UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q



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

For the quarterly period ended: September 30, ~~2017~~2019



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

For the transition period from to

Commission File Number: 001-13349

BAR HARBOR BANKSHARES

(Exact name of registrant as specified in its charter)



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

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

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

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



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

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

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

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

Large Accelerated Filer o 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 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

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

The Registrant had ~~15,433,957~~15,552,297 shares of common stock, par value $2.00 per share, outstanding as of ~~November 3, 2017.~~October 31, 2019.

BAR HARBOR BANKSHARES AND SUBSIDIARIES

FORM 10-Q

INDEX



				Page

PART I.	FINANCIAL INFORMATION

Item 1.	Consolidated Financial Statements (unaudited)

	Consolidated Balance Sheets as of September 30, ~~2017~~2019 and December 31, ~~2016~~2018			4

	Consolidated Statements of Income for the Three and Nine Months Ended September 30, ~~2017~~2019 and ~~2016~~2018			5

	Consolidated Statements of Comprehensive Income for the Three and Nine Months Ended September 30, ~~2017~~2019 and ~~2016~~2018			6

	Consolidated Statements of Changes in Shareholders’ Equity for the Three and Nine Months Ended September 30, ~~2017~~2019 and ~~2016~~2018			7

	Consolidated Statements of Cash Flows for the Three and Nine Months Ended September 30, ~~2017~~2019 and ~~2016~~2018			8

	Notes to Unaudited Consolidated Interim Financial Statements
		Note 1	Basis of Presentation	9
		Note 2	~~Acquisition~~Securities Available for Sale	1312
		Note 3	~~Securities Available for Sale~~Loans	1715
		Note 4	~~Loans~~Allowance for Loan Losses	2133
		Note 5	~~Loan Loss Allowance~~Borrowed Funds	3440
		Note 6	~~Borrowed Funds~~Deposits	3842
		Note 7	~~Deposits~~Capital Ratios and Shareholders' Equity	3943
		Note 8	~~Capital Ratios and Shareholders' Equity~~Earnings per Share	4047
		Note 9	~~Earnings per Share~~Derivative Financial Instruments and Hedging Activities	4548
		Note 10	~~Derivative Financial Instruments and Hedging Activities~~Fair Value Measurements	4551
		Note 11	~~Fair Value Measurements~~Non-Interest Income	4857
		Note 12	Leases	59
		Note 13	Subsequent Events	5461

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations			5562

	Selected Financial Data		5763

	Consolidated Loan and Deposit Analysis			5965

	Average Balances and Average Yields/Rates		6066

	Non-GAAP Financial Measures		6168
		Reconciliation of Non-GAAP Financial Measures		69
		Financial Summary		6471

Item 3.	Quantitative and Qualitative Disclosures about Market Risk			7078

Item 4.	Controls and Procedures			7280

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

FORWARD-LOOKING STATEMENTS

Certain statements contained in this document that are not historical facts may constitute forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended ("Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as amended ("Exchange Act"), and are intended to be covered by the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. When used in this Form 10-Q the words "may," "will," "should," "could," "would," "plan," "potential," "estimate," "project," "believe," "intend," "anticipate," "expect," "target" and similar expressions are intended to identify forward-looking statements, but these terms are not the exclusive means of identifying forward-looking statements. These forward-looking statements are subject to significant risks, assumptions and uncertainties, including among other things, changes in general economic and business conditions, increased competitive pressures, changes in the interest rate environment, legislative and regulatory change, changes in the financial markets, and other risks and uncertainties disclosed from time to time in documents that the Company files with the Securities and Exchange Commission, including but not limited to those discussed in the section titled "Risk Factors" in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2018. Because of these and other uncertainties, the Company’s actual results, performance or achievements, or industry results, may be materially different from the results indicated by these forward-looking statements. In addition, the Company’s past results of operations do not necessarily indicate future results. You should not place undue reliance on any of the forward-looking statements, which speak only as of the dates on which they were made. The Company is not undertaking an obligation to update forward-looking statements, even though its situation may change in the future, except as required under federal securities law. The Company qualifies all of its forward-looking statements by these cautionary statements.

PART II. FINANCIAL INFORMATION

ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

BAR HARBOR BANKSHARES AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(In thousands, except share data) September 30,
2017 December 31,
2016
Assets

Cash and due from banks $ 31,223
$ 8,219
Interest-bearing deposit with the Federal Reserve Bank 17,501
220
Total cash and cash equivalents 48,724
8,439
Securities available for sale, at fair value 718,459
528,856
Federal Home Loan Bank stock 37,107
25,331
Total securities 755,566
554,187
Commercial real estate 793,572
418,119
Commercial and industrial 357,072
151,240
Residential real estate 1,152,628
506,612
Consumer 125,590
53,093
Total loans 2,428,862
1,129,064
Less: Allowance for loan losses (11,950 ) (10,419 )
Net loans 2,416,912
1,118,645
Premises and equipment, net 48,309
23,419
Other real estate owned 122
90
Goodwill 100,255
4,935
Other intangible assets 8,811
377
Cash surrender value of bank-owned life insurance 57,613
24,450
Deferred tax assets, net 13,052
5,990
Other assets 26,368
14,817
Total assets $ 3,475,732
$ 1,755,349

Liabilities

Demand and other non-interest bearing deposits $ 357,398
$ 98,856
NOW deposits 442,085
175,150
Savings deposits 373,118
77,623
Money market deposits 300,398
282,234
Time deposits 802,110
416,437
Total deposits 2,275,109
1,050,300
Senior borrowings 775,582
531,596
Subordinated borrowings 43,048
5,000
Total borrowings 818,630
536,596
Other liabilities 28,534
11,713
Total liabilities 3,122,273
1,598,609
Shareholders’ equity

Capital stock, par value $2.00; authorized 20,000,000 shares; issued 16,428,387 and 10,182,611 shares at September 30, 2017 and December 31, 2016, respectively 32,858
13,577
Additional paid-in capital 186,220
23,027
Retained earnings 141,251
130,489
Accumulated other comprehensive loss (1,435 ) (4,326 )
Less: cost of 996,531 and 1,067,016 shares of treasury stock at September 30, 2017 and December 31, 2016, respectively (5,435 ) (6,027 )
Total shareholders’ equity 353,459
156,740
Total liabilities and shareholders’ equity $ 3,475,732
$ 1,755,349



(in thousands, except share data)	September 30, 2019			December 31, 2018
Assets
Cash and due from banks	$	50,032		$	35,208
Interest-bearing deposit with the Federal Reserve Bank	21,561			63,546
Total cash and cash equivalents	71,593			98,754
Securities available for sale, at fair value	675,675			725,837
Federal Home Loan Bank stock	27,469			35,659
Total securities	703,144			761,496
Loans:
Commercial real estate	923,773			826,699
Commercial and industrial	402,706			404,870
Residential real estate	1,143,452			1,144,698
Consumer	107,375			113,960
Total loans	2,577,306			2,490,227
Less: Allowance for loan losses	(15,353		)	(13,866		)
Net loans	2,561,953			2,476,361
Premises and equipment, net	47,644			48,804
Other real estate owned	2,455			2,351
Goodwill	100,085			100,085
Other intangible assets	6,879			7,459
Cash surrender value of bank-owned life insurance	75,368			73,810
Deferred tax assets, net	4,988			9,514
Other assets	38,365			29,853
Total assets	$	3,612,474		$	3,608,487

Liabilities
Deposits:
Demand	$	380,707		$	370,889
NOW	490,315			484,717
Savings	360,570			358,888
Money market	359,328			335,951
Time	902,665			932,793
Total deposits	2,493,585			2,483,238
Borrowings:
Senior	641,819			680,823
Subordinated	42,928			42,973
Total borrowings	684,747			723,796
Other liabilities	39,683			30,874
Total liabilities	3,218,015			3,237,908
(continued)
(continued)
Shareholders’ equity
Capital stock, par value $2.00; authorized 20,000,000 shares; issued 16,428,388 and 16,428,388 shares at September 30, 2019 and December 31, 2018, respectively	32,857			32,857
Additional paid-in capital	188,283			187,653
Retained earnings	174,994			166,526
Accumulated other comprehensive income (loss)	3,045			(11,802		)
Less: 879,785 and 905,201 shares of treasury stock at September 30, 2019 and December 31, 2018, respectively	(4,720		)	(4,655		)
Total shareholders’ equity	394,459			370,579
Total liabilities and shareholders’ equity	$	3,612,474		$	3,608,487

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

BAR HARBOR BANKSHARES AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME


	Three Months Ended September 30,					Nine Months Ended September 30,				Three Months Ended September 30,				Nine Months Ended September 30,
(In thousands, except per share data)	2017			2016		2017		2016
(in thousands, except per share data)										2019		2018		2019		2018
Interest and dividend income
Loans	$	24,661		$	10,295	$	70,081	$	30,627	$	28,157	$	26,212	$	82,681	$	77,272
Securities and other	5,402			3,828		15,832		12,014		6,105		5,972		18,593		17,407
Total interest and dividend income	30,063			14,123		85,913		42,641		34,262		32,184		101,274		94,679
Interest expense
Deposits	3,177			1,755		7,926		4,931		7,143		5,478		20,336		13,868
Borrowings	3,408			1,369		9,327		3,993		4,674		4,237		15,232		12,192
Total interest expense	6,585			3,124		17,253		8,924		11,817		9,715		35,568		26,060
Net interest income	23,478			10,999		68,660		33,717		22,445		22,469		65,706		68,619
Provision for loan losses	660			139		2,191		754		893		643		1,779		2,208
Net interest income after provision for loan losses	22,818			10,860		66,469		32,963		21,552		21,826		63,927		66,411
Non-interest income
Trust and investment management fee income	3,040			975		9,228		2,878		3,013		2,952		8,836		9,036
Insurance and brokerage service income	329			—		1,020		—
Customer service fees	2,638			706		5,990		1,999		2,553		2,490		7,336		7,061
Gain on sales of securities, net	19			1,354		19		4,489		157		—		157		—
Bank-owned life insurance income	380			197		1,165		540		497		505		1,558		1,328
Customer derivative income										828		—		1,553		545
Other income	554			140		2,043		408		595		1,179		1,823		2,515
Total non-interest income	6,960			3,372		19,465		10,314		7,643		7,126		21,263		20,485
Non-interest expense
Salaries and employee benefits	9,617			4,832		30,065		14,648		11,364		10,331		33,568		31,695
Occupancy and equipment	2,894			1,156		8,573		3,466		3,415		3,366		10,101		9,364
Loss on premises and equipment, net	(1		)	216		94		216		—		—		21		—
Outside services	907			181		2,220		430		424		456		1,278		1,597
Professional services	428			250		1,357		1,084		707		223		1,821		1,016
Communication	382			128		1,040		492		189		217		707		701
Marketing										613		293		1,419		1,207
Amortization of intangible assets	189			1		534		25		207		207		621		621
Acquisition expenses	346			320		5,917		812
Acquisition, restructuring and other expenses										3,039		70		3,319		619
Other expenses	2,824			1,666		8,663		4,305		3,442		2,743		10,075		8,623
Total non-interest expense	17,586			8,750		58,463		25,478		23,400		17,906		62,930		55,443

Income before income taxes	12,192			5,482		27,471		17,799		5,795		11,046		22,260		31,453
Income tax expense	3,575			1,850		8,085		5,450		780		2,076		3,847		6,136
Net income	$	8,617		$	3,632	$	19,386	$	12,349	$	5,015	$	8,970	$	18,413	$	25,317

Earnings per share:
Basic	$	0.56		$	0.40	$	1.27	$	1.37	$	0.32	$	0.58	$	1.19	$	1.64
Diluted	$	0.56		$	0.40	$	1.27	$	1.35	$	0.32	$	0.58	$	1.18	$	1.63

Weighted average common shares outstanding:
Basic	15,420			9,064		15,098		9,037		15,547		15,503		15,536		15,478
Diluted	15,511			9,162		15,204		9,138		15,581		15,580		15,582		15,564

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

BAR HARBOR BANKSHARES AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

Three Months Ended September 30, Nine Months Ended September 30,
(In thousands) 2017 2016 2017 2016
Net income $ 8,617
$ 3,632
$ 19,386
$ 12,349
Other comprehensive income (loss), before tax:

Changes in unrealized loss on securities available-for-sale 512
(5,577 ) 5,119
3,041
Changes in unrealized loss on derivative hedges (84 ) (92 ) (805 ) (1,309 )
Changes in unrealized loss on pension 5
8
45
86
Income taxes related to other comprehensive income (loss):

Changes in unrealized loss on securities available-for-sale (192 ) 1,952
(1,839 ) (1,064 )
Changes in unrealized loss on derivative hedges 31
32
373
458
Changes in unrealized loss on pension (2 ) (3 ) (2 ) (30 )
Total other comprehensive income 270
(3,680 ) 2,891
1,182
Total comprehensive income $ 8,887
$ (48 ) $ 22,277
$ 13,531



	Three Months Ended September 30,						Nine Months Ended September 30,
(in thousands)	2019			2018			2019			2018
Net income	$	5,015		$	8,970		$	18,413		$	25,317
Other comprehensive income, before tax:
Changes in unrealized gain (loss) on securities available-for-sale	3,200			(5,850		)	21,746			(19,639		)
Changes in unrealized (loss) gain on cash flow hedging derivatives	(370		)	299			(2,372		)	1,179
Changes in unrealized gain on pension	—			—			—			41
Income taxes related to other comprehensive income:
Changes in unrealized (gain) loss on securities available-for-sale	(747		)	1,291			(5,081		)	4,565
Changes in unrealized loss (gain) on cash flow hedging derivatives	85			(81		)	554			(290		)
Changes in unrealized loss on pension	—			—			—			(10		)
Total other comprehensive income (loss)	2,168			(4,341		)	14,847			(14,154		)
Total comprehensive income	$	7,183		$	4,629		$	33,260		$	11,163

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

BAR HARBOR BANKSHARES AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

(In thousands) Common stock amount Additional paid-in capital Retained earnings Accumulated other comprehensive income Treasury stock Total
Balance at December 31, 2015 $ 13,577
$ 21,624
$ 122,260
$ 3,629
$ (6,938 ) $ 154,152

Comprehensive income:
Net income —
—
12,349
—
—
12,349
Other comprehensive loss —
—
—
1,182
—
1,182
Total comprehensive income —
—
12,349
1,182
—
13,531
Cash dividends declared ($0.54 per share) —
—
(4,880 ) —
—
(4,880 )
Treasury stock purchased (23,072) —
—
—
—
(497 ) (497 )
Net issuance (91,466) to employee stock plans, including related tax effects —
35
(127 ) —
1,140
1,048
Recognition of stock based compensation —
982
—
—
982
Balance at September 30, 2016 $ 13,577
$ 22,641
$ 129,602
$ 4,811
$ (6,295 ) $ 164,336

Balance at December 31, 2016 $ 13,577
$ 23,027
$ 130,489
$ (4,326 ) $ (6,027 ) $ 156,740

Comprehensive income:
Net income —
—
19,386
—
—
19,386
Other comprehensive loss —
—
—
2,891
—
2,891
Total comprehensive income —
—
19,386
2,891
—
22,277
Cash dividends declared ($0.56 per share) —
—
(8,624 ) —
—
(8,624 )
Acquisition of Lake Sunapee Bank Group 8,328
173,591
—
—
—
181,919
Treasury stock purchased (9,603 shares) —
—
—
—
(282 ) (282 )
Net issuance (80,448 shares) to employee stock plans, including related tax effects —
(265 ) —
—
874
609
Three-for-two stock split 10,953
(10,968 ) —
—
—
(15 )
Recognition of stock based compensation —
835
—
—
—
835
Balance at September 30, 2017 $ 32,858
$ 186,220
$ 141,251
$ (1,435 ) $ (5,435 ) $ 353,459



(in thousands, except per share data)	Common stock amount		Additional paid-in capital			Retained earnings			Accumulated other comprehensive income (loss)			Treasury stock			Total
Balance at December 31, 2017	$	32,857	$	186,702		$	144,977		$	(4,554	)	$	(5,341	)	$	354,641
Net income	—		—			16,347			—			—			16,347
Other comprehensive loss	—		—			—			(9,813		)	—			(9,813		)
Cash dividends declared ($0.39 per share)	—		—			(5,981		)	—			—			(5,981		)
Treasury stock purchased (9,294 shares)	—		—			—			—			(278		)	(278		)
Net issuance (62,782 shares) to employee stock plans, including related tax effects	—		(131		)	—			—			735			604
Modified retrospective basis adoption of Revenue Recognition Accounting Codification Standard 606	—		—			(184		)	—			—			(184		)
Reclassification of the income tax effects of the Tax Cuts and Jobs Act from accumulated other comprehensive income for adoption of ASU 2018-02	—		—			980			(980		)	—			—
Recognition of stock based compensation	—		627			—			—			—			627
Balance at June 30, 2018	32,857		187,198			156,139			(15,347		)	(4,884		)	355,963

Net income	—		—			8,970			—			—			8,970
Other comprehensive loss	—		—			—			(4,341		)	—			(4,341		)
Cash dividends declared ($0.20 per share)	—		—			(3,101		)	—			—			(3,101		)
Treasury stock purchased (1,605 shares)	—		—			—			—			(46		)	(46		)
Net issuance (11,869 shares) to employee stock plans, including related tax effects	—		(123		)	—			—			154			31
Recognition of stock based compensation	—		209			—			—			—			209
Balance at September 30, 2018	$	32,857	$	187,284		$	162,008		$	(19,688	)	$	(4,776	)	$	357,685

Balance at December 31, 2018	$	32,857	$	187,653		$	166,526		$	(11,802	)	$	(4,655	)	$	370,579
Net income	—		—			13,398			—			—			13,398
Other comprehensive income	—		—			—			12,679			—			12,679
Cash dividends declared ($0.42 per share)	—		—			(6,524		)	—			—			(6,524		)
Treasury stock purchased (8,010 shares)	—		—			—			—			(210		)	(210		)
Net issuance (21,119 shares) to employee stock plans, including related tax effects	—		(69		)	—			—			149			80
Recognition of stock based compensation	—		560			—			—			—			560
Balance at June 30, 2019	32,857		188,144			173,400			877			(4,716		)	390,562

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

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

BAR HARBOR BANKSHARES AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS


	Nine Months Ended September 30,						Nine Months Ended September 30,
(In thousands)	2017			2016
(in thousands)							2019			2018
Cash flows from operating activities:
Net income	$	19,386		$	12,349		$	18,413		$	25,317
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses	2,191			754			1,779			2,208
Net amortization of securities	4,006			2,293			2,535			3,066
Deferred tax benefit	(237		)	—
Change in unamortized net loan costs and premiums	(368		)	—			(278		)	46
Premises and equipment depreciation and amortization expense	2,745			1,159
Premises and equipment depreciation							2,942			2,821
Stock-based compensation expense	835			982			716			836
Accretion of purchase accounting entries, net	(2,482		)	—			(2,613		)	(2,780		)
Amortization of other intangibles	542			69			621			621
Income from cash surrender value of bank-owned life insurance policies	(1,165		)	(540		)	(1,558		)	(1,328		)
Gain on sales of securities, net	(19		)	(4,489		)	(157		)	—
Loss on other real estate owned							146			—
Loss on premises and equipment, net	95			—			21			—
Net change in other	(2,387		)	(695		)
Net change in other assets and liabilities							(1,722		)	(3,644		)
Net cash provided by operating activities	23,142			11,882			20,845			27,163

Cash flows from investing activities:
Proceeds from sales of securities available for sale	1,581			66,431			67,983			—
Proceeds from maturities, calls and prepayments of securities available for sale	92,817			78,190			77,812			72,278
Purchases of securities available for sale	(138,785		)	(171,702		)	(76,620		)	(90,399		)
Net change in loans	(71,669		)	(2,842		)	(85,483		)	2,852
Purchase of loans	(18,621		)	(95,421		)
Purchase of Federal Home Loan Bank stock	(327		)	(2,233		)	(10,471		)	(1,172		)
Proceeds from sale of Federal Home Loan Bank stock							18,661			5,123
Purchase of premises and equipment, net	(3,011		)	(3,567		)	(1,803		)	(2,675		)
Acquisitions, net of cash (paid) acquired	39,537			—
Proceeds from sale of other real estate	322			—
Purchase of bank-owned life insurance							—			(14,000		)
Proceeds from sale of other real estate owned							—			69
Net cash used in investing activities	(98,156		)	(131,144		)	(9,921		)	(27,924		)

Cash flows from financing activities:
Net decrease in deposits	74,725			90,738
Net change in short-term advances from the Federal Home Loan Bank	110,801			31,250
Net change in long term advances from the Federal Home Loan Bank	(62,531		)	8,238
Net change in securities sold repurchase agreements	672			(1,784		)
Net increase in deposits							10,968			38,885
Proceeds from advances from the Federal Home Loan Bank							9,722,907			7,276,306
Repayments of advances from the Federal Home Loan Bank							(9,766,912		)	(7,320,515		)
Net change in short-term other borrowings							5,048			(3,255		)
Exercise of stock options	451			1,048			195			635
Purchase of treasury stock	(196		)	(497		)
Common stock cash dividends paid	(8,623		)	(4,880		)
Net cash provided by financing activities	115,299			124,113
Treasury stock purchased							(346		)	(324		)
Cash dividends paid on common stock							(9,945		)	(9,082		)
Net cash used in financing activities							(38,085		)	(17,350		)

Net change in cash and cash equivalents	40,285			4,851			(27,161		)	(18,111		)
Cash and cash equivalents at beginning of year	8,439			9,720			98,754			90,685
Cash and cash equivalents at end of year	$	48,724		$	14,571		$	71,593		$	72,574

Supplemental cash flow information:
Interest paid	$	16,184		$	8,858		$	34,394		$	25,537
Income taxes paid, net	6,764			5,342			2,479			9,927

Acquisition of non-cash assets and liabilities:
Assets acquired	1,454,076			—
Liabilities assumed	1,406,672			—

Other non-cash changes:
Real estate owned acquired in settlement of loans	32			—			250			30

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

BAR HARBOR BANKSHARES AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

NOTE 1. BASIS OF PRESENTATION

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

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

The results for any interim period are not necessarily indicative of results for the full year. These consolidated financial statements should be read in conjunction with the audited financial statements and note disclosures for the Company's Annual Report on Form 10-K for the year ended December 31, ~~2016~~2018 previously filed with the Securities and Exchange ~~Commission.~~Commission (the "SEC"). In management's opinion, all adjustments necessary for a fair statement are reflected in the interim periods presented.

~~As a result of the Lake Sunapee Group acquisition, the Company has the following new significant and critical accounting policy regarding acquired loans:~~

~~Acquired Loans:~~Reclassifications: Loans that the Company acquired in business combinations 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. Going forward, the Company will continue to evaluate reasonableness of expectations for the timing and the amount of cash to be collected. Subsequent decreases or increases in expected cash flows may result in changesWhenever necessary, amounts in the amortization 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 estimates the fair value of the underlying collateral of the loans. These valuesprior years’ financial statements are ~~discounted using market derived rates of return, with consideration given~~reclassified to ~~the period of time and costs associated with the foreclosure and disposition of the collateral.~~

~~Recently Adopted Accounting Principles~~

~~In March 2016, the FASB issued ASU No. 2016-09, “Improvements~~conform 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 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.current presentation. 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 qualify 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, as required

currently, or recognized when they occur. ASU No. 2016-09 is effective for interim and annual reporting periods beginning after December 15, 2016. The Company adopted ASU No. 2016-09 on January 1, 2017 and elected to recognize forfeitures as they occur. As allowed by the ASU, the Company’s adoption was prospective, therefore, prior periods have not been adjusted. The 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 2017, the adoption of ASU No. 2016-09 resulted in an insignificant decrease to the provision for income taxes primarily due to the tax benefit from the exercise of stock options and the vesting of restricted stock.

In March 2017, the FASB issued ASU No. 2017-08, “Premium Amortization on Purchased Callable Debt Securities.” This ASU shortens the amortization period for the premium on certain purchased callable debt securities to the earliest call date. Today, entities generally amortize the premium over the contractual life of the security. The new guidance does not change the accounting for purchased callable debt securities held at a discount; the discount continues to be amortized to maturity. ASU No. 2017-08 is effective for interim and annual reporting periods beginning after December 15, 2018; early adoption is permitted. The guidance calls for a modified retrospective transition approach under which a cumulative-effect adjustment will be made to retained earnings as of the beginning of the first reporting period in which the guidance is adopted. The Company elected to adopt the provisions of ASU No. 2017-08 as of March 31, 2017, whichreclassifications had no impact on net income in the Company’s ~~Consolidated Financial Statements.~~consolidated income statement.

~~Future Application of~~

Recent Accounting Pronouncements

~~In May 2014, the FASB and the International Accounting Standards Board (the “IASB”~~

The following table provides a brief description of recent accounting standards updates ("ASU") ~~jointly issued a comprehensive new revenue recognition standard~~ that will supersede nearly all existing revenue recognition guidance under U.S. GAAP and International Financial Reporting Standards (“IFRS”). Current revenue recognition guidance in U.S. GAAP consists 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 U.S. 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 common revenue 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 in the transaction price and allocating 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, or modified retrospective adoption, meaning the standard is applied only to the most current period presented in the financial statements with the cumulative effect of initially applying the standard recognized at the date of initial application. In addition, the FASB has begun to issue targeted updates to clarify specific implementation issues 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 Obligations 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.” Since the guidance does not apply to revenue associated with financial instruments, including loans and securities that are accounted for under other U.S. GAAP, the Company does not expect the new guidance to have a material impact ~~on revenue most~~

closely associated with financial instruments, including interest income. The Company is currently performing an overall assessment of revenue streams and reviewing contracts 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 U.S. 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 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-related revenue and expense. Quantitative and qualitative disclosures will be required by lessees and lessors to meet the objective 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 recorded 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 financial statements ~~of condition. The Company expects the new guidance will require these lease~~upon adoption:

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.

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.

In August 2016, the FASB issued ASU No. 2016-15, “Classification of Certain Cash Receipts and Cash Payments.” Current U.S. 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.

In March 2017, the FASB issued ASU No. 2017-07, “Improving the Presentation of Net Periodic Pension Cost and Net Periodic Post-retirement Benefit Cost.” Under the new guidance, employers will present the service cost component of the net periodic benefit cost in the same income statement line item as other employee compensation costs (e.g., Salaries and Benefits) arising from services rendered during the period. In addition, only the service cost component will be eligible for capitalization in assets. Employers will present the other components separately from the line item (e.g., Other Noninterest Expense) that includes the service cost. ASU No. 2017-07 is effective for interim and annual reporting periods beginning after December 15, 2017. Early adoption is permitted, however, the Company has decided

not to early adopt. Employers will apply the guidance on the presentation of the components of net periodic benefit cost in the income statement retrospectively. The guidance limiting the capitalization of net periodic benefit cost in assets to the service cost component will be applied prospectively. The Company expects to utilize the ASU’s practical expedient allowing entities to estimate amounts for comparative periods using the information previously disclosed in their pension and other post-retirement benefit plan footnote. ASU No. 2017-07 is not expected to have a material impact on the Company’s Consolidated Financial Statements.

In May 2017, the FASB issued ASU No. 2017-09, “Stock Compensation, Scope of Modification Accounting.” This ASU clarifies when changes to the terms of conditions of a share-based payment award must be accounted for as modifications. Companies will apply the modification accounting guidance if the value, vesting conditions or classification of the award changes. The new guidance should reduce diversity in practice and result in fewer changes to the terms of an award being accounted for as modifications, as the guidance will allow companies to make certain non-substantive changes to awards without accounting for them as modifications. It does not change the accounting for modifications. ASU No. 2017-09 is effective for interim and annual reporting periods beginning after December 15, 2017; early adoption is permitted. ASU No. 2017-09 is not expected to have a material impact on the Company’s Consolidated Financial Statements.

In August 2017, the FASB issued ASU No. 2017-12, “Targeted Improvements to Accounting for Hedging Activities.” This ASU’s objectives are 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. ASU No. 2017-12 is effective for interim and annual reporting periods beginning after December 15, 2018; early adoption is permitted. The Company’s interest rate cap agreements are derivative financial instruments that are designated as formal hedging relationships. The Company is currently evaluating this ASU to determine whether its provisions will enhance the Company’s ability to employ risk management strategies, while improving the transparency and understanding of those strategies for financial statement users.



Standard	Description	Required Date of Adoption	Effect on financial statements
Standards Adopted in 2019
ASU 2016-02, Leases	This 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 is required to be adopted on a modified retrospective basis and allows for practical expedients and elections in conjunction with implementation. The Company may elect some of the expedients upon the adoption date, which may be applied prospectively or retrospectively.	January 1, 2019	The Company adopted this ASU as of January 1, 2019 including the election of the practical expedients, allowing for existing leases to be accounted for consistent with current guidance, with the exception of balance sheet recognition for lessees. A modified retrospective transition approach was utilized, applying the new standard to all leases existing at the date of initial application. At January 1, 2019 the Company recognized a right-of-use asset and corresponding lease liability of $9.0 million. This computation is based, primarily, on the present value of unpaid future minimum lease payments. Additionally, that amount is impacted by assumptions around renewals and/or extensions, and the interest rate used to discount those future lease obligations. Due to the limited size of the Company's leasing portfolio, many other items related to this standard don't apply, or had an immaterial impact on the Company's consolidated financial statements. For transitional disclosures see Note 12 - Leases.
ASU 2018-11 Practical Expedients to Topic 842, Leases
ASU 2018-20 Scope Improvements for Lessors
ASU 2019-01 Leases: Codification Improvements
ASU 2017-12, Targeted Improvements to Accounting for Hedging Activities	This ASU amends Accounting Standards Codification ("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, 2019	The Company adopted this ASU as of January 1, 2019, although it did not have a material impact on the Company's consolidated financial statements.
ASU 2018-16, Inclusion of Overnight Financing Rate or Overnight Swap Rate as a Benchmark for Hedge Accounting
ASU 2018-07, Share Based Payment Accounting	This ASU expands the scope of Topic 718, Compensation- Stock Compensation to include share-based payments issued to non-employees for goods or services. Consequently, the accounting for share-based payments to non-employees and employees will be substantially aligned. The ASU supersedes Subtopic 505-50, Equity-Based Payments to non-employees.	January 1, 2019	The Company adopted this ASU as of January 1, 2019, with no material impact on the Company's consolidated financial statements.

~~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 in this exchange was valued at $43.69 per share based on the closing price posted on January 13, 2017 resulting in a consideration value of $181.92 million. The Company also paid $27 thousand to Lake Sunapee shareholders in lieu of the issuance of fractional shares. Total consideration paid at closing reflected the increase in Bar Harbor Bankshare's 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 tables:~~

(in thousands) 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 ) 10,217
(i) 8,296
Other liabilities (19,924 ) (4,087 ) (j) (24,011 )
Total identifiable net assets $ 136,745
$ (50,131 ) $ 86,614

Goodwill $ 95,332

~~Explanation of Certain Fair Value Adjustments~~



a.Standard	~~Represents in-process payments that were made~~Description	Required Date of Adoption	Effect on ~~the date of acquisition that were not recorded on Lake Sunapee's general ledger until after acquisition.~~

	financial statements
b.Standards Not Yet Adopted
ASU 2016-13, Measurement of Credit Losses on Financial Instruments	~~Represents~~This ASU amends Topic 326, Financial Instruments- Credit Losses to replace the ~~write down~~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 ~~book value~~amortized cost basis that the entity does not expect to collect. The amendments also eliminate the current accounting model for purchased credit impaired loans and certain off-balance sheet exposures. Additional quantitative and qualitative disclosures are required upon adoption.	January 1, 2020	Adoption of ~~investments~~this ASU is expected to ~~their estimated~~primarily change how the Company estimates credit losses on loans with the application of the expected credit loss model. Also, for acquired purchased impaired loans it requires the reclassification of the credit portion of the total remaining fair value ~~based on fair values on~~adjustment directly to 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 adjustments also includes the reversal of Lake Sunapee Bank's historic allowance for loan losses. ~~Loans that met the criteria~~Fair value adjustments on purchased credit impaired loans related to interest rates 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~~adjustments on other acquired loans will continue to be accreted into income over time.
ASU 2018-19, Codification Improvements to ASU 2016-13
	In addition, the Company expects the ASU to change the presentation of credit losses for AFS debt securities through an allowance method rather than as a direct write-off and may allow for recovery of these amounts in the future.
		While the CECL model does not apply to available for sale debt securities, the ASU does require entities to record an allowance when recognizing credit losses for available for sale securities with unrealized losses, rather than reduce the amortized cost of the securities by direct write-offs. The guidance will require companies to recognize improvements to estimated credit losses immediately in earnings rather than interest income over time.
	The Company is in the process of evaluating and implementing allowance loan loss estimation models to comply with the guidance under this ASU, which may result in a higher allowance for losses then currently recorded under the existing standard.
		The ASU should be adopted on a modified retrospective basis. Entities that have loans accounted for under ASC ~~310-10, Overall, 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 flows. ASC 310-10 loans have a $11.40 million fair value adjustment discount that is amortized into expense 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~~adoption should prospectively apply the ~~estimated useful life of one year.~~

guidance in this amendment for purchase credit deteriorated assets.	Early adoption is permitted in 2019.
h.ASU 2017-04, Simplifying the Test for Goodwill Impairment	~~Represents~~This ASU amends Topic 350, Intangibles-Goodwill and Other, and eliminates Step 2 from the ~~present value difference between cash flows~~goodwill impairment test.	January 1, 2020	Adoption of ~~current debt instruments using contractual rates and those of similar borrowings~~this ASU is not expected to have a material impact on the ~~date of acquisition. The adjustment will be amortized over the remaining four year weighted average contractual life.~~

	Company's consolidated financial statements.
i.Early adoption is permitted.
ASU 2018-13 Changes to Disclosure Requirements Fair Value Measurement, Topic 820	~~Represents net deferred tax assets resulting from~~This ASU eliminates, adds and modifies certain disclosure requirements for fair value measurements. Among the changes, entities will no longer be required to disclose the amount and reasons for transfers between Level 1 and Level 2 of the fair value ~~adjustments related~~hierarchy, but will be required to disclose the range and weighted average used to develop significant unobservable inputs for Level 3 fair value measurements.	January 1, 2020	Adoption of this ASU is not expected to have a material impact on the Company's consolidated financial statements.
		Early adoption is permitted.
ASU 2018-14 Compensation- Disclosure Requirements for Defined Pension Plans Topic 715-20	This ASU makes minor changes to the ~~acquired assets and liabilities, identifiable intangibles, and~~disclosure requirements for employers that sponsor defined benefit pension and/or other ~~purchase accounting adjustments.~~

post-retirement benefit plans.	January 1, 2021	Adoption of this ASU is not expected to have a material impact on the Company's consolidated financial statements.
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.~~Early adoption is permitted.

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.

~~Information about the acquired 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 $5.9 million during the nine months ending September 30, 2017 and were $812 thousand for the same period of 2016. For the three months ending September 30, 2017 direct acquisition and integration costs totaled $346 thousand and were $320 thousand for the same period of 2016.

~~Pro Forma Information (unaudited)~~

The following table presents selected unaudited pro forma financial information reflecting the acquisition of Lake Sunapee Bank Group assuming the acquisition was completed as of January 1, 2016. The unaudited pro forma financial information includes adjustments for scheduled amortization and accretion of fair 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 include the impact of prepayments. The unaudited pro forma financial information is presented for illustrative purposes only and is not necessarily indicative of the combined financial results of the Company and Lake Sunapee had the transaction actually been completed at the beginning of the periods presented, nor does it indicate future results for any other interim or full-year period. Pro forma basic and diluted earnings per common share were calculated using the Company'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 based on the actual financial statements of the Company and Lake Sunapee for the periods shown until the date of acquisition, at which time Lake Sunapee operations became included in the Company's financial statements. The Company has determined it is impractical to report the amounts of revenue and earnings of the acquired entity since the acquisition date. Due to the integration of its operations with those of the organization, the Company does not record revenue and earnings separately for these operations.

The unaudited pro forma information, for the nine months ended September 30, 2017 and 2016, set forth below reflects adjustments related to amortization and accretion of purchase accounting fair value adjustments and an estimated tax rate of 37.57%. Direct acquisition expenses incurred by the Company during 2017, as noted above, are reversed for the purposes of this unaudited pro forma information. Furthermore, the unaudited pro forma information does not reflect management’s estimate of any revenue-enhancing or anticipated cost-savings that could occur as a result of the acquisition.

~~Information in the following table is shown in thousands, except earnings per share:~~

Pro Forma (unaudited)
Nine Months Ended September 30,
2017 2016
Net interest income $ 69,846
$ 67,670
Non-interest income 20,883
25,808
Net income 26,133
21,371

Pro forma earnings per share:
Basic $ 1.69
$ 1.40
Diluted $ 1.68
$ 1.39

NOTE 3.2. SECURITIES AVAILABLE FOR SALE

The following is a summary of securities available for sale:


(In thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
September 30, 2017
Securities available for sale
(in thousands)									Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
September 30, 2019
Debt securities:
Obligations of US Government sponsored enterprises	$	6,952	$	27	$	—	$	6,979
Mortgage-backed securities:
US Government-sponsored enterprises	438,332		3,413		3,788		437,957		$	344,547	$	5,924	$	1,328	$	349,143
US Government agency	102,044		695		601		102,138		116,912		2,130		217		118,825
Private label	562		162		5		719		20,268		75		389		19,954
Obligations of states and political subdivisions thereof	140,475		2,818		1,311		141,982		107,854		3,519		147		111,226
Corporate bonds	28,245		441		2		28,684		75,652		1,554		679		76,527
Total securities available for sale	$	716,610	$	7,556	$	5,707	$	718,459	$	665,233	$	13,202	$	2,760	$	675,675

December 31, 2016
Securities available for sale
December 31, 2018
Debt securities:
Obligations of US Government sponsored enterprises	$	—	$	—	$	—	$	—
Mortgage-backed securities:
US Government-sponsored enterprises	330,635		2,682		4,865		328,452		$	413,492	$	904	$	9,444	$	404,952
US Government agency	76,722		797		613		76,906		111,938		509		1,935		110,512
Private label	936		207		11		1,132		20,353		113		84		20,382
Obligations of states and political subdivisions thereof	123,832		1,941		3,407		122,366		133,260		1,081		2,076		132,265
Corporate bonds	—		—		—		—		58,098		264		636		57,726
Total securities available for sale	$	532,125	$	5,627	$	8,896	$	528,856	$	737,141	$	2,871	$	14,175	$	725,837

The amortized cost and estimated fair value of available for sale (“AFS”) securities segregated by contractual maturity at September 30, ~~2017~~2019 are presented below. Expected maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations. Mortgage-backed securities are shown in total, as their maturities are highly variable.


	Available for sale				Available for sale
	Amortized		Fair
(In thousands)	Cost		Value
(in thousands)					Amortized Cost		Fair Value
Within 1 year	$	3,613	$	3,627	$	190	$	191
Over 1 year to 5 years	18,499		18,735		33,984		34,856
Over 5 years to 10 years	73,997		75,366		56,882		57,482
Over 10 years	620,501		620,731		92,451		95,224
Total bonds and obligations					183,507		187,753
Mortgage-backed securities					481,726		487,922
Total securities available for sale	$	716,610	$	718,459	$	665,233	$	675,675

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


	Less Than Twelve Months				Over Twelve Months				Total				Less Than Twelve Months				Over Twelve Months				Total
(In thousands)	Gross Unrealized Losses		Fair Value		Gross Unrealized Losses		Fair Value		Gross Unrealized Losses		Fair Value		Gross Unrealized Losses		Fair Value		Gross Unrealized Losses		Fair Value		Gross Unrealized Losses		Fair Value
September 30, 2017

Securities available for sale
September 30, 2019
Debt securities:
Obligations of US Government sponsored enterprises	$	—	$	—	$	—	$	—	$	—	$	—
Mortgage-backed securities:
US Government-sponsored enterprises	1,559		150,524		2,229		64,882		3,788		215,406		$	140	$	30,711	$	1,188	$	60,174	$	1,328	$	90,885
US Government agency	345		48,529		256		11,880		601		60,409		117		10,691		100		9,767		217		20,458
Private label	—		7		5		134		5		141		385		19,573		4		39		389		19,612
Obligations of states and political subdivisions thereof	89		8,838		1,222		31,570		1,311		40,408		20		4,138		127		1,692		147		5,830
Corporate bonds	2		3,038		—		—		2		3,038		493		14,506		186		7,186		679		21,692
Total securities available for sale	$	1,995	$	210,936	$	3,712	$	108,466	$	5,707	$	319,402	$	1,155	$	79,619	$	1,605	$	78,858	$	2,760	$	158,477


December 31, 2016

Securities available for sale
December 31, 2018
Debt securities:
Obligations of US Government sponsored enterprises	$	—	$	—	$	—	$	—	$	—	$	—
Mortgage-backed securities:
US Government-sponsored enterprises	4,369		197,914		496		10,120		4,865		208,034		$	155	$	19,367	$	9,289	$	297,569	$	9,444	$	316,936
US Government agency	472		36,941		141		4,263		613		41,204		16		2,570		1,919		68,266		1,935		70,836
Private label	—		107		11		312		11		419		79		10,393		5		47		84		10,440
Obligations of states and political subdivisions thereof	3,252		76,803		155		3,916		3,407		80,719		43		6,784		2,033		47,930		2,076		54,714
Corporate bonds	—		—		—		—		—		—		224		11,759		412		14,460		636		26,219
Total securities available for sale	$	8,093	$	311,765	$	803	$	18,611	$	8,896	$	330,376	$	517	$	50,873	$	13,658	$	428,272	$	14,175	$	479,145

Securities Impairment: As a part of the Company’s ongoing security monitoring process, the Company identifies securities in an unrealized loss position that could potentially be other-than-temporarily impaired. For the three and nine months ended September 30, ~~2017~~2019 and ~~2016~~2018 the Company did not record any other-than-temporary impairment (“OTTI”) losses.


	Three Months Ended September 30,				Three Months Ended September 30,				Nine Months Ended September 30,
	2017		2016		2019		2018		2019		2018
Estimated credit losses as of June 30,	$	1,697	$	1,697
Estimated credit losses as of prior year-end					$	1,697	$	1,697	$	1,697	$	1,697
Reductions for securities paid off during the period	—		—		—		—		—		—
Estimated credit losses at end of the period	$	1,697	$	1,697	$	1,697	$	1,697	$	1,697	$	1,697

Nine Months Ended September 30,
2017 2016
Estimated credit losses as of prior year-end, $ 1,697
$ 3,180
Reductions for securities paid off during the period —
1,483
Estimated credit losses at end of the period $ 1,697
$ 1,697

~~Visa Class B Common Shares~~

The Company 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 September 30, 2017, the Company 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 Company continues to own such Visa Class B shares in the future, the Company expects to record its Visa Class B shares at fair value.

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

~~Debt Securities~~

The Company expects to recover its amortized cost basis on all ~~debt~~ securities in its AFS portfolio. Furthermore, the Company does not intend to sell nor does it anticipate that it will be required to sell any of its securities in an unrealized loss position as of September 30, ~~2017,~~2019, prior to this recovery. The Company’s ability and intent to hold these securities until recovery is supported by the Company’s strong capital and liquidity positions as well as its historically low portfolio turnover.

The following summarizes, by investment security type, the basis for the conclusion that ~~the debt~~ securities in an unrealized loss position ~~within the Company’s AFS~~ were not other-than-temporarily impaired at September 30, ~~2017:~~2019:

US Government-sponsored enterprises

~~At September 30, 2017, 275~~172 out of the total ~~789~~702 securities in the Company’s portfolios of AFS US ~~Government sponsored~~Government-sponsored enterprises were in unrealized loss positions. Aggregate unrealized losses represented ~~1.7%~~1.4% of the amortized cost of securities in unrealized loss ~~positions.The Federal National Mortgage Association (“FNMA”)~~positions. The FNMA and ~~Federal Home Loan Mortgage Corporation (“FHLMC”)~~FHLMC guarantee the contractual cash flows of all of the Company’s US

~~government-sponsored~~ Government-sponsored enterprises. The securities are investment grade rated and there were no material underlying credit downgrades during the quarter. All securities are performing.

US Government ~~agencies~~agency

~~At September 30, 2017, 62~~46 out of the total ~~208~~190 securities in the Company’s portfolios of AFS US Government agency securities were in unrealized loss positions. Aggregate unrealized losses represented 1.0% of the amortized cost of securities in unrealized loss positions. The Government National Mortgage Association (“GNMA”) guarantees the contractual cash flows of all of the Company’s US ~~government~~Government agency securities. The securities are investment grade rated and there were no material underlying credit downgrades during the quarter. All securities are performing.

~~Private-label~~Private label

~~At September 30, 2017, 8~~Nine of the total 2620 securities in the Company’s portfolio of AFS ~~private-label~~private label mortgage-backed securities were in unrealized loss positions. Aggregate unrealized losses represented ~~3.3%~~1.9% of the amortized cost of securities in unrealized loss 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.

Obligations of states and political subdivisions thereof

~~At September 30, 2017, 79~~Nine of the total ~~262~~219 securities in the Company’s portfolio of AFS municipal bonds and obligations were in unrealized loss positions. Aggregate unrealized losses represented ~~3.1%~~2.5% of the amortized cost of securities in unrealized loss positions. The Company continually monitors the municipal bond sector of the market carefully and periodically evaluates the appropriate level of exposure to the market. At this time, the Company feels the bonds in this portfolio carry minimal risk of default and the Company is appropriately compensated for ~~that~~the risk. There were no material underlying credit downgrades during the quarter. All securities are performing.

Corporate bonds

~~At September 30, 2017, one~~Seven out of 12the total 26 securities in the Company’s portfolio of AFS corporate bonds were in an unrealized loss position. The aggregate unrealized loss represents ~~0.1%~~3.0% of the amortized cost of bonds in unrealized loss positions. The Company reviews the financial strength of all of these bonds and has concluded that the amortized cost remains supported by the expected future cash flows of these securities.

NOTE 4.3. LOANS

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

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

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

September 30, 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 $ 33,692
$ 15,593
$ 49,285
$ 14,695
$ —
$ 14,695
Other commercial real estate 455,847
288,440
744,287
403,424
—
403,424
Total Commercial Real Estate: 489,539
304,033
793,572
418,119
—
418,119

Commercial and Industrial:

Other Commercial 172,186
68,090
240,276
103,586
—
103,586
Agricultural and other loans to farmers 30,483
—
30,483
31,808
—
31,808
Tax exempt 40,776
45,537
86,313
15,846
—
15,846
Total Commercial and Industrial: 243,445
113,627
357,072
151,240
—
151,240

Total Commercial Loans: 732,984
417,660
1,150,644
569,359
—
569,359

Residential Real Estate:

Residential mortgages 568,277
584,351
1,152,628
506,612
—
506,612
Total Residential Real Estate: 568,277
584,351
1,152,628
506,612
—
506,612

Consumer:

Home equity 50,610
64,695
115,305
46,921
��
46,921
Other consumer 7,645
2,640
10,285
6,172
—
6,172
Total Consumer: 58,255
67,335
125,590
53,093
—
53,093

Total Loans: $ 1,359,516
$ 1,069,346
$ 2,428,862
$ 1,129,064
$ —
$ 1,129,064



	September 30, 2019						December 31, 2018
(in thousands)	Business Activities Loans		Acquired Loans		Total		Business Activities Loans		Acquired Loans		Total
Commercial real estate:
Construction and land development	$	28,802	$	2,064	$	30,866	$	23,754	$	2,890	$	26,644
Other commercial real estate	672,885		220,022		892,907		555,980		244,075		800,055
Total commercial real estate	701,687		222,086		923,773		579,734		246,965		826,699

Commercial and industrial:
Commercial	239,894		40,490		280,384		234,757		52,470		287,227
Agricultural	21,206		—		21,206		22,317		—		22,317
Tax exempt	66,043		35,073		101,116		56,588		38,738		95,326
Total commercial and industrial	327,143		75,563		402,706		313,662		91,208		404,870

Total commercial loans	1,028,830		297,649		1,326,479		893,396		338,173		1,231,569

Residential real estate:
Residential mortgages	730,516		412,936		1,143,452		670,189		474,509		1,144,698
Total residential real estate	730,516		412,936		1,143,452		670,189		474,509		1,144,698

Consumer:
Home equity	58,556		37,600		96,156		57,898		45,291		103,189
Other consumer	10,234		985		11,219		9,414		1,357		10,771
Total consumer	68,790		38,585		107,375		67,312		46,648		113,960

Total loans	$	1,828,136	$	749,170	$	2,577,306	$	1,630,897	$	859,330	$	2,490,227

The carrying amount of the acquired loans at September 30, ~~2017~~2019 totaled ~~$1.069 billion.~~$749.2 million. A subset of these loans was determined to have evidence of credit deterioration at acquisition date, which is accounted for in accordance with ASC 310-30. These purchased credit-impaired loans presently maintain a carrying value of ~~$14.4~~$8.4 million (and atotal note ~~balance~~balances of ~~$19.5~~$11.5 million). These loans are evaluated for impairment through the periodic reforecasting of expected cash flows. ~~Loans~~Acquired loans considered not impaired at the acquisition date had a carrying amount of ~~$1.055 billion.~~$740.8 million as of September 30, 2019.

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

Three Months Ended September 30,
(In thousands) 2017 2016
Balance at beginning of period $ 4,567
$ —
Acquisitions —
—
Reclassification from nonaccretable difference for loans with improved cash flows 513
—
Accretion (423 ) —
Balance at end of period $ 4,657
$ —


	Nine Months Ended September 30,					Three Months Ended September 30,
(In thousands)	2017			2016
(in thousands)						2019			2018
Balance at beginning of period	$	—		$	—	$	4,195		$	2,807
Acquisitions	3,398			—
Reclassification from nonaccretable difference for loans with improved cash flows	2,257			—
Reclassification from non-accretable difference for loans with (decreased) improved cash flows						(126		)	1,985
Accretion	(998		)	—		(581		)	(315		)
Balance at end of period	$	4,657		$	—	$	3,488		$	4,477

						Nine Months Ended September 30,
(in thousands)						2019			2018
Balance at beginning of period						$	4,377		$	3,509
Reclassification from non-accretable difference for loans with improved cash flows						498			2,031
Accretion						(1,387		)	(1,063		)
Balance at end of period						$	3,488		$	4,477

The following is a summary of past due loans at September 30, ~~2017~~2019 and December 31, ~~2016:~~2018:

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
September 30, 2019
Commercial real estate:
Construction and land development	$	—	$	—	$	73	$	73	$	28,729	$	28,802	$	73
Other commercial real estate	985		56		6,773		7,814		665,071		672,885		—
Total commercial real estate	985		56		6,846		7,887		693,800		701,687		73

Commercial and industrial:
Commercial	772		64		1,145		1,981		237,913		239,894		—
Agricultural	121		72		25		218		20,988		21,206		—
Tax exempt	—		—		—		—		66,043		66,043		—
Total commercial and industrial	893		136		1,170		2,199		324,944		327,143		—

Total commercial loans	1,878		192		8,016		10,086		1,018,744		1,028,830		73

Residential real estate:
Residential mortgages	399		345		871		1,615		728,901		730,516		71
Total residential real estate	399		345		871		1,615		728,901		730,516		71

Consumer:
Home equity	131		65		315		511		58,045		58,556		—
Other consumer	2		7		—		9		10,225		10,234		—
Total consumer	133		72		315		520		68,270		68,790		—

Total loans	$	2,410	$	609	$	9,202	$	12,221	$	1,815,915	$	1,828,136	$	144

Acquired 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
September 30, 2017

Commercial Real Estate:

Construction and land development $ —
$ —
$ 637
$ 637
$ 33,055
$ 33,692
$ —
Other commercial real estate 407
121
702
1,230
454,617
455,847
—
Total Commercial Real Estate: 407
121
1,339
1,867
487,672
489,539
—

Commercial and Industrial:
Other Commercial 401
150
159
710
171,476
172,186
—
Agricultural and other loans to farmers 600
90
10
700
29,783
30,483
—
Tax exempt —
—
—
—
40,776
40,776
—
Total Commercial and Industrial: 1,001
240
169
1,410
242,035
243,445
—

Total Commercial Loans: 1,408
361
1,508
3,277
729,707
732,984
—

Residential Real Estate:
Residential mortgages 2,904
172
1,260
4,336
563,941
568,277
—
Total Residential Real Estate: 2,904
172
1,260
4,336
563,941
568,277
—

Consumer:
Home equity 306
25
100
431
50,179
50,610
—
Other consumer 60
21
26
107
7,538
7,645
—
Total Consumer: 366
46
126
538
57,717
58,255
—
—
Total Loans: $ 4,678
$ 579
$ 2,894
$ 8,151
$ 1,351,365
$ 1,359,516
$ —



(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
September 30, 2019
Commercial real estate:
Construction and land development	$	12	$	—	$	—	$	12	$	190	$	2,064	$	—
Other commercial real estate	434		—		240		674		4,859		220,022		72
Total commercial real estate	446		—		240		686		5,049		222,086		72

Commercial and industrial:
Commercial	—		41		750		791		249		40,490		387
Agricultural	—		—		—		—		—		—		—
Tax exempt	—		—		—		—		—		35,073		—
Total commercial and industrial	—		41		750		791		249		75,563		387

Total commercial loans	446		41		990		1,477		5,298		297,649		459

Residential real estate:
Residential mortgages	245		519		874		1,638		3,093		412,936		47
Total residential real estate	245		519		874		1,638		3,093		412,936		47

Consumer:
Home equity	356		133		180		669		19		37,600		37
Other consumer	—		—		—		—		—		985		—
Total consumer	356		133		180		669		19		38,585		37

Total loans	$	1,047	$	693	$	2,044	$	3,784	$	8,410	$	749,170	$	543

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
$ —



(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, 2018
Commercial real estate:
Construction and land development	$	—	$	—	$	—	$	—	$	23,754	$	23,754	$	—
Other commercial real estate	1,146		—		6,725		7,871		548,109		555,980		—
Total commercial real estate	1,146		—		6,725		7,871		571,863		579,734		—

Commercial and industrial:
Commercial	395		60		402		857		233,900		234,757		50
Agricultural	65		6		25		96		22,221		22,317		—
Tax exempt	—		—		—		—		56,588		56,588		—
Total commercial and industrial	460		66		427		953		312,709		313,662		50

Total commercial loans	1,606		66		7,152		8,824		884,572		893,396		50

Residential real estate:
Residential mortgages	3,565		641		1,309		5,515		664,674		670,189		—
Total residential real estate	3,565		641		1,309		5,515		664,674		670,189		—

Consumer:
Home equity	72		—		—		72		57,826		57,898		—
Other consumer	17		—		11		28		9,386		9,414		—
Total consumer	89		—		11		100		67,212		67,312		—

Total loans	$	5,260	$	707	$	8,472	$	14,439	$	1,616,458	$	1,630,897	$	50

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
September 30, 2017

Commercial Real Estate:

Construction and land development $ 20
$ 10
$ —
$ 30
$ 258
$ 15,593
$ —
Other commercial real estate 314
25
591
930
9,760
288,440
—
Total Commercial Real Estate: 334
35
591
960
10,018
304,033
—

Commercial and Industrial:
Other Commercial 396
144
—
540
917
68,090
163
Agricultural and other loans to farmers —
—
—
—
—
—
—
Tax exempt —
—
—
—
—
45,537
—
Total Commercial and Industrial: 396
144
—
540
917
113,627
163

Total Commercial Loans: 730
179
591
1,500
10,935
417,660
163

Residential Real Estate:
Residential mortgages 1,089
13
868
1,970
3,398
584,351
—
Total Residential Real Estate: 1,089
13
868
1,970
3,398
584,351
—

Consumer:
Home equity 388
155
193
736
40
64,695
—
Other consumer 12
144
49
205
3
2,640
—
Total Consumer: 400
299
242
941
43
67,335
—
—
Total Loans: $ 2,219
$ 491
$ 1,701
$ 4,411
$ 14,376
$ 1,069,346
$ 163



(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, 2018
Commercial real estate:
Construction and land development	$	—	$	—	$	—	$	—	$	164	$	2,890	$	—
Other commercial real estate	631		99		211		941		6,143		244,075		—
Total commercial real estate	631		99		211		941		6,307		246,965		—

Commercial and industrial:
Commercial	149		26		494		669		679		52,470		—
Agricultural	—		—		—		—		—		—		—
Tax exempt	—		—		—		—		—		38,738		—
Total commercial and industrial	149		26		494		669		679		91,208		—

Total commercial loans	780		125		705		1,610		6,986		338,173		—

Residential real estate:
Residential mortgages	3,419		254		1,792		5,465		3,095		474,509		—
Total residential real estate	3,419		254		1,792		5,465		3,095		474,509		—

Consumer:
Home equity	198		—		66		264		22		45,291		7
Other consumer	17		—		—		17		3		1,357		189
Total consumer	215		—		66		281		25		46,648		196

Total loans	$	4,414	$	379	$	2,563	$	7,356	$	10,106	$	859,330	$	196

~~Non Accrual~~Non-Accrual Loans

The following is summary information pertaining to non-accrual loans at September 30, ~~2017~~2019 and December 31, ~~2016:~~

2018:

September 30, 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 1,238
591
1,829
2,564
—
2,564
Total Commercial Real Estate: 1,875
591
2,466
2,564
—
2,564

Commercial and Industrial:
Other Commercial 183
—
183
284
—
284
Agricultural and other loans to farmers 53
—
53
31
—
31
Tax exempt —
—
—
—
—
—
Total Commercial and Industrial: 236
—
236
315
—
315

Total Commercial Loans: 2,111
591
2,702
2,879
—
2,879

Residential Real Estate:
Residential mortgages 2,751
868
3,619
3,419
—
3,419
Total Residential Real Estate: 2,751
868
3,619
3,419
—
3,419

Consumer:
Home equity 151
193
344
90
—
90
Other consumer 103
49
152
108
—
108
Total Consumer: 254
242
496
198
—
198

Total Loans: $ 5,116
$ 1,701
$ 6,817
$ 6,496
$ —
$ 6,496



	September 30, 2019						December 31, 2018
(in thousands)	Business Activities Loans		Acquired Loans		Total		Business Activities Loans		Acquired Loans		Total
Commercial real estate:
Construction and land development	$	1	$	—	$	1	$	1	$	—	$	1
Other commercial real estate	8,172		346		8,518		7,873		282		8,155
Total commercial real estate	8,173		346		8,519		7,874		282		8,156

Commercial and industrial:
Commercial	1,268		575		1,843		1,423		643		2,066
Agricultural	234		—		234		265		—		265
Tax exempt	—		—		—		—		—		—
Total commercial and industrial	1,502		575		2,077		1,688		643		2,331

Total commercial loans	9,675		921		10,596		9,562		925		10,487

Residential real estate:
Residential mortgages	3,277		2,063		5,340		4,213		2,997		7,210
Total residential real estate	3,277		2,063		5,340		4,213		2,997		7,210

Consumer:
Home equity	564		154		718		246		201		447
Other consumer	25		—		25		90		1		91
Total consumer	589		154		743		336		202		538

Total loans	$	13,541	$	3,138	$	16,679	$	14,111	$	4,124	$	18,235

Loans evaluated for impairment as of September 30, ~~2017~~2019 and December 31, ~~2016 were~~2018 are, as follows:

Business Activities Loans


(In thousands)	Commercial real estate		Commercial and industrial		Residential real estate		Consumer		Total
September 30, 2017
Loans receivable:
(in thousands)											Commercial real estate		Commercial and industrial		Residential real estate		Consumer		Total
September 30, 2019
Balance at end of period
Individually evaluated for impairment	$	2,585	$	138	$	1,744	$	68	$	4,535	$	8,759	$	1,323	$	2,643	$	13	$	12,738
Collectively evaluated	486,954		243,307		566,533		58,187		1,354,981		692,928		325,820		727,873		68,777		1,815,398
Total	$	489,539	$	243,445	$	568,277	$	58,255	$	1,359,516	$	701,687	$	327,143	$	730,516	$	68,790	$	1,828,136

Acquired Loans



(in thousands)	Commercial real estate		Commercial and industrial		Residential real estate		Consumer		Total
September 30, 2019
Balance at end of period
Individually evaluated for impairment	$	257	$	414	$	973	$	—	$	1,644
Purchased credit impaired	5,049		249		3,093		19		8,410
Collectively evaluated	216,780		74,900		408,870		38,566		739,116
Total	$	222,086	$	75,563	$	412,936	$	38,585	$	749,170

Business Activities Loans


(In thousands)	Commercial real estate		Commercial and industrial		Residential real estate		Consumer		Total
December 31, 2016
Loans receivable:
(in thousands)											Commercial real estate		Commercial and industrial		Residential real estate		Consumer		Total
December 31, 2018
Balance at end of period
Individually evaluated for impairment	$	4,481	$	486	$	1,709	$	33	$	6,709	$	9,835	$	1,445	$	2,562	$	13	$	13,855
Collectively evaluated	413,638		150,754		504,903		53,060		1,122,355		569,899		312,217		667,627		67,299		1,617,042
Total	$	418,119	$	151,240	$	506,612	$	53,093	$	1,129,064	$	579,734	$	313,662	$	670,189	$	67,312	$	1,630,897

Acquired Loans


(In thousands)	Commercial real estate		Commercial and industrial		Residential real estate		Consumer		Total
September 30, 2017
Loans receivable:
(in thousands)											Commercial real estate		Commercial and industrial		Residential real estate		Consumer		Total
December 31, 2018
Balance at end of period
Individually evaluated for impairment	$	408	$	470	$	271	$	156	$	1,305	$	188	$	426	$	744	$	—	$	1,358
Purchased Credit Impaired	10,018		917		3,398		43		14,376
Purchased credit impaired											6,307		679		3,095		25		10,106
Collectively evaluated	293,607		112,240		580,682		67,136		1,053,665		240,470		90,103		470,670		46,623		847,866
Total	$	304,033	$	113,627	$	584,351	$	67,335	$	1,069,346	$	246,965	$	91,208	$	474,509	$	46,648	$	859,330

The following is a summary of impaired loans at September 30, ~~2017~~2019 and December 31, ~~2016:~~2018:

Business Activities Loans


	September 30, 2017						September 30, 2019
(In thousands)	Recorded Investment		Unpaid Principal Balance		Related Allowance
(in thousands)							Recorded Investment		Unpaid Principal Balance		Related Allowance
With no related allowance:
Construction and land development	$	—	$	—	$	—	$	—	$	—	$	—
Commercial real estate other	1,198		1,175		—
Commercial other	96		97		—
Agricultural and other loans to farmers	—		—		—
Other commercial real estate							5,634		5,675		—
Commercial							657		713		—
Agricultural							—		—		—
Tax exempt loans	—		—		—		—		—		—
Residential real estate	1,257		1,267		—		2,082		2,236		—
Home equity	13		13		—		—		—		—
Consumer other	—		—		—
Other consumer							—		—		—

With an allowance recorded:
Construction and land development	$	637	$	2,563	$	59	$	1	$	1	$	1
Commercial real estate other	750		808		331
Commercial other	42		42		2
Agricultural and other loans to farmers	—		—		—
Other commercial real estate							3,124		3,262		989
Commercial							666		694		240
Agricultural							—		—		—
Tax exempt loans	—		—		—		—		—		—
Residential real estate	487		487		44		561		594		66
Home equity	55		55		55		13		13		1
Consumer other	—		—		—
Other consumer							—		—		—

Total
Commercial real estate	$	2,585	$	4,546	$	390	$	8,759	$	8,938	$	990
Commercial and industrial	138		139		2		1,323		1,407		240
Residential real estate	1,744		1,754		44		2,643		2,830		66
Consumer	68		68		55		13		13		1
Total impaired loans	$	4,535	$	6,507	$	491	$	12,738	$	13,188	$	1,297

Acquired Loans


	September 30, 2017						September 30, 2019
(In thousands)	Recorded Investment		Unpaid Principal Balance		Related Allowance
(in thousands)							Recorded Investment		Unpaid Principal Balance		Related Allowance
With no related allowance:
Construction and land development	$	—	$	—	$	—	$	—	$	—	$	—
Commercial real estate other	108		107		—
Commercial other	470		483		—
Agricultural and other loans to farmers	—		—		—
Other commercial real estate							90		90		—
Commercial							414		508		—
Agricultural							—		—		—
Tax exempt loans	—		—		—		—		—		—
Residential real estate	271		278		—		616		852		—
Home equity	156		156		—		—		—		—
Consumer other	—		—		—
Other consumer							—		—		—

With an allowance recorded:
Construction and land development	$	—	$	—	$	—	$	—	$	—	$	—
Commercial real estate other	300		302		168
Commercial other	—		—		—
Agricultural and other loans to farmers	—		—		—
Other commercial real estate							167		168		12
Commercial							—		—		—
Agricultural							—		—		—
Tax exempt loans	—		—		—		—		—		—
Residential real estate	—		—		—		357		376		32
Home equity	—		—		—		—		—		—
Consumer other	—		—		—
Other consumer							—		—		—

Total
Commercial real estate	$	408	$	409	$	168	$	257	$	258	$	12
Commercial and industrial	470		483		—		414		508		—
Residential real estate	271		278		—		973		1,228		32
Consumer	156		156		—		—		—		—
Total impaired loans	$	1,305	$	1,326	$	168	$	1,644	$	1,994	$	44

Business Activities Loans


	December 31, 2016						December 31, 2018
(In thousands)	Recorded Investment		Unpaid Principal Balance		Related Allowance
(in thousands)							Recorded Investment		Unpaid Principal Balance		Related Allowance
With no related allowance:
Construction and land development	$	—	$	—	$	—	$	—	$	—	$	—
Commercial real estate other	2,831		2,919		—
Commercial other	130		130		—
Agricultural and other loans to farmers	139		139		—
Other commercial real estate							8,209		8,301		—
Commercial							649		669		—
Agricultural							—		—		—
Tax exempt loans	—		—		—		—		—		—
Residential real estate	1,387		1,504		—		1,671		1,709		—
Home equity	16		16		—		—		—		—
Consumer other	2		2		—
Other consumer							—		—		—

With an allowance recorded:
Construction and land development	$	—	$	—	$	—	$	1	$	1	$	1
Commercial real estate other	1,650		3,575		193
Commercial other	217		367		173
Agricultural and other loans to farmers	—		—		—
Other commercial real estate							1,625		1,660		421
Commercial							796		855		78
Agricultural							—		—		—
Tax exempt loans	—		—		—		—		—		—
Residential real estate	322		322		49		891		916		111
Home equity	—		—		—		13		13		—
Consumer other	15		15		9
Other consumer							—		—		—

Total
Commercial real estate	$	4,481	$	6,494	$	193	$	9,835	$	9,962	$	422
Commercial and industrial	486		636		173		1,445		1,524		78
Residential real estate	1,709		1,826		49		2,562		2,625		111
Consumer	33		33		9		13		13		—
Total impaired loans	$	6,709	$	8,989	$	424	$	13,855	$	14,124	$	611

Acquired Loans



	December 31, 2018
(in thousands)	Recorded Investment		Unpaid Principal Balance		Related Allowance
With no related allowance:
Construction and land development	$	—	$	—	$	—
Other commercial real estate	188		187		—
Commercial	426		510		—
Agricultural	—		—		—
Tax exempt	—		—		—
Residential mortgages	375		524		—
Home equity	—		—		—
Other consumer	—		—		—

With an allowance recorded:
Construction and land development	$	—	$	—	$	—
Other commercial real estate	—		—		—
Commercial	—		—		—
Agricultural	—		—		—
Tax exempt	—		—		—
Residential mortgages	369		379		41
Home equity	—		—		—
Other consumer	—		—		—

Total
Commercial real estate	$	188	$	187	$	—
Commercial and industrial	426		510		—
Residential real estate	744		903		41
Consumer	—		—		—
Total impaired loans	$	1,358	$	1,600	$	41

The following is a summary of the average recorded investment and interest income recognized on impaired loans ~~as of~~for the three and nine months ended September 30, ~~2017~~2019 and ~~2016:~~2018:

Business Activities ~~Loan~~Loans


	Nine Months Ended September 30, 2017				Nine Months Ended September 30, 2016				Three Months Ended September 30, 2019				Three Months Ended September 30, 2018
(in thousands)	Average Recorded Investment		Cash Basis Interest Income Recognized		Average Recorded Investment		Cash Basis Interest Income Recognized		Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
With no related allowance:
Construction and land development	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Commercial real estate other	1,716		64		2,713		131
Commercial other	99		6		141		2
Agricultural and other loans to farmers	8		1		131		8
Other commercial real estate									5,528		52		6,639		31
Commercial									747		4		625		2
Agricultural									—		—		—		—
Tax exempt loans	—		—		—		—		—		—		—		—
Residential real estate	1,245		31		1,344		55		2,041		16		3,955		9
Home equity	13		—		17		1		—		—		158		—
Consumer other	5		2		—		1
Other consumer									—		—		—		—

With an allowance recorded:
Construction and land development	$	637	$	—	$	928	$	—	$	1	$	—	$	1	$	—
Commercial real estate other	693		—		551		—
Commercial other	44		1		221		—
Agricultural and other loans to farmers	—		—		—		—
Other commercial real estate									3,217		—		2,214		—
Commercial									654		—		788		—
Agricultural									—		—		—		—
Tax exempt loans	—		—		—		—		—		—		—		—
Residential real estate	268		5		331		—		551		2		888		3
Home equity	12		—		—		—		12		—		13		—
Consumer other	—		—		17		—
Other consumer									—		—		—		—

Total
Commercial real estate	$	3,046	$	64	$	4,192	$	131	$	8,746	$	52	$	8,854	$	31
Commercial and industrial	151		8		493		10		1,401		4		1,413		2
Residential real estate	1,513		36		1,675		55		2,592		18		4,843		12
Consumer	30		2		34		2		12		—		171		—
Total impaired loans	$	4,740	$	110	$	6,394	$	198	$	12,751	$	74	$	15,281	$	45



	Nine Months Ended September 30, 2019				Nine Months Ended September 30, 2018
(in thousands)	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
With no related allowance:
Construction and land development	$	—	$	—	$	—	$	—
Other commercial real estate	5,466		56		6,204		46
Commercial	792		7		628		7
Agricultural	—		—		—		—
Tax exempt loans	—		—		—		—
Residential real estate	2,089		47		4,027		28
Home equity	—		—		236		—
Other consumer	—		—		—		—

With an allowance recorded:
Construction and land development	$	2	$	—	$	1	$	—
Other commercial real estate	2,972		29		1,600		6
Commercial	497		—		716		—
Agricultural	—		—		—		—
Tax exempt loans	—		—		—		—
Residential real estate	540		7		800		7
Home equity	13		—		13		—
Other consumer	—		—		—		—

Total
Commercial real estate	$	8,440	$	85	$	7,805	$	52
Commercial and industrial	1,289		7		1,344		7
Residential real estate	2,629		54		4,827		35
Consumer	13		—		249		—
Total impaired loans	$	12,371	$	146	$	14,225	$	94

Acquired Loans


	Nine Months Ended September 30, 2017				Nine Months Ended September 30, 2016				Three Months Ended September 30, 2019				Three Months Ended September 30, 2018
(in thousands)	Average Recorded Investment		Cash Basis Interest Income Recognized		Average Recorded Investment		Cash Basis Interest Income Recognized		Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
With no related allowance:
Construction and land development	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Commercial real estate other	89		—		—		—
Commercial other	171		—		—		—
Agricultural and other loans to farmers	—		—		—		—
Other commercial real estate									88		—		95		—
Commercial									395		—		469		—
Agricultural									—		—		—		—
Tax exempt loans	—		—		—		—		—		—		—		—
Residential real estate	254		1		—		—		702		—		276		—
Home equity	47		—		—		—		—		—		—		—
Consumer other	9		—		—		—
Other consumer									—		—		—		—

With an allowance recorded:
Construction and land development	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Commercial real estate other	46		—		—		—
Commercial other	—		—		—		—
Agricultural and other loans to farmers	—		—		—		—
Other commercial real estate									165		—		—		—
Commercial									—		—		—		—
Agricultural									—		—		—		—
Tax exempt loans	—		—		—		—		—		—		—		—
Residential real estate	—		—		—		—		352		—		181		—
Home equity	—		—		—		—		—		—		—		—
Consumer other	—		—		—		—
Other consumer									—		—		—		—

Total
Commercial real estate	$	135	$	—	$	—	$	—	$	253	$	—	$	95	$	—
Commercial and industrial	171		—		—		—		395		—		469		—
Residential real estate	254		1		—		—		1,054		—		457		—
Consumer	56		—		—		—		—		—		—		—
Total impaired loans	$	616	$	1	$	—	$	—	$	1,702	$	—	$	1,021	$	—



	Nine Months Ended September 30, 2019				Nine Months Ended September 30, 2018
(in thousands)	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
With no related allowance:
Construction and land development	$	—	$	—	$	—	$	—
Other commercial real estate	89		—		97		1
Commercial	429		—		445		1
Agricultural	—		—		—		—
Tax exempt loans	—		—		—		—
Residential real estate	593		—		124		—
Home equity	—		—		—		—
Other consumer	—		—		—		—

With an allowance recorded:
Construction and land development	$	—	$	—	$	—	$	—
Other commercial real estate	123		—		—		—
Commercial	—		—		—		—
Agricultural	—		—		—		—
Tax exempt loans	—		—		—		—
Residential real estate	361		—		186		—
Home equity	—		—		—		—
Other consumer	—		—		—		—

Total
Commercial real estate	$	212	$	—	$	97	$	1
Commercial and industrial	429		—		445		1
Residential real estate	954		—		310		—
Consumer	—		—		—		—
Total impaired loans	$	1,595	$	—	$	852	$	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 result from the Company’s loss mitigation activities and could include reductions in the interest rate, payment extensions, forgiveness of principal, forbearance, or other actions. Certain TDRs are classified as ~~nonperforming~~non-performing at the time of restructure and may only be returned to performing status after considering the borrower’s sustained repayment performance for a reasonable period, generally six months. TDRs are evaluated individually for impairment and may result in a specific allowance amount allocated to an individual loan.

The following tables include the recorded investment and number of modifications identified during the three and nine months ended September 30, ~~2017~~2019 and ~~for the three and nine months ended September 30, 2016,~~2018, 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 three and nine months ended September 30, 2017 were attributable~~Modifications may include adjustments to interest ~~rate~~rates, payment amounts, extensions of maturity, court ordered concessions ~~maturity date extensions, reamortization~~ or ~~a combination~~other actions intended to minimize economic loss and avoid foreclosure or repossession of ~~two concessions. The modifications for the three and nine months ending September 30, 2016 were attributable to interest rate concessions, maturity date extensions or a combination of both.~~collateral.

Three Months Ended September 30, 2017
(Dollars in thousands)
Number of
Modifications

Pre-Modification
Outstanding Recorded
Investment

Post-Modification
Outstanding Recorded
Investment
Troubled Debt Restructurings

Commercial installment 5
$ 483
$ 483
Agricultural and other loans to farmers —
—
—
Commercial real estate 4
144
144
Residential real estate —
—
—
Home equity —
—
—
Consumer other —
—
—
Total 9
$ 627
$ 627

Three Months Ended September 30, 2016
(Dollars in thousands)
Number of
Modifications

Pre-Modification
Outstanding Recorded
Investment

Post-Modification
Outstanding Recorded
Investment
Troubled Debt Restructurings
Commercial installment 2
$ 51
$ 51
Commercial real estate 2
936
915
Consumer other 1
9
9
Total 5
$ 996
$ 975



	Three Months Ended September 30, 2019
(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	$	268	$	267
Agricultural	1	141		141
Residential mortgages	2	399		342
Total	7	$	808	$	750


	Three Months Ended September 30, 2018
(in thousands, except modifications)	Number of Modifications	Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment
Troubled Debt Restructurings
Construction and land development	1	$	2	$	1
Other commercial real estate	1	72		72
Commercial	5	104		60
Residential mortgages	2	228		225
Total	9	$	406	$	358


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

Nine Months Ended September 30, 2017
(Dollars in thousands)
Number of
Modifications

Pre-Modification
Outstanding Recorded
Investment

Post-Modification
Outstanding Recorded
Investment
Troubled Debt Restructurings

Commercial installment 6
$ 563
$ 549
Agricultural and other loans to farmers 1
19
18
Commercial real estate 6
388
333
Residential real estate 3
692
675
Home equity 1
13
13
Consumer other 1
38
37
Total 18
$ 1,713
$ 1,625



	Nine Months Ended September 30, 2018
(in thousands)	Number of Modifications	Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment
Troubled Debt Restructurings
Construction and land development	1	$	2	$	1
Other commercial real estate	9	1,896		1,564
Other commercial	7	556		486
Agricultural	1	167		—
Residential mortgages	15	2,752		2,168
Home equity	1	100		100
Other consumer	2	5		4
Total	36	$	5,478	$	4,323

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

Nine Months Ended September 30, 2016
(Dollars in thousands)
Number of
Modifications

Pre-Modification
Outstanding Recorded
Investment

Post-Modification
Outstanding Recorded
Investment
Troubled Debt Restructurings
Commercial installment 2
$ 51
$ 51
Agricultural and other loans to farmers 2
30
24
Commercial real estate 5
1,361
1,326
Consumer Other 1
9
9
Total 10
$ 1,451
$ 1,410



	Three Months Ended September 30,
	2019			2018
(in thousands, except modifications)	Number of Modifications	Post-Modification Outstanding Recorded Investment		Number of Modifications	Post-Modification Outstanding Recorded Investment
Interest only payments	2	$	90	—	$	—
Forbearance	1	141		1	115
Forbearance and interest only payments	2	176		3	72
Forbearance and maturity concession	—	—		4	143
Forbearance, amortization and maturity concession	2	343		—	—
Maturity concession	—	—		1	28
Total	7	$	750	9	$	358


	Nine Months Ended September 30,
	2019			2018
(in thousands, except modifications)	Number of Modifications	Post-Modification Outstanding Recorded Investment		Number of Modifications	Post-Modification Outstanding Recorded Investment
Interest rate and maturity concession	—	$	—	1	$	16
Interest only payments	2	90		—	—
Interest only payments and maturity concession	2	73		—	—
Amortization and maturity concession	4	273		—	—
Amortization, interest rate and maturity concession	1	77		—	—
Forbearance	3	253		3	271
Forbearance and interest only payments	5	331		6	121
Forbearance and maturity concession	—	—		17	1,774
Forbearance, amortization and maturity concession	7	640		—	—
Maturity concession	—	—		2	440
Restructure with maturity concession	—	—		5	1,419
Other	1	58		2	282
Total	25	$	1,795	36	$	4,323

For the three and nine months ended September 30, ~~2017,~~2019, 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.

Foreclosure

As of September 30, ~~2017,~~2019 and December 31, 2018, the Company maintained ~~foreclosed~~bank-owned residential real estate property with a fair value of ~~$122 thousand.~~$2.5 million. Additionally, residential mortgage loans collateralized by real estate property that are in the process of foreclosure as of September 30, ~~2017~~2019 and December 31, ~~2016~~2018 totaled ~~$772~~$931 thousand and ~~$2.4~~$1.5 million, respectively. As

Mortgage Banking

Total residential loans included held for sale loans of $4.0 million and $168 thousand at September 30, 2019 and December 31, ~~2016, foreclosed~~2018, respectively.

NOTE 4. ALLOWANCE FOR LOAN LOSSES

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

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

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

Specific Reserve for Loans Individually Evaluated

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

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

Quantitative Reserve for Loans Collectively Evaluated

Second, the Company stratifies the loan portfolio into two general business loan pools: substandard (7 risk-rated) and pass-rated (0 to 6 risk-rated) by loan type. Substandard rated loans are subject to higher credit loss rates in the allowance for loan loss calculation. The Company utilizes historical loss rates for commercial real estate and commercial and industrial loans assessed by internal risk rating. Historical loss rates on residential real estate ~~property totaled $90 thousand.~~and consumer loans are not risk graded. Residential real estate and consumer loans are considered as part of the pass-rated portfolio unless removed due to specific reserve evaluation based on past due status and/or other indications of credit deterioration. Quantitative reserves relative to each loan pool are established as follows: for all loan segments an allocation equaling 100% of the respective pool's average 3-year historical net loan charge-off rate (determined based upon the most recent 12 quarters) is applied to the aggregate recorded investment in the pool of loans. Purchased performing loans are collectively evaluated as their own separate category within each loan pool.

Qualitative Reserve for Loans Collectively Evaluated

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

Loss Emergence Period for Loans Collectively Evaluated

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

Activity in the allowance for loan losses for the three and nine months ended September 30, ~~2017~~2019 and ~~2016 was~~2018 are, as follows:


Business Activities Loans	At or for the Nine Months Ended September 30, 2017															At or for the Three Months Ended September 30, 2019
(In thousands)	Commercial real estate			Commercial and industrial			Residential real estate			Consumer			Total
(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		$	7,206		$	2,748		$	3,942		$	394		$	14,290
Charged-off loans	(124		)	(189		)	(226		)	(87		)	(626		)	—			—			(108		)	(55		)	(163		)
Recoveries on charged-off loans	9			7			65			7			88			1			62			36			1			100
Provision/(releases) for loan losses	310			405			941			40			1,696
(Releases) provision for loan losses																956			63			(111		)	(94		)	814
Balance at end of period	$	5,340		$	2,175		$	3,501		$	561		$	11,577		$	8,163		$	2,873		$	3,759		$	246		$	15,041
Individually evaluated for impairment	391			2			44			55			492			990			240			66			1			1,297
Collectively evaluated	4,949			2,173			3,457			506			11,085			7,173			2,633			3,693			245			13,744
Total	$	5,340		$	2,175		$	3,501		$	561		$	11,577		$	8,163		$	2,873		$	3,759		$	246		$	15,041


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


Business Activities Loans	At or for the Nine Months Ended September 30, 2016															At or for the Nine Months Ended September 30, 2019
(In thousands)	Commercial real estate			Commercial and industrial			Residential real estate			Consumer			Total
(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		$	6,811		$	2,380		$	3,982		$	408		$	13,581
Charged-off loans	(133		)	(90		)	(141		)	(19		)	(383		)	(57		)	(13		)	(110		)	(129		)	(309		)
Recoveries on charged-off loans	35			200			36			22			293			131			62			55			8			256
Provision/(releases) for loan losses	719			39			38			(42		)	754
(Releases) provision for loan losses																1,278			444			(168		)	(41		)	1,513
Balance at end of period	$	5,051		$	1,739		$	2,680		$	633		$	10,103		$	8,163		$	2,873		$	3,759		$	246		$	15,041
Individually evaluated for impairment	100			174			87			10			371			990			240			66			1			1,297
Collectively evaluated	4,951			1,565			2,593			623			9,732			7,173			2,633			3,693			245			13,744
Total	$	5,051		$	1,739		$	2,680		$	633		$	10,103		$	8,163		$	2,873		$	3,759		$	246		$	15,041


Acquired Loans	At or for the Nine Months Ended September 30, 2017															At or for the Nine Months Ended September 30, 2019
(In thousands)	Commercial real estate			Commercial and industrial			Residential real estate			Consumer			Total
(in thousands)																Commercial real estate			Commercial and industrial			Residential real estate			Consumer			Total
Balance at beginning of period	$	—		$	—		$	—		$	—		$	—		$	173		$	35		$	77		$	—		$	285
Charged-off loans	(54		)	(18		)	(31		)	(19		)	(122		)	—			(15		)	(222		)	(5		)	(242		)
Recoveries on charged-off loans	—			—			—			—			—			—			—			—			3			3
Provision/(releases) for loan losses	360			49			67			19			495
(Releases) provision for loan losses																(16		)	(13		)	293			2			266
Balance at end of period	$	306		$	31		$	36		$	—		$	373		$	157		$	7		$	148		$	—		$	312
Individually evaluated for impairment	168			—			—			—			168			12			—			32			—			44
Collectively evaluated	138			31			36			—			205			145			7			116			—			268
Total	$	306		$	31		$	36		$	—		$	373		$	157		$	7		$	148		$	—		$	312

~~There were no loans meeting the definition of acquired for the nine month period ending September 30, 2016.~~



Business Activities Loans	At or for the Three Months Ended September 30, 2018
(in thousands)	Commercial real estate			Commercial and industrial			Residential real estate			Consumer			Total
Balance at beginning of period	$	6,367		$	2,509		$	3,454		$	393		$	12,723
Charged-off loans	(29		)	—			(61		)	(40		)	(130		)
Recoveries on charged-off loans	7			18			—			2			27
Provision (releases) for loan losses	291			(31		)	258			66			584
Balance at end of period	$	6,636		$	2,496		$	3,651		$	421		$	13,204
Individually evaluated for impairment	688			62			92			—			842
Collectively evaluated	5,948			2,434			3,559			421			12,362
Total	$	6,636		$	2,496		$	3,651		$	421		$	13,204


Acquired Loans	At or for the Three Months Ended September 30, 2018
(in thousands)	Commercial real estate			Commercial and industrial			Residential real estate			Consumer			Total
Balance at beginning of period	$	200		$	82		$	85		$	—		$	367
Charged-off loans	(30		)	(71		)	(62		)	(5		)	(168		)
Recoveries on charged-off loans	25			—			—			—			25
Provision (releases) for loan losses	(23		)	33			44			5			59
Balance at end of period	$	172		$	44		$	67		$	—		$	283
Individually evaluated for impairment	—			—			20			—			20
Collectively evaluated	172			44			47			—			263
Total	$	172		$	44		$	67		$	—		$	283



Business Activities Loans	At or for the Nine Months Ended September 30, 2018
(in thousands)	Commercial real estate			Commercial and industrial			Residential real estate			Consumer			Total
Balance at beginning of period	$	6,037		$	2,373		$	3,357		$	386		$	12,153
Charged-off loans	(186		)	(111		)	(61		)	(426		)	(784		)
Recoveries on charged-off loans	68			23			2			5			98
Provision for loan losses	717			211			353			456			1,737
Balance at end of period	$	6,636		$	2,496		$	3,651		$	421		$	13,204
Individually evaluated for impairment	688			62			92			—			842
Collectively evaluated	5,948			2,434			3,559			421			12,362
Total	$	6,636		$	2,496		$	3,651		$	421		$	13,204



Acquired Loans	At or for the Nine Months Ended September 30, 2018
(in thousands)	Commercial real estate			Commercial and industrial			Residential real estate			Consumer			Total
Balance at beginning of period	$	97		$	16		$	59		$	—		$	172
Charged-off loans	(136		)	(166		)	(126		)	(64		)	(492		)
Recoveries on charged-off loans	43			7			—			82			132
Provision (releases) for loan losses	168			187			134			(18		)	471
Balance at end of period	$	172		$	44		$	67		$	—		$	283
Individually evaluated for impairment	—			—			20			—			20
Collectively evaluated	172			44			47			—			263
Total	$	172		$	44		$	67		$	—		$	283

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

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

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

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

Special ~~mention:~~Mention: Loans ~~that do~~the Company considers having some potential weaknesses, but are deemed to not ~~expose the Bank to~~carry levels of risk ~~sufficient to warrant classification~~inherent in one of the subsequent 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~~require a higher level of supervision or internal reporting because of: (i) ~~lack~~declining industry trends; (ii) increasing reliance on secondary sources of ~~expertise, inadequate loan agreement; (ii)~~repayment; (iii) the poor condition of or lack of control

over collateral; or ~~(iii)~~(iv) failure to obtain proper documentation or any other deviations from prudent lending practices. Economic or market conditions which may, in the future, affect the obligor may warrant special mention of the asset. Loans for which an adverse trend in the borrower's operations or an imbalanced position in the balance sheet which has not reached a point where the liquidation is jeopardized may be included in this classification. Special mention loans are not adversely classified and do not expose the ~~Bank~~Company to sufficient risks to warrant classification.

Substandard: ~~The Bank~~Loans theCompany considers ~~a loan~~as substandard ~~if it is~~are inadequately protected by the current net worth and paying

capacity of the borrower or of the collateral pledged, if any. Substandard loans have a well-defined weakness that jeopardizes liquidation of the debt. Substandard loans include those loans where there is the distinct possibility of some loss of principal, if the deficiencies are not corrected.

Doubtful: Loans ~~that~~ the ~~Bank classifies~~Company considers as doubtful have all of the weaknesses inherent in those loans that are classified as ~~substandard but also~~substandard. These loans have the added characteristic ~~that~~of a well-defined weakness which is inadequately protected by the ~~weaknesses present make collection~~current sound worth and paying capacity of borrower or ~~liquidation in~~of the collateral pledged, if any, and calls into question the collectability of the full onbalance of the ~~basis of currently existing facts, conditions, and values, highly questionable and improbable.~~loan. The possibility of loss is high but because of certain important and reasonably specific pending factors which may work to the advantage and strengthening of the loan, its classification as loss is deferred until its more exact status is determined. Pending factors include proposed merger, acquisition, or liquidation procedures, capital injection, perfecting liens on additional collateral and refinancing plans. The entire amount of the loan might not be classified as doubtful when collection of a specific portion appears highly probable. Loans are generally not classified doubtful for an extended period of time (i.e., over a year).

Loss: Loans ~~that~~ the ~~Bank classifies~~Company considers as losses are those considered uncollectible and of such little value that their continuance as an asset is not warranted and the uncollectible amounts are charged-off. This classification does not mean ~~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 partial recovery may be affected in the future. Losses are taken in the period in which they are determined to be uncollectible.

The following tables present the Company’s loans by risk rating at September 30, ~~2017~~2019 and December 31, ~~2016:~~2018:

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) September 30, 2017 December 31, 2016 September 30, 2017 December 31, 2016 September 30, 2017 December 31, 2016
Grade:

Pass $ 33,008
$ 14,695
$ 433,934
$ 376,968
$ 466,942
$ 391,663
Special mention 47
—
6,820
5,868
6,867
5,868
Substandard 637
—
15,093
20,588
15,730
20,588
Total $ 33,692
$ 14,695
$ 455,847
$ 403,424
$ 489,539
$ 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) September 30, 2017 December 31, 2016 September 30, 2017 December 31, 2016 September 30, 2017 December 31, 2016 September 30, 2017 December 31, 2016
Grade:

Pass $ 168,608
$ 98,968
$ 30,075
$ 31,279
$ 40,610
$ 15,679
$ 239,293
$ 145,926
Special mention 1,757
2,384
91
251
166
167
2,014
2,802
Substandard 1,821
2,234
317
278
—
—
2,138
2,512
Total $ 172,186
$ 103,586
$ 30,483
$ 31,808
$ 40,776
$ 15,846
$ 243,445
$ 151,240



	Commercial construction and land development				Commercial real estate other				Total commercial real estate
(in thousands)	Sep 30, 2019		Dec 31, 2018		Sep 30, 2019		Dec 31, 2018		Sep 30, 2019		Dec 31, 2018
Grade:
Pass	$	28,728	$	23,680	$	647,075	$	532,386	$	675,803	$	556,066
Special mention	—		73		12,474		8,319		12,474		8,392
Substandard	73		—		10,212		13,914		10,285		13,914
Doubtful	1		1		3,124		1,361		3,125		1,362
Total	$	28,802	$	23,754	$	672,885	$	555,980	$	701,687	$	579,734

Acquired Loans

Commercial Real Estate

~~Credit Risk Profile by Creditworthiness Category~~


	Commercial construction and land development				Commercial real estate other				Total commercial real estate				Commercial construction and land development				Commercial real estate other				Total commercial real estate
(In thousands)	September 30, 2017		December 31, 2016		September 30, 2017		December 31, 2016		September 30, 2017		December 31, 2016
(in thousands)													Sep 30, 2019		Dec 31, 2018		Sep 30, 2019		Dec 31, 2018		Sep 30, 2019		Dec 31, 2018
Grade:
Pass	$	15,336	$	—	$	278,134	$	—	$	293,470	$	—	$	1,765	$	2,626	$	212,859	$	236,393	$	214,624	$	239,019
Special mention	233		—		2,475		—		2,708		—		12		—		1,962		1,574		1,974		1,574
Substandard	24		—		7,831		—		7,855		—		287		264		5,033		6,009		5,320		6,273
Doubtful													—		—		168		99		168		99
Total	$	15,593	$	—	$	288,440	$	—	$	304,033	$	—	$	2,064	$	2,890	$	220,022	$	244,075	$	222,086	$	246,965

Business Activities Loans

Commercial and Industrial

~~Credit Risk Profile by Creditworthiness Category~~



	Commercial				Agricultural				Tax exempt loans				Total commercial and industrial
(in thousands)	Sep 30, 2019		Dec 31, 2018		Sep 30, 2019		Dec 31, 2018		Sep 30, 2019		Dec 31, 2018		Sep 30, 2019		Dec 31, 2018
Grade:
Pass	$	219,962	$	226,353	$	20,413	$	21,680	$	66,043	$	56,588	$	306,418	$	304,621
Special mention	14,000		6,730		346		215		—		—		14,346		6,945
Substandard	4,922		924		447		422		—		—		5,369		1,346
Doubtful	1,010		750		—		—		—		—		1,010		750
Total	$	239,894	$	234,757	$	21,206	$	22,317	$	66,043	$	56,588	$	327,143	$	313,662

Acquired Loans

Commercial and Industrial


	Commercial other				Agricultural and other loans to farmers				Tax exempt loans				Total commercial and industrial				Commercial				Agricultural				Tax exempt loans				Total commercial and industrial
(In thousands)	September 30, 2017		December 31, 2016		September 30, 2017		December 31, 2016		September 30, 2017		December 31, 2016		September 30, 2017		December 31, 2016
(in thousands)																	Sep 30, 2019		Dec 31, 2018		Sep 30, 2019		Dec 31, 2018		Sep 30, 2019		Dec 31, 2018		Sep 30, 2019		Dec 31, 2018
Grade:
Pass	$	63,941	$	—	$	—	$	—	$	45,537	$	—	$	109,478	$	—	$	37,111	$	46,120	$	—	$	—	$	35,073	$	38,738	$	72,184	$	84,858
Special mention	2,053		—		—		—		—		—		2,053		—		2,511		4,825		—		—		—		—		2,511		4,825
Substandard	2,096		—		—		—		—		—		2,096		—		527		1,222		—		—		—		—		527		1,222
Doubtful																	341		303		—		—		—		—		341		303
Total	$	68,090	$	—	$	—	$	—	$	45,537	$	—	$	113,627	$	—	$	40,490	$	52,470	$	—	$	—	$	35,073	$	38,738	$	75,563	$	91,208

Business Activities Loans

Residential Real Estate and Consumer Loans



	Residential real estate				Home equity				Other consumer				Total residential real estate and consumer
(in thousands)	Sep 30, 2019		Dec 31, 2018		Sep 30, 2019		Dec 31, 2018		Sep 30, 2019		Dec 31, 2018		Sep 30, 2019		Dec 31, 2018
Performing	$	727,239	$	665,976	$	57,992	$	57,652	$	10,209	$	9,324	$	795,440	$	732,952
Nonperforming	3,277		4,213		564		246		25		90		3,866		4,549
Total	$	730,516	$	670,189	$	58,556	$	57,898	$	10,234	$	9,414	$	799,306	$	737,501

Acquired Loans

Residential Real Estate and Consumer Loans



	Residential real estate				Home equity				Other consumer				Total residential real estate and consumer
(in thousands)	Sep 30, 2019		Dec 31, 2018		Sep 30, 2019		Dec 31, 2018		Sep 30, 2019		Dec 31, 2018		Sep 30, 2019		Dec 31, 2018
Performing	$	409,830	$	470,497	$	37,446	$	45,090	$	985	$	1,356	$	448,261	$	516,943
Nonperforming	3,106		4,012		154		201		—		1		3,260		4,214
Total	$	412,936	$	474,509	$	37,600	$	45,291	$	985	$	1,357	$	451,521	$	521,157

The following table summarizes ~~information about~~ total classified and criticized loans ~~rated Special Mention or higher~~ as of September 30, ~~2017~~2019 and December 31, ~~2016. The table below includes consumer loans that are special mention and substandard accruing that are classified in the above table as performing based on payment activity.~~2018:


	September 30, 2017						December 31, 2016						September 30, 2019						December 31, 2018
(In thousands)	Business Activities Loans		Acquired Loans		Total		Business Activities Loans		Acquired Loans		Total
(in thousands)													Business Activities Loans		Acquired Loans		Total		Business Activities Loans		Acquired Loans		Total
Non-accrual	$	5,116	$	3,452	$	8,568	$	2,733	$	—	$	2,733	$	13,541	$	3,138	$	16,679	$	14,111	$	4,124	$	18,235
Substandard accruing	15,774		9,627		25,401		20,368		—		20,368		10,114		6,478		16,592		7,810		7,987		15,797
Doubtful accruing													—		—		—		—		—		—
Total classified	20,890		13,079		33,969		23,101		—		23,101		23,655		9,616		33,271		21,921		12,111		34,032
Special mention	8,864		4,762		13,626		8,669		—		8,669		26,820		4,485		31,305		15,337		6,399		21,736
Total Criticized	$	29,754	$	17,841	$	47,595	$	31,770	$	—	$	31,770	$	50,475	$	14,101	$	64,576	$	37,258	$	18,510	$	55,768

NOTE 6.5. BORROWED FUNDS

Borrowed funds at September 30, ~~2017~~2019 and December 31, ~~2016~~2018 are summarized, as follows:


	September 30, 2017				December 31, 2016				September 30, 2019				December 31, 2018
(dollars in thousands)	Carrying Value		Weighted Average Rate		Carrying Value		Weighted Average Rate		Carrying Value		Weighted Average Rate		Carrying Value		Weighted Average Rate
Short-term borrowings
Advances from the FHLBB	$	506,000	1.36	%	$	372,700	0.97	%
Advances from the FHLB									$	422,583	2.24	%	$	611,683	2.47	%
Other borrowings	41,600		0.56		21,780		0.29		41,259		1.24		36,211		1.09
Total short-term borrowings	547,600		1.30		394,480		0.93		463,842		2.15		647,894		2.39
Long-term borrowings
Advances from the FHLBB	227,982		1.50		137,116		1.59
Advances from the FHLB									177,977		2.25		32,929		1.86
Subordinated borrowings	38,048		5.46		—		—		37,928		5.69		37,973		5.58
Junior subordinated borrowings	5,000		4.81		5,000		4.41		5,000		6.15		5,000		5.96
Total long-term borrowings	271,030		2.11		142,116		1.69		220,905		2.93		75,902		3.99
Total	$	818,630	1.57	%	$	536,596	1.13	%	$	684,747	2.40	%	$	723,796	2.56	%

~~Short term~~Short-term debt includes Federal Home Loan Bank of Boston (“~~FHLBB”~~FHLB”) advances with ~~an original~~a maturity of less than one year. The ~~Bank~~Company also maintains a ~~$1.0~~$1.0 million secured line of credit with the ~~FHLBB~~FHLB that bears a daily adjustable rate calculated by the ~~FHLBB.~~FHLB. There was no outstanding balance on the ~~FHLBB~~FHLB line of credit for the periods ended September 30, ~~2017~~2019 and December 31, ~~2016.~~2018.

The ~~Bank also had~~Company has the capacity to borrow funds on a secured basis utilizing the Borrower in Custody program and the Discount Window at the Federal Reserve Bank of Boston (the “FRB”). At September 30, ~~2017,~~2019, the ~~Bank’s~~Company’s available secured line of credit at the FRB was ~~$114.6~~$107.7 million. The ~~Bank~~Company has pledged certain loans and securities to the FRB to support this arrangement. There were no borrowings with the FRB for the periods ended September 30, ~~2017~~2019 and December 31, ~~2016.~~2018.

The Company maintains, with a correspondent bank, an unused unsecured federal funds line of credit that has an aggregate overnight borrowing capacity of $50 million as of September 30, 2019 and December 31, 2018. There was no outstanding balance on the line of credit as of September 30, 2019 and December 31, 2018.

Long-term ~~FHLBB~~FHLB advances consist of advances with a maturity of more than one year. The advances outstanding at September 30, ~~2017~~2019 and December 31, 2018 include no callable advances ~~totaling $27.0 million,~~ and ~~amortizing advances totaling $689 thousand. The advances outstanding at December 31, 2016 include callable advances totaling $17.0 million, and no~~$319 thousand of amortizing advances. All ~~FHLBB~~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 ~~FHLBB~~FHLB advances as of September 30, ~~2017~~2019 is, as follows:


	September 30, 2017				September 30, 2019
(in thousands, except rates)	Carrying Value		Weighted Average Rate		Carrying Value		Weighted Average Rate
Fixed rate advances maturing:
2017	$	416,000	1.32	%
2018	165,805		1.49
2019	104,947		1.63		$	393,601	2.27	%
2020	29,911		1.76		54,982		2.14
2021	1,630		1.49		11,658		2.19
2022 and thereafter	15,689		0.36
Total FHLBB advances	$	733,982	1.40	%
2022					134,000		2.25
2023					1,000		—
2024 and thereafter					5,319		1.79
Total FHLB advances					$	600,560	2.24	%

In April 2008, the ~~Bank~~Company issued fifteen year junior subordinated notes in the amount of $5.0 million. These debt securities qualify as Tier 2 capital for the Company and the Bank. The subordinated debt securities are callable by the Bank

after five years without ~~penalty.~~penalty, the next date on which the securities can be redeemed is December 15, 2019. The interest rate is three-month LIBOR plus 3.45%. At September 30, ~~2017~~2019 and December 31, ~~2016~~2018 the interest rate was ~~4.77%~~5.57% and ~~4.41%~~6.24%, respectively.

~~On January 13, 2017, the~~The Company ~~acquired~~has $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~~with 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 noteholders. 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~~The Company also has $20.6 million in ~~connection with the Lake Sunapee acquisition, the Company acquired 100% of the common securities totaling $600 thousand and $20.0 million of~~floating Junior Subordinated Deferrable Interest Debentures ("Debentures") issued by NHTB Capital Trust II ("Trust II") and NHTB Capital Trust III ("Trust III"), which are both Connecticut statutory trusts. The Debentures were ~~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 7.6. DEPOSITS

A summary of time deposits is, as follows:


(In thousands)	September 30, 2017		December 31, 2016
(in thousands)					September 30, 2019		December 31, 2018
Time less than $100,000	$	541,585	$	304,393	$	659,610	$	622,478
Time $100,000 or more	260,525		112,044
Time $100,000 through $250,000					151,995		193,535
Time $250,000 or more					91,060		116,780
Total time deposits	$	802,110	$	416,437	$	902,665	$	932,793

At September 30, 2019 and December 31, 2018, the scheduled maturities by year for time deposits are, as follows:



(in thousands)	September 30, 2019		December 31, 2018
Within 1 year	$	416,591	$	505,313
Over 1 year to 2 years	365,372		258,176
Over 2 years to 3 years	70,050		123,337
Over 3 years to 4 years	25,603		14,494
Over 4 years to 5 years	22,597		31,353
Over 5 years	2,452		120
Total	$	902,665	$	932,793

Included in time deposits are brokered deposits of ~~$362.7~~$554.3 million and ~~$237.9~~$466.9 million at September 30, ~~2017~~2019 and December 31, ~~2016,~~2018, respectively. ~~Included~~Also included in ~~the deposit balances contained on the balance sheet~~time deposits are reciprocal deposits of ~~$49.3~~$69.7 million and ~~$43.1~~$52.4 million at September 30, ~~2017~~2019 and December 31, ~~2016,~~2018, respectively.

NOTE 8.7. CAPITAL RATIOS AND SHAREHOLDERS’ EQUITY

The actual and required capital ratios ~~were~~are, as follows:

September 30, 2017
Regulatory
Minimum to be
Well Capitalized
December 31, 2016
Regulatory
Minimum to be
Well Capitalized
Company (consolidated)

Total capital to risk weighted assets 13.8 % 10.0 % 16.5 % 10.0 %
Common equity tier 1 capital to risk weighted assets 11.3
6.5
15.0
6.5
Tier 1 capital to risk weighted assets 12.7
8.0
15.0
8.0
Tier 1 capital to average assets 8.0
5.0
8.9
5.0

Bank
Total capital to risk weighted assets 13.8 % 10.0 % 16.7 % 10.0 %
Common equity tier 1 capital to risk weighted assets 13.0
6.5
15.2
6.5
Tier 1 capital to risk weighted assets 13.0
8.0
15.2
8.0
Tier 1 capital to average assets 8.5
5.0
9.1
5.0



	September 30, 2019		Regulatory Minimum to be "Well Capitalized"		December 31, 2018		Regulatory Minimum to be "Well Capitalized"
Company (consolidated)
Total capital to risk-weighted assets	14.01	%	N/A		14.23	%	N/A
Common equity tier 1 capital to risk-weighted assets	11.63		N/A		11.80		N/A
Tier 1 capital to risk-weighted assets	12.47		N/A		12.68		N/A
Tier 1 capital to average assets	8.65		N/A		8.53		N/A

Bank
Total capital to risk-weighted assets	13.45	%	10.00	%	13.82	%	10.00	%
Common equity tier 1 capital to risk-weighted assets	12.60		6.50		12.99		6.50
Tier 1 capital to risk-weighted assets	12.60		8.00		12.99		8.00
Tier 1 capital to average assets	8.74		5.00		8.74		5.00

At each date shown, the Company and the Bank met the conditions to be classified as ~~“well capitalized”~~“well-capitalized” under the relevant regulatory framework. To be categorized as ~~well capitalized,~~"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~~The Company and the Bank ~~became~~are subject to the Basel III rule that requires the Company and the Bank to assess their Common equity tier 1 capital to ~~risk weighted~~risk-weighted assets and the Company and the Bank each exceed the minimum to be well capitalized. In addition, the final capital rules added a requirement to maintain a minimum conservation buffer, composed of common equity tier 1 capital, of 2.5% of risk-weighted assets, to be phased in over three years and applied to the 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"well-capitalized." Effective January 1, 2019 all banking organizations must maintain a minimum Common equity tier 1 risk-based capital ratio of 7.0%, a minimum Tier 1 risk-based capital ratio of 8.5% and a minimum Total risk-based capital ratio of 10.5%.

The required 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 will increase to 1.875% on January 1, 2018 and 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 is not met.

At September 30, ~~2017,~~2019, the capital levels of both the Company and the Bank exceeded all regulatory capital requirements and their regulatory capital ratios were above the minimum levels required to be considered ~~well capitalized~~"well-capitalized" for regulatory purposes. ~~The capital levels of both the Company and the Bank at September 30, 2017 also exceeded the minimum capital requirements including the currently applicable capital conservation buffer of 0.625%.~~

Accumulated other comprehensive ~~loss~~income (loss)

Components of accumulated other comprehensive income (loss) is, as follows:

(In thousands) September 30, 2017 December 31, 2016
Other accumulated comprehensive income (loss), before tax:

Net unrealized holding gain/(loss) on AFS securities $ 1,849
$ (3,269 )
Net unrealized loss on effective cash flow hedging derivatives (3,570 ) (2,766 )
Net unrealized holding loss on post-retirement plans (577 ) (622 )

Income taxes related to items of accumulated other comprehensive loss:
Net unrealized holding (loss)/gain on AFS securities (695 ) 1,144
Net unrealized loss on effective cash flow hedging derivatives 1,341
968
Net unrealized holding loss on post-retirement plans 217
219
Accumulated other comprehensive loss $ (1,435 ) $ (4,326 )



(in thousands)	September 30, 2019			December 31, 2018
Other accumulated comprehensive income (loss), before tax:
Net unrealized gain (loss) on AFS securities	$	10,442		$	(11,304	)
Net unrealized loss on effective cash flow hedging derivatives	(5,306		)	(2,934		)
Net unrealized loss on post-retirement plans	(1,162		)	(1,162		)

Income taxes related to items of accumulated other comprehensive (income) loss:
Net unrealized (gain) loss on AFS securities	(2,440		)	2,641
Net unrealized loss on effective cash flow hedging derivatives	1,239			685
Net unrealized loss on post-retirement plans	272			272
Accumulated other comprehensive income (loss)	$	3,045		$	(11,802	)

The following ~~tables~~table presents the components of other comprehensive income (loss) for the three and nine months ended September 30, ~~2017~~2019 and ~~2016:~~2018:

(In thousands) Before Tax Tax Effect Net of Tax
Three Months Ended September 30, 2017

Net unrealized holding gain on AFS securities: x

Net unrealized gain arising during the period $ 531
$ (199 ) $ 332
Less: reclassification adjustment for gains (losses) realized in net income 19
(7 ) 12
Net unrealized holding gain on AFS securities 512
(192 ) 320

Net unrealized loss on cash flow hedging derivatives:
Net unrealized loss arising during the period (84 ) 31
(53 )
Less: reclassification adjustment for gains (losses) realized in net income —
—
—
Net unrealized gain on cash flow hedging derivatives (84 ) 31
(53 )

Net unrealized holding loss on post-retirement plans:
Net unrealized gain/(loss) arising during the period 5
(2 ) 3
Less: reclassification adjustment for gains (losses) realized in net income —
—
—
Net unrealized holding gain/(loss) on post-retirement plans 5
(2 ) 3
Other comprehensive income $ 433
$ (163 ) $ 270

Three Months Ended September 30, 2016

Net unrealized holding gains on AFS securities:

Net unrealized gains arising during the period $ (4,223 ) $ 1,478
$ (2,745 )
Less: reclassification adjustment for gains realized in net income 1,354
(474 ) 880
Net unrealized holding gains on AFS securities (5,577 ) 1,952
(3,625 )

Net unrealized (loss) on cash flow hedging derivatives:

Net unrealized (loss) arising during the period (92 ) 32
(60 )
Less: reclassification adjustment for gains (losses) realized in net income —
—
—
Net unrealized (loss) on cash flow hedging derivatives (92 ) 32
(60 )

Net unrealized holding gain on post-retirement plans:

Net unrealized gain arising during the period 8
(3 ) 5
Less: reclassification adjustment for gains (losses) realized in net income —
—
—
Net unrealized holding gain on post-retirement plans 8
(3 ) 5
Other comprehensive income $ (5,661 ) $ 1,981
$ (3,680 )



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

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

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

Three Months Ended September 30, 2018
Net unrealized loss on AFS securities:
Net unrealized loss arising during the period	$	(5,850	)	$	1,291		$	(4,559	)
Less: reclassification adjustment for gains (losses) realized in net income	—			—			—
Net unrealized loss on AFS securities	(5,850		)	1,291			(4,559		)

Net unrealized gain on cash flow hedging derivatives:
Net unrealized gain arising during the period	299			(81		)	218
Less: reclassification adjustment for gains (losses) realized in net income	—			—			—
Net unrealized gain on cash flow hedging derivatives	299			(81		)	218

Net unrealized gain on post-retirement plans:
Net unrealized gain arising during the period	—			—			—
Less: reclassification adjustment for gains (losses) realized in net income	—			—			—
Net unrealized gain on post-retirement plans	—			—			—
Other comprehensive loss	$	(5,551	)	$	1,210		$	(4,341	)

(In thousands) Before Tax Tax Effect Net of Tax
Nine Months Ended September 30, 2017

Net unrealized holding gain on AFS securities: x

Net unrealized gain arising during the period $ 5,138
$ (1,846 ) $ 3,292
Less: reclassification adjustment for gains (losses) realized in net income 19
(7 ) 12
Net unrealized holding gain on AFS securities 5,119
(1,839 ) 3,280

Net unrealized loss on cash flow hedging derivatives:

Net unrealized loss arising during the period (805 ) 373
(432 )
Less: reclassification adjustment for gains (losses) realized in net income —
—
—
Net unrealized gain on cash flow hedging derivatives (805 ) 373
(432 )

Net unrealized holding loss on post-retirement plans:

Net unrealized gain arising during the period 45
(2 ) 43
Less: reclassification adjustment for gains (losses) realized in net income —
—
—
Net unrealized holding gain on post-retirement plans 45
(2 ) 43
Other comprehensive income $ 4,359
$ (1,468 ) $ 2,891

Nine Months Ended September 30, 2016

Net unrealized holding gains on AFS securities:

Net unrealized gains arising during the period $ 7,530
$ (2,635 ) $ 4,895
Less: reclassification adjustment for gains realized in net income 4,489
(1,571 ) 2,918
Net unrealized holding gains on AFS securities 3,041
(1,064 ) 1,977

Net unrealized (loss) on cash flow hedging derivatives:

Net unrealized (loss) arising during the period (1,309 ) 458
(851 )
Less: reclassification adjustment for gains (losses) realized in net income —
—
—
Net unrealized (loss) on cash flow hedging derivatives (1,309 ) 458
(851 )

Net unrealized holding gain on post-retirement plans:

Net unrealized gain arising during the period 86
(30 ) 56
Less: reclassification adjustment for gains (losses) realized in net income —
—
—
Net unrealized holding gain on post-retirement plans 86
(30 ) 56
Other comprehensive income $ 1,818
$ (636 ) $ 1,182



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

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

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

Nine Months Ended September 30, 2018
Net unrealized loss on AFS securities:
Net unrealized loss arising during the period	$	(19,639	)	$	4,565		$	(15,074	)
Less: reclassification adjustment for gains (losses) realized in net income	—			—			—
Net unrealized loss on AFS securities	(19,639		)	4,565			(15,074		)

Net unrealized gain on cash flow hedging derivatives:
Net unrealized gain arising during the period	1,179			(290		)	889
Less: reclassification adjustment for gains (losses) realized in net income	—			—			—
Net unrealized gain on cash flow hedging derivatives	1,179			(290		)	889

Net unrealized gain on post-retirement plans:
Net unrealized gain arising during the period	41			(10		)	31
Less: reclassification adjustment for gains (losses) realized in net income	—			—			—
Net unrealized gain on post-retirement plans	41			(10		)	31
Other comprehensive loss	$	(18,419	)	$	4,265		$	(14,154	)

The following table presents the changes in each component of accumulated other comprehensive income (loss), for the three and nine months ended September 30, ~~2017~~2019 and ~~2016:~~2018:


(in thousands)	Net unrealized holding gain on AFS Securities			Net loss on effective cash flow hedging derivatives			Net unrealized holding loss on pension plans			Total			Net unrealized (loss) gain on AFS Securities			Net loss on effective cash flow hedging derivatives			Net unrealized loss on pension plans			Total
Three Months Ended September 30, 2017
Three Months Ended September 30, 2019
Balance at beginning of period	$	836		$	(2,177	)	$	(364	)	$	(1,705	)	$	5,547		$	(3,782	)	$	(888	)	$	877
Other comprehensive gain(loss) before reclassifications	332			(53		)	3			282
Other comprehensive gain (loss) before reclassifications													2,573			(285		)	—			2,288
Less: amounts reclassified from accumulated other comprehensive income	12			—			—			12			120			—			—			120
Total other comprehensive income	320			(53		)	3			270
Total other comprehensive income (loss)													2,453			(285		)	—			2,168
Balance at end of period	$	1,156		$	(2,230	)	$	(361	)	$	(1,435	)	$	8,000		$	(4,067	)	$	(888	)	$	3,045

Three Months Ended September 30, 2016
Three Months Ended September 30, 2018
Balance at beginning of period	$	11,315		$	(2,412	)	$	(412	)	$	8,491		$	(12,595	)	$	(2,064	)	$	(688	)	$	(15,347	)
Other comprehensive gain before reclassifications	(2,745		)	(60		)	5			(2,800		)
Other comprehensive (loss) gain before reclassifications													(4,559		)	218			—			(4,341		)
Less: amounts reclassified from accumulated other comprehensive income	880			—			—			880			—			—			—			—
Total other comprehensive income	(3,625		)	(60		)	5			(3,680		)
Total other comprehensive (loss) income													(4,559		)	218			—			(4,341		)
Balance at end of period	$	7,690		$	(2,472	)	$	(407	)	$	4,811		$	(17,154	)	$	(1,846	)	$	(688	)	$	(19,688	)

Nine Months Ended September 30, 2017
Nine Months Ended September 30, 2019
Balance at beginning of period	$	(2,124	)	$	(1,798	)	$	(404	)	$	(4,326	)	$	(8,665	)	$	(2,249	)	$	(888	)	$	(11,802	)
Other comprehensive gain(loss) before reclassifications	3,292			(432		)	43			2,903
Other comprehensive gain (loss) before reclassifications													16,785			(1,818		)	—			14,967
Less: amounts reclassified from accumulated other comprehensive income	12			—			—			12			120			—			—			120
Total other comprehensive income	3,280			(432		)	43			2,891
Total other comprehensive income (loss)													16,665			(1,818		)	—			14,847
Balance at end of period	$	1,156		$	(2,230	)	$	(361	)	$	(1,435	)	$	8,000		$	(4,067	)	$	(888	)	$	3,045

Nine Months Ended September 30, 2016
Nine Months Ended September 30, 2018
Balance at beginning of period	$	5,713		$	(1,621	)	$	(463	)	$	3,629		$	(1,713	)	$	(2,250	)	$	(591	)	$	(4,554	)
Other comprehensive gain before reclassifications	4,895			(851		)	56			4,100
Other comprehensive (loss) gain before reclassifications													(15,074		)	889			31			(14,154		)
Less: amounts reclassified from accumulated other comprehensive income	2,918			—			—			2,918			—			—			—			—
Total other comprehensive income	1,977			(851		)	56			1,182
Total other comprehensive (loss) income													(15,074		)	889			31			(14,154		)
Less: amounts reclassified from accumulated other comprehensive income for ASU 2018-02													(367		)	(485		)	(128		)	(980		)
Balance at end of period	$	7,690		$	(2,472	)	$	(407	)	$	4,811		$	(17,154	)	$	(1,846	)	$	(688	)	$	(19,688	)

The following tables presents the amounts reclassified out of each component of accumulated other comprehensive income (loss) for the three and nine months ended September 30, ~~2017~~2019 and ~~2016:~~

2018:



	Three Months Ended September 30,						Affected Line Item in the Statement where Net Income is Presented	Three Months Ended September 30,					Nine Months Ended September 30,					Affected Line Item where Net Income is Presented
(in thousands)	2017			2016				2019			2018		2019			2018		Affected Line Item where Net Income is Presented
Realized gains on AFS securities:
	$	19		$	1,354		Non-interest income
	(7		)	(474		)	Tax expense
Net realized gains on AFS securities:
Before tax⁽¹⁾								$	157		$	—	$	157		$	—	Non-interest income
Tax effect								(37		)	—		(37		)	—		Tax expense
Total reclassifications for the period	$	12		$	880		Net of tax	$	120		$	—	$	120		$	—	Net of tax

Nine Months Ended September 30, Affected Line Item in the Statement where Net Income is Presented
(in thousands) 2017 2016
Realized gains on AFS securities:

$ 19
$ 4,489
Non-interest income
(7 ) (1,571 ) Tax expense
Total reclassifications for the period $ 12
$ 2,918
Net of tax
⁽¹⁾ Net realized gains before tax include gross realized gains $716 thousand and realized losses of $559 thousand.

NOTE 9.8. EARNINGS PER SHARE

~~Earnings~~The following table presents the calculation of earnings per ~~share have been computed based on the following (average~~share:



	Three Months Ended September 30,				Nine Months Ended September 30,
(in thousands, except per share and share data)	2019		2018		2019		2018
Net income	$	5,015	$	8,970	$	18,413	$	25,317

Average number of basic common shares outstanding	15,547,276		15,503,488		15,536,414		15,478,207
Plus: dilutive effect of stock options and awards outstanding ⁽¹⁾	34,027		76,575		45,282		85,559
Average number of diluted common shares outstanding ⁽¹⁾	15,581,303		15,580,063		15,581,696		15,563,766

Anti-dilutive options excluded from earnings calculation	—		—		—		14,394

Earnings per share:
Basic	$	0.32	$	0.58	$	1.19	$	1.64
Diluted	$	0.32	$	0.58	$	1.18	$	1.63

(1) Average diluted shares outstanding are ~~calculated~~computed using the treasury stock ~~method):~~

Three Months Ended September 30, Nine Months Ended September 30,
(In thousands, except per share and share data) 2017 2016 2017 2016
Net income $ 8,617
$ 3,632
$ 19,386
$ 12,349

Average number of basic common shares outstanding 15,420,499
9,063,576
15,098,377
9,036,548
Plus: dilutive effect of stock options and awards outstanding 90,026
98,112
105,661
101,009
Average number of diluted common shares outstanding 15,510,525
9,161,688
15,204,038
9,137,557

Anti-dilutive options excluded from earnings calculation —
101,826
8,247
107,535

Earnings per share:
Basic $ 0.56
$ 0.40
$ 1.27
$ 1.37
Diluted $ 0.56
$ 0.40
$ 1.27
$ 1.35

method.

NOTE ~~10.~~9. DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGING ACTIVITIES

As part of its overall asset and liability management strategy, the ~~Bank~~Company periodically uses derivative instruments to minimize significant unplanned fluctuations in earnings and cash flows caused by interest rate volatility. The ~~Bank’s~~Company’s interest rate risk management strategy involves modifying the re-pricing characteristics of certain assets or liabilities so ~~that~~the 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~~Company designates whether the derivative is part of a hedging relationship (i.e., cash flow or fair value hedge). The ~~Bank~~Company formally documents relationships between hedging instruments and hedged items, as well as its risk management objective and strategy for undertaking hedge transactions. The ~~Bank~~Company also assesses,

both at the hedge’s inception and on an ongoing basis, whether the derivatives used in hedging transactions are highly effective in offsetting the changes in cash flows or fair values of hedged items.

Changes in fair value of derivative instruments that are highly effective and qualify as cash flow hedges are recorded in other comprehensive income or loss. ~~Any ineffective portion is recorded in earnings.~~ The ~~Bank~~Company discontinues hedge accounting when it is determined ~~that~~ the derivative is no longer 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.

~~Information~~The following tables present information about derivative assets and liabilities at September 30, ~~2017, follows:~~2019 and December 31, 2018:



	September 30, 2019
	Notional Amount		Weighted Average Maturity	Estimated Fair Value Asset (Liability)
	(in thousands)		(in years)	(in thousands)
Cash flow hedges:
Interest rate cap agreements	$	90,000	3.4	$	89
Interest rate swap on deposits	50,000		4.5	(2,179		)
Total cash flow hedges	140,000			(2,090		)

Economic hedges:
Forward sale commitments	7,762		0.1	(61		)
Total economic hedges	7,762			(61		)

Non-hedging derivatives:
Interest rate lock commitments	12,242		0.1	78
Customer loan derivative liability	169,569		9.8	(10,923		)
Customer loan derivative asset	169,569		9.8	10,923
Total non-hedging derivatives	351,380			78

Total	$	499,142		$	(2,073	)

Weighted Average Maturity Estimated Fair Value Asset (Liability)

Notional
Amount

(In thousands) (In years) (In thousands)
Cash flow hedges:

Interest rate caps agreements $ 90,000
5.4 $ 793
Total cash flow hedges 90,000
5.4 793

Economic hedges:

Forward sale commitments 16,547
0.2 (173 )
Total economic hedges 16,547
0.2 (173 )

Non-hedging derivatives:

Interest rate lock commitments 16,742
0.2 16
Total non-hedging derivatives 16,742
0.2 16

Total $ 123,289
$ 636

~~As of December 31, 2016, the Company had interest rate cap agreements totaling $90 million (notional amount), with a weighted average maturity of 6.1 years, and an estimated fair value of $1,748.~~



	December 31, 2018
	Notional Amount		Weighted Average Maturity	Estimated Fair Value Asset (Liability)
	(in thousands)		(in years)	(in thousands)
Cash flow hedges:
Interest rate cap agreements	$	90,000	4.1	$	803
Total cash flow hedges	90,000			803

Non-hedging derivatives:
Interest rate lock commitments	957		0.1	8
Customer loan derivative liability	45,641		9.9	(1,353		)
Customer loan derivative asset	45,641		9.9	1,353
Total non-hedging derivatives	92,239			8

Total	$	182,239		$	811

Information about derivative assets and liabilities for the three and nine months ended September 30, ~~2017~~2019 and ~~September 30, 2016,~~2018 is, as follows:


	Three Months Ended September 30,				Nine Months Ended September 30,					Three Months Ended September 30,						Nine Months Ended September 30,
(In thousands)	2017		2016		2017			2016
(in thousands)										2019			2018			2019			2018
Cash flow hedges:
Interest rate cap agreements
Realized in interest expense	$	74	$	14	$	168		$	24
Realized loss in interest expense										$	(183	)	$	(137	)	$	(521	)	$	(367	)
Interest rate swap on deposits
Realized gain in interest expense										17			—			17			—

Economic hedges:
Forward commitments
Realized loss in other non-interest income	58		—		(29		)	—
Realized (loss) gain in other non-interest income										(31		)	43			(61		)	190

Non-hedging derivatives:
Interest rate lock commitments
Realized loss in other non-interest income	19		—		(5		)	—
Realized gain in other non-interest income										7			—			70			9

Cash flow hedges

Interest rate cap agreements

In 2014, interest rate cap agreements were purchased to limit the ~~Bank’s~~Company’s exposure to rising interest rates on four rolling, three-month borrowings indexed to ~~three month~~three-month LIBOR. Under the terms of the agreements, the ~~Bank~~Company paid total premiums of ~~$4,566~~$4.6 million for the right to receive cash flow payments if ~~3-month~~three-month LIBOR rises above the caps of 3.00%, thus effectively ensuring interest expense on the borrowings at maximum rates of 3.00% for the duration of the agreements. The interest rate cap agreements were designated as cash flow hedges. 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.

Interest rate swap on deposits

In March 2019, the Company entered into an interest rate swap on brokered deposits (the "SWAP") to limit its exposure to rising interest rates over a five year term. Under the terms of the agreement, the Company pays a fixed rate of 2.461% for a notional amount of $50.0 million, and the financial institution counterparty pays interest on the three-month LIBOR rate. The Company designated the SWAP as a cash flow hedge and the fair value is included in other liabilities 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.

Economic hedges

The Company utilizes forward sale commitments to hedge interest rate risk and the associated effects on the fair value of interest rate lock commitments and loans originated for sale. The forward sale commitments are accounted for as derivatives with changes in fair value recorded in current period earnings. The Company typically uses mandatory delivery contracts, which are loan sale agreements where the Company commits to deliver a certain principal amount of mortgage loans to an investor at a specified price on or before a specified date. Generally, the Company may enter into mandatory delivery contracts shortly after the loan closes with a customer.

Non-hedging derivatives

Interest rate lock commitments

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

Customer loan derivatives

The Company enters into customer loan derivatives to facilitate the risk management strategies for commercial banking customers. The Company mitigates this risk by entering into equal and offsetting loan swap agreements with highly rated third-party financial institutions. The loan swap agreements are free-standing derivatives and are recorded at fair value in the Company's consolidated balance sheet. The Company is party to master netting arrangements with its financial institutional counterparties; however, the Company does not offset assets and liabilities under these arrangements for financial statement presentation purposes. The master netting arrangements provide for a single net settlement of all loan swap agreements, as well as collateral or cash funds, in the event of default on, or termination of, any one contract. Collateral is provided by cash or securities received or posted by the counterparty with net liability positions, respectively, in accordance with contract thresholds. Currently, the Company has posted cash of $10.7 million with the counterparty.

NOTE ~~11.~~10. FAIR VALUE MEASUREMENTS

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

Recurring Fair Value Measurements

The following table summarizes financial assets and financial liabilities measured at fair value on a recurring basis as of September 30, ~~2017~~2019 and December 31, ~~2016,~~2018, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair ~~value.~~value:



	September 30, 2019
(in thousands)	Level 1 Inputs		Level 2 Inputs			Level 3 Inputs			Total Fair Value
Available for sale securities:
Mortgage-backed securities:
US Government-sponsored enterprises	$	—	$	349,143		$	—		$	349,143
US Government agency	—		118,825			—			118,825
Private label	—		19,954			—			19,954
Obligations of states and political subdivisions thereof	—		111,226			—			111,226
Corporate bonds	—		76,527			—			76,527
Derivative assets	—		11,012			78			11,090
Derivative liabilities	—		(13,102		)	(61		)	(13,163		)

September 30, 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 $ —
$ 6,979
$ —
$ 6,979
Mortgage-backed securities:
  US Government-sponsored enterprises —
437,957
—
437,957
  US Government agency —
102,138
—
102,138
  Private label —
719
—
719
Obligations of states and political subdivisions thereof —
141,982
—
141,982
Corporate bonds —
28,684
—
28,684
Derivative assets —
793
16
809
Derivative liabilities —
—
(173 ) (173 )


	December 31, 2016								December 31, 2018
	Level 1		Level 2		Level 3		Total
(In thousands)	Inputs		Inputs		Inputs		Fair Value
(in thousands)									Level 1 Inputs		Level 2 Inputs			Level 3 Inputs		Total Fair Value
Available for sale securities:
Obligations of US Government sponsored enterprises	$	—	$	—	$	—	$	—
Mortgage-backed securities:
US Government-sponsored enterprises	—		328,452		—		328,452		$	—	$	404,952		$	—	$	404,952
US Government agency	—		76,906		—		76,906		—		110,512			—		110,512
Private label	—		1,132		—		1,132		—		20,382			—		20,382
Obligations of states and political subdivisions thereof	—		122,366		—		122,366		—		132,265			—		132,265
Corporate bonds	—		—		—		—		—		57,726			—		57,726
Derivative assets	—		1,748		—		1,748		—		2,156			8		2,164
Derivative liabilities									—		(1,353		)	—		(1,353		)

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

Derivative Assets and Liabilities

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

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

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

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

Although the Company has determined that the majority of the inputs used to value its customer loan derivatives fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with its derivatives utilize Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default by itself and its counterparties. However, as of September 30, 2019, the Company assessed the significance of the impact of the credit valuation adjustments on the overall valuation of its derivative positions and determined that the credit valuation adjustments are not significant to the overall valuation of its derivatives. As a result, the Company determined that its derivative valuations in their entirety are classified in Level 2 of the fair value hierarchy.

The table below presents the changes in Level 3 assets and liabilities that were measured at fair value on a recurring basis for the three and nine months ended September 30, ~~2017.~~2019:

Assets (Liabilities)
Interest Rate
Lock Forward
(In thousands) Commitments Commitments
Three Months Ended September 30, 2017

June 30, 2017 $ (3 ) $ (231 )
Realized gain recognized in non-interest income 19
58
September 30, 2017 $ 16
$ (173 )

Nine Months Ended September 30, 2017

December 31, 2016 $ —
$ —
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 (5 ) (29 )
September 30, 2017 $ 16
$ (173 )



	Assets (Liabilities)
(in thousands)	Interest Rate Lock Commitments		Forward Commitments
Three Months Ended September 30, 2019
Balance at beginning of period	$	71	$	(30	)
Realized gain recognized in non-interest income	7		(31		)
Balance at end of period	$	78	$	(61	)

Nine Months Ended September 30, 2019
Balance at beginning of period	$	8	$	—
Realized gain (loss) recognized in non-interest income	70		(61		)
Balance at end of period	$	78	$	(61	)

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


(In thousands, except ratios)	Fair Value September 30, 2017			Valuation Techniques	Unobservable Inputs	Significant Unobservable Input Value
(in thousands, except ratios)									Fair Value September 30, 2019			Valuation Techniques	Unobservable Inputs	Unobservable Input Value
Assets (Liabilities)
Interest Rate Lock Commitment	$	16		Historical trend	Closing Ratio	90		%	$	78		Historical trend	Closing Ratio	90		%
				Pricing Model	Origination Costs, per loan	$	1.7					Pricing Model	Origination Costs, per loan	$	1.7

Forward Commitments	(173		)	Quoted prices for similar loans in active markets.	Freddie Mac pricing system	Pair-off contract price			(61		)	Quoted prices for similar loans in active markets.	Freddie Mac pricing system	Pair-off contract price
Total	$	(157	)						$	17

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.~~ measurements:



	September 30, 2019		December 31, 2018		Three Months Ended September 30, 2019			Nine Months Ended September 30, 2019			Fair Value Measurement Date as of September 30, 2019
(in thousands)	Level 3 Inputs		Level 3 Inputs		Total Gains (Losses)			Total Gains (Losses)			Level 3 Inputs
Assets
Impaired loans	$	14,382	$	15,213	$	(182	)	$	831		September 2019
Capitalized servicing rights	4,108		4,882		—			—			September 2019
Other real estate owned	2,455		2,351		(146		)	(146		)	August 2019
Assets held for sale	1,901		—		—			—			September 2019
Total	$	22,846	$	22,446	$	(328	)	$	685

There are no liabilities measured at fair value on a non-recurring basis.

September 30, 2017 December 31, 2016 Three Months Ended September 30, 2017 Nine Months Ended September 30, 2017 Fair Value Measurement Date as of September 30, 2017
(In thousands)
Level 3
Inputs
Level 3
Inputs
Total
Gains (Losses)

Total
Gains (Losses)

Level 3
Inputs
Assets

Impaired loans $ 10,251
$ 6,709
(43 ) (139 ) September 2017
Capitalized servicing rights 3,871
5
—
—
September 2017
Other real estate owned 122
90
—
—
Jan 2017 - March 2017
Total $ 14,244
$ 6,804
(43 ) (139 )

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

Fair Value

Range

(in thousands, except ratios)

September 30, 2017

Valuation Techniques

Unobservable Inputs

Range (Weighted Average) (a)

September 30, 2019

Valuation Techniques

Unobservable Inputs

(Weighted Average)^(a)

Assets

Impaired loans

3,489

Fair value of collateral - appraised value

Loss severity

0% to 63%

11,419

Fair value of collateral -appraised value

Loss severity

0% to 61%

Appraised value

$0 to $1,170

Appraised value

$0 to $6,915

Impaired loans

6,762

Discount cash flow

Discount rate

0% to 18%

2,963

Discount cash flow

Discount rate

2.88% to 9.50%

Cash flows

$0 to $1,046

Cash flows

$22 to $1,019

Capitalized servicing rights

3,871

Discounted cash flow

Constant prepayment rate (CPR)

12.42

4,108

Discounted cash flow

Constant prepayment rate (CPR)

10.21

Discount rate

10.11

Discount rate

10.08

Other real estate owned

122

Fair value of collateral

Appraised value

$122

2,455

Fair value of collateral less selling costs

Appraised value

$2,695

Selling Costs

6% to 10%

Assets held for sale^(b)

1,901

Fair value of asset less selling costs

Appraised value

$136 to $527

Selling Costs

Total

14,244

22,846


(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.


(b)	The carrying value of assets held for sale was $1.8 million as of September 30, 2019. There were no assets held for sale as of December 31, 2018.

Fair Value

Range

(in thousands)

December 31, 2016

Valuation Techniques

Unobservable Inputs

Range (Weighted Average) (a)

(in thousands, except ratios)

December 31, 2018

Valuation Techniques

Unobservable Inputs

(Weighted Average)^(a)

Assets

Impaired loans

3,268

Fair value of collateral - appraised value

Loss severity

0% to 51%

11,676

Fair value of collateral -appraised value

Loss severity

0% to 55.00%

Appraised value

$0 to $1,732

Appraised value

$0 to $6,915

Impaired loans

3,441

Discount cash flow

Discount rate

3.25% to 18.25%

3,537

Discount cash flow

Discount rate

2.88% to 9.50%

Cash flows

$6 to $861

Cash flows

$22 to $1,072

Capitalized servicing rights

Discounted cash flow

Constant prepayment rate (CPR)

17.09

4,882

Discounted cash flow

Constant prepayment rate (CPR)

8.19

Discount rate

7.55

Discount rate

10.08

Other real estate owned

Fair value of collateral

Appraised value

120

2,351

Fair value of collateral less selling costs

Appraised value

$2,700

Selling Costs

12.93

Total

6,804

22,446


(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 September 30, ~~2017~~2019 and December 31, ~~2016.~~2018.

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

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

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

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

Summary of Estimated Fair Values of Financial ~~Instruments.~~ Instruments

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


	September 30, 2017													September 30, 2019
(In thousands)	Carrying Amount			Fair Value			Level 1		Level 2		Level 3
(in thousands)														Carrying Amount			Fair Value			Level 1		Level 2			Level 3
Financial Assets
Cash and cash equivalents	$	48,724		$	48,724		$	48,724	$	—	$	—		$	71,593		$	71,593		$	71,593	$	—		$	—
Securities available for sale	718,459			718,459			—		718,459		—			675,675			675,675			—		675,675			—
FHLBB bank stock	37,107			37,107			—		37,107		—
FHLB stock														27,469			27,469			—		27,469			—
Net loans	2,416,912			2,392,284			—		—		2,392,284			2,561,953			2,567,331			—		—			2,567,331
Accrued interest receivable	3,194			3,194			—		3,194		—			3,218			3,218			—		3,218			—
Cash surrender value of bank-owned life insurance policies	57,613			57,613			—		57,613		—			75,368			75,368			—		75,368			—
Derivative assets	809			809			—		793		16			11,090			11,090			—		11,012			78

Financial Liabilities
Total deposits	$	2,275,109		$	2,250,483		$	—	$	2,250,483	$	—		$	2,493,585		$	2,491,023		$	—	$	2,491,023		$	—
Securities sold under agreements to repurchase	41,600			41,578			—		41,578		—
Federal Home Loan Bank advances	733,982			733,632			—		733,632		—
Short-term other borrowings														41,259			41,258			—		41,258			—
FHLB advances														600,559			601,377			—		601,377			—
Subordinated borrowings	38,048			38,048			—		38,048		—			37,928			37,928			—		37,928			—
Junior subordinated borrowings	5,000			3,564			—		3,564		—			5,000			4,556			—		4,556			—
Derivative liabilities	(173		)	(173		)	—		—		(173		)	(13,163		)	(13,163		)	—		(13,102		)	(61		)


	December 31, 2016										December 31, 2018
(In thousands)	Carrying Amount		Fair Value		Level 1		Level 2		Level 3
(in thousands)											Carrying Amount			Fair Value			Level 1		Level 2		Level 3
Financial Assets
Cash and cash equivalents	$	8,439	$	8,439	$	8,439	$	—	$	—	$	98,754		$	98,754		$	98,754	$	—	$	—
Securities available for sale	528,856		528,856		—		528,856		—		725,837			725,837			—		725,837		—
FHLBB bank stock	25,331		25,331		—		25,331		—
FHLB stock											35,659			35,659			—		35,659		—
Net loans	1,118,645		1,100,601		—		—		1,100,601		2,476,361			2,415,863			—		—		2,415,863
Accrued interest receivable	6,051		6,051		—		6,051		—		3,533			3,533			—		3,533		—
Cash surrender value of bank-owned life insurance policies	24,450		24,450		—		24,450		—		73,810			73,810			—		73,810		—
Derivative assets	1,748		1,748		—		1,748		—		2,164			2,164			—		2,156		8

Financial Liabilities
Total deposits	$	1,050,300	$	1,048,932	$	—	$	1,048,932	$	—	$	2,483,238		$	2,404,250		$	—	$	2,404,250	$	—
Securities sold under agreements to repurchase	21,780		21,773		—		21,773		—
Federal Home Loan Bank advances	509,816		509,793		—		509,793		—
Short-term other borrowings											36,211			36,171			—		36,171		—
FHLB advances											644,611			643,065			—		643,065		—
Subordinated borrowings	—		—		—		—		—		37,973			37,973			—		37,973		—
Junior subordinated borrowings	—		3,560		—		3,560		—		5,000			3,923			—		3,923		—
Derivative liabilities											(1,353		)	(1,353		)	—		—		(1,353		)

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 that value.

Cash and cash equivalents. Carrying value is assumed to represent fair value for cash and cash equivalents that have original maturities of ~~ninety~~90 days or less.

~~FHLBB bank~~FHLB stock and restricted securities. Carrying value approximates fair value based on the redemption provisions of the issuers.

Cash surrender value of life insurance policies. Carrying value approximates fair value.

Loans, net.The ~~carrying~~fair value of loans are calculated on an individual basis with consideration given to the ~~loans in~~loans' underlying characteristics, including account types, remaining terms, annual interest rates or coupons, interest types, timing of principal and interest payments, current market rates, risk ratings, credit ratings and remaining balances. A discounted cash flow model is used to estimate the loan portfolio is based on the cash flows of the loans discounted over their respective loan origination rates. The origination rates are adjusted for substandard and special mention loans to factor the impact of declines in the loan’s credit standing. The fair value of the loans ~~is estimated by discounting future cash flows~~ using assumptions for the ~~current interest~~coupon rates, ~~at which similar loans with similar terms would be made to borrowers~~remaining maturities, prepayment speeds, liquidity premiums, projected default probabilities, loss given defaults, and estimates of ~~similar credit quality.~~prevailing discount rates.

Accrued interest receivable. Carrying value approximates fair value.

Deposits. The fair value of demand, non-interest bearing checking, savings and money market deposits is determined as the amount payable on demand at the reporting date. The fair value of time deposits is estimated by discounting the estimated future cash flows using market rates offered for deposits of similar remaining maturities.

Borrowed funds. The fair value of borrowed funds is estimated by discounting the future cash flows using market rates for similar borrowings. Such funds include all categories of debt and debentures in the table above.

Subordinated borrowings. The Company utilizes a pricing service along with internal models to estimate the valuation of its junior subordinated debentures. The junior subordinated debentures re-price every ~~ninety~~90 days.

Off-balance-sheet financial instruments. Off-balance-sheet financial instruments ~~include~~including standby letters of credit and other financial guarantees and commitments are considered immaterial to the Company’s financial statements.

NOTE 11. NON-INTEREST INCOME

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

Disaggregation of Revenue

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



	Three Months Ended September 30,				Nine Months Ended September 30,
(in thousands)	2019		2018		2019		2018
Major Products/Service Lines
Trust management fees	$	2,737	$	2,720	$	8,055	$	8,268
Financial services fees	276		232		781		768
Interchange fees	1,323		1,146		3,567		3,277
Customer deposit fees	1,112		1,095		3,046		3,093
Other customer service fees	118		249		723		691
Total	$	5,566	$	5,442	$	16,172	$	16,097



	Three Months Ended September 30,				Nine Months Ended September 30,
(in thousands)	2019		2018		2019		2018
Timing of Revenue Recognition
Products and services transferred at a point in time	$	2,839	$	2,583	$	7,874	$	7,576
Products and services transferred over time	2,727		2,859		8,298		8,521
Total	$	5,566	$	5,442	$	16,172	$	16,097

Trust Management Fees.

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

Financial Services Fees.

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

Interchange Fees.

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

Customer Deposit Fees.

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

Other Customer Service Fees.

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

Contract Balances from Contracts with Customers

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



(in thousands)	Balance at September 30, 2019		Balance at December 31, 2018
Balances from contracts with customers only:
Other Assets	$	1,898	$	2,866
Other Liabilities	3,179		4,923

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

Costs to Obtain and Fulfill a Contract

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

NOTE 12. LEASES

A lease is defined as a contract, or part of a contract, that conveys the right to control the use of identified property, plant or equipment for a period of time in exchange for consideration. On January 1, 2019, the Company adopted ASU No. 2016-02 “Leases” and all subsequent ASUs modifying ASC 842. For the Company, ASC 842 primarily affects the accounting treatment for operating lease agreements where the Company is the lessee.

Lessee Accounting

Substantially all of the leases pursuant to which the Company is the lessee are comprised of real estate property for branches, ATM locations, and office space with terms extending through 2040. All leases are classified as operating leases, and therefore, were previously not recognized on the Company’s consolidated balance sheets. With the adoption of ASC 842, operating lease agreements are required to be recognized on the consolidated balance sheets as a right-of-use (“ROU”) asset with a corresponding lease liability using the modified retrospective approach. The total of ROU assets and lease liabilities were $9.0 million as of January 1, 2019.

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

Package of practical expedients:


◦	Lease classification as an operating lease under the prior standards is grandfathered.


◦	Re-evaluation of embedded leases evaluated under the prior standards is not required.


◦	No re-assessment of previously recorded initial direct lease costs.

Election to exclude short-term leases (i.e., leases with initial terms of twelve months or less), from capitalization on the consolidated balance sheets.

The following table presents the consolidated statements of condition classification of the Company’s ROU assets and lease liabilities as of September 30, 2019:



(in thousands)		September 30, 2019
Lease Right-of-Use Assets	Classification
Operating lease right-of-use assets	Other assets	$	8,447

Lease Liabilities
Operating lease liabilities	Other liabilities	8,524

The calculated amount of the ROU assets and lease liabilities in the table above are impacted by the length of the lease term and the discount rate used for the present value of the minimum lease payments. The Company’s lease agreements often include one or more options to renew at the Company’s discretion. If at lease inception, the Company considers the exercising of a renewal option to be reasonably certain, the Company will include the extended term in the calculation of the ROU asset and lease liability. Regarding the discount rate, ASC 842 requires the use of the rate implicit in the lease whenever this rate is readily determinable. As this rate is rarely determinable, the Company utilizes its incremental borrowing rate at lease inception, on a collateralized basis, over a similar term. For operating leases existing prior to January 1, 2019, the rate for the original lease term as of January 1, 2019 was used.



	September 30, 2019
Weighted-average remaining lease term
Operating leases	9.18

Weighted-average discount rate
Operating leases	3.37	%

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



(in thousands)	Three Months Ended September 30, 2019		Nine Months Ended September 30, 2019
Lease Costs
Operating lease cost	$	234	$	698
Variable lease cost	69		277
Total lease cost	$	303	$	975

Future minimum payments for operating leases with initial or remaining terms of one year or more as of September 30, 2019 are, as follows:



(in thousands)	Operating Leases
Twelve Months Ended:
September 30, 2020	$	911
September 30, 2021	896
September 30, 2022	912
September 30, 2023	908
September 30, 2024	917
Thereafter	6,065
Total future minimum lease payments	10,609
Amounts representing interest	(2,085		)
Present value of net future minimum lease payments	$	8,524

NOTE ~~12.~~13. SUBSEQUENT EVENTS

On ~~October 11, 2017~~July 8, 2019, the Company ~~sold its insurance company McCrillis & Eldredge Insurance, Inc.~~entered into a definitive agreement to ~~Cross Insurance,~~acquire eight branches located in central Maine with approximately $287.0 million of deposits, $111.0 million of loans and $284.0 million of assets under management (as of March 31, 2019) from People’s United Bank, National Association. The transaction closed on October 25, 2019 and the ~~sale did not have~~Company received initial proceeds of $134.0 million that were net of a ~~significant impact~~6.3% premium on average total deposits plus a premium of 1.2 times annualized wealth management revenue and approximately $4.4 million for the premises. The Company used the proceeds to pay-down Federal Home Loan Bank advances. The Company is currently in the ~~Company's balance sheet position.~~process of determining the final purchase price and allocation between the assets acquired and liabilities assumed.

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

GENERAL

Management’s discussion and analysis of financial condition and results of operations is intended to assist in understanding the financial condition and results of operations of the Company. The following discussion and analysis should be read in conjunction with the Company’s consolidated financial statements and the notes thereto appearing in Part I, Item 1 of this document and with the Company’s consolidated financial statements and the notes thereto and Management’s Discussion and Analysis of Financial Condition and Results of Operations included in the Company's ~~2016~~ Annual Report on Form ~~10-K.~~10-K for the year ended December 31, 2018. In the following discussion, income statement comparisons are against the same period of the previous year and balance sheet comparisons are against the previous fiscal year-end, unless otherwise noted. Operating results discussed herein are not necessarily indicative of the results for the full year ~~2017~~2019 or any future period. In management’s discussion and analysis of financial condition and results of operations, certain reclassifications have been made to make prior periods comparable.

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

Employee and customer experience is the foundation of superior performance, which leads to significant financial benefit to shareholders

Geography, heritage and performance are key while remaining true to a community culture

Strong commitment to risk management while balancing growth and earnings

Service and sales driven culture with a focus on core business growth

Fee income is fundamental to the Company's profitability through trust and treasury management services, customer derivatives and secondary market mortgage banking

Investment in processes, products, technology, training, leadership and infrastructure

Expansion of the Company’s brand and business to deepen market presence

Opportunity and growth for existing employees while adding catalyst recruits across all levels of the Company



~~• Community bank with $3.5 billion in assets~~ ~~• 53 branches~~ ~~• Commercial banking, retail banking and wealth management~~

~~FORWARD-LOOKING STATEMENTS~~

~~Certain statements contained in this document that are not historical facts may constitute forward-looking statements within the meaning of Section 27A~~Shown below is a profile 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 the Company files with the Securities and Exchange Commission, including the Annual Report on Form 10-K for the fiscal year ended December 31, 2016 and the Risk Factors in Item 1A of this report. Because of these and other uncertainties, the Company’s actual results, performance or achievements, or industry results, may be materially different from the results indicated by these forward-looking statements. In addition, the Company's past results of operations do not necessarily indicate future results.

Additional factors that could cause results to differ materially from those described in the forward-looking statements relate to the completed acquisition of Lake Sunapee Bank Group. These additional factors that could cause actual results to differ materially from expected results include difficulties in achieving cost savings from the acquisition or in achieving such cost savings within the expected time frame and difficulties in integrating the Company and Lake Sunapee Bank Group, increased competitive pressures, changes in the interest rate environment, changes in general economic conditions, legislative and regulatory changes that adversely affect the business in which the Company is engaged, changes in the securities markets and other risks and uncertainties disclosed from time to time in documents that the Company files with the Securities and Exchange Commission.

~~No undue reliance should be placed on any of the forward-looking statements, which speak only~~ as of the dates on which they were made. The Company is not undertaking an obligation to update forward-looking statements, even though its situation may change in the future, except as required under federal securities law. The Company qualifies all of its forward-looking statements by these cautionary statements.September 30, 2019:

SELECTED FINANCIAL DATA

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


	Three Months Ended September 30,						Nine Months Ended September 30,							Three Months Ended September 30,						Nine Months Ended September 30,
	2017			2016			2017			2016				2019			2018			2019			2018
PER SHARE DATA
Net earnings, diluted	$	0.56		$	0.40		$	1.27		$	1.35			$	0.32		$	0.58		$	1.18		$	1.63
Adjusted earnings, diluted (1) (2)	0.57			0.34			1.52			1.11
Adjusted earnings, diluted⁽¹⁾														0.47			0.58			1.35			1.66
Total book value	22.90			18.09			22.90			18.09				25.37			23.06			25.37			23.06
Tangible book value ~~(2)~~(1)	15.84			17.51			15.84			17.51				18.49			16.11			18.49			16.11
Market price at period end	31.36			24.48			31.36			24.48				24.93			28.72			24.93			28.72
Dividends	0.19			0.18			0.56			0.54				0.22			0.20			0.64			0.59
PERFORMANCE RATIOS

PERFORMANCE RATIOS⁽²⁾
Return on assets	0.99		%	0.86		%	0.75		%	1.00		%		0.55		%	1.01		%	0.68		%	0.96		%
Adjusted return on assets (1) (2)	1.01			0.73			0.90			0.82
Adjusted return on assets⁽¹⁾														0.80			1.01			0.77			0.98
Return on equity	9.67			8.78			7.43			10.20				5.04			9.92			6.37			9.54
Adjusted return on equity (1) (2)	9.90			7.49			8.86			8.34
Adjusted return on tangible equity (1) (2)	14.51			7.75			12.98			8.88
Net interest margin, fully taxable equivalent (FTE) (4)	3.06			2.84			3.13			2.90
Net interest margin (FTE), excluding purchased loan accretion (4)	2.93			2.84			3.00			4.86
Efficiency ratio (2)	53.59			61.24			56.44			59.34
GROWTH (Year-to-date)
Total commercial loans, (organic annualized) (2)	22.1		%	3.3		%	20.5		%	5.3		%
Total loans, (organic annualized) (2)	8.8			15.0			12.2			9.9
Total deposits, (organic annualized) (2)	11.2			17.7			10.6			9.6
Adjusted return on equity⁽¹⁾														7.36			9.98			7.25			9.72
Adjusted return on tangible equity⁽¹⁾														10.31			14.52			10.25			14.23
Net interest margin, fully taxable equivalent (FTE)^{(1) (3)}														2.75			2.81			2.72			2.90
Net interest margin (FTE), excluding purchased loan accretion⁽⁽³⁾													Net interest margin (FTE), excluding purchased loan accretion⁽⁽³⁾	2.65			2.71			2.63			2.79
Efficiency ratio⁽¹⁾														65.02			57.88			65.83			59.05

GROWTH (Year-to-date)⁽¹⁾
Total commercial loans														10.5		%	2.8		%	10.5		%	2.8		%
Total loans														4.7			(0.1		)	4.7			(0.1		)
Total deposits														0.6			2.2			0.6			2.2

FINANCIAL DATA (In millions)
Total assets	$	3,476		$	1,718		$	3,476		$	1,718			$	3,612		$	3,561		$	3,612		$	3,561
Total earning assets	3,184			1,649			3,184			1,649
Total earning assets⁽⁴⁾														3,270			3,253			3,270			3,253
Total investments	756			561			756			561				703			747			703			747
Total loans	2,429			1,088			2,429			1,088				2,577			2,484			2,577			2,484
Allowance for loan losses	12			10			12			10				15			13			15			13
Total goodwill and intangible assets	109			5			109			5				107			108			107			108
Total deposits	2,275			1,034			2,275			1,034				2,494			2,390			2,494			2,390
Total shareholders' equity	353			164			353			164				394			358			394			358
Net income	9			4			19			12				5			9			18			25
Adjusted income (4)	9			3			23			10
Adjusted income⁽¹⁾														7			9			21			26

ASSET QUALITY AND CONDITION RATIOS
Net charge-offs (current quarter annualized)/average loans (5)	0.03		%	(0.03		)%	0.03		%	(0.03		)%
Allowance for loan losses/total loans (5)	0.49			0.93			0.49			0.93
Net charge-offs (current quarter annualized)/average loans														0.02		%	0.04		%	0.02		%	0.06		%
Allowance for loan losses/total loans														0.60			0.54			0.60			0.54
Loans/deposits	107			105			107			105				103			104			103			104
Shareholders' equity to total assets	10.17			9.57			10.17			9.57				10.92			10.04			10.92			10.04
Tangible shareholders' equity to tangible assets (2)	7.26			9.29			7.26			9.29
Tangible shareholders' equity to tangible assets⁽¹⁾														8.20			7.24			8.20			7.24

_________________________


(1)	~~Adjusted measurements are non-GAAP~~Non-GAAP financial ~~measures that are adjusted to exclude net non-operating charges primarily related to acquisitions, and gain on sale of securities.~~measure. Refer to the Reconciliation of Non-GAAP Financial Measures section of Management's Discussion and Analysis for additional information.


(2)	~~Non-GAAP financial measure.~~


~~(3)~~	All performance ratios are annualized and are based on average balance sheet amounts, where applicable.


~~(4)~~(3)	Fully taxable equivalent considers the impact of ~~tax advantaged~~tax-advantaged investment securities and loans.

~~(5)~~

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.

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

CONSOLIDATED LOAN AND DEPOSIT ANALYSIS

The following tables present the quarterly trend in loan and deposit data and accompanying quarterly and year-to-date growth rates as of September 30, 2019 on an annualized basis:


BAR HARBOR BANKSHARES
CONSOLIDATED LOAN & DEPOSIT ANALYSIS - UNAUDITED

LOAN ANALYSIS

											Organic Annualized Growth % (1) September 30, 2017														September 30, 2019 Annualized Growth %
(in thousands)	Sep 30, 2017 Balance		Jun 30, 2017 Balance		Mar 31, 2017 Balance		Acquired Lake Sunapee Bank Balance (2)		Dec 31, 2016 Balance		Quarter End		Year to Date
(in thousands, except ratios)															Sep 30, 2019		Jun 30, 2019		Mar 31, 2019		Dec 31, 2018		Sep 30, 2018		Quarter End		Year to Date
Commercial real estate	$	793,572	$	738,584	$	779,635	$	345,586	$	418,119	29.8	%	10.7	%	$	923,773	$	881,479	$	821,567	$	826,699	$	840,018	19.2	%	15.7	%
Commercial and industrial	270,759		269,960		236,526		89,259		135,564		1.2		50.8		301,590		312,029		305,185		309,544		303,984		(13.4	)	(3.4	)
Total commercial loans	1,064,331		1,008,544		1,016,161		434,845		553,683		22.1		20.5		1,225,363		1,193,508		1,126,752		1,136,243		1,144,002		10.7		10.5
Residential real estate	1,152,628		1,160,832		1,155,436		652,255		506,612		(2.8	)	(1.8	)	1,143,452		1,167,759		1,184,053		1,144,698		1,140,519		(8.3	)	(0.1	)
Consumer	125,590		127,229		127,370		76,489		53,093		(5.2	)	(11.3	)	107,375		112,275		111,402		113,960		117,239		(17.5	)	(7.7	)
Tax exempt and other	86,313		80,042		73,469		44,611		15,676		31.3		249.0		101,116		104,696		104,752		95,326		81,830		(13.7	)	8.1
Total loans	$	2,428,862	$	2,376,647	$	2,372,436	$	1,208,200	$	1,129,064	8.8	%	12.2	%	$	2,577,306	$	2,578,238	$	2,526,959	$	2,490,227	$	2,483,590	(0.1	)%	4.7	%


~~(1)~~	~~Non-GAAP financial measure.~~


~~(2)~~	~~Acquired Lake Sunapee Bank loans are as of January 13, 2017.~~

																													DEPOSIT ANALYSIS

											Organic Annualized Growth % (1) September 30, 2017														September 30, 2019 Annualized Growth %
(in thousands)	Sep 30, 2017 Balance		Jun 30, 2017 Balance		Mar 31, 2017 Balance		Acquired Lake Sunapee Bank Balance (2)		Dec 31, 2016 Balance		Quarter End		Year to Date
(in thousands, except ratios)															Sep 30, 2019		Jun 30, 2019		Mar 31, 2019		Dec 31, 2018		Sep 30, 2018		Quarter End		Year to Date
Demand	$	357,398	$	332,339	$	349,896	$	248,051	$	98,856	30.2	%	15.9	%	$	380,707	$	354,125	$	342,030	$	370,889	$	372,358	30.0	%	3.5	%
NOW	442,085		451,171		242,876		39,999		175,150		(8.1	)	194.4		490,315		472,576		470,277		484,717		471,326		15.0		1.5
Savings															360,570		352,657		346,813		358,888		354,908		9.0		0.6
Money market	300,398		285,312		349,491		103,142		282,234		21.2		(45.2	)	359,328		305,506		349,833		335,951		254,142		70.5		9.3
Savings	373,118		360,306		511,091		467,735		77,623		14.2		(332.8	)
Total non-maturity deposits	1,472,999		1,429,128		1,453,354		858,927		633,863		12.3		(4.7	)	1,590,920		1,484,864		1,508,953		1,550,445		1,452,734		28.6		3.5
Total time deposits	802,110		783,876		720,899		291,684		416,437		9.3		33.9		902,665		996,512		956,818		932,793		937,615		(37.7	)	(4.3	)
Total deposits	$	2,275,109	$	2,213,004	$	2,174,253	$	1,150,611	$	1,050,300	11.2	%	10.6	%	$	2,493,585	$	2,481,376	$	2,465,771	$	2,483,238	$	2,390,349	2.0	%	0.6	%


~~(1)~~	~~Non-GAAP financial measure.~~


~~(2)~~	~~Acquired Lake Sunapee Bank Deposits are as of January 13, 2017.~~

AVERAGE BALANCES AND AVERAGE YIELDS/RATES

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


	Three Months Ended September 30,								Nine Months Ended September 30,								Three Months Ended September 30,
	2017				2016				2017				2016				2019						2018
(In thousands)	Average Balance		Yield/Rate (FTE basis) (3)		Average Balance		Yield/Rate (FTE basis) (3)		Average Balance		Yield/Rate (FTE basis) (3)		Average Balance		Yield/Rate (FTE basis) (3)
(in thousands, except ratios)																	Average Balance		Interest⁽³⁾		Yield/Rate ₍₃₎		Average Balance		Interest⁽³⁾		Yield/Rate ₍₃₎
Assets
Loans (1)	$	2,402,171	4.13	%	$	1,058,253	3.89	%	$	2,379,190	4.10	%	$	1,033,070	3.97	%
Commercial real estate																	$	900,568	$	10,750	4.74	%	$	837,058	$	9,646	4.57	%
Commercial and industrial																	410,453		4,947		4.78		388,831		4,497		4.59
Residential																	1,154,552		11,293		3.88		1,120,336		10,828		3.83
Consumer																	109,562		1,418		5.13		117,735		1,438		4.85
Total loans ⁽¹⁾																	2,575,135		28,408		4.38		2,463,960		26,409		4.25
Securities and other (2)	754,450		3.13		551,456		3.07		758,748		3.11		543,513		3.07		732,925		6,356		3.44		773,562		6,267		3.21
Total earning assets	3,156,621		3.89	%	1,609,709		3.62	%	3,137,938		3.86	%	1,576,583		3.66	%	3,308,060		34,764		4.17	%	3,237,522		32,676		4.00	%
Other non-earning assets	295,924				79,826				305,735				76,431
Other assets																	333,896						295,162
Total assets	$	3,452,545			$	1,689,535			$	3,443,673			$	1,653,014			$	3,641,956					$	3,532,684

Liabilities
Interest bearing deposits	$	1,901,501	0.66	%	$	897,703	0.78	%	$	1,863,091	0.57	%	$	874,666	0.75	%
NOW																	$	487,506	$	621	0.51	%	$	461,875	$	501	0.43	%
Savings																	359,242		193		0.21		356,834		151		0.17
Money market																	338,013		1,168		1.37		259,738		500		0.76
Time deposits																	947,949		5,161		2.16		964,108		4,325		1.78
Total interest bearing deposits																	2,132,710		7,143		1.33		2,042,555		5,477		1.06
Borrowings	812,938		1.66		514,999		1.06		835,274		1.49		520,508		1.03		708,222		4,674		2.62		744,632		4,237		2.26
Total interest-bearing liabilities	2,714,439		0.96	%	1,412,702		0.88	%	2,698,365		0.85	%	1,395,174		0.86	%
Non-interest-bearing demand deposits	354,470				103,971				327,547				88,652
Other non-earning liabilities	30,079				7,376				68,973				7,281
Total interest bearing liabilities																	2,840,932		11,817		1.65	%	2,787,187		9,714		1.38	%
Non-interest bearing demand deposits																	368,100						357,856
Other liabilities																	37,975						28,943
Total liabilities	3,098,988				1,524,049				3,094,885				1,491,107				3,247,007						3,173,986

Total shareholders' equity	353,557				165,486				348,788				161,907				394,949						358,698

Total liabilities and shareholders' equity	$	3,452,545			$	1,689,535			$	3,443,673			$	1,653,014			$	3,641,956					$	3,532,684

Net interest spread			2.93	%			2.74	%			3.01	%			2.81	%					2.52	%					2.62	%
Net interest margin			3.06				2.84				3.13				2.90						2.75						2.81


(1)	The average balances of loans include ~~nonaccrual~~non-accrual loans and unamortized 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~~tax-advantaged securities and loans.



	Nine Months Ended September 30,
	2019						2018
(in thousands, except ratios)	Average Balance		Interest⁽³⁾		Yield/Rate ₍₃₎		Average Balance		Interest⁽³⁾		Yield/Rate ₍₃₎
Assets
Commercial real estate	$	859,613	$	30,480	4.74	%	$	827,499	$	27,772	4.49	%
Commercial and industrial	410,350		14,662		4.78		388,627		13,268		4.56
Residential	1,157,923		33,941		3.92		1,131,509		32,669		3.86
Consumer	111,274		4,333		5.21		119,504		4,163		4.66
Total loans ⁽¹⁾	2,539,160		83,416		4.39		2,467,139		77,872		4.22
Securities and other ⁽²⁾	761,234		19,389		3.41		768,812		18,304		3.18
Total earning assets	3,300,394		102,805		4.16	%	3,235,951		96,176		3.97	%
Other assets	335,883						279,192
Total assets	$	3,636,277					$	3,515,143

Liabilities
NOW	$	472,542	$	1,764	0.50	%	$	451,178	$	1,285	0.38	%
Savings	353,117		545		0.21		356,859		456		0.17
Money market	337,822		3,521		1.39		283,356		1,580		0.75
Time deposits	925,508		14,505		2.10		900,315		10,545		1.57
Total interest bearing deposits	2,088,989		20,335		1.30		1,991,708		13,866		0.93
Borrowings	751,016		15,232		2.71		797,913		12,192		2.04
Total interest bearing liabilities	2,840,005		35,567		1.67	%	2,789,621		26,058		1.25	%
Non-interest bearing demand deposits	377,014						341,656
Other liabilities	32,676						28,926
Total liabilities	3,249,695						3,160,203

Total shareholders' equity	386,582						354,940

Total liabilities and shareholders' equity	$	3,636,277					$	3,515,143

Net interest spread					2.49	%					2.72	%
Net interest margin					2.72						2.90


(1)	The average balances of loans include non-accrual loans and unamortized deferred fees and costs.


(2)	The average balance for securities available for sale is based on amortized cost.


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

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”~~accounting principles generally accepted in the United States of America ("GAAP"). These non-GAAP measures are intended to provide the reader with additional supplemental perspectives on operating results, performance trends, and financial condition. Non-GAAP financial measures are not a substitute for GAAP measures; they should be read and used in conjunction with the ~~Company’s~~Company's GAAP financial information. ~~The Company’s~~A reconciliation of non-GAAP financial measures ~~may not be comparable~~ to ~~similar non-GAAP information which may be presented by other companies.~~GAAP measures is provided below. 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~~that management excludes when computing non-GAAP adjusted earnings can be of substantial importance to the ~~Company’s~~Company's results ~~and condition~~ for any particular quarter or year. ~~A reconciliation of~~The Company's non-GAAP adjusted earnings information set forth is not necessarily comparable to non- GAAP information that may be presented by other companies. Each non-GAAP measure used by the Company in this report as supplemental financial ~~measures to~~data should be considered in conjunction with the Company's GAAP ~~measures is provided below.~~financial information.

The Company utilizes the non-GAAP measure of adjusted earnings in evaluating operating trends, including components for ~~operating~~adjusted revenue and expense. These measures exclude amounts ~~which~~that the Company views as unrelated to its normalized operations, including gains/losses on securities, ~~gains/losses,~~premises, equipment and other real estate owned, acquisition costs, restructuring costs, legal settlements, and systems conversion costs. ~~These~~Non-GAAP 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 also calculates ~~several non-GAAP performance measures~~adjusted earnings per share based on its measure of adjusted ~~earnings, including adjusted earnings per share, adjusted return on assets, adjusted return on equity, and the efficiency ratio.~~earnings. The Company views these amounts as important to understanding its ~~performance~~operating trends, particularly due to the impact of accounting standards related to acquisition activity. ~~Several of these measures are used as performance metrics in assessing the achievement of short and long term incentive compensation for management.~~ Analysts also rely on these measures in estimating and evaluating the ~~Company’s~~Company's performance. Management also believes that the computation of non-GAAP adjusted earnings and adjusted earnings per share may facilitate the comparison of the Company to other companies in the financial services industry. The Company also adjusts certain equity related measures to exclude intangible assets due to the importance of these measures to the investment ~~community and as components of regulatory capital supervision.~~community.

~~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~~ for the time periods ~~and dates indicated~~

presented:

BAR HARBOR BANKSHARES
RECONCILIATION OF NON-GAAP FINANCIAL MEASURES AND SUPPLEMENTARY DATA- UNAUDITED
Three Months Ended September 30, Nine Months Ended September 30,
(in thousands) 2017 2016 2017 2016
Net income $ 8,617
$ 3,632
$ 19,386
$ 12,349
Adj: Security Gains (19 ) (1,354 ) (19 ) (4,489 )
Adj: Loss on sale of fixed assets, net (1 ) 216
94
216
Adj: Acquisition expense 346
320
5,917
812
Adj: Income taxes (37.57% in 2017, 35.0% in 2016) (122 ) 286
(2,251 ) 1,211
Total adjusted income (4) (A) $ 8,821
$ 3,100
$ 23,127
$ 10,099

Net-interest income (B) $ 23,478
$ 10,999
$ 68,659
$ 33,717
Plus: Non-interest income 6,960
3,372
19,465
10,314
Total Revenue 30,438
14,371
88,124
44,031
Adj: Net security gains (19 ) (1,354 ) (19 ) (4,489 )
Total adjusted revenue (4) (C) $ 30,419
$ 13,017
$ 88,105
$ 39,542

Total non-interest expense $ 17,586
$ 8,750
$ 58,463
$ 25,478
Less: Acquisition expense (346 ) (320 ) (5,917 ) (812 )
Adjusted non-interest expense (4)                                     (D) $ 17,240
$ 8,430
$ 52,546
$ 24,666

(in millions)

Total average earning assets (E) $ 3,157
$ 1,610
$ 3,138
$ 1,577
Total average assets                                                 (F) 3,453
1,690
3,444
1,653
Total average shareholders' equity                          (G) 354
165
349
162
Total average tangible shareholders' equity (H) 244
160
242
157
Total tangible shareholders' equity, period-end (1) (I) 244
159
244
159
Total tangible assets, period-end (1) (J) 3,367
1,713
3,367
1,713

(in thousands)
Total common shares outstanding, period-end (K) 15,432
9,084
15,432
9,084
Average diluted shares outstanding (L) 15,511
9,162
15,204
9,138

Adjusted earnings per share, diluted (A/L) $ 0.57
$ 0.34
$ 1.52
$ 1.11
Tangible book value per share, period-end (I/K) 15.84
17.51
15.84
17.51
Total tangible shareholders' equity/total tangible assets (H/J) 7.26
9.29
7.26
9.29

Performance ratios (2)

GAAP return on assets 0.99 % 0.86 % 0.75 % 1.00 %
Adjusted return on assets (4) (A/F) 1.01
0.73
0.90
0.82
GAAP return on equity 9.67
8.78
7.43
10.20
Adjusted return on equity (4) (A/G) 9.90
7.49
8.86
8.34
Adjusted return on tangible equity (3) (4) (A/I) 14.51
7.75
12.98
8.88
Efficiency ratio (4)(5) (D-N-P)/(C+M) 53.59
61.24
56.44
59.34
Net interest margin (B+O)/E 3.06
2.84
3.13
2.90



		At or for the Three Months Ended September 30,						At or for the Nine Months Ended September 30,
(in thousands)		2019			2018			2019			2018
GAAP net income		$	5,015		$	8,970		$	18,413		$	25,317
Plus (less):
Gain on sale of securities, net		(157		)	—			(157		)	—
Loss on sale of premises and equipment, net		—			—			21			—
Loss on other real estate owned		146			(8		)	146			15
Acquisition, restructuring and other expenses		3,039			70			3,319			619
Income tax (expense) benefit⁽¹⁾		(720		)	(12		)	(792		)	(150		)
Total adjusted income⁽²⁾	(A)	$	7,323		$	9,020		$	20,950		$	25,801

GAAP net interest income	(B)	$	22,445		$	22,469		$	65,706		$	68,619
Plus: Non-interest income		7,643			7,126			21,263			20,485
Total Revenue⁽²⁾		30,088			29,595			86,969			89,104
Less: Gain on sale of securities, net		(157		)	—			(157		)	—
Total adjusted revenue⁽²⁾	(C)	$	29,931		$	29,595		$	86,812		$	89,104

GAAP total non-interest expense		$	23,400		$	17,906		$	62,930		$	55,443
Less: Loss on sale of premises and equipment, net		—			—			(21		)	—
Less: Loss on other real estate owned		(146		)	8			(146		)	(15		)
Less: Acquisition, restructuring and other expenses		(3,039		)	(70		)	(3,319		)	(619		)
Adjusted non-interest expense⁽²⁾	(D)	$	20,215		$	17,844		$	59,444		$	54,809

(in millions)
Total average earning assets	(E)	$	3,308		$	3,238		$	3,300		$	3,236
Total average assets	(F)	3,642			3,533			3,636			3,515
Total average shareholders' equity	(G)	395			359			387			355
Total average tangible shareholders' equity⁽²⁾⁽³⁾	(H)	288			251			279			247
Total tangible shareholders' equity, period-end⁽²⁾⁽³⁾	(I)	287			250			287			250
Total tangible assets, period-end⁽²⁾⁽³⁾	(J)	3,506			3,453			3,506			3,453

(in thousands)
Total common shares outstanding, period-end	(K)	15,549			15,509			15,549			15,509
Average diluted shares outstanding	(L)	15,581			15,580			15,582			15,564

Adjusted earnings per share, diluted	(A/L)	$	0.47		$	0.58		$	1.35		$	1.66
Tangible book value per share, period-end⁽²⁾	(I/K)	18.49			16.11			18.49			16.11
Securities adjustment, net of tax⁽⁴⁾	(M)	8,002			(17,152		)	8,002			(17,152		)
Tangible book value per share, excluding securities adjustment⁽⁴⁾	(I+M)/K	17.98			17.22			17.98			17.22
Total tangible shareholders' equity/total tangible assets⁽²⁾	(I/J)	8.20			7.24			8.20			7.24


											At or for the Three Months Ended September 30,						At or for the Nine Months Ended September 30,
											2019			2018			2019			2018
Performance ratios⁽⁵⁾
Return on assets											0.55		%	1.01		%	0.68		%	0.96		%
Adjusted return on assets⁽²⁾										(A/F)	0.80			1.01			0.77			0.98
Return on equity											5.04			9.92			6.37			9.54
Adjusted return on equity⁽²⁾										(A/G)	7.36			9.98			7.25			9.72
Adjusted return on tangible equity⁽²⁾⁽⁶⁾										(A+Q)/H	10.31			14.52			10.25			14.23
Efficiency ratio⁽²⁾⁽⁷⁾										(D-O-Q)/(C+N)	65.02			57.88			65.83			59.05
Net interest margin⁽²⁾										(B+P)/E	2.75			2.81			2.72			2.90

Supplementary data (in thousands)
Taxable equivalent adjustment for efficiency ratio	(M)	$	1,107	$	434	$	3,269	$	1,061	(N)	$	658		$	654		$	2,018		$	1,921
Franchise taxes included in non-interest expense	(N)	154		36		438		103		(O)	119			129			350			440
Tax equivalent adjustment for net interest margin	(O)	878		168		2,568		528		(P)	503			493			1,532			1,498
Intangible amortization	(P)	189		157		534		471		(Q)	207			207			621			621


(1)	~~Total tangible~~Assumes a marginal tax rate of 23.78% in 2019. A marginal tax rate of 23.78% was used in the third and fourth quarter of 2018.


(2)	Non-GAAP financial measure.


(3)	Tangible shareholders' equity is computed by taking total shareholders' equity less the intangible assets at period-end. ~~Total tangible~~Tangible assets is computed by taking total assets less the intangible assets at period-end.


~~(2)~~(4)	~~Ratios~~Securities adjustment, net of tax represents the total unrealized loss on available-for-sale securities recorded on the Company's consolidated balance sheets within total common shareholders' equity.


(5)	All performance ratios are ~~annualized and~~ based on average balance sheet amounts, where applicable. ~~Quarterly data may not sum to year-to-date data due to rounding.~~


~~(3)~~(6)	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%~~23.78% in ~~2017~~2019, 24.15% in the first and ~~35.0%~~second quarter of 2018 and 23.78% in ~~2016,~~the third and fourth quarter of 2018, by tangible equity.


~~(4)~~	~~Non-GAAP financial measure.~~


~~(5)~~(7)	Efficiency ratio is computed by dividing ~~total core tangible~~adjusted non-interest expense by the sum of ~~total~~ net interest income on a fully taxable equivalent basis and ~~total core~~adjusted non-interest income. ~~The Company uses this non-GAAP measure to provide important information about its operating efficiency.~~

~~THIRD QUARTER~~

FINANCIAL SUMMARY

The Company reported third quarter ~~2017~~2019 net income of ~~$8.6~~$5.0 million or ~~56 cents~~$0.32 diluted earnings per share. Net income in the same quarter of 2018 totaled $9.0 million, or $0.58 diluted earnings per share. Adjusted earnings (non-GAAP measure) in the third quarter 2019 totaled ~~$8.8~~$7.3 million, or ~~57 cents~~$0.47 diluted earnings per share, ~~representing~~ a ~~10%~~15% increase ~~over~~from the prior quarter of $6.3 million or $0.41 diluted earnings per share. Financial highlights for the third quarter 2019 include the following:

11% annualized growth in commercial loans

29% annualized growth in non-maturity deposits

10 basis point expansion in net interest margin

3% increase in non-interest income

0.53% non-performing assets to total assets

The Company’s performance metrics improved in the third quarter 2019 as its teams focused on profitability of operations and initiatives to enhance revenue and create expense efficiencies. The Company continued to actively manage the balance sheet focusing on operations and taking advantage of the interest rate environment as a planned deleveraging strategy was executed resulting in decreasing the securities portfolio by nearly $73.0 million and using the proceeds to pay off higher cost borrowings. This resulted in yields from securities expanding 15 basis points and borrowings costs decreasing 12 basis points compared to the prior quarter. The ~~increase reflects~~commercial team delivered another quarter of strong double digit growth across the ~~strength~~Company’s three state footprint including its loan production office in Portland, Maine, which also contributed to significant customer derivative income. Loan quality continues to be strong with net charge-offs close to zero, indicative of a disciplined approach to credit quality, risk mitigation, and an effort focused on proven operators with appropriate loan structures. Growth in non-maturity deposits was up during the quarter, 29% on an annualized basis. That improvement is the direct result of the ~~Company's now expanded footprint and seasoned team. As discussed in an earlier section,~~sales culture, which the Company ~~uses~~has been cultivating over the ~~non-GAAP measure~~past year under new leadership. All of ~~adjusted earnings, and related metrics, to evaluate~~these efforts in the ~~results of its operations.~~

~~Third~~ quarter ~~financial highlights include the following (comparisons are to prior quarter unless otherwise stated):~~

~~1.01% core return on assets (non-GAAP measure)~~

~~6% increase in non-interest income~~

~~22% annualized commercial loan growth~~

~~11% annualized total deposit growth~~

~~54% efficiency ratio (non-GAAP measure)~~

~~9.90% core return on equity (non-GAAP measure)~~

Third quarter 2017 results demonstrate the Company’s stability in its business model while now having the platform for even stronger organic growth. The Company’s growth in profitability was reflected in its key performance metrics as return on assets improved to 0.99% and adjusted return on assets achieved 1.01%. Operational improvements and significant positive operating leverage resulted in a ~~54% efficiency ratio for~~6% annualized increase to tangible book value per share.

The Company completed the strategic review in the third quarter that was announced in the second quarter. This review positions the Company for improved profitability and judicious deployment of capital, while balancing liquidity and core deposit growth. The results of this strategic review included a branch optimization exercise that evaluated fixed assets, staffing models, and business and operational processes. Towards the end of September the Company announced the intent to close five branches by year-end and identified other non-branch properties to consolidate across the footprint. Additionally, the Company continues to ~~position its balance sheet~~consolidate processes within wealth management businesses to ~~optimize performance, as is evidenced by strong loan growth~~increase efficiency while improving customer service. These strategic decisions along with the elimination of other redundancies and ~~superior credit quality. Additionally, the loan~~implemented efficiencies are expected to ~~deposit ratio remained flat despite funding significant production during the quarter.~~

~~The Company’s commitment~~be accretive to ~~creating shareholder value is reflected in its return on equity and core return on equity ratios. Those ratios are at the highest levels~~earnings in the ~~past five quarters as the 10% threshold is approached. Tangible book value continues to grow towards pre-acquisition levels and the Company believes that can expand even further by adhering to~~first quarter of 2020 thereby allowing a ~~disciplined model of balancing~~platform for profitable growth ~~and profitability.~~with positive operating leverage.

In October ~~2017,~~2019, the Company completed its previously announced ~~the sale~~acquisition of eight bank branches. Experienced teams from both sides have been working together to ensure a smooth transition of customer accounts and systems. The Company welcomes its ~~insurance business, which will~~new customers and colleagues while building out its central Maine franchise. The acquisition is expected to be immediately accretive to ~~tangible equity~~adjusted income during the fourth quarter 2019.

COMPARISON OF FINANCIAL CONDITION AT SEPTEMBER 30, 2019 AND DECEMBER 31, 2018

Summary

Total assets increased $4.0 million to $3.6 billion at the end of the third quarter 2019 compared with year-end 2018. Loans increased to $2.6 billion from $2.5 billion at year-end 2018 on growth from commercial loans offset in part by lower residential loans primarily due to higher secondary market sales. Securities decreased $58.4 to $703.1 million at the end of the third quarter from year-end 2018 which includes the impact of the executed deleveraging strategy in the third quarter. Asset quality metrics remain strong with an allowance for loan losses to total loans ratio of 0.60% with a coverage ratio to non-accruing loans at 92%, up from 76% as of year-end 2018. The loan to deposit ratio

increased to 103% from 100% at year-end 2018 given robust loan growth net of deposit growth. The Company’s book value per share increased 8%, on annualized basis, in the first nine months of 2019 from year-end 2018.

Securities

Securities totaled $703.1 million in the third quarter 2019 and $761.5 million at year-end 2018 representing 19% and 21% of total assets, respectfully. Those ratios are within the tolerance range of the Company’s investment policy and the decrease is the result of the balance sheet deleveraging strategy with opportunistic sales and natural run-off. Securities purchased in 2019 included $52.6 million of mortgage-backed securities guaranteed by US Government-sponsored enterprises, $24.0 million of corporate bonds, and a net $8.2 million decrease in FHLB stock. The purchases were offset by sales of $68.0 million, maturities, calls and pay-downs of amortizing securities of $80.5 million, and a $21.7 million increase in fair value. The increase in fair value was primarily caused by lower long-term interest rates at the end of the third quarter 2019 as compared to year-end 2018. The weighted average yield on the Company’s security profile as of September 30, 2019 was 3.44% for the quarter compared to 3.28% at year-end 2018. At the end of the third quarter 2019, securities held by the Company had a weighted average life of 4.3 years and a duration of 2.9 years compared to a weighted average life of 5.2 years and a duration of 3.9 years at the end of 2018, respectively.

Loans

Total loans at September 30, 2019 were $2.6 billion, an increase of $87.1 million or 4.7% on an annualized basis, from year-end 2018. Commercial real estate grew significantly during 2019 at a rate of 15.7% due to execution of the Company’s growing pipeline across New Hampshire, Vermont, and Maine and loan production office centered in Portland, Maine. Residential loans were flat in the first nine months of 2019 primarily due to higher sales in the secondary market given the overall rate environment and initiatives around profit as fee income is central to the Company’s strategic focus. Yields also increased among all product lines as variable rate loans repriced to higher levels benefiting from the Federal Reserve Bank (“FRB”) rate hikes in 2018.

Asset Quality

Asset quality metrics remained favorable in the first nine months of 2019. The allowance for loan losses increased to $15.4 million from $13.9 million at year-end 2018 due to loan growth offset by lower specific reserves on fewer non-accruing loans. Non-accruing loans decreased $1.6 million in 2019 as the Company benefited from favorable settlements of several credit relationships that approximated the carrying values of the loans. These improvements decreased the ratio of non-accruing loans to total loans to 0.65% from 0.73% at the end of 2018 and decreased the ratio of non-performing assets to total assets to 0.53% from 0.57% at the end of 2018.

Deposits and Borrowings

Total deposits increased $10.3 million to $2.5 billion from year-end 2018. Non-maturity deposits increased $40.5 million from new accounts and seasonally high balances. New non-maturity deposit accounts opened totaled 3,457 in the third quarter 2019 compared to 2,295 in the fourth quarter 2018. Time deposits decreased $30.1 million, reflecting the shift between time deposits to money market accounts as the interest rate environment changed in 2019. The average cost of ~~this year. The decision~~deposits increased to ~~sell was driven~~1.33% from 1.12% in the fourth quarter 2018 reflecting the FRB rate hike in December 2018. Total borrowings decreased by $39.0 as a result of the balance sheet deleveraging strategy. Borrowing costs are 2.62% in 2019 up from 2.53% in the fourth quarter 2018 as a result of the previously mentioned rate hike offset by the third quarter deleveraging strategy.

Derivative Financial Instruments

The notional balance of derivative financial instruments increased to $499.1 million at the end of the third quarter 2019 from $182.2 million at year-end 2018. The increase includes a $50.0 million notional amount related to an interest rate swap on brokered certificate of deposits to limit the Company’s ~~focus on its core banking areas and investments that represent~~exposure to rising interest rates over a five-year term. Additionally, as a result of commercial loan growth, the ~~most efficient use~~Company increased customer loan derivatives by $247.9 million with matching hedges using a national bank counterparty. The net fair value of ~~capital. Transactions like this~~total derivatives was a liability of $2.1 million at the end of the third quarter 2019 compared to asset of $811 thousand at year-end 2018.

Equity

Total equity was $394.5 million, compared with $370.6 million at year-end 2018. The Company’s book value per share increased $1.50 to $25.37 from year-end 2018. The increase was primarily due to a $14.9 million improvement in the Company’s securities fair value adjustment, net of tax, along with ~~adhering~~strong net income of $18.4 million offset by $9.9 million in dividends. Tangible book value per share (non-GAAP measure) increased to ~~its business model will ultimately benefit shareholders~~$18.49 per share up from $16.94 per share at year-end 2018. Additionally, tangible book value per share excluding the impact of securities fair value adjustments (non-GAAP measure) increased to $17.98, up from $17.50 at year-end 2018. The Company evaluates changes in tangible book value excluding securities adjustment, a non-GAAP financial measure, which is a commonly considered valuation metric used by the investment community and ~~remain consistent with~~which parallels some regulatory capital measures. The Company and the ~~Company’s brand as a true community bank.~~Bank remained "well capitalized" under regulatory guidelines at period-end.

COMPARISON OF OPERATING RESULTS FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, ~~2017~~2019 AND ~~2016~~2018

Summary

~~Results in 2017 include the Lake Sunapee operations acquired on January 13, 2017. As a result, many measures of revenue, expense,~~Third quarter 2019 net income ~~and average balances increased~~was $5.0 million, or $0.32 per share, compared to ~~prior periods.~~

~~As previously noted,~~$9.0 million, or $0.58 per share, in the ~~Company uses a~~same quarter of 2018. Net income in the third quarter 2019 included acquisition, restructuring, and other expense activity totaling $3.0 million. The non-GAAP measure of adjusted net income to supplement its evaluation of its operating results. Adjusted net income excludes certain amounts not viewed as part of normalized operations. These non-operating items consist primarily of acquisition, conversion,earnings in the third quarter 2019 totaled $7.3 million or $0.47 diluted earnings per share and ~~net gains realized from sales of assets from the Company’s security portfolio. The Company views its acquisition related costs as part of the economic investment for its acquisition.~~

~~Third quarter 2017 GAAP net income was $0.56~~$9.0 million or $0.58 diluted earnings per share in ~~2017~~the same period of 2018. Both net income and adjusted earnings in the third quarter 2019 benefited from higher yields on earning assets and non-interest income growth, offset by a higher cost of funds.

The Company reported year to date net income of $18.4 million or $1.18 per share, compared ~~to $0.40~~with $25.3 million or $1.63 per share in ~~2016.~~the same period of 2018. Adjusted ~~net income increased~~earnings decreased to ~~$0.57~~$20.9 million, or $1.35 per share from $0.34 for these respective periods. Results increased due to expanded operations and improved profitability. GAAP results in the current year include charges related to the Lake Sunapee Bank Group acquisition, and prior year net income benefited from gains from sales of securities.

~~On a year-to-date basis, GAAP net income~~compared with $25.8 million, or $1.66 per share, ~~was $1.27 in 2017 compared to $1.35 in 2016. Adjusted earnings increased to $1.52 per share from $1.11~~ for these respective periods. These changes largely ~~reflected~~reflect the same factors and trends discussed above that drove ~~third quarter earnings growth.~~

quarterly net income. The return on assets ratio during the first nine months of 2019 was 0.68% compared to 0.96% in the prior year due to lower net income and a higher average asset base. Adjusted return on assets (non-GAAP measure) was 0.77% for the first nine months of 2019 compared to 0.98% in the prior year. Return on equity in the first nine months of 2019 decreased to 6.37% from 9.54% in the prior year due to lower net income and growth in the average equity balance. Correspondingly, adjusted return on ~~assets improved on a year-over-year basis while respective GAAP basis performance metrics varied~~equity (non-GAAP measure) was 7.25% for the first nine months of 2019 compared to 9.72% in the past five quarters depending upon acquisition related charges and gains on security sales. The Company’s profitability has benefited from both a higher non-interest income as well as improved efficiency. Operational enhancements in 2017 are reflected in the Company’s efficiency ratio trend, which started in the first quarter at 62%, but then improved to 55% in second quarter and 54% in the third quarter. 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.~~

The Company continues to focus on non-interest income as the key to higher profitability and is currently in the process of expanding treasury management services for customers. A roll-out of enhanced product offerings is anticipated by the end of 2017. The Company views investments in fee income businesses such as trust, secondary marketing mortgage operations, and treasury management services as vehicles to expand return on assets.year.

Net Interest Income

Third quarter net interest income ~~increased year-over-year by $12.5~~was $22.4 million to $23.5 million. The increase was driven by a $1.5 billion increase in average earning assets, which includes organic growth and benefit of the Lake Sunapee Bank Group acquisition in the first quarter 2017. Net interest margin increased to 3.06% in the third quarter compared ~~to 2.84%~~with $22.5 million in the same quarter of ~~2016. Net~~2018. Interest income was $34.3 million, up 6% from $32.2 million in the third quarter of 2018 as average earning assets grew $70.5 million net. The net interest ~~spread increased 19~~margin for the three months ended decreased 6 basis points ~~reflecting~~over third quarter 2018 to 2.75%. Yields expanded across all loan categories as variable rate products repriced to higher ~~yields from loans and~~rates driven by the 2018 short-term hikes. The yield on securities ~~as well as lower~~improved 23 basis points while the cost of interest bearing ~~deposits acquired from Lake Sunapee Bank. Net~~liabilities increased 27 basis points. The year over year increase in interest ~~margin in 2017 also benefited from purchased loan accretion totaling $1.0 million in the third quarter. These improvements were partially offset by~~bearing liabilities was primarily due to higher ~~wholesale funding costs resulting from fed fund rate hikes~~short-term interest rates and the ~~Company’s extension~~flattening of ~~funding maturities. Increases~~the yield curve in ~~overall cost of funds are expected to have a negative impact on~~2019. However, net interest margin in the ~~near-term as rates increase~~third quarter 2019 included the benefit of the deleveraging strategy to remove $72.9 million of securities yielding an average of 2.1% and ~~the Company employs strategies to mitigate the impact.~~pay-off of wholesale borrowings with an average cost of 2.4%.

For the first nine months of ~~the year,~~2019 net interest income decreased to $65.7 million from $68.6 million in the same period of 2018. Interest income from earning assets increased ~~year~~ to ~~year~~$101.3 million with a yield of 4.16% compared to $94.7 million with a yield of 3.97% in the same period of 2018. The net interest margin was 2.72% compared to 2.90% in the prior year. The yield on total loans for the nine months ended expanded 17 basis points, driven by ~~$34.9~~the yield on commercial real estate loans expanding 25 basis points and the yield on commercial and industrial loans expanding 22 basis points. Improvement in interest income was offset by interest expense increasing to $35.6 million ~~to $68.7 million.~~in the first nine months of 2019 from $26.1 million in the same period of 2018. The ~~increase primarily reflects~~year-to-date effect, and management’s response, on net interest margin from interest-bearing liabilities is the ~~inclusion of Lake Sunapee Bank’s operations, and purchased loan accretion of $2.9 million during 2017.~~same as the quarterly discussion.

Non-Interest Income

Third quarter non-interest income ~~increased~~grew 7% to ~~$7.0~~$7.6 million from ~~$3.3~~$7.1 million ~~in the same quarter of 2016. Non-interest income, excluding gains on securities, increased $4.9 million from the~~ same quarter in ~~2016. Trust~~2018. The increase was driven by $828 thousand of customer derivative income associated with commercial loan growth and ~~investment management fee revenue added $2.1 million, which is principally due to~~$157 thousand net gain on sales of securities associated with the ~~addition~~balance sheet deleverage strategy. Non-interest income in the third quarter 2018 included a $685 thousand gain associated with the sale of Charter Trust Company (now a wholly owned subsidiary of the Bank) as part of the Lake Sunapee Bank Group acquisition. Customer service fees increased $1.9 million compared to the prior quarter also as a result of the acquisition given the broader customer deposit base and higher number of ATM transactions.Visa B shares.

Non-interest income for the first nine months of ~~2017~~2019 increased ~~year-over-year~~year over year by ~~$9.2~~4% to $21.3 million compared to ~~$19.5 million.~~$20.5 million for the same period of 2018. The increase in ~~trust and customer service fee~~non-interest income for the ~~nine month~~nine-month period is driven by the same reasons as the quarterly period. ~~However, income from security gains totaled $4.5 in 2016.~~

Loan Loss Provision

The third quarter 2019 provision for loan losses ~~in the third quarter 2017~~ increased to ~~$660~~$893 thousand from ~~$139~~$643 thousand ~~for~~in the same quarter ~~in 2016.~~2018, which is reflective of the increased commercial loan growth. On a year-to-date basis, the provision for loan ~~loss provision was~~losses decreased to $1.8 million in 2019 compared to $2.2 million in ~~2017 compared to $754 thousand in 2016. The amount~~2018, which is reflective of the ~~provision exceeded net charge-offs~~decrease in ~~all periods shown, as the amount~~non-accruing loans 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.~~$5.1 million or 23%. 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.~~Company. The level of the allowance is a critical accounting estimate, which is subject to uncertainty. The ~~level~~net charged-off loans to average loans ratio remained low at 0.02% annualized rate for the third quarter of ~~the allowance is included~~2019 compared to 0.04% in the ~~discussion~~same quarter 2018. Asset quality remains strong with non-accruing loans to total loans at 0.65% in the third quarter 2019, down from 0.88% in the same quarter of ~~financial condition.~~

2018.

Non-Interest Expense

~~Third quarter non-interest~~Non-interest expense increased to ~~$17.6~~$23.4 million from $8.7 million for the same quarter of 2016. Salary and employee benefit costs increased by $4.8 million compared with the third quarter of 2016 principally due to the Lake Sunapee Bank Group acquisition. Full time equivalent staff totaled 425 in the third quarter ~~2017~~2019 compared to ~~200~~$17.9 million in the same quarter of ~~2016. Salary~~2018. The increase in part is a result of higher salaries and ~~employee benefit costs decreased during the second~~benefits attributable to previously announced strategic hires and ~~third quarters of 2017 reflecting a positive trend of disciplined cost control~~an increase in professional service fees. Third quarter acquisition, restructuring and ~~realized cost saves with the acquisition. Occupancy~~other expenses ~~increased $1.7~~totaled $3.0 million ~~as compared~~in 2019 related to the ~~third quarter of 2016 due to costs of operating additional branches from the acquisition. Acquisition related~~branch acquisition and restructuring expenses ~~in the third quarter of 2017 are consistent~~associated with ~~the same quarter of 2016. Acquisition costs peaked in the first quarter of 2017 and then curtailed in each subsequent quarter as severance and system conversion costs were finalized.~~our previously announced strategic review.

~~On a year-to-date basis 2017 non-interest~~Non-interest expense increased to ~~$58.5~~$62.9 million ~~from $25.5 million~~ in ~~2016. Acquisition related expenses for the~~ first nine months of ~~2017 totaled $5.9 compared to $812 thousand~~2019 from $55.4 million in the same period of ~~2016. All other increases~~2018. The increase in non-interest expense ~~on a year-to-date basis are consistent with~~for the nine-month period is driven by the same reasons as the quarterly ~~trends.~~period.

Income Tax Expense

The third quarter effective tax ~~was 29.3%~~rate decreased to 13.5% in ~~the third quarter 2017~~2019 compared ~~to 33.7%~~with 18.8% in the same quarter of ~~2016.~~2018, and the rate for the nine months 2019 and 2018 was 17.3% and 19.5%, respectively. The decrease in the quarterly ~~rate~~and year-to-date rates is due ~~2017 tax benefits realized from filing amended tax returns. The rate in 2016 was also higher due~~ to ~~having a~~ lower ~~proportion of tax-advantage~~pre-tax income ~~to total income resulting from security gains. On a year to date basis, the 2017 rate decreased to 29.4% from 30.6%~~ in the ~~prior year reflecting the same factors~~respective periods of 2019 as ~~the quarterly comparison.~~compared to 2018.

~~COMPARISON OF FINANCIAL CONDITION AT SEPTEMBER 30, 2017 AND DECEMBER 31, 2016~~

~~Summary~~

Total assets increased to $3.5 billion as of September 30, 2017 from $1.8 billion at year end 2016. 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 loans, $155.6 million in securities, $1.2 billion in deposits, and $182 million in equity as a result of the issuance of common shares of the Company to Lake Sunapee shareholders. The loan to deposit ratio improved to 107% from 108% at year-end 2016 as loan growth was funded by seasonally higher deposit balances.

The Company's book value per share increased to $22.90 from $17.19 at the end of 2016 primarily due to the shares issued and net assets acquired in the first quarter 2017 in connection with the acquisition. Conversely, the Company’s tangible book value (non-GAAP measure) decreased to $15.84 from $16.61 at year-end 2016. The dilution is primarily due to the net impact of the additional shares issued with acquisition and goodwill recorded as part of the transaction. However, the Company has a strong quarterly trend in GAAP net income, which added tangible book value per share of $0.57, $0.43, and $0.27 during the third, second, and first quarters, respectively.

Asset quality continues to improve as the ratio of non-accruing loans to total loans decreased to 0.28% in the third quarter from 0.58% at year-end 2016. The ratio of net charge-offs to total loans remain close to zero in past five quarters ending the third quarter at 2 basis points.

~~Securities~~

Total securities increased $201.4 million which includes securities acquired from Lake Sunapee Bank Group and $146.2 million in securities purchased during the nine months ended September 30, 2017. Securities purchased included $119.2 million of mortgage-backed securities guaranteed by US Government-sponsored enterprises, $19.6 million of corporate bonds, and $7.4 million of FHLBB stock. The increase was offset by $105.5 million of maturities, calls and pay-downs of amortizing securities. The securities portfolio continues to be a strong source of liquidity for the Company and is comprised primarily of highly rated mortgage-backed securities guaranteed by U.S. Government-sponsored enterprises and U.S. Government agencies, obligations of state and political subdivisions thereof and FHLBB stock. The Company continues to evaluate the securities portfolio in response to established asset/liability management objectives, changing market conditions and the level of interest rate risk to which we are exposed.

~~Loans~~

The acquisition of Lake Sunapee Bank Group increased the legal lending limit of the Bank and expanded the lending area across all three of the northern New England states which resulted in organic growth in the loan portfolio. Excluding the impact of the acquired balances, total loans increased during the nine month period of 2017 by 12.2% on an annualized basis with 20.5% annualized growth in commercial loans led mostly by commercial and industrial loans.

~~Allowance for loan losses~~

During the nine months ending September 30, 2017, the allowance for loan losses increased $1.5 million to $11.9 million, which is due to the increase in business activity loans and lower charge-off activity reflecting improved asset quality. 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. 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.

~~Deposits~~

Excluding the impact of acquired balances, total deposits increased 10.6% on annualized basis as of September 30, 2017 when compared to December 31, 2016. Core deposits are still the primary funding source for loan growth and the Company took on additional FHLBB borrowings in order to fund additional loan growth in the period. Historically, the Bank's deposit market area has been seasonal, with lower deposits in the winter and spring months and higher deposits in the summer and autumn months; however, this seasonality is less present in the expanded deposit market areas of New Hampshire and Vermont.

~~Borrowings~~

Total borrowings increased by $232.0 million during the first nine months of 2017, of which $175.7 million was assumed from the acquisition. Excluding the impact of the acquisition, the increase was mostly in short term FHLBB advances to fund loans and investments during the first half of the year.

~~Equity~~

Excluding the $181.9 million of common stock of the Company issued to Lake Sunapee shareholders, total equity increased by $14.8 million, or 9.4% during 2017. Accumulated other comprehensive loss decreased by $2.9 million primarily due to an improvement in net after-tax fair value of available for sale securities. The improvement is related to an overall decrease in market yields since year-end 2016.

The Company evaluates changes in tangible book value, a non-GAAP financial measure which is a commonly considered valuation metric used by the investment community and which parallels some regulatory capital measures. Tangible book value increased to $244.4 million as of September 30, 2017 from $151.0 million at year-end 2016. The increase is due to the share issuance offset by goodwill and other intangible assets recorded for the Lake Sunapee Bank Group acquisition in the first quarter 2017. The Lake Sunapee Bank Group acquisition resulted in a $95.3 million increase in goodwill. The Company’s ratio of tangible equity to tangible assets stood at 7.26% at the end of the third quarter, compared to 8.65% at the end of 2016.

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

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

The 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 September 30, 2017, liquidity, as measured by the basic surplus model, was 6.6% over the 30-day horizon and 10.8% over the 90-day horizon.

~~The Bank~~ also had capacity to borrow funds on a secured basis utilizing the ~~Borrower in Custody~~Borrower-in-Custody program and the Discount Window at the ~~Federal Reserve Bank of Boston (the “FRB”).~~FRB. At September 30, ~~2017,~~2019, the Bank’s available secured line of credit at the FRB stood at ~~$114.6~~$107.7 million or ~~3.3%~~2.98% 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.

Off-Balance Sheet Arrangements

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

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

The Company’s off-balance sheet arrangements have not changed materially since previously reported in our Annual Report on Form 10-K for the year ended December 31, 2018 or our Quarterly Report on Form 10-Q for the quarter ended June 30, 2019.

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

The Company’s significant accounting policies are described in Note 1 to the consolidated financial statements in this Form 10-Q and in the most recent Form 10-K. Please see those policies in conjunction with this discussion. The accounting and reporting policies followed by the Company conform, in all material respects, to accounting principles generally accepted in the United States and to general practices within the financial services industry. The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. While the Company bases estimates on historical experience, current information and other factors deemed to be relevant, actual results could differ from those estimates.

The SEC defines “critical accounting policies” as those that require application of management’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 may 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 which may be estimated. Management uses historical information, as well as current economic data, to assess the adequacy of the allowance for loan losses as it is affected by changing economic conditions and various external factors, which may impact the portfolio in ways currently unforeseen. Although management believes that it uses appropriate available information to establish the allowance for loan losses, future additions to the allowance may be necessary if certain future events occur that may cause actual results to differ from the assumptions used in making the evaluation. Conditions in the local economy and real estate values could require the Company to increase provisions for loan losses, which would negatively impact earnings.

Acquired Loans: Loans that the Company acquired in business combinations are initially recorded at fair value with no carryover of the related allowance for ~~credit~~loan 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. Going forward, the Company continues to evaluate reasonableness of expectations for the timing and the amount of cash to be collected. Subsequent decreases in expected cash flows may result in changes in the amortization 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 estimates the fair value of the underlying collateral of the loans. These values are 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.

Income Taxes: Significant management judgment is required in determining income tax expense and deferred tax assets and liabilities. The Company uses the asset and liability method of accounting for income taxes in which deferred tax assets and liabilities 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 allowance would be established for deferred tax assets that management estimates are more likely than not to be unrealizable based on available evidence at the time the estimate is made. ~~There was no valuation allowance as of September 30, 2017.~~

Goodwill and Identifiable Intangible Assets: Goodwill and identifiable intangible assets are recorded as a result of business acquisitions and combinations. These assets are evaluated for impairment annually or whenever events or changes in circumstances indicate the carrying value of 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 fair 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 market 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)~~("OTTI"), at least quarterly. If the fair value of a debt security is below the amortized cost basis of the security, 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 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 OTTI 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 financial 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. Trading assets, 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 record at fair value other assets on a nonrecurring basis, or to establish a loss allowance or write-down based on the fair value of impaired assets. Further, the notes to 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 the estimation process, the estimates could result in materially different results under different assumptions and conditions.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Market Risk

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

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

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

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

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

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

The interest rate risk sensitivity model requires that assets and liabilities be broken down into components as to fixed, variable, and adjustable interest rates, as well as other homogeneous groupings, which are segregated as to maturity and type of instrument. The model includes assumptions about how the balance sheet is likely to evolve through time and in different interest rate environments. The model uses contractual re-pricing dates for variable products, contractual maturities for fixed rate products, and product-specific assumptions for deposit accounts, such as money market accounts, that are subject to re-pricing based on current market conditions. Re-pricing margins are also determined for adjustable rate assets and incorporated in the model. Investment securities and borrowings with call provisions are examined on an individual basis in each rate environment to estimate the likelihood of 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;

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.

As of September 30, ~~2017~~2019 interest rate sensitivity modeling results indicate that the Bank’s balance sheet in year 1 was ~~moderately~~slightly liability sensitive ~~over the one-~~ and ~~two-year horizons (i.e., moderately exposed to rising interest rates).~~in year 2 was asset sensitive.

Assuming short-term and long-term interest rates decline ~~100~~200 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 ~~improve slightly~~deteriorate over the one year horizon ~~(+.2%~~(-0.8% versus the base case) while ~~remaining relatively stable~~deteriorating further from that level over the two-year horizon ~~(+.3%~~(-7.3% versus the base case). 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 parallel with these increases, management believes net interest income will ~~decline moderately~~remain relatively unchanged over the one and two-year horizons ~~(-3.1%~~(-1.1% and ~~-6.7%~~-0.6%, respectively, versus the base case) 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.respectively).

As compared to ~~June 30, 2017,~~December 31, 2018, the year-one sensitivity in the down 100 basis points scenario ~~decreased~~was down slightly for the ~~quarter~~nine months ended September 30, 2019 (+~~.7%~~1.7% prior, versus ~~+.2%~~-.1% current). The year-two sensitivities in the down 100 basis points scenario ~~showed a small change~~changed going from ~~+.8%~~+0.7% to ~~+.3%~~-3.0%. In the year-one up 200 basis points scenario, results ~~improved~~declined going from ~~the prior quarter (-3.8% prior, versus -3.1% current)~~-3.7% to -1.1%. Year-two, up 200 basis points ~~shows a slightly more negative result (-6.2%~~declined (-8.3% prior, versus ~~-6.7%~~-.6% current)~~, although on balance, the current aggregate position is consistent with the prior quarter’s.~~

Despite four rate hikes over the last eighteen months, the Federal Reserve continues to maintain short-term interest rates at low levels, 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 changes, caps or floors on adjustable rate assets; the potential effect of changing debt service levels on customers with adjustable rate loans; depositor early withdrawals and product preference changes; and other such variables. The sensitivity analysis also does not reflect additional actions that the Bank’s Senior Executive Team and Board of Directors might take in responding to or anticipating changes in interest rates, and the anticipated impact on the Bank’s net interest income.

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 September 30, 2017, there were no significant differences between the views of the independent consultant and management regarding the Bank’s interest rate risk exposure.

ITEM 4. CONTROLS AND PROCEDURES


a)(a)	Disclosure controls and procedures.

~~The~~

Under the supervision and with the participation of our senior management, consisting of the Company’s principal executive ~~officers, including the~~officer and our principal financial officer, ~~based on their~~the Company conducted an evaluation of the effectiveness of the design and operation of its disclosure controls and procedures, ~~(as~~as defined in ~~Exchange Act~~ Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) as of the end of the period covered by this Quarterly Report on Form ~~10-Q, have~~10-Q. Based on this evaluation, the Company’s management, including its principal executive officer and principal financial officer, concluded that as of September 30, 2019 the Company’s disclosure controls and procedures were ~~effective.~~effective to ensure that information required to be disclosed by the Company in the reports that it files under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms. The Company’s disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by the Company in its Exchange Act reports is accumulated and communicated to the Company’s management, including its principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives, and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

b)(b) Changes in internal control over financial reporting.

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

PART IIII. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

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

ITEM 1A. RISK FACTORS

There have been no material changes to the risk factors discussed in Part I, Item 1A, “Risk Factors,” in our Annual Report on Form 10-K for the year ended December 31, 2018. In addition to the other information set forth in this report, you should carefully consider ~~the~~those risk factors, ~~discussed below and in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2016,~~ which could materially affect our business, financial condition orand future operating results. ~~The risks described in this form~~Those risk factors are not the only risks ~~that we face.~~facing our company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may ~~materially adversely affect~~have a material adverse effect on our business, financial condition ~~and/or~~and operating results.

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

~~(a) Not applicable.~~

~~(b) Not applicable.~~

(c) The following table provides certain information with regard to shares repurchased by the Company in the third quarter of ~~2017:~~2019:

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)
July 1-31, 2017 6,742
$ 29
6,742
404,706
August 1-31, 2017 —
—
—
404,706
September 1-30, 2017 —
—
—
404,706
Total 6,742
$ 29
6,742
404,706



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⁾
July 1-31, 2019	—	$	—	—	767,990
August 1-30, 2019	1,185	24.52		1,185	766,805
September 1-30, 2019	—	—		—	766,805
Total	1,185	$	24.52	1,185	766,805

(1) ~~In August 2008,~~On March 21, 2019 the ~~Company’s~~Company's Board of Directors approved a ~~twenty-four month program~~twelve-month plan to repurchase up to ~~450,000 shares~~5% of ~~the Company’s~~its outstanding common stock, ~~or approximately 10.2%~~representing 776,000 shares as of ~~the shares then outstanding.~~March 15, 2019. 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~~expires 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.March 20, 2020.

~~ITEM 3. DEFAULTS UPON SENIOR SECURITIES~~

~~None.~~

~~ITEM 4. MINE SAFETY DISCLOSURES~~

~~Not applicable.~~

~~ITEM 5. OTHER INFORMATION~~

~~None.~~

ITEM 6. EXHIBITS



~~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~~.

~~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).~~

10.1	~~Employment~~ Purchase and Assumption Agreement, dated July 8, 2019, by and between ~~William J. McIver, Bar Harbor Bankshares~~People’s United Bank, National Association, and Bar Harbor Bank & Trust ~~dated May 5, 2016.~~		~~Incorporated by reference to Form 8-K, 8.01, Exhibit 10.2, filed May 9, 2016 (Commission File No. 00113349).~~

~~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~~

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

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

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

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

101	The following financial information from the Company’s ~~Annual~~Quarterly Report on Form 10-Q for the quarter ended ~~June~~September 30, ~~2017~~2019 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

*Schedules (or similar attachments) have been omitted pursuant to Item 601(a)(5) of Regulation S-K. The Company hereby undertakes to furnish copies of any of the omitted schedules upon request by the Securities and Exchange Commission; provided, however, that the Company may request confidential treatment pursuant to Rule 24b-2 of the Exchange Act for any schedules so furnished.

SIGNATURES

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



	BAR HARBOR BANKSHARES


Dated: November ~~8, 2017~~4, 2019	By:	/s/ Curtis C. Simard
		Curtis C. Simard
		President & Chief Executive Officer


Dated: November ~~8, 2017~~4, 2019	By:	/s/ Josephine Iannelli
		Josephine Iannelli
		Executive Vice President & Chief Financial ~~Officer, & Principal Accounting~~ Officer

7583




PART II.	OTHER INFORMATION

Item 1.	Legal Proceedings	7280

Item 1A.	Risk Factors	7280

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	73

~~Item 3.~~	~~Defaults Upon Senior Securities~~	73

~~Item 4.~~	~~Mine Safety Disclosures~~	73

~~Item 5.~~	~~Other Information~~	7381

Item 6.	Exhibits	7482

Signatures		7583



(In thousands, except share data)	September 30, 2017			December 31, 2016
Assets
Cash and due from banks	$	31,223		$	8,219
Interest-bearing deposit with the Federal Reserve Bank	17,501			220
Total cash and cash equivalents	48,724			8,439
Securities available for sale, at fair value	718,459			528,856
Federal Home Loan Bank stock	37,107			25,331
Total securities	755,566			554,187
Commercial real estate	793,572			418,119
Commercial and industrial	357,072			151,240
Residential real estate	1,152,628			506,612
Consumer	125,590			53,093
Total loans	2,428,862			1,129,064
Less: Allowance for loan losses	(11,950		)	(10,419		)
Net loans	2,416,912			1,118,645
Premises and equipment, net	48,309			23,419
Other real estate owned	122			90
Goodwill	100,255			4,935
Other intangible assets	8,811			377
Cash surrender value of bank-owned life insurance	57,613			24,450
Deferred tax assets, net	13,052			5,990
Other assets	26,368			14,817
Total assets	$	3,475,732		$	1,755,349

Liabilities
Demand and other non-interest bearing deposits	$	357,398		$	98,856
NOW deposits	442,085			175,150
Savings deposits	373,118			77,623
Money market deposits	300,398			282,234
Time deposits	802,110			416,437
Total deposits	2,275,109			1,050,300
Senior borrowings	775,582			531,596
Subordinated borrowings	43,048			5,000
Total borrowings	818,630			536,596
Other liabilities	28,534			11,713
Total liabilities	3,122,273			1,598,609
Shareholders’ equity
Capital stock, par value $2.00; authorized 20,000,000 shares; issued 16,428,387 and 10,182,611 shares at September 30, 2017 and December 31, 2016, respectively	32,858			13,577
Additional paid-in capital	186,220			23,027
Retained earnings	141,251			130,489
Accumulated other comprehensive loss	(1,435		)	(4,326		)
Less: cost of 996,531 and 1,067,016 shares of treasury stock at September 30, 2017 and December 31, 2016, respectively	(5,435		)	(6,027		)
Total shareholders’ equity	353,459			156,740
Total liabilities and shareholders’ equity	$	3,475,732		$	1,755,349



(in thousands)	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		)	10,217			(i)	8,296
Other liabilities	(19,924		)	(4,087		)	(j)	(24,011		)
Total identifiable net assets	$	136,745		$	(50,131	)		$	86,614

Goodwill								$	95,332



	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



	September 30, 2017		Regulatory Minimum to be Well Capitalized		December 31, 2016		Regulatory Minimum to be Well Capitalized
Company (consolidated)
Total capital to risk weighted assets	13.8	%	10.0	%	16.5	%	10.0	%
Common equity tier 1 capital to risk weighted assets	11.3		6.5		15.0		6.5
Tier 1 capital to risk weighted assets	12.7		8.0		15.0		8.0
Tier 1 capital to average assets	8.0		5.0		8.9		5.0

Bank
Total capital to risk weighted assets	13.8	%	10.0	%	16.7	%	10.0	%
Common equity tier 1 capital to risk weighted assets	13.0		6.5		15.2		6.5
Tier 1 capital to risk weighted assets	13.0		8.0		15.2		8.0
Tier 1 capital to average assets	8.5		5.0		9.1		5.0



	Assets (Liabilities)
	Interest Rate Lock			Forward
(In thousands)	Commitments			Commitments
Three Months Ended September 30, 2017
June 30, 2017	$	(3	)	$	(231	)
Realized gain recognized in non-interest income	19			58
September 30, 2017	$	16		$	(173	)

Nine Months Ended September 30, 2017
December 31, 2016	$	—		$	—
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	(5		)	(29		)
September 30, 2017	$	16		$	(173	)