FIRST BANCORP, INC / ME / Management’s Discussion and Analysis of Financial Condition and Results of Operations (Form 10-Q)

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, the fair value of
securities, goodwill, the valuation of mortgage servicing rights, and
other-than-temporary impairment on securities. Management bases its estimates on
historical experience and on various other assumptions that are believed to be
reasonable under the circumstances, the results of which form the basis in
making judgments about the carrying values of assets that are not readily
apparent from other sources. 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 Financial Accounting
Standards Board ("FASB") Accounting Standards Codification ("ASC") Topic 350
"Intangibles - Goodwill and Other." In addition,
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goodwill from a purchase acquisition is subject to ongoing periodic impairment
tests, which include an evaluation of the ongoing assets, liabilities and
revenues from the acquisition and an estimation of the impact of business
conditions.
Mortgage Servicing Rights. 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
impairment. The evaluation of securities for other-than-temporary impairment is
a quantitative and qualitative process, which is subject to risks and
uncertainties and is intended to determine whether declines in the fair value of
investments should be recognized in current period earnings. The risks and
uncertainties include changes in general economic conditions, the issuer's
financial condition and/or future prospects, the effects of changes in interest
rates or credit spreads and the expected recovery period of unrealized losses.
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 Bank also assesses, both at the hedge's inception and on an ongoing basis,
whether the derivatives that are used in hedging transactions are effective in
offsetting changes in cash flows or fair values of hedged items. Changes in fair
value of a derivative that is effective and that qualifies as a cash flow hedge
are recorded in other comprehensive income (loss) and are reclassified into
earnings when the forecasted transaction or related cash flows affect earnings.
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 and Uncertainties. As of September 30, 2021, local and state governments
in the US have eased most restrictions imposed to curtail the spread of the
global pandemic, coronavirus disease (COVID-19), however limitations in some
sectors
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remain in place and are expected to remain in place in some form subsequent to
September 30, 2021. There continues to be uncertainty surrounding the duration
of the pandemic, its potential economic ramifications, and any further
government actions to mitigate them. 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 nine months ended     

For the quarter ended in September

                                                  September 30,                         30,
Dollars in thousands                          2021             2020             2021            2020

Net interest income as presented $ 48,607 $ 44,154 $

      17,011    $    14,745
Effect of tax-exempt income                      1,762           1,741              574            586

Net interest income, tax equivalent $ 50,369 $ 45,895 $

17,585 $ 15,331


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.










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

                                             For the nine months ended 

September 30, For the closed quarter September 30, Dollars in thousands

                               2021                    2020                  2021                2020
Non-interest expense, as presented       $            29,302      $         

29,236 $ 9,932 $ 9,276 Net interest income, as presented

                     48,607                   44,154              17,011               14,745
Effect of tax-exempt interest income                   1,762                    1,741                 574                  586
Non-interest income, as presented                     14,584                   13,627               4,375                4,805
Effect of non-interest tax-exempt income                 124                      124                  41                   41
Net securities (gains) losses                            (22)                  (1,179)                142                    -
Adjusted net interest income plus
non-interest income                      $            65,055      $            58,467    $         22,143     $         20,177
Non-GAAP efficiency ratio                              45.04    %               50.00  %            44.85   %            45.97  %
GAAP efficiency ratio                                  46.37    %               50.60  %            46.44   %            47.45  %



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 nine months ended         For the quarter ended
                                                   September 30,                   September 30,
Dollars in thousands                           2021             2020            2021            2020
Average shareholders' equity as
presented                                $      233,763    $    218,603    

$ 239,672 $ 220,465

 Less average intangible assets                 (30,971)        (29,920)        (30,994)       (29,934)
Average tangible shareholders' common
equity                                   $      202,792    $    188,683    $    208,678    $   190,531



To provide period-to-period comparison of operating results prior to
consideration of credit loss provision and income taxes, the non-GAAP measure of
Pre-Tax, Pre-Provision Net Income is presented. The following table provides a
reconciliation to Net Income:
                                             For the nine months ended     

For the quarter ended in September

                                                   September 30,                         30,
Dollars in thousands                           2021             2020             2021            2020
Net Income, as presented                 $       26,723    $     20,159    $       9,014    $     7,095
Add: provision for loan losses                    1,575           4,550              525          1,800
Add: income taxes expense                         5,591           3,836     

1,915 1,379 Net income before tax and before provisions $ 33,889 $ 28,545 $ 11,454 $ 10,274








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Executive Summary
Net income for the nine months ended September 30, 2021 was $26.7 million, up
$6.6 million or 32.6% from the same period in 2020. Earnings per common share on
a fully diluted basis were $2.43 for the nine months ended September 30, 2021,
up $0.59 or 32.1% from the $1.84 posted for the same period in 2020. For the
quarter ended September 30, 2021, net income was $9.0 million, up $1.9 million
or 27.0% from the same period in 2020. Earnings per common share on a fully
diluted basis were $0.82 for the quarter ended September 30, 2021, up $0.17 or
26.2% from the $0.65 posted for the same period in 2020.
The Company posted very positive operating results during the first nine months
of 2021. Net income of $26.7 million was achieved from a combination of
increased net interest income before loan loss provision, continued strong
non-interest revenue and controlled operating expenses. Asset quality is strong
and stable. Based upon the strength of the Company's earnings, dividends
totaling 95 cents per share have been declared year-to-date, representing a
payout to our shareholders of 38.78% of basic earnings per share for the period.
Net interest income on a tax-equivalent basis was up $4.47 million or 9.7% in
the nine months ended September 30, 2021 compared to the same period in 2020.
This increase is attributable primarily to growth in earning assets along with
recognition of origination fees on Payroll Protection Plan ("PPP") loans. The
tax equivalent net interest margin for the nine months ended September 30, 2021,
was 2.94%, slightly up from 2.93% for the same period in 2020. For the quarter
ended September 30, 2021, net interest income on a tax-equivalent basis
increased $2.3 million or 14.7% compared to the same period in 2020, with the
net interest margin at 2.96% compared to 2.82% for the same period in 2020.
Non-interest income for the nine months ended September 30, 2021 was $14.6
million, up $1.0 million or 7.0%, from the nine months ended September 30, 2020.
Revenue at First National Wealth Management increased $640,000 or 23.6% over the
same period, debit card revenue was up $834,000 or 27.4% and mortgage banking
revenue increased $549,000 or 14.4%. Net gains on sales of securities for the
nine months ended September 30, 2021 were down $1.2 million, or 98.1% from the
prior year period.
Non-interest expense for the nine months ended September 30, 2021 was $29.3
million, up $66,000 or 0.2% from the nine months ended September 30, 2020.
Salaries and employee benefits increased while other operating expense decreased
over the same period.
Asset quality continues to be strong and stable. Non-performing assets stood at
0.25% of total assets as of September 30, 2021, down from 0.43% of total assets
as of September 30, 2020 and 0.32% as of December 31, 2020. Total past-due loans
were 0.25% of total loans as of September 30, 2021, down from 0.66% of total
loans as of December 31, 2020 and 0.89% as of September 30, 2020.
The provision for loan losses for the first nine months of 2021 was $1.6
million, down from the $4.6 million provisioned in the same period in 2020. The
Company continues to view it prudent to consider the uncertainties brought about
by COVID-19 and the potential impact to borrowers in its provision analysis. Net
loan chargeoffs for the nine months ended September 30, 2021 were $321,000 or
0.03% of average loans on an annualized basis. This was down from net chargeoffs
of $818,000 for the nine months ended September 30, 2020. The allowance for loan
losses increased $1.3 million between December 31, 2020 and September 30, 2021,
and now stands at 1.08% of loans outstanding as of September 30, 2021, down
slightly from 1.10% at December 31, 2020 and up slightly from 1.07% of loans
outstanding September 30, 2020.
The Company's balance sheet continued to expand in the first nine months of 2021
as total assets increased $168.4 million or 7.1% year-to-date. The loan
portfolio increased $140.5 million or 9.5% in the nine months ended September
30, 2021 and $180.6 million or 12.6% from a year ago. Loan growth in the first
nine months of 2021 was centered in commercial real estate and construction
loans, up $124.7 million, and other commercial loans, up $3.1 million. Other
commercial loans include PPP loan balances of $39.6 million, a decrease of
$20.5 million since December 31, 2020. The investment portfolio has increased
$4.2 million year-to-date and increased $11.1 million or 1.6% from a year ago.
On the liability side of the balance sheet, low-cost deposits have increased
$253.0 million or 23.5% year-to-date; this growth is attributed to a combination
of inflows from economic stimulus programs, new customer acquisition, and an
anecdotally strong summer tourism season in the Bank's market area.
Year-over-year, low-cost deposits have increased $312.0 million or 30.7%. Local
certificates of deposit ("CDs") decreased $12.1 million and wholesale CDs
decreased $78.9 million year-to-date.
Remaining well capitalized is a top priority for The First Bancorp, Inc. The
Company's total risk-based capital ratio was 14.48% as of September 30, 2021,
solidly above the well-capitalized threshold of 10.0% set by the Federal Deposit
Insurance Corporation, the Federal Reserve Board, and the Office of the
Comptroller of the Currency.
The Company's operating ratios were strong in the first nine months of 2021,
with a return on average tangible common equity of 17.62% for the nine months
ended September 30, 2021 compared to 14.27% for the same period in 2020. Our
non-GAAP efficiency ratio continues to be an important component in the
Company's overall performance and stood at 45.04% for the nine months ended
September 30, 2021 compared to 50.00% for the same period in 2020. The Company's
efficiency ratio was elevated in the first quarter of 2020 due to charges taken
to restructure several interest rate swap positions. In the absence of these
charges, the non-GAAP efficiency ratio for the first nine months of 2020 would
have been 46.87%.


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Net Interest Income
Total interest income of $57.1 million for the nine months ended September 30,
2021 was a decrease of $904,000 or 1.6% compared to total interest income of
$58.0 million for the same period of 2020. Earning asset growth, along with
increased fee recognition from PPP loans, mitigated a reduction in average
earning asset yields of 0.38 percentage points. Total interest expense of $8.5
million for the nine months ended September 30, 2021 was a decrease of $5.4
million or 38.7% compared to total interest expense for the nine months ended
September 30, 2020, a function of a reduction in average cost of 0.43 percentage
points. As a result, net interest income of $48.6 million for the nine months
ended September 30, 2021 was an increase of $4.5 million or 10.1% compared to
net interest income of $44.2 million for the same period ended September 30,
2020. The Company's net interest margin on a tax-equivalent basis for the nine
months ended September 30, 2021 was 2.94%, up slightly from 2.93% for the first
nine months of 2020. Tax-exempt interest income amounted to $6.6 million for the
nine months ended September 30, 2021 compared to $6.5 million for the nine
months ended September 30, 2020.
The following tables present the amount of interest earned or paid, as well as
the average yield or rate on an annualized basis, for each major category of
assets or liabilities for the nine months and quarters ended September 30, 2021
and 2020. Tax-exempt income is calculated on a tax-equivalent basis, using a
21.0% Federal Income Tax rate.
                                                                            

For the nine months ended

                                                            September 30, 2021                             September 30, 2020
                                                    Amount of                Average               Amount of               Average
Dollars in thousands                                 interest               Yield/Rate              interest              Yield/Rate
Interest on earning assets
Interest-bearing deposits                        $          45                  0.11       %     $        87                  0.46       %
Investments                                             12,714                  2.45       %          15,277                  3.07       %
Loans held for sale                                         22                  1.16       %              25                  1.24       %
Loans                                                   46,063                  3.99       %          44,338                  4.23       %
  Total interest income                                 58,844                  3.43       %          59,727                  3.81       %
Interest expense
Deposits                                                 5,796                  0.47       %          11,613                  1.03       %
Other borrowings                                         2,679                  1.54       %           2,219                  1.15       %
  Total interest expense                                 8,475                  0.61       %          13,832                  1.04       %
Net interest income                              $      50,369                                   $    45,895
Interest rate spread                                                            2.82       %                                  2.77       %
Net interest margin                                                             2.94       %                                  2.93       %



                                                                                        For the quarters ended
                                                                September 30, 2021                               September 30, 2020
                                                        Amount of                  Average               Amount of               Average
Dollars in thousands                                     interest                 Yield/Rate              interest              Yield/Rate
Interest on earning assets
Interest-bearing deposits                          $         21                       0.14       %     $         8                  0.12       %
Investments                                               4,168                       2.37       %           4,898                  2.88       %
Loans held for sale                                           3                       0.97       %              19                  1.51       %
Loans                                                    15,970                       3.96       %          14,167                  3.88       %
  Total interest-earning assets                          20,162                       3.39       %          19,092                  3.52       %
Interest expense
Deposits                                                  1,650                       0.40       %           2,866                  0.75       %
Other borrowings                                            927                       1.57       %             895                  1.27       %
  Total interest expense                                  2,577                       0.54       %           3,761                  0.83       %
Net interest income                                $     17,585                                        $    15,331
Interest rate spread                                                                  2.85       %                                  2.69       %
Net interest margin                                                                   2.96       %                                  2.82       %


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Interest income includes $2.9 million in net origination fees recognized during
the first nine months of 2021, attributable to PPP loans; as of September 30,
2021, net unrecognized PPP origination fees totaled $2.4 million. Interest
income in the first nine months of 2020 (program commenced in the second
quarter) included a net $788,000 in origination fees recognized on PPP loans; as
of September 30, 2020 net unrecognized PPP origination fees totaled $2.7
million.
The following tables present changes in interest income and expense attributable
to changes in interest rates and volume for interest-earning assets and
liabilities for the nine months and quarters ended ended September 30, 2021
compared to 2020. Tax-exempt income is calculated on a tax-equivalent basis,
using a 21% Federal Income Tax rate.
For the nine months ended September 30, 2021 compared to 2020
Dollars in thousands                              Volume              Rate              Rate/Volume1            Total
Interest on earning assets
Interest-bearing deposits                      $      95          $      (66)         $         (71)         $     (42)
Investment securities                                679              (3,104)                  (138)            (2,563)
Loans held for sale                                   (2)                 (2)                     1                 (3)
Loans                                              4,549              (2,562)                  (262)             1,725
  Change in interest income                        5,321              (5,734)                  (470)              (883)
Interest expense
Deposits                                             951              (6,256)                  (512)            (5,817)
Other borrowings                                    (226)                763                    (77)               460
  Change in interest expense                         725              (5,493)                  (589)            (5,357)
  Change in net interest income                $   4,596          $     

(241) $ 119 $ 4,474


1 Represents the change attributable to a combination of change in rate and
change in volume.
For the quarter ended September 30, 2021 compared to 2020
Dollars in thousands                              Volume              Rate              Rate/Volume1            Total
Interest on earning assets
Interest-bearing deposits                      $      11          $        1          $           1          $      13
Investment securities                                153                (856)                   (27)              (730)
Loans held for sale                                  (14)                 (7)                     5                (16)
Loans                                              1,429                 340                     34              1,803
 Change in interest income                         1,579                (522)                    13              1,070
Interest expense
Deposits                                             249              (1,348)                  (117)            (1,216)
Other borrowings                                    (151)                220                    (37)                32
  Change in interest expense                          98              (1,128)                  (154)            (1,184)
  Change in net interest income                $   1,481          $      

$ 606,167 $ 2,254

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Average Daily Balance Sheets
The following table shows the Company's average daily balance sheets for the
nine months and quarters ended September 30, 2021 and 2020.
                                                      For the nine months ended                        For the quarters ended
                                                September 30,           September 30,           September 30,           September 30,
 Dollars in thousands                               2021                    2020                    2021                    2020
Assets
Cash and cash equivalents                     $       23,152          $     

19 336 $ 25,195 $ 24,995
Interest-bearing deposits in other banks

              53,251                  25,386                  59,939                  25,558
Securities available for sale                        306,007                 321,834                 311,212                 318,080
Securities to be held to maturity                    378,526                 332,467                 377,879                 348,185
Restricted equity securities, at cost                  9,539                  10,252                   8,839                  10,545
Loans held for sale                                    2,530                   2,701                   1,228                   4,998
Loans                                              1,543,142               1,399,539               1,599,728               1,453,139
Allowance for loan losses                            (16,788)                (12,850)                (17,180)                (14,552)
   Net loans                                       1,526,354               1,386,689               1,582,548               1,438,587
Accrued interest receivable                            9,686                   9,144                   8,714                   9,947
Premises and equipment                                28,862                  20,971                  29,378                  20,611
Other real estate owned                                  325                     527                      71                     845
Goodwill                                              30,646                  29,805                  30,646                  29,805
Other assets                                          46,040                  51,482                  45,463                  53,131
    Total Assets                              $    2,414,918          $    2,210,594          $    2,481,112          $    2,285,287

Liabilities & Shareholders' Equity
Demand deposits                               $      291,641          $      198,196          $      331,546          $      234,898
NOW deposits                                         544,789                 419,334                 566,574                 452,758
Money market deposits                                176,767                 165,465                 185,745                 165,964
Savings deposits                                     328,648                 253,110                 342,501                 271,035
Certificates of deposit                              584,470                 673,005                 558,563                 631,581
   Total deposits                                  1,926,315               1,709,110               1,984,929               1,756,236
Borrowed funds - short term                          177,110                 203,385                 178,422                 225,897
Borrowed funds - long term                            55,092                  55,097                  55,092                  55,097
Dividends payable                                        796                     813                     615                     848
Other liabilities                                     21,842                  23,586                  22,382                  26,744
   Total Liabilities                               2,181,155               1,991,991               2,241,440               2,064,822
Shareholders' Equity:

Common stock                                             110                     109                     110                     109
Additional paid-in capital                            65,841                  64,396                  66,232                  64,720
Retained earnings                                    168,593                 151,752                 174,123                 155,087
Net unrealized gain on securities available
for sale                                               2,047                   6,772                   1,740                   6,942
Net unrealized loss on securities transferred
from available for sale to held to maturity             (120)                   (163)                   (108)                   (143)
Net unrealized loss on cash flow hedging
derivative instruments                                (2,736)                 (4,287)                 (2,453)                 (6,274)
Net unrealized gain on postretirement benefit
costs                                                     28                      24                      28                      24
  Total Shareholders' Equity                         233,763                 218,603                 239,672                 220,465

Total liabilities and equity $ 2,414,918 $ 2,210,594 $ 2,481,112 $ 2,285,287

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Non-Interest Income
Non-interest income of $14.6 million for the nine months ended September 30,
2021 is an increase of $1.0 million compared to the same period in 2020. Revenue
at First National Wealth Management increased $640,000 or 23.6% over the same
period, debit card revenue was up $834,000 or 27.4%, and mortgage banking
revenue increased $549,000, or 14.4%; net securities gains decreased $1.2
million year-over year. Non-interest income of $4.4 million for the quarter
ended September 30, 2021 is a decrease of $430,000 compared to the same period
in 2020; wealth management revenue increased $226,000 or 24.9% from the prior
year quarter and debit card income increased $268,000, or 25.2%; the gains were
offset by a decrease in mortgage banking revenue of $884,000, or 46.2%
year-over-year, and a decrease in net securities gains of $142,000. The
period-to-period decrease in mortgage banking revenue is a reflection of
extraordinary results in the third quarter of 2020; quarterly mortgage banking
revenue remains well above pre-pandemic norms.

Non-Interest Expense
Non-interest expense of $29.3 million for the nine months ended September 30,
2021 is an increase of 0.2% or $66,000 compared to non-interest expense of $29.2
million for the same period in 2020. Salaries and employee benefits increased
while other operating expense decreased over the same period. The Company's
non-GAAP efficiency ratio stood at 45.04% for the nine months ended September
30, 2021, down from 50.00% for the same period in 2020. The Company's efficiency
ratio was elevated in the first quarter of 2020 due to the charges taken to
restructure interest rate swap positions. In the absence of these charges, the
non-GAAP efficiency ratio for the first nine months of 2020 would have been
46.87%.

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

Investments

The Company's investment portfolio increased by $4.2 million between
December 31, 2020 and September 30, 2021. As of September 30, 2021,
mortgage-backed securities had a carrying value of $311.9 million and a fair
value of $310.6 million. Of this total, securities with a fair value of $65.6
million or 21.1% of the mortgage-backed portfolio were issued by the Government
National Mortgage Association and securities with a fair value of $244.9 million
or 78.9% of the mortgage-backed portfolio were issued by the Federal Home Loan
Mortgage Corporation ("Freddie Mac") and the Federal National Mortgage
Association ("Fannie Mae").
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 $99,000 at September 30, 2021. This compares to $133,000
and $139,000, net of taxes, at December 31, 2020 and September 30, 2020,
respectively. These securities were transferred as a part of the Company's
overall investment and balance sheet strategies.

                                       55
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The following table shows the Company’s investment securities at their book value as of September 30, 2021 and 2020 and December 31, 2020.

                                      September 30,       December 31,       September 30,
Dollars in thousands                       2021               2020                2020
Securities available for sale
U.S. Government-sponsored agencies   $       21,939      $      22,730      $       27,497
Mortgage-backed securities                  247,253            243,406      

276,424

State and political subdivisions             35,179             39,474              36,219
Asset-backed securities                       4,853              7,766                   -
                                     $      309,224      $     313,376      $      340,140
Securities to be held to maturity
U.S. Government-sponsored agencies   $       35,600      $      44,149      $       26,146
Mortgage-backed securities                   64,651             53,594      

43,414

State and political subdivisions            254,198            245,620             245,152

Corporate securities                         21,250             22,250              17,250
                                     $      375,699      $     365,613      $      331,962
Restricted equity securities
Federal Home Loan Bank Stock         $        7,802      $       9,508      $        9,508
Federal Reserve Bank Stock                    1,037              1,037               1,037
                                     $        8,839      $      10,545      $       10,545
Total securities                     $      693,762      $     689,534      $      682,647





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The following table sets forth yields and contractual maturities of the
Company's investment securities as of September 30, 2021. Yields on tax-exempt
securities have been computed on a tax-equivalent basis using a tax rate of 21%.
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 Sale                                 Held to Maturity
                                                           Fair                                            Amortized
 Dollars in thousands                                      Value             Yield to maturity               Cost              Yield to maturity

we Government sponsored agencies

 Due in 1 year or less                                 $        -                    0.00         %      $        -                    0.00         %
 Due in 1 to 5 years                                            -                    0.00         %               -                    0.00         %
 Due in 5 to 10 years                                       9,579                    1.17         %          17,650                    1.65         %
 Due after 10 years                                        12,360                    2.00         %          17,950                    2.06         %
 Total                                                     21,939                    1.64         %          35,600                    1.85         %
 Mortgage-Backed Securities
 Due in 1 year or less                                          -                    0.00         %             153                  (24.09)        %
 Due in 1 to 5 years                                        6,164                    3.50         %           1,466                    2.11         %
 Due in 5 to 10 years                                      16,054                    2.88         %           4,896                    2.81         %
 Due after 10 years                                       225,035                    1.44         %          58,136                    1.32         %
 Total                                                    247,253                    1.59         %          64,651                    1.39         %

State and political subdivisions

 Due in 1 year or less                                          -                    0.00         %           2,885                    5.98         %
 Due in 1 to 5 years                                          365                    6.15         %          11,150                    4.89         %
 Due in 5 to 10 years                                      12,767                    4.00         %         133,993                    4.40         %
 Due after 10 years                                        22,047                    3.74         %         106,170                    3.70         %
 Total                                                     35,179                    3.86         %         254,198                    4.15         %
 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 years                                            -                    0.00         %               -                    0.00         %
Due after 10 years                                          4,853                    0.89         %               -                    0.00         %
Total                                                       4,853                    0.89         %               -                    0.00         %
 Corporate Securities
 Due in 1 year or less                                          -                    0.00         %             750                    1.00         %
 Due in 1 to 5 years                                            -                    0.00         %           6,000                    5.38         %
 Due in 5 to 10 years                                           -                    0.00         %          14,500                    4.40         %
 Due after 10 years                                             -                    0.00         %               -                    0.00         %
 Total                                                          -                    0.00         %          21,250                    4.56         %

                                                       $  309,224                    1.82         %      $  375,699                    3.48         %



Impaired Securities
The securities portfolio contains certain securities where the amortized cost of
which exceeds fair value, which at September 30, 2021 amounted to $8.5 million,
or 1.27% of the amortized cost of the total securities portfolio. At
December 31, 2020, this amount was $1.2 million, or 0.18% of the amortized cost
of total securities portfolio. 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)
                                       57
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the financial condition, credit rating and future prospects of the issuer, (c)
whether the debtor is current on contractually obligated interest and principal
payments, (d) the volatility of the securities market price, (e) the intent and
ability of the Company to retain the investment for a period of time sufficient
to allow for recovery, which may be at maturity, and (f) any other information
and observable data considered relevant in determining whether
other-than-temporary impairment has occurred.
The Company's best estimate of cash flows uses severe economic recession
assumptions due to market uncertainty. The Company's assumptions include but are
not limited to delinquencies, foreclosure levels and constant default rates on
the underlying collateral, loss severity ratios, and constant prepayment rates.
If the Company does not expect to receive 100% of future contractual principal
and interest, an other-than-temporary impairment charge is recognized.
Estimating future cash flows is a quantitative and qualitative process that
incorporates information received from third party sources along with certain
internal assumptions and judgments regarding the future performance of the
underlying collateral.
As of September 30, 2021, the Company had temporarily impaired securities with a
fair value of $332.0 million and unrealized losses of $8.5 million, as
identified in the table below. Securities in a continuous unrealized loss
position more than twelve months amounted to $33.5 million as of September 30,
2021, compared with $3.9 million at December 31, 2020. The Company has concluded
that these securities were not other-than-temporarily impaired. This conclusion
was based on the issuer's continued satisfaction of the securities obligations
in accordance with their contractual terms and the expectation that the issuer
will continue to do so, Management's intent and ability to hold these securities
for a period of time sufficient to allow for any anticipated recovery in fair
value which may be at maturity, the expectation that the Company will receive
100% of future contractual cash flows, as well as the evaluation of the
fundamentals of the issuer's financial condition and other objective evidence.
The following table summarizes temporarily impaired securities and their
approximate fair values at September 30, 2021:
                                                        Less than 12 months                            12 months or more                                  Total
                                                  Fair Value             Unrealized             Fair Value             Unrealized            Fair Value            Unrealized
Dollars in thousands                              (Estimated)              Losses              (Estimated)               Losses             (Estimated)              Losses
U.S. Government-sponsored agencies             $       37,054          $    

(1,396) $ 16,174 $ (871) $ 53,228

          $    (2,267)
Mortgage-backed securities                            207,951               (4,207)                  17,337                 (598)               225,288               (4,805)
State and political subdivisions                       50,050               (1,348)                       -                    -                 50,050               (1,348)

Corporate Securities                                    3,465                  (35)                       -                    -                  3,465                  (35)
                                               $      298,520          $    (6,986)         $        33,511          $    (1,469)         $     332,031          $    (8,455)



For securities with unrealized losses, the following information was considered
in determining that the securities were not other-than-temporarily impaired:
Securities issued by U.S. Government-sponsored agencies and enterprises. As of
September 30, 2021, there were $2.3 million unrealized losses on these
securities compared to $333,000 unrealized losses as of December 31, 2020. All
of these securities were credit rated "AAA" or "AA+" by the major credit rating
agencies. Management believes that securities issued by U.S.
Government-sponsored agencies and enterprises have minimal credit risk, as these
agencies and enterprises play a vital role in the nation's financial markets and
does not consider these securities to be other-than-temporarily impaired at
September 30, 2021.
Mortgage-backed securities issued by U.S. Government agencies and U.S.
Government-sponsored enterprises. As of September 30, 2021, there were $4.8
million of unrealized losses on these securities compared with $812,000 at
December 31, 2020. All of these securities were credit rated "AAA" or "AA+" by
the major credit rating agencies. Management believes that securities issued by
U.S. Government agencies bear no credit risk because they are backed by the full
faith and credit of the United States and that securities issued by U.S.
Government-sponsored enterprises have minimal credit risk, as these agencies and
enterprises play a vital role in the nation's financial markets. Management
believes that the unrealized losses at September 30, 2021 were attributable to
changes in current market yields and spreads since the date the underlying
securities were purchased, and does not consider these securities to be
other-than-temporarily impaired at September 30, 2021. The Company also has the
ability and intent to hold these securities until a recovery of their amortized
cost, which may be at maturity.
Obligations of state and political subdivisions. As of September 30, 2021, there
were $1.3 million of unrealized losses on these securities compared to $3,000 at
December 31, 2020. Municipal securities are supported by the general taxing
authority of the municipality or a dedicated revenue stream, and, in the case of
school districts, are generally supported by state aid. At September 30, 2021,
all municipal bond issuers were current on contractually obligated interest and
principal payments. The Company attributes the unrealized losses at
September 30, 2021 to changes in prevailing market yields and pricing spreads
                                       58
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since the date the underlying securities were purchased, combined with current
market liquidity conditions and the disruption in the financial markets in
general. Accordingly, the Company does not consider these municipal securities
to be other-than-temporarily impaired at September 30, 2021.
Corporate securities. As of September 30, 2021, there were $35,000 of unrealized
losses on these securities compared to $2,000 at December 31, 2020. Corporate
securities are dependent on the operating performance of the issuers. At
September 30, 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 September 30, 2021, the Bank's investment in FHLB
stock totaled $7.8 million. This compares to $9.5 million as of December 31,
2020 and $9.5 million as of September 30, 2020. FHLB stock is a non-marketable
equity security and therefore is reported at cost, subject to adjustments for
any observable market transactions on the same or similar instruments of the
investee. No impairment losses have been recorded through September 30, 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
September 30, 2021, the Bank had $1.4 million in loans held for sale. This
compares to $5.9 million loans held for sale at December 31, 2020 and $6.4
million loans held for sale at September 30, 2020. The Bank participates in
FHLB's Mortgage Partnership Finance Program ("MPF"), selling loans with
recourse. The volume of loans sold to date through the MPF program is de
minimis; therefore, there was minimum impact on the reserve.
Loans
The loan portfolio increased during the first nine months of 2021, with total
loans at $1.62 billion at September 30, 2021, up $140.5 million or 9.5% from
total loans of $1.48 billion at December 31, 2020. Commercial loans increased
$127.8 million or 16.3% between December 31, 2020 and September 30, 2021,
municipal loans decreased $3.2 million or 7.2%, residential term loans increased
$15.7 million, residential construction increased $7.8 million, and home equity
lines of credit decreased $5.2 million. Loans made under the U.S. Small Business
Administration's PPP accounted for $39.6 million of commercial loans as of
September 30, 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.
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Residential term loans consist of residential real estate loans held in the
Company's loan portfolio made to borrowers who demonstrate the ability to make
scheduled payments with full consideration to underwriting factors. Borrower
qualifications include favorable credit history combined with supportive income
requirements and loan-to-value ratios within established policy and regulatory
guidelines. Collateral values are determined based on appraisals and evaluations
in accordance with established policy and regulatory guidelines. Residential
loans typically have a loan-to-value ratio of up to 80% based on appraisal
information at the time the loan is made. Collateral consists of mortgage liens
on one- to four-family residential properties. Loans are offered with fixed or
adjustable rates with amortization terms of up to thirty years.
Residential construction loans typically consist of loans for the purpose of
constructing single family residences to be owned and occupied by the borrower.
Borrower qualifications include favorable credit history combined with
supportive income requirements and loan-to-value ratios within established
policy and regulatory guidelines. Residential construction loans normally have
construction terms of one year or less and payment during the construction term
is typically on an interest only basis from sources including interest reserves,
borrower liquidity and/or income. Residential construction loans will typically
convert to permanent financing from the Company or have another financing
commitment in place from an acceptable mortgage lender. Collateral valuation and
loan-to-value guidelines are consistent with those for residential term loans.
Home equity lines of credit are made to qualified individuals and are secured by
senior or junior mortgage liens on owner-occupied one- to four-family homes,
condominiums, or vacation homes. The home equity line of credit typically has a
variable interest rate and is billed as interest-only payments during the draw
period. At the end of the draw period, the home equity line of credit is billed
as a percentage of the principal balance plus all accrued interest. Loan
maturities are normally 300 months. Borrower qualifications include favorable
credit history combined with supportive income requirements and combined
loan-to-value ratios usually not exceeding 80% inclusive of priority liens.
Collateral valuation guidelines follow those for residential real estate loans.
Consumer loan products including personal lines of credit and amortizing loans
made to qualified individuals for various purposes such as auto, recreational
vehicles, debt consolidation, personal expenses or overdraft protection.
Borrower qualifications include favorable credit history combined with
supportive income and collateral requirements within established policy
guidelines. Consumer loans may be secured or unsecured.
Construction loans, both commercial and residential, at 45.4% of Bank capital
are well under the regulatory guidance of 100.0% of capital at September 30,
2021. Construction loans and non-owner-occupied commercial real estate loans are
at 191.7% of Bank total capital, well under the regulatory guidance of 300.0% of
capital at September 30, 2021.
The following table summarizes the loan portfolio, by class, at September 30,
2021 and 2020 and December 31, 2020.
Dollars in thousands                 September 30, 2021                     December 31, 2020                       September 30, 2020
Commercial
  Real estate                 $    550,077             34.0    %     $    442,121             29.9    %      $    407,128             28.3    %
  Construction                      73,302              4.6    %           56,565              3.8    %            52,038              3.6    %
  Other                            288,121             17.8    %          285,015             19.3    %           309,297             21.5    %
Municipal                           40,616              2.5    %           43,783              3.0    %            44,110              3.1    %
Residential
  Term                             537,811             33.3    %          522,070             35.3    %           497,667             34.6    %
  Construction                      29,358              1.8    %           21,600              1.5    %            16,101              1.2    %
Home equity line of credit          74,594              4.6    %           79,750              5.4    %            82,982              5.8    %
Consumer                            23,333              1.4    %           25,857              1.8    %            27,323              1.9    %
         Total loans          $  1,617,212            100.0    %     $ 
1,476,761            100.0    %      $  1,436,646            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 September 30, 2021.
Dollars in thousands                  < 1 Year           1 - 5 Years           5 - 10 Years           > 10 Years             Total
Commercial
  Real estate                       $   1,888          $     37,644          $      56,107          $   454,438          $   550,077
  Construction                              -                 6,254                 10,892               56,156               73,302
  Other                                   924               135,645                 66,259               85,293              288,121
Municipal                                   -                17,508                  9,230               13,878               40,616
Residential
  Term                                     43                 7,380                 43,645              486,743              537,811
  Construction                            210                   332                      -               28,816               29,358
Home equity line of credit              1,579                   537                    292               72,186               74,594
Consumer                                6,663                 5,998                  5,636                5,036               23,333
Total loans                         $  11,307          $    211,298          $     192,061          $ 1,202,546          $ 1,617,212

The following table presents a list of loans by category, between variable rate and fixed rate at September 30, 2021.

                                            Fixed-Rate                                   Adjustable-Rate                                      Total
Dollars in thousands               Amount              % of total                 Amount                 % of total               Amount              % of total
Commercial
  Real estate                  $   460,507                28.5       %      $         89,570                 5.5       %      $   550,077                34.0       %
  Construction                      70,639                 4.4       %                 2,663                 0.2       %           73,302                 4.6       %
  Other                            260,856                16.1       %                27,265                 1.7       %          288,121                17.8       %
Municipal                           40,466                 2.5       %                   150                 0.0       %           40,616                 2.5       %
Residential
  Term                             476,388                29.5       %                61,423                 3.8       %          537,811                33.3       %
  Construction                      29,358                 1.8       %                     -                 0.0       %           29,358                 1.8       %
Home equity line of credit           2,063                 0.1       %                72,531                 4.5       %           74,594                 4.6       %
Consumer                            16,833                 1.0       %                 6,500                 0.4       %           23,333                 1.4       %
Total loans                    $ 1,357,110                83.9       %      $        260,102                16.1       %      $ 1,617,212               100.0       %



Loan Concentrations
As of September 30, 2021, the Bank had one concentration of loans in one
particular industry that exceeded 10% of its total loan portfolio. Loans to
hotels (except Casino hotels) and motels totaled $165.6 million, or 10.23% of
total loans.

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 commercial loan outstanding balances, excluding SBA PPP
loans, are subject to review and validation annually by an independent
consulting firm. Additionally, commercial loan relationships with exposure
greater than or equal to $500,000 are subject to review annually by the
Company's internal credit review function. 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 the economy has re-opened,
initial experience within these sectors has been generally favorable; our
Allowance for Loan Losses will be evaluated as additional information continues
to become available. The judgmental aspects involved in applying the risk
grading criteria, analyzing the quality of individual loans, and assessing
collateral values can also contribute to undetected, but probable, losses.
Consequently, there may be underlying credit risks that have not yet surfaced in
the loan-specific or qualitative metrics the Company uses to estimate its
allowance for loan losses.

The allowance for loan losses includes reserve amounts assigned to individual
loans on the basis of loan impairment. Certain loans are evaluated individually
and are judged to be impaired when Management believes it is probable that the
Company will not collect all of the contractual interest and principal payments
as scheduled in the loan agreement. Under this method, loans are selected for
evaluation based on non-accrual and/or troubled debt restructure status. A
specific reserve is allocated to an individual loan when that loan has been
deemed impaired and when the amount of a probable loss is estimable on the basis
of its collateral value, the present value of anticipated future cash flows, or
its net realizable value. At September 30, 2021, impaired loans with specific
reserves totaled $3.8 million and the amount of such reserves was $682,000. This
compares to impaired loans with specific reserves of $3.9 million at
December 31, 2020 and the amount of such reserves was $462,000.
All of these analyses are reviewed and discussed by the Directors' Loan
Committee, and recommendations from these processes provide Management and the
Board of Directors with independent information on loan portfolio condition. Our
total allowance at September 30, 2021 is considered by Management to be
appropriate to address the credit losses inherent in the loan portfolio at that
date. However, our determination of the appropriate allowance level is based
upon a number of assumptions we make about future events, which we believe are
reasonable, but which may or may not prove valid. Thus, there can be no
assurance that our charge-offs in future periods will not exceed our allowance
for loan losses or that we will not need to make additional increases in our
allowance for loan losses.
The following table summarizes our allocation of allowance by loan class as of
September 30, 2021 and 2020 and December 31, 2020. The percentages are the
portion of each loan class to total loans.
Dollars in thousands                  September 30, 2021                    December 31, 2020                     September 30, 2020
Commercial
  Real estate                   $    6,499             34.0    %      $    5,178             29.9    %      $    4,761             28.3    %
  Construction                         879              4.6    %             662              3.8    %      $      607              3.6    %
  Other                              3,727             17.8    %           3,438             19.3    %      $    3,642             21.5    %
Municipal                              189              2.5    %             171              3.0    %      $      139              3.1    %
Residential
  Term                               2,761             33.3    %           2,579             35.3    %      $    2,516             34.6    %
  Construction                         142              1.8    %             102              1.5    %      $       81              1.2    %
Home equity line of credit             956              4.6    %           1,211              5.4    %      $    1,457              5.8    %
Consumer                               867              1.4    %             778              1.8    %      $      592              1.9    %
Unallocated                          1,487                -    %           2,134                -    %      $    1,576                -    %
Total                           $   17,507            100.0    %      $   16,253            100.0    %      $   15,371            100.0    %



The allowance for loan losses totaled $17.5 million at September 30, 2021,
compared to $16.3 million as of December 31, 2020 and $15.4 million as of
September 30, 2020. Management's ongoing application of methodologies to
establish the allowance include an evaluation of impaired loans for specific
reserves. These specific reserves increased $220,000 in the first nine months of
2021 from $462,000 at December 31, 2020 to $682,000 at September 30, 2021. The
specific loans that make up those categories change from period to period.
Impairment on those loans, which would be reflected in the allowance for loan
losses, might or might not exist, depending on the specific circumstances of
each loan. The portion of the reserve based upon homogeneous pools of loans
increased by $142,000 in the first nine months of 2021. The portion of the
reserve based on
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qualitative factors increased $1.5 million in the first nine months of 2021 due
to a mix of factors. These included changes in various macroeconomic measures
used in the qualitative model, updated analysis of the loan portfolio in
multiple stress scenarios, and performance of COVID-19 related loan
modifications. Unallocated reserves of $2.1 million, or 13.1% of the total
reserve at December 31, 2020, decreased to $1.5 million, or 8.5% as of
September 30, 2021. After consideration of the shifts in specific, pooled and
qualitative reserves, Management determined that the unallocated portion of the
reserve at September 30, 2021 adequately addresses general imprecision related
to loan portfolio growth, along with other underlying credit risks not yet
captured in loan specific or qualitative metrics the Company uses to estimate
its allowance.
A breakdown of the allowance for loan losses as of September 30, 2021, by loan
class and allowance element, is presented in the following table:
                                                              General
                                        Specific            Reserves on
                                      Reserves on          Loans Based on
                                    Loans Evaluated          Historical           Reserves for
                                    Individually for            Loss               Qualitative            Unallocated
 Dollars in thousands                  Impairment            Experience              Factors               Reserves             Total Reserves
Commercial
  Real estate                       $         138          $       864          $        5,497          $          -          $         6,499
  Construction                                 18                  117                     744                     -                      879
  Other                                       397                  452                   2,878                     -                    3,727
Municipal                                       -                    -                     189                     -                      189
Residential
  Term                                        129                  189                   2,443                     -                    2,761
  Construction                                  -                   10                     132                     -                      142
Home equity line of credit                      -                  109                     847                     -                      956
Consumer                                        -                  263                     604                     -                      867
Unallocated                                     -                    -                       -                 1,487                    1,487
                                    $         682          $     2,004          $       13,334          $      1,487          $        17,507



Based upon Management's evaluation, provisions are made to maintain the
allowance as a best estimate of inherent losses within the portfolio. The
provision for loan losses to maintain the allowance was $1.6 million for the
first nine months of 2021 and $4.6 million the first nine months of 2020. Net
charge-offs were $321,000 in the first nine months of 2021, down from $818,000
in the first nine months of 2020. Our allowance as a percentage of outstanding
loans was 1.08% as of September 30, 2021, down slightly from 1.10% as of
December 31, 2020, and up from 1.07% as of September 30, 2020.
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The following table summarizes the activities in our allowance for loan losses
for the nine months ended September 30, 2021 and 2020 and for the year ended
December 31, 2020:
Dollars in thousands                        September 30, 2021           December 31, 2020           September 30, 2020
Balance at the beginning of period        $            16,253          $           11,639          $            11,639
Loans charged off:
Commercial
  Real estate                                              71                       1,088                          532
  Construction                                              -                           -                            -
  Other                                                   286                          27                           24
Municipal                                                   -                           -                            -
Residential
  Term                                                     41                          66                           46
  Construction                                              -                           -                            -
Home equity line of credit                                  -                         153                          153
Consumer                                                  239                         327                          238
Total                                                     637                       1,661                          993
Recoveries on loans previously charged
off
Commercial
  Real estate                                              95                           -                            -
  Construction                                              -                           -                            -
  Other                                                    83                          37                           24
Municipal                                                   -                           -                            -
Residential
  Term                                                     12                          34                           31
  Construction                                              -                           -                            -
Home equity line of credit                                 60                          22                           20
Consumer                                                   66                         132                          100
Total                                                     316                         225                          175
Net loans charged off                                     321                       1,436                          818
Provision for loan losses                               1,575                       6,050                        4,550
Balance at end of period                  $            17,507          $           16,253          $            15,371
Ratio of net loans charged off to average
loans outstanding1                                       0.03    %                   0.10    %                    0.08    %
Ratio of allowance for loan losses to
total loans outstanding                                  1.08    %                   1.10    %                    1.07    %


1 Annualized using a 365-day basis for 2021 and a 366-day basis for 2020.
In Management's opinion, the level of the provision for loan losses is
directionally consistent with the overall credit quality of our loan portfolio
and corresponding levels of nonperforming loans, as well as with the performance
of the national and local economies, including effects of the COVID-19 pandemic.

COVID-19 Impact on Loan Portfolio
The Company continues to actively work with borrowers impacted by the COVID-19
outbreak. As of September 30, 2021, a total of 1051 loan modification requests
for interest-only payments or deferred payments have been completed in
conformance with the Interagency Statement on Loan Modifications and Reporting
issued March 23, 2020, Section 4013 of the Coronavirus Aid, Relief, Economic
Security ("CARES") Act, or H.R. 133 signed December 27, 2020, which was extended
by the Supplemental Appropriations Act, representing $287.9 million in loan
balances, or approximately 18.3% of the overall loan portfolio. One of these
modifications of a de minimis amount has been classified as a Troubled Debt
Restructure since being
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modified. So long as modified terms are met, loans in an active modification are
not included in past due loan totals and continue to accrue interest.
As of September 30, 2021, 59 loans totaling $6.6 million remained in their
original modification or had had a subsequent modification, representing 0.41%
of the overall portfolio. Refer to Note 3 of the financial statements for
further detail.
First National Bank is a designated SBA preferred lender and has participated in
both the 2020 (PPP1) and 2021 (PPP2) rounds of the Payroll Protection Program.
Under PPP1, 1,718 loans were granted totaling $97.8 million in funds disbursed
to qualified small businesses. The Bank has been actively working with these
borrowers to process applications for forgiveness per PPP guidelines; as of
September 30, 2021, PPP1 balances had been reduced to $656,000. Under PPP2,
1,263 loans totaling $52.1 million had been granted as of September 30, 2021,
and the outstanding balances had been reduced to $39.0 million.
The impact of the consequences of COVID-19 upon borrowers and ultimately the
Company's loan portfolio metrics remains difficult to estimate or ascertain. The
State of Maine, where most of the Bank's customers reside and/or operate
businesses has largely re-opened its economy; quarantines for out of state
visitors and limits on the size of public gatherings have been lifted. The
emergence of the Delta variant of the COVID-19 virus has not yet resulted in new
restrictions or curtailment of economic activity, but remains a threat to
economic normalization and could ultimately have a negative impact on the Bank's
borrowers.

Nonperforming Loans
Nonperforming loans are comprised of loans, for which based on current
information and events, it is probable that we will be unable to collect all
amounts due according to the contractual terms of the loan agreement or when
principal and interest is 90 days or more past due unless the loan is both well
secured and in the process of collection (in which case the loan may continue to
accrue interest in spite of its past due status). A loan is "well secured" if it
is secured (1) by collateral in the form of liens on or pledges of real or
personal property, including securities, that have a realizable value sufficient
to discharge the debt including accrued interest) in full, or (2) by the
guarantee of a financially responsible party. A loan is "in the process of
collection" if collection of the loan is proceeding in due course either (1)
through legal action, including judgment enforcement procedures, or, (2) in
appropriate circumstances, through collection efforts not involving legal action
which are reasonably expected to result in repayment of the debt or in its
restoration to a current status in the near future.
Generally, when a loan becomes 90 days past due it is evaluated for collateral
dependency based upon the most recent appraisal or other evaluation method. If
the collateral value is lower than the outstanding loan balance plus accrued
interest and estimated selling costs, the loan is placed on non-accrual status,
all accrued interest is reversed from interest income, and a specific reserve is
established for the difference between the loan balance and the collateral value
less selling costs, or, in certain situations, the difference between the loan
balance and the collateral value less selling costs is written off.
Concurrently, a new appraisal or valuation may be ordered, depending on
collateral type, currency of the most recent valuation, the size of the loan,
and other factors appropriate to the loan. Upon receipt and acceptance of the
new valuation, the loan may have an additional specific reserve or write down
based on the updated collateral value. On an ongoing basis, appraisals or
valuations may be done periodically on collateral dependent nonperforming loans
and an additional specific reserve or write down will be made, if appropriate,
based on the new collateral value.
Once a loan is placed on nonaccrual, it remains in nonaccrual status until the
loan is current as to payment of both principal and interest and the borrower
demonstrates the ability to pay and remain current. All payments made on
nonaccrual loans are applied to the principal balance of the loan.














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Nonperforming loans, expressed as a percentage of total loans, totaled 0.39% at
September 30, 2021 compared to 0.46% at December 31, 2020 and 0.63% at
September 30, 2020. The following table shows the distribution of nonperforming
loans by class as of September 30, 2021 and 2020 and December 31, 2020:
                               September 30,       December 31,       September 30,
Dollars in thousands                2021               2020                2020
Commercial
  Real estate                 $          604      $         543      $        1,771
  Construction                            23                 89                 307
  Other                                1,251              1,481                 503
Municipal                                  -                  -                   -
Residential
  Term                                 3,785              3,593               4,467
  Construction                             -                  -                   -
Home equity line of credit               482              1,015               2,063
Consumer                                   -                  -                   -
Total nonperforming loans     $        6,145      $       6,721      $        9,111


The amounts shown for total nonperforming loans do not include loans 90 or more
days past due and still accruing interest. These are loans for which we expect
to collect all amounts due, including past-due interest. As of September 30,
2021, loans 90 or more days past due and still accruing interest totaled
$229,000, compared to $1.5 million at December 31, 2020 and $1.5 million at
September 30, 2020.

Troubled Debt Restructured
A troubled debt restructured ("TDR") constitutes a restructuring of debt if the
Company, for economic or legal reasons related to the borrower's financial
difficulties, grants a concession to the borrower that it would not otherwise
consider. To determine whether or not a loan should be classified as a TDR,
Management evaluates a loan based upon the following criteria:
•The borrower demonstrates financial difficulty; common indicators include past
due status with bank obligations, substandard credit bureau reports, or an
inability to refinance with another lender, and
•The Company has granted a concession; common concession types include maturity
date extension, interest rate adjustments to below market pricing, and deferment
of payments.
As of September 30, 2021, we had 64 loans with a balance of $10.1 million that
have been restructured. This compares to 74 loans with a balance of $11.5
million and 78 loans with a balance of $13.4 million classified as TDRs as of
December 31, 2020 and September 30, 2020, respectively.
The following table shows the activity in loans classified as TDRs between
December 31, 2020 and September 30, 2021:
  Balance in Thousands of Dollars   Number of Loans   Aggregate Balance
Total at December 31, 2020                  74        $           11,534
Added in 2021                                3                       345

Loans paid off in 2021                     (13)                   (1,560)
Repayments in 2021                           -                      (268)
Total at September 30, 2021                 64        $           10,051



As of September 30, 2021, 42 loans with an aggregate balance of $8.1 million
were performing under the modified terms, 19 loans with an aggregate balance of
$1.6 million were on nonaccrual and three loans with an aggregate balance of
$261,000 were more than 30 days past due and accruing. As a percentage of
aggregate outstanding balance, 80.9% were performing under the modified terms,
16.4% were on nonaccrual and 2.7% were past due and still accruing.





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The performance status of all RDTs at September 30, 2021, as well as the associated specific reserve in the allowance for loan losses, are summarized by loan type in the following table.

                                Performing    30+ Days Past Due        On           All
 In thousands of dollars       As Modified       and Accruing      Nonaccrual      TDRs
Commercial
  Real estate                 $     2,196    $             -      $       42    $  2,238
  Construction                        681                  -               -         681
  Other                               242                261             380         883
Municipal                               -                  -               -           -
Residential
  Term                              4,994                  4           1,226       6,224
  Construction                          -                  -               -           -
Home equity line of credit             21                  -               -          21
Consumer                                -                  4               -           4
                              $     8,134    $           269      $    1,648    $ 10,051
Percent of balance                   80.9  %             2.7    %       16.4  %    100.0  %
Number of loans                        42                  3              19          64
Associated specific reserve   $       227    $           261      $      148    $    636



Residential, HELOC and consumer TDRs as of September 30, 2021 included 47 loans
with an aggregate balance of $6.2 million, and the modifications granted fell
into five major categories. Loans totaling $4.4 million had an extension of
term, allowing the borrower to repay over an extended number of years and
lowering the monthly payment to a level the borrower can afford. Loans totaling
$2.5 million had interest capitalized, allowing the borrower to become current
after unpaid interest was added to the balance of the loan and re-amortized over
the remaining life of the loan. Rate concessions were granted on loans totaling
$1.2 million. Loans with an aggregate balance of $709,000 were involved in
bankruptcy. Certain residential TDRs had more than one modification.
Commercial TDRs as of September 30, 2021 were comprised of 17 loans with a
balance of $3.8 million. Of this total, five loans with an aggregate balance of
$1.2 million had an extended period of interest-only payments, deferring the
start of principal repayment. Three loans with an aggregate balance of $303,000
had an extension of term, allowing the borrower to repay over an extended number
of years and lowering the monthly payment to a level the borrower can afford.
Three loans with an aggregate balance of $404,000 had a deferral of payment. The
remaining six loans with an aggregate balance of $1.9 million had several
different modifications.
In each case when a loan was modified, Management determined it was in the
Bank's best interest to work with the borrower with modified terms rather than
to proceed to foreclosure. Once a loan is classified as a TDR it generally
remains classified as such until the balance is fully repaid, whether or not the
loan is performing under the modified terms. As of September 30, 2021,
Management is aware of eight loans classified as TDRs that are involved in
bankruptcy with an outstanding balance of $961,000. There were also 19 loans
with an outstanding balance of $1.6 million that were classified as TDRs and on
non-accrual status, of which no loans were in the process of foreclosure.

Impaired Loans
Impaired loans include restructured loans and loans placed on non-accrual
status. These loans are measured at the present value of expected future cash
flows discounted at the loan's effective interest rate or at the fair value of
the collateral less estimated selling costs if the loan is collateral dependent.
If the measure of an impaired loan is lower than the recorded investment in the
loan, a specific reserve is established for the difference. Impaired loans
totaled $14.5 million at September 30, 2021, and have decreased $1.5 million
from December 31, 2020. There were 122 impaired loans at September 30, 2021 down
from 140 loans at December 31, 2020. Impaired commercial loans decreased
$318,000 between December 31, 2020 and September 30, 2021. The specific
allowance for impaired commercial loans increased from $299,000 at December 31,
2020 to $553,000 as of September 30, 2021, which represented the fair value
deficiencies for loans where the fair value of the collateral or net present
value of expected cash flows was estimated at less than our carrying amount of
the loan. From December 31, 2020 to September 30, 2021, impaired residential
loans decreased $632,000 and impaired home equity lines of credit decreased
$536,000.


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The following table sets forth impaired loans as of September 30, 2021 and 2020
and December 31, 2020:
                               September 30,       December 31,       September 30,
Dollars in thousands                2021               2020                2020
Commercial
  Real estate                 $        2,800      $       3,029      $        4,753
  Construction                           705                770               1,009
  Other                                1,755              1,779               1,023
Municipal                                  -                  -                   -
Residential
  Term                                 8,782              9,414              10,182
  Construction                             -                  -                   -
Home equity line of credit               503              1,039               2,364
Consumer                                   4                  8                  10
Total                         $       14,549      $      16,039      $       19,341



Past Due Loans
The Bank's overall loan delinquency ratio was 0.25% at September 30, 2021
compared to 0.66% at December 31, 2020 and 0.89% at September 30, 2020. Loans 90
days delinquent and accruing decreased from $1.5 million at December 31, 2020 to
$229,000 as of September 30, 2021. The following table sets forth loan
delinquencies as of September 30, 2021 and 2020 and December 31, 2020:
                                                   September 30,            December 31,            September 30,
Dollars in thousands                                   2021                     2020                    2020
Commercial
  Real estate                                    $          259           $         555           $        2,909
  Construction                                               28                      93                       80
  Other                                                     676                   2,634                    2,676
Municipal                                                     -                       -                        -
Residential
  Term                                                    2,453                   3,955                    4,509
  Construction                                                -                       -                        -
Home equity line of credit                                  407                   2,336                    2,325
Consumer                                                    295                     149                      277
Total                                            $        4,118           $       9,722           $       12,776
Loans 30-89 days past due to total loans                   0.16    %               0.36    %                0.51    %
Loans 90+ days past due and accruing to total
loans                                                      0.01    %               0.10    %                0.10    %
Loans 90+ days past due on non-accrual to total
loans                                                      0.08    %               0.20    %                0.27    %
Total past due loans to total loans                        0.25    %               0.66    %                0.89    %



Potential Problem Loans and Loans in Process of Foreclosure
Potential problem loans consist of classified, accruing commercial and
commercial real estate loans that were between 30 and 89 days past due. Such
loans are characterized by weaknesses in the financial condition of borrowers or
collateral deficiencies. Based on historical experience, the credit quality of
some of these loans may improve due to improvements in the economy as well as
changes in collateral values or the financial condition of the borrowers, while
the credit quality of other loans may deteriorate, resulting in some amount of
loss. At September 30, 2021, there was one potential problem loan with a balance
of $261,000 or 0.02% of total loans. This compares to five loans with a balance
of $195,000 or 0.01% of total loans at December 31, 2020.
As of September 30, 2021, there were 13 loans in the process of foreclosure with
a total balance of $1,140,000. The Bank's residential foreclosure process begins
when a loan becomes 75 days past due at which time a Demand/Breach Letter is
sent to
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the borrower. If the loan becomes 120 days past due, copies of the promissory
note and mortgage deed are forwarded to the Bank's attorney for review and a
complaint for foreclosure is then prepared. An authorized Bank officer signs the
affidavit certifying the validity of the documents and verification of the past
due amount which is then forwarded to the court. Once a Motion for Summary
Judgment is granted, a Period of Redemption (POR) begins which gives the
customer 90 days to cure the default. A foreclosure auction date is then set 30
days from the POR expiration date if the default is not cured.
The Bank's commercial foreclosure process begins when a loan becomes 60 days
past due, at which time a default letter is issued. At expiration of the period
to cure default, which lasts 12 days after the issuing of the default letter,
copies of the promissory note and mortgage deed are forwarded to the Bank's
attorney for review. A Notice of Statutory Power of Sale is then prepared. This
notice must be published for three consecutive weeks in a newspaper located in
the county in which the property is located. A notice also must be issued to the
mortgagor and all parties of interest 21 days prior to the sale. The foreclosure
auction occurs and the Affidavit of Sale is recorded within the appropriate
county within 30 days of the sale.
The Bank's written policies and procedures for foreclosures, along with
implementation of same, are subject to annual review by its internal audit
provider.  The scope of this review includes loans held in portfolio and loans
serviced for others.  There were no issues requiring management attention in the
most recent review.  Servicing for others includes loans sold to Freddie Mac,
Fannie Mae, and the Federal Home Loan Bank of Boston through its MPF program.
The Bank follows the published guidelines of each investor.  Loans serviced for
Freddie Mac and Fannie Mae have been sold without recourse, and the Bank has no
liability for these loans in the event of foreclosure.  A de minimis volume of
loans has been sold to and serviced for MPF to date.  The Bank retains a second
loss layer credit enhancement obligation; no losses have been recorded on this
credit enhancement obligation since the Bank started selling loans to MPF in
2013.

Other Real Estate Owned
Other real estate owned and repossessed assets ("OREO") are comprised of
properties or other assets acquired through a foreclosure proceeding, or
acceptance of a deed or title in lieu of foreclosure. Real estate acquired
through foreclosure is carried at the lower of fair value less estimated cost to
sell or the cost of the asset and is not included as part of the allowance for
loan loss totals. At September 30, 2021, there were no OREO properties, compared
to December 31, 2020 when there were four properties owned with an OREO balance
of $908,000, net of an allowance for loan losses of $45,000 and September 30,
2020 when there were five properties owned with an OREO balance of $777,000, net
of an allowance for loan losses of 45,000.
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The following table shows the composition of the other real estate held:

                               September 30,       December 31,       September 30,
Dollars in thousands                2021               2020                2020
Carrying Value
Commercial
  Real estate                 $            -      $         445      $          222
  Construction                             -                  -                   -
  Other                                    -                  -                   -
Municipal                                  -                  -                   -
Residential
  Term                                     -                508                 600
  Construction                             -                  -                   -
Home equity line of credit                 -                  -                   -
Consumer                                   -                  -                   -
Total                                      -                953                 822
Related Allowance
Commercial
  Real estate                              -                 45                  45
  Construction                             -                  -                   -
  Other                                    -                  -                   -
Municipal                                  -                  -                   -
Residential
  Term                                     -                  -                   -
  Construction                             -                  -                   -
Home equity line of credit                 -                  -                   -
Consumer                                   -                  -                   -
Total                                      -                 45                  45
Net Value
Commercial
  Real estate                              -                400                 177
  Construction                             -                  -                   -
  Other                                    -                  -                   -
Municipal                                  -                  -                   -
Residential
  Term                                     -                508                 600
  Construction                             -                  -                   -
Home equity line of credit                 -                  -                   -
Consumer                                   -                  -                   -
Total                         $            0      $         908      $          777



Liquidity Management
As of September 30, 2021, the Bank had primary sources of liquidity of $1.0
billion. It is Management's opinion this is sufficient to meet liquidity needs
under a broad range of scenarios. The Bank has an additional $505.0 million in
contingent sources of liquidity, including the Federal Reserve Borrower in
Custody program, municipal and corporate securities, and correspondent bank
lines of credit. The Asset/Liability Committee ("ALCO") establishes guidelines
for liquidity in its Asset/Liability policy and monitors internal liquidity
measures to manage liquidity exposure. Based on its assessment of the liquidity
considerations described above, Management believes the Company's sources of
funding will meet anticipated funding needs.
Liquidity is the ability of a financial institution to meet maturing liability
obligations and customer loan demand.  The Bank's primary source of liquidity is
deposits, which funded 79.8% of total average assets in the first nine months of
2021, up from 77.6% a year ago. While the generally preferred funding strategy
is to attract and retain low-cost deposits, the ability to do
                                       71
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so is affected by competitive interest rates and terms in the marketplace. Other
sources of funding include discretionary use of purchased liabilities (e.g.,
FHLB term advances and other borrowings), cash flows from the securities
portfolios and loan repayments. Securities designated as available for sale may
also be sold in response to short-term or long-term liquidity needs although
Management has no intention to do so at this time.
The Bank has a detailed liquidity funding policy and a contingency funding plan
that provide for the prompt and comprehensive response to unexpected demands for
liquidity. Management has developed quantitative models to estimate needs for
contingent funding that could result from unexpected outflows of funds in excess
of "business as usual" cash flows. In Management's estimation, risks are
concentrated in two major categories: runoff of in-market deposit balances and
the inability to renew wholesale sources of funding. Of the two categories,
potential runoff of deposit balances would have the most significant impact on
contingent liquidity. Our modeling attempts to quantify deposits at risk over
selected time horizons. In addition to these unexpected outflow risks, several
other "business as usual" factors enter into the calculation of the adequacy of
contingent liquidity including payment proceeds from loans and investment
securities, maturing debt obligations and maturing time deposits. The Bank has
established collateralized borrowing capacity with the Federal Reserve Bank
("FRB") of Boston and also maintains additional collateralized borrowing
capacity with the FHLB in excess of levels used in the ordinary course of
business as well as Fed Funds lines with two correspondent banks and
availability through the FRB Borrower in Custody program. In the second quarter
of 2020, the Bank enrolled in the Paycheck Protection Program Liquidity Facility
("PPPLF") offered by the FRB of Boston. PPPLF offered the ability to obtain
advances dollar for dollar against the value of pledged PPP loans; per FRB
rules, the facility terminated on July 30, 2021. No PPP loans were pledged and
no PPPLF advances were taken while the facility was open.
Deposits
During the first nine months of 2021, total deposits increased by $188.6 million
or 10.2% from December 31, 2020 levels. Low-cost deposits (demand, NOW, and
savings accounts) increased by $253.0 million or 23.5% in the first nine months
of 2021, money market deposits increased $26.6 million or 16.2%, and
certificates of deposit decreased $91.0 million or 15.0%. Between September 30,
2020 and September 30, 2021, total deposits increased by $270.2 million or
15.3%. Low-cost deposits increased by $312.0 million or 30.7%, money market
accounts increased $33.5 million or 21.3%, and certificates of deposit decreased
$75.4 million or 12.8%. The increase in low-cost deposits allowed for a decrease
in higher cost certificates of deposit and Borrowed Funds.
Borrowed Funds
The Company uses funding from the FHLB, the FRB and repurchase agreements
enabling it to grow its balance sheet and its revenues. This funding may also be
used to balance seasonal deposit flows or to carry out interest rate risk
management strategies, and may be used to replace or supplement other sources of
funding, including core deposits and certificates of deposit. During the nine
months ended September 30, 2021, borrowed funds decreased $28.8 million or 11.0%
from December 31, 2020; the reduction is centered in the paydown to zero of
funds advanced from FRB. Between September 30, 2020 and September 30, 2021,
borrowed funds decreased by $50.6 million or 17.8%, also centered in repayment
of funds advanced from FRB.
Shareholders' Equity
Shareholders' equity as of September 30, 2021 was $238.7 million, compared to
$223.7 million as of December 31, 2020 and $219.4 million as of September 30,
2020. The Company's earnings in the first nine months of 2021, net of dividends
declared, added to shareholders' equity. The net unrealized loss on
available-for-sale securities, net of tax, presented in accordance with FASB ASC
Topic 320 "Investments - Debt and Equity Securities" stands at $627,000 as of
September 30, 2021 compared to a gain of $5.0 million as of December 31, 2020.
The net unrealized loss on cash flow hedging derivative instruments, net of tax,
stands at $1.5 million, compared $4.9 million as of December 31, 2020.
A cash dividend of $0.32 per share was declared in the third quarter of 2021
bringing the year-to-date total to $0.95 per share. The dividend payout ratio,
which is calculated by dividing dividends declared per share by diluted earnings
per share, was 38.78% for the first nine months of 2021 compared to 49.46% for
the same period in 2020. In determining future dividend payout levels, the Board
of Directors carefully analyzes capital requirements and earnings retention, as
set forth in the Company's Dividend Policy. The ability of the Company to pay
cash dividends to its shareholders depends on receipt of dividends from its
subsidiary, the Bank. The subsidiary may pay dividends to its parent out of so
much of its net profits as the Bank's directors deem appropriate, subject to the
limitation that the total of all dividends declared by the Bank in any calendar
year may not exceed the total of its net profits of that year combined with its
retained net profits of the preceding two years. The amount available for
dividends in 2021 is this year's net income plus $28.0 million.
Financial institution regulators have established guidelines for minimum capital
ratios for banks and bank holding
companies. The net unrealized gain or loss on available for sale securities is
generally not included in computing regulatory
capital. During the first quarter of 2015, the Company adopted the new Basel III
regulatory capital framework as approved by
the federal banking agencies. In order to avoid limitations on capital
distributions, including dividend payments, the Company
must hold a capital conservation buffer of 2.5% above the adequately capitalized
risk-based capital ratios.
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The Company has complied with each of the guidelines for well-capitalized ratios at September 30, 2021. The following tables show the capital ratios of the Bank and the Company at September 30, 2021 and December 31, 2020. From September 30, 2021

                   Leverage                Tier 1             Common Equity Tier 1            Total Risk-Based
Bank                                          8.51           %      13.25          %          13.25               %         14.37              %
Company                                       8.57           %      13.36          %          13.36               %         14.48              %
Adequately capitalized ratio                  4.00           %       6.00          %           4.50               %          8.00              %
Adequately capitalized ratio plus             4.00           %       8.50          %           7.00               %         10.50              %
capital conservation buffer
Well capitalized ratio (Bank only)            5.00           %       8.00          %           6.50               %         10.00              %


As of December 31, 2020                    Leverage                Tier 1             Common Equity Tier 1            Total Risk-Based
Bank                                          8.44           %      13.54          %          13.54               %         14.70              %
Company                                       8.49           %      13.66          %          13.66               %         14.82              %
Adequately capitalized ratio                  4.00           %       6.00          %           4.50               %          8.00              %
Adequately capitalized ratio plus             4.00           %       8.50          %           7.00               %         10.50              %
capital conservation buffer
Well capitalized ratio (Bank only)            5.00           %       8.00          %           6.50               %         10.00              %



The Bank maintains and annually updates a capital plan over a five year horizon;
the capital plan was last updated in the second quarter of 2021. Based upon
reasonable assumptions of growth and operating performance, the base capital
plan model projects that the Bank will be well capitalized throughout the five
year period. The base model is also stress tested for interest rate risk from
increasing and decreasing rates, credit risk in normal, elevated and severe loss
scenarios, and combinations of interest rate and credit risk. In each stress
scenario, the Bank maintained well capitalized status. To further validate its
internal results, the Bank engaged a third party consultant during the third
quarter of 2021 to conduct credit stress tests under six economic scenarios on
its June 30, 2021 loan portfolio. Three of the scenarios emulated the Federal
Reserve's Dodd Frank Act Stress Tests (DFAST), and three were developed by a
leading forecasting firm. The consultant's report applied projected credit
losses over a thirteen quarter horizon to the Bank's capital position with
immediate effect. In each of the six scenarios the Bank remained well
capitalized.

Off-Balance Sheet Financial Instruments and Contractual Obligations

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

At September 30, 2021, the Bank had nine outstanding off-balance sheet,
derivative instruments designated as cash flow hedges. These derivative
instruments were interest rate swap agreements, with notional principal amounts
totaling $210.0 million and an unrealized loss of $1.5 million, net of taxes.
The notional amounts and net unrealized gain (loss) of the financial derivative
instruments do not represent exposure to credit loss. The Bank is exposed to
credit loss only to the extent the counter-party defaults in its responsibility
to pay interest under the terms of the agreements. The credit risk in derivative
instruments is mitigated by entering into transactions with highly-rated
counterparties that Management believes to be creditworthy and by limiting the
amount of exposure to each counter-party. At September 30, 2021, the Bank's
derivative instrument counterparties were credit rated "A" by the major credit
rating agencies. The interest rate swap agreements were entered into by the Bank
to limit its exposure to rising interest rates.



                                       73
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The Bank also enters into swap arrangements with qualified loan customers as a
means to provide these customers with access to long-term fixed interest rates
for borrowings, and simultaneously enters into a swap contract with an approved
third- party financial institution. The terms of the contracts are designed to
offset one another resulting in their being neither a net gain or a loss. The
notional amounts of the financial derivative instruments do not represent
exposure to credit loss. The Bank is exposed to credit loss only to the extent
that either counter-party defaults in its responsibility to pay interest under
the terms of the agreements. Credit risk is mitigated by prudent underwriting of
the loan customer and financial institution counterparties. As of September 30,
2021, the Bank had six loan swap agreements in place with a total notional value
of $81.3 million.

Contractual Obligations
The following table sets forth the contractual obligations of the Company as of
September 30, 2021:
                                                    Less than 1                                                 More than 5
Dollars in thousands               Total               year             1-3 years           3-5 years              years
Borrowed funds                  $ 233,201          $  178,109          $      92          $   55,000          $          -
Operating leases                      648                  44                 81                  57                   466
Certificates of deposit           514,567             354,403            137,033              23,131                     -
Total                           $ 748,416          $  532,556          $ 137,206          $   78,188          $        466
Total loan commitments and
unused lines of credit          $ 333,697          $  333,697          $       -          $        -          $          -




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