The First Bancorp, Inc.
Annual Report 2016

Plain-text annual report

2016 Annual ReportSelected Financial Data Dollars in thousands, except for per share amounts 2016 2015 2014 2013 2012 $ 53,759 $ 50,810 $ 51,022 $ 49,936 $ 10,812 42,947 1,600 12,499 29,383 18,009 1.68 1.66 1.030 15.98 13.20 33.10 10.28% 12.42% 1.12% 10.86% 9.00% 3.05% 61.31% 0.95% 0.73% 0.48% 50.43% 9,874 40,936 1,550 12,230 29,896 16,206 $ 1.52 $ 1.51 0.870 15.58 12.78 20.47 9.74% 11.90% 1.07% 11.00% 9.01% 3.10% 57.24% 1.00% 0.75% 0.57% 54.26% $ $ 11,425 39,597 1,150 11,048 30,220 14,709 1.38 1.37 0.830 15.06 12.25 18.09 9.34% 11.57% 0.99% 10.63% 8.58% 3.10% 60.14% 1.13% 1.15% 0.97% 56.86% 12,496 37,440 4,200 12,087 28,937 12,965 1.20 1.20 0.785 13.69 10.83 17.42 8.72% 10.66% 0.90% 10.62% 8.49% 3.05% 65.42% 1.31% 1.86% 1.44% 55.44% Summary of Operations Interest Income Interest Expense Net Interest Income Provision for Loan Losses Non-Interest Income Non-Interest Expense Net Income Per Common Share Data Basic Earnings per Common Share Diluted Earnings per Common Share $ Cash Dividends Declared per Common Share Book Value per Common Share Tangible Book Value per Common Share Market Value per Common Share Financial Ratios Return on Average Equity1 Return on Average Tangible Equity1,2 Return on Average Assets1 Average Equity to Average Assets Average Tangible Equity to Average Assets2 Net Interest Margin Tax-Equivalent1,2 Dividend Payout Ratio Allowance for Loan Losses/Total Loans Non-Performing Loans to Total Loans Non-Performing Assets to Total Assets Efficiency Ratio2 At Year End Total Assets Total Loans Total Investment Securities Total Deposits Total Borrowings Total Shareholders' Equity $ 1,712,875 $ 1,564,810 $ 1,482,131 $ 1,463,963 $ 1,414,999 1,071,526 539,174 988,638 477,319 917,564 475,092 876,367 489,013 1,242,957 1,043,189 1,024,819 1,024,399 278,901 172,521 337,457 167,498 279,916 161,554 279,125 146,098 Stock Price Market price per common share of stock during 2016 High 33.21 $ $ 1Annualized using a 365-day basis in all years except 2012 and 2016, in which a 366-day basis was used. 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. 51,825 12,938 38,887 7,835 11,278 26,271 12,688 1.22 1.22 0.780 14.60 11.47 16.47 8.84% 10.40% 0.89% 10.96% 8.96% 3.14% 63.93% 1.44% 2.20% 1.89% 51.01% 869,284 449,382 958,850 282,905 156,323 Low 22.53 If I had to sum up 2016 for The First Bancorp in one word, it would be “incredible.” Growth in earning assets of $142.1 million fueled a $2.1 million increase in net interest income on a tax-equivalent basis. Non-interest income was up slightly despite a lower level of gains on sales of securities and non-interest expense actually dropped compared to 2015. Net income for the year was $18.0 million, up $1.8 million or 11.1% from the $16.2 million reported for 2015 – the best annual performance in the Company’s history – and earnings per common share on a fully diluted basis of $1.66 were up $0.15 or 9.9% compared to 2015. These factors enabled us to reward our Shareholders in the form of increased cash dividends and an increase of $12.63 per share in the price of our stock. The loan portfolio increased $82.9 million to end the year at $1.07 billion. The com- mercial loan portfolio was up $56.0 million or 13.2% and residential loans were up $18.3 million or 4.5%. The investment portfolio was up $61.9 million or 13.0% over 2015 despite having a significant volume of securities called by their issuers. On the funding side of the balance sheet, low-cost deposits were up $61.6 million or 10.6% totaling $640.8 million as of December 31, 2016 and total deposits were up $199.8 million or 19.1% to $1.24 billion at year-end. Our investment management division, First Advisors, also had an excellent year and added $32.1 million in client assets, an 11.0% increase. Dear Fellow Shareholder: Continued improvement in credit quality was another contributor to our 2016 results. Non-performing assets stood at 0.48% of total assets as of December 31, 2016 – well below 0.57% a year ago. Net charge offs were 0.13% of average loans in 2016, down from 0.21% of average loans in 2015. We provisioned $1.6 million for loan losses in 2016, up $50,000 from the amount provisioned in 2015 and the allowance for loan losses stood at 0.95% of total loans as of December 31, 2016, down from 1.0% of total loans a year ago. Strong Operating Ratios The record financial results we posted in 2016 can certainly be seen in our operating ratios. Our return on average assets was 1.12% in 2016 compared to a 1.07% return in 2015, and our return on average tangible common equity was 12.42% compared to 11.90% for the same periods, respectively. In comparison, the average return on common equity for the Bank’s UBPR peer group was 9.55% in 2016, placing the Bank in the 82nd percentile. Our efficiency ratio stood at 50.43% for 2016 compared to 54.26% for 2015 and remains well below the Bank’s UBPR peer group average which stood at 63.70% for 2016. Our stock performance was another major positive in 2016, ending the year at $33.10 per share, up $12.63 from our December 31, 2015 close at $20.47 per share. With divi- dends reinvested, our total return for 2016 was 68.78%. We outperformed the broad market during this period, as measured by the S&P 500 which had a total return with dividends reinvested of 11.95%, as well as the Russell 2000, in which we are included, which had a total return of 21.28%. We also outperformed the banking industry, with total returns for the year of 39.12% for the KBW Regional Bank Index and 37.97% for the Nasdaq Bank Index. We increased the quarterly dividend to 23 cents per share in the second quarter of 2016, and based on the December 31, 2016 closing price of $33.10 per share, our dividend yield was a respectful 2.78%. In addition to the regular quarterly dividend, the Board of Directors also declared a special cash dividend of 12 cents per share in the fourth quarter. With regular quarterly dividends of 91 cents per share and the special cash dividend of 12 cents per share, total dividends declared in 2016 were $1.03 per share which resulted in a dividend payout ratio of 61.31% for the year. All in all, a fantastic year for your Company! Looking to the Future Annual reports, by the numbers, reflect on the past. We traditionally discuss the financial highlights of the past year, provide you with financial metrics and discuss our stock price. Yet, while we look back to prepare this information for you, we are also continuously mov- ing forward, determining what’s next, and strategically preparing for the future. In 2016, we began to lay a firm foundation for the Company in two ways: through suc- cession planning and goal setting. In 2016 we took succession planning to a new level. All members of the management team – from the President/CEO to department and branch managers, created a two-pronged plan. The first part of their plan addressed a short-term absence from the Bank and the second part a longer-term absence, for example, retire- ment. Team members were asked to tap who would be a viable short-term replacement for them and to determine if that same person should be considered a long-term replacement. Through these plans, we identified top performers, development opportunities for staff and found gaps that we will work to fill during the com- ing year. With goal setting, 2016 saw us fully embrace a process that began in 2015 when I set goals for the Ex- ecutive Management Team. It is important to me that all employees understand the Company’s overall goals and how everyone can, individ- ually or departmentally, im- pact those goals. Corporate Enterprise Goals (CEGs): These are the im- portant metrics by which we measure the Bank in comparison with our peers: Return on Equity, Return on Assets, Net Interest Margin, Net Income, and the Efficiency Ratio, to name a few. At the top of each employee’s goal sheet, the CEGs are listed to keep them top of mind for everyone. Individual Empirical Goals (IEGs): This section details numerical goals for individual em- ployees. These goals may be production related – dollar amount of loans closed, number of deposit referrals made, or keeping an expense account within budget. All of these goals relate directly to the CEGs so employees can easily see their impact. Project or Administrative Goals (PAGs): PAGs are much more subjective than the two types of goals outlined above. Many of the Executive Team’s PAGs are related to initiatives developed as part of our 2015 Strategic Plan. These projects are ongoing and some are multi-year in nature. For other employees, PAGs may be a project that they are working on, or they may be related to personal development, for example, taking a banking class or attending a seminar that will help them expand their banking knowledge. Our goal setting works very well in that it lays out quite simply for our employees the desired corporate results as well as their own individual milestones. Engaging our employ- ees in the business of banking and helping them understand the “big picture” will continue to reap rewards for our Company in the future. The ability to Dream Big with our goals is a collaborative process that keeps us all pulling on the same rope. The Future of Branch Banking For many years we’ve been told that the future of branch banking is less than promising as more customers use debit cards, bank online or use their phones for banking. What we “The ability to Dream Big with our goals is a collaborative process that keeps us all pulling on the same rope.” are finding, however, is that while customers tend to use electronic options to complete simple transactions, when they need a loan for their first home, want to start a business or need retirement advice, they want to talk to a banker – the banker at their local branch. We have been gradually renovating our branches to reflect a new model of branch banking. In our renovated branches we no longer have long teller lines, but more accommodating ‘Pod’ structures that make our employees more approachable to our customers. In 2016 we renovated our busy Rockland Park Street branch in this new model and it looks fantastic. Hand-in-hand with our renovations, we have revamped our training programs over the last few years to train our Bankers in the Universal Banker model. We are so very proud of our employees for embracing this change and for the top-notch quality service they provide every day. To train the next generation of bankers we have also renovated a space in our Bangor branch with a state-of-the-art training room. We will be using it for employee meetings and it will also be available for community groups. Enhanced training programs help our employees reach their career goals and dreams. Keeping the Community in Community Banking In April of 2017, I will celebrate my 25th anniversary as a Community Banker. To me, being a community banker means being an active member of my community, serving on non-profit boards, coaching, and sometimes just listen- ing to a proposal from a local non-profit and figuring out how we can help them make their dreams come true. Our Company also strives to support our communities, from mu- nicipal governments, to non-profits, to small, Main Street businesses. We want everyone to succeed, and we assist in a variety of different ways. In 2016, we made some signifi- cant commitments to capital campaigns throughout our footprint and we also introduced a new rewards program to benefit our checking account customers and our local businesses. Capital Campaigns Support for local non-profits as they plan for their futures is something we are proud to be a part of. Later in this report, you’ll learn about a wonderful campaign that the Damariscotta River Association (DRA) is undertaking. In addition to the DRA, we are also honored to work with these fine organizations: LincolnHealth – The primary health care organization in Lincoln County is adding a new outpatient health center to their Damariscotta Campus, which will allow them to consol- idate physicians in one location and provide a higher level of convenience and service to Lincoln County residents and visitors. Mount Desert Island Hospital – Critical to Island residents, the MDI Hospital needed to re- place its aging generator. Having a reliable back-up power supply for an island-based hos- pital is important to keep our Island citizens safe in extreme weather and power outages. LifeFlight – Our market area covers many remote communities located on peninsulas and on islands, far from medical care. LifeFlight’s mission in 2016 was to purchase a third heli- copter to better cover our great state, a very important effort. Good Shepherd Food Bank – Food insecurity continues to be a problem in Maine. Good Shepherd provides food to local food pantries and other organizations throughout the state. They are currently undertaking a major project to renovate a large warehouse space in Hampden to better serve Northern and Eastern Maine. Our tagline of “Dream First, Because You Can” is not just for individuals. Working with non-profits, from the largest hospital to the local little league to make their dreams come true, to better support our citizens and help our communities thrive is our responsibility as a good corporate citizen. “We are passionate about causes related to youth and more specifically about trying to end youth hunger and food insecurity in Maine.” Dream First Rewards Program Small businesses are the backbones of our communities. Without Main Street businesses, where would towns like Rockland, Damariscotta, and Bar Harbor be? In my lifetime, Main Street has weathered and survived many competitors – big box stores, shopping malls, and now, virtual shopping. It’s in our best interest to help our small businesses thrive. To that end, in 2016 we introduced our Dream First Rewards Program. Merchants that sign up for the program agree to give First National Bank customers a discount for shopping at their store. Discounts are tailored specifically to the merchant and can be adjusted over time. In exchange, the Bank is using our traditional and non-traditional marketing chan- nels to promote their business and drive new customers to their store. This is a win-win for customers and businesses. By banking locally and shopping locally, everyone benefits. Keeping our small businesses a vital part of our economy and community is a goal we can all get behind. Be Inspired – Employee Interaction Every day, our team of employees accomplishes amazing things for you and for our cus- tomers. I am so proud to walk with this group – they continually inspire me to be a better leader. In 2016, I had the privilege of meeting with each employee for coffee or breakfast. At these meetings we reviewed our CEGs and discussed where things stood financially, but I also had another purpose. I wanted everyone’s input about their passions for our com- munities. What causes are important to them? Where should the Company spend its time, talent and funds? How can we make the places where we live and work better? “We strive to support our communities, from municipal governments, to non-profits, to the small, Main Street businesses. We want everyone to succeed.” I went into these meetings with no preconceived idea of how they might go, but I quickly saw that our employees have a lot of great ideas. Some meetings were humorous, others emotional, as we discussed a variety of causes. Ev- eryone was open and honest, sharing stories about their personal challenges and how they have transcended those challenges with help from others. The end result is that we are passionate about caus- es related to youth and more specifically about trying to end youth hunger and food insecurity in Maine. Hunger in- fluences every part of a child’s life. If a child is hungry, it is hard to concentrate in school, behave appropriately, or dream about the future. As we move into 2017, we will look for ways to further engage our employees and our Compa- ny in these very important causes. Our Best Days Are Ahead As I look back on my two years as your President and Chief Executive Officer, I can only state that it has been a phenomenal ride. With the support of our Board of Directors and you, our Shareholders, we have accomplished so much. But, this is only the beginning. With this great team beside me, we will continue to operate on all cylinders, continue to be inspired to do great things and to help our customers Dream Big! I hope you enjoy the profiles included in the rest of this annual report along with the financial data. Thank you for your continued support of The First Bancorp, of me personally, and of our great team. Best always, Tony C. McKim President & Chief Exefutive Officer Programs for All Ages at DRA The Damariscotta River Association has been preserving the natural heritage of the Dam- ariscotta Region since 1973. As they head towards their 45th anniversary, they aren’t resting on their laurels but are embarking on a capital campaign to purchase land and renovate space for a new headquarters, preserving their current space as a dedicated Nature and Education Center. For Steve Hufnagel, this project is part of a bigger dream – creating a sense of community that’s rooted in the land. He wants to engage today’s kids with nature so they will care about protecting the land in the future. It’s an ambitious dream and project and one that First National Bank is proud to support. At the core of the capital campaign is a purchase of 23 acres of riverfront property in the heart of Damariscotta which will allow the DRA to build a trail connecting down- town Damariscotta to the Great Salt Farm and Wildlife Preserve, a unique community resource. One section of the trail, which includes the historic Whaleback Shell MIdden, will be mobility friendly, allowing all members of our community to see and explore this unique artifact. Another important part of the campaign supports educational programs which have exploded in enroll- ment. In 2005 when enrollment grew to 400, they hired a part-time education director, and in 2016, with a full-time education director on staff, enrollment has grown to 2,200. According to Steve, the capital campaign is a strategic investment in the region’s future. First National Bank and the DRA have a long history together, both through the Bank and through our investment management division, First Advisors. We are happy to partner with DRA to ensure the land is protected and our community is engaged in the future. - Deep Water Dreams In Eastport Eastport is a small town, the winters are long and economic opportunity ucts industry. But that’s not the attitude of Chris Gardner, the Director can sometimes seem to be passing it by, particularly in the forest prod- of the Eastport Port Authority, who bursts with courageous optimism when talking about what’s going on in Eastport. He’s determined to not focus on what has been lost over the years and feels some of Eastport’s best days are yet to come. Eastport is the deepest natural seaport in the United States and the clos- est port to Europe. Over the last few years Chris, along with a group of other partners including First National Bank, has been working on a bold solution to take forest products to the next stage in its economic life cycle – shipping wood to Europe. Proximity to the woods and to the sea is the key. The first step was building a conveyor system to get the wood to the ships. And, while this conveyor system was being developed, Chris and his partners including Phyto Charter, E.J. Carrier, and the University of Maine, were looking to develop a process to heat treat the wood being shipped. After some trial and error, they now have a patent sanctioned by the USDA. According to Chris, First National Bank “has been a leader since the be- ginning with real people who understand real problems,” and the Port is building a $1.6 million heat-treating system to put Maine loggers back to work. Chris’s dream? It is to make the resurgence of the Port of Eastport a true Maine success story. Eastport is one of our communities, its people are our customers, we care about its future – so that’s our dream too. It’s A Dog’s Life On Main Street In Rockland I n 2009, Heidi Neal had a simple dream. She thought it would be fun to take her dog to work every day and to own a business like Loyal Biscuit, a fun and pet-friendly pet supply store in downtown Rock- land. Heidi mentioned her dream to her husband, and he suggested she talk with the owners. Coincidentally, the business was for sale and Heidi found her dream of bringing her dog to work coming true much sooner than she expected. She bought the store. With stores in Rockland and Belfast, Heidi was satisfied with her original bank. In 2012, however, when she was ready to expand again to Camden/Rockport, her bank denied her loan request. Heidi was on a deadline to get the financing she needed to make her business dreams comes true. She contacted Todd Savage at First National Bank, he re- viewed her loan request and the answer was yes. Today, with the help of First National Bank, Loyal Biscuit has four locations: Rockland, Belfast, Camden and Waterville, and she recently bought the building in which her Rockland store is located. The stores are bright and colorful with self-service dog washes, nutrition advice and anything customers would want for their pet family members. Loy- al Biscuit is also a member of the Bank’s Dream First Rewards Program – rewarding those customers that support her by both banking and shopping locally. But Heidi’s dream is not completely done – her business is flourish- ing and she hopes to expand to other locations. At First National Bank, we are proud to help our small business customers like Heidi make their dreams come true so they can keep our Main Streets vibrant. Developing Character And Dreams a day job, but he loves to coach kids, espe- Paul Miner is a coach. Not by trade, he has cially baseball. After coaching Damariscot- ta Little League for a number of years, starting a Challenger team in Midcoast Maine was a per- sonal journey for him. About a year and half ago, Paul’s five-year-old nephew who has cerebral palsy was visiting Maine. While Daniel’s cousins were out playing football in the back yard, he could only watch from the sidelines. Paul put Daniel on his back and together they took to the field. Daniel’s laughter and total enjoyment re- ally had an impact on Paul, and he decided he wanted to do something for kids like Daniel in Lincoln County. He had heard about the Little League Baseball Challenger program so he drove up to Ells- worth to see their team play. In 2016, he started the Midcoast Dream Team with six players and eight buddies who assist in the games. Waldoboro also started a team and the two teams played six games against each other, including an “under the lights” night game in Thomaston. Paul’s goal with his Dream Team is to make dreams come true for as many kids as he can and partnering with First National Bank was a natural fit with our Dream Big campaign. Looking to the future, all of the team’s 2016 players are returning and he hopes to add a few more. The Challenger teams in Maine are also hoping to have a Jamboree in Ellsworth to get all the kids together to play the sport that they love and celebrate their dreams. Rookies of the Year Some people know how to get off on the right foot and make a difference. Kristen McAlpine, below, and Jacob Dodge, right, both hired in 2016, immediately made an impact in their respective regions, Kristen as our Bangor area Business Development Officer and Jacob as a Banking Associate in Knox County. Their future looks bright at First National Bank! Unsung Heroes Behind the scenes at every financial institution are dedicated employees that customers may never see but who play a vital role in making sure dreams are fulfilled. In 2016, we honored Terri Geroux, above, our Application Support Manager and Brenda Feltis, right, a dedicated commercial loan processor as our ‘Unsung Heroes’. First National’s First Annual Employee Awards First National’s First Annual Employee Awards tradition at First National Bank. An annual employee party is a long the coast from Boothbay Harbor to Eastport With employees spread out along and inland to Bangor, it’s an occasion for getting together, enjoying a great meal, visiting with each other and having a good time. In 2016, we added a new element to our party by recognizing some very worthy employees. These employees weren’t rec- ognized for the deals they bring in or for their stats, but instead they were honored for the intangibles they bring to work every day and what they do in their communities. We are so proud to have them on our team. Volunteers of the Year As a community bank, we encourage all employ- ees to get involved in their communities and we honored Nicci Doray, left, and Mary Anne Griffin, below, as our volunteers of the year. A commer- cial loan portfolio manager in Damariscotta, Nicci represents the Bank in organizations in southern Lincoln County, while credit analyst Mary Anne is out and about on Mount Desert Island. Team Spirit Optimistic, customer-focused, tenacious and inspiring, Jake Miller, left, and Jeff Cole, above, embody our corporate values every day as they work with their teams. Jake manages our two Rockland branches and Jeff is our assistant manager in Bangor: two consummate team players who set a great example for all employees. National Bank Office Locations Bangor Bar Harbor Blue Hill Boothbay Harbor Calais Camden Damariscotta Eastport Ellsworth Northeast Harbor Rockland Park Street Rockland Union Street Rockport Southwest Harbor Waldoboro Wiscasset First National Bank Executive Management Team Tony C. McKim President & Chief Executive Officer Richard M. Elder Executive Vice President & Treasurer Susan A. Norton Executive Vice President & Chief Administrative Officer Steven K. Parady, Esq. Executive Vice President, Senior Trust Officer & Chief Fiduciary Officer Tammy L. Plummer Executive Vice President & Chief Information Officer Sarah J. Tolman Executive Vice President, Branch Administration F. Stephen Ward Executive Vice President & Chief Financial Officer Charles A. Wootton Executive Vice President & Senior Lending Officer Office Locations Bangor Bar Harbor Damariscotta Ellsworth Rockland Union Street Board of Directors David B. Soule, Jr., Chairman of the Board Katherine M. Boyd Robert B. Gregory Renee W. Kelly Tony C. McKim Mark N. Rosborough Cornelius J. Russell Stuart G. Smith Bruce B. Tindal Directors of The First Bancorp also serve as Directors of First National Bank The First Bancorp Executive Officers Tony C. McKim President & Chief Executive Officer F. Stephen Ward Executive Vice President & Chief Financial Officer Charles A. Wootton Executive Vice President & Clerk UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-K [X] Annual Report Pursuant to Section 13 or 15(d) of The Securities Exchange Act of 1934 For the Fiscal Year ended December 31, 2016 Commission File Number 0-26589 THE FIRST BANCORP, INC. (Exact name of Registrant as specified in its charter) MAINE (State or other jurisdiction of incorporation or organization) 01-0404322 (I.R.S. Employer Identification No.) MAIN STREET, DAMARISCOTTA, MAINE (Address of principal executive offices) 04543 (Zip code) (207) 563-3195 Registrant's telephone number, including area code Securities registered pursuant to Section 12(g) of the Act: Common Stock Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes [_] No [X] Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes [_] No [X] 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [_] 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] State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the registrant's most recently completed second fiscal quarter. Common Stock: $217,289,000 Indicate the number of shares outstanding of each of the registrant's classes of common stock as of March 1, 2017 Common Stock: 10,815,445 shares Table of Contents ITEM 1. Discussion of Business ITEM 1A. Risk Factors ITEM 1B. Unresolved Staff Comments ITEM 2. Properties ITEM 3. Legal Proceedings ITEM 4. Mine Safety Disclosures ITEM 5. Market for Registrant's Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities ITEM 6. Selected Financial Data ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations ITEM 7A. Quantitative and Qualitative Disclosures about Market Risk ITEM 8. Financial Statements and Supplemental Data ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure ITEM 9A. Controls and Procedures ITEM 9B. Other Information ITEM 10. Directors, Executive Officers and Corporate Governance ITEM 11. Executive Compensation ITEM 12. Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters ITEM 13. Certain Relationships and Related Transactions, and Director Independence ITEM 14. Principal Accounting Fees and Services ITEM 15. Exhibits, Financial Statement Schedules SIGNATURES 1 10 19 19 19 19 19 22 23 51 53 107 107 108 108 108 108 108 108 109 109 THIS PAGE INTENTIONALLY LEFT BLANK ITEM 1. Discussion of Business The First Bancorp, Inc. (the "Company") was incorporated under the laws of the State of Maine on January 15, 1985, for the purpose of becoming the parent holding company of The First National Bank of Damariscotta, which was chartered as a national bank under the laws of the United States on May 30, 1864. At the Company's Annual Meeting of Shareholders on April 30, 2008, the Company's name was changed from First National Lincoln Corporation to The First Bancorp, Inc. On January 14, 2005, the acquisition of FNB Bankshares ("FNB") of Bar Harbor, Maine, was completed, adding seven banking offices and one investment management office in Hancock and Washington counties of Maine. FNB's subsidiary, The First National Bank of Bar Harbor, was merged into The First National Bank of Damariscotta at closing, and from January 31, 2005, until January 28, 2016, the combined banks operated under the name: The First, N.A. On January 28, 2016, the Board of Directors voted to change the Bank's name to First National Bank (the "Bank"). On October 26, 2012, the Bank completed the purchase of a branch at 63 Union Street in Rockland, Maine, from Camden National Bank "Camden National". The branch is one of 15 Maine branches Camden National acquired from Bank of America, and this branch was divested by Camden National to resolve competitive concerns in that market raised by the U.S. Department of Justice's Antitrust Division. As part of the transaction, the Bank acquired approximately $32.3 million in deposits as well as a small volume of loans. On the same date, the Bank completed the purchase of a full-service bank building at 145 Exchange Street in Bangor, Maine, also from Camden National, and opened a full-service branch in this building in February of 2013. The total value of the transaction was $6.6 million, which included the premises and equipment for the two locations, the premium paid for the Rockland deposits, a small amount of loans, plus core deposit intangible and goodwill. As of December 31, 2016, the Company's securities consisted of one class of common stock. At that date, there were 10,793,946 shares of common stock outstanding. On January 9, 2009, the Company issued $25,000,000 in Fixed Rate Cumulative Perpetual Preferred Stock, Series A, having a liquidation preference of $1,000 per share, to the U.S. Treasury under the Capital Purchase Program ("the CPP Shares"). As of May 8, 2013, the Company had repurchased all of the CPP Shares. Incident to such issuance of the CPP Shares, the Company issued to the Treasury warrants (the "Warrants") to purchase up to 225,904 shares of the Company's common stock at a price per share of $16.60 (subject to adjustment). The Warrants (and any shares of common stock issuable pursuant to the Warrants) are freely transferable by Treasury to third parties. The Warrants have a term of ten years and could be exercised by Treasury or a subsequent holder at any time or from time to time during their term. To the extent they had not previously been exercised, the Warrants will expire after ten years. The Warrants were unchanged as a result of the CPP Shares repurchase transactions. In May 2015, the Treasury sold the Warrants to private parties. In accordance with the contractual terms of the Warrants, the number of shares issuable upon exercise and strike price were adjusted at the time of the sale. As a result of this transaction, the aggregate number of shares of common stock issuable under the Warrants were adjusted to 226,819 shares with a strike price of $16.53 per share. In November 2016, the Company repurchased all of the outstanding Warrants for an aggregate purchase price of $1,750,000. The common stock of the Bank is the principal asset of the Company, which has no other subsidiaries. The Bank's capital stock consists of one class of common stock of which 290,069 shares, par value $2.50 per share, are authorized and outstanding. All of the Bank's common stock is owned by the Company. The Bank emphasizes personal service, and its customers are primarily small businesses and individuals to whom the Bank offers a wide variety of services, including deposit accounts and consumer, commercial and mortgage loans. The Bank has not made any material changes in its mode of conducting business during the past five years. The banking business in the Bank's market area is seasonal with lower deposits in the winter and spring and higher deposits in the summer and fall. This swing is predictable and has not had a materially adverse effect on the Bank. In addition to traditional banking services, the Company provides investment management and private banking services through First Advisors, which is an operating division of the Bank. First Advisors is focused on taking advantage of opportunities created as the larger banks have altered their personal service commitment to clients not meeting established account criteria. First Advisors is able to offer a comprehensive array of private banking, financial planning, investment management and trust services to individuals, businesses, non-profit organizations and municipalities of varying asset size, and to provide the highest level of personal service. The staff includes investment and trust professionals with extensive experience. The financial services landscape has changed considerably over the past five years in the Bank's primary market area. Two large out-of-state banks have continued to experience local change as a result of mergers and acquisitions at the regional and national level. Credit unions have continued to expand their membership and the scope of banking services offered. Non- banking entities such as brokerage houses, mortgage companies and insurance companies are offering very competitive products. Many of these entities and institutions have resources substantially greater than those available to the Bank and are not subject to the same regulatory restrictions as the Company and the Bank. The Company believes that there will continue to be a need for a bank in the Bank's primary market area with local management having decision-making power and emphasizing loans to small and medium-sized businesses and to individuals. The Bank has concentrated on extending business loans to such customers in the Bank's primary market area and to extending investment and trust services to clients with accounts of all sizes. The Bank's Management also makes decisions based upon, among other things, the knowledge of the Bank's employees regarding the communities and customers in the Bank's primary market area. The individuals employed by the Bank, to a large extent, reside near the branch offices and thus are generally The First Bancorp - 2016 Form 10-K - Page 1 familiar with their communities and customers. This is important in local decision-making and allows the Bank to respond to customer questions and concerns on a timely basis and fosters quality customer service. The Bank has worked and will continue to work to position itself to be competitive in its market area. The Bank's ability to make decisions close to the marketplace, Management's commitment to providing quality banking products, the caliber of the professional staff, and the community involvement of the Bank's employees are all factors affecting the Bank's ability to be competitive. Supervision and Regulation The Company is a financial holding company within the meaning of the Bank Holding Company Act of 1956, as amended (the "BHC Act"), and section 225.82 of Regulation Y issued by the Board of Governors of the Federal Reserve System (the "Federal Reserve Board" or "FRB"), and is required to file with the Federal Reserve Board an annual report and other information required pursuant to the BHC Act. The Company is subject to examination by the Federal Reserve Board. Virtually all of the Company's cash revenues are generally derived from dividends paid to the Company by the Bank. These dividends are subject to various legal and regulatory restrictions which are summarized in Note 18 to the accompanying financial statements. The Bank is regulated by the Office of the Comptroller of the Currency (the "OCC") and is subject to the provisions of the National Bank Act. As a result, it must meet certain liquidity and capital requirements, which are discussed in the following sections. General As a financial holding company, the Company is subject to regulation under the BHC Act and to inspection, examination and supervision by its primary regulator, the FRB. The Company is also subject to the disclosure and regulatory requirements of the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934, as amended, both as administered by the Securities and Exchange Commission (the "SEC"). As a company with securities listed on the NASDAQ, the Company is subject to the rules of the NASDAQ for listed companies. The Bank is subject to regulation and examination primarily by the OCC and is subject to regulations of the Federal Deposit Insurance Corporation (the "FDIC"). Bank Holding Company Activities As a bank holding company ("BHC") that has elected to become a financial holding company pursuant to the BHC Act, we may affiliate with securities firms and insurance companies and engage in other activities that are financial in nature or incidental or complementary to activities that are financial in nature. "Financial in nature" activities include securities underwriting, dealing and market making; sponsoring mutual funds and investment companies; insurance underwriting and agency; merchant banking; and activities that the FRB, in consultation with the Secretary of the U.S. Treasury, determines to be financial in nature or incidental to such financial activity. "Complementary activities" are activities that the FRB determines upon application to be complementary to a financial activity and do not pose a safety and soundness risk. FRB approval is not generally required for us to acquire a company (other than a bank holding company, bank or savings association) engaged in activities that are financial in nature or incidental to activities that are financial in nature, as determined by the FRB. Prior notice to the FRB may be required, however, if the company to be acquired has total consolidated assets of $10 billion or more. Prior FRB approval is required before we may acquire the beneficial ownership or control of more than 5% of the voting shares or substantially all of the assets of a bank holding company, bank or savings association. Because we are a financial holding company, if the Bank receives a rating under the Community Reinvestment Act of 1977, as amended (the "CRA"), of less than satisfactory, the Bank and/or the Company will be prohibited, until the rating is raised to satisfactory or better, from engaging in new activities or acquiring companies other than bank holding companies, banks or savings associations, except that we could engage in new activities, or acquire companies engaged in activities, that are closely related to banking under the BHC Act. In addition, if the FRB finds that the Bank is not well capitalized or well managed, we would be required to enter into an agreement with the FRB to comply with all applicable capital and management requirements and which may contain additional limitations or conditions. Until corrected, we could be prohibited from engaging in any new activity or acquiring companies engaged in activities that are not closely related to banking under the BHC Act without prior FRB approval. If we fail to correct any such condition within a prescribed period, the FRB could order us to divest our banking subsidiaries or, in the alternative, to cease engaging in activities other than those closely related to banking under the BHC Act. In determining whether to approve a proposed bank acquisition, federal bank regulators will consider, among other factors, the effect of the acquisition on competition, financial condition, and future prospects including current and projected capital ratios and levels, the competence, experience, and integrity of management and record of compliance with laws and regulations, the convenience and needs of the communities to be served, including the acquiring institution's record of compliance under the CRA, the effectiveness of the acquiring institution in combating money laundering activities and the risk to the stability of the United States banking system. The Company is a legal entity separate and distinct from the Bank. The primary source of funds to pay dividends on our common stock is dividends from the Bank. Various federal and state statutory provisions and regulations limit the amount of dividends the Bank may pay without regulatory approval. Federal bank regulatory agencies have the authority to prohibit the Bank from engaging in unsafe or unsound practices in conducting its business. The payment of dividends, depending on the The First Bancorp - 2016 Form 10-K - Page 2 financial condition of the Bank, could be deemed an unsafe or unsound practice. The ability of the Bank to pay dividends in the future is currently, and could be further, influenced by bank regulatory policies and capital guidelines. The Bank is subject to restrictions under federal law that limit the transfer of funds or other items of value from a subsidiary to the Company and any nonbank subsidiaries (including affiliates) in so-called "covered transactions." In general, covered transactions include loans and other extensions of credit, investments and asset purchases, as well as certain other transactions involving the transfer of value from a subsidiary bank to an affiliate or for the benefit of an affiliate. Unless an exemption applies, covered transactions by a subsidiary bank with a single affiliate are limited to 10% of the subsidiary bank's capital and surplus and, with respect to all covered transactions with affiliates in the aggregate, to 20% of the subsidiary bank's capital and surplus. Also, loans and extensions of credit to affiliates generally are required to be secured by qualifying collateral. A bank's transactions with its nonbank affiliates are also generally required to be on arm's-length terms. The FRB has a policy that a BHC is expected to act as a source of financial and managerial strength to each of its subsidiary banks and, under appropriate circumstances, to commit resources to support each such subsidiary bank. This support may be required at times when the BHC may not have the resources to provide the support. The OCC may order an assessment of the BHC if the capital of one of its national bank subsidiaries were to become impaired. If the BHC failed to pay the assessment within three months, the OCC could order the sale of the BHC's holdings of stock in the national bank to cover the deficiency. In the event of the "liquidation or other resolution" of an insured depository institution, the claims of deposits payable in the United States (including the claims of the FDIC as subrogee of insured depositors) and certain claims for administrative expenses of the FDIC as a receiver will have priority over other general unsecured claims against the institution. If an insured depository institution fails, claims of insured and uninsured U.S. depositors, along with claims of the FDIC, will have priority in payment ahead of unsecured creditors, including the BHC, and depositors whose deposits are solely payable at such insured depository institution's non-U.S. offices. Dodd-Frank Wall Street Reform and Consumer Protection Act The Dodd-Frank Act, enacted on July 21, 2010, is resulting in broad changes to the U.S. financial system and is the most significant financial reform legislation enacted since the 1930s. Financial regulatory agencies have issued numerous rulemakings to implement its provision, but other rules have yet to be promulgated or to take effect. As a result, the ultimate impact of the Dodd-Frank Act is not yet known, but it has affected, and we expect it will continue to affect, most of our businesses in some way, either directly through regulation of specific activities or indirectly through regulation of concentration risks, capital or liquidity. Federal regulatory agencies issued numerous other rulemakings in 2012 and 2013 to implement various other requirements of the Dodd-Frank Act. Agencies have proposed rules establishing a comprehensive framework for the regulation of derivatives, restricting banking entities from engaging in proprietary trading or owning interests in or sponsoring hedge funds or private equity funds (the "Volcker Rule"), and requiring sponsors of asset-backed securities ("ABS") to retain an ownership stake in the ABS. In November 2012, the Financial Stability Oversight Council proposed new regulations for addressing perceived risks that money market mutual funds may pose to the financial stability of the United States. Once final recommendations are issued, the SEC is required to adopt the recommendations or explain its reasons for not implementing the recommendations. Although we have analyzed these and other proposed rules, the absence of final rules and the complexity of some of the proposed rules make it difficult for the Company to estimate the financial, compliance or operational impacts of the proposals. The Dodd-Frank Act also established the Consumer Financial Protection Bureau (the "CFPB") to ensure consumers receive clear and accurate disclosures regarding financial products and to protect consumers from hidden fees and unfair or abusive practices. The CFPB has begun exercising supervisory review of banks under its jurisdiction and has concentrated much of its initial rulemaking efforts on a variety of mortgage-related topics required under the Dodd-Frank Act, including ability-to-repay and qualified mortgage standards, mortgage servicing standards, loan originator compensation standards, high-cost mortgage requirements, appraisal and escrow standards and requirements for higher-priced mortgages. During 2017, we expect the CFPB will focus its rulemaking efforts on integrating disclosure requirements for lenders and settlement agents and expanding the scope of information lenders must report in connection with mortgage and other housing-related loan applications. In addition to the exercise of its rulemaking authority, the CFPB is continuing its on-going examination activities with respect to a number of consumer focused businesses and financial products. Customer Information Security The FDIC, the OCC and other bank regulatory agencies have published guidelines (the "Guidelines") establishing standards for safeguarding nonpublic personal information about customers that implement provisions of the Gramm-Leach-Bliley Act (the "GLBA"). Among other things, the Guidelines require each financial institution, under the supervision and ongoing oversight of its Board of Directors or an appropriate committee thereof, to develop, implement and maintain a comprehensive written information security program designed to ensure the security and confidentiality of customer information, to protect against any anticipated threats or hazards to the security or integrity of such information, and to protect against unauthorized access to or use of such information that could result in substantial harm or inconvenience to any customer. The First Bancorp - 2016 Form 10-K - Page 3 Privacy The FDIC, the OCC and other regulatory agencies have published privacy rules pursuant to provisions of the GLBA ("Privacy Rules"). The Privacy Rules, which govern the treatment of nonpublic personal information about consumers by financial institutions, require a financial institution to provide notice to customers (and other consumers in some circumstances) about its privacy policies and practices, describe the conditions under which a financial institution may disclose nonpublic personal information to nonaffiliated third parties, and provide a method for consumers to prevent a financial institution from disclosing that information to most nonaffiliated third parties by "opting-out" of that disclosure, subject to certain exceptions. USA Patriot Act The USA Patriot Act of 2001, designed to deny terrorists and others the ability to obtain anonymous access to the U.S. financial system, has significant implications for depository institutions, broker-dealers and other businesses involved in the transfer of money. The USA Patriot Act, together with the implementing regulations of various federal regulatory agencies, have caused financial institutions, including the Bank, to adopt and implement additional or amend existing policies and procedures with respect to, among other things, anti-money laundering compliance, suspicious activity and currency transaction reporting, customer identity verification and customer risk analysis. The statute and its underlying regulations also permit information sharing for counter-terrorist purposes between federal law enforcement agencies and financial institutions, as well as among financial institutions, subject to certain conditions, and require the Federal Reserve Board (and other federal banking regulatory agencies) to evaluate the effectiveness of an applicant in combating money laundering activities when considering applications filed under Section 3 of the BHC Act or under the Bank Merger Act. The Bank Secrecy Act The Bank Secrecy Act (the "BSA") requires all financial institutions, including banks and securities broker-dealers, to, among other things, establish a risk-based system of internal controls reasonably designed to prevent money laundering and the financing of terrorism. It includes a variety of recordkeeping and reporting requirements (such as cash and suspicious activity reporting) as well as due diligence/know-your-customer documentation requirements. The Bank has established an anti-money laundering program to comply with the BSA requirements. The Sarbanes-Oxley Act The Sarbanes-Oxley Act of 2002 ("SOX") implements a broad range of corporate governance and accounting measures for public companies (including publicly-held bank holding companies such as the Company) designed to promote honesty and transparency in corporate America and better protect investors from the type of corporate wrongdoings that occurred at Enron and WorldCom, among other companies. SOX's principal provisions, many of which have been implemented through regulations released and policies and rules adopted by the securities exchanges in 2003 and 2004, provide for and include, among other things: • The creation of an independent accounting oversight board; • Auditor independence provisions which restrict non-audit services that accountants may provide to clients; • Additional corporate governance and responsibility measures, including the requirement that the chief executive officer and chief financial officer of a public company certify financial statements; • The forfeiture of bonuses or other incentive-based compensation and profits from the sale of an issuer's securities by directors and senior officers in the twelve-month period following initial publication of any financial statements that later require restatement; • An increase in the oversight of, and enhancement of certain requirements relating to, audit committees of public companies and how they interact with the public company's independent auditors; • Requirements that audit committee members must be independent and are barred from accepting consulting, advisory or other compensatory fees from the issuer; • Requirements that companies disclose whether at least one member of the audit committee is a 'financial expert' (as such term is defined by the SEC, and if not, why not; • Expanded disclosure requirements for corporate insiders, including accelerated reporting of stock transactions by insiders and a prohibition on insider trading during pension blackout periods; • A prohibition on personal loans to directors and officers, except certain loans made by insured financial institutions, such as the Bank, on nonpreferential terms and in compliance with bank regulatory requirements; • Disclosure of a code of ethics and filing a Form 8-K in the event of a change or waiver of such code; and • A range of enhanced penalties for fraud and other violations. The Company complies with the provisions of SOX and its underlying regulations. Management believes that such compliance efforts have strengthened the Company's overall corporate governance structure and does not expect that such compliance has to date had, or will in the future have, a material impact on the Company's results of operations or financial condition. The First Bancorp - 2016 Form 10-K - Page 4 Capital Requirements The OCC has established guidelines with respect to the maintenance of appropriate levels of capital by FDIC-insured banks. The Federal Reserve Board has established substantially identical guidelines with respect to the maintenance of appropriate levels of capital, on a consolidated basis, by BHCs. If a banking organization's capital levels fall below the minimum requirements established by such guidelines, a bank or BHC will be expected to develop and implement a plan acceptable to the FDIC or the Federal Reserve Board, respectively, to achieve adequate levels of capital within a reasonable period, and may be denied approval to acquire or establish additional banks or non-bank businesses, merge with other institutions or open branch facilities until such capital levels are achieved. Federal regulations require federal bank regulators to take "prompt corrective action" with respect to insured depository institutions that fail to satisfy minimum capital requirements and impose significant restrictions on such institutions. See "Prompt Corrective Action" below. Leverage Capital Ratio The regulations of the OCC require national banks to maintain a minimum "Leverage Capital Ratio" or "Tier 1 Capital" (as defined in the Risk-Based Capital Guidelines discussed in the following paragraphs) to Total Assets of 4.0%. Any bank experiencing or anticipating significant growth is expected to maintain capital well above the minimum levels. The Federal Reserve Board's guidelines impose substantially similar leverage capital requirements on bank holding companies on a consolidated basis. It is possible that banking regulators may increase minimum capital requirements for banks should economic conditions worsen. Risk-Based Capital Requirements OCC regulations also require national banks to maintain minimum capital levels as a percentage of a bank's risk-adjusted assets. A bank's qualifying total capital ("Total Capital") for this purpose may include two components: "Core" (Tier 1) Capital and "Supplementary" (Tier 2) Capital. Core Capital consists primarily of common stockholders' equity, which generally includes common stock, related surplus and retained earnings, certain non-cumulative perpetual preferred stock and related surplus, and minority interests in the equity accounts of consolidated subsidiaries, and (subject to certain limitations) mortgage servicing rights and purchased credit card relationships, less all other intangible assets (primarily goodwill). Supplementary Capital elements include, subject to certain limitations, a portion of the allowance for loan losses, perpetual preferred stock that does not qualify for inclusion in Tier 1 capital, long-term preferred stock with an original maturity of at least 20 years and related surplus, certain forms of perpetual debt and mandatory convertible securities, and certain forms of subordinated debt and intermediate-term preferred stock. The risk-based capital rules assign the majority of a bank's balance sheet assets and the credit equivalent amounts of the bank's off-balance sheet obligations to one of four risk categories, weighted at 0%, 20%, 50% or 100%, as applicable. A small amount of assets and off-balance sheet obligations are assigned a risk weight above 100%. Applying these risk-weights to each category of the bank's balance sheet assets and to the credit equivalent amounts of the bank's off-balance sheet obligations and summing the totals results in the amount of the bank's total Risk-Adjusted Assets for purposes of the risk-based capital requirements. Risk-Adjusted Assets can either exceed or be less than reported balance sheet assets, depending on the risk profile of the banking organization. Risk-Adjusted Assets for institutions such as the Bank will generally be less than reported balance sheet assets because its retail banking activities include proportionally more residential mortgage loans, many of its investment securities have a low risk weighting and there is a relatively small volume of off-balance sheet obligations. The risk-based capital regulations require all banks to maintain a minimum ratio of Total Capital to Risk-Adjusted Assets of 8.0%, of which at least one-half (4.0%) must be Core (Tier 1) Capital. For the purpose of calculating these ratios: (i) a banking organization's Supplementary Capital eligible for inclusion in Total Capital is limited to no more than 100% of Core Capital; and (ii) the aggregate amount of certain types of Supplementary Capital eligible for inclusion in Total Capital is further limited. For example, the regulations limit the portion of the allowance for loan losses eligible for inclusion in Total Capital to 1.25% of Risk-Adjusted Assets. The Federal Reserve Board has established substantially identical risk-based capital requirements, which are applied to bank holding companies on a consolidated basis. The risk-based capital regulations explicitly provide for the consideration of interest rate risk in the overall evaluation of a bank's capital adequacy to ensure that banks effectively measure and monitor their interest rate risk, and that they maintain capital adequate for that risk. A bank deemed by its federal banking regulator to have excessive interest rate risk exposure may be required to maintain additional capital (that is, capital in excess of the minimum ratios discussed above). The Bank believes, based on its level of interest rate risk exposure, that this provision will not have a material adverse effect on it. On December 31, 2016, the Company's consolidated Total and Tier 1 Risk-Based Capital Ratios were 15.69% and 14.64%, respectively, and its Leverage Capital Ratio was 8.71%. Based on the above figures and accompanying discussion, the Company exceeds all regulatory capital requirements and is considered well capitalized. The First Bancorp - 2016 Form 10-K - Page 5 Basel III Capital Requirements In December 2010, the Basel Committee on Bank Supervision (the "BCBS") finalized a set of international guidelines for determining regulatory capital known as "Basel III." These guidelines were developed in response to the financial crisis of 2008 and 2009 and were intended to address many of the weaknesses identified in the banking sector as contributing to the crisis including excessive leverage, inadequate and low quality capital and insufficient liquidity buffers. The Basel III guidelines will: • • • • • • raise the quality of capital as that banks will be better able to absorb losses on both a going concern basis; and increase the risk coverage of the capital framework, specifically for trading activities, securitizations, exposures to off-balance sheet vehicles, and counterparty credit exposures arising from derivatives; raise the level of minimum capital requirements; establish an international leverage ratio; develop capital buffers; raise standards for the supervisory review process (Pillar 2) and public disclosures (Pillar 3). On June 2013, the U.S. banking regulators finalized rulemaking to implement the BCBS capital guidelines for U.S. banks, including, among other things: • implement in the United States the Basel III regulatory capital reforms including those that revise the definition of capital, increase minimum capital ratios, and introduce a minimum Tier 1 common equity ratio of 4.5% and a capital conservation buffer of 2.5% (for a total minimum Tier 1 common equity ratio of 7.0%) and a potential countercyclical buffer of up to 2.5%, which would be imposed by regulators at their discretion if it is determined that a period of excessive credit growth is contributing to an increase in systemic risk; revise "Basel I" rules for calculating risk-weighted assets to enhance risk sensitivity; • • modify the existing Basel II advanced approaches rules for calculating risk-weighted assets to implement Basel III; • comply with the Dodd-Frank Act provision prohibiting the reliance on external credit ratings. The U.S. banking regulators also approved a final rule to implement changes to the market risk capital rule, which requires banking organizations with significant trading activities to adjust their capital requirements to better account for the market risks of those activities. The Company has evaluated the impact of Basel III on its capital ratios based on our interpretation of the capital requirements, and our Tier 1 common equity ratio of 14.64% exceeded the fully phased-in minimum of ratio of 7.0% by 7.6% at December 31, 2016. From time to time, the OCC, the FRB and the Federal Financial Institutions Examination Council (the "FFIEC") propose changes and amendments to, and issue interpretations of, risk-based capital guidelines and related reporting instructions. In addition, the FRB has closely monitored capital levels of the institutions it supervises during the ongoing financial disruption, and may require such institutions to modify capital levels based on FRB determinations. Such determinations, proposals or interpretations could, if implemented in the future, affect our reported capital ratios and net risk-adjusted assets. Prompt Corrective Action The Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA") requires, among other things, that the federal banking regulators take "prompt corrective action" with respect to, and imposes significant restrictions on, any bank that fails to satisfy its applicable minimum capital requirements. FDICIA establishes five capital categories consisting of "well capitalized," "adequately capitalized," "undercapitalized," "significantly undercapitalized" and "critically undercapitalized." Under applicable regulations, a bank that has a Total Risk-Based Capital Ratio of 10.0% or greater, a Tier 1 Risk-Based Capital Ratio of 8.0% or greater and a Leverage Capital Ratio of 5.0% or greater, and is not subject to any written agreement, order, capital directive or prompt corrective action directive to meet and maintain a specific capital level for any capital measure, is deemed to be "well capitalized." A bank that has a Total Risk-Based Capital Ratio of 8.0% or greater, a Tier 1 Risk-Based Capital Ratio of 6.0% or greater and a Leverage Capital Ratio of 4.0% (or 3% for banks with the highest regulatory examination rating that are not experiencing or anticipating significant growth or expansion) or greater and does not meet the definition of a well- capitalized bank is considered to be "adequately capitalized." A bank that has a Total Risk-Based Capital Ratio of less than 8.0% or has a Tier 1 Risk-Based Capital Ratio that is less than 4.0%, except as noted above, or a Leverage Capital Ratio of less than 4.0% is considered "undercapitalized." A bank that has a Total Risk-Based Capital Ratio of less than 6.0%, or a Tier 1 Risk-Based Capital Ratio that is less than 3.0% or a Leverage Capital Ratio that is less than 3.0% is considered to be "significantly undercapitalized," and a bank that has a ratio of tangible equity to total assets equal to or less than 2% is deemed to be "critically undercapitalized." A bank may be deemed to be in a capital category lower than is indicated by its actual capital position if it is determined to be in an unsafe or unsound condition or receives an unsatisfactory examination rating. FDICIA generally prohibits a bank from making capital distributions (including payment of dividends) or paying management fees to controlling stockholders or their affiliates if, after such payment, the bank would be undercapitalized. Under FDICIA and the applicable implementing regulations, an undercapitalized bank will be (i) subject to increased monitoring by its primary federal banking regulator; (ii) required to submit to its primary federal banking regulator an acceptable capital restoration plan (guaranteed, subject to certain limits, by the bank's holding company) within 45 days of being classified as undercapitalized; (iii) subject to strict asset growth limitations; and (iv) required to obtain prior regulatory approval for certain acquisitions, transactions not in the ordinary course of business, and entries into new lines of business. In addition to the foregoing, the primary federal banking regulator may issue a "prompt corrective action directive" to any The First Bancorp - 2016 Form 10-K - Page 6 undercapitalized institution. Such a directive may (i) require sale or re-capitalization of the bank; (ii) impose additional restrictions on transactions between the bank and its affiliates; (iii) limit interest rates paid by the bank on deposits; (iv) limit asset growth and other activities; (v) require divestiture of subsidiaries; (vi) require replacement of directors and officers; and (vii) restrict capital distributions by the bank's parent holding company. In addition to the foregoing, a significantly undercapitalized institution may not award bonuses or increases in compensation to its senior executive officers until it has submitted an acceptable capital restoration plan and received approval from its primary federal banking regulator. No later than 90 days after an institution becomes critically undercapitalized, the primary federal banking regulator for the institution must appoint a receiver or, with the concurrence of the FDIC, a conservator, unless the agency, with the concurrence of the FDIC, determines that the purpose of the prompt corrective action provisions would be better served by another course of action. FDICIA requires that any alternative determination be "documented" and reassessed on a periodic basis. Notwithstanding the foregoing, a receiver must be appointed after 270 days unless the appropriate federal banking agency and the FDIC certify that the institution is viable and not expected to fail. Deposit Insurance Assessments The Bank is a member of the Deposit Insurance Fund ("DIF") maintained by the FDIC. Through the DIF, the FDIC insures the deposits of the Bank up to prescribed limits for each depositor. The DIF was formed March 31, 2006, upon the merger of the Bank Insurance Fund and the Savings Insurance Fund in accordance with the Federal Deposit Insurance Reform Act of 2005 (the "FDIR Act"). The FDIR Act established a range of 1.15% to 1.50% within which the FDIC Board of Directors may set the Designated Reserve Ratio (the "reserve ratio" or "DRR"). The FDIR Act also granted the FDIC Board the discretion to price deposit insurance according to risk for all insured institutions regardless of the level of the reserve ratio. In 2009, the FDIC undertook several measures in an effort to replenish the DIF. On February 27, 2009, the FDIC adopted a final rule modifying the risk-based assessment system and set new initial base assessment rates beginning April 1, 2009. Annual rates ranged from a minimum of 12 cents per $100 of domestic deposits for well-managed, well-capitalized institutions with the highest credit ratings, to 45 cents per $100 for those institutions posing the most risk to the DIF. Risk-based adjustments to the initial assessment rate could have lowered the rate to 7 cents per $100 of domestic deposits for well-managed, well-capitalized banks with the highest credit ratings or raised the rate to 77.5 cents per $100 for depository institutions posing the most risk to the DIF. On May 22, 2009, the FDIC adopted a final rule imposing a 5 basis point special assessment on each insured depository institution's assets minus Tier 1 capital as of June 30, 2009. The amount of the special assessment for any institution was limited to 10 basis points times the institution's assessment base for the second quarter 2009. On November 17, 2009, the FDIC amended its regulations to require insured institutions to prepay their estimated quarterly risk-based assessments for fourth quarter 2009, and all of 2010, 2011, 2012 and 2013. For purposes of determining the prepayment, the FDIC used the institution's assessment rate in effect on September 30, 2009. The unused portion of the prepaid assessment was refunded on June 28, 2013. The Dodd-Frank Act gave the FDIC greater discretion to manage the DIF, raised the minimum DRR to 1.35% and removed the upper limit of the range. In October 2010, the FDIC Board adopted a Restoration Plan to ensure that the DIF reserve ratio reaches 1.35% by September 30, 2020, as required by the Dodd-Frank Act. At the same time, the FDIC Board proposed a comprehensive, long-range plan for DIF management. In December 2010, as part of the comprehensive plan, the FDIC Board adopted a final rule to set the DRR at 2%, and in February 2011, the FDIC Board approved the remainder of the comprehensive plan. The Restoration Plan eliminated a 3 basis point increase in the annual assessment rates that was to take effect January 1, 2011. On February 7, 2011, the FDIC Board approved a final rule on assessments, dividends, assessment base and large bank pricing that took effect on April 1, 2011. To maintain the DIF, member institutions are assessed an insurance premium based on an assessment base and an assessment rate. Generally, the assessment base is an institution's average consolidated total assets minus average tangible equity. For large and highly complex institutions (those that are very large and are structurally and operationally complex or that pose unique challenges and risks in the case of failure), the assessment rate is determined by combining supervisory ratings and certain financial measures into scorecards. The score received by an institution will be converted into an assessment rate for the institution. The FDIC retains the ability to adjust the total score of large and highly complex institutions based upon quantitative or qualitative measures not adequately captured in the scorecards. All FDIC-insured depository institutions must also pay a quarterly assessment towards interest payments on bonds issued by the Financing Corporation, a federal corporation chartered under the authority of the Federal Housing Finance Board. The bonds (commonly referred to as FICO bonds) were issued to capitalize the Federal Savings and Loan Insurance Corporation. FDIC-insured depository institutions paid approximately 1.00 to 1.02 cents per $100 of assessable deposits during the first nine months of 2011. To coincide with Dodd-Frank Act mandated changes to the insurance assessment base, the FDIC established lower FICO assessment rates, 0.66 cents per $100 of assessment base for 2012, 0.64 cents per $100 of assessment base for 2013, 0.62 cents per $100 of assessment base for 2014 and 0.60 cents per $100 of assessment base for 2015 and on. The FDIC may terminate a depository institution's deposit insurance upon a finding that the institution's financial condition is unsafe or unsound or that the institution has engaged in unsafe or unsound practices or has violated any applicable rule, regulation, order or condition enacted or imposed by the institution's regulatory agency. The termination of deposit insurance for the Bank could have a material adverse effect on our earnings. The First Bancorp - 2016 Form 10-K - Page 7 Brokered Deposits and Pass-Through Deposit Insurance Limitations Under FDICIA, a bank cannot accept brokered deposits unless it either (i) is "Well Capitalized" or (ii) is "Adequately Capitalized" and has received a written waiver from its primary federal banking regulator. For this purpose, "Well Capitalized" and "Adequately Capitalized" have the same definitions as in the Prompt Corrective Action regulations. See "Prompt Corrective Action" above. Banks that are not in the "Well Capitalized" category are subject to certain limits on the rates of interest they may offer on any deposits (whether or not obtained through a third-party deposit broker). Pass-through insurance coverage is not available in banks that do not satisfy the requirements for acceptance of brokered deposits, except that pass-through insurance coverage will be provided for employee benefit plan deposits in institutions which at the time of acceptance of the deposit meet all applicable regulatory capital requirements and send written notice to their depositors that their funds are eligible for pass-through deposit insurance. The Bank currently accepts brokered deposits. Real Estate Lending Standards FDICIA requires the federal bank regulatory agencies to adopt uniform real estate lending standards. The FDIC and the OCC have adopted regulations which establish supervisory limitations on Loan-to-Value ("LTV") ratios in real estate loans by FDIC- insured banks, including national banks. The regulations require banks to establish LTV ratio limitations within or below the prescribed uniform range of supervisory limits. The CFPB amended Regulation Z effective January 10, 2014 to implement Ability to Repay and Qualified Mortgage Standards for residential mortgage lending. The Bank is considered a large bank under the rule. The Bank follows the Ability to Repay rule by making a good faith determination of an applicant’s ability to repay under the terms of the transaction; loans meeting the outlined standards for Qualified Mortgages are identified as such in the Bank’s records. The CFPB further amended Regulation Z along with amending Regulation X to combine certain disclosures consumers receive when applying for and closing on a mortgage loan under the Truth in Lending Act and Real Estate Settlement Procedures Act. These amendments became effective October 3, 2015. Standards for Safety and Soundness Pursuant to FDICIA the federal bank regulatory agencies have prescribed, by regulation, standards and guidelines for all insured depository institutions and depository institution holding companies relating to: (i) internal controls, information systems and internal audit systems; (ii) loan documentation; (iii) credit underwriting; (iv) interest rate risk exposure; (v) asset growth; and (vi) compensation, fees and benefits. The compensation standards prohibit employment contracts, compensation or benefit arrangements, stock option plans, fee arrangements or other compensatory arrangements that would provide "excessive" compensation, fees or benefits, or that could lead to material financial loss. In addition, the federal bank regulatory agencies are required by FDICIA to prescribe standards specifying: (i) maximum classified assets to capital ratios; (ii) minimum earnings sufficient to absorb losses without impairing capital; and (iii) to the extent feasible, a minimum ratio of market value to book value for publicly-traded shares of depository institutions and depository institution holding companies. Consumer Protection Provisions FDICIA also includes provisions requiring advance notice to regulators and customers for any proposed branch closing and authorizing (subject to future appropriation of the necessary funds) reduced insurance assessments for institutions offering "lifeline" banking accounts or engaged in lending in distressed communities. FDICIA also includes provisions requiring depository institutions to make additional and uniform disclosures to depositors with respect to the rates of interest, fees and other terms applicable to consumer deposit accounts. FDIC Waiver of Certain Regulatory Requirements The FDIC issued a rule, effective on September 22, 2003, that includes a waiver provision which grants the FDIC Board of Directors extremely broad discretionary authority to waive FDIC regulatory provisions that are not specifically mandated by statute or by a separate regulation. Future Legislation or Regulation In light of recent conditions in the U.S. and global financial markets and the U.S. and global economy, legislators, the presidential administration and regulators have continued their increased focus on regulation of the financial services industry. Legislative changes and additional regulations have the potential to change our operating environment in substantial and unpredictable ways. Such legislation and regulations could increase our cost of doing business, affect our compensation structure, restrict or expand the activities in which we may engage or affect the competitive balance among banks, savings associations, credit unions, and other financial institutions. We cannot predict whether future legislative proposals will be enacted and, if enacted, the effect that they, or any implementing regulations, would have on our business, results of operations or financial condition. Impact of Monetary Policy Our business and earnings are affected significantly by the fiscal and monetary policies of the federal government and its agencies. We are particularly affected by the policies of the FRB, which regulates the supply of money and credit in the United States. Among the instruments of monetary policy available to the FRB are (a) conducting open market operations in United The First Bancorp - 2016 Form 10-K - Page 8 States government securities, (b) changing the discount rates of borrowings of depository institutions, (c) imposing or changing reserve requirements against depository institutions' deposits, and (d) imposing or changing reserve requirements against certain borrowings by banks and their affiliates. These methods are used in varying degrees and combinations to directly affect the availability of bank loans and deposits, as well as the interest rates charged on loans and paid on deposits. The policies of the FRB may have a material effect on our business, results of operations and financial condition. The nature of future monetary policies and the effect of such policies on the future business and earnings of the Company and the Bank cannot be predicted. See Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations, regarding the Bank's net interest margin and the effect of interest rate volatility on future earnings. Employees At December 31, 2016, the Company had 235 employees and full-time equivalency of 218 employees. The Company enjoys good relations with its employees. A variety of employee benefits, including health, group life and disability income, a defined contribution retirement plan, and an incentive bonus plan, are available to qualifying officers and other employees. Company Website The Company maintains a website at www.thefirstbancorp.com where it makes available, free of charge, its annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, as well as all Section 16 reports on Forms 3, 4, and 5, as soon as reasonably practicable after such reports are electronically filed with, or furnished to, the SEC. The Company's reports filed with, or furnished to, the SEC are also available at the SEC's website at www.sec.gov. Information contained on the Company's website does not constitute a part of this report. Interactive reports for our 10-K and 10-Q filings are available in XBRL format at the Company's website. The First Bancorp - 2016 Form 10-K - Page 9 ITEM 1A. Risk Factors The risks and uncertainties described below are not the only ones the Company faces. Additional risks and uncertainties that we are unaware of, or that we currently deem immaterial, also may become important factors that affect us and our business. If any of these risks were to occur, our business, financial condition or results of operations could be materially and adversely affected. Risk Associated With Our Business We are subject to credit risk and may incur losses if loans are not repaid. There are inherent risks associated with our lending activities. These risks include, among other things, the impact of changes in interest rates and changes in the economic conditions in the markets where we operate as well as those across the United States and abroad. Increases in interest rates and/or weakening economic conditions could adversely impact the ability of borrowers to repay outstanding loans or the value of the collateral securing these loans. We seek to mitigate the risks inherent in our loan portfolio by adhering to specific underwriting practices. Although we believe that our underwriting criteria are appropriate for the various kinds of loans we make, we may incur losses on loans that meet our underwriting criteria, and these losses may exceed the amounts set aside as reserves in our allowance for loan losses. Our loan portfolio includes commercial and commercial real estate loans that may have higher risks than other types of loans. Our commercial, commercial real estate, and commercial construction loans at December 31, 2016 and 2015 were $478.7 million and $422.7 million, or 44.7% and 42.8% of total loans, respectively. Commercial and commercial real estate loans generally carry larger loan balances and can involve a greater degree of financial and credit risk than other loans. As a result, banking regulators continue to give greater scrutiny to lenders with a high concentration of commercial real estate loans in their portfolios, and such lenders are expected to implement stricter underwriting criteria, internal controls, risk management policies and portfolio stress testing, as well as higher capital levels and loss allowances. The increased financial and credit risk associated with these types of loans are a result of several factors, including the concentration of principal in a limited number of loans and borrowers, the size of loan balances, the effects of general economic conditions on income-producing properties and the increased difficulty of evaluating and monitoring these types of loans. Regulators have the right to require banks to maintain elevated levels of capital or liquidity due to commercial real estate loan concentrations, and could do so, especially if there is a downturn in our local real estate markets. In addition, when underwriting a commercial or industrial loan, we may take a security interest in commercial real estate, and, in some instances upon a default by the borrower, we may foreclose on and take title to the property, which may lead to potential financial risks for us under applicable environmental laws. If hazardous substances were discovered on any of these properties, we may be liable to governmental agencies or third parties for the costs of remediation of the hazard, as well as for personal injury and property damage. Many environmental laws can impose liability regardless of whether the Bank knew of, or had been responsible for, the contamination. Furthermore, the repayment of loans secured by commercial real estate is typically dependent upon the successful operation of the related real estate or commercial project. If the cash flows from the project are reduced, a borrower's ability to repay the loan may be impaired. This cash flow shortage may result in the failure to make loan payments. In such cases, we may be compelled to modify the terms of the loan. In addition, the nature of these loans is such that they are generally less predictable and more difficult to evaluate and monitor. As a result, repayment of these loans may, to a greater extent than residential loans, be subject to adverse conditions in the real estate market or the broader economy. Our allowance for loan losses may be insufficient and require additional provision from earnings. The Bank maintains an allowance for loan losses based on, among other things, national and regional economic conditions, historical loss experience and delinquency trends. We make various assumptions and judgments about the collectability of our loan portfolio, including the creditworthiness of borrowers and the value of the real estate and other assets serving as collateral for the repayment of loans. In determining the size of the allowance for loan losses, we rely on our experience and our evaluation of economic conditions. However, we cannot predict loan losses with certainty, and we cannot provide assurance that charge-offs in future periods will not exceed the allowance for loan losses. If, as a result of general economic conditions, previously incorrect assumptions or an increase in defaulted loans, we determine that additional increases in the allowance for loan losses are necessary, we will incur additional provision expenses. In addition, regulatory agencies review the Bank's allowance for loan losses and may require additions to the allowance based on their judgment about information available to them at the time of their examination. Management could also decide that the allowance for loan losses should be increased. If charge-offs in future periods exceed the allowance for loan losses, we will need additional provisions to increase the allowance for loan losses. Furthermore, growth in the loan portfolio would generally lead to an increase in the provision for loan losses. Any increases in the allowance for loan losses will result in a decrease in net income and capital, and may have a material adverse effect on our financial condition, results of operations and cash flows. See the section captioned "Credit Risk The First Bancorp - 2016 Form 10-K - Page 10 Management and Allowance for Loan Losses" in Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations, located elsewhere in this report, for further discussion related to our process for determining the appropriate level of the allowance for loan losses. The Maine foreclosure process can be lengthy and add additional losses for the Bank. Residential foreclosures in Maine occur through the judicial system. Under ideal circumstances, it can take as little as six months to foreclose on a Maine property; however, if the borrower contests the foreclosure or the court delays the foreclosure, the process may take as long as two years. In 2009, the Maine Legislature passed "An Act to Preserve Home Ownership and Stabilize the Economy by Preventing Unnecessary Foreclosures." This law provides for mediation of foreclosure of residential mortgages and borrowers may choose mediation in which parties must attend mediation sessions and evaluate foreclosure alternatives in good faith. This law also provides that issues such as reinstatement of the mortgage, modification of the loan and restructuring of the mortgage debt are to be addressed at these mediations. Given the uncertain timeframe related to foreclosure in Maine, the Bank can incur additional legal fees and other costs, such as payment of property taxes and insurance, if the foreclosure process is extended. In addition, the value of the property may further decline if the borrower fails to maintain the property in good order. Our level of troubled debt restructured ("TDR") remains elevated. Our efforts between 2011 and 2015 to assist homeowners and other borrowers increased our overall level of TDRs. In each case when a loan was modified, Management determined it was in the Bank's best interest to work with the borrower with modified terms rather than to proceed to foreclosure. Once a loan is classified as a TDR, however, it remains classified as a TDR until the balance is fully repaid, whether or not the loan is performing under the modified terms. As of December 31, 2016 there were 71 loans with an outstanding balance of $21.5 million that have been restructured. This compares to 84 loans with a value of $23.9 million as of December 31, 2015. As of December 31, 2016, 57 loans with an aggregate balance of $18.9 million were performing under the modified terms, five loans with an aggregate balance $876,000 were more than 30 days past due and accruing and nine loans with an aggregate balance of $1.7 million were on nonaccrual. As a percentage of aggregate outstanding balances, 87.9% were performing under the modified terms, 4.1% were more than 30 days past due and accruing and 8.0% were on nonaccrual. Although a large percentage of TDRs continue to be performing, as a group our TDRs are relatively unseasoned and the full collection of principal and interest on some TDRs may not occur, which could adversely affect our financial condition and results of operations. Changes in interest rates could adversely affect our net interest income and profitability. Our earnings and cash flows are largely dependent upon our net interest income. Net interest income is the difference between interest income earned on interest-earning assets, such as loans and securities, and interest expense paid on interest-bearing liabilities, such as deposits and borrowed funds. Interest rates are highly sensitive to many factors that are beyond our control, including general economic conditions, demand for loans, securities and deposits, and policies of various governmental and regulatory agencies and, in particular, the Board of Governors of the Federal Reserve System. Changes in monetary policy, including changes in interest rates, could influence not only the interest we receive on loans and securities and the amount of interest we pay on deposits and borrowings, but such changes could also affect • • • our ability to originate loans and obtain deposits; the fair value of our financial assets and liabilities; and the average duration of our loans and securities that are collateralized by mortgages. If the interest rates paid on deposits and other borrowings increase at a faster rate than the interest rates received on loans and other investments, our net interest income, and therefore earnings, could be adversely affected. Earnings could also be adversely affected if the interest rates received on loans and other investments fall more quickly than the interest rates paid on deposits and other borrowings. If interest rates decline, our higher-rate loans and investments may be subject to prepayment risk, which could negatively impact our net interest margin. Conversely, if interest rates increase, our loans and investments may be subject to extension risk, which could negatively impact our net interest margin as well. Any substantial, unexpected or prolonged change in market interest rates could have a material adverse effect on our financial condition, results of operations and cash flows. See Item 7A. Quantitative and Qualitative Disclosures about Market Risk located elsewhere in this report for further discussion related to our management of interest rate risk. The value of our investment portfolio may be negatively affected by changes in interest rates and disruptions in securities markets. The market for some of the investment securities held in our portfolio has become volatile over the past several years. Volatile market conditions may detrimentally affect the value of these securities due to the perception of heightened credit and liquidity risks. There can be no assurance that the declines in market value associated with these disruptions will not result in other than temporary impairments of these assets, which would lead to accounting charges that could have a material adverse effect on our The First Bancorp - 2016 Form 10-K - Page 11 net income and capital levels. Our mortgage-backed bond portfolio may be subject to extension risk as interest rates rise and borrowers are unable to refinance their current mortgages into lower rate mortgages, extending the average life of the bonds. As of December 31, 2016, we had $300.4 million and $226.8 million in available for sale and held to maturity investment securities, respectively. Numerous factors, including lack of liquidity for re-sales of certain investment securities, absence of reliable pricing information for investment securities, adverse changes in business climate, adverse actions by regulators, or unanticipated changes in the competitive environment could have a negative effect on our investment portfolio in future periods. If an impairment charge is significant enough it could affect the ability of the Bank to renew funding. This could have a material adverse effect on our liquidity and the Bank's ability to upstream dividends to the Company and for the Company to then pay dividends to shareholders. It could also negatively impact our regulatory capital ratios and result in our not being classified as "well-capitalized" for regulatory purposes. Illiquidity could impair our ability to fund operations and jeopardize our financial condition. Liquidity is essential to our business. An inability to raise funds through traditional deposits, brokered deposit renewals or rollovers, secured or unsecured borrowings, the sale of securities or loans and other sources could have a substantial negative effect on our liquidity. Our access to funding sources in amounts adequate to finance our activities could be impaired by factors that affect us specifically or the financial services industry or the economy in general, or could be available only under terms which are unacceptable to us. We rely primarily on commercial and retail deposits and, to a lesser extent, brokered deposit renewals and rollovers, advances from the Federal Home Loan Bank of Boston (the "FHLB") and other secured and unsecured borrowings to fund our operations. Factors that could detrimentally impact our access to liquidity sources include a decrease in the level of our business activity as a result of a downturn in the markets in which our loans are concentrated, adverse regulatory action against us, changes in market interest rates or increased competition for funding within our market. Disruptions in the capital markets or interest rate changes may make the terms of wholesale funding sources less favorable and may make it difficult to sell securities when needed to provide additional liquidity. In addition, if we fall below the FDIC's thresholds to be considered "well capitalized", we will be unable to continue to roll over or renew brokered funds, and the interest rate paid on deposits would be subject to restrictions. As a result, there is a risk that our cost of funding will increase or we will not have sufficient funds to meet our obligations when they become due. Loss of lower-cost funding sources could lead to margin compression and decrease net interest income. Checking and savings, NOW, and money market deposit account balances and other forms of customer deposits can decrease when customers perceive alternative investments, such as the stock market, as providing a better risk/return tradeoff. If customers move money out of bank deposits and into other investments, we could lose a relatively low-cost source of funds, increasing our funding costs and reducing our net interest income and net income. Advances from the FHLB are currently a relatively low-cost source of funding. The availability of qualified collateral on the Bank's balance sheet determines the level of advances available from FHLB and a deterioration in quality in the Bank's loan portfolio can adversely impact the availability of this source of funding, which could increase our funding costs and reduce our net interest income. The soundness of other financial institutions could adversely affect us. Financial institutions in particular have been subject to increased volatility and an overall loss in investor confidence. Our ability to engage in routine funding transactions could be adversely affected by the actions and commercial soundness of other financial institutions. Financial services companies are interrelated as a result of trading, clearing, counterparty, or other relationships. We have exposure to many different industries and counterparties, and we routinely execute transactions with counterparties in the financial services industry, including brokers and dealers, commercial banks, investment banks, mutual and hedge funds, and other institutional clients. As a result, defaults by, or even rumors or questions about, one or more financial services companies, or the financial services industry generally, have led to market-wide liquidity problems and could lead to losses or defaults by us or by other institutions. In addition, many of these transactions expose us to credit risk in the event of default of our counterparty or client. Further, our credit risk may be exacerbated when the collateral held by us cannot be realized or is liquidated at prices not sufficient to recover the full amount of the loan or derivative exposure due us. There is no assurance that any such losses would not materially and adversely affect our business, financial condition or results of operations. Lack of loan demand may adversely impact net interest income. Loan demand in the Bank's market area may be limited during periods of weak economic conditions. This could have the greatest impact on the commercial loan portfolio. In addition, in order to reduce the Bank's exposure to interest rate risk, the Bank may sell residential mortgages to the secondary market that have been refinanced by borrowers seeking to take advantage of lower interest rates. Should this happen, net interest income may be negatively impacted if loans are replaced by lower- yielding investment securities or if the balance sheet is allowed to shrink. The First Bancorp - 2016 Form 10-K - Page 12 A decline in real estate values in our primary market area could adversely impact results of operations and financial condition. Most of the Bank's lending is in Mid-Coast and Down East Maine. As a result of this geographic concentration, a significant broad-based deterioration in economic conditions in this area of Northern New England could have a material adverse impact on the quality of the Bank's loan portfolio, and could result in a decline in the demand for our products and services and, accordingly, could negatively impact our results of operations. Such a decline in economic conditions could impair borrowers' ability to pay outstanding principal and interest on loans when due and, consequently, adversely affect the cash flows of our business. The Bank's loan portfolio is largely secured by real estate collateral. A substantial portion of the real and personal property securing the loans in the Bank's portfolio is located in Mid-Coast and Down East Maine. Conditions in the real estate market in which the collateral for the Bank's loans is located strongly influence the level of the Bank's non-performing loans and results of operations. Our investment management activities are dependent on the value of investment securities which may lead to revenue fluctuations. First Advisors is the investment management arm of the Bank, operating under trust powers granted by the OCC in the Bank's charter. First Advisors provides trustee, investment management and custody services for individual, municipal and business clients, predominantly in the Bank's market area. First Advisors' revenues are directly tied to the asset values of the investments it manages for clients, and these may be adversely affected by a decline in the market value of these investments caused by normal fluctuations in the bond and stock markets. We are dependent upon the services of our management team and if we are unable to retain the services of our management team, our business may suffer. Our future success and profitability are substantially dependent upon the management and banking abilities of our senior executives. Changes in key personnel may be disruptive to our business and could have a material adverse effect on our business, financial condition and results of operations. We believe that our future results will also depend in part upon our attracting and retaining highly skilled and qualified management. Competition for the best people in most activities in which we are engaged can be intense, and we may not be able to retain or hire the people we want and/or need. In order to attract and retain qualified employees, we must compensate such employees at market levels. Typically, those levels have caused employee compensation to be our greatest expense. If we are unable to continue to attract and retain qualified employees, or do so at rates necessary to maintain our competitive position, our performance, including our competitive position, could suffer, and, in turn, have a material adverse effect on us. Although we have incentive compensation plans aimed, in part, at long-term employee retention, the unexpected loss of services of one or more of our key personnel could still occur, and such events may have a material adverse effect on us because of the loss of the employee's skills, knowledge of our market, and years of industry experience, and the difficulty of promptly finding qualified replacement personnel for our talented executives and/or relationship managers. Other restrictions on executive compensation were imposed under the Recovery Act, the Dodd-Frank Act and other legislation or regulations. Our ability to attract and/or retain talented executives and/or relationship managers may be negatively affected by these developments or any new executive compensation limits. Our internal control systems are inherently limited and may fail or be circumvented. We face the risk that the design of our controls and procedures, including those intended to mitigate the risk of fraud by employees or outsiders, may prove to be inadequate or may be circumvented, thereby causing delays in detection of errors or inaccuracies in data and information. Although Management regularly reviews and updates our internal controls, disclosure controls and procedures, and corporate governance policies and procedures, the Company's systems of internal controls, disclosure controls and corporate governance policies and procedures are inherently limited. The inherent limitations of our system of internal controls include the use of judgment in decision-making that can be faulty; breakdowns can occur because of human error; and controls can be circumvented by individual acts or by collusion of two or more people. The design of any system of controls is based in part upon certain assumptions about the likelihood of future events, and any design may not succeed in achieving its stated goals under all potential future conditions. Because of the inherent limitations of a cost-effective control system, misstatements due to error or fraud may occur and may not be detected, which may have an adverse effect on the Company's business, results of operations or financial condition. Additionally, any plans for remediation of any identified limitations may be ineffective in improving internal controls. We continually encounter technological change that may be difficult (costly) to keep up with. The financial services industry is continually undergoing rapid technological change with frequent introductions of new technology-driven products and services. The effective use of technology increases efficiency and enables financial institutions to better serve customers and to reduce costs. Our future success depends, in part, upon our ability to address the needs of our customers by using technology to provide products and services that will satisfy customer demands, as well as to create additional efficiencies in our operations. Our largest competitors have substantially greater resources to invest in technological improvements. We may not be able to effectively implement new technology-driven products and services or be successful in The First Bancorp - 2016 Form 10-K - Page 13 marketing these products and services to our customers. Failure to successfully keep pace with technological change affecting the financial services industry and increased costs due to efforts to keep pace with change, could have a material adverse effect on us. We are subject to security, transactional and operational risks relating to the use of technology that could damage our reputation and our business. We rely heavily on communications and information systems to conduct our business serving both internal and customer constituencies. Any failure, interruption or breach in security of these systems could result in failures or disruptions in our customer relationship management, general ledger, deposit, loan, and other systems. While we have in place policies and procedures, security applications and fraud mitigation applications, designed to prevent or limit the effect of the failure, interruption, fraud attacks or security breach of or affecting our information systems, there can be no assurance that any such failures, interruptions, fraud attacks or security breaches will not occur or, if they do occur, that they will be adequately addressed. Fraud attacks targeting customer-controlled devices, plastic payment card terminals, and merchant data collection points provide another source of potential loss, again through no fault of our own. The occurrence of any failures, interruptions or security breaches of information systems used to process customer transactions could damage our reputation, result in a loss of customer business, subject us to additional regulatory scrutiny, or expose us to civil litigation and possible financial liability, any of which could have a material adverse effect on our financial condition, results of operations and cash flows. Our information systems may experience an interruption or breach in security. We rely heavily on communications, information systems (both internal and provided by third parties) and the internet to conduct our business. Our business is dependent on our ability to process and monitor large numbers of daily transactions in compliance with legal, regulatory and internal standards and specifications. In addition, a significant portion of our operations relies heavily on the secure processing, storage and transmission of personal and confidential information, such as the personal information of our customers and clients. The risks associated with such operations may increase in the future as we continue to increase mobile payments and other internet-based product offerings and expand our internal usage of web-based products and applications. In the event of a failure, interruption or breach of our information systems, we may be unable to avoid impact to our customers. Other U.S. financial service institutions and companies have reported breaches in the security of their websites or other systems and have experienced significant distributed denial-of-service attacks, some of which involved sophisticated and targeted attacks intended to disable or degrade service, or sabotage systems. Other potential attacks have attempted to obtain unauthorized access to confidential information or destroy data, often through the introduction of computer viruses or malware, cyberattacks and other means. To date, none of these efforts has had a material adverse effect on our business or operations. Such security attacks can originate from a wide variety of sources, including persons who are involved with organized crime or who may be linked to terrorist organizations or hostile foreign governments. Those same parties may also attempt to fraudulently induce employees, customers or other users of our systems to disclose sensitive information in order to gain access to our data or funds or those of our customers or clients. Our security systems may not be able to protect our information systems from similar attacks due to the rapid evolution and creation of sophisticated cyberattacks. We are also subject to the risk that our employees may intercept and transmit unauthorized confidential or proprietary information. An interception, misuse or mishandling of personal, confidential or proprietary information being sent to or received from a customer or third party could result in legal liability, remediation costs, regulatory action and reputational harm. We also have risk related to data or security breaches affecting other companies. Under Federal banking regulations, if a consumer’s debit card is compromised, the liability for unauthorized transactions falls primarily to the issuing financial institution, not to the consumer or the company which experienced the data or security breach. In the normal course of business the Bank issues debit cards to its customers, creating potential risk for this type of liability. We are subject to claims and litigation that may impact our earnings and/or our reputation. From time to time, customers, vendors or other parties may make claims and take legal action against us. Whether any particular claims and legal actions are founded or unfounded, if such claims and legal actions are not resolved in a manner favorable to us, they may result in financial liability and/or adversely affect the market perception of the Bank and its products and services. Any financial liability or reputational damage could have a material adverse effect on our business, which, in turn, could have a material adverse effect on our financial condition and results of operations. We maintain reserves for certain claims when deemed appropriate based upon our assessment that a loss is probable, consistent with applicable accounting guidance. At any given time we may have legal actions asserted against us in various stages of litigation. Resolution of a legal action can often take years. We are also involved, from time to time, in other reviews, investigations and proceedings (both formal and informal) by governmental and self-regulatory agencies regarding our business, including, among other things, accounting and operational matters, certain of which may result in adverse judgments, settlements, fines, penalties, injunctions or other relief. The number and risk of these investigations and proceedings has increased in recent years with regard to many firms in the financial services industry due to legal changes to the consumer protection laws provided for by the Dodd-Frank The First Bancorp - 2016 Form 10-K - Page 14 Act, the creation of the CFPB, and the uncertainty as to whether federal preemption of certain state consumer laws remains intact for federally chartered financial institutions like the Bank. A weakening of federal pre-emption would potentially increase our compliance and operational costs and risks since the Bank is national bank and we would potentially face new state and local enforcement activity. There have also been a number of highly publicized cases involving fraud or misconduct by employees in the financial services industry in recent years, and we face the risk that employee misconduct could occur. It is not always possible to deter or prevent employee misconduct, and the precautions we take to prevent and detect this activity may not be effective in all cases. Any financial liability for which we have not adequately maintained reserves or insurance coverage, and/or any damage to our reputation from such claims and legal actions, could have a material adverse effect on us. Damage to our reputation could significantly harm our businesses. Our ability to attract and retain customers, clients, investors and highly-skilled management and employees is impacted by our reputation. Public perception of the financial services industry declined since the recent downturn in the U.S. economy. We continue to face increased public and regulatory scrutiny resulting from the financial crisis and economic downturn. Significant harm to our reputation can also arise from other sources, including employee misconduct, actual or perceived unethical behavior, litigation or regulatory outcomes, failing to deliver minimum or required standards of service and quality, compliance failures, disclosure of confidential information, and the activities of our clients, customers and counterparties, including vendors. Actions by the financial services industry generally or by certain members or individuals in the industry can also significantly adversely affect our reputation. We could also suffer significant reputational harm if we fail to properly identify and manage potential conflicts of interest. The actual or perceived failure to adequately address conflicts of interest could affect the willingness of clients to deal with us, which could adversely affect our businesses. Our actual or perceived failure to address these and other issues gives rise to reputational risk that could cause significant harm to us and our business prospects, and may have a material adverse effect on us. Our recent results may not be indicative of our future results. We may not be able to sustain our historical rate of growth or may not even be able to grow our business at all. In addition, our recent growth may distort some of our historical financial ratios and statistics. Various factors, such as economic conditions, regulatory and legislative considerations and competition, may also impede our ability to expand our market presence. If we experience a significant decrease in our historical rate of growth, our results of operations and financial condition may be adversely affected due to a high percentage of our operating costs being fixed expenses. The First Bancorp - 2016 Form 10-K - Page 15 Risks Associated With Our Industry Our business has been and may continue to be adversely affected by conditions in the financial markets and economic conditions generally and by increased regulation. Negative developments in 2008 and 2009 in the financial services industry resulted in uncertainty in the financial markets in general and a related general economic downturn, which lasted for several years. In addition, as a consequence of the recent U.S. recession, businesses across a wide range of industries faced serious difficulties due to the decrease in consumer spending, reduced consumer confidence brought on by deflated home values, among other things, and reduced liquidity in the credit markets. Unemployment also increased significantly during that period. As a result of these financial and economic crises, during this period, many lending institutions, including us, experienced declines in the performance of their loans, including construction, land development and land loans, commercial real estate loans and other commercial and consumer loans (see "Credit Risk Management and Allowance for Loan Losses" in ITEM 7: Management's Discussion and Analysis of Financial Condition and Results of Operations). Moreover, competition among depository institutions for core deposits and quality loans has increased significantly. As a result, bank regulatory agencies have been and are expected to continue to be very aggressive in responding to concerns and trends identified in examinations, including the issuance of formal or informal enforcement actions or orders. New legislation responding to these developments may negatively impact us by restricting our business operations, including our ability to originate or sell loans, and adversely impact our financial performance or our stock price. In addition, further negative market developments may affect consumer confidence levels and may cause adverse changes in payment patterns, causing increases in delinquencies and default rates, which may impact our charge-offs and provision for credit losses. A worsening of these conditions would likely exacerbate the adverse effects of these difficult market conditions on us and others in the financial services industry. Europe's debt crisis could have a material adverse effect on our business, financial condition and liquidity. The possibility that certain European Union ("EU") member states will default on their debt obligations, or that recessionary conditions will reappear or deepen in parts of the EU, has negatively impacted economic conditions and global markets. The continued uncertainty over the outcome of international and the EU's financial support programs and the possibility that other EU member states may experience similar financial troubles could further disrupt global markets. The negative impact on economic conditions and global markets could also have a material adverse effect on our liquidity, financial condition and results of operations, or result in failure to meet regulatory requirements. Great Britain’s pending departure from the EU has continued to create additional economic uncertainty, as does the possible unwinding of the North America Free Trade Agreement. We operate in a highly regulated environment and may be adversely affected by changes in law and regulations. Bank holding companies and nationally chartered banks operate in a highly regulated environment and are subject to supervision and examination by various regulatory agencies. The cost of compliance with regulatory requirements may adversely affect our results of operations or financial condition. Federal and state laws and regulations govern numerous matters including: changes in the ownership or control of banks and bank holding companies; maintenance of adequate capital and the financial condition of a financial institution; permissible types, amounts and terms of extensions of credit and investments; permissible non-banking activities; the required level of reserves against deposits; and restrictions on dividend payments. These and other restrictions limit the manner in which we may conduct our business and obtain financing. If we fail to meet minimum regulatory capital guidelines and other regulatory requirements, our financial condition would be materially and adversely affected. Our failure to maintain the status of "well-capitalized" under our regulatory framework could affect the confidence of our customers in us, thus compromising our competitive position, or could cause our regulators to take corrective or other supervisory action. The Dodd-Frank Act created a new Consumer Financial Protection Bureau, tightened capital standards and will continue to result in new laws and regulations that are expected to increase our costs of operations. The Dodd-Frank Act is significantly changing the current bank regulatory structure and affecting the lending, deposit, investment, trading and operating activities of financial institutions and their holding companies. Many of the details and the impacts of the Dodd-Frank Act may not be known for many months or years. However, it is expected that the legislation and implementing regulations may materially increase our operating and compliance costs. The CFPB has broad rule-making authority for a wide range of consumer protection matters that apply to all banks and savings institutions, including the authority to prohibit "unfair, deceptive or abusive" acts and practices. The CFPB's authority to prescribe rules governing the provision of consumer financial products and services could result in rules and regulations that reduce the profitability of such products or services, or impose new disclosure or substantive requirements on us that could increase the cost to us of providing such products and services. The Dodd-Frank Act also weakens the federal preemption rules that have been applicable to national banks and federal savings associations, and gives state attorneys general the ability to enforce federal consumer protection laws, which could increase our operating costs. The First Bancorp - 2016 Form 10-K - Page 16 Effective July 21, 2011, the Dodd-Frank Act eliminated the federal prohibitions on paying interest on demand deposits, thus allowing businesses to have interest bearing checking accounts, which could result in an increase in our interest expense. The short-term and long-term impact of changing regulatory capital requirements and new capital rules is uncertain. In June 2013, the Federal Reserve Board finalized rules that will substantially amend the regulatory risk-based capital rules applicable to us. These rules implement the Basel III regulatory capital reforms and changes required by the Dodd-Frank Act. In addition, in a weak economic environment, bank regulators may impose capital requirements that are more stringent than those required by applicable existing regulations. The application of more stringent capital requirements could, among other things, result in lower returns on equity, require the raising of additional capital, and result in adverse regulatory actions if we were to be unable to comply with such requirements. Furthermore, the imposition of liquidity requirements in connection with the implementation of Basel III could result in our having to lengthen the term of our funding, restructure our business models, and/or increase our holdings of liquid assets. Implementation of changes to asset risk weightings for risk based capital calculations, items included or deducted in calculating regulatory capital or additional capital conservation buffers, could result in management modifying our business strategy and could limit our ability to make distributions, including paying dividends or buying back our shares. Significant competition in the financial services industry may impact our results. We face substantial competition in all areas of our operations from a variety of different competitors, many of which are larger and have more financial resources than we do. We compete with other providers of financial services such as commercial and savings banks, savings and loan associations, credit unions, money market and mutual funds, mortgage companies, asset managers, insurance companies and a wide array of other local, regional and national institutions which offer financial services. Mergers between financial institutions within Maine and in neighboring states have added competitive pressure. If we are unable to compete effectively, we will lose market share and our income generated from loans, deposits, and other financial products will decline. Risks Associated With Our Common Stock There may not be a robust trading market for our common stock. Although our common stock is traded on the NASDAQ Global Select market, the trading volume of the common stock has historically not been substantial. For the year ended December 31, 2016, the average monthly trading volume of our common stock was 332,085 shares, or approximately 3.08% of the average number of our outstanding common shares. Due to the limited trading volume in our common stock, the intraday spread between bid and ask prices of the shares can be quite high. There can be no assurance that a more robust, active or economical trading market for our common stock will develop. The market value and liquidity of our common stock may, as a result, be adversely affected. The price of our common stock may fluctuate. The price of our common stock on the NASDAQ Global Select Market constantly changes and recently, given the uncertainty in the financial markets, has fluctuated widely. We expect the market price of our common stock will continue to fluctuate. Holders of our common stock will be subject to the risk of volatility and changes in prices. Our common stock price can fluctuate as a result of many factors which are beyond our control, including: • • • • • • • • • • quarterly fluctuations in our operating and financial results; operating results that vary from the expectations of investors; changes in expectations as to our future financial performance, including financial estimates; events negatively impacting the financial services industry which result in a general decline for the industry; announcements of material developments affecting our operations or our dividend policy; future sales of our equity securities; new laws or regulations or new interpretations of existing laws or regulations applicable to our business; changes in accounting standards, policies, guidance, interpretations or principles; general domestic economic and market conditions; and declines in bank stock prices driven by macro-economic concerns. In addition, recently the stock market generally has experienced extreme price and volume fluctuations, and industry factors and general economic and political conditions and events, such as economic slowdowns or recessions, interest rate changes or credit loss trends, could also cause our stock price to decrease regardless of our operating results. The First Bancorp - 2016 Form 10-K - Page 17 The inability to receive dividends from the Bank would negatively affect our ability to pay dividends to shareholders. The Company is a legal entity separate and distinct from the Bank. With the exception of cash raised from debt and equity issuances, we receive substantially all of our cash flow from dividends from the Bank. These dividends are the principal source of funds to pay dividends on our equity securities. Federal banking law and regulations limit the amount of dividends that the Bank can pay. For further information on the regulatory restrictions on the payment of dividends by the Bank, see "Supervision and Regulation" in Item 1. In the event the Bank is unable to pay dividends to the Company or such dividends were to be restricted or reduced, we may not be able to service debt, pay obligations or pay dividends on our equity securities. Our right to participate in a distribution of assets upon the Bank's liquidation or reorganization is subject to the prior claims of the Bank's creditors. If we do not manage our capital position strategically, our return on equity could be lower compared to our competitors as a result of our high level of capital. If we are unable to use strategically our excess capital, or to successfully continue capital management programs, such as stock repurchase programs or quarterly dividends to our shareholders, then our goal of generating a return on average equity that is competitive and increasing earnings per share and book value per share without assuming undue risk, could be delayed or may not be attained. Failure to achieve a competitive return on average equity might decrease investments in our common stock and might cause our common stock to trade at lower prices. We may issue additional equity securities or engage in other transactions which dilute our book value or affect the priority of the common stock, which may adversely affect the market price of our common stock. Our Board of Directors may determine from time to time that we need to raise additional capital by issuing additional shares of our common stock or other securities. Except pursuant to the rules of the NASDAQ Stock Market, we are not restricted from issuing additional shares of common stock, including securities that are convertible into or exchangeable for, or that represent the right to receive, common stock. Because our decision to issue securities in any future offering will depend on market conditions and other factors beyond our control, we cannot predict or estimate the amount, timing or nature of any future offerings, or the prices at which such offerings may be affected. Such offerings could be dilutive to common shareholders or reduce the market price of our common stock. Holders of our common stock are not entitled to preemptive rights or protection against dilution. New investors also may have rights, preferences and privileges that are senior to, and that adversely affect, our then-current common shareholders. We may attempt to increase our capital resources or, if our or the Bank's capital ratios fall below the required minimums, we could be forced to raise additional capital, by making offerings of debt or preferred equity securities, including medium-term notes, trust preferred securities, senior or subordinated notes and preferred stock. Upon liquidation, holders of our shares of preferred stock and lenders with respect to other borrowings will receive distributions of our available assets prior to the holders of our common stock. Our Board of Directors is authorized to issue one or more series of preferred stock from time to time without any action on the part of our shareholders. Our Board of Directors also has the power, without shareholder approval, to set the terms of any such series of preferred stock that may be issued, including voting rights, dividend rights and preferences over our common stock with respect to dividends or upon our dissolution, winding-up and liquidation and other terms. If we issue preferred stock in the future that has a preference over our common stock with respect to the payment of dividends or upon our liquidation, dissolution or winding up, or if we issue preferred stock with voting rights that dilute the voting power of our common stock, the rights of holders of our common stock or the market price of our common stock could be adversely affected. Potential acquisitions may disrupt our business and dilute shareholder value. Acquiring other banks, businesses, or branches involves various risks commonly associated with acquisitions, including: • • • • • • • • potential exposure to unknown or contingent liabilities of the target; exposure to potential asset quality issues of the target; difficulty and expense of integrating the operations and personnel of the target; potential disruption to our business; potential diversion of Management's time and attention; the possible loss of key employees and customers of the target; difficulty in estimating the value of the assets and liabilities of the target; potential changes in banking or tax laws or regulations that may affect the target. Merger or acquisition discussions and, in some cases, negotiations may take place and future mergers or acquisitions involving cash, debt or equity securities may occur at any time. Acquisitions typically involve the payment of a premium over book and market values, and, therefore, some dilution of our tangible book value and net income per common share may occur in connection with any future transaction. Furthermore, failure to realize the expected revenue increases, cost savings, increases in geographic or product presence, and/or other projected benefits from an acquisition could have a material adverse effect on us. The First Bancorp - 2016 Form 10-K - Page 18 ITEM 1B. Unresolved Staff Comments None ITEM 2. Properties The principal office of the Company and the Bank is located in Damariscotta, Maine. The Bank operates 16 full-service banking offices in five counties in the Mid-Coast, Eastern and Down East regions of Maine: Lincoln County Boothbay Harbor Damariscotta Waldoboro Wiscasset Knox County Camden Rockland Park Street Rockland Union Street Rockport Hancock County Bar Harbor Blue Hill Ellsworth Northeast Harbor Southwest Harbor Washington County Eastport Calais Penobscot County Bangor First Advisors, the investment management and trust division of the Bank, operates from four offices in Bangor, Bar Harbor, Ellsworth and Damariscotta. The Bank also maintains Operations Centers in Damariscotta and Edgecomb. The Company owns all of its facilities except for the land on which the Ellsworth branch is located, and except for the Camden office and the Southwest Harbor drive-up facility, for which the Bank has entered into long-term leases. Management believes that the Bank's current facilities are suitable and adequate in light of its current needs and its anticipated needs over the near term. ITEM 3. Legal Proceedings There are no material pending legal proceedings to which the Company or the Bank is a party or to which any of its property is subject, other than routine litigation incidental to the business of the Bank. None of these proceedings is expected to have a material effect on the financial condition of the Company or of the Bank. ITEM 4. Mine Safety Disclosures Not applicable. ITEM 5. Market for Registrant's Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities The common stock of The First Bancorp, Inc., (ticker symbol FNLC) trades on the NASDAQ Global Select Market System. As of December 31, 2016, there were 10,793,946 shares outstanding and held of record by approximately 4,766 shareholders. The following table reflects the high and low prices of actual sales in each quarter of 2016 and 2015. Such quotations do not reflect retail mark-ups, mark-downs or brokers' commissions. 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter 2016 2015 High Low High Low $ 20.50 $ 17.37 $ 18.25 $ 21.79 24.66 33.21 18.50 20.27 22.53 19.74 20.00 22.56 16.20 16.41 17.50 18.61 The last transaction in the Company's stock on NASDAQ during 2016 was on December 31 at $33.10 per share. There are no warrants outstanding with respect to the Company's common stock and the Company has no securities outstanding which are convertible into common equity. The First Bancorp - 2016 Form 10-K - Page 19 The ability of the Company to pay cash dividends depends on receipt of dividends from the Bank. Dividends may be declared by the Bank out of its net profits as the 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 plus retained net profits of the preceding two years. The amount available for dividends in 2017 will be that year's net income plus $13.6 million. The payment of dividends from the Bank to the Company may be additionally restricted if the payment of such dividends would result in the Bank failing to meet regulatory capital requirements. The Bank is also required to maintain minimum amounts of capital-to-total-risk-weighted-assets, as defined by banking regulators. At December 31, 2016, the Bank was required to have minimum Tier 1 and Tier 2 risk-based capital ratios of 6.00% and 8.00%, respectively. The Bank's actual ratios were 14.50% and 15.55%, respectively, as of December 31, 2016. The table below sets forth the cash dividends declared in the last two fiscal years: Date Declared March 19, 2015 June 17, 2015 September 16, 2015 December 17, 2015 March 24, 2016 June 23, 2016 September 22, 2016 December 22, 2016 December 22, 2016 Repurchase of Shares and Use of Proceeds Amount Per Share 0.210 $ 0.220 $ 0.220 $ 0.220 $ 0.220 $ 0.230 $ 0.230 $ 0.230 $ 0.120 $ Date Payable April 30, 2015 July 31, 2015 October 30, 2015 January 29, 2016 April 29, 2016 July 29, 2016 October 28, 2016 January 31, 2017 January 31, 2017 During the year ended December 31, 2016, the Company repurchased 7,156 shares of common stock with payments totaling $129,000. Unregistered Sales of Equity Securities None Securities Authorized for Issuance Under Equity Compensation Plans The following table lists the amount and weighted-average exercise price of securities authorized for issuance under equity compensation plans: Number of securities to be issued upon exercise of outstanding options, warrants and rights Weighted- average exercise price of outstanding options, warrants and rights Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column) — $ — — $ — — — 291,290 — 291,290 Plan category Equity compensation plans approved by security holders Equity compensation plans not approved by security holders Total The First Bancorp - 2016 Form 10-K - Page 20 Performance Graph Set forth below is a line graph comparing the five-year cumulative total return of $100.00 invested in the Company's common stock ("FNLC"), assuming reinvestment of all cash dividends and retention of all stock dividends, with a comparable amount invested in the Standard & Poor's 500 Index ("S&P 500") and the NASDAQ Combined Bank Index ("NASD Bank"). The NASD Bank index is a capitalization-weighted index designed to measure the performance of all NASDAQ stocks in the banking sector. FNLC S&P 500 NASD Bank 2011 2012 2013 2014 2015 2016 100.00 100.00 100.00 102.79 102.11 89.50 115.51 118.44 106.23 127.81 156.79 150.55 149.75 158.95 163.86 252.75 177.94 226.08 The First Bancorp - 2016 Form 10-K - Page 21 ITEM 6. Selected Financial Data The First Bancorp, Inc. and Subsidiary Dollars in thousands, except for per share amounts Summary of Operations Interest Income Interest Expense Net Interest Income Provision for Loan Losses Non-Interest Income Non-Interest Expense Net Income Per Common Share Data Basic Earnings per Share Diluted Earnings per Share Cash Dividends Declared per Common Share Book Value per Common Share Tangible Book Value per Common Share Market Value per Common Share Financial Ratios Return on Average Equity1 Return on Average Tangible Equity1,2 Return on Average Assets1 Average Equity to Average Assets Average Tangible Equity to Average Assets2 Net Interest Margin Tax-Equivalent1,2 Dividend Payout Ratio Allowance for Loan Losses/Total Loans Non-Performing Loans to Total Loans Non-Performing Assets to Total Assets Efficiency Ratio2 At Year End Total Assets Total Loans Total Investment Securities Total Deposits Total Borrowings Total Shareholders' Equity Years ended December 31, 2016 2015 2014 2013 2012 $ $ 53,759 10,812 42,947 1,600 12,499 29,383 18,009 1.68 1.66 1.030 15.98 13.20 33.10 10.28% 12.42% 1.12% 10.86% 9.00% 3.05% 61.31% 0.95% 0.73% 0.48% $ 50,810 $ $ $ 9,874 40,936 1,550 12,230 29,896 16,206 1.52 1.51 0.870 15.58 12.78 20.47 9.74% 11.90% 1.07% 11.00% 9.01% 3.10% 57.24% 1.00% 0.75% 0.57% $ $ 51,022 11,425 39,597 1,150 11,048 30,220 14,709 1.38 1.37 0.830 15.06 12.25 18.09 9.34% 11.57% 0.99% 10.63% 8.58% 3.10% 60.14% 1.13% 1.15% 0.97% $ $ 49,936 12,496 37,440 4,200 12,087 28,937 12,965 1.20 1.20 0.785 13.69 10.83 17.42 8.72% 10.66% 0.90% 10.62% 8.49% 3.05% 65.42% 1.31% 1.86% 1.44% 51,825 12,938 38,887 7,835 11,278 26,271 12,688 1.22 1.22 0.780 14.60 14.47 16.47 8.84% 10.40% 0.89% 10.96% 8.96% 3.14% 63.93% 1.44% 2.20% 1.89% 50.43% 54.26% 56.86% 55.44% 51.01% $ 1,712,875 $ 1,564,810 $ 1,482,131 $ 1,463,963 $ 1,414,999 1,071,526 539,174 1,242,957 278,901 172,521 988,638 477,319 917,564 475,092 876,367 489,013 1,043,189 1,024,819 1,024,399 337,457 167,498 279,916 161,554 279,125 146,098 High 869,284 449,382 958,850 282,905 156,323 Low Market price per common share of stock during 2016 1Annualized using a 365-day basis in all years except 2012 and 2016, in which a 366-day basis was used. 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. 33.21 $ $ 22.53 The First Bancorp - 2016 Form 10-K - Page 22 ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations The First Bancorp, Inc. (the "Company" or "The First Bancorp") was incorporated in the State of Maine on January 15, 1985, and is the parent holding company of First National Bank (the "Bank"). On January 28, 2016, the Board of Directors voted to change the Bank's name to First National Bank from The First, N.A. The Company generates almost all of its revenues from the Bank, which was chartered as a national bank under the laws of the United States on May 30, 1864. The Bank, which has sixteen offices along coastal and eastern Maine, emphasizes personal service to the communities it serves, concentrating primarily on small businesses and individuals. The Bank offers a wide variety of traditional banking services and derives the majority of its revenues from net interest income – the spread between what it earns on loans and investments and what it pays for deposits and borrowed funds. While net interest income typically increases as earning assets grow, the spread can vary up or down depending on the level and direction of movements in interest rates. Management believes the Bank has modest exposure to changes in interest rates, as discussed in "Interest Rate Risk Management" elsewhere in Management's Discussion. The banking business in the Bank's market area historically has been seasonal with lower deposits in the winter and spring and higher deposits in the summer and fall. This seasonal swing is fairly predictable and has not had a materially adverse effect on the Bank. Non-interest income is the Bank's secondary source of revenue and includes fees and service charges on deposit accounts, income from the sale and servicing of mortgage loans, and income from investment management and private banking services through First Advisors, a division of the Bank. Forward-Looking Statements This report contains statements that are "forward-looking statements." We may also make forward-looking statements in other documents we file with the 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", "may", "might, "could", and other expressions that predict or indicate future events or 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 collectibility, 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 this Annual Report on Form 10-K 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 annual 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 also urged to carefully review and consider the various disclosures made by the Company, which attempt to advise interested parties of the factors that affect the Company's business. Critical Accounting Policies Management's discussion and analysis of the Company's financial condition and results of operations is based on the consolidated financial statements which are prepared in accordance with accounting principles generally accepted in the United States of America. 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 amounts derived from Management's estimates and assumptions under different assumptions or conditions. The First Bancorp - 2016 Form 10-K - Page 23 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 Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") Topic 350 "Intangibles – Goodwill and Other." Goodwill from purchase acquisitions is subject to ongoing periodic evaluation for impairment. 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. 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. The First Bancorp - 2016 Form 10-K - Page 24 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 accounting principles generally accepted in the United States of America ("GAAP"). Management uses these "non-GAAP" measures in its analysis of the Company's performance and believes that these non-GAAP financial measures provide a greater understanding of ongoing operations and enhance comparability of results with prior periods as well as demonstrating the effects of significant gains and charges in the current period. The Company believes that a meaningful analysis of its financial performance requires an understanding of the factors underlying that performance. Management believes that investors may use these non-GAAP financial measures to analyze financial performance without the impact of unusual items that may obscure trends in the Company's underlying performance. These disclosures should not be viewed as a substitute for operating results determined in accordance with GAAP, nor are they necessarily comparable to non-GAAP performance measures that may be presented by other companies. In several places in this report, net interest income is presented on a fully taxable equivalent basis. Specifically included in interest income was tax-exempt interest income from certain investment securities and loans. An amount equal to the tax benefit derived from this tax exempt income has been added back to the interest income total, which adjustments increased net interest income accordingly. Management believes the disclosure of tax-equivalent net interest income information improves the clarity of financial analysis, and is particularly useful to investors in understanding and evaluating the changes and trends in the Company's results of operations. Other financial institutions commonly present net interest income on a tax-equivalent basis. This adjustment is considered helpful in the comparison of one financial institution's net interest income to that of another institution, 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, which have been prepared in accordance with GAAP. A 35.0% tax rate was used in 2016, 2015 and 2014. Dollars in thousands Net interest income as presented Effect of tax-exempt income Net interest income, tax equivalent Years ended December 31, 2016 2015 2014 $ $ 42,947 3,150 46,097 $ $ 40,936 3,092 44,028 $ $ 39,597 3,475 43,072 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. The non-GAAP efficiency ratio excludes securities losses 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: Dollars in thousands Non-interest expense, as presented Net interest income, as presented Effect of tax-exempt income Non-interest income, as presented Effect of non-interest tax-exempt income Net securities gains Adjusted net interest income plus non-interest income Non-GAAP efficiency ratio GAAP efficiency ratio Years ended December 31, 2016 2015 2014 $ 29,383 $ 29,896 $ 30,220 42,947 3,150 12,499 345 (673) $ 58,268 $ 50.43% 52.99% 40,936 3,092 12,230 236 (1,399) 55,095 54.26% 56.23% $ 39,597 3,475 11,048 185 (1,155) 53,150 56.86% 59.67% The First Bancorp - 2016 Form 10-K - Page 25 The Company presents certain information based upon average tangible common shareholders' equity instead of total average shareholders' equity. The difference between these two measures is the Company's intangible assets, specifically goodwill from prior acquisitions, and preferred stock. 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 tangible average shareholders' equity to the Company's consolidated financial statements, which have been prepared in accordance with GAAP: Dollars in thousands Average shareholders' equity as presented Less intangible assets (average) Average tangible common shareholders' equity Executive Summary Years ended December 31, 2016 2015 2014 $ $ 175,119 (30,087) 145,032 $ $ 166,319 (30,131) 136,188 $ $ 157,465 (30,338) 127,127 This was the best annual performance in The First Bancorp, Inc.'s history, surpassing our previous best year in 2015. The Company's 2016 performance was driven by increased net interest income, the result of continued strong growth in earning assets. The Company also saw a modest drop in operating expense in 2016 compared to 2015. The Company also increased the quarterly dividend by one cent in the second quarter to 23 cents per share, and also declared a special cash dividend of 12 cents per share during the fourth quarter of 2016. Net income for the year ended December 31, 2016 was $18.0 million, up $1.8 million or 11.1% from the $16.2 million posted for the year ended December 31, 2015. Earnings per common share on a fully diluted basis were $1.66 for the year ended December 31, 2016, up $0.15 or 9.9% from the $1.51 posted for the year ended December 31, 2015. Net interest income on a tax-equivalent basis increased $2.1 million or 4.7% for the year ended December 31, 2016 compared to the year ended December 31, 2015, with growth in earning assets responsible for the increase. The Company's net interest margin was 3.05% in 2016, compared to 3.10% in 2015. Non-interest income for the year ended December 31, 2016 was $12.5 million or 2.2% higher than non-interest income posted for the year ended December 31, 2015. This was primarily due to a $634,000 increase in mortgage origination and servicing income and a $153,000 increase in First Advisors income offsetting the strategic decision to not take gains from sale of securities at the level taken in 2015. Non-interest expense for the year ended December 31, 2016 was $29.4 million or 1.7% lower than non-interest expense posted for the year ended December 31, 2015, primarily due to a reduction in other credit- related costs outside of the provision for loan losses. During 2016, total assets increased $148.1 million or 9.5%. The loan portfolio increased $82.9 million or 8.4% in 2016, ending the year at $1.07 billion. The investment portfolio was up $61.9 million or 13.0% for the year. On the liability side of the balance sheet, low-cost deposits increased $61.6 million or 10.6%, totaling $640.8 million as of December 31, 2016. Certificates of deposit increased $105.6 million or 28.5% from the end of 2015. Local certificates of deposit (CDs) increased $8.9 million and wholesale CDs increased $96.7 million at December 31, 2016 compared to December 31, 2015. Continued improvement in credit quality was another contributor to the Company's 2016 results. Non-performing assets stood at 0.48% of total assets as of December 31, 2016 - well below the 0.57% level of non-performing assets a year ago. This compares to non-performing loans at 0.66% for our Uniform Bank Performance Report peer group ("UBPR peer group") as of December 31, 2016. Net chargeoffs were $1.4 million or 0.13% of average loans in 2016 compared to net chargeoffs of $2.0 million or 0.21% of average loans in 2015. Net chargeoffs for the UBPR peer group in 2016 were 0.10% of average loans. The provision for loan losses in 2016 was $1.6 million, $50,000 or 3.2% higher than in 2015. The allowance as a percentage of loans outstanding stood at 0.95% in 2016, down from 1.00% at December 31, 2015. 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 15.69%, well above the well-capitalized threshold of 10.0% set by the Federal Deposit Insurance Corporation. The Company's operating ratios remain good, with a return on average tangible common equity of 12.42% for the year ended December 31, 2016 compared to 11.90% and 11.57% for the years ended December 31, 2015 and 2014, respectively. Our return on average tangible equity was in the top 18% of all banks in the UBPR peer group, which had an average return of 9.55% for the year. Our efficiency ratio continues to be an important component in our overall performance and at 50.43%, dropped 3.83% in 2016, well below the 54.26% and 56.86% posted for 2015 and 2014, respectively. As of December 31, 2016, the average efficiency ratio for our UBPR peer group was 63.70%, which put us in the top 7% of all banks in the UBPR peer group. The First Bancorp - 2016 Form 10-K - Page 26 Results of Operations Net Interest Income Net interest income on a tax-equivalent basis increased 4.7% or $2.1 million to $46.1 million for the year ended December 31, 2016 from the $44.0 million reported for the year ended December 31, 2015, with growth in earning assets responsible for the increase. The Company's net interest margin was 3.05% in 2016, compared to 3.10% in 2015. Total interest income on a tax-equivalent basis in 2016 was $56.9 million, an increase of $3.0 million or 5.6% from the $53.9 million posted by the Company in 2015. Total interest expense in 2016 was $10.8 million, an increase of $938,000 or 9.5% from the $9.9 million posted by the Company in 2015. Tax-exempt interest income amounted to $5.8 million for the year ended December 31, 2016, $5.7 million for the year ended December 31, 2015 and $6.4 million for the year ended December 31, 2014. Net interest income on a tax-equivalent basis increased 2.2% or $956,000 to $44.0 million for the year ended December 31, 2015 from the $43.1 million reported for the year ended December 31, 2014. A $1.5 million increase in loan income and a $1.6 million decrease in funding costs more than offset the $2.1 million drop in investment income resulting from a lower level of investment securities. The Company's net interest margin was 3.10% in 2015, the same as in 2014. Total interest income on a tax-equivalent basis in 2015 was $53.9 million, a decrease of $595,000 or 1.1% from the $54.5 million posted by the Company in 2014. The following tables present changes in interest income and expense attributable to changes in interest rates, volume, and rate/volume1 for interest-earning assets and interest-bearing liabilities. Tax-exempt income is calculated on a tax-equivalent basis, using a 35.0% tax rate. Year ended December 31, 2016 compared to 2015 Dollars in thousands Interest on earning assets Interest-bearing deposits Investment securities Loans held for sale Loans Total interest income Interest expense Deposits Borrowings Total interest expense Change in net interest income Volume Rate Rate/ Volume1 Total $ (8) $ 817 11 2,764 3,584 389 95 484 $ 3,100 $ $ 20 (1,182) — 605 (557) 330 98 428 (985) $ (9) $ (57) 1 45 (20) 24 2 26 (46) $ 3 (422) 12 3,414 3,007 743 195 938 2,069 The First Bancorp - 2016 Form 10-K - Page 27 Year ended December 31, 2015 compared to 2014 Dollars in thousands Interest on earning assets Interest-bearing deposits Investment securities Loans held for sale Loans Total interest income Interest expense Deposits Borrowings Volume Rate Rate/ Volume1 Total $ 15 (1,401) 6 2,429 1,049 (113) 417 $ — $ (774) (1) (865) (1,640) (1,717) (151) (1,868) 228 $ (1) $ 56 — (59) (4) 28 (15) 13 (17) $ 14 (2,119) 5 1,505 (595) (1,802) 251 (1,551) 956 Total interest expense Change in net interest income 1 Represents the change attributable to a combination of change in rate and change in volume. 745 304 $ $ The following table presents the interest earned on or paid for each major asset and liability category, respectively, for the years ended December 31, 2016, 2015, and 2014, as well as the average yield for each major asset and liability category, and the net yield between assets and liabilities. Tax-exempt income has been calculated on a tax-equivalent basis using a 35% rate. Unrecognized interest on non-accrual loans is not included in the amount presented, but the average balance of non-accrual loans is included in the denominator when calculating yields. Dollars in thousands Interest-earning assets Interest-bearing deposits Investment securities Loans held for sale Loans Total interest-earning assets Interest-bearing liabilities Deposits Borrowings Total interest-bearing liabilities Net interest income Interest rate spread Net interest margin 2016 2015 2014 Amount of interest Average Yield/Rate Amount of interest Average Yield/Rate Amount of interest Average Yield/Rate $ $ 22 16,530 29 40,328 56,909 6,028 4,784 10,812 46,097 19 16,952 17 36,914 53,902 5,285 4,589 9,874 44,028 0.51% $ 3.42% 3.95% 3.94% 3.76% 0.61% 1.62% 0.84% $ 2.91% 3.05% 5 19,071 12 35,409 54,497 7,087 4,338 11,425 43,072 0.25% $ 3.68% 3.85% 3.87% 3.79% 0.57% 1.59% 0.81% $ 2.98% 3.10% 0.27% 3.84% 4.07% 3.97% 3.92% 0.75% 1.64% 0.95% 2.97% 3.10% The First Bancorp - 2016 Form 10-K - Page 28 Average Daily Balance Sheets The following table shows the Company's average daily balance sheets for the years ended December 31, 2016, 2015 and 2014. Dollars in thousands Assets Cash and cash equivalents Interest-bearing deposits in other banks Securities available for sale Securities to be held to maturity Restricted equity securities, at cost Loans held for sale (fair value approximates cost) Loans Allowance for loan losses Net loans Accrued interest receivable Premises and equipment, net Other real estate owned Goodwill Other assets Total Assets Liabilities & Shareholders' Equity Demand deposits NOW deposits Money market deposits Savings deposits Certificates of deposit Total deposits Borrowed funds – short term Borrowed funds – long term Dividends payable Other liabilities Total Liabilities Shareholders' Equity: Common stock Additional paid-in capital Retained earnings Net unrealized gain on securities available for sale Net unrealized gain on cash flow hedging derivative instruments Net unrealized loss on securities transferred from available for sale to held to maturity Net unrealized loss on postretirement benefit costs Total Shareholders' Equity Years ended December 31, 2016 2015 2014 $ 18,742 $ 15,446 $ 15,674 4,302 251,714 216,640 14,327 734 1,024,777 (10,229) 1,014,548 5,213 21,475 1,171 29,805 33,315 7,573 192,330 254,396 13,757 441 953,396 (9,997) 943,399 4,949 22,097 2,275 29,805 25,120 1,883 261,155 221,938 13,912 295 892,189 (11,659) 880,530 5,071 22,600 4,663 29,805 24,409 $ 1,611,986 $ 1,511,588 $ 1,481,935 $ 132,726 $ 116,151 $ 106,609 259,462 82,563 210,540 441,341 220,815 99,507 187,379 418,092 178,335 94,017 154,938 513,461 1,126,632 1,041,944 1,047,360 158,774 136,611 943 13,907 135,220 154,199 1,103 12,803 173,905 90,141 1,014 12,050 1,436,867 1,345,269 1,324,470 108 60,262 112,405 2,525 100 (125) (156) 175,119 107 59,458 105,009 1,950 — (80) (125) 166,319 $ 1,511,588 107 58,792 98,303 89 — (12) 186 157,465 $ 1,481,935 Total Liabilities & Shareholders' Equity $ 1,611,986 The First Bancorp - 2016 Form 10-K - Page 29 Non-Interest Income Non-interest income in 2016 was $12.5 million, an increase of $269,000 or 2.2% from the $12.2 million reported in 2015, with a $634,000 increase in mortgage origination income and a $153,000 increase in First Advisors income offsetting the strategic decision to not take gains from sale of securities at the level taken in 2015. Non-interest income in 2015 was $12.2 million, an increase of $1.2 million or 10.7% from the $11.0 million reported in 2014. This was primarily due to increases in securities gains and mortgage origination and servicing income. Non-Interest Expense Non-interest expense in 2016 was $29.4 million, a decrease of $513,000 or 1.7% from the $29.9 million reported in 2015, primarily due to a reduction in other-credit-related costs outside of the provision for loan losses. Non-interest expense in 2015 was $29.9 million, a decrease of $324,000 or 1.1% from the $30.2 million reported in 2014, primarily due to a decrease in other credit-related costs - including expenses for collections, foreclosure and foreclosed properties. Provision to the Allowance for Loan Losses The Company's provision to the allowance for loan losses was $1.6 million in 2016 compared to $1.6 million in 2015. This was 0.10% of average assets in 2016, compared to 0.12% of average assets for our peer group. The allowance for loan losses stood at 0.95% of total loans as of December 31, 2016, compared to 1.00% a year ago. Credit quality continued to improve in 2016. Net loan chargeoffs were $1.4 million or 0.13% of average loans, down $599,000 from net chargeoffs of $2.0 million or 0.21% of average loans in 2015. Non-performing assets stood at 0.48% of total assets as of December 31, 2016 compared to 0.57% of total assets at December 31, 2015. Past-due loans were 1.18% of total loans as of December 31, 2016, up from 0.84% of total loans as of December 31, 2015. The Company's provision to the allowance for loan losses was $1.6 million in 2015 compared to $1.2 million in 2014. This was 0.10% of average assets in 2015, compared to 0.09% of average assets for our peer group. The allowance for loan losses stood at 1.00% of total loans as of December 31, 2015, compared to 1.13% at December 31, 2014. Credit quality improved significantly in 2015. Net loan chargeoffs were $2.0 million or 0.21% of average loans, down $342,000 from net chargeoffs of $2.3 million or 0.26% of average loans in 2014. Non-performing assets stood at 0.57% of total assets as of December 31, 2015 compared to 0.97% of total assets at December 31, 2014. Past-due loans were 0.84% of total loans as of December 31, 2015, down significantly from 1.29% of total loans as of December 31, 2014. Income Taxes Income taxes on operating earnings were $6.5 million for the year ended December 31, 2016, up $940,000 from the same period in 2015. This is in line with the increase in the Company's level of income before taxes. Income taxes on operating earnings were $5.5 million for the year ended December 31, 2015, up $948,000 from the same period in 2014. This is in line with the increase in the Company's level of income before taxes. Net Income Net income for 2016 was $18.0 million, up 11.1% or $1.8 million from net income of $16.2 million that was posted in 2015. Earnings per share on a fully diluted basis were $1.66, up $0.15 or 9.9% from the $1.51 reported for the year ended December 31, 2015. Net income for 2015 was $16.2 million, up 10.2% or $1.5 million from net income of $14.7 million that was posted in 2014. Earnings per share on a fully diluted basis were $1.51, up $0.14 or 10.2% from the $1.37 reported for the year ended December 31, 2014. Key Ratios Return on average assets in 2016 was 1.12%, up from the 1.07% and the 0.99% posted in 2015 and 2014, respectively. Return on average tangible common equity was 12.42% in 2016, compared to 11.90% in 2015 and 11.57% in 2014. In 2016, the Company's dividend payout ratio (dividends declared per share divided by earnings per share) was 61.31%, compared to 57.24% in 2015 and 60.14% in 2014. The Company's efficiency ratio – a benchmark measure of the amount spent to generate a dollar of income – was 50.43% in 2016 compared to 63.70% for the Bank's peer group, on average. In 2015, the Company's efficiency ratio was 54.26% compared to 65.23% for the Bank's peer group, on average. The First Bancorp - 2016 Form 10-K - Page 30 Investment Management and Fiduciary Activities As of December 31, 2016, First Advisors, the Bank's private banking and investment management division, had assets under management with a market value of $851.0 million, consisting of 1,031 trust accounts, estate accounts, agency accounts, and self-directed individual retirement accounts. This compares to December 31, 2015, when 1,041 accounts with a market value of $762.0 million were under management. Assets and Asset Quality Total assets of $1.713 billion at December 31, 2016 increased 9.5% or $148.1 million from $1.565 billion at December 31, 2015. The investment portfolio increased $61.9 million or 13.0% over December 31, 2015, and the loan portfolio increased $82.9 million or 8.4%. Year-over-year, average assets were up $100.4 million in 2016 over 2015. Average loans in 2016 were $71.4 million higher than in 2015, and average investments in 2016 were $22.2 million higher than in 2015. Credit quality continued to improve in 2016. Non-performing assets to total assets stood at 0.48% at December 31, 2016, below 0.57% of total assets at December 31, 2015 and 0.97% of total assets at December 31, 2014. In Management's opinion, the Company's long-standing approach to working with borrowers and ethical loan underwriting standards helps alleviate some of the payment problems on customers' loans and minimizes actual loan losses. Net chargeoffs in 2016 were $1.4 million or 0.13% of average loans outstanding. This compares to net chargeoffs in 2015 of $2.0 million or 0.21% of average loans outstanding and net charge offs for our UBPR peer group in 2016 of 0.10% of average loans. Residential real estate term loans represent 38.4% of the total loan portfolio, and this loan category generally has a lower level of losses in comparison to other loan types. In 2016, the loss ratio for residential mortgages was 0.08% compared to 0.13% for the entire loan portfolio. The Company does not have a credit card portfolio or offer dealer consumer loans which generally carry more risk and potentially higher losses. The allowance for loan losses ended 2016 at $10.1 million and stood at 0.95% of total loans outstanding compared to $9.9 million and 1.00% of total loans outstanding at December 31, 2015. A $1.6 million provision for losses was made in 2016 and net charge offs totaled $1.4 million, resulting in the allowance for loan losses increasing $222,000 or 2.2% from December 31, 2015. Management believes the allowance for loan losses is appropriate as of December 31, 2016. In Management's opinion, the level of the provision for loan losses in 2016 was directionally consistent with the improvement in 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, current levels of unemployment and the outlook for future economic conditions. Investment Activities During 2016, the investment portfolio increased 13.0% to end the year at $539.2 million compared to $477.3 million at December 31, 2015. Average investments in 2016 were $22.2 million higher than in 2015. As of December 31, 2016, mortgage- backed securities had a carrying value of $311.8 million and a fair value of $312.6 million. Of this total, securities with a fair value of $199.0 million or 63.7% of the mortgage-backed portfolio were issued by the Government National Mortgage Association and securities with a fair value of $113.6 million or 36.3% 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 for trading or 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 sponsored 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 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 The First Bancorp - 2016 Form 10-K - Page 31 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 $129,000 at December 31, 2016. These securities were transferred as a part of the Company's overall investment and balance sheet strategies. The following table sets forth the Company's investment securities at their carrying amounts as of December 31, 2016, 2015, and 2014. Dollars in thousands Securities available for sale Mortgage-backed securities State and political subdivisions Other equity securities Securities to be held to maturity U.S. Government sponsored agencies Mortgage-backed securities State and political subdivisions Corporate securities Restricted equity securities Federal Home Loan Bank Stock Federal Reserve Bank Stock 2016 2015 2014 $ 280,604 $ 195,110 $ 151,855 16,482 3,330 24,506 3,423 30,855 2,551 300,416 223,039 185,261 11,943 31,201 179,384 4,300 226,828 10,893 1,037 11,930 71,000 42,193 122,530 4,300 240,023 13,220 1,037 14,257 92,341 57,003 126,275 300 275,919 12,875 1,037 13,912 Total securities $ 539,174 $ 477,319 $ 475,092 The First Bancorp - 2016 Form 10-K - Page 32 The following table sets forth information on the yields and expected maturities of the Company's investment securities as of December 31, 2016. Yields on tax-exempt securities have been computed on a tax-equivalent basis using a tax rate of 35%. Mortgage-backed securities are presented according to their contractual maturity date, while the yield takes into effect intermediate cashflows from repayment of principal which results in a much shorter average life. Dollars in thousands U.S. Government Sponsored Agencies Due in 1 year or less Due in 1 to 5 years Due in 5 to 10 years Due after 10 years Total Mortgage-Backed Securities Due in 1 year or less Due in 1 to 5 years Due in 5 to 10 years Due after 10 years Total State & Political Subdivisions Due in 1 year or less Due in 1 to 5 years Due in 5 to 10 years Due after 10 years Total Corporate Securities Due in 1 year or less Due in 1 to 5 years Due in 5 to 10 years Due after 10 years Total Equity Securities Impaired Securities Available For Sale Held to Maturity Fair Value Yield to maturity Amortized Cost Yield to maturity $ — — — — — 253 1,734 19,236 259,381 280,604 — 564 2,269 13,649 16,482 — — — — — 3,330 0.00% $ 0.00% 0.00% 0.00% 0.00% 2.41% 2.88% 2.93% 1.93% 2.01% 0.00% 6.14% 6.21% 5.63% 5.73% 0.00% 0.00% 0.00% 0.00% 0.00% 2.22% — — 4,167 7,776 11,943 6 5,584 9,601 16,010 31,201 600 7,867 23,820 147,097 179,384 300 — 4,000 — 4,300 — $ 300,416 2.21% $ 226,828 0.00% 0.00% 3.03% 3.34% 3.23% 0.16% 2.41% 3.01% 3.92% 3.37% 6.43% 6.19% 5.82% 4.61% 4.85% 1.00% 0.00% 5.50% 0.00% 5.19% — 4.56% The securities portfolio contains certain securities, the amortized cost of which exceeds fair value, which at December 31, 2016 amounted to an unrealized loss of $7.6 million, or 1.44% of the amortized cost of the total securities portfolio. At December 31, 2015 this amount represented an unrealized loss of $3.5 million, or 0.76% of the 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 security's 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 The First Bancorp - 2016 Form 10-K - Page 33 other information and observable data considered relevant in determining whether other-than-temporary impairment has occurred. The Company's best estimate of cash flows uses severe economic recession assumptions to quantify potential 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 December 31, 2016, the Company had temporarily impaired securities with a fair value of $279.6 million and unrealized losses of $7.6 million, as identified in the table below. Securities in a continuous unrealized loss position twelve- months or more amounted to $3.0 million as of December 31, 2016, compared with $21.0 million at December 31, 2015. The Company has concluded that these securities were not other-than-temporarily impaired. This conclusion was based on the issuers' continued satisfaction of their obligations in accordance with their contractual terms and the expectation that the issuers 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 issuers' financial condition and other objective evidence. The following table summarizes temporarily impaired securities and their approximate fair values at December 31, 2016. Dollars in thousands Less than 12 months 12 months or more Total Fair Value Unrealized Losses Fair Value Unrealized Losses Fair Value Unrealized Losses U.S. Government-sponsored agencies $ 6,642 $ (233) $ — $ — $ 6,642 $ Mortgage-backed securities State and political subdivisions Other equity securities 197,528 72,348 — $ 276,518 $ (3,090) (4,060) — (7,383) $ 2,905 — 128 3,033 $ (184) — (7) (191) $ 200,433 72,348 128 279,551 $ (233) (3,274) (4,060) (7) (7,574) 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. As of December 31, 2016, the total unrealized losses on these securities amounted to $233,000, compared with $2.3 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- 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 December 31, 2016. Mortgage-backed securities issued by U.S. Government agencies and U.S. Government-sponsored enterprises. As of December 31, 2016, the total unrealized losses on these securities amounted to $3.3 million, compared with $1.1 million at December 31, 2015. All of these securities were credit rated "AAA" 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 enterprises play a vital role in the nation's financial markets. Management believes that the unrealized losses at December 31, 2016 were attributable to changes in current market yields and spreads since the date the underlying securities were purchased, and does not consider these securities to be other-than-temporarily impaired at December 31, 2016. The Company also has the ability and intent to hold these securities until a recovery of their amortized cost, which may be at maturity. Obligations of state and political subdivisions. As of December 31, 2016, the total unrealized losses on municipal securities amounted to $4.1 million, compared with $87,000 at December 31, 2015. Municipal securities are supported by the general taxing authority of the municipality and, in the cases of school districts, are supported by state aid. At December 31, 2016, all municipal bond issuers were current on contractually obligated interest and principal payments. The Company monitors price changes and changes in credit quality of municipal issuers on a regular basis as a potential indicator of temporary impairment. The Company attributes the unrealized losses at December 31, 2016, however, to changes in prevailing market yields and pricing spreads since the dates 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 December 31, 2016. The Company also has the ability and intent to hold these securities until a recovery of their amortized cost, which may be at maturity. The First Bancorp - 2016 Form 10-K - Page 34 Corporate securities. As of December 31, 2016 and 2015, there were no unrealized losses on corporate securities. Corporate securities are dependent on the operating performance of the issuers. At December 31, 2016, all corporate bond issuers were current on contractually obligated interest and principal payments. Other Equity Securities. As of December 31, 2016, the total unrealized losses on other equity securities amounted to $7,000, 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 December 31, 2016. Federal Home Loan Bank Stock The Bank is a member of the Federal Home Loan Bank ("FHLB") of Boston, a cooperatively owned wholesale bank for housing and finance in the six New England States. As a requirement of membership in the FHLB, the Bank must own a minimum required amount of FHLB stock, calculated periodically based primarily on its level of borrowings from the FHLB. The Bank uses the FHLB for much of its wholesale funding needs. As of December 31, 2016 and 2015, the Bank's investment in FHLB stock totaled $10.9 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 December 31, 2016. The Bank will continue to monitor its investment in FHLB stock. Lending Activities The loan portfolio increased $82.9 million or 8.4% in 2016, with total loans at $1.1 billion at December 31, 2016, compared to $988.6 million at December 31, 2015. Commercial loans increased $56.0 million or 13.2% between December 31, 2015 and December 31, 2016. Residential term loans increased by $8.4 million or 2.1% and municipal loans increased by $7.3 million or 37.0% for the same period. Commercial loans are comprised of three major classes: commercial real estate loans, commercial construction loans and other commercial loans. Commercial real estate loans consist of mortgage loans to finance investments in real property such as multi-family residential, commercial/retail, office, industrial, hotels, educational and other specific or mixed use properties. Commercial real estate loans are typically written with amortizing payment structures. Collateral values are determined based on appraisals and evaluations in accordance with established policy and regulatory guidelines. Commercial real estate loans typically have a loan-to-value ratio of up to 80% based upon current valuation information at the time the loan is made. Commercial real estate loans are primarily paid by the cash flow generated from the real property, such as operating leases, rents, or other operating cash flows from the borrower. Commercial construction loans consist of loans to finance construction in a mix of owner- and non-owner occupied commercial real estate properties. Commercial construction loans typically have maturities of less than two years. Payment structures during the construction period are typically on an interest only basis, although principal payments may be established depending on the type of construction project being financed. During the construction phase, commercial construction loans are primarily paid by cash flow generated from the construction project or other operating cash flows from the borrower or guarantors, if applicable. At the end of the construction period, loan repayment typically comes from a third party source in the event that the Company will not be providing permanent term financing. Collateral valuation and loan-to-value guidelines follow those for commercial real estate loans. Other commercial loans consist of revolving and term loan obligations extended to business and corporate enterprises for the purpose of financing working capital and or capital investment. Collateral generally consists of pledges of business assets including, but not limited to, accounts receivable, inventory, plant and equipment, and/or real estate, if applicable. Commercial loans are primarily paid by the operating cash flow of the borrower. Commercial loans may be secured or unsecured. Municipal loans are comprised of loans to municipalities in Maine for capitalized expenditures, construction projects or tax-anticipation notes. All municipal loans are considered general obligations of the municipality and are collateralized by the taxing ability of the municipality for repayment of debt. Residential loans are comprised of two classes: term loans and construction loans. Residential term loans consist of residential real estate loans held in the Company's loan portfolio made to borrowers who demonstrate the ability to make scheduled payments with full consideration to underwriting factors. Borrower qualifications include favorable credit history combined with supportive income requirements and loan-to-value ratios within established policy and regulatory guidelines. Collateral values are determined based on appraisals and evaluations in accordance with established policy and regulatory guidelines. Residential loans typically have a loan-to-value ratio of up to 80% based on appraisal information at the time the loan is made. Collateral consists of mortgage liens on one- to four-family residential properties. Loans are offered with fixed or adjustable rates with amortization terms of up to thirty years. The First Bancorp - 2016 Form 10-K - Page 35 Residential construction loans typically consist of loans for the purpose of constructing single family residences to be owned and occupied by the borrower. Borrower qualifications include favorable credit history combined with supportive income requirements and loan-to-value ratios within established policy and regulatory guidelines. Residential construction loans normally have construction terms of one year or less and payment during the construction term is typically on an interest only basis from sources including interest reserves, borrower liquidity and/or income. Residential construction loans will typically convert to permanent financing from the Company or have another financing commitment in place from an acceptable mortgage lender. Collateral valuation and loan-to-value guidelines are consistent with those for residential term loans. Home equity lines of credit are made to qualified individuals and are secured by senior or junior mortgage liens on owner- occupied one- to four-family homes, condominiums, or vacation homes. The home equity line of credit typically has a variable interest rate and is billed as interest-only payments during the draw period. At the end of the draw period, the home equity line of credit is billed as a percentage of the principal balance plus all accrued interest. Loan maturities are normally 300 months. Borrower qualifications include favorable credit history combined with supportive income requirements and combined loan-to- value ratios usually not exceeding 80% inclusive of priority liens. Collateral valuation guidelines follow those for residential real estate loans. Consumer loan products including personal lines of credit and amortizing loans made to qualified individuals for various purposes such as auto, recreational vehicles, debt consolidation, personal expenses or overdraft protection. Borrower qualifications include favorable credit history combined with supportive income and collateral requirements within established policy guidelines. Consumer loans may be secured or unsecured. Construction loans, both commercial and residential, at 28.9% of capital are well under the regulatory guidance of 100.0% of capital at December 31, 2016. Construction loans and non-owner-occupied commercial real estate loans are at 109.4% of total capital, are below the regulatory limit of 300.0% of capital at December 31, 2016. The following table summarizes the loan portfolio, by class as of December 31, 2016, 2015, 2014, 2013 and 2012. Dollars in thousands Commercial As of December 31, 2016 2015 2014 2013 2012 Real estate $ 302,506 25,406 150,769 27,056 28.2% $ 269,462 2.4% 24,881 14.1% 128,341 2.5% 19,751 27.3% $ 242,311 26.4% $ 245,943 28.2% $ 251,335 28.9% 2.5% 30,932 3.4% 13.0% 104,531 11.4% 2.0% 20,424 2.2% 20,382 95,289 19,117 2.3% 10.9% 2.2% 22,417 81,183 14,704 2.6% 9.3% 1.7% 411,469 18,303 38.4% 403,030 1.7% 8,451 40.7% 384,032 41.9% 377,218 43.0% 379,447 43.7% 0.9% 12,160 1.3% 11,803 1.3% 6,459 0.7% 110,907 25,110 10.4% 110,202 2.3% 24,520 11.1% 103,521 11.3% 2.5% 19,653 2.1% 91,549 15,066 10.4% 1.7% 99,082 14,657 11.4% 1.7% Total loans $1,071,526 100.0% $ 988,638 100.0% $ 917,564 100.0% $ 876,367 100.0% $ 869,284 100.0% The First Bancorp - 2016 Form 10-K - Page 36 Construction Other Municipal Residential Term Construction Home equity line of credit Consumer The following table sets forth certain information regarding the contractual maturities of the Bank's loan portfolio as of December 31, 2016: Dollars in thousands < 1 Year 1 - 5 Years 5 - 10 Years > 10 Years Total Commercial Real estate Construction Other Municipal Residential Term Construction Home equity line of credit Consumer Total loans $ 1,499 $ 10,743 $ 26,248 $ 264,016 $ 302,506 — 3,466 — 1 70 100 7,128 5,989 39,493 7,056 5,486 1,042 396 4,943 2,128 33,952 10,332 11,714 54 1,750 2,959 17,289 73,858 9,668 394,268 17,137 108,661 10,080 25,406 150,769 27,056 411,469 18,303 110,907 25,110 $ 12,264 $ 75,148 $ 89,137 $ 894,977 $ 1,071,526 The following table provides a listing of loans by class, between variable and fixed rates as of December 31, 2016. Dollars in thousands Amount % of total Amount % of total Amount % of total Fixed-Rate Adjustable-Rate Total Commercial Real estate Construction Other Municipal Residential Term Construction Home equity line of credit Consumer Total loans Loan Concentrations $ 32,731 3.1% $ 269,775 25.1% $ 302,506 5,979 62,660 25,345 287,397 17,735 723 19,434 0.6% 5.8% 2.3% 19,427 88,109 1,711 26.8% 124,072 1.6% 0.1% 1.8% 568 110,184 5,676 1.8% 8.3% 0.2% 11.6% 0.1% 10.3% 0.5% 25,406 150,769 27,056 411,469 18,303 110,907 25,110 28.2% 2.4% 14.1% 2.5% 38.4% 1.7% 10.4% 2.3% $ 452,004 42.1% $ 619,522 57.9% $ 1,071,526 100.0% As of December 31, 2016, the Bank did not have any concentration of loans in one particular industry that exceeded 10% of its total loan portfolio. Loans Held for Sale As of December 31, 2016, the Bank had $782,000 in loans held for sale. This compares to $349,000 in loans held for sale at December 31, 2015. The Bank participates in FHLB's Mortgage Partnership Finance Program ("MPF"), selling loans with recourse. The volume of loans sold to date through the MPF program is de minimis; therefore, there was minimum impact on the reserve. 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 The First Bancorp - 2016 Form 10-K - Page 37 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 impaired 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 the 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 lines of business. In determining our ability to collect certain loans, we also consider the fair value of any underlying collateral. We also evaluate credit risk concentrations, including trends in large dollar exposures to related borrowers, industry and geographic concentrations, and economic and environmental factors. Residential, Home Equity and Consumer Consumer, home equity and residential mortgage loans are generally segregated into homogeneous pools with similar risk characteristics. Trends and current conditions in these pools are analyzed and historical loss experience is adjusted accordingly. Quantitative and qualitative adjustment factors for the consumer, home equity and residential mortgage portfolios are consistent with those for the commercial portfolios. Certain loans in the consumer and residential portfolios identified as having the potential for further deterioration are analyzed individually to confirm the appropriate risk status and accrual status, and to determine the need for a specific reserve. Consumer loans that are greater than 120 days past due are generally charged off. Residential loans and home equity lines of credit that are greater than 90 days past due are evaluated for collateral adequacy and if deficient are placed on non-accrual status. The First Bancorp - 2016 Form 10-K - Page 38 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. Consequently, there maybe underlying credit risks that have not yet surfaced in the loan- specific or qualitative metrics the Company uses to estimate its allowance for loan losses. The allowance for loan losses includes reserve amounts assigned to individual loans on the basis of loan impairment. Certain loans are evaluated individually and are judged to be impaired when Management believes it is probable that the Company will not collect all of the contractual interest and principal payments as scheduled in the loan agreement. Under this method, loans are selected for evaluation based on 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 December 31, 2016, impaired loans with specific reserves totaled $7.9 million and the amount of such reserves was $974,000. This compares to impaired loans with specific reserves of $8.6 million at December 31, 2015, at which date 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 December 31, 2016 is considered by Management to be appropriate to address the credit losses inherent in the loan portfolio at that date. However, our determination of the appropriate allowance level is based upon a number of assumptions we make about future events, which we believe are reasonable, but which may or may not prove valid. Thus, there can be no assurance that our charge-offs in future periods will not exceed our allowance for loan losses or that we will not need to make additional increases in our allowance for loan losses. The following table summarizes our allocation of allowance by loan class as of December 31, 2016, 2015, 2014, 2013 and 2012. The percentages are the portion of each loan type to total loans. Dollars in thousands Commercial As of December 31, 2016 2015 2014 2013 2012 Real estate $ 3,988 Construction Other Municipal Residential Term Construction Home equity line of credit Consumer Unallocated 396 1,780 18 1,288 44 807 559 1,258 28.2% $ 3,120 2.4% 580 14.1% 1,452 2.5% 17 38.4% 1.7% 10.4% 2.3% —% 1,391 24 893 566 1,873 27.3% $ 3,532 26.4% $ 4,602 28.2% $ 5,865 28.9% 2.5% 13.0% 2.0% 40.7% 0.9% 11.1% 2.5% —% 823 1,505 15 1,185 20 1,060 542 1,662 3.4% 11.4% 2.2% 41.9% 1.3% 11.3% 2.1% —% 575 2,276 15 1,099 21 675 573 1,678 2.3% 10.9% 2.2% 43.0% 1.3% 10.4% 1.7% —% 1,359 2,050 18 1,109 11 654 592 842 2.6% 9.3% 1.7% 43.7% 0.7% 11.4% 1.7% —% Total $ 10,138 100.0% $ 9,916 100.0% $ 10,344 100.0% $ 11,514 100.0% $ 12,500 100.0% The allowance for loan losses totaled $10.1 million at December 31, 2016, compared to $9.9 million at December 31, 2015. Management's ongoing application of methodologies to establish the allowance include an evaluation of non-accrual loans and troubled debt restructured for specific reserves. These specific reserves increased $220,000 in 2016 from $754,000 at December The First Bancorp - 2016 Form 10-K - Page 39 31, 2015 to $974,000 at December 31, 2016. The specific loans that make up those categories change from period to period. Impairment on those loans, which would be reflected in the allowance for loan losses, might or might not exist, depending on the specific circumstances of each loan. The portion of the reserve based upon homogeneous pools of loans increased by $833,000 in 2016. This increase was due to a growth in the loan portfolio and downgrades on a few larger credits that are performing under the terms of the loans. The portion of the reserve based on qualitative factors decreased by $216,000 during 2016 as a result of an improved U.S. economy. The unallocated reserves decreased $615,000 in 2016 from $1.9 million at December 31, 2015 to $1.3 million at December 31, 2016. The decrease in the unallocated portion is a result of charge offs on collateral dependent loans and the improvement in credit quality. Management feels the decrease in the unallocated portion is directionally consistent with local and national economic conditions. A breakdown of the allowance for loan losses as of December 31, 2016, by loan class of financing receivable and allowance element, is presented in the following table: Dollars in thousands Commercial Real estate Construction Other Municipal Residential Term Construction Home equity line of credit Consumer Unallocated 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 $ 505 100 39 — 304 — 26 — — $ 1,471 $ 2,012 $ — $ 125 735 — 563 25 444 328 — 171 1,006 18 421 19 337 231 — — — — — — — — 3,988 396 1,780 18 1,288 44 807 559 1,258 1,258 $ 974 $ 3,691 $ 4,215 $ 1,258 $ 10,138 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 at an appropriate level was $1.6 million in 2016 compared to $1.6 million in 2015. Net charge offs were $1.4 million in 2016 compared to net charge offs of $2.0 million in 2015. The allowance as a percentage of loans outstanding stood at 0.95% at December 31, 2016 compared to 1.00% at December 31, 2015. The First Bancorp - 2016 Form 10-K - Page 40 The following table summarizes the activities in our allowance for loan losses as of December 31, 2016, 2015, 2014, 2013, and 2012: Dollars in thousands Balance at beginning of year Loans charged off: Commercial Real estate Construction Other Municipal Residential Term Construction Home equity line of credit Consumer Total Recoveries on loans previously charged off Commercial Real estate Construction Other Municipal Residential Term Construction Home equity line of credit Consumer Total Net loans charged off Provision for loan losses Balance at end of period As of December 31, 2016 2015 2014 2013 2012 $ 9,916 $ 10,344 $ 11,514 $ 12,500 $ 13,000 294 75 376 — 379 — 147 450 280 9 732 — 420 — 582 350 1,205 — 989 — 699 — 153 449 150 963 2,583 — 1,394 928 3,215 — 1,118 1,911 — 611 430 389 688 555 1,721 2,373 3,495 5,855 9,080 — 8 129 — 93 — 5 108 343 1,378 1,600 $ 10,138 $ 2 1 88 — 152 — 31 121 395 1,978 1,550 9,916 144 — 758 — 36 25 16 196 1,175 2,320 1,150 — — 359 — 103 — 24 183 669 13 246 113 — 110 54 1 208 745 5,186 4,200 8,335 7,835 $ 10,344 $ 11,514 $ 12,500 Ratio of net loans charged off to average loans outstanding Ratio of allowance for loan losses to total loans outstanding 0.13% 0.21% 0.26% 0.60% 0.95% 0.95% 1.00% 1.13% 1.31% 1.44% Management believes the allowance for loan losses is appropriate as of December 31, 2016. In Management's opinion, the level of the provision for loan losses in 2016 was directionally consistent with the improvement in 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, current levels of unemployment and the outlook for economic recovery continuing for some time to come. Nonperforming Loans Nonperforming loans are comprised of loans for which, based on current information and events, it is probable that we will be unable to collect all amounts due according to the contractual terms of the loan agreement or when principal and interest is 90 days or more past due unless the loan is both well secured and in the process of collection (in which case the loan may continue to accrue interest in spite of its past due status). A loan is "well secured" if it is secured (1) by collateral in the form of liens on or pledges of real or personal property, including securities, that have a realizable value sufficient to discharge the debt (including accrued interest) in full, or (2) by the guarantee of a financially responsible party. A loan is "in the process of The First Bancorp - 2016 Form 10-K - Page 41 collection" if collection of the loan is proceeding in due course either (1) through legal action, including judgment enforcement procedures, or, (2) in appropriate circumstances, through collection efforts not involving legal action which are reasonably expected to result in repayment of the debt or in its restoration to a current status in the near future. When a loan becomes nonperforming (generally 90 days past due), it is evaluated for collateral dependency based upon the most recent appraisal or other evaluation method. If the collateral value is lower than the outstanding loan balance plus accrued interest and estimated selling costs, the loan is placed on non-accrual status, all accrued interest is reversed from interest income, and a specific reserve is established for the difference between the loan balance and the collateral value less selling costs or, in certain situations, the difference between the loan balance and the collateral value less selling costs is written off. Concurrently, a new appraisal or valuation may be ordered, depending on collateral type, currency of the most recent valuation, the size of the loan, and other factors appropriate to the loan. Upon receipt and acceptance of the new valuation, the loan may have an additional specific reserve or write down based on the updated collateral value. On an ongoing basis, appraisals or valuations may be obtained 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 non-accrual loans are applied to the principal balance of the loan. Nonperforming loans, expressed as a percentage of total loans, totaled 0.73% at December 31, 2016 compared to 0.75% at December 31, 2015. The following table shows the distribution of nonperforming loans by class as of December 31, 2016, 2015, 2014, 2013, and 2012: Dollars in thousands Commercial Real estate Construction Other Municipal Residential Term Construction Home equity line of credit Consumer 2016 2015 As of December 31, 2014 2013 2012 $ 2,088 $ 2,457 $ $ 1,907 $ — 964 — 915 238 66 — 208 935 — — 4,370 — 8,484 — 1,007 — 4,603 101 3,459 — 10,333 — 654 — 4,060 5,260 6,421 — 843 — — 893 — — 832 26 Total non-performing loans $ 7,774 $ 7,372 $ 10,510 $ 16,318 $ 19,150 Total nonperforming loans does not include loans 90 or more days past due and still accruing interest. These are loans in which we expect to collect all amounts due, including past-due interest. As of December 31, 2016, loans 90 or more days past due and still accruing interest totaled $777,000, compared to $136,000, $181,000, $1.0 million and $1.1 million at December 31, 2015, 2014, 2013 and 2012, respectively. As of December 31, 2016, 9 loans with a balance of $1.7 million were non-performing and also classified as troubled-debt- restructured. Troubled Debt Restructured A restructuring of debt constitutes a troubled debt restructuring ("TDR") 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. The First Bancorp - 2016 Form 10-K - Page 42  As of December 31, 2016 there were 71 loans with an aggregate outstanding balance of $21.5 million that have been restructured. This compares to 84 loans with amounts totaling $23.9 million as of December 31, 2015. The following table shows the activity in loans classified as TDRs between December 31, 2014 and December 31, 2016: Balance in Thousands of Dollars Total at December 31, 2014 Added in 2015 Removed in 2015 Repayments in 2015 Total at December 31, 2015 Added in 2016 Removed in 2016 Repayments in 2016 Total at December 31, 2016 Number of Loans Aggregate Balance 94 $ 2 (12) — 84 $ — (13) — 71 $ 27,214 218 (2,142) (1,367) 23,923 — (1,433) (964) 21,526 As of December 31, 2016, 57 loans with an aggregate balance of $18.9 million were performing under the modified terms, five loans with an aggregate balance of $876,000 were more than 30 days past due and nine loans with an aggregate balance of $1.7 million were on nonaccrual. As a percentage of aggregate outstanding balance, 87.9% were performing under the modified terms, 4.1% were more than 30 days past due and 8.0% were on nonaccrual. The performance status of all TDRs as of December 31, 2016, as well as the associated specific reserve in the allowance for loan losses, is summarized by class of loan in the following table. In thousands of dollars Commercial Real estate Construction Other Municipal Residential Term Construction Home equity line of credit Consumer Percent of balance Number of loans Associated specific reserve Performing As Modified 30+ Days Past Due and Accruing On Nonaccrual All TDRs $ 8,115 $ — $ 822 $ 8,937 763 779 — 8,901 — 377 — 18,935 87.9% 57 448 $ $ $ $ — — — 709 — 167 — 876 4.1% 5 10 — — — 893 — — 763 779 — 10,503 — 544 — 1,715 — 21,526 $ 8.0% 9 280 $ 100.0% 71 738 $ $ Residential TDRs as of December 31, 2016 included 52 loans with an aggregate balance of $10.5 million and the modifications granted fell into five major categories. Loans totaling $6.8 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. Loans totaling $3.9 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 $246,000 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 $2.3 million were involved in bankruptcy. Certain residential TDRs had more than one modification. Commercial TDRs as of December 31, 2016 were comprised of 16 loans with a balance of $10.5 million. Of this total, 12 loans with an aggregate balance of $7.5 million had an extended period of interest-only payments, deferring the start of The First Bancorp - 2016 Form 10-K - Page 43 principal repayment. Two 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 two loans with an aggregate balance of $1.2 million had several different modifications. In each case when a loan was modified, Management determined it was in the Bank's best interest to work with the borrower with modified terms rather than to proceed to foreclosure. Once a loan is classified as a TDR, however, it remains classified as such until the balance is fully repaid, despite whether the loan is performing under the modified terms. As of December 31, 2016, Management is aware of six loans classified as TDRs that are involved in bankruptcy with an aggregate outstanding balance of $1.7 million. There were also nine loans with an outstanding balance of $1.7 million that were classified as TDRs and on non-accrual status. One loan with an outstanding balance of $46,000 was in the process of foreclosure. Impaired Loans Impaired loans include restructured loans and loans placed on non-accrual status when, 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. 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 $27.6 million at December 31, 2016, and have decreased $1.9 million from December 31, 2015. The number of impaired loans decreased by 11 loans from 145 to 134 during the same period. Impaired commercial loans decreased $450,000 from December 31, 2015 to December 31, 2016. The specific allowance for impaired commercial loans increased from $399,000 at December 31, 2015 to $644,000 as of December 31, 2016, which represented the fair value deficiencies for those loans for which the net fair value of the collateral was estimated at less than our carrying amount of the loan. From December 31, 2015 to December 31, 2016, impaired residential loans decreased $1.4 million and impaired home equity lines of credit decreased $79,000. The following table sets forth impaired loans as of December 31, 2016, 2015, 2014, 2013 and 2012: Dollars in thousands 2016 2015 2014 2013 2012 As of December 31, Commercial Real estate Construction Other Municipal Residential Term Construction Home equity line of credit Consumer Total Past Due Loans $ 10,021 $ 10,717 $ 13,304 $ 14,935 $ 15,774 763 1,743 — 1,026 1,234 — 1,380 2,942 — 1,284 6,698 — 3,354 5,861 — 13,669 15,088 16,123 17,786 19,444 — 1,387 — — 1,466 — — 2,087 26 — 1,648 — — 1,311 — $ 27,583 $ 29,531 $ 35,862 $ 42,351 $ 45,744 The Bank's overall loan delinquency ratio was 1.18% at December 31, 2016, versus 0.84% at December 31, 2015. Loans 90 days delinquent and accruing increased from $136,000 at December 31, 2015 to $777,000 as of December 31, 2016. This total is made up of five loans, with the largest loan totaling $753,000. We expect to collect all amounts due on these loans, including interest. The First Bancorp - 2016 Form 10-K - Page 44 The following table sets forth loan delinquencies as of December 31, 2016, 2015, 2014, 2013 and 2012: Dollars in thousands Commercial Real estate Construction Other Municipal Residential Term Construction Home equity line of credit Consumer Total Loans 30-89 days past due to total loans Loans 90+ days past due and accruing to total loans Loans 90+ days past due on non-accrual to total loans Total past due loans to total loans 2016 2015 As of December 31, 2014 2013 2012 $ 3,476 — 1,031 — 6,403 — 1,564 184 $ 12,658 $ $ 0.65% 0.07% 0.46% 1.18% 884 273 328 — 5,187 368 1,108 139 8,287 0.46% 0.01% 0.37% 0.84% $ $ 860 249 860 — 7,003 — 2,122 769 11,863 $ $ 1,086 — 3,469 — 9,144 47 1,719 527 15,992 $ $ 4,898 64 3,182 136 12,784 188 1,699 216 23,167 0.38% 0.02% 0.89% 1.29% 0.46% 0.12% 1.24% 1.82% 0.92% 0.12% 1.63% 2.67% As of December 31, 2016, the UBPR peer group had loans 30-89 days past due to total loans of 0.40% and loans 90+ days past due on non-accrual to total loans of 0.66%. 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 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 December 31, 2016, there were six potential problem loans with a balance of $1.1 million or 0.10% 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 December 31, 2016, there were 23 loans in the process of foreclosure with a total balance of $4.0 million. The Bank's residential foreclosure process begins when a loan becomes 75 days past due at which time a Demand/Breach Letter is sent to the borrower. If the loan becomes 120 days past due, copies of the promissory note and mortgage deed are forwarded to the Bank's attorney for review and a complaint for foreclosure is then prepared. An authorized Bank officer signs the affidavit certifying the validity of the documents and verification of the past due amount which is then forwarded to the court. Once a Motion for Summary Judgment is granted, a Period of Redemption (POR) begins which gives the customer 90 days to cure the default. A foreclosure auction date is then set 30 days from the POR expiration date if the default is not cured. The Bank's commercial foreclosure process begins when a loan becomes 60 days past due, at which time a default letter is issued. At expiration of the period to cure default, which lasts 12 days after the issuing of the default letter, copies of the promissory note and mortgage deed are forwarded to the Bank's attorney for review. A Notice of Statutory Power of Sale is then prepared. This notice must be published for three consecutive weeks in a newspaper located in the county in which the property is located. A notice also must be issued to the mortgagor and all parties of interest 21 days prior to the sale. The foreclosure auction occurs and the Affidavit of Sale is recorded within the appropriate county within 30 days of the sale. 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. The First Bancorp - 2016 Form 10-K - Page 45 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 cost or fair value less estimated cost to sell. At December 31, 2016, there were six properties owned with a net OREO balance of $375,000, net of an allowance for losses of $205,000, 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. The following table presents the composition of other real estate owned as of December 31, 2016, 2015, 2014, 2013 and 2012: Dollars in thousands Carrying Value Commercial Real estate Construction Other Municipal Residential Term Construction Home equity line of credit Consumer Total Related Allowance Commercial Real estate Construction Other Municipal Residential Term Construction Home equity line of credit Consumer Total Net Value Commercial Real estate Construction Other Municipal Residential Term Construction Home equity line of credit Consumer Total $ $ $ $ $ As of December 31, 2016 2015 2014 2013 2012 — $ 28 170 — 382 — — — — $ 28 706 — 960 — — — $ 145 151 888 — $ 394 295 531 — 3,255 — — — 3,917 — — — — 3,406 1,617 — 2,943 — — — 580 $ 1,694 $ 4,439 $ 5,137 $ 7,966 — $ 11 127 — 67 — — — — $ 11 77 — 74 — — — 75 17 170 — 392 — — — $ 74 $ 8 7 — 241 — — — 205 $ 162 $ 654 $ 330 $ — — 158 — 215 — — — 373 — $ 17 43 — 315 — — — 17 629 — 886 — — — — $ 70 $ 134 718 — $ 320 287 524 — — 3,406 1,459 — 2,863 3,676 2,728 — — — — — — — — — $ 375 $ 1,532 $ 3,785 $ 4,807 $ 7,593 The First Bancorp - 2016 Form 10-K - Page 46 Funding, Liquidity and Capital Resources As of December 31, 2016, the Bank had primary sources of liquidity of $139.7 million or 8.3% of assets. It is Management's opinion that this is appropriate. In addition, the Bank has an additional $157.2 million in borrowing capacity under the Federal Reserve Bank of Boston's Borrower in Custody program, $48.0 million in credit lines with correspondent banks, and $169.3 million in unencumbered securities available as collateral for borrowing. These bring the Bank's primary sources of liquidity to $514.2 million or 30.5% of assets. 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 69.9% of total average assets in 2016. While the generally preferred funding strategy is to attract and retain low cost deposits, the ability to do so is affected by competitive interest rates and terms in the marketplace. Other sources of funding include discretionary use of purchased liabilities (e.g., FHLB term advances and other borrowings), cash flows from the securities portfolios and loan repayments. 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 prompt and comprehensive responses 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. Deposits During 2016, total deposits increased by $199.8 million, ending the year at $1.243 billion compared to $1.043 billion at December 31, 2015. Low-cost deposits (demand, NOW, and savings accounts) increased by $61.6 million or 10.6% during the year, money market deposits increased $32.6 million or 35.0%, and certificates of deposit increased $105.6 million or 28.5%. The majority of the change in certificates of deposit year-to-date was primarily from a shift in funding between borrowed funds and certificates of deposit. The increase in low-cost deposits resulted from an inflow of low-cost deposits due to the low interest rate environment. Average deposits increased $84.7 million in 2016, as shown in the following table which sets forth the average daily balance for the Bank's principal deposit categories for each period: Dollars in thousands Demand deposits NOW accounts Money market accounts Savings Certificates of deposit Total deposits Years ended December 31, % change 2016 132,726 $ 2015 116,151 $ 2014 106,609 $ 259,462 82,563 210,540 441,341 220,815 99,507 187,379 418,092 178,335 94,017 154,938 513,461 $ 1,126,632 $ 1,041,944 $ 1,047,360 2016 vs. 2015 14.27 % 17.50 % (17.03)% 12.36 % 5.56 % 8.13 % The First Bancorp - 2016 Form 10-K - Page 47 The average cost of deposits (including non-interest-bearing accounts) was 0.53% for the year ended December 31, 2016, compared to 0.51% for the year ended December 31, 2015 and 0.68% for the year ended December 31, 2014. The following table sets forth the average cost of each category of interest-bearing deposits for the periods indicated. NOW Money market Savings Certificates of deposit Total interest-bearing deposits Years ended December 31, 2016 2015 2014 0.44% 0.28% 0.23% 0.96% 0.61% 0.33% 0.28% 0.22% 0.92% 0.57% 0.28% 0.29% 0.20% 1.17% 0.75% Of all certificates of deposit, $321.5 million or 67.46% will mature by December 31, 2017. As of December 31, 2016, the Bank held a total of $281.5 million in certificate of deposit accounts with balances in excess of $100,000. The following table summarizes the time remaining to maturity for these certificates of deposit: Dollars in thousands Within 3 Months 3 Months through 6 months 6 months through 12 months Over 12 months Total Borrowed Funds As of December 31, 2016 2015 $ 159,791 $ 7,481 21,452 92,781 90,725 18,670 24,284 78,774 $ 281,505 $ 212,453 Borrowed funds consists mainly of advances from the FHLB which are secured by FHLB stock, funds on deposit with FHLB, U.S. agencies notes and mortgage-backed securities and qualifying first mortgage loans. As of December 31, 2016, advances totaled $194.7 million, with a weighted average interest rate of 1.67% and remaining maturities ranging from four days to 15 years. This compares to advances totaling $250.4 million, with a weighted average interest rate of 1.53% and remaining maturities ranging from two days to ten years, as of December 31, 2015, and advances totaling $205.2 million, with a weighted average interest rate of 1.71% and remaining maturities ranging from two days to ten years, as of December 31, 2014. The increase in the weighted average rate paid on borrowed funds in 2016 compared to 2015 is consistent with the interest rate policy and actions of the FOMC. The Bank offers securities repurchase agreements to municipal and corporate customers as an alternative to deposits. The balance of these agreements as of December 31, 2016 was $84.2 million, compared to $87.1 million on December 31, 2015, and $74.7 million on December 31, 2014. The weighted average rates of these agreements were 1.06% as of December 31, 2016, compared to 0.80% as of December 31, 2015 and 0.79% as of December 31, 2014. The maximum amount of borrowed funds outstanding at any month-end during each of the last three years was $388.5 million at the end of January in 2016, $337.5 million at the end of December in 2015, and $298.5 million at the end of June in 2014. The average amount outstanding during 2016 was $295.4 million with a weighted average interest rate of 1.62%. This compares to an average outstanding amount of $289.4 million with a weighted average interest rate of 1.53% in 2015, and an average outstanding amount of $264.0 million with a weighted average interest rate of 1.71% in 2014. Capital Resources Shareholders' equity as of December 31, 2016 was $172.5 million, compared to $167.5 million as of December 31, 2015. Capital at December 31, 2016 was sufficient to meet the requirements of regulatory authorities. Leverage capital of the Company, or total shareholders' equity divided by average total assets for the current quarter less goodwill and any net unrealized gain or loss on securities available for sale and postretirement benefits, stood at 8.71% on December 31, 2016 and 8.81% at December 31, 2015. To be rated "well-capitalized", regulatory requirements call for a minimum leverage capital ratio of 5.00%. At December 31, 2016, the Company had tier-one risk-based capital of 14.64% and tier-two risk-based capital of 15.69%, versus 14.70% and 15.78%, respectively, at December 31, 2015. To be rated "well-capitalized", regulatory requirements call for minimum tier-one and tier-two risk-based capital ratios of 8.00% and 10.00%, respectively. The The First Bancorp - 2016 Form 10-K - Page 48 company's actual levels of capitalization were comfortably above the standards to be rated "well-capitalized" by regulatory authorities. During 2016, the Company declared cash dividends of $0.22 per share in the first quarter and $0.23 per share in the remaining three quarters, as well as a special dividend of $0.12 per share in the fourth quarter or $1.03 per share for the year. The dividend payout ratio, which is calculated by dividing dividends declared per share by diluted earnings per share, was 61.31% for the year ended December 31, 2016 compared to 57.24% for the year ended December 31, 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 2017 is this year's net income plus $13.6 million. On January 9, 2009 the Company issued $25 million in Fixed Rate Cumulative Perpetual Preferred Stock, Series A, to the U.S. Treasury under the Capital Purchase Program ("the CPP Shares"). The CPP Shares qualified as Tier 1 capital on the Company's books for regulatory purposes and ranked senior to the Company's common stock and senior or at an equal level in the Company's capital structure to any other shares of preferred stock the Company may issue in the future. In three separate transactions in 2012 and 2013, the Company repurchased all of the CPP Shares from the Treasury. Incident to such issuance of the CPP Shares, the Company issued to the Treasury warrants (the "Warrants") to purchase up to 225,904 shares of the Company's common stock at a price per share of $16.60 (subject to adjustment). The Warrants (and any shares of common stock issuable pursuant to the Warrants) are freely transferable by Treasury to third parties. The Warrants have a term of ten years and could be exercised by Treasury or a subsequent holder at any time or from time to time during 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 the Warrants to private parties. In accordance with the contractual terms of the Warrants, the number of shares issuable upon exercise and strike price were adjusted at the time of the sale. As a result of this transaction, the aggregate number of shares of common stock issuable under the Warrants were adjusted to 226,819 shares with a strike price of $16.53 per share. In November 2016, the Company repurchased all of the outstanding Warrants for an aggregate purchase price of $1,750,000. In 2016, 47,247 shares were issued via employee stock programs, the dividend reinvestment plan, the exercise of stock options, and restricted stock grants. The Company received consideration totaling $531,000. The following table summarizes the Company's 2016 stock issuances: Dividend reinvestment plan Employee stock program Net restricted stock grants Total 10,889 14,511 21,847 47,247 Financial institution regulators have established guidelines for minimum capital ratios for banks and bank holding companies. The net unrealized gain or loss on available for sale securities is generally not included in computing regulatory capital. During the first quarter of 2015, the Company adopted the new Basel III regulatory capital framework as approved by the federal banking agencies. The adoption of this new framework modified the calculation of the various capital ratios, added a new ratio, common equity tier 1, and revised the adequately and well capitalized thresholds. Additionally, under the new rule, in order to avoid limitations on capital distributions, including dividend payments, the Company must hold a capital conservation buffer above the adequately capitalized risk-based capital ratios. The capital conservation buffer is being phased in from 0.0% for 2015 to 2.50% by 2019. The amounts shown below as the adequately capitalized ratio plus capital conservation buffer includes the fully phased-in 2.50% buffer. The Company met each of the well-capitalized ratio guidelines at December 31, 2016. The following tables indicate the capital ratios for the Bank and the Company at December 31, 2016 and December 31, 2015. As of December 31, 2016 Leverage Tier 1 Common Equity Tier 1 Total Risk- Based Bank Company Adequately capitalized ratio Adequately capitalized ratio plus capital conservation buffer Well capitalized ratio (Bank only) 8.63 % 8.71 % 4.00 % 4.00 % 5.00 % 14.50 % 14.64 % 6.00 % 8.50 % 8.00 % 14.50 % 14.64 % 4.50 % 7.00 % 6.50 % 15.55 % 15.69 % 8.00 % 10.50 % 10.00 % The First Bancorp - 2016 Form 10-K - Page 49 As of December 31, 2015 Leverage Tier 1 Common Equity Tier 1 Total Risk- Based Bank Company Adequately capitalized ratio Adequately capitalized ratio plus capital conservation buffer Well capitalized ratio (Bank only) 8.82 % 8.81 % 4.00 % 4.00 % 5.00 % 14.45 % 14.70 % 6.00 % 8.50 % 8.00 % 14.45 % 14.70 % 4.50 % 7.00 % 6.50 % 15.53 % 15.78 % 8.00 % 10.50 % 10.00 % Except as identified in Item 1A, "Risk Factors", Management knows of no present trends, events or uncertainties that will have, or are reasonably likely to have, a material effect on capital resources, liquidity, or results of operations. Contractual Obligations The following table sets forth the contractual obligations and commitments to extend credit of the Company as of December 31, 2016: Dollars in thousands Borrowed funds Operating leases Certificates of deposit Total Unused lines, collateralized by residential real estate Other unused commitments Standby letters of credit Commitments to extend credit Total Less than 1 year 1-3 years 3-5 years More than 5 years $ 278,901 $ 158,774 $ 30,000 $ 65,000 $ 25,127 $ $ $ $ 400 476,620 755,921 76,646 57,738 4,198 10,684 $ $ 160 321,537 480,471 76,646 57,738 4,198 10,684 174 76,130 31 78,376 35 577 106,304 $ 143,407 $ 25,739 — $ — $ — — — — — — — — — — — Total loan commitments and unused lines of credit $ 149,266 $ 149,266 $ — $ — $ The Company is party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These include commitments to originate loans, commitments for unused lines of credit, and standby letters of credit. The instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized in the consolidated balance sheets. Commitments for unused lines are agreements to lend to a customer provided there is no violation of any condition established in the contract and generally have fixed expiration dates. Standby letters of credit are conditional commitments issued by the Bank to guarantee a customer's performance to a third party. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loans to customers. As of December 31, 2016, the Company's off-balance-sheet activities consisted entirely of commitments to extend credit. Off-Balance Sheet Financial Instruments No material off-balance sheet risk exists that requires a separate liability presentation. Capital Purchases In 2016, the Company made capital purchases totaling $2,131,000 for real estate improvements for branch or operations premises and equipment related to technology. This cost will be amortized over an average of 16 years, adding approximately $130,000 to pre-tax operating costs per year. Goodwill On October 26, 2012, the Bank completed the purchase of a branch at 63 Union Street in Rockland, Maine, from Camden National Bank that was formerly operated by Bank of America. As part of the transaction, the Bank acquired approximately $32.3 million in deposits as well as a small volume of loans. The First Bancorp - 2016 Form 10-K - Page 50 The excess of the purchase price over the fair value of the assets acquired, liabilities assumed, and the amount allocated for core deposit intangible totaled $2.1 million and was recorded as goodwill. The goodwill is not amortizable for GAAP but is amortizable for tax purposes. On January 14, 2005, the Company acquired FNB Bankshares (“FNB”) of Bar Harbor, Maine, and its subsidiary, The First National Bank of Bar Harbor. The total value of the transaction was $48.0 million, and all of the voting equity interest of FNB was acquired in the transaction. The transaction was accounted for as a purchase and the excess of purchase price over the fair value of net identifiable assets acquired equaled $27.6 million and was recorded as goodwill, none of which was deductible for tax purposes. The portion of the purchase price related to the core deposit intangible is being amortized over its expected economic life. Goodwill is evaluated annually for possible impairment under the provisions of FASB ASC Topic 350, “Intangibles – Goodwill and Other”. As of December 31, 2016, in accordance with Topic 350, the Company completed its annual review of goodwill and determined there has been no impairment. The Bank also carries $125,000 in goodwill for a de minimus transaction in 2001. Effect of Future Interest Rates on Post-retirement Benefit Liabilities In evaluating the Company's post-retirement benefit liabilities, Management believes changes in discount rates which have occurred pursuant to recently enacted Federal legislation will not have a significant impact on the Company's future operating results or financial condition. The First Bancorp - 2016 Form 10-K - Page 51 ITEM 7A. Quantitative and Qualitative Disclosures about Market Risk Market risk is the risk of loss arising from adverse changes in the fair value of financial instruments due to changes in interest rates, and the Company'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 present 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 which reprice within a specified time period. The cumulative one-year gap, at December 31, 2016, was +0.77% of total assets, compared to +5.13% of assets at December 31, 2015. ALCO's policy limit for the one-year gap is plus or minus 20% of total assets. Core deposits with non-contractual maturities are presented based upon historical patterns of balance attrition 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. The Company's summarized static gap, as of December 31, 2016, is presented in the following table: Dollars in thousands 0-90 Days 90-365 Days 1-5 Years 5+ Years Investment securities at amortized cost (HTM) and fair value (AFS) $ 29,230 $ 56,147 $ 194,934 $ 246,933 Restricted equity securities, at cost Loans held for sale Loans Other interest-earning assets Non-rate-sensitive assets Total assets Interest-bearing deposits Borrowed funds Non-rate-sensitive liabilities and equity Total liabilities and equity Period gap Percent of total assets Cumulative gap (current) Percent of total assets 10,893 — 378,534 — 6,607 425,264 388,596 128,774 1,900 519,270 — — 169,530 22,270 — 247,947 80,108 55,000 5,700 — — 1,037 782 380,548 142,914 — — 575,482 154,493 95,000 32,350 — 72,516 464,182 479,278 127 291,549 770,954 $ (306,772) (17.91) — 140,808 281,843 $ (94,006) $ 107,139 $ 293,639 (5.49)% 6.25% 17.14% $ (94,006) $ 13,133 $ 306,772 (5.49)% 0.77% 17.91% 0.00% 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. The Company's most recent simulation model projects net interest income would decrease by approximately 0.38% of stable-rate net interest income if short-term rates affected by Federal Open Market Committee actions fall gradually by one percentage point over the next year, and decrease by approximately 3.06% 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 The First Bancorp - 2016 Form 10-K - Page 52 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 higher than that earned in a stable rate environment by 0.48% in a falling-rate scenario, and lower than that earned in a stable rate environment by 1.18% 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 December 31, 2016 and 2015 is presented in the following table: Changes in Net Interest Income Year 1 Projected changes if rates decrease by 1.0% Projected change if rates increase by 2.0% Year 2 Projected changes if rates decrease by 1.0% Projected change if rates increase by 2.0% 2016 -0.38% -3.06% 0.48% 1.18% 2015 -0.97% -1.94% -2.80% -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 December 31, 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 December 31, 2016, there were no significant differences between the views of the independent consultant and Management regarding the Company's interest rate risk exposure. Management expects interest rates will remain relatively stable in the next year and believes that the current level of interest rate risk is acceptable. The First Bancorp - 2016 Form 10-K - Page 53 ITEM 8. Financial Statements and Supplementary Data Consolidated Balance Sheets The First Bancorp, Inc. and Subsidiary As of December 31, Assets Cash and cash equivalents Interest-bearing deposits in other banks Securities available for sale Securities to be held to maturity (fair value of $225,537,000 at December 31, 2016, and $243,123,000 at December 31, 2015) Restricted equity securities, at cost Loans held for sale Loans Less allowance for loan losses Net loans Accrued interest receivable Premises and equipment, net Other real estate owned Goodwill Other assets Total assets Liabilities Demand deposits NOW deposits Money market deposits Savings deposits Certificates of deposit Total deposits Borrowed funds – short term Borrowed funds – long term Other liabilities Total liabilities Commitments and contingent liabilities Shareholders' equity Common stock, one cent par value per share Additional paid-in capital Retained earnings Accumulated other comprehensive income (loss) Net unrealized gain (loss) on securities available for sale Net unrealized loss on securities transferred from available for sale to held to maturity Net unrealized gain on cash flow hedging derivative instruments Net unrecognized loss on postretirement benefit costs Total shareholders' equity Total liabilities and shareholders' equity Common stock Number of shares authorized Number of shares issued and outstanding Book value per common share Tangible book value per common share 2016 2015 $ 17,366,000 $ 14,299,000 293,000 4,013,000 300,416,000 223,039,000 226,828,000 240,023,000 11,930,000 14,257,000 782,000 1,071,526,000 10,138,000 1,061,388,000 5,532,000 22,202,000 375,000 29,805,000 35,958,000 349,000 988,638,000 9,916,000 978,722,000 4,912,000 21,816,000 1,532,000 29,805,000 32,043,000 $ 1,712,875,000 $ 1,564,810,000 $ 140,482,000 $ 130,566,000 282,971,000 125,544,000 217,340,000 476,620,000 242,638,000 92,994,000 206,009,000 370,982,000 1,242,957,000 1,043,189,000 158,774,000 120,127,000 18,496,000 222,323,000 115,134,000 16,666,000 1,540,354,000 1,397,312,000 108,000 108,000 60,723,000 59,862,000 111,693,000 106,673,000 (935,000) (129,000) 1,163,000 (102,000) 172,521,000 $ 1,712,875,000 1,123,000 (112,000) — (156,000) 167,498,000 $ 1,564,810,000 18,000,000 10,793,946 15.98 13.20 $ $ 18,000,000 10,753,855 15.58 12.78 $ $ The accompanying notes are an integral part of these consolidated financial statements The First Bancorp - 2016 Form 10-K - Page 54 Consolidated Statements of Income and Comprehensive Income The First Bancorp, Inc. and Subsidiary Years ended December 31, Interest and dividend income Interest and fees on loans (includes tax-exempt income of $670,000 in 2016, $578,000 in 2015, and $592,000 in 2014) Interest on deposits with other banks Interest and dividends on investments (includes tax-exempt income of $5,168,000 in 2016, $5,157,000 in 2015, and $5,854,000 in 2014) Total interest and dividend income Interest expense Interest on deposits Interest on borrowed funds Total interest expense Net interest income Provision for loan losses Net interest income after provision for loan losses Non-interest income Fiduciary and investment management income Service charges on deposit accounts Net securities gains Mortgage origination and servicing income Other operating income Total non-interest income Non-interest expense Salaries and employee benefits Occupancy expense Furniture and equipment expense FDIC insurance premiums Amortization of identified intangibles Other operating expense Total non-interest expense Income before income taxes Applicable tax expense Net income Basic earnings per common share Diluted earnings per common share Other comprehensive income (loss), net of tax 2016 2015 2014 $ 39,996,000 $ 36,620,000 $ 35,102,000 22,000 19,000 5,000 13,741,000 14,171,000 15,915,000 53,759,000 50,810,000 51,022,000 6,028,000 4,784,000 5,285,000 4,589,000 7,087,000 4,338,000 10,812,000 9,874,000 11,425,000 42,947,000 40,936,000 39,597,000 1,600,000 1,550,000 1,150,000 41,347,000 39,386,000 38,447,000 2,411,000 2,237,000 673,000 2,192,000 4,986,000 2,258,000 2,384,000 1,399,000 1,558,000 4,631,000 2,139,000 2,505,000 1,155,000 979,000 4,270,000 12,499,000 12,230,000 11,048,000 15,215,000 15,080,000 14,890,000 2,313,000 3,305,000 789,000 43,000 2,312,000 3,171,000 890,000 58,000 2,215,000 2,940,000 1,004,000 326,000 7,718,000 8,385,000 8,845,000 29,383,000 29,896,000 30,220,000 24,463,000 21,720,000 19,275,000 6,454,000 5,514,000 4,566,000 $ 18,009,000 $ 16,206,000 $ 14,709,000 $ $ 1.68 1.66 $ 1.52 1.51 1.38 1.37 Net unrealized gain (loss) on securities available for sale (2,058,000) (1,399,000) 9,113,000 Net unrealized loss on securities transferred from available for sale to held to maturity, net of amortization Net unrealized gain on cash flow hedging derivative instruments Net unrecognized gain (loss) on postretirement benefits Other comprehensive income (loss) Comprehensive income (17,000) 1,163,000 54,000 (858,000) $ 17,151,000 (64,000) — (31,000) (1,494,000) $ 14,712,000 (48,000) — (313,000) 8,752,000 $ 23,461,000 The accompanying notes are an integral part of these consolidated financial statements The First Bancorp - 2016 Form 10-K - Page 55 Consolidated Statements of Changes in Shareholders' Equity The First Bancorp, Inc. and Subsidiary Common stock and additional paid-in capital Amount Shares Retained earnings Accumulated other comprehensive income (loss) Total shareholders' equity Balance at December 31, 2013 Net income 10,671,192 — $ 58,501,000 — $ 94,000,000 14,709,000 $ (6,403,000) $146,098,000 14,709,000 — Net unrealized gain on securities available for sale, net of tax Net unrealized loss on securities transferred from available for sale to held to maturity, net of tax Unrecognized loss for post-retirement benefits, net of tax Comprehensive income Cash dividends declared ($0.83 per share) Equity compensation expense Issuance of restricted stock Proceeds from sale of common stock — — — — — — 25,843 27,324 — — — — — — 9,113,000 9,113,000 (48,000) (48,000) — 14,709,000 (313,000) 8,752,000 (313,000) 23,461,000 — 431,000 — 457,000 (8,893,000) — — — — — — — (8,893,000) 431,000 — 457,000 Balance at December 31, 2014 Net income 10,724,359 — $ 59,389,000 — $ 99,816,000 16,206,000 $ 2,349,000 — $161,554,000 16,206,000 Net unrealized loss on securities available for sale, net of tax Net unrealized loss on securities transferred from available for sale to held to maturity, net of tax Unrecognized loss for post-retirement benefits, net of tax Comprehensive income Cash dividends declared ($0.87 per share) Equity compensation expense — — — — — — — — — — — — (1,399,000) (1,399,000) (64,000) (64,000) — 16,206,000 (31,000) (1,494,000) (31,000) 14,712,000 — 296,000 (9,349,000) — Payment for repurchase of common stock Issuance of restricted stock (10,138) (180,000) 14,179 — Proceeds from sale of common stock 25,455 465,000 — — — Balance at December 31, 2015 10,753,855 $ 59,970,000 $106,673,000 $ 855,000 $167,498,000 The First Bancorp - 2016 Form 10-K - Page 56 — — — — — (9,349,000) 296,000 (180,000) — 465,000 Balance at December 31, 2015 Net income Net unrealized loss on securities available for sale, net of tax Net unrealized gain on cash flow hedging derivative instruments, net of tax Net unrealized loss on securities transferred from available for sale to held to maturity, net of tax Unrecognized gain for post-retirement benefits, net of tax Comprehensive income Cash dividends declared ($1.03 per share) Equity compensation expense Payment for repurchase of common stock Repurchase of warrants Tax benefit from vesting of restricted stock Issuance of restricted stock Proceeds from sale of common stock Common stock and additional paid-in capital Amount Shares Retained earnings Accumulated other comprehensive income (loss) Total shareholders' equity 10,753,855 — $59,970,000 $106,673,000 — 18,009,000 $ 855,000 — $167,498,000 18,009,000 — — — — — — — — — — — — — (2,058,000) (2,058,000) 1,163,000 1,163,000 (17,000) (17,000) — — — 18,009,000 54,000 (858,000) 54,000 17,151,000 — (11,110,000) — 298,000 — (11,110,000) 298,000 — (7,156) — — 21,847 25,400 — — (129,000) (1,750,000) 32,000 — 531,000 — — — — — — — — (129,000) (1,750,000) 32,000 — 531,000 Balance at December 31, 2016 10,793,946 $60,831,000 $111,693,000 $ (3,000) $172,521,000 The accompanying notes are an integral part of these consolidated financial statements The First Bancorp - 2016 Form 10-K - Page 57 Consolidated Statements of Cash Flows The First Bancorp, Inc. and Subsidiary For the years ended December 31, Cash flows from operating activities Net income Adjustments to reconcile net income to net cash provided by operating activities: Depreciation Change in deferred taxes Provision for loan losses Loans originated for resale Proceeds from sales and transfers of loans Net gain on sales of loans Net gain on sale or call of securities Net amortization of investment premiums Net (gain) loss on sale of other real estate owned Provision for losses on other real estate owned Equity compensation expense Tax benefit from vesting of restricted stock Net (increase) decrease in other assets and accrued interest Net increase in other liabilities Net loss on disposal of premises and equipment Amortization of investments in limited partnerships Net acquisition amortization Net cash provided by operating activities Cash flows from investing activities (Increase) decrease in interest-bearing deposits in other banks Proceeds from sales of securities available for sale Proceeds from maturities, payments, calls of securities available for sale Proceeds from maturities, payments, calls of securities held to maturity Proceeds from sales of other real estate owned Purchases of securities available for sale Purchases of securities to be held to maturity Investment in bank-owned life insurance Purchase of Federal Home Loan Bank Stock Redemption of restricted equity securities Net increase in loans Capital expenditures Proceeds from sale of premises and equipment Net cash used in investing activities 2016 2015 2014 $ 18,009,000 $ 16,206,000 $ 14,709,000 1,745,000 (139,000) 1,600,000 (54,257,000) 55,035,000 (1,211,000) (673,000) 2,810,000 (177,000) 132,000 298,000 32,000 (2,460,000) 665,000 — 194,000 43,000 1,720,000 332,000 1,550,000 (31,306,000) 31,671,000 (714,000) (1,399,000) 783,000 5,000 311,000 296,000 — (455,000) 1,418,000 — 266,000 58,000 1,663,000 18,000 1,150,000 (21,758,000) 22,337,000 (496,000) (1,155,000) 943,000 32,000 637,000 431,000 — 676,000 378,000 3,000 569,000 326,000 21,646,000 20,742,000 20,463,000 3,720,000 10,309,000 79,223,000 88,899,000 1,786,000 (172,343,000) (75,573,000) — — 2,327,000 (84,850,000) (2,131,000) — (148,633,000) (454,000) 35,468,000 36,588,000 45,688,000 3,260,000 (111,616,000) (9,644,000) (10,000,000) (345,000) — (74,375,000) (927,000) 10,000 (86,347,000) (997,000) 15,557,000 30,226,000 18,085,000 2,624,000 (908,000) (34,881,000) — — — (45,788,000) (1,909,000) 1,240,000 (16,751,000) The First Bancorp - 2016 Form 10-K - Page 58 Cash flows from financing activities Net increase in demand, savings, and money market accounts Net increase (decrease) in certificates of deposit Advances on long-term borrowings Repayment on long-term borrowings Net increase (decrease) in short-term borrowings Payment to repurchase common stock Proceeds from sale of common stock Repurchase of warrants Dividends paid Net cash provided by (used in) financing activities Net increase (decrease) in cash and cash equivalents Cash and cash equivalents at beginning of year Cash and cash equivalents at end of year Interest paid Income taxes paid Non-cash transactions: 94,130,000 105,638,000 35,000,000 (30,000,000) (63,556,000) (129,000) 531,000 (1,750,000) (9,810,000) 130,054,000 94,889,000 (76,519,000) 55,000,000 (40,000,000) 42,541,000 (180,000) 465,000 — (9,349,000) 66,847,000 3,067,000 1,242,000 84,038,000 (83,618,000) — (30,000,000) 30,791,000 — 457,000 — (8,893,000) (7,225,000) (3,513,000) 14,299,000 13,057,000 16,570,000 $ 17,366,000 $ 14,299,000 $ 13,057,000 $ 10,767,000 $ 9,960,000 $ 11,503,000 6,367,000 4,235,000 5,150,000 Net transfer from loans to other real estate owned Transfer of securities from available for sale to held to maturity 584,000 $ — $ 1,323,000 2,271,000 — $ 89,757,000 The accompanying notes are an integral part of these consolidated financial statements The First Bancorp - 2016 Form 10-K - Page 59 Notes to Consolidated Financial Statements Nature of Operations The First Bancorp, Inc. (the "Company") through its wholly-owned subsidiary, First National Bank ("the Bank"), provides a full range of banking services to individual and corporate customers from sixteen offices in coastal and eastern Maine. First Advisors, a division of the Bank, provides investment management, private banking and financial planning services. On January 28, 2016, the Board of Directors voted to change the Bank's name to First National Bank from The First, N.A. Note 1. Summary of Significant Accounting Policies Principles of Consolidation The consolidated financial statements include the accounts of the Company and the Bank. All intercompany accounts and transactions have been eliminated in consolidation. Subsequent Events Events occurring subsequent to December 31, 2016, have been evaluated as to their potential impact to the financial statements. Use of Estimates in Preparation of Financial Statements In preparing the financial statements in accordance with accounting principles generally accepted in the United States of America ("GAAP"), Management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities as of the date of the balance sheet and revenues and expenses for the reporting period. Actual results could differ significantly from those estimates. Material estimates that are particularly susceptible to significant change in the near-term relate to the determination of the allowance for loan losses, goodwill, the valuation of mortgage servicing rights, and other-than-temporary impairment of securities. Investment Securities Investment securities are classified as available for sale or held to maturity when purchased. There are no trading account securities. 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 Bank's funds management strategy, and may be sold in response to changes in interest rates or prepayment risk, changes in liquidity needs, or for other reasons. They are accounted for at fair value, with unrealized gains or losses adjusted through shareholders' equity, net of related income taxes. The cost basis is adjusted for the amortization of premiums and accretion of discounts. Securities to be held to maturity consist primarily of debt securities which Management has acquired solely for long-term investment purposes, rather than for purposes of trading or future sale. For securities to be held to maturity, Management has the intent and the Bank has the ability to hold such securities until their respective maturity dates. Such securities are carried at cost adjusted for the amortization of premiums and accretion of discounts. Investment securities transactions are accounted for on a settlement date basis; reported amounts would not be materially different from those accounted for on a trade date basis. Gains and losses on the sales of investment securities are determined using the amortized cost of the specifically identified security. For declines in the fair value of individual debt securities available for sale below their cost that are deemed to be other than temporary, where the Company does not intend to sell the security and it is more likely than not that the Company will not be required to sell the security before recovery of its amortized cost basis, the other-than-temporary decline in the fair value of the debt security related to 1) credit loss is recognized in earnings and 2) other factors is recognized in other comprehensive income or loss. Credit loss is deemed to exist if the present value of expected future cash flows using the effective rate at acquisition is less than the amortized cost basis of the debt security. For individual debt securities where the Company intends to sell the security or more likely than not will be required to sell the security before recovery of its amortized cost, the other-than-temporary impairment is recognized in earnings equal to the entire difference between the security's cost basis and its fair value at the balance sheet date. 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 The First Bancorp - 2016 Form 10-K - Page 60 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. Loans Held for Sale Loans held for sale consist of residential real estate mortgage loans and are carried at the lower of aggregate cost or fair value, as determined by current investor yield requirements. Loans Loans are generally reported at their outstanding principal balances, adjusted for chargeoffs, the allowance for loan losses and any deferred fees or costs to originate loans. Loan commitments are recorded when funded. Loan Fees and Costs Loan origination fees and certain direct loan origination costs are deferred and recognized in interest income as an adjustment to the loan yield over the life of the related loans. The unamortized net deferred fees and costs are included on the balance sheets with the related loan balances, and the amortization is included with the related interest income. Allowance for Loan Losses Loans considered to be uncollectible are charged against the allowance for loan losses. The allowance for loan losses is maintained at a level determined by Management to be appropriate to absorb probable losses. This allowance is increased by provisions charged to operating expenses and recoveries on loans previously charged off. Arriving at an appropriate level of allowance for loan losses necessarily involves a high degree of judgment. In determining the appropriate level of allowance for loan losses, Management takes into consideration several factors, including reviews of individual non-performing loans and performing loans listed on the watch report requiring periodic evaluation, loan portfolio size by category, recent loss experience, delinquency trends and current economic conditions. For all loan classes, loans over 30 days past due are considered delinquent. Impaired loans include restructured loans and loans placed on non-accrual status when, based on current information and events, it is probable that the Bank will be unable to collect all amounts due according to the contractual terms of the loan agreement. 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. Management takes into consideration impaired loans in addition to the above mentioned factors in determining the appropriate level of allowance for loan losses. 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 to first determine if the borrower demonstrates financial difficulty. Common indicators of this include past due status with bank obligations, substandard credit bureau reports, or an inability to refinance with another lender. If the borrower is experiencing financial difficulty and concessions are granted, such as maturity date extension, interest rate adjustments to below market pricing, or a deferment of payments, the loan will generally be classified as a TDR. Accrual of Interest Income and Expense Interest on loans and investment securities is taken into income using methods which relate the income earned to the balances of loans and investment securities outstanding. Interest expense on liabilities is derived by applying applicable interest rates to principal amounts outstanding. For all classes of loans, recording of interest income on problem loans, which includes impaired loans, ceases when collectibility of principal and interest within a reasonable period of time becomes doubtful. Cash payments received on non-accrual loans, which includes 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. Premises and Equipment Premises, furniture and equipment are stated at cost, less accumulated depreciation. Depreciation expense is computed by straight- line methods over the asset's estimated useful life. Other Real Estate Owned ("OREO") Real estate acquired by foreclosure or deed in lieu of foreclosure is transferred to OREO and recorded at fair value, less estimated costs to sell, based on appraised value at the date actually or constructively received. Loan losses arising from the acquisition of The First Bancorp - 2016 Form 10-K - Page 61 such property are charged against the allowance for loan losses. Subsequent provisions to reduce the carrying value of a property are recorded to the allowance for OREO losses and a charge to operations on a specific property basis. Goodwill and Identified Intangible Assets Intangible assets include the excess of the purchase price over the fair value of net assets acquired (goodwill) from the acquisition of FNB Bankshares in 2005 as well as the core deposit intangible related to the same acquisition. The core deposit intangible is amortized on a straight-line basis over ten years. There was no annual amortization expense for 2016 as the expense is now fully amortized. For 2015 and 2014 the annual amortization expense was $15,000 and $283,000, respectfully. Intangible assets also include the goodwill and core deposit intangible from the 2012 acquisition of a bank branch in Rockland, Maine and a bank building in Bangor, Maine. The core deposit intangible will be amortized on a straight-line basis over ten years. Annual amortization expense for 2016, 2015 and 2014 was $43,000, and the amortization expense for each year until fully amortized will be $43,000. The straight-line basis is used because the Company does not expect significant run off in the core deposits acquired. The Company annually evaluates goodwill, and periodically evaluates other intangible assets, for impairment. At December 31, 2016, the Company determined goodwill and other intangible assets were not impaired. Income Taxes Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between financial statement carrying amounts of assets and liabilities and their respective tax bases, and for tax credits that are available to offset future taxable income. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period the change is enacted. Loan Servicing Servicing rights are recognized when they are acquired through sale of loans. Capitalized servicing rights are reported in other assets and 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. Servicing rights are evaluated for impairment based upon the fair value of the rights as compared to amortized cost. Impairment is determined by stratifying rights by predominant characteristics, such as interest rates and terms. Impairment is recognized through a valuation allowance for an individual stratum, to the extent that fair value is less than the capitalized amount for the stratum. Post-Retirement Benefits The cost of providing post-retirement benefits is accrued during the active service period of the employee or director. Earnings Per Share Basic earnings per share data are based on the weighted average number of common shares outstanding during each year. Diluted earnings per share gives effect to restricted stock granted and stock options and warrants outstanding, determined by the treasury stock method. Comprehensive Income (Loss) Comprehensive income (loss) includes net income and other comprehensive income (loss), which is comprised of the change in unrealized gains and losses on securities available for sale, net of tax, change in unrealized losses on securities transferred from available for sale to held to maturity, net of amortization, change in unrealized gain on cash flow hedging derivative instruments, net of tax, and unrecognized gains and losses related to post-retirement benefit costs, net of tax. Segments The First Bancorp, Inc., through the branches of its subsidiary, First National Bank, provides a broad range of financial services to individuals and companies in coastal Maine. These services include demand, time, and savings deposits; lending; ATM processing; and investment management and trust services. Operations are managed and financial performance is evaluated on a corporate-wide basis. Accordingly, all of the Company's banking operations are considered by Management to be aggregated in one reportable operating segment. Note 2. Cash and Cash Equivalents For the purposes of reporting consolidated cash flows, cash and cash equivalents include cash on hand, amounts due from banks and federal funds sold. At December 31, 2016, the Company had a contractual clearing balance of $500,000 and a reserve balance requirement of $2,134,000 at the Federal Reserve Bank, which are satisfied by both cash on hand at branches and balances held at the Federal Reserve Bank of Boston. The Company maintains a portion of its cash in bank deposit accounts which, at times, may The First Bancorp - 2016 Form 10-K - Page 62 exceed federally insured limits. The Company has not experienced any losses in such accounts. The Company believes it is not exposed to any significant risk with respect to these accounts. Note 3. Investment Securities The following tables summarize the amortized cost and estimated fair value of investment securities at December 31, 2016 and 2015: As of December 31, 2016 Securities available for sale Mortgage-backed securities State and political subdivisions Other equity securities Securities to be held to maturity U.S. Government-sponsored agencies Mortgage-backed securities State and political subdivisions Corporate securities Restricted equity securities Federal Home Loan Bank Stock Federal Reserve Bank Stock As of December 31, 2015 Securities available for sale Mortgage-backed securities State and political subdivisions Other equity securities Securities to be held to maturity U.S. Government-sponsored agencies Mortgage-backed securities State and political subdivisions Corporate securities Restricted equity securities Federal Home Loan Bank Stock Federal Reserve Bank Stock Amortized Unrealized Unrealized Fair Value Cost Gains Losses (Estimated) $ 282,397,000 $ 1,334,000 $ 16,183,000 3,274,000 $ 301,854,000 $ 11,943,000 31,201,000 179,384,000 4,300,000 $ 226,828,000 $ 10,893,000 1,037,000 $ 11,930,000 $ $ $ $ $ 475,000 63,000 1,872,000 35,000 967,000 1,971,000 — $ $ 2,973,000 $ (3,127,000) $ 280,604,000 16,482,000 3,330,000 (3,310,000) $ 300,416,000 (176,000) (7,000) (233,000) $ 11,745,000 (147,000) 32,021,000 (3,884,000) — 4,300,000 (4,264,000) $ 225,537,000 177,471,000 — $ — — $ — $ 10,893,000 — 1,037,000 — $ 11,930,000 Amortized Unrealized Unrealized Fair Value Cost Gains Losses (Estimated) $ 194,563,000 $ 1,509,000 $ 1,201,000 48,000 2,758,000 40,000 1,305,000 4,200,000 — $ $ 5,545,000 $ (962,000) $ 195,110,000 (62,000) 24,506,000 (6,000) 3,423,000 (1,030,000) $ 223,039,000 (2,284,000) $ 68,756,000 43,362,000 126,705,000 (136,000) (25,000) — 4,300,000 (2,445,000) $ 243,123,000 — $ — — $ — $ 13,220,000 — 1,037,000 — $ 14,257,000 23,367,000 3,381,000 $ 221,311,000 $ 71,000,000 42,193,000 122,530,000 4,300,000 $ 240,023,000 $ 13,220,000 1,037,000 $ 14,257,000 $ $ $ $ $ The First Bancorp - 2016 Form 10-K - Page 63 The following table summarizes the contractual maturities of investment securities at December 31, 2016: Due in 1 year or less Due in 1 to 5 years Due in 5 to 10 years Due after 10 years Equity securities Securities available for sale Securities to be held to maturity Amortized Cost Fair Value (Estimated) Amortized Cost Fair Value (Estimated) $ 253,000 $ 253,000 $ 906,000 $ 913,000 2,251,000 21,043,000 2,298,000 21,505,000 13,451,000 41,588,000 13,714,000 42,448,000 275,033,000 273,030,000 170,883,000 168,462,000 3,274,000 3,330,000 — — $ 301,854,000 $ 300,416,000 $ 226,828,000 $ 225,537,000 The following table summarizes the contractual maturities of investment securities at December 31, 2015: Due in 1 year or less Due in 1 to 5 years Due in 5 to 10 years Due after 10 years Equity securities Securities available for sale Securities to be held to maturity Amortized Cost Fair Value (Estimated) Amortized Cost Fair Value (Estimated) $ 527,000 $ 530,000 $ 1,814,000 $ 1,850,000 7,562,000 19,647,000 7,727,000 20,055,000 6,306,000 58,397,000 6,514,000 60,196,000 190,194,000 191,304,000 173,506,000 174,563,000 3,381,000 3,423,000 — — $ 221,311,000 $ 223,039,000 $ 240,023,000 $ 243,123,000 At December 31, 2016, securities with a fair value of $222,328,000 were pledged to secure borrowings from the Federal Home Loan Bank of Boston, 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 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 2016, 2015 and 2014: Proceeds from sales of securities Gross realized gains Gross realized losses Net gain Related income taxes 2016 2015 2014 $ 10,309,000 $ 35,468,000 $ 15,557,000 673,000 1,399,000 1,155,000 — — — $ $ 673,000 236,000 $ $ 1,399,000 490,000 $ $ 1,155,000 404,000 Management reviews securities with unrealized losses for other than temporary impairment. As of December 31, 2016, there were 299 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. 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. The First Bancorp - 2016 Form 10-K - Page 64 Information regarding securities temporarily impaired as of December 31, 2016 is summarized below: As of December 31, 2016 U.S. Government-sponsored agencies Less than 12 months 12 months or more Total Fair Value Unrealized Losses Fair Value Unrealized Losses Fair Value Unrealized Losses $ 6,642,000 $ (233,000) $ — $ — $ 6,642,000 $ (233,000) Mortgage-backed securities State and political subdivisions Other equity securities 197,528,000 72,348,000 — (3,090,000) (4,060,000) — 2,905,000 — 128,000 $276,518,000 $ (7,383,000) $ 3,033,000 (184,000) — (7,000) 200,433,000 (3,274,000) 72,348,000 (4,060,000) 128,000 $ (191,000) $279,551,000 (7,000) $ (7,574,000) 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: As of December 31, 2015 U.S. Government-sponsored agencies Mortgage-backed securities State and political subdivisions Other equity securities Less than 12 months 12 months or more Total Fair Value Unrealized Losses Fair Value Unrealized Losses Fair Value Unrealized Losses $ 45,311,000 120,915,000 2,528,000 64,000 $168,818,000 $ (1,469,000) $ 17,185,000 910,000 $ (815,000) $ 62,496,000 121,825,000 2,901,000 5,429,000 52,000 $ (2,525,000) $ 21,048,000 116,000 $ (950,000) $189,866,000 (1,027,000) (24,000) (5,000) (71,000) (63,000) (1,000) $ (2,284,000) (1,098,000) (87,000) (6,000) $ (3,475,000) 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 $129,000 at December 31, 2016. These securities were transferred as a part of the Company's overall investment and balance sheet strategies. The Bank is a member of the Federal Home Loan Bank ("FHLB") of Boston, a cooperatively owned wholesale bank for housing and finance in the six New England States. As a requirement of membership in the FHLB, the Bank must own a minimum required amount of FHLB stock, calculated periodically based primarily on its level of borrowings from the FHLB. The Bank uses the FHLB for much of its wholesale funding needs. As of December 31, 2016 and 2015, the Bank's investment in FHLB stock totaled $10,893,000 and $13,220,000, respectfully. FHLB stock is a restricted 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 December 31, 2016. The Bank will continue to monitor its investment in FHLB stock. Note 4. Mortgage Servicing Rights At December 31, 2016 and 2015, the Bank serviced loans for others totaling $250,083,000 and $223,610,000, respectively. Net gains from the sale of loans totaled $1,211,000 in 2016, $714,000 in 2015, and $496,000 in 2014. In 2016, mortgage servicing rights of $554,000 were capitalized and amortization for the year totaled $459,000. At December 31, 2016, mortgage servicing rights had a fair value of $1,696,000. In 2015, mortgage servicing rights of $487,000 were capitalized and amortization for the year totaled $449,000. At December 31, 2015, mortgage servicing rights had a fair value of $1,915,000. The Financial Accounting Standards Board ("FASB") Accounting Standards Codification (the "Codification" or "ASC") Topic 860, "Transfers and Servicing", requires all separately recognized servicing assets and servicing liabilities to be initially measured at The First Bancorp - 2016 Form 10-K - Page 65 fair value, if practicable. Servicing assets and servicing liabilities are reported using the amortization method or the fair value measurement method. In evaluating the carrying values of mortgage servicing rights, the Company obtains third party valuations based on loan level data including note rate, type and term of the underlying loans. The model utilizes several assumptions, the most significant of which is loan prepayments, calculated using a three-month moving average of weekly prepayment data published by the Public Securities Association (PSA) and modeled against the serviced loan portfolio, and the discount rate to discount future cash flows. As of December 31, 2016, the prepayment assumption using the PSA model was 250, which translates into an anticipated annual prepayment rate of 15.00%. The discount rate is the quarterly average ten-year U.S. Treasury interest rate 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. Mortgage servicing rights are included in other assets and detailed in the following table: As of December 31, Mortgage servicing rights Accumulated amortization Impairment reserve Note 5. Loans 2016 2015 $ $ 5,901,000 (4,680,000) (108,000) 1,113,000 $ 5,747,000 (4,619,000) (35,000) $ 1,093,000 The following table shows the composition of the Company's loan portfolio as of December 31, 2016 and 2015: Commercial Real estate Construction Other Municipal Residential Term Construction Home equity line of credit Consumer Total loans December 31, 2016 December 31, 2015 $ 302,506,000 25,406,000 150,769,000 27,056,000 411,469,000 18,303,000 110,907,000 25,110,000 $ 1,071,526,000 28.2% $ 269,462,000 2.4% 24,881,000 14.1% 2.5% 128,341,000 19,751,000 38.4% 1.7% 10.4% 403,030,000 8,451,000 110,202,000 2.3% 24,520,000 100.0% $ 988,638,000 27.3% 2.5% 13.0% 2.0% 40.7% 0.9% 11.1% 2.5% 100.0% Loan balances include net deferred loan costs of $4,921,000 in 2016 and $3,686,000 in 2015. Pursuant to collateral agreements, qualifying first mortgage loans, which were valued at $257,122,000 and $279,463,000 at December 31, 2016 and 2015, respectively, were used to collateralize borrowings from the Federal Home Loan Bank of Boston. In addition, commercial, construction and home equity loans totaling $261,463,000 at December 31, 2016 and $243,578,000 at December 2015, were used to collateralize a standby line of credit at the Federal Reserve Bank of Boston that is currently unused. At December 31, 2016 and 2015, non-accrual loans were $7,774,000 and $7,372,000, respectively. For the years ended December 31, 2016, 2015 and 2014, interest income which would have been recognized on these loans, if interest had been accrued, was $288,000, $369,000, and $551,000, respectively. Loans more than 90 days past due accruing interest totaled $777,000 at December 31, 2016 and $136,000 at December 31, 2015. The Company continues to accrue interest on these loans because it believes collection of principal and interest is reasonably assured. The First Bancorp - 2016 Form 10-K - Page 66 Loans to directors, officers and employees totaled $34,889,000 at December 31, 2016 and $31,285,000 at December 31, 2015. A summary of loans to directors and executive officers is as follows: For the years ended December 31, Balance at beginning of year New loans Repayments Balance at end of year 2016 2015 $ 20,401,000 $ 14,856,000 6,278,000 (3,386,000) $ 23,293,000 7,382,000 (1,837,000) $ 20,401,000 Information on the past-due status of loans as of December 31, 2016, is presented in the following table: Commercial Real estate Construction Other Municipal Residential Term Construction Home equity line of credit Consumer Total Commercial Real estate Construction Other Municipal Residential Term Construction Home equity line of credit Consumer Total 30-59 Days Past Due 60-89 Days Past Due 90+ Days Past Due All Past Due Current Total 90+ Days & Accruing $ 1,039,000 $ 22,000 $ 2,415,000 $ 3,476,000 $ 299,030,000 $ 302,506,000 $ 753,000 — 202,000 — — 33,000 — — 796,000 — — 1,031,000 25,406,000 149,738,000 25,406,000 150,769,000 — 20,000 — 27,056,000 27,056,000 631,000 3,970,000 1,802,000 6,403,000 405,066,000 411,469,000 — — — — 18,303,000 18,303,000 704,000 135,000 157,000 45,000 703,000 1,564,000 109,343,000 110,907,000 4,000 184,000 24,926,000 25,110,000 4,000 $ 2,711,000 $ 4,227,000 $ 5,720,000 $12,658,000 $1,058,868,000 $1,071,526,000 $ 777,000 Information on the past-due status of loans 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 $ 603,000 $ — $ 281,000 $ 884,000 $ 268,578,000 $ 269,462,000 $ — — — 238,000 25,000 — 273,000 328,000 24,608,000 24,881,000 128,013,000 128,341,000 25,000 — 19,751,000 19,751,000 — 2,098,000 2,639,000 5,187,000 397,843,000 403,030,000 100,000 — — 368,000 8,083,000 8,451,000 255,000 26,000 592,000 1,108,000 109,094,000 110,202,000 11,000 139,000 24,381,000 24,520,000 11,000 $ 2,122,000 $ 2,379,000 $ 3,786,000 $ 8,287,000 $ 980,351,000 $ 988,638,000 $ 136,000 35,000 303,000 — 450,000 368,000 261,000 102,000 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 The First Bancorp - 2016 Form 10-K - Page 67 — — — — — — — — 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. Information on nonaccrual loans as of December 31, 2016 and 2015 is presented in the following table: As of December 31, Commercial Real estate Construction Other Municipal Residential Term Construction Home equity line of credit Consumer Total 2016 2015 $ 1,907,000 $ — 964,000 — 915,000 238,000 66,000 — 4,060,000 5,260,000 — — 843,000 893,000 — — $ 7,774,000 $ 7,372,000 Information regarding impaired loans is as follows: For the years ended December 31, Average investment in impaired loans 2016 2015 2014 $ 28,217,000 $ 32,698,000 $ 38,404,000 Interest income recognized on impaired loans, all on cash basis 1,104,000 1,220,000 1,465,000 As of December 31, Balance of impaired loans Less portion for which no allowance for loan losses is allocated Portion of impaired loan balance for which an allowance for loan losses is allocated Portion of allowance for loan losses allocated to the impaired loan balance 2016 2015 $ 27,583,000 (19,716,000) 7,867,000 $ $ 974,000 $ 29,531,000 (20,889,000) $ $ 8,642,000 754,000 Impaired loans include restructured loans and loans placed on non-accrual. These loans are measured at the present value of expected future cash flows discounted at the loan's effective interest rate or at the fair value of the collateral if the loan is collateral dependent. If the measure of an impaired loan is lower than the recorded investment in the loan and estimated selling costs, a specific reserve is established for the difference, or, in certain situations, if the measure of an impaired loan is lower than the recorded investment in the loan and estimated selling costs, the difference is written off. The First Bancorp - 2016 Form 10-K - Page 68 A breakdown of impaired loans by category as of December 31, 2016, is presented in the following table: With No Related Allowance Commercial Real estate Construction Other Municipal Residential Term Construction Home equity line of credit Consumer With an Allowance Recorded Commercial Real estate Construction Other Municipal Residential Term Construction Home equity line of credit Consumer Total Commercial Real estate Construction Other Municipal Residential Term Construction Home equity line of credit Consumer Recorded Investment Unpaid Principal Balance Related Allowance Average Recorded Investment Recognized Interest Income $ 5,201,000 $ 5,614,000 $ — $ 6,252,000 $ 220,000 — — 1,671,000 1,852,000 — — — — — 32,000 1,074,000 — — 86,000 — 11,483,000 12,654,000 — 11,025,000 442,000 — — 1,361,000 1,733,000 — — — — — — 1,213,000 9,000 — 33,000 — $ 19,716,000 $ 21,853,000 $ — $ 19,605,000 $ 781,000 $ 4,820,000 $ 4,925,000 $ 505,000 $ 4,153,000 $ 186,000 763,000 72,000 — 763,000 72,000 — 100,000 39,000 — 816,000 317,000 — 36,000 — — 2,186,000 2,328,000 304,000 3,209,000 101,000 — 26,000 — — 28,000 — — 26,000 — — 69,000 48,000 — — — $ 7,867,000 $ 8,116,000 $ 974,000 $ 8,612,000 $ 323,000 $ 10,021,000 $ 10,539,000 $ 505,000 $ 10,405,000 $ 406,000 763,000 763,000 1,743,000 1,924,000 — — 100,000 39,000 — 848,000 1,391,000 — 13,669,000 14,982,000 304,000 14,234,000 — — — — 1,387,000 1,761,000 26,000 1,282,000 — — — 57,000 36,000 86,000 — 543,000 — 33,000 — $ 27,583,000 $ 29,969,000 $ 974,000 $ 28,217,000 $ 1,104,000 Substantially all interest income recognized on impaired loans for all classes of financing receivables was recognized on a cash basis as received. The First Bancorp - 2016 Form 10-K - Page 69 A breakdown of impaired loans by category as of December 31, 2015, is presented in the following table: With No Related Allowance Commercial Real estate Construction Other Municipal Residential Term Construction Home equity line of credit Consumer With an Allowance Recorded Commercial Real estate Construction Other Municipal Residential Term Construction Home equity line of credit Consumer Total Commercial Real estate Construction Other Municipal Residential Term Construction Home equity line of credit Consumer Recorded Investment Unpaid Principal Balance Related Allowance Average Recorded Investment Recognized Interest Income $ 7,173,000 $ 7,496,000 $ — $ 8,990,000 $ 301,000 30,000 30,000 1,163,000 1,210,000 — — — — — 3,000 1,893,000 — 1,000 76,000 — 11,122,000 12,157,000 — 10,480,000 415,000 — — 1,401,000 2,054,000 — — — — — — 1,400,000 42,000 — 43,000 3,000 $20,889,000 $22,947,000 $ — $22,808,000 $ 839,000 $ 3,544,000 $ 3,627,000 $ 89,000 $ 3,066,000 $ 149,000 996,000 71,000 — 996,000 77,000 — 302,000 1,153,000 8,000 — 256,000 — 44,000 5,000 — 3,966,000 4,193,000 326,000 5,228,000 180,000 — 65,000 — — 66,000 — — — 29,000 187,000 — — — 3,000 — $ 8,642,000 $ 8,959,000 $ 754,000 $ 9,890,000 $ 381,000 $10,717,000 $11,123,000 $ 89,000 $12,056,000 $ 450,000 1,026,000 1,234,000 — 1,026,000 1,287,000 — 302,000 8,000 — 1,156,000 2,149,000 — 45,000 81,000 — 15,088,000 16,350,000 326,000 15,708,000 595,000 — — — — 1,466,000 2,120,000 29,000 1,587,000 — — — 42,000 — 46,000 3,000 $29,531,000 $31,906,000 $ 754,000 $32,698,000 $ 1,220,000 The First Bancorp - 2016 Form 10-K - Page 70 A breakdown of impaired loans by category as of December 31, 2014, is presented in the following table: With No Related Allowance Commercial Real estate Construction Other Municipal Residential Term Construction Home equity line of credit Consumer With an Allowance Recorded Commercial Real estate Construction Other Municipal Residential Term Construction Home equity line of credit Consumer Total Commercial Real estate Construction Other Municipal Residential Term Construction Home equity line of credit Consumer Recorded Investment Unpaid Principal Balance Related Allowance Average Recorded Investment Recognized Interest Income $11,687,000 $12,423,000 $ — $11,080,000 $ 488,000 — — 2,616,000 3,407,000 — — — — — 30,000 — 3,853,000 156,000 — — 10,820,000 11,824,000 — 10,505,000 402,000 — — 1,164,000 1,395,000 26,000 28,000 — — — — 1,447,000 11,000 — 29,000 3,000 $26,313,000 $29,077,000 $ — $26,926,000 $ 1,078,000 $ 1,617,000 $ 1,789,000 $ 346,000 $ 3,040,000 $ 1,380,000 1,380,000 326,000 338,000 — — 413,000 129,000 — 1,279,000 1,103,000 — 62,000 56,000 13,000 — 5,303,000 5,513,000 519,000 5,738,000 239,000 — — — — 923,000 929,000 396,000 318,000 — — — — — 17,000 — $ 9,549,000 $ 9,949,000 $ 1,803,000 $11,478,000 $ 387,000 $13,304,000 $14,212,000 $ 346,000 $14,120,000 $ 550,000 1,380,000 2,942,000 — 1,380,000 3,745,000 — 413,000 129,000 — 1,309,000 4,956,000 — 56,000 169,000 — 16,123,000 17,337,000 519,000 16,243,000 641,000 — — — — 2,087,000 2,324,000 396,000 1,765,000 26,000 28,000 — 11,000 — 46,000 3,000 $35,862,000 $39,026,000 $ 1,803,000 $38,404,000 $ 1,465,000 The First Bancorp - 2016 Form 10-K - Page 71 Troubled Debt Restructured A TDR constitutes a restructuring of debt if the Company, for economic or legal reasons related to the borrower's financial difficulties, grants a concession to the borrower that it would not otherwise consider. To determine whether or not a loan should be classified as a TDR, Management evaluates a loan based upon the following criteria: • The borrower demonstrates financial difficulty; common indicators include past due status with bank obligations, substandard credit bureau reports, or an inability to refinance with another lender, and • The Company has granted a concession; common concession types include maturity date extension, interest rate adjustments to below market pricing, and deferment of payments. The Company applies the same interest accrual policy to TDRs as it does for all classes of loans. As of December 31, 2016, the Company had 71 loans with a value of $21,526,000 that have been restructured. This compares to 84 loans with a value of $23,923,000 classified as TDRs as of December 31, 2015. The impairment carried as a specific reserve in the allowance for loan losses is calculated by present valuing the cashflow modification on the loan, 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 December 31, 2016: Number of Loans Balance Specific Reserves Commercial Real estate Construction Other Municipal Residential Term Construction Home equity line of credit Consumer 10 $ 8,937,000 $ 763,000 779,000 — 375,000 100,000 — — 10,503,000 261,000 — 544,000 — — — — $ 21,526,000 $ 736,000 1 5 — 52 — 3 — 71 The following table shows TDRs by class and the specific reserve as of December 31, 2015: Commercial Real estate Construction Other Municipal Residential Term Construction Home equity line of credit Consumer Number of Loans Balance Specific Reserves 15 1 11 — 53 — 4 — 84 $ 10,350,000 $ 788,000 1,168,000 — 85,000 94,000 1,000 — 10,875,000 275,000 — 742,000 — — — — $ 23,923,000 $ 455,000 The First Bancorp - 2016 Form 10-K - Page 72 As of December 31, 2016, 12 of the loans classified as TDRs with a total balance of $2,303,000 were more than 30 days past due. Of these loans, none had been placed on TDR status in the previous 12 months. The following table shows past-due TDRs by class and the associated specific reserves included in the allowance for loan losses as of December 31, 2016: Commercial Real estate Construction Other Municipal Residential Term Construction Home equity line of credit Consumer Number of Loans Balance Specific Reserves 1 — — — 10 — 1 — 12 $ 822,000 $ 264,000 — — — — — — 1,314,000 26,000 — 167,000 — — — — $ 2,303,000 $ 290,000 As of December 31, 2015, eight of the loans classified as TDRs with a total balance of $1,053,000 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 past-due TDRs by class and the associated specific reserves included in the allowance for loan losses as of December 31, 2015: Commercial Real estate Construction Other Municipal Residential Term Construction Home equity line of credit Consumer Number of Loans Balance Specific Reserves — $ — $ — — — — — — — 1,053,000 46,000 — — — — — — $ 1,053,000 $ 46,000 — — — 8 — — — 8 During the year ended December 31, 2016, no loans were placed on TDR status. During the year ended December 31, 2015, two loans were placed on TDR status with a post-modification balance of $218,000. These were considered to be TDRs because concessions had been granted to borrowers experiencing financial difficulties. Concessions include reductions in interest rates, principal and/or interest forbearance, payment extensions, or combinations thereof. The First Bancorp - 2016 Form 10-K - Page 73  The following table shows loans placed on TDR status in 2015 by type of loan and the associated specific reserve included in the allowance for loan losses as of December 31, 2015: Commercial Real estate Construction Other Municipal Residential Term Construction Home equity line of credit Consumer Pre- Modification Outstanding Recorded Investment Post- Modification Outstanding Recorded Investment Specific Reserves Number of Loans — $ — $ — $ — — — 2 — — — 2 — — — — — — 221,000 218,000 — — — — — 221,000 $ — 218,000 $ $ — — — — — — — — — As of December 31, 2016, Management is aware of six loans classified as TDRs that are involved in bankruptcy with an outstanding balance of $1,693,000. As of December 31, 2016, there were nine loans with an outstanding balance of $1,715,000 that were classified as TDRs and were on non-accrual status, one of which, with an outstanding balance of $46,000, was in the process of foreclosure. Residential Mortgage Loans in Process of Foreclosure As of December 31, 2016, there were 15 mortgage loans collateralized by residential real estate in the process of foreclosure with a total balance of $2,058,000; this compares to 16 mortgage loans collateralized by residential real estate in the process of foreclosure with a total balance of $1,513,000 as of December 31, 2015. Note 6. 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 First Bancorp - 2016 Form 10-K - Page 74 The following table summarizes the composition of the allowance for loan losses, by class of financing receivable and allowance, as of December 31, 2016 and 2015: As of December 31, Allowance for Loans Evaluated Individually for Impairment Commercial Real estate Construction Other Municipal Residential Term Construction Home equity line of credit Consumer Total Allowance for Loans Evaluated Collectively for Impairment Commercial Real estate Construction Other Municipal Residential Term Construction Home equity line of credit Consumer Unallocated Total Total Allowance for Loan Losses Commercial Real estate Construction Other Municipal Residential Term Construction Home equity line of credit Consumer Unallocated Total The First Bancorp - 2016 Form 10-K - Page 75 2016 2015 $ 505,000 $ 100,000 39,000 — 304,000 — 26,000 — 89,000 302,000 8,000 — 326,000 — 29,000 — $ 974,000 $ 754,000 $ 3,483,000 $ 3,031,000 296,000 1,741,000 18,000 984,000 44,000 781,000 559,000 278,000 1,444,000 17,000 1,065,000 24,000 864,000 566,000 1,258,000 1,873,000 $ 9,164,000 $ 9,162,000 $ 3,988,000 $ 3,120,000 396,000 1,780,000 18,000 580,000 1,452,000 17,000 1,288,000 1,391,000 44,000 807,000 559,000 24,000 893,000 566,000 1,258,000 1,873,000 $ 10,138,000 $ 9,916,000 The allowance consists of four elements: (1) specific reserves for loans evaluated individually for impairment; (2) general reserves for each portfolio segment based on historical loan loss experience; (3) qualitative reserves judgmentally adjusted for local and national economic conditions, concentrations, portfolio composition, volume and severity of delinquencies and nonaccrual loans, trends of criticized and classified loans, changes in credit policies, and underwriting standards, credit administration practices, and other factors as applicable for each portfolio segment; and (4) unallocated reserves. All outstanding loans are considered in evaluating the appropriateness of the allowance. A breakdown of the allowance for loan losses as of December 31, 2016 and 2015, by class of financing receivable and allowance element, is presented in the following tables: As of December 31, 2016 Commercial Real estate Construction Other Municipal Residential Term Construction Home equity line of credit Consumer Unallocated As of December 31, 2015 Commercial Real estate Construction Other Municipal Residential Term Construction Home equity line of credit Consumer Unallocated 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 $ 505,000 $ 1,471,000 $ 2,012,000 $ — $ 3,988,000 100,000 39,000 — 304,000 — 26,000 — — 125,000 735,000 — 563,000 25,000 444,000 328,000 — 171,000 1,006,000 18,000 421,000 19,000 337,000 231,000 — — — — — — — 396,000 1,780,000 18,000 1,288,000 44,000 807,000 559,000 — 1,258,000 1,258,000 $ 974,000 $ 3,691,000 $ 4,215,000 $ 1,258,000 $ 10,138,000 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 $ 89,000 $ 893,000 $ 2,138,000 $ — $ 3,120,000 302,000 8,000 — 326,000 — 29,000 — 82,000 425,000 — 613,000 14,000 500,000 331,000 196,000 1,019,000 17,000 452,000 10,000 364,000 235,000 — — — — — — — 580,000 1,452,000 17,000 1,391,000 24,000 893,000 566,000 — 754,000 $ — 2,858,000 $ — 4,431,000 $ 1,873,000 1,873,000 $ 1,873,000 9,916,000 $ The First Bancorp - 2016 Form 10-K - Page 76  Qualitative adjustment factors are taken into consideration when determining reserve estimates. These adjustment factors are based upon our evaluation of various current conditions, including those listed below. • General economic conditions. • Credit quality trends with emphasis on loan delinquencies, nonaccrual levels and classified loans. • Recent loss experience in particular segments of the portfolio. • Loan volumes and concentrations, including changes in mix. • Other factors, including changes in quality of the loan origination; loan policy changes; changes in credit risk management processes; Bank regulatory and external loan review examination results. The qualitative portion of the allowance for loan losses was 0.39% of related loans as of December 31, 2016, compared to 0.45% of related loans as of December 31, 2015. The qualitative portion decreased $216,000 between December 31, 2015 and December 31, 2016. The unallocated component totaled $1,258,000 at December 31, 2016, or 12.4% of the total reserve. This compares to $1,873,000 or 18.9% as of December 31, 2015. The decrease in the unallocated portion is a result of charge offs on collateral- dependent loans and the improvement in credit quality. Management feels the decrease in the unallocated portion is directionally consistent with local and national economic conditions. The allowance for loan losses as a percent of total loans stood at 0.95% as of December 31, 2016, compared to 1.00% of total loans as of December 31, 2015. Commercial loans are comprised of three major classes, commercial real estate loans, commercial construction loans and other commercial loans. Commercial real estate loans consist of mortgage loans to finance investments in real property such as multi-family residential, commercial/retail, office, industrial, hotels, educational and other specific or mixed use properties. Commercial real estate loans are typically written with amortizing payment structures. Collateral values are determined based on appraisals and evaluations in accordance with established policy and regulatory guidelines. Commercial real estate loans typically have a loan-to-value ratio of up to 80% based upon current valuation information at the time the loan is made. Commercial real estate loans are primarily paid by the cash flow generated from the real property, such as operating leases, rents, or other operating cash flows from the borrower. Commercial construction loans consist of loans to finance construction in a mix of owner- and non-owner occupied commercial real estate properties. Commercial construction loans typically have maturities of less than two years. Payment structures during the construction period are typically on an interest only basis, although principal payments may be established depending on the type of construction project being financed. During the construction phase, commercial construction loans are primarily paid by cash flow generated from the construction project or other operating cash flows from the borrower or guarantors, if applicable. At the end of the construction period, loan repayment typically comes from a third party source in the event that the Company will not be providing permanent term financing. Collateral valuation and loan-to-value guidelines follow those for commercial real estate loans. Other commercial loans consist of revolving and term loan obligations extended to business and corporate enterprises for the purpose of financing working capital and or capital investment. Collateral generally consists of pledges of business assets including, but not limited to, accounts receivable, inventory, plant and equipment, and/or real estate, if applicable. Commercial loans are primarily paid by the operating cash flow of the borrower. Commercial loans may be secured or unsecured. Municipal loans are comprised of loans to municipalities in Maine for capitalized expenditures, construction projects or tax- anticipation notes. All municipal loans are considered general obligations of the municipality and are collateralized by the taxing ability of the municipality for repayment of debt. Residential loans are comprised of two classes: term loans and construction loans. Residential term loans consist of residential real estate loans held in the Company's loan portfolio made to borrowers who demonstrate the ability to make scheduled payments with full consideration to underwriting factors. Borrower qualifications include favorable credit history combined with supportive income requirements and loan-to-value ratios within established policy and regulatory guidelines. Collateral values are determined based on appraisals and evaluations in accordance with established policy and regulatory guidelines. Residential loans typically have a loan-to-value ratio of up to 80% based on appraisal information at the time the loan is made. Collateral consists of mortgage liens on one- to four-family residential properties. Loans are offered with fixed or adjustable rates with amortization terms of up to thirty years. Residential construction loans typically consist of loans for the purpose of constructing single family residences to be owned and occupied by the borrower. Borrower qualifications include favorable credit history combined with supportive income requirements and loan-to-value ratios within established policy and regulatory guidelines. Residential construction loans normally have construction terms of one year or less and payment during the construction term is typically on an interest only basis from sources including interest reserves, borrower liquidity and/or income. Residential construction loans will typically convert to permanent financing from the Company or have another financing commitment in place from an acceptable mortgage lender. Collateral valuation and loan-to-value guidelines are consistent with those for residential term loans. The First Bancorp - 2016 Form 10-K - Page 77 Home equity lines of credit are made to qualified individuals and are secured by senior or junior mortgage liens on owner- occupied one- to four-family homes, condominiums, or vacation homes. The home equity line of credit typically has a variable interest rate and is billed as interest-only payments during the draw period. At the end of the draw period, the home equity line of credit is billed as a percentage of the principal balance plus all accrued interest. Loan maturities are normally 300 months. Borrower qualifications include favorable credit history combined with supportive income requirements and combined loan-to- value ratios usually not exceeding 80% inclusive of priority liens. Collateral valuation guidelines follow those for residential real estate loans. Consumer loan products including personal lines of credit and amortizing loans made to qualified individuals for various purposes such as auto, recreational vehicles, debt consolidation, personal expenses or overdraft protection. Borrower qualifications include favorable credit history combined with supportive income and collateral requirements within established policy guidelines. Consumer loans may be secured or unsecured. Construction loans, both commercial and residential, at 28.9% of capital are well under the regulatory guidance of 100.0% of capital at December 31, 2016. Construction loans and non-owner-occupied commercial real estate loans are at 109.4% of total capital, are below the regulatory limit of 300.0% of capital at December 31, 2016. The process of establishing the allowance with respect to the commercial loan portfolio begins when a loan officer initially assigns each loan a risk rating, using established credit criteria. Approximately 50% of the outstanding loans and commitments are subject to review and validation annually by an independent consultant, as well as periodically by the Company's internal credit review function. The methodology employs Management's judgment as to the level of losses on existing loans based on internal review of the loan portfolio, including an analysis of a borrower's current financial position, and the consideration of current and anticipated economic conditions and their potential effects on specific borrowers and or lines of business. In determining the Company's ability to collect certain loans, Management also considers the fair value of underlying collateral. The First Bancorp - 2016 Form 10-K - Page 78 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 Bank's credit position at some future date. 7 Substandard Loans in this category are inadequately protected by the current paying capacity of the borrower or of the collateral, if any. These loans have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. Substandard loans are characterized by the distinct possibility that the Bank may sustain some loss if 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 construction, commercial real estate, commercial other and municipal loans as of December 31, 2016: 1 Strong 2 Above average 3 Satisfactory 4 Average 5 Watch 6 OAEM 7 Substandard 8 Doubtful Total Commercial Real Estate Commercial Construction Commercial Other Municipal Loans All Risk- Rated Loans $ 2,000 $ — $ 850,000 $ — $ 852,000 13,981,000 81,286,000 49,000 1,345,000 139,421,000 16,506,000 43,181,000 4,569,000 20,066,000 — 7,349,000 — 157,000 — 8,934,000 48,212,000 65,146,000 16,864,000 1,587,000 9,176,000 — 25,527,000 1,529,000 — — — — — 48,491,000 132,372,000 221,073,000 67,394,000 6,156,000 29,399,000 — $ 302,506,000 $ 25,406,000 $ 150,769,000 $ 27,056,000 $ 505,737,000 The First Bancorp - 2016 Form 10-K - Page 79 The following table summarizes the risk ratings for the Company's commercial construction, commercial real estate, commercial other and municipal loans as of December 31, 2015: 1 Strong 2 Above average 3 Satisfactory 4 Average 5 Watch 6 OAEM 7 Substandard 8 Doubtful Total Commercial Real Estate Commercial Construction Commercial Other Municipal Loans All Risk- Rated Loans $ 6,000 $ — $ 1,256,000 $ — $ 1,262,000 56,000 7,506,000 18,321,000 29,176,000 52,821,000 2,057,000 122,071,000 18,070,000 36,075,000 9,742,000 19,571,000 — 4,490,000 — 208,000 — 28,787,000 67,301,000 18,135,000 2,410,000 2,946,000 — 1,430,000 — — — — — 55,059,000 85,095,000 207,442,000 58,700,000 12,152,000 22,725,000 — $ 269,462,000 $ 24,881,000 $ 128,341,000 $ 19,751,000 $ 442,435,000 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. The First Bancorp - 2016 Form 10-K - Page 80 There were no changes to the Company's accounting policies or methodology used to estimate the allowance for loan losses during the year ended December 31, 2016. Allowance for loan losses activity for the years ended December 31, 2016, 2015 and 2014 was as follows: Commercial Residential Real Estate Construction Other Municipal Term Construction Home Equity Line of Credit Consumer Unallocated Total For the year ended December 31, 2016 Allowance for loan losses: 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 Chargeoffs Recoveries 294,000 — 75,000 8,000 Provision (credit) 1,162,000 (117,000) 376,000 129,000 575,000 — — 1,000 379,000 93,000 183,000 — — 20,000 147,000 5,000 56,000 450,000 108,000 335,000 — — 1,721,000 343,000 (615,000) 1,600,000 Ending balance $ 3,988,000 $ 396,000 $ 1,780,000 $ 18,000 $ 1,288,000 $ 44,000 $ 807,000 $ 559,000 $ 1,258,000 $ 10,138,000 Ending balance specifically evaluated for impairment Ending balance collectively evaluated for impairment Related loan balances: $ 505,000 $ 100,000 $ 39,000 $ — $ 304,000 $ — $ 26,000 $ — $ — $ 974,000 $ 3,483,000 $ 296,000 $ 1,741,000 $ 18,000 $ 984,000 $ 44,000 $ 781,000 $ 559,000 $ 1,258,000 $ 9,164,000 Ending balance $302,506,000 $ 25,406,000 $150,769,000 $27,056,000 $411,469,000 $ 18,303,000 $110,907,000 $ 25,110,000 $ — $ 1,071,526,000 Ending balance specifically evaluated for impairment Ending balance collectively evaluated for impairment For the year ended December 31, 2015 Allowance for loan losses: $ 10,021,000 $ 763,000 $ 1,743,000 $ — $ 13,669,000 $ — $ 1,387,000 $ — $ — $ 27,583,000 $292,485,000 $ 24,643,000 $149,026,000 $27,056,000 $397,800,000 $ 18,303,000 $109,520,000 $ 25,110,000 $ — $ 1,043,943,000 Commercial Residential Real Estate Construction Other Municipal Term Construction Home Equity Line of Credit Consumer Unallocated Total 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 Chargeoffs Recoveries 280,000 2,000 9,000 1,000 Provision (credit) (134,000) (235,000) 732,000 88,000 591,000 — — 2,000 420,000 152,000 474,000 — — 4,000 582,000 31,000 384,000 350,000 121,000 253,000 — — 211,000 2,373,000 395,000 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 Ending balance specifically evaluated for impairment Ending balance collectively evaluated for impairment Related loan balances: $ 89,000 $ 302,000 $ 8,000 $ — $ 326,000 $ — $ 29,000 $ — $ — $ 754,000 $ 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 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 Ending balance collectively evaluated for impairment $ 10,717,000 $ 1,026,000 $ 1,234,000 $ — $ 15,088,000 $ — $ 1,466,000 $ — $ — $ 29,531,000 $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 The First Bancorp - 2016 Form 10-K - Page 81 Commercial Residential Real Estate Construction Other Municipal Term Construction Home Equity Line of Credit Consumer Unallocated Total For the year ended December 31, 2014 Allowance for loan losses: Beginning balance $ 4,602,000 $ 575,000 $ 2,276,000 $ 15,000 $ 1,099,000 $ 21,000 $ 675,000 $ 573,000 $ 1,678,000 $ 11,514,000 Chargeoffs Recoveries 1,205,000 144,000 — — 989,000 758,000 Provision (credit) (9,000) 248,000 (540,000) — — — 699,000 36,000 749,000 — 25,000 (26,000) 153,000 16,000 522,000 449,000 196,000 222,000 — — (16,000) 3,495,000 1,175,000 1,150,000 Ending balance $ 3,532,000 $ 823,000 $ 1,505,000 $ 15,000 $ 1,185,000 $ 20,000 $ 1,060,000 $ 542,000 $ 1,662,000 $ 10,344,000 Ending balance specifically evaluated for impairment Ending balance collectively evaluated for impairment Related loan balances: $ 346,000 $ 413,000 $ 129,000 $ — $ 519,000 $ — $ 396,000 $ — $ — $ 1,803,000 $ 3,186,000 $ 410,000 $ 1,376,000 $ 15,000 $ 666,000 $ 20,000 $ 664,000 $ 542,000 $ 1,662,000 $ 8,541,000 Ending balance $242,311,000 $ 30,932,000 $104,531,000 $20,424,000 $384,032,000 $ 12,160,000 $103,521,000 $19,653,000 $ — $ 917,564,000 Ending balance specifically evaluated for impairment Ending balance collectively evaluated for impairment $ 13,304,000 $ 1,380,000 $ 2,942,000 $ — $ 16,123,000 $ — $ 2,087,000 $ 26,000 $ — $ 35,862,000 $229,007,000 $ 29,552,000 $101,589,000 $20,424,000 $367,909,000 $ 12,160,000 $101,434,000 $19,627,000 $ — $ 881,702,000 Note 7. Premises and Equipment Premises and equipment are carried at cost and consist of the following: As of December 31, Land Land improvements Buildings Equipment Less accumulated depreciation 2016 2015 $ 4,742,000 $ 4,539,000 1,041,000 21,601,000 12,032,000 39,416,000 17,214,000 874,000 20,569,000 11,358,000 37,340,000 15,524,000 $ 22,202,000 $ 21,816,000 Based on current contractual agreements (leases), Management anticipates rental revenue over the next 4 years to be $147,000 in 2017, $55,000 in 2018, $11,000 in 2019, and $4,000 in 2020. Note 8. Other Real Estate Owned The following summarizes other real estate owned: As of December 31, Real estate acquired in settlement of loans Changes in the allowance for losses from other real estate owned were as follows: For the years ended December 31, Balance at beginning of year Losses charged to allowance Provision charged to operating expenses Balance at end of year 2016 $ 375,000 $ 2015 1,532,000 2016 2015 2014 $ $ 162,000 (89,000) 132,000 205,000 $ $ 654,000 (803,000) 311,000 162,000 $ $ 330,000 (313,000) 637,000 654,000 The First Bancorp - 2016 Form 10-K - Page 82 Note 9. Income Taxes The current and deferred components of income tax expense (benefit) were as follows: For the years ended December 31, Federal income tax Current Deferred State franchise tax 2016 2015 2014 $ 6,276,000 (139,000) 6,137,000 317,000 $ 4,895,000 $ 4,282,000 332,000 5,227,000 287,000 18,000 4,300,000 266,000 $ 6,454,000 $ 5,514,000 $ 4,566,000 The actual tax expense differs from the expected tax expense (computed by applying the applicable U.S. Federal corporate income tax rate to income before income taxes) as follows: For the years ended December 31, Expected tax expense Non-taxable income State franchise tax, net of federal tax benefit Tax credits, net of amortization Other 2016 2015 2014 $ $ 8,562,000 (2,176,000) 206,000 (105,000) (33,000) 6,454,000 $ $ 7,602,000 (2,086,000) 187,000 (185,000) (4,000) 5,514,000 $ 6,746,000 (2,292,000) 173,000 (414,000) 353,000 $ 4,566,000 The First Bancorp - 2016 Form 10-K - Page 83 Deferred tax assets and liabilities are classified in other assets and other liabilities in the consolidated balance sheets. No valuation allowance is deemed necessary for the deferred tax asset. Items that give rise to the deferred income tax assets and liabilities and the tax effect of each at December 31, 2016 and 2015 are as follows: Allowance for loan losses OREO Accrued pension and post-retirement Goodwill Unrealized loss on securities transferred from available for sale to held to maturity Unrealized loss on securities available for sale Restricted stock grants Core deposit intangible Investment in flow through entities Other assets Total deferred tax asset Net deferred loan costs Depreciation Unrealized gain on securities available for sale Mortgage servicing rights Unrealized gain on derivative instruments Investment in flow through entities Prepaid expense Total deferred tax liability Net deferred tax asset 2016 2015 $ 3,548,000 $ 3,471,000 72,000 57,000 1,730,000 1,769,000 2,000 70,000 503,000 237,000 20,000 29,000 48,000 6,259,000 (1,895,000) (1,808,000) — (390,000) (626,000) — — (4,719,000) 1,540,000 $ 70,000 60,000 — 367,000 15,000 — 93,000 5,902,000 (1,445,000) (2,000,000) (605,000) (382,000) — (425,000) (104,000) (4,961,000) $ 941,000 At December 2016 and 2015, the Company held investments in two limited partnerships with related low income housing tax credits. The investments are carried at cost and amortized on the effective yield method as they were entered into prior to 2015. The tax credits from the investments are estimated at $231,000 and $244,000 for the years ended December 31, 2016 and 2015, respectively, and are recorded as a reduction of income tax expense. Amortization of the investment in the limited partnership totaled $194,000 and $201,000 for the years ended December 31, 2016 and 2015, respectively, and is recognized as a component of income tax expense in the consolidated statements of income. The carrying value of these investments was $1,503,000 and $1,739,000 at December 31, 2016 and 2015, respectively, and is recorded in securities available for sale. The Company's total exposure to the limited partnership was $1,503,000 and $1,739,000, at December 31, 2016 and 2015, respectively, which is comprised of the Company's equity investment in the limited partnership. 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 Internal Revenue Service for the years ended December 31, 2013 through 2015. The First Bancorp - 2016 Form 10-K - Page 84 Note 10. Certificates of Deposit The following table represents the breakdown of certificates of deposit at December 31, 2016 and 2015: Certificates of deposit < $100,000 Certificates $100,000 to $250,000 Certificates $250,000 and over December 31, 2016 December 31, 2015 $ $ 195,115,000 $ 240,904,000 40,601,000 476,620,000 $ 158,529,000 175,077,000 37,376,000 370,982,000 At December 31, 2016, the scheduled maturities of certificates of deposit are as follows: Year of Maturity 2017 2018 2019 2020 2021 2022 and thereafter Less than $100,000 $100,000 and Greater All Certificates of Deposit $ 132,813,000 $ 188,724,000 $ 321,537,000 13,346,000 20,991,000 14,597,000 13,313,000 55,000 17,512,000 24,281,000 31,315,000 19,151,000 522,000 30,858,000 45,272,000 45,912,000 32,464,000 577,000 $ 195,115,000 $ 281,505,000 $ 476,620,000 Interest on certificates of deposit of $100,000 or more was $1,970,000, $2,431,000, and $2,823,000 in 2016, 2015 and 2014, respectively. Note 11. Borrowed Funds Borrowed funds consist of advances from the FHLB and securities sold under agreements to repurchase with municipal and commercial customers. Pursuant to collateral agreements, FHLB advances are collateralized by all stock in FHLB, qualifying first mortgage loans, U.S. Government and Agency securities not pledged to others, and funds on deposit with FHLB. All FHLB advances as of December 31, 2016, had fixed rates of interest until their respective maturity dates. Securities sold under agreements to repurchase include U.S. agencies securities and other securities. Repurchase agreements have maturity dates ranging from one to 365 days. The Bank also has in place $48,000,000 in credit lines with correspondent banks and a credit facility of $157,000,000 with the Federal Reserve Bank of Boston using commercial and home equity loans as collateral which are currently not in use. Borrowed funds at December 31, 2016 and 2015 have the following range of interest rates and maturity dates: As of December 31, 2016 Federal Home Loan Bank Advances 2017 2018 2020 2021 2022 and thereafter Repurchase agreements Municipal and commercial customers 0.99% - 3.69% $ 74,600,000 2.25% - 3.25% 1.60% - 1.97% 1.55% 0.00% - 0.59% 30,000,000 55,000,000 10,000,000 25,127,000 194,727,000 0.15% - 1.93% 84,174,000 $ 278,901,000 The First Bancorp - 2016 Form 10-K - Page 85 As of December 31, 2015 Federal Home Loan Bank Advances 2016 2017 2018 2020 2021 and thereafter Repurchase agreements Municipal and commercial customers Note 12. Employee Benefit Plans 0.41% - 2.44% $ 135,220,000 0.99% - 3.69% 2.25% - 3.25% 1.60% - 1.97% 0.00% 30,000,000 30,000,000 55,000,000 134,000 250,354,000 0.20% - 1.89% 87,103,000 $ 337,457,000 401(k) Plan The Bank has a defined contribution plan available to substantially all employees who have completed three months of service. Employees may contribute up to IRS-determined limits and the Bank may provide a match to 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 2016, 2015, and 2014. The expense related to the 401(k) plan was $435,000, $462,000, and $454,000 in 2016, 2015, and 2014, respectively. Deferred Compensation and Supplemental Retirement Plan 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 post-retirement plan. The costs for these benefits are recognized over the service periods of the participating officers in accordance with FASB ASC Topic 712, "Compensation – Nonretirement Postemployment Benefits". The expense of these supplemental plans was $215,000 in 2016, $312,000 in 2015, and $722,000 in 2014. As of December 31, 2016 and 2015, the accrued liability of these plans was $3,073,000 and $3,088,000, respectively, and is recorded in other liabilities. 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 Bank also provides health insurance for retired directors. The other plan provides life insurance coverage to certain retired employees. None of these plans are pre-funded. The Company utilizes FASB ASC Topic 712, "Compensation – Nonretirement Postemployment Benefits", to recognize the overfunded or underfunded status of defined benefit post-retirement plans (other than a multiemployer plan) as an asset or liability in its balance sheet and to recognize changes in the funded status in the year in which the changes occur through comprehensive income (loss) of a business entity. The First Bancorp - 2016 Form 10-K - Page 86 The following table sets forth the accumulated postretirement benefit obligation and funded status: At December 31, Change in benefit obligations Benefit obligation at beginning of year: Interest cost Benefits paid Actuarial (gain) loss Benefit obligation at end of year: Funded status Benefit obligation at end of year Unamortized loss Accrued benefit cost Weighted average discount rate as of December 31 The following table sets forth the net periodic benefit cost: For the years ended December 31, Components of net periodic benefit cost Interest cost Amortization of (gain) loss Other settlement expense Net periodic benefit cost Weighted average discount rate for net periodic cost 2016 2015 2014 $ 1,967,000 $ 1,928,000 $ 1,479,000 81,000 (109,000) (69,000) 80,000 (102,000) 61,000 71,000 (100,000) 478,000 $ 1,870,000 $ 1,967,000 $ 1,928,000 $ (1,870,000) 156,000 $ (1,714,000) 4.25% $ (1,967,000) 240,000 $ (1,727,000) 4.25% $ (1,928,000) 192,000 $ (1,736,000) 4.25% 2016 2015 2014 $ $ 81,000 $ 80,000 $ 71,000 4,000 11,000 96,000 $ — 12,000 92,000 $ (12,000) 10,000 69,000 4.25% 4.25% 5.00% The measurement date for benefit obligations was as of year-end for all years presented. The estimated amount of benefits to be paid in 2017 is $126,000. For years ending 2018 through 2021, the estimated amount of benefits to be paid is $126,000, $125,000, $124,000 and $123,000, respectively, and the total estimated amount of benefits to be paid for years ended 2022 through 2026 is $623,000. Plan expense for 2017 is estimated to be $77,000. In accordance with FASB ASC Topic 715, "Compensation – Retirement Benefits", amounts not yet reflected in net periodic benefit cost and included in accumulated other comprehensive income (loss) are as follows: 2016 (156,000) $ 54,000 2015 (240,000) 84,000 (102,000) $ (156,000) $ Portion to Be Recognized in Income in 2017 — — At December 31, Unamortized net actuarial loss Deferred tax benefit at 35% Net unrecognized post-retirement benefits included in accumulated other comprehensive income (loss) $ $ The First Bancorp - 2016 Form 10-K - Page 87 Note 13. 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 years ended December 31, 2016, 2015 and 2014. For the years ended December 31, Balance at beginning of year Unrealized gains (losses) arising during the year Realized gains during the year Related deferred taxes Net change Balance at end of year $ $ 2016 1,123,000 (2,493,000) (673,000) 1,108,000 (2,058,000) $ (935,000) $ 2015 2,522,000 (754,000) (1,399,000) 754,000 (1,399,000) 1,123,000 $ 2014 (6,591,000) 15,175,000 (1,155,000) (4,907,000) 9,113,000 $ 2,522,000 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 years ended December 31, 2016, 2015, and 2014. For the years ended December 31, Balance at beginning of year Net unrealized losses transferred during the year Amortization of net unrealized losses Related deferred taxes Net change Balance at end of year 2016 2015 2014 $ $ (112,000) $ — (26,000) 9,000 (17,000) (129,000) $ (48,000) $ — (98,000) 34,000 (64,000) (112,000) $ — (23,000) (51,000) 26,000 (48,000) (48,000) The following table represents the effect of the Company's derivative financial instruments included in other comprehensive income (loss) for the years ended December 31, 2016, 2015, and 2014. For the years ended December 31, Balance at beginning of year Unrealized gains on cash flow hedging derivatives arising during the year Related deferred taxes Net change Balance at end of year 2016 2015 2014 $ — $ — $ 1,790,000 (627,000) 1,163,000 — — — $ 1,163,000 $ — $ — — — — — The following table summarizes activity in the unrealized gain or loss on postretirement benefits included in other comprehensive income (loss) for the years ended December 31, 2016, 2015, and 2014: For the years ended December 31, Unrecognized postretirement benefits at beginning of year Change in unamortized net actuarial loss Related deferred taxes Net change Unrecognized postretirement benefits at end of year 2016 (156,000) $ 84,000 (30,000) 54,000 $ (102,000) $ 2015 (125,000) $ (48,000) 17,000 (31,000) $ (156,000) $ 2014 188,000 (481,000) 168,000 (313,000) (125,000) $ $ $ The reclassification of unrecognized transition obligation and accumulated losses is a component of net periodic benefit cost (see Note 12) and the income tax effect is included in the income tax expense line of the consolidated statements of income and comprehensive income. The First Bancorp - 2016 Form 10-K - Page 88 Note 14 - Financial Derivative Instruments As part of its overall asset and liability management strategy, the Company periodically uses derivative instruments to mitigate 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 or liabilities so that changes in interest rates do not have a significant effect on net interest income. 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: Notional Amount Effective Date Maturity Date 30,000,000 June 28, 2016 June 28, 2021 20,000,000 June 27, 2016 June 27, 2021 Variable Index Received 1-Month USD LIBOR 1-Month USD LIBOR 50,000,000 $ $ $ (1) Presented within other assets in the consolidated balance sheet. As of December 31, 2016 2015 Fixed Rate Paid Fair Value(1) Fair Value(1) 0.94% $ 1,049,000 $ 0.89% $ 741,000 $ 1,790,000 $ — — — 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 15. 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 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 U.S. Treasury warrants (the "Warrants") to purchase up to 225,904 shares of the Company's common stock at a price per share of $16.60 (subject to adjustment). The Warrants (and any shares of common stock issuable pursuant to the Warrants) are freely transferable by Treasury to third parties. The warrants have a term of 10 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 the strike price were adjusted at the time of the sale. As a result of this transaction, the number of shares issuable under the Warrants was adjusted to 226,819 with a strike price of $16.53 per share. In November 2016, the Company repurchased all of the outstanding Warrants for an aggregate purchase price of $1,750,000. The First Bancorp - 2016 Form 10-K - Page 89 Common Stock In 2016, the Company reserved 250,000 shares of its common stock to be made available to directors and employees who elect to participate in the stock purchase or savings and investment plans. As of December 31, 2016, 14,511 shares had been issued pursuant to these plans, leaving 235,489 shares available for future use. The issuance price is based on the market price of the stock at issuance date. Prior to 2016, the Company had reserved 700,000 shares of its common stock to be made available to directors and employees who elect to participate in the stock purchase or savings investment plans. As of December 31, 2015, 562,224 shares had been issued pursuant to these plans. The issuance price was based on the market price of the stock at issuance date. Sales of stock to directors and employees amounted to 13,787 shares in 2015 and 14,638 shares in 2014. In 2001, the Company established a dividend reinvestment plan to allow shareholders to use their cash dividends for the automatic purchase of shares in the Company. When the plan was established, 600,000 shares were registered with the Securities and Exchange Commission, and as of December 31, 2016, 247,837 shares have been issued, leaving 352,163 shares usable for future issuance. Participation in this plan is optional and at the individual discretion of each shareholder. Shares are purchased for the plan from the Company at a price per share equal to the average of the daily bid and asked prices reported on the NASDAQ System for the five trading days immediately preceding, but not including, the dividend payment date. Sales of stock under the dividend reinvestment plan amounted to 10,889 shares in 2016, 11,668 shares in 2015, and 12,686 shares in 2014. Issuance of common stock for plans totaled $531,000, $465,000 and $457,000 for the years ended December 31, 2016, 2015 and 2014, respectively. Note 16. 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 have been and 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. As of December 31, 2016, 108,710 shares of restricted stock had been granted under the 2010 Plan, of which 67,064 shares remain restricted as of December 31, 2016 as detailed in the following table: Year Granted 2012 2013 2014 2015 2016 2016 Vesting Term (In Years) 5.0 5.0 5.0 5.0 1.0 5.0 Shares 7,996 14,776 10,422 12,023 6,832 15,015 67,064 Remaining Term (In Years) 0.1 0.9 1.9 2.9 0.1 3.9 1.9 The compensation cost related to these restricted stock grants was $1,140,000 and will be recognized over the vesting terms of each grant. In 2016, $298,000 of expense was recognized for these restricted shares, leaving $457,000 in unrecognized expense as of December 31, 2016. In 2015, $296,000 of expense was recognized for restricted shares, leaving $345,000 in unrecognized expense as of December 31, 2015. The Company established a shareholder-approved stock option plan in 1995 (the "1995 Plan"), under which the Company granted options to employees for 600,000 shares of common stock. Only incentive stock options were granted under the 1995 Plan. The exercise 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 under the 1995 Plan had been exercised or expired. The First Bancorp - 2016 Form 10-K - Page 90 Note 17. Earnings Per Share The following table provides detail for basic earnings per share (EPS) and diluted earnings per share for the years ended December 31, 2016, 2015 and 2014: Income (Numerator) Shares (Denominator) Per-Share Amount For the year ended December 31, 2016 Net income as reported $ 18,009,000 Basic EPS: Income available to common shareholders 18,009,000 10,713,290 $ 1.68 Effect of dilutive securities: restricted stock and warrants Diluted EPS: Income available to common shareholders plus assumed conversions For the year ended December 31, 2015 116,512 $ 18,009,000 10,829,802 $ 1.66 Net income as reported $ 16,206,000 Basic EPS: Income available to common shareholders 16,206,000 10,674,755 $ 1.52 Effect of dilutive securities: restricted stock and warrants Diluted EPS: Income available to common shareholders plus assumed conversions For the year ended December 31, 2014 90,114 $ 16,206,000 10,764,869 $ 1.51 Net income as reported $ 14,709,000 Basic EPS: Income available to common shareholders 14,709,000 10,638,527 $ 1.38 Effect of dilutive securities: restricted stock and warrants Diluted EPS: Income available to common shareholders plus assumed conversions 72,337 $ 14,709,000 10,710,864 $ 1.37 All earnings per share calculations have been made using the weighted average number of shares outstanding during the period. The dilutive securities are incentive stock options granted to certain key members of Management and warrants granted to the U.S. Treasury under the Capital Purchase Program. The dilutive number of shares has been calculated using the treasury method, assuming that all granted options and warrants were exercisable at the end of each period. The following table presents the number of options and warrants outstanding as of December 31, 2016, 2015 and 2014 and the amount which are above or below the strike price: Outstanding In-the-Money Out-of-the-Money As of December 31, 2016 Incentive stock options Warrants issued to private parties Total dilutive securities As of December 31, 2015 Incentive stock options Warrants issued to private parties Total dilutive securities As of December 31, 2014 Incentive stock options Warrants issued to U.S. Treasury Total dilutive securities — — — — 226,819 226,819 42,000 225,904 267,904 — — — — 226,819 226,819 — 225,904 225,904 — — — — — — 42,000 — 42,000 The First Bancorp - 2016 Form 10-K - Page 91 Note 18. Regulatory Capital Requirements The ability of the Company to pay cash dividends to its shareholders depends primarily on receipt of dividends from its subsidiary, the Bank. The subsidiary may pay dividends to its parent out of so much of its net income 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 income of that year combined with its retained net income of the preceding two years and subject to minimum regulatory capital requirements. The amount available for dividends in 2017 will be 2017 earnings plus retained earnings of $13,560,000 from 2016 and 2015. The payment of dividends by the Company is also affected by various regulatory requirements and policies, such as the requirements to maintain adequate capital. In addition, if, in the opinion of the applicable regulatory authority, a bank under its jurisdiction is engaged in or is about to engage in an unsafe or unsound practice (which, depending on the financial condition of the bank, could include the payment of dividends), that authority may require, after notice and hearing, that such bank cease and desist from that practice. The Federal Reserve Bank and the Comptroller of the Currency have each indicated that paying dividends that deplete a bank's capital base to an inadequate level would be an unsafe and unsound banking practice. The Federal Reserve Bank, the Comptroller of the Currency and the Federal Deposit Insurance Corporation have issued policy statements which provide that bank holding companies and insured banks should generally only pay dividends out of current operating earnings. In addition to the effect on the payment of dividends, failure to meet minimum capital requirements can also result in mandatory and discretionary actions by regulators that, if undertaken, could have an impact on the Company's operations. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measurements of the Bank's assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The Bank's capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Financial institution regulators have established guidelines for minimum capital ratios for banks and bank holding companies. The net unrealized gain or loss on securities available for sale 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 Company met each of the well-capitalized ratio guidelines at December 31, 2016. As of December 31, 2016, the most recent notification from the Office of the Comptroller of the Currency classified the Bank as well-capitalized under the regulatory framework for prompt corrective action. To be categorized as well-capitalized, the Bank must maintain minimum total risk-based, Tier 1 risk-based, common equity Tier 1 risk-based and Tier 1 leverage ratios as set forth in the table. There are no conditions or events since this notification that Management believes have changed the institution's category. The First Bancorp - 2016 Form 10-K - Page 92 The actual and minimum capital amounts and ratios for the Bank are presented in the following table: As of December 31, 2016 Tier 2 capital to risk-weighted assets Tier 1 capital to risk-weighted assets Common equity Tier 1 capital to risk-weighted assets Tier 1 capital to average assets As of December 31, 2015 Tier 2 capital to risk-weighted assets Tier 1 capital to risk-weighted assets Common equity Tier 1 capital to risk-weighted assets Tier 1 capital to average assets Actual For capital adequacy purposes To be well- capitalized under prompt corrective action provisions $ 151,487,000 $ 77,928,000 $ 97,410,000 15.55% 8.00% 10.00% $ 141,249,000 $ 58,446,000 $ 77,928,000 14.50% 6.00% 8.00% $ 141,249,000 $ 43,835,000 $ 63,317,000 14.50% 4.50% 6.50% $ 141,249,000 $ 65,437,000 $ 81,797,000 8.63% 4.00% 5.00% $ 144,255,000 $ 74,316,000 $ 92,895,000 15.53% 8.00% 10.00% $ 134,239,000 $ 55,737,000 $ 74,316,000 14.45% 6.00% 8.00% $ 134,239,000 $ 41,803,000 $ 60,382,000 14.45% 4.50% 6.50% $ 134,239,000 $ 60,885,000 $ 76,106,000 8.82% 4.00% 5.00% The First Bancorp - 2016 Form 10-K - Page 93 The actual and minimum capital amounts and ratios for the Company, on a consolidated basis, are presented in the following table: As of December 31, 2016 Tier 2 capital to risk-weighted assets Tier 1 capital to risk-weighted assets Common equity Tier 1 capital to risk-weighted assets Tier 1 capital to average assets As of December 31, 2015 Tier 2 capital to risk-weighted assets Tier 1 capital to risk-weighted assets Common equity Tier 1 capital to risk-weighted assets Tier 1 capital to average assets Actual For capital adequacy purposes $ 152,802,000 $ 77,928,000 15.69% 8.00% $ 142,564,000 $ 58,446,000 14.64% 6.00% $ 142,564,000 $ 43,835,000 14.64% 4.50% $ 142,564,000 $ 65,470,000 8.71% 4.00% $ 146,653,000 $ 74,357,000 15.78% 8.00% $ 136,637,000 $ 55,767,000 14.70% 6.00% $ 136,637,000 $ 41,826,000 14.70% 4.50% $ 136,637,000 $ 62,022,000 8.81% 4.00% To be well- capitalized under prompt corrective action provisions n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a Note 19. Off-Balance-Sheet Financial Instruments and Concentrations of Credit Risk The Bank is party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to originate loans, commitments for unused lines of credit, and standby letters of credit. The instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized in the consolidated balance sheets. The contract amounts of those instruments reflect the extent of involvement the Bank has in particular classes of financial instruments. Commitments for unused lines are agreements to lend to a customer provided there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Bank evaluates each customer's creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Bank upon extension of credit, is based on Management's credit evaluation of the borrower. The Bank did not incur any losses on its commitments in 2016, 2015 or 2014. Standby letters of credit are conditional commitments issued by the Bank to guarantee a customer's performance to a third party, with the customer being obligated to repay (with interest) any amounts paid out by the Bank under the letter of credit. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loans to customers. The Bank's exposure to credit loss in the event of nonperformance by the other party to the financial instrument for loan commitments and standby letters of credit is represented by the contractual amount of those instruments. The Bank uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments. The First Bancorp - 2016 Form 10-K - Page 94 At December 31, 2016 and 2015, the Bank had the following off-balance-sheet financial instruments, whose contract amounts represent credit risk: As of December 31, Unused lines, collateralized by residential real estate Other unused commitments Standby letters of credit Commitments to extend credit Total 2016 2015 $ 76,646,000 $ 69,244,000 57,738,000 49,833,000 4,198,000 4,098,000 10,684,000 10,374,000 $ 149,266,000 $ 133,549,000 The Bank grants residential, commercial and consumer loans to customers principally located in the Mid-Coast and Down East regions of Maine. Collateral on these loans typically consists of residential or commercial real estate, or personal property. Although the loan portfolio is diversified, a substantial portion of borrowers' ability to honor their contracts is dependent on the economic conditions in the area, especially in the real estate sector. 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 December 31, 2016, the Company had two outstanding, off-balance sheet, derivative instruments. These derivative instruments were interest rate swap agreements, with notional principal amounts totaling $50,000,000 and an unrealized gain of $1,163,000, net of tax. The notional amounts 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 transactions with highly-rated counterparties that Management believes to be creditworthy and by limiting the amount of exposure to each counter-party. At December 31, 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. Note 20. Fair Value Disclosures 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 mortgage servicing rights, loans held for sale, and impaired loans, are recorded at fair value on a nonrecurring basis using the lower of cost or market methodology to determine impairment of individual assets. The Company groups assets and liabilities which are recorded at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value. A financial instrument's level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement (with level 1 considered highest and level 3 considered lowest). A brief description of each level follows. Level 1 – Valuation is based upon quoted prices for identical instruments in active markets. Level 2 – Valuation is based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market. Level 3 – Valuation is generated from model-based techniques that use at least one significant assumption not observable in the market. These unobservable assumptions reflect estimates that market participants would use in pricing the asset or liability. Valuation includes use of discounted cash flow models and similar techniques. The First Bancorp - 2016 Form 10-K - Page 95 The fair value methods and assumptions for the Company's financial instruments and other assets measured at fair value are set forth below. Cash, Cash Equivalents and Interest-Bearing Deposits in Other Banks The carrying values of cash equivalents, due from banks and federal funds sold approximate their relative fair values. As such, the Company classifies these financial instruments as Level 1. Investment Securities The fair values of investment securities are estimated by independent providers using a market approach with observable inputs, including matrix pricing and recent transactions. In obtaining such valuation information from third parties, the Company has evaluated their valuation methodologies used to develop the fair values in order to determine whether the valuations are representative of an exit price in the Company's principal markets. The Company's principal markets for its securities portfolios are the secondary institutional markets, with an exit price that is predominantly reflective of bid level pricing in those markets. Fair values are calculated based on the value of one unit without regard to any premium or discount that may result from concentrations of ownership of a financial instrument, possible tax ramifications, or estimated transaction costs. If these considerations had been incorporated into the fair value estimates, the aggregate fair value could have been changed. The carrying values of restricted equity securities approximate fair values. As such, the Company classifies investment securities as Level 2. Loans Held for Sale Loans held for sale are recorded at the lower of carrying value or market 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 sales prices of similar properties currently available. As such, the Company records other real estate owned as nonrecurring Level 2. Mortgage Servicing Rights Mortgage servicing rights represent the value associated with servicing residential mortgage loans. Servicing assets and servicing liabilities are reported using the amortization method and compared to fair value for impairment. In evaluating the fair values of mortgage servicing rights, the Company obtains third party valuations based on loan level data including note rate, type and term of the underlying loans. As such, the Company classifies mortgage servicing rights as Level 2. Accrued Interest Receivable The fair value estimate of this financial instrument approximates the carrying value as this financial instrument has a short maturity. It is the Company's policy to stop accruing interest on loans for which it is probable that the interest is not collectible. Therefore, this financial instrument has been adjusted for estimated credit loss. As such, the Company classifies accrued interest receivable as Level 2. Deposits The fair value of deposits is based on the discounted value of contractual cash flows. The discount rate is estimated using the rates currently offered for deposits of similar remaining maturities. As such, the Company classifies deposits as Level 2. The fair value The First Bancorp - 2016 Form 10-K - Page 96 estimates do not include the benefit that results from the low-cost funding provided by the deposits compared to the cost of borrowing funds in the market. If that value were considered, the fair value of the Company's net assets could increase. Borrowed Funds The fair value of borrowed funds is based on the discounted value of contractual cash flows. The discount rate is estimated using the rates currently available for borrowings of similar remaining maturities. As such, the Company classifies borrowed funds as Level 2. Accrued Interest Payable The fair value estimate approximates the carrying amount as this financial instrument has a short maturity. As such, the Company classifies accrued interest payable 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 December 31, 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. Off-Balance-Sheet Instruments Off-balance-sheet instruments include loan commitments. Fair values for loan commitments have not been presented as the future revenue derived from such financial instruments is not significant. Limitations Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument. These values do not reflect any premium or discount that could result from offering for sale at one time the Company's entire holdings of a particular financial instrument. Because no market exists for a significant portion of the Company's financial instruments, fair value estimates are based on Management's judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments, and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates. Fair value estimates are based on existing on- and off-balance-sheet financial instruments without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments. Other significant assets and liabilities that are not considered financial instruments include the deferred tax asset, premises and equipment, and other real estate owned. In addition, tax ramifications related to the realization of the unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in any of the estimates. Assets and Liabilities Recorded at Fair Value on a Recurring Basis The following tables present the balances of assets and liabilities that were measured at fair value on a recurring basis as of December 31, 2016 and 2015. Securities available for sale Mortgage-backed securities State and political subdivisions Other equity securities Total securities available for sale Interest rate swap agreements Total assets At December 31, 2016 Level 1 Level 2 Level 3 Total $ $ $ $ — $ 280,604,000 — 16,482,000 — 3,330,000 — $ 300,416,000 — $ 1,790,000 — $ 302,206,000 $ $ $ $ — $ 280,604,000 — 16,482,000 — 3,330,000 — $ 300,416,000 — $ 1,790,000 — $ 302,206,000 The First Bancorp - 2016 Form 10-K - Page 97 Securities available for sale Mortgage-backed securities State and political subdivisions Other equity securities Total assets At December 31, 2015 Level 1 Level 2 Level 3 Total $ $ — $ 195,110,000 — 24,506,000 — 3,423,000 — $ 223,039,000 $ $ — $ 195,110,000 — 24,506,000 — 3,423,000 — $ 223,039,000 Assets and Liabilities Recorded at Fair Value on a Non-Recurring Basis The following tables present 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 for losses of $205,000 and $162,000 at December 2016 and 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 $478,000 and $292,000 at December 31, 2016 and 2015, respectively. Other real estate owned Impaired loans Total assets Other real estate owned Impaired loans Total assets Fair Value of Financial Instruments At December 31, 2016 Level 1 Level 2 Level 3 — $ — — $ 375,000 827,000 1,202,000 $ $ At December 31, 2015 Level 1 Level 2 Level 3 — $ — — $ 1,532,000 699,000 2,231,000 $ $ $ $ $ $ Total 375,000 827,000 1,202,000 — $ — — $ Total 1,532,000 699,000 2,231,000 — $ — — $ 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. FASB ASC 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 First Bancorp - 2016 Form 10-K - Page 98 The carrying amounts and estimated fair values for financial instruments as of December 31, 2016 were as follows: Interest-bearing deposits in other banks 293,000 293,000 293,000 $ 17,366,000 $ 17,366,000 $ 17,366,000 $ As of December 31, 2016 Financial assets Cash and cash equivalents Securities available for sale Securities to be held to maturity Restricted equity securities Loans held for sale Loans (net of allowance for loan losses) Commercial Real estate Construction Other Municipal Residential Term Construction Home equity line of credit Consumer Total loans Mortgage servicing rights Interest rate swap agreements Accrued interest receivable Financial liabilities Demand deposits NOW deposits Money market deposits Savings deposits Local certificates of deposit National certificates of deposit Total deposits Repurchase agreements Federal Home Loan Bank advances Total borrowed funds Accrued interest payable Carrying value Estimated fair value Level 1 Level 2 Level 3 300,416,000 300,416,000 226,828,000 225,537,000 11,930,000 11,930,000 782,000 782,000 297,952,000 293,103,000 24,954,000 24,548,000 148,737,000 147,394,000 27,035,000 27,446,000 409,999,000 410,327,000 18,253,000 18,125,000 109,986,000 108,740,000 24,472,000 24,131,000 1,061,388,000 1,053,814,000 1,113,000 1,790,000 5,532,000 1,696,000 1,790,000 5,532,000 — — — — — — — — — — — — — — — — — $ — 300,416,000 225,537,000 11,930,000 782,000 — — — — — — 558,000 292,545,000 — 24,548,000 33,000 147,361,000 — 27,446,000 236,000 410,091,000 — — — 18,125,000 108,740,000 24,131,000 827,000 1,052,987,000 1,696,000 1,790,000 5,532,000 $ 140,482,000 $ 133,342,000 $ — $ 133,342,000 $ 282,971,000 259,418,000 125,544,000 115,087,000 217,340,000 188,260,000 210,316,000 209,370,000 266,304,000 266,372,000 — — — — — 259,418,000 115,087,000 188,260,000 209,370,000 266,372,000 1,242,957,000 1,171,849,000 — 1,171,849,000 84,174,000 79,827,000 194,727,000 193,733,000 278,901,000 273,560,000 479,000 479,000 — — — — 79,827,000 193,733,000 273,560,000 479,000 The First Bancorp - 2016 Form 10-K - Page 99 — — — — — — — — — — — — — — 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 Interest-bearing deposits in other banks 4,013,000 4,013,000 4,013,000 $ 14,299,000 $ 14,299,000 $ 14,299,000 $ As of December 31, 2015 Financial assets Cash and cash equivalents Securities available for sale Securities to be held to maturity Restricted equity securities Loans held for sale Loans (net of allowance for loan losses) Commercial Real estate Construction Other Municipal Residential Term Construction Home equity line of credit Consumer Total loans Mortgage servicing rights Accrued interest receivable Financial liabilities Demand deposits NOW deposits Money market deposits Savings deposits Local certificates of deposit National certificates of deposit Total deposits Repurchase agreements Federal Home Loan Bank advances Total borrowed funds Accrued interest payable 223,039,000 223,039,000 240,023,000 243,123,000 14,257,000 14,257,000 349,000 349,000 265,616,000 262,763,000 24,166,000 23,906,000 126,551,000 126,141,000 19,730,000 20,331,000 401,315,000 405,315,000 8,421,000 8,379,000 109,101,000 108,118,000 23,822,000 23,754,000 978,722,000 978,707,000 1,093,000 4,912,000 1,915,000 4,912,000 — — — — — — — — — — — — — — — — $ — 223,039,000 243,123,000 14,257,000 349,000 — — — — — — — — — — — — 262,763,000 23,906,000 126,141,000 20,331,000 405,315,000 8,379,000 699,000 107,419,000 — 23,754,000 699,000 978,008,000 1,915,000 4,912,000 $ 130,566,000 $ 125,651,000 $ — $ 125,651,000 $ 242,638,000 224,627,000 92,994,000 82,050,000 206,009,000 181,010,000 201,420,000 201,013,000 169,562,000 169,617,000 1,043,189,000 983,968,000 87,103,000 82,168,000 250,354,000 250,027,000 337,457,000 332,195,000 435,000 435,000 — — — — — — — — — — 224,627,000 82,050,000 181,010,000 201,013,000 169,617,000 983,968,000 82,168,000 250,027,000 332,195,000 435,000 The First Bancorp - 2016 Form 10-K - Page 100 — — — — — — — — — — — — — Note 21. Other Operating Income and Expense Other operating income and other operating expense include the following items greater than 1% of revenues. For the years ended December 31, Other operating income ATM and debit card income Other operating expense Advertising and marketing expense Accounting and auditing expenses Collections/foreclosures/ other real estate owned expense ATM and interchange expense Legal fees and expenses Note 22. Legal Contingencies 2016 2015 2014 $ $ $ $ 3,024,000 1,099,000 690,000 278,000 853,000 377,000 $ $ 2,714,000 1,178,000 797,000 432,000 814,000 369,000 2,630,000 1,022,000 746,000 657,000 760,000 769,000 Various legal claims also arise from time to time in the normal course of business which, in the opinion of Management, will have no material effect on the Company's consolidated financial statements. Note 23. Reclassifications Certain items from prior years were reclassified in the financial statements to conform with the current year presentation. These do not have a material impact on the balance sheet or statement of income presentations. The First Bancorp - 2016 Form 10-K - Page 101 Note 24. Condensed Financial Information of Parent Condensed financial information for The First Bancorp, Inc. exclusive of its subsidiary is as follows: Balance Sheets As of December 31, Assets Cash and cash equivalents Dividends receivable Investments Investment in subsidiary Premises and equipment Goodwill Other assets Total assets Liabilities and shareholders' equity Dividends payable Other liabilities Total liabilities Shareholders' equity Common stock Additional paid-in capital Retained earnings Accumulated other comprehensive income Net unrealized gain on available for sale securities, net of tax Total accumulated other comprehensive income Total shareholders' equity Total liabilities and shareholders' equity 2016 2015 $ 613,000 $ 1,431,000 3,800,000 432,000 2,500,000 509,000 143,611,000 137,433,000 4,000 12,000 27,559,000 27,559,000 300,000 438,000 $ 176,319,000 $ 169,882,000 $ 3,778,000 $ 2,366,000 20,000 18,000 3,798,000 2,384,000 108,000 108,000 60,723,000 59,862,000 111,653,000 107,500,000 37,000 37,000 28,000 28,000 172,521,000 167,498,000 $ 176,319,000 $ 169,882,000 The First Bancorp - 2016 Form 10-K - Page 102 Statements of Income For the years ended December 31, Interest and dividends on investments Net securities gains (losses) Total income Occupancy expense Other operating expense Total expense Loss before income taxes and Bank earnings Applicable income taxes Loss before Bank earnings Equity in earnings of Bank Remitted Unremitted Net income Statements of Cash Flows 2016 2015 2014 $ 22,000 (6,000) 16,000 9,000 528,000 537,000 (521,000) (186,000) (335,000) $ 18,000 $ — 18,000 12,000 488,000 500,000 (482,000) (172,000) (310,000) 15,000 38,000 53,000 12,000 604,000 616,000 (563,000) (200,000) (363,000) 11,300,000 10,000,000 7,044,000 6,516,000 8,850,000 6,222,000 $ 18,009,000 $ 16,206,000 $ 14,709,000 For the years ended December 31, Cash flows from operating activities: Net income 2016 2015 2014 $ 18,009,000 $ 16,206,000 $ 14,709,000 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation Equity compensation expense (Gain) loss on sale of investments Tax benefit from vesting of restricted stock (Increase) decrease in other assets Increase in dividends receivable Increase in dividends payable Increase (decrease) in other liabilities Unremitted earnings of Bank Net cash provided by operating activities Cash flows from investing activities: Proceeds from sales/maturities of investments Capital expenditures Net cash provided by (used in) investing activities Cash flows from financing activities: Purchase of common stock Proceeds from sale of common stock Repurchase of warrants Dividends paid Net cash used in financing activities Net increase (decrease) in cash and cash equivalents Cash and cash equivalents at beginning of year Cash and cash equivalents at end of year 8,000 298,000 6,000 32,000 136,000 (1,300,000) 112,000 (4,000) (7,044,000) 10,253,000 87,000 — 87,000 (129,000) 531,000 (1,750,000) (9,810,000) (11,158,000) (818,000) 1,431,000 12,000 296,000 — — (135,000) (50,000) — 160,000 9,000 431,000 (38,000) — (98,000) (1,050,000) — 105,000 (6,516,000) 9,973,000 (6,222,000) 7,846,000 — — — (180,000) 465,000 — (9,349,000) (9,064,000) 909,000 — (1,000) (1,000) — 457,000 — (8,893,000) (8,436,000) (591,000) 522,000 1,113,000 $ 613,000 $ 1,431,000 $ 522,000 The First Bancorp - 2016 Form 10-K - Page 103 Note 25. New Accounting Pronouncements In January 2016, the FASB issued Accounting Standard 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. 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 and anticipates the ASU may have a material impact. The First Bancorp - 2016 Form 10-K - Page 104 Note 26. Quarterly Information The following tables provide unaudited financial information by quarter for each of the past two years: Dollars in thousands except per share data Balance Sheets 2015Q1 2015Q2 2015Q3 2015Q4 2016Q1 2016Q2 2016Q3 2016Q4 Cash and cash equivalents $ 13,855 $ 16,481 $ 19,169 $ 14,299 $ 14,533 $ 20,838 $ 23,456 $ 17,366 Interest-bearing deposits in other banks Investments Restricted equity securities Net loans and loans held for sale Other assets Total assets Deposits Borrowed funds Other liabilities Shareholders' equity Total liabilities & equity 336 418,772 24,565 463,064 301 4,013 6,372 7,568 461,255 463,062 453,336 457,599 15,098 471,063 293 527,244 13,912 13,912 13,912 14,257 13,875 14,441 14,048 11,930 928,973 82,984 953,201 82,117 953,674 91,361 979,071 90,108 994,947 1,029,568 1,019,922 1,062,170 91,618 91,440 91,501 93,872 $ 1,458,832 $ 1,553,340 $ 1,539,672 $ 1,564,810 $ 1,574,681 $ 1,621,454 $ 1,635,088 $ 1,712,875 $ 966,825 $ 1,096,323 $ 1,058,365 $ 1,043,189 $ 1,109,441 $ 1,145,709 $ 1,173,749 $ 1,242,957 312,576 15,915 163,516 278,013 15,195 163,809 297,369 16,797 167,141 337,457 16,666 167,498 276,531 17,165 171,544 283,095 17,862 174,788 268,098 17,247 175,994 278,901 18,496 172,521 $ 1,458,832 $ 1,553,340 $ 1,539,672 $ 1,564,810 $ 1,574,681 $ 1,621,454 $ 1,635,088 $ 1,712,875 Income and Comprehensive Income Statements $ 12,365 $ 12,574 $ 12,833 $ 13,038 $ 13,276 $ 13,600 $ 13,283 $ 13,600 Interest income Interest expense Net interest income Provision for loan losses Net interest income after provision for loan losses Non-interest income Non-interest expense Income before taxes Income taxes Net income Basic earnings per share $ $ 2,663 9,702 500 9,202 3,658 7,265 5,595 1,420 4,175 0.39 2,496 10,078 400 9,678 2,834 6,980 5,532 1,458 4,074 0.38 0.38 $ $ $ 2,322 10,511 200 2,393 10,645 450 2,547 10,729 375 2,649 10,951 375 2,754 10,529 375 2,862 10,738 475 10,311 10,195 10,354 10,576 10,154 10,263 2,975 7,707 5,579 1,391 4,188 0.39 0.39 $ $ $ 2,763 7,944 5,014 1,245 3,769 0.36 0.35 $ $ $ 2,964 7,200 6,118 1,615 4,503 0.42 0.42 $ $ $ 3,006 7,245 6,337 1,713 4,624 0.43 0.43 $ $ $ 3,469 7,405 6,218 1,656 4,562 0.43 0.42 $ $ $ 3,060 7,533 5,790 1,470 4,320 0.40 0.39 $ $ $ Diluted earnings per share $ 0.39 Other comprehensive income (loss), net of tax Net unrealized gain (loss) on securities available for sale Net unrealized gain (loss) on securities transfered from available for sale to held to maturity Net unrealized gain (loss) on cash flow hedging derivative instruments Unrecognized gain (loss) on postretirement benefit costs Other comprehensive income (loss) Comprehensive income $ 57 $ (1,591) $ 1,330 $ (1,195) $ 1,852 $ 1,025 $ (1,292) $ (3,643) (19) (17) (15) (13) (11) (10) 9 (5) — — 38 4,213 $ $ — — — — — (31) — — $ $ (1,608) $ 1,315 2,466 $ 5,503 $ $ (1,239) $ 1,841 2,530 $ 6,344 $ $ The First Bancorp - 2016 Form 10-K - Page 105 (135) 193 1,105 — 880 5,504 $ $ — 54 (1,090) $ (2,489) 3,472 $ 1,831 Report of Independent Registered Public Accounting Firm The Shareholders and Board of Directors The First Bancorp, Inc. We have audited the accompanying consolidated balance sheets of The First Bancorp, Inc. and Subsidiary as of December 31, 2016 and 2015, and the related consolidated statements of income and comprehensive income , changes in shareholders' equity, and cash flows for each of the three years in the period ended December 31, 2016. We have also audited The First Bancorp, Inc.'s internal control over financial reporting as of December 31, 2016, based on criteria established in the 2013 Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The First Bancorp, Inc.'s management is responsible for these financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management's Annual Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on these financial statements and an opinion on the Company's internal control over financial reporting based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by Management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions. A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States of America and that receipts and expenditures of the company are being made only in accordance with authorizations of Management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of The First Bancorp, Inc. and Subsidiary as of December 31, 2016 and 2015, and the consolidated results of their operations and their consolidated cash flows for each of the three years in the period ended December 31, 2016, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, The First Bancorp, Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2016, based on criteria established in COSO. Bangor, Maine March 10, 2017 The First Bancorp – 2016 Form 10-K 106 ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None. ITEM 9A. Controls and Procedures As required by Rule 13a-15 under the Securities Exchange Act of 1934 (the "Exchange Act"), as of December 31, 2016, the end of the period 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 are effective to provide reasonable assurance 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. Also, based on Management's evaluation, there was no change in the Company's internal control over financial reporting that occurred during the fiscal quarter ended December 31, 2016 that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting. The Company reviews its disclosure controls and procedures, which may include its internal controls over financial reporting, on an ongoing basis, and may from time to time make changes aimed at enhancing their effectiveness and to ensure that the Company's systems evolve with its business. Management's Annual Report on Internal Control over Financial Reporting The Management of the Company is responsible for the preparation and fair presentation of the financial statements and other financial information contained in this Form 10-K. Management is also responsible for establishing and maintaining adequate internal control over financial reporting and for identifying the framework used to evaluate its effectiveness. Management has designed processes, internal control and a business culture that foster financial integrity and accurate reporting. The Company's comprehensive system of internal control over financial reporting was designed to provide reasonable assurances regarding the reliability of financial reporting and the preparation of the consolidated financial statements of the Company in accordance with generally accepted accounting principles. The Company's accounting policies and internal control over financial reporting, established and maintained by Management, are under the general oversight of the Company's Board of Directors, including the Board of Directors' Audit Committee. Management has made a comprehensive review, evaluation, and assessment of the Company's internal control over financial reporting as of December 31, 2016. The standard measures adopted by Management in making its evaluation are the measures in the 2013 Internal Control – Integrated Framework published by the Committee of Sponsoring Organizations of the Treadway Commission. Based upon its review and evaluation, Management concluded that, as of December 31, 2016, the Company's internal control over financial reporting was effective and that there were no material weaknesses. Berry Dunn McNeil & Parker, LLC, an independent registered public accounting firm, which has audited and reported on the consolidated financial statements contained in this Form 10-K, has issued its written attestation report on Management's assessment of the Company's internal control over financial reporting which precedes this report. Tony C. McKim, President and Director (Principal Executive Officer) March 10, 2017 F. Stephen Ward, Treasurer and Chief Financial Officer (Principal Financial Officer, Principal Accounting Officer) March 10, 2017 The First Bancorp – 2016 Form 10-K 107 ITEM 9B. Other Information None ITEM 10. Directors, Executive Officers and Corporate Governance Information with respect to directors and executive officers of the Company required by Item 10 shall be included in the Proxy Statement for the Annual Meeting of Stockholders to be held on April 26, 2017 and is incorporated herein by reference. ITEM 11. Executive Compensation Information with respect to executive compensation required by Item 11 shall be included in the Proxy Statement for the Annual Meeting of Stockholders to be held on April 26, 2017 and is incorporated herein by reference. ITEM 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Information with respect to security ownership of certain beneficial owners and Management and related stockholder matters required by Item 12 shall be included in the Proxy Statement for the Annual Meeting of Stockholders to be held on April 26, 2017 and is incorporated herein by reference. ITEM 13. Certain Relationships and Related Transactions, and Director Independence Information with respect to certain relationships and related transactions, and director independence required by Item 13 shall be included in the Proxy Statement for the Annual Meeting of Stockholders to be held on April 26, 2017 and is incorporated herein by reference. ITEM 14. Principal Accounting Fees and Services Information with respect to principal accounting fees and services required by Item 14 shall be included in the Proxy Statement for the Annual Meeting of Stockholders to be held on April 26, 2017 and is incorporated herein by reference. The First Bancorp – 2016 Form 10-K 108 ITEM 15. Exhibits, Financial Statement Schedules A. 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 Exhibit 10.1 Employee Stock Purchase Plan, as referenced in the Company’s Form S-8 filed on January 28, 2016. Exhibit 10.2(a) Specimen Split Dollar Agreement entered into with Mr. McKim with a death benefit of $250,000. Incorporated by reference to Exhibit 10.2(a) to the Company's Form 8-K filed under item 1.01 on January 14, 2005. Exhibit 10.3(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 10.4 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 10.5 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 10.6 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 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 23.1 Consent of Independent Registered Public Accounting Firm 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 Exhibit 101.PRE XBRL Taxonomy Extension Presentation Linkbase Document Exhibit 101.DEF XBRL Taxonomy Extension Definitions Linkbase The First Bancorp – 2016 Form 10-K 109 SIGNATURES Pursuant to the requirements of section 13 or 15(d) 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. Tony C. McKim, President March 10, 2017 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. Tony C. McKim, President and Director (Principal Executive Officer) March 10, 2017 F. Stephen Ward, Treasurer and Chief Financial Officer (Principal Financial Officer, Principal Accounting Officer) March 10, 2017 David B. Soule, Jr., Director and Chairman of the Board March 10, 2017 Katherine M. Boyd, Director March 10, 2017 Robert B. Gregory, Director March 10, 2017 Renee W. Kelly, Director March 10, 2017 Mark N. Rosborough, Director March 10, 2017 Cornelius Russell, Director March 10, 2017 Stuart G. Smith, Director March 10, 2017 Bruce A. Tindal, Director March 10, 2017 The First Bancorp – 2016 Form 10-K 110 Exhibit 3.5 BYLAWS OF THE FIRST BANCORP, INC. Revised January 2008 Updated November 16, 2016 ARTICLE I Name, Location, Type of Financial Institution, Seal Section 1.1 - Name The name of this corporation is The First Bancorp, Inc. (hereinafter referred to as the “Company”). Section 1.2 - Location The principal place of business of the Company is Main Street, Damariscotta, Maine 04543. The Company may have additional places of business in Damariscotta or elsewhere within or without the State of Maine. Section 1.3 - Type of Corporation The Company is a bank holding company and is organized under the Maine Business Corporation Act. Section 1.4 - Corporate Seal The corporate seal of the Company shall be circular in form and shall be engraved as follows: THE FIRST BANCORP, INC. 1985 MAINE ARTICLE II Common Stock Section 2.1 - Authorized Common Stock The authorized common stock of the Company shall consist of Eighteen Million (18,000,000) shares of Common Stock, each having a par value of $.01. Section 2.2 - Stock Certificates Each stockholder shall be entitled to a certificate certifying the number of shares of common stock owned by the stockholder. Each certificate shall be signed by the President or a Vice President and by the Treasurer or the Clerk. Signatures of the officers of the Company on the certificate may be by facsimile so long as the manual signature of an authorized officer of the Transfer Agent appears. A certificate may be adopted by the Company and may be issued and delivered notwithstanding the fact that the person or persons who signed such certificate, or whose facsimile signatures appear thereon, have ceased to be officers of the Company. The First Bancorp – 2016 Form 10-K 111 Section 2.3 – Direct Registration System In lieu of Stock Certificates, stockholders may opt to hold the Company’s shares through the Direct Registration System (DRS). This provides registered owners with the option of holding their assets on the books and records of the transfer agent in book-entry form. Through DRS, assets can be electronically transferred to and from the transfer agent and broker/dealer. Section 2.4 - Transfers of Stock, Transfer Agent Transfers of stock shall be made only upon the transfer books of the Transfer Agent, as from time to time designated by the Board of Directors. Before a new certificate is issued the old certificate shall be surrendered for cancellation or satisfactory evidence provided of its loss or destruction. Section 2.5 - Stockholders to be Registered Only those persons whose names are registered on the books of the Transfer Agent shall be entitled to be treated by the Company as holders of the stock standing in their respective names. The Company shall not be bound to recognize any equitable or other claim to or interest in any share on the part of any other person, whether or not it shall have express or other notice thereof, except as expressly provided by the laws of the State of Maine. Section 2.6 - Loss or Destruction of Certificate In case of loss or destruction of any certificate of stock, another may be issued in its place upon proof of such loss or destruction and upon the giving of a satisfactory assurance of indemnity to the Company and/or to the Transfer Agent, as the Company may reasonably require. Section 2.7 – Non-Assessability of Stock The common stock of the Company, when duly issued, shall be fully paid and forever non-assessable. ARTICLE III Meetings of Stockholders Section 3.1 - Annual Meeting The annual meeting of the stockholders (the “Annual Meeting”) shall be held on such date during the months of April or May in each year, or in such other month as the Board of Directors may determine, at Damariscotta, Maine or such other location within the State of Maine as may be designated in the notice for the Meeting. At the Annual Meeting, the stockholders shall elect Directors and shall transact such other business as may properly be brought before the meeting. Section 3.2 - Special Meetings Special meetings of the stockholders may be called by the President, by the Chairman of the Board of Directors, by a majority of the Board of Directors or of the Executive Committee, or by the holders of not less than 10% of the shares entitled to vote at the meeting. Section 3.3 - Notice of Meetings Written notice of the Annual Meeting and of any special meeting shall be delivered to each shareholder of record entitled to vote at such meeting not less than ten (10) nor more than sixty (60) days prior to the date fixed for the meeting. Notice shall be deemed delivered when deposited with postage prepaid in the United States mail, addressed to the stockholder at the address appearing on the transfer books of the Transfer Agent. Upon written request transmitted in person or by registered or certified mail to the President or the Clerk by any person entitled under Section 3.2 to call a special meeting of stockholders, such officer shall deliver to the stockholders entitled thereto notice of a meeting to be held on a date fixed by such officer, such notice to be given within thirty (30) days after receipt of such request. Any such notice shall be delivered as provided in this Section 3.3. When a meeting of stockholders is adjourned for whatever reason for thirty (30) days or more, notice of the reconvening of the adjourned meeting shall be given as provided in this Section 3.3. Notice of the reconvening of a meeting adjourned for less than thirty (30) days need not be given if the time and place of the reconvening of the adjourned meeting are announced at the meeting at which the adjournment is taken unless a new record date is fixed for the reconvening of the meeting. At the reconvened meeting the Company may transact any business which might have been transacted at the meeting at which the adjournment was taken. The First Bancorp – 2016 Form 10-K 112 Section 3.4 - Record Date For the purpose of determining stockholders entitled to notice of or to vote at any meeting of stockholders or any adjournment thereof or entitled to receive payment of a dividend or other distribution or in order to make a determination of stockholders for any other purpose, the Board of Directors shall fix in advance a record date for any such determination of stockholders. Such date shall not in any case be more than seventy (70) nor less than ten (10) days prior to the date designated for the meeting or the payment of the dividend or distribution. Section 3.5 - Stockholder List The Clerk shall, in advance of each meeting of stockholders, prepare a complete alphabetized list of the stockholders entitled to notice of that meeting, showing the address of and number of shares held of record by each stockholder. The list shall be kept available at the Company’s principal office, or at a place identified in the meeting notice in the city where the meeting will be held, for inspection, upon written demand, by any stockholder (or any stockholder’s agent or attorney) during usual business hours, beginning two (2) business days after notice of the meeting is given and continuing through the meeting. Such list shall also be available during usual business hours for copying at the stockholder’s expense, subject to the requirements of Section 1602(4) of the Maine Business Corporation Act. Failure to comply with the requirements of this section shall not affect the validity of any action taken at any meeting, but if there has not been substantial compliance with the requirements of this section, the Maine Superior Court, on application of the stockholder requesting inspection, may postpone the meeting until an opportunity for inspection is provided. Section 3.6 - Quorum at Meetings The presence in person or by proxy of the holders of not less than one-third of the shares entitled to vote at any meeting shall constitute a quorum for that meeting and, except where a larger percentage is required by the Company’s Articles of Incorporation or by law, action at any meeting at which a quorum is present may be taken by the affirmative vote of the holders or representatives of a majority of the stock present or represented. Section 3.7 - Conduct of Meetings Each meeting of stockholders shall be presided over by the President or such other person as the Board of Directors has designated to act as chairman of the meeting. The Clerk, or such other person as the Board or the chairman of the meeting shall designate, shall act as secretary of the meeting. The chairman of the meeting shall determine the order of business at the meeting and shall have full authority to set reasonable rules of procedure by which the meeting is to be governed. Rulings of the chairman of the meeting on the order of business, adjournment of the meeting and other procedural matters may be overturned only by the affirmative vote of two thirds of the shares present in person or by proxy at the meeting. At any meeting of stockholders, the items of business to be acted upon by stockholders shall be limited to: matters specified in a notice of meeting given by, or at the direction of, the Board; in the case of a special meeting, matters properly designated in a valid and timely request by one or more stockholders for the calling of the meeting; in the case of an Annual Meeting, matters otherwise properly brought before the meeting by a stockholder who has given due notice of such matter to the Board in accordance with the requirements of Section 3.8 below; and any other matters properly brought before the meeting by, or at the direction of, the Board (or a duly authorized committee thereof). The chairman of the meeting shall have authority to rule out of order any proposed item of business or Director nomination that is not a proper matter for stockholder action at the meeting, whether due to defects in notice or otherwise. The secretary of the meeting shall keep a record of all actions taken by the stockholders at the meeting. Minutes of the meeting shall thereafter be filed with the Clerk as part of the corporate records. Section 3.8 - Advance Notice of Stockholder Proposals at Annual Meetings A stockholder who wishes to propose a matter for action by the stockholders at any Annual Meeting (“proponent”) must give the Board of Directors proper and timely notice that satisfies the following conditions: (1) The notice must set forth in writing (i) the name and address of the proponent, (ii) a representation that the proponent is a stockholder of record of the Company, (iii) a fair description of the proposal or, if the proposal relates to the nomination of one or more candidates for election as Directors, the name, address and business background of each such candidate, (iv) any significant personal or pecuniary interest (whether direct or indirect) of the proponent in such matter or, if the proposal relates to the nomination of one or more candidates for election as Directors, any arrangement or relationship between the proponent and each such candidate and (v) such other information regarding the proponent and the proposal as the proxy rules of the United States Securities and Exchange Commission or any successor commission or other governmental agency thereto (the “SEC”) would require in a proxy statement for a contested solicitation of proxies. (2) The notice must be addressed to the Clerk and received at the Company’s principal office not fewer than 120 days before the date (the “anniversary date”) that falls one year after the date on which the Company’s proxy statement was released to stockholders in connection with the immediately preceding Annual Meeting; and provided further that if the Annual Meeting The First Bancorp – 2016 Form 10-K 113 is held more than 30 days before or after the anniversary date, then notice shall be deemed to be timely if received at the Company’s principal office not later than 10 days after the Company first announces publicly the intended date of the meeting, through a press release, SEC filing or otherwise. Upon receipt of such notice, the Clerk shall forward a copy thereof to the Board, which may consider whether to endorse the proposal or, as the case may be, the proposed candidate(s). If the proposal is otherwise a proper matter for stockholder action, a proponent who has satisfied the foregoing notice requirements shall thereafter be entitled at the next Annual Meeting to introduce the proposal or, as the case may be, place in nomination the candidate(s) so described, regardless of whether the Board has chosen to endorse the proposal or candidate(s). Nothing contained herein shall relieve any person from obligations imposed under the proxy rules of the SEC or shall obligate the Company to give notice, or include in its proxy statement a description, of any stockholder proposal. In order to be eligible to submit a proposal, the stockholder must have continuously held at least $2,000 in market value of the Company’s common stock (as determined by the President) for at least one year as of the date of submittal of such proposal, and must continue to hold those securities through the date of such Annual Meeting. ARTICLE IV Board of Directors Section 4.1 - Management of Company Subject to other provisions of these Bylaws, the business and affairs of the Company shall be managed by its Board of Directors (the “Board”). Each Director shall hold office for the duration of his/her term and until his/her successor shall have been elected and qualified or until his/her earlier resignation, death or incapacity. Section 4.2 - Number, Residence, Election, Qualifying Shares The Board of Directors shall consist of not fewer than five (5) or more than twenty five (25) persons as determined by the Board prior to each Annual Meeting. No decrease in the number of Directors shall have the effect of shortening the term of an incumbent Director. No person shall be eligible to serve as a Director unless he/she is the actual and beneficial owner of 1,000 shares of common stock of the Company with additional requirements that the minimum number of shares a Director will ultimately own will be 5,000. The shortfall between the Director’s actual ownership and the 5,000 shares shall be acquired through the Employee Stock Purchase Plan or through open market purchases (see Section 4.11 regarding acquisition of additional shares). Qualifying shares may not be encumbered. Section 4.3 - Changes in the Number of Directors Within the limits permitted by these Bylaws, the Board of Directors shall have the power, by resolution, to increase the number of Directors between Annual Meetings by not more than two members. An increase in the number of Directors, other than at the Annual Meeting, shall have the effect of creating a vacancy or vacancies which may be filled by the Board, with the person or persons elected to fill such vacancy or vacancies to hold office until the next Annual Meeting. Section 4.4 - Director’s Oath Upon election or re-election, and at least annually, the Directors shall be sworn to the proper discharge of their duties and each shall take an oath that his/her qualifying shares are unencumbered and that such shares will remain unencumbered during his/her term of office. Section 4.5 - Maximum Age No person shall be eligible to serve as a Director beyond the Annual Shareholder Meeting if he/she is seventy-two (72) years of age. Section 4.6 - Executive Committee The Board of Directors, by a resolution adopted by a majority of the Directors then in office, may elect from the Board an executive committee (the “Executive Committee”) of not fewer than three (3) or more than seven (7) members, one of whom shall be the President. The Executive Committee shall have the powers of the Board in regard to the operations of the business of the Company, which powers shall be exercised at all times when the Board is not in session, subject always to any specific vote of the Board and limitations imposed by the Maine Business Corporation Act. A majority of the members of the Executive Committee shall constitute a quorum at any meeting thereof. The First Bancorp – 2016 Form 10-K 114 At the time the Executive Committee is elected, the Board may designate from among its members one or more alternate members of the Executive Committee and may specify their order of preference. Each alternate member may attend all meetings of the Committee but shall be without vote unless one or more of the regularly designated members of the Committee fails to attend the meeting. In the absence of one or more of the regular members of the Committee, such alternate member or members may be counted toward a quorum and may vote as though they were regular members of the Committee. In the event that there are more alternate members of the Committee present than there are absent regular members of the Committee, the alternate members shall have the right to vote in the order of preference specified by the Board of Directors in designating them or, if no order of preference was specified, in the order of their appointment or their listing in a single appointment. Section 4.7 - Meetings of Directors The Board shall hold regular meetings at least quarterly at a time and place designated by the Board. Special meetings of the Board may be called, on at least twenty-four (24) hours’ notice, by the President, the Chairman of the Board, or any three Directors. Notice may be given by telephone, fax, mail, e- mail, or other commercially reasonable means and shall be effective upon actual receipt or, in the case of notice sent by U.S. mail addressed to the Director’s residence or usual place of business, shall be deemed effective two (2) business days after mailing, regardless of when actually received. Section 4.8 - Quorum At any regular or special meeting of the Board of Directors, a quorum shall consist of not less than a majority of the Board, but less than a quorum shall have power to adjourn from time to time, until the next duly called meeting. Section 4.9 - Vacancies in Board Vacancies in the Board, whether created by resignation, by death or by enlargement of the Board, may be filled by vote of a majority of the remaining Directors at any meeting of the Board. Any person elected to fill a vacancy shall hold office until the next Annual Meeting and until his/her successor has been duly elected and qualified. Vacancies in the Executive Committee may be filled by majority vote of the Board of Directors from its own membership at any meeting of the Board, and any person so chosen shall hold office until the next Annual Meeting and until his/her successor has been duly elected and qualified. Section 4.10 - Meetings by Telephone Members of the Board may participate in a meeting through use of a conference telephone or similar communications equipment, so long as all Directors participating in such meeting can hear each other. Participation in a meeting pursuant to this paragraph constitutes presence in person at such meeting. Section 4.11 - Compensation of Directors Directors shall receive such reasonable compensation for meetings actually attended as from time to time shall be determined by the Board, and Directors may be reimbursed for reasonable expenses actually incurred while engaged in the business of the Company. Until the Director owns a minimum of 5,000 shares of FNLC stock, 75% of that Director’s director fees will be paid through shares issued under the Company’s Employee Stock Purchase Plan. Section 4.12 - Annual Meeting of Directors A meeting of the Board of Directors (the Annual Meeting of Directors) shall be held immediately following the Annual Meeting and no notice of such meeting shall be necessary in order legally to constitute the meeting, provided a majority of the whole Board shall be present. At the Annual Meeting of Directors, the Directors shall elect officers for the ensuing year. Section 4.13 - Additional Committees The Board of Directors, by a resolution adopted by a majority of the Directors then in office, may designate from among its members additional committees, each consisting of two or more Directors, and may delegate to such committee or committees any part or all of the authority of the Board of Directors, except as otherwise limited by the Maine Business Corporation Act. The First Bancorp – 2016 Form 10-K 115 ARTICLE V Officers Section 5.1 - Offices to be Filled, Election, Oath, Compensation, Vacancies, Bonds At the Annual Meeting of Directors, the Board shall elect a President (who shall be a member of the Board of Directors), a Treasurer and a Clerk. In addition, the Board may appoint one or more Executive Vice Presidents, one or more Senior Vice Presidents, one or more Assistant Treasurers, a Secretary and such other officers as the Board may from time to time determine. The Board shall elect from its own membership a Chairman of the Board to serve for a term of one year, plus any portion of a year resulting from an appointment occurring after the date of the annual meeting of the Board of Directors; provided, however, that no individual may serve as Chair for more than eight terms. The officers shall exercise such powers as may be authorized by the Board or by the Executive Committee, to the extent the same are not in conflict with the specific powers hereinafter authorized. Compensation of officers shall be fixed by the Compensation Committee. If any office becomes vacant, the Board may immediately fill the same. The President, the Treasurer and the Secretary shall hold office at the pleasure of the Board. Other officers, except the Clerk shall hold office at the pleasure of the President. The Clerk shall hold office until removed by the Board in accordance with law. The Board may require security for the fidelity and faithful performance of duties of its officers, employees and agents in such amount as the Board shall deem necessary or advisable. Section 5.2 - President The President shall be the Chief Executive Officer, shall preside at all meetings of the stockholders and, in the absence of the Chairman, at meetings of the Board of Directors and shall discharge such other duties as the Board shall determine. He/she shall be a member of the Executive Committee. Unless the Board directs otherwise, he/she shall have the power to exercise the Company’s voting rights with respect to the common stock of its subsidiaries. Subject to the direction of the Board, the President shall at all times exercise such general authority, direction and supervision over all of the affairs of the Company as its interest and security may require. In all cases where the duties of the subordinate officers and agents of the Company are not specifically prescribed by the Bylaws or by resolution of the Board, such subordinate officers and agents shall perform their duties under the direction of the President or his/her designee. In the case of the death, absence or disability of the Clerk, Secretary or Treasurer, the President may exercise such of their powers as are not inconsistent with these Bylaws. He/she shall perform such other duties as may be provided in the Bylaws or as may be assigned to him/her from time to time by the Board of Directors. Section 5.3 - Executive Vice President The Board may (but shall not be required to) elect one or more Executive Vice Presidents who shall perform such duties as may be specifically designated by the President or by the Board. In the case of death, absence or disability of the President, the Board shall implement the previously approved succession plan. Section 5.4 – Senior Vice Presidents The Board may from time to time elect one or more Senior Vice Presidents who shall perform such duties as may be assigned to them from time to time by the President or in his/her absence, by the Board or by the Executive Vice President. Section 5.5 - Treasurer, Assistant Treasurer The Treasurer shall have the custody of all monies and securities of the Company and shall keep regular and proper books of accounts as directed by the Board or any relevant committee thereof. He/she shall have power to endorse all checks, drafts, notes and orders for money which may be payable to the Company or its order and shall disburse funds of the Company in payment of just demands against the Company or as may be ordered by the Board, taking proper vouchers for such disbursements, and shall render to the Board from time to time as may be required of him/her an account of all of his/her transactions as Treasurer and of the financial condition of the Company. He/she shall perform all duties incident to his/her office or which properly are required of him/her by the Board. The First Bancorp – 2016 Form 10-K 116 The Assistant Treasurers, in order of seniority in office, unless otherwise directed by the President, shall have and may exercise all of the powers of the Treasurer in his/her absence, and they may also exercise such additional powers as may be specifically designated by the Treasurer or by the Executive Committee. Section 5.6 - Clerk The Clerk shall record or cause to be recorded the proceedings and actions of all meetings of the stockholders and shall give or cause to be given all notices required by these Bylaws, by law or by action of the Board for which no other provision is made. The Clerk shall have the custody of the seal of the Company and shall have the power to affix the same to certificates of stock and to other documents and instruments, the execution of which in the name of the Company may be required. The Clerk shall be a resident of the State of Maine and if he/she dies, becomes incapacitated, resigns or is otherwise unable to perform his/her duties, the Board shall promptly appoint another Clerk who shall execute and file, in the office of the Secretary of State a written statement of his/her appointment. Section 5.7 - Secretary The Secretary shall record or cause to be recorded the proceedings and actions of all meetings of the Board of Directors and the Executive Committee and shall perform such other duties as may be assigned by the Board. Deleted by requisite vote of shareholders at the Annual Shareholder Meeting held April 30, 1996. ARTICLE VI Business Combinations ARTICLE VII Indemnification and Insurance Section 7.1 - Indemnification The Company shall in all cases indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative, by reason of the fact that he/she is or was a Director, officer, employee or agent of the Company, or is or was serving at the request of the Company as a Director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against expenses, including attorneys’ fees, judgments, fines and amounts paid in settlement actually and reasonably incurred by him/her in connection with such action, suit or proceeding; provided that no indemnification shall be provided for any person with respect to any matter as to which he/she (a) (i) received a financial benefit to which he/she is not entitled; (ii) intentionally inflicted harm on the Company or its shareholders; (iii) violated Section 833 of the Maine Business Corporation Act; or (iv) intentionally violated criminal law, or (b) unless ordered by court under Section 855(1)(C) of the Maine Business Corporation Act, (i) in connection with a proceeding by or in the right of the Company, except for reasonable expenses incurred in connection with the proceeding if it is determined that the person seeking indemnification has met the relevant standard under Section 852(1) of the Maine Business Corporation Act, or (ii) in connection with any proceeding with respect to conduct for which the person seeking indemnification was adjudged liable on the basis that he/she received a financial benefit to which he/she was not entitled, whether or not involving action in such person’s official capacity. The termination of any action, suit or proceeding by judgment, order or conviction adverse to such person, or by settlement or plea of nolo contendere or its equivalent, shall not of itself create a presumption that such person did not act in good faith in the reasonable belief that his/her action was in the best interests of the Company, and, with respect to any criminal action or proceeding, had reasonable cause to believe that his/her conduct was unlawful. Section 7.2 - Authorization Any indemnification under Section 7.1, unless ordered by a court or required by the Bylaws, shall be made by the Company only as authorized in the specific case upon a determination that indemnification of the Director, officer, employee or agent is proper in the circumstances because he/she has met the applicable standard of conduct set forth in Section 7.1. Such determination shall be made by the Board of Directors by a vote of a majority of the Disinterested Directors (as hereinafter The First Bancorp – 2016 Form 10-K 117 defined) from a quorum consisting of at least two (2) Directors (a) who were not parties to such action, suit or proceeding and (b) who do not have a familial, financial, professional or employment relationship with the person(s) whose indemnification is the subject of the decision being made, which relationship would, in the circumstances, reasonably be expected to exert an influence on the Director’s judgment when voting on the decision being made (each, a “Disinterested Director”), or if such a quorum is not obtainable, or even if obtainable, if a majority of Disinterested Directors (or, if there are fewer than two (2) Disinterested Directors, the Board) so directs, by independent legal counsel in written opinion, or by the shareholders (provided that shares owned by or voted under the control of a Director who is not a Disinterested Director may not be voted on the determination). Such a determination, once made by the Board of Directors may not be revoked by the Board of Directors, and upon the making of such determination by the Board of Directors, the Director, officer, employee or agent may enforce the indemnification against the Company by a separate action notwithstanding any attempted or actual subsequent action by the Board. Section 7.3 - Advancement of Expenses Expenses incurred in defending a civil or criminal action, suit or proceeding may be paid by the Company in advance of the final disposition of such action, suit or proceeding as authorized by the Board of Directors in the manner provided in Subsection 7.2 upon receipt of (a) a written affirmation of the Director’s, officer’s, employee’s or agent’s good faith belief that he/she has met the relevant standard of conduct described in Section 7.1 or that the proceeding involves conduct for which liability has been eliminated pursuant to Section 202(2)(D) of the Maine Business Corporation Act, and (b) an unlimited general undertaking by or on behalf of the Director, officer, employee or agent to repay such amount unless it shall ultimately be determined that he/she is entitled to be indemnified by the Company as authorized in this section. Section 7.4 - Nonexclusivity of Rights The indemnification provided by this section shall not be deemed exclusive of any other rights to which those indemnified may be entitled under any bylaw, agreement, vote of stockholders or Disinterested Directors or otherwise, both as to action in his/her official capacity and as to action in another capacity while holding such office, and shall continue as to a person who has ceased to be a Director, officer, employee or agent and shall insure to the benefit of the heirs, executors and administrators of such a person. A right to indemnification required by these Bylaws may be enforced by a separate action against the Company, if an order for indemnification has not been entered by a court in any action, suit or proceeding with respect to which indemnification is sought. Section 7.5 - Insurance The Company shall have power to purchase and maintain insurance on behalf of any person who is or was a Director, officer, employee or agent of the Company, or is or was serving at the request of the Company as a Director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise against any liability asserted against him/her and incurred by him/her in any such capacity, or arising out of his/her status as such, whether or not the Company would have the power to indemnify him/her against such liability under this section. ARTICLE VIII Books, Accounts And Records Section 8.1 - Retention And Location The books, accounts and records of the Company, except as may otherwise be required by the laws of the State of Maine, shall be kept at the principal or registered office of the Company or at such other place or places as the Board of Directors may from time to time designate. Section 8.2 - Inspection By Stockholders No stockholder as such shall have any right to inspect any account or book or document of the Company, except as such right may be conferred by law. Each request by a stockholder for inspection of books and records shall be made in writing. Except as the Maine Business Corporation Act or the Board or the President may otherwise provide, each such written request must: (i) describe with reasonable particularity both the stockholder’s purpose and the records he or she desires to inspect, and demonstrate that the requested records are directly connected with the stockholder’s purposes; The First Bancorp – 2016 Form 10-K 118 (ii) affirm that the stockholder is making this request in good faith and that the stockholder (including any agents or attorneys through whom he or she conducts such inspection) shall not make any use of the records except for the particular purpose set forth in such request; and (iii) contain an undertaking by the stockholder (a) to preserve the confidentiality of any nonpublic financial information or other competitively sensitive information about the Company or its business; b) to pay the Company’s reasonable costs in making any of the requested records available for inspection by the stockholder or his or her duly designated agents or attorneys, and (c) in the event of any breach by the stockholder or his or her agents or attorneys, to indemnify the Company against its reasonable costs of enforcing any restrictions on use of the requested records. As a condition to disclosure of any nonpublic financial information or other competitively sensitive information, and as a condition to disclosure of personal information about stockholders, creditors, directors, officers or employees of the Company, the Board or the President may require the stockholder and his or her agents or attorneys to execute a confidentiality agreement containing provisions reasonably intended, in light of the stated scope and purpose of the requested inspection, to preserve the confidentiality of such information. ARTICLE IX Amendment of Bylaws Section 9.1 - Amendment of Bylaws Except as otherwise expressly provided by the Articles of Incorporation or Bylaws, these Bylaws may be amended by the Board of Directors. Sections of these bylaws were amended by the shareholders on April 30, 2008 as required. Other sections were amended by the Board of Directors. Signed: _________________________________ Charles A. Wootton, Clerk The First Bancorp, Inc. Dated: November 16, 2016 The First Bancorp – 2016 Form 10-K 119 Exhibit 23.1 Consent of Independent Registered Public Accounting Firm Consent of Independent Registered Public Accounting Firm As the independent registered public accountants of The First Bancorp, Inc., we hereby consent to the incorporation by reference in the registration statement (No. 333-167014) on Form S-8 of our report dated March 10, 2017, with respect to the consolidated balance sheets of The First Bancorp, Inc. and Subsidiary as of December 31, 2016 and 2015, and the related consolidated statements of income and comprehensive income, changes in shareholders' equity and cash flows for each of the three years in the period ended December 31, 2016, and the effectiveness of internal control over financial reporting as of December 31, 2016, which report appears in the December 31, 2016 annual report on Form 10-K of The First Bancorp, Inc. Bangor, Maine March 10, 2017 The First Bancorp – 2016 Form 10-K 120 Exhibit 31.1 Certification of Chief Executive Officer I, Tony C. McKim, President and Chief Executive Officer, certify that: 1. I have reviewed this annual report on Form 10-K of The First Bancorp, Inc. (the “Registrant”); 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this report; 4. The Registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal controls over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; (c) Evaluated the effectiveness of the Registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (d) Disclosed in this report any change in the Registrant’s internal control over financial reporting that occurred during the Registrant’s fourth quarter of 2015 that has materially affected, or is reasonably likely to materially affect, the Registrant’s internal control over financial reporting; and 5. The Registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Registrant’s auditors and the audit committee of Registrant’s board of directors: (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Registrant’s ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves Management or other employees who have a significant role in the Registrant’s internal control over financial reporting. Date: March 10, 2017 Tony C. McKim President and Chief Executive Officer The First Bancorp – 2016 Form 10-K 121 Exhibit 31.2 Certification of Chief Financial Officer I, F. Stephen Ward, Treasurer and Chief Financial Officer, certify that: 1. I have reviewed this annual report on Form 10-K of The First Bancorp, Inc. (the “Registrant”); 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this report; 4. The Registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal controls over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; (c) Evaluated the effectiveness of the Registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (d) Disclosed in this report any change in the Registrant’s internal control over financial reporting that occurred during the Registrant’s fourth quarter of 2015 that has materially affected, or is reasonably likely to materially affect, the Registrant’s internal control over financial reporting; and 5. The Registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Registrant’s auditors and the audit committee of Registrant’s board of directors: (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Registrant’s ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves Management or other employees who have a significant role in the Registrant’s internal control over financial reporting. Date: March 10, 2017 F. Stephen Ward Treasurer and Chief Financial Officer The First Bancorp – 2016 Form 10-K 122 Exhibit 32.1 Certification of Periodic Financial Report Pursuant to 18 U.S.C. Section 1350 The undersigned officer of The First Bancorp, Inc. (the “Company”) hereby certifies that the Company’s annual report on Form 10-K for the period ended December 31, 2016 to which this certification is being furnished as an exhibit (the “Report”), as filed with the Securities and Exchange Commission on the date hereof, fully complies with the requirements of Section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and that the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. This certification is provided pursuant to 18 U.S.C. Section 1350 and Item 601(b)(32) of Regulation S-K (“Item 601(b)(32)”) promulgated under the Securities Act of 1933, as amended (the “Securities Act”), and the Exchange Act. In accordance with clause (ii) of Item 601(b)(32), this certification (A) shall not be deemed “filed” for purposes of Section 18 of the Exchange Act, or otherwise subject to the liability of that section, and (B) shall not be deemed to be incorporated by reference into any filing under the Securities Act or the Exchange Act, except to the extent that the Company specifically incorporates it by reference. Date: March 10, 2017 Tony C. McKim President and Chief Executive Officer Exhibit 32.2 Certification of Periodic Financial Report Pursuant to 18 U.S.C. Section 1350 The undersigned officer of The First Bancorp, Inc. (the “Company”) hereby certifies that the Company’s annual report on Form 10-K for the period ended December 31, 2016 to which this certification is being furnished as an exhibit (the “Report”), as filed with the Securities and Exchange Commission on the date hereof, fully complies with the requirements of Section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and that the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. This certification is provided pursuant to 18 U.S.C. Section 1350 and Item 601(b)(32) of Regulation S-K (“Item 601(b)(32)”) promulgated under the Securities Act of 1933, as amended (the “Securities Act”), and the Exchange Act. In accordance with clause (ii) of Item 601(b)(32), this certification (A) shall not be deemed “filed” for purposes of Section 18 of the Exchange Act, or otherwise subject to the liability of that section, and (B) shall not be deemed to be incorporated by reference into any filing under the Securities Act or the Exchange Act, except to the extent that the Company specifically incorporates it by reference. Date: March 10, 2017 F. Stephen Ward Treasurer and Chief Financial Officer The First Bancorp – 2016 Form 10-K 123 Shareholder Information Common Stock Prices and Dividends The common stock of The First Bancorp, Inc. (ticker symbol FNLC) trades on the NASDAQ Global Select Market. The following table reflects the high and low prices of actual sales in each quarter of 2016 and 2015. Such quotations do not reflect retail mark-ups, mark- downs or brokers’ commissions. 2016 2015 High $20.50 21.79 24.66 33.21 Low $17.37 18.50 20.27 22.53 High $18.25 19.74 20.00 22.56 Low $16.20 16.41 17.50 18.61 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter The last known transaction of the Company’s stock during 2016 was on December 31 at $33.10 per share. There are no warrants outstanding with respect to the Company’s common stock.. The Company has no securities outstanding which are convertible into common equity. The table below sets forth the cash dividends declared in the last two fiscal years: Date Declared March 19, 2015 June 17, 2015 September 16, 2015 December 17, 2015 March 24 2016 June 23, 2016 September 22, 2016 December 22, 2016 December 22, 2016 Amount Per Share $0.210 $0.220 $0.220 $0.220 $0.220 $0.230 $0.230 $0.230 $0.120 Date Payable April 30, 2015 July 31, 2015 October 30, 2015 January 29, 2016 April 29, 2016 July 29, 2016 October 28, 2015 January 31, 2017 January 31, 2017 Pending Legal Proceedings There are no material pending legal proceedings to which the Company or the Bank is the party or to which any of its property is subject, other than routine litigation incidental to the business of the Bank. None of these proceedings is expected to have a material effect on the financial condition of the Company or of the Bank. Annual Meeting The Annual Meeting of the Shareholders of The First Bancorp, Inc. will be held Wednesday, April 26, 2017 at 11:00 a.m. at the Samoset Resort, 220 Warrenton Street Rockport Maine 04856. Number of Shareholders The number of shareholders of record as of February 15, 2017 was approximately 4,700. Annual Report on Form 10-K The Annual Report on Form 10-K to be filed with the Securities and Exchange Commission is available online at the Commission’s website: www.sec.gov. Shareholders may obtain a written copy, without charge, upon written request to the address listed below. Accessing Reports Online The Company’s 2017 proxy materials may be accessed online at: http://materials.proxyvote.com/31866P. The First Bancorp, Inc.’s website address is www.thefirstbancorp.com. All press releases, SEC filings and other reports or information issued by the Company are available at this website, as well as the Company’s Code of Ethics for Senior Financial Officers, the Company’s Code of Business Conduct and Ethics, Audit Committee Charter, Nominating Committee Charter, and Compensation Committee Charter. All SEC filings are accessible at the Commission’s website: www.sec.gov. Corporate Headquarters Contact: F. Stephen Ward, Chief Financial Officer The First Bancorp, Inc. 223 Main Street, P.O. Box 940 Damariscotta, Maine 04543 207-563-3195; 1-800-564-3195 Transfer Agent Changes of address or title should be directed to: Shareholder Relations The First Bancorp, Inc. 223 Main Street, P.O. Box 940 Damariscotta, Maine 04543 207-563-3195; 1-800-564-3195 Independent Certified Public Accountants Berry Dunn McNeil & Parker, LLC 36 Pleasant Street Bangor, Maine 04401 Corporate Counsel Pierce Atwood LLP, Attorneys 254 Commercial Street, Merrill’s Wharf Portland, Maine 04101 Photography Credits All photographs contained in this report are copyright of the following photographers: Adam Woodworth: Front Cover. Frank Stephens: Page 3. Melissa Huston: Page 4. Darryn Kayman: Page 5. Damariscotta River Association: Pages 6, 7. Don Dunbar: Pages 8, 9. Stacy Flagg, pages 10, 11. Lincoln Little League: Pages 12, 13. Michael O’Neil, pages 14, 15. The First Bancorp – 2016 Form 10-K 124 

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