Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K


þ

ýANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2016

For the fiscal year endedDecember 31, 2017

¨

o

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

For the transition period from ____________ to ____________.


For the transition period from                    to                  

Commission File Number: Number:001-13349

BAR HARBOR BANKSHARES

(Exact name of registrant as specified in its charter)


charter) 

Maine

01-0393663
(State or other jurisdiction of

incorporation or organization)

organization)

01-0393663

(I.R.S. Employer

Identification No.)

P.O.PO Box 400

82 Main Street,

Bar Harbor, Maine

ME

04609-0400
(Address of principal executive offices)

offices)

04609-0400

(Zip Code)

(207) 288-3314

(Registrant’s telephone number,

 including area code)


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

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

Title of each className of each exchange on which registered
Common stock, par value $2.00 per shareNYSE American

Title of className of exchange on which registered

  Common Stock, $2.00 par value per share

     NYSE MKT, LLC


Securities registered pursuant to Sectionsection 12(g) of the Act: None


Indicate by check mark whetherif the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act: YESAct. Yes ¨o NOþ  No 

ý

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act: YESAct. Yes ¨o NOþ  No 

ý

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: YESdays.  Yes þý  No  NO
¨

Indicate by checkmarkcheck mark whether the registrant has submitted electronically and posted on its corporate Website,Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). YESYes þýNO¨  No 

o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.¨o



Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company or an emerging growth company.  See the definitionsdefinition of “large accelerated filer,” “accelerated filer” and, “smaller reporting company”, or "emerging growth company" in Rule 12b-2 of the Exchange Act: Act.  (Check one)
Large accelerated filer¨Accelerated filerFiler þo Non-accelerated filer (do        Accelerated Filer ý       Non-Accelerated Filer o      Smaller Reporting Company o        Emerging growth company o
If an emerging growth company, indicate by check mark if the registrant has elected not check if a smaller reporting company)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. ¨o Smaller reporting company
¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act): YES Yes ¨o NOþ  No 

ý

The aggregate market value of the common stock held by non-affiliates of Bar Harbor Bankshares was $208,645,716$463,788,390 based on the closing sale price of the common stock on the NYSE MKTAmerican on June 30, 2016,2017, the last trading day of the registrant’s most recently completed second quarter.

Number of

The Registrant had 15,446,987 shares of Common Stockcommon stock, par value $2.00 per share, outstanding as of March 10, 2017:  10,256,441


4, 2018.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the definitive Proxy Statement for the Annual Meeting of Stockholders to be held on May 16, 201715, 2018 are incorporated by reference into Part III, Items 10-14 of this Annual Report on Form 10-K.






FORWARD-LOOKING STATEMENTS DISCLAIMER


Certain statements, as well as certain other discussions contained in this Annual Report on Form 10-K, or incorporated herein by reference, contain statements which may be considered to be forward-looking within the meaning of Section 27A of the Securities Act of 1933, as amended and Section 21E of the Securities Exchange Act of 1934, as amended. You can identify these forward-looking statements by the use of words like "strategy," "expects," "plans," "believes," "will," "estimates," "intends," "projects," "goals," "targets," and other words of similar meaning. You can also identify them by the fact that they do not relate strictly to historical or current facts.


Investors are cautioned that forward-looking statements are inherently uncertain. Forward-looking statements include, but are not limited to, those made in connection with estimates with respect to the future results of operations, financial condition, and the business of Bar Harbor Bankshares (the “Company”) which are subject to change based on the impact of various factors that could cause actual results to differ materially from those projected or suggested due to certain risks and uncertainties. Those factors include but are not limited to:


(i)

The Company's success is dependent to a significant extent upon general economic conditions in our market areas in Maine, New Hampshire and Vermont and the ability to attract new business, as well as factors that affect tourism, a major source of economic activity in the Company’s market areas;

(ii)


BAR HARBOR BANKSHARES AND SUBSIDIARIES
FORM 10-K
INDEX 

The Company's earnings depend to a great extent on the level of net interest income (the difference between interest income earned on loans and investments and the interest expense paid on deposits and borrowings) generated by the Company’s wholly-owned banking subsidiary, Bar Harbor Bank & Trust (the “Bank”), and thus the Company’s results of operations may be adversely affected by increases or decreases in interest rates;

(iii)

The banking business is highly competitive and the profitability of the Company depends on the Bank's ability to attract loans and deposits in Maine, where the Bank competes with a variety of traditional banking and non-traditional institutions, such as credit unions and finance companies;

Page

(iv)

PART I.

A significant portion of the Bank's loan portfolio is comprised of commercial loans and loans secured by real estate, exposing the Company to the risks inherent in financings based upon analysis of credit risk, the value of underlying collateral, and other intangible factors which are considered in making commercial loans and, accordingly, the Company's profitability may be negatively impacted by judgment errors in risk analysis, by loan defaults, and the ability of certain borrowers to repay such loans during a downturn in general economic conditions;

ITEM 1.

BUSINESS

4

(v)

ITEM 1A.

RISK FACTORS

Adverse changes in repayment performance and fair value of underlying residential mortgage loan collateral, that differ from the Company’s current estimates, could change the Company’s expectations that it will recover the amortized cost of its private label mortgage backed securities portfolio and/or its conclusion that such securities were not other-than temporarily impaired as of the date of this report;

23

ITEM 1B.

(vi)

The Company’s allowance for loan losses may be adversely impacted by a variety of factors, including, but not limited to, the performance of the Company’s loan portfolio, the economy, changes in interest rates, and the view of regulatory authorities toward loan classifications;





2




(vii)

Significant changes in the Company’s internal controls, or internal control failures;

(viii)

Acts or threats of terrorism and actions taken by the United States or other governments as a result of such threats, including military action and cyber security, could further adversely affect business and economic conditions in the United States generally and in the Company’s markets, which could have an adverse effect on the Company’s financial performance and that of borrowers and on the financial markets and the price of the Company’s common stock;

(ix)

Significant changes in the extensive laws, regulations, and policies governing bank holding companies and their subsidiaries could alter the Company's business environment or affect its operations;

(x)

Changes in general, national, international, regional or local economic conditions and credit markets which are less favorable than those anticipated by Company management that could impact the Company's securities portfolio, quality of credits, or the overall demand for the Company's products or services;

(xi)

The integrity of information systems are under significant threat from cyber-attacks by third parties, including thorough coordinated attacks sponsored by foreign nations and criminal organizations to disrupt business operations and other compromises to data and systems for political or criminal purposes; and

(xii)

The Company’s success in managing the risks involved in all of the foregoing matters.


Readers  should carefully review all of these factors as well as the risk factors set forth in Item 1A, Risk Factors of this Annual Report on Form 10-K. There may be other risk factors that could cause differences from those anticipated by management.


When we say “we,” “us,” “our,” or the “Company,” we mean the Company on a consolidated basis with the Bank and Trust Services.


The forward-looking statements contained herein represent the Company's judgment as of the date of this Annual Report on Form 10-K, and the Company cautions readers not to place undue reliance on such statements. The Company disclaims any obligation to publicly update or revise any forward-looking statement contained in the succeeding discussion, or elsewhere in this Annual Report on Form 10-K, except to the extent required by federal securities laws.




3



TABLE OF CONTENTS


PART I

ITEM 1

BUSINESS

6

Organization

6

Recent Acquisition

6

Bar Harbor Bank & Trust

6

Bar Harbor Trust Services

8

Market Competition

8

Management and Employees

9

Supervision and Regulation

10

Monetary Policy and Economic Environment

19

Financial Information About Industry Segments

20

Availability of Information – Company Website

20

ITEM 1A

RISK FACTORS

20

ITEM 1B

UNRESOLVED STAFF COMMENTS

27

28

ITEM 2.

PROPERTIES

28

ITEM 3.

LEGAL PROCEEDINGS

28

ITEM 2

4.

PROPERTIES

27

ITEM 3

LEGAL PROCEEDINGS

27

ITEM 4

MINE SAFETY DISCLOSURES

27

28

PART II.

PART II

ITEM 5.

ITEM 5

MARKET FOR REGISTRANT’SREGISTRANT'S COMMON STOCK,EQUITY, RELATED SHAREHOLDER MATTERS, AND ISSUER PURCHASES OF EQUITY SECURITIES

28

ITEM 6.

SELECTED FINANCIAL DATA

31

ITEM 7.

Market Information

28

Performance Graph

29

Dividends

30

Recent Sale of Unregistered Securities; Use of Proceeds from Registered Securities

30

Purchase of Equity Securities by the Issuer and Affiliated Purchasers

30

Stock Based Compensation Plans

31

Transfer Agent Services

31

ITEM 6

SELECTED CONSOLIDATED FINANCIAL DATA

32

ITEM 7

MANAGEMENT’S

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONCONDITIONS AND RESULTS OF OPERATIONS

37

39

ITEM 7A.

Critical Accounting Policies

37

Comparison of Financial Condition at December 31, 2016 and 2015

39

Results of Operations

59



ITEM 7A

QUALITATIVE

QUANTITATIVE AND QUANTITATIVEQUALITATIVE DISCLOSURES ABOUT MARKET RISK

64

49

ITEM 8.

ITEM 8

CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

67

52

ITEM 9.

ITEM 9

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES

DISCLOSURE

122

126

ITEM 9A.

ITEM 9A

CONTROLS AND PROCEDURES

122

126

ITEM 9B.

OTHER INFORMATION

129

ITEM 9B

PART III.

OTHER INFORMATION

125

ITEM 10.

PART III

ITEM 10

DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE OF THE REGISTRANT

125

130

ITEM 11.

EXECUTIVE COMPENSATION

130

ITEM 12.

ITEM 11

EXECUTIVE COMPENSATION

125

ITEM 12

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDERSHAREHOLDER MATTERS

126

131

ITEM 13.

ITEM 13

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

126

131

ITEM 14.

ITEM 14

PRINCIPAL ACCOUNTING FEES AND SERVICES

126

131

PART IV

IV.

ITEM 15.

EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

131

ITEM 15

EXHIBITS, FINANCIAL STATEMENTS SCHEDULES

126

SIGNATURES

SIGNATURES

127





5



PART I



ITEM 1. BUSINESS


Organization

FORWARD-LOOKING STATEMENTS

Certain statements contained in this Annual Report on Form 10-K that are not historical facts may constitute forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (referred to as the Securities Act), and Section 21E of the Securities Exchange Act of 1934, as amended (referred to as the Securities Exchange Act), and are intended to be covered by the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. You can identify these statements from the use of the words “may,” “will,” “should,” “could,” “would,” “plan,” “potential,” “estimate,” “project,” “believe,” “intend,” “anticipate,” “expect,” “target” and similar expressions. These forward-looking statements are subject to significant risks, assumptions and uncertainties, including among other things, changes in general economic and business conditions, increased competitive pressures, changes in the interest rate environment, legislative and regulatory change, changes in the financial markets, and other risks and uncertainties disclosed from time to time in documents that Bar Harbor Bankshares (the “Company”) (“BHB”) was incorporated underfiles with the lawsSecurities and Exchange Commission. All risk factors set forth in Item 1A of the state of Mainethis Annual Report on January 19, 1984. At December 31, 2016, the Company had total consolidated assets of $1.76 billionForm 10-K should be considered in evaluating forward-looking statements and total shareholders’ equity of $156.7 million.

undue reliance should not be placed on such statements. Bar Harbor Bankshares does not intend or assume any obligation to update or revise any forward-looking statements except as may be required by law.


GENERAL

Throughout this Annual Report on Form 10-K, Bar Harbor Bankshares is referred to as “BHB”, “the Company", “we”, “our”, or “us.” The Company has one, wholly-owned first tier operating subsidiary,was established in 1887 and is the parent company of Bar Harbor Bank & Trust (the “Bank”(“the Bank”), awhich is the only community bank, which offers a wide range of deposit, loan,Bank headquartered in Northern New England with branches in Maine, New Hampshire and related banking products, as well as brokerage services provided through a third-party brokerage arrangement. In addition, the Company offers trust and investment management services through its second tier subsidiary, Bar Harbor Trust Services (“Trust Services”), a Maine chartered non-depository trust company. These products and services are offered to individuals, businesses, not-for-profit organizations and municipalities.


The Company is a bank holding company (“BHC”) registered under the Bank Holding Company Act of 1956, as amended (the “BHC Act”), and is subject to supervision, regulation and examination by the Board of Governors of the Federal Reserve System (the “Federal Reserve Board”). The Company is also 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 (the “Superintendent”) of the Maine Bureau of Financial Institutions (“BFI”).


Recent Acquisition


On January 13, 2017, the Company completed the previously announced acquisition of Lake Sunapee Bank Group (“LSBG”). In connection with the acquisition, Lake Sunapee Bank, a wholly owned subsidiary of LSBG, merged with and into the Bank, with the Bank continuing as the surviving entity.  


Bar Harbor Bank & Trust


The Bank, originally founded in 1887, is a Maine financial institution, and its deposits are insured by the Deposit Insurance Fund (the “DIF”) of the Federal Deposit Insurance Corporation (the “FDIC”) up to the maximum extent permitted by law.Vermont. The Bank is subjecta true community bank providing exceptional commercial, retail and wealth management banking services through a network of 47 full-service branches.


The Company’s corporate goal is to be among the supervision, regulation,most profitable banks in New England, and examinationits business model is centered on the following:

Employee and customer experience is the foundation of superior performance, which leads to significant financial benefit to shareholders
Geography, heritage and performance are key while remaining true to a community culture
Strong commitment to risk management while balancing growth and earnings
Service and sales driven culture with a focus on core business growth
Investment in processes, products, technology, training, leadership and infrastructure
Expansion of the FDICCompany’s brand and the BFI. It is not a memberbusiness to deepen market presence
Opportunity and growth for existing employees while adding catalyst recruits across all levels of the Federal Reserve System.

Company


As



The following presents the Company’s geographical footprint:

The Bank serves affluent and growing markets in Maine, New Hampshire and Vermont. Within our markets, tourism, agriculture, fishing, and forestry industries remain strong and continue to drive economic activity. These core markets have also maintained their strength through diversification into various services industries.

The following is a summary of December 31, 2016,the regions that the Bank hadprimarily serves:

Maine
The Bank operates 14 branch officesfull-service branches principally located throughoutin downeast, midcoast and central Maine, includingwhich can generally be characterized as rural areas. In Maine the Company considers its principal office located at 82 Main Street, Bar Harbor. The Bank’s branch offices are located inprimary market areas to be Hancock, Knox, Washington, Knox, Kennebec and Sagadahoc Counties, representing the Bank’s principal market areas.counties. The Hancock County offices,economies in addition to Bar Harbor,these counties are located in Blue Hill, Deer Isle, Ellsworth, Northeast Harbor, Somesville, Southwest Harbor,based primarily on tourism, healthcare, fishing and Winter Harbor. The Washington County officeslobstering, agriculture, state government, and small local businesses and are located in Milbridge, Machias, and Lubec. The Knox, Kennebec and Sagadahoc County offices are located in Rockland, South China, and Topsham. The Bank delivers its operations and technology support services from its operations centers located in Ellsworth and Hampden, Maine.  Following the completion of the acquisition of LSBG, the Bank has 35 additional branch offices located throughout New Hampshire and central Vermont.


The Bank is a retail bank serving individual and business customers, retail establishments and restaurants, seasonal lodging, biological research laboratories, andalso supported by a large contingent of retirees. With significant operations in coastal Maine, it serves the tourism, hospitality, lobstering, fishing, boat building and marine services industries. It also serves Maine’s wild blueberry industry through its Hancock and Washington County offices.


New Hampshire
The Bank operates 20 full-service branches and two stand-alone drive-up windows in New Hampshire. There are several distinct markets within this region. The first market is centered in Nashua, New Hampshire, which is a competitiveregional commercial, entertainment and dining destination. Bordering Massachusetts, Nashua enjoys a vibrant high-tech industry and a robust retail industry due in part to the state's absence of a sales tax. The west-central area of New Hampshire includes the towns of Lebanon and Hanover, which are home to Dartmouth-Hitchcock Medical Center and Dartmouth College, respectively. The Lake Sunapee market is a popular year-round recreation and resort area that includes other community banks, savings institutions, credit unions,both Lake Sunapee and branch offices of statewideMount Sunapee.


Vermont
The Bank operates 13 full service-branches and interstate bank holding companiesone stand-alone drive-up window in Vermont. The branches are primarily located in central Vermont within the Bank’s market area.


The Bank has a broad deposit basecounties of Rutland, Windsor and lossOrange. These markets are home to many attractions, including Killington Mountain, Okemo Resort, and the city of any one depositor or closely aligned group of depositors would not have a material adverse effect on its business. Historically,Rutland. Popular vacation destinations in this region include Woodstock, Brandon, Ludlow and Quechee.


COMPANY WEBSITE AND AVAILABILITY OF SECURITIES AND EXCHANGE COMMISSION FILINGS

Information regarding the banking business in the Bank’s market area has been seasonal, with lower deposits in the winter and spring, and higher deposits in the summer and autumn. These seasonal swings have been fairly predictable and have historically not had a materially adverse impactCompany is available on the BankInvestor Relations tab at bhbt.com. The Company’s annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and any amendments to those reports filed pursuant to Section 13(a) or its liquidity position. Approximately 90.6%15(d) of the Bank’s



6



depositsSecurities Exchange Act of 1934 are available free of charge at sec.gov and at bhbt.com under the Investor Relations tab. Information on the website is not incorporated by reference and is not a part of this annual report on Form 10-K.



COMPETITION

Major competitors in interest bearing accounts. our market areas include local independent banks, local branches of large regional bank affiliates, thrift institutions, savings and loan institutions, mortgage companies, and credit unions.

The BankCompany has paid,generally been able to compete effectively with other financial institutions by emphasizing quality customer service, making decisions at the local level, maintaining long-term customer relationships, building customer loyalty, and anticipates that it will continue to pay, competitive interest rates on all of the deposit account products it offers and does not anticipate any material loss of these deposits.


The Bank emphasizes personal service to the community, with a concentration on retail banking. Customers are primarily individuals and small businesses to which the Bank offers a wide variety of products and services.


Retail Products and Services: The Bank offers a variety of consumer financialproviding products and services designed to satisfyaddress the specific needs of customers; however, no assurance can be given that the Company will continue to be able to compete effectively with other financial institutions in the future.


No part of the Company’s business is materially dependent upon one, or a few customers, or upon a particular industry segment, the loss of which would have a material adverse impact on the operations of the Company.

LENDING ACTIVITIES

General
The Bank originates loans in the four basic portfolio categories, which are discussed below, relate to construction and land development, commercial real estate, commercial and industrial, agricultural and other loans to farmers, tax exempt entities, residential mortgages, home equity and other consumer loans. Loan interest rates and other key loan terms are affected principally by the Bank’s credit policy, asset/liability strategy, loan demand, competition, and the supply of money available for lending purposes. The Bank does not engage in subprime lending activities. The Bank monitors and manages the amount of long-term fixed-rate lending and adjustable-rate loan products according to its interest rate management policy. The Bank generally originates loans for investment except for certain residential mortgages that are underwritten with the intention for sale in the secondary market.

Loan Portfolio Analysis. The following table sets forth the year-end composition of the Bank’s loan portfolio in dollar amounts and as a percentage of the portfolio for the five years indicated. Further information about the composition of the loan portfolio is contained in Note 4 - Loans of the Consolidated Financial Statements.
  2017 2016 2015 2014 2013
(in thousands, except percentages) Amount Percent of Total Amount Percent of Total Amount Percent of Total Amount Percent of Total Amount Percent of Total
Commercial real estate $826,746
 34% $418,119
 37% $396,032
 40% $351,354
 38% $354,398
 41%
Commercial and industrial 379,423
 15
 151,240
 13
 126,158
 13
 121,057
 13
 117,256
 14
Total commercial 1,206,169
 49
 569,359
 50
 522,190
 53
 472,411
 51
 471,654
 55
Residential 1,155,682
 46
 506,612
 45
 408,401
 41
 382,678
 42
 317,115
 37
Consumer 123,762
 5
 53,093
 5
 59,479
 6
 63,935
 7
 64,088
 8
Total loans 2,485,613
 100% 1,129,064
 100% 990,070
 100% 919,024
 100% 852,857
 100%
Allowance for loan losses (12,325) 
 (10,419) 
 (9,439) 
 (8,969) 
 (8,475) 
Net loans $2,473,288
 
 $1,118,645
 
 $980,631
 
 $910,055
 
 $844,382
 

Commercial Real Estate
Commercial real estate loans which also include multifamily loans are secured primarily by multifamily dwellings, industrial/warehouse buildings, retail centers, office buildings and hospitality properties, primarily located in the Company's market area in New England. The Company's loans secured by commercial real estate and multifamily properties are originated with either a fixed or an adjustable interest rate. The interest rate on adjustable rate loans is based on a variety of indices, generally determined through negotiation with the borrower. The Bank's commercial real estate underwriting guidelines call for loan-to-value (LTV) ratios not to exceed 80 percent of the appraised value of the underlying property securing the loan. Unless on some sort of seasonal pay basis, the loans typically require monthly payments containing balloon payments with maturities of 10 years or less based on 20 year amortization schedules for commercial real estate and 25 years for multifamily loans.

Commercial and Industrial Loans
Commercial and industrial loans are made to finance operations, provide working capital, finance the purchase of fixed assets, equipment or real property and business acquisitions. A borrower's cash flow from operations is generally the primary source of repayment. Accordingly, the Company's policies provide specific guidelines regarding debt service coverage and other financial ratios. Commercial and industrial loans include lines of credit, commercial term loans and owner-occupied commercial real estate loans. Commercial lines of credit are extended to businesses generally to finance operations and working capital needs. Commercial term loans are typically made to finance the acquisition of fixed assets, refinance short-term debt originally used to purchase fixed assets or make business acquisitions. Commercial and industrial loans are extended based on the financial strength and integrity of the borrower and guarantor(s) and are generally collateralized by the borrower's assets such as accounts receivable, inventory, equipment or real estate, typically with a term based on the collateral of 1-10 years. The interest rates on these loans generally are adjustable and usually are indexed to The Wall Street Journal's prime rate (Prime Rate) or London Interbank Offered Rate (LIBOR), the spread over which will vary based on market conditions and perceived credit risk.

In order to mitigate the risk of loss, the Company generally requires collateral and personal guarantees to support commercial and industrial loans. The Company attempts to mitigate risk by limiting advance rates against eligible collateral to no more than 80 percent, though appropriate advance rates can vary depending on asset class.

Commercial and industrial loans also attract multifaceted relationships, which include deposit and borrowing needstreasury management services.


Residential Real Estate
The Bank offers fixed-rate and adjustable-rate residential mortgage loans to individuals with maturities of its retail customers.up to 30 years that are fully amortizing with monthly loan payments. Certain loans are originated for sale with rate lock commitments which are recorded as derivative financial instruments. Mortgages are generally underwritten according to U.S. government sponsored enterprise guidelines designated as “A” or “A-” and referred to as “conforming loans”. The Bank also originates jumbo loans above conforming loan amounts which generally are consistent with secondary market guidelines for these loans; however, these are typically held for investment. The Bank does not offer subprime mortgage lending program. The Bank’s retail deposit products and services include checking accounts, interest bearing NOW accounts, moneysecondary market accounts, savings accounts, club accounts, short-term and long-term certificateslending is sold on a servicing-retained basis.

Consumer Loans
The Company offers a variety of deposit, Health Savings Accounts, and Individual Retirement Accounts. Credit products and services include home mortgages, residential constructionsecured consumer loans, including second deed-of-trust home equity loans and linesHELOCs and loans secured by deposits. The Company also offers a limited amount of unsecured loans. The Company originates consumer loans primarily in its market area. Consumer loans generally have shorter terms to maturity or variable interest rates, which reduce the Company's exposure to changes in interest rates, and carry higher rates of interest than do residential real estate loans. The Company believes that offering consumer loan products is critical to providing customer service at the holistic relationship level.

HELOCs have a 10 or 15 year draw period followed by 2 year amortization and require either interest-only payments during the draw period or the payment of 1.0 percent or 1.5 percent of the outstanding loan balance per month (depending on the terms). Following receipt of payments, the available credit includes amounts repaid up to the credit cards, installmentlimit. HELOCs with a ten year draw period have a balloon payment due at the end of the draw period and then amortize for the remaining term. For loans with shorter-term draw periods, once the draw period has lapsed, generally the payment is fixed based on the loan balance and prevailing market interest rates at that time.

Maturity and Sensitivity of Loan Portfolio
The following table shows contractual final maturities of selected loan categories at December 31, 2017. The contractual maturities do not reflect premiums, discounts, deferred costs, or prepayments.
(in thousands) 1 Year or Less 1 to 5 Years More than 5 Years Total
Commercial real estate $16,404
 $100,097
 $710,245
 $826,746
Commercial and industrial 24,842
 120,961
 233,620
 379,423
Total Commercial 41,246
 221,058
 943,865
 1,206,169
Residential 376
 23,501
 1,131,805
 1,155,682
Consumer 9,591
 31,925
 82,246
 123,762
Total $51,213
 $276,484
 $2,157,916
 $2,485,613

Problem Assets
The Bank prefers to work with borrowers to resolve problems rather than proceeding to foreclosure. For commercial loans, this may result in a period of forbearance or restructuring of the loan, which is normally done at current market terms and does not result in a “troubled” loan designation. For residential mortgage loans, the Bank generally follows FDIC guidelines to attempt a restructuring that will enable owner-occupants to remain in their home. However, if these processes fail to result in a performing loan, then the Bank generally will initiate foreclosure or other proceedings no later than the 90th day of a delinquency, as necessary, to minimize any potential loss. Management reports delinquent loans and overdraft protection services. The Bank providesnon-performing assets to the Board monthly. Loans are generally removed from accruing status when they reach 90 days delinquent, except for certain loans which are well secured and unsecured installmentin the process of collection. Loan collections are managed by a combination of the related business units and the Bank’s Managed Assets Group, which focuses on larger, riskier collections and the recovery of purchased credit impaired loans.


The following table presents the problem assets and accruing TDRs for the five years indicated:
(in thousands) 2017 2016 2015 2014 2013
Non-accruing loans:          
Commercial real estate $8,343
 $2,564
 $2,390
 $4,484
 $3,959
Commercial and industrial 1,209
 315
 308
 708
 849
Residential 4,266
 3,419
 3,452
 6,051
 3,227
Consumer 500
 198
 830
 1,045
 805
Total non-performing loans 14,318
 6,496
 6,980
 12,288
 8,840
Real estate owned 122
 90
 256
 523
 1,625
Total non-performing assets $14,440
 $6,586
 $7,236
 $12,811
 $10,465
           
Troubled debt restructurings (accruing) $1,046
 $2,713
 $2,336
 $1,092
 $1,038
Accruing loans 90+ days past due 510
 —
 28
 —
 —
           
Total non-performing loans/total loans 0.58% 0.58% 0.71% 1.34% 1.04%
Total non-performing assets/total assets 0.41
 0.38
 0.46
 0.88
 0.76

Allowance for Loan Losses
The Bank’s loan portfolio is regularly reviewed by management to evaluate the adequacy of the allowance for loan losses. The allowance represents management’s estimate of inherent losses that are probable and estimatable as of the date of the financial statements. The allowance includes a specific component for impaired loans (a “specific loan loss reserve”) and a general component for new or used automobiles, boats, recreational vehicles, mobile homesportfolios of all outstanding loans (a “general loan loss reserve”). At the time of acquisition, no allowance for loan losses is assigned to loans acquired in business combinations. These loans are carried at fair value, including the impact of expected losses, as of the acquisition date. The loan loss allowance is discussed further in Note 1 - Summary of Significant Accounting Policies of the Consolidated Financial Statements.

The following table presents an analysis of the allowance for loan losses for the five years indicated:
(in thousands, except ratios) 2017 2016 2015 2014 2013
Balance at beginning of year $10,419
 $9,439
 $8,969
 $8,475
 $8,097
Charged-off loans: 
 
 
 
 
Commercial real estate 275
 133
 667
 238
 214
Commercial and industrial 207
 90
 395
 489
 486
Residential 255
 141
 70
 650
 406
Consumer 289
 47
 487
 243
 149
Total charged-off loans 1,026
 411
 1,619
 1,620
 1,255
Recoveries on charged-off loans: 
 
 
 
 
Commercial real estate 50
 40
 98
 85
 105
Commercial and industrial 11
 289
 54
 146
 60
Residential 65
 44
 129
 12
 7
Consumer 18
 39
 23
 38
 43
Total recoveries on charged-off loans 144
 412
 304
 281
 215
Net charged-off 882
 (1) 1,315
 1,339
 1,040
Provision for loan losses 2,788
 979
 1,785
 1,833
 1,418
Balance at end of year $12,325
 $10,419
 $9,439
 $8,969
 $8,475
           
Ratios:          
Net charge-offs/average loans 0.04% — % 0.14% 0.15% 0.12%
Recoveries/charged-off loans 14.04
 100.24
 18.78
 17.35
 17.13
Net loans charged-off/allowance for loan losses 7.16
 (0.01) 13.93
 14.93
 12.27
Allowance for loan losses/total loans 0.50
 0.92
 0.95
 0.98
 0.99
Allowance for loan losses/non-accruing loans 86.08
 160.39
 135.23
 72.99
 95.87

The following table presents year-end data for the approximate allocation of the allowance for loan losses by loan categories at the dates indicated. The table shows for each category the amount of the allowance allocated to that category as a percentage of the outstanding loans in that category. Management believes that the allowance can be allocated by category only on an approximate basis. The allocation of the allowance to each category is not indicative of future losses and other personal needs. does not restrict the use of any of the allowance to absorb losses in any category. Due to the impact of accounting standards for acquired loans, data in the accompanying tables may not be comparable between accounting periods.


The Bankfollowing table presents the allocation of allowance for loan loss by category for the five years indicated:
  2017 2016 2015 2014 2013
(in thousands) Amount Allocated Percent Allocated to Total Loans In Each Category Amount Allocated Percent Allocated to Total Loans In Each Category Amount Allocated Percent Allocated to Total Loans In Each Category Amount Allocated Percent Allocated to Total Loans In Each Category Amount Allocated Percent Allocated to Total Loans In Each Category
Commercial real estate $6,134
 0.74% $5,145
 1.23% $4,430
 1.12% $4,613
 1.31% $5,139
 1.45%
Commercial and industrial 2,389
 0.63
 1,952
 1.29
 1,590
 1.26
 1,277
 1.05
 1,769
 1.75
Residential 3,416
 0.30
 2,721
 0.54
 2,747
 0.67
 2,714
 0.71
 1,166
 0.37
Consumer 386
 0.31
 601
 1.13
 672
 1.13
 365
 0.57
 401
 0.50
Total $12,325
 0.50% $10,419
 0.92% $9,439
 0.95% $8,969
 0.98% $8,475
 0.99%


INVESTMENT SECURITIES ACTIVITIES

The general objectives of the Company's investment portfolio are to provide liquidity when loan demand is high, and to absorb excess funds when demand is low.  The securities portfolio also provides a medium forcertain interest rate risk measures intended to maintain an appropriate balance between interest income from loans and total interest expense. For additional information, see Item 7A of this Annual Report on Form 10-K.

The Company only invests in high-quality investment-grade securities.  Investment decisions are made in accordance with the Company’s investment policy and include consideration of risk, return, duration, and portfolio concentrations.

The following table presents the amortized cost and fair value of securities available for sale for the three years indicated:
  2017 2016 2015
(in thousands) Amortized Cost Fair Value Amortized Cost Fair Value Amortized Cost Fair Value
Obligations of US Government sponsored enterprises $6,967
 $6,972
 $—
 $—
 $—
 $—
US Government-sponsored enterprises 447,081
 443,003
 330,635
 328,452
 304,106
 306,993
US Government agency 96,357
 95,596
 76,722
 76,906
 78,408
 79,130
Private label 529
 674
 936
 1,132
 2,713
 3,464
Obligations of states and political subdivisions thereof 138,522
 140,200
 123,832
 122,366
 110,952
 115,382
Corporate bonds 30,527
 30,797
 —
 —
 —
 —
Total $719,983
 $717,242
 $532,125
 $528,856
 $496,179
 $504,969


The following table presents the amortized cost and weighted average yields of securities at December 31, 2017:
 One Year or Less One to Five Years Five to Ten Years More Than Ten Years Total
(in thousands, except ratios)Amortized Cost Weighted Average Yield Amortized Cost Weighted Average Yield Amortized Cost Weighted Average Yield Amortized Cost Weighted Average Yield Amortized Cost Weighted Average Yield
Obligations of US Government sponsored enterprises$6,967
 1.85% $—
 —% $—
 —% $—
 —% $6,967
 1.85%
US Government-sponsored enterprises647
 3.58
 2,517
 3.17
 28,472
 2.50
 415,445
 2.55
 447,081
 2.55
US Government agency8
 3.47
 170
 3.11
 1,698
 3.69
 94,481
 2.46
 96,357
 2.48
Private label8
 4.92
 23
 56.07
 5
 489.76
 493
 5.75
 529
 12.90
Obligations of states and political subdivisions thereof30
 4.60
 2,903
 3.93
 25,231
 2.31
 110,358
 2.98
 138,522
 2.88
Corporate bonds—
 —
 8,724
 3.50
 21,711
 4.81
 92
 7.14
 30,527
 4.44
Total$7,660
 2.02% $14,337
 3.61% $77,117
 3.15% $620,869
 2.62% $719,983
 2.69%


DEPOSIT ACTIVITIES AND OTHER SOURCES OF FUNDS

The Company offers other customarya variety of deposit products to consumers, businesses and services such as safe deposit box rentals, wire transfers, check collection services, foreign currency exchange, money orders, and U.S. Savings Bonds redemptions.


The Bank staffs a call center, providinginstitutional customers with telephonea wide range of interest rates and e-mail responsesterms. The Company's deposits consist of interest-bearing and non-interest-bearing demand accounts, savings accounts, money market deposit accounts, and certificates of deposit. The Company solicits deposits primarily in its market area, excluding brokered deposits. The Company primarily relies on competitive pricing policies, marketing and customer service to their questionsattract and needs. retain deposits.


The Company manages pricing of deposits in keeping with the Company's asset/liability management, liquidity and profitability objectives, subject to market competitive factors. Based on the Company's experience, the Company believes that the Company's deposits are relatively stable sources of funds. Despite this stability, the Company's ability to attract and maintain these deposits and the rates paid on them have been and will continue to be significantly affected by market conditions.

The following table presents the average balances and weighted average rates for deposits for the three years indicated:
  2017 2016 2015
(in thousands, except ratios) Average Balance Percent of Total Average Deposits Weighted Average Rate Average Balance Percent of Total Average Deposits Weighted Average Rate Average Balance Percent of Total Average Deposits Weighted Average Rate
Demand $339,303
 15% —% $93,757
 11% —% $82,741
 9% —%
NOW 455,064
 20
 0.25
 161,494
 16
 0.20
 149,117
 16
 0.20
Savings 367,785
 17
 0.16
 72,657
 7
 0.09
 66,736
 7
 0.09
Money market 300,905
 14
 0.49
 240,325
 24
 0.40
 200,193
 22
 0.36
Time deposits 760,544
 34
 1.07
 414,347
 42
 1.29
 427,550
 46
 1.18
Total $2,223,601
 100% 0.51% $982,580
 100% 0.68% $926,337
 100% 0.66%


The following table presents the scheduled maturities of time deposits $100 thousand or greater at December 31, 2017:
(in thousands, except ratios) Amount Weighted Average Rate
Three months or less $72,611
 0.69%
Over 3 months through 6 months 17,640
 0.64
Over 6 months through 12 months 51,218
 1.27
Over 12 months 145,021
 1.63
Total $286,490
 1.26%

The Company may also utilize borrowings as an alternative source of funds which can be invested at a positive interest rate spread when the Company desires additional capacity to fund loan demand or when they meet the Company's asset/liability management goals to diversify funding sources and enhance interest rate risk management.

The Company's borrowings historically have included advances from the Federal Home Loan Bank of Boston ("FHLB"), securities sold under repurchase agreements, and an unsecured line of credit. The Company also offers free banking-by-mail services.

has the ability to borrow from the Federal Reserve Bank of Boston, as well as through unsecured federal funds lines with correspondent banks. The Company may obtain advances from the FHLB by collateralizing the advances with certain loans and investment securities of the Company. These advances may be made pursuant to several different credit programs, each of which has its own interest rate, range of maturities and call features.


Retail Brokerage Services:

RETAIL BROKERAGE SERVICES

The Bank retains Infinex Investments, Inc., (“Infinex”) as a full servicefull-service third-party broker-dealer, conducting business under the assumed business name “Bar Harbor Financial Services.” Bar Harbor Financial Services is a branch office of Infinex, an independent registered broker-dealer offering securities and insurance products that is not affiliated with the Company or its subsidiaries. These products are not deposits, are not insured by the FDIC or any other government agency, are not guaranteed by the Bank or any affiliate, and may be subject to investment risk, including possible loss of value.


Bar Harbor Financial Services principally serves the brokerage needs of individuals, from first-time purchasers, to sophisticated investors. It also offers a line of life insurance, annuity, and retirement products, as well as financial planning services. Infinex was formed by a group of member banks, and is one of the largest providers of third party investment and insurance services to banks and their customers in New England. Through Infinex, the Bank is able to take advantage of the expertise, capabilities, and experience of a well-established third-party broker-dealer in a cost effective manner.


Electronic Banking Services:The Bank continues to offer free Internet banking services, including consumer remote deposit capture, e-statements, free check images, and electronic bill payment, through its dedicated website atwww.bhbt.com. Additionally, the Bank offers telephone banking, an interactive voice response system through which customers can check account balances and activity, as well as initiate money transfers between their accounts. Customers can also monitor their accounts with free mobile banking access via text messaging, browser or “Apps”, and they can receive alerts, view accounts, transfer funds and pay bills. The Bank also offers Popmoney®, an innovative personal payment service that eliminates the need for checks and cash by allowing customers to send and receive money as easily as they send and receive e-mail and text messages.

TRUST MANAGEMENT SERVICES

The Bank has 54 Automated Teller Machines (ATMs) are located throughout downeast, midcoast and central, Maine, as well as south, central and western New Hampshire and Central Vermont. The Bank is also a member of Maine Cash Access, providing customers with surcharge-free access to over 225 ATMs throughout the state of Maine. Visa debit cards are also offered, providing customers with free access to their deposit account balances at point of sale locations throughout most of the world.




7



Commercial Products and Services:The Bank serves the small business market throughout downeast, midcoast and central Maine. It offers business loans to individuals, partnerships, corporations, and other business entities for capital construction, real estate and equipment financing, working capital, real estate development, and a broad range of other business purposes. Business loans are provided primarily to organizations and sole proprietors in the tourism, hospitality, healthcare, blueberry, boatbuilding, biological research, and fishing industries, as well as to other small and mid-size businesses associated with coastal communities.


The Bank offers a variety of commercial deposit accounts, most notably business checking and tiered money market accounts. These accounts are typically used as operating accounts or short-term savings vehicles. The Bank’s cash management servicestwo wholly-owned subsidiaries that provide business customers with short-term investment opportunities through a cash management sweep program, whereby excess operating funds over established thresholds are swept into overnight securities sold under agreements to repurchase. The Bank also offersBusiness On-Line Direct(“BOLD”) an Internet banking service for businesses. This service allows business clients to view their account histories, print statements, view check images, order stop payments, transfer funds between accounts, and transmit Automated Clearing House (ACH) files. The Bank also offers remote deposit capture, enabling its business customers to deposit checks remotely. Other commercial banking services include merchant credit card processing provided through a third party vendor, night depository, and coin and currency handling.


Bar Harbor Trust Services


Trust Services is a Maine chartered non-depository trust company and a wholly-owned subsidiary of the Bank. Trust Services provides a comprehensive array of trust and investment management services to individuals, businesses, not-for-profit organizations, and municipalities.


Bar Harbor Trust Services serves asis a Maine-chartered trust company, and Charter Trust is a New Hampshire-chartered trust company that was obtained through the Lake Sunapee Bank Group acquisition. As a New Hampshire-chartered trust company, Charter Trust is subject to New Hampshire laws applicable to trust companies and fiduciaries. Trust management services include trustee of both living trusts and trusts under wills, including revocable, irrevocable, charitable remainder and testamentary trusts, and in this capacity holds, accounts for and manages financial assets, real estate and special assets. Trust Services offers custody, estate settlement, and fiduciary tax services.


The staff includes credentialed investment and trust professionals with extensive experience. At December 31, 2017 and 2016, Trust Services served 702 client accounts, withtrust management services had total assets under management of $1.8 billion and assets held in custody amounting to $402.8 million and $21.9$403 million, respectively.


Market Competition


Maine

PERSONNEL

As of December 31, 2017, the Company had 423 full time equivalent employee positions compared to 186 full time equivalents at December 31, 2016. The Company competes principally in downeast, midcoast and central Maine, which can generally be characterized as rural areas. The Company considers its primary market areasmajority of the increase is due to be Hancock, Knox, Washington, Kennebec and Sagadahoc counties, each in the state of Maine. According to the 2015 Census Bureau Report estimate, the population of these five counties was 54,659, 39,855, 31,625, 119,980 and 35,149, respectively, representing a combined population of approximately 281,268. The economies in these counties are based primarily on tourism, healthcare, fishing and lobstering, agriculture, state government, and small local businesses, but are also supported by a large contingent of retirees. Major competitors in these market areas include local independent banks, local branches of large regional bank affiliates, thrift institutions, savings and loan institutions, mortgage companies, and credit unions. Other competitors in the Company’s primary market area include financing affiliates of consumer durable goods manufacturers, insurance companies, brokerage firms, investment advisors, and other non-bank financial service providers.


New Hampshire and Vermont

With the acquisition of Lake Sunapee Bank Group our market area now extends into certain regions of New Hampshire and Vermont.  The New Hampshire market extends from the southern New Hampshire/Massachusetts border-city of Nashua to the north through central and western New Hampshire and central Vermont. It is concentratedthat closed in the counties of Hillsborough, Grafton, Merrimack, Sullivan and Cheshire in south, central and western New Hampshire, and the counties of Rutland, Windsor and Orange in central Vermont.


There are several distinct regions within our market area. The first region is centered in Nashua, New Hampshire, the second largest city in the three northern New England states of New Hampshire, Maine and Vermont. Nashua’s downtown is a regional commercial, entertainment and dining destination. The city, bordering Massachusetts to the south, enjoys a vibrant high-tech industry and a robust retail industry due in part to New Hampshire’s absence of a sales tax. The Upper Valley region is located in the west-central area of New Hampshire, and includes the towns of Lebanon, a commerce and manufacturing center, home to Dartmouth-Hitchcock Medical Center, New Hampshire’s only academic medical center, and Hanover, home of Dartmouth College. The Lake Sunapee region is a popular year-round recreation and resort area that includes both Lake Sunapee and Mount Sunapee.


The Monadnock region, in southwestern New Hampshire, is named after Mount Monadnock, the major geographic landmark in the region, and consists of Cheshire, southern Sullivan and western Hillsborough counties. Rutland, Windsor and Orange counties are located in central Vermont. This region is home to many attractions, including Killington Mountain, Okemo Resort, and the city of Rutland. Popular vacation destinations in this region include Woodstock, Brandon, Ludlow and Quechee.




8



Like most financial institutions in the United States, the Company competes with an ever-increasing array of financial service providers. As the national economy moves further towards a concentration of service companies, competitive pressures will mount.


January 2017. The Company has generally been ablealso augmented the staff with targeted hires to compete effectively with other financial institutionsdeepen the overall employee skill set. The Company’s employees are not represented by emphasizing quality customer service, making decisions ata collective bargaining unit.


SUBSIDIARY ACTIVITIES

The Company wholly owns one consolidated bank subsidiary, which during 2017 operated under two business names: Bar Harbor Bank and Trust, and Lake Sunapee Bank, a division of Bar Harbor Bank & Trust. The Company also owns all the local level, maintaining long-term customer relationships, building customer loyalty,common stock of two Connecticut statutory trusts. These capital trusts are unconsolidated and providing products and services designedtheir only material asset in total is a $20.0 million trust preferred security related to address the specific needs of customers; however, no assurance can be given that the Company will continue to be able to compete effectively with other financial institutionsjunior subordinated debentures reported in the future.


No part of the Company’s business is materially dependent upon one, or a few customers, or upon a particular industry segment, the loss of which would have a material adverse impact on the operations of the Company.

consolidated financial statements.


Management and Employees

REGULATION AND SUPERVISION

The Company has two principal executive officers: Curtis C. Simard, President and Chief Executive Officer, and Josephine Iannelli, Executive Vice President, Chief Financial Officer and Treasurer.

For the quarter ended December 31, 2016, the Bank employed 172 full-time equivalent employees, Trust Services employed 11 full-time equivalent employees, and the Company employed 3 full-time equivalent employees, representing a full-time equivalent complement of 186employees of the Company. None of the employees are represented by collective bargaining agreements.


The Company’s management believes employee relations are good.


Supervision and Regulation


General

Banking is a complex, highly regulated industry. Consequently, the performance of the Company and the Bank can be affected not only by management decisions and general and local economic conditions, but also by the statutes enacted by, and the regulations and policies of, various governmental regulatory authorities. These authorities include, but are not limited to, the Federal Reserve Board, the Maine Bureau of Financial Institutions ("BFI"), the Internal Revenue Service, the Consumer Financial Protection Bureau (the “CFPB”) and state taxing authorities. The effect of these statutes, regulations and policies and any changes to any of them can be significant and cannot be predicted.

The primary goals of the bank regulatory scheme are to maintain a safe and sound banking system and to facilitate the conduct of sound monetary policy. In furtherance of these goals, the U.S. Congress and the State of Maine have created several largely autonomous regulatory agencies that oversee, and have enacted numerous laws that govern banks, bank holding companies and the banking industry. The system of supervision and regulation applicable to the Company and the Bank establishes a comprehensive framework for the entities’ respective operations and is intended primarily for the protection of the Bank’s depositors and the public, rather than the stockholders and creditors. The following summarizes some of the materially relevant laws, rules and regulations governing banks and bank holding companies, including the Company and the Bank, but does not purport to be a complete summary of all applicable laws, rules and regulations governing banks and bank holding companies or the Company or the Bank. The descriptions are qualified in their entirety by reference to the specific statutes, regulations and policies discussed. Any change in applicable laws, regulations or regulatory policies may have a material effect on our businesses, operations and prospects. We are unable to predict the nature or extent of the



9



effects that economic controls or new federal or state legislation may have on our business and earnings in the future.

Regulatory Agencies

Bar Harbor Bankshares is a legal entity separate and distinct from its first tierfirst-tier bank subsidiary, Bar Harbor Bank & Trust and its second tier subsidiary,second-tier subsidiaries, Bar Harbor Trust Services.Services and Charter Trust Company. As a bank holding company, the Company is regulated under the Bank Holding Company Act (“BHC”) and is subject to inspection, examination and supervision by the Board of Governors of the Federal Reserve System, or the Federal Reserve Board. The Company is also under the jurisdiction of the SEC and is subject to the disclosure and regulatory requirements of the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934, as amended (“Exchange Act”). The Company’s common stock is listed on Thethe NYSE MKT (“NYSE”)American exchange under the trading symbol “BHB,” and is subject to the rules of NYSE for listed companies.


As a Maine charteredMaine-chartered financial institution, Bar Harbor Bank & Trust is subject to supervision, periodic examination, and regulation by the BFIBureau of Financial Institutions ("BFI") as its chartering authority and the FDIC as its primary federal regulator.regulator. The prior approval of the BureauBFI and the FDIC is required, among other things, for the Bank to establish or relocate an additional branch office, assume deposits, or engage in any merger, consolidation, purchase or sale of all or substantially all of the assets of any bank.


Bank Holding Company Regulations Applicable to the Company

The BHC Act and other federal laws subject bank holding companies to particular restrictions on the types of activities in which they may engage, and to a range of supervisory requirements and activities, including regulatory enforcement actions for violations of laws and regulations.


Permitted Activities:
Generally, bank holding companies are prohibited under the BHC Act from engaging in or acquiring direct or indirect control of more than 5% of the voting shares of any company engaged in any activity other than (i) banking or managing or controlling banks or (ii) an activity that the Federal Reserve Board determines to be so closely related to banking as to be a proper incident to the business of banking. The Federal Reserve Board has the authority to require a bank holding company to terminate an activity or terminate control of or liquidate or divest certain subsidiaries or affiliates when the Federal Reserve Board believes the activity or the control of the subsidiary or affiliate constitutes a significant risk to the financial safety, soundness or stability of any of its banking subsidiaries.


A bank holding company that qualifies and elects to become a financial holding company is permitted to engage in additional activities that are financial in nature or incidental or complementary to financial activity. We currently have no plans to make a financial holding company election.



10




Sound Banking Practices:
Bank holding companies and their non-banking subsidiaries are prohibited from engaging in activities that represent unsafe and unsound banking practices. For example, under certain circumstances the Federal Reserve Board’s Regulation Y requires a holding company to give the Federal Reserve Board prior notice of any redemption or repurchase of its own equity securities if the consideration to be paid, together with the consideration paid for any repurchases in the preceding year, is equal to 10% or more of the company’s consolidated net worth. The Federal Reserve Board may oppose the transaction if it believes that the transaction would constitute an unsafe or unsound practice or would violate a regulation. As another example, a holding company is prohibited from impairing its subsidiary bank’s soundness by causing the bank to make funds available to non-banking subsidiaries or their customers if the Federal Reserve Board believes it not prudent to do so. The Federal Reserve Board has the power to assess civil money penalties for knowing or reckless violations, if the activities leading to a violation caused a substantial loss to a depository institution. Potential penalties are as high as $1,000,000 for each day the activity continues.


Source of Strength:
In accordance with Federal Reserve Board policy, the holding company is expected to act as a source of financial and managerial strength to the Bank. Section 616 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”) codifies the requirement that bank holding companies serve as a source of financial strength to their subsidiary depository institutions. Under this policy, the holding company is expected to commit resources to support its bank subsidiary, including at times when the holding company may not be in a financial position to provide it. As discussed below, the holding company could be required to guarantee the capital plan of the Bank if it becomes undercapitalized for purposes of banking regulations. Any capital loans by a bank holding company to its subsidiary bank are subordinate in right of payment to deposits and to certain other indebtedness of such subsidiary bank. The BHC Act provides that, in the event of a bank holding company’s bankruptcy, any commitment by the bank holding company to a federal bank regulatory agency to maintain the capital of a bank subsidiary will be assumed by the bankruptcy trustee and entitled to priority of payment.


Regulatory agencies have promulgated regulations to increase the capital requirements for bank holding companies to a level that matches those of banking institutions. SeeCapital Adequacy and Prompt Corrective Action.

Action.


Anti-tying Restrictions:
Bank holding companies and affiliates are prohibited from tying the provision of services, such as extensions of credit, to other services offered by a holding company or its affiliates.


Mergers & Acquisitions:
The BHC Act, the Bank Merger Act, the laws of the State of Maine applicable to financial institutions and other federal and state statutes regulate acquisitions of banks and their holding companies. The BHC Act generally limits acquisitions by bank holding companies to banks and companies engaged in activities that the Federal Reserve Board has determined to be so closely related to banking as to be a proper incident thereto. The BHC Act requires every bank holding company to obtain the prior approval of the Federal Reserve before (i) acquiring more than 5% of the voting stock of any bank or other bank holding company, (ii) acquiring all or substantially all of the assets of any bank or bank holding company, or (iii) merging or consolidating with any other bank holding company.


In reviewing applications seeking approval of merger and acquisition transactions, the bank regulatory authorities generally consider, among other things, the competitive effect and public benefits of the transactions, the financial and managerial resources and future prospects of the combined organization (including the capital position of the combined organization), the applicant’s performance record under the Community Reinvestment Act (see the section captioned “Community Reinvestment Act” included elsewhere in this item), fair housing laws and the effectiveness of the subject organizations in combating money laundering activities.


Dividends:
Dividends from the Bank are the Company's principal source of cash revenues. Our earnings and activities are affected by legislation, by regulations and by local legislative and administrative bodies and decisions of courts in the jurisdictions in which we conduct business. These include limitations on the ability of the Bank to pay dividends to

the holding company and our ability to pay dividends to our



11



stockholders. It is the policy of the Federal Reserve Board that bank holding companies should pay cash dividends on common stock only out of income available over the past year and only if prospective earnings retention is consistent with the organization’s expected future needs and financial condition. The policy provides that bank holding companies should not maintain a level of cash dividends that undermines the bank holding company’s ability to serve as a source of strength to its banking subsidiary. Consistent with such policy, a banking organization should have comprehensive policies on dividend payments that clearly articulate the organization’s objectives and approaches for maintaining a strong capital position and achieving the objectives of the policy statement.


The FDIC has the authority to use its enforcement powers to prohibit a bank from paying dividends if, in its opinion, the payment of dividends would constitute an unsafe or unsound practice. Federal law also prohibits the payment of dividends by a bank that will result in the bank failing to meet its applicable capital requirements on a pro forma basis. Maine law requires the approval of the Bureau for any dividend that would reduce a bank's capital below prescribed limits.


Annual Reporting; Examinations:Reporting
The Company is required to file an annual report with the Federal Reserve Board, and such additional information as the Federal Reserve Board may require. The Federal Reserve Board may examine a bank holding company and any of its subsidiaries, and charge the companyCompany for the cost of such an examination.


Imposition of Liability for Undercapitalized Subsidiaries:Subsidiaries: Pursuant to Section 38 of the Federal Deposit Insurance Act (“FDIA”) federal banking agencies are required to take “prompt corrective action” (“PCA”) should an insured depository institution fail to meet certain capital adequacy standards. In the event an institution becomes “undercapitalized,” it must submit a capital restoration plan. The capital restoration plan will not be accepted by the regulators unless each company “having control of” the undercapitalized institution “guarantees” the subsidiary’s compliance with the capital restoration plan until it becomes “adequately capitalized.” For purposes of this statute, the holding company has control of the Bank. Under FDIA, the aggregate liability of all companies controlling a particular institution is limited to the lesser of five percent of the depository institution’s total assets at the time it became undercapitalized or the amount necessary to bring the institution into compliance with applicable capital standards. FDIA grants greater powers to bank regulators in situations where an institution becomes “significantly” or “critically” undercapitalized or fails to submit a capital restoration plan. For example, a bank holding company controlling such an institution can be required to obtain prior Federal Reserve Board approval of proposed distributions,or might be required to consent to a merger or to divest the troubled institution or other affiliates. SeeCapital Adequacy and Prompt Corrective Action.


Transactions with Affiliates:
The holding company and the Bank are considered “affiliates” of each other under the Federal Reserve Act, and transactions between a bank and its affiliates are subject to certain restrictions, under Sections 23A and 23B of the Federal Reserve Act and the Federal Reserve Baord’sBoard's implementing Regulation W. Generally, Sections 23A and 23B: (1) limit the extent to which an insured depository or its subsidiaries may engage in covered transactions (a) with an affiliate (as defined in such sections) to an amount equal to 10% of such institution’s capital and surplus, and (b) with all affiliates, in the aggregate to an amount equal to 20% of such capital and surplus; and (2) require all transactions with an affiliate, whether or not covered transactions, to be on terms substantially the same, or at least as favorable to the institution or subsidiary, as the terms provided or that would be provided to a non-affiliate. The term “covered transaction” includes the making of loans, purchase of assets, issuance of a guarantee and other similar types of transactions.


State Law Restrictions:
As a Maine corporation, the holding company is subject to certain limitations and restrictions under applicable Maine corporate law. For example, state law restrictions in Maine include limitations and restrictions relating to indemnification of directors, distributions and dividends to



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stockholders, transactions involving directors, officers or interested stockholders, maintenance of books, records, and minutes, and observance of certain corporate formalities.



Capital Adequacy and Prompt Corrective Action


In July 2013, the Federal Reserve Board, the FDIC and the Office of the Comptroller of the Currency (the “OCC”) issued final rules (the “Capital Rules”) that established a new capital framework for U.S. banking organizations. The Capital Rules generally implement the Basel Committee on Banking Supervision’s (the “Basel Committee”) December 2010 final capital framework referred to as “Basel III” for strengthening international capital standards. In addition, the Capital Rules implement certain provisions of the Dodd-Frank Act, including the requirements of Section 939A to remove references to credit ratings from the federal banking agencies’ rules. The Capital Rules substantially revised the risk-based capital requirements applicable to bank holding companies and their depository institution subsidiaries. The risk-basedrisk based capital guidelines are designed to make regulatory capital requirements sensitive to differences in risk profiles among banks and bank holding companies, to account for off-balance sheet exposures and to minimize disincentives for holding liquid, low-risk assets.


The Capital Rules: (i) require a capital measure called “Common Equity Tier 1” (“CET1”) and related regulatory capital ratio of CET1 to risk-weighted assets; (ii) specify that Tier 1 capital consists of CET1 and “Additional Tier 1 capital” instruments meeting certain revised requirements; (iii) mandate that most deductions/adjustments to regulatory capital measures be made to CET1 and not to the other components of capital; and (iv) expand the scope of the deductions from and adjustments to capital as compared to existing regulations. The Capital Rules revised the definitions and the components of regulatory capital and impacted the calculation of the numerator in banking institutions’ regulatory capital ratios. The Capital Rules became effective for the Company and the Bank on January 1, 2015, subject to phase-in periods for certain components and other provisions. Under the Capital Rules, for most banking organizations, the most common form of Additional Tier 1 capital is non-cumulative perpetual preferred stock and the most common forms of Tier 2 capital are subordinated notes and a portion of the allocation for loan losses, in each case, subject to the Capital Rules’ specific requirements.

Pursuant to the Capital Rules, the minimum capital ratios are as follows:

•


4.5% CET1 to risk-weighted assets;

•

6.0% Tier 1 capital (that is, CET1 plus Additional Tier 1 capital) to risk-weighted assets;

•

8.0% Total capital (that is, Tier 1 capital plus Tier 2 capital) to risk-weighted assets; and

•

4.0% Tier 1 capital to average consolidated assets as reported on consolidated financial statements (the “leverage ratio”).


The Capital Rules also require a “capital conservation buffer,” composed entirely of CET1, on top of these minimum risk-weighted asset ratios. The capital conservation buffer is designed to absorb losses during periods of economic stress. Banking organizations with a ratio of CET1 to risk-weighted assets above the minimum but below the capital conservation buffer will face constraints on dividends, equity and other capital instrument repurchases and compensation based on the amount of the shortfall. When fully phased-in on January 1, 2019, the capital standards applicable to the Company and the Bank will include an additional capital conservation buffer of 2.5% of CET1, effectively resulting in minimum ratios inclusive of the capital conservation buffer of (i) CET1 to risk-weighted assets of at least 7%, (ii) Tier 1 capital to risk-weighted assets of at least 8.5%, and (iii) Total capital to risk-weighted assets of at least 10.5%.


The Capital Rules provide for a number of deductions from and adjustments to CET1. These include, for example, the requirement that mortgage servicing rights, deferred tax assets arising from temporary differences that could not be realized through net operating loss carrybacks and significant investments in non-consolidated financial entities be deducted from CET1 to the extent that any one such category exceeds 10% of CET1 or all such items, in the aggregate, exceed 15% of CET1.


In addition, under the prior general risk-based capital rules, the effects of accumulated other comprehensive income or loss (“AOCI”) items included in shareholders’ equity (for example, mark-to-market of securities held in the available-for-sale portfolio) under U.S. GAAP are reversed for the purposes of determining regulatory capital ratios. Under the Capital Rules, the effects of certain AOCI items are not excluded; however, banking organizations not using the advanced approaches, including the Company and the Bank, were permitted to make a one-time permanent election to continue to exclude these items in January 2015. The Capital Rules also preclude certain hybrid securities, such as trust preferred securities issued after May 19, 2010, from inclusion in bank holding companies’ Tier 1 capital.



Implementation of the deductions and other adjustments to CET1 began on January 1, 2015 and will beare being phased-in over a 4-year period (beginning at 40% on January 1, 2015 and an additional 20% per year thereafter). The implementation of the capital conservation buffer began on January 1, 2016, at the 0.625% level and increase by 0.625% on each subsequent January 1, until it reaches 2.5% on January 1, 2019.


The Capital Rules prescribe a standardized approach for risk weightings, generally ranging from 0% for U.S. government and agency securities, to 600% for certain equity exposures, and resulting in higher risk weights for a variety of asset classes.


Pursuant to Section 38 of the FDIA, federal banking agencies are required to take “prompt corrective action” should an insured depository institutions fail to meet certain capital adequacy standards. At each successive lower capital category, an insured depository institution is subject to more restrictions and prohibitions, including restrictions on growth, restrictions on interest rates paid on deposits, restrictions or prohibitions on payment of dividends and restrictions on the acceptance of brokered deposits. Furthermore, if an insured depository institution is classified in one of the undercapitalized categories, it is required to submit a capital restoration plan to the appropriate federal banking agency, and the holding company must guarantee the performance of that plan. Based upon its capital levels, a bank that is classified as well-capitalized,well capitalized, adequately capitalized, or undercapitalized may be treated as though it were in the next lower capital category if the appropriate federal banking agency, after notice and opportunity for hearing, determines that an unsafe or unsound condition, or an unsafe or unsound practice, warrants such treatment.


For purposes of PCA, to be: (i) well-capitalized, an insured depository institution must have a total risk basedrisk-based capital ratio of at least 10%, a Tier 1 risk basedrisk-based capital ratio of at least 8%, a CET1 risk basedrisk-based capital ratio of at least 6.5%, and a Tier 1 leverage ratio of at least 5%; (ii) adequately capitalized, an insured depository institution must have a total risk basedrisk-based capital ratio of at least 8%, a Tier 1 risk basedrisk-based capital ratio of at least 6%, a CET1 risk basedrisk-based capital ratio of at least 4.5%, and a Tier 1 leverage ratio of at least 4%; (iii) undercapitalized, an insured depository institution would have a total risk basedrisk-based capital ratio of less than 8%, a Tier 1 risk basedrisk-based capital ratio of less than 6%, a CET1 risk basedrisk-based capital ratio of less than 4.5%, and a Tier 1 leverage ratio of less than 4%; (iv) significantly undercapitalized, an insured depository institution would have a total risk basedrisk-based capital ratio of less than 6%, a Tier 1 risk basedrisk-based capital ratio of less than 4%, a CET1 risk basedrisk-based capital ratio of less than 3%, and a Tier 1 leverage ratio of less than 3%.; and (v) critically undercapitalized, an insured depository institution would have a ratio of tangible equity to total assets that is less than or equal to 2%.


Both the Company and the Bank have always maintained the capital ratios and leverage ratio above the levels to be considered quantitatively well-capitalized. For information regarding the capital ratios and leverage ratio of the Company and the Bank as of December 31, 2016,2017, and December 31, 2015,2016, see the discussion under the section captioned “Capital Resources” included in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Note 14, in the “Notes to Consolidated Financial Statements” included in Item 8, “Financial Statements and Supplementary Data”, elsewhere in this report.


The Volker Rule


Section 619 of the Dodd-Frank Act, commonly known as the Volcker Rule, restricts the ability of banking entities, such as the Company, from: (i) engaging in “proprietary trading” and (ii) investing in or sponsoring certain types of funds (“Covered Funds”), subject to certain limited exceptions. Under the Volcker Rule, a Covered Fund is any issuer that would be an investment company under the Investment Company Act (the “ICA”) but for the exemptions in section 3(c)(1) and 3(c)(7) of the ICA, which includes collateralized loan obligation (“CLO”) and collateralized debt obligation securities. The regulation also provides, among other exemptions, an exemption for CLOs meeting certain requirements. ComplianceThe Bank is in compliance with the Volcker Rule is generally required by July 21, 2017.  The Company expects to be fully compliant with the Volcker Rule by July 21, 2017.

these rules.



Significant Banking Regulations Applicable to the Bank


Deposit Insurance:Insurance
The Bank’s deposit accounts are fully insured by the DIF of the FDIC up to the deposit insurance limit of $250,000 per depositor, per FDIC insured institution, and per ownership category, all in accordance with applicable laws and regulations.


The FDIC uses a risk-based assessment system that imposes insurance premiums based upon a risk matrix that accounts for a bank's capital level and supervisory rating (CAMELS rating). The risk matrix uses different risk categories distinguished by capital levels and supervisory ratings. The base for deposit insurance assessments is consolidated average assets less average tangible equity. Assessment rates are calculated using formulas that take into account the risk of the institution being assessed. The FDIC may increase or decrease the assessment rate schedule in order to manage the DIF to prescribed statutory target levels. An increase in the risk category for the Bank or in the assessment rates could have an adverse effect on the Bank’s and consequently the Company’s earnings. The FDIC may terminate deposit insurance if it determines the institution involved has engaged in or is engaging in unsafe or unsound banking practices, is in an unsafe or unsound condition, or has violated applicable laws, regulations or orders.


In addition to deposit insurance assessments, the FDIA provides for additional assessments to be imposed on insured depository institutions to pay for the cost of Financing Corporation (“FICO”) funding. The FICO is a mixed-ownership government corporation established by the Competitive Equality Banking Act of 1987, whose sole purpose was to function as a financing vehicle for the now defunct Federal Savings & Loan Insurance Corporation. The FICO assessments are adjusted quarterly to reflect changes in the assessment base of the DIF and do not vary depending upon a depository institution’s capitalization or supervisory evaluation. The current annualized assessment rate is approximately six basis points and the rate is adjusted quarterly. These assessments will continue until the FICO bonds mature in 2019.


Depositor Preference:
The FDIA provides that, in the event of the “liquidation or other resolution” of an insured depository institution, the claims of depositors of the institution, including the claims of the FDIC as subrogee of insured depositors, and certain claims for administrative expenses of the FDIC as a receiver, will have priority over other general unsecured claims against the institution. If an insured depository institution fails, insured and uninsured depositors, along with the FDIC, will have priority in payment ahead of unsecured, non-deposit creditors, including the parent bank holding company, with respect to any extensions of credit they have made to such insured depository institution.


Reserve Requirements:
Federal Reserve Board regulations require insured depository institutions to maintain non-interest earning reserves against their transaction accounts (primary interest-bearing and regular checking accounts). The Bank’s required reserves can be in the form of vault cash. If vault cash does not fully satisfy the required reserves, in the form of a balance maintained with the Federal Reserve Bank of Boston (the “FRB Boston”). Federal Reserve Board regulations required for 20162017 that reserves be maintained against aggregate transaction accounts, except for transaction accounts which are exempt up to $15.2$15.5 million. Transaction accounts greater than $15.2$15.5 million up to and including $110.2$115.1 million have a reserve requirement of 3%. A 10% reserve ratio will be assessed on transaction accounts in excess of $110.2$115.1 million. The Federal Reserve Board makes annual adjustments to the tiered reserves. The Bank is in compliance with these reserve requirements.


Consumer Financial Protection:
The Company is subject to a number of federal and state consumer protection laws that govern its relationship with its customers. These laws include the Equal Credit Opportunity Act, the Fair Credit Reporting Act, the Truth in Lending Act, the Truth in Savings Act, the Electronic Fund Transfer Act, the Expedited Funds Availability Act, the Home Mortgage Disclosure Act, the Fair Housing Act, the Real Estate Settlement Procedures Act, the Fair Debt Collection Practices Act, the Right to Financial Privacy Act, the Service Members Civil Relief Act and these laws’ respective state-lawstate law counterparts, as well as state usury laws and laws regarding unfair and deceptive acts and practices. These and other federal laws, among other things, require disclosures of the cost of credit and terms of deposit accounts,

provide substantive consumer rights, prohibit discrimination in credit transactions, regulate the use of credit report information, provide financial privacy protections, prohibit unfair, deceptive and abusive practices, restrict the Bank's ability to raise interest rates and subject the Bank to substantial regulatory oversight. Violations of applicable consumer protection laws can result in significant potential liability from litigation brought by customers, including actual damages, restitution and attorneys’ fees.


Further, the CFPB has broad rulemaking authority for a wide range of consumer financial laws that apply to all banks, including, among other things, the authority to prohibit “unfair, deceptive or abusive” acts and practices. Abusive acts or practices are defined as those that materially interfere with a consumer’s ability to understand a term or condition of a consumer financial product or service or take unreasonable advantage of a consumer’s: (i) lack of financial savvy,understanding on the part of the consumer of the material risks, costs, or conditions of the product or service, (ii) inability of the consumer to protect himselfits interests in the selectionselecting or use ofusing a consumer financial productsproduct or services,service, or (iii) reasonable reliance on a covered entity to act in the consumer’s interests.


Neither the Dodd-Frank Act nor the individual consumer financial protection laws prevent states from adopting stricter consumer protection standards.




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Brokered Deposit Restrictions:
Under FDICIA, banks may be restricted in their ability to accept brokered deposits, depending on their classification. “Well-capitalized” institutions are permitted to accept brokered deposits, but all banks that are not well-capitalized could be restricted from accepting such deposits. The Bank is currently well-capitalized adand not restricted from accepting brokered deposits.


Community Reinvestment Act:
The Community Reinvestment Act of 1977 (“CRA”), requires depository institutions to assist in meeting the credit needs of their market areas consistent with safe and sound banking practice. Under the CRA, each depository institution is required to help meet the credit needs of its market areas by, among other things, providing credit to low- and moderate-income individuals and communities. These factors are also considered in evaluating mergers, acquisitions and applications to open a branch or facility. The applicable federal regulators regularly conduct CRA examinations to assess the performance of financial institutions and assign one of four ratings to the institution’s records of meeting the credit needs of its community. During its last examination, a rating of “satisfactory”was received by the Bank.


Insider Credit Transactions:
Section 22(h) of the FRA and its implementing Regulation O restricts loans to directors, executive officers, and principal stockholders (“insiders”). Under Section 22(h), loans to insiders and their related interests may not exceed, together with all other outstanding loans to such persons and affiliated entities, the institution’s total capital and surplus. Loans to insiders above specified amounts must receive the prior approval of the board of directors. Further, under Section 22(h) of the FRA, loans to directors, executive officers and principal stockholders must be made on terms substantially the same as offered in comparable transactions to other persons, except that such insiders may receive preferential loans made under a benefit or compensation program that is widely available to the bank’s employees and does not give preference to the insider over the employees. Section 22(g) of the FRA places additional limitations on loans to executive officers. A violation of these restrictions may result in the assessment of substantial civil monetary penalties on the affected bank or any officer, director, employee, agent or other person participating in the conduct of the affairs of that bank, the imposition of a cease and desist order, and other regulatory sanctions.

SAFETY AND SOUNDESS:


Safety and Soundness
Under FDIA, each federal banking agency has prescribed, by regulation, non-capital safety and soundness standards for institutions under its authority. These standards cover internal controls, information and internal audit systems, loan documentation, credit underwriting, interest rate exposure, asset growth, compensation, fees and benefits, such other operational and managerial standards as the agency determines to be appropriate, and standards for asset quality, earnings and stock valuation. An institution which fails to meet these standards must develop a plan acceptable to the agency, specifying the steps that the institution will take to meet the standards. Failure to submit or implement such a plan may subject the institution to regulatory sanctions.


Examinations:
The Bank is examined from time-to-time by its primary federal banking regulator, the FDIC, and the Maine Bureau of Financial Institutions (“BFI”).

BFI.



Financial Privacy:
Section V of the Gramm-Leach-Bliley Act ("GLBA") and its implementing regulations require all financial institutions, including the Company and the Bank, to adopt privacy policies, restrict the sharing of nonpublic customer data with nonaffiliated parties at the customer’s request, limit the reuse of certain consumer information received from nonaffiliated financial institutions, and establish procedures and practices to protect customer data from unauthorized access. In addition, the Fair Credit Reporting Act (“FCRA”), as amended by the Fair and Accurate Credit Transactions Act of 2003 (“FACT(the "FACT Act”), includes many provisions affecting the Company, Bank, and/or their affiliates, including provisions concerning obtaining consumer reports, furnishing information to consumer reporting agencies, maintaining a program to prevent identity theft, sharing of certain information among affiliated companies, and other provisions. The FACT Act requires persons subject to FCRA to notify their customers if they report negative information about them to a credit bureau or if they are granted credit on terms less favorable than those generally available. The CFPB and the Federal Trade Commission (“FTC”) have extensive rulemaking authority under the FACT Act, and the Company and the Bank are subject to the rules that have been promulgated under the FACT Act, including rules requiring financial institutions with covered accounts (e.g. consumer bank accounts and loans) to develop, implement, and administer an identity theft protection program, as well as rules regarding limitations on affiliate marketing and implementation of programs to identify, detect and mitigate certain identity theft red flags. The Company has developed policies and procedures for itself and its subsidiaries, including the Bank, and believes it is in compliance with all privacy, information sharing, and notification provisions of the GLB ActGLBA and the FACT Act. The Bank is also subject to data security standards, privacy and data breach notice requirements, primarily those issued by the FDIC.


Anti-Money Laundering Initiatives and the USA Patriot Act:
A major focus of governmental policy on financial institutions over the last decade has been combating money laundering and terrorist financing. The USA PATRIOT Act of 2001 (“USA Patriot Act”), substantially broadened the scope of United States anti-money laundering laws and regulations by imposing significant new compliance and due diligence obligations, creating new crimes and penalties and expanding the extra-territorial



14



jurisdiction of the United States. The U.S. Treasury Department has issued a number of regulations that apply various requirements of the USA Patriot Act to financial institutions such as the Bank. These regulations impose obligations on financial institutions to maintain appropriate policies, procedures and controls to detect, prevent and report money laundering and terrorist financing and to verify the identities of their customers. Financial institutions are also prohibited from entering into specified financial transactions and account relationships and must use enhanced due diligence procedures in their dealings with certain types of high-risk customers and implement a written customer identification program. Financial institutions must take certain steps to assist government agencies in detecting and preventing money laundering and report certain types of suspicious transactions. Regulatory authorities routinely examine financial institutions for compliance with these obligations, and failure of a financial institution to maintain and implement adequate programs to combat money laundering and terrorist financing, or to comply with all of the relevant laws or regulations, can have serious legal and reputational consequences for the institution.


Office of Foreign Assets Control Regulation:
The United States has imposed economic sanctions that affect transactions with designated foreign countries, nationals and others. These are typically known as the “OFAC” rules based on their administration by the U.S. Treasury Department Office of Foreign Assets Control (“OFAC”). The OFAC-administered sanctions targeting countries take many different forms. Generally, however, they contain one or more of the following elements: (i) restrictions on trade with or investment in a sanctioned country, including prohibitions against direct or indirect imports from and exports to a sanctioned country and prohibitions on “U.S. persons” engaging in financial transactions relating to making investments in, or providing investment-related advice or assistance to, a sanctioned country; and (ii) a blocking of assets in which the government or specially designated nationals of the sanctioned country have an interest, by prohibiting transfers of property subject to U.S. jurisdiction (including property in the possession or control of U.S. persons). Blocked assets (e.g., property and bank deposits) cannot be paid out, withdrawn, set off or transferred in any manner without a license from OFAC. The Company is responsible for, among other things, blocking accounts of, and transactions with, such targets and countries, prohibiting unlicensed trade and financial transactions with them and

reporting blocked transactions after their occurrence. Failure to comply with these sanctions could have serious legal and reputational consequences.


Other Laws and Regulations:
The Company is not only subject to federal laws applicable to it, it is also subject to the rules and regulations of the various federal agencies charged with the responsibility of implementing these federal laws.


Guidance on Sound Compensation Policies

The Dodd-Frank Act requires publicly traded companies to give stockholders a non-binding vote on executive compensation at their first annual meeting taking place six months after the date of enactment and at least every three years thereafter and on so-called “golden parachute” payments in connection with approvals of mergers and acquisitions.


The Dodd-Frank Act also requires the federal banking agencies and the SEC to establish joint regulations or guidelines prohibiting incentive-based payment arrangements at specified regulated entities with at least $1 billion in total consolidated assets that encourage inappropriate risks by providing an executive officer, employee, director or principal shareholder with excessive compensation, fees, or benefits that could lead to material financial loss to the entity. The federal banking agencies and the SEC most recently proposed such regulations in 2016, but the regulations have not yet been finalized. If the regulations are adopted in the form initially proposed, they will restrict the manner in which executive compensation is structured.


Changing Regulatory Structure and Future Legislation and Regulation

Congress may enact further legislation that affects the regulation of the financial services industry, and the Maine legislature may enact further legislation affecting the regulation of financial institutions chartered by the State of Maine. Federal and state regulatory agencies also periodically propose and adopt changes to their regulations or change the manner in which existing regulations are applied. The Company cannot predict the substance or impact of pending or future legislation or regulations, or the application thereof, although enactment of the proposed legislation could impact the regulatory structure under which the Company operates and may significantly increase costs, impede the efficiency of internal business processes, require an increase in regulatory capital, require modifications to the Company’s business strategy, and limit the Company’s ability to pursue business opportunities in an efficient manner. A change in statutes, regulations or regulatory policies applicable to the Company or any of its subsidiaries could have a material effect on its business.


Monetary Policy and Economic Environment


The earnings of the Company are significantly affected by the monetary and fiscal policies of governmental authorities, including the Federal Reserve Board. Among the instruments of monetary policy used by the Federal Reserve Board to implement these objectives are open-market operations in U.S. Government securities and federal funds, changes in the discount rate on member bank borrowings, and changes in reserve requirements against member bank deposits. These instruments of monetary policy are used in varying combinations to influence the overall level of bank loans, investments, and deposits, and the interest rates charged on loans and paid for deposits. The Federal Reserve Board frequently used these instruments of monetary policy, especially its open-market operations and the discount rate, to influence the level of interest rates and to affect the strength of the economy, the level of inflation, or the price of the dollar in foreign exchange markets. The monetary policies of the Federal Reserve Board have had a significant effect on the operating results of banking institutions in the past and are expected to continue to do so in the future. It is not possible to predict the nature of future changes in monetary and fiscal policies, or the effect which they may have on the Company’s business and earnings.


Financial Information About Industry Segments


The information required under this item is included in the Company’s financial statements, which appear in Part II, Item 8, Note 1 of this Annual Report on Form 10-K, and is incorporated herein by cross reference thereto.


Availability of Information – Company Website


The Company maintains an Internet website atwww.bhbt.com. At this website, our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and proxy statement on Schedule 14A and amendments to such reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act are available, free of charge, as soon as reasonably practicable after such forms are electronically filed with, or furnished to, the SEC. The public may read and copy any materials we file with the SEC at the SEC’s Public Reference Room, located at 100 F Street, NE, Washington, D.C. 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at



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1-800-SEC-0330. The SEC also maintains an Internet website at www.sec.gov that contains reports, proxy, and information statements, and other information regarding issuers that file electronically with the SEC. In addition, the Company makes available, free of charge, its press releases and Code of Ethics through the Company’s Investor Relations page. Information on our website is not incorporated by reference into this document and should not be considered part of this Report.


ITEM 1A. RISK FACTORS


An investment in our common stockthe Company involves risk, some of which, including market, liquidity, credit, operational, legal, compliance, reputational and strategic risks, could be substantial and is subject to risks inherent toin our business. The material risks and uncertaintiesThis risk also includes the possibility that management believes affect us are described below. Before making an investment decision, you should carefully consider the risks and uncertainties described below together with all of the other information included or incorporated by reference in this Report. The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties that management is not aware of or focused on or that management currently deems immaterial may also impair our business operations. This Report is qualified in its entirety by these risk factors.


If any of the following risks actually occurs, our financial condition, results of operations, or cash flow could be materially and adversely affected. If this were to happen, the value of our common stockthe investment could decline significantly,decrease considerably, and youdividends or other distributions concerning the investment could lose allbe reduced or part of your investment.


Changes in the general economy or the financial markets could adverselyaffect our financial performance.


We provide traditional commercial, retail and mortgage banking services, as well as other financial services including wealth management and insurance brokerage services.  Downturns in the United States or global economies or financial markets could adversely affect the demand for, or the availability of, loans and other products and services offered by us.  The business environment in the U.S. has experienced volatility in recent years and may continue to do so for the foreseeable future. There can be no assuranceeliminated. Discussed below are risk factors that economic conditions will not worsen.  Difficult economic conditions could adversely affect our business,financial results and condition, as well as the value of, operations and financial condition.




Changesreturn on investment in economic conditions ofthe Company.


Deterioration in local markets where conduct business couldeconomies or real estate market may adversely affect our operations.


Maine

The Company’s success is dependent onfinancial performance.

We serve individuals and businesses located in the local economies of downeast, midcoast and central regions of Maine, as a significant portion of our loan portfolio is concentrated among borrowersthe Cheshire, Grafton, Hillsborough, Merrimack and Sullivan counties in these markets.  Furthermore, because acentral and western New Hampshire, and the Rutland, Windsor and Orange counties in central Vermont. A substantial portion of our loan portfolio is secured by real estate in these areas and the value of the associated collateral is also subject to regionallocal real estate market conditions.


A number Furthermore, many of our customers in the hospitality and other customersindustry rely upon a high number of visits from tourists to vacation destinations and vacationers to Acadia National Park as a significant part of their businesses. Prolonged interruptions or shutdowns in the operation of tourist destination sitesattraction within our market areas could have a material adverse effect on our business and results of operations.


New Hampshire and Vermont

With the acquisition of Lake Sunapee Bank Group, we are now exposed to the local market conditions and economies of Cheshire, Grafton, Hillsborough, Merrimack and Sullivan counties in central and western New Hampshire and in Rutland, Windsor and Orange counties in central Vermont. Future growth

opportunities dependmarkets. Our success is largely dependent on the economic conditions, including employment levels, population growth, income levels, savings trends and stability of the regional economy and our ability to expand ourgovernment policies in those market area.areas. A downturn in the local economyeconomies may limitadversely affect collateral values, sources of funds, availableand demand for deposit and may negatively affect borrowers’ ability to repay their loans on a timely basis, bothour products, all of which could have ana negative impact on our profitabilityresults of operations, financial condition and business.

business expansion.


Unsuccessful acquisition

Changes in the general economy or the financial markets could adversely affect our financial performance.
The outlook for the U.S. economy remains uncertain amid concerns about short- and geographic expansionlong-term interest rates, debt and equity capital markets and general financial market conditions. A deterioration of general economic conditions could negativelyadversely affect the markets of our local economies and have a negative impact earnings


The Company recently expanded into the New Hampshireon our results of operations and Vermont markets with the acquisition of Lake Sunapee Bank Group.  Successfinancial condition. Deterioration or defaults made by issuers of the acquisition is dependent on the integrationunderlying collateral of the combined company infrastructure, culture, and acceptance of customer within these new markets.  Profitability is dependent on management’sour investment securities may cause additional credit-related other-than-temporary impairment charges to our income statement. Our ability to maintain employee and customer relationships, improve operational efficiencies and grow profitsborrow from other financial institutions or to access the debt or equity capital markets on favorable terms or at a rate that exceedsall could be adversely affected by disruptions in the growth of expenses.  To the extent that the Company acquirescapital markets or other companies, its business may be negatively impactedevents, including actions by certain risks inherent with such acquisitions.

rating agencies or deteriorating investor expectations.


Interest rate volatility could significantly reduce the Company’s profitability.


The Bank’s earnings and cash flows are largely dependent upon its net interest income. Net interest income is the difference between interest income earned on interest-bearing assets such as loans and securities and interest expense paid on interest-bearing liabilities such as deposits and borrowed funds. Interest rates are highly sensitive to many factors that are beyond the Company’s control, including general economic conditions, demand for loans, securities and deposits, and policies of various governmental and regulatory agencies and, in particular, the Board of Governors of the Federal Reserve System. Changes in monetary policy, including changes in interest rates, or the slope of the yield curve could influence not only the interest we receive on loans and securities and the amount of interest we pay on deposits and borrowings, but such changes could also affect (i) our ability to originate loans and obtain deposits, (ii) the fair value of our financial assets and liabilities, and (iii) the average duration of our loans and securities that are collateralized by mortgages. If the interest rates paid on deposits and other borrowings increase at a faster rate than the interest rates received on loans and other investments, our net interest income, and therefore



16



earnings, could be adversely affected. Earnings could also be adversely affected if the interest rates received on loans and other investments fall more quickly than the interest rates paid on deposits and other borrowings. If interest rates decline, the Bank’s higher-rate loans and investments may be subject to prepayment risk, which could negatively impact its net interest margin. Conversely, if interest rates increase, the Bank’s loans and investment securities may be subject to extension risk, which could negatively impact its net interest margin as well.


Loss of deposits or a change in deposit mix could increase our cost of funding.
Deposits are a low cost and stable source of funding. We compete with banks and other financial institutions for deposits. Funding costs may increase if we lose deposits and are forced to replace them with more expensive sources of funding, if customers shift their deposits into higher cost products or if we need to raise interest rates to avoid losing deposits. Higher funding costs reduce our net interest margin, net interest income and net income.


Wholesale funding sources may prove insufficient to replace deposits at maturity and support our operations and future growth.
The Company and banking subsidiaries must maintain sufficient funds to respond to the needs of depositors and borrowers. To manage liquidity, the Company draws upon a number of funding sources in addition to core deposit growth and repayments and maturities of loans and investments. These sources include Federal Home Loan Bank advances, proceeds from the sale of investments and loans, and liquidity resources at the holding company. Our ability to manage liquidity will be severely constrained if we are unable to maintain access to funding or if adequate financing is not available to accommodate future growth at acceptable costs. In addition, if we are required to rely more heavily on more expensive funding sources to support future growth, our revenues may not increase proportionately to cover our costs. In this case, operating margins and profitability would be adversely affected. Turbulence in the capital and credit markets may adversely affect our liquidity and financial condition and the willingness of certain counterparties and customers to do business with us.

High concentrations of commercial loans may increase exposure to credit loss upon borrower default  


default.

As of December 31, 2016,2017, approximately 49% of the Banks’s loan portfolio consisted of commercial real estate, commercial and industrial, construction and agricultural loans. Commercial loan portfolio concentration generally exposes lenders to greater risk of delinquency and loss than residential real estate loans because repayment of the loans often depends on the successful operation and income streams from the property.  Additionally, commercial loans typically involve larger balances to single borrowers or groups of related borrowers compared to residential real estate loans. Because the Bank’s loan portfolio contains a significant number of large commercial loans, the deterioration of one or a few of these loans could cause a significant increase in nonperforming loans, provision for loan losses,  and/or an increase in loan charge-offs, all of which could adversely affect the financial condition and results of operations of the Company.


Greater than anticipated credit losses in the loan portfolios may adversely affect earnings.


Credit losses are inherent in the business of making loans and could have a material adverse effect on our operating results. We make various assumptions and judgments about the collectability of our loan portfolio and provide an allowance for loan losses based on a number of factors. We evaluate the allowance for loan losses on a periodic basis using current information, including the quality of the loan portfolio, economic conditions, and the value of the underlying collateral and the level of non-accrual loans.  Although we believe the allowance for loan losses is appropriate to absorb probable losses in our loan portfolio, this allowance may not be adequate. Increases in the allowance will result in an expense for the period, thereby reducing our reported net income.


Strong competition within our markets may significantly impact the Company’s profitability.


The Company competes with an ever-increasing array of financial service providers. See the section entitled “Competition” of Item 1 of this Annual Report on Form 10-K for additional information about our competitors. Competition from nationwide banks, as well as local institutions, continues to mount in our markets.


Regional, national and international competitors have far greater assets and capitalization than we do and have greater access to capital markets and can offer a broader array of financial services than we can. For example, consumers can maintain funds that would have historically been held as bank deposits in brokerage accounts or mutual funds. Consumers can also complete transactions such as paying bills and/or transferring funds directly without the assistance of banks. The process of eliminating banks as intermediaries, known as “disintermediation,” could result in the loss of fee income, as well as the loss of customer deposits and the related income generated from those deposits. Further, many of our competitors have fewer regulatory constraints and may have lower cost structures. Additionally, due to their size, many competitors may be able to achieve economies of scale and, as a result, may offer a broader range of products and services as well as better pricing for those products and services than we can.


To compete, the Company focuses on quality customer service, making decisions at the local level, maintaining long-term customer relationships, building customer loyalty, and providing products and services designed to address the specific needs of customers. Failure to perform in any of these areas could significantly weaken our competitive position, which could adversely affect the Company’s growth and profitability.




New regulations

Expansion, growth, and acquisitions could restrict residential lending activities.


negatively impact earnings if not successful.

The Consumer Financial Protection Bureau ("CFPB") issued a rule designed to clarify for lenders how they can avoid monetary damages underCompany may grow organically both by geographic expansion and through business line expansion, as well as through acquisitions. Success of these activities depends on the Dodd-Frank Act, which would hold lenders accountable for ensuring a borrower’sCompany's ability to repay a mortgage. Loans that meet this “qualified mortgage” definition will be presumedcontinue to have complied withmaintain and develop an infrastructure appropriate to support and integrate such growth. Also, success depends on the acceptance by customers in these new markets and, in the case of expansion through acquisitions, success depends on many factors, including the long-term recruitment and retention of key personnel and acquired customer relationships. Profitability depends on whether the income generated in the new ability-to-repay standard. The CFPB’s rulemarkets will offset the increased expenses of operating a larger entity, with more staff, more locations, and more product offerings. Failure to achieve any of these success factors may have a negative impact on qualified mortgages could limit the Banks's ability or desire to make certain typesCompany’s financial condition and results of loans or loans to certain borrowers, or could make it more expensive and/or time consuming to make these loans, which could limit growth or profitability. CFPB rules on other types of consumer lending could similarly affect the cost and profitability of those lending activities.

operations.



17




The Company is subject to extensive government regulation and supervision, which may interfere with our ability to conduct our business and may negatively impact our financial results.


The Company is subject to extensive government regulation and supervision, which may interfere with our ability to conduct our business and may negatively impact our financial results.  

The Bank and certain non-bank subsidiaries are subject to extensive federal and state regulation and supervision. Banking regulations are primarily intended to protect depositors’ funds, the Federal Deposit Insurance Fund and the safety and soundness of the banking system as a whole, not stockholders. These regulations affect the Company’s lending practices, capital structure, investment practices, dividend policy and growth, among other things. Congress and federal regulatory agencies continually review banking laws, regulations and policies for possible changes. Changes to statutes, regulations or regulatory policies, including changes in interpretation or implementation of statutes, regulations or policies, could affect the Company in substantial and unpredictable ways. Such changes could subject the Company to additional costs, limit the types of financial services and products the Company may offer, and/or limit the pricing the Company may charge on certain banking services, among other things. Compliance personnel and resources may increase our costs of operations and adversely impact our earnings.


Failure to comply with laws, regulations or policies could result in sanctions by regulatory agencies, civil money penalties and/or reputation damage, which could have a material adverse effect on our business, financial condition and results of operations. While the Company has policies and procedures designed to prevent any such violations, there can be no assurance that such violations will not occur.



The Company may elect or be compelled to seek additional capital in the future, but capital may not be available when it is needed.


The Company is required by federal and state regulatory authorities to maintain adequate levels of capital to support its operations. In addition, the Company may elect to raise additional capital to support its business or to finance acquisitions, if any, or the Company may otherwise elect to raise additional capital.


The Company’s ability to raise additional capital, if needed, will depend on conditions in the capital markets, economic conditions, and a number of other factors, many of which are outside the Company’s control, and on its financial performance. Accordingly, we cannot be assured of our Company’s ability to raise additional capital if needed or on terms acceptable to us.  If the Company cannot raise additional capital when needed, or on reasonable terms, it may have a material adverse effect on its financial condition and results of operations.






18



The Bank may not be able to meet its cash flow needs on a timely basis at a reasonable cost, and its cost of funds for banking operations may significantly increase as a result of general economic conditions, interest rates, and competitive pressures.


Liquidity is the ability to meet cash flow needs on a timely basis and at a reasonable cost. The liquidity of the Bank is used to make loans and to repay deposit and borrowing liabilities as they become due, or are demanded by customers and creditors. Many factors affect the Bank’s ability to meet liquidity needs, including variations in the markets served by its network of offices, its mix of assets and liabilities, reputation and standing in the marketplace, and general economic conditions.


The Bank’s primary source of funding is retail deposits, gathered throughout its network of banking offices. Wholesale funding sources principally consist of secured borrowing lines from the Federal Home Loan Bank of Boston (the “FHLB”) of which it is a member, secured borrowing lines from the FRB of Boston, and certificates of deposit obtained from the national market. The Bank’s securities and loan portfolios provide a source of contingent liquidity that could be accessed in a reasonable time period through sales.


Significant changes in general economic conditions, market interest rates, competitive pressures or otherwise, could cause the Bank’s deposits to decrease relative to overall banking operations, and it would have to rely more heavily on brokered funds and borrowings in the future, which are typically more expensive than deposits.


Changes in economic conditions, including consumer savings habits and availability or access to the brokered deposit market could potentially have a significant impact on the Bank’s liquidity position, which in turn could materially impact its financial condition, results of operations and cash flows.


The Company is subject to a variety of operational risks, including reputational risk, legal risk, and compliance risk, and the risk of fraud or theft by employees or outsiders, which may adversely affect the Company’s business and results of operations.


The Company is exposed to many types of operational risks, including reputational risk, legal and compliance risk, the risk of fraud or theft by employees or outsiders, and unauthorized transactions by employees or operational errors, including clerical or record-keeping errors or those resulting from faulty or disabled computer or telecommunications systems.


If personal, non-public, confidential, or proprietary information of customers in our possession were to be mishandled or misused, we could suffer significant regulatory consequences, reputational damage, and financial loss.


Because the nature of the financial services business involves a high volume of transactions, certain errors may be repeated or compounded before they are discovered and successfully rectified. The Company’s necessary dependence upon automated systems to record and process transactions and its large transaction volume may further increase the risk that technical flaws or employee tampering or manipulation of those systems will result in losses that are difficult to detect. The Company may also be subject to disruptions



19



of its operating systems arising from events that are wholly or partially beyond its control (i.e., computer viruses or electrical or telecommunications outages, natural disaster, disease pandemics, or other damage to property or physical assets), which may give rise to disruption of service to customers and to financial loss or liability. The Company is further exposed to the risk that its external vendors may be unable to fulfill their contractual obligations (or will be subject to the same risk of fraud or operational errors by their respective employees as we are) and to the risk that our (or our vendors’) business continuity and data security systems prove to be inadequate. The occurrence of any of these risks could result in a diminished ability to operate our business (i.e., by requiring us to expend significant resources to correct the defect), as well as potential liability to clients, reputational damage, and regulatory intervention.



Disruptions to the Company’s information systems and security breaches could adversely affect its business and reputation.


In the ordinary course of business, the Company relies on electronic communications and information systems to conduct its businesses and to store sensitive data, including financial information regarding its customers. The integrity of information systems are under significant threat from cyber-attacks by third parties, including through coordinated attacks sponsored by foreign nations and criminal organizations to disrupt business operations and other compromises to data and systems for political or criminal purposes. The Company employs an in-depth, layered, defense approach that leverages people, processes and technology to manage and maintain cyber security controls. Notwithstanding the strength of our defensive measures, the threat from cyberattacks is severe, attacks are sophisticated and attackers respond rapidly to changes in defensive measures. Cyber security risks may also occur with the Company’s third-party service providers, and may interfere with their ability to fulfill their contractual obligations to us, with additional potential for financial loss or liability that could adversely affect the Company’s financial condition or results of operations. The Company offers its customers the ability to bank remotely and provide other technology basedtechnology-based products and services, which services include the secure transmission of confidential information over the Internet and other remote channels. To the extent that the Company’s customers’ systems are not secure or are otherwise compromised, its network could be vulnerable to unauthorized access, malicious software, phishing schemes and other security breaches. To the extent that the Company’ activities or the activities of its clients or third-party service providers involve the storage and transmission of confidential information, security breaches and malicious software could expose the Company to claims, regulatory scrutiny, litigation and other possible liabilities.


While to date the Company has not experienced a significant compromise, significant data loss or material financial losses related to cyber security attacks, the Company’s systems and those of its clients and third-party service providers are under constant threat and we may experience a significant event in the future. The Company may suffer material financial losses related to these risks in the future or it may be subject to liability for compromises to its client or third-party service provider systems. Any such losses or liabilities could adversely affect the Company’s financial condition or results of operations, and could expose us to reputation risk, the loss of client business, increased operational costs, as well as additional regulatory scrutiny, possible litigation, and related financial liability. These risks also include possible business interruption, including the inability to access critical information and systems.


The Company continually encounters technological change.


The financial services industry is continually undergoing rapid technological change with frequent introductions of new technology-driven products and services. The effective use of technology increases efficiency and enables financial institutions to better serve customers and to reduce costs. The Company’s future success depends, in part, upon its ability to address the needs of its customers by using technology to provide products and services that will satisfy customer demands, as well as to create additional efficiencies in our operations. Many of our larger competitors have substantially greater resources to invest in



20



technological improvements. The Company may not be able to effectively implement new technology-driven products and services or be successful in marketing these products and services to its customers.


The Company is subject to possible claims and litigation pertaining to fiduciary responsibilities.


From time to time, customers make claims and take legal action pertaining to the Company’s performance of its fiduciary responsibilities. Whether customer claims and legal action related to our performance of our fiduciary responsibilities are founded or unfounded, if such claims and legal actions are not resolved in a manner favorable to us, they may result in significant financial liability and/or adversely affect the market perception of our Company and our products and services as well as impact customer demand for our products and services.


Tax law changes

Changes in tax laws and regulations and differences in interpretation of tax laws and regulations may adversely affectimpact our financial statements.
Federal, state, and local tax authorities may change tax laws and regulations, which could result in a decrease or increase to our net deferred tax assets. In December 2017, we recognized a write-down of $4.0 million in net deferred tax assets in connection with the Company’sadoption of the Tax Cuts and Jobs Act of 2017 (the "TCJA"). Federal, state, and local tax authorities may interpret tax laws and regulations differently than we do and challenge tax positions that we have taken on tax returns. This may result in differences in the treatment of revenues, deductions, credits and/or differences in the

timing of these items. The differences in treatment may result in payment of additional taxes, interest or penalties that could have a material adverse effect on our results.

Goodwill from acquisitions could become impaired.
Applicable accounting standards require that the purchase method of accounting be used for all business combinations. Under purchase accounting, if the purchase price of an acquired company exceeds the fair value of the acquired company’s net income, effective tax rate,assets, the excess is carried on the balance sheet as goodwill, by the acquirer. A significant decline in our expected future cash flows, a continuing period of market disruption, market capitalization to book value deterioration, or slower growth rates may require us to record charges in the future related to the impairment of our goodwill. If the Company concludes that a future write-down is necessary, the impact could have an adverse effect on our financial condition and its overall results of operations and financial condition.


The Company’s financial performance is impacted by federal and state tax laws.  The enactment of proposed U.S. tax reforms could materially adversely affect us, including as a result of a reduction in the value of our DTAs upon a reduction in the U.S. corporate income tax rate. We cannot predict if any such proposals will ultimately become law, or, if enacted, what its provisions or that of the regulations promulgated thereunder will be, but they could materially adversely affect our financial position and our results of operations.


The Company’s controls and procedures may fail or be circumvented.


The Company regularly reviews and updates its internal controls, disclosure controls and procedures, and corporate governance policies and procedures. Any system of controls, however well designed and operated, is based in part on certain assumptions and can provide only reasonable, not absolute, assurance that the objectives of the system are met.



21




The Company’s access to funds from subsidiaries may be restricted.


Bar Harbor Bankshares is a separate and distinct legal entity from our Bank and nonbanking subsidiaries. Bar Harbor Bankshares depends on dividends, distributions and other payments from its banking and nonbanking subsidiaries to fund dividend payments on its common stock and to fund all payments on its other obligations. The Company’s subsidiaries are subject to laws that authorize regulatory bodies to block or reduce the flow of funds from those subsidiaries to Bar Harbor Bankshares, which could impede access to funds it needs to make payments on its obligations or dividend payments.


The Company may be unable to attract and retain key personnel.


The Company’s success depends, in large part, on its ability to attract and retain key personnel. Competition for qualified personnel in the financial services industry can be intense and the Company and its subsidiaries may not be able to hire or retain the key personnel that it depends upon for success. In addition, the Bank’s rural geographic marketplace, combined with relatively expensive real estate purchase prices within the area of the Bank’s principal office location in Bar Harbor, Maine, create additional risks for the Company and the Bank’s ability to attract and retain key personnel. The unexpected loss of services of one or more of the our key personnel could have a material adverse impact on our business because of their skills, knowledge of the markets in which we operate, years of industry experience and the difficulty of promptly finding qualified replacement personnel.


A new accounting standard may require us to increase our allowance for loan losses.
The Financial Accounting Standards Board has issued Accounting Standards Update 2016-13, which will be effective for the Company for the first quarter of the year ending December 31, 2020. This standard, often referred to as "CECL" requires companies to recognize an allowance for credit losses using a new current expected credit loss model. The Company is currently evaluating the impact of adopting this standard on our consolidated financial statements. Any increase in our allowance for credit losses or expenses incurred to determine the appropriate level of the allowance for loan losses may have a material adverse effect on our financial condition and results of operations.

The Bank is exposed to risk of environmental liabilities with respect to properties to which it takes title.


In the course of our business, the Bank may own or foreclose and take title to real estate, and could be subject to environmental liabilities with respect to these properties. We may be held liable to a



22



governmental entity or to third parties for property damage, personal injury, investigation and clean-up costs incurred by these parties in connection with environmental contamination, or may be required to investigate or clean up hazardous or toxic substances, or chemical releases at a property. The cost associated with investigation or remediation activities could be substantial. In addition, as the owner or former owner of a contaminated site, we may be subject to common law claims by third parties based on damages and costs resulting from environmental contamination emanating from the property.



Severe weather, natural disasters, acts of war or terrorism, and other external events could significantly impact the Company’s business and the business of its customers.


Severe weather, natural disasters, acts of war or terrorism, and other adverse external events could have a significant impact on our Company’s ability to conduct business. Such events could affect the stability of our borrowers to repay outstanding loans, impair the value of collateral securing loans, cause significant property damage, result in loss of revenue and/or cause us to incur additional expenses. In particular, such events may have a particularly negative impact upon the business of our customers who are engaged in the hospitality and natural resource dependent industries in our market area, which could have a direct negative impact on our Company’s business and results of operations.



ITEM 1B. UNRESOLVED STAFF COMMENTS


None

None.


ITEM 2. PROPERTIES


The Company’s headquartersprincipal executive offices and one branch are in a building owned by the Company located at 82 Main Street, Bar Harbor, Maine, whichMaine. The Company also serves as the main office for the Bank. The Bank completed a substantial renovation of its Bar Harbor facility to better meet its business needsprovides full-banking services at that location in 2016.  


The Bank operates 49 full-service banking officesan additional 46 locations throughout Maine, New Hampshire and Vermont. Locations in Maine include: Bar Harbor, Northeast Harbor, Southwest Harbor, Somesville, Deer Isle, Blue Hill, Ellsworth, Rockland, Topsham, South China, Winter Harbor, Milbridge, Machias,Vermont of which 30 are owned and Lubec. Locations16 are leased. The Company also has two stand-alone drive up windows in New Hampshire include: Andover, Bradford, Claremont, Concord, Enfield, Grantham, Guild, Hanover, Hillsboro, Lebanon, Milford, Nashua, Newbury, New London, Newport, Peterborough, Sunapee and West Lebanon.  Locationsone in Vermont include: Brandon, Pittsford, Quechee, Randolph, Rochester, Royalton, Rutland, South Royalton, West Rutland, Williamstown and Woodstock.  The Bank owns 33 of theseVermont. In addition to banking offices, and leases 16 at prevailing rates.


Anthe Company also has an Operations Center located in Ellsworth, Maine, that houses the Company’s operations and data processing centers. The Bank also leasescenters, as well as leased space in Hampden, Maine which serves as aand Bedford, New Hampshire, where back office support for multiple lines of business and related functions.  


functions is located. In the opinion of management, the physical properties of the Company and the Bank are considered adequate to meet the needs of customers in the communities served. Additional information relating to the Company’s properties is provided in Part II, Item 8, Note 17 of the Consolidated Financial Statements contained in this Annual Report on Form 10-K and incorporated herein by reference.



23




ITEM 3. LEGAL PROCEEDINGS


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


ITEM 4. MINE SAFETY DISCLOSURES


Not applicable

applicable.





PART II




ITEM 5. MARKET FOR REGISTRANT’S COMMON STOCK,EQUITY, RELATED SHAREHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES


Market Information


The common stock of the Company is traded on the NYSE MKT, LLC (“NYSE MKT”),American, under the trading symbol BHB.


On April 22, 2014,February 21, 2017, the Company’sCompany's Board of Directors declared a three-for-two stock split of its common stock, payable as a large stock dividend, whichdividend. The stock split was paid on May 19, 2014 (the “payment date”) to all stockholders of record at the close of business on May 5, 2014 (the “2014 Stock Split”).  All previously reported share and per share data included in public filings subsequent to the payment date have been adjusted to reflect the retroactive effect of this three-for-two stock split.  Refer to Note 2Three-for-two Common Stock Split, of the Consolidated Financial Statements, in this Annual Report on Form 10-K, for further information concerning the 2014 stock split.


On February 21, 2017, the Company announced that its Board of Directors declared a three-for-two split of its common stock payable in the form of a large stock dividend (the “2017 Stock Split”). The 2017 Stock Split is payable March 21, 2017 to the Company’sCompany's common stockholders of record at the close of business on March 7, 2017. Refer to Note 23 Subsequent Events, of the Consolidated Financial Statements in this Annual Report on Form 10-K, for further information concerning the 2017 Stock Split.



The following table sets forth the high and low market prices per share of BHB Common Stock as reported by NYSE MKTAmerican by calendar quarter for each of the last two years:

Year 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
  High Low High Low High Low High Low
2017 $33.41 $26.42 $33.05 $27.72 $31.87 $25.09 $32.48 $26.97
2016 23.13 19.69 24.07 20.53 25.13 22.7 33.25 24.13

 

1st Quarter

2nd Quarter

3rd Quarter

4th Quarter

 

High

Low

High

Low

High

Low

High

Low

2016

$34.70

$29.53

$36.10

$30.80

$37.69

$34.05

$49.87

$36.19

2015

  33.98

  30.03

  37.98

  32.50

  36.35

 28.97

  36.08

  30.00


As of March 10,4, 2017, there were 10,256,44115,446,987 shares of Company common stock, par value $2.00 per share, outstanding and approximately 1,5761,646 Registered Shareholders of record, as obtained through the Company’s transfer agent.  These

Dividends

During 2017, the Company declared and distributed regular cash dividends on its common stock in the aggregate amount of $11.5 million compared with $6.6 million in 2016. The Company's 2017 payout ratio amounted to 44.3% compared with 44.0% in 2016. The total regular cash dividends paid in 2017 amounted to $0.75 per share totals are not adjustedof common stock, compared with $0.73 in 2016, representing an increase of $0.02 per share, or 2.8%.

In the first quarter of 2018, the Company's Board of Directors declared a regular cash dividend of $0.187 per share of common stock.

The Company has a history of paying quarterly dividends on its common stock. However, the Company’s ability to pay such dividends depends on a number of factors, including the Company’s financial condition, earnings, its need for funds and restrictions on the Company’s ability to pay dividends under federal laws and regulations. Therefore, there can be no assurance that dividends on the Company’s common stock will be paid in the future.

For further information, refer to Note 14 - Shareholders' Equity and Earnings Per Common Share of the Consolidated Financial Statements.

Recent Sale of Unregistered Securities and Use of Proceeds from Registered Securities

No unregistered securities were sold by the Company during the years ended December 31, 2017, and 2016.

Purchases of Equity Securities by the Issuer and Affiliated Purchases

Period 
Total number of
shares purchased
Average price
paid per share
Total number of shares
purchased as a part of
publicly announced
plans or programs
Maximum number of
shares that may yet
be purchased under
the plans or programs (1)
October 1-31, 2017—
$—
—
404,706
November 1-30, 2017—
—
—
404,706
December 1-31, 2017—
—
—
404,706
Total—
$—
—
404,706

(1) In August 2008, the Company’s Board of Directors approved a twenty-four month program to repurchase up to 675,000 shares of the Company’s common stock, or approximately 10.2% of the shares then outstanding.  The Company’s Board of Directors authorized the continuance of this program for additional twenty-four month periods in August 2010, 2012 and 2014.  On August 16, 2016, Bar Harbor Bankshares issued a press release announcing the Company’s Board of Directors has approved the continuation of the Company’s existing stock repurchase plan through August 16, 2018.  No other changes were made to the plan. Depending on market conditions and other factors, stock repurchases may be commenced or suspended at any time, or from time to time, without prior notice and may be made in the open market or through privately negotiated transactions. The Company records repurchased shares as treasury stock.


Common Stock Split.  



















Performance Graph


The following graph illustrates the estimated yearly change in value of the Company's cumulative total stockholder return on its common stock for each of the last five years. Total shareholder return is computed by taking the difference between the ending price of the common stock at the end of the previous year and the current year, plus any dividends paid divided by the ending price of the common stock at the end of the previous year. For purposes of comparison, the graph also matches Bar Harbor Bankshares' cumulative 5-Year total shareholder return on common stock with the cumulative total returns of the NYSE MKTAmerican Composite index, the S&P 500 index, and the ABA NASDAQ CommunitySNL Bank index.$1B to $5B Index. The graph tracks the performance of a $100 investment in our common stock and in each index (with the reinvestment of all dividends) from December 31, 20112012 to December 31, 2016.

2017.



  Period Ending
Index 12/31/12 12/31/13 12/31/14 12/31/15 12/31/16 12/31/17
Bar Harbor Bankshares 100.00 122.99 152.73 169.23 240.25 211.29
NYSE American Composite Index 100.00 126.28 134.81 129.29 144.73 171.83
SNL Bank $1B - $5B Index 100.00 145.41 152.04 170.20 244.85 261.04

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ITEM 6. SELECTED FINANCIAL DATA


 

12/11

12/12

12/13

12/14

12/15

12/16

Bar Harbor Bankshares

$100.00

$116.23

$142.94

$177.51

$196.72

$279.28

NYSE MKT Composite

  100.00

  106.15

  115.07

  118.71

  106.60

  117.67

S&P 500

  100.00

  116.00

  153.58

  174.60

  177.01

  198.18

ABA Nasdaq Community Bank Index

  100.00

  115.67

  162.67

  170.61

  185.49

  258.29







Dividends


Common stock dividends paid by the CompanyThe following summary data is based in 2016 and 2015 are summarized below:


 

1st

Quarter

2nd Quarter

3rd Quarter

4th Quarter

 Total

2016

$0.265

$0.270

$0.275

$0.280

$1.090

2015

  0.245

  0.250

  0.255

  0.260

  1.010


During 2016, the Company declared and distributed regular cash dividendspart on its common stock in the aggregate amount of $6,577 compared with $6,040 in 2015. The Company’s 2016 dividend payout ratio amounted to 44.0% compared with 39.9% in 2015. The total regular cash dividends paid in 2016 amounted to $1.09 per share of common stock, compared with $1.01 in 2015, representing an increase of $0.08 per share, or 7.9%.


In the first quarter of 2017, the Company’s Board of Directors declared a regular cash dividend of $0.28 per share of common stock, representing an increase of $0.015 or 5.7% compared with the first quarter of 2016.




25



The Company has a history of paying quarterly dividends on its common stock. However, the Company’s ability to pay such dividends depends on a number of factors, including the Company’s financial condition, earnings, its need for funds and restrictions on the Company’s ability to pay dividends under federal laws and regulations. Therefore, there can be no assurance that dividends on the Company’s common stock will be paid in the future.


For further information, refer to Item 6, Selected Consolidated Financial Data for dividend related ratios and Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, (specifically the “Capital Resources” section).


Recent Sale of Unregistered Securities; Use of Proceeds from Registered Securities


No unregistered securities were sold by the Company during the years ended December 31, 2016, and 2015.


Purchases of Equity Securities by the Issuer and Affiliated Purchasers


There were no purchases of shares of the Company’s common stock made by or on behalf of the Company or any “affiliated purchaser” for the quarter ended December 31, 2016.


Information relating to the Company’s stock repurchase program is provided in Part II, Item 7,Stock Repurchase Plan, contained in this Annual Report on Form 10-K and incorporated herein by reference.













Stock Based Compensation Plans


Information regarding stock-based compensation awards both outstanding and available for future grants as of December 31, 2016, represents stock-based compensation plans approved by shareholders and is presented in the table below. There are no compensation plans under which equity securities of the Company may be issued that have not been approved by shareholders. Additional information is presented in Note 15,Stock-Based Compensation Plans,in the Notes to the Consolidated Financial Statements includedand accompanying notes, and other schedules appearing elsewhere in Part II, Item 8,Financial Statements and Supplementary Data,within this Annual Report on Form 10-K.



Plan Category

Number of securities to be issued upon exercise of outstanding options, warrants and rights, net of forfeits and exercised shares

(a)

Weighted average exercise price of outstanding options, warrants and rights              (b)

Number of securities remaining available

for issuance under equity compensation [(excluding

securities referenced in column (a)]

(c)

Equity compensation plans

      approved by security holders

              157,835

         $26.98

             170,232

Equity compensation plans

     not approved by security holders

                      ---

             N/A

                     ---

Total

              157,835

         $26.98

             170,232


Transfer Agent Services


American Stock Transfer & Trust Company provides transfer agent services for the Company. Inquiries may be directed to: American Stock Transfer & Trust Company, 6201 15th Avenue, 3rd Floor, Brooklyn, NY, 11219, telephone: 1-800-937-5449, Internet address: www.amstock.com.



26






27



ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA


The supplementary financial Historical data presentedis also based in the following table contains information highlighting certain significant trends in the Company’s financial conditionpart on, and results of operations over the past five years.


The following information should be analyzedread in conjunction with, Item 7 - Management’s Discussion and Analysis of Financial Condition and Results of Operations, andprior filings with the audited consolidated financial statements included in this Annual Report on Form 10-K. Unless otherwise noted, all dollars are expressed in thousands except share and per share data.SEC.


  At or For the Years Ended December 31,
(in millions, except per share data) 2017 2016 2015 2014 2013
Selected Financial Data:          
Total assets $3,565
 $1,755
 $1,580
 $1,459
 $1,374
Total earning assets 3,241
 1,683
 1,517
 1,411
 1,321
Total investments 755
 554
 526
 492
 469
Total loans 2,486
 1,129
 990
 919
 853
Allowance for loan losses 12
 10
 9
 9
 8
Total goodwill and intangible assets 108
 5
 5
 5
 6
Total deposits 2,352
 1,050
 943
 858
 836
Total borrowings 830
 537
 475
 447
 409
Total shareholders' equity 355
 157
 154
 146
 121
           
Selected Operating Data:          
Total interest and dividend income $116
 $57
 $55
 $54
 $51
Total interest expense 24
 12
 10
 10
 12
Net interest income 92
 45
 45
 44
 39
Non-interest income 26
 12
 9
 8
 8
Total revenue 118
 58
 54
 52
 47
Provision for loan losses 3
 1
 2
 2
 1
Total non-interest expense 73
 36
 31
 29
 27
Income tax expense - continuing operations 17
 6
 6
 6
 5
Net income 26
 15
 15
 15
 13
           
Dividends per common share $0.75
 $0.73
 $0.67
 $0.60
 $0.56
Basic earnings per common share 1.71
 1.65
 1.69
 1.64
 1.49
Diluted earnings per common share 1.70
 1.63
 1.67
 1.63
 1.48
           
Weighted average common shares outstanding - basic 15,184
 9,069
 8,970
 8,890
 8,847
Weighted average common shares outstanding - diluted 15,290
 9,143
 9,090
 8,964
 8,893

  At or For the Years Ended December 31,
  2017 2016 2015 2014 2013
Selected Operating Ratios and Other Data          
Per Common Share Data:          
Net earnings, diluted $1.70
 $1.63
 $1.67
 $1.63
 $1.48
Total book value 22.96
 17.19
 17.10
 16.40
 13.70
Dividends 0.75
 0.73
 0.67
 0.60
 0.56
Common stock price:          
High 33.41
 33.25
 25.32
 21.91
 18.43
Low 25.09
 19.69
 19.31
 16.01
 15.06
Close 27.01
 31.55
 22.95
 21.33
 17.77
           
Performance Ratios:          
Return on assets 0.75% 0.89 % 0.98% 1.03% 0.98%
Return on equity 7.41
 9.21
 10.01
 10.69
 10.52
Interest rate spread 2.99
 2.86
 3.09
 3.23
 3.03
Non-interest income/total net revenue 21.99
 21.39
 16.69
 15.04
 16.22
Non-interest expense/average assets 2.10
 2.14
 2.01
 2.05
 2.00
Dividend payout ratio 44.26
 44.04
 39.86
 36.69
 37.28
           
Growth Ratios:          
Total commercial loans 23.83% 9.24 % 11.21% 0.04% 5.72%
Total loans 13.14
 14.04
 7.73
 7.76
 4.64
Total deposits 14.39
 11.40
 9.88
 2.68
 5.11
Total net revenues, (compared to prior year) 104.66
 7.27
 4.35
 10.54
 4.41
Earnings per share, (compared to prior year) 4.08
 (2.02) 2.26
 9.96
 4.88
           
Asset Quality and Condition Ratios:          
Net charge-offs /average loans 0.04% — % 0.14% 0.15% 0.12%
Allowance for loan losses/total loans (1) 0.50
 0.92
 0.95
 0.98
 0.99
Loans/deposits 105.68
 107.50
 105.02
 107.11
 102.06
           
Capital Ratios:          
Tier 1 capital to average assets - Company 8.10% 8.94 % 9.37% 9.30% 9.01%
Tier 1 capital to risk-weighted assets - Company 12.19
 15.01
 15.55
 15.60
 14.97
Tier 1 capital to average assets - Bank 8.58
 9.06
 9.49
 9.40
 9.12
Tier 1 capital to risk-weighted assets - Bank 12.92
 15.20
 15.77
 15.77
 15.16
Shareholders equity to total assets 9.95
 8.93
 9.76
 10.02
 8.83






(1)Generally accepted accounting principles require that loans acquired in a business combination be recorded at fair value, whereas loans from business activities are recorded at cost. The fair value of loans acquired in a business combination includes expected loan losses, and there is no loan loss allowance recorded for these loans at the time of acquisition. Accordingly, the ratio of the loan loss allowance to total loans is reduced as a result of the existence of such loans, and this measure is not directly comparable to prior periods. Similarly, net loan charge-offs are normally reduced for loans acquired in a business combination since these loans are recorded net of expected loan losses. Therefore, the ratio of net loan charge-offs to average loans is reduced as a result of the existence of such loans, and this measure is not directly comparable to prior periods. Other institutions may have loans acquired in a business combination, and therefore there may be no direct comparability of these ratios between and among other institutions.


FIVE-YEAR SUMMARY OF FINANCIAL DATA

As of and For the Years Ended December 31,

AVERAGE BALANCES AND AVERAGE YIELDS/RATES

 

2016

2015

2014

2013

2012

Balance Sheet Data

 

 

 

 

 

   

 

 

 

 

 

Total assets

 $1,755,349

 $1,580,055

 $1,459,320

 $1,373,893

 $1,302,935

Total securities

      528,856

      504,969

      470,525

      450,170

      418,040

Total loans

   1,129,064

      990,070

      919,024

      852,857

      815,004

Allowance for loan losses

       (10,419)

         (9,439)

         (8,969)

         (8,475)

         (8,097)

Total deposits

   1,050,300

      942,787

      858,049

      835,651

      795,012

Total borrowings

      536,596

      474,791

      447,020

      409,445

      371,567

Total shareholders' equity

      156,740

      154,152

      146,287

      121,379

      128,046

Average assets

   1,676,941

   1,541,327

   1,424,209

   1,345,353

   1,252,390

Average shareholders' equity

      162,127

      151,391

      136,672

      125,340

      125,600

   

 

 

 

 

 

Results Of Operations

 

 

 

 

 

   

 

 

 

 

 

Interest and dividend income

 $     57,487

 $     55,224

 $     53,718

 $     50,749

 $     50,838

Interest expense

        12,113

        10,390

          9,905

        11,663

        13,867

Net interest income

        45,374

        44,834

        43,813

        39,086

        36,971

Provision for loan losses

             979

          1,785

          1,833

          1,418

          1,652

Net interest income after provision for loan losses

        44,395

        43,049

        41,980

        37,668

        35,319

   

 

 

 

 

 

Non-interest income

        12,349

          8,979

          7,758

          7,566

          7,709

Non-interest expense

        35,935

        30,908

        29,211

        26,860

        25,618

    

 

 

 

 

 

Income before income taxes

        20,809

        21,120

        20,527

        18,374

        17,410

Income taxes

          5,876

          5,967

          5,914

          5,191

          4,944

Net income

 $     14,933

 $     15,153

 $     14,613

 $     13,183

 $     12,466

Preferred stock dividends and accretion of discount

               ---

               ---

               ---

               ---

               ---

Net income available to common shareholders

 $     14,933

 $     15,153

 $     14,613

 $     13,183

 $     12,466

   

 

 

 

 

 

Per Common Share Data:

 

 

 

 

 

Basic earnings per share

 $         2.47

 $       2.53

 $       2.47

 $         2.24

 $         2.13

Diluted earnings per share

 $         2.45

 $       2.50

 $       2.45

 $         2.22

 $         2.12

Cash dividends per share

 $       1.090

 $       1.010

 $       0.905

 $       0.833

 $       0.780

Dividend payout ratio

      44.04%

       39.86%

      36.69%

       37.28%

       36.62%

   

 

 

 

 

 

Selected Financial Ratios:

 

 

 

 

 

Return on total average assets

        0.89%

        0.98%

       1.03%

         0.98%

        1.00%

Return on total average equity

       9.21%

      10.01%

    10.69%

       10.52%

        9.93%

Tax-equivalent net interest margin

       2.96%

       3.19%

      3.33%

         3.15%

        3.23%

 

 

 

 

 

 

Capital Ratios:

 

 

 

 

 

Tier 1  leverage capital ratio

        8.94%

        9.37%

       9.30%

         9.01%

         8.87%

Tier 1  risk-based capital ratio

      15.01%

      15.55%

     15.60%

       14.97%

       14.15%

Total risk-based capital ratio

      16.52%

      17.12%

     17.24%

       16.62%

       15.78%

Common equity tier 1

      15.01%

      15.55%

      n/a

       n/a

      n/a

   

 

 

 

 

 

Asset Quality Ratios:

 

 

 

 

 

Net charge-offs to average loans

       0.00%

          0.14%

       0.15%

            0.12%

          0.23%

Allowance for loan losses to total loans

       0.92%

          0.95%

       0.98%

          0.99%

          0.99%

Allowance for loan losses to non-performing loans

     160.4%

        134.7%

           73.0%

          95.9%

          82.1%

Non-performing loans to total loans

      0.58%

         0.71%

       1.34%

          1.04%

          1.21%

Use of Non-GAAP Financial Measures:Certain information discussed below is presented on a fully tax-equivalent basis. Management believes the disclosure of tax-equivalent net interest income information improves the clarity of financial analysis, and is particularly useful to investors in understanding and evaluating the changes and trends in the Company's results of operations. Other financial institutions commonly present net interest income on a tax-equivalent basis. This adjustment is considered helpful in the comparison of one financial institution's net interest income to that of another institution, as each will have a different proportion of tax-exempt interest from their earning asset portfolios. Moreover, net interest income is a component of a second financial measure commonly used by financial institutions, net interest margin, which is the ratio of net interest income to average earning assets. For purposes of this measure as well, other financial institutions generally use tax-equivalent net interest income to provide a better basis of comparison from institution to institution. The tables below provide a reconciliation of tax-equivalent financial information to the Company's consolidated financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles.


Average Balances, Interest and Average Yields/Cost:The following tables presenttable presents average balances and an analysis of average rates and yields on aan annualized fully taxable equivalent basis for the years presented. Tax exempt interest revenue is shown on a tax-equivalent basis for proper comparison.periods included:

  2017 2016 2015
(in millions, except ratios) Average Balance Interest Average Yield/Rate (3) Average Balance Interest Average Yield/Rate (3) Average Balance Interest Average Yield/Rate (3)
Assets                  
Loans (1) $2,396.5
 $98.2
 4.10% $1,054.7
 $41.9
 3.97% $962.2
 $39.5
 4.11%
Securities and other (2) 757.4
 23.5
 3.10
 546.7
 17.7
 3.24
 506.8
 17.6
 3.48
Total earning assets 3,153.9
 121.7
 3.86% 1,601.4
 59.6
 3.72% 1,469.0
 57.2
 3.89%
Other non-earning assets 310.1
     75.5
     72.3
    
Total assets $3,464.0
     $1,676.9
     $1,541.3
    
                   
Liabilities                  
Interest bearing deposits $1,884.3
 $11.3
 0.60% $888.8
 $6.7
 0.75% $843.6
 $6.1
 0.72%
Borrowings 862.5
 12.6
 1.46
 524.9
 5.4
 1.03
 456.7
 4.3
 0.94
Total interest-bearing liabilities 2,746.8
 23.9
 0.87% 1,413.7
 12.1
 0.86% 1,300.3
 10.4
 0.80%
Non-interest-bearing demand deposits 339.3
     93.8
     82.7
    
Other non-earning liabilities  27.2
     7.3
     6.9
    
Total liabilities 3,113.3
     1,514.8
     1,389.9
    
                   
Total shareholders' equity 350.7
     162.1
     151.4
    
Total liabilities and shareholders' equity $3,464.0
     $1,676.9
     $1,541.3
    
                   
Net interest-earning assets $407.1
     $187.8
     $168.8
    
Net interest income   $97.8
     $47.5
     $46.8
  
Net interest spread     2.99%     2.86%     3.09%
Net interest margin     3.10
     2.96
     3.19
Cost of funds     0.77
     0.80
     0.75
Cost of deposits     0.60
     0.75
     0.72
Interest-earning assets/interest bearing liabilities     114.82
     113.28
     112.98
                   
Supplementary Data                  
Total non-maturity deposits $1,463.1
     $568.2
     $498.8
    
Total deposits 2,223.6
     982.6
     926.3
    
Fully taxable equivalent adjustments 5.6
     2.1
     2.0
    

(1)The average balances of loans include nonaccrual loans and deferred fees and costs.
(2)The average balance for securities available for sale is based on amortized cost. The average balance of equity also reflects this adjustment.
(3)Fully taxable equivalent considers the impact of tax advantaged investment securities and loans.


For The Year Ended December 31, 2016


 

 

 

Weighted

 

Average

 

Average

 

Balance

Interest

Rate

Interest Earning Assets:

 

 

 

Loans (1,3)

 $1,054,687

$41,889

3.97%

Securities (2,3)

      521,760

  16,823

3.22%

Federal Home Loan Bank stock

        24,985

       868

3.47%

    Total Earning Assets

   1,601,432

  59,580

3.72%

Non-Interest Earning Assets:

 

 

 

Cash and due from banks

         5,485

 

   

Allowance for loan losses

      (10,061)

 

 

Other assets (2)

        80,085

 

   

    Total Assets

 $1,676,941

 

 

Interest Bearing Liabilities:

 

 

 

Deposits

 $   888,823

$  6,699

0.75%

Borrowings

      524,859

    5,414

1.03%

    Total Interest Bearing Liabilities

   1,413,682

  12,113

0.86%

Rate Spread

 

 

2.86%

Non-Interest Bearing Liabilities:

 

 

 

Demand and other non-interest bearing deposits

        93,757

 

 

Other liabilities

          7,375

 

 

  Total Liabilities

   1,514,814

 

 

Shareholders' equity

      162,127

 

 

    Total Liabilities and Shareholders' Equity

 $1,676,941

 

 

Net interest income and net interest margin (3)

 

  47,467

2.96%

Less:  Tax Equivalent adjustment

 

   (2,093)

 

    Net Interest Income

 

$45,374

2.83%




29



For The Year Ended December 31, 2015


 

Average

Balance

 

Interest

Weighted

Average

Rate

Interest Earning Assets:

 

 

 

Loans (1,3)

  $   962,240

   $39,545

4.11%

Securities (2,3)

       484,527

     17,059

3.52%

Federal Home Loan Bank stock

         22,320

          578

2.59%

    Total Earning Assets

    1,469,087

     57,182

3.89%

Non-Interest Earning Assets:

 

 

 

Cash and due from banks

           4,899

 

   

Allowance for loan losses

          (9,239)

 

 

Other assets (2)

         76,580

 

   

    Total Assets

  $1,541,327

 

 

Interest Bearing Liabilities:

 

 

 

Deposits

  $  843,596

   $  6,097

0.72%

Borrowings

      456,669

       4,293

0.94%

    Total Interest Bearing Liabilities

   1,300,265

     10,390

0.80%

Rate Spread

 

 

3.09%

Non-Interest Bearing Liabilities:

 

 

 

Demand and other non-interest bearing deposits

         82,741

 

 

Other liabilities

           6,930

 

 

  Total Liabilities

    1,389,936

 

 

Shareholders' equity

       151,391

 

 

    Total Liabilities and Shareholders' Equity

  $1,541,327

 

 

Net interest income and net interest margin (3)

 

     46,792

3.19%

Less:  Tax Equivalent adjustment

 

      (1,958)

 

    Net Interest Income

 

   $44,834

3.05%


























For The Year Ended December 31, 2014


 

Average

Balance

 

Interest

Weighted

Average

Rate

Interest Earning Assets:

 

 

 

Loans (1,3)

 $   881,389

   $37,982

4.31%

Securities (2,3)

      470,192

     17,331

3.69%

Federal Home Loan Bank stock

        20,219

          290

1.43%

 

 

 

 

 

 

 

 

    Total Earning Assets

   1,371,800

     55,603

4.05%

Non-Interest Earning Assets:

 

 

 

Cash and due from banks

          4,204

 

   

Allowance for loan losses

         (8,753)

 

 

Other assets (2)

        56,958

 

   

    Total Assets

 $1,424,209

 

 

Interest Bearing Liabilities:

 

 

 

Deposits

 $   801,224

   $  5,894

0.74%

Borrowings

      406,744

       4,011

0.99%

    Total Interest Bearing Liabilities

   1,207,968

       9,905

0.82%

Rate Spread

 

 

3.23%

Non-Interest Bearing Liabilities:

 

 

 

Demand and other non-interest bearing deposits

        72,706

 

 

Other liabilities

          6,863

 

 

  Total Liabilities

   1,287,537

 

 

Shareholders' equity

      136,672

 

 

    Total Liabilities and Shareholders' Equity

 $1,424,209

 

 

Net interest income and net interest margin (3)

 

     45,698

3.33%

Less:  Tax Equivalent adjustment

 

      (1,885)

 

    Net Interest Income

 

   $43,813

3.19%


(1) For purposes of these computations, non-accrual loans are included in average loans.

(2) For purposes of these computations, unrealized gains (losses) on available-for-sale securities are recorded in other assets.

(3) For purposes of these computations, net interest income and net interest margin are reported on a tax-equivalent basis.


Net Interest Margin Analysis:The following table summarizes the net interest margin components, on a quarterly basis, over the past two years.


WEIGHTED AVERAGE RATES

2016

 

2015

Quarter:   

4

3

2

1

 

4

3

2

1

Interest Earning Assets:

 

 

 

 

 

 

 

 

 

Loans (1,3)

3.94%

3.89%

4.03%

4.03%

 

4.05%

4.08%

4.08%

4.23%

Securities (2,3)

3.01

3.07

3.37

3.46

 

  3.47

3.56

3.43

  3.63

Federal Home Loan Bank stock

4.07

3.46

3.23

3.11

 

  3.85

3.21

1.63

  1.74

    Total Earning Assets

3.65%

3.62%

3.80%

3.83%

 

3.86%

3.89%

3.83%

3.99%

Interest Bearing Liabilities:

 

 

 

 

 

 

 

 

 

Deposits

0.76

0.78

0.76

0.72

 

  0.71

 0.70

 0.73

  0.75

Borrowings

   1.05

1.06

0.99

1.03

 

  1.01

 0.93

 0.90

  0.93

    Total Interest Bearing Liabilities

0.86%

0.88%

0.85%

0.83%

 

  0.80%

 0.78%

0.80%

0.82%

Rate Spread

2.79%

2.74%

2.95%

3.00%

 

3.06%

3.11%

3.03%

3.17%

Net Interest Margin (3)

2.89%

2.84%

3.04%

3.09%

 

3.15%

3.20%

3.12%

3.27%

Net Interest Margin without

     Tax Equivalent Adjustments

2.77%

2.72%

2.91%

2.95%

 

3.01%

3.07%

2.99%

3.14%


 (1) For purposes of these computations, non-accrual loans are included in average loans.

(2) For purposes of these computations, unrealized gains (losses) on available-for-sale securities are recorded in other assets.

(3) For purposes of these computations, net interest income and net interest margin are reported on a tax-equivalent basis.





30



Rate/Volume Analysis:Analysis


The following table presents the effects of rate and volume changes on the fully taxable equivalent net interest income. Tax exempt interest revenue is shown on a tax-equivalent basis for proper comparison. For each category of interest-earning assets and interest-bearing liabilities, information is provided with respect to changes attributable to (1) changes in rate (change in rate multiplied by prior year volume), (2) changes in volume (change in volume multiplied by prior year rate), and (3) changes in volume/rate (change in rate multiplied by change in volume) have been allocated proportionately based on the absolute value of the change due to the rate and the change due to volume.


  2017 Compared with 2016 2016 Compared with 2015
  Increases (Decreases) due to Increases (Decreases) due to
(in thousands) Rate Volume Net Rate Volume Net
Interest income:            
Commercial real estate $4,099
 $13,489
 $17,588
 $(813) $1,069
 $256
Commercial and industrial 2,379
 7,979
 10,358
 163
 325
 488
Residential (3,062) 28,729
 25,667
 (771) 2,610
 1,839
Consumer (959) 3,662
 2,703
 12
 (251) (239)
Total loans 2,457
 53,859
 56,316
 (1,409) 3,753
 2,344
Securities (1,027) 6,815
 5,788
 (1,334) 1,388
 54
Total interest income $1,430
 $60,674
 $62,104
 $(2,743) $5,141
 $2,398
             
Interest expense:            
NOW $216
 $600
 $816
 $6
 $25
 $31
Savings 248
 260
 508
 —
 5
 5
Money market 276
 241
 517
 104
 143
 247
Time deposits (1,701) 4,468
 2,767
 474
 (155) 319
Total deposits (961) 5,569
 4,608
 584
 18
 602
Borrowings 3,710
 3,483
 7,193
 480
 641
 1,121
Total interest expense $2,749
 $9,052
 $11,801
 $1,064
 $659
 $1,723
Change in net interest income $(1,319) $51,622
 $50,303
 $(3,807) $4,482
 $675

31


NON-GAAP FINANCIAL MEASURES

This document contains certain non-GAAP financial measures in addition to results presented in accordance with U.S Generally Accepted Accounting Principles (“GAAP”). These non-GAAP measures are intended to provide the reader with additional supplemental perspectives on operating results, performance trends, and financial condition. Non-GAAP financial measures are not a substitute for GAAP measures; they should be read and used in conjunction with the Company’s GAAP financial information. The Company’s non-GAAP measures may not be comparable to similar non-GAAP information which may be presented by other companies. In all cases, it should be understood that non-GAAP operating measures do not depict amounts that accrue directly to the benefit of shareholders. An item which management excludes when computing non-GAAP adjusted earnings can be of substantial importance to the Company’s results and condition for any particular quarter or year. A reconciliation of non-GAAP financial measures to GAAP measures is provided below.

FOR THE YEAR ENDED DECEMBER 31, 2016 VERSUS 2015

INCREASES (DECREASES) DUE TO:

The Company utilizes the non-GAAP measure of adjusted earnings in evaluating operating trends, including components for operating revenue and expense. These measures exclude amounts which the Company views as unrelated to its normalized operations, including securities gains/losses, acquisition costs, restructuring costs, systems conversion costs and the impact of tax law changes. These adjustments are presented net of an adjustment for related income tax expense. This adjustment is determined as the difference between the GAAP tax rate and the effective tax rate applicable to adjusted income. The Company calculates several non-GAAP performance measures based on its measure of adjusted earnings, including adjusted earnings per share, adjusted return on assets, adjusted return on equity,

 

Average

Volume

Average

Rate

Total

Change

Loans (1,3)

    $3,797

 $(1,453)

   $2,344

Securities (2,3)

      1,322

   (1,558)

       (236)

Federal Home Loan Bank stock

           69

       221

        290

TOTAL EARNING ASSETS

    $5,188

 $(2,790)

   $2,398

Interest bearing deposits

         327

       275

        602

Borrowings

         641

       480

     1,121

TOTAL INTEREST BEARING LIABILITIES

    $   968

 $    755

   $1,723

NET CHANGE IN NET INTEREST INCOME

    $4,220

 $(3,545)

   $   675


(

FOR THE YEAR ENDED DECEMBER 31, 2015 VERSUS 2014

INCREASES (DECREASES) DUE TO:


 

Average

Volume

Average

Rate

Total

Change

Loans (1,3)

  $3,481

 $(1,918)

   $1,563

Securities (2,3)

       529

      (801)

       (272)

Federal Home Loan Bank stock

         30

       258

        288

TOTAL EARNING ASSETS

  $4,040

 $(2,461)

   $1,579

Interest bearing deposits

       312

      (109)

        203

Borrowings

       492

      (210)

        282

TOTAL INTEREST BEARING LIABILITIES

  $   804

 $   (319)

   $   485

NET CHANGE IN NET INTEREST INCOME

  $3,236

 $(2,142)

   $1,094


(1) For purposes

and the efficiency ratio. The Company views these amounts as important to understanding its performance trends, particularly due to the impact of accounting standards related to acquisition activity. Several of these computations, non-accrual loansmeasures are includedused as performance metrics in average loans.

(2) For purposesassessing the achievement of short and long term incentive compensation for management. Analysts also rely on these measures in estimating and evaluating the Company’s performance. Management also believes that the computation of non-GAAP earnings and earnings per share may facilitate the comparison of the Company to other companies in the financial services industry. The Company adjusts certain equity related measures to exclude intangible assets due to the importance of these computations, unrealized gains (losses) on available-for-sale securities aremeasures to the investment community and as components of regulatory capital supervision.


Charges related to acquisition activity consist primarily of severance and retention, systems conversion and integration, and professional costs.



RECONCILIATION OF NON-GAAP FINANCIAL MEASURES
The following table summarizes the reconciliation of non-GAAP items recorded in other assets.

(3) For purposes of these computations, net interest incomefor the time periods and net interest margin are reported on a tax-equivalent basis.dates indicated:

    At or For The Years Ended
(in thousands, except ratios)   December 31, 2017 December 31, 2016 December 31, 2015
Net income   $25,993
 $14,933
 $15,153
Adj: Security Gains   (19) (4,498) (1,334)
Adj: Loss on sale of fixed assets, net   94
 248
 7
Adj: Acquisition expense   3,302
 2,650
 54
Adj: Income taxes (1)   (1,269) 560
 446
Adj: Tax reform charge   3,988
 —
 —
Total adjusted income (2) (A) $32,089
 $13,893
 $14,326
         
Net-interest income (B) $92,155
 $45,374
 $44,834
Plus: Non-interest income   25,982
 12,349
 8,979
Total Revenue   118,137
 57,723
 53,813
Adj: Net security gains   (19) (4,498) (1,334)
Total adjusted revenue (2) (C) $118,118
 $53,225
 $52,479
         
Total non-interest expense   $72,726
 $35,935
 $30,908
Less: Loss on sale of fixed assets, net   (94) (248) (7)
Less: Acquisition expense   (3,302) (2,650) (54)
Adjusted non-interest expense (2)                                     (D) $69,330
 $33,037
 $30,847
         
(in millions)        
Total average earning assets (E) $3,154
 $1,601
 $1,469
Total average assets                                                 (F) 3,464
 1,677
 1,541
Total average shareholders' equity                          (G) 351
 162
 151
Total average tangible shareholders' equity (2) (3) (H) 243
 157
 146
Total tangible shareholders' equity, period-end (2) (3) (I) 246
 151
 149
Total tangible assets, period-end (2) (3) (J) 3,457
 1,750
 1,575
         
(in thousands)        
Total common shares outstanding, period-end (K) 15,443
 9,116
 9,015
Average diluted shares outstanding (L) 15,290
 9,143
 9,090
         
Adjusted earnings per share, diluted (A/L) $2.10
 $1.52
 $1.58
Tangible book value per share, period-end (2) (I/K) 15.94
 16.61
 16.50
Total tangible shareholders' equity/total tangible (2) assets (H/J) 7.12
 8.65
 9.45
         
Performance ratios        
GAAP return on assets   0.75% 0.89% 0.98%
Adjusted return on assets (2) (A/F) 0.93
 0.83
 0.93
GAAP return on equity    7.41
 9.21
 10.01
Adjusted return on equity (2) (A/G) 9.15
 8.57
 9.46
Adjusted return on tangible equity (2) (4) (A/I) 13.40
 8.90
 9.86
Efficiency ratio (2)(5) (D-N-P)/ (C+M) 55.44
 58.90
 55.93
Net interest margin (B+O)/E 3.10
 2.96
 3.19


Supplementary data (in thousands)
        
Taxable equivalent adjustment for efficiency ratio (M) $4,391
 $2,470
 $2,284
Franchise taxes included in non-interest expense (N) 599
 140
 126
Tax equivalent adjustment for net interest margin (O) 5,615
 2,093
 1,958
Intangible amortization (P) 812
 92
 92

(1)Assumes a marginal tax rate of 37.57% in 2017 and 35.00% in 2016 and 2015.
(2)Non-GAAP financial measure.        
(3)Total tangible shareholders' equity is computed by taking total shareholders' equity less the intangible assets at period-end. Total tangible assets is computed by taking total assets less the intangible assets at period-end.              
(4)Adjusted return on tangible equity is computed by dividing the total core income adjusted for the tax-effected amortization of intangible assets, assuming a marginal rate of 37.57% in 2017 and 35.00% in 2016, by tangible equity.    
(5)Efficiency ratio is computed by dividing total core tangible non-interest expense by the sum of total net interest income on a fully taxable equivalent basis and total core non-interest income.  The Company uses this non-GAAP measure to provide important information about its operating efficiency.

















ITEM 7.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS


GENERAL
Management’s discussion and analysis, which follows, focuses on factors affecting the Company’s consolidated results of operations for the years ended December 31, 2016, 2015, and 2014, and financial condition at December 31, 2016, and 2015, and where appropriate, factors that may affect future financial performance. The following discussion and analysis of financial condition and results of operations is intended to assist in understanding the financial condition and results of operations of the CompanyCompany. The following discussion and its subsidiariesanalysis should be read in conjunction with the Company’s Consolidated Financial Statements and the accompanying notes contained in this Annual Report of Form 10-K.


APPLICATION OF CRITICAL ACCOUNTING POLICIES AND ACCOUNTING ESTIMATES, AND RECENT ACCOUNTING PRONOUNCEMENTS
The Company’s significant accounting policies are described in Note 1 to the consolidated financial statements and notes thereto, and selected financial and statistical information appearing elsewhere in this Annual Report on Form 10-K.


Amounts Please see those policies in conjunction with this discussion. The accounting and reporting policies followed by the Company conform, in all material respects, to accounting principles generally accepted in the prior periodUnited States and to general practices within the financial statements are reclassified whenever necessary to conform to current period presentation.  Unless otherwise noted, all dollars are expressed in thousands except share and per share data.


CRITICAL ACCOUNTING POLICIES


Management’s discussion and analysis of the Company’s financial condition and results of operations are based on the Consolidated Financial Statements, which are prepared in accordance with U.S. generally accepted accounting principles.services industry. The preparation of such financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported amountsin the financial statements and accompanying notes. While the Company bases estimates on historical experience, current information and other factors deemed to be relevant, actual results could differ from those estimates.


The SEC defines “critical accounting policies” as those that require application of assets, liabilities, revenuesmanagement’s most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain and expensesmay change in future periods. Please see those policies in conjunction with this discussion. Management believes that the following policies would be considered critical under the SEC’s definition:

Allowance for Loan Losses: The allowance for loan losses represents probable credit losses that are inherent in the loan portfolio at the financial statement date and related disclosurewhich may be estimated. Management uses historical information, as well as current economic data, to assess the adequacy of contingent assets and liabilities. Management evaluates its estimates, including those related to the allowance for loan losses on an ongoing basis. Management bases its estimates on historical experienceas it is affected by changing economic conditions and various other assumptionsexternal factors, which may impact the portfolio in ways currently unforeseen. Although management believes that are believedit uses appropriate available information to be reasonable underestablish the circumstances, the results of which form the basis in making judgments about the carrying values of assets that are not readily apparent from other sources. Actual results could differ from the amount derived from management’s estimates and assumptions under different assumptions or conditions.


The Company’s significant accounting policies are more fully enumerated in Note 1 to the Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K. The reader of the financial statements should review these policies to gain a greater understanding of how the Company’s



32



financial performance is reported. Management believes the following critical accounting policies represent the more significant estimates and assumptions used in the preparation of the Consolidated Financial Statements:


Allowance for Loan Losses:The allowance for loan losses, (“allowance”) is a significant accounting estimatefuture additions to the allowance may be necessary if certain future events occur that cause actual results to differ from the assumptions used in making the preparation of the Company’s consolidated financial statements. The allowance, which is established through a provision for loan loss expense, is based on management’s evaluation of the level of allowance required in relation to the estimated inherent risk of probable lossevaluation. Conditions in the loan portfolio. Management regularly evaluates the allowance for adequacy by taking into consideration factors such as previous loss experience, the size and composition of the portfolio, current general economiclocal economy and real estate market conditions andvalues could require the performance of individual loans in relationCompany to contract terms and estimated fair values of collateral. The use of different estimates or assumptions could produce differentincrease provisions for loan losses. A smaller provision for loan losses, resultswhich would negatively impact earnings.


Acquired Loans: Loans that the Company acquired in higher net income, and when a greater amount of provision for loan losses is necessary, the result is lower net income. Refer to Part II, Item 7,Allowance for Loan Losses and Provision, and Part II, Item 8, Notes 1 and 4business combinations are initially recorded at fair value with no carryover of the Consolidated Financial Statements, in this Annual Report on Form 10-K,related allowance for further discussion and analysis concerning the allowance.




Other-Than-Temporary Impairments on Securities:The Company evaluates debt and equity securities within the Company’s available for sale portfolio for other-than-temporary impairment (“OTTI”), at least quarterly. The evaluation of securities for other-than-temporary impairments is a quantitative and qualitative process, which is subject to risks and uncertainties and is intended to determine whether declines incredit losses. Determining the fair value of investments should be recognized in current period earnings. The risks and uncertainties include changes in general economic conditions, the issuer’s financial condition and/or future prospects, the effects of changes in interest rates or credit spreads and the expected recovery period of unrealized losses.


Refer to Part II, Item 7,Impaired Securities,and Part II, Item 8, Notes 1 and 3 of the Consolidated Financial Statementsin this Annual Report on Form 10-K, for further discussion and analysis concerning other-than-temporary impairments.


Income Taxes:The Company estimates its income taxes for each period for which a statement of income is presented. Thisloans involves estimating the Company’s actual current tax liability, as well as assessing temporary differences resulting from differingamount and timing of recognitionprincipal and interest cash flows initially expected to be collected on the loans and discounting those cash flows at an appropriate market rate of expenses, incomeinterest. Going forward, the Company continues to evaluate reasonableness of expectations for the timing and tax credits, for tax and accounting purposes. These differencesthe amount of cash to be collected. Subsequent decreases in expected cash flows may result in deferred tax assets and liabilities, which are includedchanges in the Company’s consolidated balance sheets. Theamortization or accretion of fair market value adjustments, and in some cases may result in the loan being considered impaired. For collateral dependent loans with deteriorated credit quality, the Company must also assessestimates the likelihood that any deferred tax assets will be recovered from historical taxes paid and future taxable income and,fair value of the underlying collateral of the loans. These values are discounted using market derived rates of return, with consideration given to the extent thatperiod of time and costs associated with the recovery is not likely, a valuation allowance must be established.foreclosure and disposition of the collateral.


Income Taxes: Significant management judgment is required in determining income tax expense and deferred tax assets and liabilities. AsThe Company uses the asset and liability method of December 31, 2016,accounting for income taxes in which deferred tax assets and 2015, there were noliabilities are established for the temporary differences between the financial reporting basis and the tax basis of the Company's assets and liabilities. The realization of the net deferred tax asset generally depends upon future levels of taxable ordinary income, taxable capital gain income, and the existence of prior years' taxable income, to which carry back refund claims could be made. A valuation allowancesallowance would be established for deferred tax assets which

that management estimates are included in other assetsmore likely than not to be unrealizable based on available evidence at the consolidated balance sheet.

time the estimate is made.


Goodwill and Identifiable Intangible Assets:In connection with acquisitions, the Company generally records as assets on its consolidated financial statements both goodwill Goodwill and identifiable intangible assets suchare recorded as core deposit intangibles.


The Company evaluates whether the carrying valuea result of its goodwill has become impaired, in which case the value is reduced through a charge to its earnings. Goodwill isbusiness acquisitions and combinations. These assets are evaluated for impairment at least annually, or upon a triggering event using certain fair value techniques. Goodwill impairment testing is performed at the segment (or “reporting unit”) level. Goodwill is assigned to reporting units at the date the goodwill is initially recorded. Once goodwill has been assigned to the reporting units, it no longer retains its association with a particular acquisition, and all of the activities within a reporting unit, whether acquired or organically grown, are available to support the value of the goodwill.  


Identifiable intangible assets, included in other assets on the consolidated balance sheet, consist of core deposit intangibles amortized over their estimated useful lives on a straight-line method, which approximates the economic benefits to the Company. These assets are reviewed for impairment at least annually or whenever events or changes in circumstances indicate that the carrying amountvalue of the asset



33



these assets may not be recoverable. When these assets are evaluated for impairment, if the carrying amount exceeds fair value, an impairment charge is recorded to income. The determinationfair value is based on observable market prices, when practicable. Other valuation techniques may be used when market prices are unavailable, including estimated discounted cash flows and analysis of which intangible assets have finite livesmarket pricing multiples. These types of analyses contain uncertainties because they require management to make assumptions and to apply judgment to estimate industry economic factors and the profitability of future business strategies. In the event of future changes in fair value, the Company may be exposed to an impairment charge that could be material.


Determination of Other-Than-Temporary Impairment of Securities: The Company evaluates debt and equity securities within the Company's available for sale for other-than-temporary impairment (OTTI), at least quarterly. If the fair value of a debt security is subjective, as isbelow the determinationamortized cost basis of the amortization periodsecurity, OTTI is required to be recognized if any of the following are met: (1) the Company intends to sell the security; (2) it is more likely than not that the Company will be required to sell the security before recovery of its amortized cost basis; or (3) for debt securities, the present value of expected cash flows is not sufficient to recover the entire amortized cost basis. For all impaired debt securities that the Company intends to sell, or more likely than not will be required to sell, the full amount of the loss is recognized as OTTI through earnings. Credit-related OTTI for all other impaired debt securities is recognized through earnings. Noncredit related OTTI for such intangible assets.


debt securities is recognized in other comprehensive income, net of applicable taxes. In evaluating its marketable equity securities portfolios for OTTI, the Company considers its intent and ability to hold an equity security to recovery of its cost basis in addition to various other factors, including the length of time and the extent to which the fair value has been less than cost and the financial condition and near term prospects of the issuer. Any changesOTTI on marketable equity securities is recognized immediately through earnings. Should actual factors and conditions differ materially from those expected by management, the actual realization of gains or losses on investment securities could differ materially from the amounts recorded in the estimates used byfinancial statements.


Fair Value of Financial Instruments: The Company uses fair value measurements to record fair value adjustments to certain financial instruments and to determine fair value disclosures. Securities available for sale and derivative instruments are recorded at fair value on a recurring basis. Additionally, from time to time, the Company may be required to determinerecord at fair value other assets on a nonrecurring basis, or to establish a loss allowance or write-down based on the carryingfair value of its goodwill and identifiable intangible assets, or which otherwise adversely affect their value or estimated lives, would adversely affectimpaired assets. Further, the Company’s consolidated results of operations.


Refernotes to Notes 1 and 8 of the consolidated financial statements include information about the extent to which fair value is used to measure assets and liabilities, the valuation methodologies used and its impact to earnings. For financial instruments not recorded at fair value, the notes to financial statements disclose the estimate of their fair value. Due to the judgments and uncertainties involved in Part II, Item 8 of this Annual Report on Form 10-K for further details of the Company’s accounting policiesestimation process, the estimates could result in materially different results under different assumptions and estimates covering goodwill.

conditions.


SUMMARY


FINANCIAL HIGHLIGHTS


·

Total assets

Bar Harbor Bankshares produced record revenue and earnings in 2017 due to business expansion and increased operational efficiencies. Net income in 2017 was $26.0 million, or $1.70 per share, compared with $14.9 million in 2016 increased 11.1% to $1,755,349or $1.63 per share. The Company’s 2017 results included almost a full year benefit from $1,580,055 in 2015

·

Total loans in 2016 increased 14.0% to $1,129,064 from $990,070 in 2015

·

2016 diluted earnings per share totaled $2.45 and were net of acquisition and system conversion costs totaling $0.28 per share

·

2016 net interest income, on a tax-equivalent basis, was $47,467 compared $46,792 in 2015

·

Total non-interest income for 2016 was up $3,370 or 38% from 2015.  Excluding securities gains, non-interest income was up $206 compared to 2015   

·

Non-performing assets decreased $512, or 7.3% compared to 2015


Lake Sunapee Bank Group Acquisition


On January 13, 2017, the Company completed the previously announced acquisitionoperations of Lake Sunapee Bank Group (“LSBG”) was completed.. The Company issued 4,163,853 common shares usingacquisition of LSBG closed in early January 2017.


Adjusted income (non-GAAP) in 2017 increased to $32.1 million, or $2.10 per share, from $13.9 million in 2016, or $1.52 per share. The measure of adjusted income excludes an after-tax reduction of $2.1 million, or $0.13 per share, during 2017 related to acquisition expenses offset by a fixed exchange ratioone-time benefit associated with the sale of 0.4970 which was based on a stock price of $34.55. Total consideration paid at closing was $182.2 million which reflected the increase in the Company’s stock atinsurance subsidiary. Adjusted income also excluded the time$4.0 million, or $0.26 per share, reduction due to the revaluation of closing plusnet deferred tax assets required by the TCJA. Adjusted income in 2016 included an additional $28 thousandafter-tax reduction of $1.7 million, or $0.19 per share, related to acquisition costs and an after-tax benefit of $2.9 million, or $0.32 per share, related to gains from security sales.

Return on assets in cash paid2017 was 0.75% as compared to 0.89% in 2016 while adjusted return on assets (non-GAAP) improved to 0.93% in 2017 from 0.83% in 2016. In a similar trend, return on equity was 7.41% for fractional shares.  At completion2017 compared to 9.21%; however, adjusted return on equity (non-GAAP) improved to 9.15% in 2017 from 8.57% in 2016. The Company’s efficiency ratio (non-GAAP) improved to 55% in 2017 from 59% in 2016 and net interest margin improved to 3.10% in 2017 from 2.96% in 2016.

Total assets increased to $3.6 billion in 2017 from $1.8 billion in 2016, which includes the $1.6 billion of assets that were acquired from LSBG. Excluding the impact of the acquisition, LSBG had approximately $1.5total loans grew by $221.0 million or 13.1% during 2017 primarily due to commercial loan growth. All major categories of assets, liabilities and equity increased due to the acquired balances which as of the acquisition date included $1.2 billion in total assets.  Final allocationloans, $155.6 million in securities, $1.2 billion in deposits, and $182 million in equity as a result of the purchase price to the fair valueissuance of assets and liabilities acquired is expected to be reported as partcommon shares of the first quarter of 2017 earnings release and Form 10-Q as of March 31, 2017.  

Company to LSBG shareholders.


COMPARISON OF FINANCIAL CONDITION AT DECEMBER 31, 20162017 AND 2015

2016


Summary:
In managing its asset portfolios, the Bank utilizes funding and capital resources within well-defined credit, investment, interest rate, and liquidity risk guidelines. Loans and investment securities are the Bank’s primary earning assets with additional capacity invested in money market instruments. Net interest income from these products is the Company’s primary source of revenue. Funding of the Company’s earning assets is achieved through its management of liabilities, attempts to provide stable and flexible sources of funding within established liquidity and interest rate risk guidelines. The Company’s objective is to optimize its balance sheet position and to enhance profitability through strategies that promise sufficient reward for understood and controlled risk. The Company maintains adequate liquidity, under prevailing and forecasted economic conditions, with an efficient and appropriate mix of core deposits, brokered deposits, and borrowed funds.


Securities:

Securities
The Company maintains a relatively high quality and liquid security portfolio consisting of mortgage-backed securities (“MBS”) issued by U.S. government agencies, U.S. Government-sponsored enterprises and, to a much lesser extent, other non-agency, private-label issuers. The securities portfolio also includes obligations of US government sponsored enterprises, obligations of state and political subdivisions thereof.thereof, as well as, corporate bonds. Each investment is evaluated from a return on equity and interest rate risk perspective under the policy guidelines established by the Company’s Board of Directors. The yield and duration of each security are given careful consideration given the current rising interest rate environment. Overall, management has positioned the portfolio to provide flexibility in reacting to asset and liability changes as they arise.


Total Securities: At December 31, 2016,Included in the Company’s total securities amounted to $528,856 compared with $504,969 at December 31, 2015, representing an increase of $23,887, or 4.7%. Securities purchased during 2016 consisted of MBS securities issued and guaranteed by U.S. Government agencies and sponsored enterprises and, to a lesser extent, obligations of state and political subdivisions.  All of the Company’s securities were classified as available for sale as of December 31, 2016 and 2015.




The following table summarizes the securities available for sale portfolio as of December 31, 2016, and 2015:



Amortized

Cost

Gross

Unrealized

Gains

Gross

Unrealized

Losses

 

Estimated

Fair Value

December 31, 2016

 

 

 

 

Mortgage-backed securities:

 

 

 

 

  US Government-sponsored enterprises

    $330,635

   $2,682

     $4,865

    $328,452

  US Government agency

        76,722

        797

          613

        76,906

  Private label

             936

        207

            11

          1,132

Obligations of states and political

      subdivisions thereof

      123,832

     1,941

       3,407

      122,366

  Total

    $532,125

   $5,627

     $8,896

    $528,856


 

Amortized

Cost

Gross

Unrealized

Gains

Gross

Unrealized

Losses

Estimated

Fair Value

December 31, 2015

 

 

 

 

Mortgage-backed securities:

 

 

 

 

  US Government-sponsored enterprises

   $304,106

   $  5,042

     $2,155

   $306,993

  US Government agency

       78,408

       1,269

          547

       79,130

  Private label

         2,713

          762

            11

         3,464

Obligations of states and political

     subdivisions thereof

     110,952

       4,758

          328

     115,382

  Total

   $496,179

   $11,831

     $3,041

   $504,969




34



Mortgage-backed Securities Issued by U.S. Government-sponsored Enterprises:This category of securities represents MBS issued and guaranteed by U.S. Government-sponsored enterprises, specifically, Federal National Mortgage Association (“FNMA”) and Federal Home Loan Mortgage Corporation (“FHLMC”). These Government-sponsored enterprises were placed under the conservatorship of the U.S. Government on September 7, 2008. In August of 2011, Standard and Poor’s, a major credit rating agency, downgraded all debt issued and guaranteed by the United States from “AAA” to “AA+”. Accordingly, all of these securities were credit rated “AA+” at December 31, 2016 and 2015. At December 31, 2016, the amortized cost of MBS issued by U.S. Government enterprises comprised 62.1% of the securities portfolio, compared with 61.3% at December 31, 2015.  At December 31, 2016, the Bank’s weighted average yield on MBS issued by U.S. Government-sponsored enterprises amounted to 2.69% compared with 2.81% at December 31, 2015.


Mortgage-backed Securities Issued by U.S. Government Agencies:This category of securities represents MBS backed by the full faith and credit of the U.S. Government, such as the Government National Mortgage Association (“GNMA”). All of these securities were credit rated “AA+” at December 31, 2016 and 2015.  At December 31, 2016, the amortized cost of mortgage-backed securities issued by U.S. Government agencies comprised 14.4% of the Bank’s securities portfolio, compared with 15.8% at December 31, 2015.  At December 31, 2016, the weighted average yield on mortgage-backed securities issued by U.S. Government agencies amounted to 2.64%, compared with 2.95% at December 31, 2015.


Mortgage-backed Securities Issued by Private-label Issuers:This category of securities represents MBS issued by banks, investment banks, and thrift institutions. Typically, these securities are largely based on mortgages which exceed the conforming loan sizes required by agency securities. While private-label MBS are not guaranteed by any U.S. Government agency, they are credit rated by the major rating agencies (Moody’s, Standard & Poor’s and FITCH).


Most of the Bank’s MBS issued by private-label issuers carry various amounts of credit enhancement, and none are classified as sub-prime MBS pools. All of these securities were purchased prior to 2008 based on the underlying loan characteristics such as loan to value ratios, borrower credit scores, property type and location, and the level of credit enhancement.  At December 31, 2016, the amortized cost of mortgage-backed securities issued by private-label issuers comprised 0.2% of the Bank’s securities portfolio, compared with 0.5% at December 31, 2015.  At December 31, 2016, the weighted average yield on the Bank’s private-label MBS portfolio amounted to 20.78%, compared with 11.59% at December 31, 2015. The unusually high yields were largely attributed to interest received on certain other-than-temporarily impaired securities where the book value was significantly lower than the contractual par value.




35



At December 31, 2016, $632 of the total amortized cost of the Bank’s private-label MBS portfolio was rated below investment grade by at least one of the major credit rating agencies, compared with $2,032 at December 31, 2015. All of these below investment grade securities had been rated “AAA” by the credit rating agencies at the date of purchase and continued to be rated “AAA” through December 31, 2007. Beginning in 2008, unprecedented market stresses began affecting all MBS (Government agency and private-label) as the economy, in general, and the housing market, in particular, seriously deteriorated. As a result, the Bank revised its assessments as to the full recoverability of its private-label MBS, which necessitated OTTI write-downs under existing accounting standards each year from 2008 through 2013. Refer to Part II, item 8, Notes to Consolidated Financial Statements, Notes 1 and 4 in this Annual Report on Form 10-K for further information on OTTI.


Obligations of States and Political Subdivisions Thereof:Obligations of states and political subdivisions thereof (“municipal bonds”) are issued by city, county and state governments, as well as by enterprises with a public purpose, such as certain electric utilities, universities and hospitals. One of the primary attractions of municipal bonds is that “Bank Qualified” issues are federally tax exempt. The Bank’s municipal securities primarily consist of general obligation bonds and, to a lesser extent, revenue bonds. General obligation bonds carry less risk, as they are supported by the full faith, credit and taxing authority of the issuing government and in the cases of school districts, are supported with state aid.  Revenue bonds are generally backed by municipal revenue streams generated through user fees or lease payments associated with specific municipal projects that have been financed. The Bank’s municipal bond portfolio is generally concentrated in school districts across the U.S.A., which have historically been considered among the safer municipal bond investments.


Municipal bonds are frequently supported with insurance, which guarantees that in the event the issuer experiences financial problems, the insurer will step in and assume payment of both principal and interest. Historically, insurance support has strengthened an issuer’s underlying credit rating to AAA or AA status. Starting in 2008, many of the insurance companies providing municipal bond insurance experienced financial difficulties and, accordingly, were downgraded by at least one of the major credit rating agencies. Consequently, since 2008 a portion of the Bank’s municipal bond portfolio was downgraded by at least one of the major credit rating agencies. Notwithstanding the credit rating downgrades, at December 31, 2016 and 2015, the Bank’s municipal bond portfolio did not contain any below investment grade securities as reported by major credit rating agencies. In addition, at December 31, 2016 and 2015 all municipal bond issuers were current on contractually obligated interest and principal payments.


At December 31, 2016, the amortized cost of municipal bonds comprised 23.3% of the Bank’s securities portfolio, compared with 22.4% at December 31, 2015. At December 31, 2016, the fully tax-equivalent yield on the Bank’s municipal bond portfolio amounted to 5.49%, compared with 5.57% at December 31, 2015.








Securities Maturity Distribution and Weighted Average Yields:  The following table summarizes the maturity distribution of the amortized cost of the Bank’s securities portfolio and weighted average yields of such securities on a fully tax-equivalent basis as of December 31, 2016. The maturity distribution is based upon the final maturity date of the securities. Expected maturities may differ from contractual maturities because issuers may have the right to call or pre-pay certain securities. In the case of mortgage-backed securities, actual maturities may also differ from expected maturities due to the amortizing nature of the underlying mortgage collateral, and the fact that borrowers have the right to prepay.



36




 

One Year or less

Greater than

one year to Five years

Greater than

Five to ten years

Greater than

ten years

TOTAL

 


Estimated

Fair

Value

Weighted average

yield

Estimated

Fair

Value

Weighted average

yield

Estimated

Fair

Value

Weighted average yield

Estimated

Fair

Value

Weighted average

yield

Estimated

Fair

Value

Weighted average

yield

Mortgage-backed

securities:

 

 

 

 

 

 

 

 

 

 

  US Government-

     sponsored

     enterprises

   $  21

4.60%

   $4,968

3.12%

   $13,003

    2.99%

 $310,460

2.67%

 $328,452

     2.69%

  US Government

     agency

       ---   

0.00%

        193

2.24%

       2,345

    2.73%

     74,368

2.63%

    76,906

     2.64%

  Private label

     113

5.48%

          45

4.74%

          215

   77.03%

          759

8.07%

       1,132

    20.78%

Obligations of

     states and

     political

     subdivisions

     thereof

       ---   

0.00%

    1,077

5.07%

       2,159

    5.92%

   119,130

5.49%

   122,366

     5.49%

   Total

   $134

 

  $6,283

 

   $17,722

 

 $504,717

 

 $528,856

 


Securities Concentrations:At December 31, 2016 and 2015, the Bank did not hold any securities for a single issuer, other than U. S. Government agencies and sponsored enterprises, where the aggregate book value of the securities exceeded 2% of the Company’s shareholders’ equity.


Impaired Securities:The securities portfolio contains certain securities where amortized cost exceeds fair value, which at December 31, 2016, amounted to an excess of $8,896 or 1.7% of the total amortized cost of the securities portfolio. At December 31, 2015, this amount represented an excess of $3,041 or 0.6% of the total amortized cost of the securities portfolio. As of December 31, 2016, unrealized losses on securities in a continuous unrealized loss position more than twelve months amounted to $803, compared with $1,161 at December 31, 2015. The decrease in net unrealized losses was attributed to changes in long-term interest rates and pricing spreads at December 31, 2016, compared with December 31, 2015, which unfavorably impacted the fair value of the Bank’s fixed income portfolio.


Further information regarding impaired securities, other-than-temporarily impaired securities and evaluation of securities for impairment is incorporated by reference to Part II, Item 8, Notes 1 and 4 of the Consolidated Financial Statements in this Annual Report on Form 10-K.


Federal Home Loan Bank Stock


The Bank is a member of the FHLB,Boston ("FHLB") stock which is a cooperatively owned wholesale bank for housing and finance in the six New England states. Its mission is to support the residential mortgage and community-development lending activities of its members, which include over 440 financial institutions across New England. As a requirement of membership in the FHLB, the Bank must own a minimum required amount of FHLB stock, calculated periodically based primarily on its level of borrowings from the FHLB.  The Bank uses the FHLB for most of its wholesale funding needs.



At December 31, 2016, the Bank’s investment in FHLB stock totaled $25,331, compared with $21,479 at December 31, 2015, representing an increase of $3,852, or 17.9%. The foregoing increase was attributed to increased FHLB borrowing levels during 2016. Additionally, during 2016 shares held in excess of the minimum required amount were redeemed at par value.




37



FHLB stock is a non-marketable equity security and, therefore, is reported at cost,cost.


Total securities increased $201.2 million which generally equals par value.includes $156.3 million in securities acquired from LSBG and $180.9 million in securities purchased during the year ended December 31, 2017. Securities purchased included $149.4 million

of mortgage-backed securities guaranteed by US Government agency and US Government-sponsored enterprises, $21.8 million of corporate bonds, and $8.8 million of FHLB stock. The ratioincrease was primarily offset by $126.8 million of maturities, calls, and pay-downs of amortizing securities and $7.5 million in FHLB stock repurchases. The weighted average yield on the Company’s securities portfolio was 3.10% in 2017 compared to 3.24% in prior year. The average life of the FHLB’s market value of equity to its par value of capital stock was 148%securities portfolio at December 31, 2016, compared2017 was estimated to be 5.1 years, with 143%a duration of approximately 4.0 years. These metrics compare with an estimated average life of 6.3 years, with a duration of approximately 4.9 years for the portfolio at December 31, 2015.

2016.


Loans
The Company periodically evaluates its investment in FHLB stock for impairment based on, among other things,acquisition of LSBG increased the capital adequacylegal lending limit of the FHLBBank and its overall financial condition. The FHLB recently reported that it remained in compliance withexpanded the lending area across all regulatory capital ratios as of December 31, 2016, and was classified as adequately capitalized by its regulator, the Federal Housing Finance Agency, based on the FHLB’s financial information at September 30, 2016.  Based on the capital adequacy, liquidity position and sustained profitabilitythree of the FHLB, management believes there is no impairment relatednorthern New England states which resulted in organic growth in the loan portfolio. Total loans increased to $2.5 billion in 2017 from $1.1 billion in 2016, of which $1.2 billion were acquired from Lake Sunapee Bank. Excluding the carrying amountimpact of the Bank’s FHLB stock as of December 31, 2016. The Bank will continue to monitor its investment in FHLB stock.


Loans


Total Loans: The loan portfolio is primarily securedacquired balances, total loans increased during 2017 by real estate in the counties of Hancock, Washington, Knox, Kennebec and Sagadahoc, Maine. The following table summarizes the major components of the Bank’s loan portfolio, net of deferred loan fees and costs, as of December 31 over the past five years.

$221.0 million or 13.1%.


 

2016

2015

2014

2013

2012

Commercial real estate mortgages

 $   403,594

  $371,002

 $325,949

 $336,542

 $324,493

Commercial and industrial

      103,586

      79,911

     73,893

     73,972

     59,373

Commercial construction and

      land development

        14,695

      24,926

     25,421

     18,129

     22,120

Agricultural and other loans to farmers

        31,808

      31,003

     30,471

     26,929

     24,922

  Total commercial loans

      553,683

    506,842

   455,734

   455,572

   430,908

   

 

 

 

 

 

Residential real estate mortgages

      506,612

    408,401

   382,678

   317,115

   297,103

Home equity loans

        46,921

      51,530

     51,795

     49,565

     53,303

Other consumer loans

          6,172

        7,949

     12,140

     14,523

     19,001

  Total consumer loans

      559,705

    467,880

   446,613

   381,203

   369,407

    

 

 

 

 

 

Tax exempt loans

        15,846

      15,244

     16,693

     16,355

     15,244

    

 

 

 

 

 

   Net deferred loan costs and fees

            (170)

           104

           (16)

        (273)

         (555)

Total loans

   1,129,064

    990,070

   919,024

   852,857

   815,004

Allowance for loan losses

       (10,419)

       (9,439)

      (8,969)

      (8,475)

      (8,097)

Total loans net of allowance for loan losses

 $1,118,645

  $980,631

 $910,055

 $844,382

 $806,907


At December 31, 2016,2017, commercial loans comprised 49.0% of the total loan portfolio, compared with 51.2%50% at December 31, 2015. Consumer loans, which principally consisted of residential2016. Residential real estate mortgage loans, comprised 49.6%46% of total loans at December 31, 2016,2017, compared with 47.3%45% at December 31, 2015.




38



Commercial Loans:The Bank offers a variety of commercial lending products including term loans and lines of credit. The Bank offers a broad range of2016. Total commercial loans primarily collateralized, to businesses for working capital (including inventory and receivables), business expansion (including acquisitions of real estate and improvements) and the purchase of equipment and machinery. The purpose ofhad a particular loan generally determines its structure. Commercial loans are provided primarily to organizations and sole proprietors in the tourism, hospitality, healthcare, blueberry, boatbuilding, biological research, insurance, and fishing industries, as well as to other small and mid-size businesses associated with the coastal communities of Maine.


At December 31, 2016, total commercial loans amounted to $553,683, compared with $506,842 at December 31, 2015, representing an increase of $46,841, or 9.2%.


Commercial loan23.8% organic growth has generally been challengedrate led mostly by continued economic uncertainty, diminished demand, and strong competition for quality loans. Bank management attributes the growth of commercial loans to an effective business banking team, deep local market knowledge, sustained new business development efforts, and a resilient local economy that has been faring better than the nation as a whole.


Reflecting the Bank’s business region, at December 31, 2016, approximately $127,676 or 31.6% of the commercial real estate mortgage portfolio was represented by loans to the lodging industry, compared with $95,330 or 25.7% at December 31, 2015. The Bank underwrites lodging industry loans as operating businesses, lending primarily to seasonal establishments with stabilized cash flows.


The proportion of commercial and industrial loans. Outside of acquired loans, growth for residential mortgage loans remained relatively flat compared to 2016.


Allowance for loan losses
The determination of the allowance for loan losses is a critical accounting estimate. The Company considers the allowance for loan losses appropriate to cover probable losses which can be reasonably estimated in the loan portfolio as of the balance sheet date. Specific allowances for impaired loans are determined based upon a discounted cash flows analysis, or as appropriate, a collateral shortfall analysis. General allowances for loan losses account for the risk and estimated loss inherent in certain pools of industry and geographic loan concentrations within the loan portfolio. Under accounting standards for business combinations, acquired loans are recorded at fair value with no loan loss allowance on the date of acquisition. An allowance for loan loss is recorded by the Company for the emergence of new probable and estimable losses on acquired loans which were not impaired as of the acquisition date. Because of the accounting for acquired loans, some measures of the loan loss allowance are not comparable to periods prior to the acquisition date or to peer measures.

During 2017, the allowance for loan losses increased $1.9 million to $12.3 million, which is due to the increase in business activity loans and lower charge-off activity reflecting improved asset quality. Asset quality remained steady with non-accruing loans to total commercial loans is generally reflectiveratios at 0.58% at year-end 2017 and 2016. The ratio of net charge-offs to total loans remain near zero in 2017 and 2016. The ratio of the Bank’s market area demographics,allowance to total loans decreased to 0.50% in 2017 from 0.92% in 2016, which have historically limitedwas primarily due to the opportunity and growth potential in this particular category of loans. Similarly, the communities served by the Bank generally offer limited opportunities for agricultural and other loans to farmers.  This categoryvolume of loans principally includes loans related to Maine’s wild blueberry industry.

acquired from LSBG.


Consumer Loans:At December 31, 2016, total consumer loans stood at $559,705 compared with $467,880 at December 31, 2015, representing an increase of $91,825, or 19.6%. At December 31, 2016, residential real estate mortgage loans represented 90.5% of total consumer loans, compared with 87.3% at December 31, 2015.


Residential real estate mortgage loans totaled $506,612 as of December 31, 2016, compared with $408,401 at December 31, 2015, representing an increase of $98,211, or 24.0%.  

The increase in residential real estate mortgage loans was aided by the purchased loans. Loans originated and closed by the Bank during 2016 were largely offset by loan re-financings and scheduled principal amortization from the existing residential real estate loan portfolio.


Home equity loans totaled $46,921 at December 31, 2016, compared with $51,530 at December 31, 2015, representing a decline of $4,069, or 8.9%. The Bank did not aggressively campaign for home equity loans during 2016.


Loans to individuals for household, family and other personal expenditures (“other consumer loans”)totaled $6,172 at December 31, 2016, compared with $7,949 at December 31, 2015, representing a decline of $1,777, or 22.4%. Given strong competition from the financing affiliates of consumer durable goods manufacturers, among other considerations, the Bank does not campaign aggressively for consumer installment loans.


Tax Exempt Loans:Tax-exempt loans totaled $15,846 at December 31, 2016, compared with $15,244 at December 31, 2015, representing an increase of $602, or 3.9%. Tax-exempt loans include loans to local government municipalities, not-for-profit organizations, and other organizations that qualify for tax-



39



exempt treatment. Government municipality loans typically have short maturities (e.g., tax anticipation notes, etc.). Government municipality loans are normally originated through a bid process among local financial institutions and are typically priced aggressively, thus generating relatively narrow net interest margins.




Loan Concentrations:Because of the Bank’s proximity to Acadia National Park, a large part of the economic activity in the area is generated from the hospitality business associated with tourism. At December 31, 2016, approximately $128,680 or 11.4%credit risk of the Bank’s loan portfolio was represented by loans to the lodging industry, compared with $98,231 or 9.9% at December 31, 2015. Loan concentrationscontinued to principally reflect the Bank’s business region.


Mortgage Loan Servicing:The Bank, from time to time, will sell residential mortgage loans to other institutions and investors such as the FHLMC. In prior years, the Bank has generally sold fixed rate, long term residential mortgage loans, as a means of managing interest rate risk. The sale of loans also allows the Bank to make more funds available to customers in its servicing area, while the retention of servicing rights provides an additional source of income. At December 31, 2016, the unpaid balance of mortgage loans serviced for others totaled $9,501 compared with $11,175 at December 31, 2015, representing a decline of $1,674 or 15.0%.


Loan Portfolio Interest Rate Composition:  The following table summarizes the commercial, tax-exempt and consumer components of the loan portfolio by fixed and variable interest rate composition, as of December 31, 2016 and 2015:


 

2016

2015

Commercial:

 

 

   Fixed

 $     88,428

 $  87,347

   Variable

      465,405

   419,560

     Total

 $   553,833

 $506,907

   

 

 

Tax exempt:

 

 

   Fixed

 $      7,585

 $    6,939

   Variable

         8,026

       8,293

     Total

 $     15,611

 $  15,232

    

 

 

Consumer:

 

 

   Fixed

 $   453,744

 $352,687

   Variable

      105,876

   115,245

     Total

 $   559,620

 $467,932

   

   

   

   Total loans:

 

 

   Fixed

 $   549,757

 $446,972

   Variable

      579,307

   543,098

     Total

 $1,129,064

 $990,070


At December 31, 2016, fixed and variable rate loans comprised 48.7% and 51.3% of the loan portfolio, respectively, compared with 45.1% and 54.9% at December 31, 2015.



40





Loan Maturities and Re-pricing Distribution:  The following table summarizes fixed rate loans reported by remaining maturity, and floating rate loans by next re-pricing date, as of December 31, 2016 and 2015. Actual maturity dates may differ from contractual maturity dates due to prepayments, modifications and re-financings.


Maturities

2016

2015

One year or less

 $   289,786

   $306,977

Over 1 - 5 years

      231,606

     196,431

Over 5 years

      607,672

     486,662

  Total loans

 $1,129,064

   $990,070


Credit Risk:Credit risk is managed through loan officer authorities, loan policies, and oversight from the Bank’s Chief Credit Officer, the Bank's Management Loan Committee, the Directors’ Loan Committee, and the Bank's Board of Directors. Management follows a policy of continually identifying, analyzing and grading credit risk inherent in the loan portfolio. An ongoing independent review, subsequent to management's review, of individual credits is performed by an independent loan review consulting firm, which reports to the Audit Committee of the Board of Directors.


Management recognizes that early and accurate recognition of risk is the best means to reduce credit losses and maximize earnings. The Bank employs a comprehensive risk management structure to identify and manage the risk of loss. For consumer loans, the Bank identifies loan delinquency beginning at 10-day delinquency and provides appropriate follow-up by written correspondence or personal contact. Closed-end non-residential mortgage loan losses are recognized no later than the point at which a loan is 120 days past due, and open-end retail loan losses are recognized no later than the point at which a loan is 180 days past due. Residential mortgage loan losses are recognized during the foreclosure process, or sooner, when that loss is quantifiable and reasonably assured. For commercial loans, the Bank applies a risk grading system, which stratifies the portfolio and allows management to focus appropriate efforts on the highest risk components of the portfolio. The risk grades include ratings that correlate with regulatory definitions of “Pass,” “Other Assets Especially Mentioned,” “Substandard,” “Doubtful,” and “Loss.”


As a result of management’s ongoing review The credit risk profile of the Company’s loan portfolio loans are placed on non-accrual status, either due to the delinquent status of principal and/or interest, or a judgment by management that, although payments of principal and/or interest are current, such action is prudent because collectiondescribed in full of all outstanding principal and interest is in doubt. Loans are generally placed on non-accrual status when principal and or interest is 90 days overdue, or sooner if judged appropriate by management. Consumer loans are generally charged-off when principal and or interest payments are 120 days overdue, or sooner if judged appropriate by management.



41




Non-performing Loans:Non-performing loans include loans on non-accrual status and loans past due 90 days or more and still accruing interest. The following table sets forth the details of non-performing loans over the past five years.


 

2016

2015

2014

2013

2012

Commercial real estate mortgages

      $2,564

       $1,279

     $  3,156

      $2,046

       $1,888

Commercial and industrial loans

           284

            292

            624

            793

            818

Commercial construction and

     land development

              ---

         1,111

         1,328

        1,913

         2,359

Agricultural and other loans to farmers

             31

              16

              84

             56

            664

   Total commercial loans

        2,879

         2,698

         5,192

        4,808

         5,729

   

 

 

 

 

 

Residential real estate mortgages

        3,419

         3,452

         6,051

        3,227

    ��    3,017

Home equity loans

             90

            820

         1,029

           745

            814

Other consumer loans

           108

              10

              16

             60

              72

   Total consumer loans

        3,617

         4,282

         7,096

        4,032

         3,903

   

 

 

 

 

 

Total non-accrual loans

        6,496

         6,980

       12,288

        8,840

         9,632

Accruing loans contractually past due

     90 days or more

             ---

              28

              ---

            ---

            235

Total non-performing loans

      $6,496

       $7,008

     $12,288

      $8,840

       $9,867

   

 

 

 

 

 

Allowance for loan losses to

     non-performing loans

        160.4%

         134.7%

         73.0%

         95.9%

          82.1%

Non-performing loans to total loans

          0.58%

           0.71%

         1.34%

         1.04%

          1.21%

Allowance to total loans

          0.92%

           0.95%

         0.98%

         0.99%

          0.99%


At December 31, 2016, total non-performing loans amounted to $6,496, compared with $7,008 at December 31, 2015, representing a decline of $512, or 7.3%.


Non-performing commercial real estate mortgages totaled $2,564 at December 31, 2016, representing an increase of $1,285, or 100.5%, compared with December 31, 2015. The increase was due to the reclassification of a non-performing commercial construction and land development loan that was completed in 2016. At December 31, 2016, non-performing commercial real estate mortgages were represented by 15 business relationships, with outstanding balances ranging from $31 to $637.


Non-performing commercial and industrial loans totaled $284 at December 31, 2016, representing a decline of $8, or 2.7%, compared with December 31, 2015.  At December 31, 2016, non-performing commercial and industrial loans were represented by four business relationships, with outstanding balances ranging from $11 to $170.


Non-performing commercial construction and land development loans totaled zero at December 31, 2016, representing a decline of $1,111, or 100%, compared with December 31, 2015. At December 31, 2015, non-performing commercial construction and land development loans were entirely represented by a commercial real estate loan to a local, non-profit affordable housing authority in support of an affordable housing project. This loan is principally secured by the housing units from the project. The project is fully constructed and there is no construction risk associated with the loan. The primary source of repayment is the saleNote 5 - Loan Loss Allowance of the existing housing units. This loan is impaired and was put on non-accrual status in late 2010. This loan was reclassified to non-performing commercial real estate mortgages during 2016.

Consolidated Financial Statements.


Non-performing agricultural and other loans to farmers totaled $31 at December 31, 2016, representing an increase of $15, or 93.8%, compared with December 31, 2015. At December 31, 2016, non-performing agricultural and other loans to farmers were represented by one loan, with an outstanding balance of $31.


Non-performing residential real estate mortgage loans totaled $3,419 at December 31, 2016, representing a decline of $33, or 1.0%, compared with December 31, 2015. At December 31, 2016, non-performing residential real estate mortgage loans were represented by 40 conventional 1-4 family mortgage loans, with outstanding balances ranging from $9 to $472.



42




Non-performing home equity loans totaled $90 at December 31, 2016, representing a decline of $730, or 89.0%, compared with December 31, 2015. At December 31, 2016, non-performing home equity loans were represented by five relationships with outstanding balances ranging from $7 to $44.


Non-performing other consumer  loans totaled $108 at December 31, 2016, representing an increase of $98, or 980.0%, compared with December 31, 2015. At December 31, 2016, non-performing other consumer loans were represented by six relationships with outstanding balances ranging from $1 to $83.


While the level and mix of non-performing loans continued to reflect favorably on the overall quality of the loan portfolio as of December 31, 2016, Bank management is cognizant of the still-recovering real estate market and soft economic conditions overall. Future levels of non-performing loans may be influenced by economic conditions, including the impact of those conditions on the Bank’s customers, including debt service levels, collateral values, tourism activity, consumer confidence and other factors existing at the time.  Management believes the economic activity and conditions in the local real estate markets will continue to be significant determinants of the quality of the loan portfolio in future periods and, thus, the Company’s results of operations and financial condition.


Delinquencies and Potential Problem Loans:In addition to the non-performing loans discussed above, the Bank also has loans that are 30 to 89 days delinquent. These loans amounted to $6,103 and $1,857 at December 31, 2016, and 2015, or 0.54% and 0.19% of total loans, respectively, net of any loans classified as non-performing that are within these delinquency categories. These loans and delinquency trends in general are considered in the evaluation of the allowance for loan losses and the related determination of the provision for loan losses.


On an ongoing basis, the Bank reviews the commercial loan portfolio for evidence of potential problem loans. Potential problem loans are loans that are currently performing in accordance with contractual terms, but where known information about possible credit problems of the borrower causes doubt about the ability of the borrower to comply with the loan payment terms and may result in disclosure of such loans as non-performing at some time in the future.


In addition the non-performing and delinquent loans discussed above, at December 31, 2016, the Bank identified 34 commercial relationships totaling $20,299, or 1.8% of total loans, as other potential problem loans (i.e. loans classified as sub-standard that were not delinquent or non-performing).At December 31, 2015, the Bank identified 32 commercial relationships totaling $19,774 as potential problem loans, or 2.0% of total loans. Factors such as payment history, value of supporting collateral, and personal or government guarantees led the Bank to conclude that the current risk exposure on these potential problem loans did not warrant accounting for the loans as non-performing. Although in a performing status as of year-end, these loans exhibited certain risk factors, which have the potential to cause them to become non-performing at some point in the future.


Allowance for Loan Losses:At December 31, 2016, the allowance for loan losses (the “allowance”) stood at $10,419, compared with $9,439 at December 31, 2015, representing an increase of $980, or 10.4%. The increase in the allowance from December 31, 2015 was largely attributed to loan growth combined with changes in the overall mix of non-performing and other potential problem loans.


Specific allowances for impaired loans are determined based upon a discounted cash flows analysis, or as appropriate, a collateral shortfall analysis. The amount of collateral dependent impaired loans totaled $3,268 as of December 31, 2016, compared with $1,999 as of December 31, 2015, representing an increase of $1,269 or 63.5%.The related allowances for loan losses on these impaired loans amounted to $369 and $312 as of December 31, 2016 and 2015, respectively.


Management reviews impaired loans to ensure such loans are transferred to interest non-accrual status, and written down when necessary. The amount of interest income not recorded on impaired loans amounted to $286, $117, and $58 for the years ended December 31, 2016, 2015 and 2014, respectively.


General allowances for loan losses account for the risk and estimated loss inherent in certain pools of industry and geographic loan concentrations within the loan portfolio. There were no material changes in loan concentrations during 2016 compared with 2015.


Based upon the process employed and giving recognition to all attendant factors associated with the loan portfolio, management believes the allowance for loan losses at December 31, 2016, is appropriate for the risks inherent in the loan portfolio.


While management uses available information to recognize losses on loans, changing economic conditions and the economic prospects of the borrowers may necessitate future additions or reductions to the allowance. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Bank’s allowance, which also may necessitate future additions or reductions to the allowance, based on information available to them at the time of their examination.



43











The following table details changes in the allowance for loan losses and summarizes loan loss experience by loan type over the past five years.


 

2016

2015

2014

2013

2012

   

 

 

 

 

 

Balance at beginning of period

 $      9,439

 $    8,969

 $    8,475

 $    8,097

 $    8,221

Charge-offs:

 

 

 

 

 

Commercial real estate mortgages

            133

          667

          238

          214

          474

Commercial and industrial

              90

          323

          475

          405

          102

Commercial construction and

     land development

              ---

            ---  

            ---

            ---

          344

Agricultural and other loans to farmers

              ---

            72

            14

            81

          160

Residential real estate mortgages

            141

            70

          650

          406

          568

Other consumer loans

              37

          111

          191

          120

          294

Home equity loans

              10

          376

            52

            29

            92

Tax exempt loans

              ---

            ---

            ---

            ---

            ---

  Total charge-offs

            411

       1,619

       1,620

       1,255

       2,034

   

 

 

 

 

 

Recoveries:

 

 

 

 

 

Commercial real estate mortgages

              40

 $         98

 $         85

 $       105

 $           9

Commercial and industrial loans

            242

            36

            16

            23

            25

Commercial construction and

     land development

              ---

            ---

            ---

            ---

            ---

Agricultural and other loans to farmers

              47

            18

          130

            37

            82

Residential real estate mortgages

              44

          129

            12

              7

          104

Other consumer loans

              29

            22

            37

            23

            38

Home equity loans

              10

              1

              1

            20

            ---

Tax exempt loans

              ---

            ---

            ---

            ---

            ---  

  Total recoveries

            412

          304

          281

          215

          258

  

 

 

 

 

 

Net (recoveries) charge-offs

               (1)

       1,315

       1,339

       1,040

       1,776

Provision charged to operations

            979

       1,785

       1,833

       1,418

       1,652

Balance at end of period

 $    10,419

 $    9,439

 $    8,969

 $    8,475

 $    8,097

   

 

 

 

 

 

Average loans outstanding during period

 $1,054,687

 $962,240

 $881,389

 $839,010

 $779,800

    

 

 

 

 

 

Annualized net charge-offs to

     average loans outstanding

0.00%

0.14%

0.15%

0.12%

0.23%


For the year ended December 31, 2016, total net loan recoveries amounted to $1, compared to net charge-offs of $1,315 in 2015, representing a decline of $1,316 or 100.1%. Total net charge-offs to average loans outstanding amounted to 0.00% in 2016, compared with 0.14% in 2015.








44










The following table presents the five-year summary of the allowance by loan type at each respective year-end.


 

2016

2015

2014

2013

2012

 

 

 

 

 

Amount

Percent of

Loans in

Each

Category to

Total loans

 

 

 

 

Amount

Percent of

Loans in

Each

Category to

Total loans

 

 

 

 

Amount

Percent of

Loans in

Each

Category to

Total loans

 

 

 

 

Amount

 Percent of

Loans in

Each

Category   to

Total loans

 

 

 

 

Amount

Percent of

Loans in

Each

Category to

Total loans

Commercial and

    Industrial,

    and agricultural

 $ 1,900

    11.99%

 $1,543

     11.20%

 $1,206

 ��   11.35%

 $1,601

      11.83%

    $1,329

    10.35%

Commercial and Consumer

     real estate mortgages:

   

 

   

 

   

 

   

 

   

 

   Real estate-construction

     and development

          79

      1.30%

      184

      2.52%

      145

       2.77%

      314

        2.13%

         515

      2.71%

   Real estate-mortgage

     8,289

     84.76%

   7,554

    83.76%

   7,453

    82.74%

   6,255

      82.42%

      5,905

    82.74%

Installments and other loans

     to individuals

          99

      0.55%

      111

      0.98%

        94

      1.32%

      137

        1.70%

         207

      2.33%

Tax exempt

          52

      1.40%

        47

      1.54%

        71

      1.82%

      168

        1.92%

         141

      1.87%

TOTAL

 $10,419

   100.00%

 $9,439

  100.00%

 $8,969

   100.00%

 $8,475

    100.00%

    $8,097

   100.00%


Bank Owned Life Insurance


Bank owned life insurance (“BOLI”) represents life insurance on the lives of certain current and retired employees who have provided positive consent allowing the Bank to be the beneficiary of such policies. Increases in the cash value of the policies, as well as insurance proceeds received in excess of the cash value, are recorded in other non-interestnon-

interest income, and are not subject to income taxes. The cash surrender value of the BOLI is included on the Company’s consolidated balance sheet.


The Company reviews the financial strength of the insurance carrier prior to the purchase of BOLI and quarterly thereafter.  

At December 31, 2016, the Bank had four BOLI carriers which were credit rated by Standard & Poor’s as “AA-” or higher (i.e., “high grade investments”).


At December 31, 2016,2017, the cash surrender value of BOLI amounted to $24,450,$58.0 million, compared with $23,747$24.4 million at December 31, 2015, representing an increasethe end of $703, or 3.0%.2016. The increase in BOLI was primarily the result of $31.7 million due to the LSBG acquisition and $1.9 million attributed to increases in the cash surrender value of the BOLI policies.


Other Assets


The Company’s other assets are principally comprised of accrued interest receivable, deferred income taxes and other real estate owned. At December 31, 2016, total other assets amounted to $21,274, compared with $13,900 at December 31, 2015, representing an increase of $7,374 or 53.1%.  The increase was principally due to an increase in deferred tax assets reflecting lower unrealized security gains in 2016 as compared to 2015.


Funding Sources


The Bank utilizes various traditional sources of funding to support its earning asset portfolios. Funding sources principally consist of retail deposits and, to a lesser extent, certificates of deposit obtained from the national market, borrowings from the FHLB, of which it is a member, Fed funds purchased and borrowing from the Federal Reserve Bank of Boston, subordinated debt and securities sold under agreements to repurchase.








45



Deposits


Historically, the banking business in the Bank’sBank's deposit market area has been seasonal, with lower deposits in the winter and spring months and higher deposits in the summer and autumn. These seasonal swings have been fairly predictable and have not had a materially adverseautumn months.

Excluding the impact on the Bank. Seasonal swings in deposits have been typically absorbed by the Bank’s strong liquidity position, including borrowing capacity from the FHLB, brokered certificates of deposit obtained from the national market and cash flows from its securities portfolio.


Total Deposits:At December 31, 2016,acquired balances, total deposits amountedincreased 14.4% to $1,050,300$1.2 billion in 2017 compared with $942,787 at December 31, 2015, representing an increase of $107,513, or 11.4%. Totalto 2016. Core deposits are still the primary funding source for loan growth and the Company took on additional FHLB borrowings in order to fund additional loan growth in the period. Organic growth for demand depositdeposits and other interest bearing deposit,deposits, NOW accounts, and savings and money market accounts increased $87,805 or 16.1%,in total remained close to zero for 2017 compared to 2016, while time deposits increased $19,708, or 5.0%, comparedgrew to $575.0 million with December 31, 2015.


Demand Deposits:The Bank’s demand deposits are principally business accounts. At December 31, 2016, total demand deposits amounted to $98,856, compared with $86,577 at December 31, 2015, representing an increaseorganic growth rate of $12,279, or 14.2%. As discussed above,38% excluding the Bank’s deposits are seasonal in nature and the timing and extentimpact of seasonal swings vary from year to year. This is particularly the case with demand deposits. For the year ended December 31, 2016, total average demand deposits amounted to $93,757 compared with $82,741 in 2015, representing an increase of $11,016, or 13.3%. The increase in average demand deposits was largely attributed to a relatively strong tourist season in the local communities served by the Bank combined with new customer relationships.

acquired balances.


The Bank strives to attract demand deposits in connection with its commercial lending activities, on a total relationship basis. The Bank’s business checking account offerings includeEasy Business Checking, Small Business Checking, Business Checking with Interest, Business Plus Checking,andNon-Profit Business Plus Checking, each designed to help business owners manage the varying financial aspects of their business. The Bank also offersRemote Deposit Capture,enabling its business customers to deposit checks remotely. Business demand deposits are also generated by way of the Bank’sMerchant Credit Card Processing Program.


NOW Accounts:The Bank offersinterest bearing NOW accounts to individuals and not-for-profit organizations. At December 31, 2016, total NOW accounts amounted to $175,150, compared with $160,394 at December 31, 2015, representing an increase of $14,756, or 9.2%. For the year ended December 31, 2016, average NOW accounts amounted to $161,494, compared with $149,117 in 2015, representing an increase of $12,377, or 8.3%.  


Savings and Money Market Deposits:  At December 31, 2016, total savings and money market accounts amounted to $359,857, compared with $299,087 at December 31, 2015, representing an increase of $60,770, or 20.3%.  For the year ended December 31, 2016, average savings and money market accounts amounted to $312,982, compared with $266,929 in 2015, representing an increase of $46,053 or 17.3%. This increase was principally attributed to both new and existing customer relationships.


Time Deposits:At December 31, 2016, total time deposits amounted to $416,437, compared with $396,729 at December 31, 2015, representing an increase of $19,708, or 5.0%. The increase in time deposits was primarily due to an increase in jumbo time deposits, compared with December 31, 2015. A portion of the Bank’s time deposits include certificates of deposit obtained from the national market. This source of funds is generally utilized to help support the Bank’s earning asset growth, while maintaining its strong on-balance-sheet liquidity position via secured borrowing lines of credit with the FHLB and the Federal Reserve Bank of Boston.





46



The following table summarizes the changes in the average balances of deposits during the periods indicated, including the weighted average interest rates paid for each category of deposits:


 

2016

2015

 

Average

Balance

Average

Rate

Average

Balance

Average

Rate

Demand deposits

 $  93,757

    ---%

 $  82,741

    ---%

NOW accounts

   161,494

0.20

   149,117

0.20

Savings and money market deposits

   312,982

0.33

   266,929

0.29

Time deposits

   414,347

1.29

   427,550

1.18

   Total deposits

 $982,580

 

 $926,337

 


The following table summarizes the maturity distribution of time deposits of $100 or greater as of December 31 2016:


Amount

Less than 3 months       

 $  32,540

Over three to six months

       9,863

Over six to twelve months

     30,279

Over twelve months

     39,362

 $112,044


Time deposits in denominations of $100 or greater totaled $112,044 at December 31, 2016, compared with $93,481 at December 31, 2015, representing an increase of $18,563, or 19.9%.


Borrowed Funds


Borrowings
The Bank utilizes borrowed funds in leveraging its strong capital position and supporting its earning asset portfolios. Borrowed funds are principally utilized to support the Bank’s investment securities portfolio and, to a lesser extent, fund loan growth. Borrowed funds also provide a means to help manage balance sheet interest rate risk, given the Bank’s ability to select desired amounts, terms and maturities on a daily basis.


Borrowed funds principally consist of advances from the FHLB and, to a lesser extent, securities sold under agreements to repurchase, Fed funds purchased and borrowings from the Federal Reserve Bank of Boston. Advances from the FHLB are secured by stock in the FHLB, investment securities, certain commercial real estate loans, and blanket liens on qualifying mortgage loans and home equity loans.


Refer to Part II, Item 7,Contractual Obligations, and Notes 11 and 12,Short-term BorrowingsandLong-term Debt,

FHLB borrowings increased by $236.2 million during 2017, of which $175.7 million was assumed from the acquisition. Excluding the impact of the consolidatedacquisition, the increase was mostly in short term FHLB advances to fund loans during the first half of the year.

Stockholders’ Equity
Excluding the $181.9 million of common stock of the Company issued to LSBG shareholders, total equity increased by $16.0 million, or 10.2%, during 2017. Accumulated other comprehensive loss increased by $228 thousand primarily due to the changes in fair value of the Company’s derivative hedges offset by improvements in its available for sale securities positions.

The Company evaluates changes in tangible book value, a non-GAAP financial statementsmeasure which is a commonly considered valuation metric used by the investment community and which parallels some regulatory capital measures. Tangible book value increased to $246.2 million as of December 31, 2017 from $151.0 million at year-end 2016. The Company’s ratio of tangible equity to tangible assets stood at 7.12% at the end of 2017, compared to 8.65% at the end of 2016. The decrease in this annual report on form 10-Kthe ratio is primarily due to the share issuance offset by goodwill and other intangible assets recorded for further information on borrowed funds.

the LSBG acquisition in the first quarter 2017. The LSBG acquisition resulted in a $95.1 million increase in goodwill.


Junior Subordinated Debentures:

The Company and the Bank remained well capitalized under regulatory guidelines at period-end.

Stock Repurchase Plan
In the second quarter ofAugust 2008, the Bank issued $5,000 aggregate principal amountCompany’s Board of subordinated debt securities. These securities qualify as Tier 2 capitalDirectors approved a 24 month program to repurchase up to 675,000 shares of the Company’s common stock. The Company’s Board of Directors authorized the continuance of this program for additional 24 month periods in August 2010, 2012 and 2014. On August 16, 2016, the BankCompany’s Board of Directors authorized the continuance of this program through August 17, 2018. Depending on market conditions and other

factors, these purchases may be commenced or suspended at any time, or from time to time, without prior notice and may be made in the open market or through privately negotiated transactions.

As of December 31, 2017, the Company had repurchased 270,294 shares of stock under this plan, at a total cost of $3.75 million and were issuedan average price of $13.86 per share. During 2017, the Company repurchased 9,603 shares under the plan, at a total cost of $282 thousand and an average price of $29.39. The Company records repurchased shares as treasury stock.

Cash Dividends
The Company has historically paid regular quarterly cash dividends on its common stock. Each quarter, the Board of Directors may declare the payment of regular quarterly cash dividends, subject to help support future earning asset growth without jeopardizing the



47



Bank’s historically strong capital position. The subordinated debt securities are due in 2023, but are callable quarterly by the Bank after five years without penalty. The rate of interest on these securities is three month Libor plus 345 basis points. The subordinated debt securities are classified as borrowingsadjustment from time to time, based on the Company’s consolidatedearnings outlook, the strength of its balance sheet.

sheet, its need for funds, and other relevant factors. There can be no assurance that dividends on the Company’s common stock will be paid in the future.


Total Borrowings:At December 31, 2016, total borrowings

The Company’s principal source of funds to pay cash dividends and support its commitments is derived from Bank operations. During 2017, the Company declared and distributed regular cash dividends on its common stock in the aggregate amount of $11.51 million compared with $6.58 million in 2016. The Company’s 2017 dividend payout ratio amounted to $536,596,44.3%, compared with $474,791 at December 31, 2015,44.0% in 2016. The total regular cash dividends paid in 2017 amounted to $0.75 per common share of common stock, compared with $0.73 in 2016, representing an increase of $61,805,$0.02 per share, or 13.0%2.8%.

COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED DECEMBER 31, 2017 AND 2016

Summary
Results in 2017 include LSBG's operations acquired on January 13, 2017. Therefore, many measures of revenue, expense, income, and average balances increased compared to prior periods. Additionally, per share measures were affected by the issuance of common shares as merger consideration.

Net income in 2017 was $26.0 million compared to $14.9 million in 2016. Adjusted income increased to $32.1 million in 2017 from $13.9 million in 2016. The improvement in results reflects operations acquired from LSBG, expanded operations and improved profitability. The Company’s profitability in 2017 benefited from both a higher non-interest income as well as improved efficiency. Acquisition costs affected both years with an after-tax charge of $2.1 million in 2017 and $1.7 million in 2016. Net income in 2016 benefited from security gains totaling $2.9 million on an after-tax basis.

Operational enhancements in 2017 are reflected in the Company’s efficiency ratio (non-GAAP) trend, which started 2017 at 59%, but then improved consecutively in each quarter ending 2017 at 55%. The efficiency ratio is a non-GAAP financial measure that compares adjusted expenses and revenues to assess how well the Company is managing its costs. Higher ratios in prior periods represent gradual investments made in infrastructure and key employees to support operations across a broader footprint and larger revenue producing institution.


Net Interest Income
Net interest income is the principal component of the Company’s income stream and represents the difference or spread between interest generated from earning assets and the interest expense paid on deposits and borrowed funds. Net interest income is entirely generated by the Bank. Fluctuations in market interest rates as well as volume and mix changes in earning assets and interest bearing liabilities can materially impact net interest income.

Net interest income also includes significant components related to the amortization of purchase accounting adjustments. The most significant component is purchased loan accretion related to recoveries on the resolution of acquired assets.


Net interest income increased year-over-year by $46.8 million to $92.2 million. The increase was driven by a $1.6 billion increase in average earning assets, which includes organic growth and benefit of the LSBG acquisition. Net interest margin increased to 3.10% in 2017 compared to 2.96% in 2016. Net interest spread increased 13 basis points mostly from the addition of acquired loans but also reflecting higher yields on commercial loans. Weighted average yields for commercial real estate and commercial and industrial loans increased to 4.24% and 4.73% in 2017 from 3.71% and 4.03% in 2016, respectively. Net interest margin in 2017 also benefited from purchased loan accretion totaling $3.7 million in the year.

Lower costs of interest-bearing deposits acquired from LSBG were offset by increased rates on FHLB advances and repurchase agreements year over year as well as acquired subordinated borrowings. For short-term advances, weighted average rates increased to 1.49% from 0.97% in 2016 while advances greater than one year showed a 13 basis point increase in weighted average rates year-over-year. Higher wholesale funding costs resulted from fed funds rate hikes. Increases in overall cost of funds are expected to have a negative impact on net interest margin in the near-term as rates increase and the Company employs strategies to mitigate the impact.

Non-Interest Income
Non-interest income for the year increased to $26.0 million from $12.3 million in 2016. Gains from sales of securities in 2016 increased non-interest income by $4.5 million. Non-interest income in 2017, excluding gains on securities, increased $18.1 million from 2016. Revenue from trust and investment management services as well as financial services on a year-to-date basis increased $8.4 million from 2016, which is principally due to the addition of Charter Trust Company as part of the LSBG acquisition. Income from trust and investment management services are principally derived from fee income based on a percentage of the fair market value of client assets under management and held in custody. Revenue from financial services is derived from retail brokerage services conducted through Bar Harbor Financial Services, an independent third-party broker. Fee income from trust, investment management and financial services represented 47% of total non-interest income in 2017 compared to 31% in 2016.

Income from customer service fees is principally derived from overdraft fees, monthly deposit account maintenance and activity fees, automated teller machine (“ATM”) fees and a variety of other deposit account related fees. Customer services fees also include Bank’s debit card product and merchant credit and debit card processing fees. Customer service fees increased $5.8 million compared to 2016 also as a result of the acquisition given the broader customer deposit base and higher number of ATM transactions. In 2017, the Company also benefited from $1.1 million in fees from its insurance subsidiary, which was acquired from the LSBG acquisition. The Company sold the insurance subsidiary in October 2017.

Loan Loss Provision
The provision for loan losses is a charge to earnings in an amount sufficient to maintain the allowance for loan losses at a level deemed adequate by the Company as an estimate of the probable and estimable loan losses in the portfolio as of period-end. The level of the allowance is a critical accounting estimate, which is subject to uncertainty. The level of the allowance is included in the discussion of financial condition. The provision for loan losses in 2017 increased to $2.8 million from $1.0 million in 2016. The amount of the provision exceeded net charge-offs in all periods shown, as the amount of the allowance has risen gradually based on loan portfolio growth and offset in part by the ongoing improvement in loan performance and credit quality.

Non-Interest Expense
Non-interest expense increased to $72.7 million from $35.9 million in 2016. Salary and employee benefit costs increased by $19.8 million compared with 2016 principally due to the LSBG acquisition. Full time equivalent staff totaled 423 at the end of 2017 compared with 186 at the end of 2016. Salary and employee benefit costs decreased on a quarterly basis in the second half of 2017 reflecting a positive trend of disciplined cost control and realized cost saves with the acquisition. Occupancy expenses increased $7.0 million as compared to 2016 due to costs of operating additional branches from the acquisition. Acquisition costs totaled $3.3 million in 2017 and $2.7 million in 2016. Acquisition costs in 2017 include severance, system conversion and professional costs, which were offset in part by a one-time benefit from the sale of the Company's insurance subsidiary.


Income Tax Expense
The effective tax rate was 39.0% in 2017 compared to 28.2% in 2016. The increase in borrowingsthe effective tax rate was a direct result of the Tax Cuts and Jobs Act of 2017. The tax reform resulted in a $4.0 million income tax charge in the fourth quarter due to the revaluation of net deferred tax assets.

COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED DECEMBER 31, 2016 AND 2015

Summary
Net income in 2016 was $14.9 million, or $1.63 per share, in 2016 compared to $15.2 million, or $1.67 per share, in 2015. Acquisition costs related to LSBG reduced 2016 earnings by $1.7 million on an after-tax basis. Those costs were offset by increases in after-tax gains from security sales of $2.1 million. Increases in non-interest expenses further reduced adjusted income per share to $1.52 per share in 2016 from $1.58 in 2015.

Net Interest Income
Net interest income in 2016 on a tax-equivalent basis amounted to $47.5 million compared with $46.8 million in 2015. The increase in 2016 tax-equivalent net interest income was attributed to average earning asset growth of $132.3 million or 9.0%, as the net interest margin declined 23 basis points compared with 2015. In2016, the tax-equivalent net interest margin amounted to 2.96%, compared with 3.19% in 2015. The decline in the net interest margin was principally utilizedattributed to help funda 17 basis point decline in the average earning asset yield, as well as a six basis point increase in the average cost of interest bearing liabilities. The increase in the average interest yield in 2016 is primarily due to average earning asset growth of $132.3 million while the increase in funding cost was due to a $113.4 million increase in average interest bearing liabilities.

Non-interest Income
In 2016 non-interest income totaled $12.3 million compared with $9.0 million in 2015, which was primarily the result of gains from sales of securities. Securities gains in 2016 were $4.5 million compared with $1.3 million in 2015. The realized securities gains largely reflected Bank management’s strategy of lowering the duration of the securities portfolio and its overall interest rate risk profile, while simultaneously generating income. Non-interest income in 2016 from trust management services, financial services, and customer service fees were relatively flat with those income streams of 2015.

Loan Loss Provision
The provision for loan loss decreased to $979 thousand in 2016 from $1.8 million in 2015 due to lower levels of non-performing loans and loan charge-off experience, combined with relatively stable credit quality metrics.

Non-interest Expense
Non-interest expense increased to $35.9 million in 2016 from $30.9 million in 2015 is primarily due to $2.7 million in merger expenses related to the LSBG acquisition, and a $1.9 million increase in salary and benefit expense related to strategic hires at the executive and senior level positions.

Income Taxes
The effective tax rate was 28.2% in 2016 and 28.3% in 2015.  The effective tax rate remained relatively flat in 2016 as compared to 2015, which reflected the impact of 2016 security gains offset by merger-related expenses.  


LIQUIDITY AND CASH FLOWS

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

The Bank actively manages its liquidity position through target ratios established under its Asset Liability Management Policy. Continual monitoring of these ratios, by using historical data and through forecasts under multiple rate and stress scenarios, allows the Bank to employ strategies necessary to maintain adequate liquidity. The Bank’s policy is to maintain a liquidity position of at least 4% of total assets. A portion of the Bank’s earning asset growth.

Capital Resources

deposit base has been historically seasonal in nature, with balances typically declining in the winter months through late spring, during which period the Bank’s liquidity position tightens.

The Bank also had capacity to borrow funds on a secured basis utilizing the Borrower in Custody program and the Discount Window at the Federal Reserve Bank of Boston (the “FRB”). At December 31, 2017, the Bank’s available secured line of credit at the FRB stood at $117.1 million or 3.2% of the Bank’s total assets. The Bank also has access to the national brokered deposit market, and has used this funding source to bolster its on balance sheet liquidity position.
The Bank maintains a liquidity contingency plan approved by the Bank’s Board of Directors. This plan addresses the steps that would be taken in the event of a liquidity crisis, and identifies other sources of liquidity available to the Company. Company management believes that the level of liquidity is sufficient to meet current and future funding requirements. However, changes in economic conditions, including consumer savings habits and availability or access to the brokered deposit market could potentially have a significant impact on the Company’s liquidity position.

CAPITAL RESOURCES

Consistent with its long-term goal of operating a sound and profitable organization, at December 31, 20162017 the Company maintained its strong capital position and continued to be a “well-capitalized” financial institution according to applicable regulatory standards. Management believes this to be vital in promoting depositor and investor confidence and providing a solid foundation for future growth.


During

In 2015 the Company amended its Articles of Incorporation to increase the number of shares of common stock authorized for issuance from 10,000,000 shares to 20,000,000 shares. The $2.00 par value of the Company’s common stock, as well as the authorized issuance of up to 1,000,000 shares of preferred stock, remained unchanged from prior periods.


In October 2009, the Company filed a shelf registration statement on Form S-3 with the SEC to register an indeterminate number of shares of common stock and preferred stock, which together have an aggregate initial offering price not to exceed $35,000 (the “Shelf Registration”). The SEC declared the Company’s Shelf Registration effective on November 3, 2009.  In December of 2009, the Company announced that it had completed its offering of 800,000 shares of its common stock to the public at $27.50 per share. The principal use of the net proceeds from that offering were used to repurchase all the Company’s Series A preferred shares previously sold to the U.S. Department of the Treasury under its Capital Purchase Program.


The Company’s Shelf Registration expired on November 3, 2012. The Company has not decided whether to file a new shelf registration statement and does not have any current plans to raise additional capital; however, the Company does recognize that financial flexibility is important and that a shelf registration filed with the SEC can be a prudent capital management tool should the need or opportunity to raise capital on attractive terms arise and, therefore, the Company may consider the filing of a new shelf registration with the SEC on terms similar to the Shelf Registration or other terms during 2017 or in other future years.


Capital Ratios:The Company and

AVERAGE BALANCES, INTEREST, AVERAGE YIELDS/COST AND RATE/VOLUME ANALYSIS

Tables with the Bankabove information are subject to the risk-based capital guidelines administered by the Company’s and the Bank's principal regulators. The risk-based capital guidelines are designed to make regulatory capital requirements more sensitive to differencespresented in risk profiles among banks and bank holding companies, to account for off-balance sheet exposure and to minimize disincentives for holding liquid assets. Under these guidelines, assets and off-balance sheet items are assigned to broad risk categories, each with appropriate weights. The resulting capital ratios represent capital as a percentage of risk-weighted assets and off-balance sheet items. Effective January 1, 2015, the Company and the Bank adopted the Basel III capital adequacy rules which, among other changes added a new risk-weighted capital measure Common Equity Tier 1 (“CET1”).  The new Basel III capital adequacy guidelines require all banks and bank holding companies to maintain minimum capital ratios of:

·

Common Equity Tier 1 of 4.5%

·

Total risk-based capital to risk-weighted assets of 8.0%

·

Tier 1 capital to total risk-weighted assets of 6.0%

·

Tier 1 capital to average assets (“Leverage Ratio”) of 4.0%




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Failure to meet minimum capital requirements can initiate certain mandatory and possible additional discretionary actions by regulators that, if undertaken, could have a material adverse effect on the Company's financial statements.


As of December 31, 2016, the Company and the Bank were considered well-capitalized under the regulatory framework for prompt corrective action. Under the Basel III capital adequacy guidelines, awell-capitalized institution must maintain the following capital ratios:

·

Common Equity Tier 1 of 6.5%

·

Total risk-based capital to risk-weighted assets of 10.0%

·

Tier 1 capital to total risk-weighted assets of 8.0%

·

Tier 1 capital to average assets  (“Leverage Ratio”) of 5.0%


The following table sets forth the Company's regulatory capital at December 31, 2016 and 2015, under the rules applicable at that date.


 

2016

2015

 

Amount

Ratio

Amount

Ratio

Common Equity Tier 1 to Risk Weighted Assets

 $155,905

15.01%

 $145,400

15.55%

Regulatory Requirement

     46,742

 4.50

     42,071

  4.50

Excess over "adequately capitalized"

 $109,163

 10.51%

 $103,329

11.05%

   

 

 

 

 

Tier 1 Capital to Risk Weighted Assets

 $155,905

15.01%

 $145,400

15.55%

Regulatory Requirement

     62,323

 6.00

     56,095

  6.00

Excess over "adequately capitalized"

 $  93,582

9.01%

 $  89,305

9.55%

   

 

 

 

 

Tier 1 Capital to Average Assets

 $171,558

16.52%

 $160,042

17.12%

Regulatory Requirement

     83,097

 8.00

     74,793

     8.00

Excess over "adequately capitalized"

 $  88,461

8.52%

 $  85,249

9.12%

   

 

 

 

 

Tier 1 Capital to Average Assets (Leverage)

 $155,905

8.94%

 $145,400

9.37%

Regulatory Requirement

     69,722

 4.00

     62,087

  4.00

Excess over "adequately capitalized"

 $  86,183

4.94%

 $  83,313

5.37%


As more fully disclosed in Note 14 of the Consolidated Financial Statements in this Annual Report on Form 10-K, the Bank also maintained its standing as a well-capitalizedinstitution as defined by applicable regulatory standards.


Shareholders’ Equity:At December 31, 2016, total shareholders’ equity amounted to $156,740, compared with $154,152 at December 31, 2015, representing an increase of $2,588, or 1.7%. The increase in shareholder’s equity was attributed to an $8,299 increase in retained earnings offset by a $7,955 decline in accumulated other comprehensive income. This decline was principally the result of a reduction in unrealized gains in the Bank’s securities portfolio, which changed from a tax effected unrealized gain of $5,713 at December 31, 2015 to a tax effected unrealized loss of $2,125 at December 31, 2016, largely resulting from interest rate movements between reporting periods.



49




Trends, Events or Uncertainties:There are no known trends, events or uncertainties, nor any recommendations by any regulatory authority, that are reasonably likely to have a material effect on the Company’s capital resources, liquidity, or financial condition.


Stock Repurchase Plan:In August 2008, the Company’s Board of Directors approved a 24 month program to repurchase up to 450,000 shares of the Company’s common stock, or approximately 10.2% of the shares then currently outstanding.  The Company’s Board of Directors authorized the continuanceItem 6 of this program for additional 24 month periods in August 2010, 2012 and 2014.  On August 16, 2016, the Company’s Board of Directors authorized the continuance of this program through August 17, 2018.

report.


Depending on market conditions and other factors, these purchases may be commenced or suspended at any time, or from time to time, without prior notice and may be made in the open market or through privately negotiated transactions.


As of December 31, 2016, the Company had repurchased 173,794 shares of stock under this plan, at a total cost of $3,465 and an average price of $19.94 per share. During 2016, the Company repurchased 15,381 shares under the plan, at a total cost of $497 and an average price of $32.30. The Company records repurchased shares as treasury stock.

CONTRACTUAL OBLIGATIONS

Cash Dividends:  The Company has historically paid regular quarterly cash dividends on its common stock. Each quarter, the Board of Directors may declare the payment of regular quarterly cash dividends, subject to adjustment from time to time, based on the Company’s earnings outlook, the strength of its balance sheet, its need for funds, and other relevant factors. There can be no assurance that dividends on the Company’s common stock will be paid in the future.


The Company’s principal source of funds to pay cash dividends and support its commitments is derived from Bank operations. During 2016, the Company declared and distributed regular cash dividends on its common stock in the aggregate amount of $6,577 compared with $6,040 in 2015. The Company’s 2016 dividend payout ratio amounted to 44.0%, compared with 39.9% in 2015. The total regular cash dividends paid in 2016 amounted to $1.09 per common share of common stock, compared with $1.01 in 2015, representing an increase of $0.08 per share, or 7.9%.


Inthe first quarter of 2017, the Company declared a regular cash dividend of $0.28 per share of common stock, representing an increase of $0.015 or 5.7%, compared with the first quarter of 2016. Based on the December 31, 2016 price of the Company’s common stock of $47.33 per share, the dividend yield amounted to 2.37%.


Contractual Obligations


The Company is a party to certain contractual obligations under which it is obligated to make future payments. These principally include borrowings from the FHLB, consisting of short and long-term fixed rate borrowings, and collateralized by all stock in the FHLB, a blanket lien on qualified collateral consisting primarily of loans with first and second mortgages secured by one-to-four family properties, and certain pledged investment securities. The Company has an obligation to repay all borrowings from the FHLB.


The Company is also obligated to make payments on operating leases for its retail branch offices inSomesville and Topsham, Maine, as well as office space in Hampden and Rockland, Maine.



50









Borrowings are stated at their contractual maturity due dates and do not reflect call features, or principal amortization features, on certain borrowings. The following table summarizes the Company’s contractual obligations at December 31, 2016.


 

 

Payments Due By Period

Description

Total Amount of Obligations

< 1

Year

 1-3

Years

4-5

Years

> 5

Years

Borrowings from Federal Home Loan Bank

    $509,816

 $372,700

 $115,750

 $21,000

 $   366

Fed Funds Purchased

              ---

          ---

          ---

          ---

        ---

Securities sold under agreements to repurchase

        21,780

    21,780

          ---

          ---

        ---

Junior subordinated debentures

          5,000

          ---

          ---

          ---

   5,000

Operating Leases

          1,704

         271

         485

        427

      521

  Total

    $538,300

$394,751

$116,235

 $21,427

 $5,887


All FHLB advances are fixed-rate instruments. Advances are payable at their call dates or final maturity dates. At December 31, 2016, the Bank had $17,000 in callable advances.


In the normal course of conducting its banking and financial services business, and in connection with providing products and services to its customers, the Company has entered into a variety of traditional third partythird-party contracts for support services. Examples of such contractual agreements would include, but are not limited to: services providing ATMs, Visa Debit Cardcore banking systems, ATM and debit card processing, trust services accounting support, check printing,software and the leasing of T-1 telecommunication lines and other technology infrastructure supporting the Company’s wide area technology network.


The majority offollowing table summarizes the Company’s core operating systems and software applications are maintained “in-house” with traditional third party maintenance agreements of one year.

contractual obligations at December 31, 2017:

(in thousands) Total Less than One Year One to Three Years Three to Five Years After Five Years
FHLB Borrowings $745,982
 $608,792
 $134,874
 $1,633
 $683
Subordinated Notes 43,033
 —
 —
 —
 43,033
Operating lease obligations 3,460
 841
 1,315
 727
 577
Purchase obligations 19,998
 2,222
 4,444
 4,444
 8,888
Total Contractual Obligations $812,473
 $611,855
 $140,633
 $6,804
 $53,181

Off-Balance Sheet Arrangements

OFF-BALANCE SHEET ARRANGEMENTS

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


At December 31, 20162017 and 2015,2016, the Company’s off-balance sheet arrangements were limited to standby letters of credit.


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


At December 31, 20162017 and 2015,2016, commitments under existing standby letters of credit totaled $385.$486 thousand and $385 thousand, respectively. The fair value of the standby letters of credit was not significant as of the foregoing dates.



51

IMPACT OF NEW ACCOUNTING PRONOUNCEMENTS


Off-Balance Sheet Risk


The Bank is party to financial instruments with off-balance sheet risk in the normal course of business to meet the financial needs of its customers and to reduce its own exposure to fluctuations in interest rates. These financial instruments include commitments to extend credit and certain financial derivative instruments.


Commitments to Extend Credit:Commitments to extend credit represent agreements by the Bank to lend to a customer provided there is no violation of any condition established in the contract. These commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee.


Since many of these commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Bank evaluates each customer's creditworthiness on a case-by-case basis using the same credit policies as it does for its balance sheet instruments, such as loans. The amount of collateral obtained, if deemed necessary by the Bank upon the issuance of commitment, is based on management's credit evaluation of the customer.


The following table summarizes the Bank’s commitments to extend credit as of December 31:


 

2016

2015

   

 

 

Commitments to originate loans

    $  41,731

    $  41,529

Unused lines of credit

        98,823

        97,283

Un-advanced portions of construction loans

        20,330

        12,719

   Total

    $160,884

    $151,531


Financial Derivative Instruments:As part of its overall asset and liability management strategy, the Bank periodically uses derivative instruments to minimize significant unplanned fluctuations in earnings and cash flows caused by interest rate volatility. The Bank's interest rate risk management strategy involves modifying the re-pricing characteristics of certain assets and liabilities so that change in interest rates does not have a significant adverse effect on net interest income. Derivative instruments that management periodically uses as part of its interest rate risk management strategy include interest rate swap agreements, interest rate floor agreements and interest rate cap agreements.


At December 31, 2016 and 2015, the Bank had four outstanding, off balance sheet, derivative instruments. These derivative instruments were interest rate cap agreements, with notional principal amounts totaling $90,000. The notional amounts of the financial derivative instruments do not represent exposure to credit loss. The Bank is exposed to credit loss only

Please refer to the extent the counter-party defaultsnotes on Recently Adopted Accounting Principles and Future Application of Accounting Pronouncements in its responsibility to pay interest under the termsNote 1 - Summary of the agreements. The interest rate cap agreements were purchased by the Bank to limit its exposure to rising interest rates and were designated as cash flow hedges.


Further information covering the Bank’s derivative instruments is incorporated by reference to Part II, Item 8, Notes 1 and 12Significant Accounting Policies of the Consolidated Financial Statements in this Annual Report on Form 10-K.

Statements.









Liquidity


Liquidity is measured by the Company’s ability to meet short-term cash needs at a reasonable cost or minimal loss. The Company seeks to obtain favorable sources of liabilities and to maintain prudent levels of liquid assets in order to satisfy varied liquidity demands. Besides serving as a funding source for



52



maturing obligations, liquidity provides flexibility in responding to customer initiated needs. Many factors affect the Company’s ability to meet liquidity needs, including variations in the markets served by its network of offices, its mix of assets and liabilities, reputation and credit standing in the marketplace, and general economic conditions.


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


The Bank uses a basic surplus model to measure its liquidity over 30 and 90-day time horizons. The relationship between liquid assets and short-term liabilities that are vulnerable to non-replacement are routinely monitored. The Bank’s policy is to maintain a liquidity position of at least 4% of total assets. At December 31, 2016, liquidity, as measured by the basic surplus model, was 9.2% over the 30-day horizon and 8.7% over the 90-day horizon.


At December 31, 2016, the Bank had unused lines of credit and net unencumbered qualifying collateral availability to support its credit line with the FHLB approximating $221,440. The Bank also had capacity to borrow funds on a secured basis utilizing the Borrower in Custody (“BIC”) program and the Discount Window at the Federal Reserve Bank of Boston (the “FRB”). At December 31, 2016, the Bank’s available secured line of credit at the FRB stood at $130,979 or 7.5% of the Bank’s total assets. The Bank also has access to the national brokered deposit market, and has used this funding source to bolster its on balance sheet liquidity position.


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


AVERAGE BALANCES, INTEREST, AVERAGE YIELDS/COST AND RATE/VOLUME ANALYSIS


Tables with the above information are presented in Item 6 of this report.











RESULTS OF OPERATIONS


Net Interest Income


Net interest income is the principal component of the Company’s income stream and represents the difference or spread between interest generated from earning assets and the interest expense paid on deposits and borrowed funds. Net interest income is entirely generated by the Bank. Fluctuations in market interest rates as well as volume and mix changes in earning assets and interest bearing liabilities can materially impact net interest income.


Total Net Interest Income:For the year ended December 31, 2016, net interest income on a tax-equivalent basis amounted to $47,467 compared with $46,792 in 2015, representing an increase of $675, or 1.4%.  The increase in 2016 tax-equivalent net interest income was attributed to average earning asset growth of $132,345 or 9.0%, as the net interest margin declined 23 basis points compared with 2015.



53




For the year ended December 31, 2015, net interest income on a tax-equivalent basis amounted to $46,792 compared with $45,698 in 2015, representing an increase of $1,094, or 2.4%. The increase in 2016 tax-equivalent net interest income was attributed to average earning asset growth of $97,287 or 7.1%, as the net interest margin declined 14 basis points compared with 2014.


For the year ended December 31, 2016, the tax equivalent net interest margin amounted to 2.96%, compared with 3.19% in 2015, representing a decline of 23 basis points. The decline in the net interest margin was principally attributed to a 17 basis point decline in the weighted average earning asset yield, as well as a six basis point increase in the weighted average cost of interest bearing liabilities.


For the year ended December 31, 2015, the tax equivalent net interest margin amounted to 3.19%, compared with 3.33% in 2014, representing a decline of fourteen basis points. The decline in the net interest margin was principally attributed to a 16 basis point decline in the weighted average earning asset yield, partially offset by a two basis point decline in the weighted average cost of interest bearing liabilities.


Interest and Dividend Income:For the year ended December 31, 2016, total interest and dividend income on a tax-equivalent basis amounted to $59,580, compared with $57,182 in 2015, representing an increase of $2,398, or 4.2%. The increase in interest and dividend income was attributed to average interest earning asset growth of $132,345 or 9.0%, partially offset by a decline in the weighted average earning asset yield of 17 basis points to 3.72%.


For the year ended December 31, 2015, total interest and dividend income on a tax-equivalent basis amounted to $57,182, compared with $55,603 in 2014, representing an increase of $1,579, or 2.8%. The increase in interest and dividend income was attributed to average earning growth of $97,287 or 7.1%, as the weighted average earning asset yield remained unchanged at 3.89%.


For the year ended December 31, 2016, tax-equivalent interest income from the securities portfolio amounted to $16,823, compared with $17,059 in 2015, representing a decline of $236, or 1.4%. This decline was principally attributed to a 30 basis point decline in the weighted average securities yield to 3.22%, but was largely offset by a $37,233 or 7.7% increase in total average securities, compared with 2015.


For the year ended December 31, 2015, tax-equivalent interest income from the securities portfolio amounted to $17,059, compared with $17,331 in 2014, representing an increase of $272 or 1.6%. This increase was principally attributed to a 17 basis point increase in the weighted average securities yield to 3.52%, but was largely offset by a $14,335 or 3.0% increase in total average securities, compared with 2014.  The decline in the weighted average securities yield was largely attributed to the replacement of MBS cash flows in a still-historically low interest rate environment, combined with management’s 2015 efforts to lower the duration of the securities portfolio.


For the year ended December 31, 2016, tax-equivalent interest income from the loan portfolio amounted to $41,889, compared with $39,545 in 2015, representing an increase of $2,344, or 5.9%. This increase was attributed to average loan portfolio growth of $92.447 or 9.6%, partially offset by a decline in the weighted average loan yield of 14 basis points to 3.97%.


For the year ended December 31, 2015, tax-equivalent interest income from the loan portfolio amounted to $39,545, compared with $37,982 in 2014, representing an increase of $1,563, or 4.1%. This increase was attributed to average loan portfolio growth of $80,851 or 9.2%, partially offset by a decline in the previously discussed weighted average loan yield of 20 basis points to 4.11%.




54



Interest Expense:For the year ended December 31, 2016, total interest expense amounted to $12,113, compared with $10,390 in 2015, representing an increase of $1,723, or 16.6%. This increase was principally attributed to a $113,417 or 8.7% increase in average interest bearing liabilities, and to a lesser extent a six basis point increase in the weighted average cost of interest bearing liabilities to 0.86%, compared with 2015.


The 2016 increase in the average cost of interest bearing liabilities was principally attributed to increases in the weighted average cost borrowings, which increased nine basis points to 1.03%, principally reflecting the maturity of higher cost, long-term borrowings that were replaced in a historically low interest rate environment.


For the year ended December 31, 2015, total interest expense amounted to $10,390, compared with $9,905 in 2014, representing an increase of $485, or 4.9%. This increase was principally attributed to a $92,297 or 7.6% increase in average interest bearing liabilities, partially offset by a two basis point decline in the weighted average cost of interest bearing liabilities to 0.80%, compared with 2014.


The 2015 decline in the average cost of interest bearing liabilities was principally attributed to prevailing, historically low short-term and long-term market interest rates, with maturing time deposits and borrowings being added or replaced at a lower cost and other interest bearing deposits re-pricing into the lower interest rate environment. The weighted average cost of interest bearing deposits declined two basis points in 2015 to 0.72%, while the weighted average cost of borrowings declined five basis points to 0.94%, principally reflecting the maturity of higher cost, long-term borrowings that were replaced in a historically low interest rate environment.  


Provision for Loan Losses


The provision for loan losses (the “provision”) reflects the amount necessary to maintain the allowance for loan losses (the “allowance”) at a level that, in management’s judgment, is appropriate for the amount of inherent risk of probable loss in the Bank’s current loan portfolio.


For the year ended December 31, 2016, the Bank recorded a provision of $979, compared with $1,785 in 2015, representing a decline of $806 or 45.2%. The decline in the provision was largely attributed to lower levels of non-performing loans and loan charge-off experience, combined with relatively stable credit quality metrics.


For the year ended December 31, 2015, the Bank recorded a provision of $1,785, compared with $1,833 in 2014, representing a decline of $48, or 2.6%. The moderate decline in the provision was attributed to lower levels of non-performing loans and loan charge-off experience, combined with relatively stable credit quality metrics.


Refer to Part II, Item 7,Non-performing Loans, Potential Problem Loans and the Allowance for Loan Losses,in this Annual Report on Form 10-Kfor further discussion and analysis related to the provision for loan losses.


Non-interest Income


In addition to net interest income, non-interest income is a significant source of revenue for the Company and an important factor in its results of operations. In 2016, non-interest income represented 21.5% of total net interest income and non-interest income, compared with 16.7% and 15.0% in 2015 and 2014, respectively.


For the year ended December 31, 2016, total non-interest income amounted to $12,349, compared with $8,979 in 2015, representing an increase of $3,370, or 37.5%.


For the year ended December 31, 2015, total non-interest income amounted to $8,979, compared with $7,758 in 2014, representing an increase of $1,221, or 15.7%.


Trust and Financial Services Income:Income from trust and financial services represented 31.0% of the Company’s total non-interest income in 2016, compared with 43.3% and 51.3% in 2015 and 2014, respectively. Income from trust and financial services is principally derived from fee income based on a percentage of the fair market value of client assets under management and held in custody and, to a lesser extent, revenue from retail brokerage services conducted through Bar Harbor Financial Services, an independent third-party broker.


For the year ended December 31, 2016, income from trust and other financial services amounted to $3,829, compared with $3,888, in 2015, representing a decline of $59, or 1.5%. This decline was attributed to lower levels of revenue from retail brokerage activities.


For the year ended December 31, 2015, income from trust and other financial services amounted to $3,888, compared with $3,976, in 2014, representing a decline of $88, or 2.2%. This decline was attributed to lower levels of revenue from retail brokerage activities.


At December 31, 2016, total assets under management stood at $402,759, compared with $377,533 at December 31, 2015, representing an increase of $25,226, or 6.7%. The increase in assets under management was principally reflective of the broad increases experienced by the equity markets during 2016, as well as new managed asset accounts.


Service Charges on Deposit Accounts:This income is principally derived from overdraft fees, monthly deposit account maintenance and activity fees, automated teller machine (“ATM”) fees and a variety of other deposit account related fees. Income from service charges on deposit accounts represented 7.0% of total 2016 non-interest income, compared with 9.9% and 12.5% in 2015 and 2014, respectively.


For the year ended December 31, 2016, income generated from service charges on deposit accounts amounted to $866, compared with $892 and $971 in 2015 and 2014, representing declines of $26 and $79, or 2.9% and 8.1%, respectively. The Bank has not been aggressive in selling its fee based overdraft



55



products as a cautionary measure in light of continued regulatory pressure on the banking industry including the Consumer Financial Protection Bureau, which was established by the Wall Street Reform and Consumer Protection Act (the “Dodd – Frank Act”).


Debit Card Service Charges and Fees:This income is principally derived from the Bank’s Visa debit card product and merchant credit and debit card processing fees. Income from debit card service charges and fees represented 14.4% of total 2016 non-interest income, compared with 18.9% and 20.4% in 2015 and 2014, respectively.


For the year ended December 31, 2016, credit and debit card service charges and fees amounted to $1,782, compared with $1,694 in 2015, representing an increase of $88, or 5.2%. This increase was principally attributed to continued growth of the Bank’s retail deposit base and continued success with a program that offers rewards for certain debit card transactions.


For the year ended December 31, 2015, debit card service charges and fees amounted to $1,694, compared with $1,584 in 2014, representing an increase of $110, or 6.9%. This increase was principally attributed to continued growth of the Bank’s retail deposit base and continued success with a program that offers rewards for certain debit card transactions.


Net Securities Gains: For the year ended December 31, 2016, total realized securities gains amounted to $4,498, compared with $1,334 in 2015, representing an increase of $3,164, or 237.2%. The realized securities gains largely reflected Bank management’s strategy of lowering the duration of the securities portfolio and its overall interest rate risk profile, while simultaneously generating income.


For the year ended December 31, 2015, total realized securities gains amounted to $1,334, compared with $403 in 2014, representing an increase of $931, or 231.0%. The realized securities gains largely reflected Bank management’s strategy of lowering the duration of the securities portfolio and its overall interest rate risk profile, while simultaneously generating income.


Further information regarding securities gains and losses is incorporated by reference to Part II, Item 8, Notes 1 and 3 of the Consolidated Financial Statements in this Annual Report on Form 10-K.


Other Operating Income:Other operating income principally includes income from bank-owned life insurance, representing increases in the cash surrender value of life insurance policies on the lives of certain retired employees who had provided positive consent allowing the Bank to be the beneficiary of such policies. Other operating income also includes a variety of miscellaneous service charges and fees including fees for non-customer ATM transactions. Other operating income represented 11.1% of total 2016 non-interest income, compared with 13.0% and 10.6% in 2015 and 2014, respectively.


For the year ended December 31, 2016, total other operating income amounted to $1,374, compared with $1,171 in 2015, representing an increase of $203, or 17.3%.


For the year ended December 31, 2015, total other operating income amounted to $1,171, compared with $824 in 2014, representing an increase of $347, or 42.1%. The 2015 increase in other operating income was principally attributed to income relating to the Bank’s purchase of Bank Owned Life Insurance (“BOLI”) during the first quarter of 2015.


Non-interest Expense


For the year ended December 31, 2016, total non-interest expense amounted to $35,935, compared with $30,908 and $29,211 in 2015 and 2014, representing increases of $5,027 and $1,697, or 16.3% and 5.8%, respectively.


Salaries and Employee Benefits:For the year ended December 31, 2016, total salaries and employee benefits expense amounted to $19,775, compared with $17,884 and $16,836 in 2015 and 2014, representing increases of $1,891 and $1,048, or 10.6% and 6.2%, respectively.  The increase in 2016 was due to strategic hires at the executive and senior level positions within the risk management and information technology departments, along with normal increases in base salaries and employee health insurance costs.  The increase in 2015 was due to normal increases in base salaries and higher levels of employee health insurance costs, higher levels of employee incentive and equity compensation, as well as increases in staffing levels.


Occupancy Expense:For the year ended December 31, 2016, total occupancy expense amounted to $2,334, compared with $2,248 and $2,143 in 2015 and 2014, representing increases of $86 and $105, or 3.8% and 4.9%, respectively. The increases were largely attributed to higher levels of building improvement expenses, as well as higher levels of utilities expense and grounds maintenance.

Furniture and Equipment Expense:For the year ended December 31, 2016, total furniture and equipment expense amounted to $2,276, compared with $2,321 and $2,166 in 2015 and 2014, representing a decrease of $45 or 1.9% and an increase of $155, or 7.2%, respectively.


Debit Card Expenses:These expenses relate to the Bank’s Visa debit card processing activities. For the year ended December 31, 2016, total debit card expense amounted to $495 compared with $452 and



56



$429 in 2015 and 2014, representing increases of $43 and $23, or 9.5% and 5.4%, respectively. These increases were principally attributed to higher transaction volumes and were more than offset with higher revenues from debit card activity.


Other Operating Expense:For the year ended December 31, 2016, total other operating expenses amounted to $10,250, compared with $7,170 in 2015, representing an increase of $3,080, or 43.0%.  The increase was principally due to $2,650 of merger related and system conversion costs in 2016 associated with the Lake Sunapee Bank Group acquisition.


For the year ended December 31, 2015, total other operating expenses amounted to $7,170, compared with $6,938 in 2014, representing an increase of $232, or 3.3%.The increase was principally due to higher professional services and shareholder related expenses in 2015.


Income Taxes


The effective tax rate was 28.2%, 28.3%, and 28.8% in 2016, 2015, and 2014, respectively.  The effective tax rate remained relative flat in 2016 as compared to 2015, which reflected the impact of 2016 security gains offset by merger-related expenses.  The slightly higher effective tax rate in 2014 was reflective of a lower proportion of tax advantaged-income.  


Impact of New Accounting Pronouncements


See Note 1 to the Consolidated Financial Statements for the recently adopted accounting standards and accounting standards pending adoption.












ITEM 7A. QUALITATIVEQUANTITATIVE AND QUANTITATIVEQUALITATIVE DISCLOSURES ABOUT MARKET RISK


Market Risk


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



57




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


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


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


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


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


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

·

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



58



·

A 200 basis point rise or decline in interest rates applied against a parallel shift in the yield curve over a twelve-month horizon together with a dynamic balance sheet anticipated to be consistent with such interest rate changes;

·

Various non-parallel shifts in the yield curve, including changes in either short-term or long-term rates over a twelve-month horizon, together with a dynamic balance sheet anticipated to be consistent with such interest rate changes; and

·

An extension of the foregoing simulations to each of two, three, four and five year horizons to determine the interest rate risk with the level of interest rates stabilizing in years two through five. Even though rates remain stable during this two to five year time period, re-pricing opportunities driven by maturities, cash flow, and adjustable rate products will continue to change the balance sheet profile for each of the interest rate conditions.


Changes in net interest income based upon the foregoing simulations are measured against the flat interest rate scenario and actions are taken to maintain the balance sheet interest rate risk within established policy guidelines.


The following table summarizes the Bank's net interest income sensitivity analysis as

As of December 31, 2016, over one and two-year horizons and under different interest rate scenarios. In light of the prevailing Federal Funds rate of 0.25% to 0.50%, and the two-year U.S. Treasury note of 1.05% at December 31, 2015, the analysis incorporates a declining interest rate scenario of 100 basis points, rather than the 200 basis points as would traditionally be the case.


 

-100 Basis Points  Parallel Yield Curve Shift

+200 Basis Points  Parallel Yield Curve Shift

Year 1

 

 

Net interest income ($)

     $    (86)

        $(982)

Net interest income (%)

        -0.18%

         -2.06%

Year 2

 

 

Net interest income ($)

     $(1,530)

     $(3,624)

Net interest income (%)

         -3.22%

         -7.63%


As more fully discussed below, the December 31, 2016,2017 interest rate sensitivity modeling results indicate that the Bank’s balance sheet was moderately liability sensitive over the oneone- and two-year horizons (i.e., moderately exposed to rising interest rates).


The following table presents the changes in sensitivities for the years ended December 31, 2017 and 2016:
Change in Interest Rates-Basis 1 - 12 Months 13 - 24 Months
Points (Rate Ramp) (In Thousands) $ Change % Change $ Change % Change
At December 31, 2017        
-100 $130
 0.14 % $301
 0.32 %
+200 (3,211) (3.44) (7,521) (8.07)
         
At December 31, 2016        
-100 $(86) (0.18)% $(1,530) (3.22)%
+200 (982) (2.07) (3,624) (7.63)
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 remain relatively stableimprove slightly over the one year horizon and then decline moderatelywith a further modest improvement over the two-year horizon as declining earning assets yields outpace reductions in funding costs.horizon. Should the yield curve steepen as rates fall, the model suggests that accelerated earning asset prepayments will slow, resulting in a more stabilized level of net interest income. Management anticipates that moderate to strong earning asset growth will be needed to meaningfully increase the Bank’s current level of net interest income should both long-term and short-term interest rates decline in parallel.


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



59



parallel with these increases, management believes net interest income will remain relatively stable over the one year horizon and then decline moderately over the two year horizonone and two-year horizons as increased funding costs outpace increases in earning asset yields. The interest rate sensitivity simulation model suggests that as interest rates rise, the Bank’s funding costs will initially re-price disproportionately with earning asset yields to a moderate degree. As funding costs begin to stabilize early in the third year of the simulation, the model suggests that the earning asset portfolios will continue to re-price at prevailing interest rate levels and cash flows from the Bank’s earning asset portfolios will be reinvested into higher yielding earning assets, resulting in a widening of spreads and a stabilization of net interest income over the three year horizon and beyond. Management believes moderate to strong earning asset growth will be necessary to meaningfully increase the current level of net interest income over the one-year and two-year horizons should short-term and long-term interest rates rise in parallel.


Interest rates plummeted during 2008 and have remained historically low ever since, as

As compared to December 31, 2016, the global economy slowed at unprecedented levels, unemployment levels soared, delinquencies on all types of loans increased alongyear-one sensitivity in the down 100 basis points scenario slightly improved year-over-year, while the year-two sensitivity in the down 100 basis points scenario showed further improvement.  In the year-one up 200 basis points scenario, results were modestly down versus the prior year, while year-two, up 200

basis points results were essentially unchanged. On balance, the current aggregate position is consistent with decreased consumer confidence and dramatic declines in housing prices. Management believes the most significant ongoing factor affecting market risk exposure andprior year’s.
Despite five rate hikes over the impact on net interest incomelast twenty-four months, the Federal Reserve continues to be the slow and extended recovery from the severe nationwide recession and the U.S. Government’s extraordinary responses, including the continued impact of a variety of government stimulus programs and quantitative easing strategies.


The Federal Reserve has maintainedmaintain short-term interest rates at historically low levels, for an extended period of time, threatening net interest income. Net interest income exposure is also significantly affected by the shape and level of the U.S. Government securities and interest rate swap yield curve, and changes in the size and composition of the Bank’s loan, investment and deposit portfolios.


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


As market conditions vary from those assumed in the sensitivity analysis, actual results may also differ due to: prepayment and refinancing levels deviating from those assumed; the impact of interest rate changechanges, 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 SETSenior Executive Team and Board of Directors might take in responding to or anticipating changes in interest rates, and the anticipated impact on the Bank’s net interest income.


The Bank engages an independent consultant to periodically review its interest rate risk position and the reasonableness of assumptions used, with periodic reports provided to the Bank’s Board of Directors. At December 31, 2016,2017, there were no significant differences between the views of the independent consultant and management regarding the Bank’s interest rate risk exposure.



60



ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA



REPORT OF INDEPENDENTINDEPENDANT REGISTERED PUBLIC ACCOUNTING FIRM



To the Shareholders and the Board of Directors and Shareholders

of Bar Harbor Bankshares

Bankshares:



Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheetsheets of Bar Harbor Bankshares and subsidiaries (the Company) as of December 31, 20162017 and 2015, and2016, the related consolidated statements of income, comprehensive income, changes in shareholders' equity and cash flows for each of the twothree years in the period ended December 31, 2016. These2017, and the related notes to the consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether(collectively, the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

statements). In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 20162017 and 2015,2016, and the results of theirits operations and theirits cash flows for each of the twothree years in the period ended December 31, 2016,2017, in conformity with U.S.accounting principles generally accepted accounting principles.

in the United States of America.


We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’sCompany's internal control over financial reporting as of December 31, 2016,2017, based on criteria established in Internal Control —- Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013, and our report dated March 14, 201713, 2018 expressed an unqualified opinion on the effectiveness of the Company’sCompany's internal control over financial reporting.

/s/ RSM US LLP


Boston, Massachusetts

March 14, 2017





61



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM



To the Board of Directors and Shareholders

Bar Harbor Bankshares:



We have audited the accompanying consolidated balance sheet of Bar Harbor Bankshares and subsidiaries as of December 31, 2014, and the related consolidated statements of income, comprehensive income, changes in shareholders’ equity, and cash flows

Basis for the year in the period ended December 31, 2014. Opinion
These consolidated financial statements are the responsibility of the Company'sCompany’s management. Our responsibility is to express an opinion on these consolidatedthe Company’s financial statements based on our audit.

audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.


We conducted our auditaudits in accordance with the standards of the Public Company Accounting Oversight Board (United States).PCAOB. Those standards require that we plan and perform the auditaudits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includesmisstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence supportingregarding the amounts and disclosures in the financial statements. An auditOur audits also includes assessingincluded evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statement presentation.statements. We believe that our audit providesaudits provide a reasonable basis for our opinion.


In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Bar Harbor Bankshares and subsidiaries as of December 31, and the results of their operations and their cash flows for the year in the period ended December 31, 2014, in conformity with U.S. generally accepted accounting principles.


/s/ RSM US LLP

We have also audited, in accordance withserved as the standards of the Public Company Accounting Oversight Board (United States), Bar Harbor Bankshares’s internal control over financial reporting as of December 31, 2014, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated March 16, 2015, expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.

Company's auditor since 2015.


/s/ KPMG LLP

Boston, Massachusetts
March 16, 2015

13, 2018



62



BAR HARBOR BANKSHARES AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

DECEMBER 31, 2016 AND 2015

(in thousands, except share and per share data)


 

2016

 

2015

Assets

   

 

   

 Cash and cash equivalents

   $      8,439

 

 $       9,720

 Securities available for sale, at fair value

       528,856

 

      504,969

 Federal Home Loan Bank stock

         25,331

 

        21,479

 Loans

    1,129,064

 

      990,070

 Allowance for loan losses

        (10,419)

 

         (9,439)

 Loans, net of allowance for loan losses

    1,118,645

 

      980,631

 Premises and equipment, net

         23,419

 

        20,674

 Goodwill

           4,935

 

          4,935

 Bank owned life insurance

         24,450

 

        23,747

 Other assets

         21,274

 

        13,900

TOTAL ASSETS

  $1,755,349

 

 $1,580,055

 

 

 

   

Liabilities

 

 

 

  Deposits:

 

 

 

    Demand and other non-interest bearing deposits

 $      98,856

 

 $     86,577

    NOW accounts

       175,150

 

      160,394

    Savings and money market deposits

       359,857

 

      299,087

    Time deposits

       416,437

 

      396,729

      Total deposits

    1,050,300

 

      942,787

 Short-term borrowings

       394,480

 

      333,909

 Long-term advances from Federal Home Loan Bank

       137,116

 

      135,882

 Junior subordinated debentures

           5,000

 

          5,000

 Other liabilities

         11,713

 

          8,325

TOTAL LIABILITIES

    1,598,609

 

   1,425,903

   

 

 

 

Commitments and Contingencies (Note 17)

 

 

 

 

 

 

 

Shareholders' equity

 

 

 

  Capital stock, par value $2.00; authorized 20,000,000 shares; issued 6,788,407 shares

 

 

 

     at December 31, 2016 and December 31, 2015

         13,577

 

        13,577

  Surplus

         23,027

 

        21,624

  Retained earnings

       130,489

 

      122,260

  Accumulated other comprehensive (loss) income:

 

 

 

    Prior service cost and unamortized net actuarial losses on employee

 

 

 

       benefit plans, net of tax of ($217) and ($249), at December 31, 2016

 

 

 

       and December 31, 2015,respectively

             (403)

 

           (463)

    Net unrealized (depreciation) appreciation on securities available for sale, net of tax

 

 

 

      of ($1,214) and $2,828, at December 31, 2016 and December 31, 2015 respectively

          (2,255)

 

         5,251

   Portion of OTTI attributable to non-credit gains, net of tax of $70 and $249, at

 

 

 

      December 31, 2016 and December 31, 2015, respectively

              130

 

            462

    Net unrealized depreciation on derivative instruments, net of tax

 

 

 

      of $968 and $873, at December 31, 2016 and December 31, 2015, respectively

          (1,798)

 

        (1,621)

    Total accumulated other comprehensive income

          (4,326)

 

         3,629

  Less: cost of 711,344 and 778,196 shares of treasury stock at December 31, 2016 and

 

 

 

      December 31, 2015, respectively

          (6,027)

 

        (6,938)

 

 

 

 

TOTAL SHAREHOLDERS' EQUITY

       156,740

 

      154,152

   

 

 

 

TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY

  $1,755,349

 

 $1,580,055



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



63




BAR HARBOR BANKSHARES AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

YEARS ENDED DECEMBER 31, 2016, 2015 AND 2014

(in thousands, except share and per share data)

 

2016

2015

2014

Interest and dividend income:

 

 

 

  Interest and fees on loans

 $41,653

 $39,303

 $37,739

  Interest on securities

   14,966

   15,343

   15,689

  Dividends on FHLB stock

        868

        578

        290

Total interest and dividend income

   57,487

   55,224

   53,718

 

   

   

   

Interest expense:

 

 

 

  Deposits

     6,699

     6,097

     5,894

  Short-term borrowings

     1,942

        983

        667

  Long-term debt

     3,472

     3,310

     3,344

Total interest expense

   12,113

   10,390

     9,905

 

   

   

   

Net interest income

   45,374

    44,834

   43,813

  Provision for loan losses

        979

      1,785

     1,833

Net interest income after provision for loan losses

   44,395

   43,049

   41,980

 

   

   

   

Non-interest income:

   

   

   

  Trust and other financial services

     3,829

     3,888

     3,976

  Service charges on deposit accounts

        866

        892

        971

  Debit card service charges and fees

     1,782

     1,694

     1,584

  Net securities gains

     4,498

     1,334

        403

  Other operating income

     1,374

     1,171

        824

Total non-interest income

   12,349

     8,979

     7,758

   

 

 

 

Non-interest expense:

   

   

   

  Salaries and employee benefits

   19,775

   17,884

   16,836

  Occupancy expense

     2,334

     2,248

     2,143

  Furniture and equipment expense

     2,276

     2,321

     2,166

  Credit and debit card expenses

        495

        452

        429

  FDIC insurance assessments

        805

        833

        699

  Other operating expense

   10,250

     7,170

     6,938

Total non-interest expense

   35,935

   30,908

   29,211

 

 

 

 

Income before income taxes

   20,809

   21,120

   20,527

Income taxes

     5,876

     5,967

     5,914

 

 

 

 

Net income

 $14,933

 $15,153

 $14,613

   

 

 

 

Per Common Share Data:

 

 

 

   Basic Earnings Per Share

 $    2.47

 $    2.53

 $    2.47

   Diluted Earnings Per Share

 $    2.45

 $    2.50

 $    2.45


(in thousands, except share data) December 31,
2017		 December 31,
2016
Assets  
  
Cash and due from banks $34,262
 $8,219
Interest-bearing deposit with the Federal Reserve Bank 56,423
 220
Total cash and cash equivalents 90,685
 8,439
Securities available for sale, at fair value 717,242
 528,856
Federal Home Loan Bank stock 38,105
 25,331
Total securities 755,347
 554,187
Commercial real estate 826,746
 418,119
Commercial and industrial 379,423
 151,240
Residential real estate 1,155,682
 506,612
Consumer 123,762
 53,093
Total loans 2,485,613
 1,129,064
Less: Allowance for loan losses (12,325) (10,419)
Net loans 2,473,288
 1,118,645
Premises and equipment, net 47,708
 23,419
Other real estate owned 122
 90
Goodwill 100,085
 4,935
Other intangible assets, net 8,383
 377
Cash surrender value of bank-owned life insurance 57,997
 24,450
Deferred tax assets, net 7,180
 5,990
Other assets 24,389
 14,817
Total assets $3,565,184
 $1,755,349
     
Liabilities  
  
Demand and other non-interest bearing deposits $349,055
 $98,856
NOW deposits 466,610
 175,150
Savings deposits 364,799
 77,623
Money market deposits 305,275
 282,234
Time deposits 866,346
 416,437
Total deposits 2,352,085
 1,050,300
Senior borrowings 786,688
 531,596
Subordinated borrowings 43,033
 5,000
Total borrowings 829,721
 536,596
Other liabilities 28,737
 11,713
Total liabilities 3,210,543
 1,598,609
Shareholders’ equity  
  
Capital stock, par value $2.00; authorized 20,000,000 shares; issued 16,428,388 and 10,182,611 shares at December 31, 2017 and December 31, 2016, respectively 32,857
 13,577
Additional paid-in capital 186,702
 23,027
Retained earnings 144,977
 130,489
Accumulated other comprehensive loss (4,554) (4,326)
Less: 985,462 and 1,067,016 shares of treasury stock at December 31, 2017 and December 31, 2016, respectively, at cost (5,341) (6,027)
Total shareholders’ equity 354,641
 156,740
Total liabilities and shareholders’ equity $3,565,184
 $1,755,349
The accompanying notes are an integral part of these consolidated financial statements.



64



BAR HARBOR BANKSHARES AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

  Years Ended December 31,
(in thousands, except per share data) 2017 2016 2015
Interest and dividend income      
Loans $94,976
 $41,653
 $39,303
Securities and other 21,093
 15,834
 15,921
Total interest and dividend income 116,069
 57,487
 55,224
Interest expense  
  
  
Deposits 11,307
 6,699
 6,097
Borrowings 12,607
 5,414
 4,293
Total interest expense 23,914
 12,113
 10,390
Net interest income 92,155
 45,374
 44,834
Provision for loan losses 2,788
 979
 1,785
Net interest income after provision for loan losses 89,367
 44,395
 43,049
Non-interest income  
  
  
Trust and investment management fee income 12,270
 3,829
 3,888
Insurance and brokerage service income 1,097
 —
 —
Customer service fees 8,484
 2,648
 2,586
Gain on sales of securities, net 19
 4,498
 1,334
Bank-owned life insurance income 1,539
 703
 606
Other income 2,573
 671
 565
Total non-interest income 25,982
 12,349
 8,979
Non-interest expense  
  
  
Salaries and employee benefits 39,589
 19,775
 17,884
Occupancy and equipment 11,633
 4,610
 4,569
Loss on premises and equipment, net 94
 248
 7
Outside services 3,000
 767
 359
Professional services 1,655
 1,489
 1,485
Communication 1,289
 586
 388
Amortization of intangible assets 812
 92
 92
Acquisition, conversion and other expenses 3,302
 2,650
 54
Other expenses 11,352
 5,718
 6,070
Total non-interest expense 72,726
 35,935
 30,908
       
Income before income taxes 42,623
 20,809
 21,120
Income tax expense 16,630
 5,876
 5,967
Net income $25,993
 $14,933
 $15,153
       
Earnings per share:  
  
  
Basic $1.71
 $1.65
 $1.69
Diluted $1.70
 $1.63
 $1.67
       
Weighted average common shares outstanding:      
Basic 15,184
 9,069
 8,970
Diluted 15,290
 9,143
 9,090
FOR THE YEARS ENDED DECEMBER 31, 2016, 2015 AND 2014

(in thousands)


 

2016

2015

2014

Net income

  $14,933

  $15,153

  $14,613

Other comprehensive (loss) income:

 

 

 

    Net unrealized (depreciation) appreciation on securities available for sale,

           net of tax of ($2,646), ($708) and $8,291, respectively

     (4,914)

     (1,321)

    15,730

    Less reclassification adjustment for net gains related to securities

           available for sale included in net income,

 

 

 

           net of tax of ($1,575), ($467) and ($138), respectively

     (2,924)

       (867)

        (262)

    Net unrealized depreciation on interest rate derivatives,

           net of tax of ($95), ($484) and ($389), respectively

       (177)

       (899)

        (722)

    Net amortization of prior service cost and actuarial loss for

          supplemental executive retirement plan,

 

 

 

          net of related tax of $10, $13 and $0, respectively

         18

          25

           ---

    Actuarial gains on supplemental executive retirement plan,

           net of related tax of $23, $0 and ($59), respectively

          42

            ---

        (115)

         Total other comprehensive loss

     (7,955)

     (3,062)

    14,631

Total comprehensive income

  $  6,978

  $12,091

  $29,244


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



65



BAR HARBOR BANKSHARES AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

YEARS ENDED DECEMBER 31, 2016, 2015 AND 2014

(in thousands, except share and per share data)


COMPREHENSIVE INCOME

 

 

 

 

Accumulated

 

 

 

 

 

 

Other

 

Total

 

Capital

 

Retained

Comprehensive

Treasury

Shareholders'

 

Stock

Surplus

Earnings

Income (Loss)

Stock

Equity

   

 

 

 

 

 

 

Balance December 31, 2014

 $  9,051

 $25,085

 $103,907

     $(7,940)

 $(8,724)

    $121,379

Net income

          ---

          ---

     14,613

             ---

          ---

        14,613

Total other comprehensive income

          ---

          ---

            ---

       14,631

          ---

        14,631

Dividend declared:

 

 

 

 

 

 

  Common stock ($0.905 per share)

          ---

          ---

     (5,362)

             ---

          ---

         (5,362)

Purchase of Treasury Stock (327 shares)

          ---

          ---

             ---

             ---

          (8)

                (8)

Net issuance of 38,083 to employee stock plans,

   including tax benefit

          ---

       (184)

            (9)

          

             ---

       697

             504

Three-for-two stock split

     4,526

    (4,526)

            ---

             ---

          ---

           ��   ---

Recognition of stock based compensation expense

          ---

        530

            ---

             ---

          ---

             530

Balance September 30, 2015

 $13,577

 $20,905

 $113,149

     $  6,691

 $(8,035)

    $146,287

   

 

 

 

 

 

 

Balance December 31, 2014

 $13,577

 $20,905

 $113,149

     $  6,691

 $(8,035)

    $146,287

Net income

          ---

          ---

     15,153

              ---

          ---

        15,153

Total other comprehensive loss

          ---

          ---

             ---

       (3,062)

          ---

         (3,062)

Dividend declared:

 

 

 

 

 

 

  Common stock ($1.01 per share)

          ---

          ---

      (6,040)

             ---

          ---

         (6,040)

Purchase of Treasury Stock (656 shares)

          ---

          ---

            ---

             ---

        (24)

              (24)

Net issuance of 64,542 to employee stock plans,

   including tax benefit

      

          ---

         (97)

             (2)

           

             ---

     1,121

          1,022

Recognition of stock based compensation expense

          ---

        816

            ---

             ---

           ---

             816

Balance December 31, 2015

 $13,577

 $21,624

 $122,260

     $ 3,629

 $(6,938)

    $154,152

   

 

 

 

 

 

 

   

 

 

 

 

 

 

Balance December 31, 2015

 $13,577

 $21,624

 $122,260

     $ 3,629

 $(6,938)

    $154,152

Net income

          ---

          ---

     14,933

              ---

          ---

        14,933

Total other comprehensive loss

          ---

          ---

            ---

       (7,955)

          ---

         (7,955)

Dividend declared:

 

 

 

 

 

 

  Common stock ($1.09 per share)

          ---

          ---

     (6,577)

             ---

          ---

         (6,577)

Purchase of Treasury Stock (15,381 shares)

          ---

          ---

            ---

             ---

      (497)

            (497)

Net issuance of 82,233 to employee stock plans,

   including tax benefit

               

          ---

        125

        (127)

         

             ---

    1,408

          1,406

Recognition of stock based compensation expense

          ---

     1,278

            ---

             ---

          ---

          1,278

Balance December 31, 2016

 $13,577

 $23,027

 $130,489

     $(4,326)

 $(6,027)

    $156,740


(in thousands) 2017 2016 2015
Net income $25,993
 $14,933
 $15,153
Other comprehensive income (loss), before tax:  
  
  
Changes in unrealized loss on securities available-for-sale 528
 (12,059) (3,365)
Changes in unrealized loss on derivative hedges (838) (272) (1,383)
Changes in unrealized loss on post-retirement plans (328) 90
 27
Income taxes related to other comprehensive income (loss):  
  
  
Changes in unrealized loss on securities available-for-sale (114) 4,221
 1,177
Changes in unrealized loss on derivative hedges 386
 95
 484
Changes in unrealized loss on post-retirement plans 138
 (30) (2)
Total other comprehensive loss (228) (7,955) (3,062)
Total comprehensive income $25,765
 $6,978
 $12,091
The accompanying notes are an integral part of these consolidated financial statements.



66



BAR HARBOR BANKSHARES AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

YEARS ENDED DECEMBER 31, 2016, 2015 AND 2014

(in thousands)

CHANGES IN SHAREHOLDERS’ EQUITY


 

2016

2015

2014

 Cash flows from operating activities:

 

 

 

    Net income

    $  14,933

    $   15,153

     $   14,613

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

 

 

 

    Depreciation of premises and equipment

          1,551

           1,710

            1,629

    Amortization of core deposit intangible

               92

                92

                 92

    Provision for loan losses

             979

           1,785

            1,833

    Net securities gains

         (4,498)

          (1,334)

             (403)

    Net amortization of bond premiums and discounts

          3,415

            2,403

           2,776

    Deferred tax benefit

             470

               142

              240

    Recognition of stock based compensation expense

          1,114

               711

              418

    Gains on sale of other real estate owned

                (9)

               (84)

               ---

    Net income from bank owned life insurance

            (703)

             (606)

           (262)

    Net change in other assets and liabilities

            (553)

              359

        (5,405)

    Net cash provided by operating activities

        16,791

         20,331

        15,531

   

 

 

 

 Cash flows from investing activities:

 

 

 

    Purchases of securities available for sale

     (210,824)

     (168,432)

     (110,239)

    Proceeds from maturities, calls and principal paydowns of

          mortgage-backed securities

      109,377

      106,801

        73,854

    Proceeds from sales of securities available for sale  

        66,583

        22,753

        37,278

    Purchases of Bank Owned Life Insurance

               -   

       (15,000)

               -   

    Net increase in Federal Home Loan Bank stock

         (3,852)

           (125)

         (2,984)

    Net (increase) decrease in total loans originated

       (10,042)

       (21,088)

        22,668

    Purchases of loans

     (128,951)

       (51,698)

       (89,854)

    Proceeds from sale of other real estate owned

              119

             672

          1,129

    Purchases of premises and equipment, net

         (4,296)

         (1,866)

         (2,002)

    Net cash used in investing activities

     (181,886)

     (127,983)

       (70,150)

   

 

 

 

 Cash flows from financing activities:

 

 

 

    Net increase in deposits

       107,513

         84,738

        22,398

    Net increase (decrease) in securities sold under repurchase agreements

         and fed funds purchased

              871

           1,189

           (535)

    Proceeds from Federal Home Loan Bank advances

         71,950

         47,593

        92,100

    Repayments of Federal Home Loan Bank advances

        (11,016)

        (21,011)

       (53,990)

    Purchases of Treasury Stock

             (497)

               (24)

               (8)

    Proceeds from stock option exercises, including excess tax benefits

            1,570

           1,127

             616

    Payments of dividends

          (6,577)

          (6,040)

         (5,362)

    Net cash provided by financing activities

       163,814

       107,572

        55,219

 

   

   

   

 Net (decrease) increase in cash and cash equivalents

          (1,281)

                (80)

             600

 Cash and cash equivalents at beginning of year

           9,720

            9,800

          9,200

 Cash and cash equivalents at end of year

    $     8,439

    $      9,720

    $    9,800

   

 

 

 

 Supplemental disclosures of cash flow information:

 

 

 

    Cash paid during the period for:

 

 

 

       Interest

    $   11,944

    $    10,362

    $    9,920

       Income taxes

    $     6,286

    $      5,566

    $    6,237

  

 

 

 

 Schedule of noncash investing activities:

 

 

 

    Transfers from loans to other real estate owned

    $        ---

    $          425

    $       320

    Restricted and Performance stock grants

    $      404

    $          151

    $       115


(in thousands, except share data) Common stock amount Additional paid-in capital Retained earnings Accumulated other comprehensive income Treasury stock Total
Balance at December 31, 2014 $13,577
 $20,905
 $113,149
 $6,691
 $(8,035) $146,287
             
Comprehensive income:            
Net income —
 —
 15,153
 —
 —
 15,153
Other comprehensive loss —
 —
 —
 (3,062) —
 (3,062)
Total comprehensive income —
 —
 15,153
 (3,062) —
 12,091
Cash dividends declared ($0.67 per share) —
 —
 (6,040) —
 —
 (6,040)
Treasury stock purchased (984 shares) —
 —
 —
 —
 (24) (24)
Net issuance (96,813 shares) to employee stock plans, including related tax effects —
 (97) (2) —
 1,121
 1,022
Recognition of stock based compensation —
 816
 —
 —
   816
Balance at December 31, 2015 $13,577
 $21,624
 $122,260
 $3,629
 $(6,938) $154,152
             
Balance at December 31, 2015 $13,577
 $21,624
 $122,260
 $3,629
 $(6,938) $154,152
             
Comprehensive income:            
Net income —
 —
 14,933
 —
 —
 14,933
Other comprehensive loss —
 —
 —
 (7,955) —
 (7,955)
Total comprehensive income —
 —
 14,933
 (7,955) —
 6,978
Cash dividends declared ($0.73 per share) —
 —
 (6,577) —
 —
 (6,577)
Treasury stock purchased (23,072 shares) —
 —
 —
 —
 (497) (497)
Net issuance (123,349 shares) to employee stock plans, including related tax effects —
 125
 (127) —
 1,408
 1,406
Recognition of stock based compensation —
 1,278
 —
 —
   1,278
Balance at December 31, 2016 $13,577
 $23,027
 $130,489
 $(4,326) $(6,027) $156,740
             
Balance at December 31, 2016 $13,577
 $23,027
 $130,489
 $(4,326) $(6,027) $156,740
             
Comprehensive income:            
Net income —
 —
 25,993
 —
 —
 25,993
Other comprehensive loss —
 —
 —
 (228) —
 (228)
Total comprehensive income —
 —
 25,993
 (228) —
 25,765
Cash dividends declared ($0.75 per share) —
 —
 (11,505) —
 —
 (11,505)
Acquisition of Lake Sunapee Bank Group (6,245,780 shares) 8,328
 173,591
 —
 —
 —
 181,919
Treasury stock purchased (9,603 shares) —
 —
 —
 ��
 (282) (282)
Net issuance (91,517 shares) to employee stock plans, including related tax effects —
 (222) —
 —
 968
 746
Three-for-two stock split 10,952
 (10,968) —
 —
 —
 (16)
Recognition of stock based compensation —
 1,274
 —
 —
 —
 1,274
Balance at December 31, 2017 $32,857
 $186,702
 $144,977
 $(4,554) $(5,341) $354,641
The accompanying notes are an integral part of these consolidated financial statements.



67



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


BAR HARBOR BANKSHARES AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS 
  Years Ended December 31,
(in thousands) 2017 2016 2015
Cash flows from operating activities:  
  
  
Net income $25,993
 $14,933
 $15,153
Adjustments to reconcile net income to net cash provided by operating activities:      
Provision for loan losses 2,788
 979
 1,785
Net amortization of securities 5,214
 3,415
 2,403
Deferred income taxes 6,886
 470
 142
Change in unamortized net loan costs and premiums (933) (557) 295
Premises and equipment depreciation and amortization expense 3,553
 1,551
 1,710
Stock-based compensation expense 1,274
 1,278
 816
Accretion of purchase accounting entries, net (3,337) —
 —
Amortization of other intangibles 812
 92
 92
Income from cash surrender value of bank-owned life insurance policies (1,539) (703) (606)
Gain on sales of securities, net (19) (4,498) (1,334)
Loss on premises and equipment, net 94
 —
 —
Net change in other assets and liabilities (654) (169) (125)
Net cash provided by operating activities 40,132
 16,791
 20,331
       
Cash flows from investing activities:  
  
  
Proceeds from sales of securities available for sale 1,599
 66,583
 22,753
Proceeds from maturities, calls and prepayments of securities available for sale 121,583
 109,377
 106,801
Purchases of securities available for sale (172,116) (210,824) (168,432)
Purchase of bank owned life insurance —
 —
 (15,000)
Net change in loans (126,828) (10,042) (21,088)
Purchase of loans (18,621) (128,951) (51,698)
Purchase of Federal Home Loan Bank stock (1,325) (3,852) (125)
Purchase of premises and equipment, net (3,157) (4,296) (1,866)
Acquisitions, net of cash (paid) acquired 39,537
 —
 —
Proceeds from sale of other real estate 322
 119
 672
Net cash used in investing activities (159,006) (181,886) (127,983)
       
Cash flows from financing activities:  
  
  
Net decrease in deposits 151,900
 107,513
 84,738
Net change in short-term advances from the Federal Home Loan Bank 213,593
 59,700
 19,200
Net change in long term advances from the Federal Home Loan Bank (153,332) 1,234
 7,382
Net change in securities sold repurchase agreements (222) 871
 1,189
Exercise of stock options 968
 1,570
 1,127
Purchase of treasury stock (282) (497) (24)
Common stock cash dividends paid (11,505) (6,577) (6,040)
Net cash provided by financing activities 201,120
 163,814
 107,572
       
Net change in cash and cash equivalents 82,246
 (1,281) (80)
Cash and cash equivalents at beginning of year 8,439
 9,720
 9,800
Cash and cash equivalents at end of year $90,685
 $8,439
 $9,720
Supplemental cash flow information:  
  
  
Interest paid $21,399
 $11,944
 $10,362
Income taxes paid, net 9,084
 6,286
 5,566
       
Acquisition of non-cash assets and liabilities:      
Assets acquired 1,454,119
 —
 —
Liabilities assumed 1,406,887
 —
 —
       
Other non-cash changes:      
Real estate owned acquired in settlement of loans 32
 —
 425
The accompanying notes are an integral part of these consolidated financial statements.

(All dollar amounts expressed in thousands, except share and per share data)


BAR HARBOR BANKSHARES AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

NOTE 1.          SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Note 1: Summary of Significant Accounting Policies


Basis of presentation:The accounting and reporting policiesconsolidated financial statements (the “financial statements”) of Bar Harbor Bankshares (the “Company”) and its wholly-owned operating subsidiary,subsidiaries (the “Company” or “Bar Harbor”) have been prepared in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”). Bar Harbor Bank & Trust (the “Bank”), conform to U.S. generally accepted accounting principles (“GAAP”) and to general practice within the banking industry.


The Company’s principal business activityBankshares is retail and commercial banking and, to a lesser extent, financial services including trust, financial planning, investment management and third-party brokerage services. The Company’s business is conducted through the Company’s fourteen (14) banking offices located throughout downeast, midcoast and central Maine.


The Company is a bank holding company registered under the Bank Holding Company Act of 1956, as amended, and is subject to supervision, regulation and examination by the Board of Governors of the Federal Reserve System. The Company is also 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. The Bank is subject toThese financial statements include the supervision, regulation, and examinationaccounts of the FDICCompany, its wholly-owned subsidiary Bar Harbor Bank & Trust (the "Bank") and the Maine BureauBank’s consolidated subsidiaries. The results of Financial Institutions.

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 U.S. GAAP requires otherwise.


Consolidation:The accompanying consolidated financial statements have been prepared in accordance with GAAP. The consolidated financial statements include the accounts of Bar Harbor Bankshares and its wholly-owned subsidiary, Bar Harbor Bank & Trust.  All significant inter-company balances and transactions have been eliminated in consolidation. Assets held in a fiduciary capacity are not assets of the Company and, accordingly, are not included in the consolidated balance sheets.


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


Stock Split: On February 21, 2017, the Company's Board of Directors declared a three-for-two stock split payable on March 21, 2017 as a large stock dividend. Shares presented in prior years have been adjusted to conform to the same basis.

Use of estimates:In preparing financial statements in conformity with GAAP, management is required to make estimates and assumptions that affect the reported amount of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to change in the near term relate to the determination of the allowance for loan losses, other-than temporary impairment on securities, income tax estimates, reviews of goodwill for impairment, and accounting for postretirement plans.


Cash and Cash Equivalents:For purposes of reporting cash flows, cash and cash equivalents include cash and due from banks, federal funds sold, and other short-term investments with maturities less than 90 days.

The Federal Reserve Bank requires the Bank to maintain certain reserve requirements of vault cash and/or deposits.  The reserve requirement, included in cash and equivalents, was $12.7 million and $595 thousand at year-end 2017 and 2016, respectively.



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Investment Securities:All securities held at December 31, 20162017 and 20152016 were classified as available-for-sale (“AFS”).  Available-for-sale securities primarily consist of mortgage-backed securities and obligations of state and political subdivisions therefore, and are carried at estimated fair value. Changes in estimated fair value of AFS securities, net of applicable income taxes, are reported in accumulated other comprehensive income (loss) as a separate component of shareholders’ equity unless deemed to be other-than-temporarily impaired (“OTTI”) as discussed below. The Bank does not have a securities trading portfolio or securities held-to-maturity.


Premiums and discounts on securities are amortized and accreted over the term of the securities using the interest method. Gains and losses on the sale of securities are recognized at the trade date using the specific-identification method and are shown separately in the consolidated statements of income.


Other-Than-Temporary Impairments on Investment Securities:The Company conducts an OTTI analysis of investment securities on a quarterly basis or more often if a potential loss-triggering event occurs. A write-down of a

debt security is recorded when fair value is below amortized cost in circumstances where: (1) the Company has the intent to sell a security; (2) it is more likely than not that the Company will be required to sell the security before recovery of its amortized cost basis; or (3) the Company does not expect to recover the entire amortized cost basis of the security. If the Company intends to sell a security or if it is more likely than not that the Company will be required to sell the security before recovery, an OTTI write-down is recognized in earnings equal to the entire difference between the security’s amortized cost basis and its fair value. If the Company does not intend to sell the security or it is not more likely than not that it will be required to sell the security before recovery, the OTTI write-down is separated into an amount representing credit loss, which is recognized in earnings, and an amount related to all other factors, which is recognized in other comprehensive income. To determine the amount related to credit loss on a debt security, the Company applies a methodology similar to that used for evaluating the impairment of loans.


Federal Home Loan Bank Stock:The Bank is a member of the Federal Home Loan Bank of Boston (“FHLB”). The Bank uses the FHLB for most of its wholesale funding needs. As a requirement of membership in the FHLB, the Bank must own a minimum required amount of FHLB stock, calculated periodically based primarily on its level of borrowings from the FHLB.  FHLB stock is a non-marketable equity security and therefore is reported at cost, which generally equals par value.Sharesvalue.Shares held in excess of the minimum required amount are generally redeemable at par value.


The Company periodically evaluates its investment in FHLB stock for impairment based on, among other things, the capital adequacy of the FHLB and its overall financial condition. Based on the capital adequacy, liquidity position and sustained profitability of the FHLB, management believes there is no impairment related to the carrying amount of the Bank’s FHLB stock as of December 31, 2016.

2017.


Loans Held for Sale: Loans originated with the intent to be sold in the secondary market are accounted for at the lower of cost or market (fair value). Fair value is primarily determined based on quoted prices for similar loans in active markets. Gains and losses on sales of residential mortgage loans (sales proceeds minus carrying value) are recorded in non-interest income. Non-refundable fees and direct loan origination costs related to residential mortgage loans held for sale are recognized in non-interest income or non-interest expense as earned or incurred.

Loans:Loans are reported at their outstanding unpaid principal balances adjusted for charge-offs, the allowance for loan losses, the unamortized balance of any deferred fees or costs on originated loans and the unamortized balance of any premiums or discounts on loans purchased or acquired through mergers.


Interest on loans is accrued and credited to income based on the principal amount of loans outstanding.

Loan origination and commitment fees and direct loan origination costs are deferred, and the net amount is amortized as an adjustment of the related loans’ yield, using the level yield method over the estimated lives of the related loans.


Acquired Loans: Loans that the Company acquired in acquisitions are initially recorded at fair value with no carryover of the related allowance for credit losses. Determining the fair value of the loans involves estimating the amount and timing of principal and interest cash flows initially expected to be collected on the loans and discounting those cash flows at an appropriate market rate of interest.

For loans that meet the criteria stipulated in ASC 310-30, “Loans and Debt Securities Acquired with Deteriorated Credit Quality,” the Company recognizes the accretable yield, which is defined as the excess of all cash flows expected at acquisition over the initial fair value of the loan, as interest income on a level-yield basis over the expected remaining life of the loan. The excess of the loan’s contractually required payments over the cash flows expected to be collected is the nonaccretable difference. The nonaccretable difference is not recognized as an adjustment of yield, a loss accrual, or a valuation allowance. On a quarterly basis, the Company evaluates whether the timing and the amount of cash to be collected are reasonably expected. Subsequent significant increases in cash flows the Company expects to collect will first reduce any previously recognized valuation allowance and then be reflected prospectively as an increase to the level yield. Subsequent decreases in expected cash flows may result in the loan being considered impaired. Interest income is not recognized to the extent that the net investment in the loan would increase to an amount greater than the estimated payoff amount.


For loans that do not meet the ASC 310-30 criteria, the Company accretes interest income based on the contractually required cash flows. The Company subjects loans that do not meet the ASC 310-30 criteria to ASC 450, “Contingencies” by collectively evaluating these loans for an allowance for loan loss.

Acquired loans that met the criteria for nonaccrual of interest prior to the acquisition are considered performing upon acquisition, regardless of whether the customer is contractually delinquent, if the Company can reasonably estimate the timing and amount of the expected cash flows on such loans and if the Company expects to fully collect the new carrying value of the loans. As such, the Company may no longer consider the loan to be nonaccrual or nonperforming and may accrue interest on these loans, including the impact of any accretable yield.

Non-performing loans:Residential real estate and home equity loans are generally placed on non-accrual status when reaching 90 days past due, or in process of foreclosure, or sooner if judged appropriate by management. Consumer loans are generally placed on non-accrual when reaching 90 days or more past due, or sooner if judged appropriate by management.  Secured consumer loans are written down to realizable value and unsecured consumer loans are charged-off upon reaching 120 days past due. Commercial real estate loans and commercial business loans that are 90 days or more past due are generally placed on non-accrual status, unless secured by sufficient cash or other assets immediately convertible to cash, and the loan is in the process of collection. Commercial real estate and commercial business loans may be placed on non-accrual status prior to the 90 days delinquency date if considered appropriate by management.


When a loan has been placed on non-accrual status, previously accrued and uncollected interest is reversed against interest on loans. The interest on non-accrual loans is accounted for using the cash-basis or cost-recovery method depending on corresponding credit risk, until qualifying for return to accrual status.  A loan can be returned to accrual status when collectibilitycollectability of principal is reasonably assured and the loan has performed for a period of time, generally six months.


Impaired loans:A loan is considered impaired when, based on current information and events, it is probable that the Company will not be able to collect all amounts due from the borrower in accordance with the contractual terms of the loan, including scheduled interest payments.


Commercial real estate and commercial business loans are considered impaired when it becomes probable the Bank will not be able to collect all amounts due according to the contractual terms of the loan agreement.

Factors considered by management in determining impairment include payment status and collateral value. In considering loans for evaluation of impairment, management generally excludes smaller balance, homogeneous loans: residential mortgage loans, home equity loans, and all consumer loans, unless such loans were restructured in a troubled debt restructuring. These loans are collectively evaluated for risk of loss.




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When a loan has been identified as being impaired, the amount of impairment is measured based on the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s observable market price, or the estimated fair value of the collateral, less any selling costs, if the loan is collateral-dependent. If the measurement of the impaired loan is less than the recorded investment in the loan (including accrued interest, net of deferred loan fees or costs, and unamortized premiums or discounts), impairment is recognized by establishing or adjusting an existing allocation of the allowance for loan losses, or by recording a partial charge-off of the loan to its fair value. Interest payments made on impaired loans are typically applied to principal unless collectability of the principal amount is reasonably assured, in which case interest income may be accrued or recognized on a cash basis.


Loans Modified in a Troubled Debt Restructuring: Loans are considered to have been modified in a troubled debt restructuring when, due to a borrower’s financial difficulties, the Company makes certain concessions to the borrower that it would not otherwise consider. Modifications may include interest rate reductions, principal or interest forgiveness, forbearance, and other actions intended to minimize economic loss and to avoid foreclosure or repossession of collateral. Generally, a non-accrual loan that has been modified in a troubled debt restructuring remains on non-accrual status for a period of at least 6 months to demonstrate that the borrower is able to meet the terms of the modified loan. However, performance prior to the modification, or significant events that coincide with the modification, are included in assessing whether the borrower can meet the new terms and may result in the loan being returned to accrual status at the time of loan modification or after a shorter performance period. If the borrower’s ability to meet the revised payment schedule is uncertain, the loan remains on non-accrual status.


Allowance for Loan Losses:The allowance for loan losses (the “allowance”) is a significant accounting estimate used in the preparation of the Company’s consolidated financial statements. The allowance is available to absorb losses inherent in the current loan portfolio and is maintained at a level that, in management’s judgment, is appropriate for the amount of risk inherent in the loan portfolio, given past and present conditions. The allowance is increased by provisions charged to operating expense and by recoveries on loans previously charged off, and is decreased by loans charged off as uncollectible.


The allowance is calculated in accordance with ASC 310 - Receivables and ASC 450 - Contingencies.

Under the guidance of ASC 310, specific allowances are established in cases where management has identified significant conditions or circumstances related to individual loans where the probability of a loss may be incurred.  Credit loss estimates for loans without specific allowances are determined under the guidance of ASC 450, which includes portfolio segmentation based on similar risk characteristics, determination of estimated historical loss rates, calculation of a time-based loss emergence and confirmation periods, and adjustments for certain qualitative risk factors.


Arriving at an appropriate level of allowance for loan losses involves a high degree of judgment. The determination of the adequacy of the allowance and provisioning for estimated losses is evaluated regularly based on review of loans, with particular emphasis on non-performing and other loans that management believes warrant special consideration.


While management uses available information to recognize losses on loans, changing economic conditions and the economic prospects of the borrowers may necessitate future additions or reductions to the allowance. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Bank’s allowance, which also may necessitate future additions or reductions to the allowance, based on information available to them at the time of their examination.


Refer to Note 45 of these consolidated financial statements,Loans andLoan Loss Allowance, for Loan Losses,for further information on the allowance for loan losses, including the Company’s loan loss estimation methodology.


Reserve for Unfunded Commitments:The unfunded reserve is a component of other liabilities and represents the estimate for probable credit losses inherent in unfunded commitments to extend credit. Unfunded commitments to extend credit include banker’s acceptances, and standby and commercial letters of credit. The process used to determine the unfunded reserve is consistent with the process for determining the allowance, as adjusted for estimated funding probabilities or loan and lease equivalency factors. The level of the unfunded reserve is adjusted by recording on an expense or recovery in other noninterest expense.  Reserve for unfunded commitments are classified in other liabilities on the Company’s consolidated balance sheet.


Premises and Equipment:Premises and equipment and related improvements are stated at cost less accumulated depreciation. Depreciation is computed on the straight-line method over the lesser of the lease term or estimated useful lives of related assets; generally 25 to 40 years for premises and three to seven years for furniture and equipment.




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Goodwill and Identifiable Intangible Assets:In connection with acquisitions, the Company generally records as assets on its consolidated financial statements both goodwill and identifiable intangible assets, such as core deposit intangibles.


Goodwill represents the excess of the purchase price over the fair value of net assets acquired in accordance with the purchase method of accounting for business combinations. Goodwill is not amortized but, instead, is subject to impairment tests on at least an annual basis or more frequently if an event occurs or circumstances change that reduce the fair value of a reporting unit below its carrying amount. The Company completes its annual goodwill impairment test as of December 31 of each year. The impairment testing process is conducted by assigning assets and goodwill to each reporting unit. Currently, the Company’s goodwill is evaluated at the entity level as there is only one reporting unit. The Company first assesses certain qualitative factors to determine if it is more likely than not that the fair value of the reporting unit is less than its carrying value. If it is more likely than not that the fair value of the reporting unit is less than the carrying value, then the fair value of each reporting unit is compared to the recorded book value “step one.” If the fair value of the reporting unit exceeds its carrying value, goodwill is not considered impaired and “step two” is not considered necessary. If the carrying value of a reporting unit exceeds its fair value,

the impairment test continues (“step two”) by comparing the carrying value of the reporting unit’s goodwill to the implied fair value of goodwill. The implied fair value is computed by adjusting all assets and liabilities of the reporting unit to current fair value with the offset adjustment to goodwill. The adjusted goodwill balance is the implied fair value of the goodwill. An impairment charge is recognized if the carrying fair value of goodwill exceeds the implied fair value of goodwill. At December 31, 2016, as a result of the step one test, there was no indication of impairment that led the Company to believe it needed to perform a step two test.


Identifiable intangible assets, included in other assets on the consolidated balance sheet, consist of core deposit intangibles amortized over their estimated useful lives on a straight-line method, which approximates the economic benefits to the Company. These assets are reviewed for impairment at least annually, or whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. The determination of which intangible assets have finite lives is subjective, as is the determination of the amortization period for such intangible assets.


Any changes in the estimates used by the Company to determine the carrying value of its goodwill and identifiable intangible assets, or which otherwise adversely affect their value or estimated lives, would adversely affect the Company’s consolidated results of operations.


Bank-Owned Life Insurance:Bank-owned life insurance (“BOLI”) represents life insurance on the lives of certain current and retired employees who had provided positive consent allowing the Bank to be the beneficiary of such policies. Increases in the cash value of the policies, as well as insurance proceeds received in excess of the cash value, are recorded in other non-interest income, and are not subject to income taxes. The cash surrender value is included in other assets on the Company’s consolidated balance sheet.


Other Real Estate Owned:Other real estate owned consists of properties acquired through foreclosure proceedings or acceptance of a deed-in-lieu of foreclosure. These properties are recorded at fair value less estimated costs to sell the property. If the recorded investment in the loan exceeds the property’s fair value at the time of acquisition, a charge-off is recorded against the allowance. If the fair value of the property at the time of acquisition exceeds the carrying amount of the loan, the excess is recorded either as a recovery to the allowance if a charge-off had previously been recorded, or as a gain on initial transfer in other noninterest income. Subsequent decreases in the property’s fair value and operating expenses of the property are recognized through charges to other noninterest expense. The fair value of the property acquired is based on third party appraisals, broker price opinions, recent sales activity, or a combination thereof, subject to management judgment.


Mortgage

Capitalized Servicing Rights:Mortgage Capitalized servicing rights are recognized as assets when mortgage loans are sold and the rights to service those loans are retained. Mortgage

The Company’s capitalized servicing rights are accounted for under the amortization method and are initially recorded at fair valuevalue. Fair values are established by using a discounted cash flow model to calculate the present value of estimated future net servicing income. Changes in the fair value of mortgagecapitalized servicing rights are primarily due to changes in valuation inputs, assumptions, and the collection and realization of expected cash flows.


The Company’s mortgage servicing rights accounted for under the amortization method are initially recorded at fair value. However, these mortgagecapitalized servicing rights are amortized in proportion to and over the period of estimated net servicing income.income, which includes prepayment assumptions. An impairment analysis is prepared on a quarterly basis by estimating the fair value of the mortgagecapitalized servicing rights and comparing that value to the carrying amount. A valuation allowance is established when the carrying amount of these mortgagecapitalized servicing rights exceeds fair value.





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Securities Sold Under Agreements to Repurchase:The Company enters into agreements under which it sells securities subject to an obligation to repurchase the same or similar securities. Under these arrangements, the Company may transfer legal control over the assets but still retain effective control through an agreement that both entitles and obligates the Company to repurchase the assets. As a result, securities sold under agreements to repurchase are accounted for as collateralized financing arrangements (i.e., secured borrowings) and not as a sale and subsequent repurchase of securities. The obligation to repurchase the securities is reflected as a liability in the Company’s consolidated statements of condition, while the securities underlying the securities sold under agreements to repurchase remain in the respective asset accounts.


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


Changes in fair value of derivative instruments that are highly effective and qualify as a cash flow hedge are recorded in other comprehensive income or loss. Any ineffective portion is recorded in earnings. For fair value hedges that are highly effective, the gain or loss on the derivative and the loss or gain on the hedged item attributable to the hedged risk are both recognized in earnings, with the differences (if any) representing hedge ineffectiveness. The Company discontinues hedge accounting when it is determined that the derivative is no longer highly effective in offsetting changes of the hedged risk on the hedged item, or management determines that the designation of the derivative as a hedging instrument is no longer appropriate.


Off-Balance Sheet Financial Instruments:In the ordinary course of business the Company has entered into off-balance sheet financial instruments consisting of commitments to extend credit, and standby letters of credit. Such financial instruments are recorded in the consolidated financial statements when they are funded or related fees are incurred or received.


Stock Based Compensation:The Company has equity award plans that include stock option, restricted stock and performance stock, which are described more fully in Note 15. The Company expenses the grant date fair value of equity awards granted.  The expense is recognized over the vesting periods of the grants.  The Company uses its treasury shares for issuing shares upon option exercises, restricted stock and performance stock vesting.


Accounting for Retirement Benefit Plans:The Company has non-qualified supplemental executive retirement agreements with certain retired officers. The agreements provide supplemental retirement benefits payable in installments over a period of years upon retirement or death. The Company recognized the net present value of payments associated with the agreements over the service periods of the participating officers. Interest costs continue to be recognized on the benefit obligations. The Company also has a supplemental executive retirement agreement with a certain current executive officer. This agreement provides a stream of future payments in accordance with individually defined vesting schedules upon retirement, termination, or in the event that the participating executive leaves the Company following a change of control event. The Company recognizes the net present value of payments associated with these agreements over the service periods of the participating executive officers. Upon retirement, interest costs will continue to be recognized on the benefit obligation.


The Company recognizes the over-funded or under-funded status of postretirement benefit plans as a liability on the balance sheet in other liabilities and recognizes changes in that funded status through other comprehensive income. Gains and losses, prior service costs and credits, and any remaining transition amounts that have not yet been recognized through net periodic benefit costs are recognized in



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accumulated other comprehensive income (loss), net of tax effects, until they are amortized as a component of net periodic cost. The measurement date, which is the date at which the benefit obligation and plan assets are measured, is the Company's fiscal year end.


Income Taxes:The Company uses the asset and liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. If current available information indicates that it is more likely than not that deferred tax assets will not be realized, a valuation allowance is established. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.


The Company performs an analysis of its tax positions and has not identified any uncertain tax positions for which tax benefits should not be recognized as of December 31, 2016. The Company’s policy is to report interest and penalties, if any, related to unrecognized tax benefits in income tax expense in the consolidated statements of income.


The Company’s income tax returns are currently open to audit under the statute of limitations by the Internal Revenue Service for the years ended December 31, 2013 through 2016.


Earnings Per ShareShare: :Basic earnings per share excludes dilution and is computed by dividing income available to common shareholders by the weighted average number of common shares outstanding for the period. Diluted earnings per share reflect the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the Company, such as the Company’s dilutive stock options.


For the years ended December 31, 2016, 2015, and 2014, the total anti-dilutive stock options amounted to 60 thousand, 86 thousand and 43 thousand shares, respectively.


Segment Reporting:An operating segment is defined as a component of a business for which separate financial information is available that is evaluated regularly by the chief operating decision-maker in deciding how to allocate resources and evaluate performance. The Company has determined that its operations are solely in the community banking industry and include traditional community banking services, including lending activities, acceptance of demand, savings and time deposits, business services, investment management, trust and third-party brokerage services. These products and services have similar distribution methods, types of customers and regulatory responsibilities. Accordingly, segment information is not presented in the consolidated financial statements.


Recently Adopted

Recent Accounting Standards


In April 2015,Pronouncements

The following table provides a brief description of accounting standards that could have a material impact to the FASBCompany’s consolidated financial statements upon adoption:
StandardDescriptionRequired Date of AdoptionEffect on financial statements
Standards Adopted in 2017
ASU 2016-09, Improvements to Employee Share-Based Payment AccountingThis ASU amends Topic 718, Stock Compensation, and intends to improve and simplify accounting for employee shared-based payments. The amendments update the accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as classification in the statement of cash flows. The transition method of accounting application (i.e. prospective, retrospective or modified retrospective application) differs by amendment and is defined in the guidance.January 1, 2017The adoption of this guidance did not have a material impact on the Company's consolidated financial statements.
ASU 2017-08, Receivables- Nonrefundable Fees and Other CostsThis ASU amends Subtopic 310-20, Receivables-Nonrefundable Fees and Other Costs, to shorten the amortization period for certain purchased callable debt securities held at a premium to the earliest call date. Current guidance generally requires entities to amortize a premium as a yield adjustment over the contractual life of the instrument. Shortening the amortization period is generally expected to more closely align the recognition of interest income with expectations incorporated into the pricing of the underlying securities. The amendments do not affect the accounting treatment of discounts. This ASU should be adopted on a modified retrospective basis.January 1, 2019The Company elected to adopt this ASU as of March 31, 2017, which had no impact on its consolidated financial statements.
Early adoption permitted, including in an interim period.

StandardDescriptionRequired Date of AdoptionEffect on financial statements
Standards Not Yet Adopted
ASU 2014-09, Revenue from Contracts with CustomersThis ASU supersedes the revenue recognition requirements in ASC Topic 605, Revenue Recognition, and most industry-specific guidance throughout the Industry topics of the Codification. The core principle of the ASU is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The ASU may be adopted either retrospectively or on a modified retrospective basis.January 1, 2018The Company performed an analysis to identify all revenue streams within the scope of this accounting guidance. After reviewing the related contracts as prescribed by the five steps within this ASU, the Company concludes that the adoption will have no material impact on the consolidated financial statements in 2018.
ASU 2015-14, Deferral of the Effective Date
ASU 2016-08, Principal versus Agent Considerations
ASU 2016-10, Identifying Performance Obligations and Licensing
ASU 2016-12, Narrow-Scope Improvements and Practical Expedience
ASU 2016-20, Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers
ASU 2016-01, Recognition and Measurement of Financial Assets and LiabilitiesThis ASU amends ASC Topic 825, Financial Instruments-Overall, and addresses certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. Among other minor amendments applicable to the Company, the main provisions require investments in equity securities to be measured at fair value with changes in fair value recognized through net income unless they qualify for a practicability exception (excludes investments accounted for under the equity method of accounting or those that result in consolidation of the investee). Except for disclosure requirements that will be adopted prospectively, the ASU must be adopted on a modified retrospective basis.January 1, 2018The Company does not have any equity securities that would be in scope of this ASU. However, the Company is subject to the exit notion pricing required in fair value disclosures starting in the first quarter of 2018. Based on its review of the current methods utilized to calculate fair value, the Company concludes that this ASU will have no material impact to its consolidated financial statements.
ASU 2016-02, LeasesThis ASU creates ASU Topic 842, Leases, and supersedes Topic 840, Leases. The new guidance requires lessees to record a right-of-use asset and a corresponding liability equal to the present value of future rental payments on their balance sheets for all leases with a term greater than one year. There are not significant changes to lessor accounting; however, there are certain improvements made to align lessor accounting with the lessee accounting model and Topic 606, Revenue from Contracts with Customers. This guidance expands both quantitative and qualitative required disclosures. This ASU should be adopted on a modified retrospective basis.January 1, 2019The Company is currently evaluating its operating lease arrangement under this ASU. Early indications suggest that the Company will need to recognize right-of-use assets and lease liabilities for most of its operating lease commitments

StandardDescriptionRequired Date of AdoptionEffect on financial statements
Standards Not Yet Adopted (Continued)
ASU 2016-13, Measurement of Credit Losses on Financial InstrumentsThis ASU amends Topic 326, Financial Instruments- Credit Losses to replace the current incurred loss accounting model with a current expected credit loss approach (CECL) for financial instruments measured at amortized cost and other commitments to extend credit. The amendments require entities to consider all available relevant information when estimating current expected credit losses, including details about past events, current conditions, and reasonable and supportable forecasts. The resulting allowance for credit losses is to reflect the portion of the amortized cost basis that the entity does not expect to collect. The amendments also eliminate the current accounting model for purchased credit impaired loans and debt securities. Additional quantitative and qualitative disclosures are required upon adoption.January 1, 2020The Company's early stages of this evaluation include a review of existing credit models and new methodologies may be leveraged to comply with the guidance under this ASU.
While the CECL model does not apply to available for sale debt securities, the ASU does require entities to record an allowance when recognizing credit losses for AFS securities, rather than reduce the amortized cost of the securities by direct write-offs.
The ASU should be adopted on a modified retrospective basis. Entities that have loans accounted for under ASC 310-30 at the time of adoption should prospectively apply the guidance in this amendment for purchase credit deteriorated assets.
ASU 2016-15, Classification of Certain Cash Receipts and Cash PaymentsThis ASU amends Topic 230, Statement of Cash Flows, and provides clarification with respect to classification within the statement of cash flows where current guidance is unclear or silent. The ASU should be adopted retrospectively.January 1, 2018Adoption of this ASU is not expected to have a material impact on the Company's consolidated financial statements.
ASU 2017-04, Simplifying the Test for Goodwill ImpairmentThis ASU amends Topic 350, Intangibles-Goodwill and Other, and eliminates Step 2 from the goodwill impairment test.January 1, 2020Adoption of this ASU is not expected to have a material impact on the Company's consolidated financial statements.
Early adoption is permitted.
ASU 2017-07, Compensation- Retirement BenefitsThis ASU amends Topic 715, Retirement Benefits, and provides more prescriptive guidance around the presentation of net period pension and postretirement benefit cost in the income statement. The amendment requires that the service cost component be disaggregated from other components of net periodic benefit cost in the income statement.January 1, 2018Adoption of this ASU is not expected to have a material impact on the Company's consolidated financial statements.
Early adoption is permitted.

StandardDescriptionRequired Date of AdoptionEffect on financial statements
Standards Not Yet Adopted (Continued)
ASU 2017-09, Stock Compensation: Scope of Modification AccountingThis ASU amends Topic 718, Compensation- Stock Compensation, and clarifies when modification accounting should be applied to changes in terms or conditions of share-based payment awards. The amendments narrow the scope of modification accounting by clarifying that modification accounting should be applied to awards if the change affects the fair value, vesting conditions, or classification of the award. The amendments do not impact current disclosure requirements for modifications, regardless of whether modification accounting is required under the new guidance.January 1, 2018Adoption of this ASU is not expected to have a material impact on the Company's consolidated financial statements.
ASU 2017-12, Targeted Improvements to Accounting for Hedging ActivitiesThis ASU amends ASC 815, Derivatives and Hedging to (1) improve the transparency and understandability of information conveyed to financial statement users about an entity's risk management activities by better aligning the entity's financial reporting for hedging relationships with those risk management activities and (2) reduce the complexity of and simplify the application of hedge accounting by preparers.January 1, 2019Adoption of this ASU is not expected to have a material impact on the Company's consolidated financial statements.
ASU 2018-02, Reclassification of Certain Tax Effects from Accumulated Other Comprehensive IncomeThe ASU amends Topic 220, Income Statement-Reporting Comprehensive Income, and is intended to help organizations reclassify certain stranded income tax effects in accumulated other comprehensive income resulting from the recently enacted Tax Reform. The guidance allows entities to reclassify stranded tax effects in accumulated other comprehensive income to retained earnings.January 1, 2019, with early adoption permitted for financial statements that have not yet been made available for issuance.The Company has elected to adopt this ASU for financial reporting as of March 31, 2018. The effect of the reclassification is expected to be an increase to retained earnings and decrease accumulated other comprehensive income by $1.0 million, with zero net effect on total stockholders' equity.


NOTE 2.ACQUISITION

Lake Sunapee Bank Group
On January 13, 2017, the Company completed its acquisition of Lake Sunapee Bank Group (“Lake Sunapee”). Lake Sunapee, as a holding company, had one banking subsidiary (“Lake Sunapee Bank”) that had 33 full-service branches located throughout New Hampshire and Vermont. As a result of the transaction, Lake Sunapee Bank Group merged into Bar Harbor Bankshares, and Lake Sunapee Bank merged into Bar Harbor Bank. This business combination expanded the Company's geographic footprint and increased market share in its New England-based franchise. The goodwill recognized results from the expected synergies and earnings accretion from this combination, including future cost savings related to the operations of Lake Sunapee Bank Group.

On the acquisition date, Lake Sunapee had 8.38 million common shares outstanding, which were exchanged for 4.16 million of the Company's common shares based on a 0.4970 exchange ratio as defined in the merger agreement. The merger qualified as a reorganization for federal income tax purposes, and as a result, Lake Sunapee common shares exchanged for the Company's common shares were transferred on a tax-free basis. Bar Harbor Bankshares common stock issued ASU No. 2015-05, “Customer’s Accounting for Fees Paidin this exchange was valued at $43.69 per share based on the closing price posted on January 13, 2017, resulting in a Cloud Computing Arrangement.” This ASU provides guidanceconsideration value of $181.92 million. The Company also paid $27 thousand to customersLake Sunapee shareholders in lieu of the issuance of fractional shares. Total consideration paid at closing reflected the increase in Bar Harbor Bankshares stock price since the time of the announcement.

The results of Lake Sunapee's operations are included in the Company's Consolidated Statement of Income from the date of acquisition. The assets and liabilities in the Lake Sunapee acquisition were recorded at their fair value based on management’s best estimate using information available as of the date of acquisition.

Consideration paid, and fair values of Lake Sunapee’s assets acquired and liabilities assumed, along with the resulting goodwill, are summarized in the following table:
(in thousands, except shares) As Acquired Fair Value Adjustments   As Recorded at Acquisition
Consideration paid:        
Bar Harbor Bankshares common stock issued to Lake Sunapee Bank Group stockholders (4,163,853 shares)       $181,919
Cash paid for fractional shares       27
Total consideration paid       181,946
Recognized amounts of identifiable assets acquired and liabilities assumed, at fair value:        
Cash and short-term investments $40,970
 $(1,406) (a) $39,564
Investment securities 156,960
 (1,381) (b) 155,579
Loans 1,217,927
 (9,728) (c) 1,208,199
Premises and equipment 22,561
 (351) (d) 22,210
Core deposit intangible —
 7,786
 (e) 7,786
Other assets 102,298
 (50,419) (f) 51,879
Deposits (1,149,865) (746) (g) (1,150,611)
Borrowings (232,261) (16) (h) (232,277)
Deferred taxes, net (1,921) 10,387
 (i) 8,466
Other liabilities (19,912) (4,087) (j) (23,999)
Total identifiable net assets $136,757
 $(49,961)   $86,796
         
Goodwill       $95,150


Explanation of Certain Fair Value Adjustments
a.Represents in-process payments that were made on the date of acquisition that were not recorded on Lake Sunapee's general ledger until after acquisition.
b.Represents the write down of the book value of investments to their estimated fair value based on fair values on the date of acquisition.
c.Represents the write down of the book value of loans to their estimated fair value based on current interest rates and expected cash flows, which includes an estimate of expected loan loss inherent in the portfolio. The adjustment also includes the reversal of Lake Sunapee Bank's historic allowance for loan losses. Loans that met the criteria and are being accounted for in accordance with ASC 310-30, Loans and Securities Acquired with Deteriorated Credit Quality, had a book value of $23.34 million and have a fair value $18.45 million. Non-impaired loans accounted for under ASC 310-10 had a book value of $1.20 billion and have a fair value of $1.188 billion. ASC 310-30 loans have a $1.09 million fair value adjustment discount that is accretable in earnings over the weighted average life of three years using the effective yield as determined on the date of acquisition. The effective yield is periodically adjusted for changes in expected cash flows. ASC 310-10 loans have a $11.40 million fair value adjustment discount that is amortized into earnings over the remaining term of the loans using the effective interest method, or a straight-line method if the loan is a revolving credit facility.
d.Represents the adjustment of the book value of buildings and equipment, to their estimated fair value based on appraisals and other methods. The adjustments will be depreciated over the estimated economic lives of the assets.
e.Represents the value of the core deposit base assumed in the acquisition. The core deposit asset was recorded as an identifiable intangible asset and will be amortized using a straight-line method over the average life of the deposit base, which is estimated to be twelve years.
f.Primarily represents the write-off of historical goodwill and unamortized intangibles recorded by Lake Sunapee from prior acquisitions that are not carried over to the Company's balance sheet.  These adjustments are not accretable into earnings in the statement of income. Also represents the value of customer list intangibles which are accretable into earnings in the statement of income.
g.Represents adjustments made to time deposits due to the weighted average contractual interest rates exceeding the cost of similar funding at the time of acquisition. The amount will be amortized using a straight-line method over the estimated useful life of one year.
h.Represents the present value difference between cash flows of current debt instruments using contractual rates and those of similar borrowings on the date of acquisition. The adjustment will be amortized over the remaining four year weighted average contractual life.
i.Represents net deferred tax assets resulting from the fair value adjustments related to the acquired assets and liabilities, identifiable intangibles, and other purchase accounting adjustments.
j.Primarily represents the impact of change in control effects on post-retirement liabilities assumed by the Company, which are not accretable into earnings in the statement of income.

Except for collateral-dependent loans with deteriorated credit quality, the fair values for loans acquired were estimated using cash flow projections based on the remaining maturity and repricing terms. Cash flows were adjusted by estimating future credit losses and the rate of prepayments. Projected monthly cash flows were then discounted to present value using a risk-adjusted market rate for similar loans. To estimate the fair value for collateral-dependent loans with deteriorated credit quality, we analyzed the underlying collateral of the loans assuming the fair values of the loans were derived from the eventual sale of the collateral. Those values were discounted using market derived rates of return, with consideration given to the period of time and costs associated with the foreclosure and disposition of the collateral. There was no carryover of the seller’s allowance for credit losses associated with the loans that were acquired in the acquisition as the loans were initially recorded at fair value.    

Capitalized goodwill, which is not amortized for book purposes, is not deductible for tax purposes.


Information about whether a cloud computing arrangement includes a software license. If a cloud computing arrangement includes a software license, the customer should accountacquired loan portfolio subject to ASC 310-30 as of January 13, 2017 is, as follows (in thousands):
  ASC 310-30 Loans
Gross contractual receivable amounts at acquisition $23,338
Contractual cash flows not expected to be collected (nonaccretable discount) (3,801)
Expected cash flows at acquisition 19,537
Interest component of expected cash flows (accretable discount) (1,089)
Fair value of acquired loans $18,448

Direct acquisition and integration costs were expensed as incurred, and totaled $6.1 million during the twelve months ending December 31, 2017 and were $2.7 million for the software license elementsame period of the arrangement consistent with2016.

Pro Forma Information (unaudited)
The following table presents selected unaudited pro forma financial information reflecting the acquisition of other software licenses. If a cloud computing arrangement does not include a software license,Lake Sunapee assuming the customer should account for the arrangementacquisition was completed as a service contract. The new guidance does not change the accounting for a customer’s accounting for service contracts. The purpose of ASU 2015-05 is to clarify which fees paid in a cloud computing arrangement should be capitalized and which fees should be expensed as incurred. The Company prospectively adopted ASU No. 2015-05 effective January 1, 2016. The adoptionunaudited pro forma financial information includes adjustments for scheduled amortization and accretion of ASU No. 2015-05 didfair value adjustments recorded at the acquisition. These adjustments would have been different if they had been recorded on January 1, 2016, and they do not have a materialinclude the impact onof prepayments. The unaudited pro forma financial information is presented for illustrative purposes only and is not necessarily indicative of the Company’s Consolidated Financial Statements.


Accounting Standards Pending Adoption


In May 2014,combined financial results of the FASBCompany and the International Accounting Standards Board (the “IASB”) jointly issued a comprehensive new revenue recognition standard that will supersede nearly all existing revenue recognition guidance under GAAP and International Financial Reporting Standards (“IFRS”). Previous revenue recognition guidance in GAAP consisted of broad revenue recognition concepts together with numerous revenue requirements for particular industries or transactions, which sometimes resulted in different accounting for economically similar transactions. In contrast, IFRS provided limited revenue recognition guidance and, consequently, could be difficult to apply to complex transactions. Accordingly, the FASB and the IASB initiated a joint project to clarify the principles for recognizing revenue and to develop a common revenue standard for GAAP and IFRS that would: (1) remove inconsistencies and weaknesses in revenue requirements; (2) provide a more robust framework for addressing revenue issues; (3) improve comparability of revenue recognition practices across entities, industries, jurisdictions, and capital markets; (4) provide more useful information to users of financial statements through improved disclosure requirements; and (5) simplify the preparation of financial statements by reducing the number of requirements to which an entity must refer. To meet those objectives, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers.” The standard’s core principle is that a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. In doing so, companies generally will be required to use more judgment and make more estimates than under current guidance. These may include identifying performance obligations in the contract, estimating the amount of variable consideration to include inLake Sunapee had the transaction price and allocatingactually been completed at the transaction price to each separate performance obligation. The standard was initially effective for public entities for interim and annual reporting periods beginning after December 15, 2016; early adoption was not permitted. However, in August 2015, the FASB issued ASU No. 2015-14, “Revenue from Contracts with Customers - Deferral of the Effective Date” which deferred the effective date by one year (i.e., interim and annual reporting periods beginning after December 15, 2017). For financial reporting purposes, the standard allows for either full retrospective adoption, meaning the standard is applied to all of the periods presented, nor does it indicate future results for any other interim or modified retrospective adoption, meaningfull-year period. Pro forma basic and diluted earnings per common share were calculated using the standardCompany's actual weighted-average shares outstanding for the periods presented plus 4.16 million shares issued as a result of the acquisition. The unaudited pro forma information is applied only tobased on the most current period presented in theactual financial statements withof the cumulative effect of initially applyingCompany and Lake Sunapee for the standard recognized atperiods shown until the date of initial application. In addition,acquisition, at which time Lake Sunapee operations became included in the FASB has begunCompany's financial statements.


The unaudited pro forma information, for the twelve months ended December 31, 2017 and 2016, set forth below reflects adjustments related to issue targeted updates to clarify specific implementation issuesamortization and accretion of ASU 2014-09. These updates include ASU No. 2016-08, “Principal versus Agent Considerations (Reporting Revenue Gross versus Net),” ASU No. 2016-10, “Identifying Performance Obligationspurchase accounting fair value adjustments and Licensing,” ASU No. 2016-12, “Narrow-Scope Improvements and Practical Expedients,” and ASU No. 2016-20 “Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers.” Sincean estimated tax rate of 37.57%. Direct acquisition expenses incurred by the guidanceCompany during 2017, as noted above, are reversed for the purposes of this unaudited pro forma information. Furthermore, the unaudited pro forma information does not applyreflect management’s estimate of any revenue-enhancing or anticipated cost-savings that could occur as a result of the acquisition. The Company has determined it is impractical to report the amounts of revenue associatedand earnings for each entity since acquisition date. Due to the integration of their operations with financial instruments, including loans and securities that are accounted for under other GAAP,those of the organization, the Company does not expect the new guidance to have a material impact on revenue most closely associated with financial instruments, including interest income and expense. The Company is currently performing an overall assessment of revenue streams potentially affected by the ASU including trust and asset management fees, deposit related fees, interchange fees, and merchant income, to determine the potential impact the new guidance is expected to have on the Company’s Consolidated Financial Statements. In addition, the Company continues to follow certain implementation issues relevant to the banking industry which are still pending resolution. The Company plans to adopt ASU No. 2014-09 on January 1, 2018 utilizing the modified retrospective approach.


In January 2016, the FASB issued ASU No. 2016-01, “Recognition and Measurement of Financial Assets and Financial Liabilities.” This ASU addresses certain aspects of recognition, measurement, presentation, and disclosure of financial instruments by making targeted improvements to GAAP as follows: (1) require equity investments (except those accounted for under the equity method of accounting or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income. However, an entity may choose to measure equity investments that do not have readily determinable fair values at cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer; (2) simplify the impairment assessment of



73



equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment. When a qualitative assessment indicates that impairment exists, an entity is required to measure the investment at fair value; (3) eliminate the requirement to disclose the fair value of financial instruments measured at amortized cost for entities that are not public business entities; (4) eliminate the requirement for public business entities to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet; (5) require public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes; (6) require an entity to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments; (7) require separate presentation of financial assets and financial liabilities by measurement category and form of financial asset (that is, securities or loans and receivables) on the balance sheet or the accompanying notes to the financial statements; and (8) clarify that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale securities in combination with the entity’s other deferred tax assets. ASU No. 2016-01 is effective for interim and annual reporting periods beginning after December 15, 2017. Early application is permitted as of the beginning of the fiscal year of adoption only for provisions (3) and (6) above. Early adoption of the other provisions mentioned above is not permitted. The Company has performed a preliminary evaluation of the provisions of ASU No. 2016-01. Based on this evaluation, the Company has determined that ASU No. 2016-01 is not expected to have a material impact on the Company’s Consolidated Financial Statements; however, the Company will continue to closely monitor developments and additional guidance.


In February 2016, the FASB issued ASU No. 2016-02, “Leases.” Under the new guidance, lessees will be required to recognize the following for all leases (with the exception of short-term leases): 1) a lease liability, which is the present value of a lessee’s obligation to make lease payments, and 2) a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. Lessor accounting under the new guidance remains largely unchanged as it is substantially equivalent to existing guidance for sales-type leases, direct financing leases, and operating leases. Leveraged leases have been eliminated, although lessors can continue to account for existing leveraged leases using the current accounting guidance. Other limited changes were made to align lessor accounting with the lessee accounting model and the new revenue recognition standard. All entities will classify leases to determine how to recognize lease-relatedrecord revenue and expense. Quantitativeearnings separately. The revenue and qualitative disclosures will be required by lessees and lessors to meet the objectiveearnings of enabling users of financial statements to assess the amount, timing, and uncertainty of cash flows arising from leases. The intention is to require enough information to supplement the amounts recordedLake Sunapee Bank's operations are included in the financial statements so that users can understand more about the nature of an entity’s leasing activities. ASU No. 2016-02 is effective for interim and annual reporting periods beginning after December 15, 2018; early adoption is permitted. All entities are required to use a modified retrospective approach for leases that exist or are entered into after the beginning of the earliest comparative period in the financial statements. They have the option to use certain relief; full retrospective application is prohibited. The Company has several lease agreements, such as branch locations, which are currently considered operating leases, and therefore, not recognized on the Company’s consolidated statements of condition. The Company expects the new guidance will require these lease agreements to now be recognized on the consolidated statements of condition as a right-of-use asset and a corresponding lease liability. Therefore, the Company’s preliminary evaluation indicates the provisions of ASU No. 2016-02 are expected to impact the Company’s consolidated statements of condition. However, the Company continues to evaluate the extent of potential impact the new guidance will have on the Company’s Consolidated Financial Statements.

income.


In March 2016, the FASB issued ASU No. 2016-09, “Improvements to Employee Share-Based Payment Accounting.” This ASU includes provisions intended to simplify various aspects related to how share-based payments are accounted for and presented

Information in the financial statements. Some of the key provisions of this new ASU include: (1) companies will no longer record excess tax benefits and certain tax deficiencies in additional paid-in capital (“APIC”). Instead, they will record all excess tax benefits and tax deficiencies as income tax expense or benefit in the income statement, and APIC pools will be eliminated. The guidance also eliminates the requirement that excess tax benefits be realized before companies can recognize them. In addition, the guidance requires companies to present excess tax benefits as an operating activity on the statement of cash flows rather than as a financing activity; (2) increase the amount an employer can withhold to cover income taxes on awards and still qualifyfollowing table shows unaudited proforma data for the exception to liability classification for shares used to satisfy the employer’s statutory income tax withholding obligation. The new guidance will also require an employer to classify the cash paid to a tax authority when shares are withheld to satisfy its statutory income tax withholding obligation as a financing activity on its statement of cash flows (current guidance did not specify how these cash flows should be classified); and (3) permit companies to make an accounting policy election for the impact of forfeitures on the recognition of expense for share-based payment awards. Forfeitures can be estimated on the date the award is granted, or recognized when they occur. ASU No. 2016-09 is effective for interim and annual reporting periods beginning afteryears ended December 15, 2016. The Company adopted ASU No. 2016-09 on January 1,31, 2017 and elected to recognize forfeitures as they occur. The Company expects adoption of ASU No. 2016-09 could result in increased volatility to reported income tax expense related to excess tax benefits and tax deficiencies for employee share-based transactions, however, the actual amounts recognized in income tax expense will be dependent on the amount of employee share-based transactions and the stock price at the time of vesting or exercise.


In June 2016, the FASB issued ASU No. 2016-13, “Measurement of Credit Losses on Financial Instruments.” This ASU significantly changes how entities will measure credit losses for most financial assets and certain other instruments that aren’t measured at fair value through net income. In issuing the standard, the FASB is responding to criticism that today’s guidance delays recognition of credit losses. The standard will replace today’s “incurred loss” approach with an “expected loss” model. The new model, referred to as the current expected credit loss (“CECL”) model, will apply to: (1) financial assets subject to credit losses and measured at amortized cost, and (2) certain off-balance sheet credit exposures. This includes, but is not limited to, loans, leases, held-to-maturity securities, loan commitments, and financial guarantees. The CECL model does not apply to available-for-sale (“AFS”) debt securities. For AFS debt securities with unrealized losses, entities will measure credit losses in a manner similar to what they do today, except that the losses will be recognized as allowances rather than reductions in the amortized cost of the securities. As a result, entities will recognize improvements to estimated credit losses immediately in earnings rather than as interest income over time, as they do today. The ASU also simplifies the accounting model for purchased credit-impaired debt securities and loans. ASU 2016-13 also expands the disclosure requirements regarding an entity’s assumptions, models, and methods for estimating the allowance for loan and lease losses. In addition, entities will need to disclose the amortized cost balance for each class of financial asset by credit quality indicator, disaggregated by the year of origination. ASU No. 2016-13 is effective for interim and annual reporting periods beginning after December 15, 2019; early adoption is permitted for interim and annual reporting periods beginning after December 15, 2018. Entities will apply the standard’s provisions as a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective (i.e., modified retrospective approach).  The Company’s preliminary evaluation indicates the provisions of ASU No. 2016-13 are expected to impact the Company’s Consolidated Financial Statements, in particular the level of the reserve for credit losses. However, the Company continues to evaluate the extent of the potential impact.

31, 2016:

  Pro Forma (unaudited)
Twelve Months Ended December 31,
(in thousands, except earnings per share) 2017 2016
Net interest income $93,200
 $90,539
Non-interest income 26,072
 32,484
Net income 33,100
 27,084
     
Pro forma earnings per share:    
Basic $2.18
 $1.77
Diluted $2.16
 $1.76

In August 2016, the FASB issued ASU No. 2016-15, “Classification of Certain Cash Receipts and Cash Payments.” Current GAAP is unclear or does not include specific guidance on how to classify certain transactions in the statement of cash flows. This ASU is intended to reduce diversity in practice in how eight particular transactions are classified in the statement of cash flows. ASU No. 2016-15 is effective for interim and annual reporting periods beginning after December 15, 2017. Early adoption is permitted, provided that all of the amendments are adopted in the same period. Entities will be required to apply the guidance retrospectively. If it is impracticable to apply the guidance retrospectively for an issue, the amendments related to that issue would be applied prospectively. As this guidance only affects the classification within the statement of cash flows, ASU No. 2016-15 is not expected to have a material impact on the Company’s Consolidated Financial Statements.


In January 2017, the FASB issued ASU No. 2017-04, “Simplifying the Test for Goodwill Impairment.” The guidance removes Step 2 of the goodwill impairment test, which requires a hypothetical purchase price allocation. Goodwill impairment will now be the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. All other goodwill impairment guidance will remain largely unchanged. ASU No. 2017-04 is effective for interim and annual reporting periods beginning after December 15, 2019, applied prospectively. Early adoption is permitted for any impairment tests performed after January 1, 2017. The Company expects to early adopt upon the next goodwill impairment test in 2017. ASU No. 2017-04 is not expected to have a material impact on the Company’s Consolidated Financial Statements.


Note 2: Three-for-two Common Stock Split


On April 22, 2014,the Company’sBoard of Directors declared a three-for-two split of its common stock, effectuated as a large stock dividend, which was paid on May 19, 2014 (the “payment date”) to all stockholders of record at the close of business on May 5, 2014. As of April 22, 2014, the Company had approximately 3,944,290 shares of common stock outstanding. After the stock split as a large stock dividend, the number of shares of Company common stock outstanding increased to 5,916,435.  All previously reported share and per share data included in public filings subsequent to the payment date has been adjusted to reflect the retroactive effect of this three-for-two stock split.

NOTE 3.    SECURITIES AVAILABLE FOR SALE

Note 3: Securities Available For Sale


A

The following is a summary of the amortized cost and market values of securities available for sale:
(in thousands) Amortized Cost 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 Fair Value
December 31, 2017  
  
  
  
Securities available for sale  
  
  
  
Debt securities:  
  
  
  
Obligations of US Government sponsored enterprises $6,967
 $5
 $—
 $6,972
Mortgage-backed securities:       

  US Government-sponsored enterprises 447,081
 1,738
 5,816
 443,003
  US Government agency 96,357
 413
 1,174
 95,596
  Private label 529
 150
 5
 674
Obligations of states and political subdivisions thereof 138,522
 2,407
 729
 140,200
Corporate bonds 30,527
 323
 53
 30,797
Total securities available for sale $719,983
 $5,036
 $7,777
 $717,242
         
December 31, 2016  
  
  
  
Securities available for sale  
  
  
  
Debt securities:  
  
  
  
Mortgage-backed securities:        
  US Government-sponsored enterprises $330,635
 $2,682
 $4,865
 $328,452
  US Government agency 76,722
 797
 613
 76,906
  Private label 936
 207
 11
 1,132
Obligations of states and political subdivisions thereof 123,832
 1,941
 3,407
 122,366
Corporate bonds —
 —
 —
 —
Total securities available for sale $532,125
 $5,627
 $8,896
 $528,856

The amortized cost and estimated fair value of available for sale follows:

(“AFS”) securities segregated by contractual maturity at December 31, 2017 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
  Amortized Fair
(in thousands) Cost Value
Within 1 year $6,997
 $7,002
Over 1 year to 5 years 11,627
 11,621
Over 5 years to 10 years 46,942
 47,776
Over 10 years 110,450
 111,569
Total bonds and obligations 176,016
 177,968
Mortgage-backed securities 543,967
 539,274
Total securities available for sale $719,983
 $717,242

December 31, 2016

 

Gross

Gross

 

 

Amortized

Unrealized

Unrealized

Estimated

Available for Sale:

Cost

Gains

Losses

Fair Value

Mortgage-backed securities:

 

 

 

 

  US Government-sponsored enterprises

 $330,635

   $2,682

   $4,865

 $328,452

  US Government agency

     76,722

        797

        613

     76,906

  Private label

          936

        207

          11

       1,132

Obligations of states

     and political subdivisions thereof

   123,832

     1,941

     3,407

   122,366

  Total

 $532,125

   $5,627

   $8,896

 $528,856

   

 

 

 

 


 

 

 

 

 

 

 

 

 

December 31, 2015

 

Gross

Gross

 

 

Amortized

Unrealized

Unrealized

Estimated

Available for Sale:

Cost

Gains

Losses

Fair Value

Mortgage-backed securities:

 

 

 

 

  US Government-sponsored enterprises

 $304,106

 $  5,042

   $2,155

 $306,993

  US Government agency

     78,408

     1,269

        547

     79,130

  Private label

       2,713

        762

          11

       3,464

Obligations of states

     and political subdivisions thereof

   110,952

     4,758

        328

   115,382

  Total

 $496,179

 $11,831

   $3,041

 $504,969

The following table summarizes proceeds from the sale of AFS securities and realized gains and losses:
(in thousands) Proceeds from Sale of Securities Available for Sale Realized Gains Realized Losses Net
2017 $1,599
 $19
 $—
 $19
2016 66,583
 4,498
 —
 4,498
2015 22,753
 1,334
 —
 1,334

Securities Impairment: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
(in thousands) 
Gross
Unrealized
Losses
 
Fair
Value
 
Gross
Unrealized
Losses
 
Fair
Value
 Gross
Unrealized
Losses		 Fair
Value
December 31, 2017  
  
  
  
  
  
Securities available for sale  
  
  
  
  
  
Debt securities:  
  
  
  
  
  
Mortgage-backed securities:           

  US Government-sponsored enterprises $1,895
 $189,486
 $3,921
 $117,156
 $5,816
 $306,642
  US Government agency 559
 45,221
 615
 30,155
 1,174
 75,376
  Private label —
 8
 5
 130
 5
 138
Obligations of states and political subdivisions thereof 58
 8,298
 671
 27,727
 729
 36,025
Corporate bonds 53
 8,943
 —
 —
 53
 8,943
Total securities available for sale $2,565
 $251,956
 $5,212
 $175,168
 $7,777
 $427,124
             
             
December 31, 2016  
  
  
  
  
  
Securities available for sale  
  
  
  
  
  
Debt securities:            
Mortgage-backed securities:            
  US Government-sponsored enterprises $4,369
 $197,914
 $496
 $10,120
 $4,865
 $208,034
  US Government agency 472
 36,941
 141
 4,263
 613
 41,204
  Private label —
 107
 11
 312
 11
 419
Obligations of states and political subdivisions thereof 3,252
 76,803
 155
 3,916
 3,407
 80,719
Corporate bonds —
 —
 —
 —
 —
 —
Total securities available for sale $8,093
 $311,765
 $803
 $18,611
 $8,896
 $330,376

A summary of securities pledged as collateral for certain deposits and borrowing arrangements as of the years ended December 31, 2017 and December 31, 2016 is as follows:
  December 31, 2017 December 31, 2016
(in thousands) Carrying Value Estimated Fair Value Carrying Value Estimated Fair Value
Securities pledged for deposits $195,921
 $194,681
 $92,380
 $92,149
Securities pledged for repurchase agreements 98,407
 98,050
 28,206
 28,130
Securities pledged for other borrowings (1)
 213,379
 212,089
 278,067
 277,261
Total securities pledged $507,707
 $504,820
 $398,653
 $397,540

(1) The Bank pledged securities as collateral for certain borrowing arrangements with the Federal Home Loan Bank of Boston and Federal Reserve Bank of Boston

Securities Impairment
As a part of the Company’s ongoing security monitoring process, the Company identifies securities in an unrealized loss position that could potentially be other-than-temporarily impaired.  For the yearstwelve months ended December 31, 2016, 2015 and 2014 the Company did not record any OTTI losses.


Despite still-elevated levels of delinquencies, defaults and losses in the underlying residential mortgage loan collateral, given credit enhancements resulting from the structures ofthe individual securities combined with OTTI write-downs recorded in prior periods, the Company currently expects that as of December 31, 2016, it will recover the amortized cost basis of its private-label mortgage-backed securities and has therefore concluded that such securities were not other-than-temporarily impaired as of that date. Nevertheless, given future market conditions, it is possible that adverse changes in repayment performance and fair value could occur in future periods that could impact the Company’s current best estimates.


The following table displays the beginning balance of OTTI related to historical credit losses on debt securities held by the Company at the beginning of the current reporting period as well as changes in estimated credit losses recognized in pre-tax earnings for the three years ended December 31, 2016.


 

2016

2015

2014

Estimated credit losses as of prior year-end,

 $3,180

 $3,413

 $3,923

Additions for credit losses for securities on which

     OTTI has been previously recognized

       ---

       ---

       ---

Additions for credit losses for securities on which

     OTTI has not been previously recognized

       ---

       ---

       ---

Reductions for securities sold or paid off during the period

   1,483

      233

     510

Estimated credit losses as of December 31,

 $1,697

 $3,180

 $3,413


Upon initial impairment of a security, total OTTI losses represent the excess of the amortized cost over the fair value. For subsequent impairments of the same security, total OTTI losses represent additional credit losses and or declines in fair value subsequent to the previously recorded OTTI losses, if applicable. Unrealized OTTI losses recognized in accumulated other comprehensive income (“OCI”)



75



represent the non-credit component of OTTI losses on debt securities. Net impairment losses recognized in earnings represent the credit component of OTTI losses on debt securities.


As of December 31, 2016, the Company held four private label MBS (debt securities) with a total amortized cost (i.e. carrying value) of $42 for which OTTI losses have previously been recognized in pre-tax earnings dating back to the fourth quarter of 2008.  For all of these securities, the Company previously recognized credit losses in excess of the unrealized losses in accumulated OCI, which contributed $130 to the net unrealized gain of $130, net of tax, as included in accumulated OCI as of December 31, 2016, compared with net unrealized gains of $462, net of tax, at December 31, 2015.


As of December 31, 2016, based on a review of the remaining securities in the securities portfolio, the Company concluded that it expects to recover its amortized cost basis for such securities. This conclusion was based on the issuers’ continued satisfaction of the securities obligations in accordance with their contractual terms and the expectation that they will continue to do so through the maturity of the security, the expectation that the Company will receive the entire amount of future contractual cash flows, as well as the evaluation of the fundamentals of the issuers’ financial condition and other objective evidence. Accordingly, the Company concluded that the declines in the values of those securities were temporary and that any additional other-than-temporary impairment charges were not appropriate at December 31, 2016.  As of that date, the Company did not intend to sell nor anticipated that it would more-likely-than-not that it would be required to sell any of its impaired securities, that is, where fair value is less than the cost basis of the security.


The following tables summarize the fair value of securities with continuous unrealized losses for less than 12 months and those that have been in a continuous unrealized loss position for 12 months or longer as of December 31, 2016 and 2015. All securities referenced are debt securities. At December 31,2017, 2016 and 2015 the Company did not holdrecord any common stock or other equityother-than-temporary impairment (“OTTI”) losses.


The following table presents the remaining amount of historical credit losses on debt securities and changes reflected in its securities portfolio.

the statement of income:

  Twelve Months Ended December 31,
(in thousands) 2017 2016 2015
Estimated credit losses as of prior year-end, $1,697
 $3,180
 $3,413
Reductions for securities paid off during the period —
 1,483
 233
Estimated credit losses at end of the period $1,697
 $1,697
 $3,180

 

Less than 12 months

12 months or longer

Total

 

Estimated

 

 

Estimated

 

 

Estimated

 

 

December 31, 2016

Fair

Number of

Unrealized

Fair

Number of

Unrealized

Fair

Number of

Unrealized

 

Value

Investments

Losses

Value

Investments

Losses

Value

Investments

Losses

Description of Securities:

 

 

 

 

 

 

 

 

 

Mortgage-backed securities:

 

 

 

 

 

 

 

 

 

  US Government-

        sponsored enterprises

 $197,914

      257

 $4,369

 $10,120

       23

 $  496

 $208,034

      280

 $4,865

  US Government agency

     36,941

        54

      472

      4,263

       15

     141

      41,204

        69

      613

  Private label

          107

          2

        ---

         312

         7

        11

           419

          9

        11

Obligations of states and

        political subdivisions thereof

     76,803

      151

   3,252

     3,916

         9

      155

      80,719

      160

   3,407

Total

 $311,765

      464

 $8,093

 $18,611

      54

 $   803

 $330,376

      518

 $8,896

   

 

 

 

 

 

 

 

 

 

 

Less than 12 months

12 months or longer

Total

 

Estimated

 

 

Estimated

 

 

Estimated

 

 

December 31, 2015

Fair

Number of

Unrealized

Fair

Number of

Unrealized

Fair

Number of

Unrealized

 

Value

Investments

Losses

Value

Investments

Losses

Value

Investments

Losses

Description of Securities:

 

 

 

 

 

 

 

 

 

Mortgage-backed securities:

 

 

 

 

 

 

 

 

 

  US Government-

        sponsored enterprises

 $112,770

      142

 $1,342

 $23,646

      33

 $   813

 $136,416

      175

 $2,155

  US Government agency

      20,201

        30

      326

   11,232

      22

      221

     31,433

        52

      547

  Private label

           235

          2

          2

        178

        5

          9

          413

          7

         11

Obligations of states and

        political subdivisions thereof

      14,853

        25

      210

     3,700

      11

      118

     18,553

       36

       328

Total

 $148,059

      199

 $1,880

 $38,756

      71

 $1,161

 $186,815

     270

  $3,041




76



For securities with unrealized losses, the following information was considered in determining that the impairments were not other-than-temporary:

·

Mortgage-backed


The Company expects to recover its amortized cost basis on all debt securities issued by U.S. Government-sponsored enterprises: Asin its AFS portfolio, as unrealized losses are the result of changes in the interest rate environment and other market factors. Furthermore, the Company does not intend to sell nor does it anticipate that it will be required to sell any of its securities in an unrealized loss position as of December 31, 2016, the total unrealized losses on2017, prior to this recovery. The Company’s ability and intent to hold these securities amounted to $4,865, compared withuntil recovery is supported by the Company’s strong capital and liquidity positions as well as its historically low portfolio turnover.

The following summarizes, by investment security type, the basis for the conclusion that the debt securities in an unrealized losses of $2,155loss position within the Company’s AFS were not other-than-temporarily impaired at December 31, 2015.2017:

US Government-sponsored enterprises
At December 31, 2017, 369 out of the total 787 securities in the Company’s portfolios of AFS US Government sponsored enterprises were in unrealized loss positions. Aggregate unrealized losses represented 1.9% of the amortized cost of securities in unrealized loss positions. The Federal National Mortgage Association (“FNMA”) and Federal Home Loan Mortgage Corporation (“FHLMC”) guarantee the contractual cash flows of all of the Company’s US government-sponsored enterprises. The securities are rated investment grade and there were no material underlying credit downgrades during the quarter. All securities are performing.

US Government agencies
At December 31, 2017, 91 out of the total 207 securities in the Company’s portfolios of AFS US Government agency securities were in unrealized loss positions. Aggregate unrealized losses represented 1.5% and 0.7%of the amortized cost of securities in unrealized loss positions aspositions. The Government National Mortgage Association (“GNMA”) guarantees the

contractual cash flows of all of the Company’s US government agency securities. The securities are rated investment grade and there were no material underlying credit downgrades during the quarter. All securities are performing.

Private-label
At December 31, 2016 and 2015, respectively.  The increase2017, 10 of the total 26 securities in the Company’s portfolio of AFS private-label mortgage-backed securities were in unrealized losses was generally attributed to a lower interest rate environment at December 31, 2015 compared with December 31, 2016. All of these securities were credit rated “AA+” by the major credit rating agencies. Company management believes these securities have minimal credit risk, as these enterprises play a vital role in the nation’s financial markets. Management’s analysis indicates that the unrealized losses at December 31, 2016, were attributed to changes in current market yields and pricing spreads for similar securities since the date the underlying securities were purchased, and does not consider these securities to be other-than-temporarily impaired at December 31, 2016.

·

Mortgage-backed securities issued by U.S. Government agencies:As of December 31, 2016, the total unrealized losses on these securities amounted to $613, compared with unrealized losses of $547 at December 31, 2015.loss positions. Aggregate unrealized losses represented 0.8% and 0.7%3.4% of the amortized cost of securities in unrealized loss positions as of December 31, 2016 and 2015, respectively. The increase in unrealized losses was generally attributed to a lower interest rate environment at December 31, 2015 compared with December 31, 2016.  All of these securities were credit rated “AA+” by the major credit rating agencies. Management’s analysis indicates that these securities bear little or no credit risk because they are backed by the full faith and credit of the United States. The Company attributes the unrealized losses at December 31, 2016, to changes in current market yields and pricing spreads for similar securities since the date the underlying securities were purchased, and does not consider these securities to be other-than-temporarily impaired at December 31, 2016.

·

Private-label mortgage-backed securities: As of December 31, 2016 and 2015, the total unrealized losses on the Bank’s private-label mortgage-backed securities amounted to $11. Aggregate unrealized losses represented 1.2% and 0.4% of securities in unrealized loss positions as of December 31, 2016 and 2015, respectively. The Company attributes the unrealized losses at December 31, 2015, to the current illiquid market for non-agency mortgage-backed securities, risk-related market pricing discounts for non-agency mortgage-backed securities and credit rating downgrades on certain private-label MBS owned by the Company.positions. Based upon the foregoing considerations, and the expectation that the Company will receive all of the future contractual cash flows related to the amortized cost on these securities, the Company does not consider there to be any additional other-than-temporary impairment with respect to these securities at December 31, 2016.

·

securities.


Obligations of states and political subdivisions thereof: As ofthereof
At December 31, 2016,2017, 71 of the total 264 securities in the Company’s portfolio of AFS municipal bonds and obligations were in unrealized losses on the Bank’s municipal securities amounted to $3,407 compared with $328 at December 31, 2015.loss positions. Aggregate unrealized losses represented 2.8% and 0.3%2.0% of the amortized cost of securities in unrealized loss positions as of December 31, 2016 and 2015, respectively.positions. The increase in unrealized losses was generally attributed to a higher interest rate environment at December 31, 2016, compared with December 31, 2015. The Bank’sCompany continually monitors the municipal securities primarily consist of general obligation bonds and to a lesser extent, revenue bonds. General obligation bonds carry less risk, as they are supported by the full faith, credit and taxing authoritybond sector of the issuing governmentmarket carefully and periodically evaluates the appropriate level of exposure to the market. At this time, the Company feels the bonds in this portfolio carry minimal risk of default and the cases of school districts, are additionally supported by state aid. Revenue bonds are generally backed by municipal revenue streams generated through user fees or lease payments associated with specific municipal projectsCompany is appropriately compensated for that have been financed.

Municipal bonds are frequently supported with insurance, which guarantees that in the event the issuer experiences financial problems, the insurer will step in and assume payment of both principal and interest. Historically, insurance support has strengthened an issuer’srisk. There were no material underlying credit rating to AAA or AA status. Starting in 2008 and continuing through 2016, many ofdowngrades during the insurance companies providing municipal bond insurance experienced financial difficulties and, accordingly, were downgraded by at least one of the major credit rating agencies. Consequently,



77



since 2008 a portion of the Bank’s municipal bond portfolio was downgraded by at least one of the major credit rating agencies. Notwithstanding the credit rating downgrades, at December 31, 2016, the Bank’s municipal bond portfolio did not contain any below investment gradequarter. All securities as reported by major credit rating agencies. In addition, at December 31, 2016, all municipal bond issuers were current on contractually obligated interest and principal payments.

The Company attributes the unrealized losses at December 31, 2016, to changes in credit ratings on certain securities and resulting changes in prevailing market yields and pricing spreads since the date the underlying securities were purchased. The Company also attributes the unrealized losses to ongoing media attention and market concerns about municipal budget deficits and the prolonged recovery from the national economic recession and the impact they might have on the future financial stability of municipalities throughout the country. Notwithstanding the foregoing considerations, the Company does not consider these municipal securities to be other-than-temporarily impaired at December 31, 2016.

are performing.


Corporate bonds
At December 31, 2016,2017, 4 out of 14 securities in the Company had no intent to sell nor believed it is more-likely-than-not that it would be required to sell anyCompany’s portfolio of its impaired securities as identified and discussed immediately above, and therefore did not consider these securities to be other-than-temporarily impaired as of that date.


Maturity Distribution:AFS corporate bonds were in an unrealized loss position. The following table summarizes the maturity distributionaggregate unrealized loss represents 0.6% of the amortized cost of bonds in unrealized loss positions. The Company reviews the financial strength of all of these bonds and estimated fair valuehas concluded that the amortized cost remains supported by the expected future cash flows of securities available for sale as of December 31, 2016.

these securities.


Securities Available for Sale

Amortized

Cost

Estimated

Fair Value

Due one year or less

   $       134

    $       134

Due after one year through five years

         6,230

          6,283

Due after five years through ten years

       17,482

        17,722

Due after ten years

     508,279

      504,717

Total

   $532,125

    $528,856


Actual maturities may differ from the final contractual maturities depicted above because of securities call or prepayment provisions with or without call or prepayment penalties. The contractual maturity of mortgage-backed securities is not a reliable indicator of their expected life because borrowers have the right to prepay their obligations at any time. Monthly pay downs on mortgage-backed securities cause the average lives of the securities to be much different than their stated lives. Mortgage-backed securities are allocated among the maturity groupings based on their final maturity dates.


Realized Securities Gains and Losses:The following table summarizes realized gains and losses and other than temporary impairment losses on securities available for sale for the years ended December 31, 2016, 2015 and 2014.


 

Proceeds

 

 

 

 

from Sale of

 

 

 

 

Securities

 

 

 

 

Available

Realized

Realized

 

 

for Sale

Gains

Losses

Net

2016

$66,583

      $4,498

      $  ---   

      $4,498

2015

 22,753

        1,334

          ---

        1,334

2014

 37,278

           809

         406

           403




78



Visa Class B Common Shares:Shares
The BankCompany was a member of the Visa USA payment network and was issued Class B shares in connection with the Visa Reorganization and the Visa Inc. initial public offering in March 2008. The Visa Class B shares are transferable only under limited circumstances until they can be converted into shares of the publicly traded class of Visa stock. This conversion cannot happen until the settlement of certain litigation, which is indemnified by Visa members. Since its initial public offering, Visa has funded a litigation reserve based upon a change in the conversion ratio of Visa Class B shares into Visa Class A shares. At its discretion, Visa may continue to increase the conversion rate in connection with any settlements in excess of amounts then in escrow for that purpose and reduce the conversion rate to the extent that it adds any funds to the escrow in the future. Based on the existing transfer restriction and the uncertainty of the litigation, the Company has recorded its Visa Class B shares on its statements of condition at zero value for all reporting periods since 2008.


At December 31, 2016,2017, the BankCompany owned 11,623 of Visa Class B shares with a then current conversion ratio to Visa Class A shares of 1.648 (or 19,158 Visa Class A shares). Upon termination of the existing transfer restriction and settlement of the litigation, and to the extent that the BankCompany continues to own such Visa Class B shares in the future, the Company expects to record its Visa Class B shares at fair value.


Note 4: Loans and Allowance for Loan Losses







NOTE 4.    LOANS

The Company’s loan portfolio is comprised of the following segments: commercial real estate, mortgages, commercial and industrial, commercial construction and land development, agricultural and other loans to farmers, residential real estate, mortgages, home equity loans, otherand consumer loans and tax exempt loans. Commercial real estate loans includeincludes single and multi-family, commercial construction and land, and other commercial real estate classes. Commercial and industrial loans include asset based lending loans to commercial businesses, agricultural and other commercial businessloans to farmers, and tax exempt loans. Other consumerResidential real estate loans consist of mortgages for 1-to-4 family housing. Consumer loans include indirecthome equity loans, auto loans and other consumer installment loans.  

lending.


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

Vermont.


Total loans include business activity loans and acquired loans. Acquired loans are those loans acquired from Lake Sunapee Bank Group. The following table summarizes the compositionis a summary of the loan portfoliototal loans as of December 31, 20162017 and 2015:

December 31, 2016:

  December 31, 2017 December 31, 2016
(in thousands) 
Business
Activities  Loans
 
Acquired
Loans
 Total 
Business
Activities  Loans
 
Acquired
Loans
 Total
Commercial Real Estate:  
  
  
  
  
  
Construction and land development $28,892
 $16,781
 $45,673
 $14,695
 $—
 $14,695
Other commercial real estate 505,119
 275,954
 781,073
 403,424
 —
 403,424
Total Commercial Real Estate 534,011
 292,735
 826,746
 418,119
 —
 418,119
             
Commercial and Industrial:  
  
  
  
  
  
Other Commercial 198,051
 68,069
 266,120
 103,586
 —
 103,586
Agricultural and other loans to farmers 27,588
 —
 27,588
 31,808
 —
 31,808
Tax exempt 42,365
 43,350
 85,715
 15,846
 —
 15,846
Total Commercial and Industrial 268,004
 111,419
 379,423
 151,240
 —
 151,240
             
Total Commercial Loans 802,015
 404,154
 1,206,169
 569,359
 —
 569,359
             
Residential Real Estate:  
  
  
  
  
  
Residential mortgages 591,411
 564,271
 1,155,682
 506,612
 —
 506,612
Total Residential Real Estate 591,411
 564,271
 1,155,682
 506,612
 —
 506,612
             
Consumer:  
    
  
  
  
Home equity 51,376
 62,217
 113,593
 46,921
 —
 46,921
Other consumer 7,828
 2,341
 10,169
 6,172
 —
 6,172
Total Consumer 59,204
 64,558
 123,762
 53,093
 —
 53,093
             
Total Loans $1,452,630
 $1,032,983
 $2,485,613
 $1,129,064
 $—
 $1,129,064

LOAN PORTFOLIO SUMMARY


 

2016

2015

Commercial real estate mortgages

 $   403,594

   $371,002

Commercial and industrial

      103,586

       79,911

Commercial construction and land development

        14,695

       24,926

Agricultural and other loans to farmers

        31,808

       31,003

  Total commercial loans

      553,683

     506,842

   

 

 

Residential real estate mortgages

      506,612

     408,401

Home equity loans

        46,921

       51,530

Other consumer loans

          6,172

         7,949

  Total consumer loans

      559,705

     467,880

   

 

 

Tax exempt loans

        15,846

       15,244

   

 

 

   Net deferred loan costs and fees

           (170)

            104

Total loans

   1,129,064

     990,070

Allowance for loan losses

       (10,419)

        (9,439)

Total loans net of allowance for loan losses

 $1,118,645

   $980,631


Included

Total unamortized net premiums included in the table above are purchasedyear-end total for business activity loans consisting of residential real estate mortgages, of $230,995 and $137,907,were the following at December 31, 20162017 and 2015, respectively.

December 31, 2016:

(in thousands) 2017 2016
Unamortized net loan origination costs $2,445
 $1,518
Unamortized net premium on purchased loans (123) (129)
Total unamortized net costs and premiums $2,322
 $1,389

At year-end 2016,


For the year ended December 31, 2017, the Company had pledged loans with a collateral value totaling $95,852$93.3 million to the Federal Reserve Bank of Boston as collateral for certain borrowing arrangements. AlsoThe Company also pledged residential first mortgage loans, home equity loans and certain commercial loans are pledgedwith collateral value totaling $948.2 million for FHLB borrowings.  See Notes 11 and 12borrowings for short-term and long-term borrowing.

the year ended December 31, 2017. (See Note 9 for detail on the Company's borrowed funds.)


Commercial Real Estate Mortgages:

The Bank’s commercial real estate mortgagecarrying amount of the acquired loans at December 31, 2017 totaled $1.033 billion. A subset of these loans was determined to have evidence of credit deterioration at the acquisition date, which is accounted for in accordance with ASC 310-30. These purchased credit-impaired loans presently maintain a carrying value of $12.6 million (and a note balance of $17.4 million). These loans are collateralized by liensevaluated for impairment through the periodic reforecasting of expected cash flows. Loans considered not impaired at acquisition date had a carrying amount of $1.020 billion.

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

  Twelve Months Ended December 31,
(in thousands) 2017 2016
Balance at beginning of period $—
 $—
Acquisitions 3,398
 —
Reclassification from nonaccretable difference for loans with improved cash flows 1,925
 —
Changes in expected cash flows that do not affect the nonaccretable difference —
 —
Reclassification to TDR —
 —
Accretion (1,814) —
Balance at end of period $3,509
 $—

The following is a summary of past due loans at December 31, 2017 and December 31, 2016:

Business Activities Loans
(in thousands) 
30-59 Days
Past Due
 
60-89 Days
Past Due
 90 Days or Greater Past Due 
Total Past
Due
 Current Total  Loans 
Past Due >
90 days and
Accruing
December 31, 2017  
  
  
  
  
  
  
Commercial Real Estate:  
  
  
  
  
  
  
Construction and land development $—
 $—
 $637
 $637
 $28,255
 $28,892
 $—
Other commercial real estate 965
 1,659
 5,065
 7,689
 497,430
 505,119
 119
Total Commercial Real Estate 965
 1,659
 5,702
 8,326
 525,685
 534,011
 119
               
Commercial and Industrial:              
Other Commercial 186
 329
 702
 1,217
 196,834
 198,051
 21
Agricultural and other loans to farmers 42
 159
 198
 399
 27,189
 27,588
 155
Tax exempt —
 —
 —
 —
 42,365
 42,365
 —
Total Commercial and Industrial 228
 488
 900
 1,616
 266,388
 268,004
 176
               
Total Commercial Loans 1,193
 2,147
 6,602
 9,942
 792,073
 802,015
 295
               
Residential Real Estate:              
Residential mortgages 3,096
 711
 975
 4,782
 586,629
 591,411
 —
Total Residential Real Estate 3,096
 711
 975
 4,782
 586,629
 591,411
 —
               
Consumer:              
Home equity 515
 —
 199
 714
 50,662
 51,376
 199
Other consumer 36
 24
 —
 60
 7,768
 7,828
 —
Total Consumer 551
 24
 199
 774
 58,430
 59,204
 199
               
Total Loans $4,840
 $2,882
 $7,776
 $15,498
 $1,437,132
 $1,452,630
 $494



Business Activities Loans
(in thousands) 
30-59 Days
Past Due
 
60-89 Days
Past Due
 90 Days or Greater Past Due 
Total Past
Due
 Current Total Loans 
Past Due >
90 days and
Accruing
December 31, 2016  
  
  
  
  
  
  
Commercial Real Estate:  
  
  
  
  
  
  
Construction and land development $—
 $—
 $—
 $—
 $14,695
 $14,695
 $—
Other commercial real estate 195
 554
 1,665
 2,414
 401,010
 403,424
 —
Total Commercial Real Estate 195
 554
 1,665
 2,414
 415,705
 418,119
 —
               
Commercial and Industrial:              
Other Commercial 61
 45
 201
 307
 103,279
 103,586
 —
Agricultural and other loans to farmers 231
 —
 —
 231
 31,577
 31,808
 —
Tax exempt —
 —
 —
 —
 15,846
 15,846
 —
Total Commercial and Industrial 292
 45
 201
 538
 150,702
 151,240
 —
               
Total Commercial Loans 487
 599
 1,866
 2,952
 566,407
 569,359
 —
               
Residential Real Estate:              
Residential mortgages 4,484
 429
 938
 5,851
 500,761
 506,612
 —
Total Residential Real Estate 4,484
 429
 938
 5,851
 500,761
 506,612
 —
               
Consumer:              
Home equity —
 —
 15
 15
 46,906
 46,921
 —
Other consumer 103
 1
 6
 110
 6,062
 6,172
 —
Total Consumer 103
 1
 21
 125
 52,968
 53,093
 —
              —
Total Loans $5,074
 $1,029
 $2,825
 $8,928
 $1,120,136
 $1,129,064
 $—



Acquired Loans
(in thousands) 
30-59 Days
Past Due
 
60-89 Days
Past Due
 90 Days or Greater Past Due 
Total Past
Due
 
Acquired
Credit
Impaired
 Total Loans 
Past Due >
90 days and
Accruing
December 31, 2017  
  
  
  
  
  
  
Commercial Real Estate:  
  
  
  
  
  
  
Construction and land development $124
 $9
 $—
 $133
 $258
 $16,781
 $—
Other commercial real estate 278
 —
 411
 689
 8,397
 275,954
 —
Total Commercial Real Estate 402
 9
 411
 822
 8,655
 292,735
 —
               
Commercial and Industrial:              
Other Commercial 125
 14
 49
 188
 632
 68,069
 —
Agricultural and other loans to farmers —
 —
 —
 —
 —
 —
 —
Tax exempt —
 —
 —
 —
 —
 43,350
 —
Total Commercial and Industrial 125
 14
 49
 188
 632
 111,419
 —
               
Total Commercial Loans 527
 23
 460
 1,010
 9,287
 404,154
 —
               
Residential Real Estate:              
Residential mortgages 752
 388
 614
 1,754
 3,259
 564,271
 —
Total Residential Real Estate 752
 388
 614
 1,754
 3,259
 564,271
 —
               
Consumer:              
Home equity 125
 117
 80
 322
 38
 62,217
 16
Other consumer 2
 —
 —
 2
 3
 2,341
 —
Total Consumer 127
 117
 80
 324
 41
 64,558
 16
              —
Total Loans $1,406
 $528
 $1,154
 $3,088
 $12,587
 $1,032,983
 $16




















Non-Accrual Loans

The following is summary information pertaining to non-accrual loans at December 31, 2017 and December 31, 2016:
  December 31, 2017 December 31, 2016
(in thousands) 
Business
Activities  Loans
 
Acquired
Loans 
 Total 
Business
Activities  Loans
 
Acquired
Loans 
 Total
Commercial Real Estate:  
  
  
  
  
  
Construction and land development $637
 $—
 $637
 $—
 $—
 $—
Other commercial real estate 7,146
 560
 7,706
 2,564
 —
 2,564
Total Commercial Real Estate 7,783
 560
 8,343
 2,564
 —
 2,564
             
Commercial and Industrial:            
Other Commercial 703
 463
 1,166
 284
 —
 284
Agricultural and other loans to farmers 43
 —
 43
 31
 —
 31
Tax exempt —
 —
 —
 —
 —
 —
Total Commercial and Industrial 746
 463
 1,209
 315
 —
 315
             
Total Commercial Loans 8,529
 1,023
 9,552
 2,879
 —
 2,879
             
Residential Real Estate:            
Residential mortgages 3,408
 858
 4,266
 3,419
 —
 3,419
Total Residential Real Estate 3,408
 858
 4,266
 3,419
 —
 3,419
             
Consumer:            
Home equity 130
 217
 347
 90
 —
 90
Other consumer 95
 58
 153
 108
 —
 108
Total Consumer 225
 275
 500
 198
 —
 198
             
Total Loans $12,162
 $2,156
 $14,318
 $6,496
 $—
 $6,496



Loans evaluated for impairment as of December 31, 2017 and December 31, 2016 were as follows:

Business Activities Loans
(in thousands) 
Commercial
real estate
 
Commercial  and
industrial 
 
Residential
real estate
 Consumer Total
December 31, 2017  
  
  
  
  
Loans receivable:  
  
  
  
  
Balance at end of period  
  
  
  
  
Individually evaluated for impairment $7,604
 $626
 $1,404
 $13
 $9,647
Collectively evaluated 526,407
 267,378
 590,007
 59,191
 1,442,983
Total $534,011
 $268,004
 $591,411
 $59,204
 $1,452,630


Business Activities Loans
(in thousands) 
Commercial
real estate
 
Commercial  and
industrial 
 
Residential
real estate
 Consumer Total
December 31, 2016  
  
  
  
  
Loans receivable:  
  
  
  
  
Balance at end of period  
  
  
  
  
Individually evaluated for impairment $4,481
 $486
 $1,709
 $33
 $6,709
Collectively evaluated 413,638
 150,754
 504,903
 53,060
 1,122,355
Total $418,119
 $151,240
 $506,612
 $53,093
 $1,129,064


Acquired Loans
(in thousands) 
Commercial
real estate
 
Commercial  and
industrial 
 
Residential
real estate
 Consumer Total
December 31, 2017  
  
  
  
  
Loans receivable:  
  
  
  
  
Balance at end of period          
Individually evaluated for impairment $241
 $571
 $271
 $63
 $1,146
Purchased credit impaired 8,655
 632
 3,259
 41
 12,587
Collectively evaluated 283,839
 110,216
 560,741
 64,454
 1,019,250
Total $292,735
 $111,419
 $564,271
 $64,558
 $1,032,983



The following is a summary of impaired loans at December 31, 2017 and December 31, 2016:
Business Activities Loans
  December 31, 2017
(in thousands) Recorded Investment 
Unpaid Principal
Balance
 Related Allowance
With no related allowance:  
  
  
Construction and land development $—
 $—
 $—
Other commercial real estate 5,896
 5,903
 —
Other commercial 218
 217
 —
Agricultural and other loans to farmers —
 —
 —
Tax exempt —
 —
 —
Residential mortgages 1,247
 1,260
 —
Home equity 13
 13
 —
Other consumer —
 —
 —
       
With an allowance recorded:      
Construction and land development $637
 $2,563
 $59
Other commercial real estate 1,071
 1,132
 388
Other commercial 408
 408
 3
Agricultural and other loans to farmers —
 —
 —
Tax exempt —
 —
 —
Residential mortgages 157
 157
 9
Home equity —
 —
 —
Other consumer —
 —
 —
       
Total      
Commercial real estate $7,604
 $9,598
 $447
Commercial and industrial 626
 625
 3
Residential real estate 1,404
 1,417
 9
Consumer 13
 13
 —
Total impaired loans $9,647
 $11,653
 $459



Business Activities Loans
  December 31, 2016
(in thousands) Recorded Investment 
Unpaid Principal
Balance
 Related Allowance
With no related allowance:  
  
  
Construction and land development $—
 $—
 $—
Other commercial real estate 2,831
 2,919
 —
Other commercial 130
 130
 —
Agricultural and other loans to farmers 139
 139
 —
Tax exempt —
 —
 —
Residential mortgages 1,387
 1,504
 —
Home equity 16
 16
 —
Other consumer 2
 2
 —
       
With an allowance recorded:      
Construction and land development $—
 $—
 $—
Other commercial real estate 1,650
 3,575
 193
Other commercial 217
 367
 173
Agricultural and other loans to farmers —
 —
 —
Tax exempt —
 —
 —
Residential mortgages 322
 322
 49
Home equity —
 —
 —
Other consumer 15
 15
 9
       
Total      
Commercial real estate $4,481
 $6,494
 $193
Commercial and industrial 486
 636
 173
Residential real estate 1,709
 1,826
 49
Consumer 33
 33
 9
Total impaired loans $6,709
 $8,989
 $424






Acquired Loans
  December 31, 2017
(in thousands) Recorded Investment 
Unpaid Principal
Balance
 Related Allowance
With no related allowance:  
  
  
Construction and land development $—
 $—
 $—
Other commercial real estate 241
 352
 —
Other commercial 571
 584
 —
Agricultural and other loans to farmers —
 —
 —
Tax exempt —
 —
 —
Residential mortgages 271
 278
 —
Home equity 63
 156
 —
Other consumer —
 —
 —
       
With an allowance recorded:      
Construction and land development $—
 $—
 $—
Other commercial real estate —
 —
 —
Other commercial —
 —
 —
Agricultural and other loans to farmers —
 —
 —
Tax exempt —
 —
 —
Residential mortgages —
 —
 —
Home equity —
 —
 —
Other consumer —
 —
 —
       
Total      
Commercial real estate $241
 $352
 $—
Commercial and industrial 571
 584
 —
Residential real estate 271
 278
 —
Consumer 63
 156
 —
Total impaired loans $1,146
 $1,370
 $—




















The following is a summary of the average recorded investment and interest income recognized on real estate,impaired loans as of December 31, 2017 and December 31, 2016:

Business Activities Loan
  Twelve Months Ended December 31, 2017 Twelve Months Ended December 31, 2016
(in thousands) 
Average Recorded
Investment
 
Cash Basis Interest
Income Recognized
 
Average Recorded
Investment
 
Cash Basis Interest
Income Recognized
With no related allowance:  
  
  
  
Construction and land development $—
 $—
 $—
 $—
Other commercial real estate 2,541
 66
 2,768
 157
Other commercial 382
 6
 239
 4
Agricultural and other loans to farmers 113
 1
 156
 9
Tax exempt —
 —
 —
 —
Residential mortgages 2,174
 39
 1,514
 73
Home equity 27
 —
 17
 1
Other consumer 53
 3
 2
 2
         
With an allowance recorded:        
Construction and land development $637
 $—
 $—
 $—
Other commercial real estate 735
 —
 1,619
 —
Other commercial 105
 1
 118
 —
Agricultural and other loans to farmers —
 —
 —
 —
Tax exempt —
 —
 —
 —
Residential mortgages 157
 5
 325
 —
Home equity —
 —
 —
 —
Other consumer —
 —
 16
 —
         
Total        
Commercial real estate $3,913
 $66
 $4,387
 $157
Commercial and industrial 600
 8
 513
 13
Residential real estate 2,331
 44
 1,839
 73
Consumer 80
 3
 35
 3
Total impaired loans $6,924
 $121
 $6,774
 $246


Acquired Loans
  Twelve Months Ended December 31, 2017 Twelve Months Ended December 31, 2016
(in thousands) 
Average Recorded
Investment
 
Cash Basis Interest
Income Recognized
 
Average Recorded
Investment
 
Cash Basis Interest
Income Recognized
With no related allowance:  
  
  
  
Construction and land development $—
 $—
 $—
 $—
Other commercial real estate 136
 —
 —
 —
Other commercial 264
 1
 —
 —
Agricultural and other loans to farmers —
 —
 —
 —
Tax exempt —
 —
 —
 —
Residential mortgages 140
 1
 —
 —
Home equity 58
 —
 —
 —
Other consumer —
 —
 —
 —
         
With an allowance recorded:        
Construction and land development $—
 $—
 $—
 $—
Other commercial real estate —
 —
 —
 —
Other commercial —
 —
 —
 —
Agricultural and other loans to farmers —
 —
 —
 —
Tax exempt —
 —
 —
 —
Residential mortgages —
 —
 —
 —
Home equity —
 —
 —
 —
Other consumer —
 —
 —
 —
         
Total        
Commercial real estate $136
 $—
 $—
 $—
Commercial and industrial 264
 1
 —
 —
Residential real estate 140
 1
 —
 —
Consumer 58
 —
 —
 —
Total impaired loans $598
 $2
 $—
 $—


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







The following tables include the recorded investment and number of modifications identified during the twelve months ended December 31, 2017 and for the twelve months ended December 31, 2016, respectively. The table includes the recorded investment in the loans prior to a modification and also the recorded investment in the loans after the loans were restructured. The modifications for the twelve months ended December 31, 2017 were attributable to maturity date extensions, adjusted interest rates and amortize overpayments, or a 15 to 20 year period. These loans are underwritten primarily as cash flow loans and secondarily as loans secured by real estate. Payments on loans secured by such properties are largely dependent oncombination of two or more concessions. The modifications for the successful operation of the property securing the loan or the business conducted on the property securing the loan. Accordingly, repayment of these loans may be subject to adverse economic conditions to a greater extent than other types of loans. The Bank seeks to minimize these risks in a variety of ways, including giving careful consideration to the property’s operating history, future operating projections, current and projected occupancy, location and physical condition in connection with underwriting these loans. The underwriting analysis also includes credit verification, analysis of global cash flows, appraisals and a review of the financial condition of the borrower. Reflecting the Bank’s business region, attwelve months ending December 31, 2016 were attributable to interest rate concessions, maturity date extensions, court ordered concessions, or a combination of two or more concessions.

  Twelve Months Ended December 31, 2017
(in thousands, except modifications) 
Number of
Modifications
 
Pre-Modification
Outstanding Recorded
Investment
 
Post-Modification
Outstanding Recorded
Investment
Troubled Debt Restructurings  
  
  
Other commercial real estate 6
 $388
 $222
Other commercial 6
 563
 545
Agricultural and other loans to farmers 1
 19
 18
Residential mortgages 3
 692
 670
Home equity 1
 13
 13
Other consumer 1
 38
 36
Total 18
 $1,713
 $1,504


  Twelve Months Ended December 31, 2016
(in thousands, except modifications) 
Number of
Modifications
 
Pre-Modification
Outstanding Recorded
Investment
 
Post-Modification
Outstanding Recorded
Investment
Troubled Debt Restructurings       
Other commercial real estate 6
 $1,459
 $1,354
Other commercial 2
 38
 48
Agricultural and other loans to farmers 3
 29
 44
Residential mortgages —
 —
 —
Home equity —
 —
 —
Other consumer 2
 11
 11
Total 13
 $1,537
 $1,457


  Twelve Months Ended December 31, 2015
(in thousands, except modifications) 
Number of
Modifications
 
Pre-Modification
Outstanding Recorded
Investment
 
Post-Modification
Outstanding Recorded
Investment
Troubled Debt Restructurings       
Other commercial real estate 4
 $342
 $352
Other commercial —
 —
 —
Agricultural and other loans to farmers 1
 18
 15
Residential mortgages —
 —
 —
Home equity —
 —
 —
Other consumer 5
 1,435
 1,433
Total 10
 $1,795
 $1,800

For the twelve months ended December 31, 2017, 2016 and 2015 there were no loans that were restructured that had subsequently defaulted during the period.


The evaluation of certain loans individually for specific impairment includes loans that were previously classified as TDRs or continue to be classified as TDRs.

As of December 31, 2017, the Company maintained foreclosed residential real estate property with a fair value of $122 thousand. Additionally, residential mortgage loans collateralized by real estate property that are in the process of foreclosure as of December 31, 2017 and December 31, 2016 totaled $843 thousand and $2.4 million, respectively. As of December 31, 2016, foreclosed residential real estate property totaled $90 thousand.

Loan Concentrations
At December 31, 2017, approximately 31.6%$234.6 million or 9.4% of the commercial real estate mortgageBank’s loan portfolio was represented by loans to the lodging industry. industry, compared with $128.7 million or 11.4% at December 31, 2016. Additionally, approximately $409.2 million or 16.5% of the Bank's loan portfolio was represented by loans to the real estate industry at December 31, 2017, compared with $166.7 million or 14.8% of the Bank's loan portfolio at December 31, 2016.  There were no other concentrations of loans related to any single industry in excess of 10% of total loans for 2017 or 2016.

Loans to Related Parties
In the ordinary course of business, the Bank has made loans at prevailing rates and terms to directors, officers and other related parties. In management’s opinion, such loans do not present more than the normal risk of collectability or incorporate other unfavorable features, and were made under terms that are consistent with the Bank’s lending policies.

Loan to related parties at December 31, 2017 and December 31, 2016 are summarized below.
(in thousands) 2017 2016
Beginning balance $10,620
 $4,100
Changes in composition (1) 249
 7,017
New Loans 1,124
 1,127
Less: repayments (1,506) (1,624)
Ending balance $10,487
 $10,620

(1) Adjustments to reflect changes in status of directors and officers for each year presented.

Mortgage Banking
The Bank underwrites lodging industrysells loans as operating businesses, lending primarily to seasonal establishments with stabilized cash flows.


Commercial and Industrial Loans: Commercial and industrial loans are underwritten after evaluating and understanding the borrower’s ability to operate profitably, and prudently expand its business. Commercial and industrial loans are primarily made in the Bank’ssecondary market areas and are underwritten onretains the basis of the borrower’s ability to service the debt from income.  These loans typically have variable interest rates and amortize over a periodmany of less than 10 years.  As a general practice, the Bank takes as collateral a lien on available real estate, equipment or other assets owned by the borrower and obtains a personal guaranty of the borrower(s) or principal(s). Working capital loans are primarily collateralized by short-term assets whereas term loans are primarily collateralized by long-term assets. The risk in commercial and industrial loans is principally due to the type of collateral securing these loans. The increased risk also derives fromBank earns fees for the expectation that commercialservicing provided. At year-end 2017 and industrial2016, the Company was servicing loans generally will befor participants totaling $497.9 million and $11.2 million, respectively. Loans serviced principally from the operations of the business, and, iffor others are not successful, these loans are primarily secured by tangible, non-real estate collateral.


Construction and Land Development Loans: The Bank makes loans to finance the construction of residential and non-residential properties.  Construction loans generally are collateralized by first liens on real estate with terms of six to twenty-four months. The Bank conducts periodic inspections, either directly or through an agent, prior to approval of periodic draws on these loans. Underwriting guidelines similar to those described immediately above are also usedincluded in the Bank’s construction lending activities. Construction loans involve additionalaccompanying consolidated balance sheets. The risks attributable to the fact that loan funds are advanced against a project under construction and the project is of uncertain value prior to its completion.  Because of uncertainties inherent in estimating construction costs, the market value of the completed projectservicing assets relate primarily to changes in prepayments that result from shifts in interest rates. Contractually-specified servicing fees were $1.2 million, $28 thousand, and the effects of governmental regulation on real property, it can be difficult to accurately evaluate the total funds required to complete a project and the related loan to value ratio. As a result of these uncertainties, construction lending often involves the disbursement of substantial funds with repayment dependent, in part, on the success of the ultimate project rather than the ability of a borrower or guarantor to repay the loan. In many cases the success of the project can also depend upon the financial support/strength of the sponsorship.  If the Bank is forced to foreclose on a project prior to completion, there is no assurance that the Bank will be able to recover the entire unpaid portion of the loan. In addition, the Bank may be required to fund additional amounts to complete a project and may have to hold the property for an indeterminate period of time. While the Bank has underwriting procedures designed to identify what it believes to be acceptable levels of risks in construction lending, no assurance can be given that these procedures will prevent losses from the risks described above.


Residential Real Estate Mortgage Loans: The Bank originates and purchases first-lien, adjustable-rate and fixed-rate, one-to-four-family residential real estate loans$33 thousand for the construction, purchase or refinancingyears 2017, 2016, and 2015, respectively, and included as a component of residential property. These loans are principally collateralized by owner-occupied properties,other income within non-interest income.


Servicing rights activity during 2017 and to a lesser extent second homes and vacation properties, and are amortized over 10 to 30 years. From time-to- time the Bank will sell longer-term, low rate, residential mortgage loans to the Federal Home Loan Mortgage Corporation (“FHLMC”) with servicing rights retained. This practice allows the Bank to better manage interest rate risk and liquidity risk. In an effort to manage risk of loss and strengthen secondary market liquidity opportunities, management typically uses secondary market underwriting, appraisal, and servicing guidelines for all loans, including those held in its portfolio. Loans on one-to-four-family residential real estate are mostly originated in amounts of no more than 80% of appraised value or have private mortgage insurance. Mortgage title insurance and hazard insurance is required.

2016 was as follows:

  At or for the Twelve Months Ended December 31,
(in thousands) 2017 2016
Balance at beginning of year $5
 $8
Acquired from Lake Sunapee Bank Group 3,417
 —
Additions 134
 —
Amortization (324) (3)
Balance at end of year $3,232
 $5

Home Equity Loans: The Bank originates home equity lines of credit and second mortgage loans (loans which are secured by a junior lien position on one-to-four-family residential real estate). Home equity loans are mostly originated in amounts of no more than 85% of the combined loan-to-value ratio (first and second liens), or have private mortgage insurance. These loans carry a higher risk than first mortgage


Total residential loans included held for sale loans of $13.4 million and $0 at December 31, 2017 and 2016, respectively. The net gains on sales of loans at December 31, 2017 and 2016 were $222 thousand and $0, respectively, and included as they are in a second position relatingcomponent of other income within non-interest income.

NOTE 5.               LOAN LOSS ALLOWANCE

The allowance for loan losses is maintained at a level considered adequate to collateral. Risk is reduced through underwriting criteria, which includeprovide for our estimate of probable credit verification, appraisals and evaluations, a review of the borrower's financial condition, and personal cash flows. A security interest, with title insurance when necessary, is takenlosses inherent in the underlying real estate.



79




Troubled Debt Restructures:A Troubled Debt Restructure (“TDR”) results from a modificationloan portfolio. The allowance is increased by provisions charged to a loan to a borrower who is experiencing financial difficulty in which the Bank grants a concession to the debtor that it would not otherwise consider but for the debtor’s financial difficulties.  Financial difficulty arises when a debtor is bankrupt or contractually past due, or is likely to become so, based upon its ability to pay.  A concession represents an accommodation not generally available to other customers, which may include a below-market interest rate, deferment of principal payments, extension of maturity dates, etc.  Such accommodations extended to customers whooperating expense and reduced by net charge-offs. Loans are not experiencing financial difficulty do not result in TDR classification.


As of December 31, 2016, the Bank had eight real estate secured loans, five commercial and industrial loans, 12 commercial real estate loans, four agricultural loan,  and three other consumer loan, outstanding to 27 relationships totaling $4,236 that were classified as TDRs.  At December 31, 2016, there were 17 of these TDRs totaling $1,523 that were classified as non-accrual, and none were past due 30 days or more and still accruing.


As of December 31, 2015, the Bank had eight real estate secured loans, four commercial and industrial loans, seven commercial real estate loans two agricultural loan,  and one other consumer loan, outstanding to 17 relationships totaling $3,162 that were classified as TDRs.  At December 31, 2016, six of these TDRs totaling $826 were classified as non-accrual, and none were past due 30 days or more and still accruing.


Troubled debt restructurings and related delinquency trends in general are considered in management’s evaluation ofcharged against the allowance for loan losses when we believe that collectability is unlikely. While we use the best information available to make our evaluation, future adjustments may be necessary if there are significant changes in conditions.


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

A summary of the provisionmethodology we employ on a quarterly basis with respect to each of these components in order to evaluate the overall adequacy of our allowance for loan losses.

losses is as follows:



80




Summary information pertaining to the TDRs granted by

Specific Reserve for Loans Individually Evaluated
First, we identify loan segment during the years ended December 31, 2016, 2015relationships having aggregate balances in excess of $150 thousand and 2014 follows:


 

For the Twelve Months Ended

 

December 31, 2016

 

Number of Loans

Pre-Modification Outstanding Recorded Investment

Post-Modification Outstanding Recorded Investment

Commercial real estate mortgages

      6

       $1,459

    $1,354

Commercial and industrial loans

      2

              38

                 48

Agricultural and other

      loans to farmers

      3

              29

                 44

  Total commercial loans

    11

         1,526

            1,446

   

 

 

 

Other consumer loans

      2

              11

                 11

  Total consumer loans

      2

              11

                 11

Total

    13

       $1,537

 $         1,457





 

For the Twelve Months Ended

 

December 31, 2015

 

Number

of Loans

Pre-Modification Outstanding Recorded Investment

Post-Modification Outstanding Recorded Investment

Commercial real estate mortgages

       4

       $  342

     $    352

Commercial and industrial loans

      ---

            ---

            ---

Agricultural and other

      loans to farmers

       1

              18

            15

  Total commercial loans

       5

            360

          367

   

 

 

 

Other consumer loans

       5

         1,435

       1,433

  Total consumer loans

       5

         1,435

       1,433

Total

     10

       $1,795

     $1,800


 

For the Twelve Months Ended

 

December 31, 2014

 

Number

of Loans

Pre-Modification Outstanding Recorded Investment

Post-Modification Outstanding Recorded Investment

Commercial real estate mortgages

       1

         $   30

       $   30

Commercial and industrial loans

     ---

              ---

            ---

Agricultural and other

      loans to farmers

       1

            100

            97

  Total commercial loans

       2

            130

          127

Other consumer loans

     ---

              ---

            ---

  Total consumer loans

     ---

              ---

            ---

 

 

 

 

Total

       2

          $130

        $127


The following table shows the Company’s post-modification balancethat may also have credit weaknesses. Such loan relationships are identified primarily through our analysis of TDRs listed by type of modification for the twelve months ended December 31, 2016 and 2015:


 

2016

2015

Extended maturity and adjusted interest rate

     $   440

      $  132

Adjusted payment

          981

          735

Adjusted payment and capitalized interest

            ---

          187

Extended maturity, adjusted interest rate, and adjusted payment

            ---

          746

Extended amortization and adjusted interest rate

              9

            ---

Court ordered concession

              1

            ---

Other concession

            26

            ---

Total

     $1,457

     $1,800


During the twelve months ended December 31, 2016, 2015 and 2014, there were no defaults on loans that had been modified as TDRs within the previous twelve months. A default for purposes of this disclosure is a TDR in which the borrower is 90 days or moreinternal loan evaluations, past due loan reports and loans adversely classified internally or results in foreclosureby regulatory authorities. Each loan so identified is then individually evaluated to determine whether it is impaired- that is, based on current information and repossession of the applicable collateral.










Past Due Loans:The following tables set forth information regarding past due loans at December 31, 2016 and December 31, 2015. Amounts shown exclude deferred loan origination fees and costs.




81






December 31, 2016

30-59 Days

Past Due

60-89

Days

Past Due

90 Days

or Greater

Total

Past Due

Current

Total

Loans

Non-

Accrual

>90 Days

Past Due

and

Accruing

Commercial real estate

     mortgages

 $    195

 $     554

 $1,665

 $2,414

$  401,180

 $   403,594

 $2,564

     $ ---   

Commercial and industrial

         61

          45

      201

      307

    103,279

      103,586

      284

        ---

Commercial construction and

      land development

      ---

          ---

       ---

        ---

      14,695

        14,695

        ---   

        ---

Agricultural and other

     loans to farmers

      231

          ---

       ---

      231

      31,577

        31,808

        31

        ---

Residential real estate

     mortgages

   4,484

       429

     938

   5,851

    500,761

      506,612

   3,419

        ---

Home equity

      ---

        ---

       15

        15

      46,906

        46,921

        90

        ---

Other consumer loans

      103

           1

         6

      110

        6,062

          6,172

      108

        ---

Tax exempt

        ---

        ---

        ---

        ---

      15,846

        15,846

        ---

        ---

Total

 $5,074

 $1,029

 $2,825

 $8,928

 1,120,306

 $1,129,234

 $6,496

     $ ---   

 

 

 

 

 

 

 

 

 

   

 

 

 

 

 

 

 

 


December 31, 2015

30-59 Days Past Due

60-89 Days Past Due

90 Days or Greater

Total Past Due

Current

Total Loans

Non-Accrual

>90 Days Past Due and Accruing

Commercial real estate

     mortgages

 $     99

    $287

 $    241

       627

 $370,375

 $     371,002

 $1,279

    $  ---   

Commercial and industrial

          9

          1

       271

       281

     79,630

         79,911

      292

        ---

Commercial construction and

      land development

        ---

        ---

    1,111

   1,111

     23,815

         24,926

   1,111

        ---

Agricultural and other

      loans to farmers

        12

        70

           3

        85

     30,918

         31,003

        16

          3

Residential real estate

     mortgages

   1,313

      452

   1,299

   3,064

   403,588

       406,652

   3,452

        25

Home equity

      245

        ---

      797

   1,042

     50,488

         51,530

      820

        ---

Other consumer loans

        66

        ---

        ---

        66

       9,632

           9,698

        10

        ---

Tax exempt

        ---

        ---

        ---

        ---

     15,244

         15,244

        ---

        ---

Total

 $1,744

    $810

 $3,722

 $6,276

 $983,690

 $     989,966

 $6,980

     $ 28


Impaired Loans: Impaired loans are all commercial loans for which the Company believesevents, it is probable that itwe will be unable to collect all amounts due according toin accordance with the contractual terms of the underlying loan agreement, as well asagreement. Substantially all loans modified into a troubled debt restructure, if any. Allowances for losses onof our impaired loans are determined by the lowerhistorically have been collateral dependent, meaning repayment of the present valueloan is expected or is considered to be provided solely from the sale of the expected cash flows related to the loan, using the original contractual interest rate, and its recorded value, or in the case of collateral dependentloan's underlying collateral. For such loans, the lower of the fair value of the collateral, less estimated costs to dispose, and the recorded amount of the loans. When foreclosure is probable,we measure impairment is measured based on the fair value of the loan's collateral, which is generally determined utilizing current appraisals. A specific reserve is established in an amount equal to the excess, if any, of the recorded investment in each impaired loan over the fair value of its underlying collateral, less estimated costs to sell.



82















Details Our policy is to re-evaluate the fair value of collateral dependent loans at least every twelve months unless there is a known deterioration in the collateral's value, in which case a new appraisal is obtained.


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

Quantitative Reserve for Loans Collectively Evaluated
Second, we stratify loan portfolio into two general business loan pools: substandard (7 risk rated) and pass-rated (0 to 6 rated) by loan type. The Company utilizes historical loss rates for commercial real estate and commercial and industrial loans that are assessed by internal risk rating. Historical loss rates on residential real estate and consumer loans are not risk graded. Residential restate and consumer loans are considered as part of the pass-rated portfolio unless removed due to specific reserve evaluation based on past due status and/or other indications of credit deterioration. Quantitative reserves relative to each loan pool are established as follows: for all loan segments an allocation equaling 100% of the respective pool's average 3 year historical net loan charge-off rate (determined based upon the most recent 9 quarters ) is applied to the aggregate recorded investment in the pool of loans. Purchased performing loans are collectively evaluated as their own separate category within each loan pool.

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

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

Activity in the allowance for loan losses for the twelve months ended December 31, 2017, 2016 and 2015 was as follows:
Business Activities Loans At or for the Twelve Months Ended December 31, 2017
(in thousands) 
Commercial
real estate
 Commercial and industrial 
Residential
real estate
 Consumer Total
Balance at beginning of period $5,145
 $1,952
 $2,721
 $601
 $10,419
Charged-off loans (124) (189) (226) (162) (701)
Recoveries on charged-off loans 49
 11
 65
 18
 143
Provision/(releases) for loan losses 967
 599
 797
 (71) 2,292
Balance at end of period $6,037
 $2,373
 $3,357
 $386
 $12,153
Individually evaluated for impairment 447
 3
 9
 —
 459
Collectively evaluated 5,590
 2,370
 3,348
 386
 11,694
Total $6,037
 $2,373
 $3,357
 $386
 $12,153

Business Activities Loans At or for the Twelve Months Ended December 31, 2016
(in thousands) 
Commercial
real estate
 Commercial and industrial 
Residential
real estate
 Consumer Total
Balance at beginning of period $4,430
 $1,590
 $2,747
 $672
 $9,439
Charged-off loans (133) (90) (141) (47) (411)
Recoveries on charged-off loans 40
 289
 44
 39
 412
Provision/(releases) for loan losses 808
 163
 71
 (63) 979
Balance at end of period $5,145
 $1,952
 $2,721
 $601
 $10,419
Individually evaluated for impairment 193
 173
 49
 9
 424
Collectively evaluated 4,952
 1,779
 2,672
 592
 9,995
Total $5,145
 $1,952
 $2,721
 $601
 $10,419


Business Activities Loans At or for the Twelve Months Ended December 31, 2015
(in thousands) 
Commercial
real estate
 Commercial and industrial 
Residential
real estate
 Consumer Total
Balance at beginning of period $4,613
 $1,277
 $2,714
 $365
 $8,969
Charged-off loans (667) (395) (70) (487) (1,619)
Recoveries on charged-off loans 98
 54
 129
 23
 304
Provision/(releases) for loan losses 386
 654
 (26) 771
 1,785
Balance at end of period $4,430
 $1,590
 $2,747
 $672
 $9,439
Individually evaluated for impairment 101
 175
 97
 —
 373
Collectively evaluated 4,329
 1,415
 2,650
 672
 9,066
Total $4,430
 $1,590
 $2,747
 $672
 $9,439
Acquired Loans At or for the Twelve Months Ended December 31, 2017
(in thousands) 
Commercial
real estate
 Commercial and industrial 
Residential
real estate
 Consumer Total
Balance at beginning of period $—
 $—
 $—
 $—
 $—
Charged-off loans (151) (18) (29) (127) (325)
Recoveries on charged-off loans 1
 —
 —
 —
 1
Provision/(releases) for loan losses 247
 34
 88
 127
 496
Balance at end of period $97
 $16
 $59
 $—
 $172
Individually evaluated for impairment —
 —
 —
 —
 —
Collectively evaluated 97
 16
 59
 —
 172
Total $97
 $16
 $59
 $—
 $172

There were no loans meeting the definition of acquired for the twelve month period ending December 31, 2016 and 2015 are as follows:

2015.


 

 

Unpaid

 

 

Unpaid

 

 

Recorded

Principal

Related

Recorded

Principal

Related

 

Investment

Balance

Allowance

Investment

Balance

Allowance

With no related allowance:

 

 

 

 

 

 

Commercial real estate mortgages

   $2,831

 $2,919

    $  ---

 $1,692

  $1,736

    $ ---   

Commercial and industrial

        130

      130

        ---

       202

       352

       ---

Commercial construction and land development

          ---

        ---

        ---

         ---

        ---

       ---

Agricultural and other loans to farmers

        139

      139

        ---

       106

       106

       ---

Residential real estate loans

     1,387

   1,504

        ---

    1,332

    1,362

       ---

Home equity loans

          16

        16

        ---

         18

         18

       ---

Other consumer

            2

          2

        ---

         ---

         ---

       ---

Subtotal

   $4,505

 $4,710

     $ ---

  $3,350

 $3,574

    $ ---

  

 

 

 

 

 

 

With an allowance:

 

 

 

 

 

 

Commercial real estate mortgages

   $1,650

 $3,575

    $193

 $    531

 $    531

    $   43

Commercial and industrial

        217

      367

      173

       224

       374

       175

Commercial construction and land development

          ---

        ---

        ---

    1,111

    3,036

         58

Agricultural and other loans to farmers

          ---

        ---

        ---

         ---

         ---

         ---

Residential real estate loans

        322

      322

        49

       515

       515

         97

Home equity loans

           ---

         ---

        ---

         ---

         ---

         ---

Other consumer

          15

        15

          9

           8

           8

         ---

Subtotal

   $2,204

 $4,279

    $424

  $2,389

 $4,464

     $373

Total

   $6,709

 $8,989

    $424

  $5,739

 $8,038

     $373

Credit Quality Information

Details of impaired loans as of December 31, 2016, 2015, and 2014 are as follows:


 

For the

Twelve Months Ended

For the

Twelve Months Ended

For the

Twelve Months Ended

 

Average

Recorded

Investment

Cash Basis

Interest

Income

Recognized

Average

Recorded

Investment

Cash Basis

Interest

Income

Recognized

Average

Recorded

Investment

Cash Basis

Interest

Income

Recognized

With no related allowance:

 

 

 

 

 

 

Commercial real estate mortgages

   $2,768

     $157

   $2,663

     $ 60

 $1,589

    $66

Commercial and industrial

        239

           4

        346

        10

      537

        4

Commercial construction and land development

          ---

         ---

          ---

        ---

   1,514

       ---

Agricultural and other loans to farmers

        156

           9

        143

          8

       162

        3

Residential real estate mortgages

     1,514

         73

     1,327

        42

       470

      25

Home equity loans

           17

           1

          18

         ---

         ---

       ---

Other consumer

             2

           2

          ---

           1

         ---

       ---

Subtotal

   $4,696

     $246

   $4,497

     $121

 $4,272

    $98

   

 

 

 

 

 

 

With an allowance:

 

 

 

 

 

 

Commercial real estate mortgages

   $1,619

     $  ---

   $   532

     $ ---

 $   572

    $---   

Commercial and industrial

        118

         ---

        227

        ---

      376

       ---

Commercial construction and land development

          ---

         ---

     1,243

        ---

         ---

       ---

Agricultural and other loans to farmers

          ---

         ---   

           ---

        ---

         ---

       ---

Residential real estate mortgages

         325

         ---

        650

        ---

         ---

       ---

Home equity loans

          ---

         ---

           ---

        ---

         ---

       ---

Other consumer

           16

         ---

             9

        ---

        12

        1

Subtotal

    $2,078

     $  ---

   $2,661

     $  ---

 $   960

    $  1

Total

    $6,774

     $246

   $7,158

     $121

 $5,232

    $99


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



Credit Quality Indicators/Classified Loans:In monitoring the credit quality of the commercial portfolio, management applies a credit quality indicator and uses an internal risk rating system to categorize commercial loans.each loan. These credit quality indicators range from one through nine, with a higher number correlating to increasing risk of loss. These ratings are used as inputs to the calculation of the allowance for loan losses.



83



Consistent with regulatory guidelines, the Bank provides for the classification of loans which are considered to be of lesser quality as substandard, doubtful, or loss (i.e. risk rated 7, 8 and 9, respectively).

loss.


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


Pass:

Loans within all classes of commercial portfolio segments that are not adversely rated, are generally contractually current as to principal and interest, and are otherwise in compliance with the contractual terms of the loan agreement. Management believes that there is a lowlower risk of loss related to these loans that are considered pass.


Special mention:

Loans that do not expose the Bank to risk sufficient to warrant classification in one of the aforementionedsubsequent categories, but which possess some weaknesses, 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 the lending officer may be unable to supervise properly because of: (i) lack of expertise or inadequate loan agreement; (ii) the poor condition of or lack of control over collateral; or (iii) 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 liquidity, or liquidation of collateral is jeopardized may be included in this classification. Special mention loans are not adversely classified and do not expose the Bank to sufficient risks to warrant classification.


Substandard:

The Bank considers a loan substandard if it is 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 that the Bank classifies as doubtful have all of the weaknesses inherent in those loans that are classified as substandard but also have the added characteristic that the weaknesses present make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable. The possibility of loss is high but because of certain important and reasonably specific pending factors which may work to the advantage and strengthening of the loan, its classification as loss is deferred until its more exact status is determined. Pending factors include proposed merger, acquisition, or liquidation procedures, capital injection, perfecting liens on additional collateral and refinancing plans. The entire amount of the loan might not be classified as doubtful when collection of a specific portion appears highly probable. Loans are generally not classified doubtful for an extended period of time (i.e., over a year).


Loss:

Loans that the Bank classifies 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 that 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 a partial recovery may be affectedeffected in the future. Losses are taken in the period in which they are determined to be uncollectible.



84




The following tables summarizepresent the Company’s commercial loan portfolioloans by risk rating at December 31, 2017 and December 31, 2016:

Business Activities Loans
Commercial Real Estate
Credit Risk Profile by Creditworthiness Category
  Construction and land development Commercial real estate other Total commercial real estate
(in thousands) December 31, 2017 December 31, 2016 December 31, 2017 December 31, 2016 December 31, 2017 December 31, 2016
Grade:  
  
  
  
  
  
Pass $28,180
 $14,695
 $483,711
 $376,968
 $511,891
 $391,663
Special mention 73
 —
 5,706
 5,868
 5,779
 5,868
Substandard 639
 —
 15,702
 20,588
 16,341
 20,588
Total $28,892
 $14,695
 $505,119
 $403,424
 $534,011
 $418,119



Commercial and Industrial
Credit Risk Profile by Creditworthiness Category
   Commercial other  Agricultural and other loans to farmers  Tax exempt loans  Total commercial and industrial
(in thousands) December 31, 2017 December 31, 2016 December 31, 2017 December 31, 2016 December 31, 2017 December 31, 2016 December 31, 2017 December 31, 2016
Grade:  
  
  
  
  
  
    
Pass $194,147
 $98,968
 $27,046
 $31,279
 $42,208
 $15,679
 $263,401
 $145,926
Special mention 1,933
 2,384
 63
 251
 157
 167
 2,153
 2,802
Substandard 1,971
 2,234
 479
 278
 —
 —
 2,450
 2,512
Total $198,051
 $103,586
 $27,588
 $31,808
 $42,365
 $15,846
 $268,004
 $151,240


Acquired Loans
Commercial Real Estate
Credit Risk Profile by Creditworthiness Category
  Commercial construction and land development Commercial real estate other Total commercial real estate
(in thousands) December 31, 2017 December 31, 2016 December 31, 2017 December 31, 2016 December 31, 2017 December 31, 2016
Grade:  
  
  
  
  
  
Pass $16,523
 $—
 $266,477
 $—
 $283,000
 $—
Special mention 235
 —
 2,440
 —
 2,675
 —
Substandard 23
 —
 7,037
 —
 7,060
 —
Total $16,781
 $—
 $275,954
 $—
 $292,735
 $—


Commercial and Industrial
Credit Risk Profile by Creditworthiness Category
��  Commercial other  Agricultural and other loans to farmers  Tax exempt loans Total commercial and industrial
(in thousands) December 31, 2017 December 31, 2016 December 31, 2017 December 31, 2016 December 31, 2017 December 31, 2016 December 31, 2017 December 31, 2016
Grade:   
     
   
   
   
   
   
Pass $60,300
 $—
 $—
 $—
 $43,350
 $—
 $103,650
 $—
Special mention 5,753
 —
 —
 —
 —
 —
 5,753
 —
Substandard 2,016
 —
 —
 —
 —
 —
 2,016
 —
Total $68,069
 $—
 $—
 $—
 $43,350
 $—
 $111,419
 $—


The following table summarizes information about total loans rated Special Mention or higher as of December 31, 20162017 and December 31, 2015, by credit quality indicator. Credit quality indicators2016. The table below includes consumer loans that are reassessed for each applicable commercial loan at least annually, or upon receiptspecial mention and analysis ofsubstandard accruing that are classified in the borrower’s financial statements, when applicable. Consumer loans, which principally consist of residential mortgage loans, are not rated, but are evaluated for credit quality after originationabove table as performing based on delinquency status (see past due loan aging table above).

payment activity.


December 31, 2016

Commercial real estate mortgages

Commercial and industrial

Commercial construction and land development

Agricultural and other loans to farmers

Total

Pass

 $376,998

   $ 98,798

    $14,695

     $31,277

    $521,768

Other Assets

     Especially Mentioned

       5,868

        2,550

            ---

            251

          8,669

Substandard

     20,728

        2,238

            ---

            280

        23,246

Doubtful

           ---

            ---

            ---

             ---

              ---

Loss

           ---

            ---

            ---

             ---

              ---

Total

 $403,594

   $103,586

    $14,695

     $31,808

    $553,683

 

 

 

 

 

 

December 31, 2015

Commercial real estate mortgages

Commercial and industrial

Commercial construction and land development

Agricultural and other loans to farmers

Total

Pass

 $345,197

   $ 74,771

    $23,460

     $30,688

    $474,116

Other Assets

     Especially Mentioned

       7,381

        2,349

           355

            168

        10,253

Substandard

     18,424

        2,790

        1,111

            147

        22,472

Doubtful

           ---

            ---

            ---

             ---

              ---

Loss

           ---

               1

            ---

             ---

                 1

Total

 $371,002

 $   79,911

    $24,926

     $31,003

    $506,842

  December 31, 2017 December 31, 2016
(in thousands) 
Business
Activities Loans
 Acquired Loans Total 
Business
Activities Loans
 Acquired Loans Total
Non-accrual $12,162
 $2,156
 $14,318
 $6,496
 $—
 $6,496
Substandard accruing 10,284
 7,833
 18,117
 20,368
 —
 20,368
Total classified 22,446
 9,989
 32,435
 26,864
 —
 26,864
Special mention 7,913
 8,429
 16,342
 8,669
 —
 8,669
Total Criticized $30,359
 $18,418
 $48,777
 $35,533
 $—
 $35,533

Allowance for Loan Losses:The Bank’s allowance for loan losses consists of two principal elements: (i) specific valuation allowances determined in accordance with ASC Topic 310 based on probable losses on specific loans; (ii) general valuation allowances, determined by taking historical valuation allowances determined in accordance with ASC Topic 450 based on historical loan loss experience for similar loans with similar characteristics and trends, adjusted, as necessary, for economic conditions and other qualitative risk factors both internal and external to the Bank.



85




The allowances established for probable losses on specific loans are based on a regular analysis and evaluation of problem loans. Loans are classified based on an internal credit risk grading process that evaluates, among other things: (i) the obligor’s ability to repay; (ii) the underlying collateral, if any; and (iii) the economic environment and industry in which the borrower operates. This analysis is performed at the relationship level for all commercial loans. When a loan has a classification of substandard or worse and is non-accruing, or considered a TDR (regardless of accrual status or risk rating).  The Bank analyzes the loan to determine whether the loan is impaired and, if impaired, the need to specifically allocate a portion of the allowance to the loan. Specific valuation allowances are determined by analyzing the borrower’s ability to repay amounts contractually owed and collateral deficiencies, among other observable considerations.


Historical valuation allowances are calculated based on the historical loss experience of specific types of loans and the internal risk grade of such loans at the time they were charged-off, and is the first step to determining the general allowance component of the reserve. The Bank calculates historical loss ratios for pools of similar loans with similar characteristics based on the proportion of actual net charge-offs experienced to the total loan balance in the pool. The historical loss ratios are updated quarterly based on this net charge-off experience. A historical valuation allowance is established for each pool of similar loans based upon the product of the historical loss rate and the total dollar amount of the loans in the pool, net of any loans for which reserves are already established. The Bank’s pools of similar loans include similarly risk-graded groups of commercial real estate loans, commercial and industrial loans, commercial construction and development loans, agricultural, tax-exempt loans, residential mortgage loans, home equity loans and consumer loans.


The general valuation allowances are determined by making adjustments to the historical valuation allowances (above), where adjustments are based on general economic conditions and other qualitative risk factors both internal and external to the Bank. Such qualitative factor adjustments are determined by evaluating, among other things: (i) changes in lending policies and procedures; (ii) economic and business conditions; (iii) changes in the volume and nature of the loan portfolio; (iv) experience, ability and depth of lending management and staff; (v) changes in asset quality and problem loan trends; (vi) quality of internal controls and effectiveness of loan review; (vii) concentrations of credit; (viii) external factors, including changes in competition, legal, and regulatory matters; and (ix) real estate market conditions and valuations of collateral.   Management evaluates the degree of risk that each one of these components has on the quality of the loan portfolio on a quarterly basis. The results are then used to determine an appropriate general valuation allowance.


Once established, the general valuation allowance is then modified by a Loss Emergence Period (“LEP”) established for each pool of homogeneous loans. The LEP is anan estimated adjustment, which improves the Bank’s ability to more accurately forecast probable losses that may exist in the loan portfolio that have not yet emerged into “problem loan” status. The Bank’s process for determining the appropriate level of the allowance is designed to account for credit deterioration as it occurs.



86




Loans identified as losses by management, external loan review and/or bank examiners, are charged-off. Furthermore, consumer loan accounts are charged-off based on regulatory requirements.


The Company’s December 31, 2016 and 2015 Allowance calculations included the use of more definitive and distinct LEPs for each loan segment, allowing the Company to more accurately forecast probable losses that have already occurred in the loan portfolio, which may not have emerged into “problem loan” status.


As of December 31, 2016, Management believes that the overall model methodology and Allowance calculation provides a reasonable and supportable basis for determining and reporting on probable losses that have already occurred in the Company’s loan portfolio.



87









The following tables detail activity in the allowance for loan losses by portfolio segment for the years ended December 31, 2016, 2015, and 2014. The tables also provide details regarding the Company’s recorded investment in loans related to each balance in the allowance for loan losses by portfolio segment and disaggregated on the basis of the Company’s impairment methodology. Allocation of a portion of the Allowance to one category of loans does not preclude its availability to absorb losses in other categories.


Twelve Months Ended         December 31, 2016

Commercial

Real Estate

Commercial and Industrial

Commercial Construction and land development

Agricultural

Residential Real Estate

Consumer

Home Equity

Tax Exempt

Total

Beginning Balance

 $    4,246

 $    1,236

 $       184

 $      307

 $      2,747

 $       111

 $     561

 $     47

 $       9,439

Charged Off

         (133)

           (90)

             ---

          ---

          (141)

           (37)

         (10)

        ---

           (411)

Recoveries

            40

          242

             ---

           47

              44

            29

          10

        ---

             412

Provision

          913

          122

          (105)

           36

              71

            (4)

        (59)

          5

             979

Ending Balance

 $    5,066

 $    1,510

 $          79

 $      390

 $      2,721

 $         99

 $    502

 $     52

 $     10,419

 

 

 

 

 

 

 

 

 

 

Amount for loans

   individually

 

 

 

 

 

 

 

 

 

  evaluated

  for impairment

 $      193

 $      173

$          ---

 

 $           49

 $         9

 $      ---

 $     ---

 $           424

   

 

 

 

 

 

 

 

 

 

Amount for loans

  collectively

 

 

 

 

 

 

 

 

 

  evaluated

  for impairment

 $    4,873

 $   1,337

 $         79

 $     390

 $      2,672

 $        90

 $       502

 $      52

 $        9,995

   

 

 

 

 

 

 

 

 

 

Loans

   individually  

  evaluated

 

 

 

 

 

 

 

 

 

  for impairment

 $    4,481

 $      347

 $        ---

 $      139

 $     1,709

 $        17

 $       16

 $       ---

 $       6,709

   

 

 

 

 

 

 

 

 

 

Loans

  collectively

  evaluated

 

 

 

 

 

 

 

 

 

  for impairment

 $399,113

 $103,239

 $ 14,695

 $31,669

 $504,903

 $   6,155

 $46,905

 $ 15,846

 $ 1,122,525


Twelve Months

Ended

December 31, 2015

Commercial

Real Estate

Commercial

and

Industrial

Commercial Construction

and Land

Development

Agricultural

Residential

Real Estate

Consumer

Home

Equity

Tax

Exempt

Total

Beginning Balance

 $    4,468

 $       929

   $      145

 $       277

 $    2,714

 $        94

 $      271

 $       71

 $  8,969

Charged Off

         (667)

         (323)

             ---

          (72)

           (70)

        (111)

        (376)

          ---

    (1,619)

Recoveries

             98

            36

             ---

           18

           129

           22

             1

          ---

         304

Provision

           347

          594

             39

           84

           (26)

         106

         665

         (24)

      1,785

Ending Balance

 $     4,246

 $    1,236

   $      184

 $      307

 $     2,747

 $      111

 $      561

 $       47

 $   9,439

 

 

 

 

 

 

 

 

 

 

Amount for loans

    individually

 

 

 

 

 

 

 

 

 

    evaluated

    for impairment

 $          43

 $      175

   $       58

 $       ---

 $         97

 $       ---

 $       ---

 $       ---

 $      373

   

 

 

 

 

 

 

 

 

 

Amount for loans

    collectively

 

 

 

 

 

 

 

 

 

    evaluated

    for impairment

 $     4,203

 $   1,061

   $     126

 $     307

 $     2,650

 $      111

 $      561

 $       47

 $   9,066

   

 

 

 

 

 

 

 

 

 

Loans

   individually

   evaluated

 

 

 

 

 

 

 

 

 

   for impairment

 $     2,223

 $      426

   $  1,111

 $     106

 $     1,847

 $          8

 $        18

 $       ---

 $   5,739

   

 

 

 

 

 

 

 

 

 

Loans

   Collectively

   evaluated

 

 

 

 

 

 

 

 

 

  for impairment

 $368,779

 $ 79,485

   $23,815

 $30,897

 $404,805

 $   9,690

 $51,512

 $15,244

 $984,227





Twelve Months Ended

December 31, 2014

Commercial

Real Estate

Commercial

and

Industrial

Commercial Construction

and Land

Development

Agricultural

Residential

Real Estate

Consumer

Home

Equity

Tax

Exempt

Total

Beginning Balance

 $   4,825

     $ 1,266

    $      314

 $     335

 $     1,166

 $       137

 $   264

 $      168

 $    8,475

Charged-off

        (238)

          (475)

              ---

        (14)

          (650)

         (191)

      (52)

           ---

      (1,620)

Recoveries

            85

             16

              ---

        130

             12

            37

          1

           ---

          281

Provision

         (204)

           122

           (169)

      (174)

        2,186

          111

        58

          (97)

       1,833

Ending Balance

 $    4,468

     $    929

    $      145

 $     277

 $     2,714

 $         94

 $   271

 $        71

 $    8,969

 

 

 

 

 

 

 

 

 

 

Amount for loans

 

 

 

 

 

 

 

 

 

  individually

   evaluated

  for impairment

 $       776

     $    187

    $       ---

 $      ---

 $          ---

 $          1

 $      ---

 $        ---

 $       964

   

 

 

 

 

 

 

 

 

 

Amount for loans

 

 

 

 

 

 

 

 

 

  collectively

  evaluated

  for impairment

 $    3,692

     $    742

    $     145

 $    277

 $    2,714

 $       93

 $    271

 $       71

 $    8,005

   

 

 

 

 

 

 

 

 

 

Loans individually

 

 

 

 

 

 

 

 

 

  evaluated for

  impairment

 $    3,592

     $     634

    $  1,328

 $     181

 $        389

 $       10

 $      ---

 $       ---

 $    6,134

   

 

 

 

 

 

 

 

 

 

Loans collectively

 

 

 

 

 

 

 

 

 

  evaluated for

  impairment

 $322,357

     $73,259

    $24,093

 $30,290

 $382,289

 $12,130

 $51,795

 $16,693

 $912,906




88



Loan Concentrations:Because of the Company’s proximity to Acadia National Park, a large part of the economic activity in the Bank’s area is generated from the lodging and hospitality business associated with tourism. At December 31, 2016 and 2015, loans to the lodging and hospitality industry amounted to approximately $128,680 and $98,231, respectively.


Loans to Related Parties:  In the ordinary course of business, the Bank has made loans at prevailing rates and terms to directors, officers and other related parties. In management’s opinion, such loans do not present more than the normal risk of collectability or incorporate other unfavorable features, and were made under terms that are consistent with the Bank’s lending policies.


Loan to related parties at December 31 are summarized below.  Balances have been adjusted to reflect changes in status of directors and officers for each year presented.


 

2016

2015

Beginning balance

    $4,100

    $2,902

Changes in composition

      7,017

      1,675

New  loans

      1,127

         236

Less: repayments

     (1,624)

        (713)

Ending balance

   $10,620

    $4,100


As of December 31, 2016, and 2015, there were no past due or non-performing loans to related parties.


Real Estate Loans Under Foreclosure: At December 31, 2016, the Bank had consumer mortgage loans secured by residential real estate properties for which formal foreclosure proceedings were in process according to local requirements of the applicable jurisdictions totaling $2,394 compared with $4,575 at December 31, 2015.



89




Note 5: Other Real Estate Owned


At December 31, 2016, total other real estate owned (“OREO”) amounted to $90 compared with $256 at December 31, 2015.



The Company's OREO activity for the years ended December 31, 2016 and 2015 are presented below:


 

2016

2015

Balance at beginning of year

$256

 $523

Additions

---

   425

Disposals

  (119)

   (672)

Writedowns

    (47)

      (20)

Balance at end of year

$  90

 $256


The Company's OREO portfolio by property type is presented in the table below as of December 31, 2016 and 2015:


 

2016

2015

 

Number of properties

Carrying value

Number of properties

Carrying value

Residential

---

   $ ---

2

    $131

Commercial

1

      90

1

      125

Total

1

   $ 90

3

    $256


The Company's net gains and losses on OREO properties are presented within non-interest expense on the consolidated statements of income.


The Company recorded net gains and losses on OREO properties for the years ended December 31, 2016, 2015 and 2014 as follows:


 

2016

2015

2014

Net gains (losses) on OREO

    $  (44)

    $ 57

 $ (397)


Note 6: Reclassifications Out of Accumulated Other Comprehensive Income


The following table summarizes the reclassifications out of Accumulated Other Comprehensive Income for the years ended December 31, 2016, 2015 and 2014.


 



2016



2015



2014

Affected Line Item in the Statement Where Net Income is Presented

Realized gains and losses on

      available-for-sale securities

 $ 4,498

 $1,334

 $400

Net securities gains

Tax (expense) or benefit

   (1,574)

     (467)

  (138)

Provision for income taxes

Net of tax

 $ 2,924

 $    867

 $262

Net income

   

 

 

 

 

Amortization of prior service cost and actuarial (loss)

     gain for supplemental executive retirement plan

 $    (28)

 $   (38)

 $ (25)

Salaries and benefits

Tax (expense) or benefit

        10

        13

     ---

Provision for income taxes

Net of tax

 $    (18)

 $    (25)

 $ (25)

Net income

Total reclassification for the period

 $ 2,906

 $    842

 $237

 

NOTE 6.PREMISES AND EQUIPMENT








Note 7: Premises and Equipment


The detail of

Year-end premises and equipment at December 31, 2017 and December 31, 2016 are summarized as follows:
(in thousands, except years) 2017 2016 Estimated Useful Life
Land $4,849
 $2,474
 N/A
Buildings and improvements 48,952
 27,448
 5 -39 years
Furniture and equipment 6,972
 8,738
 3 - 7 years
Premises and equipment, gross 60,773
 38,660
  
Accumulated depreciation and amortization (13,065) (15,241)  
       
Premises and equipment, net $47,708
 $23,419
  

Depreciation expense for the years ended December 31, 2017, 2016 and 2015 amounted to $3.5 million, $1.5 million and $1.7 million, respectively.

NOTE 7.GOODWILL AND OTHER INTANGIBLES

The activity impacting goodwill in 2017 and 2016 is as follows:
(in thousands) 2017 2016
Balance at beginning of year $4,935
 $4,935
Lake Sunapee Bank Group acquisition 95,150
 —
Balance at end of year $100,085
 $4,935

In 2017, the Company completed its annual goodwill impairment testing using data as of September 30, 2017. The analysis was performed at the consolidated Bank level of the Company, which is considered the smallest reporting unit carrying goodwill. The step one analysis under the guidance of ASC 350 was passed, and therefore step two of the goodwill impairment test was not performed and no goodwill impairment was recognized for the year ended December 31, 2017. No impairment was recorded in 2016 and 2015.

The components of other intangible assets in 2017 and 2016 are as follows:
  2017
(in thousands) Gross Intangible Assets Accumulated Amortization Net Intangible Assets
Core deposit intangible (non-maturity deposits) $8,585
 $(1,136) $7,449
Customer list and other intangibles 1,016
 (82) 934
Total $9,601
 $(1,218) $8,383

  2016
(in thousands) Gross Intangible Assets Accumulated Amortization Net Intangible Assets
Core deposit intangible (non-maturity deposits) $783
 $(406) $377
Total $783
 $(406) $377


Other intangible assets are amortized on a straight-line basis over their estimated lives, which range from eight and a half years to twelve years. Amortization expenses related to intangibles totaled $812 thousand in 2017, $92 thousand in 2016 and $92 thousand in 2015.

The estimated aggregate future amortization expense for intangible assets remaining at year-end 2017 is as follows: 2018- $827 thousand; 2019- $827 thousand; 2020- $827 thousand; 2021- $742 thousand; 2022- $734 thousand; and thereafter- $4.4 million. For the years 2017, 2016 and 2015, no impairment charges were identified for the Company's intangible assets.


NOTE 8.               DEPOSITS

A summary of time deposits at December 31, 2017 and December 31, 2016 were as follows:
(in thousands) December 31, 2017 December 31, 2016
Time less than $100,000 $579,856
 $304,393
Time $100,000 or more 286,490
 112,044
Total time deposits $866,346
 $416,437

At December 31, 2017 and December 31, 2016, the scheduled maturities by year for time deposits were as follows:
(in thousands) December 31, 2017 December 31, 2016
Within 1 year $406,295
 $165,296
Over 1 year to 2 years 305,895
 95,728
Over 2 years to 3 years 115,878
 79,306
Over 3 years to 4 years 24,459
 56,717
Over 4 years to 5 years 13,685
 18,145
Over 5 years 134
 1,245
Total $866,346
 $416,437

Included in time deposits are brokered deposits of $428.3 million and $237.9 million at December 31, 2017 and December 31, 2016, respectively. Included in the deposit balances contained on the balance sheet are reciprocal deposits of $49.7 million and $43.1 million at December 31, 2017 and December 31, 2016, respectively.


NOTE 9.               BORROWED FUNDS

Borrowed funds at December 31, 2017 and December 31, 2016 are summarized, as follows:
  December 31, 2017 December 31, 2016
(in thousands, except ratios) Amount 
Weighted
Average
Rate
 Amount Weighted
Average
Rate
Short-term borrowings  
  
  
  
Advances from the FHLB $608,792
 1.49% $372,700
 0.97%
Other borrowings 40,706
 0.59
 21,780
 0.29
Total short-term borrowings 649,498
 1.43
 394,480
 0.93
Long-term borrowings        
Advances from the FHLB 137,190
 1.72
 137,116
 1.59
Subordinated borrowings 38,033
 4.88
 —
 —
Junior subordinated borrowings 5,000
 4.89
 5,000
 4.41
Total long-term borrowings 180,223
 2.47
 142,116
 1.69
Total $829,721
 1.66% $536,596
 1.13%

Short term debt includes Federal Home Loan Bank of Boston (“FHLB”) advances with an original maturity of less than one year. The maximum amount of short-term advances from the FHLB outstanding at month-end during 2017 and 2016 were $720.9 million and $427.1 million, respectively.  For the year ended December 31, 2017, the average short-term advances from the FHLB was $590.1 million with a weighted average rate of 1.21%.  For the year ended December 31, 2016, the average short-term advances from the FHLB was $368.4 million with a weighted average rate of 0.8%. The Bank also maintains a $1.0 million secured line of credit with the FHLB that bears a daily adjustable rate calculated by the FHLB. There was no outstanding balance on the FHLB line of credit for the periods ended December 31, 2017 and December 31, 2016.

The Bank also has capacity to borrow funds on a secured basis utilizing the Borrower in Custody program and the Discount Window at the Federal Reserve Bank of Boston (the “FRB”). At December 31, 2017, the Bank’s available secured line of credit at the FRB was $117.1 million. The Bank has pledged certain loans and securities to the FRB to support this arrangement. There were no borrowings with the FRB for the periods ended December 31, 2017 and December 31, 2016.

Long-term FHLB advances consist of advances with a maturity of more than one year. The advances outstanding at December 31, 2017 include callable advances totaling $27.0 million, and amortizing advances totaling $683 thousand. The advances outstanding at December 31, 2016 include callable advances totaling $17.0 million, and no amortizing advances. All FHLB borrowings, including the line of credit, are secured by a blanket security agreement on certain qualified collateral, principally all residential first mortgage loans and certain securities.

A summary of maturities of FHLB advances as of December 31, 2017 is as follows:

  December 31, 2017
(in thousands, except rates) Amount Weighted
Average Rate
Fixed rate advances maturing:  
  
2018 $608,792
 1.49%
2019 104,954
 1.66
2020 29,920
 1.87
2021 1,633
 2.32
2022 —
 —
2023 and thereafter 683
 2.80
Total FHLB advances $745,982
 1.53%

 

 

 

Estimated useful

 

2016

2015

lives (in years)

Land

 $   2,474

 $   2,474

n/a

Buildings and leasehold improvements

    27,448

    25,034

5-39

Furniture and equipment

      8,738

      8,085

3-7

Less: accumulated depreciation

   (15,241)

   (14,919)

 

Total

 $ 23,419

 $ 20,674

 


Depreciation expense amounted to $1,551, $1,710 and $1,629

In April 2008, the Bank issued fifteen year junior subordinated notes in 2016, 2015, and 2014, respectively.


Note 8: Goodwill and Other Intangible Assets


The Company tests goodwillthe amount of $5.0 million due in 2023. These debt securities qualify as Tier 2 capital for impairment on an annual basis using fourth quarter data. The results of the qualitative assessment indicated it is more likely than not that the reporting unit’s fair value exceeds its carrying amount, and accordingly, the two-step impairment test was not performed.  If events or changes in circumstances indicate that impairment is possible, the Company will perform additional reviews.  Goodwill totaled $4,935 atand the Bank. The subordinated debt securities are callable by the Bank after five years without penalty. The interest rate is three-month LIBOR plus 3.45%. At December 31, 20162017 and 2015, respectively.  No impairment was recorded on goodwill for 2016 or 2015.  


Core Deposit Intangible Asset:The Company has a finite-lived intangible asset capitalized on its consolidated balance sheet in the form of a core deposit intangible asset related to the Border Trust Company transaction. The core deposit intangible is being amortized over an estimated useful life of eight and one-half years and is included in other assets on the Company’s consolidated balance sheet. At December 31, 2016 the balanceinterest rate was 5.04% and 4.41%, respectively.


On January 13, 2017, the Company acquired $17.0 million of subordinated debt in connection with the Lake Sunapee acquisition. The original subordinated debt was issued on October 29, 2014, in connection with the execution of a Subordinated Note Purchase Agreement between and among Lake Sunapee Bank Group and certain accredited investors pursuant to which Lake Sunapee Bank Group issued an aggregate of $17.0 million of subordinated notes (the “Notes”) to the accredited investors. The Notes have a maturity date of November 1, 2024, and will bear interest at a fixed rate of 6.75% per annum. The Company may, at its option, beginning with the interest payment date of November 1, 2019, and on any interest payment date thereafter, redeem the Notes, in whole or in part, at par plus accrued and unpaid interest to the date of redemption. Any partial redemption will be made pro rata among all of the core deposit intangiblenoteholders. The Notes are not subject to repayment at the option of the noteholders. The Notes are unsecured, subordinated obligations of the Company and rank junior in right of payment to the Company’s senior indebtedness and to the Company’s obligations to its general creditors.

Also in connection with the Lake Sunapee acquisition, the Company acquired 100% of the common securities totaling $600 thousand and $20.0 million of Junior Subordinated Deferrable Interest Debentures ("Debentures") issued by NHTB Capital Trust II and NHTB Capital Trust III, which are both Connecticut statutory trusts. The Debentures were originally issued on March 30, 2014, carry a variable interest rate of 3-month LIBOR plus 2.79%, and mature in 2034. The debt is callable by the Company at the time when any interest payment is made. NHTB Trust II and Trust III are considered variable interest entities for which the Company is not the primary beneficiary. Accordingly, Trust II and Trust III are not consolidated into the Company’s financial statements.

NOTE 10.EMPLOYEE BENEFIT PLANS

Pension Plans
The Company maintains a legacy, employer-sponsored defined benefit pension plan (the “Plan”) for which participation and benefit accruals were frozen on January 13, 2017. The Plan was assumed in connection with the Lake Sunapee acquisition in 2017. Accordingly, no employees are permitted to commence participation in the Plan and future salary increases and years of credited service are not considered when computing an employee’s benefits under the Plan. As of December 31, 2017, all minimum Employee Retirement Income Security Act (“ERISA”) funding requirements have been met. The Company did not have any defined benefit pension plans prior to 2017.


The following tables set forth information about the plan for the year ended December 31, 2017:
(in thousands) 2017
Change in projected benefit obligation:  
Projected benefit obligation on acquisition date $8,642
Service cost —
Interest cost 334
Actuarial gain 662
Benefits paid (269)
Settlements (349)
Projected benefit obligation at end of year 9,020
Accumulated benefit obligation 9,020
   
Change in fair value of plan assets:  
Fair value of plan assets on acquisition date 10,622
Expected return on plan assets 1,022
Contributions by employer —
Benefits paid (269)
Settlements (349)
Fair value of plan assets at end of year 11,026
   
Overfunded status $(2,006)
   
Amounts recognized in consolidated balance sheet: 
Other assets $2,006

Net periodic pension cost is comprised of the following for the year ended December 31, 2017:
(in thousands) 2017
Interest cost $334
Expected return on plan assets (706)
Settlement Charge 13
Net periodic pension benefit $(359)

Change in plan assets and benefit obligations recognized in accumulated other comprehensive income during 2017 are as follows:
(in thousands) 2017
Actuarial loss $346
Settlement charge (13)
Total recognized in accumulated other comprehensive income (pre-tax) 333
Total recognized in net periodic pension cost and other comprehensive income (pre-tax) $(26)

The after tax components of accumulated other comprehensive loss, which have not yet been recognized in net periodic pension cost, related to the Plan are a net loss of $208 thousand. The Company expects to make no cash contributions to the pension trust during the 2018 fiscal year. The amount expected to be amortized from accumulated other comprehensive loss into net periodic pension cost over the next fiscal year is zero.


The principal actuarial assumptions used at December 31, 2017 were as follows:
2017
Projected benefit obligation
Discount rate3.56%
Net periodic pension cost
Discount rate4.09%
Long term rate of return on plan assets7.00

The discount rate that is used in the measurement of the pension obligation is determined by comparing the expected future retirement payment cash flows of the plan to the Citigroup Above Median Double-A Curve as of the measurement date. The expected long-term rate of return on Plan assets reflects expectations of future returns as applied to the plan’s target allocation of asset amountedclasses. In estimating that rate, appropriate consideration was given to $377.  

historical returns earned by equities and fixed income securities.


 

2016

2015

  Gross carrying amount

$783

$783

  Less:  accumulated amortization

  (406)

  (313)

   Net carrying amount

$377

$470

The Company’s overall investment strategy with respect to the Plan’s assets is to maintain assets at a level that will sufficiently cover future beneficiary obligations while achieving long term growth in assets. The Plan’s targeted asset allocation is 48% equity securities and 52% fixed-income securities primarily consisting of intermediate-term products.

Amortization expense

The fair values for investment securities are determined by quoted prices in active markets, if available (Level 1). For securities where quoted prices are not available, fair values are calculated based on market prices of similar securities (Level 2). For securities where quoted prices or market prices of similar securities are not available, fair values are calculated using discounted cash flows or other market indicators (Level 3).

The fair value of the Plan's assets by category and level within fair value hierarchy are as follows at December 31, 2017:
(in thousands) Total Level 1 Level 2
Asset Category      
Equity mutual funds: 
 
 
Large-cap $2,143
 $2,143
 $—
Mid-cap 612
 612
 —
Small-cap 613
 613
 —
International 1,150
 1,150
  
Fixed income funds:      
Fixed-income - core plus 3,896
 3,896
 —
Intermediate duration 1,316
 1,316
 —
Common stock 610
 610
 —
Common/collective trusts - large-cap 555
 —
 555
Cash equivalents - money market 130
 130
 —
Total $11,025
 $10,470
 $555

The Plan did not hold any assets classified as Level 3, and there were no transfers between levels during 2017.


Estimated benefit payments under the Company's pension plan over the next 10 years at December 31, 2017 are as follows:
Year Payments in Thousands
2018 $342
2019 368
2020 392
2021 422
2022 439
2023-2027 2,316

Non-qualified Supplemental Executive Retirement Plan
The Company has non-qualified supplemental executive retirement agreements with certain retired officers. The agreements provide supplemental retirement benefits payable in installments over a period of years upon retirement or death. This agreement provides a stream of future payments in accordance with individually defined vesting schedules upon retirement, termination, or in the event that the participating executive leaves the Company following a change of control event.

The after tax components of accumulated other comprehensive loss, which have not yet been recognized in net periodic benefit cost, related to the non-qualified supplemental executive retirement agreements are a net loss of $348 thousand.

The following table sets forth changes in benefit obligation, changes in plan assets, and the funded status of the plan as of and for the years ended December 31, 2017 and December 31, 2016:
(in thousands) 2017 2016
Change in benefit obligation:    
Projected benefit obligation at beginning of year $3,670
 $3,811
Service cost —
 72
Interest cost 116
 128
Actuarial loss/(gain) 16
 (50)
Benefits paid (351) (291)
Projected benefit obligation at end of year 3,451
 3,670
Accumulated benefit obligation $3,451
 $3,670
     
Change in fair value of plan assets:    
Fair value of plan assets at beginning of year $—
 $—
Expected return on plan assets —
 —
Contributions by employer 351
 291
Benefits paid (351) (291)
Fair value of plan assets at end of year $—
 $—
     
Underfunded status $3,451
 $3,670
     
Amounts recognized in consolidated balance sheet    
Other liabilities $3,451
 $3,720


Net periodic benefit cost is comprised of the following for the years ended December 31, 2017 and 2016:
(in thousands) 2017 2016
Service cost $—
 $72
Interest cost 116
 128
Expected return on plan assets —
 —
Amortization of unrecognized actuarial loss 21
 28
Net periodic benefit cost $137
 $228

Change in plan assets and benefit obligations recognized in accumulated other comprehensive income in 2017 and 2016 are as follows:
(in thousands) 2017 2016
Amortization of actuarial loss $(21) $(28)
Amortization of prior service credit —
 —
Actuarial loss (gain) 16
 (50)
Total recognized in accumulated other comprehensive income (pre-tax) (5) (78)
Total recognized in net periodic benefit cost and other comprehensive income (pre-tax) $132
 $150

The amount expected to be amortized from accumulated other comprehensive income into net periodic benefit cost over then next fiscal year is a $29 thousand.

The principal actuarial assumptions used at December 31, 2017 and December 31, 2016 were as follows:
  2017 2016
Discount rate beginning of year 3.31% 3.48%
Discount rate end of year 3.13
 3.31

The discount rate used in the measurement of the non-qualified supplemental executive retirement plan obligation is determined by comparing the expected future retirement payment cash flows to the Citigroup Above Median Double-A Curve as of the measurement date.

The Company expects to contribute the following amounts to fund benefit payments under the supplemental executive retirement plans:
(in thousands) Payments
2018 $378
2019 378
2020 293
2021 260
2022 260
2023-2036 2,778

401(k) Plan
The Company maintains a Section 401(k) savings plan for substantially all of its employees. Employees are eligible to participate in the 401(k) Plan on the finite-lived intangible assets is expectedfirst day of any quarter following their date of hire and attainment of age 21 ½ . Under the plan, the Company makes a matching contribution of a portion of the amount contributed by each participating employee, up to a percentage of the employee’s annual salary. The plan allows for supplementary profit sharing contributions by the Company, at its discretion, for the benefit of participating employees. The total $92expense for each year fromthis plan in 2017, 2016, and 2015 was $970 thousand, $439 thousand, and $411 thousand, respectively.


Other Plans
As a result of the acquisition of Lake Sunapee, the Company assumed salary continuation agreements for supplemental retirement income with certain prior executives and senior officers along with an executive indexed supplemental retirement plan for one prior executive. The total liability for these agreements included in other liabilities was $7.7 million at acquisition date in January of 2017 through 2020, then $8 for 2021.

and $8.1 million at December 31, 2017. Expense recorded in 2017 under these agreements was $581 thousand.


Note 9: Income Taxes

The Company also assumed split-dollar life insurance agreements with the acquisition of Lake Sunapee Bank with an accrued liability of $697 thousand at acquisition date in January of 2017 and $687 thousand as of year-end 2017.

NOTE 11.INCOME TAXES

The following table summarizes the current and deferred components of income tax expense (benefit) for each of the three years ended December 31:

31, 2017, 2016 and 2015:

(in thousands) 2017 2016 2015
Current:      
Federal Tax Expense $8,705
 $5,189
 $5,607
State Tax Expense 1,039
 217
 218
Total Current Expense 9,744
 5,406
 5,825
       
Deferred 2,898
 470
 142
Impact of federal tax reform enactment 3,988
 —
 —
Total Income Tax Expense $16,630
 $5,876
 $5,967

 

2016

2015

2014

Current

 

 

 

    Federal

   $5,189

  $5,607

   $5,411

    State

        217

       218

        263

 

     5,406

    5,825

     5,674

Deferred

        470

       142

        240

 

   $5,876

  $5,967

   $5,914



The following table reconciles the expected federal income tax expense (computed by applying the federal statutory tax rate of 35%) to recorded income tax expense for each of the three years ended December 31:

31, 2017, 2016 and 2015:

  2017 2016 2015
(in thousands, except ratios) Amount Rate Amount Rate Amount Rate
Statutory Tax Rate $14,918
 35.00 % $7,283
 35.00 % $7,392
 35.00 %
Increase (Decrease) Resulting From: 
 
 
 
 
 
 State taxes, net of federal benefit 986
 2.31
 141
 0.68
 142
 0.67
 Tax exempt interest (2,074) -4.87
 (1,388) -6.67
 (1,303) -6.17
 Federal tax credits (130) -0.30
 —
 —
 —
 —
 Officers' life insurance (538) -1.26
 (244) -1.17
 (209) -0.99
 Acquisition Costs 89
 0.21
 289
 1.39
 —
 —
 Stock-based compensation plans (241) -0.57
 —
 —
 —
 —
 Impact of federal tax reform enactment 3,988
 9.36
 —
 —
 —
 —
 Other (368) -0.86
 (205) -0.99
 (55) -0.26
Effective Tax Rate $16,630
 39.02 % $5,876
 28.24 % $5,967
 28.25 %

 

2016

2015

2014

 

 

 

 

 

 

 

Computed tax expense

$7,283

35.00%

  $  7,392

35.00%

  $ 7,184

35.00%

Increase (reduction) in income taxes

    resulting from:

 

 

 

 

 

 

    Officers' life insurance

  (244)

-1.17%

        (209)

-0.99%

         (88)

-0.43%

    Tax exempt interest

(1,388)

-6.67%

     (1,303)

-6.17%

    (1,325)

-6.44%

    Acquisition costs

    289

1.39%

           ---

0.00%

         ---

0.00%

    State taxes, net of federal benefit

    141

0.68%

         142

0.67%

        171

0.83%

Other

   (205)

-0.99%

          (55)

-0.26%

         (28)

-0.22%

 

$5,876

28.24%

   $ 5,967

28.25%

   $ 5,914

28.74%


The tax effects of temporary differences that give rise to deferred tax assets and deferred tax liabilities at December 31, 20162017 and 20152016 are summarized below. The net deferred tax asset, which is included in other assets, amounted to $5,990$7.2 million at December 31, 20162017 and $2,174$6.0 million at December 31, 2015.2016.


The significant components of deferred tax assets and liabilities at December 31, 2017 and December 31, 2016 were as follows:
  2017 2016
(in thousands) 
Assets (1)
 
Liabilities (1)
 
Assets (2)
 
Liabilities (2)
Allowance for loan losses $2,729
 $—
 $3,733
 $—
Deferred compensation 3,333
 —
 1,018
 —
Unrealized gain or loss on securities available for sale 649
 —
 1,144
 —
Unrealized gain or loss on derivatives 853
 —
 968
 —
Unfunded post-retirement benefits —
   219
 —
Depreciation —
 1,356
 —
 537
 Deferred loan origination costs —
 655
 —
 517
 Other real estate owned 8
 —
 12
 —
 Non-accrual interest 273
 —
 215
 —
 Write down of impaired investments —
 —
 626
 —
 Branch acquisition costs and goodwill —
 737
 —
 760
 Core deposit intangible —
 1,525
 82
 —
 Acquisition fair value adjustments 4,000
 —
 —
 —
 Prepaid expenses —
 302
 —
 275
 Interest rate cap premium amortization —
 276
 —
 352
 Mortgage servicing rights —
 769
 —
 5
 Equity compensation 297
 —
 310
 —
 Prepaid pension —
 345
 —
 —
 Contract incentives 594
 —
 —
 —
 Other 409
 —
 110
 1
Total $13,145
 $5,965
 $8,437
 $2,447

(1) 2017 balances reflect a federal statutory rate of 21%
(2) 2016 balances reflect a federal statutory rate of 35%

 

2016

2015

 

Asset

Liability

Asset

Liability

Allowance for possible losses on

 

 

 

 

   loans and other real estate owned

 $3,733

 $     ---

 $3,379

 $     ---

Deferred compensation

   1,018

        ---

   1,035

        ---

Unrealized gain or loss on securities

   available for sale

   1,144

      

        ---

        ---

   3,076

Unrealized gain or loss on derivatives

      968

        ---

      873

        ---

Unfunded post-retirement benefits

      219

        ---

      249

        ---

Depreciation

        ---

      537

        ---

      615

Deferred loan origination costs

        ---

      517

        ---

      475

Other real estate owned

        12

        ---

       22

        ---

Non-accrual interest

      215

        ---

      211

        ---

Write down of impaired investments

      626

        ---

   1,113

        ---

Branch acquisition costs & goodwill

        ---

      760

        ---

      639

Prepaid expenses

        ---

      275

        ---

      151

Interest rate cap premium amortization

 

      352

 

      200

Equity compensation

      310

        ---

      253

        ---

Other

      187

          1

      198

          3

 

 $8,432

 $2,442

 $7,333

 $5,159


The Company has determined that a valuation allowance is not required for its net deferred tax asset since it is more likely than not that this asset is realizable principally through the ability to carry-back tofuture taxable income in prior years,and future reversalsreversal of existing taxabletemporary differences.
The Company is subject to income tax in the U.S. federal jurisdiction and also in the states of Maine, New Hampshire and Massachusetts. The Company is no longer subject to examination by taxing authorities for years before 2014.

On December 22, 2017, H.R.1, commonly known as the Tax Cuts and Jobs Act (the “Act”), was signed into law. The Act includes several provisions that will affect the Company's federal income tax expense, including reducing the federal income tax rate from 35% to 21% effective January 1, 2018. As a result of this rate reduction, the Company is required to re-measure, through income tax expense in the period of enactment, the deferred tax assets and liabilities using the enacted rate at which these items are expected to be recovered or settled. The re-measurement of the Company's net deferred tax asset resulted in additional 2017 income tax expense of $4.0 million.
Also on December 22, 2017, the U.S. Securities and Exchange Commission (“SEC”) released Staff Accounting Bulletin No. 118 (“SAB 118”) to address any uncertainty or diversity of views in practice in accounting for the income tax effects of the Act in situations where a registrant does not have the necessary information available, prepared, or analyzed in reasonable detail to complete this accounting in the reporting period that includes the enactment date. SAB 118 allows for a measurement period not to extend beyond one year from the Act’s enactment date to complete the necessary accounting.

The Company's $1.4 million deferred tax liability for temporary differences between the tax and future taxable income.


Note 10: Deposits


financial reporting bases of fixed assets was recorded as a provisional amount based upon reasonable estimates. The aggregate amountfinal determination of jumbo time deposits, each withthis deferred tax liability is awaiting completion of a minimum denominationcost segregation analysis to determine the impact of $100, was $112,044 and $93,481 at December 31, 2016 and 2015, respectively.



92







At December 31, 2016, the scheduled maturities of jumbo certificates of deposit were as follows:


Amount

Three months or less

    $  32,540

Over three to six months

          9,863

Over six to twelve months

        30,279

Over twelve months

        39,362

    $112,044


At December 31, 2016, the scheduled maturities of total time deposits were as follows:


 

Amount

2017

        $165,296

2018

            95,728

2019

            79,306

2020

            56,717

2021

            18,145

2022 & thereafter

              1,245

 

        $416,437


Note 11: Short-term Borrowings


The Company’s short-term borrowings (i.e. with maturities of twelve months or less) consist of borrowings from the Federal Home Loan Bank (the “FHLB”), and securities sold under agreementsapplying accelerated tax depreciation to repurchase. The following table summarizes short-term borrowings at December 31, 2016 and 2015.


 

2016

2015

 

 

Weighted

 

Weighted

 

Total

Average

Total

Average

 

Principal

Rate

Principal

Rate

Federal Home Loan Bank Advances

 $372,700

0.97%

 $313,000

0.54%

Securities sold under agreements to repurchase

     21,780

   0.29

     20,909

   0.28

Total short-term borrowings

 $394,480

 

 $333,909

 


Federal Home Loan Bank Advances:Information concerning short-term Federal Home Loan Bank advances for 2016 and 2015 is summarized below:


 

2016

2015

Average daily balance during the year

$357,848

$295,479

Maximum month-end balance during the year

  410,050

  342,000

Amount outstanding at end of year

  372,700

  313,000


All short-term FHLB advances are fixed-rate instruments. Pursuant to an agreement with the FHLB, advances are collateralized by stock in the FHLB, investment securities and liens on qualified collateral, consisting primarily of loans with first mortgages secured by one to four family properties, and other qualifying assets such as certain commercial real estate loans. All short-term advances are payable at their call date or final maturity.





93





Securities Sold Under Agreements to Repurchase:Securities sold under agreements to repurchase generally mature within one to four days from the transaction date. Information concerning securities sold under agreements to repurchase for 2016 and 2015 is summarized below:


 

2016

2015

Average daily balance during the year

      $17,529

      $17,001

Average interest rate during the year

            0.29%

            0.28%

Maximum month-end balance during the year

      $21,780

      $21,239

Amount outstanding at end of year

        21,780

        20,909


Securities collateralizing repurchase agreements, which are held in safekeeping by nonaffiliated financial institutions and not under the Bank's control, were as follows at December 31:


 

2016

2015

Carrying value

$28,206

$28,324

Estimated fair value

  28,130

  28,981


Note 12: Long-term Debt  


A summary of long-term debt by contractual maturity is as follows:


 

December 31, 2016

 

Total

 

Range of

Maturity

Principal

Rate

Interest Rates

2017   

   $      ---    

        ---%

    0.00%

to

0.00%

2018

      30,750

      1.28

    1.04

to

 2.25

2019

85,000

      1.64

    1.07

to

 2.15

2020

20,000

      1.83

    1.60

to

 2.45

2021

1,000

      2.43

    2.43

to

 2.43

2022 and thereafter

366

      1.85

    1.85

to

 1.85

Total long-term debt

$137,116

1.59%

 

 

 


Allbuilding costs, including application of the long-term debt represents advances fromAct's new provisions for 100% bonus depreciation.

The Company made no adjustments to deferred tax assets representing future deductions for accrued compensation that may be subject to new limitations under Internal Revenue Code Section 162(m) which, generally, limits the FHLB. Pursuantannual deduction for certain compensation paid to an agreement withcertain employees to $1 million. There is uncertainty in applying the FHLB, advances are collateralized by stock in the FHLB, investment securitiesnewly-enacted rules to existing contracts, and liens on qualified collateral, consisting primarily of loans with first mortgages secured by one to four family properties, and other qualifying assets such as qualifying commercial real estate loans. Advances are payable at their call dates or final maturity.



94




The maturity distribution of the long-term debt with callable features was as follows:


 

December 31, 2016

 

Total

 

Range of

Maturity

Principal

Rate

Interest Rates

2017

$   ---

0.00%

0.00%

to

0.00%

2018

   $2,000

      2.25

    2.25

to

     2.25

2019

---

---

---

to

---

2020

---

---

---

to

---

2021

---

---

---

to

---

2022 and thereafter

---

---

---

to

---

Total long-term debt

$2,000

2.25%

 

 

 


Junior Subordinated Debentures:In April 2008, the Company’s wholly-owned subsidiary, Bar Harbor Bank & Trust (the “Bank”), issued $5,000 aggregate principal amount of subordinated debentures. These debt securities qualify as Tier 2 capital for the Company and the Bank. The subordinated debt securities are due in 2023, but are callable by the Bank after five years without penalty. The rate of interest on these debt securities is three month LIBOR plus 345 basis points. At December 31, 2016 the interest rate was 4.41%.  The subordinated debt securities are classified as borrowings on the Company’s consolidated balance sheet. seeking further clarifications before completing its analysis.

The Company incurred $197 in costs to issuewill complete and record the securities andincome tax effects of these costs are being amortized over 15 years usingprovisional items during the interest method.

period the necessary information becomes available. This measurement period will not extend beyond December 22, 2018.


Note 13: Financial Derivative Instruments

NOTE 12.    DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGING ACTIVITIES

As part of its overall asset and liability management strategy, the Bank periodically uses derivative instruments to minimize significant unplanned fluctuations in earnings and cash flows caused by interest rate volatility.  The Bank’s interest rate risk management strategy involves modifying the re-pricing characteristics of certain assets or liabilities so that changes in interest rates do not have a significant effect on net interest income.


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



95




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. Any ineffective portion is recorded in earnings. The Bank discontinues hedge accounting when it is determined that the derivative is no longer highly effective in offsetting changes of the hedged risk on the hedged item, or management determines that the designation of the derivative as a hedging instrument is no longer appropriate.


At

Information about derivative assets and liabilities at December 31, 2017, follows:
    Weighted Average Maturity Estimated Fair Value Asset (Liability)
(in thousands, except years) 
Notional
Amount
  
Cash flow hedges:  
    
Interest rate caps agreements $90,000
 5.1 $669
Total cash flow hedges 90,000
 5.1 669
       
Economic hedges:  
    
Forward sale commitments 20,352
 0.2 (221)
Total economic hedges 20,352
 0.2 (221)
       
Non-hedging derivatives:  
    
Interest rate lock commitments 19,853
 0.2 (1)
Total non-hedging derivatives 19,853
 0.2 (1)
       
Total $130,205
   $447

As of December 31, 2016, the BankCompany had four outstandinginterest rate cap agreements totaling $90 million (notional amount), with a weighted average maturity of 6.1 years, and an estimated fair value of $1.7 million.

Information about derivative instruments with notional amounts totaling $90,000. The notional amounts of the financial derivative instruments do not represent exposure to credit loss. The Bank is exposed to credit loss only to the extent the counter-party defaults in its responsibility to pay interest under the terms of the agreements. The credit risk in derivative instruments is mitigated by entering into transactions with highly-rated counterparties that management believes to be creditworthyassets and by limiting the amount of exposure to each counter-party.  Atliabilities for December 31, 2017 and December 31, 2016, the Bank’s derivative counterparties were credit rated “AA” by the major credit rating agencies.

follows:

  Twelve Months Ended December 31,
(in thousands) 2017 2016
Cash flow hedges:    
Interest rate cap agreements    
Realized in interest expense $(257) $(50)
     
Economic hedges:    
Forward commitments    
Realized loss in other non-interest income (77) —
     
Non-hedging derivatives:     
Interest rate lock commitments     
Realized loss in other non-interest income (22) —

The details of the Bank’s financial derivative instruments are summarized below:


Interest Rate Cap Agreements as of December 31, 2016

Notional

Amount                     

Termination

Date

3-Month

LIBOR

Strike Rate

Premium

Paid

Unamortized Premium

Fair Value

   

 

 

 

 

 

$25,000

06/02/21

3.00%

  $   922

     $   901

   $   228

  20,000

06/04/24

       3.00

    1,470

       1,453

        553

  20,000

10/21/21

       3.00

       632

          626

        209

  25,000

10/21/24

       3.00

    1,542

       1,534

        758










 

Interest Rate Cap Agreements as of December 31, 2015

 

Notional Amount

Termination Date

3-month LIBOR

Strike Rate

Premium Paid

Unamortized Premium

Fair Value

$25,000

06/02/21

3.00%

$   922

$    920

$291

  20,000

06/04/24

        3.00

  1,470

   1,470

  637

  20,000

10/21/21

        3.00

     632

      632

  269

  25,000

10/21/24

        3.00

  1,542

   1,542

  872


Cash flow hedges
In 2014, interest rate cap agreements were purchased to limit the Bank’s exposure to rising interest rates on four rolling, three-month borrowings indexed to three month LIBOR.  Under the terms of the agreements, the Bank paid total premiums of $4,566$4.6 million for the right to receive cash flow payments if 3-month LIBOR rises above the caps of 3.00%, thus effectively ensuring interest expense on the borrowings at maximum rates of 3.00% for the duration of the agreements. The termination date of the agreements range from June 2, 2021 to October 21, 2024 and the unamortized premium was $4.3 million as of December 31, 2017 and $4.5 million as of December 31, 2016. The interest rate cap agreements were designated as cash flow hedges.


At December 31, 2016 and 2015, the total fair value of the interest rate cap agreements was $1,748 and $2,069, respectively.  The fair values of the interest rate cap agreements are included in other assets on the Company’s consolidated balance sheets. Changes in the fair value, representing unrealized gains or losses, are recorded in accumulated other comprehensive income, net of tax.


The premiums paid on the interest rate cap agreements are being recognized as increases in interest expense over the duration of the agreements using the caplet method. During 2016, $50


Economic hedges
The Company utilizes forward sale commitments to hedge interest rate risk and the associated effects on the fair value of amortization was recognized.  Duringinterest rate lock commitments and loans originated for sale. The forward sale commitments are accounted for as derivatives with changes in fair value recorded in current period earnings.  The Company typically uses mandatory delivery contracts, which are loan sale agreements where the next twelve months, $258Company commits to deliver a certain principal amount of mortgage loans to an investor at a specified price on or before a specified date. Generally, the Company may enter into mandatory delivery contracts shortly after the loan closes with a customer.

Non-hedging derivatives
The Company enters into interest rate lock commitments (“IRLCs”) for residential mortgage loans, which commit the Company to lend funds to a potential borrower at a specific interest rate and within a specified period of time. IRLCs that relate to the origination of mortgage loans that will be held for sale are considered derivative financial instruments under applicable accounting guidance. Outstanding IRLCs expose the Company to the risk that the price of the total premiums will be recognized asmortgage loans underlying the commitments may decline due to increases toin mortgage interest expense, increasingrates from inception of the interest expense relatedrate lock to the hedged borrowings.



96




A summaryfunding of the hedging related balancesloan. The IRLCs are free-standing derivatives which are carried at fair value with changes recorded in noninterest income in the Company’s consolidated statements of income. Changes in the fair value of IRLCs subsequent to inception are based on changes in the fair value of the underlying loan resulting from the fulfillment of the commitment and changes in the probability that the loan will fund within the terms of the commitment, which is affected primarily by changes in interest rates and the passage of time.


NOTE 13. OTHER COMMITMENTS, CONTINGENCIES, AND OFF-BALANCE SHEET ACTIVITIES

The Bank is a party to financial instruments in the normal course of business to meet financing needs of its customers. These financial instruments include commitments to extend credit, unused lines of credit, and standby letters of credit.

Commitments to originate loans, including unused lines of credit, are agreements to lend to a customer provided there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being fully drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Bank uses the same credit policy to make such commitments as it uses for on-balance-sheet items, such as loans. The Bank evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Bank upon extension of credit, is based on management’s credit evaluation of the borrower.

The Bank guarantees the obligations or performance of customers by issuing standby letters of credit to third parties. These standby letters of credit are primarily issued in support of third party debt or obligations. The risk involved in issuing standby letters of credit is essentially the same as the credit risk involved in extending loan facilities to customers, and they are subject to the same credit origination, portfolio maintenance and management procedures in effect to monitor other credit and off-balance sheet instruments. Exposure to credit loss in the event of non-performance by the counter-party to the financial instrument for standby letters of credit is represented by the contractual amount of those instruments. Typically, these standby letters of credit have terms of five years or less and expire unused; therefore, the total amounts do not necessarily represent future cash requirements.

The following table summarizes the contractual amounts of commitments and contingent liabilities as of December 31, 2017 and December 31, 2016:
(in thousands) 2017 2016
Commitments to originate new loans $52,438
 $41,731
Unused funds on commercial and other lines of credit 243,153
 98,823
Unadvanced funds on construction and real estate loans 87,915
 20,330
Standby letters of credit 486
 385
Total $383,992
 $161,269

Operating Lease Obligations
The Company leases certain properties used in operations under terms of operating leases, which include renewal options. The following table sets forth the approximate future lease payments over the remaining terms of the non-cancelable leases as of December 31, 2017.
(in thousands) Amount
2018 $841
2019 764
2020 551
2021 378
2022 349
2023 and thereafter 577
Total $3,460

In connection the foregoing lease obligations, in 2017, 2016 and 2015, follows:


 

December 31, 2016

 

 Gross

 Net of Tax

Unrealized loss on interest rate caps

    $(2,766)

   $(1,798)

Unamortized premium on interest rate caps

        4,514

      2,934

  Total

     $ 1,748

   $ 1,136


 

December 31, 2015

 

 Gross

 Net of Tax

Unrealized losses on interest rate caps

$(2,495)

   $(1,621)

Unamortized premium on interest rate caps

  4,564

  2,966

  Total

$2,069

   $ 1,345


Note 14: Capital Resources


Regulatory Capital Requirements:Thethe Company recorded $872 thousand, $352 thousand, and $394 thousand in rent expense, respectively, which is included in occupancy and equipment expense in the consolidated statements of income.



Legal Claims
Various legal claims arise from time to time in the normal course of business. As of December 31, 2017 neither the Company nor the Bank are subjectwas involved in any pending legal proceedings believed by management to be material to the Company’s financial condition or results of operations. Periodically, there have been various regulatory capital requirements administered byclaims and lawsuits involving the federal banking agencies. FailureBank, such as claims to meet minimum capital requirements can initiate certain mandatory,enforce liens, condemnation proceedings on properties in which the Bank holds security interests, claims involving the making and possibly additional discretionary actions by regulatorsservicing of real property loans, and other issues incident to the Bank’s business. However, neither the Company nor the Bank is a party to any pending legal proceedings that if undertaken, couldit believes, in the aggregate, would have a direct material adverse effect on the Company’s financial statements. Undercondition or operations of the Company. Additionally, an estimate of future, probable losses cannot be estimated as of December 31, 2017.

NOTE 14. SHAREHOLDERS’ EQUITY AND EARNINGS PER COMMON SHARE

The actual and required capital adequacy guidelinesratios at December 31, 2017 and December 31, 2016 were as follows:
  2017
  Actual Minimum Capital Requirement Minimum to be Well Capitalized Under Prompt Corrective Action Provisions
(in thousands, except ratios) Amount Ratio Amount Ratio Amount Ratio
Company (consolidated)            
Total capital to risk weighted assets $307,305
 13.73% $179,047
 8.00% $234,999
 10.50%
Common equity tier 1 capital to risk weighted assets 252,096
 11.26
 100,714
 4.50
 145,476
 6.50
Tier 1 capital to risk weighted assets 272,716
 12.19
 134,286
 6.00
 179,047
 8.00
Tier 1 capital to average assets 272,716
 8.10
 134,758
 4.00
 168,447
 5.00
  
 
 
 
 
 
Bank 
 
 
 
 
 
Total capital to risk weighted assets $306,495
 13.71% $178,868
 8.00% $234,764
 10.50%
Common equity tier 1 capital to risk weighted assets 288,906
 12.92
 100,613
 4.50
 145,331
 6.50
Tier 1 capital to risk weighted assets 288,906
 12.92
 134,151
 6.00
 178,868
 8.00
Tier 1 capital to average assets 288,906
 8.58
 134,702
 4.00
 168,378
 5.00
  2016
  Actual Minimum Capital Requirement Minimum to be Well Capitalized Under Prompt Corrective Action Provisions
(in thousands, except ratios) Amount Ratio Amount Ratio Amount Ratio
Company (consolidated)            
Total capital to risk weighted assets $171,558
 16.52% $83,097
 8.00% $109,065
 10.50%
Common equity tier 1 capital to risk weighted assets 155,905
 15.01
 46,742
 4.50
 67,516
 6.50
Tier 1 capital to risk weighted assets 155,905
 15.01
 62,323
 6.00
 83,097
 8.00
Tier 1 capital to average assets 155,905
 8.94
 69,722
 4.00
 87,152
 5.00
             
Bank            
Total capital to risk weighted assets $173,458
 16.71% $83,031
 8.00% $108,978
 10.50%
Common equity tier 1 capital to risk weighted assets 157,805
 15.20
 46,705
 4.50
 67,463
 6.50
Tier 1 capital to risk weighted assets 157,805
 15.20
 62,273
 6.00
 83,031
 8.00
Tier 1 capital to average assets 157,805
 9.06
 69,683
 4.00
 87,104
 5.00

At each date shown, the Company and the Bank met the conditions to be classified as “well capitalized” under the relevant regulatory frameworks for prompt corrective action,framework. To be categorized as well capitalized, an institution must maintain minimum total risk-

based, Tier 1 risk-based, and Tier 1 leverage ratios as set forth in the table above.

Effective January 1, 2015, the Company and the Bank must meet specific capital guidelines that involve quantitative measures of the Bank’s assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices.The Parent Company, like all bank holding companies, is notbecame subject to the prompt corrective action provisions.The Company’s and Bank’s capital amounts and classification are also subject to qualitative judgment by the regulators about components, risk weightings and other factors.


On July 2, 2013, the Board of Governors of the Federal Reserve Bank issued a final rule implementing a revised regulatory capital framework for U.S. banks in accordance with the Basel III international accordrule that requires the Company and satisfying related mandates under the Dodd-Frank Wall Street ReformBank to assess their Common equity tier 1 capital to risk weighted assets and Consumer Protection Act. The revised regulatorythe Company and the Bank each exceed the minimum to be well capitalized. In addition, the final capital framework (the "Basel III Capital Rules") substantially revised the risk basedrules added a requirement to maintain a minimum conservation buffer, composed of common equity tier 1 capital, requirements applicable to bank holding companies and depository institutions by defining the components of capital and addressing other issues affecting the numerator in banking institutions’ regulatory capital ratios, addressing risk weights and other issues affecting the denominator in banking institutions’ regulatory capital ratios and replacing the existing risk weighting approach with a more risk sensitive approach. The final rules also established a “capital conservation buffer” of 2.5% above new regulatory minimum capital ratios,of risk-weighted assets, to be phased in over three years and when fully effective in 2019, will result inapplied to the following minimum ratios: (i) a common equity tier 1 risk-based capital ratio, the Tier 1 risk-based capital ratio and the Total risk-based capital ratio. Accordingly, banking organizations, on a fully phased in basis no later than January 1, 2019, must maintain a minimum Common equity tier 1 risk-based capital ratio of 7.0%; (ii), a minimum Tier 1 risk-based capital ratio of 8.5%; and (iii) a totalminimum Total risk-based capital ratio of 10.5%.


The newrequired minimum conservation buffer began to be phased in incrementally, starting at 0.625% on January 1, 2016 and increasing to 1.25% on January 1, 2017. The buffer increased to 1.875% on January 1, 2018 and will increase to 2.5% on January 1, 2019. The final capital rules impose restrictions on capital distributions and certain discretionary cash bonus payments if the minimum capital conservation buffer requirement will be phased in beginning in January 2016 at 0.625% of risk-weighted assets and increases each year until fully implemented in January 2019. An institution is subject to limitations on paying dividends, engaging in share repurchase, and paying discretionary bonuses if its capital level falls below the buffer amount. These limitations will establish a maximum percentage of eligible retained income that can be utilized for such activities. The Basel III Capital Rules became effective for the Company on January 1, 2015.

not met.


Quantitative measures established by regulation to ensure capital adequacy require the Company and Bank to maintain minimum amounts and ratios as set forth in the table below. As of

At December 31, 2016,2017, the capital levels of both the Company and the Bank exceeded all regulatory capital adequacy requirements and their regulatory capital ratios were above the minimum levels required to which they are subject. Asbe considered well capitalized for regulatory purposes. The capital levels of both the Company and the Bank at December 31, 2017 also exceeded the minimum capital requirements including the currently applicable capital conservation buffer of 0.625%.

Accumulated Other Comprehensive Loss
Components of accumulated other comprehensive loss at December 31, 2017 and December 31, 2016 are as follows:
(in thousands) 2017 2016
Other accumulated comprehensive loss, before tax:    
Net unrealized loss on AFS securities $(2,741) $(3,269)
Net unrealized loss on derivative hedges (3,604) (2,766)
Net unrealized loss on post-retirement plans (950) (622)
  
 
Income taxes related to items of accumulated other comprehensive loss: 
 
Net unrealized loss on AFS securities 1,030
 1,144
Net unrealized loss on derivative hedges 1,354
 968
Net unrealized loss on post-retirement plans 357
 219
Accumulated other comprehensive loss $(4,554) $(4,326)


The following table presents the most recent notification fromcomponents of other comprehensive income in 2017, 2016 and 2015:
  2017
(in thousands) Before Tax Tax Effect Net of Tax
Net unrealized gain on AFS securities:      
Net unrealized gain arising during the period $547
 $(121) $426
Less: reclassification adjustment for gains (losses) realized in net income 19
 (7) 12
Net unrealized gain on AFS securities 528
 (114) 414
       
Net unrealized loss on derivative hedges:      
Net unrealized loss arising during the period (838) 386
 (452)
Less: reclassification adjustment for gains (losses) realized in net income —
 —
 —
Net unrealized loss on derivative hedges (838) 386
 (452)
       
Net unrealized loss on post-retirement plans:      
Net unrealized loss arising during the period (349) 146
 (203)
Less: reclassification adjustment for gains (losses) realized in net income (21) 8
 (13)
Net unrealized loss on post-retirement plans (328) 138
 (190)
Other comprehensive loss $(638) $410
 $(228)

  2016
(in thousands) Before Tax Tax Effect Net of Tax
Net unrealized loss on AFS securities:      
Net unrealized loss arising during the period $(7,561) $2,647
 $(4,914)
Less: reclassification adjustment for gains (losses) realized in net income 4,498
 (1,574) 2,924
Net unrealized loss on AFS securities (12,059) 4,221
 (7,838)
       
Net unrealized loss on derivative hedges:      
Net unrealized loss arising during the period (272) 95
 (177)
Less: reclassification adjustment for gains (losses) realized in net income —
 —
 —
Net unrealized loss on derivative hedges (272) 95
 (177)
       
Net unrealized loss on post-retirement plans:      
Net unrealized gain arising during the period 62
 (20) 42
Less: reclassification adjustment for gains (losses) realized in net income (28) 10
 (18)
Net unrealized gain on post-retirement plans 90
 (30) 60
Other comprehensive loss $(12,241) $4,286
 $(7,955)

  2015
(in thousands) Before Tax Tax Effect Net of Tax
Net unrealized loss on AFS securities:      
Net unrealized loss arising during the period $(2,031) $710
 $(1,321)
Less: reclassification adjustment for gains (losses) realized in net income 1,334
 (467) 867
Net unrealized loss on AFS securities (3,365) 1,177
 (2,188)
       
Net unrealized loss on derivative hedges:      
Net unrealized loss arising during the period (1,383) 484
 (899)
Less: reclassification adjustment for gains (losses) realized in net income —
 —
 —
Net unrealized loss on derivative hedges (1,383) 484
 (899)
       
Net unrealized loss on post-retirement plans:      
Net unrealized gain arising during the period (11) 11
 —
Less: reclassification adjustment for gains (losses) realized in net income (38) 13
 (25)
Net unrealized gain on post-retirement plans 27
 (2) 25
Other comprehensive loss $(4,721) $1,659
 $(3,062)


The following table presents the federal regulators categorizedchanges in each component of accumulated other comprehensive income (loss) in 2017, 2016 and 2015:
  2017
(in thousands) Net unrealized gain on AFS Securities Net loss on effective  derivative hedges Net unrealized loss on post-retirement plans Total
Balance at beginning of period $(2,125) $(1,798) $(403) $(4,326)
Other comprehensive gain/(loss) before reclassifications 426
 (452) (203) (229)
Less: amounts reclassified from accumulated other comprehensive income 12
 —
 (13) (1)
Total other comprehensive loss 414
 (452) (190) (228)
Balance at end of period $(1,711) $(2,250) $(593) $(4,554)
  2016
(in thousands) Net unrealized gain on AFS Securities Net loss on effective  derivative hedges Net unrealized loss on post-retirement plans Total
Balance at beginning of period $5,713
 $(1,621) $(463) $3,629
Other comprehensive gain/(loss) before reclassifications (4,914) (177) 42
 (5,049)
Less: amounts reclassified from accumulated other comprehensive income 2,924
 —
 (18) 2,906
Total other comprehensive loss (7,838) (177) 60
 (7,955)
Balance at end of period $(2,125) $(1,798) $(403) $(4,326)


  2015
(in thousands) Net unrealized gain on AFS Securities Net loss on effective  derivative hedges Net unrealized loss on post-retirement plans Total
Balance at beginning of period $7,901
 $(722) $(488) $6,691
Other comprehensive gain/(loss) before reclassifications (1,321) (899) —
 (2,220)
Less: amounts reclassified from accumulated other comprehensive income 867
 —
 (25) 842
Total other comprehensive loss (2,188) (899) 25
 (3,062)
Balance at end of period $5,713
 $(1,621) $(463) $3,629

The following tables presents the Bank as well-capitalized.  The final rules also added a new risk-weighted capital measure Common Equity Tier 1



97



(“CET1”).  The new Basel III capital adequacy guidelines require all banksamounts reclassified out of each component of accumulated other comprehensive income (loss) in 2017, 2016 and bank holding companies to maintain minimum capital ratios depicted in2015:

(in thousands) 2017 2016 2015 Affected Line Item where Net Income is Presented
Realized gains on AFS securities:        
Before tax $19
 $4,498
 $1,334
 Non-interest income
Tax effect (7) (1,574) (467) Tax expense
Total reclassifications for the period $12
 $2,924
 $867
 Net of tax

(in thousands) 2017 2016 2015 Affected Line Item where Net Income is Presented
Realized loss on post-retirement plans:        
Before tax $(21) $(28) $(38) Salaries and benefits
Tax effect 8
 10
 13
 Tax benefit
Total reclassifications for the period $(13) $(18) $(25) Net of tax

Earnings per share have been computed based on the table below:


 

 

Actual

Minimum Capital Requirement

Minimum to be Well Capitalized Under Prompt Corrective Action Provisions

As of December 31, 2016

Amount

Ratio

Amount

Ratio

Amount

Ratio

Total Capital

 

 

 

 

 

 

  (To Risk-Weighted Assets)

 

 

 

 

 

 

    Consolidated

 $171,558

16.52%

 $83,097

8.00%

 $109,065

10.50%

    Bank

   173,458

16.71

   83,031

  8.00

   108,978

     10.50

 

 

 

 

 

 

 

Common Equity Tier 1

   

 

   

 

   

 

  (To Risk-Weighted Assets)

   

 

   

 

   

 

    Consolidated

 $155,905

15.01%

 $46,742

4.50%

 $  67,516

6.50%

    Bank

   157,805

15.20

   46,705

4.50

     67,463

       6.50

 

 

 

 

 

 

 

Tier 1 Capital

 

 

 

 

 

 

  (To Risk-Weighted Assets)

 

 

 

 

 

 

    Consolidated

 $155,905

15.01%

 $62,323

6.00%

 $  83,097

8.00%

    Bank

   157,805

15.20

   62,273

  6.00

     83,031

   8.00

 

 

 

 

 

 

 

Leverage Capital Ratio

 

 

 

 

 

 

Total Capital

 

 

 

 

 

 

  (To Total Assets for Leverage Ratio)

 

 

 

 

 

 

    Consolidated

 $155,905

8.94%

 $69,722

4.00%

 $  87,152

5.00%

    Bank

   157,805

  9.06

   69,683

  4.00

     87,104

    5.00

 

 

 

 

 

 

 

 

 

 

 

 

 

 





 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Actual

 

Minimum Capital

 Requirement

  Minimum to be Well Capitalized Under

Prompt Corrective

Action Provisions

 

 

As of December 31, 2015

Amount

Ratio

Amount

Ratio

Amount

Ratio

Total Capital

 

 

 

 

 

 

  (To Risk-Weighted Assets)

 

 

 

 

 

 

    Consolidated

 $160,042

17.12%

 $74,793

8.00%

 $  98,166

10.50%

    Bank

   161,905

17.34

   74,713

  8.00

     98,060

 10.50

 

 

 

 

 

 

 

Common Equity Tier 1

   

 

   

 

   

 

  (To Risk-Weighted Assets)

   

 

   

 

   

 

    Consolidated

 $145,400

15.55%

 $42,071

4.50%

 $  65,444

6.50%

    Bank

   147,263

15.77

   42,026

  4.50

     65,374

       6.50

 

 

 

 

 

 

 

Tier 1 Capital

 

 

 

 

 

 

  (To Risk-Weighted Assets)

 

 

 

 

 

 

    Consolidated

 $145,400

15.55%

 $56,095

6.00%

 $ 79,468

8.00%

    Bank

   147,263

15.77

   56,035

  6.00

    79,382

   8.00

 

 

 

 

 

 

 

Leverage Capital Ratio

 

 

 

 

 

 

Total Capital

 

 

 

 

 

 

  (To Total Assets for Leverage Ratio)

 

 

 

 

 

 

    Consolidated

 $145,400

9.37%

 $62,087

4.00%

 $  62,087

5.00%

    Bank

   147,263

  9.49

   62,050

  4.00

     62,050

   5.00


Dividend Limitations:Dividends paid byfollowing (average diluted shares outstanding are calculated using the Bank are the primary source of funds available to the Company for payment of dividends to its shareholders. The Bank is subject to certain requirements imposed by federal banking laws and regulations. These requirements, among other things, establish minimum levels of capital and restrict the amount of dividends that may be distributed by the Bank to the Company. At December 31, 2016, the Bank had $69,669 available for dividends that could be paid without prior regulatory approval.


Stock Repurchase Plan:In August 2008, the Company’s Board of Directors approved a 24 month program to repurchase up to 450,000 shares of the Company’s commontreasury stock or approximately 10.2% of the shares then currently outstanding.  The Company’s Board of Directors authorized the continuance of this program for additional 24 month periods in August 2010, 2012 and 2014.  On August 16, 2016, the Company’s Board of Directors authorized the continuance of this program through August 17, 2018.

method:

(in thousands, except per share and share data) 2017 2016 2015
Net income $25,993
 $14,933
 $15,153
       
Average number of basic common shares outstanding 15,183,615
 9,068,624
 8,970,368
Plus: dilutive effect of stock options and awards outstanding 106,795
 74,029
 120,018
Average number of diluted common shares outstanding 15,290,410
 9,142,653
 9,090,386
       
Anti-dilutive options excluded from earnings calculation 8,659
 90,249
 129,198
       
Earnings per share:      
Basic $1.71
 $1.65
 $1.69
Diluted $1.70
 $1.63
 $1.67

Depending on market conditions and other factors, these purchases may be commenced or suspended at any time, or from time to time, without prior notice and may be made in the open market or through privately negotiated transactions.


As of December 31, 2016, the Company had repurchased 173,794 shares of stock under this plan, at a total cost of $3,465 and an average price of $19.94 per share. During 2016, the Company repurchased 15,381 shares under the plan, at a total cost of $497 and an average price of $32.30. The Company records repurchased shares as treasury stock.


As of December 31, 2015, the Company had repurchased 158,413 shares of stock under this plan, at a total cost of $2,968 and an average price of $18.74 per share. During 2015, the Company repurchased 656 shares under the plan.  The Company records repurchased shares as treasury stock.

NOTE 15.STOCK-BASED COMPENSATION PLANS

Note 15: Stock-Based Compensation Plans


On October 3, 2000, the shareholders of the Company approved the Bar Harbor Bankshares and Subsidiaries Incentive Stock Option Plan of 2000 (“ISOP”(the “ISOP”) for its officers and employees, which provided for the issuance of up to 450,0001,012,500 shares of common stock. The purchase price of the stock covered by each option must be at least 100% of the trading value on the date such option was granted. Vesting terms ranged from three to seven years. According to the ISOP no option shall be granted after October 3, 2010, ten years after the effective date of the ISOP.


On May 19, 2009, the shareholders of the Company approved the adoption of the 2009 Bar Harbor Bankshares and Subsidiaries Equity Incentive Plan (the “2009 Plan”) for employees and directors of the Company and its subsidiaries. Subject to adjustment for stock splits, stock dividends, and similar events, the total number of shares of common stock that can be issued under the 2009 Plan over the 10 year period in which the plan will be in place is 262,500393,750 shares of common stock, provided that no more than 112,500168,750 shares of such stock can be awarded in the form of restricted stock or restricted stock units, as further described in the 2009 Plan. The 2009 Plan is to be administered by the Company’s Compensation Committee. All employees and directors of the Company and its subsidiaries are eligible to participate in the 2009 Plan, subject to the discretion of the administrator and the terms of the 2009 Plan. The maximum stock award granted to one individual may not exceed 30,00045,000 shares of common stock (subject to adjustment for stock splits, and similar events) for any calendar year.  No grants were made after May 18, 2015 forpursuant to this plan.


On May 19, 2015, the shareholders of the Company approved the adoption of the 2015 Bar Harbor Bankshares and Subsidiaries Equity Incentive Plan (the “2015 Plan”) for employees and directors of the Company and its subsidiaries. Subject to adjustment for stock splits, stock dividends, and similar events, the total number of shares of common stock that can be issued under the 2015 Plan over the 10 year period in which the plan will be in place is 280,000420,000 shares of common stock. The 2015 Plan is to be administered by the Company’s Compensation Committee. All employees and directors of the Company and its subsidiaries are eligible to participate in the 2015 Plan, subject to the discretion of the administrator and the terms of the 2015 Plan. The maximum stock award granted to one individual may not exceed 20,00030,000 shares of common stock (subject to adjustment for stock splits, and similar events) for any calendar year. According to the 2015 Plan no shares shall be granted after May 19, 2019, ten years after the effective date of the 2015 Plan.  As of December 31, 20162017 there were 192,110185,223 shares available for grant under this plan.


In April of 2013, the Board of Directors voted a Long Term Incentive Program for senior management members.  The program is designed to be made up of a series of three year rolling plans utilizing the shares made available through the approved equity plans. Grants may be given in time vested restricted stock awards, time vested restricted stock units or performance vested restricted stock units, or a combination of these types of grants.  


Compensation expense recognized in connection with the stock based compensation plans are presented in the following table for the years ended December 31, 2017, 2016, and 2015:

(in thousands) 2017 2016 2015
Stock options and restricted stock awards $399
 $543
 $306
Performance stock units 290
 304
 376
Restricted stock units 585
 431
 134
Total compensation expense $1,274
 $1,278
 $816

The total tax benefit recognized associated with stock options and restricted stock awards for the years ended 2017, 2016 and 2015 were $308 thousand, $274 thousand and 2014:

$135 thousand, respectively. The total tax benefit recognized associated with restricted stock units and performance stock units for the years ended 2017, 2016 and 2015 was $423 thousand, $320 thousand, and $214 thousand, respectively.


 

2016

2015

2014

   

 

 

 

Stock options and restricted stock awards

  $   543

  $ 306

   $296

Performance stock units

       304

     376

     173

Restricted stock units

       431

     134

       61

Total compensation expense

  $1,278

   $816

   $530




98










There were no stock option grants during 2017 and 2016.  The fair value of options was estimated at the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions for stock option grants during the years ended December 31:

31, 2015:


 

2015

2014

   

 

 

Risk free interest rate

1.16%

1.24%

Expected market volatility factor for the Company's stock

41.22%

29.38%

Dividend yield

      6.00%

6.20%

Expected life of the options (years)

         6.0

         6.2

Options granted

   83,513

   45,000

Estimated fair value of options granted

  $   9.73

  $   5.00

  2015
Risk free interest rate 1.16%
Expected market volatility factor for the Company's stock 41.22%
Dividend yield 3.07%
Expected life of the options (years) 6.0
Options granted 125,269
Estimated fair value of options granted $6.49

The expected life of the grants is based on the simplified method, which calculated the expected life based on the midpoint of the term of the award and the vesting period.  The Company uses the simplified method because it does not have sufficient option exercise data to provide a reasonable basis upon which to estimate the expected term. The dividend yield is based on estimated future dividend yields.  The risk-free interest rates are based on the United States Treasury yield curve in effect at the time of the grant, with maturities approximating the vesting period of the stock option grants. The expected market price volatility for the grants during 2015 was determined by using the Company’s historical stock price volatility on a daily basis during the three year period ending December 31, 2015, consistent with the vesting periods of the 2015 option grants.


Stock Option and Restricted Stock Awards Activity:A summary combined status of the stock option and restricted stock awards as of December 31, 20162017 and 2015,2016, and changes during the year then ended is presented below:


Stock Options

Number of Stock Options Outstanding

Weighted Average Exercise Price

Aggregate Intrinsic Value

Outstanding at January 1, 2016

         229,435

      $26.33

 

Granted

                 ---

            ---

 

Exercised

          (56,726)

        24.15

 

Forfeited

          (14,874)

        27.73

 

Outstanding at December 31, 2016

         157,835

      $26.98

    $3,212

 

 

 

   

Ending vested and expected to vest December 31, 2016

         156,467

      $27.06

    $3,172

Exercisable at December 31, 2016

           60,538

      $24.12

    $1,405

Stock Options Number of Stock Options Outstanding Weighted Average Exercise Price Aggregate Intrinsic Value
Outstanding at January 1, 2017 236,763
 $17.99
  
Granted —
 —
  
Exercised (55,725) 15.19
  
Forfeited (11,117) 17.38
  
Outstanding at December 31, 2017 169,921
 $18.95
 $1,370
       
Ending vested and expected to vest December 31, 2017 169,921
 $18.95
 $1,370
Exercisable at December 31, 2017 100,317
 $18.66
 $838

Stock Options

Number of

Stock Options Outstanding

Weighted

Average

Exercise Price

Aggregate Intrinsic Value

Outstanding at January 1, 2015

240,308

$22.21

 

Granted

  83,513

33.27

 

Exercised

  (55,642)

21.69

 

Forfeited

  (38,744)

22.37

 

Outstanding at December 31, 2015

 229,435

$26.33

$1,860

   

 

 

 

Ending vested and expected  to vest December 31, 2015

226,219

$26.45

$1,807

Exercisable at December 31, 2015

  68,104

$21.30

$   895

Stock Options Number of Stock Options Outstanding Weighted Average Exercise Price Aggregate Intrinsic Value
Outstanding at January 1, 2016 344,159
 $17.56
  
Granted —
 —
  
Exercised (85,085) 16.10
  
Forfeited (22,311) 18.49
  
Outstanding at December 31, 2016 236,763
 $17.99
 3,213
       
Ending vested and expected to vest December 31, 2016 234,709
 $18.04
 3,173
Exercisable at December 31, 2016 90,807
 $16.08
 1,406


Restricted Stock Awards Number of Restricted Stock Awards Outstanding Weighted Average Grant Date Fair Value
Outstanding at January 1, 2017 —
 —
Awarded 8,004
 $29.96
Vested (8,004) 29.96
Forfeited —
 —
Outstanding at December 31, 2017 —
 $—

Restricted Stock Awards Number of Restricted Stock Awards Outstanding Weighted Average Grant Date Fair Value
Outstanding at January 1, 2016 —
 —
Awarded 5,190
 $28.86
Vested (5,190) 28.86
Forfeited —
 —
Outstanding at December 31, 2016 —
 $—

Restricted Stock Awards

Number of Restricted Stock Awards Outstanding

Weighted Average Grant Date Fair Value

Outstanding at January 1, 2016

              ---

       $    ---

Awarded

         3,460

         43.28

Released

        (3,460)

         43.28

Forfeited

              ---

             ---

Outstanding at December 31, 2016

              ---

       $    ---


Restricted Stock Awards

Number of Restricted Stock Awards Outstanding

Weighted Average Grant Date Fair Value

Outstanding at January 1, 2015

              ---

       $    ---

Awarded

         2,860

         34.81

Released

        (2,860)

         34.81

Forfeited

              ---

             ---

Outstanding at December 31, 2015

              ---

       $    ---




99



The intrinsic value of the options exercised and cash received by the Company for options exercised for the years ended December 31, 2017, 2016, 2015, and 2014,2015, was approximately $1,315$748 thousand, $760 thousand and $1,370, $708 and $1,207, $390 and $626,thousand, respectively.


The tax benefit received related to the exercise of options in 2016, 2015 and 2014, was $198, $159 and $43, respectively.


As of December 31, 2016,2017, there was approximately $249$64 thousand of unrecognized compensation cost related to unvested stock option awards, net of estimated forfeitures. This amount is expected to be recognized as expense over the next six years, with a weighted average recognition period of 1.51.06 years.


Performance Stock Units:Units
During 2016,2017, performance stock unit awards were granted to certain executive officers providing the opportunity to earn shares of common stock of the Company ranging from zero to 13,56319,973 shares, based on the Company’s performance compared to peers. The performance shares granted had a weighted average fair value of $31.52$26.74 at the date of grant, and will be earned over a three year performance period. The current assumption based on the most recent peer group information results in the shares earned at approximately 149%20.71% of the target 9,31013,318 shares, or 13,9332,758 shares.


During 2015,2016, performance stock unit awards were granted to certain executive officers providing the opportunity to earn shares of common stock of the Company ranging from zero to 13,81320,949 shares, based on the Company’s performance compared to peers. The performance shares granted had a weighted average fair value of $32.20$21.02 at the date of grant, and will be earned over a three year performance period. The current assumption based on the most recent peer group information results in the shares earned at 150%129.86% of the target 9,20713,969 shares, or 13,81318,140 shares.










The following table summarizes performance units at target as of December 31, 20162017 and 2015:

2016:


Performance Stock Units

Number                 of Performance Stock Units Outstanding

Weighted Average Grant Date

Fair Value

Outstanding at January 1, 2016

          24,349

$27.72

Granted

            9,310

  31.52

Vested

          13,933

  24.14

Forfeited

            2,415

  30.57

Outstanding at December 31, 2016

          17,311

$32.11

Performance Stock Units Number of Performance Stock Units Outstanding Weighted Average Grant Date Fair Value
Outstanding at January 1, 2017 34,246
 $21.25
Awarded 17,711
 26.74
Vested (15,121) 18.84
Forfeited (3,209) 21.51
Outstanding at December 31, 2017 33,627
 $25.21

Performance Stock Units

Number

of Performance Stock Units Outstanding

Weighted Average Grant Date

Fair Value

Outstanding at January 1, 2015

          17,895

          $25.77

Granted

            9,207

            32.20

Vested

                ---

                 ---

Forfeited

            2,753

            30.00

Outstanding at December 31, 2015

          24,349

          $27.72


Performance Stock Units Number of Performance Stock Units Outstanding Weighted Average Grant Date Fair Value
Outstanding at January 1, 2016 36,525
 $18.49
Awarded 20,351
 21.02
Vested (20,899) 16.09
Forfeited (1,731) 22.40
Outstanding at December 31, 2016 34,246
 $21.25

Restricted Stock Units:Units
During 20162017 and 2015,2016, restricted stock units were granted to certain executive officers and senior vice presidents. The restricted shares granted were valued at between $32.00$26.86 and $35.25$30.93 for 2017 and between $22.95 and $24.57 for 2016 the fair market value at the date of grant and vest annually over three years.



100




The following table summarizes restricted stock units as of December 31, 2016activity in 2017 and 2015:

2016:

Restricted Stock Units Number of Restricted Stock Units Outstanding Weighted Average Grant Date Fair Value
Outstanding at January 1, 2017 40,681
 $22.03
Granted 57,561
 28.48
Vested and exercised (12,667) 21.49
Forfeited (11,407) 25.43
Outstanding at December 31, 2017 74,168
 $26.60

Restricted Stock Units

Number of Restricted Stock Units Outstanding

Weighted Average Grant Date        Fair Value

Outstanding at January 1, 2016

          25,392

$30.95

Granted

          11,663

  34.80

Vested

            8,114

  29.00

Forfeited

            2,249

  32.15

Outstanding at December 31, 2016

          26,692

$33.12

Restricted Stock Units Number of Restricted Stock Units Outstanding Weighted Average Grant Date Fair Value
Outstanding at January 1, 2016 38,098
 $20.64
Granted 17,500
 23.20
Vested and exercised (12,174) 19.34
Forfeited (2,743) 22.10
Outstanding at December 31, 2016 40,681
 $22.03

Restricted Stock Units

Number of Restricted Stock Units Outstanding

Weighted Average Grant Date        Fair Value

Outstanding at January 1, 2015

          13,178

          $26.42

Granted

          21,755

            32.66

Vested

  6,040

            27.43

Forfeited

  3,501

            30.58

Outstanding at December 31, 2015

25,392

          $30.95


As of December 31, 2016,2017, there was $1,183$1.7 million of total unrecognized compensation cost related to nonvested restricted stock units and performance stock units granted under the Plans. That cost is expected to be recognized over a weighted average period of 1.82.1 years.


Note 16: Retirement Benefit Plans


The Company has non-qualified supplemental executive retirement agreements with certain retired officers. The agreements provide supplemental retirement benefits payable in installments over a period of years upon retirement or death. The Company also has a supplemental executive retirement agreement with a current executive officer. This agreement provides a stream of future payments in accordance with individually defined vesting schedules upon retirement, termination, or in the event that the participating executive leaves the Company following a change of control event.


The after tax components of accumulated other comprehensive loss, which have not yet been recognized in net periodic benefit cost, related to post-retirement benefits are net actuarial losses related to supplemental retirement plans of $439 and $417, as of December 31, 2016 and 2015, respectively.



101




A December 31 measurement date is used for the supplemental executive retirement plans. The following table sets forth changes in benefit obligation, changes in plan assets, and the funded status of the plans as of and for the years ended December 31:



Supplemental Executive

Retirement Plans

 

2016

2015

Obligations and Funded Status

 

 

   

 

 

Change in Benefit Obligation

 

 

Benefit obligation at beginning of year

   $ 3,811

   $ 3,969

Service cost

           72

           71

Interest cost

         128

         125

Actuarial (gain) loss on supplemental retirement plans

          (50)

          (63)

Benefits and expenses paid

        (291)

        (291)

Benefit obligation at end of year

   $ 3,670

   $ 3,811


Change in plan assets

 

 

Fair value of plan assets at beginning of year

   $      ---

  $      ---

Benefits and expenses paid

       (291)

       (291)

Contributions

        291

        291

Fair value of plan assets at end of year

   $     ---

  $      ---

Funded status at end of year

   $(3,720)

  $(3,874)


As of December 31, 2016 and 2015, the Company had recognized liabilities of $3,720 and $3,874, respectively, for the supplemental executive retirement plans. These amounts are reported within other liabilities on the consolidated balance sheets.


The following table summarizes the assumptions, based on long-term bond yields, used to determine the benefit obligations and net periodic benefit costs for the years ended December 31, 2016, 2015, and 2014:


 

2016

2015

2014

Weighted-average discount rate beginning of the year

3.48%

3.27%

4.02%

Weighted-average discount rate end of the year

    3.31

    3.48

  3.27


The discount rate was chosen based on high-quality long-term bond yields with maturity dates that match the timing and amount of the expected future benefit payments as of the measurement date.



102










The net periodic benefit cost for the years ended December 31 included the following components:



Components of Net Periodic Benefit Cost and Other Amounts Recognized in the Consolidated Income Statements

2016

2015

2014

   

 

 

 

Service cost

 $  72

 $  71

 $  64

Interest cost

   128

   125

   149

Recognition of net actuarial loss

     28

     38

     28

Total recognized in the consolidated income statements

 $228

 $234

 $241

   

 

 

 

Other Changes and Benefit Obligations Recognized in Other Comprehensive Income (pre-tax)

 

 

 

Recognition of net actuarial loss

     60

     79

   174

  Total recognized in other comprehensive income (pre-tax)

     60

     79

   174

  Total recognized in the consolidated income statements and

      other comprehensive income (pre-tax)

 $288

 $313

 $415


The estimated net actuarial loss for the supplemental executive retirement plan that will be amortized from accumulated other comprehensive income into net periodic benefit cost over the next fiscal year is $21.


The Company expects to contribute the following amounts to fund benefit payments under the supplemental executive retirement plans:


 

Amount

2017

      $   378

2018

           378

2019

           378

2020

           293

2021

           260

2022 & thereafter

        3,038

 

      $4,725


401(k) Plan: The Company maintains a Section 401(k) savings plan for substantially all of its employees. Employees are eligible to participate in the 401(k) Plan on the first day of any quarter following their date of hire and attainment of age 21 ½ . Under the plan, the Company makes a matching contribution of a portion of the amount contributed by each participating employee, up to a percentage of the employee’s annual salary. The plan allows for supplementary profit sharing contributions by the Company, at its discretion, for the benefit of participating employees. The total expense for this plan in 2016, 2015, and 2014 was $439, $411, and $375, respectively.


Note 17: Commitments and Contingent Liabilities


The Bank is a party to financial instruments in the normal course of business to meet financing needs of its customers. These financial instruments include commitments to extend credit, unused lines of credit, and standby letters of credit.


Commitments to originate loans, including unused lines of credit, are agreements to lend to a customer provided there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Bank uses the same credit policy to make such



103



commitments as it uses for on-balance-sheet items, such as loans. The Bank evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Bank upon extension of credit, is based on management’s credit evaluation of the borrower.


The Bank guarantees the obligations or performance of customers by issuing standby letters of credit to third parties. These standby letters of credit are primarily issued in support of third party debt or obligations. The risk involved in issuing standby letters of credit is essentially the same as the credit risk involved in extending loan facilities to customers, and they are subject to the same credit origination, portfolio maintenance and management procedures in effect to monitor other credit and off-balance sheet instruments. Exposure to credit loss in the event of non-performance by the counter-party to the financial instrument for standby letters of credit is represented by the contractual amount of those instruments. Typically, these standby letters of credit have terms of five years or less and expire unused; therefore, the total amounts do not necessarily represent future cash requirements.


The following table summarizes the contractual amounts of commitments and contingent liabilities as of December 31, 2016 and 2015.


 

2016

2015

Commitments to originate loans

    $  41,731

    $  41,529

Unused lines of credit

        98,823

        97,283

Un-advanced portions of construction loans

        20,330

        12,719

   Total

    $160,884

    $151,531


As of December 31, 2016 and 2015, the fair values of the standby letters of credit were not significant to the Company’s consolidated financial statements.


Operating Lease Obligations


The Company leases certain properties used in operations under terms of operating leases, which include renewal options. The following table sets forth the approximate future lease payments over the remaining terms of the non-cancelable leases as of December 31, 2016.


 

Amount

2017

$271

2018

 249

2019

 237

2020

 237

2021

 190

2022 and thereafter

 520

 

  $1,704


In connection the foregoing lease obligations, in 2016, 2015 and 2014, the Company recorded $352, $394, and $431 in rent expense, respectively, which is included in occupancy and furniture and fixtures expense in the consolidated statements of income.

NOTE 16.     FAIR VALUE MEASUREMENTS

Note 18: Fair Value Measurements


The Company measures fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. A fair value measurement assumes that the transaction to sell the asset or transfer the liability occurs in the principal market for the asset or liability or, in the absence of a principal market, the most advantageous market for the asset or liability. The price in the principal (or most advantageous) market used to measure the fair value of the asset or liability shall not be adjusted for transaction costs. An orderly transaction is a transaction that assumes exposure to the



104



market for a period prior to the measurement date to allow for marketing activities that are usual and customary for transactions involving such assets and liabilities; it is not a forced transaction. Market participants are buyers and sellers in the principal market that are (i) independent, (ii) knowledgeable, (iii) able to transact, and (iv) willing to transact.


The Company’s fair value measurements employ valuation techniques that are consistent with the market approach, the income approach and/or the cost approach. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets and liabilities. The income approach uses valuation techniques to convert future amounts, such as cash flows or earnings, to a single present amount on a discounted basis. The cost approach is based on the amount that currently would be required to replace the service capacity of an asset (replacement cost). Valuation techniques should be consistently applied. Inputs to valuation techniques refer to the assumptions that market participants would use in pricing the asset or liability. Inputs may be observable, meaning those that reflect the assumptions market participants would use in pricing the asset or liability developed based on market data obtained from independent sources, or unobservable, meaning those that reflect the reporting entity's own assumptions about the assumptions market participants would use in pricing the asset or liability developed based on the best information available in the circumstances. The Company uses a fair value hierarchy for valuation inputs that gives the highest priority to quoted prices in active markets (Level 1 measurements) for identical assets or liabilities and the lowest priority to unobservable inputs (Level 3 measurements). The fair value hierarchy is as follows:

·

Level 1 – Valuation is based on unadjusted quoted prices in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date.

·

Level 2 – Valuation is based on quoted prices for similar instruments in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, and model-based techniques for which all significant assumptions are observable in the market.

·

Level 3 – Valuation is principally generated from model-based techniques that use at least one significant assumption not observable in the market. These unobservable assumptions reflect estimates that market participants would use in pricing the asset or liability. Valuation techniques include use of discounted cash flow models and similar techniques.


The level in the fair value hierarchy within which the fair value measurement in its entirety falls is determined based on the lowest level input that is significant to the fair value measurement in its entirety.


The most significant instruments that the Company values are securities, all of which fall into Level 2 in the fair value hierarchy. The securities in the available for sale portfolio are priced by independent providers. In obtaining such valuation information from third parties, the Company has evaluated their valuation methodologies used to develop the fair values in order to determine whether valuations are appropriately placed within the fair value hierarchy and whether the valuations are representative of an exit price in the Company’s principal markets. The Company’s principal markets for its securities portfolios are the secondary institutional markets, with an exit price that is predominantly reflective of bid level pricing in those markets. Additionally, the Company periodically tests the reasonableness of the prices provided by these third parties by obtaining fair values from other independent providers and by obtaining desk bids from a variety of institutional brokers.


A description of the valuation methodologies used for instrumentsassets and liabilities measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy, is set forth below.

These valuation methodologies were applied to all of the Company’s financial assets and financial liabilities that are carried at fair value.


Recurring Fair Value Measurements

The following table summarizes financial assets and financial liabilities measured at fair value on a recurring basis as of December 31, 2017 and December 31, 2016, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value.

  December 31, 2017
  Level 1 Level 2 Level 3 Total
(in thousands) Inputs Inputs Inputs Fair Value
Available for sale securities:        
Obligations of US Government sponsored enterprises $—
 $6,972
 $—
 $6,972
Mortgage-backed securities:        
  US Government-sponsored enterprises —
 443,003
 —
 443,003
  US Government agency —
 95,596
 —
 95,596
  Private label —
 674
 —
 674
Obligations of states and political subdivisions thereof —
 140,200
 —
 140,200
Corporate bonds —
 30,797
 —
 30,797
Derivative assets —
 669
 —
 669
Derivative liabilities —
 

 (222) (222)

  December 31, 2016
  Level 1 Level 2 Level 3 Total
(in thousands) Inputs Inputs Inputs Fair Value
Available for sale securities:        
Obligations of US Government sponsored enterprises $—
 $—
 $—
 $—
Mortgage-backed securities:        
  US Government-sponsored enterprises —
 328,452
 —
 328,452
  US Government agency —
 76,906
 —
 76,906
  Private label —
 1,132
 —
 1,132
Obligations of states and political subdivisions thereof —
 122,366
 —
 122,366
Corporate bonds —
 —
 —
 —
Derivative assets —
 1,748
 —
 1,748
Derivative liabilities —
 —
 —
 —

Securities Available for Sale:All securities and major categories of securities classified as available for sale are reported at fair value utilizing Level 2 inputs. For these securities, the Company obtains fair value measurements from independent pricing providers. The fair value measurements used by the pricing providers consider observable data that may include dealer quotes, market maker quotes and live trading



105



systems. If quoted prices are not readily available, fair values are determined using matrix pricing models, or other model-based valuation techniques requiring observable inputs other than quoted prices such as market pricing spreads, credit information, callable features, cash flows, the U.S. Treasury yield curve, trade execution data, market consensus prepayment speeds, default rates, and the securities’ terms and conditions, among other things.



Derivative Assets and Liabilities

Interest Rate Lock Commitments.The foregoing valuation methodologies may produce fair value calculations that may not be fully indicativeCompany enters into IRLCs for residential mortgage loans, which commit the Company to lend funds to a potential borrower at a specific interest rate and within a specified period of net realizable value or reflective of future fair values. While Company management believes these valuation methodologies are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine thetime.  The estimated fair value of certain financial instruments could resultcommitments 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 that the loan in a different estimatelock position will ultimately close. The closing ratio is derived from the Bank’s internal data and is adjusted using significant management judgment. As such, IRLCs are classified as Level 3 measurements.

Forward Sale Commitments. The Company utilizes forward sale commitments as economic hedges against potential changes in the values of the IRLCs and loans originated for sale. The fair value atvalues of the reporting date.

Company’s mandatory delivery loan sale commitments are determined similarly to the IRLCs using quoted prices in the market place that are observable.  However, closing ratios included in the calculation are internally generated and are based on management’s judgment and prior experience, which are considered factors that are not observable. As such, mandatory delivery forward commitments are classified as Level 3 measurements.


The following table summarizes financialbelow presents the changes in Level 3 assets and financial liabilities that were measured at fair value on a recurring basis in 2017.
  Assets (Liabilities)
  Interest Rate
Lock		 Forward
(in thousands) Commitments Commitments
December 31, 2016 0
 0
Acquisition of Lake Sunapee Bank, January 13, 2017 $96
 $23
Goodwill adjustment Lake Sunapee Bank Merger (75) (167)
Realized (loss) recognized in non-interest income (22) (77)
December 31, 2017 $(1) $(221)

Quantitative information about the significant unobservable inputs within Level 3 recurring assets and liabilities is as follows:
(in thousands, except ratios) Fair Value
December 31, 2017		 Valuation Techniques Unobservable Inputs 
Significant
Unobservable Input
Value
Assets (Liabilities)  
      
Interest Rate Lock Commitment $(1)  Historical trend  Closing Ratio 90%
     Pricing Model  Origination Costs, per loan $1.7
         
Forward Commitments (221)  Quoted prices for similar loans in active markets.  Freddie Mac pricing system Pair-off contract price
Total $(222)      

There were no level 3 assets and liabilities that were measured at fair value on a recurring basis in 2016.

Non-Recurring Fair Value Measurements
The Company is required, on a non-recurring basis, to adjust the carrying value or provide valuation allowances for certain assets using fair value measurements in accordance with U.S. GAAP. The following is a summary of applicable non-recurring fair value measurements as of December 31, 20162017 and 2015, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value:


December 31, 2016

Level 1 Inputs

Level 2 Inputs

Level 3 Inputs

Total Fair Value

Securities available for sale:

 

 

 

 

  Mortgage-backed securities:

   

   

   

   

    US Government-sponsored enterprises

$ ---

 $328,452

$ ---

 $328,452

    US Government agencies

  ---

     76,906

   ---

     76,906

    Private label

  ---

       1,132

   ---

       1,132

  Obligations of states and political subdivisions thereof

  ---

   122,366

   ---

   122,366

Derivative assets

  ---

       1,748

   ---

       1,748

   

 

 

 

 

   

 

 

 

 

December 31, 2015

Level 1 Inputs

Level 2 Inputs

Level 3 Inputs

Total Fair Value

Securities available for sale:

 

 

 

 

  Mortgage-backed securities:

 

 

 

 

    US Government-sponsored enterprises

$ ---

 $306,993

$ ---

 $306,993

    US Government agencies

   ---

     79,130

   ---

     79,130

    Private label

   ---

       3,464

   ---

       3,464

  Obligations of states and political subdivisions thereof

   ---

   115,382

   ---

   115,382

Derivative assets

   ---

       2,069

   ---

       2,069


During the years ended December 31, 2016 and 2015, there were2016. There are no transfers between levels of the fair value hierarchy.



106



The following table summarizes financial assets and financial liabilities measured at fair value on a non-recurring basisbasis.

  December 31, 2017 December 31, 2016 December 31, 2017 Fair Value Measurement Date as of December 31, 2017
(in thousands) 
Level 3
Inputs
 Level 3
Inputs		 
Total
Gains (Losses)
 
Level 3
Inputs
Assets  
  
    
Impaired loans $10,793
 $6,709
 $(231) December 2017
Capitalized servicing rights 4,158
 5
 —
 December 2017
Other real estate owned 122
 90
 —
 Jan 2017 - Mar 2017
Total $15,073
 $6,804
 $(231)  

Quantitative information about the significant unobservable inputs within Level 3 non-recurring assets as of December 31, 20162017 and 2015, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value, shown net of specific reserves.


As of December 31, 2016

Level 1 Inputs

Level 2 Inputs

Level 3 Inputs

Fair Value

Loss

Other real estate owned

$ ---

$ ---

 $     90

 $     90

    $53

Collateral dependent impaired loans

  ---

        ---

   2,899

   2,899

      ---   

   

 

 

 

 

 

   

 

 

 

 

 

As of December 31, 2015

Level 1 Inputs

Level 2 Inputs

Level 3 Inputs

Fair Value

Loss

Other real estate owned

$ ---

$ ---

 $   256

 $   256

   $27

Collateral dependent impaired loans

   ---

   ---

   1,687

   1,687

      --   


The Company had total collateral dependent impaired loans with carrying values of approximately $3,268 and $1,999 which had specific reserves included in the allowance of $369 and $312, respectively, at December 31, 2016 is as follows:


  Fair Value      
(in thousands, except ratios) December 31, 2017 Valuation Techniques Unobservable Inputs Range (Weighted Average) (a)
Assets  
      
Impaired loans $8,586
 Fair value of collateral - appraised value  Loss severity 15.7% to 45.28%
       Appraised value $100 to $7,545
         
Impaired loans 2,207
 Discounted cash flow  Discount rate 2.63% to 9.50%
       Cash flows $6 to $320
         
Capitalized servicing rights 4,158
 Discounted cash flow Constant prepayment rate (CPR) 10.97%
       Discount rate 10.10%
         
Other real estate owned 122
 Fair value of collateral  Appraised value 
$122
Total $15,073
      

(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 individuals properties.

  Fair Value      
(in thousands, except ratios) December 31, 2016 Valuation Techniques Unobservable Inputs Range  (Weighted Average) (a)
Assets  
      
Impaired loans $3,268
 Fair value of collateral - appraised value Loss severity 0% to 51%
      Appraised value $0 to $1,732
         
Impaired loans 3,441
 Discount cash flow Discount rate 3.25% to 18.25%
      Cash flows $6 to $861
         
Capitalized servicing rights 5
 Discounted cash flow Constant prepayment rate (CPR) 17.09%
      Discount rate 7.55%
         
Other real estate owned 90
 Fair value of collateral Appraised value $120
Total $6,804
      

(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 individuals properties.

There were no Level 1 or Level 2 non-recurring fair value measurements for the periods ended December 31, 2017 and 2015. TheDecember 31, 2016.

Impaired Loans. Loans are generally not recorded at fair value on a recurring basis. Periodically, the Company measuresrecords non-recurring adjustments to the carrying value of collateral dependent impaired loans using Level 3 inputs.  Specifically, the Company uses the appraisedbased on fair value measurements for partial charge-offs of the collateral, which is then discounteduncollectible portions of those loans. Non-recurring adjustments can also include certain impairment amounts for estimated costs to dispose and other considerations.  These discountscollateral-dependent loans calculated when establishing the allowance for credit losses. Such amounts are generally range from 10% to 30% of appraised value.


In estimatingbased on the fair value of OREO, the Company generally uses market appraisals less estimated costs to dispose ofunderlying collateral supporting the property, which generally range from 10% to 30% of appraised value. Management may also make adjustments to reflect estimated fair value declines, or may apply other discounts to appraised values for unobservable factors resulting from its knowledge ofloan and, as a result, the property or consideration of broker quotes. The appraisers use a market, income, and/or a cost approach in determining thecarrying value of the collateral.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, theynonrecurring fair value measurement adjustments that relate to real estate collateral have generally been classified as Level 3. Estimates of fair value for other collateral that supports commercial loans are generally based on assumptions not observable in the marketplace and therefore such valuations have been categorizedclassified 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 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 measurement.

of the valuation hierarchy.


Note 19:

Other real estate owned (“OREO”). OREO results from the foreclosure process on residential or commercial loans issued by the Bank. Upon assuming the real estate, the Company records the property at the fair value of the asset less

the estimated sales costs. Thereafter, OREO properties are recorded at the lower of cost or fair value less the estimated sales costs. OREO fair values are primarily determined based on Level 3 data including sales comparables and appraisals.

Summary of Estimated Fair ValueValues of Financial Instruments


The Company disclosesfollowing table represents estimated fair values, and related carrying amounts of the Company’s financial instruments as of December 31, 2017 and December 31, 2016. Certain financial instruments and all non-financial instruments are excluded from disclosure requirements. Accordingly, the aggregate fair value information aboutamounts presented herein may not necessarily represent the underlying fair value of the Company.
  December 31, 2017
(in thousands) 
Carrying
Amount
 
Fair
Value
 Level 1 Level 2 Level 3
Financial Assets  
  
  
  
  
Cash and cash equivalents $90,685
 $90,685
 $90,685
 $—
 $—
Securities available for sale 717,242
 717,242
 —
 717,242
 —
FHLB bank stock 38,105
 38,105
 —
 38,105
 —
Net loans 2,473,288
 2,433,557
 —
 —
 2,433,557
Accrued interest receivable 3,347
 3,347
 —
 3,347
 —
Cash surrender value of bank-owned life insurance policies 57,997
 57,997
 —
 57,997
 —
Derivative assets 669
 669
 —
 669
 —
           
Financial Liabilities          
Total deposits $2,352,085
 $2,348,574
 $—
 $2,348,574
 $—
Securities sold under agreements to repurchase 40,706
 40,680
 —
 40,680
 —
Federal Home Loan Bank advances 745,982
 744,006
 —
 744,006
 —
Subordinated borrowings 38,033
 38,033
 —
 38,033
 —
Junior subordinated borrowings 5,000
 3,782
 —
 3,782
 —
Derivative liabilities (222) (222) —
 —
 (222)

  December 31, 2016
(in thousands) Carrying
Amount		 Fair
Value		 Level 1 Level 2 Level 3
Financial Assets  
  
  
  
  
Cash and cash equivalents $8,439
 $8,439
 $8,439
 $—
 $—
Securities available for sale 528,856
 528,856
 —
 528,856
 —
FHLB bank stock 25,331
 25,331
 —
 25,331
 —
Net loans 1,118,645
 1,100,601
 —
 —
 1,100,601
Accrued interest receivable 6,051
 6,051
 —
 6,051
 —
Cash surrender value of bank-owned life insurance policies 24,450
 24,450
 —
 24,450
 —
Derivative assets 1,748
 1,748
 —
 1,748
 —
           
Financial Liabilities          
Total deposits $1,050,300
 $1,048,932
 $—
 $1,048,932
 $—
Securities sold under agreements to repurchase 21,780
 21,773
 —
 21,773
 —
Federal Home Loan Bank advances 509,816
 509,793
 —
 509,793
 —
Subordinated borrowings —
 —
 —
 —
 —
Junior subordinated borrowings 5,000
 3,560
 —
 3,560
 —
Derivative liabilities —
 —
 —
 —
 —

Other than as discussed above, the following methods and assumptions were used by management to estimate the fair value of significant classes of financial instruments for which it is practicable to estimate fairthat value. Fair value estimates are made as of a specific point in time based on the characteristics of the financial instruments and relevant market information. Where available, quoted market prices are used. In other cases, fair values are based on estimates using present value or other valuation techniques. These techniques involve uncertainties and are significantly affected by the assumptions used and judgments made regarding risk characteristics of various financial instruments, discount rates, estimates of future cash flows, future expected loss experience and other factors. Changes in assumptions could significantly affect these estimates. Derived fair value estimates cannot be substantiated by comparison to independent markets and, in certain cases, could not be realized in an immediate sale of the instrument.


Fair value estimates are based on existing financial instruments without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments. Accordingly, the aggregate fair value amounts presented do not purport to represent the underlying market value of the Company.


The following describes the methods and significant assumptions used by the Company in estimating the fair values of significant financial instruments:


Cash and cash equivalents: Forequivalents. Carrying value is assumed to represent fair value for cash and cash equivalents including cash and due from banks and other short-term investments withthat have original maturities of 90ninety days or less, the carrying amounts reportedless.

FHLB bank stock and restricted securities. Carrying value approximates fair value based on the consolidated balance sheet approximateredemption provisions of the issuers.

Cash surrender value of life insurance policies. Carrying value approximates fair values.

value.


Federal Home Loan Bank Stock: For Federal Home Loan Bank stock,

Loans, net. The carrying value of the carrying amounts reportedloans in the loan portfolio is based on the balance sheet approximate fair values.


Loans:For variable ratecash flows of the loans that re-price frequentlydiscounted over their respective loan origination rates. The origination rates are adjusted for substandard and have no significant changespecial mention loans to factor the impact of declines in the loan’s credit risk, fair values are based on carrying values.standing. The fair value of otherthe loans is estimated by discounting the future



108



cash flows using the current interest rates at which similar loans with similar terms would be made to borrowers withof similar credit ratings and for the same remaining maturities.

quality.


Deposits:

Accrued interest receivable. Carrying value approximates fair value.

Deposits.The fair value of demand, non-interest bearing checking, savings and money market deposits with no stated maturity is equal todetermined as the carrying amount.amount payable on demand at the reporting date. The fair value of time deposits is based onestimated by discounting the discounted value of contractualestimated future cash flows applying interestusing market rates currently being offered on wholesale funding productsfor deposits of similar remaining maturities. The fair value estimates for deposits do not include the benefit that results from the low-cost funding provided by the deposit liabilities compared to the cost of alternative forms of funding (“deposit base intangibles”).


Borrowings:For borrowings that mature or re-price in 90 days or less, carrying value approximates fair value.

Borrowed funds. The fair value of the Company’s remaining borrowingsborrowed funds is estimated by using discounteddiscounting the future cash flows based on currentusing market rates available for similar typesborrowings.  Such funds include all categories of borrowing arrangements taking into account any optionality.


Accrued interest receivabledebt and payable:debentures in the table above.


Subordinated borrowings.The carrying amountsCompany utilizes a pricing service along with internal models to estimate the valuation of accrued interest receivable and payable approximate their fair values.

its junior subordinated debentures. The junior subordinated debentures re-price every ninety days.


Off-balance sheet

Off-balance-sheet financial instruments:The Company’s off-balance sheetinstruments. Off-balance-sheet financial instruments consist of loan commitments and standby letters of credit.  Fair values forinclude standby letters of credit and loanother financial guarantees and commitments were insignificant.


A summary of the carrying values and estimated fair values ofconsidered immaterial to the Company’s significant financial instruments at December 31, 2016 and 2015 follows:


December 31, 2016

 Carrying Value

 Level 1 Inputs

 Level 2 Inputs

 Level 3 Inputs

 Total

Fair Value

Financial Assets:

 

 

 

 

 

  Cash and cash equivalents

 $       8,439

  $8,439

 $        ---   

 $            ---

 $       8,439

  Federal Home Loan Bank stock

        25,331

         ---

    25,331

               ---

        25,331

  Loans, net

   1,118,645

         ---

           ---

   1,100,601

   1,100,601

  Interest receivable

          6,051

         ---

      6,051

               ---

          6,051

   

 

 

 

 

 

Financial liabilities:

 

 

 

 

 

  Deposits (with no stated maturity)

 $   633,863

  $     ---   

 $633,863

 $            ---

 $   633,863

  Time deposits

      416,437

         ---

   417,805

               ---

      417,805

  Borrowings

      536,596

         ---

   535,126

               ---

      535,126

  Interest payable

             697

         ---

          697

               ---

             697

   

 

 

 

 

 

 

 

 

 

 

 








 

 

 

 

 

 

 

 

 

 

 

December 31, 2015

 Carrying Value

 Level 1 Inputs

 Level 2 Inputs

 Level 3 Inputs

 Total

Fair Value

Financial Assets:

 

 

 

 

 

  Cash and cash equivalents

 $       9,720

  $9,720

 $         ---

$            ---

 $      9,720

  Federal Home Loan Bank stock

        21,479

         ---

     21,479

               ---

       21,479

  Loans, net

      980,631

         ---

           ---

      975,610

     975,610

  Interest receivable

          5,420

         ---

       5,420

 

         5,420

   

 

 

 

 

 

Financial liabilities:

 

 

 

 

 

  Deposits (with no stated maturity)

 $   546,058

  $     ---   

 $546,058

$            ---

 $  546,058

  Time deposits

      396,729

         ---

   399,146

              ---

     399,146

  Borrowings

      474,791

         ---

   473,404

              ---

     473,404

  Interest payable

             527

         ---

          527

              ---

            527




109



Note 20: Legal Contingencies


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


Note 21: Condensed Financial Information – Parent Company Only

NOTE 17.CONDENSED FINANCIAL STATEMENTS OF PARENT COMPANY

The condensed financial statementsbalance sheets of Bar Harbor Bankshares as of December 31, 2017 and 2016, and 2015,the condensed statements of income and cash flows for the years ended December 31, 2017, 2016 2015 and 20142015 are presented below:


CONDENSED BALANCE SHEETS

  December 31,
(in thousands) 2017 2016
Assets 
 
Cash due from Bar Harbor Bank and Trust $2,400
 $1,302
Investment in subsidiaries 392,073
 158,967
Premises and equipment 687
 687
Other assets 939
 137
Total assets $396,099
 $161,093
     
Liabilities and Shareholders Equity 
 
Subordinated notes $38,033
 $—
Accrued expenses 3,425
 4,353
Shareholders equity 354,641
 156,740
Total Liabilities and shareholders equity $396,099
 $161,093

 

2016

2015

Cash

 $    1,302

 $       918

Investment in subsidiaries

   158,967

   156,396

Premises

          687

          688

Other assets

          137

          320

    Total assets

 $161,093

 $158,322

   

 

 

Liabilities

   

   

    Total liabilities

 $    4,353

 $    4,170

  

 

 

Shareholders' equity

 

 

    Total shareholders' equity

 $156,740

 $154,152

 

 

 

Liabilities and Shareholders' equity

 $161,093

 $158,322


CONDENSED STATEMENTS OF INCOME

  Years Ended December 31,
(in thousands) 2017 2016 2015
Income:      
Dividends from subsidiaries $13,907
 $6,473
 $5,407
Other 25
 —
 —
Total income 13,932
 6,473
 5,407
Interest expense 1,857
 —
 —
Non-interest expense 2,979
 2,949
 2,183
Total expense 4,836
 2,949
 2,183
Income before taxes and equity in undistributed income of subsidiaries 9,096
 3,524
 3,224
Income tax benefit (1,210) (1,029) (657)
Income before equity in undistributed income of subsidiaries 10,306
 4,553
 3,881
Equity in undistributed income of subsidiaries 15,687
 10,380
 11,272
       
Net income $25,993
 $14,933
 $15,153

 

2016

2015

2014

Dividend income from subsidiaries

 $  6,473

 $  5,407

 $  5,697

Equity in undistributed earnings of subsidiaries

   10,380

   11,272

   10,141

Bankshares expenses

   (2,949)

    (2,183)

    (1,705)

Tax benefit

    1,029

        657

        480

Net income

 $14,933

 $15,153

 $14,613








110



CONDENSED STATEMENTS OF CASH FLOWS

  Years Ended December 31,
(in thousands) 2017 2016 2015
Cash flows from operating activities:      
Net income $25,993
 $14,933
 $15,153
Adjustments to reconcile net income to net cash (used) provided by operating activities: 
 
 
Equity in undistributed income of subsidiaries (15,687) (10,380) (11,272)
Other, net (312) 1,336
 854
Net cash provided by operating activities 9,994
 5,889
 4,735
       
Cash flows from investing activities:      
Acquisitions, net of cash paid 1,939
 —
 —
Purchase of securities —
 —
 —
Other, net —
 (1) (1)
Net cash provided by/(used in) investing activities 1,939
 (1) (1)
       
Cash flows from financing activities:      
Proceed from issuance of short term debt —
 —
 —
Net proceeds from common stock —
 —
 —
Net proceeds from reissuance of treasury stock 686
 1,073
 1,103
Common stock cash dividends paid (11,505) (6,577) (6,040)
Other, net (16) —
 —
Net cash used in financing activities (10,835) (5,504) (4,937)
       
Net change in cash and cash equivalents 1,098
 384
 (203)
       
Cash and cash equivalents at beginning of year 1,302
 918
 1,121
       
Cash and cash equivalents at end of year $2,400
 $1,302
 $918

 

2016

2015

2014

Cash flows from operating activities:

 

 

 

     Net income

 $ 14,933

 $ 15,153

 $ 14,613

 

 

 

 

Adjustments to reconcile net income to cash

 

 

 

 provided by operating activities:

 

 

 

   Depreciation

             1

            1

          ---

   Recognition of stock based expense

      1,114

        711

        418

   Net change in other assets

           38

       (281)

       (189)

   Net change in other liabilities

         183

         423

         415

   Equity in undistributed earnings of subsidiaries

   (10,380)

   (11,272)

   (10,141)

   

 

 

 

Net cash provided by operating activities

      5,889

      4,735

      5,116

   

 

 

 

Cash flows from investing activities:

 

 

 

   Additional investments in subsidiaries

           ---

           ---

         ---   

   Capital expenditures

           (1)

           (1)

           (1)

 

 

 

 

Net cash used in investing activities

           (1)

           (1)

           (1)

   

 

 

 

Cash flows from financing activities:

 

 

 

   Purchases of treasury stock

       (497)

         (24)

           (8)

   Purchase of preferred stock and warrants

          ---

           ---

          ---

   Proceeds from issuance of equity instruments

          ---

           ---

          ---

   Proceeds from stock option exercises

      1,570

      1,127

        616

   Dividend paid

     (6,577)

     (6,040)

     (5,362)

   

 

 

 

Net cash used in financing activities

     (5,504)

     (4,937)

     (4,754)

   

 

 

 

Net (decrease) increase in cash

        384

       (203)

        361

 

 

 

 

Cash and cash equivalents, beginning of year

        918

      1,121

        760

 

 

 

 

Cash and cash equivalents, end of year

 $   1,302

 $      918

 $   1,121

NOTE 18.QUARTERLY DATA (UNAUDITED)

Note 22: Selected

Quarterly Financial Data (Unaudited)

results of operations were as follows during 2017 and 2016:

  2017
(in thousands, except per share data) Fourth Quarter Third Quarter Second Quarter First Quarter
Interest and dividend income $30,156
 $30,063
 $29,665
 $26,185
Interest expense 6,660
 6,585
 5,856
 4,813
Net interest income 23,496
 23,478
 23,809
 21,372
Non-interest income 6,518
 6,960
 6,558
 5,946
Total revenue 30,014
 30,438
 30,367
 27,318
Provision for loan losses 597
 660
 736
 795
Non-interest expense 14,263
 17,586
 20,046
 20,831
Income before income taxes 15,154
 12,192
 9,585
 5,692
Income tax expense 8,545
 3,575
 3,029
 1,481
Net income $6,609
 $8,617
 $6,556
 $4,211
         
Basic earnings per share $0.43
 $0.56
 $0.43
 $0.29
         
Diluted earnings per share $0.43
 $0.56
 $0.42
 $0.29
         
Weighted average shares outstanding:        
Basic 15,437
 15,420
 15,393
 14,471
Diluted 15,537
 15,511
 15,506
 14,591

  2016
(in thousands, except per share data) Fourth Quarter Third Quarter Second Quarter First Quarter
Interest and dividend income $14,846
 $14,123
 $14,354
 $14,164
Interest expense 3,189
 3,124
 2,972
 2,828
Net interest income 11,657
 10,999
 11,382
 11,336
Non-interest income 2,035
 3,372
 3,614
 3,328
Total revenue 13,692
 14,371
 14,996
 14,664
Provision for loan losses 225
 139
 150
 465
Non-interest expense 10,457
 8,750
 8,731
 7,997
Income before income taxes 3,010
 5,482
 6,115
 6,202
Income tax expense 426
 1,850
 1,804
 1,796
Net income $2,584
 $3,632
 $4,311
 $4,406
         
Basic earnings per share $0.28
 $0.40
 $0.48
 $0.49
         
Diluted earnings per share $0.28
 $0.40
 $0.47
 $0.48
         
Weighted average shares outstanding:        
Basic 9,096
 9,064
 9,032
 9,014
Diluted 9,215
 9,162
 9,129
 9,122

2016

Quarter

1

2

3

4

Interest and dividend income

 $14,164

 $14,354

 $14,123

 $14,846

Interest expense

    2,828

   2,972

   3,124

   3,189

Net interest income

 11,336

 11,382

 10,999

 11,657

Provision for loan losses

      465

      150

      139

      225

Non-interest income

   3,328

   3,614

   3,372

   2,035

Non-interest expense

   7,997

   8,731

   8,750

 10,457

Income before income taxes

   6,202

   6,115

   5,482

   3,010

Income taxes

   1,796

   1,804

   1,850

      426

Net income

 $  4,406

 $  4,311

 $  3,632

 $  2,584

   

 

 

 

 

Per common share data:

 

 

 

 

    Basic earnings per share

 $    0.73

 $    0.72

 $    0.60

 $    0.43

    Diluted earnings per share

 $    0.72

 $    0.71

 $    0.59

 $    0.42

NOTE 19. SUBSEQUENT EVENTS



Note 23: Subsequent Events


Lake Sunapee Bank Group Acquisition Update: On January 13,

There were no significant subsequent events between December 31, 2017 and through the Company completeddate the previously announced acquisition of Lake Sunapee Bank Group (“LSBG”). The Company issued 4,163,853 shares of common stock using a fixed exchange ratio of 0.4970 which was based on a stock price of $34.55. Total consideration paid at closing was $182,200 which reflected the increase in the Company’s stock at the time of closing plus an additional $28 in cash paid for fractional shares. At completion of the acquisition, LSBG had approximately $1.5 billion in total assets. Final allocation of the purchase price to the fair value of assets and liabilities acquired is expectedfinancial statements are available to be reported as part of the first quarter of 2017 earnings release and Form 10-Q as of March 31, 2017.

issued.


Three-for-Two Stock Split as a Large Stock Dividend: On February 21, 2017, the Company announced that its Board of Directors declared a three-for-two split of its common stock payable in the form of a large stock dividend. The three-for-two stock split is payable March 21, 2017, to the Company’s  common stockholders of record at the close of business on March 7, 2017. The additional shares will be distributed by the Company’s transfer agent, American Stock Transfer & Trust Company, and the per share price of the Company’s common stock will adjust accordingly on the NYSE MKT, LLC. Stockholders will receive cash in lieu of any fractional share of common stock that they otherwise would have been entitled to receive in connection with the split, except that those shareholders participating in the Company’s dividend reinvestment and share purchase plan will have fractional shares credited to their accounts. After giving effect to the stock split, and as of March 10, 2017, the number of shares of common stock outstanding will increase to approximately 15,384,662.




111



ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES

DISCLOSURE


None.



ITEM 9A. CONTROLS AND PROCEDURES


Evaluation of Disclosure Controls and Procedures:The Company carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of its disclosure controls and procedures as of the end of the period covered by this report. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are designed to ensure that the information required to be disclosed by us in our reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and are operating in an effective manner.


Management Report on Internal Control over Financial Reporting:Management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting as defined in Rule 13a-15(f) and 15d-15(f) under the Exchange Act as a process designed by, or under the supervision of, the Company’s principal executive and principal financial officers and effected by the Company’s board of directors, management and other personnel 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 and includes those policies and procedures that:

·


Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the Company;

·


Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and

·


Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements.


Management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2016. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) inInternal Control-Integrated Framework (2013).


Based on its assessment, management believes that as of December 31, 2016,2017, the Company’s internal control over financial reporting is effective, based on the criteria set forth by COSO inInternal Control – Integrated Framework (2013).


The Company’s independent registered public accounting firm has issued an audit report on the effectiveness of the Company’s internal control over financial reporting. This report appears within Item 9A8 of this report on Form 10-K.


Changes in Internal Control Over Financial Reporting: No change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the last fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.



112

REPORT OF INDEPENDANT REGISTERED PUBLIC ACCOUNTING FIRM





113



Report of Independent Registered Public Accounting Firm


To the Shareholders and the Board of Directors and Shareholders

of Bar Harbor Bankshares

Bankshares:




114



Opinion on the Internal Control Over Financial Reporting
We have audited Bar Harbor Bankshares and subsidiaries'subsidiaries’ (the Company) internal control over financial reporting as of December 31, 2016,2017, based on criteria established in Internal Control —- Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013. In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets as of December 31, 2017 and 2016, and the related consolidated statements of income, comprehensive income, changes in shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2017, and the related notes to the consolidated financial statements of the Company and our report dated March 13, 2018 expressed an unqualified opinion.

Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying “Management Report on Effectiveness of Internal Control overOver Financial Reporting”Reporting and Compliance with Designated Laws and Regulations”. Our responsibility is to express an opinion on the company'sCompany’s internal control over financial reporting based on our audit.

We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.


We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States).PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.


Definition and Limitations of Internal Control Over Financial Reporting
A company's internal control over financial reporting is a process designed 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. A company's internal control over financial reporting includes those policies and procedures that (a)(1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (b)(2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (c)(3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company's assets that could have a material effect on the financial statements.



Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2016, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of Bar Harbor Bankshares and subsidiaries as of December 31, 2016 and 2015, and the related consolidated statements of income, comprehensive income, changes in shareholders’ equity and cash flows for each of the two years in the period ended December 31, 2016, and our report dated March 14, 2017, expressed an unqualified opinion.


/s/ RSM US LLP

Boston, Massachusetts

March 14, 2017 

13, 2018









ITEM 9B. OTHER INFORMATION


None.




PART III



ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE


Directors and Executive Officers: Information required by Item 401 of Regulation S-K with respect to the directors and executive officers will appear under the heading “DIRECTORS AND EXECUTIVE OFFICERS” in the Company’s definitive Proxy Statement for the 20162018 Annual Meeting of Shareholders, which the Company intends to file with the Commission within 120 days of the end of the Company’s 20152017 fiscal year (hereinafter the “Proxy”) and is incorporated herein by reference.


Compliance with Section 16(a) of the Securities Exchange Act of 1934:  Information required by Item 405 of Regulation S-K with respect to Compliance with Section 16(a) of the Securities Exchange Act of 1934 will appear under the heading “SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE” in the Company’s Proxy and is incorporated herein by reference.


Stockholder Nominees to Board of Directors:  The information required by Item 407(c)(3), procedures by which security holders may recommend nominees to the Company’s Board of Directors, will be set forth in the Proxy under the headings entitled “CORPORATE GOVERNANCE” – “Governance Committee” and “OTHER MATTERS” – “Nominations by Shareholders and other Shareholder Proposals” and are incorporated herein by reference.


Audit Committee: Information required by Items 407(d)(4) of Regulation S-K will appear under the heading “CORPORATE GOVERNANCE” – “Audit Committee” in the Company’s Proxy, and is incorporated herein by reference. Information required by Item 407(d)(5) of Regulation S-K will appear under “Appendix A” Report of the Audit Committee, contained in the Company’s Proxy and is incorporated herein by reference.


Code of Ethics:Conduct: Information required by Item 406 of Regulation S-K will appear under the heading “OTHER“GOVERANCE PRINCIPALS AND RELATED MATTERS” – “Code of Ethics”Conduct” contained in the Company’s Proxy and is incorporated herein by reference.




ITEM 11. EXECUTIVE COMPENSATION


The information required by Item 402 of Regulation S-K will appear under the heading “COMPENSATION OF DIRECTORS AND EXECUTIVE OFFICERS and COMPENSATION OF DIRECTORS,” in the Company’s Proxy, which information is incorporated herein by reference.


The information required by Item 407(e)(4) of Regulation S-K will appear under the heading“Compensation Committee Interlocks and Insider Participation” in the Company’s Proxy, which information is incorporated herein by reference.


The information required by Item 407(e)(5) of Regulation S-K will appear under the heading “Report of the Compensation and Human Resources Committee” in the Company’s Proxy, which information is incorporated herein by reference.



115



ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDERSHAREHOLDER MATTERS


The Information required by Item 201(d) of Regulation S-K appears in this Report as Part II, Item 5, under the heading “Market for Registrant’s Common Stock, Related Shareholder Matters and Issuer Purchases of Equity Securities” “Incentive Stock Option Plan,” which information is incorporated herein by reference.


Information required by Item 403 of Regulation S-K will appear under the heading “VOTING SECURITIES“SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND PRINCIPAL HOLDERS THEREOF”MANAGEMENT AND RELATED SHAREHOLDER MATTERS” in the Company’s Proxy, which information is incorporated herein by reference.



ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE


Information required by Item 404 of Regulation S-K will appear under the headingheadings “CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS”TRANSACTIONS,” and "GOVERNANCE PRINCIPLES AND RELATED MATTERS"-"Board Independence" in the Company’s Proxy, which information is incorporated herein by reference.


Information required by Section 407(a) of Regulation S-K will appear under the headings "DIRECTORS AND EXECUTIVE OFFICERS"- “Directors and Nominees” and “CORPORATE GOVERNANCE”- “Board“Board of Directors” in the Company’s Proxy, which information is incorporated herein by reference.



ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES


Information required by this item will appear under the heading “INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM FEES AND SERVICES,” in the Company’s Proxy, which information is incorporated herein by reference.


PART IV



ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES


(a)  

1. All Financial Statements


The consolidated financial statements of the Company and report of the Company’s independent registered public accounting firm incorporated herein are included in Item 8 of this Report as follows:


Item

Page

Item

Page
Report of Independent Registered Public Accounting Firm

67

52

Consolidated Balance Sheets

69

53

Consolidated Statements of Income

70

54

Consolidated Statements of Comprehensive Income

71

55

Consolidated Statements of Changes in Shareholders’ Equity

72

56

Consolidated Statements of Cash Flows

73

57

Notes to Consolidated Financial Statements

74

58




116



2. Financial Statement Schedules.  Schedules have been omitted because they are not applicable or are not required under the instructions contained in Regulation S-X or because the information required to be set forth therein is included in the consolidated financial statements or notes thereto.


3. Exhibits. See Item 15(b) to this Annual Report on Form 10-K.

(b)   A list of exhibits to this Form 10-K is set forth on the Exhibit Index immediately preceding such exhibits and is incorporated herein by reference.

(c)  There are no other financial statements and financial statement schedules, which were excluded from this report, which are required to be included herein.


SIGNATURES


Pursuant to the requirements of Section 13 or 15(d) 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.


EXHIBIT INDEX

March 14, 2017

BAR HARBOR BANKSHARES

(Registrant)


/s/ Curtis C. Simard

Curtis C. Simard

President & Chief Executive Officer


Pursuant to the requirements of the Securities Exchange Act of 1934, the following persons have signed this report in the capacities indicated on behalf of the Registrant.


/s/ David B. Woodside

David B. Woodside, Chairman, Board of Directors

/s/ Curtis C. Simard

Curtis C. Simard, Director

President & Chief Executive Officer

/s/ Daina H. Belair

Daina H. Belair, Director

3.1

/s/ Josephine Iannelli

Josephine Iannelli

EVP, Chief Financial Officer and Principal Accounting Officer

//s/ Matthew L. Caras

Matthew Caras, Director

/s/ Lauri E. Fernald

Lauri E. Fernald, Director

/s/ David M. Colter

David M. Colter, Director

/s/ Kenneth E. Smith

Kenneth E. Smith, Director

/s/ Steven H. Dimiick

Steven H. Dimick, Director

/s/ Stephen R. Theroux

Stephen R. Theroux, Director

/s/ Martha Tod Dudman

Martha Tod Dudman, Director

s/ Scott G. Toothaker

Scott G. Toothaker, Director

/s/ Stephen W. Ensign

Stephen W. Ensign, Director




117



EXHIBIT INDEX


The following exhibits are included as part of this Form 10-K.


EXHIBIT NUMBER

2.1

Agreement and Plan of Merger, dated as of May 5, 2016, by and between the Company and Lake Sunapee bank Group

Incorporated herein by reference to Form 8-K, Exhibit 2.1, filed with the commission on May 9, 2016 (Commission File No. 00113349).

3

Articles of Incorporation and Bylaws

3.1

Articles of Incorporation, as amended to date

Incorporated herein by reference to Form 10-Q, Part II, Item 6, Exhibit 3.1, filed with the commission on November 5, 2015 (Commission File No. 00113349).

3.2

Bylaws, as amended to date

Incorporated herein by reference to Form 8-K, Item 5.03, Exhibit 3.2, filed with the Commission on November 29, 2011.

2011.

4

4.1

Instruments Defining Rights of Security Holders

4.1

Certificate of Designations, Fixed Rate Cumulative Perpetual Preferred Stock, Series A

Incorporated herein by reference to Form 8-K, Exhibit 3.1, filed with the Commission on January 21, 2009 (Commission File No. 00113349).

4.2

Form of Specimen Stock Certificate for Series A Preferred Sock

Incorporated by reference to Form 8-K, Exhibit 4.1, filed with the Commission on January 21, 2009 (Commission File No. 00113349).

4.3

Debt Securities Purchase Agreement

Incorporated herein by reference to Form 10-K, Part IV, Item 15, Exhibit 4.5, filed with the commission on March 16, 2009 (Commission File No. 00113349).

4.4

Form of Subordinated Debt Security of Bar Harbor Bank & Trust

Incorporated herein by reference to Form 10-K, Part IV, Item 15, Exhibit 4.6, filed with the commission on March 16, 2009 (Commission File No. 00113349).

4.5

Description of Company Common Stock

Incorporated by reference to Form 8-K, Items 8.01 and 9.01, Exhibit 99.1, filed August 7, 2015 (Commission File No. 00113349).

10

10.1

Material Contracts

Employment Agreement by and between William J. McIver, Bar Harbor Bankshares and Bar Harbor Bank & Trust, dated May 5, 2016.

10.1*

Supplemental Executive Retirement Plan Adopted by the Board of Directors on September 16, 2003, and effective as of January 1, 2003, providing Joseph M. Murphy, retired President & CEO of the Company, Gerald Shencavitz, the Company’s Chief Financial Officer, and Dean S. Read, former President of the Bank, with certain defined retirement benefits (the “2003 SERP”)

Incorporated by reference to Form 10-Q, Part II, Item 6, Exhibit 10.2, filed with the Commission November 13, 2003 (Commission File No. 00113349).

10.2*

Amendment No. 1 to the 2003 SERP

Incorporated by reference to Form 8-K, 8.01, Exhibit 10.6,10.2, filed with the Commission on November 24, 2008May 9, 2016 (Commission File No. 00113349).

10.3*

11.1

Supplemental Executive Retirement Plan, Section 409A

Incorporated by reference to Form 8-K, Exhibit 10.7, filed with the Commission on November 24, 2008 (Commission File No. 00113349).

10.4*

Incentive Stock Option Plan of 2000

Incorporated by reference to Form 10-K, Item 14(a)(3), Exhibit 10.3, filled with the Commission March 28, 2002 (Commission File No. 00113349).

10.5*+

Amended and Restated Change in Control, Confidentiality, and Non-competition Agreement between the Company and Gerald Shencavitz

Incorporated by reference to Form 8-K, Exhibit 10.9, filed with the Commission on November 24, 2008 (Commission File No. 00113349).

10.6*

Change in Control, Confidentiality, and Non-competition Agreements between the Company and the following officers: Marsha C. Sawyer, Executive Vice President Human Resources; and Joshua A. Radel, Chief Investment Officer, Bar Harbor Trust Services.

Incorporated by reference to Form 8-K, Exhibit 10.1, filed with the Commission on May 18, 2012

10.7*

Change in Control Confidentiality and Noncompetition Agreement with Stephen Leackfeldt, Executive Vice President

Incorporated by reference to Form 8-K, Exhibit 10.2, filed with the Commission on May 18, 2012

10.8*

Change in Control Confidentiality and Noncompetition Agreement with Greg Dalton, Executive Vice President

Incorporated by reference to Form 8-K, Exhibit 10.4, filed with the Commission on May 18, 2012

10.9

Infinex Agreement third party brokerage services

Incorporated by reference to Form 10-K, Part III, Item 15(a), Exhibit 10.10, filed with the Commission on March 16, 2005 (Commission File No. 00113349).

10.10

Somesville Bank Branch Lease dated October 27, 2005

Incorporated by reference to Form 10-K, Part III, Item 15(a), Exhibit 10.13, filed with the Commission on March 16, 2006 (Commission File No. 00113349).

10.11*

Bar Harbor Bankshares and Subsidiaries Equity Incentive Plan of 2009

Incorporated by reference to Appendix “C” to the Company’s Definitive Proxy Statement (DEF 14A) filed with the commission on April 7, 2009 (Commission File No. 00113349).

10.12*

Change in Control Confidentiality and Noncompetition Agreement between the Company and Senior Vice President, Marcia T. Bender

Incorporated by reference to Form 8-K, Exhibit 10.1, filed with the Commission on July 30, 2013.

10.13*

Employment Agreement with Company President and Chief Executive Officer, Curtis C. Simard

Incorporated by reference to Form 8-K, Items 5.02(e) and 9.01, filed with the Commission on May 17, 2013.

10.14*

2015 Annual Incentive Plan for certain executive officers of the Company

Incorporated by reference to Form 8-K, Item 5.02(e), filed with the Commission on January 22, 2015.

10.15*

2013 through 2015 Long Term Executive Incentive Plan

Incorporated by reference to Form 8-K, Items 5.02(e) and 9.01, Exhibit 10.1, filed with the Commission on April 26, 2013.

10.16*

2014 through 2016 Long Term Executive Incentive Plan

Incorporated by reference to Form 8-K, Items 5.02(e) and 9.01, Exhibit 10.1, filed with the Commission on July 24, 2014.


10.17*

2015 through 2017 Long Term Executive Incentive Plan

Incorporated by reference to Form 8-K, Items 5.02(e) and 9.01, Exhibit 10.1, filed with the Commission on February 19, 2015.

10.18*

Change in Control Confidentiality and Noncompetition Agreement between the Company and Richard Maltz, Executive Vice President and Chief Operating Officer

Incorporated by reference to Form 8-K, Items 1.01 and 9.01, filed with the Commission on September 28, 2016.

10.19*

2016 Annual Incentive Play and designated target awards for fiscal year 2016 (calculated as a percentage of base salary) for certain executive officers of the Company and its wholly owned first tier bank and second tier trust company subsidiaries, including the Company’s named executive officers.

Incorporated by reference to Form 8-K, Item 5.02(e), filed with the Commission on December 23, 2015.

10.20*

Bar Harbor Bankshares and Subsidiaries Equity Incentive Plan of 2015 approved by Shareholders at the Company’s 2015 Annual Meeting.

Incorporated by reference to the Company’s Proxy DEF 14A, Appendix B, filed with the Commission on April 8, 2015.

10.22

Employment Agreement by and between the Company and Josephine Iannelli, Chief Financial Officer

Incorporated by reference to Form 8-K, Items 5.02 and 9.01, filed with the Commission on September 28, 2016.

11.1

Statement of re computation of per share earnings

Statement of re computation of per share earnings is provided in Note 1 to the Consolidated Financial Statements in this Report

21

Subsidiaries of the Registrant

Filed herewith

23

Consent of Independent Registered Public Accounting Firm

23.1

Consent of Independent Registered Public Accounting Firm, RSM US LLP

Filed herewith

23.2

31.1

Consent of Independent Registered Public Accounting Firm, KPMG, LLP

Filed herewith

31.1

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

Filed herewith

31.2

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

Filed herewith

32.1

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

Furnished herewith

32.2

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

Furnished herewith

101*

101

The following financial information from the Company’s Annual Report on Form 10-K for the year ended December 31, 20162017 is formatted in XBRL (eXtensible Business Reporting Language): (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


* Management contract

SIGNATURES
Pursuant to the requirements of Section 13 or compensatory arrangement.

+ Mr. Shencavitz left employment positions with15(d) of the Company effective August 15, 2016.

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


Date: March 13, 2018            /s/ Curtis C. Simard
Name: Curtis C. Simard
Title: President and Chief Executive Officer

120


Pursuant to the requirements of the Securities Exchange Act of 1934, the following persons have signed this report in the capacities indicated on behalf of the Registrant.

/s/ David B. Woodside
David B. Woodside, Chairman, Board of Directors
/s/ Curtis C. Simard
Curtis C. Simard, Director
President & Chief Executive Officer
/s/ Daina H. Belair
Daina H. Belair, Director
/s/ Josephine Iannelli
Josephine Iannelli
EVP, Chief Financial Officer and Principal Accounting Officer
/s/ Matthew L. Caras
Matthew Caras, Director
/s/ Lauri E. Fernald
Lauri E. Fernald, Director
/s/ David M. Colter
David M. Colter, Director
/s/ Kenneth E. Smith
Kenneth E. Smith, Director
/s/ Steven H. Dimick
Steven H. Dimick, Director
/s/ Stephen R. Theroux
Stephen R. Theroux, Director
/s/ Martha Tod Dudman
Martha Tod Dudman, Director
/s/ Scott G. Toothaker
Scott G. Toothaker, Director
/s/ Stephen W. Ensign
Stephen W. Ensign, Director



133