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FNLC First Bancorp Inc

Filed: 7 May 21, 9:47am
0000765207us-gaap:EstimateOfFairValueFairValueDisclosureMemberus-gaap:ResidentialPortfolioSegmentMemberus-gaap:FairValueInputsLevel3Memberfnlc:TermLoanMember2020-03-31

UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549




FORM 10-Q

Quarterly Report Pursuant to Section 13 or 15(d) of The Securities Exchange Act of 1934
For the quarterly period ended March 31, 2021

Commission File Number 0-26589



THE FIRST BANCORP, 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) 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 May 1, 2021
Common Stock: 10,986,494 shares



Table of Contents
Note 10 - Financial Derivative Instruments






Part I. Financial Information
Selected Financial Data (Unaudited)
The First Bancorp, Inc. and Subsidiary
Dollars in thousands,As of and for the three months ended March 31,
except for per share amounts20212020
Summary of Operations
Interest Income$18,953 $20,694 
Interest Expense3,080 5,776 
Net Interest Income15,873 14,918 
Provision for Loan Losses525 400 
Non-Interest Income5,298 4,221 
Non-Interest Expense9,874 11,043 
Net Income8,922 6,495 
Per Common Share Data
Basic Earnings per Share$0.82 $0.60 
Diluted Earnings per Share0.81 0.60 
Cash Dividends Declared0.31 0.30 
Book Value per Common Share20.78 19.71 
Tangible Book Value per Common Share2
17.96 16.97 
Market Value29.19 22.00 
Financial Ratios
Return on Average Equity1
15.85 %12.03 %
Return on Average Tangible Common Equity1,2
18.34 %13.95 %
Return on Average Assets1
1.54 %1.24 %
Average Equity to Average Assets9.70 %10.30 %
Average Tangible Equity to Average Assets2
8.38 %8.88 %
Net Interest Margin Tax-Equivalent1,2
2.99 %3.12 %
Dividend Payout Ratio37.80 %50.00 %
Allowance for Loan Losses/Total Loans1.09 %0.88 %
Non-Performing Loans to Total Loans0.46 %0.75 %
Non-Performing Assets to Total Assets0.30 %0.49 %
Efficiency Ratio2
45.52 %58.12 %
At Period End
Total Assets$2,436,868 $2,136,396 
Total Loans1,516,772 1,344,208 
Total Investment Securities689,994 664,514 
Total Deposits1,953,557 1,644,612 
Total Shareholders' Equity228,184 215,257 
1Annualized using a 365-day basis in 2021 and a 366-day basis in 2020.
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 March 31, 2021 and 2020 and for the three-month periods then ended. These financial statements are the responsibility of the Company's management.
We conducted our reviews in accordance with standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit in accordance with standards of the Public Company Accounting Oversight Board (United States), the objective of which is to express an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our reviews, we are not aware of any material modifications that should be made to the accompanying  interim consolidated financial statements for them to be in conformity with accounting principles generally accepted in the United States of America.


/s/ Berry Dunn McNeil & Parker, LLC
Portland, Maine
May 7, 2021
2


Consolidated Balance Sheets (Unaudited)
The First Bancorp, Inc. and Subsidiary
March 31,
2021
December 31, 2020March 31,
2020
Assets
Cash and cash equivalents$20,029,000 $26,212,000 $21,117,000 
Interest bearing deposits in other banks104,602,000 56,151,000 6,047,000 
Securities available for sale294,537,000 313,376,000 312,928,000 
Securities to be held to maturity (fair value of $388,836,000 at March 31, 2021, $377,134,000 at December 31, 2020 and $349,248,000 at March 31, 2020)385,352,000 365,613,000 341,592,000 
Restricted equity securities, at cost10,105,000 10,545,000 9,994,000 
Loans held for sale3,522,000 5,855,000 561,000 
Loans1,516,772,000 1,476,761,000 1,344,208,000 
Less allowance for loan losses16,594,000 16,253,000 11,858,000 
Net loans1,500,178,000 1,460,508,000 1,332,350,000 
Accrued interest receivable10,847,000 9,298,000 9,648,000 
Premises and equipment, net29,985,000 27,251,000 21,156,000 
Other real estate owned401,000 908,000 316,000 
Goodwill30,646,000 30,646,000 29,805,000 
Other assets46,664,000 54,873,000 50,882,000 
Total assets$2,436,868,000 $2,361,236,000 $2,136,396,000 
Liabilities
Demand deposits$275,898,000 $250,219,000 $153,477,000 
NOW deposits541,684,000 520,385,000 382,307,000 
Money market deposits175,887,000 163,819,000 161,184,000 
Savings deposits325,758,000 304,603,000 236,706,000 
Certificates of deposit634,330,000 605,585,000 710,938,000 
Total deposits1,953,557,000 1,844,611,000 1,644,612,000 
Borrowed funds – short term174,552,000 206,940,000 192,937,000 
Borrowed funds – long term55,096,000 55,098,000 55,103,000 
Other liabilities25,479,000 30,861,000 28,487,000 
Total liabilities2,208,684,000 2,137,510,000 1,921,139,000 
Shareholders' equity
Common stock, 1 cent par value per share110,000 110,000 109,000 
Additional paid-in capital65,755,000 65,285,000 64,277,000 
Retained earnings163,659,000 158,359,000 147,904,000 
Accumulated other comprehensive income (loss)
Net unrealized gain on securities available for sale219,000 5,009,000 7,890,000 
Net unrealized loss on securities transferred from available for sale to held to maturity(124,000)(133,000)(174,000)
Net unrealized loss on cash flow hedging derivative instruments(1,463,000)(4,932,000)(4,773,000)
Net unrealized gain on postretirement costs28,000 28,000 24,000 
Total shareholders' equity228,184,000 223,726,000 215,257,000 
Total liabilities & shareholders' equity$2,436,868,000 $2,361,236,000 $2,136,396,000 
Common Stock
Number of shares authorized18,000,000 18,000,000 18,000,000 
Number of shares issued and outstanding10,983,258 10,950,289 10,921,206 
Book value per common share$20.78 $20.43 $19.71 
Tangible book value per common share$17.96 $17.60 $16.97 
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 three months ended March 31,
20212020
Interest income
Interest and fees on loans (includes tax-exempt income of $290,000 YTD March 31, 2021 and $310,000 YTD March 31, 2020)$15,119,000 $15,856,000 
Interest on deposits with other banks12,000 74,000 
Interest and dividends on investments (includes tax-exempt income of $1,956,000 YTD March 31, 2021 and $1,841,000 YTD March 31, 2020)3,822,000 4,764,000 
     Total interest income18,953,000 20,694,000 
Interest expense
Interest on deposits2,198,000 5,186,000 
Interest on borrowed funds882,000 590,000 
     Total interest expense3,080,000 5,776,000 
Net interest income15,873,000 14,918,000 
Provision for loan losses525,000 400,000 
Net interest income after provision for loan losses15,348,000 14,518,000 
Non-interest income
Investment management and fiduciary income1,065,000 894,000 
Service charges on deposit accounts337,000 577,000 
Net securities gains119,000 752,000 
Mortgage origination and servicing income, net of amortization1,967,000 504,000 
Other operating income1,810,000 1,494,000 
     Total non-interest income5,298,000 4,221,000 
Non-interest expense
Salaries and employee benefits5,123,000 5,025,000 
Occupancy expense753,000 713,000 
Furniture and equipment expense1,215,000 1,116,000 
FDIC insurance premiums199,000 173,000 
Amortization of identified intangibles17,000 11,000 
Other operating expense2,567,000 4,005,000 
     Total non-interest expense9,874,000 11,043,000 
Income before income taxes10,772,000 7,696,000 
Income tax expense1,850,000 1,201,000 
NET INCOME$8,922,000 $6,495,000 
Basic earnings per common share$0.82 $0.60 
Diluted earnings per common share$0.81 $0.60 
Other comprehensive income (loss) net of tax
Net unrealized gain (loss) on securities available for sale$(4,790,000)$4,233,000 
Net unrealized gain on securities transferred from available for sale to held to maturity, net of amortization9,000 8,000 
Net unrealized gain (loss) on cash flow hedging derivative instruments3,469,000 (4,870,000)
    Other comprehensive loss(1,312,000)(629,000)
Comprehensive income$7,610,000 $5,866,000 
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
SharesAmount
Balance at December 31, 201910,899,210$64,073,000 $144,839,000 $3,596,000 $212,508,000 
Net income— — 6,495,000 — 6,495,000 
Net unrealized gain on securities available for sale, net of tax— — — 4,233,000 4,233,000 
Net unrealized gain on securities transferred from available for sale to held to maturity, net of tax— — — 8,000 8,000 
Net unrealized loss on cash flow hedging derivative instruments, net of tax— — — (4,870,000)(4,870,000)
Comprehensive income (loss)— — 6,495,000 (629,000)5,866,000 
Cash dividends declared ($0.30 per share)— — (3,276,000)— (3,276,000)
Equity compensation expense— 150,000 — — 150,000 
Payment to repurchase common stock(5,297)— (154,000)— (154,000)
Issuance of restricted stock21,595 — — — — 
Proceeds from sale of common stock5,698 163,000 — — 163,000 
Balance at March 31, 202010,921,206$64,386,000 $147,904,000 $2,967,000 $215,257,000 
Balance at December 31, 202010,950,289$65,395,000 $158,359,000 $(28,000)$223,726,000 
Net income— — 8,922,000 — 8,922,000 
Net unrealized loss on securities available for sale, net of tax— — — (4,790,000)(4,790,000)
Net unrealized gain on securities transferred from available for sale to held to maturity, net of tax— — — 9,000 9,000 
Net unrealized gain on cash flow hedging derivative instruments, net of tax— — — 3,469,000 3,469,000 
Comprehensive income (loss)— — 8,922,000 (1,312,000)7,610,000 
Cash dividends declared ($0.31 per share)— — (3,404,000)— (3,404,000)
Equity compensation expense— 288,000 — — 288,000 
Payment to repurchase common stock(8,557)— (218,000)— (218,000)
Issuance of restricted stock34,689 — — — — 
Proceeds from sale of common stock6,837 182,000 — — 182,000 
Balance at March 31, 202110,983,258$65,865,000 $163,659,000 $(1,340,000)$228,184,000 
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 three months ended
March 31, 2021March 31, 2020
Cash flows from operating activities
     Net income$8,922,000 $6,495,000 
Adjustments to reconcile net income to net cash provided by operating activities
Depreciation518,000 538,000 
Change in deferred taxes670,000 52,000 
Provision for loan losses525,000 400,000 
Loans originated for resale(36,199,000)(11,637,000)
Proceeds from sales and transfers of loans39,721,000 11,417,000 
Net gain on sales of loans(1,189,000)(187,000)
Net gain on sale or call of securities(119,000)(752,000)
Net amortization of premiums on investments662,000 369,000 
 Net gain on sale of other real estate owned(98,000)
Equity compensation expense288,000 150,000 
Net (increase) decrease in other assets and accrued interest10,917,000 (11,811,000)
Net increase (decrease) in other liabilities(5,669,000)7,729,000 
Net loss on disposal of premises and equipment1,000 
Amortization of investment in limited partnership77,000 78,000 
Net acquisition amortization17,000 11,000 
     Net cash provided by operating activities19,044,000 2,852,000 
Cash flows from investing activities
(Increase) decrease in interest-bearing deposits in other banks(48,451,000)5,263,000 
Proceeds from sales of securities available for sale1,214,000 68,620,000 
Proceeds from maturities, payments and calls of securities available for sale34,687,000 21,890,000 
Proceeds from maturities, payments, calls and sales of securities to be held to maturity39,195,000 27,275,000 
Proceeds from sales of other real estate owned605,000 
Purchases of securities available for sale(23,544,000)(37,173,000)
Purchases of securities to be held to maturity(59,047,000)(87,255,000)
Redemption of restricted equity securities440,000 
Purchase of restricted equity securities0 (1,012,000)
Net increase in loans(40,195,000)(47,351,000)
Capital expenditures(3,257,000)(389,000)
     Net cash used by investing activities(98,353,000)(50,132,000)
Cash flows from financing activities
Net increase (decrease) in demand, savings, and money market accounts80,201,000 (26,813,000)
Net increase in certificates of deposit28,745,000 20,959,000 
Net increase (decrease) in short-term borrowings(32,388,000)18,087,000 
Advances on long-term borrowings0 44,998,000 
Repayment on long-term borrowings(2,000)
Payment to repurchase common stock(218,000)(154,000)
Proceeds from sale of common stock182,000 163,000 
Dividends paid(3,394,000)(3,276,000)
     Net cash provided by financing activities73,126,000 53,964,000 
Net increase (decrease) in cash and cash equivalents(6,183,000)6,684,000 
Cash and cash equivalents at beginning of period26,212,000 14,433,000 
     Cash and cash equivalents at end of period$20,029,000 $21,117,000 
6


For the three months ended
March 31, 2021March 31, 2020
Interest paid$3,447,000 $5,777,000 
Income taxes paid0 
Non-cash transactions
Net transfer from loans to other real estate owned$0 $37,000 
See Report of Independent Registered Public Accounting Firm.
The accompanying notes are an integral part of these consolidated financial statements.
7


Notes to Consolidated Financial Statements
The First Bancorp, Inc. and Subsidiary
Note 1 – Basis of Presentation
The First Bancorp, Inc. ("the Company") is a financial holding company that owns all of the common stock of First National Bank ("the Bank"). The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP") for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of Management, all adjustments (consisting of normally recurring accruals) considered necessary for a fair presentation have been included. All significant intercompany transactions and balances are eliminated in consolidation. The income reported for the 2021 period is not necessarily indicative of the results that may be expected for the year ending December 31, 2021. 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, 2020.

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 encouraged social distancing and many imposed restrictions on travel and group meetings, and/or mandated shut-downs of all but essential businesses. The introduction of vaccines has led to a gradual re-opening to date and planned future re-openings. The pace of re-opening is at least partially dependent upon the distribution of vaccines, and varies across the United States.
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. In 2020, COVID-19 adversely impacted the tourism industry to a greater degree than other industries; however, a forward-looking assessment of the continued 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 were negatively impacted initially and have since largely rebounded, but could once again be negatively impacted due to lower activity or market declines related to COVID-19.

Subsequent Events
Events occurring subsequent to March 31, 2021, 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 March 31, 2021:
Amortized
Cost
Unrealized GainsUnrealized LossesFair Value (Estimated)
Securities available for sale
U.S. Government-sponsored agencies$23,045,000 $$(1,560,000)$21,485,000 
Mortgage-backed securities227,089,000 4,109,000 (3,284,000)227,914,000 
State and political subdivisions36,663,000 1,178,000 (283,000)37,558,000 
Asset-backed securities7,463,000 117,000 7,580,000 
$294,260,000 $5,404,000 $(5,127,000)$294,537,000 
Securities to be held to maturity
U.S. Government-sponsored agencies$35,600,000 $55,000 $(2,041,000)$33,614,000 
Mortgage-backed securities76,365,000 480,000 (2,181,000)74,664,000 
State and political subdivisions251,137,000 7,435,000 (525,000)258,047,000 
Corporate securities22,250,000 347,000 (86,000)22,511,000 
$385,352,000 $8,317,000 $(4,833,000)$388,836,000 
Restricted equity securities
Federal Home Loan Bank Stock$9,068,000 $— $— $9,068,000 
Federal Reserve Bank Stock1,037,000 — — 1,037,000 
$10,105,000 $— $— $10,105,000 

The following table summarizes the amortized cost and estimated fair value of investment securities at December 31, 2020:
Amortized
Cost
Unrealized GainsUnrealized LossesFair Value (Estimated)
Securities available for sale
U.S. Government-sponsored agencies
$23,045,000 $$(315,000)$22,730,000 
Mortgage-backed securities238,516,000 5,507,000 (617,000)243,406,000 
State and political subdivisions37,752,000 1,722,000 39,474,000 
Asset-backed securities7,723,000 43,000 7,766,000 
$307,036,000 $7,272,000 $(932,000)$313,376,000 
Securities to be held to maturity
U.S. Government-sponsored agencies$44,149,000 $143,000 $(18,000)$44,274,000 
Mortgage-backed securities53,594,000 736,000 (195,000)54,135,000 
State and political subdivisions245,620,000 10,427,000 (3,000)256,044,000 
Corporate securities22,250,000 433,000 (2,000)22,681,000 
$365,613,000 $11,739,000 $(218,000)$377,134,000 
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 
9


The following table summarizes the amortized cost and estimated fair value of investment securities at March 31, 2020:
Amortized
Cost
Unrealized GainsUnrealized LossesFair Value (Estimated)
Securities available for sale
U.S. Government-sponsored agencies$7,500,000 $52,000 $$7,552,000 
Mortgage-backed securities276,235,000 9,106,000 (189,000)285,152,000 
State and political subdivisions19,206,000 1,018,000 20,224,000 
$302,941,000 $10,176,000 $(189,000)$312,928,000 
Securities to be held to maturity
U.S. Government-sponsored agencies$35,981,000 $207,000 $$36,188,000 
Mortgage-backed securities51,142,000 1,392,000 (7,000)52,527,000 
State and political subdivisions239,719,000 5,819,000 (345,000)245,193,000 
Corporate securities14,750,000 590,000 15,340,000 
$341,592,000 $8,008,000 $(352,000)$349,248,000 
Restricted equity securities
Federal Home Loan Bank Stock$8,957,000 $— $— $8,957,000 
Federal Reserve Bank Stock1,037,000 — — 1,037,000 
$9,994,000 $— $— $9,994,000 

The following table summarizes the contractual maturities of investment securities at March 31, 2021:
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$2,544,000 $2,516,000 $3,926,000 $3,956,000 
Due in 1 to 5 years12,994,000 13,172,000 26,992,000 27,613,000 
Due in 5 to 10 years50,007,000 50,587,000 173,295,000 178,069,000 
Due after 10 years228,715,000 228,262,000 181,139,000 179,198,000 
$294,260,000 $294,537,000 $385,352,000 $388,836,000 

The following table summarizes the contractual maturities of investment securities at December 31, 2020:
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$117,000 $120,000 $3,607,000 $3,641,000 
Due in 1 to 5 years17,718,000 17,915,000 30,867,000 31,792,000 
Due in 5 to 10 years49,697,000 51,001,000 183,679,000 190,153,000 
Due after 10 years239,504,000 244,340,000 147,460,000 151,548,000 
$307,036,000 $313,376,000 $365,613,000 $377,134,000 











10


The following table summarizes the contractual maturities of investment securities at March 31, 2020:
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$66,000 $66,000 $1,331,000 $1,337,000 
Due in 1 to 5 years25,221,000 26,159,000 27,854,000 28,361,000 
Due in 5 to 10 years62,462,000 65,032,000 184,037,000 189,214,000 
Due after 10 years215,192,000 221,671,000 128,370,000 130,336,000 
$302,941,000 $312,928,000 $341,592,000 $349,248,000 
At March 31, 2021, securities with a fair value of $291,990,000 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 $297,326,000 as of December 31, 2020 and $208,376,000 at March 31, 2020, 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 three months ended March 31, 2021 and 2020:
For the three months ended March 31,
20212020
Proceeds from sales of securities$1,214,000 $68,620,000 
Gross realized gains119,000 1,098,000 
Gross realized losses0 (346,000)
Net gain$119,000 $752,000 
Related income taxes$25,000 $158,000 

Management reviews securities with unrealized losses for other than temporary impairment. As of March 31, 2021, there were 140 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 March 31, 2021 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$51,894,000 $(3,601,000)$$$51,894,000 $(3,601,000)
Mortgage-backed securities180,138,000 (5,335,000)3,744,000 (130,000)183,882,000 (5,465,000)
State and political subdivisions28,783,000 (808,000)28,783,000 (808,000)
Corporate securities3,414,000 (86,000)3,414,000 (86,000)
$264,229,000 $(9,830,000)$3,744,000 $(130,000)$267,973,000 $(9,960,000)

11


As of December 31, 2020, there were 50 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.
Information regarding securities temporarily impaired as of December 31, 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$30,212,000 $(333,000)$$$30,212,000 $(333,000)
Mortgage-backed securities65,505,000 (724,000)3,878,000 (88,000)69,383,000 (812,000)
State and political subdivisions855,000 (3,000)855,000 (3,000)
Corporate securities2,498,000 (2,000)2,498,000 (2,000)
$99,070,000 $(1,062,000)$3,878,000 $(88,000)$102,948,000 $(1,150,000)

As of March 31, 2020, there were 70 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 14 had been temporarily impaired for 12 months or more.
Information regarding securities temporarily impaired as of March 31, 2020 is summarized below:
Less than 12 months12 months or moreTotal
Fair Value (Estimated)Unrealized LossesFair Value (Estimated)Unrealized LossesFair Value (Estimated)Unrealized Losses
Mortgage-backed securities$2,963,000 $(27,000)$7,424,000 $(169,000)$10,387,000 $(196,000)
State and political subdivisions19,556,000 (345,000)19,556,000 (345,000)
$22,519,000 $(372,000)$7,424,000 $(169,000)$29,943,000 $(541,000)

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 $124,000, net of taxes, at March 31, 2021. This compares to $133,000 and $174,000, net of taxes, at December 31, 2020 and March 31, 2020, 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 March 31, 2021 and 2020, and December 31, 2020, the Bank's investment in FHLB stock totaled $9,068,000, $8,957,000 and $9,508,000, 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. NaN impairment losses have been recorded through March 31, 2021. 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 March 31, 2021 and 2020 and at December 31, 2020:
March 31, 2021December 31, 2020March 31, 2020
Commercial
   Real estate$469,974,000 31.0 %$442,121,000 29.9 %$382,753,000 28.5 %
   Construction53,394,000 3.5 %56,565,000 3.8 %43,913,000 3.3 %
   Other297,488,000 19.6 %285,015,000 19.3 %237,896,000 17.7 %
Municipal49,476,000 3.3 %43,783,000 3.0 %43,537,000 3.2 %
Residential
   Term520,317,000 34.3 %522,070,000 35.3 %500,971,000 37.3 %
   Construction24,796,000 1.6 %21,600,000 1.5 %15,202,000 1.1 %
Home equity line of credit77,210,000 5.1 %79,750,000 5.4 %90,674,000 6.7 %
Consumer24,117,000 1.6 %25,857,000 1.8 %29,262,000 2.2 %
Total$1,516,772,000 100.0 %$1,476,761,000 100.0 %$1,344,208,000 100.0 %
Loan balances include net deferred loan costs of $5,328,000 as of March 31, 2021, $6,931,000 as of December 31, 2020, and $7,551,000 as of March 31, 2020. The decrease in net deferred loan costs year-over-year and year-to-date is attributable to unearned fees and deferred costs associated with PPP loans originated during 2020 and the first quarter 2021. Pursuant to collateral agreements, qualifying first mortgage loans and commercial real estate loans, which totaled $362,271,000 at March 31, 2021, were used to collateralize borrowings from the FHLB. This compares to qualifying loans which totaled $378,183,000 at December 31, 2020, and $401,555,000 at March 31, 2020. In addition, commercial, construction and home equity loans totaling $275,993,000 at March 31, 2021, $259,599,000 at December 31, 2020, and $260,703,000 at March 31, 2020, were used to collateralize a standby line of credit at the Federal Reserve Bank of Boston.
For all loan classes, loans over 30 days past due are considered delinquent. Information on the past-due status of loans by class of financing receivable as of March 31, 2021, 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$186,000 $$283,000 $469,000 $469,505,000 $469,974,000 $
   Construction47,000 80,000 127,000 53,267,000 53,394,000 
   Other696,000 11,000 628,000 1,335,000 296,153,000 297,488,000 9,000 
Municipal49,476,000 49,476,000 
Residential
   Term1,183,000 148,000 958,000 2,289,000 518,028,000 520,317,000 71,000 
   Construction111,000 111,000 24,685,000 24,796,000 
Home equity line of credit547,000 45,000 408,000 1,000,000 76,210,000 77,210,000 
Consumer284,000 2,000 5,000 291,000 23,826,000 24,117,000 5,000 
Total$3,054,000 $206,000 $2,362,000 $5,622,000 $1,511,150,000 $1,516,772,000 $85,000 

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, which was extended by the Coronavirus Preparedness and Response Supplemental Appropriations Act, 2020. The Company actively worked with borrowers impacted by the COVID-19 outbreak and as of March 31, 2021, a total of 1037 loan modification requests for interest-only payments or deferred payments had been completed in conformance with the Interagency Statement or CARES Act, representing $292,003,000 in loan balances, or approximately 20.0% of the loan portfolio excluding PPP balances. One of these modifications of de minimis amount has been classified as a Troubled Debt Restructure since being modified. So long as modified terms are met, loans in an active modification are not included in past due loan totals and continue to accrue interest.
13


As of March 31, 2021, loans totaling $50.6 million, or 3.3% 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 Off9015.0 %$14,002,000 6.0 %
Subsequent Modification305.0 %30,435,000 13.0 %
Still in Original Modification112.0 %1,595,000 1.0 %
Out of Modification47578.0 %193,212,000 80.0 %
Total606100.0 %$239,244,000 100.0 %
Residential Real Estate Modifications
UnitsPercentageBalancePercentage
Paid Off4111.0 %$8,269,000 16.0 %
Subsequent Modification13638.0 %16,595,000 32.0 %
Still in Original Modification164.0 %1,853,000 4.0 %
Out of Modification17047.0 %24,960,000 48.0 %
Total363100.0 %$51,677,000 100.0 %

Consumer Loan Modifications
UnitsPercentageBalancePercentage
Paid Off1725.0 %$129,000 12.0 %
Subsequent Modification23.0 %62,000 6.0 %
Still in Original Modification23.0 %27,000 2.0 %
Out of Modification4769.0 %864,000 80.0 %
Total68100.0 %$1,082,000 100.0 %

Information on the past-due status of loans by class of financing receivable as of December 31, 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$139,000 $190,000 $226,000 $555,000 $441,566,000 $442,121,000 $
   Construction13,000 80,000 93,000 56,472,000 56,565,000 
   Other490,000 62,000 2,082,000 2,634,000 282,381,000 285,015,000 1,464,000 
Municipal43,783,000 43,783,000 
Residential
   Term540,000 1,799,000 1,616,000 3,955,000 518,115,000 522,070,000 23,000 
   Construction21,600,000 21,600,000 
Home equity line of credit1,645,000 324,000 367,000 2,336,000 77,414,000 79,750,000 
Consumer89,000 42,000 18,000 149,000 25,708,000 25,857,000 18,000 
Total$2,916,000 $2,417,000 $4,389,000 $9,722,000 $1,467,039,000 $1,476,761,000 $1,505,000 
14


Information on the past-due status of loans by class of financing receivable as of March 31, 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$2,935,000 $2,000 $1,297,000 $4,234,000 $378,519,000 $382,753,000 $22,000 
   Construction59,000 246,000 305,000 43,608,000 43,913,000 
   Other1,678,000 295,000 3,895,000 5,868,000 232,028,000 237,896,000 3,536,000 
Municipal43,537,000 43,537,000 
Residential
   Term4,270,000 171,000 3,320,000 7,761,000 493,210,000 500,971,000 192,000 
   Construction15,202,000 15,202,000 
Home equity line of credit1,566,000 264,000 1,481,000 3,311,000 87,363,000 90,674,000 
Consumer250,000 18,000 82,000 350,000 28,912,000 29,262,000 20,000 
Total$10,758,000 $750,000 $10,321,000 $21,829,000 $1,322,379,000 $1,344,208,000 $3,770,000 
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 March 31, 2021 and 2020 and at December 31, 2020 is presented in the following table:
March 31, 2021December 31, 2020March 31, 2020
Commercial
   Real estate$748,000 $543,000 $1,748,000 
   Construction89,000 89,000 246,000 
   Other1,675,000 1,481,000 457,000 
Municipal0 
Residential
   Term3,577,000 3,593,000 5,615,000 
   Construction0 
Home equity line of credit852,000 1,015,000 1,916,000 
Consumer0 66,000 
Total$6,941,000 $6,721,000 $10,048,000 
Impaired loans include TDR loans and loans placed on non-accrual. These loans are measured at the present value of expected future cash flows discounted at the loan's effective interest rate or at the fair value of the collateral if the loan is collateral dependent. If the measure of an impaired loan is lower than the recorded investment in the loan and estimated selling costs, a specific reserve is established for the difference, or, in certain situations, if the measure of an impaired loan is lower than the recorded investment in the loan and estimated selling costs, the difference is written off.

15


A breakdown of impaired loans by class of financing receivable as of and for the period ended March 31, 2021 is presented in the following table:
For the three months ended March 31, 2021
Recorded InvestmentUnpaid Principal BalanceRelated AllowanceAverage Recorded InvestmentRecognized Interest Income
With No Related Allowance
Commercial
  Real estate$2,223,000 $2,550,000 $— $2,179,000 $17,000 
  Construction89,000 89,000 — 89,000 
  Other1,593,000 1,650,000 — 1,654,000 5,000 
Municipal— 
Residential
  Term7,183,000 8,416,000 — 7,184,000 35,000 
  Construction— 
Home equity line of credit852,000 928,000 — 872,000 
Consumer7,000 7,000 — 7,000 
$11,947,000 $13,640,000 $— $11,985,000 $57,000 
With an Allowance Recorded
Commercial
  Real estate$978,000 $1,013,000 $174,000 $968,000 $9,000 
  Construction681,000 681,000 21,000 681,000 6,000 
  Other627,000 643,000 563,000 525,000 
Municipal
Residential
  Term2,084,000 2,113,000 142,000 1,957,000 16,000 
  Construction
Home equity line of credit23,000 23,000 8,000 
Consumer
$4,393,000 $4,473,000 $900,000 $4,139,000 $31,000 
Total
Commercial
  Real estate$3,201,000 $3,563,000 $174,000 $3,147,000 $26,000 
  Construction770,000 770,000 21,000 770,000 6,000 
  Other2,220,000 2,293,000 563,000 2,179,000 5,000 
Municipal
Residential
  Term9,267,000 10,529,000 142,000 9,141,000 51,000 
  Construction
Home equity line of credit875,000 951,000 880,000 
Consumer7,000 7,000 7,000 
$16,340,000 $18,113,000 $900,000 $16,124,000 $88,000 
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, 2020 is presented in the following table:
Recorded InvestmentUnpaid Principal BalanceRelated AllowanceAverage Recorded InvestmentRecognized Interest Income
With No Related Allowance
Commercial
  Real estate$2,060,000 $2,368,000 $— $4,123,000 $127,000 
  Construction89,000 89,000 — 358,000 
  Other1,591,000 1,623,000 — 999,000 15,000 
Municipal— 
Residential
  Term7,335,000 8,629,000 — 8,773,000 193,000 
  Construction— 
Home equity line of credit1,015,000 1,089,000 — 1,219,000 
Consumer8,000 8,000 — 1,000 1,000 
$12,098,000 $13,806,000 $— $15,473,000 $336,000 
With an Allowance Recorded
Commercial
  Real estate$969,000 $995,000 $112,000 $1,018,000 $43,000 
  Construction681,000 681,000 18,000 579,000 30,000 
  Other188,000 202,000 169,000 1,193,000 3,000 
Municipal
Residential
  Term2,079,000 2,134,000 163,000 2,073,000 65,000 
  Construction
Home equity line of credit24,000 24,000 744,000 1,000 
Consumer8,000 
$3,941,000 $4,036,000 $462,000 $5,615,000 $142,000 
Total
Commercial
  Real estate$3,029,000 $3,363,000 $112,000 $5,141,000 $170,000 
  Construction770,000 770,000 18,000 937,000 30,000 
  Other1,779,000 1,825,000 169,000 2,192,000 18,000 
Municipal
Residential
  Term9,414,000 10,763,000 163,000 10,846,000 258,000 
  Construction
Home equity line of credit1,039,000 1,113,000 1,963,000 1,000 
Consumer8,000 8,000 9,000 1,000 
$16,039,000 $17,842,000 $462,000 $21,088,000 $478,000 

17


A breakdown of impaired loans by class of financing receivable as of and for the period ended March 31, 2020 is presented in the following table:
For the three months ended March 31, 2020
Recorded InvestmentUnpaid Principal BalanceRelated AllowanceAverage Recorded InvestmentRecognized Interest Income
With No Related Allowance
Commercial
  Real estate$5,162,000 $5,421,000 $— $5,157,000 $47,000 
  Construction246,000 265,000 — 717,000 
  Other818,000 848,000 — 793,000 3,000 
Municipal— 
Residential
  Term10,378,000 12,135,000 — 10,015,000 67,000 
  Construction— 
Home equity line of credit1,232,000 1,306,000 — 1,185,000 4,000 
Consumer— 
$17,836,000 $19,975,000 $— $17,867,000 $121,000 
With an Allowance Recorded
Commercial
  Real estate$1,061,000 $1,082,000 $230,000 $1,064,000 $8,000 
  Construction701,000 701,000 3,000 234,000 10,000 
  Other172,000 194,000 172,000 4,269,000 
Municipal
Residential
  Term1,660,000 1,755,000 233,000 1,999,000 13,000 
  Construction
Home equity line of credit996,000 1,002,000 296,000 1,124,000 
Consumer67,000 67,000 58,000 26,000 
$4,657,000 $4,801,000 $992,000 $8,716,000 $31,000 
Total
Commercial
  Real estate$6,223,000 $6,503,000 $230,000 $6,221,000 $55,000 
  Construction947,000 966,000 3,000 951,000 10,000 
  Other990,000 1,042,000 172,000 5,062,000 3,000 
Municipal
Residential
  Term12,038,000 13,890,000 233,000 12,014,000 80,000 
  Construction
Home equity line of credit2,228,000 2,308,000 296,000 2,309,000 4,000 
Consumer67,000 67,000 58,000 26,000 
$22,493,000 $24,776,000 $992,000 $26,583,000 $152,000 





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 March 31, 2021, the Company had 73 loans with a balance of $11,306,000 that have been classified as TDRs. This compares to 74 loans with a balance of $11,534,000 and 81 loans with a balance of $14,968,000 classified as TDRs as of December 31, 2020 and March 31, 2020, 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 March 31, 2021:
Number of LoansBalanceSpecific Reserves
Commercial
   Real estate13 $2,525,000 $174,000 
   Construction681,000 21,000 
   Other964,000 358,000 
Municipal
Residential
   Term49 6,947,000 142,000 
   Construction
Home equity line of credit182,000 
Consumer7,000 
73 $11,306,000 $695,000 
The following table shows TDRs by class and the specific reserve as of December 31, 2020:
Number of LoansBalanceSpecific Reserves
Commercial
   Real estate13 $2,558,000 $106,000 
   Construction681,000 18,000 
   Other717,000 96,000 
Municipal
Residential
   Term51 7,384,000 149,000 
   Construction
Home equity line of credit186,000 
Consumer8,000 
74 $11,534,000 $369,000 





19


The following table shows TDRs by class and the specific reserve as of March 31, 2020:
Number of LoansBalanceSpecific Reserves
Commercial
   Real estate16 $4,688,000 $225,000 
   Construction701,000 3,000 
   Other779,000 131,000 
Municipal
Residential
   Term54 8,321,000 197,000 
   Construction
Home equity line of credit479,000 
Consumer
81 $14,968,000 $556,000 
As of March 31, 2021, 11 of the loans classified as TDRs with a total balance of $1,017,000 were more than 30 days past due. Of these loans, NaN 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 March 31, 2021:
Number of LoansBalanceSpecific Reserves
Commercial
   Real estate$72,000 $72,000 
   Construction
   Other419,000 92,000 
Municipal
Residential
   Term366,000 
   Construction
Home equity line of credit160,000 
Consumer
11 $1,017,000 $164,000 



















20


As of March 31, 2020, 22 of the loans classified as TDRs with a total balance of $3,622,000 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 March 31, 2020:
Number of LoansBalanceSpecific Reserves
Commercial
   Real estate$618,000 $
   Construction
   Other540,000 131,000 
Municipal
Residential
   Term15 2,297,000 24,000 
   Construction
Home equity line of credit167,000 
Consumer
22 $3,622,000 $155,000 
For the three months ended March 31, 2021, 1 loan was placed on TDR status. The following table shows this TDR, by class and the associated specific reserve included in the allowance for loan losses as of March 31, 2021:
Number of LoansPre-Modification
Outstanding
Recorded Investment
Post-Modification Outstanding
Recorded
Investment
Specific Reserves
Commercial
   Real estate$$$
   Construction
   Other262,000 262,000 262,000 
Municipal
Residential
   Term— 
   Construction
Home equity line of credit
Consumer
$262,000 $262,000 $262,000 














21


For the three months ended March 31, 2020, 2 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 March 31, 2020:

Number of LoansPre-Modification
Outstanding
Recorded Investment
Post-Modification Outstanding
Recorded
Investment
Specific Reserves
Commercial
   Real estate$$$
   Construction
   Other
Municipal
Residential
   Term235,000 190,000 
   Construction
Home equity line of credit
Consumer
$235,000 $190,000 $
As of March 31, 2021, Management is aware of 6 loans classified as TDRs that are involved in bankruptcy with an outstanding balance of $708,000. There were also 21 loans with an outstanding balance of $1,908,000 that were classified as TDRs and on non-accrual status, of which 1 loan with an outstanding balance of $92,000 was in the process of foreclosure.
Residential Mortgage Loans in Process of Foreclosure
As of March 31, 2021, there were 14 mortgage loans collateralized by residential real estate in the process of foreclosure with a total balance of $1,067,000. This compares to 15 mortgage loans collateralized by residential real estate in the process of foreclosure with a total balance of $2,284,000 as of March 31, 2020.
22


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.





















23


A breakdown of the allowance for loan losses as of March 31, 2021, December 31, 2020, and March 31, 2020, by class of financing receivable and allowance element, is presented in the following tables:
As of March 31, 2021Specific Reserves on Loans Evaluated Individually for ImpairmentGeneral Reserves on Loans Based on Historical Loss ExperienceReserves for Qualitative FactorsUnallocated
Reserves
Total Reserves
Commercial
   Real estate$174,000 $797,000 $4,770,000 $$5,741,000 
   Construction21,000 90,000 538,000 649,000 
   Other563,000 503,000 3,014,000 4,080,000 
Municipal185,000 185,000 
Residential
   Term142,000 259,000 2,561,000 2,962,000 
   Construction12,000 119,000 131,000 
Home equity line of credit130,000 817,000 947,000 
Consumer285,000 587,000 872,000 
Unallocated1,027,000 1,027,000 
$900,000 $2,076,000 $12,591,000 $1,027,000 $16,594,000 

As of December 31, 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$112,000 $721,000 $4,345,000 $$5,178,000 
   Construction18,000 92,000 552,000 662,000 
   Other169,000 465,000 2,804,000 3,438,000 
Municipal171,000 171,000 
Residential
   Term163,000 145,000 2,271,000 2,579,000 
   Construction6,000 96,000 102,000 
Home equity line of credit151,000 1,060,000 1,211,000 
Consumer282,000 496,000 778,000 
Unallocated2,134,000 2,134,000 
$462,000 $1,862,000 $11,795,000 $2,134,000 $16,253,000 

24


As of March 31, 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$230,000 $687,000 $2,945,000 $$3,862,000 
   Construction3,000 80,000 341,000 424,000 
   Other172,000 426,000 1,829,000 2,427,000 
Municipal29,000 29,000 
Residential
   Term233,000 300,000 693,000 1,226,000 
   Construction10,000 22,000 32,000 
Home equity line of credit296,000 168,000 548,000 1,012,000 
Consumer58,000 228,000 439,000 725,000 
Unallocated2,121,000 2,121,000 
$992,000 $1,899,000 $6,846,000 $2,121,000 $11,858,000 
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 0.83% of related loans as of March 31, 2021, compared to 0.80% of related loans as of December 31, 2020. The qualitative portion increased $796,000 between December 31, 2020 and March 31, 2021 due to a mix of factors. These factors included changes in various macroeconomic measures used in the qualitative model, updated analysis of the loan portfolio in multiple stress scenarios, and performance of COVID-19 related loan modifications.
The unallocated component of the allowance totaled $1,027,000 at March 31, 2021, or 6.2% of the total reserve. This compares to $2,134,000 or 13.1% as of December 31, 2020. Maintenance of an unallocated component reflects general imprecision related to portfolio growth along with lingering uncertainty regarding the potential impacts of COVID-19 on the loan portfolio.
The allowance for loan losses as a percent of total loans stood at 1.09% as of March 31, 2021, 1.10% at December 31, 2020 and 0.88% as of March 31, 2020.
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
25


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. Other
commercial loans also include loans made under the SBA PPP. These loans are unsecured and carry a 100% guarantee from the SBA.
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 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 36.6% of capital are below the regulatory guidance limit of 100.0% of capital at March 31, 2021. Construction loans and non-owner-occupied commercial real estate loans are at 155.2% of total capital, below the regulatory limit of 300.0% of capital at March 31, 2021.
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.






26


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.
The following table summarizes the risk ratings for the Company's commercial real estate, commercial construction, commercial other, and municipal loans as of March 31, 2021:
Commercial
Real Estate
Commercial
Construction
Commercial
Other
Municipal
Loans
All Risk-
Rated Loans
1 Strong$$$1,716,000 $16,000 $1,732,000 
2 Above Average7,663,000 187,000 4,560,000 47,632,000 60,042,000 
3 Satisfactory94,014,000 2,837,000 107,116,000 367,000 204,334,000 
4 Average279,879,000 37,779,000 128,120,000 1,461,000 447,239,000 
5 Watch77,299,000 12,375,000 49,186,000 138,860,000 
6 OAEM2,261,000 65,000 2,326,000 
7 Substandard8,858,000 216,000 6,725,000 15,799,000 
8 Doubtful
Total$469,974,000 $53,394,000 $297,488,000 $49,476,000 $870,332,000 
27


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, 2020:
Commercial
Real Estate
Commercial
Construction
Commercial
Other
Municipal
Loans
All Risk-
Rated Loans
1 Strong$$$2,402,000 $19,000 $2,421,000 
2 Above Average5,938,000 2,343,000 6,326,000 41,939,000 56,546,000 
3 Satisfactory91,475,000 2,889,000 104,432,000 369,000 199,165,000 
4 Average261,539,000 31,221,000 120,570,000 1,456,000 414,786,000 
5 Watch72,840,000 19,893,000 44,293,000 137,026,000 
6 OAEM2,754,000 234,000 2,988,000 
7 Substandard7,575,000 219,000 6,758,000 14,552,000 
8 Doubtful
Total$442,121,000 $56,565,000 $285,015,000 $43,783,000 $827,484,000 
The following table summarizes the risk ratings for the Company's commercial real estate, commercial construction, commercial other, and municipal loans as of March 31, 2020:
Commercial
Real Estate
Commercial
Construction
Commercial
Other
Municipal
Loans
All Risk-
Rated Loans
1 Strong$$$4,559,000 $28,000 $4,587,000 
2 Above Average10,222,000 842,000 5,933,000 40,340,000 57,337,000 
3 Satisfactory83,905,000 1,873,000 40,255,000 372,000 126,405,000 
4 Average203,263,000 26,029,000 131,664,000 2,797,000 363,753,000 
5 Watch68,618,000 14,702,000 46,357,000 129,677,000 
6 OAEM1,834,000 2,824,000 4,658,000 
7 Substandard14,911,000 467,000 6,304,000 21,682,000 
8 Doubtful
Total$382,753,000 $43,913,000 $237,896,000 $43,537,000 $708,099,000 

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.
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 three months ended March 31, 2021.
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The following table presents allowance for loan losses activity by class for the three months ended March 31, 2021, and allowance for loan loss balances by class and related loan balances by class as of March 31, 2021:
CommercialMunicipalResidentialHome Equity Line of CreditConsumerUnallocatedTotal
Real EstateConstructionOtherTermConstruction
For the three months ended March 31, 2021
Beginning balance$5,178,000 $662,000 $3,438,000 $171,000 $2,579,000 $102,000 $1,211,000 $778,000 $2,134,000 $16,253,000 
Charge offs5,000 142,000 29,000 103,000 279,000 
Recoveries65,000 6,000 1,000 23,000 95,000 
Provision (credit)503,000 (13,000)784,000 14,000 406,000 29,000 (265,000)174,000 (1,107,000)525,000 
Ending balance$5,741,000 $649,000 $4,080,000 $185,000 $2,962,000 $131,000 $947,000 $872,000 $1,027,000 $16,594,000 
Allowance for loan losses as of March 31, 2021
Ending balance specifically evaluated for impairment$174,000 $21,000 $563,000 $$142,000 $$$$$900,000 
Ending balance collectively evaluated for impairment$5,567,000 $628,000 $3,517,000 $185,000 $2,820,000 $131,000 $947,000 $872,000 $1,027,000 $15,694,000 
Related loan balances as of March 31, 2021
Ending balance$469,974,000 $53,394,000 $297,488,000 $49,476,000 $520,317,000 $24,796,000 $77,210,000 $24,117,000 $$1,516,772,000 
Ending balance specifically evaluated for impairment$3,201,000 $770,000 $2,220,000 $$9,267,000 $$875,000 $7,000 $$16,340,000 
Ending balance collectively evaluated for impairment$466,773,000 $52,624,000 $295,268,000 $49,476,000 $511,050,000 $24,796,000 $76,335,000 $24,110,000 $$1,500,432,000 

29


The following table presents allowance for loan losses activity by class for the year ended December 31, 2020 and allowance for loan loss balances by class and related loan balances by class as of December 31, 2020:
CommercialMunicipalResidentialHome Equity Line of CreditConsumerUnallocatedTotal
Real EstateConstructionOtherTermConstruction
For the year ended December 31, 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 offs1,088,000 27,000 66,000 153,000 327,000 1,661,000 
Recoveries37,000 34,000 22,000 132,000 225,000 
Provision2,524,000 297,000 99,000 144,000 1,587,000 77,000 264,000 106,000 952,000 6,050,000 
Ending balance$5,178,000 $662,000 $3,438,000 $171,000 $2,579,000 $102,000 $1,211,000 $778,000 $2,134,000 $16,253,000 
Allowance for loan losses as of December 31, 2020
Ending balance specifically evaluated for impairment$112,000 $18,000 $169,000 $$163,000 $$$$$462,000 
Ending balance collectively evaluated for impairment$5,066,000 $644,000 $3,269,000 $171,000 $2,416,000 $102,000 $1,211,000 $778,000 $2,134,000 $15,791,000 
Related loan balances as of December 31, 2020
Ending balance$442,121,000 $56,565,000 $285,015,000 $43,783,000 $522,070,000 $21,600,000 $79,750,000 $25,857,000 $$1,476,761,000 
Ending balance specifically evaluated for impairment$3,029,000 $770,000 $1,779,000 $$9,414,000 $$1,039,000 $8,000 $$16,039,000 
Ending balance collectively evaluated for impairment$439,092,000 $55,795,000 $283,236,000 $43,783,000 $512,656,000 $21,600,000 $78,711,000 $25,849,000 $$1,460,722,000 
30


The following table presents allowance for loan losses activity by class for the three months ended March 31, 2020, and allowance for loan loss balances by class and related loan balances by class as of March 31, 2020:
CommercialMunicipalResidential Home Equity Line of CreditConsumerUnallocatedTotal
Real EstateConstructionOtherTermConstruction
For the three months ended March 31, 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 offs2,000 153,000 100,000 255,000 
Recoveries20,000 10,000 1,000 43,000 74,000 
Provision (credit)120,000 59,000 (922,000)2,000 194,000 7,000 86,000 (85,000)939,000 400,000 
Ending balance$3,862,000 $424,000 $2,427,000 $29,000 $1,226,000 $32,000 $1,012,000 $725,000 $2,121,000 $11,858,000 
Allowance for loan losses as of March 31, 2020
Ending balance specifically evaluated for impairment$230,000 $3,000 $172,000 $$233,000 $$296,000 $58,000 $$992,000 
Ending balance collectively evaluated for impairment$3,632,000 $421,000 $2,255,000 $29,000 $993,000 $32,000 $716,000 $667,000 $2,121,000 $10,866,000 
Related loan balances as of March 31, 2020
Ending balance$382,753,000 $43,913,000 $237,896,000 $43,537,000 $500,971,000 $15,202,000 $90,674,000 $29,262,000 $$1,344,208,000 
Ending balance specifically evaluated for impairment$6,223,000 $947,000 $990,000 $$12,038,000 $$2,228,000 $67,000 $$22,493,000 
Ending balance collectively evaluated for impairment$376,530,000 $42,966,000 $236,906,000 $43,537,000 $488,933,000 $15,202,000 $88,446,000 $29,195,000 $$1,321,715,000 

31


Note 5 – Stock-Based Compensation
At the 2010 Annual Meeting, shareholders approved the 2010 Equity Incentive Plan (the "2010 Plan"). 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"). The 2020 Plan reserves 400,000 shares of common stock for issuance in connection with stock options, restricted stock awards and other equity based awards to attract and retain the best available personnel, provide additional incentive to officers, employees and non-employee Directors and promote the success of the Company. Such grants and awards will be structured in a manner that does not encourage the recipients to expose the Company to undue or inappropriate risk. Options issued under the 2020 Plan qualify for treatment as incentive stock options for purposes of Section 422 of the Internal Revenue Code. Other compensation under the 2020 Plan will qualify as performance-based for purposes of Section 162(m) of the Internal Revenue Code, and will satisfy NASDAQ guidelines relating to equity compensation.
As of March 31, 2021, 184,487 shares of restricted stock had been granted under the 2010 Plan and 40,439 shares under the 2020 Plan, of which 85,740 shares remain restricted as of March 31, 2021 as detailed in the following table:
Year
Granted
Vesting Term
(In Years)
SharesRemaining Term
(In Years)
20175.05,774 0.8
20184.0706 0.8
20185.06,184 1.8
20193.016,254 0.8
20201.03,500 0.2
20202.0694 0.8
20203.020,842 1.8
20210.4250 0.2
20211.04,114 0.8
20213.027,422 2.8
85,740 1.8
The compensation cost related to these nonvested restricted stock grants is $2,230,000 and is recognized over the vesting terms of each grant. In the three months ended March 31, 2021, $288,000 of expense was recognized for these restricted shares, leaving $1,252,000 in unrecognized expense as of March 31, 2021. In the three months ended March 31, 2020, $150,000 of expense was recognized for restricted shares, leaving $797,000 in unrecognized expense as of March 31, 2020.

Note 6 – Common Stock
Proceeds from sale of common stock totaled $182,000 and $163,000 for the three months ended March 31, 2021 and 2020, respectively.

Note 7 – Earnings Per Share
The following table sets forth the computation of basic and diluted earnings per share (EPS) for the three months ended March 31, 2021 and 2020:
Income (Numerator)Shares (Denominator)Per-Share Amount
For the three months ended March 31, 2021
Net income as reported$8,922,000 
Basic EPS: Income available to common shareholders8,922,000 10,888,133 $0.82 
Effect of dilutive securities: restricted stock85,679 
Diluted EPS: Income available to common shareholders plus assumed conversions$8,922,000 10,973,812 $0.81 
For the three months ended March 31, 2020
Net income as reported$6,495,000 
Basic EPS: Income available to common shareholders6,495,000 10,844,600 $0.60 
Effect of dilutive securities: restricted stock69,753 
Diluted EPS: Income available to common shareholders plus assumed conversions$6,495,000 10,914,353 $0.60 
32


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 3.0% of each eligible employee's compensation in 2020. The Company adopted the safe harbor form of 401(k) plan for 2021 and will follow safe harbor guidelines when determining the level of discretionary contribution. The expense related to the 401(k) plan was $217,000 and $255,000 for the three months ended March 31, 2021 and 2020, respectively.

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 $42,000 and $40,000 for the three months ended March 31, 2021 and 2020, respectively. As of March 31, 2021, the associated accrued liability included in other liabilities in the balance sheet was $2,961,000 compared to $2,991,000 and $2,772,000 at December 31, 2020 and March 31, 2020, 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 and $1,200 per month per person. The other plan provides life insurance coverage to certain retired employees and health insurance for retired directors. None of these plans are pre-funded. The Company utilizes FASB ASC Topic 712 to recognize the overfunded or underfunded status of a defined benefit postretirement plan as an asset or liability in its balance sheet and to recognize changes in the funded status in the year in which the changes occur through comprehensive income (loss).

The following table sets forth the accumulated postretirement benefit obligation and funded status:
At or for the three months ended March 31,
20212020
Change in benefit obligation
Benefit obligation at beginning of year$1,523,000 $1,581,000 
Interest cost7,000 16,000 
Benefits paid(24,000)(27,000)
Benefit obligation at end of period$1,506,000 $1,570,000 
Funded status
Benefit obligation at end of period$(1,506,000)$(1,570,000)
Unamortized gain(35,000)(31,000)
Accrued benefit cost at end of period$(1,541,000)$(1,601,000)

The following table sets forth the net periodic pension cost:
For the three months ended March 31,
20212020
Components of net periodic benefit cost
Interest cost$7,000 $16,000 
Net periodic benefit cost$7,000 $16,000 
33


Amounts not yet reflected in net periodic benefit cost and included in accumulated other comprehensive income are as follows:
March 31,
2021
December 31, 2020March 31,
2020
Unamortized net actuarial gain$35,000 $35,000 $31,000 
Deferred tax expense(7,000)(7,000)(7,000)
Net unrecognized postretirement benefits included in accumulated other comprehensive income$28,000 $28,000 $24,000 
A weighted average discount rate of 2.00% 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 2021 are $97,000. Plan expense for 2021 is estimated to be $30,000. A 1% change in trend assumptions would create an approximate change in the same direction of $100,000 in the accumulated benefit obligation, $7,000 in the interest cost and $1,000 in the service cost.


Note 9 - Other Comprehensive Income (Loss)

The following table summarizes activity in the unrealized gain or loss on available for sale securities included in other comprehensive income (loss) for the three months ended March 31, 2021 and 2020.
For the three months ended March 31,
20212020
Balance at beginning of period$5,009,000 $3,657,000 
Unrealized gains (losses) arising during the period(5,945,000)6,109,000 
Reclassification of net realized gains during the period(119,000)(752,000)
Related deferred taxes1,274,000 (1,124,000)
Net change(4,790,000)4,233,000 
Balance at end of period$219,000 $7,890,000 
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 three months ended March 31, 2021 and 2020.
For the three months ended March 31,
20212020
Balance at beginning of period$(133,000)$(182,000)
Amortization of net unrealized gains11,000 10,000 
Related deferred taxes(2,000)(2,000)
Net change9,000 8,000 
Balance at end of period$(124,000)$(174,000)

The following table presents the effect of the Company's derivative financial instruments included in other comprehensive income (loss) for the three months ended March 31, 2021 and 2020.
34


For the three months ended March 31,
20212020
Balance at beginning of period$(4,932,000)$97,000 
Unrealized gains (losses) on cash flow hedging derivatives arising during the period4,390,000 (6,165,000)
Related deferred taxes(921,000)1,295,000 
Net change3,469,000 (4,870,000)
Balance at end of period$(1,463,000)$(4,773,000)
The following table summarizes activity in the unrealized gain or loss on postretirement benefits included in other comprehensive income (loss) for the three months ended March 31, 2021 and 2020.
For the three months ended March 31,
20212020
Unrecognized postretirement benefits at beginning of period$28,000 $24,000 
Amortization of unrecognized transition obligation0 0 
Change in unamortized net actuarial gain (loss)0 
Related deferred taxes0 
Unrecognized postretirement benefits at end of period$28,000 $24,000 


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.
35


The details of the interest rate swap agreements are as follows:
March 31, 2021December 31, 2020March 31, 2020
Effective DateMaturity DateVariable Index ReceivedFixed Rate PaidPresentation on Consolidated Balance SheetNotional AmountFair ValueNotional AmountFair ValueNotional AmountFair Value
06/28/201606/28/20211-Month USD Libor0.940%Other Liabilities$30,000,000 $(61,000)$30,000,000 $(121,000)$30,000,000 $(244,000)
06/27/201606/27/20211-Month USD Libor0.893%Other Liabilities20,000,000 (38,000)20,000,000 (76,000)20,000,000 (151,000)
08/02/201908/02/20241-Month USD Libor1.590%Other Liabilities12,500,000 (458,000)12,500,000 (626,000)12,500,000 (663,000)
08/05/201908/05/20241-Month USD Libor1.420%Other Liabilities12,500,000 (387,000)12,500,000 (550,000)12,500,000 (571,000)
02/12/202002/12/20233-Month USD Libor1.486%Other Liabilities25,000,000 (580,000)25,000,000 (695,000)25,000,000 (748,000)
02/12/202002/12/20243-Month USD Libor1.477%Other Liabilities25,000,000 (735,000)25,000,000 (972,000)25,000,000 (972,000)
06/28/202106/28/20261-Month USD Libor1.158%Other Liabilities50,000,000 (352,000)50,000,000 (1,872,000)50,000,000 (1,569,000)
03/13/202003/13/20253-Month USD Libor0.855%Other Liabilities25,000,000 (99,000)25,000,000 (551,000)25,000,000 (463,000)
03/13/202003/13/20303-Month USD Libor1.029%Other (Liabilities) Assets20,000,000 1,071,000 20,000,000 (339,000)20,000,000 (661,000)
04/07/202004/07/20233-Month USD Libor0.599%Other Liabilities20,000,000 (129,000)20,000,000 (185,000)
04/07/202004/07/20243-Month USD Libor0.643%Other Liabilities20,000,000 (84,000)20,000,000 (255,000)
$260,000,000$(1,852,000)$260,000,000$(6,242,000)$220,000,000$(6,042,000)

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.
Customer loan derivatives
The Bank will enter into interest rate swaps with qualified commercial customers. Through these arrangements, the Bank is able to provide a means for a loan customer to obtain a long-term fixed rate, while it simultaneously contracts with an approved, highly-rated, third-party financial institution as counterparty to swap the fixed rate for a variable rate. Such loan level arrangements are not designated as hedges for accounting purposes, and are recorded at fair value in the Company’s consolidated balance sheet.








36


At March 31, 2021, there were 6 customer loan swap arrangements in place, detailed below:
March 31, 2021December 31, 2020March 31, 2020
Presentation on Consolidated Balance SheetNumber of PositionsNotional AmountFair ValueNumber of PositionsNotional AmountFair ValueNumber of PositionsNotional AmountFair Value
Pay Fixed, Receive VariableOther Assets3$16,797,000 $1,272,000 3$16,922,000 $37,000 $$
Pay Fixed, Receive VariableOther Liabilities325,059,000 (1,334,000)216,065,000 (2,603,000)16,294,000 (3,280,000)
641,856,000 (62,000)532,987,000 (2,566,000)16,294,000 (3,280,000)
Receive Fixed, Pay VariableOther Assets325,059,000 1,334,000 216,065,000 2,603,000 16,294,000 3,280,000 
Receive Fixed, Pay VariableOther Liabilities316,797,000 (1,272,000)316,922,000 (37,000)
641,856,000 62,000 532,987,000 2,566,000 16,294,000 3,280,000 
Total12$83,712,000 $0 10$65,974,000 $$32,588,000 $
Derivative collateral
The Bank has entered into a master netting arrangement with its counterparty and settles payments with the counterparty as necessary. The Bank's arrangement with its institutional counterparty requires it to post cash or other assets as collateral for its various loan swap contracts in a net liability position based on their fair values and the Bank's credit rating or receive cash collateral for contracts in a net asset position as requested. At March 31, 2021, the Bank posted to the counterparty $4,850,000 of cash as collateral on its swap contracts. The required amount to be pledged was $2,119,000.
Cessation of LIBOR
The Company is aware that certain tenors of USD LIBOR may no longer be published after December 31, 2021, while other tenors are expected to continue being published until June 30, 2023. 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 recently issued a voluntary fallback protocol for market participants. 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, along with guidance from US banking regulators, closely, and expects to pursue the steps ultimately recommended to provide for an orderly transition to a post-LIBOR environment. Each of the interest rate swap contracts the Company has in place as of March 31, 2021 is tied to a LIBOR tenor expected to be published until June 2023. NaN contracts carrying a total notional value of $50 million are set to mature in 2021; 2 additional contracts with a total notional value of $45 million mature prior to June 30, 2023, and an additional 7 contracts with a total notional amount of $165 million have maturity dates beyond June 30, 2023. The 6 customer loan swap contracts shown in the table immediately above have maturity dates of December 19, 2029, August 21, 2030, April 30, 2031, July 1, 2035, October 1, 2035 and April 1, 2039.

37


Note 11 – Mortgage Servicing Rights
FASB ASC Topic 860 "Transfers and Servicing" requires all separately recognized servicing assets and servicing liabilities to be initially measured at fair value, if practicable. The Company's servicing assets and servicing liabilities are reported using the amortization method and carried at the lower of amortized cost or fair value by strata. In evaluating the carrying values of mortgage servicing rights, the Company obtains third party valuations based on loan level data including note rate, type and term of the underlying loans. The model utilizes several assumptions, the most significant of which is loan prepayments, calculated using a three-months moving average of weekly prepayment data published by the Public Securities Association (PSA) and modeled against the serviced loan portfolio, and the discount rate to discount future cash flows. As of March 31, 2021, the prepayment assumption using the PSA model was 254, which translates into an anticipated prepayment rate of 15.24%. The discount rate is 9.00%. Other assumptions include delinquency rates, foreclosure rates, servicing cost inflation, and annual unit loan cost. All assumptions are adjusted periodically to reflect current circumstances. Amortization of mortgage servicing rights, as well as write-offs due to prepayments of the related mortgage loans, are recorded as a charge against mortgage servicing fee income.
For the three months ended March 31, 2021 and 2020, servicing rights capitalized totaled $328,000 and $129,000, respectively. Servicing rights amortized for the three-month periods ended March 31, 2021 and 2020 were $151,000 and $66,000, respectively. The fair value of servicing rights was $2,608,000, $1,985,000 and $2,126,000 at March 31, 2021, December 31, 2020 and March 31, 2020, respectively. The Bank serviced loans for others totaling $335,938,000, $318,459,000 and $268,077,000 at March 31, 2021, December 31, 2020, and March 31, 2020, respectively.
The Bank recorded an impairment reserve as of March 31, 2021 and December 31, 2020 for strata with a fair value lower than cost. There was 0 impairment reserve as of March 31, 2020. Mortgage servicing rights are included in other assets and detailed in the following table:
March 31,
2021
December 31,
2020
March 31,
2020
Mortgage servicing rights$7,627,000 $7,299,000 $6,269,000 
Accumulated amortization(5,136,000)(4,985,000)(4,660,000)
Amortized cost2,491,000 2,314,000 1,609,000 
Impairment reserve(92,000)(358,000)
Carrying value$2,399,000 $1,956,000 $1,609,000 
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, 2018 through 2020.

Note 13 - Certificates of Deposit
The following table represents the breakdown of certificates of deposit at March 31, 2021 and 2020, and at December 31, 2020:
March 31, 2021December 31, 2020March 31, 2020
Certificates of deposit < $100,000$230,290,000 $246,875,000 $274,621,000 
Certificates $100,000 to $250,000343,805,000 295,672,000 364,530,000 
Certificates $250,000 and over60,235,000 63,038,000 71,787,000 
$634,330,000 $605,585,000 $710,938,000 

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.

38


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

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

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

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

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

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

39


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 March 31, 2021 and 2020, and December 31, 2020, 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.

















40


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 March 31, 2021, December 31, 2020 and March 31, 2020.
At March 31, 2021
Level 1Level 2Level 3Total
Securities available for sale
   U.S. Government-sponsored agencies$$21,485,000 $$21,485,000 
   Mortgage-backed securities227,914,000 227,914,000 
   State and political subdivisions37,558,000 37,558,000 
   Asset-backed securities7,580,000 7,580,000 
Total securities available for sale294,537,000 294,537,000 
  Interest rate swap agreements1,071,000 1,071,000 
  Customer loan interest swap agreements2,606,000 2,606,000 
Total interest rate swap agreements3,677,000 3,677,000 
Total assets$$298,214,000 $$298,214,000 

At March 31, 2021
Level 1Level 2Level 3Total
Interest rate swap agreements$$2,923,000 $$2,923,000 
Customer loan interest swap agreements2,606,000 2,606,000 
Total liabilities$$5,529,000 $$5,529,000 

At December 31, 2020
Level 1Level 2Level 3Total
Securities available for sale
   U.S. Government-sponsored agencies$$22,730,000 $$22,730,000 
   Mortgage-backed securities243,406,000 243,406,000 
   State and political subdivisions39,474,000 39,474,000 
   Asset-backed securities7,766,000 7,766,000 
Total securities available for sale313,376,000 313,376,000 
   Customer loan interest swap agreements2,640,000 2,640,000 
Total interest rate swap agreements2,640,000 2,640,000 
Total assets$$316,016,000 $$316,016,000 

At December 31, 2020
Level 1Level 2Level 3Total
Interest rate swap agreements$$6,242,000 $$6,242,000 
Customer loan interest swap agreements2,640,000 2,640,000 
Total liabilities$$8,882,000 $$8,882,000 

41


At March 31, 2020
Level 1Level 2Level 3Total
Securities available for sale
   U.S. Treasury and agency$$7,552,000 $$7,552,000 
   Mortgage-backed securities285,152,000 285,152,000 
   State and political subdivisions20,224,000 20,224,000 
Total securities available for sale312,928,000 312,928,000 
   Customer loan interest swap agreements3,280,000 3,280,000 
Total interest swap agreements3,280,000 3,280,000 
Total assets$$316,208,000 $$316,208,000 

At March 31, 2020
Level 1Level 2Level 3Total
Interest rate swap agreements$$6,042,000 $$6,042,000 
Customer loan interest swap agreements3,280,000 3,280,000 
Total liabilities$$9,322,000 $$9,322,000 

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 $92,000 at March 31, 2021 and $358,000 at December 31, 2020. Other real estate owned is presented net of an allowance of $45,000 at both March 31, 2021 and December 31, 2020. There was no allowance for other real estate owned at March 31, 2020. 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 $641,000, $304,000 and $706,000 at March 31, 2021, December 31, 2020, and March 31, 2020, respectively.
At March 31, 2021
Level 1Level 2Level 3Total
Mortgage servicing rights$$2,608,000 $$2,608,000 
Other real estate owned401,000 401,000 
Impaired loans234,000 234,000 
Total assets$$3,243,000 $$3,243,000 

At December 31, 2020
Level 1Level 2Level 3Total
Mortgage servicing rights$$1,985,000 $$1,985,000 
Other real estate owned908,000 908,000 
Impaired loans794,000 794,000 
Total assets$$3,687,000 $$3,687,000 

At March 31, 2020
Level 1Level 2Level 3Total
Other real estate owned$$316,000 $$316,000 
Impaired loans1,051,000 1,051,000 
Total assets$$1,367,000 $$1,367,000 

42


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 March 31, 2021 were as follows:
Carrying valueEstimated fair valueLevel 1Level 2Level 3
Financial assets
Securities to be held to maturity$385,352,000 $388,836,000 $$388,836,000 $
Loans (net of allowance for loan losses)
Commercial
   Real estate463,854,000 459,158,000 459,158,000 
   Construction52,702,000 52,168,000 52,168,000 
   Other293,139,000 289,541,000 50,000 289,491,000 
Municipal49,279,000 48,698,000 48,698,000 
Residential
   Term517,160,000 526,134,000 184,000 525,950,000 
   Construction24,656,000 25,028,000 25,028,000 
Home equity line of credit76,201,000 74,813,000 74,813,000 
Consumer23,187,000 21,304,000 21,304,000 
Total loans1,500,178,000 1,496,844,000 234,000 1,496,610,000 
Mortgage servicing rights2,399,000 2,608,000 2,608,000 
Financial liabilities
Local certificates of deposit$246,976,000 $249,458,000 $$249,458,000 $
National certificates of deposit387,354,000 359,899,000 359,899,000 
Total certificates of deposits634,330,000 609,357,000 609,357,000 
Repurchase agreements71,952,000 70,105,000 70,105,000 
Federal Home Loan Bank and Federal Reserve Bank borrowings157,696,000 159,184,000 159,184,000 
Total borrowed funds229,648,000 229,289,000 229,289,000 









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The carrying amounts and estimated fair values for financial instruments as of December 31, 2020 were as follows:
Carrying valueEstimated fair valueLevel 1Level 2Level 3
Financial assets
Securities to be held to maturity$365,613,000 $377,134,000 $$377,134,000 $
Loans (net of allowance for loan losses)
Commercial
   Real estate436,161,000 440,735,000 347,000 440,388,000 
   Construction55,803,000 56,388,000 56,388,000 
   Other281,057,000 279,501,000 5,000 279,496,000 
Municipal43,586,000 44,440,000 44,440,000 
Residential
   Term519,101,000 533,059,000 442,000 532,617,000 
   Construction21,483,000 21,890,000 21,890,000 
Home equity line of credit78,356,000 77,177,000 77,177,000 
Consumer24,961,000 23,502,000 23,502,000 
Total loans1,460,508,000 1,476,692,000 794,000 1,475,898,000 
Mortgage servicing rights1,956,000 1,985,000 1,985,000 
Financial liabilities
Local certificates of deposit$250,264,000 $253,892,000 $$253,892,000 $
National certificates of deposit355,321,000 359,899,000 359,899,000 
Total deposits605,585,000 613,791,000 613,791,000 
Repurchase agreements69,340,000 69,497,000 69,497,000 
Federal Home Loan Bank advances192,698,000 194,469,000 194,469,000 
Total borrowed funds262,038,000 263,966,000 263,966,000 





















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The carrying amount and estimated fair values for financial instruments as of March 31, 2020 were as follows:
Carrying valueEstimated fair valueLevel 1Level 2Level 3
Financial assets
Securities to be held to maturity$341,592,000 $349,248,000 $$349,248,000 $
Loans (net of allowance for loan losses)
Commercial
   Real estate378,049,000 371,916,000 7,000 371,909,000 
   Construction43,397,000 42,693,000 42,693,000 
   Other234,940,000 233,411,000 233,411,000 
Municipal43,502,000 41,909,000 41,909,000 
Residential
   Term499,478,000 503,098,000 335,000 502,763,000 
   Construction15,163,000 15,304,000 15,304,000 
Home equity line of credit89,442,000 89,407,000 700,000 88,707,000 
Consumer28,379,000 26,933,000 9,000 26,924,000 
Total loans1,332,350,000 1,324,671,000 1,051,000 1,323,620,000 
Mortgage servicing rights1,609,000 2,126,000 2,126,000 
Financial liabilities
Local certificates of deposit$290,440,000 $290,886,000 $$290,886,000 $
National certificates of deposit420,498,000 429,110,000 429,110,000 
Total certificates of deposits710,938,000 719,996,000 719,996,000 
Repurchase agreements37,937,000 37,494,000 37,494,000 
Federal Home Loan Bank advances210,103,000 211,228,000 211,228,000 
Total borrowed funds248,040,000 248,722,000 248,722,000 
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Note 16 – Impact of Recently Issued Accounting Standards
In June 2016, the FASB issued Accounting Standards Update (ASU) No. 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. Under the new guidance, which will replace the existing incurred loss model for recognizing credit losses, banks and other lending institutions will be required to recognize the full amount of expected credit losses. The new guidance, which is referred to as the current expected credit loss model, requires that expected credit losses for financial assets held at the reporting date that are accounted for at amortized cost be measured and recognized based on historical experience and current and reasonably supportable forecasted conditions to reflect the full amount of expected credit losses. A modified version of these requirements also applies to debt securities classified as available for sale. The ASU was to be effective for all SEC registrants for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. On October 16, 2019, FASB voted to finalize a proposal issued in August 2019 under which the effective implementation date was changed for SEC registrants meeting the definition of a Smaller Reporting Company to fiscal years beginning after December 15, 2022. Early adoption is permitted for fiscal years beginning after December 15, 2018, including interim periods within such years. The Company qualifies as a Smaller Reporting Company. It continues to evaluate the impact of the adoption of the ASU on its consolidated financial statements, and continues to anticipate that it may have a material impact upon adoption. The Bank has formed an implementation committee for ASU No. 2016-13. To date, committee members have participated in educational seminars on the new standards, identified the historical data sets that will be necessary to implement the new standard, and have chosen a third-party vendor who provides software solutions for ASU No. 2016-13 modeling and calculation. The Bank is in the late stages of implementing this software and plans to run incurred loss and current expected credit loss models in parallel until adoption of ASU No. 2016-13.
In January 2017, the FASB issued ASU No. 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. The ASU was issued to reduce the cost and complexity of the goodwill impairment test. To simplify the subsequent measurement of goodwill, step two of the goodwill impairment test was eliminated. Instead, a Company will recognize an impairment of goodwill should the carrying value of a reporting unit exceed its fair value (i.e. step one). The ASU was effective for the Company on January 1, 2020 and will be applied prospectively. Implementation of this ASU did not have a material effect on the Company's consolidated financial statements.
In August 2018, the FASB issued ASU No. 2018-14, 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 did not have a material impact on the Company’s consolidated financial statements.



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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, 2020, as filed with the SEC, may result in these 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 regularly evaluates the allowance, typically monthly, to determine the appropriate level by taking into consideration factors such as the size and growth trajectory of the portfolio, quality trends as measured by key indicators, prior loan loss experience in major portfolio segments, local and national business and economic conditions, the results of any stress testing undertaken during the period, 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
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impairment tests, which include an evaluation of the ongoing assets, liabilities and revenues from the acquisition and an estimation of the impact of business conditions.
Mortgage Servicing Rights. 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.
Fair Value of Securities. Determining a market price for securities carried at fair value is a critical accounting estimate in the Company's financial statements. Pricing of individual securities is subject to a number of factors including changes in market interest rates, changes in prepayment speeds and assumptions, changes in market tolerance for risk, and any changes in the risk profile of the security. The Company subscribes to a widely recognized, independent pricing service and updates carrying values no less frequently than monthly. It also validates the values provided by the pricing service no less frequently than quarterly by measuring against security prices provided by a secondary source. Results of the validation are reported to the Bank's Asset Liability Committee each quarter and any variances between the two sources above defined thresholds are investigated by management.
Other-Than-Temporary Impairment on Securities. Another significant estimate related to investment securities is the evaluation of other-than-temporary impairments. The evaluation of securities for other-than-temporary impairments is a quantitative and qualitative process, which is subject to risks and uncertainties and is intended to determine whether declines in the fair value of investments should be recognized in current period earnings. 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 Designated as Hedges. The Company recognizes all derivatives in the consolidated balance sheets at fair value. On the date the Company enters into the derivative contract, the Company 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 Company formally documents relationships between hedging instruments and hedged items, as well as its risk management objectives and strategy for undertaking various hedge transactions. The Company also assesses, both at the hedge’s inception and on an ongoing basis, whether the derivatives that are used in hedging transactions are effective in offsetting changes in cash flows or fair values of hedged items. 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 include customer loan swaps, are recorded at fair value with changes in fair value recorded in earnings. The Company discontinues hedge accounting when it determines that the derivative is no longer effective in offsetting changes in the cash flows of the hedged item, that it is unlikely that the forecasted transaction will occur, or that the designation of the derivative as a hedging instrument is no longer appropriate.
Risks & Uncertainties. As of March 31, 2021, local, U.S., and world governments have begun to ease restrictions imposed to curtail the spread of the global pandemic, coronavirus disease (COVID-19), however limitations in many sectors remain in
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place and are expected to remain in place in some form subsequent to March 31, 2021. There continues to be uncertainty surrounding the duration of the pandemic, its potential economic ramifications, and any further government actions to mitigate them. Accordingly, while management has considered the effect of the pandemic on collectability of loans receivable and other business impacts, it is possible that this matter may have a further financial impact on the Company's financial position and results of future operations, such potential impact of which cannot be reasonably estimated.

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.
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 2021 and 2020.
For the three months ended March 31,
Dollars in thousands20212020
Net interest income as presented$15,873 $14,918 
Effect of tax-exempt income597 572 
Net interest income, tax equivalent$16,470 $15,490 
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:
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For the three months ended March 31,
Dollars in thousands20212020
Non-interest expense, as presented$9,874 $11,043 
Net interest income, as presented15,873 14,918 
Effect of tax-exempt interest income597 572 
Non-interest income, as presented5,298 4,221 
Effect of non-interest tax-exempt income41 41 
Net securities gains(119)(752)
Adjusted net interest income plus non-interest income$21,690 $19,000 
Non-GAAP efficiency ratio45.52 %58.12 %
GAAP efficiency ratio46.64 %57.70 %

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.
The following table provides a reconciliation of average tangible shareholders' common equity to the Company's consolidated financial statements, which have been prepared in accordance with GAAP:
For the three months ended March 31,
Dollars in thousands20212020
Average shareholders' equity as presented$228,276 $217,130 
  Less average intangible assets(30,989)(29,931)
Average tangible shareholders' common equity$197,287 $187,199 

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 three months ended March 31,
Dollars in thousands20212020
Net Income, as presented$8,922 $6,495 
Add: provision for loan losses525 400 
Add: income taxes1,850 1,201 
Pre-Tax, pre-provision net income$11,297 $8,096 

Executive Summary
Net income for the three months ended March 31, 2021 was $8.9 million, up $2.4 million or 37.4% from the same period in 2020. Earnings per common share on a fully diluted basis were $0.81 for the three months ended March 31, 2021, up $0.21 or 35.0% from the $0.60 posted for the same period in 2020.
The Company posted record operating results during the first quarter of 2021. Net income of $8.9 million was achieved from a combination of increased net interest income before loan loss provision, continued strong non-interest revenue and controlled operating expenses. Asset quality continues to trend positively as improvements noted over the course of 2020 have been sustained and are ongoing. Based upon the strength of the Company's earnings, a dividend of 31 cents per share was declared in the first quarter, representing a payout to our shareholders of 37.80% of net income for the period.
Net interest income on a tax-equivalent basis was up $1.0 million or 6.3% in the three months ended March 31, 2021 compared to the same period in 2020. This increase is attributable to growth in earning assets and recognition of origination fees on PPP loans. The tax equivalent net interest margin for the three months ended March 31, 2021, was 2.99%, down from 3.12% for the same period in 2020.
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Non-interest income for the three months ended March 31, 2021 was $5.3 million, up $1.1 million or 25.5%, from the three months ended March 31, 2020. Strong demand for both purchase and refinance loans, along with a favorable mortgage servicing right valuation, led to mortgage banking revenue increasing $1.5 million or 290.3% in the first quarter of 2021 versus the prior year. Revenue at First National Wealth Management increased $171,000 or 19.1% over the same period, while other income was up $316,000 or 21.2%, centered in debit card revenue.
Non-interest expense for the three months ended March 31, 2021 was $9.9 million, down $1.2 million or 10.6% from the three months ended March 31, 2020. The year-to-year change is primarily the result of charges taken during the first quarter of 2020, to restructure interest rate swap positions, partially offset by increases in employee expenses and furniture and equipment expense.
Asset quality continued to trend positively in the first quarter. Non-performing assets stood at 0.30% of total assets as of March 31, 2021, down from 0.49% of total assets as of March 31, 2020 and 0.32% as of December 31, 2020. Total past-due loans were 0.37% of total loans as of March 31, 2021, down from 0.66% of total loans as of December 31, 2020 and 1.62% as of March 31, 2020.
The provision for loan losses for the first three months of 2021 was $525,000, up from the $400,000 provisioned in the same period in 2020. The Company continues to view it prudent to consider the uncertainties brought about by COVID-19 and the potential impact to borrowers in its provision analysis. Net loan chargeoffs for the three months ended March 31, 2021 were $184,000 or 0.05% of average loans on an annualized basis. This was up slightly from net chargeoffs of $181,000 for the three months ended March 31, 2020. The allowance for loan losses increased $341,000 between December 31, 2020 and March 31, 2021, and now stands at 1.09% of loans outstanding as of March 31, 2021, down slightly from 1.10% at December 31, 2020 and up from 0.88% of loans outstanding March 31, 2020.
The Company's balance sheet continued to expand in the first three months of 2021 as total assets increased $75.6 million or 3.2% year-to-date. The loan portfolio increased $40.0 million or 2.7% in the three months ended March 31, 2021 and $172.6 million or 12.8% from a year ago. Loan growth in the first quarter was centered in commercial real estate and construction loans, up $24.7 million, and other commercial loans, up $12.5 million. Other commercial loans include Payroll Protection Program (PPP) loan balances of $62.7 million, an increase of $2.5 million in the first quarter. The investment portfolio has increased $460,000 year-to-date and increased $25.5 million or 3.8% from a year ago. On the liability side of the balance sheet, low-cost deposits have increased $68.1 million or 6.3% year-to-date, with much of the growth attributable to various economic stimulus programs, including proceeds of PPP loans, being deposited back to the Bank. Year-over-year, low-cost deposits have increased $370.9 million or 48.0%. Local certificates of deposit ("CDs") decreased $3.3 million and wholesale CDs increased $32.0 million year-to-date.
Remaining well capitalized is a top priority for The First Bancorp, Inc. The Company's total risk-based capital ratio was 14.83% as of March 31, 2021, solidly above the well-capitalized threshold of 10.0% set by the Federal Deposit Insurance Corporation, the Federal Reserve Board, and the Office of the Comptroller of the Currency.
The Company's operating ratios were strong in the first quarter, with a return on average tangible common equity of 18.34% for the three months ended March 31, 2021 compared to 13.95% for the same period in 2020. Our non-GAAP efficiency ratio continues to be an important component in our overall performance and stood at 45.52% for the three months ended March 31, 2021 compared to 58.12% for the same period in 2020. The Company's efficiency ratio was elevated in the first quarter of 2020 due to charges taken to restructure several interest rate swap positions. In the absence of these charges, the non-GAAP efficiency ratio for the first three months of 2020 would have been 48.49%.

Net Interest Income
Total interest income of $19.0 million for the three months ended March 31, 2021 was a decrease of $1.7 million or 8.4% compared to total interest income of $20.7 million for the same period of 2020. Total interest expense of $3.1 million for the three months ended March 31, 2021 was a decrease of $2.7 million or 46.7% compared to total interest expense for the three months ended March 31, 2020. As a result, net interest income of $15.9 million for the three months ended March 31, 2021 was an increase of $1.0 million or 6.4% compared to net interest income of $14.9 million for the same period ended March 31, 2020. This increase is attributable to growth in earning assets. The Company's net interest margin on a tax-equivalent basis for the three months ended March 31, 2021 was 2.99%, down from 3.12% for the first three months of 2020. Tax-exempt interest income amounted to $2.4 million for the three months ended March 31, 2021 compared to $2.3 million for the three months ended March 31, 2020.






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The following tables present the amount of interest earned or paid, as well as the average yield or rate on an annualized basis, for each major category of assets or liabilities for the three months ended March 31, 2021 and 2020. Tax-exempt income is calculated on a tax-equivalent basis, using a 21.0% Federal Income Tax rate.
For the three months ended
March 31, 2021March 31, 2020
Dollars in thousandsAmount of
interest
Average
Yield/Rate
Amount of interestAverage
Yield/Rate
Interest on earning assets
Interest-bearing deposits$12 0.10 %$74 1.43 %
Investments4,342 2.55 %5,253 3.25 %
Loans held for sale19 1.75 %5.99 %
Loans15,177 4.13 %15,934 4.84 %
   Total interest income19,550 3.55 %21,266 4.29 %
Interest expense
Deposits2,198 0.56 %5,186 1.37 %
Other borrowings882 1.52 %590 1.23 %
   Total interest expense3,080 0.68 %5,776 1.36 %
Net interest income$16,470 $15,490 
Interest rate spread2.87 %2.93 %
Net interest margin2.99 %3.12 %
Interest income includes $1.2 million in net origination fees recognized in the first quarter of 2021, attributable to PPP loans; as of March 31, 2021, net unrecognized PPP origination fees totaled $3.3 million. No such fees were recognized in the first quarter of 2020.
The following tables present changes in interest income and expense attributable to changes in interest rates and volume for interest-earning assets and liabilities for the three months ended March 31, 2021 compared to 2020. Tax-exempt income is calculated on a tax-equivalent basis, using a 21% Federal Income Tax rate.
For the three months ended March 31, 2021 compared to 2020
Dollars in thousandsVolumeRate
Rate/Volume1
Total
Interest on earning assets
Interest-bearing deposits$92 $(69)$(85)$(62)
Investment securities334 (1,170)(75)(911)
Loans held for sale61 (4)(43)14 
Loans1,988 (2,441)(304)(757)
   Change in interest income2,475 (3,684)(507)(1,716)
Interest expense
Deposits298 (3,107)(179)(2,988)
Other borrowings131 132 29 292 
   Change in interest expense429 (2,975)(150)(2,696)
   Change in net interest income$2,046 $(709)$(357)$980 
1 Represents the change attributable to a combination of change in rate and change in volume.
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Average Daily Balance Sheets
The following table shows the Company's average daily balance sheets for the three months ended March 31, 2021 and 2020.
For the three months ended
 Dollars in thousandsMarch 31,
2021
March 31,
2020
Assets
Cash and cash equivalents$23,344 $17,336 
Interest-bearing deposits in other banks46,659 20,845 
Securities available for sale303,063 337,096 
Securities to be held to maturity377,518 303,439 
Restricted equity securities, at cost10,335 9,096 
Loans held for sale4,414 336 
Loans1,488,760 1,323,612 
Allowance for loan losses(16,411)(11,747)
     Net loans1,472,349 1,311,865 
Accrued interest receivable9,772 7,943 
Premises and equipment27,382 21,279 
Other real estate owned590 310 
Goodwill30,647 29,805 
Other assets48,245 47,902 
        Total Assets$2,354,318 $2,107,252 
Liabilities & Shareholders' Equity
Demand deposits$260,640 $161,273 
NOW deposits521,480 382,150 
Money market deposits161,963 164,985 
Savings deposits315,008 235,678 
Certificates of deposit606,070 734,544 
     Total deposits1,865,161 1,678,630 
Borrowed funds – short term180,692 127,881 
Borrowed funds – long term55,096 65,103 
Dividends payable944 791 
Other liabilities24,149 17,717 
     Total Liabilities2,126,042 1,890,122 
Shareholders' Equity:
Common stock110 109 
Additional paid-in capital65,414 64,080 
Retained earnings163,262 148,425 
Net unrealized gain on securities available for sale3,399 5,751 
Net unrealized loss on securities transferred from available for sale to held to maturity(130)(179)
Net unrealized loss on cash flow hedging derivative instruments(3,807)(1,080)
Net unrealized gain on postretirement benefit costs28 24 
    Total Shareholders' Equity228,276 217,130 
       Total Liabilities & Shareholders' Equity$2,354,318 $2,107,252 
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Non-Interest Income
Non-interest income of $5.3 million for the three months ended March 31, 2021 is an increase of $1.1 million compared to the same period in 2020. Strong demand for both purchase and refinance loans, along with a favorable mortgage servicing right valuation, led to mortgage banking revenue increasing $1.5 million or 290.3% in the first quarter of 2021 versus the prior year. Revenue at First National Wealth Management increased $171,000 or 19.1% over the same period, while other income was up $316,000 or 21.2%, centered in debit card revenue.

Non-Interest Expense
Non-interest expense of $9.9 million for the three months ended March 31, 2021 is a decrease of 10.6% or $1.2 million compared to non-interest expense of $11.0 million for the same period in 2020. The year-to-year change is primarily the result of charges taken during the first quarter of 2020, to restructure interest rate swap positions, partially offset by increases in employee expenses and furniture and equipment expense. The Company's non-GAAP efficiency ratio stood at 45.52% for the three months ended March 31, 2021, down from 58.12% for the same period in 2020. The Company's efficiency ratio was elevated in the first quarter of 2020 due to the charges taken to restructure several interest rate swap positions. In the absence of these charges, the non-GAAP efficiency ratio for the first three months of 2020 would have been 48.49%.

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

Investments
The Company's investment portfolio increased by $460,000 between December 31, 2020 and March 31, 2021. As of March 31, 2021, mortgage-backed securities had a carrying value of $304.3 million and a fair value of $302.6 million. Of this total, securities with a fair value of $67.6 million or 22.3% of the mortgage-backed portfolio were issued by the Government National Mortgage Association and securities with a fair value of $235.0 million or 77.7% 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 $124,000 at March 31, 2021. This compares to $133,000 and $174,000, net of taxes, at December 31, 2020 and March 31, 2020, respectively. These securities were transferred as a part of the Company's overall investment and balance sheet strategies.

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The following table sets forth the Company's investment securities at their carrying amounts as of March 31, 2021 and 2020 and December 31, 2020.
Dollars in thousandsMarch 31,
2021
December 31,
2020
March 31,
2020
Securities available for sale
U.S. Government-sponsored agencies$21,485 $22,730 $7,552 
Mortgage-backed securities227,914 243,406 285,152 
State and political subdivisions37,558 39,474 20,224 
Asset-backed securities7,580 7,766 — 
$294,537 $313,376 $312,928 
Securities to be held to maturity
U.S. Government-sponsored agencies$35,600 $44,149 $35,981 
Mortgage-backed securities76,365 53,594 51,142 
State and political subdivisions251,137 245,620 239,719 
Corporate securities22,250 22,250 14,750 
$385,352 $365,613 $341,592 
Restricted equity securities
Federal Home Loan Bank Stock$9,068 $9,508 $8,957 
Federal Reserve Bank Stock1,037 1,037 1,037 
$10,105 $10,545 $9,994 
Total securities$689,994 $689,534 $664,514 



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The following table sets forth yields and contractual maturities of the Company's investment securities as of March 31, 2021. 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 years9,379 1.17 %17,650 1.65 %
 Due after 10 years12,106 2.00 %17,950 2.06 %
  Total21,485 1.64 %35,600 1.85 %
 Mortgage-Backed Securities
 Due in 1 year or less2,516 0.07 %415 4.70 %
 Due in 1 to 5 years12,807 (0.11)%5,075 0.44 %
 Due in 5 to 10 years27,818 1.96 %6,311 2.74 %
 Due after 10 years184,773 1.70 %64,564 1.44 %
  Total227,914 1.62 %76,365 1.50 %
 State & Political Subdivisions
 Due in 1 year or less— 0.00 %2,761 5.83 %
 Due in 1 to 5 years365 6.15 %11,917 5.25 %
 Due in 5 to 10 years11,078 4.76 %137,834 4.49 %
 Due after 10 years26,115 3.95 %98,625 3.81 %
  Total37,558 4.21 %251,137 4.27 %
 Asset-Backed Securities
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 years2,312 0.99 %— 0.00 %
Due after 10 years5,268 0.90 %— 0.00 %
Total7,580 0.93 %— 0.00 %
 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 %11,500 4.70 %
 Due after 10 years— 0.00 %— 0.00 %
  Total— 0.00 %22,250 4.93 %
$294,537 1.91 %$385,352 3.54 %

Impaired Securities
The securities portfolio contains certain securities where the amortized cost of which exceeds fair value, which at March 31, 2021 amounted to $10.0 million, or 1.51% of the amortized cost of the total securities portfolio. At December 31, 2020, this amount was $1.2 million, or 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 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)
56


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 March 31, 2021, the Company had temporarily impaired securities with a fair value of $268.0 million and unrealized losses of $10.0 million, as identified in the table below. Securities in a continuous unrealized loss position more than twelve months amounted to $3.7 million as of March 31, 2021, compared with $3.9 million at December 31, 2020. The Company has concluded that these securities were not other-than-temporarily impaired. This conclusion was based on the issuer's continued satisfaction of the securities obligations in accordance with their contractual terms and the expectation that the issuer will continue to do so, Management's intent and ability to hold these securities for a period of time sufficient to allow for any anticipated recovery in fair value which may be at maturity, the expectation that the Company will receive 100% of future contractual cash flows, as well as the evaluation of the fundamentals of the issuer's financial condition and other objective evidence. The following table summarizes temporarily impaired securities and their approximate fair values at March 31, 2021:
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$51,894 $(3,601)$— $— $51,894 $(3,601)
Mortgage-backed securities180,138 (5,335)3,744 (130)183,882 (5,465)
State and political subdivisions28,783 (808)— — 28,783 (808)
Corporate Securities3,414 (86)— — 3,414 (86)
$264,229 $(9,830)$3,744 $(130)$267,973 $(9,960)

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 March 31, 2021, there were $3.6 million unrealized losses on these securities compared to $333,000 unrealized losses as of December 31, 2020. All of these securities were credit rated "AAA" or "AA+" by the major credit rating agencies. Management believes that securities issued by U.S. Government-sponsored agencies and enterprises have minimal credit risk, as these agencies and enterprises play a vital role in the nation's financial markets and does not consider these securities to be other-than-temporarily impaired at March 31, 2021.
Mortgage-backed securities issued by U.S. Government agencies and U.S. Government-sponsored enterprises. As of March 31, 2021, there were $5.5 million of unrealized losses on these securities compared with $812,000 at December 31, 2020. 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 March 31, 2021 were attributable to changes in current market yields and spreads since the date the underlying securities were purchased, and does not consider these securities to be other-than-temporarily impaired at March 31, 2021. The Company also has the ability and intent to hold these securities until a recovery of their amortized cost, which may be at maturity.
Obligations of state and political subdivisions. As of March 31, 2021, there were $808,000 of unrealized losses on these securities compared to $3,000 at December 31, 2020. Municipal securities are supported by the general taxing authority of the municipality or a dedicated revenue stream, and, in the case of school districts, are generally supported by state aid. At March 31, 2021, all municipal bond issuers were current on contractually obligated interest and principal payments. The Company attributes the unrealized losses at March 31, 2021 to changes in prevailing market yields and pricing spreads since the date the underlying securities were purchased, combined with current market liquidity conditions and the disruption in the financial markets in general. Accordingly, the Company does not consider these municipal securities to be other-than-temporarily impaired at March 31, 2021.
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Corporate securities. As of March 31, 2021, there were $86,000 of unrealized losses on these securities compared to $2,000 at December 31, 2020. Corporate securities are dependent on the operating performance of the issuers. At March 31, 2021, all corporate bond issuers were current on contractually obligated interest and principal payments.

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 March 31, 2021, the Bank's investment in FHLB stock totaled $9.1 million. This compares to $9.5 million as of December 31, 2020 and $9.0 million as of March 31, 2020. FHLB stock is a non-marketable equity security and therefore is reported at cost, subject to adjustments for any observable market transactions on the same or similar instruments of the investee. No impairment losses have been recorded through March 31, 2021. 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 March 31, 2021, the Bank had $3.5 million in loans held for sale. This compares to $5.9 million loans held for sale at December 31, 2020 and $561,000 loans held for sale at March 31, 2020. 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 three months of 2021, with total loans at $1.52 billion at March 31, 2021, up $40.0 million or 2.7% from total loans of $1.48 billion at December 31, 2020. Commercial loans increased $37.2 million or 4.7% between December 31, 2020 and March 31, 2021, municipal loans increased $5.7 million or 13.0%, residential term loans decreased $1.8 million and home equity lines of credit decreased $2.5 million. Loans made under the U.S. Small Business Administration's PPP accounted for $62.7 million to commercial loans as of March 31, 2021.
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 a construction phase of less than two 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.
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
58


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 36.6% of capital are well under the regulatory guidance of 100.0% of capital at March 31, 2021. Construction loans and non-owner-occupied commercial real estate loans are at 155.2% of total capital, well under the regulatory guidance of 300.0% of capital at March 31, 2021.
The following table summarizes the loan portfolio, by class, at March 31, 2021 and 2020 and December 31, 2020.
Dollars in thousandsMarch 31, 2021December 31, 2020March 31, 2020
Commercial
   Real estate$469,974 31.0 %$442,121 29.9 %$382,753 28.5 %
   Construction53,394 3.5 %56,565 3.8 %43,913 3.3 %
   Other297,488 19.6 %285,015 19.3 %237,896 17.7 %
Municipal49,476 3.3 %43,783 3.0 %43,537 3.2 %
Residential
   Term520,317 34.3 %522,070 35.3 %500,971 37.3 %
   Construction24,796 1.6 %21,600 1.5 %15,202 1.1 %
Home equity line of credit77,210 5.1 %79,750 5.4 %90,674 6.7 %
Consumer24,117 1.6 %25,857 1.8 %29,262 2.2 %
Total loans$1,516,772 100.0 %$1,476,761 100.0 %$1,344,208 100.0 %














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The following table sets forth certain information regarding the contractual maturities of the Bank's loan portfolio as of March 31, 2021.
Dollars in thousands< 1 Year1 - 5 Years5 - 10 Years> 10 YearsTotal
Commercial
   Real estate$145 $23,204 $56,119 $390,506 $469,974 
   Construction321 7,394 1,880 43,799 53,394 
   Other941 142,955 75,134 78,458 297,488 
Municipal— 25,353 10,675 13,448 49,476 
Residential
   Term254 8,468 45,373 466,222 520,317 
   Construction— 523 — 24,273 24,796 
Home equity line of credit1,566 611 334 74,699 77,210 
Consumer6,116 6,283 6,335 5,383 24,117 
Total loans$9,343 $214,791 $195,850 $1,096,788 $1,516,772 
The following table provides a listing of loans by class, between variable and fixed rates as of March 31, 2021.
Fixed-RateAdjustable-RateTotal
Dollars in thousandsAmount% of totalAmount% of totalAmount% of total
Commercial
   Real estate$350,590 23.1 %$119,384 7.9 %$469,974 31.0 %
   Construction50,257 3.3 %3,137 0.2 %53,394 3.5 %
   Other255,210 16.8 %42,278 2.8 %297,488 19.6 %
Municipal49,300 3.3 %176 0.0 %49,476 3.3 %
Residential
   Term451,332 29.8 %68,985 4.5 %520,317 34.3 %
   Construction24,720 1.6 %76 0.0 %24,796 1.6 %
Home equity line of credit1,656 0.1 %75,554 5.0 %77,210 5.1 %
Consumer18,209 1.2 %5,908 0.4 %24,117 1.6 %
Total loans$1,201,274 79.2 %$315,498 20.8 %$1,516,772 100.0 %

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

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.
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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 collectibility 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
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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 March 31, 2021, impaired loans with specific reserves totaled $4.4 million and the amount of such reserves was $900,000. This compares to impaired loans with specific reserves of $3.9 million at December 31, 2020 and the amount of such reserves was $462,000.
All of these analyses are reviewed and discussed by the Directors' Loan Committee, and recommendations from these processes provide Management and the Board of Directors with independent information on loan portfolio condition. Our total allowance at March 31, 2021 is considered by Management to be appropriate to address the credit losses inherent in the loan portfolio at that date. However, our determination of the appropriate allowance level is based upon a number of assumptions we make about future events, which we believe are reasonable, but which may or may not prove valid. Thus, there can be no assurance that our charge-offs in future periods will not exceed our allowance for loan losses or that we will not need to make additional increases in our allowance for loan losses.
The following table summarizes our allocation of allowance by loan class as of March 31, 2021 and 2020 and December 31, 2020. The percentages are the portion of each loan class to total loans.
Dollars in thousandsMarch 31, 2021December 31, 2020March 31, 2020
Commercial
   Real estate$5,741 31.0 %$5,178 29.9 %$3,862 28.5 %
   Construction649 3.5 %662 3.8 %424 3.3 %
   Other4,080 19.6 %3,438 19.3 %2,427 17.7 %
Municipal185 3.3 %171 3.0 %29 3.2 %
Residential
   Term2,962 34.3 %2,579 35.3 %1,226 37.2 %
   Construction131 1.6 %102 1.5 %32 1.2 %
Home equity line of credit947 5.1 %1,211 5.4 %1,012 6.7 %
Consumer872 1.6 %778 1.8 %725 2.2 %
Unallocated1,027 — %2,134 — %2,121 — %
Total$16,594 100.0 %$16,253 100.0 %$11,858 100.0 %

The allowance for loan losses totaled $16.6 million at March 31, 2021, compared to $16.3 million as of December 31, 2020 and $11.9 million as of March 31, 2020. Management's ongoing application of methodologies to establish the allowance include an evaluation of impaired loans for specific reserves. These specific reserves increased $438,000 in the first three months of 2021 from $462,000 at December 31, 2020 to $900,000 at March 31, 2021. The specific loans that make up those categories change from period to period. Impairment on those loans, which would be reflected in the allowance for loan losses, might or might not exist, depending on the specific circumstances of each loan. The portion of the reserve based upon homogeneous pools of loans increased by $214,000 in the first three months of 2021. The portion of the reserve based on qualitative factors increased $796,000 in the first three months of 2021 due to a mix of factors. These included changes in various macroeconomic measures used in the qualitative model, updated analysis of the loan portfolio in multiple stress scenarios, and
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performance of COVID-19 related loan modifications. Unallocated reserves of $2.1 million, or 13.1% of the total reserve at December 31, 2020, decreased to $1.0 million, or 6.2% as of March 31, 2021. After consideration of the shifts in specific, pooled and qualitative reserves, Management determined that the unallocated portion of the reserve at March 31, 2021 adequately addresses general imprecision related to loan portfolio growth, along with other underlying credit risks not yet captured in loan specific or qualitative metrics the Company uses to estimate its allowance.
A breakdown of the allowance for loan losses as of March 31, 2021, by loan class and allowance element, is presented in the following table:
 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$174 $797 $4,770 $— $5,741 
   Construction21 90 538 — 649 
   Other563 503 3,014 — 4,080 
Municipal— — 185 — 185 
Residential
   Term142 259 2,561 — 2,962 
   Construction— 12 119 — 131 
Home equity line of credit— 130 817 — 947 
Consumer— 285 587 — 872 
Unallocated— — — 1,027 1,027 
$900 $2,076 $12,591 $1,027 $16,594 

Based upon Management's evaluation, provisions are made to maintain the allowance as a best estimate of inherent losses within the portfolio. The provision for loan losses to maintain the allowance was $525,000 for the first three months of 2021 and $400,000 the first three months of 2020. Net charge-offs were $184,000 in the first three months of 2021, up slightly from $181,000 in the first three months of 2020. Our allowance as a percentage of outstanding loans was 1.09% as of March 31, 2021, down slightly from 1.10% as of December 31, 2020, and up from 0.88% as of March 31, 2020.
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The following table summarizes the activities in our allowance for loan losses for the three months ended March 31, 2021 and 2020 and for the year ended December 31, 2020:
Dollars in thousandsMarch 31, 2021December 31, 2020March 31, 2020
Balance at the beginning of year$16,253 $11,639 $11,639 
Loans charged off:
Commercial
   Real estate5 1,088 — 
   Construction — — 
   Other142 27 — 
Municipal — — 
Residential
   Term29 66 
   Construction — — 
Home equity line of credit 153 153 
Consumer103 327 100 
Total279 1,661 255 
Recoveries on loans previously charged off
Commercial
   Real estate65 — — <