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: September 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", orand "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 ~~14,986,786~~15,065,620 shares of common stock, par value $2.00 per share, outstanding as of November ~~5, 2021.~~2, 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 September 30, ~~2021~~2022 and December 31, ~~2020~~2021			45

	Consolidated Statements of Income for the Three and Nine Months Ended September 30, ~~2021~~2022 and ~~2020~~2021			67

	Consolidated Statements of Comprehensive Income for the Three and Nine Months Ended September 30, ~~2021~~2022 and ~~2020~~2021			78

	Consolidated Statements of Changes in Shareholders’ Equity for the Three and Nine Months Ended September 30, ~~2021~~2022 and ~~2020~~2021			89

	Consolidated Statements of Cash Flows for the Nine Months Ended September 30, ~~2021~~2022 and ~~2020~~2021			910

	Notes to Unaudited Consolidated Interim Financial Statements
		Note 1	Basis of Presentation	11
		Note 2	Securities Available for Sale	2112
		Note 3	Loans and Allowance for Credit Losses	2415
		Note 4	Borrowed Funds	3626
		Note 5	Deposits	3828
		Note 6	Capital Ratios and Shareholders' Equity	3929
		Note 7	Earnings per Share	4434
		Note 8	Derivative Financial Instruments and Hedging Activities	4535
		Note 9	Fair Value Measurements	5445
		Note 10	Revenue from Contracts with Customers	6152
		Note 11	Leases	6354


Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations			6556
		Selected Financial Data		6658
		Consolidated Loan and Deposit Analysis		6759
		Average Balances and Average Yields/Rates		6860
		Non-GAAP Financial Measures		7062
		Reconciliation of Non-GAAP Financial Measures		7163
		~~Financial~~Performance Summary		7365

Item 3.	Quantitative and Qualitative Disclosures about Market Risk			7970

Item 4.	Controls and Procedures			8172


PART II.	OTHER INFORMATION

Item 1.	Legal Proceedings			8172

Item 1A.	Risk Factors			8172

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds			8273

Item 6.	Exhibits			8374

Signatures				8475

Table of Contents

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

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

Certain statements contained in this ~~document~~Quarterly Report on Form 10-Q (the “Form 10-Q”) 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"~~“believe,” “anticipate,” “expect,” “may,” “will,” “assume,” “should,” “predict,” “could,” “would,” “intend,” “targets,” “estimates,” “projects,” “plans,” and “potential,” and other similar words and expressions of the future, are intended to identify such forward-looking statements, but ~~these terms~~other statements not based on historical information may also be considered forward-looking, including statements about the Company’s future financial and operating results and the Company’s plans, objectives, and intentions. All forward-looking statements are ~~not~~subject to risks, uncertainties, and other factors that may cause the ~~exclusive means~~actual results, performance, or achievements of ~~identifying~~the Company to differ materially from any results, performance, or achievements expressed or implied by such forward-looking statements. These forward-looking statements are subject to ~~significant~~known and unknown 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~~factors that could cause the actual results to differ materially from ~~time to time in documents that~~ the ~~Company files with the Securities and Exchange Commission,~~statements, including, but not limited to:

●

deterioration in the financial condition of borrowers of the Bank, including as a result of the negative impact of inflationary pressures on our customers and their businesses resulting in significant increases in loan losses and provisions for those losses;

●

the possibility that our asset quality could decline or that we experience greater loan losses than anticipated,

●

increased levels of other real estate, primarily as a result of foreclosures;

●

the impact of liquidity needs on our results of operations and financial condition;

●

competition from financial institutions and other financial service providers;

●

the effect of interest rate increases on the cost of deposits;

●

unanticipated weakness in loan demand or loan pricing;

●

adverse conditions in the national or local economies including in our markets throughout Northern New England;

●

the effects of new outbreaks of COVID-19, including actions taken by governmental officials to curb the spread of the virus, and the resulting impact on general economic and financial market conditions and on the Company’s and our customers' business, results of operations, asset quality and financial condition;

●

the efficacy of vaccines against the COVID-19 virus, including new variants;

●

the effects of civil unrest, international hostilities or other geopolitical events, including the war in Ukraine;

●

inflation, interest rate, market, and monetary fluctuations;

●

lack of strategic growth opportunities or our failure to execute on available opportunities;

●

the ability to grow and retain low-cost core deposits and retain large, uninsured deposits;

●

our ability to effectively manage problem credits;

●

our ability to successfully implement efficiency initiatives on time and with the results projected;

●

our ability to successfully develop and market new products and technology;

●

the impact of negative developments in the financial industry and United States and global capital and credit markets;

●

our ability to retain executive officers and key employees and their customer and community relationships;

●

our ability to adapt to technological changes;

●

risks associated with litigation, including reputational and financial risks and the applicability of insurance coverage;

●

the vulnerability of the Bank’s computer and information technology systems and networks, and the systems and networks of third parties with whom the Company or the Bank contract, to unauthorized access, computer viruses, phishing schemes, spam attacks, human error, natural disasters, power loss, and other security breaches and interruptions;

●

ongoing competition in the labor markets and increased employee turnover;

Table of Contents

●

our ability to comply with various governmental and regulatory requirements applicable to financial institutions;

●

changes in state and federal laws, rules, regulations, or policies applicable to banks or bank or financial holding companies, including regulatory or legislative developments;

●

governmental monetary and fiscal policies, including the policies of the Board of Governors of the Federal Reserve System (the “Federal Reserve”);

●

adverse impacts (including costs, fines, reputational harm, or other negative effects) from current or future litigation, regulatory examinations, or other legal and/or regulatory actions; and

●

general competitive, economic, political, and market conditions, including economic conditions in the local markets where we operate.

Other factors not identified above, including those ~~discussed~~described under the headings “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” 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. Because~~2021, our quarterly reports on Form 10-Q, and current reports on Form 8-K filed with the Securities and Exchange Commission (the “SEC”) and available on the SEC’s website at http://www.sec.gov, may also cause actual results to differ materially from those described in our forward-looking statements. Most of these factors are difficult to anticipate and ~~other uncertainties, the Company’s actual results, performance or achievements, or industry results,~~are generally beyond our control. You should consider these factors in connection with considering any forward-looking statements that may be ~~materially different from the results indicated~~made by ~~these forward-looking statements. In addition, the Company’s past results of operations do not necessarily indicate future results. You should not place undue reliance on~~us. We undertake no obligation to release publicly any ~~of the~~revisions to any forward-looking statements, ~~which speak only as~~to report events or to report the occurrence of ~~the dates on which they were made. The Company is not undertaking an obligation~~unanticipated events unless we are required to ~~update forward-looking statements, even though its situation may change in the future, except as required under federal securities law. The Company qualifies all of its forward-looking statements~~do so by ~~these cautionary statements.~~law.

Table of Contents

PART I. FINANCIAL INFORMATION

ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS

BAR HARBOR BANKSHARES AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS (UNAUDITED)


(in thousands, except share data)	September 30, 2021		December 31, 2020		September 30, 2022		December 31, 2021
Assets
Cash and cash equivalents:
Cash and due from banks	$	39,081	$	27,566	$	50,760	$	33,508
Interest-bearing deposits with other banks		302,118		198,441
Interest-earning deposits with other banks						31,305		216,881
Total cash and cash equivalents		341,199		226,007		82,065		250,389

Securities:
Securities available for sale		545,327		585,046		556,752		618,276
Federal Home Loan Bank stock		10,192		14,036		9,035		7,384
Total securities		555,519		599,082		565,787		625,660

Loans held for sale		7,505		23,988		982		5,523

Total loans		2,534,154		2,562,885		2,850,364		2,531,910
Less: Allowance for credit losses		(22,448)		(19,082)		(25,018)		(22,718)
Net loans		2,511,706		2,543,803		2,825,346		2,509,192

Premises and equipment, net		50,070		52,458		48,010		49,382
Goodwill		119,477		119,477		119,477		119,477
Other intangible assets		6,966		7,670		6,034		6,733
Cash surrender value of bank-owned life insurance		79,380		77,870		80,758		79,020
Deferred tax assets, net⁽¹⁾		5,811		3,047		25,288		5,547
Other assets⁽¹⁾		60,712		70,873		86,499		58,310
Total assets⁽¹⁾	$	3,738,345	$	3,724,275	$	3,840,246	$	3,709,233

Liabilities
Deposits:
Demand	$	664,395	$	544,636	$	700,218	$	664,420
NOW		888,021		738,849		918,822		940,631
Savings		605,977		521,638		669,317		628,670
Money market		379,651		402,731		513,075		389,291
Time		469,221		698,361		334,248		425,532
Total deposits		3,007,265		2,906,215		3,135,680		3,048,544

Borrowings:
Senior		190,267		276,062		188,757		118,400
Subordinated		60,083		59,961		60,248		60,124
Total borrowings		250,350		336,023		249,005		178,524

Other liabilities⁽¹⁾		62,295		74,972		75,596		58,018
Total liabilities⁽¹⁾		3,319,910		3,317,210		3,460,281		3,285,086

(continued)

Table of Contents

BAR HARBOR BANKSHARES AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS (UNAUDITED) (continued)

(in thousands, except share data)

September 30, 2021

December 31, 2020
Shareholders’ equity




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

32,857

32,857
Additional paid-in capital

190,892

190,084
Retained earnings

209,426

195,607
Accumulated other comprehensive income⁽¹⁾

2,888

6,740
Less: 1,441,763 and 1,512,465 shares of treasury stock at September 30, 2021 and December 31, 2020, respectively

(17,628)

(18,223)
Total shareholders’ equity⁽¹⁾

418,435

407,065
Total liabilities and shareholders’ equity⁽¹⁾

$
3,738,345

$
3,724,275

~~(1)~~

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


(in thousands, except share data)	September 30, 2022		December 31, 2021
Shareholders’ equity
Capital stock, par value $2.00; authorized 20,000,000 shares; issued 16,428,388 shares at September 30, 2022 and December 31, 2021		32,857		32,857
Additional paid-in capital		191,438		190,876
Retained earnings		235,218		215,592
Accumulated other comprehensive (loss) income		(62,589)		2,303
Less: 1,362,768 and 1,427,059 shares of treasury stock at September 30, 2022 and December 31, 2021, respectively		(16,959)		(17,481)
Total shareholders’ equity		379,965		424,147
Total liabilities and shareholders’ equity	$	3,840,246	$	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				Nine Months Ended				Three Months Ended				Nine Months Ended
	September 30,				September 30,				September 30,				September 30,
(in thousands, except earnings per share data)	2021		2020		2021		2020		2022		2021		2022		2021
Interest and dividend income
Loans	$	25,094	$	25,918	$	72,490	$	80,398	$	27,940	$	25,094	$	75,192	$	72,490
Securities and other		3,821		4,557		11,792		15,006		5,145		3,821		13,178		11,792
Total interest and dividend income		28,915		30,475		84,282		95,404		33,085		28,915		88,370		84,282
Interest expense
Deposits		1,555		3,869		7,109		14,437		1,801		1,555		4,185		7,109
Borrowings		1,778		1,941		5,415		7,149		1,374		1,778		3,458		5,415
Total interest expense		3,333		5,810		12,524		21,586		3,175		3,333		7,643		12,524
Net interest income		25,582		24,665		71,758		73,818		29,910		25,582		80,727		71,758
Provision for credit losses		(174)		1,800		(1,428)		4,265		1,306		(174)		2,217		(1,428)
Net interest income after provision for loan losses		25,756		22,865		73,186		69,553
Net interest income after provision for credit losses										28,604		25,756		78,510		73,186

Non-interest income
Trust and investment management fee income		3,868		3,532		11,335		10,060		3,548		3,868		11,131		11,335
Customer service fees		3,515		2,886		9,742		8,437		3,836		3,515		11,108		9,742
Gain on sales of securities, net		1,930		—		1,980		1,486		44		1,930		53		1,980
Mortgage banking income		850		2,649		4,973		4,230		315		850		1,427		4,973
Bank-owned life insurance income		494		492		1,510		1,525		496		494		1,501		1,510
Customer derivative income		341		316		837		1,417		58		341		213		837
Other income		352		227		726		1,078		526		352		1,660		726
Total non-interest income		11,350		10,102		31,103		28,233		8,823		11,350		27,093		31,103

Non-interest expense
Salaries and employee benefits		11,743		11,809		35,275		35,602		12,242		11,743		35,757		35,275
Occupancy and equipment		4,029		4,279		12,251		12,559		4,458		4,029		13,254		12,251
Loss (gain) on sales of premises and equipment, net		(146)		—		(137)		90
Gain on sales of premises and equipment, net										—		(146)		(65)		(137)
Outside services		547		438		1,512		1,414		393		547		1,143		1,512
Professional services		491		479		1,200		1,488		421		491		1,122		1,200
Communication		188		215		707		698		204		188		617		707
Marketing		339		300		1,163		970		518		339		1,150		1,163
Amortization of intangible assets		233		256		707		768		233		233		699		707
Loss on debt extinguishment		1,768		—		1,768		1,351		—		1,768		—		1,768
Acquisition, conversion and other expenses		318		691		1,759		952		31		318		356		1,759
Other expenses		3,862		3,952		11,382		11,152		4,532		3,862		12,585		11,382
Total non-interest expense		23,372		22,419		67,587		67,044		23,032		23,372		66,618		67,587

Income before income taxes		13,734		10,548		36,702		30,742		14,395		13,734		38,985		36,702
Income tax expense		2,706		2,146		7,169		6,138		2,965		2,706		7,940		7,169
Net income	$	11,028	$	8,402	$	29,533	$	24,604	$	11,430	$	11,028	$	31,045	$	29,533

Earnings per share:
Basic	$	0.74	$	0.56	$	1.97	$	1.60	$	0.76	$	0.74	$	2.07	$	1.97
Diluted	$	0.73	$	0.56	$	1.96	$	1.60	$	0.76	$	0.73	$	2.06	$	1.96

Weighted average common shares outstanding:
Basic		14,983		15,079		14,961		15,359		15,058		14,983		15,029		14,961
Diluted		15,051		15,103		15,035		15,382		15,113		15,051		15,100		15,035

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				Nine Months Ended				Three Months Ended				Nine Months Ended
	September 30,				September 30,				September 30,				September 30,
(in thousands)	2021		2020		2021		2020		2022		2021		2022		2021
Net income	$	11,028	$	8,402	$	29,533	$	24,604	$	11,430	$	11,028	$	31,045	$	29,533
Other comprehensive income, before tax:
Changes in unrealized (loss) gain on securities available for sale		(3,700)		351		(7,328)		7,922
Other comprehensive (loss) income, before tax:
Changes in unrealized loss on securities available for sale										(26,933)		(3,700)		(79,186)		(7,328)
Changes in unrealized (loss) gain on hedging derivatives⁽¹⁾		(203)		1,302		2,311		(7,568)		(1,568)		(203)		(5,446)		2,311
Changes in unrealized loss on pension		0		0		0		0

Income taxes related to other comprehensive income:
Changes in unrealized loss (gain) on securities available for sale		861		(82)		1,703		(1,791)
Changes in unrealized loss (gain) on hedging derivatives⁽¹⁾		48		(308)		(538)		1,776
Changes in unrealized loss on pension		0		0		0		0
Total other comprehensive (loss) income⁽¹⁾		(2,994)		1,263		(3,852)		339
Total comprehensive income⁽¹⁾	$	8,034	$	9,665	$	25,681	$	24,943
Changes in unrealized loss on securities available for sale										6,522		861		18,486		1,703
Changes in unrealized loss (gain) on hedging derivatives										361		48		1,254		(538)
Total other comprehensive loss										(21,618)		(2,994)		(64,892)		(3,852)
Total comprehensive (loss) income									$	(10,188)	$	8,034	$	(33,847)	$	25,681

~~(1)~~

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

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

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)⁽¹⁾

stock

Total⁽¹⁾
Balance at December 31, 2019

$
32,857

$
188,536

$
175,780

$
3,792

$
(4,677)

$
396,288
Net income

0

0

16,202

0

0

16,202
Other comprehensive income

0

0

0

(924)

0

(924)
Cash dividends declared ($0.44 per share)

0

0

(6,819)

0

0

(6,819)
Treasury stock purchased (405,208 shares)

0

0

0

0

(7,467)

(7,467)
Net issuance (61,025 shares) to employee stock plans, including related tax effects

0

406

0

0

251

657
Recognition of stock based compensation

0

584

0

0

0

584
Balance at June 30, 2020

$
32,857

$
189,526

$
185,163

$
2,868

$
(11,893)

$
398,521
Net income

0

0

8,402

0

0

8,402
Other comprehensive income

0

0

0

1,263

0

1,263
Cash dividends declared ($0.22 per share)

0

0

(3,316)

0

0

(3,316)
Common stock purchased (297,658 shares)

0

0

0

0

(6,003)

(6,003)
Net issuance (12,275 shares) to employee stock plans, including related tax effects

0

(199)

0

0

224

25
Recognition of stock based compensation

0

279

0

0

0

279
Balance at September 30, 2020

$
32,857

$
189,606

$
190,249

$
4,131

$
(17,672)

$
399,171

Balance at December 31, 2020

$
32,857

$
190,084

$
195,607

$
6,740

$
(18,223)

$
407,065
Allowance for credit losses cumulative-effect adjustment - ASU 2016-13 (Note 1)

0

0

(5,242)

0

0

(5,242)
Net income

0

0

18,505

0

0

18,505
Other comprehensive loss

0

0

0

(858)

0

(858)
Cash dividends declared ($0.46 per share)

0

0

(6,876)

0

0

(6,876)
Net issuance (56,290 shares) to employee stock plans, including related tax effects

0

(280)

0

0

449

169
Recognition of stock based compensation

0

997

0

0

0

997
Balance at June 30, 2021

$
32,857

$
190,801

$
201,994

$
5,882

$
(17,774)

$
413,760
Net income

0

0

11,028

0

0

11,028
Other comprehensive income

0

0

0

(2,994)

0

(2,994)
Cash dividends declared ($0.24 per share)

0

0

(3,596)

0

0

(3,596)
Net issuance (14,412 shares) to employee stock plans, including related tax effects

0

(276)

0

0

146

(130)
Recognition of stock based compensation

0

367

0

0

0

367
Balance at September 30, 2021

$
32,857

$
190,892

$
209,426

$
2,888

$
(17,628)

$
418,435

~~(1)~~

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


							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		—		—		18,505		—		—		18,505
Other comprehensive loss		—		—		—		(858)		—		(858)
Cash dividends declared ($0.46 per share)		—		—		(6,876)		—		—		(6,876)
Net issuance (56,290 shares) to employee stock plans, including related tax effects		—		(280)		—		—		449		169
Recognition of stock based compensation		—		997		—		—		—		997
Balance at June 30, 2021	$	32,857	$	190,801	$	201,994	$	5,882	$	(17,774)	$	413,760

Net income		—		—		11,028		—		—		11,028
Other comprehensive income		—		—		—		(2,994)		—		(2,994)
Cash dividends declared ($0.24 per share)		—		—		(3,596)		—		—		(3,596)
Net issuance (14,412 shares) to employee stock plans, including related tax effects		—		(276)		—		—		146		(130)
Recognition of stock based compensation		—		367		—		—		—		367
Balance at September 30, 2021	$	32,857	$	190,892	$	209,426	$	2,888	$	(17,628)	$	418,435

Balance at December 31, 2021	$	32,857	$	190,876	$	215,592	$	2,303	$	(17,481)	$	424,147
Net income		—		—		19,615		—		—		19,615
Other comprehensive loss		—		—		—		(43,274)		—		(43,274)
Cash dividends declared ($0.50 per share)		—		—		(7,509)		—		—		(7,509)
Net issuance (24,768 shares) to employee stock plans, including related tax effects		—		376		—		—		148		524
Recognition of stock based compensation		—		94		—		—		—		94
Balance at June 30, 2022	$	32,857	$	191,346	$	227,698	$	(40,971)	$	(17,333)	$	393,597

Net income		—		—		11,430		—		—		11,430
Other comprehensive loss		—		—		—		(21,618)		—		(21,618)
Cash dividends declared ($0.26 per share)		—		—		(3,910)		—		—		(3,910)
Net issuance (39,523 shares) to employee stock plans, including related tax effects		—		(530)		—		—		374		(156)
Recognition of stock based compensation		—		622		—		—		—		622
Balance at September 30, 2022	$	32,857	$	191,438	$	235,218	$	(62,589)	$	(16,959)	$	379,965

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)

Nine Months Ended September 30,
(in thousands)

2021

2020
Cash flows from operating activities:




Net income

$
29,533

$
24,604
Adjustments to reconcile net income to net cash provided by operating activities:


Provision for credit losses

(1,428)

4,265
Net amortization of securities

3,788

2,472
Change in unamortized net loan costs and premiums

(2,739)

1,923
Premises and equipment depreciation

3,466

3,571
Stock-based compensation expense

1,364

863
Accretion of purchase accounting entries, net

10

7
Amortization of other intangibles

704

768
Income from cash surrender value of bank-owned life insurance policies

(1,510)

(1,525)
Gain on sales of securities, net

(1,980)

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

851

(578)
(Decrease) increase in lease liabilities

(786)

625
Loss on other real estate owned

—

366
(Gain) loss on premises and equipment, net

(137)

90
Net change in other assets and liabilities

(373)

(3,978)
Net cash provided by operating activities

30,763

31,987

Cash flows from investing activities:




Proceeds from sales of securities available for sale

54,388

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

99,580

109,314
Purchases of securities available for sale

(123,335)

(131,107)
Net change in loans

47,519

(71,233)
Purchase of FHLB stock

(790)

(4,044)
Proceeds from sale of FHLB stock

4,634

10,748
Purchase of premises and equipment, net

(1,216)

(4,449)
Net investment in community limited partnerships

(1,112)

—
Acquisitions, net of cash acquired

—

(340)
Proceeds from sale of other real estate owned

—

(113)
Net cash provided by (used in) investing activities

79,668

(3,703)

Cash flows from financing activities:




Net change in deposits

101,050

239,164
Net change in short-term senior borrowings

9,324

(273,268)
Proceeds from long-term senior borrowings

—

273,342
Repayments of long-term senior borrowings

(89,018)

(71,187)
Net change in short-term other borrowings

(6,112)

(14,784)
Net change subordinated debt issuance costs

—

119
Exercise of stock options

39

682
Purchase of treasury and common stock

—

(13,470)
Cash dividends paid on common stock

(10,472)

(10,135)
Net cash provided by financing activities

4,811

130,463
(continued)


	Nine Months Ended September 30,
(in thousands)	2022		2021
Cash flows from operating activities:
Net income	$	31,045	$	29,533
Adjustments to reconcile net income to net cash provided by operating activities:
Originations of loans held for sale		(33,919)		(149,948)
Proceeds from loan sales		38,184		153,832
Loss on sale of loans		281		3,621
Provision for credit losses		2,217		(1,428)
Net amortization of securities		2,287		3,788
Change in unamortized net loan costs and premiums		353		(2,739)
Premises and equipment depreciation		3,186		3,466
Stock-based compensation expense		716		1,364
Accretion of purchase accounting entries, net		—		10
Amortization of other intangibles		699		704
Income from cash surrender value of bank-owned life insurance policies		(1,501)		(1,510)
Gain on sales of securities, net		(53)		(1,980)
Amortization of right-of-use lease assets		893		851
Decrease in lease liabilities		(851)		(786)
Gain on premises and equipment, net		(65)		(137)
Net change in other assets and liabilities		(2,954)		(7,878)
Net cash provided by operating activities		40,518		30,763

Cash flows from investing activities:
Proceeds from sales of securities available for sale		19,591		54,388
Proceeds from maturities, calls and prepayments of securities available for sale		48,073		99,580
Purchases of securities available for sale		(99,294)		(123,335)
Net change in loans		(319,036)		47,360
Recoveries of previously charged off loans		312		159
Purchase of FHLB stock		(2,924)		(790)
Proceeds from sale of FHLB stock		1,273		4,634
Purchase of premises and equipment, net		(1,842)		(1,216)
Net investment in community limited partnerships		(1,430)		(1,112)
Net cash (used in) provided by investing activities		(355,277)		79,668

Cash flows from financing activities:
Net change in deposits		87,136		101,050
Net change in short-term senior borrowings		92,250		9,324
Repayments of long-term senior borrowings		(21,014)		—
Net change in short-term other borrowings		(886)		(89,018)
Net issuance to employee stock plans		368		(6,073)
Cash dividends paid on common stock		(11,419)		(10,472)
Net cash provided by financing activities		146,435		4,811

Net change in cash and cash equivalents		(168,324)		115,242
Cash and cash equivalents at beginning of year		250,389		226,007
Cash and cash equivalents at end of period	$	82,065	$	341,249

Supplemental cash flow information:
Interest paid	$	7,028	$	13,052
Income taxes paid, net		6,781		7,755

~~Table of Contents~~

~~BAR HARBOR BANKSHARES AND SUBSIDIARIES~~

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

Nine Months Ended September 30,
(in thousands)

2021

2020
Net change in cash and cash equivalents

115,242

158,747
Cash and cash equivalents at beginning of year

226,007

56,910
Cash and cash equivalents at end of period

$
341,249

$
215,657

Supplemental cash flow information:




Interest paid

$
13,052

$
22,085
Income taxes paid, net

7,755

4,806

Acquisition of non-cash assets and liabilities:

Assets acquired

—

1,171
Liabilities acquired

—

(343)

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

Table of Contents

BAR HARBOR BANKSHARES AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

NOTE 1. BASIS OF PRESENTATION

The consolidated financial statements (unaudited) (the “financial statements”) of Bar Harbor Bankshares and its subsidiaries (the ~~“Company”~~“Company,” “we,” “our” or ~~“Bar Harbor”)~~“us” or similar terms) have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”). ~~Bar Harbor Bankshares~~The Company is a Maine Financial Institution Holding Company for the purposes of the laws of the ~~state~~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 fiscal 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

~~Table of Contents~~

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

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

~~Table of Contents~~

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.

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

~~Table of Contents~~

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. 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~~

~~Revision of Previously Issued Financial Statements~~

The Company has revised amounts reported in previously issued financial statements for the periods presented in this Quarterly Report on Form 10-Q related to errors. The revised amounts relate to derivatives that were incorrectly presented as assets instead of liabilities and related equity effects net of tax and the related effects on comprehensive income and shareholders’ equity.

~~The following tables present the revisions to the line items of our previously issued financial statements to reflect the correction of errors:~~

Consolidated Balance Sheets

December 31, 2020

As Reported

Adjustment

As Revised
Deferred tax assets, net

$
1,745

$
1,302

$
3,047
Other assets

73,662

(2,789)

70,873
Total assets

$
3,725,762

$
(1,487)

$
3,724,275

Other liabilities

$
72,183

$
2,789

$
74,972
Total liabilities

3,314,421

2,789

3,317,210
Total shareholders' equity

411,341

(4,276)

407,065
Total liabilities and shareholders' equity

$
3,725,762

$
(1,487)

$
3,724,275

Consolidated Statements of Comprehensive Income (Unaudited)

Three months ended September 30, 2020

As Reported

Adjustment

As Revised
Other comprehensive income, before tax:

Changes in unrealized gain (loss) on hedging derivatives

$
805

$
497

$
1,302

Income taxes related to other comprehensive income:

Changes in unrealized (gain) loss on hedging derivatives

(190)

(118)

(308)
Total other comphrensive income

884

379

1,263
Total comphrensive income

$
9,286

$
379

$
9,665

Nine months ended September 30, 2020

As Reported

Adjustment

As Revised
Other comprehensive income, before tax:

Changes in unrealized gain (loss) on hedging derivatives

$
(833)

$
(6,735)

$
(7,568)

Income taxes related to other comprehensive income:

Changes in unrealized (gain) loss on hedging derivatives

195

1,580

1,776
Total other comphrensive income

5,494

(5,155)

339
Total comphrensive income

$
30,098

$
(5,155)

$
24,943

~~Table of Contents~~

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

As Reported

Adjustment

As Revised
Balance at December 31, 2019

$
396,407

$
(119)

$
396,288
Beginning accumulated other comprehensive income

3,911

(119)

3,792
Other comprehensive income

4,610

(5,534)

(924)
Ending accumulated other comprehensive income

8,521

(5,653)

2,868

Balance at June 30, 2020

$
404,174

$
(5,653)

$
398,521
Beginning accumulated other comprehensive income

8,521

(5,653)

2,868
Other comprehensive income

884

379

1,263
Ending accumulated other comprehensive income

9,405

(5,274)

4,131

Balance at September 30, 2020

$
404,445

$
(5,274)

$
399,171

Balance at December 31, 2020

$
411,341

$
(4,276)

$
407,065
Beginning accumulated other comprehensive income

11,016

(4,276)

6,740
Other comprehensive income

(3,322)

2,464

(858)
Ending accumulated other comprehensive income

7,694

(1,812)

5,882

Balance at June 30, 2021

$
415,572

$
(1,812)

$
413,760

~~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 (“TDR”) 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.

2011

Table of Contents

NOTE 2. SECURITIES AVAILABLE FOR SALE

The following is a summary of securities available for ~~sale:~~sale (“AFS”):


			Gross		Gross						Gross		Gross
			Unrealized		Unrealized						Unrealized		Unrealized
(in thousands)	Amortized Cost		Gains		Losses		Fair Value		Amortized Cost		Gains		Losses		Fair Value
September 30, 2021
September 30, 2022
Mortgage-backed securities:
US Government-sponsored enterprises	$	181,821	$	3,386	$	(1,939)	$	183,268	$	252,369	$	4	$	(36,349)	$	216,024
US Government agency		53,475		1,470		(239)		54,706		93,643		11		(10,128)		83,526
Private label		62,843		185		(114)		62,914		72,484		34		(5,749)		66,769
Obligations of states and political subdivisions thereof		158,914		2,090		(827)		160,177		123,350		9,205		(27,903)		104,652
Corporate bonds		82,533		2,376		(647)		84,262		91,512		26		(5,757)		85,781
Total securities available for sale	$	539,586	$	9,507	$	(3,766)	$	545,327	$	633,358	$	9,280	$	(85,886)	$	556,752


			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
December 31, 2021
Mortgage-backed securities:
US Government-sponsored enterprises	$	206,834	$	6,018	$	(462)	$	212,390	$	237,283	$	2,289	$	(3,455)	$	236,117
US Government agency		82,878		2,870		(116)		85,632		79,143		1,016		(522)		79,637
Private label		19,810		40		(141)		19,709		68,691		142		(138)		68,695
Obligations of states and political subdivisions thereof		164,766		4,244		(6)		169,004		140,585		1,489		(298)		141,776
Corporate bonds		97,689		1,465		(843)		98,311		89,994		2,479		(422)		92,051
Total securities available for sale	$	571,977	$	14,637	$	(1,568)	$	585,046	$	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 September 30, 2022 and December 31, 2021, ~~the Company~~we carried 0no 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 September 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	$	11,755	$	11,664	$	195	$	196
Over 1 year to 5 years		23,313		23,863		30,292		28,426
Over 5 years to 10 years		48,500		47,493		49,666		55,025
Over 10 years		157,879		161,419		134,709		106,786
Total bonds and obligations		241,447		244,439		214,862		190,433
Mortgage-backed securities		298,139		300,888		418,496		366,319
Total securities available for sale	$	539,586	$	545,327	$	633,358	$	556,752

2112

Table of Contents

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


	Three Months Ended				Nine Months Ended				Three Months Ended				Nine Months Ended
	September 30,				September 30,				September 30,				September 30,
(in thousands)	2021		2020		2021		2020		2022		2021		2022		2021
Gross gains on sales of available for sale securities	$	1,980	$	—	$	2,030	$	1,508	$	142	$	1,980	$	151	$	2,030
Gross losses on sales of available for sale securities		(50)		—		(50)		(22)		(98)		(50)		(98)		(50)
Net gains on sale of available for sale securities	$	1,930	$	—	$	1,980	$	1,486	$	44	$	1,930	$	53	$	1,980

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
September 30, 2021
September 30, 2022
Mortgage-backed securities:
US Government-sponsored enterprises	$	1,408	$	77,412	$	531	$	16,618	$	1,939	$	94,030	$	18,262	$	139,219	$	18,087	$	76,291	$	36,349	$	215,510
US Government agency		130		10,488		109		4,729		239		15,217		6,591		64,575		3,537		17,021		10,128		81,596
Private label		109		42,852		5		17		114		42,869		3,466		35,740		2,283		30,994		5,749		66,734
Obligations of states and political subdivisions thereof		827		48,355		—		—		827		48,355		20,425		78,085		7,478		21,373		27,903		99,458
Corporate bonds		14		2,486		633		11,617		647		14,103		3,770		65,251		1,987		16,763		5,757		82,014
Total securities available for sale	$	2,488	$	181,593	$	1,278	$	32,981	$	3,766	$	214,574	$	52,514	$	382,870	$	33,372	$	162,442	$	85,886	$	545,312


	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

2213

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 September 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 strong~~our 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 September 30, ~~2021:~~2022:

US Government-sponsored enterprises

49489 out of the total ~~528~~521 securities in ~~the Company’s~~our portfolios of AFS US Government-sponsored enterprises were in unrealized loss positions. Aggregate unrealized losses represented ~~1.07%~~14.55% of the amortized cost of securities in unrealized loss positions. The Federal National Mortgage Association and Federal Home Loan Mortgage Corporation guarantee the contractual cash flows of all of ~~the Company’s~~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

11139 out of the total ~~150~~161 securities in ~~the Company’s~~our portfolios of AFS US Government agency securities were in unrealized loss positions. Aggregate unrealized losses represented ~~0.45%~~11.04% 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

1433 of the total 3135 securities in ~~the Company’s~~our portfolio of AFS private label mortgage-backed securities were in unrealized loss positions. Aggregate unrealized losses represented ~~0.18%~~7.93% 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

1268 of the total ~~119~~83 securities in ~~the Company’s~~our portfolio of AFS municipal bonds and obligations were in unrealized loss positions. Aggregate unrealized losses represented ~~0.52%~~22.06% of the amortized cost of securities in unrealized loss positions. ~~The Company~~We continually ~~monitors~~monitor the municipal bond sector of the market carefully and periodically ~~evaluates~~evaluate 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

426 out of the total 2731 securities in ~~the Company’s~~our portfolio of AFS corporate bonds were in an unrealized loss position. The aggregate unrealized loss represents ~~0.78%~~7.07% 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~~we have 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.

2314

Table of Contents

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:


	September 30,		December 31,		September 30,		December 31,
(in thousands)	2021		2020		2022		2021
Commercial construction	$	152,700	$	117,882	$	97,156	$	56,263
Commercial real estate owner occupied		253,792		219,217		256,475		257,122
Commercial real estate non-owner occupied		733,353		716,776		1,081,924		887,092
Tax exempt		42,448		47,862		41,622		41,280
Commercial and industrial		336,989		355,684		319,645		307,112
Residential real estate		917,301		995,216		953,113		888,263
Home equity		88,002		100,096		92,296		86,657
Consumer other		9,569		10,152		8,133		8,121
Total loans		2,534,154		2,562,885		2,850,364		2,531,910
Allowance for credit losses		22,448		19,082		25,018		22,718
Net loans	$	2,511,706	$	2,543,803	$	2,825,346	$	2,509,192

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


	September 30,		December 31,		September 30,		December 31,
(in thousands)	2021		2020		2022		2021
Unamortized net loan origination costs	$	4,015	$	5,157
Unamortized net premium on purchased loans		(65)		(85)
Total unamortized net costs and premiums	$	3,950	$	5,072
Net unamortized loan origination costs					$	3,367	$	3,014
Net unamortized fair value discount on acquired loans						(3,898)		(4,758)
Total					$	(531)	$	(1,744)

~~The Company elected to~~We exclude accrued interest receivable from the amortized cost basis of loans disclosed throughout this footnote. As of September 30, ~~2021~~2022 and December 31, ~~2020,~~2021, accrued interest receivable for loans totaled ~~$8.7~~$8.8 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~~Coronavirus Aid, Relief, and Economic Security Act (CARES Act) and subsequent legislation established the Payroll Protection Program ~~(PPP),~~(“PPP”) are administered directly by the Small Business Administration ~~(SBA)~~(“SBA”). ~~The Company has participated in both 2020 and 2021 rounds of funding.~~ As of September 30, ~~2021~~2022, we had no remaining PPP loans and as of December 31, ~~2020, the Company~~2021, we had ~~404 and 746~~61 PPP loans outstanding, with an outstanding principal balance of $24.2 million and $53.8 million, respectively. 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.$6.7 million. 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)~~(“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.

2516

Table of Contents

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


	Three Months Ended September 30, 2021										At or for the Three Months Ended September 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	$	2,372	$	—	$	—	$	(286)	$	2,086	$	1,010	$	—	$	—	$	213	$	1,223
Commercial real estate owner occupied		2,552		(142)		72		237		2,719		2,722		—		7		132		2,861
Commercial real estate non-owner occupied		5,604		—		—		(22)		5,582		7,361		—		—		610		7,971
Tax exempt		91		—		—		(6)		85		105		—		—		(11)		94
Commercial and industrial		5,225		(24)		—		105		5,306		4,820		(8)		20		290		5,122
Residential real estate		6,069		(6)		19		(290)		5,792		6,806		(11)		6		85		6,886
Home equity		822		(49)		1		30		804		865		—		2		(76)		791
Consumer other		80		(65)		1		58		74		67		(66)		6		63		70
Total	$	22,815	$	(286)	$	93	$	(174)	$	22,448	$	23,756	$	(85)	$	41	$	1,306	$	25,018

Nine Months Ended September 30, 2021

Balance at

Beginning of

Impact of ASC

Balance at
(in thousands)

Period

326

Charge Offs

Recoveries

Provision

End of Period
Commercial construction

$
824

$
1,196

$
—

$
18

$
48

$
2,086
Commercial real estate owner occupied

1,783

708

(403)

72

559

2,719
Commercial real estate non-owner occupied

7,864

(2,008)

—

4

(278)

5,582
Tax exempt

58

40

—

—

(13)

85
Commercial and industrial

3,137

2,996

(44)

14

(797)

5,306
Residential real estate

5,010

1,732

(67)

141

(1,024)

5,792
Home equity

285

603

(108)

48

(24)

804
Consumer other

121

(39)

(119)

10

101

74
Total

$
19,082

$
5,228

$
(741)

$
307

$
(1,428)

$
22,448


	Three Months Ended September 30, 2020										At or for the Nine Months Ended September 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	$	532	$	—	$	—	$	185	$	717	$	2,111	$	—	$	—	$	(888)	$	1,223
Commercial real estate owner occupied		1,524		—		—		370		1,894		2,751		—		120		(10)		2,861
Commercial real estate non-owner occupied		5,926		(266)		14		783		6,457		5,650		—		—		2,321		7,971
Tax exempt		64		—		—		4		68		86		—		—		8		94
Commercial and industrial		3,056		(24)		14		236		3,282		5,369		(14)		56		(289)		5,122
Residential real estate		4,991		—		1		86		5,078		5,862		(26)		103		947		6,886
Home equity		318		—		—		(4)		314		814		(6)		22		(39)		791
Consumer other		98		(149)		8		140		97		75		(181)		9		167		70
Total	$	16,509	$	(439)	$	37	$	1,800	$	17,907	$	22,718	$	(227)	$	310	$	2,217	$	25,018

2617

Table of Contents

Nine Months Ended September 30, 2020

Balance at

Beginning of

Balance at
(in thousands)

Period

Charge Offs

Recoveries

Provision

End of Period
Commercial construction

$
317

$
—

$
—

$
400

$
717
Commercial real estate owner occupied

2,368

—

—

(474)

1,894
Commercial real estate non-owner occupied

4,695

(1,137)

109

2,790

6,457
Tax exempt

67

—

—

1

68
Commercial and industrial

3,262

(360)

25

355

3,282
Residential real estate

4,213

(32)

12

885

5,078
Home equity

320

—

—

(6)

314
Consumer other

111

(341)

13

314

97
Total

$
15,353

$
(1,870)

$
159

$
4,265

$
17,907


	At or for the Three Months Ended September 30, 2021
	Balance at
	Beginning of								Balance at
(in thousands)	Period		Charge Offs		Recoveries		Provision		End of Period
Commercial construction	$	2,372	$	—	$	—	$	(286)	$	2,086
Commercial real estate owner occupied		2,552		(142)		72		237		2,719
Commercial real estate non-owner occupied		5,604		—		—		(22)		5,582
Tax exempt		91		—		—		(6)		85
Commercial and industrial		5,225		(24)		—		105		5,306
Residential real estate		6,069		(6)		19		(290)		5,792
Home equity		822		(49)		1		30		804
Consumer other		80		(65)		1		58		74
Total	$	22,815	$	(286)	$	93	$	(174)	$	22,448



	At or for the Nine Months Ended September 30, 2021
	Balance at
	Beginning of		Impact of ASC								Balance at
(in thousands)	Period		326		Charge Offs		Recoveries		Provision		End of Period
Commercial construction	$	824	$	1,196	$	—	$	18	$	48	$	2,086
Commercial real estate owner occupied		1,783		708		(403)		72		559		2,719
Commercial real estate non-owner occupied		7,864		(2,008)		—		4		(278)		5,582
Tax exempt		58		40		—		—		(13)		85
Commercial and industrial		3,137		2,996		(44)		14		(797)		5,306
Residential real estate		5,010		1,732		(67)		141		(1,024)		5,792
Home equity		285		603		(108)		48		(24)		804
Consumer other		121		(39)		(119)		10		101		74
Total	$	19,082	$	5,228	$	(741)	$	307	$	(1,428)	$	22,448

Table of Contents

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 September 30, 2021		Nine Months Ended September 30, 2021		Three Months Ended September 30, 2022		Nine Months Ended September 30, 2022
Begininng Balance	$	1,921	$	359
Impact of CECL adoption		—		1,616
Beginning Balance					$	2,523	$	2,152
Provision for credit losses		280		226		(26)		345
Ending Balance	$	2,201	$	2,201	$	2,497	$	2,497

			��
(in thousands)	Three Months Ended September 30, 2020		Nine Months Ended September 30, 2020		Three Months Ended September 30, 2021		Nine Months Ended September 30, 2021
Begininng Balance	$	319	$	314
Beginning Balance					$	1,921	$	359
Impact of ASC 326						—		1,616
Provision for credit losses		2		7		280		226
Ending Balance	$	321	$	321	$	2,201	$	2,201

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.

~~Table of Contents~~

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

Table of Contents

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.

Table of Contents

The following table presents our loans by year of origination, loan segmentation and risk indicator as of September 30, 2022:



(in thousands)	2022		2021		2020		2019		2018		Prior		Total
Commercial construction
Risk rating:
Pass	$	34,032	$	32,179	$	5,928	$	1,011	$	973	$	—	$	74,123
Special mention		—		—		23,033		—		—		—		23,033
Substandard		—		—		—		—		—		—		—
Total	$	34,032	$	32,179	$	28,961	$	1,011	$	973	$	—	$	97,156

Commercial real estate owner occupied
Risk rating:
Pass	$	20,248	$	12,973	$	23,785	$	31,795	$	47,090	$	110,306	$	246,197
Special mention		—		—		245		672		1,145		1,711		3,773
Substandard		—		—		—		—		931		5,276		6,207
Doubtful		—		—		—		—		151		147		298
Total	$	20,248	$	12,973	$	24,030	$	32,467	$	49,317	$	117,440	$	256,475

Commercial real estate non-owner occupied
Risk rating:
Pass	$	283,316	$	249,574	$	146,764	$	89,252	$	35,671	$	259,250	$	1,063,827
Special mention		—		—		—		139		918		14,665		15,722
Substandard		—		—		—		173		—		2,048		2,221
Doubtful		—		—		—		—		—		154		154
Total	$	283,316	$	249,574	$	146,764	$	89,564	$	36,589	$	276,117	$	1,081,924

Tax exempt
Risk rating:
Pass	$	6,944	$	1,044	$	256	$	778	$	13,276	$	19,324	$	41,622
Special mention		—		—		—		—		—		—		—
Substandard		—		—		—		—		—		—		—
Total	$	6,944	$	1,044	$	256	$	778	$	13,276	$	19,324	$	41,622

Commercial and industrial
Risk rating:
Pass	$	56,222	$	70,975	$	60,338	$	29,867	$	11,053	$	84,792	$	313,247
Special mention		1,497		—		155		1,083		516		2,432		5,683
Substandard		—		55		12		70		—		514		651
Doubtful		—		—		—		—		—		64		64
Total	$	57,719	$	71,030	$	60,505	$	31,020	$	11,569	$	87,802	$	319,645

Residential real estate
Performing	$	170,291	$	178,875	$	113,573	$	71,869	$	51,588	$	361,823	$	948,019
Nonperforming		—		48		—		50		643		4,353		5,094
Total	$	170,291	$	178,923	$	113,573	$	71,919	$	52,231	$	366,176	$	953,113

Home equity
Performing	$	11,839	$	12,152	$	8,965	$	7,796	$	7,326	$	43,173	$	91,251
Nonperforming		—		—		—		—		—		1,045		1,045
Total	$	11,839	$	12,152	$	8,965	$	7,796	$	7,326	$	44,218	$	92,296

Consumer other
Performing	$	3,833	$	1,596	$	1,029	$	362	$	328	$	980	$	8,128
Nonperforming		—		—		5		—		—		—		5
Total	$	3,833	$	1,596	$	1,034	$	362	$	328	$	980	$	8,133

Total Loans	$	588,222	$	559,471	$	384,088	$	234,917	$	171,609	$	912,057	$	2,850,364

Table of Contents

The following table presents our loans by year of origination, loan segmentation and risk indicator as of December 31, 2021:



(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

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

Table of Contents

Past Dues

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


	September 30, 2022
(in thousands)	30-59		60-89		90+		Total Past Due		Current		Total Loans
Commercial construction	$	—	$	—	$	—	$	—	$	97,156	$	97,156
Commercial real estate owner occupied		84		—		—		84		256,391		256,475
Commercial real estate non-owner occupied		298		—		173		471		1,081,453		1,081,924
Tax exempt		—		—		—		—		41,622		41,622
Commercial and industrial		200		100		12		312		319,333		319,645
Residential real estate		565		928		1,882		3,375		949,738		953,113
Home equity		269		236		204		709		91,587		92,296
Consumer other		11		4		—		15		8,118		8,133
Total	$	1,427	$	1,268	$	2,271	$	4,966	$	2,845,398	$	2,850,364


	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

Non-Accrual Loans

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


	September 30, 2022
			Nonaccrual With No		90+ Days Past
(in thousands)	Nonaccrual		Related Allowance		Due and Accruing
Commercial construction	$	—	$	—	$	—
Commercial real estate owner occupied		604		371		—
Commercial real estate non-owner occupied		747		430		—
Tax exempt		—		—		—
Commercial and industrial		279		187		2
Residential real estate		5,094		1,539		242
Home equity		1,044		70		15
Consumer other		5		—		—
Total	$	7,773	$	2,597	$	259

Table of Contents


	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

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.


	September 30, 2022				December 31, 2021
(in thousands)	Real Estate		Other		Real Estate		Other
Commercial construction	$	—	$	—	$	—	$	—
Commercial real estate owner occupied		604		—		783		—
Commercial real estate non-owner occupied		747		—		622		—
Tax exempt		—		—		—		—
Commercial and industrial		122		157		385		292
Residential real estate		5,094		—		6,835		—
Home equity		1,044		—		1,269		—
Consumer other		5		—		5		—
Total	$	7,616	$	157	$	9,899	$	292

Troubled Debt Restructuring Loans

The loan portfolio also includes certain loans that have been modified in a 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 no modifications qualifying as TDR’s for the three and nine months ended September 30, 2022 and 2021.

Foreclosure

Residential mortgage loans collateralized by real estate that are in the process of foreclosure as of September 30, 2022 and December 31, 2021 totaled $249 thousand and $574 thousand, respectively.

Mortgage Banking

Loans held for sale had at September 30, 2022 and December 31, 2021 had an unpaid principal balance of $987 thousand 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

Table of Contents

of $200 thousand, and $14.8 million at September 30, 2022 and December 31, 2021, respectively. Refer to Note 8 for further discussion of forward delivery commitments.

For the three months ended September 30, 2022 and 2021, we sold $5.2 million and $28.5 million, respectively, of residential mortgage loans on the secondary market, which resulted in a net loss on sale of loans (net of costs, including direct and indirect origination costs) of $52 thousand and a gain of $682 thousand, respectively. For the nine months ended September 30, 2022 and 2021, we sold $38.2 million and $153.8 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 $281 thousand and $3.6 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.

Table of Contents

NOTE 4. BORROWED FUNDS

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


	September 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	$	167,250	2.95	%	$	75,000	0.30	%
Other borrowings		18,916	0.14			19,802	0.17
Total short-term borrowings		186,166	1.27			94,802	0.21
Long-term borrowings
Advances from the FHLB		2,591	0.39			23,598	1.08
Subordinated borrowings		60,248	5.05			60,124	4.34
Total long-term borrowings		62,839	4.86			83,722	3.42
Total	$	249,005	1.74	%	$	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 no outstanding balance on the FHLB line of credit for the periods ended September 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 September 30, 2022, our available secured line of credit at the FRB was $84.1 million. We have pledged certain loans and securities to the FRB to support this arrangement. There were no borrowings with the FRB for the periods ended 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 September 30, 2022 and December 31, 2021. There was no outstanding balance on the line of credit as of September 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 September 30, 2022 include no 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 September 30, 2022 is, as follows:


			Weighted Average
(in thousands, except rates)	Amount		Rate
2022	$	166,250	2.97	%
2023		1,000	—
2024		2,300	—
2025		—	—
2026		—	—
2027 and thereafter		291	3.45
Total FHLB advances	$	169,841	2.92	%

On November 26, 2019, we entered into Subordinated Note Purchase Agreements with certain qualified institutional buyers and accredited investors pursuant to which we sold and issued $40.0 million in aggregate principal amount of subordinated notes due 2029 (the “Notes”). 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 Overnight

Table of Contents

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 $372 thousand as of September 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)	September 30, 2022		December 31, 2021
Customer Repurchase Agreements
US Government-sponsored enterprises	$	18,916	$	19,802
Total	$	18,916	$	19,802

Table of Contents

NOTE 5. DEPOSITS

A summary of time deposits is, as follows:


(in thousands)	September 30, 2022		December 31, 2021
Time less than $100,000	$	167,056	$	181,586
Time $100,000 through $250,000		113,168		169,645
Time $250,000 or more		54,024		74,301
Total	$	334,248	$	425,532

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


(in thousands)	September 30, 2022		December 31, 2021
Within 1 year	$	262,787	$	318,692
Over 1 year to 2 years		46,867		71,247
Over 2 years to 3 years		12,626		18,201
Over 3 years to 4 years		5,971		8,498
Over 4 years to 5 years		5,302		6,751
Over 5 years		695		2,143
Total	$	334,248	$	425,532

Included in time deposits are brokered deposits of $15.1 million and $16.1 million at September 30, 2022 and December 31, 2021, respectively. Also included in time deposits are reciprocal deposits of $12.7 million and $17.3 million at September 30, 2022 and December 31, 2021, respectively.

Table of Contents

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

(in thousands)

2021

2020

2019

2018

2017

Prior

Total
Commercial construction














Risk rating:














Pass

$
22,192

$
76,226

$
44,453

$
9,829

$
—

$
—

$
152,700
Special mention

—

—

—

—

—

—

—
Substandard

—

—

—

—

—

—

—
Total

$
22,192

$
76,226

$
44,453

$
9,829

$
—

$
—

$
152,700

Commercial real estate owner occupied














Risk rating:














Pass

$
9,937

$
16,003

$
35,366

$
47,026

$
20,038

$
110,663

$
239,033
Special mention

—

—

767

—

—

3,125

3,892
Substandard

—

—

—

248

248

10,030

10,526
Doubtful

—

—

—

172

—

169

341
Total

$
9,937

$
16,003

$
36,133

$
47,446

$
20,286

$
123,987

$
253,792

Commercial real estate non-owner occupied














Risk rating:














Pass

$
101,706

$
147,754

$
90,963

$
40,545

$
147,197

$
186,056

$
714,221
Special mention

—

—

—

—

—

15,612

15,612
Substandard

—

—

—

131

131

3,086

3,348
Doubtful

—

—

—

—

—

172

172
Total

$
101,706

$
147,754

$
90,963

$
40,676

$
147,328

$
204,926

$
733,353

Tax exempt














Risk rating:














Pass

$
1,511

$
604

$
975

$
14,453

$
5,387

$
19,518

$
42,448
Special mention

—

—

—

—

—

—

—
Substandard

—

—

—

—

—

—

—
Total

$
1,511

$
604

$
975

$
14,453

$
5,387

$
19,518

$
42,448

Commercial and industrial














Risk rating:














Pass

$
104,179

$
64,303

$
36,010

$
17,635

$
35,407

$
73,972

$
331,506
Special mention

619

222

717

596

202

1,429

3,785
Substandard

98

—

549

14

50

677

1,388
Doubtful

—

—

—

—

122

188

310
Total

$
104,896

$
64,525

$
37,276

$
18,245

$
35,781

$
76,266

$
336,989

(continued)

~~Table of Contents~~

(in thousands)

2021

2020

2019

2018

2017

Prior

Total
Residential real estate














Performing

$
143,071

$
126,171

$
95,942

$
70,062

$
69,486

$
404,395

$
909,127
Nonperforming

—

—

—

576

183

7,415

8,174
Total

$
143,071

$
126,171

$
95,942

$
70,638

$
69,669

$
411,810

$
917,301

Home equity














Performing

$
8,227

$
10,946

$
9,775

$
7,647

$
6,975

$
43,133

$
86,703
Nonperforming

—

—

—

—

—

1,299

1,299
Total

$
8,227

$
10,946

$
9,775

$
7,647

$
6,975

$
44,432

$
88,002

Consumer other














Performing

$
3,037

$
1,942

$
1,023

$
803

$
329

$
2,429

$
9,563
Nonperforming

—

—

—

—

—

6

6
Total

$
3,037

$
1,942

$
1,023

$
803

$
329

$
2,435

$
9,569

Total Loans

$
394,577

$
444,171

$
316,540

$
209,737

$
285,755

$
883,374

$
2,534,154

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

December 31, 2020

Commercial

Commercial

Residential





Real Estate

and Industrial

Real Estate

Consumer

Total
Grade:









Pass

$
1,053,773

$
422,016

$
—

$
—

$
1,475,789
Performing

—

—

914,749

112,190

1,026,939
Special mention

6,075

2,771

—

—

8,846
Substandard

22,267

15,180

—

—

37,447
Doubtful

2,265

1,100

—

—

3,365
Loss

1

2

—

—

3
Non-performing

—

—

9,142

1,354

10,496
Total

$
1,084,381

$
441,069

$
923,891

$
113,544

$
2,562,885

~~Past Dues~~

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

September 30, 2021
(in thousands)

30-59

60-89

90+

Total Past Due

Current

Total Loans
Commercial construction

$
—

$
—

$
—

$
—

$
152,700

$
152,700
Commercial real estate owner occupied

—

10

627

637

253,155

253,792
Commercial real estate non-owner occupied

314

—

117

431

732,922

733,353
Tax exempt

—

—

—

—

42,448

42,448
Commercial and industrial

44

35

313

392

336,597

336,989
Residential real estate

414

1,007

2,796

4,217

913,084

917,301
Home equity

344

95

62

501

87,501

88,002
Consumer other

32

2

—

34

9,535

9,569
Total

$
1,148

$
1,149

$
3,915

$
6,212

$
2,527,942

$
2,534,154

~~Table of Contents~~

December 31, 2020
(in thousands)

30-59

60-89

90+

Total Past Due

Current

Total Loans
Commercial construction

$
74

$
—

$
1

$
75

$
117,807

$
117,882
Commercial real estate owner occupied

1,309

464

438

2,211

217,006

219,217
Commercial real estate non-owner occupied

503

674

624

1,801

714,975

716,776
Tax exempt

—

—

—

—

47,862

47,862
Commercial and industrial

161

—

193

354

355,330

355,684
Residential real estate

9,178

2,511

3,200

14,889

980,327

995,216
Home equity

1,062

614

375

2,051

98,045

100,096
Consumer other

20

—

2

22

10,130

10,152
Total

$
12,307

$
4,263

$
4,833

$
21,403

$
2,541,482

$
2,562,885

~~Non-Accrual Loans~~

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

September 30, 2021

Nonaccrual With No

90+ Days Past
(in thousands)

Nonaccrual

Related Allowance

Due and Accruing
Commercial construction

$
—

$
—

$
—
Commercial real estate owner occupied

1,184

808

366
Commercial real estate non-owner occupied

770

314

—
Tax exempt

—

—

—
Commercial and industrial

775

629

149
Residential real estate

8,174

3,217

105
Home equity

1,298

316

—
Consumer other

6

—

—
Total

$
12,207

$
5,284

$
620

December 31, 2020

Nonaccrual With No

90+ Days Past
(in thousands)

Nonaccrual

Related Allowance

Due and Accruing
Commercial construction

$
258

$
—

$
—
Commercial real estate owner occupied

3,038

929

—
Commercial real estate non-owner occupied

383

118

—
Tax exempt

—

—

—
Commercial and industrial

1,223

1,065

—
Residential real estate

5,883

4,948

—
Home equity

1,345

1,346

267
Consumer other

58

58

—
Total

$
12,188

$
8,464

$
267

~~Table of Contents~~

~~Collateral Dependent Loans~~

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

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

September 30, 2021

December 31, 2020
(in thousands)

Real Estate

Other

Real Estate

Other
Commercial construction

$
—

$
—

$
259

$
—
Commercial real estate owner occupied

1,184

—

3,441

—
Commercial real estate non-owner occupied

770

—

383

—
Tax exempt

—

—

—

—
Commercial and industrial

436

339

625

607
Residential real estate

8,174

—

7,432

—
Home equity

1,298

—

1,493

—
Consumer other

6

—

60

—
Total

$
11,868

$
339

$
13,693

$
607

~~Pre Adoption of ASC 326 – Impaired Loans~~

For periods prior to the adoption of CECL, loans were considered impaired when, based on current information 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 nine months ended September 30, 2021.

Three Months Ended September 30, 2020

Pre-Modification

Post-Modification

Number of

Outstanding

Outstanding

(in thousands)

Modifications

Balance

Balance

Reserve
Commercial and industrial

1

86

86

—
Total

1

$
86

$
86

$
—

Nine Months Ended September 30, 2020

Pre-Modification

Post-Modification

Number of

Outstanding

Outstanding

(in thousands)

Modifications

Balance

Balance

Reserve
Commercial construction

—

$
—

$
—

$
—
Commercial real estate owner occupied

—

—

—

—
Commercial real estate non-owner occupied

1

54

247

—
Tax exempt

—

—

—

—
Commercial and industrial

4

127

248

—
Residential real estate

—

—

—

—
Home equity

1

26

24

—
Consumer other

1

9

9

—
Total

7

$
216

$
528

$
—

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

September 30, 2021

September 30, 2020




Post-Modification



Post-Modification

Number of

Outstanding

Number of

Outstanding
(in thousands)

Modifications

Balance

Modifications

Balance
Interest rate, forbearance and maturity concession

—

$
—

4

$
409
Forbearance and interest only payments

—

—

1

24
Maturity concession

—

—

2

95
Total

—

$
—

7

$
528

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

~~Modifications in response to COVID-19~~

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

~~Table of Contents~~

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

~~Foreclosure~~

~~Residential mortgage loans collateralized by real estate that are in the process of foreclosure as of September 30, 2021 and December 31, 2020 totaled $734 thousand and $917 thousand, respectively.~~

~~Mortgage Banking~~

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

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

The Company sells residential loans on the secondary market with the Company primarily retaining the servicing of these loans. Servicing sold loans helps to maintain customer relationships and the Company earns fees over the servicing period. Loans serviced for others are 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 September 30, 2021 and December 31, 2020 are summarized, as follows:~~

September 30, 2021

December 31, 2020

Weighted

Weighted

(dollars in thousands)

Carrying Value

Average Rate

Carrying Value

Average Rate

Short-term borrowings









Advances from the FHLB

$
75,000

0.30
%

$
65,676

1.19
%
Other borrowings

21,667

0.13

27,779

0.15

Total short-term borrowings

96,667

0.18

93,455

0.44

Long-term borrowings









Advances from the FHLB

93,600

1.57

182,607

1.73

Subordinated borrowings

60,083

4.34

59,961

4.34

Total long-term borrowings

153,683

2.65

242,568

2.37

Total

$
250,350

1.06
%

$
336,023

1.41
%

Short-term debt includes Federal Home Loan Bank of Boston (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 September 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 September 30, 2021, the Company’s available secured line of credit at the FRB was $72.0 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 September 30, 2021 and 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 September 30, 2021 and December 31, 2020. There was 0 outstanding balance on the line of credit as of September 30, 2021 and December 31, 2020.

Long-term FHLB advances consist of advances with a maturity of more than one year. The advances outstanding at September 30, 2021 include callable advances of $20.0 million and amortizing advances of $300 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 September 30, 2021 is, as follows:~~

Weighted Average

(in thousands, except rates)

Amount

Rate

2021

$
75,000

0.30
%
2022

15,000

1.76

2023

51,000

1.71

2024

7,300

1.16

2025

20,000

1.21

2026 and thereafter

300

3.39

Total FHLB advances

$
168,600

1.01
%

On November 26, 2019, the Company 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, 2024 and thereafter the interest rate shall be reset quarterly to an interest rate per annum equal to the then current three-

~~Table of Contents~~

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 $537 thousand as of September 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)

September 30, 2021

December 31, 2020
Time less than $100,000

$
199,312

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

192,497

278,940
Time $250,000 or more

77,412

93,775
Total

$
469,221

$
698,361

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

(in thousands)

September 30, 2021

December 31, 2020
Within 1 year

$
362,774

$
574,007
Over 1 year to 2 years

56,926

61,584
Over 2 years to 3 years

31,888

41,145
Over 3 years to 4 years

9,182

12,875
Over 4 years to 5 years

6,272

8,728
Over 5 years

2,179

22
Total

$
469,221

$
698,361

Included in time deposits are brokered deposits of $31.4 million and $193.7 million at September 30, 2021 and December 31, 2020, respectively. Also included in time deposits are reciprocal deposits of $238.5 million and $125.0 million at September 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:


	September 30, 2022
					Minimum Regulatory
	Actual				Capital Requirements
(in thousands, except ratios)	Amount		Ratio		Amount		Ratio
Company (consolidated)
Total capital to risk-weighted assets	$	404,804	13.42	%	$	241,314	8.00	%
Common equity tier 1 capital to risk-weighted assets		317,043	10.51			135,740	4.50
Tier 1 capital to risk-weighted assets		337,663	11.19			180,986	6.00
Tier 1 capital to average assets (leverage ratio)		337,663	9.13			147,908	4.00

Bank
Total capital to risk-weighted assets	$	398,292	13.22	%	$	241,079	8.00	%
Common equity tier 1 capital to risk-weighted assets		371,151	12.32			135,606	4.50
Tier 1 capital to risk-weighted assets		371,151	12.32			180,808	6.00
Tier 1 capital to average assets (leverage ratio)		371,151	10.05			147,791	4.00

Regulatory



Regulatory


September 30,

Minimum to be

December 31,

Minimum to be

2021

"Well-Capitalized"

2020

"Well-Capitalized"

Company (consolidated)









Total capital to risk-weighted assets⁽¹⁾

14.12
%
10.50
%
13.57
%
10.50
%
Common equity tier 1 capital to risk-weighted assets⁽¹⁾

10.92

7.00

10.49

7.00

Tier 1 capital to risk-weighted assets⁽¹⁾

11.70

8.50

11.29

8.50

Tier 1 capital to average assets

8.54

5.00

8.12

5.00

Bank









Total capital to risk-weighted assets⁽¹⁾

13.92
%
10.50
%
13.27
%
10.50
%
Common equity tier 1 capital to risk-weighted assets⁽¹⁾

13.02

7.00

12.53

7.00

Tier 1 capital to risk-weighted assets⁽¹⁾

13.02

8.50

12.52

8.50

Tier 1 capital to average assets

9.50

5.00

9.02

5.00

~~(1)~~

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


	December 31, 2021
					Minimum Regulatory
	Actual				Capital Requirements
(in thousands, except ratios)	Amount		Ratio		Amount		Ratio
Company (consolidated)
Total capital to risk-weighted assets	$	380,690	14.31	%	$	212,798	8.00	%
Common equity tier 1 capital to risk-weighted assets		295,635	11.11			119,699	4.50
Tier 1 capital to risk-weighted assets		316,255	11.89			159,598	6.00
Tier 1 capital to average assets (leverage ratio)		316,255	8.66			146,029	4.00

Bank
Total capital to risk-weighted assets	$	375,435	14.13	%	$	220,425	8.00	%
Common equity tier 1 capital to risk-weighted assets		351,000	13.21			123,812	4.50
Tier 1 capital to risk-weighted assets		351,000	13.21			165,082	6.00
Tier 1 capital to average assets (leverage ratio)		351,000	9.62			151,082	4.00

In order to be classified as “well-capitalized” under the relevant regulatory framework, the Company must, on a consolidated basis, maintain a total risk-based capital ratio of 10.00% or greater and a Tier 1 risk-based capital ratio of 6.00% or greater; and the Bank must maintain a total risk-based capital ratio of 10.00% or greater, a Tier 1 risk-based capital ratio of 8.00% or greater, a common equity Tier 1 capital ratio of 6.50% or greater, and a leverage ratio of 5.00% or greater. At each date shown in the tables above, the Company and the Bank met the conditions to be classified as “well-capitalized” under the relevant regulatory framework. ~~To be categorized as "well-capitalized," an institution must maintain minimum total risk-based, Tier 1 risk-based, and Tier 1 leverage ratios as set forth in the table above.~~

The Company and the Bank are subject to the Basel III rule that requires the Company and the Bank to assess their Common equity tier 1 capital to risk-weighted assets and the Company and the Bank each exceed the minimum to be "well-capitalized." Effective January 1, 2019 all banking organizations must maintain a minimum Common equity tier 1 risk-based capital ratio of 7.0%, a minimum Tier 1 risk-based capital ratio of 8.5% and a minimum Total risk-based capital ratio of 10.5%.

~~Accumulated other comprehensive income (loss)~~

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

(in thousands)

September 30, 2021

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




Net unrealized gain on AFS securities

$
5,741

$
13,069
Net unrealized gain on hedging derivatives⁽¹⁾

(121)

(2,432)
Net unrealized loss on post-retirement plans

(1,850)

(1,850)

Income taxes related to items of accumulated other comprehensive income:




Net unrealized gain on AFS securities

(1,343)

(3,046)
Net unrealized gain on hedging derivatives⁽¹⁾

29

567
Net unrealized loss on post-retirement plans

432

432
Accumulated other comprehensive income⁽¹⁾

$
2,888

$
6,740

~~(1)~~

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

3929

Table of Contents

Accumulated other comprehensive (loss) income

Components of accumulated other comprehensive income is, as follows:


(in thousands)	September 30, 2022		December 31, 2021
Accumulated other comprehensive income, before tax:
Net unrealized (loss) gain on AFS securities	$	(76,606)	$	2,580
Net unrealized (loss) gain on hedging derivatives		(4,316)		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		17,891		(595)
Net unrealized loss (gain) on hedging derivatives		994		(260)
Net unrealized loss on post-retirement plans		166		166
Accumulated other comprehensive (loss) income	$	(62,589)	$	2,303

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

(in thousands)

Before Tax

Tax Effect

Net of Tax
Three Months Ended September 30, 2021






Net unrealized gain on AFS securities:






Net unrealized gain arising during the period

$
(1,770)

$
403

$
(1,367)
Less: reclassification adjustment for gains (losses) realized in net income

1,930

(458)

1,472
Net unrealized gain on AFS securities

(3,700)

861

(2,839)

Net unrealized gain on hedging derivatives:





Net unrealized gain arising during the period

(203)

48

(155)
Less: reclassification adjustment for gains (losses) realized in net income

—

—

—
Net unrealized gain on cash flow hedging derivatives

(203)

48

(155)

Net unrealized loss on post-retirement plans:





Net unrealized loss arising during the period

—

—

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

—

—

—
Net unrealized loss on post-retirement plans

—

—

—
Other comprehensive loss

$
(3,903)

$
909

$
(2,994)

Three Months Ended September 30, 2020






Net unrealized gain on AFS securities:






Net unrealized gain arising during the period

$
351

$
(82)

$
269
Less: reclassification adjustment for gains (losses) realized in net income

—

—

—
Net unrealized gain on AFS securities

351

(82)

269

Net unrealized gain on derivative hedgess:





Net unrealized gain arising during the period⁽¹⁾

1,302

(308)

994
Less: reclassification adjustment for gains (losses) realized in net income

—

—

—
Net unrealized gain on cash flow derivative hedges⁽¹⁾

1,302

(308)
��

994

Net unrealized loss on post-retirement plans:





Net unrealized loss arising during the period

—

—

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

—

—

—
Net unrealized loss on post-retirement plans

—

—

—
Other comprehensive income⁽¹⁾

$
1,653

$
(390)

$
1,263

~~(1)~~

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


(in thousands)	Before Tax		Tax Effect		Net of Tax
Three Months Ended September 30, 2022
Net unrealized loss on AFS securities:
Net unrealized loss arising during the period	$	(26,889)	$	6,512	$	(20,377)
Less: reclassification adjustment for gains (losses) realized in net income		44		(10)		34
Net unrealized loss on AFS securities		(26,933)		6,522		(20,411)

Net unrealized loss on hedging derivatives:
Net unrealized loss arising during the period		(1,568)		361		(1,207)
Less: reclassification adjustment for gains (losses) realized in net income		—		—		—
Net unrealized loss on cash flow hedging derivatives		(1,568)		361		(1,207)

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	$	(28,501)	$	6,883	$	(21,618)

Three Months Ended September 30, 2021
Net unrealized gain on AFS securities:
Net unrealized gain arising during the period	$	(1,770)	$	403	$	(1,367)
Less: reclassification adjustment for gains (losses) realized in net income		1,930		(458)		1,472
Net unrealized gain on AFS securities		(3,700)		861		(2,839)

Net unrealized gain on derivative hedgess:
Net unrealized gain arising during the period		(203)		48		(155)
Less: reclassification adjustment for gains (losses) realized in net income		—		—		—
Net unrealized gain on cash flow derivative hedges		(203)		48		(155)

Net unrealized loss on post-retirement plans:
Net unrealized loss arising during the period		—		—		—
Less: reclassification adjustment for gains (losses) realized in net income		—		—		—
Net unrealized loss on post-retirement plans		—		—		—
Other comprehensive (loss) income	$	(3,903)	$	909	$	(2,994)

4030

Table of Contents

(in thousands)

Before Tax

Tax Effect

Net of Tax
Nine Months Ended September 30, 2021






Net unrealized loss on AFS securities:






Net unrealized loss arising during the period

$
(5,348)

$
1,234

$
(4,114)
Less: reclassification adjustment for gains (losses) realized in net income

1,980

(469)

1,511
Net unrealized loss on AFS securities

(7,328)

1,703

(5,625)

Net unrealized loss on derivative hedges:




Net unrealized loss arising during the period

2,311

(538)

1,773
Less: reclassification adjustment for (losses) gains realized in net income

—

—

—
Net unrealized loss on derivative hedges

2,311

(538)

1,773

Net unrealized loss on post-retirement plans:






Net unrealized loss arising during the period

—

—

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

—

—

—
Net unrealized loss on post-retirement plans

—

—

—
Other comprehensive loss

$
(5,017)

$
1,165

$
(3,852)

Nine Months Ended September 30, 2020






Net unrealized gain on AFS securities:






Net unrealized gain arising during the period

$
9,408

$
(2,143)

$
7,265
Less: reclassification adjustment for gains realized in net income

1,486

(352)

1,134
Net unrealized gain on AFS securities

7,922

(1,791)

6,131

Net unrealized loss on cash flow hedging derivatives:






Net unrealized loss arising during the period⁽¹⁾

(7,568)

1,776

(5,792)
Less: reclassification adjustment for gains (losses) realized in net income

—

—

—
Net unrealized loss on cash flow hedging derivatives⁽¹⁾

(7,568)

1,776

(5,792)

Net unrealized gain on post-retirement plans:






Net unrealized gain arising during the period

—

—

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

—

—

—
Net unrealized gain on post-retirement plans

—

—

—
Other comprehensive income⁽¹⁾

$
354

$
(15)

$
339

~~(1)~~

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


(in thousands)	Before Tax		Tax Effect		Net of Tax
Nine Months Ended September 30, 2022
Net unrealized loss on AFS securities:
Net unrealized loss arising during the period	$	(79,133)	$	18,474	$	(60,659)
Less: reclassification adjustment for gains (losses) realized in net income		53		(12)		41
Net unrealized loss on AFS securities		(79,186)		18,486		(60,700)

Net unrealized loss on hedging derivatives:
Net unrealized loss arising during the period		(5,446)		1,254		(4,192)
Less: reclassification adjustment for gains (losses) realized in net income		—		—		—
Net unrealized gain on hedging derivatives		(5,446)		1,254		(4,192)

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	$	(84,632)	$	19,740	$	(64,892)

Nine Months Ended September 30, 2021
Net unrealized loss on AFS securities:
Net unrealized loss arising during the period	$	(5,348)	$	1,234	$	(4,114)
Less: reclassification adjustment for gains realized in net income		1,980		(469)		1,511
Net unrealized loss on AFS securities		(7,328)		1,703		(5,625)

Net unrealized gain on hedging derivatives:
Net unrealized gain arising during the period		2,311		(538)		1,773
Less: reclassification adjustment for gains (losses) realized in net income		—		—		—
Net unrealized gain on cash flow hedging derivatives		2,311		(538)		1,773

Net unrealized loss on post-retirement plans:
Net unrealized loss arising during the period		—		—		—
Less: reclassification adjustment for gains (losses) realized in net income		—		—		—
Net unrealized loss on post-retirement plans		—		—		—
Other comprehensive (loss) income	$	(5,017)	$	1,165	$	(3,852)

4131

Table of Contents

The following table presents the changes in each component of accumulated other comprehensive income (loss), net of tax impacts, for the three and nine months ended September 30, ~~2021~~2022 and ~~2020:~~2021:

Net unrealized

Net loss on

Net unrealized


gain

effective cash

loss

on AFS

flow hedging

on pension

(in thousands)

Securities

derivatives⁽¹⁾

plans

Total⁽¹⁾
Three Months Ended September 30, 2021









Balance at beginning of period

$
7,237

$
63

$
(1,418)

$
5,882
Other comprehensive gain before reclassifications

(1,367)

(155)

0

(1,522)
Less: amounts reclassified from accumulated other comprehensive income

1,472

0

0

1,472
Total other comprehensive income

(2,839)

(155)

0

(2,994)
Balance at end of period

$
4,398

$
(92)

$
(1,418)

$
2,888

Three Months Ended September 30, 2020







Balance at beginning of period

$
11,412

$
(7,387)

$
(1,157)

$
2,868
Other comprehensive gain before reclassifications

269

994

0

1,263
Less: amounts reclassified from accumulated other comprehensive income

0

0

0

0
Total other comprehensive income

269

994

0

1,263
Balance at end of period

$
11,681

$
(6,393)

$
(1,157)

$
4,131

Nine Months Ended September 30, 2021







Balance at beginning of period

$
10,023

$
(1,865)

$
(1,418)

$
6,740
Other comprehensive loss before reclassifications

(4,114)

1,773

0

(2,341)
Less: amounts reclassified from accumulated other comprehensive income

1,511

0

0

1,511
Total other comprehensive loss

(5,625)

1,773

0

(3,852)
Balance at end of period

$
4,398

$
(92)

$
(1,418)

$
2,888

Nine Months Ended September 30, 2020

Balance at beginning of period

$
5,550

$
(601)

$
(1,157)

$
3,792
Other comprehensive gain (loss) before reclassifications

7,265

(5,792)

0

1,473
Less: amounts reclassified from accumulated other comprehensive income

1,134

0

0

1,134
Total other comprehensive income (loss)

6,131

(5,792)

0

339
Balance at end of period

$
11,681

$
(6,393)

$
(1,157)

$
4,131

~~(1)~~

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


	Net unrealized		Net gain (loss) on		Net unrealized
	gain (loss)		effective cash		loss
	on AFS		flow hedging		on pension
(in thousands)	Securities		derivatives		plans		Total
Three Months Ended September 30, 2022
Balance at beginning of period	$	(38,304)	$	(2,115)	$	(552)	$	(40,971)
Other comprehensive loss before reclassifications		(20,377)		(1,207)		—		(21,584)
Less: amounts reclassified from accumulated other comprehensive income		34		—		—		34
Total other comprehensive income		(20,411)		(1,207)		—		(21,618)
Balance at end of period	$	(58,715)	$	(3,322)	$	(552)	$	(62,589)

Three Months Ended September 30, 2021
Balance at beginning of period	$	7,237	$	63	$	(1,418)	$	5,882
Other comprehensive gain before reclassifications		(1,367)		(155)		—		(1,522)
Less: amounts reclassified from accumulated other comprehensive income		1,472		—		—		1,472
Total other comprehensive income		(2,839)		(155)		—		(2,994)
Balance at end of period	$	4,398	$	(92)	$	(1,418)	$	2,888

Nine Months Ended September 30, 2022
Balance at beginning of period	$	1,985	$	870	$	(552)	$	2,303
Other comprehensive loss before reclassifications		(60,659)		(4,192)		—		(64,851)
Less: amounts reclassified from accumulated other comprehensive income		41		—		—		41
Total other comprehensive loss		(60,700)		(4,192)		—		(64,892)
Balance at end of period	$	(58,715)	$	(3,322)	$	(552)	$	(62,589)

Nine Months Ended September 30, 2021
Balance at beginning of period	$	10,023	$	(1,865)	$	(1,418)	$	6,740
Other comprehensive (loss) gain before reclassifications		(4,114)		1,773		—		(2,341)
Less: amounts reclassified from accumulated other comprehensive income		1,511		—		—		1,511
Total other comprehensive (loss) gain		(5,625)		1,773		—		(3,852)
Balance at end of period	$	4,398	$	(92)	$	(1,418)	$	2,888

4232

Table of Contents

The following tables presents the amounts reclassified out of each component of accumulated other comprehensive income for three and nine months ended September 30, ~~2021~~2022 and ~~2020:~~2021:


	Three Months Ended September 30,				Nine Months Ended September 30,				Affected Line Item where	Three Months Ended September 30,				Nine Months Ended September 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⁾	$	1,930	$	—	$	1,980	$	1,486	Non-interest income	$	44	$	1,930	$	53	$	1,980	Non-interest income
Tax effect		(458)		—		(469)		(352)	Tax expense		(10)		(458)		(12)		(469)	Tax expense
Total reclassifications for the period	$	1,472	$	—	$	1,511	$	1,134		$	34	$	1,472	$	41	$	1,511

~~(a)~~(1)

Net realized gains before tax include $~~1.9~~$141 thousand realized gains for the three months ended September 30, 2022 and $97 thousand of gross realized losses. Net realized gains before tax include $150 thousand realized gains for the nine months ended September 30, 2022 and $97 thousand of gross realized losses. Net realized gains before tax include $1.9 million realized gains for the three months ended September 30, 2021 and $97 thousand of gross realized losses. Net realized gains before tax include $2.0 million realized gains for the nine months ended September 30, 2021 and $50 thousand of gross realized losses of $50 thousand for both of the respective periods. There were 0 net realized gains or losses for the three months ended September 30, 2020. Net realized gains before tax include gross realized gains $1.5 million and realized losses of $22 thousand for the nine months ended September 30, 2020.losses.

4333

Table of Contents

NOTE 7. EARNINGS PER SHARE

The following table presents the calculation of earnings per share:


	Three Months Ended				Nine Months Ended				Three Months Ended				Nine Months Ended
	September 30,				September 30,				September 30,				September 30,
(in thousands, except per share and share data)	2021		2020		2021		2020		2022		2021		2022		2021
Net income	$	11,028	$	8,402	$	29,533	$	24,604	$	11,430	$	11,028	$	31,045	$	29,533

Average number of basic common shares outstanding		14,982,766		15,079,413		14,960,753		15,358,803		15,057,598		14,982,766		15,028,963		14,960,753
Plus: dilutive effect of stock options and awards outstanding		67,990		23,421		73,829		23,063		55,757		67,990		71,317		73,829
Average number of diluted common shares outstanding⁽¹⁾		15,050,756		15,102,834		15,034,582		15,381,866		15,113,355		15,050,756		15,100,280		15,034,582

Earnings per share:
Basic	$	0.74	$	0.56	$	1.97	$	1.60	$	0.76	$	0.74	$	2.07	$	1.97
Diluted	$	0.73	$	0.56	$	1.96	$	1.60	$	0.76	$	0.73	$	2.06	$	1.96

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

4434

Table of Contents

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,~~assess, 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 September 30, ~~2021~~2022 and December 31, ~~2020:~~2021:


	September 30, 2021							September 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		3.3	$	(1,168)	Other liabilities	$	75,000		2.3	$	5,153	Other assets
Interest rate swap on variable rate loans		50,000		4.5		(121)	Other liabilities		50,000		3.5		(5,289)	Other liabilities
Total cash flow hedges		125,000				(1,289)			125,000				(136)

Fair value hedges:
Interest rate swap on securities		37,190		7.8		(841)	Other liabilities		37,190		6.8		5,017	Other assets
Total fair value hedges		37,190				(841)			37,190				5,017

Economic hedges:
Forward sale commitments		14,533		0.1		(140)	Other liabilities		200		—		8	Other assets
Customer Loan Swaps-MNA Counterparty		250,852		6.4		(10,258)	Other liabilities		193,743		6.0		(21,795)	Other liabilities
Customer Loan Swaps-RPA Counterparty		119,285		7.1		(5,892)	Other liabilities		110,317		6.3		—	Other liabilities
Customer Loan Swaps-Customer		370,137		6.6		16,150	Other assets		304,060		6.1		21,795	Other assets
Total economic hedges		754,807				(140)			608,320				8

Non-hedging derivatives:
Interest rate lock commitments		12,885		0.1		47	Other assets		—		—		—	Other assets
Total non-hedging derivatives		12,885				47			—				—

Total	$	929,882			$	(2,223)		$	770,510			$	4,889

4535

Table of Contents

December 31, 2020

Weighted

Notional

Average

Fair Value

Location Fair

Amount

Maturity

Asset (Liability)

Value Asset


(in thousands)

(in years)

(in thousands)

(Liability)
Cash flow hedges:







Interest rate swap on wholesale fundings

$
75,000

4.0

$
(2,664)

Other liabilities
Total cash flow hedges

75,000

(2,664)

Fair value hedges:

Interest rate swap on securities⁽¹⁾

37,190

8.6

(2,789)

Other liabilities
Total fair value hedges

37,190

(2,789)

Economic hedges:

Forward sale commitments

50,629

0.2

(95)

Other liabilities
Customer Loan Swaps-MNA Counterparty

235,947

6.8

(15,938)

Other liabilities
Customer Loan Swaps-RPA Counterparty

119,285

7.9

(9,957)

Other liabilities
Customer Loan Swaps-Customer

355,232

7.1

25,895

Other assets
Total economic hedges

761,093

(95)

Non-hedging derivatives:

Interest rate lock commitments

3,320

0.1

22

Other assets
Total non-hedging derivatives

3,320

22

Total

$
876,603

$
(5,526)

~~(1)~~

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


	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 September 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
September 30, 2021
September 30, 2022
Interest rate swap on securities	Securities Available for Sale	$	39,200	$	2,010	Securities Available for Sale	$	27,993	$	(9,197)

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

4636

Table of Contents

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


	Three Months Ended September 30, 2021								Three Months Ended September 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	$	167	Interest expense	$	—	Interest expense	$	(205)	$	1,262	Interest expense	$	—	Interest expense	$	140
Interest rate swap on variable rate loans		(101)	Interest income		—	Interest income		92		(1,181)	Interest income		—	Interest income		(238)
Total cash flow hedges		66			—			(113)		81			—			(98)

Fair value hedges:
Interest rate swap on securities		(221)	Interest income		—	Interest income		(144)		(1,287)	Interest income		—	Interest income		155
Total fair value hedges		(221)			—			(144)		(1,287)			—			155

Economic hedges:
Forward commitments		—	Other income		—	Other income		(96)		—	Other income		—	Mortgage banking income		19
Total economic hedges		—			—			(96)		—			—			19

Non-hedging derivatives:
Interest rate lock commitments		—	Other income		—	Other income		22		—	Other expense		—	Mortgage banking income		(50)
Total non-hedging derivatives		—			—			22		—			—			(50)

Total	$	(155)		$	—		$	(331)	$	(1,206)		$	—		$	26

4737

Table of Contents


	Nine Months Ended September 30, 2021								Nine Months Ended September 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	$	1,148	Interest expense	$	—	Interest expense	$	(589)	$	4,058	Interest expense	$	—	Interest expense	$	(1)
Interest rate swap on variable rate loans		(93)	Interest income		—	Interest income		189		(3,489)	Interest income		—	Interest income		(239)
Total cash flow hedges		1,055			—			(400)		569			—			(240)

Fair value hedges:
Interest rate swap on securities		720	Interest income		—	Interest income		(421)		(4,761)	Interest income		—	Interest income		(48)
Total fair value hedges		720			—			(421)		(4,761)			—			(48)

Economic hedges:
Forward commitments		—	Other income		—	Other income		(45)		—	Other income		—	Mortgage banking income		(7)
Total economic hedges		—			—			(45)		—			—			(7)

Non-hedging derivatives:
Interest rate lock commitments		—	Other income		—	Other income		26		—	Other income		—	Mortgage banking income		(283)
Total non-hedging derivatives		—			—			26		—			—			(283)

Total	$	1,775		$	—		$	(840)	$	(4,192)		$	—		$	(578)

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

4838

Table of Contents


	Three Months Ended September 30, 2021
	Amount of			Amount of
	Gain (Loss)			Gain (Loss)
	Recognized in			Reclassified		Location of	Amount of
	Other		Location of Gain (Loss)	from Other		Gain (Loss)	Gain (Loss)
	Comprehensive		Reclassified from Other	Comprehensive		Recognized in	Recognized
(in thousands)	Income		Comprehensive Income	Income		Income	in Income
Cash flow hedges:
Interest rate swap on wholesale funding	$	167	Interest expense	$	—	Interest expense	$	(205)
Interest rate swap on variable rate loans		(101)	Interest income			Interest income		92
Total cash flow hedges		66			—			(113)

Fair value hedges:
Interest rate swap on securities		(221)	Interest income		—	Interest income		(144)
Total economic hedges		(221)			—			(144)

Economic hedges:
Forward commitments		—	Other income		—	Mortgage banking income		(96)
Total economic hedges		—			—			(96)

Non-hedging derivatives:
Interest rate lock commitments		—	Other income		—	Mortgage banking income		22
Total non-hedging derivatives		—			—			22

Total	$	(155)		$	—		$	(331)

Table of Contents

Three Months Ended September 30, 2020


Amount of



Amount of




Gain (Loss)

Gain (Loss)

Recognized in

Reclassified

Location of

Amount of

Other

Location of Gain (Loss)

from Other

Gain (Loss)

Gain (Loss)

Comprehensive

Reclassified from Other

Comprehensive

Recognized in

Recognized
(in thousands)

Income⁽¹⁾

Comprehensive Income

Income

Income

in Income
Cash flow hedges:










Interest rate swap on wholesale funding

$
362

Interest expense

$
—

Interest expense

$
(427)
Total cash flow hedges

362

—

(427)

Fair value hedges:










Interest rate swap on securities

635

Interest income

—

Interest income

(204)
Total economic hedges

635

—



(204)

Economic hedges:










Forward commitments

—

Other income

—

Other income

40
Total economic hedges

—

—



40

Non-hedging derivatives:










Interest rate lock commitments

—

Other income

—

Other Income

(39)
Total non-hedging derivatives

—

—



(39)

Total

$
997



$
—



$
(630)

~~(1)~~

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

Nine Months Ended September 30, 2020


Amount of



Amount of




Gain (Loss)

Gain (Loss)

Recognized in

Reclassified

Location of

Amount of

Other

Location of Gain (Loss)

from Other

Gain (Loss)

Gain (Loss)

Comprehensive

Reclassified from Other

Comprehensive

Recognized in

Recognized
(in thousands)

Income⁽¹⁾

Comprehensive Income

Income

Income

in Income
Cash flow hedges:










Interest rate swap on wholesale funding

$
(4,247)

Interest expense

$
—

Interest expense

$
(642)
Total cash flow hedges

(4,247)

—

(642)

Fair value hedges:










Interest rate swap on securities

(1,545)

Interest income

—

Interest income

(145)
Total economic hedges

(1,545)

—



(145)

Economic hedges:










Forward commitments

—

Other income

—

Other income

(3)
Total economic hedges

—

—



(3)

Non-hedging derivatives:










Interest rate lock commitments

—

Other income

—

Other Income

(35)
Total non-hedging derivatives

—

—



(35)

Total

$
(5,792)



$
—



$
(825)

~~(1)~~

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


	Nine Months Ended September 30, 2021
	Amount of			Amount of
	Gain (Loss)			Gain (Loss)
	Recognized in			Reclassified		Location of	Amount of
	Other		Location of Gain (Loss)	from Other		Gain (Loss)	Gain (Loss)
	Comprehensive		Reclassified from Other	Comprehensive		Recognized in	Recognized
(in thousands)	Income⁽¹⁾		Comprehensive Income	Income		Income	in Income
Cash flow hedges:
Interest rate swap on wholesale funding	$	1,148	Interest expense	$	—	Interest expense	$	(589)
Interest rate swap on variable rate loans		(93)	Interest income			Interest income		189
Total cash flow hedges		1,055			—			(400)

Fair value hedges:
Interest rate swap on securities		720	Interest income		—	Interest income		(421)
Total economic hedges		720			—			(421)

Economic hedges:
Forward commitments		—	Other income		—	Mortgage banking income		(45)
Total economic hedges		—			—			(45)

Non-hedging derivatives:
Interest rate lock commitments		—	Other income		—	Mortgage banking income		26
Total non-hedging derivatives		—			—			26

Total	$	1,775		$	—		$	(840)

4940

Table of Contents

The effect of cash flow hedging and fair value accounting on the consolidated statements of income for the three and nine months ended September 30, ~~2021~~2022 and ~~2020:~~2021:

Three Months Ended September 30, 2021

Interest and Dividend Income

Interest Expense

(in thousands)

Loans

Securities and other

Deposits

Borrowings

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

$
25,094

$
3,821

$
1,555

$
1,778

$
11,350






The effects of cash flow and fair value hedging:






Gain (loss) on cash flow hedges:

Interest rate swap on wholesale funding

—

—

—

(205)

—
Interest rate swap on variable rate loans

92

—

—

—

—






Gain (loss) on fair value hedges:




Interest rate swap on securities

—

(144)

—

—

—

Three Months Ended September 30, 2020

Interest and Dividend Income

Interest Expense

(in thousands)

Loans

Securities and other

Deposits

Borrowings

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

$
25,918

$
4,557

$
3,869

$
1,941

$
10,102






The effects of cash flow and fair value hedging:






Gain (loss) on cash flow hedges:

Interest rate swap on wholesale funding

—

—

(365)

(62)

—
Interest rate swap on variable rate loans

—

—

—

—

—






Gain (loss) on fair value hedges:




Interest rate swap on securities

—

(204)

—

—

—


	Three Months Ended September 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	$	27,940	$	5,145	$	1,801	$	1,374	$	8,823

The effects of cash flow and fair value hedging:

Gain (loss) on cash flow hedges:
Interest rate swap on wholesale funding		—		—		—		140		—
Interest rate swap on variable rate loans		(238)		—		—		—		—

Gain (loss) on fair value hedges:
Interest rate swap on securities		—		155		—		—		—

	Three Months Ended September 30, 2021
	Interest and Dividend Income				Interest Expense
(in thousands)	Loans		Securities and other		Deposits		Borrowings		Non-interest Income
Income and expense line items presented in the consolidated statements of income	$	25,094	$	3,821	$	1,555	$	1,778	$	11,350

The effects of cash flow and fair value hedging:

Gain (loss) on cash flow hedges:
Interest rate swap on wholesale funding		—		—		—		(205)		—
Interest rate swap on variable rate loans		92		—		—		—		—

Gain (loss) on fair value hedges:
Interest rate swap on securities		—		(144)		—		—		—

5041

Table of Contents

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


	Nine Months Ended September 30, 2021										Nine Months Ended September 30, 2022
	Interest and Dividend Income				Interest Expense						Interest and Dividend Income				Interest Expense
(in thousands)	Loans		Securities and other		Deposits		Borrowings		Non-interest Income		Loans		Securities and other		Deposits		Borrowings		Non-interest Income
Income and exepense line items presented in the consolidated statements of income	$	72,490		11,792	$	7,109		5,415	$	31,103
Income and expense line items presented in the consolidated statements of income											$	75,192	$	13,178	$	4,185	$	3,458	$	27,093

The effects of cash flow and fair value hedging:

Gain (loss) on cash flow hedges:
Interest rate swap on wholesale funding		—		—		—		(589)		—		—		—		—		(1)		—
Interest rate swap on variable rate loans		189		—		—		—		—		(239)		—		—		—		—

Gain (loss) on fair value hedges:
Interest rate swap on securities		—		(421)		—		—		—		—		(48)		—		—		—

	Nine Months Ended September 30, 2020										Nine Months Ended September 30, 2021
	Interest and Dividend Income				Interest Expense						Interest and Dividend Income				Interest Expense
(in thousands)	Loans		Securities and other		Deposits		Borrowings		Non-interest Income		Loans		Securities and other		Deposits		Borrowings		Non-interest Income
Income and exepense line items presented in the consolidated statements of income	$	80,398		15,006	$	14,437		7,149	$	28,233
Income and expense line items presented in the consolidated statements of income											$	72,490		11,792	$	7,109		5,415	$	31,103

The effects of cash flow and fair value hedging:

Gain (loss) on cash flow hedges:
Interest rate swap on wholesale funding		—		—		(580)		(62)		—		—		—		—		(589)		—
Interest rate swap on variable rate loans		—		—		—		—		—		189		—		—		—		—

Gain (loss) on fair value hedges:
Interest rate swap on securities		—		(145)		—		—		—		—		(421)		—		—		—

Table of Contents

Cash flow hedges

Interest rate swaps on wholesale funding

As of September 30, ~~2021 the Company has 2~~2022, we have two interest rate swaps on wholesale borrowings ~~(the "SWAPS")~~ to limit ~~its~~our exposure to rising interest rates over a ~~five year~~five-year term on 3-month FHLB borrowings or brokered certificates, or a combination thereof at each maturity date. The first of the 2two agreements ~~were~~was entered into in November 2019 with a $50.0 million notional amount and pays a fixed interest rate of 1.53%. A second agreement was entered oninto in April 2020 with a $25.0 million notional amount and pays a fixed rate of 0.59%. The financial institution counterparty pays ~~the Company~~us interest on the three-month LIBOR rate. ~~The Company~~We designated the swaps as a cash flow ~~hedge.~~hedges.

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, onWe have an ~~amount of the Company’s variable rate loan assets equal to $50 million. The~~ interest rate swap ~~will~~that effectively ~~fix the Company’s~~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 ~~Company~~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. ~~The Company utilizes~~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, ~~the Company~~we entered into 8eight 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~~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. ~~The Company~~We typically ~~uses~~use a combination of best efforts and mandatory delivery contracts. The contracts are loan sale agreements where ~~the Company commits~~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, ~~the Company may~~we enter into contracts just prior to the loan closing with a customer.

Customer loan derivatives

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

Table of Contents

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


	Gross Amounts Offset in the Consolidated Balance Sheet								Gross Amounts Offset in the Consolidated Balance Sheet
	Derivative				Cash Collateral				Derivative				Cash Collateral
(in thousands)	Liabilities		Derivative Assets		Pledged		Net Amount		Liabilities		Derivative Assets		Pledged		Net Amount
As of September 30, 2021
As of September 30, 2022
Customer Loan Derivatives:
MNA counterparty	$	(10,258)	$	10,258	$	17,000	$	17,000	$	(21,795)	$	21,795	$	—	$	—
RPA counterparty		(5,892)		5,892		—		—		—		—		—		—
Total	$	(16,150)	$	16,150	$	17,000	$	17,000	$	(21,795)	$	21,795	$	—	$	—


	Gross Amounts Offset in the Consolidated Balance Sheet								Gross Amounts Offset in the Consolidated Balance Sheet
	Derivative				Cash Collateral				Derivative				Cash Collateral
(in thousands)	Liabilities		Derivative Assets		Pledged		Net Amount		Liabilities		Derivative Assets		Pledged		Net Amount
As of December 31, 2020
As of December 31, 2021
Customer Loan Derivatives:
MNA counterparty	$	(15,938)	$	15,938	$	23,450	$	23,450	$	(9,429)	$	9,429	$	12,000	$	12,000
RPA counterparty		(9,957)		9,957		—		—		(4,421)		4,421		—		—
Total	$	(25,895)	$	25,895	$	23,450	$	23,450	$	(13,850)	$	13,850	$	12,000	$	12,000

~~Table of Contents~~

Non-hedging derivatives

Interest rate lock commitments

~~The Company enters~~We enter into interest rate lock commitments ~~(IRLCs)~~(“IRLCs”) for residential mortgage loans, which commit ~~the Company~~us 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 and are considered derivative financial instruments under applicable accounting guidance. Outstanding IRLCs expose ~~the Company~~us 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~~our Consolidated Statements of Income. Changes in the fair value of IRLCs subsequent to inception are based ~~on;~~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.

5344

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 September 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:


	September 30, 2021								September 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	$	183,268	$	0	$	183,268	$	—	$	216,024	$	—	$	216,024
US Government agency		0		54,706		0		54,706		—		83,526		—		83,526
Private label		0		62,914		0		62,914		—		66,769		—		66,769
Obligations of states and political subdivisions thereof		0		160,177		0		160,177		—		104,652		—		104,652
Corporate bonds		0		84,262		0		84,262		—		85,781		—		85,781
Loans held for sale										—		982		—		982
Derivative assets		0		16,149		47		16,196		—		31,964		8		31,972
Derivative liabilities		0		(18,159)		(140)		(18,299)		—		(27,084)		—		(27,084)

December 31, 2020


Level 1

Level 2

Level 3

Total
(in thousands)

Inputs

Inputs

Inputs

Fair Value
Available for sale securities:









Mortgage-backed securities:








US Government-sponsored enterprises

$
—

$
212,390

$
—

$
212,390
US Government agency

—

85,632

—

85,632
Private label

—

19,709

—

19,709
Obligations of states and political subdivisions thereof

—

169,004

—

169,004
Corporate bonds

—

98,311

—

98,311
Derivative assets⁽¹⁾

—

28,895

22

28,917
Derivative liabilities⁽¹⁾

—

(31,348)

(95)

(31,443)

~~(1)~~

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


	December 31, 2021
	Level 1		Level 2		Level 3		Total
(in thousands)	Inputs		Inputs		Inputs		Fair Value
Available for sale securities:
Mortgage-backed securities:
US Government-sponsored enterprises	$	—	$	236,117	$	—	$	236,117
US Government agency		—		79,637		—		79,637
Private label		—		68,695		—		68,695
Obligations of states and political subdivisions thereof		—		141,776		—		141,776
Corporate bonds		—		92,051		—		92,051
Loans held for sale		—		5,523		—		5,523
Derivative assets		—		13,850		298		14,148
Derivative liabilities		—		(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.~~US 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.

5445

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 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 September 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.

5546

Table of Contents

The table below presents the changes in Level 3 assets and liabilities that were measured at fair value on a recurring basis for the three and nine months ended September 30, 2022 and 2021:


	Assets (Liabilities)				Assets (Liabilities)
	Interest Rate Lock		Forward		Interest Rate Lock		Forward
(in thousands)	Commitments		Commitments		Commitments		Commitments
Three Months Ended September 30, 2022
Balance at beginning of period					$	50	$	(11)
Realized gain (loss) recognized in non-interest income						(50)		19
Balance at end of period					$	—	$	8

Three Months Ended September 30, 2021
Balance at beginning of period	$	25	$	(45)	$	25	$	(45)
Realized gain recognized in non-interest income		22		(95)
Realized (loss) gain recognized in non-interest income						22		(95)
Balance at end of period	$	47	$	(140)	$	47	$	(140)

Three Months Ended September 30, 2020
Nine Months Ended September 30, 2022
Balance at beginning of period	$	63	$	(126)	$	283	$	15
Realized gain recognized in non-interest income		(39)		39
Realized loss recognized in non-interest income						(283)		(7)
Balance at end of period	$	24	$	(87)	$	—	$	8

Nine Months Ended September 30, 2021
Balance at beginning of period	$	22	$	(95)	$	22	$	(95)
Realized loss recognized in non-interest income		25		(45)
Realized gain recognized in non-interest income						25		(45)
Balance at end of period	$	47	$	(140)	$	47	$	(140)

Nine Months Ended September 30, 2020
Balance at beginning of period	$	59	$	(84)
Realized loss recognized in non-interest income		(35)		(3)
Balance at end of period	$	24	$	(87)

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

Significant

Fair Value

Significant

Fair Value

Unobservable

September 30,

Valuation

Unobservable

(in thousands, except ratios)

September 30, 2021

December 31, 2020

Valuation Techniques

Unobservable Inputs

Input Value

2022

Techniques

Inputs

Input Value

Assets (Liabilities)

Interest Rate Lock Commitment

Historical trend

Closing Ratio

—

Pull-through Rate Analysis

Closing Ratio

—

Pricing Model

Origination Costs, per loan

1.7

Pricing Model

Origination Costs, per loan

—

Discount Cash Flows

Mortgage Servicing Asset

—

Forward Commitments

(140)

(95)

Quoted prices for similar loans in active markets

Freddie Mac pricing system

Pair-off contract price

Quoted prices for similar loans in active markets

Freddie Mac pricing system

$97.2 to $101.4

Total

(93)

(73)

Fair Value

Significant

December 31,

Valuation

Unobservable

(in thousands, except ratios)

2021

Techniques

Inputs

Input Value

Assets (Liabilities)

Interest Rate Lock Commitment

283

Pull-through Rate Analysis

Closing Ratio

Pricing Model

Origination Costs, per loan

1.7

Discount Cash Flows

Mortgage Servicing Asset

1.0

Forward Commitments

Quoted prices for similar loans in active markets

Freddie Mac pricing system

$99.8 to $103.2

Total

298

5647

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:



	September 30, 2021		December 31, 2020		Three Months Ended September 30, 2021		Nine Months Ended September 30, 2021		Fair Value Measurement Date as of September 30, 2021	September 30, 2022		December 31, 2021		Three Months Ended September 30, 2022		Nine Months Ended September 30, 2022		Fair Value Measurement Date as of September 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	$	9,247	$	8,746	$	707	$	(501)	September 2021	$	15,388	$	17,932	$	1,778	$	(2,544)	September 2022
Capitalized servicing rights		4,867		3,605		(136)		(1,262)	September 2021		7,127		5,263		84		1,864	September 2022
Premises held for sale		822		962		149		140	December 2020		327		226		—		101	February 2022
Total	$	14,936	$	13,313	$	720	$	(1,623)		$	22,842	$	23,421	$	1,862	$	(579)

There are 0no liabilities measured at fair value on a non-recurring basis in ~~2021~~2022 and ~~2020.~~2021.

5748

Table of Contents

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

(in thousands, except ratios)

Fair Value September 30, 2021

Valuation Techniques

Unobservable Inputs

Range (Weighted Average)^(a)

Fair Value September 30, 2022

Valuation Techniques

Unobservable Inputs

Range (Weighted Average)^(a)

Assets

Individually evaluated loans

6,226

Fair value of collateral-appraised value

Loss severity

10% to 70%

10,903

Fair value of collateral-appraised value

Loss severity

10% to 70%

Appraised value

$71 to $1,792

Appraised value

$80 to $1,175

Individually evaluated loans

3,021

Discount cash flow

Discount rate

2.88% to 9.50%

4,485

Discount cash flow

Discount rate

2.88% to 6.45%

Cash flows

$6 to $939

Cash flows

$4 to $925

Capitalized servicing rights

4,867

Discounted cash flow

Constant prepayment rate (CPR)

13.66%

7,127

Discounted cash flow

Constant prepayment rate (CPR)

7.10%

Discount rate

9.53%

Discount rate

9.54%

Premises held for sale

822

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

14,936

22,842

~~(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 $822 thousand as of September 30, 2021.~~

(in thousands, except ratios)

Fair Value Dec 31, 2020

Valuation Techniques

Unobservable Inputs

Range (Weighted Average)^(a)

Assets

Individually evaluated loans

$
6,128

Fair value of collateral-appraised value

Loss severity

0% to 70%

Appraised value

$0 to $1730

Individually evaluated loans

2,618

Discount cash flow

Discount rate

3.50% to 9.50%

Cash flows

$19 to $953

Capitalized servicing rights

3,605

Discounted cash flow

Constant prepayment rate (CPR)

18.53%

Discount rate

10.05%

Premises held for sale

962

Fair value of asset less selling costs

Appraised value

$220 to $386

Selling Costs

6%

Total

$
13,313



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

5849

Table of Contents

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.

5950

Table of Contents

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.


	September 30, 2021										September 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	$	341,199	$	341,199	$	341,199	$	0	$	0	$	82,065	$	82,065	$	82,065	$	—	$	—
Securities available for sale		545,327		545,327		0		545,327		0		556,752		556,752		—		556,752		—
FHLB stock		10,192		10,192		0		10,192		0		9,035		9,035		—		9,035		—
Loans held for sale		7,505		7,505		0		0		7,505		987		982		—		982		—
Net loans		2,511,706		2,472,108		0		0		2,472,108		2,850,364		2,783,612		—		—		2,783,612
Accrued interest receivable		3,272		3,272		0		3,272		0		4,053		4,053		—		4,053		—
Cash surrender value of bank-owned life insurance policies		79,380		79,380		0		79,380		0		80,758		80,758		—		80,758		—
Derivative assets		17,019		17,019		0		16,972		47		31,973		31,973		—		31,973		8

Financial Liabilities
Non-maturity deposits	$	2,538,044	$	2,452,990	$	0	$	2,452,990	$	0	$	2,801,432	$	2,616,000	$	—	$	2,616,000	$	—
Time deposits		469,221		470,000		0		470,000		0		334,248		330,059		—		330,059		—
Securities sold under agreements to repurchase		21,667		21,667		0		21,667		0		18,916		18,916		—		18,916		—
FHLB advances		168,600		169,815		0		169,815		0		169,841		169,459		—		169,459		—
Subordinated borrowings		60,083		63,660		0		63,660		0		60,248		57,744		—		57,744		—
Derivative liabilities		18,299		18,299		0		18,159		140		27,084		27,084		—		27,084		—

December 31, 2020

Carrying

Fair

(in thousands)

Amount

Value

Level 1

Level 2

Level 3
Financial Assets










Cash and cash equivalents

$
226,007

$
226,007

$
226,007

$
—

$
—
Securities available for sale

585,046

585,046

—

585,046

—
FHLB stock

14,036

14,036

—

14,036

—
Loans held for sale

23,988

24,163

—

—

24,163
Net loans

2,543,803

2,547,970

—

—

2,547,970
Accrued interest receivable

2,964

2,964

—

2,964

—
Cash surrender value of bank-owned life insurance policies

77,870

77,870

—

77,870

—
Derivative assets⁽¹⁾

28,895

25,895

—

25,917

22

Financial Liabilities










Non-maturity deposits

$
2,207,854

$
2,122,222

$
—

$
2,122,222

$
—
Time deposits

698,361

694,700

—

694,700

—
Short-term other borrowings

27,779

27,779

—

27,779

—
FHLB advances

248,283

252,698

—

252,698

—
Subordinated borrowings

59,961

57,091

—

57,091

—
Derivative liabilities⁽¹⁾

31,348

31,348

—

31,443

95

~~(1)~~

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


	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		—

6051

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 ASC 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 September 30,				Nine Months Ended September 30,				Three Months Ended September 30,				Nine Months Ended September 30,
(in thousands)	2021		2020		2021		2020		2022		2021		2022		2021
Major Products/Service Lines
Trust management fees	$	3,403	$	3,256	$	10,052	$	9,193	$	3,077	$	3,403	$	9,941	$	10,052
Financial services fees		465		276		1,283		867		471		465		1,190		1,283
Interchange fees		1,882		1,709		5,509		4,910		1,953		1,882		5,849		5,509
Customer deposit fees		1,363		937		3,542		2,836		1,578		1,363		4,418		3,542
Other customer service fees		270		240		691		691		305		270		841		691
Total	$	7,383	$	6,418	$	21,077	$	18,497	$	7,384	$	7,383	$	22,239	$	21,077


	Three Months Ended September 30,				Nine Months Ended September 30,				Three Months Ended September 30,				Nine Months Ended September 30,
(in thousands)	2021		2020		2021		2020		2022		2021		2022		2021
Timing of Revenue Recognition
Products and services transferred at a point in time	$	3,737	$	3,133	$	10,593	$	9,026	$	4,020	$	3,737	$	11,755	$	10,593
Products and services transferred over time		3,646		3,285		10,484		9,471		3,364		3,646		10,484		10,484
Total	$	7,383	$	6,418	$	21,077	$	18,497	$	7,384	$	7,383	$	22,239	$	21,077

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. These fees are primarily earned over time as ~~the Company charges its~~we charge our customers on a monthly or quarterly basis in accordance with ~~its~~ investment advisory agreements. Fees are generally assessed based on a tiered scale of the market value of assets under management at month end. Certain fees, such as bill paying fees, distribution fees, real estate sale fees, and supplemental tax service fees, are recorded as revenue at a point in time upon the completion of the service.

Financial Services Fees

Bar Harbor Financial Services is a branch office of Infinex, an independent registered broker dealer offering securities and insurance products not affiliated with the Company or its subsidiaries. ~~The Company has~~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)	September 30, 2021		December 31, 2020		September 30, 2022		December 31, 2021
Balances from contracts with customers only:
Other Assets	$	1,277	$	1,121	$	1,325	$	1,184
Other Liabilities		2,467		2,785		2,535		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.

6253

Table of Contents

NOTE 11. LEASES

A lease is defined as a contract, or part of a contract, that conveys the right to control the use of identified property, plant or equipment for a period of time in exchange for consideration. ~~On January 1, 2019, the Company adopted ASU No. 2016-02~~ ~~“Leases”~~ ~~and all subsequent ASUs modifying ASC 842. Substantially all~~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 (ROU)~~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	September 30, 2021		December 31, 2020		Classification	September 30, 2022		December 31, 2021
Lease Right-of-Use Assets
Operating lease right-of-use assets	Other assets	$	9,488	$	10,338	Other assets	$	8,381	$	9,274

Lease Liabilities
Operating lease liabilities	Other liabilities		9,841		10,627	Other liabilities		8,791		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:


	September 30, 2021		December 31, 2020		September 30, 2022		December 31, 2021
Weighted-average remaining lease term (in years)
Operating leases	8.57		9.26		7.42		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				Nine Months Ended				Three Months Ended				Nine Months Ended
(in thousands)	September 30, 2021		September 30, 2020		September 30, 2021		September 30, 2020		September 30, 2022		September 30, 2021		September 30, 2022		September 30, 2021
Lease Costs
Operating lease cost	$	324	$	344	$	966	$	988	$	338	$	324	$	994	$	966
Variable lease cost		43		59		179		177		71		43		345		179
Total lease cost	$	367	$	403	$	1,145	$	1,165	$	409	$	367	$	1,339	$	1,145

Table of Contents

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


(in thousands)	Payments		Payments
Twelve Months Ended:
September 30, 2022	$	1,314
September 30, 2023		1,318	$	1,343
September 30, 2024		1,319		1,344
September 30, 2025		1,125		1,129
September 30, 2026		1,032		1,032
September 30, 2027				889
Thereafter		4,301		3,411
Total future minimum lease payments		10,409		9,148
Amounts representing interest		(568)		(357)
Present value of net future minimum lease payments	$	9,841	$	8,791

6455

Table of Contents

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 ~~analysis~~nine months ended September 30, 2022 and should be read in conjunction with ~~the Company’s~~our unaudited consolidated financial statements and ~~the~~condensed notes thereto ~~appearing~~included elsewhere in ~~Part I, Item 1 of~~ this ~~document and with the Company’s~~Form 10-Q as well as our audited consolidated financial statements and ~~the~~ notes thereto ~~and Management’s Discussion and Analysis of Financial Condition and Results of Operations~~ included in ~~the Company's~~our Annual Report on Form 10-K for the fiscal year ended December 31, ~~2020.~~2021. The following discussion contains "forward-looking statements" that reflect our future plans, estimates, beliefs and expected performance. We caution that assumptions, expectations, projections, intentions or beliefs about future events may, and often do, vary from actual results and the differences can be material. Please see "Cautionary Statement Regarding Forward-Looking Statements" and "Part II, Item 1A. Risk Factors." All amounts, dollars and percentages presented in this Form 10-Q are rounded and therefore approximate.

Bar Harbor Bankshares (the ~~"Company")~~“Company,” “we,” “our” or “us” or similar terms) 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 135~~^th135th anniversary of ~~its~~the Bank’s 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~~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~~

Table of Contents

Shown below is aour profile ~~of the Company~~ as of September 30, ~~2021:~~2022:

6557

Table of Contents

SELECTED FINANCIAL DATA

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

Three Months Ended

Nine Months Ended

September 30,

September 30,


2021

2020


2021

2020

PER SHARE DATA

Net earnings, diluted

$
0.73

$
0.56

$
1.97

$
1.60

Adjusted earnings, diluted⁽¹⁾

0.73

0.61

2.04

1.66

Total book value⁽⁵⁾

27.92

26.74

27.92

26.74

Tangible book value^{(1) (5)}

19.48

18.21

19.48

18.21

Market price at period end

28.05

20.55

28.05

20.55

Dividends

0.24

0.22

0.70

0.66

PERFORMANCE RATIOS⁽²⁾

Return on assets

1.16
%

0.88
%

1.05
%

0.87
%
Adjusted return on assets⁽¹⁾

1.16

0.96

1.09

0.91

Pre-tax, pre-provision return on assets

1.43

1.29

1.26

1.24

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

1.43

1.39

1.31

1.29

Return on equity⁽⁵⁾

10.38

8.25

9.54

8.10

Adjusted return on equity^{(1) (5)}

10.39

9.02

9.98

8.42

Return on tangible equity⁽⁵⁾

15.08

12.32

14.01

12.10

Adjusted return on tangible equity^{(1) (5)}

15.09

13.44

14.50

12.57

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

3.02

2.90

2.88

2.95

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

2.75

2.89

2.73

2.94

Efficiency ratio⁽¹⁾

59.18

59.47

61.48

61.62

FINANCIAL DATA (In millions)

Total assets

$
3,738

$
3,861

$
3,738

$
3,861

Total earning assets⁽⁴⁾

3,394

3,505

3,394

3,505

Total investments

556

619

556

619

Total loans

2,534

2,685

2,534

2,685

Allowance for loan losses

22

18

22

18

Total goodwill and intangible assets

126

127

126

127

Total deposits

3,007

2,935

3,007

2,935

Total shareholders' equity⁽⁵⁾

418

399

418

399

Net income

11

8

30

25

Adjusted income⁽¹⁾

11

9

31

26

ASSET QUALITY AND CONDITION RATIOS

Net charge-offs (annualized)/average loans

0.03
%

0.06
%

(0.02)
%

0.07
%
Allowance for credit losses/total loans

0.89

0.67

0.89

0.67

Loans/deposits

84

91

84

91

Shareholders' equity to total assets⁽⁵⁾

11.19

10.34

11.19

10.34

Tangible shareholders' equity to tangible assets^{(1) (5)}

8.08

7.27

8.08

7.27


	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2022			2021			2022			2021
PER SHARE DATA
Net earnings, diluted	$	0.76		$	0.73		$	2.07		$	1.97
Adjusted earnings, diluted⁽¹⁾		0.76			0.73			2.07			2.04
Total book value		25.22			27.92			25.22			27.92
Tangible book value per share⁽¹⁾		16.89			19.48			16.89			19.48
Market price at period end		26.52			28.05			26.52			28.05
Dividends		0.26			0.24			0.76			0.70

PERFORMANCE RATIOS⁽²⁾
Return on assets		1.20	%		1.16	%		1.11	%		1.05	%
Adjusted return on assets⁽¹⁾		1.20			1.16			1.12			1.09
Pre-tax, pre-provision return on assets		1.65			1.43			1.48			1.26
Adjusted pre-tax, pre-provision return on assets ⁽¹⁾		1.65			1.43			1.49			1.31
Return on equity		11.55			10.38			10.32			9.54
Adjusted return on equity⁽¹⁾		11.54			10.39			10.38			9.98
Return on tangible equity		17.25			15.08			15.28			14.01
Adjusted return on tangible equity⁽¹⁾		17.24			15.09			15.37			14.50
Net interest margin, fully taxable equivalent (FTE)^{(1) (3)}		3.47			3.02			3.21			2.88
Adjusted net interest margin⁽¹⁾		3.47			2.75			3.21			2.73
Efficiency ratio⁽¹⁾		57.67			59.18			59.66			61.48

FINANCIAL DATA (In millions)
Total assets	$	3,840		$	3,738		$	3,840		$	3,738
Total earning assets⁽⁴⁾		3,525			3,394			3,525			3,394
Total investments		566			556			566			556
Total loans		2,850			2,534			2,850			2,534
Allowance for credit losses		25			22			25			22
Total goodwill and intangible assets		126			126			126			126
Total deposits		3,136			3,007			3,136			3,007
Total shareholders' equity		380			418			380			418
Net income		11			11			31			30
Adjusted income⁽¹⁾		11			11			31			31

ASSET QUALITY AND CONDITION RATIOS
Net charge-offs (recoveries) (annualized)/average loans		0.01	%		0.03	%		—	%		(0.02)	%
Allowance for credit losses/total loans		0.88			0.89			0.88			0.89
Loans/deposits		91			84			91			84
Shareholders' equity to total assets		9.89			11.19			9.89			11.19
Tangible shareholders' equity to total tangible assets⁽¹⁾		6.85			8.08			6.85			8.08

(1)	Non-GAAP financial measure. Refer to the Reconciliation of Non-GAAP Financial Measures section of ~~Management's~~the “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” in this Form 10-Q for additional information.

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

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

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

~~(5)~~

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

6658

Table of Contents

CONSOLIDATED LOAN AND DEPOSIT ANALYSIS

The following tables present the quarterly trend in loan and deposit data and accompanying ~~quarterly~~ growth rates as of September 30, ~~2021~~2022 on an annualized basis:

LOAN ANALYSIS

Annualized Growth %
(in thousands, except ratios)

Sep 30, 2021

Jun 30, 2021

Mar 31, 2021

Dec 31, 2020

Sep 30, 2020

Quarter To Date

Year To Date
Commercial real estate

$
1,170,372

$
1,135,857

$
1,118,669

$
1,084,381

$
1,045,635

12
%

11
%
Commercial and industrial

331,091

327,729

317,500

323,864

324,647

4

3

Paycheck Protection Program (PPP)

24,227

65,918

77,878

53,774

131,537

*

(74)

Total commercial loans

1,525,690

1,529,504

1,514,047

1,462,019

1,501,819

(1)

6

Total commercial loans, excluding PPP

1,501,463

1,463,586

1,436,169

1,408,245

1,370,282

10

9

Residential real estate

849,692

822,774

868,084

923,891

997,485

13

(11)

Consumer

100,933

103,589

106,835

113,544

119,340

(10)

(15)

Tax exempt and other

57,839

59,693

62,098

63,431

66,326

(12)

(12)

Total loans

$
2,534,154

$
2,515,560

$
2,551,064

$
2,562,885

$
2,684,970

3
%

(1)
%


											Annualized
											Growth %
											Quarter		Year
(in thousands, except ratios)	Sep 30, 2022		Jun 30, 2022		Mar 31, 2022		Dec 31, 2021		Sep 30, 2021		to Date		to Date
Commercial real estate	$	1,421,962	$	1,331,860	$	1,289,968	$	1,210,580	$	1,170,372	27	%	23	%
Commercial and industrial		376,624		360,304		346,394		340,129		331,091	18		14
Paycheck Protection Program (PPP)		—		170		1,126		6,669		24,227	*		*
Total commercial loans		1,798,586		1,692,334		1,637,488		1,557,378		1,525,690	25		21
Total commercial loans, excluding PPP		1,798,586		1,692,164		1,636,362		1,550,709		1,501,463	25		21

Residential real estate		896,618		876,644		868,382		821,004		849,692	9		12
Consumer		100,822		100,816		96,876		98,949		100,933	—		3
Tax exempt and other		54,338		57,480		51,816		54,579		57,839	(22)		(1)
Total loans	$	2,850,364	$	2,727,274	$	2,654,562	$	2,531,910	$	2,534,154	18	%	17	%

*Indicates ratios of 100% or greater.

DEPOSIT ANALYSIS

Annualized Growth %
(in thousands, except ratios)

Sep 30, 2021

Jun 30, 2021

Mar 31, 2021

Dec 31, 2020

Sep 30, 2020

Quarter To Date

Year To Date
Demand

$
664,395

$
599,598

$
586,487

$
544,636

$
515,064

43
%

29
%
NOW

888,021

802,681

761,817

738,849

706,048

43

27

Savings

605,977

578,361

560,095

521,638

511,938

19

22

Money market

379,651

371,075

365,507

402,731

388,356

9

(8)

Total non-maturity deposits

2,538,044

2,351,715

2,273,906

2,207,854

2,121,406

32

20

Total time deposits

469,221

470,758

638,436

698,361

813,509

(1)

(44)

Total deposits

$
3,007,265

$
2,822,473

$
2,912,342

$
2,906,215

$
2,934,915

26
%

5
%


											Annualized
											Growth %
											Quarter		Year
(in thousands, except ratios)	Sep 30, 2022		Jun 30, 2022		Mar 31, 2022		Dec 31, 2021		Sep 30, 2021		to Date		to Date
Demand	$	700,218	$	670,268	$	653,471	$	664,420	$	664,395	18	%	7	%
NOW		918,822		883,239		918,768		940,631		888,021	16		(3)
Savings		669,317		663,676		658,834		628,670		605,977	3		9
Money market		513,075		499,456		424,750		389,291		379,651	11		42
Total non-maturity deposits		2,801,432		2,716,639		2,655,823		2,623,012		2,538,044	12		9
Total time deposits		334,248		361,906		391,940		425,532		469,221	(31)		(29)
Total deposits	$	3,135,680	$	3,078,545	$	3,047,763	$	3,048,544	$	3,007,265	7	%	4	%

6759

Table of Contents

AVERAGE BALANCES AND AVERAGE YIELDS/RATES

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

Three Months Ended September 30,

2021

2020

Average

Average

(in thousands, except ratios)

Balance

Interest⁽³⁾

Yield/Rate⁽³⁾


Balance

Interest⁽³⁾

Yield/Rate⁽³⁾

Assets













Interest-bearing deposits with other banks⁽⁴⁾

$
284,429

$
110

0.15
%

$
92,066

$
21

0.09
%
Securities available for sale and FHLB stock⁽²⁾⁽³⁾

610,381

3,986

2.59

627,162

4,787

3.04

Loans:

Commercial real estate

1,153,813

10,269

3.53

1,012,194

9,691

3.81

Commercial and industrial

391,191

3,739

3.79

399,734

4,411

4.39

Paycheck protection program

45,835

2,690

23.28

131,605

1,052

3.18

Residential

824,686

7,574

3.64

1,060,084

9,886

3.71

Consumer

101,545

968

3.78

121,248

1,042

3.42

Total loans ⁽¹⁾

2,517,070

25,240

3.98

2,724,865

26,082

3.81

Total earning assets

3,411,880

29,336

3.41
%

3,444,093

30,890

3.57
%
Other assets⁽⁶⁾

352,208



370,335



Total assets⁽⁶⁾

$
3,764,088



$
3,814,428



Liabilities













NOW

$
860,206

$
272

0.13
%

$
677,706

$
243

0.14
%
Savings

591,440

124

0.08

488,508

157

0.13

Money market

381,755

115

0.12

396,351

163

0.16

Time deposits

471,934

1,044

0.88

777,424

3,307

1.69

Total interest bearing deposits

2,305,335

1,555

0.27

2,339,989

3,870

0.66

Borrowings

334,097

1,778

2.11

481,687

1,941

1.60

Total interest bearing liabilities

2,639,432

3,333

0.50
%

2,821,676

5,811

0.82
%
Non-interest bearing demand deposits

641,769





507,844



Other liabilities⁽⁶⁾

61,436





79,848



Total liabilities⁽⁶⁾

3,342,637





3,409,368



Total shareholders' equity⁽⁶⁾

421,451





405,060



Total liabilities and shareholders' equity⁽⁶⁾

$
3,764,088





$
3,814,428





Net interest spread





2.91
%





2.75
%
Net interest margin⁽¹⁾

3.02





2.90

Adjusted net interest margin⁽⁵⁾





2.75

2.89


	Three Months Ended September 30,
	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	$	59,556	$	320	2.13	%	$	284,429	$	110	0.15	%
Securities available for sale and FHLB stock⁽²⁾⁽³⁾		642,475		5,058	3.12			610,381		3,986	2.59
Loans:
Commercial real estate		1,351,599		14,510	4.26			1,153,813		10,269	3.53
Commercial and industrial		421,963		4,739	4.46			391,191		3,739	3.79
Paycheck protection program		94		—	—			45,835		2,690	23.28
Residential		882,158		7,676	3.45			824,686		7,574	3.64
Consumer		101,175		1,161	4.55			101,545		968	3.78
Total loans ⁽¹⁾		2,756,989		28,086	4.04			2,517,070		25,240	3.98
Total earning assets		3,459,020		33,464	3.84	%		3,411,880		29,336	3.41	%
Other assets		313,289						352,208
Total assets	$	3,772,309					$	3,764,088

Liabilities
NOW	$	905,668	$	366	0.16	%	$	860,206	$	272	0.13	%
Savings		668,255		143	0.08			591,440		124	0.08
Money market		491,683		808	0.65			381,755		115	0.12
Time deposits		349,787		485	0.55			471,934		1,044	0.88
Total interest bearing deposits		2,415,393		1,802	0.30			2,305,335		1,555	0.27
Borrowings		202,296		1,374	2.69			334,097		1,778	2.11
Total interest bearing liabilities		2,617,689		3,176	0.48	%		2,639,432		3,333	0.50	%
Non-interest bearing demand deposits		690,134						641,769
Other liabilities		71,934						61,436
Total liabilities		3,379,757						3,342,637

Total shareholders' equity		392,552						421,451

Total liabilities and shareholders' equity	$	3,772,309					$	3,764,088

Net interest spread					3.36	%					2.91	%
Net interest margin					3.47						3.02
Adjusted net interest margin⁽⁴⁾					3.47						2.75

(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 PPP loans.

Table of Contents


	Nine Months Ended September 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	$	86,390	$	503	0.78	%	$	229,235	$	203	0.12	%
Securities available for sale and FHLB stock⁽²⁾⁽³⁾		630,679		13,297	2.82			617,373		12,424	2.69
Loans:
Commercial real estate		1,306,664		37,765	3.86			1,128,134		30,177	3.58
Commercial and industrial⁽³⁾		408,620		11,871	3.88			381,753		10,727	3.76
Paycheck protection program		4,676		223	6.39			62,562		5,058	10.81
Residential		865,259		22,801	3.52			861,629		24,145	3.75
Consumer		99,673		2,943	3.95			105,371		2,833	3.59
Total loans ⁽¹⁾		2,684,892		75,603	3.76			2,539,449		72,940	3.84
Total earning assets		3,401,961		89,403	3.51	%		3,386,057		85,567	3.38	%
Other assets		323,253						357,334
Total assets	$	3,725,214					$	3,743,391

Liabilities
NOW	$	909,793	$	984	0.14	%	$	801,292	$	760	0.13	%
Savings		655,727		418	0.09			568,726		431	0.10
Money market		455,645		1,139	0.33			376,775		354	0.13
Time deposits		376,496		1,645	0.58			583,529		5,565	1.28
Total interest bearing deposits		2,397,661		4,186	0.23			2,330,322		7,110	0.41
Borrowings		187,629		3,458	2.46			336,432		5,415	2.15
Total interest bearing liabilities		2,585,290		7,644	0.40	%		2,666,754		12,525	0.63	%
Non-interest bearing demand deposits		671,490						598,434
Other liabilities		66,298						64,360
Total liabilities		3,323,078						3,329,548

Total shareholders' equity		402,136						413,843

Total liabilities and shareholders' equity	$	3,725,214					$	3,743,391

Net interest spread					3.12	%					2.75	%
Net interest margin					3.21						2.88
Adjusted net interest margin⁽⁴⁾					3.21						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~~PPP loans.

~~(6)~~

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

~~Table of Contents~~

Nine Months Ended September 30,

2021

2020

Average

Yield/

Average

Yield/
(in thousands, except ratios)

Balance

Interest⁽³⁾

Rate⁽³⁾

Balance

Interest⁽³⁾

Rate⁽³⁾
Assets

Interest-bearing deposits with other banks⁽⁴⁾

$
229,235

$
203

0.12
%

$
52,326

$
84

0.21
%
Securities available for sale and FHLB stock⁽²⁾⁽³⁾

617,373

12,424

2.69

643,978

15,798

3.28

Loans:

Commercial real estate

1,128,134

30,177

3.58

972,330

29,895

4.11

Commercial and industrial⁽³⁾

381,753

10,727

3.76

414,532

13,847

4.46

Paycheck protection program

62,562

5,058

10.81

78,782

1,921

3.26

Residential

861,629

24,145

3.75

1,103,442

31,386

3.80

Consumer

105,371

2,833

3.59

126,189

3,929

4.16

Total loans ⁽¹⁾

2,539,449

72,940

3.84

2,695,275

80,978

4.01

Total earning assets

3,386,057

85,567

3.38
%

3,391,579

96,860

3.81
%
Other assets⁽⁶⁾

357,334



371,792



Total assets⁽⁶⁾

$
3,743,391



$
3,763,371



Liabilities













NOW

$
801,292

$
760

0.13
%

$
622,702

$
1,021

0.22
%
Savings

568,726

431

0.10

451,952

587

0.17

Money market

376,775

354

0.13

393,702

1,511

0.51

Time deposits

583,529

5,565

1.28

813,442

11,320

1.86

Total interest bearing deposits

2,330,322

7,110

0.41

2,281,798

14,439

0.85

Borrowings

336,432

5,415

2.15

547,557

7,149

1.74

Total interest bearing liabilities

2,666,754

12,525

0.63
%

2,829,355

21,588

1.02
%
Non-interest bearing demand deposits

598,434





464,476





Other liabilities⁽⁶⁾

64,360





63,812





Total liabilities⁽⁶⁾

3,329,548





3,357,643





Total shareholders' equity⁽⁶⁾

413,843





405,728





Total liabilities and shareholders' equity⁽⁶⁾

$
3,743,391





$
3,763,371





Net interest spread

2.75
%

2.79
%
Net interest margin





2.88





2.95

Adjusted net interest margin⁽⁵⁾

2.73

2.94

~~(1)~~

~~The average balances of loans include non-accrual loans and unamortized deferred fees and costs.~~

~~(2)~~

~~The average balance for securities available for sale is based on amortized cost.~~

~~(3)~~

~~Fully taxable equivalent considers the impact of tax-advantaged securities and loans.~~

~~(4)~~

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

~~(5)~~

~~Adjusted net interest margin excludes Paycheck Protection Program loans.~~

~~(6)~~

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

6961

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. In addition, our non-GAAP financial measures may not be comparable to similarly titled measures of other companies because such measures may include or exclude other specified items.

~~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.

7062

Table of Contents

RECONCILIATION OF NON-GAAP FINANCIAL MEASURES

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

Three Months Ended September 30,

Nine Months Ended September 30,
(in thousands)

Calculations

2021

2020

2021

2020
Net income



$
11,028

$
8,402

$
29,533

$
24,604
Non-recurring items:

Gain on sale of securities, net



(1,930)

—

(1,980)

(1,486)
Loss (gain) on sale of premises and equipment, net



(146)

—

(137)

90
Loss on other real estate owned



—

335

(11)

366
Loss on debt extinguishment

1,768

—

1,768

1,351
Acquisition, conversion and other expenses



318

691

1,759

952
Income tax expense ⁽¹⁾



(2)

(245)

(332)

(304)
Total non-recurring items

8

781

1,067

969
Total adjusted income⁽²⁾

(A)

$
11,036

$
9,183

$
30,600

$
25,573

Net interest income

(B)

$
25,582

$
24,665

$
71,758

$
73,818
Plus: Non-interest income



11,350

10,102

31,103

28,233
Total Revenue



36,932

34,767

102,861

102,051
Gain on sale of securities, net



(1,930)

��

(1,980)

(1,486)
Total adjusted revenue⁽²⁾

(C)

$
35,002

$
34,767

$
100,881

$
100,565

Total non-interest expense



$
23,372

$
22,419

$
67,587

$
67,044
Non-recurring expenses:

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



146

—

137

(90)
Loss on other real estate owned



—

(335)

11

(366)
Loss on debt extinguishment

(1,768)

—

(1,768)

(1,351)
Acquisition, conversion and other expenses



(318)

(691)

(1,759)

(952)
Total non-recurring expenses

(1,940)

(1,026)

(3,379)

(2,759)
Adjusted non-interest expense⁽²⁾

(D)

$
21,432

$
21,393

$
64,208

$
64,285

Total revenue

36,932

34,767

102,861

102,051
Total non-interest expense

23,372

22,419

67,587

67,044
Pre-tax, pre-provision net revenue

$
13,560

$
12,348

$
35,274

$
35,007

Adjusted revenue⁽²⁾

35,002

34,767

100,881

100,565
Adjusted non-interest expense⁽²⁾

21,432

21,393

64,208

64,285
Adjusted pre-tax, pre-provision net revenue⁽²⁾

$
13,570

$
13,374

$
36,673

$
36,280

(in millions)










Average earning assets

(E)

$
3,412

$
3,444

$
3,386

$
3,392
Average paycheck protection program (PPP) loans

(R)

46

132

63

79
Average earning assets, excluding PPP loans

(S)

3,366

3,312

3,323

3,313
Average assets

(F)

3,764

3,814

3,743

3,763
Average shareholders' equity⁽⁸⁾

(G)

421

405

414

406
Average tangible shareholders' equity^(2)(3)(8)

(H)

295

278

287

278
Tangible shareholders' equity, period-end^(2)(3)(8)

(I)

292

272

292

272
Tangible assets, period-end^(2)(3)(8)

(J)

3,612

3,734

3,612

3,734


		Three Months Ended September 30,				Nine Months Ended September 30,
(in thousands)	Calculations	2022		2021		2022		2021
Net income		$	11,430	$	11,028	$	31,045	$	29,533
Non-recurring items:
Gain on sale of securities, net			(44)		(1,930)		(53)		(1,980)
Gain on sale of premises and equipment, net			—		(146)		(65)		(137)
Gain on other real estate owned			—		—		—		(11)
Loss on debt extinguishment			—		1,768		—		1,768
Acquisition, conversion and other expenses			31		318		356		1,759
Income tax expense ⁽¹⁾			3		(2)		(55)		(332)
Total non-recurring items			(10)		8		183		1,067
Total adjusted income⁽²⁾	(A)	$	11,420	$	11,036	$	31,228	$	30,600

Net interest income	(B)	$	29,910	$	25,582	$	80,727	$	71,758
Plus: Non-interest income			8,823		11,350		27,093		31,103
Total Revenue			38,733		36,932		107,820		102,861
Gain on sale of securities, net			(44)		(1,930)		(53)		(1,980)
Total adjusted revenue⁽²⁾	(C)	$	38,689	$	35,002	$	107,767	$	100,881

Total non-interest expense		$	23,032	$	23,372	$	66,618	$	67,587
Non-recurring expenses:
Gain on sale of premises and equipment, net			—		146		65		137
Gain on other real estate owned			—		—		—		11
Loss on debt extinguishment			—		(1,768)		—		(1,768)
Acquisition, conversion and other expenses			(31)		(318)		(356)		(1,759)
Total non-recurring expenses			(31)		(1,940)		(291)		(3,379)
Adjusted non-interest expense⁽²⁾	(D)	$	23,001	$	21,432	$	66,327	$	64,208

Total revenue			38,733		36,932		107,820		102,861
Total non-interest expense			23,032		23,372		66,618		67,587
Pre-tax, pre-provision net revenue		$	15,701	$	13,560	$	41,202	$	35,274

Adjusted revenue⁽²⁾			38,689		35,002		107,767		100,881
Adjusted non-interest expense⁽²⁾			23,001		21,432		66,327		64,208
Adjusted pre-tax, pre-provision net revenue⁽²⁾		$	15,688	$	13,570	$	41,440	$	36,673

(in millions)
Average earning assets	(E)	$	3,459	$	3,412	$	3,402	$	3,386
Average paycheck protection program (PPP) loans	(R)		—		46		5		63
Average earning assets, excluding PPP loans	(S)		3,459		3,366		3,397		3,323
Average assets	(F)		3,772		3,764		3,725		3,743
Average shareholders' equity	(G)		393		421		402		414
Average tangible shareholders' equity⁽²⁾⁽³⁾	(H)		267		295		276		287
Tangible shareholders' equity, period-end⁽²⁾⁽³⁾	(I)		254		292		254		292
Tangible assets, period-end⁽²⁾⁽³⁾	(J)		3,715		3,612		3,715		3,612

7163

Table of Contents

Three Months Ended September 30,

Nine Months Ended September 30,

Calculations

2021

2020

2021

2020

(in thousands)











Common shares outstanding, period-end

(K)

14,987

14,929

14,987

14,929

Average diluted shares outstanding

(L)

15,051

15,103

15,035

15,382

Adjusted earnings per share, diluted⁽²⁾

(A/L)

$
0.73

$
0.61

$
2.04

$
1.66

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

(I/K)

19.48

18.21

19.48

18.21

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

(M)

4,398

11,681

4,398

11,681

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

(I+M)/K

19.19

17.42

19.19

17.42

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

(I/J)

8.08

7.28

8.08

7.28

Performance ratios⁽⁵⁾

Return on assets



1.16
%

0.88

1.05
%

0.87
%
Adjusted return on assets⁽²⁾

(A/F)

1.16

0.96

1.09

0.91

Pre-tax, pre-provision return on assets

1.43

1.29

1.26

1.24

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

(U/F)

1.43

1.39

1.31

1.29

Return on equity⁽⁸⁾



10.38

8.25

9.54

8.10

Adjusted return on equity⁽²⁾⁽⁸⁾

(A/G)

10.39

9.02

9.98

8.42

Return on tangible equity⁽⁸⁾

15.08

12.32

14.01

12.10

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

(A+Q)/H

15.09

13.44

14.50

12.57

Efficiency ratio⁽²⁾⁽⁶⁾

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

59.18

59.47

61.48

61.62

Net interest margin

(B+P)/E

3.02

2.90

2.88

2.95

Adjusted net interest margin⁽²⁾⁽⁷⁾

(B+P-T)/S

2.75

2.89

2.73

2.94

Supplementary data (in thousands)











Taxable equivalent adjustment for efficiency ratio

(N)

$
576

$
570

$
1,757

$
1,395

Franchise taxes included in non-interest expense

(O)

143

121

396

360

Tax equivalent adjustment for net interest margin

(P)

421

416

1,284

1,041

Intangible amortization

(Q)

233

256

707

768

Interest and fees on PPP loans

(T)

2,690

1,052

5,058

1,921


		Three Months Ended September 30,					Nine Months Ended September 30,
	Calculations	2022			2021		2022			2021
(in thousands)
Common shares outstanding, period-end	(K)		15,066			14,987		15,066			14,987
Average diluted shares outstanding	(L)		15,113			15,051		15,100			15,035

Adjusted earnings per share, diluted⁽²⁾	(A/L)	$	0.76		$	0.73	$	2.07		$	2.04
Tangible book value per share, period-end⁽²⁾	(I/K)		16.89			19.48		16.89			19.48
Securities adjustment, net of tax⁽¹⁾⁽⁴⁾	(M)		(58,715)			4,398		(58,715)			4,398
Tangible book value per share, excluding securities adjustment⁽²⁾⁽⁴⁾	(I+M)/K		20.79			19.19		20.79			19.19
Total tangible shareholders' equity/total tangible assets⁽²⁾	(I/J)		6.85			8.08		6.85			8.08

Performance ratios⁽⁵⁾
Return on assets			1.20	%		1.16		1.11	%		1.05
Adjusted return on assets⁽²⁾	(A/F)		1.20			1.16		1.12			1.09
Pre-tax, pre-provision return on assets			1.65			1.43		1.48			1.26
Adjusted pre-tax, pre-provision return on assets⁽²⁾	(U/F)		1.65			1.43		1.49			1.31
Return on equity			11.55			10.38		10.32			9.54
Adjusted return on equity⁽²⁾	(A/G)		11.54			10.39		10.38			9.98
Return on tangible equity			17.25			15.08		15.28			14.01
Adjusted return on tangible equity⁽¹⁾⁽²⁾	(A+Q)/H		17.24			15.09		15.37			14.50
Efficiency ratio⁽²⁾⁽⁶⁾	(D-O-Q)/(C+N)		57.67			59.18		59.66			61.48
Net interest margin	(B+P)/E		3.47			3.02		3.21			2.88
Adjusted net interest margin⁽²⁾⁽⁷⁾	(B+P-T)/S		3.47			2.75		3.21			2.73

Supplementary data (in thousands)
Taxable equivalent adjustment for efficiency ratio	(N)	$	533		$	576	$	1,500		$	1,757
Franchise taxes included in non-interest expense	(O)		149			143		434			396
Tax equivalent adjustment for net interest margin	(P)		379			421		1,033			1,284
Intangible amortization	(Q)		233			233		699			707
Interest and fees on PPP loans	(T)		—			2,690		223			5,058

(1)	Assumes a marginal tax rate of 23.41% for 2022 and 23.71% for ~~2021 and the 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.

~~(8)~~

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

7264

Table of Contents

~~FINANCIAL~~QUARTERLY PERFORMANCE SUMMARY

~~The Company reported~~ Earnings (third quarter ~~2021 net income~~ of ~~$11.0 million or $0.73 per diluted share, up from $8.4 million or $0.56 per diluted share in~~2022 compared to the same quarter of ~~2020. Adjusted~~2021)

●Net income was $11.4 million, an increase of 4%, or 27% on a non-GAAP basis when excluding the accretion from PPP loan fees in 2021.

●Diluted earnings ~~(non-GAAP) were also $11.0 million~~per share was $0.76, an increase of $0.03 or ~~$0.73~~4%. Diluted earnings per ~~diluted~~ share in the third quarter of 2021 ~~compared to $9.2 million, or $0.61 per share for the same period of 2020.~~

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

included a $0.14 benefit from PPP loan fees.

●

~~1.16% return on assets, for both GAAP and non-GAAP measures~~

●

~~10% annualized commercial loan growth, excluding Paycheck Protection Program (PPP) loans~~

●

~~32% annualized core deposit growth~~

●

~~3.02% net interest margin (NIM) compared to 2.90%~~

●

~~15% increase in fee income, excluding mortgage banking income and security gains~~

●

~~Bar Harbor Bank & Trust named as America’s Best Bank in Maine by Newsweek Magazine~~

●Return on assets increased to 1.20% from 1.16% or 0.95% on a non-GAAP basis when excluding PPP loan fees. Return on equity was 11.55% compared to 10.38%. Both ratios include the benefit of higher net income and lower average balances related to unrealized losses on securities as noted below under the Financial Position section.

~~Adjusted earnings per share (non-GAAP) in the third quarter 2021 grew 20% over the same quarter~~

●Net interest income was $29.9 million, an increase of ~~2020. The adjusted return on assets in the third quarter~~17%. Net interest margin (NIM) was ~~1.16% compared to 0.96%~~3.47% in the third quarter of ~~2020, evidencing~~2022, an increase of 45 basis points from the same period in 2021. The increase is primarily due to the repricing of variable rate assets, continued ~~execution~~loan growth and a lower percentage of ~~strategies~~wholesale borrowings to total debt.

●The provision for credit losses was an expense of $1.3 million mainly due to loan growth compared to a net benefit of $174 thousand reflecting improved economic forecasts.

●Non-interest income was $8.8 million, down $2.5 million. Customer service fee income was up 9%, trust and wealth management income was down 8%, and prior year included $1.9 million of net securities gains.

●Non-interest expense was $23.0 million versus $23.4 million. Prior year includes a $1.8 million loss on extinguishment of debt.

●Efficiency ratio improved to 58% from 59%, or 63% on a non-GAAP basis that balance growth with earnings. This is indicative of the strength in the Company’s core businesses and the results of strategic initiatives. The momentum seen in each area affords the Company flexibility with diverse revenue streams to support operations, even in uncertain economic environments.

excludes PPP loan fees.

While fee income and efficiency improvements contributed to increased profitability, the quarterly results also benefited from a 13 basis point expansion in the margin to 2.99% compared with 2.86% in the second quarter 2021 on a normalized basis (excluding PPP and excess cash effects). This improvement is a direct result of increased core deposit funding as the Company gained market share and reduced reliance on wholesale borrowings. Financial Position(As of September 30, ~~2021, the Company’s wholesale borrowings as a percentage of funding was 9%, down from 23% in the prior year.~~2022, compared to June 30, 2022)

●Total assets increased $124.5 million to $3.8 billion mainly due to loan growth supported by growth in total deposits.

●Cash and cash equivalents were $82.1 million, compared to $67.1 million. The ~~Company’s~~increase is a principally a timing difference between loan activity and short-term borrowings at the end of the quarter.

●Securities were $565.8 million, or 15% of total assets, compared to $592.7 million, or 16% of total assets. Net unrealized losses were $76.6 million, or 12% of gross securities, compared with $49.7 million, or 8% of gross securities as fixed rate securities continued to price reflecting higher interest rates.

●Total loans grew 18% on annualized basis during the quarter as commercial ~~teams~~loans and residential loans increased 25% and 9%, respectively. Loan growth was generated across all of our footprint and among many industry sectors and business lines. We believe that the economy in Northern New England continues to be strong despite pressures from the broader economy.

●The ratio of the allowance for credit losses to total loans was 0.88%, increasing from 0.87%, which reflects more conservative economic forecasting. Net charge-offs continue to ~~deliver strong loan growth despite~~be insignificant and each credit metric improved during the competitive landscape within its footprint. Commercial real estate loan growth this quarter was driven by new multi-family residential and light industrial & manufacturing relationships with proven operators. Risk management remains at the forefront of all that the Company does. The Company saw yields bottoming out on residential loans this quarter and was able to increase contractual rates at times. Given the overall interest rate risk position of the balance sheet and this recent rate increase, the Company strategically directed more residential mortgage production onto the balance sheet rather than sell in the secondary market.”

quarter.

~~The Company executed another delever and security remix strategy~~

●Total deposits grew 7% on annualized basis during the ~~third~~ quarter ~~prepaying $89 million~~on an increasing number of ~~FHLB borrowings~~customer accounts and selling $44 million of credit sensitive municipal and corporate bonds. The additional purchase of securities was completed subsequent to quarter end. This transaction is expected to expand the NIM by 12 basis points and will be accretive to earnings by $0.02 on a quarterly basis.

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

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

market share.

7365

Table of Contents

●Total book value per share was $25.22 compared to $26.19. Net unrealized security losses reduced book value per share by $3.90 compared to $2.55. Tangible book value per share excluding net unrealized security losses (non-GAAP) increased 8% on annualized basis on net income offset by dividends to shareholders.

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

Total assets were $3.7 billion at the end of the third quarter 2021 as well as at year-end 2020. In the third quarter the Company executed a balance sheet delever and security remix strategy, prepaying $89.0 million of Federal Home Loan Bank advances and selling $43.5 million of securities. The replenishment of those securities is expected to be fulfilled in the fourth quarter 2021. Total loans decreased $28.7 million from year-end 2020 primarily due to PPP loan forgiveness outpacing 2021 originations by $29.5 million from year-end 2020. Non-maturity deposits (core deposits) increased $330.2 million from the end of 2020 as over 800 new accounts were opened during the quarter, continuing a trend of almost 1,000 new accounts per quarter. The loan to deposit ratio was 84% at the end of the third quarter compared to 88% at year-end 2020. Asset quality metrics remain strong with an allowance for credit losses to total loans ratio of 0.89% and a coverage ratio to non-accruing loans of 184%, up from 157% as of year-end 2020. Tangible book value per share (non-GAAP) increased to $19.48 from $18.77 at year-end on strong earnings offset by the impact of the CECL adoption in the first quarter 2021.

~~Cash~~

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

Securities

~~Securities totaled $555.5~~Total securities decreased to $565.8 million ~~in the third quarter 2021 and $599.1~~from $625.6 million at year-end ~~2020 representing 15% and 16% of~~2021. The $59.8 million decrease in total assets, respectively. The decrease is primarily due to the security sale of $43.5 million as a part of the balance sheet delever and security remix strategy. In the first nine months of 2021 purchases totaled $123.3 million and were offset by $52.4securities included $99.3 million of purchases, $19.5 million in sales, ~~$103.4~~an $11.7 million cost reduction to municipal securities that are hedged, and $50.4 million of maturities, calls and pay-downs ~~of amortizing securities~~ and ~~a $3.8 million reduction in FHLB stock.~~amortization. Fair value adjustments ~~increased~~reduced the security portfolio by ~~$7.3~~$76.6 million at the end of the ~~third~~September 30, 2022 quarter, ~~2021 and $13.1~~compared to an increase of $2.6 million at year-end ~~2020. Unrealized gains decreased for~~2021. Net unrealized losses in the nine months ~~ended September 30, 2021 due~~of 2022 resulted from the Federal Reserve increasing the federal funds target interest rate 300 basis points in that period. All securities remain classified as available for sale to ~~sales~~provide flexibility in loan funding and ~~changes in the long-term treasury yield curve.~~management of our cost of funds. The weighted average yield of ~~the Company's~~our securities portfolio was ~~2.82% as of September 30, 2021 compared to 2.96%~~3.43% at ~~year-end 2020. At the end of the third quarter 2021 securities~~quarter-end and 2.63% at year-end. Securities held ~~by the Company~~at quarter-end had an average life of ~~5.1~~9.5 years and an effective duration of ~~4.4~~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 loans decreased to $7.5 million at September 30, 2021 from $24.0 million at December 31, 2020. The Company sold $28.5 million of residential loan originations in the third quarter 2021 compared with $86.2 million in the same quarter of 2020. Sales in the nine month period of 2021 totaled $153.9 million and $156.0 million in the comparable period of 2020. The decrease in sales reflects the Company strategically directing residential loan production to the balance sheet when rates were higher in the quarter.

Loans

~~Loan balances in the third quarter~~Total loans increased by $318.5 million from year-end 2021, ~~were $2.5 billion compared $2.6~~or 17% annualized, to $2.9 billion at ~~year-end 2020.~~September 30, 2022. Commercial loans ~~grew 9% on a year-to-date annualized basis, excluding~~increased by $241.2 million with growth from existing customers and 491 new lending relationships. PPP ~~loans and included 2 new relationships totaling $21.2 million during~~loan balances were zero at the ~~third quarter. Commercial real estate and commercial and industrial loans, excluding PPP, increased 11% and 3% on a year-to-date annualized basis, respectively. PPP loans totaled $24.2~~end of the quarter, compared to $6.7 million at ~~quarter-end, consisting of $24.1~~year-end. Total residential loans increased by $75.6 million from 2021, ~~and $145 thousand from 2020, and were $53.8 million at year-end 2020. COVID loan modifications totaled $4.7 million, down from $68.6 million at year-end,~~ as ~~the majority of modified loans have resumed normal payment schedules. Total residential loans decreased $74.2 million from year-end 2020, which includes $156.3 million of~~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 ~~$230.5 million of prepayments/amortization.~~increasing market rates.

Allowance for Credit Losses

The ~~allowance for credit losses (ACL) totaled $22.4~~ACL increased to $25.0 million at ~~the end of the third quarter 2021 and $19.0~~quarter-end as compared to $22.7 million at year-end ~~2020. The increase is primarily~~2021 principally due to loan growth. The ratio of the ~~Company’s adoption of CECL as of January 1, 2021, which increased~~allowance to loans decreased to 0.88% from 0.90% at year-end reflecting an improvement in economic forecasts used the ACL by $5.2 million and unfunded commitment reserves by $1.6 million. Since adoption the ACL has decreased due to improved economic forecasts and lower reserves on specific loans offset by changes in loan mix.

~~Table of Contents~~

~~Net charge offs totaled $434 thousand in the first nine months of 2021, or 0.02% of total average loans, compared to $1.9 million, or 0.07% of total average loans, for the same period of 2020.~~calculation. Non-accruing loans ~~were $12.2~~continue to trend downwards on a quarterly basis to $7.8 million ~~or 0.48% of total loans, at the end of the third quarter 2021 and were $12.2 million or 0.48% of total loans at year-end 2020.~~from $10.2 million. The ratio of accruing past due loans to total loans improved to ~~0.12%~~0.10% of total loans ~~decreasing~~ from ~~0.58%~~0.32%. Total delinquent and non-accruing loans as percentage of ~~December 31, 2020.~~total improved to 0.37% from 0.72%. Net recoveries on previously charged-off loans for the first nine months of 2022 totaled $83 thousand compared to net charge-offs of $434 thousand for the same period of 2021.

Other Assets

~~Total other~~Other assets were ~~$322.4~~$366.1 million compared to $318.5 million at ~~the end~~year-end 2021. The increase includes $18.5 million of ~~the third quarter 2021 compared to $331.4~~deferred tax assets recorded in connection with unrealized losses on securities, $6.5 million as of ~~December 31, 2020. The decrease is primarily from~~investments made in tax credits and community developments, a ~~$9.7~~$7.9 million ~~decrease~~increase in the fair value inof customer loan ~~derivatives offset by $2.9~~swaps, and a $10.2 million increase in ~~community limited partnership investments. Additionally,~~the fair value of derivative ~~balances and deferred taxes have been restated for prior periods as described in~~ ~~Note 1 Revision of Previously Issued Financial Statements.~~instruments.

Deposits and Borrowings

Total deposits increased by $87.1 million from year-end 2021 to $3.1 billion. In the first nine months of 2022 over 2,300 net new deposit accounts opened and over 2,900 were ~~$3.0 billion~~opened in the same period of 2021. The loan to deposit ratio increased to 91% from 83% at the end of 2021 due to loan growth offset in part by 4% annualized growth in total deposits. Core deposits grew by $178.4 million, or 9% annualized, while time deposits decreased by $27.7 million, which includes $36.0 million of wholesale deposits that matured. Borrowings increased by $70.5 million from year-end 2021 to supplement excess cash and deposit funding. FHLB borrowings totaled $169.8 million and $98.6 million with weighted average rates of 2.91% and 0.49% at the end of the third quarter of 2022 and year-end 2021, compared to $2.9 billion at year-end 2020. Non-maturity deposits increased $330.2 million over the first nine months of 2021, or 20% on an annualized basis due to growth in new accounts with over 2,900 new customer relationships added. Growth in core deposits during 2021 and the prepayment of $89.0 million in FHLBrespectively. Wholesale borrowings ~~resulted in a reduction of wholesale funding~~ as a percentage of total ~~funding~~debt decreased to 9% from 18% at year-end 2020. Time deposits decreased $229.1 million to $469.2 million at quarter-end as $162.3 million of brokered deposits matured in the first nine months of 2021 and were not replaced due to excess liquidity. Retail time deposits decreased $66.9 million as customers moved funds to transactional accounts upon contractual maturity. Total borrowings decreased by $85.7 million primarily from the aforementioned delever strategy. The average cost of deposits was 0.27%5.8% in the third quarter of 2021 compared to 0.61% in the fourth quarter 2020 and borrowing costs were 2.11% compared to 1.83% for the same periods. The change in cost of funds reflects the attrition of balances on prepaid or matured borrowings and time deposits.from 6.0% at year-end 2021.

Table of Contents

~~Derivative Financial Instruments and~~ Other Liabilities

~~The notional balance of derivative financial instruments increased~~Other liabilities were $75.6 million compared to ~~$929.9 million at the end of the third quarter 2021 from $876.6~~$58.0 million at year-end ~~2020.~~2021. The $17.6 million increase ~~is principally due~~includes $7.0 million in remaining tax credit investment commitments, a $7.9 million increase related to a $50.0 million new hedge on variable rate loans tied to one-month LIBOR. The net fair value of all derivatives was a liability of $2.2 million at the end of the third quarter 2021 compared to liability of $5.5 million at year-end 2020. The reduction in net derivative fair values reflects the rise in long-term interest rates. Additionally, derivative balances have been restated for prior periods as described in ~~Note 1 Revision of Previously Issued Financial Statements.~~

~~Other liabilities totaled $62.3 million at the end of the third quarter 2021 compared to $75.0 million as of December 31, 2020. The decrease primarily reflects the $9.7 million reduction in~~ the fair value of customer loan ~~derivatives~~swaps, and a ~~$3.3~~$4.5 million ~~decrease in cash flow and~~increase related to the fair value ~~hedges.~~of derivative instruments.

Equity

Total equity was $418.4 million, compared with $407.1 million at year-end 2020. The Company’s book value per share was $27.92 as of September 30, 2021 compared with $27.29 at December 31, 2020. Equity included net unrealized securities totaling $4.4 million at the end of the third quarter ~~2021 and $10.0~~of 2022 was $380.0 million compared to $424.1 million at year-end ~~2020. Equity was reduced by $5.2~~2021. The $44.1 million ~~due to the Company’s CECL adoption~~decrease in the first ~~quarter 2021. Additionally, accumulated~~nine months of 2022 included net income totaling $31.0 million, $11.4 million of dividends to shareholders and $64.9 million of other comprehensive ~~income has been restated for prior periods as described in~~ ~~Note 1 Revision~~losses. Other comprehensive losses were primarily due to unrealized losses on securities, net of ~~Previously Issued Financial Statements~~.tax, totaling $60.7 million.

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. As of September 30, 2022, no repurchases have been made, but we will continue examine buying opportunities considering market conditions, including interest rate volatility and potential loan and risk-weighted asset growth.

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

~~Summary~~Net Income

Net income in the third quarter ~~2021~~of 2022 was $11.4 million, or $0.76 per diluted share, compared to $11.0 million, or $0.73 per diluted share, ~~compared to $8.4 million, or $0.56 per share,~~ in the same quarter of 2020. Net income improved on higher fee income and fees from PPP loans in the quarter. PPP loan fees contributed $0.13 to earnings per share in the third quarter of 2021 and $0.06 in the same period of 2020. Adjusted earnings totaled $11.0 million or $0.73 per share, compared to $9.1 million, or $0.61 per share, in the same

~~Table of Contents~~

quarter of 2020. Non-recurring items (non-GAAP) reduced net income by $8 thousand and $781 thousand in third quarters of 2021 and 2020, respectively. The Company's return on assets ratio was 1.16% in the third quarter of 2021 and 0.88% in the same quarter of 2020. Adjusted return on assets (non-GAAP) was 1.16% and 0.96% for the third quarters of 2021 and 2020, respectively evidencing continued execution of strategic initiatives that balance growth and earnings2021.

~~The Company reported year-to-date 2021~~During the first nine months of 2022, net income ~~of $29.5~~was $31.0 million, or ~~$1.96~~$2.06 per diluted share, compared ~~with $24.6~~to $29.5 million, or ~~$1.60~~$1.96 per diluted share, in the same period of ~~2020. Adjusted earnings increased to $30.6 million, or $2.04 per diluted share comparedwith$25.6million,~~or~~$1.66per~~ ~~diluted~~ ~~share,fortherespectiveperiods.~~2021. Non-recurring items ~~(non-GAAP) in the first nine months~~ reduced net income by $1.1 million, ~~and $969 thousand~~or $0.07 per diluted share, in ~~2021 and 2020, respectively. The return on assets ratio year-to-date~~2021.

~~2021was1.05%compared~~to~~0.87%~~in~~theprioryear and adjusted return on assets was 1.09% during the first nine months of 2021 and 0.91% in the same period of 2020. Thesechangeslargelyreflectthesame factors and trends discussed above that drove third quarter net income and average assets.~~

Net Interest Income

Net interest income was $29.9 million in the third quarter of 2022 compared with $25.6 million in the third quarter ~~2021~~of 2021. NIM was 3.47% compared ~~with $24.7 million in~~to 3.02% for the same ~~quarter~~periods, and was 3.50%% and 2.94%, respectively, on a non-GAAP basis when excluding the impact of ~~2020. Net~~PPP loan fees and interest-bearing excess cash. The increase in net interest income and net interest margin was ~~3.02% compared to 2.90% in third quarter of 2020. Acceleration of PPP loan fee amortization~~ due to ~~forgiveness contributed 28 basis points~~higher interest on earning assets due to ~~NIM in the third quarter 2021 and 1 basis point in the same period of 2020. Interest-bearing cash balances, held mostly at~~ the Federal Reserve ~~Bank, reduced NIM by 26 basis points in the quarter and 8 basis points in the third quarter 2020.~~increasing their federal funds target rate. The yield on earning assets totaled ~~3.41%~~3.84% compared to ~~3.57%~~3.41% in the third quarter ~~2020. Excluding the impact~~ of ~~PPP and excess cash, the yield on earning assets totaled 3.42% and 3.67% for the same periods.~~2021. The yield on loans was 4.04% in the third quarter of 2022, and 3.98% in the third quarter ~~2021and 3.81%~~of 2021. The non-GAAP the yield on loans was 4.04% and 3.62% for the same periods when excluding PPP loan fees. Total cost of deposits was 0.30% in the third quarter of ~~2020. Excluding PPP loans the yield on loans was 3.62%~~2022 compared to 0.27% in the third quarter of 2021 ~~and 3.83% in~~reflecting a lower correlation to federal fund rate movements. Borrowing costs were 2.69% compared to 2.11% for the ~~third quarter of 2020. Costs of funds decreased to 0.50% from 0.82% in the third quarter 2020~~same periods due to ~~increased core deposit levels, lower deposit rates and reduced wholesale borrowings.~~the repricing of rolling short-term FHLB borrowings to market rates.

For the first nine months of ~~2021,~~2022, net interest income was ~~$71.8~~$80.7 million compared with ~~$73.9~~$71.8 million in the same period of ~~2020. Net interest margin~~2021. The comparison of NIM and earning asset yields were 3.21% and 2.88%, and 3.51% and 3.38% in 2022 and 2021, respectively. The explanations for improvement in those ratios are consistent with the nine months ended was 2.88% in the third quarter 2021 compared to 2.95% in the third quarter of 2020. The decrease in net interest income and NIM was driven by rate compression triggered by the pandemic, combined with growth in the Company’s interest-bearing cash balances. PPP loan accretion in 2021 helped to offset interest rate compression on yields. Costs of funds for the nine months ended September 30, 2021 decreased to 0.63% from 1.02% due to increased core deposit levels, lower deposit rates and reduced wholesale borrowings.three month comparison above.

Provision for Credit Losses

The provision for credit losses ~~(the “provision”)~~ for the quarter was $1.3 million, compared to a ~~benefit~~recapture of $174 thousand ~~compared to an expense of $1.8 million~~ in the third quarter of ~~2020. For~~2021.

During the first nine months of ~~2021,~~2022, the provision for credit losses was $2.2 million compared to a benefit of $1.4 ~~million compared to an expense of $4.3~~ million in the same period of ~~2020.~~2021. The ~~benefits experienced~~change in the ~~periods of 2021~~provisions for credit losses and benefit are mostly attributable to ~~continued strong credit quality~~loan growth in 2022, and ~~improving~~improved economic ~~forecasts.~~ forecasts in 2021 as compared to 2020, respectively.

Table of Contents

Non-Interest Income

Non-interest income in the third quarter ~~2021~~of 2022 was ~~$11.4~~$8.8 million, compared to ~~$10.1~~$11.4 million in the same quarter of ~~2020. The increase was due to higher customer service fees, wealth management income, and a gain on securities sales.~~2021. Customer service fees were ~~$3.5~~$3.8 million in the third quarter of 2022, compared to ~~$2.9~~$3.5 million in the same period of ~~2020.~~2021. The increase ~~is due to over 800~~reflects the net new accounts that were opened ~~during the quarter~~ and a higher volume of customer activity and transactions. Wealth management income ~~increased 10% over~~was $3.5 million in the third quarter of 2022, down from $3.9 million in the same quarter of ~~2020 to $3.9 million with assets~~2021. Assets under management ~~of $2.4 billion~~(“AUM”) declined approximately 16.1% year to date, as compared to ~~$2.1 billion~~the blended decline of the S&P 500 of 24.1%. The smaller decline in AUM is a direct function of effective portfolio management and new business successes. Mortgage banking income was $315 thousand in the third quarter of 2022, compared to $850 thousand in the same period of 2020. The Company sold securities resulting in a $1.9 million gain as part of its delever and security remix strategy. Mortgage banking activities contributed $850 thousand, compared to $2.6 million in the same period of 2020. The Company took advantage of volatility in the yield curve in the third quarter and put residential mortgages2021 reflecting higher on ~~the~~ balance sheet ~~when rates were higher~~activity and ~~sold loans in the secondary market when rates were low.~~lower residential loan originations.

Non-interest income for the first nine months of ~~2021~~2022 was ~~$31.1~~$27.1 million compared to ~~$28.2~~$31.1 million in the same period in ~~2020. The increase reflects a 13% increase in wealth management income, 15% increase in customer~~2021. Customer service fees ~~18% increase in~~increased $1.4 million while mortgage banking income decreased $3.5 million and ~~gains~~in 2021 included a $2.0 million net gain on ~~securities; all of which were driven by~~security sales. The reasons for these changes are the same ~~reasons~~ as the quarterly ~~period.~~ comparison above.

~~Table of Contents~~

Non-Interest Expense

Non-interest expense was ~~$23.4~~$23.0 million in the third quarter ~~2021 from $22.4~~of 2022, compared to $23.4 million in the same quarter of ~~2020. Salaries~~2021. The decrease is primarily the net result of a $499 thousand increase in salary and ~~benefits~~benefit expense, ~~decreased to $11.7 million compared to $11.8~~a $429 thousand increase in occupancy and equipment expense, and non-recurring expenses totaling $2.1 million in ~~the same quarter~~2021. Salary and benefit expense increased due to annual cost of ~~2020, reflecting full-time equivalents of 428 compared to 457~~living adjustments in the ~~third~~second quarter ~~of 2020. Non-core~~2022 along with higher pay-for-performance incentives. Occupancy and equipment expense increased on higher utility costs and software amortization in 2022. Non-recurring expenses (non-GAAP) in ~~the third quarter~~ 2021, ~~totaled $1.9 million and were mostly made up of the~~included a $1.8 million ~~prepayment penalty~~loss on debt ~~extinguishment. In the same quarter~~extinguishment and $318 thousand of ~~2020 non-core expenses (non-GAAP) totaled $1.0 million and included costs~~fees related to consolidate the Company’s wealth management systems. The efficiency ratio for the third quarter was 59.18% compared to 59.47% in the same period of 2020. Excluding the effects of PPP the efficiency ratio was 63.35% and 61.30% for the same respective periods.consolidating our Wealth Management businesses.

For the first nine months of ~~2021,~~2022, non-interest expense was ~~$67.6~~$66.6 million ~~and $67.0~~compared to $67.6 million in the same period of ~~2020.~~2021. The ~~Company’s year-to-date~~reasons for the decrease in the nine month period is similar to the quarterly explanation above with higher salary and benefits expense and occupancy costs, and lower non-recurring expenses. Non-recurring expenses in 2022 totaled $291 thousand consisting of mostly contract renegotiation fees. In 2021, non-recurring expenses were $3.4 million consisting of $1.8 million of reduction in workforce costs and a $1.8 million loss on extinguishment of debt. The efficiency ratio was 59.66% in the first nine months of 2022 compared to 61.48% in same period 2021, ~~compared to 61.62% in 2020~~ which reflects managements disciplined approach to expense management as revenue grows and the above noted expense initiatives. Non-recurring expenses (non-GAAP) in the first nine months of 2021 totaled $3.3 million and $2.8 million in the same period of 2020. In the first nine months of 2021 these expenses mostly consisted of workforce reduction charges and loss on debt extinguishment and in 2020 primarily consisted of a loss on debt extinguishment and costscontinues to ~~consolidate wealth management systems.~~

~~Income Tax Expense~~

The third quarter effective tax rate decreased to 19.7% in 2021 compared with 20.3% in the same quarter of 2020, reflecting higher pre-tax income being offset by the proportional amounts of tax-advantaged revenue.grow.

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 liquidity position remains strong.~~ During the third quarter 2022 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 September 30, ~~2021,~~2022, available same-day liquidity totaled approximately ~~$1.3~~$1.0 billion, 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 ~~$467.2~~$385 million, unused borrowing capacity at the Federal

Table of Contents

Reserve of ~~$72.0~~$84 million and unused lines of credit totaling $51.0 million, in addition to over ~~$200.0~~$82.1 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.

~~Table of Contents~~

Capital Resources

Please see the ~~“Equity”~~ section ~~of the Comparison~~titled “Comparison of Financial Condition at September 30, 2022 and December 31, 2021--Equity” for a discussion of shareholders’ equity together with ~~the~~ Note 6 ~~Capital~~“Capital Ratios and Shareholders’ ~~Equity~~Equity” in the consolidated financial statements. Additional information about regulatory capital is contained in the notes to the consolidated financial statements and in ~~the Company's~~our most recent Annual Report on Form 10-K.

~~The Company’s~~Our principal cash requirement is the payment of dividends on our common stock, as and when declared by ~~the Company's~~our Board of Directors. Dividends to shareholders in the aggregate amount of ~~$10.5~~$11.4 million and ~~$10.1~~$10.5 million for the nine months ended September 30, ~~2021~~2022 and ~~2020,~~2021, respectively. All dividends declared and distributed by ~~the Company~~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.

~~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 fiscal 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 accountingfiscal year 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.~~critical accounting policies. Several factors are considered in determining whether or not a policy is critical in the 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 “Management's Discussion and Analysis of Financial Condition and Results of Operations--Critical Accouting Policies and Estimates” included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021. There have been no significant changes in our application of critical accounting policies since December 31, 2021.

~~Management has identified~~Refer to “Note 1 Basis of Presentation--Recent Accounting Pronouncements” of the ~~Company's most critical~~consolidated financial statements for discussion of accounting ~~policies as related to:~~

•

~~Allowance for Credit Losses~~

•

~~Income Taxes~~

•

~~Goodwill and Identifiable Intangible Assets~~

•

~~Fair Value of Financial Instruments~~

pronouncements issued but yet to be adopted and implemented.

7869

Table of Contents

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 Bank’s Chief Financial Officer and composed of various members of the Bank’s 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~~Bank’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;~~

7970

Table of Contents

~~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 September 30, ~~2021~~2022, interest rate sensitivity modeling results indicate that the Bank’s balance sheet ~~in years 1 and 2~~ was asset ~~sensitive.~~sensitive over the one- and two-year horizons.

The following table presents the changes in sensitivities on net interest income for the periods ended September 30, 2022 and 2021:


Change in Interest Rates-Basis Points (Rate Ramp)	1 - 12 Months				13 - 24 Months
(in thousands, except ratios)	$ Change		% Change		$ Change		% Change
At September 30, 2022
-100	$	(3,414)	(2.4)	%	$	(10,292)	(6.9)	%
+100		1,956	1.4			6,544	4.4
+200		3,721	2.6			12,622	8.5
At September 30, 2021
-100		(2,226)	(2.4)			(6,019)	(6.7)
+100		4,715	5.1			11,583	13.0
+200		9,548	10.3			21,878	24.5

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 ~~(-2.4% versus the base case)~~ while deteriorating further from that level over the two-year ~~horizon (-9.8% 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 (10.6% and 21.8%, respectively).~~horizons.

As compared to ~~December 31, 2020, the year-one~~September 30, 2021, sensitivity ~~in the~~to both a down 100 basis points scenario was up slightly for the nine months ended September 30, 2021 (-2.6% prior, versus -2.4% current). The year-two sensitivities in the down 100 basis points scenario were mostly unchanged going from -9.5% to -9.8%. In the year-onepoint rate movement and an up 200 basis ~~points scenario, results were up slightly going from 7.7% to 10.6%. Year-two, up 200 basis points was up (18.4% prior, versus 21.8% current).~~point rate movement has decreased.

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.

8071

Table of Contents

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~~we conducted an evaluation of the effectiveness of the design and operation of its disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the ~~Securities~~ Exchange Act, ~~of 1934, as amended (the “Exchange Act”)~~ as of the end of the period covered by this ~~Quarterly Report on~~ Form 10-Q. Based on this evaluation, ~~the Company’s~~our management, including ~~its~~our principal executive officer and principal financial officer, concluded that as of September 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 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~~using 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~~businesses. Although the Company is not able to predict the outcome of such actions, after reviewing pending and threatened actions with counsel, our management believes that based on the information currently available the outcome of such actions, individually or in the ~~opinion of management based upon currently available information~~aggregate, will not have noa material adverse effect on the ~~Company's~~Company’s consolidated financial ~~statements.~~position as a whole.

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 fiscal year ended December 31, ~~2020.~~2021. In addition to the other information set forth in this ~~report,~~Form 10-Q, 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.~~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.

8172

Table of Contents

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 third 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
July 1-31, ~~2021~~2022	—	$	—	—	~~747,000~~751,000
August 1-31, ~~2021~~2022	—		—	—	~~747,000~~751,000
September 1-30, ~~2021~~2022	—		—	—	~~747,000~~751,000
Total	—	$	—	—	~~747,000~~751,000

8273

Table of Contents

ITEM 6. EXHIBITS


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

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

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

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

~~101~~101*	The following financial information from the Company’s Quarterly Report on Form 10-Q for the quarter ended September 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~~(formatted as Inline XBRL ~~document)~~and contained in Exhibit 101)

*Filed herewith

**Furnished herewith

8374

Table of Contents

SIGNATURES

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


	BAR HARBOR BANKSHARES


Dated: November ~~8, 2021~~4, 2022	By:	/s/ Curtis C. Simard
		Curtis C. Simard
		President & Chief Executive Officer (Principal Executive Officer)


Dated: November ~~8, 2021~~4, 2022	~~By:~~	/s/ Josephine Iannelli
		Josephine Iannelli
		Executive Vice President & Chief Financial Officer (Principal Financial and Accounting Officer)

8475


				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


Consolidated Balance Sheets

December 31, 2020	As Reported		Adjustment		As Revised
Deferred tax assets, net	$	1,745	$	1,302	$	3,047
Other assets		73,662		(2,789)		70,873
Total assets	$	3,725,762	$	(1,487)	$	3,724,275

Other liabilities	$	72,183	$	2,789	$	74,972
Total liabilities		3,314,421		2,789		3,317,210
Total shareholders' equity		411,341		(4,276)		407,065
Total liabilities and shareholders' equity	$	3,725,762	$	(1,487)	$	3,724,275


	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


	Three Months Ended September 30, 2020
		Pre-Modification		Post-Modification
	Number of	Outstanding		Outstanding
(in thousands)	Modifications	Balance		Balance		Reserve
Commercial and industrial	1		86		86		—
Total	1	$	86	$	86	$	—


			Regulatory				Regulatory
	September 30,		Minimum to be		December 31,		Minimum to be
	2021		"Well-Capitalized"		2020		"Well-Capitalized"
Company (consolidated)
Total capital to risk-weighted assets⁽¹⁾	14.12	%	10.50	%	13.57	%	10.50	%
Common equity tier 1 capital to risk-weighted assets⁽¹⁾	10.92		7.00		10.49		7.00
Tier 1 capital to risk-weighted assets⁽¹⁾	11.70		8.50		11.29		8.50
Tier 1 capital to average assets	8.54		5.00		8.12		5.00

Bank
Total capital to risk-weighted assets⁽¹⁾	13.92	%	10.50	%	13.27	%	10.50	%
Common equity tier 1 capital to risk-weighted assets⁽¹⁾	13.02		7.00		12.53		7.00
Tier 1 capital to risk-weighted assets⁽¹⁾	13.02		8.50		12.52		8.50
Tier 1 capital to average assets	9.50		5.00		9.02		5.00


	Net unrealized		Net loss on		Net unrealized
	gain		effective cash		loss
	on AFS		flow hedging		on pension
(in thousands)	Securities		derivatives⁽¹⁾		plans		Total⁽¹⁾
Three Months Ended September 30, 2021
Balance at beginning of period	$	7,237	$	63	$	(1,418)	$	5,882
Other comprehensive gain before reclassifications		(1,367)		(155)		0		(1,522)
Less: amounts reclassified from accumulated other comprehensive income		1,472		0		0		1,472
Total other comprehensive income		(2,839)		(155)		0		(2,994)
Balance at end of period	$	4,398	$	(92)	$	(1,418)	$	2,888

Three Months Ended September 30, 2020
Balance at beginning of period	$	11,412	$	(7,387)	$	(1,157)	$	2,868
Other comprehensive gain before reclassifications		269		994		0		1,263
Less: amounts reclassified from accumulated other comprehensive income		0		0		0		0
Total other comprehensive income		269		994		0		1,263
Balance at end of period	$	11,681	$	(6,393)	$	(1,157)	$	4,131

Nine Months Ended September 30, 2021
Balance at beginning of period	$	10,023	$	(1,865)	$	(1,418)	$	6,740
Other comprehensive loss before reclassifications		(4,114)		1,773		0		(2,341)
Less: amounts reclassified from accumulated other comprehensive income		1,511		0		0		1,511
Total other comprehensive loss		(5,625)		1,773		0		(3,852)
Balance at end of period	$	4,398	$	(92)	$	(1,418)	$	2,888

Nine Months Ended September 30, 2020
Balance at beginning of period	$	5,550	$	(601)	$	(1,157)	$	3,792
Other comprehensive gain (loss) before reclassifications		7,265		(5,792)		0		1,473
Less: amounts reclassified from accumulated other comprehensive income		1,134		0		0		1,134
Total other comprehensive income (loss)		6,131		(5,792)		0		339
Balance at end of period	$	11,681	$	(6,393)	$	(1,157)	$	4,131



(in thousands, 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)	Sep 30, 2021		Jun 30, 2021		Mar 31, 2021		Dec 31, 2020		Sep 30, 2020		Quarter To Date		Year To Date
Commercial real estate	$	1,170,372	$	1,135,857	$	1,118,669	$	1,084,381	$	1,045,635	12	%	11	%
Commercial and industrial		331,091		327,729		317,500		323,864		324,647	4		3
Paycheck Protection Program (PPP)		24,227		65,918		77,878		53,774		131,537	*		(74)
Total commercial loans		1,525,690		1,529,504		1,514,047		1,462,019		1,501,819	(1)		6
Total commercial loans, excluding PPP		1,501,463		1,463,586		1,436,169		1,408,245		1,370,282	10		9

Residential real estate		849,692		822,774		868,084		923,891		997,485	13		(11)
Consumer		100,933		103,589		106,835		113,544		119,340	(10)		(15)
Tax exempt and other		57,839		59,693		62,098		63,431		66,326	(12)		(12)
Total loans	$	2,534,154	$	2,515,560	$	2,551,064	$	2,562,885	$	2,684,970	3	%	(1)	%