Table of Contents

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: March 31,June 30, 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

GraphicGraphic

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 14,975,30014,982,325 shares of common stock, par value $2.00 per share, outstanding as of April 30,July 29, 2021.

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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 March 31,June 30, 2021 and December 31, 2020

4

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

6

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

7

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

8

Consolidated Statements of Cash Flows for the ThreeSix Months Ended March 31,June 30, 2021 and 2020

9

Notes to Unaudited Consolidated Interim Financial Statements

Note 1

Basis of Presentation

11

Note 2

Securities Available for Sale

19

Note 3

Loans and Allowance for Credit Losses

22

Note 4

Borrowed Funds

3334

Note 5

Deposits

3536

Note 6

Capital Ratios and Shareholders' Equity

3637

Note 7

Earnings per Share

3942

Note 8

Derivative Financial Instruments and Hedging Activities

4043

Note 9

Fair Value Measurements

4652

Note 10

Revenue from Contracts with Customers

5258

Note 11

Leases

5460

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

5662

Selected Financial Data

5763

Consolidated Loan and Deposit Analysis

5864

Average Balances and Average Yields/Rates

5965

Non-GAAP Financial Measures

6067

Reconciliation of Non-GAAP Financial Measures

6168

Financial Summary

6370

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

6976

Item 4.

Controls and Procedures

7178

PART II.

OTHER INFORMATION

Item 1.

Legal Proceedings

7178

Item 1A.

Risk Factors

7178

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

7279

Item 5.

Other Information

7279

Item 6.

Exhibits

7380

Signatures

7481

Table of Contents

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

FORWARD-LOOKING STATEMENTS

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

3

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PART I.          FINANCIAL INFORMATION

ITEM 1.          CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

BAR HARBOR BANKSHARES AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(in thousands, except share data)

    

March 31, 2021

    

December 31, 2020

    

June 30, 2021

    

December 31, 2020

Assets

 

  

 

  

 

  

 

  

Cash and cash equivalents:

Cash and due from banks

$

39,039

$

27,566

$

41,440

$

27,566

Interest-bearing deposits with other banks

 

184,473

 

198,441

 

132,278

 

198,441

Total cash and cash equivalents

 

223,512

 

226,007

 

173,718

 

226,007

Securities:

Securities available for sale

 

626,403

 

585,046

 

621,849

 

585,046

Federal Home Loan Bank stock

 

14,826

 

14,036

 

14,145

 

14,036

Total securities

 

641,229

 

599,082

 

635,994

 

599,082

Loans held for sale

10,148

23,988

7,942

23,988

Total loans

 

2,551,064

 

2,562,885

 

2,515,560

 

2,562,885

Less: Allowance for credit losses

 

(23,653)

 

(19,082)

 

(22,815)

 

(19,082)

Net loans

 

2,527,411

 

2,543,803

 

2,492,745

 

2,543,803

Premises and equipment, net

 

52,253

 

52,458

 

51,119

 

52,458

Goodwill

 

119,477

 

119,477

 

119,477

 

119,477

Other intangible assets

 

7,431

 

7,670

 

7,198

 

7,670

Cash surrender value of bank-owned life insurance

 

78,388

 

77,870

 

78,886

 

77,870

Deferred tax assets, net

 

5,639

 

1,745

 

4,349

 

1,745

Other assets

 

64,742

 

73,662

 

68,247

 

73,662

Total assets

$

3,730,230

$

3,725,762

$

3,639,675

$

3,725,762

Liabilities

 

  

 

  

 

  

 

  

Deposits:

 

  

 

  

 

  

 

  

Demand

$

586,487

$

544,636

$

599,598

$

544,636

NOW

 

761,817

 

738,849

 

802,681

 

738,849

Savings

 

560,095

 

521,638

 

578,361

 

521,638

Money market

 

365,507

 

402,731

 

371,075

 

402,731

Time

 

638,436

 

698,361

 

470,758

 

698,361

Total deposits

 

2,912,342

 

2,906,215

 

2,822,473

 

2,906,215

Borrowings:

 

  

 

  

 

  

 

  

Senior

 

292,210

 

276,062

 

279,991

 

276,062

Subordinated

 

60,003

 

59,961

 

60,042

 

59,961

Total borrowings

 

352,213

 

336,023

 

340,033

 

336,023

Other liabilities

 

60,094

 

72,183

 

61,597

 

72,183

Total liabilities

 

3,324,649

 

3,314,421

 

3,224,103

 

3,314,421

(continued)

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BAR HARBOR BANKSHARES AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS (continued)

(in thousands, except share data)

    

March 31, 2021

    

December 31, 2020

    

June 30, 2021

    

December 31, 2020

Shareholders’ equity

    

    

    

    

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

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

 

32,857

 

32,857

Additional paid-in capital

 

190,564

 

190,084

 

190,801

 

190,084

Retained earnings

 

196,561

 

195,607

 

201,994

 

195,607

Accumulated other comprehensive income

 

3,464

 

11,016

 

7,694

 

11,016

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)

Less: 1,456,175 and 1,512,465 shares of treasury stock at June 30, 2021 and December 31, 2020, respectively

 

(17,774)

 

(18,223)

Total shareholders’ equity

 

405,581

 

411,341

 

415,572

 

411,341

Total liabilities and shareholders’ equity

$

3,730,230

$

3,725,762

$

3,639,675

$

3,725,762

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

5

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BAR HARBOR BANKSHARES AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

Three Months Ended

March 31, 

(in thousands, except earnings per share data)

    

2021

    

2020

    

Interest and dividend income

Loans

$

24,205

$

27,987

Securities and other

 

3,979

 

5,507

Total interest and dividend income

 

28,184

 

33,494

Interest expense

 

  

 

  

Deposits

 

2,951

 

6,020

Borrowings

 

1,811

 

2,911

Total interest expense

 

4,762

 

8,931

Net interest income

 

23,422

 

24,563

Provision for credit losses

 

(489)

 

1,111

Net interest income after provision for loan losses

 

23,911

 

23,452

Non-interest income

 

  

 

  

Trust and investment management fee income

 

3,666

 

3,369

Customer service fees

 

2,970

 

3,112

Gain on sales of securities, net

 

0

 

135

Mortgage banking income

2,570

457

Bank-owned life insurance income

 

518

 

537

Customer derivative income

 

410

 

588

Other income

 

114

 

223

Total non-interest income

 

10,248

 

8,421

Non-interest expense

 

  

 

  

Salaries and employee benefits

 

12,176

 

11,884

Occupancy and equipment

 

4,328

 

4,420

Loss on premises and equipment, net

 

8

 

92

Outside services

 

432

 

534

Professional services

 

558

 

672

Communication

 

321

 

289

Marketing

 

290

 

388

Amortization of intangible assets

 

241

 

256

Acquisition, conversion and other expenses

 

889

 

103

Other expenses

 

3,248

 

3,721

Total non-interest expense

 

22,491

 

22,359

Income before income taxes

 

11,668

 

9,514

Income tax expense

 

2,188

 

1,793

Net income

$

9,480

$

7,721

Earnings per share:

 

  

 

  

Basic

$

0.63

$

0.50

Diluted

$

0.63

$

0.50

Weighted average common shares outstanding:

 

  

 

  

Basic

 

14,934

 

15,558

Diluted

 

15,007

 

15,593

Three Months Ended

Six Months Ended

June 30, 

June 30, 

(in thousands, except earnings per share data)

    

2021

    

2020

    

2021

    

2020

Interest and dividend income

Loans

$

23,191

$

26,493

$

47,396

$

54,480

Securities and other

 

3,992

 

4,942

 

7,971

 

10,449

Total interest and dividend income

 

27,183

 

31,435

 

55,367

 

64,929

Interest expense

 

  

 

  

 

  

 

  

Deposits

 

2,603

 

4,548

 

5,554

 

10,568

Borrowings

 

1,826

 

2,297

 

3,637

 

5,208

Total interest expense

 

4,429

 

6,845

 

9,191

 

15,776

Net interest income

 

22,754

 

24,590

 

46,176

 

49,153

Provision for credit losses

 

(765)

 

1,354

 

(1,254)

 

2,465

Net interest income after provision for loan losses

 

23,519

 

23,236

 

47,430

 

46,688

Non-interest income

 

  

 

  

 

  

 

  

Trust and investment management fee income

 

3,801

 

3,159

 

7,467

 

6,528

Customer service fees

 

3,257

 

2,439

 

6,227

 

5,551

Gain on sales of securities, net

 

50

 

1,351

 

50

 

1,486

Mortgage banking income

1,553

1,124

4,123

1,581

Bank-owned life insurance income

 

498

 

496

 

1,016

 

1,033

Customer derivative income

 

86

 

513

 

496

 

1,101

Other income

 

260

 

628

 

374

 

851

Total non-interest income

 

9,505

 

9,710

 

19,753

 

18,131

Non-interest expense

 

  

 

  

 

  

 

  

Salaries and employee benefits

 

11,356

 

11,909

 

23,532

 

23,793

Occupancy and equipment

 

3,894

 

3,860

 

8,222

 

8,280

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

 

1

 

(2)

 

9

 

90

Outside services

 

533

 

442

 

965

 

976

Professional services

 

151

 

337

 

709

 

1,009

Communication

 

198

 

194

 

519

 

483

Marketing

 

534

 

282

 

824

 

670

Amortization of intangible assets

 

233

 

256

 

474

 

512

Loss on debt extinguishment

1,351

0

1,351

Acquisition, conversion and other expenses

 

552

 

158

 

1,441

 

261

Other expenses

 

4,272

 

3,479

 

7,520

 

7,200

Total non-interest expense

 

21,724

 

22,266

 

44,215

 

44,625

Income before income taxes

 

11,300

 

10,680

 

22,968

 

20,194

Income tax expense

 

2,275

 

2,199

 

4,463

 

3,992

Net income

$

9,025

$

8,481

$

18,505

$

16,202

Earnings per share:

 

  

 

  

 

  

 

  

Basic

$

0.60

$

0.55

$

1.24

$

1.05

Diluted

$

0.60

$

0.55

$

1.23

$

1.04

Weighted average common shares outstanding:

 

  

 

  

 

  

 

  

Basic

 

14,965

 

15,424

 

14,950

 

15,500

Diluted

 

15,042

 

15,441

 

15,026

 

15,523

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

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BAR HARBOR BANKSHARES AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

    

Three Months Ended

March 31, 

(in thousands)

    

2021

    

2020

Net income

$

9,480

$

7,721

Other comprehensive income, before tax:

 

  

 

  

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

 

(7,185)

 

5,357

Changes in unrealized loss on hedging derivatives

 

(2,659)

 

(2,382)

Changes in unrealized loss on pension

 

0

 

0

Income taxes related to other comprehensive income:

 

  

 

  

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

 

1,672

 

(1,346)

Changes in unrealized loss on hedging derivatives

 

620

 

650

Changes in unrealized loss on pension

 

0

 

0

Total other comprehensive (loss) income

 

(7,552)

 

2,279

Total comprehensive income

$

1,928

$

10,000

    

Three Months Ended

    

Six Months Ended

June 30, 

June 30, 

(in thousands)

    

2021

    

2020

    

2021

    

2020

Net income

$

9,025

$

8,481

$

18,505

$

16,202

Other comprehensive income, before tax:

 

  

 

  

 

  

 

  

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

 

3,557

 

2,421

 

(3,628)

 

7,662

Changes in unrealized gain (loss) on hedging derivatives

 

1,963

 

626

 

(696)

 

(1,639)

Changes in unrealized loss on pension

 

0

 

0

 

0

 

0

Income taxes related to other comprehensive income:

 

  

 

  

 

  

 

  

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

 

(830)

 

(569)

 

842

 

(1,709)

Changes in unrealized (gain) loss on hedging derivatives

 

(460)

 

(147)

 

160

 

296

Changes in unrealized loss on pension

 

0

 

0

 

0

 

0

Total other comprehensive income (loss)

 

4,230

 

2,331

 

(3,322)

 

4,610

Total comprehensive income

$

13,255

$

10,812

$

15,183

$

20,812

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

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BAR HARBOR BANKSHARES AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

    

    

    

Accumulated 

    

    

Common 

Additional 

other 

stock

paid-in

Retained 

comprehensive 

Treasury

(in thousands, except per share data)

    

 amount

    

 capital

    

earnings

    

income (loss)

    

 stock

    

Total

Balance at December 31, 2019

 

$

32,857

$

188,536

$

175,780

$

3,911

$

(4,677)

$

396,407

 

Net income

 

0

 

0

 

7,721

 

0

 

0

 

7,721

Other comprehensive income

 

0

 

0

 

0

 

2,279

 

0

 

2,279

Cash dividends declared ($0.22 per share)

 

0

 

0

 

(3,429)

 

0

 

0

 

(3,429)

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

 

0

 

118

 

0

 

0

 

0

 

118

Balance at March 31, 2020

$

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

 

0

 

0

 

9,480

 

0

 

0

 

9,480

Other comprehensive (loss) income

 

0

 

0

 

0

 

(7,552)

 

0

 

(7,552)

Cash dividends declared ($0.22 per share)

 

0

 

0

 

(3,284)

 

0

 

0

 

(3,284)

Net issuance (34,049 shares) to employee stock plans, including related tax effects

 

0

 

(186)

 

0

 

0

 

358

 

172

Recognition of stock based compensation

 

0

 

666

 

0

 

0

 

0

 

666

Balance at March 31, 2021

$

32,857

$

190,564

$

196,561

$

3,464

$

(17,865)

$

405,581

    

    

    

Accumulated 

    

    

Common 

Additional 

other 

stock

paid-in

Retained 

comprehensive 

Treasury

(in thousands, except per share data)

    

 amount

    

 capital

    

earnings

    

income (loss)

    

 stock

    

Total

Balance at December 31, 2019

 

$

32,857

$

188,536

$

175,780

$

3,911

$

(4,677)

$

396,407

Net income

 

0

 

0

 

7,721

 

0

 

0

 

7,721

Other comprehensive income

 

0

 

0

 

0

 

2,279

 

0

 

2,279

Cash dividends declared ($0.22 per share)

 

0

 

0

 

(3,429)

 

0

 

0

 

(3,429)

Treasury stock purchased (6,069 shares)

 

0

 

0

 

0

 

0

 

(130)

 

(130)

Net issuance (27,786 shares) to employee stock plans, including related tax effects

 

0

 

660

 

0

 

0

 

129

 

789

Recognition of stock based compensation

 

0

 

118

 

0

 

0

 

0

 

118

Balance at March 31, 2020

$

32,857

$

189,314

$

180,072

$

6,190

$

(4,678)

$

403,755

Net income

 

0

 

0

 

8,481

 

0

 

0

 

8,481

Other comprehensive income

 

0

 

0

 

0

 

2,331

 

0

 

2,331

Cash dividends declared ($0.22 per share)

 

0

 

0

 

(3,390)

 

0

 

0

 

(3,390)

Common stock purchased (399,622 shares)

 

0

 

0

 

0

 

0

 

(7,337)

 

(7,337)

Net issuance (30,987 shares) to employee stock plans, including related tax effects

 

0

 

(254)

 

0

 

0

 

122

 

(132)

Recognition of stock based compensation

 

0

 

466

 

0

 

0

 

0

 

466

Balance at June 30, 2020

$

32,857

$

189,526

$

185,163

$

8,521

$

(11,893)

$

404,174

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

 

0

 

0

 

9,480

 

0

 

0

 

9,480

Other comprehensive loss

 

0

 

0

 

0

 

(7,552)

 

0

 

(7,552)

Cash dividends declared ($0.22 per share)

 

0

 

0

 

(3,284)

 

0

 

0

 

(3,284)

Net issuance (34,049 shares) to employee stock plans, including related tax effects

 

0

 

(186)

 

0

 

0

 

358

 

172

Recognition of stock based compensation

 

0

 

666

 

0

 

0

 

0

 

666

Balance at March 31, 2021

$

32,857

$

190,564

$

196,561

$

3,464

$

(17,865)

$

405,581

Net income

 

0

 

0

 

9,025

 

0

 

0

 

9,025

Other comprehensive income

 

0

 

0

 

0

 

4,230

 

0

 

4,230

Cash dividends declared ($0.24 per share)

 

0

 

0

 

(3,592)

 

0

 

0

 

(3,592)

Net issuance (22,241 shares) to employee stock plans, including related tax effects

 

0

 

(94)

 

0

 

0

 

91

 

(3)

Recognition of stock based compensation

 

0

 

331

 

0

 

0

 

0

 

331

Balance at June 30, 2021

$

32,857

$

190,801

$

201,994

$

7,694

$

(17,774)

$

415,572

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

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BAR HARBOR BANKSHARES AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

Three Months Ended March 31, 

Six Months Ended June 30, 

(in thousands)

    

2021

    

2020

    

2021

    

2020

Cash flows from operating activities:

 

 

  

  

 

 

  

  

Net income

 

$

9,480

$

7,721

 

$

18,505

$

16,202

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

 

 

  

 

 

  

Provision for credit losses

 

(489)

 

1,111

 

(1,254)

 

2,465

Net amortization of securities

 

1,215

 

686

 

1,219

 

1,603

Change in unamortized net loan costs and premiums

 

(1,768)

 

(1,358)

 

(2,200)

 

2,223

Premises and equipment depreciation

 

1,181

 

1,182

 

2,341

 

2,380

Stock-based compensation expense

 

666

 

118

 

997

 

584

Accretion of purchase accounting entries, net

 

4

 

(263)

 

(45)

 

(516)

Amortization of other intangibles

 

241

 

256

 

472

 

512

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

 

(518)

 

(537)

 

(1,016)

 

(1,033)

Gain on sales of securities, net

 

 

(135)

 

(50)

 

(1,486)

Decrease in right-of-use lease assets

282

506

566

(578)

Decrease in lease liabilities

(259)

(555)

(520)

(625)

Loss on other real estate owned

 

 

31

 

 

82

Loss on premises and equipment, net

 

8

 

92

 

9

 

90

Net change in other assets and liabilities

 

(3,887)

 

(5,851)

 

(6,102)

 

(5,787)

Net cash provided by operating activities

 

6,156

 

3,004

 

12,922

 

16,116

Cash flows from investing activities:

 

  

 

  

 

  

 

  

Proceeds from sales of securities available for sale

 

 

32,017

 

4,050

 

87,521

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

 

28,687

 

24,899

 

69,900

 

63,096

Purchases of securities available for sale

 

(79,583)

 

(15,739)

 

(115,928)

 

(120,405)

Net change in loans

 

25,330

 

6,300

 

65,330

 

(91,857)

Purchase of FHLB stock

 

(790)

 

(3,161)

 

(790)

 

(4,044)

Proceeds from sale of FHLB stock

 

 

3,943

 

681

 

4,458

Purchase of premises and equipment, net

 

(982)

 

(628)

 

(1,008)

 

(2,221)

Net investment in community limited partnerships

(470)

(917)

Acquisitions, net of cash acquired

(340)

(340)

Proceeds from sale of other real estate owned

51

Net cash (used in) provided by investing activities

 

(27,808)

 

47,342

Net cash provided by (used in) investing activities

 

21,318

 

(63,792)

Cash flows from financing activities:

 

  

 

  

 

  

 

  

Net change in deposits

 

6,127

 

(44,959)

 

(83,742)

 

(420)

Net change in short-term senior borrowings

19,653

(98,970)

14,324

(119,774)

Proceeds from long-term senior borrowings

139,000

273,436

Repayments of long-term senior borrowings

(8)

(14)

(67,188)

Net change in short-term other borrowings

 

(3,503)

 

(13,831)

 

(10,390)

 

(10,986)

Repayments of subordinated debt

(32)

Payment of subordinated debt issuance costs

(39)

Net issuance to employee stock plans

172

789

Exercise of stock options

169

657

Purchase of treasury and common stock

(130)

(7,467)

Cash dividends paid on common stock

 

(3,284)

 

(3,429)

 

(6,876)

 

(6,819)

Net cash provided by (used in) financing activities

 

19,157

 

(21,601)

Net cash (used in) provided by financing activities

 

(86,529)

 

61,439

(continued)

(continued)

(continued)

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BAR HARBOR BANKSHARES AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)

Three Months Ended March 31, 

Six Months Ended June 30, 

(in thousands)

    

2021

    

2020

    

2021

    

2020

Net change in cash and cash equivalents

 

(2,495)

 

28,745

 

(52,289)

 

13,763

Cash and cash equivalents at beginning of year

 

226,007

 

56,910

 

226,007

 

56,910

Cash and cash equivalents at end of year

$

223,512

$

85,655

$

173,718

$

70,673

Supplemental cash flow information:

 

  

 

  

 

  

 

  

Interest paid

$

6,231

$

8,455

$

10,019

$

16,275

Income taxes paid, net

 

3,389

 

1,205

 

5,622

 

3,112

Acquisition of non-cash assets and liabilities:

Assets acquired

1,171

1,171

Liabilities acquired

(343)

(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, 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, 2020.  The updates reflect the adoption of the Financial Accounting Standards Board (FASB) Accounting Standards Updates (ASU) 2016-13, “Financial Instruments - Credit Losses (Topic 326) - Measurement of Credit Losses on Financial Instruments”, referred to as ASC 326 or, more commonly, referred to as Current Expected Credit Losses (CECL).

Allowance for Credit Loss on AFS Debt Securities: Upon adoption of CECL, effective January 1, 2021,  the Company monitors the credit quality of available for sale (AFS) debt securities through credit ratings from various rating agencies and substantial price changes. Credit ratings express opinions about the credit quality of a security and are utilized by the Company to make informed decisions.  Securities are triggered for further review in the quarter if the security has significant fluctuations in ratings, drops below investment grade, or significant pricing changes. For securities without credit ratings, the 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 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 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,June 30, 2021 and January 1, 2021 (i.e. ASU 2016-13 adoption), there was 0 allowance carried on the Company's AFS debt securities. Refer to Note 2 of the consolidated financial statements for further discussion.

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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 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 individual loans. The sum of the loan’s purchase price and allowance for credit losses becomes its initial amortized cost. The difference between the initial amortized cost and the par value of the loan is a discount or premium, which is amortized into interest income over the life of the loan. Subsequent changes to the allowance for credit losses are 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 loan is in the process of collection. Commercial real estate and commercial business loans may be placed on non-accrual status prior to the 90 days delinquency date if considered appropriate by management.

When a loan has been placed on non-accrual status, previously accrued and uncollected interest is reversed against interest on the loan. The interest on non-accrual loans is accounted for using the cash-basis or cost-recovery method depending on corresponding credit 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 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 becomesbecame 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 nature of the Company's business impacting the loan portfolio, (v) and other external factors, that may include, but are not limited to, results of internal loan reviews, stress testing, examinations by bank regulatory agencies, or other events such as a natural disaster.

Arriving at an appropriate 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 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.  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.  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.

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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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Table of Contents

Impact of Adoption

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

Reclassification

Pre-CECL

Post-CECL

Reclassification

Pre-CECL

Post-CECL

to CECL

Adoption

Adoption

Impact of

to CECL

Adoption

Adoption

Impact of

Pre-CECL

Portfolio

Portfolio

Portfolio

CECL

Pre-CECL

Portfolio

Portfolio

Portfolio

CECL

(in thousands)

    

Adoption

    

Segmentation

    

Segmentation

    

Segmentation

    

Adoption

    

Adoption

    

Segmentation

    

Segmentation

    

Segmentation

    

Adoption

Assets:

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

Loans:

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

Commercial construction

$

131,123

$

(13,241)

$

117,882

$

117,882

$

$

131,123

$

(13,241)

$

117,882

$

117,882

$

Commercial real estate

 

953,258

 

(953,258)

 

 

 

 

953,258

 

(953,258)

 

 

 

Commercial real estate owner occupied

 

 

219,217

 

219,217

 

219,217

 

 

 

219,217

 

219,217

 

219,217

 

Commercial real estate non-owner occupied

 

 

716,776

 

716,776

 

716,776

 

 

 

716,776

 

716,776

 

716,776

 

Tax exempt

 

63,431

 

(15,569)

 

47,862

 

47,862

 

 

63,431

 

(15,569)

 

47,862

 

47,862

 

Commercial and industrial

 

377,638

 

(21,954)

 

355,684

 

355,684

 

 

377,638

 

(21,954)

 

355,684

 

355,684

 

Residential real estate

 

923,891

 

71,325

 

995,216

 

995,216

 

 

923,891

 

71,325

 

995,216

 

995,216

 

Home equity

 

102,464

 

(2,368)

 

100,096

 

100,096

 

 

102,464

 

(2,368)

 

100,096

 

100,096

 

Consumer other

 

11,080

 

(928)

 

10,152

 

10,152

 

 

11,080

 

(928)

 

10,152

 

10,152

 

Total loans

$

2,562,885

$

$

2,562,885

$

2,562,885

$

$

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

$

1,044

$

(220)

$

824

$

2,020

$

1,196

Commercial real estate

 

10,199

 

(10,199)

 

 

 

 

10,199

 

(10,199)

 

 

 

Commercial real estate owner occupied

 

 

1,783

 

1,783

 

2,491

 

708

 

 

1,783

 

1,783

 

2,491

 

708

Commercial real estate non-owner occupied

 

 

7,864

 

7,864

 

5,856

 

(2,008)

 

 

7,864

 

7,864

 

5,856

 

(2,008)

Tax exempt

 

80

 

(22)

 

58

 

98

 

40

 

80

 

(22)

 

58

 

98

 

40

Commercial and industrial

 

3,302

 

(165)

 

3,137

 

6,133

 

2,996

 

3,302

 

(165)

 

3,137

 

6,133

 

2,996

Residential real estate

 

4,078

 

932

 

5,010

 

6,742

 

1,732

 

4,078

 

932

 

5,010

 

6,742

 

1,732

Home equity

 

258

 

27

 

285

 

888

 

603

 

258

 

27

 

285

 

888

 

603

Consumer other

 

121

 

 

121

 

82

 

(39)

 

121

 

 

121

 

82

 

(39)

Total allowance for credit losses on loans

$

19,082

$

$

19,082

$

24,310

$

5,228

$

19,082

$

$

19,082

$

24,310

$

5,228

Liabilities:

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

Allowance for credit losses on unfunded commitments

$

359

$

$

359

$

1,975

$

1,616

$

359

$

$

359

$

1,975

$

1,616

Total allowance for credit losses

$

19,441

$

$

19,441

$

26,285

$

6,844

$

19,441

$

$

19,441

$

26,285

$

6,844

Retained earnings:

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

Total increase in Allowance for credit losses

 

  

 

  

 

  

 

  

$

6,844

 

  

 

  

 

  

 

  

$

6,844

Balance sheet reclassification

 

  

 

  

 

  

 

  

 

Total pre-tax impact

 

  

 

  

 

  

 

  

 

6,844

Tax effect

 

  

 

  

 

  

 

  

 

(1,602)

 

  

 

  

 

  

 

  

 

(1,602)

Decrease to retained earnings

 

  

 

  

 

  

 

  

$

5,242

 

  

 

  

 

  

 

  

$

5,242

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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 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, 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, 2022

Adoption of this ASU is expected to primarily changechanged how the Company estimates credit losses with the application of the expected credit loss model. The Company will applyapplied 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'sCompany has finalized its CECL implementation, efforts in the first quarter focused on the finalization andrecieved board approval of the final CECL model, completed modelling of off-balance sheet credit risks, completed formal governance and control documentation, and developed and presented revised disclosures for board approval.

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

The Company adopted CECL effective January 1, 2021, which increased its allowance for credit losses (ACL) by $5.2 million and reserve for unfunded commitments by $1.6 million. Equity was reduced by $5.2 million, net of deferred tax of $1.6 million inon the first quarter due todate of adoption. The coverage ratio of ACL to total loans increased to 0.94% as of March 31, 2021 from 0.76% at December 31, 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 did not have a material impact on the Company's consolidated financial statements. The impact will be reflected in the Company’s annual 10-K disclosures of employee benefit plans.

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Standard

Description

Required Date
of Adoption

Effect on financial statements

Standards Adopted in 2021

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

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

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

Standard

Description

Required Date
of Adoption

Effect on financial statements

Standards Not Yet Adopted

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 whichdiscontinued. The following elections needhave been made in regards 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 madeour cash flow hedges as outlined on the next page.

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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

Gross

Gross

 Unrealized

 Unrealized

 Unrealized

 Unrealized

(in thousands)

    

Amortized Cost

    

 Gains

    

 Losses

    

Fair Value

    

Amortized Cost

    

 Gains

    

 Losses

    

Fair Value

March 31, 2021

 

  

 

  

 

  

 

  

June 30, 2021

 

  

 

  

 

  

 

  

Mortgage-backed securities:

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

US Government-sponsored enterprises

$

213,049

$

4,860

$

(3,302)

$

214,607

$

196,476

$

4,001

$

(2,116)

$

198,361

US Government agency

 

74,293

 

2,211

 

(319)

 

76,185

 

64,693

 

1,853

 

(203)

 

66,343

Private label

 

47,576

 

111

 

(146)

 

47,541

 

73,428

 

195

 

(88)

 

73,535

Obligations of states and political subdivisions thereof

 

185,985

 

3,081

 

(1,203)

 

187,863

 

184,229

 

4,196

 

(272)

 

188,153

Corporate bonds

 

99,616

 

1,560

 

(969)

 

100,207

 

93,582

 

2,735

 

(860)

 

95,457

Total securities available for sale

$

620,519

$

11,823

$

(5,939)

$

626,403

$

612,408

$

12,980

$

(3,539)

$

621,849

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

The amortized cost and estimated fair value of available for sale (“AFS”) securities segregated by contractual maturity at March 31,June 30, 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

Available for sale

(in thousands)

    

Amortized Cost

    

Fair Value

    

Amortized Cost

    

Fair Value

Within 1 year

 

$

4,776

$

4,848

 

$

6,765

$

6,869

Over 1 year to 5 years

 

20,745

 

20,965

 

21,738

 

21,904

Over 5 years to 10 years

 

75,062

 

73,650

 

68,136

 

67,171

Over 10 years

 

185,018

 

188,607

 

181,172

 

187,666

Total bonds and obligations

 

285,601

 

288,070

 

277,811

 

283,610

Mortgage-backed securities

 

334,918

 

338,333

 

334,597

 

338,239

Total securities available for sale

$

620,519

$

626,403

$

612,408

$

621,849

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

Three Months Ended

Three Months Ended

Six Months Ended

March 31, 

June 30, 

June 30, 

(in thousands)

    

2021

    

2020

    

2021

    

2020

    

2021

    

2020

Gross gains on sales of available for sale securities

$

$

146

$

50

$

1,362

$

50

$

1,508

Gross losses on sales of available for sale securities

 

 

(11)

 

 

(11)

 

 

(22)

Net gains on sale of available for sale securities

$

$

135

$

50

$

1,351

$

50

$

1,486

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

Less Than Twelve Months

Over Twelve Months

Total

Less Than Twelve Months

Over Twelve Months

Total

Gross

    

    

Gross

    

    

Gross

    

Gross

    

    

Gross

    

    

Gross

    

Unrealized

Fair

Unrealized

Fair

Unrealized 

Fair

Unrealized

Fair

Unrealized

Fair

Unrealized 

Fair

(in thousands)

    

Losses

    

Value

    

Losses

    

Value

    

Losses

    

Value

    

Losses

    

Value

    

Losses

    

Value

    

Losses

    

Value

March 31, 2021

 

  

 

  

 

  

 

  

 

  

 

  

June 30, 2021

 

  

 

  

 

  

 

  

 

  

 

  

Mortgage-backed securities:

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

US Government-sponsored enterprises

$

3,073

$

96,384

$

229

$

3,803

$

3,302

$

100,187

$

1,879

$

91,739

$

237

$

3,743

$

2,116

$

95,482

US Government agency

 

300

 

14,716

 

19

 

4,204

 

319

 

18,920

 

189

 

13,512

 

14

 

3,190

 

203

 

16,702

Private label

 

2

 

15,822

 

144

 

19,257

 

146

 

35,079

 

83

 

51,718

 

5

 

19

 

88

 

51,737

Obligations of states and political subdivisions thereof

 

1,203

 

56,813

 

 

 

1,203

 

56,813

 

272

 

35,808

 

 

 

272

 

35,808

Corporate bonds

 

128

 

14,622

 

841

 

19,158

 

969

 

33,780

 

16

 

6,984

 

844

 

16,406

 

860

 

23,390

Total securities available for sale

$

4,706

$

198,357

$

1,233

$

46,422

$

5,939

$

244,779

$

2,439

$

199,761

$

1,100

$

23,358

$

3,539

$

223,119

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,June 30, 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,June 30, 2021:

US Government-sponsored enterprises

5044 out of the total 556546 securities in the Company’s portfolios of AFS US Government-sponsored enterprises were in unrealized loss positions. Aggregate unrealized losses represented 1.55%1.08% 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 158157 securities in the Company’s portfolios of AFS US Government agency securities were in unrealized loss positions. Aggregate unrealized losses represented 0.43%0.31% 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

1217 of the total 2933 securities in the Company’s portfolio of AFS private label mortgage-backed securities were in unrealized loss positions. Aggregate unrealized losses represented 0.31%0.12% 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

169 of the total 144140 securities in the Company’s portfolio of AFS municipal bonds and obligations were in unrealized loss positions. Aggregate unrealized losses represented 0.65%0.15% 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

86 out of the total 3331 securities in the Company’s portfolio of AFS corporate bonds were in an unrealized loss position. The aggregate unrealized loss represents 0.97%0.92% 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, 

June 30, 

December 31, 

(in thousands)

    

2021

    

2020

    

2021

    

2020

Commercial construction

$

117,464

$

117,882

$

161,192

$

117,882

Commercial real estate owner occupied

 

233,847

 

219,217

 

233,825

 

219,217

Commercial real estate non-owner occupied

 

733,507

 

716,776

 

713,889

 

716,776

Tax exempt

 

46,541

 

47,862

 

44,079

 

47,862

Commercial and industrial

 

376,395

 

355,684

 

370,074

 

355,684

Residential real estate

 

940,127

 

995,216

 

891,806

 

995,216

Home equity

 

93,625

 

100,096

 

90,440

 

100,096

Consumer other

 

9,558

 

10,152

 

10,255

 

10,152

Total loans

 

2,551,064

 

2,562,885

 

2,515,560

 

2,562,885

Allowance for credit losses

 

23,653

 

19,082

 

22,815

 

19,082

Net loans

$

2,527,411

$

2,543,803

$

2,492,745

$

2,543,803

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

March 31, 

December 31, 

June 30, 

December 31, 

(in thousands)

    

2021

    

2020

    

2021

    

2020

Unamortized net loan origination costs

$

3,774

$

5,157

$

3,336

$

5,157

Unamortized net premium on purchased loans

 

(82)

 

(85)

 

(77)

 

(85)

Total unamortized net costs and premiums

$

3,692

$

5,072

$

3,259

$

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,June 30, 2021 and December 31, 2020, accrued interest receivable for loans totaled $11.9$12.1 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”)(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,June 30, 2021 and December 31, 2020, the Company had 1,0571,250 and 746 PPP loans outstanding, with an outstanding principal balance of $77.9$65.9 million and $53.8 million, respectively.  The increase reflects the 2021 round of funding of 9561,233  PPP loans with and outstanding principal balance of $57.4$62.7 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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Table of Contents

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

Three Months Ended March 31, 2021

Three Months Ended June 30, 2021

Balance at

Balance at

Beginning of

Impact of ASC

Balance at

Beginning of

Balance at

(in thousands)

    

Period

    

326

    

Charge Offs

    

Recoveries

    

Provision

    

End of Period

    

Period

    

Charge Offs

    

Recoveries

    

Provision

    

End of Period

Commercial construction

$

824

$

1,196

$

$

18

$

(246)

$

1,792

$

1,792

$

$

$

580

$

2,372

Commercial real estate owner occupied

 

1,783

 

708

 

(153)

 

0

 

1,014

 

3,352

 

3,352

 

(108)

 

2

 

(694)

 

2,552

Commercial real estate non-owner occupied

 

7,864

 

(2,008)

 

 

4

 

42

 

5,902

 

5,902

 

 

 

(298)

 

5,604

Tax exempt

 

58

 

40

 

 

 

(4)

 

94

 

94

 

 

 

(3)

 

91

Commercial and industrial

 

3,137

 

2,996

 

 

1

 

(1,094)

 

5,040

 

5,040

 

(20)

 

13

 

192

 

5,225

Residential real estate

 

5,010

 

1,732

 

(40)

 

13

 

(146)

 

6,569

 

6,569

 

(21)

 

109

 

(588)

 

6,069

Home equity

 

285

 

603

 

(22)

 

11

 

(54)

 

823

 

823

 

(32)

 

36

 

(5)

 

822

Consumer other

 

121

 

(39)

 

(1)

 

1

 

(1)

 

81

 

81

 

(58)

 

6

 

51

 

80

Total

$

19,082

$

5,228

$

(216)

$

48

$

(489)

$

23,653

$

23,653

$

(239)

$

166

$

(765)

$

22,815

Three Months Ended March 31, 2020

Six Months Ended June 30, 2021

Balance at

Balance at

Beginning of

Balance at

Beginning of

Impact of ASC

Balance at

(in thousands)

    

Period

    

Charge Offs

    

Recoveries

    

Provision

    

End of Period

    

Period

    

326

    

Charge Offs

    

Recoveries

    

Provision

    

End of Period

Commercial construction

$

317

$

$

$

78

$

395

$

824

$

1,196

$

$

18

$

334

$

2,372

Commercial real estate owner occupied

 

2,368

 

 

 

(882)

 

1,486

 

1,783

 

708

 

(261)

 

2

 

320

 

2,552

Commercial real estate non-owner occupied

 

4,695

 

(871)

 

25

 

1,465

 

5,314

 

7,864

 

(2,008)

 

 

4

 

(256)

 

5,604

Tax exempt

 

67

 

 

 

(10)

 

57

 

58

 

40

 

 

 

(7)

 

91

Commercial and industrial

 

3,262

 

(179)

 

9

 

231

 

3,323

 

3,137

 

2,996

 

(20)

 

14

 

(902)

 

5,225

Residential real estate

 

4,213

 

(8)

 

7

 

79

 

4,291

 

5,010

 

1,732

 

(61)

 

122

 

(734)

 

6,069

Home equity

 

320

 

 

 

8

 

328

 

285

 

603

 

(54)

 

47

 

(59)

 

822

Consumer other

 

111

 

(153)

 

3

 

142

 

103

 

121

 

(39)

 

(59)

 

7

 

50

 

80

Total

$

15,353

$

(1,211)

$

44

$

1,111

$

15,297

$

19,082

$

5,228

$

(455)

$

214

$

(1,254)

$

22,815

Three Months Ended June 30, 2020

Balance at

Beginning of

Balance at

(in thousands)

    

Period

    

Charge Offs

    

Recoveries

    

Provision

    

End of Period

Commercial construction

$

395

$

$

$

137

$

532

Commercial real estate owner occupied

 

1,486

 

 

 

38

 

1,524

Commercial real estate non-owner occupied

 

5,314

 

 

71

 

541

 

5,926

Tax exempt

 

57

 

 

 

7

 

64

Commercial and industrial

 

3,323

 

(160)

 

5

 

(112)

 

3,056

Residential real estate

 

4,291

 

(20)

 

 

720

 

4,991

Home equity

 

328

 

 

 

(10)

 

318

Consumer other

 

103

 

(40)

 

2

 

33

 

98

Total

$

15,297

$

(220)

$

78

$

1,354

$

16,509

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Table of Contents

Six Months Ended June 30, 2020

Balance at

Beginning of

Balance at

(in thousands)

    

Period

    

Charge Offs

    

Recoveries

    

Provision

    

End of Period

Commercial construction

$

317

$

$

$

215

$

532

Commercial real estate owner occupied

 

2,368

 

 

 

(844)

 

1,524

Commercial real estate non-owner occupied

 

4,695

 

(825)

 

50

 

2,006

 

5,926

Tax exempt

 

67

 

 

 

(3)

 

64

Commercial and industrial

 

3,262

 

(375)

50

 

119

 

3,056

Residential real estate

 

4,213

 

(31)

 

10

 

799

 

4,991

Home equity

 

320

 

 

 

(2)

 

318

Consumer other

 

111

 

(200)

 

12

 

175

 

98

Total

$

15,353

$

(1,431)

$

122

$

2,465

$

16,509

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

Three Months Ended June 30, 2021

    

Six Months Ended June 30, 2021

Balance at December 31, 2020

$

359

Begininng Balance

$

1,819

$

359

Impact of CECL adoption

1,616

1,616

Provision for credit losses

 

(156)

 

102

 

(156)

Balance at March 31, 2021

$

1,819

Ending Balance

$

1,921

$

1,921

(in thousands)

    

2020

Three Months Ended June 30, 2020

    

Six Months Ended June 30, 2020

Balance at December 31, 2019

$

314

Begininng Balance

$

359

$

314

Provision for credit losses

 

45

 

(40)

 

5

Balance at December 31, 2020

$

359

Ending Balance

$

319

$

319

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.

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Table of Contents

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.

25

Table of Contents

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).

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 year of origination, loan segmentation and risk indicator as of March 31, 2021:

    

    

    

    

    

    

    

(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)

26

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 tables present the Company’s loans by year of origination, loan segmentation and risk indicator as of June 30, 2021:

    

    

    

    

    

    

    

(in thousands)

2021

2020

2019

2018

2017

Prior

Total

Commercial construction

 

  

 

  

 

  

 

  

 

  

 

  

 

  

Risk rating:

 

  

 

  

 

  

 

  

 

  

 

  

 

  

Pass

$

12,778

$

68,262

$

53,760

$

26,392

$

$

$

161,192

Special mention

 

 

 

 

 

 

 

Substandard

 

 

 

 

 

 

 

Total

$

12,778

$

68,262

$

53,760

$

26,392

$

$

$

161,192

Commercial real estate owner occupied

 

  

 

  

 

  

 

  

 

  

 

  

 

  

Risk rating:

 

  

 

  

 

  

 

  

 

  

 

  

 

  

Pass

$

4,866

$

15,555

$

35,811

$

30,353

$

20,769

$

112,798

$

220,152

Special mention

 

 

 

773

 

 

 

1,618

 

2,391

Substandard

 

 

 

 

261

 

261

 

10,397

 

10,919

Doubtful

188

175

363

Total

$

4,866

$

15,555

$

36,584

$

30,802

$

21,030

$

124,988

$

233,825

Commercial real estate non-owner occupied

 

  

 

  

 

  

 

  

 

  

 

  

 

  

Risk rating:

 

  

 

  

 

  

 

  

 

  

 

  

 

  

Pass

$

65,282

$

148,198

$

98,572

$

41,971

$

150,092

$

204,405

$

708,520

Special mention

 

 

 

 

 

 

1,472

 

1,472

Substandard

 

 

 

 

150

 

150

 

3,408

 

3,708

Doubtful

189

189

Total

$

65,282

$

148,198

$

98,572

$

42,121

$

150,242

$

209,474

$

713,889

Tax exempt

 

  

 

  

 

  

 

  

 

  

 

  

 

  

Risk rating:

 

  

 

  

 

  

 

  

 

  

 

  

 

  

Pass

$

833

$

338

$

1,125

$

14,790

$

5,463

$

21,530

$

44,079

Special mention

 

 

 

 

 

 

 

Substandard

 

 

 

 

 

 

 

Total

$

833

$

338

$

1,125

$

14,790

$

5,463

$

21,530

$

44,079

Commercial and industrial

 

  

 

  

 

  

 

  

 

  

 

  

 

  

Risk rating:

 

  

 

  

 

  

 

  

 

  

 

  

 

  

Pass

$

114,688

$

59,804

$

38,907

$

17,769

$

66,905

$

51,081

$

349,154

Special mention

 

345

 

259

 

806

 

702

 

215

 

1,105

 

3,432

Substandard

 

98

 

 

583

 

15,010

 

57

 

1,252

 

17,000

Doubtful

129

359

488

Total

$

115,131

$

60,063

$

40,296

$

33,481

$

67,306

$

53,797

$

370,074

(continued)

27

Table of Contents

    

    

    

    

    

    

    

(in thousands)

2021

2020

2019

2018

2017

Prior

Total

Residential real estate

 

  

 

  

 

  

 

  

 

  

 

  

 

  

Performing

$

62,479

$

130,710

$

105,016

$

78,567

$

77,987

$

428,092

$

882,851

Nonperforming

 

 

 

 

580

 

271

 

8,104

 

8,955

Total

$

62,479

$

130,710

$

105,016

$

79,147

$

78,258

$

436,196

$

891,806

Home equity

 

  

 

  

 

  

 

  

 

  

 

  

 

  

Performing

$

5,888

$

10,270

$

10,912

$

8,305

$

7,203

$

46,618

$

89,196

Nonperforming

 

 

 

 

 

 

1,244

 

1,244

Total

$

5,888

$

10,270

$

10,912

$

8,305

$

7,203

$

47,862

$

90,440

Consumer other

 

  

 

  

 

  

 

  

 

  

 

  

 

  

Performing

$

2,673

$

2,388

$

1,265

$

896

$

369

$

2,657

$

10,248

Nonperforming

 

 

 

 

 

 

7

 

7

Total

$

2,673

$

2,388

$

1,265

$

896

$

369

$

2,664

$

10,255

Total Loans

$

269,930

$

435,784

$

347,530

$

235,934

$

329,871

$

896,511

$

2,515,560

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

    

December 31, 2020

Commercial

Commercial

Residential

    

    

Real Estate

and Industrial

Real Estate

Consumer

Total

Grade:

 

  

 

  

 

  

 

  

 

Pass

 

$

1,053,773

$

422,016

$

$

$

1,475,789

Performing

914,749

112,190

1,026,939

Special mention

 

6,075

2,771

8,846

Substandard

 

22,267

15,180

37,447

Doubtful

 

2,265

1,100

3,365

Loss

 

1

2

3

Non-performing

9,142

1,354

10,496

Total

 

$

1,084,381

$

441,069

$

923,891

$

113,544

$

2,562,885

Past Dues

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

March 31, 2021

June 30, 2021

(in thousands)

    

30-59

    

60-89

    

90+

    

Total Past Due

    

Current

    

Total Loans

    

30-59

    

60-89

    

90+

    

Total Past Due

    

Current

    

Total Loans

Commercial construction

$

$

$

$

$

117,464

$

117,464

$

$

$

$

$

161,192

$

161,192

Commercial real estate owner occupied

 

10

 

 

331

 

341

 

233,506

 

233,847

 

573

 

8

 

71

 

652

 

233,173

 

233,825

Commercial real estate non-owner occupied

 

644

 

179

 

317

 

1,140

 

732,367

 

733,507

 

442

 

148

 

445

 

1,035

 

712,854

 

713,889

Tax exempt

 

 

 

 

 

46,541

 

46,541

 

 

 

 

 

44,079

 

44,079

Commercial and industrial

 

364

 

 

399

 

763

 

375,632

 

376,395

 

 

47

 

205

 

252

 

369,822

 

370,074

Residential real estate

 

7,815

 

1,345

 

3,194

 

12,354

 

927,773

 

940,127

 

300

 

926

 

3,891

 

5,117

 

886,689

 

891,806

Home equity

 

399

 

198

 

429

 

1,026

 

92,599

 

93,625

 

475

 

259

 

151

 

885

 

89,555

 

90,440

Consumer other

 

4

 

 

100

 

104

 

9,454

 

9,558

 

21

 

1

 

 

22

 

10,233

 

10,255

Total

$

9,236

$

1,722

$

4,770

$

15,728

$

2,535,336

$

2,551,064

$

1,811

$

1,389

$

4,763

$

7,963

$

2,507,597

$

2,515,560

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December 31, 2020

(in thousands)

    

30-59

    

60-89

    

90+

    

Total Past Due

    

Current

    

Total Loans

Commercial construction

$

74

$

$

1

$

75

$

117,807

$

117,882

Commercial real estate owner occupied

 

1,309

 

464

 

438

 

2,211

 

217,006

 

219,217

Commercial real estate non-owner occupied

 

503

 

674

 

624

 

1,801

 

714,975

 

716,776

Tax exempt

 

 

 

 

 

47,862

 

47,862

Commercial and industrial

 

161

 

 

193

 

354

 

355,330

 

355,684

Residential real estate

 

9,178

 

2,511

 

3,200

 

14,889

 

980,327

 

995,216

Home equity

 

1,062

 

614

 

375

 

2,051

 

98,045

 

100,096

Consumer other

 

20

 

 

2

 

22

 

10,130

 

10,152

Total

$

12,307

$

4,263

$

4,833

$

21,403

$

2,541,482

$

2,562,885

Non-Accrual Loans

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

March 31, 2021

June 30, 2021

Nonaccrual With No

90+ Days Past

Nonaccrual With No

90+ Days Past

(in thousands)

    

Nonaccrual

    

Related Allowance

    

Due and Accruing

    

Nonaccrual

    

Related Allowance

    

Due and Accruing

Commercial construction

$

$

$

$

$

$

Commercial real estate owner occupied

 

1,576

 

895

 

 

1,316

 

917

 

Commercial real estate non-owner occupied

 

930

 

742

 

50

 

1,105

 

845

 

Tax exempt

 

 

 

 

 

 

Commercial and industrial

 

1,067

 

641

 

15

 

952

 

583

 

Residential real estate

 

9,142

 

3,405

 

24

 

8,955

 

3,594

 

449

Home equity

 

1,344

 

352

 

 

1,244

 

326

 

24

Consumer other

 

10

 

 

100

 

7

 

 

Total

$

14,069

$

6,035

$

189

$

13,579

$

6,265

$

473

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

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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

June 30, 2021

December 31, 2020

(in thousands)

    

Real Estate

    

Other

    

Real Estate

    

Other

    

Real Estate

    

Other

    

Real Estate

    

Other

Commercial construction

$

$

$

259

$

$

$

$

259

$

Commercial real estate owner occupied

 

1,576

 

 

3,441

 

 

1,316

 

 

3,441

 

Commercial real estate non-owner occupied

 

930

 

 

383

 

 

1,105

 

 

383

 

Tax exempt

 

 

 

 

 

 

 

 

Commercial and industrial

 

564

 

503

 

625

 

607

 

551

 

401

 

625

 

607

Residential real estate

 

9,142

 

 

7,432

 

 

8,955

 

 

7,432

 

Home equity

 

1,344

 

 

1,493

 

 

1,244

 

 

1,493

 

Consumer other

 

10

 

 

60

 

 

7

 

 

60

 

Total

$

13,566

$

503

$

13,693

$

607

$

13,178

$

401

$

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.

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

    

December 31, 2020

Recorded

    

Unpaid Principal

    

Related

    

Average Recorded

    

Interest

(in thousands)

Investment

Balance

Allowance

Investment

Income Recognized

With no related allowance:

 

  

 

  

 

  

 

  

 

  

Construction and land development

$

$

$

$

$

Other commercial real estate

 

2,001

 

2,047

 

 

1,610

 

Commercial

 

1,095

 

1,254

 

 

1,140

 

4

Agricultural

 

361

 

150

 

 

114

 

2

Tax exempt loans

 

 

 

 

 

Residential real estate

 

2,745

 

3,165

 

 

1,077

 

17

Home equity

 

 

 

 

 

Other consumer

 

 

 

 

 

With an allowance recorded:

 

  

 

  

 

  

 

  

 

  

Construction and land development

 

258

 

258

 

205

 

203

 

Other commercial real estate

 

1,963

 

2,108

 

1,038

 

1,973

 

17

Commercial

 

282

 

289

 

164

 

73

 

Agricultural

 

 

 

 

 

Tax exempt loans

 

 

 

 

 

Residential real estate

 

887

 

944

 

106

 

1,865

 

37

Home equity

 

13

 

13

 

 

12

 

1

Other consumer

 

 

 

 

 

Total

 

  

 

  

 

  

 

  

 

  

Commercial real estate

 

4,222

 

4,413

 

1,243

 

3,786

 

17

Commercial and industrial

 

1,738

 

1,693

 

164

 

1,327

 

6

Residential real estate

 

3,632

 

4,109

 

106

 

2,942

 

54

Consumer

 

13

 

13

 

 

12

 

1

Total impaired loans

$

9,605

$

10,228

$

1,513

$

8,067

$

78

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Troubled Debt Restructuring Loans

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

The following tables include the recorded investment and number of modifications identified during the periods ended. The table includes the recorded investment in the loans prior to a modification and also the recorded investment in the loans after the loans were restructured. Modifications may include adjustments to interest rates, payment amounts, extensions of maturity, court ordered concessions or other actions intended to minimize economic loss and avoid

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foreclosure or repossession of collateral. There were 0 modifications qualifying as TDR’s for the three and six months ended March 31, 2021.June 30, 2021 and 0 modifications qualifying as TDR’s for the three months ended June 30, 2020.

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

$

$

$

Three Months Ended March 31, 2020

Six Months Ended June 30, 2020

Pre-Modification

Post-Modification

Pre-Modification

Post-Modification

Number of

Outstanding

Outstanding

Number of

Outstanding

Outstanding

(in thousands)

    

Modifications

    

Balance

    

Balance

    

Reserve

    

Modifications

    

Balance

    

Balance

    

Reserve

Commercial construction

$

$

$

$

$

$

Commercial real estate owner occupied

 

 

 

 

 

 

 

 

Commercial real estate non-owner occupied

 

1

 

54

 

259

 

 

1

 

54

 

252

 

Tax exempt

 

 

 

 

 

 

 

 

Commercial and industrial

 

3

 

41

 

208

 

 

3

 

41

 

196

 

Residential real estate

 

 

 

 

 

 

 

 

Home equity

 

1

 

26

 

25

 

 

1

 

26

 

25

 

Consumer other

 

1

 

9

 

9

 

 

1

 

9

 

9

 

Total

 

6

$

130

$

501

$

 

6

$

130

$

482

$

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

March 31, 2021

March 31, 2020

June 30, 2021

June 30, 2020

    

    

Post-Modification

    

    

Post-Modification

    

    

Post-Modification

    

    

Post-Modification

Number of

Outstanding

Number of

Outstanding

Number of

Outstanding

Number of

Outstanding

(in thousands)

Modifications

Balance

Modifications

Balance

Modifications

Balance

Modifications

Balance

Interest rate, forbearance and maturity concession

 

$

 

4

$

467

 

$

 

4

$

448

Forbearance and interest only payments

 

 

 

1

 

25

 

 

 

1

 

25

Maturity concession

 

 

 

1

 

9

 

 

 

1

 

9

Total

 

$

 

6

$

501

 

$

 

6

$

482

For the three months ended March 31,June 30, 2021 there were 0 loans that were restructured that had subsequently defaulted during the period. The evaluation of certain loans individually for specific impairment includes loans that were previously classified as TDRs or continue to be classified as TDRs.

Modifications in response to COVID-19

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

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Table of Contents

Foreclosure

Residential mortgage loans collateralized by real estate that are in the process of foreclosure as of March 31,June 30, 2021 and December 31, 2020 totaled $343 thousand$1.1 million and $917 thousand, respectively.

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Mortgage Banking

The Company had identified and designated loans with an unpaid principal balance of $10.1$7.9 million and $23.7$24.0 million as residential loans held for sale at March 31,June 30, 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$14.6 million, and $50.6 million, respectively.  Refer to Note 8 for further discussion of the Company's forward delivery commitments.

For the periods ended March 31,June 30, 2021 and December 31, 2020, the Company sold $69.2$56.1 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$2.9 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.

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NOTE 4.               BORROWED FUNDS

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

March 31, 2021

December 31, 2020

 

June 30, 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

$

85,329

 

0.51

%  

$

65,676

 

1.19

%

$

80,000

 

0.39

%  

$

65,676

 

1.19

%

Other borrowings

 

24,276

 

0.16

 

27,779

 

0.15

 

17,389

 

0.13

 

27,779

 

0.15

Total short-term borrowings

 

109,605

 

0.26

 

93,455

 

0.44

 

97,389

 

0.19

 

93,455

 

0.44

Long-term borrowings

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

Advances from the FHLB

 

182,605

 

1.73

 

182,607

 

1.73

 

182,602

 

1.73

 

182,607

 

1.73

Subordinated borrowings

 

60,003

 

4.45

 

59,961

 

4.34

 

60,042

 

4.41

 

59,961

 

4.34

Total long-term borrowings

 

242,608

 

2.40

 

242,568

 

2.37

 

242,644

 

2.39

 

242,568

 

2.37

Total

$

352,213

 

1.20

%  

$

336,023

 

1.41

%

$

340,033

 

1.13

%  

$

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 March 31,June 30, 2021 and December 31, 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 March 31,June 30, 2021, the Company’s available secured line of credit at the FRB was $73.8$74.3 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 March 31,June 30, 2021 December 31, 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 March 31,June 30, 2021 and December 31, 2020. There was 0 outstanding balance on the line of credit as of March 31,June 30, 2021 and December 31, 2020.

Long-term FHLB advances consist of advances with a maturity of more than one year. The advances outstanding at March 31,June 30, 2021 include callable advances of $20.0 million and amortizing advances of $305$302 thousand. The advances outstanding at December 31, 2020 included $20.0 million of callable advances and $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 March 31,June 30, 2021 is, as follows:

March 31, 2021

 

June 30, 2021

 

    

    

Weighted Average

 

    

    

Weighted Average

 

(in thousands, except rates)

Amount

 Rate

 

Amount

 Rate

 

2021

$

85,329

 

0.51

%

$

80,000

 

0.39

%

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

 

20,000

 

1.21

 

20,000

 

1.21

2026 and thereafter

 

305

 

1.79

 

302

 

2.58

Total FHLB advances

$

267,934

 

1.34

%

$

262,602

 

1.32

%

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 $617$578 thousand as of March 31,June 30, 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 5.               DEPOSITS

A summary of time deposits is, as follows:

(in thousands)

    

March 31, 2021

    

December 31, 2020

    

June 30, 2021

    

December 31, 2020

Time less than $100,000

$

309,408

$

325,646

$

203,004

$

325,646

Time $100,000 through $250,000

 

201,996

 

278,940

 

194,247

 

278,940

Time $250,000 or more

 

127,032

 

93,775

 

73,507

 

93,775

Total

$

638,436

$

698,361

$

470,758

$

698,361

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

(in thousands)

    

March 31, 2021

December 31, 2020

    

June 30, 2021

December 31, 2020

Within 1 year

$

525,701

$

574,007

$

361,912

$

574,007

Over 1 year to 2 years

 

56,988

 

61,584

 

58,910

 

61,584

Over 2 years to 3 years

 

37,070

 

41,145

 

32,910

 

41,145

Over 3 years to 4 years

 

10,682

 

12,875

 

10,074

 

12,875

Over 4 years to 5 years

 

7,989

 

8,728

 

6,870

 

8,728

Over 5 years

 

6

 

22

 

82

 

22

Total

$

638,436

$

698,361

$

470,758

$

698,361

Included in time deposits are brokered deposits of $136.6$31.4 million and $193.7 million at March 31,June 30, 2021 and December 31, 2020, respectively. Also included in time deposits are reciprocal deposits of $140.7$185.0 million and $125.0 million at March 31,June 30, 2021 and December 31, 2020, respectively.

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NOTE 6.           CAPITAL RATIOS AND SHAREHOLDERS’ EQUITY

The actual and required capital ratios are, as follows:

    

    

Regulatory

    

    

Regulatory

  

    

    

Regulatory

    

    

Regulatory

  

March 31, 

Minimum to be

December 31, 

Minimum to be

 

June 30, 

Minimum to be

December 31, 

Minimum to be

 

2021

"Well-Capitalized"

2020

"Well-Capitalized"

 

2021

"Well-Capitalized"

2020

"Well-Capitalized"

 

Company (consolidated)

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

Total capital to risk-weighted assets

 

13.83

%  

10.50

%  

13.56

%  

10.50

%  

 

13.95

%  

10.50

%  

13.56

%  

10.50

%  

Common equity tier 1 capital to risk-weighted assets

 

10.55

 

7.00

 

10.49

 

7.00

 

10.72

 

7.00

 

10.49

 

7.00

Tier 1 capital to risk-weighted assets

 

11.34

 

8.50

 

11.28

 

8.50

 

11.51

 

8.50

 

11.28

 

8.50

Tier 1 capital to average assets

 

8.27

 

5.00

 

8.12

 

5.00

 

8.36

 

5.00

 

8.12

 

5.00

Bank

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

Total capital to risk-weighted assets

 

13.62

%  

10.50

%  

13.27

%  

10.50

%

 

13.78

%  

10.50

%  

13.27

%  

10.50

%

Common equity tier 1 capital to risk-weighted assets

 

12.66

 

7.00

 

12.52

 

7.00

 

12.86

 

7.00

 

12.52

 

7.00

Tier 1 capital to risk-weighted assets

 

12.66

 

8.50

 

12.52

 

8.50

 

12.86

 

8.50

 

12.52

 

8.50

Tier 1 capital to average assets

 

9.23

 

5.00

 

9.02

 

5.00

 

9.34

 

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)

    

March 31, 2021

    

December 31, 2020

    

June 30, 2021

    

December 31, 2020

Accumulated other comprehensive income, before tax:

 

  

 

  

 

  

 

  

Net unrealized gain on AFS securities

$

5,884

$

13,069

$

9,441

$

13,069

Net unrealized gain on hedging derivatives

 

485

 

3,144

 

2,448

 

3,144

Net unrealized loss on post-retirement plans

 

(1,850)

 

(1,850)

 

(1,850)

 

(1,850)

Income taxes related to items of accumulated other comprehensive income:

 

  

 

  

 

  

 

  

Net unrealized gain on AFS securities

 

(1,374)

 

(3,046)

 

(2,204)

 

(3,046)

Net unrealized gain on hedging derivatives

 

(113)

 

(733)

 

(573)

 

(733)

Net unrealized loss on post-retirement plans

 

432

 

432

 

432

 

432

Accumulated other comprehensive income

$

3,464

$

11,016

$

7,694

$

11,016

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

(in thousands)

    

Before Tax

    

Tax Effect

    

Net of Tax

    

Before Tax

    

Tax Effect

    

Net of Tax

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

 

  

 

  

 

  

Three Months Ended June 30, 2021

 

  

 

  

 

  

Net unrealized gain on AFS securities:

 

  

 

  

 

  

 

  

 

  

 

  

Net unrealized gain arising during the period

$

5,492

$

(1,378)

$

4,114

$

3,607

$

(842)

$

2,765

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

 

135

 

(32)

 

103

 

50

 

(12)

 

38

Net unrealized gain on AFS securities

 

5,357

 

(1,346)

 

4,011

 

3,557

 

(830)

 

2,727

Net unrealized loss on derivative hedgess:

 

  

 

  

 

Net unrealized loss arising during the period

 

(2,382)

 

650

 

(1,732)

Net unrealized gain on hedging derivatives:

 

  

 

  

 

Net unrealized gain arising during the period

 

1,963

 

(460)

 

1,503

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

 

 

 

 

 

 

Net unrealized loss on cash flow derivative hedges

 

(2,382)

 

650

 

(1,732)

Net unrealized gain on cash flow hedging derivatives

 

1,963

 

(460)

 

1,503

Net unrealized loss on post-retirement plans:

 

  

 

  

 

 

  

 

  

 

Net unrealized loss arising during the period

 

 

 

 

 

 

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

 

 

 

 

 

 

Net unrealized loss on post-retirement plans

 

 

 

 

 

 

Other comprehensive income

$

2,975

$

(696)

$

2,279

$

5,520

$

(1,290)

$

4,230

Three Months Ended June 30, 2020

 

  

 

  

 

  

Net unrealized gain on AFS securities:

 

  

 

  

 

  

Net unrealized gain arising during the period

$

3,772

$

(891)

$

2,881

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

 

1,351

 

(322)

 

1,029

Net unrealized gain on AFS securities

 

2,421

 

(569)

 

1,852

Net unrealized gain on derivative hedgess:

 

  

 

  

 

Net unrealized gain arising during the period

 

626

 

(147)

 

479

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

 

 

 

Net unrealized gain on cash flow derivative hedges

 

626

 

(147)

 

479

Net unrealized loss on post-retirement plans:

 

  

 

  

 

Net unrealized loss arising during the period

 

 

 

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

 

 

 

Net unrealized loss on post-retirement plans

 

 

 

Other comprehensive income

$

3,047

$

(716)

$

2,331

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(in thousands)

    

Before Tax

    

Tax Effect

    

Net of Tax

Six Months Ended June 30, 2021

 

  

 

  

 

  

Net unrealized loss on AFS securities:

 

  

 

  

 

  

Net unrealized loss arising during the period

$

(3,578)

$

830

$

(2,748)

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

 

50

 

(12)

 

38

Net unrealized loss on AFS securities

 

(3,628)

 

842

 

(2,786)

Net unrealized loss on derivative hedges:

 

 

  

 

  

Net unrealized loss arising during the period

 

(696)

 

160

 

(536)

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

 

 

 

Net unrealized loss on derivative hedges

 

(696)

 

160

 

(536)

Net unrealized loss on post-retirement plans:

 

  

 

  

 

  

Net unrealized loss arising during the period

 

 

 

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

 

 

 

Net unrealized loss on post-retirement plans

 

 

 

Other comprehensive income

$

(4,324)

$

1,002

$

(3,322)

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 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 cash flow hedging derivatives:

 

  

 

  

 

  

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 cash flow hedging derivatives

 

(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

39

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

    

Net unrealized

    

Net loss on

    

Net unrealized

    

    

Net unrealized

    

Net loss on

    

Net unrealized

    

gain

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 March 31, 2021

  

  

  

  

Three Months Ended June 30, 2021

  

  

  

  

Balance at beginning of period

$

4,510

$

372

$

(1,418)

$

3,464

Other comprehensive gain before reclassifications

 

2,765

 

1,503

 

0

 

4,268

Less: amounts reclassified from accumulated other comprehensive income

 

38

 

0

 

0

 

38

Total other comprehensive income

 

2,727

 

1,503

 

0

 

4,230

Balance at end of period

$

7,237

$

1,875

$

(1,418)

$

7,694

Three Months Ended June 30, 2020

 

  

 

  

 

  

 

Balance at beginning of period

$

9,560

$

(2,213)

$

(1,157)

$

6,190

Other comprehensive gain before reclassifications

 

2,881

 

479

 

0

 

3,360

Less: amounts reclassified from accumulated other comprehensive income

 

1,029

 

0

 

0

 

1,029

Total other comprehensive income

 

1,852

 

479

 

0

 

2,331

Balance at end of period

$

11,412

$

(1,734)

$

(1,157)

$

8,521

Six Months Ended June 30, 2021

 

  

 

  

 

  

 

Balance at beginning of period

$

10,021

$

2,413

$

(1,418)

$

11,016

$

10,023

$

2,411

$

(1,418)

$

11,016

Other comprehensive loss before reclassifications

 

(5,513)

 

(2,039)

 

0

 

(7,552)

 

(2,748)

 

(536)

 

0

 

(3,284)

Less: amounts reclassified from accumulated other comprehensive income

 

0

 

0

 

0

 

0

 

38

 

0

 

0

 

38

Total other comprehensive loss

 

(5,513)

 

(2,039)

 

0

 

(7,552)

 

(2,786)

 

(536)

 

0

 

(3,322)

Balance at end of period

$

4,508

$

374

$

(1,418)

$

3,464

$

7,237

$

1,875

$

(1,418)

$

7,694

Three Months Ended March 31, 2020

 

  

 

  

 

  

 

Six Months Ended June 30, 2020

Balance at beginning of period

$

5,549

$

(481)

$

(1,157)

$

3,911

$

5,459

$

(391)

$

(1,157)

$

3,911

Other comprehensive gain (loss) before reclassifications

 

4,114

 

(1,732)

 

0

 

2,382

 

7,084

 

(1,343)

 

0

 

5,741

Less: amounts reclassified from accumulated other comprehensive income

 

103

 

0

 

0

 

103

 

1,131

 

0

 

0

 

1,131

Total other comprehensive income (loss)

 

4,011

 

(1,732)

 

0

 

2,279

 

5,953

 

(1,343)

 

0

 

4,610

Less: amounts reclassified from accumulated other comprehensive income for ASU 2018-02

 

0

 

0

 

0

 

0

Balance at end of period

$

9,560

$

(2,213)

$

(1,157)

$

6,190

$

11,412

$

(1,734)

$

(1,157)

$

8,521

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

Three Months Ended March 31, 

Affected Line Item where

(in thousands)

    

2021

    

2020

    

    

Net Income is Presented

Net realized gains on AFS securities:

  

  

  

Before tax

$

$

135

 

Non-interest income

Tax effect

 

 

(32)

 

Tax expense

Total reclassifications for the period

$

$

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 of $146 thousand and realized losses of $11 thousand for the three months ended March 31, 2020.

..

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

Three Months Ended June 30, 

Six Months Ended June 30, 

Affected Line Item where

(in thousands)

    

2021

    

2020

    

2021

    

2020

    

Net Income is Presented

Net realized gains on AFS securities:

  

  

  

  

  

Before tax (1)

$

50

$

1,351

$

50

$

1,486

 

Non-interest income

Tax effect

 

(12)

 

(322)

 

(12)

 

(355)

 

Tax expense

Total reclassifications for the period

$

38

$

1,029

$

38

$

1,131

(a)Net realized gains before tax include $50 thousand realized gains for the three and six months ended June 30, 2021.  Net realized gains before tax include gross realized gains $1.4 million 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, 2020.

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Table of Contents

NOTE 7.           EARNINGS PER SHARE

The following table presents the calculation of earnings per share:

Three Months Ended

Three Months Ended

Six Months Ended

March 31, 

June 30, 

June 30, 

(in thousands, except per share and share data)

    

2021

    

2020

    

2021

    

2020

    

2021

    

2020

Net income

$

9,480

$

7,721

$

9,025

$

8,481

$

18,505

$

16,202

Average number of basic common shares outstanding

 

14,933,554

 

15,558,132

 

14,965,398

 

15,423,997

 

14,949,564

 

15,500,033

Plus: dilutive effect of stock options and awards outstanding

 

73,161

 

34,463

 

76,427

 

17,281

 

76,130

 

22,960

Average number of diluted common shares outstanding(1)

 

15,006,715

 

15,592,595

 

15,041,825

 

15,441,278

 

15,025,694

 

15,522,993

Earnings per share:

 

  

 

  

 

  

 

  

 

  

 

  

Basic

$

0.63

$

0.50

$

0.60

$

0.55

$

1.24

$

1.05

Diluted

$

0.63

$

0.50

$

0.60

$

0.55

$

1.23

$

1.04

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

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NOTE 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 March 31,June 30, 2021 and December 31, 2020:

March 31, 2021

June 30, 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 fundings

$

75,000

 

3.8

$

(1,379)

Other liabilities

$

75,000

 

3.5

$

(1,386)

Other liabilities

Interest rate swap on variable rate loans

50,000

5.0

(278)

Other liabilities

50,000

4.7

10

Other assets

Total cash flow hedges

 

125,000

 

4.3

(1,657)

 

125,000

 

(1,376)

Fair value hedges:

Interest rate swap on securities

 

37,190

 

8.3

 

262

Other assets

 

37,190

 

7.0

 

1,183

Other assets

Total fair value hedges

 

37,190

 

8.3

262

 

37,190

 

1,183

Economic hedges:

Forward sale commitments

 

31,382

 

0.2

 

(85)

Other liabilities

 

14,635

 

0.1

 

(45)

Other liabilities

Customer Loan Swaps-MNA Counterparty

260,792

6.8

(9,944)

Other liabilities

262,271

6.3

(10,845)

Other liabilities

Customer Loan Swaps-RPA Counterparty

119,285

7.6

(5,482)

Other liabilities

119,285

7.4

(6,621)

Other liabilities

Customer Loan Swaps-Customer

380,077

7.1

15,426

Other assets

381,556

6.6

17,466

Other assets

Total economic hedges

 

791,536

 

(85)

 

777,747

 

(45)

Non-hedging derivatives:

Interest rate lock commitments

 

6,735

 

0.2

 

46

Other assets

 

10,464

 

0.1

 

25

Other assets

Total non-hedging derivatives

 

6,735

 

0.2

46

 

10,464

 

25

Total

$

960,461

$

(1,434)

$

950,401

$

(213)

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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,June 30, 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 

    

    

    

Cumulative Amount of Fair 

Location of Hedged Item on 

Carrying Amount of Hedged 

Value Hedging Adjustment in 

Location of Hedged Item on 

Carrying Amount of Hedged 

Value Hedging Adjustment in 

    

Balance Sheet

    

Assets (Liabilities)

    

Carrying Amount

    

Balance Sheet

    

Assets 

    

Carrying Amount

March 31, 2021

 

  

 

  

 

  

June 30, 2021

 

  

 

  

 

  

Interest rate swap on securities

 

Securities Available for Sale

$

39,070

$

1,880

 

Securities Available for Sale

$

39,831

$

2,641

December 31, 2020

 

  

 

  

 

  

 

  

 

  

 

  

Interest rate swap on securities

 

Securities Available for Sale

$

40,209

$

3,019

 

Securities Available for Sale

$

40,209

$

3,019

4144

Table of Contents

Information about derivative assets and liabilities for March 31,the three and six months ended June 30, 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)

The Company expects approximately $390 thousand of losses (pre-tax) related to the Company’s cash flow hedges to be reclassified to earnings from AOCI over the next 12 months. This reclassification is due to anticipated payments that will be made and/or received on the swaps based upon the forward curve as of March 31, 2021.

Three Months Ended June 30, 2021

    

Amount of

    

    

Amount of

    

    

Gain (Loss)

Gain (Loss)

Recognized in

Reclassified

Location of

Amount of

Other

Location of Gain (Loss)

from Other

Gain (Loss)

Gain (Loss)

Comprehensive

Reclassified from Other

Comprehensive

Recognized in

Recognized

(in thousands)

    

Income

    

Comprehensive Income

    

Income

    

Income

    

in Income

Cash flow hedges:

 

  

 

  

 

  

 

  

 

  

Interest rate swap on wholesale funding

$

(1,056)

Interest expense

$

 

Interest expense

$

(196)

Interest rate swap on variable rate loans

221

Interest income

Interest income

89

Total cash flow hedges

 

(835)

 

 

 

  

 

(107)

Fair value hedges:

 

  

 

  

 

  

 

  

 

  

Interest rate swap on securities

 

1,288

 

Interest income

 

 

Interest income

 

(140)

Total fair value hedges

 

1,288

 

 

 

  

 

(140)

Economic hedges:

 

  

 

  

 

  

 

  

 

  

Forward commitments

 

 

Other income

 

 

Other income

 

40

Total economic hedges

 

 

 

 

  

 

40

Non-hedging derivatives:

 

  

 

  

 

  

 

  

 

  

Interest rate lock commitments

 

 

Other income

 

 

Other income

 

(20)

Total non-hedging derivatives

 

 

 

 

  

 

(20)

Total

$

453

$

 

  

$

(227)

4245

Table of Contents

Three Months Ended March 31, 2020

Six Months Ended June 30, 2021

    

Amount of

    

    

Amount of

    

    

    

Amount of

    

    

Amount of

    

    

Gain (Loss)

Gain (Loss)

Gain (Loss)

Gain (Loss)

Recognized in

Reclassified

Location of

Amount of

Recognized in

Reclassified

Location of

Amount of

Other

Location of Gain (Loss)

from Other

Gain (Loss)

Gain (Loss)

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

$

(3,945)

 

Interest expense

$

(1)

 

Interest expense

$

(1)

$

(981)

Interest expense

$

 

Interest expense

$

(384)

Interest rate swap on variable rate loans

(1,246)

Interest income

Interest income

97

Total cash flow hedges

(3,945)

 

(1)

 

 

(1)

 

(2,227)

 

 

 

  

 

(287)

 

Fair value hedges:

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

Interest rate swap on securities

 

2,213

 

Interest income

 

(18)

 

Interest income

 

(18)

 

(1,525)

 

Interest income

 

 

Interest income

 

(276)

Total economic hedges

2,213

 

(18)

 

  

 

(18)

Total fair value hedges

 

(1,525)

 

 

 

  

 

(276)

Economic hedges:

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

Forward commitments

 

 

Other income

 

(11)

 

Other income

 

(11)

 

 

Other income

 

 

Other income

 

50

Total economic hedges

 

(11)

 

  

 

(11)

 

 

���

 

 

  

 

50

 

Non-hedging derivatives:

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

Interest rate lock commitments

 

 

Other income

 

(34)

 

Other Income

 

(34)

 

 

Other income

 

 

Other income

 

4

Total non-hedging derivatives

 

(34)

 

  

 

(34)

 

 

 

 

  

 

4

Total

$

(1,732)

 

  

$

(64)

 

  

$

(64)

$

(3,752)

$

 

  

$

(509)

The Company expects approximately $323 thousand of losses (pre-tax) related to the Company’s cash flow hedges to be reclassified to earnings from AOCI over the next 12 months. This reclassification is due to anticipated payments that will be made and/or received on the swaps based upon the forward curve as of June 30, 2021.

46

Table of Contents

Three 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

Income

in Income

Cash flow hedges:

 

  

 

  

 

  

 

  

 

  

Interest rate swap on wholesale funding

$

(644)

 

Interest expense

$

 

Interest expense

$

217

Total cash flow hedges

(644)

 

 

 

217

 

Fair value hedges:

  

 

  

 

  

 

  

 

  

Interest rate swap on securities

 

1,122

 

Interest income

 

 

Interest income

 

(23)

Total economic hedges

1,122

 

 

  

 

(23)

Economic hedges:

  

 

  

 

  

 

  

 

  

Forward commitments

 

 

Other income

 

 

Other income

 

(54)

Total economic hedges

 

 

  

 

(54)

 

Non-hedging derivatives:

 

  

 

  

 

  

 

  

 

  

Interest rate lock commitments

 

 

Other income

 

 

Other Income

 

(30)

Total non-hedging derivatives

 

 

  

 

(30)

Total

$

478

 

  

$

 

  

$

110

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

Income

in Income

Cash flow hedges:

 

  

 

  

 

  

 

  

 

  

Interest rate swap on wholesale funding

$

(4,588)

 

Interest expense

$

 

Interest expense

$

216

Total cash flow hedges

(4,588)

 

 

 

216

 

Fair value hedges:

  

 

  

 

  

 

  

 

  

Interest rate swap on securities

 

3,335

 

Interest income

 

 

Interest income

 

(41)

Total economic hedges

3,335

 

 

  

 

(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

$

(1,253)

 

  

$

 

  

$

136

47

Table of Contents

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

Three Months Ended June 30, 2021

Interest and Dividend Income

Interest Expense

(in thousands)

    

Loans

Securities and other

    

Deposits

Borrowings

    

Non-interest Income

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

 

$

23,191

$

3,992

$

2,603

$

1,826

$

9,505

 

  

 

  

 

  

The effects of cash flow and fair value hedging:

 

  

 

  

 

  

Gain (loss) on cash flow hedges:

Interest rate swap on wholesale funding

(196)

Interest rate swap on variable rate loans

 

89

 

 

 

  

 

  

 

  

Gain (loss) on fair value hedges:

 

 

  

 

  

Interest rate swap on securities

(140)

Three Months Ended June 30, 2020

Interest and Dividend Income

Interest Expense

(in thousands)

    

Loans

Securities and other

    

Deposits

Borrowings

    

Non-interest Income

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

 

$

26,493

$

4,942

$

4,548

$

2,297

$

9,710

 

  

 

  

 

  

The effects of cash flow and fair value hedging:

 

  

 

  

 

  

Gain (loss) on cash flow hedges:

Interest rate swap on wholesale funding

217

Interest rate swap on variable rate loans

 

 

 

 

  

 

  

 

  

Gain (loss) on fair value hedges:

 

 

  

 

  

Interest rate swap on securities

(23)

48

Table of Contents

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

Six Months Ended June 30, 2021

Interest and Dividend Income

Interest Expense

(in thousands)

    

Loans

Securities and other

    

Deposits

Borrowings

    

Non-interest Income

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

 

$

47,396

7,971

$

5,554

3,637

$

19,753

 

  

 

  

 

  

The effects of cash flow and fair value hedging:

 

  

 

  

 

  

Gain (loss) on cash flow hedges:

Interest rate swap on wholesale funding

(384)

Interest rate swap on variable rate loans

 

97

 

 

 

  

 

  

 

  

Gain (loss) on fair value hedges:

 

 

  

 

  

Interest rate swap on securities

(276)

Six Months Ended June 30, 2020

Interest and Dividend Income

Interest Expense

(in thousands)

    

Loans

Securities and other

    

Deposits

Borrowings

    

Non-interest Income

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

 

$

54,480

10,449

$

10,568

5,208

$

18,131

 

  

 

  

 

  

The effects of cash flow and fair value hedging:

 

  

 

  

 

  

Gain (loss) on cash flow hedges:

Interest rate swap on wholesale funding

216

Interest rate swap on variable rate loans

 

 

 

 

  

 

  

 

  

Gain (loss) on fair value hedges:

 

 

  

 

  

Interest rate swap on securities

(41)

Cash flow hedges

Interest rate swaps on wholesale funding

In March and November 2019 and April 2020,As of June 30, 2021 the Company entered intohas 2 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 termsThe first of the agreement, the Company has 2 swaps eachagreements were entered in November 2019 with a $50.0 million notional amount and pays a fixed interest rate of 2.46% and 1.53% respectively and 1 swap.  A second agreement was entered on April 2020 with a $25.0 million notional amount and pays a fixed rate of 0.59%. The financial institution counterparty pays the Company interest on the three-month LIBOR rate. The Company designated the swapswaps 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.

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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 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 $12.7$14.7 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 March 31, 2021

  

  

  

  

As of June 30, 2021

  

  

  

  

Customer Loan Derivatives:

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

MNA counterparty

$

(9,944)

$

9,944

$

12,700

$

12,700

$

(10,845)

$

10,845

$

14,700

$

14,700

RPA counterparty

 

(5,482)

 

5,482

 

 

 

(6,621)

 

6,621

 

 

Total

$

(15,426)

$

15,426

$

12,700

$

12,700

$

(17,466)

$

17,466

$

14,700

$

14,700

Gross Amounts Offset in the Consolidated Balance Sheet

Derivative

Cash Collateral

(in thousands)

    

 Liabilities

    

Derivative Assets

    

 Pledged

    

Net Amount

As of December 31, 2020

  

  

  

  

Customer Loan Derivatives:

 

  

 

  

 

  

 

  

MNA counterparty

$

(15,938)

$

15,938

$

23,450

$

23,450

RPA counterparty

 

(9,957)

 

9,957

 

 

Total

$

(25,895)

$

25,895

$

23,450

$

23,450

4450

Table of Contents

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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Table of Contents

NOTE 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 March 31,June 30, 2021 and December 31, 2020, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value:

March 31, 2021

June 30, 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

$

0

$

214,607

$

0

$

214,607

$

0

$

198,361

$

0

$

198,361

US Government agency

 

0

 

76,185

 

0

 

76,185

 

0

 

66,343

 

0

 

66,343

Private label

 

0

 

47,541

 

0

 

47,541

 

0

 

73,535

 

0

 

73,535

Obligations of states and political subdivisions thereof

 

0

 

187,863

 

0

 

187,863

 

0

 

188,153

 

0

 

188,153

Corporate bonds

 

0

 

100,207

 

0

 

100,207

 

0

 

95,457

 

0

 

95,457

Derivative assets

 

0

 

15,426

 

46

 

15,472

 

0

 

18,659

 

25

 

18,684

Derivative liabilities

 

0

 

(16,805)

 

(85)

 

(16,890)

 

0

 

(18,852)

 

(45)

 

(18,897)

December 31, 2020

    

Level 1

    

Level 2

    

Level 3

    

Total

(in thousands)

Inputs

Inputs

Inputs

Fair Value

Available for sale securities:

  

  

  

  

Mortgage-backed securities:

 

  

 

  

 

  

 

  

US Government-sponsored enterprises

$

$

212,390

$

$

212,390

US Government agency

 

 

85,632

 

 

85,632

Private label

 

 

19,709

 

 

19,709

Obligations of states and political subdivisions thereof

 

 

169,004

 

 

169,004

Corporate bonds

 

 

98,311

 

 

98,311

Derivative assets

 

 

28,684

 

22

 

28,706

Derivative liabilities

 

 

(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.

46

Table of Contents

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

52

Table of Contents

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

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 March 31,June 30, 2021:

Assets (Liabilities)

Assets (Liabilities)

Interest Rate Lock

Forward

Interest Rate Lock

Forward

(in thousands)

    

Commitments

    

Commitments

    

Commitments

    

Commitments

Three Months Ended March 31, 2021

  

  

Three Months Ended June 30, 2021

  

  

Balance at beginning of period

$

22

$

(95)

$

46

$

(85)

Realized gain recognized in non-interest income

 

24

 

10

 

(21)

 

40

Balance at end of period

$

46

$

(85)

$

25

$

(45)

Three Months Ended March 31, 2020

  

  

Three Months Ended June 30, 2020

  

  

Balance at beginning of period

$

59

$

(84)

$

93

$

(73)

Realized gain recognized in non-interest income

 

34

 

11

 

(30)

 

(53)

Balance at end of period

$

93

$

(73)

$

63

$

(126)

Six Months Ended June 30, 2021

 

  

 

  

Balance at beginning of period

$

22

$

(95)

Realized loss recognized in non-interest income

 

3

 

50

Balance at end of period

$

25

$

(45)

Six Months Ended June 30, 2020

 

  

 

  

Balance at beginning of period

$

59

$

(84)

Realized loss recognized in non-interest income

 

4

 

(42)

Balance at end of period

$

63

$

(126)

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

    

    

    

Significant

 

    

    

    

Significant

 

Fair Value

Fair Value

Unobservable

Fair Value

Fair Value

Unobservable

(in thousands, except ratios)

    

March 31, 2021

    

December 31, 2020

Valuation Techniques

    

Unobservable Inputs

    

Input Value

    

June 30, 2021

    

December 31, 2020

Valuation Techniques

    

Unobservable Inputs

    

Input Value

Assets (Liabilities)

  

  

  

  

  

 

  

  

  

  

  

 

Interest Rate Lock Commitment

 

$

46

$

22

Historical trend

 

Closing Ratio

 

90

%

 

$

25

$

22

Historical trend

 

Closing Ratio

 

90

%

 

 

Pricing Model

Origination Costs, per loan

$

1.7

 

 

Pricing Model

Origination Costs, per loan

$

1.7

 

 

Forward Commitments

 

(85)

 

(95)

Quoted prices for similar loans in active markets

 

Freddie Mac pricing system

 

Pair-off contract price

 

(45)

 

(95)

Quoted prices for similar loans in active markets

 

Freddie Mac pricing system

 

Pair-off contract price

Total

$

(39)

$

(73)

  

 

  

 

  

$

(20)

$

(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 Measurement

March 31, 2021

December 31, 2020

March 31, 2021

Date as of March 31, 2021

Level 3

Level 3

Total

Level 3

(in thousands)

    

Inputs

    

Inputs

    

Gains (Losses)

    

Inputs

Assets

  

  

  

  

Individually evaluated loans

$

10,556

$

8,746

$

(1,810)

March 2021

Capitalized servicing rights

 

4,693

3,605

 

(1,088)

 

March 2021

Premises held for sale

 

971

962

 

(9)

 

December 2020

Total

$

16,220

$

13,313

$

(2,907)

 

  

June 30, 2021

December 31, 2020

Three Months Ended June 30, 2021

Six Months Ended June 30, 2021

Fair Value Measurement Date as of June 30, 2021

Level 3

Level 3

Total

Total

Level 3

(in thousands)

    

Inputs

    

Inputs

    

Gains (Losses)

    

Gains (Losses)

    

Inputs

Assets

  

  

  

  

  

Individually evaluated loans

$

10,348

$

8,746

$

208

$

(1,602)

June 2021

Capitalized servicing rights

 

4,731

3,605

 

(38)

 

(1,126)

 

June 2021

Premises held for sale

 

971

962

 

0

 

(9)

 

December 2020

Total

$

16,050

$

13,313

$

170

$

(2,737)

 

  

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

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

 

 

(in thousands, except ratios)

    

Fair Value March 31, 2021

    

Valuation Techniques

    

Unobservable Inputs

    

Range (Weighted Average)(a)

 

    

Fair Value June 30, 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%

$

7,226

 

Fair value of collateral-appraised value

 

Loss severity

10% to 70%

 

Appraised value

$0 to $1,792

 

Appraised value

$71 to $1,792

Individually evaluated loans

 

3,318

 

Discount cash flow

 

Discount rate

 

2.88% to 9.50%

 

3,122

 

Discount cash flow

 

Discount rate

 

2.88% to 9.50%

 

Cash flows

$7 to $953

 

Cash flows

$7 to $959

Capitalized servicing rights

 

4,693

 

Discounted cash flow

 

Constant prepayment rate (CPR)

 

13.38

 

4,731

 

Discounted cash flow

 

Constant prepayment rate (CPR)

 

15.14

 

  

 

  

 

Discount rate

 

10.04

 

  

 

  

 

Discount rate

 

9.54

Premises held for sale

 

971

 

Fair value of asset less selling costs

 

Appraised value

$220 to $386

 

971

 

Fair value of asset less selling costs

 

Appraised value

$220 to $386

 

 

  

 

Selling Costs

 

6%

 

 

  

 

Selling Costs

 

6%

Total

$

16,220

 

  

 

  

 

  

$

16,050

 

  

 

  

 

  

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

(in thousands, except ratios)

    

Fair Value Dec 31, 2020

    

Valuation Techniques

    

Unobservable Inputs

    

Range (Weighted Average)(a)

Assets

Individually evaluated loans

$

6,128

Fair value of collateral-appraised value

Loss severity

0% to 70%

Appraised value

$0 to $1730

Individually evaluated loans

 

2,618

Discount cash flow

Discount rate

 

3.50% to 9.50%

Cash flows

$19 to $953

Capitalized servicing rights

 

3,605

Discounted cash flow

Constant prepayment rate (CPR)

 

18.53%

Discount rate

 

10.05%

Premises held for sale

 

962

Fair value of asset less selling costs

Appraised value

 

$220 to $386

Selling Costs

 

6%

Total

$

13,313

(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.

There were no Level 1 or Level 2 non-recurring fair value measurements for the periods ended March 31,June 30, 2021 and December 31, 2020.

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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.

March 31, 2021

June 30, 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

$

223,512

$

223,512

$

223,512

$

0

$

0

$

173,718

$

173,718

$

173,718

$

0

$

0

Securities available for sale

 

626,403

 

626,403

 

0

 

626,403

 

0

 

621,849

 

621,849

 

0

 

621,849

 

0

FHLB stock

 

14,826

 

14,826

 

0

 

14,826

 

0

 

14,145

 

14,145

 

0

 

14,145

 

0

Loans held for sale

10,148

10,148

0

0

10,148

7,942

7,942

0

0

7,942

Net loans

 

2,527,411

 

2,518,606

 

0

 

0

 

2,518,606

 

2,492,745

 

2,472,108

 

0

 

0

 

2,472,108

Accrued interest receivable

 

3,688

 

3,668

 

0

 

3,668

 

0

 

3,381

 

3,381

 

0

 

3,381

 

0

Cash surrender value of bank-owned life insurance policies

 

78,388

 

78,388

 

0

 

78,388

 

0

 

78,886

 

78,886

 

0

 

78,886

 

0

Derivative assets

 

15,472

 

15,472

 

0

 

15,426

 

46

 

18,684

 

18,684

 

0

 

18,659

 

25

Financial Liabilities

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

Non-maturity deposits

$

2,273,906

$

2,274,973

$

0

$

2,274,973

$

0

$

2,351,715

$

2,326,202

$

0

$

2,326,202

$

0

Time deposits

638,436

636,670

0

636,670

0

470,758

469,775

0

469,775

0

Securities sold under agreements to repurchase

24,276

24,276

0

24,276

0

17,389

17,389

0

17,389

0

FHLB advances

 

267,934

 

271,622

 

0

 

271,622

 

0

 

262,602

 

266,290

 

0

 

266,290

 

0

Subordinated borrowings

 

60,003

 

57,133

 

0

 

57,133

 

0

 

60,042

 

62,164

 

0

 

62,164

 

0

Derivative liabilities

 

16,890

 

16,890

 

0

 

16,805

 

85

 

18,897

 

18,897

 

0

 

18,852

 

45

December 31, 2020

Carrying

Fair

(in thousands)

    

Amount

    

Value

    

Level 1

    

Level 2

    

Level 3

Financial Assets

 

  

 

  

 

  

 

  

 

  

Cash and cash equivalents

$

226,007

$

226,007

$

226,007

$

$

Securities available for sale

 

585,046

 

585,046

 

 

585,046

 

FHLB stock

 

14,036

 

14,036

 

 

14,036

 

Loans held for sale

23,988

24,163

24,163

Net loans

 

2,543,803

 

2,547,970

 

 

 

2,547,970

Accrued interest receivable

 

2,964

 

2,964

 

 

2,964

 

Cash surrender value of bank-owned life insurance policies

 

77,870

 

77,870

 

 

77,870

 

Derivative assets

 

28,706

 

28,706

 

 

28,684

 

22

Financial Liabilities

 

  

 

  

 

  

 

  

 

  

Non-maturity deposits

$

2,207,854

$

2,122,222

$

$

2,122,222

$

Time deposits

698,361

694,700

694,700

Short-term other borrowings

 

27,779

 

27,779

 

 

27,779

 

FHLB advances

 

248,283

 

252,698

 

 

252,698

 

Subordinated borrowings

 

59,961

 

57,091

 

 

57,091

 

Derivative liabilities

 

28,654

 

28,654

 

 

28,559

 

95

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NOTE 10.           REVENUE FROM CONTRACTS WITH CUSTOMER

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

Disaggregation of Revenue

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

Three Months Ended March 31, 

Three Months Ended June 30, 

Six Months Ended June 30, 

(in thousands)

    

2021

    

2020

    

2021

    

2020

    

2021

    

2020

Major Products/Service Lines

 

  

 

  

 

  

 

  

 

  

 

  

Trust management fees

$

3,175

$

3,046

$

3,474

$

2,892

$

6,649

$

5,938

Financial services fees

 

491

 

323

 

327

 

267

 

818

 

590

Interchange fees

 

1,712

 

1,738

 

1,915

 

1,463

 

3,627

 

3,200

Customer deposit fees

 

1,049

 

1,110

 

1,130

 

789

 

2,179

 

1,899

Other customer service fees

 

209

 

264

 

212

 

187

 

421

 

452

Total

$

6,636

$

6,481

$

7,058

$

5,598

$

13,694

$

12,079

Three Months Ended March 31, 

Three Months Ended June 30, 

Six Months Ended June 30, 

(in thousands)

    

2021

    

2020

    

2021

    

2020

    

2021

    

2020

Timing of Revenue Recognition

 

  

 

  

 

  

 

  

 

  

 

  

Products and services transferred at a point in time

$

3,287

$

3,273

$

3,570

$

2,620

$

6,856

$

5,892

Products and services transferred over time

 

3,349

 

3,208

 

3,488

 

2,978

 

6,838

 

6,187

Total

$

6,636

$

6,481

$

7,058

$

5,598

$

13,694

$

12,079

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 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:

    

    

    

    

(in thousands)

March 31, 2021

December 31, 2020

June 30, 2021

December 31, 2020

Balances from contracts with customers only:

 

  

 

  

 

  

 

  

Other Assets

$

1,293

$

1,121

$

1,190

$

1,121

Other Liabilities

 

2,664

 

2,785

 

2,545

 

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

The following table presents the consolidated statements of condition classification of the Company’s ROU assets and lease liabilities:

(in thousands)

    

Classification

    

March 31, 2021

    

December 31, 2020

    

Classification

    

June 30, 2021

    

December 31, 2020

Lease Right-of-Use Assets

 

  

  

 

  

  

Operating lease right-of-use assets

 

Other assets

$

10,056

$

10,338

 

Other assets

$

9,773

$

10,338

Lease Liabilities

 

  

 

  

 

  

 

  

 

  

 

  

Operating lease liabilities

 

Other liabilities

 

10,368

 

10,627

 

Other liabilities

 

10,107

 

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:

    

March 31, 2021

    

December 31, 2020

    

June 30, 2021

    

December 31, 2020

Weighted-average remaining lease term (in years)

  

  

  

  

Operating leases

9.02

9.26

8.80

9.26

Weighted-average discount rate

  

  

  

  

Operating leases

3.15

%

3.15

%

3.15

%

3.15

%

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The following table represents lease costs, which includes prepaids and expenses 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

Three Months Ended

Three Months Ended

Six Months Ended

(in thousands)

    

March 31, 2021

    

March 31, 2020

June 30, 2021

    

June 30, 2020

    

June 30, 2021

    

June 30, 2020

Lease Costs

 

  

 

  

  

 

  

 

  

 

  

Operating lease cost

$

321

$

234

$

322

$

323

$

642

$

644

Variable lease cost

 

81

 

144

 

55

 

62

 

136

 

118

Total lease cost

$

402

$

378

$

377

$

385

$

778

$

762

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

(in thousands)

    

Payments

    

Payments

Twelve Months Ended:

 

  

 

  

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

June 30, 2022

$

1,307

June 30, 2023

 

1,319

June 30, 2024

 

1,327

June 30, 2025

 

1,176

June 30, 2026

 

1,073

Thereafter

 

4,788

 

4,531

Total future minimum lease payments

 

11,055

 

10,733

Amounts representing interest

 

(687)

 

(626)

Present value of net future minimum lease payments

$

10,368

$

10,107

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Table of Contents

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

GENERAL

Management’s discussion and analysis 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, 2020.

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

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

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

GraphicGraphic

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Table of Contents

SELECTED FINANCIAL DATA

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

Three Months Ended

 

Three Months Ended

Six Months Ended

 

March 31, 

 

June 30, 

June 30, 

 

2021

    

2020

 

    

2021

    

2020

    

2021

    

2020

 

PER SHARE DATA

Net earnings, diluted

$

0.63

$

0.50

$

0.60

$

0.55

$

1.23

$

1.04

Adjusted earnings, diluted(1)

 

0.68

 

0.50

 

0.63

 

0.56

 

1.32

 

1.06

Total book value

 

27.13

 

25.90

 

27.76

 

26.56

 

27.76

 

26.56

Tangible book value(1)

 

18.64

 

17.70

 

19.30

 

18.18

 

19.30

 

18.18

Market price at period end

 

29.42

 

17.28

 

28.62

 

22.39

 

28.62

 

22.39

Dividends

 

0.22

 

0.22

 

0.24

 

0.22

 

0.46

 

0.44

PERFORMANCE RATIOS(2)

Return on assets

 

1.03

%

 

0.85

%

 

0.97

%

 

0.90

%

 

1.00

%

 

0.86

%

Adjusted return on assets(1)

 

1.11

 

0.86

 

1.01

 

0.91

 

1.07

 

0.87

Pre-tax, pre-provision return on assets

1.13

 

1.27

 

1.17

 

1.25

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

1.18

 

1.29

 

1.27

 

2.97

Return on equity

 

9.45

 

7.64

 

8.76

 

8.40

 

9.10

 

8.02

Adjusted return on equity(1)

 

10.13

 

7.71

 

9.13

 

8.52

 

9.75

 

8.12

Adjusted return on tangible equity(1)

 

15.00

 

11.54

 

13.42

 

12.72

 

14.37

 

12.13

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

 

2.88

 

3.06

 

2.74

 

2.93

 

2.81

 

3.02

Adjusted net interest margin(1) (2) (5)

 

2.78

 

2.99

 

2.67

 

2.92

 

2.72

 

3.03

Efficiency ratio(1)

 

61.95

 

64.82

 

63.45

 

60.67

 

62.20

 

62.74

GROWTH (Year-to-date annualized)(1)

Total commercial loans

 

14

%

 

6

%

 

9

%

 

33

%

 

9

%

 

33

%

Total loans

 

(2)

 

(1)

 

(4)

 

5

 

(4)

 

5

Total deposits

 

1

 

(7)

 

(6)

 

(0)

 

(6)

 

(0)

FINANCIAL DATA (In millions)

Total assets

$

3,730

$

3,677

$

3,640

$

3,780

$

3,640

$

3,780

Total earning assets(4)

 

3,371

 

3,269

 

3,274

 

3,414

 

3,274

 

3,414

Total investments

 

641

 

646

 

636

 

662

 

636

 

662

Total loans

 

2,551

 

2,635

 

2,516

 

2,706

 

2,516

 

2,706

Allowance for loan losses

 

24

 

15

 

23

 

17

 

23

 

17

Total goodwill and intangible assets

 

127

 

129

 

127

 

128

 

127

 

128

Total deposits

 

2,912

 

2,651

 

2,822

 

2,695

 

2,822

 

2,695

Total shareholders' equity

 

406

 

404

 

416

 

404

 

416

 

404

Net income

 

9

 

8

 

9

 

8

 

19

 

16

Adjusted income(1)

 

10

 

8

 

9

 

9

 

20

 

16

ASSET QUALITY AND CONDITION RATIOS

Net charge-offs (annualized)/average loans

 

0.03

%

 

0.18

%

 

0.01

%

 

0.02

%

 

0.02

%

 

0.10

%

Allowance for loan losses/total loans

 

0.93

 

0.58

Allowance for credit losses/total loans

 

0.91

 

0.61

 

0.91

 

0.61

Loans/deposits

 

88

 

99

 

89

 

100

 

89

 

100

Shareholders' equity to total assets

 

10.87

 

10.98

 

11.42

 

10.69

 

11.42

 

10.69

Tangible shareholders' equity to tangible assets(1)

 

7.73

 

7.77

 

8.23

 

7.57

 

8.23

 

7.57

(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.

63

Table of Contents

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

57

Table of Contents

CONSOLIDATED LOAN AND DEPOSIT ANALYSIS

The following tables present the quarterly trend in loan and deposit data and accompanying quarterly growth rates as of March 31,June 30, 2021 on an annualized basis:

LOAN ANALYSIS

Annualized Growth %

Annualized Growth %

(in thousands, except ratios)

    

Mar 31, 2021

    

Dec 31, 2020

    

Sep 30, 2020

    

Jun 30, 2020

    

Mar 31, 2020

    

March 31, 2021

    

Jun 30, 2021

    

Mar 31, 2021

    

Dec 31, 2020

    

Sep 30, 2020

    

Jun 30, 2020

    

Quarter To Date

Year To Date

Commercial real estate

$

1,118,669

$

1,084,381

$

1,045,635

$

982,070

$

948,178

 

13

%

$

1,135,857

$

1,118,669

$

1,084,381

$

1,045,635

$

982,070

 

6

%

9

%

Commercial and industrial

 

317,500

 

323,864

 

324,647

 

340,898

 

321,605

 

(8)

 

 

327,729

 

317,500

 

323,864

 

324,647

 

340,898

 

13

 

2

Paycheck Protection Program (PPP)

77,878

53,774

131,537

131,626

179

65,918

77,878

53,774

131,537

131,626

(61)

45

Total commercial loans

 

1,514,047

 

1,462,019

 

1,501,819

 

1,454,594

 

1,269,783

 

14

 

1,529,504

 

1,514,047

 

1,462,019

 

1,501,819

 

1,454,594

 

4

9

Total commercial loans, excluding PPP

1,436,169

1,408,245

1,370,282

1,322,968

1,269,783

8

1,463,586

1,436,169

1,408,245

1,370,282

1,322,968

8

8

Residential real estate

 

868,084

 

923,891

 

1,021,206

 

1,083,708

 

1,132,328

 

(24)

 

 

822,774

 

868,084

 

923,891

 

1,021,206

 

1,083,708

 

(21)

 

(22)

Consumer

 

106,835

 

113,544

 

119,340

 

124,197

 

128,120

 

(24)

 

 

103,589

 

106,835

 

113,544

 

119,340

 

124,197

 

(12)

 

(18)

Tax exempt and other

 

62,098

 

63,431

 

66,326

 

66,918

 

104,752

 

(8)

 

 

59,693

 

62,098

 

63,431

 

66,326

 

66,918

 

(15)

 

(12)

Total loans

$

2,551,064

$

2,562,885

$

2,708,691

$

2,729,417

$

2,634,983

 

(2)

%

$

2,515,560

$

2,551,064

$

2,562,885

$

2,708,691

$

2,729,417

 

(6)

%

(4)

%

DEPOSIT ANALYSIS

Annualized Growth %

Annualized Growth %

(in thousands, except ratios)

    

Mar 31, 2021

    

Dec 31, 2020

    

Sep 30, 2020

    

Jun 30, 2020

    

Mar 31, 2020

    

March 31, 2021

    

Jun 30, 2021

    

Mar 31, 2021

    

Dec 31, 2020

    

Sep 30, 2020

    

Jun 30, 2020

    

Quarter To Date

Year To Date

Demand

$

586,487

$

544,636

$

515,064

$

504,325

$

400,410

 

31

%

$

599,598

$

586,487

$

544,636

$

515,064

$

504,325

 

9

%

20

%

NOW

 

761,817

 

738,849

 

706,048

 

642,908

 

578,320

 

12

 

 

802,681

 

761,817

 

738,849

 

706,048

 

642,908

 

21

 

17

Savings

 

560,095

 

521,638

 

511,938

 

466,668

 

423,345

 

29

 

 

578,361

 

560,095

 

521,638

 

511,938

 

466,668

 

13

 

22

Money market

 

365,507

 

402,731

 

388,356

 

402,835

 

404,385

 

(37)

 

 

371,075

 

365,507

 

402,731

 

388,356

 

402,835

 

6

 

(16)

Total non-maturity deposits

 

2,273,906

 

2,207,854

 

2,121,406

 

2,016,736

 

1,806,460

 

12

 

 

2,351,715

 

2,273,906

 

2,207,854

 

2,121,406

 

2,016,736

 

14

 

13

Total time deposits

 

638,436

 

698,361

 

813,509

 

678,126

 

844,097

 

(34)

 

 

470,758

 

638,436

 

698,361

 

813,509

 

678,126

 

*

 

(65)

Total deposits

$

2,912,342

$

2,906,215

$

2,934,915

$

2,694,862

$

2,650,557

 

1

%

$

2,822,473

$

2,912,342

$

2,906,215

$

2,934,915

$

2,694,862

 

(12)

%

(6)

%

5864

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 March 31, 

 

    

Three Months Ended June 30, 

 

2021

2020

 

2021

2020

 

Average 

Average 

 

Average 

Average 

 

(in thousands, except ratios)

    

Balance

    

Interest(3)

    

Yield/Rate(3)

    

Balance

    

Interest(3)

    

Yield/Rate(3)

    

    

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

%  

$

228,825

$

54

0.09

%  

$

71,067

$

14

0.08

%  

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

613,459

4,221

2.79

661,848

5,764

3.50

635,978

4,217

2.66

648,185

5,247

3.26

Loans:

Commercial real estate

1,099,937

9,987

 

3.68

945,851

10,484

 

4.46

1,122,831

9,921

 

3.54

952,264

9,720

 

4.11

Commercial and industrial

 

377,176

 

3,594

 

3.86

 

423,393

 

5,151

 

4.89

 

378,634

 

3,394

 

3.60

 

417,620

 

4,285

 

4.13

Paycheck protection program

65,149

1,304

8.12

76,701

1,064

5.56

104,740

869

3.34

Residential

 

916,633

 

8,508

 

3.76

 

1,141,908

 

10,909

 

3.84

 

850,119

 

8,063

 

3.80

 

1,117,608

 

10,591

 

3.81

Consumer

 

109,802

 

965

 

3.56

 

130,471

 

1,688

 

5.20

 

104,851

 

900

 

3.44

 

126,413

 

1,199

 

3.81

Total loans (1)

 

2,568,697

 

24,358

 

3.85

 

2,641,623

 

28,232

 

4.30

 

2,533,136

 

23,342

 

3.70

 

2,718,645

 

26,664

 

3.94

Total earning assets

 

3,358,884

 

28,618

 

3.46

%  

 

3,320,404

 

34,045

 

4.12

%

 

3,397,939

 

27,613

 

3.26

%  

 

3,437,897

 

31,925

 

3.73

%

Other assets

 

357,900

 

  

 

341,355

 

  

 

 

348,153

 

  

 

369,224

 

  

 

Total assets

$

3,716,784

 

  

$

3,661,759

 

  

 

$

3,746,092

 

  

$

3,807,121

 

  

 

Liabilities

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

NOW

$

749,100

$

250

 

0.14

%  

$

570,127

$

565

 

0.40

%

$

781,836

$

237

 

0.12

%  

$

611,860

$

213

 

0.14

%

Savings

 

541,203

 

169

 

0.13

 

410,931

 

258

 

0.25

 

568,193

 

138

 

0.10

 

450,621

 

172

 

0.15

Money market

 

378,743

 

127

 

0.14

 

373,650

 

934

 

1.01

 

368,826

 

112

 

0.12

 

411,232

 

414

 

0.40

Time deposits

 

675,422

 

2,405

 

1.44

 

892,654

 

4,263

 

1.92

 

619,454

 

2,116

 

1.37

 

776,042

 

3,750

 

1.94

Total interest bearing deposits

 

2,344,468

 

2,951

 

0.51

 

2,247,362

 

6,020

 

1.08

 

2,338,309

 

2,603

 

0.45

 

2,249,755

 

4,549

 

0.81

Borrowings

 

340,209

 

1,811

 

2.16

 

556,824

 

2,911

 

2.10

 

345,896

 

1,826

 

2.12

 

612,538

 

2,297

 

1.51

Total interest bearing liabilities

 

2,684,677

 

4,762

 

0.72

%  

 

2,804,186

 

8,931

 

1.28

%

 

2,684,205

 

4,429

 

0.66

%  

 

2,862,293

 

6,846

 

0.96

%

Non-interest bearing demand deposits

 

550,657

 

  

 

  

 

406,951

 

  

 

 

591,982

 

  

 

  

 

472,688

 

  

 

Other liabilities

 

74,646

 

  

 

  

 

44,343

 

  

 

 

56,630

 

  

 

  

 

66,302

 

  

 

Total liabilities

 

3,309,980

 

  

 

  

 

3,255,480

 

  

 

 

3,332,817

 

  

 

  

 

3,401,283

 

  

 

Total shareholders' equity

 

406,804

 

  

 

  

 

406,279

 

  

 

 

413,275

 

  

 

  

 

405,838

 

  

 

Total liabilities and shareholders' equity

$

3,716,784

 

  

 

  

$

3,661,759

 

  

 

  

$

3,746,092

 

  

 

  

$

3,807,121

 

  

 

  

Net interest spread

 

  

 

  

 

2.74

%  

 

  

 

  

 

2.84

%

 

  

 

  

 

2.60

%  

 

  

 

  

 

2.77

%

Net interest margin (1)

2.88

 

  

 

  

 

3.04

2.74

 

  

 

  

 

2.93

Core net interest margin (2)

 

  

 

  

 

2.78

3.04

Adjusted net interest margin(5)

 

  

 

  

 

2.67

2.92

(1)The average balances of loans include non-accrual loans and unamortized deferred fees and costs.
(2)The average balance for securities available for sale is based on amortized cost.
(3)Fully taxable equivalent considers the impact of tax-advantaged securities and loans.
(4)Income from interest-bearing deposits with other banks has been separated from securities and restated for prior periods to conform to the current period presentation.

(5)Adjusted net interest margin excludes Paycheck Protection Program loans.

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Table of Contents

Six Months Ended June 30, 

2021

2020

 

Average 

Yield/

Average 

Yield/

(in thousands, except ratios)

    

Balance

    

Interest(3)

    

Rate(3)

Balance

    

Interest(3)

    

Rate(3)

Assets

Interest-bearing deposits with other banks(4)

$

200,333

$

93

0.09

%  

$

44,000

$

63

0.74

%  

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

624,866

8,438

2.72

655,123

11,011

2.98

Loans:

Commercial real estate

1,112,909

19,908

 

3.61

951,866

20,204

 

4.27

Commercial and industrial(3)

 

378,087

 

6,988

 

3.73

 

412,037

 

9,436

 

3.97

Paycheck protection program

70,925

2,368

6.73

65,813

869

2.66

Residential

 

880,174

 

16,571

 

3.80

 

1,125,863

 

21,500

 

3.84

Consumer

 

107,079

 

1,865

 

3.51

 

128,621

 

2,887

 

4.51

Total loans (1)

 

2,549,174

 

47,700

 

3.77

 

2,684,200

 

54,896

 

4.11

Total earning assets

 

3,374,373

 

56,231

 

3.36

%  

 

3,383,323

 

65,970

 

3.97

%

Other assets

 

353,303

 

  

 

403,104

 

  

Total assets

$

3,727,676

 

  

$

3,786,427

 

  

Liabilities

 

  

 

  

 

  

 

  

 

  

 

  

NOW

$

768,616

$

488

 

0.13

%  

$

596,409

$

778

 

0.26

%

Savings

 

556,146

 

307

 

0.11

 

433,693

 

430

 

0.20

Money market

 

373,512

 

239

 

0.13

 

394,036

 

1,348

 

0.69

Time deposits

 

637,193

 

4,521

 

1.43

 

827,556

 

8,013

 

1.95

Total interest bearing deposits

 

2,335,467

 

5,555

 

0.48

 

2,251,694

 

10,569

 

0.94

Borrowings

 

342,854

 

3,637

 

2.14

 

579,785

 

5,208

 

1.81

Total interest bearing liabilities

 

2,678,321

 

9,192

 

0.69

%  

 

2,831,479

 

15,777

 

1.12

%

Non-interest bearing demand deposits

 

573,659

 

  

 

  

 

491,950

 

  

 

  

Other liabilities

 

65,656

 

  

 

  

 

56,936

 

  

 

  

Total liabilities

 

3,317,636

 

  

 

  

 

3,380,365

 

  

 

  

Total shareholders' equity

 

410,040

 

  

 

  

 

406,062

 

  

 

  

Total liabilities and shareholders' equity

$

3,727,676

 

  

 

  

$

3,786,427

 

  

 

  

Net interest spread

2.67

%

2.85

%

Net interest margin

 

  

 

  

 

2.81

 

  

 

  

 

3.02

Adjusted net interest margin(5)

2.73

3.03

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

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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.

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RECONCILIATION OF NON-GAAP FINANCIAL MEASURES

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

    

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

Three Months Ended June 30, 

    

Six Months Ended June 30, 

(in thousands)

    

Calculations

    

2021

    

2020

2021

    

2020

Net income

 

  

$

9,025

$

8,481

$

18,505

$

16,202

Non-recurring items:

Gain on sale of securities, net

 

  

 

(50)

 

(1,351)

 

(50)

 

(1,486)

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

 

  

 

1

 

(2)

 

9

 

90

Loss on other real estate owned

 

  

 

 

 

324

 

31

Loss on debt extinguishment

1,351

1,351

Acquisition, conversion and other expenses

 

  

 

552

 

158

 

1,441

 

261

Income tax expense (1)

 

  

 

(119)

 

(37)

 

(409)

 

(59)

Total non-recurring items

384

119

1,315

188

Total adjusted income(2)

 

(A)

$

9,409

$

8,600

$

19,820

$

16,390

Net interest income

 

(B)

$

22,754

$

24,590

$

46,176

$

49,153

Plus: Non-interest income

 

  

 

9,505

 

9,710

 

19,753

 

18,131

Total Revenue

 

  

 

32,259

 

34,300

 

65,929

 

67,284

Gain on sale of securities, net

 

  

 

(50)

 

(1,351)

 

(50)

 

(1,486)

Total adjusted revenue(2)

 

(C)

$

32,209

$

32,949

$

65,879

$

65,798

Total non-interest expense

 

  

$

21,724

$

22,266

$

44,215

$

44,625

Non-recurring expenses:

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

 

  

 

(1)

 

2

 

(9)

 

(90)

Loss on other real estate owned

 

  

 

 

 

(324)

 

(31)

Loss on debt extinguishment

(1,351)

(1,351)

Acquisition, conversion and other expenses

 

  

 

(552)

 

(158)

 

(1,441)

 

(261)

Total non-recurring expenses

(553)

(1,507)

(1,774)

(1,733)

Adjusted non-interest expense(2)

 

(D)

$

21,171

$

20,759

$

42,441

$

42,892

Total revenue

32,259

34,300

65,929

67,284

Total non-interest expense

21,724

22,266

44,215

44,625

Pre-tax, pre-provision net revenue

$

10,535

$

12,034

$

21,714

$

22,659

Adjusted revenue(2)

32,209

32,949

65,879

65,798

Adjusted non-interest expense(2)

21,171

20,759

42,441

42,892

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

$

11,038

$

12,190

$

23,438

$

22,906

(in millions)

 

  

 

  

 

  

 

  

 

  

Average earning assets

 

(E)

$

3,398

$

3,438

$

3,374

$

3,339

Average paycheck protection program (PPP) loans

(R)

77

105

71

66

Average earning assets, excluding PPP loans

(S)

3,321

3,333

3,303

3,273

Average assets

 

(F)

 

3,746

 

3,807

 

3,728

 

3,786

Average shareholders' equity

 

(G)

 

413

 

406

 

410

 

406

Average tangible shareholders' equity(2)(3)

 

(H)

 

287

 

278

 

283

 

278

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

 

(I)

 

289

 

277

 

289

 

277

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

 

(J)

 

3,513

 

3,653

 

3,513

 

3,653

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Three Months Ended March 31,

Three Months Ended June 30, 

    

Six Months Ended June 30, 

Calculations

2021

2020

Calculations

2021

2020

2021

2020

(in thousands)

 

  

 

  

 

  

 

  

 

  

Common shares outstanding, period-end

 

(K)

 

14,972

 

15,214

 

14,972

 

15,214

Average diluted shares outstanding

 

(L)

 

15,042

 

15,441

 

15,026

 

15,523

Adjusted earnings per share, diluted(2)

 

(A/L)

$

0.63

$

0.56

$

1.32

$

1.06

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

 

(I/K)

 

19.30

 

18.18

 

19.30

 

18.18

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

 

(M)

 

7,237

 

11,412

 

7,237

 

11,412

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

 

(I+M)/K

 

18.81

 

17.43

 

18.81

 

17.43

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

 

(I/J)

 

8.23

 

7.57

 

8.23

 

7.57

Performance ratios(5)

GAAP Return on assets

  

1.03

%  

0.85

Return on assets

  

0.97

%  

0.90

1.00

%  

0.86

Adjusted return on assets(2)

(A/F)

1.11

0.86

(A/F)

1.01

0.91

1.07

0.87

GAAP Return on equity

  

9.45

7.64

Pre-tax, pre-provision return on assets

1.13

1.27

1.17

1.25

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

(U/F)

1.18

1.29

1.27

2.98

Return on equity

  

8.76

8.40

9.10

8.02

Adjusted return on equity(2)

(A/G)

10.13

7.71

(A/G)

9.13

8.52

9.75

8.12

Adjusted return on tangible equity(2)

(A+Q)/H

15.00

11.54

Adjusted return on tangible equity(1)(2)

(A+Q)/H

13.42

12.55

13.44

12.13

Efficiency ratio(2)(6)

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

61.95

64.82

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

63.45

60.67

62.20

62.74

Net interest margin(2)

(B+P)/E

2.88

3.04

Adjusted net interest margin(7)

(B+P-T)/S

2.78

3

Net interest margin

(B+P)/E

2.74

2.93

2.81

3.02

Adjusted net interest margin(2)(7)

(B+P-T)/S

2.67

2.92

2.73

3.03

Supplementary data (in thousands)

  

  

  

  

  

  

  

  

Taxable equivalent adjustment for efficiency ratio

(N)

$

595

$

719

(N)

$

586

$

646

$

1,181

$

1,365

Franchise taxes included in non-interest expense

(O)

125

119

(O)

128

120

253

239

Tax equivalent adjustment for net interest margin

(P)

433

551

(P)

430

490

863

1,041

Intangible amortization

(Q)

241

256

(Q)

233

256

474

512

Interest and fees on PPP loans

(T)

1,304

(T)

1,064

869

2,368

869

(1)Assumes a marginal tax rate of 23.71% in the first and second quarter of 2021 and fourth quarter of 2020 and 23.87% for the first three quarters of 2020.
(2)Non-GAAP financial measure.
(3)Tangible shareholders' equity is computed by taking total shareholders' equity less the intangible assets at period-end. 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)Efficiency ratio is computed by dividing core non-interest expense net of franchise taxes and intangible amortization divided by core revenue on a fully taxable equivalent basis.
(7)CoreAdjusted net interest margin excludes Paycheck Protection Program loans.

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FINANCIAL SUMMARY

Bar Harbor Bankshares reported a 26% increase in earnings for the firstsecond quarter 2021 compared to the same quarternet income of 2020.  Net income in the first quarter 2021 was $9.5$9.0 million or $0.63$0.60 per share compared to $7.7from $8.5 million or $0.50$0.55 per share in the same quarter of 2020.2020, an increase of 9% in earnings per share.  For the same periods adjusted earnings (non-GAAP) were $10.2$9.4 million, or $0.68$0.63 per share, compared to $7.8$8.6 million, or $0.50$0.56 per share.  Non-recurring expensesitems (non-GAAP) reduced net income in the firstsecond quarter 2021 included a reduction in workforce charges totaling $900by $384 thousand, or $0.05$0.03 per share.      

Key ratios includedFinancial highlights for the second quarter include the following, duringas compared to the firstsecond quarter 2021:of 2020 unless otherwise noted:

1.03%9% growth in earnings per share, 13% growth in adjusted earnings (non-GAAP)
0.97% return on assets; 1.11% core1.01% adjusted return on assets (non-GAAP)
8% annualized total commercial loan growth, excluding paycheck protection program (“PPP”) loans
12%14% annualized increase in core deposits
5% increase in pre-tax, pre-provision net revenue; 13% excluding non-core charges (non-GAAP)
22% increase in fee income
0.55% non-accrual to total loan ratio, 0.47% excluding purchased credit deteriorated (“PCD”) loans (non- GAAP), net charge-offs near zero

During the first quarter 2021, adjustedThe Company had core earnings increased 36% over the same quartergrowth of 2020, improving12% and adjusted return on assets of 1.01%.  Profitability increased with higher fee income driven from growth in core deposits and assets under management.  Customer service income also returned to 1.11%.  Earningspre-pandemic levels suggesting a meaningful recovery in the quarter were driven by strongregional activity.  The 8% annualized growth in total commercial loans during the second quarter 2021, 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 toreflects the Company’s business model.  Therefore,commitment to meeting the Company continuesneeds of existing customers and developing new relationships as it navigates past PPP loan activities.  The Company’s Retail and Commercial loan teams continue to generate significant gains from residential loan sales that are more profitablenew core deposit accounts, especially in the short and long term versus recording them on the balance sheet. 

With a continued focus on profitability, the Company reduced most categories of non-interest expense during the first quarter 2021 as compared with 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 footprint, and establish sustainable run-rates that allow for revenue growth in the future.  The Company recorded one-time charges related to early retirement and reduction in workforce initiatives, as a result of early milestones achieved in the expense review.  Those one-time charges are expected to decrease salary and benefit expense by morebearing categories.  More than $3.0 million annually starting1,000 new banking relationships were created in the second quarter 2021. The final resultshighlighting both existing customer retention efforts and new customer initiatives.  With the increase in mortgage rates in the beginning of the reviewquarter 2021, the Company chose to selectively add residential loans to the balance sheet, which helped to offset amortization and action plans are expectedprepayments.  

The Company continued to be completedorganically grow capital levels expanding tangible equity to tangible assets (non-GAAP) to 8.23% while maintaining exceptional credit quality.  All credit metrics remain strong and further improved in the second quarter, primarily marked by lower past dues, minimal net charge-offs and improved coverage ratios.  Risk ratings in the second quarter 2021 continue to migrate favorably across most loan categories.  The large majority of loan modification concessions made during the pandemic have resumed normal repayment schedules as of the end of the second quarter.   quarter 2021.

Net interest margin (“NIM”) in the second quarter had substantially less PPP fee acceleration and included the effects of excess cash.  The Company’s provision for credit losses was a benefit to earningsCompany had $105 million of $500 thousand due to improved macroeconomic expectations along with lower specific reserves.  Quarterly stress testing and tightly managed credit disciplines also contributed towholesale deposits mature on the recapturelast day of the Company’s provision.

Liquidity levels increased through newsecond quarter 2021, which will benefit its cost of funds going forward.  The quarterly trend in NIM is starting to level off, excluding non-recurring items noted above, as the Company continues to reduce wholesale borrowings and grows core deposit account openings totaling 4,300deposits.  Excluding the effects of one-time items, second quarter NIM was 2.95% compared with the same adjusted metric of 2.86% in the first quarter 2021, which sustained the Company’s loans to deposits ratio at 88% from year-end 2020.  Growth in deposits has allowed2021.  Given an overall asset sensitive balance sheet position and a more core-funded profile, the Company is well positioned for when rates start 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.increase.    

The Company adopted ASU 2016-13 (Topic 326), “Measurementinitiated a comprehensive review of Credit Lossesnon-interest expenses in the first quarter of 2021, which included an annual reduction to salary and benefits of more than $3.0 million along with cost savings associated with vendor contracts and process efficiencies.  Some of the identified savings reduced second quarter expense run-rates while other cost savings will be phased in depending 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 amountscontract timelines. As business-as-usual activities continue to be reported in accordanceresume, the Company is also rolling out cost containment initiatives to absorb any potential increases associated with previously applicable GAAP.  For more information, see “Note 1 - Basispandemic-delayed expenses.  In total, the Company evaluates profitability at each branch within its footprint taking into consideration the unique geography 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)Northern New England and customer needs.

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by $5.2 million and 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 fourth quarter of 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 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 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 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 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 2021.

The Company’s capital position continues to strengthen with growth in 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 in capital and on-going profitability programs, validating the Company’s commitment to building shareholder value.

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

Summary

Total assets were $3.7$3.6 billion at the end of the firstsecond quarter 2021 andcompared to $3.7 billion at year-end 2020 as2020.  The slight decrease of $86.1 million in the Company continuesfirst half of 2021 is principally due to reposition and take advantagea $47.3 million decrease in total loans, $52.3 million decrease in cash, offset in part by a $36.9 million increase in securities.  Total liabilities decreased by $90.3 million to $3.2 billion at the end of the current interest ratesecond quarter 2021, which included a $162.3 million decrease in brokered deposits, a $65.3 million decrease in retail time deposits and market conditionsa $143.9 million increase in non-maturity deposits (core deposits).  The loan to deposit ratio was 89% at the end of the banking industry.second quarter compared to 88% at year-end 2020.  Asset quality metrics remain strong with an allowance for credit losses to total loans ratio of 0.93%0.91% with a coverage ratio to non-accruing loans atof 168%, up from 157% as of year-end 2020.  The loanTangible book value per share (non-GAAP) increased to deposit ratio was 88% at$19.30 from $19.05 on strong earnings offset by decreases in unrealized securities gains and the endimpact of the CECL adoption in the first quarter and at year-end 2020.2021.  

Cash

Total cash and cash equivalents at March 31,June 30, 2021 were $223.5$173.7 million, compared to $226.0 million at December 31, 2020 were $226 million. Balances of cash and cash equivalents continues to be elevated due to growth in non-maturity deposits from new accounts and government stimulus outpacing the growth in other earning assets. Federal Reserve balances reflected in interest2020.  Interest bearing deposits held with other banks totaled $171.8$132.3 million at quarter end and $175.0$198.4 million at year-end 2020 carrying a yield of 0.10% for both periods.0.09% and 0.11% respectively.  The decrease in cash balances reflects strong growth in core deposits on relatively flat loan growth, which was more than offset by reductions to time deposits.

Securities

Securities totaled $641.2$636.0 million in the firstsecond quarter 2021 and $599.1 million at year-end 2020 representing 17% and 16% of total assets, respectively.  The increase in the first quarterhalf of 2021 is due to securities purchases $79.6of $115.9 million to increase the Company’s average risk adjusted returns and increase duration on the portfolio. The purchases were offset by $28.7$79.0 million of sales, maturities, calls and pay-downs of amortizing securities.  Fair value adjustments increased the security portfolio by $5.9$9.4 million at the end of the firstsecond quarter 2021 and $13.1 million at year-end 2020.  Unrealized gains decreased during the quarterfirst half of the year by the upward movement in the long-term treasury yield curve, which partially recovered in years three to thirty and related impact to the Company’s portfolio.second quarter.  The weighted average yield onof the Company's securities profileportfolio was 2.88% as of March 31,June 30, 2021 was 2.89% for the quarter compared to 2.96% at year-end 2020.  At the end of the firstsecond quarter 2021 securities held by the Company had an average life of 5.4 years and aan effective duration of 5.04.6 years compared to 4.8 years and 4.3 years at the end of 2020, respectively.  

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Loans Held For Sale

Held for sale loans decreased to $10.1$7.9 million at March 31,June 30, 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 salessold $56.1 million of residential mortgage loans totaled $69.2 millionloan originations in the second quarter 2021 compared to $14.8with $52.0 million in the same quarter of 2020.  Sales in the six month period of 2021 totaled $125.4 million and $69.8 million in comparable period of 2020.  The increase in sales is due to a greater focus on gains and servicing rights given current interest rates and credit risk.  

Loans

Loan balances in the firstsecond quarter 2021 were $2.5 billion flat withcompared $2.6 billion at year-end 2020.  Total commercialCommercial loans grew at an8% on a year-to-date annualized rate of 8%,basis, excluding PPP loans.loans and included 76 new relationships developed during the second quarter.  Commercial real estate and commercial and industrial loans, grew 13%excluding PPP increased 9% and 2% on ana year-to-date annualized basis, and included new originations of highly sought after borrowers in favorable industries within our footprint.respectively.  PPP loans totaled $77.9$65.9 million at quarter-end, consisting of $54.2$62.7 million from 2021 originations and $23.7$3.2 million remaining from 2020, originations.  Applications for 2021 PPPand were $53.8 million at year-end 2020.  COVID loan modifications totaled $19.0 million, down from $68.6 million at year-end, as 97% of modified 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 salehave resumed normal payment schedules.  Total residential loans decreased $69.6$101.1 million due to $60.7in the first half of 2021, which includes $68.9 million of originations less sales of $69.2 million and prepayments of $61.1 million asrecorded on the Company 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$170.0 million 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 $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.prepayments/amortization.

Allowance for Credit Losses

The allowance for credit losses (ACL) totaled $23.7$22.8 million at the end of the firstsecond 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 areincrease is primarily due to the Company’s adoption of CECL as of January 1, 2021, which increased the ACL by $5.2 million and unfunded commitment reserves by $1.6 million.  Since the beginning of the first quarter,adoption the ACL decreased due to improved macroeconomicstronger economic forecasts and fewerlower reserves on specific loans.  Whileloans offset by changes in loan mix.    

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Net charge offs totaled $241 thousand in the first half of 2021, or 0.01% of total average loans, compared to $1.3 million, or 0.05% of total average loans, for the same period of 2020.  Non-accruing loans were $13.6 million, or 0.54% of total loans, at the end of the second quarter ACL includes2021 and were $12.2 million or 0.48% of total loans at year-end 2020.  The ratio of past due loans to total loans improved to 0.15% of total loans, decreasing from 0.58% as of December 31, 2020.  Commercial past due loans totaled $1.9 million at quarter end, which is the effectlowest level since 2016 when the portfolio was approximately 36% of net charge-offs, the majority is due to the settlement of a PCD loan that had a $300 thousand discount that increased interest income as a recovery.  There were no significant downgrades in credit quality identified through commercial loan stress testing or through regular credit reviews.its current size.  

Non-accrual loans increased by $1.9Other Assets

Total other assets were $329.3 million at the end of the second quarter 2021 compared to $332.9 million as of December 31, 2020. The decrease is primarily from an $8.4 million decrease in the first quarter 2021 primarily due tofair value in customer loan derivatives and $1.6 million decrease in the conversion of purchase credit impaired  loans to PCD loans with the CECL adoption, which does not represent a true changefair value hedge on securities offset by $2.6 million increase in credit quality.  Excluding PCD loans, the Company’s ratio of non-accrual loans to 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 which included the top 50 relationships, all criticized loans greater than $1.0deferred tax assets and $2.7 million hospitality loans greater than $250 thousand, all loans over $250 thousand with a pandemic modification and any seasonal payment, restaurant, or maturing term loans through March 31, 2022 that are greater than $500 thousand.  Results of the stress testing led to no significant downgrades or changes to reserves.in community limited partnership investments.  

Deposits and Borrowings

Total deposits duringwas $2.8 billion at the end of the second quarter increased $6.1 million2021 compared to $2.9 billion.billion at year-end 2020.  Non-maturity deposits increased $66.1$143.9 million over the first six months of 2021, or 12%13% on an annualized basis due to growth in new accounts with over 2,100 new customer accounts totaling 4,300.relationships added.  Growth in core deposits sinceduring the first quarterhalf of 20202021 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%.12% from 18% at year-end 2020.  Time deposits decreased $59.9$227.6 million to $638.4$470.8 million at quarter-end as the result of $57.0primarily from $162.3 million of brokered deposits reaching maturity, which were not replaced due to excess liquidity.  Retail time deposits decreased $65.3 million as customers moved funds to transactional accounts upon contractual maturity.  Total borrowings increased by $16.2$4.0 million primarily from a $50$50.0 million three-month advance replacing a three-month brokered deposit associated with a wholesale funding hedge offset by $33.9$46.0 million in payments on matured and amortizing advances.  The average cost of deposits was 0.51%0.45% in the firstsecond quarter of 2021 compared to 0.61% in the fourth quarter 2020 and borrowing costs were 2.16%2.12% compared to 1.83% for the same periods.  The changeschange in cost of funds are reflective of a shift in maturity dates due toreflects the attrition of balances.balances on matured borrowings and time deposits.

Derivative Financial Instruments and Other Liabilities

The notional balance of derivative financial instruments increased to $960.5$950.4 million at the end of the firstsecond quarter 2021 from $876.6 million at year-end 2020.  The increase is principally due to a $50.0 million new hedge on variable rate loans tied to one-month LIBOR and $49.7$52.6 million increase in customer loan derivatives sold on commercial loans with matching hedges using national bank counterparties.  The net fair value of all derivatives was a liability of $1.4 million$213 thousand at the end of the firstsecond quarter 2021 compared to asset of $52 thousand at year-end 2020.  The reduction in derivative fair valuevalues reflects the impact risesrise in long-term treasury yields.interest rates.  

Other liabilities totaled $61.6 million at the end of the second quarter 2021 compared to $72.2 million as of December 31, 2020.  The decrease primarily reflects the $8.4 million reduction in the fair value of customer loan derivatives and a $1.3 million decrease in the cash flow hedge on wholesale borrowings.

Equity

Total equity was $405.6$415.6 million, compared with $411.3 million at year-end 2020.  The 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,$27.76 as of June 30, 2021 compared with $27.58 at December 31, 2020.  NetEquity included net unrealized gains on securities increased equity by $4.5totaling $7.2 million at the end of the second quarter 2021 and $10.0 million at year-end 2020.  Equity was also reduced by $5.2 million due to the Company’s CECL adoption in the first quarter due to implementing CECL.  Excluding security adjustments and CECL adoption, tangible book value per share was $18.69 and $18.38 as of March 31, 2021 and December 31, 2020, respectively.2021.    

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

Summary

Net income in the firstsecond quarter 2021 was $9.5$9.0 million, or $0.60 per share, compared to $8.5 million, or $0.55 per share, in the same quarter of 2020.  Adjusted earnings totaled $9.4 million or $0.63 per share, compared to $7.7$8.6 million, or $0.50$0.56 per share, in the same quarter of 2020.  Net income benefited from higher fee income lower operating expenses and a credit provision recapture in the first quarter 2021.quarter.  Non-recurring items (non-GAAP) reduced net income by $384 thousand and $119 thousand in second quarters

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of 2021 and 2020, respectively. The Company's return on assets ratio was 1.03% during0.97% in the firstsecond quarter of 2021 and 0.85%0.90% in the same quarter of 2020.  Adjusted return on equityassets (non-GAAP) was 1.11%1.01% and 0.91% for the second quarters of 2021 and 2020, respectively.  The return on asset ratios improved on higher net income and lower average assets.  

The Company reported first half 2021 net income of $18.5 million or $1.23 per diluted share, compared with $16.2 million or $1.04 per diluted share in the same period of 2020.  Adjusted earnings increased to $19.8 million, or $1.32 per diluted share comparedwith$16.4million,or$1.06per diluted share,fortherespectiveperiods.Non-recurring items (non-GAAP) in the first six months reduced net income by $1.3 million and $188 thousand in 2021 and 2020, respectively. The return on assets ratio during the first quarterhalfof2021was1.00%comparedto0.86%intheprioryear and adjusted return on assets was 1.07% during the first half of 2021 compared to 0.86%and 0.87% in the same quarterperiod of 2020.

 Thesechangeslargelyreflectthesame factors and trends discussed above that drove second quarter net income and average assets.

Net Interest Income

Net interest income was $23.4$22.8 million in the second quarter 2021 compared with $24.6 million in the same quarter of 2020. Net interest margin (“NIM”)was 2.74% compared to 2.93% in the firstsecond quarter of 2021 was 2.88% compared to 3.04% in the same period of 2020.  The decrease in NIM is due to the Federal Reserve rate cuts in response to the pandemic, which lowered the yields on many classes of earning assets and also lowered the costs of interest-bearing liabilities.  The yield on earning assets was 3.46% compared to 4.12% in the first quarter 2020 reflecting loan originations and repricing of variable rate products in a lower interest rate environment.  Costs of funds decreased to 0.72% compared to 1.28% in the first quarter 2020 due to lower rates and reductions to wholesale funding afforded by significant growth in core deposits.  PPP loans added 10contributed 7 basis points to NIM during the quarter as the majority of the remaining 2020 originations were forgiven.  Accretion on PPP loans originated in the first quarter 2021 are not expected to materially affect NIM until loans are forgiven starting in the third quarter. Settlementquarter 2021.  Interest-bearing cash balances reduced NIM by 19 basis points.  The yield on earning assets totaled 3.26% compared to 3.73% in the second quarter 2020.  Costs of onefunds decreased to 0.66% from 0.96% in the second quarter 2020 on lower deposit rates and reductions to wholesale funding due to significant PCD loan contributed 4growth in core deposits.  Brokered deposits that matured during second quarter carried 9 basis points to NIM due to acceleration of the related discount. Excess liquiditytotal funding cost.

For the first six months of 2021, net interest income was $46.2 million compared with $49.2 million in the formsame period of 2020.  The comparison of NIM and earning asset yields for the respective periods of 2021 and 2020 were 2.81% and 3.02%, and 3.36% and 3.97%.  The decrease is NIM and yield was driven by rate drops after the pandemic started in 2020 combined with growth in the Company’s interest-bearing cash balances held mostly at the Federal Reserve Bankbalances.  PPP loan accretion in 2021 helped to offset interest rate compression.  Cost of funds in the first quarterhalf of 2021 reduced NIMdecreased to 0.69% from 1.12% in the same period of 2020.  Costs of interest-bearing deposits decreased in the first six months of 2021 to 0.48% compared to 0.94% in the same months of 2020.  These improvements were also due to a lower interest rate environment triggered by 15 basis points.  

the pandemic along with reductions to wholesale funding and the Company’s continued efforts to optimize its balance sheet.

Loan Loss Provision for Credit Losses

The provision for credit losses (the “provision”) for the quarter was a benefit of $489$765 thousand, compared to an expense of $1.1$1.4 million in the firstsecond quarter of 2020.  TheFor the first half of 2021, the provision recapturewas a benefit of $1.3 million compared to an expense of $2.5 million in the first quartersame period of 2020.  The benefits experienced in the periods of 2021 is attributablewere allowance for credit loss recaptures due to improving economic forecasts and lower amounts of specific reserves due tostrong credit improvements.quality, offset in part by shifts in loan mix.  

Non-Interest Income

Non-interest income in the second quarter 2021 was $9.5 million, compared to $9.7 million in the same quarter of 2020.  Excluding gain on sales of securities, non-interest income increased 13% on higher customer service fees, wealth management income, and gains on loan sales.  Customer service fees increased 34% from the second quarter of 2020 as customer transactions exceeded pre-pandemic levels.  Additionally, these fees benefited from the Company’s previously announced fee strategies implemented at the beginning of 2021.  Wealth management income increased 20% in the second quarter 2021 compared to the same quarter of 2020 as assets under management increased to $2.4 billion or 12%.  Mortgage banking activities continue to provide a significant amount of fee income, increasing to $1.6 million in the second quarter 2021 from $1.1 million in the same period of 2020.

Non-interest income for the first half of 2021 was $19.8 million compared to $18.1 million in the same period in 2020 and increased 18% excluding gain on sales of securities.  The increase reflects a 12% increase in customer service fees, 14% in wealth management income, and 161% increase in mortgage banking income; all of which were driven by the same reasons as the quarterly period.  

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Non-Interest Income

Non-interest income in the first quarter 2021 increased 21% to $10.2 million from $8.4 million in the same quarter in 2020 due to higher wealth management and mortgage banking income.  While customer 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 first quarter 2021 and $186 thousand in the first quarter of 2020.

Non-Interest Expense

Non-interest expense was $22.5improved to $21.7 million in the firstsecond quarter 2021 compared to $22.4from $22.3 million in the same quarter of 2020.  Included in non-interestSalaries and benefits expense decreased 5% due to implementing workforce reduction programs at the beginning of the second quarter.  Non-recurring expense adjustments (non-GAAP) in the firstsecond quarter was $8002021 totaled $553 thousand of higherand were mostly 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 reductionsreduction in workforce programs whilecharges.  In the same quarter of 2020 non-recurring expenses totaled $1.5 million and included costs to consolidate our wealth management systems.  Reductions to most categoriessystems and a loss on debt extinguishment.  

For the first six months of 2021, non-interest expense was $44.2 million and $44.6 million in the quarter helped drive our efficiency ratio (non-GAAP) to 61.95%, down from 64.82% for the same period of 2020. The Company’s year-to-date efficiency ratio was 62.2% in 2021 compared to 62.7% in 2020 which reflects managements disciplined approach to expense management as revenue grows and the above noted expense initiatives. Non-recurring expenses (non-GAAP) in the first half of 2021 totaled $1.8 million and $1.7 million in the same period of 2020. In the first half of 2021these expenses mostly consisted of  workforce reduction charges and in 2020 primarily consisted of a loss on debt extinguishment.

Income Tax Expense

The second quarter effective tax rate was 18.8% for bothdecreased to 20.1% in 2021 compared with 20.6% in the firstsame quarter of 2021 and 2020, reflecting higher pre-tax income being offset by the proportional amounts of 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 March 31,June 30, 2021, same day available same-day liquidity totaled approximately $1.2 billion, including cash, borrowing capacity at the Federal Home Loan Bank of Boston (“FHLB”)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 Bank'sCompany's amortizing securities and loan portfolios.  At March 31, 2021, theThe Company had unused borrowing capacity at the FHLB of $400.8$372.8 million, unused borrowing capacity at the Federal Reserve of $73.8$74.3 million and unused lines of credit totaling $51.0 million.million, in addition to over $200.0 million in unencumbered, liquid investment portfolio assets.  

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, 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 LoanCredit 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 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 March 31,June 30, 2021 interest rate sensitivity modeling results indicate that the Bank’s balance sheet in years 1 and 2 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 (-2.0%(-2.1% versus the base case) while deteriorating further from that level over the two-year horizon (-10.0%(-11.4% 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 over the one and two-year horizons (6.9%(8.5% and 14.9%14.4%, respectively).

As compared to December 31, 2020, the year-one sensitivity in the down 100 basis points scenario was up slightly for the threesix months ended March 31,June 30, 2021 (-2.6% prior, versus -2.0%-2.1% current). The year-two sensitivities in the down 100 basis points scenario were mostly unchanged going from -9.5% to -10.0%-11.4%. In the year-one up 200 basis points scenario, results were again similar going from 7.7% to 6.9%8.5%. Year-two, up 200 basis points was down (18.4% prior, versus 14.9%14.4% 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 March 31,June 30, 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, 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 firstsecond quarter of 2021:

    

Total number of shares

Maximum number of

 purchased as a part of 

 shares that may yet be 

Total number of 

Average price 

 

publicly announced 

 

purchased under

Period

    

shares purchased

    

paid per share

    

plans or programs

    

 the plans or programs(1)

January 1-31,April 1-30, 2021

 

$

 

 

747,000

February 1-28, 2021

MarchMay 1-31, 2021

 

 

 

 

747,000

June 1-30, 2021

747,000

Total

 

$

 

 

747,000

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,withholdings, 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

10.1*

Separation Agreement and General Release, effective as of May 1, 2021, among Bar Harbor Bankshares, Bar Harbor Bank & Trust and Richard B. Maltz

Filed herewithExhibit 10.1 to Form 10-Q filed with the SEC on May 5, 2021

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 March 31,June 30, 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: May 5,August 3, 2021

By:

/s/ Curtis C. Simard

Curtis C. Simard

President & Chief Executive Officer

Dated: May 5,August 3, 2021

By:

/s/ Josephine Iannelli

Josephine Iannelli

Executive Vice President & Chief Financial Officer

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