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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

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

For the quarterly period ended: June 30, 2023March 31, 2024

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

Graphic

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", and "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 Registrantregistrant had 15,156,07115,232,425 shares of common stock, par value $2.00 per share, outstanding as of August 3, 2023.May 6, 2024.

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BAR HARBOR BANKSHARES AND SUBSIDIARIES

FORM 10-Q

INDEX

Page

PART I.

FINANCIAL INFORMATION

Item 1.

Consolidated Financial Statements (unaudited)

Consolidated Balance Sheets as of June 30, 2023March 31, 2024 and December 31, 20222023

5

Consolidated Statements of Income for the Three and Six Months Ended June 30,March 31, 2024 and 2023 and 2022

76

Consolidated Statements of Comprehensive Income for the Three and Six Months Ended June 30,March 31, 2024 and 2023 and 2022

87

Consolidated Statements of Changes in Shareholders’ Equity for the Three and Six Months Ended June 30,March 31, 2024 and 2023 and 2022

98

Consolidated Statements of Cash Flows for the SixThree Months Ended June 30,March 31, 2024 and 2023 and 2022

109

Condensed Notes to Unaudited Consolidated Interim Financial Statements

Note 1

Basis of Presentation

1110

Note 2

Securities Available for Sale

12

Note 3

Loans and Allowance for Credit Losses

1516

Note 4

Borrowed Funds

2625

Note 5

Deposits

2827

Note 6

Capital Ratios and Shareholders' Equity

2928

Note 7

Earnings per Share

3331

Note 8

Derivative Financial Instruments and Hedging Activities

3432

Note 9

Fair Value Measurements

4439

Note 10

Revenue from Contracts with Customers

5145

Item 2.

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

5347

Selected Financial Data

5953

Consolidated Loan and Deposit Analysis

6054

Average Balances and Average Yields/Rates

6155

Reconciliation of Non-GAAP Financial Measures

6356

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

6558

Item 4.

Controls and Procedures

6760

PART II.

OTHER INFORMATION

Item 1.

Legal Proceedings

6760

Item 1A.

Risk Factors

6760

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

6861

Item 5.

Other Information

6861

Item 6.

Exhibits

6962

Signatures

7063

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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 Quarterly Report on Form 10-Q (this “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, and Section 21E of the Securities Exchange Act of 1934, as amended (the "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 “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 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 subject to risks, uncertainties, and other factors that may cause the actual results, performance, or achievements of 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 known and unknown risks, uncertainties and other factors that could cause the actual results to differ materially from the statements, including, but not limited to: 

deterioration in the financial performance and/or 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 loancredit 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 owned, 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;
changes in consumer spending, borrowing and saving habits;
the emergence and effects related to a future pandemic, epidemic or outbreak of new outbreaks of COVID-19,an infectious disease, including actions taken by governmental officials to curb the spread of the virus,such an infectious disease, 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 effects of civil unrest, international hostilities or other geopolitical events, including the war in Ukraine;Ukraine and recent hostilities in the Middle East;
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;implement technology effectively;
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;relationships;
our ability to implement and 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;

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changes in the reliability of our vendors, internal control systems or information systems;
ongoing competition in the labor markets and increased employee turnover;
the potential impact of climate change;
the impact of pandemics, epidemics, or any other health-related crisis;

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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;
governmentalthe effects of and changes in trade and monetary and fiscal policies and laws, including the interest rate policies of the Board of Governors of the Federal Reserve System (the “Federal Reserve”);
adverse impacts (including costs, fines, reputational harm, financial risks and the applicability of insurance coverage 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 described under the headings “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” in our Annual Report on Form 10-K for the fiscal year ended December 31, 20222023 (the “Form 10-K”), 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 are generally beyond our control. Given these uncertainties, you are cautioned not to place undue reliance on such forward-looking statements, and you should consider these factors in connection with considering any forward-looking statements that may be made by us. We undertake no obligation to release publicly any revisions to any forward-looking statements, to report events or to report the occurrence of unanticipated events unless we are required to do so by law.

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PART I.          FINANCIAL INFORMATION

ITEM 1.          CONSOLIDATED FINANCIAL STATEMENTS

BAR HARBOR BANKSHARES AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS (UNAUDITED)

(in thousands, except share data)

    

June 30, 2023

    

December 31, 2022

Assets

 

  

 

  

Cash and cash equivalents:

Cash and due from banks

$

46,532

$

39,933

Interest-earning deposits with other banks

 

77,253

 

52,362

Total cash and cash equivalents

 

123,785

 

92,295

Securities:

Securities available for sale

 

538,178

 

559,516

Federal Home Loan Bank stock

 

17,784

 

14,893

Total securities

 

555,962

 

574,409

Loans held for sale

3,669

Total loans

 

3,007,480

 

2,902,690

Less: Allowance for credit losses

 

(27,362)

 

(25,860)

Net loans

 

2,980,118

 

2,876,830

Premises and equipment, net

 

47,412

 

47,622

Goodwill

 

119,477

 

119,477

Other intangible assets

 

5,335

 

5,801

Cash surrender value of bank-owned life insurance

 

78,967

 

81,197

Deferred tax assets, net

 

24,181

 

24,443

Other assets

 

89,641

 

87,729

Total assets

$

4,028,547

$

3,909,803

Liabilities

 

  

 

  

Deposits:

 

  

 

  

Demand

$

602,667

$

676,350

NOW

 

911,488

 

900,730

Savings

 

588,769

 

664,514

Money market

 

351,762

 

478,398

Time

 

635,559

 

323,439

Total deposits

 

3,090,245

 

3,043,431

Borrowings:

 

  

 

  

Senior

 

398,972

 

333,957

Subordinated

 

60,371

 

60,289

Total borrowings

 

459,343

 

394,246

Other liabilities

 

68,243

 

78,676

Total liabilities

 

3,617,831

 

3,516,353

(continued)

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BAR HARBOR BANKSHARES AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS (UNAUDITED) (continued)

(in thousands, except share data)

    

March 31, 2024

    

December 31, 2023

Assets

 

  

 

  

Cash and cash equivalents:

Cash and due from banks

$

30,770

$

42,221

Interest-earning deposits with other banks

 

45,449

 

52,621

Total cash and cash equivalents

 

76,219

 

94,842

Securities:

Securities available for sale

 

527,603

 

534,574

Federal Home Loan Bank stock

 

9,960

 

12,788

Total securities

 

537,563

 

547,362

Loans held for sale

3,137

2,189

Total loans

 

3,011,672

 

2,999,049

Less: Allowance for credit losses

 

(28,355)

 

(28,142)

Net loans

 

2,983,317

 

2,970,907

Premises and equipment, net

 

47,849

 

48,287

Other real estate owned

 

 

Goodwill

 

119,477

 

119,477

Other intangible assets

 

4,637

 

4,869

Cash surrender value of bank-owned life insurance

 

80,642

 

80,037

Deferred tax assets, net

 

23,849

 

22,979

Other assets

 

82,285

 

79,936

Total assets

$

3,958,975

$

3,970,885

Liabilities

 

  

 

  

Deposits:

 

  

 

  

Demand

$

544,495

$

569,714

Interest-bearing demand deposits

 

888,591

 

946,978

Savings

 

551,493

 

553,963

Money market

 

365,289

 

370,242

Time

 

777,208

 

700,260

Total deposits

 

3,127,076

 

3,141,157

Borrowings:

 

  

 

  

Senior

 

269,437

 

271,044

Subordinated

 

60,501

 

60,461

Total borrowings

 

329,938

 

331,505

Other liabilities

 

66,247

 

66,164

Total liabilities

 

3,523,261

 

3,538,826

(in thousands, except share data)

    

June 30, 2023

    

December 31, 2022

Shareholders’ equity

    

    

    

    

Capital stock, par value $2.00; authorized 20,000,000 shares; issued 16,384,353 shares; outstanding 15,124,451 shares and 15,001,329 shares at June 30, 2023 and December 31, 2022 respectively

 

32,857

 

32,857

Capital stock, par value $2.00; authorized 20,000,000 shares; issued 16,428,388 shares; outstanding 15,211,877 shares and 15,172,131 shares at March 31, 2024 and December 31, 2023, respectively

 

32,857

 

32,857

Additional paid-in capital

 

192,341

 

191,922

 

193,246

 

193,114

Retained earnings

 

259,470

 

243,815

 

277,991

 

272,101

Accumulated other comprehensive loss

 

(57,564)

 

(58,340)

 

(52,568)

 

(49,862)

Less: 1,284,195 and 1,345,700 shares of treasury stock, at cost, at June 30, 2023 and December 31, 2022, respectively

 

(16,388)

 

(16,804)

Less: 1,216,511 and 1,256,257 shares of treasury stock, at cost, at March 31, 2024 and December 31, 2023, respectively

 

(15,812)

 

(16,151)

Total shareholders’ equity

 

410,716

 

393,450

 

435,714

 

432,059

Total liabilities and shareholders’ equity

$

4,028,547

$

3,909,803

$

3,958,975

$

3,970,885

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

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BAR HARBOR BANKSHARES AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

Three Months Ended

Six Months Ended

Three Months Ended

June 30, 

June 30, 

March 31, 

(in thousands, except earnings per share data)

    

2023

    

2022

    

2023

    

2022

    

    

2024

    

2023

Interest and dividend income

Loans

$

36,917

$

24,581

$

71,477

$

47,252

$

39,470

$

34,560

Securities and other

 

5,964

 

4,207

 

11,755

 

8,033

 

6,353

 

5,791

Total interest and dividend income

 

42,881

 

28,788

 

83,232

 

55,285

 

45,823

 

40,351

Interest expense

 

  

 

  

 

  

 

  

 

  

 

  

Deposits

 

8,590

 

1,195

 

13,855

 

2,384

 

14,532

 

5,265

Borrowings

 

5,501

 

1,074

 

9,681

 

2,084

 

3,236

 

4,180

Total interest expense

 

14,091

 

2,269

 

23,536

 

4,468

 

17,768

 

9,445

Net interest income

 

28,790

 

26,519

 

59,696

 

50,817

 

28,055

 

30,906

Provision for credit losses

 

750

 

534

 

1,548

 

911

 

289

 

798

Net interest income after provision for credit losses

 

28,040

 

25,985

 

58,148

 

49,906

 

27,766

 

30,108

Non-interest income

 

  

 

  

 

  

 

  

 

  

 

  

Trust and investment management fee income

 

3,805

 

3,829

 

7,360

 

7,583

 

3,670

 

3,555

Customer service fees

 

3,774

 

3,656

 

7,451

 

7,272

 

3,710

 

3,677

Gain on sales of securities, net

 

 

 

34

 

9

 

 

34

Mortgage banking income

378

488

657

1,112

257

279

Bank-owned life insurance income

 

503

 

504

 

1,651

 

1,005

 

561

 

1,148

Customer derivative income

 

83

 

137

 

215

 

155

 

 

132

Other income

 

437

 

347

 

796

 

1,134

 

388

 

359

Total non-interest income

 

8,980

 

8,961

 

18,164

 

18,270

 

8,586

 

9,184

Non-interest expense

 

  

 

  

 

  

 

  

 

  

 

  

Salaries and employee benefits

 

13,223

 

11,368

 

25,994

 

23,515

 

13,248

 

12,771

Occupancy and equipment

 

4,392

 

4,373

 

8,806

 

8,796

 

4,473

 

4,414

(Gain) loss on sales of premises and equipment, net

 

(86)

 

10

 

(99)

 

(65)

Gain on sales of premises and equipment, net

 

(15)

 

(13)

Outside services

 

424

 

410

 

780

 

750

 

338

 

356

Professional services

 

355

 

528

 

781

 

701

 

400

 

426

Communication

 

175

 

188

 

337

 

413

 

189

 

162

Marketing

 

476

 

369

 

885

 

632

 

567

 

409

Amortization of intangible assets

 

233

 

233

 

466

 

466

 

233

 

233

Acquisition, conversion and other expenses

 

 

 

20

 

325

 

20

 

20

Provision for unfunded commitments

45

45

(130)

 

371

(185)

(175)

Other expenses

 

4,155

 

4,176

 

8,256

 

7,682

 

4,420

 

4,101

Total non-interest expense

 

23,392

 

21,700

 

46,096

 

43,586

 

23,688

 

22,704

Income before income taxes

 

13,628

 

13,246

 

30,216

 

24,590

 

12,664

 

16,588

Income tax expense

 

2,837

 

2,743

 

6,413

 

4,975

 

2,569

 

3,576

Net income

$

10,791

$

10,503

$

23,803

$

19,615

$

10,095

$

13,012

Earnings per share:

 

  

 

  

 

  

 

  

 

  

 

  

Basic

$

0.71

$

0.70

$

1.57

$

1.31

$

0.66

$

0.86

Diluted

$

0.71

$

0.70

1.57

1.30

$

0.66

$

0.86

Weighted average common shares outstanding:

 

  

 

  

 

  

 

  

 

  

 

  

Basic

 

15,139

 

15,018

 

15,125

 

15,014

 

15,198

 

15,110

Diluted

 

15,180

 

15,077

 

15,186

 

15,094

 

15,270

 

15,190

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

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BAR HARBOR BANKSHARES AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

    

Three Months Ended

    

Six Months Ended

    

Three Months Ended

June 30, 

June 30, 

March 31, 

(in thousands)

    

2023

    

2022

    

2023

    

2022

    

2024

    

2023

Net income

$

10,791

$

10,503

$

23,803

$

19,615

$

10,095

$

13,012

Other comprehensive income (loss), before tax:

 

  

 

  

 

  

 

  

 

  

 

  

Changes in unrealized loss on securities available for sale

 

(6,057)

 

(23,409)

 

(51)

 

(52,253)

Changes in unrealized gain (loss) on hedging derivatives

 

321

 

(1,997)

 

1,088

 

(3,878)

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

 

(2,597)

 

6,006

Changes in unrealized (loss) gain on hedging derivatives

 

(937)

 

767

Changes in unrealized gain (loss) on pension

 

22

 

Income taxes related to other comprehensive income:

 

  

 

  

 

  

 

  

Income taxes related to other comprehensive income (loss):

 

  

 

  

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

 

1,396

 

5,330

 

(10)

 

11,964

 

613

 

(1,406)

Changes in unrealized (gain) loss on hedging derivatives

 

(73)

 

460

 

(251)

 

893

Changes in unrealized loss (gain) on hedging derivatives

 

221

 

(178)

Changes in unrealized (gain) loss on pension

 

(28)

 

Total other comprehensive (loss) income

 

(4,413)

 

(19,616)

 

776

 

(43,274)

 

(2,706)

 

5,189

Total comprehensive income (loss)

$

6,378

$

(9,113)

$

24,579

$

(23,659)

Total comprehensive income

$

7,389

$

18,201

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

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BAR HARBOR BANKSHARES AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (UNAUDITED)

    

    

    

Accumulated 

    

    

    

    

    

Accumulated 

    

    

Common 

Additional 

other 

Common 

Additional 

other 

stock

paid-in

Retained 

comprehensive 

Treasury

stock

paid-in

Retained 

comprehensive 

Treasury

(in thousands, except per share data)

    

 amount

    

 capital

    

earnings

    

income (loss)

    

 stock

    

Total

    

 amount

    

 capital

    

earnings

    

income (loss)

    

 stock

    

Total

Balance at December 31, 2021

$

32,857

$

190,876

$

215,592

$

2,303

$

(17,481)

$

424,147

Net income

 

 

 

9,112

 

 

 

9,112

Other comprehensive loss

 

 

 

 

(23,658)

 

 

(23,658)

Cash dividends declared ($0.24 per share)

 

 

 

(3,603)

 

 

 

(3,603)

Net issuance (11,277 shares) to employee stock plans, including related tax effects

 

 

436

 

 

 

111

 

547

Recognition of stock based compensation

 

 

454

 

 

 

 

454

Balance at March 31, 2022

$

32,857

$

191,766

$

221,101

$

(21,355)

$

(17,370)

$

406,999

Net income

 

 

 

10,503

 

 

 

10,503

Other comprehensive income

 

 

 

 

(19,616)

 

 

(19,616)

Cash dividends declared ($0.26 per share)

 

 

 

(3,906)

 

 

 

(3,906)

Net issuance (13,491 shares) to employee stock plans, including related tax effects

 

 

(60)

 

 

 

37

 

(23)

Recognition of stock based compensation

 

 

(360)

 

 

 

 

(360)

Balance at June 30, 2022

$

32,857

$

191,346

$

227,698

$

(40,971)

$

(17,333)

$

393,597

Balance at December 31, 2022

$

32,857

$

191,922

$

243,815

$

(58,340)

$

(16,804)

$

393,450

$

32,857

$

191,922

$

243,815

$

(58,340)

$

(16,804)

$

393,450

Net income

 

 

 

13,012

 

 

 

13,012

 

 

 

13,012

 

 

 

13,012

Other comprehensive income

 

 

 

5,189

 

5,189

 

 

 

5,189

 

5,189

Cash dividends declared ($0.26 per share)

 

 

(3,943)

 

 

(3,943)

 

 

(3,943)

 

 

(3,943)

Net issuance (41,763 shares) to employee stock plans, including related tax effects

 

 

40

 

 

 

363

 

403

 

 

40

 

 

 

363

 

403

Recognition of stock based compensation

 

 

299

 

 

 

 

299

 

 

299

 

 

 

 

299

Balance at March 31, 2023

$

32,857

$

192,261

$

252,884

$

(53,151)

$

(16,441)

$

408,410

$

32,857

$

192,261

$

252,884

$

(53,151)

$

(16,441)

$

408,410

Balance at December 31, 2023

$

32,857

$

193,114

$

272,101

$

(49,862)

$

(16,151)

$

432,059

Net income

 

 

 

10,791

 

 

 

10,791

 

 

 

10,095

 

 

 

10,095

Other comprehensive income

 

 

 

 

(4,413)

 

 

(4,413)

Other comprehensive loss

 

 

 

(2,706)

 

(2,706)

Cash dividends declared ($0.28 per share)

 

 

 

(4,205)

 

 

 

(4,205)

 

 

(4,205)

 

 

(4,205)

Net issuance (19,707 shares) to employee stock plans, including related tax effects

 

 

(304)

 

 

 

53

 

(251)

Net issuance (39,746 shares) to employee stock plans, including related tax effects

 

 

(355)

 

 

 

339

 

(16)

Recognition of stock based compensation

 

 

384

 

 

 

 

384

 

 

487

 

 

 

 

487

Balance at June 30, 2023

$

32,857

$

192,341

$

259,470

$

(57,564)

$

(16,388)

$

410,716

Balance at March 31, 2024

$

32,857

$

193,246

$

277,991

$

(52,568)

$

(15,812)

$

435,714

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

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BAR HARBOR BANKSHARES AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

Six Months Ended June 30, 

(in thousands)

    

2023

    

2022

Cash flows from operating activities:

 

 

  

  

Net income

 

$

23,803

$

19,615

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

 

 

Net change in loans held for sale

(3,669)

1,950

Provision for credit losses

 

1,548

 

911

Net amortization of securities

 

1,202

 

1,532

Change in unamortized net loan costs and premiums

 

159

 

(1,556)

Premises and equipment depreciation

 

2,112

 

2,132

Stock-based compensation expense

 

683

 

94

Amortization of other intangibles

 

466

 

466

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

 

(1,651)

 

(1,005)

Gain on sales of securities, net

 

(34)

 

(9)

Amortization of right-of-use lease assets

597

593

Decrease in lease liabilities

(582)

(563)

Gain on premises and equipment, net

 

(99)

 

(65)

Net change in other assets and liabilities

 

(12,153)

 

(5,481)

Net cash provided by operating activities

 

12,382

 

18,614

Cash flows from investing activities:

 

  

 

  

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

 

22,456

 

47,570

Purchases of securities available for sale

 

(1,000)

 

(77,408)

Net change in loans

 

(104,995)

 

(193,681)

Purchase of Federal Home Loan Bank stock

 

(14,262)

 

(461)

Proceeds from sale of Federal Home Loan Bank stock

 

11,371

 

1,273

Purchase of premises and equipment, net

 

(2,194)

 

(1,138)

Proceeds from death benefit of bank-owned life insurance policy

3,904

Net cash used in investing activities

 

(84,720)

 

(223,845)

Cash flows from financing activities:

 

  

 

  

Net change in deposits

 

46,814

 

30,001

Net change in short-term borrowings

65,020

19,952

Repayments of long-term borrowings

(10)

(21,010)

Net issuance to employee stock plans

152

524

Cash dividends paid on common stock

 

(8,148)

 

(7,509)

Net cash provided by financing activities

 

103,828

 

21,958

Net change in cash and cash equivalents

 

31,490

 

(183,273)

Cash and cash equivalents at beginning of year

 

92,295

 

250,389

Cash and cash equivalents at end of period

$

123,785

$

67,116

Supplemental cash flow information:

 

  

 

  

Interest paid

$

21,708

$

2,128

Income taxes paid, net

 

8,530

 

4,418

Three Months Ended March 31, 

(in thousands)

    

2024

    

2023

Cash flows from operating activities:

 

 

  

  

Net income

 

$

10,095

$

13,012

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

 

 

Net change in loans held for sale

948

463

Provision for credit losses

 

289

 

798

Net amortization of securities

 

485

 

540

Change in unamortized net loan costs and premiums

 

(265)

 

49

Premises and equipment depreciation

 

1,036

 

1,048

Stock-based compensation expense

 

487

 

299

Amortization of other intangibles

 

233

 

233

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

 

(561)

 

(1,148)

Gain on sales of securities, net

 

 

(34)

Amortization of right-of-use lease assets

126

298

Decrease in lease liabilities

(126)

(290)

Gain on premises and equipment, net

 

(15)

 

(13)

Net change in other assets and liabilities

 

(4,217)

 

2,098

Net cash provided by operating activities

 

8,515

 

17,353

Cash flows from investing activities:

 

  

 

  

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

 

7,738

 

2,534

Purchases of securities available for sale

 

(4,762)

 

(1,000)

Net change in loans

 

(12,434)

 

(41,582)

Purchase of Federal Home Loan Bank stock

 

(3,244)

 

(5,030)

Proceeds from sale of Federal Home Loan Bank stock

 

6,072

 

4,205

Purchase of premises and equipment, net

 

(671)

 

(1,153)

Proceeds from sale of premises and equipment

74

Proceeds from death benefit of bank-owned life insurance policy

3,909

Net cash used in investing activities

 

(7,227)

 

(38,117)

Cash flows from financing activities:

 

  

 

  

Net change in deposits

 

(14,081)

 

10,383

Net change in short-term borrowings

(1,604)

4,290

Repayments of long-term borrowings

(5)

(3)

Net change in subordinated debt issuance costs

41

Net issuance to employee stock plans

(16)

403

Cash dividends paid on common stock

 

(4,205)

 

(3,943)

Net cash provided by financing activities

 

(19,911)

 

11,171

Net change in cash and cash equivalents

 

(18,623)

 

(9,593)

Cash and cash equivalents at beginning of year

 

94,842

 

92,295

Cash and cash equivalents at end of period

$

76,219

$

82,702

Supplemental cash flow information:

 

  

 

  

Interest paid

$

15,941

$

9,417

Income taxes paid, net

 

4,303

 

5,219

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BAR HARBOR BANKSHARES AND SUBSIDIARIES

CONDENSED 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,” “we,” “our,” “us” or similar terms) have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”). The Company is a Maine Financial Institution Holding Company for the purposes of the laws of the State of Maine, and as such is subject to the jurisdiction of the Superintendent of the Maine Bureau of Financial Institutions. These financial statements include our accounts, the accounts of our wholly owned subsidiary Bar Harbor Bank & Trust (the “Bank”) and the Bank’s consolidated subsidiaries. The results of operations of companies or assets acquired are included only from the dates of acquisition. All material wholly owned and majority owned subsidiaries are consolidated unless GAAP requires otherwise.

In addition, these interim financial statements have been prepared in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X, and accordingly, certain information and footnote disclosures normally included in financial statements prepared according to GAAP have been omitted.

The results for any interim period are not necessarily indicative of results for the full year. TheseThe consolidated financial statements should be read in conjunction with the audited financial statements and note disclosures in the Form 10-K previously filed with the Securities and Exchange Commission (the "SEC"“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 consolidated income statement.

Goodwill assessment: In connection with acquisitions, management generally records as assets on our consolidated financial statements both goodwill and other intangible assets, such as core deposit and acquired customer relationship intangibles.

Goodwill represents the excess of the purchase price over the fair value of net assets acquired in accordance with the purchase method of accounting for business combinations. Goodwill is not amortized but, instead, is subject to impairment tests on at least an annual basis, or more frequently, if an event occurs or circumstances change that reduce the fair value of a reporting unit below its carrying amount. The impairment testing process is conducted by assigning assets and goodwill to each reporting unit. Currently, our goodwill is evaluated at the entity level as there is only one reporting unit. Management, at our discretion, assesses certain qualitative factors to determine if it is more likely than not that the fair value of the reporting unit is less than its carrying value. An impairment charge is recognized if the carrying fair value of goodwill exceeds the implied fair value of goodwill.  

In the fourth quarter 2023, management completed its annual goodwill impairment testing using balance sheet and market data as of September 30, 2023. The analysis was performed at the consolidated Bank-level of the Company, which is considered the smallest reporting unit carrying goodwill. Based on an analysis performed, the Company's estimated fair value to a market participant as of September 30, 2023, exceeded its carrying amount resulting in no impairment charge for the period. Management evaluated current conditions and concluded there have been no significant changes in the economic environment or future projections and therefore, believes that there has been no further decline in the Company's fair value as of September 30, 2023. Management will continue to evaluate the economic conditions at future reporting periods for applicable changes.

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Recent Accounting Pronouncements

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

Standard

  

  

Description

  

  

Required Date
of Adoption

  

  

Effect on financial statements

Standards Adopted in 2023

ASU 2022-02 Financial Instruments - Credit Losses (Topic 326): Troubled Debt Restructurings ("TDRs") and Vintage Disclosures

The amendments in this update eliminate TDR recognition and measurement guidance and, instead, require that an entity evaluate (consistent with the accounting for other loan modifications) whether the modification represents a new loan or a continuation of an exisitingexisting loan. The amendments enhance existing disclosure requirements and introduce new requirements related to certain modifications of receivables made to borrowers experiencing financial difficulty.

January 1, 2023

The adoption of this ASU did not have a material impact on our consolidated financial statements.

Standards Not Yet Adopted

ASU 2023-02 Investments - Equity Method and Joint Ventures (Topic 323): Accounting for Investments in Tax Credit Structures Using the Proportional Amortization Method

The amendments in this update permit reporting entities to elect to account for their tax equity investments, regardless of the tax credit program from which the income tax credits are received, using the proportional amortization method if certain conditions are met.

December 15, 2023, including interim periods within the fiscal year

The adoption of this ASU did not have a material impact on our consolidated financial statements.

Standards Not Yet Adopted

ASU 2023-09 Income Taxes (Topic 740): Improvements to Income Tax Disclosures

The amendments in this update require that public business entities on an annual basis (1) disclose specific categories in the rate reconciliation and (2) provide additional information for reconciling items that meet a quantitative threshold (if the effect of those reconciling items is equal to or greater than 5 percent of the amount computed by multiplying pretax income [or loss] by the applicable statutory income tax rate).


Annual periods beginning after December 15, 2024

We do not expect adoption of this ASU to have a material impact on our consolidated financial statements.

11

Table of Contents

NOTE 2.           SECURITIES AVAILABLE FOR SALE

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

Gross

Gross

Gross

Gross

 Unrealized

 Unrealized

 Unrealized

 Unrealized

(in thousands)

    

Amortized Cost

    

 Gains

    

 Losses

    

Fair Value

    

Amortized Cost

    

 Gains

    

 Losses

    

Fair Value

June 30, 2023

 

  

 

  

 

  

 

  

Mortgage-backed securities:

 

  

 

  

 

  

 

  

March 31, 2024

 

  

 

  

 

  

 

  

Debt securities:

 

  

 

  

 

  

 

  

Obligations of US Government-sponsored enterprises

$

1,718

$

$

(31)

$

1,687

Mortgage-backed securities and collateralized mortgage obligations:

 

  

 

  

 

  

 

  

US Government-sponsored enterprises

$

237,839

$

2

$

(34,081)

$

203,760

218,631

4

(32,811)

185,824

US Government agency

 

89,021

 

4

 

(12,002)

 

77,023

 

87,527

 

79

 

(11,424)

 

76,182

Private label

 

61,679

 

24

 

(2,846)

 

58,857

 

60,520

 

18

 

(1,506)

 

59,032

Obligations of states and political subdivisions thereof

 

120,024

 

5,811

 

(17,495)

 

108,340

 

118,605

 

5,425

 

(15,924)

 

108,106

Corporate bonds

 

101,498

 

33

 

(11,333)

 

90,198

 

105,550

 

1

 

(8,779)

 

96,772

Total securities available for sale

$

610,061

$

5,874

$

(77,757)

$

538,178

$

592,551

$

5,527

$

(70,475)

$

527,603

Gross

Gross

Gross

Gross

 Unrealized

 Unrealized

 Unrealized

 Unrealized

(in thousands)

    

Amortized Cost

    

 Gains

    

 Losses

    

Fair Value

    

Amortized Cost

    

 Gains

    

 Losses

    

Fair Value

December 31, 2022

 

  

 

  

 

  

 

  

Mortgage-backed securities:

 

  

 

  

 

  

 

  

December 31, 2023

 

  

 

  

 

  

 

  

Debt securities:

 

  

 

  

 

  

 

  

Obligations of US Government-sponsored enterprises

$

2,021

$

$

(29)

$

1,992

Mortgage-backed securities and collateralized mortgage obligations:

 

  

 

  

 

  

 

  

US Government-sponsored enterprises

$

249,838

$

14

$

(34,825)

$

215,027

223,602

12

(30,332)

193,282

US Government agency

 

93,010

 

21

 

(10,765)

 

82,266

 

85,005

 

145

 

(10,937)

 

74,213

Private label

 

64,056

 

34

 

(3,936)

 

60,154

 

60,888

 

18

 

(1,855)

 

59,051

Obligations of states and political subdivisions thereof

 

121,939

 

7,149

 

(21,351)

 

107,737

 

119,857

 

4,515

 

(14,204)

 

110,168

Corporate bonds

 

102,505

 

33

 

(8,206)

 

94,332

 

105,552

 

19

 

(9,703)

 

95,868

Total securities available for sale

$

631,348

$

7,251

$

(79,083)

$

559,516

$

596,925

$

4,709

$

(67,060)

$

534,574

Credit Quality Information

We monitor the credit quality of available for sale debt securities through credit ratings from various rating agencies and substantial price changes. In an effort to make informed decisions, we utilize credit ratings that express opinions about the credit quality of a security.  Securities are triggered for further review in the quarter if the security has significant fluctuations in ratings, significant pricing changes, or drops below investment grade,investment-grade, or significant pricing changes. For securities without credit ratings, we utilize other financial information indicating the financial health of the underlying municipality, agency, or organization associated with the underlying security.

As of June 30, 2023March 31, 2024 and December 31, 2022,2023, we carried no allowance on available for sale debt securities in accordance with ASC 326, Measurement of Credit Losses on Financial Instruments.

The amortized cost and estimated fair value of available for sale securities segregated by contractual maturity at June 30, 2023March 31, 2024 are presented below. Expected maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations. Mortgage-backed securities and collateralized mortgage obligations are shown in total, as their maturities are highly variable.

Available for sale

(in thousands)

    

Amortized Cost

    

Fair Value

Within 1 year

 

$

3,195

$

3,112

Over 1 year to 5 years

 

36,271

 

33,518

Over 5 years to 10 years

 

54,326

 

52,686

Over 10 years

 

127,730

 

109,222

Total bonds and obligations

 

221,522

 

198,538

Mortgage-backed securities

 

388,539

 

339,640

Total securities available for sale

$

610,061

$

538,178

12

Table of Contents

Available for sale

(in thousands)

    

Amortized Cost

    

Fair Value

Within 1 year

 

$

4,024

$

4,024

Over 1 year to 5 years

 

52,916

 

49,626

Over 5 years to 10 years

 

42,276

 

43,158

Over 10 years

 

126,657

 

109,757

Total bonds and obligations

 

225,873

 

206,565

Mortgage-backed securities and collateralized mortgage obligations

 

366,678

 

321,038

Total securities available for sale

$

592,551

$

527,603

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

Three Months Ended

March 31, 

(in thousands)

    

2024

    

2023

Gross gains on sales of available for sale securities

$

$

34

Gross losses on sales of available for sale securities

 

 

Net gains on sale of available for sale securities

$

$

34

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

Less Than Twelve Months

Over Twelve Months

Total

Gross

    

    

Gross

    

    

Gross

    

Unrealized

Fair

Unrealized

Fair

Unrealized 

Fair

(in thousands)

    

Losses

    

Value

    

Losses

    

Value

    

Losses

    

Value

March 31, 2024

 

  

 

  

 

  

 

  

 

  

 

  

Debt securities:

 

  

 

  

 

  

 

  

 

  

 

  

Obligations of US Government-sponsored enterprises

$

1

$

865

$

30

$

823

$

31

$

1,688

Mortgage-backed securities and collateralized mortgage obligations:

 

  

 

  

 

  

 

  

 

  

 

  

US Government-sponsored enterprises

50

3,071

32,761

182,199

32,811

185,270

US Government agency

 

62

 

6,901

 

11,362

 

66,391

 

11,424

 

73,292

Private label

 

1

 

23

 

1,505

 

57,494

 

1,506

 

57,517

Obligations of states and political subdivisions thereof

 

26

 

4,922

 

15,898

 

100,867

 

15,924

 

105,789

Corporate bonds

 

70

 

6,952

 

8,709

 

88,789

 

8,779

 

95,741

Total securities available for sale

$

210

$

22,734

$

70,265

$

496,563

$

70,475

$

519,297

13

Table of Contents

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

Less Than Twelve Months

Over Twelve Months

Total

    

Gross

    

    

Gross

    

    

Gross

    

Unrealized

Fair

Unrealized

Fair

Unrealized 

Fair

(in thousands)

Losses

Value

Losses

Value

Losses

Value

December 31, 2023

 

  

 

  

 

  

 

  

 

  

 

  

Debt securities:

 

  

 

  

 

  

 

  

 

  

 

  

Obligations of US Government-sponsored enterprises

$

1

$

1,084

$

28

$

907

$

29

$

1,991

Mortgage-backed securities and collateralized mortgage obligations:

 

  

 

  

 

  

 

  

 

  

 

  

US Government-sponsored enterprises

10

3,439

30,322

188,611

30,332

192,050

US Government agency

 

2

 

120

 

10,935

 

68,891

 

10,937

 

69,011

Private label

 

 

26

 

1,855

 

59,007

 

1,855

 

59,033

Obligations of states and political subdivisions thereof

 

26

 

3,099

 

14,178

 

101,036

 

14,204

 

104,135

Corporate bonds

 

156

 

4,913

 

9,547

 

84,950

 

9,703

 

89,863

Total securities available for sale

$

195

$

12,681

$

66,865

$

503,402

$

67,060

$

516,083

Three Months Ended

Six Months Ended

June 30, 

June 30, 

(in thousands)

    

2023

    

2022

    

2023

    

2022

    

Gross gains on sales of available for sale securities

$

$

$

34

$

9

Gross losses on sales of available for sale securities

 

 

 

 

Net gains on sale of available for sale securities

$

$

$

34

$

9

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

Less Than Twelve Months

Over Twelve Months

Total

Gross

    

    

Gross

    

    

Gross

    

Unrealized

Fair

Unrealized

Fair

Unrealized 

Fair

(in thousands)

    

Losses

    

Value

    

Losses

    

Value

    

Losses

    

Value

June 30, 2023

 

  

 

  

 

  

 

  

 

  

 

  

Mortgage-backed securities:

 

  

 

  

 

  

 

  

 

  

 

  

US Government-sponsored enterprises

$

1,766

$

33,148

$

32,315

$

169,804

$

34,081

$

202,952

US Government agency

 

1,100

 

20,772

 

10,902

 

54,776

 

12,002

 

75,548

Private label

 

 

26

 

2,846

 

58,807

 

2,846

 

58,833

Obligations of states and political subdivisions thereof

 

200

 

9,792

 

17,295

 

95,851

 

17,495

 

105,643

Corporate bonds

 

4,504

 

31,481

 

6,829

 

55,684

 

11,333

 

87,165

Total securities available for sale

$

7,570

$

95,219

$

70,187

$

434,922

$

77,757

$

530,141

Less Than Twelve Months

Over Twelve Months

Total

    

Gross

    

    

Gross

    

    

Gross

    

Unrealized

Fair

Unrealized

Fair

Unrealized 

Fair

(in thousands)

Losses

Value

Losses

Value

Losses

Value

December 31, 2022

 

  

 

  

 

  

 

  

 

  

 

  

Mortgage-backed securities:

 

  

 

  

 

  

 

  

 

  

 

  

US Government-sponsored enterprises

$

7,005

$

82,483

$

27,820

$

127,745

$

34,825

$

210,228

US Government agency

 

2,902

 

42,865

 

7,863

 

34,988

 

10,765

 

77,853

Private label

 

841

 

15,694

 

3,095

 

44,396

 

3,936

 

60,090

Obligations of states and political subdivisions thereof

 

7,990

 

48,799

 

13,361

 

55,702

 

21,351

 

104,501

Corporate bonds

 

4,733

 

65,279

 

3,473

 

25,027

 

8,206

 

90,306

Total securities available for sale

$

23,471

$

255,120

$

55,612

$

287,858

$

79,083

$

542,978

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We expect to recover the amortized cost basis on all securities in our AFS portfolio. Furthermore, we do not intend to sell nor do we anticipate that we will be required to sell any securities in an unrealized loss position as of June 30, 2023,March 31, 2024, prior to this recovery. Our ability and intent to hold these securities until recovery is supported by our capital and liquidity positions as well as historically low portfolio turnover.

The following summarizes, by investment security type, the impact of securities in an unrealized loss position at June 30, 2023:March 31, 2024:

Obligations of US Government-sponsored enterprises

8 out of the total 8 securities in our portfolio of AFS obligations of US Government-sponsored enterprises were in unrealized loss positions. Aggregate unrealized losses represented 1.77% of the amortized cost of securities in unrealized loss positions. The US Small Business Administration guarantees the contractual cash flows of all of our obligations of US Government-sponsored enterprises. The securities are investment grade rated and there were no material underlying credit downgrades during the quarter.

US Government-sponsored enterprises

492466 out of the total 506493 securities in our portfoliosportfolio of AFS US Government-sponsored enterprises were in unrealized loss positions. Aggregate unrealized losses represented 14.38%15.05% 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 our US Government-sponsored enterprises. The securities are investment grade rated and there were no material underlying credit downgrades during the quarter.

US Government agency

148139 out of the total 158154 securities in our portfoliosportfolio of AFS US Government agency securities were in unrealized loss positions. Aggregate unrealized losses represented 13.71%13.49% of the amortized cost of securities in unrealized loss positions. The Government National Mortgage Association guarantees the contractual cash flows of all of our US Government agency securities. The securities are investment grade rated and there were no material underlying credit downgrades during the quarter.

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Private label

2625 of the total 28 securities in our portfolio of AFS private label mortgage-backed securities were in unrealized loss positions. Aggregate unrealized losses represented 4.61%2.55% of the amortized cost of securities in unrealized loss positions. We expect to receive all of the future contractual cash flows related to the amortized cost on these securities.

Obligations of states and political subdivisions thereof

6461 of the total 7169 securities in our portfolio of AFS municipal bonds and obligations were in unrealized loss positions. Aggregate unrealized losses represented 14.91%13.69% of the amortized cost of securities in unrealized loss positions. We continually monitor the municipal bond sector of the market carefully and periodically evaluate the appropriate level of exposure to the market. At this time, we thinkbelieve (i) the bonds in this portfolio carry minimal risk of default and (ii) we are appropriately compensated for the risk. There were no material underlying credit downgrades during the quarter.

Corporate bonds

3033 out of the total 3335 securities in our portfolio of AFS corporate bonds were in an unrealized loss position. The aggregate unrealized loss represents 11.51%8.40% of the amortized cost of bonds in unrealized loss positions. We review the financial strength of all of these bonds, and 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.

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NOTE 3.           LOANS AND ALLOWANCE FOR CREDIT LOSSES

We evaluate risk characteristics of loans based on regulatory call report code with segmentation based on the underlying collateral for certain loan types. The following is a summary of total loans bybased on regulatory call report code segmentation based on underlying collateral for certain loan types:

June 30, 

December 31, 

March 31, 

December 31, 

(in thousands)

    

2023

    

2022

    

2024

    

2023

Commercial construction

$

147,654

$

117,577

$

158,270

$

154,048

Commercial real estate owner occupied

 

288,351

 

244,814

 

323,581

 

310,015

Commercial real estate non-owner occupied

 

1,161,649

 

1,146,674

 

1,155,297

 

1,144,566

Tax exempt

 

46,472

 

42,879

 

39,261

 

43,688

Commercial and industrial

 

309,865

 

297,112

 

306,844

 

310,883

Residential real estate

 

957,312

 

954,968

 

933,911

 

940,334

Home equity

 

88,381

 

90,865

 

86,879

 

87,683

Consumer other

 

7,796

 

7,801

 

7,629

 

7,832

Total loans

 

3,007,480

 

2,902,690

 

3,011,672

 

2,999,049

Allowance for credit losses

 

27,362

 

25,860

 

28,355

 

28,142

Net loans

$

2,980,118

$

2,876,830

$

2,983,317

$

2,970,907

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

June 30, 

December 31, 

March 31, 

December 31, 

(in thousands)

    

2023

    

2022

    

2024

    

2023

Net unamortized loan origination costs

$

3,020

$

3,184

$

2,774

$

3,039

Net unamortized fair value discount on acquired loans

 

(3,183)

 

(3,506)

 

(2,781)

 

(2,891)

Total

$

(163)

$

(322)

$

(7)

$

148

We exclude accrued interest receivable from the amortized cost basis of loans disclosed throughout this footnote. As of June 30, 2023

March 31, 2024 and December 31, 2022,2023, accrued interest receivable for loans totaled $11.5$13.2 million and $10.7$11.9 million, respectively, and is included in the “other assets” line item on the consolidated balance sheets.

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 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.

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

Tax Exempt - Loans in this segment primarily include loans to various state and municipal government entities. Loans made to these borrowers may provide 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.

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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 U.S.US Small Business Administration.  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 loan portfolio are made to borrowers who demonstrate the ability to make scheduled payments with full consideration to various underwriting factors. Borrower qualifications include favorable credit history combined with supportive income requirements and combined loan-to-value ratios within established policy guidelines.

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

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

Allowance for Credit Losses

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

The ACL 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.

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The activity in the ACL for the periods ended are as follows:

At or for the Three Months Ended June 30, 2023

Balance at

Beginning of

Balance at

(in thousands)

    

Period

Charge Offs

    

Recoveries

    

Provision

    

End of Period

Commercial construction

$

3,034

$

$

$

343

$

3,377

Commercial real estate owner occupied

 

2,348

 

 

139

 

79

 

2,566

Commercial real estate non-owner occupied

 

9,344

 

 

 

137

 

9,481

Tax exempt

 

93

 

 

 

8

 

101

Commercial and industrial

 

3,615

 

(121)

 

49

 

70

 

3,613

Residential real estate

 

7,305

 

(4)

 

7

 

68

 

7,376

Home equity

 

792

 

(12)

 

2

 

(14)

 

768

Consumer other

 

76

 

(62)

 

7

 

59

 

80

Total

$

26,607

$

(199)

$

204

$

750

$

27,362

At or for the Six Months Ended June 30, 2023

Balance at

Beginning of

Balance at

(in thousands)

    

Period

Charge Offs

    

Recoveries

    

Provision

    

End of Period

Commercial construction

$

2,579

$

$

$

798

$

3,377

Commercial real estate owner occupied

 

2,189

 

 

139

 

238

 

2,566

Commercial real estate non-owner occupied

 

9,341

 

 

 

140

 

9,481

Tax exempt

 

93

 

 

 

8

 

101

Commercial and industrial

 

3,493

 

(122)

 

55

 

187

 

3,613

Residential real estate

 

7,274

 

(8)

 

15

 

95

 

7,376

Home equity

 

811

 

(12)

 

4

 

(35)

 

768

Consumer other

 

80

 

(125)

 

8

 

117

 

80

Total

$

25,860

$

(267)

$

221

$

1,548

$

27,362

At or for the Three Months Ended June 30, 2022

At or for the Three Months Ended March 31, 2024

Balance at

Balance at

Beginning of

Balance at

Beginning of

Balance at

(in thousands)

    

Period

Charge Offs

    

Recoveries

    

Provision

    

End of Period

    

Period

Charge Offs

    

Recoveries

    

Provision

    

End of Period

Commercial construction

$

1,001

$

$

$

9

$

1,010

$

4,261

$

$

$

(564)

$

3,697

Commercial real estate owner occupied

 

2,673

 

 

61

 

(12)

 

2,722

 

2,863

 

(3)

 

 

221

 

3,081

Commercial real estate non-owner occupied

 

7,007

 

 

 

354

 

7,361

 

9,443

 

 

 

(288)

 

9,155

Tax exempt

 

 

 

 

105

 

105

 

119

 

 

 

(6)

 

113

Commercial and industrial

 

4,739

 

 

12

 

69

 

4,820

 

3,259

 

(65)

 

1

 

639

 

3,834

Residential real estate

 

6,878

 

 

6

 

(78)

 

6,806

 

7,352

 

 

5

 

294

 

7,651

Home equity

 

827

 

(4)

 

15

 

27

 

865

 

767

 

 

3

 

(18)

 

752

Consumer other

 

65

 

(58)

 

 

60

 

67

 

78

 

(45)

 

28

 

11

 

72

Total

$

23,190

$

(62)

$

94

$

534

$

23,756

$

28,142

$

(113)

$

37

$

289

$

28,355

At or for the Three Months Ended March 31, 2023

Balance at

Beginning of

Balance at

(in thousands)

    

Period

Charge Offs

    

Recoveries

    

Provision

    

End of Period

Commercial construction

$

2,579

$

$

$

455

$

3,034

Commercial real estate owner occupied

 

2,189

 

 

 

159

 

2,348

Commercial real estate non-owner occupied

 

9,341

 

 

 

3

 

9,344

Tax exempt

 

93

 

 

 

 

93

Commercial and industrial

 

3,493

 

(1)

 

6

 

117

 

3,615

Residential real estate

 

7,274

 

(4)

 

8

 

27

 

7,305

Home equity

 

811

 

 

2

 

(21)

 

792

Consumer other

 

80

 

(63)

 

1

 

58

 

76

Total

$

25,860

$

(68)

$

17

$

798

$

26,607

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At or for the Six Months Ended June 30, 2022

Balance at

Beginning of

Balance at

(in thousands)

    

Period

    

Charge Offs

    

Recoveries

    

Provision

    

End of Period

Commercial construction

$

2,111

$

$

$

(1,101)

$

1,010

Commercial real estate owner occupied

 

2,751

 

 

113

 

(142)

 

2,722

Commercial real estate non-owner occupied

 

5,650

 

 

 

1,711

 

7,361

Tax exempt

 

86

 

 

 

19

 

105

Commercial and industrial

 

5,369

 

37

 

(586)

 

4,820

Residential real estate

 

5,862

 

(15)

 

98

 

861

 

6,806

Home equity

 

814

 

(6)

 

20

 

37

 

865

Consumer other

 

75

 

(124)

 

4

 

112

 

67

Total

$

22,718

$

(145)

$

272

$

911

$

23,756

Unfunded Commitments

The ACL 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 activity in the ACL on unfunded commitments for the periods ended was as follows:

(in thousands)

Three Months Ended June 30, 2023

    

Six Months Ended June 30, 2023

 

Three Months Ended June 30, 2022

    

Six Months Ended June 30, 2022

Beginning Balance

$

3,735

$

3,910

$

2,182

$

2,152

Provision for credit losses

 

45

 

(130)

 

341

 

371

Ending Balance

$

3,780

$

3,780

$

2,523

$

2,523

(in thousands)

Three Months Ended March 31, 2024

    

Three Months Ended March 31, 2023

Beginning Balance

$

3,825

$

3,910

Provision for credit losses

 

(186)

 

(175)

Ending Balance

$

3,639

$

3,639

Loan Origination/Risk Management: We have certain lending policies and procedures in place designed to maximize loan income within an acceptable level of risk. Our Board of Directors reviews and approves these policies and procedures on a regular basis. A reporting system supplements the review process by providing management and the 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. 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

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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 our credit quality indicators:

Pass: Loans 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.

Special Mention: Loans 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 marketconditions which may, in the future, affect the obligor may warrant special mention of the asset. Loans for which an

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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 us to sufficient risks to warrant classification.

Substandard: Loans 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 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 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 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 effected in the future. Losses are taken in the period in which they are determined to be uncollectible.

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The following table presents our loans by year of origination, loan segmentation and risk indicator as of June 30, 2023:March 31, 2024:

    

    

    

    

    

    

    

    

    

    

    

    

    

    

(in thousands)

2023

2022

2021

2020

2019

Prior

Total

2024

2023

2022

2021

2020

Prior

Total

Commercial construction

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

Risk rating:

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

Pass

$

2,109

$

102,477

$

36,746

$

5,382

$

$

940

$

147,654

$

1,219

$

23,199

$

107,106

$

20,918

$

4,415

$

1,413

$

158,270

Special mention

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Substandard

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

$

2,109

$

102,477

$

36,746

$

5,382

$

$

940

$

147,654

$

1,219

$

23,199

$

107,106

$

20,918

$

4,415

$

1,413

$

158,270

Current period gross write-offs

Commercial real estate owner occupied

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

Risk rating:

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

Pass

$

36,758

$

30,523

$

31,082

$

20,946

$

29,938

$

122,915

$

272,162

$

1,328

$

52,491

$

67,078

$

60,467

$

19,975

$

115,429

$

316,768

Special mention

 

 

 

7,485

 

1,672

 

653

 

2,153

 

11,963

 

 

152

 

 

 

1,565

 

3,382

 

5,099

Substandard

 

 

 

 

 

 

4,097

 

4,097

 

 

 

 

 

 

1,604

 

1,604

Doubtful

129

129

110

110

Total

$

36,758

$

30,523

$

38,567

$

22,618

$

30,591

$

129,294

$

288,351

$

1,328

$

52,643

$

67,078

$

60,467

$

21,540

$

120,525

$

323,581

Current period gross write-offs

3

3

Commercial real estate non-owner occupied

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

Risk rating:

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

Pass

$

26,282

$

354,472

$

227,982

$

139,508

$

73,747

$

252,023

$

1,074,014

$

10,379

$

41,205

$

342,797

$

198,618

$

135,808

$

321,447

$

1,050,254

Special mention

 

 

 

13,605

 

28,213

 

14,881

 

16,208

 

72,907

 

 

7,782

 

9,363

 

21,525

 

27,946

 

20,597

 

87,213

Substandard

 

 

 

 

 

102

 

14,490

 

14,592

 

 

 

 

 

 

17,830

 

17,830

Doubtful

136

136

Total

$

26,282

$

354,472

$

241,587

$

167,721

$

88,730

$

282,857

$

1,161,649

$

10,379

$

48,987

$

352,160

$

220,143

$

163,754

$

359,874

$

1,155,297

Current period gross write-offs

Tax exempt

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

Risk rating:

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

Pass

$

2,676

$

11,949

$

922

$

243

$

698

$

29,984

$

46,472

$

501

$

2,832

$

8,468

$

724

$

208

$

26,528

$

39,261

Special mention

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Substandard

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

$

2,676

$

11,949

$

922

$

243

$

698

$

29,984

$

46,472

$

501

$

2,832

$

8,468

$

724

$

208

$

26,528

$

39,261

Current period gross write-offs

Commercial and industrial

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

Risk rating:

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

Pass

$

43,961

$

87,084

$

25,591

$

40,800

$

19,721

$

85,061

$

302,218

$

25,552

$

79,412

$

62,520

$

18,175

$

33,714

$

79,651

$

299,024

Special mention

 

44

 

1,354

 

 

10

 

863

 

3,902

 

6,173

 

 

306

 

1,419

 

124

 

704

 

3,442

 

5,995

Substandard

 

52

 

102

 

195

 

119

 

365

 

641

 

1,474

 

 

155

 

201

 

123

 

124

 

1,001

 

1,604

Doubtful

221

221

Total

$

44,057

$

88,540

$

25,786

$

40,929

$

20,949

$

89,604

$

309,865

$

25,552

$

79,873

$

64,140

$

18,422

$

34,542

$

84,315

$

306,844

Current period gross write-offs

5

117

122

62

3

65

Residential real estate

 

  

 

  

 

  

 

  

 

  

 

  

 

  

Performing

$

7,076

$

76,695

$

186,939

$

162,848

$

94,344

$

401,684

$

929,586

Nonperforming

 

 

 

403

 

662

 

 

3,260

 

4,325

Total

$

7,076

$

76,695

$

187,342

$

163,510

$

94,344

$

404,944

$

933,911

Current period gross write-offs

Home equity

 

  

 

  

 

  

 

  

 

  

 

  

 

  

Performing

$

2,620

$

15,816

$

15,200

$

7,107

$

6,138

$

39,038

$

85,919

Nonperforming

 

 

 

 

57

 

 

903

 

960

Total

$

2,620

$

15,816

$

15,200

$

7,164

$

6,138

$

39,941

$

86,879

Current period gross write-offs

Consumer other

 

  

 

  

 

  

 

  

 

  

 

  

 

  

Performing

$

1,913

$

2,618

$

1,476

$

572

$

212

$

827

$

7,618

Nonperforming

 

 

 

 

6

 

5

 

 

11

Total

$

1,913

$

2,618

$

1,476

$

578

$

217

$

827

$

7,629

Current period gross write-offs

4

1

40

45

Total Loans

$

50,588

$

302,663

$

802,970

$

491,926

$

325,158

$

1,038,367

$

3,011,672

20

Table of Contents

(in thousands)

2023

2022

2021

2020

2019

Prior

Total

Residential real estate

 

  

 

  

 

  

 

  

 

  

 

  

 

  

Performing

$

42,042

$

197,429

$

173,301

$

102,057

$

66,109

$

372,770

$

953,708

Nonperforming

 

 

 

42

 

 

47

 

3,515

 

3,604

Total

$

42,042

$

197,429

$

173,343

$

102,057

$

66,156

$

376,285

$

957,312

Current period gross write-offs

8

8

Home equity

 

  

 

  

 

  

 

  

 

  

 

  

 

  

Performing

$

7,456

$

16,743

$

9,297

$

6,910

$

5,141

$

42,277

$

87,824

Nonperforming

 

 

 

 

 

 

557

 

557

Total

$

7,456

$

16,743

$

9,297

$

6,910

$

5,141

$

42,834

$

88,381

Current period gross write-offs

12

12

Consumer other

 

  

 

  

 

  

 

  

 

  

 

  

 

  

Performing

$

2,796

$

2,349

$

982

$

606

$

116

$

939

$

7,788

Nonperforming

 

 

 

5

 

3

 

 

 

8

Total

$

2,796

$

2,349

$

987

$

609

$

116

$

939

$

7,796

Current period gross write-offs

52

8

2

$

63

125

Total Loans

$

164,165

$

804,482

$

527,235

$

346,469

$

212,381

$

952,748

$

3,007,480

The following table presents our loans by year of origination, loan segmentation and risk indicator as of December 31, 2022:2023:

    

    

    

    

    

    

    

    

    

    

    

    

    

    

(in thousands)

2022

2021

2020

2019

2018

Prior

Total

2023

2022

2021

2020

2019

Prior

Total

Commercial construction

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

Risk rating:

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

Pass

$

49,722

$

38,837

$

2,865

$

1,011

$

964

$

$

93,399

$

14,040

$

99,115

$

35,978

$

3,992

$

$

923

$

154,048

Special mention

 

 

 

24,178

 

 

 

 

24,178

 

 

 

 

 

 

 

Substandard

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

$

49,722

$

38,837

$

27,043

$

1,011

$

964

$

$

117,577

$

14,040

$

99,115

$

35,978

$

3,992

$

$

923

$

154,048

Current period gross write-offs

Commercial real estate owner occupied

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

Risk rating:

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

Pass

$

22,371

$

11,290

$

23,014

$

31,352

$

46,398

$

103,295

$

237,720

$

57,603

$

61,015

$

43,228

$

20,209

$

20,462

$

91,187

$

293,704

Special mention

 

 

 

243

 

666

 

173

 

1,870

 

2,952

 

160

 

387

 

7,488

 

1,596

 

 

3,066

 

12,697

Substandard

 

 

 

 

 

77

 

3,924

 

4,001

 

 

 

 

 

 

3,497

 

3,497

Doubtful

141

141

117

117

Total

$

22,371

$

11,290

$

23,257

$

32,018

$

46,648

$

109,230

$

244,814

$

57,763

$

61,402

$

50,716

$

21,805

$

20,462

$

97,867

$

310,015

Current period gross write-offs

Commercial real estate non-owner occupied

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

Risk rating:

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

Pass

$

370,856

$

228,414

$

145,096

$

88,111

$

35,213

$

238,395

$

1,106,085

$

41,270

$

353,613

$

199,311

$

127,231

$

78,759

$

238,973

$

1,039,157

Special mention

 

 

21,390

 

 

127

 

911

 

16,612

 

39,040

 

7,809

 

 

14,134

 

37,249

 

15,246

 

17,108

 

91,546

Substandard

 

 

 

 

 

 

1,404

 

1,404

 

 

 

 

 

 

13,863

 

13,863

Doubtful

145

145

Total

$

370,856

$

249,804

$

145,096

$

88,238

$

36,124

$

256,556

$

1,146,674

$

49,079

$

353,613

$

213,445

$

164,480

$

94,005

$

269,944

$

1,144,566

Current period gross write-offs

Tax exempt

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

Risk rating:

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

Pass

$

8,686

$

1,020

$

252

$

772

$

13,231

$

18,918

$

42,879

$

6,340

$

8,468

$

787

$

208

$

590

$

27,295

$

43,688

Special mention

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Substandard

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

$

8,686

$

1,020

$

252

$

772

$

13,231

$

18,918

$

42,879

$

6,340

$

8,468

$

787

$

208

$

590

$

27,295

$

43,688

Current period gross write-offs

Commercial and industrial

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

Risk rating:

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

Pass

$

83,151

$

26,948

$

62,835

$

27,491

$

9,511

$

81,316

$

291,252

$

80,942

$

69,402

$

22,205

$

38,824

$

14,739

$

77,273

$

303,385

Special mention

 

1,450

 

 

53

 

803

 

201

 

619

 

3,126

 

364

 

1,446

 

 

776

 

28

 

3,588

 

6,202

Substandard

 

 

113

 

111

 

65

 

299

 

2,106

 

2,694

 

58

 

94

 

186

 

109

 

95

 

532

 

1,074

Doubtful

40

40

87

135

222

Total

$

84,601

$

27,061

$

62,999

$

28,359

$

10,011

$

84,081

$

297,112

$

81,364

$

70,942

$

22,391

$

39,709

$

14,949

$

81,528

$

310,883

Current period gross write-offs

5

659

664

Performing

$

72,395

$

194,109

$

165,434

$

96,016

$

62,648

$

345,823

$

936,425

Nonperforming

 

 

 

41

 

 

234

 

3,634

 

3,909

Total

$

72,395

$

194,109

$

165,475

$

96,016

$

62,882

$

349,457

$

940,334

Current period gross write-offs

8

8

Home equity

 

  

 

  

 

  

 

  

 

  

 

  

 

  

Performing

$

15,582

$

15,334

$

7,873

$

6,633

$

4,800

$

36,652

$

86,874

Nonperforming

 

 

 

 

 

 

809

 

809

Total

$

15,582

$

15,334

$

7,873

$

6,633

$

4,800

$

37,461

$

87,683

Current period gross write-offs

12

12

Consumer other

 

  

 

  

 

  

 

  

 

  

 

  

 

  

Performing

$

4,128

$

1,787

$

696

$

301

$

51

$

864

$

7,827

Nonperforming

 

 

 

4

 

1

 

 

 

5

Total

$

4,128

$

1,787

$

700

$

302

$

51

$

864

$

7,832

Current period gross write-offs

52

18

5

214

289

Total Loans

$

300,691

$

804,770

$

497,365

$

333,145

$

197,739

$

865,339

$

2,999,049

21

Table of Contents

(in thousands)

2022

2021

2020

2019

2018

Prior

Total

Residential real estate

 

  

 

  

 

  

 

  

 

  

 

  

 

  

Performing

$

195,320

$

177,480

$

111,021

$

69,170

$

47,797

$

349,795

$

950,583

Nonperforming

 

 

45

 

 

49

 

641

 

3,650

 

4,385

Total

$

195,320

$

177,525

$

111,021

$

69,219

$

48,438

$

353,445

$

954,968

Home equity

 

  

 

  

 

  

 

  

 

  

 

  

 

  

Performing

$

17,107

$

10,638

$

8,139

$

6,830

$

6,997

$

40,191

$

89,902

Nonperforming

 

 

 

 

 

 

963

 

963

Total

$

17,107

$

10,638

$

8,139

$

6,830

$

6,997

$

41,154

$

90,865

Consumer other

 

  

 

  

 

  

 

  

 

  

 

  

 

  

Performing

$

4,321

$

1,341

$

863

$

265

$

64

$

942

$

7,796

Nonperforming

 

 

 

5

 

 

 

 

5

Total

$

4,321

$

1,341

$

868

$

265

$

64

$

942

$

7,801

Total Loans

$

752,984

$

517,516

$

378,675

$

226,712

$

162,477

$

864,326

$

2,902,690

Past Dues

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

June 30, 2023

March 31, 2024

(in thousands)

    

30-59

    

60-89

    

90+

    

Total Past Due

    

Current

    

Total Loans

    

30-59

    

60-89

    

90+

    

Total Past Due

    

Current

    

Total Loans

Commercial construction

$

$

399

$

$

399

$

147,255

$

147,654

$

$

$

$

$

158,270

$

158,270

Commercial real estate owner occupied

 

59

 

 

 

59

 

288,292

 

288,351

 

262

 

359

 

 

621

 

322,960

 

323,581

Commercial real estate non-owner occupied

 

249

 

 

127

 

376

 

1,161,273

 

1,161,649

 

217

 

 

94

 

311

 

1,154,986

 

1,155,297

Tax exempt

 

 

 

 

 

46,472

 

46,472

 

 

 

 

 

39,261

 

39,261

Commercial and industrial

 

420

 

 

303

 

723

 

309,142

 

309,865

 

527

 

183

 

1,010

 

1,720

 

305,124

 

306,844

Residential real estate

 

265

 

996

 

2,268

 

3,529

 

953,783

 

957,312

 

1,138

 

1,112

 

787

 

3,037

 

930,874

 

933,911

Home equity

 

104

 

165

 

372

 

641

 

87,740

 

88,381

 

187

 

150

 

348

 

685

 

86,194

 

86,879

Consumer other

 

32

 

17

 

 

49

 

7,747

 

7,796

 

66

 

8

 

7

 

81

 

7,548

 

7,629

Total

$

1,129

$

1,577

$

3,070

$

5,776

$

3,001,704

$

3,007,480

$

2,397

$

1,812

$

2,246

$

6,455

$

3,005,217

$

3,011,672

December 31, 2022

December 31, 2023

(in thousands)

    

30-59

    

60-89

    

90+

    

Total Past Due

    

Current

    

Total Loans

    

30-59

    

60-89

    

90+

    

Total Past Due

    

Current

    

Total Loans

Commercial construction

$

$

$

$

$

117,577

$

117,577

$

$

$

$

$

154,048

$

154,048

Commercial real estate owner occupied

 

385

 

 

 

385

 

244,429

 

244,814

 

 

 

 

 

310,015

 

310,015

Commercial real estate non-owner occupied

 

45

 

145

 

139

 

329

 

1,146,345

 

1,146,674

 

 

 

103

 

103

 

1,144,463

 

1,144,566

Tax exempt

 

 

 

 

 

42,879

 

42,879

 

 

 

 

 

43,688

 

43,688

Commercial and industrial

 

169

 

 

9

 

178

 

296,934

 

297,112

 

465

 

59

 

330

 

854

 

310,029

 

310,883

Residential real estate

 

803

 

348

 

2,029

 

3,180

 

951,788

 

954,968

 

1,520

 

627

 

1,999

 

4,146

 

936,188

 

940,334

Home equity

 

216

 

160

 

246

 

622

 

90,243

 

90,865

 

600

 

 

337

 

937

 

86,746

 

87,683

Consumer other

 

41

 

8

 

 

49

 

7,752

 

7,801

 

10

 

2

 

 

12

 

7,820

 

7,832

Total

$

1,659

$

661

$

2,423

$

4,743

$

2,897,947

$

2,902,690

$

2,595

$

688

$

2,769

$

6,052

$

2,992,997

$

2,999,049

Non-Accrual Loans

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

March 31, 2024

Nonaccrual With No

90+ Days Past

(in thousands)

    

Nonaccrual

    

Related Allowance

    

Due and Accruing

Commercial construction

$

$

$

Commercial real estate owner occupied

 

95

 

 

Commercial real estate non-owner occupied

 

327

 

201

 

Tax exempt

 

 

 

Commercial and industrial

 

1,152

 

516

 

Residential real estate

 

4,325

 

726

 

Home equity

 

960

 

1

 

Consumer other

 

11

 

1

 

Total

$

6,870

$

1,445

$

22

Table of Contents

Non-Accrual Loans

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

June 30, 2023

Nonaccrual With No

90+ Days Past

(in thousands)

    

Nonaccrual

    

Related Allowance

    

Due and Accruing

Commercial construction

$

$

$

Commercial real estate owner occupied

 

117

 

51

 

Commercial real estate non-owner occupied

 

603

 

385

 

Tax exempt

 

 

 

Commercial and industrial

 

1,814

 

270

 

Residential real estate

 

3,604

 

1,253

 

386

Home equity

 

557

 

1

 

182

Consumer other

 

8

 

 

Total

$

6,703

$

1,960

$

568

December 31, 2022

Nonaccrual With No

90+ Days Past

(in thousands)

    

Nonaccrual

    

Related Allowance

    

Due and Accruing

Commercial construction

$

$

$

Commercial real estate owner occupied

 

439

 

360

 

Commercial real estate non-owner occupied

 

550

 

411

 

Tax exempt

 

 

 

Commercial and industrial

 

207

 

145

 

Residential real estate

 

4,385

 

1,361

 

202

Home equity

 

963

 

57

 

14

Consumer other

 

5

 

 

Total

$

6,549

$

2,334

$

216

December 31, 2023

Nonaccrual With No

90+ Days Past

(in thousands)

    

Nonaccrual

    

Related Allowance

    

Due and Accruing

Commercial construction

$

$

$

Commercial real estate owner occupied

 

103

 

44

 

Commercial real estate non-owner occupied

 

340

 

224

 

Tax exempt

 

 

 

Commercial and industrial

 

363

 

6

 

Residential real estate

 

3,908

 

1,131

 

118

Home equity

 

809

 

1

 

22

Consumer other

 

5

 

 

Total

$

5,528

$

1,406

$

140

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.ended:

June 30, 2023

December 31, 2022

March 31, 2024

December 31, 2023

(in thousands)

    

Real Estate

    

Other

    

Real Estate

    

Other

    

Real Estate

    

Other

    

Real Estate

    

Other

Commercial construction

$

$

$

$

$

$

$

$

Commercial real estate owner occupied

 

117

 

 

439

 

 

95

 

 

104

 

Commercial real estate non-owner occupied

 

603

 

 

550

 

 

327

 

 

340

 

Tax exempt

 

 

 

 

 

 

 

 

Commercial and industrial

 

385

 

1,429

 

91

 

116

 

1,019

 

133

 

229

 

134

Residential real estate

 

3,604

 

 

4,385

 

 

4,325

 

 

3,908

 

Home equity

 

557

 

 

963

 

 

960

 

 

808

 

Consumer other

 

8

 

 

5

 

 

11

 

 

5

 

Total

$

5,274

$

1,429

$

6,433

$

116

$

6,737

$

133

$

5,394

$

134

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Loan Modifications to Borrowers Experiencing Financial Difficulty

In January 2023, the Company adopted ASU 2022-02, “Financial Instruments - Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures” which eliminated the accounting guidance for TDRs while enhancing disclosure requirements for certain loan refinancing and restructurings by creditors when a borrower is experiencing financial difficulty. This guidance was applied on a prospective basis. Upon adoption of this guidance, we are no longer required to establish a specific reserve for modifications to borrowers experiencing financial difficulty. Instead, these modifications are included in their respective category and a historical loss rate is applied to the current loan balance to arrive at the quantitative baseline portion of the ACL.

These modifications typically result from loss mitigation activities and could include reductions in the interest rate, payment extensions, forgiveness of principal, forbearance, or other actions. There were no qualifying modifications for the three and six months ended June 30, 2022.

The following table presents the amortized cost basis of loans that were both experiencing financial difficulty and modified during the three and six months ended June 30, 2023,March 31, 2024, by class and by type of modification.

(in thousands)

Principal Forgiveness

Payment Delay

Term Extension

Interest Rate Reduction

Combination Interest Rate Reduction and Term Extension

% of Total Class of Loans

Principal Forgiveness

Payment Delay

Term Extension

Interest Rate Reduction

Combination Interest Rate Reduction and Term Extension

% of Total Class of Loans

Three Months Ended June 30, 2023

Three Months Ended March 31, 2024

Commercial construction

$

$

$

$

$

%

$

$

$

$

$

%

Commercial real estate owner occupied

 

 

 

 

 

 

 

 

 

 

Commercial real estate non-owner occupied

 

 

 

 

 

 

 

 

 

 

Tax exempt

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

 

 

 

1,419

 

 

18

0.46

 

 

 

 

 

Residential real estate

 

 

 

 

101

 

0.01

 

 

 

33

 

 

0.00

Home equity

 

 

 

 

 

 

 

 

 

 

Consumer other

 

 

 

 

 

 

 

 

 

 

Total

$

$

$

1,419

$

101

$

18

0.05

%

$

$

$

33

$

$

0.00

%

Six Months Ended June 30, 2023

Commercial construction

$

$

$

$

$

%

Commercial real estate owner occupied

 

 

 

 

 

Commercial real estate non-owner occupied

 

 

 

 

 

Tax exempt

 

 

 

 

 

Commercial and industrial

 

 

 

1,419

 

 

18

0.46

Residential real estate

 

 

 

 

101

 

0.01

Home equity

 

 

 

 

 

Consumer other

 

 

 

 

 

Total

$

$

$

1,419

$

101

$

18

0.05

%

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The following table presents the financial effect of loan modifications made to borrowers experiencing financial difficulty during the three and six months ended June 30,March 31, 2024.

(in thousands)

Weighted-Average Months of Payment Delay

Weighted-Average Months of Term Extension

Weighted-Average Interest Rate Reduction

Three Months Ended March 31, 2024

Commercial construction

%

Commercial real estate owner occupied

Commercial real estate non-owner occupied

Tax exempt

Commercial and industrial

Residential real estate

64

Home equity

Consumer other

Total

64

%

There were no qualifying modifications for the three months ended March 31, 2023.

(in thousands)

Weighted-Average Months of Term Extension

Weighted-Average Interest Rate Reduction

Three Months Ended June 30, 2023

Commercial construction

%

Commercial real estate owner occupied

Commercial real estate non-owner occupied

Tax exempt

Commercial and industrial

3.82

3.75

Residential real estate

1.38

Home equity

Consumer other

Total

3.82

5.13

%

Six Months Ended June 30, 2023

Commercial construction

%

Commercial real estate owner occupied

Commercial real estate non-owner occupied

Tax exempt

Commercial and industrial

3.82

3.75

Residential real estate

1.38

Home equity

Consumer other

Total

3.82

5.13

%

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Foreclosure

There were no residential mortgage loans collateralized by real estate that are in the process of foreclosure as of March 31, 2024. Residential mortgage loans collateralized by real estate that are in the process of foreclosure as of June 30, 2023 and December 31, 20222023 totaled $808 thousand and $253 thousand, respectively.$430 thousand.

Mortgage Banking

Loans held for sale at June 30, 2023March 31, 2024 had an unpaid principal balance of $3.7$3.1 million and there were no loans held for sale$2.2 million as of December 31, 2022.2023.  The interest rate exposure on loans held for sale is mitigated through forward sale commitments with certain approved secondary market investors.  Forward sale commitments had a notional amount of $11.5$6.0 million at June 30, 2023,March 31, 2024, and we had no open forward sale commitments$5.0 million at December 31, 2022.2023.

For the three months ended June 30,March 31, 2024 and 2023, and 2022, we sold $5.4$8.4 million and $11.1 million,$691 thousand, respectively, of residential mortgage loans on the secondary market, which resulted in a net gainloss on sale of loans (net of costs, including direct and indirect origination costs) of $16$31 thousand and $150 thousand, respectively. For the six months ended June 30, 2023 and 2022, we sold $6.1 million and $31.9 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 $8 thousand and $333 thousand, respectively.

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

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NOTE 4.               BORROWED FUNDS

Borrowed funds at June 30, 2023March 31, 2024 and December 31, 20222023 are summarized, as follows:

June 30, 2023

December 31, 2022

 

March 31, 2024

December 31, 2023

 

Weighted

Weighted

Weighted

Weighted

(dollars in thousands)

    

Carrying Value

    

Average Rate

Carrying Value

    

Average Rate

 

    

Carrying Value

    

Average Rate

Carrying Value

    

Average Rate

 

Short-term borrowings

  

  

  

  

 

  

  

  

  

 

Advances from the FHLB

$

384,500

 

5.32

%  

$

318,000

 

3.84

%

$

196,000

 

5.44

%  

$

232,300

 

5.46

%

Advances from the FRB BTFP

65,000

4.79

30,000

4.90

Other borrowings

 

11,889

 

0.10

 

13,369

 

0.13

 

8,161

 

0.14

 

8,465

 

0.13

Total short-term borrowings

 

396,389

 

3.40

 

331,369

 

2.20

 

269,161

 

3.00

 

270,765

 

2.88

Long-term borrowings

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

Advances from the FHLB

 

2,583

 

0.48

 

2,588

 

0.48

 

276

 

4.42

 

279

 

4.39

Subordinated borrowings

 

60,371

 

6.04

 

60,289

 

4.95

 

60,501

 

6.24

 

60,461

 

6.22

Total long-term borrowings

 

62,954

 

5.81

 

62,877

 

4.76

 

60,777

 

6.23

 

60,740

 

6.21

Total

$

459,343

 

3.63

%  

$

394,246

 

2.45

%

$

329,938

 

3.34

%  

$

331,505

 

3.24

%

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 June 30, 2023March 31, 2024 and December 31, 2022.2023. There are no variable rate short-term FHLB borrowings.

We have the capacity to borrow funds on a secured basis utilizing the Bank Term Funding Program (the “BTFP”), the Borrower in Custody program, and the Discount Window at the Federal Reserve Bank of Boston (the “FRB”). At June 30, 2023,March 31, 2024, our available secured line of credit at the FRB was $162.9 million.$155.9 million versus $156.6 million at December 31, 2023. We have pledged certain loans and securities to the FRB to support this arrangement. There were no borrowingsThe BTFP enables depository institutions to pledge eligible investment securities to the Federal Reserve with borrowing capacity based upon the FRBpar value of the collateral.

As of March 31, 2024, we maintained a BTFP balance of $65 million at a fixed rate of 4.76% with a maturity date of January 16, 2025. During the first quarter 2024, we prepaid our existing advance of $30 million at a rate of 4.85%, and entered into a new advance for $65 million at a rate of 4.76%. The BTFP was an additional source of liquidity with

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favorable prepayment terms, as we may prepay at any time without penalty. As announced by the periods ended June 30, 2023 and  December 31, 2022.Federal Reserve Board on January 24, 2024, the BTFP has ceased making new loans effective March 11, 2024.

We maintain with a correspondent bank, an unused unsecured federal funds line of credit with a correspondent bank that has an aggregate overnight borrowing capacity of $50.0 million as of June 30, 2023March 31, 2024 and December 31, 2022.2023. There was no outstanding balance on the line of credit as of June 30, 2023March 31, 2024 and December 31, 2022.2023.

Long-term FHLB advances consist of advances with a remaining maturity of more than one year. The advances outstanding at June 30, 2023March 31, 2024 include no callable advances and amortizing advances of $283$276 thousand. There were no callable advances outstanding and $288$279 thousand of amortizing advances at December 31, 2022.2023. 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. There are no variable rate long-term FHLB borrowings.

A summary of maturities of FHLB advances as of June 30, 2023March 31, 2024 is, as follows:

    

    

Weighted Average

 

    

    

Weighted Average

 

(in thousands, except rates)

Amount

 Rate

 

Amount

 Rate

 

2023

$

384,500

 

5.32

%

2024

 

2,300

 

$

196,000

 

5.44

%

2025

 

 

2026

 

 

2027

 

 

Thereafter

 

283

 

4.34

 

276

 

4.42

Total FHLB advances

$

387,083

 

5.28

%

$

196,276

 

5.44

%

On November 26, 2019, we entered intoWe executed a Subordinated Note Purchase AgreementsAgreement with certain qualified institutional buyers and accredited investors pursuant to which we sold and issuedan aggregate of $40.0 million in aggregate principal amount of subordinated notes due 2029 (the “Notes”). to accredited investors on November 19, 2019. The Notes have a maturity date of December 1, 2029 and bear a fixed interest rate of 4.63% through December 1, 2024 payable semi-annually in arrears. From December 1, 2024 and thereafter the

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Table of Contents

interest rate shall be reset quarterly to an interest rate per annum equal to the then current three-month Secured Overnight Financing Rate (SOFR)(“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 $249$119 thousand as of June 30, 2023March 31, 2024 and $331$158 thousand net of amortization as of December 31, 2022, that2023, which 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 LIBORSOFR plus 2.79%, and mature in 2034. The debt is callable by usthe Company at the time when any interest payment is made. Trust II and Trust III are considered variable interest entities for which we are not the primary beneficiary. Accordingly, Trust II and Trust III are not consolidated into our financial statements.

Repurchase Agreements

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

(in thousands)

June 30, 2023

December 31, 2022

Customer Repurchase Agreements

 

  

 

  

US Government-sponsored enterprises

$

11,889

$

13,369

Total

$

11,889

$

13,369

(in thousands)

March 31, 2024

December 31, 2023

Customer Repurchase Agreements

 

  

 

  

US Government-sponsored enterprises

$

8,161

$

8,465

Total

$

8,161

$

8,465

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NOTE 5.               DEPOSITS

A summary of time deposits is, as follows:

(in thousands)

    

June 30, 2023

    

December 31, 2022

    

March 31, 2024

    

December 31, 2023

Time less than $100,000

$

354,323

$

157,263

$

445,450

$

381,902

Time $100,000 through $250,000

 

146,414

 

118,655

 

173,118

 

163,933

Time $250,000 or more

 

134,822

 

47,521

 

158,640

 

154,425

Total

$

635,559

$

323,439

$

777,208

$

700,260

At June 30, 2023March 31, 2024 and December 31, 2022,2023, the scheduled maturities by year for time deposits are, as follows:

(in thousands)

    

June 30, 2023

December 31, 2022

    

March 31, 2024

December 31, 2023

Within 1 year

$

515,745

$

262,338

$

750,747

$

670,961

Over 1 year to 2 years

 

103,284

 

37,937

 

15,827

 

17,000

Over 2 years to 3 years

 

9,046

 

12,936

 

5,830

 

6,932

Over 3 years to 4 years

 

3,872

 

5,410

 

3,377

 

3,434

Over 4 years to 5 years

 

3,399

 

4,319

 

1,299

 

1,795

Over 5 years

 

213

 

499

 

128

 

138

Total

$

635,559

$

323,439

$

777,208

$

700,260

Included in time deposits are brokered deposits of $202.6$275.0 million and $15.1$219.6 million at June 30, 2023March 31, 2024 and December 31, 2022,2023, respectively.  Also included in time deposits are reciprocal deposits of $36.5$49.3 million and $27.4$43.3 million at June 30, 2023March 31, 2024 and December 31, 2022,2023, respectively.

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NOTE 6.           CAPITAL RATIOS AND SHAREHOLDERS’ EQUITY

The actual and required capital ratios are, as follows:

June 30, 2023

March 31, 2024

Minimum Regulatory

Minimum Regulatory

Actual

Capital Requirements

Actual

Capital Requirements

(in thousands, except ratios)

    

Amount

    

Ratio

Amount

    

Ratio

    

Amount

    

Ratio

Amount

    

Ratio

Company (consolidated)

 

 

Total capital to risk-weighted assets

$

435,229

13.62

%

$

257,458

8.00

%

$

456,781

14.36

%

$

254,393

8.00

%

Common equity tier 1 capital to risk-weighted assets

 

343,470

10.67

 

144,819

4.50

 

364,168

11.45

 

143,097

4.50

Tier 1 capital to risk-weighted assets

 

364,090

11.31

 

193,093

6.00

 

384,788

12.10

 

190,795

6.00

Tier 1 capital to average assets (leverage ratio)

 

364,090

9.40

 

154,881

4.00

 

384,788

9.92

 

155,105

4.00

Bank

Total capital to risk-weighted assets

$

427,327

13.29

%

$

257,232

8.00

%

$

447,860

14.10

%

$

254,134

8.00

%

Common equity tier 1 capital to risk-weighted assets

 

396,188

12.33

 

144,594

4.50

 

415,867

13.09

 

142,950

4.50

Tier 1 capital to risk-weighted assets

 

396,188

12.33

 

192,792

6.00

 

415,867

13.09

 

190,600

6.00

Tier 1 capital to average assets (leverage ratio)

 

396,188

10.24

 

154,761

4.00

 

415,867

10.73

 

154,978

4.00

December 31, 2022

December 31, 2023

Minimum Regulatory

Minimum Regulatory

Actual

Capital Requirements

Actual

Capital Requirements

(in thousands, except ratios)

    

Amount

    

Ratio

Amount

    

Ratio

    

Amount

    

Ratio

Amount

    

Ratio

Company (consolidated)

 

 

Total capital to risk-weighted assets

$

416,900

13.50

%

$

247,041

8.00

%

$

450,160

14.24

%

$

252,888

8.00

%

Common equity tier 1 capital to risk-weighted assets

 

326,513

10.57

 

138,960

4.50

 

357,574

11.31

 

142,249

4.50

Tier 1 capital to risk-weighted assets

 

347,133

11.24

 

185,281

6.00

 

378,194

11.96

 

189,666

6.00

Tier 1 capital to average assets (leverage ratio)

 

347,133

9.21

 

150,772

4.00

 

378,194

9.70

 

156,022

4.00

Bank

Total capital to risk-weighted assets

$

410,053

13.29

%

$

246,812

8.00

%

$

441,278

13.97

%

$

252,642

8.00

%

Common equity tier 1 capital to risk-weighted assets

 

380,286

12.33

 

138,832

4.50

 

409,312

12.96

 

142,111

4.50

Tier 1 capital to risk-weighted assets

 

380,286

12.33

 

185,110

6.00

 

409,312

12.96

 

189,482

6.00

Tier 1 capital to average assets (leverage ratio)

 

380,286

10.10

 

150,655

4.00

 

409,312

10.50

 

155,908

4.00

In order to be classified as “well-capitalized” under the relevant regulatory framework, (i) 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 (ii) 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.

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Accumulated other comprehensive (loss) income

Components of accumulated other comprehensive loss is, as follows:

(in thousands)

    

June 30, 2023

    

December 31, 2022

    

March 31, 2024

    

December 31, 2023

Accumulated other comprehensive income, before tax:

 

  

 

  

Accumulated other comprehensive loss, before tax:

 

  

 

  

Net unrealized loss on AFS securities

$

(71,883)

$

(71,832)

$

(64,948)

$

(62,351)

Net unrealized loss on hedging derivatives

 

(1,245)

 

(2,333)

 

(2,259)

 

(1,322)

Net unrealized loss on post-retirement plans

 

(1,675)

 

(1,691)

 

(1,518)

 

(1,540)

Income taxes related to items of accumulated other comprehensive income:

 

  

 

  

Income taxes related to items of accumulated other comprehensive loss:

 

  

 

  

Net unrealized loss on AFS securities

 

16,576

 

16,586

 

15,315

 

14,702

Net unrealized loss on hedging derivatives

 

288

 

539

 

533

 

312

Net unrealized loss on post-retirement plans

 

375

 

391

 

309

 

337

Accumulated other comprehensive loss

$

(57,564)

$

(58,340)

$

(52,568)

$

(49,862)

The following table presents the components of other comprehensive income (loss) for the three and six months ended June 30, 2023March 31, 2024 and 2022:2023:

(in thousands)

    

Before Tax

    

Tax Effect

    

Net of Tax

Three Months Ended June 30, 2023

 

  

 

  

 

  

Net unrealized loss on AFS securities:

 

  

 

  

 

  

Net unrealized loss arising during the period

$

(6,057)

$

1,396

$

(4,661)

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

 

 

 

Net unrealized loss on AFS securities

 

(6,057)

 

1,396

 

(4,661)

Net unrealized gain on hedging derivatives:

 

  

 

  

 

Net unrealized gain arising during the period

 

321

 

(73)

 

248

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

 

 

 

Net unrealized gain on cash flow hedging derivatives

 

321

 

(73)

 

248

Other comprehensive (loss) income

$

(5,736)

$

1,323

$

(4,413)

Three Months Ended June 30, 2022

 

  

 

  

 

  

Net unrealized loss on AFS securities:

 

  

 

  

 

  

Net unrealized loss arising during the period

$

(23,409)

$

5,330

$

(18,079)

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

 

 

 

Net unrealized loss on AFS securities

 

(23,409)

 

5,330

 

(18,079)

Net unrealized loss on hedging derivatives:

 

  

 

  

 

Net unrealized loss arising during the period

 

(1,997)

 

460

 

(1,537)

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

 

 

 

Net unrealized loss on cash flow hedging derivatives

 

(1,997)

 

460

 

(1,537)

Other comprehensive (loss) income

$

(25,406)

$

5,790

$

(19,616)

(in thousands)

    

Before Tax

    

Tax Effect

    

Net of Tax

Three Months Ended March 31, 2024

 

  

 

  

 

  

Net unrealized loss on AFS securities:

 

  

 

  

 

  

Net unrealized loss arising during the period

$

(2,597)

$

613

$

(1,984)

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

 

 

 

Net unrealized loss on AFS securities

 

(2,597)

 

613

 

(1,984)

Net unrealized loss on hedging derivatives:

 

  

 

  

 

Net unrealized loss arising during the period

 

(937)

 

221

 

(716)

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

 

 

 

Net unrealized loss on cash flow hedging derivatives

 

(937)

 

221

 

(716)

Net unrealized loss on post-retirement plans:

 

  

 

  

 

Net unrealized loss arising during the period

 

22

 

(28)

 

(6)

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

 

 

 

Net unrealized loss on post-retirement plans

 

22

 

(28)

 

(6)

Other comprehensive loss

$

(3,512)

$

806

$

(2,706)

Three Months Ended March 31, 2023

 

  

 

  

 

  

Net unrealized loss on AFS securities:

 

  

 

  

 

  

Net unrealized loss arising during the period

$

6,040

$

(1,414)

$

4,626

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

 

34

 

(8)

 

26

Net unrealized loss on AFS securities

 

6,006

 

(1,406)

 

4,600

Net unrealized loss on hedging derivatives:

 

  

 

  

 

Net unrealized loss arising during the period

 

767

 

(178)

 

589

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

 

 

 

Net unrealized loss on cash flow hedging derivatives

 

767

 

(178)

 

589

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

$

6,773

$

(1,584)

$

5,189

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(in thousands)

    

Before Tax

    

Tax Effect

    

Net of Tax

Six Months Ended June 30, 2023

 

  

 

  

 

  

Net unrealized loss on AFS securities:

 

  

 

  

 

  

Net unrealized loss arising during the period

$

(17)

$

(18)

$

(35)

Less: reclassification adjustment for gains realized in net income

 

34

 

(8)

 

26

Net unrealized loss on AFS securities

 

(51)

 

(10)

 

(61)

Net unrealized gain on hedging derivatives:

 

 

  

 

  

Net unrealized gain arising during the period

 

1,088

 

(251)

 

837

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

 

 

 

Net unrealized gain on hedging derivatives

 

1,088

 

(251)

 

837

Other comprehensive income

$

1,037

$

(261)

$

776

Six Months Ended June 30, 2022

 

  

 

  

 

  

Net unrealized loss on AFS securities:

 

  

 

  

 

  

Net unrealized loss arising during the period

$

(52,244)

$

11,962

$

(40,282)

Less: reclassification adjustment for gains realized in net income

 

9

 

(2)

 

7

Net unrealized loss on AFS securities

 

(52,253)

 

11,964

 

(40,289)

Net unrealized loss on hedging derivatives:

 

  

 

  

 

  

Net unrealized loss arising during the period

 

(3,878)

 

893

 

(2,985)

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

 

 

 

Net unrealized loss on cash flow hedging derivatives

 

(3,878)

 

893

 

(2,985)

Other comprehensive loss

$

(56,131)

$

12,857

$

(43,274)

31

Table of Contents

The following table presents the changes in each component of accumulated other comprehensive income (loss), net of tax impacts, for the three and six months ended June 30, 2023March 31, 2024 and 2022:2023:

    

    

    

Net unrealized

    

Net gain (loss) on

    

Net unrealized

    

    

Net unrealized

    

Net gain (loss) on

    

Net unrealized

    

gain (loss)

effective cash

 loss

gain (loss)

effective cash

 loss

on AFS

flow hedging

on pension

on AFS

flow hedging

on pension

(in thousands)

Securities

derivatives

plans

Total

Securities

derivatives

plans

Total

Three Months Ended June 30, 2023

  

  

  

  

Balance at beginning of period

$

(50,646)

$

(1,205)

$

(1,300)

$

(53,151)

Other comprehensive loss before reclassifications

 

(4,661)

 

248

 

 

(4,413)

Less: amounts reclassified from accumulated other comprehensive income

 

 

 

 

Total other comprehensive income

 

(4,661)

 

248

 

 

(4,413)

Balance at end of period

$

(55,307)

$

(957)

$

(1,300)

$

(57,564)

Three Months Ended June 30, 2022

 

  

 

  

 

  

 

Three Months Ended March 31, 2024

 

  

 

  

 

  

 

Balance at beginning of period

$

(20,225)

$

(578)

$

(552)

$

(21,355)

$

(47,649)

$

(1,010)

$

(1,203)

$

(49,862)

Other comprehensive gain before reclassifications

 

(18,079)

 

(1,537)

 

 

(19,616)

 

(1,984)

 

(716)

 

(6)

 

(2,706)

Less: amounts reclassified from accumulated other comprehensive income

 

 

 

 

 

 

 

 

Total other comprehensive income

 

(18,079)

 

(1,537)

 

 

(19,616)

 

(1,984)

 

(716)

 

(6)

 

(2,706)

Balance at end of period

$

(38,304)

$

(2,115)

$

(552)

$

(40,971)

$

(49,633)

$

(1,726)

$

(1,209)

$

(52,568)

Six Months Ended June 30, 2023

 

  

 

  

 

  

 

Three Months Ended March 31, 2023

Balance at beginning of period

$

(55,246)

$

(1,794)

$

(1,300)

$

(58,340)

$

(55,246)

$

(1,794)

$

(1,300)

$

(58,340)

Other comprehensive loss before reclassifications

 

(35)

 

837

 

 

802

 

4,626

 

589

 

 

5,215

Less: amounts reclassified from accumulated other comprehensive income

 

26

 

 

 

26

 

26

 

 

 

26

Total other comprehensive loss

 

(61)

 

837

 

 

776

 

4,600

 

589

 

 

5,189

Balance at end of period

$

(55,307)

$

(957)

$

(1,300)

$

(57,564)

$

(50,646)

$

(1,205)

$

(1,300)

$

(53,151)

Six Months Ended June 30, 2022

Balance at beginning of period

$

1,985

$

870

$

(552)

$

2,303

Other comprehensive loss before reclassifications

 

(40,282)

 

(2,985)

 

 

(43,267)

Less: amounts reclassified from accumulated other comprehensive income

 

7

 

 

 

7

Total other comprehensive loss

 

(40,289)

 

(2,985)

 

 

(43,274)

Balance at end of period

$

(38,304)

$

(2,115)

$

(552)

$

(40,971)

32

Table of Contents

The following tables presents the amounts reclassified out of each component of accumulated other comprehensive income for three and six months ended June 30, 2023March 31, 2024 and 2022:2023:

Three Months Ended June 30, 

Six Months Ended June 30, 

Affected Line Item where

(in thousands)

    

2023

    

2022

    

2023

    

2022

    

    

Net Income is Presented

Net realized gains on AFS securities:

  

  

  

  

  

Before tax

$

$

$

34

$

9

 

Non-interest income

Tax effect

 

 

 

(8)

 

(2)

 

Tax expense

Total reclassifications for the period

$

$

$

26

$

7

Three Months Ended June 30, 

Six Months Ended June 30, 

Affected Line Item where

(in thousands)

    

2023

    

2022

    

2023

    

2022

    

    

Net Income is Presented

Net realized loss on hedging derivatives:

  

  

  

  

  

Before tax

$

$

$

$

4,852

 

Non-interest income

Tax effect

 

 

 

 

(917)

 

Tax expense

Total reclassifications for the period

$

$

$

$

3,935

(1)

Three Months Ended March 31, 

Affected Line Item where

(in thousands)

    

2024

    

2023

    

    

Net Income is Presented

Net realized gains on AFS securities:

  

  

  

Before tax

$

$

34

 

Non-interest income

Tax effect

 

 

(8)

 

Tax expense

Total reclassifications for the period

$

$

26

30

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NOTE 7.           EARNINGS PER SHARE

The following table presents the calculation of earnings per share:

Three Months Ended

Six Months Ended

Three Months Ended

June 30, 

June 30, 

March 31, 

(in thousands, except per share and share data)

    

2023

    

2022

    

2023

    

2022

    

2024

    

2023

Net income

$

10,791

$

10,503

$

23,803

$

19,615

$

10,095

$

13,012

Average number of basic common shares outstanding

 

15,139,057

 

15,017,943

 

15,124,533

 

15,014,408

 

15,198,337

 

15,109,847

Plus: dilutive effect of stock options and awards outstanding

 

40,882

 

59,484

 

61,249

 

79,219

 

71,496

 

80,242

Average number of diluted common shares outstanding(1)

 

15,179,939

 

15,077,427

 

15,185,782

 

15,093,627

 

15,269,833

 

15,190,089

Earnings per share:

 

  

 

  

 

  

 

  

 

  

 

  

Basic

$

0.71

$

0.70

$

1.57

$

1.31

$

0.66

$

0.86

Diluted

$

0.71

$

0.70

1.57

1.30

0.66

0.86

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

3331

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NOTE 8.           DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGING ACTIVITIES

We use derivative instruments to minimize fluctuations in earnings and cash flows caused by interest rate volatility. 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 our derivative contracts are considered to be interest rate contracts.

We recognize our derivative instruments on the consolidated balance sheet at fair value. On the date the derivative instrument is entered into, we designate whether the derivative is part of a hedging relationship (i.e., cash flow or fair value hedge). We formally document relationships between hedging instruments and hedged items, as well as our risk management objective and strategy for undertaking hedge transactions. We also 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.

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”MNAs”) with financial institution counterparties or Risk Participation Agreements (“RPA”RPAs”) with commercial bank counterparties, for which we assumesassume a pro rata share of the credit exposure associated with a borrower's performance related to the derivative contract with the counterparty.

The following tables present information about derivative assets and liabilities at June 30, 2023March 31, 2024 and December 31, 2022:2023:

June 30, 2023

March 31, 2024

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

 

1.5

$

4,687

Other assets

Interest rate swap on wholesale funding

$

75,000

 

0.8

$

2,361

Other assets

Interest rate swap on variable rate loans

50,000

2.7

(4,770)

Other liabilities

50,000

2.0

(3,604)

Other liabilities

Total cash flow hedges

 

125,000

 

(83)

 

125,000

 

(1,243)

Fair value hedges:

Interest rate swap on securities

 

37,190

 

6.1

 

4,646

Other assets

 

37,190

 

5.3

 

4,407

Other assets

Total fair value hedges

 

37,190

 

4,646

 

37,190

 

4,407

Economic hedges:

Forward sale commitments

 

11,508

 

 

49

Other assets

 

6,000

 

0.1

 

(16)

Other liabilities

Customer Loan Swaps-MNA Counterparty

188,948

5.2

(19,837)

Other liabilities

177,994

4.9

(17,037)

Other liabilities

Customer Loan Swaps-RPA Counterparty

112,750

5.5

Other liabilities

142,199

4.7

Other liabilities

Customer Loan Swaps-Customer

301,698

5.3

19,837

Other assets

320,193

4.8

17,037

Other assets

Total economic hedges

 

614,904

 

49

 

646,386

 

(16)

Non-hedging derivatives:

Interest rate lock commitments

 

9,169

 

0.1

 

36

Other assets

 

3,397

 

0.4

 

56

Other assets

Total non-hedging derivatives

 

9,169

 

36

 

3,397

 

56

Total

$

786,263

$

4,648

$

811,973

$

3,204

3432

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December 31, 2022

December 31, 2023

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

 

2.0

$

4,978

Other assets

Interest rate swap on wholesale funding

$

75,000

 

1.0

$

2,803

Other assets

Interest rate swap on variable rate loans

50,000

3.2

(4,941)

Other liabilities

50,000

2.2

(3,459)

Other liabilities

Total cash flow hedges

 

125,000

 

37

 

125,000

 

(656)

Fair value hedges:

Interest rate swap on securities

 

37,190

 

6.6

 

4,774

Other assets

 

37,190

 

5.6

 

3,844

Other assets

Total fair value hedges

 

37,190

 

4,774

 

37,190

 

3,844

Economic hedges:

Forward sale commitments

 

 

Other assets

5,000

 

 

(20)

Other assets

Customer Loan Swaps-MNA Counterparty

191,987

5.8

(20,287)

Other liabilities

184,826

5.0

(14,842)

Other liabilities

Customer Loan Swaps-RPA Counterparty

113,928

6.0

Other liabilities

142,199

4.9

(286)

Other liabilities

Customer Loan Swaps-Customer

305,914

5.9

20,287

Other assets

327,025

4.9

15,128

Other assets

Total economic hedges

 

611,829

 

 

659,050

 

(20)

Non-hedging derivatives:

 

 

Interest rate lock commitments

 

 

 

Other assets

 

3,153

 

0.1

 

63

Other assets

Total non-hedging derivatives

 

 

 

3,153

 

63

Total

$

774,019

$

4,811

$

824,393

$

3,231

As of June 30, 2023March 31, 2024 and December 31, 2022,2023, the following amounts were recorded on the consolidated balance sheet related to cumulative basis adjustments for fair value hedges:

    

    

    

Cumulative Amount of Fair 

    

    

    

Cumulative Amount of Fair 

Location of Hedged Item on 

Carrying Amount of Hedged 

Value Hedging Adjustment in 

Location of Hedged Item on 

Carrying Amount of Hedged 

Value Hedging Adjustment in 

    

Balance Sheet

    

Assets 

    

Carrying Amount

    

Balance Sheet

    

Assets 

    

Carrying Amount

June 30, 2023

 

  

 

  

 

  

March 31, 2024

 

  

 

  

 

  

Interest rate swap on securities

 

Securities available for sale

$

31,381

$

(5,809)

 

Securities available for sale

$

31,767

$

(5,423)

December 31, 2022

 

  

 

  

 

  

December 31, 2023

 

  

 

  

 

  

Interest rate swap on securities

 

Securities available for sale

$

30,045

$

(7,145)

 

Securities available for sale

$

32,680

$

(4,510)

3533

Table of Contents

Information about derivative assets and liabilities for the three and six months ended June 30,March 31, 2024 and 2023, and 2022, follows:

Three Months Ended June 30, 2023

Three Months Ended March 31, 2024

    

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

$

387

Interest expense

$

 

Interest expense

$

745

$

(338)

Interest expense

$

 

Interest expense

$

827

Interest rate swap on variable rate loans

(462)

Interest income

Interest income

(531)

(111)

Interest income

Interest income

(585)

Total cash flow hedges

 

(75)

 

 

 

  

 

214

 

(449)

 

 

 

  

 

242

Fair value hedges:

 

 

  

 

 

  

 

 

 

  

 

 

  

 

Interest rate swap on securities

 

321

 

Interest income

 

 

Interest income

 

330

 

(268)

 

Interest income

 

 

Interest income

 

370

Total fair value hedges

 

321

 

 

 

  

 

330

 

(268)

 

 

 

  

 

370

Economic hedges:

 

 

  

 

 

  

 

 

 

  

 

 

  

 

Forward commitments

 

 

Other income

 

 

Mortgage banking income

 

49

 

 

Other income

 

 

Mortgage banking income

 

4

Total economic hedges

 

 

 

 

  

 

49

 

 

 

 

  

 

4

Non-hedging derivatives:

 

 

  

 

 

  

 

 

 

  

 

 

  

 

Interest rate lock commitments

 

 

Other expense

 

 

Mortgage banking income

 

(111)

 

 

Other expense

 

 

Mortgage banking income

 

(7)

Total non-hedging derivatives

 

 

 

 

  

 

(111)

 

 

 

 

  

 

(7)

Total

$

246

$

 

  

$

482

$

(717)

$

 

  

$

609

3634

Table of Contents

Three Months Ended June 30, 2022

    

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

$

605

 

Interest expense

$

 

Interest expense

$

(28)

Interest rate swap on variable rate loans

(510)

Interest income

Interest income

(17)

Total cash flow hedges

95

 

 

 

(45)

Fair value hedges:

 

  

 

 

  

 

Interest rate swap on securities

 

(1,632)

 

Interest income

 

 

Interest income

 

(68)

Total economic hedges

(1,632)

 

 

  

 

(68)

Economic hedges:

 

  

 

 

  

 

Forward commitments

 

 

Other income

 

 

Mortgage banking income

 

(213)

Total economic hedges

 

 

  

 

(213)

Non-hedging derivatives:

 

 

  

 

 

  

 

Interest rate lock commitments

 

 

Other income

 

 

Mortgage banking income

 

55

Total non-hedging derivatives

 

 

  

 

55

Total

$

(1,537)

 

  

$

 

  

$

(271)

Three Months Ended March 31, 2023

    

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

$

(610)

 

Interest expense

$

 

Interest expense

$

664

Interest rate swap on variable rate loans

592

Interest income

Interest income

(466)

Total cash flow hedges

(18)

 

 

 

198

Fair value hedges:

 

  

 

 

  

 

Interest rate swap on securities

 

607

 

Interest income

 

 

Interest income

 

286

Total economic hedges

607

 

 

  

 

286

Economic hedges:

 

  

 

 

  

 

Forward commitments

 

 

Other income

 

 

Mortgage banking income

 

Total economic hedges

 

 

  

 

Non-hedging derivatives:

 

 

  

 

 

  

 

Interest rate lock commitments

 

 

Other expense

 

 

Mortgage banking income

 

8

Total non-hedging derivatives

 

 

  

 

8

Total

$

589

 

  

$

 

  

$

492

37

Table of Contents

Six Months Ended June 30, 2023

    

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

$

(222)

Interest expense

$

 

Interest expense

$

1,409

Interest rate swap on variable rate loans

130

Interest income

Interest income

(997)

Total cash flow hedges

 

(92)

 

 

 

  

 

412

Fair value hedges:

 

 

  

 

 

  

 

Interest rate swap on securities

 

929

 

Interest income

 

 

Interest income

 

616

Total fair value hedges

 

929

 

 

 

  

 

616

Economic hedges:

 

 

  

 

 

  

 

Forward commitments

 

 

Other income

 

 

Mortgage banking income

 

49

Total economic hedges

 

 

 

 

  

 

49

Non-hedging derivatives:

 

 

  

 

 

  

 

Interest rate lock commitments

 

 

Other expense

 

 

Mortgage banking income

 

(103)

Total non-hedging derivatives

 

 

 

 

  

 

(103)

Total

$

837

$

 

  

$

974

38

Table of Contents

Six Months Ended June 30, 2022

    

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

$

2,796

 

Interest expense

$

 

Interest expense

$

(141)

Interest rate swap on variable rate loans

(2,308)

Interest income

Interest income

(1)

Total cash flow hedges

488

 

 

 

(142)

Fair value hedges:

 

  

 

 

  

 

Interest rate swap on securities

 

(3,473)

 

Interest income

 

 

Interest income

 

(203)

Total economic hedges

(3,473)

 

 

  

 

(203)

Economic hedges:

 

  

 

 

  

 

Forward commitments

 

 

Other income

 

 

Mortgage banking income

 

(26)

Total economic hedges

 

 

  

 

(26)

Non-hedging derivatives:

 

 

  

 

 

  

 

Interest rate lock commitments

 

 

Other income

 

 

Mortgage banking income

 

(233)

Total non-hedging derivatives

 

 

  

 

(233)

Total

$

(2,985)

 

  

$

 

  

$

(604)

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The effect of cash flow hedging and fair value accounting on the consolidated statements of income for the three and six months ended June 30, 2023March 31, 2024 and 2022:2023:

Three Months Ended June 30, 2023

Three Months Ended March 31, 2024

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 expense line items presented in the consolidated statements of income

 

$

36,917

$

5,964

$

8,590

$

5,501

$

8,980

 

$

39,470

$

6,353

$

14,532

$

3,236

$

8,586

 

  

 

  

 

  

 

  

 

  

 

  

The effects of cash flow and fair value hedging:

 

  

 

  

 

  

 

  

 

  

 

  

Gain (loss) on cash flow hedges:

Interest rate swap on wholesale funding

745

827

Interest rate swap on variable rate loans

 

(531)

 

 

 

(585)

 

 

 

  

 

  

 

  

 

  

 

  

 

  

Gain (loss) on fair value hedges:

 

 

  

 

  

 

 

  

 

  

Interest rate swap on securities

330

370

Three Months Ended June 30, 2022

Three Months Ended March 31, 2023

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 expense line items presented in the consolidated statements of income

 

$

24,581

$

4,207

$

1,195

$

1,074

$

8,961

 

$

34,560

$

5,791

$

5,265

$

4,180

$

9,184

 

  

 

  

 

  

 

  

 

  

 

  

The effects of cash flow and fair value hedging:

 

  

 

  

 

  

 

  

 

  

 

  

Gain (loss) on cash flow hedges:

Interest rate swap on wholesale funding

(28)

664

Interest rate swap on variable rate loans

 

(17)

 

 

 

(466)

 

 

 

  

 

  

 

  

 

  

 

  

 

  

Gain (loss) on fair value hedges:

 

 

  

 

  

 

 

  

 

  

Interest rate swap on securities

(68)

286

4036

Table of Contents

Six Months Ended June 30, 2023

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

 

$

71,477

$

11,755

$

13,855

$

9,681

$

18,164

 

  

 

  

 

  

The effects of cash flow and fair value hedging:

 

  

 

  

 

  

Gain (loss) on cash flow hedges:

Interest rate swap on wholesale funding

1,409

Interest rate swap on variable rate loans

 

(997)

 

 

 

  

 

  

 

  

Gain (loss) on fair value hedges:

 

 

  

 

  

Interest rate swap on securities

616

Six Months Ended June 30, 2022

Interest and Dividend Income

Interest Expense

(in thousands)

    

Loans

Securities and other

    

Deposits

Borrowings

    

Non-interest Income

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

 

$

47,252

$

8,033

$

2,384

$

2,084

$

18,270

 

  

 

  

 

  

The effects of cash flow and fair value hedging:

 

  

 

  

 

  

Gain (loss) on cash flow hedges:

Interest rate swap on wholesale funding

(141)

Interest rate swap on variable rate loans

 

(1)

 

 

 

  

 

  

 

  

Gain (loss) on fair value hedges:

 

 

  

 

  

Interest rate swap on securities

(203)

41

Table of Contents

The effect of derivatives not designated as hedging instruments on the consolidated statements of income for the three  and six months ended June 30, 2023March 31, 2024 and 2022:2023:

Location of Gain (Loss) Recognized

Three Months Ended June 30,

Six Months Ended June 30,

Location of Gain (Loss) Recognized

Three Months Ended March 31,

(In thousands)

in Non-interest Income

2023

2022

2023

2022

in Non-interest Income

2024

2023

Derivatives not designated as hedging instruments

Economic hedges:

Forward commitments

Mortgage banking income

$

49

$

(213)

$

49

$

(26)

Mortgage banking income

$

4

$

-

Non-hedging derivatives:

Interest rate lock commitments

Mortgage banking income

(111)

55

(103)

(233)

Mortgage banking income

(7)

8

Cash flow hedges

Interest rate swaps on wholesale funding

As of June 30, 2023,March 31, 2024, we have two interest rate swaps on wholesale borrowings to limit our exposure to rising interest rates over a five-year term on 3-month FHLB borrowings or brokered certificates, or a combination thereof at each maturity date.  The first of the two agreements 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 into in April 2020 with a $25.0 million notional amount and pays a fixed rate of 0.59%. The financial institution counterparty pays us interest on the three-month LIBOR rate.daily SOFR rate plus 26 basis points. We designated the swaps as cash flow hedges.

Interest rate swap on variable rate loans

We have an interest rate swap that effectively fixes our interest rate on $50 million at the daily SOFR rate plus 11 basis points of 1 month USD-LIBOR-BBA (or LIBOR less two days) based loan assets at 0.806% plus the credit spread on the loans that reprices on weighted average basis. The instrument is specifically designed to hedge the risk of changes in its cash flows from interest receipts attributable to changes in a contractually specified interest rate, on an amount of our variable rate loan assets equal to $50 million. We designated the swap as a cash flow hedge.

Fair value hedges

Interest rate swap on securities

For derivative instruments that are designated and qualify as a fair value hedge, the gain or loss on the derivative instrument as well as the offsetting loss or gain on the hedged asset or liability attributable to the hedged risk are recognized in current earnings. We utilize interest rate swaps designated as fair value hedges to mitigate the effect of changing interest rates on the fair values of fixed rate callable securities available-for-sale. The hedging strategy on securities converts the fixed interest rates to LIBOR-basedSOFR based variable interest rates. These derivatives are designated as partial term hedges of selected cash flows covering specified periods of time prior to the call dates of the hedged securities. During 2019, we entered into eight 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 2.19%1.70%.

Economic hedges

Forward sale commitments

We utilize forward sale commitments on residential mortgage loans to hedge interest rate risk and the associated effects on the fair value of interest rate lock commitments and loans originated for sale. The forward sale commitments are accounted for as derivatives. We typically use a combination of best efforts and mandatory delivery contracts. The contracts are loan sale agreements where we commit to deliver a certain principal amount of mortgage loans to an investor at a specified price on or before a specified date. Generally, we enter into contracts just prior to the loan closing with a customer.

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Customer loan derivatives

We enter into customer loan derivatives to facilitate the risk management strategies for commercial banking customers. We mitigate this risk by entering into equal and offsetting loan swap agreements with highly rated third-party financial institutions. The loan swap agreements are free standing derivatives and are recorded at fair value in our consolidated balance sheet. We are party to MNAs with our financial institutional counterparties; however, we do not offset assets and liabilities under these arrangements for financial statement presentation purposes.

The MNAs 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.

Gross Amounts Offset in the Consolidated Balance Sheet

Derivative

Cash Collateral

(in thousands)

    

 Liabilities

    

Derivative Assets

    

 Pledged

    

Net Amount

As of June 30, 2023

  

  

  

  

Customer Loan Derivatives:

 

  

 

  

 

  

 

  

MNA counterparty

$

(19,837)

$

19,837

$

$

RPA counterparty

 

 

 

 

Total

$

(19,837)

$

19,837

$

$

The below tables describe the potential effect of master netting arrangements on the consolidated balance sheet and the financial collateral pledged for these arrangements:

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, 2022

  

  

  

  

As of March 31, 2024

  

  

  

  

Customer Loan Derivatives:

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

MNA counterparty

$

(20,287)

$

20,287

$

$

$

(17,037)

$

17,037

$

$

RPA counterparty

 

 

 

 

 

 

 

 

Total

$

(20,287)

$

20,287

$

$

$

(17,037)

$

17,037

$

$

Gross Amounts Offset in the Consolidated Balance Sheet

Derivative

Cash Collateral

(in thousands)

    

 Liabilities

    

Derivative Assets

    

 Pledged

    

Net Amount

As of December 31, 2023

  

  

  

  

Customer Loan Derivatives:

 

  

 

  

 

  

 

  

MNA counterparty

$

(14,842)

$

14,842

$

$

RPA counterparty

 

(286)

 

286

 

 

Total

$

(15,128)

$

15,128

$

$

Non-hedging derivatives

Interest rate lock commitments

We enter into interest rate lock commitments (“IRLCs”) for residential mortgage loans, which commit us to lend funds to a potential borrower at a specific interest rate and within a specified period of time. IRLCs relate to the origination of residential mortgage loans that are held for sale and are considered derivative financial instruments under applicable accounting guidance. Outstanding IRLCs expose 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 our Consolidated Statements of Income. Changes in the fair value of IRLCs subsequent to inception are based on (i) changes in the fair value of the underlying loan resulting from the fulfillment of the commitment and (ii) changes in the probability when the loan will fund within the terms of the commitment, which is affected primarily by changes in interest rates and the passage of time.

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NOTE 9.           FAIR VALUE MEASUREMENTS

Recurring Fair Value Measurements

The following table summarizes financial assets and financial liabilities measured at fair value on a recurring basis as of June 30, 2023March 31, 2024 and December 31, 2022,2023, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value:

June 30, 2023

March 31, 2024

    

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:

  

  

  

  

  

  

Obligations of US Government-sponsored enterprises

$

$

1,687

$

$

1,687

Mortgage-backed securities:

 

  

 

  

 

  

 

  

 

  

 

 

  

 

  

US Government-sponsored enterprises

$

$

203,760

$

$

203,760

185,824

185,824

US Government agency

 

 

77,023

 

 

77,023

 

 

76,182

 

 

76,182

Private label

 

 

58,857

 

 

58,857

 

 

59,032

 

 

59,032

Obligations of states and political subdivisions thereof

 

 

108,340

 

 

108,340

 

 

108,106

 

 

108,106

Corporate bonds

 

 

90,198

 

 

90,198

 

 

96,772

 

 

96,772

Loans held for sale

3,669

3,669

3,137

3,137

Derivative assets

 

 

29,219

 

36

 

29,255

 

 

23,805

 

56

 

23,861

Derivative liabilities

 

 

(24,604)

 

 

(24,604)

 

 

(20,641)

 

(16)

 

(20,657)

December 31, 2022

December 31, 2023

    

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:

  

  

  

  

  

  

  

  

Obligations of US Government-sponsored enterprises

$

$

1,992

$

$

1,992

Mortgage-backed securities:

 

  

 

  

 

  

 

  

 

  

 

 

  

 

  

US Government-sponsored enterprises

$

$

215,027

$

$

215,027

193,282

193,282

US Government agency

 

 

82,266

 

 

82,266

 

 

74,213

 

 

74,213

Private label

 

 

60,154

 

 

60,154

 

 

59,051

 

 

59,051

Obligations of states and political subdivisions thereof

 

 

107,737

 

 

107,737

 

 

110,168

 

 

110,168

Corporate bonds

 

 

94,332

 

 

94,332

 

 

95,868

 

 

95,868

Loans held for sale

2,189

2,189

Derivative assets

 

 

30,039

 

 

30,039

 

 

21,775

 

63

 

21,838

Derivative liabilities

 

 

(25,228)

 

 

(25,228)

 

 

(18,587)

 

(20)

 

(18,607)

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, 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 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 Hedges. The valuation of 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 cash flow hedges are all classified as Level 2 measurements.

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Table of Contents

Interest Rate Lock Commitments. We enter into IRLCs for residential mortgage loans, which commit us to lend funds to potential 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 internal data and is adjusted using significant management judgment. As such, IRLCs are classified as Level 3 measurements.

Forward Sale Commitments. 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 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 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. We incorporate credit valuation adjustments to appropriately reflect our nonperformance risk and the respective counterparty’s nonperformance risk in the fair value measurements. In adjusting the fair value of the derivative contracts for the effect of nonperformance risk, we have considered the impact of MNAs and any applicable credit enhancements, such as collateral postings.

Although we have determined that the majority of the inputs used to value customer loan derivatives fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with derivatives utilize Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default by itself and counterparties. However, as of June 30, 2023,March 31, 2024, we assessed the significance of the impact of the credit valuation adjustments on the overall valuation of our derivative positions and determined that the credit valuation adjustments are not significant to the overall valuation of our derivatives. As a result, we determined that the derivative valuations in their entirety are classified in Level 2 of the fair value hierarchy.

The table below presents the changes in Level 3 assets and liabilities that were measured at fair value on a recurring basis for the three months ended March 31, 2024 and 2023:

Assets (Liabilities)

Interest Rate Lock

Forward

(in thousands)

    

Commitments

    

Commitments

Three Months Ended March 31, 2024

 

  

 

  

Balance at beginning of period

$

63

$

(20)

Realized gain recognized in non-interest income

 

(7)

 

4

Balance at end of period

$

56

$

(16)

Three Months Ended March 31, 2023

 

  

 

  

Balance at beginning of period

$

$

Realized loss recognized in non-interest income

 

8

 

Balance at end of period

$

8

$

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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 six months ended June 30, 2023 and 2022:

Assets (Liabilities)

Interest Rate Lock

Forward

(in thousands)

    

Commitments

    

Commitments

Three Months Ended June 30, 2023

  

  

Balance at beginning of period

$

8

$

Realized gain recognized in non-interest income

 

28

 

49

Balance at end of period

$

36

$

49

Three Months Ended June 30, 2022

  

  

Balance at beginning of period

$

(5)

$

15

Realized gain (loss) recognized in non-interest income

 

55

 

(26)

Balance at end of period

$

50

$

(11)

Six Months Ended June 30, 2023

 

  

 

  

Balance at beginning of period

$

$

Realized gain recognized in non-interest income

 

36

 

49

Balance at end of period

$

36

$

49

Six Months Ended June 30, 2022

 

  

 

  

Balance at beginning of period

$

283

$

15

Realized loss recognized in non-interest income

 

(233)

 

(26)

Balance at end of period

$

50

$

(11)

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

Fair Value

Fair Value

(in thousands,

June 30, 

Valuation 

Unobservable 

Unobservable

March 31, 

Valuation 

Unobservable 

Unobservable

except ratios)

    

2023

    

Techniques

    

Inputs

    

Input Value

 

    

2024

    

Techniques

    

Inputs

    

Input Value

 

Assets (Liabilities)

  

  

  

  

 

  

  

  

  

 

Interest Rate Lock Commitment

 

$

36

Pull-through Rate Analysis

 

Closing Ratio

 

76

%

 

$

56

Pull-through Rate Analysis

 

Closing Ratio

 

95

%

 

Pricing Model

Origination Costs, per loan

$

1.7

 

Pricing Model

Origination Costs, per loan

$

1.7

Discount Cash Flows

Mortgage Servicing Asset

1.0

%

Discount Cash Flows

Mortgage Servicing Asset

1.0

%

 

 

Forward Commitments

 

49

Quoted prices for similar loans in active markets

 

Freddie Mac pricing system

 

$97.2 to $101.4

 

(16)

Quoted prices for similar loans in active markets

 

Freddie Mac pricing system

 

$99.3 to $102.8

Total

$

85

$

40

    

Fair Value

    

    

Significant

 

    

Fair Value

    

    

Significant

 

December 31,

Valuation

Unobservable

Unobservable

December 31,

Valuation

Unobservable

Unobservable

(in thousands, except ratios)

    

 2022

Techniques

    

Inputs

    

Input Value

    

 2023

Techniques

    

Inputs

    

Input Value

Assets (Liabilities)

  

  

  

  

 

  

  

  

  

 

Interest Rate Lock Commitment

 

$

283

Pull-through Rate Analysis

 

Closing Ratio

 

85

%

 

$

63

Pull-through Rate Analysis

 

Closing Ratio

 

95

%

 

Pricing Model

Origination Costs, per loan

$

1.7

 

Pricing Model

Origination Costs, per loan

$

1.7

Discount Cash Flows

Mortgage Servicing Asset

1.0

%

Discount Cash Flows

Mortgage Servicing Asset

1.0

%

 

 

Forward Commitments

 

15

Quoted prices for similar loans in active markets

 

Freddie Mac pricing system

 

$99.8 to $103.2

 

(20)

Quoted prices for similar loans in active markets

 

Freddie Mac pricing system

 

$100.9 to $103.3

Total

$

298

$

43

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Non-Recurring Fair Value Measurements

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:

Fair Value

Fair Value

Three Months Ended

Six Months Ended

 Measurement Date as of 

 Measurement Date as of 

Jun 30, 2023

Dec 31, 2022

June 30, 2023

June 30, 2023

June 30, 2023

Mar 31, 2024

Dec 31, 2023

March 31, 2024

March 31, 2024

Level 3

Level 3

Total

Total

Level 3

Level 3

Level 3

Total

Level 3

(in thousands)

    

Inputs

    

Inputs

    

Gains (Losses)

    

Gains (Losses)

    

Inputs

    

Inputs

    

Inputs

    

Gains (Losses)

    

Inputs

Assets

  

  

  

  

  

  

  

  

  

Individually evaluated loans

$

13,095

$

16,477

$

(2,418)

$

(3,382)

June 2023

$

2,911

$

3,500

$

(589)

March 2024

Capitalized servicing rights

 

6,761

6,845

 

191

 

(84)

 

June 2023

 

6,991

6,764

 

227

 

March 2024

Premises held for sale

 

252

252

 

 

 

June 2023

 

1,154

1,154

 

 

March 2024

Total

$

20,108

$

23,574

$

(2,227)

$

(3,466)

 

  

$

11,056

$

11,418

$

(362)

 

  

There are no liabilities measured at fair value on a non-recurring basis in 20232024 and 2022.2023.

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

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(in thousands, except ratios)

    

Fair Value June 30, 2023

    

Valuation Techniques

    

Unobservable Inputs

    

Range (Weighted Average)(a)

 

Assets

 

  

 

  

 

  

  

Individually evaluated loans

$

10,220

 

Fair value of collateral-appraised value

 

Loss severity

10% to 53%

 

Appraised value

$80 to $2,941

Individually evaluated loans

 

2,875

 

Discount cash flow

 

Discount rate

 

3.38% to 6.24%

 

Cash flows

$3 to $703

Capitalized servicing rights

 

6,761

 

Discounted cash flow

 

Constant prepayment rate

 

7.03%

 

  

 

  

 

Discount rate

 

9.55%

Premises held for sale

 

252

 

Fair value of asset less selling costs

 

Appraised value

$267

 

 

  

 

Selling Costs

 

6%

Total

$

20,108

 

  

 

  

 

  

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

(in thousands, except ratios)

    

Fair Value March 31, 2024

    

Valuation Techniques

    

Unobservable Inputs

    

Range (Weighted Average)(a)

 

Assets

 

  

 

  

 

  

  

Individually evaluated loans

$

2,254

 

Fair value of collateral-appraised value

 

Loss severity

0% to 40%

 

Appraised value

$215 to $916

Individually evaluated loans

 

657

 

Discount cash flow

 

Discount rate

 

3.25% to 4.99%

 

Cash flows

$320 to $513

Capitalized servicing rights

 

6,991

 

Discounted cash flow

 

Constant prepayment rate

 

6.87%

 

 

  

 

Discount rate

 

10.06%

Premises held for sale

 

1,154

 

Fair value of asset less selling costs

 

Appraised value

$1,223

 

 

  

 

Selling Costs

 

6%

Total

$

11,056

 

  

 

  

 

  

(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.

(in thousands, except ratios)

    

Fair Value December 31, 2022

    

Valuation Techniques

    

Unobservable Inputs

    

Range (Weighted Average)(a)

    

Fair Value December 31, 2023

    

Valuation Techniques

    

Unobservable Inputs

    

Range (Weighted Average)(a)

Assets

 

  

 

  

 

  

  

Individually evaluated loans

$

13,587

 

Fair value of collateral-appraised value

 

Loss severity

1% to 40%

$

2,437

 

Fair value of collateral-appraised value

 

Loss severity

10% to 43%

 

Appraised value

$80 to $3,859

 

Appraised value

$80 to $965

Individually evaluated loans

 

2,890

 

Discount cash flow

 

Discount rate

 

3.63% to 6.38%

 

1,063

 

Discount cash flow

 

Discount rate

 

3.25% to 7.13%

 

Cash flows

$100 to $539

 

Cash flows

$2 to $520

Capitalized servicing rights

 

6,845

 

Discounted cash flow

 

Constant prepayment rate

 

7.29%

 

6,764

 

Discounted cash flow

 

Constant prepayment rate

 

7.20%

  

 

  

 

Discount rate

 

9.54%

 

 

  

 

Discount rate

 

10.06%

Premises held for sale

 

252

 

Fair value of asset less selling costs

 

Appraised value

$267

 

1,154

 

Fair value of asset less selling costs

 

Appraised value

$1,223

 

  

 

Selling Costs

 

6%

 

 

  

 

Selling Costs

 

6%

Total

$

23,574

$

11,418

 

  

 

  

 

  

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

There were no Level 1 or Level 2 non-recurring fair value measurements for the periods ended June 30, 2023March 31, 2024 and December 31, 2022.2023.

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Individually evaluated loans. Loans are generally not recorded at fair value on a recurring basis. Periodically, 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 ACL. Such amounts are generally based on the fair value of the underlying collateral supporting the loan and, as a result, the carrying value of the loan less the calculated valuation amount does not necessarily represent the fair value of the loan. Real estate collateral is typically valued using appraisals or other indications of value based on recent comparable sales of similar properties or assumptions generally observable in the marketplace. However, the choice of observable data is subject to significant judgment, and there are often adjustments based on judgment in order to make observable data comparable and to consider the impact of time, the condition of properties, interest rates, and other market factors on current values. Additionally, commercial real estate appraisals frequently involve discounting of projected cash flows, which relies inherently on unobservable data. Therefore, non-recurring fair value measurement adjustments relating to real estate collateral have generally been classified as Level 3. Estimates of fair value for other collateral supporting commercial loans are generally based on assumptions not observable in the marketplace and therefore such valuations have been classified as Level 3.

Capitalized loan servicing rights. A loan servicing right asset represents the amount by which the present value of the estimated future net cash flows to be received from servicing loans exceed adequate compensation for performing the servicing. The fair value of loan servicing rights is estimated using a present value cash flow model. The most important assumptions used in the valuation model are the anticipated rate of the loan prepayments and discount rates. Adjustments are only recorded when the discounted cash flows derived from the valuation model are less than the carrying value of the asset. Although some assumptions in determining fair value are based on standards used by market participants, some are based on unobservable inputs and therefore are classified in Level 3 of the valuation hierarchy.

Other real estate owned (“OREO”). OREO results from the foreclosure process on residential or commercial loans issued by the Company. Upon assuming the real estate, 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. There was no OREO as of June 30, 2023March 31, 2024 and December 31, 2022.2023.

Premises held for sale. Assets held for sale, identified as part of our strategic review and branch optimization exercise, were transferred from premises and equipment at the lower of amortized cost or fair value less the estimated sales costs. Assets held for sale fair values are primarily determined based on Level 3 data including sales comparables and appraisals.

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Summary of Estimated Fair Values of Financial Instruments

The estimated fair values, and related carrying amounts, of our financial instruments are included in the table below. Certain financial instruments and all non-financial instruments are excluded from disclosure requirements. Accordingly, the aggregate fair value amounts presented herein may not necessarily represent the underlying fair value of the Company.

June 30, 2023

March 31, 2024

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

$

123,785

$

123,785

$

123,785

$

$

$

76,219

$

76,219

$

76,219

$

$

Securities available for sale

 

538,178

 

538,178

 

 

538,178

 

 

527,603

 

527,603

 

 

527,603

 

FHLB stock

 

17,784

 

17,784

 

 

17,784

 

 

9,960

 

9,960

 

 

9,960

 

Loans held for sale

3,669

3,669

3,669

3,137

3,137

3,137

Net loans

 

3,007,480

 

2,861,936

 

 

 

2,861,936

 

2,983,317

 

2,844,033

 

 

 

2,844,033

Accrued interest receivable

 

4,623

 

4,623

 

 

4,623

 

 

5,317

 

5,317

 

 

5,317

 

Cash surrender value of bank-owned life insurance policies

 

78,967

 

78,967

 

 

78,967

 

 

80,642

 

80,642

 

 

80,642

 

Derivative assets

 

29,255

 

29,255

 

 

29,219

 

36

 

23,861

 

23,861

 

 

23,805

 

56

Financial Liabilities

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

Non-maturity deposits

$

2,454,686

$

2,188,295

$

$

2,188,295

$

$

2,349,868

$

2,177,428

$

$

2,177,428

$

Time deposits

635,559

624,656

624,656

777,208

769,302

769,302

Securities sold under agreements to repurchase

11,889

11,889

11,889

8,161

8,161

8,161

FRB advances

65,000

65,000

65,000

FHLB advances

 

387,083

 

386,800

 

 

386,800

 

 

196,276

 

196,159

 

 

196,159

 

Subordinated borrowings

 

60,371

 

67,671

 

 

67,671

 

 

60,501

 

67,691

 

 

67,691

 

Derivative liabilities

 

24,604

 

24,604

 

 

24,604

 

 

20,657

 

20,657

 

 

20,641

 

16

December 31, 2022

December 31, 2023

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

$

92,295

$

92,295

$

92,295

$

$

$

94,842

$

94,842

$

94,842

$

$

Securities available for sale

 

559,516

 

559,516

 

 

559,516

 

 

534,574

 

534,574

 

 

534,574

 

FHLB stock

 

14,893

 

14,893

 

 

14,893

 

 

14,834

 

14,834

 

 

14,834

 

Loans held for sale

2,189

2,189

2,189

Net loans

 

2,902,690

 

2,774,863

 

 

 

2,774,863

 

2,970,907

 

2,832,173

 

 

 

2,832,173

Accrued interest receivable

 

4,257

 

4,257

 

 

4,257

 

 

4,921

 

4,921

 

 

4,921

 

Cash surrender value of bank-owned life insurance policies

 

81,197

 

81,197

 

 

81,197

 

 

80,037

 

80,037

 

 

80,037

 

Derivative assets

 

30,039

 

30,039

 

 

30,039

 

 

21,838

 

21,838

 

 

21,775

 

63

Financial Liabilities

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

Non-maturity deposits

$

2,719,992

$

2,309,555

$

$

2,309,555

$

$

2,482,012

$

2,325,307

$

$

2,325,307

$

Time deposits

323,439

315,180

315,180

658,482

651,855

651,855

Securities sold under agreements to repurchase

13,369

13,369

13,369

8,465

8,465

8,465

FRB advances

30,000

30,000

30,000

FHLB advances

 

320,588

 

320,244

 

 

320,244

 

 

232,579

 

232,375

 

 

232,375

 

Subordinated borrowings

 

60,289

 

66,846

 

 

66,846

 

 

60,422

 

67,635

 

 

67,635

 

Derivative liabilities

 

25,228

 

25,228

 

 

25,228

 

 

15,607

 

15,607

 

 

15,587

 

20

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NOTE 10.           REVENUE FROM CONTRACTS WITH CUSTOMERS

We account for our various non-interest revenue streams and related contracts in accordance with “Revenue from Contracts with Customers” (“ASC 606”). ASC 606 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 interest income on loans and investment securities, in addition to loan derivative income and gains on loan and investment sales.

Disaggregation of Revenue

The following presents non-interest income, segregated by revenue streams in-scope and out-of-scope of Topic 606:

Three Months Ended June 30, 

Six Months Ended June 30, 

Three Months Ended March 31, 

(in thousands)

    

2023

    

2022

    

2023

    

2022

    

2024

    

2023

Non-interest income within the scope of ASC 606:

 

  

 

  

 

  

 

  

 

  

 

  

Trust management fees

$

3,498

$

3,462

$

6,589

$

6,865

$

3,243

$

3,091

Financial services fees

 

307

 

367

 

771

 

718

 

427

 

464

Interchange fees

 

1,928

 

1,921

 

3,938

 

3,895

 

1,970

 

2,010

Customer deposit fees

 

1,590

 

1,470

 

3,019

 

2,841

 

1,502

 

1,429

Other customer service fees

 

256

 

265

 

494

 

536

 

238

 

238

Total non-interest income within the scope of ASC 606

7,579

7,485

14,811

14,855

7,380

7,232

Total non-interest income not within the scope of ASC 606

1,401

1,476

3,353

3,415

1,206

1,952

Total non-interest income

$

8,980

$

8,961

$

18,164

$

18,270

$

8,586

$

9,184

Three Months Ended June 30, 

Six Months Ended June 30, 

Three Months Ended March 31, 

(in thousands)

    

2023

    

2022

    

2023

    

2022

    

2024

    

2023

Timing of Revenue Recognition

 

  

 

  

 

  

 

  

 

  

 

  

Products and services transferred at a point in time

$

3,848

$

3,978

$

7,797

$

7,735

$

3,926

$

3,950

Products and services transferred over time

 

3,731

 

3,507

 

7,014

 

7,120

 

3,454

 

3,282

Total

$

7,579

$

7,485

$

14,811

$

14,855

$

7,380

$

7,232

Trust Management Fees

The trust management business generates revenue through a range of fiduciary services including trust and estate administration, financial advice, and investment management to individuals, businesses, not-for-profit organizations, and municipalities. These fees are primarily earned over time as we charge our customers on a monthly or quarterly basis in accordance with investment advisory agreements.  Fees are generally 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,Osaic Institutions, Inc., (“Osaic”) a full-service third-party broker-dealer, conducting business under the assumed business name “Bar Harbor Financial Services.” Osaic is an independent registered broker dealer offering securitiesbroker-dealer and insurance productsis not affiliated with the Company or its subsidiaries. We have a revenue sharing agreement with InfinexOsaic 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

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

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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.

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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 at a point in time upon the completion of the service.

Other Customer Service Fees

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. We also earn a percentage of the fees generated from third-party credit card plans promoted through the Bank. Revenue from these incentive and referral fee arrangements are recognized over time using the right to invoice measure of progress.

Contract Balances from Contracts with Customers

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

    

    

    

    

(in thousands)

June 30, 2023

December 31, 2022

March 31, 2024

December 31, 2023

Balances from contracts with customers only:

 

  

 

  

 

  

 

  

Other Assets

$

1,061

$

1,211

$

1,107

$

1,178

Other Liabilities

 

2,109

 

2,345

 

1,720

 

1,769

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, 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

We currently expense contract costs for processing and administrative fees for debit card transactions. We also expense custody fees and transactional costs associated with securities transactions as well as third-party tax preparation fees. We have elected the practical expedient in ASC 340-40-25-4, whereby we recognize the incremental costs of obtaining contracts as an expense when incurred if the amortization period of the assets we otherwise would have recognized is one year or less.

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

The following is management’s discussion and analysis of the major factors that influenced our results of operations and financial condition as of and for the three and six months ended June 30, 2023March 31, 2024 and should be read in conjunction with our unaudited consolidated financial statements and condensed notes thereto included elsewhere in this Form 10-Q as well as our audited consolidated financial statements and notes thereto included in our Form 10-K. 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. Factors that could cause such differences are discussed in the sections titled "Cautionary Statement Regarding Forward-Looking Statements" and "Part II, Item 1A. Risk Factors" in this Form 10-Q. All amounts, dollars and percentages presented in this Form 10-Q are rounded and therefore approximate.

GENERAL

The Company is a bank holding company headquartered in Maine, providing a broad array of banking and nonbanking products and services to businesses and consumers primarily within our three-state footprint. The Company's primary sources of revenue, through the Bank, are net interest income (predominantly from loans and investment securities) and noninterest income (principally fees and other revenue from financial services provided to customers or ancillary services tied to loans and deposits).

NON-GAAP FINANCIAL MEASURES

Our accounting and reporting policies conform to GAAP and the prevailing practices in the financial services industry. However, we also evaluate our performance by reference to certain additional financial measures discussed in this Form 10-Q that we identify as being “non-GAAP financial measures.” In accordance with SEC rules, we classify a financial measure as being a non-GAAP financial measure if that financial measure excludes or includes amounts, or is subject to adjustments that have the effect of excluding or including amounts, that are included or excluded, as the case may be, in the most directly comparable measure calculated and presented in accordance with GAAP as in effect from time to time in the United States in our statements of income, balance sheets or statements of cash flows. Non-GAAP financial measures do not include operating and other statistical measures or ratios or statistical measures calculated using exclusively either financial measures calculated in accordance with GAAP, operating measures or other measures that are not non-GAAP financial measures or both.

The non-GAAP financial measures that we discuss in this Form 10-Q should not be considered in isolation or as a substitute for the most directly comparable or other financial measures calculated in accordance with GAAP. Moreover, the manner in which we calculate the non-GAAP financial measures that we discuss in this Form 10-Q may differ from that of other companies reporting measures with similar names. You should understand how such other banking organizations calculate their financial measures similar or with names similar to the non-GAAP financial measures we have discussed in this Form 10-Q when comparing such non-GAAP financial measures.

Recent Banking Crisis

In light of recent events in the last year or so in the banking sector, including recent bank failures, continuingelevated interest rate hikesrates and possible recessionary concerns, we intend to continue to position our balance sheet to mitigate the risks affecting the Company and the overall banking industry in order to serve our clients and communities.

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Liquidity remains strong, with cash and available for sale securities representing approximately 17%15.5% of our total assets at June 30, 2023.March 31, 2024. We maintain the ability to access considerable sources of contingent liquidity at the FHLB and the FRB. We consider the Company's current liquidity position to be adequate to meet both short-term and long-term liquidity needs. Refer to “Liquidity and Cash Flows” for additional information.

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Capital remains strong, with capital ratios of both the Company and the Bank remaining well-capitalized under regulatory guidelines at period end as further described in Note 6 – “Capital Ratios and Shareholders’ Equity” to our unaudited consolidated financial statements.

Asset quality remains solid, with a non-performing asset ratioto total assets of 0.17% of our total assets as of June 30, 2023March 31, 2024 and net charge-offs of near zero,$76 thousand, reflecting our disciplined underwriting and conservative lending philosophy which has supported the Company's strong credit performance during prior financial crises.

We will continue our safe and sound banking practices, but the continuing impact of the banking crisis and further extent on the Company's operations and financial results for the remainder of 20232024 is uncertain and cannot be predicted.

QUARTERLY PERFORMANCE SUMMARY

Earnings (secondfirst quarter  of 2023,2024, compared to the same period of 2022)2023)

Net income was $10.8$10.1 million, compared to $10.5$13.0 million.  Diluted earnings per share was $0.71,$0.66, compared to $0.70.$0.86.  The increase isdecrease was primarily due to an increasedriven by a higher cost of funds offset by rising asset yields in net interest income, flat non-interest income, offset in part by an increase in non-interest expense.  the first quarter 2024.

Return on assets was 1.10%1.03% versus 1.14%,1.36% and return on equity was 10.49%9.31% compared to 10.58%12.96%. BothThe decrease in both ratios include the benefit ofreflect higher respective average asset and equity balances and slightly lower net income seedriven by increased cost of funds. See the “Financial Position” section for further discussion of changes in assets and equity.discussion.  

Net interest income was $28.8$28.1 million an increase of 9%.  Netcompared to $30.9 million and net interest margin (“NIM”) was 3.22%3.14%, versus 3.19%3.54%. The increasedecrease was primarily driven by loan growth and the repricinghigher cost of funds offset in part by yield expansion on a majority of our variable rate loans to the most recent Federal Reserve hikes while managing deposit costs at a relationship level.  Since the Federal Reserve started the cycle of interest rate hikes, our accumulated deposit beta stands at 22% at quarter-end.earnings assets.  

The provision for credit losses was an expense of $750$289 thousand compared with $534 thousand.  The increase is largely driven by a combination$798 million. Our credit trends continue to remain strong.  Non-performing assets remain at 17 basis points of loan growth and general macroeconomic trends.total assets while net charge-offs to average loans remain near zero. 

Our quarterly credit trends remained strong as we saw a favorable reduction to nonaccrual loans across all products and improvements in delinquencies.

Non-interest income was $9.0$8.6 million flat withcompared to $9.2 million in the prior year quarter.  Increases in customer service same quarter 2023 primarily driven by elevated bank-owned life insurance (“BOLI”) income during the current quarter was offset by lower mortgage income and customer derivative income, while trust and investment management fee income.of $622 thousand related to one-time death benefits.

Non-interest expense was $23.4$23.7 million versus $21.7 million.  The increase is primarily duein the first quarter 2024 compared to higher salaries$22.7 million in the first quarter 2023 driven by salary and employee benefit expenses along with higher revaluations of stock compensationbenefits, marketing and supplemental post retirement plan obligations.other expenses.

Efficiency ratio was to 60.25%62.91% compared to 59.25%54.72% reflecting higherlower net interest income offset by the increase in non-interest expense.income.

Financial Position (June 30, 2023,March 31, 2024, compared to MarchDecember 31, 2023)

Total assets increased to a Company record ofwere $4.0 billion up from $3.9 billion mainlyat the end of both the first quarter 2024 and the fourth quarter 2023, primarily due to loan growth.growth offset by lower cash and security balances during the first quarter 2024.

CashTotal cash and cash equivalents increasedwere $76.2 million, compared to $123.8$94.8 million from $82.7at year-end 2023. Interest-earning cash held with other banks totaled $45.3 million principally duecompared to an increase in wholesale borrowings.  $52.6 million at year-end 2023.

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Securities were $556.0decreased to $527.6 million or 14% of total assets, compared to $572.8$534.6 million or 15% of total assets. Net unrealized losses increased to $71.9 million from $65.8 million as prevailing market rates for similar durationat year-end 2023 driven primarily by amortizing securities increased during the current quarter.  pay-downs offset by security purchases.

Total loans grew 9%, led by commercial loans, which increased 12%.  We continue to be selective in commercial loan growth with proven business partnerswere $3.0 billion at the end of both the first quarter 2024 and lending limits, representing a mix of real estate loans, commercial and industrial loans, and lines of credit.fourth quarter 2023.  

The ratio of the ACL to total loans was 0.91% compared with 0.90%.0.94% for both periods.  Net charge-offs continue to be insignificant.

Total deposits increased by $36 million to $3.1 billion.  Time deposits increased $231.3 million, including $134.5 million of brokered accounts, while non-maturity deposit balances decreased $194.9 million.  insignificant and near zero.

Borrowings were $459.3 million compared to $398.6 million as wholesale funds were primarily used to grow loans duringTotal deposits remained at $3.1 billion at the quarter.end of the first quarter 2024 and the end of the fourth quarter 2023.

TotalSenior borrowings remained relatively flat at $269.4 million in the first quarter 2024 compared to $271.0 million at the end of the fourth quarter of 2023.

The Company's book value per share was $27.12$28.64 as of March 31, 2024 compared to $27.00.  Net income during the second quarter 2023 increased our$28.48 as of December 31, 2023.  Unrealized losses on securities, net of taxes, reduced book value per share by $0.71, which was offset by a cash dividend$3.26 and $3.14 at the end of $0.28those respective periods.  Tangible book value per share paid(non-GAAP measure) was $20.48 at the end of the first quarter 2024, compared to shareholders and $0.31 per share due to$20.28 at the increase in unrealized losses on our securities portfolio.end of the fourth quarter 2023.  

We are honored and proud to be recognized by Forbes as one of the “World’s Best Banks” again for the second consecutive year in the first quarter of 2023,2024, based largely on service and trust metrics. Of the 75 U.S.-basedUS-based banks to make the list, Bar Harbor Bank & Trust is one of only three banks headquartered in Northern New England. We believe that this recognition is a reflection of our customers’ experience with us and their trust in Bar Harbor Bank & Trust.

In May 2023, our Board of Directors authorized a stock repurchase plan for up to 5% of our outstanding shares of common stock, which represents approximately 756,000 shares. No repurchases were made in the second quarter 2023, but we will continue examine buying opportunities considering market conditions, including interest rate volatility and potential loan and risk-weighted asset growth.

COMPARISON OF FINANCIAL CONDITION AT JUNE 30, 2023MARCH 31, 2024 AND DECEMBER 31, 20222023

Cash and cash equivalents

Total cash and cash equivalents were $123.8$76.2 million, as of June 30, 2023, compared to $92.3$94.8 million at year-end.year-end 2023. Interest-earning cash held with other banks totaled $77.3$45.3 million compared to $52.4$52.6 million at year-end 20222023 and yielded 5.59%5.88% and 4.00%6.42%, respectively.

Securities

Securities totaled $556.0decreased to $527.6 million at June 30, 2023 and were $574.4compared to $534.6 million at year-end 2022.  Year to date,2023 driven by $485 thousand in net amortization, and $7.8 million of amortizing securities pay-downs offset by security purchases totaled $1.0 million and were offset by $23.6 million of maturities, calls and pay-downs of amortizing securities. There were also $2.9 million of purchases of FHLB stock during the first half of 2023.$4.8 million. Fair value adjustments decreased the security portfolio by $71.9$64.9 million at quarter-end compared to a $71.8$62.4 million at year-end. The year to date weighted average yield of the securities portfolio was 3.68% at June 30, 20234.02% compared to 3.58%3.85% at year-end.year-end primarily due to a run-off of lower coupon fixed-rate securities. As of quarter-end and year-end, our securities portfolio had an average life of nine years with an effective duration of five years.  Allyears and all securities remain classified as available for sale to provide flexibility in loanasset funding and management of our cost of funds.other opportunities as they arise.

Loans

Loans increased $104.8 million to $3.0Total loans grew 2%, on an annualized basis and remained at $3 billion at the end of both the secondfirst quarter 2024 and fourth quarter 2023. The increase wasCommercial loans grew by $35.1 million or 7% annualized primarily driven by commercial loans that grew by $92.0a $22.7 million of which $41.1 million was with new customers primarilyor 6% increase in the finance andcommercial real estate and leasing industries.$12.4 million or 12% increase in commercial and industrial growth. Residential loans grewdecreased by annualized growth rate of 2% as we believe it was more profitable$16.7 million or 8% compared to sell most of higher yielding originationsthe fourth quarter 2023, primarily due to continued lower demand for gains inprevailing mortgage rates and sales into the secondary market.  ConsumerTax exempt loans droppeddecreased by $3.9$4.7 million dueor 31% driven by payoffs within the first quarter 2024.

Allowance for Credit Losses

The ACL remained flat at $28.4 million at the end of the first quarter 2024 compared to run-off$28.1 million at the end of balances associated with the repricingfourth quarter 2023.  Our ACL continues to be driven by a combination of home equity lines ofportfolio loan growth, nominal credit movement and general macroeconomic trends.  Non-accruing loans increased during the first quarter 2024 to the higher interest rate environment.$6.9 million from $5.5

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Allowance for Credit Losses

The ACL was $27.4 million at June 30, 2023 compared to $25.9 million at year-end.  The increase ACL balance is largely due to loan growth during the first half of 2023, however, the ratio of ACL to total loans increased to 0.91% from 0.89% at year-end due to more refined economic forecasting, especially in the national unemployment figures. Non-accruingfourth quarter 2023, but declined on a year-over-year basis. Charge-offs and specific reserves on non-accruing loans were $6.7 million comparedremain nominal, with $6.5 million at year-end primarily due to one lending relationship that is expected to be collected in full. Past due accounts between 30 to 89 days as a percentage of total loans was 0.09% at June 30, 2023 compared to 0.08% at year-end.these non-accruing relationships supported by relatively strong collateral values.  

Deposits and Borrowings

Total deposits increased $46.8 million toremained at $3.1 billion at the end quarter. Demandof the first quarter 2024 and otherthe end of fourth quarter 2023. The $58.4 million decrease in interest bearing demand deposits and the $25.2 million decrease in non-interest bearing demand deposits decreased $73.7in the first quarter 2024 were offset by an increase in time deposits of $76.9 million driven by large institutional outflows mainlyprimarily due to seasonality. While ourremix in higher yielding deposit base does contain some larger institutionalcategories as customers are anticipating rates to decrease and are maximizing their own returns.  Brokered certificate of deposit accounts our community banking model caters(“CDs”) increased by $55 million, and senior borrowings remained relatively flat at $269.4 million in the first quarter 2024 compared to the high volume, lower average balance accounts, which generally are less rate sensitive and less likely to run-off.  Time deposits increased $312.1$271.0 million due to a shift of interest-bearing deposits to higher interest-bearing accounts, and a $187.6 million increase in brokered deposits. Savings deposits decreased $75.7 million evenly throughout the quarter. Our deposit composition at the end of the fourth quarter was 46% commercial customers and 54% consumer customers, compared with 47% and 53%, respectively at year-end.  Our uninsured or otherwise unsecured deposits represents 8% of our total deposits, which ranks us on the low end in risk for the industry, and, specifically, in comparison to others within our footprint.  Total borrowings increased by $65.1 million during the quarter due to support loan growth.2023.

Equity

Total equity was $410.7$435.7 million at June 30, 2023March 31, 2024 compared with $393.4$432.1 million at year-end. Tangible book value per share (non-GAAP) was $18.88$20.48 at June 30, 2023March 31, 2024 compared with $17.78$20.28 at year-end. Equity included net unrealized losses on securities totaling a $55.3Fair value adjustments decreased the security portfolio by $64.9 million loss at June 30, 2023 andquarter-end compared to $62.4 million at year-end 2022.  Excluding unrealized net losses on securities, our tangible book value per share was $22.53 per share at June 30, 2023 compared with $21.44 per share at year-end, which is an annualized increase of 10%.year-end.  

COMPARISON OF OPERATING RESULTS FOR THE THREE AND SIX MONTHS ENDED JUNE 30,MARCH 31, 2024 AND MARCH 31, 2023 AND 2022

Net Income

Net income was $10.1 million, compared to $13.0 million.  Diluted earnings per share was $0.66, compared to $0.86.  The decrease was primarily driven by a higher cost of funds offset by rising asset yields in the first quarter 2024.

Interest and Dividend Income

Total interest and dividend income increased by $5.4 million or 13.4% to $45.8 million compared to $40.4 million in the first quarter 2023 primarily driven by the repricing of adjustable loans and originations of higher fixed rate loans within the commercial portfolio. The yield on commercial real estate loans grew 39 basis points to 5.47% at the end of the first quarter 2024 from 5.08% in the first quarter 2023. Commercial and industrial yield grew 79 basis points to yield 6.68% at the end of the first quarter 2024 compared to 5.89% at the end of the first quarter 2023. Increases in yields were driven by the current rate environment.

Net Interest Income

Net incomeinterest margin was 3.14% compared to 3.54% in the secondfirst quarter 2023 was $10.8 million, or $0.71 per diluted share, versus $10.5 million, or $0.70 per diluted share, in the same quarter of 2022. NIM increased to 3.22% in the second quarter 2023 compared to 3.19% in the same quarter of 2022.2023. The increasedecrease was primarily driven by new loans and yield expansion on existing variable rate loans, which were partially offset by a higher cost of funds.  Interest-bearing cash balances increased NIMfunds offset by 2 basis pointsrising asset yields in the secondfirst quarter 2023 compared to a decrease of 5 basis points in the prior year quarter.2024. The yield on loans expandedgrew 49 basis points to 4.99% at5.31% in the end of the secondfirst quarter 2023,2024, up from 3.71%4.82% in the same quarter of 2022.2023.  Costs of interest-bearing liabilities increased to 1.99%2.48% from 1.39% in the secondfirst quarter 2023 from 0.36% inshowing evolution of the same quarter 2022market pricing amongst interest-bearing demand deposits, money market accounts and time deposits as our costscustomers are seeking out more competitive rates. We continue to drift upwards from subsequent interest rate hikes. We also experiencedexperience a shift in deposit composition from non-maturity deposits to time deposits as some customers continueCDs. Interest expense increased $8.3 million in the first quarter 2024 compared to seek higher returns. In the secondfirst quarter of 2023 driven by the rate environment. Cost of borrowing decreased $944 thousand or 22.5% in the first quarter 2024 compared to the first quarter 2023 we haddriven by a heavier reliance on whole-sale borrowings than$68.8 million reduction in the second quarter 2022, which also has a cost that is almost 200 basis points higher than in the prior year quarter.

For the first six months of 2023, net interest income was $59.7borrowing to $269.4 million compared with $50.8from $338.2 million in the same period of 2022. The comparison of NIM and earning asset yields for the respective six month periods of 2023 and 2022 were 3.39% and 4.70%, and 3.07% and 3.34%.  Interest-bearing cash balances increased NIM by 1 basis point in the first half of 2023 compared to a decrease of 9 basis points in the same period in prior year. The explanations for the improvement in NIM are consistent with those provided in the year-over-year three month comparison above.quarter 2023.

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Provision for Credit Losses

The provision for credit losses was $750$289 thousand compared to $798 thousand in the secondfirst quarter 2023 compared to $534 thousand in the prior year quarter.  For the first half of 2023, provision for credit losses was $1.5 million and $911 thousand in the same period of 2022.  The increase is primarily driven by loan growth and slightly higher provisioning given current market conditions. The ratio ofas net charge-offs to total loans was near zero forcontinue to remain nominal. Credit quality continues to be strong as non-accruing loans to total loans declined 3 basis points to 0.23% at the secondend of the first quarter of 2023 and year-to-date June 30, 2023 as well2024 compared to 0.26% in the same comparative periodsfirst quarter 2023. Total delinquent and non-accruing loans to total loans declined 15 basis points from 0.52% at the end of 2022.  Net charge-offs have been at historic lows for the past five years, which we believe is duefirst quarter 2023 to our underwriting standards.0.37% in the first quarter 2024.

Non-Interest Income

Non-interest income was $9.0$8.6 million in the secondfirst quarter 2023 and 2022. Customer service fees grew2024 compared to $3.8 million in the second quarter 2023 from $3.7$9.2 million in the same quarter 2023 primarily driven by elevated BOLI income of 2022 on a higher number$622 thousand related to one-time death benefits, and customer derivative income

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$132 thousand at the end of the first quarter 2023.  Wealth management income was $3.8grew 3% to $3.7 million compared to $3.6 million in the secondfirst quarter 2023 and 2022 as higher inflows of cash since 2022 were offset by lower security valuations of assets under management in 2023.  Mortgage banking income was $378 thousand in the second quarter of 2023, compared to $488 thousand in the same period of 2022 reflecting fewer sales and increased on balance sheet activity related to higher interest rates.

Non-Interest Expense

Non-interest expense was $23.4$23.7 million in the secondfirst quarter of 20232024 compared to $21.7$22.7 million in the samefirst quarter of 2022 principally due to higher2023 driven by salary and benefit expense.benefits, marketing and other expenses.  Salary and benefit expenseexpenses increased due4% or $477 thousand from the comparative quarter driven by cost of living increases in the first quarter 2024.  Marketing expenses increased to annual salary adjustments that were effective at$567 thousand compared to $409 thousand in the end offirst quarter 2023. Other expenses increased to $4.4 million from $4.1 million in the first quarter of 2023 primarily due to increases in assessments, software expenses, and higher stock compensation and post-retirement expense in 2023 as compared to the prior year quarter.  The increase in stock compensation expense is due the revaluation of our long term incentive obligation based on a smaller changedebit card replacement costs in the Company stock price as compared to the second quarter 2022.  Post-retirement expense also increased because of a smaller revaluation of obligations, which based on changes in the FTSE Above Median Double-A Index, as compared to the secondfirst quarter of 2022.

For the first six months of 2023, non-interest expense was $46.1 million and $43.6 million in the same period of 2022.  The increase in non-interest expense is due to the same reasons as discussed in the quarterly period above.  The Company's year-to-date efficiency ratio was 57.40% in 2023 compared to 60.78% in 2022 which reflects managements’ disciplined approach to expense management as revenue continues to grow.2024.

Income Tax Expense

Income tax expense was $2.8$2.6 million in the secondfirst quarter 20232024 compared with $2.7$3.6 million in the prior year quarter.  The effective tax rate increasedwas 20.3% the first quarter 2024 compared to 20.8% in21.6% the secondfirst quarter 2023, which is flat with 20.7% prior year quarter due to relatively consistent pre-tax income.2023.  

Liquidity and Cash Flows

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

As of June 30, 2023,March 31, 2024, available same-day liquidity totaled approximately $557.0 million,$1.1 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 our amortizing securities and loan portfolios. We

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March 31, 2024, we had unused borrowing capacity at the FHLB of $219.3$426.1 million, unused borrowing capacity at the Federal Reserve of $162.9$90.9 million and unused lines of credit totaling $51.0 million, in addition to $123.8$76.2 million in cash.

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

Capital Resources

Please refer to “Comparison of Financial Condition at June 30, 2023March 31, 2024 and December 31, 20222023 - Equity” for a discussion of shareholders’ equity together with Note 6 “Capital Ratios and Shareholders’ Equity” in the unaudited consolidated financial statements. Additional information about regulatory capital is contained in the notes to the consolidated financial statements and in our most recent Form 10-K.

We expect to continue our current practice of paying quarterly cash dividends with respect to our common stock subject to our Board of Directors’ discretion to modify or terminate this practice at any time and for any reason without prior notice. We believe our quarterly dividend rate per share as approved by our Board of Directors, enables us to balance our multiple objectives of managing our business and returning a portion of our earnings to our shareholders. Historically, and a practice we intend to continue, our principal cash expenditure is the payment of dividends on our common stock, if as and when declared by our Board of Directors. Dividends were paid to our shareholders in the aggregate amount of $8.1 $4.2

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million and $7.5$3.9 million for the sixthree months ended June 30,March 31, 2024 and 2023, and 2022, respectively. All dividends declared and distributed by us will be in compliance with applicable state corporate law and regulatory requirements.

Off-Balance Sheet Arrangements

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 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.

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 such letters of credit 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.

Our off-balance sheet arrangements have not changed materially since previously reported in our Form 10-K.

IMPACT OF NEW ACCOUNTING PRONOUNCEMENTS

Please refer to Note 1 – “Basis of Presentation—Recent Accounting Pronouncements” of the Consolidated Financial Statements in this Form 10-Q and Note 1—“Summary of Significant Accounting Policies” of the Consolidated Financial Statements to our Form 10-K.

CRITICAL ACCOUNTING POLICIES

Our Consolidated Financial Statements were prepared in accordance with GAAP and follow general practices within the industries in which we operate. The most significant accounting policies we follow are presented in Note 1—“Summary of Significant Accounting Policies” of the Consolidated Financial Statements to our Form 10-K. Application of these principles requires us to make estimates, assumptions, and judgments that affect the amounts reported in the Consolidated Financial Statements and accompanying notes. Most accounting policies are not considered by management to be 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

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in the section titled “Management's Discussion and Analysis of Financial Condition and Results of Operations--CriticalOperations - Critical Accounting Policies and Estimates” included in our Form 10-K. There have been no significant changes in our application of critical accounting policies since December 31, 2022.2023. Refer to Note 1 – “Basis of Presentation--RecentPresentation - Recent Accounting Pronouncements” of the consolidated financial statements for discussion of accounting pronouncements issued but yet to be adopted and implemented.

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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 Form 10-Q or prior SEC filings.

Three Months Ended

Six Months Ended

 

Three Months Ended

June 30, 

June 30, 

 

March 31, 

    

2023

    

2022

    

2023

    

2022

 

    

2024

    

2023

    

PER SHARE DATA

Net earnings, diluted

$

0.71

$

0.70

$

1.57

$

1.30

$

0.66

$

0.86

Adjusted earnings, diluted(1)

 

0.71

 

0.70

 

1.56

 

1.30

 

0.66

 

0.86

Total book value

 

27.12

 

26.19

 

27.11

 

26.19

 

28.64

 

27.00

Tangible book value per share(1)

 

18.88

 

17.83

 

18.87

 

17.83

 

20.48

 

18.74

Market price at period end

 

24.64

 

25.86

 

24.64

 

25.86

 

26.48

 

26.45

Dividends

 

0.28

 

0.26

 

0.54

 

0.50

 

0.28

 

0.26

PERFORMANCE RATIOS(2)

Return on assets

 

1.10

%

 

1.14

%

 

1.23

%

 

1.07

%

 

1.03

%

 

1.36

%

Adjusted return on assets(1)

 

1.09

 

1.14

 

1.22

 

1.07

 

1.03

 

1.36

Pre-tax, pre-provision return on assets

1.47

 

1.50

 

1.64

 

1.39

1.32

 

1.81

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

1.46

 

1.50

 

1.63

 

1.40

1.32

 

1.81

Return on equity

 

10.49

 

10.58

 

11.71

 

9.72

 

9.32

 

12.96

Adjusted return on equity(1)

 

10.42

 

10.59

 

11.67

 

9.74

 

9.32

 

12.94

Return on tangible equity

15.28

15.74

17.10

14.33

13.26

18.97

Adjusted return on tangible equity(1)

 

15.19

 

15.76

 

17.04

 

14.37

 

13.27

 

18.94

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

 

3.22

 

3.19

 

3.39

 

3.07

 

3.14

 

3.54

Efficiency ratio(1)

 

60.25

 

59.25

 

57.40

 

60.78

 

62.91

 

54.72

FINANCIAL DATA (In millions)

Total assets

$

4,029

$

3,716

$

4,029

$

3,716

$

3,959

$

3,928

Total earning assets(4)

 

3,716

 

3,399

 

3,716

 

3,399

 

3,663

 

3,628

Total investments

 

556

 

593

 

556

 

593

 

538

 

573

Total loans

 

3,007

 

2,727

 

3,007

 

2,727

 

3,012

 

2,944

Allowance for credit losses

 

27

 

24

 

27

 

24

 

28

 

27

Total goodwill and intangible assets

 

125

 

126

 

125

 

126

 

124

 

125

Total deposits

 

3,090

 

3,079

 

3,090

 

3,079

 

3,127

 

3,054

Total shareholders' equity

 

411

 

394

 

411

 

394

 

436

 

408

Net income

 

11

 

11

 

24

 

20

 

10

 

13

Adjusted income(1)

 

11

 

11

 

24

 

20

 

10

 

13

ASSET QUALITY AND CONDITION RATIOS

Net charge-offs (recoveries) (annualized)/average loans

 

%

 

%

 

0.01

%

 

(0.01)

%

 

0.01

%

 

0.01

%

Allowance for credit losses/total loans

 

0.91

 

0.87

 

0.91

 

0.87

 

0.94

 

0.90

Loans/deposits

 

97

 

89

 

97

 

89

 

96

 

96

Shareholders' equity to total assets

 

10.20

 

10.59

 

10.20

 

10.59

 

11.01

 

10.40

Tangible shareholders' equity to total tangible assets(1)

 

7.32

 

7.46

 

7.32

 

7.46

 

8.13

 

7.45

59

Table of Contents

(1)Non-GAAP financial measure. Refer to the Reconciliation of Non-GAAP Financial Measures section of 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.

53

Table of Contents

CONSOLIDATED LOAN AND DEPOSIT ANALYSIS (UNAUDITED)

The following tables present the quarterly trend in loan and deposit data and accompanying growth rates as of June 30, 2023March 31, 2024 on an annualized basis:

LOAN ANALYSIS

Annualized 

Annualized 

Growth %

Growth %

Quarter

Year

Quarter

(in thousands, except ratios)

    

Jun 30, 2023

    

Mar 31, 2023

    

Dec 31, 2022

    

Sep 30, 2022

    

Jun 30, 2022

    

to Date

to Date

    

Mar 31, 2024

    

Dec 31, 2023

    

Sep 30, 2023

    

Jun 30, 2023

    

Mar 31, 2023

    

to Date

Commercial real estate

$

1,551,748

$

1,519,219

$

1,495,452

$

1,421,962

$

1,331,860

 

9

%

8

%

$

1,574,802

$

1,552,061

$

1,548,835

$

1,551,748

$

1,519,219

 

6

%

Commercial and industrial

 

388,430

 

364,315

 

352,735

 

376,624

 

360,304

 

26

 

20

 

412,567

 

400,169

 

391,347

 

388,430

 

364,315

 

12

 

Paycheck Protection Program (PPP)

170

Total commercial loans

 

1,940,178

 

1,883,534

 

1,848,187

 

1,798,586

 

1,692,334

 

12

10

 

1,987,369

 

1,952,230

 

1,940,182

 

1,940,178

 

1,883,534

 

7

Total commercial loans, excluding PPP

1,940,178

1,883,534

1,848,187

1,798,586

1,692,164

12

10

Residential real estate

 

907,741

 

906,059

 

898,192

 

896,618

 

876,644

 

1

 

2

 

873,213

 

889,904

 

896,757

 

907,741

 

906,059

 

(8)

 

Consumer

 

96,947

 

98,616

 

100,855

 

100,822

 

100,816

 

(7)

 

(8)

 

95,838

 

97,001

 

95,160

 

96,947

 

98,616

 

(5)

 

Tax exempt and other

 

62,614

 

55,796

 

55,456

 

54,338

 

57,480

 

49

 

26

 

55,252

 

59,914

 

60,692

 

62,614

 

55,796

 

(31)

 

Total loans

$

3,007,480

$

2,944,005

$

2,902,690

$

2,850,364

$

2,727,274

 

9

%

7

%

$

3,011,672

$

2,999,049

$

2,992,791

$

3,007,480

$

2,944,005

 

2

%

DEPOSIT ANALYSIS

Annualized 

Annualized 

Growth %

Growth %

Quarter

Year

Quarter

(in thousands, except ratios)

    

Jun 30, 2023

    

Mar 31, 2023

    

Dec 31, 2022

    

Sep 30, 2022

    

Jun 30, 2022

    

to Date

to Date

    

Mar 31, 2024

    

Dec 31, 2023

    

Sep 30, 2023

    

Jun 30, 2023

    

Mar 31, 2023

    

to Date

Demand

$

602,667

$

636,710

$

676,350

$

700,218

$

670,268

 

(21)

%

(22)

%

$

544,495

$

569,714

$

618,421

$

602,667

$

636,710

 

(18)

%

NOW

 

911,488

 

908,483

 

900,730

 

918,822

 

883,239

 

1

 

2

 

888,591

 

946,978

 

929,481

 

911,488

 

908,483

 

(25)

 

Savings

 

588,769

 

628,798

 

664,514

 

669,317

 

663,676

 

(25)

 

(23)

 

551,493

 

553,963

 

572,271

 

588,769

 

628,798

 

(2)

 

Money market

 

351,762

 

475,577

 

478,398

 

513,075

 

499,456

 

*

 

(53)

 

365,289

 

370,242

 

361,839

 

351,762

 

475,577

 

(5)

 

Total non-maturity deposits

 

2,454,686

 

2,649,568

 

2,719,992

 

2,801,432

 

2,716,639

 

(29)

 

(20)

 

2,349,868

 

2,440,897

 

2,482,012

 

2,454,686

 

2,649,568

 

(15)

 

Total time deposits

 

635,559

 

404,246

 

323,439

 

334,248

 

361,906

 

*

 

*

 

777,208

 

700,260

 

658,482

 

635,559

 

404,246

 

44

 

Total deposits

$

3,090,245

$

3,053,814

$

3,043,431

$

3,135,680

$

3,078,545

 

5

%

3

%

$

3,127,076

$

3,141,157

$

3,140,494

$

3,090,245

$

3,053,814

 

(2)

%

6054

Table of Contents

AVERAGE BALANCES AND AVERAGE YIELDS/RATES  (UNAUDITED)

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

    

Three Months Ended June 30, 

 

    

Three Months Ended March 31, 

 

2023

 

2022

 

2024

 

2023

 

Average 

Yield/

 

Average 

Yield/

 

Average 

Yield/

 

Average 

Yield/

 

(in thousands, except ratios)

    

Balance

    

Interest(3)

    

Rate(3)

    

Balance

    

Interest(3)

    

Rate(3)

    

    

Balance

    

Interest(3)

    

Rate(3)

    

Balance

    

Interest(3)

    

Rate(3)

    

Assets

 

  

 

  

 

  

  

 

  

 

  

 

  

 

  

 

  

  

 

  

 

  

Interest-earning deposits with other banks

$

21,440

$

299

5.59

%  

$

63,317

$

127

0.80

%  

$

36,608

$

535

5.88

%  

$

19,819

$

209

4.28

%  

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

636,088

5,888

3.71

637,881

4,276

2.69

604,658

6,040

4.02

643,523

5,807

3.66

Loans:

Commercial real estate

1,536,035

19,960

5.21

1,296,162

12,348

3.82

1,558,506

21,187

5.47

1,505,681

18,862

5.08

Commercial and industrial

 

434,384

6,958

6.42

412,518

3,771

3.67

 

464,762

7,718

6.68

413,921

6,009

5.89

Paycheck protection program

788

27

13.99

Residential

 

911,788

8,537

3.76

863,172

7,635

3.55

 

884,767

9,004

4.09

902,348

8,260

3.71

Consumer

 

97,518

1,621

6.67

98,588

938

3.82

 

96,163

1,726

7.22

100,124

1,572

6.37

Total loans (1)

 

2,979,725

37,076

4.99

2,671,228

24,719

3.71

 

3,004,198

39,635

5.31

2,922,074

34,703

4.82

Total earning assets

 

3,637,253

43,263

4.77

%

3,372,426

29,122

3.46

%

 

3,645,464

46,210

5.10

%

3,585,416

40,719

4.61

%

Other assets

 

293,449

315,950

 

292,541

299,516

Total assets

$

3,930,702

$

3,688,376

$

3,938,005

$

3,884,932

Liabilities

 

 

NOW

$

885,091

$

2,081

0.94

%

$

893,239

$

304

0.14

%

Interest-bearing demand deposits

$

899,349

$

3,000

1.34

%

$

883,134

$

1,106

0.51

%

Savings

 

602,724

559

0.37

657,047

138

0.08

 

552,231

863

0.63

646,291

485

0.30

Money market

 

423,013

2,657

2.52

457,088

213

0.19

 

390,720

2,986

3.07

481,951

2,542

2.14

Time deposits

 

468,188

3,293

2.82

375,782

540

0.58

 

738,683

7,683

4.18

342,994

1,132

1.34

Total interest bearing deposits

 

2,379,016

8,590

1.45

2,383,156

1,195

0.20

 

2,580,983

14,532

2.26

2,354,370

5,265

0.91

Borrowings

 

466,402

5,501

4.73

178,519

1,074

2.41

 

298,918

3,236

4.35

398,837

4,180

4.25

Total interest bearing liabilities

 

2,845,418

14,091

1.99

%

2,561,675

2,269

0.36

%

 

2,879,901

17,768

2.48

%

2,753,207

9,445

1.39

%

Non-interest bearing demand deposits

 

608,180

661,412

 

554,816

651,885

Other liabilities

 

64,346

67,069

 

67,561

72,693

Total liabilities

 

3,517,944

3,290,156

 

3,502,278

3,477,785

Total shareholders' equity

 

412,758

398,220

 

435,727

407,147

Total liabilities and shareholders' equity

$

3,930,702

$

3,688,376

$

3,938,005

$

3,884,932

Net interest spread

 

2.78

%

3.10

%

 

2.62

%

3.22

%

Net interest margin

3.22

3.19

3.14

3.54

(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.

61

Table of Contents

Six Months Ended June 30, 

2023

2022

 

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

$

22,506

$

508

4.55

%  

$

100,052

$

183

0.37

%  

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

623,488

11,695

3.78

630,443

8,239

2.64

Loans:

Commercial real estate

1,522,470

38,823

5.14

1,282,528

23,255

 

3.66

Commercial and industrial(3)

 

425,676

12,967

6.14

 

392,006

 

7,132

 

3.67

Paycheck protection program

16,112

223

2.80

Residential

 

906,979

16,797

3.73

 

857,109

 

15,125

 

3.56

Consumer

 

98,817

3,193

6.52

 

98,824

 

1,782

 

3.64

Total loans (1)

 

2,953,942

 

71,780

 

4.90

 

2,646,579

 

47,517

 

3.62

Total earning assets

 

3,599,936

83,983

4.70

%

 

3,377,074

 

55,939

 

3.34

%

 

  

Other assets

311,354

325,144

 

  

 

  

Total assets

$

3,911,290

 

  

$

3,702,218

 

  

Liabilities

 

  

 

  

 

  

 

  

 

  

 

  

NOW

$

885,317

$

3,187

0.73

%  

$

911,420

$

618

 

0.14

%  

Savings

 

622,662

1,044

0.34

 

649,652

 

275

 

0.09

Money market

 

447,543

5,198

2.34

 

438,189

 

331

 

0.15

Time deposits

 

416,849

4,425

2.14

 

390,040

 

1,160

 

0.60

Total interest bearing deposits

 

2,372,371

 

13,854

 

1.18

 

2,389,301

 

2,384

 

0.20

Borrowings

 

432,867

9,681

4.51

 

178,643

 

2,084

 

2.35

Total interest bearing liabilities

 

2,805,238

 

23,535

 

1.69

%  

 

2,567,944

 

4,468

 

0.35

%  

Non-interest bearing demand deposits

 

628,663

 

  

 

  

 

661,677

 

  

 

  

Other liabilities

 

67,437

 

  

 

  

 

65,669

 

  

 

  

Total liabilities

 

3,501,338

 

  

 

  

 

3,295,290

 

  

 

  

Total shareholders' equity

 

409,952

 

  

 

  

 

406,928

 

  

 

  

Total liabilities and shareholders' equity

$

3,911,290

 

  

 

  

$

3,702,218

 

  

 

  

Net interest spread

3.01

%

2.99

%

Net interest margin

 

  

 

  

 

3.39

 

  

 

  

 

3.07

(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.

6255

Table of Contents

RECONCILIATION OF NON-GAAP FINANCIAL MEASURES (UNAUDITED)

The following reconciliation table provides a more detailed analysis of these, and reconciliation for, each of non-GAAP financial measures:

    

    

    

    

Three Months Ended June 30, 

Six Months Ended June 30, 

Three Months Ended March 31, 

(in thousands)

    

Calculations

2023

    

2022

    

2023

    

2022

    

    

Calculations

    

2024

    

2023

    

Net income

 

  

$

10,791

$

10,503

$

23,803

$

19,615

 

  

$

10,095

$

13,012

Non-recurring items:

Gain on sale of securities, net

 

  

 

 

 

(34)

 

(9)

 

  

 

 

(34)

Gain on sale of premises and equipment, net

 

  

 

(86)

 

10

 

(99)

 

(65)

 

  

 

(15)

 

(13)

Acquisition, conversion and other expenses

 

  

 

 

 

20

 

325

 

  

 

20

 

20

Income tax expense (1)

 

  

 

20

 

(2)

 

28

 

(205)

 

  

 

(1)

 

6

Total non-recurring items

(66)

8

(85)

46

4

(21)

Total adjusted income(2)

 

(A)

$

10,725

$

10,511

$

23,718

$

19,661

 

(A)

$

10,099

$

12,991

Net interest income

 

(B)

$

28,790

$

26,519

$

59,696

$

50,817

 

(B)

$

28,055

$

30,906

Plus: Non-interest income

 

  

 

8,980

 

8,961

 

18,164

 

18,270

 

  

 

8,586

 

9,184

Total Revenue

 

  

 

37,770

 

35,480

 

77,860

 

69,087

 

  

 

36,641

 

40,090

Gain on sale of securities, net

 

  

 

 

 

(34)

 

(9)

 

  

 

 

(34)

Total adjusted revenue(2)

 

(C)

$

37,770

$

35,480

$

77,826

$

69,078

 

(C)

$

36,641

$

40,056

Total non-interest expense

 

  

$

23,392

$

21,700

$

46,096

$

43,586

 

  

$

23,688

$

22,704

Non-recurring expenses:

Gain on sale of premises and equipment, net

 

  

 

86

 

(10)

 

99

 

65

 

  

 

15

 

13

Acquisition, conversion and other expenses

 

  

 

 

 

(20)

 

(325)

 

  

 

(20)

 

(20)

Total non-recurring expenses

86

(10)

79

(260)

(5)

(7)

Adjusted non-interest expense(2)

 

(D)

$

23,478

$

21,690

$

46,175

$

43,326

 

(D)

$

23,683

$

22,697

Total revenue

37,770

35,480

77,860

69,087

36,641

40,090

Total non-interest expense

23,392

21,700

46,096

43,586

23,688

22,704

Pre-tax, pre-provision net revenue

$

14,378

$

13,780

$

31,764

$

25,501

$

12,953

$

17,386

Adjusted revenue(2)

37,770

35,480

77,826

69,078

36,641

40,056

Adjusted non-interest expense(2)

23,478

21,690

46,175

43,326

23,683

22,697

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

(U)

$

14,292

$

13,790

$

31,651

$

25,752

(U)

$

12,958

$

17,359

(in millions)

 

  

 

  

 

  

 

  

Average earning assets

 

(E)

3,637

3,372

��

$

3,600

$

3,377

 

(E)

$

3,645

$

3,585

Average paycheck protection program (PPP) loans

(R)

1

16

Average earning assets, excluding PPP loans

(S)

3,931

3,371

3,600

3,361

Average assets

 

(F)

413

3,688

 

3,911

 

3,702

 

(F)

3,938

3,885

Average shareholders' equity

 

(G)

288

398

 

410

 

407

 

(G)

436

407

Average tangible shareholders' equity(2)(3)

 

(H)

286

272

 

410

 

281

 

(H)

312

282

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

 

(I)

3,904

268

 

283

 

268

 

(I)

312

283

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

 

(J)

3,590

 

3,904

 

3,590

 

(J)

3,835

3,803

6356

Table of Contents

Three Months Ended June 30, 

Six Months Ended June 30, 

Three Months Ended March 31, 

Calculations

2023

    

2022

    

2023

    

2022

    

Calculations

    

2024

    

2023

    

(in thousands)

 

  

 

  

Common shares outstanding, period-end

 

(K)

15,144

 

15,026

15,125

 

15,026

 

(K)

15,212

 

15,124

Average diluted shares outstanding

 

(L)

15,180

 

15,077

15,186

 

15,094

 

(L)

15,270

 

15,190

Adjusted earnings per share, diluted(2)

 

(A/L)

$

0.71

$

0.70

$

1.57

$

1.30

 

(A/L)

$

0.66

$

0.86

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

 

(I/K)

18.88

 

17.83

18.88

 

17.83

 

(I/K)

20.48

 

18.74

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

 

(M)

(55,307)

 

(38,304)

(55,307)

 

(38,304)

 

(M)

(49,633)

 

(50,646)

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

 

(I+M)/K

22.53

 

20.38

22.53

 

20.38

 

(I+M)/K

23.75

 

22.08

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

 

(I/J)

7.32

 

7.46

7.45

 

7.46

 

(I/J)

8.13

 

7.45

Performance ratios(5)

Return on assets

  

1.10

%  

1.14

%

1.23

%  

1.07

%

  

1.03

%  

1.36

%

Core return on assets(2)

(A/F)

1.09

1.14

1.22

1.07

(A/F)

1.03

1.36

Pre-tax, pre-provision return on assets

1.47

1.50

1.64

1.39

1.32

1.81

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

(U/F)

1.63

1.50

1.63

1.40

(U/F)

1.32

1.81

Return on equity

  

10.49

10.58

11.71

9.72

  

9.32

12.96

Core return on equity(2)

(A/G)

10.42

10.59

11.67

9.74

(A/G)

9.32

12.94

Return on tangible equity

15.28

15.74

17.10

14.33

13.26

18.97

Adjusted return on tangible equity(1)(2)

(A+Q)/H

15.19

15.76

17.04

14.37

(A+Q)/H

13.27

18.94

Efficiency ratio(1)(2)(6)

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

60.25

59.25

57.40

60.78

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

62.91

54.72

Net interest margin

(B+P)/E

3.22

3.19

3.39

3.07

(B+P)/E

3.14

3.54

Supplementary data (in thousands)

  

  

  

  

  

  

  

  

Taxable equivalent adjustment for efficiency ratio

(N)

$

539

$

491

$

1,266

$

967

(N)

$

523

$

727

Franchise taxes included in non-interest expense

(O)

163

144

311

285

(O)

70

148

Tax equivalent adjustment for net interest margin

(P)

382

334

750

654

(P)

388

368

Intangible amortization

(Q)

233

233

466

466

(Q)

233

233

Interest and fees on PPP loans

(T)

27

223

(1)Assumes a marginal tax rate of 24.01% for 2024 and 23.80% for 2023 and 23.41% for 2022.2023.
(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 losses and gains on available-for-sale securities recorded on 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.

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ITEM 3.           QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Market Risk

Market risk is the risk of loss in a financial instrument arising from adverse changes in market rates/prices, such as interest rates, foreign currency exchange rates, commodity prices and equity prices. The most significant market risk that affects us is interest rate risk. Other types of market risk do not arise in the normal course of our business activities.

The responsibility for interest rate risk management oversight is the function of the Bank’s Asset and Liability Committee (“ALCO”), chaired by the 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/or cash flow characteristics of assets and liabilities. Management’s objectives are to measure, monitor and develop strategies in response to the interest rate risk profile inherent in the Bank’s balance sheet. The objectives in managing the Bank's balance sheet are to preserve the sensitivity of net interest income to actual or potential changes in interest rates, and to enhance profitability through strategies that promote sufficient reward for understood and controlled risk.

The Bank’s interest rate risk measurement and management techniques incorporate the re-pricing and cash flow attributes of balance sheet and off-balance sheet instruments as each relate to current and potential changes in interest rates. The level of interest rate risk, measured in terms of the potential future effect on net interest income, is determined through the use of modeling and other techniques under multiple interest rate scenarios. Interest rate risk is evaluated in depth on a quarterly basis and reviewed by ALCO and the 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 option provisions are examined on an individual basis in each rate environment to estimate the likelihood of exercise. Prepayment assumptions for mortgage loans are calibrated using specific Bank experience while mortgage-backed securities are developed from industry 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.

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

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expectations. Our net interest income sensitivity analysis reflects changes to net interest income assuming no balance sheet growth and a parallel shift in interest rates. All rate changes were “ramped” over the first 12-month period and then maintained at those levels over the remainder of the simulation horizon. Changes in net interest income based upon these simulations are measured against the flat interest rate scenario.

As of June 30, 2023,March 31, 2024, interest rate sensitivity modeling results indicate that the Bank’s balance sheet was asset sensitive over the one- and two-year horizons.

The following table presents the changes in sensitivities on net interest income for the periods ended June 30, 2023March 31, 2024 and 2022:2023:

Change in Interest Rates-Basis Points (Rate Ramp)

1 - 12 Months

13 - 24 Months

 

1 - 12 Months

13 - 24 Months

 

(in thousands, except ratios)

$ Change

% Change

$ Change

% Change

 

$ Change

% Change

$ Change

% Change

 

At June 30, 2023

    

  

    

  

    

  

    

  

At March 31, 2024

    

  

    

  

    

  

    

  

-200

$

(4,283)

(3.3)

%

$

(12,042)

(8.6)

%

$

(6,051)

(5.0)

%

$

(12,235)

(9.6)

%

-100

(2,214)

(1.7)

(5,442)

(3.9)

(3,304)

(2.7)

(6,138)

(4.8)

+100

1,194

0.9

3,048

2.2

2,297

1.9

4,306

3.4

+200

 

2,225

1.7

5,505

3.9

 

4,525

3.8

8,307

6.5

At June 30, 2022

 

  

 

  

 

 

  

At March 31, 2023

 

 

  

 

 

  

-200

(9,239)

(7.5)

(24,179)

(18.8)

$

(4,936)

(3.6)

%

$

(14,923)

(10.3)

%

-100

 

(3,979)

 

(3.2)

(11,446)

 

(8.9)

 

(2,593)

 

(1.9)

(7,028)

 

(4.8)

+100

2,917

2.4

8,441

6.6

1,000

0.7

4,618

3.2

+200

 

5,070

 

4.1

 

15,789

 

12.3

 

2,068

 

1.5

 

8,422

 

5.8

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 while deteriorating further from that level over the two-year horizon.

Assuming short-term and long-term interest rates increase 200 basis points from current levels (i.e., a parallel yield curve shift) over the next twelve months and 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- andone year horizon while improving further from that level over the two-year horizons.horizon.

As compared to June 30, 2022,March 31, 2023, asset sensitivity has increased in year one while in year two sensitivity decreased to both a down 100 basis pointdownward rate movementmovements and an up 200 basis pointincreased to upward rate movement has decreased.movements.

The preceding sensitivity analysis does not represent a 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, 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 managementSenior Executive Team and the Bank’s Board of Directors might take in responding to or anticipating changes in interest rates, and the anticipated impact on the Bank’s net interest income.

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ITEM 4.           CONTROLS AND PROCEDURES

(a)Disclosure controls and procedures.

Under the supervision and with the participation of our senior management, consisting of our principal executive officer and our principal financial officer, 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 Exchange Act, as of the end of the period covered by this Form 10-Q. Based on this evaluation, our management, including our principal executive officer and principal financial officer, concluded that as of June 30, 2023,March 31, 2024, our disclosure controls and procedures were effective to ensure that information required to be disclosed by the reports that we file under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms. Our disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by using our Exchange Act reports is accumulated and communicated to our management, including 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 our internal control over financial reporting that occurred during the last fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II.           OTHER INFORMATION

ITEM 1.             LEGAL PROCEEDINGS

We and our subsidiaries are parties to certain ordinary routine litigation incidental to the normal conduct of their respective businesses. Although the Company is not able to predict the outcome of such actions, at this time, in the opinion of management, the likelihood is remote that the impact of such proceedings, either individually or in the aggregate, would have a material adverse effect on the Company’s consolidated financial position as a whole.  However, one or more unfavorable outcomes in any claim or litigation against us could have a material adverse effect for the period in which they are resolved. In addition, regardless of their merits or their ultimate outcomes, such matters are costly, divert management’s attention and may materially adversely affect our reputation, even if resolved in our favor.

ITEM 1A.          RISK FACTORS

Investing in the Company involves various risks which are particular to our Company, our industry and our market area. We believe there were no material changes to the risk factors discussed in Part I, Item 1A. of our Form 10-K. In addition to the other information set forth in this 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. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may have a material adverse effect on our business, financial condition and operating results.

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

No unregistered equity securities were sold by the Company during the quarter ended June 30, 2023.March 31, 2024.

On May 22, 2023,April 18, 2024, the Board of Directors approved a 12-month plan to repurchase up to 5% of the Company’s outstanding shares of common stock, representing  756,000approximately 761,000 shares. No shares were repurchased by the Company in the secondfirst quarter of 20232024 and the maximum number of shares that may yet be purchased under the plan is 756,000761,000 shares. We will continue examine buying opportunities considering market conditions, including interest rate volatility and potential loan and risk-weighted asset growth.

ITEM 5.           OTHER INFORMATION

During the fiscal quarter ended June 30, 2023, none of the Company’s directorsMarch 31, 2024, no director or or officersofficer (as defined in Rule 16a-1(f) under the Exchange Act) adopted or terminated any contract, instruction or written plan for the purchase or sale of Company securities that was intended to satisfy the affirmative defense conditions of Rule 10b5-1(c) of the Exchange ActCompany adopted or terminated any non-Rule"Rule 10b5-1 trading arrangement.arrangement" or "non-Rule 10b5-1 trading arrangement" as such terms are defined in Item 408(a) of Regulation S-K.

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ITEM 6.           EXHIBITS

10.1

Employment Agreement, dated as of March 8, 2024, between Bar Harbor Bankshares, Bar Harbor Bank & Trust and Josephine Iannelli (incorporated herein by reference to Exhibit 10.4 to the Annual Report on Form 10-K filed with the SEC on March 11, 2024)

10.2

2024 through 2026 Long Term Executive Incentive Program Guidelines (incorporated herein by reference to Exhibit 10.9 to the Annual Report on Form 10-K filed with the SEC on March 11, 2024)

31.1*

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

31.2*

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

32.1**

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

32.2**

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

101*

The following financial information from the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2023March 31, 2024 is formatted in Inline Extensible Business Reporting Language (iXBRL): (i) Consolidated Statements of Income, (ii) the Consolidated Balance Sheets, (iii) the Consolidated Statements of Changes in Shareholders’ Equity, (iv) Consolidated Statements of Cash Flows and (v) Condensed Notes to the Consolidated Financial Statements

104

Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)

*Filed herewith

**Furnished herewith

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SIGNATURES

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

BAR HARBOR BANKSHARES

Dated: August 7, 2023May 8, 2024

By:

/s/ Curtis C. Simard

Curtis C. Simard

President & Chief Executive Officer

(Principal Executive Officer)

Dated: August 7, 2023May 8, 2024

/s/ Josephine Iannelli

Josephine Iannelli

Executive Vice President & Chief Financial Officer

(Principal Financial and Accounting Officer)

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