were credit rated "AAA" or "AA+" by the major credit rating agencies. Management believes that securities issued by U.S. Government agencies bear no credit risk because they are backed by the full faith and credit of the United States and that securities issued by U.S. 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 September 30, 20192020 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, 2019.2020. The Company also has the ability and intent to hold these securities until a recovery of their amortized cost, which may be at maturity.
Obligations of state and political subdivisions. As of September 30, 2019,2020, there were $48,000$361,000 of unrealized losses on these securities compared to $5.7 million$109,000 at December 31, 2018.2019. Municipal securities are supported by the general taxing authority of the municipality and, in the cases of school districts, are generally supported by state aid. At September 30, 2019,2020, all municipal bond issuers were current on contractually obligated interest and principal payments. The Company attributes the unrealized
60


losses at September 30, 20192020 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, 2019. In the first quarter of 2019 one issuer of securities held in the portfolio was downgraded by a rating agency to less than investment grade. These securities totaled approximately 0.13% of overall state and municipal security holdings and were sold during the third quarter. The Company has the ability and intent to hold its impaired securities until a recovery of their amortized cost, which may be at maturity.2020.
Corporate securities. As of September 30, 2020 and December 31, 2019, there were no of unrealized losses on these securities compared to none at December 31, 2018.securities. Corporate securities are dependent on the operating performance of the issuers. At September 30, 2019,2020, all corporate bond issuers were current on contractually obligated interest and principal payments.






Federal Home Loan Bank Stock
The Bank is a member of the Federal Home Loan Bank ("FHLB") of Boston, a cooperatively owned wholesale bank for housing and finance in the six New England States. As a requirement of membership in the FHLB, the Bank must own a minimum required amount of FHLB stock, calculated periodically based primarily on its level of borrowings from the FHLB. The Bank uses the FHLB for much of its wholesale funding needs. As of September 30, 2019, 2018 and December 31, 2018,2020, the Bank's investment in FHLB stock totaled $9.5 million. This compares to $7.9 million $10.5 millionas of December 31, 2019 and $10.5 million, respectively.September 30, 2019. FHLB stock is a non-marketable equity security and therefore is reported at cost, which equals par value. The Company periodically evaluates its investment in FHLB stocksubject to adjustments for impairment basedany observable market transactions on among other factors, the capital adequacysame or similar instruments of the FHLB and its overall financial condition.investee. No impairment losses have been recorded through September 30, 2019.2020. The Company will continue to monitor its investment in FHLB stock.
Loans Held for Sale
Loans held for sale are carried at the lower of cost or market value. As of September 30, 2019,2020, the Bank had $852,000$6.4 million in loans held for sale. This compares to no$154,000 loans held for sale at December 31, 20182019 and $1.1 million in$852,000 loans held for sale at September 30, 2018.2019. The Bank participates in FHLB's Mortgage Partnership Finance Program ("MPF"), selling loans with recourse. The volume of loans sold to date through the MPF program is de minimis; therefore, there was minimum impact on the reserve.
Loans
The loan portfolio increased during the first nine months of 2019,2020, with total loans at $1.26$1.44 billion at September 30, 2019,2020, up $25.2$139.6 million or 2.0%10.8% from total loans of $1.24$1.30 billion at December 31, 2018.2019. Commercial loans increased $30.3$138.8 million or 5.3%22.0% between December 31, 20182019 and September 30, 2019,2020, municipal loans decreased $14.6increased $2.8 million or 28.6%6.8%, residential term loans increased $16.3$5.2 million and home equity lines of credit decreased $4.3$9.4 million. Loans made under the U.S. Small Business Administration's Payroll Protection Program (PPP) added $96.0 million to commercial loans in the second quarter of 2020, and $1.3 million in the third quarter.
Commercial loans are comprised of three major classes: commercial real estate loans, commercial construction loans and other commercial loans.
Commercial real estate loans consist of mortgage loans to finance investments in real property such as multi-family residential, commercial/retail, office, industrial, hotels, educational and other specific or mixed use properties. Commercial real estate loans are typically written with amortizing payment structures. Collateral values are determined based on appraisals and evaluations in accordance with established policy and regulatory guidelines. Commercial real estate loans typically have a loan-to-value ratio of up to 80% based upon current valuation information at the time the loan is made. Commercial real estate loans are primarily paid by the cash flow generated from the real property, such as operating leases, rents, or other operating cash flows from the borrower.
Commercial construction loans consist of loans to finance construction in a mix of owner- and non-owner occupied commercial real estate properties. Commercial construction loans typically have maturitiesa construction phase of less than two years.years, followed by a repayment phase. Payment structures during the construction period are typically on an interest only basis, although principal payments may be established depending on the type of construction project being financed. During the construction phase, commercial construction loans are primarily paid by cash flow generated from the construction project or other operating cash flows from the borrower or guarantors, if applicable. At the end of the construction period, loan repayment typically comes from a third party source in the event that the Company will not be providing permanent term financing. Collateral valuation and loan-to-value guidelines follow those for commercial real estate loans.
Other commercial loans consist of revolving and term loan obligations extended to business and corporate enterprises for the purpose of financing working capital and or capital investment. Collateral generally consists of pledges of business assets including, but not limited to, accounts receivable, inventory, plant and equipment, and/or real estate, if applicable. Commercial loans are primarily paid by the operating cash flow of the borrower. Commercial loans may be secured or unsecured.
Municipal loans are comprised of loans to municipalities in Maine for capitalized expenditures, construction projects or tax-anticipation notes. All municipal loans are considered general obligations of the municipality and are collateralized by the taxing ability of the municipality for repayment of debt.
Residential loans are comprised of two classes: term loans and construction loans.
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Residential term loans consist of residential real estate loans held in the Company's loan portfolio made to borrowers who demonstrate the ability to make scheduled payments with full consideration to underwriting factors. Borrower qualifications include favorable credit history combined with supportive income requirements and loan-to-value ratios within established policy and regulatory guidelines. Collateral values are determined based on appraisals and evaluations in accordance with established policy and regulatory guidelines. Residential loans typically have a loan-to-value ratio of up to 80% based on appraisal information at the time the loan is made. Collateral consists of mortgage liens on one- to four-family residential properties. Loans are offered with fixed or adjustable rates with amortization terms of up to thirty years.


Residential construction loans typically consist of loans for the purpose of constructing single family residences to be owned and occupied by the borrower. Borrower qualifications include favorable credit history combined with supportive income requirements and loan-to-value ratios within established policy and regulatory guidelines. Residential construction loans normally have construction terms of one year or less and payment during the construction term is typically on an interest only basis from sources including interest reserves, borrower liquidity and/or income. Residential construction loans will typically convert to permanent financing from the Company or have another financing commitment in place from an acceptable mortgage lender. Collateral valuation and loan-to-value guidelines are consistent with those for residential term loans.
Home equity lines of credit are made to qualified individuals and are secured by senior or junior mortgage liens on owner-occupied one- to four-family homes, condominiums, or vacation homes. The home equity line of credit typically has a variable interest rate and is billed as interest-only payments during the draw period. At the end of the draw period, the home equity line of credit is billed as a percentage of the principal balance plus all accrued interest. Loan maturities are normally 300 months. Borrower qualifications include favorable credit history combined with supportive income requirements and combined loan-to-value ratios usually not exceeding 80% inclusive of priority liens. Collateral valuation guidelines follow those for residential real estate loans.
Consumer loan products including personal lines of credit and amortizing loans made to qualified individuals for various purposes such as auto, recreational vehicles, debt consolidation, personal expenses or overdraft protection. Borrower qualifications include favorable credit history combined with supportive income and collateral requirements within established policy guidelines. Consumer loans may be secured or unsecured.
Construction loans, both commercial and residential, at 27.6%33.4% of capital are well under the regulatory guidance of 100.0% of capital at September 30, 2019.2020. Construction loans and non-owner-occupied commercial real estate loans are at 123.7%129.4% of total capital, well under the regulatory guidance of 300.0% of capital at September 30, 2019.2020.
The following table summarizes the loan portfolio, by class, at September 30, 20192020 and 20182019 and December 31, 20182019.
Dollars in thousandsSeptember 30, 2020December 31, 2019September 30, 2019
Commercial
   Real estate$407,128 28.3 %$372,810 28.7 %$368,165 29.1 %
   Construction52,038 3.6 %38,084 3.0 %37,242 2.9 %
   Other309,297 21.5 %218,773 16.9 %201,859 16.0 %
Municipal44,110 3.1 %41,288 3.2 %36,522 2.9 %
Residential
   Term497,667 34.6 %492,455 37.9 %485,490 38.4 %
   Construction16,101 1.2 %14,813 1.2 %14,118 1.1 %
Home equity line of credit82,982 5.8 %92,349 7.1 %94,144 7.5 %
Consumer27,323 1.9 %26,503 2.0 %25,919 2.1 %
Total loans$1,436,646 100.0 %$1,297,075 100.0 %$1,263,459 100.0 %

.








62


Dollars in thousandsSeptember 30, 2019 December 31, 2018 September 30, 2018 
Commercial            
   Real estate$368,165
 29.1%$353,243
 28.5%$366,390
 29.5%
   Construction37,242
 2.9%27,304
 2.2%23,889
 1.9%
   Other201,859
 16.0%196,391
 15.9%188,128
 15.1%
Municipal36,522
 2.9%51,128
 4.1%56,704
 4.6%
Residential            
   Term485,490
 38.4%469,145
 37.9%459,449
 36.8%
   Construction14,118
 1.1%17,743
 1.4%18,166
 1.5%
Home equity line of credit94,144
 7.5%98,469
 8.0%105,213
 8.5%
Consumer25,919
 2.1%24,860
 2.0%25,619
 2.1%
Total loans$1,263,459
 100.0%$1,238,283
 100.0%$1,243,558
 100.0%


















The following table sets forth certain information regarding the contractual maturities of the Bank's loan portfolio as of September 30, 2019.2020.
Dollars in thousands< 1 Year1 - 5 Years5 - 10 Years> 10 YearsTotal
Commercial
   Real estate$909 $22,798 $41,625 $341,796 $407,128 
   Construction423 7,396 2,632 41,587 52,038 
   Other1,095 169,112 74,046 65,044 309,297 
Municipal— 22,922 11,158 10,030 44,110 
Residential
   Term100 9,380 45,879 442,308 497,667 
   Construction— 319 — 15,782 16,101 
Home equity line of credit— 631 506 81,845 82,982 
Consumer7,443 6,655 7,227 5,998 27,323 
Total loans$9,970 $239,213 $183,073 $1,004,390 $1,436,646 
Dollars in thousands< 1 Year 1 - 5 Years 5 - 10 Years > 10 Years Total
Commercial         
   Real estate$863
 $21,693
 $36,660
 $308,949
 $368,165
   Construction279
 6,409
 2,283
 28,271
 37,242
   Other689
 88,390
 51,497
 61,283
 201,859
Municipal
 16,667
 11,731
 8,124
 36,522
Residential         
   Term
 8,534
 27,194
 449,762
 485,490
   Construction
 719
 
 13,399
 14,118
Home equity line of credit
 642
 812
 92,690
 94,144
Consumer7,925
 6,265
 4,053
 7,676
 25,919
Total loans$9,756
 $149,319
 $134,230
 $970,154
 $1,263,459
The following table provides a listing of loans by class, between variable and fixed rates as of September 30, 2019.2020.
Fixed-RateAdjustable-RateTotal
Dollars in thousandsAmount% of totalAmount% of totalAmount% of total
Commercial
   Real estate$284,566 19.8 %$122,562 8.5 %$407,128 28.3 %
   Construction48,235 3.3 %3,803 0.3 %52,038 3.6 %
   Other260,539 18.1 %48,758 3.4 %309,297 21.5 %
Municipal43,224 3.0 %886 0.1 %44,110 3.1 %
Residential
   Term421,326 29.3 %76,341 5.3 %497,667 34.6 %
   Construction16,101 1.1 %— 0.1 %16,101 1.2 %
Home equity line of credit1,904 0.1 %81,078 5.7 %82,982 5.8 %
Consumer20,375 1.4 %6,948 0.5 %27,323 1.9 %
Total loans$1,096,270 76.1 %$340,376 23.9 %$1,436,646 100.0 %
 Fixed-Rate Adjustable-Rate Total 
Dollars in thousandsAmount % of total Amount % of total Amount % of total 
Commercial            
   Real estate$98,120
 7.8%$270,045
 21.3%$368,165
 29.1%
   Construction22,572
 1.7%14,670
 1.2%37,242
 2.9%
   Other113,951
 9.0%87,908
 7.0%201,859
 16.0%
Municipal35,354
 2.8%1,168
 0.1%36,522
 2.9%
Residential            
   Term371,346
 29.4%114,144
 9.0%485,490
 38.4%
   Construction14,118
 1.0%0
 0.1%14,118
 1.1%
Home equity line of credit1,422
 0.1%92,722
 7.4%94,144
 7.5%
Consumer19,101
 1.6%6,818
 0.5%25,919
 2.1%
Total loans$675,984
 53.4%$587,475
 46.6%$1,263,459
 100.0%

Loan Concentrations
As of September 30, 2019,2020, the Bank did not have any concentration of loans in one particular industry that exceeded 10% of its total loan portfolio.

Credit Risk Management and Allowance for Loan Losses
Credit risk is the risk of loss arising from the inability of a borrower to meet its obligations. We manage credit risk by evaluating the risk profile of the borrower, repayment sources, the nature of the underlying collateral, and other support given current events, conditions, and expectations. We attempt to manage the risk characteristics of our loan portfolio through various control processes, such as credit evaluation of borrowers, establishment of lending limits, and application of lending procedures, including the holding of adequate collateral and the maintenance of compensating balances. However, we seek to rely primarily on the cash flow of our borrowers as the principal source of repayment. Although credit policies and evaluation processes are designed to minimize our risk, Management recognizes that loan losses will occur and the amount of these losses will fluctuate depending on the risk characteristics of our loan portfolio, as well as general and regional economic conditions.
We provide for loan losses through the establishment of an allowance for loan losses which represents an estimated reserve for existing losses in the loan portfolio. We deploy a systematic methodology for determining our allowance that includes a quarterly review process, risk rating, and adjustment to our allowance. We classify our portfolios as either commercial or residential and consumer and monitor credit risk separately as discussed below. We evaluate the appropriateness of our allowance continually based on a review of all significant loans, with a particular emphasis on nonaccruing, past due, and other loans that we believe require special attention.

63


The allowance consists of four elements: (1) specific reserves for loans evaluated individually for impairment; (2) general reserves for types or portfolios of loans based on historical loan loss experience; (3) qualitative reserves judgmentally adjusted for local and national economic conditions, concentrations, portfolio composition, volume and severity of delinquencies and nonaccrual loans, trends of criticized and classified loans, changes in credit policies, and underwriting standards, credit administration practices, and other factors as applicable; and (4) unallocated reserves. All outstanding loans are considered in evaluating the appropriateness of the allowance.
Appropriateness of the allowance for loan losses is determined using a consistent, systematic methodology, which analyzes the risk inherent in the loan portfolio. In addition to evaluating the collectabilitycollectibility of specific loans when determining the appropriateness of the allowance for loan losses, Management also takes into consideration other factors such as changes in the mix and size of the loan portfolio, historic loss experience, the amount of delinquencies and loans adversely classified, economic trends, changes in credit policies, and experience, ability and depth of lending management. The appropriateness of the allowance for loan losses is assessed by an allocation process whereby specific reserve allocations are made against certain adversely classified loans, and general reserve allocations are made against segments of the loan portfolio which have similar attributes. The Company's historical loss experience, industry trends, and the impact of the local and regional economy on the Company's borrowers, are considered by Management in determining the appropriateness of the allowance for loan losses.
The allowance for loan losses is increased by provisions charged against current earnings. Loan losses are charged against the allowance when Management believes that the collectibility of the loan principal is unlikely. Recoveries on loans previously charged off are credited to the allowance. While Management uses available information to assess possible losses on loans, future additions to the allowance may be necessary based on increases in non-performing loans, changes in economic conditions, growth in loan portfolios, or for other reasons. Any future additions to the allowance would be recognized in the period in which they were determined to be necessary. In addition, various regulatory agencies periodically review the Company's allowance for loan losses as an integral part of their examination process. Such agencies may require the Company to record additions to the allowance based on judgments different from those of Management.

Commercial
Our commercial portfolio includes all secured and unsecured loans to borrowers for commercial purposes, including commercial lines of credit and commercial real estate. Our process for evaluating commercial loans includes performing updates on loans that we have rated for credit risk. Our non-performing commercial loans are generally reviewed individually to determine impairment, accrual status, and the need for specific reserves. Our methodology incorporates a variety of risk considerations, both qualitative and quantitative. Quantitative factors include our historical loss experience by loan type, collateral values, financial condition of borrowers, and other factors. Qualitative factors applied to the portfolio or segments of the portfolio may include judgments concerning general economic conditions that may affect credit quality, credit concentrations, the pace of portfolio growth, the direction of risk rating movements, policy exception levels, and delinquency levels; these qualitative factors are also considered in connection with the unallocated portion of our allowance for loan losses.
The process of establishing the allowance with respect to the commercial loan portfolio begins when a Loan Officer or Senior Officer (or designate) initially assigns each loan a risk rating, using established credit criteria. Approximately 60% of a trailing four quarter average gross commercial portfolio is subject to review and validation annually by an independent consulting firm. Additionally, commercial loan relationships with exposure greater than or equal to $500,000 are subject to review annually by the Company's internal credit review function. Our methodology employs Management's judgment as to the level of losses on existing loans based on our internal review of the loan portfolio, including an analysis of the borrowers' current financial position, and the consideration of current and anticipated economic conditions and their potential effects on specific borrowers and or lines of business. In determining our ability to collect certain loans, we also consider the fair value of any underlying collateral. We also evaluate credit risk concentrations, including trends in large dollar exposures to related borrowers, industry and geographic concentrations, and economic and environmental factors.

Residential, Home Equity and Consumer
Consumer, home equity and residential mortgage loans are generally segregated into homogeneous pools with similar risk characteristics. Trends and current conditions in these pools are analyzed and historical loss experience is adjusted accordingly. Quantitative and qualitative adjustment factors for the consumer, home equity and residential mortgage portfolios are consistent with those for the commercial portfolios. Certain loans in the consumer and residential portfolios identified as having the potential for further deterioration are analyzed individually to confirm the appropriate risk status and accrual status, and to determine the need for a specific reserve. Consumer loans that are greater than 120 days past due are generally charged off. Residential loans and home equity lines of credit that are greater than 90 days past due are evaluated for collateral adequacy and if deficient are placed on non-accrual status.






Unallocated
The unallocated portion of the allowance is intended to provide for losses that are not identified when establishing the specific and general portions of the allowance and is based upon Management's evaluation of various conditions that are not directly
64


measured in the determination of the portfolio and loan specific allowances. Such conditions may include general economic and business conditions affecting our lending area, credit quality trends (including trends in delinquencies and nonperforming loans expected to result from existing conditions), loan volumes and concentrations, duration of the current business cycle, bank regulatory examination results, findings of external loan review examiners, and Management's judgment with respect to various other conditions including loan administration and management and the quality of risk identification systems. Management reviews these conditions quarterly. We have risk management practices designed to ensure timely identification of changes in loan risk profiles; however, undetected losses may exist inherently within the loan portfolio. 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. 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.

The allowance for loan losses includes reserve amounts assigned to individual loans on the basis of loan impairment. Certain loans are evaluated individually and are judged to be impaired when Management believes it is probable that the Company will not collect all of the contractual interest and principal payments as scheduled in the loan agreement. Under this method, loans are selected for evaluation based on non-accrual and/or troubled debt restructure status. A specific reserve is allocated to an individual loan when that loan has been deemed impaired and when the amount of a probable loss is estimable on the basis of its collateral value, the present value of anticipated future cash flows, or its net realizable value. At September 30, 2019,2020, impaired loans with specific reserves totaled $11.5$5.2 million and the amount of such reserves was $2.1 million.$890,000. This compares to impaired loans with specific reserves of $10.7$11.1 million at December 31, 20182019 and the amount of such reserves was $2.3$2.2 million. Several impaired loans at December 31, 2019 were paid off or otherwise resolved in the nine months ended September 30, 2020, accounting for the $5.9 million. decrease in impaired loans and the $1.3 million reduction in specific reserves.
All of these analyses are reviewed and discussed by the Directors' Loan Committee, and recommendations from these processes provide Management and the Board of Directors with independent information on loan portfolio condition. Our total allowance at September 30, 20192020 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 September 30, 20192020 and 20182019 and December 31, 2018.2019. The percentages are the portion of each loan class to total loans.
Dollars in thousandsSeptember 30, 2020December 31, 2019September 30, 2019
Commercial
   Real estate$4,761 28.3 %$3,742 28.7 %$3,795 29.1 %
   Construction607 3.6 %365 3.0 %353 2.9 %
   Other3,642 21.5 %3,329 16.9 %3,220 16.0 %
Municipal139 3.1 %27 3.2 %26 2.9 %
Residential
   Term2,516 34.6 %1,024 37.9 %1,137 38.4 %
   Construction81 1.2 %25 1.2 %23 1.1 %
Home equity line of credit1,457 5.8 %1,078 7.1 %824 7.5 %
Consumer592 1.9 %867 2.0 %680 2.1 %
Unallocated1,576 — %1,182 — %1,707 — %
Total$15,371 100.0 %$11,639 100.0 %$11,765 100.0 %

Dollars in thousandsSeptember 30, 2019 December 31, 2018 September 30, 2018 
Commercial            
   Real estate$3,795
 29.1%$3,567
 28.5%$3,589
 29.5%
   Construction353
 2.9%255
 2.2%214
 1.9%
   Other3,220
 16.0%3,541
 15.9%3,591
 15.1%
Municipal26
 2.9%24
 4.1%23
 4.6%
Residential            
   Term1,137
 38.4%1,235
 37.9%1,092
 36.8%
   Construction23
 1.1%34
 1.4%36
 1.5%
Home equity line of credit824
 7.5%730
 8.0%719
 8.5%
Consumer680
 2.1%630
 2.0%740
 2.1%
Unallocated1,707
 %1,216
 %1,678
 %
Total$11,765
 100.0%$11,232
 100.0%$11,682
 100.0%

The allowance for loan losses totaled $11.8$15.4 million at September 30, 2019,2020, compared to $11.2$11.6 million as of December 31, 20182019 and $11.7$11.8 million as of September 30, 2018.2019. Management's ongoing application of methodologies to establish the allowance include an evaluation of impaired loans for specific reserves. These specific reserves decreased $248,000$1.3 million in the first nine months of 20192020 from $2.3$2.2 million at December 31, 20182019 to $2.1 million$890,000 at September 30, 2019.2020. The specific loans that make up those categories change from period to period. Impairment on those loans, which would be reflected in the allowance for loan losses, might or might not exist, depending on the specific circumstances of each loan. The portion of the reserve based
65


upon homogeneous pools of loans decreased by $148,000$157,000 in the first nine months of 2019.2020. The portion of the reserve based on qualitative factors increased $438,000$4.8 million in the first nine months of 20192020 due to a mix of factors. These included initial impacts of the COVID-19 pandemic on various macroeconomic measures used in the qualitative model, as well as top down and unit level analysis of the loan portfolio for factors such as COVID-19 related modifications and industry segments particularly vulnerable to social distancing. Unallocated reserves of $1.2 million, or 10.2% of the total reserve at December 31, 2019, increased to $1.6 million, or 10.3% as of September 30, 2020. After consideration of the shifts in specific, pooled and qualitative reserves, Management determined that the change in unallocated reserves from $1.2 million,


or 10.8%portion of the total reserve at December 31, 2018, to $1.8 million, or 14.5% as of September 30, 2019, supported2020 adequately addresses general imprecision related to loan portfolio growth, and includes consideration of general economic and business conditions affecting our lending area, credit quality trends (including trends in delinquencies and nonperforming loans expected to result from existing conditions), loan volumes and concentrations, duration of the current business cycle, bank regulatory examination results, findings of external loan review examiners, and Management's judgmentalong with respect to various other conditions including loan administration and management and the quality of risk identification systems. Consequently, there maybe underlying credit risks that have not yet surfacedcaptured in the loan specific or qualitative metrics the Company uses to estimate its allowance for loan losses that are reflected in the unallocated component.allowance.

A breakdown of the allowance for loan losses as of September 30, 2019,2020, by loan class and allowance element, is presented in the following table:
 Dollars in thousands
Specific Reserves on Loans Evaluated Individually for ImpairmentGeneral Reserves on Loans Based on Historical Loss ExperienceReserves for Qualitative FactorsUnallocated
Reserves
Total Reserves
Commercial
   Real estate$135 $686 $3,940 $— $4,761 
   Construction19 87 501 — 607 
   Other128 521 2,993 — 3,642 
Municipal— — 139 — 139 
Residential
   Term204 275 2,037 — 2,516 
   Construction— 10 71 — 81 
Home equity line of credit403 79 975 — 1,457 
Consumer168 423 — 592 
Unallocated— — — 1,576 1,576 
$890 $1,826 $11,079 $1,576 $15,371 

 Dollars in thousands
Specific Reserves on Loans Evaluated Individually for Impairment General Reserves on Loans Based on Historical Loss Experience Reserves for Qualitative Factors 
Unallocated
Reserves
 Total Reserves
Commercial         
   Real estate$258
 $792
 $2,745
 $
 $3,795
   Construction
 79
 274
 
 353
   Other1,275
 436
 1,509
 
 3,220
Municipal
 
 26
 
 26
Residential         
   Term337
 185
 615
 
 1,137
   Construction
 5
 18
 
 23
Home equity line of credit184
 155
 485
 
 824
Consumer6
 285
 389
 
 680
Unallocated
 
 
 1,707
 1,707
 $2,060
 $1,937
 $6,061
 $1,707
 $11,765
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 $875,000$4.6 million for the first nine months of 2019 and $1.3 million the first nine months of 2018.2020 and $875,000 the first nine months of 2019. Net chargeoffscharge-offs were $818,000 in the first nine months of 2020, up from $342,000 in the first nine months of 2019, down from $380,000 in the first nine months of 2018.2019. Our allowance as a percentage of outstanding loans was 0.93% as of September 30, 2019, slightly up from 0.91% as of December 31, 2018, and down from 0.94%1.07% as of September 30, 2018.2020, up from 0.90% as of December 31, 2019, and 0.93% as of September 30, 2019.
66




The following table summarizes the activities in our allowance for loan losses for the nine months ended September 30, 20192020 and 20182019 and for the year ended December 31, 2018:2019:
Dollars in thousandsSeptember 30, 2019 December 31, 2018 September 30, 2018 Dollars in thousandsSeptember 30, 2020December 31, 2019September 30, 2019
Balance at the beginning of year$11,232
 $10,729
 $10,729
 Balance at the beginning of year$11,639 $11,232 $11,232 
Loans charged off:      Loans charged off:
Commercial      Commercial
Real estate53
 168
 
  Real estate532 89 53 
Construction
 
 
  Construction — — 
Other123
 423
 68
  Other24 179 123 
Municipal
 
 
 Municipal — — 
Residential      Residential
Term93
 213
 212
  Term46 445 93 
Construction
 
 
  Construction — — 
Home equity line of credit38
 121
 121
 Home equity line of credit153 69 38 
Consumer235
 348
 195
 Consumer238 338 235 
Total542
 1,273
 596
 Total993 1,120 542 
Recoveries on loans previously charged off      Recoveries on loans previously charged off
Commercial      Commercial
Real estate15
 52
 52
  Real estate 15 15 
Construction
 
 
  Construction — — 
Other70
 40
 33
  Other24 73 70 
Municipal
 
 
 Municipal — — 
Residential      Residential
Term10
 64
 45
  Term31 57 10 
Construction
 
 
  Construction — — 
Home equity line of credit3
 24
 13
 Home equity line of credit20 
Consumer102
 96
 73
 Consumer100 128 102 
Total200
 276
 216
 Total175 277 200 
Net loans charged off342
 997
 380
 Net loans charged off818 843 342 
Provision for loan losses875
 1,500
 1,333
 Provision for loan losses4,550 1,250 875 
Balance at end of period$11,765
 $11,232
 $11,682
 Balance at end of period$15,371 $11,639 $11,765 
Ratio of net loans charged off to average loans outstanding1
0.04
%0.08
%0.04
%
Ratio of net loans charged off to average loans outstanding1
0.08 %0.07 %0.04 %
Ratio of allowance for loan losses to total loans outstanding0.93
%0.91
%0.94
%Ratio of allowance for loan losses to total loans outstanding1.07 %0.90 %0.93 %
1 Annualized using a 366-day basis for 2020 and a 365-day basis for both 2019 and 2018.2019.

In Management's opinion, the level of the provision for loan losses is directionally consistent with the overall credit quality of our loan portfolio and corresponding levels of nonperforming loans, as well as with the performance of the national and local economies.economies, including effects of the COVID-19 pandemic.

COVID-19 Impact on Loan Portfolio
The Company is actively working with borrowers impacted by the COVID-19 outbreak. As of September 30, 2020, a total of 966 loan modification requests for interest-only payments or deferred payments have been completed in conformance with the Interagency Statement on Loan Modifications and Reporting issued March 23, 2020 and/or Section 4013 of the Coronavirus Aid, Relief, and Economic Security (CARES) Act, representing $279.7 million in loan balances, or approximately 20.8% of the overall loan portfolio. One of these modifications of a de minimis amount has been classified as a Troubled Debt
67


Restructure since being modified. So long as modified terms are met, loans in an active modification are not included in past due loan totals and continue to accrue interest.
As of September 30, 2020, loans totaling $81.0 remained in their original modification or had had a subsequent modification, representing 6.0% of the overall portfolio. Refer to Note 4 of the financial statements for further detail.
First National Bank is a designated SBA preferred lender and had processed 1,710 Paycheck Protection Program (PPP) loan requests totaling $97.3 million in funds disbursed to qualified small businesses as of September 30, 2020. The Bank is now actively working with these PPP borrowers to process applications for forgiveness per PPP guidelines.
The impact of the consequences of COVID-19 upon borrowers and ultimately the Company's loan portfolio metrics remains difficult to estimate or ascertain. The State of Maine, where most of the Bank's customers reside and/or operate businesses has gradually re-opened its economy. Impacts upon economic activity has been mixed with some sectors, such as residential real estate and outdoor recreation, performing strongly while others such as hospitality and indoor dining have been negatively impacted. Quarantines for visitors from many states and limits on the size of public gatherings remain in place. As of September 30, 2020, approximately 9% of the Company’s loan portfolio consisted of hospitality or restaurant industry borrowers, considered amongst the most impacted by COVID-19.
The Company regularly monitors activity on open credit lines and has not observed increased utilization related to COVID-19. Commercial credit line balances decreased $19.4 million in the third quarter of 2020 following the payoff of a large participation credit. The average utilization rate in the third quarter was 42.3%, down from an average utilization rate of 51.0% in the second quarter of 2020 and down from an average of 54.2% in the third quarter of 2019. Home equity line of credit balances decreased $4.5 million in the third quarter of 2020 resulting in an average utilization rate for the quarter of 49.4%, down slightly from 51.1% in the second quarter of 2020 and down from 51.9% in the third quarter of 2020.
Nonperforming Loans
Nonperforming loans are comprised of loans, for which based on current information and events, it is probable that we will be unable to collect all amounts due according to the contractual terms of the loan agreement or when principal and interest is 90 days or more past due unless the loan is both well secured and in the process of collection (in which case the loan may continue to accrue interest in spite of its past due status). A loan is "well secured" if it is secured (1) by collateral in the form of liens on or pledges of real or personal property, including securities, that have a realizable value sufficient to discharge the debt including accrued interest) in full, or (2) by the guarantee of a financially responsible party. A loan is "in the process of collection" if collection of the loan is proceeding in due course either (1) through legal action, including judgment enforcement


procedures, or, (2) in appropriate circumstances, through collection efforts not involving legal action which are reasonably expected to result in repayment of the debt or in its restoration to a current status in the near future.
WhenGenerally, when a loan becomes nonperforming (generally 90 days past due),due it is evaluated for collateral dependency based upon the most recent appraisal or other evaluation method. If the collateral value is lower than the outstanding loan balance plus accrued interest and estimated selling costs, the loan is placed on non-accrual status, all accrued interest is reversed from interest income, and a specific reserve is established for the difference between the loan balance and the collateral value less selling costs, or, in certain situations, the difference between the loan balance and the collateral value less selling costs is written off. Concurrently, a new appraisal or valuation may be ordered, depending on collateral type, currency of the most recent valuation, the size of the loan, and other factors appropriate to the loan. Upon receipt and acceptance of the new valuation, the loan may have an additional specific reserve or write down based on the updated collateral value. On an ongoing basis, appraisals or valuations may be done periodically on collateral dependent non-performingnonperforming loans and an additional specific reserve or write down will be made, if appropriate, based on the new collateral value.
Once a loan is placed on nonaccrual, it remains in nonaccrual status until the loan is current as to payment of both principal and interest and the borrower demonstrates the ability to pay and remain current. All payments made on nonaccrual loans are applied to the principal balance of the loan.











68





Nonperforming loans, expressed as a percentage of total loans, totaled 0.63% at September 30, 2020 compared to 1.28% at December 31, 2019 and 1.33% at September 30, 2019 compared to 1.19% at December 31, 2018 and 1.14% at September 30, 2018.2019. The following table shows the distribution of nonperforming loans by class as of September 30, 20192020 and 20182019 and December 31, 2018:2019:
Dollars in thousandsSeptember 30,
2020
December 31,
2019
September 30,
2019
Commercial
   Real estate$1,771 $1,784 $1,807 
   Construction307 256 256 
   Other503 6,534 6,871 
Municipal — — 
Residential
   Term4,467 5,899 6,840 
   Construction— — — 
Home equity line of credit2,063 2,171 1,078 
Consumer 
Total nonperforming loans$9,111 $16,649 $16,858 
Dollars in thousandsSeptember 30,
2019
 December 31,
2018
 September 30,
2018
Commercial     
   Real estate$1,807
 $1,226
 $964
   Construction256
 
 
   Other6,871
 8,664
 9,330
Municipal
 
 
Residential     
   Term6,840
 4,062
 3,042
   Construction
 
 
Home equity line of credit1,078
 760
 834
Consumer6
 15
 2
Total nonperforming loans$16,858
 $14,727
 $14,172
The amounts shown for total nonperforming loans do not include loans 90 or more days past due and still accruing interest. These are loans for which we expect to collect all amounts due, including past-due interest. As of September 30, 2019,2020, loans 90 or more days past due and still accruing interest totaled $18,000,$1.5 million, compared to $351,000$1.6 million at December 31, 20182019 and $249,000$18,000 at September 30, 2018.2019.

Troubled Debt Restructured
A troubled debt restructured ("TDR") constitutes a restructuring of debt if the Company, for economic or legal reasons related to the borrower's financial difficulties, grants a concession to the borrower that it would not otherwise consider. To determine whether or not a loan should be classified as a TDR, Management evaluates a loan based upon the following criteria:
The borrower demonstrates financial difficulty; common indicators include past due status with bank obligations, substandard credit bureau reports, or an inability to refinance with another lender, and
The Company has granted a concession; common concession types include maturity date extension, interest rate adjustments to below market pricing, and deferment of payments.
As of September 30, 2019,2020, we had 78 loans with a balance of $13.4 million that have been restructured. This compares to 81 loans with a balance of $21.4 million and 82 loans with a balance of $24.3 million that have been restructured. This compares to 76 loans with a balance of $25.2 million and 71 loans with a balance of $25.7 million classified as TDRs as of December 31, 20182019 and September 30, 2018,2019, respectively.


The following table shows the activity in loans classified as TDRs between December 31, 20182019 and September 30, 20192020:
Balance in Thousands of DollarsNumber of LoansAggregate Balance
Total at December 31, 201981 $21,424 
Added in 2020197 
Loans paid off in 2020(6)(7,000)
Repayments in 2020— (1,231)
Total at September 30, 202078 $13,390 
:
Balance in Thousands of DollarsNumber of LoansAggregate Balance
Total at December 31, 201876
$25,222
Added in 201910
994
Principal reduction on loans added in 2019 (17)
Net added in 2019 977
Loans paid off in 2019(4)(336)
Repayments in 2019
(1,582)
Total at September 30, 201982
$24,281

As of September 30, 2019, 552020, 51 loans with an aggregate balance of $15.3$9.5 million were performing under the modified terms, one loanfive loans with an aggregate balance of $90,000 was$703,000 were more than 30 days past due and accruing and 2622 loans with an aggregate balance of $8.9$3.2 million were on nonaccrual. As a percentage of aggregate outstanding balance, 62.8%71.2% were performing under the modified terms, 0.4%5.3% were more than 30 days past due and accruing and 36.8%23.6% were on nonaccrual. The performance status of all TDRs as of September 30, 2019,2020, as well as the associated specific reserve in the allowance for loan losses, is summarized by type of loan in the following table.
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In thousands of dollars
Performing
As Modified
30+ Days Past Due
and Accruing
On
Nonaccrual
All
TDRs
In thousands of dollars
Performing
As Modified
30+ Days Past Due
and Accruing
On
Nonaccrual
All
TDRs
Commercial Commercial
Real estate$7,241
$
$318
$7,559
Real estate$2,505 $477 $1,072 $4,054 
Construction721


721
Construction701 — — 701 
Other461

6,490
6,951
Other305 216 208 729 
Municipal



Municipal— — — — 
Residential Residential
Term6,516
90
1,957
8,563
Term5,716 — 1,714 7,430 
Construction



Construction— — — — 
Home equity line of credit320

167
487
Home equity line of credit301 — 165 466 
Consumer



Consumer— 10 — 10 
$15,259
$90
$8,932
$24,281
$9,528 $703 $3,159 $13,390 
Percent of balance62.8%0.4%36.8%100.0%Percent of balance71.2 %5.3 %23.6 %100.0 %
Number of loans55
1
26
82
Number of loans51 22 78 
Associated specific reserve$334.8
$1.2
$1,347
$1,683
Associated specific reserve$285 $$108 $395 

Residential TDRs (including home equity lines of credit) as of September 30, 20192020 included 5554 loans with an aggregate balance of $9.1$7.9 million, and the modifications granted fell into five major categories. Loans totaling $5.7$5.3 million had an extension of term, allowing the borrower to repay over an extended number of years and lowering the monthly payment to a level the borrower can afford. Loans totaling $3.1$2.9 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 $511,000$483,000 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 $1.8$1.6 million. Loans with an aggregate balance of $1.6 million$854,000 were involved in bankruptcy. Certain residential TDRs had more than one modification.
Consumer TDR's as of September 30, 2020 included one loan with a balance of $10,000 due to an extension of term, allowing the borrower to repay over an extended number of years and lowering the monthly payment to a level the borrower can afford.
Commercial TDRs as of September 30, 20192020 were comprised of 2723 loans with a balance of $15.2$5.5 million. Of this total, eightsix loans with an aggregate balance of $4.0$1.3 million had an extended period of interest-only payments, deferring the start of principal repayment. FourFive loans with an aggregate balance of $1.8$1.2 million had an extension of term, allowing the borrower to repay over an extended number of years and lowering the monthly payment to a level the borrower can afford. EightSix loans with an aggregate balance of $7.3 million$937,000 had a deferral of payment. The remaining sevensix loans with an aggregate balance of $2.1$2.0 million had several different modifications.
In each case when a loan was modified, Management determined it was in the Bank's best interest to work with the borrower with modified terms rather than to proceed to foreclosure. Once a loan is classified as a TDR it remains classified as such until the balance is fully repaid, despite whether the loan is performing under the modified terms. As of September 30, 2019,2020, Management is aware of nineeight loans classified as TDRs that are involved in bankruptcy with an outstanding balance of


$1.0 million. $911,000. There were also 2622 loans with an outstanding balance of $8.9$3.2 million that were classified as TDRs and on non-accrual status, of which threetwo loans with an outstanding balance of $398,000$430,000 were in the process of foreclosure.



Impaired Loans
Impaired loans include restructured loans and loans placed on non-accrual status. These loans are measured at the present value of expected future cash flows discounted at the loan's effective interest rate or at the fair value of the collateral less estimated selling costs if the loan is collateral dependent. 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 $32.2$19.3 million at September 30, 2019,2020, and have increased $458,000decreased $9.9 million from December 31, 2018.2019. There were 158145 impaired loans at September 30, 2019 up2020 down from 143150 loans at December 31, 2018.2019. Impaired commercial loans decreased $2.4$7.6 million between December 31, 20182019 and September 30, 2019.2020. The specific allowance for impaired commercial loans decreased from $2.0$1.5 million at December 31, 20182019 to $1.5 million$282,000 as of September 30, 2019,2020, which represented the fair value deficiencies for loans where the fair value of the collateral or net present value of expected cash flows was estimated at less than our carrying amount of the loan. From December 31, 20182019 to September 30, 2019,2020, impaired residential loans increased $2.5decreased $2.3 million and impaired home equity lines of credit increased decreased $124,000.
$306,000.
70


The following table sets forth impaired loans as of September 30, 20192020 and 20182019 and December 31, 2018:2019:
Dollars in thousandsSeptember 30,
2020
December 31,
2019
September 30,
2019
Commercial
   Real estate$4,753 $6,309 $9,049 
   Construction1,009 958 978 
   Other1,023 7,075 7,332 
Municipal — — 
Residential
   Term10,182 12,439 13,446 
   Construction — — 
Home equity line of credit2,364 2,488 1,398 
Consumer10 
Total$19,341 $29,274 $32,209 
Dollars in thousandsSeptember 30,
2019
 December 31,
2018
 September 30,
2018
Commercial     
   Real estate$9,049
 $9,760
 $9,410
   Construction978
 721
 741
   Other7,332
 9,259
 9,849
Municipal
 
 
Residential     
   Term13,446
 10,904
 10,928
   Construction
 
 
Home equity line of credit1,398
 1,092
 1,168
Consumer6
 15
 2
Total$32,209
 $31,751
 $32,098


Past Due Loans
The Bank's overall loan delinquency ratio was 0.78%0.89% at September 30, 20192020 compared to 1.08%1.16% at December 31, 20182019 and 0.83%0.78% at September 30, 2018.2019. Loans 90 days delinquent and accruing decreased from $351,000$1.6 million at December 31, 20182019 to $18,000$1.5 million as of September 30, 2019.2020. The following table sets forth loan delinquencies as of September 30, 20192020 and 20182019 and December 31, 2018:2019:
Dollars in thousandsSeptember 30,
2020
December 31,
2019
September 30,
2019
Commercial
   Real estate$2,909 $1,774 $1,199 
   Construction80 271 293 
   Other2,676 5,028 663 
Municipal — — 
Residential
   Term4,509 4,640 5,223 
   Construction — — 
Home equity line of credit2,325 2,957 1,867 
Consumer277 347 569 
Total$12,776 $15,017 $9,814 
Loans 30-89 days past due to total loans0.51 %0.63 %0.33 %
Loans 90+ days past due and accruing to total loans0.10 %0.12 %0.00 %
Loans 90+ days past due on non-accrual to total loans0.27 %0.40 %0.45 %
Total past due loans to total loans0.89 %1.16 %0.78 %
Dollars in thousandsSeptember 30,
2019
 December 31,
2018
 September 30,
2018
 
Commercial      
   Real estate$1,199
 $2,051
 $808
 
   Construction293
 10
 
 
   Other663
 580
 1,382
 
Municipal
 
 
 
Residential      
   Term5,223
 6,638
 5,105
 
   Construction
 76
 
 
Home equity line of credit1,867
 3,731
 2,851
 
Consumer569
 289
 227
 
Total$9,814
 $13,375
 $10,373
 
Loans 30-89 days past due to total loans0.33
%0.80
%0.58
%
Loans 90+ days past due and accruing to total loans0.00
%0.03
%0.02
%
Loans 90+ days past due on non-accrual to total loans0.45
%0.25
%0.23
%
Total past due loans to total loans0.78
%1.08
%0.83
%


Potential Problem Loans and Loans in Process of Foreclosure
Potential problem loans consist of classified, accruing commercial and commercial real estate loans that were between 30 and 89 days past due. Such loans are characterized by weaknesses in the financial condition of borrowers or collateral deficiencies. 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 September 30, 2019,2020, there were threenine potential problem loans with a balance of $286,000$1.4 million or 0.02%0.09% of total loans. This compares to sevennine loans with a balance of $645,000$1.3 million or 0.05%0.10% of total loans at December 31, 2018.2019.
As of September 30, 2019,2020, there were 1819 loans in the process of foreclosure with a total balance of $2.2$2.6 million. The Bank's residential foreclosure process begins when a loan becomes 75 days past due at which time a Demand/Breach Letter is sent to the borrower. If the loan becomes 120 days past due, copies of the promissory note and mortgage deed are forwarded to
71


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. A foreclosure auction date is then set 30 days from the POR expiration date if the default is not cured.
The Bank's commercial foreclosure process begins when a loan becomes 60 days past due, at which time a default letter is issued. At expiration of the period to cure default, which lasts 12 days after the issuing of the default letter, copies of the promissory note and mortgage deed are forwarded to the Bank's attorney for review. A Notice of Statutory Power of Sale is then prepared. This notice must be published for three consecutive weeks in a newspaper located in the county in which the property is located. A notice also must be issued to the mortgagor and all parties of interest 21 days prior to the sale. The foreclosure auction occurs and the Affidavit of Sale is recorded within the appropriate county within 30 days of the sale.
The Bank’s written policies and procedures for foreclosures, along with implementation of same, are subject to annual review by its internal audit provider.  The scope of this review includes loans held in portfolio and loans serviced for others.  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.  The Bank follows the published guidelines of each investor.  Loans serviced for Freddie Mac and Fannie Mae have been sold without recourse, and the Bank has no liability for these loans in the event of foreclosure.  A de minimis volume of


loans has been sold to and serviced for MPF to date.  The Bank retains a second loss layer credit enhancement obligation; no losses have been recorded on this credit enhancement obligation since the Bank started selling loans to MPF in 2013.

Other Real Estate Owned
Other real estate owned and repossessed assets ("OREO") are comprised of properties or other assets acquired through a foreclosure proceeding, or acceptance of a deed or title in lieu of foreclosure. 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 September 30, 20192020, there were twofive properties owned with an OREO balance of $279,000,$777,000, net of an allowance for losses of $45,000, compared to December 31, 20182019 and September 30, 20182019 when there were fivetwo properties owned with an OREO balance of $584,000. There were$279,000, with no allowance losses in any period.for loan losses.
72


The following table presents the composition of other real estate owned:
Dollars in thousandsSeptember 30,
2020
December 31,
2019
September 30,
2019
Carrying Value
Commercial
   Real estate$222 $— $— 
   Construction — — 
   Other — — 
Municipal — — 
Residential
   Term600 279 279 
   Construction — — 
Home equity line of credit — — 
Consumer — — 
Total$822 $279 $279 
Related Allowance
Commercial
   Real estate$45 $— $— 
   Construction — — 
   Other — — 
Municipal — — 
Residential
   Term — — 
   Construction — — 
Home equity line of credit — — 
Consumer — — 
Total$45 $— $— 
Net Value
Commercial
   Real estate$177 $— $— 
   Construction — — 
   Other — — 
Municipal — — 
Residential
   Term600 279 279 
   Construction — — 
Home equity line of credit — — 
Consumer — — 
Total$777 $279 $279 
Dollars in thousandsSeptember 30,
2019
 December 31,
2018
 September 30,
2018
Carrying Value     
Commercial     
   Real estate$
 $
 $
   Construction
 
 
   Other
 
 
Municipal
 
 
Residential

   

   Term279
 584
 584
   Construction
 
 
Home equity line of credit
 
 
Consumer
 
 
Total$279
 $584
 $584
Related Allowance     
Commercial     
   Real estate$
 $
 $
   Construction
 
 
   Other
 
 
Municipal
 
 
Residential

   

   Term
 
 
   Construction
 
 
Home equity line of credit
 
 
Consumer
 
 
Total$
 $
 $
Net Value     
Commercial     
   Real estate$
 $
 $
   Construction
 
 
   Other
 
 
Municipal
 
 
Residential

   

   Term279
 584
 584
   Construction
 
 
Home equity line of credit
 
 
Consumer
 
 
Total$279
 $584
 $584



Liquidity Management
As of September 30, 2019,2020, the Bank had primary sources of liquidity of $710.4$938.7 million. It is Management's opinion this is sufficient to meet liquidity needs under a broad range of scenarios. The Bank has an additional $365.2$390.0 million in contingent sources of liquidity, including the Federal Reserve Borrower in Custody program, municipal and corporate securities, and correspondent bank lines of credit. The Asset/Liability Committee ("ALCO") establishes guidelines for liquidity in its Asset/Liability policy and monitors internal liquidity measures to manage liquidity exposure. Based on its assessment of the liquidity considerations described above, Management believes the Company's sources of funding will meet anticipated funding needs.
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 79.8%77.3% of total average assets in the first nine months of 2019.2020. While the generally preferred funding strategy is to attract and retain low-cost deposits, the ability to do so is affected by
73


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. Securities designated as available for sale may also be sold in response to short-term or long-term liquidity needs although Management has no intention to do so at this time.
The Bank has a detailed liquidity funding policy and a contingency funding plan that provide for the prompt and comprehensive response to unexpected demands for liquidity. Management has developed quantitative models to estimate needs for contingent funding that could result from unexpected outflows of funds in excess of "business as usual" cash flows. In Management's estimation, risks are concentrated in two major categories: runoff of in-market deposit balances and the inability to renew wholesale sources of funding. Of the two categories, potential runoff of deposit balances would have the most significant impact on contingent liquidity. Our modeling attempts to quantify deposits at risk over selected time horizons. 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. PPPLF offers the ability to obtain advances dollar for dollar against the value of pledged PPP loans. The facility will be available to draw upon until December 31, 2020; no PPPLF advances have been taken to date.
Deposits
During the first nine months of 2019,2020, total deposits increased by $96.2$112.6 million or 6.3%6.8% from December 31, 20182019 levels. Low-cost deposits (demand, NOW, and savings accounts) increased by $29.2$216.7 million or 3.7%27.1% in the first nine months of 2019,2020, money market deposits decreased $3.4$4.1 million or 2.2%2.5%, and certificates of deposit increased $70.4decreased $100.0 million or 11.9%14.5%. Between September 30, 2018 and September 30, 2019, and September 30, 2020, total deposits increased by $108.4$139.8 million or 7.2%8.6%. Low-cost deposits increased by $46.8$203.4 million or 6.1%25.0%, money market accounts increased $19.2$8.3 million or 14.8%5.6%, and certificates of deposit increased $42.4decreased $71.8 million or 6.8%10.9%. The increase in low-cost deposits year-to-date is consistent with our normal seasonal fluctuation. The majorityand further utilization of the change in certificates of deposit both year-to-date and year-over-year resulted from funding of asset growth and a shift in funding between borrowed funds and certificatesallowed for a decrease in higher cost Certificates of deposit.Deposit.
Borrowed Funds
The Company uses funding from the FHLBFederal Home Loan Bank of Boston (FHLB), the Federal Reserve Bank of Boston (FRB) and repurchase agreements enabling it to grow its balance sheet and its revenues. This funding may also be used to balance seasonal deposit flows or to carry out interest rate risk management strategies, and may be used to replace or supplement other sources of funding, including core deposits and certificates of deposit. During the nine months ended September 30, 2020, borrowed funds increased $98.8 million or 53.4% from December 31, 2019. Between September 30, 2019, and September 30, 2020, borrowed funds decreased $28.9increased by $102.4 million or 13.7%56.4%. Factors in the year-to-date and year-to-year increases include a $50 million short term advance from December 31, 2018. Between September 30, 2018the FRB Discount Window in the first quarter of 2020, subsequently renewed, and September 30, 2019, borrowed funds decreased by $83.9an increase of $28.2 million or 31.6%.in repurchase agreement balances over the second and third quarters of 2020.
Shareholders' Equity
Shareholders' equity as of September 30, 20192020 was $208.5$219.4 million,, compared to $191.5$212.5 million as of December 31, 20182019 and $184.7$208.5 million as of September 30, 2018.2019. The Company's earnings in the first nine months of 2019,2020, net of dividends declared, added to shareholders' equity. The net unrealized gain/(loss)gain on available-for-sale securities, presented in accordance with FASB ASC Topic 320 "Investments – Debt and Equity Securities" rebounded substantially from a loss position of $5.1 million at December 31, 2018 and now stands at a$5.5 million as of September 30, 2020 compared to $3.7 million as of December 31, 2019. The net unrealized loss on cash flow hedging derivative instruments now stands at $5.8 million, compared to the $97,000 gain on available-for-sale securities.as of December 31, 2019.
A cash dividend of $0.30$0.31 per share was declared in the third quarter of 2019.2020. The dividend payout ratio, which is calculated by dividing dividends declared per share by diluted earnings per share, was 51.15%49.46% for the first nine months of 20192020 compared to 51.57%51.15% for the same period in 2018.2019. In determining future dividend payout levels, the Board of Directors carefully analyzes capital requirements and earnings retention, as set forth in the Company's Dividend Policy. The ability of the Company to pay cash dividends to its shareholders depends on receipt of dividends from its subsidiary, the Bank. The subsidiary may pay dividends to its parent out of so much of its net profits as the Bank's directors deem appropriate, subject to the limitation that the total of all dividends declared by the Bank in any calendar year may not exceed the total of its net profits


of that year combined with its retained net profits of the preceding two years. The amount available for dividends in 20192020 is this year's net income plus $21.4 million.$26.1 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. The adoption of this new framework modified the calculation of the various capital ratios, added a
74


new ratio, common equity tier 1, and revised the adequately and well capitalized thresholds. Additionally, under the new rule, in order to avoid limitations on capital distributions, including dividend payments, the Company must hold a capital conservation buffer above the adequately capitalized risk-based capital ratios. The capital conservation buffer was phased in from 0.0% for 2015 to 2.50% in 2019. The amounts shown below as the adequately capitalized ratio plus capital conservation buffer include the fully phased-in 2.50% buffer.
The Company met each of the well-capitalized ratio guidelines at September 30, 2019.2020. The following tables indicate the capital ratios for the Bank and the Company at September 30, 20192020 and December 31, 2018.2019.
As of September 30, 2020LeverageTier 1Common Equity Tier 1Total Risk-Based
Bank8.38 %14.17 %14.17 %15.33 %
Company8.42 %14.28 %14.28 %15.44 %
Adequately capitalized ratio4.00 %6.00 %4.50 %8.00 %
Adequately capitalized ratio plus capital conservation buffer4.00 %8.50 %7.00 %10.50 %
Well capitalized ratio (Bank only)5.00 %8.00 %6.50 %10.00 %
As of December 31, 2019LeverageTier 1Common Equity Tier 1Total Risk-Based
Bank8.84 %14.25 %14.25 %15.19 %
Company8.88 %14.34 %14.34 %15.27 %
Adequately capitalized ratio4.00 %6.00 %4.50 %8.00 %
Adequately capitalized ratio plus capital conservation buffer4.00 %8.50 %7.00 %10.50 %
Well capitalized ratio (Bank only)5.00 %8.00 %6.50 %10.00 %

The Bank maintains and annually updates a capital plan over a five year horizon; the capital plan was updated in the second quarter of 2020. Based upon reasonable assumptions of growth and operating performance, the base capital plan model projects that the Bank will be well capitalized throughout the five year period. The base model is also stress tested for interest rate risk from increasing and decreasing rates, credit risk in normal, elevated and severe loss scenarios, and combinations of interest rate and credit risk. In each stress scenario, the Bank maintained well capitalized status. To further validate its internal results, the Bank engaged a third party consultant during the second quarter of 2020 to conduct credit stress tests on its loan portfolio under six scenarios. Three of the scenarios emulated the Federal Reserve's Dodd Frank Act Stress Tests (DFAST), two were pandemic scenarios developed in response to COVID-19 by a leading forecasting firm, and a final severe Coronavirus pandemic scenario developed by the consultant. The consultant's report applied projected credit losses over a thirteen quarter horizon to the Bank's capital position with immediate effect. In each of the six scenarios the Bank remained well capitalized.
As of September 30, 2019Leverage Tier 1 Common Equity Tier 1 Total Risk-Based 
Bank8.79
%14.38
%14.38
%15.36
%
Company8.82
%14.47
%14.47
%15.44
%
Adequately capitalized ratio4.00
%6.00
%4.50
%8.00
%
Adequately capitalized ratio plus capital conservation buffer4.00
%8.50
%7.00
%10.50
%
Well capitalized ratio (Bank only)5.00
%8.00
%6.50
%10.00
%
As of December 31, 2018Leverage Tier 1 Common Equity Tier 1 Total Risk-Based 
Bank8.51
%14.13
%14.13
%15.11
%
Company8.60
%14.22
%14.22
%15.19
%
Adequately capitalized ratio4.00
%6.00
%4.50
%8.00
%
Adequately capitalized ratio plus capital conservation buffer4.00
%8.50
%7.00
%10.50
%
Well capitalized ratio (Bank only)5.00
%8.00
%6.50
%10.00
%

Off-Balance Sheet Financial Instruments and Contractual Obligations

Derivative Financial Instruments Designated as Hedges
As part of its overall asset and liability management strategy, the Bank periodically uses derivative instruments to minimize significant unplanned fluctuations in earnings and cash flows caused by interest rate volatility. The Bank's interest rate risk management strategy involves modifying the re-pricing characteristics of certain assets and/or liabilities so that change in interest rates does not have a significant adverse effect on net interest income. 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. 

During the first quarter of 2020, the Bank took advantage of market opportunities to restructure several interest rate swap positions and extend funding at favorable interest rates. At September 30, 2019,2020, the Bank had eight11 outstanding off-balance sheet, derivative instruments designated as cash flow hedges. These derivative instruments were interest rate swap agreements, with notional principal amounts totaling $175.0$260.0 million and an unrealized loss of $265,000,$5.8 million, net of taxes. The notional amounts and net unrealized gain (loss) of the financial derivative instruments do not represent exposure to credit loss. The Bank is exposed to credit loss only to the extent the counter-party defaults in its responsibility to pay interest under the terms of the agreements. 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 September 30, 2019,
75


2020, the Bank's derivative instrument counterparties were credit rated “A” by the major credit rating agencies. The interest rate swap agreements were entered into by the Bank to limit its exposure to rising interest rates.



The Bank also enters into swap arrangements with qualified loan customers as a means to provide these customers with access to long-term fixed interest rates for borrowings, and simultaneously enters into a swap contract with an approved third- party financial institution. The terms of the two contracts are designed to offset one another resulting in their being neither a net gain or a loss. The notional amounts of the financial derivative instruments do not represent exposure to credit loss. The Bank is exposed to credit loss only to the extent that either counter-party defaults in its responsibility to pay interest under the terms of the agreements. Credit risk is mitigated by prudent underwriting of the loan customer and financial institution counterparties. As of September 30, 2019,2020, the Bank had customerfour loan swap contractsagreements in place with a total notional value of $25.8$57.1 million.


Contractual Obligations
The following table sets forth the contractual obligations of the Company as of September 30, 20192020:
Dollars in thousandsTotalLess than 1 year1-3 years3-5 yearsMore than 5 years
Borrowed funds$283,787 $228,687 $— $55,100 $— 
Operating leases59 16 33 10 — 
Certificates of deposit589,931 444,041 113,861 32,029 — 
Total$873,777 $672,744 $113,894 $87,139 $— 
Total loan commitments and unused lines of credit$243,639 $243,639 $— $— $— 
:
In addition to the above, on September 3, 2020 the Bank entered into a Branch Purchase & Assumption Agreement with Bangor Savings Bank (BSB) to acquire a branch location in Belfast, ME currently owned and operated by Damariscotta Bank & Trust (DB&T); BSB has an agreement in place to purchase DB&T.

The acquisition will be the Bank's first branch location in Waldo County, and is expected to add $16.5 million in deposits and $23.5 million in loans to its balance sheet. The final value of the transaction is estimated to be $24.8 million which includes the loans, an assignment of a ground lease, leasehold improvements, furniture and equipment, and the premium paid for the deposits. The Bank has received regulatory approval for the purchase, and the transaction is expected to be closed in the fourth quarter. A copy of the Agreement is included as Exhibit 10.4.
76
Dollars in thousandsTotal Less than 1 year 1-3 years 3-5 years More than 5 years
Borrowed funds$181,417
 $171,310
 $10,000
 $
 $107
Operating leases74
 16
 33
 25
 
Certificates of deposit661,773
 414,874
 140,937
 105,962
 
Total$843,264
 $586,200
 $150,970
 $105,987
 $107
Total loan commitments and unused lines of credit$187,558
 $187,558
 $
 $
 $



Item 3 – Quantitative and Qualitative Disclosures About Market Risk

Market-Risk Management
Market risk is the risk of loss arising from adverse changes in the fair value of financial instruments due to changes in interest rates. The First Bancorp, Inc.'s market risk is composed primarily of interest rate risk. The Bank's Asset/Liability Committee (ALCO) is responsible for reviewing the interest rate sensitivity position of the Company and establishing policies to monitor and limit exposure to interest rate risk. All guidelines and policies established by ALCO have been approved by the Board of Directors.
Asset/Liability Management
The primary goal of asset/liability management is to maximize net interest income within the interest rate risk limits set by ALCO. Interest rate risk is monitored through the use of two complementary measures: static gap analysis and earnings simulation modeling. While each measurement has limitations, taken together they represent a reasonably comprehensive view of the magnitude of interest rate risk in the Company, the level of risk through time, and the amount of exposure to changes in certain interest rate relationships.
Static gap analysis measures the amount of repricing risk embedded in the balance sheet at a point in time. It does so by comparing the differences in the repricing characteristics of assets and liabilities. A gap is defined as the difference between the principal amount of assets and liabilities that reprice within a specified time period. The Company's cumulative one-year gap at September 30, 20192020 was -3.79%7.30% of total assets compared to -2.01%-5.96% of total assets at December 31, 2018.2019. Core deposits with non-contractual maturities are presented based upon historical patterns of balance attrition and pricing behavior, which are reviewed at least annually.
The gap repricing distributions include principal cash flows from residential mortgage loans and mortgage-backed securities in the time frames in which they are expected to be received. Mortgage prepayments are estimated by applying industry median projections of prepayment speeds to portfolio segments based on coupon range and loan age.
A summary of the Company's static gap, as of September 30, 2019,2020, is presented in the following table:
0-9090-3651-55+
Dollars in thousands 
DaysDaysYearsYears
Investment securities at amortized cost (HTM) and fair value (AFS)$102,310 $158,315 $231,740 $179,737 
Restricted stock, at cost9,508 — — 1,037 
Loans held for sale— — — 6,387 
Loans450,874 261,548 516,756 207,468 
Other interest-earning assets3,100 24,587 — — 
Non-rate-sensitive assets53,567 — — 89,692 
 Total assets619,359 444,450 748,496 484,321 
Interest-bearing deposits459,145 292,547 147,522 681,160 
Borrowed funds90,000 22,600 55,100 50,000 
Non-rate-sensitive liabilities and equity6,767 25,166 34,100 432,519 
 Total liabilities and equity555,912 340,313 236,722 1,163,679 
Period gap$63,447 $104,137 $511,774 $(679,358)
Percent of total assets2.76 %4.53 %22.28 %(29.58)%
Cumulative gap (current)$63,447 $167,584 $679,358 $— 
Percent of total assets2.76 %7.30 %29.58 %— %
 0-90 90-365 1-5 5+ 
Dollars in thousands 
Days Days Years Years 
Investment securities at amortized cost (HTM) and fair value (AFS)$72,766
 $96,711
 $240,756
 $215,351
 
Restricted stock, at cost7,945
 
 
 1,037
 
Loans held for sale
 
 
 852
 
Loans402,880
 163,462
 517,487
 180,482
 
Other interest-earning assets
 23,975
 
 
 
Non-rate-sensitive assets20,526
 
 
 88,997
 
 Total assets504,117
 284,148
 758,243
 486,719
 
Interest-bearing deposits431,774
 295,925
 171,163
 593,149
 
Borrowed funds75,000
 55,000
 10,107
 0
 
Non-rate-sensitive liabilities and equity1,900
 5,700
 34,100
 359,409
 
 Total liabilities and equity508,674
 356,625
 215,370
 952,558
 
Period gap$(4,557) $(72,477) $542,873
 $(465,839) 
Percent of total assets(0.22)%(3.56)%26.70
%(22.91)%
Cumulative gap (current)$(4,557) $(77,034) $465,839
 $
 
Percent of total assets(0.22)%(3.79)%22.91
%
%

The earnings simulation model forecasts capture the impact of changing interest rates on one-year and two-year net interest income. The modeling process calculates changes in interest income received and interest expense paid on all interest-earning assets and interest-bearing liabilities reflected on the Company's balance sheet. None of the assets used in the simulation are held for trading purposes. The modeling is done for a variety of scenarios that incorporate changes in the absolute level of interest rates as well as basis risk, as represented by changes in the shape of the yield curve and changes in interest rate relationships. Management evaluates the effects on income of alternative interest rate scenarios against earnings in a stable interest rate environment. This analysis is also most useful in determining the short-run earnings exposures to changes in customer behavior involving loan payments and deposit additions and withdrawals.

77


The Company's most recent simulation model projects net interest income would decrease by approximately 0.1%0.4% of stable-rate net interest income if short-term rates affected by Federal Open Market Committee actions fall gradually by one percentage point over the next year, and decreaseincrease by approximately 4.2%0.8% if rates rise gradually by two percentage points. Both scenarios are well within ALCO's policy limit of a decrease in net interest income of no more than 10.0% given a 2.0% move in interest rates, up or down. Management believes this reflects a reasonable interest rate risk position. In year two, and assuming no additional movement in rates, the model forecasts that net interest income would be lower than that earned in a stable rate environment by 3.0% in a falling-rate scenario, and higher than that earned in a stable rate environment by 2.3% in a falling-rate scenario, and lower than that earned in a stable rate environment by 6.8%0.9% in a rising rate scenario, when compared to the year-one base scenario. A summary of the Bank's interest rate risk simulation modeling, as of September 30, 20192020 and December 31, 20182019 is presented in the following table:
Changes in Net Interest IncomeSeptember 30, 2019December 31, 2018Changes in Net Interest IncomeSeptember 30, 2020December 31, 2019
Year 1 Year 1
Projected change if rates decrease by 1.0% (September 30, 2019) and decrease by 2.0% (December 31, 2018)-0.1%-0.1%
Projected change if rates decrease by 1.0%Projected change if rates decrease by 1.0%-0.4%0.2%
Projected change if rates increase by 2.0%-4.2%-3.9%Projected change if rates increase by 2.0%0.8%-4.3%
Year 2 Year 2
Projected change if rates decrease by 1.0% (September 30, 2019) and decrease by 2.0% (December 31, 2018)2.3%1.6%
Projected change if rates decrease by 1.0%Projected change if rates decrease by 1.0%-3.0%-0.9%
Projected change if rates increase by 2.0%-6.8%-7.0%Projected change if rates increase by 2.0%0.9%-10.1%
This dynamic simulation model includes assumptions about how the balance sheet is likely to evolve through time and in different interest rate environments. Loans and deposits are projected to maintain stable balances. All maturities, calls and prepayments in the securities portfolio are assumed to be reinvested in similar assets. Mortgage loan prepayment assumptions are developed from industry median estimates of prepayment speeds for portfolios with similar coupon ranges and seasoning. Non-contractual deposit volatility and pricing are assumed to follow historical patterns. The sensitivities of key assumptions are analyzed annually and reviewed by ALCO.
This sensitivity analysis does not represent a Company forecast and should not be relied upon as being indicative of expected operating results. These hypothetical estimates are based upon numerous assumptions including, among others, the nature and timing of interest rate levels, yield curve shape, prepayments on loans and securities, pricing decisions on loans and deposits, and reinvestment/ replacement of asset and liability cash flows. While assumptions are developed based upon current economic and local market conditions, the Company cannot make any assurances as to the predictive ability of these assumptions, including how customer preferences or competitor influences might change.

Interest Rate Risk Management
A variety of financial instruments can be used to manage interest rate sensitivity. These may include investment securities, interest rate swaps, and interest rate caps and floors. Frequently called interest rate derivatives, interest rate swaps, caps and floors have characteristics similar to securities but possess the advantages of customization of the risk-reward profile of the instrument, minimization of balance sheet leverage and improvement of liquidity. As of September 30, 2019,2020, the Company was using interest rate swaps for interest rate risk management.
The Company engages an independent consultant to periodically review its interest rate risk position, as well as the effectiveness of simulation modeling and reasonableness of assumptions used. As of September 30, 2019,2020, there were no significant differences between the views of the independent consultant and Management regarding the Company's interest rate risk exposure. As a result of recent statements made byIn response the the COVID-19 pandemic, the Federal Open Market Committee in March 2020 lowered its short-term benchmark interest rate by 150 basis points to a range of 0.00% to 0.25%. Management expects that short-term interest rates are likely to declineremain in this range for at least the next one-to-threeseveral quarters, and believes that the current level of interest rate risk is acceptable.

Cessation of LIBOR
TheThe Company holds various instruments that are tied to the London Interbank Offering Rate (LIBOR).  We areis aware that LIBOR may no longer be published after December 31, 2021. The Federal Reserve formed the Alternative Reference Rates Committee (ARRC) to guide the transition process in the United States. ARRC has issued a number of recommendations including the adoption of the Secured Overnight Financing Rate (SOFR) as a replacement for LIBOR. The International Swap and Derivatives Association (ISDA), the organization that oversees and guides swap and derivatives markets and participants, continues to work on transitions and replacement rates, including having replacement rates in place before the possible cessation of LIBOR at the end of 2021, and has committed to providing more definitive recommendations later in 2020. The Company has formed a working group to address the change away from LIBOR. Management intends to continue to monitor developments from ARRC and ISDA closely, and expects to pursue the steps ultimately recommended to provide for an orderly transition to a post-LIBOR environment. Of the interest rate swap contracts the Bank has in place as of September 30, 2020, two contracts carrying a total notional amount of $50 million are monitoring the introductionset to mature
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prior to December 31, 2021; nine contracts with a total notional amount of $210 million have maturity dates beyond December 31, 2021. The four customer loan swap contracts have maturity dates of December 19, 2029, August 21, 2030, July 1, 2035 and market acceptance of replacement indices.  We are working to specifically identify the dollar volume of LIBOR tied contracts, and reviewing underlying contract language.  Management believes its overall exposure to LIBOR is modest and does not pose any undue market risk.October 1, 2039.





Item 4: Controls and Procedures
As required by Rule 13a-15 under the Securities Exchange Act of 1934, as of September 30, 2019,2020, the end of the quarter covered by this report, the Company carried out an evaluation under the supervision and with the participation of the Company's management, including the Company's Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures. In designing and evaluating the Company's disclosure controls and procedures, the Company and its management recognize that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and the Company's management necessarily was required to apply its judgment in evaluating and implementing possible controls and procedures. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures were effective at the reasonable assurance level to ensure that information required to be disclosed by the Company in the reports it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission's rules and forms. There was no change in the Company's internal control over financial reporting that occurred during the quarter ended September 30, 20192020 that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting. The Company reviews its disclosure controls and procedures, which may include its internal controls over financial reporting on an ongoing basis, and may from time to time make changes aimed at enhancing their effectiveness and to ensure that the Company's systems evolve with its business.

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Part II – Other Information

Item 1 – Legal Proceedings

The Company was not involved in any legal proceedings requiring disclosure under Item 103 of Regulation S-K during the reporting period.

Item 1A – Risk Factors

There have been no material changes from the risk factors previously disclosed in theThe Company's Form 10-K for the year ended December 31, 2018.2019 provides information on risk factors at that time and mentions the potential economic consequences associated with the COVID-19 outbreak. Since the 10-K was published, the COVID-19 outbreak has evolved into a worldwide pandemic with a myriad of adverse impacts upon society as a whole. The spread of COVID-19 has caused illness, quarantines, cancellation of events and travel, business and school shutdowns, reduction in business activity and financial transactions, supply chain interruptions and overall economic and financial market instability. In response to the COVID-19 pandemic, Federal, State and Local governments have taken preventative or protective actions, such as imposing restrictions on travel and business operations, advising or requiring individuals to limit or forgo their time outside of their homes, and ordering temporary closures of businesses that have been deemed to be non-essential. The initial restrictions and other consequences of the pandemic resulted in significant adverse effects for many different types of businesses, including, among others, those in the retail sales, travel, hospitality and food and beverage industries, and resulted in a significant number of layoffs and furloughs of employees nationwide and in the markets in which we operate. Restrictions have been at least partially lifted nationally and within the Company's operating footprint with some level of economic recovery resulting. An increase in virus spread or infection rates could result in restrictions being re-implemented with further negative impact to economic activity.

The ultimate effects of COVID-19 on the broader economy and the markets that we serve are not known nor is the ultimate length of the restrictions described above and any accompanying effects. Moreover, the Federal Reserve has taken action to lower the Federal Funds rate, which may negatively affect our interest income and, therefore, earnings, financial condition and results of operations. Additional impacts of COVID-19 on our business could be widespread and material, and may include, or exacerbate, among other consequences, the following:

employees contracting COVID-19
unavailability of key personnel necessary to conduct our business activities
disruption resulting from having a significant percentage of employees work remotely
repeated or sustained closures of our branch lobbies
declines in demand for loans and other banking services
reduced consumer spending due to job losses or other impacts of the virus
adverse conditions in financial markets may have a negative impact on our investment portfolio
adverse economic conditions result in a slowdown in municipal tax collections potentially impacting municipal loans, investments, and deposit balances
decline in credit quality of our loan portfolio leading to increased provisions for loan losses
declines in the value of loan collateral, including residential and commercial real estate
decline in the liquidity of borrowers and guarantors impairing their ability to honor financial commitments
actions of governmental entities to limit business activities

The significant contribution of tourism to the State of Maine's overall economy, and the Company's primary market areas in particular, may result in a disproportionate effect relative to other regions. These factors, together or in combination with other events or occurrences that may not yet be known or anticipated, may materially and adversely affect our business, financial condition and results of operations.







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Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds

a. None

b. None

c. The Company made the following repurchases of its common stock in the nine months ended September 30, 2019:
2020:
MonthShares Purchased
Average Price Per Share1
Total shares purchased as part of publicly announced repurchase plansMaximum number of shares that may be purchased under the plans
January 2019250
$0.00


February 20193,554
$26.52


March 2019



April 2019300
$0.00


May 2019



June 2019



July 2019



August 2019



September 201975
27.48


 4,179
$27.00


MonthShares PurchasedAverage Price Per ShareTotal shares purchased as part of publicly announced repurchase plansMaximum number of shares that may be purchased under the plans
January 20203,491 29.33 — — 
February 20201,806 28.47 — — 
March 2020— — — — 
April 2020— — — — 
May 2020— — — — 
June 2020— — — — 
July 2020— — — — 
August 2020150 20.73 — — 
September 2020— — — — 
5,447 $26.18 — — 
1Zeroaverage price for share represents forfeiture of shares issued under 2010 Equity Incentive Plan.
Item 3 – Default Upon Senior Securities

None.


Item 4 – Other Information

A.  None.
A.  
On November 8, 2019 the Bank entered into an agreement with a certain key Executive of the Bank under the 2010 Equity Incentive Plan.  This Agreement accelerated the vesting period of Restricted Shares issued to President & CEO McKim in 2015, 2016, 2017, and 2018 such that the Shares issued in 2015, 2016 and 2017 will vest immediately and the Shares issued in 2018 will vest fully after three years instead of the original five years.  The economic values of the shares was disclosed in the Company’s 2016,  2017, 2018 and 2019 Definitive Proxy Statements filed on March 11, 2016, March 10, 2017, March 14, 2018 and March 8, 2019, respectively.

B.  None.

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Item 5 – Exhibits

Exhibit 3.2 Amendment to the Registrant's Articles of Incorporation (incorporated by reference to Exhibit 3.1 to the Company's Form 8-K filed under item 5.03 on May 1, 2008).
Exhibit 3.3 Amendment to the Registrant's Articles of Incorporation (incorporated by reference to the Definitive Proxy Statement for the Company's 2008 Annual Meeting filed on March 14, 2008).
Exhibit 3.4 Amendment to the Registrant's Articles of Incorporation authorizing issuance of preferred stock (incorporated by reference to Exhibit 3.1 to Current Report on Form 8-K filed on December 29, 2008).
Exhibit 3.5 Conformed Copy of the Company's Bylaws (incorporated by reference to Exhibit 3.5 to the Company's Form 10-K filed March 10, 2017).
Exhibit 10.1 Director Split Dollar Insurance Plan and Specimen Agreement dated January 1, 2016, attached as Exhibit 10.1 to the Company's Form 8-K filed under item 1.01 on October 25, 2017.
Exhibit 10.2 Executive Split Dollar Insurance Plan and Specimen Agreement dated January 1, 2016, attached as Exhibit 10.2 to the Company's Form 8-K filed under item 1.01 on October 25, 2017.
Exhibit 10.3 Amendments dated November 8, 2019 to the Restricted Stock Agreements of an Executive Officer dated January 29, 2015, January 28, 2016, January 26, 2017 and January 4, 2018 attached as Exhibit 10.3 to the Company’s Form 10-Q filed under Part II Item 4A on November 12, 2019.
Exhibit 10.4 Branch Purchase and Assumption Agreement between the Bank and Bangor Savings Bank for the purchase of a bank branch, loans and deposits at 1 Belmont Ave, Belfast, Maine, attached as Exhibit 10.4 to the Company’s Quarterly Report on Form 10-Q filed on November 6, 2020.
Exhibit 14.1 Code of Ethics for Senior Financial Officers, adopted by the Board of Directors on September 19, 2003. Incorporated by reference to Exhibit 14.1 to the Company's Annual Report on Form 10-K filed on March 15, 2006.
Exhibit 14.2 Code of Business Conduct and Ethics, adopted by the Board of Directors on April 15, 2004. Incorporated by reference to Exhibit 14.2 to the Company's Annual Report on Form 10-K filed on March 15, 2006.
Exhibit 23.1 Consent of Independent Registered Public Accounting firm on Form 10-K filed on March 8, 2019.6, 2020.
Exhibit 31.1 Certification of Chief Executive Officer Pursuant to Rule 13A-14(A) of The Securities Exchange Act of 1934
Exhibit 31.2 Certification of Chief Financial Officer Pursuant to Rule 13A-14(A) of The Securities Exchange Act of 1934
Exhibit 32.1 Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of The Sarbanes-Oxley Act of 2002
Exhibit 32.2 Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of The Sarbanes-Oxley Act of 2002
Exhibit 101.INS XBRL Instance Document
Exhibit 101.SCH XBRL Taxonomy Extension Schema Document
Exhibit 101.CAL XBRL Taxonomy Extension Calculation Linkbase Document
Exhibit 101.LAB XBRL Taxonomy Extension Label Linkbase Document
Exhibit 101.PRE XBRL Taxonomy Extension Presentation Linkbase Document
Exhibit 101.DEF XBRL Taxonomy Extension Definitions Linkbase
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Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
THE FIRST BANCORP, INC.



/s/ Tony C. McKim
Tony C. McKim
President & Chief Executive Officer

Date: November 6, 2020
Date: November 12, 2019


/s/ Richard M. Elder
Richard M. Elder
Executive Vice President & Chief Financial Officer

Date: November 6, 2020
Date: November 12, 2019




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