Edgar Filing: First Bancorp, Inc /ME/

Document

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 September 30, 2016

Commission File Number 0-26589

THE FIRST BANCORP, INC.

(Exact name of Registrant as specified in its charter)



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



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

(207) 563-3195

Registrant's telephone number, including area code

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes [X] No[_]

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site,

if any, every,Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes [X] No[_]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, non-accelerated filer, or a smaller

reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule

12b-2 of the Exchange Act. (Check one):

Large accelerated filer [_] Accelerated filer [X] Non-accelerated filer [_] Smaller reporting company [_]

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).

Yes [_] No [X]

Indicate the number of shares outstanding of each of the registrant's classes of common stock as of November 1, 2016

Common Stock: 10,791,668 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 (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 31
Note 10 - Financial Derivative Instruments	Page 33
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 45
Net Interest Income	Page 46
Average Daily Balance Sheets	Page 49
Non-Interest Income	Page 50
Non-Interest Expense	Page 50
Income Taxes	Page 50
Investments	Page 50
Impaired Securities	Page 52
Federal Home Loan Bank Stock	Page 54
Loans and Loans Held for Sale	Page 54
Credit Risk Management and Allowance for Loan Losses	Page 56
Non-Performing Loans and Troubled Debt Restructured	Page 59
Impaired Loans	Page 62
Past Due Loans	Page 62
Potential Problem Loans and Loans in Process of Foreclosure	Page 62
Other Real Estate Owned	Page 63
Liquidity Management	Page 64
Deposits	Page 65
Borrowed Funds	Page 65



Shareholders' Equity	Page 65
Off-Balance-Sheet Financial Instruments and Contractual Obligations	Page 66
Item 3 – Quantitative and Qualitative Disclosures About Market Risk	Page 68
Market-Risk Management	Page 68
Asset/Liability Management	Page 68
Interest Rate Risk Management	Page 69
Item 4 - Controls and Procedures	Page 69
Part II. Other Information	Page 71
Item 1 – Legal Proceedings	Page 71
Item 1a – Risk Factors	Page 71
Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds	Page 71
Item 3 – Default Upon Senior Securities	Page 71
Item 4 – Other Information	Page 72
Item 5 – Exhibits	Page 73
Signatures	Page 75

Part I. Financial Information

Selected Financial Data (Unaudited)

The First Bancorp, Inc. and Subsidiary



Dollars in thousands,	As of and for the nine months ended September 30,						As of and for the quarters ended September 30,
except for per share amounts	2016			2015			2016			2015
Summary of Operations
Interest Income	$	40,159		$	37,772		$	13,283		$	12,833
Interest Expense	7,950			7,481			2,754			2,322
Net Interest Income	32,209			30,291			10,529			10,511
Provision for Loan Losses	1,125			1,100			375			200
Non-Interest Income	9,439			9,467			3,469			2,975
Non-Interest Expense	21,850			21,952			7,405			7,707
Net Income	13,689			12,437			4,562			4,188
Per Common Share Data
Basic Earnings per Share	$	1.28		$	1.17		$	0.43		$	0.39
Diluted Earnings per Share	1.27			1.16			0.42			0.39
Cash Dividends Declared	0.68			0.65			0.23			0.22
Book Value per Common Share	16.31			15.55			16.31			15.55
Tangible Book Value per Common Share²	13.53			12.75			13.53			12.75
Market Value	23.97			19.10			23.97			19.10
Financial Ratios
Return on Average Equity¹	10.48		%	10.05		%	10.24		%	9.97		%
Return on Average Tangible Common Equity^1,2	12.67		%	12.29		%	12.33		%	12.18		%
Return on Average Assets¹	1.15		%	1.11		%	1.12		%	1.09		%
Average Equity to Average Assets	10.94		%	11.05		%	10.99		%	10.88		%
Average Tangible Equity to Average Assets²	9.06		%	9.03		%	9.12		%	8.92		%
Net Interest Margin Tax-Equivalent^1,2	3.08		%	3.09		%	2.98		%	3.11		%
Dividend Payout Ratio	53.13		%	55.56		%	53.49		%	56.41		%
Allowance for Loan Losses/Total Loans	1.00		%	1.00		%	1.00		%	1.00		%
Non-Performing Loans to Total Loans	0.69		%	0.83		%	0.69		%	0.83		%
Non-Performing Assets to Total Assets	0.49		%	0.65		%	0.49		%	0.65		%
Efficiency Ratio²	50.19		%	53.76		%	50.25		%	53.88		%
At Period End
Total Assets	$	1,635,088		$	1,539,672		$	1,635,088		$	1,539,672
Total Loans	1,028,992			963,151			1,028,992			963,151
Total Investment Securities	485,111			475,167			485,111			475,167
Total Deposits	1,173,749			1,058,365			1,173,749			1,058,365
Total Shareholders' Equity	175,994			167,141			175,994			167,141

¹Annualized using a 366-day basis for 2016 and a 365-day basis for 2015.

²These ratios use non-GAAP financial measures. See Management's Discussion and Analysis of Financial Condition and Results of Operations for additional disclosures and information.

Page 1

Item 1 – Financial Statements

Report of Independent Registered Public Accounting Firm

The Board of Directors and Shareholders

The First Bancorp, Inc.

We have reviewed the accompanying interim consolidated financial information of The First Bancorp, Inc. and Subsidiary as of September 30, 2016 and 2015 and for the three-month and nine-month periods then ended. These financial statements are the responsibility of the Company's management.

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

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

/s/ Berry Dunn McNeil & Parker, LLC

Bangor, Maine

November 9, 2016

Page 2

Consolidated Balance Sheets (Unaudited)

The First Bancorp, Inc. and Subsidiary



	September 30, 2016			December 31, 2015			September 30, 2015
Assets
Cash and cash equivalents	$	23,456,000		$	14,299,000		$	19,169,000
Interest bearing deposits in other banks	15,098,000			4,013,000			301,000
Securities available for sale	282,293,000			223,039,000			215,933,000
Securities to be held to maturity (fair value of $195,797,000 at September 30, 2016, $243,123,000 at December 31, 2015 and $248,344,000 at September 30, 2015)	188,770,000			240,023,000			245,322,000
Restricted equity securities, at cost	14,048,000			14,257,000			13,912,000
Loans held for sale	1,228,000			349,000			200,000
Loans	1,028,992,000			988,638,000			963,151,000
Less allowance for loan losses	10,298,000			9,916,000			9,677,000
Net loans	1,018,694,000			978,722,000			953,474,000
Accrued interest receivable	5,079,000			4,912,000			5,189,000
Premises and equipment, net	21,779,000			21,816,000			21,704,000
Other real estate owned	855,000			1,532,000			1,916,000
Goodwill	29,805,000			29,805,000			29,805,000
Other assets	33,983,000			32,043,000			32,747,000
Total assets	$	1,635,088,000		$	1,564,810,000		$	1,539,672,000
Liabilities
Demand deposits	$	158,476,000		$	130,566,000		$	128,555,000
NOW deposits	295,708,000			242,638,000			246,155,000
Money market deposits	76,685,000			92,994,000			95,217,000
Savings deposits	218,425,000			206,009,000			199,131,000
Certificates of deposit	424,455,000			370,982,000			389,307,000
Total deposits	1,173,749,000			1,043,189,000			1,058,365,000
Borrowed funds – short term	137,970,000			222,323,000			152,233,000
Borrowed funds – long term	130,128,000			115,134,000			145,136,000
Other liabilities	17,247,000			16,666,000			16,797,000
Total liabilities	1,459,094,000			1,397,312,000			1,372,531,000
Shareholders' equity
Common stock, one cent par value per share	108,000			108,000			107,000
Additional paid-in capital	60,500,000			59,862,000			59,667,000
Retained earnings	112,900,000			106,673,000			105,273,000
Accumulated other comprehensive income (loss)
Net unrealized gain on securities available for sale	2,708,000			1,123,000			2,318,000
Net unrealized loss on securities transferred from available for sale to held to maturity	(124,000		)	(112,000		)	(99,000		)
Net unrealized gain on cash flow hedging derivative instruments	58,000			—			—
Net unrealized loss on postretirement benefit costs	(156,000		)	(156,000		)	(125,000		)
Total shareholders' equity	175,994,000			167,498,000			167,141,000
Total liabilities & shareholders' equity	$	1,635,088,000		$	1,564,810,000		$	1,539,672,000
Common Stock
Number of shares authorized	18,000,000			18,000,000			18,000,000
Number of shares issued and outstanding	10,788,329			10,753,855			10,747,495
Book value per common share	$	16.31		$	15.58		$	15.55
Tangible book value per common share	$	13.53		$	12.78		$	12.75

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 nine months ended September 30,						For the quarter ended September 30,
	2016			2015			2016			2015
Interest income
Interest and fees on loans (includes year-to-date tax-exempt income of $487,000 in 2016 and $434,000 in September 30, 2015)	$	29,759,000		$	27,247,000		$	10,021,000		$	9,235,000
Interest on deposits with other banks	17,000			16,000			9,000			3,000
Interest and dividends on investments (includes year-to-date tax-exempt income of $3,761,000 in 2016 and $3,891,000 in 2015)	10,383,000			10,509,000			3,253,000			3,595,000
Total interest income	40,159,000			37,772,000			13,283,000			12,833,000
Interest expense
Interest on deposits	4,382,000			3,995,000			1,538,000			1,236,000
Interest on borrowed funds	3,568,000			3,486,000			1,216,000			1,086,000
Total interest expense	7,950,000			7,481,000			2,754,000			2,322,000
Net interest income	32,209,000			30,291,000			10,529,000			10,511,000
Provision for loan losses	1,125,000			1,100,000			375,000			200,000
Net interest income after provision for loan losses	31,084,000			29,191,000			10,154,000			10,311,000
Non-interest income
Investment management and fiduciary income	1,805,000			1,706,000			591,000			548,000
Service charges on deposit accounts	1,711,000			1,801,000			528,000			564,000
Net securities gains	668,000			1,396,000			137,000			1,000
Mortgage origination and servicing income, net of amortization	1,534,000			1,093,000			896,000			388,000
Other operating income	3,721,000			3,471,000			1,317,000			1,474,000
Total non-interest income	9,439,000			9,467,000			3,469,000			2,975,000
Non-interest expense
Salaries and employee benefits	11,136,000			10,944,000			3,931,000			3,784,000
Occupancy expense	1,735,000			1,772,000			589,000			556,000
Furniture and equipment expense	2,416,000			2,324,000			819,000			772,000
FDIC insurance premiums	631,000			667,000			210,000			221,000
Amortization of identified intangibles	32,000			47,000			10,000			11,000
Other operating expense	5,900,000			6,198,000			1,846,000			2,363,000
Total non-interest expense	21,850,000			21,952,000			7,405,000			7,707,000
Income before income taxes	18,673,000			16,706,000			6,218,000			5,579,000
Income tax expense	4,984,000			4,269,000			1,656,000			1,391,000
NET INCOME	$	13,689,000		$	12,437,000		$	4,562,000		$	4,188,000
Basic earnings per common share	$	1.28		$	1.17		$	0.43		$	0.39
Diluted earnings per common share	$	1.27		$	1.16		$	0.42		$	0.39
Other comprehensive income (loss) net of tax
Net unrealized gain (loss) on securities available for sale	1,585,000			(204,000		)	(1,292,000		)	1,330,000
Net unrealized gain (loss) on securities transferred from available for sale to held to maturity, net of amortization	(12,000		)	(51,000		)	9,000			(15,000		)
Net unrealized gain on cash flow hedging derivative instruments	58,000			—			193,000			—
Other comprehensive income (loss)	1,631,000			(255,000		)	(1,090,000		)	1,315,000
Comprehensive income	$	15,320,000		$	12,182,000		$	3,472,000		$	5,503,000

See Report of Independent Registered Public Accounting Firm.

The accompanying notes are an integral part of these consolidated financial statements.

Page 4

Consolidated Statements of Changes in Shareholders' Equity (Unaudited)

The First Bancorp, Inc. and Subsidiary



	Common stock and additional paid-in capital					Retained earnings			Accumulated other comprehensive income			Total shareholders' equity
	Shares		Amount			Retained earnings			Accumulated other comprehensive income			Total shareholders' equity
Balance at December 31, 2014	10,724,359		$	59,389,000		$	99,816,000		$	2,349,000		$	161,554,000
Net income	—		—			12,437,000			—			12,437,000
Net unrealized loss on securities available for sale, net of tax	—		—			—			(204,000		)	(204,000		)
Net unrealized loss on securities transferred from available for sale to held to maturity, net of tax	—		—			—			(51,000		)	(51,000		)
Comprehensive income	—		—			12,437,000			(255,000		)	12,182,000
Cash dividends declared ($0.65 per share)	—		—			(6,980,000		)	—			(6,980,000		)
Equity compensation expense	—		222,000			—			—			222,000
Payment to repurchase common stock	(10,138	)	(180,000		)	—			—			(180,000		)
Issuance of restricted stock	13,650		—			—			—			—
Proceeds from sale of common stock	19,624		343,000			—			—			343,000
Balance at September 30, 2015	10,747,495		$	59,774,000		$	105,273,000		$	2,094,000		$	167,141,000

Balance at December 31, 2015	10,753,855		$	59,970,000		$	106,673,000		$	855,000		$	167,498,000
Net income	—		—			13,689,000			—			13,689,000
Net unrealized gain on securities available for sale, net of tax	—		—			—			1,585,000			1,585,000
Net unrealized gain on cash flow hedging derivative instruments	—		—			—			58,000			58,000
Net unrealized loss on securities transferred from available for sale to held to maturity, net of tax	—		—			—			(12,000		)	(12,000		)
Comprehensive income	—		—			13,689,000			1,631,000			15,320,000
Cash dividends declared ($0.68 per share)	—		—			(7,333,000		)	—			(7,333,000		)
Equity compensation expense	—		215,000			—			—			215,000
Payment to repurchase common stock	(7,053	)	—			(129,000		)	—			(129,000		)
Tax benefit from vesting of restricted stock	—		32,000			—			—			32,000
Issuance of restricted stock	21,847		—			—			—			—
Proceeds from sale of common stock	19,680		391,000			—			—			391,000
Balance at September 30, 2016	10,788,329		$	60,608,000		$	112,900,000		$	2,486,000		$	175,994,000

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 nine months ended
	September 30, 2016			September 30, 2015
Cash flows from operating activities
Net income	$	13,689,000		$	12,437,000
Adjustments to reconcile net income to net cash provided by operating activities
Depreciation	1,302,000			1,276,000
Change in deferred taxes	(237,000		)	334,000
Provision for loan losses	1,125,000			1,100,000
Loans originated for resale	(37,790,000		)	(23,504,000		)
Proceeds from sales and transfers of loans	37,765,000			23,794,000
Net gain on sales of loans	(854,000		)	(490,000		)
Net gain on sale or call of securities	(668,000		)	(1,396,000		)
Net amortization of premiums on investments	1,668,000			634,000
Net (gain) loss on sale of other real estate owned	(168,000		)	2,000
Provision for losses on other real estate owned	89,000			236,000
Equity compensation expense	215,000			222,000
Tax benefit from vesting of restricted stock	32,000			—
Net increase in other assets and accrued interest	(2,115,000		)	(1,486,000		)
Net (decrease) increase in other liabilities	(159,000		)	978,000
Amortization of investment in limited partnership	146,000			199,000
Net acquisition amortization	32,000			47,000
Net cash provided by operating activities	14,072,000			14,383,000
Cash flows from investing activities
(Increase) decrease in interest-bearing deposits in other banks	(11,085,000		)	3,258,000
Proceeds from sales of securities available for sale	10,305,000			35,466,000
Proceeds from maturities, payments and calls of securities available for sale	49,088,000			25,481,000
Proceeds from maturities, payments and calls of securities to be held to maturity	82,900,000			36,367,000
Proceeds from sales of other real estate owned	1,340,000			2,587,000
Purchases of securities available for sale	(117,307,000		)	(91,297,000		)
Purchases of securities to be held to maturity	(31,549,000		)	(5,644,000		)
Investment in bank-owned life insurance	—			(10,000,000		)
Redemption of restricted equity securities	209,000			—
Net increase in loans	(41,681,000		)	(48,310,000		)
Capital expenditures	(1,265,000		)	(371,000		)
Proceeds from disposal of premises and equipment	—			10,000
Net cash used by investing activities	(59,045,000		)	(52,453,000		)
Cash flows from financing activities
Net increase in demand, savings, and money market accounts	77,087,000			91,740,000
Net increase (decrease) in certificates of deposit	53,473,000			(58,194,000		)
Net (decrease) increase in short-term borrowings	(104,359,000		)	2,453,000
Advances on long-term borrowings	35,000,000			55,000,000
Repayment on long-term borrowings	—			(40,000,000		)
Payment to repurchase common stock	(129,000		)	(180,000		)
Proceeds from sale of common stock	391,000			343,000
Dividends paid	(7,333,000		)	(6,980,000		)
Net cash provided by financing activities	54,130,000			44,182,000
Net increase in cash and cash equivalents	9,157,000			6,112,000
Cash and cash equivalents at beginning of period	14,299,000			13,057,000
Cash and cash equivalents at end of period	$	23,456,000		$	19,169,000
Interest paid	$	7,877,000		$	7,564,000
Income taxes paid	4,682,000			2,915,000
Non-cash transactions
Net transfer from loans to other real estate owned	$	584,000		$	956,000

Page 6

Notes to Consolidated Financial Statements

The First Bancorp, Inc. and Subsidiary

Note 1 – Basis of Presentation

The First Bancorp, Inc. ("the Company") is a financial holding company that owns all of the common stock of First National Bank ("the Bank"). The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP") for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of Management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. All significant intercompany transactions and balances are eliminated in consolidation. The income reported for the 2016 period is not necessarily indicative of the results that may be expected for the year ending December 31, 2016. For further information, refer to the consolidated financial statements and notes included in the Company's annual report on Form 10-K for the year ended December 31, 2015.

Subsequent Events

Events occurring subsequent to September 30, 2016, have been evaluated as to their potential impact to the financial statements.

Note 2 – Investment Securities

The following table summarizes the amortized cost and estimated fair value of investment securities at September 30, 2016:



	Amortized Cost		Unrealized Gains		Unrealized Losses			Fair Value (Estimated)
Securities available for sale
Mortgage-backed securities	$	258,179,000	$	3,848,000	$	(513,000	)	$	261,514,000
State and political subdivisions	16,689,000		795,000		—			17,484,000
Other equity securities	3,258,000		55,000		(18,000		)	3,295,000
	$	278,126,000	$	4,698,000	$	(531,000	)	$	282,293,000
Securities to be held to maturity
U.S. Government-sponsored agencies	$	891,000	$	15,000	$	—		$	906,000
Mortgage-backed securities	34,186,000		1,386,000		(34,000		)	35,538,000
State and political subdivisions	149,393,000		5,830,000		(170,000		)	155,053,000
Corporate securities	4,300,000		—		—			4,300,000
	$	188,770,000	$	7,231,000	$	(204,000	)	$	195,797,000
Restricted equity securities
Federal Home Loan Bank Stock	$	13,011,000	$	—	$	—		$	13,011,000
Federal Reserve Bank Stock	1,037,000		—		—			1,037,000
	$	14,048,000	$	—	$	—		$	14,048,000

Page 7

The following table summarizes the amortized cost and estimated fair value of investment securities at December 31, 2015:



	Amortized Cost		Unrealized Gains		Unrealized Losses			Fair Value (Estimated)
Securities available for sale
Mortgage-backed securities	$	194,563,000	$	1,509,000	$	(962,000	)	$	195,110,000
State and political subdivisions	23,367,000		1,201,000		(62,000		)	24,506,000
Other equity securities	3,381,000		48,000		(6,000		)	3,423,000
	$	221,311,000	$	2,758,000	$	(1,030,000	)	$	223,039,000
Securities to be held to maturity
U.S. Government-sponsored agencies	$	71,000,000	$	40,000	$	(2,284,000	)	$	68,756,000
Mortgage-backed securities	42,193,000		1,305,000		(136,000		)	43,362,000
State and political subdivisions	122,530,000		4,200,000		(25,000		)	126,705,000
Corporate securities	4,300,000		—		—			4,300,000
	$	240,023,000	$	5,545,000	$	(2,445,000	)	$	243,123,000
Restricted equity securities
Federal Home Loan Bank Stock	$	13,220,000	$	—	$	—		$	13,220,000
Federal Reserve Bank Stock	1,037,000		—		—			1,037,000
	$	14,257,000	$	—	$	—		$	14,257,000

The following table summarizes the amortized cost and estimated fair value of investment securities at September 30, 2015:



	Amortized Cost		Unrealized Gains		Unrealized Losses			Fair Value (Estimated)
Securities available for sale
Mortgage-backed securities	$	184,865,000	$	2,921,000	$	(276,000	)	$	187,510,000
State and political subdivisions	24,372,000		1,104,000		(186,000		)	25,290,000
Other equity securities	3,129,000		40,000		(36,000		)	3,133,000
	$	212,366,000	$	4,065,000	$	(498,000	)	$	215,933,000
Securities to be held to maturity
U.S. Government-sponsored agencies	$	75,991,000	$	22,000	$	(1,571,000	)	$	74,442,000
Mortgage-backed securities	45,287,000		1,744,000		(53,000		)	46,978,000
State and political subdivisions	123,744,000		3,031,000		(151,000		)	126,624,000
Corporate securities	300,000		—		—			300,000
	$	245,322,000	$	4,797,000	$	(1,775,000	)	$	248,344,000
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 September 30, 2016:



	Securities available for sale				Securities to be held to maturity
	Amortized Cost		Fair Value (Estimated)		Amortized Cost		Fair Value (Estimated)
Due in 1 year or less	$	973,000	$	974,000	$	1,772,000	$	1,783,000
Due in 1 to 5 years	3,020,000		3,106,000		13,428,000		13,782,000
Due in 5 to 10 years	22,843,000		23,503,000		39,832,000		41,423,000
Due after 10 years	248,032,000		251,415,000		133,738,000		138,809,000
Equity securities	3,258,000		3,295,000		—		—
	$	278,126,000	$	282,293,000	$	188,770,000	$	195,797,000

The following table summarizes the contractual maturities of investment securities at December 31, 2015:



	Securities available for sale				Securities to be held to maturity
	Amortized Cost		Fair Value (Estimated)		Amortized Cost		Fair Value (Estimated)
Due in 1 year or less	$	527,000	$	530,000	$	1,814,000	$	1,850,000
Due in 1 to 5 years	7,562,000		7,727,000		6,306,000		6,514,000
Due in 5 to 10 years	19,647,000		20,055,000		58,397,000		60,196,000
Due after 10 years	190,194,000		191,304,000		173,506,000		174,563,000
Equity securities	3,381,000		3,423,000		—		—
	$	221,311,000	$	223,039,000	$	240,023,000	$	243,123,000

The following table summarizes the contractual maturities of investment securities at September 30, 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	$	926,000	$	937,000	$	1,362,000	$	1,378,000
Due in 1 to 5 years	8,867,000		9,077,000		6,861,000		7,140,000
Due in 5 to 10 years	9,459,000		9,872,000		49,095,000		50,778,000
Due after 10 years	189,985,000		192,914,000		188,004,000		189,048,000
Equity securities	3,129,000		3,133,000		—		—
	$	212,366,000	$	215,933,000	$	245,322,000	$	248,344,000

At September 30, 2016, securities with a fair value of $249,162,000 were pledged to secure public deposits, repurchase agreements, and for other purposes as required by law. This compares to securities with a fair value of $201,879,000 as of December 31, 2015 and $221,072,000 at September 30, 2015, pledged for the same purposes.

Gains and losses on the sale of securities available for sale are computed by subtracting the amortized cost at the time of sale from the security's selling price, net of accrued interest to be received. The following table shows securities gains and losses for the nine months and quarters ended September 30, 2016 and 2015:



	For the nine months ended September 30,				For the quarter ended September 30,
	2016		2015		2016		2015
Proceeds from sales of securities	$	10,305,000	$	35,466,000	$	1,351,000	$	1,000
Gross realized gains	668,000		1,396,000		137,000		1,000
Gross realized losses	—		—		—		—
Net gain	$	668,000	$	1,396,000	$	137,000	$	1,000
Related income taxes	$	234,000	$	489,000	$	48,000	$	—

Page 9

Management reviews securities with unrealized losses for other than temporary impairment. As of September 30, 2016, there were 71 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 13 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 September 30, 2016 is summarized below:



	Less than 12 months					12 months or more					Total
	Fair Value (Estimated)		Unrealized Losses			Fair Value (Estimated)		Unrealized Losses			Fair Value (Estimated)		Unrealized Losses
Mortgage-backed securities	$	79,118,000	$	(468,000	)	$	2,407,000	$	(79,000	)	$	81,525,000	$	(547,000	)
State and political subdivisions	13,666,000		(170,000		)	—		—			13,666,000		(170,000		)
Other equity securities	10,000		(2,000		)	107,000		(16,000		)	117,000		(18,000		)
	$	92,794,000	$	(640,000	)	$	2,514,000	$	(95,000	)	$	95,308,000	$	(735,000	)

As of December 31, 2015, there were 78 securities with unrealized losses held in the Company's portfolio. These securities were temporarily impaired as a result of changes in interest rates reducing their fair value, of which 15 had been temporarily impaired for 12 months or more. Information regarding securities temporarily impaired as of December 31, 2015 is summarized below:



	Less than 12 months					12 months or more					Total
	Fair Value (Estimated)		Unrealized Losses			Fair Value (Estimated)		Unrealized Losses			Fair Value (Estimated)		Unrealized Losses
U.S. Government-sponsored agencies	$	45,311,000	$	(1,469,000	)	$	17,185,000	$	(815,000	)	$	62,496,000	$	(2,284,000	)
Mortgage-backed securities	120,915,000		(1,027,000		)	910,000		(71,000		)	121,825,000		(1,098,000		)
State and political subdivisions	2,528,000		(24,000		)	2,901,000		(63,000		)	5,429,000		(87,000		)
Other equity securities	64,000		(5,000		)	52,000		(1,000		)	116,000		(6,000		)
	$	168,818,000	$	(2,525,000	)	$	21,048,000	$	(950,000	)	$	189,866,000	$	(3,475,000	)

As of September 30, 2015, there were 88 securities with unrealized losses held in the Company's portfolio. These securities were temporarily impaired as a result of changes in interest rates reducing their fair value, of which 14 had been temporarily impaired for 12 months or more. Information regarding securities temporarily impaired as of September 30, 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	$	46,621,000	$	(1,015,000	)	$	17,444,000	$	(556,000	)	$	64,065,000	$	(1,571,000	)
Mortgage-backed securities	30,713,000		(266,000		)	989,000		(63,000		)	31,702,000		(329,000		)
State and political subdivisions	14,417,000		(207,000		)	2,374,000		(130,000		)	16,791,000		(337,000		)
Other equity securities	264,000		(34,000		)	51,000		(2,000		)	315,000		(36,000		)
	$	92,015,000	$	(1,522,000	)	$	20,858,000	$	(751,000	)	$	112,873,000	$	(2,273,000	)

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

Page 10

remaining unamortized balance of the net unrealized losses for the securities transferred from available for sale to held to maturity was $124,000 at September 30, 2016. These securities were transferred as a part of the Company's overall investment and balance sheet strategies.

The Bank is a member of the Federal Home Loan Bank ("FHLB") of Boston, a cooperatively owned wholesale bank for housing and finance in the six New England States. As a requirement of membership in the FHLB, the Bank must own a minimum required amount of FHLB stock, calculated periodically based primarily on its level of borrowings from the FHLB. The Bank uses the FHLB for much of its wholesale funding needs. As of September 30, 2016 and 2015, and December 31, 2015, the Bank's investment in FHLB stock totaled $13,011,000, $12,875,000 and $13,220,000, respectively. FHLB stock is a non-marketable equity security and therefore is reported at cost, which equals par value. The Company periodically evaluates its investment in FHLB stock for impairment based on, among other factors, the capital adequacy of the FHLB and its overall financial condition. No impairment losses have been recorded through September 30, 2016. The Bank will continue to monitor its investment in FHLB stock.

Note 3 – Loans

The following table shows the composition of the Company's loan portfolio as of September 30, 2016 and 2015 and at December 31, 2015:



	September 30, 2016				December 31, 2015				September 30, 2015
Commercial
Real estate	$	297,808,000	28.9	%	$	269,462,000	27.3	%	$	268,741,000	27.9	%
Construction	18,828,000		1.8	%	24,881,000		2.5	%	23,624,000		2.5	%
Other	131,198,000		12.8	%	128,341,000		13.0	%	119,097,000		12.4	%
Municipal	26,153,000		2.5	%	19,751,000		2.0	%	21,377,000		2.2	%
Residential
Term	403,159,000		39.2	%	403,030,000		40.7	%	385,145,000		39.9	%
Construction	14,269,000		1.4	%	8,451,000		0.9	%	12,029,000		1.2	%
Home equity line of credit	111,994,000		10.9	%	110,202,000		11.1	%	109,390,000		11.4	%
Consumer	25,583,000		2.5	%	24,520,000		2.5	%	23,748,000		2.5	%
Total	$	1,028,992,000	100.0	%	$	988,638,000	100.0	%	$	963,151,000	100.0	%

Loan balances include net deferred loan costs of $4,648,000 as of September 30, 2016, $3,686,000 as of December 31, 2015, and $3,452,000 as of September 30, 2015. Pursuant to collateral agreements, qualifying first mortgage loans, which totaled $262,001,000 at September 30, 2016, $279,463,000 at December 31, 2015, and $281,925,000 at September 30, 2015, were used to collateralize borrowings from the FHLB. In addition, commercial, construction and home equity loans totaling $261,416,000 at September 30, 2016, $243,578,000 at December 31, 2015, and $251,937,000 at September 30, 2015, were used to collateralize a standby line of credit at the Federal Reserve Bank of Boston that is currently unused.

For all loan classes, loans over 30 days past due are considered delinquent. Information on the past-due status of loans by class of financing receivable as of September 30, 2016, is presented in the following table:



	30-59 Days Past Due		60-89 Days Past Due		90+ Days Past Due		All Past Due		Current		Total		90+ Days & Accruing
Commercial
Real estate	$	—	$	385,000	$	1,101,000	$	1,486,000	$	296,322,000	$	297,808,000	$	—
Construction	—		—		—		—		18,828,000		18,828,000		—
Other	573,000		18,000		53,000		644,000		130,554,000		131,198,000		—
Municipal	—		—		—		—		26,153,000		26,153,000		—
Residential
Term	414,000		3,896,000		1,925,000		6,235,000		396,924,000		403,159,000		—
Construction	—		—		—		—		14,269,000		14,269,000		—
Home equity line of credit	310,000		49,000		708,000		1,067,000		110,927,000		111,994,000		—
Consumer	124,000		124,000		62,000		310,000		25,273,000		25,583,000		7,000
Total	$	1,421,000	$	4,472,000	$	3,849,000	$	9,742,000	$	1,019,250,000	$	1,028,992,000	$	7,000

Page 11

Information on the past-due status of loans by class of financing receivable as of December 31, 2015, is presented in the following table:



	30-59 Days Past Due		60-89 Days Past Due		90+ Days Past Due		All Past Due		Current		Total		90+ Days & Accruing
Commercial
Real estate	$	603,000	$	—	$	281,000	$	884,000	$	268,578,000	$	269,462,000	$	—
Construction	35,000		—		238,000		273,000		24,608,000		24,881,000		—
Other	303,000		—		25,000		328,000		128,013,000		128,341,000		25,000
Municipal	—		—		—		—		19,751,000		19,751,000		—
Residential
Term	450,000		2,098,000		2,639,000		5,187,000		397,843,000		403,030,000		100,000
Construction	368,000		—		—		368,000		8,083,000		8,451,000		—
Home equity line of credit	261,000		255,000		592,000		1,108,000		109,094,000		110,202,000		—
Consumer	102,000		26,000		11,000		139,000		24,381,000		24,520,000		11,000
Total	$	2,122,000	$	2,379,000	$	3,786,000	$	8,287,000	$	980,351,000	$	988,638,000	$	136,000

Information on the past-due status of loans by class of financing receivable as of September 30, 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	$	193,000	$	863,000	$	—	$	1,056,000	$	267,685,000	$	268,741,000	$	—
Construction	—		31,000		208,000		239,000		23,385,000		23,624,000		—
Other	10,000		—		—		10,000		119,087,000		119,097,000		—
Municipal	—		—		—		—		21,377,000		21,377,000		—
Residential
Term	982,000		3,012,000		2,956,000		6,950,000		378,195,000		385,145,000		—
Construction	—		—		—		—		12,029,000		12,029,000		—
Home equity line of credit	577,000		—		618,000		1,195,000		108,195,000		109,390,000		—
Consumer	146,000		52,000		110,000		308,000		23,440,000		23,748,000		109,000
Total	$	1,908,000	$	3,958,000	$	3,892,000	$	9,758,000	$	953,393,000	$	963,151,000	$	109,000

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

Page 12

Cash payments received on non-accrual loans, which are included in impaired loans, are applied to reduce the loan's principal balance until the remaining principal balance is deemed collectible, after which interest is recognized when collected. As a general rule, a loan may be restored to accrual status when payments are current for a substantial period of time, generally six months, and repayment of the remaining contractual amounts is expected or when it otherwise becomes well secured and in the process of collection. Information on nonaccrual loans as of September 30, 2016 and 2015 and at December 31, 2015 is presented in the following table:



	September 30, 2016		December 31, 2015		September 30, 2015
Commercial
Real estate	$	1,222,000	$	915,000	$	1,220,000
Construction	—		238,000		208,000
Other	412,000		66,000		114,000
Municipal	—		—		—
Residential
Term	4,475,000		5,260,000		5,491,000
Construction	—		—		—
Home equity line of credit	851,000		893,000		948,000
Consumer	170,000		—		—
Total	$	7,130,000	$	7,372,000	$	7,981,000

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 period ended September 30, 2016 is presented in the following table:



							For the nine months ended September 30, 2016				For the quarter ended September 30, 2016
	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Recognized Interest Income		Average Recorded Investment		Recognized Interest Income
With No Related Allowance
Commercial
Real estate	$	5,530,000	$	5,601,000	$	—	$	6,559,000	$	186,000	$	5,540,000	$	41,000
Construction	—		—		—		43,000		1,000		10,000		—
Other	754,000		801,000		—		1,016,000		33,000		883,000		12,000
Municipal	—		—		—		—		—		—		—
Residential
Term	11,675,000		12,830,000		—		10,830,000		340,000		11,183,000		131,000
Construction	—		—		—		—		—		—		—
Home equity line of credit	1,334,000		1,705,000		—		1,171,000		26,000		1,080,000		13,000
Consumer	55,000		96,000		—		6,000		3,000		18,000		3,000
	$	19,348,000	$	21,033,000	$	—	$	19,625,000	$	589,000	$	18,714,000	$	200,000
With an Allowance Recorded
Commercial
Real estate	$	4,912,000	$	5,094,000	$	381,000	$	3,940,000	$	130,000	$	4,899,000	$	59,000
Construction	788,000		788,000		99,000		834,000		27,000		788,000		9,000
Other	500,000		503,000		68,000		312,000		21,000		519,000		9,000
Municipal	—		—		—		—		—		—		—
Residential
Term	2,456,000		2,667,000		318,000		3,529,000		79,000		2,929,000		13,000
Construction	—		—		—		—		—		—		—
Home equity line of credit	66,000		68,000		32,000		75,000		1,000		80,000		—
Consumer	115,000		115,000		51,000		51,000		2,000		115,000		2,000
	$	8,837,000	$	9,235,000	$	949,000	$	8,741,000	$	260,000	$	9,330,000	$	92,000
Total
Commercial
Real estate	$	10,442,000	$	10,695,000	$	381,000	$	10,499,000	$	316,000	$	10,439,000	$	100,000
Construction	788,000		788,000		99,000		877,000		28,000		798,000		9,000
Other	1,254,000		1,304,000		68,000		1,328,000		54,000		1,402,000		21,000
Municipal	—		—		—		—		—		—		—
Residential
Term	14,131,000		15,497,000		318,000		14,359,000		419,000		14,112,000		144,000
Construction	—		—		—		—		—		—		—
Home equity line of credit	1,400,000		1,773,000		32,000		1,246,000		27,000		1,160,000		13,000
Consumer	170,000		211,000		51,000		57,000		5,000		133,000		5,000
	$	28,185,000	$	30,268,000	$	949,000	$	28,366,000	$	849,000	$	28,044,000	$	292,000

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

Page 14

A breakdown of impaired loans by class of financing receivable as of and for the year ended December 31, 2015 is presented in the following table:



	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Recognized Interest Income
With No Related Allowance
Commercial
Real estate	$	7,173,000	$	7,496,000	$	—	$	8,990,000	$	301,000
Construction	30,000		30,000		—		3,000		1,000
Other	1,163,000		1,210,000		—		1,893,000		76,000
Municipal	—		—		—		—		—
Residential
Term	11,122,000		12,157,000		—		10,480,000		415,000
Construction	—		—		—		—		—
Home equity line of credit	1,401,000		2,054,000		—		1,400,000		43,000
Consumer	—		—		—		42,000		3,000
	$	20,889,000	$	22,947,000	$	—	$	22,808,000	$	839,000
With an Allowance Recorded
Commercial
Real estate	$	3,544,000	$	3,627,000	$	89,000	$	3,066,000	$	149,000
Construction	996,000		996,000		302,000		1,153,000		44,000
Other	71,000		77,000		8,000		256,000		5,000
Municipal	—		—		—		—		—
Residential
Term	3,966,000		4,193,000		326,000		5,228,000		180,000
Construction	—		—		—		—		—
Home equity line of credit	65,000		66,000		29,000		187,000		3,000
Consumer	—		—		—		—		—
	$	8,642,000	$	8,959,000	$	754,000	$	9,890,000	$	381,000
Total
Commercial
Real estate	$	10,717,000	$	11,123,000	$	89,000	$	12,056,000	$	450,000
Construction	1,026,000		1,026,000		302,000		1,156,000		45,000
Other	1,234,000		1,287,000		8,000		2,149,000		81,000
Municipal	—		—		—		—		—
Residential
Term	15,088,000		16,350,000		326,000		15,708,000		595,000
Construction	—		—		—		—		—
Home equity line of credit	1,466,000		2,120,000		29,000		1,587,000		46,000
Consumer	—		—		—		42,000		3,000
	$	29,531,000	$	31,906,000	$	754,000	$	32,698,000	$	1,220,000

Page 15

A breakdown of impaired loans by class of financing receivable as of and for the period ended September 30, 2015 is presented in the following table:



							For the nine months ended September 30, 2015				For the quarter ended September 30, 2015
	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Recognized Interest Income		Average Recorded Investment		Recognized Interest Income
With No Related Allowance
Commercial
Real estate	$	7,976,000	$	8,444,000	$	—	$	9,410,000	$	247,000	$	8,310,000	$	65,000
Construction	—		—		—		—		—		—		—
Other	1,660,000		1,728,000		—		2,077,000		76,000		1,698,000		34,000
Municipal	—		—		—		—		—		—		—
Residential
Term	10,096,000		11,006,000		—		10,482,000		268,000		9,852,000		95,000
Construction	—		—		—		—		—		—		—
Home equity line of credit	1,484,000		2,135,000		—		1,383,000		36,000		1,498,000		21,000
Consumer	—		—		—		56,000		3,000		62,000		—
	$	21,216,000	$	23,313,000	$	—	$	23,408,000	$	630,000	$	21,420,000	$	215,000
With an Allowance Recorded
Commercial
Real estate	$	3,252,000	$	3,332,000	$	71,000	$	2,969,000	$	108,000	$	3,294,000	$	37,000
Construction	996,000		996,000		282,000		1,206,000		38,000		996,000		13,000
Other	76,000		83,000		8,000		317,000		4,000		152,000		—
Municipal	—		—		—		—		—		—		—
Residential
Term	5,180,000		5,485,000		435,000		5,375,000		166,000		5,429,000		46,000
Construction	—		—		—		—		—		—		—
Home equity line of credit	66,000		67,000		30,000		227,000		2,000		67,000		—
Consumer	—		—		—		—		—		—		—
	$	9,570,000	$	9,963,000	$	826,000	$	10,094,000	$	318,000	$	9,938,000	$	96,000
Total
Commercial
Real estate	$	11,228,000	$	11,776,000	$	71,000	$	12,379,000	$	355,000	$	11,604,000	$	102,000
Construction	996,000		996,000		282,000		1,206,000		38,000		996,000		13,000
Other	1,736,000		1,811,000		8,000		2,394,000		80,000		1,850,000		34,000
Municipal	—		—		—		—		—		—		—
Residential
Term	15,276,000		16,491,000		435,000		15,857,000		434,000		15,281,000		141,000
Construction	—		—		—		—		—		—		—
Home equity line of credit	1,550,000		2,202,000		30,000		1,610,000		38,000		1,565,000		21,000
Consumer	—		—		—		56,000		3,000		62,000		—
	$	30,786,000	$	33,276,000	$	826,000	$	33,502,000	$	948,000	$	31,358,000	$	311,000

Page 16

Troubled Debt Restructured

A troubled debt restructured ("TDR") constitutes a restructuring of debt if the Company, for economic or legal reasons related to the borrower's financial difficulties, grants a concession to the borrower that it would not otherwise consider. To determine whether or not a loan should be classified as a TDR, Management evaluates a loan based upon the following criteria:


•	The borrower demonstrates financial difficulty; common indicators include past due status with bank obligations, substandard credit bureau reports, or an inability to refinance with another lender, and


•	The Company has granted a concession; common concession types include maturity date extension, interest rate adjustments to below market pricing, and deferment of payments.

As of September 30, 2016, the Company had 75 loans with a value of $22,025,000 that have been classified as TDRs. This compares to 84 loans with a value of $23,923,000 and 88 loans with a value of $24,715,000 classified as TDRs as of December 31, 2015 and September 30, 2015, respectively. The impairment carried as a specific reserve in the allowance for loan losses is calculated by present valuing the expected cash flows on the loan at the original interest rate, or, for collateral-dependent loans, using the fair value of the collateral less costs to sell.

The following table shows TDRs by class and the specific reserve as of September 30, 2016:



	Number of Loans	Balance		Specific Reserves
Commercial
Real estate	11	$	9,221,000	$	116,000
Construction	1	788,000		99,000
Other	7	841,000		5,000
Municipal	—	—		—
Residential
Term	53	10,626,000		272,000
Construction	—	—		—
Home equity line of credit	3	549,000		—
Consumer	—	—		—
	75	$	22,025,000	$	492,000

The following table shows TDRs by class and the specific reserve as of December 31, 2015:



	Number of Loans	Balance		Specific Reserves
Commercial
Real estate	15	$	10,350,000	$	85,000
Construction	1	788,000		94,000
Other	11	1,168,000		1,000
Municipal	—	—		—
Residential
Term	53	10,875,000		275,000
Construction	—	—		—
Home equity line of credit	4	742,000		—
Consumer	—	—		—
	84	$	23,923,000	$	455,000

Page 17

The following table shows TDRs by class and the specific reserve as of September 30, 2015:



	Number of Loans	Balance		Specific Reserves
Commercial
Real estate	16	$	10,696,000	$	69,000
Construction	1	788,000		76,000
Other	13	1,621,000		1,000
Municipal	—	—		—
Residential
Term	53	10,837,000		378,000
Construction	—	—		—
Home equity line of credit	5	773,000		—
Consumer	—	—		—
	88	$	24,715,000	$	524,000

As of September 30, 2016, eight of the loans classified as TDRs with a total balance of $1,060,000 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 September 30, 2016:



	Number of Loans	Balance		Specific Reserves
Commercial
Real estate	—	$	—	$	—
Construction	—	—		—
Other	—	—		—
Municipal	—	—		—
Residential
Term	8	1,060,000		78,000
Construction	—	—		—
Home equity line of credit	—	—		—
Consumer	—	—		—
	8	$	1,060,000	$	78,000

Page 18

As of September 30, 2015, 10 of the loans classified as TDRs with a total balance of $1,593,000 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 September 30, 2015:



	Number of Loans	Balance		Specific Reserves
Commercial
Real estate	—	$	—	$	—
Construction	—	—		—
Other	—	—		—
Municipal	—	—		—
Residential
Term	10	1,593,000		96,000
Construction	—	—		—
Home equity line of credit	—	—		—
Consumer	—	—		—
	10	$	1,593,000	$	96,000

For the nine months ended September 30, 2016, no loans were placed on TDR status. This compares to one loan placed on TDR status with a post-modification outstanding balance of $108,000 for the nine months ended September 30, 2015. This was considered a TDR 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 table shows loans placed on TDR status in the nine months ended September 30, 2015, by class of loan and the associated specific reserve included in the allowance for loan losses as of September 30, 2015:



	Number of Loans	Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment		Specific Reserves
Commercial
Real estate	—	$	—	$	—	$	—
Construction	—	—		—		—
Other	—	—		—		—
Municipal	—	—		—		—
Residential
Term	1	111,000		108,000		—
Construction	—	—		—		—
Home equity line of credit	—	—		—		—
Consumer	—	—		—		—
	1	$	111,000	$	108,000	$	—

For the quarter ended September 30, 2016 no loans were placed on TDR status. This compares to one loan placed on TDR status with a post-modification outstanding balance of $108,000 for the quarter ended September 30, 2015. This was considered a 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.

Page 19

The following table shows loans placed on TDR status in the three months ended September 30, 2015, by class of loan and the associated specific reserve included in the allowance for loan losses as of September 30, 2015:



	Number of Loans	Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment		Specific Reserves
Commercial
Real estate	—	$	—	$	—	$	—
Construction	—	—		—		—
Other	—	—		—		—
Municipal	—	—		—		—
Residential
Term	1	111,000		108,000		—
Construction	—	—		—		—
Home equity line of credit	—	—		—		—
Consumer	—	—		—		—
	1	$	111,000	$	108,000	$	—

As of September 30, 2016, Management is aware of six loans classified as TDRs that are involved in bankruptcy with an outstanding balance of $1,062,000. There were also nine loans with an outstanding balance of $971,000 that were classified as TDRs and on non-accrual status. Three loans with an outstanding balance of $222,000, that were classified as TDRs, were in the process of foreclosure.

Residential Mortgage Loans in Process of Foreclosure

As of September 30, 2016, there were 13 mortgage loans collateralized by residential real estate in the process of foreclosure with a total balance of $1,508,000; this compares to 18 mortgage loans collateralized by residential real estate in the process of foreclosure with a total balance of $2,038,000 as of September 30, 2015.

Note 4. Allowance for Loan Losses

The Company provides for loan losses through the establishment of an allowance for loan losses which represents an estimated reserve for existing losses in the loan portfolio. A systematic methodology is used for determining the allowance that includes a quarterly review process, risk rating changes, and adjustments to the allowance. The loan portfolio is classified in eight classes and credit risk is evaluated separately in each class. The appropriate level of the allowance is evaluated continually based on a review of significant loans, with a particular emphasis on nonaccruing, past due, and other loans that may require special attention. Other factors include general conditions in local and national economies; loan portfolio composition and asset quality indicators; and internal factors such as changes in underwriting policies, credit administration practices, experience, ability and depth of lending management, among others. The allowance consists of four elements: (1) specific reserves for loans evaluated individually for impairment; (2) general reserves for each portfolio segment based on historical loan loss experience, (3) qualitative reserves judgmentally adjusted for local and national economic conditions, concentrations, portfolio composition, volume and severity of delinquencies and nonaccrual loans, trends of criticized and classified loans, changes in credit policies and underwriting standards, credit administration practices, and other factors as applicable for each portfolio segment; and (4) unallocated reserves. All outstanding loans are considered in evaluating the appropriateness of the allowance.

Page 20

A breakdown of the allowance for loan losses as of September 30, 2016, December 31, 2015, and September 30, 2015, by class of financing receivable and allowance element, is presented in the following tables:



As of September 30, 2016	Specific Reserves on Loans Evaluated Individually for Impairment		General Reserves on Loans Based on Historical Loss Experience		Reserves for Qualitative Factors		Unallocated Reserves		Total Reserves
Commercial
Real estate	$	381,000	$	1,303,000	$	2,355,000	$	—	$	4,039,000
Construction	99,000		81,000		147,000		—		327,000
Other	68,000		577,000		1,043,000		—		1,688,000
Municipal	—		—		18,000		—		18,000
Residential
Term	318,000		571,000		470,000		—		1,359,000
Construction	—		20,000		17,000		—		37,000
Home equity line of credit	32,000		457,000		385,000		—		874,000
Consumer	51,000		318,000		249,000		—		618,000
Unallocated	—		—		—		1,338,000		1,338,000
	$	949,000	$	3,327,000	$	4,684,000	$	1,338,000	$	10,298,000



As of December 31, 2015	Specific Reserves on Loans Evaluated Individually for Impairment		General Reserves on Loans Based on Historical Loss Experience		Reserves for Qualitative Factors		Unallocated Reserves		Total Reserves
Commercial
Real estate	$	89,000	$	893,000	$	2,138,000	$	—	$	3,120,000
Construction	302,000		82,000		196,000		—		580,000
Other	8,000		425,000		1,019,000		—		1,452,000
Municipal	—		—		17,000		—		17,000
Residential
Term	326,000		613,000		452,000		—		1,391,000
Construction	—		14,000		10,000		—		24,000
Home equity line of credit	29,000		500,000		364,000		—		893,000
Consumer	—		331,000		235,000		—		566,000
Unallocated	—		—		—		1,873,000		1,873,000
	$	754,000	$	2,858,000	$	4,431,000	$	1,873,000	$	9,916,000

Page 21



As of September 30, 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	$	71,000	$	1,094,000	$	1,986,000	$	—	$	3,151,000
Construction	282,000		98,000		178,000		—		558,000
Other	8,000		486,000		882,000		—		1,376,000
Municipal	—		—		16,000		—		16,000
Residential
Term	435,000		300,000		430,000		—		1,165,000
Construction	—		9,000		13,000		—		22,000
Home equity line of credit	30,000		530,000		341,000		—		901,000
Consumer	—		346,000		216,000		—		562,000
Unallocated	—		—		—		1,926,000		1,926,000
	$	826,000	$	2,863,000	$	4,062,000	$	1,926,000	$	9,677,000

Qualitative adjustment factors are taken into consideration when determining reserve estimates. These adjustment factors are based upon Management's evaluation of various current conditions, including those listed below.


•	General economic conditions.


•	Credit quality trends with emphasis on loan delinquencies, nonaccrual levels and classified loans.


•	Recent loss experience in particular segments of the portfolio.


•	Loan volumes and concentrations, including changes in mix.


•	Other factors, including changes in quality of the loan origination; loan policy changes; changes in credit risk management processes; Bank regulatory and external loan review examination results.

The qualitative portion of the allowance for loan losses was 0.46% of related loans as of September 30, 2016 and 0.45% as of December 31, 2015. The qualitative portion increased $253,000 between December 31, 2015 and September 30, 2016 due to an increase in loans outstanding. Due to the increased commercial loan volume this year and potential weaknesses in a small number of credits which are currently performing, the Company is carrying a $1,000,000 overlay in pooled reserves.

The unallocated component of the allowance totaled $1,338,000 at September 30, 2016, or 13.0% of the total reserve, up slightly from the second quarter 2016. This compares to $1,873,000 or 18.9% as of December 31, 2015. Management feels the change in the unallocated is consistent with improvement in credit quality.

The allowance for loan losses as a percent of total loans stood at 1.00% as of September 30, 2016. This compares to 1.00% of total loans as of December 31, 2015 and September 30, 2015.

Construction, land and land development loans, both commercial and residential, comprise a small portion of the portfolio, and at 21.9% of capital are below the regulatory limit of 100.0% of capital at September 30, 2016. Construction loans and non-owner-occupied commercial real estate loans are at 102.9% of total capital, below the regulatory limit of 300.0% of capital at September 30, 2016.

The process of establishing the allowance with respect to the commercial loan portfolio begins when a loan officer initially assigns each loan a risk rating, using established credit criteria. Approximately 50% of the outstanding loans and commitments are subject to review and validation annually by an independent consulting firm, as well as periodically by the Company's internal credit review function. The methodology employs Management's judgment as to the level of losses on existing loans based on internal review of the loan portfolio, including an analysis of a borrower's current financial position, and the consideration of current and anticipated economic conditions and their potential effects on specific borrowers and or lines of business.

Page 22

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

1 Strong

Credits rated "1" are characterized by borrowers fully responsible for the credit with excellent capacity to pay principal and interest. Loans rated "1" may be secured with acceptable forms of liquid collateral.

2 Above Average

Credits rated "2" are characterized by borrowers that have better than average liquidity, capitalization, earnings and/or cash flow with a consistent record of solid financial performance.

3 Satisfactory

Credits rated "3" are characterized by borrowers with favorable liquidity, profitability and financial condition with adequate cash flow to pay debt service.

4 Average

Credits rated "4" are characterized by borrowers that present risk more than 1, 2 and 3 rated loans and merit an ordinary level of ongoing monitoring. Financial condition is on par or somewhat below industry averages while cash flow is generally adequate to meet debt service requirements.

5 Watch

Credits rated "5" are characterized by borrowers that warrant greater monitoring due to financial condition or unresolved and identified risk factors.

6 Other Assets Especially Mentioned (OAEM)

Loans in this category are currently protected but are potentially weak and constitute an undue and unwarranted credit risk, but not to the point of justifying a classification of substandard. OAEM have potential weaknesses which may, if not checked or corrected, weaken the asset or inadequately protect the Company's credit position at some future date.

7 Substandard

Loans in this category are inadequately protected by the paying capacity of the borrower or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. Substandard loans are characterized by the distinct possibility that the Company may sustain some loss if the deficiencies are not corrected.

8 Doubtful

Loans classified "Doubtful" have the same weaknesses as those classified substandard with the added characteristic that the weaknesses make collection or liquidation in full, based on currently existing facts, conditions, and values, highly questionable and improbable. The possibility of loss is high, but because of certain important and reasonably specific pending factors which may work to the advantage and strengthening of the asset, its classification as an estimated loss is deferred until its more exact status may be determined.

The following table summarizes the risk ratings for the Company's commercial real estate, commercial construction, commercial other, and municipal loans as of September 30, 2016:



	Commercial Real Estate		Commercial Construction		Commercial Other		Municipal Loans		All Risk- Rated Loans
1 Strong	$	2,000	$	—	$	721,000	$	—	$	723,000
2 Above Average	24,225,000		53,000		9,546,000		24,592,000		58,416,000
3 Satisfactory	72,082,000		824,000		24,032,000		1,561,000		98,499,000
4 Average	133,835,000		12,764,000		67,811,000		—		214,410,000
5 Watch	41,120,000		5,187,000		24,189,000		—		70,496,000
6 OAEM	9,360,000		—		1,957,000		—		11,317,000
7 Substandard	17,184,000		—		2,942,000		—		20,126,000
8 Doubtful	—		—		—		—		—
Total	$	297,808,000	$	18,828,000	$	131,198,000	$	26,153,000	$	473,987,000

Page 23

The following table summarizes the risk ratings for the Company's commercial real estate, commercial construction, commercial other, and municipal loans as of December 31, 2015:



	Commercial Real Estate		Commercial Construction		Commercial Other		Municipal Loans		All Risk- Rated Loans
1 Strong	$	6,000	$	—	$	1,256,000	$	—	$	1,262,000
2 Above Average	29,176,000		56,000		7,506,000		18,321,000		55,059,000
3 Satisfactory	52,821,000		2,057,000		28,787,000		1,430,000		85,095,000
4 Average	122,071,000		18,070,000		67,301,000		—		207,442,000
5 Watch	36,075,000		4,490,000		18,135,000		—		58,700,000
6 OAEM	9,742,000		—		2,410,000		—		12,152,000
7 Substandard	19,571,000		208,000		2,946,000		—		22,725,000
8 Doubtful	—		—		—		—		—
Total	$	269,462,000	$	24,881,000	$	128,341,000	$	19,751,000	$	442,435,000

The following table summarizes the risk ratings for the Company's commercial real estate, commercial construction, commercial other, and municipal loans as of September 30, 2015:



	Commercial Real Estate		Commercial Construction		Commercial Other		Municipal Loans		All Risk- Rated Loans
1 Strong	$	8,000	$	—	$	788,000	$	—	$	796,000
2 Above Average	26,881,000		58,000		8,753,000		19,892,000		55,584,000
3 Satisfactory	50,944,000		2,389,000		29,253,000		1,485,000		84,071,000
4 Average	127,903,000		16,711,000		55,625,000		—		200,239,000
5 Watch	36,213,000		3,749,000		19,457,000		—		59,419,000
6 OAEM	8,477,000		—		1,836,000		—		10,313,000
7 Substandard	18,315,000		717,000		3,385,000		—		22,417,000
8 Doubtful	—		—		—		—		—
Total	$	268,741,000	$	23,624,000	$	119,097,000	$	21,377,000	$	432,839,000

Commercial loans are generally charged off when all or a portion of the principal amount is determined to be uncollectible. This determination is based on circumstances specific to a borrower including repayment ability, analysis of collateral and other factors as applicable.

Residential loans are comprised of two classes: term loans, which include traditional amortizing home mortgages, and construction loans, which include loans for owner-occupied residential construction. Residential loans typically have a 75% to 80% loan to value based upon current appraisal information at the time the loan is made. Home equity loans and lines of credit are typically written to the same underwriting standards. Consumer loans are primarily amortizing loans to individuals collateralized by automobiles, pleasure craft and recreation vehicles, typically with a maximum loan to value of 80% to 90% of the purchase price of the collateral. Consumer loans also include a small amount of unsecured short-term time notes to individuals.

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

There were no changes to the Company's accounting policies or methodology used to estimate the allowance for loan losses during the nine months ended September 30, 2016.

Page 24

The following table presents allowance for loan losses activity by class for the nine months and quarter ended September 30, 2016, and allowance for loan loss balances by class and related loan balances by class as of September 30, 2016:



	Commercial							Municipal		Residential				Home Equity Line of Credit		Consumer		Unallocated			Total
	Real Estate		Construction			Other				Term		Construction
For the nine months ended September 30, 2016
Beginning balance	$	3,120,000	$	580,000		$	1,452,000	$	17,000	$	1,391,000	$	24,000	$	893,000	$	566,000	$	1,873,000		$	9,916,000
Charge offs	33,000		75,000			167,000		—		338,000		—		147,000		246,000		—			1,006,000
Recoveries	—		4,000			80,000		—		88,000		—		3,000		88,000		—			263,000
Provision (credit)	952,000		(182,000		)	323,000		1,000		218,000		13,000		125,000		210,000		(535,000		)	1,125,000
Ending balance	$	4,039,000	$	327,000		$	1,688,000	$	18,000	$	1,359,000	$	37,000	$	874,000	$	618,000	$	1,338,000		$	10,298,000
For the three months ended September 30, 2016
Beginning balance	$	3,955,000	$	318,000		$	1,778,000	$	17,000	$	1,365,000	$	34,000	$	880,000	$	635,000	$	1,216,000		$	10,198,000
Charge offs	—		17,000			137,000		—		72,000		—		25,000		89,000		—			340,000
Recoveries	—		4,000			24,000		—		14,000		—		1,000		22,000		—			65,000
Provision	84,000		22,000			23,000		1,000		52,000		3,000		18,000		50,000		122,000			375,000
Ending balance	$	4,039,000	$	327,000		$	1,688,000	$	18,000	$	1,359,000	$	37,000	$	874,000	$	618,000	$	1,338,000		$	10,298,000
Allowance for loan losses as of September 30, 2016
Ending balance specifically evaluated for impairment	$	381,000	$	99,000		$	68,000	$	—	$	318,000	$	—	$	32,000	$	51,000	$	—		$	949,000
Ending balance collectively evaluated for impairment	$	3,658,000	$	228,000		$	1,620,000	$	18,000	$	1,041,000	$	37,000	$	842,000	$	567,000	$	1,338,000		$	9,349,000
Related loan balances as of September 30, 2016
Ending balance	$	297,808,000	$	18,828,000		$	131,198,000	$	26,153,000	$	403,159,000	$	14,269,000	$	111,994,000	$	25,583,000	$	—		$	1,028,992,000
Ending balance specifically evaluated for impairment	$	10,442,000	$	788,000		$	1,254,000	$	—	$	14,131,000	$	—	$	1,400,000	$	170,000	$	—		$	28,185,000
Ending balance collectively evaluated for impairment	$	287,366,000	$	18,040,000		$	129,944,000	$	26,153,000	$	389,028,000	$	14,269,000	$	110,594,000	$	25,413,000	$	—		$	1,000,807,000

Page 25

The following table presents allowance for loan losses activity by class for the year-ended December 31, 2015 and allowance for loan loss balances by class and related loan balances by class as of December 31, 2015:



	Commercial								Municipal		Residential				Home Equity Line of Credit		Consumer		Unallocated		Total
	Real Estate			Construction			Other				Term		Construction
For the year ended December 31, 2015
Beginning balance	$	3,532,000		$	823,000		$	1,505,000	$	15,000	$	1,185,000	$	20,000	$	1,060,000	$	542,000	$	1,662,000	$	10,344,000
Charge offs	280,000			9,000			732,000		—		420,000		—		582,000		350,000		—		2,373,000
Recoveries	2,000			1,000			88,000		—		152,000		—		31,000		121,000		—		395,000
Provision (credit)	(134,000		)	(235,000		)	591,000		2,000		474,000		4,000		384,000		253,000		211,000		1,550,000
Ending balance	$	3,120,000		$	580,000		$	1,452,000	$	17,000	$	1,391,000	$	24,000	$	893,000	$	566,000	$	1,873,000	$	9,916,000
Allowance for loan losses as of December 31, 2015
Ending balance specifically evaluated for impairment	$	89,000		$	302,000		$	8,000	$	—	$	326,000	$	—	$	29,000	$	—	$	—	$	754,000
Ending balance collectively evaluated for impairment	$	3,031,000		$	278,000		$	1,444,000	$	17,000	$	1,065,000	$	24,000	$	864,000	$	566,000	$	1,873,000	$	9,162,000
Related loan balances as of December 31, 2015
Ending balance	$	269,462,000		$	24,881,000		$	128,341,000	$	19,751,000	$	403,030,000	$	8,451,000	$	110,202,000	$	24,520,000	$	—	$	988,638,000
Ending balance specifically evaluated for impairment	$	10,717,000		$	1,026,000		$	1,234,000	$	—	$	15,088,000	$	—	$	1,466,000	$	—	$	—	$	29,531,000
Ending balance collectively evaluated for impairment	$	258,745,000		$	23,855,000		$	127,107,000	$	19,751,000	$	387,942,000	$	8,451,000	$	108,736,000	$	24,520,000	$	—	$	959,107,000

Page 26

The following table presents allowance for loan losses activity by class for the nine months and quarter ended September 30, 2015, and allowance for loan loss balances by class and related loan balances by class as of September 30, 2015:



	Commercial									Municipal		Residential					Home Equity Line of Credit		Consumer		Unallocated		Total
	Real Estate			Construction			Other					Term		Construction
For the nine months ended September 30, 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	254,000			9,000			732,000			—		187,000		—			532,000		282,000		—		1,996,000
Recoveries	1,000			—			66,000			—		37,000		—			31,000		94,000		—		229,000
Provision (credit)	(128,000		)	(256,000		)	537,000			1,000		130,000		2,000			342,000		208,000		264,000		1,100,000
Ending balance	$	3,151,000		$	558,000		$	1,376,000		$	16,000	$	1,165,000	$	22,000		$	901,000	$	562,000	$	1,926,000	$	9,677,000
For the three months ended September 30, 2015
Beginning balance	$	2,943,000		$	705,000		$	1,671,000		$	16,000	$	1,184,000	$	27,000		$	918,000	$	580,000	$	1,864,000	$	9,908,000
Charge offs	132,000			—			246,000			—		38,000		—			24,000		77,000		—		517,000
Recoveries	1,000			—			51,000			—		4,000		—			1,000		29,000		—		86,000
Provision (credit)	339,000			(147,000		)	(100,000		)	—		15,000		(5,000		)	6,000		30,000		62,000		200,000
Ending balance	$	3,151,000		$	558,000		$	1,376,000		$	16,000	$	1,165,000	$	22,000		$	901,000	$	562,000	$	1,926,000	$	9,677,000
Allowance for loan losses as of September 30, 2015
Ending balance specifically evaluated for impairment	$	71,000		$	282,000		$	8,000		$	—	$	435,000	$	—		$	30,000	$	—	$	—	$	826,000
Ending balance collectively evaluated for impairment	$	3,080,000		$	276,000		$	1,368,000		$	16,000	$	730,000	$	22,000		$	871,000	$	562,000	$	1,926,000	$	8,851,000
Related loan balances as of September 30, 2015
Ending balance	$	268,741,000		$	23,624,000		$	119,097,000		$	21,377,000	$	385,145,000	$	12,029,000		$	109,390,000	$	23,748,000	$	—	$	963,151,000
Ending balance specifically evaluated for impairment	$	11,228,000		$	996,000		$	1,736,000		$	—	$	15,276,000	$	—		$	1,550,000	$	—	$	—	$	30,786,000
Ending balance collectively evaluated for impairment	$	257,513,000		$	22,628,000		$	117,361,000		$	21,377,000	$	369,869,000	$	12,029,000		$	107,840,000	$	23,748,000	$	—	$	932,365,000

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 September 30, 2016, 108,710 shares of restricted stock had been granted under the 2010 Plan, of which 67,064 shares remain restricted as of September 30, 2016 as detailed in the following table:



Year Granted	Vesting Term (In Years)	Shares	Remaining Term (In Years)
2012	5.0	7,996	0.2
2013	5.0	14,776	1.2
2014	5.0	10,422	2.2
2015	5.0	12,023	3.2
2016	1.0	6,832	0.2
2016	5.0	15,015	4.2
		67,064	2.2

The compensation cost related to these restricted stock grants is $1,140,000 and will be recognized over the vesting terms of each grant. In the nine months ended September 30, 2016, $215,000 of expense was recognized for these restricted shares, leaving $540,000 in unrecognized expense as of September 30, 2016. In the nine months ended September 30, 2015, $222,000 of expense was recognized for restricted shares, leaving $419,000 in unrecognized expense as of September 30, 2015.

The Company established a shareholder-approved stock option plan in 1995 (the "1995 Plan"), under which the Company granted options to employees for 600,000 shares of common stock. Only incentive stock options were granted under the 1995 Plan. The option price of each option grant was determined by the Options Committee of the Board of Directors, and in no instance was less than the fair market value on the date of the grant. An option's maximum term was ten years from the date of grant, with 50% of the options granted vesting two years from the date of grant and the remaining 50% vesting five years from the date of grant. As of January 16, 2005, all options under the 1995 Plan had been granted, and as of January 16, 2015, all options granted under the 1995 plan had been exercised or expired.

Note 6 – Preferred and Common Stock

Preferred Stock

On January 9, 2009, the Company issued $25,000,000 in Fixed Rate Cumulative Perpetual Preferred Stock, Series A, to the U.S. Treasury ("Treasury') under the Capital Purchase Program ("the CPP Shares"). The CPP Shares qualified as Tier 1 capital on the Company's books for regulatory purposes and ranked senior to the Company's common stock and senior or at an equal level in the Company's capital structure to any other shares of preferred stock the Company may issue in the future. In three separate transactions in 2012 and 2013, the Company repurchased all of the CPP shares from the Treasury.

Incident to such issuance of the CPP shares, the Company issued to the Treasury warrants (the "Warrants") to purchase up to 225,904 shares of the Company's common stock at a price per share of $16.60 (subject to adjustment). The Warrants (and any shares of common stock issuable pursuant to the Warrants) are freely transferable by the Treasury to third parties. The Warrants have a term of ten years and could be exercised by the Treasury or a subsequent holder at any time or from time to time during their term. To the extent they had not previously been exercised, the Warrants will expire after ten years. The Warrants were unchanged as a result of the CPP Shares repurchase transactions.

In May 2015, the Treasury sold all of the Warrants to private parties. In accordance with the contractual terms of the Warrants, the number of shares issuable upon exercise of the warrants and strike price were adjusted at the time of the sale. As a result of this transaction, the number of issuable shares under the Warrants now stands at 226,819 shares with a strike price of $16.53 per share.

Common Stock

Proceeds from sale of common stock totaled $391,000 and $343,000 for the nine months ended September 30, 2016 and 2015, respectively.

Page 28

Note 7 – Earnings Per Share

The following table sets forth the computation of basic and diluted earnings per share (EPS) for the nine months ended September 30, 2016 and 2015:



	Income (Numerator)		Shares (Denominator)	Per-Share Amount
For the nine months ended September 30, 2016
Net income as reported	$	13,689,000
Basic EPS: Income available to common shareholders	13,689,000		10,709,901	$	1.28
Effect of dilutive securities: restricted stock and warrants			110,492
Diluted EPS: Income available to common shareholders plus assumed conversions	$	13,689,000	10,820,393	$	1.27
For the nine months ended September 30, 2015
Net income as reported	$	12,437,000
Basic EPS: Income available to common shareholders	12,437,000		10,671,573	$	1.17
Effect of dilutive securities: restricted stock and warrants			80,706
Diluted EPS: Income available to common shareholders plus assumed conversions	$	12,437,000	10,752,279	$	1.16

The following table sets forth the computation of basic and diluted EPS for the quarters ended September 30, 2016 and 2015.



	Income (Numerator)		Shares (Denominator)	Per-Share Amount
For the quarter ended September 30, 2016
Net income as reported	$	4,562,000
Basic EPS: Income available to common shareholders	4,562,000		10,718,873	$	0.43
Effect of dilutive securities: restricted stock and warrants			125,495
Diluted EPS: Income available to common shareholders plus assumed conversions	$	4,562,000	10,844,368	$	0.42
For the quarter ended September 30, 2015
Net income as reported	$	4,188,000
Basic EPS: Income available to common shareholders	4,188,000		10,677,922	$	0.39
Effect of dilutive securities: restricted stock and warrants			95,278
Diluted EPS: Income available to common shareholders plus assumed conversions	$	4,188,000	10,773,200	$	0.39

All earnings per share calculations have been made using the weighted average number of shares outstanding during the period. The potentially dilutive securities are 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 warrants were exercisable at the end of each period. Warrants that are out-of-the-money are not considered in the calculation of dilutive earnings per share as the effect would be anti-dilutive.

The following table presents the number of warrants outstanding as of September 30, 2016 and 2015 and the amount for which the average market price at period end is above or below the strike price:



	Outstanding	In-the-Money	Out-of-the-Money
For the three and nine months ended September 30, 2016
Warrants to private parties	226,819	226,819	—
Total	226,819	226,819	—
For the three and nine months ended September 30, 2015
Warrants issued to Treasury	226,819	226,819	—
Total	226,819	226,819	—

Page 29

Note 8 – Employee Benefit Plans

401(k) Plan

The Bank has a defined contribution plan available to substantially all employees who have completed 3 months of service. Employees may contribute up to Internal Revenue Service ("IRS") determined limits and the Bank may match employee contributions not to exceed 3.0% of compensation depending on contribution level. Subject to a vote of the Board of Directors, the Bank may also make a profit-sharing contribution to the Plan. Such contribution equaled 2.0% of each eligible employee's compensation in 2015. The amount for 2016 has not been established. The expense related to the 401(k) plan was $338,000 and $333,000 for the nine months ended September 30, 2016 and 2015, 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 Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") Topic 712 "Compensation – Nonretirement Postemployment Benefits". The expense of these supplemental retirement benefits was $161,000 for the nine months ended September 30, 2016 and $234,000 for the same period in 2015. As of September 30, 2016, the associated accrued liability included in other liabilities in the balance sheet was $3,072,000 compared to $3,088,000 and $3,074,000 at December 31, 2015 and September 30, 2015, respectively.

Post-Retirement Benefit Plans

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



	At or for the nine months ended September 30,
	2016			2015
Change in benefit obligation
Benefit obligation at beginning of year	$	1,967,000		$	1,928,000
Service cost	—			—
Interest cost	63,000			54,000
Benefits paid	(90,000		)	(78,000		)
Benefit obligation at end of period	$	1,940,000		$	1,904,000
Funded status
Benefit obligation at end of period	$	(1,940,000	)	$	(1,904,000	)
Unamortized loss	240,000			192,000
Accrued benefit cost at end of period	$	(1,700,000	)	$	(1,712,000	)

The following table sets forth the net periodic pension cost:



	For the nine months ended September 30,				For the quarter ended September 30,
	2016		2015		2016		2015
Components of net periodic benefit cost
Service cost	$	—	$	—	$	—	$	—
Interest cost	63,000		54,000		21,000		18,000
Net periodic benefit cost	$	63,000	$	54,000	$	21,000	$	18,000

Page 30

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



	September 30, 2016			December 31, 2015			September 30, 2015
Unamortized net actuarial loss	$	(240,000	)	$	(240,000	)	$	(192,000	)
Deferred tax benefit at 35%	84,000			84,000			67,000
Net unrecognized postretirement benefits included in accumulated other comprehensive income (loss)	$	(156,000	)	$	(156,000	)	$	(125,000	)

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

Note 9 - Other Comprehensive Income (Loss)

The following table summarizes activity in the unrealized gain or loss on available for sale securities included in other comprehensive income (loss) for the nine months and quarters ended September 30, 2016 and 2015.



	For the nine months ended September 30,						For the quarter ended September 30,
	2016			2015			2016			2015
Balance at beginning of period	$	1,123,000		$	2,522,000		$	4,000,000		$	988,000
Unrealized gains (losses) arising during the period	3,106,000			1,082,000			(1,851,000		)	2,047,000
Reclassification of realized gains during the period	(668,000		)	(1,396,000		)	(137,000		)	(1,000		)
Related deferred taxes	(853,000		)	110,000			696,000			(716,000		)
Net change	1,585,000			(204,000		)	(1,292,000		)	1,330,000
Balance at end of period	$	2,708,000		$	2,318,000		$	2,708,000		$	2,318,000

The reclassification of realized gains is included in the net securities gains line of the consolidated statements of income and comprehensive income and the tax effect is included in the income tax expense line of the same statement.

The following table summarizes activity in the unrealized loss on securities transferred from available for sale to held to maturity included in other comprehensive income (loss) for the nine months and quarters ended September 30, 2016 and 2015.



	For the nine months ended September 30,						For the quarter ended September 30,
	2016			2015			2016			2015
Balance at beginning of period	$	(112,000	)	$	(48,000	)	$	(133,000	)	$	(84,000	)
Amortization of net unrealized gains (losses)	(18,000		)	(78,000		)	14,000			(51,000		)
Related deferred taxes	6,000			27,000			(5,000		)	36,000
Net change	(12,000		)	(51,000		)	9,000			(15,000		)
Balance at end of period	$	(124,000	)	$	(99,000	)	$	(124,000	)	$	(99,000	)

Page 31

The following table presents the effect of the Company's derivative financial instruments included in other comprehensive income (loss) for the nine months and quarters ended September 30, 2016 and 2015.



	For the nine months ended September 30,					For the quarter ended September 30,
	2016			2015		2016			2015
Balance at beginning of period	$	—		$	—	$	(135,000	)	$	—
Unrealized gains on cash flow hedging derivatives arising during the period	90,000			—		298,000			—
Related deferred taxes	(32,000		)	—		(105,000		)	—
Net change	58,000			—		193,000			—
Balance at end of period	$	58,000		$	—	$	58,000		$	—

The following table summarizes activity in the unrealized gain or loss on postretirement benefits included in other comprehensive income (loss) for the nine months and quarters ended September 30, 2016 and 2015.



	For the nine months ended September 30,						For the quarter ended September 30,
	2016			2015			2016			2015
Unrecognized postretirement benefits at beginning of period	$	(156,000	)	$	(125,000	)	$	(156,000	)	$	(125,000	)
Amortization of unrecognized transition obligation	—			—			—			—
Change in unamortized net actuarial gain (loss)	—			—			—			—
Related deferred taxes	—			—			—			—
Unrecognized postretirement benefits at end of period	$	(156,000	)	$	(125,000	)	$	(156,000	)	$	(125,000	)

Page 32

Note 10 - Financial Derivative Instruments

The Company recognizes its derivative instruments in the consolidated balance sheet at fair value. On the date the derivative instrument is entered into, the Company designates whether the derivative is part of a hedging relationship (i.e., cash flow or fair value hedge). The Company formally documents relationships between hedging instruments and hedged items, as well as its risk management objective and strategy for undertaking hedge transactions. The Company also assesses, both at the hedge’s inception and on an ongoing basis, whether the derivatives used in hedging transactions are highly effective in offsetting the changes in cash flows or fair values of hedged items. Changes in fair value of derivative instruments that are highly effective and qualify as cash flow hedges are recorded in other comprehensive income or loss. Any ineffective portion is recorded in earnings. The Company discontinues hedge accounting when it is determined that the derivative is no longer highly effective in offsetting changes of the hedged risk on the hedged item, or management determines that the designation of the derivative as a hedging instrument is no longer appropriate.

In 2016, interest rate swaps were contracted to limit the Company’s exposure to rising interest rates on short-term liabilities indexed to one-month London Inter-bank Offered Rates (LIBOR). The interest rate swaps were designated as cash flow hedges.

The details of the interest rate swap agreements are as follows:



							As of September 30
							2016		2015
Notional Amount		Effective Date	Maturity Date	Variable Index Received	Fixed Rate Paid		Fair Value⁽¹⁾		Fair Value⁽¹⁾
$	30,000,000	June 28, 2016	June 28, 2021	1-Month USD LIBOR	0.940	%	$	28,000	$	—
$	20,000,000	June 27, 2016	June 27, 2021	1-Month USD LIBOR	0.893	%	$	62,000	—
$	50,000,000						$	90,000	$	—

⁽¹⁾ Presented within other assets in the consolidated balance sheet.

The Company would reclassify unrealized gains or losses accounted for within accumulated other comprehensive income (loss) into earnings if the interest rate swaps were to become ineffective or the swaps were to terminate. In the next 12 months, the Company does not believe it will be required to reclassify any unrealized gains or losses accounted for within accumulated other comprehensive income (loss) into earnings as a result of ineffectiveness or swap termination. Amounts paid or received under the swaps are reported in interest expense in the statement of income, and in interest paid in the statement of cash flows.

Note 11 – Mortgage Servicing Rights

FASB ASC Topic 860 "Transfers and Servicing" requires all separately recognized servicing assets and servicing liabilities to be initially measured at fair value, if practicable. The Company's servicing assets and servicing liabilities are reported using the amortization method and carried at the lower of amortized cost or fair value by strata. In evaluating the carrying values of mortgage servicing rights, the Company obtains third party valuations based on loan level data including note rate, type and term of the underlying loans. The model utilizes several assumptions, the most significant of which is loan prepayments, calculated using a three-months moving average of weekly prepayment data published by the Public Securities Association (PSA) and modeled against the serviced loan portfolio, and the discount rate to discount future cash flows. As of September 30, 2016, the prepayment assumption using the PSA model was 271, which translates into an anticipated prepayment rate of 16.24%. The discount rate is the quarterly average 10 year U.S. Treasury plus 3.79%. Other assumptions include delinquency rates, foreclosure rates, servicing cost inflation, and annual unit loan cost. All assumptions are adjusted periodically to reflect current circumstances. Amortization of mortgage servicing rights, as well as write-offs due to prepayments of the related mortgage loans, are recorded as a charge against mortgage servicing fee income.

For the nine months ended September 30, 2016 and 2015, servicing rights capitalized totaled $370,000 and $358,000, respectively. Servicing rights capitalized for the three-month periods ended September 30, 2016 and 2015, were $197,000 and $131,000 respectively. Servicing rights amortized for the nine months ended September 30, 2016 and 2015, were $339,000 and $337,000, respectively. The fair value of servicing rights was $1,683,000, $1,915,000 and $2,014,000 at September 30, 2016,

Page 33

December 31, 2015 and September 30, 2015, respectively. The Bank serviced loans for others totaling $241,028,000, $223,610,000 and $218,624,000 at September 30, 2016, December 31, 2015, and September 30, 2015, respectively.

Mortgage servicing rights are included in other assets and detailed in the following table:



	September 30, 2016			December 31, 2015			September 30, 2015
Mortgage servicing rights	$	5,718,000		$	5,747,000		$	6,398,000
Accumulated amortization	(4,560,000		)	(4,619,000		)	(5,287,000		)
Impairment reserve	(87,000		)	(35,000		)	(16,000		)
	$	1,071,000		$	1,093,000		$	1,095,000

Note 12 – Income Taxes

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

Note 13 - Certificates of Deposit

The following table represents the breakdown of certificates of deposit at September 30, 2016 and 2015, and at December 31, 2015:



	September 30, 2016		December 31, 2015		September 30, 2015
Certificates of deposit < $100,000	$	192,424,000	$	158,529,000	$	141,946,000
Certificates $100,000 to $250,000	183,991,000		175,077,000		204,707,000
Certificates $250,000 and over	48,040,000		37,376,000		42,654,000
	$	424,455,000	$	370,982,000	$	389,307,000

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.

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

Cash, Cash Equivalents and Interest-Bearing Deposits in Other Banks

The carrying values of cash equivalents, due from banks and federal funds sold approximate their relative fair values. As such, the Company classifies these financial instruments as Level 1.

Investment Securities

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

Loans Held for Sale

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

Loans

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

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.

Page 35

Deposits

The fair value of deposits is based on the discounted value of contractual cash flows. The discount rate is estimated using the rates currently offered for deposits of similar remaining maturities. As such, the Company classifies deposits as Level 2.

The fair value estimates do not include the benefit that results from the low-cost funding provided by the deposits compared to the cost of borrowing funds in the market. If that value were considered, the fair value of the Company's net assets could increase.

Borrowed Funds

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

Derivatives

The fair value of interest rate swaps is determined using inputs that are observable in the market place obtained from third parties including yield curves, publicly available volatilities, and floating indexes and, accordingly, are classified as Level 2 inputs. The credit value adjustments associated with derivatives utilize Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default by the Company and its counterparties. As of September 30, 2016, the Company has assessed the significance of the impact of the credit valuation adjustments on the overall valuation of its derivative positions and has determined that the credit valuation adjustments are not significant to the overall valuation of its derivatives due to collateral postings.

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 that were measured at fair value on a recurring basis as of September 30, 2016, December 31, 2015 and September 30, 2015.



	At September 30, 2016
	Level 1		Level 2		Level 3		Total
Securities available for sale
Mortgage-backed securities	$	—	$	261,514,000	$	—	$	261,514,000
State and political subdivisions	—		17,484,000		—		17,484,000
Other equity securities	—		3,295,000		—		3,295,000
Total Securities available for sale	—		282,293,000		—		282,293,000
Interest rate swap agreements	—		90,000		—		90,000
Total assets	$	—	$	282,383,000	$	—	$	282,383,000

Page 36



	At December 31, 2015
	Level 1		Level 2		Level 3		Total
Securities available for sale
Mortgage-backed securities	$	—	$	195,110,000	$	—	$	195,110,000
State and political subdivisions	—		24,506,000		—		24,506,000
Other equity securities	—		3,423,000		—		3,423,000
Total assets	$	—	$	223,039,000	$	—	$	223,039,000



	At September 30, 2015
	Level 1		Level 2		Level 3		Total
Securities available for sale
Mortgage-backed securities	$	—	$	187,510,000	$	—	$	187,510,000
State and political subdivisions	—		25,290,000		—		25,290,000
Other equity securities	—		3,133,000		—		3,133,000
Total assets	$	—	$	215,933,000	$	—	$	215,933,000

Assets and Liabilities Recorded at Fair Value on a Non-Recurring Basis

The following tables include assets measured at fair value on a nonrecurring basis that have had a fair value adjustment since their initial recognition. Other real estate owned is presented net of an allowance of $162,000, $162,000 and $409,000 at September 30, 2016, December 31, 2015, and September 30, 2015, respectively. Only collateral-dependent impaired loans with a related specific allowance for loan losses or a partial charge off are included in impaired loans for purposes of fair value disclosures. Impaired loans below are presented net of specific allowances of $496,000, $292,000 and $394,000 at September 30, 2016, December 31, 2015, and September 30, 2015, respectively.



	At September 30, 2016
	Level 1		Level 2		Level 3		Total
Other real estate owned	$	—	$	855,000	$	—	$	855,000
Impaired loans	—		1,311,000		—		1,311,000
Total assets	$	—	$	2,166,000	$	—	$	2,166,000



	At December 31, 2015
	Level 1		Level 2		Level 3		Total
Other real estate owned	$	—	$	1,532,000	$	—	$	1,532,000
Impaired loans	—		699,000		—		699,000
Total assets	$	—	$	2,231,000	$	—	$	2,231,000



	At September 30, 2015
	Level 1		Level 2		Level 3		Total
Other real estate owned	$	—	$	1,916,000	$	—	$	1,916,000
Impaired loans	—		1,413,000		—		1,413,000
Total assets	$	—	$	3,329,000	$	—	$	3,329,000

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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 September 30, 2016 were as follows:



	Carrying value		Estimated fair value		Level 1		Level 2		Level 3
Financial assets
Cash and cash equivalents	$	23,456,000	$	23,456,000	$	23,456,000	$	—	$	—
Interest bearing deposits in other banks	15,098,000		15,098,000		15,098,000		—		—
Securities available for sale	282,293,000		282,293,000		—		282,293,000		—
Securities to be held to maturity	188,770,000		195,797,000		—		195,797,000		—
Restricted equity securities	14,048,000		14,048,000		—		14,048,000		—
Loans held for sale	1,228,000		1,228,000		—		1,228,000		—
Loans (net of allowance for loan losses)
Commercial
Real estate	293,167,000		289,015,000		—		544,000		288,471,000
Construction	18,452,000		18,191,000		—		—		18,191,000
Other	129,258,000		129,143,000		—		—		129,143,000
Municipal	26,132,000		27,270,000		—		—		27,270,000
Residential
Term	401,597,000		409,916,000		—		703,000		409,213,000
Construction	14,226,000		14,170,000		—		—		14,170,000
Home equity line of credit	110,989,000		110,220,000		—		—		110,220,000
Consumer	24,873,000		24,724,000		—		64,000		24,660,000
Total loans	1,018,694,000		1,022,649,000		—		1,311,000		1,021,338,000
Mortgage servicing rights	1,071,000		1,683,000		—		1,683,000		—
Interest rate swap agreements	90,000		90,000		—		90,000		—
Accrued interest receivable	5,079,000		5,079,000		—		5,079,000		—
Financial liabilities
Demand deposits	$	158,476,000	$	163,498,000	$	—	$	163,498,000	$	—
NOW deposits	295,708,000		296,393,000		—		296,393,000		—
Money market deposits	76,685,000		71,714,000		—		71,714,000		—
Savings deposits	218,425,000		206,331,000		—		206,331,000		—
Local certificates of deposit	211,402,000		213,622,000		—		213,622,000		—
National certificates of deposit	213,053,000		213,332,000		—		213,332,000		—
Total deposits	1,173,749,000		1,164,890,000		—		1,164,890,000		—
Repurchase agreements	87,970,000		87,246,000		—		87,246,000		—
Federal Home Loan Bank advances	180,128,000		181,918,000		—		181,918,000		—
Total borrowed funds	268,098,000		269,164,000		—		269,164,000		—
Accrued interest payable	508,000		508,000		—		508,000		—

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The carrying amounts and estimated fair values for financial instruments as of December 31, 2015 were as follows:



	Carrying value		Estimated fair value		Level 1		Level 2		Level 3
Financial assets
Cash and cash equivalents	$	14,299,000	$	14,299,000	$	14,299,000	$	—	$	—
Interest bearing deposits in other banks	4,013,000		4,013,000		4,013,000		—		—
Securities available for sale	223,039,000		223,039,000		—		223,039,000		—
Securities to be held to maturity	240,023,000		243,123,000		—		243,123,000		—
Restricted equity securities	14,257,000		14,257,000		—		14,257,000		—
Loans held for sale	349,000		349,000		—		349,000		—
Loans (net of allowance for loan losses)
Commercial
Real estate	265,616,000		262,763,000		—		—		262,763,000
Construction	24,166,000		23,906,000		—		—		23,906,000
Other	126,551,000		126,141,000		—		—		126,141,000
Municipal	19,730,000		20,331,000		—		—		20,331,000
Residential
Term	401,315,000		405,315,000		—		—		405,315,000
Construction	8,421,000		8,379,000		—		—		8,379,000
Home equity line of credit	109,101,000		108,118,000		—		699,000		107,419,000
Consumer	23,822,000		23,754,000		—		—		23,754,000
Total loans	978,722,000		978,707,000		—		699,000		978,008,000
Mortgage servicing rights	1,093,000		1,915,000		—		1,915,000		—
Accrued interest receivable	4,912,000		4,912,000		—		4,912,000		—
Financial liabilities
Demand deposits	$	130,566,000	$	125,651,000	$	—	$	125,651,000	$	—
NOW deposits	242,638,000		224,627,000		—		224,627,000		—
Money market deposits	92,994,000		82,050,000		—		82,050,000		—
Savings deposits	206,009,000		181,010,000		—		181,010,000		—
Local certificates of deposit	201,420,000		201,013,000		—		201,013,000		—
National certificates of deposit	169,562,000		169,617,000		—		169,617,000		—
Total deposits	1,043,189,000		983,968,000		—		983,968,000		—
Repurchase agreements	87,103,000		82,168,000		—		82,168,000		—
Federal Home Loan Bank advances	250,354,000		250,027,000		—		250,027,000		—
Total borrowed funds	337,457,000		332,195,000		—		332,195,000		—
Accrued interest payable	435,000		435,000		—		435,000		—

Page 39

The carrying amount and estimated fair values for financial instruments as of September 30, 2015 were as follows:



	Carrying value		Estimated fair value		Level 1		Level 2		Level 3
Financial assets
Cash and cash equivalents	$	19,169,000	$	19,169,000	$	19,169,000	$	—	$	—
Interest bearing deposits in other banks	301,000		301,000		301,000		—		—
Securities available for sale	215,933,000		215,933,000		—		215,933,000		—
Securities to be held to maturity	245,322,000		248,344,000		—		248,344,000		—
Restricted equity securities	13,912,000		13,912,000		—		13,912,000		—
Loans held for sale	200,000		200,000		—		200,000		—
Loans (net of allowance for loan losses)
Commercial
Real estate	264,807,000		262,197,000		—		—		262,197,000
Construction	22,927,000		22,701,000		—		—		22,701,000
Other	117,379,000		117,427,000		—		—		117,427,000
Municipal	21,357,000		21,907,000		—		—		21,907,000
Residential
Term	383,691,000		390,392,000		—		1,413,000		388,979,000
Construction	12,002,000		11,960,000		—		—		11,960,000
Home equity line of credit	108,265,000		107,589,000		—		—		107,589,000
Consumer	23,046,000		23,117,000		—		—		23,117,000
Total loans	953,474,000		957,290,000		—		1,413,000		955,877,000
Mortgage servicing rights	1,095,000		2,014,000		—		2,014,000		—
Accrued interest receivable	5,189,000		5,189,000		—		5,189,000		—
Financial liabilities
Demand deposits	$	128,555,000	$	124,979,000	$	—	$	124,979,000	$	—
NOW deposits	246,155,000		230,680,000		—		230,680,000		—
Money market deposits	95,217,000		84,535,000		—		84,535,000		—
Savings deposits	199,131,000		176,791,000		—		176,791,000		—
Local certificates of deposit	195,607,000		196,663,000		—		196,663,000		—
National certificates of deposit	193,700,000		193,774,000		—		193,774,000		—
Total deposits	1,058,365,000		1,007,422,000		—		1,007,422,000		—
Repurchase agreements	100,498,000		95,078,000		—		95,078,000		—
Federal Home Loan Bank advances	196,871,000		197,795,000		—		197,795,000		—
Total borrowed funds	297,369,000		292,873,000		—		292,873,000		—
Accrued interest payable	499,000		499,000		—		499,000		—

Note 16 – Impact of Recently Issued Accounting Standards

In January 2016, the FASB issued Accounting Standards Update ("ASU") No. 2016-01, Financial Instruments - Overall: Recognition and Measurement of Financial Assets and Financial Liabilities. The ASU was issued to enhance the reporting model for financial instruments to provide users of financial statements with more decision-useful information. This ASU changes how entities account for equity investments that do not result in consolidation and are not accounted for under the equity method of accounting. The ASU also changes certain disclosure requirements and other aspects of U.S. GAAP, including a requirement for public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes. The ASU is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The ASU will not have a material effect on the Company's consolidated financial statements.

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). The ASU was issued to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. The ASU is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2018. Management is reviewing the guidance in the ASU to determine whether it will have a material effect on the Company’s consolidated financial statements.

Page 40

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. Under the new guidance, which will replace the existing incurred loss model for recognizing credit losses, banks and other lending institutions will be required to recognize the full amount of expected credit losses. The new guidance, which is referred to as the current expected credit loss model, requires that expected credit losses for financial assets held at the reporting date that are accounted for at amortized cost be measured and recognized based on historical experience and current and reasonably supportable forecasted conditions to reflect the full amount of expected credit losses. A modified version of these requirements also applies to debt securities classified as available for sale. The ASU is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted for fiscal years beginning after December 15, 2018, including interim periods within such years. The Company is evaluating the potential impact of the ASU on its 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, 2015, as filed with the SEC, may result in these differences. You should carefully review all of these factors, and you should be aware that there may be other factors that could cause these differences. These forward-looking statements were based on information, plans and estimates at the date of this quarterly report, and we assume no obligation to update any forward-looking statements to reflect changes in underlying assumptions or factors, new information, future events or other changes.

Although the Company believes that the expectations reflected in such forward-looking statements are reasonable, actual results may differ materially from the results discussed in these forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. The Company undertakes no obligation to republish revised forward-looking statements to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events. Readers are also urged to carefully review and consider the various disclosures made by the Company, which attempt to advise interested parties of the facts that affect the Company's business.

Critical Accounting Policies

Management's discussion and analysis of the Company's financial condition is based on the consolidated financial statements which are prepared in accordance with GAAP. The preparation of such financial statements requires Management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosure of contingent assets and liabilities. On an ongoing basis, Management evaluates its estimates, including those related to the allowance for loan losses, goodwill, the valuation of mortgage servicing rights, and other-than-temporary impairment on securities. Management bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis in making judgments about the carrying values of assets that are not readily apparent from other sources. Actual results could differ from the amount derived from Management's estimates and assumptions under different assumptions or conditions.

Allowance for Loan Losses. Management believes the allowance for loan losses requires the most significant estimates and assumptions used in the preparation of the consolidated financial statements. The allowance for loan losses is based on Management's evaluation of the level of the allowance required in relation to the estimated loss exposure in the loan portfolio. Management believes the allowance for loan losses is a significant estimate and therefore regularly evaluates it to determine the appropriate level by taking into consideration factors such as prior loan loss experience, the character and size of the loan portfolio, business and economic conditions and Management's estimation of potential losses. The use of different estimates or assumptions could produce different provisions for loan losses.

Goodwill. Management utilizes numerous techniques to estimate the value of various assets held by the Company, including methods to determine the appropriate carrying value of goodwill as required under FASB ASC Topic 350 "Intangibles – Goodwill and Other." In addition, goodwill from a purchase acquisition is subject to ongoing periodic impairment tests, which include an evaluation of the ongoing assets, liabilities and revenues from the acquisition and an estimation of the impact of business conditions.

Page 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.

Derivative Financial Instruments Designated as Hedges. The Company recognizes all derivatives in the consolidated balance sheets at fair value. On the date the Company enters into the derivative contract, the Company designates the derivative as a hedge of either a forecasted transaction or the variability of cash flows to be received or paid related to a recognized asset or liability (“cash flow hedge”), a hedge of the fair value of a recognized asset or liability or of an unrecognized firm commitment (“fair value hedge”), or a held for trading instrument (“trading instrument”). The Company formally documents relationships between hedging instruments and hedged items, as well as its risk management objectives and strategy for undertaking various hedge transactions. The Company also assesses, both at the hedge’s inception and on an ongoing basis, whether the derivatives that are used in hedging transactions are effective in offsetting changes in cash flows or fair values of hedged items. Changes in fair value of a derivative that is effective and that qualifies as a cash flow hedge are recorded in other comprehensive income (loss) and are reclassified into earnings when the forecasted transaction or related cash flows affect earnings. Changes in fair value of a derivative that qualifies as a fair value hedge and the change in fair value of the hedged item are both recorded in earnings and offset each other when the transaction is effective. Those derivatives that are classified as trading instruments are recorded at fair value with changes in fair value recorded in earnings. The Company discontinues hedge accounting when it determines that the derivative is no longer effective in offsetting changes in the cash flows of the hedged item, that it is unlikely that the forecasted transaction will occur, or that the designation of the derivative as a hedging instrument is no longer appropriate.

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.

Page 43

In several places net interest income is presented on a fully taxable-equivalent basis. Specifically included in interest income was tax-exempt interest income from certain investment securities and loans. An amount equal to the tax benefit derived from this tax exempt income has been added back to the interest income total which, as adjusted, increased net interest income accordingly. Management believes the disclosure of tax-equivalent net interest income information improves the clarity of financial analysis, and is particularly useful to investors in understanding and evaluating the changes and trends in the Company's results of operations. Other financial institutions commonly present net interest income on a tax-equivalent basis. This adjustment is considered helpful in the comparison of one financial institution's net interest income to that of another, as each will have a different proportion of tax-exempt interest from its earning assets. Moreover, net interest income is a component of a second financial measure commonly used by financial institutions, net interest margin, which is the ratio of net interest income to average earning assets. For purposes of this measure as well, other financial institutions generally use tax-equivalent net interest income to provide a better basis of comparison from institution to institution. The Company follows these practices. The following table provides a reconciliation of tax-equivalent financial information to the Company's consolidated financial statements prepared in accordance with GAAP. A 35.0% tax rate was used in both 2016 and 2015.



	For the nine months ended September 30,				For the quarter ended September 30,
Dollars in thousands	2016		2015		2016		2015
Net interest income as presented	$	32,209	$	30,291	$	10,529	$	10,511
Effect of tax-exempt income	2,291		2,332		785		775
Net interest income, tax equivalent	$	34,500	$	32,623	$	11,314	$	11,286

The Company presents its efficiency ratio using non-GAAP information which is most commonly used by financial institutions. The GAAP-based efficiency ratio is noninterest expenses divided by net interest income plus noninterest income from the Consolidated Statements of Income and Comprehensive Income (Loss). The non-GAAP efficiency ratio excludes securities losses and other-than-temporary impairment charges from noninterest expenses, excludes securities gains from noninterest income, and adds the tax-equivalent adjustment to net interest income. The following table provides a reconciliation between the GAAP and non-GAAP efficiency ratio:



	For the nine months ended September 30,						For the quarter ended September 30,
Dollars in thousands	2016			2015			2016			2015
Non-interest expense, as presented	$	21,850		$	21,952		$	7,405		$	7,707
Net interest income, as presented	32,209			30,291			10,529			10,511
Effect of tax-exempt income	2,291			2,332			785			775
Non-interest income, as presented	9,439			9,467			3,469			2,975
Effect of non-interest tax-exempt income	267			136			89			45
Net securities gains	(668		)	(1,396		)	(137		)	(1		)
Adjusted net interest income plus non-interest income	$	43,538		$	40,830		$	14,735		$	14,305
Non-GAAP efficiency ratio	50.19		%	53.76		%	50.25		%	53.88		%
GAAP efficiency ratio	52.46		%	55.21		%	52.90		%	57.15		%

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:

Page 44



	For the nine months ended September 30,						For the quarter ended September 30,
Dollars in thousands	2016			2015			2016			2015
Average shareholders' equity as presented	$	174,415		$	165,421		$	177,312		$	166,571
Less average intangible assets	(30,092		)	(30,137		)	(30,082		)	(30,125		)
Average tangible shareholders' common equity	$	144,323		$	135,284		$	147,230		$	136,446

Executive Summary

Net income for the nine months ended September 30, 2016 was $13.7 million, up $1.3 million or 10.1% from the same period in 2015. Earnings per common share on a fully diluted basis were $1.27 for the nine months ended September 30, 2016, up $0.11 or 9.5% from the $1.16 posted for the same period in 2015. For the quarter ended September 30, 2016, net income was $4.6 million, up $374,000 or 8.9% from the same period in 2015. Earnings per common share on a fully diluted basis were $0.42 for the quarter ended September 30, 2016, up $0.03 or 7.7% from the $0.39 posted in 2015. Compared to the previous quarter, net income was down $62,000 or 1.3% and earnings per common share on a fully diluted basis were down $0.01 or 2.3%.

This was the best performance for the first nine months of the year in the Company's history. It was also the second best quarter in the Company's history, just $62,000 below the record set in the second quarter of this year. Increased net interest income continues to drive our 2016 performance, the result of strong growth in earning assets. We maintained the quarterly dividend at 23 cents per share in the third quarter and we continue to pay out more than half of our net income to our shareholders in the form of cash dividends.

Net interest income on a tax-equivalent basis was up $1.9 million or 5.8% in the nine months ended September 30, 2016 compared to the same period in 2015, with all of the increase attributable to growth in earning assets, specifically in the loan portfolio, and a small takeaway attributable to our net interest margin slipping to 3.08% in 2016 versus 3.09% in 2015 due to securities calls.

For the quarter ended September 30, 2016, net interest income on a tax-equivalent basis increased $28,000 or 0.2% compared to the same period in 2015. Compared to the previous quarter, net interest income on a tax-equivalent basis was down $396,000 or 3.4%.

Non-interest income for the nine months ended September 30, 2016 was $28,000 or 0.3% lower than in the nine months ended September 30, 2015. This was primarily due to a lower level of gains from sale of securities. This was greatly offset, however, by a $441,000 or 40.3% increase in mortgage origination and servicing income. Non-interest expense for the nine months ended September 30, 2016 was $102,000 or 0.5% lower than in the same period in 2015, primarily due to a reduction in other-credit-related costs outside of the provision for loan losses.

This reduction in other-credit-related costs was driven by continued improvement in credit quality. Non-performing assets stood at 0.49% of total assets as of September 30, 2016 - well below the 0.65% of total assets as of September 30, 2015 and down from 0.57% as of December 31, 2015. Total past-due loans were 0.95% of total loans as of September 30, 2016, compared to 0.84% of total loans as of December 31, 2015, and down from 1.01% as of September 30, 2015.

The provision for loan losses for the first nine months of 2016 was $1.1 million, $25,000 or 2.3% higher than in the same period in 2015. Net loan chargeoffs for the nine months ended September 30, 2016 were $743,000 or 0.10% of average loans on an annualized basis. This was down $1.0 million from net chargeoffs of $1.8 million or 0.25% of average loans on an annualized basis for the nine months ended September 30, 2015. The allowance for loan losses increased $382,000 between December 31, 2015 and September 30, 2016, and is 1.00% of loans outstanding as of September 30, 2016, even with December 31, 2015 and September 30, 2015.

Total assets have increased $70.3 million or 4.5% year-to-date. The loan portfolio increased $40.4 million or 4.1% in the nine months ended September 30, 2016 and $65.8 million or 6.8% from a year ago. After topping the $1.0 billion mark in the first quarter of this year, the loan portfolio dropped slightly in the third quarter. This was partly due to lines of credit paying down earlier than expected. The majority of the loan growth has been in commercial and municipal loans, with modest growth in other loan categories. The investment portfolio has increased $7.8 million year-to-date and increased $9.9 million or 2.1% from a year ago. On the liability side of the balance sheet, low-cost deposits have increased $93.4 million or 16.1% year-to-date and increased $98.8 million or 17.2% over the past year. Local certificates of deposit ("CDs") increased $10.0 million and wholesale CDs increased $43.5 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 16.49%, well above the well-capitalized threshold of 10.0% set by the Federal Deposit Insurance Corporation.

Page 45

The Company's operating ratios remain good, with a return on average tangible common equity of 12.67% for the nine months ended September 30, 2016 compared to 12.29% for the same period in 2015. Based upon June 30, 2016 data, our return on average tangible common equity was in the top 15% of all banks in the UBPR peer group, which had an average return on equity of 9.46%. Our efficiency ratio continues to be an important component in our overall performance and dropped over 3.0% to 50.19% for the nine months ended September 30, 2016, from 53.76% for the same period in 2015. This ratio remains well below the UBPR peer group average of 64.25% as of June 30, 2016.

Net Interest Income

Total interest income of $40.2 million for the nine months ended September 30, 2016 was an increase of $2.4 million or 6.3% compared to total interest income of $37.8 million for the same period of 2015. Total interest expense of $8.0 million for the nine months ended September 30, 2016 was an increase of $469,000 or 6.3% compared to total interest expense for the nine months ended September 30, 2015. As a result, net interest income of $32.2 million for the nine months ended September 30, 2016 was an increase of $1.9 million or 6.3% compared to net interest income of $30.3 million for the same period ended September 30, 2015. The Company's net interest margin on a tax-equivalent basis decreased from 3.09% for the nine months ended September 30, 2015 to 3.08% for the nine months ended September 30, 2016. Tax-exempt interest income amounted to $4.2 million for the nine months ended September 30, 2016 and $4.3 million for the same period of 2015.

Total interest income of $13.3 million for the quarter ended September 30, 2016 is a 3.5% increase from total interest income of $12.8 million in the comparable period of 2015. Total interest expense of $2.8 million for the quarter ended September 30, 2016 is a 18.6% increase from total interest expense of $2.3 million for the comparable period of 2015. As a result, net interest income increased 0.2% or $18,000 to $10.5 million for the quarter ended September 30, 2016, from the same period in 2015. The Company's net interest margin on a tax-equivalent basis decreased from 3.11% for the quarter ended September 30, 2015 to 2.98% for the quarter ended September 30, 2016. Tax-exempt interest income amounted to $1.5 million and $1.4 million for the quarters ended September 30, 2016 and 2015, respectively.

The following tables present the amount of interest earned or paid, as well as the average yield or rate on an annualized basis, for each major category of assets or liabilities for the nine months and quarters ended September 30, 2016 and 2015. Tax-exempt income is calculated on a tax-equivalent basis, using a 35.0% tax rate in 2016 and 2015.



	For the nine months ended
	September 30, 2016				September 30, 2015
Dollars in thousands	Amount of interest		Average Yield/Rate		Amount of interest		Average Yield/Rate
Interest on earning assets
Interest-bearing deposits	$	17	0.40	%	$	16	0.25	%
Investments	12,412		3.51	%	12,607		3.71	%
Loans held for sale	20		3.74	%	12		3.71	%
Loans	30,001		3.94	%	27,469		3.88	%
Total interest income	42,450		3.79	%	40,104		3.80	%
Interest expense
Deposits	4,382		0.60	%	3,995		0.58	%
Other borrowings	3,568		1.59	%	3,486		1.62	%
Total interest expense	7,950		0.83	%	7,481		0.83	%
Net interest income	$	34,500			$	32,623
Interest rate spread			2.95	%			2.97	%
Net interest margin			3.08	%			3.09	%

Page 46



	For the quarters ended
	September 30, 2016				September 30, 2015
Dollars in thousands	Amount of interest		Average Yield/Rate		Amount of interest		Average Yield/Rate
Interest on earning assets
Interest-bearing deposits	$	9	0.83	%	$	3	0.29	%
Investments	3,940		3.33	%	4,290		3.58	%
Loans held for sale	7		2.55	%	5		3.71	%
Loans	10,112		3.90	%	9,310		3.84	%
Total interest-earning assets	14,068		3.71	%	13,608		3.74	%
Interest expense
Deposits	1,538		0.61	%	1,236		0.52	%
Other borrowings	1,216		1.76	%	1,086		1.51	%
Total interest expense	2,754		0.86	%	2,322		0.75	%
Net interest income	$	11,314			$	11,286
Interest rate spread			2.85	%			2.99	%
Net interest margin			2.98	%			3.11	%

The following tables present changes in interest income and expense attributable to changes in interest rates and volume for interest-earning assets and liabilities for the nine months and quarter ended September 30, 2016 compared to 2015. Tax-exempt income is calculated on a tax-equivalent basis, using a 35.0% tax rate in 2016 and 2015.



For the nine months ended September 30, 2016 compared to 2015
Dollars in thousands	Volume			Rate			Rate/Volume¹			Total
Interest on earning assets
Interest-bearing deposits	$	(5	)	$	10		$	(4	)	$	1
Investment securities	491			(660		)	(26		)	(195		)
Loans held for sale	8			—			—			8
Loans	2,023			474			35			2,532
Change in interest income	2,517			(176		)	5			2,346
Interest expense
Deposits	247			132			8			387
Other borrowings	145			(60		)	(3		)	82
Change in interest expense	392			72			5			469
Change in net interest income	$	2,125		$	(248	)	$	—		$	1,877

Page 47

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



For the quarter ended September 30, 2016 compared to 2015
Dollars in thousands	Volume			Rate			Rate/Volume¹			Total
Interest on earning assets
Interest-bearing deposits	$	—		$	5		$	1		$	6
Investment securities	(43		)	(310		)	3			(350		)
Loans held for sale	5			(2		)	(1		)	2
Loans	691			103			8			802
Change in interest income	653			(204		)	11			460
Interest expense
Deposits	80			208			14			302
Other borrowings	(43		)	181			(8		)	130
Change in interest expense	37			389			6			432
Change in net interest income	$	616		$	(593	)	$	5		$	28

Page 48

Average Daily Balance Sheets

The following table shows the Company's average daily balance sheets for the nine months and quarters ended September 30, 2016 and 2015.



	For the nine months ended						For the quarters ended
Dollars in thousands	September 30, 2016			September 30, 2015			September 30, 2016			September 30, 2015
Assets
Cash and cash equivalents	$	17,856		$	14,907		$	23,933		$	15,736
Interest-bearing deposits in other banks	5,693			8,610			4,331			4,061
Securities available for sale	236,179			182,944			261,422			214,641
Securities to be held to maturity	221,230			257,306			195,281			247,373
Restricted equity securities, at cost	14,444			13,912			14,436			13,912
Loans held for sale	714			432			1,092			535
Loans	1,016,958			947,209			1,032,567			961,192
Allowance for loan losses	(10,203		)	(10,066		)	(10,300		)	(9,841		)
Net loans	1,006,755			937,143			1,022,267			951,351
Accrued interest receivable	5,339			5,083			5,097			4,963
Premises and equipment	21,376			22,197			21,158			21,922
Other real estate owned	1,379			2,565			903			2,273
Goodwill	29,805			29,805			29,805			29,805
Other assets	32,893			22,757			33,862			23,803
Total Assets	$	1,593,663		$	1,497,661		$	1,613,587		$	1,530,375

Liabilities & Shareholders' Equity
Demand deposits	$	127,587		$	110,420		$	144,067		$	122,999
NOW deposits	247,409			211,070			258,354			224,913
Money market deposits	76,445			100,649			75,120			100,668
Savings deposits	207,967			182,108			212,709			195,028
Certificates of deposit	444,871			426,089			455,915			420,333
Total deposits	1,104,279			1,030,336			1,146,165			1,063,941
Borrowed funds – short term	170,047			143,077			137,970			152,233
Borrowed funds – long term	130,128			145,136			136,620			133,762
Dividends payable	961			1,093			997			1,146
Other liabilities	13,833			12,598			14,523			12,722
Total Liabilities	1,419,248			1,332,240			1,436,275			1,363,804
Shareholders' Equity:
Common stock	108			107			108			107
Additional paid-in capital	60,152			59,361			60,368			59,548
Retained earnings	111,535			104,137			113,722			105,742
Net unrealized gain on securities available-for-sale	2,913			2,014			3,438			1,388
Net unrealized loss on securities transferred from available for sale to held to maturity	(124		)	(73		)	(130		)	(89		)
Net unrealized loss on cash flow hedging derivative instruments	(13		)	—			(38		)	—
Net unrealized loss on postretirement benefit costs	(156		)	(125		)	(156		)	(125		)
Total Shareholders' Equity	174,415			165,421			177,312			166,571
Total Liabilities & Shareholders' Equity	$	1,593,663		$	1,497,661		$	1,613,587		$	1,530,375

Page 49

Non-Interest Income

Non-interest income of $9.4 million for the nine months ended September 30, 2016 is a decrease of $28,000 compared to the same period in 2015. This was primarily due to a lower level of gains from sale of securities. This was greatly offset, however, by a $441,000 or 40.3% increase in mortgage origination and servicing income. Non-interest income was $3.5 million for the quarter ended September 30, 2016, an increase of 16.6% from the $3.0 million reported for the quarter ended September 30, 2015. This increase was attributable to the increase in mortgage origination and servicing income.

Non-Interest Expense

Non-interest expense of $21.9 million for the nine months ended September 30, 2016 is a decrease of 0.5% or $102,000 compared to non-interest expense of $22.0 million for the same period in 2015, primarily due to a reduction in other-credit-related costs outside of the provision for loan losses. The Company's efficiency ratio has dropped more than 3.0% to 50.19% for the nine months ended September 30, 2016 from 53.76% for the same period in 2015. Noninterest expense of $7.4 million for the quarter ended September 30, 2016 is a decrease of 3.9% compared to noninterest expense of $7.7 million for the same period in 2015 due to the reasons mentioned above.

Income Taxes

Income taxes on operating earnings were $5.0 million for the nine months ended September 30, 2016, up $715,000 from the same period in 2015. This is in line with the increase in the Company's level of income before income taxes.

Investments

The Company's investment portfolio increased by $7.8 million between December 31, 2015, and September 30, 2016. As of September 30, 2016, mortgage-backed securities had a carrying value of $295.7 million and a fair value of $297.1 million. Of this total, securities with a fair value of $199.8 million or 67.3% of the mortgage-backed portfolio were issued by the Government National Mortgage Association and securities with a fair value of $97.3 million or 32.7% 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 $124,000 at September 30, 2016. These securities were transferred as a part of the Company's overall investment and balance sheet strategies.

Page 50

The following table sets forth the Company's investment securities at their carrying amounts as of September 30, 2016 and 2015 and December 31, 2015.



Dollars in thousands	September 30, 2016		December 31, 2015		September 30, 2015
Securities available for sale
Mortgage-backed securities	$	261,514	$	195,110	$	187,510
State and political subdivisions	17,484		24,506		25,290
Other equity securities	3,295		3,423		3,133
	$	282,293	$	223,039	$	215,933
Securities to be held to maturity
U.S. government-sponsored agencies	$	891	$	71,000	$	75,991
Mortgage-backed securities	34,186		42,193		45,287
State and political subdivisions	149,393		122,530		123,744
Corporate securities	4,300		4,300		300
	$	188,770	$	240,023	$	245,322
Restricted equity securities
Federal Home Loan Bank Stock	$	13,011	$	13,220	$	12,875
Federal Reserve Bank Stock	1,037		1,037		1,037
	$	14,048	$	14,257	$	13,912
Total securities	$	485,111	$	477,319	$	475,167

Page 51

The following table sets forth yields and contractual maturities of the Company's investment securities as of September 30, 2016. Yields on tax-exempt securities have been computed on a tax-equivalent basis using a tax rate of 35%. Mortgage-backed securities are presented according to their final contractual maturity date, while the calculated yield takes into effect the intermediate cash flows from repayment of principal which results in a much shorter average life.



	Available For Sale				Held to Maturity
Dollars in thousands	Fair Value		Yield to maturity		Amortized Cost		Yield to maturity
U.S. Government-Sponsored Agencies
Due in 1 year or less	$	—	0.00	%	$	—	0.00	%
Due in 1 to 5 years	—		0.00	%	—		0.00	%
Due in 5 to 10 years	—		0.00	%	—		0.00	%
Due after 10 years	—		0.00	%	891		5.57	%
Total	—		0.00	%	891		5.57	%
Mortgage-Backed Securities
Due in 1 year or less	974		3.76	%	127		5.90	%
Due in 1 to 5 years	2,528		3.11	%	7,164		2.64	%
Due in 5 to 10 years	21,648		2.91	%	10,953		2.92	%
Due after 10 years	236,364		2.22	%	15,942		3.95	%
Total	261,514		2.29	%	34,186		3.35	%
State & Political Subdivisions
Due in 1 year or less	—		0.00	%	1,345		7.03	%
Due in 1 to 5 years	578		6.14	%	6,264		6.18	%
Due in 5 to 10 years	1,855		6.23	%	24,879		5.89	%
Due after 10 years	15,051		5.65	%	116,905		4.72	%
Total	17,484		5.73	%	149,393		5.00	%
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	%	4,000		5.50	%
Due after 10 years	—		0.00	%	—		0.00	%
Total	—		0.00	%	4,300		5.19	%
Equity Securities	3,295		2.19	%	—		0.00	%
	$	282,293	2.50	%	$	188,770	4.71	%

Impaired Securities

The securities portfolio contains certain securities that the amortized cost of which exceeds fair value, which at September 30, 2016 amounted to $735,000, or 0.16% of the amortized cost of the total securities portfolio. At December 31, 2015 this amount was $3.5 million, or 0.76% of the amortized cost of total securities portfolio. As a part of the Company's ongoing security monitoring process, the Company identifies securities in an unrealized loss position that could potentially be other-than-temporarily impaired. If a decline in the fair value of a debt security is judged to be other-than-temporary, the decline related to credit loss is recorded in net realized securities losses while the decline attributable to other factors is recorded in other comprehensive income or loss.

The Company's evaluation of securities for impairment is a quantitative and qualitative process intended to determine whether declines in the fair value of investment securities should be recognized in current period earnings. The primary factors considered in evaluating whether a decline in the fair value of securities is other-than-temporary include: (a) the length of time and extent to which the fair value has been less than cost or amortized cost and the expected recovery period of the security, (b) the financial condition, credit rating and future prospects of the issuer, (c) whether the debtor is current on contractually obligated interest and principal payments, (d) the volatility of the securities market price, (e) the intent and ability of the Company to retain the investment for a period of time sufficient to allow for recovery, which may be at maturity, and (f) any other information and observable data considered relevant in determining whether other-than-temporary impairment has occurred.

Page 52

The Company's best estimate of cash flows uses severe economic recession assumptions due to market uncertainty. The Company's assumptions include but are not limited to delinquencies, foreclosure levels and constant default rates on the underlying collateral, loss severity ratios, and constant prepayment rates. If the Company does not expect to receive 100% of future contractual principal and interest, an other-than-temporary impairment charge is recognized. Estimating future cash flows is a quantitative and qualitative process that incorporates information received from third party sources along with certain internal assumptions and judgments regarding the future performance of the underlying collateral.

As of September 30, 2016, the Company had temporarily impaired securities with a fair value of $95.3 million and unrealized losses of $735,000, as identified in the table below. This was down from December 31, 2015 as a result of a shift in the yield curve and a corresponding increase in value of investment securities. Securities in a continuous unrealized loss position more than twelve months amounted to $2.5 million as of September 30, 2016, compared with $21.0 million at December 31, 2015. The Company has concluded that these securities were not other-than-temporarily impaired. This conclusion was based on the issuer's continued satisfaction of the securities obligations in accordance with their contractual terms and the expectation that the issuer will continue to do so, Management's intent and ability to hold these securities for a period of time sufficient to allow for any anticipated recovery in fair value which may be at maturity, the expectation that the Company will receive 100% of future contractual cash flows, as well as the evaluation of the fundamentals of the issuer's financial condition and other objective evidence. The following table summarizes temporarily impaired securities and their approximate fair values at September 30, 2016:



	Less than 12 months					12 months or more					Total
Dollars in thousands	Fair Value (Estimated)		Unrealized Losses			Fair Value (Estimated)		Unrealized Losses			Fair Value (Estimated)		Unrealized Losses
Mortgage-backed securities	$	79,118	$	(468	)	$	2,407	$	(79	)	$	81,525	$	(547	)
State and political subdivisions	13,666		(170		)	—		—			13,666		(170		)
Other equity securities	10		(2		)	107		(16		)	117		(18		)
	$	92,794	$	(640	)	$	2,514	$	(95	)	$	95,308	$	(735	)

For securities with unrealized losses, the following information was considered in determining that the securities were not other-than-temporarily impaired:

Securities issued by U.S. Government-sponsored agencies and enterprises. As of September 30, 2016, there were no unrealized losses on these securities compared to $2.3 million unrealized losses as of December 31, 2015. All of these securities were credit rated "AAA" or "AA+" by the major credit rating agencies. Management believes that securities issued by U.S. Government-sponsored agencies and enterprises have minimal credit risk, as these agencies and enterprises play a vital role in the nation's financial markets and does not consider these securities to be other-than-temporarily impaired at September 30, 2016.

Mortgage-backed securities issued by U.S. Government agencies and U.S. Government-sponsored enterprises. As of September 30, 2016, there were $547,000 of unrealized losses on these securities compared with $1.1 million at December 31, 2015. All of these securities were credit rated "AAA" or "AA+" by the major credit rating agencies. Management believes that securities issued by U.S. Government agencies bear no credit risk because they are backed by the full faith and credit of the United States and that securities issued by U.S. Government-sponsored enterprises have minimal credit risk, as these agencies and enterprises play a vital role in the nation's financial markets. Management believes that the unrealized losses at September 30, 2016 were attributable to changes in current market yields and spreads since the date the underlying securities were purchased, and does not consider these securities to be other-than-temporarily impaired at September 30, 2016. The Company also has the ability and intent to hold these securities until a recovery of their amortized cost, which may be at maturity.

Obligations of state and political subdivisions. As of September 30, 2016, there were $170,000 of unrealized losses on these securities compared to $87,000 at December 31, 2015. Municipal securities are supported by the general taxing authority of the municipality and, in the cases of school districts, are generally supported by state aid. At September 30, 2016, all municipal bond issuers were current on contractually obligated interest and principal payments. The Company attributes the unrealized losses at September 30, 2016 to changes in prevailing market yields and pricing spreads since the date the underlying securities were purchased, combined with current market liquidity conditions and the disruption in the financial markets in general. Accordingly, the Company does not consider these municipal securities to be other-than-temporarily impaired at September 30, 2016. The Company also has the ability and intent to hold these securities until a recovery of their amortized cost, which may be at maturity.

Page 53

Corporate securities. There were no unrealized losses on corporate securities as of September 30, 2016, or at December 31, 2015. Corporate securities are dependent on the operating performance of the issuers. At September 30, 2016, all corporate bond issuers were current on contractually obligated interest and principal payments.

Other equity securities. As of September 30, 2016, the total unrealized losses on other equity securities amounted to $18,000 compared with $6,000 at December 31, 2015. Other equity securities is comprised of common and preferred stock holdings. The unrealized losses were the result of normal market fluctuations for equity securities. Accordingly, the Company does not consider other equity securities to be other-than-temporarily impaired at September 30, 2016.

Federal Home Loan Bank Stock

The Bank is a member of the Federal Home Loan Bank ("FHLB") of Boston, a cooperatively owned wholesale bank for housing and finance in the six New England States. As a requirement of membership in the FHLB, the Bank must own a minimum required amount of FHLB stock, calculated periodically based primarily on its level of borrowings from the FHLB. The Bank uses the FHLB for much of its wholesale funding needs. As of September 30, 2016, 2015 and December 31, 2015, the Bank's investment in FHLB stock totaled $13.0 million, $12.9 million and $13.2 million, respectively. FHLB stock is a non-marketable equity security and therefore is reported at cost, which equals par value. The Company periodically evaluates its investment in FHLB stock for impairment based on, among other factors, the capital adequacy of the FHLB and its overall financial condition. No impairment losses have been recorded through September 30, 2016. The Bank will continue to monitor its investment in FHLB stock.

Loans Held for Sale

Loans held for sale are carried at the lower of cost or market value. As of September 30, 2016, the Bank had $1.2 million in loans held for sale. This compares to $349,000 in loans held for sale at December 31, 2015 and $200,000 in loans held for sale at September 30, 2015. The Bank participates in FHLB's Mortgage Partnership Finance Program ("MPF"), selling loans with recourse. The volume of loans sold to date through the MPF program is de minimis; therefore, there was minimum impact on the reserve.

Loans

The loan portfolio increased during the first nine months of 2016, with total loans at $1.03 billion at September 30, 2016, up $40.4 million or 4.1% from total loans of $988.6 million at December 31, 2015. Commercial loans increased $25.2 million or 6.0% between December 31, 2015 and September 30, 2016, municipal loans increased $6.4 million or 32.4%, residential term loans increased $129,000 and home equity lines of credit increased $1.8 million.

Commercial loans are comprised of three major classes, commercial real estate loans, commercial construction loans and other commercial loans. Commercial real estate is primarily comprised of loans to small businesses collateralized by owner-occupied real estate, while other commercial is primarily comprised of loans to small businesses collateralized by plant and equipment, commercial fishing vessels and gear, and limited inventory-based lending.Commercial real estate loans typically have a maximum loan-to-value of 80% based upon current appraisal information at the time the loan is made. Land and land development loans typically have a maximum loan-to-value of 65% to 75% based upon current appraisal information at the time the loan is made. Construction, land and land improvement loans, both commercial and residential, comprise a small portion of the portfolio, and at 21.9% 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 102.9% 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 54

The following table summarizes the loan portfolio, by class, at September 30, 2016 and 2015 and December 31, 2015.



Dollars in thousands	September 30, 2016				December 31, 2015				September 30, 2015
Commercial
Real estate	$	297,808	28.9	%	$	269,462	27.3	%	$	268,741	27.9	%
Construction	18,828		1.8	%	24,881		2.5	%	23,624		2.5	%
Other	131,198		12.8	%	128,341		13.0	%	119,097		12.4	%
Municipal	26,153		2.5	%	19,751		2.0	%	21,377		2.2	%
Residential
Term	403,159		39.2	%	403,030		40.7	%	385,145		39.9	%
Construction	14,269		1.4	%	8,451		0.9	%	12,029		1.2	%
Home equity line of credit	111,994		10.9	%	110,202		11.1	%	109,390		11.4	%
Consumer	25,583		2.5	%	24,520		2.5	%	23,748		2.5	%
Total loans	$	1,028,992	100.0	%	$	988,638	100.0	%	$	963,151	100.0	%

The following table sets forth certain information regarding the contractual maturities of the Bank's loan portfolio as of September 30, 2016.



Dollars in thousands	< 1 Year		1 - 5 Years		5 - 10 Years		> 10 Years		Total
Commercial
Real estate	$	3,179	$	10,797	$	26,759	$	257,073	$	297,808
Construction	53		5,709		2,243		10,823		18,828
Other	8,636		37,242		29,972		55,348		131,198
Municipal	16		5,683		10,482		9,972		26,153
Residential
Term	677		5,735		12,532		384,215		403,159
Construction	169		702		55		13,343		14,269
Home equity line of credit	177		682		1,770		109,365		111,994
Consumer	7,226		5,120		2,985		10,252		25,583
Total loans	$	20,133	$	71,670	$	86,798	$	850,391	$	1,028,992

The following table provides a listing of loans by class, between variable and fixed rates as of September 30, 2016.



	Fixed-Rate				Adjustable-Rate				Total
Dollars in thousands	Amount		% of total		Amount		% of total		Amount		% of total
Commercial
Real estate	$	35,806	3.5	%	$	262,002	25.4	%	$	297,808	28.9	%
Construction	4,999		0.5	%	13,829		1.3	%	18,828		1.8	%
Other	50,163		4.9	%	81,035		7.9	%	131,198		12.8	%
Municipal	24,398		2.3	%	1,755		0.2	%	26,153		2.5	%
Residential
Term	279,764		27.2	%	123,395		12.0	%	403,159		39.2	%
Construction	13,758		1.4	%	511		0.0	%	14,269		1.4	%
Home equity line of credit	822		0.1	%	111,172		10.8	%	111,994		10.9	%
Consumer	20,264		2.0	%	5,319		0.5	%	25,583		2.5	%
Total loans	$	429,974	41.9	%	$	599,018	58.1	%	$	1,028,992	100.0	%

Loan Concentrations

As of September 30, 2016, the Bank did not have any concentration of loans in one particular industry that exceeded 10% of its total loan portfolio.

Page 55

Credit Risk Management and Allowance for Loan Losses

Credit risk is the risk of loss arising from the inability of a borrower to meet its obligations. We manage credit risk by evaluating the risk profile of the borrower, repayment sources, the nature of the underlying collateral, and other support given current events, conditions, and expectations. We attempt to manage the risk characteristics of our loan portfolio through various control processes, such as credit evaluation of borrowers, establishment of lending limits, and application of lending procedures, including the holding of adequate collateral and the maintenance of compensating balances. However, we seek to rely primarily on the cash flow of our borrowers as the principal source of repayment. Although credit policies and evaluation processes are designed to minimize our risk, Management recognizes that loan losses will occur and the amount of these losses will fluctuate depending on the risk characteristics of our loan portfolio, as well as general and regional economic conditions.

We provide for loan losses through the establishment of an allowance for loan losses which represents an estimated reserve for existing losses in the loan portfolio. We deploy a systematic methodology for determining our allowance that includes a quarterly review process, risk rating, and adjustment to our allowance. We classify our portfolios as either commercial or residential and consumer and monitor credit risk separately as discussed below. We evaluate the appropriateness of our allowance continually based on a review of all significant loans, with a particular emphasis on nonaccruing, past due, and other loans that we believe require special attention.

The allowance consists of four elements: (1) specific reserves for loans evaluated individually for impairment; (2) general reserves for types or portfolios of loans based on historical loan loss experience; (3) qualitative reserves judgmentally adjusted for local and national economic conditions, concentrations, portfolio composition, volume and severity of delinquencies and nonaccrual loans, trends of criticized and classified loans, changes in credit policies, and underwriting standards, credit administration practices, and other factors as applicable; and (4) unallocated reserves. All outstanding loans are considered in evaluating the appropriateness of the allowance.

Appropriateness of the allowance for loan losses is determined using a consistent, systematic methodology, which analyzes the risk inherent in the loan portfolio. In addition to evaluating the collectability of specific loans when determining the appropriateness of the allowance for loan losses, Management also takes into consideration other factors such as changes in the mix and size of the loan portfolio, historic loss experience, the amount of delinquencies and loans adversely classified, economic trends, changes in credit policies, and experience, ability and depth of lending management. The appropriateness of the allowance for loan losses is assessed by an allocation process whereby specific reserve allocations are made against certain adversely classified loans, and general reserve allocations are made against segments of the loan portfolio which have similar attributes. The Company's historical loss experience, industry trends, and the impact of the local and regional economy on the Company's borrowers, are considered by Management in determining the appropriateness of the allowance for loan losses.

The allowance for loan losses is increased by provisions charged against current earnings. Loan losses are charged against the allowance when Management believes that the collectability of the loan principal is unlikely. Recoveries on loans previously charged off are credited to the allowance. While Management uses available information to assess possible losses on loans, future additions to the allowance may be necessary based on increases in non-performing loans, changes in economic conditions, growth in loan portfolios, or for other reasons. Any future additions to the allowance would be recognized in the period in which they were determined to be necessary. In addition, various regulatory agencies periodically review the Company's allowance for loan losses as an integral part of their examination process. Such agencies may require the Company to record additions to the allowance based on judgments different from those of Management.

Commercial

Our commercial portfolio includes all secured and unsecured loans to borrowers for commercial purposes, including commercial lines of credit and commercial real estate. Our process for evaluating commercial loans includes performing updates on loans that we have rated for risk. Our non-performing commercial loans are generally reviewed individually to determine impairment, accrual status, and the need for specific reserves. Our methodology incorporates a variety of risk considerations, both qualitative and quantitative. Quantitative factors include our historical loss experience by loan type, collateral values, financial condition of borrowers, and other factors. Qualitative factors include judgments concerning general economic conditions that may affect credit quality, credit concentrations, the pace of portfolio growth, and delinquency levels; these qualitative factors are also considered in connection with our unallocated portion of our allowance for loan losses.

The process of establishing the allowance with respect to our commercial loan portfolio begins when a loan officer initially assigns each loan a risk rating, using established credit criteria. Approximately 50% of our outstanding loans and commitments are subject to review and validation annually by an independent consulting firm, as well as periodically by our internal credit review function. Our methodology employs Management's judgment as to the level of losses on existing loans based on our internal review of the loan portfolio, including an analysis of the borrowers' current financial position, and the consideration of current and anticipated economic conditions and their potential effects on specific borrowers and or lines of business. In determining our ability to collect certain loans, we also consider the fair value of any underlying collateral. We also evaluate credit risk concentrations, including trends in large dollar exposures to related borrowers, industry and geographic concentrations, and economic and environmental factors.

Page 56

Residential, Home Equity and Consumer

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

Unallocated

The unallocated portion of the allowance is intended to provide for losses that are not identified when establishing the specific and general portions of the allowance and is based upon Management's evaluation of various conditions that are not directly measured in the determination of the portfolio and loan specific allowances. Such conditions may include general economic and business conditions affecting our lending area, credit quality trends (including trends in delinquencies and nonperforming loans expected to result from existing conditions), loan volumes and concentrations, duration of the current business cycle, bank regulatory examination results, findings of external loan review examiners, and Management's judgment with respect to various other conditions including loan administration and management and the quality of risk identification systems. Management reviews these conditions quarterly. We have risk management practices designed to ensure timely identification of changes in loan risk profiles; however, undetected losses may exist inherently within the loan portfolio. The judgmental aspects involved in applying the risk grading criteria, analyzing the quality of individual loans, and assessing collateral values can also contribute to undetected, but probable, losses. Changes in various elements of the allowance caused the period-to-period decrease. Management feels the change in the unallocated is consistent with improvement in credit quality.

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 September 30, 2016, impaired loans with specific reserves totaled $8.8 million and the amount of such reserves was $949,000. This compares to impaired loans with specific reserves of $8.6 million at December 31, 2015 and the amount of such reserves was $754,000.

All of these analyses are reviewed and discussed by the Directors' Loan Committee, and recommendations from these processes provide Management and the Board of Directors with independent information on loan portfolio condition. Our total allowance at September 30, 2016 is considered by Management to be appropriate to address the credit losses inherent in the loan portfolio at that date. Management views the level of the allowance for loan losses as appropriate. However, our determination of the appropriate allowance level is based upon a number of assumptions we make about future events, which we believe are reasonable, but which may or may not prove valid. Thus, there can be no assurance that our charge-offs in future periods will not exceed our allowance for loan losses or that we will not need to make additional increases in our allowance for loan losses.

The following table summarizes our allocation of allowance by loan class as of September 30, 2016 and 2015 and December 31, 2015. The percentages are the portion of each loan class to total loans.



Dollars in thousands	September 30, 2016				December 31, 2015				September 30, 2015
Commercial
Real estate	$	4,039	28.9	%	$	3,120	27.3	%	$	3,151	27.9	%
Construction	327		1.8	%	580		2.5	%	558		2.5	%
Other	1,688		12.8	%	1,452		13.0	%	1,376		12.4	%
Municipal	18		2.5	%	17		2.0	%	16		2.2	%
Residential
Term	1,359		39.2	%	1,391		40.7	%	1,165		39.9	%
Construction	37		1.4	%	24		0.9	%	22		1.2	%
Home equity line of credit	874		10.9	%	893		11.1	%	901		11.4	%
Consumer	618		2.5	%	566		2.5	%	562		2.5	%
Unallocated	1,338		—	%	1,873		—	%	1,926		—	%
Total	$	10,298	100.0	%	$	9,916	100.0	%	$	9,677	100.0	%

Page 57

The allowance for loan losses totaled $10.3 million at September 30, 2016, compared to $9.9 million as of December 31, 2015 and $9.7 million as of September 30, 2015. Management's ongoing application of methodologies to establish the allowance include an evaluation of impaired loans for specific reserves. These specific reserves increased $195,000 in the first nine months of 2016 from $754,000 at December 31, 2015 to $949,000 at September 30, 2016. The specific loans that make up those categories change from period to period. Impairment on those loans, which would be reflected in the allowance for loan losses, might or might not exist, depending on the specific circumstances of each loan. The portion of the reserve based upon homogeneous pools of loans increased by $469,000 in the first nine months of 2016. This increase was due to a $1.0 million overlay in pooled reserves due to increased commercial loan volume this year and potential weakness in a small number of credits which are currently performing. The portion of the reserve based on qualitative factors increased by $253,000 in the first nine months of 2016 as a result of adjustments for several qualitative factors. After consideration of the shifts in specific, pooled and qualitative reserves, Management determined that market trends and other internal factors warranted the $535,000 decrease in unallocated reserves in the first nine months of 2016 from $1.9 million at December 31, 2015 to $1.3 million at September 30, 2016.

A breakdown of the allowance for loan losses as of September 30, 2016, by loan class and allowance element, is presented in the following table:



Dollars in thousands	Specific Reserves on Loans Evaluated Individually for Impairment		General Reserves on Loans Based on Historical Loss Experience		Reserves for Qualitative Factors		Unallocated Reserves		Total Reserves
Commercial
Real estate	$	381	$	1,303	$	2,355	$	—	$	4,039
Construction	99		81		147		—		327
Other	68		577		1,043		—		1,688
Municipal	—		—		18		—		18
Residential
Term	318		571		470		—		1,359
Construction	—		20		17		—		37
Home equity line of credit	32		457		385		—		874
Consumer	51		318		249		—		618
Unallocated	—		—		—		1,338		1,338
	$	949	$	3,327	$	4,684	$	1,338	$	10,298

Based upon Management's evaluation, provisions are made to maintain the allowance as a best estimate of inherent losses within the portfolio. The provision for loan losses to maintain the allowance was $1,125,000 for the first nine months of 2016, an increase of $25,000 from the first nine months of 2015. Net chargeoffs were $743,000 in the first nine months of 2016 compared to net chargeoffs of $1.8 million in the first nine months of 2015. Our allowance as a percentage of outstanding loans was 1.00% as of September 30, 2016, even with December 31, 2015, and September 30, 2015.

Page 58

The following table summarizes the activities in our allowance for loan losses for the nine months ended September 30, 2016 and 2015 and for the year ended December 31, 2015:



Dollars in thousands	September 30, 2016			December 31, 2015			September 30, 2015
Balance at the beginning of year	$	9,916		$	10,344		$	10,344
Loans charged off:
Commercial
Real estate	33			280			254
Construction	75			9			9
Other	167			732			732
Municipal	—			—			—
Residential
Term	338			420			187
Construction	—			—			—
Home equity line of credit	147			582			532
Consumer	246			350			282
Total	1,006			2,373			1,996
Recoveries on loans previously charged off
Commercial
Real estate	—			2			1
Construction	4			1			—
Other	80			88			66
Municipal	—			—			—
Residential
Term	88			152			37
Construction	—			—			—
Home equity line of credit	3			31			31
Consumer	88			121			94
Total	263			395			229
Net loans charged off	743			1,978			1,767
Provision for loan losses	1,125			1,550			1,100
Balance at end of period	$	10,298		$	9,916		$	9,677
Ratio of net loans charged off to average loans outstanding¹	0.10		%	0.21		%	0.25		%
Ratio of allowance for loan losses to total loans outstanding	1.00		%	1.00		%	1.00		%

¹ Annualized using a 366-day basis for 2016 and a 365-day basis for 2015.

Management believes the allowance for loan losses is appropriate as of September 30, 2016. In Management's opinion, the level of the provision for loan losses is directionally consistent with the overall credit quality of our loan portfolio and corresponding levels of nonperforming loans, as well as with the performance of the national and local economies.

Nonperforming Loans

Nonperforming loans are comprised of loans, for which based on current information and events, it is probable that we will be unable to collect all amounts due according to the contractual terms of the loan agreement or when principal and interest is 90 days or more past due unless the loan is both well secured and in the process of collection (in which case the loan may continue to accrue interest in spite of its past due status). A loan is "well secured" if it is secured (1) by collateral in the form of liens on or pledges of real or personal property, including securities, that have a realizable value sufficient to discharge the debt including accrued interest) in full, or (2) by the guarantee of a financially responsible party. A loan is "in the process of collection" if collection of the loan is proceeding in due course either (1) through legal action, including judgment enforcement p

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rocedures, or, (2) in appropriate circumstances, through collection efforts not involving legal action which are reasonably expected to result in repayment of the debt or in its restoration to a current status in the near future.

When a loan becomes nonperforming (generally 90 days past due), it is evaluated for collateral dependency based upon the most recent appraisal or other evaluation method. If the collateral value is lower than the outstanding loan balance plus accrued interest and estimated selling costs, the loan is placed on non-accrual status, all accrued interest is reversed from interest income, and a specific reserve is established for the difference between the loan balance and the collateral value less selling costs, or, in certain situations, the difference between the loan balance and the collateral value less selling costs is written off. Concurrently, a new appraisal or valuation may be ordered, depending on collateral type, currency of the most recent valuation, the size of the loan, and other factors appropriate to the loan. Upon receipt and acceptance of the new valuation, the loan may have an additional specific reserve or write down based on the updated collateral value. On an ongoing basis, appraisals or valuations may be done periodically on collateral dependent non-performing loans and an additional specific reserve or write down will be made, if appropriate, based on the new collateral value.

Once a loan is placed on nonaccrual, it remains in nonaccrual status until the loan is current as to payment of both principal and interest and the borrower demonstrates the ability to pay and remain current. All payments made on nonaccrual loans are applied to the principal balance of the loan.

Nonperforming loans, expressed as a percentage of total loans, totaled 0.69% at September 30, 2016 compared to 0.75% at December 31, 2015 and 0.83% at September 30, 2015. The following table shows the distribution of nonperforming loans by class as of September 30, 2016 and 2015 and December 31, 2015:



Dollars in thousands	September 30, 2016		December 31, 2015		September 30, 2015
Commercial
Real estate	$	1,222	$	915	$	1,220
Construction	—		238		208
Other	412		66		114
Municipal	—		—		—
Residential
Term	4,475		5,260		5,491
Construction	—		—		—
Home equity line of credit	851		893		948
Consumer	170		—		—
Total nonperforming loans	$	7,130	$	7,372	$	7,981

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 September 30, 2016, loans 90 or more days past due and still accruing interest totaled $7,000, compared to $136,000 at December 31, 2015 and $109,000 at September 30, 2015.

Troubled Debt Restructured

A troubled debt restructured ("TDR") constitutes a restructuring of debt if the Bank, for economic or legal reasons related to the borrower's financial difficulties, grants a concession to the borrower that it would not otherwise consider. To determine whether or not a loan should be classified as a TDR, Management evaluates a loan based upon the following criteria:


•	The borrower demonstrates financial difficulty; common indicators include past due status with bank obligations, substandard credit bureau reports, or an inability to refinance with another lender, and


•	The Bank has granted a concession; common concession types include maturity date extension, interest rate adjustments to below market pricing, and deferment of payments.

Our overall level of TDRs decreased during the first nine months of 2016. As of September 30, 2016, we had 75 loans with a value of $22.0 million that have been restructured. This compares to 84 loans with a value of $23.9 million and 88 loans with a value of $24.7 million classified as TDRs as of December 31, 2015 and September 30, 2015, respectively.

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The following table shows the activity in loans classified as TDRs between December 31, 2015 and September 30, 2016:



Balance in Thousands of Dollars	Number of Loans		Aggregate Balance
Total at December 31, 2015	84		$	23,923
Added in 2016	—		—
Removed in 2016	(9	)	(1,033		)
Repayments in 2016	—		(865		)
Total at September 30, 2016	75		$	22,025

As of September 30, 2016, 64 loans with an aggregate balance of $20.6 million were performing under the modified terms, two loans with an aggregate balance of $495,000 were more than 30 days past due and accruing and nine loans with an aggregate balance of $971,000 were on nonaccrual. As a percentage of aggregate outstanding balance, 93.3% were performing under the modified terms, 2.2% were more than 30 days past due and accruing and 4.4% were on nonaccrual. The performance status of all TDRs as of September 30, 2016, as well as the associated specific reserve in the allowance for loan losses, is summarized by type of loan in the following table.



In thousands of dollars	Performing As Modified			30+ Days Past Due and Accruing			On Nonaccrual			All TDRs
Commercial
Real estate	$	9,221		$	—		$	—		$	9,221
Construction	788			—			—			788
Other	841			—			—			841
Municipal	—			—			—			—
Residential
Term	9,160			495			971			10,626
Construction	—			—			—			—
Home equity line of credit	549			—			—			549
Consumer	—			—			—			—
	$	20,559		$	495		$	971		$	22,025
Percent of balance	93.3		%	2.2		%	4.4		%	100.0		%
Number of loans	64			2			9			75
Associated specific reserve	$	414		$	43		$	35		$	492

Residential TDRs (including home equity lines of credit) as of September 30, 2016 included 56 loans with an aggregate balance of $11.2 million, and the modifications granted fell into five major categories. Loans totaling $6.9 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 $249,000 were converted from interest-only to regular principal-and-interest payments based on the borrowers' ability to service the higher payment amount. Short-term rate concessions were granted on loans totaling $2.0 million, with a rate concession typically of 1.0% or less. Loans with an aggregate balance of $2.4 million were involved in bankruptcy. Certain residential TDRs had more than one modification.

Commercial TDRs as of September 30, 2016 were comprised of 19 loans with a balance of $10.8 million. Of this total, 13 loans with an aggregate balance of $7.5 million had an extended period of interest-only payments, deferring the start of principal repayment. Three loans with an aggregate balance of $1.8 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 three loans with an aggregate balance of $1.5 million had several different modifications.

In each case when a loan was modified, Management determined it was in the Bank's best interest to work with the borrower with modified terms rather than to proceed to foreclosure. Once a loan is classified as a TDR it remains classified as such until the balance is fully repaid, despite whether the loan is performing under the modified terms. As of September 30, 2016, Management is aware of six loans classified as TDRs that are involved in bankruptcy with an outstanding balance of $1.1 million. There were also nine loans with an outstanding balance of $971,000 that were classified as TDRs and on non-accrual status. Three loans with an outstanding balance of $222,000 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 $28.2 million at September 30, 2016, and have decreased $1.3 million from December 31, 2015. The number of loans decreased by nine from 145 to 136 during the same period. Impaired commercial loans decreased $493,000 between December 31, 2015 and September 30, 2016. The specific allowance for impaired commercial loans increased from $399,000 at December 31, 2015 to $548,000 as of September 30, 2016, which represented the fair value deficiencies for loans where the fair value of the collateral or net present value of expected cash flows was estimated at less than our carrying amount of the loan. From December 31, 2015 to September 30, 2016, impaired residential loans decreased $957,000 and impaired home equity lines of credit decreased $66,000.

The following table sets forth impaired loans as of September 30, 2016 and 2015 and December 31, 2015:



Dollars in thousands	September 30, 2016		December 31, 2015		September 30, 2015
Commercial
Real estate	$	10,442	$	10,717	$	11,228
Construction	788		1,026		996
Other	1,254		1,234		1,736
Municipal	—		—		—
Residential
Term	14,131		15,088		15,276
Construction	—		—		—
Home equity line of credit	1,400		1,466		1,550
Consumer	170		—		—
Total	$	28,185	$	29,531	$	30,786

Past Due Loans

The Bank's overall loan delinquency ratio was 0.95% at September 30, 2016 compared to 0.84% at December 31, 2015 and 1.01% at September 30, 2015. Loans 90 days delinquent and accruing decreased from $136,000 at December 31, 2015 to $7,000 as of September 30, 2016. The following table sets forth loan delinquencies as of September 30, 2016 and 2015 and December 31, 2015:



Dollars in thousands	September 30, 2016			December 31, 2015			September 30, 2015
Commercial
Real estate	$	1,486		$	884		$	1,056
Construction	—			273			239
Other	644			328			10
Municipal	—			—			—
Residential
Term	6,235			5,187			6,950
Construction	—			368			—
Home equity line of credit	1,067			1,108			1,195
Consumer	310			139			308
Total	$	9,742		$	8,287		$	9,758
Loans 30-89 days past due to total loans	0.57		%	0.46		%	0.61		%
Loans 90+ days past due and accruing to total loans	0.00		%	0.01		%	0.01		%
Loans 90+ days past due on non-accrual to total loans	0.37		%	0.37		%	0.39		%
Total past due loans to total loans	0.95		%	0.84		%	1.01		%

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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 September 30, 2016, there were seven potential problem loans with a balance of $479,000 or 0.05% of total loans. This compares to six loans with a balance of $579,000 or 0.06% of total loans at December 31, 2015.

As of September 30, 2016, there were 19 loans in the process of foreclosure with a total balance of $2.9 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 2016, 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 September 30, 2016, there were nine properties owned with a net OREO balance of $855,000, net of an allowance for losses of $162,000, compared to December 31, 2015 when there were 14 properties owned with a net OREO balance of $1.5 million, net of an allowance for losses of $162,000 and September 30, 2015 when there were 17 properties owned with a net OREO balance of $1.9 million, net of an allowance for losses of $409,000.

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



Dollars in thousands	September 30, 2016		December 31, 2015		September 30, 2015
Carrying Value
Commercial
Real estate	$	—	$	—	$	—
Construction	28		28		81
Other	352		706		931
Municipal	—		—		—
Residential
Term	637		960		1,313
Construction	—		—		—
Home equity line of credit	—		—		—
Consumer	—		—		—
Total	$	1,017	$	1,694	$	2,325
Related Allowance
Commercial
Real estate	$	—	$	—	$	—
Construction	11		11		45
Other	92		77		67
Municipal	—		—		—
Residential
Term	59		74		297
Construction	—		—		—
Home equity line of credit	—		—		—
Consumer	—		—		—
Total	$	162	$	162	$	409
Net Value
Commercial
Real estate	$	—	$	—	$	—
Construction	17		17		36
Other	260		629		864
Municipal	—		—		—
Residential
Term	578		886		1,016
Construction	—		—		—
Home equity line of credit	—		—		—
Consumer	—		—		—
Total	$	855	$	1,532	$	1,916

Liquidity Management

As of September 30, 2016, the Bank had primary sources of liquidity of $238.1 million. It is Management's opinion this is sufficient to meet liquidity needs under a broad range of scenarios. The Bank has an additional $325.1 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 68.4% of total average assets in the first nine months of 2016. While the generally preferred funding strategy is to attract and retain low-cost deposits, the ability to do so is affected by

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competitive interest rates and terms in the marketplace. Other sources of funding include discretionary use of purchased liabilities (e.g., FHLB term advances and other borrowings), cash flows from the securities portfolios and loan repayments. Securities designated as available for sale may also be sold in response to short-term or long-term liquidity needs although Management has no intention to do so at this time.

The Bank has a detailed liquidity funding policy and a contingency funding plan that provide for the prompt and comprehensive response to unexpected demands for liquidity. Management has developed quantitative models to estimate needs for contingent funding that could result from unexpected outflows of funds in excess of "business as usual" cash flows. In Management's estimation, risks are concentrated in two major categories: runoff of in-market deposit balances and the inability to renew wholesale sources of funding. Of the two categories, potential runoff of deposit balances would have the most significant impact on contingent liquidity. Our modeling attempts to quantify deposits at risk over selected time horizons. In addition to these unexpected outflow risks, several other "business as usual" factors enter into the calculation of the adequacy of contingent liquidity including payment proceeds from loans and investment securities, maturing debt obligations and maturing time deposits. The Bank has established collateralized borrowing capacity with the Federal Reserve Bank of Boston and also maintains additional collateralized borrowing capacity with the FHLB in excess of levels used in the ordinary course of business as well as Fed Funds lines with three correspondent banks and availability through the Federal Reserve Bank Borrower in Custody program.

Deposits

During the first nine months of 2016, total deposits increased by $130.6 million or 12.5% from December 31, 2015 levels. Low-cost deposits (demand, NOW, and savings accounts) increased by $93.4 million or 16.1% in the first nine months of 2016, money market deposits decreased $16.3 million or 17.5%, and certificates of deposit increased $53.5 million or 14.4%. Between September 30, 2015 and September 30, 2016, total deposits increased by $115.4 million or 10.9%. Low-cost deposits increased by $98.8 million or 17.2%, money market accounts decreased $18.5 million or 19.5%, and certificates of deposit increased $35.1 million or 9.0%. The increase in low-cost deposits year-to-date is consistent with our normal seasonal fluctuation. The majority of the change in certificates of deposit both year-to-date and year-over-year was primarily from a shift in funding strategy 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 nine months ended September 30, 2016, borrowed funds decreased $69.4 million or 20.6% from December 31, 2015. Between September 30, 2015 and September 30, 2016, borrowed funds decreased by $29.3 million or 9.8%. This is due to the above mentioned shift in funding strategy between borrowed funds and certificates of deposit.

Shareholders' Equity

Shareholders' equity as of September 30, 2016 was $176.0 million, compared to $167.5 million as of December 31, 2015 and $167.1 million as of September 30, 2015. The Company's earnings in the first nine months of 2016, net of dividends paid, added to shareholders' equity. The net unrealized gain on available-for-sale securities, presented in accordance with FASB ASC Topic 740 "Investments – Debt and Equity Securities", increased by $1.6 million from December 31, 2015 and now stands at a $2.7 million.

A cash dividend of $0.23 per share was declared in the third quarter of 2016. This is equal to what was paid in the second quarter. The dividend payout ratio, which is calculated by dividing dividends declared per share by diluted earnings per share, was 53.13% for the first nine months of 2016 compared to 55.56% for the same period in 2015. In determining future dividend payout levels, the Board of Directors carefully analyzes capital requirements and earnings retention, as set forth in the Company's Dividend Policy. The ability of the Company to pay cash dividends to its shareholders depends on receipt of dividends from its subsidiary, the Bank. The subsidiary may pay dividends to its parent out of so much of its net profits as the Bank's directors deem appropriate, subject to the limitation that the total of all dividends declared by the Bank in any calendar year may not exceed the total of its net profits of that year combined with its retained net profits of the preceding two years. The amount available for dividends in 2016 is this year's net income plus $12.7 million.

On January 9, 2009 the Company issued $25 million in Fixed Rate Cumulative Perpetual Preferred Stock, Series A, by the U.S. Treasury under the Capital Purchase Program ("the CPP Shares"). The CPP Shares qualified as Tier 1 capital on the Company's books for regulatory purposes and ranked senior to the Company's common stock and senior or at an equal level in the Company's capital structure to any other shares of preferred stock the Company may issue in the future. In three separate transactions in 2012 and 2013, the Company repurchased all of the CPP shares from the Treasury.

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any shares of common stock issuable pursuant to the Warrants) are freely transferable by Treasury to third parties. The Warrants have a term of ten years and could be exercised by Treasury or a subsequent holder at any time or from time to time during their term. To the extent they had not previously been exercised, the Warrants will expire after ten years. The Warrants were unchanged as a result of the CPP Shares repurchase transactions.

In May 2015, the Treasury sold all of the Warrants to private parties. In accordance with the contractual terms of the Warrants, the number of shares issuable upon exercise of the Warrants and strike price were adjusted at the time of the sale. As a result of this transaction, the number of shares issuable under the Warrants now stands at 226,819 shares with a strike price of $16.53 per share.

Financial institution regulators have established guidelines for minimum capital ratios for banks and bank holding companies. The net unrealized gain or loss on available-for-sale securities is generally not included in computing regulatory capital. During the first quarter of 2015, the Company adopted the new Basel III regulatory capital framework as approved by the federal banking agencies. The adoption of this new framework modified the calculation of the various capital ratios, added a new ratio, common equity tier 1, and revised the adequately and well capitalized thresholds. Additionally, under the new rule, in order to avoid limitations on capital distributions, including dividend payments, the Company must hold a capital conservation buffer above the adequately capitalized risk-based capital ratios. The capital conservation buffer is being phased in from 0.0% for 2015 to 2.50% by 2019. The amounts shown below as the adequately capitalized ratio plus capital conservation buffer include the fully phased-in 2.50% buffer.

The Company met each of the well-capitalized ratio guidelines at September 30, 2016. The following tables indicate the capital ratios for the Bank and the Company at September 30, 2016 and December 31, 2015.



As of September 30, 2016	Leverage		Tier 1		Common Equity Tier 1		Total Risk-Based
Bank	8.88	%	15.07	%	15.07	%	16.18	%
Company	9.06	%	15.38	%	15.38	%	16.49	%
Adequately capitalized ratio	4.00	%	6.00	%	4.50	%	8.00	%
Adequately capitalized ratio plus capital conservation buffer	4.00	%	8.50	%	7.00	%	10.50	%
Well capitalized ratio (Bank only)	5.00	%	8.00	%	6.50	%	10.00	%



As of December 31, 2015	Leverage		Tier 1		Common Equity Tier 1		Total Risk-Based
Bank	8.82	%	14.45	%	14.45	%	15.53	%
Company	8.81	%	14.70	%	14.70	%	15.78	%
Adequately capitalized ratio	4.00	%	6.00	%	4.50	%	8.00	%
Adequately capitalized ratio plus capital conservation buffer	4.00	%	8.50	%	7.00	%	10.50	%
Well capitalized ratio (Bank only)	5.00	%	8.00	%	6.50	%	10.00	%

Off-Balance Sheet Financial Instruments and Contractual Obligations

Derivative Financial Instruments Designated as Hedges

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

At September 30, 2016, the Company had two outstanding, off-balance sheet, derivative instruments. These derivative instruments were interest rate swap agreements, with notional principal amounts totaling $50.0 million and an unrealized gain of $90,000. The notional amounts and net unrealized gain (loss) of the financial derivative instruments do not represent exposure to credit loss. The Company is exposed to credit loss only to the extent the counter-party defaults in its responsibility to pay interest under the terms of the agreements. The credit risk in derivative instruments is mitigated by entering into

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transactions with highly-rated counterparties that Management believes to be creditworthy and by limiting the amount of exposure to each counter-party. At September 30, 2016, the Company’s derivative instrument counterparties were credit rated “A” by the major credit rating agencies. The interest rate swap agreements were entered into by the Company to limit its exposure to rising interest rates and were designated as cash flow hedges.

Contractual Obligations

The following table sets forth the contractual obligations of the Company as of September 30, 2016:



Dollars in thousands	Total		Less than 1 year		1-3 years		3-5 years		More than 5 years
Borrowed funds	$	268,098	$	137,970	$	40,000	$	65,000	$	25,128
Operating leases	442		164		208		31		39
Certificates of deposit	424,455		267,201		72,091		85,163		—
Total	$	692,995	$	405,335	$	112,299	$	150,194	$	25,167
Total loan commitments and unused lines of credit	$	176,062	$	176,062	$	—	$	—	$	—

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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 September 30, 2016 was +15.95% of total assets compared to +5.13% of total assets at December 31, 2015. Core deposits with non-contractual maturities are presented based upon historical patterns of balance attrition and pricing behavior, which are reviewed at least annually.

The gap repricing distributions include principal cash flows from residential mortgage loans and mortgage-backed securities in the time frames in which they are expected to be received. Mortgage prepayments are estimated by applying industry median projections of prepayment speeds to portfolio segments based on coupon range and loan age.

A summary of the Company's static gap, as of September 30, 2016, is presented in the following table:



	0-90			90-365			1-5			5+
Dollars in thousands	Days			Days			Years			Years
Investment securities at amortized cost (HTM) and fair value (AFS)	$	40,294		$	78,668		$	210,449		$	141,652
Restricted stock, at cost	13,011			—			—			1,037
Loans held for sale	—			—			—			1,228
Loans	394,731			170,654			359,070			104,537
Other interest-earning assets	—			22,124			—			—
Non-rate-sensitive assets	25,379			—			—			72,254
Total assets	473,415			271,446			569,519			320,708
Interest-bearing deposits	273,767			64,778			156,662			500,061
Borrowed funds	117,970			20,000			105,000			25,128
Non-rate-sensitive liabilities and equity	1,900			5,700			32,350			331,772
Total liabilities and equity	393,637			90,478			294,012			856,961
Period gap	$	79,778		$	180,968		$	275,507		$	(536,253	)
Percent of total assets	4.88		%	11.07		%	16.85		%	(32.80		)	%
Cumulative gap (current)	$	79,778		$	260,746		$	536,253		$	—
Percent of total assets	4.88		%	15.95		%	32.80		%	—			%

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 1.23% 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 increase by approximately 0.43% if rates rise gradually by two percentage points. Both scenarios are well within ALCO's policy limit of a decrease in net interest income of no more than 10.0% given a 2.0% move in interest rates, up or down. Management believes this reflects a reasonable interest rate risk position. In year two, and assuming no additional movement in rates, the model forecasts that net interest income would be lower than that earned in a stable rate environment by 0.52% in a falling-rate scenario, and higher than that earned in a stable rate environment by 6.37% in a rising rate scenario, when compared to the year-one base scenario. A summary of the Bank's interest rate risk simulation modeling, as of September 30, 2016 and December 31, 2015 is presented in the following table:



Changes in Net Interest Income	September 30, 2016	December 31, 2015
Year 1
Projected change if rates decrease by 1.0%	-1.23%	-0.97%
Projected change if rates increase by 2.0%	0.43%	-1.94%
Year 2
Projected change if rates decrease by 1.0%	-0.52%	-2.80%
Projected change if rates increase by 2.0%	6.37%	-1.59%

This dynamic simulation model includes assumptions about how the balance sheet is likely to evolve through time and in different interest rate environments. Loans and deposits are projected to maintain stable balances. All maturities, calls and prepayments in the securities portfolio are assumed to be reinvested in similar assets. Mortgage loan prepayment assumptions are developed from industry median estimates of prepayment speeds for portfolios with similar coupon ranges and seasoning. Non-contractual deposit volatility and pricing are assumed to follow historical patterns. The sensitivities of key assumptions are analyzed annually and reviewed by ALCO.

This sensitivity analysis does not represent a Company forecast and should not be relied upon as being indicative of expected operating results. These hypothetical estimates are based upon numerous assumptions including, among others, the nature and timing of interest rate levels, yield curve shape, prepayments on loans and securities, pricing decisions on loans and deposits, and reinvestment/ replacement of asset and liability cash flows. While assumptions are developed based upon current economic and local market conditions, the Company cannot make any assurances as to the predictive ability of these assumptions, including how customer preferences or competitor influences might change.

Interest Rate Risk Management

A variety of financial instruments can be used to manage interest rate sensitivity. These may include investment securities, interest rate swaps, and interest rate caps and floors. Frequently called interest rate derivatives, interest rate swaps, caps and floors have characteristics similar to securities but possess the advantages of customization of the risk-reward profile of the instrument, minimization of balance sheet leverage and improvement of liquidity. As of September 30, 2016, the Company was using interest rate swaps for interest rate risk management.

The Company engages an independent consultant to periodically review its interest rate risk position, as well as the effectiveness of simulation modeling and reasonableness of assumptions used. As of September 30, 2016, there were no significant differences between the views of the independent consultant and Management regarding the Company's interest rate risk exposure. As a result of recent statements made by the Federal Open Market Committee, Management expects that short-term interest rates may increase sometime in the next one-to-three quarters and believes that the current level of interest rate risk is acceptable.

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Item 4: Controls and Procedures

As required by Rule 13a-15 under the Securities Exchange Act of 1934, as of September 30, 2016, the end of the quarter covered by this report, the Company carried out an evaluation under the supervision and with the participation of the Company's management, including the Company's Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures. In designing and evaluating the Company's disclosure controls and procedures, the Company and its management recognize that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and the Company's management necessarily was required to apply its judgment in evaluating and implementing possible controls and procedures. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures were effective at the reasonable assurance level to ensure that information required to be disclosed by the Company in the reports it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission's rules and forms. There was no change in the Company's internal control over financial reporting that occurred during the quarter ended September 30, 2016 that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting. The Company reviews its disclosure controls and procedures, which may include its internal controls over financial reporting on an ongoing basis, and may from time to time make changes aimed at enhancing their effectiveness and to ensure that the Company's systems evolve with its business.

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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, 2015.

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

a. None

b. None

c. The Company made the following repurchases of its common stock in the nine months ended September 30, 2016:



Month	Shares Purchased	Average Price Per Share	Total shares purchased as part of publicly announced repurchase plans	Maximum number of shares that may be purchased under the plans
January 2016	1,434	18.45	0	0
February 2016	4,761	18.74	0	0
March 2016	741	19.06	0	0
April 2016	—	—	0	0
May 2016	117	20.28	0	0
June 2016	—	—	0	0
July 2016	—	—	0	0
August 2016	—	—	0	0
September 2016	—	—	0	0
Total	7,053	18.71	0	0

Item 3 – Default Upon Senior Securities

None.

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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: November 9, 2016

/s/ F. Stephen Ward

F. Stephen Ward

Executive Vice President & Chief Financial Officer

Date: November 9, 2016

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