Edgar Filing: First Bancorp, Inc /ME/

FNLC-2015.03.31-10Q

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, 2015

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, or a non-accelerated filer. See definition of "accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer [_] Accelerated filer [X] Non-accelerated filer [_]

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 1, 2015

Common Stock: 10,738,595 shares

Table of Contents



Part I. Financial Information	Page 1
Selected Financial Data (Unaudited)	Page 1
Item 1 – Financial Statements	Page 2
Report of Independent Registered Public Accounting Firm	Page 2
Consolidated Balance Sheets (Unaudited)	Page 3
Consolidated Statements of Income and Comprehensive Income (Loss) (Unaudited)	Page 4
Consolidated Statements of Changes in Shareholders' Equity (Unaudited)	Page 5
Consolidated Statements of Cash Flows (Unaudited)	Page 6
Notes to Consolidated Financial Statements	Page 7
Note 1 – Basis of Presentation	Page 7
Note 2 –Investment Securities	Page 7
Note 3 – Loans	Page 11
Note 4 – Allowance for Loan Losses	Page 20
Note 5 – Stock Options and Stock Based Compensation	Page 27
Note 6 – Preferred and Common Stock	Page 28
Note 7 – Earnings Per Share	Page 29
Note 8 – Employee Benefit Plans	Page 30
Note 9 - Other Comprehensive Income (Loss)	Page 32
Note 10 – Acquisitions and Intangible Assets	Page 32
Note 11 – Mortgage Servicing Rights	Page 33
Note 12 – Income Taxes	Page 34
Note 13 - Certificates of Deposit	Page 34
Note 14 – Reclassifications	Page 34
Note 15 – Fair Value Disclosures	Page 34
Note 16 – Impact of Recently Issued Accounting Standards	Page 40
Item 2 – Management's Discussion and Analysis of Financial Condition and Results of Operations	Page 42
Forward-Looking Statements	Page 42
Critical Accounting Policies	Page 42
Use of Non-GAAP Financial Measures	Page 43
Executive Summary	Page 44
Net Interest Income	Page 45
Average Daily Balance Sheets	Page 47
Non-Interest Income	Page 48
Non-Interest Expense	Page 48
Income Taxes	Page 48
Investments	Page 48
Impaired Securities	Page 50
Federal Home Loan Bank Stock	Page 52
Loans and Loans Held for Sale	Page 52
Credit Risk Management and Allowance for Loan Losses	Page 54
Non-Performing Loans and Troubled Debt Restructured	Page 57
Impaired Loans	Page 60
Past Due Loans	Page 60
Potential Problem Loans and Loans in Process of Foreclosure	Page 60
Other Real Estate Owned	Page 61
Liquidity Management	Page 62
Deposits	Page 63
Borrowed Funds	Page 63



Shareholders' Equity	Page 63
Off-Balance-Sheet Financial Instruments and Contractual Obligations	Page 64
Item 3 – Quantitative and Qualitative Disclosures About Market Risk	Page 65
Market-Risk Management	Page 65
Asset/Liability Management	Page 65
Interest Rate Risk Management	Page 66
Item 4 - Controls and Procedures	Page 66
Part II. Other Information	Page 68
Item 1 – Legal Proceedings	Page 68
Item 1a – Risk Factors	Page 68
Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds	Page 68
Item 3 – Default Upon Senior Securities	Page 68
Item 4 – Other Information	Page 68
Item 5 – Exhibits	Page 69
Signatures	Page 71

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	2015			2014
Summary of Operations
Interest Income	$	12,365		$	12,623
Interest Expense	2,663			2,912
Net Interest Income	9,702			9,711
Provision for Loan Losses	500			400
Non-Interest Income	3,658			2,332
Non-Interest Expense	7,265			7,252
Net Income	4,175			3,428
Per Common Share Data
Basic Earnings per Share	$	0.39		$	0.32
Diluted Earnings per Share	0.39			0.32
Cash Dividends Declared	0.21			0.20
Book Value per Common Share	15.23			14.24
Tangible Book Value per Common Share²	12.43			11.40
Market Value	17.45			16.30
Financial Ratios
Return on Average Equity¹	10.32		%	9.19		%
Return on Average Tangible Common Equity^1,2	12.63		%	11.51		%
Return on Average Assets¹	1.16		%	0.95		%
Average Equity to Average Assets	11.26		%	10.29		%
Average Tangible Equity to Average Assets²	9.19		%	8.22		%
Net Interest Margin Tax-Equivalent^1,2	3.10		%	3.13		%
Dividend Payout Ratio	53.85		%	62.50		%
Allowance for Loan Losses/Total Loans	1.09		%	1.34		%
Non-Performing Loans to Total Loans	1.10		%	1.63		%
Non-Performing Assets to Total Assets	0.91		%	1.30		%
Efficiency Ratio²	56.79		%	55.90		%
At Period End
Total Assets	$	1,458,832		$	1,466,117
Total Loans	939,169			868,914
Total Investment Securities	432,684			502,465
Total Deposits	966,825			1,045,970
Total Shareholders' Equity	163,516			152,416

¹Annualized using a 365-day basis for both years.

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, 2015 and 2014 and for the three-month periods then ended. These financial statements are the responsibility of the Company's management.

We conducted our reviews in accordance with standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit in accordance with standards of the Public Company Accounting Oversight Board (United States), the objective of which is to express an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

Based on our reviews, we are not aware of any material modifications that should be made to the accompanying interim consolidated financial statements for them to be in conformity with accounting principles generally accepted in the United States of America.

/s/ Berry Dunn McNeil & Parker, LLC

Portland, Maine

May 8, 2015

Page 2

Consolidated Balance Sheets (Unaudited)

The First Bancorp, Inc. and Subsidiary



	March 31, 2015			December 31, 2014			March 31, 2014
Assets
Cash and cash equivalents	$	13,855,000		$	13,057,000		$	13,894,000
Interest bearing deposits in other banks	336,000			3,559,000			2,935,000
Securities available for sale	156,317,000			185,261,000			305,700,000
Securities to be held to maturity (fair value of $267,247,000 at March 31, 2015, $279,704,000 at December 31, 2014 and $176,562,000 at March 31, 2014)	262,455,000			275,919,000			182,853,000
Restricted equity securities, at cost	13,912,000			13,912,000			13,912,000
Loans held for sale	—			—			56,000
Loans	939,169,000			917,564,000			868,914,000
Less allowance for loan losses	10,196,000			10,344,000			11,655,000
Net loans	928,973,000			907,220,000			857,259,000
Accrued interest receivable	5,724,000			4,748,000			5,962,000
Premises and equipment, net	22,270,000			22,619,000			23,239,000
Other real estate owned	2,899,000			3,785,000			4,934,000
Goodwill	29,805,000			29,805,000			29,805,000
Other assets	22,286,000			22,246,000			25,568,000
Total assets	$	1,458,832,000		$	1,482,131,000		$	1,466,117,000
Liabilities
Demand deposits	$	100,939,000		$	113,133,000		$	94,260,000
NOW deposits	199,099,000			199,977,000			158,278,000
Money market deposits	101,292,000			98,607,000			89,382,000
Savings deposits	167,338,000			165,601,000			149,076,000
Certificates of deposit	398,157,000			447,501,000			554,974,000
Total deposits	966,825,000			1,024,819,000			1,045,970,000
Borrowed funds – short term	167,437,000			189,775,000			123,372,000
Borrowed funds – long term	145,139,000			90,141,000			130,147,000
Other liabilities	15,915,000			15,842,000			14,212,000
Total liabilities	1,295,316,000			1,320,577,000			1,313,701,000
Shareholders' equity
Common stock, one cent par value per share	107,000			107,000			107,000
Additional paid-in capital	59,286,000			59,282,000			58,600,000
Retained earnings	101,736,000			99,816,000			95,288,000
Accumulated other comprehensive income (loss)
Net unrealized gain (loss) on securities available for sale	2,579,000			2,522,000			(1,767,000		)
Net unrealized loss on securities transferred from available for sale to held to maturity	(67,000		)	(48,000		)	—
Net unrealized gain (loss) on postretirement benefit costs	(125,000		)	(125,000		)	188,000
Total shareholders' equity	163,516,000			161,554,000			152,416,000
Total liabilities & shareholders' equity	$	1,458,832,000		$	1,482,131,000		$	1,466,117,000
Common Stock
Number of shares authorized	18,000,000			18,000,000			18,000,000
Number of shares issued and outstanding	10,734,419			10,724,359			10,703,272
Book value per common share	$	15.23		$	15.06		$	14.24
Tangible book value per common share	$	12.43		$	12.25		$	11.40

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,
	2015			2014
Interest income
Interest and fees on loans	$	8,855,000		$	8,578,000
Interest on deposits with other banks	5,000			2,000
Interest and dividends on investments	3,505,000			4,043,000
Total interest income	12,365,000			12,623,000
Interest expense
Interest on deposits	1,443,000			1,825,000
Interest on borrowed funds	1,220,000			1,087,000
Total interest expense	2,663,000			2,912,000
Net interest income	9,702,000			9,711,000
Provision for loan losses	500,000			400,000
Net interest income after provision for loan losses	9,202,000			9,311,000
Non-interest income
Investment management and fiduciary income	541,000			517,000
Service charges on deposit accounts	579,000			619,000
Net securities gains	1,395,000			36,000
Mortgage origination and servicing income, net of amortization	197,000			194,000
Other operating income	946,000			966,000
Total non-interest income	3,658,000			2,332,000
Non-interest expense
Salaries and employee benefits	3,720,000			3,697,000
Occupancy expense	645,000			612,000
Furniture and equipment expense	770,000			697,000
FDIC insurance premiums	230,000			265,000
Amortization of identified intangibles	25,000			82,000
Other operating expense	1,875,000			1,899,000
Total non-interest expense	7,265,000			7,252,000
Income before income taxes	5,595,000			4,391,000
Income tax expense	1,420,000			963,000
NET INCOME	$	4,175,000		$	3,428,000
Basic earnings per common share	$	0.39		$	0.32
Diluted earnings per common share	$	0.39		$	0.32
Other comprehensive income (loss) net of tax
Net unrealized gain on securities available for sale	57,000			4,824,000
Net unrealized loss on securities transferred from available for sale to held to maturity, net of amortization	(19,000		)	—
Other comprehensive income	38,000			4,824,000
Comprehensive income	$	4,213,000		$	8,252,000

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 (loss)			Total shareholders' equity
	Shares		Amount			Retained earnings			Accumulated other comprehensive income (loss)			Total shareholders' equity
Balance at December 31, 2013	10,671,192		$	58,501,000		$	94,000,000		$	(6,403,000	)	$	146,098,000
Net income	—		—			3,428,000			—			3,428,000
Net unrealized gain on securities available for sale, net of tax	—		—			—			4,824,000			4,824,000
Comprehensive income	—		—			3,428,000			4,824,000			8,252,000
Cash dividends declared ($0.20 per share)	—		—			(2,139,000		)	—			(2,139,000		)
Equity compensation expense	—		102,000			—			—			102,000
Issuance of restricted stock	25,843		1,000			(1,000		)	—			—
Proceeds from sale of common stock	6,237		103,000			—			—			103,000
Balance at March 31, 2014	10,703,272		$	58,707,000		$	95,288,000		$	(1,579,000	)	$	152,416,000

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 for repurchase of 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

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, 2015			March 31, 2014
Cash flows from operating activities
Net income	$	4,175,000		$	3,428,000
Adjustments to reconcile net income to net cash provided by operating activities
Depreciation	425,000			445,000
Change in deferred taxes	88,000			105,000
Provision for loan losses	500,000			400,000
Loans originated for resale	(5,489,000		)	(5,331,000		)
Proceeds from sales and transfers of loans	5,599,000			5,462,000
Net gain on sales of loans	(110,000		)	(104,000		)
Net gain on sale or call of securities	(1,395,000		)	(36,000		)
Net amortization of premiums on investments	159,000			273,000
Net gain on sale of other real estate owned	(43,000		)	(36,000		)
Equity compensation expense	74,000			102,000
Net increase in other assets and accrued interest	(1,301,000		)	(1,857,000		)
Net increase (decrease) in other liabilities	129,000			(74,000		)
Net loss on disposal of premises and equipment	—			3,000
Amortization of investment in limited partnership	66,000			142,000
Net acquisition amortization	25,000			82,000
Net cash provided by operating activities	2,902,000			3,004,000
Cash flows from investing activities
(Increase) decrease in interest-bearing deposits in other banks	3,223,000			(373,000		)
Proceeds from sales of securities available for sale	35,465,000			—
Proceeds from maturities, payments and calls of securities available for sale	5,991,000			7,775,000
Proceeds from maturities, payments and calls of securities to be held to maturity	18,875,000			2,976,000
Proceeds from sales of other real estate owned	1,309,000			808,000
Purchases of securities available for sale	(11,255,000		)	(510,000		)
Purchases of securities to be held to maturity	(5,344,000		)	(16,509,000		)
Net (increase) decrease in loans	(22,633,000		)	6,295,000
Capital expenditures	(76,000		)	(71,000		)
Net cash provided by investing activities	25,555,000			391,000
Cash flows from financing activities
Net decrease in demand, savings, and money market accounts	(8,650,000		)	(2,284,000		)
Net increase (decrease) in certificates of deposit	(49,344,000		)	23,855,000
Net decrease in short-term borrowings	(22,340,000		)	—
Advances on long-term borrowings	55,000,000			—
Repayment on long-term borrowings	—			(25,606,000		)
Payment to repurchase common stock	(180,000		)	—
Proceeds from sale of common stock	110,000			103,000
Dividends paid	(2,255,000		)	(2,139,000		)
Net cash used by financing activities	(27,659,000		)	(6,071,000		)
Net increase (decrease) in cash and cash equivalents	798,000			(2,676,000		)
Cash and cash equivalents at beginning of period	13,057,000			16,570,000
Cash and cash equivalents at end of period	$	13,855,000		$	13,894,000
Interest paid	$	2,621,000		$	2,864,000
Income taxes paid	—			180,000
Non-cash transactions
Net transfer from loans to other real estate owned	$	380,000		$	899,000

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 The First, N.A. ("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 2015 period is not necessarily indicative of the results that may be expected for the year ending December 31, 2015. 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, 2014.

Subsequent Events

Events occurring subsequent to March 31, 2015, 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, 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 7

The following table summarizes the amortized cost and estimated fair value of investment securities at December 31, 2014:



	Amortized Cost		Unrealized Gains		Unrealized Losses			Fair Value (Estimated)
Securities available for sale
Mortgage-backed securities	$	149,796,000	$	2,637,000	$	(578,000	)	$	151,855,000
State and political subdivisions	29,094,000		1,865,000		(104,000		)	30,855,000
Other equity securities	2,490,000		65,000		(4,000		)	2,551,000
	$	181,380,000	$	4,567,000	$	(686,000	)	$	185,261,000
Securities to be held to maturity
U.S. Government-sponsored agencies	$	92,341,000	$	54,000	$	(2,066,000	)	$	90,329,000
Mortgage-backed securities	57,003,000		1,830,000		(116,000		)	58,717,000
State and political subdivisions	126,275,000		4,114,000		(31,000		)	130,358,000
Corporate securities	300,000		—		—			300,000
	$	275,919,000	$	5,998,000	$	(2,213,000	)	$	279,704,000
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

The following table summarizes the amortized cost and estimated fair value of investment securities at March 31, 2014:



	Amortized Cost		Unrealized Gains		Unrealized Losses			Fair Value (Estimated)
Securities available for sale
Mortgage-backed securities	$	172,909,000	$	1,917,000	$	(2,711,000	)	$	172,115,000
State and political subdivisions	133,303,000		2,796,000		(4,784,000		)	131,315,000
Other equity securities	2,207,000		66,000		(3,000		)	2,270,000
	$	308,419,000	$	4,779,000	$	(7,498,000	)	$	305,700,000
Securities to be held to maturity
U.S. Government-sponsored agencies	$	92,312,000	$	2,000	$	(9,131,000	)	$	83,183,000
Mortgage-backed securities	49,805,000		1,652,000		(789,000		)	50,668,000
State and political subdivisions	40,436,000		2,070,000		(95,000		)	42,411,000
Corporate securities	300,000		—		—			300,000
	$	182,853,000	$	3,724,000	$	(10,015,000	)	$	176,562,000
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, 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

The following table summarizes the contractual maturities of investment securities at December 31, 2014:



	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	$	2,309,000	$	2,329,000	$	1,693,000	$	1,713,000
Due in 1 to 5 years	15,200,000		15,499,000		8,467,000		8,702,000
Due in 5 to 10 years	18,547,000		19,124,000		50,629,000		52,717,000
Due after 10 years	142,834,000		145,758,000		215,130,000		216,572,000
Equity securities	2,490,000		2,551,000		—		—
	$	181,380,000	$	185,261,000	$	275,919,000	$	279,704,000

The following table summarizes the contractual maturities of investment securities at March 31, 2014:



	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	$	137,000	$	137,000	$	265,000	$	267,000
Due in 1 to 5 years	19,747,000		20,052,000		5,951,000		6,266,000
Due in 5 to 10 years	15,868,000		16,190,000		42,272,000		43,472,000
Due after 10 years	270,460,000		267,051,000		134,365,000		126,557,000
Equity securities	2,207,000		2,270,000		—		—
	$	308,419,000	$	305,700,000	$	182,853,000	$	176,562,000

At March 31, 2015, securities with a fair value of $224,133,000 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 $164,919,000 as of December 31, 2014 and $132,657,000 at March 31, 2014, pledged for the same purposes.

Page 9

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 and quarters ended March 31, 2015 and 2014:



	For the three months ended March 31,
	2015		2014
Proceeds from sales of securities	$	35,465,000	$	—
Gross realized gains	1,395,000		36,000
Gross realized losses	—		—
Net gain	$	1,395,000	$	36,000
Related income taxes	$	488,000	$	13,000

Management reviews securities with unrealized losses for other than temporary impairment. 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. 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, 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	)

As of December 31, 2014, there were 56 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 36 had been temporarily impaired for 12 months or more. Information regarding securities temporarily impaired as of December 31, 2014 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	$	—	$	—		$	79,444,000	$	(2,066,000	)	$	79,444,000	$	(2,066,000	)
Mortgage-backed securities	13,878,000		(40,000		)	29,182,000		(654,000		)	43,060,000		(694,000		)
State and political subdivisions	3,352,000		(31,000		)	3,017,000		(104,000		)	6,369,000		(135,000		)
Other equity securities	68,000		(3,000		)	51,000		(1,000		)	119,000		(4,000		)
	$	17,298,000	$	(74,000	)	$	111,694,000	$	(2,825,000	)	$	128,992,000	$	(2,899,000	)

Page 10

As of March 31, 2014, there were 268 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 73 had been temporarily impaired for 12 months or more. Information regarding securities temporarily impaired as of March 31, 2014 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	$	82,374,000	$	(9,131,000	)	$	—	$	—		$	82,374,000	$	(9,131,000	)
Mortgage-backed securities	81,618,000		(2,758,000		)	14,324,000		(742,000		)	95,942,000		(3,500,000		)
State and political subdivisions	50,480,000		(2,669,000		)	18,918,000		(2,210,000		)	69,398,000		(4,879,000		)
Other equity securities	67,000		(2,000		)	51,000		(1,000		)	118,000		(3,000		)
	$	214,539,000	$	(14,560,000	)	$	33,293,000	$	(2,953,000	)	$	247,832,000	$	(17,513,000	)

During the third quarter of 2014, the Company transferred securities with a total amortized cost of $89,780,000 with a corresponding fair value of $89,757,000 from available for sale to held to maturity. The net unrealized loss, net of taxes, on these securities at the date of the transfer was $15,000. The net unrealized holding loss at the time of transfer continues to be reported in accumulated other comprehensive income (loss), net of tax and is amortized over the remaining lives of the securities as an adjustment of the yield. The amortization of the net unrealized loss reported in accumulated other comprehensive income (loss) will offset the effect on interest income of the discount for the transferred securities. The remaining unamortized balance of the net unrealized losses for the securities transferred from available for sale to held to maturity was $67,000 at March 31, 2015. 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, 2015, and 2014, and December 31, 2014, the Bank's investment in FHLB stock totaled $12,875,000. 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, 2015. 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, 2015 and 2014 and at December 31, 2014:



	March 31, 2015				December 31, 2014				March 31, 2014
Commercial
Real estate	$	242,021,000	25.8	%	$	242,311,000	26.4	%	$	240,187,000	27.7	%
Construction	34,683,000		3.7	%	30,932,000		3.4	%	21,686,000		2.5	%
Other	115,455,000		12.3	%	104,531,000		11.4	%	97,276,000		11.2	%
Municipal	26,277,000		2.8	%	20,424,000		2.2	%	17,790,000		2.0	%
Residential
Term	383,869,000		40.8	%	384,032,000		41.9	%	372,479,000		42.9	%
Construction	13,036,000		1.4	%	12,160,000		1.3	%	12,360,000		1.4	%
Home equity line of credit	104,100,000		11.1	%	103,521,000		11.3	%	92,202,000		10.6	%
Consumer	19,728,000		2.1	%	19,653,000		2.1	%	14,934,000		1.7	%
Total	$	939,169,000	100.0	%	$	917,564,000	100.0	%	$	868,914,000	100.0	%

Loan balances include net deferred loan costs of $2,933,000 as of March 31, 2015, $2,729,000 as of December 31, 2014, and $2,264,000 as of March 31, 2014. Pursuant to collateral agreements, qualifying first mortgage loans, which totaled $240,760,000 at March 31, 2015, $266,716,000 at December 31, 2014, and $268,963,000 at March 31, 2014, were used to

Page 11

collateralize borrowings from the FHLB. In addition, commercial, construction and home equity loans totaling $244,170,000 at March 31, 2015, $240,943,000 at December 31, 2014, and $181,617,000 at March 31, 2014, 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, 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

Information on the past-due status of loans by class of financing receivable as of December 31, 2014, 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	$	346,000	$	107,000	$	407,000	$	860,000	$	241,451,000	$	242,311,000	$	—
Construction	—		41,000		208,000		249,000		30,683,000		30,932,000		—
Other	336,000		543,000		314,000		1,193,000		103,338,000		104,531,000		—
Municipal	—		—		—		—		20,424,000		20,424,000		—
Residential
Term	1,140,000		2,118,000		3,745,000		7,003,000		377,029,000		384,032,000		101,000
Construction	—		—		—		—		12,160,000		12,160,000		—
Home equity line of credit	621,000		769,000		732,000		2,122,000		101,399,000		103,521,000		—
Consumer	303,000		53,000		80,000		436,000		19,217,000		19,653,000		80,000
Total	$	2,746,000	$	3,631,000	$	5,486,000	$	11,863,000	$	905,701,000	$	917,564,000	$	181,000

Page 12

Information on the past-due status of loans by class of financing receivable as of March 31, 2014, 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	$	1,186,000	$	55,000	$	1,121,000	$	2,362,000	$	237,825,000	$	240,187,000	$	—
Construction	—		—		208,000		208,000		21,478,000		21,686,000		—
Other	231,000		231,000		1,384,000		1,846,000		95,430,000		97,276,000		—
Municipal	—		—		—		—		17,790,000		17,790,000		—
Residential
Term	2,557,000		933,000		3,492,000		6,982,000		365,497,000		372,479,000		137,000
Construction	—		—		—		—		12,360,000		12,360,000		—
Home equity line of credit	250,000		40,000		1,046,000		1,336,000		90,866,000		92,202,000		29,000
Consumer	67,000		27,000		57,000		151,000		14,783,000		14,934,000		58,000
Total	$	4,291,000	$	1,286,000	$	7,308,000	$	12,885,000	$	856,029,000	$	868,914,000	$	224,000

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

Cash payments received on non-accrual loans, which are included in impaired loans, are applied to reduce the loan's principal balance until the remaining principal balance is deemed collectible, after which interest is recognized when collected. As a general rule, a loan may be restored to accrual status when payments are current for a substantial period of time, generally six months, and repayment of the remaining contractual amounts is expected or when it otherwise becomes well secured and in the process of collection. Information on nonaccrual loans as of March 31, 2015 and 2014 and at December 31, 2014 is presented in the following table:



	March 31, 2015		December 31, 2014		March 31, 2014
Commercial
Real estate	$	1,609,000	$	2,088,000	$	2,835,000
Construction	208,000		208,000		208,000
Other	932,000		935,000		3,008,000
Municipal	—		—		—
Residential
Term	6,514,000		6,421,000		7,103,000
Construction	—		—		—
Home equity line of credit	1,039,000		832,000		1,017,000
Consumer	25,000		26,000		—
Total	$	10,327,000	$	10,510,000	$	14,171,000

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, 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

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, 2014, 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	$	11,687,000	$	12,423,000	$	—	$	11,080,000	$	488,000
Construction	—		—		—		30,000		—
Other	2,616,000		3,407,000		—		3,853,000		156,000
Municipal	—		—		—		—		—
Residential
Term	10,820,000		11,824,000		—		10,505,000		402,000
Construction	—		—		—		—		—
Home equity line of credit	1,164,000		1,395,000		—		1,447,000		29,000
Consumer	26,000		28,000		—		11,000		3,000
	$	26,313,000	$	29,077,000	$	—	$	26,926,000	$	1,078,000
With an Allowance Recorded
Commercial
Real estate	$	1,617,000	$	1,789,000	$	346,000	$	3,040,000	$	62,000
Construction	1,380,000		1,380,000		413,000		1,279,000		56,000
Other	326,000		338,000		129,000		1,103,000		13,000
Municipal	—		—		—		—		—
Residential
Term	5,303,000		5,513,000		519,000		5,738,000		239,000
Construction	—		—		—		—		—
Home equity line of credit	923,000		929,000		396,000		318,000		17,000
Consumer	—		—		—		—		—
	$	9,549,000	$	9,949,000	$	1,803,000	$	11,478,000	$	387,000
Total
Commercial
Real estate	$	13,304,000	$	14,212,000	$	346,000	$	14,120,000	$	550,000
Construction	1,380,000		1,380,000		413,000		1,309,000		56,000
Other	2,942,000		3,745,000		129,000		4,956,000		169,000
Municipal	—		—		—		—		—
Residential
Term	16,123,000		17,337,000		519,000		16,243,000		641,000
Construction	—		—		—		—		—
Home equity line of credit	2,087,000		2,324,000		396,000		1,765,000		46,000
Consumer	26,000		28,000		—		11,000		3,000
	$	35,862,000	$	39,026,000	$	1,803,000	$	38,404,000	$	1,465,000

Page 15

A breakdown of impaired loans by class of financing receivable as of and for the three months ended March 31, 2014, 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	$	11,428,000	$	12,066,000	$	—	$	11,735,000	$	94,000
Construction	208,000		208,000		—		69,000		—
Other	4,214,000		5,910,000		—		5,148,000		24,000
Municipal	—		—		—		—		—
Residential
Term	10,985,000		11,898,000		—		11,325,000		188,000
Construction	—		—		—		—		—
Home equity line of credit	1,473,000		1,716,000		—		1,510,000		6,000
Consumer	—		—		—		—		—
	$	28,308,000	$	31,798,000	$	—	$	29,787,000	$	312,000
With an Allowance Recorded
Commercial
Real estate	$	3,832,000	$	3,992,000	$	1,019,000	$	3,533,000	$	34,000
Construction	1,284,000		1,284,000		276,000		1,284,000		16,000
Other	1,044,000		1,097,000		834,000		1,054,000		4,000
Municipal	—		—		—		—		—
Residential
Term	5,939,000		6,195,000		574,000		5,817,000		65,000
Construction	—		—		—		—		—
Home equity line of credit	180,000		181,000		83,000		122,000		1,000
Consumer	—		—		—		—		—
	$	12,279,000	$	12,749,000	$	2,786,000	$	11,810,000	$	120,000
Total
Commercial
Real estate	$	15,260,000	$	16,058,000	$	1,019,000	$	15,268,000	$	128,000
Construction	1,492,000		1,492,000		276,000		1,354,000		16,000
Other	5,258,000		7,007,000		834,000		6,202,000		28,000
Municipal	—		—		—		—		—
Residential
Term	16,924,000		18,093,000		574,000		17,142,000		253,000
Construction	—		—		—		—		—
Home equity line of credit	1,653,000		1,897,000		83,000		1,631,000		7,000
Consumer	—		—		—		—		—
	$	40,587,000	$	44,547,000	$	2,786,000	$	41,597,000	$	432,000

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, 2015, the Company had 90 loans with a value of $26,524,000 that have been classified as TDRs. This compares to 94 loans with a value of $27,214,000 and 101 loans with a value of $28,796,000 classified as TDRs as of December 31, 2014 and March 31, 2014, 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, 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

The following table shows TDRs by class and the specific reserve as of December 31, 2014:



	Number of Loans	Balance		Specific Reserves
Commercial
Real estate	19	$	12,282,000	$	267,000
Construction	1	1,172,000		207,000
Other	15	2,007,000		—
Municipal	—	—		—
Residential
Term	54	10,932,000		373,000
Construction	—	—		—
Home equity line of credit	5	821,000		21,000
Consumer	—	—		—
	94	$	27,214,000	$	868,000

Page 17

The following table shows TDRs by class and the specific reserve as of March 31, 2014:



	Number of Loans	Balance		Specific Reserves
Commercial
Real estate	20	$	12,925,000	$	520,000
Construction	1	1,284,000		277,000
Other	19	2,300,000		103,000
Municipal	—	—		—
Residential
Term	56	11,450,000		346,000
Construction	—	—		—
Home equity line of credit	5	837,000		—
Consumer	—	—		—
	101	$	28,796,000	$	1,246,000

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

Page 18

As of March 31, 2014, 13 of the loans classified as TDRs with a total balance of $1,915,000 were more than 30 days past due. Of these loans, two loans with an outstanding balance of $301,000 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, 2014:



	Number of Loans	Balance		Specific Reserves
Commercial
Real estate	2	$	307,000	$	5,000
Construction	—	—		—
Other	1	3,000		—
Municipal	—	—		—
Residential
Term	9	1,404,000		66,000
Construction	—	—		—
Home equity line of credit	1	201,000		—
Consumer	—	—		—
	13	$	1,915,000	$	71,000

For the three months ended March 31, 2015, no loans were placed on TDR status. This compares to three loans placed on TDR status with a post-modification outstanding balance of $293,000 for the three months ended March 31, 2014. These were considered TDRs because concessions had been granted to borrowers experiencing financial difficulties. Concessions include reductions in interest rates, principal and/or interest forbearance, payment extensions, or combinations thereof.

The following tables show loans placed on TDR status in the three months ended March 31, 2014, by class of loan and the associated specific reserve included in the allowance for loan losses as of March 31, 2014:



For the three months ended March 31, 2014	Number of Loans	Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment		Specific Reserves
Commercial
Real estate	—	$	—	$	—	$	—
Construction	—	—		—		—
Other	—	—		—		—
Municipal	—	—		—		—
Residential
Term	3	349,000		293,000		3,000
Construction	—	—		—		—
Home equity line of credit	—	—		—		—
Consumer	—	—		—		—
	3	$	349,000	$	293,000	$	3,000

As of March 31, 2015, Management is aware of nine loans classified as TDRs that are involved in bankruptcy with an outstanding balance of $1,206,000. There were also 14 loans with an outstanding balance of $2,019,000 that were classified as TDRs and on non-accrual status. Four loans with an outstanding balance of $472,000, that were classified as TDRs, were in the process of foreclosure.

Page 19

Consumer Mortgage Loans in Process of Foreclosure

As of March 31, 2015, there were 16 consumer mortgage loans collateralized by residential real estate in the process of foreclosure with a total balance of 1,677,000.

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, 2015, December 31, 2014, and March 31, 2014, by class of financing receivable and allowance element, is presented in the following tables:



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

Page 20



As of December 31, 2014	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	$	346,000	$	1,444,000	$	1,742,000	$	—	$	3,532,000
Construction	413,000		186,000		224,000		—		823,000
Other	129,000		624,000		752,000		—		1,505,000
Municipal	—		—		15,000		—		15,000
Residential
Term	519,000		297,000		369,000		—		1,185,000
Construction	—		9,000		11,000		—		20,000
Home equity line of credit	396,000		376,000		288,000		—		1,060,000
Consumer	—		346,000		196,000		—		542,000
Unallocated	—		—		—		1,662,000		1,662,000
	$	1,803,000	$	3,282,000	$	3,597,000	$	1,662,000	$	10,344,000



As of March 31, 2014	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	$	1,019,000	$	1,707,000	$	1,774,000	$	—	$	4,500,000
Construction	276,000		154,000		160,000		—		590,000
Other	834,000		690,000		717,000		—		2,241,000
Municipal	—		—		15,000		—		15,000
Residential
Term	574,000		303,000		355,000		—		1,232,000
Construction	—		10,000		12,000		—		22,000
Home equity line of credit	83,000		343,000		282,000		—		708,000
Consumer	—		323,000		194,000		—		517,000
Unallocated	—		—		—		1,830,000		1,830,000
	$	2,786,000	$	3,530,000	$	3,509,000	$	1,830,000	$	11,655,000

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 0.41% and 0.39% of related loans as of March 31, 2015 and December 31, 2014, respectively. The qualitative portion increased $208,000 between December 31, 2014 and March 31, 2015 due to an increase in loans outstanding.

The unallocated component of the allowance totaled $1,841,000 at March 31, 2015, or 18.1% of the total reserve. This compares to $1,662,000 or 16.1% as of December 31, 2014. The increase in the unallocated portion is due to increased loan

Page 21

demand in comparison to previous years. Management feels the increase in the unallocated portion is directionally consistent with this change in demand.

The allowance for loan losses as a percent of total loans stood at 1.09% as of March 31, 2015. This compares to 1.13% of total loans as of December 31, 2014 and 1.34% of total loans as of March 31, 2014.

Construction loans, both commercial and residential, comprise a small portion of the portfolio, and at 34.1% of capital are well under the regulatory guidance of 100.0% of capital at March 31, 2015. Construction loans and non-owner-occupied commercial real estate loans are at 97.3% of total capital, well under regulatory guidance of 300.0% of capital at March 31, 2015.

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 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.

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 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

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, 2014:



	Commercial Real Estate		Commercial Construction		Commercial Other		Municipal Loans		All Risk- Rated Loans
1 Strong	$	12,000	$	—	$	330,000	$	—	$	342,000
2 Above Average	12,668,000		771,000		7,210,000		18,789,000		39,438,000
3 Satisfactory	50,275,000		1,983,000		24,232,000		1,635,000		78,125,000
4 Average	108,719,000		23,345,000		44,895,000		—		176,959,000
5 Watch	36,974,000		1,567,000		18,171,000		—		56,712,000
6 OAEM	9,846,000		2,519,000		1,970,000		—		14,335,000
7 Substandard	23,817,000		747,000		7,723,000		—		32,287,000
8 Doubtful	—		—		—		—		—
Total	$	242,311,000	$	30,932,000	$	104,531,000	$	20,424,000	$	398,198,000

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, 2014:



	Commercial Real Estate		Commercial Construction		Commercial Other		Municipal Loans		All Risk- Rated Loans
1 Strong	$	15,000	$	—	$	261,000	$	—	$	276,000
2 Above Average	9,287,000		773,000		7,458,000		15,926,000		33,444,000
3 Satisfactory	44,918,000		1,080,000		16,864,000		1,864,000		64,726,000
4 Average	102,361,000		16,388,000		46,447,000		—		165,196,000
5 Watch	33,079,000		—		10,828,000		—		43,907,000
6 OAEM	26,951,000		2,668,000		3,883,000		—		33,502,000
7 Substandard	23,576,000		777,000		11,495,000		—		35,848,000
8 Doubtful	—		—		40,000		—		40,000
Total	$	240,187,000	$	21,686,000	$	97,276,000	$	17,790,000	$	376,939,000

Page 23

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, 2015.

Page 24

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

Page 25

The following table presents allowance for loan losses activity by class for the year-ended December 31, 2014 and allowance for loan loss balances by class and related loan balances by class as of December 31, 2014:



	Commercial								Municipal		Residential					Home Equity Line of Credit		Consumer		Unallocated			Total
	Real Estate			Construction		Other					Term		Construction
For the year ended December 31, 2014
Beginning balance	$	4,602,000		$	575,000	$	2,276,000		$	15,000	$	1,099,000	$	21,000		$	675,000	$	573,000	$	1,678,000		$	11,514,000
Charge offs	1,205,000			—		989,000			—		699,000		—			153,000		449,000		—			3,495,000
Recoveries	144,000			—		758,000			—		36,000		25,000			16,000		196,000		—			1,175,000
Provision (credit)	(9,000		)	248,000		(540,000		)	—		749,000		(26,000		)	522,000		222,000		(16,000		)	1,150,000
Ending 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
Allowance for loan losses as of December 31, 2014
Ending balance specifically evaluated for impairment	$	346,000		$	413,000	$	129,000		$	—	$	519,000	$	—		$	396,000	$	—	$	—		$	1,803,000
Ending balance collectively evaluated for impairment	$	3,186,000		$	410,000	$	1,376,000		$	15,000	$	666,000	$	20,000		$	664,000	$	542,000	$	1,662,000		$	8,541,000
Related loan balances as of December 31, 2014
Ending balance	$	242,311,000		$	30,932,000	$	104,531,000		$	20,424,000	$	384,032,000	$	12,160,000		$	103,521,000	$	19,653,000	$	—		$	917,564,000
Ending balance specifically evaluated for impairment	$	13,304,000		$	1,380,000	$	2,942,000		$	—	$	16,123,000	$	—		$	2,087,000	$	26,000	$	—		$	35,862,000
Ending balance collectively evaluated for impairment	$	229,007,000		$	29,552,000	$	101,589,000		$	20,424,000	$	367,909,000	$	12,160,000		$	101,434,000	$	19,627,000	$	—		$	881,702,000

Page 26

The following table presents allowance for loan losses activity by class for the three months ended March 31, 2014, and allowance for loan loss balances by class and related loan balances by class as of March 31, 2014:



	Commercial							Municipal		Residential				Home Equity Line of Credit		Consumer			Unallocated		Total
	Real Estate			Construction		Other				Term		Construction
For the three months ended March 31, 2014
Beginning balance	$	4,602,000		$	575,000	$	2,276,000	$	15,000	$	1,099,000	$	21,000	$	675,000	$	573,000		$	1,678,000	$	11,514,000
Charge offs	20,000			—		174,000		—		119,000		—		12,000		70,000			—		395,000
Recoveries	1,000			—		64,000		—		4,000		—		1,000		66,000			—		136,000
Provision (credit)	(83,000		)	15,000		75,000		—		248,000		1,000		44,000		(52,000		)	152,000		400,000
Ending balance	$	4,500,000		$	590,000	$	2,241,000	$	15,000	$	1,232,000	$	22,000	$	708,000	$	517,000		$	1,830,000	$	11,655,000
Allowance for loan losses as of March 31, 2014
Ending balance specifically evaluated for impairment	$	1,019,000		$	276,000	$	834,000	$	—	$	574,000	$	—	$	83,000	$	—		$	—	$	2,786,000
Ending balance collectively evaluated for impairment	$	3,481,000		$	314,000	$	1,407,000	$	15,000	$	658,000	$	22,000	$	625,000	$	517,000		$	1,830,000	$	8,869,000
Related loan balances as of March 31, 2014
Ending balance	$	240,187,000		$	21,686,000	$	97,276,000	$	17,790,000	$	372,479,000	$	12,360,000	$	92,202,000	$	14,934,000		$	—	$	868,914,000
Ending balance specifically evaluated for impairment	$	15,260,000		$	1,492,000	$	5,258,000	$	—	$	16,924,000	$	—	$	1,653,000	$	—		$	—	$	40,587,000
Ending balance collectively evaluated for impairment	$	224,927,000		$	20,194,000	$	92,018,000	$	17,790,000	$	355,555,000	$	12,360,000	$	90,549,000	$	14,934,000		$	—	$	828,327,000

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 27

As of March 31, 2015, 86,336 shares of restricted stock had been granted under the 2010 Plan, of which 66,644 shares remain restricted as of March 31, 2015 as detailed in the following table:



Year Granted	Vesting Term (In Years)	Shares	Remaining Term (In Years)
2011	5.0	5,500	0.9
2012	4.0	2,704	0.9
2012	5.0	7,996	1.9
2013	3.0	3,808	0.8
2013	5.0	14,776	2.8
2014	2.0	7,786	0.9
2014	5.0	10,422	3.9
2015	1.0	2,156	0.8
2015	5.0	11,496	4.8
		66,644	2.6

The compensation cost related to these restricted stock grants is $1,079,000 and will be recognized over the vesting terms of each grant. In the three months ended March 31, 2015, $74,000 of expense was recognized for these restricted shares, leaving $567,000 in unrecognized expense as of March 31, 2015. In the three months ended March 31, 2014, $102,000 of expense was recognized for restricted shares, leaving $741,000 in unrecognized expense as of March 31, 2014.

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.

The Company applies the fair value recognition provisions of the Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") Topic 718 "Compensation – Stock Compensation", to stock-based employee compensation. As of March 31, 2015, all outstanding options were fully vested and all compensation cost for options had been recognized. A summary of the status of outstanding stock options as of March 31, 2015 and changes during the three months then ended, is presented below.



	Number of Shares	Weighted Average Exercise Price		Weighted Average Remaining Contractual Term (In years)	Aggregate Intrinsic Value (In thousands)
Outstanding at December 31, 2014	42,000	$	18.00
Granted in 2015	—	—			—
Exercised in 2015	—	—			—
Expired unexercised in 2015	42,000	18.00			—
Outstanding at March 31, 2015	—	$	—	—	—
Exercisable at March 31, 2015	—	$	—	—	—

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, having a liquidation preference of $1,000 per share, to the U.S. Treasury ("Treasury') under the Capital Purchase Program ("the CPP Shares"). The CPP Shares called for cumulative dividends at a rate of 5.0% per year for the first five years, and at a rate of 9.0% per year in following years, payable quarterly in arrears on February 15, May 15, August 15 and November 15 of each year.

On August 24, 2011, the Company repurchased $12,500,000 of the CPP Shares. Almost all of the repayment was made from retained earnings accumulated since the preferred stock was issued in 2009. On March 27, 2013, the Company repurchased $2,500,000 of the CPP Shares with funds from its operating account. On May 8, 2013, the Company repurchased

Page 28

the remaining $10,000,000 CPP Shares using proceeds from the Company's common stock offering in the first quarter of 2013. All the repurchase transactions were approved by the Federal Reserve Bank of Boston, the Company's primary regulator.

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 and the Company has filed a registration statement with the Securities and Exchange Commission to allow for possible resale of such securities.

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. Treasury will not vote any shares of common stock it receives upon exercise of the Warrants, but that restriction would not apply to third parties to whom Treasury transferred the Warrants. The proceeds from the sale of the CPP Shares were allocated between the CPP Shares and Warrants based on their relative fair values on the issue date. The fair value of the Warrants was determined using the Black-Scholes model which includes the following assumptions: common stock price of $16.60 per share, dividend yield of 4.70%, stock price volatility of 24.43%, and a risk-free interest rate of 2.01%. The discount on the CPP Shares was based on the value that was allocated to the Warrants upon issuance, and has been accreted back to the value of the CPP Shares over a five-year period (the expected life of the shares upon issuance) on a straight-line basis. The Warrants were unchanged as a result of the CPP Shares repurchase transactions and remain outstanding.

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 $110,000 and $103,000 for the three months ended March 31, 2015 and 2014, respectively.

Note 7 – Earnings Per Share

The following table sets forth the computation of basic and diluted earnings per share (EPS) for the three months ended March 31, 2015 and 2014:



	Income (Numerator)		Shares (Denominator)	Per-Share Amount
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			66,430
Diluted EPS: Income available to common shareholders plus assumed conversions	$	4,175,000	10,731,489	$	0.39
For the three months ended March 31, 2014
Net income as reported	$	3,428,000
Basic EPS: Income available to common shareholders	3,428,000		10,627,214	$	0.32
Effect of dilutive securities: restricted stock			60,911
Diluted EPS: Income available to common shareholders plus assumed conversions	$	3,428,000	10,688,125	$	0.32

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.

Page 29

The following table presents the number of options and warrants outstanding as of March 31, 2015 and 2014 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, 2015
Incentive stock options	—	—	—
Warrants issued to Treasury	225,904	225,904	—
Total dilutive securities	225,904	225,904	—
For the three months ended March 31, 2014
Incentive stock options	42,000	—	42,000
Warrants issued to Treasury	225,904	—	225,904
Total dilutive securities	267,904	—	267,904

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 2014. The amount for 2015 has not been established. The expense related to the 401(k) plan was $121,000 and $116,000 for the three months ended March 31, 2015 and 2014, respectively.

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 $78,000 for the three months ended March 31, 2015 and $94,000 for the same period in 2014. As of March 31, 2015, the associated accrued liability included in other liabilities in the balance sheet was $3,031,000 compared to $2,999,000 and $2,413,000 at December 31, 2014 and March 31, 2014, 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:

Page 30



	At or for the three months ended March 31,
	2015			2014
Change in benefit obligation
Benefit obligation at beginning of year	$	1,928,000		$	1,479,000
Service cost	—			5,000
Interest cost	18,000			22,000
Benefits paid	(26,000		)	(26,000		)
Benefit obligation at end of period	$	1,920,000		$	1,480,000
Funded status
Benefit obligation at end of period	$	(1,920,000	)	$	(1,480,000	)
Unamortized (gain) loss	192,000			(289,000		)
Accrued benefit cost at end of period	$	(1,728,000	)	$	(1,769,000	)

The following table sets forth the net periodic pension cost:



	For the three months ended March 31,
	2015		2014
Components of net periodic benefit cost
Service cost	$	—	$	5,000
Interest cost	18,000		22,000
Net periodic benefit cost	$	18,000	$	27,000

Amounts not yet reflected in net periodic benefit cost and included in accumulated other comprehensive income (loss) are as follows:



	March 31, 2015			December 31, 2014			March 31, 2014
Unamortized net actuarial gain (loss)	$	(192,000	)	$	(192,000	)	$	289,000
Deferred tax (expense) benefit at 35%	67,000			67,000			(101,000		)
Net unrecognized postretirement benefits included in accumulated other comprehensive income (loss)	$	(125,000	)	$	(125,000	)	$	188,000

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 the second quarter of 2015 are $30,000 and the expected benefit payments for all of 2015 are $120,000. Plan expense for 2015 is estimated to be $80,000. 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.

Page 31

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, 2015 and 2014.



	For the three months ended March 31,
	2015			2014
Balance at beginning of period	$	2,522,000		$	(6,591,000	)
Unrealized gains arising during the period	1,483,000			7,457,000
Reclassification of realized gains during the period	(1,395,000		)	(36,000		)
Related deferred taxes	(31,000		)	(2,597,000		)
Net change	57,000			4,824,000
Balance at end of period	$	2,579,000		$	(1,767,000	)

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, 2015 and 2014.



	For the three months ended March 31,
	2015			2014
Balance at beginning of period	$	(48,000	)	$	—
Net unrealized losses transferred during the period	—			—
Amortization of net unrealized losses	(14,000		)	—
Related deferred taxes	(5,000		)	—
Net change	(19,000		)	—
Balance at end of period	$	(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, 2015 and 2014.



	For the three months ended March 31,
	2015			2014
Unrecognized postretirement benefits at beginning of period	$	(125,000	)	$	188,000
Amortization of unrecognized transition obligation	—			—
Change in unamortized net actuarial gain (loss)	—			—
Related deferred taxes	—			—
Unrecognized postretirement benefits at end of period	$	(125,000	)	$	188,000

Note 10 - Acquisitions and Intangible Assets

On October 26, 2012, the Bank completed the purchase of a branch at 63 Union Street in Rockland, Maine, from Camden National Bank that was formerly operated by Bank of America. As part of the transaction, the Bank acquired approximately $32,300,000 in deposits as well as a small volume of loans.

The purchase premium of $2,553,000 was allocated to assets acquired and liabilities assumed based on estimates of fair value at the date of acquisition. The fair value of the deposit accounts assumed was compared to the carrying amounts received

Page 32

and the difference of $432,000 was recorded as core deposit intangible. The core deposit intangible is subject to amortization over the estimated ten-year average life of the acquired core deposit base and will be evaluated for impairment periodically. The amortization expense is included in noninterest expense in the consolidated statements of income and comprehensive income and is deductible for tax purposes.

The excess of the purchase price over the fair value of the assets acquired, liabilities assumed, and the amount allocated for core deposit intangible totaled $2,121,000 and was recorded as goodwill. The goodwill is not amortizable for GAAP but is amortizable for tax purposes.

On January 14, 2005, the Company acquired FNB Bankshares (“FNB”) of Bar Harbor, Maine, and its subsidiary, The First National Bank of Bar Harbor. The total value of the transaction was $47,955,000, and all of the voting equity interest of FNB was acquired in the transaction. The transaction was accounted for as a purchase and the excess of purchase price over the fair value of net identifiable assets acquired equaled $27,559,000 and was recorded as goodwill, none of which was deductible for tax purposes. The portion of the purchase price related to the core deposit intangible is being amortized over its expected economic life.

Goodwill is evaluated annually for possible impairment under the provisions of FASB ASC Topic 350, “Intangibles – Goodwill and Other”. As of December 31, 2014, in accordance with Topic 350, the Company completed its annual review of goodwill and determined there has been no impairment. The Bank also carries $125,000 in goodwill for a de minimus transaction in 2001.

As of December 31, 2014, the amortization expense related to the core deposit intangible, absent any future impairment, is expected to be as follows:



2015	$	57,000
2016	43,000
2017	43,000
2018	43,000
2019	43,000
Thereafter	131,000
Total	$	360,000

Note 11 – Mortgage Servicing Rights

FASB ASC Topic 860 "Transfers and Servicing" requires all separately recognized servicing assets and servicing liabilities to be initially measured at fair value, if practicable. The Company's servicing assets and servicing liabilities are reported using the amortization method and carried at the lower of amortized cost or fair value by strata. In evaluating the carrying values of mortgage servicing rights, the Company obtains third party valuations based on loan level data including note rate, type and term of the underlying loans. The model utilizes several assumptions, the most significant of which is loan prepayments, calculated using a three-month 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, 2015, the prepayment assumption using the PSA model was 214, which translates into an anticipated prepayment rate of 12.83%. The discount rate is the quarterly average 10 year U.S. Treasury plus 4.88%. 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, 2015 and 2014, servicing rights capitalized totaled $64,000 and $81,000, respectively. Servicing rights amortized for the three months ended March 31, 2015 and 2014, were $104,000 and $114,000, respectively. The fair value of servicing rights was $1,746,000, $2,088,000 and $2,114,000 at March 31, 2015, December 31, 2014 and March 31, 2014, respectively. The Bank serviced loans for others totaling $214,537,000, $214,086,000 and $211,725,000 at March 31, 2015, December 31, 2014, and March 31, 2014, respectively. Mortgage servicing rights are included in other assets and detailed in the following table:



	March 31, 2015			December 31, 2014			March 31, 2014
Mortgage servicing rights	$	6,103,000		$	6,039,000		$	7,240,000
Accumulated amortization	(5,053,000		)	(4,949,000		)	(6,098,000		)
Impairment reserve	(47,000		)	(4,000		)	(13,000		)
	$	1,003,000		$	1,086,000		$	1,129,000

Page 33

Note 12 – Income Taxes

FASB ASC Topic 740 "Income Taxes" defines the criteria that an individual tax position must satisfy for some or all of the benefits of that position to be recognized in a company's financial statements. Topic 740 prescribes a recognition threshold of more-likely-than-not, and a measurement attribute for all tax positions taken or expected to be taken on a tax return, in order for those tax positions to be recognized in the financial statements. The Company is currently open to audit under the statute of limitations by the IRS for the years ended December 31, 2012 through 2014.

Note 13 - Certificates of Deposit

The following table represents the breakdown of certificates of deposit at March 31, 2015 and 2014, and at December 31, 2014:



	March 31, 2015		December 31, 2014		March 31, 2014
Certificates of deposit < $100,000	$	137,166,000	$	184,471,000	$	230,762,000
Certificates $100,000 to $250,000	210,657,000		221,892,000		278,185,000
Certificates $250,000 and over	50,334,000		41,138,000		46,027,000
	$	398,157,000	$	447,501,000	$	554,974,000

Note 14 – 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.

Note 15 – Fair Value

Certain assets and liabilities are recorded at fair value to provide additional insight into the Company's quality of earnings. Some of these assets and liabilities are measured on a recurring basis while others are measured on a nonrecurring basis, with the determination based upon applicable existing accounting pronouncements. For example, securities available for sale are recorded at fair value on a recurring basis. Other assets, such as, other real estate owned and impaired loans, are recorded at fair value on a nonrecurring basis using the lower of cost or market methodology to determine impairment of individual assets. The Company groups assets and liabilities which are recorded at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value. A financial instrument's level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement (with level 1 considered highest and level 3 considered lowest). A brief description of each level follows.

Level 1 - Valuation is based upon quoted prices for identical instruments in active markets.

Level 2 - Valuation is based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market.

Level 3 - Valuation is generated from model-based techniques that use at least one significant assumption not observable in the market. These unobservable assumptions reflect estimates that market participants would use in pricing the asset or liability. Valuation includes use of discounted cash flow models and similar techniques.

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

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.

Page 34

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 or partial charge off results in a fair value measure as Level 2. All other impaired loans are classified as Level 3.

Other Real Estate Owned

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

Mortgage Servicing Rights

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

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.

Page 35

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, 2015, December 31, 2014 and March 31, 2014.



	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



	At December 31, 2014
	Level 1		Level 2		Level 3		Total
Securities available for sale
Mortgage-backed securities	$	—	$	151,855,000	$	—	$	151,855,000
State and political subdivisions	—		30,855,000		—		30,855,000
Other equity securities	—		2,551,000		—		2,551,000
Total assets	$	—	$	185,261,000	$	—	$	185,261,000



	At March 31, 2014
	Level 1		Level 2		Level 3		Total
Securities available for sale
Mortgage-backed securities	$	—	$	172,115,000	$	—	$	172,115,000
State and political subdivisions	—		131,315,000		—		131,315,000
Other equity securities	—		2,270,000		—		2,270,000
Total assets	$	—	$	305,700,000	$	—	$	305,700,000

Page 36

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 $387,000, $654,000 and $215,000 at March 31, 2015, December 31, 2014, and March 31, 2014, 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 $799,000, $1,074,000 and $1,762,000 at March 31, 2015, December 31, 2014, and March 31, 2014, respectively.



	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



	At December 31, 2014
	Level 1		Level 2		Level 3		Total
Other real estate owned	$	—	$	3,785,000	$	—	$	3,785,000
Impaired loans	—		1,909,000		—		1,909,000
Total assets	$	—	$	5,694,000	$	—	$	5,694,000



	At March 31, 2014
	Level 1		Level 2		Level 3		Total
Other real estate owned	$	—	$	4,934,000	$	—	$	4,934,000
Impaired loans	—		2,327,000		—		2,327,000
Total assets	$	—	$	7,261,000	$	—	$	7,261,000

Page 37

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, 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		—

Page 38

The carrying amounts and estimated fair values for financial instruments as of December 31, 2014 were as follows:



	Carrying value		Estimated fair value		Level 1		Level 2		Level 3
Financial assets
Cash and cash equivalents	$	13,057,000	$	13,057,000	$	13,057,000	$	—	$	—
Interest bearing deposits in other banks	3,559,000		3,559,000		3,559,000		—		—
Securities available for sale	185,261,000		185,261,000		—		185,261,000		—
Securities to be held to maturity	275,919,000		279,704,000		—		279,704,000		—
Restricted equity securities	13,912,000		13,912,000		—		13,912,000		—
Loans (net of allowance for loan losses)
Commercial
Real estate	238,104,000		236,368,000		—		431,000		235,937,000
Construction	29,951,000		29,733,000		—		—		29,733,000
Other	102,738,000		102,858,000		—		—		102,858,000
Municipal	20,406,000		20,833,000		—		—		20,833,000
Residential
Term	382,620,000		389,200,000		—		990,000		388,210,000
Construction	12,136,000		12,123,000		—		—		12,123,000
Home equity line of credit	102,258,000		101,733,000		—		488,000		101,245,000
Consumer	19,007,000		19,207,000		—		—		19,207,000
Total loans	907,220,000		912,055,000		—		1,909,000		910,146,000
Mortgage servicing rights	1,086,000		2,088,000		—		2,088,000		—
Accrued interest receivable	4,748,000		4,748,000		—		4,748,000		—
Financial liabilities
Demand deposits	$	113,133,000	$	109,973,000	$	—	$	109,973,000	$	—
NOW deposits	199,977,000		186,490,000		—		186,490,000		—
Money market deposits	98,607,000		83,837,000		—		83,837,000		—
Savings deposits	165,601,000		146,936,000		—		146,936,000		—
Local certificates of deposit	205,072,000		205,360,000		—		205,360,000		—
National certificates of deposit	242,429,000		242,824,000		—		242,824,000		—
Total deposits	1,024,819,000		975,420,000		—		975,420,000		—
Repurchase agreements	74,725,000		70,783,000		—		70,783,000		—
Federal Home Loan Bank advances	205,191,000		208,259,000		—		208,259,000		—
Total borrowed funds	279,916,000		279,042,000		—		279,042,000		—
Accrued interest payable	521,000		521,000		—		521,000		—

Page 39

The carrying amount and estimated fair values for financial instruments as of March 31, 2014 were as follows:



	Carrying value		Estimated fair value		Level 1		Level 2		Level 3
Financial assets
Cash and cash equivalents	$	13,894,000	$	13,894,000	$	13,894,000	$	—	$	—
Interest bearing deposits in other banks	2,935,000		2,935,000		2,935,000		—		—
Securities available for sale	305,700,000		305,700,000		—		305,700,000		—
Securities to be held to maturity	182,853,000		176,562,000		—		176,562,000		—
Restricted equity securities	13,912,000		13,912,000		—		13,912,000		—
Loans held for sale	56,000		56,000		—		56,000		—
Loans (net of allowance for loan losses)
Commercial
Real estate	234,848,000		233,305,000		—		672,000		232,633,000
Construction	20,986,000		20,848,000		—		—		20,848,000
Other	94,618,000		94,888,000		—		199,000		94,689,000
Municipal	17,772,000		18,089,000		—		—		18,089,000
Residential
Term	371,018,000		375,802,000		—		1,397,000		374,405,000
Construction	12,334,000		12,312,000		—		—		12,312,000
Home equity line of credit	91,362,000		91,075,000		—		59,000		91,016,000
Consumer	14,321,000		14,650,000		—		—		14,650,000
Total loans	857,259,000		860,969,000		—		2,327,000		858,642,000
Mortgage servicing rights	1,129,000		2,114,000		—		2,114,000		—
Accrued interest receivable	5,962,000		5,962,000		—		5,962,000		—
Financial liabilities
Demand deposits	$	94,260,000	$	87,904,000	$	—	$	87,904,000	$	—
NOW deposits	158,278,000		140,824,000		—		140,824,000		—
Money market deposits	89,382,000		72,560,000		—		72,560,000		—
Savings deposits	149,076,000		126,637,000		—		126,637,000		—
Local certificates of deposit	224,552,000		226,091,000		—		226,091,000		—
National certificates of deposit	330,422,000		332,069,000		—		332,069,000		—
Total deposits	1,045,970,000		986,085,000		—		986,085,000		—
Repurchase agreements	83,372,000		83,372,000		—		83,372,000		—
Federal Home Loan Bank advances	170,147,000		174,646,000		—		174,646,000		—
Total borrowed funds	253,519,000		258,018,000		—		258,018,000		—
Accrued interest payable	607,000		607,000		—		607,000		—

Note 16 – Impact of Recently Issued Accounting Standards

In January 2014, the FASB issued Accounting Standards Update (“ASU”) No. 2014-01, Accounting for Investments in Qualified Affordable Housing Projects. The amendments in this Update permit entities to make accounting policy elections to account for their investments in qualified affordable housing projects using the proportional amortization method if certain conditions are met. Under the proportional amortization method, an entity amortizes the initial cost of the investment in proportion to the tax credits and other tax benefits received and recognizes the net investment performance in the income statement as a component of income tax expense (benefit). For those investments in qualified affordable housing projects not accounted for using the proportional amortization method, the ASU requires the investment to be accounted for as an equity method investment or a cost method investment. The amendments in this Update should be applied retrospectively to all periods presented. A reporting entity that uses the effective yield method to account for its investments in qualified affordable housing projects before the date of adoption may continue to apply the effective yield method for those preexisting investments. The amendments in this ASU are effective for annual periods and interim reporting periods within those annual periods, beginning after December 15, 2014. The ASU did not have a material effect on the Company's consolidated financial statements.

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In January 2014, the FASB issued ASU No. 2014-04, Reclassification of Residential Real Estate Collateralized Consumer

Mortgage Loans upon Foreclosure. The amendments in this Update clarify that an in-substance repossession or foreclosure occurs, and a creditor is considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan, upon either (1) the creditor obtaining legal title to the residential real estate property upon completion of a foreclosure or (2) the borrower conveying all interest in the residential real estate property to the creditor to satisfy that loan through completion of a deed in lieu of foreclosure or through a similar legal agreement. Additionally, the amendments require disclosure of both (1) the amount of foreclosed residential real estate property held by the creditor and (2) the recorded investment in consumer mortgage loans collateralized by residential real estate property that are in the process of foreclosure. The amendments in this Update are effective for annual periods and interim reporting periods within those annual periods, beginning after December 15, 2014. The ASU did not have a material effect on the Company's consolidated financial statements.

In May 2014, the FASB Issued ASU No. 2014-09, Revenue from Contracts with Customers. The ASU was issued to clarify the principles for recognizing revenue and to develop a common revenue standard for U.S. GAAP and International Financial Reporting Standards. The ASU is effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. The Company is currently evaluating the potential impact of the ASU on its consolidated financial statements.

In June 2014, the FASB issued ASU No. 2014-11, Transfers and Servicing: Repurchase-to-Maturity Transactions, Repurchase Financings, and Disclosures. The ASU was issued to respond to concerns about current accounting and disclosures for repurchase agreements and similar transactions. The concern was that under current accounting guidance there is an unnecessary distinction between the accounting for different types of repurchase agreements. Under current guidance, the repurchase-to-maturity transactions are accounted for as sales with forward agreements, whereas repurchase agreements that settle before the maturity of the transferred financial asset are accounted for as secured borrowings. The ASU amendments require new disclosures for repurchase agreements, securities lending transactions, and repurchase-to-maturity transactions accounted for as secured borrowings. The ASU is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2014. The ASU did not have a material effect on the Company's consolidated financial statements.

In June 2014, the FASB issued ASU No. 2014-12, Compensation - Stock Compensation: Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period. The ASU was issued because current U.S. GAAP does not contain explicit guidance on how to account for share-based payments when a performance target could be achieved after the requisite service period. The ASU is effective for annual periods and interim periods within those annual periods beginning after December 15, 2015. The ASU will not have a material effect on the Company's consolidated financial statements.

In August 2014, the FASB issued ASU No. 2014-14, Receivables - Troubled Debt Restructurings by Creditors: Classification of Certain Government-Guaranteed Mortgage Loans upon Foreclosure. The ASU was issued to provide specific guidance on how to classify or measure foreclosed mortgage loans that are government guaranteed. The ASU is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2014. The ASU did not have a material effect on the Company's consolidated financial statements.

Page 41

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, 2014, 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 42

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 adjustments 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 2015 and 2014.

Page 43



	For the three months ended March 31,
Dollars in thousands	2015		2014
Net interest income as presented	$	9,702	$	9,711
Effect of tax-exempt income	784		921
Net interest income, tax equivalent	$	10,486	$	10,632

The Company presents its efficiency ratio using non-GAAP information. 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	2015			2014
Non-interest expense, as presented	$	7,265		$	7,252
Net interest income, as presented	9,702			9,711
Effect of tax-exempt income	784			921
Non-interest income, as presented	3,658			2,332
Effect of non-interest tax-exempt income	45			45
Net securities gains	(1,395		)	(36		)
Adjusted net interest income plus non-interest income	$	12,794		$	12,973
Non-GAAP efficiency ratio	56.79		%	55.90		%
GAAP efficiency ratio	54.38		%	60.22		%

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	2015			2014
Average shareholders' equity as presented	$	164,142		$	151,217
Less intangible assets	(30,151		)	(30,461		)
Average tangible shareholders' common equity	$	133,991		$	120,756

Executive Summary

Net income for the three months ended March 31, 2015 was $4.2 million, up $747,000 or 21.8% from the same period in 2014. Earnings per common share on a fully diluted basis were $0.39 for the three months ended March 31, 2015, up $0.07 or 21.9% from the $0.32 posted for the same period in 2014.

This was an excellent quarter for The First Bancorp, Inc. Net income was the best quarterly income reported in the Company's history, $67,000 or 1.6% above the previous highest set in the third quarter of 2014. Strong operating results were driven by two factors: good loan growth and controlled operating expenses. In addition, the Board of Directors voted to maintain the quarterly dividend in March at $0.21 per share. Net interest income on a tax-equivalent basis was down $146,000 or 1.4% in the three months ended March 31, 2015 compared to the same period in 2014. Lower levels of earning assets were responsible for $131,000 of the decrease and $15,000 resulted from a the Company's net interest margin decreasing from 3.13% for the three months ended March 31, 2014 to 3.10% for same period in 2015.

Page 44

Non-interest income for the three months ended March 31, 2015 was $1.3 million or 56.9% higher than in the three months ended March 31, 2014. This was attributable to an increase in net securities gains.

Credit quality continues to show significant improvement. Non-performing assets stood at 0.91% of total assets as of March 31, 2015 - the lowest level seen since the third quarter of 2008, well below the 1.30% of total assets as of March 31, 2014 and down from 0.97% as of December 31, 2014. Total past-due loans were 1.27% of total loans as of March 31, 2015, compared to 1.29% of total loans as of December 31, 2014, and 1.48% as of March 31, 2014.

The provision for loan losses for the first three months of 2015 was $500,000, $100,000 or 25.0% higher than in the same period in 2014. Net loan chargeoffs for the three months ended March 31, 2015 were $648,000 or 0.28% of average loans on an annualized basis. This was up $389,000 from net chargeoffs of $259,000 or 0.12% of average loans on an annualized basis for the three months ended March 31, 2014. The allowance for loan losses decreased $148,000 between December 31, 2014 and March 31, 2015, and is 1.09% of loans outstanding as of March 31, 2015, down from 1.13% at December 31, 2014 and from 1.34% a year ago.

Total assets have decreased $23.3 million or 1.6% year-to-date. The loan portfolio increased $21.6 million in the three months ended March 31, 2015 and $70.3 million from a year ago. The investment portfolio has decreased $42.4 million or 8.9% year-to-date and $69.8 million or 13.9% from a year ago. On the liability side of the balance sheet, low-cost deposits have decreased $11.3 million or 2.4% year-to-date and increased $65.8 million or 16.4% over the past year. The year-to-date decrease is in line with our normal seasonal fluctuation. Local certificates of deposit (CDs) decreased $25.0 million and wholesale CDs decreased $132.2 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 16.46%, well above the well-capitalized threshold of 10.5% set by the Federal Deposit Insurance Corporation.

The Company's operating ratios remain good, with a return on average tangible common equity of 12.63% for the three months ended March 31, 2015 compared to 11.51% for the same period in 2014. Based upon December 31, 2014 data, our return on average tangible common equity was in the top 26% of all banks in the UBPR peer group, which had an average return on equity of 9.62%. Our efficiency ratio continues to be an important component in our overall performance and increased slightly to 56.79% for the three months ended March 31, 2015, from 55.90% for the same period in 2014. This ratio remains well below the UBPR peer group average of 66.39% as of December 31, 2014.

Net Interest Income

Total interest income of $12.4 million for the three months ended March 31, 2015, was an decrease of $258,000 or 2.0% compared to total interest income of $12.6 million for the same period of 2014. Total interest expense of $2.7 million for the three months ended March 31, 2015 is a $249,000 or 8.6% decrease from total interest expense of $2.9 million for the three months ended March 31, 2014. As a result, net interest income of $9.7 million for the three months ended March 31, 2015, remained virtually the same as reported for the three months ended March 31, 2014. The Company's net interest margin on a tax-equivalent basis decreased from 3.13% for the three months ended March 31, 2014 to 3.10% for the three months ended March 31, 2015. Tax-exempt interest income amounted to $1.5 million for the three months ended March 31, 2015 and $1.7 million for the same period of 2014.

Page 45

The following tables present the amount of interest earned or paid, as well as the average yield or rate on an annualized basis, for each major category of assets or liabilities for the three months ended March 31, 2015 and 2014. Tax-exempt income is calculated on a tax-equivalent basis, using a 35.0% tax rate in 2015 and 2014.



	For the three months ended
	March 31, 2015				March 31, 2014
Dollars in thousands	Amount of interest		Average Yield/Rate		Amount of interest		Average Yield/Rate
Interest on earning assets
Interest-bearing deposits	$	5	0.26	%	$	2	0.25	%
Investments	4,213		3.89	%	4,876		3.99	%
Loans held for sale	2		2.94	%	3		3.90	%
Loans	8,929		3.92	%	8,663		4.01	%
Total interest income	13,149		3.89	%	13,544		3.99	%
Interest expense
Deposits	1,443		0.67	%	1,825		0.78	%
Other borrowings	1,220		1.65	%	1,087		1.72	%
Total interest expense	2,663		0.92	%	2,912		0.98	%
Net interest income	$	10,486			$	10,632
Interest rate spread			2.97	%			3.01	%
Net interest margin			3.10	%			3.13	%

The following tables present changes in interest income and expense attributable to changes in interest rates and volume for interest-earning assets and liabilities for the three months ended March 31, 2015 compared to 2014. Tax-exempt income is calculated on a tax-equivalent basis, using a 35.0% tax rate in 2015 and 2014.



For the three months ended March 31, 2015 compared to 2014
Dollars in thousands	Volume			Rate			Rate/Volume¹			Total
Interest on earning assets
Interest-bearing deposits	$	3		$	—		$	—		$	3
Investment securities	(556		)	(120		)	13			(663		)
Loans held for sale	—			(1		)	—			(1		)
Loans	469			(191		)	(12		)	266
Change in interest income	(84		)	(312		)	1			(395		)
Interest expense
Deposits	(150		)	(252		)	20			(382		)
Other borrowings	186			(45		)	(8		)	133
Change in interest expense	36			(297		)	12			(249		)
Change in net interest income	$	(120	)	$	(15	)	$	(11	)	$	(146	)

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

Page 46

Average Daily Balance Sheets

The following table shows the Company's average daily balance sheets for the three months ended March 31, 2015 and 2014.



	For the three months ended
Dollars in thousands	March 31, 2015			March 31, 2014
Assets
Cash and cash equivalents	$	13,565		$	15,670
Interest-bearing deposits in other banks	7,699			3,224
Securities available for sale	155,125			309,190
Securities to be held to maturity	270,026			172,521
Restricted equity securities, at cost	13,912			13,912
Loans held for sale	276			312
Loans	924,359			876,910
Allowance for loan losses	(10,123		)	(11,641		)
Net loans	914,236			865,269
Accrued interest receivable	4,905			5,229
Premises and equipment	22,490			23,486
Other real estate owned	3,114			4,837
Goodwill	29,805			29,805
Other assets	22,252			26,081
Total Assets	$	1,457,405		$	1,469,536

Liabilities & Shareholders' Equity
Demand deposits	$	104,328		$	96,093
NOW deposits	198,273			150,669
Money market deposits	97,354			86,600
Savings deposits	166,783			150,631
Certificates of deposit	413,364			566,489
Total deposits	980,102			1,050,482
Borrowed funds – short term	167,437			123,372
Borrowed funds – long term	132,082			132,263
Dividends payable	1,051			973
Other liabilities	12,591			11,229
Total Liabilities	1,293,263			1,318,319
Shareholders' Equity:
Common stock	107			106
Additional paid-in capital	59,172			58,460
Retained earnings	102,578			95,895
Net unrealized gain (loss) on securities available-for-sale	2,465			(3,432		)
Net unrealized loss on securities transferred from available for sale to held to maturity	(55		)	—
Net unrealized gain (loss) on postretirement benefit costs	(125		)	188
Total Shareholders' Equity	164,142			151,217
Total Liabilities & Shareholders' Equity	$	1,457,405		$	1,469,536

Page 47

Non-Interest Income

Non-interest income of $3.7 million for the three months ended March 31, 2015, is an increase of $1.3 million compared to the same period in 2014. This was attributable to an increase in net securities gain.

Non-Interest Expense

Non-interest expense of $7.3 million for the three months ended March 31, 2015 is an increase of 0.2% or $13,000 compared to non-interest expense of $7.3 million for the same period in 2014. Lower other credit-related costs - including expenses for collections, foreclosure and foreclosed properties - was a major factor in keeping the increase in non-interest expense to $13,000. The Company's efficiency ratio has increased slightly to 56.79% for the three months ended March 31, 2015 from 55.90% for the same period in 2014.

Income Taxes

Income taxes on operating earnings were $1.4 million for the three months ended March 31, 2015, up $457,000 from the same period in 2014. This is in line with the increase in the Company's level of income before taxes.

Investments

The Company's investment portfolio decreased by $42.4 million or 8.9% between December 31, 2014, and March 31, 2015. As of March 31, 2015, mortgage-backed securities had a carrying value of $180.8 million and a fair value of $182.8 million. Of this total, securities with a fair value of $112.4 million or 61.5% of the mortgage-backed portfolio were issued by the Government National Mortgage Association and securities with a fair value of $70.4 million or 38.5% 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 $67,000 at March 31, 2015. These securities were transferred as a part of the Company's overall investment and balance sheet strategies.

Page 48

The following table sets forth the Company's investment securities at their carrying amounts as of March 31, 2015 and 2014 and December 31, 2014.



Dollars in thousands	March 31, 2015		December 31, 2014		March 31, 2014
Securities available for sale
Mortgage-backed securities	$	127,617	$	151,855	$	172,115
State and political subdivisions	25,598		30,855		131,315
Other equity securities	3,102		2,551		2,270
	$	156,317	$	185,261	$	305,700
Securities to be held to maturity
U.S. government-sponsored agencies	$	82,974	$	92,341	$	92,312
Mortgage-backed securities	53,228		57,003		49,805
State and political subdivisions	125,953		126,275		40,436
Corporate securities	300		300		300
	$	262,455	$	275,919	$	182,853
Restricted equity securities
Federal Home Loan Bank Stock	$	12,875	$	12,875	$	12,875
Federal Reserve Bank Stock	1,037		1,037		1,037
	$	13,912	$	13,912	$	13,912
Total securities	$	432,684	475,092		502,465

Page 49

The following table sets forth yields and contractual maturities of the Company's investment securities as of March 31, 2015. 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	%	5,354		2.43	%
Due after 10 years	—		0.00	%	77,620		3.27	%
Total	—		0.00	%	82,974		3.22	%
Mortgage-Backed Securities
Due in 1 year or less	2,858		2.30	%	535		51.10	%
Due in 1 to 5 years	14,886		2.88	%	7,189		2.65	%
Due in 5 to 10 years	16,624		3.04	%	18,287		2.88	%
Due after 10 years	93,249		2.84	%	27,217		3.57	%
Total	127,617		2.86	%	53,228		3.69	%
State & Political Subdivisions
Due in 1 year or less	—		0.00	%	1,038		6.65	%
Due in 1 to 5 years	345		6.31	%	4,861		6.34	%
Due in 5 to 10 years	1,486		6.09	%	24,257		6.16	%
Due after 10 years	23,767		5.80	%	95,797		5.07	%
Total	25,598		5.82	%	125,953		5.34	%
Corporate Securities
Due in 1 year or less	—		0.00	%	300		1.00	%
Due in 1 to 5 years	—		0.00	%	—		0.00	%
Due in 5 to 10 years	—		0.00	%	—		0.00	%
Due after 10 years	—		0.00	%	—		0.00	%
Total	—		0.00	%	300		1.00	%
Equity Securities	3,102		1.13	%	—		0.00	%
	$	156,317	3.31	%	$	262,455	4.33	%

Impaired Securities

The securities portfolio contains certain securities that the amortized cost of which exceeds fair value, which at March 31, 2015 amounted to $1.4 million, or 0.34% of the amortized cost of the total securities portfolio. At December 31, 2014 this amount was $2.9 million, or 0.63% 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 50

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, 2015, the Company had temporarily impaired securities with a fair value of $80.1 million and unrealized losses of $1.4 million, as identified in the table below. This was down from December 31, 2014 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 $12.6 million as of March 31, 2015, compared with $111.7 million at December 31, 2014. 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, 2015:



	Less than 12 months					12 months or more					Total
Dollars in thousands	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
U.S. government-sponsored agencies	$	36,459	$	(595	)	$	10,903	$	(317	)	$	47,362	$	(912	)
Mortgage-backed securities	20,634		(256		)	65		(2		)	20,699		(258		)
State and political subdivisions	10,390		(201		)	1,641		(42		)	12,031		(243		)
	$	67,483	$	(1,052	)	$	12,609	$	(361	)	$	80,092	$	(1,413	)

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, 2015, there were $912,000 of unrealized losses on these securities compared to $2.1 million unrealized losses as of December 31, 2014. 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, 2015.

Mortgage-backed securities issued by U.S. Government agencies and U.S. Government-sponsored enterprises. As of March 31, 2015, there were $258,000 of unrealized losses on these securities compared with $694,000 at December 31, 2014. 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, 2015 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, 2015. 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, 2015, the total unrealized losses on municipal securities amounted to $243,000, compared with $135,000 at December 31, 2014. 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, 2015, all municipal bond issuers were current on contractually obligated interest and principal payments. The Company attributes the unrealized losses at March 31, 2015 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, 2015. The Company also has the ability and intent to hold these securities until a recovery of their amortized cost, which may be at maturity.

Corporate securities. There were no unrealized losses on corporate securities as of March 31, 2015, or at December 31, 2014. Corporate securities are dependent on the operating performance of the issuers. At March 31, 2015, all corporate bond issuers were current on contractually obligated interest and principal payments.

Page 51

Other equity securities. There were no unrealized losses on other equity securities as of March 31, 2015, compared with $4,000 at December 31, 2014. 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, 2015.

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, 2015 and December 31, 2014, the Bank's investment in FHLB stock totaled $12.9 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, 2015. 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, 2015, the Bank had no loans held for sale. This compares to no loans at December 31, 2014 and $56,000 at March 31, 2014. 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 2015, with total loans at $939.2 million at March 31, 2015, up $21.6 million or 2.4% from total loans of $917.6 million at December 31, 2014. Commercial loans increased $14.4 million or 3.8% between December 31, 2014 and March 31, 2015, municipal loans increased $5.9 million or 28.7%, residential term loans decreased $163,000 and home equity lines of credit increased $579,000 or 0.6%.

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 75% 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 loans, both commercial and residential, comprise a small portion of the portfolio, and at 34.1% 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 97.3% 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 52

The following table summarizes the loan portfolio, by class, at March 31, 2015 and 2014 and December 31, 2014.



Dollars in thousands	March 31, 2015				December 31, 2014				March 31, 2014
Commercial
Real estate	$	242,021	25.8	%	$	242,311	26.4	%	$	240,187	27.7	%
Construction	34,683		3.7	%	30,932		3.4	%	21,686		2.5	%
Other	115,455		12.3	%	104,531		11.4	%	97,276		11.2	%
Municipal	26,277		2.8	%	20,424		2.2	%	17,790		2.0	%
Residential
Term	383,869		40.8	%	384,032		41.9	%	372,479		42.9	%
Construction	13,036		1.4	%	12,160		1.3	%	12,360		1.4	%
Home equity line of credit	104,100		11.1	%	103,521		11.3	%	92,202		10.6	%
Consumer	19,728		2.1	%	19,653		2.1	%	14,934		1.7	%
Total loans	$	939,169	100.0	%	$	917,564	100.0	%	$	868,914	100.0	%

The following table sets forth certain information regarding the contractual maturities of the Bank's loan portfolio as of March 31, 2015.



Dollars in thousands	< 1 Year		1 - 5 Years		5 - 10 Years		> 10 Years		Total
Commercial
Real estate	$	7,426	$	16,935	$	22,706	$	194,954	$	242,021
Construction	1,238		2,515		917		30,013		34,683
Other	8,493		46,413		20,716		39,833		115,455
Municipal	8,678		5,438		6,238		5,923		26,277
Residential
Term	3,723		7,500		16,292		356,354		383,869
Construction	804		620		—		11,612		13,036
Home equity line of credit	570		247		1,609		101,674		104,100
Consumer	6,589		5,166		1,792		6,181		19,728
Total loans	$	37,521	$	84,834	$	70,270	$	746,544	$	939,169

The following table provides a listing of loans by class, between variable and fixed rates as of March 31, 2015.



	Fixed-Rate				Adjustable-Rate				Total
Dollars in thousands	Amount		% of total		Amount		% of total		Amount		% of total
Commercial
Real estate	$	36,281	3.9	%	$	205,740	21.9	%	$	242,021	25.8	%
Construction	885		0.1	%	33,798		3.6	%	34,683		3.7	%
Other	47,534		5.1	%	67,921		7.2	%	115,455		12.3	%
Municipal	24,046		2.6	%	2,231		0.2	%	26,277		2.8	%
Residential
Term	243,133		25.8	%	140,736		15.0	%	383,869		40.8	%
Construction	12,527		1.3	%	509		0.1	%	13,036		1.4	%
Home equity line of credit	1,139		0.1	%	102,961		11.0	%	104,100		11.1	%
Consumer	14,824		1.6	%	4,904		0.5	%	19,728		2.1	%
Total loans	$	380,369	40.5	%	$	558,800	59.5	%	$	939,169	100.0	%

Loan Concentrations

As of March 31, 2015, the Bank did not have any concentration of loans in one particular industry that exceeded 10% of its total loan portfolio.

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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

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credit risk concentrations, including trends in large dollar exposures to related borrowers, industry and geographic concentrations, and economic and environmental factors.

Residential, Home Equity and Consumer

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

Unallocated

The unallocated portion of the allowance is intended to provide for losses that are not identified when establishing the specific

and general portions of the allowance and is based upon Management's evaluation of various conditions that are not directly

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. The increase in the unallocated portion is due to increased loan demand in comparison to previous years. Management feels the increase in the unallocated portion is directionally consistent with this change in demand.

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, 2015, impaired loans with specific reserves totaled $10.8 million and the amount of such reserves was $1.4 million. This compares to impaired loans with specific reserves of $9.5 million at December 31, 2014 and the amount of such reserves was $1.8 million.

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, 2015 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.

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The following table summarizes our allocation of allowance by loan class as of March 31, 2015 and 2014 and December 31, 2014. The percentages are the portion of each loan class to total loans.



Dollars in thousands	March 31, 2015				December 31, 2014				March 31, 2014
Commercial
Real estate	$	3,117	25.8	%	$	3,532	26.4	%	$	4,500	27.7	%
Construction	807		3.7	%	823		3.4	%	590		2.5	%
Other	1,714		12.3	%	1,505		11.4	%	2,241		11.2	%
Municipal	16		2.8	%	15		2.2	%	15		2.0	%
Residential
Term	1,108		40.8	%	1,185		41.9	%	1,232		42.9	%
Construction	23		1.4	%	20		1.3	%	22		1.4	%
Home equity line of credit	1,044		11.1	%	1,060		11.3	%	708		10.6	%
Consumer	526		2.1	%	542		2.1	%	517		1.7	%
Unallocated	1,841		—	%	1,662		—	%	1,830		—	%
Total	$	10,196	100.0	%	$	10,344	100.0	%	$	11,655	100.0	%

The allowance for loan losses totaled $10.2 million at March 31, 2015, compared to $10.3 million as of December 31, 2014 and $11.7 million as of March 31, 2014. Management's ongoing application of methodologies to establish the allowance include an evaluation of impaired loans for specific reserves. These specific reserves decreased $367,000 in the first three months of 2015 from $1.8 million at December 31, 2014 to $1.4 million at March 31, 2015. 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 decreased by $168,000 in the first three months of 2015. This decline was due to a reduction in classified pool balances from December 31, 2014 and a lower level of historical loss averages. The portion of the reserve based on qualitative factors increased by $208,000 in the first three months of 2015 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 $179,000 increase in unallocated reserves in the first three months of 2015 from $1.7 million at December 31, 2014 to $1.8 million at March 31, 2015.

A breakdown of the allowance for loan losses as of March 31, 2015, 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	$	248	$	1,094	$	1,775	$	—	$	3,117
Construction	396		157		254		—		807
Other	347		521		846		—		1,714
Municipal	—		—		16		—		16
Residential
Term	421		298		389		—		1,108
Construction	—		10		13		—		23
Home equity line of credit	24		716		304		—		1,044
Consumer	—		318		208		—		526
Unallocated	—		—		—		1,841		1,841
	$	1,436	$	3,114	$	3,805	$	1,841	$	10,196

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 $500,000 for the first three months of 2015, an increase of $100,000 from the first three months of 2014. Net chargeoffs were $648,000 in the first three months of 2015

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compared to net chargeoffs of $259,000 in the first three months of 2014. Our allowance as a percentage of outstanding loans was 1.09% as of March 31, 2015, down from 1.13% at December 31, 2014, and down from 1.34% a year ago.

The following table summarizes the activities in our allowance for loan losses for the three months ended March 31, 2015 and 2014 and for the year ended December 31, 2014:



Dollars in thousands	March 31, 2015			December 31, 2014			March 31, 2014
Balance at beginning of year	$	10,344		$	11,514		$	11,514
Loans charged off:
Commercial
Real estate	122			1,205			20
Construction	—			—			—
Other	2			989			174
Municipal	—			—			—
Residential
Term	83			699			119
Construction	—			—			—
Home equity line of credit	447			153			12
Consumer	62			449			70
Total	716			3,495			395
Recoveries on loans previously charged off
Commercial
Real estate	—			144			1
Construction	—			—			—
Other	4			758			64
Municipal	—			—			—
Residential
Term	6			36			4
Construction	—			25			—
Home equity line of credit	22			16			1
Consumer	36			196			66
Total	68			1,175			136
Net loans charged off	648			2,320			259
Provision for loan losses	500			1,150			400
Balance at end of period	$	10,196		$	10,344		$	11,655
Ratio of net loans charged off to average loans outstanding¹	0.28		%	0.26		%	0.12		%
Ratio of allowance for loan losses to total loans outstanding	1.09		%	1.13		%	1.34		%

¹ Ratios for both years have been annualized on a 365-day basis.

Management believes the allowance for loan losses is appropriate as of March 31, 2015. 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 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

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(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 1.10% at March 31, 2015 compared to 1.15% at December 31, 2014 and 1.63% at March 31, 2014. The following table shows the distribution of nonperforming loans by class as of March 31, 2015 and 2014 and December 31, 2014:



Dollars in thousands	March 31, 2015		December 31, 2014		March 31, 2014
Commercial
Real estate	$	1,609	$	2,088	$	2,835
Construction	208		208		208
Other	932		935		3,008
Municipal	—		—		—
Residential
Term	6,514		6,421		7,103
Construction	—		—		—
Home equity line of credit	1,039		832		1,017
Consumer	25		26		—
Total nonperforming loans	$	10,327	$	10,510	$	14,171

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, 2015, loans 90 or more days past due and still accruing interest totaled $184,000, compared to $181,000 at December 31, 2014 and $224,000 at March 31, 2014.

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 2015. As of March 31, 2015, we had 90 loans with a value of $26.5 million that have been restructured. This compares to 94 loans with a value of $27.2 million and 101 loans with a value of $28.8 million classified as TDRs as of December 31, 2014 and March 31, 2014, respectively.

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The following table shows the activity in loans classified as TDRs between December 31, 2014 and March 31, 2015:



Balance in Thousands of Dollars	Number of Loans		Aggregate Balance
Total at December 31, 2014	94		$	27,214
Added in 2015	—		—
Removed in 2015	(4	)	(580		)
Repayments in 2015	—		(110		)
Total at March 31, 2015	90		$	26,524

As of March 31, 2015, 74 loans with an aggregate balance of $24.1 million were performing under the modified terms, two loans with an aggregate balance of $416,000 were more than 30 days past due and accruing and 14 loans with an aggregate balance of $2.0 million were on nonaccrual. As a percentage of aggregate outstanding balance, 90.8% were performing under the modified terms, 1.6% were more than 30 days past due and accruing and 7.6% were on nonaccrual. The performance status of all TDRs as of March 31, 2015, 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	$	11,096		$	—		$	735		$	11,831
Construction	1,172			—			—			1,172
Other	1,789			—			—			1,789
Municipal	—			—			—			—
Residential
Term	9,418			416			1,083			10,917
Construction	—			—			—			—
Home equity line of credit	614			—			201			815
Consumer	—			—			—			—
	$	24,089		$	416		$	2,019		$	26,524
Percent of balance	90.8		%	1.6		%	7.6		%	100.0		%
Number of loans	74			2			14			90
Associated specific reserve	$	657		$	—		$	38		$	695

Residential TDRs (including home equity lines of credit) as of March 31, 2015 included 59 loans with an aggregate balance of $11.7 million, and the modifications granted fell into five major categories. Loans totaling $7.1 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 $459,000 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 $1.8 million, with a rate concession typically of 1.0% or less. Loans with an aggregate balance of $2.6 million were involved in bankruptcy. Certain residential TDRs had more than one modification.

Commercial TDRs as of March 31, 2015 were comprised of 31 loans with a balance of $14.8 million. Of this total, 20 loans with an aggregate balance of $10.5 million had an extended period of interest-only payments, deferring the start of principal repayment. Six loans with an aggregate balance of $2.3 million had an extension of term, allowing the borrower to repay over an extended number of years and lowering the monthly payment to a level the borrower can afford. The remaining five loans with an aggregate balance of $2.0 million had several different modifications.

In each case when a loan was modified, Management determined it was in the Bank's best interest to work with the borrower with modified terms rather than to proceed to foreclosure. Once a loan is classified as a TDR, however, 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, 2015, Management is aware of nine loans classified as TDRs that are involved in bankruptcy with an outstanding balance of $1.2 million. There were also 14 loans with an outstanding balance of $2.0 million that were classified as TDRs and on non-accrual status. Four loans with an outstanding balance of $472,000, were in the process of foreclosure.

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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 $34.8 million at March 31, 2015, and have decreased $1.0 million from December 31, 2014. The number of loans decreased by seven from 181 to 174 during the same period. Impaired commercial loans decreased $820,000 between December 31, 2014 and March 31, 2015. The specific allowance for impaired commercial loans increased from $888,000 at December 31, 2014 to $1.0 million as of March 31, 2015, 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, 2014 to March 31, 2015, impaired residential loans increased $225,000 and impaired home equity lines of credit decreased $433,000.

The following table sets forth impaired loans as of March 31, 2015 and 2014 and December 31, 2014:



Dollars in thousands	March 31, 2015		December 31, 2014		March 31, 2014
Commercial
Real estate	$	12,705	$	13,304	$	15,260
Construction	1,380		1,380		1,492
Other	2,721		2,942		5,258
Municipal	—		—		—
Residential
Term	16,348		16,123		16,924
Construction	—		—		—
Home equity line of credit	1,654		2,087		1,653
Consumer	25		26		—
Total	$	34,833	$	35,862	$	40,587

Past Due Loans

The Bank's overall loan delinquency ratio was 1.27% at March 31, 2015 compared to 1.29% at December 31, 2014 and 1.48% at March 31, 2014. Loans 90 days delinquent and accruing increased from $181,000 at December 31, 2014 to $184,000 as of March 31, 2015. The total at March 31, 2015, is made up of four loans, with the largest loan totaling $100,000. We expect to collect all amounts due on these loans, including accrued interest. The following table sets forth loan delinquencies as of March 31, 2015 and 2014 and December 31, 2014:



Dollars in thousands	March 31, 2015			December 31, 2014			March 31, 2014
Commercial
Real estate	$	798		$	860		$	2,362
Construction	229			249			208
Other	994			1,193			1,846
Municipal	—			—			—
Residential
Term	8,243			7,003			6,982
Construction	—			—			—
Home equity line of credit	1,457			2,122			1,336
Consumer	237			436			151
Total	$	11,958		$	11,863		$	12,885
Loans 30-89 days past due to total loans	0.72		%	0.69		%	0.64		%
Loans 90+ days past due and accruing to total loans	0.02		%	0.02		%	0.03		%
Loans 90+ days past due on non-accrual to total loans	0.53		%	0.58		%	0.82		%
Total past due loans to total loans	1.27		%	1.29		%	1.48		%

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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, 2015, there were four potential problem loans with a balance of $277,000 or 0.03% of total loans. This compares to three loans with a balance of $387,000 or 0.04% of total loans at December 31, 2014.

As of March 31, 2015, there were 26 loans in the process of foreclosure with a total balance of $2.8 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 2014, 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, 2015, there were 21 properties owned with a net OREO balance of $2.9 million, net of an allowance for losses of $387,000, compared to December 31, 2014 when there were 28 properties owned with a net OREO balance of $3.8 million, net of an allowance for losses of $654,000 and March 31, 2014 when there were 31 properties owned with a net OREO balance of $4.9 million, net of an allowance for losses of $215,000.

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



Dollars in thousands	March 31, 2015		December 31, 2014		March 31, 2014
Carrying Value
Commercial
Real estate	$	145	$	145	$	145
Construction	151		151		192
Other	785		888		591
Municipal	—		—		—
Residential
Term	2,205		3,255		4,221
Construction	—		—		—
Home equity line of credit	—		—		—
Consumer	—		—		—
Total	$	3,286	$	4,439	$	5,149
Related Allowance
Commercial
Real estate	$	75	$	75	$	—
Construction	17		17		8
Other	29		170		7
Municipal	—		—		—
Residential
Term	266		392		200
Construction	—		—		—
Home equity line of credit	—		—		—
Consumer	—		—		—
Total	$	387	$	654	$	215
Net Value
Commercial
Real estate	$	70	$	70	$	145
Construction	134		134		184
Other	756		718		584
Municipal	—		—		—
Residential
Term	1,939		2,863		4,021
Construction	—		—		—
Home equity line of credit	—		—		—
Consumer	—		—		—
Total	$	2,899	$	3,785	$	4,934

Liquidity Management

As of March 31, 2015, the Bank had primary sources of liquidity of $231.2 million. It is Management's opinion this is sufficient to meet liquidity needs under a broad range of scenarios. The Bank has an additional $294.9 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 67.2% of total average assets in the first three months of 2015. 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.

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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 2015, total deposits decreased by $58.0 million or 5.7% from December 31, 2014 levels. Low-cost deposits (demand, NOW, and savings accounts) decreased by $11.3 million or 2.4% in the first three months of 2015, money market deposits increased $2.7 million or 2.7%, and certificates of deposit decreased $49.3 million or 11.0%. Between March 31, 2014 and March 31, 2015, total deposits decreased by $79.1 million or 7.6%. Low-cost deposits increased by $65.8 million or 16.4%, money market accounts increased $11.9 million or 13.3%, and certificates of deposit decreased $156.8 million or 28.3%. The decrease in low-cost deposits year-to-date is the result of normal seasonal fluctuation. The year-over-year increase in low-cost deposits is due to organic growth throughout our branch network. The majority of the change in certificates of deposit 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, 2015, borrowed funds increased $32.7 million or 11.7% from December 31, 2014. Between March 31, 2014 and March 31, 2015, borrowed funds increased by $59.1 million or 23.3%. This is due to the above mentioned shift in funding between borrowed funds and certificates of deposit.

Shareholders' Equity

Shareholders' equity as of March 31, 2015 was $163.5 million, compared to $161.6 million as of December 31, 2014 and $152.4 million as of March 31, 2014. The Company's earnings in the first three months of 2015, 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 $57,000 from December 31, 2014 and now stands at a $2.6 million.

A cash dividend of $0.21 per share was declared in the first quarter of 2015, equal to the dividend per share paid the last three quarters. The dividend payout ratio, which is calculated by dividing dividends declared per share by diluted earnings per share, was 53.85% for the first three months of 2015 compared to 62.50% for the same period in 2014. 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 2015 is this year's net income plus $12.3 million.

On November 21, 2008, the Company received approval for a $25 million investment in Fixed Rate Cumulative Perpetual Preferred Stock, Series A, by the U.S. Treasury under the Capital Purchase Program ("the CPP Shares"). The Company completed the CPP Shares transaction on January 9, 2009. The CPP Shares called for cumulative dividends at a rate of 5.0% per year for the first five years, and at a rate of 9.0% per year in following years. 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.

On August 24, 2011, the Company repurchased $12.5 million of the CPP Shares. The repurchase transaction was approved by the Federal Reserve Bank of Boston, the Company's primary regulator, as well as the Bank's primary regulator, the Office of

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the Comptroller of the Currency. These approvals were based on the Company's and the Bank's continued strong capital ratios after the repayment, and almost all of the repayment was made from retained earnings accumulated since the preferred stock was issued in 2009. After the repurchase, $12.5 million of CPP Shares remained outstanding.

On March 27, 2013, the Company repurchased $2.5 million of the CPP Shares with funds from its operating account. After the repurchase, $10.0 million of the CPP shares remained outstanding. On March 28, 2013, the Company consummated a fully underwritten offering for 760,771 shares of the Company's common stock, and on May 8, 2013, the Company repurchased the remaining $10.0 million CPP Shares using the proceeds from the Company's common stock offering. The repurchase transaction was approved by the Federal Reserve Bank of Boston, the Company's primary regulator. The warrants issued in conjunction with the CPP Shares for 225,904 shares of Common Stock at an exercise price of $16.60 per share were unchanged as a result of the repurchase transaction and remain outstanding.

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, 2015. The following tables indicate the capital ratios for the Bank and the Company at March 31, 2015 and December 31, 2015.



As of March 31, 2015	Leverage		Tier 1		Common Equity Tier 1		Total Risk-Based
Bank	9.07	%	15.00	%	15.00	%	16.19	%
Company	9.21	%	15.52	%	15.52	%	16.71	%
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, 2014	Leverage		Tier 1		Common Equity Tier 1		Total Risk-Based
Bank	8.77	%	14.87	%	N/A	%	16.09	%
Company	8.88	%	15.06	%	N/A	%	16.27	%
Adequately capitalized ratio	4.00	%	4.00	%	N/A	%	8.00	%
Well capitalized ratio (Bank only)	5.00	%	6.00	%	N/A	%	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, 2015:



Dollars in thousands	Total		Less than 1 year		1-3 years		3-5 years		More than 5 years
Borrowed funds	$	312,576	$	167,437	$	80,000	$	65,000	$	139
Operating leases	594		147		266		119		62
Certificates of deposit	398,157		271,298		57,334		69,525		—
Total	$	711,327	$	438,882	$	137,600	$	134,644	$	201
Total loan commitments and unused lines of credit	$	128,958	$	128,958	$	—	$	—	$	—

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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, 2015 was +8.61% of total assets compared to +0.05% of total assets at December 31, 2014. 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, 2015, 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	$	54,832		$	37,341		$	142,477		$	179,687
Restricted stock, at cost	12,875			—			—			1,037
Loans held for sale	—			—			—			—
Loans	400,637			150,197			295,959			92,376
Other interest-earning assets	—			11,192			—			—
Non-rate-sensitive assets	6,686			—			—			73,536
Total assets	475,030			198,730			438,436			346,636
Interest-bearing deposits	275,440			97,749			126,087			366,610
Borrowed funds	122,437			45,000			145,000			139
Non-rate-sensitive liabilities and equity	1,900			5,700			32,350			240,420
Total liabilities and equity	399,777			148,449			303,437			607,169
Period gap	$	75,253		$	50,281		$	134,999		$	(260,533	)
Percent of total assets	5.16		%	3.45		%	9.25		%	(17.86		)	%
Cumulative gap (current)	$	75,253		$	125,534		$	260,533		$	—
Percent of total assets	5.16		%	8.61		%	17.86		%	—			%

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.

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The Company's most recent simulation model projects net interest income would decrease by approximately 1.24% 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 1.55% 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 2.81% in a falling-rate scenario, and lower than that earned in a stable rate environment by 0.20% 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, 2015 and December 31, 2014 is presented in the following table:



Changes in Net Interest Income	March 31, 2015		December 31, 2014
Year 1
Projected change if rates decrease by 1.0%	-1.24	%	-1.47%
Projected change if rates increase by 2.0%	-1.55	%	-2.95%
Year 2
Projected change if rates decrease by 1.0%	-2.81	%	-3.00%
Projected change if rates increase by 2.0%	-0.20	%	-3.42%

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, 2015, 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, 2015, 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 interest rates will remain stable in the next two-to-four quarters and believes that the current level of interest rate risk is acceptable.

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Item 4: Controls and Procedures

As required by Rule 13a-15 under the Securities Exchange Act of 1934, as of March 31, 2015, 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, 2015 that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting. The Company reviews its disclosure controls and procedures, which may include its internal controls over financial reporting on an ongoing basis, and may from time to time make changes aimed at enhancing their effectiveness and to ensure that the Company's systems evolve with its business.

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Part II – Other Information

Item 1 – Legal Proceedings

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

Item 1A – Risk Factors

There have been no material changes from the risk factors previously disclosed in the Company's Form 10-K for the year ended December 31, 2014.

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

a. None

b. None

c. None

Item 3 – Default Upon Senior Securities

None.

Item 4 – Other Information

A. None.

B. None.

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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 8, 2015

/s/ F. Stephen Ward

F. Stephen Ward

Executive Vice President & Chief Financial Officer

Date: May 8, 2015

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