10-Q - BHB - Equibles

Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q


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

For the quarterly period ended: September 30, 2020


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

For the transition period from to

Commission File Number: 001-13349

BAR HARBOR BANKSHARES

(Exact name of registrant as specified in its charter)


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

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

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

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

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

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

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

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

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

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

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

The Registrant had 14,928,565 shares of common stock, par value $2.00 per share, outstanding as of October 30, 2020.

Table of Contents BAR HARBOR BANKSHARES AND SUBSIDIARIES

FORM 10-Q

INDEX

				Page
PART I.	FINANCIAL INFORMATION

Item 1.	Consolidated Financial Statements (unaudited)

	Consolidated Balance Sheets as of September 30, 2020 and December 31, 2019			4

	Consolidated Statements of Income for the Three and Nine Months Ended September 30, 2020 and 2019			6

	Consolidated Statements of Comprehensive Income for the Three and Nine Months Ended September 30, 2020 and 2019			7

	Consolidated Statements of Changes in Shareholders’ Equity for the Three and Nine Months Ended September 30, 2020 and 2019			8

	Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2020 and 2019			9

	Notes to Unaudited Consolidated Interim Financial Statements
		Note 1	Basis of Presentation	11
		Note 2	Securities Available for Sale	15
		Note 3	Loans	18
		Note 4	Allowance for Loan Losses	36
		Note 5	Borrowed Funds	42
		Note 6	Deposits	44
		Note 7	Capital Ratios and Shareholders' Equity	45
		Note 8	Earnings per Share	49
		Note 9	Derivative Financial Instruments and Hedging Activities	50
		Note 10	Fair Value Measurements	56
		Note 11	Revenue from Contracts with Customers	62
		Note 12	Leases	64


Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations			66
		Selected Financial Data		67
		Consolidated Loan and Deposit Analysis		68
		Average Balances and Average Yields/Rates		69
		Non-GAAP Financial Measures		71
		Reconciliation of Non-GAAP Financial Measures		72
		Financial Summary		74

Item 3.	Quantitative and Qualitative Disclosures about Market Risk			80

Item 4.	Controls and Procedures			82

PART II.	OTHER INFORMATION

Item 1.	Legal Proceedings			82

Item 1A.	Risk Factors			82

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds			83

Item 6.	Exhibits			84

Signatures				85

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

FORWARD-LOOKING STATEMENTS

Certain statements contained in this document that are not historical facts may constitute forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended ("Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as amended ("Exchange Act"), and are intended to be covered by the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. When used in this Form 10-Q the words "may," "will," "should," "could," "would," "plan," "potential," "estimate," "project," "believe," "intend," "anticipate," "expect," "target" and similar expressions are intended to identify forward-looking statements, but these terms are not the exclusive means of identifying forward-looking statements. These forward-looking statements are subject to significant risks, assumptions and uncertainties, including among other things, changes in general economic and business conditions, increased competitive pressures, changes in the interest rate environment, legislative and regulatory change, changes in the financial markets, and other risks and uncertainties disclosed from time to time in documents that the Company files with the Securities and Exchange Commission, including but not limited to those discussed in the section titled "Risk Factors" in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2019 and Part II, Item 1A. of the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2020. Because of these and other uncertainties, the Company’s actual results, performance or achievements, or industry results, may be materially different from the results indicated by these forward-looking statements. In addition, the Company’s past results of operations do not necessarily indicate future results. You should not place undue reliance on any of the forward-looking statements, which speak only as of the dates on which they were made. The Company is not undertaking an obligation to update forward-looking statements, even though its situation may change in the future, except as required under federal securities law. The Company qualifies all of its forward-looking statements by these cautionary statements.

Table of Contents PART I. FINANCIAL INFORMATION

ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

BAR HARBOR BANKSHARES AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS


(in thousands, except share data)	****	September 30, 2020		****	December 31, 2019
Assets
Cash and cash equivalents:
Cash and due from banks		$	53,173		$	37,261
Interest-bearing deposits with the Federal Reserve Bank			162,484			19,649
Total cash and cash equivalents			215,657			56,910

Securities:
Securities available for sale, at fair value			604,529			663,230
Federal Home Loan Bank stock			13,975			20,679
Total securities			618,504			683,909

Loans:
Commercial real estate			1,045,635			930,661
Commercial and industrial			522,510			423,291
Residential real estate			1,021,206			1,151,857
Consumer			119,340			135,283
Total loans			2,708,691			2,641,092
Less: Allowance for loan losses			(17,907)			(15,353)
Net loans			2,690,784			2,625,739

Premises and equipment, net			51,424			51,205
Other real estate owned			1,983			2,236
Goodwill			119,477			118,649
Other intangible assets			7,913			8,641
Cash surrender value of bank-owned life insurance			77,388			75,863
Deferred tax assets, net			2,180			3,865
Other assets			74,400			42,111
Total assets		$	3,859,710		$	3,669,128

Liabilities
Deposits:
Demand		$	515,064		$	414,534
NOW			706,048			575,809
Savings			511,938			388,683
Money market			388,356			384,090
Time			813,509			932,635
Total deposits			2,934,915			2,695,751

Borrowings:
Senior			385,472			471,396
Subordinated			59,920			59,920
Total borrowings			445,392			531,316

Other liabilities			74,958			45,654
Total liabilities			3,455,265			3,272,721

(continued) 4

Table of Contents BAR HARBOR BANKSHARES AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS (continued)


(in thousands, except share data)	September 30, 2020		****	December 31, 2019
Shareholders’ equity
Capital stock, par value 2.00; authorized 20,000,000 shares; issued 16,428,388 shares at September 30, 2020 and December 31, 2019		32,857			32,857
Additional paid-in capital		189,606			188,536
Retained earnings		190,249			175,780
Accumulated other comprehensive income		9,405			3,911
Less: 1,499,823 and 870,257 shares of treasury stock at September 30, 2020 and December 31, 2019, respectively		(17,672)			(4,677)
Total shareholders’ equity		404,445			396,407
Total liabilities and shareholders’ equity	$	3,859,710		$	3,669,128

All values are in US Dollars.

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

Table of Contents BAR HARBOR BANKSHARES AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME


		Three Months Ended						Nine Months Ended
		September 30,						September 30,
(in thousands, except earnings per share data)	****	2020		****	2019		****	2020		****	2019
Interest and dividend income
Loans		$	25,918		$	28,157		$	80,398		$	82,681
Securities and other			4,557			6,105			15,006			18,593
Total interest and dividend income			30,475			34,262			95,404			101,274
Interest expense
Deposits			3,869			7,143			14,437			20,336
Borrowings			1,941			4,674			7,149			15,232
Total interest expense			5,810			11,817			21,586			35,568
Net interest income			24,665			22,445			73,818			65,706
Provision for loan losses			1,800			893			4,265			1,779
Net interest income after provision for loan losses			22,865			21,552			69,553			63,927

Non-interest income
Trust and investment management fee income			3,532			3,013			10,060			8,836
Customer service fees			2,886			2,553			8,437			7,336
Gain on sales of securities, net			—			157			1,486			157
Mortgage banking income			2,649			452			4,230			1,094
Bank-owned life insurance income			492			497			1,525			1,558
Customer derivative income			316			828			1,417			1,553
Other income			227			143			1,078			729
Total non-interest income			10,102			7,643			28,233			21,263

Non-interest expense
Salaries and employee benefits			11,809			11,364			35,602			33,568
Occupancy and equipment			4,279			3,415			12,559			10,101
Loss on premises and equipment, net			—			—			90			21
Outside services			438			424			1,414			1,278
Professional services			479			707			1,488			1,821
Communication			215			189			698			707
Marketing			300			613			970			1,419
Amortization of intangible assets			256			207			768			621
Loss on debt extinguishment			—			—			1,351			—
Acquisition, conversion and other expenses			691			3,039			952			3,319
Other expenses			3,952			3,442			11,152			10,075
Total non-interest expense			22,419			23,400			67,044			62,930

Income before income taxes			10,548			5,795			30,742			22,260
Income tax expense			2,146			780			6,138			3,847
Net income		$	8,402		$	5,015		$	24,604		$	18,413

Earnings per share:
Basic		$	0.56		$	0.32		$	1.60		$	1.19
Diluted		$	0.56		$	0.32		$	1.60		$	1.18

Weighted average common shares outstanding:
Basic			15,079			15,547			15,359			15,536
Diluted			15,103			15,581			15,382			15,582

The accompanying notes are an integral part of these consolidated financial statements. 6

Table of Contents BAR HARBOR BANKSHARES AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME


	****	Three Months Ended					****	Nine Months Ended
		September 30,						September 30,
(in thousands)	****	2020		****	2019		****	2020		****	2019
Net income		$	8,402		$	5,015		$	24,604		$	18,413
Other comprehensive income, before tax:
Changes in unrealized gain on securities available for sale			351			3,200			7,922			21,746
Changes in unrealized gain (loss) on hedging derivatives			805			(370)			(833)			(2,372)
Changes in unrealized loss on pension			—			—			—			—

Income taxes related to other comprehensive income:
Changes in unrealized gain on securities available for sale			(82)			(747)			(1,791)			(5,081)
Changes in unrealized (gain) loss on hedging derivatives			(190)			85			196			554
Changes in unrealized loss on pension			—			—			—			—
Total other comprehensive income			884			2,168			5,494			14,847
Total comprehensive income		$	9,286		$	7,183		$	30,098		$	33,260

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

Table of Contents BAR HARBOR BANKSHARES AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY


	****		****				****				Accumulated		****			****
		Common			Additional						other
		stock			paid-in			Retained			comprehensive			Treasury
(in thousands, except per share data)	****	amount		****	capital		****	earnings		****	income (loss)		****	stock		****	Total
Balance at December 31, 2018		$	32,857		$	187,653		$	166,526		$	(11,802)		$	(4,655)		$	370,579

Net income			—			—			13,398			—			—			13,398
Other comprehensive income			—			—			—			12,679			—			12,679
Cash dividends declared ($0.42 per share)			—			—			(6,524)			—			—			(6,524)
Common stock purchased (8,010 shares)			—			—			—			—			(210)			(210)
Net issuance (21,119 shares) to employee stock plans, including related tax effects			—			(69)			—			—			149			80
Recognition of stock based compensation			—			560			—			—			—			560
Balance at June 30, 2019			32,857			188,144			173,400			877			(4,716)			390,562

Net income			—			—			5,015			—			—			5,015
Other comprehensive income			—			—			—			2,168			—			2,168
Cash dividends declared ($0.22 per share)			—			—			(3,421)			—			—			(3,421)
Common stock purchased (5,482 shares)			—			—			—			—			(136)			(136)
Net issuance (4,297 shares) to employee stock plans, including related tax effects			—			(17)			—			—			132			115
Recognition of stock based compensation			—			156			—			—			—			156
Balance at September 30, 2019		$	32,857		$	188,283		$	174,994		$	3,045		$	(4,720)		$	394,459

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

Net income			—			—			16,202			—			—			16,202
Other comprehensive income			—			—			—			4,610			—			4,610
Cash dividends declared ($0.44 per share)			—			—			(6,819)			—			—			(6,819)
Common stock purchased (405,208 shares)			—			—			—			—			(7,467)			(7,467)
Net issuance (61,025 shares) to employee stock plans, including related tax effects			—			406			—			—			251			657
Recognition of stock based compensation			—			584			—			—			—			584
Balance at June 30, 2020			32,857			189,526			185,163			8,521			(11,893)			404,174

Net income			—			—			8,402			—			—			8,402
Other comprehensive income			—			—			—			884			—			884
Cash dividends declared ($0.22 per share)			—			—			(3,316)			—			—			(3,316)
Common stock purchased (297,658 shares)			—			—			—			—			(6,003)			(6,003)
Net issuance (12,275 shares) to employee stock plans, including related tax effects			—			(199)			—			—			224			25
Recognition of stock based compensation			—			279			—			—			—			279
Balance at September 30, 2020		$	32,857		$	189,606		$	190,249		$	9,405		$	(17,672)		$	404,445

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

Table of Contents BAR HARBOR BANKSHARES AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS


		Nine Months Ended September 30,
(in thousands)	****	2020		****	2019
Cash flows from operating activities:
Net income		$	24,604		$	18,413
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses			4,265			1,779
Net amortization of securities			2,472			2,535
Change in unamortized net loan costs and premiums			3,149			(278)
Premises and equipment depreciation			3,571			2,942
Stock-based compensation expense			863			716
Accretion of purchase accounting entries, net			(1,219)			(2,613)
Amortization of other intangibles			768			621
Income from cash surrender value of bank-owned life insurance policies			(1,525)			(1,558)
Gain on sales of securities, net			(1,486)			(157)
Increase in right-of-use lease assets			(578)			—
Increase in lease liabilities			625			—
Loss on other real estate owned			366			146
Loss on premises and equipment, net			90			21
Net change in other assets and liabilities			(3,978)			(1,722)
Net cash provided by operating activities			31,987			20,845

Cash flows from investing activities:
Proceeds from sales of securities available for sale			87,521			67,983
Proceeds from maturities, calls and prepayments of securities available for sale			109,314			77,812
Purchases of securities available for sale			(131,107)			(76,620)
Net change in loans			(71,233)			(85,483)
Purchase of FHLB stock			(4,044)			(10,471)
Proceeds from sale of FHLB stock			10,748			18,661
Purchase of premises and equipment, net			(4,449)			(1,803)
Acquisitions, net of cash acquired			(340)			—
Proceeds from sale of other real estate			(113)			—
Net cash used in investing activities			(3,703)			(9,921)

Cash flows from financing activities:
Net change in deposits			239,164			10,968
Net change in short-term senior borrowings			(273,268)			(111,400)
Proceeds from long-term senior borrowings			273,342			174,000
Repayments of long-term senior borrowings			(71,187)			(106,605)
Net change in short-term other borrowings			(14,784)			5,048
Net change in subordinated debt issuance costs			119			—
Exercise of stock options			682			195
Purchase of treasury and common stock			(13,470)			(346)
Cash dividends paid on common stock			(10,135)			(9,945)
Net cash provided by (used in) financing activities			130,463			(38,085)

Net change in cash and cash equivalents			158,747			(27,161)
Cash and cash equivalents at beginning of year			56,910			98,754
Cash and cash equivalents at end of year		$	215,657		$	71,593

(continued) 9

Table of Contents BAR HARBOR BANKSHARES AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)


		Nine Months Ended September 30,
(in thousands)	****	2020		****	2019
Supplemental cash flow information:
Interest paid		$	22,085		$	34,394
Income taxes paid, net			4,806			2,479

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

Other non-cash changes:
Real estate owned acquired in settlement of loans			—			250

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

Table of Contents BAR HARBOR BANKSHARES AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

NOTE 1. BASIS OF PRESENTATION

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

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

The results for any interim period are not necessarily indicative of results for the full year. These consolidated financial statements should be read in conjunction with the audited financial statements and note disclosures for the Company's Annual Report on Form 10-K for the year ended December 31, 2019 previously filed with the Securities and Exchange Commission (the "SEC"). In management's opinion, all adjustments necessary for a fair statement are reflected in the interim periods presented.

Reclassifications: Whenever necessary, amounts in the prior years’ financial statements are reclassified to conform to current presentation. The reclassifications had no impact on net income in the Company’s consolidated income statement.

Summary of Significant Accounting Policies

The disclosures below supplement the accounting policies previously disclosed in NOTE 1 – Summary of Significant Accounting Policies of the Company’s Annual Report on Form 10-K for the year ended December 31, 2019.

Operating, Accounting and Reporting Considerations related to COVID-19:

The COVID-19 pandemic has negatively impacted the global economy. In response to this crisis, the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act was passed by Congress and signed into law on March 27, 2020. The CARES Act provides an estimated $2.2 trillion to fight the COVID-19 pandemic and stimulate the economy by supporting individuals and businesses through loans, grants, tax changes, and other types of relief. Some of the provisions applicable to the Company include, but are not limited to:

●	Accounting for Loan Modifications - The CARES Act provides that a financial institution may elect to suspend (1) the requirements under GAAP for certain loan modifications that may otherwise be categorized as a troubled debt restructuring (“TDR”) and (2) any determination that such loan modifications would be considered a TDR, including the related impairment for accounting purposes.
●	Paycheck Protection Program - The CARES Act established the Paycheck Protection Program (“PPP”), an expansion of the Small Business Administration’s 7(a) loan program and the Economic Injury Disaster Loan Program, administered directly by the SBA.
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●	Mortgage Forbearance - Under the CARES Act, through the earlier of December 31, 2020, or the termination date of the COVID-19 national emergency, a borrower with a federally backed mortgage loan that is experiencing financial hardship due to COVID-19 may request a forbearance. A multifamily borrower with a federally backed multifamily mortgage loan that was current as of February 1, 2020, and is experiencing financial hardship due to COVID-19 may request forbearance on the loan for up to 30 days, with up to two additional 30-day periods at the borrower’s request.
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Table of Contents Also in response to the COVID-19 pandemic, the Board of Governors of the Federal Reserve Board (“FRB”), the Federal Deposit Insurance Corporation (“FDIC”), the National Credit Union Administration, the Office of the Comptroller of the Currency, and the Consumer Financial Protection Bureau, in consultation with the state financial regulators (collectively, the “agencies”) issued a joint interagency statement (issued March 22, 2020; revised statement issued April 7, 2020). Some of the provisions applicable to the Company include, but are not limited to:

●	Accounting for Loan Modifications - Loan modifications that do not meet the conditions of the CARES Act may still qualify as a modification that does not need to be accounted for as a TDR. The agencies confirmed with FASB staff that short-term modifications made on a good faith basis in response to COVID-19 to borrowers who were current prior to any relief are not TDRs. This includes short-term (e.g., six months) modifications such as payment deferrals, fee waivers, extensions of repayment terms, or insignificant delays in payment.
●	Past Due Reporting - With regard to loans not otherwise reportable as past due, financial institutions are not expected to designate loans with deferrals granted due to COVID-19 as past due because of the deferral. A loan’s payment date is governed by the due date stipulated in the legal agreement. If a financial institution agrees to a payment deferral, these loans would not be considered past due during the period of the deferral.
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●	Nonaccrual Status and Risk Rating - For short-term COVID-19 modifications, these loans generally should not be reported as nonaccrual or as having a classified risk rating.
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Recent Accounting Pronouncements

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


Standard	****	****	Description	****	****	Required Date of Adoption	****	****	Effect on financial statements
Standards Adopted in 2020
ASU 2017-04, Simplifying the Test for Goodwill Impairment			This ASU amends Topic 350, Intangibles-Goodwill and Other, and eliminates Step 2 from the goodwill impairment test. The Company still has the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary			January 1, 2020<br><br>Early adoption is permitted.			The Company has adopted ASU 2017-04 effective January 1, 2020, as required, and the ASU did not have a material impact on its financial statements. Annual goodwill testing was completed as of September 30, 2020. The Company recognized no impairments to goodwill in the third quarter of 2020. See management’s discussion and analysis for further details.
ASU 2018-13 Changes to Disclosure Requirements Fair Value Measurement, Topic 820			This ASU eliminates, adds and modifies certain disclosure requirements for fair value measurements. Among the changes, entities will no longer be required to disclose the amount and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, but will be required to disclose the range and weighted average used to develop significant unobservable inputs for Level 3 fair value measurements.			January 1, 2020<br><br>Early adoption is permitted.			The Company has adopted ASU 2018-13, as of January 1, 2020, as required, and the ASU did not have a material impact to the disclosures as a result of the adoption.

Table of Contents


Standard	****	****	Description	****	****	Required Date of Adoption	****	****	Effect on financial statements
Standards Not Yet Adopted
ASU 2016-13, Measurement of Credit Losses on Financial Instruments ASU 2018‑19, Codification Improvements to ASU 2016-13			This ASU amends Topic 326, Financial Instruments- Credit Losses to replace the current incurred loss accounting model with a current expected credit loss approach ("CECL") for financial instruments measured at amortized cost and other commitments to extend credit. The amendments require entities to consider all available relevant information when estimating current expected credit losses, including details about past events, current conditions, and reasonable and supportable forecasts. The resulting allowance for credit losses is to reflect the portion of the amortized cost basis that the entity does not expect to collect. The amendments also eliminate the current accounting model for purchased credit impaired loans and certain off-balance sheet exposures. Additional quantitative and qualitative disclosures are required upon adoption.<br><br>While the CECL model does not apply to available for sale debt securities, the ASU does require entities to record an allowance when recognizing credit losses for available for sale securities with unrealized losses, rather than reduce the amortized cost of the securities by direct write-offs. The guidance will require companies to recognize improvements to estimated credit losses immediately in earnings rather than interest income over time.<br><br>The ASU should be adopted on a modified retrospective basis. Entities that have loans accounted for under ASC 310-30 at the time of adoption should prospectively apply the guidance in this amendment for purchase credit deteriorated assets.			January 1, 2020<br><br>			Adoption of this ASU is expected to primarily change how the Company estimates credit losses with the application of the expected credit loss model. The Company will apply the standard's provisions as a cumulative effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective (i.e., modified retrospective approach). The Company's CECL implementation efforts in the third quarter focused on model validation, continuing to develop new disclosures and establish formal policies and procedures and other governance and control documentation. Certain elements of the calculation were finalized in the second quarter, including refinement of the model assumptions, the qualitative framework, internal control design, model validation, and the operational control framework to support the new process. Furthermore, changes to the economic forecasts within the model could positively or negatively impact the actual results.<br><br> The ASU was originally effective for the Company beginning in the first quarter of 2020; however, the CARES Act issued in 2020 provided an option to delay the implementation of CECL until the earlier of when the national emergency associated with COVID-19 virus terminates or December 31, 2020. The Company elected to delay the adoption. The Allowance for Loan Loss calculated under the CECL method is estimated to be in a range of $23.0 million to $26.0 million as of September 30, 2020, compared to $20.0 million to $23.0 million on the effective date of January 1, 2020.
ASU 2018-14 Compensation- Disclosure Requirements for Defined Pension Plans Topic 715-20			This ASU makes minor changes to the disclosure requirements for employers that sponsor defined benefit pension and/or other post-retirement benefit plans.			January 1, 2021<br><br>Early adoption is permitted.			Adoption of this ASU is not expected to have a material impact on the Company's consolidated financial statements.

Table of Contents


Standard	****	****	Description	****	****	Required Date of Adoption	****	****	Effect on financial statements
Standards Not Yet Adopted (continued)
ASU 2020-04 Facilitation of the Effects of Reference Rate Reform, Topic 848			This ASU provides temporary optional expedients and exceptions to GAAP guidance on contract modifications and hedge accounting to ease the financial reporting burdens of the expected market transition from the London Interbank Offered Rate ("LIBOR") and other interbank offered rates to alternative reference rates, such as the Secured Overnight Financing Rate ("SOFR"). For instance, companies can (1) elect not to apply certain modification accounting requirements to contracts affected by reference rate reform, if certain criteria are met. A company that makes this election would not have to re-measure the contracts at the modification date or reassess a previous accounting determination. Companies can also (2) elect various optional expedients that would allow them to continue applying hedge accounting for hedging relationships affected by reference rate reform, if certain criteria are met. Finally, companies can (3) make a one-time election to sell and/or reclassify held-to-maturity debt securities that reference an interest rate affected by reference rate reform.			May be elected through December 31, 2022.			The Company is currently evaluating all of its contracts, hedging relationships and other transactions that will be effected by reference rates that are being discontinued and determining which elections need to be made.

Table of Contents NOTE 2. SECURITIES AVAILABLE FOR SALE

The following is a summary of securities available for sale:


					Gross			Gross
					Unrealized			Unrealized
(in thousands)	****	Amortized Cost		****	Gains		****	Losses		****	Fair Value
September 30, 2020
Debt securities:
Mortgage-backed securities:
US Government-sponsored enterprises		$	226,930		$	8,683		$	(441)		$	235,172
US Government agency			92,517			3,413			(145)			95,785
Private label			20,142			40			(579)			19,603
Obligations of states and political subdivisions thereof			149,890			4,267			—			154,157
Corporate bonds			99,786			1,713			(1,687)			99,812
Total securities available for sale		$	589,265		$	18,116		$	(2,852)		$	604,529


					Gross			Gross
					Unrealized			Unrealized
(in thousands)	****	Amortized Cost		****	Gains		****	Losses		****	Fair Value
December 31, 2019
Debt securities:
Mortgage-backed securities:
US Government-sponsored enterprises		$	319,064		$	4,985		$	(2,080)		$	321,969
US Government agency			98,568			1,640			(547)			99,661
Private label			20,212			68			(747)			19,533
Obligations of states and political subdivisions thereof			139,240			3,034			(268)			142,006
Corporate bonds			78,804			1,478			(221)			80,061
Total securities available for sale		$	655,888		$	11,205		$	(3,863)		$	663,230

The amortized cost and estimated fair value of available for sale (“AFS”) securities segregated by contractual maturity at September 30, 2020 are presented below. Expected maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations. Mortgage-backed securities are shown in total, as their maturities are highly variable.


		Available for sale
(in thousands)	****	Amortized Cost		****	Fair Value
Within 1 year		$	—		$	—
Over 1 year to 5 years			25,596			25,849
Over 5 years to 10 years			81,687			79,979
Over 10 years			142,393			148,141
Total bonds and obligations			249,676			253,969
Mortgage-backed securities			339,589			350,560
Total securities available for sale		$	589,265		$	604,529

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


		Three Months Ended						Nine Months Ended
		September 30,						September 30,
(In thousands)	****	2020		****	2019		****	2020		****	2019
Gross gains on sales of available for sale securities		$	—		$	716		$	1,508		$	716
Gross losses on sales of available for sale securities			—			(559)			(22)			(559)
Net gains on sale of available for sale securities		$	—		$	157		$	1,486		$	157

Table of Contents 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
September 30, 2020
Debt securities:
Mortgage-backed securities:
US Government-sponsored enterprises		$	193		$	35,087		$	248		$	4,027		$	441		$	39,114
US Government agency			68			8,671			77			3,458			145			12,129
Private label			1			108			578			19,398			579			19,506
Obligations of states and political subdivisions thereof			—			247			—			—			—			247
Corporate bonds			1,687			41,260			—			—			1,687			41,260
Total securities available for sale		$	1,949		$	85,373		$	903		$	26,883		$	2,852		$	112,256


	Less Than Twelve Months						Over Twelve Months						Total
	Gross		****			****	Gross		****			****	Gross		****
	Unrealized			Fair			Unrealized			Fair			Unrealized			Fair
(In thousands)	Losses			Value			Losses			Value			Losses			Value
December 31, 2019
Debt securities:
Mortgage-backed securities:
US Government-sponsored enterprises	$	1,074		$	43,429		$	1,006		$	49,712		$	2,080		$	93,141
US Government agency		432			19,717			115			9,120			547			28,837
Private label		380			9,843			367			9,411			747			19,254
Obligations of states and political subdivisions thereof		137			29,355			131			1,682			268			31,037
Corporate bonds		142			9,888			79			12,276			221			22,164
Total securities available for sale	$	2,165		$	112,232		$	1,698		$	82,201		$	3,863		$	194,433

Securities Impairment: As a part of the Company’s ongoing security monitoring process, the Company identifies securities in an unrealized loss position that could potentially be other-than-temporarily impaired. For the three and nine months ended September 30, 2020 and 2019 the Company did not record any other-than-temporary impairment (“OTTI”) losses.

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


		Three Months Ended						Nine Months Ended
		September 30,						September 30,
	****	2020		****	2019		****	2020		****	2019
Estimated credit losses as of prior year-end		$	1,697		$	1,697		$	1,697		$	1,697
Reductions for securities paid off during the period			—			—			—			—
Estimated credit losses at end of the period		$	1,697		$	1,697		$	1,697		$	1,697

The Company expects to recover its amortized cost basis on all securities in its AFS portfolio. Furthermore, the Company does not intend to sell nor does it anticipate that it will be required to sell any of its securities in an unrealized loss position as of September 30, 2020, prior to this recovery. The Company’s ability and intent to hold these securities until recovery is supported by the Company’s strong capital and liquidity positions as well as its historically low portfolio turnover.

Table of Contents The following summarizes, by investment security type, the basis for the conclusion that securities in an unrealized loss position were not OTTI at September 30, 2020:

US Government-sponsored enterprises

36 out of the total 611 securities in the Company’s portfolios of AFS US Government-sponsored enterprises were in unrealized loss positions. Aggregate unrealized losses represented 1.12% of the amortized cost of securities in unrealized loss positions. The Federal National Mortgage Association and Federal Home Loan Mortgage Corporation guarantee the contractual cash flows of all of the Company’s US Government-sponsored enterprises. The securities are investment grade rated and there were no material underlying credit downgrades during the quarter. All securities are performing.

US Government agency

14 out of the total 166 securities in the Company’s portfolios of AFS US Government agency securities were in unrealized loss positions. Aggregate unrealized losses represented 1.18% of the amortized cost of securities in unrealized loss positions. The Government National Mortgage Association guarantees the contractual cash flows of all of the Company’s US Government agency securities. The securities are investment grade rated and there were no material underlying credit downgrades during the quarter. All securities are performing.

Private label

11 of the total 16 securities in the Company’s portfolio of AFS private label mortgage-backed securities were in unrealized loss positions. Aggregate unrealized losses represented 2.88% of the amortized cost of securities in unrealized loss positions. Based upon the expectation that the Company will receive all of the future contractual cash flows related to the amortized cost on these securities, the Company does not consider there to be any additional other-than-temporary impairment with respect to these securities.

Obligations of states and political subdivisions thereof

1 of the total 177 securities in the Company’s portfolio of AFS municipal bonds and obligations were in unrealized loss positions. Aggregate unrealized losses represented 0.08% of the amortized cost of securities in unrealized loss positions. The Company continually monitors the municipal bond sector of the market carefully and periodically evaluates the appropriate level of exposure to the market. At this time, the Company feels the bonds in this portfolio carry minimal risk of default and the Company is appropriately compensated for the risk. There were no material underlying credit downgrades during the quarter. All securities are performing.

Corporate bonds

13 out of the total 34 securities in the Company’s portfolio of AFS corporate bonds were in an unrealized loss position. The aggregate unrealized loss represents 3.97% of the amortized cost of bonds in unrealized loss positions. The Company reviews the financial strength of all of these bonds and has concluded that the amortized cost remains supported by the expected future cash flows of these securities. The most recent review includes all bond issuers and their current credit ratings, financial performance and capitalization.

Table of Contents

NOTE 3. LOANS

The Company’s loan portfolio is comprised of the following segments: commercial real estate, commercial and industrial, residential real estate, and consumer loans. Commercial real estate loans include multi-family, commercial construction and land development, and other commercial real estate classes. Commercial and industrial loans include loans to commercial and agricultural businesses and tax exempt entities. Residential real estate loans consist of mortgages for 1-to-4 family housing. Consumer loans include home equity loans, auto and other installment loans.

The Company’s lending activities are principally conducted in Maine, New Hampshire, and Vermont.

Total loans include business activity loans and acquired loans. Acquired loans are those loans previously acquired from other institutions. The following is a summary of total loans:


		September 30, 2020									December 31, 2019
		Business									Business
		Activities			Acquired						Activities			Acquired
(in thousands)	****	Loans		****	Loans		****	Total		****	Loans		****	Loans		****	Total
Commercial real estate:
Construction and land development		$	86,927		$	2,191		$	89,118		$	31,387		$	2,903		$	34,290
Other commercial real estate			765,471			191,046			956,517			666,051			230,320			896,371
Total commercial real estate			852,398			193,237			1,045,635			697,438			233,223			930,661

Commercial and industrial:
Commercial			381,512			56,858			438,370			239,692			59,072			298,764
Agricultural			17,658			156			17,814			20,018			206			20,224
Tax exempt			41,951			24,375			66,326			66,860			37,443			104,303
Total commercial and industrial			441,121			81,389			522,510			326,570			96,721			423,291

Total commercial loans			1,293,519			274,626			1,568,145			1,024,008			329,944			1,353,952

Residential real estate:
Residential mortgages			695,766			325,440			1,021,206			740,687			411,170			1,151,857
Total residential real estate			695,766			325,440			1,021,206			740,687			411,170			1,151,857

Consumer:
Home equity			58,344			50,530			108,874			59,368			63,033			122,401
Other consumer			9,217			1,249			10,466			11,167			1,715			12,882
Total consumer			67,561			51,779			119,340			70,535			64,748			135,283

Total loans		$	2,056,846		$	651,845		$	2,708,691		$	1,835,230		$	805,862		$	2,641,092

The carrying amount of the acquired loans at September 30, 2020 totaled $651.8 million. A subset of these loans was determined to have evidence of credit deterioration at acquisition date, which is accounted for in accordance with ASC 310-30, Accounting for Certain Loans or Debt Securities Acquired in a Transfer. These purchased credit-impaired loans presently maintain a carrying value of $14.2 million (and total note balances of $18.1 million). These loans are evaluated for impairment through the periodic reforecasting of expected cash flows. Acquired loans considered not impaired at the acquisition date had a carrying amount of $637.6 million as of September 30, 2020.

Table of Contents The following table summarizes activity in the accretable yield for the acquired loan portfolio that falls under the purview of ASC 310-30, Accounting for Certain Loans or Debt Securities Acquired in a Transfer:


		Three Months Ended September 30,
(in thousands)	****	2020		****	2019
Balance at beginning of period		$	6,227		$	4,195
Net reclassifications from (to) nonaccretable difference			53			(126)
Accretion			(455)			(581)
Balance at end of period		$	5,825		$	3,488


		Nine Months Ended September 30,
(in thousands)	****	2020		****	2019
Balance at beginning of period		$	7,367		$	4,377
Net reclassifications from (to) nonaccretable difference			1,004			498
Accretion			(2,546)			(1,387)
Balance at end of period		$	5,825		$	3,488

The following is a summary of past due loans at September 30, 2020 and December 31, 2019:

Business Activities Loans


								90 Days or												Past Due >
	****	30-59 Days		****	60-89 Days		****	Greater		****	Total Past		****			****			****	90 days and
(in thousands)		Past Due			Past Due			Past Due			Due			Current			Total Loans			Accruing
September 30, 2020
Commercial real estate:
Construction and land development		$	—		$	—		$	212		$	212		$	86,715		$	86,927		$	—
Other commercial real estate			200			1,119			725			2,044			763,427			765,471			—
Total commercial real estate			200			1,119			937			2,256			850,142			852,398			—

Commercial and industrial:
Commercial			92			310			2,193			2,595			378,917			381,512			1,932
Agricultural			122			—			109			231			17,427			17,658			—
Tax exempt			—			—			—			—			41,951			41,951			—
Total commercial and industrial			214			310			2,302			2,826			438,295			441,121			1,932

Total commercial loans			414			1,429			3,239			5,082			1,288,437			1,293,519			1,932

Residential real estate:
Residential mortgages			217			112			1,369			1,698			694,068			695,766			—
Total residential real estate			217			112			1,369			1,698			694,068			695,766			—

Consumer:
Home equity			39			36			171			246			58,098			58,344			—
Other consumer			12			—			2			14			9,203			9,217			—
Total consumer			51			36			173			260			67,301			67,561			—

Total loans		$	682		$	1,577		$	4,781		$	7,040		$	2,049,806		$	2,056,846		$	1,932

Table of Contents Acquired Loans


	****			****			****	90 Days or		****			****	Acquired		****			****	Past Due >
		30-59 Days			60-89 Days			Greater			Total Past			Credit						90 days and
(in thousands)		Past Due			Past Due			Past Due			Due		****	Impaired			Total Loans		****	Accruing
September 30, 2020
Commercial real estate:
Construction and land development		$	—		$	—		$	—		$	—		$	221		$	2,191		$	—
Other commercial real estate			169			156			678			1,003			7,227			191,046			—
Total commercial real estate			169			156			678			1,003			7,448			193,237			—

Commercial and industrial:
Commercial			450			65			18			533			1,182			56,858			—
Agricultural			—			—			—			—			156			156			—
Tax exempt			—			—			—			—			—			24,375			—
Total commercial and industrial			450			65			18			533			1,338			81,389			—

Total commercial loans			619			221			696			1,536			8,786			274,626			—

Residential real estate:
Residential mortgages			291			441			2,006			2,738			4,657			325,440			215
Total residential real estate			291			441			2,006			2,738			4,657			325,440			215

Consumer:
Home equity			291			133			170			594			711			50,530			69
Other consumer			—			—			—			—			44			1,249			—
Total consumer			291			133			170			594			755			51,779			69

Total loans		$	1,201		$	795		$	2,872		$	4,868		$	14,198		$	651,845		$	284

Table of Contents Business Activities Loans


	`							90 Days or												Past Due >
	****	30-59 Days		****	60-89 Days		****	Greater		****	Total Past		****			****			****	90 days and
(in thousands)		Past Due			Past Due			Past Due			Due			Current			Total Loans			Accruing
December 31, 2019
Commercial real estate:
Construction and land development		$	205		$	53		$	—		$	258		$	31,129		$	31,387		$	—
Other commercial real estate			40			1,534			1,810			3,384			662,667			666,051			—
Total commercial real estate			245			1,587			1,810			3,642			693,796			697,438			—

Commercial and industrial:
Commercial			452			50			894			1,396			238,296			239,692			—
Agricultural			62			34			96			192			19,826			20,018			—
Tax exempt			—			—			—			—			66,860			66,860			—
Total commercial and industrial			514			84			990			1,588			324,982			326,570			—

Total commercial loans			759			1,671			2,800			5,230			1,018,778			1,024,008			—

Residential real estate:
Residential mortgages			7,293			1,243			668			9,204			731,483			740,687			—
Total residential real estate			7,293			1,243			668			9,204			731,483			740,687			—

Consumer:
Home equity			597			43			429			1,069			58,299			59,368			50
Other consumer			36			12			—			48			11,119			11,167			—
Total consumer			633			55			429			1,117			69,418			70,535			50

Total loans		$	8,685		$	2,969		$	3,897		$	15,551		$	1,819,679		$	1,835,230		$	50

Table of Contents Acquired Loans


	****			****			****	90 Days or		****			****	Acquired		****			****	Past Due >
		30-59 Days			60-89 Days			Greater			Total Past			Credit						90 days and
(in thousands)		Past Due			Past Due			Past Due			Due			Impaired			Total Loans			Accruing
December 31, 2019
Commercial real estate:
Construction and land development		$	—		$	12		$	—		$	12		$	384		$	2,903		$	—
Other commercial real estate			2,029			245			231			2,505			8,289			230,320			—
Total commercial real estate			2,029			257			231			2,517			8,673			233,223			—

Commercial and industrial:
Commercial			440			335			140			915			2,723			59,072			—
Agricultural			—			—			—			—			173			206			—
Tax exempt			—			—			—			—			36			37,443			—
Total commercial and industrial			440			335			140			915			2,932			96,721			—

Total commercial loans			2,469			592			371			3,432			11,605			329,944			—

Residential real estate:
Residential mortgages			3,185			864			1,015			5,064			5,591			411,170			—
Total residential real estate			3,185			864			1,015			5,064			5,591			411,170			—

Consumer:
Home equity			208			548			217			973			1,291			63,033			217
Other consumer			2			9			—			11			66			1,715			—
Total consumer			210			557			217			984			1,357			64,748			217

Total loans		$	5,864		$	2,013		$	1,603		$	9,480		$	18,553		$	805,862		$	217

Table of Contents Non-Accrual Loans

The following is summary information pertaining to non-accrual loans at September 30, 2020 and December 31, 2019:


	September 30, 2020						December 31, 2019
	Business						Business
	Activities		Acquired				Activities		Acquired
(in thousands)	Loans		Loans		Total		Loans		Loans		Total
Commercial real estate:
Construction and land development	$	212	$	—	$	212	$	258	$	—	$	258
Other commercial real estate		1,818		2,684		4,502		2,888		343		3,231
Total commercial real estate		2,030		2,684		4,714		3,146		343		3,489

Commercial and industrial:
Commercial		918		416		1,334		932		626		1,558
Agricultural		486		—		486		278		—		278
Tax exempt		—		—		—		—		—		—
Total commercial and industrial		1,404		416		1,820		1,210		626		1,836

Total commercial loans		3,434		3,100		6,534		4,356		969		5,325

Residential real estate:
Residential mortgages		3,864		3,290		7,154		3,362		1,973		5,335
Total residential real estate		3,864		3,290		7,154		3,362		1,973		5,335

Consumer:
Home equity		450		255		705		615		254		869
Other consumer		15		—		15		21		—		21
Total consumer		465		255		720		636		254		890

Total loans	$	7,763	$	6,645	$	14,408	$	8,354	$	3,196	$	11,550

Table of Contents Loans evaluated for impairment as of September 30, 2020 and December 31, 2019 are, as follows:

Business Activities Loans


		Commercial			Commercial			Residential
(in thousands)	****	real estate		****	and industrial		****	real estate		****	Consumer		****	Total
September 30, 2020
Balance at end of period
Individually evaluated for impairment		$	2,586		$	1,274		$	2,233		$	12		$	6,105
Collectively evaluated			849,812			439,847			693,533			67,549			2,050,741
Total		$	852,398		$	441,121		$	695,766		$	67,561		$	2,056,846

Acquired Loans


	****	Commercial		****	Commercial		****	Residential		****			****
(in thousands)		real estate			and industrial			real estate			Consumer			Total
September 30, 2020
Balance at end of period
Individually evaluated for impairment		$	2,358		$	322		$	832		$	—		$	3,512
Purchased credit impaired			7,448			1,338			4,657			755			14,198
Collectively evaluated			183,431			79,729			319,951			51,024			634,135
Total		$	193,237		$	81,389		$	325,440		$	51,779		$	651,845

Business Activities Loans


	****	Commercial		****	Commercial		****	Residential		****			****
(in thousands)		real estate			and industrial			real estate			Consumer			Total
December 31, 2019
Balance at end of period
Individually evaluated for impairment		$	3,964		$	1,353		$	2,620		$	13		$	7,950
Collectively evaluated			693,474			325,217			738,067			70,522			1,827,280
Total		$	697,438		$	326,570		$	740,687		$	70,535		$	1,835,230

Acquired Loans


	****	Commercial		****	Commercial		****	Residential		****			****
(in thousands)		real estate			and industrial			real estate			Consumer			Total
December 31, 2019
Balance at end of period
Individually evaluated for impairment		$	258		$	385		$	1,032		$	—		$	1,675
Purchased credit impaired			8,673			2,932			5,591			1,357			18,553
Collectively evaluated			224,292			93,404			404,547			63,391			785,634
Total		$	233,223		$	96,721		$	411,170		$	64,748		$	805,862

Table of Contents The following is a summary of impaired loans at September 30, 2020 and December 31, 2019:

Business Activities Loans


	September 30, 2020
	Recorded		Unpaid Principal		Related
(in thousands)	Investment		Balance		Allowance
With no related allowance:
Construction and land development	$	—	$	—	$	—
Other commercial real estate		1,941		2,020		—
Commercial		678		773		—
Agricultural		155		158		—
Tax exempt loans		—		—		—
Residential real estate		1,555		1,649		—
Home equity		—		—		—
Other consumer		—		—		—

With an allowance recorded:
Construction and land development		210		210		158
Other commercial real estate		435		503		185
Commercial		216		216		18
Agricultural		225		361		225
Tax exempt loans		—		—		—
Residential real estate		678		725		45
Home equity		12		12		1
Other consumer		—		—		—

Total
Commercial real estate		2,586		2,733		343
Commercial and industrial		1,274		1,508		243
Residential real estate		2,233		2,374		45
Consumer		12		12		1
Total impaired loans	$	6,105	$	6,627	$	632

Table of Contents Acquired Loans


	September 30, 2020
	Recorded		Unpaid Principal		Related
(in thousands)	Investment		Balance		Allowance
With no related allowance:
Construction and land development	$	—	$	—	$	—
Other commercial real estate		1,584		1,605		—
Commercial		257		353		—
Agricultural		—		—		—
Tax exempt loans		—		—		—
Residential real estate		403		683		—
Home equity		—		—		—
Other consumer		—		—		—

With an allowance recorded:
Construction and land development		—		—		—
Other commercial real estate		774		793		297
Commercial		65		67		7
Agricultural		—		—		—
Tax exempt loans		—		—		—
Residential real estate		429		522		52
Home equity		—		—		—
Other consumer		—		—		—

Total
Commercial real estate		2,358		2,398		297
Commercial and industrial		322		420		7
Residential real estate		832		1,205		52
Consumer		—		—		—
Total impaired loans	$	3,512	$	4,023	$	356

Table of Contents Business Activities Loans


	December 31, 2019
	Recorded		Unpaid Principal		Related
(in thousands)	Investment		Balance		Allowance
With no related allowance:
Construction and land development	$	—	$	—	$	—
Other commercial real estate		1,911		1,957		—
Commercial		710		773		—
Agricultural		361		361		—
Tax exempt loans		—		—		—
Residential real estate		2,067		2,227		—
Home equity		—		—		—
Other consumer		—		—		—

With an allowance recorded:
Construction and land development		258		258		205
Other commercial real estate		1,795		1,940		1,026
Commercial		282		289		164
Agricultural		—		—		—
Tax exempt loans		—		—		—
Residential real estate		553		590		57
Home equity		13		13		—
Other consumer		—		—		—

Total
Commercial real estate		3,964		4,155		1,231
Commercial and industrial		1,353		1,423		164
Residential real estate		2,620		2,817		57
Consumer		13		13		—
Total impaired loans	$	7,950	$	8,408	$	1,452

Table of Contents Acquired Loans


	December 31, 2019
	Recorded		Unpaid Principal		Related
(in thousands)	Investment		Balance		Allowance
With no related allowance:
Construction and land development	$	—	$	—	$	—
Other commercial real estate		90		90		—
Commercial		385		481		—
Agricultural		—		—		—
Tax exempt		—		—		—
Residential mortgages		678		938		—
Home equity		—		—		—
Other consumer		—		—		—

With an allowance recorded:
Construction and land development		—		—		—
Other commercial real estate		168		168		12
Commercial		—		—		—
Agricultural		—		—		—
Tax exempt		—		—		—
Residential mortgages		354		376		49
Home equity		—		—		—
Other consumer		—		—		—

Total
Commercial real estate		258		258		12
Commercial and industrial		385		481		—
Residential real estate		1,032		1,314		49
Consumer		—		—		—
Total impaired loans	$	1,675	$	2,053	$	61

Table of Contents The following is a summary of the average recorded investment and interest income recognized on impaired loans for the three and nine months ended September 30, 2020 and 2019:

Business Activities Loans


	Three Months Ended September 30, 2020				Three Months Ended September 30, 2019
	Average Recorded		Interest		Average Recorded		Interest
(in thousands)	Investment		Income Recognized		Investment		Income Recognized
With no related allowance:
Construction and land development	$	—	$	—	$	—	$	—
Other commercial real estate		1,899		14		5,528		63
Commercial		692		1		747		4
Agricultural		157		—		—		—
Tax exempt loans		—		—		—		—
Residential real estate		1,547		12		2,041		16
Home equity		—		—		—		—
Other consumer		—		—		—		—

With an allowance recorded:
Construction and land development		205		—		1		—
Other commercial real estate		429		—		3,217		—
Commercial		212		1		654		—
Agricultural		—		—		—		—
Tax exempt loans		—		—		—		—
Residential real estate		665		3		551		2
Home equity		12		—		12		—
Other consumer		—		—		—		—

Total
Commercial real estate		2,533		14		8,746		52
Commercial and industrial		1,061		2		1,401		4
Residential real estate		2,212		15		2,592		18
Consumer		12		—		12		—
Total impaired loans	$	5,818	$	31	$	12,751	$	74

Table of Contents Business Activities Loans


	Nine Months Ended September 30, 2020				Nine Months Ended September 30, 2019
	Average Recorded		Interest		Average Recorded		Interest
(in thousands)	Investment		Income Recognized		Investment		Income Recognized
With no related allowance:
Construction and land development	$	—	$	—	$	—	$	—
Other commercial real estate		1,427		14		5,466		56
Commercial		732		2		792		7
Agricultural		101		—		—		—
Tax exempt loans		—		—		—		—
Residential real estate		1,581		25		2,089		47
Home equity		—		—		—		—
Other consumer		—		—		—		—

With an allowance recorded:
Construction and land development		208		—		2		—
Other commercial real estate		452		—		2,972		29
Commercial		97		2		497		—
Agricultural		—		—		—		—
Tax exempt loans		—		—		—		—
Residential real estate		681		9		540		7
Home equity		12		—		13		—
Other consumer		—		—		—		—

Total
Commercial real estate		2,087		14		8,440		85
Commercial and industrial		930		4		1,289		7
Residential real estate		2,262		34		2,629		54
Consumer		12		—		13		—
Total impaired loans	$	5,291	$	52	$	12,371	$	146

Table of Contents Acquired Loans


	Three Months Ended September 30, 2020				Three Months Ended September 30, 2019
	Average Recorded		Interest		Average Recorded		Interest
(in thousands)	Investment		Income Recognized		Investment		Income Recognized
With no related allowance:
Construction and land development	$	—	$	—	$	—	$	—
Other commercial real estate		1,566		—		88		—
Commercial		264		—		395		—
Agricultural		—		—		—		—
Tax exempt loans		—		—		—		—
Residential real estate		519		—		702		—
Home equity		—		—		—		—
Other consumer		—		—		—		—

With an allowance recorded:
Construction and land development		—		—		—		—
Other commercial real estate		782		3		165		—
Commercial		67		—		—		—
Agricultural		—		—		—		—
Tax exempt loans		—		—		—		—
Residential real estate		420		—		352		—
Home equity		—		—		—		—
Other consumer		—		—		—		—

Total
Commercial real estate		2,348		3		253		—
Commercial and industrial		331		—		395		—
Residential real estate		939		—		1,054		—
Consumer		—		—		—		—
Total impaired loans	$	3,618	$	3	$	1,702	$	—

Table of Contents Acquired Loans


	Nine Months Ended September 30, 2020				Nine Months Ended September 30, 2019
	Average Recorded		Interest		Average Recorded		Interest
(in thousands)	Investment		Income Recognized		Investment		Income Recognized
With no related allowance:
Construction and land development	$	—	$	—	$	—	$	—
Other commercial real estate		1,097		—		89		—
Commercial		318		—		429		—
Agricultural		—		—		—		—
Tax exempt loans		—		—		—		—
Residential real estate		541		—		593		—
Home equity		—		—		—		—
Other consumer		—		—		—		—

With an allowance recorded:
Construction and land development		—		—		—		—
Other commercial real estate		639		3		123		—
Commercial		75		—		—		—
Agricultural		—		—		—		—
Tax exempt loans		—		—		—		—
Residential real estate		432		—		361		—
Home equity		—		—		—		—
Other consumer		—		—		—		—

Total
Commercial real estate		1,736		3		212		—
Commercial and industrial		393		—		429		—
Residential real estate		973		—		954		—
Consumer		—		—		—		—
Total impaired loans	$	3,102	$	3	$	1,595	$	—

Table of Contents

Troubled Debt Restructuring Loans

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

The following tables include the recorded investment and number of modifications identified during the three and nine months ended September 30, 2020 and 2019, respectively. The table includes the recorded investment in the loans prior to a modification and also the recorded investment in the loans after the loans were restructured. Modifications may include adjustments to interest rates, payment amounts, extensions of maturity, court ordered concessions or other actions intended to minimize economic loss and avoid foreclosure or repossession of collateral.


		Three Months Ended September 30, 2020
				Pre-Modification			Post-Modification
		Number of		Outstanding Recorded			Outstanding Recorded
(in thousands, except modifications)	****	Modifications	****	Investment		****	Investment
Troubled Debt Restructurings
Agricultural		1		$	86		$	86
Total		1		$	86		$	86


		Three Months Ended September 30, 2019
				Pre-Modification			Post-Modification
		Number of		Outstanding Recorded			Outstanding Recorded
(in thousands, except modifications)	****	Modifications	****	Investment		****	Investment
Troubled Debt Restructurings
Other commercial real estate		4		$	268		$	267
Agricultural		1			141			141
Residential mortgages		2			399			342
Total		7		$	808		$	750


		Nine Months Ended September 30, 2020
				Pre-Modification			Post-Modification
		Number of		Outstanding Recorded			Outstanding Recorded
(in thousands, except modifications)	****	Modifications	****	Investment		****	Investment
Troubled Debt Restructurings
Other commercial real estate		1		$	54		$	247
Other commercial		3			41			162
Agricultural		1			86			86
Home equity		1			26			24
Other consumer		1			9			9
Total		7		$	216		$	528


		Nine Months Ended September 30, 2019
				Pre-Modification				Post-Modification
		Number of		Outstanding Recorded			Outstanding Recorded
(in thousands, except modifications)	****	Modifications	****	Investment		****	Investment
Troubled Debt Restructurings
Other commercial real estate		9		$	543		$	529
Other commercial		4			168			91
Agricultural		1			141			141
Residential mortgages		11			1,133			1,034
Total		25		$	1,985		$	1,795

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


		Three Months Ended September 30,
		2020					2019
				Post-Modification					Post-Modification
				Outstanding					Outstanding
		Number of		Recorded			Number of		Recorded
(in thousands, except modifications)	****	Modifications	****	Investment		****	Modifications	****	Investment
Troubled Debt Restructurings
Interest only payments		—		$	—		2		$	90
Forbearance		—			—		1			141
Forbearance and interest only payments		—			—		2			176
Forbearance, amortization and maturity concession		—			—		2			343
Maturity concession		1			86		—			—
Total		1		$	86		7		$	750


		Nine Months Ended September 30,
		2020					2019
	****		****	Post-Modification		****		****	Post-Modification
				Outstanding					outstanding
		Number of		Recorded			Number of		Recorded
(in thousands, except modifications)	****	Modifications	****	Investment		****	Modifications	****	Investment
Troubled Debt Restructurings
Interest only payments		—		$	—		2		$	90
Interest only payments and maturity concession		—			—		2			73
Interest rate, forbearance and maturity concession		4			409		—			—
Amortization and maturity concession		—			—		4			273
Amortization, interest rate and maturity concession		—			—		1			77
Forbearance		—			—		3			253
Forbearance and interest only payments		1			24		5			331
Forbearance, amortization and maturity concession		—			—		7			640
Maturity concession		2			95		—			—
Other		—			—		1			58
Total		7		$	528		25		$	1,795

For the three and nine months ended September 30, 2020, there were no loans that were restructured that had subsequently defaulted during the period. The evaluation of certain loans individually for specific impairment includes loans that were previously classified as TDRs or continue to be classified as TDRs.

Modifications in response to COVID-19

The Company began offering short-term loan modifications to assist borrowers during the COVID-19 national emergency. The CARES Act along with a joint agency statement issued by banking agencies, provides that short-term modifications made in response to COVID-19 do not need to be accounted for as a TDR. Accordingly, the Company does not account for such loan modifications as TDRs. See Note 1 - Basis of Presentation for more information.

The Company modified 588 commercial loans totaling $375.0 million and 564 residential loans totaling $98.5 million. As of September 30, 2020 total outstanding deferrals were $78.7 million, which primarily consist of interest only forbearance. Outstanding deferrals consisted of 110 commercial loans totaling $74.1 million and 86 residential loans totaling $4.6 million.

Foreclosure

As of September 30, 2020 and December 31, 2019, the Company maintained bank-owned residential real estate with a fair value of $1.9 million. Additionally, residential mortgage loans collateralized by real estate that are in the process of foreclosure as of September 30, 2020 and December 31, 2019 totaled $917 thousand and $810 thousand, respectively.

Table of Contents

Mortgage Banking

The Bank sells loans in the secondary market and retains the ability to service many of these loans. The Bank earns fees for the servicing provided. Loans serviced for others are not included in the accompanying consolidated balance sheets. The risks inherent in servicing assets relate primarily to changes in prepayments that result from shifts in interest rates.

Servicing rights activity during the three and nine months ended September 30, 2020 and 2019, included in other assets, was as follows:


		At or for the Three Months Ended September 30,					At or for the Nine Months Ended September 30,
(in thousands)	****	2020		****	2019		2020		****	2019
Balance at beginning of year		$	2,939		$	2,941	$	3,001		$	3,086
Acquired			—			—		—			—
Additions			515			106		796			213
Amortization			(220)			(138)		(563)			(390)
Balance at end of year		$	3,234		$	2,909	$	3,234		$	2,909

Total residential loans included held for sale loans of $23.7 million and $6.5 million at September 30, 2020 and December 31, 2019, respectively.

Table of Contents NOTE 4. ALLOWANCE FOR LOAN LOSSES

The allowance for loan losses is maintained at a level considered adequate to provide for an estimate of probable credit losses inherent in the loan portfolio. The allowance is increased by the provision charged to operating expense and reduced by net charge-offs. Loans are charged against the allowance for loan losses when the Company believes collectability has declined to a point where there is a distinct possibility of some loss of principal and interest. While the Company uses the best information available to make the evaluation, future adjustments may be necessary if there are significant changes in conditions.

The allowance is comprised of four distinct reserve components: (1) specific reserves related to loans individually evaluated; (2) quantitative reserves related to loans collectively evaluated; (3) qualitative reserves related to loans collectively evaluated; and (4) a temporal estimate is made for incurred loss emergence period for each loan category within the collectively evaluated pools.

A summary of the methodology employed on a quarterly basis with respect to each of these components in order to evaluate the overall adequacy of the Company's allowance for loan losses is as follows:

Specific Reserve for Loans Individually Evaluated

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

Purchase credit impaired (“PCI”) loans are collectively evaluated, but are not included in the general reserve as described below. The evaluation of the PCI loans requires continued quarterly assessment of key assumptions and estimates similar to the initial fair value estimate, including changes in the severity of loss, timing and speed of payments, collateral value changes, expected cash flows and other relevant factors. The quarterly assessment is compared to the initial fair value estimate and a determination is made if an adjustment to the allowance for loan loss is deemed necessary.

Quantitative Reserve for Loans Collectively Evaluated

Second, the Company stratifies the loan portfolio into two general business loan pools: substandard (7 risk-rated) and pass-rated (0 to 6 risk-rated) by loan type. Substandard rated loans are subject to higher credit loss rates in the allowance for loan loss calculation. The Company utilizes historical loss rates for commercial real estate and commercial and industrial loans assessed by internal risk rating. Historical loss rates on residential real estate and consumer loans are not risk graded. Residential real estate and consumer loans are considered as part of the pass-rated portfolio unless removed due to specific reserve evaluation based on past due status and/or other indications of credit deterioration. Quantitative reserves relative to each loan pool are established as follows: for all loan segments an allocation equaling 100% of the respective pool's average 3-year historical net loan charge-off rate (determined based upon the most recent 12 quarters) is applied to the aggregate recorded investment in the pool of loans. Purchased performing loans are collectively evaluated as their own separate category within each loan pool. 36

Table of Contents

Qualitative Reserve for Loans Collectively Evaluated

Third, the Company considers the necessity to adjust the average historical net loan charge-off rates relative to each of the above two loan pools for potential risks factors that could result in actual losses deviating from prior loss experience. Such qualitative risk factors considered are: (1) lending policies and procedures, (2) business conditions, (3) volume and nature of the loan portfolio, (4) experience, ability and depth of lending management, (5) problem loan trends, (6) quality of the Company’s loan review system, (7) concentrations in the loan portfolio, (8) competition, legal, and regulatory environment and (9) collateral coverage and loan-to-value.

Loss Emergence Period for Loans Collectively Evaluated

Fourth, the general allowance related to loans collectively evaluated includes an estimate of incurred losses over an estimated loss emergence period ("LEP"). The LEP is generated utilizing a charge-off look-back analysis, which evaluates the time from the first indication of elevated risk of repayment (or other early event indicating a problem) to eventual charge-off to support the LEP considered in the allowance calculation. This reserving methodology establishes the approximate number of months of LEP that represents incurred losses for each loan portfolio within each portfolio segment in addition to the qualitative reserves.

Activity in the allowance for loan losses for the three and nine months ended September 30, 2020 and 2019 are, as follows:


Business Activities Loans		At or for the Three Months Ended September 30, 2020
	****	Commercial		****	Commercial		****	Residential		****			****
(in thousands)		real estate			and industrial			real estate			Consumer			Total
Balance at beginning of period		$	8,416		$	3,241		$	3,945		$	376		$	15,978
Charged-off loans			(266)			(4)			—			(146)			(416)
Recoveries on charged-off loans			12			14			—			6			32
Provision for loan losses			1,265			269			104			143			1,781
Balance at end of period		$	9,427		$	3,520		$	4,049		$	379		$	17,375
Individually evaluated for impairment			343			243			45			1			632
Collectively evaluated			9,084			3,277			4,004			378			16,743
Total		$	9,427		$	3,520		$	4,049		$	379		$	17,375


Business Activities Loans	At or for the Nine Months Ended September 30, 2020
	Commercial		Commercial		Residential
(in thousands)	real estate		and industrial		real estate		Consumer		Total
Balance at beginning of period	$	7,668	$	3,608	$	3,402	$	379	$	15,057
Charged-off loans		(1,036)		(307)		(21)		(335)		(1,699)
Recoveries on charged-off loans		90		16		—		5		111
Provision for loan losses		2,705		203		668		330		3,906
Balance at end of period	$	9,427	$	3,520	$	4,049	$	379	$	17,375
Individually evaluated for impairment		343		243		45		1		632
Collectively evaluated		9,084		3,277		4,004		378		16,743
Total	$	9,427	$	3,520	$	4,049	$	379	$	17,375


Acquired Loans	At or for the Three Months Ended September 30, 2020
	Commercial		Commercial		Residential
(in thousands)	real estate		and industrial		real estate		Consumer		Total
Balance at beginning of period	$	401	$	12	$	118	$	—	$	531
Charged-off loans		—		(20)		—		(3)		(23)
Recoveries on charged-off loans		2		—		1		2		5
Provision (release) for loan losses		(3)		20		1		1		19
Balance at end of period	$	400	$	12	$	120	$	—	$	532
Individually evaluated for impairment		297		7		52		—		356
Collectively evaluated		103		5		68		—		176
Total	$	400	$	12	$	120	$	—	$	532

Table of Contents


Acquired Loans	At or for the Nine Months Ended September 30, 2020
	Commercial		Commercial		Residential
(in thousands)	real estate		and industrial		real estate		Consumer		Total
Balance at beginning of period	$	147	$	6	$	143	$	—	$	296
Charged-off loans		(101)		(53)		(11)		(6)		(171)
Recoveries on charged-off loans		19		9		12		8		48
Provision (release) for loan losses		335		50		(24)		(2)		359
Balance at end of period	$	400	$	12	$	120	$	—	$	532
Individually evaluated for impairment		297		7		52		—		356
Collectively evaluated		103		5		68		—		176
Total	$	400	$	12	$	120	$	—	$	532


Business Activities Loans	At or for the Three Months Ended September 30, 2019
	Commercial		Commercial		Residential
(in thousands)	real estate		and industrial		real estate		Consumer		Total
Balance at beginning of period	$	7,206	$	2,748	$	3,942	$	394	$	14,290
Charged-off loans		—		—		(108)		(55)		(163)
Recoveries on charged-off loans		1		62		36		1		100
Provision (release) for loan losses		956		63		(111)		(94)		814
Balance at end of period	$	8,163	$	2,873	$	3,759	$	246	$	15,041
Individually evaluated for impairment		990		240		66		1		1,297
Collectively evaluated		7,173		2,633		3,693		245		13,744
Total	$	8,163	$	2,873	$	3,759	$	246	$	15,041


Business Activities Loans	At or for the Nine Months Ended September 30, 2019
	Commercial		Commercial		Residential
(in thousands)	real estate		and industrial		real estate		Consumer		Total
Balance at beginning of period	$	6,811	$	2,380	$	3,982	$	408	$	13,581
Charged-off loans		(57)		(13)		(110)		(129)		(309)
Recoveries on charged-off loans		131		62		55		8		256
Provision (release) for loan losses		1,278		444		(168)		(41)		1,513
Balance at end of period	$	8,163	$	2,873	$	3,759	$	246	$	15,041
Individually evaluated for impairment		990		240		66		1		1,297
Collectively evaluated		7,173		2,633		3,693		245		13,744
Total	$	8,163	$	2,873	$	3,759	$	246	$	15,041


Acquired Loans		At or for the Three Months Ended September 30, 2019
	****	Commercial		****	Commercial		****	Residential		****			****
(in thousands)		real estate			and industrial			real estate			Consumer			Total
Balance at beginning of period		$	159		$	22		$	101		$	—		$	282
Charged-off loans			—			—			(52)			—			(52)
Recoveries on charged-off loans			—			—			—			3			3
Provision (release) for loan losses			(2)			(15)			99			(3)			79
Balance at end of period		$	157		$	7		$	148		$	—		$	312
Individually evaluated for impairment			12			—			32			—			44
Collectively evaluated			145			7			116			—			268
Total		$	157		$	7		$	148		$	—		$	312

Table of Contents


Acquired Loans		At or for the Nine Months Ended September 30, 2019
	****	Commercial		****	Commercial		****	Residential		****			****
(in thousands)		real estate			and industrial			real estate			Consumer			Total
Balance at beginning of period		$	173		$	35		$	77		$	—		$	285
Charged-off loans			—			(15)			(222)			(5)			(242)
Recoveries on charged-off loans			—			—			—			3			3
Provision (releases) for loan losses			(16)			(13)			293			2			266
Balance at end of period		$	157		$	7		$	148		$	—		$	312
Individually evaluated for impairment			12			—			32			—			44
Collectively evaluated			145			7			116			—			268
Total		$	157		$	7		$	148		$	—		$	312

Loan Origination/Risk Management: The Company has certain lending policies and procedures in place designed to maximize loan income within an acceptable level of risk. The Company’s Board of Directors reviews and approves these policies and procedures on a regular basis. A reporting system supplements the review process by providing management and the Company's Board of Directors with frequent reports related to loan production, loan quality, concentration of credit, loan delinquencies, non-performing loans and potential problem loans. The Company seeks to diversify the loan portfolio as a means of managing risk associated with fluctuations in economic conditions.

Credit Quality Indicators/Classified Loans: In monitoring the credit quality of the portfolio, management applies a credit quality indicator and uses an internal risk rating system to categorize commercial loans. These credit quality indicators range from one through nine, with a higher number correlating to increasing risk of loss. These ratings are used as inputs to the calculation of the allowance for loan losses. Consistent with regulatory guidelines, the Company provides for the classification of loans which are considered to be of lesser quality as special mention, substandard, doubtful, or loss (i.e. risk-rated 6, 7, 8 and 9, respectively).

The following are the definitions of the Company’s credit quality indicators:

Pass: Loans the Company considers in the commercial portfolio segments that are not adversely rated, are contractually current as to principal and interest, and are otherwise in compliance with the contractual terms of the loan agreement. Management believes there is a low risk of loss related to these loans considered pass-rated.

Special Mention: Loans the Company considers having some potential weaknesses, but are deemed to not carry levels of risk inherent in one of the subsequent categories, are designated as special mention. A special mention loan has potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the asset or in the institution’s credit position at some future date. This might include loans which may require a higher level of supervision or internal reporting because of: (i) declining industry trends; (ii) increasing reliance on secondary sources of repayment; (iii) the poor condition of or lack of control over collateral; or (iv) failure to obtain proper documentation or any other deviations from prudent lending practices. Economic or market conditions which may, in the future, affect the obligor may warrant special mention of the asset. Loans for which an adverse trend in the borrower's operations or an imbalanced position in the balance sheet which has not reached a point where the liquidation is jeopardized may be included in this classification. Special mention loans are not adversely classified and do not expose the Company to sufficient risks to warrant classification.

Substandard: Loans the Company considers as substandard are inadequately protected by the current net worth and paying capacity of the borrower or of the collateral pledged, if any. Substandard loans have a well-defined weakness that jeopardizes liquidation of the debt. Substandard loans include those loans where there is the distinct possibility of some loss of principal, if the deficiencies are not corrected.

Doubtful: Loans the Company considers as doubtful have all of the weaknesses inherent in those loans that are classified as substandard. These loans have the added characteristic of a well-defined weakness which is inadequately protected by the current sound worth and paying capacity of borrower or of the collateral pledged, if any, and calls into question the collectability of the full balance of the loan. The possibility of loss is high but because of certain important and reasonably specific pending factors which may work to the advantage and strengthening of the loan, its classification as loss is deferred

Table of Contents until its more exact status is determined. Pending factors include proposed merger, acquisition, or liquidation procedures, capital injection, perfecting liens on additional collateral and refinancing plans. The entire amount of the loan might not be classified as doubtful when collection of a specific portion appears highly probable. Loans are generally not classified doubtful for an extended period of time (i.e., over a year).

Loss: Loans the Company considers as losses are those considered uncollectible and of such little value that their continuance as an asset is not warranted and the uncollectible amounts are charged-off. This classification does not mean the asset has absolutely no recovery or salvage value, but rather it is not practical or desirable to defer writing off this worthless asset even though partial recovery may be affected in the future. Losses are taken in the period in which they are determined to be uncollectible.

The following tables present the Company’s loans by risk rating at September 30, 2020 and December 31, 2019:

Business Activities Loans

Commercial Real Estate


	Commercial construction
	and land development				Commercial real estate other				Total commercial real estate
(in thousands)	Sep 30, 2020		Dec 31, 2019		Sep 30, 2020		Dec 31, 2019		Sep 30, 2020		Dec 31, 2019
Grade:
Pass	$	86,716	$	31,057	$	742,214	$	646,886	$	828,930	$	677,943
Special mention		—		—		6,722		5,483		6,722		5,483
Substandard		—		330		15,981		11,974		15,981		12,304
Doubtful		211		—		554		1,708		765		1,708
Total	$	86,927	$	31,387	$	765,471	$	666,051	$	852,398	$	697,438

Acquired Loans

Commercial Real Estate


	Commercial construction
	and land development				Commercial real estate other				Total commercial real estate
(in thousands)	Sep 30, 2020		Dec 31, 2019		Sep 30, 2020		Dec 31, 2019		Sep 30, 2020		Dec 31, 2019
Grade:
Pass	$	1,878	$	2,412	$	180,602	$	218,491	$	182,480	$	220,903
Special mention		—		12		1,508		2,261		1,508		2,273
Substandard		313		479		7,411		9,400		7,724		9,879
Doubtful		—		—		1,525		168		1,525		168
Total	$	2,191	$	2,903	$	191,046	$	230,320	$	193,237	$	233,223

Business Activities Loans

Commercial and Industrial


	Commercial				Agricultural				Tax exempt loans				Total commercial and industrial
(in thousands)	Sep 30, 2020		Dec 31, 2019		Sep 30, 2020		Dec 31, 2019		Sep 30, 2020		Dec 31, 2019		Sep 30, 2020		Dec 31, 2019
Grade:
Pass	$	362,351	$	221,329	$	16,744	$	18,940	$	41,951	$	66,860	$	421,046	$	307,129
Special mention		4,066		2,744		200		298		—		—		4,266		3,042
Substandard		14,430		14,866		489		780		—		—		14,919		15,646
Doubtful		665		753		225		—		—		—		890		753
Total	$	381,512	$	239,692	$	17,658	$	20,018	$	41,951	$	66,860	$	441,121	$	326,570

Table of Contents

Acquired Loans

Commercial and Industrial


	Commercial				Agricultural				Tax exempt loans				Total commercial and industrial
(in thousands)	Sep 30, 2020		Dec 31, 2019		Sep 30, 2020		Dec 31, 2019		Sep 30, 2020		Dec 31, 2019		Sep 30, 2020		Dec 31, 2019
Grade:
Pass	$	54,667	$	51,184	$	21	$	58	$	24,375	$	37,407	$	79,063	$	88,649
Special mention		421		5,432		—		—		—		—		421		5,432
Substandard		1,255		2,115		135		148		—		36		1,390		2,299
Doubtful		515		341		—		—		—		—		515		341
Total	$	56,858	$	59,072	$	156	$	206	$	24,375	$	37,443	$	81,389	$	96,721

Business Activities Loans

Residential Real Estate and Consumer Loans


	Residential real estate				Home equity				Other consumer				Total residential real estate and consumer
(in thousands)	Sep 30, 2020		Dec 31, 2019		Sep 30, 2020		Dec 31, 2019		Sep 30, 2020		Dec 31, 2019		Sep 30, 2020		Dec 31, 2019
Performing	$	691,902	$	737,325	$	57,894	$	58,753	$	9,202	$	11,146	$	758,998	$	807,224
Nonperforming		3,864		3,362		450		615		15		21		4,329		3,998
Total	$	695,766	$	740,687	$	58,344	$	59,368	$	9,217	$	11,167	$	763,327	$	811,222

Acquired Loans

Residential Real Estate and Consumer Loans


	Residential real estate				Home equity				Other consumer				Total residential real estate and consumer
(in thousands)	Sep 30, 2020		Dec 31, 2019		Sep 30, 2020		Dec 31, 2019		Sep 30, 2020		Dec 31, 2019		Sep 30, 2020		Dec 31, 2019
Performing	$	320,772	$	407,811	$	50,059	$	62,504	$	1,249	$	1,707	$	372,080	$	472,022
Nonperforming		4,668		3,359		471		529		—		8		5,139		3,896
Total	$	325,440	$	411,170	$	50,530	$	63,033	$	1,249	$	1,715	$	377,219	$	475,918

The following table summarizes total classified and criticized loans as of September 30, 2020 and December 31, 2019:


	September 30, 2020						December 31, 2019
	Business						Business
(in thousands)	Activities Loans		Acquired Loans		Total		Activities Loans		Acquired Loans		Total
Non-accrual	$	7,763	$	6,645	$	14,408	$	8,354	$	3,196	$	11,550
Substandard accruing		29,121		9,648		38,769		26,055		13,387		39,442
Total classified		36,884		16,293		53,177		34,409		16,583		50,992
Special mention		10,988		1,929		12,917		8,525		7,705		16,230
Total Criticized	$	47,872	$	18,222	$	66,094	$	42,934	$	24,288	$	67,222

Table of Contents NOTE 5. BORROWED FUNDS

Borrowed funds at September 30, 2020 and December 31, 2019 are summarized, as follows:


		September 30, 2020					December 31, 2019				****
					Weighted					Weighted
(dollars in thousands)	****	Carrying Value		****	Average Rate	****	Carrying Value		****	Average Rate	****
Short-term borrowings
Advances from the FHLB		$	41,672		1.69	%	$	303,286		1.83	%
Other borrowings			30,048		0.60			44,832		0.99
Total short-term borrowings			71,720		1.20			348,118		1.73
Long-term borrowings
Advances from the FHLB			182,609		1.73			123,278		1.93
Advances from the FRB PPPLF			131,143		0.35			—		—
Subordinated borrowings			59,920		4.48			59,920		5.53
Total long-term borrowings			373,672		1.69			183,198		2.87
Total		$	445,392		1.60	%	$	531,316		2.11	%

Short-term debt includes Federal Home Loan Bank of Boston (“FHLB”) advances with a maturity of less than one year. The Company also maintains a $1.0 million secured line of credit with the FHLB that bears a daily adjustable rate calculated by the FHLB. There was no outstanding balance on the FHLB line of credit for the periods ended September 30, 2020 and December 31, 2019.

The Company has the capacity to borrow funds on a secured basis utilizing the Borrower in Custody program and the Discount Window at the Federal Reserve Bank of Boston (the “FRB”). At September 30, 2020, the Company’s available secured line of credit at the FRB was $81.1 million. The Company has pledged certain loans and securities to the FRB to support this arrangement. There were no outstanding advances with the FRB for the periods ended September 30, 2020 December 31, 2019.

On April 15, 2020, the FRB provided a Paycheck Protection Program Lending Facility (“PPPLF”) that the Company used to fund most of its PPP loans totaling $131.1 million as of September 30, 2020.

The Company maintains, with a correspondent bank, an unused unsecured federal funds line of credit that has an aggregate overnight borrowing capacity of $50.0 million as of September 30, 2020 and December 31, 2019. There was no outstanding balance on the line of credit as of September 30, 2020 and December 31, 2019.

Long-term FHLB advances consist of advances with a maturity of more than one year. Callable advances as of September 30, 2020 were $2.0 million, as of December 31, 2019 there were no callable advances. As of September 30, 2020 and December 31, 2019 there were $309 thousand and $316 thousand of amortizing advances, respectively. All FHLB borrowings, including the line of credit, are secured by a blanket security agreement on certain qualified collateral, principally all residential first mortgage loans and certain securities.

A summary of maturities of FHLB advances as of September 30, 2020 is, as follows:


		September 30, 2020				****
	****			****	Weighted Average	****
(in thousands, except rates)		Carrying Value			Rate	****
Fixed rate advances maturing:
2020		$	1,000		1.65	%
2021			40,672		1.69
2022			75,000		1.87
2023			80,000		1.77
2024			7,300		1.16
2025 and thereafter			20,309		1.25
Total FHLB advances		$	224,281		1.72	%

Table of Contents On November 26, 2019, the Company executed a Subordinated Note Purchase Agreement with an aggregate of $40.0 million of subordinated notes (the "Notes") to accredited investors. The Notes have a maturity date of December 1, 2029 and bear a fixed interest rate of 4.625% through December 1, 2024 payable semi-annually in arrears. From December 1, 2024 and thereafter the interest rate shall be reset quarterly to an interest rate per annum equal to the then current three-month SOFR plus 3.27%. The Company has the option beginning with the interest payment date of December 1, 2024, and on any scheduled payment date thereafter, to redeem the Notes, in whole or in part upon prior approval of the Federal Reserve. Netted with subordinated borrowings is amortized subordinated debt issuance costs of $700 thousand as of September 30, 2020.

The Company also has $20.6 million in floating Junior Subordinated Deferrable Interest Debentures ("Debentures") issued by NHTB Capital Trust II ("Trust II") and NHTB Capital Trust III ("Trust III"), which are both Connecticut statutory trusts. The Debentures were issued on March 30, 2004, carry a variable interest rate of 3-month LIBOR plus 2.79%, and mature in 2034. The debt is callable by the Company at the time when any interest payment is made. Trust II and Trust III are considered variable interest entities for which the Company is not the primary beneficiary. Accordingly, Trust II and Trust III are not consolidated into the Company’s financial statements.

Table of Contents NOTE 6. DEPOSITS

A summary of time deposits is, as follows:


(in thousands)	September 30, 2020		December 31, 2019
Time less than $100,000	$	497,403	$	600,747
Time $100,000 through $250,000		192,243		225,505
Time $250,000 or more		123,863		106,383
Total time deposits	$	813,509	$	932,635

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


(in thousands)	September 30, 2020		December 31, 2019
Within 1 year	$	635,798	$	555,074
Over 1 year to 2 years		111,500		287,934
Over 2 years to 3 years		29,392		51,444
Over 3 years to 4 years		27,598		31,262
Over 4 years to 5 years		9,216		6,883
Over 5 years		5		38
Total	$	813,509	$	932,635

Included in time deposits are brokered deposits of $327.2 million and $526.9 million at September 30, 2020 and December 31, 2019, respectively. Also included in time deposits are reciprocal deposits of $127.4 million and $64.1 million at September 30, 2020 and December 31, 2019, respectively.

Table of Contents NOTE 7. CAPITAL RATIOS AND SHAREHOLDERS’ EQUITY

The actual and required capital ratios are, as follows:


	****		****	Regulatory	****		****	Regulatory	****
		September 30,		Minimum to be		December 31,		Minimum to be	****
		2020		"Well-Capitalized"		2019		"Well-Capitalized"	****
Company (consolidated)
Total capital to risk-weighted assets		13.32	%	10.50	%	13.61	%	10.50	%
Common equity tier 1 capital to risk-weighted assets		10.29		7.00		10.57		7.00
Tier 1 capital to risk-weighted assets		11.08		8.50		11.39		8.50
Tier 1 capital to average assets		8.14		5.00		8.13		5.00

Bank
Total capital to risk-weighted assets		13.03	%	10.50	%	12.42	%	10.50	%
Common equity tier 1 capital to risk-weighted assets		12.33		7.00		11.79		7.00
Tier 1 capital to risk-weighted assets		12.33		8.50		11.79		8.50
Tier 1 capital to average assets		9.06		5.00		8.39		5.00

At each date shown, the Company and the Bank met the conditions to be classified as “well-capitalized” under the relevant regulatory framework. To be categorized as "well-capitalized," an institution must maintain minimum total risk-based, Tier 1 risk-based, and Tier 1 leverage ratios as set forth in the table above.

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

Accumulated other comprehensive income (loss)

Components of accumulated other comprehensive income is, as follows:


(in thousands)	****	September 30, 2020		****	December 31, 2019
Other accumulated comprehensive income, before tax:
Net unrealized gain on AFS securities		$	15,264		$	7,342
Net unrealized loss on hedging derivatives			(1,461)			(718)
Net unrealized loss on post-retirement plans			(1,512)			(1,512)

Income taxes related to items of accumulated other comprehensive income:
Net unrealized gain on AFS securities			(3,583)			(1,793)
Net unrealized loss on hedging derivatives			342			237
Net unrealized loss on post-retirement plans			355			355
Accumulated other comprehensive income		$	9,405		$	3,911

Table of Contents The following table presents the components of other comprehensive income (loss) for the three and nine months ended September 30, 2020 and 2019:


(in thousands)	****	Before Tax		****	Tax Effect		****	Net of Tax
Three Months Ended September 30, 2020
Net unrealized gain on AFS securities:
Net unrealized gain arising during the period		$	351		$	(82)		$	269
Less: reclassification adjustment for gains (losses) realized in net income			—			—			—
Net unrealized gain on AFS securities			351			(82)			269

Net unrealized gain on cash flow hedging derivatives:
Net unrealized gain arising during the period			805			(190)			615
Less: reclassification adjustment for gains (losses) realized in net income			—			—			—
Net unrealized gain on cash flow hedging derivatives			805			(190)			615

Net unrealized gain on post-retirement plans:
Net unrealized gain arising during the period			—			—			—
Less: reclassification adjustment for gains (losses) realized in net income			—			—			—
Net unrealized gain on post-retirement plans			—			—			—
Other comprehensive income		$	1,156		$	(272)		$	884

Three Months Ended September 30, 2019
Net unrealized gain on AFS securities:
Net unrealized gain arising during the period		$	3,357		$	(784)		$	2,573
Less: reclassification adjustment for gains (losses) realized in net income			157			(37)			120
Net unrealized gain on AFS securities			3,200			(747)			2,453

Net unrealized loss on cash flow hedging derivatives:
Net unrealized loss arising during the period			(370)			85			(285)
Less: reclassification adjustment for gains (losses) realized in net income			—			—			—
Net unrealized loss on cash flow hedging derivatives			(370)			85			(285)

Net unrealized gain on post-retirement plans:
Net unrealized gain arising during the period			—			—			—
Less: reclassification adjustment for gains (losses) realized in net income			—			—			—
Net unrealized gain on post-retirement plans			—			—			—
Other comprehensive income		$	2,830		$	(662)		$	2,168

Table of Contents


(in thousands)	****	Before Tax		****	Tax Effect		****	Net of Tax
Nine Months Ended September 30, 2020
Net unrealized gain on AFS securities:
Net unrealized gain arising during the period		$	9,408		$	(2,146)		$	7,262
Less: reclassification adjustment for gains (losses) realized in net income			1,486			(355)			1,131
Net unrealized gain on AFS securities			7,922			(1,791)			6,131

Net unrealized loss on derivative hedges:
Net unrealized loss arising during the period			(833)			196			(637)
Less: reclassification adjustment for gains (losses) realized in net income			—			—			—
Net unrealized loss on derivative hedges			(833)			196			(637)

Net unrealized gain on post-retirement plans:
Net unrealized gain arising during the period			—			—			—
Less: reclassification adjustment for gains (losses) realized in net income			—			—			—
Net unrealized gain on post-retirement plans			—			—			—
Other comprehensive income		$	7,089		$	(1,595)		$	5,494

Nine Months Ended September 30, 2019
Net unrealized gain on AFS securities:
Net unrealized gain arising during the period		$	21,903		$	(5,118)		$	16,785
Less: reclassification adjustment for gains realized in net income			157			(37)			120
Net unrealized gain on AFS securities			21,746			(5,081)			16,665

Net unrealized loss on cash flow hedging derivatives:
Net unrealized loss arising during the period			(2,372)			554			(1,818)
Less: reclassification adjustment for gains (losses) realized in net income			—			—			—
Net unrealized loss on cash flow hedging derivatives			(2,372)			554			(1,818)

Net unrealized gain on post-retirement plans:
Net unrealized gain arising during the period			—			—			—
Less: reclassification adjustment for gains (losses) realized in net income			—			—			—
Net unrealized gain on post-retirement plans			—			—			—
Other comprehensive income		$	19,374		$	(4,527)		$	14,847

Table of Contents The following table presents the changes in each component of accumulated other comprehensive income (loss), net of tax impacts, for the three and nine months ended September 30, 2020 and 2019:


	****	Net unrealized		****	Net loss on		****	Net unrealized		****
		gain (loss)			effective cash			loss
		on AFS			flow hedging			on pension
(in thousands)		Securities			derivatives			plans			Total
Three Months Ended September 30, 2020
Balance at beginning of period		$	11,412		$	(1,734)		$	(1,157)		$	8,521
Other comprehensive gain before reclassifications			269			615			—			884
Less: amounts reclassified from accumulated other comprehensive income			—			—			—			—
Total other comprehensive income			269			615			—			884
Balance at end of period		$	11,681		$	(1,119)		$	(1,157)		$	9,405

Three Months Ended September 30, 2019
Balance at beginning of period		$	5,547		$	(3,782)		$	(888)		$	(5,628)
Other comprehensive gain (loss) before reclassifications			2,573			(285)			—			2,288
Less: amounts reclassified from accumulated other comprehensive income			120			—			—			120
Total other comprehensive income (loss)			2,453			(285)			—			2,168
Balance at end of period		$	8,000		$	(4,067)		$	(888)		$	3,045

Nine Months Ended September 30, 2020
Balance at beginning of period		$	5,550		$	(482)		$	(1,157)		$	3,911
Other comprehensive gain (loss) before reclassifications			7,262			(637)			—			6,625
Less: amounts reclassified from accumulated other comprehensive income			1,131			—			—			1,131
Total other comprehensive income (loss)			6,131			(637)			—			5,494
Balance at end of period		$	11,681		$	(1,119)		$	(1,157)		$	9,405

Nine Months Ended September 30, 2019
Balance at beginning of period		$	(8,665)		$	(2,249)		$	(888)		$	(11,802)
Other comprehensive gain (loss) before reclassifications			16,785			(1,818)			—			14,967
Less: amounts reclassified from accumulated other comprehensive income			120			—			—			120
Total other comprehensive income (loss)			16,665			(1,818)			—			14,847
Balance at end of period		$	8,000		$	(4,067)		$	(888)		$	3,045

The following tables presents the amounts reclassified out of each component of accumulated other comprehensive income for three and nine months ended September 30, 2020 and 2019:


		Three Months Ended September 30,						Nine Months Ended September 30,							Affected Line Item where
(in thousands)	****	2020		****	2019		****	2020		****	2019		****	****	Net Income is Presented
Net realized gains on AFS securities:
Before tax^(1)^		$	—		$	157		$	1,486		$	157			Non-interest income
Tax effect			—			(37)			(355)			(37)			Tax expense
Total reclassifications for the period		$	—		$	120		$	1,131		$	120			Net of tax
(1)	Net realized gains before tax include gross realized gains $1.5 million and realized losses of $22 thousand for the nine months ended September 30, 2020 and gross realized gains of $716 thousand and realized losses of $559 thousand for the three and nine months ended September 30, 2019.
---	---

.. 48

Table of Contents NOTE 8. EARNINGS PER SHARE

The following table presents the calculation of earnings per share:


		Three Months Ended						Nine Months Ended
		September 30,						September 30,
(in thousands, except per share and share data)	****	2020		****	2019		****	2020		****	2019
Net income		$	8,402		$	5,015		$	24,604		$	18,413

Average number of basic common shares outstanding			15,079,413			15,547,276			15,358,803			15,536,414
Plus: dilutive effect of stock options and awards outstanding^(1)^			23,421			34,027			23,063			45,282
Average number of diluted common shares outstanding			15,102,834			15,581,303			15,381,866			15,581,696

Earnings per share:
Basic		$	0.56		$	0.32		$	1.60		$	1.19
Diluted		$	0.56		$	0.32		$	1.60		$	1.18
(1)	Average diluted shares outstanding are computed using the treasury stock method.
---	---

Table of Contents NOTE 9. DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGING ACTIVITIES

The Company uses derivative instruments to minimize fluctuations in earnings and cash flows caused by interest rate volatility. The Company’s interest rate risk management strategy involves modifying the re-pricing characteristics of certain assets or liabilities so the changes in interest rates do not have a significant effect on net interest income. Thus, all of the Company's derivative contracts are considered to be interest rate contracts.

The Company recognizes its derivative instruments on the consolidated balance sheet at fair value. On the date the derivative instrument is entered into, the Company designates whether the derivative is part of a hedging relationship (i.e., cash flow or fair value hedge). The Company formally documents relationships between hedging instruments and hedged items, as well as its risk management objective and strategy for undertaking hedge transactions. The Company also assesses, both at the hedge’s inception and on an ongoing basis, whether the derivatives used in hedging transactions are highly effective in offsetting the changes in cash flows or fair values of hedged items. Changes in fair value of derivative instruments that are highly effective and qualify as cash flow hedges are recorded in other comprehensive income or loss.

The Company offers derivative products in the form of interest rate swaps, to commercial loan customers to facilitate their risk management strategies. These instruments are executed through Master Netting Arrangements ("MNA") with financial institution counterparties or Risk Participation Agreements ("RPA") with commercial bank counterparties, for which the Company assumes a pro rata share of the credit exposure associated with a borrower's performance related to the derivative contract with the counterparty.

The following tables present information about derivative assets and liabilities at September 30, 2020 and December 31, 2019:


		September 30, 2020
					Weighted					****
		Notional			Average			Fair Value			Location Fair
		Amount			Maturity			Asset (Liability)		****	Value Asset
	****	(in thousands)		****	(in years)		****	(in thousands)		****	(Liability)
Cash flow hedges:
Interest rate swap on wholesale fundings		$	125,000			4.1		$	(6,835)		Other liabilities
Total cash flow hedges			125,000			4.1			(6,835)

Fair value hedges:
Interest rate swap on securities			37,190			8.7			3,445		Other assets
Total fair value hedges			37,190			8.7			3,445

Economic hedges:
Forward sale commitments			47,739			0.2			(87)		Other liabilities
Customer Loan Swaps-MNA Counterparty			189,244			7.1			(16,965)		Other liabilities
Customer Loan Swaps-RPA Counterparty			103,391			7.8			(11,071)		Other liabilities
Customer Loan Swaps-Customer			292,635			7.4			28,036		Other assets
Total economic hedges			633,009						(87)

Non-hedging derivatives:
Interest rate lock commitments			27,730			0.1			24		Other assets
Total non-hedging derivatives			27,730			0.1			24

Total		$	822,929					$	(3,453)

Table of Contents


		December 31, 2019
					Weighted					****
		Notional			Average			Fair Value			Location Fair
		Amount			Maturity			Asset (Liability)		****	Value Asset
	****	(in thousands)		****	(in years)		****	(in thousands)		****	(Liability)
Cash flow hedges:
Interest rate swap on wholesale fundings		$	100,000			4.6		$	(1,311)		Other liabilities
Total cash flow hedges			100,000						(1,311)

Fair value hedges:
Interest rate swap on securities			37,190			9.6			593		Other liabilities
Total fair value hedges			37,190						593

Economic hedges:
Forward sale commitments			11,228			0.1			(84)		Other liabilities
Customer Loan Swaps-MNA Counterparty			135,598			7.5			(4,669)		(1)
Customer Loan Swaps-RPA Counterparty			69,505			8.8			(3,377)		(1)
Customer Loan Swaps-Customer			205,103			8.1			8,046		(1)
Total economic hedges			421,434						(84)

Non-hedging derivatives:
Interest rate lock commitments			21,748			0.1			59		Other assets
Total non-hedging derivatives			21,748						59

Total		$	580,372					$	(743)
(1)	Customer loan derivatives are subject to MNA or RPA arrangements with financial institution counterparties, thus assets and liabilities with the counterparty were previously netted for financial statement presentation.
---	---

As of September 30, 2020 and December 31, 2019, the following amounts were recorded on the balance sheet related to cumulative basis adjustments for fair value hedges:


	****		****			****	Cumulative Amount of Fair
		Location of Hedged Item on		Carrying Amount of Hedged			Value Hedging Adjustment in
	****	Balance Sheet	****	Assets (Liabilities)		****	Carrying Amount
September 30, 2020
Fair value hedges:
Interest rate swap on securities		Securities Available for Sale		$	42,564		$	5,374

December 31, 2019
Fair value hedges:
Interest rate swap on securities		Securities Available for Sale		$	39,026		$	523

Table of Contents Information about derivative assets and liabilities for September 30, 2020 and December 31, 2019, follows:


	Nine Months Ended September 30, 2020
	Amount of			Amount of
	Gain (Loss)			Gain (Loss)
	Recognized in			Reclassified		Location of	Amount of
	Other		Location of Gain (Loss)	from Other		Gain (Loss)	Gain (Loss)
	Comprehensive		Reclassified from Other	Comprehensive		Recognized in	Recognized
(in thousands)	Income		Comprehensive Income	Income		Income	in Income
Cash flow hedges:
Interest rate swap on wholesale funding	$	(5,231)	Interest expense	$	—	Interest expense	$	(642)
Total cash flow hedges		(5,231)			—			(642)

Fair value hedges:
Interest rate swap on securities		4,113	Interest income		—	Interest income		(145)
Total fair value hedges		4,113			—			(145)

Economic hedges:
Forward commitments		—	Other income		—	Other income		(3)
Total economic hedges		—			—			(3)

Non-hedging derivatives:
Interest rate lock commitments		—	Other income		—	Other income		(35)
Total non-hedging derivatives		—			—			(35)

Total	$	(1,118)		$	—		$	(825)

Table of Contents


	Years Ended December 31, 2019
	Amount of			Amount of
	Gain (Loss)			Gain (Loss)			Amount of
	Recognized in			Reclassified		Location of	Gain (Loss)
	Other		Location of Gain (Loss)	from Other		Gain (Loss)	Recognized
	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	$	—	Acquisition, restructuring, and other expenses	$	3,156	Interest expense	$	(603)
Interest rate cap agreements		2,291	Interest expense		—	Interest expense		(2)
Total cash flow hedges		2,291			3,156			(605)

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

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

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

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

Cash flow hedges

Interest rate swaps on wholesale funding

In March and November 2019 and April 2020, the Company entered into interest rate swaps on wholesale borrowings (the "SWAPS") to limit its exposure to rising interest rates over a five year term on 3-month FHLB borrowings or brokered certificates, or a combination thereof at each maturity date. Under the terms of the agreement, the Company has two swaps each with a $50.0 million notional amount and pays a fixed interest rate of 2.46% and 1.53% respectively and one swap with a $25.0 million notional amount and pays a fixed rate of 0.59%. The financial institution counterparty pays the Company interest on the three-month LIBOR rate. The Company designated the swap as a cash flow hedge.

Interest rate cap agreements

In 2014, interest rate cap agreements were purchased to limit the Company’s exposure to rising interest rates on four rolling, three-month borrowings indexed to three-month LIBOR. Under the terms of the agreements, the Company paid total premiums of $4.6 million for the right to receive cash flow payments if three-month LIBOR rises above the caps of 3.00%, thus effectively ensuring interest expense on the borrowings at maximum rates of 3.00% for the duration of the agreements. The interest rate cap agreements were designated as cash flow hedges; however, the caps were terminated in the fourth quarter of 2019 and the unamortized premium totaling $3.2 million was recognized in acquisition, restructuring and other expenses.

Fair value hedges

Interest rate swap on securities

For derivative instruments that are designated and qualify as a fair value hedge, the gain or loss on the derivative instrument as well as the offsetting loss or gain on the hedged asset or liability attributable to the hedged risk are recognized in current earnings. The Company utilizes interest rate swaps designated as fair value hedges to mitigate the effect of changing interest rates on the fair values of fixed rate callable securities available-for-sale. The hedging strategy on securities 53

Table of Contents converts the fixed interest rates to LIBOR-based variable interest rates. These derivatives are designated as partial term hedges of selected cash flows covering specified periods of time prior to the call dates of the hedged securities. During 2019, the Company entered into 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 1.696%.

Economic hedges

Forward sale commitments

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

Customer loan derivatives

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

The master netting arrangements provide for a single net settlement of all loan swap agreements, as well as collateral or cash funds, in the event of default on, or termination of, any one contract. Collateral is provided by cash or securities received or posted by the counterparty with net liability positions, respectively, in accordance with contract thresholds. Currently, the Company has posted cash of $30.5 million with counterparties.


		Gross Amounts Offset in the Consolidated Balance Sheet
		Derivative						Cash Collateral
(in thousands)	****	Liabilities		****	Derivative Assets		****	Pledged		****	Net Amount
As of September 30, 2020
Customer Loan Derivatives:
MNA counterparty		$	(16,965)		$	16,965		$	30,450		$	—
RPA counterparty			(11,071)			11,071			—			—
Total		$	(28,036)		$	28,036		$	30,450		$	—


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

Table of Contents Non-hedging derivatives

Interest rate lock commitments

The Company enters into interest rate lock commitments (“IRLCs”) for residential mortgage loans, which commit the Company to lend funds to a potential borrower at a specific interest rate and within a specified period of time. IRLCs relate to the origination of residential mortgage loans that are held for sale are considered derivative financial instruments under applicable accounting guidance. Outstanding IRLCs expose the Company to the risk that the price of the mortgage loans underlying the commitments may decline due to increases in mortgage interest rates from inception of the rate lock to the funding of the loan. The IRLCs are free standing derivatives which are carried at fair value with changes recorded in non-interest income in the Company’s Consolidated Statements of Income. Changes in the fair value of IRLCs subsequent to inception are based on; (i) changes in the fair value of the underlying loan resulting from the fulfillment of the commitment and (ii) changes in the probability when the loan will fund within the terms of the commitment, which is affected primarily by changes in interest rates and the passage of time.

Table of Contents NOTE 10. FAIR VALUE MEASUREMENTS

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

Recurring Fair Value Measurements

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


		September 30, 2020
	****	Level 1		****	Level 2		****	Level 3		****	Total
(in thousands)		Inputs			Inputs			Inputs			Fair Value
Available for sale securities:
Mortgage-backed securities:
US Government-sponsored enterprises		$	—		$	235,172		$	—		$	235,172
US Government agency			—			95,785			—			95,785
Private label			—			19,603			—			19,603
Obligations of states and political subdivisions thereof			—			154,157			—			154,157
Corporate bonds			—			99,812			—			99,812
Derivative assets			—			31,481			24			31,505
Derivative liabilities			—			(34,871)			(87)			(34,958)


		December 31, 2019
	****	Level 1		****	Level 2		****	Level 3		****	Total
(in thousands)		Inputs			Inputs			Inputs			Fair Value
Available for sale securities:
Mortgage-backed securities:
US Government-sponsored enterprises		$	—		$	321,969		$	—		$	321,969
US Government agency			—			99,661			—			99,661
Private label			—			19,533			—			19,533
Obligations of states and political subdivisions thereof			—			142,006			—			142,006
Corporate bonds			—			80,061			—			80,061
Derivative assets			—			6,791			59			6,850
Derivative liabilities			—			(8,102)			(84)			(8,186)

Securities Available for Sale: All securities and major categories of securities classified as available for sale are reported at fair value utilizing Level 2 inputs. For these securities, the Company obtains fair value measurements from independent pricing providers. The fair value measurements used by the pricing providers consider observable data that may include dealer quotes, market maker quotes and live trading systems. If quoted prices are not readily available, fair values are determined using matrix pricing models, or other model-based valuation techniques requiring observable inputs other than quoted prices such as market pricing spreads, credit information, callable features, cash flows, the U.S. Treasury yield curve, trade execution data, market consensus prepayment speeds, default rates, and the securities’ terms and conditions, among other things.

Derivative Assets and Liabilities

Cash Flow and Fair Value Hedges. The valuation of the Company's cash flow hedges are obtained from a third party. The pricing analysis is based on observable inputs for the contractual terms of the derivatives, including the period to maturity and interest rate curves. The inputs used to value the Company's cash flow hedges are all classified as Level 2 measurements.

Table of Contents

Interest Rate Lock Commitments. The Company enters into IRLCs for residential mortgage loans, which commit the Company to lend funds to a potential borrower at a specific interest rate and within a specified period of time. The estimated fair value of commitments to originate residential mortgage loans for sale is based on quoted prices for similar loans in active markets. However, this value is adjusted by a factor which considers the likelihood of a loan in a lock position will ultimately close. The closing ratio is derived from the Company’s internal data and is adjusted using significant management judgment. As such, IRLCs are classified as Level 3 measurements.

Forward Sale Commitments. The Company utilizes forward sale commitments as economic hedges against potential changes in the values of the IRLCs and loans originated for sale. The fair values of the Company’s mandatory delivery loan sale commitments are determined similarly to the IRLCs using quoted prices in the market place that are observable. However, closing ratios included in the calculation are internally generated and are based on management’s judgment and prior experience, which are not considered observable factors. As such, mandatory delivery forward commitments are classified as Level 3 measurements.

Customer Loan Derivatives. The valuation of the Company’s customer loan derivatives is obtained from a third-party pricing service and is determined using a discounted cash flow analysis on the expected cash flows of each derivative. The pricing analysis is based on observable inputs for the contractual terms of the derivatives, including the period to maturity and interest rate curves. The Company incorporates credit valuation adjustments to appropriately reflect both its own nonperformance risk and the respective counterparty’s nonperformance risk in the fair value measurements. In adjusting the fair value of its derivative contracts for the effect of nonperformance risk, the Company has considered the impact of master netting arrangements and any applicable credit enhancements, such as collateral postings.

Although the Company has determined that the majority of the inputs used to value its customer loan derivatives fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with its derivatives utilize Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default by itself and its counterparties. However, as of September 30, 2020, the Company assessed the significance of the impact of the credit valuation adjustments on the overall valuation of its derivative positions and determined that the credit valuation adjustments are not significant to the overall valuation of its derivatives. As a result, the Company determined that its derivative valuations in their entirety are classified in Level 2 of the fair value hierarchy.

The table below presents the changes in Level 3 assets and liabilities that were measured at fair value on a recurring basis for the three and nine months ended September 30, 2020:


		Assets (Liabilities)
		Interest Rate Lock			Forward
(in thousands)	****	Commitments		****	Commitments
Three Months Ended September 30, 2020
Balance at beginning of period		$	63		$	(126)
Realized (loss) gain recognized in non-interest income			(39)			39
Balance at end of period		$	24		$	(87)

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

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


		Fair Value			Fair Value
(in thousands,		September 30,			December 31,			Valuation		Unobservable		Unobservable
except ratios)	****	2020		****	2019		****	Techniques	****	Inputs	****	Input Value		****
Assets (Liabilities)
Interest Rate Lock Commitment		$	24		$	59		Historical trend		Closing Ratio			90	%
								Pricing Model		Origination Costs, per loan		$	1.7

Forward Commitments			(87)			(84)		Quoted prices for similar loans in active markets.		Freddie Mac pricing system			Pair-off contract price
Total		$	(63)		$	(25)

Non-Recurring Fair Value Measurements

The Company is required, on a non-recurring basis, to adjust the carrying value or provide valuation allowances for certain assets using fair value measurements in accordance with GAAP. The following is a summary of applicable non-recurring fair value measurements:


														Fair Value
								Three Months Ended			Nine Months Ended			Measurement Date as of
		Sep 30, 2020			Dec 31, 2019			September 30, 2020			September 30, 2020			September 30, 2020
		Level 3			Level 3			Total			Total			Level 3
(in thousands)	****	Inputs		****	Inputs		****	Gains (Losses)		****	Gains (Losses)		****	Inputs
Assets
Impaired loans		$	9,617		$	9,625		$	(6)		$	(8)		September 2020
Capitalized servicing rights			3,234			4,301			323			(1,067)		September 2020
Other real estate owned			1,983			2,236			(335)			(253)		September 2020
Premises held for sale			1,764			1,764			—			—		September 2019
Total		$	16,598		$	17,926		$	(18)		$	(1,328)

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

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


(in thousands,		Fair Value							Range		****
except ratios)	****	Sep 30, 2020		****	Valuation Techniques	****	Unobservable Inputs	****	(Weighted Average)^(a)^		****
Assets
Impaired loans		$	7,071		Fair value of collateral-appraised value		Loss severity			0% to 53%
							Appraised value			$0 to $1,730

Impaired loans			2,546		Discount cash flow		Discount rate			3.50% to 9.50%
							Cash flows			$21 to $1,002

Capitalized servicing rights			3,234		Discounted cash flow		Constant prepayment rate (CPR)			16.73%
							Discount rate			10.05%

Other real estate owned			1,983		Fair value of collateral less selling costs		Appraised value			$2,000
							Selling Costs			6%

Premises held for sale^(b)^			1,764		Fair value of asset less selling costs		Appraised value			$136 to $527
							Selling Costs			6%
Total		$	16,598
(a)	Where dollar amounts are disclosed, the amounts represent the lowest and highest fair value of the respective assets in the population except for adjustments for market/property conditions, which represents the range of adjustments to individual properties.
---	---
(b)	The carrying value of premises held for sale was $1.8 million as of September 30, 2020.
---	---


(in thousands,		Fair Value							Range
except ratios)	****	Dec 31, 2019		****	Valuation Techniques	****	Unobservable Inputs	****	(Weighted Average)^(a)^
Assets
Impaired loans		$	6,137		Fair value of collateral-appraised value		Loss severity			0% to 55.00%
							Appraised value			$0 to $6,915

Impaired loans			3,488		Discount cash flow		Discount rate			2.88% to 9.50%
							Cash flows			$22 to $1,002

Capitalized servicing rights			4,301		Discounted cash flow		Constant prepayment rate (CPR)			9.95%
							Discount rate			10.07%

Other real estate owned			2,236		Fair value of collateral less selling costs		Appraised value			$2,695
							Selling Costs			10% to 20%

Premises held for sale^(b)^			1,764		Fair value of asset less selling costs		Appraised value			$136 to $527
							Selling Costs			6%
Total		$	17,926
(a)	Where dollar amounts are disclosed, the amounts represent the lowest and highest fair value of the respective assets in the population except for adjustments for market/property conditions, which represents the range of adjustments to individual properties.
---	---
(b)	The carrying value of premises held for sale was $1.8 million as of December 31, 2019.
---	---

There were no Level 1 or Level 2 non-recurring fair value measurements for the periods ended September 30, 2020 and December 31, 2019.

Table of Contents

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

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

Other real estate owned (“OREO”). OREO results from the foreclosure process on residential or commercial loans issued by the Company. Upon assuming the real estate, the Company records the property at the fair value of the asset less the estimated sales costs. Thereafter, OREO properties are recorded at the lower of cost or fair value less the estimated sales costs. OREO fair values are primarily determined based on Level 3 data including sales comparables and appraisals.

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

Table of Contents Summary of Estimated Fair Values of Financial Instruments

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


		September 30, 2020
		Carrying			Fair
(in thousands)	****	Amount		****	Value		****	Level 1		****	Level 2		****	Level 3
Financial Assets
Cash and cash equivalents		$	215,657		$	215,657		$	215,657		$	—		$	—
Securities available for sale			604,529			604,529			—			604,529			—
FHLB stock			13,975			13,975			—			13,975			—
Net loans			2,690,784			2,672,882			—			—			2,672,882
Accrued interest receivable			3,171			3,171			—			3,171			—
Cash surrender value of bank-owned life insurance policies			77,388			77,388			—			77,388			—
Derivative assets			31,505			31,505			—			31,481			24

Financial Liabilities
Non-maturity deposits		$	2,121,406		$	2,037,099		$	—		$	2,037,099		$	—
Time deposits			813,509			805,783			—			805,783			—
Securities sold under agreements to repurchase			30,048			30,048			—			30,048			—
FHLB advances			224,282			229,413			—			229,413			—
FRB PPPLF			131,236			131,141			—			131,141			—
Subordinated borrowings			59,920			59,920			—			59,920			—
Derivative liabilities			34,958			34,958			—			34,871			87


		December 31, 2019
		Carrying			Fair
(in thousands)	****	Amount		****	Value		****	Level 1		****	Level 2		****	Level 3
Financial Assets
Cash and cash equivalents		$	56,910		$	56,910		$	56,910		$	—		$	—
Securities available for sale			663,230			663,230			—			663,230			—
FHLB stock			20,679			20,679			—			20,679			—
Net loans			2,625,739			2,634,147			—			—			2,634,147
Accrued interest receivable			3,294			3,294			—			3,294			—
Cash surrender value of bank-owned life insurance policies			75,863			75,863			—			75,863			—
Derivative assets			6,850			6,850			—			6,791			59

Financial Liabilities
Non-maturity deposits		$	1,763,116		$	1,751,481		$	—		$	1,751,481		$	—
Time deposits			932,635			932,886			—			932,886			—
Short-term other borrowings			44,832			44,831			—			44,831			—
FHLB advances			426,564			425,989			—			425,989			—
Subordinated borrowings			59,920			59,920			—			59,920			—
Derivative liabilities			8,186			8,186			—			8,102			84

Table of Contents NOTE 11. REVENUE FROM CONTRACTS WITH CUSTOMER

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

Disaggregation of Revenue

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


		Three Months Ended						Nine Months Ended
		September 30,						September 30,
(in thousands)	****	2020		****	2019		****	2020		****	2019
Major Products/Service Lines
Trust management fees		$	3,256		$	2,737		$	9,194		$	8,055
Financial services fees			276			276			867			781
Interchange fees			1,709			1,323			4,910			3,567
Customer deposit fees			937			1,112			2,836			3,046
Other customer service fees			240			118			691			723
Total		$	6,418		$	5,566		$	18,497		$	16,172


		Three Months Ended						Nine Months Ended
		September 30,						September 30,
(in thousands)	****	2020		****	2019		****	2020		****	2019
Timing of Revenue Recognition
Products and services transferred at a point in time		$	3,133		$	2,839		$	9,026		$	7,874
Products and services transferred over time			3,285			2,727			9,471			8,298
Total		$	6,418		$	5,566		$	18,497		$	16,172

Trust Management Fees

The trust management business generates revenue through a range of fiduciary services including trust and estate administration, wealth advisory, and investment management to individuals, businesses, not-for-profit organizations, and municipalities. Revenue from these services are generally recognized over time and is typically based on a time elapsed measure of service. Certain fees, such as bill paying fees, distribution fees, real estate sale fees, and supplemental tax service fees, are recorded as revenue at a point in time upon the completion of the service.

Financial Services Fees

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

Interchange Fees

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

Customer Deposit Fees

The Customer Deposit business offers a variety of deposit accounts with a range of interest rates, fee schedules and other terms, which are designed to meet the customer's financial needs. Additional depositor-related services provided to customers include ATM, bank-by-phone, internet banking, internet bill pay, mobile banking, and other cash management 62

Table of Contents services which include remote deposit capture, ACH origination, and wire transfers. These customer deposit fees are generally recognized by the Company at a point in time upon the completion of the service.

Other Customer Service Fees

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

Contract Balances from Contracts with Customers

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


	****	Balance at		****	Balance at
(in thousands)		September 30, 2020			December 31, 2019
Balances from contracts with customers only:
Other Assets		$	1,311		$	1,236
Other Liabilities			2,918			3,114

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

Costs to Obtain and Fulfill a Contract

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

Table of Contents NOTE 12. LEASES

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

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

●	Package of practical expedients:
o	Lease classification as an operating lease under the prior standards is grandfathered.
---	---
o	Re-evaluation of embedded leases evaluated under the prior standards is not required.
---	---
o	No re-assessment of previously recorded initial direct lease costs.
---	---
●	Election to exclude short-term leases (i.e., leases with initial terms of twelve months or less), from capitalization on the consolidated balance sheets.
---	---

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


(in thousands)			September 30, 2020		****	December 31, 2019
Lease Right-of-Use Assets	****	Classification
Operating lease right-of-use assets		Other assets	$	10,617		$	9,623

Lease Liabilities
Operating lease liabilities		Other liabilities		10,881			9,651

The calculated amount of the ROU assets and lease liabilities in the table above are impacted by the length of the lease term and the discount rate used for the present value of the minimum lease payments. The Company’s lease agreements often include one or more options to renew at the Company’s discretion. If at lease inception, the Company considers the exercising of a renewal option to be reasonably certain, the Company will include the extended term in the calculation of the ROU asset and lease liability. If there are multiple renewals typically only the next lease renewal is considered. Regarding the discount rate, ASC 842 requires the use of the rate implicit in the lease whenever this rate is readily determinable. As this rate is rarely determinable, the Company utilizes its incremental borrowing rate at lease inception, on a collateralized basis, over a similar term.

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


	****	September 30, 2020		****	December 31, 2019
Weighted-average remaining lease term (in years)
Operating leases		9.04			8.96

Weighted-average discount rate
Operating leases		3.15	%		3.27	%

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


		Three Months Ended			Nine Months Ended
(in thousands)	****	September 30, 2020		****	September 30, 2020
Lease Costs
Operating lease cost		$	344		$	988
Variable lease cost			59			177
Total lease cost		$	403		$	1,165

Future minimum payments for operating leases with initial or remaining terms of one year or more as of September 30, 2020 are, as follows:


(in thousands)	****	Operating Leases
Twelve Months Ended:
September 30, 2021		$	1,375
September 30, 2022			1,404
September 30, 2023			1,410
September 30, 2024			1,413
September 30, 2025			1,221
Thereafter			7,444
Total future minimum lease payments			14,267
Amounts representing interest			(3,386)
Present value of net future minimum lease payments		$	10,881

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

GENERAL

Management’s discussion and analysis of financial condition and results of operations is intended to assist in understanding the financial condition and results of operations of the Company. The following discussion and analysis should be read in conjunction with the Company’s consolidated financial statements and the notes thereto appearing in Part I, Item 1 of this document and with the Company’s consolidated financial statements and the notes thereto and Management’s Discussion and Analysis of Financial Condition and Results of Operations included in the Company's Annual Report on Form 10-K for the year ended December 31, 2019. In the following discussion, income statement comparisons are against the same period of the previous year and balance sheet comparisons are against the previous fiscal year-end, unless otherwise noted. Operating results discussed herein are not necessarily indicative of the results for the full year 2020 or any future period. In management’s discussion and analysis of financial condition and results of operations, certain reclassifications have been made to make prior periods comparable.

Bar Harbor Bankshares is the parent of Bar Harbor Bank & Trust, which is the only community bank headquartered in Northern New England with branches in Maine, New Hampshire and Vermont. The Bank is a true community bank providing exceptional commercial, retail, and wealth management banking services from over 50 locations. The Company’s corporate goal is to be among the most profitable banks in New England, and its business model is centered on the following:

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

Shown below is a profile of the Company as of September 30, 2020:

Table of Contents SELECTED FINANCIAL DATA

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


		Three Months Ended						Nine Months Ended
		September 30,						September 30,
	****	2020		****	2019		****	2020		****	2019		****
PER SHARE DATA
Net earnings, diluted		$	0.56		$	0.32		$	1.60		$	1.18
Adjusted earnings, diluted^(1)^			0.61			0.47			1.66			1.35
Total book value			27.09			25.37			27.09			25.37
Tangible book value^(1)^			18.56			18.49			18.56			18.49
Market price at period end			20.55			24.93			20.55			24.93
Dividends			0.22			0.22			0.66			0.64

PERFORMANCE RATIOS^(2)^
Return on assets			0.88	%		0.55	%		0.87	%		0.68	%
Adjusted return on assets^(1)^			0.96			0.80			0.91			0.77
Return on equity			8.22			5.04			8.09			6.37
Adjusted return on equity^(1)^			8.98			7.36			8.41			7.25
Adjusted return on tangible equity^(1)^			13.36			10.31			12.54			10.25
Net interest margin, fully taxable equivalent (FTE)^(1) (3)^			2.98			2.75			3.01			2.72
Net interest margin (FTE), excluding purchased loan accretion^(3)^			2.92			2.65			2.93			2.63
Efficiency ratio^(1)^			59.47			65.02			61.62			65.83

GROWTH (Year-to-date)^(1)^
Total commercial loans			27	%		11	%		27	%		11	%
Total loans			3			5			3			5
Total deposits			12			1			12			1

FINANCIAL DATA (In millions)
Total assets		$	3,860		$	3,612		$	3,860		$	3,612
Total earning assets^(4)^			3,312			3,270			3,312			3,270
Total investments			619			703			619			703
Total loans			2,709			2,577			2,709			2,577
Allowance for loan losses			18			15			18			15
Total goodwill and intangible assets			127			107			127			107
Total deposits			2,935			2,494			2,935			2,494
Total shareholders' equity			404			394			404			394
Net income			8			5			25			18
Adjusted income^(1)^			9			7			26			21

ASSET QUALITY AND CONDITION RATIOS
Net charge-offs (annualized)/average loans			0.06	%		0.02	%		0.08	%		0.02	%
Allowance for loan losses/total loans			0.66			0.60			0.66			0.60
Loans/deposits			92			103			92			103
Shareholders' equity to total assets			10.48			10.92			10.48			10.92
Tangible shareholders' equity to tangible assets^(1)^			7.42			8.20			7.42			8.20
(1)	Non-GAAP financial measure. Refer to the Reconciliation of Non-GAAP Financial Measures section of Management's Discussion and Analysis for additional information.
---	---
(2)	All performance ratios are annualized and are based on average balance sheet amounts, where applicable.
---	---
(3)	Fully taxable equivalent considers the impact of tax-advantaged investment securities and loans.
---	---
(4)	Earning assets includes non-accruing loans and securities are valued at amortized cost.
---	---

Table of Contents CONSOLIDATED LOAN AND DEPOSIT ANALYSIS

The following tables present the quarterly trend in loan and deposit data and accompanying quarterly growth rates as of September 30, 2020 on an annualized basis:

LOAN ANALYSIS


																	Annualized Growth %
																	September 30, 2020
(in thousands, except ratios)	****	Sep 30, 2020		****	Jun 30, 2020		****	Mar 31, 2020		****	Dec 31, 2019		****	Sep 30, 2019		****	Quarter To Date		Year To Date
Commercial real estate		$	1,045,635		$	982,070		$	948,178		$	930,661		$	923,773		26	%	16	%
Commercial and industrial			456,184			472,524			321,605			318,988			301,590		(14)		57
Total commercial loans			1,501,819			1,454,594			1,269,783			1,249,649			1,225,363		13		27
Residential real estate			1,021,206			1,083,708			1,132,328			1,151,857			1,143,452		(23)		(15)
Consumer			119,340			124,197			128,120			135,283			107,375		(16)		(16)
Tax exempt and other			66,326			66,918			104,752			104,303			101,116		(4)		(49)
Total loans		$	2,708,691		$	2,729,417		$	2,634,983		$	2,641,092		$	2,577,306		(3)	%	3	%

DEPOSIT ANALYSIS


																	Annualized Growth %
																	September 30, 2020			****
(in thousands, except ratios)	****	Sep 30, 2020		****	Jun 30, 2020		****	Mar 31, 2020		****	Dec 31, 2019		****	Sep 30, 2019		****	Quarter To Date		Year To Date	****
Demand		$	515,064		$	504,325		$	400,410		$	414,534		$	380,707		9	%	32	%
NOW			706,048			642,908			578,320			575,809			490,315		39		30
Savings			511,938			466,668			423,345			388,683			360,570		39		42
Money market			388,356			402,835			404,385			384,090			359,328		(14)		1
Total non-maturity deposits			2,121,406			2,016,736			1,806,460			1,763,116			1,590,920		21		27
Total time deposits			813,509			678,126			844,097			932,635			902,665		80		(17)
Total deposits		$	2,934,915		$	2,694,862		$	2,650,557		$	2,695,751		$	2,493,585		36	%	12	%

Table of Contents AVERAGE BALANCES AND AVERAGE YIELDS/RATES

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


	****	Three Months Ended September 30,
		2020								2019
		Average								Average							****
(in thousands, except ratios)	****	Balance		****	Interest^(3)^		****	Yield/Rate^(3)^	****	Balance		****	Interest^(3)^		****	Yield/Rate^(3)^	****
Assets
Commercial real estate		$	1,012,194		$	9,691		3.81	%	$	900,568		$	10,750		4.74	%
Commercial and industrial			531,339			5,463		4.09			410,453			4,947		4.78
Residential			1,060,084			9,886		3.71			1,154,552			11,293		3.88
Consumer			121,248			1,042		3.42			109,562			1,418		5.13
Total loans ^(1)^			2,724,865			26,082		3.81			2,575,135			28,408		4.38
Securities and other ^(2)^			627,162			4,808		3.05			732,925			6,356		3.44
Total earning assets			3,352,027			30,890		3.67	%		3,308,060			34,764		4.17	%
Other assets			462,383								333,896
Total assets		$	3,814,410							$	3,641,956

Liabilities
NOW		$	677,706		$	243		0.14	%	$	487,506		$	621		0.51	%
Savings			488,508			157		0.13			359,242			193		0.21
Money market			396,351			163		0.16			338,013			1,168		1.37
Time deposits			777,424			3,307		1.69			947,949			5,161		2.16
Total interest bearing deposits			2,339,989			3,870		0.66			2,132,710			7,143		1.33
Borrowings			481,687			1,941		1.60			708,222			4,674		2.62
Total interest bearing liabilities			2,821,676			5,811		0.82	%		2,840,932			11,817		1.65	%
Non-interest bearing demand deposits			507,844								368,100
Other liabilities			78,072								37,975
Total liabilities			3,407,592								3,247,007

Total shareholders' equity			406,818								394,949

Total liabilities and shareholders' equity		$	3,814,410							$	3,641,956

Net interest spread								2.85	%							2.52	%
Net interest margin								2.98								2.75
(1)	The average balances of loans include non-accrual loans and unamortized deferred fees and costs.
---	---
(2)	The average balance for securities available for sale is based on amortized cost.
---	---
(3)	Fully taxable equivalent considers the impact of tax-advantaged securities and loans.
---	---

Table of Contents


	****	Nine Months Ended September 30,
		2020								2019
		Average								Average							****
(in thousands, except ratios)	****	Balance		****	Interest^(3)^		****	Yield/Rate^(3)^	****	Balance		****	Interest^(3)^		****	Yield/Rate^(3)^	****
Assets
Commercial real estate		$	972,330		$	29,895		4.11	%	$	859,613		$	30,480		4.74	%
Commercial and industrial			493,314			15,768		4.27			410,350			14,662		4.78
Residential			1,103,442			31,386		3.80			1,157,923			33,941		3.92
Consumer			126,189			3,929		4.16			111,274			4,333		5.21
Total loans ^(1)^			2,695,275			80,978		4.01			2,539,160			83,416		4.39
Securities and other ^(2)^			643,978			15,882		3.29			761,234			19,389		3.41
Total earning assets			3,339,253			96,860		3.87	%		3,300,394			102,805		4.16	%
Other assets			424,118								335,883
Total assets		$	3,763,371							$	3,636,277

Liabilities
NOW		$	622,702		$	1,021		0.22	%	$	472,542		$	1,764		0.50	%
Savings			451,952			587		0.17			353,117			545		0.21
Money market			393,702			1,511		0.51			337,822			3,521		1.39
Time deposits			813,442			11,318		1.86			925,508			14,505		2.10
Total interest bearing deposits			2,281,798			14,437		0.85			2,088,989			20,335		1.30
Borrowings			547,557			7,149		1.74			751,016			15,232		2.71
Total interest bearing liabilities			2,829,355			21,586		1.02	%		2,840,005			35,567		1.67	%
Non-interest bearing demand deposits			464,476								377,014
Other liabilities			63,226								32,676
Total liabilities			3,357,057								3,249,695

Total shareholders' equity			406,314								386,582

Total liabilities and shareholders' equity		$	3,763,371							$	3,636,277

Net interest spread								2.86	%							2.49	%
Net interest margin								3.01								2.72

(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.

Table of Contents NON-GAAP FINANCIAL MEASURES

This document contains certain non-GAAP financial measures in addition to results presented in accordance with accounting principles generally accepted in the United States of America ("GAAP"). These non-GAAP measures are intended to provide the reader with additional supplemental perspectives on operating results, performance trends, and financial condition. Non-GAAP financial measures are not a substitute for GAAP measures; they should be read and used in conjunction with the Company's GAAP financial information. A reconciliation of non-GAAP financial measures to GAAP measures is provided below. In all cases, it should be understood that non-GAAP measures do not depict amounts that accrue directly to the benefit of shareholders. An item that management excludes when computing non-GAAP adjusted earnings can be of substantial importance to the Company's results for any particular quarter or year. The Company's non-GAAP adjusted earnings information set forth is not necessarily comparable to non-GAAP information that may be presented by other companies. Each non-GAAP measure used by the Company in this report as supplemental financial data should be considered in conjunction with the Company's GAAP financial information.

The Company utilizes the non-GAAP measure of adjusted earnings in evaluating operating trends, including components for adjusted revenue and expense. These measures exclude amounts that the Company views as unrelated to its normalized operations, including gains/losses on securities, premises, equipment and other real estate owned, acquisition costs, restructuring costs, legal settlements, and systems conversion costs. Non-GAAP adjustments are presented net of an adjustment for income tax expense.

The Company also calculates adjusted earnings per share based on its measure of adjusted earnings. The Company views these amounts as important to understanding its operating trends, particularly due to the impact of accounting standards related to acquisition activity. Analysts also rely on these measures in estimating and evaluating the Company's performance. Management also believes that the computation of non-GAAP adjusted earnings and adjusted earnings per share may facilitate the comparison of the Company to other companies in the financial services industry. The Company also adjusts certain equity related measures to exclude intangible assets due to the importance of these measures to the investment community.

Table of Contents RECONCILIATION OF NON-GAAP FINANCIAL MEASURES

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


				Three Months Ended September 30,					****	Nine Months Ended September 30,
(in thousands)	****	Calculations	****	2020		****	2019			2020		****	2019
GAAP net income				$	8,402		$	5,015		$	24,604		$	18,413
Plus (less):
Gain on sale of securities, net					—			(157)			(1,486)			(157)
Loss on sale of premises and equipment, net					—			—			90			21
Loss on other real estate owned					335			146			366			146
Loss on debt extinguishment					—			—			1,351			—
Acquisition, restructuring and other expenses					691			3,039			952			3,319
Income tax expense^(1)^					(245)			(720)			(304)			(792)
Total adjusted income^(2)^		(A)		$	9,183		$	7,323		$	25,573		$	20,950

GAAP net interest income		(B)		$	24,665		$	22,445		$	73,818		$	65,706
Plus: Non-interest income					10,102			7,643			28,233			21,263
Total Revenue					34,767			30,088			102,051			86,969
Less: Gain on sale of securities, net					—			(157)			(1,486)			(157)
Total adjusted revenue^(2)^		(C)		$	34,767		$	29,931		$	100,565		$	86,812

GAAP total non-interest expense				$	22,419		$	23,400		$	67,044		$	62,930
Less: Loss on sale of premises and equipment, net					—			—			(90)			(21)
Less: Loss on other real estate owned					(335)			(146)			(366)			(146)
Less: Loss on debt extinguishment					—			—			(1,351)			—
Less: Acquisition, restructuring and other expenses					(691)			(3,039)			(952)			(3,319)
Adjusted non-interest expense^(2)^		(D)		$	21,393		$	20,215		$	64,285		$	59,444

(in millions)
Total average earning assets		(E)		$	3,352		$	3,308		$	3,339		$	3,300
Total average assets		(F)			3,814			3,642			3,763			3,636
Total average shareholders' equity		(G)			407			395			406			387
Total average tangible shareholders' equity^(2)(3)^		(H)			279			288			279			279
Total tangible shareholders' equity, period-end^(2)(3)^		(I)			277			287			277			287
Total tangible assets, period-end^(2)(3)^		(J)			3,732			3,506			3,732			3,506

(in thousands)
Total common shares outstanding, period-end		(K)			14,929			15,549			14,929			15,549
Average diluted shares outstanding		(L)			15,103			15,581			15,382			15,582

Adjusted earnings per share, diluted		(A/L)		$	0.61		$	0.47		$	1.66		$	1.35
Tangible book value per share, period-end^(2)^		(I/K)			18.56			18.49			18.56			18.49
Securities adjustment, net of tax^(1)(4)^		(M)			11,681			8,002			11,681			8,002
Tangible book value per share, excluding securities adjustment^(2)(4)^		(I+M)/K			17.78			17.98			17.78			17.98
Total tangible shareholders' equity/total tangible assets^(2)^		(I/J)			7.42			8.20			7.42			8.20

Table of Contents


	****		****	Three Months Ended September 30,						Nine Months Ended September 30,
		Calculations		2020			2019			2020			2019
Performance ratios^(5)^
Return on assets					0.88	%		0.55	%		0.87	%		0.68
Adjusted return on assets^(2)^		(A/F)			0.96			0.80			0.91			0.77
Return on equity					8.22			5.04			8.09			6.37
Adjusted return on equity^(2)^		(A/G)			8.98			7.36			8.41			7.25
Adjusted return on tangible equity^(2)(6)^		(A+Q)/H			13.36			10.31			12.54			10.25
Efficiency ratio^(2)(7)^		(D-O-Q)/(C+N)			59.47			65.02			61.62			65.83
Net interest margin^(2)^		(B+P)/E			2.98			2.75			3.01			2.72

Supplementary data (in thousands)
Taxable equivalent adjustment for efficiency ratio		(N)		$	570		$	658		$	1,935		$	2,018
Franchise taxes included in non-interest expense		(O)			121			119			360			350
Tax equivalent adjustment for net interest margin		(P)			416			503			1,457			1,532
Intangible amortization		(Q)			256			207			768			621
(1)	Assumes a marginal tax rate of 23.87% in 2020. A marginal tax rate of 23.78% was used in 2019.
---	---
(2)	Non-GAAP financial measure.
---	---
(3)	Tangible shareholders' equity is computed by taking total shareholders' equity less the intangible assets at period-end. Tangible assets is computed by taking total assets less the intangible assets at period-end.
---	---
(4)	Securities adjustment, net of tax represents the total unrealized loss on available-for-sale securities recorded on the Company's consolidated balance sheets within total common shareholders' equity.
---	---
(5)	All performance ratios are based on average balance sheet amounts, where applicable.
---	---
(6)	Adjusted return on tangible equity is computed by taking adjusted earnings divided by shareholders’ equity less the tax-effected amortization of intangible assets, assuming a marginal tax rate of 23.87% in 2020 and 23.78% in 2019.
---	---
(7)	Efficiency ratio is computed by dividing adjusted non-interest expense net of franchise taxes and intangible amortization divided by core revenue on a fully taxable equivalent basis.
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Table of Contents FINANCIAL SUMMARY

The Company reported third quarter 2020 net income of $8.4 million or $0.56 per share compared to $5.0 million or $0.32 per share in the same quarter of 2019. Adjusted earnings (non-GAAP measure) increased 30% to $9.2 million, or $0.61 per share in the third quarter 2020 compared to $7.3 million or $0.47 per share in the third quarter of 2019.

Financial highlights for the third quarter 2020 include the following, as compared to the third quarter of 2019 unless otherwise noted:

●	13% annualized growth in total commercial loans
●	92% loan to deposit ratio
---	---
●	2.98% net interest margin compared to 2.75%
---	---
●	32% increase in non-interest income
---	---
●	0.56% non-accruing loans to total loans, excluding Paycheck Protection Program (PPP) loans
---	---
●	0.88% return on assets compared to 0.55%; 0.96% core return on assets compared to 0.80% (non-GAAP)
---	---
●	59.5% efficiency ratio compared to 65.0%
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As a direct result of well executed strategies, the Company expanded all key performance metrics on a year-over-year and prior quarter basis. These strategies not only entailed expense and deleveraging initiatives, but also focused on increasing core deposits thus reducing overall funding costs, and expanding fee income. Adjusted return on assets increased to 0.96% as the Company continues to achieve positive operating leverage with minimal reliance on accretion from PPP related fees. Customer activity within the Company’s footprint has increased since state economies re-opened on a limited basis during the summer. Branch operations have also rebounded compared to the first half of the year. The loan to deposit ratio improved to 92% as deposits continue to grow on relatively flat, total loan growth. Given the current economic environment, the Company selectively grew commercial loans by 14% for the quarter, excluding PPP loans, and directed most mortgage production through the secondary market platform. The Company kept pace with the high demand of mortgage markets for new and refinanced loans, which resulted in four times the gains on loan sales compared to the same quarter 2019. The Company continues to adhere to risk-based credit philosophies and profitability disciplines as evidenced by third quarter results. Excess liquidity generated during the quarter was used to pay down wholesale borrowings as part of on-going initiatives to de-lever and expand net interest margin.

The Company’s wealth management business continues to be a significant contributor to fee income, as well as a keystone for deepening customer relationships with $2.1 billion in assets under management. Recently, the leadership and operations of the wealth management businesses was combined onto a common platform, which led to unified policies and best practices. The Company is now working with regulators to bring both of its wealth management companies and brokerage teams under one name Bar Harbor Wealth Management. Bringing this business together under one brand was the logical next step as talent, engagement and culture is aligned.

The Company’s allowance for loan losses is well established to absorb any inherent losses in the portfolio and increased during the quarter on higher commercial loan growth. Steady allowance levels coupled with an extensive stress testing process reflects the quality of the Company’s credit culture as net charge-offs and past due accounts remain low. Third quarter stress testing resulted in no significant risk-rating downgrades or changes to reserves. While the hotel industry is a large credit exposure for the Company there has been minimal degradation as those borrowers are strong, proven operators with an average loan to value ratio of less than 60% for the segment. In addition, any individual hotel exposure with a loan to value ratio greater than 65% was specifically included in the stress testing. The Company had a significant decrease in loans under COVID-related forbearance during the third quarter. As of September 30, 2020 total outstanding deferrals were $78.7 million or 3% of total loans, which primarily consist of interest only forbearance. Outstanding deferrals of residential loans totaled $4.6 million or less than ½ of a percent of the total residential portfolio.

The Company has supported its customers during the COVID-19 pandemic by originating approximately 1,900 PPP loans totaling $131.5 million. Net unearned fees remaining on PPP loans at the end of the third quarter was $3.8 million and accretion will accelerate as the loans are reimbursed by the Small Business Administration (“SBA”). Despite the significant challenges posed by the pandemic and related market conditions, the Company continues to maintain high levels of capital and liquidity, diversified revenue streams, strong credit performance and an exceptional core deposit base. 74

Table of Contents COMPARISON OF FINANCIAL CONDITION AT SEPTEMBER 30, 2020 AND DECEMBER 31, 2019

Total assets were $3.9 billion at the end of the third quarter 2020 compared to $3.7 billion at year-end 2019. Asset quality metrics remain strong with an allowance for loan losses to total loans ratio of 0.66% compared to 0.58% as of year-end 2019. The loan to deposit ratio was 92% in the third quarter compared to 98% at year-end 2019. The Company's tangible book value per share increased 10%, on an annualized basis, in the first nine months of 2020 from year-end 2019.

Securities

Securities totaled $618.5 million in the third quarter 2020 and $683.9 million at year-end 2019 representing 16% and 19% of total assets, respectively. The decrease in security holdings reflects the Company’s deleveraging strategy to reduce borrowings and allow for the natural run-off of amortizing and maturing fixed rate investments. Securities purchased in the first nine months of 2020 included $66.0 million of mortgage-backed securities guaranteed by US Government-sponsored enterprises, $31.2 million of tax exempt municipal bonds, $32.0 million of corporate bonds and $1.9 million in community investments, in addition to a net $6.7 million decrease in FHLB stock. The purchases were offset by $199.3 million of sales, maturities, calls and pay-downs of amortizing securities. Fair value adjustments increased the security portfolio by $11.7 million at the end of the third quarter 2020 and $5.5 million at year-end 2019. The improvement in fair value continues to be the result of lower long-term interest rates. The weighted average yield on the Company's securities portfolio as of September 30, 2020 was 3.05% compared to 3.42% at year-end 2019. At the end of the third quarter 2020, securities held by the Company had an average life of 4.0 years and a duration of 2.9 years compared to 5.0 years and 3.6 years at the end of 2019, respectively.

Loans

Loan balances in the third quarter 2020 were $2.7 billion compared to $2.6 billion year-end 2019. The increase is primarily due to commercial real estate growth and PPP originations offset by secondary market sales and prepayments of residential mortgages. In the first nine months of 2020, commercial real estate increased $115.0 million during at an annualized rate of 16% and commercial and industrial (“C&I”) loans increased $9.5 million or 4% on an annualized basis excluding PPP loans. The increase in C&I was tempered by one customer with loans totaling $39.8 million that were refinanced to a lower principal of $25.0 million along with an open line of credit with no current advances. Mortgage loan originations totaled $86.5 million from new and refinancing activity given the lower interest rate environment. Most residential originations were sold in the secondary market to generate fee income.

Asset Quality

The allowance for loan losses totaled $17.9 million at the end of the third quarter 2020 and $15.4 million at year-end 2019. The $2.6 million increase reflects a provision for loan loss of $4.3 million offset by net charge offs of $1.7 million. Excluding PPP loans the allowance for loan losses to total loans ratio for the third quarter was 0.69% from 0.58% at year-end 2019. Delinquent and non-accrual loans as a percentage of total loans decreased to 0.77% from 1.19% at the end of 2019. Commercial non-accrual loans in the first nine months increased $1.2 million primarily due to two commercial loan relationships totaling $1.4 million, one was written down by $349 thousand and the other has subsequently settled at its carrying value.

In March 2020, the Company elected to defer implementation of CECL as allowed under the CARES Act. As result, the Company continues to operate its incurred loss model. While the impact of COVID-19 and other market conditions remain uncertain, the Company believes the existing allowance for loan losses is sufficient to absorb inherent losses based on a disciplined credit approach, experienced losses and methodology, and current and ongoing stress testing reviews of the portfolio. The Allowance for Loan Loss calculated under the CECL method is estimated to be in a range of $23.0 million to $26.0 million as of September 30, 2020, compared to $20.0 million to $23.0 million on the effective date of January 1, 2020.

The Company performed third quarter stress testing of the commercial loan portfolio including the top 50 relationships, all criticized loans greater than $1.0 million, hospitality loans over $250 thousand with loan to values in excess of 65%, and any seasonal payment, restaurant, or term loans maturing within a year that are greater than $500 thousand. Results of the testing led to no significant risk-rating downgrades or changes to reserves or any other meaningful deterioration in the overall quality of the commercial portfolio. Any impact from the stress testing was considered in the adequacy of the allowance for loan losses as of September 30, 2020. 75

Table of Contents Goodwill

The Company completed its 2020 annual goodwill impairment test using balance sheet and market data as of September 30, 2020. The Company’s models suggest that the fair value of the business is greater than the book value or market capitalization based on the price at which the stock is currently trading. While the Company concluded there is no goodwill impairment, it will continue to evaluate its position as economic conditions change.

Deposits and Borrowings

Total deposits were $2.9 billion at the end of the third quarter 2020 and $2.7 billion at year-end 2019. Non-maturity deposits increased by 27%, on an annualized basis due to growth from new accounts and an overall decrease in customer spending given current market conditions. The Company's expanding branch model has helped to increase new accounts, which totaled 3,744 in the third quarter 2020 compared to 2,918 in the fourth quarter 2019. Total borrowings decreased by $85.9 million and brokered certificate of deposits decreased by $325.7 million as excess liquidity primarily from higher deposit balances was used to pay down wholesale borrowings.

Derivative Financial Instruments

The notional balance of derivative financial instruments increased to $822.9 million at the end of the third quarter 2020 from $580.4 million at year-end 2019. The increase is principally due to a $175.0 million increase in customer loan derivatives sold on commercial loans with matching hedges using national bank counterparties and a $36.5 million increase in forward commitments to sell mortgages in the secondary market. The net fair value of all derivatives was a liability of $3.5 million at the end of the third quarter 2020 compared to $743 thousand at year-end 2019. The increase in the net derivative liability primarily reflects the valuation of the Company’s interest rate swaps on wholesale funding and securities based on lower market rates at the end of the third quarter 2020.

Equity

Total equity was $404.4 million, compared with $396.4 million at year-end 2019. The increase includes a $6.1 million improvement in fair value of securities, net of tax, along with strong net income of $24.6 million offset by $10.1 million in dividends and common stock repurchases of $13.3 million. Stock repurchases totaled 297 thousand shares during the third quarter 2020 and 689 thousand shares on a year-to-date basis. An additional 92 thousand shares are available to be repurchased before the end of March in 2021. The Company's book value per share increased to $27.09 at the end of the third quarter 2020 from $25.48 at year-end 2019. Tangible book value per share (non-GAAP measure) increased to $18.56 per share at September 30, 2020 up from $17.30 per share at year-end 2019, an increase of 10% on an annualized basis.

COMPARISON OF OPERATING RESULTS FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2020 AND 2019

Summary

Net income in the third quarter 2020 was $8.4 million, or $0.56 per share, compared with $5.0 million, or $0.32 per share, in the same quarter 2019. The non-GAAP measure of adjusted earnings in the third quarter 2020 totaled $9.2 million, or $0.61 per share, compared to $7.3 million or $0.47 per share, in the same quarter of 2019. The improvement in net income is driven by expanded net interest margin and higher non-interest income. The Company's return on assets ratio was 0.88% during the third quarter of 2020 and 0.55% in the same quarter of 2019. The ratio for adjusted return on assets increased to 0.96% from 0.88% in third quarter of 2019 on higher net income.

The Company reported year to date net income of $24.6 million or $1.60 per share, compared with $18.4 million or $1.18 per share in the same period of 2019. Adjusted earnings increased to $25.6 million, or $1.66 per share compared with $21.0 million, or $1.35 per share, for the respective periods. These changes largely reflect the same factors and trends discussed above that drove third quarter net income.

Net Interest Income

Net interest income was $24.7 million in the third quarter 2020 compared with $22.4 million in the same quarter of 2019. Net interest margin in the third quarter 2020 increased to 2.98% from 2.75% in the same period of 2019 primarily due to a lower cost of funds. Costs of funds decreased to 0.82% compared to 1.65% in the third quarter 2019 due to a shift in funding sources from borrowings to non-maturity deposits. Cost of deposits and borrowings also benefited from the 76

Table of Contents Federal Reserve rate cuts in 2020 and other key indexes in response to COVID-19. Costs of interest-bearing deposits decreased to 0.66% compared to 1.33% in the third quarter 2019 and cost of borrowings improved to 1.60% from 2.62% in same quarter of 2019. Additionally, excess liquidity was used to pay off $239.4 million of borrowings since the third quarter of 2019 in connection with deleveraging strategies that further reduced interest expense. Yields from earning assets were 3.67% compared to 4.17% in the third quarter 2019 reflecting loan originations and repricing of variable rate products in a lower interest rate environment. Purchased loan accretion contributed 0.06% to net interest margin in the third quarter 2020 compared to 0.10% in the third quarter 2019. Excluding the effects of PPP loans, the third quarter yield on total earning assets was 3.72%.

For the first nine months of the year, net interest income was $69.6 million compared with $63.9 million in the same months of 2019 and net interest margin was 3.01% from 2.72% for the same respective periods. The increase is primarily driven by reduced borrowing levels and higher non-maturity deposits. The average borrowing levels decreased to $481.7 million in the first nine months of 2020 from $708.2 million in the same period of 2019 and borrowing costs were 1.74% from 2.71% for the same respective periods. Costs of interest-bearing deposits also decreased in the first nine months of 2020 to 0.85% compared to 1.30% in the same period of 2019. Yields from earning assets were 3.87% in the first nine months of 2020 compared to 4.16% in the first nine months of 2019. The year-to-date effect on net interest margin from earning assets and interest bearing liabilities is the same as the quarterly discussion.

Loan Loss Provision

The third quarter 2020 provision for loan losses increased to $1.8 million from $893 thousand in the same quarter of 2019. While overall credit quality in the loan portfolio remains strong, the increase in the reserve is indicative of the continued commercial loan growth and higher economic adjustments reflecting elevated risk from COVID-19. As previously noted, the Company has maintained its incurred loss model for calculating the allowance for loan losses.

Non-Interest Income

Non-interest income in the third quarter 2020 was $10.1 million compared to $7.6 million in the same quarter of 2019. The increase is primarily due to a $2.2 million increase in mortgage banking income associated with secondary market sales of $86.2 million compared to $20.7 million in the same period of 2019. Customer service fees increased 13% and trust and investment management fees increased 17% as the result of expanded operations into Central Maine partially offset by lower activity stemming from COVID-19.

Non-interest income for the first nine months of 2020 was $28.2 million compared to $21.3 million in the same period in 2019. The increase in non-interest income for the nine-month period is driven by the same reasons as the quarterly period, but also includes a $1.5 million gain on sales of securities recorded in connection with balance sheet remixing and deleveraging strategies.

Non-Interest Expense

Non-interest expense was $22.4 million in the third quarter 2020 compared to $23.4 million in the same quarter of 2019. The decrease is principally due to lower acquisition, conversion and other expenses, which totaled $691 thousand in 2020 compared to $3.0 million in 2019. Salary and benefit expense and occupancy costs were higher during the third quarter 2020 to support the Company’s expanded branch model and wealth management business. Total operating expenses remained controlled as demonstrated by the drop in the efficiency ratio to 59.5% compared to 65.0% for third quarter of 2019.

For the first nine months of 2020, non-interest expense increased to $67.0 million from $62.9 million in the same period of 2019. The increase in non-interest expense for the nine-month period is driven by the same reasons as the quarterly period along with a prepayment penalty on a longer term and higher cost FHLB borrowing in the second quarter 2020.

Income Tax Expense

The third quarter effective tax rate increased to 20.3% in 2020 compared with 13.5% in the same quarter of 2019, reflecting the higher level of taxable income and lower level of non-tax advantaged income in 2020.

Table of Contents Liquidity and Cash Flows

Liquidity is measured by the Company's ability to meet short-term cash needs at a reasonable cost or minimal loss. The Company seeks to obtain favorable sources of liabilities and to maintain prudent levels of liquid assets in order to satisfy varied liquidity demands. Besides serving as a funding source for maturing obligations, liquidity provides flexibility in responding to customer-initiated needs. Many factors affect the Company's ability to meet liquidity needs, including variations in the markets served by its network of offices, its mix of assets and liabilities, reputation and credit standing in the marketplace, and general economic conditions.

The Bank actively manages its liquidity position through target ratios established under its Asset-Liability Management Policy. Continual monitoring of these ratios, by using historical data and through forecasts under multiple rate and stress scenarios, allows the Bank to employ strategies necessary to maintain adequate liquidity. The Bank's policy is to maintain a liquidity position of at least 4% of total assets. A portion of the Bank's deposit base has been historically seasonal in nature, with balances typically declining in the winter months through late spring, during which period the Bank's liquidity position tightens.

The Company’s liquidity position remains strong. During the quarter we initiated pandemic-specific liquidity stress tests to analyze potential impacts from payment deferrals, unanticipated use of committed lines of credit, as well as the possibility of required servicer advances on sold loans. At September 30, 2020, available same-day liquidity totaled approximately $1.5 billion, including cash, borrowing capacity at FHLB and the Federal Reserve Discount Window and various lines of credit. Additional sources of liquidity include cash flows from operations, wholesale deposits, cash flow from the Company's amortizing securities and loan portfolios. The Company had unused borrowing capacity at the FHLB of $634.0 million, unused borrowing capacity at the Federal Reserve of $81.1 million and unused lines of credit totaling $51.0 million, in addition to over $200.0 million in unencumbered, liquid investment portfolio assets. The Company has also utilized the Federal Reserve's Paycheck Protection Program Liquidity Facility to provide liquidity to fund PPP loans.

The Bank maintains a liquidity contingency plan approved by the Bank's Board of Directors. This plan addresses the steps that would be taken in the event of a liquidity crisis, and identifies other sources of liquidity available to the Company. Company management believes the level of liquidity is sufficient to meet current and future funding requirements. However, changes in economic conditions, including consumer savings habits and availability or access to the brokered deposit market could potentially have a significant impact on the Company's liquidity position.

Off-Balance Sheet Arrangements

The Company is, from time to time, a party to certain off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on the Company's financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources, that may be material to investors.

The Company’s off-balance sheet arrangements are limited to standby letters of credit whereby the Bank guarantees the obligations or performance of certain customers. These letters of credit are sometimes issued in support of third-party debt. The risk involved in issuing standby letters of credit is essentially the same as the credit risk involved in extending loan facilities to customers, and they are subject to the same origination, portfolio maintenance and management procedures in effect to monitor other credit products. The amount of collateral obtained, if deemed necessary by the Bank upon issuance of a standby letter of credit, is based upon management's credit evaluation of the customer.

The Company’s off-balance sheet arrangements have not changed materially since previously reported in our Annual Report on Form 10-K for the year ended December 31, 2019.

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

The Company’s significant accounting policies are described in Note 1 to the consolidated financial statements in this Form 10-Q and in the most recent Form 10-K. Please see those policies in conjunction with this discussion. The accounting and reporting policies followed by the Company conform, in all material respects, to accounting principles generally accepted in the United States and to general practices within the financial services industry. The preparation of financial 78

Table of Contents statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. While the Company bases estimates on historical experience, current information and other factors deemed to be relevant, actual results could differ from those estimates.

Management has identified the Company's most critical accounting policies as related to:

•	Allowance for Loan Losses
•	Acquired Loans
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•	Income Taxes
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•	Goodwill and Identifiable Intangible Assets
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•	Determination of Other-Than-Temporary Impairment of Securities
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•	Fair Value of Financial Instruments
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Table of Contents ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Market Risk

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

The responsibility for interest rate risk management oversight is the function of the Bank’s Asset and Liability Committee (“ALCO”), chaired by the Chief Financial Officer and composed of various members of senior management. ALCO meets regularly to review balance sheet structure, formulate strategies in light of current and expected economic conditions, adjust product prices as necessary, implement policy, monitor liquidity, and review performance against guidelines established to control exposure to the various types of inherent risk.

Interest Rate Risk: Interest rate risk can be defined as an exposure to movement in interest rates that could have an adverse impact on the Bank's net interest income. Interest rate risk arises from the imbalance in the re-pricing, maturity and or cash flow characteristics of assets and liabilities. Management's objectives are to measure, monitor and develop strategies in response to the interest rate risk profile inherent in the Bank's balance sheet. The objectives in managing the Bank's balance sheet are to preserve the sensitivity of net interest income to actual or potential changes in interest rates, and to enhance profitability through strategies that promote sufficient reward for understood and controlled risk.

The Bank's interest rate risk measurement and management techniques incorporate the re-pricing and cash flow attributes of balance sheet and off-balance sheet instruments as each relate to current and potential changes in interest rates. The level of interest rate risk, measured in terms of the potential future effect on net interest income, is determined through the use of modeling and other techniques under multiple interest rate scenarios. Interest rate risk is evaluated in depth on a quarterly basis and reviewed by ALCO and the Company’s Board of Directors.

The Bank's Asset Liability Management Policy, approved annually by the Bank’s Board of Directors, establishes interest rate risk limits in terms of variability of net interest income under rising, flat, and decreasing rate scenarios. It is the role of the ALCO to evaluate the overall risk profile and to determine actions to maintain and achieve a posture consistent with policy guidelines.

Interest Rate Sensitivity Modeling: The Bank utilizes an interest rate risk model widely recognized in the financial industry to monitor and measure interest rate risk. The model simulates the behavior of interest income and expense for all balance sheet and off-balance sheet instruments, under different interest rate scenarios together with a dynamic future balance sheet. Interest rate risk is measured in terms of potential changes in net interest income based upon shifts in the yield curve.

The interest rate risk sensitivity model requires that assets and liabilities be broken down into components as to fixed, variable, and adjustable interest rates, as well as other homogeneous groupings, which are segregated as to maturity and type of instrument. The model includes assumptions about how the balance sheet is likely to evolve through time and in different interest rate environments. The model uses contractual re-pricing dates for variable products, contractual maturities for fixed rate products, and product-specific assumptions for deposit accounts, such as money market accounts, that are subject to re-pricing based on current market conditions. Re-pricing margins are also determined for adjustable rate assets and incorporated in the model. Investment securities and borrowings with call provisions are examined on an individual basis in each rate environment to estimate the likelihood of exercise. Prepayment assumptions for mortgage loans and mortgage-backed securities are developed from industry median estimates of prepayment speeds, based upon similar coupon ranges and degree of seasoning. Cash flows and maturities are then determined, and for certain assets, prepayment assumptions are estimated under different interest rate scenarios. Interest income and interest expense are then simulated under several hypothetical interest rate conditions including:

•	A flat interest rate scenario in which current prevailing rates are locked in and the only balance sheet fluctuations that occur are due to cash flows, maturities, new volumes, and re-pricing volumes consistent with this flat rate assumption;

Table of Contents

•	A 200 basis point rise or decline in interest rates (or as appropriate given the absolute level of market rates) applied against a parallel shift in the yield curve over a twelve-month horizon together with a dynamic balance sheet anticipated to be consistent with such interest rate changes;
•	Various non-parallel shifts in the yield curve, including changes in either short-term or long-term rates over a twelve-month horizon, together with a dynamic balance sheet anticipated to be consistent with such interest rate changes; and
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•	An extension of the foregoing simulations to each of two, three, four and five year horizons to determine the interest rate risk with the level of interest rates stabilizing in years two through five. Even though rates remain stable during this two to five year time period, re-pricing opportunities driven by maturities, cash flow, and adjustable rate products will continue to change the balance sheet profile for each of the interest rate conditions.
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Changes in net interest income based upon the foregoing simulations are measured against the flat interest rate scenario and actions are taken to maintain the balance sheet interest rate risk within established policy guidelines.

As of September 30, 2020 interest rate sensitivity modeling results indicate that the Bank’s balance sheet in years 1 and 2 were modestly asset sensitive.

Assuming short-term and long-term interest rates decline 100 basis points from current levels (i.e., a parallel yield curve shift) and the Bank’s balance sheet structure and size remain at current levels, management believes net interest income will deteriorate over the one year horizon (-0.4% versus the base case) while deteriorating further from that level over the two-year horizon (-9.0% versus the base case).

Assuming the Bank’s balance sheet structure and size remain at current levels and the Federal Reserve increases short-term interest rates by 200 basis points with the balance of the yield curve shifting in parallel with these increases, management believes net interest income will improve slightly over the one and two-year horizons (1.8% and 5.1%, respectively).

As compared to December 31, 2019, the year-one sensitivity in the down 100 basis points scenario was up slightly for the nine months ended September 30, 2020 (-1.0% prior, versus -0.4% current). The year-two sensitivities in the down 100 basis points scenario changed going from -3.7% to -9.0%. In the year-one up 200 basis points scenario, results improved going from 0.7% to 1.8%. Year-two, up 200 basis points was up (3.3% prior, versus 5.1% current).

The preceding sensitivity analysis does not represent a Company forecast and should not be relied upon as being indicative of expected operating results. These hypothetical estimates are based upon numerous assumptions including: the nature and timing of interest rate levels and yield curve shape, prepayment speeds on loans and securities, deposit rates, pricing decisions on loans and deposits, reinvestment or replacement of asset and liability cash flows, and renegotiated loan terms with borrowers. While assumptions are developed based upon current economic and local market conditions, the Company cannot make any assurances as to the predictive nature of these assumptions including how customer preferences or competitor influences might change.

As market conditions vary from those assumed in the sensitivity analysis, actual results may also differ due to: prepayment and refinancing levels deviating from those assumed; the impact of interest rate changes, caps or floors on adjustable rate assets; the potential effect of changing debt service levels on customers with adjustable rate loans; depositor early withdrawals and product preference changes; and other such variables. The sensitivity analysis also does not reflect additional actions that the Bank’s Senior Executive Team and Board of Directors might take in responding to or anticipating changes in interest rates, and the anticipated impact on the Bank’s net interest income.

Table of Contents ITEM 4. CONTROLS AND PROCEDURES

(a)	Disclosure controls and procedures.

Under the supervision and with the participation of our senior management, consisting of the Company’s principal executive officer and our principal financial officer, the Company conducted an evaluation of the effectiveness of the design and operation of its disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on this evaluation, the Company’s management, including its principal executive officer and principal financial officer, concluded that as of September 30, 2020 the Company’s disclosure controls and procedures were effective to ensure that information required to be disclosed by the Company in the reports that it files under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms. The Company’s disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by the Company in its Exchange Act reports is accumulated and communicated to the Company’s management, including its principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives, and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

(b)	Changes in internal control over financial reporting.

There were no changes in the Company’s internal control over financial reporting that occurred during the last fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

The Company and its subsidiaries are parties to certain ordinary routine litigation incidental to the normal conduct of their respective businesses, which in the opinion of management based upon currently available information will have no material effect on the Company's consolidated financial statements.

ITEM 1A. RISK FACTORS

There were no material changes to the risk factors discussed in Part I, Item 1A. of the Company’s Annual Report on Form 10-K for the year ended December 31, 2019 and Part II, Item 1A. of the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2020. In addition to the other information set forth in this report, you should carefully consider those risk factors, which could materially affect our business, financial condition and future operating results. Those risk factors are not the only risks facing our company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may have a material adverse effect on our business, financial condition and operating results.

Table of Contents ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

(c)	The following table provides certain information with regard to shares repurchased by the Company in the third quarter of 2020:


	****						Total number of shares		Maximum number of
							purchased as a part of		shares that may yet be
		Total number of		Average price		****	publicly announced	****	purchased under
Period	****	shares purchased	****	paid per share		****	plans or programs	****	the plans or programs^(1)^
July 1-31, 2020		108,178		$	20.38		500,501		280,499
August 1-31, 2020		77,767			20.35		578,268		202,732
September 1-30, 2020		111,074			19.83		689,342		91,658
Total		297,019		$	20.19		689,342		91,658
(1)	On March 12, 2020, the Company's Board of Directors approved a twelve-month plan to repurchase up to 5% of its outstanding common stock, representing 781,000 shares and expires on March 20, 2021.
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Table of Contents ITEM 6. EXHIBITS


10.1*	Employment Agreement, dated as of September 14, 2020, between Bar Harbor Bankshares, Bar Harbor Bank & Trust and Josephine Iannelli

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

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

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

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

101	The following financial information from the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2020 is formatted in Inline Extensible Business Reporting Language (iXBRL): (i) Consolidated Condensed Statements of Income, (ii) the Condensed Consolidated Balance Sheets, (iii) the Condensed Consolidated Statements of Changes in Shareholders’ Equity, (iv) Consolidated Statements of Cash Flows and (v) Notes to the Consolidated Condensed Financial Statements

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

Table of Contents SIGNATURES

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


	BAR HARBOR BANKSHARES


Dated: November 5, 2020	By:	/s/ Curtis C. Simard
		Curtis C. Simard
		President & Chief Executive Officer


Dated: November 5, 2020	By:	/s/ Josephine Iannelli
		Josephine Iannelli
		Executive Vice President & Chief Financial Officer

Exhibit 31.1

CERTIFICATION OF THE CHIEF EXECUTIVE OFFICER

PURSUANT TO RULES 13a-14 AND 15d-14 OF THE SECURITIES EXCHANGE ACT

OF 1934 AND SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Curtis C. Simard, certify that:

1.	I have reviewed this quarterly report on Form 10-Q of Bar Harbor Bankshares (the “Registrant”);
2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
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3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this report;
---	---
4.	The Registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Registrant and have:
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(a)	Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
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(b)	Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
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(c)	Evaluated the effectiveness of the Registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
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(d)	Disclosed in this report any change in the Registrant’s internal control over financial reporting that occurred during the Registrant’s most recent fiscal quarter (the Registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the Registrant’s internal control over financial reporting; and
---	---
5.	The Registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Registrant’s auditors and the audit committee of Registrant’s board of directors (or persons performing the equivalent functions):
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(a)	All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Registrant’s ability to record, process, summarize and report financial information; and
---	---
(b)	Any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant’s internal control over financial reporting.
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Date: November 5, 2020		/s/ Curtis C. Simard

	Name:	Curtis C. Simard
	Title:	President and Chief Executive Officer

Exhibit 31.2

CERTIFICATION OF THE CHIEF FINANCIAL OFFICER

PURSUANT TO RULES 13a-14 AND 15d-14 OF THE SECURITIES EXCHANGE ACT

OF 1934 AND SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Josephine Iannelli, certify that:

1.	I have reviewed this quarterly report on Form 10-Q of Bar Harbor Bankshares (the “Registrant”);
2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
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3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this report;
---	---
4.	The Registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Registrant and have:
---	---
(a)	Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
---	---
(b)	Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
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(c)	Evaluated the effectiveness of the Registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
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(d)	Disclosed in this report any change in the Registrant’s internal control over financial reporting that occurred during the Registrant’s most recent fiscal quarter (the Registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the Registrant’s internal control over financial reporting; and
---	---
5.	The Registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Registrant’s auditors and the audit committee of Registrant’s board of directors (or persons performing the equivalent functions):
---	---
(a)	All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Registrant’s ability to record, process, summarize and report financial information; and
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(b)	Any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant’s internal control over financial reporting.
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Date: November 5, 2020		/s/ Josephine Iannelli

	Name:	Josephine Iannelli
	Title:	Executive Vice President and Chief Financial Officer

Exhibit 32.1

CERTIFICATION OF CHIEF EXECUTIVE OFFICER

PURSUANT TO SECTION 906 OF THE

SARBANES-OXLEY ACT OF 2002 (18 U.S.C. Section 1350)

The undersigned executive officer of Bar Harbor Bankshares (the “Registrant”) hereby certifies that the Registrant’s Form 10- Q for the period ended September 30, 2020, fully complies with the requirements of Section 13(a) or 15(d), as applicable of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) and that the information contained therein fairly presents, in all material respects, the financial condition and results of operations of the Registrant. This certification is provided pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, and Item 601(b)(32) of Regulation S-K (“Item 601(b)(32)”) promulgated under the Securities Act of 1933, as amended (the “Securities Act”) and the Exchange Act. In accordance with clause (ii) of Item 601(b)(32), this certification (a) shall not be deemed “filed” for purposes of Section 18 of the Exchange Act, or otherwise subject to liability under that section, and (b) shall not be deemed to be incorporated by reference into any filing under the Securities Act or the Exchange Act, except to the extent that the Registrant specifically incorporates it by reference.


Date: November 5, 2020		/s/ Curtis C. Simard

	Name:	Curtis C. Simard
	Title:	President and Chief Executive Officer

Exhibit 32.2

CERTIFICATION OF CHIEF FIANANCIAL OFFICER

PURSUANT TO SECTION 906 OF THE

SARBANES-OXLEY ACT OF 2002 (18 U.S.C. Section 1350)

The undersigned executive officer of Bar Harbor Bankshares (the “Registrant”) hereby certifies that the Registrant’s Form 10-Q for the period ended September 30, 2020, fully complies with the requirements of Section 13(a) or 15(d), as applicable of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) and that the information contained therein fairly presents, in all material respects, the financial condition and results of operations of the Registrant. This certification is provided pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, and Item 601(b)(32) of Regulation S-K (“Item 601(b)(32)”) promulgated under the Securities Act of 1933, as amended (the “Securities Act”) and the Exchange Act. In accordance with clause (ii) of Item 601(b)(32), this certification (a) shall not be deemed “filed” for purposes of Section 18 of the Exchange Act, or otherwise subject to liability under that section, and (b) shall not be deemed to be incorporated by reference into any filing under the Securities Act or the Exchange Act, except to the extent that the Registrant specifically incorporates it by reference.

t
Date: November 5, 2020		/s/ Josephine Iannelli

	Name:	Josephine Iannelli
	Title:	Executive Vice President and Chief Financial Officer