Table of Contents


UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

ý

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended:September 30, 2017

2021

o

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                    to

Commission File Number:001-13349

bhblogoa01.jpg

Graphic

BAR HARBOR BANKSHARES

(Exact name of registrant as specified in its charter)

Maine

01-0393663

Maine01-0393663

(State or other jurisdiction of incorporation or organization)

(I.R.S. Employer Identification No.)

PO Box 400

82 Main Street, Bar Harbor, ME

04609-0400

(Address of principal executive offices)

(Zip Code)

Registrant’s telephone number, including area code: (207) (207) 288-3314

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading Symbol

Name of each exchange on which registered

Common Stock, par value $2.00 per share

BHB

NYSE American

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 ý  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 ý  No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company.  See the definition of “large"large accelerated filer,” “accelerated filer”" "accelerated filer", “smaller"smaller reporting company”company", or "emerging growth company" in Rule 12b-2 of the Exchange Act.  (Check one)

Large Accelerated Filer o        Accelerated Filer ý       Non-Accelerated Filer o      Smaller Reporting Company o        Emerging growth company o

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act) Yes o  No ý

The Registrant had 15,433,95714,986,786 shares of common stock, par value $2.00 per share, outstanding as of November 3, 2017.5, 2021.

Table of Contents


BAR HARBOR BANKSHARES AND SUBSIDIARIES

FORM 10-Q

INDEX

Page

PART I.

FINANCIAL INFORMATION

Page

6

7

8

9

11

21

24

36

39

44

54

61

Note 11

Leases

63

Item 2.

65

66

67

68

70

Reconciliation of Non-GAAP Financial Measures

71

Financial Summary

73

79


81

81

81

82

83

84




PART I

Table of Contents

Bar Harbor Bankshares conducts business operations principally through Bar Harbor Bank & Trust, which may be referred to as the “Bank” and which is a subsidiary of Bar Harbor Bankshares. Unless the context requires otherwise, references in this report to “the Company” "our company, "our," "us,"  and similar terms refer to Bar Harbor Bankshares and its subsidiaries, including the Bank, collectively.

FORWARD-LOOKING STATEMENTS

Certain statements contained in this document that are not historical facts may constitute forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended ("Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as amended ("Exchange Act"), and are intended to be covered by the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. When used in this Form 10-Q the words "may," "will," "should," "could," "would," "plan," "potential," "estimate," "project," "believe," "intend," "anticipate," "expect," "target" and similar expressions are intended to identify forward-looking statements, but these terms are not the exclusive means of identifying forward-looking statements. These forward-looking statements are subject to significant risks, assumptions and uncertainties, including among other things, changes in general economic and business conditions, increased competitive pressures, changes in the interest rate environment, legislative and regulatory change, changes in the financial markets, and other risks and uncertainties disclosed from time to time in documents that the Company files with the Securities and Exchange Commission, including but not limited to those discussed in the section titled "Risk Factors" in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2020. Because of these and other uncertainties, the Company’s actual results, performance or achievements, or industry results, may be materially different from the results indicated by these forward-looking statements. In addition, the Company’s past results of operations do not necessarily indicate future results. You should not place undue reliance on any of the forward-looking statements, which speak only as of the dates on which they were made. The Company is not undertaking an obligation to update forward-looking statements, even though its situation may change in the future, except as required under federal securities law. The Company qualifies all of its forward-looking statements by these cautionary statements.

3

Table of Contents

PART I.          FINANCIAL INFORMATION

ITEM 1.          CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


BAR HARBOR BANKSHARES AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS (UNAUDITED)

(in thousands, except share data)

    

September 30, 2021

    

December 31, 2020

Assets

 

  

 

  

Cash and cash equivalents:

Cash and due from banks

$

39,081

$

27,566

Interest-bearing deposits with other banks

 

302,118

 

198,441

Total cash and cash equivalents

 

341,199

 

226,007

Securities:

Securities available for sale

 

545,327

 

585,046

Federal Home Loan Bank stock

 

10,192

 

14,036

Total securities

 

555,519

 

599,082

Loans held for sale

7,505

23,988

Total loans

 

2,534,154

 

2,562,885

Less: Allowance for credit losses

 

(22,448)

 

(19,082)

Net loans

 

2,511,706

 

2,543,803

Premises and equipment, net

 

50,070

 

52,458

Goodwill

 

119,477

 

119,477

Other intangible assets

 

6,966

 

7,670

Cash surrender value of bank-owned life insurance

 

79,380

 

77,870

Deferred tax assets, net(1)

 

5,811

 

3,047

Other assets(1)

 

60,712

 

70,873

Total assets(1)

$

3,738,345

$

3,724,275

Liabilities

 

  

 

  

Deposits:

 

  

 

  

Demand

$

664,395

$

544,636

NOW

 

888,021

 

738,849

Savings

 

605,977

 

521,638

Money market

 

379,651

 

402,731

Time

 

469,221

 

698,361

Total deposits

 

3,007,265

 

2,906,215

Borrowings:

 

  

 

  

Senior

 

190,267

 

276,062

Subordinated

 

60,083

 

59,961

Total borrowings

 

250,350

 

336,023

Other liabilities(1)

 

62,295

 

74,972

Total liabilities(1)

 

3,319,910

 

3,317,210

(continued)

4

Table of Contents

BAR HARBOR BANKSHARES AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS (UNAUDITED) (continued)

(in thousands, except share data)

    

September 30, 2021

    

December 31, 2020

Shareholders’ equity

    

    

Capital stock, par value $2.00; authorized 20,000,000 shares; issued 16,428,388 shares at September 30, 2021 and December 31, 2020

 

32,857

 

32,857

Additional paid-in capital

 

190,892

 

190,084

Retained earnings

 

209,426

 

195,607

Accumulated other comprehensive income(1)

 

2,888

 

6,740

Less: 1,441,763 and 1,512,465 shares of treasury stock at September 30, 2021 and December 31, 2020, respectively

 

(17,628)

 

(18,223)

Total shareholders’ equity(1)

 

418,435

 

407,065

Total liabilities and shareholders’ equity(1)

$

3,738,345

$

3,724,275

(In thousands, except share data) September 30,
2017
 December 31,
2016
Assets  
  
Cash and due from banks $31,223
 $8,219
Interest-bearing deposit with the Federal Reserve Bank 17,501
 220
Total cash and cash equivalents 48,724
 8,439
Securities available for sale, at fair value 718,459
 528,856
Federal Home Loan Bank stock 37,107
 25,331
Total securities 755,566
 554,187
Commercial real estate 793,572
 418,119
Commercial and industrial 357,072
 151,240
Residential real estate 1,152,628
 506,612
Consumer 125,590
 53,093
Total loans 2,428,862
 1,129,064
Less: Allowance for loan losses (11,950) (10,419)
Net loans 2,416,912
 1,118,645
Premises and equipment, net 48,309
 23,419
Other real estate owned 122
 90
Goodwill 100,255
 4,935
Other intangible assets 8,811
 377
Cash surrender value of bank-owned life insurance 57,613
 24,450
Deferred tax assets, net 13,052
 5,990
Other assets 26,368
 14,817
Total assets $3,475,732
 $1,755,349
     
Liabilities  
  
Demand and other non-interest bearing deposits $357,398
 $98,856
NOW deposits 442,085
 175,150
Savings deposits 373,118
 77,623
Money market deposits 300,398
 282,234
Time deposits 802,110
 416,437
Total deposits 2,275,109
 1,050,300
Senior borrowings 775,582
 531,596
Subordinated borrowings 43,048
 5,000
Total borrowings 818,630
 536,596
Other liabilities 28,534
 11,713
Total liabilities 3,122,273
 1,598,609
Shareholders’ equity  
  
Capital stock, par value $2.00; authorized 20,000,000 shares; issued 16,428,387 and 10,182,611 shares at September 30, 2017 and December 31, 2016, respectively 32,858
 13,577
Additional paid-in capital 186,220
 23,027
Retained earnings 141,251
 130,489
Accumulated other comprehensive loss (1,435) (4,326)
Less: cost of 996,531 and 1,067,016 shares of treasury stock at September 30, 2017 and December 31, 2016, respectively (5,435) (6,027)
Total shareholders’ equity 353,459
 156,740
Total liabilities and shareholders’ equity $3,475,732
 $1,755,349
(1)Prior period has been revised, see Note 1 Basis of Presentation – Revision of Previously Issued Financial Statements.

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


5

BAR HARBOR BANKSHARES AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

 Three Months Ended September 30, Nine Months Ended September 30,
(In thousands, except per share data)2017 2016 2017 2016
Interest and dividend income     
  
Loans$24,661
 $10,295
 $70,081
 $30,627
Securities and other5,402
 3,828
 15,832
 12,014
Total interest and dividend income30,063
 14,123
 85,913
 42,641
Interest expense 
  
  
  
Deposits3,177
 1,755
 7,926
 4,931
Borrowings3,408
 1,369
 9,327
 3,993
Total interest expense6,585
 3,124
 17,253
 8,924
Net interest income23,478
 10,999
 68,660
 33,717
Provision for loan losses660
 139
 2,191
 754
Net interest income after provision for loan losses22,818
 10,860
 66,469
 32,963
Non-interest income 
  
  
  
Trust and investment management fee income3,040
 975
 9,228
 2,878
Insurance and brokerage service income329
 
 1,020
 
Customer service fees2,638
 706
 5,990
 1,999
Gain on sales of securities, net19
 1,354
 19
 4,489
Bank-owned life insurance income380
 197
 1,165
 540
Other income554
 140
 2,043
 408
Total non-interest income6,960
 3,372
 19,465
 10,314
Non-interest expense 
  
  
  
Salaries and employee benefits9,617
 4,832
 30,065
 14,648
Occupancy and equipment2,894
 1,156
 8,573
 3,466
Loss on premises and equipment, net(1) 216
 94
 216
Outside services907
 181
 2,220
 430
Professional services428
 250
 1,357
 1,084
Communication382
 128
 1,040
 492
Amortization of intangible assets189
 1
 534
 25
Acquisition expenses346
 320
 5,917
 812
Other expenses2,824
 1,666
 8,663
 4,305
Total non-interest expense17,586
 8,750
 58,463
 25,478
        
Income before income taxes12,192
 5,482
 27,471
 17,799
Income tax expense3,575
 1,850
 8,085
 5,450
Net income$8,617
 $3,632
 $19,386
 $12,349
        
Earnings per share: 
  
  
  
Basic$0.56
 $0.40
 $1.27
 $1.37
Diluted$0.56
 $0.40
 $1.27
 $1.35
        
Weighted average common shares outstanding:       
Basic15,420
 9,064
 15,098
 9,037
Diluted15,511
 9,162
 15,204
 9,138
(UNAUDITED)

Three Months Ended

Nine Months Ended

September 30, 

September 30, 

(in thousands, except earnings per share data)

    

2021

    

2020

    

2021

    

2020

Interest and dividend income

Loans

$

25,094

$

25,918

$

72,490

$

80,398

Securities and other

 

3,821

 

4,557

 

11,792

 

15,006

Total interest and dividend income

 

28,915

 

30,475

 

84,282

 

95,404

Interest expense

 

  

 

  

 

  

 

  

Deposits

 

1,555

 

3,869

 

7,109

 

14,437

Borrowings

 

1,778

 

1,941

 

5,415

 

7,149

Total interest expense

 

3,333

 

5,810

 

12,524

 

21,586

Net interest income

 

25,582

 

24,665

 

71,758

 

73,818

Provision for credit losses

 

(174)

 

1,800

 

(1,428)

 

4,265

Net interest income after provision for loan losses

 

25,756

 

22,865

 

73,186

 

69,553

Non-interest income

 

  

 

  

 

  

 

  

Trust and investment management fee income

 

3,868

 

3,532

 

11,335

 

10,060

Customer service fees

 

3,515

 

2,886

 

9,742

 

8,437

Gain on sales of securities, net

 

1,930

 

 

1,980

 

1,486

Mortgage banking income

850

2,649

4,973

4,230

Bank-owned life insurance income

 

494

 

492

 

1,510

 

1,525

Customer derivative income

 

341

 

316

 

837

 

1,417

Other income

 

352

 

227

 

726

 

1,078

Total non-interest income

 

11,350

 

10,102

 

31,103

 

28,233

Non-interest expense

 

  

 

  

 

  

 

  

Salaries and employee benefits

 

11,743

 

11,809

 

35,275

 

35,602

Occupancy and equipment

 

4,029

 

4,279

 

12,251

 

12,559

Loss (gain) on sales of premises and equipment, net

 

(146)

 

 

(137)

 

90

Outside services

 

547

 

438

 

1,512

 

1,414

Professional services

 

491

 

479

 

1,200

 

1,488

Communication

 

188

 

215

 

707

 

698

Marketing

 

339

 

300

 

1,163

 

970

Amortization of intangible assets

 

233

 

256

 

707

 

768

Loss on debt extinguishment

1,768

1,768

1,351

Acquisition, conversion and other expenses

 

318

 

691

 

1,759

 

952

Other expenses

 

3,862

 

3,952

 

11,382

 

11,152

Total non-interest expense

 

23,372

 

22,419

 

67,587

 

67,044

Income before income taxes

 

13,734

 

10,548

 

36,702

 

30,742

Income tax expense

 

2,706

 

2,146

 

7,169

 

6,138

Net income

$

11,028

$

8,402

$

29,533

$

24,604

Earnings per share:

 

  

 

  

 

  

 

  

Basic

$

0.74

$

0.56

$

1.97

$

1.60

Diluted

$

0.73

$

0.56

$

1.96

$

1.60

Weighted average common shares outstanding:

 

  

 

  

 

  

 

  

Basic

 

14,983

 

15,079

 

14,961

 

15,359

Diluted

 

15,051

 

15,103

 

15,035

 

15,382

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


6

BAR HARBOR BANKSHARES AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(UNAUDITED)

    

Three Months Ended

    

Nine Months Ended

September 30, 

September 30, 

(in thousands)

    

2021

    

2020

    

2021

    

2020

Net income

$

11,028

$

8,402

$

29,533

$

24,604

Other comprehensive income, before tax:

 

  

 

  

 

  

 

  

Changes in unrealized (loss) gain on securities available for sale

 

(3,700)

 

351

 

(7,328)

 

7,922

Changes in unrealized (loss) gain on hedging derivatives(1)

 

(203)

 

1,302

 

2,311

 

(7,568)

Changes in unrealized loss on pension

 

0

 

0

 

0

 

0

Income taxes related to other comprehensive income:

 

  

 

  

 

  

 

  

Changes in unrealized loss (gain) on securities available for sale

 

861

 

(82)

 

1,703

 

(1,791)

Changes in unrealized loss (gain) on hedging derivatives(1)

 

48

 

(308)

 

(538)

 

1,776

Changes in unrealized loss on pension

 

0

 

0

 

0

 

0

Total other comprehensive (loss) income(1)

 

(2,994)

 

1,263

 

(3,852)

 

339

Total comprehensive income(1)

$

8,034

$

9,665

$

25,681

$

24,943

  Three Months Ended September 30, Nine Months Ended September 30,
(In thousands) 2017 2016 2017 2016
Net income $8,617
 $3,632
 $19,386
 $12,349
Other comprehensive income (loss), before tax:  
  
  
  
Changes in unrealized loss on securities available-for-sale 512
 (5,577) 5,119
 3,041
Changes in unrealized loss on derivative hedges (84) (92) (805) (1,309)
Changes in unrealized loss on pension 5
 8
 45
 86
Income taxes related to other comprehensive income (loss):  
  
    
Changes in unrealized loss on securities available-for-sale (192) 1,952
 (1,839) (1,064)
Changes in unrealized loss on derivative hedges 31
 32
 373
 458
Changes in unrealized loss on pension (2) (3) (2) (30)
Total other comprehensive income 270
 (3,680) 2,891
 1,182
Total comprehensive income $8,887
 $(48) $22,277
 $13,531
(1)Prior period has been revised, see Note 1 Basis of Presentation – Revision of Previously Issued Financial Statements.

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


7


BAR HARBOR BANKSHARES AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY


(UNAUDITED)

    

    

    

Accumulated 

    

    

Common 

Additional 

other 

stock

paid-in

Retained 

comprehensive 

Treasury

(in thousands, except per share data)

    

 amount

    

 capital

    

earnings

    

income (loss)(1)

    

 stock

    

Total(1)

Balance at December 31, 2019

 

$

32,857

$

188,536

$

175,780

$

3,792

$

(4,677)

$

396,288

Net income

 

0

 

0

 

16,202

 

0

 

0

 

16,202

Other comprehensive income

 

0

 

0

 

0

 

(924)

 

0

 

(924)

Cash dividends declared ($0.44 per share)

 

0

 

0

 

(6,819)

 

0

 

0

 

(6,819)

Treasury stock purchased (405,208 shares)

 

0

 

0

 

0

 

0

 

(7,467)

 

(7,467)

Net issuance (61,025 shares) to employee stock plans, including related tax effects

 

0

 

406

 

0

 

0

 

251

 

657

Recognition of stock based compensation

 

0

 

584

 

0

 

0

 

0

 

584

Balance at June 30, 2020

$

32,857

$

189,526

$

185,163

$

2,868

$

(11,893)

$

398,521

Net income

 

0

 

0

 

8,402

 

0

 

0

 

8,402

Other comprehensive income

 

0

 

0

 

0

 

1,263

 

0

 

1,263

Cash dividends declared ($0.22 per share)

 

0

 

0

 

(3,316)

 

0

 

0

 

(3,316)

Common stock purchased (297,658 shares)

 

0

 

0

 

0

 

0

 

(6,003)

 

(6,003)

Net issuance (12,275 shares) to employee stock plans, including related tax effects

 

0

 

(199)

 

0

 

0

 

224

 

25

Recognition of stock based compensation

 

0

 

279

 

0

 

0

 

0

 

279

Balance at September 30, 2020

$

32,857

$

189,606

$

190,249

$

4,131

$

(17,672)

$

399,171

Balance at December 31, 2020

$

32,857

$

190,084

$

195,607

$

6,740

$

(18,223)

$

407,065

Allowance for credit losses cumulative-effect adjustment - ASU 2016-13 (Note 1)

0

0

(5,242)

0

0

(5,242)

Net income

 

0

 

0

 

18,505

 

0

 

0

 

18,505

Other comprehensive loss

 

0

 

0

 

0

 

(858)

 

0

 

(858)

Cash dividends declared ($0.46 per share)

 

0

 

0

 

(6,876)

 

0

 

0

 

(6,876)

Net issuance (56,290 shares) to employee stock plans, including related tax effects

 

0

 

(280)

 

0

 

0

 

449

 

169

Recognition of stock based compensation

 

0

 

997

 

0

 

0

 

0

 

997

Balance at June 30, 2021

$

32,857

$

190,801

$

201,994

$

5,882

$

(17,774)

$

413,760

Net income

 

0

 

0

 

11,028

 

0

 

0

 

11,028

Other comprehensive income

 

0

 

0

 

0

 

(2,994)

 

0

 

(2,994)

Cash dividends declared ($0.24 per share)

 

0

 

0

 

(3,596)

 

0

 

0

 

(3,596)

Net issuance (14,412 shares) to employee stock plans, including related tax effects

 

0

 

(276)

 

0

 

0

 

146

 

(130)

Recognition of stock based compensation

 

0

 

367

 

0

 

0

 

0

 

367

Balance at September 30, 2021

$

32,857

$

190,892

$

209,426

$

2,888

$

(17,628)

$

418,435

(In thousands) Common stock amount Additional paid-in capital Retained earnings Accumulated other comprehensive income Treasury stock Total
Balance at December 31, 2015 $13,577
 $21,624
 $122,260
 $3,629
 $(6,938) $154,152
             
Comprehensive income:            
Net income 
 
 12,349
 
 
 12,349
Other comprehensive loss 
 
 
 1,182
 
 1,182
Total comprehensive income 
 
 12,349
 1,182
 
 13,531
Cash dividends declared ($0.54 per share) 
 
 (4,880) 
 
 (4,880)
Treasury stock purchased (23,072) 
 
 
 
 (497) (497)
Net issuance (91,466) to employee stock plans, including related tax effects 
 35
 (127) 
 1,140
 1,048
Recognition of stock based compensation 
 982
 
 
   982
Balance at September 30, 2016 $13,577
 $22,641
 $129,602
 $4,811
 $(6,295) $164,336
             
Balance at December 31, 2016 $13,577
 $23,027
 $130,489
 $(4,326) $(6,027) $156,740
             
Comprehensive income:            
Net income 
 
 19,386
 
 
 19,386
Other comprehensive loss 
 
 
 2,891
 
 2,891
Total comprehensive income 
 
 19,386
 2,891
 
 22,277
Cash dividends declared ($0.56 per share) 
 
 (8,624) 
 
 (8,624)
Acquisition of Lake Sunapee Bank Group 8,328
 173,591
 
 
 
 181,919
Treasury stock purchased (9,603 shares) 
 
 
 
 (282) (282)
Net issuance (80,448 shares) to employee stock plans, including related tax effects 
 (265) 
 
 874
 609
Three-for-two stock split 10,953
 (10,968) 
 
 
 (15)
Recognition of stock based compensation 
 835
 
 
 
 835
Balance at September 30, 2017 $32,858
 $186,220
 $141,251
 $(1,435) $(5,435) $353,459

(1)Prior period has been revised, see Note 1 Basis of Presentation – Revision of Previously Issued Financial Statements.

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


8


BAR HARBOR BANKSHARES AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

Nine Months Ended September 30, 

(in thousands)

    

2021

    

2020

Cash flows from operating activities:

 

 

  

  

Net income

 

$

29,533

$

24,604

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

  

Provision for credit losses

 

(1,428)

 

4,265

Net amortization of securities

 

3,788

 

2,472

Change in unamortized net loan costs and premiums

 

(2,739)

 

1,923

Premises and equipment depreciation

 

3,466

 

3,571

Stock-based compensation expense

 

1,364

 

863

Accretion of purchase accounting entries, net

 

10

 

7

Amortization of other intangibles

 

704

 

768

Income from cash surrender value of bank-owned life insurance policies

 

(1,510)

 

(1,525)

Gain on sales of securities, net

 

(1,980)

 

(1,486)

Decrease (increase) in right-of-use lease assets

851

(578)

(Decrease) increase in lease liabilities

(786)

625

Loss on other real estate owned

 

 

366

(Gain) loss on premises and equipment, net

 

(137)

 

90

Net change in other assets and liabilities

 

(373)

 

(3,978)

Net cash provided by operating activities

 

30,763

 

31,987

Cash flows from investing activities:

 

  

 

  

Proceeds from sales of securities available for sale

 

54,388

 

87,521

Proceeds from maturities, calls and prepayments of securities available for sale

 

99,580

 

109,314

Purchases of securities available for sale

 

(123,335)

 

(131,107)

Net change in loans

 

47,519

 

(71,233)

Purchase of FHLB stock

 

(790)

 

(4,044)

Proceeds from sale of FHLB stock

 

4,634

 

10,748

Purchase of premises and equipment, net

 

(1,216)

 

(4,449)

Net investment in community limited partnerships

(1,112)

Acquisitions, net of cash acquired

(340)

Proceeds from sale of other real estate owned

(113)

Net cash provided by (used in) investing activities

 

79,668

 

(3,703)

Cash flows from financing activities:

 

  

 

  

Net change in deposits

 

101,050

 

239,164

Net change in short-term senior borrowings

9,324

(273,268)

Proceeds from long-term senior borrowings

273,342

Repayments of long-term senior borrowings

(89,018)

(71,187)

Net change in short-term other borrowings

 

(6,112)

 

(14,784)

Net change subordinated debt issuance costs

119

Exercise of stock options

39

682

Purchase of treasury and common stock

(13,470)

Cash dividends paid on common stock

 

(10,472)

 

(10,135)

Net cash provided by financing activities

 

4,811

 

130,463

(continued)

9

BAR HARBOR BANKSHARES AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

  Nine Months Ended September 30,
(In thousands) 2017 2016
Cash flows from operating activities:  
  
Net income $19,386
 $12,349
Adjustments to reconcile net income to net cash provided by operating activities:    
Provision for loan losses 2,191
 754
Net amortization of securities 4,006
 2,293
Deferred tax benefit (237) 
Change in unamortized net loan costs and premiums (368) 
Premises and equipment depreciation and amortization expense 2,745
 1,159
Stock-based compensation expense 835
 982
Accretion of purchase accounting entries, net (2,482) 
Amortization of other intangibles 542
 69
Income from cash surrender value of bank-owned life insurance policies (1,165) (540)
Gain on sales of securities, net (19) (4,489)
Loss on premises and equipment, net 95
 
Net change in other (2,387) (695)
Net cash provided by operating activities 23,142
 11,882
     
Cash flows from investing activities:  
  
Proceeds from sales of securities available for sale 1,581
 66,431
Proceeds from maturities, calls and prepayments of securities available for sale 92,817
 78,190
Purchases of securities available for sale (138,785) (171,702)
Net change in loans (71,669) (2,842)
Purchase of loans (18,621) (95,421)
Purchase of Federal Home Loan Bank stock (327) (2,233)
Purchase of premises and equipment, net (3,011) (3,567)
Acquisitions, net of cash (paid) acquired 39,537
 
Proceeds from sale of other real estate 322
 
Net cash used in investing activities (98,156) (131,144)
     
Cash flows from financing activities:  
  
Net decrease in deposits 74,725
 90,738
Net change in short-term advances from the Federal Home Loan Bank 110,801
 31,250
Net change in long term advances from the Federal Home Loan Bank (62,531) 8,238
Net change in securities sold repurchase agreements 672
 (1,784)
Exercise of stock options 451
 1,048
Purchase of treasury stock (196) (497)
Common stock cash dividends paid (8,623) (4,880)
Net cash provided by financing activities 115,299
 124,113
     
Net change in cash and cash equivalents 40,285
 4,851
Cash and cash equivalents at beginning of year 8,439
 9,720
Cash and cash equivalents at end of year $48,724
 $14,571
Supplemental cash flow information:  
  
Interest paid $16,184
 $8,858
Income taxes paid, net 6,764
 5,342
     
Acquisition of non-cash assets and liabilities:    
Assets acquired 1,454,076
 
Liabilities assumed 1,406,672
 
     
Other non-cash changes:    
Real estate owned acquired in settlement of loans 32
 
(UNAUDITED) (continued)

Nine Months Ended September 30, 

(in thousands)

    

2021

    

2020

Net change in cash and cash equivalents

 

115,242

 

158,747

Cash and cash equivalents at beginning of year

 

226,007

 

56,910

Cash and cash equivalents at end of period

$

341,249

$

215,657

Supplemental cash flow information:

 

  

 

  

Interest paid

$

13,052

$

22,085

Income taxes paid, net

 

7,755

 

4,806

Acquisition of non-cash assets and liabilities:

Assets acquired

1,171

Liabilities acquired

(343)

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


10


BAR HARBOR BANKSHARES AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS


NOTE 1.          BASIS OF PRESENTATION


The consolidated financial statements (the “financial statements”) of Bar Harbor Bankshares and its subsidiaries (the “Company” or “Bar Harbor”) have been prepared in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”). Bar Harbor Bankshares is a Maine Financial Institution Holding Company for the purposes of the laws of the state of Maine, and as such is subject to the jurisdiction of the Superintendent of the Maine Bureau of Financial Institutions. These financial statements include the accounts of the Company, its wholly-ownedwholly owned subsidiary Bar Harbor Bank & Trust (the "Bank") and the Bank’s consolidated subsidiaries. In consolidation, all significant intercompany accounts and transactions are eliminated. The results of operations of companies or assets acquired are included only from the dates of acquisition. All material wholly-ownedwholly owned and majority-ownedmajority owned subsidiaries are consolidated unless U.S. GAAP requires otherwise.


In addition, these interim financial statements have been prepared in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X, and accordingly, certain information and footnote disclosures normally included in financial statements prepared according to U.S. GAAP have been omitted.


The results for any interim period are not necessarily indicative of results for the full year. These consolidated financial statements should be read in conjunction with the audited financial statements and note disclosures for the Company's Annual Report on Form 10-K for the year ended December 31, 20162020 previously filed with the Securities and Exchange Commission.Commission (the "SEC").  In management's opinion, all adjustments necessary for a fair statement are reflected in the interim periods presented.


As a result

Reclassifications: Whenever necessary, amounts in the prior years’ financial statements are reclassified to conform to current presentation. The reclassifications had no impact on net income in the Company’s consolidated income statement.

Summary of Significant Accounting Policies

The disclosures below supplement updates the accounting policies previously disclosed in NOTE 1 – Summary of Significant Accounting Policies of the Lake Sunapee Group acquisition,Company’s Annual Report on Form 10-K for the year ended December 31, 2020.  The updates reflect the adoption of the Financial Accounting Standards Board (FASB) Accounting Standards Updates (ASU) 2016-13, “Financial Instruments - Credit Losses (Topic 326) - Measurement of Credit Losses on Financial Instruments”, referred to as ASC 326 or, more commonly, referred to as Current Expected Credit Losses (CECL).

Allowance for Credit Loss on AFS Debt Securities: Upon adoption of CECL, effective January 1, 2021,  the Company monitors the credit quality of available for sale (AFS) debt securities through credit ratings from various rating agencies and substantial price changes. Credit ratings express opinions about the credit quality of a security and are utilized by the Company to make informed decisions.  Securities are triggered for further review in the quarter if the security has significant fluctuations in ratings, drops below investment grade, or significant pricing changes. For securities without credit ratings, the following new significantCompany utilizes other financial information indicating the financial health of the underlying municipality, agency, or organization associated with the underlying security.  If this assessment indicates that a credit loss exists, the present value of cash flows expected to be collected from the security are compared to the amortized cost basis of the security.  If the present value of cash flows expected to be collected is less than the amortized cost basis, a credit loss exists and critical accounting policy regardingan allowance on AFS debt securities is recorded for the credit loss, limited by the amount that the fair value is less than the amortized cost basis. When assessing an AFS debt security for credit loss, securities with identical CUSIPs are pooled together to assess for impairment using the average cost basis. Any impairment that has not been recorded through an allowance is recognized in other comprehensive income.

A change in the allowance on AFS debt securities may be in full or a portion thereof, is recorded as expense (credit) within provision for credit losses on the consolidated statements of income. Losses are charged against the allowance when management believes the uncollectibility of an AFS debt security is confirmed  based on the above described analysis.  As

11

of September 30, 2021 and January 1, 2021 (i.e. ASU 2016-13 adoption), there was 0 allowance carried on the Company's AFS debt securities. Refer to Note 2 of the consolidated financial statements for further discussion.

Loans:  Loans held for investment by the Company are reported at amortized cost.  Amortized cost is the principal balance outstanding net of the unamortized balance of any deferred fees or costs and the unamortized balance of any premiums or discounts on loans purchased or acquired loans:


Acquiredthrough mergers.  

For originated loans, loan fees and certain direct origination costs are deferred and amortized into interest income over the contractual term of the loan using the level-yield method over the estimated lives of the related loans. When a loan is paid off, the unamortized portion of deferred fees or costs are recognized in interest income. Interest income on originated loans is accrued based upon the daily principal amount outstanding except for loans on non-accrual status.  

For acquired loans, interest income is accrued based upon the daily principal amount outstanding and is then further adjusted by the accretion of any discount or amortization of any premium associated with the loan that was recognized based on the acquisition date fair value. When a loan is paid off, the unamortized portion of any premiums or discounts on loans are recognized in interest income.

Purchase Credit Deteriorated (PCD) Loans:  Loans that the Company acquired in business combinationsacquisitions include some loans that have experienced more than insignificant credit deterioration since origination. The initial allowance for credit losses is determined on a collective basis and allocated to the individual loans. The sum of the loan’s purchase price and allowance for credit losses becomes its initial amortized cost. The difference between the initial amortized cost and the par value of the loan is a discount or premium, which is amortized into interest income over the life of the loan. Subsequent changes to the allowance for credit losses are initially recorded at fair valuethrough provision expense.

The Company adopted CECL using the prospective transition approach for financial assets purchased with no carryovercredit deterioration that were previously classified as purchased credit impaired (PCI) and accounted for under ASC 310-30. In accordance with the standard, the Company did not reassess whether PCI assets met the definition of PCD assets as of the date of adoption. On January 1, 2021, the amortized cost basis of the PCD assets representing the noncredit discount will be accreted into interest income using the level-yield method over the estimated lives of the related loans.  The converted PCD assets of $12.5 million were then pooled by call report coding and an additional allowance was calculated on the pooled assets separately from other loan pools totaling $524 thousand.

Non-performing loans: Residential real estate and consumer loans are generally placed on non-accrual status when reaching 90 days past due, or in process of foreclosure, or sooner if considered appropriate by management. Secured consumer loans are written down to net realizable value and unsecured consumer loans are charged-off upon reaching 120 days past due. Commercial real estate loans and commercial business loans that are 90 days or more past due are generally placed on non-accrual status, unless secured by sufficient cash or other assets immediately convertible to cash, and the loan is in the process of collection. Commercial real estate and commercial business loans may be placed on non-accrual status prior to the 90 days delinquency date if considered appropriate by management.

When a loan has been placed on non-accrual status, previously accrued and uncollected interest is reversed against interest on the loan. The interest on non-accrual loans is accounted for using the cash-basis or cost-recovery method depending on corresponding credit losses. Determiningrisk, until qualifying for return to accrual status. A loan can be returned to accrual status when collectability of principal is reasonably assured and the fairloan has performed for a period of time, generally six months.

Previously, acquired loans that met the criteria for non-accrual of interest prior to the acquisition were considered performing upon acquisition, regardless of whether the customer is contractually delinquent, if the Company could reasonably estimate the timing and amount of the expected cash flows on such loans and if the Company expects to fully collect the new carrying value of the loans involves estimatingand any change in performance would have impacted accretable yield.  After adoption of ASC 326 on January 1, 2021 the amountCompany now treats these non-performing acquired loans that meet the criteria for non-accrual consistent with originated loans.

Allowance for Credit Losses: The allowance for credit losses (the “allowance”) is a significant accounting estimate used in the preparation of the Company’s consolidated financial statements.  The Allowance is comprised of the allowance for

12

loan losses and timingthe allowance for off-balance sheet credit exposures, which is accounted for as a separate liability in other liabilities on the balance sheet. The level of principal and interest cash flows initiallythe allowance represents management’s estimate of expected credit losses over the expected life of the loans at the balance sheet date.

Upon adoption of ASC 326 or CECL on January 1, 2021, the Company replaced the incurred loss impairment model that recognizes losses when it became probable that a credit loss will be incurred, with a requirement to recognize lifetime expected credit losses immediately when a financial asset is originated or purchased. The allowance for credit losses is a valuation account that is deducted from the amortized cost basis of loans to present the net amount expected to be collected on the loans. Loans, or portions thereof, are charged off against the allowance when they are deemed uncollectible. Expected recoveries do not exceed the aggregate of amounts previously charged-off and expected to be charged- off.  The allowance is comprised of reserves measured on a collective (pool) basis based on a lifetime loss-rate model when similar risk characteristics exist. Loans that do not share risk characteristics are evaluated on an individual basis, generally larger non-accruing commercial loans and discounting thoseTDRs.

The Company uses the discounted cash flow (DCF) method to estimate expected credit losses for all loan portfolio segments measured on a collective (pool) basis. For each loan segment, the Company generates cash flow projections at the instrument level wherein payment expectations are adjusted for estimated prepayment speeds, probability of default, and loss given default. The modeling of prepayment speeds is based on historical internal data.

The Company uses regression analysis of historical internal and peer data to determine suitable loss drivers to utilize when modeling lifetime probability of default. This analysis also determines how expected probability of default and loss given default will react to forecasted levels of the loss drivers. For all loan pools utilizing the DCF method, management utilizes various economic indicators such as changes in unemployment rates, gross domestic product, property values, housing starts, and other relevant factors as loss drivers.  For all DCF models, management has determined that due to historic volatility in economic data, two quarters currently represents a reasonable and supportable forecast period, followed by a six-period reversion to historical mean levels for each of the various economic indicators.

The combination of adjustments for credit expectations (default and loss) and timing expectations (prepayment, curtailment, and time to recovery) produces an expected cash flow stream at the instrument level. Specific instrument effective yields are calculated, net of the impacts of prepayment assumptions, and the instrument expected cash flows are then discounted at that effective yield to produce an instrument-level Net Present Value (NPV). An allowance is established for the difference between the instrument’s NPV and amortized cost basis.

The allowance evaluation also considers various qualitative factors, such as: (i) changes to lending policies, underwriting standards and/or management personnel performing such functions, (ii) delinquency and other credit quality trends, (iii) credit risk concentrations, if any, (iv) changes to the nature of the Company's business impacting the loan portfolio, (v) and other external factors, that may include, but are not limited to, results of internal loan reviews, stress testing, examinations by bank regulatory agencies, or other events such as a natural disaster.

Arriving at an appropriate market ratelevel of interest. Going forward,allowance involves a high degree of judgment. The determination of the adequacy of the allowance and provisioning for estimated losses is evaluated regularly based on review of loans, with particular emphasis on non-performing and other loans that management believes warrant special consideration.  While management uses available information to recognize losses on loans, changing economic conditions and the economic prospects of the borrowers may necessitate future additions or reductions to the allowance.

Individually Evaluated Loans:  Prior to the adoption of CECL on January 1, 2021, a loan was individually evaluated when the loan was considered impaired.  Impaired loans were based on current information and events, it is probable that the Company will continuenot be able to evaluate reasonablenesscollect all amounts due from the borrower in accordance with the contractual terms of expectations for the timingloan, including scheduled interest payments.

With the adoption of CECL, loans that do not share risk characteristics with existing pools are evaluated on an individual basis.  For loans that are individually evaluated and collateral dependent,  financial loans where the Company has determined that foreclosure of the collateral is probable, or where the borrower is experiencing financial difficulty and the amountCompany expects repayment of cashthe financial asset to be collected. Subsequent decreasesprovided substantially through the operation or increases insale of the collateral, the ACL is measured

13

based on the difference between the fair value of the collateral and the amortized cost basis of the asset as of the measurement date.  When repayment is expected cash flows may result in changes into be from the amortization or accretionoperation of fair market value adjustments, and in some cases may result in the loan being considered impaired. For collateral, dependent loans with deterioratedthe specific credit quality,loss reserve is calculated as the Company estimatesamount by which the amortized cost basis of the financial asset exceeds the NPV from the operation of the collateral. When repayment is expected to be from the sale of the collateral, the specific credit loss reserve is calculated as the amount by which the amortized costs basis of the financial asset exceeds the fair value of the underlying collateral of the loans. These values are discounted using market derived rates of return, with consideration givenless estimated cost to the period of time and costs associated with the foreclosure and disposition of the collateral.


Recently Adopted Accounting Principles
In March 2016, the FASB issued ASU No. 2016-09, “Improvements to Employee Share-Based Payment Accounting.” This ASU includes provisions intended to simplify various aspects related to how share-based payments are accounted for and presented in the financial statements. Some of the key provisions of this new ASU include: (1) companies will no longer record excess tax benefits and certain tax deficiencies in additional paid-in capital (“APIC”). Instead, they will record all excess tax benefits and tax deficiencies as income tax expense or benefit in the income statement, and APIC pools willsell.  The allowance may be eliminated. The guidance also eliminates the requirement that excess tax benefits be realized before companies can recognize them. In addition, the guidance requires companies to present excess tax benefits as an operating activity on the statement of cash flows rather than as a financing activity; (2) increase the amount an employer can withhold to cover income taxes on awards and still qualify for the exception to liability classification for shares used to satisfy the employer’s statutory income tax withholding obligation. The new guidance will also require an employer to classify the cash paid to a tax authority when shares are withheld to satisfy its statutory income tax withholding obligation as a financing activity on its statement of cash flows (current guidance did not specify how these cash flows should be classified); and (3) permit companies to make an accounting policy election for the impact of forfeitures on the recognition of expense for share-based payment awards. Forfeitures can be estimated, as required

currently, or recognized when they occur. ASU No. 2016-09 is effective for interim and annual reporting periods beginning after December 15, 2016. The Company adopted ASU No. 2016-09 on January 1, 2017 and elected to recognize forfeitures as they occur. As allowed by the ASU, the Company’s adoption was prospective, therefore, prior periods have not been adjusted. The adoption of ASU No. 2016-09 could result in increased volatility to reported income tax expense related to excess tax benefits and tax deficiencies for employee share-based transactions, however, the actual amounts recognized in income tax expense will be dependent on the amount of employee share-based transactions and the stock price at the time of vesting or exercise. In 2017, the adoption of ASU No. 2016-09 resulted in an insignificant decrease to the provision for income taxes primarily due to the tax benefit from the exercise of stock options and the vesting of restricted stock.

In March 2017, the FASB issued ASU No. 2017-08, “Premium Amortization on Purchased Callable Debt Securities.” This ASU shortens the amortization period for the premium on certain purchased callable debt securities to the earliest call date. Today, entities generally amortize the premium over the contractual life of the security. The new guidance does not change the accounting for purchased callable debt securities held at a discount; the discount continues to be amortized to maturity. ASU No. 2017-08 is effective for interim and annual reporting periods beginning after December 15, 2018; early adoption is permitted. The guidance calls for a modified retrospective transition approach under which a cumulative-effect adjustment will be made to retained earnings as of the beginning of the first reporting period in which the guidance is adopted. The Company elected to adopt the provisions of ASU No. 2017-08 as of March 31, 2017, which had no impact on the Company’s Consolidated Financial Statements.

Future Application of Accounting Pronouncements
In May 2014, the FASB and the International Accounting Standards Board (the “IASB”) jointly issued a comprehensive new revenue recognition standard that will supersede nearly all existing revenue recognition guidance under U.S. GAAP and International Financial Reporting Standards (“IFRS”). Current revenue recognition guidance in U.S. GAAP consists of broad revenue recognition concepts together with numerous revenue requirements for particular industries or transactions, which sometimes resulted in different accounting for economically similar transactions. In contrast, IFRS provided limited revenue recognition guidance and, consequently, could be difficult to apply to complex transactions. Accordingly, the FASB and the IASB initiated a joint project to clarify the principles for recognizing revenue and to develop a common revenue standard for U.S. GAAP and IFRS that would: (1) remove inconsistencies and weaknesses in revenue requirements; (2) provide a more robust framework for addressing revenue issues; (3) improve comparability of revenue recognition practices across entities, industries, jurisdictions, and capital markets; (4) provide more useful information to users of financial statements through improved disclosure requirements; and (5) simplify the preparation of financial statements by reducing the number of requirements to which an entity must refer. To meet those objectives, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers.” The common revenue standard’s core principle is that a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. In doing so, companies generally will be required to use more judgment and make more estimates than under current guidance. These may include identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation. The standard was initially effective for public entities for interim and annual reporting periods beginning after December 15, 2016; early adoption was not permitted. However, in August 2015, the FASB issued ASU No. 2015-14, “Revenue from Contracts with Customers - Deferral of the Effective Date” which deferred the effective date by one year (i.e., interim and annual reporting periods beginning after December 15, 2017). For financial reporting purposes, the standard allows for either full retrospective adoption, meaning the standard is applied to all of the periods presented, or modified retrospective adoption, meaning the standard is applied only to the most current period presented in the financial statements with the cumulative effect of initially applying the standard recognized at the date of initial application. In addition, the FASB has begun to issue targeted updates to clarify specific implementation issues of ASU 2014-09. These updates include ASU No. 2016-08, “Principal versus Agent Considerations (Reporting Revenue Gross versus Net),” ASU No. 2016-10, “Identifying Performance Obligations and Licensing,” ASU No. 2016-12, “Narrow-Scope Improvements and Practical Expedients,” and ASU No. 2016-20 “Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers.” Since the guidance does not apply to revenue associated with financial instruments, including loans and securities that are accounted for under other U.S. GAAP, the Company does not expect the new guidance to have a material impact on revenue most

closely associated with financial instruments, including interest income. The Company is currently performing an overall assessment of revenue streams and reviewing contracts potentially affected by the ASU including trust and asset management fees, deposit related fees, interchange fees, and merchant income, to determine the potential impact the new guidance is expected to have on the Company’s Consolidated Financial Statements. In addition, the Company continues to follow certain implementation issues relevant to the banking industry which are still pending resolution. The Company plans to adopt ASU No. 2014-09 on January 1, 2018 utilizing the modified retrospective approach.

In January 2016, the FASB issued ASU No. 2016-01, “Recognition and Measurement of Financial Assets and Financial Liabilities.” This ASU addresses certain aspects of recognition, measurement, presentation, and disclosure of financial instruments by making targeted improvements to U.S. GAAP as follows: (1) require equity investments (except those accounted for under the equity method of accounting or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income. However, an entity may choose to measure equity investments that do not have readily determinable fair values at cost minus impairment,zero if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer; (2) simplify the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment. When a qualitative assessment indicates that impairment exists, an entity is required to measure the investment at fair value; (3) eliminate the requirement to disclose the fair value of financial instruments measuredthe collateral at the measurement date exceeds the amortized cost for entities that are not public business entities; (4) eliminate the requirement for public business entities to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet; (5) require public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes; (6) require an entity to present separately in other comprehensive income the portionbasis of the total change in the fair valuefinancial asset.

Accrued Interest. Upon adoption of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments; (7) require separate presentation of financial assets and financial liabilities by measurement category and form of financial asset (that is, securities or loans and receivables) on the balance sheet or the accompanying notes to the financial statements; and (8) clarify that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale securities in combination with the entity’s other deferred tax assets. ASU No. 2016-01 isCECL, effective for interim and annual reporting periods beginning after December 15, 2017. Early application is permitted as of the beginning of the fiscal year of adoption only for provisions (3) and (6) above. Early adoption of the other provisions mentioned above is not permitted. The Company has performed a preliminary evaluation of the provisions of ASU No. 2016-01. Based on this evaluation,January 1, 2021, the Company has determined that ASU No. 2016-01 is not expected to have a material impact on the Company’s Consolidated Financial Statements; however, the Company will continue to closely monitor developments and additional guidance.


In February 2016, the FASB issued ASU No. 2016-02, “Leases.” Under the new guidance, lessees will be required to recognizemade the following for all leases (with the exception of short-term leases): (1) a lease liability, which is theelections regarding accrued interest receivable: (i) present value of a lessee’s obligation to make lease payments, and (2) a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. Lessor accounting under the new guidance remains largely unchanged as it is substantially equivalent to existing guidance for sales-type leases, direct financing leases, and operating leases. Leveraged leases have been eliminated, although lessors can continue to account for existing leveraged leases using the current accounting guidance. Other limited changes were made to align lessor accounting with the lessee accounting model and the new revenue recognition standard. All entities will classify leases to determine how to recognize lease-related revenue and expense. Quantitative and qualitative disclosures will be required by lessees and lessors to meet the objective of enabling users of financial statements to assess the amount, timing, and uncertainty of cash flows arising from leases. The intention is to require enough information to supplement the amounts recorded in the financial statements so that users can understand more about the nature of an entity’s leasing activities. ASU No. 2016-02 is effective for interim and annual reporting periods beginning after December 15, 2018; early adoption is permitted. All entities are required to use a modified retrospective approach for leases that exist or are entered into after the beginning of the earliest comparative period in the financial statements. They have the option to use certain relief; full retrospective application is prohibited. The Company has several lease agreements, such as branch locations, which are currently considered operating leases, and therefore, not recognized on the Company’s consolidated statements of condition. The Company expects the new guidance will require these lease

agreements to now be recognizedaccrued interest receivable balances within other assets on the consolidated statements of condition ascondition; (ii) exclude accrued interest from the measurement of the allowance for credit losses, including investments and loans; and (iii) continue to write-off accrued interest receivable by reversing interest income. The Company has a right-of-use asset andpolicy in place to write-off accrued interest when a corresponding lease liability. Therefore, the Company’s preliminary evaluation indicates the provisions of ASU No. 2016-02 are expected to impact the Company’s consolidated statements of condition. However,loan is placed on non-accrual.  Historically, the Company continues to evaluate the extenthas not experienced uncollectible accrued interest receivable on investment debt securities.

Allowance for off-balance sheet credit exposures:  The exposure is a component of potential impact the new guidance will haveother liabilities on the Company’s Consolidated Financial Statements.


In June 2016,Balance Sheet and represents the FASB issued ASU No. 2016-13, “Measurement of Credit Losses on Financial Instruments.” This ASU significantly changes how entities will measureestimate for probable credit losses for most financial assets and certain other instruments that aren’t measured at fair value through net income. In issuing the standard, the FASB is respondinginherent in unfunded commitments to criticism that today’s guidance delays recognitionextend credit.  Unfunded commitments to extend credit include unused portions of lines of credit losses.and standby and commercial letters of credit. The standard will replace today’s “incurred loss” approach with an “expected loss” model. The new model, referredprocess used to as the current expected credit loss (“CECL”) model, will apply to: (1) financial assets subject to credit losses and measured at amortized cost, and (2) certain off-balance sheet credit exposures. This includes, but is not limited to, loans, leases, held-to-maturity securities, loan commitments, and financial guarantees. The CECL model does not apply to available-for-sale (“AFS”) debt securities. For AFS debt securities with unrealized losses, entities will measure credit losses in a manner similar to what they do today, except that the losses will be recognized as allowances rather than reductions in the amortized cost of the securities. As a result, entities will recognize improvements to estimated credit losses immediately in earnings rather than as interest income over time, as they do today. The ASU also simplifies the accounting model for purchased credit-impaired debt securities and loans. ASU 2016-13 also expands the disclosure requirements regarding an entity’s assumptions, models, and methods for estimatingdetermine the allowance for these exposures is consistent with the process for determining the allowance for loans, as adjusted for estimated funding probabilities or loan and lease losses. In addition, entities will needequivalency factors.  A charge (credit) to discloseprovision for credit losses on the amortized cost balanceconsolidated statements of income is made to account for each classthe change in the allowance on off-balance sheet exposures between reporting periods.

14

Impact of Adoption

The following table illustrates the yearadoption of origination. ASU No. 2016-13 is effective for interim and annual reporting periods beginning after December CECL on January 1, 2021:

Reclassification

Pre-CECL

Post-CECL

to CECL

Adoption

Adoption

Impact of

Pre-CECL

Portfolio

Portfolio

Portfolio

CECL

(in thousands)

    

Adoption

    

Segmentation

    

Segmentation

    

Segmentation

    

Adoption

Assets:

 

  

 

  

 

  

 

  

 

  

Loans:

 

  

 

  

 

  

 

  

 

  

Commercial construction

$

131,123

$

(13,241)

$

117,882

$

117,882

$

Commercial real estate

 

953,258

 

(953,258)

 

 

 

Commercial real estate owner occupied

 

 

219,217

 

219,217

 

219,217

 

Commercial real estate non-owner occupied

 

 

716,776

 

716,776

 

716,776

 

Tax exempt

 

63,431

 

(15,569)

 

47,862

 

47,862

 

Commercial and industrial

 

377,638

 

(21,954)

 

355,684

 

355,684

 

Residential real estate

 

923,891

 

71,325

 

995,216

 

995,216

 

Home equity

 

102,464

 

(2,368)

 

100,096

 

100,096

 

Consumer other

 

11,080

 

(928)

 

10,152

 

10,152

 

Total loans

$

2,562,885

$

$

2,562,885

$

2,562,885

$

Allowance for credit losses on loans

 

  

 

  

 

  

 

  

 

  

Commercial construction

$

1,044

$

(220)

$

824

$

2,020

$

1,196

Commercial real estate

 

10,199

 

(10,199)

 

 

 

Commercial real estate owner occupied

 

 

1,783

 

1,783

 

2,491

 

708

Commercial real estate non-owner occupied

 

 

7,864

 

7,864

 

5,856

 

(2,008)

Tax exempt

 

80

 

(22)

 

58

 

98

 

40

Commercial and industrial

 

3,302

 

(165)

 

3,137

 

6,133

 

2,996

Residential real estate

 

4,078

 

932

 

5,010

 

6,742

 

1,732

Home equity

 

258

 

27

 

285

 

888

 

603

Consumer other

 

121

 

 

121

 

82

 

(39)

Total allowance for credit losses on loans

$

19,082

$

$

19,082

$

24,310

$

5,228

Liabilities:

 

  

���

 

  

 

  

 

  

 

  

Allowance for credit losses on unfunded commitments

$

359

$

$

359

$

1,975

$

1,616

Total allowance for credit losses

$

19,441

$

$

19,441

$

26,285

$

6,844

Retained earnings:

 

  

 

  

 

  

 

  

 

  

Total increase in Allowance for credit losses

 

  

 

  

 

  

 

  

$

6,844

Tax effect

 

  

 

  

 

  

 

  

 

(1,602)

Decrease to retained earnings

 

  

 

  

 

  

 

  

$

5,242

15 2019; early adoption is permitted for interim and annual reporting periods beginning after December 15, 2018. Entities will apply the standard’s provisions as a cumulative-effect adjustment to retained earnings as

Revision of the first reporting period in which the guidance is effective (i.e., modified retrospective approach). The Company’s preliminary evaluation indicates the provisions of ASU No. 2016-13 are expected to impact the Company’s ConsolidatedPreviously Issued Financial Statements

The Company has revised amounts reported in particularpreviously issued financial statements for the level of the reserve for credit losses. However, the Company continues to evaluate the extent of the potential impact.


In August 2016, the FASB issued ASU No. 2016-15, “Classification of Certain Cash Receipts and Cash Payments.” Current U.S. GAAP is unclear or does not include specific guidanceperiods presented in this Quarterly Report on how to classify certain transactions in the statement of cash flows. This ASU is intended to reduce diversity in practice in how eight particular transactions are classified in the statement of cash flows. ASU No. 2016-15 is effective for interim and annual reporting periods beginning after December 15, 2017. Early adoption is permitted, provided that all of the amendments are adopted in the same period. Entities will be required to apply the guidance retrospectively. If it is impracticable to apply the guidance retrospectively for an issue, the amendmentsForm 10-Q related to errors. The revised amounts relate to derivatives that issue would be applied prospectively. As this guidance only affectswere incorrectly presented as assets instead of liabilities and related equity effects net of tax and the classification withinrelated effects on comprehensive income and shareholders’ equity.

The following tables present the statementrevisions to the line items of cash flows, ASU No. 2016-15 is not expectedour previously issued financial statements to reflect the correction of errors:

Consolidated Balance Sheets

December 31, 2020

As Reported

Adjustment

As Revised

Deferred tax assets, net

$

1,745

$

1,302

$

3,047

Other assets

73,662

(2,789)

70,873

Total assets

$

3,725,762

$

(1,487)

$

3,724,275

Other liabilities

$

72,183

$

2,789

$

74,972

Total liabilities

3,314,421

2,789

3,317,210

Total shareholders' equity

411,341

(4,276)

407,065

Total liabilities and shareholders' equity

$

3,725,762

$

(1,487)

$

3,724,275

Consolidated Statements of Comprehensive Income (Unaudited)

Three months ended September 30, 2020

As Reported

Adjustment

As Revised

Other comprehensive income, before tax:

Changes in unrealized gain (loss) on hedging derivatives

$

805

$

497

$

1,302

Income taxes related to other comprehensive income:

Changes in unrealized (gain) loss on hedging derivatives

(190)

(118)

(308)

Total other comphrensive income

884

379

1,263

Total comphrensive income

$

9,286

$

379

$

9,665

Nine months ended September 30, 2020

As Reported

Adjustment

As Revised

Other comprehensive income, before tax:

Changes in unrealized gain (loss) on hedging derivatives

$

(833)

$

(6,735)

$

(7,568)

Income taxes related to other comprehensive income:

Changes in unrealized (gain) loss on hedging derivatives

195

1,580

1,776

Total other comphrensive income

5,494

(5,155)

339

Total comphrensive income

$

30,098

$

(5,155)

$

24,943

16

Consolidated Statements of Changes in Shareholder's Equity (Unaudited)

As Reported

Adjustment

As Revised

Balance at December 31, 2019

$

396,407

$

(119)

$

396,288

Beginning accumulated other comprehensive income

3,911

(119)

3,792

Other comprehensive income

4,610

(5,534)

(924)

Ending accumulated other comprehensive income

8,521

(5,653)

2,868

Balance at June 30, 2020

$

404,174

$

(5,653)

$

398,521

Beginning accumulated other comprehensive income

8,521

(5,653)

2,868

Other comprehensive income

884

379

1,263

Ending accumulated other comprehensive income

9,405

(5,274)

4,131

Balance at September 30, 2020

$

404,445

$

(5,274)

$

399,171

Balance at December 31, 2020

$

411,341

$

(4,276)

$

407,065

Beginning accumulated other comprehensive income

11,016

(4,276)

6,740

Other comprehensive income

(3,322)

2,464

(858)

Ending accumulated other comprehensive income

7,694

(1,812)

5,882

Balance at June 30, 2021

$

415,572

$

(1,812)

$

413,760

17

Recent Accounting Pronouncements

The following table provides a brief description of recent accounting standards updates (ASU) that could have a material impact onto the Company’s Consolidated Financial Statements.


In January 2017, the FASB issued ASU No. 2017-04, “Simplifying the Test for Goodwill Impairment.” The guidance removes Step 2 of the goodwill impairment test, which requires a hypothetical purchase price allocation. Goodwill impairment will now be the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. All other goodwill impairment guidance will remain largely unchanged. ASU No. 2017-04 is effective for interim and annual reporting periods beginning after December 15, 2019, applied prospectively. Early adoption is permitted for any impairment tests performed after January 1, 2017. The Company expects to early adoptconsolidated financial statements upon the next goodwill impairment test in 2017. ASU No. 2017-04 is not expected to have a material impact on the Company’s Consolidated Financial Statements.

In March 2017, the FASB issued ASU No. 2017-07, “Improving the Presentation of Net Periodic Pension Cost and Net Periodic Post-retirement Benefit Cost.” Under the new guidance, employers will present the service cost component of the net periodic benefit cost in the same income statement line item as other employee compensation costs (e.g., Salaries and Benefits) arising from services rendered during the period. In addition, only the service cost component will be eligible for capitalization in assets. Employers will present the other components separately from the line item (e.g., Other Noninterest Expense) that includes the service cost. ASU No. 2017-07 is effective for interim and annual reporting periods beginning after December 15, 2017. Early adoption is permitted, however, the Company has decided

not to early adopt. Employers will apply the guidance on the presentation of the components of net periodic benefit cost in the income statement retrospectively. The guidance limiting the capitalization of net periodic benefit cost in assets to the service cost component will be applied prospectively. The Company expects to utilize the ASU’s practical expedient allowing entities to estimate amounts for comparative periods using the information previously disclosed in their pension and other post-retirement benefit plan footnote. ASU No. 2017-07 is not expected to have a material impact on the Company’s Consolidated Financial Statements.

In May 2017, the FASB issued ASU No. 2017-09, “Stock Compensation, Scope of Modification Accounting.” This ASU clarifies when changes to the terms of conditions of a share-based payment award must be accounted for as modifications. Companies will apply the modification accounting guidance if the value, vesting conditions or classification of the award changes. The new guidance should reduce diversity in practice and result in fewer changes to the terms of an award being accounted for as modifications, as the guidance will allow companies to make certain non-substantive changes to awards without accounting for them as modifications. It does not change the accounting for modifications. ASU No. 2017-09 is effective for interim and annual reporting periods beginning after December 15, 2017; early adoption is permitted. ASU No. 2017-09 is not expected to have a material impact on the Company’s Consolidated Financial Statements.

In August 2017, the FASB issued ASU No. 2017-12, “Targeted Improvements to Accounting for Hedging Activities.” This ASU’s objectives are to (1) improve the transparency and understandability of information conveyed to financial statement users about an entity’s risk management activities by better aligning the entity’s financial reporting for hedging relationships with those risk management activities; and (2) reduce the complexity of and simplify the application of hedge accounting by preparers. ASU No. 2017-12 is effective for interim and annual reporting periods beginning after December 15, 2018; early adoption is permitted. The Company’s interest rate cap agreements are derivative financial instruments that are designated as formal hedging relationships. The Company is currently evaluating this ASU to determine whether its provisions will enhance the Company’s ability to employ risk management strategies, while improving the transparency and understanding of those strategies for financial statement users.



NOTE 2.ACQUISITION

Lake Sunapee Bank Group
On January 13, 2017, the Company completed its acquisition of Lake Sunapee Bank Group (“Lake Sunapee”). Lake Sunapee, as a holding company, had one banking subsidiary (“Lake Sunapee Bank”) that had 33 full service branches located throughout New Hampshire and Vermont. As a result of the transaction, Lake Sunapee Bank Group merged into Bar Harbor Bankshares, and Lake Sunapee Bank merged into Bar Harbor Bank. This business combination expanded the Company's geographic footprint and increased market share in its New England based franchise. The goodwill recognized results from the expected synergies and earnings accretion from this combination, including future cost savings related to the operations of Lake Sunapee Bank Group.

On the acquisition date, Lake Sunapee had 8.38 million common shares outstanding, which were exchanged for 4.16 million of the Company's common shares based on a 0.4970 exchange ratio as defined in the merger agreement. The merger qualified as a reorganization for federal income tax purposes, and as a result, Lake Sunapee common shares exchanged for the Company's common shares were transferred on a tax-free basis. Bar Harbor Bankshares common stock issued in this exchange was valued at $43.69 per share based on the closing price posted on January 13, 2017 resulting in a consideration value of $181.92 million. The Company also paid $27 thousand to Lake Sunapee shareholders in lieu of the issuance of fractional shares. Total consideration paid at closing reflected the increase in Bar Harbor Bankshare's stock price since the time of the announcement.

The results of Lake Sunapee's operations are included in the Company's Consolidated Statement of Income from the date of acquisition. The assets and liabilities in the Lake Sunapee acquisition were recorded at their fair value based on management’s best estimate using information available as of the date of acquisition.


Consideration paid, and fair values of Lake Sunapee’s assets acquired and liabilities assumed, along with the resulting goodwill, are summarized in the following tables:
(in thousands) As Acquired Fair Value Adjustments   As Recorded at Acquisition
Consideration paid:        
Bar Harbor Bankshares common stock issued to Lake Sunapee Bank Group stockholders (4,163,853 shares)       $181,919
Cash paid for fractional shares       27
Total consideration paid       181,946
Recognized amounts of identifiable assets acquired and liabilities assumed, at fair value:        
Cash and short-term investments $40,970
 $(1,406) (a) $39,564
Investment securities 156,960
 (1,381) (b) 155,579
Loans 1,217,927
 (9,728) (c) 1,208,199
Premises and equipment 22,561
 (351) (d) 22,210
Core deposit intangible 
 7,786
 (e) 7,786
Other assets 102,298
 (50,419) (f) 51,879
Deposits (1,149,865) (746) (g) (1,150,611)
Borrowings (232,261) (16) (h) (232,277)
Deferred taxes, net (1,921) 10,217
 (i) 8,296
Other liabilities (19,924) (4,087) (j) (24,011)
Total identifiable net assets $136,745
 $(50,131)   $86,614
         
Goodwill       $95,332

Explanation of Certain Fair Value Adjustments
adoption:

a.

Standard

Represents in-process payments that were made

Description

Required Date
of Adoption

Effect on the date of acquisition that were not recorded on Lake Sunapee's general ledger until after acquisition.

financial statements

b.

Standards Adopted in 2021

Represents

ASU 2016-13, Measurement of Credit Losses on Financial Instruments ASU 2018‑19, Codification Improvements to ASU 2016-13

This ASU amends Topic 326, Financial Instruments- Credit Losses to replace the write downcurrent incurred loss accounting model with a current expected credit loss approach (CECL) for financial instruments measured at amortized cost and other commitments to extend credit, such as of balance sheet credit exposures (loan comitments, unused line of credit and stand-by letters of credit). The amendments require entities to consider all available relevant information when estimating current expected credit losses, including details about past events, current conditions, and reasonable and supportable forecasts. The resulting allowance for credit losses is to reflect the portion of the book value of investmentsamortized cost basis that the entity does not expect to their estimated fair value based on fair values oncollect. The amendments also eliminate the date of acquisition.

c.Representscurrent accounting model for purchased credit impaired loans and certain off-balance sheet exposures. Additional quantitative and qualitative disclosures are required upon adoption.

While
the write downCECL model does not apply to available for sale debt securities, the ASU does require entities to record an allowance when recognizing credit losses for available for sale securities with unrealized losses, rather than reduce the amortized cost of the book value of loanssecurities by direct write-offs. The guidance will require companies to theirrecognize improvements to estimated fair value basedcredit losses immediately in earnings rather than interest income over time.

The ASU should be adopted
on current interest rates and expected cash flows, which includes an estimate of expected loan loss inherent in the portfolio. The adjustments also includes the reversal of Lake Sunapee Bank's historic allowance for loan losses. Loansa modified retrospective basis. Entities that met the criteria and are being accounted for in accordance with ASC 310-30, Loans and Securities Acquired with Deteriorated Credit Quality, had a book value of $23.34 million and have a fair value $18.45 million. Non-impaired loans accounted for under ASC 310-10, Overall, had310-30 at the time of adoption should prospectively apply the guidance in this amendment for purchase credit deteriorated assets.

January 1, 2022

Adoption of this ASU primarily changed how the Company estimates credit losses with the application of the expected credit loss model. The Company applied the standard's provisions as a book valuecumulative effect adjustment to retained earnings as of $1.20 billionthe beginning of the first reporting period in which the guidance is effective (i.e., modified retrospective approach). The Company has finalized its CECL implementation, recieved board approval of the final CECL model, completed modelling of off-balance sheet credit risks, completed formal governance and havecontrol documentation, and developed and presented revised disclosures for board approval.

The ASU was originally effective for the Company beginning in the first quarter of 2020; however, after the The Coronavirus Aid, Relief, and Economic Security Act, or CARES CARES Act Act, was enacted on March 27, 2020, the Securities and Exchange Commission (SEC) staff clarified that once the deferral was elected by
a fair valueregistrant, Dec. 31, 2020, adoption of $1.188 billion. ASC 310-30 loans haveCECL was required, retrospective to Jan. 1, 2020 (ignoring an early termination of the national emergency). Under the amendments, a $1.09registrant electing the delay under the CARES Act is further delayed until Jan. 1, 2022, effective as of Jan. 1, 2022 (absent an early termination of the national emergency). With regard to the amendments to Section 4014, the SEC staff indicated it would not object to a registrant early adopting on Dec. 31, 2020, retrospective to Jan. 1, 2020, or Jan. 1, 2021, effective as of Jan. 1, 2021.

The Company adopted CECL effective January 1, 2021, which increased its allowance for credit losses (ACL) by $5.2
million fair value adjustment discount that is accretable in earnings over the weighted average lifeand reserve for unfunded commitments by $1.6 million. Equity was reduced by $5.2 million, net of three years using the effective yield as determineddeferred tax of $1.6 million on the date of acquisition. The effective yieldadoption.

ASU 2018-14 Compensation- Disclosure Requirements for Defined Pension Plans Topic 715-20

This ASU makes minor changes to the disclosure requirements for employers that sponsor defined benefit pension and/or other post-retirement benefit plans.

January 1, 2021

Early adoption
is periodically adjusted for changes in expected flows. ASC 310-10 loanspermitted.

Adoption of this ASU did not have a $11.40 millionmaterial impact on the Company's consolidated financial statements. The impact will be reflected in the Company’s annual 10-K disclosures of employee benefit plans.

18

Table of Contents

Standard

Description

Required Date
of Adoption

Effect on financial statements

Standards Adopted in 2021

ASU 2020-01, Investments—Equity Securities, Investments Equity Method and Joint Ventures, and Derivatives and Hedging

In January 2016, the FASB issued Accounting Standards Update No. 2016-01, Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities, which added Topic 321, Investments – Equity Securities, and made targeted improvements to address certain aspects of accounting for financial instruments. The amendments in this Update affect all entities that apply the guidance in Topics 321, 323, and 815 and (1) elect to apply the measurement alternative or (2) enter into a forward contract or purchase an option to purchase securities that, upon settlement of the forward contract or exercise of the purchased option, would be accounted for under the equity method of accounting.

The amendments in this Update clarify certain interactions between the guidance to account for certain equity securities under Topic 321, the guidance to account for investments under the equity method of accounting in Topic 323, and the guidance in Topic 815, which could change how an entity accounts for an equity security under the measurement alternative or a forward contract or purchased option to purchase securities that, upon settlement of the forward contract or exercise of the purchased option, would be accounted for under the equity method of accounting or the
fair value adjustment discount that is amortized into expense overoption in accordance with Topic 825, Financial Instruments. The amendments in this Update should be applied prospectively.

December 15, 2020

The adoption had no material impact on the remaining termCompany's consolidated financial statements. The Company’s equity method investments which primarily consist of community limited partnership investments are in compliance with the new guidance prospectively in 2021.

Standard

Description

Required Date
of Adoption

Effect on financial statements

Standards Not Yet Adopted

ASU 2020-04 Facilitation of the loans usingEffects of Reference Rate Reform, Topic 848, as amended in ASU 2021-01

This ASU provides temporary optional expedients and exceptions to GAAP guidance on contract modifications and hedge accounting to ease the effectivefinancial reporting burdens of the expected market transition from the London Interbank Offered Rate (LIBOR) and other interbank offered rates to alternative reference rates, such as the Secured Overnight Financing Rate (SOFR). For instance, companies can (1) elect not to apply certain modification accounting requirements to contracts affected by reference rate reform, if certain criteria are met. A company that makes this election would not have to re-measure the contracts at the modification date or reassess a previous accounting determination. Companies can also (2) elect various optional expedients that would allow them to continue applying hedge accounting for hedging relationships affected by reference rate reform, if certain criteria are met. Finally, companies can (3) make a one-time election to sell and/or reclassify held-to-maturity debt securities that reference an interest method, or a straight-line method ifrate affected by reference rate reform.

May be elected through December 31, 2022.

The Company is currently evaluating all of its contracts, hedging relationships and other transactions that will be effected by reference rates are being discontinued. The following elections have been made in regards to our cash flow hedges as outlined on the loan is a revolving credit facility.next page.

19

Table of Contents

Rate Reform Elections

Adherence to ISDA Fallback Protocol

The ISDA 2020 IBOR Fallbacks Protocol (the “ISDA Fallback Protocol”) was made available for adherence on October 23, 2020 with an effective date of January 25, 2021. Once adhered to by both counterparties in a bilateral relationship and the effective date is reached, the ISDA Fallback Protocol represents a change to the contractual terms of derivatives governed by each respective ISDA agreement between the Company and a derivative counterparty. The change relates to reference rate reform and represents the potential for addition of or changes to contractual terms and was developed by a private-sector working group convened by a regulator as referenced in 848-20-15-5(g). For all of the Company’s interest rate swaps that meet the scope requirements of 848-10-15-3 and 848-10-15-3A and for which the Company adhered to the ISDA Fallback Protocol, the Company makes the following elections:

Modification related elections
d.Represents the adjustment of the book value of buildings and equipment,Option to their estimated fair value based on appraisals and other methods. The adjustments will be depreciated over the estimated economic lives of the assets.not reassess a previous accounting determination (paragraph 848-20-35-4)
e.Represents the value of the core deposit base assumed in the acquisition. The core deposit asset was recorded as an identifiable intangible asset and will be amortized using a straight-line method over the average life of the deposit base, which is estimated to be twelve years.Hedge accounting related modifications
f.Primarily represents the write-off of historical goodwill and unamortized intangibles recorded by Lake Sunapee from prior acquisitions that areOption to not carried over to the Company's balance sheet.  These adjustments are not

accretable into earnings in the statement of income. Also represents the value of customer list intangibles which are accretable into earnings in the statement of income.
g.Represents adjustments made to time depositsdedesignate a hedging relationship due to the weighted average contractual interest rates exceeding the cost of similar funding at the time of acquisition. The amount will be amortized using a straight-line method over the estimated useful life of one year.change in a critical term (paragraph 848-30-25-3)
Option to change the contractual terms of a hedging instrument, hedged item, or forecasted transaction and to not dedesignate a hedging relationship (paragraph 848-30-25-5)

Cash flow hedges

The Company amends the hedge documentation, without dedesignating and redesignating, for all outstanding cash flow hedging relationships for the following elections:

h.RepresentsProbability of forecasted transactions: The Company elects the present value difference between cash flowsexpedient in ASC 848-50-25-2 to assert probability of current debt instruments using contractual rates and thosethe hedged interest payments/receipts regardless of similar borrowings on the date of acquisition. The adjustment will be amortized over the remaining four year weighted average contractual life.any expected modification in terms related to reference rate reform.
i.Represents net deferred tax assets resulting fromAssessment of effectiveness: In accordance with ASC 848-30-25-4, ASC 848-30-25-8, and ASC 848-50-35-1 through 35-24 the fair value adjustments relatedCompany has the option to change the method of assessing effectiveness upon a change in the critical terms of the derivative or the hedged transactions and upon the end of relief under ASC 848. At this time the Company elects to continue the method of assessing effectiveness as documented in the original hedge documentation and elects to apply the expedient in ASC 848-50-35-17 so that the reference rate on the hypothetical derivative matches the reference rate on the hedging instrument. For new hedging relationships designated subsequent to the acquired assets and liabilities, identifiable intangibles, and other purchase accounting adjustments.
j.Primarily represents the impactdate of change in control effects on post-retirement liabilities assumed bythis memorandum, the Company which areelects to apply the expedient in ASC 848-50-25-11 to assume that the reference rate will not accretable into earnings inbe replaced for the statementremainder of income.the hedging relationship.

Except

New hedging activity

The Company makes the same elections for collateral dependent loans with deteriorated credit quality,each hedging relationship designated subsequent to March 31, 2021.  Any hedging relationship-specific elections beyond the fair values for loans acquired were estimated using cash flow projections based onelections noted above will be documented in the remaining maturityrespective inception hedge documentation. Subsequent election of optional expedients and repricing terms. Cash flows were adjusted by estimating future credit losses andexceptions after the rate of prepayments. Projected monthly cash flows were then discounted to present value using a risk-adjusted market rate for similar loans. To estimate the fair value for collateral dependent loans with deteriorated credit quality, we analyzed the underlying collateral of the loans assuming the fair values of the loans were derived from the eventual sale of the collateral. Those values were discounted using market derived rates of return, with consideration given to the period of time and costs associatedMarch 31, 2021 will be documented in accordance with the foreclosure and dispositionelections being made here.

20


Information about the acquired loan portfolio subject to ASC 310-30 as of January 13, 2017 is, as follows (in thousands):
 ASC 310-30 Loans
Gross contractual receivable amounts at acquisition$23,338
Contractual cash flows not expected to be collected (nonaccretable discount)(3,801)
Expected cash flows at acquisition19,537
Interest component of expected cash flows (accretable discount)(1,089)
Fair value of acquired loans$18,448

Direct acquisition and integration costs were expensed as incurred, and totaled $5.9 million during the nine months ending September 30, 2017 and were $812 thousand for the same period of 2016. For the three months ending September 30, 2017 direct acquisition and integration costs totaled $346 thousand and were $320 thousand for the same period of 2016.

Pro Forma Information (unaudited)
The following table presents selected unaudited pro forma financial information reflecting the acquisition of Lake Sunapee Bank Group assuming the acquisition was completed as of January 1, 2016. The unaudited pro forma financial information includes adjustments for scheduled amortization and accretion of fair value adjustments recorded at the acquisition. These adjustments would have been different if they had been recorded on January 1, 2016, and they do not include the impact of prepayments. The unaudited pro forma financial information is presented for illustrative purposes only and is not necessarily indicative of the combined financial results of the Company and Lake Sunapee had the transaction actually been completed at the beginning of the periods presented, nor does it indicate future results for any other interim or full-year period. Pro forma basic and diluted earnings per common share were calculated using the Company's actual weighted-average shares outstanding for the periods presented plus 4.16 million shares issued as a result of the acquisition. The unaudited pro forma information is based on the actual financial statements of the Company and Lake Sunapee for the periods shown until the date of acquisition, at which time Lake Sunapee operations became included in the Company's financial statements. The Company has determined it is impractical to report the amounts of revenue and earnings of the acquired entity since the acquisition date. Due to the integration of its operations with those of the organization, the Company does not record revenue and earnings separately for these operations.

The unaudited pro forma information, for the nine months ended September 30, 2017 and 2016, set forth below reflects adjustments related to amortization and accretion of purchase accounting fair value adjustments and an estimated tax rate of 37.57%. Direct acquisition expenses incurred by the Company during 2017, as noted above, are reversed for the purposes of this unaudited pro forma information. Furthermore, the unaudited pro forma information does not reflect management’s estimate of any revenue-enhancing or anticipated cost-savings that could occur as a result of the acquisition.

Information in the following table is shown in thousands, except earnings per share:
  Pro Forma (unaudited)
Nine Months Ended September 30,
  2017 2016
Net interest income $69,846
 $67,670
Non-interest income 20,883
 25,808
Net income 26,133
 21,371
     
Pro forma earnings per share:    
Basic $1.69
 $1.40
Diluted $1.68
 $1.39


NOTE 3.2.           SECURITIES AVAILABLE FOR SALE


The following is a summary of securities available for sale:

(In thousands) Amortized Cost 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 Fair Value
September 30, 2017  
  
  
  
Securities available for sale  
  
  
  
Debt securities:  
  
  
  
Obligations of US Government sponsored enterprises $6,952
 $27
 $
 $6,979
Mortgage-backed securities:       

  US Government-sponsored enterprises 438,332
 3,413
 3,788
 437,957
  US Government agency 102,044
 695
 601
 102,138
  Private label 562
 162
 5
 719
Obligations of states and political subdivisions thereof 140,475
 2,818
 1,311
 141,982
Corporate bonds 28,245
 441
 2
 28,684
Total securities available for sale $716,610
 $7,556
 $5,707
 $718,459
         
December 31, 2016  
  
  
  
Securities available for sale  
  
  
  
Debt securities:  
  
  
  
Obligations of US Government sponsored enterprises $
 $
 $
 $
Mortgage-backed securities:        
  US Government-sponsored enterprises 330,635
 2,682
 4,865
 328,452
  US Government agency 76,722
 797
 613
 76,906
  Private label 936
 207
 11
 1,132
Obligations of states and political subdivisions thereof 123,832
 1,941
 3,407
 122,366
Corporate bonds 
 
 
 
Total securities available for sale $532,125
 $5,627
 $8,896
 $528,856

Gross

Gross

 Unrealized

 Unrealized

(in thousands)

    

Amortized Cost

    

 Gains

    

 Losses

    

Fair Value

September 30, 2021

 

  

 

  

 

  

 

  

Mortgage-backed securities:

 

  

 

  

 

  

 

  

US Government-sponsored enterprises

$

181,821

$

3,386

$

(1,939)

$

183,268

US Government agency

 

53,475

 

1,470

 

(239)

 

54,706

Private label

 

62,843

 

185

 

(114)

 

62,914

Obligations of states and political subdivisions thereof

 

158,914

 

2,090

 

(827)

 

160,177

Corporate bonds

 

82,533

 

2,376

 

(647)

 

84,262

Total securities available for sale

$

539,586

$

9,507

$

(3,766)

$

545,327

Gross

Gross

 Unrealized

 Unrealized

(in thousands)

    

Amortized Cost

    

 Gains

    

 Losses

    

Fair Value

December 31, 2020

 

  

 

  

 

  

 

  

Mortgage-backed securities:

 

  

 

  

 

  

 

  

US Government-sponsored enterprises

$

206,834

$

6,018

$

(462)

$

212,390

US Government agency

 

82,878

 

2,870

 

(116)

 

85,632

Private label

 

19,810

 

40

 

(141)

 

19,709

Obligations of states and political subdivisions thereof

 

164,766

 

4,244

 

(6)

 

169,004

Corporate bonds

 

97,689

 

1,465

 

(843)

 

98,311

Total securities available for sale

$

571,977

$

14,637

$

(1,568)

$

585,046

Credit Quality Information

The Company monitors the credit quality of available for sale debt securities through credit ratings from various rating agencies and substantial price changes. Credit ratings express opinions about the credit quality of a security and are utilized by the Company to make informed decisions.  Securities are triggered for further review in the quarter if the security has significant fluctuations in ratings, drops below investment grade, or significant pricing changes. For securities without credit ratings, the Company utilizes other financial information indicating the financial health of the underlying municipality, agency, or organization associated with the underlying security.

As of September 30, 2021 the Company carried 0 allowance on available for sale debt securities in accordance with ASU 2016-13.

The amortized cost and estimated fair value of available for sale (“AFS”) securities segregated by contractual maturity at September 30, 20172021 are presented below. Expected maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations. Mortgage-backed securities are shown in total, as their maturities are highly variable.

Available for sale

(in thousands)

    

Amortized Cost

    

Fair Value

Within 1 year

 

$

11,755

$

11,664

Over 1 year to 5 years

 

23,313

 

23,863

Over 5 years to 10 years

 

48,500

 

47,493

Over 10 years

 

157,879

 

161,419

Total bonds and obligations

 

241,447

 

244,439

Mortgage-backed securities

 

298,139

 

300,888

Total securities available for sale

$

539,586

$

545,327

21

Table of Contents

  Available for sale
  Amortized Fair
(In thousands) Cost Value
Within 1 year $3,613
 $3,627
Over 1 year to 5 years 18,499
 18,735
Over 5 years to 10 years 73,997
 75,366
Over 10 years 620,501
 620,731
Total securities available for sale $716,610
 $718,459


The following table presents the gains and losses from the sale of AFS securities for the periods presented:

Three Months Ended

Nine Months Ended

September 30, 

September 30, 

(in thousands)

    

2021

    

2020

    

2021

    

2020

Gross gains on sales of available for sale securities

$

1,980

$

$

2,030

$

1,508

Gross losses on sales of available for sale securities

 

(50)

 

 

(50)

 

(22)

Net gains on sale of available for sale securities

$

1,930

$

$

1,980

$

1,486

Securities with unrealized losses, segregated by the duration of their continuous unrealized loss positions, are summarized as follows:

Less Than Twelve Months

Over Twelve Months

Total

Gross

    

    

Gross

    

    

Gross

    

Unrealized

Fair

Unrealized

Fair

Unrealized 

Fair

(in thousands)

    

Losses

    

Value

    

Losses

    

Value

    

Losses

    

Value

September 30, 2021

 

  

 

  

 

  

 

  

 

  

 

  

Mortgage-backed securities:

 

  

 

  

 

  

 

  

 

  

 

  

US Government-sponsored enterprises

$

1,408

$

77,412

$

531

$

16,618

$

1,939

$

94,030

US Government agency

 

130

 

10,488

 

109

 

4,729

 

239

 

15,217

Private label

 

109

 

42,852

 

5

 

17

 

114

 

42,869

Obligations of states and political subdivisions thereof

 

827

 

48,355

 

 

 

827

 

48,355

Corporate bonds

 

14

 

2,486

 

633

 

11,617

 

647

 

14,103

Total securities available for sale

$

2,488

$

181,593

$

1,278

$

32,981

$

3,766

$

214,574

Less Than Twelve Months

Over Twelve Months

Total

    

Gross

    

    

Gross

    

    

Gross

    

Unrealized

Fair

Unrealized

Fair

Unrealized 

Fair

(in thousands)

Losses

Value

Losses

Value

Losses

Value

December 31, 2020

 

  

 

  

 

  

 

  

 

  

 

  

Mortgage-backed securities:

 

  

 

  

 

  

 

  

 

  

 

  

US Government-sponsored enterprises

$

209

$

40,285

$

253

$

4,323

$

462

$

44,608

US Government agency

 

45

 

6,776

 

71

 

3,297

 

116

 

10,073

Private label

 

 

 

141

 

19,514

 

141

 

19,514

Obligations of states and political subdivisions thereof

 

6

 

5,577

 

 

 

6

 

5,577

Corporate bonds

 

555

 

21,774

 

288

 

11,712

 

843

 

33,486

Total securities available for sale

$

815

$

74,412

$

753

$

38,846

$

1,568

$

113,258

22

  Less Than Twelve Months Over Twelve Months Total
(In thousands) 
Gross
Unrealized
Losses
 
Fair
Value
 
Gross
Unrealized
Losses
 
Fair
Value
 Gross
Unrealized
Losses
 Fair
Value
September 30, 2017  
  
  
  
  
  
             
Securities available for sale  
  
  
  
  
  
Debt securities:  
  
  
  
  
  
Obligations of US Government sponsored enterprises $
 $
 $
 $
 $
 $
Mortgage-backed securities:           

  US Government-sponsored enterprises 1,559
 150,524
 2,229
 64,882
 3,788
 215,406
  US Government agency 345
 48,529
 256
 11,880
 601
 60,409
  Private label 
 7
 5
 134
 5
 141
Obligations of states and political subdivisions thereof 89
 8,838
 1,222
 31,570
 1,311
 40,408
Corporate bonds 2
 3,038
 
 
 2
 3,038
Total securities available for sale $1,995
 $210,936
 $3,712
 $108,466
 $5,707
 $319,402
             
             
December 31, 2016  
  
  
  
  
  
             
Securities available for sale  
  
  
  
  
  
Debt securities:            
Obligations of US Government sponsored enterprises $
 $
 $
 $
 $
 $
Mortgage-backed securities:            
  US Government-sponsored enterprises 4,369
 197,914
 496
 10,120
 4,865
 208,034
  US Government agency 472
 36,941
 141
 4,263
 613
 41,204
  Private label 
 107
 11
 312
 11
 419
Obligations of states and political subdivisions thereof 3,252
 76,803
 155
 3,916
 3,407
 80,719
Corporate bonds 
 
 
 
 
 
Total securities available for sale $8,093
 $311,765
 $803
 $18,611
 $8,896
 $330,376


Securities Impairment: 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.  For the three and nine months ended September 30, 2017 and 2016 the Company did not record any other-than-temporary impairment (“OTTI”) losses.

Table of Contents

 Three Months Ended September 30,
 2017 2016
Estimated credit losses as of June 30,$1,697
 $1,697
Reductions for securities paid off during the period
 
Estimated credit losses at end of the period$1,697
 $1,697

 Nine Months Ended September 30,
 2017 2016
Estimated credit losses as of prior year-end,$1,697
 $3,180
Reductions for securities paid off during the period
 1,483
Estimated credit losses at end of the period$1,697
 $1,697

Visa Class B Common Shares
The Company was a member of the Visa USA payment network and was issued Class B shares in connection with the Visa Reorganization and the Visa Inc. initial public offering in March 2008. The Visa Class B shares are transferable only under limited circumstances until they can be converted into shares of the publicly traded class of Visa stock. This conversion cannot happen until the settlement of certain litigation, which is indemnified by Visa members. Since its initial public offering, Visa has funded a litigation reserve based upon a change in the conversion ratio of Visa Class B shares into Visa Class A shares. At its discretion, Visa may continue to increase the conversion rate in connection with any settlements in excess of amounts then in escrow for that purpose and reduce the conversion rate to the extent that it adds any funds to the escrow in the future. Based on the existing transfer restriction and the uncertainty of the litigation, the Company has recorded its Visa Class B shares on its statements of condition at zero value for all reporting periods since 2008. At September 30, 2017, the Company owned 11,623 of Visa Class B shares with a then current conversion ratio to Visa Class A shares of 1.648 (or 19,158 Visa Class A shares). Upon termination of the existing transfer restriction and settlement of the litigation, and to the extent that the Company continues to own such Visa Class B shares in the future, the Company expects to record its Visa Class B shares at fair value.

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

Debt Securities

The Company expects to recover its amortized cost basis on all debt securities in its AFS portfolio. Furthermore, the Company does not intend to sell nor does it anticipate that it will be required to sell any of its securities in an unrealized loss position as of September 30, 2017,2021, prior to this recovery. The Company’s ability and intent to hold these securities until recovery is supported by the Company’s strong capital and liquidity positions as well as its historically low portfolio turnover.


The following summarizes, by investment security type, the basis for the conclusion that the debtimpact of securities in an unrealized loss position within the Company’s AFS were not other-than-temporarily impairedfor greater than 12 months at September 30, 2017:


2021:

US Government-sponsored enterprises

At September 30, 2017, 275

49 out of the total 789528 securities in the Company’s portfolios of AFS US Government sponsoredGovernment-sponsored enterprises were in unrealized loss positions. Aggregate unrealized losses represented 1.7%1.07% of the amortized cost of securities in unrealized loss positions.Thepositions. The Federal National Mortgage Association (“FNMA”) and Federal Home Loan Mortgage Corporation (“FHLMC”) guarantee the contractual cash flows of all of the Company’s US


government-sponsored Government-sponsored enterprises. The securities are investment grade rated and there were no material underlying credit downgrades during the quarter. All securities are performing.

US Government agencies

At September 30, 2017, 62agency

11 out of the total 208150 securities in the Company’s portfolios of AFS US Government agency securities were in unrealized loss positions. Aggregate unrealized losses represented 1.0%0.45% of the amortized cost of securities in unrealized loss positions. The Government National Mortgage Association (“GNMA”) guarantees the contractual cash flows of all of the Company’s US governmentGovernment agency securities. The securities are investment grade rated and there were no material underlying credit downgrades during the quarter. All securities are performing.


Private-label
At September 30, 2017, 8

Private label

14 of the total 2631 securities in the Company’s portfolio of AFS private-labelprivate label mortgage-backed securities were in unrealized loss positions. Aggregate unrealized losses represented 3.3%0.18% of the amortized cost of securities in unrealized loss positions. Based upon the foregoing considerations, and the expectation that the Company will receive all of the future contractual cash flows related to the amortized cost on these securities, the Company does not consider there to be any additional other-than-temporary impairment with respect to these securities.


Obligations of states and political subdivisions thereof

At September 30, 2017, 79

12 of the total 262119 securities in the Company’s portfolio of AFS municipal bonds and obligations were in unrealized loss positions. Aggregate unrealized losses represented 3.1%0.52% of the amortized cost of securities in unrealized loss positions. The Company continually monitors the municipal bond sector of the market carefully and periodically evaluates the appropriate level of exposure to the market. At this time, the Company feels the bonds in this portfolio carry minimal risk of default and the Company is appropriately compensated for thatthe risk. There were no material underlying credit downgrades during the quarter. All securities are performing.


Corporate bonds

At September 30, 2017, one

4 out of 12the total 27 securities in the Company’s portfolio of AFS corporate bonds were in an unrealized loss position. The aggregate unrealized loss represents 0.1%0.78% of the amortized cost of bonds in unrealized loss positions. The Company reviews the financial strength of all of these bonds and has concluded that the amortized cost remains supported by the expected future cash flows of these securities. The most recent review includes all bond issuers and their current credit ratings, financial performance and capitalization.


23



Table of Contents




NOTE 4.3.           LOANS


The Company’s AND ALLOWANCE FOR CREDIT LOSSES

Upon adoption of ASC 326 or CECL, at January 1, 2021, the Company evaluates its risk characteristics of loans based on regulatory call report code with segmentation based on the underlying collateral for certain loan portfolio is comprisedtypes. Prior to the adoption of ASC 326, under the incurred loss model, the Company evaluated its risk characteristics of loans based on purpose of the following segments: commercial real estate, commercial and industrial, residential real estate, and consumer loans. Commercial real estate loans includes single and multi-family, commercial construction and land, and other commercial real estate classes. Commercial and industrial loans includes loans to commercial businesses, agricultural and other loans to farmers, and tax exempt loans. Residential real estate loans consists of mortgages for 1 to 4 family housing. Consumer loans include home equity loans, indirect auto and other installment lending.


The Company’s lending activities are principally conducted in Maine, New Hampshire, and Vermont.

Total loans include business activity loans and acquired loans. Acquired loans are those loans acquired from Lake Sunapee Bank Group.

The following is a summary of total loans:

  September 30, 2017 December 31, 2016
(In thousands) 
Business
Activities  Loans
 
Acquired
Loans
 Total 
Business
Activities  Loans
 
Acquired
Loans
 Total
Commercial Real Estate:  
  
  
  
  
  
Construction and land development $33,692
 $15,593
 $49,285
 $14,695
 $
 $14,695
Other commercial real estate 455,847
 288,440
 744,287
 403,424
 
 403,424
Total Commercial Real Estate: 489,539
 304,033
 793,572
 418,119
 
 418,119
             
Commercial and Industrial:  
  
  
  
  
  
Other Commercial 172,186
 68,090
 240,276
 103,586
 
 103,586
Agricultural and other loans to farmers 30,483
 
 30,483
 31,808
 
 31,808
Tax exempt 40,776
 45,537
 86,313
 15,846
 
 15,846
Total Commercial and Industrial: 243,445
 113,627
 357,072
 151,240
 
 151,240
             
Total Commercial Loans: 732,984
 417,660
 1,150,644
 569,359
 
 569,359
             
Residential Real Estate:  
  
  
  
  
  
Residential mortgages 568,277
 584,351
 1,152,628
 506,612
 
 506,612
Total Residential Real Estate: 568,277
 584,351
 1,152,628
 506,612
 
 506,612
             
Consumer:  
    
  
  
  
Home equity 50,610
 64,695
 115,305
 46,921
 ��
 46,921
Other consumer 7,645
 2,640
 10,285
 6,172
 
 6,172
Total Consumer: 58,255
 67,335
 125,590
 53,093
 
 53,093
             
Total Loans: $1,359,516
 $1,069,346
 $2,428,862
 $1,129,064
 $
 $1,129,064

The carrying amount of the acquired loans at September 30, 2017 totaled $1.069 billion. A subset of these loans was determined to have evidence of credit deterioration at acquisition date, which is accountedby regulatory call report code segmentation based on underlying collateral for certain loan types:

September 30, 

December 31, 

(in thousands)

    

2021

    

2020

Commercial construction

$

152,700

$

117,882

Commercial real estate owner occupied

 

253,792

 

219,217

Commercial real estate non-owner occupied

 

733,353

 

716,776

Tax exempt

 

42,448

 

47,862

Commercial and industrial

 

336,989

 

355,684

Residential real estate

 

917,301

 

995,216

Home equity

 

88,002

 

100,096

Consumer other

 

9,569

 

10,152

Total loans

 

2,534,154

 

2,562,885

Allowance for credit losses

 

22,448

 

19,082

Net loans

$

2,511,706

$

2,543,803

Total unamortized net costs and premiums included in accordance with ASC 310-30. These purchased credit-impaired loans presently maintain a carrying value of $14.4 million (and a note balance of $19.5 million). These loans are evaluated for impairment through the periodic reforecasting of expected cash flows. Loans considered not impaired at acquisition date had a carrying amount of $1.055 billion.





The following table summarizes activity in the accretable yield for the acquired loan portfolio that falls under the purview of ASC 310-30, Accounting for Certain Loans or Debt Securities Acquired in a Transfer:
  Three Months Ended September 30,
(In thousands) 2017 2016
Balance at beginning of period $4,567
 $
Acquisitions 
 
Reclassification from nonaccretable difference for loans with improved cash flows 513
 
Accretion (423) 
Balance at end of period $4,657
 $

  Nine Months Ended September 30,
(In thousands) 2017 2016
Balance at beginning of period $
 $
Acquisitions 3,398
 
Reclassification from nonaccretable difference for loans with improved cash flows 2,257
 
Accretion (998) 
Balance at end of period $4,657
 $



The following is a summary of past due loans at September 30, 2017 and December 31, 2016:

Business Activities Loans
(in thousands) 
30-59 Days
Past Due
 
60-89 Days
Past Due
 90 Days or Greater Past Due 
Total Past
Due
 Current Total  Loans 
Past Due >
90 days and
Accruing
September 30, 2017  
  
  
  
  
  
  
Commercial Real Estate:  
  
  
  
  
  
  
Construction and land development $
 $
 $637
 $637
 $33,055
 $33,692
 $
Other commercial real estate 407
 121
 702
 1,230
 454,617
 455,847
 
Total Commercial Real Estate: 407
 121
 1,339
 1,867
 487,672
 489,539
 
               
Commercial and Industrial:              
Other Commercial 401
 150
 159
 710
 171,476
 172,186
 
Agricultural and other loans to farmers 600
 90
 10
 700
 29,783
 30,483
 
Tax exempt 
 
 
 
 40,776
 40,776
 
Total Commercial and Industrial: 1,001
 240
 169
 1,410
 242,035
 243,445
 
               
Total Commercial Loans: 1,408
 361
 1,508
 3,277
 729,707
 732,984
 
               
Residential Real Estate:              
Residential mortgages 2,904
 172
 1,260
 4,336
 563,941
 568,277
 
Total Residential Real Estate: 2,904
 172
 1,260
 4,336
 563,941
 568,277
 
               
Consumer:              
Home equity 306
 25
 100
 431
 50,179
 50,610
 
Other consumer 60
 21
 26
 107
 7,538
 7,645
 
Total Consumer: 366
 46
 126
 538
 57,717
 58,255
 
              
Total Loans: $4,678
 $579
 $2,894
 $8,151
 $1,351,365
 $1,359,516
 $



Business Activities Loans
(in thousands) 
30-59 Days
Past Due
 
60-89 Days
Past Due
 90 Days or Greater Past Due 
Total Past
Due
 Current Total Loans 
Past Due >
90 days and
Accruing
December 31, 2016  
  
  
  
  
  
  
Commercial Real Estate:  
  
  
  
  
  
  
Construction and land development $
 $
 $
 $
 $14,695
 $14,695
 $
Other commercial real estate 195
 554
 1,665
 2,414
 401,010
 403,424
 
Total Commercial Real Estate: 195
 554
 1,665
 2,414
 415,705
 418,119
 
               
Commercial and Industrial:              
Other Commercial 61
 45
 201
 307
 103,279
 103,586
 
Agricultural and other loans to farmers 231
 
 
 231
 31,577
 31,808
 
Tax exempt 
 
 
 
 15,846
 15,846
 
Total Commercial and Industrial: 292
 45
 201
 538
 150,702
 151,240
 
               
Total Commercial Loans: 487
 599
 1,866
 2,952
 566,407
 569,359
 
               
Residential Real Estate:              
Residential mortgages 4,484
 429
 938
 5,851
 500,761
 506,612
 
Total Residential Real Estate: 4,484
 429
 938
 5,851
 500,761
 506,612
 
               
Consumer:              
Home equity 
 
 15
 15
 46,906
 46,921
 
Other consumer 103
 1
 6
 110
 6,062
 6,172
 
Total Consumer: 103
 1
 21
 125
 52,968
 53,093
 
              
Total Loans: $5,074
 $1,029
 $2,825
 $8,928
 $1,120,136
 $1,129,064
 $



Acquired Loans
(in thousands) 
30-59 Days
Past Due
 
60-89 Days
Past Due
 90 Days or Greater Past Due 
Total Past
Due
 
Acquired
Credit
Impaired
 Total Loans 
Past Due >
90 days and
Accruing
September 30, 2017  
  
  
  
  
  
  
Commercial Real Estate:  
  
  
  
  
  
  
Construction and land development $20
 $10
 $
 $30
 $258
 $15,593
 $
Other commercial real estate 314
 25
 591
 930
 9,760
 288,440
 
Total Commercial Real Estate: 334
 35
 591
 960
 10,018
 304,033
 
               
Commercial and Industrial:              
Other Commercial 396
 144
 
 540
 917
 68,090
 163
Agricultural and other loans to farmers 
 
 
 
 
 
 
Tax exempt 
 
 
 
 
 45,537
 
Total Commercial and Industrial: 396
 144
 
 540
 917
 113,627
 163
               
Total Commercial Loans: 730
 179
 591
 1,500
 10,935
 417,660
 163
               
Residential Real Estate:              
Residential mortgages 1,089
 13
 868
 1,970
 3,398
 584,351
 
Total Residential Real Estate: 1,089
 13
 868
 1,970
 3,398
 584,351
 
               
Consumer:              
Home equity 388
 155
 193
 736
 40
 64,695
 
Other consumer 12
 144
 49
 205
 3
 2,640
 
Total Consumer: 400
 299
 242
 941
 43
 67,335
 
              
Total Loans: $2,219
 $491
 $1,701
 $4,411
 $14,376
 $1,069,346
 $163




















Non Accrual Loans

The following is summary information pertaining to non-accrual loans at September 30, 2017 and December 31, 2016:

  September 30, 2017 December 31, 2016
(In thousands) 
Business
Activities  Loans
 
Acquired
Loans 
 Total 
Business
Activities  Loans
 
Acquired
Loans 
 Total
Commercial Real Estate:  
  
  
  
  
  
Construction and land development $637
 $
 $637
 $
 $
 $
Other commercial real estate 1,238
 591
 1,829
 2,564
 
 2,564
Total Commercial Real Estate: 1,875
 591
 2,466
 2,564
 
 2,564
             
Commercial and Industrial:            
Other Commercial 183
 
 183
 284
 
 284
Agricultural and other loans to farmers 53
 
 53
 31
 
 31
Tax exempt 
 
 
 
 
 
Total Commercial and Industrial: 236
 
 236
 315
 
 315
             
Total Commercial Loans: 2,111
 591
 2,702
 2,879
 
 2,879
             
Residential Real Estate:            
Residential mortgages 2,751
 868
 3,619
 3,419
 
 3,419
Total Residential Real Estate: 2,751
 868
 3,619
 3,419
 
 3,419
             
Consumer:            
Home equity 151
 193
 344
 90
 
 90
Other consumer 103
 49
 152
 108
 
 108
Total Consumer: 254
 242
 496
 198
 
 198
             
Total Loans: $5,116
 $1,701
 $6,817
 $6,496
 $
 $6,496



Loans evaluated for impairment as of September 30, 2017 and December 31, 2016totals were as follows:

Business Activities Loans
(In thousands) 
Commercial
real estate
 
Commercial  and
industrial 
 
Residential
real estate
 Consumer Total
September 30, 2017  
  
  
  
  
Loans receivable:  
  
  
  
  
Balance at end of period  
  
  
  
  
Individually evaluated for impairment $2,585
 $138
 $1,744
 $68
 $4,535
Collectively evaluated 486,954
 243,307
 566,533
 58,187
 1,354,981
Total $489,539
 $243,445
 $568,277
 $58,255
 $1,359,516


Business Activities Loans
(In thousands) 
Commercial
real estate
 
Commercial  and
industrial 
 
Residential
real estate
 Consumer Total
December 31, 2016  
  
  
  
  
Loans receivable:  
  
  
  
  
Balance at end of period  
  
  
  
  
Individually evaluated for impairment $4,481
 $486
 $1,709
 $33
 $6,709
Collectively evaluated 413,638
 150,754
 504,903
 53,060
 1,122,355
Total $418,119
 $151,240
 $506,612
 $53,093
 $1,129,064


Acquired Loans
(In thousands) 
Commercial
real estate
 
Commercial  and
industrial 
 
Residential
real estate
 Consumer Total
September 30, 2017  
  
  
  
  
Loans receivable:  
  
  
  
  
Balance at end of period 

 

 

 

 

Individually evaluated for impairment $408
 $470
 $271
 $156
 $1,305
Purchased Credit Impaired 10,018
 917
 3,398
 43
 14,376
Collectively evaluated 293,607
 112,240
 580,682
 67,136
 1,053,665
Total $304,033
 $113,627
 $584,351
 $67,335
 $1,069,346



September 30, 

December 31, 

(in thousands)

    

2021

    

2020

Unamortized net loan origination costs

$

4,015

$

5,157

Unamortized net premium on purchased loans

 

(65)

 

(85)

Total unamortized net costs and premiums

$

3,950

$

5,072

The following is a summary of impaired loans at September 30, 2017 and December 31, 2016:

Business Activities Loans
  September 30, 2017
(In thousands) Recorded Investment 
Unpaid Principal
Balance
 Related Allowance
With no related allowance:  
  
  
Construction and land development $
 $
 $
Commercial real estate other 1,198
 1,175
 
Commercial other 96
 97
 
Agricultural and other loans to farmers 
 
 
Tax exempt loans 
 
 
Residential real estate 1,257
 1,267
 
Home equity 13
 13
 
Consumer other 
 
 
       
With an allowance recorded:      
Construction and land development $637
 $2,563
 $59
Commercial real estate other 750
 808
 331
Commercial other 42
 42
 2
Agricultural and other loans to farmers 
 
 
Tax exempt loans 
 
 
Residential real estate 487
 487
 44
Home equity 55
 55
 55
Consumer other 
 
 
       
Total      
Commercial real estate $2,585
 $4,546
 $390
Commercial and industrial 138
 139
 2
Residential real estate 1,744
 1,754
 44
Consumer 68
 68
 55
Total impaired loans $4,535
 $6,507
 $491








Acquired Loans
  September 30, 2017
(In thousands) Recorded Investment 
Unpaid Principal
Balance
 Related Allowance
With no related allowance:  
  
  
Construction and land development $
 $
 $
Commercial real estate other 108
 107
 
Commercial other 470
 483
 
Agricultural and other loans to farmers 
 
 
Tax exempt loans 
 
 
Residential real estate 271
 278
 
Home equity 156
 156
 
Consumer other 
 
 
       
With an allowance recorded:      
Construction and land development $
 $
 $
Commercial real estate other 300
 302
 168
Commercial other 
 
 
Agricultural and other loans to farmers 
 
 
Tax exempt loans 
 
 
Residential real estate 
 
 
Home equity 
 
 
Consumer other 
 
 
       
Total      
Commercial real estate $408
 $409
 $168
Commercial and industrial 470
 483
 
Residential real estate 271
 278
 
Consumer 156
 156
 
Total impaired loans $1,305
 $1,326
 $168


Business Activities Loans
  December 31, 2016
(In thousands) Recorded Investment 
Unpaid Principal
Balance
 Related Allowance
With no related allowance:  
  
  
Construction and land development $
 $
 $
Commercial real estate other 2,831
 2,919
 
Commercial other 130
 130
 
Agricultural and other loans to farmers 139
 139
 
Tax exempt loans 
 
 
Residential real estate 1,387
 1,504
 
Home equity 16
 16
 
Consumer other 2
 2
 
       
With an allowance recorded:      
Construction and land development $
 $
 $
Commercial real estate other 1,650
 3,575
 193
Commercial other 217
 367
 173
Agricultural and other loans to farmers 
 
 
Tax exempt loans 
 
 
Residential real estate 322
 322
 49
Home equity 
 
 
Consumer other 15
 15
 9
       
Total      
Commercial real estate $4,481
 $6,494
 $193
Commercial and industrial 486
 636
 173
Residential real estate 1,709
 1,826
 49
Consumer 33
 33
 9
Total impaired loans $6,709
 $8,989
 $424




















The following is a summary of the average recorded investment andCompany elected to exclude accrued interest income recognized on impaired loans as of September 30, 2017 and 2016:

Business Activities Loan
  Nine Months Ended September 30, 2017 Nine Months Ended September 30, 2016
(in thousands) 
Average Recorded
Investment
 
Cash Basis Interest
Income Recognized
 
Average Recorded
Investment
 
Cash Basis Interest
Income Recognized
With no related allowance:  
  
  
  
Construction and land development $
 $
 $
 $
Commercial real estate other 1,716
 64
 2,713
 131
Commercial other 99
 6
 141
 2
Agricultural and other loans to farmers 8
 1
 131
 8
Tax exempt loans 
 
 
 
Residential real estate 1,245
 31
 1,344
 55
Home equity 13
 
 17
 1
Consumer other 5
 2
 
 1
         
With an allowance recorded:        
Construction and land development $637
 $
 $928
 $
Commercial real estate other 693
 
 551
 
Commercial other 44
 1
 221
 
Agricultural and other loans to farmers 
 
 
 
Tax exempt loans 
 
 
 
Residential real estate 268
 5
 331
 
Home equity 12
 
 
 
Consumer other 
 
 17
 
         
Total        
Commercial real estate $3,046
 $64
 $4,192
 $131
Commercial and industrial 151
 8
 493
 10
Residential real estate 1,513
 36
 1,675
 55
Consumer 30
 2
 34
 2
Total impaired loans $4,740
 $110
 $6,394
 $198


Acquired Loans
  Nine Months Ended September 30, 2017 Nine Months Ended September 30, 2016
(in thousands) 
Average Recorded
Investment
 
Cash Basis Interest
Income Recognized
 
Average Recorded
Investment
 
Cash Basis Interest
Income Recognized
With no related allowance:  
  
  
  
Construction and land development $
 $
 $
 $
Commercial real estate other 89
 
 
 
Commercial other 171
 
 
 
Agricultural and other loans to farmers 
 
 
 
Tax exempt loans 
 
 
 
Residential real estate 254
 1
 
 
Home equity 47
 
 
 
Consumer other 9
 
 
 
         
With an allowance recorded:        
Construction and land development $
 $
 $
 $
Commercial real estate other 46
 
 
 
Commercial other 
 
 
 
Agricultural and other loans to farmers 
 
 
 
Tax exempt loans 
 
 
 
Residential real estate 
 
 
 
Home equity 
 
 
 
Consumer other 
 
 
 
         
Total        
Commercial real estate $135
 $
 $
 $
Commercial and industrial 171
 
 
 
Residential real estate 254
 1
 
 
Consumer 56
 
 
 
Total impaired loans $616
 $1
 $
 $


Troubled Debt Restructuring Loans
The Company’s loan portfolio also includes certain loans that have been modified in a Troubled Debt Restructuring ("TDR"), where economic concessions have been granted to borrowers who have experienced or are expected to experience financial difficulties. These concessions typically resultreceivable from the Company’s loss mitigation activities and could include reductions in the interest rate, payment extensions, forgivenessamortized cost basis of principal, forbearance, or other actions. Certain TDRs are classified as nonperforming at the time of restructure and may only be returned to performing status after considering the borrower’s sustained repayment performance for a reasonable period, generally six months. TDRs are evaluated individually for impairment and may result in a specific allowance amount allocated to an individual loan.







The following tables include the recorded investment and number of modifications identified during the three and nine months ended September 30, 2017 and for the three and nine months ended September 30, 2016, respectively. The table includes the recorded investment in the loans prior to a modification and also the recorded investment in the loans after the loans were restructured. The modifications for the three and nine months ended September 30, 2017 were attributable to interest rate concessions, maturity date extensions, reamortization or a combination of two concessions. The modifications for the three and nine months ending September 30, 2016 were attributable to interest rate concessions, maturity date extensions or a combination of both.
  Three Months Ended September 30, 2017
(Dollars in thousands) 
Number of
Modifications
 
Pre-Modification
Outstanding Recorded
Investment
 
Post-Modification
Outstanding Recorded
Investment
Troubled Debt Restructurings  
  
  
Commercial installment 5
 $483
 $483
Agricultural and other loans to farmers 
 
 
Commercial real estate 4
 144
 144
Residential real estate 
 
 
Home equity 
 
 
Consumer other 
 
 
Total 9
 $627
 $627
  Three Months Ended September 30, 2016
(Dollars in thousands) 
Number of
Modifications
 
Pre-Modification
Outstanding Recorded
Investment
 
Post-Modification
Outstanding Recorded
Investment
Troubled Debt Restructurings       
Commercial installment 2
 $51
 $51
Commercial real estate 2
 936
 915
Consumer other 1
 9
 9
Total 5
 $996
 $975

  Nine Months Ended September 30, 2017
(Dollars in thousands) 
Number of
Modifications
 
Pre-Modification
Outstanding Recorded
Investment
 
Post-Modification
Outstanding Recorded
Investment
Troubled Debt Restructurings  
  
  
Commercial installment 6
 $563
 $549
Agricultural and other loans to farmers 1
 19
 18
Commercial real estate 6
 388
 333
Residential real estate 3
 692
 675
Home equity 1
 13
 13
Consumer other 1
 38
 37
Total 18
 $1,713
 $1,625



  Nine Months Ended September 30, 2016
(Dollars in thousands) 
Number of
Modifications
 
Pre-Modification
Outstanding Recorded
Investment
 
Post-Modification
Outstanding Recorded
Investment
Troubled Debt Restructurings       
Commercial installment 2
 $51
 $51
Agricultural and other loans to farmers 2
 30
 24
Commercial real estate 5
 1,361
 1,326
Consumer Other 1
 9
 9
Total 10
 $1,451
 $1,410

For the three and nine months ended September 30, 2017, there were no loans that were restructured that had subsequently defaulted during the period.

The evaluation of certain loans individually for specific impairment includes loans that were previously classified as TDRs or continue to be classified as TDRs.

disclosed throughout this footnote. As of September 30, 2017, the Company maintained foreclosed residential real estate property with a fair value of $122 thousand. Additionally, residential mortgage2021 and December 31, 2020, accrued interest receivable for loans collateralized by real estate property that aretotaled $8.7 million and $11.4 million, respectively, and is included in the process“other assets” line item on the Company’s consolidated balance sheets.

The CARES Act and subsequent legislation established the Payroll Protection Program (PPP), administered directly by the Small Business Administration (SBA). The Company has participated in both 2020 and 2021 rounds of foreclosure asfunding.  As of September 30, 20172021 and December 31, 2016 totaled $772 thousand2020, the Company had 404 and $2.4746 PPP loans outstanding, with an outstanding principal balance of $24.2 million and $53.8 million, respectively.  AsThe PPP loans are fully guaranteed by the SBA and may be eligible for forgiveness by the SBA to the extent that the proceeds are used to cover eligible costs.  PPP loans are included in the commercial and industrial portfolio segment.

Characteristics of December 31, 2016, foreclosedeach loan portfolio segment are as follows:

Commercial construction - Loans in this segment primarily include raw land, land development and construction of commercial and multifamily residential properties.  Collateral values are determined based upon appraisals and evaluations of the completed structure in accordance with established policy guidelines. Maximum loan-to-value ratios at origination are governed by established policy guidelines that are more restrictive than existing structures.  Construction loans are primarily paid by the cash flow generated from the completed structure, such as operating leases, rents, or other operating cash flows from the borrower.

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Table of Contents

Commercial real estate owner occupied and non-owner occupied - Loans in these segments are primarily owner-occupied or income-producing properties.  Loans to Real Estate Investment Trusts (REITs) and unsecured loans to developers that closely correlate to the inherent risk in commercial real estate markets are also included.  Commercial real estate loans are typically written with amortizing payment structures. Collateral values are determined based upon appraisals and evaluations in accordance with established policy guidelines. Maximum loan-to-value ratios at origination are governed by established policy and regulatory guidelines.  Commercial real estate loans are primarily paid by the cash flow generated from the real property, totaled $90 thousand.


NOTE 5.               LOAN LOSS ALLOWANCE

Activitysuch as operating leases, rents, or other operating cash flows from the borrower.

Tax Exempt - Loans in this segment primarily include loans to various state and municipal government entities. Loans made in these borrowers may provide the Company with tax-exempt income. While governed and underwritten similar to commercial loans they do have unique requirements based on established polices. Almost all state and municipal loans are considered a general obligation of the issuing entity. Given the size of many municipal borrowers, borrowings are normally not rated by major rating agencies.

Commercial and industrial loans - 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 in this segment.  Generally loans are secured by assets of the business such as accounts receivable, inventory, marketable securities, other liquid collateral, equipment and other business assets.  Some loans in this category may be unsecured or guaranteed by government agencies such as the SBA.  Loans are primarily paid by the operating cash flow of the borrower.

Residential real estate - All loans in this segment are collateralized by one-to-four family homes.  Residential real estate loans held in the Company's loan portfolio are made to borrowers who demonstrate the ability to make scheduled payments with full consideration to various underwriting factors. Borrower qualifications include favorable credit history combined with supportive income requirements and combined loan-to-value ratios within established policy guidelines.

Home equity - All loans and 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 loan has a fixed rate and is billed as equal payments comprised of principal and interest. The home equity line of credit has a variable 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. Borrower qualifications include favorable credit history combined with supportive income requirements and combined loan-to-value ratios within established policy guidelines.

Consumer  other - Loans in this segment include personal lines of credit and amortizing loans made to qualified individuals for various purposes such as auto loans, recreational equipment, overdraft protection or other consumer loans. Borrower qualifications include favorable credit history combined with supportive income and collateral requirements within established policy guidelines, as applicable.

Allowance for Credit Losses

The Allowance for Credit Losses (ACL) is comprised of the allowance for loan losses and the allowance for unfunded commitments which is accounted for as a separate liability in other liabilities on the balance sheet. The level of the ACL represents management’s estimate of expected credit losses over the expected life of the loans at the balance sheet date.

Upon adoption of CECL on January 1, 2021, the Company replaced the incurred loss impairment model that recognizes losses when it becomes probable that a credit loss will be incurred, with a requirement to recognize lifetime expected credit losses immediately when a financial asset is originated or purchased. The allowance for credit losses is a valuation account that is deducted from the amortized cost basis of loans to present the net amount expected to be collected on the loans. Loans, or portions thereof, are charged off against the allowance when they are deemed uncollectible. Expected recoveries do not exceed the aggregate of amounts previously charged-off and expected to be charged off.  The ACL is comprised of reserves measured on a collective (pool) basis based on a lifetime loss-rate model when similar risk characteristics exist. Loans that do not share risk characteristics are evaluated on an individual basis, generally larger non-accruing commercial loans and TDRs.

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Table of Contents

The Company’s activity in the allowance for credit losses for the nine monthsperiods ended September 30, 2017 and 2016are as follows:

Three Months Ended September 30, 2021

Balance at

Beginning of

Balance at

(in thousands)

    

Period

    

Charge Offs

    

Recoveries

    

Provision

    

End of Period

Commercial construction

$

2,372

$

$

$

(286)

$

2,086

Commercial real estate owner occupied

 

2,552

 

(142)

 

72

 

237

 

2,719

Commercial real estate non-owner occupied

 

5,604

 

 

 

(22)

 

5,582

Tax exempt

 

91

 

 

 

(6)

 

85

Commercial and industrial

 

5,225

 

(24)

 

 

105

 

5,306

Residential real estate

 

6,069

 

(6)

 

19

 

(290)

 

5,792

Home equity

 

822

 

(49)

 

1

 

30

 

804

Consumer other

 

80

 

(65)

 

1

 

58

 

74

Total

$

22,815

$

(286)

$

93

$

(174)

$

22,448

Nine Months Ended September 30, 2021

Balance at

Beginning of

Impact of ASC

Balance at

(in thousands)

    

Period

    

326

    

Charge Offs

    

Recoveries

    

Provision

    

End of Period

Commercial construction

$

824

$

1,196

$

$

18

$

48

$

2,086

Commercial real estate owner occupied

 

1,783

 

708

 

(403)

 

72

 

559

 

2,719

Commercial real estate non-owner occupied

 

7,864

 

(2,008)

 

 

4

 

(278)

 

5,582

Tax exempt

 

58

 

40

 

 

 

(13)

 

85

Commercial and industrial

 

3,137

 

2,996

 

(44)

 

14

 

(797)

 

5,306

Residential real estate

 

5,010

 

1,732

 

(67)

 

141

 

(1,024)

 

5,792

Home equity

 

285

 

603

 

(108)

 

48

 

(24)

 

804

Consumer other

 

121

 

(39)

 

(119)

 

10

 

101

 

74

Total

$

19,082

$

5,228

$

(741)

$

307

$

(1,428)

$

22,448

Three Months Ended September 30, 2020

Balance at

Beginning of

Balance at

(in thousands)

    

Period

    

Charge Offs

    

Recoveries

    

Provision

    

End of Period

Commercial construction

$

532

$

$

$

185

$

717

Commercial real estate owner occupied

 

1,524

 

 

 

370

 

1,894

Commercial real estate non-owner occupied

 

5,926

 

(266)

 

14

 

783

 

6,457

Tax exempt

 

64

 

 

 

4

 

68

Commercial and industrial

 

3,056

 

(24)

 

14

 

236

 

3,282

Residential real estate

 

4,991

 

 

1

 

86

 

5,078

Home equity

 

318

 

 

 

(4)

 

314

Consumer other

 

98

 

(149)

 

8

 

140

 

97

Total

$

16,509

$

(439)

$

37

$

1,800

$

17,907

26

Table of Contents

Nine Months Ended September 30, 2020

Balance at

Beginning of

Balance at

(in thousands)

    

Period

    

Charge Offs

    

Recoveries

    

Provision

    

End of Period

Commercial construction

$

317

$

$

$

400

$

717

Commercial real estate owner occupied

 

2,368

 

 

 

(474)

 

1,894

Commercial real estate non-owner occupied

 

4,695

 

(1,137)

 

109

 

2,790

 

6,457

Tax exempt

 

67

 

 

 

1

 

68

Commercial and industrial

 

3,262

 

(360)

25

 

355

 

3,282

Residential real estate

 

4,213

 

(32)

 

12

 

885

 

5,078

Home equity

 

320

 

 

 

(6)

 

314

Consumer other

 

111

 

(341)

 

13

 

314

 

97

Total

$

15,353

$

(1,870)

$

159

$

4,265

$

17,907

Unfunded Commitments

The Company’s allowance for credit losses on unfunded commitments is recognized as a liability (other liabilities on the consolidated balance sheet), with adjustments to the reserve recognized in other non-interest expense in the consolidated statement of operations. The Company’s activity in the allowance for credit losses on unfunded commitments for the periods ended was as follows:

Business Activities Loans At or for the Nine Months Ended September 30, 2017

(In thousands)
 
Commercial
real estate
 Commercial and industrial 
Residential
real estate
 Consumer Total
Balance at beginning of period $5,145
 $1,952
 $2,721
 $601
 $10,419
Charged-off loans (124) (189) (226) (87) (626)
Recoveries on charged-off loans 9
 7
 65
 7
 88
Provision/(releases) for loan losses 310
 405
 941
 40
 1,696
Balance at end of period $5,340
 $2,175
 $3,501
 $561
 $11,577
Individually evaluated for impairment 391
 2
 44
 55
 492
Collectively evaluated 4,949
 2,173
 3,457
 506
 11,085
Total $5,340
 $2,175
 $3,501
 $561
 $11,577


Business Activities Loans At or for the Nine Months Ended September 30, 2016

(In thousands)
 
Commercial
real estate
 Commercial and industrial 
Residential
real estate
 Consumer Total
Balance at beginning of period $4,430
 $1,590
 $2,747
 $672
 $9,439
Charged-off loans (133) (90) (141) (19) (383)
Recoveries on charged-off loans 35
 200
 36
 22
 293
Provision/(releases) for loan losses 719
 39
 38
 (42) 754
Balance at end of period $5,051
 $1,739
 $2,680
 $633
 $10,103
Individually evaluated for impairment 100
 174
 87
 10
 371
Collectively evaluated 4,951
 1,565
 2,593
 623
 9,732
Total $5,051
 $1,739
 $2,680
 $633
 $10,103

Acquired Loans At or for the Nine Months Ended September 30, 2017

(In thousands)
 
Commercial
real estate
 Commercial and industrial 
Residential
real estate
 Consumer Total
Balance at beginning of period $
 $
 $
 $
 $
Charged-off loans (54) (18) (31) (19) (122)
Recoveries on charged-off loans 
 
 
 
 
Provision/(releases) for loan losses 360
 49
 67
 19
 495
Balance at end of period $306
 $31
 $36
 $
 $373
Individually evaluated for impairment 168
 
 
 
 168
Collectively evaluated 138
 31
 36
 
 205
Total $306
 $31
 $36
 $
 $373

There were no loans meeting the definition of acquired for the nine month period ending September 30, 2016.


(in thousands)

Three Months Ended September 30, 2021

    

Nine Months Ended September 30, 2021

Begininng Balance

$

1,921

$

359

Impact of CECL adoption

1,616

Provision for credit losses

 

280

 

226

Ending Balance

$

2,201

$

2,201

��

(in thousands)

Three Months Ended September 30, 2020

    

Nine Months Ended September 30, 2020

Begininng Balance

$

319

$

314

Provision for credit losses

 

2

 

7

Ending Balance

$

321

$

321

Loan Origination/Risk Management: The BankCompany has certain lending policies and procedures in place that are designed to maximize loan income within an acceptable level of risk. The Bank’s boardCompany’s Board of directorsDirectors reviews and approves these policies and procedures on a regular basis. A reporting system supplements the review process by providing management and the Bank's boardCompany's Board of directorsDirectors with frequent reports related to loan production, loan quality, concentrationsand concentration of credit, loan delinquencies, and non-performing loans and potential problem loans. The BankCompany seeks to diversify the loan portfolio as a means of managing risk associated with fluctuations in economic conditions.


Credit Quality Indicators/Classified Loans:Indicators:  In monitoring the credit quality of the portfolio, management applies a credit quality indicator and uses an internal risk rating system to categorize commercial loans. These credit quality indicators range from one through nine, with a higher number correlating to increasing risk of loss.  These ratings are used as inputs to the calculation of the allowance for loan losses. Consistent with regulatory guidelines, the BankCompany provides for the classification of loans which are considered to be of lesser quality as special mention, substandard, doubtful, or loss (i.e. risk ratedrisk-rated 6, 7, 8 and 9, respectively).


The following are the definitions of the Bank’sCompany’s credit quality indicators:


Pass: Loans within all classes ofthe Company considers in the commercial portfolio segments that are not adversely rated, are contractually current as to principal and interest, and are otherwise in compliance with the contractual terms of the loan agreement. Management believes that there is a low risk of loss related to these loans thatconsidered pass-rated.

27

Table of Contents

Special Mention: Loans the Company considers having some potential weaknesses, but are considered pass.


Special mention:Loans that dodeemed to not expose the Bank tocarry levels of risk sufficient to warrant classificationinherent in one of the subsequent categories, but which possess some weaknesses, are designated as special mention. A special mention loan has potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the asset or in the institution’s credit position at some future date. This might include loans which the lending officer may be unable to supervise properlyrequire a higher level of supervision or internal reporting because of: (i) lackdeclining industry trends; (ii) increasing reliance on secondary sources of expertise, inadequate loan agreement; (ii)repayment; (iii) the poor condition of or lack of control over collateral; or (iii)(iv) failure to obtain proper documentation or any other deviations from prudent lending practices. Economic or market conditions which may, in the future, affect the obligor may warrant special mention of the asset. Loans for which an adverse trend in the borrower's operations or an imbalanced position in the balance sheet which has not reached a point where the liquidation is jeopardized may be included in this classification. Special mention loans are not adversely classified and do not expose the BankCompany to sufficient risks to warrant classification.

Substandard: The BankLoans the Company considers a loanas substandard if it isare inadequately protected by the current net worth and paying


capacity of the borrower or of the collateral pledged, if any. Substandard loans have a well-defined weakness that jeopardizes liquidation of the debt. Substandard loans include those loans where there is the distinct possibility of some loss of principal, if the deficiencies are not corrected.

Doubtful: Loans that the Bank classifiesCompany considers as doubtful have all of the weaknesses inherent in those loans that are classified as substandard but alsosubstandard. These loans have the added characteristic thatof a well-defined weakness which is inadequately protected by the weaknesses present make collectioncurrent sound worth and paying capacity of borrower or liquidation inof the collateral pledged, if any, and calls into question the collectability of the full onbalance of the basis of currently existing facts, conditions, and values, highly questionable and improbable.loan. 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 loan, its classification as loss is deferred until its more exact status is determined. Pending factors include proposed merger, acquisition, or liquidation procedures, capital injection, perfecting liens on additional collateral and refinancing plans. The entire amount of the loan might not be classified as doubtful when collection of a specific portion appears highly probable. Loans are generally not classified doubtful for an extended period of time (i.e., over a year).


Loss: Loans that the Bank classifiesCompany considers as losses are those considered uncollectible and of such little value that their continuance as an asset is not warranted and the uncollectible amounts are charged-off. This classification does not mean that the asset has absolutely no recovery or salvage value, but rather it is not practical or desirable to defer writing off this worthless asset even though partial recovery may be affected in the future. Losses are taken in the period in which they are determined to be uncollectible.


28

Table of Contents

The following tables present the Company’s loans by year of origination, loan segmentation and risk rating atindicator as of September 30, 2017 and December 31, 2016:2021:

    

    

    

    

    

    

    

(in thousands)

2021

2020

2019

2018

2017

Prior

Total

Commercial construction

 

  

 

  

 

  

 

  

 

  

 

  

 

  

Risk rating:

 

  

 

  

 

  

 

  

 

  

 

  

 

  

Pass

$

22,192

$

76,226

$

44,453

$

9,829

$

$

$

152,700

Special mention

 

 

 

 

 

 

 

Substandard

 

 

 

 

 

 

 

Total

$

22,192

$

76,226

$

44,453

$

9,829

$

$

$

152,700

Commercial real estate owner occupied

 

  

 

  

 

  

 

  

 

  

 

  

 

  

Risk rating:

 

  

 

  

 

  

 

  

 

  

 

  

 

  

Pass

$

9,937

$

16,003

$

35,366

$

47,026

$

20,038

$

110,663

$

239,033

Special mention

 

 

 

767

 

 

 

3,125

 

3,892

Substandard

 

 

 

 

248

 

248

 

10,030

 

10,526

Doubtful

172

169

341

Total

$

9,937

$

16,003

$

36,133

$

47,446

$

20,286

$

123,987

$

253,792

Commercial real estate non-owner occupied

 

  

 

  

 

  

 

  

 

  

 

  

 

  

Risk rating:

 

  

 

  

 

  

 

  

 

  

 

  

 

  

Pass

$

101,706

$

147,754

$

90,963

$

40,545

$

147,197

$

186,056

$

714,221

Special mention

 

 

 

 

 

 

15,612

 

15,612

Substandard

 

 

 

 

131

 

131

 

3,086

 

3,348

Doubtful

172

172

Total

$

101,706

$

147,754

$

90,963

$

40,676

$

147,328

$

204,926

$

733,353

Tax exempt

 

  

 

  

 

  

 

  

 

  

 

  

 

  

Risk rating:

 

  

 

  

 

  

 

  

 

  

 

  

 

  

Pass

$

1,511

$

604

$

975

$

14,453

$

5,387

$

19,518

$

42,448

Special mention

 

 

 

 

 

 

 

Substandard

 

 

 

 

 

 

 

Total

$

1,511

$

604

$

975

$

14,453

$

5,387

$

19,518

$

42,448

Commercial and industrial

 

  

 

  

 

  

 

  

 

  

 

  

 

  

Risk rating:

 

  

 

  

 

  

 

  

 

  

 

  

 

  

Pass

$

104,179

$

64,303

$

36,010

$

17,635

$

35,407

$

73,972

$

331,506

Special mention

 

619

 

222

 

717

 

596

 

202

 

1,429

 

3,785

Substandard

 

98

 

 

549

 

14

 

50

 

677

 

1,388

Doubtful

122

188

310

Total

$

104,896

$

64,525

$

37,276

$

18,245

$

35,781

$

76,266

$

336,989

(continued)


29

Business Activities Loans
Commercial Real Estate
Credit Risk Profile by Creditworthiness Category

Table of Contents

  Construction and land development Commercial real estate other Total commercial real estate
(In thousands) September 30, 2017 December 31, 2016 September 30, 2017 December 31, 2016 September 30, 2017 December 31, 2016
Grade:  
  
  
  
  
  
Pass $33,008
 $14,695
 $433,934
 $376,968
 $466,942
 $391,663
Special mention 47
 
 6,820
 5,868
 6,867
 5,868
Substandard 637
 
 15,093
 20,588
 15,730
 20,588
Total $33,692
 $14,695
 $455,847
 $403,424
 $489,539
 $418,119


Commercial and Industrial
Credit Risk Profile by Creditworthiness Category
   Commercial other  Agricultural and other loans to farmers  Tax exempt loans  Total commercial and industrial
(In thousands) September 30, 2017 December 31, 2016 September 30, 2017 December 31, 2016 September 30, 2017 December 31, 2016 September 30, 2017 December 31, 2016
Grade:  
  
  
  
  
  
    
Pass $168,608
 $98,968
 $30,075
 $31,279
 $40,610
 $15,679
 $239,293
 $145,926
Special mention 1,757
 2,384
 91
 251
 166
 167
 2,014
 2,802
Substandard 1,821
 2,234
 317
 278
 
 
 2,138
 2,512
Total $172,186
 $103,586
 $30,483
 $31,808
 $40,776
 $15,846
 $243,445
 $151,240



Acquired Loans
Commercial Real Estate
Credit Risk Profile by Creditworthiness Category
  Commercial construction and land development Commercial real estate other Total commercial real estate
(In thousands) September 30, 2017 December 31, 2016 September 30, 2017 December 31, 2016 September 30, 2017 December 31, 2016
Grade:  
  
  
  
  
  
Pass $15,336
 $
 $278,134
 $
 $293,470
 $
Special mention 233
 
 2,475
 
 2,708
 
Substandard 24
 
 7,831
 
 7,855
 
Total $15,593
 $
 $288,440
 $
 $304,033
 $


Commercial and Industrial
Credit Risk Profile by Creditworthiness Category
   Commercial other  Agricultural and other loans to farmers  Tax exempt loans Total commercial and industrial
(In thousands) September 30, 2017 December 31, 2016 September 30, 2017 December 31, 2016 September 30, 2017 December 31, 2016 September 30, 2017 December 31, 2016
Grade:   
     
   
   
   
   
   
Pass $63,941
 $
 $
 $
 $45,537
 $
 $109,478
 $
Special mention 2,053
 
 
 
 
 
 2,053
 
Substandard 2,096
 
 
 
 
 
 2,096
 
Total $68,090
 $
 $
 $
 $45,537
 $
 $113,627
 $


    

    

    

    

    

    

    

(in thousands)

2021

2020

2019

2018

2017

Prior

Total

Residential real estate

 

  

 

  

 

  

 

  

 

  

 

  

 

  

Performing

$

143,071

$

126,171

$

95,942

$

70,062

$

69,486

$

404,395

$

909,127

Nonperforming

 

 

 

 

576

 

183

 

7,415

 

8,174

Total

$

143,071

$

126,171

$

95,942

$

70,638

$

69,669

$

411,810

$

917,301

Home equity

 

  

 

  

 

  

 

  

 

  

 

  

 

  

Performing

$

8,227

$

10,946

$

9,775

$

7,647

$

6,975

$

43,133

$

86,703

Nonperforming

 

 

 

 

 

 

1,299

 

1,299

Total

$

8,227

$

10,946

$

9,775

$

7,647

$

6,975

$

44,432

$

88,002

Consumer other

 

  

 

  

 

  

 

  

 

  

 

  

 

  

Performing

$

3,037

$

1,942

$

1,023

$

803

$

329

$

2,429

$

9,563

Nonperforming

 

 

 

 

 

 

6

 

6

Total

$

3,037

$

1,942

$

1,023

$

803

$

329

$

2,435

$

9,569

Total Loans

$

394,577

$

444,171

$

316,540

$

209,737

$

285,755

$

883,374

$

2,534,154

The following table summarizes credit risk exposure indicators by portfolio segment, under the incurred loss methodology, as of the period indicated:

    

December 31, 2020

Commercial

Commercial

Residential

    

    

Real Estate

and Industrial

Real Estate

Consumer

Total

Grade:

 

  

 

  

 

  

 

  

 

Pass

 

$

1,053,773

$

422,016

$

$

$

1,475,789

Performing

914,749

112,190

1,026,939

Special mention

 

6,075

2,771

8,846

Substandard

 

22,267

15,180

37,447

Doubtful

 

2,265

1,100

3,365

Loss

 

1

2

3

Non-performing

9,142

1,354

10,496

Total

 

$

1,084,381

$

441,069

$

923,891

$

113,544

$

2,562,885

Past Dues

The following is a summary of past due loans for the periods ended:

September 30, 2021

(in thousands)

    

30-59

    

60-89

    

90+

    

Total Past Due

    

Current

    

Total Loans

Commercial construction

$

$

$

$

$

152,700

$

152,700

Commercial real estate owner occupied

 

 

10

 

627

 

637

 

253,155

 

253,792

Commercial real estate non-owner occupied

 

314

 

 

117

 

431

 

732,922

 

733,353

Tax exempt

 

 

 

 

 

42,448

 

42,448

Commercial and industrial

 

44

 

35

 

313

 

392

 

336,597

 

336,989

Residential real estate

 

414

 

1,007

 

2,796

 

4,217

 

913,084

 

917,301

Home equity

 

344

 

95

 

62

 

501

 

87,501

 

88,002

Consumer other

 

32

 

2

 

 

34

 

9,535

 

9,569

Total

$

1,148

$

1,149

$

3,915

$

6,212

$

2,527,942

$

2,534,154

30

Table of Contents

December 31, 2020

(in thousands)

    

30-59

    

60-89

    

90+

    

Total Past Due

    

Current

    

Total Loans

Commercial construction

$

74

$

$

1

$

75

$

117,807

$

117,882

Commercial real estate owner occupied

 

1,309

 

464

 

438

 

2,211

 

217,006

 

219,217

Commercial real estate non-owner occupied

 

503

 

674

 

624

 

1,801

 

714,975

 

716,776

Tax exempt

 

 

 

 

 

47,862

 

47,862

Commercial and industrial

 

161

 

 

193

 

354

 

355,330

 

355,684

Residential real estate

 

9,178

 

2,511

 

3,200

 

14,889

 

980,327

 

995,216

Home equity

 

1,062

 

614

 

375

 

2,051

 

98,045

 

100,096

Consumer other

 

20

 

 

2

 

22

 

10,130

 

10,152

Total

$

12,307

$

4,263

$

4,833

$

21,403

$

2,541,482

$

2,562,885

Non-Accrual Loans

The following is a summary of non-accrual loans for the periods ended:

September 30, 2021

Nonaccrual With No

90+ Days Past

(in thousands)

    

Nonaccrual

    

Related Allowance

    

Due and Accruing

Commercial construction

$

$

$

Commercial real estate owner occupied

 

1,184

 

808

 

366

Commercial real estate non-owner occupied

 

770

 

314

 

Tax exempt

 

 

 

Commercial and industrial

 

775

 

629

 

149

Residential real estate

 

8,174

 

3,217

 

105

Home equity

 

1,298

 

316

 

Consumer other

 

6

 

 

Total

$

12,207

$

5,284

$

620

December 31, 2020

Nonaccrual With No

90+ Days Past

(in thousands)

    

Nonaccrual

    

Related Allowance

    

Due and Accruing

Commercial construction

$

258

$

$

Commercial real estate owner occupied

 

3,038

 

929

 

Commercial real estate non-owner occupied

 

383

 

118

 

Tax exempt

 

 

 

Commercial and industrial

 

1,223

 

1,065

 

Residential real estate

 

5,883

 

4,948

 

Home equity

 

1,345

 

1,346

 

267

Consumer other

 

58

 

58

 

Total

$

12,188

$

8,464

$

267

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Table of Contents

Collateral Dependent Loans

Loans that do not share risk characteristics are evaluated on an individual basis. For loans that are individually evaluated and collateral dependent,  financial loans where the Company has determined that foreclosure of the collateral is probable, or where the borrower is experiencing financial difficulty and the Company expects repayment of the financial asset to be provided substantially through the operation or sale of the collateral, the ACL is measured based on the difference between the fair value of the collateral and the amortized cost basis of the asset as of the measurement date.

The following table presents the amortized cost basis of collateral-dependent loans by loan portfolio segment for the periods ended.

September 30, 2021

December 31, 2020

(in thousands)

    

Real Estate

    

Other

    

Real Estate

    

Other

Commercial construction

$

$

$

259

$

Commercial real estate owner occupied

 

1,184

 

 

3,441

 

Commercial real estate non-owner occupied

 

770

 

 

383

 

Tax exempt

 

 

 

 

Commercial and industrial

 

436

 

339

 

625

 

607

Residential real estate

 

8,174

 

 

7,432

 

Home equity

 

1,298

 

 

1,493

 

Consumer other

 

6

 

 

60

 

Total

$

11,868

$

339

$

13,693

$

607

Pre Adoption of ASC 326 – Impaired Loans

For periods prior to the adoption of CECL, loans were considered impaired when, based on current information about totaland events, it was probable the Company would be unable to collect all amounts due in accordance with the original contractual terms of the loan agreement, including scheduled principal and interest payments.  The Company identified loan relationships having aggregate balances in excess of $150 thousand with potential credit weaknesses. Such loan relationships were identified primarily through the Company's analysis of internal loan evaluations, past due loan reports, TDRs and loans rated Special Mentionadversely classified. Each loan so identified was then individually evaluated for impairment. Substantially all impaired loans have historically been collateral dependent, meaning repayment of the loan was expected or higherwas considered to be provided solely from the sale of the loan's underlying collateral. For such loans, the Company measured impairment based on the fair value of the loan's collateral, which is generally determined utilizing current appraisals. A specific reserve was established in an amount equal to the excess, if any, of the recorded investment in each impaired loan over the fair value of its underlying collateral, less estimated costs to sell. The Company's policy was to re-evaluate the fair value of collateral dependent loans at least every twelve months unless there is a known deterioration in the collateral's value, in which case a new appraisal is obtained.

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Table of Contents

The tables reflects the activity associated with impaired loans in 2020 prior to the adoption of CECL.

    

December 31, 2020

Recorded

    

Unpaid Principal

    

Related

    

Average Recorded

    

Interest

(in thousands)

Investment

Balance

Allowance

Investment

Income Recognized

With no related allowance:

 

  

 

  

 

  

 

  

 

  

Construction and land development

$

$

$

$

$

Other commercial real estate

 

2,001

 

2,047

 

 

1,610

 

Commercial

 

1,095

 

1,254

 

 

1,140

 

4

Agricultural

 

361

 

150

 

 

114

 

2

Tax exempt loans

 

 

 

 

 

Residential real estate

 

2,745

 

3,165

 

 

1,077

 

17

Home equity

 

 

 

 

 

Other consumer

 

 

 

 

 

With an allowance recorded:

 

  

 

  

 

  

 

  

 

  

Construction and land development

 

258

 

258

 

205

 

203

 

Other commercial real estate

 

1,963

 

2,108

 

1,038

 

1,973

 

17

Commercial

 

282

 

289

 

164

 

73

 

Agricultural

 

 

 

 

 

Tax exempt loans

 

 

 

 

 

Residential real estate

 

887

 

944

 

106

 

1,865

 

37

Home equity

 

13

 

13

 

 

12

 

1

Other consumer

 

 

 

 

 

Total

 

  

 

  

 

  

 

  

 

  

Commercial real estate

 

4,222

 

4,413

 

1,243

 

3,786

 

17

Commercial and industrial

 

1,738

 

1,693

 

164

 

1,327

 

6

Residential real estate

 

3,632

 

4,109

 

106

 

2,942

 

54

Consumer

 

13

 

13

 

 

12

 

1

Total impaired loans

$

9,605

$

10,228

$

1,513

$

8,067

$

78

33

Table of Contents

Troubled Debt Restructuring Loans

The Company’s loan portfolio also includes certain loans that have been modified in a Troubled Debt Restructuring (TDR), where economic concessions have been granted to borrowers who have experienced or are expected to experience financial difficulties. These concessions typically result from the Company’s loss mitigation activities and could include reductions in the interest rate, payment extensions, forgiveness of principal, forbearance, or other actions. Certain TDRs are classified as non-performing at the time of restructure and may only be returned to performing status after considering the borrower’s sustained repayment performance for a reasonable period, generally six months. TDRs are evaluated individually for impairment and may result in a specific allowance amount allocated to an individual loan.

The following tables include the recorded investment and number of modifications identified during the periods ended. The table includes the recorded investment in the loans prior to a modification and also the recorded investment in the loans after the loans were restructured. Modifications may include adjustments to interest rates, payment amounts, extensions of maturity, court ordered concessions or other actions intended to minimize economic loss and avoid foreclosure or repossession of collateral. There were 0 modifications qualifying as TDR’s for the three and nine months ended September 30, 2021.

Three Months Ended September 30, 2020

Pre-Modification

Post-Modification

Number of

Outstanding

Outstanding

(in thousands)

    

Modifications

    

Balance

    

Balance

    

Reserve

Commercial and industrial

 

1

 

86

 

86

 

Total

 

1

$

86

$

86

$

Nine Months Ended September 30, 2020

Pre-Modification

Post-Modification

Number of

Outstanding

Outstanding

(in thousands)

    

Modifications

    

Balance

    

Balance

    

Reserve

Commercial construction

$

$

$

Commercial real estate owner occupied

 

 

 

 

Commercial real estate non-owner occupied

 

1

 

54

 

247

 

Tax exempt

 

 

 

 

Commercial and industrial

 

4

 

127

 

248

 

Residential real estate

 

 

 

 

Home equity

 

1

 

26

 

24

 

Consumer other

 

1

 

9

 

9

 

Total

 

7

$

216

$

528

$

The following tables summarize the types of loan concessions made for the periods presented:

September 30, 2021

September 30, 2020

    

    

Post-Modification

    

    

Post-Modification

Number of

Outstanding

Number of

Outstanding

(in thousands)

Modifications

Balance

Modifications

Balance

Interest rate, forbearance and maturity concession

 

$

 

4

$

409

Forbearance and interest only payments

 

 

 

1

 

24

Maturity concession

 

 

 

2

 

95

Total

 

$

 

7

$

528

For the three months ended September 30, 2021 there were 0 loans that were restructured that had subsequently defaulted during the period. The evaluation of certain loans individually for specific impairment includes loans that were previously classified as TDRs or continue to be classified as TDRs.

Modifications in response to COVID-19

The Company began offering short-term loan modifications to assist borrowers during the COVID-19 national emergency. The CARES Act along with a joint agency statement issued by banking agencies, provides that short-term modifications

34

Table of Contents

made in response to COVID-19 do not need to be accounted for as a TDR. Accordingly, the Company does not account for such loan modifications as TDRs. See Note 1 - Basis of Presentation in December 31, 2020 10-K for more information.

Foreclosure

Residential mortgage loans collateralized by real estate that are in the process of foreclosure as of September 30, 20172021 and December 31, 2016. 2020 totaled $734 thousand and $917 thousand, respectively.

Mortgage Banking

The table below includes consumerCompany had identified and designated loans thatwith an unpaid principal balance of $7.5 million and $24.0 million as residential loans held for sale at September 30, 2021 and December 31, 2020, respectively.  The interest rate exposure on loans held for sale are special mentionmitigated through forward delivery commitments with certain approved secondary market investors. Forward delivery commitments were $14.5 million, and substandard accruing that$50.6 million, respectively.  Refer to Note 8 for further discussion of the Company's forward delivery commitments.

For the three months ended September 30, 2021 and 2020, the Company sold $28.5 million and $86.2 million, respectively, of residential mortgage loans on the secondary market, which resulted in a net gain on sale of loans (net of costs, including direct and indirect origination costs) of $682 thousand and $2.2 million, respectively. For the nine months ended September 30, 2021 and 2020, the Company sold $153.9 million and $156.0 million, respectively, of residential mortgage loans on the secondary market, which resulted in a net gain on sale of loans (net of costs, including direct and indirect origination costs) of $3.6 million and $3.1 million, respectively.

The Company sells residential loans on the secondary market with the Company primarily retaining the servicing of these loans.  Servicing sold loans helps to maintain customer relationships and the Company earns fees over the servicing period. Loans serviced for others are classifiednot included in the above table as performing based on payment activity.accompanying consolidated balance sheets. The risks inherent in servicing assets relate primarily to level of prepayments that result from shifts in interest rates.   The Company obtains third party valuations of its servicing assets portfolio quarterly, which assumptions are reflected in Fair Value disclosures.


35

Table of Contents

  September 30, 2017 December 31, 2016
(In thousands) 
Business
Activities Loans
 Acquired Loans Total 
Business
Activities Loans
 Acquired Loans Total
Non-accrual $5,116
 $3,452
 $8,568
 $2,733
 $
 $2,733
Substandard accruing 15,774
 9,627
 25,401
 20,368
 
 20,368
Total classified 20,890
 13,079
 33,969
 23,101
 
 23,101
Special mention 8,864
 4,762
 13,626
 8,669
 
 8,669
Total Criticized $29,754
 $17,841
 $47,595
 $31,770
 $
 $31,770


NOTE 6.4.               BORROWED FUNDS


Borrowed funds at September 30, 20172021 and December 31, 20162020 are summarized, as follows:

  September 30, 2017 December 31, 2016
(dollars in thousands) Carrying Value 
Weighted
Average
Rate
 Carrying Value Weighted
Average
Rate
Short-term borrowings  
  
  
  
Advances from the FHLBB $506,000
 1.36% $372,700
 0.97%
Other borrowings 41,600
 0.56
 21,780
 0.29
Total short-term borrowings 547,600
 1.30
 394,480
 0.93
Long-term borrowings        
Advances from the FHLBB 227,982
 1.50
 137,116
 1.59
Subordinated borrowings 38,048
 5.46
 
 
Junior subordinated borrowings 5,000
 4.81
 5,000
 4.41
Total long-term borrowings 271,030
 2.11
 142,116
 1.69
Total $818,630
 1.57% $536,596
 1.13%

Short term

September 30, 2021

December 31, 2020

 

Weighted

Weighted

(dollars in thousands)

    

Carrying Value

    

Average Rate

Carrying Value

    

Average Rate

 

Short-term borrowings

  

  

  

  

 

Advances from the FHLB

$

75,000

 

0.30

%  

$

65,676

 

1.19

%

Other borrowings

 

21,667

 

0.13

 

27,779

 

0.15

Total short-term borrowings

 

96,667

 

0.18

 

93,455

 

0.44

Long-term borrowings

 

  

 

  

 

  

 

  

Advances from the FHLB

 

93,600

 

1.57

 

182,607

 

1.73

Subordinated borrowings

 

60,083

 

4.34

 

59,961

 

4.34

Total long-term borrowings

 

153,683

 

2.65

 

242,568

 

2.37

Total

$

250,350

 

1.06

%  

$

336,023

 

1.41

%

Short-term debt includes Federal Home Loan Bank of Boston (“FHLBB”)(FHLB) advances with an originala maturity of less than one year. The BankCompany also maintains a $1.0$1.0 million secured line of credit with the FHLBBFHLB that bears a daily adjustable rate calculated by the FHLBB.FHLB. There was no0 outstanding balance on the FHLBBFHLB line of credit for the periods ended September 30, 20172021 and December 31, 2016.


2020.

The Bank also hadCompany has the capacity to borrow funds on a secured basis utilizing the Borrower in Custody program and the Discount Window at the Federal Reserve Bank of Boston (the “FRB”). At September 30, 2017,2021, the Bank’sCompany’s available secured line of credit at the FRB was $114.6$72.0 million. The BankCompany has pledged certain loans and securities to the FRB to support this arrangement. There were no borrowings0 outstanding advances with the FRB for the periods ended September 30, 20172021 and December 31, 2016.


2020.

The Company maintains, with a correspondent bank, an unused unsecured federal funds line of credit that has an aggregate overnight borrowing capacity of $50.0 million as of September 30, 2021 and December 31, 2020. There was 0 outstanding balance on the line of credit as of September 30, 2021 and December 31, 2020.

Long-term FHLBBFHLB advances consist of advances with a maturity of more than one year. The advances outstanding at September 30, 20172021 include callable advances totaling $27.0of $20.0 million and amortizing advances totaling $689of $300 thousand. The advances outstanding at December 31, 2016 include2020 included $20.0 million of callable advances totaling $17.0and $307 million and noof amortizing advances. All FHLBBFHLB borrowings, including the line of credit, are secured by a blanket security agreement on certain qualified collateral, principally all residential first mortgage loans and certain securities.


A summary of maturities of FHLBBFHLB advances as of September 30, 20172021 is, as follows:

  September 30, 2017
(in thousands, except rates) Carrying Value Weighted
Average
Rate
Fixed rate advances maturing:  
  
2017 $416,000
 1.32%
2018 165,805
 1.49
2019 104,947
 1.63
2020 29,911
 1.76
2021 1,630
 1.49
2022 and thereafter 15,689
 0.36
Total FHLBB advances $733,982
 1.40%


In April 2008, the Bank issued fifteen year junior subordinated notes in the amount of $5.0 million. These debt securities qualify as Tier 2 capital for

    

    

Weighted Average

 

(in thousands, except rates)

Amount

 Rate

 

2021

$

75,000

 

0.30

%

2022

 

15,000

 

1.76

2023

 

51,000

 

1.71

2024

 

7,300

 

1.16

2025

 

20,000

 

1.21

2026 and thereafter

 

300

 

3.39

Total FHLB advances

$

168,600

 

1.01

%

On November 26, 2019, the Company and the Bank. The subordinated debt securities are callable by the Bank


after five years without penalty. The interest rate is three-month LIBOR plus 3.45%. At September 30, 2017 and December 31, 2016 the interest rate was 4.77% and 4.41%, respectively.

On January 13, 2017, the Company acquired $17.0 million of subordinated debt in connection with the Lake Sunapee acquisition. The original subordinated debt was issued on October 29, 2014, in connection with the execution ofexecuted a Subordinated Note Purchase Agreement between and among Lake Sunapee Bank Group and certain accredited investors pursuant to which Lake Sunapee Bank Group issuedwith an aggregate of $17.0$40.0 million of subordinated notes (the “Notes”"Notes") to the accredited investors. The Notes have a maturity date of NovemberDecember 1, 2029 and bear a fixed interest rate of 4.625% through December 1, 2024 payable semi-annually in arrears. From December 1, 2024 and will bearthereafter the interest at a fixed rate shall be reset quarterly to an interest rate per annum equal to the then current three-

36

Table of 6.75% per annum.Contents

month SOFR plus 3.27%. The Company may, at itshas the option beginning with the interest payment date of NovemberDecember 1, 2019,2024, and on any interestscheduled payment date thereafter, to redeem the Notes, in whole or in part at par plus accrued and unpaid interest to the date of redemption. Any partial redemption will be made pro rata among allupon prior approval of the noteholders. Federal Reserve. Netted with subordinated borrowings is amortized subordinated debt issuance costs of $537 thousand as of September 30, 2021 and issuance costs of $659 thousand net of amortization as of December 31, 2020.

The Notes are not subject to repayment at the option of the noteholders. The Notes are unsecured, subordinated obligations of the Company and rank junioralso has $20.6 million in right of payment to the Company’s senior indebtedness and to the Company’s obligations to its general creditors.


Also in connection with the Lake Sunapee acquisition, the Company acquired 100% of the common securities totaling $600 thousand and $20.0 million offloating Junior Subordinated Deferrable Interest Debentures ("Debentures") issued by NHTB Capital Trust II ("Trust II") and NHTB Capital Trust III ("Trust III"), which are both Connecticut statutory trusts. The Debentures were originally issued on March 30, 2014,2004, carry a variable interest rate of 3-month LIBOR plus 2.79%, and mature in 2034. The debt is callable by the Company at the time when any interest payment is made. NHTB Trust II and Trust III are considered variable interest entities for which the Company is not the primary beneficiary. Accordingly, Trust II and Trust III are not consolidated into the Company’s financial statements.


37

Table of Contents


NOTE 7.               5.               DEPOSITS


A summary of time deposits is, as follows:

(In thousands) September 30, 2017 December 31, 2016
Time less than $100,000 $541,585
 $304,393
Time $100,000 or more 260,525
 112,044
Total time deposits $802,110
 $416,437

(in thousands)

    

September 30, 2021

    

December 31, 2020

Time less than $100,000

$

199,312

$

325,646

Time $100,000 through $250,000

 

192,497

 

278,940

Time $250,000 or more

 

77,412

 

93,775

Total

$

469,221

$

698,361

At September 30, 2021 and December 31, 2020, the scheduled maturities by year for time deposits are, as follows:

(in thousands)

    

September 30, 2021

December 31, 2020

Within 1 year

$

362,774

$

574,007

Over 1 year to 2 years

 

56,926

 

61,584

Over 2 years to 3 years

 

31,888

 

41,145

Over 3 years to 4 years

 

9,182

 

12,875

Over 4 years to 5 years

 

6,272

 

8,728

Over 5 years

 

2,179

 

22

Total

$

469,221

$

698,361

Included in time deposits are brokered deposits of $362.7$31.4 million and $237.9$193.7 million at September 30, 20172021 and December 31, 2016,2020, respectively. IncludedAlso included in the deposit balances contained on the balance sheettime deposits are reciprocal deposits of $49.3$238.5 million and $43.1$125.0 million at September 30, 20172021 and December 31, 2016,2020, respectively.


38


Table of Contents

NOTE 8.6.           CAPITAL RATIOS AND SHAREHOLDERS’ EQUITY


The actual and required capital ratios wereare, as follows:

    

    

Regulatory

    

    

Regulatory

  

September 30, 

Minimum to be

December 31, 

Minimum to be

 

2021

"Well-Capitalized"

2020

"Well-Capitalized"

 

Company (consolidated)

 

  

 

  

 

  

 

  

Total capital to risk-weighted assets(1)

 

14.12

%  

10.50

%  

13.57

%  

10.50

%  

Common equity tier 1 capital to risk-weighted assets(1)

 

10.92

 

7.00

 

10.49

 

7.00

Tier 1 capital to risk-weighted assets(1)

 

11.70

 

8.50

 

11.29

 

8.50

Tier 1 capital to average assets

 

8.54

 

5.00

 

8.12

 

5.00

Bank

 

  

 

  

 

  

 

  

Total capital to risk-weighted assets(1)

 

13.92

%  

10.50

%  

13.27

%  

10.50

%

Common equity tier 1 capital to risk-weighted assets(1)

 

13.02

 

7.00

 

12.53

 

7.00

Tier 1 capital to risk-weighted assets(1)

 

13.02

 

8.50

 

12.52

 

8.50

Tier 1 capital to average assets

 

9.50

 

5.00

 

9.02

 

5.00

  September 30, 2017 
Regulatory
Minimum to be
Well Capitalized
 December 31, 2016 
Regulatory
Minimum to be
Well Capitalized
Company (consolidated)  
  
  
  
Total capital to risk weighted assets 13.8% 10.0% 16.5% 10.0%
Common equity tier 1 capital to risk weighted assets 11.3
 6.5
 15.0
 6.5
Tier 1 capital to risk weighted assets 12.7
 8.0
 15.0
 8.0
Tier 1 capital to average assets 8.0
 5.0
 8.9
 5.0
         
Bank        
Total capital to risk weighted assets 13.8% 10.0% 16.7% 10.0%
Common equity tier 1 capital to risk weighted assets 13.0
 6.5
 15.2
 6.5
Tier 1 capital to risk weighted assets 13.0
 8.0
 15.2
 8.0
Tier 1 capital to average assets 8.5
 5.0
 9.1
 5.0

(1)Prior period has been revised, see Note 1 Basis of Presentation – Revision of Previously Issued Financial Statements.

At each date shown, the Company and the Bank met the conditions to be classified as “well capitalized”“well-capitalized” under the relevant regulatory framework. To be categorized as well capitalized,"well-capitalized," an institution must maintain minimum total risk-based, Tier 1 risk-based, and Tier 1 leverage ratios as set forth in the table above.


Effective January 1, 2015, the

The Company and the Bank becameare subject to the Basel III rule that requires the Company and the Bank to assess their Common equity tier 1 capital to risk weightedrisk-weighted assets and the Company and the Bank each exceed the minimum to be well capitalized. In addition, the final capital rules added a requirement to maintain a minimum conservation buffer, composed of common equity tier 1 capital, of 2.5% of risk-weighted assets, to be phased in over three years and applied to the common equity tier 1 risk-based capital ratio, the Tier 1 risk-based capital ratio and the Total risk-based capital ratio. Accordingly, banking organizations, on a fully phased in basis no later than"well-capitalized." Effective January 1, 2019 all banking organizations must maintain a minimum Common equity tier 1 risk-based capital ratio of 7.0%, a minimum Tier 1 risk-based capital ratio of 8.5% and a minimum Total risk-based capital ratio of 10.5%.


The required minimum conservation buffer began to be phased in incrementally, starting at 0.625% on January 1, 2016 and increasing to 1.25% on January 1, 2017. The buffer will increase to 1.875% on January 1, 2018 and 2.5% on January 1, 2019. The final capital rules impose restrictions on capital distributions and certain discretionary cash bonus payments if the minimum capital conservation buffer is not met.

At September 30, 2017, the capital levels of both the Company and the Bank exceeded all regulatory capital requirements and their regulatory capital ratios were above the minimum levels required to be considered well capitalized for regulatory purposes. The capital levels of both the Company and the Bank at September 30, 2017 also exceeded the minimum capital requirements including the currently applicable capital conservation buffer of 0.625%.


Accumulated other comprehensive loss

income (loss)

Components of accumulated other comprehensive income is, as follows:

(in thousands)

    

September 30, 2021

    

December 31, 2020

Accumulated other comprehensive income, before tax:

 

  

 

  

Net unrealized gain on AFS securities

$

5,741

$

13,069

Net unrealized gain on hedging derivatives(1)

 

(121)

 

(2,432)

Net unrealized loss on post-retirement plans

 

(1,850)

 

(1,850)

Income taxes related to items of accumulated other comprehensive income:

 

  

 

  

Net unrealized gain on AFS securities

 

(1,343)

 

(3,046)

Net unrealized gain on hedging derivatives(1)

 

29

 

567

Net unrealized loss on post-retirement plans

 

432

 

432

Accumulated other comprehensive income(1)

$

2,888

$

6,740

(In thousands) September 30, 2017 December 31, 2016
Other accumulated comprehensive income (loss), before tax:  
  
Net unrealized holding gain/(loss) on AFS securities $1,849
 $(3,269)
Net unrealized loss on effective cash flow hedging derivatives (3,570) (2,766)
Net unrealized holding loss on post-retirement plans (577) (622)
     
Income taxes related to items of accumulated other comprehensive loss:    
Net unrealized holding (loss)/gain on AFS securities (695) 1,144
Net unrealized loss on effective cash flow hedging derivatives 1,341
 968
Net unrealized holding loss on post-retirement plans 217
 219
Accumulated other comprehensive loss $(1,435) $(4,326)
(1)Prior period has been revised, see Note 1 Basis of Presentation – Revision of Previously Issued Financial Statements.


39



The following tablestable presents the components of other comprehensive income (loss) for the three and nine months ended September 30, 20172021 and 2016:

(In thousands) Before Tax Tax Effect Net of Tax
Three Months Ended September 30, 2017  
  
  
Net unrealized holding gain on AFS securities: x
    
Net unrealized gain arising during the period $531
 $(199) $332
Less: reclassification adjustment for gains (losses) realized in net income 19
 (7) 12
Net unrealized holding gain on AFS securities 512
 (192) 320
       
Net unrealized loss on cash flow hedging derivatives:      
Net unrealized loss arising during the period (84) 31
 (53)
Less: reclassification adjustment for gains (losses) realized in net income 
 
 
Net unrealized gain on cash flow hedging derivatives (84) 31
 (53)
       
Net unrealized holding loss on post-retirement plans:      
Net unrealized gain/(loss) arising during the period 5
 (2) 3
Less: reclassification adjustment for gains (losses) realized in net income 
 
 
Net unrealized holding gain/(loss) on post-retirement plans 5
 (2) 3
Other comprehensive income $433
 $(163) $270
       
Three Months Ended September 30, 2016  
  
  
Net unrealized holding gains on AFS securities:    
  
Net unrealized gains arising during the period $(4,223) $1,478
 $(2,745)
Less: reclassification adjustment for gains realized in net income 1,354
 (474) 880
Net unrealized holding gains on AFS securities (5,577) 1,952
 (3,625)
       
Net unrealized (loss) on cash flow hedging derivatives:  
    
Net unrealized (loss) arising during the period (92) 32
 (60)
Less: reclassification adjustment for gains (losses) realized in net income 
 
 
Net unrealized (loss) on cash flow hedging derivatives (92) 32
 (60)
       
Net unrealized holding gain on post-retirement plans:  
  
  
Net unrealized gain arising during the period 8
 (3) 5
Less: reclassification adjustment for gains (losses) realized in net income 
 
 
Net unrealized holding gain on post-retirement plans 8
 (3) 5
Other comprehensive income $(5,661) $1,981
 $(3,680)


2020:

(in thousands)

    

Before Tax

    

Tax Effect

    

Net of Tax

Three Months Ended September 30, 2021

 

  

 

  

 

  

Net unrealized gain on AFS securities:

 

  

 

  

 

  

Net unrealized gain arising during the period

$

(1,770)

$

403

$

(1,367)

Less: reclassification adjustment for gains (losses) realized in net income

 

1,930

 

(458)

 

1,472

Net unrealized gain on AFS securities

 

(3,700)

 

861

 

(2,839)

Net unrealized gain on hedging derivatives:

 

  

 

  

 

Net unrealized gain arising during the period

 

(203)

 

48

 

(155)

Less: reclassification adjustment for gains (losses) realized in net income

 

 

 

Net unrealized gain on cash flow hedging derivatives

 

(203)

 

48

 

(155)

Net unrealized loss on post-retirement plans:

 

  

 

  

 

Net unrealized loss arising during the period

 

 

 

Less: reclassification adjustment for gains (losses) realized in net income

 

 

 

Net unrealized loss on post-retirement plans

 

 

 

Other comprehensive loss

$

(3,903)

$

909

$

(2,994)

Three Months Ended September 30, 2020

 

  

 

  

 

  

Net unrealized gain on AFS securities:

 

  

 

  

 

  

Net unrealized gain arising during the period

$

351

$

(82)

$

269

Less: reclassification adjustment for gains (losses) realized in net income

 

 

 

Net unrealized gain on AFS securities

 

351

 

(82)

 

269

Net unrealized gain on derivative hedgess:

 

  

 

  

 

Net unrealized gain arising during the period(1)

 

1,302

 

(308)

 

994

Less: reclassification adjustment for gains (losses) realized in net income

 

 

 

Net unrealized gain on cash flow derivative hedges(1)

 

1,302

 

(308)

��

 

994

Net unrealized loss on post-retirement plans:

 

  

 

  

 

Net unrealized loss arising during the period

 

 

 

Less: reclassification adjustment for gains (losses) realized in net income

 

 

 

Net unrealized loss on post-retirement plans

 

 

 

Other comprehensive income(1)

$

1,653

$

(390)

$

1,263

(In thousands) Before Tax Tax Effect Net of Tax
Nine Months Ended September 30, 2017  
  
  
Net unrealized holding gain on AFS securities: x
    
Net unrealized gain arising during the period $5,138
 $(1,846) $3,292
Less: reclassification adjustment for gains (losses) realized in net income 19
 (7) 12
Net unrealized holding gain on AFS securities 5,119
 (1,839) 3,280
       
Net unrealized loss on cash flow hedging derivatives:  
  
  
Net unrealized loss arising during the period (805) 373
 (432)
Less: reclassification adjustment for gains (losses) realized in net income 
 
 
Net unrealized gain on cash flow hedging derivatives (805) 373
 (432)
       
Net unrealized holding loss on post-retirement plans:  
  
  
Net unrealized gain arising during the period 45
 (2) 43
Less: reclassification adjustment for gains (losses) realized in net income 
 
 
Net unrealized holding gain on post-retirement plans 45
 (2) 43
Other comprehensive income $4,359
 $(1,468) $2,891
       
Nine Months Ended September 30, 2016  
  
  
Net unrealized holding gains on AFS securities:    
  
Net unrealized gains arising during the period $7,530
 $(2,635) $4,895
Less: reclassification adjustment for gains realized in net income 4,489
 (1,571) 2,918
Net unrealized holding gains on AFS securities 3,041
 (1,064) 1,977
       
Net unrealized (loss) on cash flow hedging derivatives:  
    
Net unrealized (loss) arising during the period (1,309) 458
 (851)
Less: reclassification adjustment for gains (losses) realized in net income 
 
 
Net unrealized (loss) on cash flow hedging derivatives (1,309) 458
 (851)
       
Net unrealized holding gain on post-retirement plans:  
  
  
Net unrealized gain arising during the period 86
 (30) 56
Less: reclassification adjustment for gains (losses) realized in net income 
 
 
Net unrealized holding gain on post-retirement plans 86
 (30) 56
Other comprehensive income $1,818
 $(636) $1,182
(1)Prior period has been revised, see Note 1 Basis of Presentation – Revision of Previously Issued Financial Statements.


40




(in thousands)

    

Before Tax

    

Tax Effect

    

Net of Tax

Nine Months Ended September 30, 2021

 

  

 

  

 

  

Net unrealized loss on AFS securities:

 

  

 

  

 

  

Net unrealized loss arising during the period

$

(5,348)

$

1,234

$

(4,114)

Less: reclassification adjustment for gains (losses) realized in net income

 

1,980

 

(469)

 

1,511

Net unrealized loss on AFS securities

 

(7,328)

 

1,703

 

(5,625)

Net unrealized loss on derivative hedges:

 

 

  

 

  

Net unrealized loss arising during the period

 

2,311

 

(538)

 

1,773

Less: reclassification adjustment for (losses) gains realized in net income

 

 

 

Net unrealized loss on derivative hedges

 

2,311

 

(538)

 

1,773

Net unrealized loss on post-retirement plans:

 

  

 

  

 

  

Net unrealized loss arising during the period

 

 

 

Less: reclassification adjustment for gains (losses) realized in net income

 

 

 

Net unrealized loss on post-retirement plans

 

 

 

Other comprehensive loss

$

(5,017)

$

1,165

$

(3,852)

Nine Months Ended September 30, 2020

 

  

 

  

 

  

Net unrealized gain on AFS securities:

 

  

 

  

 

  

Net unrealized gain arising during the period

$

9,408

$

(2,143)

$

7,265

Less: reclassification adjustment for gains realized in net income

 

1,486

 

(352)

 

1,134

Net unrealized gain on AFS securities

 

7,922

 

(1,791)

 

6,131

Net unrealized loss on cash flow hedging derivatives:

 

  

 

  

 

  

Net unrealized loss arising during the period(1)

 

(7,568)

 

1,776

 

(5,792)

Less: reclassification adjustment for gains (losses) realized in net income

 

 

 

Net unrealized loss on cash flow hedging derivatives(1)

 

(7,568)

 

1,776

 

(5,792)

Net unrealized gain on post-retirement plans:

 

  

 

  

 

  

Net unrealized gain arising during the period

 

 

 

Less: reclassification adjustment for gains (losses) realized in net income

 

 

 

Net unrealized gain on post-retirement plans

 

 

 

Other comprehensive income(1)

$

354

$

(15)

$

339

(1)Prior period has been revised, see Note 1 Basis of Presentation – Revision of Previously Issued Financial Statements.


41












The following table presents the changes in each component of accumulated other comprehensive income (loss), net of tax impacts, for the three and nine months ended September 30, 20172021 and 2016:

2020:

    

Net unrealized

    

Net loss on

    

Net unrealized

    

gain

effective cash

 loss

on AFS

flow hedging

on pension

(in thousands)

Securities

derivatives(1)

plans

Total(1)

Three Months Ended September 30, 2021

  

  

  

  

Balance at beginning of period

$

7,237

$

63

$

(1,418)

$

5,882

Other comprehensive gain before reclassifications

 

(1,367)

 

(155)

 

0

 

(1,522)

Less: amounts reclassified from accumulated other comprehensive income

 

1,472

 

0

 

0

 

1,472

Total other comprehensive income

 

(2,839)

 

(155)

 

0

 

(2,994)

Balance at end of period

$

4,398

$

(92)

$

(1,418)

$

2,888

Three Months Ended September 30, 2020

 

  

 

  

 

  

 

Balance at beginning of period

$

11,412

$

(7,387)

$

(1,157)

$

2,868

Other comprehensive gain before reclassifications

 

269

 

994

 

0

 

1,263

Less: amounts reclassified from accumulated other comprehensive income

 

0

 

0

 

0

 

0

Total other comprehensive income

 

269

 

994

 

0

 

1,263

Balance at end of period

$

11,681

$

(6,393)

$

(1,157)

$

4,131

Nine Months Ended September 30, 2021

 

  

 

  

 

  

 

Balance at beginning of period

$

10,023

$

(1,865)

$

(1,418)

$

6,740

Other comprehensive loss before reclassifications

 

(4,114)

 

1,773

 

0

 

(2,341)

Less: amounts reclassified from accumulated other comprehensive income

 

1,511

 

0

 

0

 

1,511

Total other comprehensive loss

 

(5,625)

 

1,773

 

0

 

(3,852)

Balance at end of period

$

4,398

$

(92)

$

(1,418)

$

2,888

Nine Months Ended September 30, 2020

Balance at beginning of period

$

5,550

$

(601)

$

(1,157)

$

3,792

Other comprehensive gain (loss) before reclassifications

 

7,265

 

(5,792)

 

0

 

1,473

Less: amounts reclassified from accumulated other comprehensive income

 

1,134

 

0

 

0

 

1,134

Total other comprehensive income (loss)

 

6,131

 

(5,792)

 

0

 

339

Balance at end of period

$

11,681

$

(6,393)

$

(1,157)

$

4,131

(in thousands) 
Net unrealized
holding gain
on AFS Securities
 
Net loss on
effective cash
flow hedging derivatives
 
Net unrealized
holding loss
on pension plans
 Total
Three Months Ended September 30, 2017  
  
  
  
Balance at beginning of period $836
 $(2,177) $(364) $(1,705)
Other comprehensive gain(loss) before reclassifications 332
 (53) 3
 282
Less: amounts reclassified from accumulated other comprehensive income 12
 
 
 12
Total other comprehensive income 320
 (53) 3
 270
Balance at end of period $1,156
 $(2,230) $(361) $(1,435)
         
Three Months Ended September 30, 2016        
Balance at beginning of period $11,315
 $(2,412) $(412) $8,491
Other comprehensive gain before reclassifications (2,745) (60) 5
 (2,800)
Less: amounts reclassified from accumulated other comprehensive income 880
 
 
 880
Total other comprehensive income (3,625) (60) 5
 (3,680)
Balance at end of period $7,690
 $(2,472) $(407) $4,811
         
Nine Months Ended September 30, 2017        
Balance at beginning of period $(2,124) $(1,798) $(404) $(4,326)
Other comprehensive gain(loss) before reclassifications 3,292
 (432) 43
 2,903
Less: amounts reclassified from accumulated other comprehensive income 12
 
 
 12
Total other comprehensive income 3,280
 (432) 43
 2,891
Balance at end of period $1,156
 $(2,230) $(361) $(1,435)
         
Nine Months Ended September 30, 2016  
  
  
  
Balance at beginning of period $5,713
 $(1,621) $(463) $3,629
Other comprehensive gain before reclassifications 4,895
 (851) 56
 4,100
Less: amounts reclassified from accumulated other comprehensive income 2,918
 
 
 2,918
Total other comprehensive income 1,977
 (851) 56
 1,182
Balance at end of period $7,690
 $(2,472) $(407) $4,811
(1)Prior period has been revised, see Note 1 Basis of Presentation – Revision of Previously Issued Financial Statements.


42


The following tables presents the amounts reclassified out of each component of accumulated other comprehensive income (loss) for the three and nine months ended September 30, 20172021 and 2016:


2020:

Three Months Ended September 30, 

Nine Months Ended September 30, 

Affected Line Item where

(in thousands)

    

2021

    

2020

    

2021

    

2020

    

Net Income is Presented

Net realized gains on AFS securities:

  

  

  

  

  

Before tax (1)

$

1,930

$

$

1,980

$

1,486

 

Non-interest income

Tax effect

 

(458)

 

 

(469)

 

(352)

 

Tax expense

Total reclassifications for the period

$

1,472

$

$

1,511

$

1,134

       
  Three Months Ended September 30, Affected Line Item in the Statement where Net Income is Presented
(in thousands)  2017 2016 
Realized gains on AFS securities:  
  
  
  $19
 $1,354
 Non-interest income
  (7) (474) Tax expense
Total reclassifications for the period $12
 $880
 Net of tax
(a)Net realized gains before tax include $1.9 million realized gains for the three months ended September 30, 2021 and $2.0 million for the nine months ended September 30, 2021 and gross realized losses of $50 thousand for both of the respective periods. There were 0 net realized gains or losses for the three months ended September 30, 2020. Net realized gains before tax include gross realized gains $1.5 million and realized losses of $22 thousand for the nine months ended September 30, 2020.


43

       
  Nine Months Ended September 30, Affected Line Item in the Statement where Net Income is Presented
(in thousands)  2017 2016 
Realized gains on AFS securities:  
  
  
  $19
 $4,489
 Non-interest income
  (7) (1,571) Tax expense
Total reclassifications for the period $12
 $2,918
 Net of tax


Table of Contents


NOTE 9.7.           EARNINGS PER SHARE


Earnings

The following table presents the calculation of earnings per share have been computed based on the following (average diluted shares outstanding are calculated using the treasury stock method):

share:

Three Months Ended

Nine Months Ended

September 30, 

September 30, 

(in thousands, except per share and share data)

    

2021

    

2020

    

2021

    

2020

Net income

$

11,028

$

8,402

$

29,533

$

24,604

Average number of basic common shares outstanding

 

14,982,766

 

15,079,413

 

14,960,753

 

15,358,803

Plus: dilutive effect of stock options and awards outstanding

 

67,990

 

23,421

 

73,829

 

23,063

Average number of diluted common shares outstanding(1)

 

15,050,756

 

15,102,834

 

15,034,582

 

15,381,866

Earnings per share:

 

  

 

  

 

  

 

  

Basic

$

0.74

$

0.56

$

1.97

$

1.60

Diluted

$

0.73

$

0.56

$

1.96

$

1.60

(1)Average diluted shares outstanding are computed using the treasury stock method.
  Three Months Ended September 30, Nine Months Ended September 30,
(In thousands, except per share and share data) 2017 2016 2017 2016
Net income $8,617
 $3,632
 $19,386
 $12,349
         
Average number of basic common shares outstanding 15,420,499
 9,063,576
 15,098,377
 9,036,548
Plus: dilutive effect of stock options and awards outstanding 90,026
 98,112
 105,661
 101,009
Average number of diluted common shares outstanding 15,510,525
 9,161,688
 15,204,038
 9,137,557
         
Anti-dilutive options excluded from earnings calculation 
 101,826
 8,247
 107,535
         
Earnings per share:        
Basic $0.56
 $0.40
 $1.27
 $1.37
Diluted $0.56
 $0.40
 $1.27
 $1.35

44

Table of Contents


NOTE 10.8.           DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGING ACTIVITIES


As part of its overall asset and liability management strategy, the Bank periodically

The Company uses derivative instruments to minimize significant unplanned fluctuations in earnings and cash flows caused by interest rate volatility. The Bank’sCompany’s interest rate risk management strategy involves modifying the re-pricing characteristics of certain assets or liabilities so thatthe changes in interest rates do not have a significant effect on net interest income.


Thus, all of the Company's derivative contracts are considered to be interest rate contracts.

The Company recognizes its derivative instruments on the consolidated balance sheet at fair value. On the date the derivative instrument is entered into, the BankCompany designates whether the derivative is part of a hedging relationship (i.e., cash flow or fair value hedge). The BankCompany formally documents relationships between hedging instruments and hedged items, as well as its risk management objective and strategy for undertaking hedge transactions. The BankCompany 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

The Company offers derivative products in earnings. The Bank discontinues hedge accounting when it is determined thatthe form of interest rate swaps, to commercial loan customers to facilitate their risk management strategies. These instruments are executed through Master Netting Arrangements (MNA) with financial institution counterparties or Risk Participation Agreements (RPA) with commercial bank counterparties, for which the Company assumes a pro rata share of the credit exposure associated with a borrower's performance related to the derivative is no longer effective in offsetting changes ofcontract with the hedged risk on the hedged item, or management determines that the designation of the derivative as a hedging instrument is no longer appropriate.



Informationcounterparty.

The following tables present information about derivative assets and liabilities at September 30, 2017, follows:2021 and December 31, 2020:

September 30, 2021

Weighted

 

Notional

Average

Fair Value

Location Fair

Amount

Maturity

Asset (Liability)

    

Value Asset

    

(in thousands)

    

(in years)

    

(in thousands)

 

(Liability)

Cash flow hedges:

Interest rate swap on wholesale fundings

$

75,000

 

3.3

$

(1,168)

Other liabilities

Interest rate swap on variable rate loans

50,000

4.5

(121)

Other liabilities

Total cash flow hedges

 

125,000

 

(1,289)

Fair value hedges:

Interest rate swap on securities

 

37,190

 

7.8

 

(841)

Other liabilities

Total fair value hedges

 

37,190

 

(841)

Economic hedges:

Forward sale commitments

 

14,533

 

0.1

 

(140)

Other liabilities

Customer Loan Swaps-MNA Counterparty

250,852

6.4

(10,258)

Other liabilities

Customer Loan Swaps-RPA Counterparty

119,285

7.1

(5,892)

Other liabilities

Customer Loan Swaps-Customer

370,137

6.6

16,150

Other assets

Total economic hedges

 

754,807

 

(140)

Non-hedging derivatives:

Interest rate lock commitments

 

12,885

 

0.1

 

47

Other assets

Total non-hedging derivatives

 

12,885

 

47

Total

$

929,882

$

(2,223)


45

Table of Contents

December 31, 2020

Weighted

 

Notional

Average

Fair Value

Location Fair

Amount

Maturity

Asset (Liability)

    

Value Asset

    

(in thousands)

    

(in years)

    

(in thousands)

 

(Liability)

Cash flow hedges:

 

  

 

  

 

  

Interest rate swap on wholesale fundings

$

75,000

 

4.0

$

(2,664)

Other liabilities

Total cash flow hedges

 

75,000

 

(2,664)

Fair value hedges:

Interest rate swap on securities(1)

 

37,190

 

8.6

 

(2,789)

Other liabilities

Total fair value hedges

 

37,190

 

(2,789)

Economic hedges:

Forward sale commitments

50,629

 

0.2

 

(95)

Other liabilities

Customer Loan Swaps-MNA Counterparty

235,947

6.8

(15,938)

Other liabilities

Customer Loan Swaps-RPA Counterparty

119,285

7.9

(9,957)

Other liabilities

Customer Loan Swaps-Customer

355,232

7.1

25,895

Other assets

Total economic hedges

 

761,093

 

(95)

Non-hedging derivatives:

 

Interest rate lock commitments

 

3,320

 

0.1

 

22

Other assets

Total non-hedging derivatives

 

3,320

 

22

Total

$

876,603

$

(5,526)

    Weighted Average Maturity Estimated Fair Value Asset (Liability)
  
Notional
Amount
  
  (In thousands) (In years) (In thousands)
Cash flow hedges:  
    
Interest rate caps agreements $90,000
 5.4 $793
Total cash flow hedges 90,000
 5.4 793
       
Economic hedges:  
    
Forward sale commitments 16,547
 0.2 (173)
Total economic hedges 16,547
 0.2 (173)
       
Non-hedging derivatives:  
    
Interest rate lock commitments 16,742
 0.2 16
Total non-hedging derivatives 16,742
 0.2 16
       
Total $123,289
   $636

(1)Prior period has been revised, see Note 1 Basis of Presentation – Revision of Previously Issued Financial Statements.

As of September 30, 2021 and December 31, 2016,2020, the Company had interest rate cap agreements totaling $90 million (notional amount), with a weighted average maturity of 6.1 years, and an estimatedfollowing amounts were recorded on the balance sheet related to cumulative basis adjustments for fair value hedges:

    

    

    

Cumulative Amount of Fair 

Location of Hedged Item on 

Carrying Amount of Hedged 

Value Hedging Adjustment in 

    

Balance Sheet

    

Assets 

    

Carrying Amount

September 30, 2021

 

  

 

  

 

  

Interest rate swap on securities

 

Securities Available for Sale

$

39,200

$

2,010

December 31, 2020

 

  

 

  

 

  

Interest rate swap on securities

 

Securities Available for Sale

$

40,209

$

3,019

46




Information about derivative assets and liabilities for the three and nine months ended September 30, 20172021 and December 31, 2020, follows:

Three Months Ended September 30, 2021

    

Amount of

    

    

Amount of

    

    

Gain (Loss)

Gain (Loss)

Recognized in

Reclassified

Location of

Amount of

Other

Location of Gain (Loss)

from Other

Gain (Loss)

Gain (Loss)

Comprehensive

Reclassified from Other

Comprehensive

Recognized in

Recognized

(in thousands)

    

Income

    

Comprehensive Income

    

Income

    

Income

    

in Income

Cash flow hedges:

 

  

 

  

 

  

 

  

 

  

Interest rate swap on wholesale funding

$

167

Interest expense

$

 

Interest expense

$

(205)

Interest rate swap on variable rate loans

(101)

Interest income

Interest income

92

Total cash flow hedges

 

66

 

 

 

  

 

(113)

Fair value hedges:

 

  

 

  

 

  

 

  

 

  

Interest rate swap on securities

 

(221)

 

Interest income

 

 

Interest income

 

(144)

Total fair value hedges

 

(221)

 

 

 

  

 

(144)

Economic hedges:

 

  

 

  

 

  

 

  

 

  

Forward commitments

 

 

Other income

 

 

Other income

 

(96)

Total economic hedges

 

 

 

 

  

 

(96)

Non-hedging derivatives:

 

  

 

  

 

  

 

  

 

  

Interest rate lock commitments

 

 

Other income

 

 

Other income

 

22

Total non-hedging derivatives

 

 

 

 

  

 

22

Total

$

(155)

$

 

  

$

(331)

47

Nine Months Ended September 30, 2021

    

Amount of

    

    

Amount of

    

    

Gain (Loss)

Gain (Loss)

Recognized in

Reclassified

Location of

Amount of

Other

Location of Gain (Loss)

from Other

Gain (Loss)

Gain (Loss)

Comprehensive

Reclassified from Other

Comprehensive

Recognized in

Recognized

(in thousands)

    

Income

    

Comprehensive Income

    

Income

    

Income

    

in Income

Cash flow hedges:

 

  

 

  

 

  

 

  

 

  

Interest rate swap on wholesale funding

$

1,148

Interest expense

$

 

Interest expense

$

(589)

Interest rate swap on variable rate loans

(93)

Interest income

Interest income

189

Total cash flow hedges

 

1,055

 

 

 

  

 

(400)

Fair value hedges:

 

  

 

  

 

  

 

  

 

  

Interest rate swap on securities

 

720

 

Interest income

 

 

Interest income

 

(421)

Total fair value hedges

 

720

 

 

 

  

 

(421)

Economic hedges:

 

  

 

  

 

  

 

  

 

  

Forward commitments

 

 

Other income

 

 

Other income

 

(45)

Total economic hedges

 

 

 

 

  

 

(45)

Non-hedging derivatives:

 

  

 

  

 

  

 

  

 

  

Interest rate lock commitments

 

 

Other income

 

 

Other income

 

26

Total non-hedging derivatives

 

 

 

 

  

 

26

Total

$

1,775

$

 

  

$

(840)

The Company expects approximately $1.0 million of losses (pre-tax) related to the Company’s cash flow hedges to be reclassified to earnings from AOCI over the next 12 months. This reclassification is due to anticipated payments that will be made and/or received on the swaps based upon the forward curve as of September 30, 2016, follows:2021.


48

Three Months Ended September 30, 2020

    

Amount of

    

    

Amount of

    

    

Gain (Loss)

Gain (Loss)

Recognized in

Reclassified

Location of

Amount of

Other

Location of Gain (Loss)

from Other

Gain (Loss)

Gain (Loss)

Comprehensive

Reclassified from Other

Comprehensive

Recognized in

Recognized

(in thousands)

Income(1)

Comprehensive Income

Income

Income

in Income

Cash flow hedges:

 

  

 

  

 

  

 

  

 

  

Interest rate swap on wholesale funding

$

362

 

Interest expense

$

 

Interest expense

$

(427)

Total cash flow hedges

362

 

 

 

(427)

 

Fair value hedges:

  

 

  

 

  

 

  

 

  

Interest rate swap on securities

 

635

 

Interest income

 

 

Interest income

 

(204)

Total economic hedges

635

 

 

  

 

(204)

Economic hedges:

  

 

  

 

  

 

  

 

  

Forward commitments

 

 

Other income

 

 

Other income

 

40

Total economic hedges

 

 

  

 

40

 

Non-hedging derivatives:

 

  

 

  

 

  

 

  

 

  

Interest rate lock commitments

 

 

Other income

 

 

Other Income

 

(39)

Total non-hedging derivatives

 

 

  

 

(39)

Total

$

997

 

  

$

 

  

$

(630)

(1)Prior period has been revised, see Note 1 Basis of Presentation – Revision of Previously Issued Financial Statement.

Nine Months Ended September 30, 2020

    

Amount of

    

    

Amount of

    

    

Gain (Loss)

Gain (Loss)

Recognized in

Reclassified

Location of

Amount of

Other

Location of Gain (Loss)

from Other

Gain (Loss)

Gain (Loss)

Comprehensive

Reclassified from Other

Comprehensive

Recognized in

Recognized

(in thousands)

Income(1)

Comprehensive Income

Income

Income

in Income

Cash flow hedges:

 

  

 

  

 

  

 

  

 

  

Interest rate swap on wholesale funding

$

(4,247)

 

Interest expense

$

 

Interest expense

$

(642)

Total cash flow hedges

(4,247)

 

 

 

(642)

 

Fair value hedges:

  

 

  

 

  

 

  

 

  

Interest rate swap on securities

 

(1,545)

 

Interest income

 

 

Interest income

 

(145)

Total economic hedges

(1,545)

 

 

  

 

(145)

Economic hedges:

  

 

  

 

  

 

  

 

  

Forward commitments

 

 

Other income

 

 

Other income

 

(3)

Total economic hedges

 

 

  

 

(3)

 

Non-hedging derivatives:

 

  

 

  

 

  

 

  

 

  

Interest rate lock commitments

 

 

Other income

 

 

Other Income

 

(35)

Total non-hedging derivatives

 

 

  

 

(35)

Total

$

(5,792)

 

  

$

 

  

$

(825)

  Three Months Ended September 30, Nine Months Ended September 30,
(In thousands) 2017 2016 2017 2016
Cash flow hedges:        
Interest rate cap agreements        
Realized in interest expense $74
 $14
 $168
 $24
         
Economic hedges:  
  
    
Forward commitments  
  
    
Realized loss in other non-interest income 58
 
 (29) 
         
Non-hedging derivatives:   
  
     
Interest rate lock commitments   
  
     
Realized loss in other non-interest income 19
 
 (5) 
(1)Prior period has been revised, see Note 1 Basis of Presentation – Revision of Previously Issued Financial Statement.


49

The effect of cash flow hedging and fair value accounting on the consolidated statements of income for the three months ended September 30, 2021 and 2020:

Three Months Ended September 30, 2021

Interest and Dividend Income

Interest Expense

(in thousands)

    

Loans

Securities and other

    

Deposits

Borrowings

    

Non-interest Income

Income and exepense line items presented in the consolidated statements of income

 

$

25,094

$

3,821

$

1,555

$

1,778

$

11,350

 

  

 

  

 

  

The effects of cash flow and fair value hedging:

 

  

 

  

 

  

Gain (loss) on cash flow hedges:

Interest rate swap on wholesale funding

(205)

Interest rate swap on variable rate loans

 

92

 

 

 

  

 

  

 

  

Gain (loss) on fair value hedges:

 

 

  

 

  

Interest rate swap on securities

(144)

Three Months Ended September 30, 2020

Interest and Dividend Income

Interest Expense

(in thousands)

    

Loans

Securities and other

    

Deposits

Borrowings

    

Non-interest Income

Income and exepense line items presented in the consolidated statements of income

 

$

25,918

$

4,557

$

3,869

$

1,941

$

10,102

 

  

 

  

 

  

The effects of cash flow and fair value hedging:

 

  

 

  

 

  

Gain (loss) on cash flow hedges:

Interest rate swap on wholesale funding

(365)

(62)

Interest rate swap on variable rate loans

 

 

 

 

  

 

  

 

  

Gain (loss) on fair value hedges:

 

 

  

 

  

Interest rate swap on securities

(204)

50

The effect of cash flow hedging and fair value accounting on the consolidated statements of income for the nine months ended September 30, 2021 and 2020:

Nine Months Ended September 30, 2021

Interest and Dividend Income

Interest Expense

(in thousands)

    

Loans

Securities and other

    

Deposits

Borrowings

    

Non-interest Income

Income and exepense line items presented in the consolidated statements of income

 

$

72,490

11,792

$

7,109

5,415

$

31,103

 

  

 

  

 

  

The effects of cash flow and fair value hedging:

 

  

 

  

 

  

Gain (loss) on cash flow hedges:

Interest rate swap on wholesale funding

(589)

Interest rate swap on variable rate loans

 

189

 

 

 

  

 

  

 

  

Gain (loss) on fair value hedges:

 

 

  

 

  

Interest rate swap on securities

(421)

Nine Months Ended September 30, 2020

Interest and Dividend Income

Interest Expense

(in thousands)

    

Loans

Securities and other

    

Deposits

Borrowings

    

Non-interest Income

Income and exepense line items presented in the consolidated statements of income

 

$

80,398

15,006

$

14,437

7,149

$

28,233

 

  

 

  

 

  

The effects of cash flow and fair value hedging:

 

  

 

  

 

  

Gain (loss) on cash flow hedges:

Interest rate swap on wholesale funding

(580)

(62)

Interest rate swap on variable rate loans

 

 

 

 

  

 

  

 

  

Gain (loss) on fair value hedges:

 

 

  

 

  

Interest rate swap on securities

(145)

Cash flow hedges

In 2014,

Interest rate swaps on wholesale funding

As of September 30, 2021 the Company has 2 interest rate cap agreements were purchasedswaps on wholesale borrowings (the "SWAPS") to limit the Bank’sits exposure to rising interest rates over a five year term on four rolling, three-month3-month FHLB borrowings indexed to three month LIBOR.  Under the termsor brokered certificates, or a combination thereof at each maturity date.  The first of the 2 agreements were entered in November 2019 with a $50.0 million notional amount and pays a fixed interest rate of 1.53%.  A second agreement was entered on April 2020 with a $25.0 million notional amount and pays a fixed rate of 0.59%. The financial institution counterparty pays the Bank paid total premiums of $4,566 forCompany interest on the right to receivethree-month LIBOR rate. The Company designated the swaps as a cash flow payments if 3-month LIBOR rises abovehedge.

Interest rate swap on variable rate loans

In March 2021, the capsCompany entered into a contract with a counterparty to manage interest rate risk associated with its variable rate loans.  The instrument is specifically designed to hedge the risk of 3.00%, thus effectively ensuringchanges in its cash flows from interest expensereceipts attributable to changes in a contractually specified interest rate, on the borrowings at maximum rates of 3.00% for the durationan amount of the agreements.Company’s variable rate loan assets equal to $50 million. The interest rate cap agreements wereswap will effectively fix the Company’s interest rate on $50 million of 1 month USD-LIBOR-BBA (or LIBOR less two days) based loan assets at 0.806% plus the credit spread on the loans that reprices on weighted average basis.  The Company designated the swap as a cash flow hedge.

51

Fair value hedges

Interest rate swap on securities

For derivative instruments that are designated and qualify as a fair value hedge, the gain or loss on the derivative instrument as well as the offsetting loss or gain on the hedged asset or liability attributable to the hedged risk are recognized in current earnings. The Company utilizes interest rate swaps designated as cash flow hedges.  Thefair value hedges to mitigate the effect of changing interest rates on the fair values of fixed rate callable securities available-for-sale. The hedging strategy on securities converts the fixed interest rate cap agreementsrates to LIBOR-based variable interest rates. These derivatives are included in other assetsdesignated as partial term hedges of selected cash flows covering specified periods of time prior to the call dates of the hedged securities. During 2019, the Company entered into 8 swap transactions with a notional amount of $37.2 million designated as fair value hedges. These derivatives are intended to protect against the effects of changing interest rates on the Company’s consolidated balance sheets. Changes in the fair value, representing unrealized gains or losses, are recorded in accumulated other comprehensive income, netvalues of tax.fixed rate securities.  The premiums paidfixed rates on the interest rate cap agreements are being recognized as increases in interest expense over the durationtransactions have a weighted average of the agreements using the caplet method.


1.696%.

Economic hedges

Forward sale commitments

The Company utilizes forward sale commitments on residential mortgage loans to hedge interest rate risk and the associated effects on the fair value of interest rate lock commitments and loans originated for sale. The forward sale commitments are accounted for as derivatives with changes in fair value recorded in current period earnings.derivatives. The Company typically uses a combination of best efforts and mandatory delivery contracts. The contracts which are loan sale agreements where the Company commits to deliver a certain principal amount of mortgage loans to an investor at a specified price on or before a specified date. Generally, the Company may enter into mandatory delivery contracts shortly afterjust prior to the loan closesclosing with a customer.

Customer loan derivatives

The Company enters into customer loan derivatives to facilitate the risk management strategies for commercial banking customers. The Company mitigates this risk by entering into equal and offsetting loan swap agreements with highly rated third-party financial institutions. The loan swap agreements are free standing derivatives and are recorded at fair value in the Company's consolidated balance sheet. The Company is party to master netting arrangements with its financial institutional counterparties; however, the Company does not offset assets and liabilities under these arrangements for financial statement presentation purposes.

The master netting arrangements provide for a single net settlement of all loan swap agreements, as well as collateral or cash funds, in the event of default on, or termination of, any one contract. Collateral is provided by cash or securities received or posted by the counterparty with net liability positions, respectively, in accordance with contract thresholds. Currently, the Company has posted cash of $17.0 million with counterparties.

Gross Amounts Offset in the Consolidated Balance Sheet

Derivative

Cash Collateral

(in thousands)

    

 Liabilities

    

Derivative Assets

    

 Pledged

    

Net Amount

As of September 30, 2021

  

  

  

  

Customer Loan Derivatives:

 

  

 

  

 

  

 

  

MNA counterparty

$

(10,258)

$

10,258

$

17,000

$

17,000

RPA counterparty

 

(5,892)

 

5,892

 

 

Total

$

(16,150)

$

16,150

$

17,000

$

17,000

Gross Amounts Offset in the Consolidated Balance Sheet

Derivative

Cash Collateral

(in thousands)

    

 Liabilities

    

Derivative Assets

    

 Pledged

    

Net Amount

As of December 31, 2020

  

  

  

  

Customer Loan Derivatives:

 

  

 

  

 

  

 

  

MNA counterparty

$

(15,938)

$

15,938

$

23,450

$

23,450

RPA counterparty

 

(9,957)

 

9,957

 

 

Total

$

(25,895)

$

25,895

$

23,450

$

23,450


52

Non-hedging derivatives

Interest rate lock commitments

The Company enters into interest rate lock commitments (“IRLCs”)(IRLCs) for residential mortgage loans, which commit the Company to lend funds to a potential borrower at a specific interest rate and within a specified period of time. IRLCs that relate to the origination of residential mortgage loans that will beare held for sale are considered derivative financial instruments under applicable accounting guidance. Outstanding IRLCs expose the Company to the risk that the price of the mortgage loans underlying the commitments may decline due to increases in mortgage interest rates from inception of the rate lock to the funding of the loan. The IRLCs are free-standingfree standing derivatives which are carried at fair value with changes recorded in noninterestnon-interest income in the Company’s consolidated statementsConsolidated Statements of income.Income. Changes in the fair value of IRLCs subsequent to inception are based onon; (i) changes in the fair value of the underlying loan resulting from the fulfillment of the commitment and (ii) changes in the probability thatwhen the loan will fund within the terms of the commitment, which is affected primarily by changes in interest rates and the passage of time.


53



NOTE 11.9.           FAIR VALUE MEASUREMENTS


A description of the valuation methodologies used for assets and liabilities measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy, is set forth below. These valuation methodologies were applied to all of the Company’s financial assets and financial liabilities that are carried at fair value.


Recurring Fair Value Measurements


The following table summarizes financial assets and financial liabilities measured at fair value on a recurring basis as of September 30, 20172021 and December 31, 2016,2020, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value.


value:

September 30, 2021

    

Level 1

    

Level 2

    

Level 3

    

Total

(in thousands)

Inputs

Inputs

Inputs

Fair Value

Available for sale securities:

  

  

  

Mortgage-backed securities:

 

  

 

  

 

  

 

  

US Government-sponsored enterprises

$

0

$

183,268

$

0

$

183,268

US Government agency

 

0

 

54,706

 

0

 

54,706

Private label

 

0

 

62,914

 

0

 

62,914

Obligations of states and political subdivisions thereof

 

0

 

160,177

 

0

 

160,177

Corporate bonds

 

0

 

84,262

 

0

 

84,262

Derivative assets

 

0

 

16,149

 

47

 

16,196

Derivative liabilities

 

0

 

(18,159)

 

(140)

 

(18,299)

December 31, 2020

    

Level 1

    

Level 2

    

Level 3

    

Total

(in thousands)

Inputs

Inputs

Inputs

Fair Value

Available for sale securities:

  

  

  

  

Mortgage-backed securities:

 

  

 

  

 

  

 

  

US Government-sponsored enterprises

$

$

212,390

$

$

212,390

US Government agency

 

 

85,632

 

 

85,632

Private label

 

 

19,709

 

 

19,709

Obligations of states and political subdivisions thereof

 

 

169,004

 

 

169,004

Corporate bonds

 

 

98,311

 

 

98,311

Derivative assets(1)

 

 

28,895

 

22

 

28,917

Derivative liabilities(1)

 

 

(31,348)

 

(95)

 

(31,443)

  September 30, 2017
  Level 1 Level 2 Level 3 Total
(In thousands) Inputs Inputs Inputs Fair Value
Available for sale securities:        
Obligations of US Government sponsored enterprises $
 $6,979
 $
 $6,979
Mortgage-backed securities:        
  US Government-sponsored enterprises 
 437,957
 
 437,957
  US Government agency 
 102,138
 
 102,138
  Private label 
 719
 
 719
Obligations of states and political subdivisions thereof 
 141,982
 
 141,982
Corporate bonds 
 28,684
 
 28,684
Derivative assets 
 793
 16
 809
Derivative liabilities 
 
 (173) (173)
  December 31, 2016
  Level 1 Level 2 Level 3 Total
(In thousands) Inputs Inputs Inputs Fair Value
Available for sale securities:        
Obligations of US Government sponsored enterprises $
 $
 $
 $
Mortgage-backed securities:        
  US Government-sponsored enterprises 
 328,452
 
 328,452
  US Government agency 
 76,906
 
 76,906
  Private label 
 1,132
 
 1,132
Obligations of states and political subdivisions thereof 
 122,366
 
 122,366
Corporate bonds 
 
 
 
Derivative assets 
 1,748
 
 1,748


(1)Prior period has been revised, see Note 1 Basis of Presentation – Revision of Previously Issued Financial Statement.

Securities Available for Sale: All securities and major categories of securities classified as available for sale are reported at fair value utilizing Level 2 inputs. For these securities, the Company obtains fair value measurements from independent pricing providers. The fair value measurements used by the pricing providers consider observable data that may include dealer quotes, market maker quotes and live trading systems. If quoted prices are not readily available, fair values are determined using matrix pricing models, or other model-based valuation techniques requiring observable inputs other than quoted prices such as market pricing spreads, credit information, callable features, cash flows, the U.S. Treasury yield curve, trade execution data, market consensus prepayment speeds, default rates, and the securities’ terms and conditions, among other things.



Derivative Assets and Liabilities

Cash Flow and Fair Value Hedges. The valuation of the Company's cash flow hedges are obtained from a third party. The pricing analysis is based on observable inputs for the contractual terms of the derivatives, including the period to maturity and interest rate curves. The inputs used to value the Company's cash flow hedges are all classified as Level 2 measurements.


54

Interest Rate Lock Commitments. The Company enters into IRLCs for residential mortgage loans, which commit the Company to lend funds to a potential borrower at a specific interest rate and within a specified period of time. The estimated fair value of commitments to originate residential mortgage loans for sale is based on quoted prices for similar loans in active markets. However, this value is adjusted by a factor which considers the likelihood that theof a loan in a lock position will ultimately close. The closing ratio is derived from the Bank’sCompany’s internal data and is adjusted using significant management judgment. As such, IRLCs are classified as Level 3 measurements.


Forward Sale Commitments. The Company utilizes forward sale commitments as economic hedges against potential changes in the values of the IRLCs and loans originated for sale. The fair values of the Company’s mandatory delivery loan sale commitments are determined similarly to the IRLCs using quoted prices in the market place that are observable. However, closing ratios included in the calculation are internally generated and are based on management’s judgment and prior experience, which are not considered factors that are not observable.observable factors. As such, mandatory delivery forward commitments are classified as Level 3 measurements.

Customer Loan Derivatives. The valuation of the Company’s customer loan derivatives is obtained from a third-party pricing service and is determined using a discounted cash flow analysis on the expected cash flows of each derivative. The pricing analysis is based on observable inputs for the contractual terms of the derivatives, including the period to maturity and interest rate curves. The Company incorporates credit valuation adjustments to appropriately reflect both its own nonperformance risk and the respective counterparty’s nonperformance risk in the fair value measurements. In adjusting the fair value of its derivative contracts for the effect of nonperformance risk, the Company has considered the impact of master netting arrangements and any applicable credit enhancements, such as collateral postings.

Although the Company has determined that the majority of the inputs used to value its customer loan derivatives fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with its derivatives utilize Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default by itself and its counterparties. However, as of September 30, 2021, the Company assessed the significance of the impact of the credit valuation adjustments on the overall valuation of its derivative positions and determined that the credit valuation adjustments are not significant to the overall valuation of its derivatives. As a result, the Company determined that its derivative valuations in their entirety are classified in Level 2 of the fair value hierarchy.


55

The table below presents the changes in Level 3 assets and liabilities that were measured at fair value on a recurring basis for the three and nine months ended September 30, 2017.

  Assets (Liabilities)
  Interest Rate
Lock
 Forward
(In thousands) Commitments Commitments
Three Months Ended September 30, 2017  
  
June 30, 2017 $(3) $(231)
Realized gain recognized in non-interest income 19
 58
September 30, 2017 $16
 $(173)
     
Nine Months Ended September 30, 2017  
  
December 31, 2016 $
 $
Acquisition of Lake Sunapee Bank, January 13, 2017 96
 23
Goodwill adjustment Lake Sunapee Bank Merger (75) (167)
Realized (loss) recognized in non-interest income (5) (29)
September 30, 2017 $16
 $(173)

2021:

Assets (Liabilities)

Interest Rate Lock

Forward

(in thousands)

    

Commitments

    

Commitments

Three Months Ended September 30, 2021

  

  

Balance at beginning of period

$

25

$

(45)

Realized gain recognized in non-interest income

 

22

 

(95)

Balance at end of period

$

47

$

(140)

Three Months Ended September 30, 2020

  

  

Balance at beginning of period

$

63

$

(126)

Realized gain recognized in non-interest income

 

(39)

 

39

Balance at end of period

$

24

$

(87)

Nine Months Ended September 30, 2021

 

  

 

  

Balance at beginning of period

$

22

$

(95)

Realized loss recognized in non-interest income

 

25

 

(45)

Balance at end of period

$

47

$

(140)

Nine Months Ended September 30, 2020

 

  

 

  

Balance at beginning of period

$

59

$

(84)

Realized loss recognized in non-interest income

 

(35)

 

(3)

Balance at end of period

$

24

$

(87)

Quantitative information about the significant unobservable inputs within Level 3 recurring assets and liabilities is, as follows:

    

    

    

Significant

 

Fair Value

Fair Value

Unobservable

(in thousands, except ratios)

    

September 30, 2021

    

December 31, 2020

Valuation Techniques

    

Unobservable Inputs

    

Input Value

Assets (Liabilities)

  

  

  

  

  

 

Interest Rate Lock Commitment

 

$

47

$

22

Historical trend

 

Closing Ratio

 

85

%

 

 

Pricing Model

Origination Costs, per loan

$

1.7

 

Forward Commitments

 

(140)

 

(95)

Quoted prices for similar loans in active markets

 

Freddie Mac pricing system

 

Pair-off contract price

Total

$

(93)

$

(73)

  

 

  

 

  

56

(In thousands, except ratios) Fair Value
September 30, 2017
 Valuation Techniques Unobservable Inputs 
Significant
Unobservable Input
Value
Assets (Liabilities)  
      
Interest Rate Lock Commitment $16
  Historical trend  Closing Ratio 90%
     Pricing Model  Origination Costs, per loan $1.7
         
Forward Commitments (173)  Quoted prices for similar loans in active markets.  Freddie Mac pricing system Pair-off contract price
Total $(157)      



Non-Recurring Fair Value Measurements

The Company is required, on a non-recurring basis, to adjust the carrying value or provide valuation allowances for certain assets using fair value measurements in accordance with U.S. GAAP. The following is a summary of applicable non-recurring fair value measurements. measurements:

September 30, 2021

December 31, 2020

Three Months Ended September 30, 2021

Nine Months Ended September 30, 2021

Fair Value Measurement Date as of September 30, 2021

Level 3

Level 3

Total

Total

Level 3

(in thousands)

    

Inputs

    

Inputs

    

Gains (Losses)

    

Gains (Losses)

    

Inputs

Assets

  

  

  

  

  

Individually evaluated loans

$

9,247

$

8,746

$

707

$

(501)

September 2021

Capitalized servicing rights

 

4,867

3,605

 

(136)

 

(1,262)

 

September 2021

Premises held for sale

 

822

962

 

149

 

140

 

December 2020

Total

$

14,936

$

13,313

$

720

$

(1,623)

 

  

There are no0 liabilities measured at fair value on a non-recurring basis.basis in 2021 and 2020.

57

Table of Contents

  September 30, 2017 December 31, 2016 Three Months Ended September 30, 2017 Nine Months Ended September 30, 2017 Fair Value Measurement Date as of September 30, 2017
(In thousands) 
Level 3
Inputs
 Level 3
Inputs
 
Total
Gains (Losses)
 
Total
Gains (Losses)
 
Level 3
Inputs
Assets  
  
      
Impaired loans $10,251
 $6,709
 (43) (139) September 2017
Capitalized servicing rights 3,871
 5
 
 
 September 2017
Other real estate owned 122
 90
 
 
 Jan 2017 - March 2017
Total $14,244
 $6,804
 (43) (139)  

Quantitative information about the significant unobservable inputs within Level 3 non-recurring assets is, as follows:


 

(in thousands, except ratios)

    

Fair Value September 30, 2021

    

Valuation Techniques

    

Unobservable Inputs

    

Range (Weighted Average)(a)

 

Assets

 

  

 

  

 

  

  

Individually evaluated loans

$

6,226

 

Fair value of collateral-appraised value

 

Loss severity

10% to 70%

 

Appraised value

$71 to $1,792

Individually evaluated loans

 

3,021

 

Discount cash flow

 

Discount rate

 

2.88% to 9.50%

 

Cash flows

$6 to $939

Capitalized servicing rights

 

4,867

 

Discounted cash flow

 

Constant prepayment rate (CPR)

 

13.66%

 

  

 

  

 

Discount rate

 

9.53%

Premises held for sale

 

822

 

Fair value of asset less selling costs

 

Appraised value

$220 to $386

 

 

  

 

Selling Costs

 

6%

Total

$

14,936

 

  

 

  

 

  

  Fair Value      
(in thousands, except ratios) September 30, 2017 Valuation Techniques Unobservable Inputs Range (Weighted Average) (a)
Assets  
      
Impaired loans $3,489
 Fair value of collateral - appraised value  Loss severity 0% to 63%
       Appraised value $0 to $1,170
         
Impaired loans 6,762
  Discount cash flow  Discount rate 0% to 18%
       Cash flows $0 to $1,046
         
Capitalized servicing rights 3,871
 Discounted cash flow Constant prepayment rate (CPR) 12.42%
       Discount rate 10.11%
         
Other real estate owned 122
 Fair value of collateral  Appraised value 
$122
Total $14,244
      

(b)
(a)Where dollar amounts are disclosed, the amounts represent the lowest and highest fair value of the respective assets in the population except for adjustments for market/property conditions, which represents the range of adjustments to individualsindividual properties.

(c)The carrying value of premises held for sale was $822 thousand as of September 30, 2021.

(in thousands, except ratios)

    

Fair Value Dec 31, 2020

    

Valuation Techniques

    

Unobservable Inputs

    

Range (Weighted Average)(a)

Assets

Individually evaluated loans

$

6,128

Fair value of collateral-appraised value

Loss severity

0% to 70%

Appraised value

$0 to $1730

Individually evaluated loans

 

2,618

Discount cash flow

Discount rate

 

3.50% to 9.50%

Cash flows

$19 to $953

Capitalized servicing rights

 

3,605

Discounted cash flow

Constant prepayment rate (CPR)

 

18.53%

Discount rate

 

10.05%

Premises held for sale

 

962

Fair value of asset less selling costs

Appraised value

 

$220 to $386

Selling Costs

 

6%

Total

$

13,313

  Fair Value      
(in thousands) December 31, 2016 Valuation Techniques Unobservable Inputs Range  (Weighted Average) (a)
Assets  
      
Impaired loans $3,268
 Fair value of collateral - appraised value Loss severity 0% to 51%
      Appraised value $0 to $1,732
         
Impaired loans 3,441
 Discount cash flow Discount rate 3.25% to 18.25%
      Cash flows $6 to $861
         
Capitalized servicing rights 5
 Discounted cash flow Constant prepayment rate (CPR) 17.09%
      Discount rate 7.55%
         
Other real estate owned 90
 Fair value of collateral Appraised value 120
Total $6,804
      

(a)Where dollar amounts are disclosed, the amounts represent the lowest and highest fair value of the respective assets in the population except for adjustments for market/property conditions, which represents the range of adjustments to individualsindividual properties.

There were no Level 1 or Level 2 non-recurring fair value measurements for the periods ended September 30, 20172021 and December 31, 2016.2020.


58

Impaired Loans.

Table of Contents

Individually evaluated loans. Loans are generally not recorded at fair value on a recurring basis. Periodically, the Company records non-recurring adjustments to the carrying value of loans based on fair value measurements for partial charge-offs of the uncollectible portions of those loans. Non-recurring adjustments can also include certain impairment amounts for collateral-dependent loans calculated when establishing the allowance for credit losses. Such amounts are generally based on the fair value of the underlying collateral supporting the loan and, as a result, the carrying value of the loan less the calculated valuation amount does not necessarily represent the fair value of the loan. Real estate collateral is typically valued using appraisals or other indications of value based on recent comparable sales of similar properties or assumptions generally observable in the marketplace. However, the choice of observable data is subject to significant judgment, and there are often adjustments based on judgment in order to make observable data comparable and to consider the impact of time, the condition of properties, interest rates, and other market factors on current values. Additionally, commercial real estate appraisals frequently involve discounting of projected cash flows, which relies inherently on unobservable data. Therefore, nonrecurringnon-recurring fair value measurement adjustments that relaterelating to real estate collateral have generally been classified as Level 3. Estimates of fair value for other collateral that supportssupporting commercial loans are generally based on assumptions not observable in the marketplace and therefore such valuations have been classified as Level 3.


Capitalized loan servicing rights.A loan servicing right asset represents the amount by which the present value of the estimated future net cash flows to be received from servicing loans exceed adequate compensation for performing the servicing. The fair value of loan servicing rights is estimated using a present value cash flow model. The most important assumptions used in the valuation model are the anticipated rate of the loan prepayments and discount rates. Adjustments are only recorded when the discounted cash flows derived from the valuation model are less than the carrying value of the asset. Although some assumptions in determining fair value are based on standards used by market participants, some are based on unobservable inputs and therefore are classified in Level 3 of the valuation hierarchy.


Other real estate owned (“OREO”)(OREO). OREO results from the foreclosure process on residential or commercial loans issued by the Bank.Company. Upon assuming the real estate, the Company records the property at the fair value of the asset less the estimated sales costs. Thereafter, OREO properties are recorded at the lower of cost or fair value less the estimated sales costs. OREO fair values are primarily determined based on Level 3 data including sales comparables and appraisals.

Premises held for sale. Assets held for sale, identified as part of the Company’s strategic review and branch optimization exercise, were transferred from premises and equipment at the lower of amortized cost or fair value less the estimated sales costs. Assets held for sale fair values are primarily determined based on Level 3 data including sales comparables and appraisals.


59

Table of Contents

Summary of Estimated Fair Values of Financial Instruments. Instruments

The estimated fair values, and related carrying amounts, of the Company’s financial instruments follow.are included in the table below. Certain financial instruments and all non-financial instruments are excluded from disclosure requirements. Accordingly, the aggregate fair value amounts presented herein may not necessarily represent the underlying fair value of the Company.

September 30, 2021

Carrying

Fair

(in thousands)

    

Amount

    

Value

    

Level 1

    

Level 2

    

Level 3

Financial Assets

 

  

 

  

 

  

 

  

 

  

Cash and cash equivalents

$

341,199

$

341,199

$

341,199

$

0

$

0

Securities available for sale

 

545,327

 

545,327

 

0

 

545,327

 

0

FHLB stock

 

10,192

 

10,192

 

0

 

10,192

 

0

Loans held for sale

7,505

7,505

0

0

7,505

Net loans

 

2,511,706

 

2,472,108

 

0

 

0

 

2,472,108

Accrued interest receivable

 

3,272

 

3,272

 

0

 

3,272

 

0

Cash surrender value of bank-owned life insurance policies

 

79,380

 

79,380

 

0

 

79,380

 

0

Derivative assets

 

17,019

 

17,019

 

0

 

16,972

 

47

Financial Liabilities

 

  

 

  

 

  

 

  

 

  

Non-maturity deposits

$

2,538,044

$

2,452,990

$

0

$

2,452,990

$

0

Time deposits

469,221

470,000

0

470,000

0

Securities sold under agreements to repurchase

21,667

21,667

0

21,667

0

FHLB advances

 

168,600

 

169,815

 

0

 

169,815

 

0

Subordinated borrowings

 

60,083

 

63,660

 

0

 

63,660

 

0

Derivative liabilities

 

18,299

 

18,299

 

0

 

18,159

 

140

December 31, 2020

Carrying

Fair

(in thousands)

    

Amount

    

Value

    

Level 1

    

Level 2

    

Level 3

Financial Assets

 

  

 

  

 

  

 

  

 

  

Cash and cash equivalents

$

226,007

$

226,007

$

226,007

$

$

Securities available for sale

 

585,046

 

585,046

 

 

585,046

 

FHLB stock

 

14,036

 

14,036

 

 

14,036

 

Loans held for sale

23,988

24,163

24,163

Net loans

 

2,543,803

 

2,547,970

 

 

 

2,547,970

Accrued interest receivable

 

2,964

 

2,964

 

 

2,964

 

Cash surrender value of bank-owned life insurance policies

 

77,870

 

77,870

 

 

77,870

 

Derivative assets(1)

 

28,895

 

25,895

 

 

25,917

 

22

Financial Liabilities

 

  

 

  

 

  

 

  

 

  

Non-maturity deposits

$

2,207,854

$

2,122,222

$

$

2,122,222

$

Time deposits

698,361

694,700

694,700

Short-term other borrowings

 

27,779

 

27,779

 

 

27,779

 

FHLB advances

 

248,283

 

252,698

 

 

252,698

 

Subordinated borrowings

 

59,961

 

57,091

 

 

57,091

 

Derivative liabilities(1)

 

31,348

 

31,348

 

 

31,443

 

95

(1)Prior period has been revised, see Note 1 Basis of Presentation – Revision of Previously Issued Financial Statement.

  September 30, 2017
(In thousands) 
Carrying
Amount
 
Fair
Value
 Level 1 Level 2 Level 3
Financial Assets  
  
  
  
  
Cash and cash equivalents $48,724
 $48,724
 $48,724
 $
 $
Securities available for sale 718,459
 718,459
 
 718,459
 
FHLBB bank stock 37,107
 37,107
 
 37,107
 
Net loans 2,416,912
 2,392,284
 
 
 2,392,284
Accrued interest receivable 3,194
 3,194
 
 3,194
 
Cash surrender value of bank-owned life insurance policies 57,613
 57,613
 
 57,613
 
Derivative assets 809
 809
 
 793
 16
           
Financial Liabilities          
Total deposits $2,275,109
 $2,250,483
 $
 $2,250,483
 $
Securities sold under agreements to repurchase 41,600
 41,578
 
 41,578
 
Federal Home Loan Bank advances 733,982
 733,632
 
 733,632
 
Subordinated borrowings 38,048
 38,048
 
 38,048
 
Junior subordinated borrowings 5,000
 3,564
 
 3,564
 
Derivative liabilities (173) (173) 
 
 (173)

60

Table of Contents

NOTE 10.           REVENUE FROM CONTRACTS WITH CUSTOMER

The Company has accounted for the various non-interest revenue streams and related contracts under ASC 606.

Disaggregation of Revenue

The following tables present disaggregation of the Company’s non-interest revenue by major business line and timing of revenue recognition for the transfer of products or services:

Three Months Ended September 30, 

Nine Months Ended September 30, 

(in thousands)

    

2021

    

2020

    

2021

    

2020

Major Products/Service Lines

 

  

 

  

 

  

 

  

Trust management fees

$

3,403

$

3,256

$

10,052

$

9,193

Financial services fees

 

465

 

276

 

1,283

 

867

Interchange fees

 

1,882

 

1,709

 

5,509

 

4,910

Customer deposit fees

 

1,363

 

937

 

3,542

 

2,836

Other customer service fees

 

270

 

240

 

691

 

691

 Total

$

7,383

$

6,418

$

21,077

$

18,497

Three Months Ended September 30, 

Nine Months Ended September 30, 

(in thousands)

    

2021

    

2020

    

2021

    

2020

Timing of Revenue Recognition

 

  

 

  

 

  

 

  

Products and services transferred at a point in time

$

3,737

$

3,133

$

10,593

$

9,026

Products and services transferred over time

 

3,646

 

3,285

 

10,484

 

9,471

Total

$

7,383

$

6,418

$

21,077

$

18,497

Trust Management Fees

The trust management business generates revenue through a range of fiduciary services including trust and estate administration, wealth advisory, and investment management to individuals, businesses, not-for-profit organizations, and municipalities. These fees are primarily earned over time as the Company charges its customers on a monthly or quarterly basis in accordance with its investment advisory agreements.  Fees are generally assessed based on a tiered scale of the market value of assets under management at month end.  Certain fees, such as bill paying fees, distribution fees, real estate sale fees, and supplemental tax service fees, are recorded as revenue at a point in time upon the completion of the service.

Financial Services Fees

Bar Harbor Financial Services is a branch office of Infinex, an independent registered broker dealer offering securities and insurance products not affiliated with the Company or its subsidiaries. The Company has a revenue sharing agreement with Infinex for any financial service fee income generated. Financial services fees are recognized at a point in time upon the completion of service requirements.

Interchange Fees

The Company earns interchange fees from transaction fees that merchants pay whenever a customer uses a debit card to make a purchase from their store. The fees are paid to the card-issuing bank to cover handling costs, fraud, bad debt costs and the risk involved in approving the payment. Interchange fees are generally recognized as revenue at a point in time upon the completion of a debit card transaction.

Customer Deposit Fees

The Customer Deposit business offers a variety of deposit accounts with a range of interest rates, fee schedules and other terms, which are designed to meet the customer's financial needs. Additional depositor-related services provided to customers include ATM, bank-by-phone, internet banking, internet bill pay, mobile banking, and other cash management services which include remote deposit capture, ACH origination, and wire transfers. These customer deposit fees are generally recognized by the Company at a point in time upon the completion of the service.

61

  December 31, 2016
(In thousands) Carrying
Amount
 Fair
Value
 Level 1 Level 2 Level 3
Financial Assets  
  
  
  
  
Cash and cash equivalents $8,439
 $8,439
 $8,439
 $
 $
Securities available for sale 528,856
 528,856
 
 528,856
 
FHLBB bank stock 25,331
 25,331
 
 25,331
 
Net loans 1,118,645
 1,100,601
 
 
 1,100,601
Accrued interest receivable 6,051
 6,051
 
 6,051
 
Cash surrender value of bank-owned life insurance policies 24,450
 24,450
 
 24,450
 
Derivative assets 1,748
 1,748
 
 1,748
 
           
Financial Liabilities          
Total deposits $1,050,300
 $1,048,932
 $
 $1,048,932
 $
Securities sold under agreements to repurchase 21,780
 21,773
 
 21,773
 
Federal Home Loan Bank advances 509,816
 509,793
 
 509,793
 
Subordinated borrowings 
 
 
 
 
Junior subordinated borrowings 
 3,560
 
 3,560
 

Table of Contents

Other thanCustomer Service Fees

The Company has certain incentive and referral fee arrangements with independent third parties in which fees are earned for new account activity, product sales, or transaction volume generated for the respective third parties. The Company also earns a percentage of the fees generated from third-party credit card plans promoted through the Bank. Revenue from these incentive and referral fee arrangements are recognized over time using the right to invoice measure of progress.

Contract Balances from Contracts with Customers

The following table provides information about contract assets or receivables and contract liabilities or deferred revenues from contracts with customers:

    

    

(in thousands)

September 30, 2021

December 31, 2020

Balances from contracts with customers only:

 

  

 

  

Other Assets

$

1,277

$

1,121

Other Liabilities

 

2,467

 

2,785

The timing of revenue recognition, billings and cash collections results in contract assets or receivables and contract liabilities or deferred revenue on the consolidated balance sheets. For most customer contracts, fees are deducted directly from customer accounts and, therefore, there is no associated impact on the accounts receivable balance. For certain types of service contracts, the Company has an unconditional right to consideration under the service contract and an accounts receivable balance is recorded for services completed. When consideration is received, or such consideration is unconditionally due, from a customer prior to transferring goods or services to the customer under the terms of a contract, a contract liability is recorded. Contract liabilities are recognized as discussed above,revenue after control of the products or services is transferred to the customer and all revenue recognition criteria have been met.

Costs to Obtain and Fulfill a Contract

The Company currently expenses contract costs for processing and administrative fees for debit card transactions. The Company also expenses custody fees and transactional costs associated with securities transactions as well as third party tax preparation fees. The Company has elected the practical expedient in ASC 340-40-25-4, whereby the Company recognizes the incremental costs of obtaining contracts as an expense when incurred if the amortization period of the assets the Company otherwise would have recognized is one year or less.

62

Table of Contents

NOTE 11.           LEASES

A lease is defined as a contract, or part of a contract, that conveys the right to control the use of identified property, plant or equipment for a period of time in exchange for consideration. On January 1, 2019, the Company adopted ASU No. 2016-02 “Leases” and all subsequent ASUs modifying ASC 842. Substantially all of the leases pursuant to which the Company is the lessee are comprised of real estate property for branches, ATM locations, and office space with terms extending through 2040. All leases are classified as operating leases, and therefore, were previously not recognized on the Company’s consolidated balance sheets. With the adoption of ASC 842, operating lease agreements are required to be recognized on the consolidated balance sheets as a right-of-use (ROU) asset with a corresponding lease liability using the modified retrospective approach.

The Company elected the following methods and assumptions were used by management to estimatepractical expedients in conjunction with implementation of ASC 842 as follows:

Package of practical expedients:
oLease classification as an operating lease under the prior standards is grandfathered.
oRe-evaluation of embedded leases evaluated under the prior standards is not required.
oNo re-assessment of previously recorded initial direct lease costs.
Election to exclude short-term leases (i.e., leases with initial terms of twelve months or less), from capitalization on the consolidated balance sheets.

The following table presents the fair valueconsolidated statements of significant classes of financial instruments for which it is practicable to estimate that value.



Cash and cash equivalents. Carrying value is assumed to represent fair value for cash and cash equivalents that have original maturities of ninety days or less.

FHLBB bank stock and restricted securities. Carrying value approximates fair value based on the redemption provisionscondition classification of the issuers.

Cash surrender valueCompany’s ROU assets and lease liabilities:

(in thousands)

    

Classification

    

September 30, 2021

    

December 31, 2020

Lease Right-of-Use Assets

 

  

  

Operating lease right-of-use assets

 

Other assets

$

9,488

$

10,338

Lease Liabilities

 

  

 

  

 

  

Operating lease liabilities

 

Other liabilities

 

9,841

 

10,627

The calculated amount of life insurance policies. Carrying value approximates fair value.


Loans, net. The carryingthe ROU assets and lease liabilities in the table above are impacted by the length of the lease term and the discount rate used for the present value of the loansminimum lease payments. The Company’s lease agreements often include one or more options to renew at the Company’s discretion. If at lease inception, the Company considers the exercising of a renewal option to be reasonably certain, the Company will include the extended term in the loan portfolio is based on the cash flowscalculation of the loans discounted over their respective loan origination rates. The origination ratesROU asset and lease liability. If there are adjusted for substandard and special mention loans to factormultiple renewals typically only the impactnext lease renewal is considered. Regarding the discount rate, ASC 842 requires the use of declinesthe rate implicit in the loan’s credit standing. lease whenever this rate is readily determinable. As this rate is rarely determinable, the Company utilizes its incremental borrowing rate at lease inception, on a collateralized basis, over a similar term.

The fair valuefollowing table presents the weighted average lease term and discount rate of the loans is estimated by discounting future cash flows using the current interest rates atCompany’s leases:

    

September 30, 2021

    

December 31, 2020

Weighted-average remaining lease term (in years)

  

  

Operating leases

8.57

9.26

Weighted-average discount rate

  

  

Operating leases

3.15

%

3.15

%

63

Table of Contents

The following table represents lease costs, which similar loans with similar terms would be made to borrowers of similar credit quality.


Accrued interest receivable. Carrying value approximates fair value.

Deposits. The fair value of demand, non-interest bearing checking, savingsincludes prepaids and money market deposits is determined as the amount payable on demand at the reporting date. The fair value of time deposits is estimated by discounting the estimated future cash flows using market rates offered for deposits of similar remaining maturities.

Borrowed funds. The fair value of borrowed funds is estimated by discounting the future cash flows using market rates for similar borrowings.  Such funds include all categories of debt and debentures in the table above.

Subordinated borrowings. The Company utilizes a pricing service along with internal models to estimate the valuation of its junior subordinated debentures. The junior subordinated debentures re-price every ninety days.

Off-balance-sheet financial instruments. Off-balance-sheet financial instruments include standby letters of creditexpenses and other financial guaranteeslease information. As the Company elected, for all classes of underlying assets, not to separate lease and commitments considered immaterialnon-lease components and instead to account for them as a single lease component, the Company’s financial statements.variable lease cost primarily represents variable payments such as real estate taxes, common area maintenance and utilities.

Three Months Ended

Nine Months Ended

(in thousands)

September 30, 2021

    

September 30, 2020

    

September 30, 2021

    

September 30, 2020

Lease Costs

  

 

  

 

  

 

  

Operating lease cost

$

324

$

344

$

966

$

988

Variable lease cost

 

43

 

59

 

179

 

177

Total lease cost

$

367

$

403

$

1,145

$

1,165

Future minimum payments for operating leases with initial or remaining terms of one year or more as of September 30, 2021 are, as follows:

(in thousands)

    

Payments

Twelve Months Ended:

 

  

September 30, 2022

$

1,314

September 30, 2023

 

1,318

September 30, 2024

 

1,319

September 30, 2025

 

1,125

September 30, 2026

 

1,032

Thereafter

 

4,301

Total future minimum lease payments

 

10,409

Amounts representing interest

 

(568)

Present value of net future minimum lease payments

$

9,841

64

Table of Contents


NOTE 12. SUBSEQUENT EVENTS

On October 11, 2017 the Company sold its insurance company McCrillis & Eldredge Insurance, Inc. to Cross Insurance, the sale did not have a significant impact to the Company's balance sheet position.


ITEM 2.           MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS


GENERAL

Management’s discussion and analysis of financial condition and results of operations is intended to assist in understanding the financial condition and results of operations of the Company. The following discussion and analysis should be read in conjunction with the Company’s consolidated financial statements and the notes thereto appearing in Part I, Item 1 of this document and with the Company’s consolidated financial statements and the notes thereto and Management’s Discussion and Analysis of Financial Condition and Results of Operations included in the Company's 2016 Annual Report on Form 10-K. In the following discussion, income statement comparisons are against the same period of the previous year and balance sheet comparisons are against the previous fiscal year-end, unless otherwise noted. Operating results discussed herein are not necessarily indicative of the results10-K for the year 2017 or any future period. In management’s discussion and analysis of financial condition and results of operations, certain reclassifications have been made to make prior periods comparable.


ended December 31, 2020.

Bar Harbor Bankshares (the "Company") is the parent company of Bar Harbor Bank & Trust a true(the "Bank”), which is the only community bank headquartered in Northern New England with branches in Maine, New Hampshire and Vermont. The Bank is a regional community bank that thinks differently about banking. The Bank provides the technology offerings and capabilities of larger banks, accompanied by access to local decision makers who are acutely focused on their local markets. As the Company approaches the 135th anniversary of its founding, they have not forgotten that helping customers achieve their goals is the key to the Bank’s success. The Company delivers banking, lending and wealth management services from more than 50 locations. The Company’s corporate goal is to be among the most profitable banks in New England, and its business model is centered on the following:

Employee and customer experience is the foundation of superior performance, which leads to significant financial benefit to shareholders
Geography, heritage, and performance are key while remaining true to a community-focused culture
Strong commitment to risk management while balancing growth and earnings
Service and sales driven culture with a focus on core business growth
Fee income is fundamental to the Company’s profitability through trust and treasury management services, customer derivatives, and secondary market mortgage sales
Investment in processes, products, technology, training, leadership, and infrastructure
Expansion of the Company’s brand and business to deepen market presence
Opportunity and growth for existing employees while adding catalyst recruits across all levels of the Company

Shown below is the foundation of superior performance, which leads to significant financial benefit to shareholders

Geography, heritage and performance are key while remaining true to a community culture
Strong commitment to risk management while balancing growth and earnings
Service and sales driven culture with a focus on core business growth
Investment in processes, products, technology, training, leadership and infrastructure
Expansionprofile of the Company’s brand and business to deepen market presence
Opportunity and growth for existing employees while adding catalyst recruits across all levels of the Company

• Community bank with $3.5 billion in assets
• 53 branches
• Commercial banking, retail banking and wealth management

mapa01.jpg






FORWARD-LOOKING STATEMENTS
Certain statements contained in this document that are not historical facts may constitute forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (referred to as the Securities Act), and Section 21E of the Securities Exchange Act of 1934, as amended (referred to as the Securities Exchange Act), and are intended to be covered by the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. You can identify these statements from the use of the words “may,” “will,” “should,” “could,” “would,” “plan,” “potential,” “estimate,” “project,” “believe,” “intend,” “anticipate,” “expect,” “target” and similar expressions. These forward-looking statements are subject to significant risks, assumptions and uncertainties, including among other things, changes in general economic and business conditions, increased competitive pressures, changes in the interest rate environment, legislative and regulatory change, changes in the financial markets, and other risks and uncertainties disclosed from time to time in documents that the Company files with the Securities and Exchange Commission, including the Annual Report on Form 10-K for the fiscal year ended December 31, 2016 and the Risk Factors in Item 1A of this report. Because of these and other uncertainties, the Company’s actual results, performance or achievements, or industry results, may be materially different from the results indicated by these forward-looking statements. In addition, the Company's past results of operations do not necessarily indicate future results.

Additional factors that could cause results to differ materially from those described in the forward-looking statements relate to the completed acquisition of Lake Sunapee Bank Group. These additional factors that could cause actual results to differ materially from expected results include difficulties in achieving cost savings from the acquisition or in achieving such cost savings within the expected time frame and difficulties in integrating the Company and Lake Sunapee Bank Group, increased competitive pressures, changes in the interest rate environment, changes in general economic conditions, legislative and regulatory changes that adversely affect the business in which the Company is engaged, changes in the securities markets and other risks and uncertainties disclosed from time to time in documents that the Company files with the Securities and Exchange Commission.

No undue reliance should be placed on any of the forward-looking statements, which speak only as of the dates on which they were made. The Company is not undertaking an obligation to update forward-looking statements, even though its situation may change in the future, except as required under federal securities law. The Company qualifies allSeptember 30, 2021:

Graphic

65

Table of its forward-looking statements by these cautionary statements.Contents



SELECTED FINANCIAL DATA

The following summary data is based in part on the consolidated financial statements and accompanying notes and other information appearing elsewhere in this or prior Forms 10-Q10-Q.

Three Months Ended

Nine Months Ended

 

September 30, 

September 30, 

 

    

2021

    

2020

    

2021

    

2020

 

PER SHARE DATA

Net earnings, diluted

$

0.73

$

0.56

$

1.97

$

1.60

Adjusted earnings, diluted(1)

 

0.73

 

0.61

 

2.04

 

1.66

Total book value(5)

 

27.92

 

26.74

 

27.92

 

26.74

Tangible book value(1) (5)

 

19.48

 

18.21

 

19.48

 

18.21

Market price at period end

 

28.05

 

20.55

 

28.05

 

20.55

Dividends

 

0.24

 

0.22

 

0.70

 

0.66

PERFORMANCE RATIOS(2)

Return on assets

 

1.16

%

 

0.88

%

 

1.05

%

 

0.87

%

Adjusted return on assets(1)

 

1.16

 

0.96

 

1.09

 

0.91

Pre-tax, pre-provision return on assets

1.43

 

1.29

 

1.26

 

1.24

Adjusted pre-tax, pre-provision return on assets (1) (2)

1.43

 

1.39

 

1.31

 

1.29

Return on equity(5)

 

10.38

 

8.25

 

9.54

 

8.10

Adjusted return on equity(1) (5)

 

10.39

 

9.02

 

9.98

 

8.42

Return on tangible equity(5)

15.08

12.32

14.01

12.10

Adjusted return on tangible equity(1) (5)

 

15.09

 

13.44

 

14.50

 

12.57

Net interest margin, fully taxable equivalent (FTE)(1) (3)

 

3.02

 

2.90

 

2.88

 

2.95

Adjusted net interest margin(1) (5)

 

2.75

 

2.89

 

2.73

 

2.94

Efficiency ratio(1)

 

59.18

 

59.47

 

61.48

 

61.62

FINANCIAL DATA (In millions)

Total assets

$

3,738

$

3,861

$

3,738

$

3,861

Total earning assets(4)

 

3,394

 

3,505

 

3,394

 

3,505

Total investments

 

556

 

619

 

556

 

619

Total loans

 

2,534

 

2,685

 

2,534

 

2,685

Allowance for loan losses

 

22

 

18

 

22

 

18

Total goodwill and intangible assets

 

126

 

127

 

126

 

127

Total deposits

 

3,007

 

2,935

 

3,007

 

2,935

Total shareholders' equity(5)

 

418

 

399

 

418

 

399

Net income

 

11

 

8

 

30

 

25

Adjusted income(1)

 

11

 

9

 

31

 

26

ASSET QUALITY AND CONDITION RATIOS

Net charge-offs (annualized)/average loans

 

0.03

%

 

0.06

%

 

(0.02)

%

 

0.07

%

Allowance for credit losses/total loans

 

0.89

 

0.67

 

0.89

 

0.67

Loans/deposits

 

84

 

91

 

84

 

91

Shareholders' equity to total assets(5)

 

11.19

 

10.34

 

11.19

 

10.34

Tangible shareholders' equity to tangible assets(1) (5)

 

8.08

 

7.27

 

8.08

 

7.27

  Three Months Ended September 30, Nine Months Ended September 30,
  2017 2016 2017 2016
PER SHARE DATA        
Net earnings, diluted $0.56
 $0.40
 $1.27
 $1.35
Adjusted earnings, diluted (1) (2) 0.57
 0.34
 1.52
 1.11
Total book value 22.90
 18.09
 22.90
 18.09
Tangible book value (2) 15.84
 17.51
 15.84
 17.51
Market price at period end 31.36
 24.48
 31.36
 24.48
Dividends 0.19
 0.18
 0.56
 0.54
PERFORMANCE RATIOS        
Return on assets 0.99% 0.86% 0.75% 1.00%
Adjusted return on assets (1) (2) 1.01
 0.73
 0.90
 0.82
Return on equity 9.67
 8.78
 7.43
 10.20
Adjusted return on equity (1) (2) 9.90
 7.49
 8.86
 8.34
Adjusted return on tangible equity (1) (2) 14.51
 7.75
 12.98
 8.88
Net interest margin, fully taxable equivalent (FTE) (4) 3.06
 2.84
 3.13
 2.90
Net interest margin (FTE), excluding purchased loan accretion (4) 2.93
 2.84
 3.00
 4.86
Efficiency ratio (2) 53.59
 61.24
 56.44
 59.34
GROWTH (Year-to-date)
        
Total commercial loans, (organic annualized) (2) 22.1% 3.3% 20.5% 5.3%
Total loans, (organic annualized) (2) 8.8
 15.0
 12.2
 9.9
Total deposits, (organic annualized) (2) 11.2
 17.7
 10.6
 9.6
FINANCIAL DATA (In millions)
        
Total assets $3,476
 $1,718
 $3,476
 $1,718
Total earning assets 3,184
 1,649
 3,184
 1,649
Total investments 756
 561
 756
 561
Total loans 2,429
 1,088
 2,429
 1,088
Allowance for loan losses 12
 10
 12
 10
Total goodwill and intangible assets 109
 5
 109
 5
Total deposits 2,275
 1,034
 2,275
 1,034
Total shareholders' equity 353
 164
 353
 164
Net income 9
 4
 19
 12
Adjusted income (4) 9
 3
 23
 10
ASSET QUALITY AND CONDITION RATIOS         
Net charge-offs (current quarter annualized)/average loans (5) 0.03% (0.03)% 0.03% (0.03)%
Allowance for loan losses/total loans (5) 0.49
 0.93
 0.49
 0.93
Loans/deposits 107
 105
 107
 105
Shareholders' equity to total assets 10.17
 9.57
 10.17
 9.57
Tangible shareholders' equity to tangible assets (2) 7.26
 9.29
 7.26
 9.29






(1)Adjusted measurements are non-GAAPNon-GAAP financial measures that are adjusted to exclude net non-operating charges primarily related to acquisitions, and gain on sale of securities.measure. Refer to the Reconciliation of Non-GAAP Financial Measures section of Management's Discussion and Analysis for additional information.
(2)Non-GAAP financial measure.
(3)All performance ratios are annualized and are based on average balance sheet amounts, where applicable.
(3)
(4)Fully taxable equivalent considers the impact of tax advantagedtax-advantaged investment securities and loans.
(4)
(5)Generally accepted accounting principles require that loans acquired in a business combination be recorded at fair value, whereas loans from business activities are recorded at cost. The fair value of loans acquired in a business combinationEarning assets includes expected loan losses, and there is no loan loss allowance recorded for these loans at the time of acquisition. Accordingly, the ratio of the loan loss allowance to total loans is reduced as a result of the existence of suchnon-accruing loans and this measure is not directly comparable to prior periods. Similarly, net loan charge-offssecurities are normally reduced for loans acquired in a business combination since these loans are recorded net of expected loan losses. Therefore, the ratio of net loan charge-offs to average loans is reduced as a result of the existence of such loans, and this measure is not directly comparable to prior periods. Other institutions may have loans acquired in a business combination, and therefore there may be no direct comparability of these ratios between and among other institutions.

BAR HARBOR BANKSHARES
CONSOLIDATED LOAN & DEPOSIT ANALYSIS - UNAUDITED
 
LOAN ANALYSIS
             
            Organic Annualized Growth % (1) September 30, 2017
(in thousands) Sep 30, 2017 Balance Jun 30, 2017 Balance Mar 31, 2017 Balance Acquired Lake Sunapee Bank Balance (2) Dec 31, 2016 Balance Quarter End Year to Date
Commercial real estate $793,572
 $738,584
 $779,635
 $345,586
 $418,119
 29.8 % 10.7 %
Commercial and industrial 270,759
 269,960
 236,526
 89,259
 135,564
 1.2
 50.8
Total commercial loans  1,064,331
 1,008,544
 1,016,161
 434,845
 553,683
 22.1
 20.5
Residential real estate 1,152,628
 1,160,832
 1,155,436
 652,255
 506,612
 (2.8) (1.8)
Consumer 125,590
 127,229
 127,370
 76,489
 53,093
 (5.2) (11.3)
Tax exempt and other 86,313
 80,042
 73,469
 44,611
 15,676
 31.3
 249.0
Total loans $2,428,862
 $2,376,647
 $2,372,436
 $1,208,200
 $1,129,064
 8.8 % 12.2 %

(1)Non-GAAP financial measure.valued at amortized cost.
(5)
(2)Acquired Lake Sunapee Bank loans are asPrior period has been revised, see Note 1 Basis of January 13, 2017.Presentation – Revision of Previously Issued Financial Statement.


66

Table of Contents

CONSOLIDATED LOAN AND DEPOSIT ANALYSIS

The following tables present the quarterly trend in loan and deposit data and accompanying quarterly growth rates as of September 30, 2021 on an annualized basis:

LOAN ANALYSIS

Annualized Growth %

(in thousands, except ratios)

    

Sep 30, 2021

    

Jun 30, 2021

    

Mar 31, 2021

    

Dec 31, 2020

    

Sep 30, 2020

    

Quarter To Date

Year To Date

Commercial real estate

$

1,170,372

$

1,135,857

$

1,118,669

$

1,084,381

$

1,045,635

 

12

%

11

%

Commercial and industrial

 

331,091

 

327,729

 

317,500

 

323,864

 

324,647

 

4

 

3

Paycheck Protection Program (PPP)

24,227

65,918

77,878

53,774

131,537

*

(74)

Total commercial loans

 

1,525,690

 

1,529,504

 

1,514,047

 

1,462,019

 

1,501,819

 

(1)

6

Total commercial loans, excluding PPP

1,501,463

1,463,586

1,436,169

1,408,245

1,370,282

10

9

Residential real estate

 

849,692

 

822,774

 

868,084

 

923,891

 

997,485

 

13

 

(11)

Consumer

 

100,933

 

103,589

 

106,835

 

113,544

 

119,340

 

(10)

 

(15)

Tax exempt and other

 

57,839

 

59,693

 

62,098

 

63,431

 

66,326

 

(12)

 

(12)

Total loans

$

2,534,154

$

2,515,560

$

2,551,064

$

2,562,885

$

2,684,970

 

3

%

(1)

%

DEPOSIT ANALYSIS

Annualized Growth %

(in thousands, except ratios)

    

Sep 30, 2021

    

Jun 30, 2021

    

Mar 31, 2021

    

Dec 31, 2020

    

Sep 30, 2020

    

Quarter To Date

Year To Date

Demand

$

664,395

$

599,598

$

586,487

$

544,636

$

515,064

 

43

%

29

%

NOW

 

888,021

 

802,681

 

761,817

 

738,849

 

706,048

 

43

 

27

Savings

 

605,977

 

578,361

 

560,095

 

521,638

 

511,938

 

19

 

22

Money market

 

379,651

 

371,075

 

365,507

 

402,731

 

388,356

 

9

 

(8)

Total non-maturity deposits

 

2,538,044

 

2,351,715

 

2,273,906

 

2,207,854

 

2,121,406

 

32

 

20

Total time deposits

 

469,221

 

470,758

 

638,436

 

698,361

 

813,509

 

(1)

 

(44)

Total deposits

$

3,007,265

$

2,822,473

$

2,912,342

$

2,906,215

$

2,934,915

 

26

%

5

%

67

DEPOSIT ANALYSIS
             
            Organic Annualized Growth % (1) September 30, 2017
(in thousands) Sep 30, 2017 Balance Jun 30, 2017 Balance Mar 31, 2017 Balance Acquired Lake Sunapee Bank Balance (2) Dec 31, 2016 Balance Quarter End Year to Date
Demand $357,398
 $332,339
 $349,896
 $248,051
 $98,856
 30.2 % 15.9 %
NOW 442,085
 451,171
 242,876
 39,999
 175,150
 (8.1) 194.4
Money market 300,398
 285,312
 349,491
 103,142
 282,234
 21.2
 (45.2)
Savings 373,118
 360,306
 511,091
 467,735
 77,623
 14.2
 (332.8)
Total non-maturity deposits 1,472,999
 1,429,128
 1,453,354
 858,927
 633,863
 12.3
 (4.7)
Total time deposits 802,110
 783,876
 720,899
 291,684
 416,437
 9.3
 33.9
Total deposits $2,275,109
 $2,213,004
 $2,174,253
 $1,150,611
 $1,050,300
 11.2 % 10.6 %

(1)Non-GAAP financial measure.
(2)Acquired Lake Sunapee Bank Deposits are as of January 13, 2017.

Table of Contents

AVERAGE BALANCES AND AVERAGE YIELDS/RATES


The following table presentstables present average balances and an analysis of average ratesyields and yieldsrates on an annualized fully taxable equivalent basis for the periods included:

    

Three Months Ended September 30, 

 

2021

2020

 

Average 

Average 

 

(in thousands, except ratios)

    

Balance

    

Interest(3)

    

Yield/Rate(3)

    

Balance

    

Interest(3)

    

Yield/Rate(3)

    

Assets

 

  

 

  

 

  

 

  

 

  

 

  

Interest-bearing deposits with other banks(4)

$

284,429

$

110

0.15

%  

$

92,066

$

21

0.09

%  

Securities available for sale and FHLB stock(2)(3)

610,381

3,986

2.59

627,162

4,787

3.04

Loans:

Commercial real estate

1,153,813

10,269

 

3.53

1,012,194

9,691

 

3.81

Commercial and industrial

 

391,191

 

3,739

 

3.79

 

399,734

 

4,411

 

4.39

Paycheck protection program

45,835

2,690

23.28

131,605

1,052

3.18

Residential

 

824,686

 

7,574

 

3.64

 

1,060,084

 

9,886

 

3.71

Consumer

 

101,545

 

968

 

3.78

 

121,248

 

1,042

 

3.42

Total loans (1)

 

2,517,070

 

25,240

 

3.98

 

2,724,865

 

26,082

 

3.81

Total earning assets

 

3,411,880

 

29,336

 

3.41

%  

 

3,444,093

 

30,890

 

3.57

%

Other assets(6)

 

352,208

 

  

 

370,335

 

  

 

Total assets(6)

$

3,764,088

 

  

$

3,814,428

 

  

 

Liabilities

 

  

 

  

 

  

 

  

 

  

 

  

NOW

$

860,206

$

272

 

0.13

%  

$

677,706

$

243

 

0.14

%

Savings

 

591,440

 

124

 

0.08

 

488,508

 

157

 

0.13

Money market

 

381,755

 

115

 

0.12

 

396,351

 

163

 

0.16

Time deposits

 

471,934

 

1,044

 

0.88

 

777,424

 

3,307

 

1.69

Total interest bearing deposits

 

2,305,335

 

1,555

 

0.27

 

2,339,989

 

3,870

 

0.66

Borrowings

 

334,097

 

1,778

 

2.11

 

481,687

 

1,941

 

1.60

Total interest bearing liabilities

 

2,639,432

 

3,333

 

0.50

%  

 

2,821,676

 

5,811

 

0.82

%

Non-interest bearing demand deposits

 

641,769

 

  

 

  

 

507,844

 

  

 

Other liabilities(6)

 

61,436

 

  

 

  

 

79,848

 

  

 

Total liabilities(6)

 

3,342,637

 

  

 

  

 

3,409,368

 

  

 

Total shareholders' equity(6)

 

421,451

 

  

 

  

 

405,060

 

  

 

Total liabilities and shareholders' equity(6)

$

3,764,088

 

  

 

  

$

3,814,428

 

  

 

  

Net interest spread

 

  

 

  

 

2.91

%  

 

  

 

  

 

2.75

%

Net interest margin (1)

3.02

 

  

 

  

 

2.90

Adjusted net interest margin(5)

 

  

 

  

 

2.75

2.89

  Three Months Ended September 30, Nine Months Ended September 30,
  2017 2016 2017 2016
(In thousands) 
Average
Balance
Yield/Rate
(FTE basis) (3)
 Average
Balance
Yield/Rate
(FTE basis) (3)
 
Average
Balance
Yield/Rate
(FTE basis) (3)
 Average
Balance
Yield/Rate
(FTE basis) (3)
Assets            
Loans (1) $2,402,171
4.13% $1,058,253
3.89% $2,379,190
4.10% $1,033,070
3.97%
Securities and other (2) 754,450
3.13
 551,456
3.07
 758,748
3.11
 543,513
3.07
Total earning assets 3,156,621
3.89% 1,609,709
3.62% 3,137,938
3.86% 1,576,583
3.66%
Other non-earning assets 295,924
  79,826
  305,735
  76,431
 
Total assets $3,452,545
  $1,689,535
  $3,443,673
  $1,653,014
 
             
Liabilities            
Interest bearing deposits $1,901,501
0.66% $897,703
0.78% $1,863,091
0.57% $874,666
0.75%
Borrowings 812,938
1.66
 514,999
1.06
 835,274
1.49
 520,508
1.03
Total interest-bearing liabilities 2,714,439
0.96% 1,412,702
0.88% 2,698,365
0.85% 1,395,174
0.86%
Non-interest-bearing demand deposits 354,470
  103,971
  327,547
  88,652
 
Other non-earning liabilities  30,079
  7,376
  68,973
  7,281
 
Total liabilities 3,098,988
  1,524,049
  3,094,885
  1,491,107
 
             
Total shareholders' equity 353,557
  165,486
  348,788
  161,907
 
Total liabilities and shareholders' equity $3,452,545
  $1,689,535
  $3,443,673
  $1,653,014
 
             
Net interest spread  2.93%  2.74%  3.01%  2.81%
Net interest margin  3.06
  2.84
  3.13
  2.90

(1)The average balances of loans include nonaccrualnon-accrual loans and unamortized deferred fees and costs.
(2)The average balance for securities available for sale is based on amortized cost. The average balance of equity also reflects this adjustment.
(3)Fully taxable equivalent considers the impact of tax advantaged investmenttax-advantaged securities and loans.

(4)Income from interest-bearing deposits with other banks has been separated from securities and restated for prior periods to conform to the current period presentation.
(5)Adjusted net interest margin excludes Paycheck Protection Program loans.
(6)Prior period has been revised, see Note 1 Basis of Presentation – Revision of Previously Issued Financial Statement.

68

Table of Contents

Nine Months Ended September 30, 

2021

2020

 

Average 

Yield/

Average 

Yield/

(in thousands, except ratios)

    

Balance

    

Interest(3)

    

Rate(3)

Balance

    

Interest(3)

    

Rate(3)

Assets

Interest-bearing deposits with other banks(4)

$

229,235

$

203

0.12

%  

$

52,326

$

84

0.21

%  

Securities available for sale and FHLB stock(2)(3)

617,373

12,424

2.69

643,978

15,798

3.28

Loans:

Commercial real estate

1,128,134

30,177

 

3.58

972,330

29,895

 

4.11

Commercial and industrial(3)

 

381,753

 

10,727

 

3.76

 

414,532

 

13,847

 

4.46

Paycheck protection program

62,562

5,058

10.81

78,782

1,921

3.26

Residential

 

861,629

 

24,145

 

3.75

 

1,103,442

 

31,386

 

3.80

Consumer

 

105,371

 

2,833

 

3.59

 

126,189

 

3,929

 

4.16

Total loans (1)

 

2,539,449

 

72,940

 

3.84

 

2,695,275

 

80,978

 

4.01

Total earning assets

 

3,386,057

 

85,567

 

3.38

%  

 

3,391,579

 

96,860

 

3.81

%

Other assets(6)

 

357,334

 

  

 

371,792

 

  

Total assets(6)

$

3,743,391

 

  

$

3,763,371

 

  

Liabilities

 

  

 

  

 

  

 

  

 

  

 

  

NOW

$

801,292

$

760

 

0.13

%  

$

622,702

$

1,021

 

0.22

%

Savings

 

568,726

 

431

 

0.10

 

451,952

 

587

 

0.17

Money market

 

376,775

 

354

 

0.13

 

393,702

 

1,511

 

0.51

Time deposits

 

583,529

 

5,565

 

1.28

 

813,442

 

11,320

 

1.86

Total interest bearing deposits

 

2,330,322

 

7,110

 

0.41

 

2,281,798

 

14,439

 

0.85

Borrowings

 

336,432

 

5,415

 

2.15

 

547,557

 

7,149

 

1.74

Total interest bearing liabilities

 

2,666,754

 

12,525

 

0.63

%  

 

2,829,355

 

21,588

 

1.02

%

Non-interest bearing demand deposits

 

598,434

 

  

 

  

 

464,476

 

  

 

  

Other liabilities(6)

 

64,360

 

  

 

  

 

63,812

 

  

 

  

Total liabilities(6)

 

3,329,548

 

  

 

  

 

3,357,643

 

  

 

  

Total shareholders' equity(6)

 

413,843

 

  

 

  

 

405,728

 

  

 

  

Total liabilities and shareholders' equity(6)

$

3,743,391

 

  

 

  

$

3,763,371

 

  

 

  

Net interest spread

2.75

%

2.79

%

Net interest margin

 

  

 

  

 

2.88

 

  

 

  

 

2.95

Adjusted net interest margin(5)

2.73

2.94

(1)The average balances of loans include non-accrual loans and unamortized deferred fees and costs.
(2)The average balance for securities available for sale is based on amortized cost.
(3)Fully taxable equivalent considers the impact of tax-advantaged securities and loans.
(4)Income from interest-bearing deposits with other banks has been separated from securities and restated for prior periods to conform to the current period presentation.
(5)Adjusted net interest margin excludes Paycheck Protection Program loans.
(6)Prior period has been revised, see Note 1 Basis of Presentation – Revision of Previously Issued Financial Statement.

69

Table of Contents

NON-GAAP FINANCIAL MEASURES


This document contains certain non-GAAP financial measures in addition to results presented in accordance with U.S Generally Accepted Accounting Principles (“GAAP”accounting principles generally accepted in the United States of America ("GAAP"). These non-GAAP measures are intended to provide the reader with additional supplemental perspectives on operating results, performance trends, and financial condition. Non-GAAP financial measures are not a substitute for GAAP measures; they should be read and used in conjunction with the Company’sCompany's GAAP financial information. The Company’sA reconciliation of non-GAAP financial measures may not be comparable to similar non-GAAP information which may be presented by other companies.GAAP measures is provided below. In all cases, it should be understood that non-GAAP operating measures do not depict amounts that accrue directly to the benefit of shareholders. An item whichthat management excludes when computing non-GAAP adjusted earnings can be of substantial importance to the Company’sCompany's results and condition for any particular quarter or year. A reconciliation ofThe Company's non-GAAP adjusted earnings information set forth is not necessarily comparable to non-GAAP information that may be presented by other companies. Each non-GAAP measure used by the Company in this report as supplemental financial measures todata should be considered in conjunction with the Company's GAAP measures is provided below.


financial information.

The Company utilizes the non-GAAP measure of adjusted earnings in evaluating operating trends, including components for operatingadjusted revenue and expense. These measures exclude amounts whichthat the Company views as unrelated to its normalized operations, including gains/losses on securities, gains/losses,premises, equipment and other real estate owned, acquisition costs, restructuring costs, legal settlements, and systems conversion costs. TheseNon-GAAP adjustments are presented net of an adjustment for related income tax expense. This adjustment is determined as the difference between the GAAP tax rate and the effective tax rate applicable to adjusted income.

The Company also calculates several non-GAAP performance measuresadjusted earnings per share based on its measure of adjusted earnings, including adjusted earnings per share, adjusted return on assets, adjusted return on equity, and the efficiency ratio.earnings. The Company views these amounts as important to understanding its performanceoperating trends, particularly due to the impact of accounting standards related to acquisition activity. Several of these measures are used as performance metrics in assessing the achievement of short and long term incentive compensation for management. Analysts also rely on these measures in estimating and evaluating the Company’sCompany's performance. Management also believes that the computation of non-GAAP adjusted earnings and adjusted earnings per share may facilitate the comparison of the Company to other companies in the financial services industry. The Company also adjusts certain equity related measures to exclude intangible assets due to the importance of these measures to the investment community and as componentscommunity.

70

Table of regulatory capital supervision.Contents


Charges related to acquisition activity consist primarily of severance and retention, systems conversion and integration, and professional costs.



RECONCILIATION OF NON-GAAP FINANCIAL MEASURES

The following table summarizes the reconciliation of non-GAAP items recorded for the time periods and dates indicatedpresented:

Three Months Ended September 30, 

    

Nine Months Ended September 30, 

(in thousands)

    

Calculations

    

2021

    

2020

2021

    

2020

Net income

 

  

$

11,028

$

8,402

$

29,533

$

24,604

Non-recurring items:

Gain on sale of securities, net

 

  

 

(1,930)

 

 

(1,980)

 

(1,486)

Loss (gain) on sale of premises and equipment, net

 

  

 

(146)

 

 

(137)

 

90

Loss on other real estate owned

 

  

 

 

335

 

(11)

 

366

Loss on debt extinguishment

1,768

1,768

1,351

Acquisition, conversion and other expenses

 

  

 

318

 

691

 

1,759

 

952

Income tax expense (1)

 

  

 

(2)

 

(245)

 

(332)

 

(304)

Total non-recurring items

8

781

1,067

969

Total adjusted income(2)

 

(A)

$

11,036

$

9,183

$

30,600

$

25,573

Net interest income

 

(B)

$

25,582

$

24,665

$

71,758

$

73,818

Plus: Non-interest income

 

  

 

11,350

 

10,102

 

31,103

 

28,233

Total Revenue

 

  

 

36,932

 

34,767

 

102,861

 

102,051

Gain on sale of securities, net

 

  

 

(1,930)

 

���

 

(1,980)

 

(1,486)

Total adjusted revenue(2)

 

(C)

$

35,002

$

34,767

$

100,881

$

100,565

Total non-interest expense

 

  

$

23,372

$

22,419

$

67,587

$

67,044

Non-recurring expenses:

(Loss) gain on sale of premises and equipment, net

 

  

 

146

 

 

137

 

(90)

Loss on other real estate owned

 

  

 

 

(335)

 

11

 

(366)

Loss on debt extinguishment

(1,768)

(1,768)

(1,351)

Acquisition, conversion and other expenses

 

  

 

(318)

 

(691)

 

(1,759)

 

(952)

Total non-recurring expenses

(1,940)

(1,026)

(3,379)

(2,759)

Adjusted non-interest expense(2)

 

(D)

$

21,432

$

21,393

$

64,208

$

64,285

Total revenue

36,932

34,767

102,861

102,051

Total non-interest expense

23,372

22,419

67,587

67,044

Pre-tax, pre-provision net revenue

$

13,560

$

12,348

$

35,274

$

35,007

Adjusted revenue(2)

35,002

34,767

100,881

100,565

Adjusted non-interest expense(2)

21,432

21,393

64,208

64,285

Adjusted pre-tax, pre-provision net revenue(2)

$

13,570

$

13,374

$

36,673

$

36,280

(in millions)

 

  

 

  

 

  

 

  

 

  

Average earning assets

 

(E)

$

3,412

$

3,444

$

3,386

$

3,392

Average paycheck protection program (PPP) loans

(R)

46

132

63

79

Average earning assets, excluding PPP loans

(S)

3,366

3,312

3,323

3,313

Average assets

 

(F)

 

3,764

 

3,814

 

3,743

 

3,763

Average shareholders' equity(8)

 

(G)

 

421

 

405

 

414

 

406

Average tangible shareholders' equity(2)(3)(8)

 

(H)

 

295

 

278

 

287

 

278

Tangible shareholders' equity, period-end(2)(3)(8)

 

(I)

 

292

 

272

 

292

 

272

Tangible assets, period-end(2)(3)(8)

 

(J)

 

3,612

 

3,734

 

3,612

 

3,734

71

Table of Contents

Three Months Ended September 30, 

    

Nine Months Ended September 30, 

Calculations

2021

2020

2021

2020

(in thousands)

 

  

 

  

 

  

 

  

 

  

Common shares outstanding, period-end

 

(K)

 

14,987

 

14,929

 

14,987

 

14,929

Average diluted shares outstanding

 

(L)

 

15,051

 

15,103

 

15,035

 

15,382

Adjusted earnings per share, diluted(2)

 

(A/L)

$

0.73

$

0.61

$

2.04

$

1.66

Tangible book value per share, period-end(2)(8)

 

(I/K)

 

19.48

 

18.21

 

19.48

 

18.21

Securities adjustment, net of tax(1)(4)

 

(M)

 

4,398

 

11,681

 

4,398

 

11,681

Tangible book value per share, excluding securities adjustment(2)(4)(8)

 

(I+M)/K

 

19.19

 

17.42

 

19.19

 

17.42

Total tangible shareholders' equity/total tangible assets(2)(8)

 

(I/J)

 

8.08

 

7.28

 

8.08

 

7.28

Performance ratios(5)

Return on assets

  

1.16

%  

0.88

1.05

%  

0.87

%

Adjusted return on assets(2)

(A/F)

1.16

0.96

1.09

0.91

Pre-tax, pre-provision return on assets

1.43

1.29

1.26

1.24

Adjusted pre-tax, pre-provision return on assets (2)

(U/F)

1.43

1.39

1.31

1.29

Return on equity(8)

  

10.38

8.25

9.54

8.10

Adjusted return on equity(2)(8)

(A/G)

10.39

9.02

9.98

8.42

Return on tangible equity(8)

15.08

12.32

14.01

12.10

Adjusted return on tangible equity(1)(2)(8)

(A+Q)/H

15.09

13.44

14.50

12.57

Efficiency ratio(2)(6)

(D-O-Q)/(C+N)

59.18

59.47

61.48

61.62

Net interest margin

(B+P)/E

3.02

2.90

2.88

2.95

Adjusted net interest margin(2)(7)

(B+P-T)/S

2.75

2.89

2.73

2.94

Supplementary data (in thousands)

  

  

  

  

  

Taxable equivalent adjustment for efficiency ratio

(N)

$

576

$

570

$

1,757

$

1,395

Franchise taxes included in non-interest expense

(O)

143

121

396

360

Tax equivalent adjustment for net interest margin

(P)

421

416

1,284

1,041

Intangible amortization

(Q)

233

256

707

768

Interest and fees on PPP loans

(T)

2,690

1,052

5,058

1,921

BAR HARBOR BANKSHARES
RECONCILIATION OF NON-GAAP FINANCIAL MEASURES AND SUPPLEMENTARY DATA- UNAUDITED
   Three Months Ended September 30, Nine Months Ended September 30,
(in thousands)  2017 2016 2017 2016
Net income  $8,617
 $3,632
 $19,386
 $12,349
Adj: Security Gains  (19) (1,354) (19) (4,489)
Adj: Loss on sale of fixed assets, net  (1) 216
 94
 216
Adj: Acquisition expense  346
 320
 5,917
 812
Adj: Income taxes (37.57% in 2017, 35.0% in 2016)  (122) 286
 (2,251) 1,211
Total adjusted income (4)(A) $8,821
 $3,100
 $23,127
 $10,099
          
Net-interest income(B) $23,478
 $10,999
 $68,659
 $33,717
Plus: Non-interest income  6,960
 3,372
 19,465
 10,314
Total Revenue  30,438
 14,371
 88,124
 44,031
Adj: Net security gains  (19) (1,354) (19) (4,489)
Total adjusted revenue (4)(C) $30,419
 $13,017
 $88,105
 $39,542
          
Total non-interest expense  $17,586
 $8,750
 $58,463
 $25,478
Less: Acquisition expense  (346) (320) (5,917) (812)
Adjusted non-interest expense (4)                                    (D) $17,240
 $8,430
 $52,546
 $24,666
          
(in millions)       
  
Total average earning assets(E) $3,157
 $1,610
 $3,138
 $1,577
Total average assets                                                (F) 3,453
 1,690
 3,444
 1,653
Total average shareholders' equity                         (G) 354
 165
 349
 162
Total average tangible shareholders' equity(H) 244
 160
 242
 157
Total tangible shareholders' equity, period-end (1)(I) 244
 159
 244
 159
Total tangible assets, period-end (1)(J) 3,367
 1,713
 3,367
 1,713
          
(in thousands)         
Total common shares outstanding, period-end(K) 15,432
 9,084
 15,432
 9,084
Average diluted shares outstanding(L) 15,511
 9,162
 15,204
 9,138
          
Adjusted earnings per share, diluted(A/L) $0.57
 $0.34
 $1.52
 $1.11
Tangible book value per share, period-end(I/K) 15.84
 17.51
 15.84
 17.51
Total tangible shareholders' equity/total tangible assets(H/J) 7.26
 9.29
 7.26
 9.29
          
Performance ratios (2)       
  
GAAP return on assets  0.99% 0.86% 0.75% 1.00%
Adjusted return on assets (4)(A/F) 1.01
 0.73
 0.90
 0.82
GAAP return on equity   9.67
 8.78
 7.43
 10.20
Adjusted return on equity (4)(A/G) 9.90
 7.49
 8.86
 8.34
Adjusted return on tangible equity (3) (4)(A/I) 14.51
 7.75
 12.98
 8.88
Efficiency ratio (4)(5)(D-N-P)/(C+M) 53.59
 61.24
 56.44
 59.34
Net interest margin(B+O)/E 3.06
 2.84
 3.13
 2.90

Supplementary data (in thousands)
         
Taxable equivalent adjustment for efficiency ratio(M) $1,107
 $434
 $3,269
 $1,061
Franchise taxes included in non-interest expense(N) 154
 36
 438
 103
Tax equivalent adjustment for net interest margin(O) 878
 168
 2,568
 528
Intangible amortization(P) 189
 157
 534
 471

(1)Total tangibleAssumes a marginal tax rate of 23.71% for 2021 and the fourth quarter of 2020 and 23.87% for the first three quarters of 2020.
(2)Non-GAAP financial measure.
(3)Tangible shareholders' equity is computed by taking total shareholders' equity less the intangible assets at period-end. Total tangibleTangible assets is computed by taking total assets less the intangible assets at period-end.
(4)Securities adjustment, net of tax represents the total unrealized loss on available-for-sale securities recorded on the Company's consolidated balance sheets within total common shareholders' equity.
(2)(5)RatiosAll performance ratios are annualized and based on average balance sheet amounts, where applicable. Quarterly data may not sum to year-to-date data due  to rounding.                                        
(6)
(3)Adjusted return on tangible equity is computed by dividing the total core income adjusted for the tax-effected amortization of intangible assets, assuming a marginal rate of 37.57% in 2017 and 35.0% in 2016, by tangible equity.            
(4)Non-GAAP financial measure.                                        
(5)Efficiency ratio is computed by dividing total core tangible non-interest expense net of franchise taxes and intangible amortization divided by the sum of total net interest incomecore revenue on a fully taxable equivalent basis and total core non-interest income.  The Company uses this non-GAAP measure to provide important information about its operating efficiency.    basis.

(7)Adjusted net interest margin excludes Paycheck Protection Program loans.
(8)Prior period has been revised, see Note 1 Basis of Presentation – Revision of Previously Issued Financial Statement.


72

THIRD QUARTER

FINANCIAL SUMMARY


The Company reported third quarter 20172021 net income of $8.6$11.0 million or 56 cents$0.73 per share.diluted share, up from $8.4 million or $0.56 per diluted share in the same quarter of 2020.  Adjusted earnings totaled $8.8(non-GAAP) were also $11.0 million or 57 cents$0.73 per diluted share in the third quarter of 2021, compared to $9.2 million, or $0.61 per share representing a for the same period of 2020.    

THIRD QUARTER HIGHLIGHTS (ratios compared to the third quarter 2020)

1.16% return on assets, for both GAAP and non-GAAP measures
10% annualized commercial loan growth, excluding Paycheck Protection Program (PPP) loans
32% annualized core deposit growth
3.02% net interest margin (NIM) compared to 2.90%
15% increase in fee income, excluding mortgage banking income and security gains
Bar Harbor Bank & Trust named as America’s Best Bank in Maine by Newsweek Magazine

Adjusted earnings per share (non-GAAP) in the third quarter 2021 grew 20% over the prior quarter.same quarter of 2020.  The increase reflects the strength of the Company's now expanded footprint and seasoned team. As discussed in an earlier section, the Company uses the non-GAAP measure of adjusted earnings, and related metrics, to evaluate the results of its operations.


Third quarter financial highlights include the following (comparisons are to prior quarter unless otherwise stated):
1.01% core return on assets (non-GAAP measure)
6% increase in non-interest income
22% annualized commercial loan growth
11% annualized total deposit growth
54% efficiency ratio (non-GAAP measure)
9.90% core return on equity (non-GAAP measure)

Third quarter 2017 results demonstrate the Company’s stability in its business model while now having the platform for even stronger organic growth. The Company’s growth in profitability was reflected in its key performance metrics as return on assets improved to 0.99% and adjusted return on assets achieved 1.01%. Operational improvements and significant positive operating leverage resulted in a 54% efficiency ratio for the third quarter. quarter was 1.16% compared to 0.96% in the third quarter of 2020, evidencing continued execution of strategies that balance growth with earnings.  This is indicative of the strength in the Company’s core businesses and the results of strategic initiatives.   The momentum seen in each area affords the Company flexibility with diverse revenue streams to support operations, even in uncertain economic environments.

While fee income and efficiency improvements contributed to increased profitability, the quarterly results also benefited from a 13 basis point expansion in the margin to 2.99% compared with 2.86% in the second quarter 2021 on a normalized basis (excluding PPP and excess cash effects).  This improvement is a direct result of increased core deposit funding as the Company gained market share and reduced reliance on wholesale borrowings.  As of September 30, 2021, the Company’s wholesale borrowings as a percentage of funding was 9%, down from 23% in the prior year.

The Company’s commercial teams continue to deliver strong loan growth despite the competitive landscape within its footprint.  Commercial real estate loan growth this quarter was driven by new multi-family residential and light industrial & manufacturing relationships with proven operators.  Risk management remains at the forefront of all that the Company does.  The Company saw yields bottoming out on residential loans this quarter and was able to increase contractual rates at times.  Given the overall interest rate risk position of the balance sheet and this recent rate increase, the Company strategically directed more residential mortgage production onto the balance sheet rather than sell in the secondary market.”

The Company executed another delever and security remix strategy during the third quarter, prepaying $89 million of FHLB borrowings and selling $44 million of credit sensitive municipal and corporate bonds.  The additional purchase of securities was completed subsequent to quarter end.  This transaction is expected to expand the NIM by 12 basis points and will be accretive to earnings by $0.02 on a quarterly basis.

The Company continues to position itsbuild long term shareholder value while providing a favorable dividend rate relative to other community banks.  The Company’s return on equity for the third quarter rose to 10.38% from 8.25% in the same quarter of 2020.  The Company remains committed to underwriting standards as evidenced by further improvement in past-due accounts, non-accruals and a near zero net-charge-off ratio.

The Company was named by Newsweek Magazine as one of "America's Best Banks."  Best Bank winners were selected from over 2,500 financial institutions and assessed on more than 30 separate factors including the overall health of the bank, customer service performance and features, digital and branch presence, account and loan options, interest rate offerings, and fees.

73

COMPARISON OF FINANCIAL CONDITION AT SEPTEMBER 30, 2021 AND DECEMBER 31, 2020

Total assets were $3.7 billion at the end of the third quarter 2021 as well as at year-end 2020.  In the third quarter the Company executed a balance sheet delever and security remix strategy, prepaying $89.0 million of Federal Home Loan Bank advances and selling $43.5 million of securities. The replenishment of those securities is expected to optimize performance,be fulfilled in the fourth quarter 2021.  Total loans decreased $28.7 million from year-end 2020 primarily due to PPP loan forgiveness outpacing 2021 originations by $29.5 million from year-end 2020.  Non-maturity deposits (core deposits) increased $330.2 million from the end of 2020 as is evidenced by strong loan growth and superior credit quality. Additionally,over 800 new accounts were opened during the quarter, continuing a trend of almost 1,000 new accounts per quarter.  The loan to deposit ratio remained flat despite funding significant production during the quarter.


The Company’s commitment to creating shareholder value is reflected in its return on equity and core return on equity ratios. Those ratios arewas 84% at the highest levels inend of the past five quartersthird quarter compared to 88% at year-end 2020.  Asset quality metrics remain strong with an allowance for credit losses to total loans ratio of 0.89% and a coverage ratio to non-accruing loans of 184%, up from 157% as the 10% threshold is approached.of year-end 2020.  Tangible book value continuesper share (non-GAAP) increased to grow towards pre-acquisition levels$19.48 from $18.77 at year-end on strong earnings offset by the impact of the CECL adoption in the first quarter 2021.  

Cash

Total cash and cash equivalents at September 30, 2021 were $341.2 million, compared to $226.0 million at December 31, 2020.  Interest bearing deposits held with other banks totaled $302.1 million at quarter end and $198.4 million at year-end 2020 carrying a yield of 0.15% and 0.11% respectively.  The increase in cash balances reflects the growth in core deposits.

Securities

Securities totaled $555.5 million in the third quarter 2021 and $599.1 million at year-end 2020 representing 15% and 16% of total assets, respectively.  The decrease is primarily due to the security sale of $43.5 million as a part of the balance sheet delever and security remix strategy. In the first nine months of 2021 purchases totaled $123.3 million and were offset by $52.4 million of sales, $103.4 million of maturities, calls and pay-downs of amortizing securities and a $3.8 million reduction in FHLB stock.  Fair value adjustments increased the security portfolio by $7.3 million at the end of the third quarter 2021 and $13.1 million at year-end 2020.  Unrealized gains decreased for the nine months ended September 30, 2021 due to sales and changes in the long-term treasury yield curve.  The weighted average yield of the Company's securities portfolio was 2.82% as of September 30, 2021 compared to 2.96% at year-end 2020.  At the end of the third quarter 2021 securities held by the Company had an average life of 5.1 years and an effective duration of 4.4 years compared to 4.8 years and 4.3 years at the end of 2020, respectively.  

Loans Held For Sale

Held for sale loans decreased to $7.5 million at September 30, 2021 from $24.0 million at December 31, 2020.  The Company sold $28.5 million of residential loan originations in the third quarter 2021 compared with $86.2 million in the same quarter of 2020.  Sales in the nine month period of 2021 totaled $153.9 million and $156.0 million in the comparable period of 2020.  The decrease in sales reflects the Company strategically directing residential loan production to the balance sheet when rates were higher in the quarter.

Loans

Loan balances in the third quarter 2021 were $2.5 billion compared $2.6 billion at year-end 2020.  Commercial loans grew 9% on a year-to-date annualized basis, excluding PPP loans and included 2 new relationships totaling $21.2 million during the third quarter.  Commercial real estate and commercial and industrial loans, excluding PPP, increased 11% and 3% on a year-to-date annualized basis, respectively.  PPP loans totaled $24.2 million at quarter-end, consisting of $24.1 million from 2021 and $145 thousand from 2020, and were $53.8 million at year-end 2020.  COVID loan modifications totaled $4.7 million, down from $68.6 million at year-end, as the majority of modified loans have resumed normal payment schedules.  Total residential loans decreased $74.2 million from year-end 2020, which includes $156.3 million of originations recorded on the balance sheet and $230.5 million of prepayments/amortization.

Allowance for Credit Losses

The allowance for credit losses (ACL) totaled $22.4 million at the end of the third quarter 2021 and $19.0 million at year-end 2020.  The increase is primarily due to the Company’s adoption of CECL as of January 1, 2021, which increased the ACL by $5.2 million and unfunded commitment reserves by $1.6 million.  Since adoption the ACL has decreased due to improved economic forecasts and lower reserves on specific loans offset by changes in loan mix.    

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Net charge offs totaled $434 thousand in the first nine months of 2021, or 0.02% of total average loans, compared to $1.9 million, or 0.07% of total average loans, for the same period of 2020.  Non-accruing loans were $12.2 million, or 0.48% of total loans, at the end of the third quarter 2021 and were $12.2 million or 0.48% of total loans at year-end 2020.  The ratio of accruing past due loans to total loans improved to 0.12% of total loans, decreasing from 0.58% as of December 31, 2020.

Other Assets

Total other assets were $322.4 million at the end of the third quarter 2021 compared to $331.4 million as of December 31, 2020. The decrease is primarily from a $9.7 million decrease in the fair value in customer loan derivatives offset by $2.9 million increase in community limited partnership investments.  Additionally, derivative balances and deferred taxes have been restated for prior periods as described in Note 1 Revision of Previously Issued Financial Statements.

Deposits and Borrowings

Total deposits were $3.0 billion at the end of the third quarter 2021 compared to $2.9 billion at year-end 2020.  Non-maturity deposits increased $330.2 million over the first nine months of 2021, or 20% on an annualized basis due to growth in new accounts with over 2,900 new customer relationships added.  Growth in core deposits during 2021 and the Company believes that can expand even furtherprepayment of $89.0 million in FHLB borrowings resulted in a reduction of wholesale funding as a percentage of total funding to 9% from 18% at year-end 2020.  Time deposits decreased $229.1 million to $469.2 million at quarter-end as $162.3 million of brokered deposits matured in the first nine months of 2021 and were not replaced due to excess liquidity.  Retail time deposits decreased $66.9 million as customers moved funds to transactional accounts upon contractual maturity.  Total borrowings decreased by adhering$85.7 million primarily from the aforementioned delever strategy.  The average cost of deposits was 0.27% in the third quarter of 2021 compared to a disciplined model of balancing growth and profitability.


In October 2017, the Company announced the sale of its insurance business, which will be accretive to tangible equity0.61% in the fourth quarter 2020 and borrowing costs were 2.11% compared to 1.83% for the same periods.  The change in cost of this year. funds reflects the attrition of balances on prepaid or matured borrowings and time deposits.

Derivative Financial Instruments and Other Liabilities

The decisionnotional balance of derivative financial instruments increased to sell$929.9 million at the end of the third quarter 2021 from $876.6 million at year-end 2020.  The increase is principally due to a $50.0 million new hedge on variable rate loans tied to one-month LIBOR.  The net fair value of all derivatives was drivena liability of $2.2 million at the end of the third quarter 2021 compared to liability of $5.5 million at year-end 2020.  The reduction in net derivative fair values reflects the rise in long-term interest rates.  Additionally, derivative balances have been restated for prior periods as described in Note 1 Revision of Previously Issued Financial Statements.

Other liabilities totaled $62.3 million at the end of the third quarter 2021 compared to $75.0 million as of December 31, 2020.  The decrease primarily reflects the $9.7 million reduction in the fair value of customer loan derivatives and a $3.3 million decrease in cash flow and fair value hedges.

Equity

Total equity was $418.4 million, compared with $407.1 million at year-end 2020.  The Company’s book value per share was $27.92 as of September 30, 2021 compared with $27.29 at December 31, 2020.  Equity included net unrealized securities totaling $4.4 million at the end of the third quarter 2021 and $10.0 million at year-end 2020.  Equity was reduced by $5.2 million due to the Company’s focus on its core banking areas and investments that representCECL adoption in the most efficient usefirst quarter 2021.    Additionally, accumulated other comprehensive income has been restated for prior periods as described in Note 1 Revision of capital. Transactions like this along with adhering to its business model will ultimately benefit shareholders and remain consistent with the Company’s brand as a true community bank.


Previously Issued Financial Statements.

COMPARISON OF OPERATING RESULTS FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 20172021 AND 2016


2020

Summary

Results

Net income in 2017 include the Lake Sunapee operations acquired on January 13, 2017. As a result, many measures of revenue, expense, income, and average balances increasedthird quarter 2021 was $11.0 million, or $0.73 per diluted share, compared to prior periods.


As previously noted, the Company uses a non-GAAP measure of adjusted net income to supplement its evaluation of its operating results. Adjusted net income excludes certain amounts not viewed as part of normalized operations. These non-operating items consist primarily of acquisition, conversion, and net gains realized from sales of assets from the Company’s security portfolio. The Company views its acquisition related costs as part of the economic investment for its acquisition.

Third quarter 2017 GAAP net income was$8.4 million, or $0.56 per share, in 2017 comparedthe same quarter of 2020. Net income improved on higher fee income and fees from PPP loans in the quarter.  PPP loan fees contributed $0.13 to $0.40earnings per share in 2016.the third quarter of 2021 and $0.06 in the same period of 2020. Adjusted earnings totaled $11.0 million or $0.73 per share, compared to $9.1 million, or $0.61 per share, in the same

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quarter of 2020.  Non-recurring items (non-GAAP) reduced net income increased to $0.57 per share from $0.34 for these respective periods. Results increased due to expanded operationsby $8 thousand and improved profitability. GAAP results$781 thousand in third quarters of 2021 and 2020, respectively. The Company's return on assets ratio was 1.16% in the current year include charges related tothird quarter of 2021 and 0.88% in the Lake Sunapee Bank Group acquisition,same quarter of 2020.  Adjusted return on assets (non-GAAP) was 1.16% and prior year0.96% for the third quarters of 2021 and 2020, respectively evidencing continued execution of strategic initiatives that balance growth and earnings

The Company reported year-to-date 2021 net income benefited from gains from sales of securities.


On a year-to-date basis, GAAP net income$29.5 million or $1.96 per diluted share, was $1.27compared with $24.6 million or $1.60 per diluted share in 2017 compared to $1.35 in 2016.the same period of 2020.  Adjusted earnings increased to $1.52$30.6 million, or $2.04 per diluted share from $1.11 comparedwith$25.6million,or$1.66per diluted share,for these therespectiveperiods. These changes largely reflectedNon-recurring items (non-GAAP) in the first nine months reduced net income by $1.1 million and $969 thousand in 2021 and 2020, respectively. The return on assets ratio year-to-date2021was1.05%comparedto0.87%intheprioryear and adjusted return on assets was 1.09% during the first nine months of 2021 and 0.91% in the same period of 2020.  Thesechangeslargelyreflectthesame factors and trends discussed above that drove third quarter earnings growth.

Adjusted return on equitynet income and adjusted return on assets improved on a year-over-year basis while respective GAAP basis performance metrics variedaverage assets.

Net Interest Income

Net interest income was $25.6 million in the past five quarters depending upon acquisition related chargesthird quarter 2021 compared with $24.7 million in the same quarter of 2020. Net interest margin was 3.02% compared to 2.90% in third quarter of 2020. Acceleration of PPP loan fee amortization due to forgiveness contributed 28 basis points to NIM in the third quarter 2021 and gains1 basis point in the same period of 2020. Interest-bearing cash balances, held mostly at the Federal Reserve Bank, reduced NIM by 26 basis points in the quarter and 8 basis points in the third quarter 2020. The yield on security sales.earning assets totaled 3.41% compared to 3.57% in the third quarter 2020. Excluding the impact of PPP and excess cash, the yield on earning assets totaled 3.42% and 3.67% for the same periods. The Company’s profitability has benefitedyield on loans was 3.98% in the third quarter 2021and 3.81% in the third quarter of 2020. Excluding PPP loans the yield on loans was 3.62% in the third quarter of 2021, and 3.83% in the third quarter of 2020. Costs of funds decreased to 0.50% from both a higher non-interest0.82% in the third quarter 2020 due to increased core deposit levels, lower deposit rates and reduced wholesale borrowings.

For the first nine months of 2021, net interest income as well as improved efficiency. Operational enhancementswas $71.8 million compared with $73.9 million in 2017 are reflectedthe same period of 2020.  Net interest margin for the nine months ended was 2.88% in the third quarter 2021 compared to 2.95% in the third quarter of 2020. The decrease in net interest income and NIM was driven by rate compression triggered by the pandemic, combined with growth in the Company’s efficiency ratio trend, which startedinterest-bearing cash balances. PPP loan accretion in 2021 helped to offset interest rate compression on yields.  Costs of funds for the firstnine months ended September 30, 2021 decreased to 0.63% from 1.02% due to increased core deposit levels, lower deposit rates and reduced wholesale borrowings.

Provision for Credit Losses

The provision for credit losses (the “provision”) for the quarter at 62%, but then improvedwas a benefit of $174 thousand, compared to 55% in second quarter and 54%an expense of $1.8 million in the third quarter. The efficiency ratio isquarter of 2020.  For the first nine months of 2021, the provision was a non-GAAP financial measure that compares adjusted expenses and revenuesbenefit of $1.4 million compared to assess how well the Company is managing its costs. Higher ratios in prior periods represent gradual investments made in infrastructure and key employees to support operations across a broader footprint and larger revenue producing institution.


The Company continues to focus on non-interest income as the key to higher profitability and is currentlyan expense of $4.3 million in the processsame period of expanding treasury management services for customers. A roll-out2020.  The benefits experienced in the periods of enhanced product offerings is anticipated by2021 are attributable to continued strong credit quality and improving economic forecasts.  

Non-Interest Income

Non-interest income in the endthird quarter 2021 was $11.4 million, compared to $10.1 million in the same quarter of 2017. The Company views investments in fee income businesses such as trust, secondary marketing mortgage operations, and treasury management services as vehicles to expand return on assets.


Net Interest Income
Third quarter net interest income increased year-over-year by $12.5 million to $23.5 million.2020. The increase was driven bydue to higher customer service fees, wealth management income, and a $1.5 billion increase in average earning assets, which includes organic growth and benefit of the Lake Sunapee Bank Group acquisition in the first quarter 2017. Net interest margin increased to 3.06%gain on securities sales. Customer service fees were $3.5 million in the third quarter compared to 2.84%$2.9 million in the same period of 2020. The increase is due to over 800 new accounts that were opened during the quarter and a higher volume of customer activity and transactions. Wealth management income increased 10% over the same quarter of 2016. Net interest spread increased 19 basis points reflecting higher yields from loans2020 to $3.9 million with assets under management of $2.4 billion compared to $2.1 billion in the same period of 2020. The Company sold securities resulting in a $1.9 million gain as part of its delever and securities as well as lower cost of interest bearing deposits acquired from Lake Sunapee Bank. Net interest margin in 2017 also benefited from purchased loan accretion totaling $1.0security remix strategy. Mortgage banking activities contributed $850 thousand, compared to $2.6 million in the third quarter. These improvements were partially offset by higher wholesale funding costs resulting from fed fund rate hikes and the Company’s extensionsame period of funding maturities. Increases in overall cost2020. The Company took advantage of funds are expected to have a negative impact on net interest marginvolatility in the near-term asyield curve in the third quarter and put residential mortgages on the balance sheet when rates increasewere higher and sold loans in the Company employs strategies to mitigate the impact.

Forsecondary market when rates were low.

Non-interest income for the first nine months of the year, net interest income increased year2021 was $31.1 million compared to year by $34.9 million to $68.7 million. The increase primarily reflects the inclusion of Lake Sunapee Bank’s operations, and purchased loan accretion of $2.9 million during 2017.


Non-Interest Income
Third quarter non-interest income increased to $7.0 million from $3.3$28.2 million in the same quarter of 2016. Non-interestperiod in 2020. The increase reflects a 13% increase in wealth management income, excluding15% increase in customer service fees, 18% increase in mortgage banking income and gains on securities, increased $4.9 million from the same quarter in 2016. Trust and investment management fee revenue added $2.1 million,securities; all of which is principally due to the addition of Charter Trust Company (now a wholly owned subsidiary of the Bank) as part of the Lake Sunapee Bank Group acquisition. Customer service fees increased $1.9 million compared to the prior quarter also as a result of the acquisition given the broader customer deposit base and higher number of ATM transactions.

Non-interest income for the nine months of 2017 increased year-over-year by $9.2 million to $19.5 million. The increase in trust and customer service fee income for the nine month period iswere driven by the same reasons as the quarterly period.  However, income from security gains totaled $4.5 in 2016.


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Loan Loss Provision
The provision for loan losses

Non-Interest Expense

Non-interest expense was $23.4 million in the third quarter 2017 increased to $660 thousand2021 from $139 thousand for the same quarter in 2016. On a year-to-date basis, the loan loss provision was $2.2$22.4 million in 2017 compared to $754 thousand in 2016. The amount of the provision exceeded net charge-offs in all periods shown, as the amount of the allowance has risen gradually based on loan portfolio growth and offset in part by the ongoing improvement in loan performance and credit quality. The provision for loan losses is a charge to earnings in an amount sufficient to maintain the allowance for loan losses at a level deemed adequate by the Company as an estimate of the probable and estimable loan losses in the portfolio as of period-end. The level of the allowance is a critical accounting estimate, which is subject to uncertainty. The level of the allowance is included in the discussion of financial condition.



Non-Interest Expense
Third quarter non-interest expense increased to $17.6 million from $8.7 million for the same quarter of 2016. Salary and employee benefit costs increased by $4.8 million compared with the third quarter of 2016 principally due to the Lake Sunapee Bank Group acquisition. Full time equivalent staff totaled 425 in the third quarter 2017 compared to 200 in the same quarter of 2016. Salary2020. Salaries and employee benefit costsbenefits expense decreased during the second and third quarters of 2017 reflecting a positive trend of disciplined cost control and realized cost saves with the acquisition. Occupancy expenses increased $1.7to $11.7 million as compared to $11.8 million in the thirdsame quarter of 2016 due2020, reflecting full-time equivalents of 428 compared to costs of operating additional branches from the acquisition. Acquisition related expenses457 in the third quarter of 2017 are consistent with2020. Non-core expenses (non-GAAP) in the third quarter 2021 totaled $1.9 million and were mostly made up of the $1.8 million prepayment penalty on debt extinguishment. In the same quarter of 2016. Acquisition2020 non-core expenses (non-GAAP) totaled $1.0 million and included costs peakedto consolidate the Company’s wealth management systems. The efficiency ratio for the third quarter was 59.18% compared to 59.47% in the first quartersame period of 20172020. Excluding the effects of PPP the efficiency ratio was 63.35% and then curtailed in each subsequent quarter as severance and system conversion costs were finalized.

On a year-to-date basis 2017 non-interest expense increased to $58.5 million from $25.5 million in 2016. Acquisition related expenses61.30% for the same respective periods.

For the first nine months of 2017 totaled $5.9 compared to $812 thousand2021, non-interest expense was $67.6 million and $67.0 million in the same period of 2016. All other increases2020. The Company’s year-to-date efficiency ratio was 61.48% in non-interest2021 compared to 61.62% in 2020 which reflects managements disciplined approach to expense management as revenue grows and the above noted expense initiatives. Non-recurring expenses (non-GAAP) in the first nine months of 2021 totaled $3.3 million and $2.8 million in the same period of 2020. In the first nine months of 2021 these expenses mostly consisted of workforce reduction charges and loss on debt extinguishment and in 2020 primarily consisted of a year-to-date basis are consistent with quarterly trends.


loss on debt extinguishment and costs to consolidate wealth management systems.

Income Tax Expense

The third quarter effective tax was 29.3%rate decreased to 19.7% in the third quarter 20172021 compared to 33.7%with 20.3% in the same quarter of 2016. The decrease in the quarterly rate is due 2017 tax benefits realized from filing amended tax returns. The rate in 2016 was also2020, reflecting higher due to having a lower proportion of tax-advantagepre-tax income to total income resulting from security gains. On a year to date basis, the 2017 rate decreased to 29.4% from 30.6% in the prior year reflecting the same factors as the quarterly comparison.



COMPARISON OF FINANCIAL CONDITION AT SEPTEMBER 30, 2017 AND DECEMBER 31, 2016

Summary
Total assets increased to $3.5 billion as of September 30, 2017 from $1.8 billion at year end 2016. All major categories of assets, liabilities and equity increased due to the acquired balances which as of the acquisition date included $1.2 billion in loans, $155.6 million in securities, $1.2 billion in deposits, and $182 million in equity as a result of the issuance of common shares of the Company to Lake Sunapee shareholders. The loan to deposit ratio improved to 107% from 108% at year-end 2016 as loan growth was funded by seasonally higher deposit balances.
The Company's book value per share increased to $22.90 from $17.19 at the end of 2016 primarily due to the shares issued and net assets acquired in the first quarter 2017 in connection with the acquisition. Conversely, the Company’s tangible book value (non-GAAP measure) decreased to $15.84 from $16.61 at year-end 2016. The dilution is primarily due to the net impact of the additional shares issued with acquisition and goodwill recorded as part of the transaction. However, the Company has a strong quarterly trend in GAAP net income, which added tangible book value per share of $0.57, $0.43, and $0.27 during the third, second, and first quarters, respectively.

Asset quality continues to improve as the ratio of non-accruing loans to total loans decreased to 0.28% in the third quarter from 0.58% at year-end 2016. The ratio of net charge-offs to total loans remain close to zero in past five quarters ending the third quarter at 2 basis points.

Securities
Total securities increased $201.4 million which includes securities acquired from Lake Sunapee Bank Group and $146.2 million in securities purchased during the nine months ended September 30, 2017. Securities purchased included $119.2 million of mortgage-backed securities guaranteed by US Government-sponsored enterprises, $19.6 million of corporate bonds, and $7.4 million of FHLBB stock. The increase wasbeing offset by $105.5 millionthe proportional amounts of maturities, calls and pay-downs of amortizing securities. The securities portfolio continues to be a strong source of liquidity for the Company and is comprised primarily of highly rated mortgage-backed securities guaranteed by U.S. Government-sponsored enterprises and U.S. Government agencies, obligations of state and political subdivisions thereof and FHLBB stock. The Company continues to evaluate the securities portfolio in response to established asset/liability management objectives, changing market conditions and the level of interest rate risk to which we are exposed.

Loans
The acquisition of Lake Sunapee Bank Group increased the legal lending limit of the Bank and expanded the lending area across all three of the northern New England states which resulted in organic growth in the loan portfolio. Excluding the impact of the acquired balances, total loans increased during the nine month period of 2017 by 12.2% on an annualized basis with 20.5% annualized growth in commercial loans led mostly by commercial and industrial loans.

Allowance for loan losses
During the nine months ending September 30, 2017, the allowance for loan losses increased $1.5 million to $11.9 million, which is due to the increase in business activity loans and lower charge-off activity reflecting improved asset quality. The determination of the allowance for loan losses is a critical accounting estimate. The Company considers the allowance for loan losses appropriate to cover probable losses which can be reasonably estimated in the loan portfolio as of the balance sheet date. Under accounting standards for business combinations, acquired loans are recorded at fair value with no loan loss allowance on the date of acquisition. An allowance for loan loss is recorded by the Company for the emergence of new probable and estimable losses on acquired loans which were not impaired as of the acquisition date. Because of the accounting for acquired loans, some measures of the loan loss allowance are not comparable to periods prior to the acquisition date or to peer measures.

Deposits
Excluding the impact of acquired balances, total deposits increased 10.6% on annualized basis as of September 30, 2017 when compared to December 31, 2016. Core deposits are still the primary funding source for loan growth and the Company took on additional FHLBB borrowings in order to fund additional loan growth in the period. Historically, the Bank's deposit market area has been seasonal, with lower deposits in the winter and spring months and higher deposits in the summer and autumn months; however, this seasonality is less present in the expanded deposit market areas of New Hampshire and Vermont.

Borrowings
Total borrowings increased by $232.0 million during the first nine months of 2017, of which $175.7 million was assumed from the acquisition. Excluding the impact of the acquisition, the increase was mostly in short term FHLBB advances to fund loans and investments during the first half of the year.

Equity
Excluding the $181.9 million of common stock of the Company issued to Lake Sunapee shareholders, total equity increased by $14.8 million, or 9.4% during 2017. Accumulated other comprehensive loss decreased by $2.9 million primarily due to an improvement in net after-tax fair value of available for sale securities. The improvement is related to an overall decrease in market yields since year-end 2016.

The Company evaluates changes in tangible book value, a non-GAAP financial measure which is a commonly considered valuation metric used by the investment community and which parallels some regulatory capital measures. Tangible book value increased to $244.4 million as of September 30, 2017 from $151.0 million at year-end 2016. The increase is due to the share issuance offset by goodwill and other intangible assets recorded for the Lake Sunapee Bank Group acquisition in the first quarter 2017. The Lake Sunapee Bank Group acquisition resulted in a $95.3 million increase in goodwill. The Company’s ratio of tangible equity to tangible assets stood at 7.26% at the end of the third quarter, compared to 8.65% at the end of 2016.

The Company and the Bank remained well capitalized under regulatory guidelines at period-end.


tax-advantaged revenue.

Liquidity and Cash Flows

Liquidity is measured by the Company’sCompany's ability to meet short-term cash needs at a reasonable cost or minimal loss. The Company seeks to obtain favorable sources of liabilities and to maintain prudent levels of liquid assets in order to satisfy varied liquidity demands. Besides serving as a funding source for maturing obligations, liquidity provides flexibility in responding to customer initiatedcustomer-initiated needs. Many factors affect the Company’sCompany's ability to meet liquidity needs,


including variations in the markets served by its network of offices, its mix of assets and liabilities, reputation and credit standing in the marketplace, and general economic conditions.

The Bank actively manages its liquidity position through target ratios established under its Asset LiabilityAsset-Liability Management Policy. Continual monitoring of these ratios, bothby using historical data and through forecasts under multiple rate and stress scenarios, allows the Bank to employ strategies necessary to maintain adequate liquidity. The Bank's policy is to maintain a liquidity position of at least 4% of total assets. A portion of the Bank’sBank's deposit base has been historically seasonal in nature, with balances typically declining in the winter months through late spring, during which period the Bank’sBank's liquidity position tightens.


The Bank uses a basic surplus model to measure its liquidity over 30 and 90-day time horizons. The relationship between liquid assets and short-term liabilities that are vulnerable to non-replacement are routinely monitored. The Bank’s policy is to maintain aCompany’s liquidity position remains strong. During the quarter we initiated pandemic-specific liquidity stress tests to analyze potential impacts from payment deferrals, unanticipated use of at least 4%committed lines of total assets.credit, as well as the possibility of required servicer advances on sold loans.  At September 30, 2017,2021, available same-day liquidity as measured by the basic surplus model, was 6.6% over the 30-day horizon and 10.8% over the 90-day horizon.


The Bank also hadtotaled approximately $1.3 billion, including cash, borrowing capacity to borrow funds on a secured basis utilizing the Borrower in Custody programat FHLB and the Federal Reserve Discount Window and various lines of credit. Additional sources of liquidity include cash flows from operations, wholesale deposits, cash flow from the Company's amortizing securities and loan portfolios.  The Company had unused borrowing capacity at the FHLB of $467.2 million, unused borrowing capacity at the Federal Reserve Bank of Boston (the “FRB”). At September 30, 2017, the Bank’s available secured line$72.0 million and unused lines of credit at the FRB stood at $114.6totaling $51.0 million, or 3.3% of the Bank’s totalin addition to over $200.0 million in unencumbered, liquid investment portfolio assets.  The Bank also has access to the national brokered deposit market, and has used this funding source to bolster its on balance sheet liquidity position.

The Bank maintains a liquidity contingency plan approved by the Bank’sBank's Board of Directors. This plan addresses the steps that would be taken in the event of a liquidity crisis, and identifies other sources of liquidity available to the Company. Company management believes that the level of liquidity is sufficient to meet current and future funding requirements. However, changes in economic conditions, including consumer savings habits and availability or access to the brokered deposit market could potentially have a significant impact on the Company’sCompany's liquidity position.


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Capital Resources

Please see the “Equity” section of the Comparison of Financial Condition for a discussion of shareholders’ equity together with the Note 6 Capital Ratios and Shareholders’ Equity in the consolidated financial statements. Additional information about regulatory capital is contained in the notes to the consolidated financial statements and in the Company's most recent Form 10-K.

The Company’s principal cash requirement is the payment of dividends on our common stock, as and when declared by the Company's Board of Directors.  Dividends to shareholders in the aggregate amount of $10.5 million and $10.1 million for the nine months ended September 30, 2021 and 2020, respectively.  All dividends declared and distributed by the Company will be in compliance with applicable state corporate law and regulatory requirements.

Off-Balance Sheet Arrangements

The Company is, from time to time, a party to certain off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on the Company's financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources, that may be material to investors.

The Company’s off-balance sheet arrangements are limited to standby letters of credit whereby the Bank guarantees the obligations or performance of certain customers. These letters of credit are sometimes issued in support of third-party debt. The risk involved in issuing standby letters of credit is essentially the same as the credit risk involved in extending loan facilities to customers, and they are subject to the same origination, portfolio maintenance and management procedures in effect to monitor other credit products. The amount of collateral obtained, if deemed necessary by the Bank upon issuance of a standby letter of credit, is based upon management's credit evaluation of the customer.

The Company’s off-balance sheet arrangements have not changed materially since previously reported in our Annual Report on Form 10-K for the year ended December 31, 2020.

APPLICATION OF CRITICAL ACCOUNTING POLICIES AND ACCOUNTING ESTIMATES, AND RECENT ACCOUNTING PRONOUNCEMENTS

The Company’s significant accounting policies are described in Note 1 to the consolidated financial statements in this Form 10-Q and in the most recent Form 10-K. Please see those policies in conjunction with this discussion. The accounting and reporting policies followed by the Company conform, in all material respects, to accounting principles generally accepted in the United States and to general practices within the financial services industry. The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. While the Company bases estimates on historical experience, current information and other factors deemed to be relevant, actual results could differ from those estimates.


The SEC defines “critical accounting policies” as those that require application of management’s most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain and may change in future periods. Please see those policies in conjunction with this discussion.

Management believes that the following policies would be considered critical under the SEC’s definition:


Allowance for Loan Losses: The allowance for loan losses represents probable credit losses that are inherent in the loan portfolio at the financial statement date and which may be estimated. Management uses historical information, as well as current economic data, to assess the adequacy of the allowance for loan losses as it is affected by changing economic conditions and various external factors, which may impact the portfolio in ways currently unforeseen. Although management believes that it uses appropriate available information to establish the allowance for loan losses, future additions to the allowance may be necessary if certain future events occur that cause actual results to differ from the assumptions used in making the evaluation. Conditions in the local economy and real estate values could require the Company to increase provisions for loan losses, which would negatively impact earnings.

Acquired Loans: Loans that the Company acquired in business combinations are initially recorded at fair value with no carryover of the related allowance for credit losses. Determining the fair value of the loans involves estimating the

amount and timing of principal and interest cash flows initially expected to be collected on the loans and discounting those cash flows at an appropriate market rate of interest. Going forward, the Company continues to evaluate reasonableness of expectations for the timing and the amount of cash to be collected. Subsequent decreases in expected cash flows may result in changes in the amortization or accretion of fair market value adjustments, and in some cases may result in the loan being considered impaired. For collateral dependent loans with deteriorated credit quality, the Company estimates the fair value of the underlying collateral of the loans. These values are discounted using market derived rates of return, with consideration given to the period of time and costs associated with the foreclosure and disposition of the collateral.

Income Taxes: Significant management judgment is required in determining income tax expense and deferred tax assets and liabilities. The Company uses the asset and liability method of accounting for income taxes in which deferred tax assets and liabilities are established for the temporary differences between the financial reporting basis and the tax basis ofhas identified the Company's assets and liabilities. The realizationmost critical accounting policies as related to:

Allowance for Credit Losses
Income Taxes
Goodwill and Identifiable Intangible Assets
Fair Value of Financial Instruments

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Goodwill and Identifiable Intangible Assets: Goodwill and identifiable intangible assets are recorded as a result of business acquisitions and combinations. These assets are evaluated for impairment annually or whenever events or changes in circumstances indicate the carrying value of these assets may not be recoverable. When these assets are evaluated for impairment, if the carrying amount exceeds fair value, an impairment charge is recorded to income. The fair value is based on observable market prices, when practicable. Other valuation techniques may be used when market prices are unavailable, including estimated discounted cash flows and analysis of market pricing multiples. These types of analyses contain uncertainties because they require management to make assumptions and to apply judgment to estimate industry economic factors and the profitability of future business strategies. In the event of future changes in fair value, the Company may be exposed to an impairment charge that could be material.

Determination of Other-Than-Temporary Impairment of Securities: The Company evaluates debt and equity securities within the Company's available for sale for other-than-temporary impairment (OTTI), at least quarterly. If the fair value of a debt security is below the amortized cost basis of the security, OTTI is required to be recognized if any of the following are met: (1) the Company intends to sell the security; (2) it is more likely than not that the Company will be required to sell the security before recovery of its amortized cost basis; or (3) for debt securities, the present value of expected cash flows is not sufficient to recover the entire amortized cost basis. For all impaired debt securities that the Company intends to sell, or more likely than not will be required to sell, the full amount of the loss is recognized as OTTI through earnings. Credit-related OTTI for all other impaired debt securities is recognized through earnings. Noncredit related OTTI for such debt securities is recognized in other comprehensive income, net of applicable taxes. In evaluating its marketable equity securities portfolios for OTTI, the Company considers its intent and ability to hold an equity security to recovery of its cost basis in addition to various other factors, including the length of time and the extent to which the fair value has been less than cost and the financial condition and near term prospects of the issuer. Any OTTI on marketable equity securities is recognized immediately through earnings. Should actual factors and conditions differ materially from those expected by management, the actual realization of gains or losses on investment securities could differ materially from the amounts recorded in the financial statements.

Fair Value of Financial Instruments: The Company uses fair value measurements to record fair value adjustments to certain financial instruments and to determine fair value disclosures. Trading assets, securities available for sale, and derivative instruments are recorded at fair value on a recurring basis. Additionally, from time to time, the Company may be required to record at fair value other assets on a nonrecurring basis, or to establish a loss allowance or write-down based on the fair value of impaired assets. Further, the notes to financial statements include information about the extent to which fair value is used to measure assets and liabilities, the valuation methodologies used and its impact to earnings. For financial instruments not recorded at fair value, the notes to financial statements disclose the estimate of their fair value. Due to the judgments and uncertainties involved in the estimation process, the estimates could result in materially different results under different assumptions and conditions.


ITEM 3.           QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK


Market Risk


Market risk is the risk of loss in a financial instrument arising from adverse changes in market rates/prices, such as interest rates, foreign currency exchange rates, commodity prices and equity prices. Interest rate risk is the most significant market risk affecting the Company. Other types of market risk do not arise in the normal course of the Company’s business activities.


The responsibility for interest rate risk management oversight is the function of the Bank’s Asset and Liability Committee (“ALCO”), chaired by the Chief Financial Officer and composed of various members of senior management. ALCO meets regularly to review balance sheet structure, formulate strategies in light of current and expected economic conditions, adjust product prices as necessary, implement policy, monitor liquidity, and review performance against guidelines established to control exposure to the various types of inherent risk.


Interest Rate Risk: Risk: Interest rate risk can be defined as an exposure to movement in interest rates that could have an adverse impact on the Bank's net interest income. Interest rate risk arises from the imbalance in the re-pricing, maturity and or cash flow characteristics of assets and liabilities. Management's objectives are to measure, monitor and develop strategies in response to the interest rate risk profile inherent in the Bank's balance sheet. The objectives in managing the Bank's balance sheet are to preserve the sensitivity of net interest income to actual or potential changes in interest rates, and to enhance profitability through strategies that promote sufficient reward for understood and controlled risk.


The Bank's interest rate risk measurement and management techniques incorporate the re-pricing and cash flow attributes of balance sheet and off-balance sheet instruments as each relate to current and potential changes in interest rates. The level of interest rate risk, measured in terms of the potential future effect on net interest income, is determined through the use of modeling and other techniques under multiple interest rate scenarios. Interest rate risk is evaluated in depth on a quarterly basis and reviewed by ALCO and the Company’s Board of Directors.


The Bank's Asset Liability Management Policy, approved annually by the Bank’s Board of Directors, establishes interest rate risk limits in terms of variability of net interest income under rising, flat, and decreasing rate scenarios. It is the role of the ALCO to evaluate the overall risk profile and to determine actions to maintain and achieve a posture consistent with policy guidelines.


Interest Rate Sensitivity Modeling: The Bank utilizes an interest rate risk model widely recognized in the financial industry to monitor and measure interest rate risk. The model simulates the behavior of interest income and expense for all balance sheet and off-balance sheet instruments, under different interest rate scenarios together with a dynamic future balance sheet. Interest rate risk is measured in terms of potential changes in net interest income based upon shifts in the yield curve.


The interest rate risk sensitivity model requires that assets and liabilities be broken down into components as to fixed, variable, and adjustable interest rates, as well as other homogeneous groupings, which are segregated as to maturity and type of instrument. The model includes assumptions about how the balance sheet is likely to evolve through time and in different interest rate environments. The model uses contractual re-pricing dates for variable products, contractual maturities for fixed rate products, and product-specific assumptions for deposit accounts, such as money market accounts, that are subject to re-pricing based on current market conditions. Re-pricing margins are also determined for adjustable rate assets and incorporated in the model. Investment securities and borrowings with call provisions are examined on an individual basis in each rate environment to estimate the likelihood of a call.exercise. Prepayment assumptions for mortgage loans and mortgage-backed securities are developed from industry median estimates of prepayment speeds, based upon similar coupon ranges and degree of seasoning. Cash flows and maturities are then determined, and for certain assets, prepayment assumptions are estimated under different interest rate scenarios. Interest income and interest expense are then simulated under several hypothetical interest rate conditions including:

A flat interest rate scenario in which current prevailing rates are locked in and the only balance sheet fluctuations that occur are due to cash flows, maturities, new volumes, and re-pricing volumes consistent with this flat rate assumption;


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A 200 basis point rise or decline in interest rates (or as appropriate given the absolute level of market rates) applied against a parallel shift in the yield curve over a twelve-month horizon together with a dynamic balance sheet anticipated to be consistent with such interest rate changes;

Various non-parallel shifts in the yield curve, including changes in either short-term or long-term rates over a twelve-month horizon, together with a dynamic balance sheet anticipated to be consistent with such interest rate changes; and

An extension of the foregoing simulations to each of two, three, four and five year horizons to determine the interest rate risk with the level of interest rates stabilizing in years two through five. Even though rates remain stable during this two to five year time period, re-pricing opportunities driven by maturities, cash flow, and adjustable rate products will continue to change the balance sheet profile for each of the interest rate conditions.


Changes in net interest income based upon the foregoing simulations are measured against the flat interest rate scenario and actions are taken to maintain the balance sheet interest rate risk within established policy guidelines.


As of September 30, 20172021 interest rate sensitivity modeling results indicate that the Bank’s balance sheet in years 1 and 2 was moderately liability sensitive over the one- and two-year horizons (i.e., moderately exposed to rising interest rates).


asset sensitive.

Assuming short-term and long-term interest rates decline 100 basis points from current levels (i.e., a parallel yield curve shift) and the Bank’s balance sheet structure and size remain at current levels, management believes net interest income will improve slightlydeteriorate over the one year horizon (+.2%(-2.4% versus the base case) while remaining relatively stabledeteriorating further from that level over the two-year horizon (+.3%(-9.8% versus the base case). Should the yield curve steepen as rates fall, the model suggests that accelerated earning asset prepayments will slow, resulting in a more stabilized level of net interest income. Management anticipates that moderate to strong earning asset growth will be needed to meaningfully increase the Bank’s current level of net interest income should both long-term and short-term interest rates decline in parallel.


Assuming the Bank’s balance sheet structure and size remain at current levels and the Federal Reserve increases short-term interest rates by 200 basis points with the balance of the yield curve shifting in parallel with these increases, management believes net interest income will decline moderatelyimprove over the one and two-year horizons (-3.1%(10.6% and -6.7%21.8%, respectively, versus the base case) as increased funding costs outpace increases in earning asset yields. The interest rate sensitivity simulation model suggests that as interest rates rise, the Bank’s funding costs will initially re-price disproportionately with earning asset yields to a moderate degree. As funding costs begin to stabilize early in the third year of the simulation, the model suggests that the earning asset portfolios will continue to re-price at prevailing interest rate levels and cash flows from the Bank’s earning asset portfolios will be reinvested into higher yielding earning assets, resulting in a widening of spreads and a stabilization of net interest income over the three year horizon and beyond. Management believes moderate to strong earning asset growth will be necessary to meaningfully increase the current level of net interest income over the one-year and two-year horizons should short-term and long-term interest rates rise in parallel.


respectively).

As compared to June 30, 2017,December 31, 2020, the year-one sensitivity in the down 100 basis points scenario decreasedwas up slightly for the quarter (+.7%nine months ended September 30, 2021 (-2.6% prior, versus +.2%-2.4% current). The year-two sensitivities in the down 100 basis points scenario showed a small changewere mostly unchanged going from +.8%-9.5% to +.3%-9.8%. In the year-one up 200 basis points scenario, results improvedwere up slightly going from the prior quarter (-3.8% prior, versus -3.1% current)7.7% to 10.6%. Year-two, up 200 basis points shows a slightly more negative result (-6.2%was up (18.4% prior, versus -6.7%21.8% current), although on balance, the current aggregate position is consistent with the prior quarter’s.


Despite four rate hikes over the last eighteen months, the Federal Reserve continues to maintain short-term interest rates at low levels, threatening net interest income. Net interest income exposure is also significantly affected by the shape and level of the U.S. Government securities and interest rate swap yield curve, and changes in the size and composition of the Bank’s loan, investment and deposit portfolios.

.

The preceding 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: the nature and timing of interest rate levels and yield curve shape, prepayment speeds on loans and securities, deposit rates, pricing decisions on loans and deposits, reinvestment or replacement of asset and liability cash flows, and renegotiated loan terms with borrowers. While assumptions are developed based upon current economic and local


market conditions, the Company cannot make any assurances as to the predictive nature of these assumptions including how customer preferences or competitor influences might change.

As market conditions vary from those assumed in the sensitivity analysis, actual results may also differ due to: prepayment and refinancing levels deviating from those assumed; the impact of interest rate changes, caps or floors on adjustable rate assets; the potential effect of changing debt service levels on customers with adjustable rate loans; depositor early withdrawals and product preference changes; and other such variables. The sensitivity analysis also does not reflect additional actions that the Bank’s Senior Executive Team and Board of Directors might take in responding to or anticipating changes in interest rates, and the anticipated impact on the Bank’s net interest income.


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The Bank engages an independent consultant to periodically review its interest rate risk position and the reasonableness

ITEM 4.           CONTROLS AND PROCEDURES


(a)
a)Disclosure controls and procedures.
The

Under the supervision and with the participation of our senior management, consisting of the Company’s principal executive officers, including theofficer and our principal financial officer, based on theirthe Company conducted an evaluation of the effectiveness of the design and operation of its disclosure controls and procedures, (asas defined in Exchange Act Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) as of the end of the period covered by this Quarterly Report on Form 10-Q, have10-Q. Based on this evaluation, the Company’s management, including its principal executive officer and principal financial officer, concluded that as of September 30, 2021 the Company’s disclosure controls and procedures were effective.

b) Changeseffective to ensure that information required to be disclosed by the Company in internal control overthe reports that it files under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms. The Company’s disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by the Company in its Exchange Act reports is accumulated and communicated to the Company’s management, including its principal executive officer and principal financial reporting.
officer, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives, and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

(b)Changes in internal control over financial reporting.

There were no changes in the Company’s internal control over financial reporting that occurred during the last fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II


II.           OTHER INFORMATION

ITEM 1.             LEGAL PROCEEDINGS


The Company and its subsidiaries are parties to certain ordinary routine litigation incidental to the normal conduct of their respective businesses, which in the opinion of management based upon currently available information will have no material effect on the Company's consolidated financial statements.



ITEM 1A.          RISK FACTORS


There were no material changes to the risk factors discussed in Part I, Item 1A. of the Company’s Annual Report on Form 10-K for the year ended December 31, 2020.In addition to the other information set forth in this report, you should carefully consider thethose risk factors, discussed below and in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2016, which could materially affect our business, financial condition orand future operating results. The risks described in this formThose risk factors are not the only risks that we face.facing our company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affecthave a material adverse effect on our business, financial condition and/orand operating results.


81

ITEM 2.           UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS


(a) Not applicable.
(b) Not applicable.

(c)On April 20, 2021, Company's Board of Directors approved a twelve-month plan to repurchase up to 5% of its outstanding common stock, representing 747,000 shares.

The following table provides certain information with regard toindicates that no shares were repurchased by the Company in the third quarter of 2017:2021:

Total number of shares

Maximum number of

 purchased as a part of 

 shares that may yet be 

Total number of

Average price

publicly announced 

purchased under

Period

shares purchased

paid per share

plans or programs

 the plans or programs

July 1-31, 2021

$

747,000

August 1-31, 2021

747,000

September 1-30, 2021

747,000

Total

$

747,000

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Period  
Total number of
shares purchased
 
Average price
paid per share
 
Total number of shares
purchased as a part of
publicly announced
plans or programs
 
Maximum number of
shares that may yet
be purchased under
the plans or programs (1)
July 1-31, 2017 6,742
 $29
 6,742
 404,706
August 1-31, 2017 
 
 
 404,706
September 1-30, 2017 
 
 
 404,706
Total 6,742
 $29
 6,742
 404,706
(1) In August 2008, the Company’s Board

Table of Directors approved a twenty-four month program to repurchase up to 450,000 shares of the Company’s common stock, or approximately 10.2% of the shares then outstanding.  The Company’s Board of Directors authorized the continuance of this program for additional twenty-four month periods in August 2010, 2012 and 2014.  On August 16, 2016, Bar Harbor Bankshares issued a press release announcing the Company’s Board of Directors has approved the continuation of the Company’s existing stock repurchase plan through August 16, 2018.  No other changes were made to the plan. Depending on market conditions and other factors, stock repurchases may be commenced or suspended at any time, or from time to time, without prior notice and may be made in the open market or through privately negotiated transactions. The Company records repurchased shares as treasury stock.


Contents

ITEM 3.                DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4.                  MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5.                OTHER INFORMATION

None.


ITEM 6.           EXHIBITS

3.1Articles of Incorporation, as amended to date

31.1

3.2Bylaws, as amended to date
4.1Certificate of Designations, Fixed Rate Cumulative Perpetual Preferred Stock, Series A
4.2Form of Specimen Stock Certificate for Series A Preferred Sock
4.3Debt Securities Purchase Agreement
4.4Form of Subordinated Debt Security of Bar Harbor Bank & Trust
4.5Description of Company Common Stock
10.1Employment Agreement by and between William J. McIver, Bar Harbor Bankshares and Bar Harbor Bank & Trust, dated May 5, 2016.
11.1Statement of re computation of per share earnings
31.1Certification of Chief Executive Officer under Rule 13a-14(a)/15d-14(a)

31.2

Certification of Chief Financial Officer under Rule 13a-14(a)/15d-14(a)

32.1

Certification of Chief Executive Officer under 18 U.S.C. Sec. 1350.1350

32.2

Certification of Chief Financial Officer under 18 U.S.C. Sec. 1350.1350

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The following financial information from the Company’s AnnualQuarterly Report on Form 10-Q for the quarter ended JuneSeptember 30, 20172021 is formatted in XBRL (eXtensible Inline Extensible Business Reporting Language)Language (iXBRL): (i) Consolidated Condensed Statements of Income, (ii) the Condensed Consolidated Balance Sheets, (iii) the Condensed Consolidated Statements of Changes in Shareholders’ Equity, (iv) Consolidated Statements of Cash Flows and (v) Notes to the Consolidated Condensed Financial Statements

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Cover Page Interactive Data File (the cover page XBRL tags are embedded within the Inline XBRL document)


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SIGNATURES

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


BAR HARBOR BANKSHARES

Dated: November 8, 20172021

By:

/s/ Curtis C. Simard

Curtis C. Simard

President & Chief Executive Officer

Dated: November 8, 20172021

By:

/s/ Josephine Iannelli

Josephine Iannelli

Executive Vice President & Chief Financial Officer & Principal Accounting Officer


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