UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q


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

For the quarterly period ended: June 30, ~~2021~~2022


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

For the transition period from to

Commission File Number: 001-13349

BAR HARBOR BANKSHARES

(Exact name of registrant as specified in its charter)


Maine		01-0393663
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

PO Box 400
82 Main Street, Bar Harbor, ME		04609-0400
(Address of principal executive offices)		(Zip Code)

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

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

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

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

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ⌧ No ◻

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

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

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

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

The Registrant had ~~14,982,325~~15,038,746 shares of common stock, par value $2.00 per share, outstanding as of July 29, ~~2021.~~2022.

Table of Contents

BAR HARBOR BANKSHARES AND SUBSIDIARIES

FORM 10-Q

INDEX

				Page
PART I.	FINANCIAL INFORMATION

Item 1.	Consolidated Financial Statements (unaudited)

	Consolidated Balance Sheets as of June 30, ~~2021~~2022 and December 31, ~~2020~~2021			4

	Consolidated Statements of Income for the Three and Six Months Ended June 30, ~~2021~~2022 and ~~2020~~2021			6

	Consolidated Statements of Comprehensive Income for the Three and Six Months Ended June 30, ~~2021~~2022 and ~~2020~~2021			7

	Consolidated Statements of Changes in Shareholders’ Equity for the Three and Six Months Ended June 30, ~~2021~~2022 and ~~2020~~2021			8

	Consolidated Statements of Cash Flows for the Six Months Ended June 30, ~~2021~~2022 and ~~2020~~2021			9

	Notes to Unaudited Consolidated Interim Financial Statements
		Note 1	Basis of Presentation	1110
		Note 2	Securities Available for Sale	1911
		Note 3	Loans and Allowance for Credit Losses	2214
		Note 4	Borrowed Funds	3425
		Note 5	Deposits	3627
		Note 6	Capital Ratios and Shareholders' Equity	3728
		Note 7	Earnings per Share	4233
		Note 8	Derivative Financial Instruments and Hedging Activities	4334
		Note 9	Fair Value Measurements	5244
		Note 10	Revenue from Contracts with Customers	5851
		Note 11	Leases	6053


Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations			6255
		Selected Financial Data		6356
		Consolidated Loan and Deposit Analysis		6457
		Average Balances and Average Yields/Rates		6558
		Non-GAAP Financial Measures		6760
		Reconciliation of Non-GAAP Financial Measures		6861
		~~Financial~~Performance Summary		7063

Item 3.	Quantitative and Qualitative Disclosures about Market Risk			7668

Item 4.	Controls and Procedures			7870


PART II.	OTHER INFORMATION

Item 1.	Legal Proceedings			7870

Item 1A.	Risk Factors			7870

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds			79

~~Item 5.~~	~~Other Information~~			7971

Item 6.	Exhibits			8072

Signatures				8173

Table of Contents

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

FORWARD-LOOKING STATEMENTS

Certain statements contained in this document that are not historical facts may constitute forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended ("Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as amended ("Exchange Act"), and are intended to be covered by the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. When used in this Form 10-Q the words "may," "will," "should," "could," "would," "plan," "potential," "estimate," "project," "believe," "intend," "anticipate," "expect," "target" and similar expressions are intended to identify forward-looking statements, but these terms are not the exclusive means of identifying forward-looking statements. These forward-looking statements are subject to significant risks, assumptions and uncertainties, including among other things, changes in general economic and business conditions, increased competitive pressures, changes in the interest rate environment, legislative and regulatory change, changes in the financial markets, and other risks and uncertainties disclosed from time to time in documents that ~~the Company files~~we file with the Securities and Exchange Commission, including but not limited to those discussed in the section titled "Risk Factors" in ~~the Company's~~our Annual Report on Form 10-K for the fiscal year ended December 31, ~~2020.~~2021. Because of these and other uncertainties, ~~the Company’s~~our 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~~our 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~~We are 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~~We qualify all of ~~its~~our forward-looking statements by these cautionary statements.

Table of Contents

PART I. FINANCIAL INFORMATION

ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS ~~(UNAUDITED)~~

BAR HARBOR BANKSHARES AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS (UNAUDITED)


(in thousands, except share data)	June 30, 2021		December 31, 2020		June 30, 2022		December 31, 2021
Assets
Cash and cash equivalents:
Cash and due from banks	$	41,440	$	27,566	$	40,834	$	33,508
Interest-bearing deposits with other banks		132,278		198,441
Interest-earning deposits with other banks						26,282		216,881
Total cash and cash equivalents		173,718		226,007		67,116		250,389

Securities:
Securities available for sale		621,849		585,046		586,142		618,276
Federal Home Loan Bank stock		14,145		14,036		6,572		7,384
Total securities		635,994		599,082		592,714		625,660

Loans held for sale		7,942		23,988		3,539		5,523

Total loans		2,515,560		2,562,885		2,727,274		2,531,910
Less: Allowance for credit losses		(22,815)		(19,082)		(23,756)		(22,718)
Net loans		2,492,745		2,543,803		2,703,518		2,509,192

Premises and equipment, net		51,119		52,458		48,350		49,382
Goodwill		119,477		119,477		119,477		119,477
Other intangible assets		7,198		7,670		6,267		6,733
Cash surrender value of bank-owned life insurance		78,886		77,870		80,262		79,020
Deferred tax assets, net		4,349		1,745		18,405		5,547
Other assets		68,247		73,662		76,109		58,310
Total assets	$	3,639,675	$	3,725,762	$	3,715,757	$	3,709,233

Liabilities
Deposits:
Demand	$	599,598	$	544,636	$	670,268	$	664,420
NOW		802,681		738,849		883,239		940,631
Savings		578,361		521,638		663,676		628,670
Money market		371,075		402,731		499,456		389,291
Time		470,758		698,361		361,906		425,532
Total deposits		2,822,473		2,906,215		3,078,545		3,048,544

Borrowings:
Senior		279,991		276,062		117,347		118,400
Subordinated		60,042		59,961		60,206		60,124
Total borrowings		340,033		336,023		177,553		178,524

Other liabilities		61,597		72,183		66,062		58,018
Total liabilities		3,224,103		3,314,421		3,322,160		3,285,086

(continued)

Table of Contents

BAR HARBOR BANKSHARES AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS (UNAUDITED) (continued)


(in thousands, except share data)	June 30, 2021		December 31, 2020		June 30, 2022		December 31, 2021
Shareholders’ equity
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
Capital stock, par value $2.00; authorized 20,000,000 shares; issued 16,428,388 shares at June 30, 2022 and December 31, 2021						32,857		32,857
Additional paid-in capital		190,801		190,084		191,346		190,876
Retained earnings		201,994		195,607		227,698		215,592
Accumulated other comprehensive income		7,694		11,016
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)
Accumulated other comprehensive (loss) income						(40,971)		2,303
Less: 1,402,291 and 1,427,059 shares of treasury stock at June 30, 2022 and December 31, 2021, respectively						(17,333)		(17,481)
Total shareholders’ equity		415,572		411,341		393,597		424,147
Total liabilities and shareholders’ equity	$	3,639,675	$	3,725,762	$	3,715,757	$	3,709,233

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

Table of Contents

BAR HARBOR BANKSHARES AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)


	Three Months Ended				Six Months Ended				Three Months Ended				Six Months Ended
	June 30,				June 30,				June 30,				June 30,
(in thousands, except earnings per share data)	2021		2020		2021		2020		2022		2021		2022		2021
Interest and dividend income
Loans	$	23,191	$	26,493	$	47,396	$	54,480	$	24,581	$	23,191	$	47,252	$	47,396
Securities and other		3,992		4,942		7,971		10,449		4,207		3,992		8,033		7,971
Total interest and dividend income		27,183		31,435		55,367		64,929		28,788		27,183		55,285		55,367
Interest expense
Deposits		2,603		4,548		5,554		10,568		1,195		2,603		2,384		5,554
Borrowings		1,826		2,297		3,637		5,208		1,074		1,826		2,084		3,637
Total interest expense		4,429		6,845		9,191		15,776		2,269		4,429		4,468		9,191
Net interest income		22,754		24,590		46,176		49,153		26,519		22,754		50,817		46,176
Provision for credit losses		(765)		1,354		(1,254)		2,465		534		(765)		911		(1,254)
Net interest income after provision for loan losses		23,519		23,236		47,430		46,688
Net interest income after provision for credit losses										25,985		23,519		49,906		47,430

Non-interest income
Trust and investment management fee income		3,801		3,159		7,467		6,528		3,829		3,801		7,583		7,467
Customer service fees		3,257		2,439		6,227		5,551		3,656		3,257		7,272		6,227
Gain on sales of securities, net		50		1,351		50		1,486		—		50		9		50
Mortgage banking income		1,553		1,124		4,123		1,581		488		1,553		1,112		4,123
Bank-owned life insurance income		498		496		1,016		1,033		504		498		1,005		1,016
Customer derivative income		86		513		496		1,101		137		86		155		496
Other income		260		628		374		851		347		260		1,134		374
Total non-interest income		9,505		9,710		19,753		18,131		8,961		9,505		18,270		19,753

Non-interest expense
Salaries and employee benefits		11,356		11,909		23,532		23,793		11,368		11,356		23,515		23,532
Occupancy and equipment		3,894		3,860		8,222		8,280		4,373		3,894		8,796		8,222
Loss (gain) on sales of premises and equipment, net		1		(2)		9		90		10		1		(65)		9
Outside services		533		442		965		976		410		533		750		965
Professional services		151		337		709		1,009		528		151		701		709
Communication		198		194		519		483		188		198		413		519
Marketing		534		282		824		670		369		534		632		824
Amortization of intangible assets		233		256		474		512		233		233		466		474
Loss on debt extinguishment		—		1,351		0		1,351
Acquisition, conversion and other expenses		552		158		1,441		261		—		552		325		1,441
Other expenses		4,272		3,479		7,520		7,200		4,221		4,272		8,053		7,520
Total non-interest expense		21,724		22,266		44,215		44,625		21,700		21,724		43,586		44,215

Income before income taxes		11,300		10,680		22,968		20,194		13,246		11,300		24,590		22,968
Income tax expense		2,275		2,199		4,463		3,992		2,743		2,275		4,975		4,463
Net income	$	9,025	$	8,481	$	18,505	$	16,202	$	10,503	$	9,025	$	19,615	$	18,505

Earnings per share:
Basic	$	0.60	$	0.55	$	1.24	$	1.05	$	0.70	$	0.60	$	1.31	$	1.24
Diluted	$	0.60	$	0.55	$	1.23	$	1.04	$	0.70	$	0.60	$	1.30	$	1.23

Weighted average common shares outstanding:
Basic		14,965		15,424		14,950		15,500		15,018		14,965		15,014		14,950
Diluted		15,042		15,441		15,026		15,523		15,077		15,042		15,094		15,026

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

Table of Contents

BAR HARBOR BANKSHARES AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

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


	Three Months Ended				Six Months Ended
	June 30,				June 30,
(in thousands)	2022		2021		2022		2021
Net income	$	10,503	$	9,025	$	19,615	$	18,505
Other comprehensive (loss) income, before tax:
Changes in unrealized (loss) gain on securities available for sale		(23,409)		3,557		(52,253)		(3,628)
Changes in unrealized (loss) gain on hedging derivatives		(1,997)		120		(3,878)		2,514

Income taxes related to other comprehensive income:
Changes in unrealized loss (gain) on securities available for sale		5,330		(830)		11,964		842
Changes in unrealized loss (gain) on hedging derivatives		460		(28)		893		(586)
Total other comprehensive (loss) income		(19,616)		2,819		(43,274)		(858)
Total comprehensive (loss) income	$	(9,113)	$	11,844	$	(23,659)	$	17,647

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

Table of Contents

BAR HARBOR BANKSHARES AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

(UNAUDITED)

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


							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, 2020	$	32,857	$	190,084	$	195,607	$	6,740	$	(18,223)	$	407,065
Allowance for credit losses cumulative-effect adjustment - ASU 2016-13		—		—		(5,242)		—		—		(5,242)
Net income		—		—		9,480		—		—		9,480
Other comprehensive loss		—		—		—		(3,677)		—		(3,677)
Cash dividends declared ($0.22 per share)		—		—		(3,284)		—		—		(3,284)
Net issuance (34,049 shares) to employee stock plans, including related tax effects		—		(186)		—		—		358		172
Recognition of stock based compensation		—		666		—		—		—		666
Balance at March 31, 2021	$	32,857	$	190,564	$	196,561	$	3,063	$	(17,865)	$	405,180

Net income		—		—		9,025		—		—		9,025
Other comprehensive income		—		—		—		2,819		—		2,819
Cash dividends declared ($0.24 per share)		—		—		(3,592)		—		—		(3,592)
Net issuance (22,241 shares) to employee stock plans, including related tax effects		—		(94)		—		—		91		(3)
Recognition of stock based compensation		—		331		—		—		—		331
Balance at June 30, 2021	$	32,857	$	190,801	$	201,994	$	5,882	$	(17,774)	$	413,760

Balance at December 31, 2021	$	32,857	$	190,876	$	215,592	$	2,303	$	(17,481)	$	424,147
Net income		—		—		9,112		—		—		9,112
Other comprehensive loss		—		—		—		(23,658)		—		(23,658)
Cash dividends declared ($0.24 per share)		—		—		(3,603)		—		—		(3,603)
Net issuance (11,277 shares) to employee stock plans, including related tax effects		—		436		—		—		111		547
Recognition of stock based compensation		—		454		—		—		—		454
Balance at March 31, 2022	$	32,857	$	191,766	$	221,101	$	(21,355)	$	(17,370)	$	406,999

Net income		—		—		10,503		—		—		10,503
Other comprehensive loss		—		—		—		(19,616)		—		(19,616)
Cash dividends declared ($0.26 per share)		—		—		(3,906)		—		—		(3,906)
Net issuance (13,491 shares) to employee stock plans, including related tax effects		—		(60)		—		—		37		(23)
Recognition of stock based compensation		—		(360)		—		—		—		(360)
Balance at June 30, 2022	$	32,857	$	191,346	$	227,698	$	(40,971)	$	(17,333)	$	393,597

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

Table of Contents

BAR HARBOR BANKSHARES AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

Six Months Ended June 30,
(in thousands)

2021

2020
Cash flows from operating activities:




Net income

$
18,505

$
16,202
Adjustments to reconcile net income to net cash provided by operating activities:


Provision for credit losses

(1,254)

2,465
Net amortization of securities

1,219

1,603
Change in unamortized net loan costs and premiums

(2,200)

2,223
Premises and equipment depreciation

2,341

2,380
Stock-based compensation expense

997

584
Accretion of purchase accounting entries, net

(45)

(516)
Amortization of other intangibles

472

512
Income from cash surrender value of bank-owned life insurance policies

(1,016)

(1,033)
Gain on sales of securities, net

(50)

(1,486)
Decrease in right-of-use lease assets

566

(578)
Decrease in lease liabilities

(520)

(625)
Loss on other real estate owned

—

82
Loss on premises and equipment, net

9

90
Net change in other assets and liabilities

(6,102)

(5,787)
Net cash provided by operating activities

12,922

16,116

Cash flows from investing activities:




Proceeds from sales of securities available for sale

4,050

87,521
Proceeds from maturities, calls and prepayments of securities available for sale

69,900

63,096
Purchases of securities available for sale

(115,928)

(120,405)
Net change in loans

65,330

(91,857)
Purchase of FHLB stock

(790)

(4,044)
Proceeds from sale of FHLB stock

681

4,458
Purchase of premises and equipment, net

(1,008)

(2,221)
Net investment in community limited partnerships

(917)

—
Acquisitions, net of cash acquired

—

(340)
Net cash provided by (used in) investing activities

21,318

(63,792)

Cash flows from financing activities:




Net change in deposits

(83,742)

(420)
Net change in short-term senior borrowings

14,324

(119,774)
Proceeds from long-term senior borrowings

—

273,436
Repayments of long-term senior borrowings

(14)

(67,188)
Net change in short-term other borrowings

(10,390)

(10,986)
Exercise of stock options

169

657
Purchase of treasury and common stock

—

(7,467)
Cash dividends paid on common stock

(6,876)

(6,819)
Net cash (used in) provided by financing activities

(86,529)

61,439
(continued)


	Six Months Ended June 30,
(in thousands)	2022		2021
Cash flows from operating activities:
Net income	$	19,615	$	18,505
Adjustments to reconcile net income to net cash provided by operating activities:
Originations of loans held for sale		(30,641)		(65,963)
Proceeds from loan sales		32,323		68,776
Loss (gain) on sale of loans		268		(2,939)
Provision for credit losses		911		(1,254)
Net amortization of securities		1,532		1,219
Change in unamortized net loan costs and premiums		(1,556)		(2,200)
Premises and equipment depreciation		2,132		2,341
Stock-based compensation expense		94		997
Accretion of purchase accounting entries, net		—		(45)
Amortization of other intangibles		466		472
Income from cash surrender value of bank-owned life insurance policies		(1,005)		(1,016)
Gain on sales of securities, net		(9)		(50)
Amortization of right-of-use lease assets		593		565
Decrease in lease liabilities		(563)		(520)
(Gain) loss on premises and equipment, net		(65)		9
Net change in other assets and liabilities		(4,549)		(5,975)
Net cash provided by operating activities		19,546		12,922

Cash flows from investing activities:
Proceeds from sales of securities available for sale		11,726		4,050
Proceeds from maturities, calls and prepayments of securities available for sale		35,844		69,900
Purchases of securities available for sale		(77,408)		(115,928)
Net change in loans		(193,953)		65,116
Recoveries of previously charged off loans		272		214
Purchase of FHLB stock		(461)		(790)
Proceeds from sale of FHLB stock		1,273		681
Purchase of premises and equipment, net		(1,138)		(1,008)
Net investment in community limited partnerships		(932)		(917)
Net cash (used in) provided by investing activities		(224,777)		21,318

Cash flows from financing activities:
Net change in deposits		30,001		(83,742)
Net change in short-term senior borrowings		21,000		14,324
Repayments of long-term senior borrowings		(21,010)		(14)
Net change in short-term other borrowings		(1,048)		(10,390)
Net issuance to employee stock plans		524		169
Cash dividends paid on common stock		(7,509)		(6,876)
Net cash provided by (used in) financing activities		21,958		(86,529)

Net change in cash and cash equivalents		(183,273)		(52,289)
Cash and cash equivalents at beginning of year		250,389		226,007
Cash and cash equivalents at end of period	$	67,116	$	173,718

Supplemental cash flow information:
Interest paid	$	2,128	$	10,019
Income taxes paid, net		4,418		5,622

~~Table of Contents~~

~~BAR HARBOR BANKSHARES AND SUBSIDIARIES~~

~~CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)~~

Six Months Ended June 30,
(in thousands)

2021

2020
Net change in cash and cash equivalents

(52,289)

13,763
Cash and cash equivalents at beginning of year

226,007

56,910
Cash and cash equivalents at end of year

$
173,718

$
70,673

Supplemental cash flow information:




Interest paid

$
10,019

$
16,275
Income taxes paid, net

5,622

3,112

Acquisition of non-cash assets and liabilities:

Assets acquired

—

1,171
Liabilities acquired

—

(343)

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

Table of Contents

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”~~(“we”, “our” or ~~“Bar Harbor”~~“us”) 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 our accounts, the accounts of ~~the Company, its~~our wholly owned subsidiary Bar Harbor Bank & Trust (the ~~"Bank"~~“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~~in the ~~Company's~~ Annual Report on Form 10-K for the year ended December 31, ~~2020~~2021 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 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.

~~Table of Contents~~

~~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.

~~Table of Contents~~

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

~~Table of Contents~~

When repayment is expected to be from the sale of the collateral, the specific credit loss reserve is calculated as the amount by which the amortized costs basis of the financial asset exceeds the fair value of the underlying collateral 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.

~~Table of Contents~~

~~Impact of Adoption~~

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

Reclassification

Pre-CECL

Post-CECL

to CECL

Adoption

Adoption

Impact of

Pre-CECL

Portfolio

Portfolio

Portfolio

CECL
(in thousands)

Adoption

Segmentation

Segmentation

Segmentation

Adoption
Assets:










Loans:










Commercial construction

$
131,123

$
(13,241)

$
117,882

$
117,882

$
—
Commercial real estate

953,258

(953,258)

—

—

—
Commercial real estate owner occupied

—

219,217

219,217

219,217

—
Commercial real estate non-owner occupied

—

716,776

716,776

716,776

—
Tax exempt

63,431

(15,569)

47,862

47,862

—
Commercial and industrial

377,638

(21,954)

355,684

355,684

—
Residential real estate

923,891

71,325

995,216

995,216

—
Home equity

102,464

(2,368)

100,096

100,096

—
Consumer other

11,080

(928)

10,152

10,152

—
Total loans

$
2,562,885

$
—

$
2,562,885

$
2,562,885

$
—

Allowance for credit losses on loans










Commercial construction

$
1,044

$
(220)

$
824

$
2,020

$
1,196
Commercial real estate

10,199

(10,199)

—

—

—
Commercial real estate owner occupied

—

1,783

1,783

2,491

708
Commercial real estate non-owner occupied

—

7,864

7,864

5,856

(2,008)
Tax exempt

80

(22)

58

98

40
Commercial and industrial

3,302

(165)

3,137

6,133

2,996
Residential real estate

4,078

932

5,010

6,742

1,732
Home equity

258

27

285

888

603
Consumer other

121

—

121

82

(39)
Total allowance for credit losses on loans

$
19,082

$
—

$
19,082

$
24,310

$
5,228

Liabilities:










Allowance for credit losses on unfunded commitments

$
359

$
—

$
359

$
1,975

$
1,616

Total allowance for credit losses

$
19,441

$
—

$
19,441

$
26,285

$
6,844

Retained earnings:










Total increase in Allowance for credit losses









$
6,844
Tax effect









(1,602)
Decrease to retained earnings









$
5,242

~~Table of Contents~~

Recent Accounting Pronouncements

The following table provides a brief description of recent accounting standards updates ~~("ASU")~~(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 primarily changed how the Company estimates credit losses with the application of the expected credit loss model. The Company applied the standard's provisions as a 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 has finalized its CECL implementation, recieved board approval of the final CECL model, completed modelling of off-balance sheet credit risks, completed formal governance and 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 on the date of adoption.~~
~~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.

~~Table of Contents~~


~~Standard~~	~~Description~~	Required Date of Adoption	~~Effect on financial statements~~
~~Standards Adopted in 2021~~
~~ASU 2020-01, Investments—Equity Securities, Investments Equity Method and Joint Ventures, and Derivatives and Hedging~~	In January 2016, the FASB issued Accounting Standards Update No. 2016-01, Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities, which added Topic 321, Investments – Equity Securities, and made targeted improvements to address certain aspects of accounting for financial instruments. The amendments in this Update affect all entities that apply the guidance in Topics 321, 323, and 815 and (1) elect to apply the measurement alternative or (2) enter into a forward contract or purchase an option to purchase securities that, upon settlement of the forward contract or exercise of the purchased option, would be accounted for under the equity method of accounting. The amendments in this Update clarify certain interactions between the guidance to account for certain equity securities under Topic 321, the guidance to account for investments under the equity method of accounting in Topic 323, and the guidance in Topic 815, which could change how an entity accounts for an equity security under the measurement alternative or a forward contract or purchased option to purchase securities that, upon settlement of the forward contract or exercise of the purchased option, would be accounted for under the equity method of accounting or the fair value 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~~2022-02 Financial Instruments - Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures	~~This ASU provides temporary optional expedients~~The amendments in this update eliminate TDR recognition and ~~exceptions to GAAP~~measurement guidance ~~on contract modifications~~ and, ~~hedge~~instead, require that an entity evaluate (consistent with the accounting ~~to ease the financial reporting burdens of the expected market transition from the London Interbank Offered Rate ("LIBOR") and~~for 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 atloan modifications) whether the modification ~~date~~represents a new loan or ~~reassess~~ a ~~previous accounting determination. Companies can also (2) elect various optional expedients that would allow them~~continuation of an exisiting loan. The amendments enhance existing disclosure requirements and introduce new requirements related 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~~modifications of receivables made to ~~sell and/or reclassify held-to-maturity debt securities that reference an interest rate affected by reference rate reform.~~borrowers experiencing financial difficulty.	~~May be elected through December 31, 2022.~~January 1, 2023	~~The Company is currently evaluating all~~We do not expect adoption of ~~its contracts, hedging relationships and other transactions that will be effected by reference rates are being discontinued. The following elections~~this ASU to have ~~been made in regards to~~a material impact on our ~~cash flow hedges as outlined on the next page.~~consolidated financial statements.

~~Table of Contents~~

~~Rate Reform Elections~~

~~Adherence to ISDA Fallback Protocol~~

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

•

~~Modification related elections~~

•

~~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 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.

1810

Table of Contents

NOTE 2. SECURITIES AVAILABLE FOR SALE

The following is a summary of securities available for sale:

Gross

Gross

Unrealized

Unrealized

(in thousands)

Amortized Cost

Gains

Losses

Fair Value
June 30, 2021








Mortgage-backed securities:








US Government-sponsored enterprises

$
196,476

$
4,001

$
(2,116)

$
198,361
US Government agency

64,693

1,853

(203)

66,343
Private label

73,428

195

(88)

73,535
Obligations of states and political subdivisions thereof

184,229

4,196

(272)

188,153
Corporate bonds

93,582

2,735

(860)

95,457
Total securities available for sale

$
612,408

$
12,980

$
(3,539)

$
621,849


			Gross		Gross						Gross		Gross
			Unrealized		Unrealized						Unrealized		Unrealized
(in thousands)	Amortized Cost		Gains		Losses		Fair Value		Amortized Cost		Gains		Losses		Fair Value
December 31, 2020
June 30, 2022
Mortgage-backed securities:
US Government-sponsored enterprises	$	206,834	$	6,018	$	(462)	$	212,390	$	250,838	$	126	$	(23,602)	$	227,362
US Government agency		82,878		2,870		(116)		85,632		91,284		59		(6,371)		84,972
Private label		19,810		40		(141)		19,709		76,132		36		(4,257)		71,911
Obligations of states and political subdivisions thereof		164,766		4,244		(6)		169,004		128,407		5,752		(18,192)		115,967
Corporate bonds		97,689		1,465		(843)		98,311		89,154		589		(3,813)		85,930
Total securities available for sale	$	571,977	$	14,637	$	(1,568)	$	585,046	$	635,815	$	6,562	$	(56,235)	$	586,142


			Gross		Gross
			Unrealized		Unrealized
(in thousands)	Amortized Cost		Gains		Losses		Fair Value
December 31, 2021
Mortgage-backed securities:
US Government-sponsored enterprises	$	237,283	$	2,289	$	(3,455)	$	236,117
US Government agency		79,143		1,016		(522)		79,637
Private label		68,691		142		(138)		68,695
Obligations of states and political subdivisions thereof		140,585		1,489		(298)		141,776
Corporate bonds		89,994		2,479		(422)		92,051
Total securities available for sale	$	615,696	$	7,415	$	(4,835)	$	618,276

Credit Quality Information

~~The Company monitors~~We monitor 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~~us 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~~we utilize other financial information indicating the financial health of the underlying municipality, agency, or organization associated with the underlying security.

As of June 30, 2022 and December 31, 2021 ~~the Company~~we carried 0 allowance on available for sale debt securities in accordance with ASU ~~2016-13.~~2016-13, Measurement of Credit Losses on Financial Instruments.

The amortized cost and estimated fair value of available for sale securities segregated by contractual maturity at June 30, ~~2021~~2022 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	$	6,765	$	6,869	$	—	$	—
Over 1 year to 5 years		21,738		21,904		29,232		28,306
Over 5 years to 10 years		68,136		67,171		52,870		56,054
Over 10 years		181,172		187,666		135,459		117,537
Total bonds and obligations		277,811		283,610		217,561		201,897
Mortgage-backed securities		334,597		338,239		418,254		384,245
Total securities available for sale	$	612,408	$	621,849	$	635,815	$	586,142

1911

Table of Contents

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


	Three Months Ended				Six Months Ended				Three Months Ended				Six Months Ended
	June 30,				June 30,				June 30,				June 30,
(in thousands)	2021		2020		2021		2020		2022		2021		2022		2021
Gross gains on sales of available for sale securities	$	50	$	1,362	$	50	$	1,508	$	—	$	50	$	9	$	50
Gross losses on sales of available for sale securities		—		(11)		—		(22)		—		—		—		—
Net gains on sale of available for sale securities	$	50	$	1,351	$	50	$	1,486	$	—	$	50	$	9	$	50

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
June 30, 2021
June 30, 2022
Mortgage-backed securities:
US Government-sponsored enterprises	$	1,879	$	91,739	$	237	$	3,743	$	2,116	$	95,482	$	15,205	$	165,870	$	8,397	$	50,520	$	23,602	$	216,390
US Government agency		189		13,512		14		3,190		203		16,702		5,160		67,111		1,211		9,803		6,371		76,914
Private label		83		51,718		5		19		88		51,737		2,517		39,815		1,740		31,542		4,257		71,357
Obligations of states and political subdivisions thereof		272		35,808		—		—		272		35,808		15,683		93,608		2,509		7,989		18,192		101,597
Corporate bonds		16		6,984		844		16,406		860		23,390		3,155		51,276		658		6,592		3,813		57,868
Total securities available for sale	$	2,439	$	199,761	$	1,100	$	23,358	$	3,539	$	223,119	$	41,720	$	417,680	$	14,515	$	106,446	$	56,235	$	524,126


	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
December 31, 2020
December 31, 2021
Mortgage-backed securities:
US Government-sponsored enterprises	$	209	$	40,285	$	253	$	4,323	$	462	$	44,608	$	1,589	$	127,780	$	1,866	$	39,717	$	3,455	$	167,497
US Government agency		45		6,776		71		3,297		116		10,073		381		32,628		141		4,548		522		37,176
Private label		—		—		141		19,514		141		19,514		133		44,372		5		16		138		44,388
Obligations of states and political subdivisions thereof		6		5,577		—		—		6		5,577		187		36,878		111		6,129		298		43,007
Corporate bonds		555		21,774		288		11,712		843		33,486		94		21,358		328		11,922		422		33,280
Total securities available for sale	$	815	$	74,412	$	753	$	38,846	$	1,568	$	113,258	$	2,384	$	263,016	$	2,451	$	62,332	$	4,835	$	325,348

2012

Table of Contents

~~The Company expects~~We expect to recover ~~its~~the amortized cost basis on all securities in ~~its~~our AFS portfolio. Furthermore, ~~the Company does~~we do not intend to sell nor ~~does it~~do we anticipate that itwe will be required to sell any ~~of its~~ securities in an unrealized loss position as of June 30, ~~2021,~~2022, prior to this recovery. ~~The Company’s~~Our ability and intent to hold these securities until recovery is supported by ~~the Company’s~~our 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 June 30, ~~2021:~~2022:

US Government-sponsored enterprises

44361 out of the total ~~546~~526 securities in ~~the Company’s~~our portfolios of AFS US Government-sponsored enterprises were in unrealized loss positions. Aggregate unrealized losses represented ~~1.08%~~8.83% 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~~our 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

13109 out of the total ~~157~~160 securities in ~~the Company’s~~our portfolios of AFS US Government agency securities were in unrealized loss positions. Aggregate unrealized losses represented ~~0.31%~~7.65% 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~~our 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

1731 of the total 3335 securities in ~~the Company’s~~our portfolio of AFS private label mortgage-backed securities were in unrealized loss positions. Aggregate unrealized losses represented ~~0.12%~~5.63% of the amortized cost of securities in unrealized loss positions. ~~Based upon the expectation that the Company will~~We expect to 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

951 of the total ~~140~~84 securities in ~~the Company’s~~our portfolio of AFS municipal bonds and obligations were in unrealized loss positions. Aggregate unrealized losses represented ~~0.15%~~15.19% of the amortized cost of securities in unrealized loss positions. ~~The Company~~We 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~~we feel the bonds in this portfolio carry minimal risk of default and ~~the Company is~~we are appropriately compensated for the risk. There were no material underlying credit downgrades during the quarter. ~~All securities are performing.~~

Corporate bonds

618 out of the total 3128 securities in ~~the Company’s~~our portfolio of AFS corporate bonds were in an unrealized loss position. The aggregate unrealized loss represents ~~0.92%~~6.17% of the amortized cost of bonds in unrealized loss positions. ~~The Company reviews~~We review 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.

2113

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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~~We evaluate 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:


	June 30,		December 31,		June 30,		December 31,
(in thousands)	2021		2020		2022		2021
Commercial construction	$	161,192	$	117,882	$	86,163	$	56,263
Commercial real estate owner occupied		233,825		219,217		250,890		257,122
Commercial real estate non-owner occupied		713,889		716,776		1,003,573		887,092
Tax exempt		44,079		47,862		44,439		41,280
Commercial and industrial		370,074		355,684		301,381		307,112
Residential real estate		891,806		995,216		939,730		888,263
Home equity		90,440		100,096		92,949		86,657
Consumer other		10,255		10,152		8,149		8,121
Total loans		2,515,560		2,562,885		2,727,274		2,531,910
Allowance for credit losses		22,815		19,082		23,756		22,718
Net loans	$	2,492,745	$	2,543,803	$	2,703,518	$	2,509,192

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


	June 30,		December 31,		June 30,		December 31,
(in thousands)	2021		2020		2022		2021
Unamortized net loan origination costs	$	3,336	$	5,157
Unamortized net premium on purchased loans		(77)		(85)
Total unamortized net costs and premiums	$	3,259	$	5,072
Net unamortized loan origination costs					$	4,276	$	3,014
Net unamortized fair value discount on acquired loans						(4,088)		(4,758)
Total					$	188	$	(1,744)

~~The Company elected to~~We exclude accrued interest receivable from the amortized cost basis of loans disclosed throughout this footnote. As of June 30, ~~2021~~2022 and December 31, ~~2020,~~2021, accrued interest receivable for loans totaled ~~$12.1~~$9.3 million and ~~$11.4~~$6.3 million, respectively, and is included in the “other assets” line item on the ~~Company’s~~ consolidated balance sheets.

The CARES Act and subsequent legislation established the Payroll Protection Program (PPP), administered directly by the Small Business Administration (SBA). ~~The Company has participated in both 2020 and 2021 rounds of funding.~~ As of June 30, ~~2021~~2022 and December 31, ~~2020, the Company~~2021, we had ~~1,250~~5 and ~~746~~61 PPP loans outstanding, with an outstanding principal balance of ~~$65.9~~$170 thousand and $6.7 million, ~~and $53.8 million,~~ respectively. The increase reflects the 2021 round of funding of 1,233 PPP loans with and outstanding principal balance of $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.~~on stabilized commercial real estate transactions. 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.

~~Table of Contents~~

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

Table of Contents

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~~us with tax-exempt income. While governed and underwritten similar to commercial loans they do have unique requirements based on established polices. Almost all state and municipal loans are considered a general obligation of the issuing entity. Given the size of many municipal borrowers, borrowings are normally not rated by major rating agencies.

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

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

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

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

Allowance for Credit Losses

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

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

2315

Table of Contents

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


	Three Months Ended June 30, 2021										At or for the Three Months Ended June 30, 2022
	Balance at										Balance at
	Beginning of								Balance at		Beginning of								Balance at
(in thousands)	Period		Charge Offs		Recoveries		Provision		End of Period		Period		Charge Offs		Recoveries		Provision		End of Period
Commercial construction	$	1,792	$	—	$	—	$	580	$	2,372	$	1,001	$	—	$	—	$	9	$	1,010
Commercial real estate owner occupied		3,352		(108)		2		(694)		2,552		2,673		—		61		(12)		2,722
Commercial real estate non-owner occupied		5,902		—		—		(298)		5,604		7,007		—		—		354		7,361
Tax exempt		94		—		—		(3)		91		—		—		—		105		105
Commercial and industrial		5,040		(20)		13		192		5,225		4,739		—		12		69		4,820
Residential real estate		6,569		(21)		109		(588)		6,069		6,878		—		6		(78)		6,806
Home equity		823		(32)		36		(5)		822		827		(4)		15		27		865
Consumer other		81		(58)		6		51		80		65		(58)		—		60		67
Total	$	23,653	$	(239)	$	166	$	(765)	$	22,815	$	23,190	$	(62)	$	94	$	534	$	23,756

Six Months Ended June 30, 2021

Balance at

Beginning of

Impact of ASC

Balance at
(in thousands)

Period

326

Charge Offs

Recoveries

Provision

End of Period
Commercial construction

$
824

$
1,196

$
—

$
18

$
334

$
2,372
Commercial real estate owner occupied

1,783

708

(261)

2

320

2,552
Commercial real estate non-owner occupied

7,864

(2,008)

—

4

(256)

5,604
Tax exempt

58

40

—

—

(7)

91
Commercial and industrial

3,137

2,996

(20)

14

(902)

5,225
Residential real estate

5,010

1,732

(61)

122

(734)

6,069
Home equity

285

603

(54)

47

(59)

822
Consumer other

121

(39)

(59)

7

50

80
Total

$
19,082

$
5,228

$
(455)

$
214

$
(1,254)

$
22,815


	Three Months Ended June 30, 2020										At or for the Six Months Ended June 30, 2022
	Balance at										Balance at
	Beginning of								Balance at		Beginning of								Balance at
(in thousands)	Period		Charge Offs		Recoveries		Provision		End of Period		Period		Charge Offs		Recoveries		Provision		End of Period
Commercial construction	$	395	$	—	$	—	$	137	$	532	$	2,111	$	—	$	—	$	(1,101)	$	1,010
Commercial real estate owner occupied		1,486		—		—		38		1,524		2,751		—		113		(142)		2,722
Commercial real estate non-owner occupied		5,314		—		71		541		5,926		5,650		—		—		1,711		7,361
Tax exempt		57		—		—		7		64		86		—		—		19		105
Commercial and industrial		3,323		(160)		5		(112)		3,056		5,369		—		37		(586)		4,820
Residential real estate		4,291		(20)		—		720		4,991		5,862		(15)		98		861		6,806
Home equity		328		—		—		(10)		318		814		(6)		20		37		865
Consumer other		103		(40)		2		33		98		75		(124)		4		112		67
Total	$	15,297	$	(220)	$	78	$	1,354	$	16,509	$	22,718	$	(145)	$	272	$	911	$	23,756

2416

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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


	At or for the Three Months Ended June 30, 2021
	Balance at
	Beginning of								Balance at
(in thousands)	Period		Charge Offs		Recoveries		Provision		End of Period
Commercial construction	$	1,792	$	—	$	—	$	580	$	2,372
Commercial real estate owner occupied		3,352		(108)		2		(694)		2,552
Commercial real estate non-owner occupied		5,902		—		—		(298)		5,604
Tax exempt		94		—		—		(3)		91
Commercial and industrial		5,040		(20)		13		192		5,225
Residential real estate		6,569		(21)		109		(588)		6,069
Home equity		823		(32)		36		(5)		822
Consumer other		81		(58)		6		51		80
Total	$	23,653	$	(239)	$	166	$	(765)	$	22,815



	At or for the Six Months Ended June 30, 2021
	Balance at
	Beginning of		Impact of ASC								Balance at
(in thousands)	Period		326		Charge Offs		Recoveries		Provision		End of Period
Commercial construction	$	824	$	1,196	$	—	$	18	$	334	$	2,372
Commercial real estate owner occupied		1,783		708		(261)		2		320		2,552
Commercial real estate non-owner occupied		7,864		(2,008)		—		4		(256)		5,604
Tax exempt		58		40		—		—		(7)		91
Commercial and industrial		3,137		2,996		(20)		14		(902)		5,225
Residential real estate		5,010		1,732		(61)		122		(734)		6,069
Home equity		285		603		(54)		47		(59)		822
Consumer other		121		(39)		(59)		7		50		80
Total	$	19,082	$	5,228	$	(455)	$	214	$	(1,254)	$	22,815

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Unfunded Commitments

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



(in thousands)	Three Months Ended June 30, 2021		Six Months Ended June 30, 2021		Three Months Ended June 30, 2022		Six Months Ended June 30, 2022
Begininng Balance	$	1,819	$	359
Impact of CECL adoption		—		1,616
Beginning Balance					$	2,182	$	2,152
Provision for credit losses		102		(156)		341		371
Ending Balance	$	1,921	$	1,921	$	2,523	$	2,523


(in thousands)	Three Months Ended June 30, 2020		Six Months Ended June 30, 2020		Three Months Ended June 30, 2021		Six Months Ended June 30, 2021
Begininng Balance	$	359	$	314
Beginning Balance					$	1,819	$	359
Impact of ASC 326						—		1,616
Provision for credit losses		(40)		5		102		(54)
Ending Balance	$	319	$	319	$	1,921	$	1,921

Loan Origination/Risk Management: ~~The Company has~~We have certain lending policies and procedures in place designed to maximize loan income within an acceptable level of risk. ~~The Company’s~~Our Board of Directors ~~reviews~~review and ~~approves~~approve 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~~We seek 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~~our credit quality indicators:

Pass: Loans ~~the Company considers~~we consider 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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Special Mention: Loans ~~the Company considers~~considered 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~~us to sufficient risks to warrant classification.

Substandard: Loans ~~the Company considers~~we consider 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

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liquidation of the debt. Substandard loans include those loans where there is the distinct possibility of some loss of principal, if the deficiencies are not corrected.

Doubtful: Loans ~~the Company considers~~we consider 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~~we consider 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.

2619

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The following tables present ~~the Company’s~~our loans by year of origination, loan segmentation and risk indicator as of June 30, 2022 and December 31, 2021:



(in thousands)		2021		2020		2019		2018		2017		Prior		Total			2022		2021		2020		2019		2018		Prior		Total
Commercial construction
Risk rating:
Pass		$	12,778	$	68,262	$	53,760	$	26,392	$	—	$	—	$	161,192		$	16,952	$	25,707	$	31,927	$	1,011	$	10,566	$	—	$	86,163
Special mention			—		—		—		—		—		—		—			—		—		—		—		—		—		—
Substandard			—		—		—		—		—		—		—			—		—		—		—		—		—		—
Total		$	12,778	$	68,262	$	53,760	$	26,392	$	—	$	—	$	161,192		$	16,952	$	25,707	$	31,927	$	1,011	$	10,566	$	—	$	86,163

Commercial real estate owner occupied
Risk rating:
Pass		$	4,866	$	15,555	$	35,811	$	30,353	$	20,769	$	112,798	$	220,152		$	16,947	$	12,956	$	24,170	$	32,907	$	38,530	$	115,912	$	241,422
Special mention			—		—		773		—		—		1,618		2,391			—		—		246		—		978		1,819		3,043
Substandard			—		—		—		261		261		10,397		10,919			—		—		—		—		853		5,253		6,106
Doubtful			—		—		—		188		—		175		363			—		—		—		—		167		152		319
Total		$	4,866	$	15,555	$	36,584	$	30,802	$	21,030	$	124,988	$	233,825		$	16,947	$	12,956	$	24,416	$	32,907	$	40,528	$	123,136	$	250,890

Commercial real estate non-owner occupied
Risk rating:
Pass		$	65,282	$	148,198	$	98,572	$	41,971	$	150,092	$	204,405	$	708,520		$	186,590	$	247,260	$	152,249	$	90,146	$	37,524	$	271,359	$	985,128
Special mention			—		—		—		—		—		1,472		1,472			—		—		—		151		978		14,830		15,959
Substandard			—		—		—		150		150		3,408		3,708			—		—		—		—		—		2,323		2,323
Doubtful			—		—		—		—		—		189		189			—		—		—		—		—		163		163
Total		$	65,282	$	148,198	$	98,572	$	42,121	$	150,242	$	209,474	$	713,889		$	186,590	$	247,260	$	152,249	$	90,297	$	38,502	$	288,675	$	1,003,573

Tax exempt
Risk rating:
Pass		$	833	$	338	$	1,125	$	14,790	$	5,463	$	21,530	$	44,079		$	6,899	$	1,155	$	290	$	925	$	13,543	$	21,627	$	44,439
Special mention			—		—		—		—		—		—		—			—		—		—		—		—		—		—
Substandard			—		—		—		—		—		—		—			—		—		—		—		—		—		—
Total		$	833	$	338	$	1,125	$	14,790	$	5,463	$	21,530	$	44,079		$	6,899	$	1,155	$	290	$	925	$	13,543	$	21,627	$	44,439

Commercial and industrial
Risk rating:
Pass		$	114,688	$	59,804	$	38,907	$	17,769	$	66,905	$	51,081	$	349,154		$	39,970	$	69,858	$	53,091	$	31,842	$	9,726	$	94,725	$	299,212
Special mention			345		259		806		702		215		1,105		3,432			—		—		60		268		442		312		1,082
Substandard			98		—		583		15,010		57		1,252		17,000			—		58		2		304		—		620		984
Doubtful			—		—		—		—		129		359		488			—		—		—		—		—		103		103
Total		$	115,131	$	60,063	$	40,296	$	33,481	$	67,306	$	53,797	$	370,074		$	39,970	$	69,916	$	53,153	$	32,414	$	10,168	$	95,760	$	301,381

(continued)	(continued)															(continued)

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(in thousands)	2022		2021		2020		2019		2018		Prior		Total
Residential real estate
Performing	$	127,436	$	183,662	$	114,026	$	74,866	$	54,141	$	380,464	$	934,595
Nonperforming		—		—		—		—		647		4,488		5,135
Total	$	127,436	$	183,662	$	114,026	$	74,866	$	54,788	$	384,952	$	939,730

Home equity
Performing	$	7,850	$	11,632	$	10,339	$	7,898	$	7,907	$	46,163	$	91,789
Nonperforming		—		—		—		—		—		1,160		1,160
Total	$	7,850	$	11,632	$	10,339	$	7,898	$	7,907	$	47,323	$	92,949

Consumer other
Performing	$	3,156	$	1,879	$	1,197	$	472	$	409	$	1,028	$	8,141
Nonperforming		—		—		—		—		6		2		8
Total	$	3,156	$	1,879	$	1,197	$	472	$	415	$	1,030	$	8,149

Total Loans	$	405,800	$	554,167	$	387,597	$	240,790	$	176,417	$	962,503	$	2,727,274



(in thousands)	2021		2020		2019		2018		2017		Prior		Total
Commercial construction
Risk rating:
Pass	$	22,866	$	4,787	$	19,211	$	9,399	$	—	$	—	$	56,263
Special mention		—		—		—		—		—		—		—
Substandard		—		—		—		—		—		—		—
Total	$	22,866	$	4,787	$	19,211	$	9,399	$	—	$	—	$	56,263

Commercial real estate owner occupied
Risk rating:
Pass	$	12,940	$	25,240	$	34,782	$	49,136	$	19,292	$	103,144	$	244,534
Special mention		—		—		760		—		—		2,659		3,419
Substandard		—		—		1		853		247		7,737		8,838
Doubtful		—		—		—		167		—		164		331
Total	$	12,940	$	25,240	$	35,543	$	50,156	$	19,539	$	113,704	$	257,122

Commercial real estate non-owner occupied
Risk rating:
Pass	$	235,646	$	172,785	$	119,326	$	39,663	$	136,120	$	165,329	$	868,869
Special mention		—		—		174		—		—		14,789		14,963
Substandard		—		—		—		—		—		3,097		3,097
Doubtful		—		—		—		—		—		163		163
Total	$	235,646	$	172,785	$	119,500	$	39,663	$	136,120	$	183,378	$	887,092

Tax exempt
Risk rating:
Pass	$	1,249	$	299	$	968	$	14,408	$	5,329	$	19,027	$	41,280
Special mention		—		—		—		—		—		—		—
Substandard		—		—		—		—		—		—		—
Total	$	1,249	$	299	$	968	$	14,408	$	5,329	$	19,027	$	41,280

Commercial and industrial
Risk rating:
Pass	$	77,608	$	80,569	$	33,405	$	16,457	$	33,413	$	61,594	$	303,046
Special mention		—		—		584		468		172		1,396		2,620
Substandard		58		3		512		—		48		578		1,199
Doubtful		—		—		—		—		92		155		247
Total	$	77,666	$	80,572	$	34,501	$	16,925	$	33,725	$	63,723	$	307,112

(continued)

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(in thousands)	2021		2020		2019		2018		2017		Prior		Total
Residential real estate
Performing	$	191,466	$	120,495	$	83,044	$	62,299	$	59,642	$	364,482	$	881,428
Nonperforming		—		—		—		286		178		6,371		6,835
Total	$	191,466	$	120,495	$	83,044	$	62,585	$	59,820	$	370,853	$	888,263

Home equity
Performing	$	12,770	$	10,461	$	9,005	$	7,855	$	6,474	$	38,823	$	85,388
Nonperforming		—		—		—		—		—		1,269		1,269
Total	$	12,770	$	10,461	$	9,005	$	7,855	$	6,474	$	40,092	$	86,657

Consumer other
Performing	$	2,525	$	1,659	$	792	$	669	$	92	$	2,379	$	8,116
Nonperforming		—		—		—		—		—		5		5
Total	$	2,525	$	1,659	$	792	$	669	$	92	$	2,384	$	8,121

Total Loans	$	557,128	$	416,298	$	302,564	$	201,660	$	261,099	$	793,161	$	2,531,910

Past Dues

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


	June 30, 2022
(in thousands)	30-59		60-89		90+		Total Past Due		Current		Total Loans
Commercial construction	$	—	$	—	$	—	$	—	$	86,163	$	86,163
Commercial real estate owner occupied		6		—		—		6		250,884		250,890
Commercial real estate non-owner occupied		—		—		—		—		1,003,573		1,003,573
Tax exempt		—		—		—		—		44,439		44,439
Commercial and industrial		35		11		—		46		301,335		301,381
Residential real estate		762		1,278		1,679		3,719		936,011		939,730
Home equity		346		60		401		807		92,142		92,949
Consumer other		57		1		8		66		8,083		8,149
Total	$	1,206	$	1,350	$	2,088	$	4,644	$	2,722,630	$	2,727,274


	December 31, 2021
(in thousands)	30-59		60-89		90+		Total Past Due		Current		Total Loans
Commercial construction	$	—	$	—	$	—	$	—	$	56,263	$	56,263
Commercial real estate owner occupied		1,190		7		1		1,198		255,924		257,122
Commercial real estate non-owner occupied		—		—		—		—		887,092		887,092
Tax exempt		—		—		—		—		41,280		41,280
Commercial and industrial		31		318		185		534		306,578		307,112
Residential real estate		5,010		1,238		1,416		7,664		880,599		888,263
Home equity		699		149		101		949		85,708		86,657
Consumer other		29		—		2		31		8,090		8,121
Total	$	6,959	$	1,712	$	1,705	$	10,376	$	2,521,534	$	2,531,910

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Non-Accrual Loans

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


	June 30, 2022
			Nonaccrual With No		90+ Days Past
(in thousands)	Nonaccrual		Related Allowance		Due and Accruing
Commercial construction	$	—	$	—	$	—
Commercial real estate owner occupied		636		383		—
Commercial real estate non-owner occupied		595		595		—
Tax exempt		—		—		—
Commercial and industrial		344		232		—
Residential real estate		5,135		413		704
Home equity		1,160		287		15
Consumer other		8		—		—
Total	$	7,878	$	1,910	$	719


	December 31, 2021
			Nonaccrual With No		90+ Days Past
(in thousands)	Nonaccrual		Related Allowance		Due and Accruing
Commercial construction	$	—	$	—	$	—
Commercial real estate owner occupied		783		424		—
Commercial real estate non-owner occupied		622		459		—
Tax exempt		—		—		—
Commercial and industrial		677		542		30
Residential real estate		6,835		2,537		41
Home equity		1,269		305		63
Consumer other		5		—		—
Total	$	10,191	$	4,267	$	134

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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 we have determined that foreclosure of the collateral is probable, or where the borrower is experiencing financial difficulty and we expect 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.


	June 30, 2022				December 31, 2021
(in thousands)	Real Estate		Other		Real Estate		Other
Commercial construction	$	—	$	—	$	—	$	—
Commercial real estate owner occupied		636		—		783		—
Commercial real estate non-owner occupied		595		—		622		—
Tax exempt		—		—		—		—
Commercial and industrial		122		222		385		292
Residential real estate		5,135		—		6,835		—
Home equity		1,160		—		1,269		—
Consumer other		8		—		5		—
Total	$	7,656	$	222	$	9,899	$	292

Troubled Debt Restructuring Loans

The 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 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. There were 0 modifications qualifying as TDR’s for the three and six months ended June 30, 2022 and 2021.

Foreclosure

Residential mortgage loans collateralized by real estate that are in the process of foreclosure as of June 30, 2022 and December 31, 2021 totaled $179 thousand and $574 thousand, respectively.

Mortgage Banking

Loans held for sale had at June 30, 2022 and December 31, 2021 had an unpaid principal balance of $3.5 million and $5.4 million, 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 had a notional amount of $7.0 million, and $16.6 million at June 30, 2022 and December 31, 2021, respectively. Refer to Note 8 for further discussion of forward delivery commitments.

For the three months ended June 30, 2022 and 2021, we sold $11.1 million and $56.1 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 $150 thousand and $1.0 million, respectively. For the six months ended June 30, 2022 and 2021, we sold $31.9 million and $125.4 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 $333 thousand and $2.9 million, respectively.

We sell residential loans on the secondary market while primarily retaining the servicing of these loans. Servicing sold loans helps to maintain customer relationships and earn 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. We obtain third party valuations of our servicing assets portfolio quarterly, and the assumptions are reflected in Fair Value disclosures.

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NOTE 4. BORROWED FUNDS

Borrowed funds at June 30, 2022 and December 31, 2021 are summarized, as follows:


	June 30, 2022				December 31, 2021
			Weighted				Weighted
(dollars in thousands)	Carrying Value		Average Rate		Carrying Value		Average Rate
Short-term borrowings
Advances from the FHLB	$	96,000	1.22	%	$	75,000	0.30	%
Other borrowings		18,754	0.12			19,802	0.17
Total short-term borrowings		114,754	0.43			94,802	0.21
Long-term borrowings
Advances from the FHLB		2,593	0.20			23,598	1.08
Subordinated borrowings		60,206	4.70			60,124	4.34
Total long-term borrowings		62,799	4.51			83,722	3.42
Total	$	177,553	1.07	%	$	178,524	0.91	%

Short-term debt includes Federal Home Loan Bank of Boston (FHLB) advances with a remaining maturity of less than one year. We also maintain a $1.0 million secured line of credit with the FHLB that bears a daily adjustable rate calculated by the FHLB. There was 0 outstanding balance on the FHLB line of credit for the periods ended June 30, 2022 and December 31, 2021.

We have the capacity to borrow funds on a secured basis utilizing the Borrower in Custody program and the Discount Window at the Federal Reserve Bank of Boston (the “FRB”). At June 30, 2022, our available secured line of credit at the FRB was $82.7 million. We have pledged certain loans and securities to the FRB to support this arrangement. There were 0 borrowings with the FRB for the periods ended June 30, 2022 and December 31, 2021.

We maintain, with a correspondent bank, an unused unsecured federal funds line of credit that has an aggregate overnight borrowing capacity of $50.0 million as of June 30, 2022 and December 31, 2021. There was 0 outstanding balance on the line of credit as of June 30, 2022 and December 31, 2021.

Long-term FHLB advances consist of advances with a remaining maturity of more than one year. The advances outstanding at June 30, 2022 include 0 callable advances and amortizing advances of $291 thousand. The advances outstanding at December 31, 2021 included $20.0 million of callable advances and $298 thousand of amortizing advances. All FHLB borrowings, including the line of credit, are secured by a blanket security agreement on certain qualified collateral, principally all residential first mortgage loans and certain securities.

A summary of maturities of FHLB advances as of June 30, 2022 is, as follows:


			Weighted Average
(in thousands, except rates)	Amount		Rate
2022	$	95,000	1.23	%
2023		1,000	—
2024		2,300	—
2025		—	—
2026		—	—
2027 and thereafter		293	1.82
Total FHLB advances	$	98,593	1.19	%

We have a Subordinated Note Purchase Agreement with an aggregate of $40.0 million of subordinated notes (the "Notes") to accredited investors on November 26, 2019. The Notes have a maturity date of December 1, 2029 and bear a fixed interest rate of 4.63% through December 1, 2024 payable semi-annually in arrears. From December 1, 2024 and thereafter the interest rate shall be reset quarterly to an interest rate per annum equal to the then current three-month Secured

Table of Contents

Overnight Financing Rate ("SOFR") plus 3.27%. We have 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. The transaction included debt issuance costs of $415 thousand as of June 30, 2022 and $496 thousand net of amortization as of December 31, 2021, that are netted against the subordinated debt.

We also have $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 three-month LIBOR plus 2.79%, and mature in 2034. The debt is callable by us at the time when any interest payment is made. Trust II and Trust III are considered variable interest entities for which we are not the primary beneficiary. Accordingly, Trust II and Trust III are not consolidated into our financial statements.

Repurchase Agreements

We can raise additional liquidity by entering into repurchase agreements at our discretion. In a security repurchase agreement transaction, we will generally sell a security, agreeing to repurchase either the same or substantially identical security on a specified later date, at a greater price than the original sales price. The difference between the sale price and purchase price is the cost of the proceeds, which is recorded as interest expense on the consolidated statements of income. The securities underlying the agreements are delivered to counterparties as security for the repurchase obligations. Since the securities are treated as collateral and the agreement does not qualify for a full transfer of effective control, the transactions do not meet the criteria to be classified as sales, and are therefore considered secured borrowing transactions for accounting purposes. Payments on such borrowings are interest only until the scheduled repurchase date. In a repurchase agreement we are subject to the risk that the purchaser may default at maturity and not return the securities underlying the agreements. In order to minimize this potential risk, we either deal with established firms when entering into these transactions or with customers whose agreements stipulate that the securities underlying the agreement are not delivered to the customer and instead are held in segregated safekeeping accounts by our safekeeping agents.


(in thousands)	June 30, 2022		December 31, 2021
Customer Repurchase Agreements
US Government-sponsored enterprises	$	18,754	$	19,802
Total	$	18,754	$	19,802

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NOTE 5. DEPOSITS

A summary of time deposits is, as follows:


(in thousands)	June 30, 2022		December 31, 2021
Time less than $100,000	$	172,679	$	181,586
Time $100,000 through $250,000		128,676		169,645
Time $250,000 or more		60,551		74,301
Total	$	361,906	$	425,532

At June 30, 2022 and December 31, 2021, the scheduled maturities by year for time deposits are, as follows:


(in thousands)	June 30, 2022		December 31, 2021
Within 1 year	$	288,071	$	318,692
Over 1 year to 2 years		46,247		71,247
Over 2 years to 3 years		13,945		18,201
Over 3 years to 4 years		6,745		8,498
Over 4 years to 5 years		5,505		6,751
Over 5 years		1,393		2,143
Total	$	361,906	$	425,532

Included in time deposits are brokered deposits of $15.7 million and $16.1 million at June 30, 2022 and December 31, 2021, respectively. Also included in time deposits are reciprocal deposits of $12.1 million and $17.3 million at June 30, 2022 and December 31, 2021, respectively.

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:~~

June 30, 2021
(in thousands)

30-59

60-89

90+

Total Past Due

Current

Total Loans
Commercial construction

$
—

$
—

$
—

$
—

$
161,192

$
161,192
Commercial real estate owner occupied

573

8

71

652

233,173

233,825
Commercial real estate non-owner occupied

442

148

445

1,035

712,854

713,889
Tax exempt

—

—

—

—

44,079

44,079
Commercial and industrial

—

47

205

252

369,822

370,074
Residential real estate

300

926

3,891

5,117

886,689

891,806
Home equity

475

259

151

885

89,555

90,440
Consumer other

21

1

—

22

10,233

10,255
Total

$
1,811

$
1,389

$
4,763

$
7,963

$
2,507,597

$
2,515,560

~~Table of Contents~~

December 31, 2020
(in thousands)

30-59

60-89

90+

Total Past Due

Current

Total Loans
Commercial construction

$
74

$
—

$
1

$
75

$
117,807

$
117,882
Commercial real estate owner occupied

1,309

464

438

2,211

217,006

219,217
Commercial real estate non-owner occupied

503

674

624

1,801

714,975

716,776
Tax exempt

—

—

—

—

47,862

47,862
Commercial and industrial

161

—

193

354

355,330

355,684
Residential real estate

9,178

2,511

3,200

14,889

980,327

995,216
Home equity

1,062

614

375

2,051

98,045

100,096
Consumer other

20

—

2

22

10,130

10,152
Total

$
12,307

$
4,263

$
4,833

$
21,403

$
2,541,482

$
2,562,885

~~Non-Accrual Loans~~

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

June 30, 2021

Nonaccrual With No

90+ Days Past
(in thousands)

Nonaccrual

Related Allowance

Due and Accruing
Commercial construction

$
—

$
—

$
—
Commercial real estate owner occupied

1,316

917

—
Commercial real estate non-owner occupied

1,105

845

—
Tax exempt

—

—

—
Commercial and industrial

952

583

—
Residential real estate

8,955

3,594

449
Home equity

1,244

326

24
Consumer other

7

—

—
Total

$
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

~~Table of Contents~~

~~Collateral Dependent Loans~~

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

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

June 30, 2021

December 31, 2020
(in thousands)

Real Estate

Other

Real Estate

Other
Commercial construction

$
—

$
—

$
259

$
—
Commercial real estate owner occupied

1,316

—

3,441

—
Commercial real estate non-owner occupied

1,105

—

383

—
Tax exempt

—

—

—

—
Commercial and industrial

551

401

625

607
Residential real estate

8,955

—

7,432

—
Home equity

1,244

—

1,493

—
Consumer other

7

—

60

—
Total

$
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.

~~Table of Contents~~

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

December 31, 2020

Recorded

Unpaid Principal

Related

Average Recorded

Interest
(in thousands)

Investment

Balance

Allowance

Investment

Income Recognized
With no related allowance:










Construction and land development

$
—

$
—

$
—

$
—

$
—
Other commercial real estate

2,001

2,047

—

1,610

—
Commercial

1,095

1,254

—

1,140

4
Agricultural

361

150

—

114

2
Tax exempt loans

—

—

—

—

—
Residential real estate

2,745

3,165

—

1,077

17
Home equity

—

—

—

—

—
Other consumer

—

—

—

—

—

With an allowance recorded:










Construction and land development

258

258

205

203

—
Other commercial real estate

1,963

2,108

1,038

1,973

17
Commercial

282

289

164

73

—
Agricultural

—

—

—

—

—
Tax exempt loans

—

—

—

—

—
Residential real estate

887

944

106

1,865

37
Home equity

13

13

—

12

1
Other consumer

—

—

—

—

—

Total










Commercial real estate

4,222

4,413

1,243

3,786

17
Commercial and industrial

1,738

1,693

164

1,327

6
Residential real estate

3,632

4,109

106

2,942

54
Consumer

13

13

—

12

1
Total impaired loans

$
9,605

$
10,228

$
1,513

$
8,067

$
78

~~Table of Contents~~

~~Troubled Debt Restructuring Loans~~

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

The following tables include the recorded investment and number of modifications identified during the periods ended. The table includes the recorded investment in the loans prior to a modification and also the recorded investment in the loans after the loans were restructured. Modifications may include adjustments to interest rates, payment amounts, extensions of maturity, court ordered concessions or other actions intended to minimize economic loss and avoid foreclosure or repossession of collateral. There were 0 modifications qualifying as TDR’s for the three and six months ended June 30, 2021 and 0 modifications qualifying as TDR’s for the three months ended June 30, 2020.

Six Months Ended June 30, 2020

Pre-Modification

Post-Modification

Number of

Outstanding

Outstanding

(in thousands)

Modifications

Balance

Balance

Reserve
Commercial construction

—

$
—

$
—

$
—
Commercial real estate owner occupied

—

—

—

—
Commercial real estate non-owner occupied

1

54

252

—
Tax exempt

—

—

—

—
Commercial and industrial

3

41

196

—
Residential real estate

—

—

—

—
Home equity

1

26

25

—
Consumer other

1

9

9

—
Total

6

$
130

$
482

$
—

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

June 30, 2021

June 30, 2020




Post-Modification



Post-Modification

Number of

Outstanding

Number of

Outstanding
(in thousands)

Modifications

Balance

Modifications

Balance
Interest rate, forbearance and maturity concession

—

$
—

4

$
448
Forbearance and interest only payments

—

—

1

25
Maturity concession

—

—

1

9
Total

—

$
—

6

$
482

For the three months ended 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.~~

~~Table of Contents~~

~~Foreclosure~~

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

~~Mortgage Banking~~

The Company had identified and designated loans with an unpaid principal balance of $7.9 million and $24.0 million as residential loans held for sale at 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 $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 June 30, 2021 and December 31, 2020, the Company sold $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 $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.

~~Table of Contents~~

~~NOTE 4. BORROWED FUNDS~~

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

June 30, 2021

December 31, 2020

Weighted

Weighted

(dollars in thousands)

Carrying Value

Average Rate

Carrying Value

Average Rate

Short-term borrowings









Advances from the FHLB

$
80,000

0.39
%

$
65,676

1.19
%
Other borrowings

17,389

0.13

27,779

0.15

Total short-term borrowings

97,389

0.19

93,455

0.44

Long-term borrowings









Advances from the FHLB

182,602

1.73

182,607

1.73

Subordinated borrowings

60,042

4.41

59,961

4.34

Total long-term borrowings

242,644

2.39

242,568

2.37

Total

$
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 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 June 30, 2021, the Company’s available secured line of credit at the FRB was $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 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 June 30, 2021 and December 31, 2020. There was 0 outstanding balance on the line of credit as of 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 June 30, 2021 include callable advances of $20.0 million and amortizing advances of $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 June 30, 2021 is, as follows:~~

June 30, 2021

Weighted Average

(in thousands, except rates)

Amount

Rate

2021

$
80,000

0.39
%
2022

75,000

1.87

2023

80,000

1.77

2024

7,300

1.16

2025

20,000

1.21

2026 and thereafter

302

2.58

Total FHLB advances

$
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,

~~Table of Contents~~

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 $578 thousand as of 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.

~~Table of Contents~~

~~NOTE 5.~~ ~~DEPOSITS~~

~~A summary of time deposits is, as follows:~~

(in thousands)

June 30, 2021

December 31, 2020
Time less than $100,000

$
203,004

$
325,646
Time $100,000 through $250,000

194,247

278,940
Time $250,000 or more

73,507

93,775
Total

$
470,758

$
698,361

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

(in thousands)

June 30, 2021

December 31, 2020
Within 1 year

$
361,912

$
574,007
Over 1 year to 2 years

58,910

61,584
Over 2 years to 3 years

32,910

41,145
Over 3 years to 4 years

10,074

12,875
Over 4 years to 5 years

6,870

8,728
Over 5 years

82

22
Total

$
470,758

$
698,361

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

~~Table of Contents~~

NOTE 6. CAPITAL RATIOS AND SHAREHOLDERS’ EQUITY

The actual and required capital ratios are, as follows:


	June 30, 2022
					Regulatory Minimum to
	Actual				be "Well-Capitalized"
(in thousands, except ratios)	Amount		Ratio		Amount		Ratio
Company (consolidated)
Total capital to risk-weighted assets	$	395,301	13.76	%	$	287,216	10.00	%
Common equity tier 1 capital to risk-weighted assets		308,825	10.75			186,691	6.50
Tier 1 capital to risk-weighted assets		329,445	11.47			299,773	8.00
Tier 1 capital to average assets		329,445	9.16			179,785	5.00

Bank
Total capital to risk-weighted assets	$	389,279	13.57	%	$	286,882	10.00	%
Common equity tier 1 capital to risk-weighted assets		363,423	12.67			186,474	6.50
Tier 1 capital to risk-weighted assets		363,423	12.67			229,506	8.00
Tier 1 capital to average assets		363,423	10.12			179,637	5.00


			Regulatory				Regulatory		December 31, 2021
	June 30,		Minimum to be		December 31,		Minimum to be						Regulatory Minimum to
	2021		"Well-Capitalized"		2020		"Well-Capitalized"		Actual				be "Well-Capitalized"
(in thousands, except ratios)									Amount		Ratio		Amount		Ratio
Company (consolidated)
Total capital to risk-weighted assets	13.95	%	10.50	%	13.56	%	10.50	%	$	380,690	14.31	%	$	265,997	10.00	%
Common equity tier 1 capital to risk-weighted assets	10.72		7.00		10.49		7.00			295,635	11.11			172,898	6.50
Tier 1 capital to risk-weighted assets	11.51		8.50		11.28		8.50			316,255	11.89			212,798	8.00
Tier 1 capital to average assets	8.36		5.00		8.12		5.00			316,255	8.66			182,536	5.00

Bank
Total capital to risk-weighted assets	13.78	%	10.50	%	13.27	%	10.50	%	$	375,435	14.13	%	$	265,733	10.00	%
Common equity tier 1 capital to risk-weighted assets	12.86		7.00		12.52		7.00			351,000	13.21			172,726	6.50
Tier 1 capital to risk-weighted assets	12.86		8.50		12.52		8.50			351,000	13.21			212,586	8.00
Tier 1 capital to average assets	9.34		5.00		9.02		5.00			351,000	9.62			182,396	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%~~6.5%, a minimum Tier 1 risk-based capital ratio of ~~8.5%~~8.0% and a minimum Total risk-based capital ratio of ~~10.5%~~10.0%.

~~Accumulated other comprehensive income (loss)~~

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

(in thousands)

June 30, 2021

December 31, 2020
Accumulated other comprehensive income, before tax:




Net unrealized gain on AFS securities

$
9,441

$
13,069
Net unrealized gain on hedging derivatives

2,448

3,144
Net unrealized loss on post-retirement plans

(1,850)

(1,850)

Income taxes related to items of accumulated other comprehensive income:




Net unrealized gain on AFS securities

(2,204)

(3,046)
Net unrealized gain on hedging derivatives

(573)

(733)
Net unrealized loss on post-retirement plans

432

432
Accumulated other comprehensive income

$
7,694

$
11,016

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Accumulated other comprehensive (loss) income

Components of accumulated other comprehensive income is, as follows:


(in thousands)	June 30, 2022		December 31, 2021
Accumulated other comprehensive income, before tax:
Net unrealized (loss) gain on AFS securities	$	(49,673)	$	2,580
Net unrealized (loss) gain on hedging derivatives		(2,748)		1,130
Net unrealized loss on post-retirement plans		(718)		(718)

Income taxes related to items of accumulated other comprehensive income:
Net unrealized loss (gain) on AFS securities		11,369		(595)
Net unrealized loss (gain) on hedging derivatives		633		(260)
Net unrealized loss on post-retirement plans		166		166
Accumulated other comprehensive (loss) income	$	(40,971)	$	2,303

The following table presents the components of other comprehensive income (loss) for the three and six months ended June 30, ~~2021~~2022 and ~~2020:~~2021:

(in thousands)

Before Tax

Tax Effect

Net of Tax
Three Months Ended June 30, 2021






Net unrealized gain on AFS securities:






Net unrealized gain arising during the period

$
3,607

$
(842)

$
2,765
Less: reclassification adjustment for gains (losses) realized in net income

50

(12)

38
Net unrealized gain on AFS securities

3,557

(830)

2,727

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 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

$
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


	2022
(in thousands)	Before Tax		Tax Effect		Net of Tax
Three Months Ended June 30, 2022
Net unrealized loss on AFS securities:
Net unrealized loss arising during the period	$	(23,409)	$	5,330	$	(18,079)
Less: reclassification adjustment for gains (losses) realized in net income		—		—		—
Net unrealized loss on AFS securities		(23,409)		5,330		(18,079)

Net unrealized loss on hedging derivatives:
Net unrealized loss arising during the period		(1,997)		460		(1,537)
Less: reclassification adjustment for gains (losses) realized in net income		—		—		—
Net unrealized loss on cash flow hedging derivatives		(1,997)		460		(1,537)

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	$	(25,406)	$	5,790	$	(19,616)

Three Months Ended June 30, 2021
Net unrealized gain on AFS securities:
Net unrealized gain arising during the period	$	3,607	$	(842)	$	2,765
Less: reclassification adjustment for gains (losses) realized in net income		50		(12)		38
Net unrealized gain on AFS securities		3,557		(830)		2,727

Net unrealized gain on derivative hedgess:
Net unrealized gain arising during the period		120		(28)		92
Less: reclassification adjustment for gains (losses) realized in net income		—		—		—
Net unrealized gain on cash flow derivative hedges		120		(28)		92

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	$	3,677	$	(858)	$	2,819

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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


(in thousands)	Before Tax		Tax Effect		Net of Tax
Six Months Ended June 30, 2022
Net unrealized loss on AFS securities:
Net unrealized loss arising during the period	$	(52,244)	$	11,962	$	(40,282)
Less: reclassification adjustment for gains (losses) realized in net income		9		(2)		7
Net unrealized loss on AFS securities		(52,253)		11,964		(40,289)

Net unrealized loss on hedging derivatives:
Net unrealized loss arising during the period		(3,878)		893		(2,985)
Less: reclassification adjustment for gains (losses) realized in net income		—		—		—
Net unrealized gain on hedging derivatives		(3,878)		893		(2,985)

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	$	(56,131)	$	12,857	$	(43,274)

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 realized in net income		50		(12)		38
Net unrealized loss on AFS securities		(3,628)		842		(2,786)

Net unrealized gain on hedging derivatives:
Net unrealized gain arising during the period		2,516		(588)		1,928
Less: reclassification adjustment for gains (losses) realized in net income		—		—		—
Net unrealized gain on cash flow hedging derivatives		2,516		(588)		1,928

Net unrealized loss on post-retirement plans:
Net unrealized loss arising during the period		—		—		—
Less: reclassification adjustment for gains (losses) realized in net income		—		—		—
Net unrealized loss on post-retirement plans		—		—		—
Other comprehensive income	$	(1,112)	$	254	$	(858)

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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 June 30, ~~2021~~2022 and ~~2020:~~2021:


									2022
	Net unrealized		Net loss on		Net unrealized				Net unrealized		Net gain (loss) on		Net unrealized
	gain		effective cash		loss				gain (loss)		effective cash		loss
	on AFS		flow hedging		on pension				on AFS		flow hedging		on pension
(in thousands)	Securities		derivatives		plans		Total		Securities		derivatives		plans		Total
Three Months Ended June 30, 2022
Balance at beginning of period									$	(20,225)	$	(578)	$	(552)	$	(21,355)
Other comprehensive loss before reclassifications										(18,079)		(1,537)		0		(19,616)
Less: amounts reclassified from accumulated other comprehensive income										0		0		0		0
Total other comprehensive income										(18,079)		(1,537)		0		(19,616)
Balance at end of period									$	(38,304)	$	(2,115)	$	(552)	$	(40,971)

Three Months Ended June 30, 2021
Balance at beginning of period	$	4,510	$	372	$	(1,418)	$	3,464	$	4,510	$	(30)	$	(1,418)	$	3,062
Other comprehensive gain before reclassifications		2,765		1,503		0		4,268		2,765		92		0		2,857
Less: amounts reclassified from accumulated other comprehensive income		38		0		0		38		38		0		0		38
Total other comprehensive income		2,727		1,503		0		4,230		2,727		92		0		2,819
Balance at end of period	$	7,237	$	1,875	$	(1,418)	$	7,694	$	7,237	$	62	$	(1,418)	$	5,881

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
Six Months Ended June 30, 2022
Balance at beginning of period	$	10,023	$	2,411	$	(1,418)	$	11,016	$	1,985	$	870	$	(552)	$	2,303
Other comprehensive loss before reclassifications		(2,748)		(536)		0		(3,284)		(40,282)		(2,985)		0		(43,267)
Less: amounts reclassified from accumulated other comprehensive income		38		0		0		38		7		0		0		7
Total other comprehensive loss		(2,786)		(536)		0		(3,322)		(40,289)		(2,985)		0		(43,274)
Balance at end of period	$	7,237	$	1,875	$	(1,418)	$	7,694	$	(38,304)	$	(2,115)	$	(552)	$	(40,971)

Six Months Ended June 30, 2020
Six Months Ended June 30, 2021
Balance at beginning of period	$	5,459	$	(391)	$	(1,157)	$	3,911	$	10,023	$	(1,866)	$	(1,418)	$	6,739
Other comprehensive gain (loss) before reclassifications		7,084		(1,343)		0		5,741
Other comprehensive (loss) gain before reclassifications										(2,748)		1,928		0		(820)
Less: amounts reclassified from accumulated other comprehensive income		1,131		0		0		1,131		38		0		0		38
Total other comprehensive income (loss)		5,953		(1,343)		0		4,610
Less: amounts reclassified from accumulated other comprehensive income for ASU 2018-02		0		0		0		0
Total other comprehensive loss										(2,786)		1,928		0		(858)
Balance at end of period	$	11,412	$	(1,734)	$	(1,157)	$	8,521	$	7,237	$	62	$	(1,418)	$	5,881

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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~~2022 and ~~2020:~~2021:


	Three Months Ended June 30,				Six Months Ended June 30,				Affected Line Item where	Three Months Ended June 30,				Six Months Ended June 30,				Affected Line Item where
(in thousands)	2021		2020		2021		2020		Net Income is Presented	2022		2021		2022		2021		Net Income is Presented
Net realized gains on AFS securities:
Before tax⁽¹⁾	$	50	$	1,351	$	50	$	1,486	Non-interest income	$	—	$	50	$	9	$	50	Non-interest income
Tax effect		(12)		(322)		(12)		(355)	Tax expense		—		(12)		(2)		(12)	Tax expense
Total reclassifications for the period	$	38	$	1,029	$	38	$	1,131		$	—	$	38	$	7	$	38

										Three Months Ended June 30,				Six Months Ended June 30,				Affected Line Item where
(in thousands)										2022		2021		2022		2021		Net Income is Presented
Net realized loss on hedging derivatives:
Before tax										$	—	$	—	$	4,852	$	1,486	Non-interest income
Tax effect											—		—		(917)		(355)	Tax expense
Total reclassifications for the period										$	—	$	—	$	3,935	$	1,131

~~(a)~~(1)

~~Net~~There were 0 net realized gains ~~before tax include $50 thousand realized gains~~or losses for the three ~~and six~~ months ended June 30, 2021. Net realized gains before tax include ~~gross~~$9 thousand 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.~~2022 and 0 gross realized losses.

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NOTE 7. EARNINGS PER SHARE

The following table presents the calculation of earnings per share:


	Three Months Ended				Six Months Ended				Three Months Ended				Six Months Ended
	June 30,				June 30,				June 30,				June 30,
(in thousands, except per share and share data)	2021		2020		2021		2020		2022		2021		2022		2021
Net income	$	9,025	$	8,481	$	18,505	$	16,202	$	10,503	$	9,025	$	19,615	$	18,505

Average number of basic common shares outstanding		14,965,398		15,423,997		14,949,564		15,500,033		15,017,943		14,965,398		15,014,408		14,949,564
Plus: dilutive effect of stock options and awards outstanding		76,427		17,281		76,130		22,960		59,484		76,427		79,219		76,130
Average number of diluted common shares outstanding⁽¹⁾		15,041,825		15,441,278		15,025,694		15,522,993		15,077,427		15,041,825		15,093,627		15,025,694

Earnings per share:
Basic	$	0.60	$	0.55	$	1.24	$	1.05	$	0.70	$	0.60	$	1.31	$	1.24
Diluted	$	0.60	$	0.55	$	1.23	$	1.04	$	0.70	$	0.60	$	1.30	$	1.23

(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~~We use derivative instruments to minimize fluctuations in earnings and cash flows caused by interest rate volatility. ~~The Company’s~~Our 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~~our derivative contracts are considered to be interest rate contracts.

~~The Company recognizes its~~We recognize our derivative instruments on the consolidated balance sheet at fair value. On the date the derivative instrument is entered into, ~~the Company designates~~we designate whether the derivative is part of a hedging relationship (i.e., cash flow or fair value hedge). ~~The Company~~We formally ~~documents~~document relationships between hedging instruments and hedged items, as well as ~~its~~our risk management objective and strategy for undertaking hedge transactions. ~~The Company~~We 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~~We offer 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")~~(MNA) with financial institution counterparties or Risk Participation Agreements ~~("RPA")~~(RPA) with commercial bank counterparties, for which ~~the Company~~we assumes a pro rata share of the credit exposure associated with a borrower's performance related to the derivative contract with the counterparty.

The following tables present information about derivative assets and liabilities at June 30, ~~2021~~2022 and December 31, ~~2020:~~2021:


	June 30, 2021							June 30, 2022
			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		3.5	$	(1,386)	Other liabilities	$	75,000		2.8	$	3,513	Other assets
Interest rate swap on variable rate loans		50,000		4.7		10	Other assets		50,000		4.0		(3,754)	Other liabilities
Total cash flow hedges		125,000				(1,376)			125,000				(241)

Fair value hedges:
Interest rate swap on securities		37,190		7.0		1,183	Other assets		37,190		7.3		3,154	Other assets
Total fair value hedges		37,190				1,183			37,190				3,154

Economic hedges:
Forward sale commitments		14,635		0.1		(45)	Other liabilities		7,000		—		(11)	Other liabilities
Customer Loan Swaps-MNA Counterparty		262,271		6.3		(10,845)	Other liabilities		191,757		6.6		(14,000)	Other liabilities
Customer Loan Swaps-RPA Counterparty		119,285		7.4		(6,621)	Other liabilities		107,103		7.1		(364)	Other liabilities
Customer Loan Swaps-Customer		381,556		6.6		17,466	Other assets		298,860		6.8		14,364	Other assets
Total economic hedges		777,747				(45)			604,720				(11)

Non-hedging derivatives:
Interest rate lock commitments		10,464		0.1		25	Other assets		3,324		0.3		50	Other assets
Total non-hedging derivatives		10,464				25			3,324				50

Total	$	950,401			$	(213)		$	770,234			$	2,952

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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


	December 31, 2021
			Weighted
	Notional		Average		Fair Value		Location Fair
	Amount		Maturity		Asset (Liability)		Value Asset
	(in thousands)		(in years)		(in thousands)		(Liability)
Cash flow hedges:
Interest rate swap on wholesale fundings	$	75,000		3.0	$	(121)	Other liabilities
Interest rate swap on variable rate loans		50,000		4.2		(756)	Other liabilities
Total cash flow hedges		125,000				(877)

Fair value hedges:
Interest rate swap on securities		37,190		7.6		(530)	Other liabilities
Total fair value hedges		37,190				(530)

Economic hedges:
Forward sale commitments		16,600		0.1		15	Other assets
Customer Loan Swaps-MNA Counterparty		260,102		6.2		(9,429)	Other liabilities
Customer Loan Swaps-RPA Counterparty		115,285		6.7		(4,421)	Other liabilities
Customer Loan Swaps-Customer		375,387		6.4		13,850	Other assets
Total economic hedges		767,374				15

Non-hedging derivatives:
Interest rate lock commitments		14,059		0.1		283	Other assets
Total non-hedging derivatives		14,059				283

Total	$	943,623			$	(1,109)

As of June 30, ~~2021~~2022 and December 31, ~~2020,~~2021, 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		Carrying Amount		Balance Sheet	Assets		Carrying Amount
June 30, 2021
June 30, 2022
Interest rate swap on securities	Securities Available for Sale	$	39,831	$	2,641	Securities Available for Sale	$	31,530	$	(5,660)

December 31, 2020
December 31, 2021
Interest rate swap on securities	Securities Available for Sale	$	40,209	$	3,019	Securities Available for Sale	$	39,726	$	2,536

4435

Table of Contents

Information about derivative assets and liabilities for the three and six months ~~ended~~eneded June 30, ~~2021~~2022 and ~~2020,~~December 31, 2021, follows:


	Three Months Ended June 30, 2021								Three Months Ended June 30, 2022
	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	$	(1,056)	Interest expense	$	—	Interest expense	$	(196)	$	605	Interest expense	$	—	Interest expense	$	(28)
Interest rate swap on variable rate loans		221	Interest income		—	Interest income		89		(510)	Interest income		—	Interest income		(17)
Total cash flow hedges		(835)			—			(107)		95			—			(45)

Fair value hedges:
Interest rate swap on securities		1,288	Interest income		—	Interest income		(140)		(1,632)	Interest income		—	Interest income		(68)
Total fair value hedges		1,288			—			(140)		(1,632)			—			(68)

Economic hedges:
Forward commitments		—	Other income		—	Other income		40		—	Other income		—	Mortgage banking income		(213)
Total economic hedges		—			—			40		—			—			(213)

Non-hedging derivatives:
Interest rate lock commitments		—	Other income		—	Other income		(20)		—	Other expense		—	Mortgage banking income		55
Total non-hedging derivatives		—			—			(20)		—			—			55

Total	$	453		$	—		$	(227)	$	(1,537)		$	—		$	(271)

4536

Table of Contents


	Six Months Ended June 30, 2021									Six Months Ended June 30, 2022
	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	$	(981)	Interest expense		$	—	Interest expense	$	(384)	$	2,796	Interest expense	$	—	Interest expense	$	(141)
Interest rate swap on variable rate loans		(1,246)	Interest income			—	Interest income		97		(2,308)	Interest income		—	Interest income		(1)
Total cash flow hedges		(2,227)				—			(287)		488			—			(142)

Fair value hedges:
Interest rate swap on securities		(1,525)	Interest income			—	Interest income		(276)		(3,473)	Interest income		—	Interest income		(203)
Total fair value hedges		(1,525)				—			(276)		(3,473)			—			(203)

Economic hedges:
Forward commitments		—	Other income			—	Other income		50		—	Other income		—	Mortgage banking income		(26)
Total economic hedges		—		��		—			50		—			—			(26)

Non-hedging derivatives:
Interest rate lock commitments		—	Other income			—	Other income		4		—	Other income		—	Mortgage banking income		(233)
Total non-hedging derivatives		—				—			4		—			—			(233)

Total	$	(3,752)			$	—		$	(509)	$	(2,985)		$	—		$	(604)

Table of Contents


	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	$	(6)	Interest expense	$	—	Interest expense	$	(196)
Interest rate swap on variable rate loans		221	Interest income			Interest income		89
Total cash flow hedges		215			—			(107)

Fair value hedges:
Interest rate swap on securities		(122)	Interest income		—	Interest income		(140)
Total economic hedges		(122)			—			(140)

Economic hedges:
Forward commitments		—	Other income		—	Mortgage banking income		40
Total economic hedges		—			—			40

Non-hedging derivatives:
Interest rate lock commitments		—	Other income		—	Mortgage banking income		(20)
Total non-hedging derivatives		—			—			(20)

Total	$	93		$	—		$	(227)

Table of Contents


	Six 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⁽¹⁾		Comprehensive Income	Income		Income	in Income
Cash flow hedges:
Interest rate swap on wholesale funding	$	981	Interest expense	$	—	Interest expense	$	(384)
Interest rate swap on variable rate loans		8	Interest income			Interest income		97
Total cash flow hedges		989			—			(287)

Fair value hedges:
Interest rate swap on securities		941	Interest income		—	Interest income		(276)
Total economic hedges		941			—			(276)

Economic hedges:
Forward commitments		—	Other income		—	Mortgage banking income		50
Total economic hedges		—			—			50

Non-hedging derivatives:
Interest rate lock commitments		—	Other income		—	Mortgage banking income		4
Total non-hedging derivatives		—			—			4

Total	$	1,930		$	—		$	(509)

Table of Contents

The effect of cash flow hedging and fair value accounting on the consolidated statements of income for the three and six months ended June 30, 2022 and 2021:


	Three Months Ended June 30, 2022
	Interest and Dividend Income				Interest Expense
(in thousands)	Loans		Securities and other		Deposits		Borrowings		Non-interest Income
Income and expense line items presented in the consolidated statements of income	$	24,581	$	4,207	$	1,195	$	1,074	$	8,961

The effects of cash flow and fair value hedging:

Gain (loss) on cash flow hedges:
Interest rate swap on wholesale funding		—		—		—		(28)		—
Interest rate swap on variable rate loans		(17)		—		—		—		—

Gain (loss) on fair value hedges:
Interest rate swap on securities		—		(68)		—		—		—

	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 expense 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)		—		—		—

Table of Contents


	Six Months Ended June 30, 2022
	Interest and Dividend Income				Interest Expense
(in thousands)	Loans		Securities and other		Deposits		Borrowings		Non-interest Income
Income and expense line items presented in the consolidated statements of income	$	47,252		8,033	$	2,384		2,084	$	18,270

The effects of cash flow and fair value hedging:

Gain (loss) on cash flow hedges:
Interest rate swap on wholesale funding		—		—		—		(141)		—
Interest rate swap on variable rate loans		(1)		—		—		—		—

Gain (loss) on fair value hedges:
Interest rate swap on securities		—		(203)		—		—		—

	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 expense 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)		—		—		—

Cash flow hedges

Interest rate swaps on wholesale funding

As of June 30, 2022 we have 2 interest rate swaps on wholesale borrowings (the "SWAPS") to limit our 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. The first of the 2 agreements were entered in November 2019 with a $50.0 million notional amount and pays a fixed interest rate of 1.53%. A second agreement was entered on April 2020 with a $25.0 million notional amount and pays a fixed rate of 0.59%. The financial institution counterparty pays us interest on the three-month LIBOR rate. We designated the swaps as cash flow hedges.

Interest rate swap on variable rate loans

We have an interest rate swap that effectively fixes our 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 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 our variable rate loan assets equal to $50 million. We designated the swap as a cash flow hedge.

Table of Contents

Fair value hedges

Interest rate swap on securities

For derivative instruments that are designated and qualify as a fair value hedge, the gain or loss on the derivative instrument as well as the offsetting loss or gain on the hedged asset or liability attributable to the hedged risk are recognized in current earnings. We utilize 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, we 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

We utilize 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. We typically use a combination of best efforts and mandatory delivery contracts. The contracts are loan sale agreements where we commit to deliver a certain principal amount of mortgage loans to an investor at a specified price on or before a specified date. Generally, we enter into contracts just prior to the loan closing with a customer.

Customer loan derivatives

We enter into customer loan derivatives to facilitate the risk management strategies for commercial banking customers. We mitigate 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 our consolidated balance sheet. We are party to master netting arrangements with our financial institutional counterparties; however, we do not offset assets and liabilities under these arrangements for financial statement presentation purposes.

The ~~Company expects approximately $323 thousand~~master netting arrangements provide for a single net settlement of ~~losses (pre-tax) related~~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.


	Gross Amounts Offset in the Consolidated Balance Sheet
	Derivative				Cash Collateral
(in thousands)	Liabilities		Derivative Assets		Pledged		Net Amount
As of June 30, 2022
Customer Loan Derivatives:
MNA counterparty	$	(14,000)	$	14,000	$	—	$	—
RPA counterparty		(364)		364		—		—
Total	$	(14,364)	$	14,364	$	—	$	—


	Gross Amounts Offset in the Consolidated Balance Sheet
	Derivative				Cash Collateral
(in thousands)	Liabilities		Derivative Assets		Pledged		Net Amount
As of December 31, 2021
Customer Loan Derivatives:
MNA counterparty	$	(9,429)	$	9,429	$	12,000	$	12,000
RPA counterparty		(4,421)		4,421		—		—
Total	$	(13,850)	$	13,850	$	12,000	$	12,000

Table of Contents

Non-hedging derivatives

Interest rate lock commitments

We enter into interest rate lock commitments (IRLCs) for residential mortgage loans, which commit us to lend funds to a potential borrower at a specific interest rate and within a specified period of time. IRLCs relate to the ~~Company’s cash flow hedges~~origination of residential mortgage loans that are held for sale are considered derivative financial instruments under applicable accounting guidance. Outstanding IRLCs expose us to ~~be reclassified to earnings from AOCI over~~ the ~~next 12 months. This reclassification is~~risk that the price of the mortgage loans underlying the commitments may decline due to ~~anticipated payments that~~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 our 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 ~~be made and/or received on~~fund within the ~~swaps based upon~~terms of the ~~forward curve as~~commitment, which is affected primarily by changes in interest rates and the passage of ~~June 30, 2021.~~time.

4643

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

~~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)

—

—

—

~~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~~

As of June 30, 2021 the Company has 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. The first of the 2 agreements were entered in November 2019 with a $50.0 million notional amount and pays a fixed interest rate of 1.53%. A second agreement was entered on April 2020 with a $25.0 million notional amount and pays a fixed rate of 0.59%. The financial institution counterparty pays the Company interest on the three-month LIBOR rate. The Company designated the swaps as a cash flow hedge.

~~Interest rate swap on variable rate loans~~

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

~~Table of Contents~~

~~Fair value hedges~~

~~Interest rate swap on securities~~

For derivative instruments that are designated and qualify as a fair value hedge, the gain or loss on the derivative instrument as well as the offsetting loss or gain on the hedged asset or liability attributable to the hedged risk are recognized in current earnings. The Company utilizes interest rate swaps designated as fair value hedges to mitigate the effect of changing interest rates on the fair values of fixed rate callable securities available-for-sale. The hedging strategy on securities 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 $14.7 million with counterparties.

Gross Amounts Offset in the Consolidated Balance Sheet

Derivative

Cash Collateral

(in thousands)

Liabilities

Derivative Assets

Pledged

Net Amount
As of June 30, 2021









Customer Loan Derivatives:








MNA counterparty

$
(10,845)

$
10,845

$
14,700

$
14,700
RPA counterparty

(6,621)

6,621

—

—
Total

$
(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

~~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.

~~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 June 30, ~~2021~~2022 and December 31, ~~2020,~~2021, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value:


	June 30, 2021								June 30, 2022
	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	$	198,361	$	0	$	198,361	$	—	$	227,362	$	—	$	227,362
US Government agency		0		66,343		0		66,343		0		84,972		0		84,972
Private label		0		73,535		0		73,535		—		71,911		—		71,911
Obligations of states and political subdivisions thereof		0		188,153		0		188,153		0		115,967		0		115,967
Corporate bonds		0		95,457		0		95,457		0		85,930		0		85,930
Loans held for sale										—		3,539		—		3,539
Derivative assets		0		18,659		25		18,684		0		21,031		50		21,081
Derivative liabilities		0		(18,852)		(45)		(18,897)		0		(18,118)		(11)		(18,129)


	December 31, 2020								December 31, 2021
	Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3		Total
(in thousands)	Inputs		Inputs		Inputs		Fair Value		Inputs		Inputs		Inputs		Fair Value
Available for sale securities:
Mortgage-backed securities:
US Government-sponsored enterprises	$	—	$	212,390	$	—	$	212,390	$	—	$	236,117	$	—	$	236,117
US Government agency		—		85,632		—		85,632		—		79,637		—		79,637
Private label		—		19,709		—		19,709		—		68,695		—		68,695
Obligations of states and political subdivisions thereof		—		169,004		—		169,004		—		141,776		—		141,776
Corporate bonds		—		98,311		—		98,311		—		92,051		—		92,051
Loans held for sale										—		5,523		—		5,523
Derivative assets		—		28,684		22		28,706		—		13,850		298		14,148
Derivative liabilities		—		(28,559)		(95)		(28,654)		—		(15,257)		—		(15,257)

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~~we obtain 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.

Loans Held for Sale:The valuation of the Company’s loans held for sale are determined on an individual basis using quoted secondary market prices and are classified as Level 2 measurements.

Derivative Assets and Liabilities

Cash Flow ~~and Fair Value~~ Hedges. The valuation of ~~the Company's~~our 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.

Table of Contents

Interest Rate Lock Commitments. ~~The Company enters~~We enter into IRLCs for residential mortgage loans, which commit ~~the Company~~us to lend funds to a potential ~~borrower~~borrowers at a specific interest rate and within a specified period of time. The estimated

~~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~~We utilize 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~~our 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~~We incorporate credit valuation adjustments to appropriately reflect ~~both its own~~our nonperformance risk and the respective counterparty’s nonperformance risk in the fair value measurements. In adjusting the fair value of ~~its~~the derivative contracts for the effect of nonperformance risk, ~~the Company has~~we have considered the impact of master netting arrangements and any applicable credit enhancements, such as collateral postings.

Although ~~the Company has~~we have determined that the majority of the inputs used to value ~~its~~ customer loan derivatives fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with ~~its~~ derivatives utilize Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default by itself and ~~its~~ counterparties. However, as of June 30, ~~2021, the Company~~2022, we assessed the significance of the impact of the credit valuation adjustments on the overall valuation of ~~its~~our derivative positions and determined that the credit valuation adjustments are not significant to the overall valuation of ~~its~~our derivatives. As a result, ~~the Company~~we determined that ~~its~~the derivative valuations in their entirety are classified in Level 2 of the fair value hierarchy.

~~The table below presents the changes in Level 3 assets and liabilities that were measured at fair value on a recurring basis for the three and six months ended June 30, 2021:~~

Assets (Liabilities)

Interest Rate Lock

Forward
(in thousands)

Commitments

Commitments
Three Months Ended June 30, 2021





Balance at beginning of period

$
46

$
(85)
Realized gain recognized in non-interest income

(21)

40
Balance at end of period

$
25

$
(45)

Three Months Ended June 30, 2020





Balance at beginning of period

$
93

$
(73)
Realized gain recognized in non-interest income

(30)

(53)
Balance at end of period

$
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)

5345

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The table below presents the changes in Level 3 assets and liabilities that were measured at fair value on a recurring basis for the three and six months ended June 30, 2022:


	Assets (Liabilities)
	Interest Rate Lock		Forward
(in thousands)	Commitments		Commitments
Three Months Ended June 30, 2022
Balance at beginning of period	$	(5)	$	15
Realized gain (loss) recognized in non-interest income		55		(26)
Balance at end of period	$	50	$	(11)

Three Months Ended June 30, 2021
Balance at beginning of period	$	46	$	(85)
Realized (loss) gain recognized in non-interest income		(21)		40
Balance at end of period	$	25	$	(45)

Six Months Ended June 30, 2022
Balance at beginning of period	$	283	$	15
Realized loss recognized in non-interest income		(233)		(26)
Balance at end of period	$	50	$	(11)

Six Months Ended June 30, 2021
Balance at beginning of period	$	22	$	(95)
Realized gain recognized in non-interest income		3		50
Balance at end of period	$	25	$	(45)

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


							Significant			Fair Value		Fair Value				Significant
	Fair Value		Fair Value				Unobservable			June 30,		December 31,		Valuation	Unobservable	Unobservable
(in thousands, except ratios)	June 30, 2021		December 31, 2020		Valuation Techniques	Unobservable Inputs	Input Value			2022		2021		Techniques	Inputs	Input Value
Assets (Liabilities)
Interest Rate Lock Commitment	$	25	$	22	Historical trend	Closing Ratio		90	%	$	50	$	283	Pull-through Rate Analysis	Closing Ratio		93	%
					Pricing Model	Origination Costs, per loan	$	1.7						Pricing Model	Origination Costs, per loan	$	1.7
														Discount Cash Flows	Mortgage Servicing Asset		1.0	%

Forward Commitments		(45)		(95)	Quoted prices for similar loans in active markets	Freddie Mac pricing system		Pair-off contract price			(11)		15	Quoted prices for similar loans in active markets	Freddie Mac pricing system		$99.3 to $102.8
Total	$	(20)	$	(73)						$	39	$	298

Table of Contents

Non-Recurring Fair Value Measurements

~~The Company is~~We are 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:



	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	June 30, 2022		December 31, 2021		Three Months Ended June 30, 2022		Six Months Ended June 30, 2022		Fair Value Measurement Date as of June 30, 2022
	Level 3		Level 3		Total		Total		Level 3	Level 3		Level 3		Total		Total		Level 3
(in thousands)	Inputs		Inputs		Gains (Losses)		Gains (Losses)		Inputs	Inputs		Inputs		Gains (Losses)		Gains (Losses)		Inputs
Assets
Individually evaluated loans	$	10,348	$	8,746	$	208	$	(1,602)	June 2021	$	13,610	$	17,932	$	0	$	(4,322)	June 2022
Capitalized servicing rights		4,731		3,605		(38)		(1,126)	June 2021		7,043		5,263		265		1,780	June 2022
Premises held for sale		971		962		0		(9)	December 2020		327		226		0		101	February 2022
Total	$	16,050	$	13,313	$	170	$	(2,737)		$	20,980	$	23,421	$	265	$	(2,441)

There are 0 liabilities measured at fair value on a non-recurring basis in ~~2021~~2022 and ~~2020.~~2021.

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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 June 30, 2021

Valuation Techniques

Unobservable Inputs

Range (Weighted Average)^(a)

Fair Value June 30, 2022

Valuation Techniques

Unobservable Inputs

Range (Weighted Average)^(a)

Assets

Individually evaluated loans

7,226

Fair value of collateral-appraised value

Loss severity

10% to 70%

8,070

Fair value of collateral-appraised value

Loss severity

10% to 70%

Appraised value

$71 to $1,792

Appraised value

$71 to $1,175

Individually evaluated loans

3,122

Discount cash flow

Discount rate

2.88% to 9.50%

5,540

Discount cash flow

Discount rate

2.88% to 6.45%

Cash flows

$7 to $959

Cash flows

$5 to $943

Capitalized servicing rights

4,731

Discounted cash flow

Constant prepayment rate (CPR)

15.14

7,043

Discounted cash flow

Constant prepayment rate (CPR)

7.18%

Discount rate

9.54

Discount rate

9.04%

Premises held for sale

971

Fair value of asset less selling costs

Appraised value

$220 to $386

327

Fair value of asset less selling costs

Appraised value

$347

Selling Costs

Total

16,050

20,980

~~(b)~~(a)

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

~~(c)~~

~~The carrying value of premises held for sale was $0.0 million as of 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



(in thousands, except ratios)	Fair Value December 31, 2021		Valuation Techniques	Unobservable Inputs	Range (Weighted Average)^(a)
Assets
Individually evaluated loans	$	12,127	Fair value of collateral-appraised value	Loss severity		10% to 70%
				Appraised value		$71 to $1,792

Individually evaluated loans		5,805	Discount cash flow	Discount rate		2.88% to 9.50%
				Cash flows		$6 to $931

Capitalized servicing rights		5,263	Discounted cash flow	Constant prepayment rate (CPR)		12.47%
				Discount rate		9.53%

Premises held for sale		226	Fair value of asset less selling costs	Appraised value		$240
				Selling Costs		6%
Total	$	23,421

(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 June 30, ~~2021~~2022 and December 31, ~~2020.~~2021.

5548

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Individually evaluated loans. Loans are generally not recorded at fair value on a recurring basis. Periodically, ~~the Company records~~we record 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”).~~or OREO. OREO results from the foreclosure process on residential or commercial loans issued by the Company. Upon assuming the real estate, ~~the Company records~~we record 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~~our 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~~our financial instruments are included in the table below. Certain financial instruments and all non-financial instruments are excluded from disclosure requirements. Accordingly, the aggregate fair value amounts presented herein may not necessarily represent the underlying fair value of the Company.


	June 30, 2021										June 30, 2022
	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	$	173,718	$	173,718	$	173,718	$	0	$	0	$	67,116	$	67,116	$	67,116	$	—	$	—
Securities available for sale		621,849		621,849		0		621,849		0		586,142		586,142		—		586,142		—
FHLB stock		14,145		14,145		0		14,145		0		6,572		6,572		—		6,572		—
Loans held for sale		7,942		7,942		0		0		7,942		3,539		3,539		—		3,539		—
Net loans		2,492,745		2,472,108		0		0		2,472,108		2,703,518		2,620,097		—		—		2,620,097
Accrued interest receivable		3,381		3,381		0		3,381		0		3,124		3,124		—		3,124		—
Cash surrender value of bank-owned life insurance policies		78,886		78,886		0		78,886		0		80,262		80,262		—		80,262		—
Derivative assets		18,684		18,684		0		18,659		25		21,081		21,081		—		21,031		50

Financial Liabilities
Non-maturity deposits	$	2,351,715	$	2,326,202	$	0	$	2,326,202	$	0	$	2,716,639	$	2,476,000	$	—	$	2,476,000	$	—
Time deposits		470,758		469,775		0		469,775		0		361,906		355,000		—		355,000		—
Securities sold under agreements to repurchase		17,389		17,389		0		17,389		0		18,754		18,754		—		18,754		—
FHLB advances		262,602		266,290		0		266,290		0		98,593		98,248		—		98,248		—
Subordinated borrowings		60,042		62,164		0		62,164		0		60,206		69,722		—		69,722		—
Derivative liabilities		18,897		18,897		0		18,852		45		18,129		18,129		—		18,118		11

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


	December 31, 2021
	Carrying		Fair
(in thousands)	Amount		Value		Level 1		Level 2		Level 3
Financial Assets
Cash and cash equivalents	$	250,389	$	250,389	$	250,389	$	—	$	—
Securities available for sale		618,276		618,276		—		618,276		—
FHLB stock		7,384		7,384		—		7,384		—
Loans held for sale		5,523		5,523		—		5,523		—
Net loans		2,509,192		2,442,741		—		—		2,442,741
Accrued interest receivable		2,712		2,712		—		2,712		—
Cash surrender value of bank-owned life insurance policies		79,020		79,020		—		79,020		—
Derivative assets		14,148		14,148		—		13,850		298

Financial Liabilities
Non-maturity deposits	$	2,623,012	$	2,853,000	$	—	$	2,853,000	$	—
Time deposits		425,532		424,000		—		424,000		—
Securities sold under agreements to repurchase		19,802		19,802		—		19,802		—
FHLB advances		98,598		98,439		—		98,439		—
Subordinated borrowings		60,124		61,884		—		61,884		—
Derivative liabilities		15,257		15,257		—		15,257		—

5750

Table of Contents

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

~~The Company has accounted~~We account for ~~the~~our various non-interest revenue streams and related contracts under ASC 606. Revenue from contracts with customers is based on the consideration specified in the contract with a customer and excludes amounts collected on behalf of third parties. Revenue is recognized when we satisfy our performance obligation, which is generally when services are rendered and can be either satisfied at a point in time or over time. We recognize revenue at a point in time that is transactional in nature. We recognize revenue over time that is earned as services are performed and performance obligations are satisfied over time.

A substantial portion of our revenue is specifically excluded from the scope of Topic 606. This exclusion is associated with financial instruments, including interst income on loans and investment securities, in addition to loan derivative income and gains on loan and investment sales.

Disaggregation of Revenue

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


	Three Months Ended June 30,				Six Months Ended June 30,				Three Months Ended June 30,				Six Months Ended June 30,
(in thousands)	2021		2020		2021		2020		2022		2021		2022		2021
Major Products/Service Lines
Trust management fees	$	3,474	$	2,892	$	6,649	$	5,938	$	3,462	$	3,474	$	6,865	$	6,649
Financial services fees		327		267		818		590		367		327		718		818
Interchange fees		1,915		1,463		3,627		3,200		1,921		1,915		3,895		3,627
Customer deposit fees		1,130		789		2,179		1,899		1,470		1,130		2,841		2,179
Other customer service fees		212		187		421		452		265		212		536		421
Total	$	7,058	$	5,598	$	13,694	$	12,079	$	7,485	$	7,058	$	14,855	$	13,694


	Three Months Ended June 30,				Six Months Ended June 30,				Three Months Ended June 30,				Six Months Ended June 30,
(in thousands)	2021		2020		2021		2020		2022		2021		2022		2021
Timing of Revenue Recognition
Products and services transferred at a point in time	$	3,570	$	2,620	$	6,856	$	5,892	$	3,978	$	3,570	$	7,735	$	6,856
Products and services transferred over time		3,488		2,978		6,838		6,187		3,507		3,488		7,120		6,838
Total	$	7,058	$	5,598	$	13,694	$	12,079	$	7,485	$	7,058	$	14,855	$	13,694

Trust Management Fees

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

Financial Services Fees

Bar Harbor Financial Services is a branch office of Infinex, an independent registered broker dealer offering securities and insurance products not affiliated with the Company or its subsidiaries. ~~The Company has~~We have 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~~We earn 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.

Table of Contents

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.

~~Table of Contents~~

Other Customer Service Fees

~~The Company has~~We have 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~~We also ~~earns~~earn 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)	June 30, 2021		December 31, 2020		June 30, 2022		December 31, 2021
Balances from contracts with customers only:
Other Assets	$	1,190	$	1,121	$	1,321	$	1,184
Other Liabilities		2,545		2,785		2,756		2,324

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~~we have 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~~We currently ~~expenses~~expense contract costs for processing and administrative fees for debit card transactions. ~~The Company~~We also ~~expenses~~expense custody fees and transactional costs associated with securities transactions as well as third party tax preparation fees. ~~The Company has~~We have elected the practical expedient in ASC 340-40-25-4, whereby ~~the Company recognizes~~we recognize the incremental costs of obtaining contracts as an expense when incurred if the amortization period of the assets ~~the Company~~we 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~~Most of ~~the~~our leases ~~pursuant to which the Company is the lessee~~ are ~~comprised of real estate property~~ for branches, ATM locations, and office space ~~with~~and have 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~~right- of-use (“ROU”) asset with a corresponding lease ~~liability using the modified retrospective approach.~~

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

●	~~Package of practical expedients:~~

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

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

~~No re-assessment of previously recorded initial direct lease costs.~~

●	~~Election to exclude short-term leases (i.e., leases with initial terms of twelve months or less), from capitalization on the consolidated balance sheets.~~

liability.

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


(in thousands)	Classification	June 30, 2021		December 31, 2020		Classification	June 30, 2022		December 31, 2021
Lease Right-of-Use Assets
Operating lease right-of-use assets	Other assets	$	9,773	$	10,338	Other assets	$	8,681	$	9,274

Lease Liabilities
Operating lease liabilities	Other liabilities		10,107		10,627	Other liabilities		9,080		9,643

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~~our discretion. If at lease inception, ~~the Company considers~~we consider the exercising of a renewal option to be reasonably certain, ~~the Company~~we will include the extended term in the calculation of the ROU asset and lease liability. If there are multiple renewals typically only the next lease renewal is considered. Regarding the discount rate, ASC 842 requires the use of the rate implicit in the lease whenever this rate is readily determinable. As this rate is rarely determinable, the Company utilizes its incremental borrowing rate at lease inception, on a collateralized basis, over a similar term.

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


	June 30, 2021		December 31, 2020		June 30, 2022		December 31, 2021
Weighted-average remaining lease term (in years)
Operating leases	8.80		9.26		7.61		8.03

Weighted-average discount rate
Operating leases	3.15	%	3.15	%	3.09	%	3.07	%

~~Table of Contents~~

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


	Three Months Ended				Six Months Ended				Three Months Ended				Six Months Ended
(in thousands)	June 30, 2021		June 30, 2020		June 30, 2021		June 30, 2020		June 30, 2022		June 30, 2021		June 30, 2022		June 30, 2021
Lease Costs
Operating lease cost	$	322	$	323	$	642	$	644	$	335	$	322	$	656	$	642
Variable lease cost		55		62		136		118		62		55		274		136
Total lease cost	$	377	$	385	$	778	$	762	$	397	$	377	$	930	$	778

Table of Contents

Future minimum payments for operating leases with initial or remaining terms of one year or more as of June 30, ~~2021~~2022 are, as follows:


(in thousands)	Payments		Payments
Twelve Months Ended:
June 30, 2022	$	1,307
June 30, 2023		1,319	$	1,345
June 30, 2024		1,327		1,353
June 30, 2025		1,176		1,186
June 30, 2026		1,073		1,073
June 30, 2027				913
Thereafter		4,531		3,618
Total future minimum lease payments		10,733		9,488
Amounts representing interest		(626)		(408)
Present value of net future minimum lease payments	$	10,107	$	9,080

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

GENERAL

~~Management’s~~The following is management’s discussion and analysis ~~is intended to assist in understanding~~of the ~~financial condition and~~major factors that influenced our results of operations and financial condition as of and for the ~~Company. The following discussion~~three and six months ended June 30, 2022. This 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'sour Annual Report on Form 10-K for the year ended December 31, ~~2020.~~2021 and with the unaudited consolidated financial statements and notes thereto set forth in this Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2022.

Bar Harbor Bankshares (the "Company" or “we”) 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. AsHaving recently celebrated the ~~Company approaches the~~ 135thanniversary of ~~its~~our founding, ~~they have not forgotten that~~we remain focused on helping our customers achieve their goals isas the key to the Bank’s success. ~~The Company delivers banking, lending~~With over 500 dedicated professionals and ~~wealth management services from~~ more than 50 ~~locations. The Company’s~~locations, we are committed to servicing and building enduring relationships by providing a higher standard of banking. We offer a variety of financial products and services designed around our customers in order to serve their banking and financial needs. Through these efforts, we continue to be a relationship-focused community bank, maintaining our credit quality and serving businesses, entrepreneurs and individuals within our footprint. Our corporate goal is to be ~~among~~one of the ~~most profitable~~top performing banks in New England, and ~~its~~our 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~~our 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~~our 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 aour profile ~~of the Company~~ as of June 30, ~~2021:~~2022:

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SELECTED FINANCIAL DATA

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

Three Months Ended

Six Months Ended

June 30,

June 30,


2021

2020


2021

2020

PER SHARE DATA

Net earnings, diluted

$
0.60

$
0.55

$
1.23

$
1.04

Adjusted earnings, diluted⁽¹⁾

0.63

0.56

1.32

1.06

Total book value

27.76

26.56

27.76

26.56

Tangible book value⁽¹⁾

19.30

18.18

19.30

18.18

Market price at period end

28.62

22.39

28.62

22.39

Dividends

0.24

0.22

0.46

0.44

PERFORMANCE RATIOS⁽²⁾

Return on assets

0.97
%

0.90
%

1.00
%

0.86
%
Adjusted return on assets⁽¹⁾

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

8.76

8.40

9.10

8.02

Adjusted return on equity⁽¹⁾

9.13

8.52

9.75

8.12

Adjusted return on tangible equity⁽¹⁾

13.42

12.72

14.37

12.13

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

2.74

2.93

2.81

3.02

Adjusted net interest margin^{(1) (2) (5)}

2.67

2.92

2.72

3.03

Efficiency ratio⁽¹⁾

63.45

60.67

62.20

62.74

GROWTH (Year-to-date annualized)⁽¹⁾

Total commercial loans

9
%

33
%

9
%

33
%
Total loans

(4)

5

(4)

5

Total deposits

(6)

(0)

(6)

(0)

FINANCIAL DATA (In millions)

Total assets

$
3,640

$
3,780

$
3,640

$
3,780

Total earning assets⁽⁴⁾

3,274

3,414

3,274

3,414

Total investments

636

662

636

662

Total loans

2,516

2,706

2,516

2,706

Allowance for loan losses

23

17

23

17

Total goodwill and intangible assets

127

128

127

128

Total deposits

2,822

2,695

2,822

2,695

Total shareholders' equity

416

404

416

404

Net income

9

8

19

16

Adjusted income⁽¹⁾

9

9

20

16

ASSET QUALITY AND CONDITION RATIOS

Net charge-offs (annualized)/average loans

0.01
%

0.02
%

0.02
%

0.10
%
Allowance for credit losses/total loans

0.91

0.61

0.91

0.61

Loans/deposits

89

100

89

100

Shareholders' equity to total assets

11.42

10.69

11.42

10.69

Tangible shareholders' equity to tangible assets⁽¹⁾

8.23

7.57

8.23

7.57


	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2022			2021			2022			2021
PER SHARE DATA
Net earnings, diluted	$	0.70		$	0.60		$	1.30		$	1.23
Adjusted earnings, diluted⁽¹⁾		0.70			0.63			1.30			1.32
Total book value		26.19			27.64			26.19			27.76
Tangible book value⁽¹⁾		17.83			19.17			17.83			19.30
Market price at period end		25.86			28.62			25.86			28.62
Dividends		0.26			0.24			0.50			0.46

PERFORMANCE RATIOS⁽²⁾
Return on assets		1.14	%		0.97	%		1.07	%		1.00	%
Adjusted return on assets⁽¹⁾		1.14			1.01			1.07			1.07
Pre-tax, pre-provision return on assets		1.50			1.13			1.39			1.17
Adjusted pre-tax, pre-provision return on assets ⁽¹⁾		1.50			1.18			1.40			1.27
Return on equity		10.58			8.77			9.72			9.10
Adjusted return on equity⁽¹⁾		10.59			9.14			9.74			9.75
Return on tangible equity		15.74			12.91			14.33			13.44
Adjusted return on tangible equity⁽¹⁾		15.76			13.45			14.37			14.37
Net interest margin, fully taxable equivalent (FTE)^{(1) (3)}		3.19			2.74			3.07			2.81
Adjusted net interest margin⁽¹⁾		3.19			2.67			3.07			2.73
Efficiency ratio⁽¹⁾		59.25			63.45			60.78			62.20

FINANCIAL DATA (In millions)
Total assets	$	3,716		$	3,639		$	3,716		$	3,639
Total earning assets⁽⁴⁾		3,399			3,282			3,399			3,282
Total investments		593			636			593			636
Total loans		2,727			2,516			2,727			2,516
Allowance for credit losses		24			23			24			23
Total goodwill and intangible assets		126			127			126			127
Total deposits		3,079			2,822			3,079			2,822
Total shareholders' equity		394			414			394			414
Net income		11			9			20			19
Adjusted income⁽¹⁾		11			9			20			20

ASSET QUALITY AND CONDITION RATIOS
Net (recoveries) charge-offs (annualized)/average loans		—	%		0.01	%		(0.01)	%		0.02	%
Allowance for credit losses/total loans		0.87			0.91			0.87			0.91
Loans/deposits		89			89			89			89
Shareholders' equity to total assets		10.59			11.37			10.59			11.42
Tangible shareholders' equity to tangible assets⁽¹⁾		7.46			8.17			7.46			8.23

(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.

~~Table of Contents~~

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

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 June 30, ~~2021~~2022 on an annualized basis:

LOAN ANALYSIS

Annualized Growth %
(in thousands, except ratios)

Jun 30, 2021

Mar 31, 2021

Dec 31, 2020

Sep 30, 2020

Jun 30, 2020

Quarter To Date

Year To Date
Commercial real estate

$
1,135,857

$
1,118,669

$
1,084,381

$
1,045,635

$
982,070

6
%

9
%
Commercial and industrial

327,729

317,500

323,864

324,647

340,898

13

2

Paycheck Protection Program (PPP)

65,918

77,878

53,774

131,537

131,626

(61)

45

Total commercial loans

1,529,504

1,514,047

1,462,019

1,501,819

1,454,594

4

9

Total commercial loans, excluding PPP

1,463,586

1,436,169

1,408,245

1,370,282

1,322,968

8

8

Residential real estate

822,774

868,084

923,891

1,021,206

1,083,708

(21)

(22)

Consumer

103,589

106,835

113,544

119,340

124,197

(12)

(18)

Tax exempt and other

59,693

62,098

63,431

66,326

66,918

(15)

(12)

Total loans

$
2,515,560

$
2,551,064

$
2,562,885

$
2,708,691

$
2,729,417

(6)
%

(4)
%


											Annualized
											Growth %
											Quarter		Year
(in thousands, except ratios)	Jun 30, 2022		Mar 31, 2022		Dec 31, 2021		Sep 30, 2021		Jun 30, 2021		to Date		to Date
Commercial real estate	$	1,331,860	$	1,289,968	$	1,210,580	$	1,170,372	$	1,135,857	13	%	20	%
Commercial and industrial		360,304		346,394		340,129		331,091		327,729	16		12
Paycheck Protection Program (PPP)		170		1,126		6,669		24,227		65,918	*		*
Total commercial loans		1,692,334		1,637,488		1,557,378		1,525,690		1,529,504	13		17
Total commercial loans, excluding PPP		1,692,164		1,636,362		1,550,709		1,501,463		1,463,586	14		18

Residential real estate		876,644		868,382		821,004		849,692		822,774	4		14
Consumer		100,816		96,876		98,949		100,933		103,589	16		4
Tax exempt and other		57,480		51,816		54,579		57,839		59,693	44		11
Total loans	$	2,727,274	$	2,654,562	$	2,531,910	$	2,534,154	$	2,515,560	11	%	15	%

*Indicates ratios of 100% or greater.

DEPOSIT ANALYSIS

Annualized Growth %
(in thousands, except ratios)

Jun 30, 2021

Mar 31, 2021

Dec 31, 2020

Sep 30, 2020

Jun 30, 2020

Quarter To Date

Year To Date
Demand

$
599,598

$
586,487

$
544,636

$
515,064

$
504,325

9
%

20
%
NOW

802,681

761,817

738,849

706,048

642,908

21

17

Savings

578,361

560,095

521,638

511,938

466,668

13

22

Money market

371,075

365,507

402,731

388,356

402,835

6

(16)

Total non-maturity deposits

2,351,715

2,273,906

2,207,854

2,121,406

2,016,736

14

13

Total time deposits

470,758

638,436

698,361

813,509

678,126

*

(65)

Total deposits

$
2,822,473

$
2,912,342

$
2,906,215

$
2,934,915

$
2,694,862

(12)
%

(6)
%


											Annualized
											Growth %
											Quarter		Year
(in thousands, except ratios)	Jun 30, 2022		Mar 31, 2022		Dec 31, 2021		Sep 30, 2021		Jun 30, 2021		to Date		to Date
Demand	$	670,268	$	653,471	$	664,420	$	664,395	$	599,598	10	%	2	%
NOW		883,239		918,768		940,631		888,021		802,681	(15)		(12)
Savings		663,676		658,834		628,670		605,977		578,361	3		11
Money market		499,456		424,750		389,291		379,651		371,075	70		57
Total non-maturity deposits		2,716,639		2,655,823		2,623,012		2,538,044		2,351,715	9		7
Total time deposits		361,906		391,940		425,532		469,221		470,758	(31)		(30)
Total deposits	$	3,078,545	$	3,047,763	$	3,048,544	$	3,007,265	$	2,822,473	4	%	2	%

6457

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AVERAGE BALANCES AND AVERAGE YIELDS/RATES

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

Three Months Ended June 30,

2021

2020

Average

Average

(in thousands, except ratios)

Balance

Interest⁽³⁾

Yield/Rate⁽³⁾


Balance

Interest⁽³⁾

Yield/Rate⁽³⁾

Assets













Interest-bearing deposits with other banks⁽⁴⁾

$
228,825

$
54

0.09
%

$
71,067

$
14

0.08
%
Securities available for sale and FHLB stock⁽²⁾⁽³⁾

635,978

4,217

2.66

648,185

5,247

3.26

Loans:

Commercial real estate

1,122,831

9,921

3.54

952,264

9,720

4.11

Commercial and industrial

378,634

3,394

3.60

417,620

4,285

4.13

Paycheck protection program

76,701

1,064

5.56

104,740

869

3.34

Residential

850,119

8,063

3.80

1,117,608

10,591

3.81

Consumer

104,851

900

3.44

126,413

1,199

3.81

Total loans ⁽¹⁾

2,533,136

23,342

3.70

2,718,645

26,664

3.94

Total earning assets

3,397,939

27,613

3.26
%

3,437,897

31,925

3.73
%
Other assets

348,153



369,224



Total assets

$
3,746,092



$
3,807,121



Liabilities













NOW

$
781,836

$
237

0.12
%

$
611,860

$
213

0.14
%
Savings

568,193

138

0.10

450,621

172

0.15

Money market

368,826

112

0.12

411,232

414

0.40

Time deposits

619,454

2,116

1.37

776,042

3,750

1.94

Total interest bearing deposits

2,338,309

2,603

0.45

2,249,755

4,549

0.81

Borrowings

345,896

1,826

2.12

612,538

2,297

1.51

Total interest bearing liabilities

2,684,205

4,429

0.66
%

2,862,293

6,846

0.96
%
Non-interest bearing demand deposits

591,982





472,688



Other liabilities

56,630





66,302



Total liabilities

3,332,817





3,401,283



Total shareholders' equity

413,275





405,838



Total liabilities and shareholders' equity

$
3,746,092





$
3,807,121





Net interest spread





2.60
%





2.77
%
Net interest margin⁽¹⁾

2.74





2.93

Adjusted net interest margin⁽⁵⁾





2.67

2.92


	Three Months Ended June 30,
	2022						2021
	Average						Average
(in thousands, except ratios)	Balance		Interest⁽³⁾		Yield/Rate⁽³⁾		Balance		Interest⁽³⁾		Yield/Rate⁽³⁾
Assets
Interest-earning deposits with other banks	$	63,317	$	127	0.80	%	$	228,825	$	54	0.09	%
Securities available for sale and FHLB stock⁽²⁾⁽³⁾		637,881		4,276	2.69			635,978		4,217	2.66
Loans:
Commercial real estate		1,296,162		12,348	3.82			1,122,831		9,921	3.54
Commercial and industrial		412,518		3,771	3.67			378,634		3,394	3.60
Paycheck protection program		788		27	13.99			76,701		1,064	5.56
Residential		863,172		7,635	3.55			850,119		8,063	3.80
Consumer		98,588		938	3.82			104,851		900	3.44
Total loans ⁽¹⁾		2,671,228		24,719	3.71			2,533,136		23,342	3.70
Total earning assets		3,372,426		29,122	3.46	%		3,397,939		27,613	3.26	%
Other assets		315,950						348,146
Total assets	$	3,688,376					$	3,746,085

Liabilities
NOW	$	893,239	$	304	0.14	%	$	781,836	$	238	0.12	%
Savings		657,047		138	0.08			568,193		138	0.10
Money market		457,088		213	0.19			368,826		112	0.12
Time deposits		375,782		540	0.58			619,454		2,116	1.37
Total interest bearing deposits		2,383,156		1,195	0.20			2,338,309		2,604	0.45
Borrowings		178,519		1,074	2.41			345,896		1,826	2.12
Total interest bearing liabilities		2,561,675		2,269	0.36	%		2,684,205		4,430	0.66	%
Non-interest bearing demand deposits		661,412						591,982
Other liabilities		67,069						57,227
Total liabilities		3,290,156						3,333,414

Total shareholders' equity		398,220						412,671

Total liabilities and shareholders' equity	$	3,688,376					$	3,746,085

Net interest spread					3.10	%					2.60	%
Net interest margin					3.19						2.74
Adjusted net interest margin⁽⁴⁾					3.19						2.67

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

Table of Contents


	Six Months Ended June 30,
	2022						2021
	Average		Interest		Yield/		Average		Interest		Yield/
(in millions, except ratios)	Balance		⁽³⁾		Rate⁽³⁾		Balance		⁽³⁾		Rate⁽³⁾
Assets
Interest-earning deposits with other banks	$	100,052	$	183	0.37	%	$	200,333	$	93	0.09	%
Securities available for sale and FHLB stock⁽²⁾⁽³⁾		630,443		8,239	2.64			624,866		8,438	2.72
Loans:
Commercial real estate		1,282,528		23,255	3.66			1,112,909		19,908	3.61
Commercial and industrial⁽³⁾		392,006		7,132	3.67			378,087		6,988	3.73
Paycheck protection program		16,112		223	2.80			70,925		2,368	6.73
Residential		857,109		15,125	3.56			880,174		16,571	3.80
Consumer		98,824		1,782	3.64			107,079		1,865	3.51
Total loans ⁽¹⁾		2,646,579		47,517	3.62			2,549,174		47,700	3.77
Total earning assets		3,377,074		55,939	3.34	%		3,374,373		56,231	3.36	%
Other assets		325,144						353,303
Total assets	$	3,702,218					$	3,727,676

Liabilities
NOW	$	911,420	$	618	0.14	%	$	768,616	$	488	0.13	%
Savings		649,652		275	0.09			556,146		307	0.11
Money market		438,189		331	0.15			373,512		239	0.13
Time deposits		390,040		1,160	0.60			637,193		4,521	1.43
Total interest bearing deposits		2,389,301		2,384	0.20			2,335,467		5,555	0.48
Borrowings		178,643		2,084	2.35			342,854		3,637	2.14
Total interest bearing liabilities		2,567,944		4,468	0.35	%		2,678,321		9,192	0.69	%
Non-interest bearing demand deposits		661,677						573,659
Other liabilities		65,669						65,959
Total liabilities		3,295,290						3,317,939

Total shareholders' equity		406,928						409,737

Total liabilities and shareholders' equity	$	3,702,218					$	3,727,676

Net interest spread					2.99	%					2.67	%
Net interest margin					3.07						2.81
Adjusted net interest margin⁽⁴⁾					3.07						2.73

(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.~~

~~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.

6659

Table of Contents

NON-GAAP FINANCIAL MEASURES

This document contains certain non-GAAP financial measures in addition to results presented in accordance with accounting principles generally accepted in the United States of America, ~~("GAAP").~~or 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~~our 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~~our results for any particular quarter or year. ~~The Company's~~Our 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~~us in this report as supplemental financial data should be considered in conjunction with ~~the Company's~~our GAAP financial information.

~~The Company utilizes~~We use 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~~we view 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~~We also ~~calculates~~calculate adjusted earnings per share based on ~~its~~our measure of adjusted earnings. ~~The Company views~~We view 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~~our performance. ~~Management also believes~~We believe that the computation of non-GAAP adjusted earnings and adjusted earnings per share may facilitate the comparison of ~~the Company~~us to other companies in the financial services industry. ~~The Company~~We also ~~adjusts~~adjust certain equity related measures to exclude intangible assets due to the importance of these measures to the investment community.

6760

Table of Contents

RECONCILIATION OF NON-GAAP FINANCIAL MEASURES

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

Three Months Ended June 30,

Six Months Ended June 30,
(in thousands)

Calculations

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


		Three Months Ended June 30,				Six Months Ended June 30,
(in thousands)	Calculations	2022		2021		2022		2021
Net income		$	10,503	$	9,025	$	19,615	$	18,505
Non-recurring items:
Gain on sale of securities, net			—		(50)		(9)		(50)
Loss (gain) on sale of premises and equipment, net			10		1		(65)		9
Loss on other real estate owned			—		—		—		324
Acquisition, conversion and other expenses			—		552		325		1,441
Income tax expense ⁽¹⁾			(2)		(119)		(205)		(409)
Total non-recurring items			8		384		46		1,315
Total adjusted income⁽²⁾	(A)	$	10,511	$	9,409	$	19,661	$	19,820

Net interest income	(B)	$	26,519	$	22,754	$	50,817	$	46,176
Plus: Non-interest income			8,961		9,505		18,270		19,753
Total Revenue			35,480		32,259		69,087		65,929
Gain on sale of securities, net			—		(50)		(9)		(50)
Total adjusted revenue⁽²⁾	(C)	$	35,480	$	32,209	$	69,078	$	65,879

Total non-interest expense		$	21,700	$	21,724	$	43,586	$	44,215
Non-recurring expenses:
(Loss) gain on sale of premises and equipment, net			(10)		(1)		65		(9)
Loss on other real estate owned			—		—		—		(324)
Acquisition, conversion and other expenses			—		(552)		(325)		(1,441)
Total non-recurring expenses			(10)		(553)		(260)		(1,774)
Adjusted non-interest expense⁽²⁾	(D)	$	21,690	$	21,171	$	43,326	$	42,441

Total revenue			35,480		32,259		69,087		65,929
Total non-interest expense			21,700		21,724		43,586		44,215
Pre-tax, pre-provision net revenue		$	13,780	$	10,535	$	25,501	$	21,714

Adjusted revenue⁽²⁾			35,480		32,209		69,078		65,879
Adjusted non-interest expense⁽²⁾			21,690		21,171		43,326		42,441
Adjusted pre-tax, pre-provision net revenue⁽²⁾		$	13,790	$	11,038	$	25,752	$	23,438

(in millions)
Average earning assets	(E)	$	3,372	$	3,398	$	3,377	$	3,374
Average paycheck protection program (PPP) loans	(R)		1		77		16		71
Average earning assets, excluding PPP loans	(S)		3,371		3,321		3,361		3,303
Average assets	(F)		3,688		3,746		3,702		3,728
Average shareholders' equity	(G)		398		413		407		410
Average tangible shareholders' equity⁽²⁾⁽³⁾	(H)		272		286		281		283
Tangible shareholders' equity, period-end⁽²⁾⁽³⁾	(I)		268		287		268		289
Tangible assets, period-end⁽²⁾⁽³⁾	(J)		3,590		3,512		3,590		3,512

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Table of Contents

Three Months Ended June 30,

Six Months Ended June 30,

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⁾

Return on assets



0.97
%

0.90

1.00
%

0.86
Adjusted return on assets⁽²⁾

(A/F)

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⁽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)

9.13

8.52

9.75

8.12
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)

63.45

60.67

62.20

62.74
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)

$
586

$
646

$
1,181

$
1,365
Franchise taxes included in non-interest expense

(O)

128

120

253

239
Tax equivalent adjustment for net interest margin

(P)

430

490

863

1,041
Intangible amortization

(Q)

233

256

474

512
Interest and fees on PPP loans

(T)

1,064

869

2,368

869


		Three Months Ended June 30,					Six Months Ended June 30,
	Calculations	2022			2021		2022			2021
(in thousands)
Common shares outstanding, period-end	(K)		15,026			14,972		15,026			14,972
Average diluted shares outstanding	(L)		15,077			15,042		15,094			15,026

Adjusted earnings per share, diluted⁽²⁾	(A/L)	$	0.70		$	0.63	$	1.30		$	1.32
Tangible book value per share, period-end⁽²⁾	(I/K)		17.83			19.17		17.83			19.17
Securities adjustment, net of tax⁽¹⁾⁽⁴⁾	(M)		(38,304)			7,237		(38,304)			7,237
Tangible book value per share, excluding securities adjustment⁽²⁾⁽⁴⁾	(I+M)/K		20.38			18.69		20.38			18.69
Total tangible shareholders' equity/total tangible assets⁽²⁾	(I/J)		7.46			8.17		7.46			8.17

Performance ratios⁽⁵⁾
Return on assets			1.14	%		0.97		1.07	%		1.00
Adjusted return on assets⁽²⁾	(A/F)		1.14			1.01		1.07			1.07
Pre-tax, pre-provision return on assets			1.50			1.13		1.39			1.17
Adjusted pre-tax, pre-provision return on assets⁽²⁾	(U/F)		1.50			1.18		1.40			1.27
Return on equity			10.58			8.77		9.72			9.10
Adjusted return on equity⁽²⁾	(A/G)		10.59			9.14		9.74			9.75
Return on tangible equity			15.74			12.91		14.33			13.44
Adjusted return on tangible equity⁽¹⁾⁽²⁾	(A+Q)/H		15.76			13.45		14.37			14.37
Efficiency ratio⁽²⁾⁽⁶⁾	(D-O-Q)/(C+N)		59.25			63.45		60.78			62.20
Net interest margin	(B+P)/E		3.19			2.74		3.07			2.81
Adjusted net interest margin⁽²⁾⁽⁷⁾	(B+P-T)/S		3.19			2.67		3.07			2.73

Supplementary data (in thousands)
Taxable equivalent adjustment for efficiency ratio	(N)	$	491		$	586	$	967		$	1,181
Franchise taxes included in non-interest expense	(O)		144			128		285			253
Tax equivalent adjustment for net interest margin	(P)		334			430		654			863
Intangible amortization	(Q)		233			233		466			474
Interest and fees on PPP loans	(T)		27			1,064		223			2,368

(1)	Assumes a marginal tax rate of 23.41% for 2022 and 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.~~2021.

(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~~losses and gains on available-for-sale securities recorded on ~~the Company's~~our 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)	Adjusted net interest margin excludes Paycheck Protection Program loans.

6962

Table of Contents

~~FINANCIAL~~QUARTERLY PERFORMANCE SUMMARY

~~Bar Harbor Bankshares reported~~ Earnings (second quarter ~~2021 net income~~ of ~~$9.0 million or $0.60 per share from $8.5 million or $0.55 per share in~~2022 compared to the same quarter of 2020, an increase of 9% in earnings per share. For the same periods adjusted earnings (non-GAAP) were $9.4 million, or $0.63 per share, compared to $8.6 million, or $0.56 per share. Non-recurring items (non-GAAP) reduced net income in the second quarter 2021 by $384 thousand, or $0.03 per share. 2021)

•

Net income was $10.5 million, an increase of $1.5 million or 16%, which increased return on assets to 1.14% from 0.97%. Return on equity was 10.58% compared to 8.77%, which includes the benefit of higher net income and lower average equity related to unrealized losses on securities as noted below under the Financial Position section.

~~Financial highlights for the second quarter include the following, as compared to the second quarter of 2020 unless otherwise noted:~~

●•

~~9% growth in~~Diluted earnings per share ~~13% growth~~was $0.70, an increase of $0.10 or 17%. Earnings per share in ~~adjusted earnings (non-GAAP)~~the second quarter of 2021 included a $0.05 benefit from Paycheck Protection Program (PPP) loan fee accretion, which was offset by $0.03 of non-recurring expenses.

●•

~~0.97% return on assets; 1.01% adjusted return on assets (non-GAAP)~~Net interest income was $26.5 million, an increase of 17%. Net interest margin was 3.19% in the second quarter of 2022, an increase of 45 basis points from the same period in 2021. The increase in the net interest margin from prior year is largely due to a higher interest rate environment, and continued strong loan growth and lower wholesale borrowings.

●•

~~8% annualized total commercial~~The provision for credit losses was an expense of $534 thousand principally due to loan growth ~~excluding paycheck protection program (“PPP”) loans~~compared to a net benefit of $765 thousand on improved economic conditions and a reduction in loan balances.

●•

~~14% annualized increase~~Non-interest income was $9.0 million, a decrease of 6% from lower mortgage banking income offset in ~~core deposits~~part by higher customer service fees. Wealth management income was flat with prior year.

●•

~~13% increase~~Non-interest expense was $21.7 million in ~~fee income~~both periods, which improved the efficiency ratio to 59.25% from 63.45% on higher total revenue.

~~The Company had core earnings growth~~Financial Position(As of ~~12% 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~~June 30, 2022, compared to pre-pandemic levels suggesting a meaningful recovery in regional activity. The 8% annualized growth in commercial loans during the second quarter 2021, excluding PPP loans, reflects the Company’s commitment to meeting the needs 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 new core deposit accounts, especially in non-interest bearing categories. More than 1,000 new banking relationships were created in the second quarter highlighting both existing customer retention efforts and new customer initiatives. With the increase in mortgage rates in the beginning of the quarter 2021, the Company chose to selectively add residential loans to the balance sheet, which helped to offset amortization and prepayments. March 31, 2022)

The Company continued to organically 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 2021.

Net interest margin (“NIM”) in the second quarter had substantially less PPP fee acceleration and included the effects of excess cash. The Company had $105 million of wholesale deposits mature on the last day of the second 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 deposits. 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. Given an overall asset sensitive balance sheet position and a more core-funded profile, the Company is well positioned for when rates start to increase.

•	Total assets increased $23.7 million to $3.7 billion mainly due to loan growth supported by solid growth in non-maturity deposits (core deposits).

The Company initiated a comprehensive review of non-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 contract timelines. As business-as-usual activities continue to resume, the Company is also rolling out cost containment initiatives to absorb any potential increases associated with pandemic-delayed expenses. In total, the Company evaluates profitability at each branch within its footprint taking into consideration the unique geography of Northern New England and customer needs.

•	Cash and cash equivalents were $67.1 million, compared to $111.0 million. The decrease reflects our continued use of excess cash to fund loan growth in 2022.

•

Securities were $592.7 million, or 16% of total assets, compared to $611.3 million, or 17% of total assets. Net unrealized losses were $49.7 million, or 8% of gross securities, compared with $26.3 million, or 4% of gross securities as fixed rate securities continued to price reflecting higher interest rates.

•

Total loans grew 11% on annualized basis during the quarter as balances increased across all product offerings, especially commercial loans, which grew at a 13% annualized rate. Residential loans continued increase during the quarter at a 4% annualized rate as we continue to put more production on the balance sheet given the current profitable market rates.

•

The ratio of the allowance for credit losses to total loans was 0.87% in both periods. We believe that our disciplined approach and underwriting expertise has allowed us to maintain superior credit quality. We continue to have very low charge-offs offset and a positive cycle of recoveries, along with improvement in almost every credit measurement.

•	Total deposits grew 4% on annualized basis during the quarter as core deposits expanded at an annualized rate of 9% on an increasing number of customer accounts.

•

Total book value per share was $26.19 compared to $27.11. Net unrealized security losses reduced book value per share by $2.55 compared to $1.35. Tangible book value per share excluding net unrealized security losses (non-GAAP) increased 6% on annualized basis on strong net income offset by dividends to shareholders.

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In June 2022, our Board of Directors authorized a stock repurchase plan for up to 5% of outstanding shares of common stock, which represents approximately 751,000 shares. No repurchases were made in the second quarter 2022, but we will continue examine buying opportunities considering market conditions, including interest rate volatility and potential loan and risk-weighted asset growth.

COMPARISON OF FINANCIAL CONDITION AT JUNE 30, ~~2021~~2022 AND DECEMBER 31, ~~2020~~2021

Total assets were $3.6 billion at the end of the second quarter 2021 compared to $3.7 billion at year-end 2020. The slight decrease of $86.1 million in the first half of 2021 is principally due to a $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 second quarter 2021, which included a $162.3 million decrease in brokered deposits, a $65.3 million decrease in retail time deposits and a $143.9 million increase in non-maturity deposits (core deposits). The loan to deposit ratio was 89% at the end of the 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 0.91% with a coverage ratio to non-accruing loans of 168%, up from 157% as of year-end 2020. Tangible book value per share (non-GAAP) increased to $19.30 from $19.05 on strong earnings offset by decreases in unrealized securities gains and the impact of the CECL adoption in the first quarter 2021.

~~Cash~~

Total cash and cash equivalents at June 30, 2021 were $173.7 million, compared to $226.0 million at December 31, 2020. Interest bearing deposits held with other banks totaled $132.3 million at quarter end and $198.4 million at year-end 2020 carrying a yield of 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 $636.0~~Total securities decreased to $592.7 million from $625.6 million at year-end. The $32.9 million decrease in total securities included $77.4 million of purchases, $11.8 million in ~~the second quarter 2021~~sales, an $8.2 million cost reduction to municipal securities that are hedged, and ~~$599.1~~$37.4 million ~~at year-end 2020 representing 17% and 16%~~ of total assets, respectively. The increase in the first half of 2021 is due to securities purchases of $115.9 million to increase the Company’s average risk adjusted returns and increase duration on the portfolio. The purchases were offset by $79.0 million of sales, maturities, calls and pay-downs of amortizing securities. Fair value adjustments ~~increased~~reduced the security portfolio by ~~$9.4~~$49.7 million at the end of the ~~second quarter 2021 and $13.1~~June 2022 compared to an increase of $2.6 million at year-end ~~2020. Unrealized gains decreased during~~2021. Net unrealized losses in the first ~~half~~six months of 2022 resulted from the ~~year by~~Federal Reserve increasing the ~~upward movement~~federal funds target interest rate 150 basis points in ~~the long-term treasury yield curve, which partially recovered in the second quarter.~~that period. The weighted average yield of ~~the Company's~~our securities portfolio was ~~2.88% as of June 30, 2021 compared to 2.96%~~3.21% at ~~year-end 2020. At the end of the second quarter 2021 securities~~quarter-end and 2.63% at year-end. Securities held ~~by the Company~~at quarter-end had an average life of ~~5.4~~9.0 years and an effective duration of ~~4.6~~5.1 years compared to ~~4.8~~5.3 years and ~~4.3~~4.2 years at ~~the end of 2020,~~year-end 2021, respectively.

Loans ~~Held For Sale~~

~~Held for sale~~Total loans ~~decreased~~increased $195.4 million from year-end 2021, or 15% annualized, to ~~$7.9 million~~$2.7 billion at June 30, ~~2021 from $24.0~~2022, which included strong growth across all product lines and included 130 new lending relatinships. Commercial loans increased $135.0 million primarily due to new loans with existing customers. PPP loan balances totaled $170 thousand at the end of the quarter, compared to $6.7 million at December 31, 2020. The Company sold $56.1 million of residential loan originations in the second quarter 2021 compared with $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 second quarter 2021 were $2.5 billion compared $2.6 billion at year-end 2020. Commercial loans grew 8% on a year-to-date annualized basis, excluding PPP loans and included 76 new relationships developed during the second quarter. Commercial real estate and commercial and industrial loans, excluding PPP increased 9% and 2% on a year-to-date annualized basis, respectively. PPP loans totaled $65.9 million at quarter-end, consisting of $62.7 million from 2021 and $3.2 million from 2020, and 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 have resumed normal payment schedules.year-end. Total residential loans ~~decreased $101.1~~increased $55.6 million infrom the ~~first half~~end of the fourth quarter 2021, ~~which includes $68.9 million of~~as we placed more originations ~~recorded~~ on the balance sheet instead of selling into the secondary market. Residential loan origination volume in 2022 is significantly down as compared to respective periods 2021 on lower refinancing activity and ~~$170.0 million of prepayments/amortization.~~increasing market rates.

Allowance for Credit Losses

The allowance for credit losses ~~(ACL) totaled $22.8~~was $23.8 million at ~~the end of the second quarter 2021 and $19.0~~quarter-end as compared to $22.7 million at ~~year-end 2020. The increase is primarily due~~year-end. A steadying economic forecast and disciplined approach to ~~the Company’s adoption~~credit quality resulted in an allowance to total loans coverage ratio of ~~CECL as of January 1, 2021, which increased the ACL by $5.2 million and unfunded commitment reserves by $1.6 million. Since adoption the ACL decreased due~~0.87% compared to ~~stronger economic forecasts and lower reserves~~0.90% at year-end. Net recoveries on ~~specific~~previously charged-off loans ~~offset by changes in loan mix.~~

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~~Net charge offs totaled $241 thousand in~~for the first half of ~~2021, or 0.01% of total average loans,~~2022 totaled $127 thousand compared to ~~$1.3 million, or 0.05%~~net charge-offs of ~~total average loans,~~$241 thousand for the same period of ~~2020.~~2021. Non-accruing loans ~~were $13.6~~decreased to $7.9 million ~~or 0.54% of total~~from $10.2 million at year-end with improvement across all loan categories. The progress in non-accrual loans atis a quarterly trend seen since the end of ~~the second quarter 2021 and were $12.2 million or 0.48% of total loans at year-end~~year 2020. The ratio of accruing past due loans to total loans improved to ~~0.15%~~0.12% of total loans ~~decreasing~~at quarter-end from ~~0.58% as of December 31, 2020. Commercial past due loans totaled $1.9 million~~0.32% at ~~quarter end, which is the lowest level since 2016 when the portfolio was approximately 36% of its current size.~~ year-end 2021.

Other Assets

~~Total other~~Other assets were ~~$329.3~~$348.9 million compared to $318.5 million at ~~the end~~year-end 2021. The increase reflects $12.0 million of ~~the second quarter 2021 compared to $332.9~~deferred tax assets recorded in connection with unrealized losses on securities, $6.8 million as of ~~December 31, 2020. The decrease is primarily from an $8.4~~investments made in tax credits and community developments, and a $6.9 million ~~decrease~~increase in the fair value in customer loan derivatives and $1.6 million decrease in the fair value hedge on securities offset by $2.6 million increase in deferred tax assets and $2.7 million in community limited partnership investments.of derivative instruments.

Deposits and Borrowings

Total deposits ~~was $2.8 billion at the end of the second quarter~~increased $30.0 million from year-end 2021 ~~compared~~ to ~~$2.9 billion at year-end 2020. Non-maturity~~$3.1 billion. Core deposits ~~increased $143.9~~grew $93.6 million, ~~over~~or 7% on an year-to-date annualized basis during the first six months of 2022. A total of 1,350 net new deposit accounts were opened in the first six months of 2022 compared to 2,100 accounts in same period of 2021. The loan to deposit ratio was 87% compared to 83% at the end of 2021 ~~or 13% on an annualized basis~~ due to ~~growth~~loan growth. Time deposits decreased $63.6 million in ~~new accounts with over 2,100 new customer relationships added. Growth in core deposits during the~~ first half of ~~2021 has allowed the Company~~2022 primarily due to optimize its cost of funds by reducing wholesale funding as a percentage of total debt to 12% from 18% at year-end 2020. Time deposits decreased $227.6 million to $470.8 million at quarter-end primarily from $162.3$22.0 million of ~~brokered~~wholesale deposits ~~reaching maturity, which were not replaced due~~that matured. The remaining decrease is attributable to ~~excess liquidity. Retail time deposits decreased $65.3 million as~~ customers ~~moved~~continuing to move funds to transactional accounts upon contractual maturity. ~~Total~~Borrowings were flat due to a consistent deposit level and use of excess cash to fund loan growth. Wholesale borrowings ~~increased by $4.0 million primarily~~as a percentage of total debt remained at 6% through the second quarter from ~~a $50.0 million three-month advance replacing a three-month brokered deposit offset by $46.0 million in payments on matured and amortizing advances. The average~~year end 2021. Total cost of deposits was ~~0.45%~~0.20% in the second quarter of ~~2021~~2022 compared to ~~0.61%~~0.24% in the fourth quarter ~~2020~~of 2021, and borrowing costs were ~~2.12%~~2.41% compared to ~~1.83%~~2.17% for the same periods. The change in cost of funds reflects the ~~attrition~~repricing of ~~balances on matured~~rolling short-term FHLB borrowings ~~and time deposits.~~

~~Derivative Financial Instruments and Other Liabilities~~

~~The notional~~to market rates. FHLB borrowings were term advances with a total balance of ~~derivative financial instruments increased to $950.4~~$98.6 million and a weighted average rates of 1.19% at the end of the second quarter ~~2021 from $876.6~~2022 and 0.48% at year-end 2021.

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Other Liabilities

Other liabilities were $66.1 million compared to $58.0 million at year-end ~~2020.~~2021. The $8.0 million increase is principally due to ~~a $50.0 million new hedge on variable rate loans tied to one-month LIBOR~~tax credit and $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 $213 thousand at the end of the second quarter 2021 compared to asset of $52 thousand at year-end 2020. The reduction in derivative fair values reflects the rise in long-term 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~~community development investment commitments made in the ~~fair value of customer loan derivatives and a $1.3 million decrease in the cash flow hedge on wholesale borrowings.~~first quarter 2022.

Equity

Total equity at quarter-end was ~~$415.6~~$393.6 million compared ~~with $411.3~~to $424.1 million at year-end ~~2020.~~2021. The ~~Company’s book value per share was $27.76 as of June 30, 2021 compared with $27.58 at December 31, 2020. Equity included net unrealized securities totaling $7.2~~$30.5 million ~~at the end of the second quarter 2021 and $10.0 million at year-end 2020. Equity was reduced by $5.2 million due to the Company’s CECL adoption~~decrease in the first ~~quarter 2021.~~

half of 2022 included net of income totaling $19.6 million, $7.5 million of dividends to shareholders and $43.3 million of other comprehensive losses. Other comprehensive losses were primarily due to unrealized losses on securities, net of tax, totaling $40.3 million.

COMPARISON OF OPERATING RESULTS FOR THE THREE AND SIX MONTHS ENDED JUNE 30, ~~2021~~2022 AND ~~2020~~2021

~~Summary~~Net Income

Net income in the second quarter ~~2021~~2022 was $10.5 million, or $0.70 per diluted share, compared to $9.0 million, or $0.60 per ~~share, compared to $8.5 million, or $0.55 per~~diluted share, in the same quarter of ~~2020.~~2021. Adjusted earnings (non-GAAP) totaled $10.5 million or $0.70 per diluted share, compared to $9.4 million, or $0.63 per ~~share, compared to $8.6 million, or $0.56 per~~diluted share, in the same quarter of 2020. Net income benefited from higher fee income and a credit provision recapture in the 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 0.97% in the second quarter of 2021 and 0.90% in the same quarter of 2020. Adjusted return on assets (non-GAAP) was 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. 2021.

~~The Company reported~~Net income for the first half ~~2021 net income~~ of ~~$18.5~~2022 was $19.6 million, or ~~$1.23~~$1.30 per diluted share, compared ~~with $16.2~~to $18.5 million, or ~~$1.04~~$1.23 per diluted share, in the same period of ~~2020.~~2021. Adjusted earnings ~~increased~~(non-GAAP) totaled $19.7 million or $1.30 per diluted share, compared 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 half~~of~~2021was1.00%compared~~to~~0.86%~~in~~theprioryear and adjusted return on assets was 1.07% during the first half of 2021 and 0.87%~~ in the same period of ~~2020. These~~2021.

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

Net Interest Income

Net interest income was ~~$22.8~~$26.5 million in the second quarter ~~2021~~2022 compared with ~~$24.6~~$22.8 million in the same quarter of ~~2020.~~2021. Net interest margin (NIM) was ~~2.74%~~3.19% compared to ~~2.93%~~2.74% in second quarter of ~~2020.~~2021. The increase in net interest income and net interest margin was due to higher interest on earning assets due to the Federal Reserve increasing their federal funds target rate. Interest and fees on PPP loans contributed $1.1 million to net interest income and 7 basis points to NIM during the quarter as the majority of the remaining 2020 originations were forgiven. Accretion on PPP loans originated in 2021 are not expected to materially affect NIM until loans are forgiven starting in the ~~third~~second quarter 2021. Interest-bearing cash balances, held mostly at the Federal Reserve Bank, reduced NIM by 5 basis points in the second quarter 2022 and 19 basis ~~points.~~points in the second quarter 2021. The yield on earning assets totaled ~~3.26%~~3.46% compared to ~~3.73%~~3.26% in the second quarter ~~2020. Costs~~2021. Excluding the impact of ~~funds decreased to 0.66% from 0.96%~~PPP and excess cash, the yield on earning assets totaled 3.51% and 3.44% for the same periods. The yield on loans was 3.71% in the second quarter ~~2020~~2022, and 3.70% in the second quarter of 2021. Excluding PPP loans the yield on loans was 3.71% in the second quarter of 2022 and 3.64% in the second quarter 2021. Costs of interest-bearing liabilities decreased to 0.36% from 0.66% in the second quarter 2021 due to lower deposit rates and ~~reductions to~~less wholesale ~~funding due to significant growth in core deposits. Brokered deposits that matured during second quarter carried 9 basis points of the total funding cost.~~borrowings.

For the first six months of ~~2021,~~2022, net interest income was ~~$46.2~~$50.8 million compared with ~~$49.2~~$46.2 million in the same ~~period~~quarter of ~~2020.~~2021. The comparison of NIM and earning asset yields for the respective six month periods of 2022 and 2021 were 3.07% and ~~2020 were~~ 2.81% ~~and 3.02%~~, and ~~3.36%~~3.34% and ~~3.97%~~3.36%. The ~~decrease is~~explanations for the improvement in NIM ~~and yield was driven by rate drops after the pandemic started in 2020 combined~~are consistent with ~~growth~~those provided in the Company’s interest-bearing cash balances. PPP loan accretion in 2021 helped to offset interest rate compression. Cost of funds in the first half of 2021 decreased 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 the pandemic along with reductions to wholesale funding and the Company’s continued efforts to optimize its balance sheet.year-over-year three month comparison above.

Provision for Credit Losses

The provision for credit losses ~~(the “provision”)~~ for the quarter was $534 thousand, compared to a ~~benefit~~recapture of $765 thousand ~~compared to an expense of $1.4 million~~ in the second quarter of ~~2020.~~2022. For the first half of ~~2021,~~2022, provision for credit losses for the ~~provision~~quarter was $911 thousand and was a benefit of $1.3 million ~~compared to an expense of $2.5 million~~ in the same period of ~~2020.~~2021. The ~~benefits experienced~~change in the ~~periods of 2021 were allowance~~provisions for credit ~~loss recaptures due~~losses and benefit are mostly attributable to ~~improving economic forecasts~~loan growth in 2022 and ~~strong~~improved credit quality ~~offset~~metrics in ~~part by shifts in loan mix.~~ 2021, respectively.

Non-Interest Income

Non-interest income in the second quarter ~~2021~~2022 was ~~$9.5~~$9.0 million, compared to ~~$9.7~~$9.5 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.~~2021. 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 $1.6were $3.7 million in the second quarter ~~2021 from $1.1~~compared to $3.3 million in the same period of ~~2020.~~2021. The increase reflects the net new accounts that were opened and a higher volume of customer activity and transactions. Wealth management income was $3.8 million in the second quarter of 2022 and the second quarter of 2021 on strong cash inflows offset by market volatility effects on assets under management. Mortgage banking income was $488 thousand, compared to $1.5 million in the same period of 2021 reflecting higher on balance sheet activity and lower residential loan originations.

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Non-interest income for the first half of ~~2021~~2022 was ~~$19.8~~$18.3 million compared to ~~$18.1~~$19.8 million in the same period in ~~2020 and increased 18% excluding gain on sales of securities.~~2021. The ~~increase~~decrease reflects a ~~12%~~17% increase in customer service fees, ~~14%~~2% in wealth management income, and ~~161% increase~~73% decrease in mortgage banking income; all of which were driven by the same reasons as the quarterly period.

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Non-Interest Expense

Non-interest expense ~~improved to~~was $21.7 million in the second quarter 2022 and the same quarter of 2021 ~~from $22.3 million~~reflecting consistent and stable costs across most categories excluding occupancy and equipment, and acquisition, conversion and other expense. Occupancy and equipment expense increased $479 thousand on higher utility costs and software amortization. Acquisition, conversion and other expense was zero in the second of 2022 and totaled $553 thousand in the same quarter of ~~2020. Salaries and benefits expense decreased 5% due to implementing~~2021, which was mostly reduction in workforce ~~reduction programs at the beginning of the second quarter. Non-recurring expense adjustments (non-GAAP)~~charges. The efficiency ratio in the second quarter ~~2021 totaled $553 thousand and were mostly one-time reduction~~2022 was 59.25%, down from 63.45% in ~~workforce charges. In~~ the ~~same~~second quarter ~~of 2020 non-recurring expenses totaled $1.5 million and included costs to consolidate our wealth management systems and a loss on debt extinguishment.~~2021.

For the first six months of ~~2021,~~2022, non-interest expense was ~~$44.2~~$43.6 million and ~~$44.6~~$44.2 million in the same period of ~~2020.~~2021. The ~~Company’s~~Company's year-to-date efficiency ratio was ~~62.2%~~60.78% in ~~2021~~2022 compared to ~~62.7%~~62.20% in ~~2020~~2021 which reflects managements disciplined approach to expense management as revenue ~~grows and the above noted expense initiatives.~~continues to grow. Non-recurring expenses (non-GAAP) in the first half of ~~2021 totaled~~2022 were $325 thousand related to contract renogiations and $1.8 ~~million and $1.7~~ million in the same period of ~~2020. In the first half~~2021 consisting 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 decreased to 20.1% in 2021 compared with 20.6% in the same quarter of 2020, reflecting higher pre-tax income being offset by the proportional amounts of tax-advantaged revenue. charges.

Liquidity and Cash Flows

Liquidity is measured by ~~the Company's~~our ability to meet short-term cash needs at a reasonable cost or minimal loss. ~~The Company seeks~~We seek 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~~our ability to meet liquidity needs, including variations in the markets served by ~~its~~our 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%8% of total assets. A portion of the ~~Bank's~~Bank’s deposit base has been historically seasonal in nature, with balances typically declining in the winter months through late spring, during which period the ~~Bank's~~Bank’s liquidity position tightens.

~~The Company’s~~Our liquidity position remains strong. During the quarter we initiated pandemic-specific liquidity stress tests to analyze potential impacts from payment deferrals, unanticipated use of committed lines of credit, as well as the possibility of required servicer advances on sold loans. At June 30, ~~2021,~~2022, available same-day liquidity totaled approximately ~~$1.2 billion,~~$640.6 million, including cash, borrowing capacity at FHLB and the Federal Reserve Discount Window and various lines of credit. Additional sources of liquidity include cash flows from operations, wholesale deposits, cash flow from ~~the Company's~~our amortizing securities and loan portfolios. ~~The Company~~We had unused borrowing capacity at the FHLB of ~~$372.8~~$436 million, unused borrowing capacity at the Federal Reserve of ~~$74.3~~$87 million and unused lines of credit totaling $51.0 million, in addition to over ~~$200.0~~$67.1 million in unencumbered, liquid investment portfolio assets.

The Bank maintains a liquidity contingency plan approved by the ~~Bank's~~Bank’s Board of Directors. This plan addresses the steps that would be taken in the event of a liquidity crisis, and identifies other sources of liquidity available to ~~the Company. Company~~us. Our 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~~our liquidity position.

Capital Resources

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

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Our principal cash requirement is the payment of dividends on our common stock, as and when declared by our Board of Directors. Dividends to shareholders in the aggregate amount of $7.5 million and $6.9 million for the six months ended June 30, 2022 and 2021, respectively. All dividends declared and distributed by us will be in compliance with applicable state corporate law and regulatory requirements.

Off-Balance Sheet Arrangements

~~The Company is,~~We are, 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~~our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources, that may be material to investors.

~~Table of Contents~~

~~The Company’s~~Our 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~~Our 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.~~2021.

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

Our Consolidated Financial Statements were prepared in accordance with GAAP and follow general practices within the industries in which we operate. The ~~Company’s~~most significant accounting policies we follow are ~~described~~presented in Note 1 to our Annual Report on Form 10-K for 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 accountingyear ended December 31, 2021. Application of these 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~~us to make estimates, assumptions, and ~~assumptions~~judgments that affect the amounts reported in the ~~financial statements~~Consolidated Financial Statements and accompanying notes. ~~While the Company bases estimates on historical experience, current information and other factors deemed~~Most accounting policies are not considered by management to be ~~relevant, actual results could differ from those estimates.~~

~~Management has identified~~critical accounting policies. Several factors are considered in determining whether or not a policy is critical in the ~~Company's~~preparation of the Consolidated Financial Statements. These factors include among other things, whether the policy requires management to make difficult, subjective, and complex judgments about matters that are inherently uncertain and because it is likely that materially different amounts would be reported under different conditions or using different assumptions. The accounting policies which we believe to be most critical in preparing our Consolidated Financial Statements are presented in the section titled "Critical Accounting Policies" in Management's Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the year ended December 31, 2021. There have been no significant changes in our application of critical accounting policies ~~as related to:~~since December 31, 2021.

•

~~Allowance for Credit Losses~~

•

~~Income Taxes~~

•

~~Goodwill and Identifiable Intangible Assets~~

•

~~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~~The most significant market risk ~~affecting the Company.~~that affects us is interest rate risk. Other types of market risk do not arise in the normal course of ~~the Company’s~~our business activities.

The responsibility for interest rate risk management oversight is the function of the Bank’s Asset and Liability Committee, ~~(“ALCO”),~~or 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~~ and/or cash flow characteristics of assets and liabilities. ~~Management's~~Management’s objectives are to measure, monitor and develop strategies in response to the interest rate risk profile inherent in the ~~Bank's~~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~~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~~option provisions are examined on an individual basis in each rate environment to estimate the likelihood of exercise. Prepayment assumptions for mortgage loans ~~and~~are calibrated using specific Bank experience while mortgage-backed securities are developed from industry ~~median estimates~~standard models 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:~~conditions.

~~A flat~~The simulation models a parallel and pro rata shift in rates over a 12-month period. Using this approach, we are able to produce simulation results that illustrate the effect that both a gradual “rate ramp” and a “rate shock” have on earnings expectations. Our net interest ~~rate scenario in which current prevailing rates are locked in and the only~~income sensitivity analysis reflects changes to net interest income assuming no 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~~growth and a parallel shift in interest rates. All rate changes were “ramped” over the ~~yield curve~~first 12-month period and then maintained at those levels 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~~remainder 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.

simulation horizon. Changes in net interest income based upon ~~the foregoing~~these 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.~~scenario.

As of June 30, ~~2021~~2022, interest rate sensitivity modeling results indicate that the Bank’s balance sheet was asset sensitive over the one- and two-year horizons.

The following table presents the changes in ~~years 1~~sensitivities on net interest income for the periods ended June 30, 2022 and ~~2 was modestly asset sensitive.~~2021:


Change in Interest Rates-Basis Points (Rate Ramp)	1 - 12 Months				13 - 24 Months
(in thousands, except ratios)	$ Change		% Change		$ Change		% Change
At June 30, 2022
-100	$	(3,979)	(3.2)	%	$	(11,446)	(8.9)	%
+200		5,070	4.1			15,789	12.3
At June 30, 2021
-100		(1,969)	(2.1)			(5,648)	(6.3)
+200		8,068	8.5			18,905	21.0

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 ~~(-2.1% versus the base case)~~ while deteriorating further from that level over the two-year ~~horizon (-11.4% versus the base case).~~horizon.

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 both the one and two-year ~~horizons (8.5% and 14.4%, respectively).~~horizons.

As compared to ~~December 31, 2020, the year-one~~June 30, 2021, sensitivity ~~in the~~to a down 100 basis points scenario was up slightly for the six months ended June 30, 2021 (-2.6% prior, versus -2.1% current). The year-two sensitivities in the down 100 basis points scenario were mostly unchanged going from -9.5%point rate movement has increased while sensitivity to ~~-11.4%. In the year-one~~an up 200 basis ~~points scenario, results were again similar going from 7.7% to 8.5%. Year-two, up 200 basis points was down (18.4% prior, versus 14.4% current).~~point rate movement has decreased on a year-over-year basis.

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~~we 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~~our principal executive officer and our principal financial officer, ~~the Company conducted~~weconducted 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”)~~or 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~~our management, including ~~its~~our principal executive officer and principal financial officer, concluded that as of June 30, ~~2021 the Company’s~~2022, our disclosure controls and procedures were effective to ensure that information required to be disclosed by ~~the Company in~~usin the reports that ~~it files~~we file under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms. ~~The Company’s~~Our disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by ~~the Company in its~~usin our Exchange Act reports is accumulated and communicated to ~~the Company’s~~our management, including ~~its~~our 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~~our 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~~our internal control over financial reporting.

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

~~The Company~~We and ~~its~~our 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~~ourconsolidated 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~~our Annual Report on Form 10-K for the year ended December 31, ~~2020.~~2021. 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 ~~April 20, 2021, Company's~~June 23, 2022, our Board of Directors approved a twelve-month plan to repurchase up to 5% of ~~its~~our outstanding shares of common stock, representing ~~747,000~~751,000 shares.

The following table indicates that no shares were repurchased by ~~the Company~~us in the second quarter of ~~2021:~~2022:


				Total number of shares	Maximum number of
				purchased as a part of	shares that may yet be
	Total number of	Average price		publicly announced	purchased under
Period	shares purchased	paid per share		plans or programs	the plans or programs⁽¹⁾
April 1-30, ~~2021~~2022	—	$	—	—	747,000
May 1-31, ~~2021~~2022	—		—	—	747,000
June 1-30, ~~2021~~2022	—		—	—	~~747,000~~751,000
Total	—	$	—	—	~~747,000~~751,000

~~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 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~~	~~Exhibit 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.~~1350	~~Furnished herewith~~

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

101	The following financial information from the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, ~~2021~~2022 is formatted in Inline Extensible Business Reporting Language (iXBRL): (i) Consolidated Condensed Statements of Income, (ii) the Condensed Consolidated Balance Sheets, (iii) the Condensed Consolidated Statements of Changes in Shareholders’ Equity, (iv) Consolidated Statements of Cash Flows and (v) Notes to the Consolidated Condensed Financial Statements

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

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SIGNATURES

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


	BAR HARBOR BANKSHARES


Dated: August 3, ~~2021~~2022	By:	/s/ Curtis C. Simard
		Curtis C. Simard
		President & Chief Executive Officer


Dated: August 3, ~~2021~~2022	~~By:~~	/s/ Josephine Iannelli
		Josephine Iannelli
		Executive Vice President & Chief Financial Officer

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

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

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

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

Retained earnings:
Total increase in Allowance for credit losses									$	6,844
Tax effect										(1,602)
Decrease to retained earnings									$	5,242


	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


	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


	Six Months Ended June 30, 2020
		Pre-Modification		Post-Modification
	Number of	Outstanding		Outstanding
(in thousands)	Modifications	Balance		Balance		Reserve
Commercial construction	—	$	—	$	—	$	—
Commercial real estate owner occupied	—		—		—		—
Commercial real estate non-owner occupied	1		54		252		—
Tax exempt	—		—		—		—
Commercial and industrial	3		41		196		—
Residential real estate	—		—		—		—
Home equity	1		26		25		—
Consumer other	1		9		9		—
Total	6	$	130	$	482	$	—



(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


											Annualized Growth %
(in thousands, except ratios)	Jun 30, 2021		Mar 31, 2021		Dec 31, 2020		Sep 30, 2020		Jun 30, 2020		Quarter To Date		Year To Date
Commercial real estate	$	1,135,857	$	1,118,669	$	1,084,381	$	1,045,635	$	982,070	6	%	9	%
Commercial and industrial		327,729		317,500		323,864		324,647		340,898	13		2
Paycheck Protection Program (PPP)		65,918		77,878		53,774		131,537		131,626	(61)		45
Total commercial loans		1,529,504		1,514,047		1,462,019		1,501,819		1,454,594	4		9
Total commercial loans, excluding PPP		1,463,586		1,436,169		1,408,245		1,370,282		1,322,968	8		8

Residential real estate		822,774		868,084		923,891		1,021,206		1,083,708	(21)		(22)
Consumer		103,589		106,835		113,544		119,340		124,197	(12)		(18)
Tax exempt and other		59,693		62,098		63,431		66,326		66,918	(15)		(12)
Total loans	$	2,515,560	$	2,551,064	$	2,562,885	$	2,708,691	$	2,729,417	(6)	%	(4)	%