~~0000743367bhb:LoansFromBusinessActivitiesMemberus-gaap:CommercialPortfolioSegmentMemberus-gaap:FinancingReceivables30To59DaysPastDueMember2019-12-31~~

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q


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

For the quarterly period ended: ~~June 30, 2020~~March 31, 2021


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

For the transition period from to

Commission File Number: 001-13349

BAR HARBOR BANKSHARES

(Exact name of registrant as specified in its charter)


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)

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

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

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ⌧ No ◻

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 ⌧ No ◻

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 ◻ Accelerated Filer ⌧ Non-Accelerated Filer  Smaller Reporting Company ☐ Emerging growth company ☐

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. ◻

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

The Registrant had ~~15,084,031~~14,975,300 shares of common stock, par value $2.00 per share, outstanding as of ~~July 31, 2020.~~April 30, 2021.

Table of Contents

BAR HARBOR BANKSHARES AND SUBSIDIARIES

FORM 10-Q

INDEX

				Page
PART I.	FINANCIAL INFORMATION

Item 1.	Consolidated Financial Statements (unaudited)

	Consolidated Balance Sheets as of ~~June 30, 2020~~March 31, 2021 and December 31, ~~2019~~2020			4

	Consolidated Statements of Income for the Three ~~and Six~~ Months Ended ~~June 30,~~March 31, 2021 and 2020 ~~and 2019~~			6

	Consolidated Statements of Comprehensive Income for the Three ~~and Six~~ Months Ended ~~June 30,~~March 31, 2021 and 2020 ~~and 2019~~			7

	Consolidated Statements of Changes in Shareholders’ Equity for the Three ~~and Six~~ Months Ended ~~June 30,~~March 31, 2021 and 2020 ~~and 2019~~			8

	Consolidated Statements of Cash Flows for the ~~Six~~Three Months Ended ~~June 30,~~March 31, 2021 and 2020 ~~and 2019~~			9

	Notes to Unaudited Consolidated Interim Financial Statements
		Note 1	Basis of Presentation	11
		Note 2	Securities Available for Sale	1519
		Note 3	Loans and Allowance for Credit Losses	1822
		Note 4	~~Allowance for Loan Losses~~Borrowed Funds	3633
		Note 5	~~Borrowed Funds~~Deposits	4235
		Note 6	~~Deposits~~Capital Ratios and Shareholders' Equity	4436
		Note 7	~~Capital Ratios and Shareholders' Equity~~Earnings per Share	4539
		Note 8	~~Earnings per Share~~Derivative Financial Instruments and Hedging Activities	4940
		Note 9	~~Derivative Financial Instruments and Hedging Activities~~Fair Value Measurements	5046
		Note 10	~~Fair Value Measurements~~Revenue from Contracts with Customers	5652
		Note 11	~~Revenue from Contracts with Customers~~	62
	~~Note 12~~	Leases	6454


Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations			6656
		Selected Financial Data		6757
		Consolidated Loan and Deposit Analysis		6858
		Average Balances and Average Yields/Rates		6959
		Non-GAAP Financial Measures		7160
		Reconciliation of Non-GAAP Financial Measures		7261
		Financial Summary		7463

Item 3.	Quantitative and Qualitative Disclosures about Market Risk			8069

Item 4.	Controls and Procedures			8271


PART II.	OTHER INFORMATION

Item 1.	Legal Proceedings			8271

Item 1A.	Risk Factors			8271

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds			8372

Item 5.	Other Information			72

Item 6.	Exhibits			8473

Signatures				8574

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," 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, ~~2019~~ ~~and Part II, Item 1A. of the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2020~~.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.

Table of Contents

PART I. FINANCIAL INFORMATION

ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

BAR HARBOR BANKSHARES AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS


(in thousands, except share data)	June 30, 2020		December 31, 2019		March 31, 2021		December 31, 2020
Assets
Cash and cash equivalents:
Cash and due from banks	$	52,776	$	37,261	$	39,039	$	27,566
Interest-bearing deposit with the Federal Reserve Bank		17,897		19,649
Interest-bearing deposits with other banks						184,473		198,441
Total cash and cash equivalents		70,673		56,910		223,512		226,007

Securities:
Securities available for sale, at fair value		641,574		663,230
Securities available for sale						626,403		585,046
Federal Home Loan Bank stock		20,265		20,679		14,826		14,036
Total securities		661,839		683,909		641,229		599,082

Loans:
Commercial real estate		982,070		930,661
Commercial and industrial		539,442		423,291
Residential real estate		1,083,708		1,151,857
Consumer		124,197		135,283
Loans held for sale						10,148		23,988

Total loans		2,729,417		2,641,092		2,551,064		2,562,885
Less: Allowance for loan losses		(16,509)		(15,353)
Less: Allowance for credit losses						(23,653)		(19,082)
Net loans		2,712,908		2,625,739		2,527,411		2,543,803

Premises and equipment, net		50,464		51,205		52,253		52,458
Other real estate owned		2,318		2,236
Goodwill		119,477		118,649		119,477		119,477
Other intangible assets		8,155		8,641		7,431		7,670
Cash surrender value of bank-owned life insurance		76,896		75,863		78,388		77,870
Deferred tax assets, net		2,451		3,865		5,639		1,745
Other assets		75,084		42,111		64,742		73,662
Total assets	$	3,780,265	$	3,669,128	$	3,730,230	$	3,725,762

Liabilities
Deposits:
Demand	$	504,325	$	414,534	$	586,487	$	544,636
NOW		642,908		575,809		761,817		738,849
Savings		466,668		388,683		560,095		521,638
Money market		402,835		384,090		365,507		402,731
Time		678,126		932,635		638,436		698,361
Total deposits		2,694,862		2,695,751		2,912,342		2,906,215

Borrowings:
Senior		546,863		471,396		292,210		276,062
Subordinated		59,879		59,920		60,003		59,961
Total borrowings		606,742		531,316		352,213		336,023

Other liabilities		74,487		45,654		60,094		72,183
Total liabilities		3,376,091		3,272,721		3,324,649		3,314,421

(continued)

Table of Contents

BAR HARBOR BANKSHARES AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS (continued)


(in thousands, except share data)	June 30, 2020		December 31, 2019		March 31, 2021		December 31, 2020
Shareholders’ equity
Capital stock, par value $2.00; authorized 20,000,000 shares; issued 16,428,388 shares at June 30, 2020 and December 31, 2019		32,857		32,857
Capital stock, par value $2.00; authorized 20,000,000 shares; issued 16,428,388 shares at March 31, 2021 and December 31, 2020						32,857		32,857
Additional paid-in capital		189,526		188,536		190,564		190,084
Retained earnings		185,163		175,780		196,561		195,607
Accumulated other comprehensive income		8,521		3,911		3,464		11,016
Less: 1,214,440 and 870,257 shares of treasury stock at June 30, 2020 and December 31, 2019, respectively		(11,893)		(4,677)
Less: 1,478,416 and 1,512,465 shares of treasury stock at March 31, 2021 and December 31, 2020, respectively						(17,865)		(18,223)
Total shareholders’ equity		404,174		396,407		405,581		411,341
Total liabilities and shareholders’ equity	$	3,780,265	$	3,669,128	$	3,730,230	$	3,725,762

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					Six Months Ended				Three Months Ended
	June 30,					June 30,				March 31,
(in thousands, except earnings per share data)	2020			2019		2020		2019		2021		2020
Interest and dividend income
Loans	$	26,493		$	27,660	$	54,480	$	54,524	$	24,205	$	27,987
Securities and other		4,942			6,125		10,449		12,488		3,979		5,507
Total interest and dividend income		31,435			33,785		64,929		67,012		28,184		33,494
Interest expense
Deposits		4,548			6,886		10,568		13,193		2,951		6,020
Borrowings		2,297			5,403		5,208		10,558		1,811		2,911
Total interest expense		6,845			12,289		15,776		23,751		4,762		8,931
Net interest income		24,590			21,496		49,153		43,261		23,422		24,563
Provision for loan losses		1,354			562		2,465		886
Provision for credit losses											(489)		1,111
Net interest income after provision for loan losses		23,236			20,934		46,688		42,375		23,911		23,452

Non-interest income
Trust and investment management fee income		3,159			3,066		6,528		5,823		3,666		3,369
Customer service fees		2,439			2,618		5,551		4,783		2,970		3,112
Gain on sales of securities, net		1,351			—		1,486		—		0		135
Mortgage banking income		1,124			420		1,581		642		2,570		457
Bank-owned life insurance income		496			519		1,033		1,061		518		537
Customer derivative income		513			696		1,101		725		410		588
Other income		628			134		851		586		114		223
Total non-interest income		9,710			7,453		18,131		13,620		10,248		8,421

Non-interest expense
Salaries and employee benefits		11,909			11,685		23,793		22,204		12,176		11,884
Occupancy and equipment		3,860			3,300		8,280		6,686		4,328		4,420
(Gain) loss on premises and equipment, net		(2)			21		90		21
Loss on premises and equipment, net											8		92
Outside services		442			443		976		854		432		534
Professional services		337			570		1,009		1,114		558		672
Communication		194			283		483		518		321		289
Marketing		282			511		670		806		290		388
Amortization of intangible assets		256			207		512		414		241		256
Loss on debt extinguishment		1,351			—		1,351		—
Acquisition, restructuring and other expenses		158			280		261		280
Acquisition, conversion and other expenses											889		103
Other expenses		3,479			3,606		7,200		6,633		3,248		3,721
Total non-interest expense		22,266			20,906		44,625		39,530		22,491		22,359

Income before income taxes		10,680			7,481		20,194		16,465		11,668		9,514
Income tax expense		2,199			1,364		3,992		3,067		2,188		1,793
Net income	$	8,481		$	6,117	$	16,202	$	13,398	$	9,480	$	7,721

Earnings per share:
Basic	$	0.55		$	0.39	$	1.05	$	0.86	$	0.63	$	0.50
Diluted	$	0.55		$	0.39	$	1.04	$	0.86	$	0.63	$	0.50
			��
Weighted average common shares outstanding:
Basic		15,424			15,538		15,500		15,531		14,934		15,558
Diluted		15,441			15,586		15,523		15,582		15,007		15,593

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				Six Months Ended				Three Months Ended
	June 30,				June 30,				March 31,
(in thousands)	2020		2019		2020		2019		2021		2020
Net income	$	8,481	$	6,117	$	16,202	$	13,398	$	9,480	$	7,721
Other comprehensive income, before tax:
Changes in unrealized gain on securities available for sale		2,421		9,646		7,662		18,546
Changes in unrealized (loss) gain on securities available for sale										(7,185)		5,357
Changes in unrealized loss on hedging derivatives		626		(1,157)		(1,639)		(2,002)		(2,659)		(2,382)
Changes in unrealized loss on pension		—		—		—		—		0		0

Income taxes related to other comprehensive income:
Changes in unrealized gain on securities available for sale		(569)		(2,255)		(1,709)		(4,334)
Changes in unrealized loss (gain) on securities available for sale										1,672		(1,346)
Changes in unrealized loss on hedging derivatives		(147)		271		296		469		620		650
Changes in unrealized loss on pension		—		—		—		—		0		0
Total other comprehensive income		2,331		6,505		4,610		12,679
Total other comprehensive (loss) income										(7,552)		2,279
Total comprehensive income	$	10,812	$	12,622	$	20,812	$	26,077	$	1,928	$	10,000

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


							Accumulated												Accumulated
	Common		Additional				other						Common		Additional				other
	stock		paid-in		Retained		comprehensive		Treasury				stock		paid-in		Retained		comprehensive		Treasury
(in thousands, except per share data)	amount		capital		earnings		income (loss)		stock		Total		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		—		—		7,281		—		—		7,281
Other comprehensive income		—		—		—		6,174		—		6,174
Cash dividends declared ($0.20 per share)		—		—		(3,105)		—		—		(3,105)
Net issuance (441 shares) to employee stock plans, including related tax effects		—		(173)		—		—		4		(169)
Recognition of stock based compensation		—		263		—		—		—		263
Balance at March 31, 2019		32,857		187,743		170,702		(5,628)		(4,651)		381,023

Net income		—		—		6,117		—		—		6,117
Other comprehensive income		—		—		—		6,505		—		6,505
Cash dividends declared ($0.22 per share)		—		—		(3,419)		—		—		(3,419)
Treasury stock purchased (8,010 shares)		—		—		—		—		(210)		(210)
Net issuance (20,678 shares) to employee stock plans, including related tax effects		—		104		—		—		145		249
Recognition of stock based compensation		—		297		—		—		—		297
Balance at June 30, 2019	$	32,857	$	188,144	$	173,400	$	877	$	(4,716)	$	390,562

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

Net income		—		—		7,721		—		—		7,721		0		0		7,721		0		0		7,721
Other comprehensive income		—		—		—		2,279		—		2,279		0		0		0		2,279		0		2,279
Cash dividends declared ($0.22 per share)		—		—		(3,429)		—		—		(3,429)		0		0		(3,429)		0		0		(3,429)
Treasury stock purchased (6,069 shares)		—		—		—		—		(130)		(130)
Net issuance (27,786 shares) to employee stock plans, including related tax effects		—		660		—		—		129		789
Treasury stock purchased (5,586 shares)														0		0		0		0		(130)		(130)
Net issuance (23,010 shares) to employee stock plans, including related tax effects														0		660		0		0		129		789
Recognition of stock based compensation		—		118		—		—		—		118		0		118		0		0		0		118
Balance at March 31, 2020		32,857		189,314		180,072		6,190		(4,678)		403,755	$	32,857	$	189,314	$	180,072	$	6,190	$	(4,678)	$	403,755

Balance at December 31, 2020													$	32,857	$	190,084	$	195,607	$	11,016	$	(18,223)	$	411,341

Allowance for credit losses cumulative-effect adjustment - ASU 2016-13 (Note 1)														0		0		(5,242)		0		0		(5,242)
Net income		—		—		8,481		—		—		8,481		0		0		9,480		0		0		9,480
Other comprehensive income		—		—		—		2,331		—		2,331
Other comprehensive (loss) income														0		0		0		(7,552)		0		(7,552)
Cash dividends declared ($0.22 per share)		—		—		(3,390)		—		—		(3,390)		0		0		(3,284)		0		0		(3,284)
Common stock purchased (399,622 shares)		—		—		—		—		(7,337)		(7,337)
Net issuance (30,987 shares) to employee stock plans, including related tax effects		—		(254)		—		—		122		(132)
Net issuance (34,049 shares) to employee stock plans, including related tax effects														0		(186)		0		0		358		172
Recognition of stock based compensation		—		466		—		—		—		466		0		666		0		0		0		666
Balance at June 30, 2020	$	32,857	$	189,526	$	185,163	$	8,521	$	(11,893)	$	404,174
Balance at March 31, 2021													$	32,857	$	190,564	$	196,561	$	3,464	$	(17,865)	$	405,581

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

Six Months Ended June 30,
(in thousands)

2020

2019
Cash flows from operating activities:




Net income

$
16,202

$
13,398
Adjustments to reconcile net income to net cash provided by operating activities:




Provision for loan losses

2,465

886
Net amortization of securities

1,603

1,735
Change in unamortized net loan costs and premiums

3,449

(190)
Premises and equipment depreciation

2,380

1,905
Stock-based compensation expense

584

560
Accretion of purchase accounting entries, net

(1,742)

(1,017)
Amortization of other intangibles

512

414
Income from cash surrender value of bank-owned life insurance policies

(1,033)

(1,061)
Gain on sales of securities, net

(1,486)

—
Loss on other real estate owned

82

—
Loss on premises and equipment, net

90

21
Net change in other assets and liabilities

(5,787)

(3,052)
Net cash provided by operating activities

17,319

13,599

Cash flows from investing activities:




Proceeds from sales of securities available for sale

87,521

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

63,096

50,546
Purchases of securities available for sale

(120,405)

(56,831)
Net change in loans

(91,857)

(86,745)
Purchase of FHLB stock

(4,044)

(9,720)
Proceeds from sale of FHLB stock

4,458

10,159
Purchase of premises and equipment, net

(2,221)

(3,352)
Acquisitions, net of cash acquired

(340)

—
Increase in right of use asset from new operating lease

(578)

—
Net cash used in investing activities

(64,370)

(95,943)

Cash flows from financing activities:




Net decrease in deposits

(420)

(1,448)
Net change in short-term senior borrowings

(119,774)

(62,510)
Proceeds from long-term senior borrowings

273,436

114,062
Repayments of long-term senior borrowings

(67,188)

—
Net change in short-term other borrowings

(10,986)

—
Increase in lease liability from new operating lease

(625)

—
Exercise of stock options

657

80
Purchase of treasury and common stock

(7,467)

(210)
Cash dividends paid on common stock

(6,819)

(6,524)
Net cash provided by financing activities

60,814

43,450

Net change in cash and cash equivalents

13,763

(38,894)
Cash and cash equivalents at beginning of year

56,910

98,754
Cash and cash equivalents at end of year

$
70,673

$
59,860


	Three Months Ended March 31,
(in thousands)	2021		2020
Cash flows from operating activities:
Net income	$	9,480	$	7,721
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for credit losses		(489)		1,111
Net amortization of securities		1,215		686
Change in unamortized net loan costs and premiums		(1,768)		(1,358)
Premises and equipment depreciation		1,181		1,182
Stock-based compensation expense		666		118
Accretion of purchase accounting entries, net		4		(263)
Amortization of other intangibles		241		256
Income from cash surrender value of bank-owned life insurance policies		(518)		(537)
Gain on sales of securities, net		—		(135)
Decrease in right-of-use lease assets		282		506
Decrease in lease liabilities		(259)		(555)
Loss on other real estate owned		—		31
Loss on premises and equipment, net		8		92
Net change in other assets and liabilities		(3,887)		(5,851)
Net cash provided by operating activities		6,156		3,004

Cash flows from investing activities:
Proceeds from sales of securities available for sale		—		32,017
Proceeds from maturities, calls and prepayments of securities available for sale		28,687		24,899
Purchases of securities available for sale		(79,583)		(15,739)
Net change in loans		25,330		6,300
Purchase of FHLB stock		(790)		(3,161)
Proceeds from sale of FHLB stock		—		3,943
Purchase of premises and equipment, net		(982)		(628)
Net investment in community limited partnerships		(470)		—
Acquisitions, net of cash acquired		—		(340)
Proceeds from sale of other real estate owned		—		51
Net cash (used in) provided by investing activities		(27,808)		47,342

Cash flows from financing activities:
Net change in deposits		6,127		(44,959)
Net change in short-term senior borrowings		19,653		(98,970)
Proceeds from long-term senior borrowings		—		139,000
Repayments of long-term senior borrowings		(8)		—
Net change in short-term other borrowings		(3,503)		(13,831)
Repayments of subordinated debt		—		(32)
Payment of subordinated debt issuance costs		—		(39)
Net issuance to employee stock plans		172		789
Purchase of treasury and common stock		—		(130)
Cash dividends paid on common stock		(3,284)		(3,429)
Net cash provided by (used in) financing activities		19,157		(21,601)
(continued)

~~(continued)~~

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BAR HARBOR BANKSHARES AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)

Six Months Ended June 30,
(in thousands)

2020

2019
Supplemental cash flow information:




Interest paid

$
16,275

$
22,577
Income taxes paid, net

3,112

1,685

Acquisition of non-cash assets and liabilities:

Assets acquired

1,171

—
Liabilities acquired

(343)

—


	Three Months Ended March 31,
(in thousands)	2021		2020
Net change in cash and cash equivalents		(2,495)		28,745
Cash and cash equivalents at beginning of year		226,007		56,910
Cash and cash equivalents at end of year	$	223,512	$	85,655

Supplemental cash flow information:
Interest paid	$	6,231	$	8,455
Income taxes paid, net		3,389		1,205

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

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

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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 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, ~~2019~~2020 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 updates 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~~updates reflect the ~~COVID-19 pandemic and stimulate the economy by supporting individuals and businesses through loans, grants, tax changes, and other types of relief. Some~~adoption of the ~~provisions applicable~~Financial Accounting Standards Board (FASB) Accounting Standards Updates (ASU) 2016-13, “Financial Instruments - Credit Losses (Topic 326) - Measurement of Credit Losses on Financial Instruments”, referred to as ASC 326 or, more commonly, referred to as Current Expected Credit Losses (CECL).

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

A change in the allowance on AFS debt securities may be in full or a portion thereof, is recorded as expense (credit) within provision for credit losses on the consolidated statements of income. Losses are charged against the allowance when management believes the uncollectibility of an AFS debt security is confirmed based on the above described analysis. As of March 31, 2021 and January 1, 2021 (i.e. ASU 2016-13 adoption), there was 0 allowance carried on the Company's AFS debt securities. Refer to Note 2 of the consolidated financial statements for further discussion.

●

~~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 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 (“EIDL”), 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~~Loans: Loans held for investment by the Company are reported at amortized cost. Amortized cost is the principal balance outstanding net of the unamortized balance of any deferred fees or costs and the unamortized balance of any premiums or discounts on loans purchased or acquired through mergers.

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

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

Purchase Credit Deteriorated (PCD) Loans: Loans that the Company acquired in acquisitions include some loans that have experienced more than insignificant credit deterioration since origination. The initial allowance for credit losses is determined on a collective basis and allocated to the ~~COVID-19 pandemic, the Board of Governors~~individual loans. The sum of the ~~Federal Reserve System (“FRB”),~~loan’s purchase price and allowance for credit losses becomes its initial amortized cost. The difference between the ~~Federal Deposit Insurance Corporation (“FDIC”),~~initial amortized cost and the ~~National Credit Union Administration (“NCUA”), the Office~~par value of the ~~Comptroller~~loan is a discount or premium, which is amortized into interest income over the life of the ~~Currency (“OCC”),~~loan. Subsequent changes to the allowance for credit losses are recorded through provision expense.

The Company adopted CECL using the prospective transition approach for financial assets purchased with credit deterioration that were previously classified as purchased credit impaired (PCI) and accounted for under ASC 310-30. In accordance with the standard, the Company did not reassess whether PCI assets met the definition of PCD assets as of the date of adoption. On January 1, 2021, the amortized cost basis of the PCD assets representing the noncredit discount will be accreted into interest income using the level-yield method over the estimated lives of the related loans. The converted PCD assets of $12.5 million were then pooled by call report coding and an additional allowance was calculated on the pooled assets separately from other loan pools totaling $524 thousand.

Non-performing loans: Residential real estate and consumer loans are generally placed on non-accrual status when reaching 90 days past due, or in process of foreclosure, or sooner if considered appropriate by management. Secured consumer loans are written down to net realizable value and unsecured consumer loans are charged-off upon reaching 120 days past due. Commercial real estate loans and commercial business loans that are 90 days or more past due are generally placed on non-accrual status, unless secured by sufficient cash or other assets immediately convertible to cash, and the ~~Consumer Financial Protection Bureau (“CFPB”),~~loan is in ~~consultation with~~ the ~~state financial regulators (collectively,~~process of collection. Commercial real estate and commercial business loans may be placed on non-accrual status prior to the ~~“agencies”) issued~~90 days delinquency date if considered appropriate by management.

When a ~~joint interagency statement (issued March 22, 2020; revised statement issued April 7, 2020). Some~~loan has been placed on non-accrual status, previously accrued and uncollected interest is reversed against interest on the loan. The interest on non-accrual loans is accounted for using the cash-basis or cost-recovery method depending on corresponding credit risk, until qualifying for return to accrual status. A loan can be returned to accrual status when collectability of principal is reasonably assured and the loan has performed for a period of time, generally six months.

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

Allowance for Credit Losses: The allowance for credit losses (the “allowance”) is a significant accounting estimate used in the preparation of the Company’s consolidated financial statements. The Allowance is comprised of the allowance for loan losses and the allowance for off-balance sheet credit exposures, which is accounted for as a separate liability in other liabilities on the balance sheet. The level of the allowance represents management’s estimate of expected credit losses over the expected life of the loans at the balance sheet date.

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

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

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

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

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

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

Individually Evaluated Loans: Prior to the adoption of CECL on January 1, 2021, a loan was individually evaluated when the loan was considered impaired. Impaired loans were based on current information and events, it is probable that the Company will not be able to collect all amounts due from the borrower in accordance with the contractual terms of the loan, including scheduled interest payments.

With the adoption of CECL, loans that do not share risk characteristics with existing pools are evaluated on an individual basis. For collateral dependent financial loans where the Company has determined that foreclosure of the collateral is probable, or where the borrower is experiencing financial difficulty and the Company expects repayment of the financial asset to be provided substantially through the operation or sale of the collateral. When repayment is expected to be from the operation of the collateral, the specific credit loss reserve is calculated as the amount by which the amortized cost basis of the financial asset exceeds the NPV from the operation of the collateral. When repayment is expected to be from the sale of the collateral, the specific credit loss reserve is calculated as the amount by which the amortized costs basis of the

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financial asset exceeds the fair value of the underlying collateral less estimated cost to sell. The allowance may be zero if the fair value of the collateral at the measurement date exceeds the amortized cost basis of the financial asset.

Accrued Interest. Upon adoption of CECL, effective as of January 1, 2021, the Company made the following elections regarding accrued interest receivable: (i) present accrued interest receivable balances within other assets on the consolidated statements of condition; (ii) exclude accrued interest from the measurement of the allowance for credit losses, including investments and loans; and (iii) continue to write-off accrued interest receivable by reversing interest income. The Company has a policy in place to write-off accrued interest when a loan is placed on non-accrual. Historically, the Company has not experienced uncollectible accrued interest receivable on investment debt securities.

Allowance for off-balance sheet credit exposures: The exposure is a component of other liabilities on the Company’s Consolidated Balance Sheet and represents the estimate for probable credit losses inherent in unfunded commitments to extend credit. Unfunded commitments to extend credit include unused portions of lines of credit and standby and commercial letters of credit. The process used to determine the allowance for these exposures is consistent with the process for determining the allowance for loans, as adjusted for estimated funding probabilities or loan equivalency factors. A charge (credit) to provision for credit losses on the consolidated statements of income is made to account for the change in the allowance on off-balance sheet exposures between reporting periods.

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Impact of Adoption

The following table illustrates the adoption of CECL on January 1, 2021:


			Reclassification		Pre-CECL		Post-CECL
			to CECL		Adoption		Adoption		Impact of
	Pre-CECL		Portfolio		Portfolio		Portfolio		CECL
(in thousands)	Adoption		Segmentation		Segmentation		Segmentation		Adoption
Assets:
Loans:
Commercial construction	$	131,123	$	(13,241)	$	117,882	$	117,882	$	—
Commercial real estate		953,258		(953,258)		—		—		—
Commercial real estate owner occupied		—		219,217		219,217		219,217		—
Commercial real estate non-owner occupied		—		716,776		716,776		716,776		—
Tax exempt		63,431		(15,569)		47,862		47,862		—
Commercial and industrial		377,638		(21,954)		355,684		355,684		—
Residential real estate		923,891		71,325		995,216		995,216		—
Home equity		102,464		(2,368)		100,096		100,096		—
Consumer other		11,080		(928)		10,152		10,152		—
Total loans	$	2,562,885	$	—	$	2,562,885	$	2,562,885	$	—

Allowance for credit losses on loans
Commercial construction	$	1,044	$	(220)	$	824	$	2,020	$	1,196
Commercial real estate		10,199		(10,199)		—		—		—
Commercial real estate owner occupied		—		1,783		1,783		2,491		708
Commercial real estate non-owner occupied		—		7,864		7,864		5,856		(2,008)
Tax exempt		80		(22)		58		98		40
Commercial and industrial		3,302		(165)		3,137		6,133		2,996
Residential real estate		4,078		932		5,010		6,742		1,732
Home equity		258		27		285		888		603
Consumer other		121		—		121		82		(39)
Total allowance for credit losses on loans	$	19,082	$	—	$	19,082	$	24,310	$	5,228

Liabilities:
Allowance for credit losses on unfunded commitments	$	359	$	—	$	359	$	1,975	$	1,616

Total allowance for credit losses	$	19,441	$	—	$	19,441	$	26,285	$	6,844

Retained earnings:
Total increase in Allowance for credit losses									$	6,844
Balance sheet reclassification										—
Total pre-tax impact										6,844
Tax effect										(1,602)
Decrease to retained earnings									$	5,242

●

~~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.~~

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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	Description	Required Date of Adoption	Effect on financial statements
Standards Adopted in ~~2020~~
~~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.~~ ~~The Company still has the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary~~	January 1, 2020 Early adoption is permitted.	The Company has adopted ASU 2017-04 effective January 1, 2020, as required, and the ASU did not have a material impact on its financial statements. Goodwill testing is normally scheduled to be completed during the fourth quarter, but was evaluated quarterly in 2020 in light of the economic impacts of COVID-19. The Company recognized no impairments to goodwill in the second quarter of 2020. See management’s discussion and analysis for further details.
~~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 Early adoption is permitted.	~~The Company has adopted ASU 2018-13, as of January 1, 2020, as required, and the ASU did not have a material impact to the disclosures as a result of the adoption.~~

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~~Standard~~	~~Description~~	Required Date of Adoption	~~Effect on financial statements~~
~~Standards Not Yet Adopted~~2021
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") for financial instruments measured at amortized cost and other commitments to extend ~~credit.~~credit, such as of balance sheet credit exposures (loan comitments, unused line of credit and stand-by letters of credit). The amendments require entities to consider all available relevant information when estimating current expected credit losses, including details about past events, current conditions, and reasonable and supportable forecasts. The resulting allowance for credit losses is to reflect the portion of the 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. 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 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.	January 1, ~~2020~~2022	Adoption of this ASU is expected to 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 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 ~~second~~first quarter focused on the finalization and board approval of the final CECL model, ~~validation, continueing to develop new disclosures and establish~~completed modelling of off-balance sheet credit risks, completed 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,documentation, 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.~~developed and presented revised disclosures for board approval. The ASU was originally effective for the Company beginning in the first quarter of 2020; however, after the The Coronavirus Aid, Relief, and Economic Security Act, or CARES CARES Act Act, was enacted on March 27, 2020, the Securities and Exchange Commission (SEC) staff clarified that once the deferral was elected by a registrant, Dec. 31, 2020, adoption of CECL was required, retrospective to Jan. 1, 2020 (ignoring an early termination of the national emergency). Under the amendments, a registrant electing the delay under the CARES Act ~~issued in 2020 provided~~is further delayed until Jan. 1, 2022, effective as of Jan. 1, 2022 (absent an ~~option to delay the implementation~~early termination of ~~CECL until the earlier of when~~ the national ~~emergency associated with COVID-19 virus terminates~~emergency). With regard to the amendments to Section 4014, the SEC staff indicated it would not object to a registrant early adopting on Dec. 31, 2020, retrospective to Jan. 1, 2020, or ~~December 31, 2020.~~ Jan. 1, 2021, effective as of Jan. 1, 2021. The Company ~~elected to delay the adoption. Had~~adopted CECL ~~been adopted as of~~effective January 1, ~~2020, the Company estimates that the~~2021, which increased its allowance for credit losses ~~would have increased $5.0 to $10.0~~(ACL) by $5.2 million and reserve for unfunded commitments by $1.6 million. Equity was reduced by $5.2 million, net of deferred tax of $1.6 million ~~over~~in the ~~balance reported~~first quarter due to adoption. The coverage ratio of ACL to total loans increased to 0.94% as of March 31, 2021 from 0.76% at December 31, ~~2019.~~2020, excluding PPP loans.

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Standard	Description	Required Date of Adoption	Effect on financial statements
Standards Adopted in 2021
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 isdid not ~~expected to~~ have a material impact on the Company's consolidated financial statements.

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The impact will be reflected in the Company’s annual 10-K disclosures of employee benefit plans.

~~Standard~~

~~Description~~

Required Date
of Adoption

~~Effect on financial statements~~

~~Standards Not Yet Adopted (continued)~~ASU 2020-01, Investments—Equity Securities, Investments Equity Method and Joint Ventures, and Derivatives and Hedging

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

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

December 15, 2020

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

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

This ASU provides temporary optional expedients and exceptions to GAAP guidance on contract modifications and hedge accounting to ease the 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. 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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reference an interest rate affected by reference rate reform.

Rate Reform Elections at March 31, 2021

Adherence to ISDA Fallback Protocol

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

•

Modification related elections

•

Option to not reassess a previous accounting determination (paragraph 848-20-35-4).

•

Hedge accounting related modifications

•

Option to not dedesignate a hedging relationship due to a change in a critical term (paragraph 848-30-25-3).

•

Option to change the contractual terms of a hedging instrument, hedged item, or forecasted transaction and to not dedesignate a hedging relationship (paragraph 848-30-25-5).

Cash flow hedges

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

•

Probability of forecasted transactions: The Company elects the expedient in ASC 848-50-25-2 to assert probability of the hedged interest payments/receipts regardless of any expected modification in terms related to reference rate reform.

•

Assessment of effectiveness: In accordance with ASC 848-30-25-4, ASC 848-30-25-8, and ASC 848-50-35-1 through 35-24 the Company has the option to change the method of assessing effectiveness upon a change in the critical terms of the derivative or the hedged transactions and upon the end of relief under ASC 848. At this time the Company elects to continue the method of assessing effectiveness as documented in the original hedge documentation and elects to apply the expedient in ASC 848-50-35-17 so that the reference rate on the hypothetical derivative matches the reference rate on the hedging instrument. For new hedging relationships designated subsequent to the date of this memorandum, the Company elects to apply the expedient in ASC 848-50-25-11 to assume that the reference rate will not be replaced for the remainder of the hedging relationship.

New hedging activity

The Company makes the same elections for each hedging relationship designated subsequent to March 31, 2021. Any hedging relationship-specific elections beyond the elections noted above will be documented in the respective inception hedge documentation. Subsequent election of optional expedients and exceptions after the March 31, 2021 will be documented in accordance with the elections being made here.

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NOTE 2. SECURITIES AVAILABLE FOR SALE

The following is a summary of securities available for sale:


			Gross		Gross
			Unrealized		Unrealized
(in thousands)	Amortized Cost		Gains		Losses		Fair Value
March 31, 2021
Mortgage-backed securities:
US Government-sponsored enterprises	$	213,049	$	4,860	$	(3,302)	$	214,607
US Government agency		74,293		2,211		(319)		76,185
Private label		47,576		111		(146)		47,541
Obligations of states and political subdivisions thereof		185,985		3,081		(1,203)		187,863
Corporate bonds		99,616		1,560		(969)		100,207
Total securities available for sale	$	620,519	$	11,823	$	(5,939)	$	626,403


			Gross		Gross
			Unrealized		Unrealized
(in thousands)	Amortized Cost		Gains		Losses		Fair Value
December 31, 2020
Mortgage-backed securities:
US Government-sponsored enterprises	$	206,834	$	6,018	$	(462)	$	212,390
US Government agency		82,878		2,870		(116)		85,632
Private label		19,810		40		(141)		19,709
Obligations of states and political subdivisions thereof		164,766		4,244		(6)		169,004
Corporate bonds		97,689		1,465		(843)		98,311
Total securities available for sale	$	571,977	$	14,637	$	(1,568)	$	585,046

Credit Quality Information

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

As of March 31, 2021 the Company carried 0 allowance on available for sale debt securities in accordance with ASU 2016-13.

The amortized cost and estimated fair value of available for sale (“AFS”) securities segregated by contractual maturity at March 31, 2021 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	$	4,776	$	4,848
Over 1 year to 5 years		20,745		20,965
Over 5 years to 10 years		75,062		73,650
Over 10 years		185,018		188,607
Total bonds and obligations		285,601		288,070
Mortgage-backed securities		334,918		338,333
Total securities available for sale	$	620,519	$	626,403

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~~NOTE 2. SECURITIES AVAILABLE FOR SALE~~

~~The following is a summary of securities available for sale:~~

Gross

Gross

Unrealized

Unrealized

(in thousands)

Amortized Cost

Gains

Losses

Fair Value
June 30, 2020








Debt securities:








Mortgage-backed securities:








US Government-sponsored enterprises

$
258,169

$
9,701

$
(426)

$
267,444
US Government agency

94,894

3,845

(84)

98,655
Private label

20,200

41

(874)

19,367
Obligations of states and political subdivisions thereof

153,802

5,514

(29)

159,287
Corporate bonds

98,248

1,141

(2,568)

96,821
Total securities available for sale

$
625,313

$
20,242

$
(3,981)

$
641,574

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 June 30, 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

26,069

26,368
Over 5 years to 10 years

70,676

69,548
Over 10 years

155,305

160,192
Total bonds and obligations

252,050

256,108
Mortgage-backed securities

373,263

385,466
Total securities available for sale

$
625,313

$
641,574

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


	Three Months Ended				Six Months Ended				Three Months Ended
	June 30,				June 30,				March 31,
(In thousands)	2020		2019		2020		2019
(in thousands)									2021		2020
Gross gains on sales of available for sale securities	$	1,362	$	—	$	1,508	$	—	$	—	$	146
Gross losses on sales of available for sale securities		(11)		—		(22)		—		—		(11)
Net gains on sale of available for sale securities	$	1,351	$	—	$	1,486	$	—	$	—	$	135

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


	Less Than Twelve Months				Over Twelve Months				Total
	Gross				Gross				Gross
	Unrealized		Fair		Unrealized		Fair		Unrealized		Fair
(in thousands)	Losses		Value		Losses		Value		Losses		Value
March 31, 2021
Mortgage-backed securities:
US Government-sponsored enterprises	$	3,073	$	96,384	$	229	$	3,803	$	3,302	$	100,187
US Government agency		300		14,716		19		4,204		319		18,920
Private label		2		15,822		144		19,257		146		35,079
Obligations of states and political subdivisions thereof		1,203		56,813		—		—		1,203		56,813
Corporate bonds		128		14,622		841		19,158		969		33,780
Total securities available for sale	$	4,706	$	198,357	$	1,233	$	46,422	$	5,939	$	244,779


	Less Than Twelve Months				Over Twelve Months				Total
	Gross				Gross				Gross
	Unrealized		Fair		Unrealized		Fair		Unrealized		Fair
(in thousands)	Losses		Value		Losses		Value		Losses		Value
December 31, 2020
Mortgage-backed securities:
US Government-sponsored enterprises	$	209	$	40,285	$	253	$	4,323	$	462	$	44,608
US Government agency		45		6,776		71		3,297		116		10,073
Private label		—		—		141		19,514		141		19,514
Obligations of states and political subdivisions thereof		6		5,577		—		—		6		5,577
Corporate bonds		555		21,774		288		11,712		843		33,486
Total securities available for sale	$	815	$	74,412	$	753	$	38,846	$	1,568	$	113,258

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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 March 31, 2021, prior to this recovery. The Company’s ability and intent to hold these securities until recovery is supported by the Company’s strong capital and liquidity positions as well as its historically low portfolio turnover.

The following summarizes, by investment security type, the impact of securities in an unrealized loss position for greater than 12 months at March 31, 2021:

US Government-sponsored enterprises

50 out of the total 556 securities in the Company’s portfolios of AFS US Government-sponsored enterprises were in unrealized loss positions. Aggregate unrealized losses represented 1.55% of the amortized cost of securities in unrealized loss positions. The Federal National Mortgage Association and 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

13 out of the total 158 securities in the Company’s portfolios of AFS US Government agency securities were in unrealized loss positions. Aggregate unrealized losses represented 0.43% of the amortized cost of securities in unrealized loss positions. The Government National Mortgage Association 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

12 of the total 29 securities in the Company’s portfolio of AFS private label mortgage-backed securities were in unrealized loss positions. Aggregate unrealized losses represented 0.31% 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

16 of the total 144 securities in the Company’s portfolio of AFS municipal bonds and obligations were in unrealized loss positions. Aggregate unrealized losses represented 0.65% 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

8 out of the total 33 securities in the Company’s portfolio of AFS corporate bonds were in an unrealized loss position. The aggregate unrealized loss represents 0.97% 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.

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NOTE 3. LOANS AND ALLOWANCE FOR CREDIT LOSSES

Upon adoption of ASC 326 or CECL, at January 1, 2021, the Company evaluates its risk characteristics of loans based on regulatory call report code with segmentation based on the underlying collateral for certain loan types. Prior to the adoption of ASC 326, under the incurred loss model, the Company evaluated its risk characteristics of loans based on purpose of the loans.

The following is a summary of total loans by regulatory call report code segmentation based on underlying collateral for certain loan types:


	March 31,		December 31,
(in thousands)	2021		2020
Commercial construction	$	117,464	$	117,882
Commercial real estate owner occupied		233,847		219,217
Commercial real estate non-owner occupied		733,507		716,776
Tax exempt		46,541		47,862
Commercial and industrial		376,395		355,684
Residential real estate		940,127		995,216
Home equity		93,625		100,096
Consumer other		9,558		10,152
Total loans		2,551,064		2,562,885
Allowance for credit losses		23,653		19,082
Net loans	$	2,527,411	$	2,543,803

Total unamortized net costs and premiums included in loan totals were as follows:


	March 31,		December 31,
(in thousands)	2021		2020
Unamortized net loan origination costs	$	3,774	$	5,157
Unamortized net premium on purchased loans		(82)		(85)
Total unamortized net costs and premiums	$	3,692	$	5,072

The Company elected to exclude accrued interest receivable from the amortized cost basis of loans disclosed throughout this footnote. As of March 31, 2021 and December 31, 2020, accrued interest receivable for loans totaled $11.9 million and $11.4 million, respectively, and is included in the “other assets” line item on the Company’s consolidated balance sheets.

The CARES Act and subsequent legislation established the Payroll Protection Program (“PPP”), administered directly by the Small Business Administration (SBA). The Company has participated in both 2020 and 2021 rounds of funding. As of March 31, 2021 and December 31, 2020, the Company had 1,057 and 746 PPP loans outstanding, with an outstanding principal balance of $77.9 million and $53.8 million, respectively. The increase reflects the 2021 round of funding of 956 PPP loans with and outstanding principal balance of $57.4 million. The PPP loans are fully guaranteed by the SBA and may be eligible for forgiveness by the SBA to the extent that the proceeds are used to cover eligible costs. PPP loans are included in the commercial and industrial portfolio segment.

Characteristics of each loan portfolio segment are as follows:

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

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

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

Commercial and industrial loans - Loans consist of revolving and term loan obligations extended to business and corporate enterprises for the purpose of financing working capital and/or capital investment in this segment. Generally loans are secured by assets of the business such as accounts receivable, inventory, marketable securities, other liquid collateral, equipment and other business assets. Some loans in this category may be unsecured or guaranteed by government agencies such as the SBA. Loans are primarily paid by the operating cash flow of the borrower.

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

Home equity - All loans and lines of credit are made to qualified individuals and are secured by senior or junior mortgage liens on owner-occupied one- to four-family homes, condominiums, or vacation homes. The home equity loan has a fixed rate and is billed as equal payments comprised of principal and interest. The home equity line of credit has a variable rate and is billed as interest-only payments during the draw period. At the end of the draw period, the home equity line of credit is billed as a percentage of the principal balance plus all accrued interest. Borrower qualifications include favorable credit history combined with supportive income requirements and combined loan-to-value ratios within established policy guidelines.

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

Allowance for Credit Losses

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

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

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The Company’s activity in the allowance for credit losses for the periods ended are as follows:


	Three Months Ended March 31, 2021
	Balance at
	Beginning of		Impact of ASC								Balance at
(in thousands)	Period		326		Charge Offs		Recoveries		Provision		End of Period
Commercial construction	$	824	$	1,196	$	—	$	18	$	(246)	$	1,792
Commercial real estate owner occupied		1,783		708		(153)		0		1,014		3,352
Commercial real estate non-owner occupied		7,864		(2,008)		—		4		42		5,902
Tax exempt		58		40		—		—		(4)		94
Commercial and industrial		3,137		2,996		—		1		(1,094)		5,040
Residential real estate		5,010		1,732		(40)		13		(146)		6,569
Home equity		285		603		(22)		11		(54)		823
Consumer other		121		(39)		(1)		1		(1)		81
Total	$	19,082	$	5,228	$	(216)	$	48	$	(489)	$	23,653


	Three Months Ended March 31, 2020
	Balance at
	Beginning of								Balance at
(in thousands)	Period		Charge Offs		Recoveries		Provision		End of Period
Commercial construction	$	317	$	—	$	—	$	78	$	395
Commercial real estate owner occupied		2,368		—		—		(882)		1,486
Commercial real estate non-owner occupied		4,695		(871)		25		1,465		5,314
Tax exempt		67		—		—		(10)		57
Commercial and industrial		3,262		(179)		9		231		3,323
Residential real estate		4,213		(8)		7		79		4,291
Home equity		320		—		—		8		328
Consumer other		111		(153)		3		142		103
Total	$	15,353	$	(1,211)	$	44	$	1,111	$	15,297

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Unfunded Commitments

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


(in thousands)	2021
Balance at December 31, 2020	$	359
Impact of CECL adoption		1,616
Provision for credit losses		(156)
Balance at March 31, 2021	$	1,819


(in thousands)	2020
Balance at December 31, 2019	$	314
Provision for credit losses		45
Balance at December 31, 2020	$	359

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, and 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: 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. 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 the Company 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.

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

Less Than Twelve Months

Over Twelve Months

Total

Gross



Gross



Gross


Unrealized

Fair

Unrealized

Fair

Unrealized

Fair
(In thousands)

Losses

Value

Losses

Value

Losses

Value
June 30, 2020












Debt securities:












Mortgage-backed securities:












US Government-sponsored enterprises

$
187

$
39,157

$
239

$
4,047

$
426

$
43,204
US Government agency

57

5,177

27

1,674

84

6,851
Private label

3

112

871

19,133

874

19,245
Obligations of states and political subdivisions thereof

29

11,564

—

—

29

11,564
Corporate bonds

2,332

45,854

236

4,765

2,568

50,619
Total securities available for sale

$
2,608

$
101,864

$
1,373

$
29,619

$
3,981

$
131,483

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 six months ended June 30, 2020 and 2019 the Company did not record any other-than-temporary impairment (“OTTI”) losses.

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

Three Months Ended

Six Months Ended

June 30,

June 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

—

—

—

—
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 June 30, 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 OTTI at June 30, 2020:~~

~~US Government-sponsored enterprises~~

42 out of the total 618 securities in the Company’s portfolios of AFS US Government-sponsored enterprises were in unrealized loss positions. Aggregate unrealized losses represented 0.98% of the amortized cost of securities in unrealized loss positions. The Federal National Mortgage Association and 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~~

12 out of the total 170 securities in the Company’s portfolios of AFS US Government agency securities were in unrealized loss positions. Aggregate unrealized losses represented 1.21% of the amortized cost of securities in unrealized loss positions. The Government National Mortgage Association 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~~

11 of the total 18 securities in the Company’s portfolio of AFS private label mortgage-backed securities were in unrealized loss positions. Aggregate unrealized losses represented 4.34% 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~~

3 of the total 190 securities in the Company’s portfolio of AFS municipal bonds and obligations were in unrealized loss positions. Aggregate unrealized losses represented 0.25% 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~~

16 out of the total 33 securities in the Company’s portfolio of AFS corporate bonds were in an unrealized loss position. The aggregate unrealized loss represents 4.89% 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~~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 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).

~~The Company’s loan portfolio~~Loss: Loans the Company considers as losses are those considered uncollectible and of such little value that their continuance as an asset is ~~comprised of~~not warranted and 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 loansuncollectible 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 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.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 ~~lending activities are principally conducted in Maine, New Hampshire,~~loans by year of origination, loan segmentation and ~~Vermont.~~risk indicator as of March 31, 2021:

~~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:~~



(in thousands)	2021		2020		2019		2018		2017		Prior		Total
Commercial construction
Risk rating:
Pass	$	1,262	$	61,092	$	29,027	$	26,083	$	—	$	—	$	117,464
Special mention		—		—		—		—		—		—		—
Substandard		—		—		—		—		—		—		—
Total	$	1,262	$	61,092	$	29,027	$	26,083	$	—	$	—	$	117,464

Commercial real estate owner occupied
Risk rating:
Pass	$	915	$	14,931	$	34,446	$	30,661	$	21,587	$	118,206	$	220,746
Special mention		—		—		780		—		—		1,102		1,882
Substandard		—		—		—		262		262		10,319		10,843
Doubtful		—		—		—		188				188		376
Total	$	915	$	14,931	$	35,226	$	31,111	$	21,849	$	129,815	$	233,847

Commercial real estate non-owner occupied
Risk rating:
Pass	$	36,535	$	153,240	$	121,209	$	42,460	$	155,787	$	218,391	$	727,622
Special mention		—		—		—		118		—		1,779		1,897
Substandard		—		—		—		168		168		3,463		3,799
Doubtful		—		—		—		—		—		189		189
Total	$	36,535	$	153,240	$	121,209	$	42,746	$	155,955	$	223,822	$	733,507

Tax exempt
Risk rating:
Pass	$	678	$	1,845	$	1,131	$	14,840	$	5,470	$	22,577	$	46,541
Special mention		—		—		—		—		—		—		—
Substandard		—		—		—		—		—		—		—
Total	$	678	$	1,845	$	1,131	$	14,840	$	5,470	$	22,577	$	46,541

Commercial and industrial
Risk rating:
Pass	$	59,576	$	87,130	$	41,814	$	19,119	$	64,289	$	80,963	$	352,891
Special mention		196		351		844		744		2,683		1,150		5,969
Substandard		—		—		611		15,220		88		1,039		16,958
Doubtful		—		—		—		—		131		445		576
Total	$	59,772	$	87,481	$	43,269	$	35,083	$	67,192	$	83,598	$	376,395
(continued)

June 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

$
60,096

$
2,377

$
62,473

$
31,387

$
2,903

$
34,290
Other commercial real estate

722,949

196,648

919,597

666,051

230,320

896,371
Total commercial real estate

783,045

199,025

982,070

697,438

233,223

930,661

Commercial and industrial:









Commercial

384,390

69,949

454,339

239,692

59,072

298,764
Agricultural

18,026

159

18,185

20,018

206

20,224
Tax exempt

40,593

26,325

66,918

66,860

37,443

104,303
Total commercial and industrial

443,009

96,433

539,442

326,570

96,721

423,291

Total commercial loans

1,226,054

295,458

1,521,512

1,024,008

329,944

1,353,952

Residential real estate:









Residential mortgages

725,450

358,258

1,083,708

740,687

411,170

1,151,857
Total residential real estate

725,450

358,258

1,083,708

740,687

411,170

1,151,857

Consumer:









Home equity

59,413

54,686

114,099

59,368

63,033

122,401
Other consumer

8,685

1,413

10,098

11,167

1,715

12,882
Total consumer

68,098

56,099

124,197

70,535

64,748

135,283

Total loans

$
2,019,602

$
709,815

$
2,729,417

$
1,835,230

$
805,862

$
2,641,092

The carrying amount of the acquired loans at June 30, 2020 totaled $709.8 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, ~~Accounting for Certain Loans or Debt Securities Acquired in a Transfer~~. These purchased credit-impaired loans presently maintain a carrying value of $14.8 million (and total note balances of $18.7 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 $695.0 million as of June 30, 2020.

1826

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 June 30,
(in thousands)

2020

2019
Balance at beginning of period

$
6,839

$
4,150
Reclassification from nonaccretable difference for loans with improved cash flows

370

402
Accretion

(982)

(357)
Balance at end of period

$
6,227

$
4,195

Six Months Ended June 30,
(in thousands)

2020

2019
Balance at beginning of period

$
7,367

$
4,377
Reclassification from nonaccretable difference for loans with improved cash flows

424

624
Accretion

(1,564)

(806)
Balance at end of period

$
6,227

$
4,195

~~The following is a summary of past due loans at June 30, 2020 and December 31, 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
June 30, 2020














Commercial real estate:














Construction and land development

$
—

$
—

$
267

$
267

$
59,829

$
60,096

$
—
Other commercial real estate

1,450

23

720

2,193

720,756

722,949

—
Total commercial real estate

1,450

23

987

2,460

780,585

783,045

—

Commercial and industrial:














Commercial

152

295

646

1,093

383,297

384,390

49
Agricultural

20

—

158

178

17,848

18,026

16
Tax exempt

—

—

—

—

40,593

40,593

—
Total commercial and industrial

172

295

804

1,271

441,738

443,009

65

Total commercial loans

1,622

318

1,791

3,731

1,222,323

1,226,054

65

Residential real estate:














Residential mortgages

320

1,820

1,950

4,090

721,360

725,450

270
Total residential real estate

320

1,820

1,950

4,090

721,360

725,450

270

Consumer:














Home equity

40

153

384

577

58,836

59,413

—
Other consumer

5

—

2

7

8,678

8,685

—
Total consumer

45

153

386

584

67,514

68,098

—

Total loans

$
1,987

$
2,291

$
4,127

$
8,405

$
2,011,197

$
2,019,602

$
335

~~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
June 30, 2020














Commercial real estate:














Construction and land development

$
—

$
—

$
—

$
—

$
269

$
2,377

$
—
Other commercial real estate

113

1,495

960

2,568

6,993

196,648

298
Total commercial real estate

113

1,495

960

2,568

7,262

199,025

298

Commercial and industrial:














Commercial

48

97

409

554

1,821

69,949

387
Agricultural

—

—

—

—

159

159

—
Tax exempt

—

—

—

—

—

26,325

—
Total commercial and industrial

48

97

409

554

1,980

96,433

387

Total commercial loans

161

1,592

1,369

3,122

9,242

295,458

685

Residential real estate:













Residential mortgages

433

530

1,033

1,996

4,715

358,258

60
Total residential real estate

433

530

1,033

1,996

4,715

358,258

60

Consumer:














Home equity

273

369

285

927

766

54,686

25
Other consumer

—

—

—

—

47

1,413

—
Total consumer

273

369

285

927

813

56,099

25

Total loans

$
867

$
2,491

$
2,687

$
6,045

$
14,770

$
709,815

$
770

~~Table of Contents~~







(in thousands)	2021		2020		2019		2018		2017		Prior		Total
Residential real estate
Performing	$	36,563	$	132,520	$	114,920	$	86,017	$	85,719	$	475,246	$	930,985
Nonperforming		—		—		—		299		274		8,569		9,142
Total	$	36,563	$	132,520	$	114,920	$	86,316	$	85,993	$	483,815	$	940,127

Home equity
Performing	$	2,137	$	11,009	$	11,783	$	8,800	$	8,118	$	50,434	$	92,281
Nonperforming		—		—		—		—		65		1,279		1,344
Total	$	2,137	$	11,009	$	11,783	$	8,800	$	8,183	$	51,713	$	93,625

Consumer other
Performing	$	1,030	$	2,928	$	1,552	$	1,013	$	420	$	2,605	$	9,548
Nonperforming		—		—		—		—		—		10		10
Total	$	1,030	$	2,928	$	1,552	$	1,013	$	420	$	2,615	$	9,558

Total Loans	$	138,893	$	465,046	$	358,117	$	245,992	$	345,062	$	997,954	$	2,551,064

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


	December 31, 2020
	Commercial		Commercial		Residential
	Real Estate		and Industrial		Real Estate		Consumer		Total
Grade:
Pass	$	1,053,773	$	422,016	$	—	$	—	$	1,475,789
Performing		—		—		914,749		112,190		1,026,939
Special mention		6,075		2,771		—		—		8,846
Substandard		22,267		15,180		—		—		37,447
Doubtful		2,265		1,100		—		—		3,365
Loss		1		2		—		—		3
Non-performing		—		—		9,142		1,354		10,496
Total	$	1,084,381	$	441,069	$	923,891	$	113,544	$	2,562,885

~~Business Activities Loans~~Past Dues

`

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

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


	March 31, 2021
(in thousands)	30-59		60-89		90+		Total Past Due		Current		Total Loans
Commercial construction	$	—	$	—	$	—	$	—	$	117,464	$	117,464
Commercial real estate owner occupied		10		—		331		341		233,506		233,847
Commercial real estate non-owner occupied		644		179		317		1,140		732,367		733,507
Tax exempt		—		—		—		—		46,541		46,541
Commercial and industrial		364		—		399		763		375,632		376,395
Residential real estate		7,815		1,345		3,194		12,354		927,773		940,127
Home equity		399		198		429		1,026		92,599		93,625
Consumer other		4		—		100		104		9,454		9,558
Total	$	9,236	$	1,722	$	4,770	$	15,728	$	2,535,336	$	2,551,064

2127

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

~~Table of Contents~~


	December 31, 2020
(in thousands)	30-59		60-89		90+		Total Past Due		Current		Total Loans
Commercial construction	$	74	$	—	$	1	$	75	$	117,807	$	117,882
Commercial real estate owner occupied		1,309		464		438		2,211		217,006		219,217
Commercial real estate non-owner occupied		503		674		624		1,801		714,975		716,776
Tax exempt		—		—		—		—		47,862		47,862
Commercial and industrial		161		—		193		354		355,330		355,684
Residential real estate		9,178		2,511		3,200		14,889		980,327		995,216
Home equity		1,062		614		375		2,051		98,045		100,096
Consumer other		20		—		2		22		10,130		10,152
Total	$	12,307	$	4,263	$	4,833	$	21,403	$	2,541,482	$	2,562,885

Non-Accrual Loans

The following is a summary ~~information pertaining to~~of non-accrual loans ~~at June 30, 2020 and December 31, 2019:~~for the periods ended:

June 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

$
267

$
—

$
267

$
258

$
—

$
258
Other commercial real estate

1,487

2,227

3,714

2,888

343

3,231
Total commercial real estate

1,754

2,227

3,981

3,146

343

3,489

Commercial and industrial:












Commercial

803

459

1,262

932

626

1,558
Agricultural

528

—

528

278

—

278
Tax exempt

—

—

—

—

—

—
Total commercial and industrial

1,331

459

1,790

1,210

626

1,836

Total commercial loans

3,085

2,686

5,771

4,356

969

5,325

Residential real estate:












Residential mortgages

4,041

3,153

7,194

3,362

1,973

5,335
Total residential real estate

4,041

3,153

7,194

3,362

1,973

5,335

Consumer:












Home equity

618

388

1,006

615

254

869
Other consumer

17

—

17

21

—

21
Total consumer

635

388

1,023

636

254

890

Total loans

$
7,761

$
6,227

$
13,988

$
8,354

$
3,196

$
11,550


	March 31, 2021
			Nonaccrual With No		90+ Days Past
(in thousands)	Nonaccrual		Related Allowance		Due and Accruing
Commercial construction	$	—	$	—	$	—
Commercial real estate owner occupied		1,576		895		—
Commercial real estate non-owner occupied		930		742		50
Tax exempt		—		—		—
Commercial and industrial		1,067		641		15
Residential real estate		9,142		3,405		24
Home equity		1,344		352		—
Consumer other		10		—		100
Total	$	14,069	$	6,035	$	189


	December 31, 2020
			Nonaccrual With No		90+ Days Past
(in thousands)	Nonaccrual		Related Allowance		Due and Accruing
Commercial construction	$	258	$	—	$	—
Commercial real estate owner occupied		2,400		929		—
Commercial real estate non-owner occupied		383		118		—
Tax exempt		—		—		—
Commercial and industrial		1,223		1,065		—
Residential real estate		5,883		4,948		—
Home equity		1,345		1,346		267
Consumer other		58		58		—
Total	$	11,550	$	8,464	$	267

2328

Table of Contents

Collateral Dependent Loans

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

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


	March 31, 2021				December 31, 2020
(in thousands)	Real Estate		Other		Real Estate		Other
Commercial construction	$	—	$	—	$	259	$	—
Commercial real estate owner occupied		1,576		—		3,441		—
Commercial real estate non-owner occupied		930		—		383		—
Tax exempt		—		—		—		—
Commercial and industrial		564		503		625		607
Residential real estate		9,142		—		7,432		—
Home equity		1,344		—		1,493		—
Consumer other		10		—		60		—
Total	$	13,566	$	503	$	13,693	$	607

Pre Adoption of ASC 326 – Impaired Loans

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

Table of Contents

~~Loans evaluated for impairment as~~The tables reflects the activity associated with impaired loans in 2020 prior to the adoption of ~~June 30, 2020 and December 31, 2019 are, as follows:~~CECL.

~~Business Activities Loans~~

Commercial

Commercial

Residential

(in thousands)

real estate

and industrial

real estate

Consumer

Total
June 30, 2020










Balance at end of period










Individually evaluated for impairment

$
2,482

$
1,049

$
2,396

$
13

$
5,940
Collectively evaluated

780,563

441,960

723,054

68,085

2,013,662
Total

$
783,045

$
443,009

$
725,450

$
68,098

$
2,019,602

~~Acquired Loans~~

Commercial

Commercial

Residential




(in thousands)

real estate

and industrial

real estate

Consumer

Total
June 30, 2020










Balance at end of period










Individually evaluated for impairment

$
2,402

$
356

$
925

$
—

$
3,683
Purchased credit impaired

7,262

1,980

4,715

813

14,770
Collectively evaluated

189,361

94,097

352,618

55,286

691,362
Total

$
199,025

$
96,433

$
358,258

$
56,099

$
709,815

~~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

~~Table of Contents~~

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


	December 31, 2020
	Recorded		Unpaid Principal		Related		Average Recorded		Interest
(in thousands)	Investment		Balance		Allowance		Investment		Income Recognized
With no related allowance:
Construction and land development	$	—	$	—	$	—	$	—	$	—
Other commercial real estate		2,001		2,047		—		1,610		—
Commercial		1,095		1,254		—		1,140		4
Agricultural		361		150		—		114		2
Tax exempt loans		—		—		—		—		—
Residential real estate		2,745		3,165		—		1,077		17
Home equity		—		—		—		—		—
Other consumer		—		—		—		—		—

With an allowance recorded:
Construction and land development		258		258		205		203		—
Other commercial real estate		1,963		2,108		1,038		1,973		17
Commercial		282		289		164		73		—
Agricultural		—		—		—		—		—
Tax exempt loans		—		—		—		—		—
Residential real estate		887		944		106		1,865		37
Home equity		13		13		—		12		1
Other consumer		—		—		—		—		—

Total
Commercial real estate		4,222		4,413		1,243		3,786		17
Commercial and industrial		1,738		1,693		164		1,327		6
Residential real estate		3,632		4,109		106		2,942		54
Consumer		13		13		—		12		1
Total impaired loans	$	9,605	$	10,228	$	1,513	$	8,067	$	78

~~Business Activities Loans~~

June 30, 2020


Recorded

Unpaid Principal

Related
(in thousands)

Investment

Balance

Allowance
With no related allowance:






Construction and land development

$
—

$
—

$
—
Other commercial real estate

1,344

1,449

—
Commercial

625

714

—
Agricultural

290

428

—
Tax exempt loans

—

—

—
Residential real estate

1,875

2,036

—
Home equity

—

—

—
Other consumer

—

—

—

With an allowance recorded:






Construction and land development

267

265

213
Other commercial real estate

871

924

474
Commercial

134

134

18
Agricultural

—

—

—
Tax exempt loans

—

—

—
Residential real estate

521

587

60
Home equity

13

13

1
Other consumer

—

—

—

Total






Commercial real estate

2,482

2,638

687
Commercial and industrial

1,049

1,276

18
Residential real estate

2,396

2,623

60
Consumer

13

13

1
Total impaired loans

$
5,940

$
6,550

$
766

~~Table of Contents~~

~~Acquired Loans~~

June 30, 2020


Recorded

Unpaid Principal

Related
(in thousands)

Investment

Balance

  Allowance
With no related allowance:






Construction and land development

$
—

$
—

$
—
Other commercial real estate

1,518

1,525

—
Commercial

284

373

—
Agricultural

—

—

—
Tax exempt loans

—

—

—
Residential real estate

401

590

—
Home equity

—

—

—
Other consumer

—

—

—

With an allowance recorded:






Construction and land development

—

—

—
Other commercial real estate

884

907

365
Commercial

72

74

9
Agricultural

—

—

—
Tax exempt loans

—

—

—
Residential real estate

524

707

67
Home equity

—

—

—
Other consumer

—

—

—

Total






Commercial real estate

2,402

2,432

365
Commercial and industrial

356

447

9
Residential real estate

925

1,297

67
Consumer

—

—

—
Total impaired loans

$
3,683

$
4,176

$
441

~~Table of Contents~~

~~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

261

—
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

~~Table of Contents~~

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

~~Business Activities Loans~~

Three Months Ended June 30, 2020

Three Months Ended June 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

1,347

3

7,499

20
Commercial

652

1

940

2
Agricultural

382

—

—

—
Tax exempt loans

—

—

—

—
Residential real estate

1,875

4

2,104

16
Home equity

—

—

—

—
Other consumer

—

—

—

—

With an allowance recorded:








Construction and land development

265

—

1

—
Other commercial real estate

871

—

1,396

—
Commercial

134

—

412

—
Agricultural

—

—

—

—
Tax exempt loans

—

—

—

—
Residential real estate

546

—

572

3
Home equity

13

—

13

—
Other consumer

—

—

—

—

Total








Commercial real estate

2,483

3

8,896

20
Commercial and industrial

1,168

1

1,352

2
Residential real estate

2,421

4

2,676

19
Consumer

13

—

13

—
Total impaired loans

$
6,085

$
8

$
12,937

$
41

~~Table of Contents~~

~~Business Activities Loans~~

Six Months Ended June 30, 2020

Six Months Ended June 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

1,286

6

7,219

46
Commercial

657

2

931

4
Agricultural

406

—

—

—
Tax exempt loans

—

—

—

—
Residential real estate

1,880

16

2,113

31
Home equity

—

—

—

—
Other consumer

—

—

—

—

With an allowance recorded:








Construction and land development

264

—

3

—
Other commercial real estate

874

—

1,497

—
Commercial

134

—

417

—
Agricultural

—

—

—

—
Tax exempt loans

—

—

—

—
Residential real estate

547

2

534

5
Home equity

13

—

13

—
Other consumer

—

—

—

—

Total








Commercial real estate

2,424

6

8,719

46
Commercial and industrial

1,197

2

1,348

4
Residential real estate

2,427

18

2,647

36
Consumer

13

—

13

—
Total impaired loans

$
6,061

$
26

$
12,727

$
86

~~Table of Contents~~

~~Acquired Loans~~

Three Months Ended June 30, 2020

Three Months Ended June 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

1,527

—

187

—
Commercial

295

—

412

—
Agricultural

—

—

—

—
Tax exempt loans

—

—

—

—
Residential real estate

446

—

426

—
Home equity

—

—

—

—
Other consumer

—

—

—

—

With an allowance recorded:








Construction and land development

—

—

—

—
Other commercial real estate

906

3

71

—
Commercial

75

—

—

—
Agricultural

—

—

—

—
Tax exempt loans

—

—

—

—
Residential real estate

596

—

363

—
Home equity

—

—

—

—
Other consumer

—

—

—

—

Total








Commercial real estate

2,433

3

258

—
Commercial and industrial

370

—

412

—
Residential real estate

1,042

—

789

—
Consumer

—

—

—

—
Total impaired loans

$
3,845

$
3

$
1,459

$
—

~~Table of Contents~~

~~Acquired Loans~~

Six Months Ended June 30, 2020

Six Months Ended June 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

763

—

157

—
Commercial

345

—

446

—
Agricultural

—

—

—

—
Tax exempt loans

—

—

—

—
Residential real estate

456

—

431

—
Home equity

—

—

—

—
Other consumer

—

—

—

—

With an allowance recorded:








Construction and land development

—

—

—

—
Other commercial real estate

663

3

36

—
Commercial

80

—

—

—
Agricultural

—

—

—

—
Tax exempt loans

—

—

—

—
Residential real estate

601

—

365

—
Home equity

—

—

—

—
Other consumer

—

—

—

—

Total








Commercial real estate

1,426

3

193

—
Commercial and industrial

425

—

446

—
Residential real estate

1,057

—

796

—
Consumer

—

—

—

—
Total impaired loans

$
2,908

$
3

$
1,435

$
—

~~Table of Contents~~

Troubled Debt Restructuring Loans

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

The following tables include the recorded investment and number of modifications identified during the ~~three and six months ended June 30, 2020 and 2019, respectively.~~periods ended. The table includes the recorded investment in the loans prior to a modification and also the recorded investment in the loans after the loans were restructured. Modifications may include adjustments to interest rates, payment amounts, extensions of maturity, court ordered concessions or other actions intended to minimize economic loss and avoid ~~foreclosure or repossession of collateral. There were 0 modifactions qualifying as TDR’s for the three months ended June 30, 2020.~~

The following tables include the recorded investment and number of modifications identified during the three and six months ended June 30, 2020 and 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. There were no modifications qualifying as TDR’s for the three months ended June 30, 2020.

Three Months Ended June 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

2

186

177
Commercial

1

12

12
Residential mortgages

2

152

116
Total

5

$
350

$
305

Six Months Ended June 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

$
252
Other commercial

3

41

196
Home equity

1

26

25
Other consumer

1

9

9
Total

6

$
130

$
482

Six Months Ended June 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

5

$
299

$
290
Other commercial

3

43

43
Residential mortgages

8

682

644
Total

16

$
1,024

$
977

~~Table of Contents~~

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

Three Months Ended June 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 and maturity concession

—

$
—

1

$
70
Forbearance and interest only payments

—

—

2

131
Forbearance and maturity concession

—

—

1

46
Other

—

—

1

58
Total

—

$
—

5

$
305

Six Months Ended June 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 rate and maturity concession

—

$
—

—

$
—
Interest only payments and maturity concession

—

—

2

75
Interest rate, forbearance and maturity concession

4

448

—

—
Amortization and maturity concession

—

—

4

275
Forbearance

—

—

1

77
Forbearance and interest only payments

1

25

4

243
Forbearance and maturity concession

—

—

4

249
Maturity concession

1

9

—

—
Other

—

—

1

58
Total

6

$
482

16

$
977

~~For the three and six months ended June~~ 30 2020, there were 0 loans that were restructured that had subsequently defaulted during the period. The evaluation of certain loans individually for specific impairment includes loans that were previously classified as TDRs or continue to be classified as TDRs.

~~Modifications in response to COVID-19~~

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

~~Foreclosure~~

As of June 30, 2020 and December 31, 2019, the Company maintained bank-owned residential real estate with a fair value of $2.3 million. Additionally, residential mortgage loans collateralized by real estate that are in the process of foreclosure as of June 30, 2020 and December 31, 2019 totaled $537 thousand and $810 thousand, respectively.

~~Table of Contents~~

~~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 six months ended June 30, 2020 and 2019, included in other assets, was as follows:~~

At or for the Three Months Ended June 30,

At or for the Six Months Ended June 30,
(in thousands)

2020

2019

2020

2019
Balance at beginning of year

$
2,939

$
3,025

$
3,001

$
3,086
Acquired

—

—

—

—
Additions

164

51

253

107
Amortization

(192)

(135)

(343)

(252)
Balance at end of year

$
2,911

$
2,941

$
2,911

$
2,941

~~Total residential loans included held for sale loans of $23.0 million and $6.5 million at June 30, 2020 and December 31, 2019, respectively.~~

~~Table of Contents~~

~~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 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 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.

~~Table of Contents~~

~~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 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 six months ended June 30, 2020 and 2019 are, as follows:~~

Business Activities Loans

At or for the Three Months Ended June 30, 2020


Commercial

Commercial

Residential




(in thousands)

real estate

and industrial

real estate

Consumer

Total
Balance at beginning of period

$
7,661

$
3,543

$
3,513

$
384

$
15,101
Charged-off loans

—

(153)

(21)

(35)

(209)
Recoveries on charged-off loans

71

1

—

2

74
Provision (release) for loan losses

684

(150)

453

25

1,012
Balance at end of period

$
8,416

$
3,241

$
3,945

$
376

$
15,978
Individually evaluated for impairment

687

18

60

1

766
Collectively evaluated

7,729

3,223

3,885

375

15,212
Total

$
8,416

$
3,241

$
3,945

$
376

$
15,978

Business Activities Loans

At or for the Six Months Ended June 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

(771)

(304)

(21)

(185)

(1,281)
Recoveries on charged-off loans

78

1

—

2

81
Provision (release) for loan losses

1,441

(64)

564

180

2,121
Balance at end of period

$
8,416

$
3,241

$
3,945

$
376

$
15,978
Individually evaluated for impairment

687

18

60

1

766
Collectively evaluated

7,729

3,223

3,885

375

15,212
Total

$
8,416

$
3,241

$
3,945

$
376

$
15,978

Acquired Loans

At or for the Three Months Ended June 30, 2020


Commercial

Commercial

Residential




(in thousands)

real estate

and industrial

real estate

Consumer

Total
Balance at beginning of period

$
64

$
3

$
129

$
—

$
196
Charged-off loans

—

(3)

(3)

(5)

(11)
Recoveries on charged-off loans

—

—

4

—

4
Provision (release) for loan losses

337

12

(12)

5

342
Balance at end of period

$
401

$
12

$
118

$
—

$
531
Individually evaluated for impairment

365

9

67

—

441
Collectively evaluated

36

3

51

—

90
Total

$
401

$
12

$
118

$
—

$
531

~~Table of Contents~~

Acquired Loans

At or for the Six Months Ended June 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)

(33)

(11)

(6)

(151)
Recoveries on charged-off loans

18

9

11

4

42
Provision (release) for loan losses

337

30

(25)

2

344
Balance at end of period

$
401

$
12

$
118

$
—

$
531
Individually evaluated for impairment

365

9

67

—

441
Collectively evaluated

36

3

51

—

90
Total

$
401

$
12

$
118

$
—

$
531

Business Activities Loans

At or for the Three Months Ended June 30, 2019


Commercial

Commercial

Residential




(in thousands)

real estate

and industrial

real estate

Consumer

Total
Balance at beginning of period

$
6,575

$
2,778

$
3,953

$
396

$
13,702
Charged-off loans

—

(13)

—

(22)

(35)
Recoveries on charged-off loans

114

1

—

2

117
Provision (release) for loan losses

517

(18)

(11)

18

506
Balance at end of period

$
7,206

$
2,748

$
3,942

$
394

$
14,290
Individually evaluated for impairment

449

39

75

1

564
Collectively evaluated

6,757

2,709

3,867

393

13,726
Total

$
7,206

$
2,748

$
3,942

$
394

$
14,290

Business Activities Loans

At or for the Six Months Ended June 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)

—

(75)

(145)
Recoveries on charged-off loans

130

1

18

6

155
Provision (release) for loan losses

322

380

(58)

55

699
Balance at end of period

$
7,206

$
2,748

$
3,942

$
394

$
14,290
Individually evaluated for impairment

449

39

75

1

564
Collectively evaluated

6,757

2,709

3,867

393

13,726
Total

$
7,206

$
2,748

$
3,942

$
394

$
14,290

Acquired Loans

At or for the Three Months Ended June 30, 2019


Commercial

Commercial

Residential




(in thousands)

real estate

and industrial

real estate

Consumer

Total
Balance at beginning of period

$
161

$
29

$
105

$
—

$
295
Charged-off loans

—

—

(65)

(4)

(69)
Recoveries on charged-off loans

—

—

—

—

—
Provision (release) for loan losses

(2)

(7)

61

4

56
Balance at end of period

$
159

$
22

$
101

$
—

$
282
Individually evaluated for impairment

12

—

35

—

47
Collectively evaluated

147

22

66

—

235
Total

$
159

$
22

$
101

$
—

$
282

~~Table of Contents~~

Acquired Loans

At or for the Six Months Ended June 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)

(170)

(5)

(190)
Recoveries on charged-off loans

—

—

—

—

—
Provision (releases) for loan losses

(14)

2

194

5

187
Balance at end of period

$
159

$
22

$
101

$
—

$
282
Individually evaluated for impairment

12

—

35

—

47
Collectively evaluated

147

22

66

—

235
Total

$
159

$
22

$
101

$
—

$
282

~~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 the Company 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

~~Table of Contents~~

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 June 30, 2020 and December 31, 2019:~~

~~Business Activities Loans~~

~~Commercial Real Estate~~

Commercial construction

and land development

Commercial real estate other

Total commercial real estate
(in thousands)

Jun 30, 2020

Dec 31, 2019

Jun 30, 2020

Dec 31, 2019

Jun 30, 2020

Dec 31, 2019
Grade:













Pass

$
59,829

$
31,057

$
699,720

$
646,886

$
759,549

$
677,943
Special mention

—

—

9,011

5,483

9,011

5,483
Substandard

—

330

13,257

11,974

13,257

12,304
Doubtful

267

—

961

1,708

1,228

1,708
Total

$
60,096

$
31,387

$
722,949

$
666,051

$
783,045

$
697,438

~~Acquired Loans~~

~~Commercial Real Estate~~

Commercial construction

and land development

Commercial real estate other

Total commercial real estate
(in thousands)

Jun 30, 2020

Dec 31, 2019

Jun 30, 2020

Dec 31, 2019

Jun 30, 2020

Dec 31, 2019
Grade:













Pass

$
2,014

$
2,412

$
185,970

$
218,491

$
187,984

$
220,903
Special mention

—

12

1,499

2,261

1,499

2,273
Substandard

363

479

7,617

9,400

7,980

9,879
Doubtful

—

—

1,562

168

1,562

168
Total

$
2,377

$
2,903

$
196,648

$
230,320

$
199,025

$
233,223

~~Business Activities Loans~~

~~Commercial and Industrial~~

Commercial

Agricultural

Tax exempt loans

Total commercial
and industrial
(in thousands)

Jun 30, 2020

Dec 31, 2019

Jun 30, 2020

Dec 31, 2019

Jun 30, 2020

Dec 31, 2019

Jun 30, 2020

Dec 31, 2019
Grade:

















Pass

$
366,761

$
221,329

$
17,138

$
18,940

$
40,593

$
66,860

$
424,492

$
307,129
Special mention

3,544

2,744

219

298

—

—

3,763

3,042
Substandard

13,363

14,866

444

780

—

—

13,807

15,646
Doubtful

722

753

225

—

—

—

947

753
Total

$
384,390

$
239,692

$
18,026

$
20,018

$
40,593

$
66,860

$
443,009

$
326,570

Table of Contents

~~Acquired Loans~~

~~Commercial and Industrial~~foreclosure or repossession of collateral. There were 0 modifications qualifying as TDR’s for the three months ended March 31, 2021.

Commercial

Agricultural

Tax exempt loans

Total commercial
and industrial
(in thousands)

Jun 30, 2020

Dec 31, 2019

Jun 30, 2020

Dec 31, 2019

Jun 30, 2020

Dec 31, 2019

Jun 30, 2020

Dec 31, 2019
Grade:

















Pass

$
67,501

$
51,184

$
23

$
58

$
26,325

$
37,407

$
93,849

$
88,649
Special mention

831

5,432

—

—

—

—

831

5,432
Substandard

1,047

2,115

136

148

—

36

1,183

2,299
Doubtful

570

341

—

—

—

—

570

341
Total

$
69,949

$
59,072

$
159

$
206

$
26,325

$
37,443

$
96,433

$
96,721


	March 31, 2021
		Pre-Modification		Post-Modification
	Number of	Outstanding		Outstanding
(in thousands)	Modifications	Balance		Balance		Reserve
Commercial construction	—	$	—	$	—	$	—
Commercial real estate owner occupied	—		—		—		—
Commercial real estate non-owner occupied	—		—		—		—
Tax exempt	—		—		—		—
Commercial and industrial	—		—		—		—
Residential real estate	—		—		—		—
Home equity	—		—		—		—
Consumer other	—		—		—		—
Total	—	$	—	$	—	$	—

~~Business Activities Loans~~

~~Residential Real Estate and Consumer Loans~~


	Three Months Ended March 31, 2020
		Pre-Modification		Post-Modification
	Number of	Outstanding		Outstanding
(in thousands)	Modifications	Balance		Balance		Reserve
Commercial construction	—	$	—	$	—	$	—
Commercial real estate owner occupied	—		—		—		—
Commercial real estate non-owner occupied	1		54		259		—
Tax exempt	—		—		—		—
Commercial and industrial	3		41		208		—
Residential real estate	—		—		—		—
Home equity	1		26		25		—
Consumer other	1		9		9		—
Total	6	$	130	$	501	$	—

Residential real estate

Home equity

Other consumer

Total residential real estate and consumer
(in thousands)

Jun 30, 2020

Dec 31, 2019

Jun 30, 2020

Dec 31, 2019

Jun 30, 2020

Dec 31, 2019

Jun 30, 2020

Dec 31, 2019
Performing

$
721,409

$
737,325

$
58,795

$
58,753

$
8,668

$
11,146

$
788,872

$
807,224
Nonperforming

4,041

3,362

618

615

17

21

4,676

3,998
Total

$
725,450

$
740,687

$
59,413

$
59,368

$
8,685

$
11,167

$
793,548

$
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)

Jun 30, 2020

Dec 31, 2019

Jun 30, 2020

Dec 31, 2019

Jun 30, 2020

Dec 31, 2019

Jun 30, 2020

Dec 31, 2019
Performing

$
353,736

$
407,811

$
54,101

$
62,504

$
1,413

$
1,707

$
409,250

$
472,022
Nonperforming

4,522

3,359

585

529

—

8

5,107

3,896
Total

$
358,258

$
411,170

$
54,686

$
63,033

$
1,413

$
1,715

$
414,357

$
475,918

The following ~~table summarizes total~~tables summarize the types of loan concessions made for the periods presented:


	March 31, 2021			March 31, 2020
		Post-Modification			Post-Modification
	Number of	Outstanding		Number of	Outstanding
(in thousands)	Modifications	Balance		Modifications	Balance
Interest rate, forbearance and maturity concession	—	$	—	4	$	467
Forbearance and interest only payments	—		—	1		25
Maturity concession	—		—	1		9
Total	—	$	—	6	$	501

For the three ended March 31, 2021 there were 0 loans that were restructured that had subsequently defaulted during the period. The evaluation of certain loans individually for specific impairment includes loans that were previously classified ~~and criticized~~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 in December 31, 2020 10-K for more information.

Foreclosure

Residential mortgage loans collateralized by real estate that are in the process of foreclosure as of ~~June 30, 2020~~March 31, 2021 and December 31, ~~2019:~~2020 totaled $343 thousand and $917 thousand, respectively.

Table of Contents

Mortgage Banking

The Company had identified and designated loans with an unpaid principal balance of $10.1 million and $23.7 million as residential loans held for sale at March 31, 2021 and December 31, 2020, respectively. The interest rate exposure on loans held for sale are mitigated through forward delivery commitments with certain approved secondary market investors. Forward delivery commitments were $31.3 million, and $50.6 million, respectively. Refer to Note 8 for further discussion of the Company's forward delivery commitments.

June 30, 2020

December 31, 2019

Business

Business

(in thousands)

Activities Loans

Acquired Loans

Total

Activities Loans

Acquired Loans

Total
Non-accrual

$
7,761

$
6,227

$
13,988

$
8,354

$
3,196

$
11,550
Substandard accruing

26,154

10,175

36,329

26,055

13,387

39,442
Total classified

33,915

16,402

50,317

34,409

16,583

50,992
Special mention

12,774

2,330

15,104

8,525

7,705

16,230
Total Criticized

$
46,689

$
18,732

$
65,421

$
42,934

$
24,288

$
67,222

For the periods ended March 31, 2021 and December 31, 2020, the Company sold $69.2 million and $70.4 million, respectively, of residential mortgage loans on the secondary market, which resulted in a net gain on sale of loans (net of costs, including direct and indirect origination costs) of $1.9 million and $2.2 million, respectively.

The Company sells residential loans on the secondary market with the Company primarily retaining the servicing of these loans. Servicing sold loans helps to maintain customer relationships and the Company earns fees over the servicing period. Loans serviced for others are not included in the accompanying consolidated balance sheets. The risks inherent in servicing assets relate primarily to level of prepayments that result from shifts in interest rates. The Company obtains third party valuations of its servicing assets portfolio quarterly, which assumptions are reflected in Fair Value disclosures.

4132

Table of Contents

NOTE 5.4. BORROWED FUNDS

Borrowed funds at ~~June 30, 2020~~March 31, 2021 and December 31, ~~2019~~2020 are summarized, as follows:


	June 30, 2020				December 31, 2019				March 31, 2021				December 31, 2020
			Weighted				Weighted				Weighted				Weighted
(dollars in thousands)	Carrying Value		Average Rate		Carrying Value		Average Rate		Carrying Value		Average Rate		Carrying Value		Average Rate
Short-term borrowings
Advances from the FHLB	$	194,169	0.84	%	$	303,286	1.83	%	$	85,329	0.51	%	$	65,676	1.19	%
Other borrowings		33,846	0.68			44,832	0.99			24,276	0.16			27,779	0.15
Total short-term borrowings		228,015	0.75			348,118	1.73			109,605	0.26			93,455	0.44
Long-term borrowings
Advances from the FHLB		187,612	1.73			123,278	1.93			182,605	1.73			182,607	1.73
Advances from the FRB PPPLF		131,236	0.34			—	—
Subordinated borrowings		59,879	4.54			59,920	5.53			60,003	4.45			59,961	4.34
Total long-term borrowings		378,727	2.58			183,198	2.87			242,608	2.40			242,568	2.37
Total	$	606,742	1.66	%	$	531,316	2.11	%	$	352,213	1.20	%	$	336,023	1.41	%

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 0 outstanding balance on the FHLB line of credit for the periods ended ~~June 30, 2020~~March 31, 2021 and December 31, ~~2019.~~2020.

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 ~~June 30, 2020,~~March 31, 2021, the Company’s available secured line of credit at the FRB was ~~$82.4~~$73.8 million. The Company has pledged certain loans and securities to the FRB to support this arrangement. There were 0 outstanding advances with the FRB for the periods ended ~~June 30, 2020 and~~March 31, 2021 December 31, ~~2019.~~

~~In the second quarter 2020, the FRB provided a Paycheck Protection Program Lending Facility (“PPPLF”) that the Company used to fund most of its PPP loans totaling $131.2 million as of June 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 $50.0 million as of ~~June 30, 2020~~March 31, 2021 and December 31, ~~2019.~~2020. There was 0 outstanding balance on the line of credit as of ~~June 30, 2020~~March 31, 2021 and December 31, ~~2019.~~2020.

Long-term FHLB advances consist of advances with a maturity of more than one year. The advances outstanding at ~~June 30, 2020~~March 31, 2021 include callable advances of $20.0 million and amortizing advances of $305 thousand. The advances outstanding at December 31, ~~2019 include 0~~2020 included $20.0 million of callable advances and ~~$312 thousand~~$307 million of amortizing advances. 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 ~~June 30, 2020~~March 31, 2021 is, as follows:


	June 30, 2020				March 31, 2021
			Weighted Average				Weighted Average
(in thousands, except rates)	Carrying Value		Rate		Amount		Rate
Fixed rate advances maturing:
2020	$	158,500	0.65	%
2021		40,669	1.67		$	85,329	0.51	%
2022		75,000	1.87			75,000	1.87
2023		80,000	1.77			80,000	1.77
2024		7,300	1.16			7,300	1.16
2025 and thereafter		20,312	1.23
2025						20,000	1.21
2026 and thereafter						305	1.79
Total FHLB advances	$	381,781	1.27	%	$	267,934	1.34	%

~~Table of Contents~~

On November 26, 2019, the Company executed a Subordinated Note Purchase Agreement with an aggregate of $40.0 million of subordinated notes (the "Notes") to accredited investors. The Notes have a maturity date of December 1, 2029 and bear a fixed interest rate of 4.625% through December 1, 2024 payable semi-annually in arrears. From December 1,

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2024 and thereafter the interest rate shall be reset quarterly to an interest rate per annum equal to the then current three-month SOFR plus 3.27%. The Company has the option beginning with the interest payment date of December 1, 2024, and on any scheduled payment date thereafter, to redeem the Notes, in whole or in part upon prior approval of the Federal Reserve. Netted with subordinated borrowings is amortized subordinated debt issuance costs of ~~$741~~$617 thousand as of ~~June 30,~~March 31, 2021 and issuance costs of $659 thousand net of amortization as of December 31, 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, 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 6.5. DEPOSITS

A summary of time deposits is, as follows:


(in thousands)	June 30, 2020		December 31, 2019		March 31, 2021		December 31, 2020
Time less than $100,000	$	378,100	$	600,747	$	309,408	$	325,646
Time $100,000 through $250,000		182,727		225,505		201,996		278,940
Time $250,000 or more		117,299		106,383		127,032		93,775
Total time deposits	$	678,126	$	932,635
Total					$	638,436	$	698,361

At ~~June 30, 2020~~March 31, 2021 and December 31, ~~2019,~~2020, the scheduled maturities by year for time deposits are, as follows:


(in thousands)	June 30, 2020		December 31, 2019		March 31, 2021		December 31, 2020
Within 1 year	$	475,130	$	555,074	$	525,701	$	574,007
Over 1 year to 2 years		131,479		287,934		56,988		61,584
Over 2 years to 3 years		34,812		51,444		37,070		41,145
Over 3 years to 4 years		27,096		31,262		10,682		12,875
Over 4 years to 5 years		9,057		6,883		7,989		8,728
Over 5 years		552		38		6		22
Total	$	678,126	$	932,635	$	638,436	$	698,361

Included in time deposits are brokered deposits of ~~$201.2~~$136.6 million and ~~$526.9~~$193.7 million at ~~June 30, 2020~~March 31, 2021 and December 31, ~~2019,~~2020, respectively. Also included in time deposits are reciprocal deposits of ~~$95.0~~$140.7 million and ~~$64.1~~$125.0 million at ~~June 30, 2020~~March 31, 2021 and December 31, ~~2019,~~2020, respectively.

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NOTE 7.6. CAPITAL RATIOS AND SHAREHOLDERS’ EQUITY

The actual and required capital ratios are, as follows:


			Regulatory				Regulatory				Regulatory				Regulatory
	June 30,		Minimum to be		December 31,		Minimum to be		March 31,		Minimum to be		December 31,		Minimum to be
	2020		"Well-Capitalized"		2019		"Well-Capitalized"		2021		"Well-Capitalized"		2020		"Well-Capitalized"
Company (consolidated)
Total capital to risk-weighted assets	13.41	%	10.50	%	13.61	%	10.50	%	13.83	%	10.50	%	13.56	%	10.50	%
Common equity tier 1 capital to risk-weighted assets	10.41		7.00		10.57		7.00		10.55		7.00		10.49		7.00
Tier 1 capital to risk-weighted assets	11.21		8.50		11.39		8.50		11.34		8.50		11.28		8.50
Tier 1 capital to average assets	8.11		5.00		8.13		5.00		8.27		5.00		8.12		5.00

Bank
Total capital to risk-weighted assets	12.85	%	10.50	%	12.42	%	10.50	%	13.62	%	10.50	%	13.27	%	10.50	%
Common equity tier 1 capital to risk-weighted assets	12.19		7.00		11.79		7.00		12.66		7.00		12.52		7.00
Tier 1 capital to risk-weighted assets	12.19		8.50		11.79		8.50		12.66		8.50		12.52		8.50
Tier 1 capital to average assets	8.82		5.00		8.39		5.00		9.23		5.00		9.02		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%.

Accumulated other comprehensive income (loss)

Components of accumulated other comprehensive income is, as follows:


(in thousands)	June 30, 2020		December 31, 2019		March 31, 2021		December 31, 2020
Other accumulated comprehensive income, before tax:
Accumulated other comprehensive income, before tax:
Net unrealized gain on AFS securities	$	14,913	$	7,342	$	5,884	$	13,069
Net unrealized loss on hedging derivatives		(2,266)		(718)
Net unrealized gain on hedging derivatives						485		3,144
Net unrealized loss on post-retirement plans		(1,512)		(1,512)		(1,850)		(1,850)

Income taxes related to items of accumulated other comprehensive income:
Net unrealized gain on AFS securities		(3,501)		(1,793)		(1,374)		(3,046)
Net unrealized loss on hedging derivatives		532		237
Net unrealized gain on hedging derivatives						(113)		(733)
Net unrealized loss on post-retirement plans		355		355		432		432
Accumulated other comprehensive income	$	8,521	$	3,911	$	3,464	$	11,016

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The following table presents the components of other comprehensive income (loss) for the three ~~and six~~ months ended ~~June 30, 2020~~March 31, 2021 and ~~2019:~~2020:


(in thousands)	Before Tax		Tax Effect		Net of Tax		Before Tax		Tax Effect		Net of Tax
Three Months Ended June 30, 2020
Three Months Ended March 31, 2021
Net unrealized loss on AFS securities:
Net unrealized loss arising during the period							$	(7,185)	$	1,672	$	(5,513)
Less: reclassification adjustment for gains (losses) realized in net income								—		—		—
Net unrealized loss on AFS securities								(7,185)		1,672		(5,513)

Net unrealized gain on hedging derivatives:
Net unrealized loss arising during the period								(2,659)		620		(2,039)
Less: reclassification adjustment for gains (losses) realized in net income								—		—		—
Net unrealized loss on cash flow hedging derivatives								(2,659)		620		(2,039)

Net unrealized loss on post-retirement plans:
Net unrealized loss arising during the period								—		—		—
Less: reclassification adjustment for gains (losses) realized in net income								—		—		—
Net unrealized loss on post-retirement plans								—		—		—
Other comprehensive loss							$	(9,844)	$	2,292	$	(7,552)

Three Months Ended March 31, 2020
Net unrealized gain on AFS securities:
Net unrealized gain arising during the period	$	3,772	$	(891)	$	2,881	$	5,492	$	(1,378)	$	4,114
Less: reclassification adjustment for gains (losses) realized in net income		1,351		(322)		1,029		135		(32)		103
Net unrealized gain on AFS securities		2,421		(569)		1,852		5,357		(1,346)		4,011

Net unrealized loss on cash flow hedging derivatives:
Net unrealized loss on derivative hedgess:
Net unrealized loss arising during the period		626		(147)		479		(2,382)		650		(1,732)
Less: reclassification adjustment for gains (losses) realized in net income		—		—		—		—		—		—
Net unrealized loss on cash flow hedging derivatives		626		(147)		479
Net unrealized loss on cash flow derivative hedges								(2,382)		650		(1,732)

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	$	3,047	$	(716)	$	2,331

Three Months Ended June 30, 2019
Net unrealized gain on AFS securities:
Net unrealized gain arising during the period	$	9,646	$	(2,255)	$	7,391
Less: reclassification adjustment for gains (losses) realized in net income		—		—		—
Net unrealized gain on AFS securities		9,646		(2,255)		7,391

Net unrealized loss on cash flow hedging derivatives:
Net unrealized loss on post-retirement plans:
Net unrealized loss arising during the period		(1,157)		271		(886)		—		—		—
Less: reclassification adjustment for gains (losses) realized in net income		—		—		—		—		—		—
Net unrealized loss on cash flow hedging derivatives		(1,157)		271		(886)

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		—		—		—
Net unrealized loss on post-retirement plans								—		—		—
Other comprehensive income	$	8,489	$	(1,984)	$	6,505	$	2,975	$	(696)	$	2,279

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(in thousands)

Before Tax

Tax Effect

Net of Tax
Six Months Ended June 30, 2020






Net unrealized gain on AFS securities:






Net unrealized gain arising during the period

$
9,148

$
(2,064)

$
7,084
Less: reclassification adjustment for gains (losses) realized in net income

1,486

(355)

1,131
Net unrealized gain on AFS securities

7,662

(1,709)

5,953

Net unrealized loss on derivative hedges:






Net unrealized loss arising during the period

(1,639)

296

(1,343)
Less: reclassification adjustment for gains (losses) realized in net income

—

—

—
Net unrealized loss on derivative hedges

(1,639)

296

(1,343)

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

$
6,023

$
(1,413)

$
4,610

Six Months Ended June 30, 2019






Net unrealized gain on AFS securities:






Net unrealized gain arising during the period

$
18,546

$
(4,334)

$
14,212
Less: reclassification adjustment for gains realized in net income

—

—

—
Net unrealized gain on AFS securities

18,546

(4,334)

14,212

Net unrealized loss on cash flow hedging derivatives:






Net unrealized loss arising during the period

(2,002)

469

(1,533)
Less: reclassification adjustment for gains (losses) realized in net income

—

—

—
Net unrealized gain on cash flow hedging derivatives

(2,002)

469

(1,533)

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

$
16,544

$
(3,865)

$
12,679

~~Table of Contents~~

The following table presents the changes in each component of accumulated other comprehensive income (loss), net of tax impacts, for the three ~~and six~~ months ended ~~June 30, 2020~~March 31, 2021 and ~~2019:~~2020:


	Net unrealized		Net loss on		Net unrealized				Net unrealized		Net loss on		Net unrealized
	gain (loss)		effective cash		loss				gain		effective cash		loss
	on AFS		flow hedging		on pension				on AFS		flow hedging		on pension
(in thousands)	Securities		derivatives		plans		Total		Securities		derivatives		plans		Total
Three Months Ended June 30, 2020
Three Months Ended March 31, 2021
Balance at beginning of period									$	10,021	$	2,413	$	(1,418)	$	11,016
Other comprehensive loss before reclassifications										(5,513)		(2,039)		0		(7,552)
Less: amounts reclassified from accumulated other comprehensive income										0		0		0		0
Total other comprehensive loss										(5,513)		(2,039)		0		(7,552)
Balance at end of period									$	4,508	$	374	$	(1,418)	$	3,464

Three Months Ended March 31, 2020
Balance at beginning of period	$	9,560	$	(2,213)	$	(1,157)	$	6,190	$	5,549	$	(481)	$	(1,157)	$	3,911
Other comprehensive gain (loss) before reclassifications		2,881		479		—		3,360		4,114		(1,732)		0		2,382
Less: amounts reclassified from accumulated other comprehensive income		1,029		—		—		1,029		103		0		0		103
Total other comprehensive income (loss)		1,852		479		—		2,331		4,011		(1,732)		0		2,279
Balance at end of period	$	11,412	$	(1,734)	$	(1,157)	$	8,521	$	9,560	$	(2,213)	$	(1,157)	$	6,190

Three Months Ended June 30, 2019
Balance at beginning of period	$	(1,844)	$	(2,896)	$	(888)	$	(5,628)
Other comprehensive gain (loss) before reclassifications		7,391		(886)		—		6,505
Less: amounts reclassified from accumulated other comprehensive income		—		—		—		—
Total other comprehensive income (loss)		7,391		(886)		—		6,505
Balance at end of period	$	5,547	$	(3,782)	$	(888)	$	877

Six Months Ended June 30, 2020
Balance at beginning of period	$	5,459	$	(391)	$	(1,157)	$	3,911
Other comprehensive gain (loss) before reclassifications		7,084		(1,343)		—		5,741
Less: amounts reclassified from accumulated other comprehensive income		1,131		—		—		1,131
Total other comprehensive income (loss)		5,953		(1,343)		—		4,610
Balance at end of period	$	11,412	$	(1,734)	$	(1,157)	$	8,521

Six Months Ended June 30, 2019
Balance at beginning of period	$	(8,665)	$	(2,249)	$	(888)	$	(11,802)
Other comprehensive gain (loss) before reclassifications		14,212		(1,533)		—		12,679
Less: amounts reclassified from accumulated other comprehensive income		—		—		—		—
Total other comprehensive income (loss)		14,212		(1,533)		—		12,679
Less: amounts reclassified from accumulated other comprehensive income for ASU 2018-02		—		—		—		—
Balance at end of period	$	5,547	$	(3,782)	$	(888)	$	877

The following tables presents the amounts reclassified out of each component of accumulated other comprehensive income for three ~~and six~~ months ended ~~June 30, 2020~~March 31, 2021 and ~~2019:~~2020:


	Three Months Ended June 30,				Six Months Ended June 30,				Affected Line Item where	Three Months Ended March 31,				Affected Line Item where
(in thousands)	2020		2019		2020		2019		Net Income is Presented	2021		2020		Net Income is Presented
Net realized gains on AFS securities:
Before tax⁽¹⁾	$	1,351	$	—	$	1,486	$	—	Non-interest income	$	—	$	135	Non-interest income
Tax effect		(322)		—		(355)		—	Tax expense		—		(32)	Tax expense
Total reclassifications for the period	$	1,029	$	—	$	1,131	$	—	Net of tax	$	—	$	103	Net of tax

(1)

Net realized gains before tax include 0 realized gains and losses for the three months ended March 31, 2021 and gross realized gains ~~$1.4 million~~of $146 thousand and realized losses of $11 thousand for the three months ended ~~June 30, 2020 and gross realized gains of $1.5 million and realized losses of $22 thousand for the six months ended June 30,~~March 31, 2020.

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NOTE 8.7. EARNINGS PER SHARE

The following table presents the calculation of earnings per share:


	Three Months Ended				Six Months Ended				Three Months Ended
	June 30,				June 30,				March 31,
(in thousands, except per share and share data)	2020		2019		2020		2019		2021		2020
Net income	$	8,481	$	6,117	$	16,202	$	13,398	$	9,480	$	7,721

Average number of basic common shares outstanding		15,423,997		15,538,282		15,500,033		15,530,893		14,933,554		15,558,132
Plus: dilutive effect of stock options and awards outstanding⁽¹⁾		17,281		47,299		22,960		51,340		73,161		34,463
Average number of diluted common shares outstanding⁽¹⁾		15,441,278		15,585,581		15,522,993		15,582,233		15,006,715		15,592,595

Earnings per share:
Basic	$	0.55	$	0.39	$	1.05	$	0.86	$	0.63	$	0.50
Diluted	$	0.55	$	0.39	$	1.04	$	0.86	$	0.63	$	0.50

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

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NOTE 9.8. DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGING ACTIVITIES

The Company uses derivative instruments to minimize 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 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 contract with the counterparty.

The following tables present information about derivative assets and liabilities at ~~June 30, 2020~~March 31, 2021 and December 31, ~~2019:~~2020:


	June 30, 2020							March 31, 2021
			Weighted							Weighted
	Notional		Average		Fair Value		Location Fair	Notional		Average		Fair Value		Location Fair
	Amount		Maturity		Asset (Liability)		Value Asset	Amount		Maturity		Asset (Liability)		Value Asset
	(in thousands)		(in years)		(in thousands)		(Liability)	(in thousands)		(in years)		(in thousands)		(Liability)
Cash flow hedges:
Interest rate swap on wholesale funding	$	125,000		4.5	$	(7,308)	Other liabilities
Interest rate swap on wholesale fundings								$	75,000		3.8	$	(1,379)	Other liabilities
Interest rate swap on variable rate loans									50,000		5.0		(278)	Other liabilities
Total cash flow hedges		125,000		4.5		(7,308)			125,000		4.3		(1,657)

Fair value hedges:
Interest rate swap on securities		37,190		9.3		3,694	Other liabilities		37,190		8.3		262	Other assets
Total fair value hedges		37,190		9.3		3,694			37,190		8.3		262

Economic hedges:
Forward sale commitments		43,967		0.1		(126)	Other liabilities		31,382		0.2		(85)	Other liabilities
Customer Loan Swaps-MNA Counterparty		159,215		7.7		(17,129)	Other liabilities		260,792		6.8		(9,944)	Other liabilities
Customer Loan Swaps-RPA Counterparty		103,391		8.1		(11,624)	Other liabilities		119,285		7.6		(5,482)	Other liabilities
Customer Loan Swaps-Customer		262,606		7.8		28,753	Other assets		380,077		7.1		15,426	Other assets
Total economic hedges		569,179				(126)			791,536				(85)

Non-hedging derivatives:
Interest rate lock commitments		19,540		0.1		63	Other assets		6,735		0.2		46	Other assets
Total non-hedging derivatives		19,540		0.1		63			6,735		0.2		46

Total	$	750,909			$	(3,677)		$	960,461			$	(1,434)

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	December 31, 2020
			Weighted
	Notional		Average		Fair Value		Location Fair
	Amount		Maturity		Asset (Liability)		Value Asset
	(in thousands)		(in years)		(in thousands)		(Liability)
Cash flow hedges:
Interest rate swap on wholesale fundings	$	75,000		4.0	$	(2,664)	Other liabilities
Total cash flow hedges		75,000				(2,664)

Fair value hedges:
Interest rate swap on securities		37,190		8.6		2,789	Other assets
Total fair value hedges		37,190				2,789

Economic hedges:
Forward sale commitments		50,629		0.2		(95)	Other liabilities
Customer Loan Swaps-MNA Counterparty		235,947		6.8		(15,938)	Other liabilities
Customer Loan Swaps-RPA Counterparty		119,285		7.9		(9,957)	Other liabilities
Customer Loan Swaps-Customer		355,232		7.1		25,895	Other assets
Total economic hedges		761,093				(95)

Non-hedging derivatives:
Interest rate lock commitments		3,320		0.1		22	Other assets
Total non-hedging derivatives		3,320				22

Total	$	876,603			$	52

As of March 31, 2021 and December 31, 2020, the following amounts were recorded on the balance sheet related to cumulative basis adjustments for fair value hedges:


				Cumulative Amount of Fair
	Location of Hedged Item on	Carrying Amount of Hedged		Value Hedging Adjustment in
	Balance Sheet	Assets (Liabilities)		Carrying Amount
March 31, 2021
Interest rate swap on securities	Securities Available for Sale	$	39,070	$	1,880

December 31, 2020
Interest rate swap on securities	Securities Available for Sale	$	40,209	$	3,019

Table of Contents

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 funding

$
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)

~~(1)~~

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

Information about derivative assets and liabilities for March 31, 2021 and 2020, follows:


	Three Months Ended March 31, 2021
	Amount of			Amount of
	Gain (Loss)			Gain (Loss)
	Recognized in			Reclassified		Location of	Amount of
	Other		Location of Gain (Loss)	from Other		Gain (Loss)	Gain (Loss)
	Comprehensive		Reclassified from Other	Comprehensive		Recognized in	Recognized
(in thousands)	Income		Comprehensive Income	Income		Income	in Income
Cash flow hedges:
Interest rate swap on wholesale funding	$	987	Interest expense	$	(188)	Interest expense	$	(188)
Interest rate swap on variable rate loans		(213)	Interest income		8	Interest income		8
Total cash flow hedges		774			(180)			(180)

Fair value hedges:
Interest rate swap on securities		(2,813)	Interest income		(137)	Interest income		(137)
Total fair value hedges		(2,813)			(137)			(137)

Economic hedges:
Forward commitments		—	Other income		10	Other income		10
Total economic hedges		—			10			10

Non-hedging derivatives:
Interest rate lock commitments		—	Other income		24	Other income		24
Total non-hedging derivatives		—			24			24

Total	$	(2,039)		$	(283)		$	(283)

AsThe Company expects approximately $390 thousand of ~~June 30, 2020 and~~ ~~December~~ losses (pre-tax) related to the Company’s cash flow hedges to be reclassified to earnings from AOCI over the next 12 months. This reclassification is due to anticipated payments that will be made and/or received on the swaps based upon the forward curve as of March 31, ~~2019,thefollowingamountswererecorded~~on~~thebalancesheetrelated~~to~~cumulative 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
June 30, 2020






Fair value hedges:






Interest rate swap on securities

Securities Available for Sale

$
42,232

$
5,042

December 31, 2019






Fair value hedges:






Interest rate swap on securities

Securities Available for Sale

$
39,026

$
523

2021.

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~~Information about derivative assets and liabilities for June 30, 2020 and December 31, 2019, follows:~~

Six Months Ended June 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⁽¹⁾

Income

in Income
Cash flow hedges:










Interest rate swap on wholesale funding

$
5,592

Other income

$
—

Interest expense

$
(216)
Total cash flow hedges

5,592

—



(216)

Fair value hedges:










Interest rate swap on securities

(3,858)

Interest income

—

Interest income

41
Total fair value hedges

(3,858)

—



41

Economic hedges:










Forward commitments

—

Other income

—

Other income

(43)
Total economic hedges

—

—



(43)

Non-hedging derivatives:










Interest rate lock commitments

—

Other Income

—

Other Income

4
Total non-hedging derivatives

—

—



4

Total

$
1,734

$
—



$
(214)

~~(1)~~

~~As of June 30, 2020 the Company does not expect any reclassifications from accumulated other comprehensive income into earnings within the next 12 months.~~

~~Table of Contents~~


	Years Ended December 31, 2019								Three Months Ended March 31, 2020
	Amount of			Amount of					Amount of			Amount of
	Gain (Loss)			Gain (Loss)			Amount of		Gain (Loss)			Gain (Loss)
	Recognized in			Reclassified		Location of	Gain (Loss)		Recognized in			Reclassified		Location of	Amount of
	Other		Location of Gain (Loss)	from Other		Gain (Loss)	Recognized		Other		Location of Gain (Loss)	from Other		Gain (Loss)	Gain (Loss)
	Comprehensive		Reclassified from Other	Comprehensive		Recognized in	Recognized		Comprehensive		Reclassified from Other	Comprehensive		Recognized in	Recognized
(in thousands)	Income		Comprehensive Income	Income		Income	in Income		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)	$	(3,945)	Interest expense	$	(1)	Interest expense	$	(1)
Interest rate cap agreements		2,291	Interest expense		—	Interest expense		(2)
Total cash flow hedges		2,291			3,156			(605)		(3,945)			(1)			(1)

Fair value hedges:
Interest rate swap on securities		(523)	Interest income		—	Interest expense		7		2,213	Interest income		(18)	Interest income		(18)
Total economic hedges		(523)			—			7		2,213			(18)			(18)

Economic hedges:
Forward commitments		—	Other income		—	Other income		(84)		—	Other income		(11)	Other income		(11)
Total economic hedges		—			—			(84)		—			(11)			(11)

Non-hedging derivatives:
Interest rate lock commitments		—	Other income		—	Other Income		52		—	Other income		(34)	Other Income		(34)
Total non-hedging derivatives		—			—			52		—			(34)			(34)

Total	$	1,768		$	3,156		$	(630)	$	(1,732)		$	(64)		$	(64)

Cash flow hedges

~~Interest rate cap agreements~~

In 2014, interest rate cap agreements were purchased to limit the Company’s exposure to rising interest rates on 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; however, the caps were terminated in the fourth quarter of 2019 and the unamortized premium totaling $3.2 million was recognized in acquisition, restructuring and other expenses.

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 ~~0.58%~~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.

Based on direct and indirect events resulting from COVID-19 pandemic, the Company determined that $50 million of wholesale fundings were no longer necessary. As a result of the unprecedented nature of the pandemic the FASB staff believes that it would be acceptable for a company to determine that missed forecasts related to the effects of the COVID-19 pandemic need not be considered when determining whether it has exhibited a pattern of missing forecasts that would call into question its ability to accurately predict forecasted transactions and the propriety of using cash flow hedge accounting in the future for similar transactions. The FASB staff believes that this guidance did not contemplate forecasts changing so rapidly as a result of a pandemic. The March 2019 hedge with a $50.0 million notional amount and fixed rate of 2.46% was terminated in the fourth quarter of 2020, with $3.9 million loss recognized in acquisition, conversion, and other expenses as a result of the reclassification from other comprehensive income.

Interest rate swap on variable rate loans

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

Table of Contents

Fair value hedges

Interest rate swap on securities

For derivative instruments that are designated and qualify as a fair value hedge, the gain or loss on the derivative instrument as well as the offsetting loss or gain on the hedged asset or liability attributable to the hedged risk are recognized in current earnings. The Company utilizes interest rate swaps designated as 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

~~Table of Contents~~

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 8 swap transactions with a notional amount of $37.2 million designated as fair value hedges. These derivatives are intended to protect against the effects of changing interest rates on the fair values of fixed rate securities. The fixed rates on the transactions have a weighted average of 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. The Company typically uses a combination of best efforts and mandatory delivery contracts. The contracts 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 contracts just prior to the loan closing with a customer.

Customer loan derivatives

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

The master netting arrangements provide for a single net settlement of all loan swap agreements, as well as collateral or cash funds, in the event of default on, or termination of, any one contract. Collateral is provided by cash or securities received or posted by the counterparty with net liability positions, respectively, in accordance with contract thresholds. Currently, the Company has posted cash of ~~$28.4~~$12.7 million with counterparties.


	Gross Amounts Offset in the Consolidated Balance Sheet								Gross Amounts Offset in the Consolidated Balance Sheet
	Derivative				Cash Collateral				Derivative				Cash Collateral
(in thousands)	Liabilities		Derivative Assets		Pledged		Net Amount		Liabilities		Derivative Assets		Pledged		Net Amount
As of June 30, 2020
As of March 31, 2021
Customer Loan Derivatives:
MNA counterparty	$	(17,129)	$	17,129	$	28,350	$	—	$	(9,944)	$	9,944	$	12,700	$	12,700
RPA counterparty		(11,624)		11,624		—		—		(5,482)		5,482		—		—
Total	$	(28,753)	$	28,753	$	28,350	$	—	$	(15,426)	$	15,426	$	12,700	$	12,700


	Gross Amounts Offset in the Consolidated Balance Sheet								Gross Amounts Offset in the Consolidated Balance Sheet
	Derivative				Cash Collateral				Derivative				Cash Collateral
(in thousands)	Liabilities		Derivative Assets		Pledged		Net Amount		Liabilities		Derivative Assets		Pledged		Net Amount
As of December 31, 2019
As of December 31, 2020
Customer Loan Derivatives:
MNA counterparty	$	(4,669)	$	4,669	$	10,700	$	—	$	(15,938)	$	15,938	$	23,450	$	23,450
RPA counterparty		(3,377)		3,377		—		—		(9,957)		9,957		—		—
Total	$	(8,046)	$	8,046	$	10,700	$	—	$	(25,895)	$	25,895	$	23,450	$	23,450

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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 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.~~9. FAIR VALUE MEASUREMENTS

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

Recurring Fair Value Measurements

The following table summarizes financial assets and financial liabilities measured at fair value on a recurring basis as of ~~June 30, 2020~~March 31, 2021 and December 31, ~~2019,~~2020, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value:


	June 30, 2020								March 31, 2021
	Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3		Total
(in thousands)	Inputs		Inputs		Inputs		Fair Value		Inputs		Inputs		Inputs		Fair Value
Available for sale securities:
Mortgage-backed securities:
US Government-sponsored enterprises	$	—	$	267,444	$	—	$	267,444	$	0	$	214,607	$	0	$	214,607
US Government agency		—		98,655		—		98,655		0		76,185		0		76,185
Private label		—		19,367		—		19,367		0		47,541		0		47,541
Obligations of states and political subdivisions thereof		—		159,287		—		159,287		0		187,863		0		187,863
Corporate bonds		—		96,821		—		96,821		0		100,207		0		100,207
Derivative assets		—		28,753		63		28,816		0		15,426		46		15,472
Derivative liabilities		—		(32,367)		(126)		(32,493)		0		(16,805)		(85)		(16,890)


	December 31, 2019								December 31, 2020
	Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3		Total
(in thousands)	Inputs		Inputs		Inputs		Fair Value		Inputs		Inputs		Inputs		Fair Value
Available for sale securities:
Mortgage-backed securities:
US Government-sponsored enterprises	$	—	$	321,969	$	—	$	321,969	$	—	$	212,390	$	—	$	212,390
US Government agency		—		99,661		—		99,661		—		85,632		—		85,632
Private label		—		19,533		—		19,533		—		19,709		—		19,709
Obligations of states and political subdivisions thereof		—		142,006		—		142,006		—		169,004		—		169,004
Corporate bonds		—		80,061		—		80,061		—		98,311		—		98,311
Derivative assets		—		6,791		59		6,850		—		28,684		22		28,706
Derivative liabilities		—		(8,102)		(84)		(8,186)		—		(28,559)		(95)		(28,654)

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 ~~June 30, 2020,~~March 31, 2021, the Company assessed the significance of the impact of the credit valuation adjustments on the overall valuation of its derivative positions and determined that the credit valuation adjustments are not significant to the overall valuation of its derivatives. As a result, the Company determined that its derivative valuations in their entirety are classified in Level 2 of the fair value hierarchy.

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 six~~ months ended ~~June 30, 2020:~~March 31, 2021:


	Assets (Liabilities)				Assets (Liabilities)
	Interest Rate Lock		Forward		Interest Rate Lock		Forward
(in thousands)	Commitments		Commitments		Commitments		Commitments
Three Months Ended June 30, 2020
Three Months Ended March 31, 2021
Balance at beginning of period	$	93	$	(73)	$	22	$	(95)
Realized gain recognized in non-interest income		(30)		(53)		24		10
Balance at end of period	$	63	$	(126)	$	46	$	(85)

Six Months Ended June 30, 2020
Three Months Ended March 31, 2020
Balance at beginning of period	$	59	$	(84)	$	59	$	(84)
Realized gain (loss) recognized in non-interest income		4		(42)
Realized gain recognized in non-interest income						34		11
Balance at end of period	$	63	$	(126)	$	93	$	(73)

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


	Fair Value		Fair Value													Significant
(in thousands,	June 30,		December 31,		Valuation	Unobservable	Unobservable
except ratios)	2020		2019		Techniques	Inputs	Input Value
										Fair Value		Fair Value				Unobservable
(in thousands, except ratios)										March 31, 2021		December 31, 2020		Valuation Techniques	Unobservable Inputs	Input Value
Assets (Liabilities)
Interest Rate Lock Commitment	$	63	$	59	Historical trend	Closing Ratio		90	%	$	46	$	22	Historical trend	Closing Ratio		90	%
					Pricing Model	Origination Costs, per loan	$	1.7						Pricing Model	Origination Costs, per loan	$	1.7

Forward Commitments		(126)		(84)	Quoted prices for similar loans in active markets.	Freddie Mac pricing system		Pair-off contract price			(85)		(95)	Quoted prices for similar loans in active markets	Freddie Mac pricing system		Pair-off contract price
Total	$	(63)	$	(25)						$	(39)	$	(73)

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:


									Fair Value
					Three Months Ended		Six Months Ended		Measurement Date as of							Fair Value Measurement
	June 30, 2020		December 31, 2019		June 30, 2020		June 30, 2020		June 30, 2020	March 31, 2021		December 31, 2020		March 31, 2021		Date as of March 31, 2021
	Level 3		Level 3		Total		Total		Level 3	Level 3		Level 3		Total		Level 3
(in thousands)	Inputs		Inputs		Gains (Losses)		Gains (Losses)		Inputs	Inputs		Inputs		Gains (Losses)		Inputs
Assets
Impaired loans	$	9,623	$	9,625	$	(1,288)	$	2	June 2020
Individually evaluated loans										$	10,556	$	8,746	$	(1,810)	March 2021
Capitalized servicing rights		3,234		4,301		(663)		(1,067)	June 2020		4,693		3,605		(1,088)	March 2021
Other real estate owned		2,318		2,236		113		82	August 2019
Premises held for sale		1,764		1,764		—		—	September 2019		971		962		(9)	December 2020
Total	$	16,939	$	17,926	$	(1,838)	$	(983)		$	16,220	$	13,313	$	(2,907)

There are no liabilities measured at fair value on a non-recurring basis in ~~2020~~2021 and ~~2019.~~2020.

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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)

June 30, 2020

Valuation Techniques

Unobservable Inputs

(Weighted Average)^(a)

Assets

Impaired loans

6,924

Fair value of collateral-appraised value

Loss severity

0% to 70%

Appraised value

$0 to $1,730

Impaired loans

2,699

Discount cash flow

Discount rate

3.50% to 9.50%

(in thousands, except ratios)

Fair Value March 31, 2021

Valuation Techniques

Unobservable Inputs

Range (Weighted Average)^(a)

Assets

Individually evaluated loans

7,238

Fair value of collateral-appraised value

Loss severity

0% to 70%

Appraised value

$0 to $1,792

Individually evaluated loans

3,318

Discount cash flow

Discount rate

2.88% to 9.50%

Cash flows

$21 to $1,002

Cash flows

$7 to $953

Capitalized servicing rights

3,234

Discounted cash flow

Constant prepayment rate (CPR)

15.95

4,693

Discounted cash flow

Constant prepayment rate (CPR)

13.38

Discount rate

10.07

Discount rate

10.04

Other real estate owned

2,318

Fair value of collateral less selling costs

Appraised value

2,695

Selling Costs

6% to 10%

Premises held for sale^(b)

1,764

Fair value of asset less selling costs

Appraised value

$136 to $527

Premises held for sale

971

Fair value of asset less selling costs

Appraised value

$220 to $386

Selling Costs

Total

16,939

16,220

(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 individual properties.

(b)	The carrying value of premises held for sale was ~~$1.8~~$0.0 million as of ~~June 30, 2020.~~March 31, 2021.

(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%

(in thousands, except ratios)

Fair Value Dec 31, 2020

Valuation Techniques

Unobservable Inputs

Range (Weighted Average)^(a)

Assets

Individually evaluated loans

6,128

Fair value of collateral-appraised value

Loss severity

0% to 70%

Appraised value

$0 to $1730

Individually evaluated loans

2,618

Discount cash flow

Discount rate

3.50% to 9.50%

Cash flows

$22 to $1,002

Cash flows

$19 to $953

Capitalized servicing rights

4,301

Discounted cash flow

Constant prepayment rate (CPR)

9.95

3,605

Discounted cash flow

Constant prepayment rate (CPR)

18.53%

Discount rate

10.07

Discount rate

10.05%

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

Premises held for sale

962

Fair value of asset less selling costs

Appraised value

$220 to $386

Selling Costs

6.00

Selling Costs

Total

17,926

13,313

(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 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 ~~June 30, 2020~~March 31, 2021 and December 31, ~~2019.~~2020.

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

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.


	June 30, 2020										March 31, 2021
	Carrying		Fair								Carrying		Fair
(in thousands)	Amount		Value		Level 1		Level 2		Level 3		Amount		Value		Level 1		Level 2		Level 3
Financial Assets					��
Cash and cash equivalents	$	70,673	$	70,763	$	70,763	$	—	$	—	$	223,512	$	223,512	$	223,512	$	0	$	0
Securities available for sale		641,574		641,574		—		641,574		—		626,403		626,403		0		626,403		0
FHLB stock		20,265		20,265		—		20,265		—		14,826		14,826		0		14,826		0
Loans held for sale												10,148		10,148		0		0		10,148
Net loans		2,712,908		2,698,382		—		—		2,698,382		2,527,411		2,518,606		0		0		2,518,606
Accrued interest receivable		3,215		3,215		—		3,215		—		3,688		3,668		0		3,668		0
Cash surrender value of bank-owned life insurance policies		76,896		76,896		—		76,896		—		78,388		78,388		0		78,388		0
Derivative assets		28,816		28,816		—		28,753		63		15,472		15,472		0		15,426		46

Financial Liabilities
Non-maturity deposits	$	2,016,736	$	2,090,727	$	—	$	2,090,727	$	—	$	2,273,906	$	2,274,973	$	0	$	2,274,973	$	0
Time deposits		678,126		668,803		—		668,803		—		638,436		636,670		0		636,670		0
Short-term other borrowings		33,846		33,846		—		33,846		—
Securities sold under agreements to repurchase												24,276		24,276		0		24,276		0
FHLB advances		381,781		387,053		—		387,053		—		267,934		271,622		0		271,622		0
FRB PPPLF		131,236		131,236		—		131,236		—
Subordinated borrowings		59,879		59,879		—		59,879		—		60,003		57,133		0		57,133		0
Derivative liabilities		(32,493)		(32,493)		—		(32,367)		(126)		16,890		16,890		0		16,805		85


	December 31, 2019										December 31, 2020
	Carrying		Fair								Carrying		Fair
(in thousands)	Amount		Value		Level 1		Level 2		Level 3		Amount		Value		Level 1		Level 2		Level 3
Financial Assets
Cash and cash equivalents	$	56,910	$	56,910	$	56,910	$	—	$	—	$	226,007	$	226,007	$	226,007	$	—	$	—
Securities available for sale		663,230		663,230		—		663,230		—		585,046		585,046		—		585,046		—
FHLB stock		20,679		20,679		—		20,679		—		14,036		14,036		—		14,036		—
Loans held for sale												23,988		24,163		—		—		24,163
Net loans		2,625,739		2,634,147		—		—		2,634,147		2,543,803		2,547,970		—		—		2,547,970
Accrued interest receivable		3,294		3,294		—		3,294		—		2,964		2,964		—		2,964		—
Cash surrender value of bank-owned life insurance policies		75,863		75,863		—		75,863		—		77,870		77,870		—		77,870		—
Derivative assets		6,850		6,850		—		6,791		59		28,706		28,706		—		28,684		22

Financial Liabilities
Non-maturity deposits	$	1,763,116	$	1,751,481	$	—	$	1,751,481	$	—	$	2,207,854	$	2,122,222	$	—	$	2,122,222	$	—
Time deposits		932,635		932,886		—		932,886		—		698,361		694,700		—		694,700		—
Short-term other borrowings		44,832		44,831		—		44,831		—		27,779		27,779		—		27,779		—
FHLB advances		426,564		425,989		—		425,989		—		248,283		252,698		—		252,698		—
Subordinated borrowings		59,920		59,920		—		59,920		—		59,961		57,091		—		57,091		—
Derivative liabilities		8,186		8,186		—		8,102		84		28,654		28,654		—		28,559		95

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NOTE ~~11.~~10. REVENUE FROM CONTRACTS WITH CUSTOMER

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

Disaggregation of Revenue

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


	Three Months Ended				Six Months Ended
	June 30,				June 30,				Three Months Ended March 31,
(in thousands)	2020		2019		2020		2019		2021		2020
Major Products/Service Lines
Trust management fees	$	2,892	$	2,794	$	5,938	$	5,319	$	3,175	$	3,046
Financial services fees		267		272		590		505		491		323
Interchange fees		1,463		1,213		3,200		2,244		1,712		1,738
Customer deposit fees		789		1,026		1,899		1,933		1,049		1,110
Other customer service fees		187		379		452		605		209		264
Total	$	5,598	$	5,684	$	12,079	$	10,606	$	6,636	$	6,481


	Three Months Ended				Six Months Ended
	June 30,				June 30,				Three Months Ended March 31,
(in thousands)	2020		2019		2020		2019		2021		2020
Timing of Revenue Recognition
Products and services transferred at a point in time	$	2,620	$	2,767	$	5,892	$	5,034	$	3,287	$	3,273
Products and services transferred over time		2,978		2,917		6,187		5,572		3,349		3,208
Total	$	5,598	$	5,684	$	12,079	$	10,606	$	6,636	$	6,481

Trust Management Fees

The trust management business generates revenue through a range of fiduciary services including trust and estate administration, wealth advisory, and investment management to individuals, businesses, not-for-profit organizations, and municipalities. Revenue from these services are generally recognized over time and is typically based on a time elapsed measure of 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

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

Interchange Fees

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

Customer Deposit Fees

The Customer Deposit business offers a variety of deposit accounts with a range of interest rates, fee schedules and other terms, which are designed to meet the customer's financial needs. Additional depositor-related services provided to customers include ATM, bank-by-phone, internet banking, internet bill pay, mobile banking, and other cash management

~~Table of Contents~~

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.

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Other Customer Service Fees

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

Contract Balances from Contracts with Customers

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


	Balance at		Balance at
(in thousands)	June 30, 2020		December 31, 2019		March 31, 2021		December 31, 2020
Balances from contracts with customers only:
Other Assets	$	2,842	$	1,703	$	1,293	$	1,121
Other Liabilities		3,027		3,114		2,664		2,785

The timing of revenue recognition, billings and cash collections results in contract assets or receivables and contract liabilities or deferred revenue on the consolidated balance sheets. For most customer contracts, fees are deducted directly from customer accounts and, therefore, there is no associated impact on the accounts receivable balance. For certain types of service contracts, the Company has an unconditional right to consideration under the service contract and an accounts receivable balance is recorded for services completed. When consideration is received, or such consideration is unconditionally due, from a customer prior to transferring goods or services to the customer under the terms of a contract, a contract liability is recorded. Contract liabilities are recognized as 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.~~11. LEASES

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

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

●	Package of practical expedients:

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

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

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.

The following table presents the consolidated statements of condition classification of the Company’s ROU assets and lease ~~liabilities as of June 30, 2020:~~liabilities:


(in thousands)		June 30, 2020		December 31, 2019		Classification	March 31, 2021		December 31, 2020
Lease Right-of-Use Assets	Classification
Operating lease right-of-use assets	Other assets	$	9,866	$	9,623	Other assets	$	10,056	$	10,338

Lease Liabilities
Operating lease liabilities	Other liabilities		9,968		9,651	Other liabilities		10,368		10,627

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.

The following table presents the weighted average lease term and discount rate of the Company’s leases:


	June 30, 2020		December 31, 2019		March 31, 2021		December 31, 2020
Weighted-average remaining lease term (in years)
Operating leases	9.27		8.96		9.02		9.26

Weighted-average discount rate
Operating leases	3.30	%	3.27	%	3.15	%	3.15	%

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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.


	Three Months Ended		Six Months Ended		Three Months Ended		Three Months Ended
(in thousands)	June 30, 2020		June 30, 2020		March 31, 2021		March 31, 2020
Lease Costs
Operating lease cost	$	323	$	644	$	321	$	234
Variable lease cost		62		118		81		144
Total lease cost	$	385	$	762	$	402	$	378

Future minimum payments for operating leases with initial or remaining terms of one year or more as of ~~June 30, 2020~~March 31, 2021 are, as follows:


(in thousands)	Operating Leases		Payments
Twelve Months Ended:
June 30, 2021	$	1,284
June 30, 2022		1,307
June 30, 2023		1,319
June 30, 2024		1,327
June 30, 2025		1,176
March 31, 2022			$	1,300
March 31, 2023				1,319
March 31, 2024				1,323
March 31, 2025				1,240
March 31, 2026				1,085
Thereafter		6,549		4,788
Total future minimum lease payments		12,962		11,055
Amounts representing interest		(2,994)		(687)
Present value of net future minimum lease payments	$	9,968	$	10,368

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

GENERAL

Management’s discussion and analysis ~~of financial condition and results of operations~~ is intended to assist in understanding the financial condition and results of operations of the Company. The following discussion and analysis should be read in conjunction with the Company’s consolidated financial statements and the notes thereto appearing in Part I, Item 1 of this document and with the Company’s consolidated financial statements and the notes thereto and Management’s Discussion and Analysis of Financial Condition and Results of Operations included in the Company's Annual Report on Form 10-K for the year ended December 31, 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 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.2020.

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

●

Employee and customer experience is the foundation of superior performance, which leads to significant financial benefit to shareholders

●

Geography, heritage, and performance are key while remaining true to a ~~community~~community-focused culture

●

Strong commitment to risk management while balancing growth and earnings

●

Service and sales driven culture with a focus on core business growth

●

Fee income is fundamental to the ~~Company's~~Company’s profitability through trust and treasury management services, customer derivatives, and secondary market mortgage ~~banking~~sales

●

Investment in processes, products, technology, training, leadership, and infrastructure

●

Expansion of the Company’s brand and business to deepen market presence

●

Opportunity and growth for existing employees while adding catalyst recruits across all levels of the Company

Shown below is a profile of the Company as of ~~June 30, 2020:~~March 31, 2021:

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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

Six Months Ended

June 30,

June 30,


2020

2019

2020

2019

PER SHARE DATA

Net earnings, diluted

$
0.55

$
0.39

$
1.04

$
0.86

Adjusted earnings, diluted⁽¹⁾

0.56

0.41

1.06

0.88

Total book value

26.56

25.13

26.56

25.13

Tangible book value⁽¹⁾

18.18

18.23

18.18

18.23

Market price at period end

22.39

26.59

22.39

26.59

Dividends

0.22

0.22

0.44

0.42

PERFORMANCE RATIOS⁽²⁾

Return on assets

0.90
%

0.67
%

0.86
%

0.74
%
Adjusted return on assets⁽¹⁾

0.91

0.70

0.87

0.76

Return on equity

8.40

6.33

8.02

7.07

Adjusted return on equity⁽¹⁾

8.52

6.57

8.12

7.19

Adjusted return on tangible equity⁽¹⁾

12.72

9.30

12.13

10.22

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

3.00

2.65

3.02

2.71

Net interest margin (FTE), excluding purchased loan accretion⁽³⁾

2.88

2.56

2.93

2.61

Efficiency ratio⁽¹⁾

60.67

68.48

62.74

66.25

GROWTH (Year-to-date)⁽¹⁾

Total commercial loans

33
%

10
%

33
%

10
%
Total loans

7

7

7

7

Total deposits

(0)

(0)

(0)

(0)

FINANCIAL DATA (In millions)

Total assets

$
3,780

$
3,688

$
3,780

$
3,688

Total earning assets⁽⁴⁾

3,376

3,355

3,376

3,355

Total investments

662

784

662

784

Total loans

2,729

2,578

2,729

2,578

Allowance for loan losses

17

15

17

15

Total goodwill and intangible assets

128

107

128

107

Total deposits

2,695

2,481

2,695

2,481

Total shareholders' equity

404

391

404

391

Net income

8

6

16

13

Adjusted income⁽¹⁾

9

6

16

14

ASSET QUALITY AND CONDITION RATIOS

Net charge-offs (current quarter annualized)/average loans

0.02
%

—
%

0.10
%

0.02
%
Allowance for loan losses/total loans

0.60

0.57

0.60

0.57

Loans/deposits

101

104

101

104

Shareholders' equity to total assets

10.69

10.59

10.69

10.59

Tangible shareholders' equity to tangible assets⁽¹⁾

7.57

7.92

7.57

7.92


	Three Months Ended
	March 31,
	2021			2020
PER SHARE DATA
Net earnings, diluted	$	0.63		$	0.50
Adjusted earnings, diluted⁽¹⁾		0.68			0.50
Total book value		27.13			25.90
Tangible book value⁽¹⁾		18.64			17.70
Market price at period end		29.42			17.28
Dividends		0.22			0.22

PERFORMANCE RATIOS⁽²⁾
Return on assets		1.03	%		0.85	%
Adjusted return on assets⁽¹⁾		1.11			0.86
Return on equity		9.45			7.64
Adjusted return on equity⁽¹⁾		10.13			7.71
Adjusted return on tangible equity⁽¹⁾		15.00			11.54
Net interest margin, fully taxable equivalent (FTE)^{(1) (3)}		2.88			3.06
Adjusted net interest margin^{(1) (2) (5)}		2.78			2.99
Efficiency ratio⁽¹⁾		61.95			64.82

GROWTH (Year-to-date annualized)⁽¹⁾
Total commercial loans		14	%		6	%
Total loans		(2)			(1)
Total deposits		1			(7)

FINANCIAL DATA (In millions)
Total assets	$	3,730		$	3,677
Total earning assets⁽⁴⁾		3,371			3,269
Total investments		641			646
Total loans		2,551			2,635
Allowance for loan losses		24			15
Total goodwill and intangible assets		127			129
Total deposits		2,912			2,651
Total shareholders' equity		406			404
Net income		9			8
Adjusted income⁽¹⁾		10			8

ASSET QUALITY AND CONDITION RATIOS
Net charge-offs (annualized)/average loans		0.03	%		0.18	%
Allowance for loan losses/total loans		0.93			0.58
Loans/deposits		88			99
Shareholders' equity to total assets		10.87			10.98
Tangible shareholders' equity to tangible assets⁽¹⁾		7.73			7.77

(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)	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 growth rates as of ~~June 30, 2020~~March 31, 2021 on an annualized basis:

LOAN ANALYSIS

Annualized

Growth %

June 30,

March 31,

December 31,

September 30,

June 30,

June 30,

Year to

(in thousands, except ratios)

2020

2020

2019

2019

2019

2020

Date

Commercial real estate

$
982,070

$
948,178

$
930,661

$
923,773

$
881,479

14
%

11
%
Commercial and industrial

472,524

321,605

318,988

301,590

312,029

188

96

Total commercial loans

1,454,594

1,269,783

1,249,649

1,225,363

1,193,508

58

33

Residential real estate

1,083,708

1,132,328

1,151,857

1,143,452

1,167,759

(17)

(12)

Consumer

124,197

128,120

135,283

107,375

112,275

(12)

(16)

Tax exempt and other

66,918

104,752

104,303

101,116

104,696

(144)

(72)

Total loans

$
2,729,417

$
2,634,983

$
2,641,092

$
2,577,306

$
2,578,238

14
%

7
%


											Annualized Growth %
(in thousands, except ratios)	Mar 31, 2021		Dec 31, 2020		Sep 30, 2020		Jun 30, 2020		Mar 31, 2020		March 31, 2021
Commercial real estate	$	1,118,669	$	1,084,381	$	1,045,635	$	982,070	$	948,178	13	%
Commercial and industrial		317,500		323,864		324,647		340,898		321,605	(8)
Paycheck Protection Program (PPP)		77,878		53,774		131,537		131,626		—	179
Total commercial loans		1,514,047		1,462,019		1,501,819		1,454,594		1,269,783	14
Total commercial loans, excluding PPP		1,436,169		1,408,245		1,370,282		1,322,968		1,269,783	8

Residential real estate		868,084		923,891		1,021,206		1,083,708		1,132,328	(24)
Consumer		106,835		113,544		119,340		124,197		128,120	(24)
Tax exempt and other		62,098		63,431		66,326		66,918		104,752	(8)
Total loans	$	2,551,064	$	2,562,885	$	2,708,691	$	2,729,417	$	2,634,983	(2)	%

DEPOSIT ANALYSIS

Annualized

Growth %

June 30,

March 31,

December 31,

September 30,

June 30,

June 30,

Year to

(in thousands, except ratios)

2020

2020

2019

2019

2019

2020

Date

Demand

$
504,325

$
400,410

$
414,534

$
380,707

$
354,125

104
%

43
%
NOW

642,908

578,320

575,809

490,315

472,576

45

23

Savings

466,668

423,345

388,683

360,570

352,657

41

40

Money market

402,835

404,385

384,090

359,328

305,506

(2)

10

Total non-maturity deposits

2,016,736

1,806,460

1,763,116

1,590,920

1,484,864

47

29

Total time deposits

678,126

844,097

932,635

902,665

996,512

(79)

(55)

Total deposits

$
2,694,862

$
2,650,557

$
2,695,751

$
2,493,585

$
2,481,376

7
%

(0)
%


											Annualized Growth %
(in thousands, except ratios)	Mar 31, 2021		Dec 31, 2020		Sep 30, 2020		Jun 30, 2020		Mar 31, 2020		March 31, 2021
Demand	$	586,487	$	544,636	$	515,064	$	504,325	$	400,410	31	%
NOW		761,817		738,849		706,048		642,908		578,320	12
Savings		560,095		521,638		511,938		466,668		423,345	29
Money market		365,507		402,731		388,356		402,835		404,385	(37)
Total non-maturity deposits		2,273,906		2,207,854		2,121,406		2,016,736		1,806,460	12
Total time deposits		638,436		698,361		813,509		678,126		844,097	(34)
Total deposits	$	2,912,342	$	2,906,215	$	2,934,915	$	2,694,862	$	2,650,557	1	%

6858

Table of Contents

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 June 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

$
952,264

$
9,720

4.11
%
$
846,921

$
10,009

4.74
%
Commercial and industrial

522,360

5,154

3.97

416,000

4,929

4.75

Residential

1,117,608

10,591

3.81

1,176,583

11,522

3.93

Consumer

126,413

1,199

3.81

111,641

1,451

5.21

Total loans ⁽¹⁾

2,718,645

26,664

3.94

2,551,145

27,911

4.39

Securities and other ⁽²⁾

648,185

5,261

3.26

779,072

6,388

3.29

Total earning assets

3,366,830

31,925

3.81
%

3,330,217

34,299

4.13
%
Other assets

440,291



315,861



Total assets

$
3,807,121



$
3,646,078



Liabilities













NOW

$
611,860

$
213

0.14
%
$
459,572

$
557

0.49
%
Savings

450,621

172

0.15

352,733

189

0.21

Money market

411,232

414

0.40

338,095

1,212

1.44

Time deposits

776,042

3,750

1.94

935,616

4,928

2.11

Total interest bearing deposits

2,249,755

4,549

0.81

2,086,016

6,886

1.32

Borrowings

612,538

2,297

1.51

789,953

5,403

2.74

Total interest bearing liabilities

2,862,293

6,846

0.96
%

2,875,969

12,289

1.71
%
Non-interest bearing demand deposits

472,688





349,322



Other liabilities

66,295





33,107



Total liabilities

3,401,276





3,258,398



Total shareholders' equity

405,845





387,680



Total liabilities and shareholders' equity

$
3,807,121





$
3,646,078





Net interest spread





2.85
%





2.42
%
Net interest margin





3.00





2.65


	Three Months Ended March 31,
	2021						2020
	Average						Average
(in thousands, except ratios)	Balance		Interest⁽³⁾		Yield/Rate⁽³⁾		Balance		Interest⁽³⁾		Yield/Rate⁽³⁾
Assets
Interest-bearing deposits with other banks⁽⁴⁾	$	176,728	$	39	0.09	%	$	16,933	$	49	1.16	%
Securities available for sale and FHLB stock⁽²⁾⁽³⁾		613,459		4,221	2.79			661,848		5,764	3.50
Loans:
Commercial real estate		1,099,937		9,987	3.68			945,851		10,484	4.46
Commercial and industrial		377,176		3,594	3.86			423,393		5,151	4.89
Paycheck protection program		65,149		1,304	8.12			—		—	—
Residential		916,633		8,508	3.76			1,141,908		10,909	3.84
Consumer		109,802		965	3.56			130,471		1,688	5.20
Total loans ⁽¹⁾		2,568,697		24,358	3.85			2,641,623		28,232	4.30
Total earning assets		3,358,884		28,618	3.46	%		3,320,404		34,045	4.12	%
Other assets		357,900						341,355
Total assets	$	3,716,784					$	3,661,759

Liabilities
NOW	$	749,100	$	250	0.14	%	$	570,127	$	565	0.40	%
Savings		541,203		169	0.13			410,931		258	0.25
Money market		378,743		127	0.14			373,650		934	1.01
Time deposits		675,422		2,405	1.44			892,654		4,263	1.92
Total interest bearing deposits		2,344,468		2,951	0.51			2,247,362		6,020	1.08
Borrowings		340,209		1,811	2.16			556,824		2,911	2.10
Total interest bearing liabilities		2,684,677		4,762	0.72	%		2,804,186		8,931	1.28	%
Non-interest bearing demand deposits		550,657						406,951
Other liabilities		74,646						44,343
Total liabilities		3,309,980						3,255,480

Total shareholders' equity		406,804						406,279

Total liabilities and shareholders' equity	$	3,716,784					$	3,661,759

Net interest spread					2.74	%					2.84	%
Net interest margin⁽¹⁾					2.88						3.04
Core net interest margin ⁽²⁾					2.78						3.04

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

(2)	The average balance for securities available for sale is based on amortized cost.

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

(4)	Income from interest-bearing deposits with other banks has been separated from securities and restated for prior periods to conform to the current period presentation.

~~Table of Contents~~

Six Months Ended June 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

$
951,866

$
20,204

4.27
%
$
839,216

$
19,730

4.74
%
Commercial and industrial

477,850

10,305

4.34

410,861

9,715

4.77

Residential

1,125,863

21,500

3.84

1,160,733

22,648

3.93

Consumer

128,621

2,887

4.51

112,288

2,915

5.24

Total loans ⁽¹⁾

2,684,200

54,896

4.11

2,523,098

55,008

4.40

Securities and other ⁽²⁾

655,123

11,074

3.40

778,132

13,033

3.38

Total earning assets

3,339,323

65,970

3.97
%

3,301,230

68,041

4.16
%
Other assets

447,104



329,108





Total assets

$
3,786,427



$
3,630,338





Liabilities













NOW

$
596,409

$
778

0.26
%
$
464,969

$
1,143

0.50
%
Savings

433,693

430

0.20

349,966

352

0.20

Money market

394,036

1,348

0.69

335,421

2,353

1.41

Time deposits

827,556

8,013

1.95

918,500

9,344

2.05

Total interest bearing deposits

2,251,694

10,569

0.94

2,068,856

13,192

1.29

Borrowings

579,785

5,208

1.81

776,551

10,558

2.74

Total interest bearing liabilities

2,831,479

15,777

1.12
%

2,845,407

23,750

1.68
%
Non-interest bearing demand deposits

491,950





372,259





Other liabilities

56,936





30,266





Total liabilities

3,380,365





3,247,932





Total shareholders' equity

406,062





382,406





Total liabilities and shareholders' equity

$
3,786,427





$
3,630,338





Net interest margin





2.85
%





2.47
%
Net interest margin





3.02





2.71

~~(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.~~

7059

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 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.

7160

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 June 30,

Six Months Ended June 30,
(in thousands)

Calculations

2020

2019

2020

2019
GAAP net income



$
8,481

$
6,117

$
16,202

$
13,398
Plus (less):










Gain on sale of securities, net



(1,351)

—

(1,486)

—
Loss on sale of premises and equipment, net



(2)

21

90

21
Loss on other real estate owned



—

—

31

—
Loss on debt extinguishment

1,351

—

1,351

—
Acquisition, restructuring and other expenses



158

280

261

280
Income tax expense⁽¹⁾



(37)

(72)

(59)

(72)
Total adjusted income⁽²⁾

(A)

$
8,600

$
6,346

$
16,390

$
13,627

GAAP net interest income

(B)

$
24,590

$
21,496

$
49,153

$
43,261
Plus: Non-interest income



9,710

7,453

18,131

13,620
Total Revenue



34,300

28,949

67,284

56,881
Less: Gain on sale of securities, net



(1,351)

—

(1,486)

—
Total adjusted revenue⁽²⁾

(C)

$
32,949

$
28,949

$
65,798

$
56,881

GAAP total non-interest expense



$
22,266

$
20,906

$
44,625

$
39,530
Less: Loss on sale of premises and equipment, net



2

(21)

(90)

(21)
Less: Loss on other real estate owned



—

—

(31)

—
Less: Loss on debt extinguishment

(1,351)

(1,351)

Less: Acquisition, restructuring and other expenses



(158)

(280)

(261)

(280)
Adjusted non-interest expense⁽²⁾

(D)

$
20,759

$
20,605

$
42,892

$
39,229

(in millions)










Total average earning assets

(E)

$
3,367

$
3,330

$
3,339

$
3,301
Total average assets

(F)

3,807

3,646

3,786

3,630
Total average shareholders' equity

(G)

406

388

406

382
Total average tangible shareholders' equity⁽²⁾⁽³⁾

(H)

278

280

278

275
Total tangible shareholders' equity, period-end⁽²⁾⁽³⁾

(I)

277

283

277

283
Total tangible assets, period-end⁽²⁾⁽³⁾

(J)

3,653

3,580

3,653

3,580

(in thousands)










Total common shares outstanding, period-end

(K)

15,214

15,544

15,214

15,544
Average diluted shares outstanding

(L)

15,441

15,586

15,523

15,582

Adjusted earnings per share, diluted

(A/L)

$
0.56

$
0.41

$
1.06

$
0.88
Tangible book value per share, period-end⁽²⁾

(I/K)

18.18

18.23

18.18

18.23
Securities adjustment, net of tax⁽¹⁾⁽⁴⁾

(M)

11,412

5,550

11,412

5,550
Tangible book value per share, excluding securities adjustment⁽²⁾⁽⁴⁾

(I+M)/K

17.43

17.88

17.43

17.88
Total tangible shareholders' equity/total tangible assets⁽²⁾

(I/J)

7.57

7.92

7.57

7.92


		Three Months Ended March 31,
(in thousands)	Calculations	2021		2020
GAAP net income		$	9,480	$	7,721
Gain on sale of securities, net			—		(135)
Loss on sale of premises and equipment, net			8		92
Loss on other real estate owned			—		31
Acquisition, conversion and other expenses			889		103
Income tax expense ⁽¹⁾			(213)		(22)
Total adjusted income⁽²⁾	(A)	$	10,164	$	7,790

GAAP net interest income	(B)	$	23,422	$	24,563
Plus: Non-interest income			10,248		8,421
Total Revenue			33,670		32,984
Gain on sale of securities, net			—		(135)
Total adjusted revenue⁽²⁾	(C)	$	33,670	$	32,849

GAAP total non-interest expense		$	22,491	$	22,359
Loss on sale of premises and equipment, net			(8)		(92)
Loss on other real estate owned			—		(31)
Acquisition, conversion and other expenses			(889)		(103)
Adjusted non-interest expense⁽²⁾	(D)	$	21,594	$	22,133

Total revenue			33,670		32,984
Total non-interest expense			22,491		22,359
Pre-tax, pre-provision net revenue		$	11,179	$	10,625

Adjusted revenue			33,670		32,849
Adjusted non-interest expense			21,594		22,133
Adjusted pre-tax, pre-provision net revenue		$	12,076	$	10,716

(in millions)
Average earning assets	(E)	$	3,359	$	3,306
Average paycheck protection program (PPP) loans	(R)		65		—
Average earning assets, excluding PPP loans	(S)		3,294		3,306
Average assets	(F)		3,717		3,662
Average shareholders' equity	(G)		407		406
Average tangible shareholders' equity⁽²⁾⁽³⁾	(H)		280		278
Tangible shareholders' equity, period-end⁽²⁾⁽³⁾	(I)		279		276
Tangible assets, period-end⁽²⁾⁽³⁾	(J)		3,603		3,549

(in thousands)
Common shares outstanding, period-end	(K)		14,950		15,587
Average diluted shares outstanding	(L)		15,007		15,593

Adjusted earnings per share, diluted	(A/L)	$	0.68	$	0.50
Tangible book value per share, period-end⁽²⁾	(I/K)		18.64		17.70
Securities adjustment, net of tax⁽¹⁾⁽⁴⁾	(M)		4,510		9,560
Tangible book value per share, excluding securities adjustment⁽²⁾⁽⁴⁾	(I+M)/K		18.34		17.09
Total tangible shareholders' equity/total tangible assets⁽²⁾	(I/J)		7.73		7.77

7261

Table of Contents

Three Months Ended June 30,

Six Months Ended June 30,

Calculations

2020

2019

2020

2019
Performance ratios⁽⁵⁾

Return on assets



0.90
%

0.67
%

0.86
%

0.74
Adjusted return on assets⁽²⁾

(A/F)

0.91

0.70

0.87

0.76
Return on equity



8.40

6.33

8.02

7.07
Adjusted return on equity⁽²⁾

(A/G)

8.52

6.57

8.12

7.19
Adjusted return on tangible equity⁽²⁾⁽⁶⁾

(A+Q)/H

12.72

9.30

12.13

10.22
Efficiency ratio⁽²⁾⁽⁷⁾

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

60.67

68.48

62.74

66.25
Net interest margin⁽²⁾

(B+P)/E

3.00

2.65

3.02

2.71

Supplementary data (in thousands)










Taxable equivalent adjustment for efficiency ratio

(N)

$
646

$
676

$
1,365

$
1,360
Franchise taxes included in non-interest expense

(O)

120

111

239

231
Tax equivalent adjustment for net interest margin

(P)

490

514

1,041

1,029
Intangible amortization

(Q)

256

207

512

414


		Three Months Ended March 31,
	Calculations	2021			2020
Performance ratios⁽⁵⁾
GAAP Return on assets			1.03	%		0.85
Adjusted return on assets⁽²⁾	(A/F)		1.11			0.86
GAAP Return on equity			9.45			7.64
Adjusted return on equity⁽²⁾	(A/G)		10.13			7.71
Adjusted return on tangible equity⁽²⁾	(A+Q)/H		15.00			11.54
Efficiency ratio⁽²⁾⁽⁶⁾	(D-O-Q)/(C+N)		61.95			64.82
Net interest margin⁽²⁾	(B+P)/E		2.88			3.04
Adjusted net interest margin⁽⁷⁾	(B+P-T)/S		2.78			3

Supplementary data (in thousands)
Taxable equivalent adjustment for efficiency ratio	(N)	$	595		$	719
Franchise taxes included in non-interest expense	(O)		125			119
Tax equivalent adjustment for net interest margin	(P)		433			551
Intangible amortization	(Q)		241			256
Interest and fees on PPP loans	(T)		1,304			—

(1)	Assumes a marginal tax rate of 23.71% in the first quarter of 2021 and fourth quarter of 2020 and 23.87% infor the first three quarters of 2020. ~~A marginal tax rate of 23.78% was used in 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 taking adjusted earnings divided by shareholders’ equity less the tax-effected amortization of intangible assets, assuming a marginal rate of 23.87% for the first half of 2020 and the fourth quarter of 2019, and 23.78% in the first three quarters of 2019.

~~(7)~~

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

(7)	Core net interest margin excludes Paycheck Protection Program loans.

7362

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FINANCIAL SUMMARY

~~The Company~~Bar Harbor Bankshares reported ~~second~~a 26% increase in earnings for the first quarter ~~2020 net income of $8.5 million or $0.55 per diluted share; up 41% over~~2021 compared to the same quarter of ~~2019 of $6.1~~2020. Net income in the first quarter 2021 was $9.5 million, or ~~$0.39~~$0.63 per ~~diluted share. Adjusted earnings (non-GAAP measure) in the second quarter 2020 totaled $8.6 million, or $0.56 per diluted~~ share, compared to ~~$6.3~~$7.7 million, or ~~$0.41~~$0.50 per ~~diluted~~ share ofin the same quarter of ~~2019.~~2020. For the same periods, adjusted earnings (non-GAAP) were $10.2 million, or $0.68 per share, compared to $7.8 million, or $0.50 per share. Non-recurring expenses in the first quarter 2021 included a reduction in workforce charges totaling $900 thousand, or $0.05 per share.

~~Financial highlights for the second quarter 2020 include~~Key ratios included the following ~~as compared to~~during the ~~second~~first quarter ~~of 2019 unless otherwise noted:~~

2021:

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~~18%~~1.03% return on assets; 1.11% core return on assets (non-GAAP)

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8% annualized ~~growth in~~total commercial ~~loans,~~loan growth, excluding paycheck protection program ~~(PPP)~~(“PPP”) loans

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~~32%~~12% annualized ~~growth~~increase in ~~total non-maturity~~core deposits ~~excluding balances from PPP loans~~

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~~3.00%~~5% increase in pre-tax, pre-provision net ~~interest margin compared to 2.65%~~revenue; 13% excluding non-core charges (non-GAAP)

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~~12%~~22% increase in ~~non-interest~~fee income ~~excluding $1.4 million in security gains~~

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~~0.54% non-accruing loans~~0.55% non-accrual to total loan ratio, 0.47% excluding purchased credit deteriorated (“PCD”) loans ~~excluding PPP loans, compared to 0.66%~~

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~~0.90% return on assets, compared to 0.67%~~(non- GAAP), net charge-offs near zero

~~Coming out of the uncertainty of~~During the first quarter ~~teams~~2021, adjusted earnings increased 36% over the same quarter of 2020, improving adjusted return on assets to 1.11%. Earnings in the quarter were driven by strong 8% annualized growth in total commercial loans excluding PPP loans, higher wealth management and mortgage banking income, lower core non-interest expenses and a credit provision recapture. The Company had a 13% increase in core pre-tax, pre-provision net revenue reflecting a continued development across its varying businesses lines. Wealth management income increased 9% due to a 23% increase in assets under management (“AUM”) in the first quarter 2021, compared to the same quarter of 2020. Balancing growth with earnings is a key fundamental to the Company’s business model. Therefore, the Company ~~communicated directly with customers~~continues to ~~better understand~~generate significant gains from residential loan sales that are more profitable in the ~~developing challenges~~short and opportunities. As a result, the Company took on the economic headwinds in stride while improving profitability during the second quarter 2020. Return on assets improved five basis points during the second quarter to 0.90%, a trend that is expected to continue as strategies are executed throughout all aspects of business operations. Commercial loans led the quarter with strong double digit growth even excluding the influx of PPP loans. This demonstrates an understanding of client needs while creating opportunities with targeted prospects. Given the lower interest rate environment, the Company tailored its strategy towards leveraging the secondary market sales platform on its mortgage production. Mortgage banking fee income grew, doubling compared to any prior quarter, in lieu of interest income as residential loans were allowed to contractlong term versus recording them on the balance sheet.

~~The Company’s credit quality remains strong in~~With a continued focus on profitability, the ~~current economic cycle adhering to a strong credit culture. The proven lending and credit teams, experienced with various cycles, have diligently managed underwriting practices~~Company reduced most categories of non-interest expense during ~~these uncertain times. Risk ratings on loans remained steady with~~ the first quarter ~~2020,~~2021 as compared with ~~lower past due accounts~~the same quarter 2020. Additionally, the Company started an intensive review of non-interest expense leveraging a strategic third-party partner. The goal of the review is to identify normalized expense run-rates that are optimal for the Company’s current size and ~~net charge-offs near record lows. The Company’s second quarter provision~~footprint, and establish sustainable run-rates that allow for loan losses increased slightly by $243 thousand, which included overall higher economic qualitative factors plus a specific reserve on one long-standing commercial relationship, offset by other credit quality improvements.revenue growth in the future. The Company ~~has~~recorded one-time charges related to early retirement and reduction in workforce initiatives, as a ~~history~~result of ~~settling non-performing loans for their carrying values or higher.~~

~~PPP loan originations leveled off~~early milestones achieved in the expense review. Those one-time charges are expected to decrease salary and benefit expense by ~~mid-June for a total of approximately 1,900 loans with a total principal balance of $131.5~~more than $3.0 million ~~and net unearned fees of $5.3 million. Accretion of the net fees began~~annually starting in the second quarter 2021. The final results of the review and isaction plans are expected to be ~~accelerated~~completed by the end of the ~~year depending on the timing of customer forgiveness and processing by the Small Business Administration (“SBA”). Throughout the~~ second quarter, the Company modified close to 800 loans totaling about $400.0 million, which were mostly temporary principal deferrals with normal interest accruals. At quarter end almost 20% of the modified loans resumed payments under normalized arrangements with the remaining population expected to migrate to regular payments in the second half of the year. Accrued interest recorded under the modified plans currently totals $2.4 million, all of which is expected to be collected over the remaining lives of the loans.

Non-maturity deposits were a significant source of funding during the second quarter 2020 and were up 32% on an annualized basis, excluding deposits from PPP loans, further reducing reliance on wholesale funding. Excluding the Federal Reserve credit facility for PPP loans, senior borrowings were down 17%. The Company continues to actively manage its balance sheet and support net interest margin by locking into lower cost wholesale funding through a mixture of longer durations and derivative instruments, and managing its cost of deposits in line with market expectations. The Company is also further executing on deleveraging and/or remixing various asset classes, taking advantage of current market disruptions. Additionally, the Company continues to have access to a significant amount of funding through diversified sources of liquidity.quarter.

The Company’s provision for credit losses was a benefit to earnings of $500 thousand due to improved macroeconomic expectations along with lower specific reserves. Quarterly stress testing and tightly managed credit disciplines also contributed to the recapture of the Company’s provision.

Liquidity levels increased through new core deposit account openings totaling 4,300 in the first quarter 2021, which sustained the Company’s loans to deposits ratio at 88% from year-end 2020. Growth in deposits has allowed the Company to optimize cost of funds by reducing wholesale funding as a percentage of total debt to 15%, compared to 29% for the first quarter 2020. Over the past several quarters excess liquidity was used to fund earning asset growth, specifically in commercial loans.

The Company adopted ASU 2016-13 (Topic 326), “Measurement of Credit Losses on Financial Instruments,” which replaces the current incurred loss accounting model with a current expected credit loss (CECL) approach, effective January 1, 2021., The Company adopted ASC 326 using the modified retrospective approach method for all financial assets measured at amortized cost and OBS credit exposures. Results for reporting periods beginning after January 1, 2021 are presented under ASC 326 while prior period amounts continue to be reported in accordance with previously applicable GAAP. For more information, see “Note 1 - Basis of Presentation—Significant Accounting Policies” to the Unaudited Consolidated Financial Statements in this report. The adoption of CECL increased its allowance for credit losses (ACL)

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~~The Company’s capital position is strong~~by $5.2 million and ~~risk-weighted capital ratios are quickly approaching levels seen~~reserve for unfunded commitments by $1.6 million. As a result of the adoption, the coverage ratio of ACL to total loans increased to 0.94% from 0.76% in the ~~third~~fourth quarter of ~~2019~~2020, excluding PPP loans. While uncertainties around general economic factors still exist, the Company continues to observe positive trends in its credit quality indicators. Specifically, past due accounts within the commercial real estate and residential product lines were significantly down from year-end 2020 and total past due accounts were about half of levels experienced prior to the ~~branch acquisition.~~ pandemic. Past due accounts totaled $15.7 million for the first quarter 2021, compared to $31.1 million for the same quarter of 2020.

The Company ~~also began repurchasing its common stock accumulating 392~~continues to support customers with PPP loans and COVID related loan modifications. At the end of the quarter, the Company had $23.7 million and $54.2 million of PPP loans that were originated in 2020 and 2021, respectively. Unearned fees on PPP loans at quarter-end were $340 thousand ~~shares or $7.3~~from 2020 originations and $3.5 million from 2021 originations. Although most of these loans are expected to be forgiven, the impact is not expected to have a significant effect on the operating results of any single quarter in 2021. COVID modifications totaled $43.0 million at the end of the ~~second quarter. Dividends were declared during~~first quarter of 2021, down from $68.6 million at year-end 2020, and largely represent commercial loans. These modifications are considered modest and backed by the strong credit quality of the borrowers. Most of the modifications are set to resume normal principal and interest payments starting in the second quarter ~~and are expected to be distributed in a similar manner in future quarters, which is viewed as an integral part of maximizing shareholder value.~~2021.

The Company’s ~~commitment~~capital position continues to serving customers throughout its branch footprint continues and branch lobbies are fully open adhering to national and state safety standards. Looking to the second half of the year, unknown volatilitystrengthen with growth in economic conditions and financial markets could impact the financial performance of the Company. A consistent operating model, disciplined approach to underwriting and proven execution of delivering on strategy, has well positioned the Company to handle potential challenges as they emerge. The Company remains committed to profitability and tangible book value on a 7% organic basis that excludes unrealized security gains and the impact of adopting CECL (non-GAAP). As previously announced, the Company increased its quarterly cash dividend 9% with an approximate annual yield of 3.26%, just after its repurchase of approximately 720 thousand shares in 2020. In addition, the Board of Directors approved a stock repurchase plan, authorizing the repurchase of up to 5% of the Company’s outstanding common stock, representing approximately 747 thousand shares as of March 31, 2021, which is authorized to last no longer than 12 months. These return of capital measures are supported by expanded earnings, continuous growth ~~while navigating expense management~~in capital and ~~positive operating leverage during these periods.~~on-going profitability programs, validating the Company’s commitment to building shareholder value.

COMPARISON OF FINANCIAL CONDITION AT ~~JUNE 30, 2020~~MARCH 31, 2021 AND DECEMBER 31, ~~2019~~2020

Summary

Total assets were ~~$3.8~~$3.7 billion at the end of the ~~second~~first quarter ~~2020 compared to $3.7 billion~~2021 and at year-end ~~2019.~~2020 as the Company continues to reposition and take advantage of the current interest rate and market conditions of the banking industry. Asset quality metrics remain strong with an allowance for ~~loan~~credit losses to total loans ratio of ~~0.60% compared~~0.93% with a coverage ratio to ~~0.58%~~non-accruing loans at 168%, up from 157% as of year-end ~~2019.~~2020. The loan to deposit ratio was ~~101% in~~88% at the ~~second~~end of the first quarter and at year-end 2020.

Cash

Total cash and cash equivalents at March 31, 2021 were $223.5 million, compared to ~~98%~~$226.0 million at ~~year-end 2019, slightly~~December 31, 2020 were $226 million. Balances of cash and cash equivalents continues to be elevated ~~given the increase in PPP loans despite strong~~due to growth in non-maturity ~~deposits. The Company's tangible book value per share increased 10%, on an annualized basis,~~deposits from new accounts and government stimulus outpacing the growth in ~~the first half~~other earning assets. Federal Reserve balances reflected in interest bearing deposits totaled $171.8 million and $175.0 million carrying a yield of ~~2020 from year-end 2019.~~0.10% for both periods.

Securities

Securities totaled ~~$661.8~~$641.2 million in the ~~second~~first quarter ~~2020~~2021 and ~~$683.9~~$599.1 million at year-end ~~2019~~2020 representing ~~18%~~17% and ~~19%~~16% of total assets, respectively. The ~~decrease~~increase in the first ~~half of 2020~~quarter is ~~consistent with~~due to securities purchases $79.6 million to increase the Company’s ~~strategy to deleverage~~average risk adjusted returns and increase duration on the ~~balance sheet, reduce borrowing levels and remix the investment~~ portfolio. Securities purchased in the first six months of 2020 included $59.2 million of mortgage-backed securities guaranteed by US Government-sponsored enterprises, $31.2 million of tax exempt municipal bonds, and $30.0 million of corporate bonds, in addition to a net $414 thousand decrease in FHLB stock. The purchases were offset by ~~$152.5~~$28.7 million of sales, maturities, calls and pay-downs of amortizing securities. Fair value adjustments increased the security portfolio by ~~$16.3~~$5.9 million at the end of the ~~second~~first quarter ~~2020~~2021 and ~~$7.3~~$13.1 million at year-end ~~2019. The improvement~~2020. Unrealized gains decreased during the quarter by the upward movement in ~~fair value continues~~the treasury yield curve in years three to bethirty and related impact to the ~~result of lower long-term interest rates.~~Company’s portfolio. The weighted average yield on the Company's securities ~~portfolio~~profile as of ~~June 30, 2020~~March 31, 2021 was ~~3.10%~~2.89% for the quarter compared to ~~3.42%~~2.96% at year-end ~~2019.~~2020. At the end of the ~~second~~first quarter ~~2020,~~2021 securities held by the Company had an average life of ~~4.2~~5.4 years and a duration of ~~2.9~~5.0 years compared to ~~5.0~~4.8 years and ~~3.6~~4.3 years at the end of ~~2019,~~2020, respectively.

~~Loans~~

Loan balances in the second quarter 2020 increased $88.3 million compared to year-end 2019, primarily due to a net $127.0 million in PPP originations included in the commercial and industrial category, offset by the Company’s strategy to shrink the residential loans portfolio. Commercial real estate increased $51.4 million during the first half of 2020 at an annualized rate of 11%. Commercial and industrial loans excluding PPP loans of $127.0 million increased $26.5 million during the first six months or 17% on an annualized basis. Residential real estate loan production was strong led by refinancing activity given the lower interest rate environment. The majority of residential production was sold in the secondary market to generate fee income.

~~Asset Quality~~

The allowance for loan losses totaled $16.5 million at the end of the second quarter 2020 and $15.4 million at year-end 2019. The $1.2 million increase reflects net charge offs totaling $1.3 million and a provision for loan losses of $2.5 million. The allowance for loan losses to total loans ratio for the second quarter expanded to 0.60% from 0.58% at year-end 2019. Excluding PPP loan balances, which are backed by the SBA, the ratio increased to 0.63%. Past due and delinquent loans as a percentage of total loans decreased to 0.83% from 1.19% at the end of 2019. Commercial non-accrual loans in the first six months increased $446 thousand primarily due to one commercial loan relationship that was written down by $349 thousand to its net realizable value. There were some residential loans that continued to hover around 90 days past due over the past few quarters and were conservatively placed on non-accrual status.

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InLoans Held For Sale

Held for sale loans decreased to $10.1 million at March 31, 2021 from $24.0 million at December 31, 2020. This asset category is subject to a high degree of variability depending on, among other things, recent mortgage loan rates and the timing of loan sales into the secondary market. The Company continues with its strategy to sell most of its residential mortgage originations on the secondary market. Secondary market sales of residential mortgage loans totaled $69.2 million compared to $14.8 million in the same quarter of 2020.

Loans

Loan balances in the first quarter 2021 were $2.5 billion, flat with year-end 2020. Total commercial loans grew at an annualized rate of 8%, excluding PPP loans. Commercial real estate loans grew 13% on an annualized basis and included new originations of highly sought after borrowers in favorable industries within our footprint. PPP loans totaled $77.9 million at quarter-end consisting of $54.2 million from 2021 originations and $23.7 million remaining from 2020 originations. Applications for 2021 PPP loans continue to be processed and are expected to end by the third quarter 2021 timeframe in accordance with the Consolidation and Appropriations Act 2021. Residential loans, including held for sale loans, decreased $69.6 million due to $60.7 million of originations less sales of $69.2 million and prepayments of $61.1 million as the Company ~~elected~~sold newly originated loans, allowing for the run-off of lower yielding loans.

Other Assets

The Company identifies on its balance sheet premises and equipment, other real estate owned, goodwill, other intangible assets, bank-owned life insurance, net deferred tax assets and other assets consisting of derivative fair values, right of use asset, community investments, and receivables. These collective assets totaled $327.9 million at the end of the first quarter 2021 compared to ~~defer implementation~~$332.8 million as of December 31, 2020. The decrease is primarily from the $10.5 million decrease in the fair value in customer loan derivatives and $2.5 million decrease in the fair value hedge on securities offset by $4.2 million increase in deferred tax assets and $2.7 million in new community limited partnership investments committed to during the quarter. Community limited partnership investments provide affordable loans or equity funding typically for multifamily or residential real estate in qualified community reinvestment areas, some of which may involve low income housing tax credits. Partnerships can also include loans for commercial purposes used in economic development in qualified community reinvestment areas.

Allowance for Credit Losses

The allowance for credit losses totaled $23.7 million at the end of the first quarter 2021 and $19.0 million at year-end 2020. The ACL to total loans ratio, excluding PPP, for the first quarter expanded to 0.94% from 0.76% in the fourth quarter 2020. These increases are is primarily due to the Company’s adoption of CECL as ~~allowed under~~of January 1, 2021, which increased the ~~CARES Act. As result,~~ACL by $5.2 million and unfunded commitment reserves by $1.6 million. Since the ~~Company continues~~beginning of the first quarter, the ACL decreased due to ~~operate its incurred loss model.~~improved macroeconomic forecasts and fewer reserves on specific loans. While the ~~impact~~first quarter ACL includes the effect of ~~COVID-19 and other market conditions remain uncertain,~~net charge-offs, the ~~Company believes~~majority is due to the ~~existing allowance for~~settlement of a PCD loan ~~losses is sufficient to absorb inherent losses based on~~that had a ~~disciplined~~$300 thousand discount that increased interest income as a recovery. There were no significant downgrades in credit ~~approach, experienced losses and methodology, and current and ongoing~~quality identified through commercial loan stress testing ~~reviews of the portfolio.~~ or through regular credit reviews.

~~Additionally, the Company performed a stress test of its commercial portfolio~~Non-accrual loans increased by $1.9 in the ~~second~~first quarter ~~2020 analyzing potentially vulnerable North American Industry Classification System codes,~~2021 primarily due to the conversion of purchase credit impaired loans to PCD loans with the CECL adoption, which does not represent a true change in ~~addition~~credit quality. Excluding PCD loans, the Company’s ratio of non-accrual loans to ~~normal migration analysis. The following segments~~total was 0.47% for the first quarter compared to 0.48% at year-end 2020.

During the first quarter stress testing was performed on 61% of the commercial loan portfolio ~~were identified for stress testing: hospitality loans with a loan-to-value in excess of 65%, all loans contained in~~which included the ~~Company’s~~ top 50 relationships, ~~and~~all criticized loans greater than $1.0 million, hospitality loans greater than $250 thousand, all loans ~~$1.0 million~~over $250 thousand with a pandemic modification and any seasonal payment, restaurant, or maturing term loans through March 31, 2022 that are greater ~~with risk ratings of special mention or higher. The results~~than $500 thousand. Results of the stress testing ~~did not indicate any meaningful deterioration in the overall quality of the commercial portfolio and any impact was considered in the adequacy of the allowance for loan losses as of June 30, 2020.~~led to no significant downgrades or changes to reserves.

~~Goodwill~~

Given current events and the economic conditions associated with COVID-19 along with the variation of the Company’s stock price, the fair value of the Company’s business and test for goodwill impairment is required under accounting standards. 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 which the stock is currently trading. While the Company concluded there is no goodwill impairment in the second quarter 2020, it will continue to evaluate its position as economic conditions change.

Deposits and Borrowings

Total deposits ~~were $2.7 billion at~~during the ~~end of the second~~ quarter ~~2020 and year-end 2019.~~increased $6.1 million to $2.9 billion. Non-maturity deposits increased ~~by 32% in the second quarter 2020,~~$66.1 million, or 12% on an annualized basis ~~excluding PPP loan related balances. During~~due to growth in new customer accounts totaling 4,300. Growth in core deposits since the first ~~half~~quarter of 2020 ~~non-maturity~~has allowed the Company to optimize its cost of funds by reducing wholesale funding as a percentage of

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total debt to 15%. Time deposits decreased $59.9 million to $638.4 million at quarter-end as the result of $57.0 million of brokered deposits reaching maturity, which were not replaced due to excess liquidity. Total borrowings increased ~~$187.6~~by $16.2 million ~~further reducing reliance~~primarily from a $50 million three-month advance replacing a three-month brokered deposit associated with a wholesale funding hedge offset by $33.9 million in payments on ~~wholesale funding.~~matured advances. The ~~Company's expanding branch model has helped to increase new accounts, which totaled 3,427~~average cost of deposits was 0.51% in the ~~second~~first quarter ~~2020~~of 2021 compared to ~~2,918~~0.61% in the fourth quarter ~~2019. Time deposits decreased $254.5 million, as part~~2020 and borrowing costs were 2.16% compared to 1.83% for the same periods. The changes in cost of funds are reflective of a ~~strategy~~shift in maturity dates due to target lower rate and longer duration funding sources. Total borrowings increased by $75.4 million as the Company utilized the Federal Reserve credit facility to fund PPP loans. Senior borrowings were down $55.8 million or 12% when excluding the PPP credit facility as a resultattrition of ~~locking into lower cost wholesale funding through a mixture of longer durations and derivative instruments.~~ balances.

Derivative Financial Instruments

The notional balance of derivative financial instruments increased to ~~$750.9~~$960.5 million at the end of the ~~second~~first quarter ~~2020~~2021 from ~~$580.4~~$876.6 million at year-end ~~2019.~~2020. The increase is principally due to a ~~$25.0~~$50.0 million ~~additional cash flow~~new hedge on ~~wholesale funding, a $115.0~~variable rate loans tied to one-month LIBOR and $49.7 million increase in customer loan derivatives sold on commercial loans with matching hedges using national bank ~~counterparties and a $32.7 million increase in forward commitments to sell mortgages in the secondary market.~~counterparties. The net fair value of all derivatives was a liability of ~~$3.7~~$1.4 million at the end of the ~~second~~first quarter ~~2020~~2021 compared to ~~$743~~asset of $52 thousand at year-end ~~2019.~~2020. The ~~increase~~reduction in ~~the net~~ derivative ~~liability primarily~~fair value 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 second quarter 2020.~~impact rises in long-term treasury yields.

Equity

Total equity was ~~$404.1~~$405.6 million, compared with ~~$396.4~~$411.3 million at year-end ~~2019.~~2020. The ~~Company's~~reduction reflects the impact of changes in unrealized gains and the adoption of CECL in the first quarter 2021. The Company’s book value per share was $27.13 at March 31, 2021 compared with $27.58 at December 31, 2020. Net unrealized gains on securities increased ~~to $26.56~~equity by $4.5 million at the end of the ~~second~~ quarter ~~2020 from $25.48~~and $10.0 million at year-end ~~2019. The increase includes a $5.9 million improvement in fair value of securities, net of tax, along with strong net income of $16.2 million offset~~2020. Equity was also reduced by ~~$6.8~~$5.2 million in ~~dividends~~the first quarter due to implementing CECL. Excluding security adjustments and ~~common stock repurchases of $7.3 million. The Company evaluates changes in~~CECL adoption, tangible ~~book value, a non-GAAP financial measure that is a commonly used valuation metric in the investment community, which parallels some regulatory capital measures. Tangible~~ book value per share ~~(non-GAAP measure) increased to $18.18 per share at June 30,~~was $18.69 and $18.38 as of March 31, 2021 and December 31, 2020, ~~up from $17.30 per share at year-end 2019, an increase of 10% on an annualized basis.~~ respectively.

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COMPARISON OF OPERATING RESULTS FOR THE THREE ~~AND SIX~~ MONTHS ENDED ~~JUNE 30,~~MARCH 31, 2021 AND 2020 ~~AND 2019~~

Summary

Net income in the ~~second~~first quarter ~~2020~~2021 was ~~$8.5~~$9.5 million, or ~~$0.55~~$0.63 per diluted share, compared with $6.1 million, or $0.39 per diluted share, in the same quarter 2019. The non-GAAP measure of adjusted earnings in the second quarter 2020 totaled $8.6 million, or $0.56 per diluted share, compared to ~~$6.3~~$7.7 million, or ~~$0.41~~$0.50 per ~~diluted~~ share, in the same quarter of ~~2019. Noteworthy improvements~~2020. Net income benefited from higher fee income, lower operating expenses and a credit provision recapture in ~~net income include a lower cost of funds and increased non-interest income offset in part by higher operational expenses.~~the first quarter 2021. The Company's return on assets ratio was ~~0.90%~~1.03% during the ~~second~~first quarter of ~~2020~~2021 and ~~0.67%~~0.85% in the same quarter of ~~2019 and the~~2020. Adjusted return on equity ~~ratio~~ was ~~8.40% and 6.33% for~~1.11% during the ~~same respective periods.~~

~~The Company reported~~ first ~~half 2020 net income~~quarter of ~~$16.2 million or $1.04 per diluted share,~~2021 compared ~~with $13.4 million or $0.86 per diluted share~~to 0.86% in the same ~~period~~quarter of ~~2019. Adjusted earnings increased to $16.4 million, or $1.06 per diluted share comparedwith$13.6million,~~or~~$0.88per~~ ~~diluted~~ ~~share,fortherespectiveperiods.Thesechangeslargelyreflectthesame factors and trends discussed above that drove second quarter net income. The return on assets ratio during the first half~~of~~2020was0.86%compared~~to~~0.74%~~in~~theprioryeardue~~to ~~higher~~ ~~netincomeand~~a~~higheraverageassetbase. Return on equity in the first half 2020 increased to 8.02% from 7.07% in the prior year due to higher~~ ~~net~~ ~~income and growth in the average equity balance.~~2020.

Net Interest Income

Net interest income was ~~$24.6~~$23.4 million ~~in the second quarter 2020~~ compared with ~~$21.5~~$24.6 million in the same quarter of ~~2019 and net~~2020. Net interest margin (“NIM”) in the first quarter of 2021 was ~~3.00% from 2.65% for~~2.88% compared to 3.04% in the same ~~respective periods.~~period of 2020. The ~~increase~~decrease in NIM is primarily driven by lower borrowing levels as the average balance decreased to $612.5 million in the second quarter 2020 from $779.0 million in the second quarter of 2019 due to continued deleveraging strategies. These balance sheet strategies along with federal funds rate cuts that began in the second half of 2019 improved borrowing costs to 1.51% in the second quarter 2020 from 2.74% in same quarter of 2019. Costs of interest-bearing deposits also decreased to 0.81% compared to 1.32% in the second quarter 2019 due to the ~~federal fund~~Federal Reserve rate cuts ~~and lower brokered deposits associated with deleveraging activities. Yields from~~in response to the pandemic, which lowered the yields on many classes of earning assets ~~were 3.81%~~and also lowered the costs of interest-bearing liabilities. The yield on earning assets was 3.46% compared to ~~4.13%~~4.12% in the ~~second~~first quarter ~~2019~~2020 reflecting loan originations and repricing of variable rate products in a lower interest rate environment. ~~Purchased loan accretion contributed 0.12%~~Costs of funds decreased to ~~net interest margin in the second quarter 2020~~0.72% compared to 0.09% in the second quarter 2019. Excluding the effects of PPP loans, the second quarter yield on total earning assets was 3.89%. PPP loans are expected to increase interest income with accelerated accretion during the second half of 2020 as loans are expected to be forgiven by the SBA.

For the first six months of the year, net interest income was $46.7 million compared with $42.4 million in the same months of 2019 and net interest margin was 3.02% from 2.71% for the same respective periods. The increase is primarily driven by lower borrowing levels and higher amount of non-maturity deposits. The average borrowing levels decreased to $579.8 million1.28% in the first ~~half~~quarter 2020 ~~from $776.6 million~~due to lower rates and reductions to wholesale funding afforded by significant growth in core deposits. PPP loans added 10 basis points to NIM during the ~~same period~~quarter as the majority of ~~2019 and borrowing costs was 1.81% from 2.74% for~~ the ~~same respective periods. Costs of interest-bearing deposits also decreased~~remaining 2020 originations were forgiven. Accretion on PPP loans originated in the first ~~six months of 2020~~quarter 2021 are not expected to ~~0.94% compared to 1.29%~~materially affect NIM until loans are forgiven starting in the ~~same months~~third quarter. Settlement of ~~2019. Yields from earning assets were 3.97%~~one significant PCD loan contributed 4 basis points to NIM due to acceleration of the related discount. Excess liquidity in the form of cash balances held mostly at the Federal Reserve Bank in the first ~~half of 2020 compared to 4.16% in the first half of 2019.~~quarter 2021 reduced NIM by 15 basis points.

~~Theyear-to-dateeffect onnetinterestmarginfromearning assets and interest bearing liabilities~~is~~thesame~~as~~thequarterlydiscussion.~~

Loan Loss Provision

The ~~second quarter 2020~~ provision for ~~loan~~credit losses ~~increased~~for the quarter was a benefit of $489 thousand compared to ~~$1.4~~an expense of $1.1 million from $562 thousand in the same quarter 2019. As previously noted, the Company has maintained its incurred loss model for calculating the allowance for loan losses. The year-over-year increase in the provision for loan losses is due to qualitative adjustments made in the general reserve to reflect a downward economic trend that started in the first quarter ~~2020 offset in part by improvements in other credit quality factors such as charge-off history and underwriting practices. Also included~~of 2020. The provision recapture in the ~~second~~first quarter ~~2020 provision~~2021 is ~~a new $349 thousand~~attributable to improving economic forecasts and lower amounts of specific ~~reserve related~~reserves due to ~~one commercial real estate relationship that is expected to be settled at its carrying value.~~credit improvements.

~~Non-Interest Income~~

Non-interest income in the second quarter 2020 was $9.7 million compared to $7.5 million in the same quarter in 2019. The increase is primarily due to a $704 thousand increase in mortgage banking income associated with secondary market

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~~sales and a $1.4 million gain on sales of securities. Trust and investment management fee~~Non-Interest Income

Non-interest income ~~contributed with a 3% year-over-year increase based on assets under management reaching $2.0 billion compared to $1.8 billion~~ in the ~~second~~first quarter ~~of 2019. Customer service fees were $2.4~~2021 increased 21% to $10.2 million ~~for the second quarter 2020 compared to $2.6~~from $8.4 million in the same quarter ~~of 2019~~in 2020 due to ~~fewer~~higher wealth management and mortgage banking income. While customer ~~transactions~~service fees were slightly down compared to the first quarter 2020, the income has been building up on a sequential quarter basis and is approaching pre-pandemic levels. Wealth management is up 9% as AUM expanded 23% over the first quarter of 2020 due to the strength of the Company’s newly consolidated platform and improved market conditions. Mortgage banking activities continue to contribute a significant amount of fee income due to the favorability of sales given the current interest rate environment. Net gains from sales totaled $1.9 million in the ~~current economic environment associated with COVID-19.~~first quarter 2021 and $186 thousand in the first quarter of 2020.

Non-interest income for the first six months of 2020 was $18.1 million compared to $13.6 million in the same period in 2019. The increase in non-interest income for the six-month period is driven by the same reasons as the quarterly period with mortgage banking increasing $939 thousand, a $1.5 million gain on sales of securities, and trust and investment management fee income increasing $705 thousand. However, customer services fees increased to $5.6 million for the first half of 2020 compared to $4.8 million from the same quarter of 2019 due to an overall increase in customer activity following the branch acquisition in October 2019.

Non-Interest Expense

Non-interest expense was ~~$22.3~~$22.5 million in the ~~second~~first quarter ~~2020~~2021 compared to ~~$20.9~~$22.4 million in the same quarter of ~~2019. The increase is primarily due to a $1.4 million loss on extinguishment of debt~~2020. Included in non-interest expense in the ~~second~~first quarter was $800 thousand of higher one-time expenses offset by $700 thousand in operational expense improvements. One-time expenses in the first quarter 2021were primarily charges from early retirement and reductions in workforce programs while the same quarter of 2020 ~~representing a prepayment penalty on a longer term and higher cost FHLB borrowing. Salary and benefit expense and occupancy and equipment~~included costs ~~were also higher during the second quarter 2020~~ to ~~support the Company’s expanded branch model and~~consolidate our wealth management ~~business.~~

~~For the first six months~~systems. Reductions to most categories of ~~2020,~~ non-interest expense ~~increased~~in the quarter helped drive our efficiency ratio (non-GAAP) to ~~$44.6 million in first half of 2019~~61.95%, down from ~~$39.5 million in~~64.82% for the same period of ~~2019. The increase in non-interest expense for the six-month period is driven by the same reasons as the quarterly period.~~2020.

Income Tax Expense

The ~~second quarter~~ effective tax rate ~~increased to 20.6% in 2020 compared with 18.2% in~~was 18.8% for both the ~~same~~first quarter of ~~2019,~~2021 and 2020 reflecting higher pre-tax income offset by the ~~higher level~~proportional amounts of ~~taxable income.~~tax-advantaged revenue.

Liquidity and Cash Flows

Liquidity is measured by the 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 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 policy is to maintain a liquidity position of at least 4% of total assets. A portion of the 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 liquidity position tightens.

The Company’s liquidity position remains strong. During the quarter we initiated pandemic-specific liquidity stress tests to analyze potential impacts from payment deferrals, unanticipated use of committed lines of credit, as well as the possibility of required servicer advances on sold loans. At ~~June 30, 2020,~~March 31, 2021, same day available ~~same-day~~ liquidity totaled approximately ~~$1.3~~$1.2 billion, including cash, borrowing capacity at ~~FHLB~~the Federal Home Loan Bank of Boston (“FHLB”) and the Federal Reserve Discount Window and various lines of credit. Additional sources of liquidity include cash flows from operations, wholesale deposits, cash flow from the ~~Company's~~Bank's amortizing securities and loan portfolios. ~~The~~At March 31, 2021, the Company had unused borrowing capacity at the FHLB of ~~$559.2~~$400.8 million, unused borrowing capacity at the Federal Reserve of ~~$82.4~~$73.8 million and unused lines of credit totaling $51.0 million, in addition to over $200.0 million in unencumbered, liquid investment portfolio assets. The Company has also utilized the Federal Reserve's Paycheck Protection Program Liquidity Facility to provide liquidity to fund PPP loans.million.

~~Table of Contents~~

The Bank maintains a liquidity contingency plan approved by the 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 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.

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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, ~~2019.~~

2020.

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

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

Management has identified the Company's 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

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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: 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 ~~June 30, 2020~~March 31, 2021 interest rate sensitivity modeling results indicate that the Bank’s balance sheet in years 1 and 2 ~~were~~was modestly asset sensitive.

Assuming short-term and long-term interest rates decline 100 basis points from current levels (i.e., a parallel yield curve shift) and the Bank’s balance sheet structure and size remain at current levels, management believes net interest income will deteriorate over the one year horizon ~~(-0.2%~~(-2.0% versus the base case) while deteriorating further from that level over the two-year horizon ~~(-8.9%~~(-10.0% 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 improve ~~slightly~~ over the one and two-year horizons ~~(1.2%~~(6.9% and ~~3.4%~~14.9%, respectively).

As compared to December 31, ~~2019,~~2020, the year-one sensitivity in the down 100 basis points scenario was up slightly for the ~~six~~three months ended ~~June 30, 2020 (-1.0%~~March 31, 2021 (-2.6% prior, versus ~~-0.2%~~-2.0% current). The year-two sensitivities in the down 100 basis points scenario ~~changed~~were mostly unchanged going from ~~-3.7%~~-9.5% to ~~-8.9%~~-10.0%. In the year-one up 200 basis points scenario, results ~~improved~~were again similar going from ~~0.7%~~7.7% to ~~1.2%~~6.9%. Year-two, up 200 basis points was ~~flat (3.3%~~down (18.4% prior, versus ~~3.4%~~14.9% 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 ~~June 30, 2020~~March 31, 2021 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.

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 were no material changes to the risk factors discussed in Part I, Item 1A. of the Company’s Annual Report on Form 10-K for the year ended December 31, ~~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)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 expired on March 20, 2021. Prior to the plan expiring the Company purchased a total of 720,043 shares, none of which were purchased in the first quarter of 2021. On April 20, 2021, Company's Board of Directors approved a twelve-month plan to repurchase up to 5% of its outstanding common stock, representing 747,000 shares.

The following table indicates that no provides certain information with regard to shares were repurchased by the Company in the first quarter of 2021:

~~(c)~~	~~The following table provides certain information with regard to~~
					Total number of shares	Maximum number of
					purchased as a part of	shares ~~repurchased by~~that may yet be
		Total number of	Average price		publicly announced	purchased under
Period		shares purchased	paid per share		plans or programs	the ~~Company in the second quarter of 2020:~~plans or programs⁽¹⁾
January 1-31, 2021		—	$	—	—	—
February 1-28, 2021		—		—	—	—
March 1-31, 2021		—		—	—	—
Total		—	$	—	—	—

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⁾
April 1-30, 2020

73,096

$
17.69

73,096

707,904
May 1-31, 2020

210,969

18.65

284,065

496,935
June 1-30, 2020

108,258

19.87

392,323

388,677
Total

392,323

$
18.74

392,323

388,677

~~(1)~~

On March 12, 2019 and 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 776,000 and 781,000 shares, respectively. The current stock repurchase plan expires on March 20, 2021.

ITEM 5. OTHER INFORMATION

Effective May 1, 2021, the Company entered into a separation agreement and general release with Richard B. Maltz in connection with the previously-announced retirement from his position as Executive Vice President, Chief Operating Officer & Chief Risk Officer. Pursuant to the Separation Agreement, among other things, Mr. Maltz will receive a separation payment equal to $250,000, subject to applicable tax with holdings, 6 months of COBRA benefits and his existing equity awards will continue to vest pursuant to the original terms.

The foregoing summary of the Separation Agreement is qualified in its entirety by reference to the text of the Separation Agreement, which is being filed as Exhibit 10.1 to this report and is incorporated in this report by reference.

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ITEM 6. EXHIBITS


~~3.1~~10.1*	~~Amended~~Separation Agreement and ~~Restated Bylaws~~General Release, effective as of May 1, 2021, among Bar Harbor Bankshares, Bar Harbor Bank & Trust and Richard B. Maltz	Filed herewith

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 ~~June 30, 2020~~March 31, 2021 is formatted in Inline Extensible Business Reporting 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

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SIGNATURES

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


	BAR HARBOR BANKSHARES


Dated: ~~August 4, 2020~~May 5, 2021	By:	/s/ Curtis C. Simard
		Curtis C. Simard
		President & Chief Executive Officer


Dated: ~~August 4, 2020~~May 5, 2021	By:	/s/ Josephine Iannelli
		Josephine Iannelli
		Executive Vice President & Chief Financial Officer

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	June 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	$	60,096	$	2,377	$	62,473	$	31,387	$	2,903	$	34,290
Other commercial real estate		722,949		196,648		919,597		666,051		230,320		896,371
Total commercial real estate		783,045		199,025		982,070		697,438		233,223		930,661

Commercial and industrial:
Commercial		384,390		69,949		454,339		239,692		59,072		298,764
Agricultural		18,026		159		18,185		20,018		206		20,224
Tax exempt		40,593		26,325		66,918		66,860		37,443		104,303
Total commercial and industrial		443,009		96,433		539,442		326,570		96,721		423,291

Total commercial loans		1,226,054		295,458		1,521,512		1,024,008		329,944		1,353,952

Residential real estate:
Residential mortgages		725,450		358,258		1,083,708		740,687		411,170		1,151,857
Total residential real estate		725,450		358,258		1,083,708		740,687		411,170		1,151,857

Consumer:
Home equity		59,413		54,686		114,099		59,368		63,033		122,401
Other consumer		8,685		1,413		10,098		11,167		1,715		12,882
Total consumer		68,098		56,099		124,197		70,535		64,748		135,283

Total loans	$	2,019,602	$	709,815	$	2,729,417	$	1,835,230	$	805,862	$	2,641,092


					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
June 30, 2020
Commercial real estate:
Construction and land development	$	—	$	—	$	267	$	267	$	59,829	$	60,096	$	—
Other commercial real estate		1,450		23		720		2,193		720,756		722,949		—
Total commercial real estate		1,450		23		987		2,460		780,585		783,045		—

Commercial and industrial:
Commercial		152		295		646		1,093		383,297		384,390		49
Agricultural		20		—		158		178		17,848		18,026		16
Tax exempt		—		—		—		—		40,593		40,593		—
Total commercial and industrial		172		295		804		1,271		441,738		443,009		65

Total commercial loans		1,622		318		1,791		3,731		1,222,323		1,226,054		65

Residential real estate:
Residential mortgages		320		1,820		1,950		4,090		721,360		725,450		270
Total residential real estate		320		1,820		1,950		4,090		721,360		725,450		270

Consumer:
Home equity		40		153		384		577		58,836		59,413		—
Other consumer		5		—		2		7		8,678		8,685		—
Total consumer		45		153		386		584		67,514		68,098		—

Total loans	$	1,987	$	2,291	$	4,127	$	8,405	$	2,011,197	$	2,019,602	$	335


	At or for the Three Months Ended June 30,				At or for the Six Months Ended June 30,
(in thousands)	2020		2019		2020		2019
Balance at beginning of year	$	2,939	$	3,025	$	3,001	$	3,086
Acquired		—		—		—		—
Additions		164		51		253		107
Amortization		(192)		(135)		(343)		(252)
Balance at end of year	$	2,911	$	2,941	$	2,911	$	2,941


Business Activities Loans	At or for the Three Months Ended June 30, 2020
	Commercial		Commercial		Residential
(in thousands)	real estate		and industrial		real estate		Consumer		Total
Balance at beginning of period	$	7,661	$	3,543	$	3,513	$	384	$	15,101
Charged-off loans		—		(153)		(21)		(35)		(209)
Recoveries on charged-off loans		71		1		—		2		74
Provision (release) for loan losses		684		(150)		453		25		1,012
Balance at end of period	$	8,416	$	3,241	$	3,945	$	376	$	15,978
Individually evaluated for impairment		687		18		60		1		766
Collectively evaluated		7,729		3,223		3,885		375		15,212
Total	$	8,416	$	3,241	$	3,945	$	376	$	15,978


Acquired Loans	At or for the Three Months Ended June 30, 2020
	Commercial		Commercial		Residential
(in thousands)	real estate		and industrial		real estate		Consumer		Total
Balance at beginning of period	$	64	$	3	$	129	$	—	$	196
Charged-off loans		—		(3)		(3)		(5)		(11)
Recoveries on charged-off loans		—		—		4		—		4
Provision (release) for loan losses		337		12		(12)		5		342
Balance at end of period	$	401	$	12	$	118	$	—	$	531
Individually evaluated for impairment		365		9		67		—		441
Collectively evaluated		36		3		51		—		90
Total	$	401	$	12	$	118	$	—	$	531


	Commercial construction
	and land development				Commercial real estate other				Total commercial real estate
(in thousands)	Jun 30, 2020		Dec 31, 2019		Jun 30, 2020		Dec 31, 2019		Jun 30, 2020		Dec 31, 2019
Grade:
Pass	$	59,829	$	31,057	$	699,720	$	646,886	$	759,549	$	677,943
Special mention		—		—		9,011		5,483		9,011		5,483
Substandard		—		330		13,257		11,974		13,257		12,304
Doubtful		267		—		961		1,708		1,228		1,708
Total	$	60,096	$	31,387	$	722,949	$	666,051	$	783,045	$	697,438


	Commercial				Agricultural				Tax exempt loans				Total commercial and industrial
(in thousands)	Jun 30, 2020		Dec 31, 2019		Jun 30, 2020		Dec 31, 2019		Jun 30, 2020		Dec 31, 2019		Jun 30, 2020		Dec 31, 2019
Grade:
Pass	$	366,761	$	221,329	$	17,138	$	18,940	$	40,593	$	66,860	$	424,492	$	307,129
Special mention		3,544		2,744		219		298		—		—		3,763		3,042
Substandard		13,363		14,866		444		780		—		—		13,807		15,646
Doubtful		722		753		225		—		—		—		947		753
Total	$	384,390	$	239,692	$	18,026	$	20,018	$	40,593	$	66,860	$	443,009	$	326,570


	Residential real estate				Home equity				Other consumer				Total residential real estate and consumer
(in thousands)	Jun 30, 2020		Dec 31, 2019		Jun 30, 2020		Dec 31, 2019		Jun 30, 2020		Dec 31, 2019		Jun 30, 2020		Dec 31, 2019
Performing	$	721,409	$	737,325	$	58,795	$	58,753	$	8,668	$	11,146	$	788,872	$	807,224
Nonperforming		4,041		3,362		618		615		17		21		4,676		3,998
Total	$	725,450	$	740,687	$	59,413	$	59,368	$	8,685	$	11,167	$	793,548	$	811,222


											Annualized
											Growth %
	June 30,		March 31,		December 31,		September 30,		June 30,		June 30,		Year to
(in thousands, except ratios)	2020		2020		2019		2019		2019		2020		Date
Commercial real estate	$	982,070	$	948,178	$	930,661	$	923,773	$	881,479	14	%	11	%
Commercial and industrial		472,524		321,605		318,988		301,590		312,029	188		96
Total commercial loans		1,454,594		1,269,783		1,249,649		1,225,363		1,193,508	58		33
Residential real estate		1,083,708		1,132,328		1,151,857		1,143,452		1,167,759	(17)		(12)
Consumer		124,197		128,120		135,283		107,375		112,275	(12)		(16)
Tax exempt and other		66,918		104,752		104,303		101,116		104,696	(144)		(72)
Total loans	$	2,729,417	$	2,634,983	$	2,641,092	$	2,577,306	$	2,578,238	14	%	7	%