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: March 31, 2023


☐	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", and "emerging growth company" in Rule 12b-2 of the Exchange Act.

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

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

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

The Registrant had 15,143,558 shares of common stock, par value $2.00 per share, outstanding as of May 4, 2023.

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 March 31, 2023 and December 31, 2022			5

	Consolidated Statements of Income for the Three Months Ended March 31, 2023 and 2022			7

	Consolidated Statements of Comprehensive Income for the Three Months Ended March 31, 2023 and 2022			8

	Consolidated Statements of Changes in Shareholders’ Equity for the Three Months Ended March 31, 2023 and 2022			9

	Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2023 and 2022			10

	Notes to Unaudited Consolidated Interim Financial Statements
		Note 1	Basis of Presentation	11
		Note 2	Securities Available for Sale	12
		Note 3	Loans and Allowance for Credit Losses	15
		Note 4	Borrowed Funds	24
		Note 5	Deposits	26
		Note 6	Capital Ratios and Shareholders' Equity	27
		Note 7	Earnings per Share	30
		Note 8	Derivative Financial Instruments and Hedging Activities	31
		Note 9	Fair Value Measurements	38
		Note 10	Revenue from Contracts with Customers	44



Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations			46
		Selected Financial Data		52
		Consolidated Loan and Deposit Analysis		53
		Average Balances and Average Yields/Rates		54
		Reconciliation of Non-GAAP Financial Measures		55


Item 3.	Quantitative and Qualitative Disclosures about Market Risk			57

Item 4.	Controls and Procedures			59


PART II.	OTHER INFORMATION

Item 1.	Legal Proceedings			59

Item 1A.	Risk Factors			59

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds			60

Item 6.	Exhibits			61

Signatures				62

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

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

Certain statements contained in this Quarterly Report on Form 10-Q (this “Form 10-Q”) that are not historical facts may constitute forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended ("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 “believe,” “anticipate,” “expect,” “may,” “will,” “assume,” “should,” “predict,” “could,” “would,” “intend,” “targets,” “estimates,” “projects,” “plans,” and “potential,” and other similar words and expressions of the future, are intended to identify such forward-looking statements, but other statements not based on historical information may also be considered forward-looking, including statements about the Company’s future financial and operating results and the Company’s plans, objectives, and intentions. All forward-looking statements are subject to risks, uncertainties, and other factors that may cause the actual results, performance, or achievements of the Company to differ materially from any results, performance, or achievements expressed or implied by such forward-looking statements. These forward-looking statements are subject to known and unknown risks, uncertainties and other factors that could cause the actual results to differ materially from the statements, including, but not limited to:

●	deterioration in the financial condition of borrowers of the Bank, including as a result of the negative impact of inflationary pressures on our customers and their businesses resulting in significant increases in loan losses and provisions for those losses;
●	the possibility that our asset quality could decline or that we experience greater loan losses than anticipated;
---	---
●	increased levels of other real estate, primarily as a result of foreclosures;
---	---
●	the impact of liquidity needs on our results of operations and financial condition;
---	---
●	competition from financial institutions and other financial service providers;
---	---
●	the effect of interest rate increases on the cost of deposits;
---	---
●	unanticipated weakness in loan demand or loan pricing;
---	---
●	adverse conditions in the national or local economies including in our markets throughout Northern New England;
---	---
●	the effects of new outbreaks of COVID-19, including actions taken by governmental officials to curb the spread of the virus, and the resulting impact on general economic and financial market conditions and on the Company’s and our customers' business, results of operations, asset quality and financial condition;
---	---
●	the effects of civil unrest, international hostilities or other geopolitical events, including the war in Ukraine;
---	---
●	inflation, interest rate, market, and monetary fluctuations;
---	---
●	lack of strategic growth opportunities or our failure to execute on available opportunities;
---	---
●	the ability to grow and retain low-cost core deposits and retain large, uninsured deposits;
---	---
●	our ability to effectively manage problem credits;
---	---
●	our ability to successfully implement efficiency initiatives on time and with the results projected;
---	---
●	our ability to successfully develop and market new products and technology;
---	---
●	the impact of negative developments in the financial industry and United States and global capital and credit markets;
---	---
●	our ability to retain executive officers and key employees and their customer and community relationships;
---	---
●	our ability to implement and to adapt to technological changes;
---	---
●	the vulnerability of the Bank’s computer and information technology systems and networks, and the systems and networks of third parties with whom the Company or the Bank contract, to unauthorized access, computer viruses, phishing schemes, spam attacks, human error, natural disasters, power loss, and other security breaches and interruptions;
---	---
●	changes in the reliability of our vendors, internal control systems or information systems;
---	---
●	ongoing competition in the labor markets and increased employee turnover;
---	---
●	the potential impact of climate change;
---	---
●	the impact of pandemics, epidemics, or any other health-related crisis;
---	---

Table of Contents

●	our ability to comply with various governmental and regulatory requirements applicable to financial institutions;
●	changes in state and federal laws, rules, regulations, or policies applicable to banks or bank or financial holding companies, including regulatory or legislative developments;
---	---
●	governmental monetary and fiscal policies, including the policies of the Board of Governors of the Federal Reserve System (the “Federal Reserve”);
---	---
●	adverse impacts (including costs, fines, reputational harm, financial risks and the applicability of insurance coverage or other negative effects) from current or future litigation, regulatory examinations, or other legal and/or regulatory actions; and
---	---
●	general competitive, economic, political, and market conditions, including economic conditions in the local markets where we operate.
---	---

Other factors not identified above, including those described under the headings “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2022 (the “Form 10-K”), our quarterly reports on Form 10-Q, and current reports on Form 8-K filed with the Securities and Exchange Commission (the “SEC”) and available on the SEC’s website at http://www.sec.gov, may also cause actual results to differ materially from those described in our forward-looking statements. Most of these factors are difficult to anticipate and are generally beyond our control. You should consider these factors in connection with considering any forward-looking statements that may be made by us. We undertake no obligation to release publicly any revisions to any forward-looking statements, to report events or to report the occurrence of unanticipated events unless we are required to do so by law.

Table of Contents PART I. FINANCIAL INFORMATION

ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS

BAR HARBOR BANKSHARES AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS (UNAUDITED)


(in thousands, except share data)	****	March 31, 2023		****	December 31, 2022
Assets
Cash and cash equivalents:
Cash and due from banks		$	37,769		$	39,933
Interest-earning deposits with other banks			44,933			52,362
Total cash and cash equivalents			82,702			92,295

Securities:
Securities available for sale			557,040			559,516
Federal Home Loan Bank stock			15,718			14,893
Total securities			572,758			574,409

Loans held for sale			463			—

Total loans			2,944,005			2,902,690
Less: Allowance for credit losses			(26,607)			(25,860)
Net loans			2,917,398			2,876,830

Premises and equipment, net			47,549			47,622
Goodwill			119,477			119,477
Other intangible assets			5,568			5,801
Cash surrender value of bank-owned life insurance			78,436			81,197
Deferred tax assets, net			22,858			24,443
Other assets			81,269			87,729
Total assets		$	3,928,478		$	3,909,803

Liabilities
Deposits:
Demand		$	636,710		$	676,350
NOW			908,483			900,730
Savings			628,798			664,514
Money market			475,577			478,398
Time			404,246			323,439
Total deposits			3,053,814			3,043,431

Borrowings:
Senior			338,244			333,957
Subordinated			60,330			60,289
Total borrowings			398,574			394,246

Other liabilities			67,680			78,676
Total liabilities			3,520,068			3,516,353

(continued) 5

Table of Contents BAR HARBOR BANKSHARES AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS (UNAUDITED) (continued)


(in thousands, except share data)	March 31, 2023		****	December 31, 2022
Shareholders’ equity
Capital stock, par value 2.00; authorized 20,000,000 shares; issued 16,428,388 shares; outstanding 15,124,451 shares and 15,001,329 shares at March 31, 2023 and December 31, 2022 respectively		32,857			32,857
Additional paid-in capital		192,261			191,922
Retained earnings		252,884			243,815
Accumulated other comprehensive loss		(53,151)			(58,340)
Less: 1,303,937 and 1,345,700 shares of treasury stock, at cost, at March 31, 2023 and December 31, 2022, respectively		(16,441)			(16,804)
Total shareholders’ equity		408,410			393,450
Total liabilities and shareholders’ equity	$	3,928,478		$	3,909,803

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 (UNAUDITED)


		Three Months Ended
		March 31,
(in thousands, except earnings per share data)	****	2023		****	2022
Interest and dividend income
Loans		$	34,560		$	22,671
Securities and other			5,791			3,826
Total interest and dividend income			40,351			26,497
Interest expense
Deposits			5,265			1,189
Borrowings			4,180			1,010
Total interest expense			9,445			2,199
Net interest income			30,906			24,298
Provision for credit losses			798			377
Net interest income after provision for credit losses			30,108			23,921

Non-interest income
Trust and investment management fee income			3,555			3,754
Customer service fees			3,677			3,616
Gain on sales of securities, net			34			9
Mortgage banking income			279			624
Bank-owned life insurance income			1,148			501
Customer derivative income			132			18
Other income			359			787
Total non-interest income			9,184			9,309

Non-interest expense
Salaries and employee benefits			12,771			12,147
Occupancy and equipment			4,414			4,423
Gain on sales of premises and equipment, net			(13)			(75)
Outside services			356			340
Professional services			426			173
Communication			162			225
Marketing			409			263
Amortization of intangible assets			233			233
Acquisition, conversion and other expenses			20			325
Provision for unfunded commitments			(175)			326
Other expenses			4,101			3,506
Total non-interest expense			22,704			21,886

Income before income taxes			16,588			11,344
Income tax expense			3,576			2,232
Net income		$	13,012		$	9,112

Earnings per share:
Basic		$	0.86		$	0.61
Diluted			0.86			0.60

Weighted average common shares outstanding:
Basic			15,110			15,011
Diluted			15,190			15,102

The accompanying notes are an integral part of these consolidated financial statements. 7

Table of Contents BAR HARBOR BANKSHARES AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)


	****	Three Months Ended
		March 31,
(in thousands)	****	2023		****	2022
Net income		$	13,012		$	9,112
Other comprehensive income (loss), before tax:
Changes in unrealized gain (loss) on securities available for sale			6,006			(28,844)
Changes in unrealized gain (loss) on hedging derivatives			767			(1,881)
Changes in unrealized (loss) gain on pension			—			—

Income taxes related to other comprehensive income:
Changes in unrealized (gain) loss on securities available for sale			(1,406)			6,634
Changes in unrealized (gain) loss on hedging derivatives			(178)			433
Changes in unrealized loss (gain) on pension			—			—
Total other comprehensive income (loss)			5,189			(23,658)
Total comprehensive income (loss)		$	18,201		$	(14,546)

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

Table of Contents BAR HARBOR BANKSHARES AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (UNAUDITED)


	****		****				****				Accumulated		****			****
		Common			Additional						other
		stock			paid-in			Retained			comprehensive			Treasury
(in thousands, except per share data)	****	amount		****	capital		****	earnings		****	income (loss)		****	stock		****	Total
Balance at December 31, 2021		$	32,857		$	190,876		$	215,592		$	2,303		$	(17,481)		$	424,147

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

Balance at December 31, 2022		$	32,857		$	191,922		$	243,815		$	(58,340)		$	(16,804)		$	393,450

Net income			—			—			13,012			—			—			13,012
Other comprehensive income			—			—			—			5,189			—			5,189
Cash dividends declared ($0.26 per share)			—			—			(3,943)			—			—			(3,943)
Net issuance (41,763 shares) to employee stock plans, including related tax effects			—			40			—			—			363			403
Recognition of stock based compensation			—			299			—			—			—			299
Balance at March 31, 2023		$	32,857		$	192,261		$	252,884		$	(53,151)		$	(16,441)		$	408,410

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

Table of Contents BAR HARBOR BANKSHARES AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)


		Three Months Ended March 31,
(in thousands)	****	2023		****	2022
Cash flows from operating activities:
Net income		$	13,012		$	9,112
Adjustments to reconcile net income to net cash provided by operating activities:
Net change in loans held for sale			463			2,534
Provision for credit losses			798			377
Net amortization of securities			540			832
Change in unamortized net loan costs and premiums			216			(1,370)
Premises and equipment depreciation			1,048			1,067
Stock-based compensation expense			299			454
Amortization of other intangibles			233			233
Income from cash surrender value of bank-owned life insurance policies			(1,148)			(501)
Gain on sales of securities, net			(34)			(9)
Amortization (accretion) of right-of-use lease assets			298			296
(Decrease) increase in lease liabilities			(290)			(280)
Loss (gain) on premises and equipment, net			(13)			(75)
Net change in other assets and liabilities			1,931			(6,469)
Net cash provided by operating activities			17,353			6,201

Cash flows from investing activities:
Proceeds from sales, maturities, calls and prepayments of securities available for sale			2,534			27,670
Purchases of securities available for sale			(1,000)			(47,721)
Net change in loans			(41,582)			(121,187)
Purchase of Federal Home Loan Bank stock			(5,030)			—
Proceeds from sale of Federal Home Loan Bank stock			4,205			—
Purchase of premises and equipment, net			(1,153)			(602)
Proceeds from death benefit of bank-owned life insurance policy			3,909			—
Net cash (used in) provided by investing activities			(38,117)			(141,840)

Cash flows from financing activities:
Net change in deposits			10,383			(781)
Net change in short-term borrowings			4,290			141
Proceeds from long-term borrowings			—			—
Repayments of long-term borrowings			(3)			(5)
Net change subordinated debt issuance costs			41			—
Net issuance to employee stock plans			403			547
Cash dividends paid on common stock			(3,943)			(3,603)
Net cash provided by (used in) financing activities			11,171			(3,701)

Net change in cash and cash equivalents			(9,593)			(139,340)
Cash and cash equivalents at beginning of year			92,295			250,389
Cash and cash equivalents at end of period		$	82,702		$	111,049

Supplemental cash flow information:
Interest paid		$	9,417		$	1,717
Income taxes paid, net			5,219			1,073

Table of Contents BAR HARBOR BANKSHARES AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

NOTE 1. BASIS OF PRESENTATION

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

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

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

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

Recent Accounting Pronouncements

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


Standard	****	****	Description	****	****	Required Date of Adoption	****	****	Effect on financial statements
Standards Adopted in 2023
ASU 2022-02 Financial Instruments - Credit Losses (Topic 326): Troubled Debt Restructurings ("TDRs") and Vintage Disclosures			The amendments in this update eliminate TDR recognition and measurement guidance and, instead, require that an entity evaluate (consistent with the accounting for other loan modifications) whether the modification represents a new loan or a continuation of an exisiting loan. The amendments enhance existing disclosure requirements and introduce new requirements related to certain modifications of receivables made to borrowers experiencing financial difficulty.			January 1, 2023			The adoption of this ASU did not have a material impact on our consolidated financial statements.
Standards Not Yet Adopted
ASU 2023-02 Investments - Equity Method and Joint Ventures (Topic 323): Accounting for Investments in Tax Credit Structures Using the Proportional Amortization Method			The amendments in this update permit reporting entities to elect to account for their tax equity investments, regardless of the tax credit program from which the income tax credits are received, using the proportional amortization method if certain conditions are met.			December 15, 2023, including interim periods within the fiscal year			We do not expect adoption of this ASU to have a material impact on our consolidated financial statements.

Table of Contents NOTE 2. SECURITIES AVAILABLE FOR SALE

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


					Gross			Gross
					Unrealized			Unrealized
(in thousands)	****	Amortized Cost		****	Gains		****	Losses		****	Fair Value
March 31, 2023
Mortgage-backed securities:
US Government-sponsored enterprises		$	245,482		$	41		$	(31,223)		$	214,300
US Government agency			91,092			43			(10,197)			80,938
Private label			62,101			34			(3,635)			58,500
Obligations of states and political subdivisions thereof			122,686			5,543			(17,064)			111,165
Corporate bonds			101,505			17			(9,385)			92,137
Total securities available for sale		$	622,866		$	5,678		$	(71,504)		$	557,040


					Gross			Gross
					Unrealized			Unrealized
(in thousands)	****	Amortized Cost		****	Gains		****	Losses		****	Fair Value
December 31, 2022
Mortgage-backed securities:
US Government-sponsored enterprises		$	249,838		$	14		$	(34,825)		$	215,027
US Government agency			93,010			21			(10,765)			82,266
Private label			64,056			34			(3,936)			60,154
Obligations of states and political subdivisions thereof			121,939			7,149			(21,351)			107,737
Corporate bonds			102,505			33			(8,206)			94,332
Total securities available for sale		$	631,348		$	7,251		$	(79,083)		$	559,516

Credit Quality Information

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

As of March 31, 2023 and December 31, 2022, we carried no allowance on available for sale debt securities in accordance with ASU 2016-13, Measurement of Credit Losses on Financial Instruments.

The amortized cost and estimated fair value of available for sale securities segregated by contractual maturity at March 31, 2023 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		$	195		$	196
Over 1 year to 5 years			37,278			34,483
Over 5 years to 10 years			57,610			57,009
Over 10 years			129,108			111,614
Total bonds and obligations			224,191			203,302
Mortgage-backed securities			398,675			353,738
Total securities available for sale		$	622,866		$	557,040

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



		Three Months Ended March 31,
(in thousands)	****	2023		****	2022
Gross gains on sales of available for sale securities		$	34		$	9
Gross losses on sales of available for sale securities			—			—
Net gains on sale of available for sale securities		$	34		$	9

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


		Less Than Twelve Months						Over Twelve Months						Total
		Gross		****			****	Gross		****			****	Gross		****
		Unrealized			Fair			Unrealized			Fair			Unrealized			Fair
(in thousands)	****	Losses		****	Value		****	Losses		****	Value		****	Losses		****	Value
March 31, 2023
Mortgage-backed securities:
US Government-sponsored enterprises		$	1,324		$	35,076		$	29,899		$	174,319		$	31,223		$	209,395
US Government agency			834			22,846			9,363			53,711			10,197			76,557
Private label			5			94			3,630			58,372			3,635			58,466
Obligations of states and political subdivisions thereof			184			9,439			16,880			94,281			17,064			103,720
Corporate bonds			3,877			43,045			5,508			45,992			9,385			89,037
Total securities available for sale		$	6,224		$	110,500		$	65,280		$	426,675		$	71,504		$	537,175


	Less Than Twelve Months						Over Twelve Months						Total
	Gross		****			****	Gross		****			****	Gross		****
	Unrealized			Fair			Unrealized			Fair			Unrealized			Fair
(in thousands)	Losses			Value			Losses			Value			Losses			Value
December 31, 2022
Mortgage-backed securities:
US Government-sponsored enterprises	$	7,005		$	82,483		$	27,820		$	127,745		$	34,825		$	210,228
US Government agency		2,902			42,865			7,863			34,988			10,765			77,853
Private label		841			15,694			3,095			44,396			3,936			60,090
Obligations of states and political subdivisions thereof		7,990			48,799			13,361			55,702			21,351			104,501
Corporate bonds		4,733			65,279			3,473			25,027			8,206			90,306
Total securities available for sale	$	23,471		$	255,120		$	55,612		$	287,858		$	79,083		$	542,978

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

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

US Government-sponsored enterprises

466 out of the total 516 securities in our portfolios of AFS US Government-sponsored enterprises were in unrealized loss positions. Aggregate unrealized losses represented 12.98% of the amortized cost of securities in unrealized loss positions. The Federal National Mortgage Association and Federal Home Loan Mortgage Corporation guarantee the contractual cash flows of all of our US Government-sponsored enterprises. The securities are investment grade rated and there were no material underlying credit downgrades during the quarter.

US Government agency

139 out of the total 160 securities in our portfolios of AFS US Government agency securities were in unrealized loss positions. Aggregate unrealized losses represented 11.75% of the amortized cost of securities in unrealized loss positions. The Government National Mortgage Association guarantees the contractual cash flows of all of our US Government agency securities. The securities are investment grade rated and there were no material underlying credit downgrades during the quarter.

Private label

26 of the total 28 securities in our portfolio of AFS private label mortgage-backed securities were in unrealized loss positions. Aggregate unrealized losses represented 5.85% of the amortized cost of securities in unrealized loss positions. We expect to receive all of the future contractual cash flows related to the amortized cost on these securities.

Obligations of states and political subdivisions thereof

53 of the total 76 securities in our portfolio of AFS municipal bonds and obligations were in unrealized loss positions. Aggregate unrealized losses represented 14.81% of the amortized cost of securities in unrealized loss positions. We continually monitor the municipal bond sector of the market carefully and periodically evaluate the appropriate level of exposure to the market. At this time, we think the bonds in this portfolio carry minimal risk of default, and we are appropriately compensated for the risk. There were no material underlying credit downgrades during the quarter.

Corporate bonds

30 out of the total 33 securities in our portfolio of AFS corporate bonds were in an unrealized loss position. The aggregate unrealized loss represents 9.53% of the amortized cost of bonds in unrealized loss positions. We review the financial strength of all of these bonds, and we have concluded that the amortized cost remains supported by the expected future cash flows of these securities. The most recent review includes all bond issuers and their current credit ratings, financial performance and capitalization.

Table of Contents NOTE 3. LOANS AND ALLOWANCE FOR CREDIT LOSSES

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


		March 31,			December 31,
(in thousands)	****	2023		****	2022
Commercial construction		$	132,960		$	117,577
Commercial real estate owner occupied			261,365			244,814
Commercial real estate non-owner occupied			1,149,030			1,146,674
Tax exempt			43,253			42,879
Commercial and industrial			298,384			297,112
Residential real estate			961,701			954,968
Home equity			89,777			90,865
Consumer other			7,535			7,801
Total loans			2,944,005			2,902,690
Allowance for credit losses			26,607			25,860
Net loans		$	2,917,398		$	2,876,830

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


		March 31,			December 31,
(in thousands)	****	2023		****	2022
Net unamortized loan origination costs		$	3,233		$	3,184
Net unamortized fair value discount on acquired loans			(3,339)			(3,506)
Total		$	(106)		$	(322)

We exclude accrued interest receivable from the amortized cost basis of loans disclosed throughout this footnote. As of March 31, 2023 and December 31, 2022, accrued interest receivable for loans totaled $11.2 million and $10.7 million, respectively, and is included in the “other assets” line item on the consolidated balance sheets.

Characteristics of each loan portfolio segment are as follows:

Commercial construction - Loans in this segment primarily include raw land, land development and construction of commercial and multifamily residential properties. Collateral values are determined based upon appraisals and evaluations of the completed structure in accordance with established policy guidelines. Maximum loan-to-value ratios at origination are governed by established policy guidelines that are more restrictive than on stabilized commercial real estate transactions. Construction loans are primarily paid by the cash flow generated from the completed structure, such as operating leases, rents, or other operating cash flows from the borrower.

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

Tax Exempt - Loans in this segment primarily include loans to various state and municipal government entities. Loans made to these borrowers may provide us with tax-exempt income. While governed and underwritten similar to commercial loans they do have unique requirements based on established polices. Almost all state and municipal loans are considered a general obligation of the issuing entity. Given the size of many municipal borrowers, borrowings are normally not rated by major rating agencies.

Table of Contents

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

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

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

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

Allowance for Credit Losses

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

The ACL is a valuation account that is deducted from the amortized cost basis of loans to present the net amount expected to be collected on the loans. Loans, or portions thereof, are charged off against the allowance when they are deemed uncollectible. Expected recoveries do not exceed the aggregate of amounts previously charged-off and expected to be charged off. The ACL is comprised of reserves measured on a collective (pool) basis based on a lifetime loss-rate model when similar risk characteristics exist. Loans that do not share risk characteristics are evaluated on an individual basis, generally larger non-accruing commercial loans.

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


	At or for the Three Months Ended March 31, 2023
	Balance at
	Beginning of								Balance at
(in thousands)	Period		Charge Offs		Recoveries		Provision		End of Period
Commercial construction	$	2,579	$	—	$	—	$	455	$	3,034
Commercial real estate owner occupied		2,189		—		—		159		2,348
Commercial real estate non-owner occupied		9,341		—		—		3		9,344
Tax exempt		93		—		—		—		93
Commercial and industrial		3,493		(1)		6		117		3,615
Residential real estate		7,274		(4)		8		27		7,305
Home equity		811		—		2		(21)		792
Consumer other		80		(63)		1		58		76
Total	$	25,860	$	(68)	$	17	$	798	$	26,607


	At or for the Three Months Ended March 31, 2022
	Balance at
	Beginning of								Balance at
(in thousands)	Period		Charge Offs		Recoveries		Provision		End of Period
Commercial construction	$	2,111	$	—	$	—	$	(1,110)	$	1,001
Commercial real estate owner occupied		2,751		—		54		(132)		2,673
Commercial real estate non-owner occupied		5,650		—		—		1,357		7,007
Tax exempt		86		—		—		(86)		—
Commercial and industrial		5,369		—		25		(655)		4,739
Residential real estate		5,862		(15)		91		940		6,878
Home equity		814		(2)		5		10		827
Consumer other		75		(66)		3		53		65
Total	$	22,718	$	(83)	$	178	$	377	$	23,190

Table of Contents Unfunded Commitments

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


(in thousands)	Three Months Ended March 31, 2023		****	Three Months Ended March 31, 2022
Beginning Balance	$	3,910		$	2,152
Provision for credit losses		(175)			30
Ending Balance	$	3,735		$	2,182

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

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

The following are the definitions of our credit quality indicators:

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

Special Mention: Loans considered having some potential weaknesses, but are deemed to not carry levels of risk inherent in one of the subsequent categories, are designated as special mention. A special mention loan has potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the asset or in the institution’s credit position at some future date. This might include loans which may require a higher level of supervision or internal reporting because of: (i) declining industry trends; (ii) increasing reliance on secondary sources of repayment; (iii) the poor condition of or lack of control over collateral; or (iv) failure to obtain proper documentation or any other deviations from prudent lending practices. Economic or 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 us to sufficient risks to warrant classification.

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

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

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

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

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


	****			****			****			****			****			****			****
(in thousands)		2023			2022			2021			2020			2019			Prior			Total
Commercial construction
Risk rating:
Pass		$	375		$	67,868		$	36,035		$	3,541		$	—		$	954		$	108,773
Special mention			—			—			—			24,187			—			—			24,187
Substandard			—			—			—			—			—			—			—
Total		$	375		$	67,868		$	36,035		$	27,728		$	—		$	954		$	132,960
Current period gross write-offs			—			—			—			—			—			—			—

Commercial real estate owner occupied
Risk rating:
Pass		$	2,829		$	30,185		$	23,375		$	22,719		$	30,348		$	146,061		$	255,517
Special mention			—			—			—			240			659			531			1,430
Substandard			—			—			—			—			—			4,282			4,282
Doubtful			—			—			—			—			—			136			136
Total		$	2,829		$	30,185		$	23,375		$	22,959		$	31,007		$	151,010		$	261,365
Current period gross write-offs			—			—			—			—			—			—			—

Commercial real estate non-owner occupied
Risk rating:
Pass		$	2,795		$	372,122		$	228,413		$	144,782		$	89,518		$	270,794		$	1,108,424
Special mention			—			—			21,498			—			—			4,135			25,633
Substandard			—			—			—			—			115			14,722			14,837
Doubtful			—			—			—			—			—			136			136
Total		$	2,795		$	372,122		$	249,911		$	144,782		$	89,633		$	289,787		$	1,149,030
Current period gross write-offs			—			—			—			—			—			—			—

Tax exempt
Risk rating:
Pass		$	2		$	10,612		$	946		$	247		$	714		$	30,732		$	43,253
Special mention			—			—			—			—			—			—			—
Substandard			—			—			—			—			—			—			—
Total		$	2		$	10,612		$	946		$	247		$	714		$	30,732		$	43,253
Current period gross write-offs			—			—			—			—			—			—			—

Commercial and industrial
Risk rating:
Pass		$	14,313		$	74,242		$	26,272		$	59,235		$	29,188		$	88,912		$	292,162
Special mention			45			1,403			—			48			956			735			3,187
Substandard			—			102			142			120			335			2,336			3,035
Doubtful			—			—			—			—			—			—			—
Total		$	14,358		$	75,747		$	26,414		$	59,403		$	30,479		$	91,983		$	298,384
Current period gross write-offs			—			—			—			—			—			1			1

Table of Contents


(in thousands)	2023		2022		2021		2020		2019		Prior		Total
Residential real estate
Performing	$	21,385	$	196,948	$	176,209	$	109,432	$	67,756	$	385,905	$	957,635
Nonperforming		—		—		43		—		48		3,975		4,066
Total	$	21,385	$	196,948	$	176,252	$	109,432	$	67,804	$	389,880	$	961,701
Current period gross write-offs		—		—		—		—		—		4		4

Home equity
Performing	$	3,428	$	18,315	$	10,306	$	7,383	$	5,953	$	43,459	$	88,844
Nonperforming		—		—		—		—		—		933		933
Total	$	3,428	$	18,315	$	10,306	$	7,383	$	5,953	$	44,392	$	89,777
Current period gross write-offs		—		—		—		—		—		—		—

Consumer other
Performing	$	1,862	$	2,659	$	1,150	$	718	$	181	$	961	$	7,531
Nonperforming		—		—		—		4		—		—		4
Total	$	1,862	$	2,659	$	1,150	$	722	$	181	$	961	$	7,535
Current period gross write-offs		—		52		8		2		—	$	1		63

Total Loans	$	47,034	$	774,456	$	524,389	$	372,656	$	225,771	$	999,699	$	2,944,005

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


	****			****			****			****			****			****			****
(in thousands)		2022			2021			2020			2019			2018			Prior			Total
Commercial construction
Risk rating:
Pass		$	49,722		$	38,837		$	2,865		$	1,011		$	964		$	—		$	93,399
Special mention			—			—			24,178			—			—			—			24,178
Substandard			—			—			—			—			—			—			—
Total		$	49,722		$	38,837		$	27,043		$	1,011		$	964		$	—		$	117,577

Commercial real estate owner occupied
Risk rating:
Pass		$	22,371		$	11,290		$	23,014		$	31,352		$	46,398		$	103,295		$	237,720
Special mention			—			—			243			666			173			1,870			2,952
Substandard			—			—			—			—			77			3,924			4,001
Doubtful			—			—			—			—			—			141			141
Total		$	22,371		$	11,290		$	23,257		$	32,018		$	46,648		$	109,230		$	244,814

Commercial real estate non-owner occupied
Risk rating:
Pass		$	370,856		$	228,414		$	145,096		$	88,111		$	35,213		$	238,395		$	1,106,085
Special mention			—			21,390			—			127			911			16,612			39,040
Substandard			—			—			—			—			—			1,404			1,404
Doubtful			—			—			—			—			—			145			145
Total		$	370,856		$	249,804		$	145,096		$	88,238		$	36,124		$	256,556		$	1,146,674

Tax exempt
Risk rating:
Pass		$	8,686		$	1,020		$	252		$	772		$	13,231		$	18,918		$	42,879
Special mention			—			—			—			—			—			—			—
Substandard			—			—			—			—			—			—			—
Total		$	8,686		$	1,020		$	252		$	772		$	13,231		$	18,918		$	42,879

Commercial and industrial
Risk rating:
Pass		$	83,151		$	26,948		$	62,835		$	27,491		$	9,511		$	81,316		$	291,252
Special mention			1,450			—			53			803			201			619			3,126
Substandard			—			113			111			65			299			2,106			2,694
Doubtful			—			—			—			—			—			40			40
Total		$	84,601		$	27,061		$	62,999		$	28,359		$	10,011		$	84,081		$	297,112

Table of Contents


(in thousands)	2022		2021		2020		2019		2018		Prior		Total
Residential real estate
Performing	$	195,320	$	177,480	$	111,021	$	69,170	$	47,797	$	349,795	$	950,583
Nonperforming		—		45		—		49		641		3,650		4,385
Total	$	195,320	$	177,525	$	111,021	$	69,219	$	48,438	$	353,445	$	954,968

Home equity
Performing	$	17,107	$	10,638	$	8,139	$	6,830	$	6,997	$	40,191	$	89,902
Nonperforming		—		—		—		—		—		963		963
Total	$	17,107	$	10,638	$	8,139	$	6,830	$	6,997	$	41,154	$	90,865

Consumer other
Performing	$	4,321	$	1,341	$	863	$	265	$	64	$	942	$	7,796
Nonperforming		—		—		5		—		—		—		5
Total	$	4,321	$	1,341	$	868	$	265	$	64	$	942	$	7,801

Total Loans	$	752,984	$	517,516	$	378,675	$	226,712	$	162,477	$	864,326	$	2,902,690

Past Dues

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


	March 31, 2023
(in thousands)	30-59		60-89		90+		Total Past Due		Current		Total Loans
Commercial construction	$	—	$	—	$	—	$	—	$	132,960	$	132,960
Commercial real estate owner occupied		197		227		308		732		260,633		261,365
Commercial real estate non-owner occupied		352		—		133		485		1,148,545		1,149,030
Tax exempt		—		—		—		—		43,253		43,253
Commercial and industrial		261		281		134		676		297,708		298,384
Residential real estate		5,325		393		1,728		7,446		954,255		961,701
Home equity		821		—		276		1,097		88,680		89,777
Consumer other		14		9		—		23		7,512		7,535
Total	$	6,970	$	910	$	2,579	$	10,459	$	2,933,546	$	2,944,005


	December 31, 2022
(in thousands)	30-59		60-89		90+		Total Past Due		Current		Total Loans
Commercial construction	$	—	$	—	$	—	$	—	$	117,577	$	117,577
Commercial real estate owner occupied		385		—		—		385		244,429		244,814
Commercial real estate non-owner occupied		45		145		139		329		1,146,345		1,146,674
Tax exempt		—		—		—		—		42,879		42,879
Commercial and industrial		169		—		9		178		296,934		297,112
Residential real estate		803		348		2,029		3,180		951,788		954,968
Home equity		216		160		246		622		90,243		90,865
Consumer other		41		8		—		49		7,752		7,801
Total	$	1,659	$	661	$	2,423	$	4,743	$	2,897,947	$	2,902,690

Table of Contents Non-Accrual Loans

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


	March 31, 2023
			Nonaccrual With No		90+ Days Past
(in thousands)	Nonaccrual		Related Allowance		Due and Accruing
Commercial construction	$	—	$	—	$	—
Commercial real estate owner occupied		432		362		—
Commercial real estate non-owner occupied		529		396		—
Tax exempt		—		—		—
Commercial and industrial		1,832		138		—
Residential real estate		4,066		1,181		93
Home equity		933		51		45
Consumer other		4		—		—
Total	$	7,796	$	2,128	$	138


	December 31, 2022
			Nonaccrual With No		90+ Days Past
(in thousands)	Nonaccrual		Related Allowance		Due and Accruing
Commercial construction	$	—	$	—	$	—
Commercial real estate owner occupied		439		360		—
Commercial real estate non-owner occupied		550		411		—
Tax exempt		—		—		—
Commercial and industrial		207		145		—
Residential real estate		4,385		1,361		202
Home equity		963		57		14
Consumer other		5		—		—
Total	$	6,549	$	2,334	$	216

Collateral Dependent Loans

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

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


		March 31, 2023						December 31, 2022
(in thousands)	****	Real Estate		****	Other		****	Real Estate		****	Other
Commercial construction		$	—		$	—		$	—		$	—
Commercial real estate owner occupied			432			—			439			—
Commercial real estate non-owner occupied			529			—			550			—
Tax exempt			—			—			—			—
Commercial and industrial			222			1,610			91			116
Residential real estate			4,066			—			4,385			—
Home equity			933			—			963			—
Consumer other			4			—			5			—
Total		$	6,186		$	1,610		$	6,433		$	116

Table of Contents

Loan Modifications to Borrowers Experiencing Financial Difficulty

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

These modifications typically result from loss mitigation activities and could include reductions in the interest rate, payment extensions, forgiveness of principal, forbearance, or other actions. There were no qualifying modifications for the three months ended March 31, 2023 and 2022.

Foreclosure

Residential mortgage loans collateralized by real estate that are in the process of foreclosure as of March 31, 2023 and December 31, 2022 totaled $570 thousand and $253 thousand, respectively.

Mortgage Banking

Loans held for sale at March 31, 2023 had an unpaid principal balance of $463 thousand and there were no loans held for sale as of December 31, 2022. The interest rate exposure on loans held for sale is mitigated through forward delivery commitments with certain approved secondary market investors. We had no open forward delivery commitments at March 31, 2023 and December 31, 2022, respectively.

For the three months ended March 31, 2023 and 2022, we sold $691 thousand and $22.2 million, respectively, of residential mortgage loans on the secondary market, which resulted in a net loss on sale of loans (net of costs, including direct and indirect origination costs) of $8 thousand and a gain of $182 thousand, respectively.

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

Table of Contents NOTE 4. BORROWED FUNDS

Borrowed funds at March 31, 2023 and December 31, 2022 are summarized, as follows:


		March 31, 2023					December 31, 2022				****
					Weighted					Weighted
(dollars in thousands)	****	Carrying Value		****	Average Rate		Carrying Value		****	Average Rate	****
Short-term borrowings
Advances from the FHLB		$	322,925		4.96	%	$	318,000		3.84	%
Other borrowings			12,734		0.13			13,369		0.13
Total short-term borrowings			335,659		2.86			331,369		2.20
Long-term borrowings
Advances from the FHLB			2,585		0.48			2,588		0.48
Subordinated borrowings			60,330		6.01			60,289		4.95
Total long-term borrowings			62,915		5.78			62,877		4.76
Total		$	398,574		3.15	%	$	394,246		2.45	%

Short-term debt includes Federal Home Loan Bank of Boston (“FHLB”) advances with a remaining maturity of less than one year. We also maintain a $1.0 million secured line of credit with the FHLB that bears a daily adjustable rate calculated by the FHLB. There was no outstanding balance on the FHLB line of credit for the periods ended March 31, 2023 and December 31, 2022.

We have the capacity to borrow funds on a secured basis utilizing the Bank Term Funding Program, the Borrower in Custody program, and the Discount Window at the Federal Reserve Bank of Boston (the “FRB”). At March 31, 2023, our available secured line of credit at the FRB was $177.5 million. We have pledged certain loans and securities to the FRB to support this arrangement. There were no borrowings with the FRB for the periods ended March 31, 2023 and December 31, 2022.

We maintain, with a correspondent bank, an unused unsecured federal funds line of credit that has an aggregate overnight borrowing capacity of $50.0 million as of March 31, 2023 and December 31, 2022. There was no outstanding balance on the line of credit as of March 31, 2023 and December 31, 2022.

Long-term FHLB advances consist of advances with a remaining maturity of more than one year. The advances outstanding at March 31, 2023 include no callable advances and amortizing advances of $285 thousand. There were no callable advances outstanding and $288 thousand of amortizing advances at December 31, 2022. All FHLB borrowings, including the line of credit, are secured by a blanket security agreement on certain qualified collateral, principally all residential first mortgage loans and certain securities.

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


	****			****	Weighted Average	****
(in thousands, except rates)		Amount			Rate	****
2023		$	322,925		4.96	%
2024			2,300		—
2025			—		—
2026			—		—
2027			—		—
Thereafter			285		4.32
Total FHLB advances		$	325,510		4.93	%

On November 26, 2019, we entered into Subordinated Note Purchase Agreements with certain qualified institutional buyers and accredited investors pursuant to which we sold and issued $40.0 million in aggregate principal amount of subordinated notes due 2029 (the “Notes”). The Notes have a maturity date of December 1, 2029 and bear a fixed interest rate of 4.63% through December 1, 2024 payable semi-annually in arrears. From December 1, 2024 and thereafter the 24

Table of Contents interest rate shall be reset quarterly to an interest rate per annum equal to the then current three-month Secured Overnight Financing Rate (SOFR) plus 3.27%. We have the option beginning with the interest payment date of December 1, 2024, and on any scheduled payment date thereafter, to redeem the Notes, in whole or in part upon prior approval of the Federal Reserve. The transaction included debt issuance costs of $291 thousand as of March 31, 2023 and $331 thousand net of amortization as of December 31, 2022, that are netted against the subordinated debt.

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

Repurchase Agreements

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


(in thousands)	March 31, 2023		December 31, 2022
Customer Repurchase Agreements
US Government-sponsored enterprises	$	12,734	$	13,369
Total	$	12,734	$	13,369

Table of Contents NOTE 5. DEPOSITS

A summary of time deposits is, as follows:


(in thousands)	March 31, 2023		December 31, 2022
Time less than $100,000	$	215,300	$	157,263
Time $100,000 through $250,000		126,907		118,655
Time $250,000 or more		62,039		47,521
Total	$	404,246	$	323,439

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


(in thousands)	March 31, 2023		December 31, 2022
Within 1 year	$	342,053	$	262,338
Over 1 year to 2 years		41,116		37,937
Over 2 years to 3 years		11,416		12,936
Over 3 years to 4 years		4,880		5,410
Over 4 years to 5 years		4,381		4,319
Over 5 years		400		499
Total	$	404,246	$	323,439

Included in time deposits are brokered deposits of $68.2 million and $15.1 million at March 31, 2023 and December 31, 2022, respectively. Also included in time deposits are reciprocal deposits of $25.3 million and $27.4 million at March 31, 2023 and December 31, 2022, respectively.

Table of Contents NOTE 6. CAPITAL RATIOS AND SHAREHOLDERS’ EQUITY

The actual and required capital ratios are, as follows:


		March 31, 2023
							Minimum Regulatory
		Actual					Capital Requirements
(in thousands, except ratios)	****	Amount		****	Ratio		Amount		****	Ratio
Company (consolidated)
Total capital to risk-weighted assets		$	427,290		13.65	%	$	250,436		8.00	%
Common equity tier 1 capital to risk-weighted assets			336,331		10.74			140,871		4.50
Tier 1 capital to risk-weighted assets			347,133		11.40			182,662		6.00
Tier 1 capital to average assets (leverage ratio)			347,133		9.33			148,896		4.00

Bank
Total capital to risk-weighted assets		$	419,780		13.50	%	$	248,747		8.00	%
Common equity tier 1 capital to risk-weighted assets			389,441		11.24			155,897		4.50
Tier 1 capital to risk-weighted assets			389,441		11.24			207,863		6.00
Tier 1 capital to average assets (leverage ratio)			389,441		10.57			147,326		4.00


		December 31, 2022
							Minimum Regulatory
		Actual					Capital Requirements
(in thousands, except ratios)	****	Amount		****	Ratio		Amount		****	Ratio
Company (consolidated)
Total capital to risk-weighted assets		$	416,900		13.50	%	$	247,041		8.00	%
Common equity tier 1 capital to risk-weighted assets			326,513		10.57			138,960		4.50
Tier 1 capital to risk-weighted assets			347,133		11.24			185,281		6.00
Tier 1 capital to average assets (leverage ratio)			347,133		9.21			150,772		4.00

Bank
Total capital to risk-weighted assets		$	410,053		13.29	%	$	246,812		8.00	%
Common equity tier 1 capital to risk-weighted assets			380,286		12.33			138,832		4.50
Tier 1 capital to risk-weighted assets			380,286		12.33			185,110		6.00
Tier 1 capital to average assets (leverage ratio)			380,286		10.10			150,655		4.00

In order to be classified as “well-capitalized” under the relevant regulatory framework, (i) the Company must, on a consolidated basis, maintain a total risk-based capital ratio of 10.00% or greater and a Tier 1 risk-based capital ratio of 6.00% or greater; and (ii) the Bank must maintain a total risk-based capital ratio of 10.00% or greater, a Tier 1 risk-based capital ratio of 8.00% or greater, a common equity Tier 1 capital ratio of 6.50% or greater, and a leverage ratio of 5.00% or greater. At each date shown in the tables above, the Company and the Bank met the conditions to be classified as “well-capitalized” under the relevant regulatory framework.

Table of Contents

Accumulated other comprehensive (loss) income

Components of accumulated other comprehensive income is, as follows:


(in thousands)	****	March 31, 2023		****	December 31, 2022
Accumulated other comprehensive income, before tax:
Net unrealized loss on AFS securities		$	(65,826)		$	(71,832)
Net unrealized loss on hedging derivatives			(1,566)			(2,333)
Net unrealized loss on post-retirement plans			(1,675)			(1,691)

Income taxes related to items of accumulated other comprehensive income:
Net unrealized loss on AFS securities			15,180			16,586
Net unrealized loss on hedging derivatives			361			539
Net unrealized loss on post-retirement plans			375			391
Accumulated other comprehensive loss		$	(53,151)		$	(58,340)

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


(in thousands)	****	Before Tax		****	Tax Effect		****	Net of Tax
Three Months Ended March 31, 2023
Net unrealized gain on AFS securities:
Net unrealized gain arising during the period		$	6,040		$	(1,414)		$	4,626
Less: reclassification adjustment for gains (losses) realized in net income			34			(8)			26
Net unrealized gain on AFS securities			6,006			(1,406)			4,600

Net unrealized loss on hedging derivatives:
Net unrealized gain arising during the period			767			(178)			589
Less: reclassification adjustment for gains (losses) realized in net income			—			—			—
Net unrealized gain on cash flow hedging derivatives			767			(178)			589

Other comprehensive income (loss)		$	6,773		$	(1,584)		$	5,189

Three Months Ended March 31, 2022
Net unrealized loss on AFS securities:
Net unrealized loss arising during the period		$	(28,835)		$	6,632		$	(22,203)
Less: reclassification adjustment for gains (losses) realized in net income			9			(2)			7
Net unrealized gain on AFS securities			(28,844)			6,634			(22,210)

Net unrealized loss on derivative hedgess:
Net unrealized loss arising during the period			(1,881)			433			(1,448)
Less: reclassification adjustment for gains (losses) realized in net income			—			—			—
Net unrealized loss on cash flow derivative hedges			(1,881)			433			(1,448)

Other comprehensive (loss) income		$	(30,725)		$	7,067		$	(23,658)

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 months ended March 31, 2023 and 2022:


	****	Net unrealized		****	Net gain (loss) on		****	Net unrealized		****
		gain (loss)			effective cash			loss
		on AFS			flow hedging			on pension
(in thousands)		Securities			derivatives			plans			Total
Three Months Ended March 31, 2023
Balance at beginning of period		$	(55,246)		$	(1,794)		$	(1,300)		$	(58,340)
Other comprehensive loss before reclassifications			4,626			589			—			5,215
Less: amounts reclassified from accumulated other comprehensive income			26			—			—			26
Total other comprehensive income			4,600			589			—			5,189
Balance at end of period		$	(50,646)		$	(1,205)		$	(1,300)		$	(53,151)

Three Months Ended March 31, 2022
Balance at beginning of period		$	1,985		$	870		$	(552)		$	2,303
Other comprehensive loss before reclassifications			(22,203)			(1,448)			—			(23,651)
Less: amounts reclassified from accumulated other comprehensive income			7			—			—			7
Total other comprehensive loss			(22,210)			(1,448)			—			(23,658)
Balance at end of period		$	(20,225)		$	(578)		$	(552)		$	(21,355)

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


								Affected Line Item where
(in thousands)	****	2023		****	2022		****	Net Income is Presented
Net realized gains on AFS securities:
Before tax^(1)^		$	34		$	9		Non-interest income
Tax effect			(8)			(2)		Tax expense
Total reclassifications for the period		$	26		$	7

								Affected Line Item where
(in thousands)	****	2023		****	2022		****	Net Income is Presented
Net realized loss on hedging derivatives:
Before tax		$	—		$	—		Non-interest income
Tax effect			—			—		Tax expense
Total reclassifications for the period		$	—		$	—
(1)	Net realized gains before tax include $34 thousand realized gains for the three months ended March 31, 2023 and no gross realized losses. Net realized gains before tax include $9 thousand realized gains for the three months ended March 31, 2022 and no gross realized losses.
---	---

Table of Contents NOTE 7. EARNINGS PER SHARE

The following table presents the calculation of earnings per share:


		Three Months Ended
		March 31,
(in thousands, except per share and share data)	****	2023		****	2022
Net income		$	13,012		$	9,112

Average number of basic common shares outstanding			15,109,847			15,010,834
Plus: dilutive effect of stock options and awards outstanding			80,242			90,951
Average number of diluted common shares outstanding^(1)^			15,190,089			15,101,785

Earnings per share:
Basic		$	0.86		$	0.61
Diluted			0.86			0.60
(1)	Average diluted shares outstanding are computed using the treasury stock method.
---	---

Table of Contents NOTE 8. DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGING ACTIVITIES

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

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

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

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


		March 31, 2023
					Weighted					****
		Notional			Average			Fair Value			Location Fair
		Amount			Maturity			Asset (Liability)		****	Value Asset
	****	(in thousands)		****	(in years)		****	(in thousands)		****	(Liability)
Cash flow hedges:
Interest rate swap on wholesale fundings		$	75,000			1.8		$	4,184		Other assets
Interest rate swap on variable rate loans			50,000			3.0			(4,170)		Other liabilities
Total cash flow hedges			125,000						14

Fair value hedges:
Interest rate swap on securities			37,190			6.3			3,952		Other assets
Total fair value hedges			37,190						3,952

Economic hedges:
Customer Loan Swaps-MNA Counterparty			192,269			5.5			(16,375)		Other liabilities
Customer Loan Swaps-RPA Counterparty			112,836			5.7			(23)		Other liabilities
Customer Loan Swaps-Customer			305,105			5.6			16,398		Other assets
Total economic hedges			610,210						—

Non-hedging derivatives:
Interest rate lock commitments			552			0.2			8		Other assets
Total non-hedging derivatives			552						8

Total		$	772,952					$	3,974

Table of Contents


		December 31, 2022
					Weighted					****
		Notional			Average			Fair Value			Location Fair
		Amount			Maturity			Asset (Liability)		****	Value Asset
	****	(in thousands)		****	(in years)		****	(in thousands)		****	(Liability)
Cash flow hedges:
Interest rate swap on wholesale fundings		$	75,000			2.0		$	4,978		Other assets
Interest rate swap on variable rate loans			50,000			3.2			(4,941)		Other liabilities
Total cash flow hedges			125,000						37

Fair value hedges:
Interest rate swap on securities			37,190			6.6			4,774		Other assets
Total fair value hedges			37,190						4,774

Economic hedges:
Forward sale commitments			—			—			—		Other assets
Customer Loan Swaps-MNA Counterparty			191,987			5.8			(20,287)		Other liabilities
Customer Loan Swaps-RPA Counterparty			113,928			6.0			—		Other liabilities
Customer Loan Swaps-Customer			305,914			5.9			20,287		Other assets
Total economic hedges			611,829						—

Non-hedging derivatives:
Interest rate lock commitments			—			—			—		Other assets
Total non-hedging derivatives			—						—

Total		$	774,019					$	4,811

As of March 31, 2023 and December 31, 2022, 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		****	Carrying Amount
March 31, 2023
Interest rate swap on securities		Securities Available for Sale		$	31,658		$	(5,532)

December 31, 2022
Interest rate swap on securities		Securities Available for Sale		$	41,964		$	4,774

Table of Contents Information about derivative assets and liabilities for the three months ended March 31, 2023 and March 31, 2022, follows:


	Three Months Ended March 31, 2023
	Amount of			Amount of
	Gain (Loss)			Gain (Loss)
	Recognized in			Reclassified		Location of	Amount of
	Other		Location of Gain (Loss)	from Other		Gain (Loss)	Gain (Loss)
	Comprehensive		Reclassified from Other	Comprehensive		Recognized in	Recognized
(in thousands)	Income		Comprehensive Income	Income		Income	in Income
Cash flow hedges:
Interest rate swap on wholesale funding	$	(610)	Interest expense	$	—	Interest expense	$	664
Interest rate swap on variable rate loans		592	Interest income		—	Interest income		(466)
Total cash flow hedges		(18)			—			198

Fair value hedges:
Interest rate swap on securities		607	Interest income		—	Interest income		286
Total fair value hedges		607			—			286

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

Non-hedging derivatives:
Interest rate lock commitments		—	Other expense		—	Mortgage banking income		8
Total non-hedging derivatives		—			—			8

Total	$	589		$	—		$	492

Table of Contents


	Three Months Ended March 31, 2022
	Amount of			Amount of
	Gain (Loss)			Gain (Loss)
	Recognized in			Reclassified		Location of	Amount of
	Other		Location of Gain (Loss)	from Other		Gain (Loss)	Gain (Loss)
	Comprehensive		Reclassified from Other	Comprehensive		Recognized in	Recognized
(in thousands)	Income		Comprehensive Income	Income		Income	in Income
Cash flow hedges:
Interest rate swap on wholesale funding	$	2,191	Interest expense	$	—	Interest expense	$	(113)
Interest rate swap on variable rate loans		(1,798)	Interest income		—	Interest income		16
Total cash flow hedges		393			—			(97)

Fair value hedges:
Interest rate swap on securities		(1,841)	Interest income		—	Interest income		(135)
Total economic hedges		(1,841)			—			(135)

Economic hedges:
Forward commitments		—	Other income		—	Non-interest income		186
Total economic hedges		—			—			186

Non-hedging derivatives:
Interest rate lock commitments		—	Other income		—	Non-interest income		(288)
Total non-hedging derivatives		—			—			(288)

Total	$	(1,448)		$	—		$	(334)

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


		Three Months Ended March 31, 2023
		Interest and Dividend Income					Interest Expense
(in thousands)	****	Loans		Securities and other		****	Deposits		Borrowings		****	Non-interest Income
Income and expense line items presented in the consolidated statements of income		$	34,560	$	5,791		$	5,265	$	4,180		$	9,184

The effects of cash flow and fair value hedging:

Gain (loss) on cash flow hedges:
Interest rate swap on wholesale funding			—		—			—		664			—
Interest rate swap on variable rate loans			(466)		—			—		—			—

Gain (loss) on fair value hedges:
Interest rate swap on securities			—		286			—		—			—

		Three Months Ended March 31, 2022
		Interest and Dividend Income					Interest Expense
(in thousands)	****	Loans		Securities and other		****	Deposits		Borrowings		****	Non-interest Income
Income and expense line items presented in the consolidated statements of income		$	22,671	$	3,826		$	1,189	$	1,010		$	9,309

The effects of cash flow and fair value hedging:

Gain (loss) on cash flow hedges:
Interest rate swap on wholesale funding			—		—			—		(113)			—
Interest rate swap on variable rate loans			16		—			—		—			—

Gain (loss) on fair value hedges:
Interest rate swap on securities			—		(135)			—		—			—

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


	Location of Gain (Loss) Recognized	Three Months Ended March 31,
(In thousands)	in Non-interest Income	2023			2022
Derivatives not designated as hedging instruments
Non-hedging derivatives:
Interest rate lock commitments	Mortgage banking income	$	8	$	(288)

Cash flow hedges

Interest rate swaps on wholesale funding

As of March 31, 2023, we have two interest rate swaps on wholesale borrowings to limit our exposure to rising interest rates over a five-year term on 3-month FHLB borrowings or brokered certificates, or a combination thereof at each maturity date. The first of the two agreements was entered into in November 2019 with a $50.0 million notional amount and pays a fixed interest rate of 1.53%. A second agreement was entered into in April 2020 with a $25.0 million notional amount and pays a fixed rate of 0.59%. The financial institution counterparty pays us interest on the three-month LIBOR rate. We designated the swaps as cash flow hedges.

Interest rate swap on variable rate loans

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

Fair value hedges

Interest rate swap on securities

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

We utilize forward sale commitments on residential mortgage loans to hedge interest rate risk and the associated effects on the fair value of interest rate lock commitments and loans originated for sale. The forward sale commitments are accounted for as derivatives. We typically use a combination of best efforts and mandatory delivery contracts. The contracts are loan sale agreements where we commit to deliver a certain principal amount of mortgage loans to an investor at a specified price on or before a specified date. Generally, we enter into contracts just prior to the loan closing with a customer. As of March 31, 2023, there were no forward sale commitments.

Customer loan derivatives

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

Table of Contents The MNAs provide for a single net settlement of all loan swap agreements, as well as collateral or cash funds, in the event of default on, or termination of, any one contract. Collateral is provided by cash or securities received or posted by the counterparty with net liability positions, respectively, in accordance with contract thresholds.


		Gross Amounts Offset in the Consolidated Balance Sheet
		Derivative						Cash Collateral
(in thousands)	****	Liabilities		****	Derivative Assets		****	Pledged		****	Net Amount
As of March 31, 2023
Customer Loan Derivatives:
MNA counterparty		$	(16,375)		$	16,375		$	—		$	—
RPA counterparty			(23)			23			—			—
Total		$	(16,398)		$	16,398		$	—		$	—


		Gross Amounts Offset in the Consolidated Balance Sheet
		Derivative						Cash Collateral
(in thousands)	****	Liabilities		****	Derivative Assets		****	Pledged		****	Net Amount
As of December 31, 2022
Customer Loan Derivatives:
MNA counterparty		$	(20,287)		$	20,287		$	—		$	—
RPA counterparty			—			—			—			—
Total		$	(20,287)		$	20,287		$	—		$	—

Non-hedging derivatives

Interest rate lock commitments

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

Table of Contents NOTE 9. FAIR VALUE MEASUREMENTS

Recurring Fair Value Measurements

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


		March 31, 2023
	****	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		$	—		$	214,300		$	—		$	214,300
US Government agency			—			80,938			—			80,938
Private label			—			58,500			—			58,500
Obligations of states and political subdivisions thereof			—			111,165			—			111,165
Corporate bonds			—			92,137			—			92,137
Loans held for sale			—			463			—			463
Derivative assets			—			24,534			8			24,542
Derivative liabilities			—			(20,568)			—			(20,568)


		December 31, 2022
	****	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		$	—		$	215,027		$	—		$	215,027
US Government agency			—			82,266			—			82,266
Private label			—			60,154			—			60,154
Obligations of states and political subdivisions thereof			—			107,737			—			107,737
Corporate bonds			—			94,332			—			94,332
Loans held for sale			—			—			—			—
Derivative assets			—			30,039			—			30,039
Derivative liabilities			—			(25,228)			—			(25,228)

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

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

Derivative Assets and Liabilities

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

Table of Contents

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

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

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

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

The table below presents the changes in Level 3 assets and liabilities that were measured at fair value on a recurring basis for the three months ended March 31, 2023 and 2022:


		Assets (Liabilities)
		Interest Rate Lock			Forward
(in thousands)	****	Commitments		****	Commitments
Three Months Ended March 31, 2023
Balance at beginning of period		$	—		$	—
Realized loss recognized in non-interest income			8			—
Balance at end of period		$	8		$	—

Three Months Ended March 31, 2022
Balance at beginning of period		$	283		$	15
Realized gain recognized in non-interest income			(288)			186
Balance at end of period		$	(5)		$	201

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


		Fair Value
(in thousands,		March 31,			Valuation		Unobservable		Unobservable
except ratios)	****	2023		****	Techniques	****	Inputs	****	Input Value		****
Assets (Liabilities)
Interest Rate Lock Commitment		$	8		Pull-through Rate Analysis		Closing Ratio			76	%
					Pricing Model		Origination Costs, per loan		$	1.7
					Discount Cash Flows		Mortgage Servicing Asset			1.0	%
Total		$	8

Non-Recurring Fair Value Measurements

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



		March 31, 2023			December 31, 2022			March 31, 2023			Fair Value Measurement Date as of March 31, 2023
		Level 3			Level 3			Total			Level 3
(in thousands)	****	Inputs		****	Inputs		****	Gains (Losses)		****	Inputs
Assets
Individually evaluated loans		$	15,513		$	16,477		$	(964)		March 2023
Capitalized servicing rights			6,570			6,845			(275)		March 2023
Premises held for sale			252			252			—		March 2023
Total		$	22,335		$	23,574		$	(1,239)

There are no liabilities measured at fair value on a non-recurring basis in 2023 and 2022.

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


											****
(in thousands, except ratios)	****	Fair Value March 31, 2023		****	Valuation Techniques	****	Unobservable Inputs	****	Range (Weighted Average)^(a)^		****
Assets
Individually evaluated loans		$	11,945		Fair value of collateral-appraised value		Loss severity			10% to 70%
							Appraised value			$80 to $2,941

Individually evaluated loans			3,568		Discount cash flow		Discount rate			3.38% to 6.38%
							Cash flows			$3 to $707

Capitalized servicing rights			6,570		Discounted cash flow		Constant prepayment rate			7.19%
							Discount rate			9.54%

Premises held for sale			252		Fair value of asset less selling costs		Appraised value			$267
							Selling Costs			6%
Total		$	22,335
(a)	Where dollar amounts are disclosed, the amounts represent the lowest and highest fair value of the respective assets in the population except for adjustments for market/property conditions, which represents the range of adjustments to individual properties.
---	---



(in thousands, except ratios)	****	Fair Value December 31, 2022		****	Valuation Techniques	****	Unobservable Inputs	****	Range (Weighted Average)^(a)^
Assets
Individually evaluated loans		$	13,587		Fair value of collateral-appraised value		Loss severity			1% to 40%
							Appraised value			$80 to $3,859

Individually evaluated loans			2,890		Discount cash flow		Discount rate			3.63% to 6.38%
							Cash flows			$100 to $539

Capitalized servicing rights			6,845		Discounted cash flow		Constant prepayment rate			7.29%
							Discount rate			9.54%

Premises held for sale			252		Fair value of asset less selling costs		Appraised value			$267
							Selling Costs			6%
Total		$	23,574
(a)	Where dollar amounts are disclosed, the amounts represent the lowest and highest fair value of the respective assets in the population except for adjustments for market/property conditions, which represents the range of adjustments to individual properties.
---	---

There were no Level 1 or Level 2 non-recurring fair value measurements for the periods ended March 31, 2023 and December 31, 2022.

Table of Contents

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

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

Other real estate owned (“OREO”). OREO results from the foreclosure process on residential or commercial loans issued by the Company. Upon assuming the real estate, we record the property at the fair value of the asset less the estimated sales costs. Thereafter, OREO properties are recorded at the lower of cost or fair value less the estimated sales costs. OREO fair values are primarily determined based on Level 3 data including sales comparables and appraisals. There was no OREO as of March 31, 2023 and December 31, 2022.

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

Table of Contents Summary of Estimated Fair Values of Financial Instruments

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


		March 31, 2023
		Carrying			Fair
(in thousands)	****	Amount		****	Value		****	Level 1		****	Level 2		****	Level 3
Financial Assets
Cash and cash equivalents		$	82,702		$	82,702		$	82,702		$	—		$	—
Securities available for sale			557,040			557,040			—			557,040			—
FHLB stock			15,718			15,718			—			15,718			—
Loans held for sale			463			463			—			463			—
Net loans			2,917,398			2,789,397			—			—			2,789,397
Accrued interest receivable			4,747			4,747			—			4,747			—
Cash surrender value of bank-owned life insurance policies			78,436			8,436			—			8,436			—
Derivative assets			24,542			24,542			—			24,534			8

Financial Liabilities
Non-maturity deposits		$	2,649,568		$	2,306,918		$	—		$	2,306,918		$	—
Time deposits			404,246			395,594			—			395,594			—
Securities sold under agreements to repurchase			12,733			12,733			—			12,733			—
FHLB advances			325,511			325,334			—			325,334			—
Subordinated borrowings			60,330			66,981			—			66,981			—
Derivative liabilities			20,568			20,568			—			20,568			—


		December 31, 2022
		Carrying			Fair
(in thousands)	****	Amount		****	Value		****	Level 1		****	Level 2		****	Level 3
Financial Assets
Cash and cash equivalents		$	92,295		$	92,295		$	92,295		$	—		$	—
Securities available for sale			559,516			559,516			—			559,516			—
FHLB stock			14,893			14,893			—			14,893			—
Loans held for sale			—			—			—			—			—
Net loans			2,902,690			2,774,863			—			—			2,774,863
Accrued interest receivable			4,257			4,257			—			4,257			—
Cash surrender value of bank-owned life insurance policies			81,197			81,197			—			81,197			—
Derivative assets			30,039			30,039			—			30,039			—

Financial Liabilities
Non-maturity deposits		$	2,719,992		$	2,309,555		$	—		$	2,309,555		$	—
Time deposits			323,439			315,180			—			315,180			—
Securities sold under agreements to repurchase			13,369			13,369			—			13,369			—
FHLB advances			320,588			320,244			—			320,244			—
Subordinated borrowings			60,289			66,846			—			66,846			—
Derivative liabilities			25,228			25,228			—			25,228			—

Table of Contents NOTE 10. REVENUE FROM CONTRACTS WITH CUSTOMERS

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

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

Disaggregation of Revenue

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


		Three Months Ended March 31,
(in thousands)	****	2023		****	2022
Non-interest income within the scope of ASC 606:
Trust management fees		$	3,091		$	3,403
Financial services fees			464			351
Interchange fees			2,010			1,973
Customer deposit fees			1,429			1,372
Other customer service fees			238			271
Total non-interest income within the scope of ASC 606			7,232			7,370
Total non-interest income not within the scope of ASC 606			1,952			1,939
Total non-interest income		$	9,184		$	9,309


		Three Months Ended March 31,
(in thousands)	****	2023		****	2022
Timing of Revenue Recognition
Products and services transferred at a point in time		$	3,950		$	3,757
Products and services transferred over time			3,282			3,613
Total		$	7,232		$	7,370

Trust Management Fees

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

Financial Services Fees

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

Interchange Fees

We earn interchange fees from transaction fees that merchants pay whenever a customer uses a debit card to make a purchase from their store. The fees are paid to the card-issuing bank to cover handling costs, fraud, bad debt costs and the risk involved in approving the payment. Interchange fees are generally recognized as revenue at a point in time upon the completion of a debit card transaction. 44

Table of Contents

Customer Deposit Fees

The Customer Deposit business offers a variety of deposit accounts with a range of interest rates, fee schedules and other terms, which are designed to meet the customer's financial needs. Additional depositor-related services provided to customers include ATM, bank-by-phone, internet banking, internet bill pay, mobile banking, and other cash management services which include remote deposit capture, ACH origination, and wire transfers. These customer deposit fees are generally recognized at a point in time upon the completion of the service.

Other Customer Service Fees

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

Contract Balances from Contracts with Customers

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


	****			****
(in thousands)		March 31, 2023			December 31, 2022
Balances from contracts with customers only:
Other Assets		$	1,121		$	1,211
Other Liabilities			2,285			2,345

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

Costs to Obtain and Fulfill a Contract

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

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

The following is management’s discussion and analysis of the major factors that influenced our results of operations and financial condition as of and for the three months ended March 31, 2023 and should be read in conjunction with our unaudited consolidated financial statements and condensed notes thereto included elsewhere in this Form 10-Q as well as our audited consolidated financial statements and notes thereto included in our Form 10-K. The following discussion contains "forward-looking statements" that reflect our future plans, estimates, beliefs and expected performance. We caution that assumptions, expectations, projections, intentions or beliefs about future events may, and often do, vary from actual results and the differences can be material. Please refer to "Cautionary Statement Regarding Forward-Looking Statements" and "Part II, Item 1A. Risk Factors." All amounts, dollars and percentages presented in this Form 10-Q are rounded and therefore approximate.

GENERAL

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

NON-GAAP FINANCIAL MEASURES

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

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

Recent Banking Crisis

In light of recent events in the banking sector, including recent bank failures, continuing interest rate hikes and recessionary concerns, we continue to position our balance sheet to mitigate the risks affecting the Company and the overall banking industry in order to serve our clients and communities.

●

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

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●	Capital remains strong, with ratios of the Company and the Bank remained well-capitalized under regulatory guidelines at period end as further described in Note 6 – “Capital Ratios and Shareholders’ Equity” on the Consolidated Financial Statements.
●	Asset quality remains solid, with a non-performing asset ratio of 0.20% of total assets as of March 31, 2023 and net charge-offs of 0.01% annualized for the period, reflecting our disciplined underwriting and conservative lending philosophy which has supported the Company's strong credit performance during prior financial crises.
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We will continue our safe and sound banking practices, but the continuing impact of the crisis and further extent on the Company's operations and financial results for the remainder of 2023 is uncertain and cannot be predicted.

QUARTERLY PERFORMANCE SUMMARY

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

●	Net income was $13.0 million, an increase of 43%. The increase is primarily due to a benefit to net interest income as our assets repriced to higher rates while non-interest expenses increased a modest 4%.

●	Diluted earnings per share was $0.86, an increase of $0.26. The increase included $0.04 from one-time benefits from bank-owned life insurance policies (“BOLI”).

●	Return on assets increased to 1.36%, or 1.29% excluding one-time benefits from BOLI policies, from 1.00%. Return on equity was 12.96% compared to 8.89%. Both ratios include the benefit of higher net income and lower average balances related to unrealized losses on securities as noted below under the “Financial Position” section.

●

Net interest income was $30.9 million, an increase of 27%. Net interest margin (“NIM”) was 3.54%, an increase of 59 basis points from the same period in 2022. The increase was driven by significant loan growth and the repricing on a majority of our variable rate loans to the most recent Federal Reserve hikes while managing deposit costs at a relationship level. Since the Federal Reserve started the cycle of interest rate hikes, our accumulated deposit beta stands at 14% at quarter-end.

●	The provision for credit losses was an expense of $798 thousand compared with $377 thousand. The provisions in both periods were mostly driven by loan growth, along with using more conservative loss factors in the current year quarter to coincide with developing economic conditions.

●	Non-interest income was $9.2 million compared to $9.3 million. Current quarter income included a $622 thousand in non-time benefits from BOLI policies, which was offset by lower trust and investment management fee income and mortgage banking income due to current market conditions.

●	Non-interest expense was $22.7 million versus $21.9 million. The increase is primarily due to higher salaries and employee benefit expenses reflecting a full quarter impact of annual adjustments made in the second quarter of 2022.

●	Efficiency ratio improved to 55% from 62% reflecting higher revenue and our disciplined approach to expense management.

Financial Position (March 31, 2023, compared to December 31, 2022)

●	Total assets increased $18.7 million to $3.9 billion mainly due to loan growth.

●	Cash and cash equivalents decreased to $82.7 million, from $92.3 million principally due to self-funding loan growth with support from wholesale borrowings.

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●	Securities were $572.8 million, or 15% of total assets, compared to $574.4 million, or 16% of total assets. Net unrealized losses improved to $65.8 million from $71.8 million as prevailing market rates for similar duration securities decreased from year-end. Our securities portfolio is highly liquid and is comprised of shorter-term duration securities.

●	Total loans grew 6%, led by commercial loans which increased 8%. We continue to be selective in commercial loan growth with proven business partners and lending limits, representing a mix of real estate loans, commercial and industrial loans, and lines of credit.

●	The ratio of the ACL to total loans was 0.90% compared with 0.89%. Net charge-offs continue to be insignificant.

●	Total deposits increased $10.4 million to $3.1 billion. Time deposits increased $80.8 million, including $53.1 million of brokered accounts, while non-maturity deposit balances decreased $70.4 million, which is consistent with the seasonal downward trends we normally experience in larger business accounts.

●	Borrowings were essentially flat, $398.6 million compared to $394.2 million, as cash and use of brokered deposits were used to grow loans during the quarter.

●	Total book value per share was $27.00 compared to $26.09. Net income less dividends during the first quarter 2023 increased our book value per share by $0.60 and the improved valuation of our securities portfolio contributed $0.30 per share.

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

COMPARISON OF FINANCIAL CONDITION AT MARCH 31, 2023 AND DECEMBER 31, 2022

Cash and cash equivalents

Total cash and cash equivalents were $82.7 million at March 31, 2023, compared to $92.3 million at year-end. Interest-earning cash held with other banks totaled $44.9 million at March 31, 2023 compared to $52.4 million at year-end 2022 and yielded 4.28% and 4.00%, respectively.

Securities

Securities totaled $572.8 million at March 31, 2023 and were $574.4 million at year-end 2022. During the first quarter, security purchases totaled $1.0 million and were offset by $11.1 million of maturities, calls and pay-downs of amortizing securities. There were also $1.0 million of purchases of FHLB stock during the first quarter 2023. Fair value adjustments decreased the security portfolio by $65.8 million at quarter-end compared to a $71.8 million at year-end. The weighted average yield of the securities portfolio was 3.62% at March 31, 2023 compared to 3.58% at year-end. As of quarter-end and year-end, our securities portfolio had an average life of nine years with an effective duration of five years. All securities remain classified as available for sale to provide flexibility in loan funding and management of our cost of funds.

Loans

Loans increased $41.3 million to $2.9 billion at the end of the first quarter 2023. The increase was primarily driven by commercial loans that grew by $35.3 million, of which $19.5 million was with new customers primarily in the finance and real estate and leasing industries. Residential loans grew by annualized growth rate of 4% as we believe it was more profitable to put these higher yield loans on the balance sheet instead of selling them for small gains in the secondary market. Consumer loans dropped by $2.2 million due to run-off of balances associated with the repricing of home equity lines of credit to the higher interest rate environment.

Allowance for Credit Losses

The ACL was $26.6 million at March 31, 2023 compared to $25.9 million at year-end. The increase ACL balance is largely due to loan growth during the first quarter, however, the ratio of ACL to total loans increased to 0.90% from 0.89% 48

Table of Contents at year-end due to more refined economic forecasting, especially in the national unemployment figures. Non-accruing loans in the quarter increased $1.3 million from $6.5 million at the end of the fourth quarter primarily due to one lending relationship that is expected to be collected in full. Past due accounts between 30 to 89 days as a percentage of total loans was 0.26% at March 31, 2023 compared to 0.08% at year-end. The increase is largely due to a group of customers that typically make payments about 30 days in arrears, which become overdue when the 31^st^ day lands on a business day. Accordingly, we do not believe the increase is an indication of deteriorated credit quality.

Other Assets

Total other assets decreased $11.1 million to $355.2 million from $366.3 million as of year-end. The decrease is primarily attributed to a $5.5 million decrease in the asset position of the derivative and hedging instruments. Deferred tax assets, net, decreased $1.6 million due to the improvement in unrealized losses from securities available for sale portfolio during the quarter.

Deposits and Borrowings

Total deposits increased $10.4 million to $3.1 billion at the end quarter. Demand and other non-interest bearing deposits decreased $39.6 million driven by large institutional outflows mainly due to seasonality. While our deposit base does contain some larger institutional accounts, our community banking model caters to the high volume, lower average balance accounts, which generally are less rate sensitive and less likely to run-off. Time deposits increased $81.0 million due to a shift of interest-bearing deposits to higher interest-bearing accounts, and a $53.1 million increase in brokered deposits. Savings deposits decreased $35.7 million evenly throughout the quarter. Our deposit composition at the end of quarter was 49% commercial customers and 51% consumer customers, compared with 47% and 53%, respectively at year-end. Our uninsured or otherwise unsecured deposits represents 11% of our total deposits, which ranks us on the low end in risk for the industry, and, specifically, in comparison to others within our footprint. Total borrowings increased by $4.3 million during the quarter due to support loan growth.

Derivative Financial Instruments and Other Liabilities

Other liabilities totaled $67.7 million compared to $78.7 million at year-end. The $11.1 million decrease primarily reflects a $4.7 million increase in capital commitments on limited partnership investments, a $3.9 million net decrease in customer loan swaps, and a $771.2 thousand variable rate loan hedge decrease due to lower interest rates compared to year-end.

Equity

Total equity was $408.4 million at March 31, 2023 compared with $393.4 million at year-end. Tangible book value per share (non-GAAP) was $18.74 at March 31, 2023 compared with $17.78 at year-end. Equity included net unrealized losses on securities, derivative and pension revaluations, net of tax, totaling a $53.2 million loss at March 31, 2023 compared to a $58.3 million loss at year-end. Excluding unrealized net losses on securities, our tangible book value per share was $22.08 per share at March 31, 2023 compared with $21.44 per share at year-end, which is an annualized increase of 12%.

COMPARISON OF OPERATING RESULTS FOR THE THREE MONTHS ENDED MARCH 31, 2023 AND MARCH 31, 2022

Net Interest Income

Net interest income was $30.1 million in the first quarter 2023 compared with $23.9 million in the prior year quarter. NIM increased to 3.54% in the first quarter 2023 compared to 2.95% in the prior year quarter. The increase was primarily driven by a yield expansion in existing variable rate loans as those repriced to current indexes, which was partially offset by a higher cost of funds. Interest-bearing cash balances reduced NIM by 3 basis points in the first quarter 2023 compared to 12 basis points in the prior year quarter. The yield on loans was 4.82% in the first quarter 2023, up from 3.54% in the prior year quarter. Costs of interest-bearing liabilities increased to 1.39% in the first quarter 2023 from 0.35% in the first quarter 2022 as our cost of interest-bearing deposits continues to drift higher subsequent to the rate hikes. We also experienced a shift in deposit composition due to time deposits as some customers with excess cash are seeking higher rates. Additionally in the first quarter 2023, we had a heavier reliance on whole-sale borrowings, which have a cost that is almost 200 basis points higher than in the prior year quarter.

Table of Contents Provision for Credit Losses

The provision for credit losses was $798 thousand in the first quarter 2023 compared to $687 thousand in the prior year quarter. The increase is primarily driven by loan growth and slightly higher provisioning given current market conditions. The ratio of net charge-offs to total loans was 0.01% in the first quarter 2023 compared to a net recovery of 0.01% in the prior year quarter. Net charge-offs have been at historic lows for the past five years, which we believe is due to our underwriting standard and conservative provisioning.

Non-Interest Income

Non-interest income was $9.2 million in the first quarter 2023 compared to $9.3 million in the prior year quarter. Customer service fees grew to $3.7 million in the first quarter 2023 from $3.6 million in the same quarter of 2022 on a higher number of transactional accounts. Wealth management income in the first quarter 2023 was $3.6 million, compared to $3.8 million in prior year quarter due primarily to lower assets under management stemming from a decline in market valuations. Mortgage banking income was $279 thousand in the first quarter of 2023, compared to $624 thousand in the same period of 2022 reflecting fewer sales and increased on balance sheet activity related to higher interest rates. BOLI income included $622 thousand related to one-time death benefits during the current year quarter.

Non-Interest Expense

Non-interest expense increased to $22.7 million in the first quarter 2023 from $21.9 million in the prior year quarter principally due to higher salary and benefit expense. Salary and benefit expense increased by $624 thousand in the first quarter 2023 due to annual salary adjustments that were effective at the end of the first quarter of 2022, and higher post-retirement expense in 2023 associated with changes to discount rates.

Income Tax Expense

Income tax expense was $3.6 million in the first quarter 2023 compared with $2.2 million in the prior year quarter. The effective tax rate increased to 21.6% in the first quarter 2023 from 19.7% in the prior year quarter due to having a higher level of non-taxed advantaged income in the current year quarter.

Liquidity and Cash Flows

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

The Bank actively manages its liquidity position through target ratios established under its Asset-Liability Management Policy. Continual monitoring of these ratios, by using historical data and through forecasts under multiple rate and stress scenarios, allows the Bank to employ strategies necessary to maintain adequate liquidity. The Bank's policy is to maintain a liquidity position of at least 8% of total assets. A portion of the Bank’s deposit base has been historically seasonal in nature, with balances typically declining in the winter months through late spring, during which period the Bank’s liquidity position tightens.

As of March 31, 2023, available same-day liquidity totaled approximately $566.4 million, including cash, borrowing capacity at FHLB and the Federal Reserve Discount Window and various lines of credit. Additional sources of liquidity include cash flows from operations, wholesale deposits, cash flow from our amortizing securities and loan portfolios. We had unused borrowing capacity at the FHLB of $255.2 million, unused borrowing capacity at the Federal Reserve of $177.5 million and unused lines of credit totaling $51.0 million, in addition to $82.7 million in cash.

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

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Capital Resources

Please refer to “Comparison of Financial Condition at March 31, 2023 and December 31, 2022--Equity” for a discussion of shareholders’ equity together with Note 6 “Capital Ratios and Shareholders’ Equity” in the consolidated financial statements. Additional information about regulatory capital is contained in the notes to the consolidated financial statements and in our most recent Form 10-K.

We expect to continue our current practice of paying quarterly cash dividends with respect to our common stock subject to our Board of Directors’ discretion to modify or terminate this practice at any time and for any reason without prior notice. We believe our quarterly dividend rate per share as approved by our Board of Directors, enables us to balance our multiple objectives of managing our business and returning a portion of our earnings to our shareholders. Historically, and a practice we intend to continue, our principal cash expenditure is the payment of dividends on our common stock, if as and when declared by our Board of Directors. Dividends to shareholders in the aggregate amount of $3.9 million and $3.6 million for the three months ended March 31, 2023 and 2022, respectively. All dividends declared and distributed by us will be in compliance with applicable state corporate law and regulatory requirements.

Off-Balance Sheet Arrangements

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

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

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

IMPACT OF NEW ACCOUNTING PRONOUNCEMENTS

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

CRITICAL ACCOUNTING POLICIES

Our Consolidated Financial Statements were prepared in accordance with GAAP and follow general practices within the industries in which we operate. The most significant accounting policies we follow are presented in Note 1—“Summary of Significant Accounting Policies” of the Consolidated Financial Statements to our Form 10-K. Application of these principles requires us to make estimates, assumptions, and judgments that affect the amounts reported in the Consolidated Financial Statements and accompanying notes. Most accounting policies are not considered by management to be critical accounting policies. Several factors are considered in determining whether or not a policy is critical in the preparation of the Consolidated Financial Statements. These factors include among other things, whether the policy requires management to make difficult, subjective, and complex judgments about matters that are inherently uncertain and because it is likely that materially different amounts would be reported under different conditions or using different assumptions. The accounting policies which we believe to be most critical in preparing our Consolidated Financial Statements are presented in the section titled “Management's Discussion and Analysis of Financial Condition and Results of Operations--Critical Accounting Policies and Estimates” included in our Form 10-K. There have been no significant changes in our application of critical accounting policies since December 31, 2022. Refer to Note 1 – “Basis of Presentation--Recent Accounting Pronouncements” of the consolidated financial statements for discussion of accounting pronouncements issued but yet to be adopted and implemented.

Table of Contents SELECTED FINANCIAL DATA

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


		Three Months Ended
		March 31,
		2023		****	2022		****
PER SHARE DATA
Net earnings, diluted		$	0.86		$	0.60
Adjusted earnings, diluted^(1)^			0.86			0.62
Total book value			27.00			27.11
Tangible book value per share^(1)^			18.74			18.72
Market price at period end			26.45			28.62
Dividends			0.26			0.24

PERFORMANCE RATIOS^(2)^
Return on assets			1.36	%		1.00	%
Adjusted return on assets^(1)^			1.36			1.02
Pre-tax, pre-provision return on assets			1.81			1.28
Adjusted pre-tax, pre-provision return on assets ^(1)^			1.81			1.31
Return on equity			12.96			8.89
Adjusted return on equity^(1)^			12.94			9.07
Return on tangible equity			18.97			13.01
Adjusted return on tangible equity^(1)^			18.94			13.27
Net interest margin, fully taxable equivalent^(1) (3)^			3.54			2.95
Adjusted net interest margin^(1)^			3.54			2.93
Efficiency ratio^(1)^			54.72			62.40

FINANCIAL DATA (In millions)
Total assets		$	3,928		$	3,692
Total earning assets^(4)^			3,628			3,367
Total investments			573			611
Total loans			2,944			2,655
Allowance for credit losses			27			23
Total goodwill and intangible assets			125			126
Total deposits			3,054			3,048
Total shareholders' equity			408			407
Net income			13			9
Adjusted income^(1)^			13			9

ASSET QUALITY AND CONDITION RATIOS
Net charge-offs (recoveries) (annualized)/average loans			0.01	%		(0.01)	%
Allowance for credit losses/total loans			0.90			0.87
Loans/deposits			96			87
Shareholders' equity to total assets			10.40			11.02
Tangible shareholders' equity to total tangible assets^(1)^			7.45			7.88
(1)	Non-GAAP financial measure. Refer to the Reconciliation of Non-GAAP Financial Measures section of the “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” in this Form 10-Q for additional information.
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(2)	All performance ratios are annualized and are based on average balance sheet amounts, where applicable.
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(3)	Fully taxable equivalent considers the impact of tax-advantaged investment securities and loans.
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(4)	Earning assets includes non-accruing loans and securities are valued at amortized cost.
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CONSOLIDATED LOAN AND DEPOSIT ANALYSIS

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

LOAN ANALYSIS


																	Annualized
																	Growth %
																	Quarter
(in thousands, except ratios)	****	Mar 31, 2023		****	Dec 31, 2022		****	Sep 30, 2022		****	Jun 30, 2022		****	Mar 31, 2022		****	to Date
Commercial real estate		$	1,519,219		$	1,495,452		$	1,421,962		$	1,331,860		$	1,289,968		6	%
Commercial and industrial			364,315			352,735			376,624			360,304			346,394		13
Paycheck Protection Program (PPP)			—			—			—			170			1,126		—
Total commercial loans			1,883,534			1,848,187			1,798,586			1,692,334			1,637,488		8
Total commercial loans, excluding PPP			1,883,534			1,848,187			1,798,586			1,692,164			1,636,362		8

Residential real estate			906,059			898,192			896,618			876,644			868,382		4
Consumer			98,616			100,855			100,822			100,816			96,876		(9)
Tax exempt and other			55,796			55,456			54,338			57,480			51,816		2
Total loans		$	2,944,005		$	2,902,690		$	2,850,364		$	2,727,274		$	2,654,562		6	%

DEPOSIT ANALYSIS


																	Annualized
																	Growth %
																	Quarter
(in thousands, except ratios)	****	Mar 31, 2023		****	Dec 31, 2022		****	Sep 30, 2022		****	Jun 30, 2022		****	Mar 31, 2022		****	to Date
Demand		$	636,710		$	676,350		$	700,218		$	670,268		$	653,471		(23)	%
NOW			908,483			900,730			918,822			883,239			918,768		3
Savings			628,798			664,514			669,317			663,676			658,834		(21)
Money market			475,577			478,398			513,075			499,456			424,750		(2)
Total non-maturity deposits			2,649,568			2,719,992			2,801,432			2,716,639			2,655,823		(10)
Total time deposits			404,246			323,439			334,248			361,906			391,940		100
Total deposits		$	3,053,814		$	3,043,431		$	3,135,680		$	3,078,545		$	3,047,763		1	%

Table of Contents AVERAGE BALANCES AND AVERAGE YIELDS/RATES

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


	****	Three Months Ended March 31,
		2023								2022
		Average								Average							****
(in thousands, except ratios)	****	Balance		****	Interest^(3)^		****	Yield/Rate^(3)^	****	Balance		****	Interest^(3)^		****	Yield/Rate^(3)^	****
Assets
Interest-earning deposits with other banks		$	19,819			209		4.28			140,383			56		0.16	%
Securities available for sale and FHLB stock^(2)(3)^			643,523			5,807		3.66			629,811			3,963		2.55
Loans:
Commercial real estate			1,505,681			18,862		5.08			1,264,798			10,907		3.50
Commercial and industrial			413,921			6,009		5.89			393,759			3,361		3.46
Paycheck protection program			—			—		—			2,999			196		26.49
Residential			902,348			8,260		3.71			856,252			7,490		3.55
Consumer			100,124			1,572		6.37			97,594			844		3.51
Total loans ^(1)^			2,922,074			34,703		4.82			2,615,402			22,798		3.54
Total earning assets			3,585,416			40,719		4.61			3,385,596			26,817		3.21	%
Other assets			299,516								326,422
Total assets		$	3,884,932								3,712,018

Liabilities
NOW		$	883,134			1,106		0.51			930,556			314		0.14	%
Savings			646,291			485		0.30			640,672			137		0.09
Money market			481,951			2,542		2.14			414,130			118		0.12
Time deposits			342,994			1,132		1.34			406,730			620		0.62
Total interest bearing deposits			2,354,370			5,265		0.91			2,392,088			1,189		0.20
Borrowings			398,837			4,180		4.25			178,958			1,010		2.29
Total interest bearing liabilities			2,753,207			9,445		1.39			2,571,046			2,199		0.35	%
Non-interest bearing demand deposits			651,885								660,717
Other liabilities			72,693								64,619
Total liabilities			3,477,785								3,296,382

Total shareholders' equity			407,147								415,636

Total liabilities and shareholders' equity		$	3,884,932								3,712,018

Net interest spread								3.22								2.86	%
Net interest margin^^								3.54								2.95
Adjusted net interest margin^(4)^								3.54								2.93
(1)	The average balances of loans include non-accrual loans and unamortized deferred fees and costs.
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(2)	The average balance for securities available for sale is based on amortized cost.
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(3)	Fully taxable equivalent considers the impact of tax-advantaged securities and loans.
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(4)	Adjusted net interest margin excludes PPP loans.
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Table of Contents RECONCILIATION OF NON-GAAP FINANCIAL MEASURES

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


	****	****

			Three Months Ended March 31,
(in thousands)	****	Calculations		2023	****		2022	****
Net income			$	13,012		$	9,112
Non-recurring items:
Gain on sale of securities, net				(34)			(9)
Gain on sale of premises and equipment, net				(13)			(75)
Acquisition, conversion and other expenses				20			325
Income tax expense ^(1)^				6			(56)
Total non-recurring items				(21)			185
Total adjusted income^(2)^		(A)	$	12,991		$	9,297

Net interest income		(B)	$	30,906		$	24,298
Plus: Non-interest income				9,184			9,309
Total Revenue				40,090			33,607
Gain on sale of securities, net				(34)			(9)
Total adjusted revenue^(2)^		(C)	$	40,056		$	33,598

Total non-interest expense			$	22,704		$	21,886
Non-recurring expenses:
Gain on sale of premises and equipment, net				13			75
Acquisition, conversion and other expenses				(20)			(325)
Total non-recurring expenses				(7)			(250)
Adjusted non-interest expense^(2)^		(D)	$	22,697		$	21,636

Total revenue				40,090			33,607
Total non-interest expense				22,704			21,886
Pre-tax, pre-provision net revenue			$	17,386		$	11,721

Adjusted revenue^(2)^				40,056			33,598
Adjusted non-interest expense^(2)^				22,697			21,636
Adjusted pre-tax, pre-provision net revenue^(2)^		(U)	$	17,359		$	11,962

(in millions)
Average earning assets		(E)	$	3,585		$	3,386
Average paycheck protection program (PPP) loans		(R)		—			3
Average earning assets, excluding PPP loans		(S)		3,585			3,383
Average assets		(F)		3,885			3,712
Average shareholders' equity		(G)		407			416
Average tangible shareholders' equity^(2)(3)^		(H)		282			290
Tangible shareholders' equity, period-end^(2)(3)^		(I)		283			281
Tangible assets, period-end^(2)(3)^		(J)		3,803			3,566

Table of Contents


			Three Months Ended March 31,
		Calculations		2023	****		2022	****
(in thousands)
Common shares outstanding, period-end		(K)		15,124			15,013
Average diluted shares outstanding		(L)		15,190			15,012

Adjusted earnings per share, diluted^(2)^		(A/L)	$	0.86		$	0.62
Tangible book value per share, period-end^(2)^		(I/K)		18.74			18.72
Securities adjustment, net of tax^(1)(4)^		(M)		(50,646)			(20,225)
Tangible book value per share, excluding securities adjustment^(2)(4)^		(I+M)/K		22.08			20.07
Total tangible shareholders' equity/total tangible assets^(2)^		(I/J)		7.45			7.88

Performance ratios^(5)^
Return on assets				1.36	%		1.00	%
Adjusted return on assets^(2)^		(A/F)		1.36			1.02
Pre-tax, pre-provision return on assets				1.81			1.28
Adjusted pre-tax, pre-provision return on assets^(2)^		(U/F)		1.81			1.31
Return on equity				12.96			8.89
Adjusted return on equity^(2)^		(A/G)		12.94			9.07
Return on tangible equity				18.97			13.01
Adjusted return on tangible equity^(1)(2)^		(A+Q)/H		18.94			13.27
Efficiency ratio^(1)(2)(6)^		(D-O-Q)/(C+N)		54.72			62.40
Net interest margin		(B+P)/E		3.54			2.95
Adjusted net interest margin^(2)(7)^		(B+P-T)/S		3.54			2.93

Supplementary data (in thousands)
Taxable equivalent adjustment for efficiency ratio		(N)	$	727		$	476
Franchise taxes included in non-interest expense		(O)		148			141
Tax equivalent adjustment for net interest margin		(P)		368			320
Intangible amortization		(Q)		233			233
Interest and fees on PPP loans		(T)		—			196
(1)	Assumes a marginal tax rate of 23.80% for 2023 and 23.41% for 2022.
---	---
(2)	Non-GAAP financial measure.
---	---
(3)	Tangible shareholders' equity is computed by taking total shareholders' equity less the intangible assets at period-end. Tangible assets is computed by taking total assets less the intangible assets at period-end.
---	---
(4)	Securities adjustment, net of tax represents the total unrealized losses and gains on available-for-sale securities recorded on our consolidated balance sheets within total common shareholders' equity.
---	---
(5)	All performance ratios are based on average balance sheet amounts, where applicable.
---	---
(6)	Efficiency ratio is computed by dividing core non-interest expense net of franchise taxes and intangible amortization divided by core revenue on a fully taxable equivalent basis.
---	---
(7)	Adjusted net interest margin excludes PPP loans.
---	---

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

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

Interest Rate Risk

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

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

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

Interest Rate Sensitivity Modeling:

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

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

The simulation models a parallel and pro rata shift in rates over a 12-month period. Using this approach, we are able to produce simulation results that illustrate the effect that both a gradual “rate ramp” and a “rate shock” have on earnings 57

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

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

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


Change in Interest Rates-Basis Points (Rate Ramp)	1 - 12 Months		13 - 24 Months
(in thousands, except ratios)	Change	% Change	Change	% Change
At March 31, 2023
-100		(1.9)		(4.8)
+100		0.7		3.2
+200		1.5		5.8
At March 31, 2022
-100		(3.9)		(8.0)
+100		3.2		8.3
+200		6.6		16.4

All values are in US Dollars.

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

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

As compared to March 31, 2022, sensitivity to both a down 100 basis point rate movement and an up 200 basis point rate movement has decreased.

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

As market conditions vary from those assumed in the sensitivity analysis, actual results may also differ due to: prepayment and refinancing levels deviating from those assumed; the impact of interest rate changes, caps or floors on adjustable rate assets; the potential effect of changing debt service levels on customers with adjustable rate loans; depositor early withdrawals and product preference changes; and other such variables. The sensitivity analysis also does not reflect additional actions that the Bank’s senior management and the Bank’s Board of Directors might take in responding to or anticipating changes in interest rates, and the anticipated impact on the Bank’s net interest income. 58

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 our principal executive officer and our principal financial officer, we conducted an evaluation of the effectiveness of the design and operation of its disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, as of the end of the period covered by this Form 10-Q. Based on this evaluation, our management, including our principal executive officer and principal financial officer, concluded that as of March 31, 2023, our disclosure controls and procedures were effective to ensure that information required to be disclosed by the reports that we file under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms. Our disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by using our Exchange Act reports is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives, and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

(b)	Changes in internal control over financial reporting.

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

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

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

ITEM 1A. RISK FACTORS

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

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

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

On June 23, 2022, the Board of Directors approved a 12-month plan to repurchase up to 5% of the Company’s outstanding shares of common stock, representing 751,000 shares. No shares were repurchased by the Company in the first quarter of 2023 and the maximum number of shares that may yet be purchased under the plan is 751,000 shares.

Table of Contents ITEM 6. EXHIBITS


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

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

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

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

101*	The following financial information from the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2023 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 (formatted as Inline XBRL and contained in Exhibit 101)<br><br><br><br><br><br>

*Filed herewith

**Furnished herewith

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: May 8, 2023	By:	/s/ Curtis C. Simard
		Curtis C. Simard
		President & Chief Executive Officer<br><br>(Principal Executive Officer)


Dated: May 8, 2023		/s/ Josephine Iannelli
		Josephine Iannelli
		Executive Vice President & Chief Financial Officer<br><br>(Principal Financial and Accounting 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;
---	---
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;
---	---
(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
---	---
(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
---	---
(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.
---	---


Date: May 8, 2023		/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;
---	---
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;
---	---
(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
---	---
(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
---	---
(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.
---	---


Date: May 8, 2023		/s/ Josephine Iannelli

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

Exhibit 32.1

CERTIFICATION PURSUANT TO

18 U.S.C SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report on Form 10-Q of Bar Harbor Bankshares (the “Registrant”) for the quarterly period ended March 31, 2023 (the “Report”), as filed with the Securities and Exchange Commission on the date hereof, I, Curtis C. Simard, President and Chief Executive Officer of the Registrant, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to the best of my knowledge:

The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and

The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Registrant.


Date: May 8, 2023		/s/ Curtis C. Simard

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

Exhibit 32.2

CERTIFICATION PURSUANT TO

18 U.S.C SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report on Form 10-Q of Bar Harbor Bankshares (the “Registrant”) for the quarterly period ended March 31, 2023 (the “Report”), as filed with the Securities and Exchange Commission on the date hereof, I, Josephine Iannelli, Executive Vice President and Chief Financial Officer of the Registrant, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to the best of my knowledge:

The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and

The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Registrant.

t
Date: May 8, 2023		/s/ Josephine Iannelli

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