0000743367bhb:LoansFromBusinessActivitiesMemberbhb:CommercialAndIndustrialLoansPortfolioSegmentMemberus-gaap:FinancingReceivables30To59DaysPastDueMember2019-12-31

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

For the quarterly period ended:September 30, ~~2019~~

For the transition period from to

Commission File Number:001-13349

BAR HARBOR BANKSHARES

(Exact name of registrant as specified in its charter)


Maine		01-0393663
~~Maine~~		~~01-0393663~~
(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)

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 o

◻

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 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 accelerated filer," "accelerated filer", "smaller reporting company", or "emerging growth company" in Rule 12b-2 of the Exchange Act.

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 ~~15,552,297~~14,928,565 shares of common stock, par value $2.00 per share, outstanding as of October ~~31, 2019.~~30, 2020.

BAR HARBOR BANKSHARES AND SUBSIDIARIES

Table of Contents

Bar Harbor Bankshares conducts business operations principally through Bar Harbor Bank & Trust, which may be referred to as ~~the Bank~~“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," ~~"we"~~ 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, ~~2018.~~2019 and Part II, Item 1A. of the Company’s Quarterly Report on Form 10-Q for the quarter ended March 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.

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PART I. FINANCIAL INFORMATION

ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

BAR HARBOR BANKSHARES AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS


(in thousands, except share data)	September 30, 2020		December 31, 2019
Assets
Cash and cash equivalents:
Cash and due from banks	$	53,173	$	37,261
Interest-bearing deposits with the Federal Reserve Bank		162,484		19,649
Total cash and cash equivalents		215,657		56,910

Securities:
Securities available for sale, at fair value		604,529		663,230
Federal Home Loan Bank stock		13,975		20,679
Total securities		618,504		683,909

Loans:
Commercial real estate		1,045,635		930,661
Commercial and industrial		522,510		423,291
Residential real estate		1,021,206		1,151,857
Consumer		119,340		135,283
Total loans		2,708,691		2,641,092
Less: Allowance for loan losses		(17,907)		(15,353)
Net loans		2,690,784		2,625,739

Premises and equipment, net		51,424		51,205
Other real estate owned		1,983		2,236
Goodwill		119,477		118,649
Other intangible assets		7,913		8,641
Cash surrender value of bank-owned life insurance		77,388		75,863
Deferred tax assets, net		2,180		3,865
Other assets		74,400		42,111
Total assets	$	3,859,710	$	3,669,128

Liabilities
Deposits:
Demand	$	515,064	$	414,534
NOW		706,048		575,809
Savings		511,938		388,683
Money market		388,356		384,090
Time		813,509		932,635
Total deposits		2,934,915		2,695,751

Borrowings:
Senior		385,472		471,396
Subordinated		59,920		59,920
Total borrowings		445,392		531,316

Other liabilities		74,958		45,654
Total liabilities		3,455,265		3,272,721

(continued)

(in thousands, except share data) September 30, 2019 December 31, 2018
Assets

Cash and due from banks $ 50,032
$ 35,208
Interest-bearing deposit with the Federal Reserve Bank 21,561
63,546
Total cash and cash equivalents 71,593
98,754
Securities available for sale, at fair value 675,675
725,837
Federal Home Loan Bank stock 27,469
35,659
Total securities 703,144
761,496
Loans:
Commercial real estate 923,773
826,699
Commercial and industrial 402,706
404,870
Residential real estate 1,143,452
1,144,698
Consumer 107,375
113,960
Total loans 2,577,306
2,490,227
Less: Allowance for loan losses (15,353 ) (13,866 )
Net loans 2,561,953
2,476,361
Premises and equipment, net 47,644
48,804
Other real estate owned 2,455
2,351
Goodwill 100,085
100,085
Other intangible assets 6,879
7,459
Cash surrender value of bank-owned life insurance 75,368
73,810
Deferred tax assets, net 4,988
9,514
Other assets 38,365
29,853
Total assets $ 3,612,474
$ 3,608,487

Liabilities

Deposits:
Demand $ 380,707
$ 370,889
NOW 490,315
484,717
Savings 360,570
358,888
Money market 359,328
335,951
Time 902,665
932,793
Total deposits 2,493,585
2,483,238
Borrowings:
Senior 641,819
680,823
Subordinated 42,928
42,973
Total borrowings 684,747
723,796
Other liabilities 39,683
30,874
Total liabilities 3,218,015
3,237,908
(continued)

Shareholders’ equity

Capital stock, par value $2.00; authorized 20,000,000 shares; issued 16,428,388 and 16,428,388 shares at September 30, 2019 and December 31, 2018, respectively 32,857
32,857
Additional paid-in capital 188,283
187,653
Retained earnings 174,994
166,526
Accumulated other comprehensive income (loss) 3,045
(11,802 )
Less: 879,785 and 905,201 shares of treasury stock at September 30, 2019 and December 31, 2018, respectively (4,720 ) (4,655 )
Total shareholders’ equity 394,459
370,579
Total liabilities and shareholders’ equity $ 3,612,474
$ 3,608,487

Table of Contents

BAR HARBOR BANKSHARES AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS (continued)


(in thousands, except share data)	September 30, 2020		December 31, 2019
Shareholders’ equity
Capital stock, par value $2.00; authorized 20,000,000 shares; issued 16,428,388 shares at September 30, 2020 and December 31, 2019		32,857		32,857
Additional paid-in capital		189,606		188,536
Retained earnings		190,249		175,780
Accumulated other comprehensive income		9,405		3,911
Less: 1,499,823 and 870,257 shares of treasury stock at September 30, 2020 and December 31, 2019, respectively		(17,672)		(4,677)
Total shareholders’ equity		404,445		396,407
Total liabilities and shareholders’ equity	$	3,859,710	$	3,669,128

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

Table of Contents

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) 2019 2018 2019 2018
Interest and dividend income

Loans $ 28,157
$ 26,212
$ 82,681
$ 77,272
Securities and other 6,105
5,972
18,593
17,407
Total interest and dividend income 34,262
32,184
101,274
94,679
Interest expense

Deposits 7,143
5,478
20,336
13,868
Borrowings 4,674
4,237
15,232
12,192
Total interest expense 11,817
9,715
35,568
26,060
Net interest income 22,445
22,469
65,706
68,619
Provision for loan losses 893
643
1,779
2,208
Net interest income after provision for loan losses 21,552
21,826
63,927
66,411
Non-interest income

Trust and investment management fee income 3,013
2,952
8,836
9,036
Customer service fees 2,553
2,490
7,336
7,061
Gain on sales of securities, net 157
—
157
—
Bank-owned life insurance income 497
505
1,558
1,328
Customer derivative income 828
—
1,553
545
Other income 595
1,179
1,823
2,515
Total non-interest income 7,643
7,126
21,263
20,485
Non-interest expense

Salaries and employee benefits 11,364
10,331
33,568
31,695
Occupancy and equipment 3,415
3,366
10,101
9,364
Loss on premises and equipment, net —
—
21
—
Outside services 424
456
1,278
1,597
Professional services 707
223
1,821
1,016
Communication 189
217
707
701
Marketing 613
293
1,419
1,207
Amortization of intangible assets 207
207
621
621
Acquisition, restructuring and other expenses 3,039
70
3,319
619
Other expenses 3,442
2,743
10,075
8,623
Total non-interest expense 23,400
17,906
62,930
55,443

Income before income taxes 5,795
11,046
22,260
31,453
Income tax expense 780
2,076
3,847
6,136
Net income $ 5,015
$ 8,970
$ 18,413
$ 25,317

Earnings per share:

Basic $ 0.32
$ 0.58
$ 1.19
$ 1.64
Diluted $ 0.32
$ 0.58
$ 1.18
$ 1.63

Weighted average common shares outstanding:
Basic 15,547
15,503
15,536
15,478
Diluted 15,581
15,580
15,582
15,564


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
(in thousands, except earnings per share data)	2020		2019		2020		2019
Interest and dividend income
Loans	$	25,918	$	28,157	$	80,398	$	82,681
Securities and other		4,557		6,105		15,006		18,593
Total interest and dividend income		30,475		34,262		95,404		101,274
Interest expense
Deposits		3,869		7,143		14,437		20,336
Borrowings		1,941		4,674		7,149		15,232
Total interest expense		5,810		11,817		21,586		35,568
Net interest income		24,665		22,445		73,818		65,706
Provision for loan losses		1,800		893		4,265		1,779
Net interest income after provision for loan losses		22,865		21,552		69,553		63,927

Non-interest income
Trust and investment management fee income		3,532		3,013		10,060		8,836
Customer service fees		2,886		2,553		8,437		7,336
Gain on sales of securities, net		—		157		1,486		157
Mortgage banking income		2,649		452		4,230		1,094
Bank-owned life insurance income		492		497		1,525		1,558
Customer derivative income		316		828		1,417		1,553
Other income		227		143		1,078		729
Total non-interest income		10,102		7,643		28,233		21,263

Non-interest expense
Salaries and employee benefits		11,809		11,364		35,602		33,568
Occupancy and equipment		4,279		3,415		12,559		10,101
Loss on premises and equipment, net		—		—		90		21
Outside services		438		424		1,414		1,278
Professional services		479		707		1,488		1,821
Communication		215		189		698		707
Marketing		300		613		970		1,419
Amortization of intangible assets		256		207		768		621
Loss on debt extinguishment		—		—		1,351		0
Acquisition, conversion and other expenses		691		3,039		952		3,319
Other expenses		3,952		3,442		11,152		10,075
Total non-interest expense		22,419		23,400		67,044		62,930

Income before income taxes		10,548		5,795		30,742		22,260
Income tax expense		2,146		780		6,138		3,847
Net income	$	8,402	$	5,015	$	24,604	$	18,413

Earnings per share:
Basic	$	0.56	$	0.32	$	1.60	$	1.19
Diluted	$	0.56	$	0.32	$	1.60	$	1.18

Weighted average common shares outstanding:
Basic		15,079		15,547		15,359		15,536
Diluted		15,103		15,581		15,382		15,582

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

Table of Contents

BAR HARBOR BANKSHARES AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

Three Months Ended September 30, Nine Months Ended September 30,
(in thousands) 2019 2018 2019 2018
Net income $ 5,015
$ 8,970
$ 18,413
$ 25,317
Other comprehensive income, before tax:
Changes in unrealized gain (loss) on securities available-for-sale 3,200
(5,850 ) 21,746
(19,639 )
Changes in unrealized (loss) gain on cash flow hedging derivatives (370 ) 299
(2,372 ) 1,179
Changes in unrealized gain on pension —
—
—
41
Income taxes related to other comprehensive income:
Changes in unrealized (gain) loss on securities available-for-sale (747 ) 1,291
(5,081 ) 4,565
Changes in unrealized loss (gain) on cash flow hedging derivatives 85
(81 ) 554
(290 )
Changes in unrealized loss on pension —
—
—
(10 )
Total other comprehensive income (loss) 2,168
(4,341 ) 14,847
(14,154 )
Total comprehensive income $ 7,183
$ 4,629
$ 33,260
$ 11,163


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
(in thousands)	2020		2019		2020		2019
Net income	$	8,402	$	5,015	$	24,604	$	18,413
Other comprehensive income, before tax:
Changes in unrealized gain on securities available for sale		351		3,200		7,922		21,746
Changes in unrealized gain (loss) on hedging derivatives		805		(370)		(833)		(2,372)
Changes in unrealized loss on pension		0		0		0		0

Income taxes related to other comprehensive income:
Changes in unrealized gain on securities available for sale		(82)		(747)		(1,791)		(5,081)
Changes in unrealized (gain) loss on hedging derivatives		(190)		85		196		554
Changes in unrealized loss on pension		0		0		0		0
Total other comprehensive income		884		2,168		5,494		14,847
Total comprehensive income	$	9,286	$	7,183	$	30,098	$	33,260

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

Table of Contents

BAR HARBOR BANKSHARES AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

(in thousands, except per share data) Common stock amount Additional paid-in capital Retained earnings Accumulated other comprehensive income (loss) Treasury stock Total
Balance at December 31, 2017 $ 32,857
$ 186,702
$ 144,977
$ (4,554 ) $ (5,341 ) $ 354,641
Net income —
—
16,347
—
—
16,347
Other comprehensive loss —
—
—
(9,813 ) —
(9,813 )
Cash dividends declared ($0.39 per share) —
—
(5,981 ) —
—
(5,981 )
Treasury stock purchased (9,294 shares) —
—
—
—
(278 ) (278 )
Net issuance (62,782 shares) to employee stock plans, including related tax effects —
(131 ) —
—
735
604
Modified retrospective basis adoption of Revenue Recognition Accounting Codification Standard 606 —
—
(184 ) —
—
(184 )
Reclassification of the income tax effects of the Tax Cuts and Jobs Act from accumulated other comprehensive income for adoption of ASU 2018-02 —
—
980
(980 ) —
—
Recognition of stock based compensation —
627
—
—
—
627
Balance at June 30, 2018 32,857
187,198
156,139
(15,347 ) (4,884 ) 355,963

Net income —
—
8,970
—
—
8,970
Other comprehensive loss —
—
—
(4,341 ) —
(4,341 )
Cash dividends declared ($0.20 per share) —
—
(3,101 ) —
—
(3,101 )
Treasury stock purchased (1,605 shares) —
—
—
—
(46 ) (46 )
Net issuance (11,869 shares) to employee stock plans, including related tax effects —
(123 ) —
—
154
31
Recognition of stock based compensation —
209
—
—
—
209
Balance at September 30, 2018 $ 32,857
$ 187,284
$ 162,008
$ (19,688 ) $ (4,776 ) $ 357,685

Balance at December 31, 2018 $ 32,857
$ 187,653
$ 166,526
$ (11,802 ) $ (4,655 ) $ 370,579
Net income —
—
13,398
—
—
13,398
Other comprehensive income —
—
—
12,679
—
12,679
Cash dividends declared ($0.42 per share) —
—
(6,524 ) —
—
(6,524 )
Treasury stock purchased (8,010 shares) —
—
—
—
(210 ) (210 )
Net issuance (21,119 shares) to employee stock plans, including related tax effects —
(69 ) —
—
149
80
Recognition of stock based compensation —
560
—
—
—
560
Balance at June 30, 2019 32,857
188,144
173,400
877
(4,716 ) 390,562

Net income —
—
5,015
—
—
5,015
Other comprehensive income —
—
—
2,168
—
2,168
Cash dividends declared ($0.22 per share) —
—
(3,421 ) —
—
(3,421 )
Treasury stock purchased (5,482 shares) —
—
—
—
(136 ) (136 )
Net issuance (4,297 shares) to employee stock plans, including related tax effects —
(17 ) —
—
132
115
Recognition of stock based compensation —
156
—
—
—
156
Balance at September 30, 2019 $ 32,857
$ 188,283
$ 174,994
$ 3,045
$ (4,720 ) $ 394,459


							Accumulated
	Common		Additional				other
	stock		paid-in		Retained		comprehensive		Treasury
(in thousands, except per share data)	amount		capital		earnings		income (loss)		stock		Total
Balance at December 31, 2018	$	32,857	$	187,653	$	166,526	$	(11,802)	$	(4,655)	$	370,579

Net income		0		0		13,398		0		0		13,398
Other comprehensive income		0		0		0		12,679		0		12,679
Cash dividends declared ($0.42 per share)		0		0		(6,524)		0		0		(6,524)
Common stock purchased (8,010 shares)		0		0		0		0		(210)		(210)
Net issuance (21,119 shares) to employee stock plans, including related tax effects		0		(69)		0		0		149		80
Recognition of stock based compensation		0		560		0		0		0		560
Balance at June 30, 2019		32,857		188,144		173,400		877		(4,716)		390,562

Net income		0		0		5,015		0		0		5,015
Other comprehensive income		0		0		0		2,168		0		2,168
Cash dividends declared ($0.22 per share)		0		0		(3,421)		0		0		(3,421)
Common stock purchased (5,482 shares)		0		0		0		0		(136)		(136)
Net issuance (4,297 shares) to employee stock plans, including related tax effects		0		(17)		0		0		132		115
Recognition of stock based compensation		0		156		0		0		0		156
Balance at September 30, 2019	$	32,857	$	188,283	$	174,994	$	3,045	$	(4,720)	$	394,459

Balance at December 31, 2019	$	32,857	$	188,536	$	175,780	$	3,911	$	(4,677)	$	396,407

Net income		0		0		16,202		0		0		16,202
Other comprehensive income		0		0		0		4,610		0		4,610
Cash dividends declared ($0.44 per share)		0		0		(6,819)		0		0		(6,819)
Common 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		8,521		(11,893)		404,174

Net income		0		0		8,402		0		0		8,402
Other comprehensive income		0		0		0		884		0		884
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	$	9,405	$	(17,672)	$	404,445

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

Table of Contents

BAR HARBOR BANKSHARES AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS


	Nine Months Ended September 30,
(in thousands)	2020		2019
Cash flows from operating activities:
Net income	$	24,604	$	18,413
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses		4,265		1,779
Net amortization of securities		2,472		2,535
Change in unamortized net loan costs and premiums		3,149		(278)
Premises and equipment depreciation		3,571		2,942
Stock-based compensation expense		863		716
Accretion of purchase accounting entries, net		(1,219)		(2,613)
Amortization of other intangibles		768		621
Income from cash surrender value of bank-owned life insurance policies		(1,525)		(1,558)
Gain on sales of securities, net		(1,486)		(157)
Increase in right-of-use lease assets		(578)		—
Increase in lease liabilities		625		—
Loss on other real estate owned		366		146
Loss on premises and equipment, net		90		21
Net change in other assets and liabilities		(3,978)		(1,722)
Net cash provided by operating activities		31,987		20,845

Cash flows from investing activities:
Proceeds from sales of securities available for sale		87,521		67,983
Proceeds from maturities, calls and prepayments of securities available for sale		109,314		77,812
Purchases of securities available for sale		(131,107)		(76,620)
Net change in loans		(71,233)		(85,483)
Purchase of FHLB stock		(4,044)		(10,471)
Proceeds from sale of FHLB stock		10,748		18,661
Purchase of premises and equipment, net		(4,449)		(1,803)
Acquisitions, net of cash acquired		(340)		—
Proceeds from sale of other real estate		(113)		—
Net cash used in investing activities		(3,703)		(9,921)

Cash flows from financing activities:
Net change in deposits		239,164		10,968
Net change in short-term senior borrowings		(273,268)		(111,400)
Proceeds from long-term senior borrowings		273,342		174,000
Repayments of long-term senior borrowings		(71,187)		(106,605)
Net change in short-term other borrowings		(14,784)		5,048
Net change in subordinated debt issuance costs		119		—
Exercise of stock options		682		195
Purchase of treasury and common stock		(13,470)		(346)
Cash dividends paid on common stock		(10,135)		(9,945)
Net cash provided by (used in) financing activities		130,463		(38,085)

Net change in cash and cash equivalents		158,747		(27,161)
Cash and cash equivalents at beginning of year		56,910		98,754
Cash and cash equivalents at end of year	$	215,657	$	71,593

(continued)

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BAR HARBOR BANKSHARES AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

Nine Months Ended September 30,
(in thousands) 2019 2018
Cash flows from operating activities:

Net income $ 18,413
$ 25,317
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses 1,779
2,208
Net amortization of securities 2,535
3,066
Change in unamortized net loan costs and premiums (278 ) 46
Premises and equipment depreciation 2,942
2,821
Stock-based compensation expense 716
836
Accretion of purchase accounting entries, net (2,613 ) (2,780 )
Amortization of other intangibles 621
621
Income from cash surrender value of bank-owned life insurance policies (1,558 ) (1,328 )
Gain on sales of securities, net (157 ) —
Loss on other real estate owned 146
—
Loss on premises and equipment, net 21
—
Net change in other assets and liabilities (1,722 ) (3,644 )
Net cash provided by operating activities 20,845
27,163

Cash flows from investing activities:

Proceeds from sales of securities available for sale 67,983
—
Proceeds from maturities, calls and prepayments of securities available for sale 77,812
72,278
Purchases of securities available for sale (76,620 ) (90,399 )
Net change in loans (85,483 ) 2,852
Purchase of Federal Home Loan Bank stock (10,471 ) (1,172 )
Proceeds from sale of Federal Home Loan Bank stock 18,661
5,123
Purchase of premises and equipment, net (1,803 ) (2,675 )
Purchase of bank-owned life insurance —
(14,000 )
Proceeds from sale of other real estate owned —
69
Net cash used in investing activities (9,921 ) (27,924 )

Cash flows from financing activities:
Net increase in deposits 10,968
38,885
Proceeds from advances from the Federal Home Loan Bank 9,722,907
7,276,306
Repayments of advances from the Federal Home Loan Bank (9,766,912 ) (7,320,515 )
Net change in short-term other borrowings 5,048
(3,255 )
Exercise of stock options 195
635
Treasury stock purchased (346 ) (324 )
Cash dividends paid on common stock (9,945 ) (9,082 )
Net cash used in financing activities (38,085 ) (17,350 )

Net change in cash and cash equivalents (27,161 ) (18,111 )
Cash and cash equivalents at beginning of year 98,754
90,685
Cash and cash equivalents at end of year $ 71,593
$ 72,574

Supplemental cash flow information:

Interest paid $ 34,394
$ 25,537
Income taxes paid, net 2,479
9,927

Other non-cash changes:
Real estate owned acquired in settlement of loans 250
30

(continued)


	Nine Months Ended September 30,
(in thousands)	2020		2019
Supplemental cash flow information:
Interest paid	$	22,085	$	34,394
Income taxes paid, net		4,806		2,479

Acquisition of non-cash assets and liabilities:
Assets acquired		1,171		—
Liabilities acquired		(343)		—

Other non-cash changes:
Real estate owned acquired in settlement of loans		—		250

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

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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 (“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 owned subsidiary Bar Harbor Bank & Trust (the "Bank") and the Bank’s consolidated subsidiaries. The results of operations of companies or assets acquired are included only from the dates of acquisition. All material ~~wholly-owned~~wholly owned and majority owned subsidiaries are consolidated unless 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 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, ~~2018~~2019 previously filed with the Securities and Exchange Commission (the "SEC"). In management's opinion, all adjustments necessary for a fair statement are reflected in the interim periods presented.

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 the accounting policies previously disclosed in NOTE 1 – Summary of Significant Accounting Policies of the Company’s Annual Report on Form 10-K for the year ended December 31, 2019.

Operating, Accounting and Reporting Considerations related to COVID-19:

The COVID-19 pandemic has negatively impacted the global economy. In response to this crisis, the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act was passed by Congress and signed into law on March 27, 2020. The CARES Act provides an estimated $2.2 trillion to fight the COVID-19 pandemic and stimulate the economy by supporting individuals and businesses through loans, grants, tax changes, and other types of relief. Some of the provisions applicable to the Company include, but are not limited to:

●

Accounting for Loan Modifications - The CARES Act provides that a financial institution may elect to suspend (1) the requirements under GAAP for certain loan modifications that may otherwise be categorized as a troubled debt restructuring (“TDR”) and (2) any determination that such loan modifications would be considered a TDR, including the related impairment for accounting purposes.

●	Paycheck Protection Program - The CARES Act established the Paycheck Protection Program (“PPP”), an expansion of the Small Business Administration’s 7(a) loan program and the Economic Injury Disaster Loan Program, administered directly by the SBA.

●

Mortgage Forbearance - Under the CARES Act, through the earlier of December 31, 2020, or the termination date of the COVID-19 national emergency, a borrower with a federally backed mortgage loan that is experiencing financial hardship due to COVID-19 may request a forbearance. A multifamily borrower with a federally backed multifamily mortgage loan that was current as of February 1, 2020, and is experiencing financial hardship due to COVID-19 may request forbearance on the loan for up to 30 days, with up to two additional 30-day periods at the borrower’s request.

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Also in response to the COVID-19 pandemic, the Board of Governors of the Federal Reserve Board (“FRB”), the Federal Deposit Insurance Corporation (“FDIC”), the National Credit Union Administration, the Office of the Comptroller of the Currency, and the Consumer Financial Protection Bureau, in consultation with the state financial regulators (collectively, the “agencies”) issued a joint interagency statement (issued March 22, 2020; revised statement issued April 7, 2020). Some of the provisions applicable to the Company include, but are not limited to:

●

Accounting for Loan Modifications - Loan modifications that do not meet the conditions of the CARES Act may still qualify as a modification that does not need to be accounted for as a TDR. The agencies confirmed with FASB staff that short-term modifications made on a good faith basis in response to COVID-19 to borrowers who were current prior to any relief are not TDRs. This includes short-term (e.g., six months) modifications such as payment deferrals, fee waivers, extensions of repayment terms, or insignificant delays in payment.

●

Past Due Reporting - With regard to loans not otherwise reportable as past due, financial institutions are not expected to designate loans with deferrals granted due to COVID-19 as past due because of the deferral. A loan’s payment date is governed by the due date stipulated in the legal agreement. If a financial institution agrees to a payment deferral, these loans would not be considered past due during the period of the deferral.

●	Nonaccrual Status and Risk Rating - For short-term COVID-19 modifications, these loans generally should not be reported as nonaccrual or as having a classified risk rating.

Recent Accounting Pronouncements

The following table provides a brief description of recent accounting standards updates ("ASU") that could have a material impact to the Company’s consolidated financial statements upon adoption:


Standard
~~Standard~~ Description	~~Description~~		Required Date of Adoption		Effect on financial statements
Standards Adopted in ~~2019~~2020
ASU ~~2016-02, Leases~~2017-04, Simplifying the Test for Goodwill Impairment		This ASU creates ASU Topic 842, Leases, and supersedes Topic 840, Leases. The new guidance requires lessees to record a right-of-use asset and a corresponding liability equal to the present value of future rental payments on their balance sheets for all leases with a term greater than one year. There are not significant changes to lessor accounting; however, there are certain improvements made to align lessor accounting with the lessee accounting model and Topic 606, Revenue from Contracts with Customers. This guidance expands both quantitative and qualitative required disclosures. This ASU is required to be adopted on a modified retrospective basis and allows for practical expedients and elections in conjunction with implementation. The Company may elect some of the expedients upon the adoption date, which may be applied prospectively or retrospectively.	~~January 1, 2019~~	The Company adopted this ASU as of January 1, 2019 including the election of the practical expedients, allowing for existing leases to be accounted for consistent with current guidance, with the exception of balance sheet recognition for lessees. A modified retrospective transition approach was utilized, applying the new standard to all leases existing at the date of initial application. At January 1, 2019 the Company recognized a right-of-use asset and corresponding lease liability of $9.0 million. This computation is based, primarily, on the present value of unpaid future minimum lease payments. Additionally, that amount is impacted by assumptions around renewals and/or extensions, and the interest rate used to discount those future lease obligations. Due to the limited size of the Company's leasing portfolio, many other items related to this standard don't apply, or had an immaterial impact on the Company's consolidated financial statements. For transitional disclosures see Note 12 - Leases.
~~ASU 2018-11 Practical Expedients to Topic 842, Leases~~
~~ASU 2018-20 Scope Improvements for Lessors~~
~~ASU 2019-01 Leases: Codification Improvements~~
~~ASU 2017-12, Targeted Improvements to Accounting for Hedging Activities~~	This ASU amends ~~Accounting Standards Codification ("ASC") 815, Derivatives~~Topic 350, Intangibles-Goodwill and ~~Hedging~~Other, and eliminates Step 2 from the goodwill impairment test. The Company still has the option to ~~(1) improve~~perform the ~~transparency and understandability of information conveyed~~qualitative assessment for a reporting unit to ~~financial statement users about an entity's risk management activities by better aligning~~determine if 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.~~quantitative impairment test is necessary			January 1, ~~2019~~2020 Early adoption is permitted.		The Company has adopted ~~this~~ ASU ~~as of~~2017-04 effective January 1, ~~2019, although it~~2020, as required, and the ASU did not have a material impact on ~~the Company's consolidated~~its financial statements. Annual goodwill testing was completed as of September 30, 2020. The Company recognized no impairments to goodwill in the third quarter of 2020. See management’s discussion and analysis for further details.
ASU ~~2018-16, Inclusion of Overnight Financing Rate or Overnight Swap Rate as a Benchmark for Hedge Accounting~~
~~ASU 2018-07, Share Based Payment Accounting~~2018-13 Changes to Disclosure Requirements Fair Value Measurement, Topic 820				This ASU ~~expands~~eliminates, adds and modifies certain disclosure requirements for fair value measurements. Among the ~~scope~~changes, entities will no longer be required to disclose the amount and reasons for transfers between Level 1 and Level 2 of ~~Topic 718, Compensation- Stock Compensation to include share-based payments issued to non-employees for goods or services. Consequently,~~ the ~~accounting for share-based payments to non-employees and employees~~fair value hierarchy, but will be ~~substantially aligned. The ASU supersedes Subtopic 505-50, Equity-Based Payments~~required to ~~non-employees.~~disclose the range and weighted average used to develop significant unobservable inputs for Level 3 fair value measurements.		January 1, ~~2019~~2020 Early adoption is permitted.	The Company has adopted ~~this~~ ASU 2018-13, as of January 1, ~~2019, with no~~2020, as required, and the ASU did not have a material impact onto the ~~Company's consolidated financial statements.~~disclosures as a result of the adoption.


Standard
~~Standard~~ Description	~~Description~~		Required Date of Adoption			Effect on financial statements
Standards Not Yet Adopted
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 current incurred loss accounting model with a current expected credit loss approach ~~(CECL)~~("CECL") for financial instruments measured at amortized cost and other commitments to extend 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 amortized cost basis that the entity does not expect to collect. The amendments also eliminate the current accounting model for purchased credit impaired loans and certain off-balance sheet exposures. Additional quantitative and qualitative disclosures are required upon adoption.	~~January 1, 2020~~	Adoption of this ASU is expected to primarily change how the Company estimates credit losses on loans with the application of the expected credit loss model. Also, for acquired purchased impaired loans it requires the reclassification of the credit portion of the total remaining fair value adjustment directly to the allowance for loan losses. Fair value adjustments on purchased credit impaired loans related to interest rates and fair value adjustments on other acquired loans will continue to be accreted into income over time.
~~ASU 2018-19, Codification Improvements to ASU 2016-13~~
	In addition, the Company expects the ASU to change the presentation of credit losses for AFS debt securities through an allowance method rather than as a direct write-off and may allow for recovery of these amounts in the future.
		While the CECL 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 securities by direct write-offs. The guidance will require companies to recognize improvements to estimated credit losses immediately in earnings rather than interest income over time.
	The Company is in the process of evaluating and implementing allowance loan loss estimation models to comply with the guidance under this ASU, which may result in a higher allowance for losses then currently recorded under the existing standard.
		The ASU should be adopted on a modified retrospective basis. Entities that have loans accounted for under ASC 310-30 at the time of adoption should prospectively apply the guidance in this amendment for purchase credit deteriorated assets.	~~Early adoption is permitted in 2019.~~
~~ASU 2017-04, Simplifying the Test for Goodwill Impairment~~	~~This ASU amends Topic 350, Intangibles-Goodwill and Other, and eliminates Step 2 from the goodwill impairment test.~~	January 1, 2020			Adoption of this ASU is ~~not~~ expected to ~~have~~primarily change how the Company estimates credit losses with the application of the expected credit loss model. The Company will apply the standard's provisions as a ~~material~~cumulative effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective (i.e., modified retrospective approach). The Company's CECL implementation efforts in the third quarter focused on model validation, continuing to develop new disclosures and establish formal policies and procedures and other governance and control documentation. Certain elements of the calculation were finalized in the second quarter, including refinement of the model assumptions, the qualitative framework, internal control design, model validation, and the operational control framework to support the new process. Furthermore, changes to the economic forecasts within the model could positively or negatively impact the actual results. The ASU was originally effective for the Company beginning in the first quarter of 2020; however, the CARES Act issued in 2020 provided an option to delay the implementation of CECL until the earlier of when the national emergency associated with COVID-19 virus terminates or December 31, 2020. The Company elected to delay the adoption. The Allowance for Loan Loss calculated under the CECL method is estimated to be in a range of $23.0 million to $26.0 million as of September 30, 2020, compared to $20.0 million to $23.0 million on the ~~Company's consolidated financial statements.~~effective date of January 1, 2020.
	~~Early adoption is permitted.~~
~~ASU 2018-13 Changes to Disclosure Requirements Fair Value Measurement, Topic 820~~	This ASU eliminates, adds and modifies certain disclosure requirements for fair value measurements. Among the changes, entities will no longer be required to disclose the amount and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, but will be required to disclose the range and weighted average used to develop significant unobservable inputs for Level 3 fair value measurements.	~~January 1, 2020~~	~~Adoption of this ASU is not expected to have a material impact on the Company's consolidated financial statements.~~
		~~Early adoption is permitted.~~
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 permitted.	Adoption of this ASU is not expected to have a material impact on the Company's consolidated financial statements.
	~~Early adoption is permitted.~~

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Standard	Description	Required Date of Adoption	Effect on financial statements
Standards Not Yet Adopted (continued)
ASU 2020-04 Facilitation of the Effects of Reference Rate Reform, Topic 848	This ASU provides temporary optional expedients and exceptions to GAAP guidance on contract modifications and hedge accounting to ease the financial 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 rate 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 that are being discontinued and determining which elections need to be made.

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NOTE 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, 2019

Debt securities:

Mortgage-backed securities:

US Government-sponsored enterprises $ 344,547
$ 5,924
$ 1,328
$ 349,143
US Government agency 116,912
2,130
217
118,825
Private label 20,268
75
389
19,954
Obligations of states and political subdivisions thereof 107,854
3,519
147
111,226
Corporate bonds 75,652
1,554
679
76,527
Total securities available for sale $ 665,233
$ 13,202
$ 2,760
$ 675,675

December 31, 2018

Debt securities:

Mortgage-backed securities:
US Government-sponsored enterprises $ 413,492
$ 904
$ 9,444
$ 404,952
US Government agency 111,938
509
1,935
110,512
Private label 20,353
113
84
20,382
Obligations of states and political subdivisions thereof 133,260
1,081
2,076
132,265
Corporate bonds 58,098
264
636
57,726
Total securities available for sale $ 737,141
$ 2,871
$ 14,175
$ 725,837


			Gross		Gross
			Unrealized		Unrealized
(in thousands)	Amortized Cost		Gains		Losses		Fair Value
September 30, 2020
Debt securities:
Mortgage-backed securities:
US Government-sponsored enterprises	$	226,930	$	8,683	$	(441)	$	235,172
US Government agency		92,517		3,413		(145)		95,785
Private label		20,142		40		(579)		19,603
Obligations of states and political subdivisions thereof		149,890		4,267		—		154,157
Corporate bonds		99,786		1,713		(1,687)		99,812
Total securities available for sale	$	589,265	$	18,116	$	(2,852)	$	604,529


			Gross		Gross
			Unrealized		Unrealized
(in thousands)	Amortized Cost		Gains		Losses		Fair Value
December 31, 2019
Debt securities:
Mortgage-backed securities:
US Government-sponsored enterprises	$	319,064	$	4,985	$	(2,080)	$	321,969
US Government agency		98,568		1,640		(547)		99,661
Private label		20,212		68		(747)		19,533
Obligations of states and political subdivisions thereof		139,240		3,034		(268)		142,006
Corporate bonds		78,804		1,478		(221)		80,061
Total securities available for sale	$	655,888	$	11,205	$	(3,863)	$	663,230

The amortized cost and estimated fair value of available for sale (“AFS”) securities segregated by contractual maturity at September 30, ~~2019~~2020 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	$	—	$	—
Over 1 year to 5 years		25,596		25,849
Over 5 years to 10 years		81,687		79,979
Over 10 years		142,393		148,141
Total bonds and obligations		249,676		253,969
Mortgage-backed securities		339,589		350,560
Total securities available for sale	$	589,265	$	604,529

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)	2020		2019		2020		2019
Gross gains on sales of available for sale securities	$	—	$	716	$	1,508	$	716
Gross losses on sales of available for sale securities		—		(559)		(22)		(559)
Net gains on sale of available for sale securities	$	—	$	157	$	1,486	$	157

Available for sale
(in thousands) Amortized Cost Fair Value
Within 1 year $ 190
$ 191
Over 1 year to 5 years 33,984
34,856
Over 5 years to 10 years 56,882
57,482
Over 10 years 92,451
95,224
Total bonds and obligations 183,507
187,753
Mortgage-backed securities 481,726
487,922
Total securities available for sale $ 665,233
$ 675,675

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
(In thousands)
Gross
Unrealized
Losses

Fair
Value

Gross
Unrealized
Losses

Fair
Value
Gross
Unrealized
Losses Fair
Value
September 30, 2019

Debt securities:

Mortgage-backed securities:

US Government-sponsored enterprises $ 140
$ 30,711
$ 1,188
$ 60,174
$ 1,328
$ 90,885
US Government agency 117
10,691
100
9,767
217
20,458
Private label 385
19,573
4
39
389
19,612
Obligations of states and political subdivisions thereof 20
4,138
127
1,692
147
5,830
Corporate bonds 493
14,506
186
7,186
679
21,692
Total securities available for sale $ 1,155
$ 79,619
$ 1,605
$ 78,858
$ 2,760
$ 158,477

December 31, 2018

Debt securities:
Mortgage-backed securities:
US Government-sponsored enterprises $ 155
$ 19,367
$ 9,289
$ 297,569
$ 9,444
$ 316,936
US Government agency 16
2,570
1,919
68,266
1,935
70,836
Private label 79
10,393
5
47
84
10,440
Obligations of states and political subdivisions thereof 43
6,784
2,033
47,930
2,076
54,714
Corporate bonds 224
11,759
412
14,460
636
26,219
Total securities available for sale $ 517
$ 50,873
$ 13,658
$ 428,272
$ 14,175
$ 479,145


	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, 2020
Debt securities:
Mortgage-backed securities:
US Government-sponsored enterprises	$	193	$	35,087		$	248	$	4,027	$	441	$	39,114
US Government agency		68		8,671			77		3,458		145		12,129
Private label		1		108			578		19,398		579		19,506
Obligations of states and political subdivisions thereof		—		247			—		—		—		247
Corporate bonds		1,687		41,260			—		—		1,687		41,260
Total securities available for sale	$	1,949	$	85,373	��	$	903	$	26,883	$	2,852	$	112,256


	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, 2019
Debt securities:
Mortgage-backed securities:
US Government-sponsored enterprises	$	1,074	$	43,429	$	1,006	$	49,712	$	2,080	$	93,141
US Government agency		432		19,717		115		9,120		547		28,837
Private label		380		9,843		367		9,411		747		19,254
Obligations of states and political subdivisions thereof		137		29,355		131		1,682		268		31,037
Corporate bonds		142		9,888		79		12,276		221		22,164
Total securities available for sale	$	2,165	$	112,232	$	1,698	$	82,201	$	3,863	$	194,433

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, ~~2019~~2020 and ~~2018~~2019 the Company did not record any other-than-temporary impairment (“OTTI”) losses.

Three Months Ended September 30, Nine Months Ended September 30,
2019 2018 2019 2018
Estimated credit losses as of prior year-end $ 1,697
$ 1,697
$ 1,697
$ 1,697
Reductions for securities paid off during the period —
—
—
—
Estimated credit losses at end of the period $ 1,697
$ 1,697
$ 1,697
$ 1,697

The following table presents the changes in estimated credit losses recognized by the Company for the periods presented:


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2020		2019		2020		2019
Estimated credit losses as of prior year-end	$	1,697	$	1,697	$	1,697	$	1,697
Reductions for securities paid off during the period		—		—		0		0
Estimated credit losses at end of the period	$	1,697	$	1,697	$	1,697	$	1,697

The Company expects to recover its amortized cost basis on all 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, ~~2019,~~2020, 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.

Table of Contents

The following summarizes, by investment security type, the basis for the conclusion that securities in an unrealized loss position were not ~~other-than-temporarily impaired~~OTTI at September 30, ~~2019:~~

2020:

US Government-sponsored enterprises

~~172~~

36 out of the total ~~702~~611 securities in the Company’s portfolios of AFS US Government-sponsored enterprises were in unrealized loss positions. Aggregate unrealized losses represented ~~1.4%~~1.12% of the amortized cost of securities in unrealized loss positions. The ~~FNMA~~Federal National Mortgage Association and ~~FHLMC~~Federal Home Loan Mortgage Corporation guarantee the contractual cash flows of all of the Company’s US 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 agency

14 out of the total ~~190~~166 securities in the Company’s portfolios of AFS US Government agency securities were in unrealized loss positions. Aggregate unrealized losses represented ~~1.0%~~1.18% 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 Government 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

~~Nine~~

11 of the total 2016 securities in the Company’s portfolio of AFS private label mortgage-backed securities were in unrealized loss positions. Aggregate unrealized losses represented ~~1.9%~~2.88% of the amortized cost of securities in unrealized loss positions. Based upon 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

~~Nine~~

1 of the total ~~219~~177 securities in the Company’s portfolio of AFS municipal bonds and obligations were in unrealized loss positions. Aggregate unrealized losses represented ~~2.5%~~0.08% 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 the risk. There were no material underlying credit downgrades during the quarter. All securities are performing.

Corporate bonds

~~Seven~~

13 out of the total 2634 securities in the Company’s portfolio of AFS corporate bonds were in an unrealized loss position. The aggregate unrealized loss represents ~~3.0%~~3.97% 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.

Table of Contents

NOTE 3. LOANS

The Company’s loan portfolio is comprised of the following segments: commercial real estate, commercial and industrial, residential real estate, and consumer loans. Commercial real estate loans include multi-family, commercial construction and land development, and other commercial real estate classes. Commercial and industrial loans include loans to commercial and agricultural businesses and tax exempt entities. Residential real estate loans consist of mortgages for 1-to-4 family housing. Consumer loans include home equity loans, auto and other installment loans.

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 previously acquired from other institutions. The following is a summary of total loans:

September 30, 2019 December 31, 2018
(in thousands) Business Activities Loans
Acquired
Loans
Total
Business
Activities Loans

Acquired
Loans
Total
Commercial real estate:

Construction and land development $ 28,802
$ 2,064
$ 30,866
$ 23,754
$ 2,890
$ 26,644
Other commercial real estate 672,885
220,022
892,907
555,980
244,075
800,055
Total commercial real estate 701,687
222,086
923,773
579,734
246,965
826,699

Commercial and industrial:

Commercial 239,894
40,490
280,384
234,757
52,470
287,227
Agricultural 21,206
—
21,206
22,317
—
22,317
Tax exempt 66,043
35,073
101,116
56,588
38,738
95,326
Total commercial and industrial 327,143
75,563
402,706
313,662
91,208
404,870

Total commercial loans 1,028,830
297,649
1,326,479
893,396
338,173
1,231,569

Residential real estate:

Residential mortgages 730,516
412,936
1,143,452
670,189
474,509
1,144,698
Total residential real estate 730,516
412,936
1,143,452
670,189
474,509
1,144,698

Consumer:

Home equity 58,556
37,600
96,156
57,898
45,291
103,189
Other consumer 10,234
985
11,219
9,414
1,357
10,771
Total consumer 68,790
38,585
107,375
67,312
46,648
113,960

Total loans $ 1,828,136
$ 749,170
$ 2,577,306
$ 1,630,897
$ 859,330
$ 2,490,227


	September 30, 2020						December 31, 2019
	Business						Business
	Activities		Acquired				Activities		Acquired
(in thousands)	Loans		Loans		Total		Loans		Loans		Total
Commercial real estate:
Construction and land development	$	86,927	$	2,191	$	89,118	$	31,387	$	2,903	$	34,290
Other commercial real estate		765,471		191,046		956,517		666,051		230,320		896,371
Total commercial real estate		852,398		193,237		1,045,635		697,438		233,223		930,661

Commercial and industrial:
Commercial		381,512		56,858		438,370		239,692		59,072		298,764
Agricultural		17,658		156		17,814		20,018		206		20,224
Tax exempt		41,951		24,375		66,326		66,860		37,443		104,303
Total commercial and industrial		441,121		81,389		522,510		326,570		96,721		423,291

Total commercial loans		1,293,519		274,626		1,568,145		1,024,008		329,944		1,353,952

Residential real estate:
Residential mortgages		695,766		325,440		1,021,206		740,687		411,170		1,151,857
Total residential real estate		695,766		325,440		1,021,206		740,687		411,170		1,151,857

Consumer:
Home equity		58,344		50,530		108,874		59,368		63,033		122,401
Other consumer		9,217		1,249		10,466		11,167		1,715		12,882
Total consumer		67,561		51,779		119,340		70,535		64,748		135,283

Total loans	$	2,056,846	$	651,845	$	2,708,691	$	1,835,230	$	805,862	$	2,641,092

The carrying amount of the acquired loans at September 30, ~~2019~~2020 totaled ~~$749.2~~$651.8 million. A subset of these loans was determined to have evidence of credit deterioration at acquisition date, which is accounted for in accordance with ASC ~~310-30.~~310-30, Accounting for Certain Loans or Debt Securities Acquired in a Transfer. These purchased credit-impaired loans presently maintain a carrying value of ~~$8.4~~$14.2 million (and total note balances of ~~$11.5~~$18.1 million). These loans are evaluated for impairment through the periodic reforecasting of expected cash flows. Acquired loans considered not impaired at the acquisition date had a carrying amount of ~~$740.8~~$637.6 million as of September 30, ~~2019.~~2020.

Table of Contents

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) 2019 2018
Balance at beginning of period $ 4,195
$ 2,807
Reclassification from non-accretable difference for loans with (decreased) improved cash flows (126 ) 1,985
Accretion (581 ) (315 )
Balance at end of period $ 3,488
$ 4,477

Nine Months Ended September 30,
(in thousands) 2019 2018
Balance at beginning of period $ 4,377
$ 3,509
Reclassification from non-accretable difference for loans with improved cash flows 498
2,031
Accretion (1,387 ) (1,063 )
Balance at end of period $ 3,488
$ 4,477


	Three Months Ended September 30,
(in thousands)	2020		2019
Balance at beginning of period	$	6,227	$	4,195
Net reclassifications from (to) nonaccretable difference		53		(126)
Accretion		(455)		(581)
Balance at end of period	$	5,825	$	3,488


	Nine Months Ended September 30,
(in thousands)	2020		2019
Balance at beginning of period	$	7,367	$	4,377
Net reclassifications from (to) nonaccretable difference		1,004		498
Accretion		(2,546)		(1,387)
Balance at end of period	$	5,825	$	3,488

The following is a summary of past due loans at September 30, ~~2019~~2020 and December 31, ~~2018:~~

2019:

Business Activities Loans


					90 Days or								Past Due >
	30-59 Days		60-89 Days		Greater		Total Past						90 days and
(in thousands)	Past Due		Past Due		Past Due		Due		Current		Total Loans		Accruing
September 30, 2020
Commercial real estate:
Construction and land development	$	0	$	0	$	212	$	212	$	86,715	$	86,927	$	0
Other commercial real estate		200		1,119		725		2,044		763,427		765,471		0
Total commercial real estate		200		1,119		937		2,256		850,142		852,398		0

Commercial and industrial:
Commercial		92		310		2,193		2,595		378,917		381,512		1,932
Agricultural		122		0		109		231		17,427		17,658		0
Tax exempt		0		0		0		0		41,951		41,951		0
Total commercial and industrial		214		310		2,302		2,826		438,295		441,121		1,932

Total commercial loans		414		1,429		3,239		5,082		1,288,437		1,293,519		1,932

Residential real estate:
Residential mortgages		217		112		1,369		1,698		694,068		695,766		0
Total residential real estate		217		112		1,369		1,698		694,068		695,766		0

Consumer:
Home equity		39		36		171		246		58,098		58,344		0
Other consumer		12		0		2		14		9,203		9,217		0
Total consumer		51		36		173		260		67,301		67,561		0

Total loans	$	682	$	1,577	$	4,781	$	7,040	$	2,049,806	$	2,056,846	$	1,932

(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, 2019

Commercial real estate:

Construction and land development $ —
$ —
$ 73
$ 73
$ 28,729
$ 28,802
$ 73
Other commercial real estate 985
56
6,773
7,814
665,071
672,885
—
Total commercial real estate 985
56
6,846
7,887
693,800
701,687
73

Commercial and industrial:
Commercial 772
64
1,145
1,981
237,913
239,894
—
Agricultural 121
72
25
218
20,988
21,206
—
Tax exempt —
—
—
—
66,043
66,043
—
Total commercial and industrial 893
136
1,170
2,199
324,944
327,143
—

Total commercial loans 1,878
192
8,016
10,086
1,018,744
1,028,830
73

Residential real estate:
Residential mortgages 399
345
871
1,615
728,901
730,516
71
Total residential real estate 399
345
871
1,615
728,901
730,516
71

Consumer:
Home equity 131
65
315
511
58,045
58,556
—
Other consumer 2
7
—
9
10,225
10,234
—
Total consumer 133
72
315
520
68,270
68,790
—

Total loans $ 2,410
$ 609
$ 9,202
$ 12,221
$ 1,815,915
$ 1,828,136
$ 144

Table of Contents

Acquired Loans


					90 Days or				Acquired				Past Due >
	30-59 Days		60-89 Days		Greater		Total Past		Credit				90 days and
(in thousands)	Past Due		Past Due		Past Due		Due		Impaired		Total Loans		Accruing
September 30, 2020
Commercial real estate:
Construction and land development	$	—	$	—	$	—	$	—	$	221	$	2,191	$	—
Other commercial real estate		169		156		678		1,003		7,227		191,046		—
Total commercial real estate		169		156		678		1,003		7,448		193,237		—

Commercial and industrial:
Commercial		450		65		18		533		1,182		56,858		—
Agricultural		—		—		—		—		156		156		—
Tax exempt		—		—		—		—		—		24,375		—
Total commercial and industrial		450		65		18		533		1,338		81,389		—

Total commercial loans		619		221		696		1,536		8,786		274,626		—

Residential real estate:
Residential mortgages		291		441		2,006		2,738		4,657		325,440		215
Total residential real estate		291		441		2,006		2,738		4,657		325,440		215

Consumer:
Home equity		291		133		170		594		711		50,530		69
Other consumer		—		—		—		—		44		1,249		—
Total consumer		291		133		170		594		755		51,779		69

Total loans	$	1,201	$	795	$	2,872	$	4,868	$	14,198	$	651,845	$	284

(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, 2019

Commercial real estate:

Construction and land development $ 12
$ —
$ —
$ 12
$ 190
$ 2,064
$ —
Other commercial real estate 434
—
240
674
4,859
220,022
72
Total commercial real estate 446
—
240
686
5,049
222,086
72

Commercial and industrial:
Commercial —
41
750
791
249
40,490
387
Agricultural —
—
—
—
—
—
—
Tax exempt —
—
—
—
—
35,073
—
Total commercial and industrial —
41
750
791
249
75,563
387

Total commercial loans 446
41
990
1,477
5,298
297,649
459

Residential real estate:
Residential mortgages 245
519
874
1,638
3,093
412,936
47
Total residential real estate 245
519
874
1,638
3,093
412,936
47

Consumer:
Home equity 356
133
180
669
19
37,600
37
Other consumer —
—
—
—
—
985
—
Total consumer 356
133
180
669
19
38,585
37

Total loans $ 1,047
$ 693
$ 2,044
$ 3,784
$ 8,410
$ 749,170
$ 543

Business Activities Loans


	`					90 Days or									Past Due >
		30-59 Days		60-89 Days		Greater		Total Past							90 days and
(in thousands)		Past Due		Past Due		Past Due		Due		Current		Total Loans			Accruing
December 31, 2019
Commercial real estate:
Construction and land development		$	205	$	53	$	—	$	258	$	31,129	$	31,387		$	—
Other commercial real estate			40		1,534		1,810		3,384		662,667		666,051			—
Total commercial real estate			245		1,587		1,810		3,642		693,796		697,438			—

Commercial and industrial:
Commercial			452		50		894		1,396		238,296		239,692			—
Agricultural			62		34		96		192		19,826		20,018			—
Tax exempt			—		—		—		—		66,860		66,860			—
Total commercial and industrial			514		84		990		1,588		324,982		326,570			—

Total commercial loans			759		1,671		2,800		5,230		1,018,778		1,024,008			—

Residential real estate:
Residential mortgages			7,293		1,243		668		9,204		731,483		740,687			—
Total residential real estate			7,293		1,243		668		9,204		731,483		740,687			—

Consumer:
Home equity			597		43		429		1,069		58,299		59,368			50
Other consumer			36		12		—		48		11,119		11,167			—
Total consumer			633		55		429		1,117		69,418		70,535	��		50

Total loans		$	8,685	$	2,969	$	3,897	$	15,551	$	1,819,679	$	1,835,230		$	50

(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, 2018

Commercial real estate:

Construction and land development $ —
$ —
$ —
$ —
$ 23,754
$ 23,754
$ —
Other commercial real estate 1,146
—
6,725
7,871
548,109
555,980
—
Total commercial real estate 1,146
—
6,725
7,871
571,863
579,734
—

Commercial and industrial:
Commercial 395
60
402
857
233,900
234,757
50
Agricultural 65
6
25
96
22,221
22,317
—
Tax exempt —
—
—
—
56,588
56,588
—
Total commercial and industrial 460
66
427
953
312,709
313,662
50

Total commercial loans 1,606
66
7,152
8,824
884,572
893,396
50

Residential real estate:
Residential mortgages 3,565
641
1,309
5,515
664,674
670,189
—
Total residential real estate 3,565
641
1,309
5,515
664,674
670,189
—

Consumer:
Home equity 72
—
—
72
57,826
57,898
—
Other consumer 17
—
11
28
9,386
9,414
—
Total consumer 89
—
11
100
67,212
67,312
—

Total loans $ 5,260
$ 707
$ 8,472
$ 14,439
$ 1,616,458
$ 1,630,897
$ 50

Table of Contents

Acquired Loans


					90 Days or				Acquired				Past Due >
	30-59 Days		60-89 Days		Greater		Total Past		Credit				90 days and
(in thousands)	Past Due		Past Due		Past Due		Due		Impaired		Total Loans		Accruing
December 31, 2019
Commercial real estate:
Construction and land development	$	—	$	12	$	—	$	12	$	384	$	2,903	$	—
Other commercial real estate		2,029		245		231		2,505		8,289		230,320		—
Total commercial real estate		2,029		257		231		2,517		8,673		233,223		—

Commercial and industrial:
Commercial		440		335		140		915		2,723		59,072		—
Agricultural		—		—		—		—		173		206		—
Tax exempt		—		—		—		—		36		37,443		—
Total commercial and industrial		440		335		140		915		2,932		96,721		—

Total commercial loans		2,469		592		371		3,432		11,605		329,944		—

Residential real estate:
Residential mortgages		3,185		864		1,015		5,064		5,591		411,170		—
Total residential real estate		3,185		864		1,015		5,064		5,591		411,170		—

Consumer:
Home equity		208		548		217		973		1,291		63,033		217
Other consumer		2		9		—		11		66		1,715		—
Total consumer		210		557		217		984		1,357		64,748		217

Total loans	$	5,864	$	2,013	$	1,603	$	9,480	$	18,553	$	805,862	$	217

(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
December 31, 2018

Commercial real estate:

Construction and land development $ —
$ —
$ —
$ —
$ 164
$ 2,890
$ —
Other commercial real estate 631
99
211
941
6,143
244,075
—
Total commercial real estate 631
99
211
941
6,307
246,965
—

Commercial and industrial:
Commercial 149
26
494
669
679
52,470
—
Agricultural —
—
—
—
—
—
—
Tax exempt —
—
—
—
—
38,738
—
Total commercial and industrial 149
26
494
669
679
91,208
—

Total commercial loans 780
125
705
1,610
6,986
338,173
—

Residential real estate:
Residential mortgages 3,419
254
1,792
5,465
3,095
474,509
—
Total residential real estate 3,419
254
1,792
5,465
3,095
474,509
—

Consumer:
Home equity 198
—
66
264
22
45,291
7
Other consumer 17
—
—
17
3
1,357
189
Total consumer 215
—
66
281
25
46,648
196

Total loans $ 4,414
$ 379
$ 2,563
$ 7,356
$ 10,106
$ 859,330
$ 196

Table of Contents

Non-Accrual Loans

The following is summary information pertaining to non-accrual loans at September 30, ~~2019~~2020 and December 31, ~~2018:~~2019:


	September 30, 2020						December 31, 2019
	Business						Business
	Activities		Acquired				Activities		Acquired
(in thousands)	Loans		Loans		Total		Loans		Loans		Total
Commercial real estate:
Construction and land development	$	212	$	0	$	212	$	258	$	0	$	258
Other commercial real estate		1,818		2,684		4,502		2,888		343		3,231
Total commercial real estate		2,030		2,684		4,714		3,146		343		3,489

Commercial and industrial:
Commercial		918		416		1,334		932		626		1,558
Agricultural		486		0		486		278		0		278
Tax exempt		0		0		0		0		0		0
Total commercial and industrial		1,404		416		1,820		1,210		626		1,836

Total commercial loans		3,434		3,100		6,534		4,356		969		5,325

Residential real estate:
Residential mortgages		3,864		3,290		7,154		3,362		1,973		5,335
Total residential real estate		3,864		3,290		7,154		3,362		1,973		5,335

Consumer:
Home equity		450		255		705		615		254		869
Other consumer		15		0		15		21		0		21
Total consumer		465		255		720		636		254		890

Total loans	$	7,763	$	6,645	$	14,408	$	8,354	$	3,196	$	11,550

September 30, 2019 December 31, 2018
(in thousands)
Business
Activities Loans

Acquired
Loans
Total
Business
Activities Loans

Acquired
Loans
Total
Commercial real estate:

Construction and land development $ 1
$ —
$ 1
$ 1
$ —
$ 1
Other commercial real estate 8,172
346
8,518
7,873
282
8,155
Total commercial real estate 8,173
346
8,519
7,874
282
8,156

Commercial and industrial:
Commercial 1,268
575
1,843
1,423
643
2,066
Agricultural 234
—
234
265
—
265
Tax exempt —
—
—
—
—
—
Total commercial and industrial 1,502
575
2,077
1,688
643
2,331

Total commercial loans 9,675
921
10,596
9,562
925
10,487

Residential real estate:
Residential mortgages 3,277
2,063
5,340
4,213
2,997
7,210
Total residential real estate 3,277
2,063
5,340
4,213
2,997
7,210

Consumer:
Home equity 564
154
718
246
201
447
Other consumer 25
—
25
90
1
91
Total consumer 589
154
743
336
202
538

Total loans $ 13,541
$ 3,138
$ 16,679
$ 14,111
$ 4,124
$ 18,235

Table of Contents

Loans evaluated for impairment as of September 30, ~~2019~~2020 and December 31, ~~2018~~2019 are, as follows:

Business Activities Loans

(in thousands)
Commercial
real estate
Commercial and industrial
Residential
real estate
Consumer Total
September 30, 2019

Balance at end of period

Individually evaluated for impairment $ 8,759
$ 1,323
$ 2,643
$ 13
$ 12,738
Collectively evaluated 692,928
325,820
727,873
68,777
1,815,398
Total $ 701,687
$ 327,143
$ 730,516
$ 68,790
$ 1,828,136


	Commercial		Commercial		Residential
(in thousands)	real estate		and industrial		real estate		Consumer		Total
September 30, 2020
Balance at end of period
Individually evaluated for impairment	$	2,586	$	1,274	$	2,233	$	12	$	6,105
Collectively evaluated		849,812		439,847		693,533		67,549		2,050,741
Total	$	852,398	$	441,121	$	695,766	$	67,561	$	2,056,846

Acquired Loans

(in thousands) Commercial
real estate Commercial and industrial Residential
real estate Consumer Total
September 30, 2019

Balance at end of period
Individually evaluated for impairment $ 257
$ 414
$ 973
$ —
$ 1,644
Purchased credit impaired 5,049
249
3,093
19
8,410
Collectively evaluated 216,780
74,900
408,870
38,566
739,116
Total $ 222,086
$ 75,563
$ 412,936
$ 38,585
$ 749,170


	Commercial		Commercial		Residential
(in thousands)	real estate		and industrial		real estate		Consumer		Total
September 30, 2020
Balance at end of period
Individually evaluated for impairment	$	2,358	$	322	$	832	$	—	$	3,512
Purchased credit impaired		7,448		1,338		4,657		755		14,198
Collectively evaluated		183,431		79,729		319,951		51,024		634,135
Total	$	193,237	$	81,389	$	325,440	$	51,779	$	651,845

Business Activities Loans


	Commercial		Commercial		Residential
(in thousands)	real estate		and industrial		real estate		Consumer		Total
December 31, 2019
Balance at end of period
Individually evaluated for impairment	$	3,964	$	1,353	$	2,620	$	13	$	7,950
Collectively evaluated		693,474		325,217		738,067		70,522		1,827,280
Total	$	697,438	$	326,570	$	740,687	$	70,535	$	1,835,230

Acquired Loans


	Commercial		Commercial		Residential
(in thousands)	real estate		and industrial		real estate		Consumer		Total
December 31, 2019
Balance at end of period
Individually evaluated for impairment	$	258	$	385	$	1,032	$	—	$	1,675
Purchased credit impaired		8,673		2,932		5,591		1,357		18,553
Collectively evaluated		224,292		93,404		404,547		63,391		785,634
Total	$	233,223	$	96,721	$	411,170	$	64,748	$	805,862

(in thousands) Commercial
real estate Commercial and industrial Residential
real estate Consumer Total
December 31, 2018

Balance at end of period

Individually evaluated for impairment $ 9,835
$ 1,445
$ 2,562
$ 13
$ 13,855
Collectively evaluated 569,899
312,217
667,627
67,299
1,617,042
Total $ 579,734
$ 313,662
$ 670,189
$ 67,312
$ 1,630,897

(in thousands) Commercial
real estate Commercial and industrial Residential
real estate Consumer Total
December 31, 2018

Balance at end of period
Individually evaluated for impairment $ 188
$ 426
$ 744
$ —
$ 1,358
Purchased credit impaired 6,307
679
3,095
25
10,106
Collectively evaluated 240,470
90,103
470,670
46,623
847,866
Total $ 246,965
$ 91,208
$ 474,509
$ 46,648
$ 859,330

The following is a summary of impaired loans at September 30, ~~2019~~2020 and December 31, ~~2018:~~

2019:

Business Activities Loans


	September 30, 2020
	Recorded		Unpaid Principal		Related
(in thousands)	Investment		Balance		Allowance
With no related allowance:
Construction and land development	$	0	$	0	$	0
Other commercial real estate		1,941		2,020		0
Commercial		678		773		0
Agricultural		155		158		0
Tax exempt loans		0		0		0
Residential real estate		1,555		1,649		0
Home equity		0		0		0
Other consumer		0		0		0

With an allowance recorded:
Construction and land development		210		210		158
Other commercial real estate		435		503		185
Commercial		216		216		18
Agricultural		225		361		225
Tax exempt loans		0		0		0
Residential real estate		678		725		45
Home equity		12		12		1
Other consumer		0		0		0

Total
Commercial real estate		2,586		2,733		343
Commercial and industrial		1,274		1,508		243
Residential real estate		2,233		2,374		45
Consumer		12		12		1
Total impaired loans	$	6,105	$	6,627	$	632

Table of Contents

Acquired Loans


	September 30, 2020
	Recorded		Unpaid Principal		Related
(in thousands)	Investment		Balance		Allowance
With no related allowance:
Construction and land development	$	—	$	—	$	—
Other commercial real estate		1,584		1,605		—
Commercial		257		353		—
Agricultural		—		—		—
Tax exempt loans		—		—		—
Residential real estate		403		683		—
Home equity		—		—		—
Other consumer		—		—		—

With an allowance recorded:
Construction and land development		—		—		—
Other commercial real estate		774		793		297
Commercial		65		67		7
Agricultural		—		—		—
Tax exempt loans		—		—		—
Residential real estate		429		522		52
Home equity		—		—		—
Other consumer		—		—		—

Total
Commercial real estate		2,358		2,398		297
Commercial and industrial		322		420		7
Residential real estate		832		1,205		52
Consumer		—		—		—
Total impaired loans	$	3,512	$	4,023	$	356

September 30, 2019
(in thousands) Recorded Investment
Unpaid Principal
Balance
Related Allowance
With no related allowance:

Construction and land development $ —
$ —
$ —
Other commercial real estate 5,634
5,675
—
Commercial 657
713
—
Agricultural —
—
—
Tax exempt loans —
—
—
Residential real estate 2,082
2,236
—
Home equity —
—
—
Other consumer —
—
—

With an allowance recorded:
Construction and land development $ 1
$ 1
$ 1
Other commercial real estate 3,124
3,262
989
Commercial 666
694
240
Agricultural —
—
—
Tax exempt loans —
—
—
Residential real estate 561
594
66
Home equity 13
13
1
Other consumer —
—
—

Total
Commercial real estate $ 8,759
$ 8,938
$ 990
Commercial and industrial 1,323
1,407
240
Residential real estate 2,643
2,830
66
Consumer 13
13
1
Total impaired loans $ 12,738
$ 13,188
$ 1,297

September 30, 2019
(in thousands) Recorded Investment
Unpaid Principal
Balance
Related Allowance
With no related allowance:

Construction and land development $ —
$ —
$ —
Other commercial real estate 90
90
—
Commercial 414
508
—
Agricultural —
—
—
Tax exempt loans —
—
—
Residential real estate 616
852
—
Home equity —
—
—
Other consumer —
—
—

With an allowance recorded:
Construction and land development $ —
$ —
$ —
Other commercial real estate 167
168
12
Commercial —
—
—
Agricultural —
—
—
Tax exempt loans —
—
—
Residential real estate 357
376
32
Home equity —
—
—
Other consumer —
—
—

Total
Commercial real estate $ 257
$ 258
$ 12
Commercial and industrial 414
508
—
Residential real estate 973
1,228
32
Consumer —
—
—
Total impaired loans $ 1,644
$ 1,994
$ 44

Business Activities Loans


	December 31, 2019
	Recorded		Unpaid Principal		Related
(in thousands)	Investment		Balance		Allowance
With no related allowance:
Construction and land development	$	—	$	—	$	—
Other commercial real estate		1,911		1,957		—
Commercial		710		773		—
Agricultural		361		361		—
Tax exempt loans		—		—		—
Residential real estate		2,067		2,227		—
Home equity		—		—		—
Other consumer		—		—		—

With an allowance recorded:
Construction and land development		258		258		205
Other commercial real estate		1,795		1,940		1,026
Commercial		282		289		164
Agricultural		—		—		—
Tax exempt loans		—		—		—
Residential real estate		553		590		57
Home equity		13		13		—
Other consumer		—		—		—

Total
Commercial real estate		3,964		4,155		1,231
Commercial and industrial		1,353		1,423		164
Residential real estate		2,620		2,817		57
Consumer		13		13		—
Total impaired loans	$	7,950	$	8,408	$	1,452

Table of Contents

Acquired Loans


	December 31, 2019
	Recorded		Unpaid Principal		Related
(in thousands)	Investment		Balance		Allowance
With no related allowance:
Construction and land development	$	—	$	—	$	—
Other commercial real estate		90		90		—
Commercial		385		481		—
Agricultural		—		—		—
Tax exempt		—		—		—
Residential mortgages		678		938		—
Home equity		—		—		—
Other consumer		—		—		—

With an allowance recorded:
Construction and land development		—		—		—
Other commercial real estate		168		168		12
Commercial		—		—		—
Agricultural		—		—		—
Tax exempt		—		—		—
Residential mortgages		354		376		49
Home equity		—		—		—
Other consumer		—		—		—

Total
Commercial real estate		258		258		12
Commercial and industrial		385		481		—
Residential real estate		1,032		1,314		49
Consumer		—		—		—
Total impaired loans	$	1,675	$	2,053	$	61

December 31, 2018
(in thousands) Recorded Investment
Unpaid Principal
Balance
Related Allowance
With no related allowance:

Construction and land development $ —
$ —
$ —
Other commercial real estate 8,209
8,301
—
Commercial 649
669
—
Agricultural —
—
—
Tax exempt loans —
—
—
Residential real estate 1,671
1,709
—
Home equity —
—
—
Other consumer —
—
—

With an allowance recorded:
Construction and land development $ 1
$ 1
$ 1
Other commercial real estate 1,625
1,660
421
Commercial 796
855
78
Agricultural —
—
—
Tax exempt loans —
—
—
Residential real estate 891
916
111
Home equity 13
13
—
Other consumer —
—
—

Total
Commercial real estate $ 9,835
$ 9,962
$ 422
Commercial and industrial 1,445
1,524
78
Residential real estate 2,562
2,625
111
Consumer 13
13
—
Total impaired loans $ 13,855
$ 14,124
$ 611

December 31, 2018
(in thousands) Recorded Investment
Unpaid Principal
Balance
Related Allowance
With no related allowance:

Construction and land development $ —
$ —
$ —
Other commercial real estate 188
187
—
Commercial 426
510
—
Agricultural —
—
—
Tax exempt —
—
—
Residential mortgages 375
524
—
Home equity —
—
—
Other consumer —
—
—

With an allowance recorded:
Construction and land development $ —
$ —
$ —
Other commercial real estate —
—
—
Commercial —
—
—
Agricultural —
—
—
Tax exempt —
—
—
Residential mortgages 369
379
41
Home equity —
—
—
Other consumer —
—
—

Total
Commercial real estate $ 188
$ 187
$ —
Commercial and industrial 426
510
—
Residential real estate 744
903
41
Consumer —
—
—
Total impaired loans $ 1,358
$ 1,600
$ 41

The following is a summary of the average recorded investment and interest income recognized on impaired loans for the three and nine months ended September 30, ~~2019~~2020 and ~~2018:~~

2019:

Business Activities Loans


	Three Months Ended September 30, 2020				Three Months Ended September 30, 2019
	Average Recorded		Interest		Average Recorded		Interest
(in thousands)	Investment		Income Recognized		Investment		Income Recognized
With no related allowance:
Construction and land development	$	—	$	—	$	—	$	—
Other commercial real estate		1,899		14		5,528		63
Commercial		692		1		747		4
Agricultural		157		—		—		—
Tax exempt loans		—		—		—		—
Residential real estate		1,547		12		2,041		16
Home equity		—		—		—		—
Other consumer		—		—		—		—

With an allowance recorded:
Construction and land development		205		—		1		—
Other commercial real estate		429		—		3,217		—
Commercial		212		1		654		—
Agricultural		—		—		—		—
Tax exempt loans		—		—		—		—
Residential real estate		665		3		551		2
Home equity		12		—		12		—
Other consumer		—		—		—		—

Total
Commercial real estate		2,533		14		8,746		52
Commercial and industrial		1,061		2		1,401		4
Residential real estate		2,212		15		2,592		18
Consumer		12		—		12		—
Total impaired loans	$	5,818	$	31	$	12,751	$	74

Table of Contents

Business Activities Loans


	Nine Months Ended September 30, 2020				Nine Months Ended September 30, 2019
	Average Recorded		Interest		Average Recorded		Interest
(in thousands)	Investment		Income Recognized		Investment		Income Recognized
With no related allowance:
Construction and land development	$	—	$	—	$	—	$	—
Other commercial real estate		1,427		14		5,466		56
Commercial		732		2		792		7
Agricultural		101		—		—		—
Tax exempt loans		—		—		—		—
Residential real estate		1,581		25		2,089		47
Home equity		—		—		—		—
Other consumer		—		—		—		—

With an allowance recorded:
Construction and land development		208		—		2		—
Other commercial real estate		452		—		2,972		29
Commercial		97		2		497		—
Agricultural		—		—		—		—
Tax exempt loans		—		—		—		—
Residential real estate		681		9		540		7
Home equity		12		—		13		—
Other consumer		—		—		—		—

Total
Commercial real estate		2,087		14		8,440		85
Commercial and industrial		930		4		1,289		7
Residential real estate		2,262		34		2,629		54
Consumer		12		—		13		—
Total impaired loans	$	5,291	$	52	$	12,371	$	146

Three Months Ended September 30, 2019 Three Months Ended September 30, 2018
(in thousands)
Average Recorded
Investment

Interest
Income Recognized

Average Recorded
Investment

Interest
Income Recognized
With no related allowance:

Construction and land development $ —
$ —
$ —
$ —
Other commercial real estate 5,528
52
6,639
31
Commercial 747
4
625
2
Agricultural —
—
—
—
Tax exempt loans —
—
—
—
Residential real estate 2,041
16
3,955
9
Home equity —
—
158
—
Other consumer —
—
—
—

With an allowance recorded:
Construction and land development $ 1
$ —
$ 1
$ —
Other commercial real estate 3,217
—
2,214
—
Commercial 654
—
788
—
Agricultural —
—
—
—
Tax exempt loans —
—
—
—
Residential real estate 551
2
888
3
Home equity 12
—
13
—
Other consumer —
—
—
—

Total
Commercial real estate $ 8,746
$ 52
$ 8,854
$ 31
Commercial and industrial 1,401
4
1,413
2
Residential real estate 2,592
18
4,843
12
Consumer 12
—
171
—
Total impaired loans $ 12,751
$ 74
$ 15,281
$ 45

Table of Contents

Acquired Loans


	Three Months Ended September 30, 2020				Three Months Ended September 30, 2019
	Average Recorded		Interest		Average Recorded		Interest
(in thousands)	Investment		Income Recognized		Investment		Income Recognized
With no related allowance:
Construction and land development	$	—	$	—	$	—	$	—
Other commercial real estate		1,566		—		88		—
Commercial		264		—		395		—
Agricultural		—		—		—		—
Tax exempt loans		—		—		—		—
Residential real estate		519		—		702		—
Home equity		—		—		—		—
Other consumer		—		—		—		—

With an allowance recorded:
Construction and land development		—		—		—		—
Other commercial real estate		782		3		165		—
Commercial		67		—		—		—
Agricultural		—		—		—		—
Tax exempt loans		—		—		—		—
Residential real estate		420		—		352		—
Home equity		—		—		—		—
Other consumer		—		—		—		—

Total
Commercial real estate		2,348		3		253		—
Commercial and industrial		331		—		395		—
Residential real estate		939		—		1,054		—
Consumer		—		—		—		—
Total impaired loans	$	3,618	$	3	$	1,702	$	—

Nine Months Ended September 30, 2019 Nine Months Ended September 30, 2018
(in thousands)
Average Recorded
Investment

Interest
Income Recognized

Average Recorded
Investment

Interest
Income Recognized
With no related allowance:

Construction and land development $ —
$ —
$ —
$ —
Other commercial real estate 5,466
56
6,204
46
Commercial 792
7
628
7
Agricultural —
—
—
—
Tax exempt loans —
—
—
—
Residential real estate 2,089
47
4,027
28
Home equity —
—
236
—
Other consumer —
—
—
—

With an allowance recorded:
Construction and land development $ 2
$ —
$ 1
$ —
Other commercial real estate 2,972
29
1,600
6
Commercial 497
—
716
—
Agricultural —
—
—
—
Tax exempt loans —
—
—
—
Residential real estate 540
7
800
7
Home equity 13
—
13
—
Other consumer —
—
—
—

Total
Commercial real estate $ 8,440
$ 85
$ 7,805
$ 52
Commercial and industrial 1,289
7
1,344
7
Residential real estate 2,629
54
4,827
35
Consumer 13
—
249
—
Total impaired loans $ 12,371
$ 146
$ 14,225
$ 94

Table of Contents

Acquired Loans


	Nine Months Ended September 30, 2020				Nine Months Ended September 30, 2019
	Average Recorded		Interest		Average Recorded		Interest
(in thousands)	Investment		Income Recognized		Investment		Income Recognized
With no related allowance:
Construction and land development	$	—	$	—	$	—	$	—
Other commercial real estate		1,097		—		89		—
Commercial		318		—		429		—
Agricultural		—		—		—		—
Tax exempt loans		—		—		—		—
Residential real estate		541		—		593		—
Home equity		—		—		—		—
Other consumer		—		—		—		—

With an allowance recorded:
Construction and land development		—		—		—		—
Other commercial real estate		639		3		123		—
Commercial		75		—		—		—
Agricultural		—		—		—		—
Tax exempt loans		—		—		—		—
Residential real estate		432		—		361		—
Home equity		—		—		—		—
Other consumer		—		—		—		—

Total
Commercial real estate		1,736		3		212		—
Commercial and industrial		393		—		429		—
Residential real estate		973		—		954		—
Consumer		—		—		—		—
Total impaired loans	$	3,102	$	3	$	1,595	$	—

Three Months Ended September 30, 2019 Three Months Ended September 30, 2018
(in thousands)
Average Recorded
Investment

Interest
Income Recognized

Average Recorded
Investment

Interest
Income Recognized
With no related allowance:

Construction and land development $ —
$ —
$ —
$ —
Other commercial real estate 88
—
95
—
Commercial 395
—
469
—
Agricultural —
—
—
—
Tax exempt loans —
—
—
—
Residential real estate 702
—
276
—
Home equity —
—
—
—
Other consumer —
—
—
—

With an allowance recorded:
Construction and land development $ —
$ —
$ —
$ —
Other commercial real estate 165
—
—
—
Commercial —
—
—
—
Agricultural —
—
—
—
Tax exempt loans —
—
—
—
Residential real estate 352
—
181
—
Home equity —
—
—
—
Other consumer —
—
—
—

Total
Commercial real estate $ 253
$ —
$ 95
$ —
Commercial and industrial 395
—
469
—
Residential real estate 1,054
—
457
—
Consumer —
—
—
—
Total impaired loans $ 1,702
$ —
$ 1,021
$ —

Nine Months Ended September 30, 2019 Nine Months Ended September 30, 2018
(in thousands)
Average Recorded
Investment

Interest
Income Recognized

Average Recorded
Investment

Interest
Income Recognized
With no related allowance:

Construction and land development $ —
$ —
$ —
$ —
Other commercial real estate 89
—
97
1
Commercial 429
—
445
1
Agricultural —
—
—
—
Tax exempt loans —
—
—
—
Residential real estate 593
—
124
—
Home equity —
—
—
—
Other consumer —
—
—
—

With an allowance recorded:
Construction and land development $ —
$ —
$ —
$ —
Other commercial real estate 123
—
—
—
Commercial —
—
—
—
Agricultural —
—
—
—
Tax exempt loans —
—
—
—
Residential real estate 361
—
186
—
Home equity —
—
—
—
Other consumer —
—
—
—

Total
Commercial real estate $ 212
$ —
$ 97
$ 1
Commercial and industrial 429
—
445
1
Residential real estate 954
—
310
—
Consumer —
—
—
—
Total impaired loans $ 1,595
$ —
$ 852
$ 2

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 three and nine months ended September 30, ~~2019~~2020 and ~~2018,~~2019, 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. 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.


	Three Months Ended September 30, 2020
		Pre-Modification		Post-Modification
	Number of	Outstanding Recorded		Outstanding Recorded
(in thousands, except modifications)	Modifications	Investment		Investment
Troubled Debt Restructurings
Agricultural	1	$	86	$	86
Total	1	$	86	$	86


	Three Months Ended September 30, 2019
		Pre-Modification		Post-Modification
	Number of	Outstanding Recorded		Outstanding Recorded
(in thousands, except modifications)	Modifications	Investment		Investment
Troubled Debt Restructurings
Other commercial real estate	4	$	268	$	267
Agricultural	1		141		141
Residential mortgages	2		399		342
Total	7	$	808	$	750


	Nine Months Ended September 30, 2020
		Pre-Modification		Post-Modification
	Number of	Outstanding Recorded		Outstanding Recorded
(in thousands, except modifications)	Modifications	Investment		Investment
Troubled Debt Restructurings
Other commercial real estate	1	$	54	$	247
Other commercial	3		41		162
Agricultural	1		86		86
Home equity	1		26		24
Other consumer	1		9		9
Total	7	$	216	$	528


	Nine Months Ended September 30, 2019
		Pre-Modification			Post-Modification
	Number of	Outstanding Recorded		Outstanding Recorded
(in thousands, except modifications)	Modifications	Investment		Investment
Troubled Debt Restructurings
Other commercial real estate	9	$	543	$	529
Other commercial	4		168		91
Agricultural	1		141		141
Residential mortgages	11		1,133		1,034
Total	25	$	1,985	$	1,795

Three Months Ended September 30, 2019
(in thousands, except modifications)
Number of
Modifications

Pre-Modification
Outstanding Recorded
Investment

Post-Modification
Outstanding Recorded
Investment
Troubled Debt Restructurings

Other commercial real estate 4
$ 268
$ 267
Agricultural 1
141
141
Residential mortgages 2
399
342
Total 7
$ 808
$ 750

Three Months Ended September 30, 2018
(in thousands, except modifications)
Number of
Modifications

Pre-Modification
Outstanding Recorded
Investment

Post-Modification
Outstanding Recorded
Investment
Troubled Debt Restructurings

Construction and land development 1
$ 2
$ 1
Other commercial real estate 1
72
72
Commercial 5
104
60
Residential mortgages 2
228
225
Total 9
$ 406
$ 358

Nine Months Ended September 30, 2019
(in thousands)
Number of
Modifications

Pre-Modification
Outstanding Recorded
Investment

Post-Modification
Outstanding Recorded
Investment
Troubled Debt Restructurings

Other commercial real estate 9
$ 543
$ 529
Other commercial 4
168
91
Agricultural 1
141
141
Residential mortgages 11
1,133
1,034
Total 25
$ 1,985
$ 1,795

Nine Months Ended September 30, 2018
(in thousands)
Number of
Modifications

Pre-Modification
Outstanding Recorded
Investment

Post-Modification
Outstanding Recorded
Investment
Troubled Debt Restructurings

Construction and land development 1
$ 2
$ 1
Other commercial real estate 9
1,896
1,564
Other commercial 7
556
486
Agricultural 1
167
—
Residential mortgages 15
2,752
2,168
Home equity 1
100
100
Other consumer 2
5
4
Total 36
$ 5,478
$ 4,323

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

Three Months Ended September 30,
2019 2018
(in thousands, except modifications)
Number of
Modifications
Post-Modification Outstanding Recorded Investment
Number of
Modifications
Post-Modification Outstanding Recorded Investment
Interest only payments 2
$ 90
—
$ —
Forbearance 1
141
1
115
Forbearance and interest only payments 2
176
3
72
Forbearance and maturity concession —
—
4
143
Forbearance, amortization and maturity concession 2
343
—
—
Maturity concession —
—
1
28
Total 7
$ 750
9
$ 358

Nine Months Ended September 30,
2019 2018
(in thousands, except modifications)
Number of
Modifications
Post-Modification Outstanding Recorded Investment
Number of
Modifications
Post-Modification Outstanding Recorded Investment
Interest rate and maturity concession —
$ —
1
$ 16
Interest only payments 2
90
—
—
Interest only payments and maturity concession 2
73
—
—
Amortization and maturity concession 4
273
—
—
Amortization, interest rate and maturity concession 1
77
—
—
Forbearance 3
253
3
271
Forbearance and interest only payments 5
331
6
121
Forbearance and maturity concession —
—
17
1,774
Forbearance, amortization and maturity concession 7
640
—
—
Maturity concession —
—
2
440
Restructure with maturity concession —
—
5
1,419
Other 1
58
2
282
Total 25
$ 1,795
36
$ 4,323


	Three Months Ended September 30,
	2020			2019
		Post-Modification			Post-Modification
		Outstanding			Outstanding
	Number of	Recorded		Number of	Recorded
(in thousands, except modifications)	Modifications	Investment		Modifications	Investment
Troubled Debt Restructurings
Interest only payments	—	$	—	2	$	90
Forbearance	—		—	1		141
Forbearance and interest only payments	—		—	2		176
Forbearance, amortization and maturity concession	—		—	2		343
Maturity concession	1		86	—		—
Total	1	$	86	7	$	750


	Nine Months Ended September 30,
	2020			2019
		Post-Modification			Post-Modification
		Outstanding			outstanding
	Number of	Recorded		Number of	Recorded
(in thousands, except modifications)	Modifications	Investment		Modifications	Investment
Troubled Debt Restructurings
Interest only payments	0	$	0	2	$	90
Interest only payments and maturity concession	0		0	2		73
Interest rate, forbearance and maturity concession	4		409	0		0
Amortization and maturity concession	0		0	4		273
Amortization, interest rate and maturity concession	0		0	1		77
Forbearance	0		0	3		253
Forbearance and interest only payments	1		24	5		331
Forbearance, amortization and maturity concession	0		0	7		640
Maturity concession	2		95	0		0
Other	0		0	1		58
Total	7	$	528	25	$	1,795

For the three and nine months ended September 30, ~~2019,~~2020, there were no0 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 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 for more information.

The Company modified 588 commercial loans totaling $375.0 million and 564 residential loans totaling $98.5 million. As of September 30, ~~2019~~2020 total outstanding deferrals were $78.7 million, which primarily consist of interest only forbearance. Outstanding deferrals consisted of 110 commercial loans totaling $74.1 million and 86 residential loans totaling $4.6 million.

Foreclosure

As of September 30, 2020 and December 31, ~~2018,~~2019, the Company maintained bank-owned residential real estate ~~property~~ with a fair value of ~~$2.5~~$1.9 million. Additionally, residential mortgage loans collateralized by real estate ~~property~~ that are in the process of foreclosure as of September 30, ~~2019~~2020 and December 31, ~~2018~~2019 totaled ~~$931~~$917 thousand and ~~$1.5 million,~~$810 thousand, respectively.

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Mortgage Banking

The Bank sells loans in the secondary market and retains the ability to service many of these loans. The Bank earns fees for the servicing provided. Loans serviced for others are not included in the accompanying consolidated balance sheets. The risks inherent in servicing assets relate primarily to changes in prepayments that result from shifts in interest rates.

Servicing rights activity during the three and nine months ended September 30, 2020 and 2019, included in other assets, was as follows:


	At or for the Three Months Ended September 30,				At or for the Nine Months Ended September 30,
(in thousands)	2020		2019		2020		2019
Balance at beginning of year	$	2,939	$	2,941	$	3,001	$	3,086
Acquired		—		—		—		—
Additions		515		106		796		213
Amortization		(220)		(138)		(563)		(390)
Balance at end of year	$	3,234	$	2,909	$	3,234	$	2,909

Total residential loans included held for sale loans of ~~$4.0~~$23.7 million and ~~$168 thousand~~$6.5 million at September 30, ~~2019~~2020 and December 31, ~~2018,~~2019, respectively.

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NOTE 4. ALLOWANCE FOR LOAN LOSSES

The allowance for loan losses is maintained at a level considered adequate to provide for an estimate of probable credit losses inherent in the loan portfolio. The allowance is increased by the provision charged to operating expense and reduced by net charge-offs. Loans are charged against the allowance for loan losses when the Company believes collectability has declined to a point where there is a distinct possibility of some loss of principal and interest. While the Company uses the best information available to make the evaluation, future adjustments may be necessary if there are significant changes in conditions.

The allowance is comprised of ~~four~~4 distinct reserve components: (1) specific reserves related to loans individually evaluated; (2) quantitative reserves related to loans collectively evaluated; (3) qualitative reserves related to loans collectively evaluated; and (4) a temporal estimate is made for incurred loss emergence period for each loan category within the collectively evaluated pools.

A summary of the methodology employed on a quarterly basis with respect to each of these components in order to evaluate the overall adequacy of the Company's allowance for loan losses is as follows:

Specific Reserve for Loans Individually Evaluated

First, the Company identifies loan relationships having aggregate balances in excess of $150 thousand with potential credit weaknesses. Such loan relationships are identified primarily through the Company's analysis of internal loan evaluations, past due loan reports, TDRs and loans adversely classified. Each loan so identified is then individually evaluated for impairment. Loans are considered impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the original loan agreement. Substantially all impaired loans have historically been collateral dependent, meaning repayment of the loan is expected or is considered to be provided solely from the sale of the loan's underlying collateral. For such loans, the Company measures impairment based on the fair value of the loan's collateral, which is generally determined utilizing current appraisals. A specific reserve is 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 is 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.

Purchase credit impaired (“PCI”) loans are collectively evaluated, but are not included in the general reserve as described below. The evaluation of the PCI loans requires continued quarterly assessment of key assumptions and estimates similar to the initial fair value estimate, including changes in the severity of loss, timing and speed of payments, collateral value changes, expected cash flows and other relevant factors. The quarterly assessment is compared to the initial fair value estimate and a determination is made if an adjustment to the allowance for loan loss is deemed necessary.

Quantitative Reserve for Loans Collectively Evaluated

Second, the Company stratifies the loan portfolio into ~~two~~2 general business loan pools: substandard (7 risk-rated) and pass-rated (0 to 6 risk-rated) by loan type. Substandard rated loans are subject to higher credit loss rates in the allowance for loan loss calculation. The Company utilizes historical loss rates for commercial real estate and commercial and industrial loans assessed by internal risk rating. Historical loss rates on residential real estate and consumer loans are not risk graded. Residential real estate and consumer loans are considered as part of the pass-rated portfolio unless removed due to specific reserve evaluation based on past due status and/or other indications of credit deterioration. Quantitative reserves relative to each loan pool are established as follows: for all loan segments an allocation equaling 100% of the respective pool's average 3-year historical net loan charge-off rate (determined based upon the most recent 12 quarters) is applied to the aggregate recorded investment in the pool of loans. Purchased performing loans are collectively evaluated as their own separate category within each loan pool.

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Qualitative Reserve for Loans Collectively Evaluated

Third, the Company considers the necessity to adjust the average historical net loan charge-off rates relative to each of the above ~~two~~2 loan pools for potential risks factors that could result in actual losses deviating from prior loss experience. Such qualitative risk factors considered are: (1) lending policies and procedures, (2) business conditions, (3) volume and nature of the loan portfolio, (4) experience, ability and depth of lending management, (5) problem loan trends, (6) quality of the Company’s loan review system, (7) concentrations in the loan portfolio, (8) competition, legal, and regulatory environment and (9) collateral coverage and loan-to-value.

Loss Emergence Period for Loans Collectively Evaluated

Fourth, the general allowance related to loans collectively evaluated includes an estimate of incurred losses over an estimated loss emergence period ("LEP"). The LEP is generated utilizing a charge-off look-back analysis, which evaluates the time from the first indication of elevated risk of repayment (or other early event indicating a problem) to eventual charge-off to support the LEP considered in the allowance calculation. This reserving methodology establishes the approximate number of months of LEP that represents incurred losses for each loan portfolio within each portfolio segment in addition to the qualitative reserves.

Activity in the allowance for loan losses for the three and nine months ended September 30, ~~2019~~2020 and ~~2018~~2019 are, as follows:


Business Activities Loans	At or for the Three Months Ended September 30, 2020
	Commercial		Commercial		Residential
(in thousands)	real estate		and industrial		real estate		Consumer		Total
Balance at beginning of period	$	8,416	$	3,241	$	3,945	$	376	$	15,978
Charged-off loans		(266)		(4)		—		(146)		(416)
Recoveries on charged-off loans		12		14		—		6		32
Provision for loan losses		1,265		269		104		143		1,781
Balance at end of period	$	9,427	$	3,520	$	4,049	$	379	$	17,375
Individually evaluated for impairment		343		243		45		1		632
Collectively evaluated		9,084		3,277		4,004		378		16,743
Total	$	9,427	$	3,520	$	4,049	$	379	$	17,375


Business Activities Loans	At or for the Nine Months Ended September 30, 2020
	Commercial		Commercial		Residential
(in thousands)	real estate		and industrial		real estate		Consumer		Total
Balance at beginning of period	$	7,668	$	3,608	$	3,402	$	379	$	15,057
Charged-off loans		(1,036)		(307)		(21)		(335)		(1,699)
Recoveries on charged-off loans		90		16		—		5		111
Provision for loan losses		2,705		203		668		330		3,906
Balance at end of period	$	9,427	$	3,520	$	4,049	$	379	$	17,375
Individually evaluated for impairment		343		243		45		1		632
Collectively evaluated		9,084		3,277		4,004		378		16,743
Total	$	9,427	$	3,520	$	4,049	$	379	$	17,375


Acquired Loans	At or for the Three Months Ended September 30, 2020
	Commercial		Commercial		Residential
(in thousands)	real estate		and industrial		real estate		Consumer		Total
Balance at beginning of period	$	401	$	12	$	118	$	—	$	531
Charged-off loans		—		(20)		—		(3)		(23)
Recoveries on charged-off loans		2		—		1		2		5
Provision (release) for loan losses		(3)		20		1		1		19
Balance at end of period	$	400	$	12	$	120	$	—	$	532
Individually evaluated for impairment		297		7		52		—		356
Collectively evaluated		103		5		68		—		176
Total	$	400	$	12	$	120	$	—	$	532

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Acquired Loans	At or for the Nine Months Ended September 30, 2020
	Commercial		Commercial		Residential
(in thousands)	real estate		and industrial		real estate		Consumer		Total
Balance at beginning of period	$	147	$	6	$	143	$	—	$	296
Charged-off loans		(101)		(53)		(11)		(6)		(171)
Recoveries on charged-off loans		19		9		12		8		48
Provision (release) for loan losses		335		50		(24)		(2)		359
Balance at end of period	$	400	$	12	$	120	$	—	$	532
Individually evaluated for impairment		297		7		52		—		356
Collectively evaluated		103		5		68		—		176
Total	$	400	$	12	$	120	$	—	$	532


Business Activities Loans	At or for the Three Months Ended September 30, 2019
	Commercial		Commercial		Residential
(in thousands)	real estate		and industrial		real estate		Consumer		Total
Balance at beginning of period	$	7,206	$	2,748	$	3,942	$	394	$	14,290
Charged-off loans		—		—		(108)		(55)		(163)
Recoveries on charged-off loans		1		62		36		1		100
Provision (release) for loan losses		956		63		(111)		(94)		814
Balance at end of period	$	8,163	$	2,873	$	3,759	$	246	$	15,041
Individually evaluated for impairment		990		240		66		1		1,297
Collectively evaluated		7,173		2,633		3,693		245		13,744
Total	$	8,163	$	2,873	$	3,759	$	246	$	15,041


Business Activities Loans	At or for the Nine Months Ended September 30, 2019
	Commercial		Commercial		Residential
(in thousands)	real estate		and industrial		real estate		Consumer		Total
Balance at beginning of period	$	6,811	$	2,380	$	3,982	$	408	$	13,581
Charged-off loans		(57)		(13)		(110)		(129)		(309)
Recoveries on charged-off loans		131		62		55		8		256
Provision (release) for loan losses		1,278		444		(168)		(41)		1,513
Balance at end of period	$	8,163	$	2,873	$	3,759	$	246	$	15,041
Individually evaluated for impairment		990		240		66		1		1,297
Collectively evaluated		7,173		2,633		3,693		245		13,744
Total	$	8,163	$	2,873	$	3,759	$	246	$	15,041


Acquired Loans	At or for the Three Months Ended September 30, 2019
	Commercial		Commercial		Residential
(in thousands)	real estate		and industrial		real estate		Consumer		Total
Balance at beginning of period	$	159	$	22	$	101	$	—	$	282
Charged-off loans		—		—		(52)		—		(52)
Recoveries on charged-off loans		—		—		—		3		3
Provision (release) for loan losses		(2)		(15)		99		(3)		79
Balance at end of period	$	157	$	7	$	148	$	—	$	312
Individually evaluated for impairment		12		—		32		—		44
Collectively evaluated		145		7		116		—		268
Total	$	157	$	7	$	148	$	—	$	312

Business Activities Loans At or for the Three Months Ended September 30, 2019
(in thousands)
Commercial
real estate
Commercial and industrial
Residential
real estate
Consumer Total
Balance at beginning of period $ 7,206
$ 2,748
$ 3,942
$ 394
$ 14,290
Charged-off loans —
—
(108 ) (55 ) (163 )
Recoveries on charged-off loans 1
62
36
1
100
(Releases) provision for loan losses 956
63
(111 ) (94 ) 814
Balance at end of period $ 8,163
$ 2,873
$ 3,759
$ 246
$ 15,041
Individually evaluated for impairment 990
240
66
1
1,297
Collectively evaluated 7,173
2,633
3,693
245
13,744
Total $ 8,163
$ 2,873
$ 3,759
$ 246
$ 15,041

Acquired Loans At or for the Three Months Ended September 30, 2019
(in thousands)
Commercial
real estate
Commercial and industrial
Residential
real estate
Consumer Total
Balance at beginning of period $ 159
$ 22
$ 101
$ —
$ 282
Charged-off loans —
—
(52 ) —
(52 )
Recoveries on charged-off loans —
—
—
3
3
(Releases) provision for loan losses (2 ) (15 ) 99
(3 ) 79
Balance at end of period $ 157
$ 7
$ 148
$ —
$ 312
Individually evaluated for impairment 12
—
32
—
44
Collectively evaluated 145
7
116
—
268
Total $ 157
$ 7
$ 148
$ —
$ 312

Business Activities Loans At or for the Nine Months Ended September 30, 2019
(in thousands)
Commercial
real estate
Commercial and industrial
Residential
real estate
Consumer Total
Balance at beginning of period $ 6,811
$ 2,380
$ 3,982
$ 408
$ 13,581
Charged-off loans (57 ) (13 ) (110 ) (129 ) (309 )
Recoveries on charged-off loans 131
62
55
8
256
(Releases) provision for loan losses 1,278
444
(168 ) (41 ) 1,513
Balance at end of period $ 8,163
$ 2,873
$ 3,759
$ 246
$ 15,041
Individually evaluated for impairment 990
240
66
1
1,297
Collectively evaluated 7,173
2,633
3,693
245
13,744
Total $ 8,163
$ 2,873
$ 3,759
$ 246
$ 15,041

Acquired Loans At or for the Nine Months Ended September 30, 2019
(in thousands)
Commercial
real estate
Commercial and industrial
Residential
real estate
Consumer Total
Balance at beginning of period $ 173
$ 35
$ 77
$ —
$ 285
Charged-off loans —
(15 ) (222 ) (5 ) (242 )
Recoveries on charged-off loans —
—
—
3
3
(Releases) provision for loan losses (16 ) (13 ) 293
2
266
Balance at end of period $ 157
$ 7
$ 148
$ —
$ 312
Individually evaluated for impairment 12
—
32
—
44
Collectively evaluated 145
7
116
—
268
Total $ 157
$ 7
$ 148
$ —
$ 312

Business Activities Loans At or for the Three Months Ended September 30, 2018
(in thousands)
Commercial
real estate
Commercial and industrial
Residential
real estate
Consumer Total
Balance at beginning of period $ 6,367
$ 2,509
$ 3,454
$ 393
$ 12,723
Charged-off loans (29 ) —
(61 ) (40 ) (130 )
Recoveries on charged-off loans 7
18
—
2
27
Provision (releases) for loan losses 291
(31 ) 258
66
584
Balance at end of period $ 6,636
$ 2,496
$ 3,651
$ 421
$ 13,204
Individually evaluated for impairment 688
62
92
—
842
Collectively evaluated 5,948
2,434
3,559
421
12,362
Total $ 6,636
$ 2,496
$ 3,651
$ 421
$ 13,204

Acquired Loans At or for the Three Months Ended September 30, 2018
(in thousands)
Commercial
real estate
Commercial and industrial
Residential
real estate
Consumer Total
Balance at beginning of period $ 200
$ 82
$ 85
$ —
$ 367
Charged-off loans (30 ) (71 ) (62 ) (5 ) (168 )
Recoveries on charged-off loans 25
—
—
—
25
Provision (releases) for loan losses (23 ) 33
44
5
59
Balance at end of period $ 172
$ 44
$ 67
$ —
$ 283
Individually evaluated for impairment —
—
20
—
20
Collectively evaluated 172
44
47
—
263
Total $ 172
$ 44
$ 67
$ —
$ 283

Business Activities Loans At or for the Nine Months Ended September 30, 2018
(in thousands)
Commercial
real estate
Commercial and industrial
Residential
real estate
Consumer Total
Balance at beginning of period $ 6,037
$ 2,373
$ 3,357
$ 386
$ 12,153
Charged-off loans (186 ) (111 ) (61 ) (426 ) (784 )
Recoveries on charged-off loans 68
23
2
5
98
Provision for loan losses 717
211
353
456
1,737
Balance at end of period $ 6,636
$ 2,496
$ 3,651
$ 421
$ 13,204
Individually evaluated for impairment 688
62
92
—
842
Collectively evaluated 5,948
2,434
3,559
421
12,362
Total $ 6,636
$ 2,496
$ 3,651
$ 421
$ 13,204

Acquired Loans At or for the Nine Months Ended September 30, 2018
(in thousands)
Commercial
real estate
Commercial and industrial
Residential
real estate
Consumer Total
Balance at beginning of period $ 97
$ 16
$ 59
$ —
$ 172
Charged-off loans (136 ) (166 ) (126 ) (64 ) (492 )
Recoveries on charged-off loans 43
7
—
82
132
Provision (releases) for loan losses 168
187
134
(18 ) 471
Balance at end of period $ 172
$ 44
$ 67
$ —
$ 283
Individually evaluated for impairment —
—
20
—
20
Collectively evaluated 172
44
47
—
263
Total $ 172
$ 44
$ 67
$ —
$ 283


Acquired Loans	At or for the Nine Months Ended September 30, 2019
	Commercial		Commercial		Residential
(in thousands)	real estate		and industrial		real estate		Consumer		Total
Balance at beginning of period	$	173	$	35	$	77	$	—	$	285
Charged-off loans		—		(15)		(222)		(5)		(242)
Recoveries on charged-off loans		—		—		—		3		3
Provision (releases) for loan losses		(16)		(13)		293		2		266
Balance at end of period	$	157	$	7	$	148	$	—	$	312
Individually evaluated for impairment		12		—		32		—		44
Collectively evaluated		145		7		116		—		268
Total	$	157	$	7	$	148	$	—	$	312

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

Credit Quality Indicators/Classified Loans: 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 Company provides for the classification of loans which are considered to be of lesser quality as special mention, substandard, doubtful, or loss (i.e. risk-rated 6, 7, 8 and 9, respectively).

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

Pass: Loans the 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 there is a low risk of loss related to these loans considered pass-rated.

Special Mention:Loans the Company considers having some potential weaknesses, but are deemed to not carry levels of risk inherent in one of the subsequent categories, 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 may require a higher level of supervision or internal reporting because of: (i) declining industry trends; (ii) increasing reliance on secondary sources of repayment; (iii) the poor condition of or lack of control

over collateral; or (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 Company to sufficient risks to warrant classification.

Substandard: Loans theCompany considers as substandard are 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 the Company considers as doubtful have all of the weaknesses inherent in those loans that are classified as substandard. These loans have the added characteristic of a well-defined weakness which is inadequately protected by the current sound worth and paying capacity of borrower or of the collateral pledged, if any, and calls into question the collectability of the full balance of the 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

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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 the Company 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 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.

The following tables present the Company’s loans by risk rating at September 30, ~~2019~~2020 and December 31, ~~2018:~~

2019:

Business Activities Loans

Commercial Real Estate

Commercial construction and land development Commercial real estate other Total commercial real estate
(in thousands) Sep 30, 2019 Dec 31, 2018 Sep 30, 2019 Dec 31, 2018 Sep 30, 2019 Dec 31, 2018
Grade:

Pass $ 28,728
$ 23,680
$ 647,075
$ 532,386
$ 675,803
$ 556,066
Special mention —
73
12,474
8,319
12,474
8,392
Substandard 73
—
10,212
13,914
10,285
13,914
Doubtful 1
1
3,124
1,361
3,125
1,362
Total $ 28,802
$ 23,754
$ 672,885
$ 555,980
$ 701,687
$ 579,734


	Commercial construction
	and land development				Commercial real estate other				Total commercial real estate
(in thousands)	Sep 30, 2020		Dec 31, 2019		Sep 30, 2020		Dec 31, 2019		Sep 30, 2020		Dec 31, 2019
Grade:
Pass	$	86,716	$	31,057	$	742,214	$	646,886	$	828,930	$	677,943
Special mention		0		0		6,722		5,483		6,722		5,483
Substandard		—		330		15,981		11,974		15,981		12,304
Doubtful		211		0		554		1,708		765		1,708
Total	$	86,927	$	31,387	$	765,471	$	666,051	$	852,398	$	697,438

Acquired Loans

Commercial Real Estate

Commercial construction and land development Commercial real estate other Total commercial real estate
(in thousands) Sep 30, 2019 Dec 31, 2018 Sep 30, 2019 Dec 31, 2018 Sep 30, 2019 Dec 31, 2018
Grade:

Pass $ 1,765
$ 2,626
$ 212,859
$ 236,393
$ 214,624
$ 239,019
Special mention 12
—
1,962
1,574
1,974
1,574
Substandard 287
264
5,033
6,009
5,320
6,273
Doubtful —
—
168
99
168
99
Total $ 2,064
$ 2,890
$ 220,022
$ 244,075
$ 222,086
$ 246,965


	Commercial construction
	and land development				Commercial real estate other				Total commercial real estate
(in thousands)	Sep 30, 2020		Dec 31, 2019		Sep 30, 2020		Dec 31, 2019		Sep 30, 2020		Dec 31, 2019
Grade:
Pass	$	1,878	$	2,412	$	180,602	$	218,491	$	182,480	$	220,903
Special mention		—		12		1,508		2,261		1,508		2,273
Substandard		313		479		7,411		9,400		7,724		9,879
Doubtful		—		—		1,525		168		1,525		168
Total	$	2,191	$	2,903	$	191,046	$	230,320	$	193,237	$	233,223

Business Activities Loans

Commercial and Industrial


	Commercial				Agricultural				Tax exempt loans				Total commercial and industrial
(in thousands)	Sep 30, 2020		Dec 31, 2019		Sep 30, 2020		Dec 31, 2019		Sep 30, 2020		Dec 31, 2019		Sep 30, 2020		Dec 31, 2019
Grade:
Pass	$	362,351	$	221,329	$	16,744	$	18,940	$	41,951	$	66,860	$	421,046	$	307,129
Special mention		4,066		2,744		200		298		0		0		4,266		3,042
Substandard		14,430		14,866		489		780		0		0		14,919		15,646
Doubtful		665		753		225		0		0		0		890		753
Total	$	381,512	$	239,692	$	17,658	$	20,018	$	41,951	$	66,860	$	441,121	$	326,570

Commercial Agricultural Tax exempt loans Total commercial and industrial
(in thousands) Sep 30, 2019 Dec 31, 2018 Sep 30, 2019 Dec 31, 2018 Sep 30, 2019 Dec 31, 2018 Sep 30, 2019 Dec 31, 2018
Grade:

Pass $ 219,962
$ 226,353
$ 20,413
$ 21,680
$ 66,043
$ 56,588
$ 306,418
$ 304,621
Special mention 14,000
6,730
346
215
—
—
14,346
6,945
Substandard 4,922
924
447
422
—
—
5,369
1,346
Doubtful 1,010
750
—
—
—
—
1,010
750
Total $ 239,894
$ 234,757
$ 21,206
$ 22,317
$ 66,043
$ 56,588
$ 327,143
$ 313,662

Commercial and Industrial

Commercial Agricultural Tax exempt loans Total commercial and industrial
(in thousands) Sep 30, 2019 Dec 31, 2018 Sep 30, 2019 Dec 31, 2018 Sep 30, 2019 Dec 31, 2018 Sep 30, 2019 Dec 31, 2018
Grade:






Pass $ 37,111
$ 46,120
$ —
$ —
$ 35,073
$ 38,738
$ 72,184
$ 84,858
Special mention 2,511
4,825
—
—
—
—
2,511
4,825
Substandard 527
1,222
—
—
—
—
527
1,222
Doubtful 341
303
—
—
—
—
341
303
Total $ 40,490
$ 52,470
$ —
$ —
$ 35,073
$ 38,738
$ 75,563
$ 91,208


	Commercial				Agricultural				Tax exempt loans				Total commercial and industrial
(in thousands)	Sep 30, 2020		Dec 31, 2019		Sep 30, 2020		Dec 31, 2019		Sep 30, 2020		Dec 31, 2019		Sep 30, 2020		Dec 31, 2019
Grade:
Pass	$	54,667	$	51,184	$	21	$	58	$	24,375	$	37,407	$	79,063	$	88,649
Special mention		421		5,432		—		—		—		—		421		5,432
Substandard		1,255		2,115		135		148		—		36		1,390		2,299
Doubtful		515		341		—		—		—		—		515		341
Total	$	56,858	$	59,072	$	156	$	206	$	24,375	$	37,443	$	81,389	$	96,721

Business Activities Loans

Residential Real Estate and Consumer Loans

Residential real estate Home equity Other consumer Total residential real estate and consumer
(in thousands) Sep 30, 2019 Dec 31, 2018 Sep 30, 2019 Dec 31, 2018 Sep 30, 2019 Dec 31, 2018 Sep 30, 2019 Dec 31, 2018
Performing $ 727,239
$ 665,976
$ 57,992
$ 57,652
$ 10,209
$ 9,324
$ 795,440
$ 732,952
Nonperforming 3,277
4,213
564
246
25
90
3,866
4,549
Total $ 730,516
$ 670,189
$ 58,556
$ 57,898
$ 10,234
$ 9,414
$ 799,306
$ 737,501


	Residential real estate				Home equity				Other consumer				Total residential real estate and consumer
(in thousands)	Sep 30, 2020		Dec 31, 2019		Sep 30, 2020		Dec 31, 2019		Sep 30, 2020		Dec 31, 2019		Sep 30, 2020		Dec 31, 2019
Performing	$	691,902	$	737,325	$	57,894	$	58,753	$	9,202	$	11,146	$	758,998	$	807,224
Nonperforming		3,864		3,362		450		615		15		21		4,329		3,998
Total	$	695,766	$	740,687	$	58,344	$	59,368	$	9,217	$	11,167	$	763,327	$	811,222

Acquired Loans

Residential Real Estate and Consumer Loans

Residential real estate Home equity Other consumer Total residential real estate and consumer
(in thousands) Sep 30, 2019 Dec 31, 2018 Sep 30, 2019 Dec 31, 2018 Sep 30, 2019 Dec 31, 2018 Sep 30, 2019 Dec 31, 2018
Performing $ 409,830
$ 470,497
$ 37,446
$ 45,090
$ 985
$ 1,356
$ 448,261
$ 516,943
Nonperforming 3,106
4,012
154
201
—
1
3,260
4,214
Total $ 412,936
$ 474,509
$ 37,600
$ 45,291
$ 985
$ 1,357
$ 451,521
$ 521,157


	Residential real estate				Home equity				Other consumer				Total residential real estate and consumer
(in thousands)	Sep 30, 2020		Dec 31, 2019		Sep 30, 2020		Dec 31, 2019		Sep 30, 2020		Dec 31, 2019		Sep 30, 2020		Dec 31, 2019
Performing	$	320,772	$	407,811	$	50,059	$	62,504	$	1,249	$	1,707	$	372,080	$	472,022
Nonperforming		4,668		3,359		471		529		—		8		5,139		3,896
Total	$	325,440	$	411,170	$	50,530	$	63,033	$	1,249	$	1,715	$	377,219	$	475,918

The following table summarizes total classified and criticized loans as of September 30, ~~2019~~2020 and December 31, ~~2018:~~2019:


	September 30, 2020						December 31, 2019
	Business						Business
(in thousands)	Activities Loans		Acquired Loans		Total		Activities Loans		Acquired Loans		Total
Non-accrual	$	7,763	$	6,645	$	14,408	$	8,354	$	3,196	$	11,550
Substandard accruing		29,121		9,648		38,769		26,055		13,387		39,442
Total classified		36,884		16,293		53,177		34,409		16,583		50,992
Special mention		10,988		1,929		12,917		8,525		7,705		16,230
Total Criticized	$	47,872	$	18,222	$	66,094	$	42,934	$	24,288	$	67,222

September 30, 2019 December 31, 2018
(in thousands)
Business
Activities Loans
Acquired Loans Total Business Activities Loans Acquired Loans Total
Non-accrual $ 13,541
$ 3,138
$ 16,679
$ 14,111
$ 4,124
$ 18,235
Substandard accruing 10,114
6,478
16,592
7,810
7,987
15,797
Doubtful accruing —
—
—
—
—
—
Total classified 23,655
9,616
33,271
21,921
12,111
34,032
Special mention 26,820
4,485
31,305
15,337
6,399
21,736
Total Criticized $ 50,475
$ 14,101
$ 64,576
$ 37,258
$ 18,510
$ 55,768

NOTE 5. BORROWED FUNDS

Borrowed funds at September 30, ~~2019~~2020 and December 31, ~~2018~~2019 are summarized, as follows:

September 30, 2019 December 31, 2018
(dollars in thousands) Carrying Value Weighted Average Rate Carrying Value Weighted Average Rate
Short-term borrowings

Advances from the FHLB $ 422,583
2.24 % $ 611,683
2.47 %
Other borrowings 41,259
1.24
36,211
1.09
Total short-term borrowings 463,842
2.15
647,894
2.39
Long-term borrowings
Advances from the FHLB 177,977
2.25
32,929
1.86
Subordinated borrowings 37,928
5.69
37,973
5.58
Junior subordinated borrowings 5,000
6.15
5,000
5.96
Total long-term borrowings 220,905
2.93
75,902
3.99
Total $ 684,747
2.40 % $ 723,796
2.56 %


	September 30, 2020				December 31, 2019
			Weighted				Weighted
(dollars in thousands)	Carrying Value		Average Rate		Carrying Value		Average Rate
Short-term borrowings
Advances from the FHLB	$	41,672	1.69	%	$	303,286	1.83	%
Other borrowings		30,048	0.60			44,832	0.99
Total short-term borrowings		71,720	1.20			348,118	1.73
Long-term borrowings
Advances from the FHLB		182,609	1.73			123,278	1.93
Advances from the FRB PPPLF		131,143	0.35			—	—
Subordinated borrowings		59,920	4.48			59,920	5.53
Total long-term borrowings		373,672	1.69			183,198	2.87
Total	$	445,392	1.60	%	$	531,316	2.11	%

Short-term debt includes Federal Home Loan Bank of Boston (“FHLB”) advances with a maturity of less than one year. The Company also maintains a $1.0 million secured line of credit with the FHLB that bears a daily adjustable rate calculated by the FHLB. There was no0 outstanding balance on the FHLB line of credit for the periods ended September 30, ~~2019~~2020 and December 31, ~~2018.~~

2019.

The Company 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, ~~2019,~~2020, the Company’s available secured line of credit at the FRB was ~~$107.7~~$81.1 million. The Company has pledged certain loans and securities to the FRB to support this arrangement. There were ~~no borrowings~~0 outstanding advances with the FRB for the periods ended September 30, ~~2019 and~~2020 December 31, ~~2018.~~

2019.

On April 15, 2020, the FRB provided a Paycheck Protection Program Lending Facility (“PPPLF”) that the Company used to fund most of its PPP loans totaling $131.1 million as of September 30, 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~~$50.0 million as of September 30, ~~2019~~2020 and December 31, ~~2018.~~2019. There was no0 outstanding balance on the line of credit as of September 30, ~~2019~~2020 and December 31, ~~2018.~~

2019.

Long-term FHLB advances consist of advances with a maturity of more than one year. ~~The~~Callable advances ~~outstanding at~~as of September 30, 2020 were $2.0 million, as of December 31, 2019 there were 0 callable advances. As of September 30, 2020 and December 31, ~~2018 include no callable advances~~2019 there were $309 thousand and ~~$319~~$316 thousand of amortizing ~~advances.~~advances, respectively. All FHLB 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 FHLB advances as of September 30, ~~2019~~2020 is, as follows:


	September 30, 2020
			Weighted Average
(in thousands, except rates)	Carrying Value		Rate
Fixed rate advances maturing:
2020	$	1,000	1.65	%
2021		40,672	1.69
2022		75,000	1.87
2023		80,000	1.77
2024		7,300	1.16
2025 and thereafter		20,309	1.25
Total FHLB advances	$	224,281	1.72	%

September 30, 2019
(in thousands, except rates) Carrying Value Weighted Average Rate
Fixed rate advances maturing:

2019 $ 393,601
2.27 %
2020 54,982
2.14
2021 11,658
2.19
2022 134,000
2.25
2023 1,000
—
2024 and thereafter 5,319
1.79
Total FHLB advances $ 600,560
2.24 %

~~In April 2008,~~

On November 26, 2019, the Company issued fifteen year junior subordinated notes in the amount of $5.0 million. These debt securities qualify as Tier 2 capital for the Company and the Bank. The subordinated debt securities are callable by the Bank after five years without penalty, the next date on which the securities can be redeemed is December 15, 2019. The interest rate is three-month LIBOR plus 3.45%. At September 30, 2019 and December 31, 2018 the interest rate was 5.57% and 6.24%, respectively.

~~The Company has $17.0 million of subordinated debt issued on October 29, 2014, in connection with the execution of~~executed a Subordinated Note Purchase Agreement with 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 ~~November~~December 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 bear~~thereafter the interest ~~at a fixed~~ rate ~~of 6.75%~~shall be reset quarterly to an interest rate per ~~annum.~~annum equal to the then current three-month SOFR plus 3.27%. The Company ~~may, at its~~has the option beginning with the interest payment date of ~~November~~December 1, ~~2019,~~2024, and on any ~~interest~~scheduled 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 all~~upon prior approval of the ~~noteholders. The Notes are not subject to repayment at the option~~Federal Reserve. Netted with subordinated borrowings is amortized subordinated debt issuance costs of ~~the noteholders. The Notes are unsecured, subordinated obligations~~$700 thousand as of ~~the Company and rank junior in right of payment to the Company’s senior indebtedness and to the Company’s obligations to its general creditors.~~

September 30, 2020.

The Company also has $20.6 million in floating 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 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. 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.

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NOTE 6. DEPOSITS

A summary of time deposits is, as follows:

(in thousands) September 30, 2019 December 31, 2018
Time less than $100,000 $ 659,610
$ 622,478
Time $100,000 through $250,000 151,995
193,535
Time $250,000 or more 91,060
116,780
Total time deposits $ 902,665
$ 932,793


(in thousands)	September 30, 2020		December 31, 2019
Time less than $100,000	$	497,403	$	600,747
Time $100,000 through $250,000		192,243		225,505
Time $250,000 or more		123,863		106,383
Total time deposits	$	813,509	$	932,635

At September 30, ~~2019~~2020 and December 31, ~~2018,~~2019, the scheduled maturities by year for time deposits are, as follows:

(in thousands) September 30, 2019 December 31, 2018
Within 1 year $ 416,591
$ 505,313
Over 1 year to 2 years 365,372
258,176
Over 2 years to 3 years 70,050
123,337
Over 3 years to 4 years 25,603
14,494
Over 4 years to 5 years 22,597
31,353
Over 5 years 2,452
120
Total $ 902,665
$ 932,793


(in thousands)	September 30, 2020		December 31, 2019
Within 1 year	$	635,798	$	555,074
Over 1 year to 2 years		111,500		287,934
Over 2 years to 3 years		29,392		51,444
Over 3 years to 4 years		27,598		31,262
Over 4 years to 5 years		9,216		6,883
Over 5 years		5		38
Total	$	813,509	$	932,635

Included in time deposits are brokered deposits of ~~$554.3~~$327.2 million and ~~$466.9~~$526.9 million at September 30, ~~2019~~2020 and December 31, ~~2018,~~2019, respectively. Also included in time deposits are reciprocal deposits of ~~$69.7~~$127.4 million and ~~$52.4~~$64.1 million at September 30, ~~2019~~2020 and December 31, ~~2018,~~2019, respectively.

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NOTE 7. CAPITAL RATIOS AND SHAREHOLDERS’ EQUITY

The actual and required capital ratios are, as follows:

September 30, 2019 Regulatory Minimum to be "Well Capitalized" December 31, 2018
Regulatory
Minimum to be
"Well Capitalized"
Company (consolidated)

Total capital to risk-weighted assets 14.01 % N/A
14.23 % N/A
Common equity tier 1 capital to risk-weighted assets 11.63
N/A
11.80
N/A
Tier 1 capital to risk-weighted assets 12.47
N/A
12.68
N/A
Tier 1 capital to average assets 8.65
N/A
8.53
N/A

Bank
Total capital to risk-weighted assets 13.45 % 10.00 % 13.82 % 10.00 %
Common equity tier 1 capital to risk-weighted assets 12.60
6.50
12.99
6.50
Tier 1 capital to risk-weighted assets 12.60
8.00
12.99
8.00
Tier 1 capital to average assets 8.74
5.00
8.74
5.00


			Regulatory				Regulatory
	September 30,		Minimum to be		December 31,		Minimum to be
	2020		"Well-Capitalized"		2019		"Well-Capitalized"
Company (consolidated)
Total capital to risk-weighted assets	13.32	%	10.50	%	13.61	%	10.50	%
Common equity tier 1 capital to risk-weighted assets	10.29		7.00		10.57		7.00
Tier 1 capital to risk-weighted assets	11.08		8.50		11.39		8.50
Tier 1 capital to average assets	8.14		5.00		8.13		5.00

Bank
Total capital to risk-weighted assets	13.03	%	10.50	%	12.42	%	10.50	%
Common equity tier 1 capital to risk-weighted assets	12.33		7.00		11.79		7.00
Tier 1 capital to risk-weighted assets	12.33		8.50		11.79		8.50
Tier 1 capital to average assets	9.06		5.00		8.39		5.00

At each date shown, the Company and the Bank met the conditions to be classified as “well-capitalized” under the relevant regulatory framework. To be categorized as "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.

The Company and the Bank are subject to the Basel III rule that requires the Company and the Bank to assess their Common equity tier 1 capital to risk-weighted assets and the Company and the Bank each exceed the minimum to be "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 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, 2019, 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.

Accumulated other comprehensive income (loss)

Components of accumulated other comprehensive income ~~(loss)~~ is, as follows:


(in thousands)	September 30, 2020		December 31, 2019
Other accumulated comprehensive income, before tax:
Net unrealized gain on AFS securities	$	15,264	$	7,342
Net unrealized loss on hedging derivatives		(1,461)		(718)
Net unrealized loss on post-retirement plans		(1,512)		(1,512)

Income taxes related to items of accumulated other comprehensive income:
Net unrealized gain on AFS securities		(3,583)		(1,793)
Net unrealized loss on hedging derivatives		342		237
Net unrealized loss on post-retirement plans		355		355
Accumulated other comprehensive income	$	9,405	$	3,911

(in thousands) September 30, 2019 December 31, 2018
Other accumulated comprehensive income (loss), before tax:

Net unrealized gain (loss) on AFS securities $ 10,442
$ (11,304 )
Net unrealized loss on effective cash flow hedging derivatives (5,306 ) (2,934 )
Net unrealized loss on post-retirement plans (1,162 ) (1,162 )

Income taxes related to items of accumulated other comprehensive (income) loss:
Net unrealized (gain) loss on AFS securities (2,440 ) 2,641
Net unrealized loss on effective cash flow hedging derivatives 1,239
685
Net unrealized loss on post-retirement plans 272
272
Accumulated other comprehensive income (loss) $ 3,045
$ (11,802 )

The following table presents the components of other comprehensive income (loss) for the three and nine months ended September 30, ~~2019~~2020 and ~~2018:~~2019:


(in thousands)	Before Tax		Tax Effect		Net of Tax
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 cash flow hedging derivatives:
Net unrealized gain arising during the period		805		(190)		615
Less: reclassification adjustment for gains (losses) realized in net income		—		—		—
Net unrealized gain on cash flow hedging derivatives		805		(190)		615

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	$	1,156	$	(272)	$	884

Three Months Ended September 30, 2019
Net unrealized gain on AFS securities:
Net unrealized gain arising during the period	$	3,357	$	(784)	$	2,573
Less: reclassification adjustment for gains (losses) realized in net income		157		(37)		120
Net unrealized gain on AFS securities		3,200		(747)		2,453

Net unrealized loss on cash flow hedging derivatives:
Net unrealized loss arising during the period		(370)		85		(285)
Less: reclassification adjustment for gains (losses) realized in net income		—		—		—
Net unrealized loss on cash flow hedging derivatives		(370)		85		(285)

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	$	2,830	$	(662)	$	2,168

(in thousands) Before Tax Tax Effect Net of Tax
Three Months Ended September 30, 2019

Net unrealized gain on AFS securities:
Net unrealized gain arising during the period $ 3,357
$ (784 ) $ 2,573
Less: reclassification adjustment for gains (losses) realized in net income 157
(37 ) 120
Net unrealized gain on AFS securities 3,200
(747 ) 2,453

Net unrealized loss on cash flow hedging derivatives:
Net unrealized loss arising during the period (370 ) 85
(285 )
Less: reclassification adjustment for gains (losses) realized in net income —
—
—
Net unrealized loss on cash flow hedging derivatives (370 ) 85
(285 )

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 $ 2,830
$ (662 ) $ 2,168

Three Months Ended September 30, 2018

Net unrealized loss on AFS securities:

Net unrealized loss arising during the period $ (5,850 ) $ 1,291
$ (4,559 )
Less: reclassification adjustment for gains (losses) realized in net income —
—
—
Net unrealized loss on AFS securities (5,850 ) 1,291
(4,559 )

Net unrealized gain on cash flow hedging derivatives:

Net unrealized gain arising during the period 299
(81 ) 218
Less: reclassification adjustment for gains (losses) realized in net income —
—
—
Net unrealized gain on cash flow hedging derivatives 299
(81 ) 218

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 loss $ (5,551 ) $ 1,210
$ (4,341 )

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(in thousands)	Before Tax		Tax Effect		Net of Tax
Nine Months Ended September 30, 2020
Net unrealized gain on AFS securities:
Net unrealized gain arising during the period	$	9,408	$	(2,146)	$	7,262
Less: reclassification adjustment for gains (losses) realized in net income		1,486		(355)		1,131
Net unrealized gain on AFS securities		7,922		(1,791)		6,131

Net unrealized loss on derivative hedges:
Net unrealized loss arising during the period		(833)		196		(637)
Less: reclassification adjustment for gains (losses) realized in net income		—		—		—
Net unrealized loss on derivative hedges		(833)		196		(637)

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	$	7,089	$	(1,595)	$	5,494

Nine Months Ended September 30, 2019
Net unrealized gain on AFS securities:
Net unrealized gain arising during the period	$	21,903	$	(5,118)	$	16,785
Less: reclassification adjustment for gains realized in net income		157		(37)		120
Net unrealized gain on AFS securities		21,746		(5,081)		16,665

Net unrealized loss on cash flow hedging derivatives:
Net unrealized loss arising during the period		(2,372)		554		(1,818)
Less: reclassification adjustment for gains (losses) realized in net income		—		—		—
Net unrealized loss on cash flow hedging derivatives		(2,372)		554		(1,818)

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	$	19,374	$	(4,527)	$	14,847

(in thousands) Before Tax Tax Effect Net of Tax
Nine Months Ended September 30, 2019

Net unrealized gain on AFS securities:
Net unrealized gain arising during the period $ 21,903
$ (5,118 ) $ 16,785
Less: reclassification adjustment for gains (losses) realized in net income 157
(37 ) 120
Net unrealized gain on AFS securities 21,746
(5,081 ) 16,665

Net unrealized loss on derivative hedges:

Net unrealized loss arising during the period (2,372 ) 554
(1,818 )
Less: reclassification adjustment for gains (losses) realized in net income —
—
—
Net unrealized loss on derivative hedges (2,372 ) 554
(1,818 )

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 $ 19,374
$ (4,527 ) $ 14,847

Nine Months Ended September 30, 2018

Net unrealized loss on AFS securities:

Net unrealized loss arising during the period $ (19,639 ) $ 4,565
$ (15,074 )
Less: reclassification adjustment for gains (losses) realized in net income —
—
—
Net unrealized loss on AFS securities (19,639 ) 4,565
(15,074 )

Net unrealized gain on cash flow hedging derivatives:

Net unrealized gain arising during the period 1,179
(290 ) 889
Less: reclassification adjustment for gains (losses) realized in net income —
—
—
Net unrealized gain on cash flow hedging derivatives 1,179
(290 ) 889

Net unrealized gain on post-retirement plans:

Net unrealized gain arising during the period 41
(10 ) 31
Less: reclassification adjustment for gains (losses) realized in net income —
—
—
Net unrealized gain on post-retirement plans 41
(10 ) 31
Other comprehensive loss $ (18,419 ) $ 4,265
$ (14,154 )

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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, ~~2019~~2020 and ~~2018:~~

(in thousands) Net unrealized (loss) gain on AFS Securities
Net loss on
effective cash
flow hedging derivatives

Net unrealized
loss
on pension plans
Total
Three Months Ended September 30, 2019

Balance at beginning of period $ 5,547
$ (3,782 ) $ (888 ) $ 877
Other comprehensive gain (loss) before reclassifications 2,573
(285 ) —
2,288
Less: amounts reclassified from accumulated other comprehensive income 120
—
—
120
Total other comprehensive income (loss) 2,453
(285 ) —
2,168
Balance at end of period $ 8,000
$ (4,067 ) $ (888 ) $ 3,045

Three Months Ended September 30, 2018
Balance at beginning of period $ (12,595 ) $ (2,064 ) $ (688 ) $ (15,347 )
Other comprehensive (loss) gain before reclassifications (4,559 ) 218
—
(4,341 )
Less: amounts reclassified from accumulated other comprehensive income —
—
—
—
Total other comprehensive (loss) income (4,559 ) 218
—
(4,341 )
Balance at end of period $ (17,154 ) $ (1,846 ) $ (688 ) $ (19,688 )

Nine Months Ended September 30, 2019
Balance at beginning of period $ (8,665 ) $ (2,249 ) $ (888 ) $ (11,802 )
Other comprehensive gain (loss) before reclassifications 16,785
(1,818 ) —
14,967
Less: amounts reclassified from accumulated other comprehensive income 120
—
—
120
Total other comprehensive income (loss) 16,665
(1,818 ) —
14,847
Balance at end of period $ 8,000
$ (4,067 ) $ (888 ) $ 3,045

Nine Months Ended September 30, 2018

Balance at beginning of period $ (1,713 ) $ (2,250 ) $ (591 ) $ (4,554 )
Other comprehensive (loss) gain before reclassifications (15,074 ) 889
31
(14,154 )
Less: amounts reclassified from accumulated other comprehensive income —
—
—
—
Total other comprehensive (loss) income (15,074 ) 889
31
(14,154 )
Less: amounts reclassified from accumulated other comprehensive income for ASU 2018-02 (367 ) (485 ) (128 ) (980 )
Balance at end of period $ (17,154 ) $ (1,846 ) $ (688 ) $ (19,688 )

2019:


	Net unrealized		Net loss on		Net unrealized
	gain (loss)		effective cash		loss
	on AFS		flow hedging		on pension
(in thousands)	Securities		derivatives		plans		Total
Three Months Ended September 30, 2020
Balance at beginning of period	$	11,412	$	(1,734)	$	(1,157)	$	8,521
Other comprehensive gain before reclassifications		269		615		0		884
Less: amounts reclassified from accumulated other comprehensive income		0		0		0		0
Total other comprehensive income		269		615		0		884
Balance at end of period	$	11,681	$	(1,119)	$	(1,157)	$	9,405

Three Months Ended September 30, 2019
Balance at beginning of period	$	5,547	$	(3,782)	$	(888)	$	(5,628)
Other comprehensive gain (loss) before reclassifications		2,573		(285)		0		2,288
Less: amounts reclassified from accumulated other comprehensive income		120		0		0		120
Total other comprehensive income (loss)		2,453		(285)		0		2,168
Balance at end of period	$	8,000	$	(4,067)	$	(888)	$	3,045

Nine Months Ended September 30, 2020
Balance at beginning of period	$	5,550	$	(482)	$	(1,157)	$	3,911
Other comprehensive gain (loss) before reclassifications		7,262		(637)		0		6,625
Less: amounts reclassified from accumulated other comprehensive income		1,131		0		0		1,131
Total other comprehensive income (loss)		6,131		(637)		0		5,494
Balance at end of period	$	11,681	$	(1,119)	$	(1,157)	$	9,405

Nine Months Ended September 30, 2019
Balance at beginning of period	$	(8,665)	$	(2,249)	$	(888)	$	(11,802)
Other comprehensive gain (loss) before reclassifications		16,785		(1,818)		0		14,967
Less: amounts reclassified from accumulated other comprehensive income		120		0		0		120
Total other comprehensive income (loss)		16,665		(1,818)		0		14,847
Balance at end of period	$	8,000	$	(4,067)	$	(888)	$	3,045

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, ~~2019~~2020 and ~~2018:~~

2019:


	Three Months Ended September 30,				Nine Months Ended September 30,				Affected Line Item where
(in thousands)	2020		2019		2020		2019		Net Income is Presented
Net realized gains on AFS securities:
Before tax⁽¹⁾	$	—	$	157	$	1,486	$	157	Non-interest income
Tax effect		—		(37)		(355)		(37)	Tax expense
Total reclassifications for the period	$	—	$	120	$	1,131	$	120	Net of tax

Three Months Ended September 30, Nine Months Ended September 30, Affected Line Item where Net Income is Presented
(in thousands) 2019 2018 2019 2018
Net realized gains on AFS securities:
Before tax⁽¹⁾
$ 157
$ —
$ 157
$ —
Non-interest income
Tax effect (37 ) —
(37 ) —
Tax expense
Total reclassifications for the period $ 120
$ —
$ 120
$ —
Net of tax

(1)	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 and gross realized gains of $716 thousand and realized losses of $559 thousand for the three and nine months ended September 30, 2019.

⁽¹⁾ ~~Net realized gains before tax include gross realized gains $716 thousand and realized losses~~

Table of ~~$559 thousand.~~Contents

NOTE 8. EARNINGS PER SHARE

The following table presents the calculation of earnings per share:


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
(in thousands, except per share and share data)	2020		2019		2020		2019
Net income	$	8,402	$	5,015	$	24,604	$	18,413

Average number of basic common shares outstanding		15,079,413		15,547,276		15,358,803		15,536,414
Plus: dilutive effect of stock options and awards outstanding⁽¹⁾		23,421		34,027		23,063		45,282
Average number of diluted common shares outstanding		15,102,834		15,581,303		15,381,866		15,581,696

Earnings per share:
Basic	$	0.56	$	0.32	$	1.60	$	1.19
Diluted	$	0.56	$	0.32	$	1.60	$	1.18

(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) 2019 2018 2019 2018
Net income $ 5,015
$ 8,970
$ 18,413
$ 25,317

Average number of basic common shares outstanding 15,547,276
15,503,488
15,536,414
15,478,207
Plus: dilutive effect of stock options and awards outstanding ⁽¹⁾
34,027
76,575
45,282
85,559
Average number of diluted common shares outstanding ⁽¹⁾
15,581,303
15,580,063
15,581,696
15,563,766

Anti-dilutive options excluded from earnings calculation —
—
—
14,394

Earnings per share:
Basic $ 0.32
$ 0.58
$ 1.19
$ 1.64
Diluted $ 0.32
$ 0.58
$ 1.18
$ 1.63

~~(1) Average diluted shares outstanding are computed using the treasury stock method.~~

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NOTE 9. DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGING ACTIVITIES

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

The Company ~~periodically~~ uses derivative instruments to minimize ~~significant unplanned~~ fluctuations in earnings and cash flows caused by interest rate volatility. The Company’s interest rate risk management strategy involves modifying the re-pricing characteristics of certain assets or liabilities so the 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 Company designates whether the derivative is part of a hedging relationship (i.e., cash flow or fair value hedge). The Company formally documents relationships between hedging instruments and hedged items, as well as its risk management objective and strategy for undertaking hedge transactions. The Company also assesses, both at the hedge’s inception and on an ongoing basis, whether the derivatives used in hedging transactions are highly effective in offsetting the changes in cash flows or fair values of hedged items.

Changes in fair value of derivative instruments that are highly effective and qualify as cash flow hedges are recorded in other comprehensive income or loss.

The Company ~~discontinues hedge accounting when it is determined~~offers derivative products in the 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 of~~contract with the ~~hedged risk on the hedged item, or management determines the designation of the derivative as a hedging instrument is no longer appropriate.~~

counterparty.

The following tables present information about derivative assets and liabilities at September 30, ~~2019~~2020 and December 31, ~~2018:~~2019:


	September 30, 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	$	125,000		4.1	$	(6,835)	Other liabilities
Total cash flow hedges		125,000		4.1		(6,835)

Fair value hedges:
Interest rate swap on securities		37,190		8.7		3,445	Other assets
Total fair value hedges		37,190		8.7		3,445

Economic hedges:
Forward sale commitments		47,739		0.2		(87)	Other liabilities
Customer Loan Swaps-MNA Counterparty		189,244		7.1		(16,965)	Other liabilities
Customer Loan Swaps-RPA Counterparty		103,391		7.8		(11,071)	Other liabilities
Customer Loan Swaps-Customer		292,635		7.4		28,036	Other assets
Total economic hedges		633,009				(87)

Non-hedging derivatives:
Interest rate lock commitments		27,730		0.1		24	Other assets
Total non-hedging derivatives		27,730		0.1		24

Total	$	822,929			$	(3,453)

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	December 31, 2019
			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	$	100,000		4.6	$	(1,311)	Other liabilities
Total cash flow hedges		100,000				(1,311)

Fair value hedges:
Interest rate swap on securities		37,190		9.6		593	Other liabilities
Total fair value hedges		37,190				593

Economic hedges:
Forward sale commitments		11,228		0.1		(84)	Other liabilities
Customer Loan Swaps-MNA Counterparty		135,598		7.5		(4,669)	(1)
Customer Loan Swaps-RPA Counterparty		69,505		8.8		(3,377)	(1)
Customer Loan Swaps-Customer		205,103		8.1		8,046	(1)
Total economic hedges		421,434				(84)

Non-hedging derivatives:
Interest rate lock commitments		21,748		0.1		59	Other assets
Total non-hedging derivatives		21,748				59

Total	$	580,372			$	(743)

September 30, 2019

Notional
Amount
Weighted Average Maturity Estimated Fair Value Asset (Liability)
(in thousands) (in years) (in thousands)
Cash flow hedges:

Interest rate cap agreements $ 90,000
3.4 $ 89
Interest rate swap on deposits 50,000
4.5 (2,179 )
Total cash flow hedges 140,000
(2,090 )

Economic hedges:

Forward sale commitments 7,762
0.1 (61 )
Total economic hedges 7,762
(61 )

Non-hedging derivatives:

Interest rate lock commitments 12,242
0.1 78
Customer loan derivative liability 169,569
9.8 (10,923 )
Customer loan derivative asset 169,569
9.8 10,923
Total non-hedging derivatives 351,380

78

Total $ 499,142
$ (2,073 )

(1)	Customer loan derivatives are subject to MNA or RPA arrangements with financial institution counterparties, thus assets and liabilities with the counterparty were previously netted for financial statement presentation.

Asof September 30, 2020 and December 31, 2019,thefollowingamountswererecordedonthebalancesheetrelatedtocumulative basis adjustments for fair valuehedges:


				Cumulative Amount of Fair
	Location of Hedged Item on	Carrying Amount of Hedged		Value Hedging Adjustment in
	Balance Sheet	Assets (Liabilities)		Carrying Amount
September 30, 2020
Fair value hedges:
Interest rate swap on securities	Securities Available for Sale	$	42,564	$	5,374

December 31, 2019
Fair value hedges:
Interest rate swap on securities	Securities Available for Sale	$	39,026	$	523

Table of Contents

December 31, 2018

Notional
Amount
Weighted Average Maturity Estimated Fair Value Asset (Liability)
(in thousands) (in years) (in thousands)
Cash flow hedges:

Interest rate cap agreements $ 90,000
4.1 $ 803
Total cash flow hedges 90,000

803

Non-hedging derivatives:

Interest rate lock commitments 957
0.1 8
Customer loan derivative liability 45,641
9.9 (1,353 )
Customer loan derivative asset 45,641
9.9 1,353
Total non-hedging derivatives 92,239
8

Total $ 182,239
$ 811

Information about derivative assets and liabilities for ~~the three and nine months ended~~ September 30, 2020 and December 31, 2019, ~~and 2018 is, as~~ follows:


	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		Comprehensive Income	Income		Income	in Income
Cash flow hedges:
Interest rate swap on wholesale funding	$	(5,231)	Interest expense	$	—	Interest expense	$	(642)
Total cash flow hedges		(5,231)			—			(642)

Fair value hedges:
Interest rate swap on securities		4,113	Interest income		—	Interest income		(145)
Total fair value hedges		4,113			—			(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	$	(1,118)		$	—		$	(825)

Three Months Ended September 30, Nine Months Ended September 30,
(in thousands) 2019 2018 2019 2018
Cash flow hedges:
Interest rate cap agreements
Realized loss in interest expense $ (183 ) $ (137 ) $ (521 ) $ (367 )
Interest rate swap on deposits
Realized gain in interest expense 17
—
17
—

Economic hedges:

Forward commitments

Realized (loss) gain in other non-interest income (31 ) 43
(61 ) 190

Non-hedging derivatives:


Interest rate lock commitments


Realized gain in other non-interest income 7
—
70
9


	Years Ended December 31, 2019
	Amount of			Amount of
	Gain (Loss)			Gain (Loss)			Amount of
	Recognized in			Reclassified		Location of	Gain (Loss)
	Other		Location of Gain (Loss)	from Other		Gain (Loss)	Recognized
	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	$	—	Acquisition, restructuring, and other expenses	$	3,156	Interest expense	$	(603)
Interest rate cap agreements		2,291	Interest expense		—	Interest expense		(2)
Total cash flow hedges		2,291			3,156			(605)

Fair value hedges:
Interest rate swap on securities		(523)	Interest income		—	Interest expense		7
Total economic hedges		(523)			—			7

Economic hedges:
Forward commitments		—	Other income		—	Other income		(84)
Total economic hedges		—			—			(84)

Non-hedging derivatives:
Interest rate lock commitments		—	Other income		—	Other Income		52
Total non-hedging derivatives		—			—			52

Total	$	1,768		$	3,156		$	(630)

Cash flow hedges

Interest rate swaps on wholesale funding

In March and November 2019 and April 2020, the Company entered into interest rate swaps on wholesale borrowings (the "SWAPS") to limit its exposure to rising interest rates over a five year term on 3-month FHLB borrowings or brokered certificates, or a combination thereof at each maturity date. Under the terms of the agreement, the Company has 2 swaps each with a $50.0 million notional amount and pays a fixed interest rate of 2.46% and 1.53% respectively and 1 swap with a $25.0 million notional amount and pays a fixed rate of 0.59%. The financial institution counterparty pays the Company interest on the three-month LIBOR rate. The Company designated the swap as a cash flow hedge.

Interest rate cap agreements

In 2014, interest rate cap agreements were purchased to limit the Company’s exposure to rising interest rates on ~~four~~4 rolling, three-month borrowings indexed to three-month LIBOR. Under the terms of the agreements, the Company paid total premiums of $4.6 million for the right to receive cash flow payments if three-month LIBOR rises above the caps of 3.00%, thus effectively ensuring interest expense on the borrowings at maximum rates of 3.00% for the duration of the agreements. The interest rate cap agreements were designated as cash flow ~~hedges. The fair values of~~hedges; however, the ~~interest rate cap agreements are included in other assets on the Company’s consolidated balance sheets. Changes~~caps were terminated in the ~~fair~~fourth quarter of 2019 and the unamortized premium totaling $3.2 million was recognized in acquisition, restructuring and other expenses.

Fair value representing unrealized gains or losses, are recorded in accumulated other comprehensive income, net of tax. The premiums paid on the interest rate cap agreements are being recognized as increases in interest expense over the duration of the agreements using the caplet method.

hedges

Interest rate swap on ~~deposits~~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 fair 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

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converts the fixed interest rates to LIBOR-based variable interest rates. These derivatives are designated 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 ~~an interest rate~~8 swap ~~on brokered deposits (the "SWAP") to limit its exposure to rising interest rates over a five year term. Under the terms of the agreement, the Company pays a fixed rate of 2.461% for~~transactions with a notional amount of ~~$50.0~~$37.2 million ~~and~~designated as fair value hedges. These derivatives are intended to protect against the ~~financial institution counterparty pays~~effects of changing interest rates on the ~~three-month LIBOR rate.~~fair values of fixed rate securities. The ~~Company designated the SWAP as a cash flow hedge and the fair value is included in other liabilities~~fixed 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, net~~transactions have a weighted average of ~~tax.~~

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 after~~just prior to the loan ~~closes~~closing with a customer.

~~Non-hedging derivatives~~

~~Interest rate lock commitments~~

The Company enters into interest rate lock commitments (“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 relate to the origination of residential mortgage loans held for sale are considered as derivative financial instruments under applicable accounting guidance. Outstanding IRLCs expose the Company to the risk that the market 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-standing derivatives which are carried at fair value with changes recorded in non-interest income in the Company’s consolidated statements of income. Changes in the fair value of IRLCs subsequent to inception are based on changes in the fair value of the underlying loan resulting from the fulfillment of the commitment and changes in the probability when the loan will fund within the terms of the commitment, which is affected primarily by changes in interest rates and the passage of time.

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~~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 ~~$10.7~~$30.5 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, 2020
Customer Loan Derivatives:
MNA counterparty	$	(16,965)	$	16,965	$	30,450	$	—
RPA counterparty		(11,071)		11,071		—		—
Total	$	(28,036)	$	28,036	$	30,450	$	—


	Gross Amounts Offset in the Consolidated Balance Sheet
	Derivative				Cash Collateral
(in thousands)	Liabilities		Derivative Assets		Pledged		Net Amount
As of December 31, 2019
Customer Loan Derivatives:
MNA counterparty	$	(4,669)	$	4,669	$	10,700	$	—
RPA counterparty		(3,377)		3,377		—		—
Total	$	(8,046)	$	8,046	$	10,700	$	—

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Non-hedging derivatives

Interest rate lock commitments

The Company enters into interest rate lock commitments (“IRLCs”) for residential mortgage loans, which commit the ~~counterparty.~~Company to lend funds to a potential borrower at a specific interest rate and within a specified period of time. IRLCs relate to the origination of residential mortgage loans that are 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 standing derivatives which are carried at fair value with changes recorded in non-interest income in the Company’s Consolidated Statements of Income. Changes in the fair value of IRLCs subsequent to inception are based on; (i) changes in the fair value of the underlying loan resulting from the fulfillment of the commitment and (ii) changes in the probability when the loan will fund within the terms of the commitment, which is affected primarily by changes in interest rates and the passage of time.

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NOTE 10. 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, ~~2019~~2020 and December 31, ~~2018,~~2019, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value:

September 30, 2019
(in thousands) Level 1 Inputs Level 2 Inputs Level 3 Inputs Total Fair Value
Available for sale securities:
Mortgage-backed securities:
  US Government-sponsored enterprises $ —
$ 349,143
$ —
$ 349,143
  US Government agency —
118,825
—
118,825
  Private label —
19,954
—
19,954
Obligations of states and political subdivisions thereof —
111,226
—
111,226
Corporate bonds —
76,527
—
76,527
Derivative assets —
11,012
78
11,090
Derivative liabilities —
(13,102 ) (61 ) (13,163 )

December 31, 2018
(in thousands) Level 1 Inputs Level 2 Inputs Level 3 Inputs Total Fair Value
Available for sale securities:
Mortgage-backed securities:
  US Government-sponsored enterprises $ —
$ 404,952
$ —
$ 404,952
  US Government agency —
110,512
—
110,512
  Private label —
20,382
—
20,382
Obligations of states and political subdivisions thereof —
132,265
—
132,265
Corporate bonds —
57,726
—
57,726
Derivative assets —
2,156
8
2,164
Derivative liabilities —
(1,353 ) —
(1,353 )


	September 30, 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	$	0	$	235,172	$	0	$	235,172
US Government agency		0		95,785		0		95,785
Private label		0		19,603		0		19,603
Obligations of states and political subdivisions thereof		0		154,157		0		154,157
Corporate bonds		0		99,812		0		99,812
Derivative assets		0		31,481		24		31,505
Derivative liabilities		0		(34,871)		(87)		(34,958)


	December 31, 2019
	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	$	—	$	321,969	$	—	$	321,969
US Government agency		—		99,661		—		99,661
Private label		—		19,533		—		19,533
Obligations of states and political subdivisions thereof		—		142,006		—		142,006
Corporate bonds		—		80,061		—		80,061
Derivative assets		—		6,791		59		6,850
Derivative liabilities		—		(8,102)		(84)		(8,186)

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.

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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 of a loan in a lock position will ultimately close. The closing ratio is derived from the Company’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 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, ~~2019,~~2020, 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.

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, ~~2019:~~2020:


	Assets (Liabilities)
	Interest Rate Lock		Forward
(in thousands)	Commitments		Commitments
Three Months Ended September 30, 2020
Balance at beginning of period	$	63	$	(126)
Realized (loss) gain recognized in non-interest income		(39)		39
Balance at end of period	$	24	$	(87)

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)

Assets (Liabilities)
(in thousands) Interest Rate Lock Commitments Forward Commitments
Three Months Ended September 30, 2019

Balance at beginning of period $ 71
$ (30 )
Realized gain recognized in non-interest income 7
(31 )
Balance at end of period $ 78
$ (61 )

Nine Months Ended September 30, 2019

Balance at beginning of period $ 8
$ —
Realized gain (loss) recognized in non-interest income 70
(61 )
Balance at end of period $ 78
$ (61 )

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

(in thousands, except ratios) Fair Value
September 30, 2019 Valuation Techniques Unobservable Inputs Unobservable Input Value
Assets (Liabilities)

Interest Rate Lock Commitment $ 78
Historical trend Closing Ratio 90 %
Pricing Model Origination Costs, per loan $ 1.7

Forward Commitments (61 ) Quoted prices for similar loans in active markets. Freddie Mac pricing system Pair-off contract price
Total $ 17

Fair Value

(in thousands,

September 30,

December 31,

Valuation

Unobservable

except ratios)

2020

2019

Techniques

Inputs

Input Value

Assets (Liabilities)

Interest Rate Lock Commitment

Historical trend

Closing Ratio

Pricing Model

Origination Costs, per loan

1.7

Forward Commitments

(87)

(84)

Quoted prices for similar loans in active markets.

Freddie Mac pricing system

Pair-off contract price

Total

(63)

(25)

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 GAAP. The following is a summary of applicable non-recurring fair value measurements:

September 30, 2019 December 31, 2018 Three Months Ended September 30, 2019 Nine Months Ended September 30, 2019 Fair Value Measurement Date as of September 30, 2019
(in thousands)
Level 3
Inputs
Level 3
Inputs
Total
Gains (Losses)

Total
Gains (Losses)

Level 3
Inputs
Assets

Impaired loans $ 14,382
$ 15,213
$ (182 ) $ 831
September 2019
Capitalized servicing rights 4,108
4,882
—
—
September 2019
Other real estate owned 2,455
2,351
(146 ) (146 ) August 2019
Assets held for sale 1,901
—
—
—
September 2019
Total $ 22,846
$ 22,446
$ (328 ) $ 685


									Fair Value
					Three Months Ended		Nine Months Ended		Measurement Date as of
	Sep 30, 2020		Dec 31, 2019		September 30, 2020		September 30, 2020		September 30, 2020
	Level 3		Level 3		Total		Total		Level 3
(in thousands)	Inputs		Inputs		Gains (Losses)		Gains (Losses)		Inputs
Assets
Impaired loans	$	9,617	$	9,625	$	(6)	$	(8)	September 2020
Capitalized servicing rights		3,234		4,301		323		(1,067)	September 2020
Other real estate owned		1,983		2,236		(335)		(253)	September 2020
Premises held for sale		1,764		1,764		—		—	September 2019
Total	$	16,598	$	17,926	$	(18)	$	(1,328)

There are no liabilities measured at fair value on a non-recurring ~~basis.~~basis in 2020 and 2019.

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


(in thousands,	Fair Value				Range
except ratios)	Sep 30, 2020		Valuation Techniques	Unobservable Inputs	(Weighted Average)^(a)
Assets
Impaired loans	$	7,071	Fair value of collateral-appraised value	Loss severity		0% to 53%
				Appraised value		$0 to $1,730

Impaired loans		2,546	Discount cash flow	Discount rate		3.50% to 9.50%
				Cash flows		$21 to $1,002

Capitalized servicing rights		3,234	Discounted cash flow	Constant prepayment rate (CPR)		16.73%
				Discount rate		10.05%

Other real estate owned		1,983	Fair value of collateral less selling costs	Appraised value		$2,000
				Selling Costs		6%

Premises held for sale^(b)		1,764	Fair value of asset less selling costs	Appraised value		$136 to $527
				Selling Costs		6%
Total	$	16,598

Fair Value Range
(in thousands, except ratios) September 30, 2019 Valuation Techniques Unobservable Inputs
(Weighted Average)^(a)
Assets

Impaired loans $ 11,419
Fair value of collateral -appraised value Loss severity 0% to 61%
Appraised value $0 to $6,915

Impaired loans 2,963
Discount cash flow Discount rate 2.88% to 9.50%
Cash flows $22 to $1,019

Capitalized servicing rights 4,108
Discounted cash flow Constant prepayment rate (CPR) 10.21 %
Discount rate 10.08 %

Other real estate owned 2,455
Fair value of collateral less selling costs Appraised value
$2,695
Selling Costs 6% to 10%

Assets held for sale^(b)
1,901
Fair value of asset less selling costs Appraised value $136 to $527
Selling Costs 6 %
Total $ 22,846


(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 ~~individuals~~individual properties.


(b)	The carrying value of ~~assets~~premises held for sale was $1.8 million as of September 30, ~~2019. There were no assets held for sale as of December 31, 2018.~~2020.


(in thousands,	Fair Value				Range
except ratios)	Dec 31, 2019		Valuation Techniques	Unobservable Inputs	(Weighted Average)^(a)
Assets
Impaired loans	$	6,137	Fair value of collateral-appraised value	Loss severity		0% to 55.00%
				Appraised value		$0 to $6,915

Impaired loans		3,488	Discount cash flow	Discount rate		2.88% to 9.50%
				Cash flows		$22 to $1,002

Capitalized servicing rights		4,301	Discounted cash flow	Constant prepayment rate (CPR)		9.95%
				Discount rate		10.07%

Other real estate owned		2,236	Fair value of collateral less selling costs	Appraised value		$2,695
				Selling Costs		10% to 20%

Premises held for sale^(b)		1,764	Fair value of asset less selling costs	Appraised value		$136 to $527
				Selling Costs		6%
Total	$	17,926

Fair Value Range
(in thousands, except ratios) December 31, 2018 Valuation Techniques Unobservable Inputs
(Weighted Average)^(a)
Assets

Impaired loans $ 11,676
Fair value of collateral -appraised value Loss severity 0% to 55.00%
Appraised value $0 to $6,915

Impaired loans 3,537
Discount cash flow Discount rate 2.88% to 9.50%
Cash flows $22 to $1,072

Capitalized servicing rights 4,882
Discounted cash flow Constant prepayment rate (CPR) 8.19 %
Discount rate 10.08 %

Other real estate owned 2,351
Fair value of collateral less selling costs Appraised value
$2,700
Selling Costs 12.93 %
Total $ 22,446


(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 ~~individuals~~individual properties.

(b)	The carrying value of premises held for sale was $1.8 million as of December 31, 2019.

There were no Level 1 or Level 2 non-recurring fair value measurements for the periods ended September 30, ~~2019~~2020 and December 31, ~~2018.~~2019.

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Impaired 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, non-recurring fair value measurement adjustments relating to real estate collateral have generally been classified as Level 3. Estimates of fair value for other collateral supporting 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 results from the foreclosure process on residential or commercial loans issued by the 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.

~~Assets~~

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.

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Summary of Estimated Fair Values of Financial Instruments

The estimated fair values, and related carrying amounts, of the Company’s financial instruments 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, 2020
	Carrying		Fair
(in thousands)	Amount		Value		Level 1		Level 2		Level 3
Financial Assets
Cash and cash equivalents	$	215,657	$	215,657	$	215,657	$	0	$	0
Securities available for sale		604,529		604,529		0		604,529		0
FHLB stock		13,975		13,975		0		13,975		0
Net loans		2,690,784		2,672,882		0		0		2,672,882
Accrued interest receivable		3,171		3,171		0		3,171		0
Cash surrender value of bank-owned life insurance policies		77,388		77,388		0		77,388		0
Derivative assets		31,505		31,505		0		31,481		24

Financial Liabilities
Non-maturity deposits	$	2,121,406	$	2,037,099	$	0	$	2,037,099	$	0
Time deposits		813,509		805,783		0		805,783		0
Securities sold under agreements to repurchase		30,048		30,048		0		30,048		0
FHLB advances		224,282		229,413		0		229,413		0
FRB PPPLF		131,236		131,141		0		131,141		0
Subordinated borrowings		59,920		59,920		0		59,920		0
Derivative liabilities		34,958		34,958		0		34,871		87


	December 31, 2019
	Carrying		Fair
(in thousands)	Amount		Value		Level 1		Level 2		Level 3
Financial Assets
Cash and cash equivalents	$	56,910	$	56,910	$	56,910	$	—	$	—
Securities available for sale		663,230		663,230		—		663,230		—
FHLB stock		20,679		20,679		—		20,679		—
Net loans		2,625,739		2,634,147		—		—		2,634,147
Accrued interest receivable		3,294		3,294		—		3,294		—
Cash surrender value of bank-owned life insurance policies		75,863		75,863		—		75,863		—
Derivative assets		6,850		6,850		—		6,791		59

Financial Liabilities
Non-maturity deposits	$	1,763,116	$	1,751,481	$	—	$	1,751,481	$	—
Time deposits		932,635		932,886		—		932,886		—
Short-term other borrowings		44,832		44,831		—		44,831		—
FHLB advances		426,564		425,989		—		425,989		—
Subordinated borrowings		59,920		59,920		—		59,920		—
Derivative liabilities		8,186		8,186		—		8,102		84

September 30, 2019
(in thousands)
Carrying
Amount

Fair
Value
Level 1 Level 2 Level 3
Financial Assets

Cash and cash equivalents $ 71,593
$ 71,593
$ 71,593
$ —
$ —
Securities available for sale 675,675
675,675
—
675,675
—
FHLB stock 27,469
27,469
—
27,469
—
Net loans 2,561,953
2,567,331
—
—
2,567,331
Accrued interest receivable 3,218
3,218
—
3,218
—
Cash surrender value of bank-owned life insurance policies 75,368
75,368
—
75,368
—
Derivative assets 11,090
11,090
—
11,012
78

Financial Liabilities
Total deposits $ 2,493,585
$ 2,491,023
$ —
$ 2,491,023
$ —
Short-term other borrowings 41,259
41,258
—
41,258
—
FHLB advances 600,559
601,377
—
601,377
—
Subordinated borrowings 37,928
37,928
—
37,928
—
Junior subordinated borrowings 5,000
4,556
—
4,556
—
Derivative liabilities (13,163 ) (13,163 ) —
(13,102 ) (61 )

December 31, 2018
(in thousands) Carrying
Amount Fair
Value Level 1 Level 2 Level 3
Financial Assets

Cash and cash equivalents $ 98,754
$ 98,754
$ 98,754
$ —
$ —
Securities available for sale 725,837
725,837
—
725,837
—
FHLB stock 35,659
35,659
—
35,659
—
Net loans 2,476,361
2,415,863
—
—
2,415,863
Accrued interest receivable 3,533
3,533
—
3,533
—
Cash surrender value of bank-owned life insurance policies 73,810
73,810
—
73,810
—
Derivative assets 2,164
2,164
—
2,156
8

Financial Liabilities
Total deposits $ 2,483,238
$ 2,404,250
$ —
$ 2,404,250
$ —
Short-term other borrowings 36,211
36,171
—
36,171
—
FHLB advances 644,611
643,065
—
643,065
—
Subordinated borrowings 37,973
37,973
—
37,973
—
Junior subordinated borrowings 5,000
3,923
—
3,923
—
Derivative liabilities (1,353 ) (1,353 ) —
—
(1,353 )

~~Other than as discussed above, the following methods and assumptions were used by management to estimate the fair value~~

Table of ~~significant classes of financial instruments for which it is practicable to estimate that value.~~

NOTE 11. ~~NON-INTEREST INCOME~~

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) 2019 2018 2019 2018
Major Products/Service Lines
Trust management fees $ 2,737
$ 2,720
$ 8,055
$ 8,268
Financial services fees 276
232
781
768
Interchange fees 1,323
1,146
3,567
3,277
Customer deposit fees 1,112
1,095
3,046
3,093
Other customer service fees 118
249
723
691
Total $ 5,566
$ 5,442
$ 16,172
$ 16,097

Three Months Ended September 30, Nine Months Ended September 30,
(in thousands) 2019 2018 2019 2018
Timing of Revenue Recognition
Products and services transferred at a point in time $ 2,839
$ 2,583
$ 7,874
$ 7,576
Products and services transferred over time 2,727
2,859
8,298
8,521
Total $ 5,566
$ 5,442
$ 16,172
$ 16,097


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
(in thousands)	2020		2019		2020		2019
Major Products/Service Lines
Trust management fees	$	3,256	$	2,737	$	9,194	$	8,055
Financial services fees		276		276		867		781
Interchange fees		1,709		1,323		4,910		3,567
Customer deposit fees		937		1,112		2,836		3,046
Other customer service fees		240		118		691		723
Total	$	6,418	$	5,566	$	18,497	$	16,172


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
(in thousands)	2020		2019		2020		2019
Timing of Revenue Recognition
Products and services transferred at a point in time	$	3,133	$	2,839	$	9,026	$	7,874
Products and services transferred over time		3,285		2,727		9,471		8,298
Total	$	6,418	$	5,566	$	18,497	$	16,172

Trust Management ~~Fees.~~

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. Revenue from these services are generally recognized over time and is typically based on a time elapsed measure of ~~progress.~~service. 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.~~

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 ~~monthly~~ service requirements.

Interchange ~~Fees.~~

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.~~

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

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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.

Other Customer Service ~~Fees.~~

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) Balance at September 30, 2019 Balance at December 31, 2018
Balances from contracts with customers only:
Other Assets $ 1,898
$ 2,866
Other Liabilities 3,179
4,923


	Balance at		Balance at
(in thousands)	September 30, 2020		December 31, 2019
Balances from contracts with customers only:
Other Assets	$	1,311	$	1,236
Other Liabilities		2,918		3,114

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 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.

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NOTE 12. 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. ~~For the Company, ASC 842 primarily affects the accounting treatment for operating lease agreements where the Company is the lessee.~~

~~Lessee Accounting~~

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 total of ROU assets and lease liabilities were $9.0 million as of January 1, 2019.~~

The Company ~~has~~ elected the following practical expedients in conjunction with implementation of ASC 842 as follows:

~~Package of practical expedients:~~

●	Package of practical expedients:


◦o	Lease classification as an operating lease under the prior standards is grandfathered.


◦o	Re-evaluation of embedded leases evaluated under the prior standards is not required.


◦o	No 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.~~

●	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 consolidated statements of condition classification of the Company’s ROU assets and lease liabilities as of September 30, ~~2019:~~

(in thousands) September 30, 2019
Lease Right-of-Use Assets Classification
Operating lease right-of-use assets Other assets $ 8,447

Lease Liabilities
Operating lease liabilities Other liabilities 8,524

2020:


(in thousands)		September 30, 2020		December 31, 2019
Lease Right-of-Use Assets	Classification
Operating lease right-of-use assets	Other assets	$	10,617	$	9,623

Lease Liabilities
Operating lease liabilities	Other liabilities		10,881		9,651

The calculated amount of the 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 minimum 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 calculation of the ROU asset and lease liability. If there are multiple renewals typically only the next lease renewal is considered. Regarding the discount rate, ASC 842 requires the use of the rate implicit in the 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. ~~For operating leases existing prior to January 1, 2019,~~

The following table presents the ~~rate for the original~~weighted average lease term asand discount rate of ~~January 1, 2019 was used.~~the Company’s leases:


	September 30, 2020		December 31, 2019
Weighted-average remaining lease term (in years)
Operating leases	9.04		8.96

Weighted-average discount rate
Operating leases	3.15	%	3.27	%



	~~September 30, 2019~~
~~Weighted-average remaining lease term~~
~~Operating leases~~	~~9.18~~

~~Weighted-average discount rate~~
~~Operating leases~~	~~3.37~~	%

The following table represents lease costs and other lease information. As the Company elected, for all classes of underlying assets, not to separate lease and non-lease components and instead to account for them as a single lease component, the variable lease cost primarily represents variable payments such as real estate taxes, common area maintenance and utilities.

(in thousands) Three Months Ended September 30, 2019 Nine Months Ended September 30, 2019
Lease Costs
Operating lease cost $ 234
$ 698
Variable lease cost 69
277
Total lease cost $ 303
$ 975


	Three Months Ended		Nine Months Ended
(in thousands)	September 30, 2020		September 30, 2020
Lease Costs
Operating lease cost	$	344	$	988
Variable lease cost		59		177
Total lease cost	$	403	$	1,165

Future minimum payments for operating leases with initial or remaining terms of one year or more as of September 30, ~~2019~~2020 are, as follows:


(in thousands)	Operating Leases
Twelve Months Ended:
September 30, 2021	$	1,375
September 30, 2022		1,404
September 30, 2023		1,410
September 30, 2024		1,413
September 30, 2025		1,221
Thereafter		7,444
Total future minimum lease payments		14,267
Amounts representing interest		(3,386)
Present value of net future minimum lease payments	$	10,881

(in thousands) Operating Leases
Twelve Months Ended:
September 30, 2020 $ 911
September 30, 2021 896
September 30, 2022 912
September 30, 2023 908
September 30, 2024 917
Thereafter 6,065
Total future minimum lease payments 10,609
Amounts representing interest (2,085 )
Present value of net future minimum lease payments $ 8,524

~~NOTE 13. SUBSEQUENT EVENTS~~

On July 8, 2019, the Company entered into a definitive agreement to acquire eight branches located in central Maine with approximately $287.0 million of deposits, $111.0 million of loans and $284.0 million of assets under management (as of March 31, 2019) from People’s United Bank, National Association. The transaction closed on October 25, 2019 and the Company received initial proceeds of $134.0 million that were net of a 6.3% premium on average total deposits plus a premium of 1.2 times annualized wealth management revenue and approximately $4.4 million for the premises. The Company used the proceeds to pay-down Federal Home Loan Bank advances. The Company is currently in the process of determining the final purchase price and allocation between the assets acquired and liabilities assumed.

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

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 Annual Report on Form 10-K for the year ended December 31, ~~2018.~~2019. 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 results for the full year ~~2019~~2020 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.

Bar Harbor Bankshares~~(the “Company”)~~ is the parent of Bar Harbor Bank & Trust, ~~(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 true community bank providing exceptional commercial, retail, and wealth management banking services from over 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 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 banking

●

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 a profile of the Company as of September 30, ~~2019:~~2020:

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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-Q.


	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2020			2019			2020			2019
PER SHARE DATA
Net earnings, diluted	$	0.56		$	0.32		$	1.60		$	1.18
Adjusted earnings, diluted⁽¹⁾		0.61			0.47			1.66			1.35
Total book value		27.09			25.37			27.09			25.37
Tangible book value⁽¹⁾		18.56			18.49			18.56			18.49
Market price at period end		20.55			24.93			20.55			24.93
Dividends		0.22			0.22			0.66			0.64

PERFORMANCE RATIOS⁽²⁾
Return on assets		0.88	%		0.55	%		0.87	%		0.68	%
Adjusted return on assets⁽¹⁾		0.96			0.80			0.91			0.77
Return on equity		8.22			5.04			8.09			6.37
Adjusted return on equity⁽¹⁾		8.98			7.36			8.41			7.25
Adjusted return on tangible equity⁽¹⁾		13.36			10.31			12.54			10.25
Net interest margin, fully taxable equivalent (FTE)^{(1) (3)}		2.98			2.75			3.01			2.72
Net interest margin (FTE), excluding purchased loan accretion⁽³⁾		2.92			2.65			2.93			2.63
Efficiency ratio⁽¹⁾		59.47			65.02			61.62			65.83

GROWTH (Year-to-date)⁽¹⁾
Total commercial loans		27	%		11	%		27	%		11	%
Total loans		3			5			3			5
Total deposits		12			1			12			1

FINANCIAL DATA (In millions)
Total assets	$	3,860		$	3,612		$	3,860		$	3,612
Total earning assets⁽⁴⁾		3,312			3,270			3,312			3,270
Total investments		619			703			619			703
Total loans		2,709			2,577			2,709			2,577
Allowance for loan losses		18			15			18			15
Total goodwill and intangible assets		127			107			127			107
Total deposits		2,935			2,494			2,935			2,494
Total shareholders' equity		404			394			404			394
Net income		8			5			25			18
Adjusted income⁽¹⁾		9			7			26			21

ASSET QUALITY AND CONDITION RATIOS
Net charge-offs (annualized)/average loans		0.06	%		0.02	%		0.08	%		0.02	%
Allowance for loan losses/total loans		0.66			0.60			0.66			0.60
Loans/deposits		92			103			92			103
Shareholders' equity to total assets		10.48			10.92			10.48			10.92
Tangible shareholders' equity to tangible assets⁽¹⁾		7.42			8.20			7.42			8.20

Three Months Ended September 30, Nine Months Ended September 30,
2019 2018 2019 2018
PER SHARE DATA
Net earnings, diluted $ 0.32
$ 0.58
$ 1.18
$ 1.63
Adjusted earnings, diluted⁽¹⁾
0.47
0.58
1.35
1.66
Total book value 25.37
23.06
25.37
23.06
Tangible book value⁽¹⁾
18.49
16.11
18.49
16.11
Market price at period end 24.93
28.72
24.93
28.72
Dividends 0.22
0.20
0.64
0.59

PERFORMANCE RATIOS⁽²⁾

Return on assets 0.55 % 1.01 % 0.68 % 0.96 %
Adjusted return on assets⁽¹⁾
0.80
1.01
0.77
0.98
Return on equity 5.04
9.92
6.37
9.54
Adjusted return on equity⁽¹⁾
7.36
9.98
7.25
9.72
Adjusted return on tangible equity⁽¹⁾
10.31
14.52
10.25
14.23
Net interest margin, fully taxable equivalent (FTE)^{(1) (3)}
2.75
2.81
2.72
2.90
Net interest margin (FTE), excluding purchased loan accretion⁽⁽³⁾
2.65
2.71
2.63
2.79
Efficiency ratio⁽¹⁾
65.02
57.88
65.83
59.05

GROWTH (Year-to-date)⁽¹⁾

Total commercial loans 10.5 % 2.8 % 10.5 % 2.8 %
Total loans 4.7
(0.1 ) 4.7
(0.1 )
Total deposits 0.6
2.2
0.6
2.2

FINANCIAL DATA (In millions)

Total assets $ 3,612
$ 3,561
$ 3,612
$ 3,561
Total earning assets⁽⁴⁾
3,270
3,253
3,270
3,253
Total investments 703
747
703
747
Total loans 2,577
2,484
2,577
2,484
Allowance for loan losses 15
13
15
13
Total goodwill and intangible assets 107
108
107
108
Total deposits 2,494
2,390
2,494
2,390
Total shareholders' equity 394
358
394
358
Net income 5
9
18
25
Adjusted income⁽¹⁾
7
9
21
26

ASSET QUALITY AND CONDITION RATIOS
Net charge-offs (current quarter annualized)/average loans 0.02 % 0.04 % 0.02 % 0.06 %
Allowance for loan losses/total loans 0.60
0.54
0.60
0.54
Loans/deposits 103
104
103
104
Shareholders' equity to total assets 10.92
10.04
10.92
10.04
Tangible shareholders' equity to tangible assets⁽¹⁾
8.20
7.24
8.20
7.24

~~_________________________~~


(1)	Non-GAAP financial measure. Refer to the Reconciliation of Non-GAAP Financial Measures section of Management's Discussion and Analysis for additional information.


(2)	All performance ratios are annualized and are based on average balance sheet amounts, where applicable.


(3)	Fully taxable equivalent considers the impact of tax-advantaged investment securities and loans.

~~(4)~~

(4)	Earning assets includes non-accruing loans and securities are valued at amortized cost.

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CONSOLIDATED LOAN AND DEPOSIT ANALYSIS

The following tables present the quarterly trend in loan and deposit data and accompanying quarterly ~~and year-to-date~~ growth rates as of September 30, ~~2019~~2020 on an annualized basis:

LOAN ANALYSIS


											Annualized Growth %
											September 30, 2020
(in thousands, except ratios)	Sep 30, 2020		Jun 30, 2020		Mar 31, 2020		Dec 31, 2019		Sep 30, 2019		Quarter To Date		Year To Date
Commercial real estate	$	1,045,635	$	982,070	$	948,178	$	930,661	$	923,773	26	%	16	%
Commercial and industrial		456,184		472,524		321,605		318,988		301,590	(14)		57
Total commercial loans		1,501,819		1,454,594		1,269,783		1,249,649		1,225,363	13		27
Residential real estate		1,021,206		1,083,708		1,132,328		1,151,857		1,143,452	(23)		(15)
Consumer		119,340		124,197		128,120		135,283		107,375	(16)		(16)
Tax exempt and other		66,326		66,918		104,752		104,303		101,116	(4)		(49)
Total loans	$	2,708,691	$	2,729,417	$	2,634,983	$	2,641,092	$	2,577,306	(3)	%	3	%

DEPOSIT ANALYSIS


											Annualized Growth %
											September 30, 2020
(in thousands, except ratios)	Sep 30, 2020		Jun 30, 2020		Mar 31, 2020		Dec 31, 2019		Sep 30, 2019		Quarter To Date		Year To Date
Demand	$	515,064	$	504,325	$	400,410	$	414,534	$	380,707	9	%	32	%
NOW		706,048		642,908		578,320		575,809		490,315	39		30
Savings		511,938		466,668		423,345		388,683		360,570	39		42
Money market		388,356		402,835		404,385		384,090		359,328	(14)		1
Total non-maturity deposits		2,121,406		2,016,736		1,806,460		1,763,116		1,590,920	21		27
Total time deposits		813,509		678,126		844,097		932,635		902,665	80		(17)
Total deposits	$	2,934,915	$	2,694,862	$	2,650,557	$	2,695,751	$	2,493,585	36	%	12	%

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LOAN ANALYSIS

September 30, 2019 Annualized Growth %
(in thousands, except ratios) Sep 30,
2019 Jun 30,
2019 Mar 31,
2019 Dec 31,
2018 Sep 30,
2018 Quarter End Year to Date
Commercial real estate $ 923,773
$ 881,479
$ 821,567
$ 826,699
$ 840,018
19.2 % 15.7 %
Commercial and industrial 301,590
312,029
305,185
309,544
303,984
(13.4 ) (3.4 )
Total commercial loans 1,225,363
1,193,508
1,126,752
1,136,243
1,144,002
10.7
10.5
Residential real estate 1,143,452
1,167,759
1,184,053
1,144,698
1,140,519
(8.3 ) (0.1 )
Consumer 107,375
112,275
111,402
113,960
117,239
(17.5 ) (7.7 )
Tax exempt and other 101,116
104,696
104,752
95,326
81,830
(13.7 ) 8.1
Total loans $ 2,577,306
$ 2,578,238
$ 2,526,959
$ 2,490,227
$ 2,483,590
(0.1 )% 4.7 %

DEPOSIT ANALYSIS

September 30, 2019 Annualized Growth %
(in thousands, except ratios) Sep 30,
2019 Jun 30,
2019 Mar 31,
2019 Dec 31,
2018 Sep 30,
2018 Quarter End Year to Date
Demand $ 380,707
$ 354,125
$ 342,030
$ 370,889
$ 372,358
30.0 % 3.5 %
NOW 490,315
472,576
470,277
484,717
471,326
15.0
1.5
Savings 360,570
352,657
346,813
358,888
354,908
9.0
0.6
Money market 359,328
305,506
349,833
335,951
254,142
70.5
9.3
Total non-maturity deposits 1,590,920
1,484,864
1,508,953
1,550,445
1,452,734
28.6
3.5
Total time deposits 902,665
996,512
956,818
932,793
937,615
(37.7 ) (4.3 )
Total deposits $ 2,493,585
$ 2,481,376
$ 2,465,771
$ 2,483,238
$ 2,390,349
2.0 % 0.6 %

AVERAGE BALANCES AND AVERAGE YIELDS/RATES

The following tables present average balances and average yields and rates on an annualized fully taxable equivalent basis for the periods included:


	Three Months Ended September 30,
	2020						2019
	Average						Average
(in thousands, except ratios)	Balance		Interest⁽³⁾		Yield/Rate⁽³⁾		Balance		Interest⁽³⁾		Yield/Rate⁽³⁾
Assets
Commercial real estate	$	1,012,194	$	9,691	3.81	%	$	900,568	$	10,750	4.74	%
Commercial and industrial		531,339		5,463	4.09			410,453		4,947	4.78
Residential		1,060,084		9,886	3.71			1,154,552		11,293	3.88
Consumer		121,248		1,042	3.42			109,562		1,418	5.13
Total loans ⁽¹⁾		2,724,865		26,082	3.81			2,575,135		28,408	4.38
Securities and other ⁽²⁾		627,162		4,808	3.05			732,925		6,356	3.44
Total earning assets		3,352,027		30,890	3.67	%		3,308,060		34,764	4.17	%
Other assets		462,383						333,896
Total assets	$	3,814,410					$	3,641,956

Liabilities
NOW	$	677,706	$	243	0.14	%	$	487,506	$	621	0.51	%
Savings		488,508		157	0.13			359,242		193	0.21
Money market		396,351		163	0.16			338,013		1,168	1.37
Time deposits		777,424		3,307	1.69			947,949		5,161	2.16
Total interest bearing deposits		2,339,989		3,870	0.66			2,132,710		7,143	1.33
Borrowings		481,687		1,941	1.60			708,222		4,674	2.62
Total interest bearing liabilities		2,821,676		5,811	0.82	%		2,840,932		11,817	1.65	%
Non-interest bearing demand deposits		507,844						368,100
Other liabilities		78,072						37,975
Total liabilities		3,407,592						3,247,007

Total shareholders' equity		406,818						394,949

Total liabilities and shareholders' equity	$	3,814,410					$	3,641,956

Net interest spread					2.85	%					2.52	%
Net interest margin					2.98						2.75

Three Months Ended September 30,
2019 2018
(in thousands, except ratios)
Average
Balance

Interest⁽³⁾

Yield/Rate ₍₃₎
Average
Balance
Interest⁽³⁾

Yield/Rate ₍₃₎
Assets
Commercial real estate $ 900,568
$ 10,750
4.74 % $ 837,058
$ 9,646
4.57 %
Commercial and industrial 410,453
4,947
4.78
388,831
4,497
4.59
Residential 1,154,552
11,293
3.88
1,120,336
10,828
3.83
Consumer 109,562
1,418
5.13
117,735
1,438
4.85
Total loans ⁽¹⁾
2,575,135
28,408
4.38
2,463,960
26,409
4.25
Securities and other ⁽²⁾
732,925
6,356
3.44
773,562
6,267
3.21
Total earning assets 3,308,060
34,764
4.17 % 3,237,522
32,676
4.00 %
Other assets 333,896
295,162

Total assets $ 3,641,956
$ 3,532,684

Liabilities
NOW $ 487,506
$ 621
0.51 % $ 461,875
$ 501
0.43 %
Savings 359,242
193
0.21
356,834
151
0.17
Money market 338,013
1,168
1.37
259,738
500
0.76
Time deposits 947,949
5,161
2.16
964,108
4,325
1.78
Total interest bearing deposits 2,132,710
7,143
1.33
2,042,555
5,477
1.06
Borrowings 708,222
4,674
2.62
744,632
4,237
2.26
Total interest bearing liabilities 2,840,932
11,817
1.65 % 2,787,187
9,714
1.38 %
Non-interest bearing demand deposits 368,100
357,856

Other liabilities 37,975
28,943

Total liabilities 3,247,007
3,173,986

Total shareholders' equity 394,949
358,698

Total liabilities and shareholders' equity $ 3,641,956
$ 3,532,684

Net interest spread 2.52 % 2.62 %
Net interest margin 2.75
2.81


(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.

Table of Contents


	Nine Months Ended September 30,
	2020						2019
	Average						Average
(in thousands, except ratios)	Balance		Interest⁽³⁾		Yield/Rate ⁽³⁾		Balance		Interest⁽³⁾		Yield/Rate ⁽³⁾
Assets
Commercial real estate	$	972,330	$	29,895	4.11	%	$	859,613	$	30,480	4.74	%
Commercial and industrial		493,314		15,768	4.27			410,350		14,662	4.78
Residential		1,103,442		31,386	3.80			1,157,923		33,941	3.92
Consumer		126,189		3,929	4.16			111,274		4,333	5.21
Total loans ⁽¹⁾		2,695,275		80,978	4.01			2,539,160		83,416	4.39
Securities and other ⁽²⁾		643,978		15,882	3.29			761,234		19,389	3.41
Total earning assets		3,339,253		96,860	3.87	%		3,300,394		102,805	4.16	%
Other assets		424,118						335,883
Total assets	$	3,763,371					$	3,636,277

Liabilities
NOW	$	622,702	$	1,021	0.22	%	$	472,542	$	1,764	0.50	%
Savings		451,952		587	0.17			353,117		545	0.21
Money market		393,702		1,511	0.51			337,822		3,521	1.39
Time deposits		813,442		11,318	1.86			925,508		14,505	2.10
Total interest bearing deposits		2,281,798		14,437	0.85			2,088,989		20,335	1.30
Borrowings		547,557		7,149	1.74			751,016		15,232	2.71
Total interest bearing liabilities		2,829,355		21,586	1.02	%		2,840,005		35,567	1.67	%
Non-interest bearing demand deposits		464,476						377,014
Other liabilities		63,226						32,676
Total liabilities		3,357,057						3,249,695

Total shareholders' equity		406,314						386,582

Total liabilities and shareholders' equity	$	3,763,371					$	3,636,277

Net interest spread					2.86	%					2.49	%
Net interest margin					3.01						2.72

Nine Months Ended September 30,
2019 2018
(in thousands, except ratios)
Average
Balance

Interest⁽³⁾

Yield/Rate ₍₃₎
Average
Balance
Interest⁽³⁾

Yield/Rate ₍₃₎
Assets
Commercial real estate $ 859,613
$ 30,480
4.74 % $ 827,499
$ 27,772
4.49 %
Commercial and industrial 410,350
14,662
4.78
388,627
13,268
4.56
Residential 1,157,923
33,941
3.92
1,131,509
32,669
3.86
Consumer 111,274
4,333
5.21
119,504
4,163
4.66
Total loans ⁽¹⁾
2,539,160
83,416
4.39
2,467,139
77,872
4.22
Securities and other ⁽²⁾
761,234
19,389
3.41
768,812
18,304
3.18
Total earning assets 3,300,394
102,805
4.16 % 3,235,951
96,176
3.97 %
Other assets 335,883
279,192

Total assets $ 3,636,277
$ 3,515,143

Liabilities
NOW $ 472,542
$ 1,764
0.50 % $ 451,178
$ 1,285
0.38 %
Savings 353,117
545
0.21
356,859
456
0.17
Money market 337,822
3,521
1.39
283,356
1,580
0.75
Time deposits 925,508
14,505
2.10
900,315
10,545
1.57
Total interest bearing deposits 2,088,989
20,335
1.30
1,991,708
13,866
0.93
Borrowings 751,016
15,232
2.71
797,913
12,192
2.04
Total interest bearing liabilities 2,840,005
35,567
1.67 % 2,789,621
26,058
1.25 %
Non-interest bearing demand deposits 377,014
341,656

Other liabilities 32,676
28,926

Total liabilities 3,249,695
3,160,203

Total shareholders' equity 386,582
354,940

Total liabilities and shareholders' equity $ 3,636,277
$ 3,515,143

Net interest spread 2.49 % 2.72 %
Net interest margin 2.72
2.90

(1) The average balances of loans include non-accrual loans and unamortized deferred fees and costs.


~~(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.~~

(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.

Table of Contents

NON-GAAP FINANCIAL MEASURES

This document contains certain non-GAAP financial measures in addition to results presented in accordance with 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's GAAP financial information. A reconciliation of non-GAAP financial measures to GAAP measures is provided below. In all cases, it should be understood that non-GAAP measures do not depict amounts that accrue directly to the benefit of shareholders. An item that management excludes when computing non-GAAP adjusted earnings can be of substantial importance to the Company's results for any particular quarter or year. The Company's non-GAAP adjusted earnings information set forth is not necessarily comparable to ~~non- GAAP~~non-GAAP information that may be presented by other companies. Each non-GAAP measure used by the Company in this report as supplemental financial data should be considered in conjunction with the Company's GAAP financial information.

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

The Company also calculates adjusted earnings per share based on its measure of adjusted earnings. The Company views these amounts as important to understanding its operating trends, particularly due to the impact of accounting standards related to acquisition activity. Analysts also rely on these measures in estimating and evaluating the Company'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.

Table of Contents

RECONCILIATION OF NON-GAAP FINANCIAL MEASURES

The following table summarizes the reconciliation of non-GAAP items for the time periods presented:


		Three Months Ended September 30,				Nine Months Ended September 30,
(in thousands)	Calculations	2020		2019		2020		2019
GAAP net income		$	8,402	$	5,015	$	24,604	$	18,413
Plus (less):
Gain on sale of securities, net			—		(157)		(1,486)		(157)
Loss on sale of premises and equipment, net			—		—		90		21
Loss on other real estate owned			335		146		366		146
Loss on debt extinguishment			—		—		1,351		—
Acquisition, restructuring and other expenses			691		3,039		952		3,319
Income tax expense⁽¹⁾			(245)		(720)		(304)		(792)
Total adjusted income⁽²⁾	(A)	$	9,183	$	7,323	$	25,573	$	20,950

GAAP net interest income	(B)	$	24,665	$	22,445	$	73,818	$	65,706
Plus: Non-interest income			10,102		7,643		28,233		21,263
Total Revenue			34,767		30,088		102,051		86,969
Less: Gain on sale of securities, net			—		(157)		(1,486)		(157)
Total adjusted revenue⁽²⁾	(C)	$	34,767	$	29,931	$	100,565	$	86,812

GAAP total non-interest expense		$	22,419	$	23,400	$	67,044	$	62,930
Less: Loss on sale of premises and equipment, net			—		—		(90)		(21)
Less: Loss on other real estate owned			(335)		(146)		(366)		(146)
Less: Loss on debt extinguishment			—		—		(1,351)		—
Less: Acquisition, restructuring and other expenses			(691)		(3,039)		(952)		(3,319)
Adjusted non-interest expense⁽²⁾	(D)	$	21,393	$	20,215	$	64,285	$	59,444

(in millions)
Total average earning assets	(E)	$	3,352	$	3,308	$	3,339	$	3,300
Total average assets	(F)		3,814		3,642		3,763		3,636
Total average shareholders' equity	(G)		407		395		406		387
Total average tangible shareholders' equity⁽²⁾⁽³⁾	(H)		279		288		279		279
Total tangible shareholders' equity, period-end⁽²⁾⁽³⁾	(I)		277		287		277		287
Total tangible assets, period-end⁽²⁾⁽³⁾	(J)		3,732		3,506		3,732		3,506

(in thousands)
Total common shares outstanding, period-end	(K)		14,929		15,549		14,929		15,549
Average diluted shares outstanding	(L)		15,103		15,581		15,382		15,582

Adjusted earnings per share, diluted	(A/L)	$	0.61	$	0.47	$	1.66	$	1.35
Tangible book value per share, period-end⁽²⁾	(I/K)		18.56		18.49		18.56		18.49
Securities adjustment, net of tax⁽¹⁾⁽⁴⁾	(M)		11,681		8,002		11,681		8,002
Tangible book value per share, excluding securities adjustment⁽²⁾⁽⁴⁾	(I+M)/K		17.78		17.98		17.78		17.98
Total tangible shareholders' equity/total tangible assets⁽²⁾	(I/J)		7.42		8.20		7.42		8.20

At or for the Three Months Ended September 30, At or for the Nine Months Ended September 30,
(in thousands) 2019 2018 2019 2018
GAAP net income $ 5,015
$ 8,970
$ 18,413
$ 25,317
Plus (less):
Gain on sale of securities, net (157 ) —
(157 ) —
Loss on sale of premises and equipment, net —
—
21
—
Loss on other real estate owned 146
(8 ) 146
15
Acquisition, restructuring and other expenses 3,039
70
3,319
619
Income tax (expense) benefit⁽¹⁾
(720 ) (12 ) (792 ) (150 )
Total adjusted income⁽²⁾
(A) $ 7,323
$ 9,020
$ 20,950
$ 25,801

GAAP net interest income (B) $ 22,445
$ 22,469
$ 65,706
$ 68,619
Plus: Non-interest income 7,643
7,126
21,263
20,485
Total Revenue⁽²⁾
30,088
29,595
86,969
89,104
Less: Gain on sale of securities, net (157 ) —
(157 ) —
Total adjusted revenue⁽²⁾
(C) $ 29,931
$ 29,595
$ 86,812
$ 89,104

GAAP total non-interest expense $ 23,400
$ 17,906
$ 62,930
$ 55,443
Less: Loss on sale of premises and equipment, net —
—
(21 ) —
Less: Loss on other real estate owned (146 ) 8
(146 ) (15 )
Less: Acquisition, restructuring and other expenses (3,039 ) (70 ) (3,319 ) (619 )
Adjusted non-interest expense⁽²⁾
(D) $ 20,215
$ 17,844
$ 59,444
$ 54,809

(in millions)

Total average earning assets (E) $ 3,308
$ 3,238
$ 3,300
$ 3,236
Total average assets                                                 (F) 3,642
3,533
3,636
3,515
Total average shareholders' equity                          (G) 395
359
387
355
Total average tangible shareholders' equity⁽²⁾⁽³⁾
(H) 288
251
279
247
Total tangible shareholders' equity, period-end⁽²⁾⁽³⁾
(I) 287
250
287
250
Total tangible assets, period-end⁽²⁾⁽³⁾
(J) 3,506
3,453
3,506
3,453

(in thousands)
Total common shares outstanding, period-end (K) 15,549
15,509
15,549
15,509
Average diluted shares outstanding (L) 15,581
15,580
15,582
15,564

Adjusted earnings per share, diluted (A/L) $ 0.47
$ 0.58
$ 1.35
$ 1.66
Tangible book value per share, period-end⁽²⁾
(I/K) 18.49
16.11
18.49
16.11
Securities adjustment, net of tax⁽⁴⁾
(M) 8,002
(17,152 ) 8,002
(17,152 )
Tangible book value per share, excluding securities adjustment⁽⁴⁾
(I+M)/K 17.98
17.22
17.98
17.22
Total tangible shareholders' equity/total tangible assets⁽²⁾
(I/J) 8.20
7.24
8.20
7.24

Table of Contents


		Three Months Ended September 30,						Nine Months Ended September 30,
	Calculations	2020			2019			2020			2019
Performance ratios⁽⁵⁾
Return on assets			0.88	%		0.55	%		0.87	%		0.68
Adjusted return on assets⁽²⁾	(A/F)		0.96			0.80			0.91			0.77
Return on equity			8.22			5.04			8.09			6.37
Adjusted return on equity⁽²⁾	(A/G)		8.98			7.36			8.41			7.25
Adjusted return on tangible equity⁽²⁾⁽⁶⁾	(A+Q)/H		13.36			10.31			12.54			10.25
Efficiency ratio⁽²⁾⁽⁷⁾	(D-O-Q)/(C+N)		59.47			65.02			61.62			65.83
Net interest margin⁽²⁾	(B+P)/E		2.98			2.75			3.01			2.72

Supplementary data (in thousands)
Taxable equivalent adjustment for efficiency ratio	(N)	$	570		$	658		$	1,935		$	2,018
Franchise taxes included in non-interest expense	(O)		121			119			360			350
Tax equivalent adjustment for net interest margin	(P)		416			503			1,457			1,532
Intangible amortization	(Q)		256			207			768			621

At or for the Three Months Ended September 30, At or for the Nine Months Ended September 30,
2019 2018 2019 2018
Performance ratios⁽⁵⁾

Return on assets 0.55 % 1.01 % 0.68 % 0.96 %
Adjusted return on assets⁽²⁾
(A/F) 0.80
1.01
0.77
0.98
Return on equity 5.04
9.92
6.37
9.54
Adjusted return on equity⁽²⁾
(A/G) 7.36
9.98
7.25
9.72
Adjusted return on tangible equity⁽²⁾⁽⁶⁾
(A+Q)/H 10.31
14.52
10.25
14.23
Efficiency ratio⁽²⁾⁽⁷⁾
(D-O-Q)/(C+N) 65.02
57.88
65.83
59.05
Net interest margin⁽²⁾
(B+P)/E 2.75
2.81
2.72
2.90

Supplementary data (in thousands)

Taxable equivalent adjustment for efficiency ratio (N) $ 658
$ 654
$ 2,018
$ 1,921
Franchise taxes included in non-interest expense (O) 119
129
350
440
Tax equivalent adjustment for net interest margin (P) 503
493
1,532
1,498
Intangible amortization (Q) 207
207
621
621


(1)	Assumes a marginal tax rate of ~~23.78%~~23.87% in ~~2019.~~2020. A marginal tax rate of 23.78% was used in ~~the third and fourth quarter of 2018.~~2019.


(2)	Non-GAAP financial measure.


(3)	Tangible shareholders' equity is computed by taking total shareholders' equity less the intangible assets at period-end. Tangible 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.


(5)	All performance ratios are based on average balance sheet amounts, where applicable.

(6)

Adjusted return on tangible equity is computed by ~~dividing the total core income~~taking adjusted ~~for~~earnings divided by shareholders’ equity less the tax-effected amortization of intangible assets, assuming a marginal tax rate of ~~23.78%~~23.87% in ~~2019, 24.15% in the first and second quarter of 2018~~2020 and 23.78% in ~~the third and fourth quarter of 2018, by tangible equity.~~ 2019.


(7)	Efficiency ratio is computed by dividing adjusted non-interest expense net of franchise taxes and intangible amortization divided by ~~the sum of net interest income~~core revenue on a fully taxable equivalent ~~basis and adjusted non-interest income.~~ basis.

Table of Contents

FINANCIAL SUMMARY

The Company reported third quarter ~~2019~~2020 net income of $8.4 million or $0.56 per share compared to $5.0 million or $0.32 ~~diluted earnings~~ per ~~share. Net income~~share in the same quarter of ~~2018 totaled $9.0 million, or $0.58 diluted earnings per share.~~2019. Adjusted earnings (non-GAAP measure) increased 30% to $9.2 million, or $0.61 per share in the third quarter ~~2019 totaled~~2020 compared to $7.3 million or $0.47 ~~diluted earnings~~ per share ~~a 15% increase from~~in the ~~prior~~third quarter of ~~$6.3 million or $0.41 diluted earnings per share.~~ 2019.

Financial highlights for the third quarter ~~2019~~2020 include the ~~following:~~

~~11% annualized growth in commercial loans~~

~~29% annualized growth in non-maturity deposits~~

~~10 basis point expansion in net interest margin~~

~~3% increase in non-interest income~~

~~0.53% non-performing assets~~following, as compared to ~~total assets~~

~~The Company’s performance metrics improved in~~ the third quarter of 2019 as its teams focused on profitability of operations and initiatives to enhance revenue and create expense efficiencies. The Company continued to actively manage the balance sheet focusing on operations and taking advantage of the interest rate environment asunless otherwise noted:

●

13% annualized growth in total commercial loans

●

92% loan to deposit ratio

●

2.98% net interest margin compared to 2.75%

●

32% increase in non-interest income

●

0.56% non-accruing loans to total loans, excluding Paycheck Protection Program (PPP) loans

●

0.88% return on assets compared to 0.55%; 0.96% core return on assets compared to 0.80% (non-GAAP)

●

59.5% efficiency ratio compared to 65.0%

As a planned deleveraging strategy was executed resulting in decreasing the securities portfolio by nearly $73.0 million and using the proceeds to pay off higher cost borrowings. This resulted in yields from securities expanding 15 basis points and borrowings costs decreasing 12 basis points compared to the prior quarter. The commercial team delivered another quarter of strong double digit growth across the Company’s three state footprint including its loan production office in Portland, Maine, which also contributed to significant customer derivative income. Loan quality continues to be strong with net charge-offs close to zero, indicative of a disciplined approach to credit quality, risk mitigation, and an effort focused on proven operators with appropriate loan structures. Growth in non-maturity deposits was up during the quarter, 29% on an annualized basis. That improvement is the direct result of ~~the sales culture, which~~well executed strategies, the Company ~~has been cultivating over the past year under new leadership. All of these efforts in the~~expanded all key performance metrics on a year-over-year and prior quarter ~~resulted in a 6% annualized increase~~basis. These strategies not only entailed expense and deleveraging initiatives, but also focused on increasing core deposits thus reducing overall funding costs, and expanding fee income. Adjusted return on assets increased to ~~tangible book value per share.~~

The Company completed the strategic review in the third quarter that was announced in the second quarter. This review positions the Company for improved profitability and judicious deployment of capital, while balancing liquidity and core deposit growth. The results of this strategic review included a branch optimization exercise that evaluated fixed assets, staffing models, and business and operational processes. Towards the end of September the Company announced the intent to close five branches by year-end and identified other non-branch properties to consolidate across the footprint. Additionally,0.96% as the Company continues to ~~consolidate processes~~achieve positive operating leverage with minimal reliance on accretion from PPP related fees. Customer activity within the Company’s footprint has increased since state economies re-opened on a limited basis during the summer. Branch operations have also rebounded compared to the first half of the year. The loan to deposit ratio improved to 92% as deposits continue to grow on relatively flat, total loan growth. Given the current economic environment, the Company selectively grew commercial loans by 14% for the quarter, excluding PPP loans, and directed most mortgage production through the secondary market platform. The Company kept pace with the high demand of mortgage markets for new and refinanced loans, which resulted in four times the gains on loan sales compared to the same quarter 2019. The Company continues to adhere to risk-based credit philosophies and profitability disciplines as evidenced by third quarter results. Excess liquidity generated during the quarter was used to pay down wholesale borrowings as part of on-going initiatives to de-lever and expand net interest margin.

The Company’s wealth management business continues to be a significant contributor to fee income, as well as a keystone for deepening customer relationships with $2.1 billion in assets under management. Recently, the leadership and operations of the wealth management businesses was combined onto a common platform, which led to ~~increase efficiency while improving customer service. These strategic decisions along~~unified policies and best practices. The Company is now working with regulators to bring both of its wealth management companies and brokerage teams under one name Bar Harbor Wealth Management. Bringing this business together under one brand was the ~~elimination of other redundancies~~logical next step as talent, engagement and ~~implemented efficiencies are expected~~culture is aligned.

The Company’s allowance for loan losses is well established to ~~be accretive to earnings~~absorb any inherent losses in the ~~first~~portfolio and increased during the quarter on higher commercial loan growth. Steady allowance levels coupled with an extensive stress testing process reflects the quality of ~~2020 thereby allowing~~the Company’s credit culture as net charge-offs and past due accounts remain low. Third quarter stress testing resulted in no significant risk-rating downgrades or changes to reserves. While the hotel industry is a ~~platform~~large credit exposure for ~~profitable growth with positive operating leverage.~~

~~In October 2019,~~ the Company ~~completed its previously announced acquisition~~there has been minimal degradation as those borrowers are strong, proven operators with an average loan to value ratio of ~~eight bank branches. Experienced teams from both sides have been working together~~less than 60% for the segment. In addition, any individual hotel exposure with a loan to ~~ensure a smooth transition of customer accounts and systems.~~value ratio greater than 65% was specifically included in the stress testing. The Company ~~welcomes its new customers and colleagues while building out its central Maine franchise. The acquisition is expected to be immediately accretive to adjusted income~~had a significant decrease in loans under COVID-related forbearance during the ~~fourth~~third quarter. As of September 30, 2020 total outstanding deferrals were $78.7 million or 3% of total loans, which primarily consist of interest only forbearance. Outstanding deferrals of residential loans totaled $4.6 million or less than ½ of a percent of the total residential portfolio.

The Company has supported its customers during the COVID-19 pandemic by originating approximately 1,900 PPP loans totaling $131.5 million. Net unearned fees remaining on PPP loans at the end of the third quarter ~~2019.~~was $3.8 million and accretion will accelerate as the loans are reimbursed by the Small Business Administration (“SBA”). Despite the significant challenges posed by the pandemic and related market conditions, the Company continues to maintain high levels of capital and liquidity, diversified revenue streams, strong credit performance and an exceptional core deposit base.

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COMPARISON OF FINANCIAL CONDITION AT SEPTEMBER 30, ~~2019~~2020 AND DECEMBER 31, ~~2018~~

~~Summary~~

2019

Total assets ~~increased $4.0 million to $3.6~~were $3.9 billion at the end of the third quarter ~~2019~~2020 compared ~~with year-end 2018. Loans increased~~ to ~~$2.6 billion from $2.5~~$3.7 billion at year-end 2018 on growth from commercial loans offset in part by lower residential loans primarily due to higher secondary market sales. Securities decreased $58.4 to $703.1 million at the end of the third quarter from year-end 2018 which includes the impact of the executed deleveraging strategy in the third quarter.2019. Asset quality metrics remain strong with an allowance for loan losses to total loans ratio of ~~0.60% with a coverage ratio~~0.66% compared to ~~non-accruing loans at 92%, up from 76%~~0.58% as of year-end ~~2018.~~2019. The loan to deposit ratio

~~increased~~ was 92% in the third quarter compared to ~~103% from 100%~~98% at year-end ~~2018 given robust loan growth net of deposit growth.~~2019. The ~~Company’s~~Company's tangible book value per share increased 8%10%, on an annualized basis, in the first nine months of ~~2019~~2020 from year-end ~~2018.~~

2019.

Securities

Securities totaled ~~$703.1~~$618.5 million in the third quarter ~~2019~~2020 and ~~$761.5~~$683.9 million at year-end ~~2018~~2019 representing ~~19%~~16% and ~~21%~~19% of total assets, ~~respectfully. Those ratios are within the tolerance range of~~respectively. The decrease in security holdings reflects the Company’s ~~investment policy and the decrease is the result of the balance sheet~~ deleveraging strategy ~~with opportunistic sales~~to reduce borrowings and allow for the natural ~~run-off.~~run-off of amortizing and maturing fixed rate investments. Securities purchased in ~~2019~~the first nine months of 2020 included ~~$52.6~~$66.0 million of mortgage-backed securities guaranteed by US Government-sponsored enterprises, ~~$24.0~~$31.2 million of tax exempt municipal bonds, $32.0 million of corporate bonds and $1.9 million in community investments, in addition to a net ~~$8.2~~$6.7 million decrease in FHLB stock. The purchases were offset by ~~sales~~$199.3 million of ~~$68.0 million,~~sales, maturities, calls and pay-downs of amortizing ~~securities of $80.5~~securities. Fair value adjustments increased the security portfolio by $11.7 million ~~and a $21.7 million increase in fair value. The increase in fair value was primarily caused by lower long-term interest rates~~ at the end of the third quarter ~~2019 as compared~~2020 and $5.5 million at year-end 2019. The improvement in fair value continues to ~~year-end 2018.~~be the result of lower long-term interest rates. The weighted average yield on the ~~Company’s security profile~~Company's securities portfolio as of September 30, ~~2019~~2020 was ~~3.44% for the quarter~~3.05% compared to ~~3.28%~~3.42% at year-end ~~2018.~~2019. At the end of the third quarter ~~2019,~~2020, securities held by the Company had ~~a weighted~~an average life of ~~4.3~~4.0 years and a duration of 2.9 years compared to ~~a weighted average life of 5.2~~5.0 years and ~~a duration of 3.9~~3.6 years at the end of ~~2018,~~2019, respectively.

Loans

~~Total loans at September 30, 2019~~

Loan balances in the third quarter 2020 were $2.7 billion compared to $2.6 billion year-end 2019. The increase is primarily due to commercial real estate growth and PPP originations offset by secondary market sales and prepayments of residential mortgages. In the first nine months of 2020, commercial real estate increased $115.0 million during at an ~~increase~~annualized rate of ~~$87.1~~16% and commercial and industrial (“C&I”) loans increased $9.5 million or ~~4.7%~~4% on an annualized basis excluding PPP loans. The increase in C&I was tempered by one customer with loans totaling $39.8 million that were refinanced to a lower principal of $25.0 million along with an open line of credit with no current advances. Mortgage loan originations totaled $86.5 million from ~~year-end 2018. Commercial real estate grew significantly during 2019~~new and refinancing activity given the lower interest rate environment. Most residential originations were sold in the secondary market to generate fee income.

Asset Quality

The allowance for loan losses totaled $17.9 million at ~~a rate of 15.7% due to execution~~the end of the ~~Company’s growing pipeline across New Hampshire, Vermont,~~third quarter 2020 and ~~Maine~~$15.4 million at year-end 2019. The $2.6 million increase reflects a provision for loan loss of $4.3 million offset by net charge offs of $1.7 million. Excluding PPP loans the allowance for loan losses to total loans ratio for the third quarter was 0.69% from 0.58% at year-end 2019. Delinquent and ~~loan production office centered in Portland, Maine. Residential~~non-accrual loans ~~were flat~~as a percentage of total loans decreased to 0.77% from 1.19% at the end of 2019. Commercial non-accrual loans in the first nine months ~~of 2019~~increased $1.2 million primarily due to ~~higher sales in~~two commercial loan relationships totaling $1.4 million, one was written down by $349 thousand and the ~~secondary~~other has subsequently settled at its carrying value.

In March 2020, the Company elected to defer implementation of CECL as allowed under the CARES Act. As result, the Company continues to operate its incurred loss model. While the impact of COVID-19 and other market ~~given~~conditions remain uncertain, the ~~overall rate environment and initiatives around profit as fee income is central to~~Company believes the ~~Company’s strategic focus. Yields also increased among all product lines as variable rate loans repriced to higher levels benefiting from the Federal Reserve Bank (“FRB”) rate hikes in 2018.~~

~~Asset Quality~~

~~Asset quality metrics remained favorable in the first nine months of 2019. The~~existing allowance for loan losses ~~increased~~is sufficient to ~~$15.4~~absorb inherent losses based on a disciplined credit approach, experienced losses and methodology, and current and ongoing stress testing reviews of the portfolio. The Allowance for Loan Loss calculated under the CECL method is estimated to be in a range of $23.0 million to $26.0 million as of September 30, 2020, compared to $20.0 million to $23.0 million on the effective date of January 1, 2020.

The Company performed third quarter stress testing of the commercial loan portfolio including the top 50 relationships, all criticized loans greater than $1.0 million, hospitality loans over $250 thousand with loan to values in excess of 65%, and any seasonal payment, restaurant, or term loans maturing within a year that are greater than $500 thousand. Results of the testing led to no significant risk-rating downgrades or changes to reserves or any other meaningful deterioration in the overall quality of the commercial portfolio. Any impact from ~~$13.9 million~~the stress testing was considered in the adequacy of the allowance for loan losses as of September 30, 2020.

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Goodwill

The Company completed its 2020 annual goodwill impairment test using balance sheet and market data as of September 30, 2020. The Company’s models suggest that the fair value of the business is greater than the book value or market capitalization based on the price at ~~year-end 2018 due to loan growth offset by lower specific reserves on fewer non-accruing loans. Non-accruing loans decreased $1.6 million in 2019 as~~which the stock is currently trading. While the Company ~~benefited from favorable settlements of several credit relationships that approximated the carrying values of the loans. These improvements decreased the ratio of non-accruing loans~~concluded there is no goodwill impairment, it will continue to ~~total loans to 0.65% from 0.73%~~evaluate its position as economic conditions change.

Deposits and Borrowings

Total deposits were $2.9 billion at the end of ~~2018~~the third quarter 2020 and ~~decreased the ratio of non-performing assets to total assets to 0.53% from 0.57%~~$2.7 billion at ~~the end of 2018.~~

~~Deposits and Borrowings~~

~~Total deposits increased $10.3 million to $2.5 billion from~~ year-end ~~2018.~~2019. Non-maturity deposits increased ~~$40.5 million~~by 27%, on an annualized basis due to growth from new accounts and ~~seasonally high balances. New non-maturity deposit~~an overall decrease in customer spending given current market conditions. The Company's expanding branch model has helped to increase new accounts, ~~opened~~which totaled ~~3,457~~3,744 in the third quarter ~~2019~~2020 compared to ~~2,295~~2,918 in the fourth quarter ~~2018. Time deposits decreased $30.1 million, reflecting the shift between time deposits to money market accounts as the interest rate environment changed in~~ 2019. ~~The average cost of deposits increased to 1.33% from 1.12% in the fourth quarter 2018 reflecting the FRB rate hike in December 2018.~~ Total borrowings decreased by ~~$39.0~~$85.9 million and brokered certificate of deposits decreased by $325.7 million as ~~a result of the balance sheet deleveraging strategy. Borrowing costs are 2.62% in 2019 up~~excess liquidity primarily from ~~2.53% in the fourth quarter 2018 as a result of the previously mentioned rate hike offset by the third quarter deleveraging strategy.~~

higher deposit balances was used to pay down wholesale borrowings.

Derivative Financial Instruments

The notional balance of derivative financial instruments increased to ~~$499.1~~$822.9 million at the end of the third quarter ~~2019~~2020 from ~~$182.2~~$580.4 million at year-end ~~2018.~~2019. The increase ~~includes~~is principally due to a ~~$50.0~~$175.0 million notional amount related to an interest rate swap on brokered certificate of deposits to limit the Company’s exposure to rising interest rates over a five-year term. Additionally, as a result of commercial loan growth, the Company increasedincrease in customer loan derivatives ~~by $247.9 million~~sold on commercial loans with matching hedges using a national bank ~~counterparty.~~counterparties and a $36.5 million increase in forward commitments to sell mortgages in the secondary market. The net fair value of ~~total~~all derivatives was a liability of ~~$2.1~~$3.5 million at the end of the third quarter ~~2019~~2020 compared to ~~asset of $811~~$743 thousand at year-end ~~2018.~~

2019. The increase in the net derivative liability primarily reflects the valuation of the Company’s interest rate swaps on wholesale funding and securities based on lower market rates at the end of the third quarter 2020.

Equity

Total equity was ~~$394.5~~$404.4 million, compared with ~~$370.6~~$396.4 million at year-end ~~2018. The Company’s book value per share increased $1.50 to $25.37 from year-end 2018.~~2019. The increase ~~was primarily due to~~includes a ~~$14.9~~$6.1 million improvement in ~~the Company’s securities~~ fair value ~~adjustment,~~of securities, net of tax, along with strong net income of ~~$18.4~~$24.6 million offset by ~~$9.9~~$10.1 million in ~~dividends.~~dividends and common stock repurchases of $13.3 million. Stock repurchases totaled 297 thousand shares during the third quarter 2020 and 689 thousand shares on a year-to-date basis. An additional 92 thousand shares are available to be repurchased before the end of March in 2021. The Company's book value per share increased to $27.09 at the end of the third quarter 2020 from $25.48 at year-end 2019. Tangible book value per share (non-GAAP measure) increased to ~~$18.49~~$18.56 per share at September 30, 2020 up from ~~$16.94~~$17.30 per share at year-end ~~2018. Additionally, tangible book value per share excluding the impact~~2019, an increase of securities fair value adjustments (non-GAAP measure) increased to $17.98, up from $17.50 at year-end 2018. The Company evaluates changes in tangible book value excluding securities adjustment, a non-GAAP financial measure, which is a commonly considered valuation metric used by the investment community and which parallels some regulatory capital measures. The Company and the Bank remained "well capitalized" under regulatory guidelines at period-end.

10% on an annualized basis.

COMPARISON OF OPERATING RESULTS FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, ~~2019~~2020 AND ~~2018~~

2019

Summary

~~Third~~

Net income in the third quarter ~~2019 net income~~2020 was $8.4 million, or $0.56 per share, compared with $5.0 million, or $0.32 per share, ~~compared to $9.0 million, or $0.58 per share,~~ in the same quarter ~~of 2018. Net income in the third quarter 2019 included acquisition, restructuring, and other expense activity totaling $3.0 million.~~2019. The non-GAAP measure of adjusted earnings in the third quarter ~~2019~~2020 totaled $9.2 million, or $0.61 per share, compared to $7.3 million or $0.47 ~~diluted earnings per share and $9.0 million or $0.58 diluted earnings~~ per share, in the same ~~period~~quarter of ~~2018. Both~~2019. The improvement in net income is driven by expanded net interest margin and ~~adjusted earnings in~~higher non-interest income. The Company's return on assets ratio was 0.88% during the third quarter of 2020 and 0.55% in the same quarter of 2019. The ratio for adjusted return on assets increased to 0.96% from 0.88% in third quarter of 2019 ~~benefited from~~on higher ~~yields on earning assets and non-interest income growth, offset by a higher cost of funds.~~

net income.

The Company reported year to date net income of ~~$18.4~~$24.6 million or ~~$1.18~~$1.60 per share, compared with ~~$25.3~~$18.4 million or ~~$1.63~~$1.18 per share in the same period of ~~2018.~~2019. Adjusted earnings ~~decreased~~increased to ~~$20.9 million, or $1.35 per share compared with $25.8~~$25.6 million, or $1.66 per share comparedwith$21.0million,or$1.35pershare,for ~~these~~ therespectiveperiods.Thesechangeslargelyreflectthesame factors and trends discussed above that drove ~~quarterly~~third quarter net income. The return on assets ratio during the first nine months of 2019 was 0.68% compared to 0.96% in the prior year due to lower net income and a higher average asset base. Adjusted return on assets (non-GAAP measure) was 0.77% for the first nine months of 2019 compared to 0.98% in the prior year. Return on equity in the first nine months of 2019 decreased to 6.37% from 9.54% in the prior year due to lower net income and growth in the average equity balance. Correspondingly, adjusted return on equity (non-GAAP measure) was 7.25% for the first nine months of 2019 compared to 9.72% in the prior year.

Net Interest Income

~~Third quarter net~~

Net interest income was ~~$22.4~~$24.7 million in the third quarter 2020 compared with ~~$22.5~~$22.4 million in the same quarter of ~~2018. Interest income was $34.3 million, up 6% from $32.2 million~~2019. Net interest margin in the third quarter 2020 increased to 2.98% from 2.75% in the same period of ~~2018 as average~~2019 primarily due to a lower cost of funds. Costs of funds decreased to 0.82% compared to 1.65% in the third quarter 2019 due to a shift in funding sources from borrowings to non-maturity deposits. Cost of deposits and borrowings also benefited from the

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Federal Reserve rate cuts in 2020 and other key indexes in response to COVID-19. Costs of interest-bearing deposits decreased to 0.66% compared to 1.33% in the third quarter 2019 and cost of borrowings improved to 1.60% from 2.62% in same quarter of 2019. Additionally, excess liquidity was used to pay off $239.4 million of borrowings since the third quarter of 2019 in connection with deleveraging strategies that further reduced interest expense. Yields from earning assets ~~grew $70.5 million net. The net interest margin for~~were 3.67% compared to 4.17% in the ~~three months ended decreased 6 basis points over~~ third quarter ~~2018 to 2.75%. Yields expanded across all~~2019 reflecting loan ~~categories as~~originations and repricing of variable rate products ~~repriced~~in a lower interest rate environment. Purchased loan accretion contributed 0.06% to higher rates driven by the 2018 short-term hikes. The yield on securities improved 23 basis points while the cost of interest bearing liabilities increased 27 basis points. The year over year increase in interest bearing liabilities was primarily due to higher short-term interest rates and the flattening of the yield curve in 2019. However, net interest margin in the third quarter ~~2019 included~~2020 compared to 0.10% in the ~~benefit~~third quarter 2019. Excluding the effects of PPP loans, the ~~deleveraging strategy to remove $72.9 million of securities yielding an average of 2.1% and pay-off of wholesale borrowings with an average cost of 2.4%~~third quarter yield on total earning assets was 3.72%.

For the first nine months of ~~2019~~the year, net interest income ~~decreased to $65.7~~was $69.6 million ~~from $68.6~~compared with $63.9 million in the same ~~period~~months of ~~2018. Interest income from earning assets increased to $101.3 million with a yield of 4.16% compared to $94.7 million with a yield of 3.97% in the same period of 2018. The~~2019 and net interest margin was 3.01% from 2.72% ~~compared to 2.90% in the prior year. The yield on total loans~~ for the ~~nine months ended expanded 17 basis points,~~same respective periods. The increase is primarily driven by ~~the yield on commercial real estate loans expanding 25 basis points~~reduced borrowing levels and ~~the yield on commercial and industrial loans expanding 22 basis points. Improvement in interest income was offset by interest expense increasing~~higher non-maturity deposits. The average borrowing levels decreased to ~~$35.6~~$481.7 million in the first nine months of ~~2019~~2020 from ~~$26.1~~$708.2 million in the same period of ~~2018. The year-to-date effect,~~2019 and ~~management’s response, on net interest margin~~borrowing costs were 1.74% from ~~interest-bearing liabilities is~~2.71% for the same asrespective periods. Costs of interest-bearing deposits also decreased in the first nine months of 2020 to 0.85% compared to 1.30% in the same period of 2019. Yields from earning assets were 3.87% in the first nine months of 2020 compared to 4.16% in the first nine months of 2019.Theyear-to-dateeffect onnetinterestmarginfromearning assets and interest bearing liabilitiesisthesameasthequarterlydiscussion.

~~Non-Interest Income~~

~~Third~~

Loan Loss Provision

The third quarter ~~non-interest income grew 7%~~2020 provision for loan losses increased to ~~$7.6~~$1.8 million from ~~$7.1 million~~$893 thousand in the same quarter of 2019. While overall credit quality in ~~2018. The~~the loan portfolio remains strong, the increase ~~was driven by $828 thousand~~in the reserve is indicative of ~~customer derivative income associated with~~the continued commercial loan growth and ~~$157 thousand net gain on sales of securities associated with~~higher economic adjustments reflecting elevated risk from COVID-19. As previously noted, the ~~balance sheet deleverage strategy.~~ Company has maintained its incurred loss model for calculating the allowance for loan losses.

Non-Interest Income

Non-interest income in the third quarter ~~2018 included~~2020 was $10.1 million compared to $7.6 million in the same quarter of 2019. The increase is primarily due to a ~~$685 thousand gain~~$2.2 million increase in mortgage banking income associated with secondary market sales of $86.2 million compared to $20.7 million in the ~~sale~~same period of ~~Visa B shares.~~

2019. Customer service fees increased 13% and trust and investment management fees increased 17% as the result of expanded operations into Central Maine partially offset by lower activity stemming from COVID-19.

Non-interest income for the first nine months of ~~2019 increased year over year by 4%~~2020 was $28.2 million compared to $21.3 million ~~compared to $20.5 million for~~in the same period ~~of 2018.~~in 2019. The increase in non-interest income for the nine-month period is driven by the same reasons as the quarterly ~~period.~~

~~Loan Loss Provision~~

~~The third quarter 2019 provision for loan losses increased to $893 thousand from $643 thousand~~period, but also includes a $1.5 million gain on sales of securities recorded in the same quarter 2018, which is reflective of the increased commercial loan growth. On a year-to-date basis, the provision for loan losses decreased to $1.8 million in 2019 compared to $2.2 million in 2018, which is reflective of the decrease in non-accruing loans of $5.1 million or 23%. 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. The level of the allowance is a critical accounting estimate, which is subject to uncertainty. The net charged-off loans to average loans ratio remained low at 0.02% annualized rate for the third quarter of 2019 compared to 0.04% in the same quarter 2018. Asset quality remains strongconnection with ~~non-accruing loans to total loans at 0.65% in the third quarter 2019, down from 0.88% in the same quarter of 2018.~~

balance sheet remixing and deleveraging strategies.

Non-Interest Expense

Non-interest expense ~~increased to $23.4~~was $22.4 million in the third quarter ~~2019~~2020 compared to ~~$17.9~~$23.4 million in the same quarter of ~~2018.~~2019. The ~~increase in part~~decrease is ~~a result of higher salaries and benefits attributable~~principally due to ~~previously announced strategic hires and an increase in professional service fees. Third quarter~~lower acquisition, ~~restructuring~~conversion and other expenses, which totaled $691 thousand in 2020 compared to $3.0 million in ~~2019 related~~2019. Salary and benefit expense and occupancy costs were higher during the third quarter 2020 to support the Company’s expanded branch ~~acquisition~~model and ~~restructuring~~wealth management business. Total operating expenses ~~associated with our previously announced strategic review.~~

~~Non-interest expense increased~~remained controlled as demonstrated by the drop in the efficiency ratio to ~~$62.9 million in~~59.5% compared to 65.0% for third quarter of 2019.

For the first nine months of ~~2019~~2020, non-interest expense increased to $67.0 million from ~~$55.4~~$62.9 million in the same period of ~~2018.~~2019. The increase in non-interest expense for the nine-month period is driven by the same reasons as the quarterly ~~period.~~

period along with a prepayment penalty on a longer term and higher cost FHLB borrowing in the second quarter 2020.

Income Tax Expense

The third quarter effective tax rate ~~decreased~~increased to ~~13.5%~~20.3% in ~~2019~~2020 compared with ~~18.8%~~13.5% in the same quarter of ~~2018,~~2019, reflecting the higher level of taxable income and ~~the rate for the nine months 2019 and 2018 was 17.3% and 19.5%, respectively. The decrease in the quarterly and year-to-date rates is due to~~ lower ~~pre-tax~~level of non-tax advantaged income in ~~the respective periods~~2020.

Table of ~~2019 as compared to 2018.~~Contents

Liquidity and Cash Flows

Liquidity is measured by the ~~Company’s~~Company'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-initiated needs. Many factors affect the ~~Company’s~~Company'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-Liability Management Policy. Continual monitoring of these ratios, by 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~~Bank's policy is to maintain a liquidity position of at least 4% of total assets. A portion of the ~~Bank’s~~Bank'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’s~~Bank's liquidity position tightens.

The ~~Bank also had capacity~~Company’s liquidity position remains strong. During the quarter we initiated pandemic-specific liquidity stress tests to ~~borrow funds~~analyze potential impacts from payment deferrals, unanticipated use of committed lines of credit, as well as the possibility of required servicer advances on ~~a secured basis utilizing the Borrower-in-Custody program and the Discount Window at the FRB.~~sold loans. At September 30, ~~2019,~~2020, available same-day liquidity totaled approximately $1.5 billion, including cash, borrowing capacity at FHLB and the ~~Bank’s available secured line~~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 $634.0 million, unused borrowing capacity at the Federal Reserve of $81.1 million and unused lines of credit ~~at the FRB stood at $107.7~~totaling $51.0 million, ~~or 2.98% of the Bank’s total~~in addition to over $200.0 million in unencumbered, liquid investment portfolio assets. The ~~Bank~~Company has also ~~has access~~utilized the Federal Reserve's Paycheck Protection Program Liquidity Facility to ~~the national brokered deposit market, and has used this funding source~~provide liquidity to ~~bolster its on balance sheet liquidity position.~~

fund PPP loans.

The Bank maintains a liquidity contingency plan approved by the ~~Bank’s~~Bank'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 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’s~~Company's liquidity position.

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, ~~2018 or our Quarterly Report on Form 10-Q for the quarter ended June 30,~~ 2019.

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

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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 may 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 loan 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 realization~~most critical accounting policies as related to:

•

Allowance for Loan Losses

•

Acquired Loans

•

Income Taxes

•

Goodwill and Identifiable Intangible Assets

•

Determination of Other-Than-Temporary Impairment of Securities

•

Fair Value of Financial Instruments

Table of the net deferred tax asset generally depends upon future levels of taxable ordinary income, taxable capital gain income, and the existence of prior years' taxable income, to which carry back refund claims could be made. A valuation allowance would be established for deferred tax assets that management estimates are more likely than not to be unrealizable based on available evidence at the time the estimate is made.Contents

~~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, ~~2019~~2020 interest rate sensitivity modeling results indicate that the Bank’s balance sheet in ~~year~~years 1 ~~was slightly liability sensitive~~ and ~~in year~~ 2 ~~was~~were modestly asset sensitive.

Assuming short-term and long-term interest rates decline ~~200~~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 deteriorate over the one year horizon ~~(-0.8%~~(-0.4% versus the base case) while deteriorating further from that level over the two-year horizon ~~(-7.3%~~(-9.0% versus the base case).

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 ~~remain relatively unchanged~~improve slightly over the one and two-year horizons ~~(-1.1%~~(1.8% and ~~-0.6%~~5.1%, respectively).

As compared to December 31, ~~2018,~~2019, the year-one sensitivity in the down 100 basis points scenario was ~~down~~up slightly for the nine months ended September 30, ~~2019 (+1.7%~~2020 (-1.0% prior, versus ~~-.1%~~-0.4% current). The year-two sensitivities in the down 100 basis points scenario changed going from ~~+0.7%~~-3.7% to ~~-3.0%~~-9.0%. In the year-one up 200 basis points scenario, results ~~declined~~improved going from ~~-3.7%~~0.7% to ~~-1.1%~~1.8%. Year-two, up 200 basis points ~~declined (-8.3%~~was up (3.3% prior, versus ~~-.6%~~5.1% current).

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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ITEM 4. CONTROLS AND PROCEDURES


(a)	Disclosure controls and procedures.

Under the supervision and with the participation of our senior management, consisting of the Company’s principal executive officer and our principal financial officer, the Company conducted an evaluation of the effectiveness of the design and operation of its disclosure controls and procedures, as defined in 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. Based on this evaluation, the Company’s management, including its principal executive officer and principal financial officer, concluded that as of September 30, ~~2019~~2020 the Company’s disclosure controls and procedures were effective to ensure that information required to be disclosed by the Company in the 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 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.~~

(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. 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 ~~have been~~were no material changes to the risk factors discussed in Part I, Item ~~1A, “Risk Factors,” in our~~1A. of the Company’s Annual Report on Form 10-K for the year ended December 31, ~~2018.~~ 2019 and Part II, Item 1A. of the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2020. In addition to the other information set forth in this report, you should carefully consider those risk factors, which could materially affect our business, financial condition and future operating results. Those risk factors are not the only risks facing our company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may have a material adverse effect on our business, financial condition and operating results.

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

~~(c) The following table provides certain information with regard to shares repurchased by the Company in the third quarter of 2019:~~

(c)	The following table provides certain information with regard to shares repurchased by the Company in the third quarter of 2020:


				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⁽¹⁾
July 1-31, 2020	108,178	$	20.38	500,501	280,499
August 1-31, 2020	77,767		20.35	578,268	202,732
September 1-30, 2020	111,074		19.83	689,342	91,658
Total	297,019	$	20.19	689,342	91,658

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, 2019 —
$ —
—
767,990
August 1-30, 2019 1,185
24.52
1,185
766,805
September 1-30, 2019 —
—
—
766,805
Total 1,185
$ 24.52
1,185
766,805

(1)	On March 12, 2020, the Company's Board of Directors approved a twelve-month plan to repurchase up to 5% of its outstanding common stock, representing 781,000 shares and expires on March 20, 2021.

~~(1) On March 21, 2019 the Company's Board~~

Table of ~~Directors approved a twelve-month plan to repurchase up to 5% of its outstanding common stock, representing 776,000 shares as of March 15, 2019. The stock repurchase plan expires on March 20, 2020.~~Contents

ITEM 6. EXHIBITS


10.1*
~~10.1~~		~~Purchase and Assumption~~Employment Agreement, dated ~~July 8, 2019, by and~~as of September 14, 2020, between ~~People’s United Bank, National Association, and~~Bar Harbor Bankshares, Bar Harbor Bank & Trust and Josephine Iannelli

31.1		Certification of Chief Executive Officer under Rule 13a-14(a)/15d-14(a)	Filed herewith

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

32.1		Certification of Chief Executive Officer under 18 U.S.C. Sec. 1350.	Furnished herewith

32.2		Certification of Chief Financial Officer under 18 U.S.C. Sec. 1350.	Furnished herewith

101			The following financial information from the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, ~~2019~~2020 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

104 *	Cover Page Interactive Data File (the cover page XBRL tags are embedded within the Inline XBRL document). Indicates management contract or compensatory plan

*Schedules (or similar attachments) have been omitted pursuant to Item 601(a)(5)

Table of Regulation S-K. The Company hereby undertakes to furnish copies of any of the omitted schedules upon request by the Securities and Exchange Commission; provided, however, that the Company may request confidential treatment pursuant to Rule 24b-2 of the Exchange Act for any schedules so furnished.Contents

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 ~~4, 2019~~5, 2020	By:	/s/ Curtis C. Simard
		Curtis C. Simard
		President & Chief Executive Officer


Dated: November ~~4, 2019~~5, 2020	By:	/s/ Josephine Iannelli
		Josephine Iannelli
		Executive Vice President & Chief Financial Officer



Title of each class		Trading Symbol	Name of each exchange on which registered
Common Stock, par value $2.00 per share	~~BHB~~	BHB	NYSE American

				Page
PART I.	FINANCIAL INFORMATION
				~~Page~~
~~PART I.~~	~~FINANCIAL INFORMATION~~

Item 1.	Consolidated Financial Statements (unaudited)

	Consolidated Balance Sheets as of September 30, ~~2019~~2020 and December 31, ~~2018~~2019			4

	Consolidated Statements of Income for the Three and Nine Months Ended September 30, ~~2019~~2020 and ~~2018~~2019			5 6

	Consolidated Statements of Comprehensive Income for the Three and Nine Months Ended September 30, ~~2019~~2020 and ~~2018~~2019			6 7

	Consolidated Statements of Changes in Shareholders’ Equity for the Three and Nine Months Ended September 30, ~~2019~~2020 and ~~2018~~2019			7 8

	Consolidated Statements of Cash Flows for the ~~Three and~~ Nine Months Ended September 30, ~~2019~~2020 and ~~2018~~2019			8 9

	Notes to Unaudited Consolidated Interim Financial Statements
		Note 1	Basis of Presentation	9 11
		Note 2	Securities Available for Sale	12 15
		Note 3	Loans	15 18
		Note 4	Allowance for Loan Losses	33 36
		Note 5	Borrowed Funds	40 42
		Note 6	Deposits	42 44
		Note 7	Capital Ratios and Shareholders' Equity	43 45
		Note 8	Earnings per Share	47 49
		Note 9	Derivative Financial Instruments and Hedging Activities	48 50
		Note 10	Fair Value Measurements	51 56
		Note 11	~~Non-Interest Income~~Revenue from Contracts with Customers	57 62
		Note 12	Leases	59 64
		~~Note 13~~	~~Subsequent Events~~	61

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations			62 66
		Selected Financial Data		63 67
		Consolidated Loan and Deposit Analysis		65 68
		Average Balances and Average Yields/Rates		66 69
		Non-GAAP Financial Measures		68 71
		Reconciliation of Non-GAAP Financial Measures		69 72
		Financial Summary		71 74

Item 3.	Quantitative and Qualitative Disclosures about Market Risk			78 80

Item 4.	Controls and Procedures			80

82

PART II.	OTHER INFORMATION

Item 1.	Legal Proceedings	80 82

Item 1A.	Risk Factors	80 82

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	81 83

Item 6.	Exhibits	82 84

Signatures			83 85


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


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



(in thousands, except share data)	September 30, 2019			December 31, 2018
Assets
Cash and due from banks	$	50,032		$	35,208
Interest-bearing deposit with the Federal Reserve Bank	21,561			63,546
Total cash and cash equivalents	71,593			98,754
Securities available for sale, at fair value	675,675			725,837
Federal Home Loan Bank stock	27,469			35,659
Total securities	703,144			761,496
Loans:
Commercial real estate	923,773			826,699
Commercial and industrial	402,706			404,870
Residential real estate	1,143,452			1,144,698
Consumer	107,375			113,960
Total loans	2,577,306			2,490,227
Less: Allowance for loan losses	(15,353		)	(13,866		)
Net loans	2,561,953			2,476,361
Premises and equipment, net	47,644			48,804
Other real estate owned	2,455			2,351
Goodwill	100,085			100,085
Other intangible assets	6,879			7,459
Cash surrender value of bank-owned life insurance	75,368			73,810
Deferred tax assets, net	4,988			9,514
Other assets	38,365			29,853
Total assets	$	3,612,474		$	3,608,487

Liabilities
Deposits:
Demand	$	380,707		$	370,889
NOW	490,315			484,717
Savings	360,570			358,888
Money market	359,328			335,951
Time	902,665			932,793
Total deposits	2,493,585			2,483,238
Borrowings:
Senior	641,819			680,823
Subordinated	42,928			42,973
Total borrowings	684,747			723,796
Other liabilities	39,683			30,874
Total liabilities	3,218,015			3,237,908
(continued)
(continued)
Shareholders’ equity
Capital stock, par value $2.00; authorized 20,000,000 shares; issued 16,428,388 and 16,428,388 shares at September 30, 2019 and December 31, 2018, respectively	32,857			32,857
Additional paid-in capital	188,283			187,653
Retained earnings	174,994			166,526
Accumulated other comprehensive income (loss)	3,045			(11,802		)
Less: 879,785 and 905,201 shares of treasury stock at September 30, 2019 and December 31, 2018, respectively	(4,720		)	(4,655		)
Total shareholders’ equity	394,459			370,579
Total liabilities and shareholders’ equity	$	3,612,474		$	3,608,487



	Three Months Ended September 30,				Nine Months Ended September 30,
(in thousands, except per share data)	2019		2018		2019		2018
Interest and dividend income
Loans	$	28,157	$	26,212	$	82,681	$	77,272
Securities and other	6,105		5,972		18,593		17,407
Total interest and dividend income	34,262		32,184		101,274		94,679
Interest expense
Deposits	7,143		5,478		20,336		13,868
Borrowings	4,674		4,237		15,232		12,192
Total interest expense	11,817		9,715		35,568		26,060
Net interest income	22,445		22,469		65,706		68,619
Provision for loan losses	893		643		1,779		2,208
Net interest income after provision for loan losses	21,552		21,826		63,927		66,411
Non-interest income
Trust and investment management fee income	3,013		2,952		8,836		9,036
Customer service fees	2,553		2,490		7,336		7,061
Gain on sales of securities, net	157		—		157		—
Bank-owned life insurance income	497		505		1,558		1,328
Customer derivative income	828		—		1,553		545
Other income	595		1,179		1,823		2,515
Total non-interest income	7,643		7,126		21,263		20,485
Non-interest expense
Salaries and employee benefits	11,364		10,331		33,568		31,695
Occupancy and equipment	3,415		3,366		10,101		9,364
Loss on premises and equipment, net	—		—		21		—
Outside services	424		456		1,278		1,597
Professional services	707		223		1,821		1,016
Communication	189		217		707		701
Marketing	613		293		1,419		1,207
Amortization of intangible assets	207		207		621		621
Acquisition, restructuring and other expenses	3,039		70		3,319		619
Other expenses	3,442		2,743		10,075		8,623
Total non-interest expense	23,400		17,906		62,930		55,443

Income before income taxes	5,795		11,046		22,260		31,453
Income tax expense	780		2,076		3,847		6,136
Net income	$	5,015	$	8,970	$	18,413	$	25,317

Earnings per share:
Basic	$	0.32	$	0.58	$	1.19	$	1.64
Diluted	$	0.32	$	0.58	$	1.18	$	1.63

Weighted average common shares outstanding:
Basic	15,547		15,503		15,536		15,478
Diluted	15,581		15,580		15,582		15,564



	Three Months Ended September 30,						Nine Months Ended September 30,
(in thousands)	2019			2018			2019			2018
Net income	$	5,015		$	8,970		$	18,413		$	25,317
Other comprehensive income, before tax:
Changes in unrealized gain (loss) on securities available-for-sale	3,200			(5,850		)	21,746			(19,639		)
Changes in unrealized (loss) gain on cash flow hedging derivatives	(370		)	299			(2,372		)	1,179
Changes in unrealized gain on pension	—			—			—			41
Income taxes related to other comprehensive income:
Changes in unrealized (gain) loss on securities available-for-sale	(747		)	1,291			(5,081		)	4,565
Changes in unrealized loss (gain) on cash flow hedging derivatives	85			(81		)	554			(290		)
Changes in unrealized loss on pension	—			—			—			(10		)
Total other comprehensive income (loss)	2,168			(4,341		)	14,847			(14,154		)
Total comprehensive income	$	7,183		$	4,629		$	33,260		$	11,163



(in thousands, except per share data)	Common stock amount		Additional paid-in capital			Retained earnings			Accumulated other comprehensive income (loss)			Treasury stock			Total
Balance at December 31, 2017	$	32,857	$	186,702		$	144,977		$	(4,554	)	$	(5,341	)	$	354,641
Net income	—		—			16,347			—			—			16,347
Other comprehensive loss	—		—			—			(9,813		)	—			(9,813		)
Cash dividends declared ($0.39 per share)	—		—			(5,981		)	—			—			(5,981		)
Treasury stock purchased (9,294 shares)	—		—			—			—			(278		)	(278		)
Net issuance (62,782 shares) to employee stock plans, including related tax effects	—		(131		)	—			—			735			604
Modified retrospective basis adoption of Revenue Recognition Accounting Codification Standard 606	—		—			(184		)	—			—			(184		)
Reclassification of the income tax effects of the Tax Cuts and Jobs Act from accumulated other comprehensive income for adoption of ASU 2018-02	—		—			980			(980		)	—			—
Recognition of stock based compensation	—		627			—			—			—			627
Balance at June 30, 2018	32,857		187,198			156,139			(15,347		)	(4,884		)	355,963

Net income	—		—			8,970			—			—			8,970
Other comprehensive loss	—		—			—			(4,341		)	—			(4,341		)
Cash dividends declared ($0.20 per share)	—		—			(3,101		)	—			—			(3,101		)
Treasury stock purchased (1,605 shares)	—		—			—			—			(46		)	(46		)
Net issuance (11,869 shares) to employee stock plans, including related tax effects	—		(123		)	—			—			154			31
Recognition of stock based compensation	—		209			—			—			—			209
Balance at September 30, 2018	$	32,857	$	187,284		$	162,008		$	(19,688	)	$	(4,776	)	$	357,685

Balance at December 31, 2018	$	32,857	$	187,653		$	166,526		$	(11,802	)	$	(4,655	)	$	370,579
Net income	—		—			13,398			—			—			13,398
Other comprehensive income	—		—			—			12,679			—			12,679
Cash dividends declared ($0.42 per share)	—		—			(6,524		)	—			—			(6,524		)
Treasury stock purchased (8,010 shares)	—		—			—			—			(210		)	(210		)
Net issuance (21,119 shares) to employee stock plans, including related tax effects	—		(69		)	—			—			149			80
Recognition of stock based compensation	—		560			—			—			—			560
Balance at June 30, 2019	32,857		188,144			173,400			877			(4,716		)	390,562

Net income	—		—			5,015			—			—			5,015
Other comprehensive income	—		—			—			2,168			—			2,168
Cash dividends declared ($0.22 per share)	—		—			(3,421		)	—			—			(3,421		)
Treasury stock purchased (5,482 shares)	—		—			—			—			(136		)	(136		)
Net issuance (4,297 shares) to employee stock plans, including related tax effects	—		(17		)	—			—			132			115
Recognition of stock based compensation	—		156			—			—			—			156
Balance at September 30, 2019	$	32,857	$	188,283		$	174,994		$	3,045		$	(4,720	)	$	394,459



(in thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
September 30, 2019
Debt securities:
Mortgage-backed securities:
US Government-sponsored enterprises	$	344,547	$	5,924	$	1,328	$	349,143
US Government agency	116,912		2,130		217		118,825
Private label	20,268		75		389		19,954
Obligations of states and political subdivisions thereof	107,854		3,519		147		111,226
Corporate bonds	75,652		1,554		679		76,527
Total securities available for sale	$	665,233	$	13,202	$	2,760	$	675,675

December 31, 2018
Debt securities:
Mortgage-backed securities:
US Government-sponsored enterprises	$	413,492	$	904	$	9,444	$	404,952
US Government agency	111,938		509		1,935		110,512
Private label	20,353		113		84		20,382
Obligations of states and political subdivisions thereof	133,260		1,081		2,076		132,265
Corporate bonds	58,098		264		636		57,726
Total securities available for sale	$	737,141	$	2,871	$	14,175	$	725,837



	Available for sale
(in thousands)	Amortized Cost		Fair Value
Within 1 year	$	190	$	191
Over 1 year to 5 years	33,984		34,856
Over 5 years to 10 years	56,882		57,482
Over 10 years	92,451		95,224
Total bonds and obligations	183,507		187,753
Mortgage-backed securities	481,726		487,922
Total securities available for sale	$	665,233	$	675,675



	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, 2019
Debt securities:
Mortgage-backed securities:
US Government-sponsored enterprises	$	140	$	30,711	$	1,188	$	60,174	$	1,328	$	90,885
US Government agency	117		10,691		100		9,767		217		20,458
Private label	385		19,573		4		39		389		19,612
Obligations of states and political subdivisions thereof	20		4,138		127		1,692		147		5,830
Corporate bonds	493		14,506		186		7,186		679		21,692
Total securities available for sale	$	1,155	$	79,619	$	1,605	$	78,858	$	2,760	$	158,477

December 31, 2018
Debt securities:
Mortgage-backed securities:
US Government-sponsored enterprises	$	155	$	19,367	$	9,289	$	297,569	$	9,444	$	316,936
US Government agency	16		2,570		1,919		68,266		1,935		70,836
Private label	79		10,393		5		47		84		10,440
Obligations of states and political subdivisions thereof	43		6,784		2,033		47,930		2,076		54,714
Corporate bonds	224		11,759		412		14,460		636		26,219
Total securities available for sale	$	517	$	50,873	$	13,658	$	428,272	$	14,175	$	479,145



(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, 2019
Commercial real estate:
Construction and land development	$	—	$	—	$	73	$	73	$	28,729	$	28,802	$	73
Other commercial real estate	985		56		6,773		7,814		665,071		672,885		—
Total commercial real estate	985		56		6,846		7,887		693,800		701,687		73

Commercial and industrial:
Commercial	772		64		1,145		1,981		237,913		239,894		—
Agricultural	121		72		25		218		20,988		21,206		—
Tax exempt	—		—		—		—		66,043		66,043		—
Total commercial and industrial	893		136		1,170		2,199		324,944		327,143		—

Total commercial loans	1,878		192		8,016		10,086		1,018,744		1,028,830		73

Residential real estate:
Residential mortgages	399		345		871		1,615		728,901		730,516		71
Total residential real estate	399		345		871		1,615		728,901		730,516		71

Consumer:
Home equity	131		65		315		511		58,045		58,556		—
Other consumer	2		7		—		9		10,225		10,234		—
Total consumer	133		72		315		520		68,270		68,790		—

Total loans	$	2,410	$	609	$	9,202	$	12,221	$	1,815,915	$	1,828,136	$	144



(in thousands)	Commercial real estate		Commercial and industrial		Residential real estate		Consumer		Total
September 30, 2019
Balance at end of period
Individually evaluated for impairment	$	8,759	$	1,323	$	2,643	$	13	$	12,738
Collectively evaluated	692,928		325,820		727,873		68,777		1,815,398
Total	$	701,687	$	327,143	$	730,516	$	68,790	$	1,828,136



	September 30, 2019
(in thousands)	Recorded Investment		Unpaid Principal Balance		Related Allowance
With no related allowance:
Construction and land development	$	—	$	—	$	—
Other commercial real estate	5,634		5,675		—
Commercial	657		713		—
Agricultural	—		—		—
Tax exempt loans	—		—		—
Residential real estate	2,082		2,236		—
Home equity	—		—		—
Other consumer	—		—		—

With an allowance recorded:
Construction and land development	$	1	$	1	$	1
Other commercial real estate	3,124		3,262		989
Commercial	666		694		240
Agricultural	—		—		—
Tax exempt loans	—		—		—
Residential real estate	561		594		66
Home equity	13		13		1
Other consumer	—		—		—

Total
Commercial real estate	$	8,759	$	8,938	$	990
Commercial and industrial	1,323		1,407		240
Residential real estate	2,643		2,830		66
Consumer	13		13		1
Total impaired loans	$	12,738	$	13,188	$	1,297



	Three Months Ended September 30, 2019				Three Months Ended September 30, 2018
(in thousands)	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
With no related allowance:
Construction and land development	$	—	$	—	$	—	$	—
Other commercial real estate	5,528		52		6,639		31
Commercial	747		4		625		2
Agricultural	—		—		—		—
Tax exempt loans	—		—		—		—
Residential real estate	2,041		16		3,955		9
Home equity	—		—		158		—
Other consumer	—		—		—		—

With an allowance recorded:
Construction and land development	$	1	$	—	$	1	$	—
Other commercial real estate	3,217		—		2,214		—
Commercial	654		—		788		—
Agricultural	—		—		—		—
Tax exempt loans	—		—		—		—
Residential real estate	551		2		888		3
Home equity	12		—		13		—
Other consumer	—		—		—		—

Total
Commercial real estate	$	8,746	$	52	$	8,854	$	31
Commercial and industrial	1,401		4		1,413		2
Residential real estate	2,592		18		4,843		12
Consumer	12		—		171		—
Total impaired loans	$	12,751	$	74	$	15,281	$	45



	Nine Months Ended September 30, 2019				Nine Months Ended September 30, 2018
(in thousands)	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
With no related allowance:
Construction and land development	$	—	$	—	$	—	$	—
Other commercial real estate	5,466		56		6,204		46
Commercial	792		7		628		7
Agricultural	—		—		—		—
Tax exempt loans	—		—		—		—
Residential real estate	2,089		47		4,027		28
Home equity	—		—		236		—
Other consumer	—		—		—		—

With an allowance recorded:
Construction and land development	$	2	$	—	$	1	$	—
Other commercial real estate	2,972		29		1,600		6
Commercial	497		—		716		—
Agricultural	—		—		—		—
Tax exempt loans	—		—		—		—
Residential real estate	540		7		800		7
Home equity	13		—		13		—
Other consumer	—		—		—		—

Total
Commercial real estate	$	8,440	$	85	$	7,805	$	52
Commercial and industrial	1,289		7		1,344		7
Residential real estate	2,629		54		4,827		35
Consumer	13		—		249		—
Total impaired loans	$	12,371	$	146	$	14,225	$	94



	Three Months Ended September 30, 2019
(in thousands, except modifications)	Number of Modifications	Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment
Troubled Debt Restructurings
Other commercial real estate	4	$	268	$	267
Agricultural	1	141		141
Residential mortgages	2	399		342
Total	7	$	808	$	750


	Three Months Ended September 30, 2018
(in thousands, except modifications)	Number of Modifications	Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment
Troubled Debt Restructurings
Construction and land development	1	$	2	$	1
Other commercial real estate	1	72		72
Commercial	5	104		60
Residential mortgages	2	228		225
Total	9	$	406	$	358


	Nine Months Ended September 30, 2019
(in thousands)	Number of Modifications	Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment
Troubled Debt Restructurings
Other commercial real estate	9	$	543	$	529
Other commercial	4	168		91
Agricultural	1	141		141
Residential mortgages	11	1,133		1,034
Total	25	$	1,985	$	1,795



Business Activities Loans	At or for the Three Months Ended September 30, 2019
(in thousands)	Commercial real estate			Commercial and industrial			Residential real estate			Consumer			Total
Balance at beginning of period	$	7,206		$	2,748		$	3,942		$	394		$	14,290
Charged-off loans	—			—			(108		)	(55		)	(163		)
Recoveries on charged-off loans	1			62			36			1			100
(Releases) provision for loan losses	956			63			(111		)	(94		)	814
Balance at end of period	$	8,163		$	2,873		$	3,759		$	246		$	15,041
Individually evaluated for impairment	990			240			66			1			1,297
Collectively evaluated	7,173			2,633			3,693			245			13,744
Total	$	8,163		$	2,873		$	3,759		$	246		$	15,041


Acquired Loans	At or for the Three Months Ended September 30, 2019
(in thousands)	Commercial real estate			Commercial and industrial			Residential real estate			Consumer			Total
Balance at beginning of period	$	159		$	22		$	101		$	—		$	282
Charged-off loans	—			—			(52		)	—			(52		)
Recoveries on charged-off loans	—			—			—			3			3
(Releases) provision for loan losses	(2		)	(15		)	99			(3		)	79
Balance at end of period	$	157		$	7		$	148		$	—		$	312
Individually evaluated for impairment	12			—			32			—			44
Collectively evaluated	145			7			116			—			268
Total	$	157		$	7		$	148		$	—		$	312



Business Activities Loans	At or for the Nine Months Ended September 30, 2019
(in thousands)	Commercial real estate			Commercial and industrial			Residential real estate			Consumer			Total
Balance at beginning of period	$	6,811		$	2,380		$	3,982		$	408		$	13,581
Charged-off loans	(57		)	(13		)	(110		)	(129		)	(309		)
Recoveries on charged-off loans	131			62			55			8			256
(Releases) provision for loan losses	1,278			444			(168		)	(41		)	1,513
Balance at end of period	$	8,163		$	2,873		$	3,759		$	246		$	15,041
Individually evaluated for impairment	990			240			66			1			1,297
Collectively evaluated	7,173			2,633			3,693			245			13,744
Total	$	8,163		$	2,873		$	3,759		$	246		$	15,041



	Commercial construction and land development				Commercial real estate other				Total commercial real estate
(in thousands)	Sep 30, 2019		Dec 31, 2018		Sep 30, 2019		Dec 31, 2018		Sep 30, 2019		Dec 31, 2018
Grade:
Pass	$	28,728	$	23,680	$	647,075	$	532,386	$	675,803	$	556,066
Special mention	—		73		12,474		8,319		12,474		8,392
Substandard	73		—		10,212		13,914		10,285		13,914
Doubtful	1		1		3,124		1,361		3,125		1,362
Total	$	28,802	$	23,754	$	672,885	$	555,980	$	701,687	$	579,734



	September 30, 2019				December 31, 2018
(dollars in thousands)	Carrying Value		Weighted Average Rate		Carrying Value		Weighted Average Rate
Short-term borrowings
Advances from the FHLB	$	422,583	2.24	%	$	611,683	2.47	%
Other borrowings	41,259		1.24		36,211		1.09
Total short-term borrowings	463,842		2.15		647,894		2.39
Long-term borrowings
Advances from the FHLB	177,977		2.25		32,929		1.86
Subordinated borrowings	37,928		5.69		37,973		5.58
Junior subordinated borrowings	5,000		6.15		5,000		5.96
Total long-term borrowings	220,905		2.93		75,902		3.99
Total	$	684,747	2.40	%	$	723,796	2.56	%



	September 30, 2019
(in thousands, except rates)	Carrying Value		Weighted Average Rate
Fixed rate advances maturing:
2019	$	393,601	2.27	%
2020	54,982		2.14
2021	11,658		2.19
2022	134,000		2.25
2023	1,000		—
2024 and thereafter	5,319		1.79
Total FHLB advances	$	600,560	2.24	%



	September 30, 2019		Regulatory Minimum to be "Well Capitalized"		December 31, 2018		Regulatory Minimum to be "Well Capitalized"
Company (consolidated)
Total capital to risk-weighted assets	14.01	%	N/A		14.23	%	N/A
Common equity tier 1 capital to risk-weighted assets	11.63		N/A		11.80		N/A
Tier 1 capital to risk-weighted assets	12.47		N/A		12.68		N/A
Tier 1 capital to average assets	8.65		N/A		8.53		N/A

Bank
Total capital to risk-weighted assets	13.45	%	10.00	%	13.82	%	10.00	%
Common equity tier 1 capital to risk-weighted assets	12.60		6.50		12.99		6.50
Tier 1 capital to risk-weighted assets	12.60		8.00		12.99		8.00
Tier 1 capital to average assets	8.74		5.00		8.74		5.00



(in thousands)	Before Tax			Tax Effect			Net of Tax
Three Months Ended September 30, 2019
Net unrealized gain on AFS securities:
Net unrealized gain arising during the period	$	3,357		$	(784	)	$	2,573
Less: reclassification adjustment for gains (losses) realized in net income	157			(37		)	120
Net unrealized gain on AFS securities	3,200			(747		)	2,453

Net unrealized loss on cash flow hedging derivatives:
Net unrealized loss arising during the period	(370		)	85			(285		)
Less: reclassification adjustment for gains (losses) realized in net income	—			—			—
Net unrealized loss on cash flow hedging derivatives	(370		)	85			(285		)

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	$	2,830		$	(662	)	$	2,168

Three Months Ended September 30, 2018
Net unrealized loss on AFS securities:
Net unrealized loss arising during the period	$	(5,850	)	$	1,291		$	(4,559	)
Less: reclassification adjustment for gains (losses) realized in net income	—			—			—
Net unrealized loss on AFS securities	(5,850		)	1,291			(4,559		)

Net unrealized gain on cash flow hedging derivatives:
Net unrealized gain arising during the period	299			(81		)	218
Less: reclassification adjustment for gains (losses) realized in net income	—			—			—
Net unrealized gain on cash flow hedging derivatives	299			(81		)	218

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 loss	$	(5,551	)	$	1,210		$	(4,341	)



(in thousands)	Net unrealized (loss) gain on AFS Securities			Net loss on effective cash flow hedging derivatives			Net unrealized loss on pension plans			Total
Three Months Ended September 30, 2019
Balance at beginning of period	$	5,547		$	(3,782	)	$	(888	)	$	877
Other comprehensive gain (loss) before reclassifications	2,573			(285		)	—			2,288
Less: amounts reclassified from accumulated other comprehensive income	120			—			—			120
Total other comprehensive income (loss)	2,453			(285		)	—			2,168
Balance at end of period	$	8,000		$	(4,067	)	$	(888	)	$	3,045

Three Months Ended September 30, 2018
Balance at beginning of period	$	(12,595	)	$	(2,064	)	$	(688	)	$	(15,347	)
Other comprehensive (loss) gain before reclassifications	(4,559		)	218			—			(4,341		)
Less: amounts reclassified from accumulated other comprehensive income	—			—			—			—
Total other comprehensive (loss) income	(4,559		)	218			—			(4,341		)
Balance at end of period	$	(17,154	)	$	(1,846	)	$	(688	)	$	(19,688	)

Nine Months Ended September 30, 2019
Balance at beginning of period	$	(8,665	)	$	(2,249	)	$	(888	)	$	(11,802	)
Other comprehensive gain (loss) before reclassifications	16,785			(1,818		)	—			14,967
Less: amounts reclassified from accumulated other comprehensive income	120			—			—			120
Total other comprehensive income (loss)	16,665			(1,818		)	—			14,847
Balance at end of period	$	8,000		$	(4,067	)	$	(888	)	$	3,045

Nine Months Ended September 30, 2018
Balance at beginning of period	$	(1,713	)	$	(2,250	)	$	(591	)	$	(4,554	)
Other comprehensive (loss) gain before reclassifications	(15,074		)	889			31			(14,154		)
Less: amounts reclassified from accumulated other comprehensive income	—			—			—			—
Total other comprehensive (loss) income	(15,074		)	889			31			(14,154		)
Less: amounts reclassified from accumulated other comprehensive income for ASU 2018-02	(367		)	(485		)	(128		)	(980		)
Balance at end of period	$	(17,154	)	$	(1,846	)	$	(688	)	$	(19,688	)



	Three Months Ended September 30,					Nine Months Ended September 30,					Affected Line Item where Net Income is Presented
(in thousands)	2019			2018		2019			2018		Affected Line Item where Net Income is Presented
Net realized gains on AFS securities:
Before tax⁽¹⁾	$	157		$	—	$	157		$	—	Non-interest income
Tax effect	(37		)	—		(37		)	—		Tax expense
Total reclassifications for the period	$	120		$	—	$	120		$	—	Net of tax



	Three Months Ended September 30,				Nine Months Ended September 30,
(in thousands, except per share and share data)	2019		2018		2019		2018
Net income	$	5,015	$	8,970	$	18,413	$	25,317

Average number of basic common shares outstanding	15,547,276		15,503,488		15,536,414		15,478,207
Plus: dilutive effect of stock options and awards outstanding ⁽¹⁾	34,027		76,575		45,282		85,559
Average number of diluted common shares outstanding ⁽¹⁾	15,581,303		15,580,063		15,581,696		15,563,766

Anti-dilutive options excluded from earnings calculation	—		—		—		14,394

Earnings per share:
Basic	$	0.32	$	0.58	$	1.19	$	1.64
Diluted	$	0.32	$	0.58	$	1.18	$	1.63



	September 30, 2019
	Notional Amount		Weighted Average Maturity	Estimated Fair Value Asset (Liability)
	(in thousands)		(in years)	(in thousands)
Cash flow hedges:
Interest rate cap agreements	$	90,000	3.4	$	89
Interest rate swap on deposits	50,000		4.5	(2,179		)
Total cash flow hedges	140,000			(2,090		)

Economic hedges:
Forward sale commitments	7,762		0.1	(61		)
Total economic hedges	7,762			(61		)

Non-hedging derivatives:
Interest rate lock commitments	12,242		0.1	78
Customer loan derivative liability	169,569		9.8	(10,923		)
Customer loan derivative asset	169,569		9.8	10,923
Total non-hedging derivatives	351,380			78

Total	$	499,142		$	(2,073	)



	September 30, 2019
(in thousands)	Level 1 Inputs		Level 2 Inputs			Level 3 Inputs			Total Fair Value
Available for sale securities:
Mortgage-backed securities:
US Government-sponsored enterprises	$	—	$	349,143		$	—		$	349,143
US Government agency	—		118,825			—			118,825
Private label	—		19,954			—			19,954
Obligations of states and political subdivisions thereof	—		111,226			—			111,226
Corporate bonds	—		76,527			—			76,527
Derivative assets	—		11,012			78			11,090
Derivative liabilities	—		(13,102		)	(61		)	(13,163		)



	September 30, 2019
(in thousands)	Carrying Amount			Fair Value			Level 1		Level 2			Level 3
Financial Assets
Cash and cash equivalents	$	71,593		$	71,593		$	71,593	$	—		$	—
Securities available for sale	675,675			675,675			—		675,675			—
FHLB stock	27,469			27,469			—		27,469			—
Net loans	2,561,953			2,567,331			—		—			2,567,331
Accrued interest receivable	3,218			3,218			—		3,218			—
Cash surrender value of bank-owned life insurance policies	75,368			75,368			—		75,368			—
Derivative assets	11,090			11,090			—		11,012			78

Financial Liabilities
Total deposits	$	2,493,585		$	2,491,023		$	—	$	2,491,023		$	—
Short-term other borrowings	41,259			41,258			—		41,258			—
FHLB advances	600,559			601,377			—		601,377			—
Subordinated borrowings	37,928			37,928			—		37,928			—
Junior subordinated borrowings	5,000			4,556			—		4,556			—
Derivative liabilities	(13,163		)	(13,163		)	—		(13,102		)	(61		)



(in thousands)		September 30, 2019
Lease Right-of-Use Assets	Classification
Operating lease right-of-use assets	Other assets	$	8,447

Lease Liabilities
Operating lease liabilities	Other liabilities	8,524



(in thousands)	Operating Leases
Twelve Months Ended:
September 30, 2020	$	911
September 30, 2021	896
September 30, 2022	912
September 30, 2023	908
September 30, 2024	917
Thereafter	6,065
Total future minimum lease payments	10,609
Amounts representing interest	(2,085		)
Present value of net future minimum lease payments	$	8,524