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EX-31.2 - EXHIBIT 31.2 - First Bancorp, Inc /ME/fnlc-20160331xex312.htm
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EX-32.1 - EXHIBIT 32.1 - First Bancorp, Inc /ME/fnlc-20160331xex321.htm
EX-32.2 - EXHIBIT 32.2 - First Bancorp, Inc /ME/fnlc-20160331xex322.htm


UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549




FORM 10-Q

[X] Quarterly Report Pursuant to Section 13 or 15(d) of The Securities Exchange Act of 1934
For the quarterly period ended March 31, 2016

Commission File Number 0-26589




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

MAINE
01-0404322
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)

MAIN STREET, DAMARISCOTTA,  MAINE
04543
(Address of principal executive offices)
 (Zip code)

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




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

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

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

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


Indicate the number of shares outstanding of each of the registrant's classes of common stock as of May 2, 2016
Common Stock: 10,776,377 shares




Table of Contents








Part I. Financial Information

Selected Financial Data (Unaudited)
The First Bancorp, Inc. and Subsidiary
Dollars in thousands,
As of and for the three months ended March 31,
 
except for per share amounts
2016
 
2015
 
Summary of Operations
 
 
 
 
Interest Income
$
13,276

 
$
12,365

 
Interest Expense
2,547

 
2,663

 
Net Interest Income
10,729

 
9,702

 
Provision for Loan Losses
375

 
500

 
Non-Interest Income
2,964

 
3,658

 
Non-Interest Expense
7,200

 
7,265

 
Net Income
4,503

 
4,175

 
Per Common Share Data
 
 
 
 
Basic Earnings per Share
$
0.42

 
$
0.39

 
Diluted Earnings per Share
0.42

 
0.39

 
Cash Dividends Declared
0.22

 
0.21

 
Book Value per Common Share
15.92

 
15.23

 
Tangible Book Value per Common Share2
13.13

 
12.43

 
Market Value
19.51

 
17.45

 
Financial Ratios
 
 
 
 
Return on Average Equity1
10.56

%
10.32

%
Return on Average Tangible Common Equity1,2
12.80

%
12.63

%
Return on Average Assets1
1.15

%
1.16

%
Average Equity to Average Assets
10.92

%
11.26

%
Average Tangible Equity to Average Assets2
9.00

%
9.19

%
Net Interest Margin Tax-Equivalent1,2
3.13

%
3.10

%
Dividend Payout Ratio
52.38

%
53.85

%
Allowance for Loan Losses/Total Loans
1.02

%
1.09

%
Non-Performing Loans to Total Loans
0.67

%
1.10

%
Non-Performing Assets to Total Assets
0.53

%
0.91

%
Efficiency Ratio2
51.45

%
56.79

%
At Period End
 
 
 
 
Total Assets
$
1,574,681

 
$
1,458,832

 
Total Loans
1,004,942

 
939,169

 
Total Investment Securities
467,211

 
432,684

 
Total Deposits
1,109,441

 
966,825

 
Total Shareholders' Equity
171,545

 
163,516

 
1Annualized using a 366-day basis for 2016 and a 365-day basis for 2015.
2These ratios use non-GAAP financial measures. See Management's Discussion and Analysis of Financial Condition and Results of Operations for additional disclosures and information.

Page 1



Item 1 – Financial Statements










Report of Independent Registered Public Accounting Firm

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

We have reviewed the accompanying interim consolidated financial information of The First Bancorp, Inc. and Subsidiary as of March 31, 2016 and 2015 and for the three-month periods then ended. These financial statements are the responsibility of the Company's management.
We conducted our reviews in accordance with standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit in accordance with standards of the Public Company Accounting Oversight Board (United States), the objective of which is to express an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our reviews, we are not aware of any material modifications that should be made to the accompanying  interim consolidated financial statements for them to be in conformity with accounting principles generally accepted in the United States of America.


/s/ Berry Dunn McNeil & Parker, LLC
Bangor, Maine
May 6, 2016

Page 2



Consolidated Balance Sheets (Unaudited)
The First Bancorp, Inc. and Subsidiary
 
March 31,
2016
 
December 31, 2015
 
March 31,
2015
Assets
 
 
 
 
 
Cash and cash equivalents
$
14,533,000

 
$
14,299,000

 
$
13,855,000

Interest bearing deposits in other banks
6,372,000

 
4,013,000

 
336,000

Securities available for sale
216,725,000

 
223,039,000

 
156,317,000

Securities to be held to maturity (fair value of $243,337,000 at March 31, 2016, $243,123,000 at December 31, 2015 and $267,247,000 at March 31, 2015)
236,611,000

 
240,023,000

 
262,455,000

Restricted equity securities, at cost
13,875,000

 
14,257,000

 
13,912,000

Loans held for sale
224,000

 
349,000

 

Loans
1,004,942,000

 
988,638,000

 
939,169,000

Less allowance for loan losses
10,219,000

 
9,916,000

 
10,196,000

Net loans
994,723,000

 
978,722,000

 
928,973,000

Accrued interest receivable
6,271,000

 
4,912,000

 
5,724,000

Premises and equipment, net
21,392,000

 
21,816,000

 
22,270,000

Other real estate owned
1,592,000

 
1,532,000

 
2,899,000

Goodwill
29,805,000

 
29,805,000

 
29,805,000

Other assets
32,558,000

 
32,043,000

 
22,286,000

Total assets
$
1,574,681,000

 
$
1,564,810,000

 
$
1,458,832,000

Liabilities
 
 
 
 
 
Demand deposits
$
116,756,000

 
$
130,566,000

 
$
100,939,000

NOW deposits
240,112,000

 
242,638,000

 
199,099,000

Money market deposits
74,643,000

 
92,994,000

 
101,292,000

Savings deposits
205,218,000

 
206,009,000

 
167,338,000

Certificates of deposit
472,712,000

 
370,982,000

 
398,157,000

Total deposits
1,109,441,000

 
1,043,189,000

 
966,825,000

Borrowed funds – short term
151,399,000

 
222,323,000

 
167,437,000

Borrowed funds – long term
125,132,000

 
115,134,000

 
145,139,000

Other liabilities
17,164,000

 
16,666,000

 
15,915,000

Total liabilities
1,403,136,000

 
1,397,312,000

 
1,295,316,000

Shareholders' equity
 
 
 
 
 
Common stock, one cent par value per share
108,000

 
108,000

 
107,000

Additional paid-in capital
60,064,000

 
59,862,000

 
59,286,000

Retained earnings
108,677,000

 
106,673,000

 
101,736,000

Accumulated other comprehensive income (loss)
 
 
 
 
 
   Net unrealized gain on securities available for sale
2,975,000

 
1,123,000

 
2,579,000

Net unrealized loss on securities transferred from available for sale to held to maturity
(123,000
)
 
(112,000
)
 
(67,000
)
   Net unrealized loss on postretirement benefit costs
(156,000
)
 
(156,000
)
 
(125,000
)
Total shareholders' equity
171,545,000

 
167,498,000

 
163,516,000

Total liabilities & shareholders' equity
$
1,574,681,000

 
$
1,564,810,000

 
$
1,458,832,000

Common Stock
 
 
 
 
 
Number of shares authorized
18,000,000

 
18,000,000

 
18,000,000

Number of shares issued and outstanding
10,775,307

 
10,753,855

 
10,734,419

Book value per common share
$
15.92

 
$
15.58

 
$
15.23

Tangible book value per common share
$
13.13

 
$
12.78

 
$
12.43

See Report of Independent Registered Public Accounting Firm.
The accompanying notes are an integral part of these consolidated financial statements.

Page 3



Consolidated Statements of Income and Comprehensive Income (Unaudited)
The First Bancorp, Inc. and Subsidiary
 
For the three months ended March 31,
 
2016
 
2015
Interest income
 
 
 
Interest and fees on loans (includes tax-exempt income of $148,000 for March 31, 2016 and $141,000 for March 31, 2015)
$
9,734,000

 
$
8,855,000

Interest on deposits with other banks
3,000

 
5,000

Interest and dividends on investments (includes tax-exempt income of $1,237,000 for March 31, 2016 and $1,312,000 for March 31, 2015)
3,539,000

 
3,505,000

     Total interest income
13,276,000

 
12,365,000

Interest expense
 
 
 
Interest on deposits
1,353,000

 
1,443,000

Interest on borrowed funds
1,194,000

 
1,220,000

     Total interest expense
2,547,000

 
2,663,000

Net interest income
10,729,000

 
9,702,000

Provision for loan losses
375,000

 
500,000

Net interest income after provision for loan losses
10,354,000

 
9,202,000

Non-interest income
 
 
 
Investment management and fiduciary income
563,000

 
541,000

Service charges on deposit accounts
574,000

 
579,000

Net securities gains
536,000

 
1,395,000

Mortgage origination and servicing income, net of amortization
129,000

 
197,000

Other operating income
1,162,000

 
946,000

     Total non-interest income
2,964,000

 
3,658,000

Non-interest expense
 
 
 
Salaries and employee benefits
3,598,000

 
3,720,000

Occupancy expense
578,000

 
645,000

Furniture and equipment expense
796,000

 
770,000

FDIC insurance premiums
214,000

 
230,000

Amortization of identified intangibles
11,000

 
25,000

Other operating expense
2,003,000

 
1,875,000

     Total non-interest expense
7,200,000

 
7,265,000

Income before income taxes
6,118,000

 
5,595,000

Income tax expense
1,615,000

 
1,420,000

NET INCOME
$
4,503,000

 
$
4,175,000

Basic earnings per common share
$
0.42

 
$
0.39

Diluted earnings per common share
$
0.42

 
$
0.39

Other comprehensive income (loss) net of tax
 
 
 
Net unrealized gain on securities available for sale
1,852,000

 
57,000

Net unrealized loss on securities transferred from available for sale to held to maturity, net of amortization
(11,000
)
 
(19,000
)
      Other comprehensive income
1,841,000

 
38,000

Comprehensive income
$
6,344,000

 
$
4,213,000

See Report of Independent Registered Public Accounting Firm.
The accompanying notes are an integral part of these consolidated financial statements.

Page 4



Consolidated Statements of Changes in Shareholders' Equity (Unaudited)
The First Bancorp, Inc. and Subsidiary
 
 
Common stock and
additional paid-in capital
 
Retained
earnings
 
Accumulated
other
comprehensive
income
 
Total
shareholders'
equity
 
 
Shares
 
Amount
 
 
 
Balance at December 31, 2014
 
10,724,359

 
$
59,389,000

 
$
99,816,000

 
$
2,349,000

 
$
161,554,000

Net income
 

 

 
4,175,000

 

 
4,175,000

Net unrealized gain on securities available for sale, net of tax
 

 

 

 
57,000

 
57,000

Net unrealized loss on securities transferred from available for sale to held to maturity, net of tax
 

 

 

 
(19,000
)
 
(19,000
)
Comprehensive income
 

 

 
4,175,000

 
38,000

 
4,213,000

Cash dividends declared ($0.21 per share)
 

 

 
(2,255,000
)
 

 
(2,255,000
)
Equity compensation expense
 

 
74,000

 

 

 
74,000

Payment to repurchase common stock
 
(10,138
)
 
(180,000
)
 

 

 
(180,000
)
Issuance of restricted stock
 
13,650

 

 

 

 

Proceeds from sale of common stock
 
6,548

 
110,000

 

 

 
110,000

Balance at March 31, 2015
 
10,734,419

 
$
59,393,000

 
$
101,736,000

 
$
2,387,000

 
$
163,516,000

 
 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2015
 
10,753,855

 
$
59,970,000

 
$
106,673,000

 
$
855,000

 
$
167,498,000

Net income
 

 

 
4,503,000

 

 
4,503,000

Net unrealized gain on securities available for sale, net of tax
 

 

 

 
1,852,000

 
1,852,000

Net unrealized loss on securities transferred from available for sale to held to maturity, net of tax
 

 

 

 
(11,000
)
 
(11,000
)
Comprehensive income
 

 

 
4,503,000

 
1,841,000

 
6,344,000

Cash dividends declared ($0.22 per share)
 

 

 
(2,370,000
)
 

 
(2,370,000
)
Equity compensation expense
 

 
49,000

 

 

 
49,000

Payment for repurchase of common stock
 
(6,936
)
 

 
(129,000
)
 

 
(129,000
)
Tax benefit from vesting of restricted stock
 

 
32,000

 

 

 
32,000

Issuance of restricted stock
 
21,847

 

 

 

 

Proceeds from sale of common stock
 
6,541

 
121,000

 

 

 
121,000

Balance at March 31, 2016
 
10,775,307

 
$
60,172,000

 
$
108,677,000

 
$
2,696,000

 
$
171,545,000

See Report of Independent Registered Public Accounting Firm.
The accompanying notes are an integral part of these consolidated financial statements.

Page 5



Consolidated Statements of Cash Flows (Unaudited)
The First Bancorp, Inc. and Subsidiary
 
For the three months ended
 
March 31, 2016
 
March 31, 2015
Cash flows from operating activities
 
 
 
     Net income
$
4,503,000

 
$
4,175,000

Adjustments to reconcile net income to net cash provided by operating activities
 
 
 
Depreciation
432,000

 
425,000

Change in deferred taxes
(111,000
)
 
88,000

Provision for loan losses
375,000

 
500,000

Loans originated for resale
(4,560,000
)
 
(5,489,000
)
Proceeds from sales and transfers of loans
4,799,000

 
5,599,000

Net gain on sales of loans
(114,000
)
 
(110,000
)
Net gain on sale or call of securities
(536,000
)
 
(1,395,000
)
Net amortization of premiums on investments
619,000

 
159,000

Net gain on sale of other real estate owned
(7,000
)
 
(43,000
)
Equity compensation expense
49,000

 
74,000

Tax benefit from vesting of restricted stock
32,000

 

Net increase in other assets and accrued interest
(1,944,000
)
 
(1,301,000
)
Net increase (decrease) in other liabilities
(388,000
)
 
129,000

Amortization of investment in limited partnership
49,000

 
66,000

Net acquisition amortization
11,000

 
25,000

     Net cash provided by operating activities
3,209,000

 
2,902,000

Cash flows from investing activities
 
 
 
(Increase) decrease in interest-bearing deposits in other banks
(2,359,000
)
 
3,223,000

Proceeds from sales of securities available for sale
8,868,000

 
35,465,000

Proceeds from maturities, payments and calls of securities available for sale
8,852,000

 
5,991,000

Proceeds from maturities, payments and calls of securities to be held to maturity
6,228,000

 
18,875,000

Proceeds from sales of other real estate owned
201,000

 
1,309,000

Purchases of securities available for sale
(8,672,000
)
 
(11,255,000
)
Purchases of securities to be held to maturity
(2,785,000
)
 
(5,344,000
)
Redemption of restricted equity securities
382,000

 

Net increase in loans
(16,630,000
)
 
(22,633,000
)
Capital expenditures
(8,000
)
 
(76,000
)
     Net cash provided (used) by investing activities
(5,923,000
)
 
25,555,000

Cash flows from financing activities
 
 
 
Net decrease in demand, savings, and money market accounts
(35,478,000
)
 
(8,650,000
)
Net increase (decrease) in certificates of deposit
101,730,000

 
(49,344,000
)
Net decrease in short-term borrowings
(70,926,000
)
 
(22,340,000
)
Advances on long-term borrowings
10,000,000

 
55,000,000

Payment to repurchase common stock
(129,000
)
 
(180,000
)
Proceeds from sale of common stock
121,000

 
110,000

Dividends paid
(2,370,000
)
 
(2,255,000
)
     Net cash provided (used) by financing activities
2,948,000

 
(27,659,000
)
Net increase in cash and cash equivalents
234,000

 
798,000

Cash and cash equivalents at beginning of period
14,299,000

 
13,057,000

     Cash and cash equivalents at end of period
$
14,533,000

 
$
13,855,000

Interest paid
$
2,487,000

 
$
2,621,000

Income taxes paid

 

Non-cash transactions
 
 
 
Net transfer from loans to other real estate owned
$
254,000

 
$
380,000


Page 6



Notes to Consolidated Financial Statements
The First Bancorp, Inc. and Subsidiary
                          
Note 1 – Basis of Presentation
The First Bancorp, Inc. ("the Company") is a financial holding company that owns all of the common stock of First National Bank ("the Bank"). The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP") for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of Management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. All significant intercompany transactions and balances are eliminated in consolidation. The income reported for the 2016 period is not necessarily indicative of the results that may be expected for the year ending December 31, 2016. For further information, refer to the consolidated financial statements and notes included in the Company's annual report on Form 10-K for the year ended December 31, 2015.
Subsequent Events
Events occurring subsequent to March 31, 2016, have been evaluated as to their potential impact to the financial statements.
Note 2 – Investment Securities
The following table summarizes the amortized cost and estimated fair value of investment securities at March 31, 2016:
 
Amortized
Cost
 
Unrealized Gains
 
Unrealized Losses
 
Fair Value (Estimated)
Securities available for sale
 
 
 
 
 
 
 
Mortgage-backed securities
$
190,025,000

 
$
3,837,000

 
$
(205,000
)
 
$
193,657,000

State and political subdivisions
18,975,000

 
948,000

 
(19,000
)
 
19,904,000

Other equity securities
3,148,000

 
39,000

 
(23,000
)
 
3,164,000

 
$
212,148,000

 
$
4,824,000

 
$
(247,000
)
 
$
216,725,000

Securities to be held to maturity
 
 
 
 
 
 
 
U.S. Government-sponsored agencies
$
68,009,000

 
$
37,000

 
$
(107,000
)
 
$
67,939,000

Mortgage-backed securities
39,828,000

 
1,675,000

 
(35,000
)
 
41,468,000

State and political subdivisions
124,474,000

 
5,156,000

 

 
129,630,000

Corporate securities
4,300,000

 

 

 
4,300,000

 
$
236,611,000

 
$
6,868,000

 
$
(142,000
)
 
$
243,337,000

Restricted equity securities
 
 
 
 
 
 
 
Federal Home Loan Bank Stock
$
12,838,000

 
$

 
$

 
$
12,838,000

Federal Reserve Bank Stock
1,037,000

 

 

 
1,037,000

 
$
13,875,000

 
$

 
$

 
$
13,875,000



Page 7



The following table summarizes the amortized cost and estimated fair value of investment securities at December 31, 2015:
 
Amortized
Cost
 
Unrealized Gains
 
Unrealized Losses
 
Fair Value (Estimated)
Securities available for sale
 
 
 
 
 
 
 
Mortgage-backed securities
$
194,563,000

 
$
1,509,000

 
$
(962,000
)
 
$
195,110,000

State and political subdivisions
23,367,000

 
1,201,000

 
(62,000
)
 
24,506,000

Other equity securities
3,381,000

 
48,000

 
(6,000
)
 
3,423,000

 
$
221,311,000

 
$
2,758,000

 
$
(1,030,000
)
 
$
223,039,000

Securities to be held to maturity
 
 
 
 
 
 
 
U.S. Government-sponsored agencies
$
71,000,000

 
$
40,000

 
$
(2,284,000
)
 
$
68,756,000

Mortgage-backed securities
42,193,000

 
1,305,000

 
(136,000
)
 
43,362,000

State and political subdivisions
122,530,000

 
4,200,000

 
(25,000
)
 
126,705,000

Corporate securities
4,300,000

 

 

 
4,300,000

 
$
240,023,000

 
$
5,545,000

 
$
(2,445,000
)
 
$
243,123,000

Restricted equity securities
 
 
 
 
 
 
 
Federal Home Loan Bank Stock
$
13,220,000

 
$

 
$

 
$
13,220,000

Federal Reserve Bank Stock
1,037,000

 

 

 
1,037,000

 
$
14,257,000

 
$

 
$

 
$
14,257,000


The following table summarizes the amortized cost and estimated fair value of investment securities at March 31, 2015:
 
Amortized
Cost
 
Unrealized Gains
 
Unrealized Losses
 
Fair Value (Estimated)
Securities available for sale
 
 
 
 
 
 
 
Mortgage-backed securities
$
124,969,000

 
$
2,790,000

 
$
(142,000
)
 
$
127,617,000

State and political subdivisions
24,384,000

 
1,328,000

 
(114,000
)
 
25,598,000

Other equity securities
2,997,000

 
105,000

 

 
3,102,000

 
$
152,350,000

 
$
4,223,000

 
$
(256,000
)
 
$
156,317,000

Securities to be held to maturity
 
 
 
 
 
 
 
U.S. Government-sponsored agencies
$
82,974,000

 
$
108,000

 
$
(912,000
)
 
$
82,170,000

Mortgage-backed securities
53,228,000

 
2,030,000

 
(116,000
)
 
55,142,000

State and political subdivisions
125,953,000

 
3,811,000

 
(129,000
)
 
129,635,000

Corporate securities
300,000

 

 

 
300,000

 
$
262,455,000

 
$
5,949,000

 
$
(1,157,000
)
 
$
267,247,000

Restricted equity securities
 
 
 
 
 
 
 
Federal Home Loan Bank Stock
$
12,875,000

 
$

 
$

 
$
12,875,000

Federal Reserve Bank Stock
1,037,000

 

 

 
1,037,000

 
$
13,912,000

 
$

 
$

 
$
13,912,000



Page 8



The following table summarizes the contractual maturities of investment securities at March 31, 2016:
 
Securities available for sale
 
Securities to be held to maturity
 
Amortized
Cost
 
Fair Value (Estimated)
 
Amortized
Cost
 
Fair Value (Estimated)
Due in 1 year or less
$
2,599,000

 
$
2,633,000

 
$
1,825,000

 
$
1,847,000

Due in 1 to 5 years
3,321,000

 
3,390,000

 
6,709,000

 
6,925,000

Due in 5 to 10 years
19,222,000

 
19,946,000

 
56,874,000

 
58,932,000

Due after 10 years
183,858,000

 
187,592,000

 
171,203,000

 
175,633,000

Equity securities
3,148,000

 
3,164,000

 

 

 
$
212,148,000

 
$
216,725,000

 
$
236,611,000

 
$
243,337,000


The following table summarizes the contractual maturities of investment securities at December 31, 2015:
 
Securities available for sale
 
Securities to be held to maturity
 
Amortized
Cost
 
Fair Value (Estimated)
 
Amortized
Cost
 
Fair Value (Estimated)
Due in 1 year or less
$
527,000

 
$
530,000

 
$
1,814,000

 
$
1,850,000

Due in 1 to 5 years
7,562,000

 
7,727,000

 
6,306,000

 
6,514,000

Due in 5 to 10 years
19,647,000

 
20,055,000

 
58,397,000

 
60,196,000

Due after 10 years
190,194,000

 
191,304,000

 
173,506,000

 
174,563,000

Equity securities
3,381,000

 
3,423,000

 

 

 
$
221,311,000

 
$
223,039,000

 
$
240,023,000

 
$
243,123,000


The following table summarizes the contractual maturities of investment securities at March 31, 2015:
 
Securities available for sale
 
Securities to be held to maturity
 
Amortized
Cost
 
Fair Value (Estimated)
 
Amortized
Cost
 
Fair Value (Estimated)
Due in 1 year or less
$
2,842,000

 
$
2,858,000

 
$
1,873,000

 
$
1,899,000

Due in 1 to 5 years
14,950,000

 
15,231,000

 
12,050,000

 
12,241,000

Due in 5 to 10 years
17,746,000

 
18,110,000

 
47,898,000

 
49,930,000

Due after 10 years
113,815,000

 
117,016,000

 
200,634,000

 
203,177,000

Equity securities
2,997,000

 
3,102,000

 

 

 
$
152,350,000

 
$
156,317,000

 
$
262,455,000

 
$
267,247,000

At March 31, 2016, securities with a fair value of $202,296,000 were pledged to secure public deposits, repurchase agreements, and for other purposes as required by law. This compares to securities with a fair value of $201,879,000 as of December 31, 2015 and $224,133,000 at March 31, 2015, pledged for the same purposes.
Gains and losses on the sale of securities available for sale are computed by subtracting the amortized cost at the time of sale from the security's selling price, net of accrued interest to be received. The following table shows securities gains and losses for the three months ended March 31, 2016 and 2015:
 
For the three months ended March 31,
 
2016
 
2015
Proceeds from sales of securities
$
8,868,000

 
$
35,465,000

Gross realized gains
536,000

 
1,395,000

Gross realized losses

 

Net gain
$
536,000

 
$
1,395,000

Related income taxes
$
188,000

 
$
488,000



Page 9



Management reviews securities with unrealized losses for other than temporary impairment. As of March 31, 2016, there were 34 securities with unrealized losses held in the Company's portfolio. These securities were temporarily impaired as a result of changes in interest rates reducing their fair value, of which 12 had been temporarily impaired for 12 months or more. At the present time, there have been no material changes in the credit quality of these securities resulting in other than temporary impairment, and in Management's opinion, no additional write-down for other-than-temporary impairment is warranted. Information regarding securities temporarily impaired as of March 31, 2016 is summarized below:
 
Less than 12 months
 
12 months or more
 
Total
 
Fair Value (Estimated)
 
Unrealized Losses
 
Fair Value (Estimated)
 
Unrealized Losses
 
Fair Value (Estimated)
 
Unrealized Losses
U.S. Government-sponsored agencies
$

 
$

 
$
4,893,000

 
$
(107,000
)
 
$
4,893,000

 
$
(107,000
)
Mortgage-backed securities
17,125,000

 
(170,000
)
 
1,866,000

 
(70,000
)
 
18,991,000

 
(240,000
)
State and political subdivisions
522,000

 

 
1,417,000

 
(19,000
)
 
1,939,000

 
(19,000
)
Other equity securities
235,000

 
(6,000
)
 
106,000

 
(17,000
)
 
341,000

 
(23,000
)
 
$
17,882,000

 
$
(176,000
)
 
$
8,282,000

 
$
(213,000
)
 
$
26,164,000

 
$
(389,000
)

As of December 31, 2015, there were 78 securities with unrealized losses held in the Company's portfolio. These securities were temporarily impaired as a result of changes in interest rates reducing their fair value, of which 15 had been temporarily impaired for 12 months or more. Information regarding securities temporarily impaired as of December 31, 2015 is summarized below:
 
Less than 12 months
 
12 months or more
 
Total
 
Fair Value (Estimated)
 
Unrealized Losses
 
Fair Value (Estimated)
 
Unrealized Losses
 
Fair Value (Estimated)
 
Unrealized Losses
U.S. Government-sponsored agencies
$
45,311,000

 
$
(1,469,000
)
 
$
17,185,000

 
$
(815,000
)
 
$
62,496,000

 
$
(2,284,000
)
Mortgage-backed securities
120,915,000

 
(1,027,000
)
 
910,000

 
(71,000
)
 
121,825,000

 
(1,098,000
)
State and political subdivisions
2,528,000

 
(24,000
)
 
2,901,000

 
(63,000
)
 
5,429,000

 
(87,000
)
Other equity securities
64,000

 
(5,000
)
 
52,000

 
(1,000
)
 
116,000

 
(6,000
)
 
$
168,818,000

 
$
(2,525,000
)
 
$
21,048,000

 
$
(950,000
)
 
$
189,866,000

 
$
(3,475,000
)
As of March 31, 2015, there were 55 securities with unrealized losses held in the Company's portfolio. These securities were temporarily impaired as a result of changes in interest rates reducing their fair value, of which five had been temporarily impaired for 12 months or more. Information regarding securities temporarily impaired as of March 31, 2015 is summarized below:
 
Less than 12 months
 
12 months or more
 
Total
 
Fair Value (Estimated)
 
Unrealized Losses
 
Fair Value (Estimated)
 
Unrealized Losses
 
Fair Value (Estimated)
 
Unrealized Losses
U.S. Government-sponsored agencies
$
36,459,000

 
$
(595,000
)
 
$
10,903,000

 
$
(317,000
)
 
$
47,362,000

 
$
(912,000
)
Mortgage-backed securities
20,634,000

 
(256,000
)
 
65,000

 
(2,000
)
 
20,699,000

 
(258,000
)
State and political subdivisions
10,390,000

 
(201,000
)
 
1,641,000

 
(42,000
)
 
12,031,000

 
(243,000
)
 
$
67,483,000

 
$
(1,052,000
)
 
$
12,609,000

 
$
(361,000
)
 
$
80,092,000

 
$
(1,413,000
)

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

Page 10



remaining unamortized balance of the net unrealized losses for the securities transferred from available for sale to held to maturity was $123,000 at March 31, 2016. These securities were transferred as a part of the Company's overall investment and balance sheet strategies.
The Bank is a member of the Federal Home Loan Bank ("FHLB") of Boston, a cooperatively owned wholesale bank for housing and finance in the six New England States. As a requirement of membership in the FHLB, the Bank must own a minimum required amount of FHLB stock, calculated periodically based primarily on its level of borrowings from the FHLB. The Bank uses the FHLB for much of its wholesale funding needs. As of March 31, 2016 and 2015, and December 31, 2015, the Bank's investment in FHLB stock totaled $12,838,000, $12,875,000 and $13,220,000, respectively. FHLB stock is a non-marketable equity security and therefore is reported at cost, which equals par value. The Company periodically evaluates its investment in FHLB stock for impairment based on, among other factors, the capital adequacy of the FHLB and its overall financial condition. No impairment losses have been recorded through March 31, 2016. The Bank will continue to monitor its investment in FHLB stock.

Note 3 – Loans
The following table shows the composition of the Company's loan portfolio as of March 31, 2016 and 2015 and at December 31, 2015:
 
March 31, 2016
 
December 31, 2015
 
March 31, 2015
 
Commercial
 
 
 
 
 
 
 
 
 
 
 
 
   Real estate
$
279,683,000

 
27.8
%
$
269,462,000

 
27.3
%
$
242,021,000

 
25.8
%
   Construction
20,138,000

 
2.0
%
24,881,000

 
2.5
%
34,683,000

 
3.7
%
   Other
133,629,000

 
13.3
%
128,341,000

 
13.0
%
115,455,000

 
12.3
%
Municipal
19,042,000

 
1.9
%
19,751,000

 
2.0
%
26,277,000

 
2.8
%
Residential
 
 
 
 
 
 
 
 
 
 
 
 
   Term
405,495,000

 
40.3
%
403,030,000

 
40.7
%
383,869,000

 
40.8
%
   Construction
11,754,000

 
1.2
%
8,451,000

 
0.9
%
13,036,000

 
1.4
%
Home equity line of credit
110,249,000

 
11.0
%
110,202,000

 
11.1
%
104,100,000

 
11.1
%
Consumer
24,952,000

 
2.5
%
24,520,000

 
2.5
%
19,728,000

 
2.1
%
Total
$
1,004,942,000

 
100.0
%
$
988,638,000

 
100.0
%
$
939,169,000

 
100.0
%
Loan balances include net deferred loan costs of $4,053,000 as of March 31, 2016, $3,686,000 as of December 31, 2015, and $2,933,000 as of March 31, 2015. Pursuant to collateral agreements, qualifying first mortgage loans, which totaled $277,905,000 at March 31, 2016, $279,463,000 at December 31, 2015, and $240,760,000 at March 31, 2015, were used to collateralize borrowings from the FHLB. In addition, commercial, construction and home equity loans totaling $258,369,000 at March 31, 2016, $243,578,000 at December 31, 2015, and $244,170,000 at March 31, 2015, were used to collateralize a standby line of credit at the Federal Reserve Bank of Boston that is currently unused.
For all loan classes, loans over 30 days past due are considered delinquent. Information on the past-due status of loans by class of financing receivable as of March 31, 2016, is presented in the following table:
 
30-59 Days
Past Due
 
60-89 Days
Past Due
 
90+ Days
Past Due
 
All
Past Due
 
Current
 
Total
 
90+ Days
& Accruing
Commercial
 
 
 
 
 
 
 
 
 
 
 
 
 
   Real estate
$
428,000

 
$
376,000

 
$
451,000

 
$
1,255,000

 
$
278,428,000

 
$
279,683,000

 
$

   Construction

 

 
150,000

 
150,000

 
19,988,000

 
20,138,000

 

   Other
323,000

 
110,000

 

 
433,000

 
133,196,000

 
133,629,000

 

Municipal

 

 

 

 
19,042,000

 
19,042,000

 

Residential
 
 
 
 
 
 
 
 
 
 
 
 
 
   Term
2,321,000

 
62,000

 
2,400,000

 
4,783,000

 
400,712,000

 
405,495,000

 
411,000

   Construction

 

 

 

 
11,754,000

 
11,754,000

 

Home equity line of credit
718,000

 
122,000

 
543,000

 
1,383,000

 
108,866,000

 
110,249,000

 

Consumer
176,000

 
26,000

 
41,000

 
243,000

 
24,709,000

 
24,952,000

 
41,000

Total
$
3,966,000

 
$
696,000

 
$
3,585,000

 
$
8,247,000

 
$
996,695,000

 
$
1,004,942,000

 
$
452,000


Page 11



Information on the past-due status of loans by class of financing receivable as of December 31, 2015, is presented in the following table:
 
30-59 Days
Past Due
 
60-89 Days
Past Due
 
90+ Days
Past Due
 
All
Past Due
 
Current
 
Total
 
90+ Days
& Accruing
Commercial
 
 
 
 
 
 
 
 
 
 
 
 
 
   Real estate
$
603,000

 
$

 
$
281,000

 
$
884,000

 
$
268,578,000

 
$
269,462,000

 
$

   Construction
35,000

 

 
238,000

 
273,000

 
24,608,000

 
24,881,000

 

   Other
303,000

 

 
25,000

 
328,000

 
128,013,000

 
128,341,000

 
25,000

Municipal

 

 

 

 
19,751,000

 
19,751,000

 

Residential
 
 
 
 
 
 
 
 
 
 
 
 
 
   Term
450,000

 
2,098,000

 
2,639,000

 
5,187,000

 
397,843,000

 
403,030,000

 
100,000

   Construction
368,000

 

 

 
368,000

 
8,083,000

 
8,451,000

 

Home equity line of credit
261,000

 
255,000

 
592,000

 
1,108,000

 
109,094,000

 
110,202,000

 

Consumer
102,000

 
26,000

 
11,000

 
139,000

 
24,381,000

 
24,520,000

 
11,000

Total
$
2,122,000

 
$
2,379,000

 
$
3,786,000

 
$
8,287,000

 
$
980,351,000

 
$
988,638,000

 
$
136,000

Information on the past-due status of loans by class of financing receivable as of March 31, 2015, is presented in the following table:
 
30-59 Days
Past Due
 
60-89 Days
Past Due
 
90+ Days
Past Due
 
All
Past Due
 
Current
 
Total
 
90+ Days
& Accruing
Commercial
 
 
 
 
 
 
 
 
 
 
 
 
 
   Real estate
$
491,000

 
$

 
$
307,000

 
$
798,000

 
$
241,223,000

 
$
242,021,000

 
$

   Construction
21,000

 

 
208,000

 
229,000

 
34,454,000

 
34,683,000

 

   Other
135,000

 
2,000

 
857,000

 
994,000

 
114,461,000

 
115,455,000

 

Municipal

 

 

 

 
26,277,000

 
26,277,000

 

Residential
 
 
 
 
 
 
 
 
 
 
 
 
 
   Term
3,948,000

 
1,438,000

 
2,857,000

 
8,243,000

 
375,626,000

 
383,869,000

 
100,000

   Construction

 

 

 

 
13,036,000

 
13,036,000

 

Home equity line of credit
488,000

 
105,000

 
864,000

 
1,457,000

 
102,643,000

 
104,100,000

 

Consumer
136,000

 
16,000

 
85,000

 
237,000

 
19,491,000

 
19,728,000

 
84,000

Total
$
5,219,000

 
$
1,561,000

 
$
5,178,000

 
$
11,958,000

 
$
927,211,000

 
$
939,169,000

 
$
184,000

For all classes, loans are placed on non-accrual status when, based on current information and events, it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement or when principal and interest is 90 days or more past due unless the loan is both well secured and in the process of collection (in which case the loan may continue to accrue interest in spite of its past due status). A loan is "well secured" if it is secured (1) by collateral in the form of liens on or pledges of real or personal property, including securities, that have a realizable value sufficient to discharge the debt (including accrued interest) in full, or (2) by the guarantee of a financially responsible party. A loan is "in the process of collection" if collection of the loan is proceeding in due course either (1) through legal action, including judgment enforcement procedures, or, (2) in appropriate circumstances, through collection efforts not involving legal action which are reasonably expected to result in repayment of the debt or in its restoration to a current status in the near future.

Page 12



Cash payments received on non-accrual loans, which are included in impaired loans, are applied to reduce the loan's principal balance until the remaining principal balance is deemed collectible, after which interest is recognized when collected. As a general rule, a loan may be restored to accrual status when payments are current for a substantial period of time, generally six months, and repayment of the remaining contractual amounts is expected or when it otherwise becomes well secured and in the process of collection. Information on nonaccrual loans as of March 31, 2016 and 2015 and at December 31, 2015 is presented in the following table:
 
March 31, 2016
 
December 31, 2015
 
March 31, 2015
Commercial
 
 
 
 
 
   Real estate
$
920,000

 
$
915,000

 
$
1,609,000

   Construction
180,000

 
238,000

 
208,000

   Other
69,000

 
66,000

 
932,000

Municipal

 

 

Residential
 
 
 
 
 
   Term
4,677,000

 
5,260,000

 
6,514,000

   Construction

 

 

Home equity line of credit
841,000

 
893,000

 
1,039,000

Consumer

 

 
25,000

Total
$
6,687,000

 
$
7,372,000

 
$
10,327,000

Impaired loans include troubled debt restructured and loans placed on non-accrual. These loans are measured at the present value of expected future cash flows discounted at the loan's effective interest rate or at the fair value of the collateral if the loan is collateral dependent. If the measure of an impaired loan is lower than the recorded investment in the loan and estimated selling costs, a specific reserve is established for the difference, or, in certain situations, if the measure of an impaired loan is lower than the recorded investment in the loan and estimated selling costs, the difference is written off.


Page 13



A breakdown of impaired loans by class of financing receivable as of and for the three months ended March 31, 2016 is presented in the following table:
 
Recorded Investment
 
Unpaid Principal Balance
 
Related Allowance
 
Average Recorded Investment
 
Recognized Interest Income
With No Related Allowance
Commercial
 
 
 
 
 
 
 
 
 
  Real estate
$
7,381,000

 
$
7,712,000

 
$

 
$
7,221,000

 
$
79,000

  Construction
179,000

 
238,000

 

 
80,000

 
1,000

  Other
1,097,000

 
1,137,000

 

 
1,121,000

 
8,000

Municipal

 

 

 

 

Residential
 
 
 
 
 
 
 
 
 
  Term
10,543,000

 
11,541,000

 

 
10,715,000

 
91,000

  Construction

 

 

 

 

Home equity line of credit
1,344,000

 
2,023,000

 

 
1,353,000

 
8,000

Consumer

 

 

 

 

 
$
20,544,000

 
$
22,651,000

 
$

 
$
20,490,000

 
$
187,000

With an Allowance Recorded
Commercial
 
 
 
 
 
 
 
 
 
  Real estate
$
3,129,000

 
$
3,213,000

 
$
69,000

 
$
3,399,000

 
$
36,000

  Construction
788,000

 
788,000

 
96,000

 
926,000

 
8,000

  Other
88,000

 
96,000

 
21,000

 
80,000

 

Municipal

 

 

 

 

Residential
 
 
 
 
 
 
 
 
 
  Term
3,997,000

 
4,265,000

 
384,000

 
3,995,000

 
43,000

  Construction

 

 

 

 

Home equity line of credit
64,000

 
65,000

 
29,000

 
83,000

 
1,000

Consumer

 

 

 

 

 
$
8,066,000

 
$
8,427,000

 
$
599,000

 
$
8,483,000

 
$
88,000

Total
Commercial
 
 
 
 
 
 
 
 
 
  Real estate
$
10,510,000

 
$
10,925,000

 
$
69,000

 
$
10,620,000

 
$
115,000

  Construction
967,000

 
1,026,000

 
96,000

 
1,006,000

 
9,000

  Other
1,185,000

 
1,233,000

 
21,000

 
1,201,000

 
8,000

Municipal

 

 

 

 

Residential
 
 
 
 
 
 
 
 
 
  Term
14,540,000

 
15,806,000

 
384,000

 
14,710,000

 
134,000

  Construction

 

 

 

 

Home equity line of credit
1,408,000

 
2,088,000

 
29,000

 
1,436,000

 
9,000

Consumer

 

 

 

 

 
$
28,610,000

 
$
31,078,000

 
$
599,000

 
$
28,973,000

 
$
275,000

Substantially all interest income recognized on impaired loans for all classes of financing receivables was recognized on a cash basis as received.

Page 14



A breakdown of impaired loans by class of financing receivable as of and for the year ended December 31, 2015 is presented in the following table:
 
Recorded Investment
 
Unpaid Principal Balance
 
Related Allowance
 
Average Recorded Investment
 
Recognized Interest Income
With No Related Allowance
Commercial
 
 
 
 
 
 
 
 
 
  Real estate
$
7,173,000

 
$
7,496,000

 
$

 
$
8,990,000

 
$
301,000

  Construction
30,000

 
30,000

 

 
3,000

 
1,000

  Other
1,163,000

 
1,210,000

 

 
1,893,000

 
76,000

Municipal

 

 

 

 

Residential
 
 
 
 
 
 
 
 
 
  Term
11,122,000

 
12,157,000

 

 
10,480,000

 
415,000

  Construction

 

 

 

 

Home equity line of credit
1,401,000

 
2,054,000

 

 
1,400,000

 
43,000

Consumer

 

 

 
42,000

 
3,000

 
$
20,889,000

 
$
22,947,000

 
$

 
$
22,808,000

 
$
839,000

With an Allowance Recorded
Commercial
 
 
 
 
 
 
 
 
 
  Real estate
$
3,544,000

 
$
3,627,000

 
$
89,000

 
$
3,066,000

 
$
149,000

  Construction
996,000

 
996,000

 
302,000

 
1,153,000

 
44,000

  Other
71,000

 
77,000

 
8,000

 
256,000

 
5,000

Municipal

 

 

 

 

Residential
 
 
 
 
 
 
 
 
 
  Term
3,966,000

 
4,193,000

 
326,000

 
5,228,000

 
180,000

  Construction

 

 

 

 

Home equity line of credit
65,000

 
66,000

 
29,000

 
187,000

 
3,000

Consumer

 

 

 

 

 
$
8,642,000

 
$
8,959,000

 
$
754,000

 
$
9,890,000

 
$
381,000

Total
Commercial
 
 
 
 
 
 
 
 
 
  Real estate
$
10,717,000

 
$
11,123,000

 
$
89,000

 
$
12,056,000

 
$
450,000

  Construction
1,026,000

 
1,026,000

 
302,000

 
1,156,000

 
45,000

  Other
1,234,000

 
1,287,000

 
8,000

 
2,149,000

 
81,000

Municipal

 

 

 

 

Residential
 
 
 
 
 
 
 
 
 
  Term
15,088,000

 
16,350,000

 
326,000

 
15,708,000

 
595,000

  Construction

 

 

 

 

Home equity line of credit
1,466,000

 
2,120,000

 
29,000

 
1,587,000

 
46,000

Consumer

 

 

 
42,000

 
3,000

 
$
29,531,000

 
$
31,906,000

 
$
754,000

 
$
32,698,000

 
$
1,220,000



Page 15



A breakdown of impaired loans by class of financing receivable as of and for the three months ended March 31, 2015 is presented in the following table:
 
Recorded Investment
 
Unpaid Principal Balance
 
Related Allowance
 
Average Recorded Investment
 
Recognized Interest Income
With No Related Allowance
Commercial
 
 
 
 
 
 
 
 
 
  Real estate
$
9,062,000

 
$
9,496,000

 
$

 
$
10,899,000

 
$
88,000

  Construction

 

 

 

 

  Other
2,305,000

 
2,411,000

 

 
2,465,000

 
16,000

Municipal

 

 

 

 

Residential
 
 
 
 
 
 
 
 
 
  Term
11,235,000

 
12,243,000

 

 
11,136,000

 
100,000

  Construction

 

 

 

 

Home equity line of credit
1,363,000

 
1,958,000

 

 
1,281,000

 
8,000

Consumer
25,000

 
28,000

 

 
25,000

 
1,000

 
$
23,990,000

 
$
26,136,000

 
$

 
$
25,806,000

 
$
213,000

With an Allowance Recorded
Commercial
 
 
 
 
 
 
 
 
 
  Real estate
$
3,643,000

 
$
3,955,000

 
$
248,000

 
$
1,996,000

 
$
32,000

  Construction
1,380,000

 
1,380,000

 
396,000

 
1,372,000

 
13,000

  Other
416,000

 
1,115,000

 
347,000

 
327,000

 

Municipal

 

 

 

 

Residential
 
 
 
 
 
 
 
 
 
  Term
5,113,000

 
5,363,000

 
421,000

 
5,233,000

 
53,000

  Construction

 

 

 

 

Home equity line of credit
291,000

 
295,000

 
24,000

 
387,000

 

Consumer

 

 

 

 

 
$
10,843,000

 
$
12,108,000

 
$
1,436,000

 
$
9,315,000

 
$
98,000

Total
Commercial
 
 
 
 
 
 
 
 
 
  Real estate
$
12,705,000

 
$
13,451,000

 
$
248,000

 
$
12,895,000

 
$
120,000

  Construction
1,380,000

 
1,380,000

 
396,000

 
1,372,000

 
13,000

  Other
2,721,000

 
3,526,000

 
347,000

 
2,792,000

 
16,000

Municipal

 

 

 

 

Residential
 
 
 
 
 
 
 
 
 
  Term
16,348,000

 
17,606,000

 
421,000

 
16,369,000

 
153,000

  Construction

 

 

 

 

Home equity line of credit
1,654,000

 
2,253,000

 
24,000

 
1,668,000

 
8,000

Consumer
25,000

 
28,000

 

 
25,000

 
1,000

 
$
34,833,000

 
$
38,244,000

 
$
1,436,000

 
$
35,121,000

 
$
311,000










Page 16



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 March 31, 2016, the Company had 82 loans with a value of $23,628,000 that have been classified as TDRs. This compares to 84 loans with a value of $23,923,000 and 90 loans with a value of $26,524,000 classified as TDRs as of December 31, 2015 and March 31, 2015, respectively. The impairment carried as a specific reserve in the allowance for loan losses is calculated by present valuing the expected cash flows on the loan at the original interest rate, or, for collateral-dependent loans, using the fair value of the collateral less costs to sell.

The following table shows TDRs by class and the specific reserve as of March 31, 2016:
 
Number of Loans
 
Balance
 
Specific Reserves
Commercial
 
 
 
 
 
   Real estate
14

 
$
10,133,000

 
$
65,000

   Construction
1

 
788,000

 
96,000

   Other
10

 
1,116,000

 

Municipal

 

 

Residential
 
 
 
 
 
   Term
53

 
10,856,000

 
275,000

   Construction

 

 

Home equity line of credit
4

 
735,000

 

Consumer

 

 

 
82

 
$
23,628,000

 
$
436,000

The following table shows TDRs by class and the specific reserve as of December 31, 2015:
 
Number of Loans
 
Balance
 
Specific Reserves
Commercial
 
 
 
 
 
   Real estate
15

 
$
10,350,000

 
$
85,000

   Construction
1

 
788,000

 
94,000

   Other
11

 
1,168,000

 
1,000

Municipal

 

 

Residential
 
 
 
 
 
   Term
53

 
10,875,000

 
275,000

   Construction

 

 

Home equity line of credit
4

 
742,000

 

Consumer

 

 

 
84

 
$
23,923,000

 
$
455,000

     






Page 17



The following table shows TDRs by class and the specific reserve as of March 31, 2015:
 
Number of Loans
 
Balance
 
Specific Reserves
Commercial
 
 
 
 
 
   Real estate
17

 
$
11,831,000

 
$
133,000

   Construction
1

 
1,172,000

 
189,000

   Other
13

 
1,789,000

 

Municipal

 

 

Residential
 
 
 
 
 
   Term
54

 
10,917,000

 
351,000

   Construction

 

 

Home equity line of credit
5

 
815,000

 
22,000

Consumer

 

 

 
90

 
$
26,524,000

 
$
695,000


As of March 31, 2016, six of the loans classified as TDRs with a total balance of $890,000 were more than 30 days past due. None of these loans had been placed on TDR status in the previous 12 months. The following table shows these TDRs by class and the associated specific reserves included in the allowance for loan losses as of March 31, 2016:

 
Number of Loans
 
Balance
 
Specific Reserves
Commercial
 
 
 
 
 
   Real estate
1

 
$
155,000

 
$

   Construction

 

 

   Other

 

 

Municipal

 

 

Residential
 
 
 
 
 
   Term
5

 
735,000

 
46,000

   Construction

 

 

Home equity line of credit

 

 

Consumer

 

 

 
6

 
$
890,000

 
$
46,000



















Page 18



As of March 31, 2015, eight of the loans classified as TDRs with a total balance of $1,121,000 were more than 30 days past due. None, of these loans had been placed on TDR status in the previous 12 months. The following table shows these TDRs by class and the associated specific reserves included in the allowance for loan losses as of March 31, 2015:
 
Number of Loans
 
Balance
 
Specific Reserves
Commercial
 
 
 
 
 
   Real estate

 
$

 
$

   Construction

 

 

   Other

 

 

Municipal

 

 

Residential
 
 
 
 
 
   Term
7

 
920,000

 

   Construction

 

 

Home equity line of credit
1

 
201,000

 
22,000

Consumer

 

 

 
8

 
$
1,121,000

 
$
22,000


For the three months ended March 31, 2016 and 2015, no loans were placed on TDR status.
As of March 31, 2016, Management is aware of six loans classified as TDRs that are involved in bankruptcy with an outstanding balance of $1,073,000. There were also 12 loans with an outstanding balance of $1,703,000 that were classified as TDRs and on non-accrual status. Two loans with an outstanding balance of $215,000, that were classified as TDRs, were in the process of foreclosure.

Residential Mortgage Loans in Process of Foreclosure
As of March 31, 2016, there were 14 mortgage loans collateralized by residential real estate in the process of foreclosure with a total balance of $1,399,000; this compares to 16 mortgage loans collateralized by residential real estate in the process of foreclosure with a total balance of $1,677,000 as of March 31, 2015.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Note 4. Allowance for Loan Losses
The Company provides for loan losses through the establishment of an allowance for loan losses which represents an estimated reserve for existing losses in the loan portfolio. A systematic methodology is used for determining the allowance that includes a quarterly review process, risk rating changes, and adjustments to the allowance. The loan portfolio is classified in eight classes and credit risk is evaluated separately in each class. The appropriate level of the allowance is evaluated continually based on a review of significant loans, with a particular emphasis on nonaccruing, past due, and other loans that may require special attention. Other factors include general conditions in local and national economies; loan portfolio composition and asset quality indicators; and internal factors such as changes in underwriting policies, credit administration practices, experience, ability and depth of lending management, among others. The allowance consists of four elements: (1) specific reserves for loans evaluated individually for impairment; (2) general reserves for each portfolio segment based on historical loan loss experience, (3) qualitative reserves judgmentally adjusted for local and national economic conditions, concentrations, portfolio composition, volume and severity of delinquencies and nonaccrual loans, trends of criticized and classified loans, changes in credit policies and underwriting standards, credit administration practices, and other factors as applicable for each portfolio segment; and (4) unallocated reserves. All outstanding loans are considered in evaluating the appropriateness of the allowance. A breakdown of the allowance for loan losses as of March 31, 2016, December 31, 2015, and March 31, 2015, by class of financing receivable and allowance element, is presented in the following tables:

Page 19



As of March 31, 2016
Specific Reserves on Loans Evaluated Individually for Impairment
 
General Reserves on Loans Based on Historical Loss Experience
 
Reserves for Qualitative Factors
 
Unallocated
Reserves
 
Total Reserves
Commercial
 
 
 
 
 
 
 
 
 
   Real estate
$
69,000

 
$
1,236,000

 
$
2,219,000

 
$

 
$
3,524,000

   Construction
96,000

 
89,000

 
160,000

 

 
345,000

   Other
21,000

 
592,000

 
1,063,000

 

 
1,676,000

Municipal

 

 
17,000

 

 
17,000

Residential
 
 
 
 
 
 
 
 
 
   Term
384,000

 
630,000

 
460,000

 

 
1,474,000

   Construction

 
19,000

 
14,000

 

 
33,000

Home equity line of credit
29,000

 
502,000

 
374,000

 

 
905,000

Consumer

 
413,000

 
241,000

 

 
654,000

Unallocated

 

 

 
1,591,000

 
1,591,000

 
$
599,000

 
$
3,481,000

 
$
4,548,000

 
$
1,591,000

 
$
10,219,000

As of December 31, 2015
Specific Reserves on Loans Evaluated Individually for Impairment
 
General Reserves on Loans Based on Historical Loss Experience
 
Reserves for Qualitative Factors
 
Unallocated
Reserves
 
Total Reserves
Commercial
 
 
 
 
 
 
 
 
 
   Real estate
$
89,000

 
$
893,000

 
$
2,138,000

 
$

 
$
3,120,000

   Construction
302,000

 
82,000

 
196,000

 

 
580,000

   Other
8,000

 
425,000

 
1,019,000

 

 
1,452,000

Municipal

 

 
17,000

 

 
17,000

Residential
 
 
 
 
 
 
 
 
 
   Term
326,000

 
613,000

 
452,000

 

 
1,391,000

   Construction

 
14,000

 
10,000

 

 
24,000

Home equity line of credit
29,000

 
500,000

 
364,000

 

 
893,000

Consumer

 
331,000

 
235,000

 

 
566,000

Unallocated

 

 

 
1,873,000

 
1,873,000

 
$
754,000

 
$
2,858,000

 
$
4,431,000

 
$
1,873,000

 
$
9,916,000



Page 20



As of March 31, 2015
Specific Reserves on Loans Evaluated Individually for Impairment
 
General Reserves on Loans Based on Historical Loss Experience
 
Reserves for Qualitative Factors
 
Unallocated
Reserves
 
Total Reserves
Commercial
 
 
 
 
 
 
 
 
 
   Real estate
$
248,000

 
$
1,094,000

 
$
1,775,000

 
$

 
$
3,117,000

   Construction
396,000

 
157,000

 
254,000

 

 
807,000

   Other
347,000

 
521,000

 
846,000

 

 
1,714,000

Municipal

 

 
16,000

 

 
16,000

Residential
 
 
 
 
 
 
 
 
 
   Term
421,000

 
298,000

 
389,000

 

 
1,108,000

   Construction

 
10,000

 
13,000

 

 
23,000

Home equity line of credit
24,000

 
716,000

 
304,000

 

 
1,044,000

Consumer

 
318,000

 
208,000

 

 
526,000

Unallocated

 

 

 
1,841,000

 
1,841,000

 
$
1,436,000

 
$
3,114,000

 
$
3,805,000

 
$
1,841,000

 
$
10,196,000

Qualitative adjustment factors are taken into consideration when determining reserve estimates. These adjustment factors are based upon our evaluation of various current conditions, including those listed below.
General economic conditions.
Credit quality trends with emphasis on loan delinquencies, nonaccrual levels and classified loans.
Recent loss experience in particular segments of the portfolio.
Loan volumes and concentrations, including changes in mix.
Other factors, including changes in quality of the loan origination; loan policy changes; changes in credit risk management processes; Bank regulatory and external loan review examination results.
The qualitative portion of the allowance for loan losses was 0.45% of related loans as of March 31, 2016 and December 31, 2015. The qualitative portion increased $117,000 between December 31, 2015 and March 31, 2016 due to an increase in loans outstanding.
The unallocated component of the allowance totaled $1,591,000 at March 31, 2016, or 15.6% of the total reserve. This compares to $1,873,000 or 18.9% as of December 31, 2015. Changes in various elements of the allowance caused the period-to-period decrease. Management feels the change in the unalloctaed is consistent with improvement in credit quality and the effect of loan portfolio growth.
The allowance for loan losses as a percent of total loans stood at 1.02% as of March 31, 2016. This compares to 1.00% of total loans as of December 31, 2015 and 1.09% of total loans as of March 31, 2015.
Commercial loans are comprised of three major classes, commercial real estate loans, commercial construction loans and other commercial loans. Commercial real estate is primarily comprised of loans to small businesses collateralized by owner-occupied real estate, while other commercial is primarily comprised of loans to small businesses collateralized by plant and equipment, commercial fishing vessels and gear, and limited inventory-based lending. Commercial real estate loans typically have a maximum loan-to-value of 80% based upon current appraisal information at the time the loan is made. 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 as such are collateralized by the taxing ability of the municipality for repayment of debt.
Construction, land and land development loans, both commercial and residential, comprise a small portion of the portfolio, and at 21.8% of capital are below the regulatory limit of 100.0% of capital at March 31, 2016. Construction loans and non-owner-occupied commercial real estate loans are at 106.7% of total capital, below the regulatory limit of 300.0% of capital at March 31, 2016.
The process of establishing the allowance with respect to the commercial loan portfolio begins when a loan officer initially assigns each loan a risk rating, using established credit criteria. Approximately 50% of the outstanding loans and commitments are subject to review and validation annually by an independent consulting firm, as well as periodically by the Company's internal credit review function. The methodology employs Management's judgment as to the level of losses on existing loans based on internal review of the loan portfolio, including an analysis of a borrower's current financial position, and the consideration of current and anticipated economic conditions and their potential effects on specific borrowers and or lines of business. In

Page 21



determining the Company's ability to collect certain loans, Management also considers the fair value of underlying collateral. The risk rating system has eight levels, defined as follows:

1    Strong
Credits rated "1" are characterized by borrowers fully responsible for the credit with excellent capacity to pay principal and interest. Loans rated "1" may be secured with acceptable forms of liquid collateral.
2    Above Average
Credits rated "2" are characterized by borrowers that have better than average liquidity, capitalization, earnings and/or cash flow with a consistent record of solid financial performance.
3    Satisfactory
Credits rated "3" are characterized by borrowers with favorable liquidity, profitability and financial condition with adequate cash flow to pay debt service.
4    Average
Credits rated "4" are characterized by borrowers that present risk more than 1, 2 and 3 rated loans and merit an ordinary level of ongoing monitoring. Financial condition is on par or somewhat below industry averages while cash flow is generally adequate to meet debt service requirements.
5    Watch
Credits rated "5" are characterized by borrowers that warrant greater monitoring due to financial condition or unresolved and identified risk factors.
6    Other Assets Especially Mentioned (OAEM)
Loans in this category are currently protected but are potentially weak and constitute an undue and unwarranted credit risk, but not to the point of justifying a classification of substandard. OAEM have potential weaknesses which may, if not checked or corrected, weaken the asset or inadequately protect the Company's credit position at some future date.
7    Substandard
Loans in this category are inadequately protected by the paying capacity of the borrower or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. Substandard loans are characterized by the distinct possibility that the Company may sustain some loss if the deficiencies are not corrected.
8    Doubtful
Loans classified "Doubtful" have the same weaknesses as those classified substandard with the added characteristic that the weaknesses make collection or liquidation in full, based on currently existing facts, conditions, and values, highly questionable and improbable. The possibility of loss is high, but because of certain important and reasonably specific pending factors which may work to the advantage and strengthening of the asset, its classification as an estimated loss is deferred until its more exact status may be determined.
The following table summarizes the risk ratings for the Company's commercial real estate, commercial construction, commercial other, and municipal loans as of March 31, 2016:
 
Commercial
Real Estate
 
Commercial
Construction
 
Commercial
Other
 
Municipal
Loans
 
All Risk-
Rated Loans
1 Strong
$
6,000

 
$

 
$
990,000

 
$

 
$
996,000

2 Above Average
27,586,000

 
55,000

 
7,707,000

 
17,331,000

 
52,679,000

3 Satisfactory
59,080,000

 
2,898,000

 
31,629,000

 
1,711,000

 
95,318,000

4 Average
129,432,000

 
11,926,000

 
67,550,000

 

 
208,908,000

5 Watch
34,025,000

 
5,109,000

 
20,345,000

 

 
59,479,000

6 OAEM
9,821,000

 

 
2,490,000

 

 
12,311,000

7 Substandard
19,733,000

 
150,000

 
2,918,000

 

 
22,801,000

8 Doubtful

 

 

 

 

Total
$
279,683,000

 
$
20,138,000

 
$
133,629,000

 
$
19,042,000

 
$
452,492,000


Page 22



The following table summarizes the risk ratings for the Company's commercial real estate, commercial construction, commercial other, and municipal loans as of December 31, 2015:
 
Commercial
Real Estate
 
Commercial
Construction
 
Commercial
Other
 
Municipal
Loans
 
All Risk-
Rated Loans
1 Strong
$
6,000

 
$

 
$
1,256,000

 
$

 
$
1,262,000

2 Above Average
29,176,000

 
56,000

 
7,506,000

 
18,321,000

 
55,059,000

3 Satisfactory
52,821,000

 
2,057,000

 
28,787,000

 
1,430,000

 
85,095,000

4 Average
122,071,000

 
18,070,000

 
67,301,000

 

 
207,442,000

5 Watch
36,075,000

 
4,490,000

 
18,135,000

 

 
58,700,000

6 OAEM
9,742,000

 

 
2,410,000

 

 
12,152,000

7 Substandard
19,571,000

 
208,000

 
2,946,000

 

 
22,725,000

8 Doubtful

 

 

 

 

Total
$
269,462,000

 
$
24,881,000

 
$
128,341,000

 
$
19,751,000

 
$
442,435,000

The following table summarizes the risk ratings for the Company's commercial real estate, commercial construction, commercial other, and municipal loans as of March 31, 2015:
 
Commercial
Real Estate
 
Commercial
Construction
 
Commercial
Other
 
Municipal
Loans
 
All Risk-
Rated Loans
1 Strong
$
11,000

 
$

 
$
344,000

 
$

 
$
355,000

2 Above Average
11,599,000

 
766,000

 
8,282,000

 
24,687,000

 
45,334,000

3 Satisfactory
52,828,000

 
2,227,000

 
24,758,000

 
1,590,000

 
81,403,000

4 Average
108,480,000

 
25,867,000

 
55,120,000

 

 
189,467,000

5 Watch
36,816,000

 
2,567,000

 
17,642,000

 

 
57,025,000

6 OAEM
9,670,000

 
2,509,000

 
1,669,000

 

 
13,848,000

7 Substandard
22,617,000

 
747,000

 
7,640,000

 

 
31,004,000

8 Doubtful

 

 

 

 

Total
$
242,021,000

 
$
34,683,000

 
$
115,455,000

 
$
26,277,000

 
$
418,436,000


Commercial loans are generally charged off when all or a portion of the principal amount is determined to be uncollectible. This determination is based on circumstances specific to a borrower including repayment ability, analysis of collateral and other factors as applicable.
Residential loans are comprised of two classes: term loans, which include traditional amortizing home mortgages, and construction loans, which include loans for owner-occupied residential construction. Residential loans typically have a 75% to 80% loan to value based upon current appraisal information at the time the loan is made. Home equity loans and lines of credit are typically written to the same underwriting standards. Consumer loans are primarily amortizing loans to individuals collateralized by automobiles, pleasure craft and recreation vehicles, typically with a maximum loan to value of 80% to 90% of the purchase price of the collateral. Consumer loans also include a small amount of unsecured short-term time notes to individuals.
Residential loans, consumer loans and home equity lines of credit are segregated into homogeneous pools with similar risk characteristics. Trends and current conditions are analyzed and historical loss experience is adjusted accordingly. Quantitative and qualitative adjustment factors for these segments are consistent with those for the commercial and municipal classes. Certain loans in the residential, home equity lines of credit and consumer classes identified as having the potential for further deterioration are analyzed individually to confirm impairment status, and to determine the need for a specific reserve; however there is no formal rating system used for these classes. Consumer loans greater than 120 days past due are generally charged off. Residential loans 90 days or more past due are placed on non-accrual status unless the loans are both well secured and in the process of collection. One- to  four-family residential real estate loans and home equity loans are written down or charged-off no later than 180 days past due, or for residential real estate secured loans having a borrower in bankruptcy, within 60 days of receipt of notification of filing from the bankruptcy court, whichever is sooner. This is subject to completion of a current assessment of the value of the collateral with any outstanding loan balance in excess of the fair value of the property, less costs to sell, written down or charged-off. 
There were no changes to the Company's accounting policies or methodology used to estimate the allowance for loan losses during the three months ended March 31, 2016.

Page 23



The following table presents allowance for loan losses activity by class for the three months ended March 31, 2016, and allowance for loan loss balances by class and related loan balances by class as of March 31, 2016:
 
Commercial
Municipal
Residential
Home Equity Line of Credit
Consumer
Unallocated
Total
 
Real Estate
Construction
Other
 
Term
Construction
 
 
 
 
For the three months ended March 31, 2016
Beginning balance
$
3,120,000

$
580,000

$
1,452,000

$
17,000

$
1,391,000

$
24,000

$
893,000

$
566,000

$
1,873,000

$
9,916,000

Charge offs

58,000



20,000


49,000

63,000


190,000

Recoveries


20,000


65,000


1,000

32,000


118,000

Provision (credit)
404,000

(177,000
)
204,000


38,000

9,000

60,000

119,000

(282,000
)
375,000

Ending balance
$
3,524,000

$
345,000

$
1,676,000

$
17,000

$
1,474,000

$
33,000

$
905,000

$
654,000

$
1,591,000

$
10,219,000

Allowance for loan losses as of March 31, 2016
Ending balance specifically evaluated for impairment
$
69,000

$
96,000

$
21,000

$

$
384,000

$

$
29,000

$

$

$
599,000

Ending balance collectively evaluated for impairment
$
3,455,000

$
249,000

$
1,655,000

$
17,000

$
1,090,000

$
33,000

$
876,000

$
654,000

$
1,591,000

$
9,620,000

Related loan balances as of March 31, 2016
Ending balance
$
279,683,000

$
20,138,000

$
133,629,000

$
19,042,000

$
405,495,000

$
11,754,000

$
110,249,000

$
24,952,000

$

$
1,004,942,000

Ending balance specifically evaluated for impairment
$
10,510,000

$
967,000

$
1,185,000

$

$
14,540,000

$

$
1,408,000

$

$

$
28,610,000

Ending balance collectively evaluated for impairment
$
269,173,000

$
19,171,000

$
132,444,000

$
19,042,000

$
390,955,000

$
11,754,000

$
108,841,000

$
24,952,000

$

$
976,332,000



Page 24



The following table presents allowance for loan losses activity by class for the year-ended December 31, 2015 and allowance for loan loss balances by class and related loan balances by class as of December 31, 2015:
 
Commercial
Municipal
Residential
 
Home Equity Line of Credit
Consumer
Unallocated
Total
 
Real Estate
 
Construction
 
Other
 
Term
 
Construction
 
 
 
 
 
For the year ended December 31, 2015
Beginning balance
$
3,532,000

 
$
823,000

 
$
1,505,000

$
15,000

$
1,185,000

 
$
20,000

 
$
1,060,000

$
542,000

$
1,662,000

$
10,344,000

Charge offs
280,000

 
9,000

 
732,000


420,000

 

 
582,000

350,000


2,373,000

Recoveries
2,000

 
1,000

 
88,000


152,000

 

 
31,000

121,000


395,000

Provision (credit)
(134,000
)
 
(235,000
)
 
591,000

2,000

474,000

 
4,000

 
384,000

253,000

211,000

1,550,000

Ending balance
$
3,120,000

 
$
580,000

 
$
1,452,000

$
17,000

$
1,391,000

 
$
24,000

 
$
893,000

$
566,000

$
1,873,000

$
9,916,000

Allowance for loan losses as of December 31, 2015
Ending balance specifically evaluated for impairment
$
89,000

 
$
302,000

 
$
8,000

$

$
326,000

 
$

 
$
29,000

$

$

$
754,000

Ending balance collectively evaluated for impairment
$
3,031,000

 
$
278,000

 
$
1,444,000

$
17,000

$
1,065,000

 
$
24,000

 
$
864,000

$
566,000

$
1,873,000

$
9,162,000

Related loan balances as of December 31, 2015
Ending balance
$
269,462,000

 
$
24,881,000

 
$
128,341,000

$
19,751,000

$
403,030,000

 
$
8,451,000

 
$
110,202,000

$
24,520,000

$

$
988,638,000

Ending balance specifically evaluated for impairment
$
10,717,000

 
$
1,026,000

 
$
1,234,000

$

$
15,088,000

 
$

 
$
1,466,000

$

$

$
29,531,000

Ending balance collectively evaluated for impairment
$
258,745,000

 
$
23,855,000

 
$
127,107,000

$
19,751,000

$
387,942,000

 
$
8,451,000

 
$
108,736,000

$
24,520,000

$

$
959,107,000


Page 25




The following table presents allowance for loan losses activity by class for the three months ended March 31, 2015, and allowance for loan loss balances by class and related loan balances by class as of March 31, 2015:
 
Commercial
Municipal
Residential
 Home Equity Line of Credit
Consumer
Unallocated
Total
 
Real Estate
Construction
Other
 
Term
Construction
 
 
 
 
For the three months ended March 31, 2015
Beginning balance
$
3,532,000

$
823,000

$
1,505,000

$
15,000

$
1,185,000

$
20,000

$
1,060,000

$
542,000

$
1,662,000

$
10,344,000

Charge offs
122,000


2,000


83,000


447,000

62,000


716,000

Recoveries


4,000


6,000


22,000

36,000


68,000

Provision (credit)
(293,000
)
(16,000
)
207,000

1,000


3,000

409,000

10,000

179,000

500,000

Ending balance
$
3,117,000

$
807,000

$
1,714,000

$
16,000

$
1,108,000

$
23,000

$
1,044,000

$
526,000

$
1,841,000

$
10,196,000

Allowance for loan losses as of March 31, 2015
Ending balance specifically evaluated for impairment
$
248,000

$
396,000

$
347,000

$

$
421,000

$

$
24,000

$

$

$
1,436,000

Ending balance collectively evaluated for impairment
$
2,869,000

$
411,000

$
1,367,000

$
16,000

$
687,000

$
23,000

$
1,020,000

$
526,000

$
1,841,000

$
8,760,000

Related loan balances as of March 31, 2015
Ending balance
$
242,021,000

$
34,683,000

$
115,455,000

$
26,277,000

$
383,869,000

$
13,036,000

$
104,100,000

$
19,728,000

$

$
939,169,000

Ending balance specifically evaluated for impairment
$
12,705,000

$
1,380,000

$
2,721,000

$

$
16,348,000

$

$
1,654,000

$
25,000

$

$
34,833,000

Ending balance collectively evaluated for impairment
$
229,316,000

$
33,303,000

$
112,734,000

$
26,277,000

$
367,521,000

$
13,036,000

$
102,446,000

$
19,703,000

$

$
904,336,000


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







Page 26



As of March 31, 2016, 108,710 shares of restricted stock had been granted under the 2010 Plan, of which 67,064 shares remain restricted as of March 31, 2016 as detailed in the following table:
Year
Granted
Vesting Term
(In Years)
Shares
Remaining Term
(In Years)
2012
5.0
7,996

0.8
2013
5.0
14,776

1.8
2014
5.0
10,422

2.8
2015
5.0
12,023

3.8
2016
1.0
6,832

0.8
2016
5.0
15,015

4.8
 
 
67,064

2.8
The compensation cost related to these restricted stock grants is $1,140,000 and will be recognized over the vesting terms of each grant. In the three months ended March 31, 2016, $49,000 of expense was recognized for these restricted shares, leaving $706,000 in unrecognized expense as of March 31, 2016. In the three months ended March 31, 2015, $74,000 of expense was recognized for restricted shares, leaving $567,000 in unrecognized expense as of March 31, 2015.
The Company established a shareholder-approved stock option plan in 1995 (the "1995 Plan"), under which the Company granted options to employees for 600,000 shares of common stock. Only incentive stock options were granted under the 1995 Plan. The option price of each option grant was determined by the Options Committee of the Board of Directors, and in no instance was less than the fair market value on the date of the grant. An option's maximum term was ten years from the date of grant, with 50% of the options granted vesting two years from the date of grant and the remaining 50% vesting five years from the date of grant. As of January 16, 2005, all options under the 1995 Plan had been granted, and as of January 16, 2015, all options granted under the 2015 plan had been exercised or expired.

Note 6 – Preferred and Common Stock
Preferred Stock
On January 9, 2009, the Company issued $25,000,000 in Fixed Rate Cumulative Perpetual Preferred Stock, Series A, by the U.S. Treasury ("Treasury') under the Capital Purchase Program ("the CPP Shares"). The CPP Shares qualified as Tier 1 capital on the Company's books for regulatory purposes and ranked senior to the Company's common stock and senior or at an equal level in the Company's capital structure to any other shares of preferred stock the Company may issue in the future. In three separate transactions in 2012 and 2013, the Company repurchased all of the CPP shares from the Treasury.
Incident to such issuance of the CPP shares, the Company issued to the Treasury warrants (the "Warrants") to purchase up to 225,904 shares of the Company's common stock at a price per share of $16.60 (subject to adjustment). The Warrants (and any shares of common stock issuable pursuant to the Warrants) are freely transferable by Treasury to third parties. The Warrants have a term of ten years and could be exercised by Treasury or a subsequent holder at any time or from time to time during their term. To the extent they had not previously been exercised, the Warrants will expire after ten years. The Warrants were unchanged as a result of the CPP Shares repurchase transactions.
In May 2015, the Treasury sold all of the Warrants to private parties. In accordance with the contractual terms of the Warrants, the number of shares issuable upon exercise of the warrants and strike price were adjusted at the time of the sale. As a result of this transaction, the number of issuable shares under the Warrants now stands at 226,819 shares with a strike price of $16.53 per share.

Common Stock
On March 28, 2013, the Company consummated a fully underwritten offering for 760,771 shares of the Company's common stock, with net proceeds of $11,649,000. The Company used these proceeds to repurchase the remaining $10,000,000 of CPP Shares on May 8, 2013. Proceeds from sale of common stock totaled $121,000 and $110,000 for the three months ended March 31, 2016 and 2015, respectively.


Page 27



Note 7 – Earnings Per Share
The following table sets forth the computation of basic and diluted earnings per share (EPS) for the three months ended March 31, 2016 and 2015:
 
Income (Numerator)
 
Shares (Denominator)
 
Per-Share Amount
For the three months ended March 31, 2016
 
 
 
 
 
Net income as reported
$
4,503,000

 
 
 
 
Basic EPS: Income available to common shareholders
4,503,000

 
10,699,440

 
$
0.42

Effect of dilutive securities: restricted stock and warrants
 
 
95,672

 
 
Diluted EPS: Income available to common shareholders plus assumed conversions
$
4,503,000

 
10,795,112

 
$
0.42

For the three months ended March 31, 2015
 
 
 
 
 
Net income as reported
$
4,175,000

 
 
 
 
Basic EPS: Income available to common shareholders
4,175,000

 
10,665,059

 
$
0.39

Effect of dilutive securities: restricted stock and warrants
 
 
66,430

 
 
Diluted EPS: Income available to common shareholders plus assumed conversions
$
4,175,000

 
10,731,489

 
$
0.39

 
 
 
 
 
 
All earnings per share calculations have been made using the weighted average number of shares outstanding during the period. The potentially dilutive securities are incentive stock options, unvested shares of restricted stock granted to certain key members of Management and the warrants. The number of dilutive shares is calculated using the treasury method, assuming that all options and warrants were exercisable at the end of each period. Options and warrants that are out-of-the-money are not considered in the calculation of dilutive earnings per share as the effect would be anti-dilutive.
The following table presents the number of options and warrants outstanding as of March 31, 2016 and 2015 and the amount for which the average market price at period end is above or below the strike price:
 
Outstanding
In-the-Money
Out-of-the-Money
For the three months ended March 31, 2016
 
 
 
Warrants to private parties
226,819

226,819


Total dilutive securities
226,819

226,819


For the three months ended March 31, 2015
 
 
 
Warrants issued to Treasury
225,904

225,904


Total dilutive securities
225,904

225,904




Note 8 – Employee Benefit Plans
401(k) Plan
The Bank has a defined contribution plan available to substantially all employees who have completed 3 months of service. Employees may contribute up to Internal Revenue Service ("IRS") determined limits and the Bank may match employee contributions not to exceed 3.0% of compensation depending on contribution level. Subject to a vote of the Board of Directors, the Bank may also make a profit-sharing contribution to the Plan. Such contribution equaled 2.0% of each eligible employee's compensation in 2015. The amount for 2016 has not been established. The expense related to the 401(k) plan was $120,000 and $121,000 for the three months ended March 31, 2016 and 2015, respectively.


Page 28



Deferred Compensation and Supplemental Retirement Benefits
The Bank also provides unfunded, non-qualified deferred compensation payable over two years, as well as unfunded supplemental retirement benefits for certain officers, payable in installments over 20 years upon retirement or death. The agreements consist of individual contracts with differing characteristics that, when taken together, do not constitute a postretirement plan. The costs for these benefits are recognized over the service periods of the participating officers in accordance with FASB ASC Topic 712 "Compensation – Nonretirement Postemployment Benefits". The expense of these supplemental retirement benefits was $54,000 for the three months ended March 31, 2016 and $78,000 for the same period in 2015. As of March 31, 2016, the associated accrued liability included in other liabilities in the balance sheet was $3,082,000 compared to $3,088,000 and $3,031,000 at December 31, 2015 and March 31, 2015, respectively.

Post-Retirement Benefit Plans
The Bank sponsors two post-retirement benefit plans. One plan currently provides a subsidy for health insurance premiums to certain retired employees and a future subsidy for seven active employees who were age 50 and over in 1996. These subsidies are based on years of service and range between $40 and $1,200 per month per person. The other plan provides life insurance coverage to certain retired employees and health insurance for retired directors. None of these plans are pre-funded. The Company utilizes FASB ASC Topic 712 "Compensation – Nonretirement Postemployment Benefits" to recognize the overfunded or underfunded status of a defined benefit postretirement plan as an asset or liability in its balance sheet and to recognize changes in the funded status in the year in which the changes occur through comprehensive income. The following table sets forth the accumulated postretirement benefit obligation and funded status:
 
At or for the three months ended March 31,
 
2016
 
2015
Change in benefit obligation
 
 
 
Benefit obligation at beginning of year
$
1,967,000

 
$
1,928,000

Service cost

 

Interest cost
21,000

 
18,000

Benefits paid
(30,000
)
 
(26,000
)
Benefit obligation at end of period
$
1,958,000

 
$
1,920,000

Funded status
 
 
 
Benefit obligation at end of period
$
(1,958,000
)
 
$
(1,920,000
)
Unamortized loss
240,000

 
192,000

Accrued benefit cost at end of period
$
(1,718,000
)
 
$
(1,728,000
)
The following table sets forth the net periodic pension cost:
 
For the three months ended March 31,
 
2016
 
2015
Components of net periodic benefit cost
 
 
 
Service cost
$

 
$

Interest cost
21,000

 
18,000

Net periodic benefit cost
$
21,000

 
$
18,000

Amounts not yet reflected in net periodic benefit cost and included in accumulated other comprehensive income (loss) are as follows:
 
March 31,
2016
 
December 31, 2015
 
March 31,
2015
Unamortized net actuarial loss
$
(240,000
)
 
$
(240,000
)
 
$
(192,000
)
Deferred tax benefit at 35%
84,000

 
84,000

 
67,000

Net unrecognized postretirement benefits included in accumulated other comprehensive income (loss)
$
(156,000
)
 
$
(156,000
)
 
$
(125,000
)


Page 29



A weighted average discount rate of 4.25% was used in determining the accumulated benefit obligation and the net periodic benefit cost. The assumed health care cost trend rate is 7.0%. The measurement date for benefit obligations was as of year-end for prior years presented. The expected benefit payments for all of 2016 are $121,000. Plan expense for 2016 is estimated to be $85,000. A 1% change in trend assumptions would create an approximate change in the same direction of $100,000 in the accumulated benefit obligation, $7,000 in the interest cost and $1,000 in the service cost.


Note 9 - Other Comprehensive Income (Loss)

The following table summarizes activity in the unrealized gain or loss on available for sale securities included in other comprehensive income (loss) for the three months ended March 31, 2016 and 2015.
 
For the three months ended March 31,
 
2016
2015
Balance at beginning of period
$
1,123,000

$
2,522,000

Unrealized gains arising during the period
3,385,000

1,483,000

Reclassification of realized gains during the period
(536,000
)
(1,395,000
)
Related deferred taxes
(997,000
)
(31,000
)
Net change
1,852,000

57,000

Balance at end of period
$
2,975,000

$
2,579,000


The reclassification of realized gains is included in the net securities gains line of the consolidated statements of income and comprehensive income and the tax effect is included in the income tax expense line of the same statement.
The following table summarizes activity in the unrealized loss on securities transferred from available for sale to held to maturity included in other comprehensive income (loss) for the three months ended March 31, 2016 and 2015.
 
For the three months ended March 31,
 
2016
2015
Balance at beginning of period
$
(112,000
)
$
(48,000
)
Amortization of net unrealized losses
(17,000
)
(14,000
)
Related deferred taxes
6,000

(5,000
)
Net change
(11,000
)
(19,000
)
Balance at end of period
$
(123,000
)
$
(67,000
)

The following table summarizes activity in the unrealized gain or loss on postretirement benefits included in other comprehensive income (loss) for the three months ended March 31, 2016 and 2015.
 
For the three months ended March 31,
 
2016
2015
Unrecognized postretirement benefits at beginning of period
$
(156,000
)
$
(125,000
)
Amortization of unrecognized transition obligation


Change in unamortized net actuarial gain (loss)


Related deferred taxes


Unrecognized postretirement benefits at end of period
$
(156,000
)
$
(125,000
)



Page 30



Note 10 – Mortgage Servicing Rights

FASB ASC Topic 860 "Transfers and Servicing" requires all separately recognized servicing assets and servicing liabilities to be initially measured at fair value, if practicable. The Company's servicing assets and servicing liabilities are reported using the amortization method and carried at the lower of amortized cost or fair value by strata. In evaluating the carrying values of mortgage servicing rights, the Company obtains third party valuations based on loan level data including note rate, type and term of the underlying loans. The model utilizes several assumptions, the most significant of which is loan prepayments, calculated using a three-months moving average of weekly prepayment data published by the Public Securities Association (PSA) and modeled against the serviced loan portfolio, and the discount rate to discount future cash flows. As of March 31, 2016, the prepayment assumption using the PSA model was 248, which translates into an anticipated prepayment rate of 14.86%. The discount rate is the quarterly average 10 year U.S. Treasury plus 5.17%. Other assumptions include delinquency rates, foreclosure rates, servicing cost inflation, and annual unit loan cost. All assumptions are adjusted periodically to reflect current circumstances. Amortization of mortgage servicing rights, as well as write-offs due to prepayments of the related mortgage loans, are recorded as a charge against mortgage servicing fee income.
For the three months ended March 31, 2016 and 2015, servicing rights capitalized totaled zero and $64,000, respectively. Servicing rights amortized for the three months ended March 31, 2016 and 2015, were $97,000 and $104,000, respectively. The fair value of servicing rights was $1,543,000, $1,915,000 and $1,746,000 at March 31, 2016, December 31, 2015 and March 31, 2015, respectively. The Bank serviced loans for others totaling $223,565,000, $223,610,000 and $214,537,000 at March 31, 2016, December 31, 2015, and March 31, 2015, respectively.
Mortgage servicing rights are included in other assets and detailed in the following table:
 
March 31,
2016
 
December 31,
2015
 
March 31,
2015
Mortgage servicing rights
$
5,747,000

 
$
5,747,000

 
$
6,103,000

Accumulated amortization
(4,716,000
)
 
(4,619,000
)
 
(5,053,000
)
Impairment reserve
(107,000
)
 
(35,000
)
 
(47,000
)
 
$
924,000

 
$
1,093,000

 
$
1,003,000

 

Note 11 – Income Taxes
FASB ASC Topic 740 "Income Taxes" defines the criteria that an individual tax position must satisfy for some or all of the benefits of that position to be recognized in a company's financial statements. Topic 740 prescribes a recognition threshold of more-likely-than-not, and a measurement attribute for all tax positions taken or expected to be taken on a tax return, in order for those tax positions to be recognized in the financial statements. The Company is currently open to audit under the statute of limitations by the IRS for the years ended December 31, 2013 through 2015.

Note 12 - Certificates of Deposit
The following table represents the breakdown of certificates of deposit at March 31, 2016 and 2015, and at December 31, 2015:
 
March 31, 2016
 
December 31, 2015
 
March 31, 2015
Certificates of deposit < $100,000
$
197,006,000

 
$
158,529,000

 
$
137,166,000

Certificates $100,000 to $250,000
226,644,000

 
175,077,000

 
210,657,000

Certificates $250,000 and over
49,062,000

 
37,376,000

 
50,334,000

 
$
472,712,000

 
$
370,982,000

 
$
398,157,000


Note 13 – Reclassifications
Certain items from the prior year were reclassified in the financial statements to conform with the current year presentation. These do not have a material impact on the consolidated balance sheet or statement of income and comprehensive income presentations.


Page 31



Note 14 – Fair Value
Certain assets and liabilities are recorded at fair value to provide additional insight into the Company's quality of earnings. Some of these assets and liabilities are measured on a recurring basis while others are measured on a nonrecurring basis, with the determination based upon applicable existing accounting pronouncements. For example, securities available for sale are recorded at fair value on a recurring basis. Other assets, such as, other real estate owned and impaired loans, are recorded at fair value on a nonrecurring basis using the lower of cost or market methodology to determine impairment of individual assets. The Company groups assets and liabilities which are recorded at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value. A financial instrument's level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement (with level 1 considered highest and level 3 considered lowest). A brief description of each level follows.
Level 1 - Valuation is based upon quoted prices for identical instruments in active markets.
Level 2 - Valuation is based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market.
Level 3 - Valuation is generated from model-based techniques that use at least one significant assumption not observable in the market. These unobservable assumptions reflect estimates that market participants would use in pricing the asset or liability. Valuation includes use of discounted cash flow models and similar techniques.

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

Cash, Cash Equivalents and Interest-Bearing Deposits in Other Banks
The carrying values of cash equivalents, due from banks and federal funds sold approximate their relative fair values. As such, the Company classifies these financial instruments as Level 1.

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

Loans Held for Sale
Loans held for sale are recorded at the lower of carrying value or fair value. The fair value of mortgage loans held for sale is based on what secondary markets are currently offering for portfolios with similar characteristics. As such, the Company classifies mortgage loans held for sale as Level 2.

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


Page 32



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

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

Accrued Interest Receivable
The fair value estimate of this financial instrument approximates the carrying value as this financial instrument has a short maturity. It is the Company's policy to stop accruing interest on loans for which it is probable that the interest is not collectible. Therefore, this financial instrument has been adjusted for estimated credit loss. As such, the Company classifies accrued interest receivable as Level 2.

Deposits
The fair value of deposits is based on the discounted value of contractual cash flows. The discount rate is estimated using the rates currently offered for deposits of similar remaining maturities. As such, the Company classifies deposits as Level 2.
The fair value estimates do not include the benefit that results from the low-cost funding provided by the deposits compared to the cost of borrowing funds in the market. If that value were considered, the fair value of the Company's net assets could increase.

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

Accrued Interest Payable
The fair value estimate approximates the carrying amount as this financial instrument has a short maturity. The Company classifies accrued interest payable as Level 2.

Off-Balance-Sheet Instruments
Off-balance-sheet instruments include loan commitments. Fair values for loan commitments have not been presented as the future revenue derived from such financial instruments is not significant.

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





Assets and Liabilities Recorded at Fair Value on a Recurring Basis
The following tables present the balances of assets and liabilities that were measured at fair value on a recurring basis as of March 31, 2016, December 31, 2015 and March 31, 2015.

Page 33



 
At March 31, 2016
 
Level 1
 
Level 2
 
Level 3
 
Total
Securities available for sale
 
 
 
 
 
 
 
   Mortgage-backed securities
$

 
$
193,657,000

 
$

 
$
193,657,000

   State and political subdivisions

 
19,904,000

 

 
19,904,000

   Other equity securities

 
3,164,000

 

 
3,164,000

Total assets
$

 
$
216,725,000

 
$

 
$
216,725,000

 
At December 31, 2015
 
Level 1
 
Level 2
 
Level 3
 
Total
Securities available for sale
 
 
 
 
 
 
 
   Mortgage-backed securities
$

 
$
195,110,000

 
$

 
$
195,110,000

   State and political subdivisions

 
24,506,000

 

 
24,506,000

   Other equity securities

 
3,423,000

 

 
3,423,000

Total assets
$

 
$
223,039,000

 
$

 
$
223,039,000

 
At March 31, 2015
 
Level 1
 
Level 2
 
Level 3
 
Total
Securities available for sale
 
 
 
 
 
 
 
   Mortgage-backed securities
$

 
$
127,617,000

 
$

 
$
127,617,000

   State and political subdivisions

 
25,598,000

 

 
25,598,000

   Other equity securities

 
3,102,000

 

 
3,102,000

Total assets
$

 
$
156,317,000

 
$

 
$
156,317,000


Assets and Liabilities Recorded at Fair Value on a Non-Recurring Basis
The following tables include assets measured at fair value on a nonrecurring basis that have had a fair value adjustment since their initial recognition. Other real estate owned is presented net of an allowance of $130,000, $162,000 and $387,000 at March 31, 2016, December 31, 2015, and March 31, 2015, respectively. Only collateral-dependent impaired loans with a related specific allowance for loan losses or a partial charge off are included in impaired loans for purposes of fair value disclosures. Impaired loans below are presented net of specific allowances of $158,000, $292,000 and $799,000 at March 31, 2016, December 31, 2015, and March 31, 2015, respectively.
 
At March 31, 2016
 
Level 1
 
Level 2
 
Level 3
 
Total
Other real estate owned
$

 
$
1,592,000

 
$

 
$
1,592,000

Impaired loans

 
879,000

 

 
879,000

Total assets
$

 
$
2,471,000

 
$

 
$
2,471,000

 
At December 31, 2015
 
Level 1
 
Level 2
 
Level 3
 
Total
Other real estate owned
$

 
$
1,532,000

 
$

 
$
1,532,000

Impaired loans

 
699,000

 

 
699,000

Total assets
$

 
$
2,231,000

 
$

 
$
2,231,000

 
At March 31, 2015
 
Level 1
 
Level 2
 
Level 3
 
Total
Other real estate owned
$

 
$
2,899,000

 
$

 
$
2,899,000

Impaired loans

 
1,439,000

 

 
1,439,000

Total assets
$

 
$
4,338,000

 
$

 
$
4,338,000



Page 34



Fair Value of Financial Instruments

FASB ASC Topic 825 "Financial Instruments" requires disclosures of fair value information about financial instruments, whether or not recognized in the balance sheet, if the fair values can be reasonably determined. Fair value is best determined based upon quoted market prices. However, in many instances, there are no quoted market prices for the Company's various financial instruments. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques using observable inputs when available. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. Accordingly, the fair value estimates may not be realized in an immediate settlement of the instrument. Topic 825 excludes certain financial instruments and all nonfinancial instruments from its disclosure requirements. Accordingly, the aggregate fair value amounts presented may not necessarily represent the underlying fair value of the Company.
The carrying amount and estimated fair values for financial instruments as of March 31, 2016 were as follows:
 
Carrying value
 
Estimated fair value
 
Level 1
 
Level 2
 
Level 3
Financial assets
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
14,533,000

 
$
14,533,000

 
$
14,533,000

 
$

 
$

Interest bearing deposits in other banks
6,372,000

 
6,372,000

 
6,372,000

 

 

Securities available for sale
216,725,000

 
216,725,000

 

 
216,725,000

 

Securities to be held to maturity
236,611,000

 
243,337,000

 

 
243,337,000

 

Restricted equity securities
13,875,000

 
13,875,000

 

 
13,875,000

 

Loans held for sale
224,000

 
224,000

 

 
224,000

 

Loans (net of allowance for loan losses)
 
 
 
 
 
 
 
 
 
Commercial
 
 
 
 
 
 
 
 
 
   Real estate
275,510,000

 
272,302,000

 

 

 
272,302,000

   Construction
19,729,000

 
19,499,000

 

 

 
19,499,000

   Other
131,644,000

 
131,637,000

 

 

 
131,637,000

Municipal
19,022,000

 
19,994,000

 

 

 
19,994,000

Residential
 
 
 
 
 
 
 
 
 
   Term
403,749,000

 
410,670,000

 

 
17,000

 
410,653,000

   Construction
11,715,000

 
11,648,000

 

 

 
11,648,000

Home equity line of credit
109,177,000

 
108,274,000

 

 
862,000

 
107,412,000

Consumer
24,177,000

 
24,153,000

 

 

 
24,153,000

Total loans
994,723,000

 
998,177,000

 

 
879,000

 
997,298,000

Mortgage servicing rights
924,000

 
1,543,000

 

 
1,543,000

 

Accrued interest receivable
6,271,000

 
6,271,000

 

 
6,271,000

 

Financial liabilities
 
 
 
 
 
 
 
 
 
Demand deposits
$
116,756,000

 
$
116,614,000

 
$

 
$
116,614,000

 
$

NOW deposits
240,112,000

 
230,934,000

 

 
230,934,000

 

Money market deposits
74,643,000

 
68,221,000

 

 
68,221,000

 

Savings deposits
205,218,000

 
187,346,000

 

 
187,346,000

 

Local certificates of deposit
207,664,000

 
209,455,000

 

 
209,455,000

 

National certificates of deposit
265,048,000

 
265,335,000

 

 
265,335,000

 

Total deposits
1,109,441,000

 
1,077,905,000

 

 
1,077,905,000

 

Repurchase agreements
91,399,000

 
88,442,000

 

 
88,442,000

 

Federal Home Loan Bank advances
185,132,000

 
186,398,000

 

 
186,398,000

 

Total borrowed funds
276,531,000

 
274,840,000

 

 
274,840,000

 

Accrued interest payable
495,000

 
495,000

 

 
495,000

 





Page 35




The carrying amounts and estimated fair values for financial instruments as of December 31, 2015 were as follows:
 
Carrying value
 
Estimated fair value
 
Level 1
 
Level 2
 
Level 3
Financial assets
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
14,299,000

 
$
14,299,000

 
$
14,299,000

 
$

 
$

Interest bearing deposits in other banks
4,013,000

 
4,013,000

 
4,013,000

 

 

Securities available for sale
223,039,000

 
223,039,000

 

 
223,039,000

 

Securities to be held to maturity
240,023,000

 
243,123,000

 

 
243,123,000

 

Restricted equity securities
14,257,000

 
14,257,000

 

 
14,257,000

 

Loans held for sale
349,000

 
349,000

 

 
349,000

 

Loans (net of allowance for loan losses)
 
 
 
 
 
 
 
 
 
Commercial
 
 
 
 
 
 
 
 
 
   Real estate
265,616,000

 
262,763,000

 

 

 
262,763,000

   Construction
24,166,000

 
23,906,000

 

 

 
23,906,000

   Other
126,551,000

 
126,141,000

 

 

 
126,141,000

Municipal
19,730,000

 
20,331,000

 

 

 
20,331,000

Residential
 
 
 
 
 
 
 
 
 
   Term
401,315,000

 
405,315,000

 

 

 
405,315,000

   Construction
8,421,000

 
8,379,000

 

 

 
8,379,000

Home equity line of credit
109,101,000

 
108,118,000

 

 
699,000

 
107,419,000

Consumer
23,822,000

 
23,754,000

 

 

 
23,754,000

Total loans
978,722,000

 
978,707,000

 

 
699,000

 
978,008,000

Mortgage servicing rights
1,093,000

 
1,915,000

 

 
1,915,000

 

Accrued interest receivable
4,912,000

 
4,912,000

 

 
4,912,000

 

Financial liabilities
 
 
 
 
 
 
 
 
 
Demand deposits
$
130,566,000

 
$
125,651,000

 
$

 
$
125,651,000

 
$

NOW deposits
242,638,000

 
224,627,000

 

 
224,627,000

 

Money market deposits
92,994,000

 
82,050,000

 

 
82,050,000

 

Savings deposits
206,009,000

 
181,010,000

 

 
181,010,000

 

Local certificates of deposit
201,420,000

 
201,013,000

 

 
201,013,000

 

National certificates of deposit
169,562,000

 
169,617,000

 

 
169,617,000

 

Total deposits
1,043,189,000

 
983,968,000

 

 
983,968,000

 

Repurchase agreements
87,103,000

 
82,168,000

 

 
82,168,000

 

Federal Home Loan Bank advances
250,354,000

 
250,027,000

 

 
250,027,000

 

Total borrowed funds
337,457,000

 
332,195,000

 

 
332,195,000

 

Accrued interest payable
435,000

 
435,000

 

 
435,000

 



Page 36



The carrying amount and estimated fair values for financial instruments as of March 31, 2015 were as follows:
 
Carrying value
 
Estimated fair value
 
Level 1
 
Level 2
 
Level 3
Financial assets
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
13,855,000

 
$
13,855,000

 
$
13,855,000

 
$

 
$

Interest bearing deposits in other banks
336,000

 
336,000

 
336,000

 

 

Securities available for sale
156,317,000

 
156,317,000

 

 
156,317,000

 

Securities to be held to maturity
262,455,000

 
267,247,000

 

 
267,247,000

 

Restricted equity securities
13,912,000

 
13,912,000

 

 
13,912,000

 

Loans (net of allowance for loan losses)
 
 
 
 
 
 
 
 
 
Commercial
 
 
 
 
 
 
 
 
 
   Real estate
238,218,000

 
236,340,000

 

 
184,000

 
236,156,000

   Construction
33,698,000

 
33,432,000

 

 

 
33,432,000

   Other
113,363,000

 
113,409,000

 

 
9,000

 
113,400,000

Municipal
26,257,000

 
26,844,000

 

 

 
26,844,000

Residential
 
 
 
 
 
 
 
 
 
   Term
382,517,000

 
389,582,000

 

 
1,018,000

 
388,564,000

   Construction
13,008,000

 
12,988,000

 

 

 
12,988,000

Home equity line of credit
102,826,000

 
102,302,000

 

 
228,000

 
102,074,000

Consumer
19,086,000

 
19,259,000

 

 

 
19,259,000

Total loans
928,973,000

 
934,156,000

 

 
1,439,000

 
932,717,000

Mortgage servicing rights
1,003,000

 
1,746,000

 

 
1,746,000

 

Accrued interest receivable
5,724,000

 
5,724,000

 

 
5,724,000

 

Financial liabilities
 
 
 
 
 
 
 
 
 
Demand deposits
$
100,939,000

 
$
99,935,000

 
$

 
$
99,935,000

 
$

NOW deposits
199,099,000

 
189,139,000

 

 
189,139,000

 

Money market deposits
101,292,000

 
87,816,000

 

 
87,816,000

 

Savings deposits
167,338,000

 
151,345,000

 

 
151,345,000

 

Local certificates of deposit
199,553,000

 
200,506,000

 

 
200,506,000

 

National certificates of deposit
198,604,000

 
198,846,000

 

 
198,846,000

 

Total deposits
966,825,000

 
927,587,000

 

 
927,587,000

 

Repurchase agreements
85,657,000

 
81,693,000

 

 
81,693,000

 

Federal Home Loan Bank advances
226,919,000

 
230,230,000

 

 
230,230,000

 

Total borrowed funds
312,576,000

 
311,923,000

 

 
311,923,000

 

Accrued interest payable
564,000

 
564,000

 

 
564,000

 


Note 15 – Impact of Recently Issued Accounting Standards
In January 2016, the FASB issued ASU No. 2016-01, Financial Instruments - Overall: Recognition and Measurement of Financial Assets and Financial Liabilities. The ASU was issued to enhance the reporting model for financial instruments to provide users of financial statements with more decision-useful information. This ASU changes how entities account for equity investments that do not result in consolidation and are not accounted for under the equity method of accounting. The ASU also changes certain disclosure requirements and other aspects of U.S. GAAP, including a requirement for public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes. The ASU is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The ASU will not have a material effect on the Company's consolidated financial statements.
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). The ASU was issued to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. The ASU is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2018. Management is reviewing the guidance in the ASU to determine whether it will have a material effect on the Company’s consolidated financial statements.


Page 37



Item 2 – Management's Discussion and Analysis of Financial Condition
and Results of Operations
The First Bancorp, Inc. and Subsidiary
Forward-Looking Statements
This report contains statements that are "forward-looking statements." We may also make written or oral forward-looking statements in other documents we file with the Securities and Exchange Commission ("SEC"), in our annual reports to shareholders, in press releases and other written materials, and in oral statements made by our officers, directors or employees. You can identify forward-looking statements by the use of the words "believe," "expect," "anticipate," "intend," "estimate," "assume," "outlook," "will," "should," and other expressions that predict or indicate future events and trends and which do not relate to historical matters. You should not rely on forward-looking statements, because they involve known and unknown risks, uncertainties and other factors, some of which are beyond the control of the Company. These risks, uncertainties and other factors may cause the actual results, performance or achievements of the Company to be materially different from the anticipated future results, performance or achievements expressed or implied by the forward-looking statements.
Some of the factors that might cause these differences include the following: changes in general national, regional or international economic conditions or conditions affecting the banking or financial services industries or financial capital markets, volatility and disruption in national and international financial markets, government intervention in the U.S. financial system, reductions in net interest income resulting from interest rate volatility as well as changes in the balance and mix of loans and deposits, reductions in the market value of wealth management assets under administration, changes in the value of securities and other assets, reductions in loan demand, changes in loan collectability, default and charge-off rates, changes in the size and nature of the Company's competition, changes in legislation or regulation and accounting principles, policies and guidelines, 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, 2015, as filed with the SEC, may result in these differences. You should carefully review all of these factors, and you should be aware that there may be other factors that could cause these differences. These forward-looking statements were based on information, plans and estimates at the date of this quarterly report, and we assume no obligation to update any forward-looking statements to reflect changes in underlying assumptions or factors, new information, future events or other changes.
Although the Company believes that the expectations reflected in such forward-looking statements are reasonable, actual results may differ materially from the results discussed in these forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. The Company undertakes no obligation to republish revised forward-looking statements to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events. Readers are also urged to carefully review and consider the various disclosures made by the Company, which attempt to advise interested parties of the facts that affect the Company's business.
Critical Accounting Policies
Management's discussion and analysis of the Company's financial condition is based on the consolidated financial statements which are prepared in accordance with GAAP. The preparation of such financial statements requires Management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosure of contingent assets and liabilities. On an ongoing basis, Management evaluates its estimates, including those related to the allowance for loan losses, goodwill, the valuation of mortgage servicing rights, and other-than-temporary impairment on securities. Management bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis in making judgments about the carrying values of assets that are not readily apparent from other sources. Actual results could differ from the amount derived from Management's estimates and assumptions under different assumptions or conditions.
Allowance for Loan Losses. Management believes the allowance for loan losses requires the most significant estimates and assumptions used in the preparation of the consolidated financial statements. The allowance for loan losses is based on Management's evaluation of the level of the allowance required in relation to the estimated loss exposure in the loan portfolio. Management believes the allowance for loan losses is a significant estimate and therefore regularly evaluates it to determine the appropriate level by taking into consideration factors such as prior loan loss experience, the character and size of the loan portfolio, business and economic conditions and Management's estimation of potential losses. The use of different estimates or assumptions could produce different provisions for loan losses.
Goodwill. Management utilizes numerous techniques to estimate the value of various assets held by the Company, including methods to determine the appropriate carrying value of goodwill as required under FASB ASC Topic 350 "Intangibles – Goodwill and Other." In addition, goodwill from a purchase acquisition is subject to ongoing periodic impairment tests, which include an evaluation of the ongoing assets, liabilities and revenues from the acquisition and an estimation of the impact of business conditions.

Page 38



Mortgage Servicing Rights. The valuation of mortgage servicing rights is a critical accounting policy which requires significant estimates and assumptions. The Bank often sells mortgage loans it originates and retains the ongoing servicing of such loans, receiving a fee for these services, generally 0.25% of the outstanding balance of the loan per annum. Mortgage servicing rights are recognized at fair value when they are acquired through the sale of loans, and are reported in other assets. They are amortized into non-interest income in proportion to, and over the period of, the estimated future net servicing income of the underlying financial assets. The rights are subsequently carried at the lower of amortized cost or fair value. Management uses an independent firm which specializes in the valuation of mortgage servicing rights to determine the fair value which is recorded on the balance sheet. The most important assumption is the anticipated loan prepayment rate, and increases in prepayment speed results in lower valuations of mortgage servicing rights. The valuation also includes an evaluation for impairment based upon the fair value of the rights, which can vary depending upon current interest rates and prepayment expectations, as compared to amortized cost. Impairment is determined by stratifying rights by predominant characteristics, such as interest rates and terms. The use of different assumptions could produce a different valuation. All of the assumptions are based on standards the Company believes would be utilized by market participants in valuing mortgage servicing rights and are consistently derived and/or benchmarked against independent public sources.
Other-Than-Temporary Impairment on Securities. One of the significant estimates related to investment securities is the evaluation of other-than-temporary impairments. The evaluation of securities for other-than-temporary impairments is a quantitative and qualitative process, which is subject to risks and uncertainties and is intended to determine whether declines in the fair value of investments should be recognized in current period earnings. The risks and uncertainties include changes in general economic conditions, the issuer's financial condition and/or future prospects, the effects of changes in interest rates or credit spreads and the expected recovery period of unrealized losses. Securities that are in an unrealized loss position are reviewed at least quarterly to determine if other-than-temporary impairment is present based on certain quantitative and qualitative factors and measures. The primary factors considered in evaluating whether a decline in value of securities is other-than-temporary include: (a) the length of time and extent to which the fair value has been less than cost or amortized cost and the expected recovery period of the security, (b) the financial condition, credit rating and future prospects of the issuer, (c) whether the debtor is current on contractually obligated interest and principal payments, (d) the volatility of the securities' market price, (e) the intent and ability of the Company to retain the investment for a period of time sufficient to allow for recovery, which may be at maturity and (f) any other information and observable data considered relevant in determining whether other-than-temporary impairment has occurred, including the expectation of receipt of all principal and interest when due.
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 35.0% tax rate was used in both 2016 and 2015.


Page 39



 
For the three months ended March 31,
Dollars in thousands
2016
 
2015
Net interest income as presented
$
10,729

 
$
9,702

Effect of tax-exempt income
748

 
784

Net interest income, tax equivalent
$
11,477

 
$
10,486

The Company presents its efficiency ratio using non-GAAP information which is most commonly used by financial institutions. The GAAP-based efficiency ratio is noninterest expenses divided by net interest income plus noninterest income from the Consolidated Statements of Income and Comprehensive Income (Loss). The non-GAAP efficiency ratio excludes securities losses and other-than-temporary impairment charges from noninterest expenses, excludes securities gains from noninterest income, and adds the tax-equivalent adjustment to net interest income. The following table provides a reconciliation between the GAAP and non-GAAP efficiency ratio:
 
For the three months ended March 31,
Dollars in thousands
2016
 
2015
Non-interest expense, as presented
$
7,200

 
$
7,265

Net interest income, as presented
10,729

 
9,702

Effect of tax-exempt income
748

 
784

Non-interest income, as presented
2,964

 
3,658

Effect of non-interest tax-exempt income
89

 
45

Net securities gains
(536
)
 
(1,395
)
Adjusted net interest income plus non-interest income
$
13,994

 
$
12,794

Non-GAAP efficiency ratio
51.45
%
 
56.79
%
GAAP efficiency ratio
52.58
%
 
54.38
%
The Company presents certain information based upon average tangible shareholders' common equity instead of total average shareholders' equity. The difference between these measures is the Company's intangible assets, specifically goodwill from prior acquisitions. Management, banking regulators and many stock analysts use the tangible common equity ratio and the tangible book value per common share in conjunction with more traditional bank capital ratios to compare the capital adequacy of banking organizations with significant amounts of goodwill or other intangible assets, typically stemming from the use of the purchase accounting method in accounting for mergers and acquisitions. The following table provides a reconciliation of average tangible shareholders' common equity to the Company's consolidated financial statements, which have been prepared in accordance with GAAP:
 
For the three months ended March 31,
 Dollars in thousands
2016
 
2015
Average shareholders' equity as presented
$
171,554

 
$
164,142

  Less average intangible assets
(30,103
)
 
(30,151
)
Average tangible shareholders' common equity
$
141,451

 
$
133,991


Executive Summary
Net income for the three months ended March 31, 2016 was $4.5 million, up $328,000 or 7.9% from the same period in 2015. Earnings per common share on a fully diluted basis were $0.42 for the three months ended March 31, 2016, up $0.03 or 7.7% from the $0.39 posted for the same period in 2015.
This was another excellent quarter for The First Bancorp, Inc. and the best quarter in the Company's history, with net income $315,000 above the record set in the third quarter of 2015. It was also the third quarter in the past five quarters which set a new net income record. Higher net interest income driven by loan growth and lower operating costs are the major factors in our strong performance in 2016. We also maintained the quarterly dividend at 22 cents per share in the first quarter and continue to pay out more than half of our net income to our shareholders in the form of cash dividends.

Page 40



Net interest income on a tax-equivalent basis was up $991,000 or 9.5% in the three months ended March 31, 2016 compared to the same period in 2015, with $805,000 of this increase attributable to growth in earning assets, specifically in the loan portfolio, and $186,000 being attributable to an improved net interest margin which is 3.13% in 2016 versus 3.10% in 2015.
Non-interest income for the three months ended March 31, 2016 was $694,000 or 19.0% lower than in the three months ended March 31, 2015. This was primarily due to a lower level of gains from sale of securities. Non-interest expense for the three months ended March 31, 2016 was $65,000 or 0.9% lower than in the same period in 2015, due to lower employee costs and occupancy expense.
The other driver of our performance, credit quality, continues on the path of significant improvement that we have seen for the past several quarters. Non-performing assets stood at 0.53% of total assets as of March 31, 2016 - the lowest level seen since the second quarter of 2008, well below the 0.91% of total assets as of March 31, 2015 and down from 0.57% as of December 31, 2015. Total past-due loans were 0.82% of total loans as of March 31, 2016, compared to 0.84% of total loans as of December 31, 2015, and 1.27% as of March 31, 2015.
The provision for loan losses for the first three months of 2016 was $375,000, $125,000 or 25.0% lower than in the same period in 2015. Net loan chargeoffs for the three months ended March 31, 2016 were $72,000 or 0.03% of average loans on an annualized basis. This was down $576,000 from net chargeoffs of $648,000 or 0.28% of average loans on an annualized basis for the three months ended March 31, 2015. The allowance for loan losses increased $303,000 between December 31, 2015 and March 31, 2016, and is 1.02% of loans outstanding as of March 31, 2016, up from 1.00% at December 31, 2015 and down from 1.09% a year ago.
Total assets have increased $9.9 million or 0.6% year-to-date. The loan portfolio increased $16.3 million or 1.6% in the three months ended March 31, 2016 and $65.8 million or 7.0% from a year ago. The loan portfolio topped the $1.0 billion mark at quarter end, the first time reaching this milestone. The investment portfolio has decreased $10.1 million year-to-date due to securities sales and increased $34.5 million or 8.0% from a year ago. On the liability side of the balance sheet, low-cost deposits have decreased $17.1 million or 3.0% year-to-date and increased $94.7 million or 20.3% over the past year. The year-to-date decrease is in line with our normal seasonal fluctuation. Local certificates of deposit (CDs) increased $8.1 million and wholesale CDs increased $66.4 million over the past year.
Remaining well capitalized remains a top priority for The First Bancorp, Inc. Since December 31, 2008, the Company's total risk-based capital ratio has increased from 11.13% to 16.57%, well above the well-capitalized threshold of 10.0% set by the Federal Deposit Insurance Corporation.
The Company's operating ratios remain good, with a return on average tangible common equity of 12.80% for the three months ended March 31, 2016 compared to 12.63% for the same period in 2015. Based upon December 31, 2015 data, our return on average tangible common equity was in the top 24% of all banks in the UBPR peer group, which had an average return on equity of 9.53%. Our efficiency ratio continues to be an important component in our overall performance and dropped over 5.0% to 51.45% for the three months ended March 31, 2016, from 56.79% for the same period in 2015. This ratio remains well below the UBPR peer group average of 65.23% as of December 31, 2015.

Net Interest Income
Total interest income of $13.3 million for the three months ended March 31, 2016 was an increase of $911,000 or 7.4% compared to total interest income of $12.4 million for the same period of 2015. Total interest expense of $2.5 million for the three months ended March 31, 2016 is a $116,000 or 4.4% decrease from total interest expense of $2.7 million for the three months ended March 31, 2015. As a result, net interest income of $10.7 million for the three months ended March 31, 2016 was an increase of $1,027,000 or 10.6% compared to net interest income of $9.7 million for the same period ended March 31, 2015. The Company's net interest margin on a tax-equivalent basis increased from 3.10% for the three months ended March 31, 2015 to 3.13% for the three months ended March 31, 2016. Tax-exempt interest income amounted to $1.4 million for the three months ended March 31, 2016 and $1.5 million for the same period of 2015.
      

Page 41



The following table presents the amount of interest earned or paid, as well as the average yield or rate on an annualized basis, for each major category of assets or liabilities for the three months ended March 31, 2016 and 2015. Tax-exempt income is calculated on a tax-equivalent basis, using a 35.0% tax rate in 2016 and 2015.
 
For the three months ended
 
March 31, 2016
 
March 31, 2015
 
Dollars in thousands
Amount of
interest
 
Average
Yield/Rate
 
Amount of interest
 
Average
Yield/Rate
 
Interest on earning assets
 
 
 
 
 
 
 
 
Interest-bearing deposits
$
3

 
0.56
%
$
5

 
0.26
%
Investments
4,207

 
3.57
%
4,213

 
3.89
%
Loans held for sale
3

 
3.74
%
2

 
2.94
%
Loans
9,811

 
3.96
%
8,929

 
3.92
%
   Total interest income
14,024

 
3.83
%
13,149

 
3.89
%
Interest expense
 
 
 
 
 
 
 
 
Deposits
1,353

 
0.58
%
1,443

 
0.67
%
Other borrowings
1,194

 
1.45
%
1,220

 
1.65
%
   Total interest expense
2,547

 
0.81
%
2,663

 
0.92
%
Net interest income
$
11,477

 
 
 
$
10,486

 
 
 
Interest rate spread
 
 
3.02
%
 
 
2.97
%
Net interest margin
 
 
3.13
%
 
 
3.10
%
 
 
 
 
 
 
 
 
 
The following table presents changes in interest income and expense attributable to changes in interest rates and volume for interest-earning assets and liabilities for the three months ended March 31, 2016 compared to 2015. Tax-exempt income is calculated on a tax-equivalent basis, using a 35.0% tax rate in 2016 and 2015.
For the three months ended March 31, 2016 compared to 2015
 
 
 
 
Dollars in thousands
Volume
 
Rate
 
Rate/Volume1
 
Total
Interest on earning assets
 
 
 
 
 
 
 
Interest-bearing deposits
$
(4
)
 
$
6

 
$
(4
)
 
$
(2
)
Investment securities
331

 
(313
)
 
(24
)
 
(6
)
Loans held for sale

 
1

 

 
1

Loans
706

 
163

 
13

 
882

   Change in interest income
1,033

 
(143
)
 
(15
)
 
875

Interest expense
 
 
 
 
 
 
 
Deposits
100

 
(178
)
 
(12
)
 
(90
)
Other borrowings
128

 
(139
)
 
(15
)
 
(26
)
   Change in interest expense
228

 
(317
)
 
(27
)
 
(116
)
   Change in net interest income
$
805

 
$
174

 
$
12

 
$
991

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

Page 42



Average Daily Balance Sheets
The following table shows the Company's average daily balance sheets for the three months ended March 31, 2016 and 2015.
 
For the three months ended
 Dollars in thousands
March 31,
2016
 
March 31,
2015
Assets
 
 
 
Cash and cash equivalents
$
16,836

 
$
13,565

Interest-bearing deposits in other banks
2,163

 
7,699

Securities available for sale
220,196

 
155,125

Securities to be held to maturity
238,666

 
270,026

Restricted equity securities, at cost
14,710

 
13,912

Loans held for sale
323

 
276

Loans
997,467

 
924,359

Allowance for loan losses
(10,075
)
 
(10,123
)
     Net loans
987,392

 
914,236

Accrued interest receivable
5,249

 
4,905

Premises and equipment
21,669

 
22,490

Other real estate owned
1,697

 
3,114

Goodwill
29,805

 
29,805

Other assets
32,190

 
22,252

        Total Assets
$
1,570,896

 
$
1,457,405

 
 
 
 
Liabilities & Shareholders' Equity
 
 
 
Demand deposits
$
117,897

 
$
104,328

NOW deposits
235,021

 
198,273

Money market deposits
80,326

 
97,354

Savings deposits
205,878

 
166,783

Certificates of deposit
415,236

 
413,364

     Total deposits
1,054,358

 
980,102

Borrowed funds – short term
151,399

 
167,437

Borrowed funds – long term
179,507

 
132,082

Dividends payable
936

 
1,051

Other liabilities
13,142

 
12,591

     Total Liabilities
1,399,342

 
1,293,263

Shareholders' Equity:
 
 
 
Common stock
108

 
107

Additional paid-in capital
59,936

 
59,172

Retained earnings
109,355

 
102,578

Net unrealized gain on securities available-for-sale
2,427

 
2,465

Net unrealized loss on securities transferred from available for sale to held to maturity
(116
)
 
(55
)
Net unrealized loss on postretirement benefit costs
(156
)
 
(125
)
    Total Shareholders' Equity
171,554

 
164,142

       Total Liabilities & Shareholders' Equity
$
1,570,896

 
$
1,457,405


Page 43




Non-Interest Income
Non-interest income of $3.0 million for the three months ended March 31, 2016 is a decrease of $694,000 compared to the same period in 2015. This was primarily due to a lower level of gains from sale of securities.
Non-Interest Expense
Non-interest expense of $7.2 million for the three months ended March 31, 2016 is a decrease of 0.9% or $65,000 compared to non-interest expense of $7.3 million for the same period in 2015, due to lower employee costs and occupancy expense.
The Company's efficiency ratio has dropped more than 5.0% to 51.45% for the three months ended March 31, 2016 from 56.79% for the same period in 2015.
Income Taxes
Income taxes on operating earnings were $1.6 million for the three months ended March 31, 2016, up $195,000 from the same period in 2015. This is in line with the increase in the Company's level of income before taxes.
Investments
The Company's investment portfolio decreased by $10.1 million between December 31, 2015, and March 31, 2016. As of March 31, 2016, mortgage-backed securities had a carrying value of $233.5 million and a fair value of $235.1 million. Of this total, securities with a fair value of $132.5 million or 56.4% of the mortgage-backed portfolio were issued by the Government National Mortgage Association and securities with a fair value of $102.6 million or 43.6% of the mortgage-backed portfolio were issued by the Federal Home Loan Mortgage Corporation and the Federal National Mortgage Association.
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 $123,000 at March 31, 2016. These securities were transferred as a part of the Company's overall investment and balance sheet strategies.


Page 44



The following table sets forth the Company's investment securities at their carrying amounts as of March 31, 2016 and 2015 and December 31, 2015.
Dollars in thousands
March 31,
2016
 
December 31,
2015
 
March 31,
2015
Securities available for sale
 
 
 
 
 
Mortgage-backed securities
$
193,657

 
$
195,110

 
$
127,617

State and political subdivisions
19,904

 
24,506

 
25,598

Other equity securities
3,164

 
3,423

 
3,102

 
$
216,725

 
$
223,039

 
$
156,317

Securities to be held to maturity
 
 
 
 
 
U.S. government-sponsored agencies
$
68,009

 
$
71,000

 
$
82,974

Mortgage-backed securities
39,828

 
42,193

 
53,228

State and political subdivisions
124,474

 
122,530

 
125,953

Corporate securities
4,300

 
4,300

 
300

 
$
236,611

 
$
240,023

 
$
262,455

Restricted equity securities
 
 
 
 
 
Federal Home Loan Bank Stock
$
12,838

 
$
13,220

 
$
12,875

Federal Reserve Bank Stock
1,037

 
1,037

 
1,037

 
$
13,875

 
$
14,257

 
$
13,912

Total securities
$
467,211

 
$
477,319

 
$
432,684





Page 45



The following table sets forth yields and contractual maturities of the Company's investment securities as of March 31, 2016. Yields on tax-exempt securities have been computed on a tax-equivalent basis using a tax rate of 35%. 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
 
 Dollars in thousands
Fair
Value
 
Yield to maturity
 
Amortized Cost
 
Yield to maturity
 
 U.S. Government-Sponsored Agencies
 
 
 
 
 
 
 
 
 Due in 1 year or less
$

 
0.00

%
$

 
0.00

%
 Due in 1 to 5 years

 
0.00

%

 
0.00

%
 Due in 5 to 10 years

 
0.00

%
5,355

 
2.43

%
 Due after 10 years

 
0.00

%
62,654

 
3.28

%
  Total

 
0.00

%
68,009

 
3.22

%
 Mortgage-Backed Securities
 
 
 
 
 
 
 
 
 Due in 1 year or less
2,633

 
3.22

%
2

 
0.03

%
 Due in 1 to 5 years
3,061

 
2.45

%
406

 
6.15

%
 Due in 5 to 10 years
17,021

 
3.05

%
22,320

 
2.73

%
 Due after 10 years
170,942

 
2.59

%
17,100

 
3.91

%
  Total
193,657

 
2.64

%
39,828

 
3.27

%
 State & Political Subdivisions
 
 
 
 
 
 
 
 
 Due in 1 year or less

 
0.00

%
1,823

 
6.77

%
 Due in 1 to 5 years
329

 
6.31

%
6,003

 
6.18

%
 Due in 5 to 10 years
2,925

 
6.20

%
25,199

 
6.11

%
 Due after 10 years
16,650

 
5.75

%
91,449

 
4.97

%
  Total
19,904

 
5.82

%
124,474

 
5.29

%
 Corporate Securities
 
 
 
 
 
 
 
 
 Due in 1 year or less

 
0.00

%

 
0.00

%
 Due in 1 to 5 years

 
0.00

%
300

 
1.00

%
 Due in 5 to 10 years

 
0.00

%
4,000

 
5.50

%
 Due after 10 years

 
0.00

%

 
0.00

%
  Total

 
0.00

%
4,300

 
5.19

%
 Equity Securities
3,164

 
2.69

%

 
0.00

%
 
$
216,725

 
2.93

%
$
236,611

 
4.35

%

Impaired Securities
The securities portfolio contains certain securities that the amortized cost of which exceeds fair value, which at March 31, 2016 amounted to $389,000, or 0.17% of the amortized cost of the total securities portfolio. At December 31, 2015 this amount was $3.5 million, or 0.76% 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) 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.

Page 46



The Company's best estimate of cash flows uses severe economic recession assumptions due to market uncertainty. The Company's assumptions include but are not limited to delinquencies, foreclosure levels and constant default rates on the underlying collateral, loss severity ratios, and constant prepayment rates. If the Company does not expect to receive 100% of future contractual principal and interest, an other-than-temporary impairment charge is recognized. Estimating future cash flows is a quantitative and qualitative process that incorporates information received from third party sources along with certain internal assumptions and judgments regarding the future performance of the underlying collateral.
As of March 31, 2016, the Company had temporarily impaired securities with a fair value of $26.2 million and unrealized losses of $389,000, as identified in the table below. This was down from December 31, 2015 as a result of a shift in the yield curve and a corresponding increase in value of investment securities. Securities in a continuous unrealized loss position more than twelve months amounted to $8.3 million as of March 31, 2016, compared with $21.0 million at December 31, 2015. The Company has concluded that these securities were not other-than-temporarily impaired. This conclusion was based on the issuer's continued satisfaction of the securities obligations in accordance with their contractual terms and the expectation that the issuer will continue to do so, Management's intent and ability to hold these securities for a period of time sufficient to allow for any anticipated recovery in fair value which may be at maturity, the expectation that the Company will receive 100% of future contractual cash flows, as well as the evaluation of the fundamentals of the issuer's financial condition and other objective evidence. The following table summarizes temporarily impaired securities and their approximate fair values at March 31, 2016:
 
Less than 12 months
 
12 months or more
 
Total
Dollars in thousands
Fair
Value (Estimated)
 
Unrealized
Losses
 
Fair
Value (Estimated)
 
Unrealized
Losses
 
Fair
Value (Estimated)
 
Unrealized
Losses
U.S. Government-sponsored agencies
$

 
$

 
$
4,893

 
$
(107
)
 
$
4,893

 
$
(107
)
Mortgage-backed securities
17,125

 
(170
)
 
1,866

 
(70
)
 
18,991

 
(240
)
State and political subdivisions
522

 

 
1,417

 
(19
)
 
1,939

 
(19
)
Other equity securities
235

 
(6
)
 
106

 
(17
)
 
341

 
(23
)
 
$
17,882

 
$
(176
)
 
$
8,282

 
$
(213
)
 
$
26,164

 
$
(389
)

For securities with unrealized losses, the following information was considered in determining that the securities were not other-than-temporarily impaired:
Securities issued by U.S. Government-sponsored agencies and enterprises. As of March 31, 2016, there were $107,000 of unrealized losses on these securities compared to $2.3 million unrealized losses as of December 31, 2015. All of these securities were credit rated "AAA" or "AA+" by the major credit rating agencies. Management believes that securities issued by U.S. Government-sponsored agencies and enterprises have minimal credit risk, as these agencies and enterprises play a vital role in the nation's financial markets and does not consider these securities to be other-than-temporarily impaired at March 31, 2016.
Mortgage-backed securities issued by U.S. Government agencies and U.S. Government-sponsored enterprises. As of March 31, 2016, there were $240,000 of unrealized losses on these securities compared with $1.1 million at December 31, 2015. All of these securities were credit rated "AAA" or "AA+" by the major credit rating agencies. Management believes that securities issued by U.S. Government agencies bear no credit risk because they are backed by the full faith and credit of the United States and that securities issued by U.S. Government-sponsored enterprises have minimal credit risk, as these agencies and enterprises play a vital role in the nation's financial markets. Management believes that the unrealized losses at March 31, 2016 were attributable to changes in current market yields and spreads since the date the underlying securities were purchased, and does not consider these securities to be other-than-temporarily impaired at March 31, 2016. The Company also has the ability and intent to hold these securities until a recovery of their amortized cost, which may be at maturity.
Obligations of state and political subdivisions. As of March 31, 2016, the total unrealized losses on municipal securities amounted to $19,000, compared with $87,000 at December 31, 2015. Municipal securities are supported by the general taxing authority of the municipality and, in the cases of school districts, are generally supported by state aid. At March 31, 2016, all municipal bond issuers were current on contractually obligated interest and principal payments. The Company attributes the unrealized losses at March 31, 2016 to changes in prevailing market yields and pricing spreads since the date the underlying securities were purchased, combined with current market liquidity conditions and the disruption in the financial markets in general. Accordingly, the Company does not consider these municipal securities to be other-than-temporarily impaired at March 31, 2016. The Company also has the ability and intent to hold these securities until a recovery of their amortized cost, which may be at maturity.

Page 47



Corporate securities. There were no unrealized losses on corporate securities as of March 31, 2016, or at December 31, 2015. Corporate securities are dependent on the operating performance of the issuers. At March 31, 2016, all corporate bond issuers were current on contractually obligated interest and principal payments.
Other equity securities. As of March 31, 2016, the total unrealized losses on other equity securities amounted to $23,000 compared with $6,000 at December 31, 2015. Other equity securities is comprised of common and preferred stock holdings. The unrealized losses were the result of normal market fluctuations for equity securities. Accordingly, the Company does not consider other equity securities to be other-than-temporarily impaired at March 31, 2016.
Federal Home Loan Bank Stock
The Bank is a member of the Federal Home Loan Bank ("FHLB") of Boston, a cooperatively owned wholesale bank for housing and finance in the six New England States. As a requirement of membership in the FHLB, the Bank must own a minimum required amount of FHLB stock, calculated periodically based primarily on its level of borrowings from the FHLB. The Bank uses the FHLB for much of its wholesale funding needs. As of March 31, 2016, 2015 and December 31, 2015, the Bank's investment in FHLB stock totaled $12.8 million, $12.9 million and $13.2 million. FHLB stock is a non-marketable equity security and therefore is reported at cost, which equals par value. The Company periodically evaluates its investment in FHLB stock for impairment based on, among other factors, the capital adequacy of the FHLB and its overall financial condition. No impairment losses have been recorded through March 31, 2016. The Bank will continue to monitor its investment in FHLB stock.
Loans Held for Sale
Loans held for sale are carried at the lower of cost or market value. As of March 31, 2016, the Bank had $224,000 in loans held for sale. This compares to $349,000 in loans held for sale at December 31, 2015 and no loans held for sale at March 31, 2015. The Bank participates in FHLB's Mortgage Partnership Finance Program ("MPF"), selling loans with recourse. The volume of loans sold to date through the MPF program is de minimis; therefore, there was minimum impact on the reserve.
Loans
The loan portfolio increased during the first three months of 2016, with total loans at $1.0 billion at March 31, 2016, up $16.3 million or 1.6% from total loans of $988.6 million at December 31, 2015. Commercial loans increased $10.8 million or 2.5% between December 31, 2015 and March 31, 2016, municipal loans decreased $709,000 or 3.6%, residential term loans increased $2.5 million or 0.6% and home equity lines of credit increased $47,000.
Commercial loans are comprised of three major classes, commercial real estate loans, commercial construction loans and other commercial loans. Commercial real estate is primarily comprised of loans to small businesses collateralized by owner-occupied real estate, while other commercial is primarily comprised of loans to small businesses collateralized by plant and equipment, commercial fishing vessels and gear, and limited inventory-based lending.Commercial real estate loans typically have a maximum loan-to-value of 80% based upon current appraisal information at the time the loan is made. Land and land development loans typically have a maximum loan-to-value of 65% to 75% based upon current appraisal information at the time the loan is made. Construction, land and land improvement loans, both commercial and residential, comprise a small portion of the portfolio, and at 21.8% of capital are well under the regulatory guidance of 100.0% of capital. Construction loans and non-owner-occupied commercial real estate loans are at 106.7% of total capital, well under the regulatory guidance of 300.0% of capital. Municipal loans are comprised of loans to municipalities in the State of Maine for capitalized expenditures, construction projects or tax-anticipation notes. All municipal loans are considered general obligations of the municipality and as such are collateralized by the taxing ability of the municipality for repayment of debt.
Residential loans are also comprised of two classes, term loans, which include traditional amortizing home mortgages, and construction loans, which include loans for owner-occupied residential construction. Residential loans typically have a 75% to 80% loan to value based upon current appraisal information at the time the loan is made. Consumer loans are primarily amortizing loans to individuals collateralized by automobiles, pleasure craft and recreation vehicles, typically with a maximum loan to value of 80% to 90% of the purchase price of the collateral. Consumer loans also include a small amount of unsecured short-term time notes to individuals.

Page 48



The following table summarizes the loan portfolio, by class, at March 31, 2016 and 2015 and December 31, 2015.
Dollars in thousands
March 31, 2016
 
December 31, 2015
 
March 31, 2015
 
Commercial
 
 
 
 
 
 
 
 
 
 
 
 
   Real estate
$
279,683

 
27.8
%
$
269,462

 
27.3
%
$
242,021

 
25.8
%
   Construction
20,138

 
2.0
%
24,881

 
2.5
%
34,683

 
3.7
%
   Other
133,629

 
13.3
%
128,341

 
13.0
%
115,455

 
12.3
%
Municipal
19,042

 
1.9
%
19,751

 
2.0
%
26,277

 
2.8
%
Residential
 
 
 
 
 
 
 
 
 
 
 
 
   Term
405,495

 
40.3
%
403,030

 
40.7
%
383,869

 
40.8
%
   Construction
11,754

 
1.2
%
8,451

 
0.9
%
13,036

 
1.4
%
Home equity line of credit
110,249

 
11.0
%
110,202

 
11.1
%
104,100

 
11.1
%
Consumer
24,952

 
2.5
%
24,520

 
2.5
%
19,728

 
2.1
%
Total loans
$
1,004,942

 
100.0
%
$
988,638

 
100.0
%
$
939,169

 
100.0
%

The following table sets forth certain information regarding the contractual maturities of the Bank's loan portfolio as of March 31, 2016.
Dollars in thousands
< 1 Year
 
1 - 5 Years
 
5 - 10 Years
 
> 10 Years
 
Total
Commercial
 
 
 
 
 
 
 
 
 
   Real estate
$
8,783

 
$
10,901

 
$
28,129

 
$
231,870

 
$
279,683

   Construction
767

 
5,026

 
2,491

 
11,854

 
20,138

   Other
8,456

 
45,769

 
28,879

 
50,525

 
133,629

Municipal
822

 
3,344

 
7,273

 
7,603

 
19,042

Residential
 
 
 
 
 
 
 
 
 
   Term
1,346

 
6,795

 
14,050

 
383,304

 
405,495

   Construction
858

 
385

 
57

 
10,454

 
11,754

Home equity line of credit
281

 
203

 
1,977

 
107,788

 
110,249

Consumer
7,537

 
5,266

 
2,562

 
9,587

 
24,952

Total loans
$
28,850

 
$
77,689

 
$
85,418

 
$
812,985

 
$
1,004,942

The following table provides a listing of loans by class, between variable and fixed rates as of March 31, 2016.
 
Fixed-Rate
 
Adjustable-Rate
 
Total
 
Dollars in thousands
Amount
 
% of total
 
Amount
 
% of total
 
Amount
 
% of total
 
Commercial
 
 
 
 
 
 
 
 
 
 
 
 
   Real estate
$
29,818

 
3.0
%
$
249,865

 
24.8
%
$
279,683

 
27.8
%
   Construction
4,770

 
0.5
%
15,368

 
1.5
%
20,138

 
2.0
%
   Other
53,772

 
5.4
%
79,857

 
7.9
%
133,629

 
13.3
%
Municipal
17,127

 
1.7
%
1,915

 
0.2
%
19,042

 
1.9
%
Residential
 
 
 
 
 
 
 
 
 
 
 
 
   Term
277,240

 
27.5
%
128,255

 
12.8
%
405,495

 
40.3
%
   Construction
10,158

 
1.0
%
1,596

 
0.2
%
11,754

 
1.2
%
Home equity line of credit
960

 
0.1
%
109,289

 
10.9
%
110,249

 
11.0
%
Consumer
19,882

 
2.0
%
5,070

 
0.5
%
24,952

 
2.5
%
Total loans
$
413,727

 
41.2
%
$
591,215

 
58.8
%
$
1,004,942

 
100.0
%

Loan Concentrations
As of March 31, 2016, the Bank did not have any concentration of loans in one particular industry that exceeded 10% of its total loan portfolio.

Page 49




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.
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 collectability 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 collectability 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 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 include judgments concerning general economic conditions that may affect credit quality, credit concentrations, the pace of portfolio growth, and delinquency levels; these qualitative factors are also considered in connection with our unallocated portion of our allowance for loan losses.
The process of establishing the allowance with respect to our commercial loan portfolio begins when a loan officer initially assigns each loan a risk rating, using established credit criteria. Approximately 50% of our outstanding loans and commitments are subject to review and validation annually by an independent consulting firm, as well as periodically by our 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.

Page 50




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 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. 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. Changes in various elements of the allowance caused the period-to-period decrease. Management feels the change in the unalloctaed is consistent with improvement in credit quality and the effect of loan portfolio growth.
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 internal risk ratings or non-accrual status. A specific reserve is allocated to an individual loan when that loan has been deemed impaired and when the amount of a probable loss is estimable on the basis of its collateral value, the present value of anticipated future cash flows, or its net realizable value. At March 31, 2016, impaired loans with specific reserves totaled $8.1 million and the amount of such reserves was $599,000. This compares to impaired loans with specific reserves of $8.6 million at December 31, 2015 and the amount of such reserves was $754,000.
All of these analyses are reviewed and discussed by the Directors' Loan Committee, and recommendations from these processes provide Management and the Board of Directors with independent information on loan portfolio condition. Our total allowance at March 31, 2016 is considered by Management to be appropriate to address the credit losses inherent in the loan portfolio at that date. Management views the level of the allowance for loan losses as appropriate. 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.

Page 51



The following table summarizes our allocation of allowance by loan class as of March 31, 2016 and 2015 and December 31, 2015. The percentages are the portion of each loan class to total loans.
Dollars in thousands
March 31, 2016
 
December 31, 2015
 
March 31, 2015
 
Commercial
 
 
 
 
 
 
 
 
 
 
 
 
   Real estate
$
3,524

 
27.8
%
$
3,120

 
27.3
%
$
3,117

 
25.8
%
   Construction
345

 
2.0
%
580

 
2.5
%
807

 
3.7
%
   Other
1,676

 
13.3
%
1,452

 
13.0
%
1,714

 
12.3
%
Municipal
17

 
1.9
%
17

 
2.0
%
16

 
2.8
%
Residential
 
 
 
 
 
 
 
 
 
 
 
 
   Term
1,474

 
40.3
%
1,391

 
40.7
%
1,108

 
40.8
%
   Construction
33

 
1.2
%
24

 
0.9
%
23

 
1.4
%
Home equity line of credit
905

 
11.0
%
893

 
11.1
%
1,044

 
11.1
%
Consumer
654

 
2.5
%
566

 
2.5
%
526

 
2.1
%
Unallocated
1,591

 
%
1,873

 
%
1,841

 
%
Total
$
10,219

 
100.0
%
$
9,916

 
100.0
%
$
10,196

 
100.0
%

The allowance for loan losses totaled $10.2 million at March 31, 2016, compared to $9.9 million as of December 31, 2015 and $10.2 million as of March 31, 2015. Management's ongoing application of methodologies to establish the allowance include an evaluation of impaired loans for specific reserves. These specific reserves decreased $155,000 in the first three months of 2016 from $754,000 at December 31, 2015 to $599,000 at March 31, 2016. 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 $623,000 in the first three months of 2016. This increase was due in part to loan growth and adjustments made for early signs of weakening observed in a small number of larger credits. The portion of the reserve based on qualitative factors increased by $117,000 in the first three months of 2016 as a result of adjustments for several qualitative factors. After consideration of the shifts in specific, pooled and qualitative reserves, Management determined that market trends and other internal factors warranted the $282,000 decrease in unallocated reserves in the first three months of 2016 from $1.9 million at December 31, 2015 to $1.6 million at March 31, 2016.
A breakdown of the allowance for loan losses as of March 31, 2016, by loan class and allowance element, is presented in the following table:
 Dollars in thousands
Specific Reserves on Loans Evaluated Individually for Impairment
 
General Reserves on Loans Based on Historical Loss Experience
 
Reserves for Qualitative Factors
 
Unallocated
Reserves
 
Total Reserves
Commercial
 
 
 
 
 
 
 
 
 
   Real estate
$
69

 
$
1,236

 
$
2,219

 
$

 
$
3,524

   Construction
96

 
89

 
160

 

 
345

   Other
21

 
592

 
1,063

 

 
1,676

Municipal

 

 
17

 

 
17

Residential
 
 
 
 
 
 
 
 
 
   Term
384

 
630

 
460

 

 
1,474

   Construction

 
19

 
14

 

 
33

Home equity line of credit
29

 
502

 
374

 

 
905

Consumer

 
413

 
241

 

 
654

Unallocated

 

 

 
1,591

 
1,591

 
$
599

 
$
3,481

 
$
4,548

 
$
1,591

 
$
10,219

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 $375,000 for the first three months of 2016, a decrease of $125,000 from the first three months of 2015. Net chargeoffs were $72,000 in the first three months of 2016

Page 52



compared to net chargeoffs of $648,000 in the first three months of 2015. Our allowance as a percentage of outstanding loans was 1.02% as of March 31, 2016, up from 1.00% at December 31, 2015, and down from 1.09% a year ago.
The following table summarizes the activities in our allowance for loan losses for the three months ended March 31, 2016 and 2015 and for the year ended December 31, 2015:
Dollars in thousands
March 31, 2016
 
December 31, 2015
 
March 31, 2015
 
Balance at beginning of year
$
9,916

 
$
10,344

 
$
10,344

 
Loans charged off:
 
 
 
 
 
 
Commercial
 
 
 
 
 
 
   Real estate

 
280

 
122

 
   Construction
58

 
9

 

 
   Other

 
732

 
2

 
Municipal

 

 

 
Residential
 
 
 
 
 
 
   Term
20

 
420

 
83

 
   Construction

 

 

 
Home equity line of credit
49

 
582

 
447

 
Consumer
63

 
350

 
62

 
Total
190

 
2,373

 
716

 
Recoveries on loans previously charged off
 
 
 
 
 
 
Commercial
 
 
 
 
 
 
   Real estate

 
2

 

 
   Construction

 
1

 

 
   Other
20

 
88

 
4

 
Municipal

 

 

 
Residential
 
 
 
 


 
   Term
65

 
152

 
6

 
   Construction

 

 

 
Home equity line of credit
1

 
31

 
22

 
Consumer
32

 
121

 
36

 
Total
118

 
395

 
68

 
Net loans charged off
72

 
1,978

 
648

 
Provision for loan losses
375

 
1,550

 
500

 
Balance at end of period
$
10,219

 
$
9,916

 
$
10,196

 
Ratio of net loans charged off to average loans outstanding1
0.03

%
0.21

%
0.28

%
Ratio of allowance for loan losses to total loans outstanding
1.02

%
1.00

%
1.09

%
1 Annualized using a 366-day basis for 2016 and a 365-day basis for 2015.
Management believes the allowance for loan losses is appropriate as of March 31, 2016. 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, higher levels of unemployment and the outlook for slow economic conditions continuing for some time to come.

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

Page 53



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.
When a loan becomes nonperforming (generally 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 non-performing 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.
Nonperforming loans, expressed as a percentage of total loans, totaled 0.67% at March 31, 2016 compared to 0.75% at December 31, 2015 and 1.10% at March 31, 2015. The following table shows the distribution of nonperforming loans by class as of March 31, 2016 and 2015 and December 31, 2015:
Dollars in thousands
March 31,
2016
 
December 31,
2015
 
March 31,
2015
Commercial
 
 
 
 
 
   Real estate
$
920

 
$
915

 
$
1,609

   Construction
180

 
238

 
208

   Other
69

 
66

 
932

Municipal

 

 

Residential
 
 
 
 
 
   Term
4,677

 
5,260

 
6,514

   Construction

 

 

Home equity line of credit
841

 
893

 
1,039

Consumer

 

 
25

Total nonperforming loans
$
6,687

 
$
7,372

 
$
10,327

Total nonperforming loans does 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 March 31, 2016, loans 90 or more days past due and still accruing interest totaled $452,000, compared to $136,000 at December 31, 2015 and $184,000 at March 31, 2015.

Troubled Debt Restructured
A troubled debt restructured ("TDR") constitutes a restructuring of debt if the Bank, 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 Bank has granted a concession; common concession types include maturity date extension, interest rate adjustments to below market pricing, and deferment of payments.
Our overall level of TDRs decreased during the first three months of 2016. As of March 31, 2016, we had 82 loans with a value of $23.6 million that have been restructured. This compares to 84 loans with a value of $23.9 million and 90 loans with a value of $26.5 million classified as TDRs as of December 31, 2015 and March 31, 2015, respectively.

Page 54



The following table shows the activity in loans classified as TDRs between December 31, 2015 and March 31, 2016:
Balance in Thousands of Dollars
Number of Loans
Aggregate Balance
Total at December 31, 2015
84

$
23,923

Added in 2016


Removed in 2016
(2
)
(55
)
Repayments in 2016

(240
)
Total at March 31, 2016
82

$
23,628


As of March 31, 2016, 69 loans with an aggregate balance of $21.6 million were performing under the modified terms, one loan with an aggregate balance of $309,000 was more than 30 days past due and accruing and 12 loans with an aggregate balance of $1.7 million were on nonaccrual. As a percentage of aggregate outstanding balance, 91.5% were performing under the modified terms, 1.3% were more than 30 days past due and accruing and 7.2% were on nonaccrual. The performance status of all TDRs as of March 31, 2016, as well as the associated specific reserve in the allowance for loan losses, is summarized by type of loan in the following table.
 In thousands of dollars
Performing
As Modified
30+ Days Past Due
and Accruing
On
Nonaccrual
All
TDRs
Commercial
 
 
 
 
   Real estate
$
9,590

$

$
543

$
10,133

   Construction
788



788

   Other
1,116



1,116

Municipal




Residential
 
 
 
 
   Term
9,555

309

992

10,856

   Construction




Home equity line of credit
567


168

735

Consumer




 
$
21,616

$
309

$
1,703

$
23,628

Percent of balance
91.5
%
1.3
%
7.2
%
100.0
%
Number of loans
69

1

12

82

Associated specific reserve
$
390

$
44

$
2

$
436


Residential TDRs (including home equity lines of credit) as of March 31, 2016 included 57 loans with an aggregate balance of $11.6 million, and the modifications granted fell into five major categories. Loans totaling $7.0 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 $4.0 million had interest capitalized, allowing the borrower to become current after unpaid interest was added to the balance of the loan and re-amortized over the remaining life of the loan. Loans with an aggregate balance of $254,000 were converted from interest-only to regular principal-and-interest payments based on the borrowers' ability to service the higher payment amount. Short-term rate concessions were granted on loans totaling $2.0 million, with a rate concession typically of 1.0% or less. Loans with an aggregate balance of $2.4 million were involved in bankruptcy. Certain residential TDRs had more than one modification.
Commercial TDRs as of March 31, 2016 were comprised of 25 loans with a balance of $12.0 million. Of this total, 16 loans with an aggregate balance of $8.5 million had an extended period of interest-only payments, deferring the start of principal repayment. Five loans with an aggregate balance of $2.2 million had an extension of term, allowing the borrower to repay over an extended number of years and lowering the monthly payment to a level the borrower can afford. The remaining four loans with an aggregate balance of $1.3 million had several different modifications.
In each case when a loan was modified, Management determined it was in the Bank's best interest to work with the borrower with modified terms rather than to proceed to foreclosure. Once a loan is classified as a TDR it remains classified as such until the balance is fully repaid, despite whether the loan is performing under the modified terms. As of March 31, 2016, Management is aware of six loans classified as TDRs that are involved in bankruptcy with an outstanding balance of $1.1 million. There were also 12 loans with an outstanding balance of $1.7 million that were classified as TDRs and on non-accrual status. Two loans with an outstanding balance of $215,000 were in the process of foreclosure.



Page 55



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 $28.6 million at March 31, 2016, and have decreased $921,000 from December 31, 2015. The number of loans decreased by 4 from 145 to 141 during the same period. Impaired commercial loans decreased $315,000 between December 31, 2015 and March 31, 2016. The specific allowance for impaired commercial loans decreased from $399,000 at December 31, 2015 to $186,000 as of March 31, 2016, 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, 2015 to March 31, 2016, impaired residential loans decreased $548,000 and impaired home equity lines of credit decreased $58,000.
The following table sets forth impaired loans as of March 31, 2016 and 2015 and December 31, 2015:
Dollars in thousands
March 31,
2016
 
December 31,
2015
 
March 31,
2015
Commercial
 
 
 
 
 
   Real estate
$
10,510

 
$
10,717

 
$
12,705

   Construction
967

 
1,026

 
1,380

   Other
1,185

 
1,234

 
2,721

Municipal

 

 

Residential
 
 
 
 
 
   Term
14,540

 
15,088

 
16,348

   Construction

 

 

Home equity line of credit
1,408

 
1,466

 
1,654

Consumer

 

 
25

Total
$
28,610

 
$
29,531

 
$
34,833

Past Due Loans
The Bank's overall loan delinquency ratio was 0.82% at March 31, 2016 compared to 0.84% at December 31, 2015 and 1.27% at March 31, 2015. Loans 90 days delinquent and accruing increased from $136,000 at December 31, 2015 to $452,000 as of March 31, 2016. The following table sets forth loan delinquencies as of March 31, 2016 and 2015 and December 31, 2015:
Dollars in thousands
March 31,
2016
 
December 31,
2015
 
March 31,
2015
 
Commercial
 
 
 
 
 
 
   Real estate
$
1,255

 
$
884

 
$
798

 
   Construction
150

 
273

 
229

 
   Other
433

 
328

 
994

 
Municipal

 

 

 
Residential
 
 
 
 
 
 
   Term
4,783

 
5,187

 
8,243

 
   Construction

 
368

 

 
Home equity line of credit
1,383

 
1,108

 
1,457

 
Consumer
243

 
139

 
237

 
Total
$
8,247

 
$
8,287

 
$
11,958

 
Loans 30-89 days past due to total loans
0.46

%
0.46

%
0.72

%
Loans 90+ days past due and accruing to total loans
0.04

%
0.01

%
0.02

%
Loans 90+ days past due on non-accrual to total loans
0.31

%
0.37

%
0.53

%
Total past due loans to total loans
0.82

%
0.84

%
1.27

%



Page 56



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 March 31, 2016, there were 12 potential problem loans with a balance of $1.1 million or 0.11% of total loans. This compares to six loans with a balance of $579,000 or 0.06% of total loans at December 31, 2015.
As of March 31, 2016, there were 21 loans in the process of foreclosure with a total balance of $2.1 million. The Bank's foreclosure process begins when a loan becomes 45 days past due at which time a preliminary foreclosure letter is sent to the borrower. If the loan becomes 80 days past due, copies of the promissory note and mortgage deed are forwarded to the Bank's attorney for review and an affidavit for a Motion for Summary Judgment 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.
In July 2015, the Bank conducted a self-audit of its loans in foreclosure and its foreclosure process and found there were no deficiencies or areas to improve. For loans sold to the secondary market on which servicing is retained, the Bank follows Freddie Mac's and Fannie Mae's published guidelines and regularly reviews these guidelines for updates and changes to process. All secondary market loans have been sold without recourse in a non-securitized, one-on-one basis. As a result, the Bank has no liability for these loans in the event of a foreclosure.

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 March 31, 2016, there were 14 properties owned with a net OREO balance of $1.6 million, net of an allowance for losses of $130,000, compared to December 31, 2015 when there were 14 properties owned with a net OREO balance of $1.5 million, net of an allowance for losses of $162,000 and March 31, 2015 when there were 21 properties owned with a net OREO balance of $2.9 million, net of an allowance for losses of $387,000.

Page 57



The following table presents the composition of other real estate owned:
Dollars in thousands
March 31,
2016
 
December 31,
2015
 
March 31,
2015
Carrying Value
 
 
 
 
 
Commercial
 
 
 
 
 
   Real estate
$

 
$

 
$
145

   Construction
28

 
28

 
151

   Other
501

 
706

 
785

Municipal

 

 

Residential


 
 
 


   Term
1,193

 
960

 
2,205

   Construction

 

 

Home equity line of credit

 

 

Consumer

 

 

Total
$
1,722

 
$
1,694

 
$
3,286

Related Allowance
 
 
 
 
 
Commercial
 
 
 
 
 
   Real estate
$

 
$

 
$
75

   Construction
11

 
11

 
17

   Other
45

 
77

 
29

Municipal

 

 

Residential


 
 
 


   Term
74

 
74

 
266

   Construction

 

 

Home equity line of credit

 

 

Consumer

 

 

Total
$
130

 
$
162

 
$
387

Net Value
 
 
 
 
 
Commercial
 
 
 
 
 
   Real estate
$

 
$

 
$
70

   Construction
17

 
17

 
134

   Other
456

 
629

 
756

Municipal

 

 

Residential


 
 
 


   Term
1,119

 
886

 
1,939

   Construction

 

 

Home equity line of credit

 

 

Consumer

 

 

Total
$
1,592

 
$
1,532

 
$
2,899

Liquidity Management
As of March 31, 2016, the Bank had primary sources of liquidity of $225.1 million. It is Management's opinion this is sufficient to meet liquidity needs under a broad range of scenarios. The Bank has an additional $314.4 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 67.1% of total average assets in the first three months of 2016. While the generally preferred funding strategy is to attract and retain low-cost deposits, the ability to do so is affected by competitive interest rates and terms in the marketplace. Other sources of funding include discretionary use of purchased liabilities (e.g., FHLB term advances and other borrowings), cash flows from the securities portfolios and loan repayments.

Page 58



Securities designated as available for sale may also be sold in response to short-term or long-term liquidity needs although Management has no intention to do so at this time.
The Bank has a detailed liquidity funding policy and a contingency funding plan that provide for the prompt and comprehensive response to unexpected demands for liquidity. Management has developed quantitative models to estimate needs for contingent funding that could result from unexpected outflows of funds in excess of "business as usual" cash flows. In Management's estimation, risks are concentrated in two major categories: runoff of in-market deposit balances and the inability to renew wholesale sources of funding. Of the two categories, potential runoff of deposit balances would have the most significant impact on contingent liquidity. Our modeling attempts to quantify deposits at risk over selected time horizons. In addition to these unexpected outflow risks, several other "business as usual" factors enter into the calculation of the adequacy of contingent liquidity including payment proceeds from loans and investment securities, maturing debt obligations and maturing time deposits. The Bank has established collateralized borrowing capacity with the Federal Reserve Bank of Boston and also maintains additional collateralized borrowing capacity with the FHLB in excess of levels used in the ordinary course of business as well as Fed Funds lines with three correspondent banks and availability through the Federal Reserve Bank Borrower in Custody program.
Deposits
During the first three months of 2016, total deposits increased by $66.3 million or 6.4% from December 31, 2015 levels. Low-cost deposits (demand, NOW, and savings accounts) decreased by $17.1 million or 3.0% in the first three months of 2016, money market deposits decreased $18.4 million or 19.7%, and certificates of deposit increased $101.7 million or 27.4%. Between March 31, 2015 and March 31, 2016, total deposits increased by $142.6 million or 14.8%. Low-cost deposits increased by $94.7 million or 20.3%, money market accounts decreased $26.6 million or 26.3%, and certificates of deposit increased $74.6 million or 18.7%. The decrease in low-cost deposits year-to-date is the result of normal seasonal fluctuation. The majority of the change in certificates of deposit both year-to-date and year-over-year was primarily from a shift in funding between borrowed funds and certificates of deposit.
Borrowed Funds
The Company uses funding from the FHLB of Boston, the Federal Reserve Bank of Boston 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 is increased to replace or supplement other sources of funding, including core deposits and certificates of deposit. During the three months ended March 31, 2016, borrowed funds decreased $60.9 million or 18.1% from December 31, 2015. Between March 31, 2015 and March 31, 2016, borrowed funds decreased by $36.0 million or 11.5%. This is due to the above mentioned shift in funding strategy between borrowed funds and certificates of deposit.
Shareholders' Equity
Shareholders' equity as of March 31, 2016 was $171.5 million, compared to $167.5 million as of December 31, 2015 and $163.5 million as of March 31, 2015. The Company's earnings in the first three months of 2016, net of dividends paid, added to shareholders' equity. The net unrealized gain on available-for-sale securities, presented in accordance with FASB ASC Topic 740 "Investments – Debt and Equity Securities", increased by $1.9 million from December 31, 2015 and now stands at a $3.0 million.
A cash dividend of $0.22 per share was declared in the first quarter of 2016. This is equal to what was paid in the last three quarters. The dividend payout ratio, which is calculated by dividing dividends declared per share by diluted earnings per share, was 52.38% for the first three months of 2016 compared to 53.85% for the same period in 2015. 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 2016 is this year's net income plus $12.7 million.
On January 9, 2009 the Company issued $25 million in Fixed Rate Cumulative Perpetual Preferred Stock, Series A, by the U.S. Treasury under the Capital Purchase Program ("the CPP Shares"). The CPP Shares qualified as Tier 1 capital on the Company's books for regulatory purposes and ranked senior to the Company's common stock and senior or at an equal level in the Company's capital structure to any other shares of preferred stock the Company may issue in the future. In three separate transactions in 2012 and 2013, the Company repurchased all of the CPP shares from the Treasury.
Incident to such issuance of the CPP shares, the Company issued to the Treasury warrants (the "Warrants") to purchase up to 225,904 shares of the Company's common stock at a price per share of $16.60 (subject to adjustment). The Warrants (and any shares of common stock issuable pursuant to the Warrants) are freely transferable by Treasury to third parties. The Warrants have a term of ten years and could be exercised by Treasury or a subsequent holder at any time or from time to time during

Page 59



their term. To the extent they had not previously been exercised, the Warrants will expire after ten years. The Warrants were unchanged as a result of the CPP Shares repurchase transactions.
In May 2015, the Treasury sold all of the Warrants to private parties. In accordance with the contractual terms of the Warrants, the number of shares issuable upon exercise of the Warrants and strike price were adjusted at the time of the sale. As a result of this transaction, the number of shares issuable under the Warrants now stands at 226,819 shares with a strike price of $16.53 per share.
Financial institution regulators have established guidelines for minimum capital ratios for banks and bank holding companies. The net unrealized gain or loss on available-for-sale securities is generally not included in computing regulatory capital. During the first quarter of 2015, the Company adopted the new Basel III regulatory capital framework as approved by the federal banking agencies. The adoption of this new framework modified the calculation of the various capital ratios, added a new ratio, common equity tier 1, and revised the adequately and well capitalized thresholds. Additionally, under the new rule, in order to avoid limitations on capital distributions, including dividend payments, the Company must hold a capital conservation buffer above the adequately capitalized risk-based capital ratios. The capital conservation buffer is being phased in from 0.0% for 2015 to 2.50% by 2019. The amounts shown below as the adequately capitalized ratio plus capital conservation buffer includes the fully phased-in 2.50% buffer.
The Company met each of the well-capitalized ratio guidelines at March 31, 2016. The following tables indicate the capital ratios for the Bank and the Company at March 31, 2016 and December 31, 2015.
As of March 31, 2016
Leverage
 
Tier 1
 
Common Equity Tier 1
 
Total Risk-Based
 
Bank
8.85

%
15.15

%
15.15

%
16.29

%
Company
9.00

%
15.42

%
15.42

%
16.57

%
Adequately capitalized ratio
4.00

%
6.00

%
4.50

%
8.00

%
Adequately capitalized ratio plus capital conservation buffer
4.00

%
8.50

%
7.00

%
10.50

%
Well capitalized ratio (Bank only)
5.00

%
8.00

%
6.50

%
10.00

%
As of December 31, 2015
Leverage
 
Tier 1
 
Common Equity Tier 1
 
Total Risk-Based
 
Bank
8.82

%
14.45

%
14.45

%
15.53

%
Company
8.81

%
14.70

%
14.70

%
15.78

%
Adequately capitalized ratio
4.00

%
6.00

%
4.50

%
8.00

%
Adequately capitalized ratio plus capital conservation buffer
4.00

%
8.50

%
7.00

%
10.50

%
Well capitalized ratio (Bank only)
5.00

%
8.00

%
6.50

%
10.00

%

Off-Balance Sheet Financial Instruments
No material off-balance sheet risk exists that requires a separate liability presentation.

Contractual Obligations
The following table sets forth the contractual obligations of the Company as of March 31, 2016:
Dollars in thousands
Total
 
Less than 1 year
 
1-3 years
 
3-5 years
 
More than 5 years
Borrowed funds
$
276,531

 
$
151,399

 
$
60,000

 
$
65,000

 
$
132

Operating leases
453

 
143

 
202

 
61

 
47

Certificates of deposit
472,712

 
327,317

 
58,687

 
86,708

 

Total
$
749,696

 
$
478,859

 
$
118,889

 
$
151,769

 
$
179

Total loan commitments and unused lines of credit
$
156,263

 
$
156,263

 
$

 
$

 
$


Page 60



Item 3 – Quantitative and Qualitative Disclosures About Market Risk

Market-Risk Management
Market risk is the risk of loss arising from adverse changes in the fair value of financial instruments due to changes in interest rates. The First Bancorp, Inc.'s market risk is composed primarily of interest rate risk. The Bank's Asset/Liability Committee (ALCO) is responsible for reviewing the interest rate sensitivity position of the Company and establishing policies to monitor and limit exposure to interest rate risk. All guidelines and policies established by ALCO have been approved by the Board of Directors.
Asset/Liability Management
The primary goal of asset/liability management is to maximize net interest income within the interest rate risk limits set by ALCO. Interest rate risk is monitored through the use of two complementary measures: static gap analysis and earnings simulation modeling. While each measurement has limitations, taken together they represent a reasonably comprehensive view of the magnitude of interest rate risk in the Company, the level of risk through time, and the amount of exposure to changes in certain interest rate relationships.
Static gap analysis measures the amount of repricing risk embedded in the balance sheet at a point in time. It does so by comparing the differences in the repricing characteristics of assets and liabilities. A gap is defined as the difference between the principal amount of assets and liabilities that reprice within a specified time period. The Company's cumulative one-year gap at March 31, 2016 was +10.09% of total assets compared to +5.13% of total assets at December 31, 2015. Core deposits with non-contractual maturities are presented based upon historical patterns of balance attrition and pricing behavior, which are reviewed at least annually.
The gap repricing distributions include principal cash flows from residential mortgage loans and mortgage-backed securities in the time frames in which they are expected to be received. Mortgage prepayments are estimated by applying industry median projections of prepayment speeds to portfolio segments based on coupon range and loan age.
A summary of the Company's static gap, as of March 31, 2016, is presented in the following table:
 
0-90
 
90-365
 
1-5
 
5+
 
Dollars in thousands 
Days
 
Days
 
Years
 
Years
 
Investment securities at amortized cost (HTM) and fair value (AFS)
$
86,822

 
$
54,815

 
$
171,317

 
$
140,382

 
Restricted stock, at cost
12,838

 

 

 
1,037

 
Loans held for sale

 

 

 
224

 
Loans
399,712

 
153,711

 
351,755

 
99,764

 
Other interest-earning assets

 
21,794

 

 

 
Non-rate-sensitive assets
10,857

 

 

 
69,653

 
 Total assets
510,229

 
230,320

 
523,072

 
311,060

 
Interest-bearing deposits
336,101

 
86,543

 
144,482

 
425,559

 
Borrowed funds
121,399

 
30,000

 
125,000

 
132

 
Non-rate-sensitive liabilities and equity
1,900

 
5,700

 
32,350

 
265,515

 
 Total liabilities and equity
459,400

 
122,243

 
301,832

 
691,206

 
Period gap
$
50,829

 
$
108,077

 
$
221,240

 
$
(380,146
)
 
Percent of total assets
3.23

%
6.86

%
14.05

%
(24.14
)
%
Cumulative gap (current)
$
50,829

 
$
158,906

 
$
380,146

 
$

 
Percent of total assets
3.23

%
10.09

%
24.14

%

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

Page 61



The Company's most recent simulation model projects net interest income would decrease by approximately 0.71% of stable-rate net interest income if short-term rates affected by Federal Open Market Committee actions fall gradually by one percentage point over the next year, and decrease by approximately 2.18% if rates rise gradually by two percentage points. Both scenarios are well within ALCO's policy limit of a decrease in net interest income of no more than 10.0% given a 2.0% move in interest rates, up or down. Management believes this reflects a reasonable interest rate risk position. In year two, and assuming no additional movement in rates, the model forecasts that net interest income would be lower than that earned in a stable rate environment by 0.45% in a falling-rate scenario, and lower than that earned in a stable rate environment by 0.30% in a rising rate scenario, when compared to the year-one base scenario. A summary of the Bank's interest rate risk simulation modeling, as of March 31, 2016 and December 31, 2015 is presented in the following table:
Changes in Net Interest Income
March 31, 2016
December 31, 2015
Year 1
 
 
Projected change if rates decrease by 1.0%
-0.71
 %
-0.97%
Projected change if rates increase by 2.0%
-2.18
 %
-1.94%
Year 2
 
 
Projected change if rates decrease by 1.0%
-0.45
 %
-2.80%
Projected change if rates increase by 2.0%
-0.30
 %
-1.59%
This dynamic simulation model includes assumptions about how the balance sheet is likely to evolve through time and in different interest rate environments. Loans and deposits are projected to maintain stable balances. All maturities, calls and prepayments in the securities portfolio are assumed to be reinvested in similar assets. Mortgage loan prepayment assumptions are developed from industry median estimates of prepayment speeds for portfolios with similar coupon ranges and seasoning. Non-contractual deposit volatility and pricing are assumed to follow historical patterns. The sensitivities of key assumptions are analyzed annually and reviewed by ALCO.
This sensitivity analysis does not represent a Company forecast and should not be relied upon as being indicative of expected operating results. These hypothetical estimates are based upon numerous assumptions including, among others, the nature and timing of interest rate levels, yield curve shape, prepayments on loans and securities, pricing decisions on loans and deposits, and reinvestment/ replacement of asset and liability cash flows. While assumptions are developed based upon current economic and local market conditions, the Company cannot make any assurances as to the predictive ability of these assumptions, including how customer preferences or competitor influences might change.

Interest Rate Risk Management
A variety of financial instruments can be used to manage interest rate sensitivity. These may include investment securities, interest rate swaps, and interest rate caps and floors. Frequently called interest rate derivatives, interest rate swaps, caps and floors have characteristics similar to securities but possess the advantages of customization of the risk-reward profile of the instrument, minimization of balance sheet leverage and improvement of liquidity. As of March 31, 2016, the Company was using no interest rate derivatives for interest rate risk management.
The Company engages an independent consultant to periodically review its interest rate risk position, as well as the effectiveness of simulation modeling and reasonableness of assumptions used. As of March 31, 2016, there were no significant differences between the views of the independent consultant and Management regarding the Company's interest rate risk exposure. As a result of recent statements made by the Federal Open Market Committee, Management expects that short-term interest rates may increase sometime in the next one-to-three quarters and believes that the current level of interest rate risk is acceptable.


Page 62



Item 4: Controls and Procedures
As required by Rule 13a-15 under the Securities Exchange Act of 1934, as of March 31, 2016, the end of the quarter covered by this report, the Company carried out an evaluation under the supervision and with the participation of the Company's management, including the Company's Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures. In designing and evaluating the Company's disclosure controls and procedures, the Company and its management recognize that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and the Company's management necessarily was required to apply its judgment in evaluating and implementing possible controls and procedures. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures were effective at the reasonable assurance level to ensure that information required to be disclosed by the Company in the reports it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission's rules and forms. There was no change in the Company's internal control over financial reporting that occurred during the quarter ended March 31, 2016 that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting. The Company reviews its disclosure controls and procedures, which may include its internal controls over financial reporting on an ongoing basis, and may from time to time make changes aimed at enhancing their effectiveness and to ensure that the Company's systems evolve with its business.

Page 63



Part II – Other Information

Item 1 – Legal Proceedings

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

Item 1A – Risk Factors

There have been no material changes from the risk factors previously disclosed in the Company's Form 10-K for the year ended December 31, 2015.

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

a. None

b. None

c. The Company made the following repurchases of its common stock in the quarter ended March 31, 2016:

Month
Shares Purchased
Average Price Per Share
Total shares purchased as part of publicly announced repurchase plans
Maximum number of shares that may be purchased under the plans
January 2016
          1,434
      18.45
0
0
February 2016
          4,761
      18.74
0
0
March 2016
             741
      19.06
0
0
Total
          6,936
      18.71
0
0



Item 3 – Default Upon Senior Securities

None.

Item 4 – Other Information

A.  None.

B.  None.

Page 64



Item 5 – Exhibits

Exhibit 2.1 Agreement and Plan of Merger With FNB Bankshares Dated August 25, 2004, incorporated by reference to Exhibit 2.1 to the Company's Form 8-K dated August 25, 2004, filed under item 1.01 on August 27, 2004.
Exhibit 3.1 Conformed Copy of the Registrant's Articles of Incorporation (incorporated by reference to Exhibit 3.1 to the Company's Form 8-K filed under item 5.03 on October 7, 2004).
Exhibit 3.2 Amendment to the Registrant's Articles of Incorporation (incorporated by reference to Exhibit 3.1 to the Company's Form 8-K filed under item 5.03 on May 1, 2008).
Exhibit 3.3 Amendment to the Registrant's Articles of Incorporation (incorporated by reference to the Definitive Proxy Statement for the Company's 2008 Annual Meeting filed on March 14, 2008).
Exhibit 3.4 Amendment to the Registrant's Articles of Incorporation authorizing issuance of preferred stock (incorporated by reference to Exhibit 3.1 to Current Report on Form 8-K filed on December 29, 2008).
Exhibit 3.5 Conformed Copy of the Company's Bylaws (incorporated by reference to Exhibit 3.1 to the Company's Form 8-K filed under item 5.03 on October 31, 2012).
Exhibit 10.1(a) Specimen Split Dollar Agreement entered into with Mr. McKim with a death benefit of $250,000. Incorporated by reference to Exhibit 10.3(a) to the Company's Form 8-K filed under item 1.01 on January 14, 2005.
Exhibit 10.1(b) Specimen Amendment to Split Dollar Agreement entered into with Mr. McKim, incorporated by reference to Exhibit 10.3(b) to the Company's Form 8-K filed under item 1.01 on January 14, 2005.
Exhibit 10.2 Specimen Amendment to Supplemental Executive Retirement Plan entered into with Messrs. Daigneault and Ward changing the normal retirement age to receive the full benefit under the Plan from age 65 to age 63, incorporated by reference to Exhibit 10.1 to the Company's Form 8-K filed under item 1.01 on December 30, 2008.
Exhibit 10.3 Purchase and Assumption Agreement between the Bank and Camden National Bank for the purchase of a bank branch, loans and deposits at 63 Union Street in Rockland, Maine, attached as Exhibit 10.5 to the Company's Quarterly Report on Form 10-Q filed on August 9, 2012.
Exhibit 10.4 Purchase and Sale Agreement between the Bank and Camden National Bank for the purchase of a bank building at 145 Exchange Street in Bangor, Maine, attached as Exhibit 10.6 to the Company's Quarterly Report on Form 10-Q filed on August 9, 2012.
Exhibit 10.5 Underwriting agreement for a public common stock offering between the Company and Keefe, Bruyette & Woods, Inc., a Stifel Company, incorporated by reference to Exhibit 1 to the Company's Form 8-K filed under item 1.01 on March 26, 2013.
Exhibit 10.6 Letter Agreement between the Company and the United States Treasury, dated March 27, 2013, to repurchase $2.5 million of the Company's Fixed Rate Cumulative Perpetual Preferred Stock, Series A, incorporated by reference to Exhibit 10.1 to the Company's Form 8-K filed under item 1.01 on March 28, 2013.
Exhibit 10.7 Letter Agreement between the Company and the United States Treasury, dated May 8, 2013, to repurchase $10.0 million of the Company's Fixed Rate Cumulative Perpetual Preferred Stock, Series A, incorporated by reference to Exhibit 10.1 to the Company's Form 8-K filed under item 1.01 on March 28, 2013.
Exhibit 10.8 Specimen Deferred Compensation Agreement entered into with Mr. Daigneault, referenced in the Company's Form 8-K filed under item 5.02 on September 30, 2014.
Exhibit 14.1 Code of Ethics for Senior Financial Officers, adopted by the Board of Directors on September 19, 2003. Incorporated by reference to Exhibit 14.1 to the Company's Annual Report on Form 10-K filed on March 15, 2006.
Exhibit 14.2 Code of Business Conduct and Ethics, adopted by the Board of Directors on April 15, 2004. Incorporated by reference to Exhibit 14.2 to the Company's Annual Report on Form 10-K filed on March 15, 2006.
Exhibit 31.1 Certification of Chief Executive Officer Pursuant to Rule 13A-14(A) of The Securities Exchange Act of 1934
Exhibit 31.2 Certification of Chief Financial Officer Pursuant to Rule 13A-14(A) of The Securities Exchange Act of 1934
Exhibit 32.1 Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of The Sarbanes-Oxley Act of 2002
Exhibit 32.2 Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of The Sarbanes-Oxley Act of 2002
Exhibit 101.INS XBRL Instance Document
Exhibit 101.SCH XBRL Taxonomy Extension Schema Document
Exhibit 101.CAL XBRL Taxonomy Extension Calculation Linkbase Document
Exhibit 101.LAB XBRL Taxonomy Extension Label Linkbase Document

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Exhibit 101.PRE XBRL Taxonomy Extension Presentation Linkbase Document
Exhibit 101.DEF XBRL Taxonomy Extension Definitions Linkbase

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Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
THE FIRST BANCORP, INC.



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

Date: May 6, 2016


/s/ F. Stephen Ward
F. Stephen Ward
Executive Vice President & Chief Financial Officer

Date: May 6, 2016




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