UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q


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

For the quarterly period ended: September 30, 2023


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

For the transition period from to

Commission File Number: 001-13349

BAR HARBOR BANKSHARES

(Exact name of registrant as specified in its charter)


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

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

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

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

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

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

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

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

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

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

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

The registrant had 15,155,971 shares of common stock, par value $2.00 per share, outstanding as of November 1, 2023.

Table of Contents

BAR HARBOR BANKSHARES AND SUBSIDIARIES

FORM 10-Q

INDEX

				Page
PART I.	FINANCIAL INFORMATION

Item 1.	Consolidated Financial Statements (unaudited)

	Consolidated Balance Sheets as of September 30, 2023 and December 31, 2022			5

	Consolidated Statements of Income for the Three and Nine Months Ended September 30, 2023 and 2022			7

	Consolidated Statements of Comprehensive Income for the Three and Nine Months Ended September 30, 2023 and 2022			8

	Consolidated Statements of Changes in Shareholders’ Equity for the Three and Nine Months Ended September 30, 2023 and 2022			9

	Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2023 and 2022			10

	Condensed Notes to Unaudited Consolidated Interim Financial Statements
		Note 1	Basis of Presentation	11
		Note 2	Securities Available for Sale	13
		Note 3	Loans and Allowance for Credit Losses	17
		Note 4	Borrowed Funds	28
		Note 5	Deposits	30
		Note 6	Capital Ratios and Shareholders' Equity	31
		Note 7	Earnings per Share	35
		Note 8	Derivative Financial Instruments and Hedging Activities	36
		Note 9	Fair Value Measurements	46
		Note 10	Revenue from Contracts with Customers	53



Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations			55
		Selected Financial Data		62
		Consolidated Loan and Deposit Analysis		63
		Average Balances and Average Yields/Rates		64
		Reconciliation of Non-GAAP Financial Measures		66


Item 3.	Quantitative and Qualitative Disclosures about Market Risk			68

Item 4.	Controls and Procedures			70


PART II.	OTHER INFORMATION

Item 1.	Legal Proceedings			70

Item 1A.	Risk Factors			70

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds			71

Item 5.	Other Information			71

Item 6.	Exhibits			72

Signatures				73

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

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

Certain statements contained in this Quarterly Report on Form 10-Q (this “Form 10-Q”) that are not historical facts may constitute forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and are intended to be covered by the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. When used in this Form 10-Q the words “believe,” “anticipate,” “expect,” “may,” “will,” “assume,” “should,” “predict,” “could,” “would,” “intend,” “targets,” “estimates,” “projects,” “plans,” and “potential,” and other similar words and expressions of the future, are intended to identify such forward-looking statements, but other statements not based on historical information may also be considered forward-looking, including statements about the Company’s future financial and operating results and the Company’s plans, objectives, and intentions. All forward-looking statements are subject to risks, uncertainties, and other factors that may cause the actual results, performance, or achievements of the Company to differ materially from any results, performance, or achievements expressed or implied by such forward-looking statements. These forward-looking statements are subject to known and unknown risks, uncertainties and other factors that could cause the actual results to differ materially from the statements, including, but not limited to:

●

deterioration in the financial performance and/or condition of borrowers of the Bank, including as a result of the negative impact of inflationary pressures on our customers and their businesses resulting in significant increases in credit losses and provisions for those losses;

●

the possibility that our asset quality could decline or that we experience greater loan losses than anticipated;

●

increased levels of other real estate owned, primarily as a result of foreclosures;

●

the impact of liquidity needs on our results of operations and financial condition;

●

competition from financial institutions and other financial service providers;

●

the effect of interest rate increases on the cost of deposits;

●

unanticipated weakness in loan demand or loan pricing;

●

adverse conditions in the national or local economies including in our markets throughout Northern New England;

●

changes in consumer spending, borrowing and saving habits;

●

the effects of civil unrest, international hostilities or other geopolitical events, including the war in Ukraine and recent hostilities in the Middle East;

●

inflation, interest rate, market, and monetary fluctuations;

●

lack of strategic growth opportunities or our failure to execute on available opportunities;

●

the ability to grow and retain low-cost core deposits and retain large, uninsured deposits;

●

our ability to effectively manage problem credits;

●

our ability to successfully implement efficiency initiatives on time and with the results projected;

●

our ability to successfully develop and market new products and technology;

●

the impact of negative developments in the financial industry and United States and global capital and credit markets;

●

our ability to retain executive officers and key employees and their customer and community relationships;

●

our ability to effectively implement and to adapt to technological changes;

●

risks associated with litigation, including reputational and financial risks and the applicability of insurance coverage;

●

the vulnerability of the Bank’s computer and information technology systems and networks, and the systems and networks of third parties with whom the Company or the Bank contracts, to unauthorized access, computer viruses, phishing schemes, spam attacks, human error, natural disasters, power loss, and other security breaches and interruptions;

●

changes in the reliability of our vendors, internal control systems or information systems;

●

ongoing competition in the labor markets and increased employee turnover;

●

the potential impact of climate change;

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●

the impact of pandemics, epidemics or any other health-related crises, including new outbreaks of COVID-19 and actions taken by governmental officials to curb the spread of such health-related crises, and the resulting impact on general economic and financial market conditions and on the Company’s and our customers' business, results of operations, asset quality and financial condition;

●

our ability to comply with various governmental and regulatory requirements applicable to financial institutions;

●

changes in state and federal laws, rules, regulations, or policies applicable to banks or bank or financial holding companies, including regulatory or legislative developments;

●

the effects of and changes in trade and monetary and fiscal policies and laws, including the interest rate policies of the Board of Governors of the Federal Reserve System (the “Federal Reserve”);

●

adverse impacts (including costs, fines, reputational harm, financial risks and the applicability of insurance coverage or other negative effects) from current or future litigation, regulatory examinations, or other legal and/or regulatory actions; and

●

general competitive, economic, political, and market conditions, including economic conditions in the local markets where we operate.

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

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PART I. FINANCIAL INFORMATION

ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS

BAR HARBOR BANKSHARES AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS (UNAUDITED)


(in thousands, except share data)	September 30, 2023		December 31, 2022
Assets
Cash and cash equivalents:
Cash and due from banks	$	41,210	$	39,933
Interest-earning deposits with other banks		81,606		52,362
Total cash and cash equivalents		122,816		92,295

Securities:
Securities available for sale		509,453		559,516
Federal Home Loan Bank stock		14,834		14,893
Total securities		524,287		574,409

Loans held for sale		2,016		—

Total loans		2,992,791		2,902,690
Less: Allowance for credit losses		(28,011)		(25,860)
Net loans		2,964,780		2,876,830

Premises and equipment, net		47,790		47,622
Goodwill		119,477		119,477
Other intangible assets		5,102		5,801
Cash surrender value of bank-owned life insurance		79,469		81,197
Deferred tax assets, net		28,328		24,443
Other assets		89,876		87,729
Total assets	$	3,983,941	$	3,909,803

Liabilities
Deposits:
Demand	$	618,421	$	676,350
NOW		929,481		900,730
Savings		572,271		664,514
Money market		361,839		478,398
Time		658,482		323,439
Total deposits		3,140,494		3,043,431

Borrowings:
Senior		307,070		333,957
Subordinated		60,422		60,289
Total borrowings		367,492		394,246

Other liabilities		71,747		78,676
Total liabilities		3,579,733		3,516,353

(continued)

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BAR HARBOR BANKSHARES AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS (UNAUDITED) (continued)


(in thousands, except share data)	September 30, 2023		December 31, 2022
Shareholders’ equity
Capital stock, par value $2.00; authorized 20,000,000 shares; issued 16,428,388 shares; outstanding 15,155,971 shares and 15,082,688 shares at September 30, 2023 and December 31, 2022 respectively		32,857		32,857
Additional paid-in capital		192,673		191,922
Retained earnings		266,365		243,815
Accumulated other comprehensive loss		(71,400)		(58,340)
Less: 1,272,417 and 1,345,700 shares of treasury stock, at cost, at September 30, 2023 and December 31, 2022, respectively		(16,287)		(16,804)
Total shareholders’ equity		404,208		393,450
Total liabilities and shareholders’ equity	$	3,983,941	$	3,909,803

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

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BAR HARBOR BANKSHARES AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
(in thousands, except earnings per share data)	2023		2022		2023		2022
Interest and dividend income
Loans	$	38,412	$	27,940	$	109,889	$	75,192
Securities and other		6,723		5,145		18,478		13,178
Total interest and dividend income		45,135		33,085		128,367		88,370
Interest expense
Deposits		11,415		1,801		25,270		4,185
Borrowings		4,534		1,374		14,215		3,458
Total interest expense		15,949		3,175		39,485		7,643
Net interest income		29,186		29,910		88,882		80,727
Provision for credit losses		673		1,306		2,221		2,217
Net interest income after provision for credit losses		28,513		28,604		86,661		78,510

Non-interest income
Trust and investment management fee income		3,522		3,548		10,882		11,131
Customer service fees		3,926		3,836		11,377		11,108
Gain on sales of securities, net		—		44		34		53
Mortgage banking income		415		315		1,072		1,427
Bank-owned life insurance income		515		496		2,166		1,501
Customer derivative income		43		58		258		213
Other income		394		526		1,190		1,660
Total non-interest income		8,815		8,823		26,979		27,093

Non-interest expense
Salaries and employee benefits		13,011		12,242		39,005		35,757
Occupancy and equipment		4,469		4,458		13,275		13,254
(Gain) loss on sales of premises and equipment, net		—		—		(99)		(65)
Outside services		376		393		1,156		1,143
Professional services		436		421		1,217		1,122
Communication		170		204		507		617
Marketing		326		518		1,211		1,150
Amortization of intangible assets		233		233		699		699
Acquisition, conversion and other expenses		—		31		20		356
Provision for unfunded commitments		45		(26)		(85)		345
Other expenses		3,950		4,558		12,206		12,240
Total non-interest expense		23,016		23,032		69,112		66,618

Income before income taxes		14,312		14,395		44,528		38,985
Income tax expense		3,208		2,965		9,621		7,940
Net income	$	11,104	$	11,430	$	34,907	$	31,045

Earnings per share:
Basic	$	0.73	$	0.76	$	2.31	$	2.07
Diluted	$	0.73	$	0.76		2.30		2.06

Weighted average common shares outstanding:
Basic		15,155		15,058		15,135		15,029
Diluted		15,196		15,113		15,189		15,100

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

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BAR HARBOR BANKSHARES AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
(in thousands)	2023		2022		2023		2022
Net income	$	11,104	$	11,430	$	34,907	$	31,045
Other comprehensive loss, before tax:
Changes in unrealized loss on securities available for sale		(14,586)		(26,933)		(14,637)		(79,186)
Changes in unrealized loss on hedging derivatives		(3,395)		(1,568)		(2,307)		(5,446)

Income taxes related to other comprehensive loss:
Changes in unrealized loss on securities available for sale		3,363		6,522		3,353		18,486
Changes in unrealized loss on hedging derivatives		782		361		531		1,254
Total other comprehensive loss		(13,836)		(21,618)		(13,060)		(64,892)
Total comprehensive (loss) income	$	(2,732)	$	(10,188)	$	21,847	$	(33,847)

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

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BAR HARBOR BANKSHARES AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (UNAUDITED)


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

Net income		—		—		19,615		—		—		19,615
Other comprehensive loss		—		—		—		(43,274)		—		(43,274)
Cash dividends declared ($0.50 per share)		—		—		(7,509)		—		—		(7,509)
Net issuance (24,768 shares) to employee stock plans, including related tax effects		—		376		—		—		148		524
Recognition of stock based compensation		—		94		—		—		—		94
Balance at June 30, 2022	$	32,857	$	191,346	$	227,698	$	(40,971)	$	(17,333)	$	393,597

Net income		—		—		11,430		—		—		11,430
Other comprehensive loss		—		—		—		(21,618)		—		(21,618)
Cash dividends declared ($0.26 per share)		—		—		(3,910)		—		—		(3,910)
Net issuance (39,523 shares) to employee stock plans, including related tax effects		—		(530)		—		—		374		(156)
Recognition of stock based compensation		—		622		—		—		—		622
Balance at September 30, 2022	$	32,857	$	191,438	$	235,218	$	(62,589)	$	(16,959)	$	379,965

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

Net income		—		—		23,803		—		—		23,803
Other comprehensive income		—		—		—		776		—		776
Cash dividends declared ($0.54 per share)		—		—		(8,148)		—		—		(8,148)
Net issuance (61,470 shares) to employee stock plans, including related tax effects		—		(264)		—		—		416		152
Recognition of stock based compensation		—		683		—		—		—		683
Balance at June 30, 2023	$	32,857	$	192,341	$	259,470	$	(57,564)	$	(16,388)	$	410,716

Net income		—		—		11,104		—		—		11,104
Other comprehensive loss		—		—		—		(13,836)		—		(13,836)
Cash dividends declared ($0.28 per share)		—		—		(4,209)		—		—		(4,209)
Net issuance (11,813 shares) to employee stock plans, including related tax effects		—		(381)		—		—		101		(280)
Recognition of stock based compensation		—		713		—		—		—		713
Balance at September 30, 2023	$	32,857	$	192,673	$	266,365	$	(71,400)	$	(16,287)	$	404,208

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

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BAR HARBOR BANKSHARES AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)


	Nine Months Ended September 30,
(in thousands)	2023		2022
Cash flows from operating activities:
Net income	$	34,907	$	31,045
Adjustments to reconcile net income to net cash provided by operating activities:
Net change in loans held for sale		2,016		4,546
Provision for credit losses		2,221		2,217
Net amortization of securities		1,758		2,287
Change in unamortized net loan costs and premiums		73		353
Premises and equipment depreciation		3,136		3,186
Stock-based compensation expense		1,396		716
Amortization of other intangibles		699		699
Income from cash surrender value of bank-owned life insurance policies		(2,166)		(1,501)
Gain on sales of securities, net		(34)		(53)
Amortization of right-of-use lease assets		900		893
Decrease in lease liabilities		(879)		(851)
Gain on premises and equipment, net		(99)		(65)
Net change in other assets and liabilities		(12,702)		(4,384)
Net cash provided by operating activities		31,226		39,088

Cash flows from investing activities:
Proceeds from sales, maturities, calls and prepayments of securities available for sale		32,542		67,664
Purchases of securities available for sale		(1,000)		(99,294)
Net change in loans		(90,244)		(318,724)
Purchase of Federal Home Loan Bank stock		(15,059)		(2,924)
Proceeds from sale of Federal Home Loan Bank stock		15,118		1,273
Purchase of premises and equipment, net		(3,650)		(1,842)
Proceeds from death benefit of bank-owned life insurance policy		3,904		—
Net cash used in investing activities		(58,389)		(353,847)

Cash flows from financing activities:
Net change in deposits		97,063		87,136
Net change in short-term borrowings		(26,880)		91,364
Repayments of long-term borrowings		(14)		(21,014)
Net issuance to employee stock plans		(128)		368
Cash dividends paid on common stock		(12,357)		(11,419)
Net cash provided by financing activities		57,684		146,435

Net change in cash and cash equivalents		30,521		(168,324)
Cash and cash equivalents at beginning of year		92,295		250,389
Cash and cash equivalents at end of period	$	122,816	$	82,065

Supplemental cash flow information:
Interest paid	$	36,298	$	7,028
Income taxes paid, net		12,228		6,781

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BAR HARBOR BANKSHARES AND SUBSIDIARIES

CONDENSED NOTES TO UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

NOTE 1. BASIS OF PRESENTATION

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

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

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

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

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

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

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

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Recent Accounting Pronouncements

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


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

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NOTE 2. SECURITIES AVAILABLE FOR SALE

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


			Gross		Gross
			Unrealized		Unrealized
(in thousands)	Amortized Cost		Gains		Losses		Fair Value
September 30, 2023
Debt securities:
Obligations of US Government-sponsored enterprises	$	2,218	$	1	$	(40)	$	2,179
Mortgage-backed securities and collateralized mortgage obligations:
US Government-sponsored enterprises		230,746		2		(41,025)		189,723
US Government agency		84,324		—		(13,890)		70,434
Private label		61,235		23		(2,413)		58,845
Obligations of states and political subdivisions thereof		115,908		9,305		(27,805)		97,408
Corporate bonds		101,491		31		(10,658)		90,864
Total securities available for sale	$	595,922	$	9,362	$	(95,831)	$	509,453


			Gross		Gross
			Unrealized		Unrealized
(in thousands)	Amortized Cost		Gains		Losses		Fair Value
December 31, 2022
Debt securities:
Obligations of US Government-sponsored enterprises	$	2,692	$	5	$	(37)	$	2,660
Mortgage-backed securities and collateralized mortgage obligations:
US Government-sponsored enterprises		249,838		14		(34,825)		215,027
US Government agency		90,318		16		(10,728)		79,606
Private label		64,056		34		(3,936)		60,154
Obligations of states and political subdivisions thereof		121,939		7,149		(21,351)		107,737
Corporate bonds		102,505		33		(8,206)		94,332
Total securities available for sale	$	631,348	$	7,251	$	(79,083)	$	559,516

Credit Quality Information

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

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

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

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	Available for sale
(in thousands)	Amortized Cost		Fair Value
Within 1 year	$	3,051	$	3,022
Over 1 year to 5 years		36,218		33,257
Over 5 years to 10 years		51,635		54,313
Over 10 years		128,713		99,859
Total bonds and obligations		219,617		190,451
Mortgage-backed securities and collateralized mortgage obligations		376,305		319,002
Total securities available for sale	$	595,922	$	509,453

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


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
(in thousands)	2023		2022		2023		2022
Gross gains on sales of available for sale securities	$	—	$	142	$	34	$	151
Gross losses on sales of available for sale securities		—		(98)		—		(98)
Net gains on sale of available for sale securities	$	—	$	44	$	34	$	53

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


	Less Than Twelve Months				Over Twelve Months				Total
	Gross				Gross				Gross
	Unrealized		Fair		Unrealized		Fair		Unrealized		Fair
(in thousands)	Losses		Value		Losses		Value		Losses		Value
September 30, 2023
Debt securities:
Obligations of US Government-sponsored enterprises	$	—	$	8	$	40	$	930	$	40	$	938
Mortgage-backed securities and collateralized mortgage obligations:
US Government-sponsored enterprises		154		4,373		40,871		184,991		41,025		189,364
US Government agency		43		2,627		13,847		67,729		13,890		70,356
Private label		1		25		2,412		58,797		2,413		58,822
Obligations of states and political subdivisions thereof		571		7,386		27,234		88,571		27,805		95,957
Corporate bonds		1,079		6,921		9,579		80,918		10,658		87,839
Total securities available for sale	$	1,848	$	21,340	$	93,983	$	481,936	$	95,831	$	503,276

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	Less Than Twelve Months				Over Twelve Months				Total
	Gross				Gross				Gross
	Unrealized		Fair		Unrealized		Fair		Unrealized		Fair
(in thousands)	Losses		Value		Losses		Value		Losses		Value
December 31, 2022
Debt securities:
Obligations of US Government-sponsored enterprises	$	32	$	435	$	6	$	790	$	38	$	1,225
Mortgage-backed securities and collateralized mortgage obligations:
US Government-sponsored enterprises		7,005		82,483		27,820		127,745		34,825		210,228
US Government agency		2,870		42,430		7,857		34,198		10,727		76,628
Private label		841		15,694		3,095		44,396		3,936		60,090
Obligations of states and political subdivisions thereof		7,990		48,799		13,361		55,702		21,351		104,501
Corporate bonds		4,733		65,279		3,473		25,027		8,206		90,306
Total securities available for sale	$	23,471	$	255,120	$	55,612	$	287,858	$	79,083	$	542,978

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

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

Obligations of US Government-sponsored enterprises

7 out of the total 8 securities in our portfolio of AFS obligations of US Government-sponsored enterprises were in unrealized loss positions. Aggregate unrealized losses represented 4.09% of the amortized cost of securities in unrealized loss positions. The US Small Business Administration guarantees the contractual cash flows of all of our obligations of US Government-sponsored enterprises. The securities are investment-grade rated and there were no material underlying credit downgrades during the quarter.

US Government-sponsored enterprises

492 out of the total 499 securities in our portfolio of AFS US Government-sponsored enterprises were in unrealized loss positions. Aggregate unrealized losses represented 17.81% of the amortized cost of securities in unrealized loss positions. The Federal National Mortgage Association and Federal Home Loan Mortgage Corporation guarantee the contractual cash flows of all of our US Government-sponsored enterprises. The securities are investment-grade rated and there were no material underlying credit downgrades during the quarter.

US Government agency

147 out of the total 150 securities in our portfolio of AFS US Government agency securities were in unrealized loss positions. Aggregate unrealized losses represented 16.49% of the amortized cost of securities in unrealized loss positions. The Government National Mortgage Association guarantees the contractual cash flows of all of our US Government agency securities. The securities are investment-grade rated and there were no material underlying credit downgrades during the quarter.

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Private label

26 of the total 28 securities in our portfolio of AFS private label mortgage-backed securities were in unrealized loss positions. Aggregate unrealized losses represented 3.94% of the amortized cost of securities in unrealized loss positions. We expect to receive all of the future contractual cash flows related to the amortized cost on these securities.

Obligations of states and political subdivisions thereof

66 of the total 70 securities in our portfolio of AFS municipal bonds and obligations were in unrealized loss positions. Aggregate unrealized losses represented 24.29% of the amortized cost of securities in unrealized loss positions. We continually monitor the municipal bond sector of the market carefully and periodically evaluate the appropriate level of exposure to the market. At this time, we think the bonds in this portfolio carry minimal risk of default, and we are appropriately compensated for the risk. There were no material underlying credit downgrades during the quarter.

Corporate bonds

30 out of the total 33 securities in our portfolio of AFS corporate bonds were in an unrealized loss position. The aggregate unrealized loss represents 10.82% of the amortized cost of bonds in unrealized loss positions. We review the financial strength of all of these bonds, and we have concluded that the amortized cost remains supported by the expected future cash flows of these securities. The most recent review includes all bond issuers and their current credit ratings, financial performance and capitalization.

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NOTE 3. LOANS AND ALLOWANCE FOR CREDIT LOSSES

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


	September 30,		December 31,
(in thousands)	2023		2022
Commercial construction	$	147,423	$	117,577
Commercial real estate owner occupied		282,717		244,814
Commercial real estate non-owner occupied		1,168,877		1,146,674
Tax exempt		44,247		42,879
Commercial and industrial		306,279		297,112
Residential real estate		947,339		954,968
Home equity		88,064		90,865
Consumer other		7,845		7,801
Total loans		2,992,791		2,902,690
Allowance for credit losses		28,011		25,860
Net loans	$	2,964,780	$	2,876,830

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


	September 30,		December 31,
(in thousands)	2023		2022
Net unamortized loan origination costs	$	2,793	$	3,184
Net unamortized fair value discount on acquired loans		(3,042)		(3,506)
Total	$	(249)	$	(322)

We exclude accrued interest receivable from the amortized cost basis of loans disclosed throughout this footnote. As of September 30, 2023 and December 31, 2022, accrued interest receivable for loans totaled $11.0 million and $10.7 million, respectively, and is included in the “other assets” line item on the consolidated balance sheets.

Characteristics of each loan portfolio segment are as follows:

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

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

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

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

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

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

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

Allowance for Credit Losses

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

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

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


	At or for the Three Months Ended September 30, 2023
	Balance at
	Beginning of								Balance at
(in thousands)	Period		Charge Offs		Recoveries		Provision		End of Period
Commercial construction	$	3,377	$	—	$	—	$	300	$	3,677
Commercial real estate owner occupied		2,566		—		—		(81)		2,485
Commercial real estate non-owner occupied		9,481		—		—		72		9,553
Tax exempt		101		—		—		(5)		96
Commercial and industrial		3,613		—		34		558		4,205
Residential real estate		7,376		—		13		(243)		7,146
Home equity		768		—		1		(4)		765
Consumer other		80		(74)		2		76		84
Total	$	27,362	$	(74)	$	50	$	673	$	28,011


	At or for the Nine Months Ended September 30, 2023
	Balance at
	Beginning of								Balance at
(in thousands)	Period		Charge Offs		Recoveries		Provision		End of Period
Commercial construction	$	2,579	$	—	$	—	$	1,098	$	3,677
Commercial real estate owner occupied		2,189		—		142		154		2,485
Commercial real estate non-owner occupied		9,341		—		—		212		9,553
Tax exempt		93		—		—		3		96
Commercial and industrial		3,493		(122)		86		748		4,205
Residential real estate		7,274		(8)		28		(148)		7,146
Home equity		811		(12)		5		(39)		765
Consumer other		80		(199)		10		193		84
Total	$	25,860	$	(341)	$	271	$	2,221	$	28,011


	At or for the Three Months Ended September 30, 2022
	Balance at
	Beginning of								Balance at
(in thousands)	Period		Charge Offs		Recoveries		Provision		End of Period
Commercial construction	$	1,010	$	—	$	—	$	213	$	1,223
Commercial real estate owner occupied		2,722		—		7		132		2,861
Commercial real estate non-owner occupied		7,361		—		—		610		7,971
Tax exempt		105		—		—		(11)		94
Commercial and industrial		4,820		(8)		20		290		5,122
Residential real estate		6,806		(11)		6		85		6,886
Home equity		865		—		2		(76)		791
Consumer other		67		(66)		6		63		70
Total	$	23,756	$	(85)	$	41	$	1,306	$	25,018

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	At or for the Nine Months Ended Septembere 30, 2022
	Balance at
	Beginning of								Balance at
(in thousands)	Period		Charge Offs		Recoveries		Provision		End of Period
Commercial construction	$	2,111	$	—	$	—	$	(888)	$	1,223
Commercial real estate owner occupied		2,751		—		120		(10)		2,861
Commercial real estate non-owner occupied		5,650		—		—		2,321		7,971
Tax exempt		86		—		—		8		94
Commercial and industrial		5,369		(14)		56		(289)		5,122
Residential real estate		5,862		(26)		103		947		6,886
Home equity		814		(6)		22		(39)		791
Consumer other		75		(181)		9		167		70
Total	$	22,718	$	(227)	$	310	$	2,217	$	25,018

Unfunded Commitments

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


(in thousands)	Three Months Ended September 30, 2023		Nine Months Ended September 30, 2023		Three Months Ended September 30, 2022		Nine Months Ended September 30, 2022
Beginning Balance	$	3,780	$	3,910	$	2,523	$	2,152
Provision for credit losses		44		(86)		(26)		345
Ending Balance	$	3,824	$	3,824	$	2,497	$	2,497

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

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

The following are the definitions of our credit quality indicators:

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

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

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conditions which may, in the future, affect the obligor may warrant special mention of the asset. Loans for which an adverse trend in the borrower's operations or an imbalanced position in the balance sheet which has not reached a point where the liquidation is jeopardized may be included in this classification. Special mention loans are not adversely classified and do not expose us to sufficient risks to warrant classification.

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

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

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

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



(in thousands)	2023		2022		2021		2020		2019		Prior		Total
Commercial construction
Risk rating:
Pass	$	6,693	$	94,911	$	40,320	$	4,567	$	—	$	932	$	147,423
Special mention		—		—		—		—		—		—		—
Substandard		—		—		—		—		—		—		—
Total	$	6,693	$	94,911	$	40,320	$	4,567	$	—	$	932	$	147,423
Current period gross write-offs		—		—		—		—		—		—		—

Commercial real estate owner occupied
Risk rating:
Pass	$	47,571	$	52,647	$	30,018	$	20,830	$	22,548	$	93,129	$	266,743
Special mention		—		—		7,486		1,634		—		3,127		12,247
Substandard		—		—		—		—		—		3,603		3,603
Doubtful		—		—		—		—		—		124		124
Total	$	47,571	$	52,647	$	37,504	$	22,464	$	22,548	$	99,983	$	282,717
Current period gross write-offs		—		—		—		—		—		—		—

Commercial real estate non-owner occupied
Risk rating:
Pass	$	32,985	$	348,087	$	213,568	$	135,429	$	80,171	$	270,271	$	1,080,511
Special mention		7,835		—		13,516		28,146		15,750		8,774		74,021
Substandard		—		—		—		—		—		14,214		14,214
Doubtful		—		—		—		—		—		131		131
Total	$	40,820	$	348,087	$	227,084	$	163,575	$	95,921	$	293,390	$	1,168,877
Current period gross write-offs		—		—		—		—		—		—		—

Tax exempt
Risk rating:
Pass	$	2,672	$	12,128	$	812	$	209	$	597	$	27,829	$	44,247
Special mention		—		—		—		—		—		—		—
Substandard		—		—		—		—		—		—		—
Total	$	2,672	$	12,128	$	812	$	209	$	597	$	27,829	$	44,247
Current period gross write-offs		—		—		—		—		—		—		—

Commercial and industrial
Risk rating:
Pass	$	57,318	$	77,033	$	23,295	$	41,034	$	17,732	$	81,740	$	298,152
Special mention		374		1,306		—		7		35		3,746		5,468
Substandard		59		99		191		117		105		611		1,182
Doubtful		—		—		—		—		88		1,389		1,477
Total	$	57,751	$	78,438	$	23,486	$	41,158	$	17,960	$	87,486	$	306,279
Current period gross write-offs		—		—		—		—		5		117		122

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(in thousands)	2023		2022		2021		2020		2019		Prior		Total
Residential real estate
Performing	$	58,083	$	196,017	$	168,614	$	98,218	$	64,181	$	358,368	$	943,481
Nonperforming		—		—		42		—		238		3,578		3,858
Total	$	58,083	$	196,017	$	168,656	$	98,218	$	64,419	$	361,946	$	947,339
Current period gross write-offs		—		—		—		—		—		8		8

Home equity
Performing	$	10,163	$	16,491	$	8,886	$	6,634	$	4,775	$	40,489	$	87,438
Nonperforming		—		—		—		—		—		626		626
Total	$	10,163	$	16,491	$	8,886	$	6,634	$	4,775	$	41,115	$	88,064
Current period gross write-offs		—		—		—		—		—		12		12

Consumer other
Performing	$	3,556	$	2,061	$	836	$	419	$	72	$	892	$	7,836
Nonperforming		—		—		4		5		—		—		9
Total	$	3,556	$	2,061	$	840	$	424	$	72	$	892	$	7,845
Current period gross write-offs		—		52		8		2		—		136		198

Total Loans	$	227,309	$	800,780	$	507,588	$	337,249	$	206,292	$	913,573	$	2,992,791

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



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

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

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

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

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

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

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

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

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

Past Dues

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


	September 30, 2023
(in thousands)	30-59		60-89		90+		Total Past Due		Current		Total Loans
Commercial construction	$	—	$	—	$	—	$	—	$	147,423	$	147,423
Commercial real estate owner occupied		246		—		—		246		282,471		282,717
Commercial real estate non-owner occupied		—		115		871		986		1,167,891		1,168,877
Tax exempt		—		—		—		—		44,247		44,247
Commercial and industrial		45		—		158		203		306,076		306,279
Residential real estate		2,227		690		2,103		5,020		942,319		947,339
Home equity		479		99		195		773		87,291		88,064
Consumer other		22		8		3		33		7,812		7,845
Total	$	3,019	$	912	$	3,330	$	7,261	$	2,985,530	$	2,992,791


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

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Non-Accrual Loans

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


	September 30, 2023
			Nonaccrual With No		90+ Days Past
(in thousands)	Nonaccrual		Related Allowance		Due and Accruing
Commercial construction	$	—	$	—	$	—
Commercial real estate owner occupied		111		108		—
Commercial real estate non-owner occupied		570		449		749
Tax exempt		—		—		—
Commercial and industrial		1,596		8		—
Residential real estate		3,858		1,299		159
Home equity		626		1		51
Consumer other		9		—		—
Total	$	6,770	$	1,865	$	959


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

Collateral Dependent Loans

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

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


	September 30, 2023				December 31, 2022
(in thousands)	Real Estate		Other		Real Estate		Other
Commercial construction	$	—	$	—	$	—	$	—
Commercial real estate owner occupied		111		—		439		—
Commercial real estate non-owner occupied		570		—		550		—
Tax exempt		—		—		—		—
Commercial and industrial		258		1,338		91		116
Residential real estate		3,858		—		4,385		—
Home equity		626		—		963		—
Consumer other		9		—		5		—
Total	$	5,432	$	1,338	$	6,433	$	116

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Loan Modifications to Borrowers Experiencing Financial Difficulty

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

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

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


(in thousands)	Principal Forgiveness		Payment Delay		Term Extension		Interest Rate Reduction		Combination Interest Rate Reduction and Term Extension		% of Total Class of Loans
Three Months Ended September 30, 2023
Commercial construction	$	—	$	—	$	—	$	—	$	—	—	%
Commercial real estate owner occupied		—		—		—		—		—	—
Commercial real estate non-owner occupied		—		—		—		—		—	—
Tax exempt		—		—		—		—		—	—
Commercial and industrial		—		66		—		—		—	0.02
Residential real estate		—		—		—		—		—	—
Home equity		—		—		—		—		—	—
Consumer other		—		—		—		—		—	—
Total	$	—	$	66	$	—	$	—	$	—	0.00	%

Nine Months Ended September 30, 2023
Commercial construction	$	—	$	—	$	—	$	—	$	—	—	%
Commercial real estate owner occupied		—		—		—		—		—	—
Commercial real estate non-owner occupied		—		—		—		—		—	—
Tax exempt		—		—		—		—		—	—
Commercial and industrial		—		66		1,387		—		—	0.47
Residential real estate		—		—		—		100		—	0.01
Home equity		—		—		—		—		—	—
Consumer other		—		—		—		—		—	—
Total	$	—	$	66	$	1,387	$	100	$	—	0.05	%

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The following table presents the financial effect of loan modifications made to borrowers experiencing financial difficulty during the three and nine months ended September 30, 2023.


(in thousands)	Weighted-Average Months of Payment Delay		Weighted-Average Months of Term Extension		Weighted-Average Interest Rate Reduction
Three Months Ended September 30, 2023
Commercial construction		—		—	—	%
Commercial real estate owner occupied		—		—	—
Commercial real estate non-owner occupied		—		—	—
Tax exempt		—		—	—
Commercial and industrial		3.00		3.82	3.75
Residential real estate		—		—	1.38
Home equity		—		—	—
Consumer other		—		—	—
Total		3.00		3.82	5.13	%

Nine Months Ended September 30, 2023
Commercial construction		—		—	—	%
Commercial real estate owner occupied		—		—	—
Commercial real estate non-owner occupied		—		—	—
Tax exempt		—		—	—
Commercial and industrial		3.00		3.82	3.75
Residential real estate		—		—	1.38
Home equity		—		—	—
Consumer other		—		—	—
Total		3.00		3.82	5.13	%

Foreclosure

Residential mortgage loans collateralized by real estate that are in the process of foreclosure as of September 30, 2023 and December 31, 2022 totaled $492 thousand and $253 thousand, respectively.

Mortgage Banking

Loans held for sale at September 30, 2023 had an unpaid principal balance of $2.0 million and there were no loans held for sale as of December 31, 2022. The interest rate exposure on loans held for sale is mitigated through forward sale commitments with certain approved secondary market investors. Forward sale commitments had a notional amount of $6.4 million at September 30, 2023, and we had no open forward sale commitments at December 31, 2022.

For the three months ended September 30, 2023 and 2022, we sold $20.2 million and $5.2 million, respectively, of residential mortgage loans on the secondary market, which resulted in a net gain on sale of loans (net of costs, including direct and indirect origination costs) of $14 thousand and a net loss $52 thousand, respectively. For the nine months ended September 30, 2023 and 2022, we sold $26.3 million and $38.2 million, respectively, of residential mortgage loans on the secondary market, which resulted in a net gain on sale of loans (net of costs, including direct and indirect origination costs) of $22 thousand and $281 thousand, respectively.

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

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NOTE 4. BORROWED FUNDS

Borrowed funds at September 30, 2023 and December 31, 2022 are summarized, as follows:


	September 30, 2023				December 31, 2022
			Weighted				Weighted
(dollars in thousands)	Carrying Value		Average Rate		Carrying Value		Average Rate
Short-term borrowings
Advances from the FHLB	$	295,000	5.53	%	$	318,000	3.84	%
Other borrowings		9,489	0.16			13,369	0.13
Total short-term borrowings		304,489	3.20			331,369	2.20
Long-term borrowings
Advances from the FHLB		2,581	0.38			2,588	0.48
Subordinated borrowings		60,422	6.19			60,289	4.95
Total long-term borrowings		63,003	5.95			62,877	4.76
Total	$	367,492	3.50	%	$	394,246	2.45	%

Short-term debt includes Federal Home Loan Bank of Boston (“FHLB”) advances with a remaining maturity of less than one year. We also maintain a $1.0 million secured line of credit with the FHLB that bears a daily adjustable rate calculated by the FHLB. There was no outstanding balance on the FHLB line of credit for the periods ended September 30, 2023 and December 31, 2022.

We have the capacity to borrow funds on a secured basis utilizing the Bank Term Funding Program, the Borrower in Custody program, and the Discount Window at the Federal Reserve Bank of Boston (the “FRB”). At September 30, 2023, our available secured line of credit at the FRB was $158.0 million. We have pledged certain loans and securities to the FRB to support this arrangement. There were no borrowings with the FRB for the periods ended September 30, 2023 and December 31, 2022.

We maintain, with a correspondent bank, an unused unsecured federal funds line of credit that has an aggregate overnight borrowing capacity of $50.0 million as of September 30, 2023 and December 31, 2022. There was no outstanding balance on the line of credit as of September 30, 2023 and December 31, 2022.

Long-term FHLB advances consist of advances with a remaining maturity of more than one year. The advances outstanding at September 30, 2023 include no callable advances and amortizing advances of $281 thousand. There were no callable advances outstanding and $288 thousand of amortizing advances at December 31, 2022. All FHLB borrowings, including the line of credit, are secured by a blanket security agreement on certain qualified collateral, principally all residential first mortgage loans and certain securities.

A summary of maturities of FHLB advances as of September 30, 2023 is, as follows:


			Weighted Average
(in thousands, except rates)	Amount		Rate
2023	$	295,000	5.53	%
2024		2,300	—
2025		—	—
2026		—	—
2027		—	—
Thereafter		281	3.52
Total FHLB advances	$	297,581	5.48	%

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

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interest rate shall be reset quarterly to an interest rate per annum equal to the then current three-month Secured Overnight Financing Rate (“SOFR”) plus 3.27%. We have the option beginning with the interest payment date of December 1, 2024, and on any scheduled payment date thereafter, to redeem the Notes, in whole or in part upon prior approval of the Federal Reserve. The transaction included debt issuance costs of $198 thousand as of September 30, 2023 and $331 thousand net of amortization as of December 31, 2022, that are netted against the subordinated debt.

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

Repurchase Agreements

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


(in thousands)	September 30, 2023		December 31, 2022
Customer Repurchase Agreements
US Government-sponsored enterprises	$	9,489	$	13,369
Total	$	9,489	$	13,369

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NOTE 5. DEPOSITS

A summary of time deposits is, as follows:


(in thousands)	September 30, 2023		December 31, 2022
Time less than $100,000	$	358,703	$	157,263
Time $100,000 through $250,000		154,125		118,655
Time $250,000 or more		145,654		47,521
Total	$	658,482	$	323,439

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


(in thousands)	September 30, 2023		December 31, 2022
Within 1 year	$	550,775	$	262,338
Over 1 year to 2 years		93,779		37,937
Over 2 years to 3 years		7,719		12,936
Over 3 years to 4 years		3,735		5,410
Over 4 years to 5 years		2,287		4,319
Over 5 years		187		499
Total	$	658,482	$	323,439

Included in time deposits are brokered deposits of $202.0 million and $15.1 million at September 30, 2023 and December 31, 2022, respectively. Also included in time deposits are reciprocal deposits of $41.6 million and $27.4 million at September 30, 2023 and December 31, 2022, respectively.

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NOTE 6. CAPITAL RATIOS AND SHAREHOLDERS’ EQUITY

The actual and required capital ratios are, as follows:


	September 30, 2023
					Minimum Regulatory
	Actual				Capital Requirements
(in thousands, except ratios)	Amount		Ratio		Amount		Ratio
Company (consolidated)
Total capital to risk-weighted assets	$	443,482	13.86	%	$	255,967	8.00	%
Common equity tier 1 capital to risk-weighted assets		351,029	10.97			143,981	4.50
Tier 1 capital to risk-weighted assets		371,649	11.62			191,976	6.00
Tier 1 capital to average assets (leverage ratio)		371,649	9.45			157,333	4.00

Bank
Total capital to risk-weighted assets	$	434,770	13.60	%	$	257,232	8.00	%
Common equity tier 1 capital to risk-weighted assets		402,937	12.61			144,594	4.50
Tier 1 capital to risk-weighted assets		402,937	12.61			192,792	6.00
Tier 1 capital to average assets (leverage ratio)		402,937	10.25			154,761	4.00


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

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

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

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Accumulated other comprehensive (loss) income

Components of accumulated other comprehensive loss is, as follows:


(in thousands)	September 30, 2023		December 31, 2022
Accumulated other comprehensive loss, before tax:
Net unrealized loss on AFS securities	$	(86,469)	$	(71,832)
Net unrealized loss on hedging derivatives		(4,640)		(2,333)
Net unrealized loss on post-retirement plans		(1,675)		(1,691)

Income taxes related to items of accumulated other comprehensive loss:
Net unrealized loss on AFS securities		19,939		16,586
Net unrealized loss on hedging derivatives		1,070		539
Net unrealized loss on post-retirement plans		375		391
Accumulated other comprehensive loss	$	(71,400)	$	(58,340)

The following table presents the components of other comprehensive income (loss) for the three and nine months ended September 30, 2023 and 2022:


(in thousands)	Before Tax		Tax Effect		Net of Tax
Three Months Ended September 30, 2023
Net unrealized loss on AFS securities:
Net unrealized loss arising during the period	$	(14,586)	$	3,363	$	(11,223)
Less: reclassification adjustment for gains (losses) realized in net income		—		—		—
Net unrealized loss on AFS securities		(14,586)		3,363		(11,223)

Net unrealized loss on hedging derivatives:
Net unrealized loss arising during the period		(3,395)		782		(2,613)
Less: reclassification adjustment for gains (losses) realized in net income		—		—		—
Net unrealized loss on cash flow hedging derivatives		(3,395)		782		(2,613)

Other comprehensive loss	$	(17,981)	$	4,145	$	(13,836)

Three Months Ended September 30, 2022
Net unrealized loss on AFS securities:
Net unrealized loss arising during the period	$	(26,889)	$	6,512	$	(20,377)
Less: reclassification adjustment for gains (losses) realized in net income		44		(10)		34
Net unrealized loss on AFS securities		(26,933)		6,522		(20,411)

Net unrealized loss on hedging derivatives:
Net unrealized loss arising during the period		(1,568)		361		(1,207)
Less: reclassification adjustment for gains (losses) realized in net income		—		—		—
Net unrealized loss on cash flow hedging derivatives		(1,568)		361		(1,207)

Other comprehensive loss	$	(28,501)	$	6,883	$	(21,618)

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(in thousands)	Before Tax		Tax Effect		Net of Tax
Nine Months Ended September 30, 2023
Net unrealized loss on AFS securities:
Net unrealized loss arising during the period	$	(14,603)	$	3,345	$	(11,258)
Less: reclassification adjustment for gains realized in net income		34		(8)		26
Net unrealized loss on AFS securities		(14,637)		3,353		(11,284)

Net unrealized loss on hedging derivatives:
Net unrealized loss arising during the period		(2,307)		531		(1,776)
Less: reclassification adjustment for gains (losses) realized in net income		—		—		—
Net unrealized loss on hedging derivatives		(2,307)		531		(1,776)

Other comprehensive loss	$	(16,944)	$	3,884	$	(13,060)

Nine Months Ended September 30, 2022
Net unrealized loss on AFS securities:
Net unrealized loss arising during the period	$	(79,133)	$	18,474	$	(60,659)
Less: reclassification adjustment for gains realized in net income		53		(12)		41
Net unrealized loss on AFS securities		(79,186)		18,486		(60,700)

Net unrealized loss on hedging derivatives:
Net unrealized loss arising during the period		(5,446)		1,254		(4,192)
Less: reclassification adjustment for gains (losses) realized in net income		—		—		—
Net unrealized loss on cash flow hedging derivatives		(5,446)		1,254		(4,192)

Other comprehensive loss	$	(84,632)	$	19,740	$	(64,892)

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



	Net unrealized		Net gain (loss) on		Net unrealized
	gain (loss)		effective cash		loss
	on AFS		flow hedging		on pension
(in thousands)	Securities		derivatives		plans		Total
Three Months Ended September 30, 2023
Balance at beginning of period	$	(55,307)	$	(957)	$	(1,300)	$	(57,564)
Other comprehensive loss before reclassifications		(11,223)		(2,613)		—		(13,836)
Less: amounts reclassified from accumulated other comprehensive income		—		—		—		—
Total other comprehensive loss		(11,223)		(2,613)		—		(13,836)
Balance at end of period	$	(66,530)	$	(3,570)	$	(1,300)	$	(71,400)

Three Months Ended September 30, 2022
Balance at beginning of period	$	(38,304)	$	(2,115)	$	(552)	$	(40,971)
Other comprehensive loss before reclassifications		(20,377)		(1,207)		—		(21,584)
Less: amounts reclassified from accumulated other comprehensive income		34		—		—		34
Total other comprehensive loss		(20,411)		(1,207)		—		(21,618)
Balance at end of period	$	(58,715)	$	(3,322)	$	(552)	$	(62,589)

Nine Months Ended September 30, 2023
Balance at beginning of period	$	(55,246)	$	(1,794)	$	(1,300)	$	(58,340)
Other comprehensive loss before reclassifications		(11,258)		(1,776)		—		(13,034)
Less: amounts reclassified from accumulated other comprehensive income		26		—		—		26
Total other comprehensive loss		(11,284)		(1,776)		—		(13,060)
Balance at end of period	$	(66,530)	$	(3,570)	$	(1,300)	$	(71,400)

Nine Months Ended September 30, 2022
Balance at beginning of period	$	1,985	$	870	$	(552)	$	2,303
Other comprehensive loss before reclassifications		(60,659)		(4,192)		—		(64,851)
Less: amounts reclassified from accumulated other comprehensive income		41		—		—		41
Total other comprehensive loss		(60,700)		(4,192)		—		(64,892)
Balance at end of period	$	(58,715)	$	(3,322)	$	(552)	$	(62,589)

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The following tables presents the amounts reclassified out of each component of accumulated other comprehensive income for three and nine months ended September 30, 2023 and 2022:


	Three Months Ended September 30,				Nine Months Ended September 30,				Affected Line Item where
(in thousands)	2023		2022		2023		2022		Net Income is Presented
Net realized gains on AFS securities:
Before tax	$	—	$	44	$	34	$	53	Non-interest income
Tax effect		—		(10)		(8)		(12)	Tax expense
Total reclassifications for the period	$	—	$	34	$	26	$	41

	Three Months Ended September 30,				Nine Months Ended September 30,				Affected Line Item where
(in thousands)	2023		2022		2023		2022		Net Income is Presented
Net realized loss on hedging derivatives:
Before tax	$	—	$	—	$	—	$	—	Non-interest income
Tax effect		—		—		—		—	Tax expense
Total reclassifications for the period	$	—	$	—	$	—	$	—

NOTE 7. EARNINGS PER SHARE

The following table presents the calculation of earnings per share:


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
(in thousands, except per share and share data)	2023		2022		2023		2022
Net income	$	11,104	$	11,430	$	34,907	$	31,045

Average number of basic common shares outstanding		15,155,457		15,057,598		15,134,954		15,028,963
Plus: dilutive effect of stock options and awards outstanding		40,067		55,757		53,765		71,317
Average number of diluted common shares outstanding⁽¹⁾		15,195,524		15,113,355		15,188,719		15,100,280

Earnings per share:
Basic	$	0.73	$	0.76	$	2.31	$	2.07
Diluted		0.73		0.76		2.30		2.06

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

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NOTE 8. DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGING ACTIVITIES

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

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

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

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


	September 30, 2023
			Weighted
	Notional		Average		Fair Value		Location Fair
	Amount		Maturity		Asset (Liability)		Value Asset
	(in thousands)		(in years)		(in thousands)		(Liability)
Cash flow hedges:
Interest rate swap on wholesale fundings	$	75,000		1.3	$	3,955	Other assets
Interest rate swap on variable rate loans		50,000		2.5		(4,707)	Other liabilities
Total cash flow hedges		125,000				(752)

Fair value hedges:
Interest rate swap on securities		37,190		5.8		5,416	Other assets
Total fair value hedges		37,190				5,416

Economic hedges:
Forward sale commitments		6,425		—		47	Other assets
Customer Loan Swaps-MNA Counterparty		183,510		5.1		(22,226)	Other liabilities
Customer Loan Swaps-RPA Counterparty		119,000		5.4		—	Other liabilities
Customer Loan Swaps-Customer		302,510		5.2		22,226	Other assets
Total economic hedges		611,445				47

Non-hedging derivatives:
Interest rate lock commitments		4,920		0.1		25	Other assets
Total non-hedging derivatives		4,920				25

Total	$	778,555			$	4,736

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

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

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

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

Total	$	774,019			$	4,811

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


				Cumulative Amount of Fair
	Location of Hedged Item on	Carrying Amount of Hedged		Value Hedging Adjustment in
	Balance Sheet	Assets		Carrying Amount
September 30, 2023
Interest rate swap on securities	Securities available for sale	$	27,887	$	(9,303)

December 31, 2022
Interest rate swap on securities	Securities available for sale	$	30,045	$	(7,145)

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Information about derivative assets and liabilities for the three and nine months ended September 30, 2023 and 2022, follows:


	Three Months Ended September 30, 2023
	Amount of			Amount of
	Gain (Loss)			Gain (Loss)
	Recognized in			Reclassified		Location of	Amount of
	Other		Location of Gain (Loss)	from Other		Gain (Loss)	Gain (Loss)
	Comprehensive		Reclassified from Other	Comprehensive		Recognized in	Recognized
(in thousands)	Income		Comprehensive Income	Income		Income	in Income
Cash flow hedges:
Interest rate swap on wholesale funding	$	(564)	Interest expense	$	—	Interest expense	$	816
Interest rate swap on variable rate loans		48	Interest income		—	Interest income		(578)
Total cash flow hedges		(516)			—			238

Fair value hedges:
Interest rate swap on securities		(2,096)	Interest income		—	Interest income		369
Total fair value hedges		(2,096)			—			369

Economic hedges:
Forward commitments		—	Other income		—	Mortgage banking income		(2)
Total economic hedges		—			—			(2)

Non-hedging derivatives:
Interest rate lock commitments		—	Other expense		—	Mortgage banking income		24
Total non-hedging derivatives		—			—			24

Total	$	(2,612)		$	—		$	629

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	Three Months Ended September 30, 2022
	Amount of			Amount of
	Gain (Loss)			Gain (Loss)
	Recognized in			Reclassified		Location of	Amount of
	Other		Location of Gain (Loss)	from Other		Gain (Loss)	Gain (Loss)
	Comprehensive		Reclassified from Other	Comprehensive		Recognized in	Recognized
(in thousands)	Income		Comprehensive Income	Income		Income	in Income
Cash flow hedges:
Interest rate swap on wholesale funding	$	1,262	Interest expense	$	—	Interest expense	$	140
Interest rate swap on variable rate loans		(1,181)	Interest income		—	Interest income		(238)
Total cash flow hedges		81			—			(98)

Fair value hedges:
Interest rate swap on securities		(1,287)	Interest income		—	Interest income		155
Total economic hedges		(1,287)			—			155

Economic hedges:
Forward commitments		—	Other income		—	Mortgage banking income		19
Total economic hedges		—			—			19

Non-hedging derivatives:
Interest rate lock commitments		—	Other income		—	Mortgage banking income		(50)
Total non-hedging derivatives		—			—			(50)

Total	$	(1,206)		$	—		$	26

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	Nine Months Ended September 30, 2023
	Amount of			Amount of
	Gain (Loss)			Gain (Loss)
	Recognized in			Reclassified		Location of	Amount of
	Other		Location of Gain (Loss)	from Other		Gain (Loss)	Gain (Loss)
	Comprehensive		Reclassified from Other	Comprehensive		Recognized in	Recognized
(in thousands)	Income		Comprehensive Income	Income		Income	in Income
Cash flow hedges:
Interest rate swap on wholesale funding	$	(786)	Interest expense	$	—	Interest expense	$	2,225
Interest rate swap on variable rate loans		178	Interest income		—	Interest income		(1,575)
Total cash flow hedges		(608)			—			650

Fair value hedges:
Interest rate swap on securities		(1,168)	Interest income		—	Interest income		985
Total fair value hedges		(1,168)			—			985

Economic hedges:
Forward commitments		—	Other income		—	Mortgage banking income		47
Total economic hedges		—			—			47

Non-hedging derivatives:
Interest rate lock commitments		—	Other expense		—	Mortgage banking income		(79)
Total non-hedging derivatives		—			—			(79)

Total	$	(1,776)		$	—		$	1,603

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	Nine Months Ended September 30, 2022
	Amount of			Amount of
	Gain (Loss)			Gain (Loss)
	Recognized in			Reclassified		Location of	Amount of
	Other		Location of Gain (Loss)	from Other		Gain (Loss)	Gain (Loss)
	Comprehensive		Reclassified from Other	Comprehensive		Recognized in	Recognized
(in thousands)	Income		Comprehensive Income	Income		Income	in Income
Cash flow hedges:
Interest rate swap on wholesale funding	$	4,058	Interest expense	$	—	Interest expense	$	(1)
Interest rate swap on variable rate loans		(3,489)	Interest income		—	Interest income		(239)
Total cash flow hedges		569			—			(240)

Fair value hedges:
Interest rate swap on securities		(4,761)	Interest income		—	Interest income		(48)
Total economic hedges		(4,761)			—			(48)

Economic hedges:
Forward commitments		—	Other income		—	Mortgage banking income		(7)
Total economic hedges		—			—			(7)

Non-hedging derivatives:
Interest rate lock commitments		—	Other income		—	Mortgage banking income		(283)
Total non-hedging derivatives		—			—			(283)

Total	$	(4,192)		$	—		$	(578)

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The effect of cash flow hedging and fair value accounting on the consolidated statements of income for the three and nine months ended September 30, 2023 and 2022:


	Three Months Ended September 30, 2023
	Interest and Dividend Income				Interest Expense
(in thousands)	Loans		Securities and other		Deposits		Borrowings		Non-interest Income
Income and expense line items presented in the consolidated statements of income	$	38,412	$	6,723	$	11,415	$	4,534	$	8,815

The effects of cash flow and fair value hedging:

Gain (loss) on cash flow hedges:
Interest rate swap on wholesale funding		—		—		—		816		—
Interest rate swap on variable rate loans		(578)		—		—		—		—

Gain (loss) on fair value hedges:
Interest rate swap on securities		—		369		—		—		—

	Three Months Ended September 30, 2022
	Interest and Dividend Income				Interest Expense
(in thousands)	Loans		Securities and other		Deposits		Borrowings		Non-interest Income
Income and expense line items presented in the consolidated statements of income	$	27,940	$	5,145	$	1,801	$	1,374	$	8,823

The effects of cash flow and fair value hedging:

Gain (loss) on cash flow hedges:
Interest rate swap on wholesale funding		—		—		—		140		—
Interest rate swap on variable rate loans		(238)		—		—		—		—

Gain (loss) on fair value hedges:
Interest rate swap on securities		—		155		—		—		—

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	Nine Months Ended September 30, 2023
	Interest and Dividend Income				Interest Expense
(in thousands)	Loans		Securities and other		Deposits		Borrowings		Non-interest Income
Income and expense line items presented in the consolidated statements of income	$	109,889	$	18,478	$	25,270	$	14,215	$	26,979

The effects of cash flow and fair value hedging:

Gain (loss) on cash flow hedges:
Interest rate swap on wholesale funding		—		—		—		2,225		—
Interest rate swap on variable rate loans		(1,575)		—		—		—		—

Gain (loss) on fair value hedges:
Interest rate swap on securities		—		985		—		—		—

	Nine Months Ended September 30, 2022
	Interest and Dividend Income				Interest Expense
(in thousands)	Loans		Securities and other		Deposits		Borrowings		Non-interest Income
Income and expense line items presented in the consolidated statements of income	$	75,192	$	13,178	$	4,185	$	3,458	$	27,093

The effects of cash flow and fair value hedging:

Gain (loss) on cash flow hedges:
Interest rate swap on wholesale funding		—		—		—		(1)		—
Interest rate swap on variable rate loans		(239)		—		—		—		—

Gain (loss) on fair value hedges:
Interest rate swap on securities		—		(48)		—		—		—

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The effect of derivatives not designated as hedging instruments on the consolidated statements of income for the three and nine months ended September 30, 2023 and 2022:


	Location of Gain (Loss) Recognized	Three Months Ended September 30,				Nine Months Ended September 30,
(In thousands)	in Non-interest Income	2023			2022	2023			2022
Derivatives not designated as hedging instruments

Economic hedges:
Forward commitments	Mortgage banking income	$	(2)	$	19	$	47	$	(7)
Non-hedging derivatives:
Interest rate lock commitments	Mortgage banking income		24		(50)		(79)		(283)

Cash flow hedges

Interest rate swaps on wholesale funding

As of September 30, 2023, we have two interest rate swaps on wholesale borrowings to limit our exposure to rising interest rates over a five-year term on 3-month FHLB borrowings or brokered certificates, or a combination thereof at each maturity date. The first of the two agreements was entered into in November 2019 with a $50.0 million notional amount and pays a fixed interest rate of 1.53%. A second agreement was entered into in April 2020 with a $25.0 million notional amount and pays a fixed rate of 0.59%. The financial institution counterparty pays us interest on the daily SOFR rate plus 26 basis points. We designated the swaps as cash flow hedges.

Interest rate swap on variable rate loans

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

Fair value hedges

Interest rate swap on securities

For derivative instruments that are designated and qualify as a fair value hedge, the gain or loss on the derivative instrument as well as the offsetting loss or gain on the hedged asset or liability attributable to the hedged risk are recognized in current earnings. We utilize interest rate swaps designated as fair value hedges to mitigate the effect of changing interest rates on the fair values of fixed rate callable securities available-for-sale. The hedging strategy on securities converts the fixed interest rates to LIBOR and SOFR based variable interest rates, all securities are expected to convert to SOFR by December 31, 2023. These derivatives are designated as partial term hedges of selected cash flows covering specified periods of time prior to the call dates of the hedged securities. During 2019, we entered into eight swap transactions with a notional amount of $37.2 million designated as fair value hedges. These derivatives are intended to protect against the effects of changing interest rates on the fair values of fixed rate securities. The fixed rates on the transactions have a weighted average of 1.70%.

Economic hedges

Forward sale commitments

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

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Customer loan derivatives

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

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


	Gross Amounts Offset in the Consolidated Balance Sheet
	Derivative				Cash Collateral
(in thousands)	Liabilities		Derivative Assets		Pledged		Net Amount
As of September 30, 2023
Customer Loan Derivatives:
MNA counterparty	$	(22,226)	$	22,226	$	—	$	—
RPA counterparty		—		—		—		—
Total	$	(22,226)	$	22,226	$	—	$	—


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

Non-hedging derivatives

Interest rate lock commitments

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

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NOTE 9. FAIR VALUE MEASUREMENTS

Recurring Fair Value Measurements

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


	September 30, 2023
	Level 1		Level 2		Level 3		Total
(in thousands)	Inputs		Inputs		Inputs		Fair Value
Available for sale securities:
Obligations of US Government-sponsored enterprises	$	—	$	2,179	$	—	$	2,179
Mortgage-backed securities:
US Government-sponsored enterprises		—		189,723		—		189,723
US Government agency		—		70,434		—		70,434
Private label		—		58,845		—		58,845
Obligations of states and political subdivisions thereof		—		97,408		—		97,408
Corporate bonds		—		90,864		—		90,864
Loans held for sale		—		2,016		—		2,016
Derivative assets		—		31,644		25		31,669
Derivative liabilities		—		(26,933)		—		(26,933)


	December 31, 2022
	Level 1		Level 2		Level 3		Total
(in thousands)	Inputs		Inputs		Inputs		Fair Value
Available for sale securities:
Obligations of US Government-sponsored enterprises	$	—	$	2,660	$	—	$	2,660
Mortgage-backed securities:
US Government-sponsored enterprises		—		215,027		—		215,027
US Government agency		—		79,606		—		79,606
Private label		—		60,154		—		60,154
Obligations of states and political subdivisions thereof		—		107,737		—		107,737
Corporate bonds		—		94,332		—		94,332
Loans held for sale		—		—		—		—
Derivative assets		—		30,039		—		30,039
Derivative liabilities		—		(25,228)		—		(25,228)

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

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

Derivative Assets and Liabilities

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

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

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

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

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

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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, 2023 and 2022:


	Assets (Liabilities)
	Interest Rate Lock		Forward
(in thousands)	Commitments		Commitments
Three Months Ended September 30, 2023
Balance at beginning of period	$	8	$	—
Realized gain recognized in non-interest income		17		47
Balance at end of period	$	25	$	47

Three Months Ended September 30, 2022
Balance at beginning of period	$	50	$	(11)
Realized gain (loss) recognized in non-interest income		(50)		19
Balance at end of period	$	—	$	8

Nine Months Ended September 30, 2023
Balance at beginning of period	$	—	$	—
Realized gain recognized in non-interest income		25		47
Balance at end of period	$	25	$	47

Nine Months Ended September 30, 2022
Balance at beginning of period	$	283	$	15
Realized loss recognized in non-interest income		(283)		(7)
Balance at end of period	$	—	$	8

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


	Fair Value
(in thousands,	September 30,		Valuation	Unobservable	Unobservable
except ratios)	2023		Techniques	Inputs	Input Value
Assets (Liabilities)
Interest Rate Lock Commitment	$	25	Pull-through Rate Analysis	Closing Ratio		76	%
			Pricing Model	Origination Costs, per loan	$	1.7
			Discount Cash Flows	Mortgage Servicing Asset		1.0	%

Forward Commitments		47	Quoted prices for similar loans in active markets	Freddie Mac pricing system		$97.2 to $101.4
Total	$	72

	Fair Value				Significant
	December 31,		Valuation	Unobservable	Unobservable
(in thousands, except ratios)	2022		Techniques	Inputs	Input Value
Assets (Liabilities)
Interest Rate Lock Commitment	$	283	Pull-through Rate Analysis	Closing Ratio		85	%
			Pricing Model	Origination Costs, per loan	$	1.7
			Discount Cash Flows	Mortgage Servicing Asset		1.0	%

Forward Commitments		15	Quoted prices for similar loans in active markets	Freddie Mac pricing system		$99.8 to $103.2
Total	$	298

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Non-Recurring Fair Value Measurements

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


									Fair Value
					Three Months Ended		Nine Months Ended		Measurement Date as of
	Sep 30, 2023		Dec 31, 2022		September 30, 2023		September 30, 2023		September 30, 2023
	Level 3		Level 3		Total		Total		Level 3
(in thousands)	Inputs		Inputs		Gains (Losses)		Gains (Losses)		Inputs
Assets
Individually evaluated loans	$	5,387	$	16,477	$	(7,706)	$	(11,090)	September 2023
Capitalized servicing rights		7,077		6,845		316		232	September 2023
Premises held for sale		252		252		—		—	September 2023
Total	$	12,716	$	23,574	$	(7,390)	$	(10,858)

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

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


(in thousands, except ratios)	Fair Value September 30, 2023		Valuation Techniques	Unobservable Inputs	Range (Weighted Average)^(a)
Assets
Individually evaluated loans	$	4,311	Fair value of collateral-appraised value	Loss severity		10% to 53%
				Appraised value		$150 to $965

Individually evaluated loans		1,076	Discount cash flow	Discount rate		3.25% to 7.13%
				Cash flows		$2 to $697

Capitalized servicing rights		7,077	Discounted cash flow	Constant prepayment rate		7.04%
				Discount rate		9.56%

Premises held for sale		252	Fair value of asset less selling costs	Appraised value		$267
				Selling Costs		6%
Total	$	12,716

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



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

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

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

Premises held for sale		252	Fair value of asset less selling costs	Appraised value		$267
				Selling Costs		6%
Total	$	23,574

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

There were no Level 1 or Level 2 non-recurring fair value measurements for the periods ended September 30, 2023 and December 31, 2022.

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

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

Other real estate owned (“OREO”). OREO results from the foreclosure process on residential or commercial loans issued by the Company. Upon assuming the real estate, we record the property at the fair value of the asset less the estimated sales costs. Thereafter, OREO properties are recorded at the lower of cost or fair value less the estimated sales costs. OREO fair values are primarily determined based on Level 3 data including sales comparables and appraisals. There was no OREO as of September 30, 2023 and December 31, 2022.

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

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Summary of Estimated Fair Values of Financial Instruments

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


	September 30, 2023
	Carrying		Fair
(in thousands)	Amount		Value		Level 1		Level 2		Level 3
Financial Assets
Cash and cash equivalents	$	122,816	$	122,816	$	122,816	$	—	$	—
Securities available for sale		509,453		509,453		—		509,453		—
FHLB stock		14,834		14,834		—		14,834		—
Loans held for sale		2,016		2,016		—		2,016		—
Net loans		2,964,780		2,796,561		—		—		2,796,561
Accrued interest receivable		5,056		5,056		—		5,056		—
Cash surrender value of bank-owned life insurance policies		79,469		79,469		—		79,469		—
Derivative assets		31,669		31,669		—		31,644		25

Financial Liabilities
Non-maturity deposits	$	2,482,012	$	2,489,295	$	—	$	2,489,295	$	—
Time deposits		658,482		651,067		—		651,067		—
Securities sold under agreements to repurchase		9,490		9,490		—		9,490		—
FHLB advances		297,580		297,432		—		297,432		—
Subordinated borrowings		60,422		67,470		—		67,470		—
Derivative liabilities		26,933		26,933		—		26,933		—


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

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

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NOTE 10. REVENUE FROM CONTRACTS WITH CUSTOMERS

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

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

Disaggregation of Revenue

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


	Three Months Ended September 30,				Nine Months Ended September 30,
(in thousands)	2023		2022		2023		2022
Non-interest income within the scope of ASC 606:
Trust management fees	$	3,135	$	3,077	$	9,724	$	9,941
Financial services fees		387		471		1,158		1,190
Interchange fees		1,971		1,953		5,909		5,849
Customer deposit fees		1,669		1,578		4,688		4,418
Other customer service fees		286		305		780		841
Total non-interest income within the scope of ASC 606		7,448		7,384		22,259		22,239
Total non-interest income not within the scope of ASC 606		1,367		1,439		4,720		4,854
Total non-interest income	$	8,815	$	8,823	$	26,979	$	27,093


	Three Months Ended September 30,				Nine Months Ended September 30,
(in thousands)	2023		2022		2023		2022
Timing of Revenue Recognition
Products and services transferred at a point in time	$	4,045	$	4,020	$	11,842	$	11,755
Products and services transferred over time		3,403		3,364		10,417		10,484
Total	$	7,448	$	7,384	$	22,259	$	22,239

Trust Management Fees

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

Financial Services Fees

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

Interchange Fees

We earn interchange fees from transaction fees that merchants pay whenever a customer uses a debit card to make a purchase from their store. The fees are paid to the card-issuing bank to cover handling costs, fraud, bad debt costs and the

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risk involved in approving the payment. Interchange fees are generally recognized as revenue at a point in time upon the completion of a debit card transaction.

Customer Deposit Fees

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

Other Customer Service Fees

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

Contract Balances from Contracts with Customers

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

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

Costs to Obtain and Fulfill a Contract

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

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

The following is management’s discussion and analysis of the major factors that influenced our results of operations and financial condition as of and for the three and nine months ended September 30, 2023 and should be read in conjunction with our unaudited consolidated financial statements and condensed notes thereto included elsewhere in this Form 10-Q as well as our audited consolidated financial statements and notes thereto included in our Form 10-K. The following discussion contains "forward-looking statements" that reflect our future plans, estimates, beliefs and expected performance. We caution that assumptions, expectations, projections, intentions or beliefs about future events may, and often do, vary from actual results and the differences can be material. Factors that could cause such differences are discussed in the sections titled "Cautionary Statement Regarding Forward-Looking Statements" and "Part II, Item 1A. Risk Factors" in this Form 10-Q. All amounts, dollars and percentages presented in this Form 10-Q are rounded and therefore approximate.

GENERAL

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

NON-GAAP FINANCIAL MEASURES

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

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

Recent Banking Crisis

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

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●

Liquidity remains strong, with cash and available for sale securities representing approximately 16.2% of our total assets at September 30, 2023. We maintain the ability to access considerable sources of contingent liquidity at the FHLB and the FRB. We consider the Company's current liquidity position to be adequate to meet both short-term and long-term liquidity needs. Refer to “Liquidity and Cash Flows” for additional information.

●

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

●

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

We will continue our safe and sound banking practices, but the continuing impact of the banking crisis and further extent on the Company's operations and financial results for the remainder of 2023 is uncertain and cannot be predicted.

QUARTERLY PERFORMANCE SUMMARY

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

●

Net income was $11.1 million, compared to $11.4 million. Diluted earnings per share was $0.73, compared to $0.76. Net interest income along with non-interest income and expense was relatively consistent in both periods. A benefit from a lower provision for loan credit losses was offset by a higher provision for income taxes due to one-time charges.

●

Return on assets was 1.11% versus 1.20% and return on equity was 10.72% compared to 11.55%. The decrease in both ratios reflect higher respective average asset and equity balances and slightly lower net income. See the “Financial Position” section for further discussion.

●

Net interest income was $29.2 million compared to $29.9 million and net interest margin (“NIM”) was 3.18%, versus 3.47%. The decrease was primarily driven by higher cost of funds offset in part by yield expansion on earnings assets. Our accumulated deposit beta stands at 27% at quarter-end.

●

The provision for credit losses was an expense of $673 thousand compared with $1.3 million. Our credit trends remain strong as expected. Non-performing assets remain at 17 basis points of total assets while net charge-offs to average loans remain near zero.

●

Non-interest income was $8.8 million in both periods on a steady source of customer service and wealth management fees.

●

Non-interest expense was $23.0 million in third quarter and the prior year quarter. Prior year expense includes $635 thousand of non-recurring items.

●

Efficiency ratio was 58.59% compared to 57.67% reflecting lower net interest income.

Financial Position(September 30, 2023, compared to June 30, 2023)

●

Total assets were $4.0 billion, at the end of the third and second quarters of 2023, primarily due to relatively flat loan growth and lower security balances as interest rates continued to rise during the quarter.

●

Cash and cash equivalents remained at consistent levels of $122.8 million, and $123.8 million.

●

Securities were $509.5 million, or 13% of total assets, compared to $556.0 million, or 14% of total assets as proceeds from amortization and prepayments were used to fund loans. Net unrealized losses increased to $86.5

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million from $71.9 million as market rates for similar duration securities continued to increase during the current quarter.

●

Total loans were $3.0 billion at the end of both the third and second quarters 2023.

●

The ratio of the ACL to total loans was 0.94% compared with 0.91%. Net charge-offs continue to be insignificant and near zero.

●

Total deposits grew 7% on an annualized basis during the quarter on an increasing number of customer accounts and gain in market share.

●

Borrowings decreased by $91.8 million to $367.5 million as excess cash generated from operations was used to pay down higher costs on Federal Home Loan Bank advances.

●

Total book value per share was $26.67 compared to $27.12. Unrealized losses on securities, net of taxes, reduced book value per share by $4.39 and $3.65 at the end of the respective periods. Tangible book value per share excluding net unrealized security losses (non-GAAP) increased 5.5% on annualized basis on net income offset by dividends to shareholders.

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

COMPARISON OF FINANCIAL CONDITION AT SEPTEMBER 30, 2023 AND DECEMBER 31, 2022

Cash and cash equivalents

Total cash and cash equivalents were $122.8 million as of September 30, 2023, compared to $92.3 million at year-end. Interest-earning cash held with other banks totaled $81.6 million compared to $52.4 million at year-end 2022 and yielded 5.02% and 4.00%, respectively.

Securities

Securities totaled $524.3 million at September 30, 2023 and were $574.4 million at year-end 2022. Year to date, security purchases totaled $1.0 million and were offset by $32.5 million of maturities, calls and pay-downs of amortizing securities. Fair value adjustments increased the security portfolio to $86.5 million at quarter-end compared to $71.8 million at year-end. The weighted average yield of the securities portfolio was 3.61% at September 30, 2023 compared to 3.58% at year-end primarily due to a repricing of variable rates, acceleration of discounts due to prepayments, and a run-off of lower coupon fixed-rate securities. As of quarter-end and year-end, our securities portfolio had an average life of nine years with an effective duration of five years. All securities remain classified as available for sale to provide flexibility in loan funding and management of our cost of funds.

Loans

Total loans increased by $90.0 million to $3.0 billion from year-end 2022. The increase was primarily due to a $54.4 million increase in commercial real estate loans and $38.6 million increase in commercial and industrial loans. Commercial real estate originations during 2023 totaled $208 million primarily in the health care, real estate rental, and retail trade industries. Commercial and industrial loan originations totaled $79.5 million, which serves a diverse portfolio of industries, but predominantly in businesses of finance and insurance, and accommodation and food services. Originations of both commercial real estate and commercial and industrial loans were offset by payoffs and paydowns of lower yielding loans. Residential loans decreased by $1.4 million from year end 2022, primarily due to lower demand for prevailing mortgage rates.

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Allowance for Credit Losses

The ACL was $28.0 million at September 30, 2023 compared to $25.9 million at year-end and the ratio of ACL to total loans increased to 0.94% from 0.89% at year-end. The increase ACL balance is largely due to commercial loan growth and a specific reserve on one non-accrual commercial and industrial loan that is expected to be settled in the fourth quarter of 2023. While total non-accruing loans increased to $6.8 million from $6.5 million at year-end, we continue to see improvement in the commercial categories as we continue to work-out those loans.

Deposits and Borrowings

Total deposits increased by $97.1 million during 2023 from $3.0 billion at year-end 2022. Demand and other non-interest bearing deposits decreased $57.9 million driven by large institutional outflows mainly due to seasonality. While our deposit base does contain some larger institutional accounts, our community banking model caters to the high volume, lower average balance accounts, which generally are less rate sensitive and less likely to run-off. Time deposits increased $335.0 million due to a shift of interest-earning deposits to higher interest-bearing accounts, and a $186.8 million increase in brokered deposits to support loan growth at favorable rates. Our deposit composition at the end of quarter was 48% commercial customers and 52% consumer customers, compared with 47% and 53%, respectively at year-end. Estimated uninsured and uncollateralized deposits, excluding intercompany deposits, were 8.7% of total deposits at September 30, 2023, compared to 11.2% at December 31, 2022. Total borrowings decreased by $26.8 million from year-end and $91.9 million over the prior quarter due to our initiatives pay-down higher costing wholesale debt with excess cash generated from operations.

Equity

Total equity was $404.2 million at September 30, 2023 compared with $393.4 million at year-end. Tangible book value per share (non-GAAP) was $18.45 at September 30, 2023 compared with $17.78 at year-end. Equity included net unrealized losses on securities totaling a $66.5 million loss at September 30, 2023 compared to $55.3 million at year-end 2022. Excluding unrealized net losses on securities, our tangible book value per share was $22.84 per share at September 30, 2023 compared with $21.44 per share at year-end, which is an annualized increase of 8.13%.

COMPARISON OF OPERATING RESULTS FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2023 AND 2022

Net Income

Net income in the third quarter 2023 was $11.1 million, or $0.73 per diluted share, versus $11.4 million, or $0.76 per diluted share, in the same quarter of 2022. Net interest income along with non-interest income and expense was relatively consistent in both periods. The benefit from a lower provision for loan credit losses was offset by a higher provision for income taxes due to one-time charges.

Net Interest Income

Net interest margin in the third quarter 2023 was 3.18% compared to 3.47% in the third quarter of 2022. The decrease was primarily driven by a higher cost of funds offset in part by yield expansion on earning assets. The yield on loans expanded to 5.11% in the third quarter of 2023, up from 4.04% in the same quarter of 2022. The yield from securities steadily increased over the past year primarily due to a repricing of variable rates, acceleration of discounts due to prepayments, and a run-off of lower coupon fixed-rate securities. Costs of interest-bearing liabilities increased to 2.19% from 0.48% in the third quarter 2022 as our costs continue to drift upwards from subsequent rate hikes. We also experienced a shift in deposit composition from non-maturity deposits to certificates of deposits, and had a heavier reliance on whole-sale borrowings in the third quarter 2023 as compared with the prior year quarter of 2022.

For the first nine months of 2023, net interest income was $88.9 million compared with $80.7 million in the same period of 2022. The comparison of NIM and earning asset yields for the respective nine month periods of 2023 and 2022 were 3.18% and 3.22%, and 3.76% and 3.47%, respectively. Interest-bearing cash balances increased NIM by 3 basis point in the first nine months of 2023 and same period in prior year. The explanations for the improvement in NIM are consistent with those provided in the year-over-year three month comparison above.

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Provision for Credit Losses

The provision for credit losses was $673 thousand in the third quarter 2023 compared to $1.3 million in the prior year quarter driven by timing of economic forecasts and loan growth year over year.

For the nine months ended 2023 and 2022, the provision for credit losses was flat at $2.2 million. Both periods are driven by loan growth, improved economic forecasts and strong credit quality. The ratio of net charge-offs to total loans was near zero for the quarter and year-to-date period ended September 30, 2023 compared to 0.01% and zero in the same comparative periods of 2022. Net charge-offs continue at historic lows over the past five years, which we believe is due to our conservative lending and underwriting standards.

Non-Interest Income

Non-interest income was $8.8 million in the third quarter 2023 and 2022. Our fee-based revenue remains a significant portion of total revenue (non-GAAP) due to the diversity of sources and considerable size of our wealth management business. Wealth management income was $3.5 million in both periods as higher inflows of cash since 2022 were offset by lower security valuations in 2023. Customer service fees grew to $3.9 million in the third quarter 2023 from $3.8 million in the same quarter of 2022 on a higher number of transactional accounts. Mortgage banking income was $415 thousand in the third quarter of 2023, compared to $315 thousand in the same period of 2022, which reflects a increase in sales in the secondary market, but overall lower production related to higher interest rates.

Non-interest income for the first nine months of 2023 was $27.0 million and in the same period in 2022. Wealth management fees were $10.9 million and $11.1 million and customer service fees were $3.9 million and $3.8 million for the nine months of 2023 and 2022, respectively. The reasons for these changes are the same as the quarterly comparison above.

Non-Interest Expense

Non-interest expense was $23.0 million in the third quarter 2023 and 2022. Salary and benefit expense was up 6% over the prior year quarter principally due to annual merit increases and lower expense deferral on decreased loan production. Other expense in the third quarter 2022 included one-time charges of $635 thousand related to the write-off of a few reconciling items.

For the first nine months of 2023, non-interest expense was $69.1 million and $66.6 million in the same period of 2022. The increase in non-interest expense is due to the same reasons as discussed in the quarterly period above. The Company's year-to-date efficiency ratio was 58.59% in 2023 compared to 57.67% in 2022 which reflects management’s disciplined approach to expense management as revenue continues to grow.

Income Tax Expense

Income tax expense was $3.2 million in the third quarter 2023 compared with $3.0 million in the prior year quarter. The effective tax rate in the third quarter 2023 was 22.4%, compared to 20.6% in the same quarter of 2022. One-time charges due to an audit settlement with the State of New Hampshire and 2022 return to provision adjustments totaled $268 thousand. Excluding one-time charges, our effective tax rate in the third quarter 2023 was consistent with the prior year quarter.

Liquidity and Cash Flows

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

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

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nature, with balances typically declining in the winter months through late spring, during which period the Bank’s liquidity position tightens.

As of September 30, 2023, available same-day liquidity totaled approximately $551.1 million, including cash, borrowing capacity at FHLB and the Federal Reserve Discount Window and various lines of credit. Additional sources of liquidity include cash flows from operations, wholesale deposits, cash flow from our amortizing securities and loan portfolios. As of September 30, 2023, we had unused borrowing capacity at the FHLB of $219.3 million, unused borrowing capacity at the Federal Reserve of $158.0 million and unused lines of credit totaling $51.0 million, in addition to $122.8 million in cash.

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

Capital Resources

Please refer to “Comparison of Financial Condition at September 30, 2023 and December 31, 2022 - Equity” for a discussion of shareholders’ equity together with Note 6 “Capital Ratios and Shareholders’ Equity” in the unaudited consolidated financial statements. Additional information about regulatory capital is contained in the notes to the consolidated financial statements and in our most recent Form 10-K.

We expect to continue our current practice of paying quarterly cash dividends with respect to our common stock subject to our Board of Directors’ discretion to modify or terminate this practice at any time and for any reason without prior notice. We believe our quarterly dividend rate per share as approved by our Board of Directors, enables us to balance our multiple objectives of managing our business and returning a portion of our earnings to our shareholders. Historically, and a practice we intend to continue, our principal cash expenditure is the payment of dividends on our common stock, if as and when declared by our Board of Directors. Dividends were paid to our shareholders in the aggregate amount of $12.4 million and $11.4 million for the nine months ended September 30, 2023 and 2022, respectively. All dividends declared and distributed by us will be in compliance with applicable state corporate law and regulatory requirements.

Off-Balance Sheet Arrangements

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

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

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

IMPACT OF NEW ACCOUNTING PRONOUNCEMENTS

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

CRITICAL ACCOUNTING POLICIES

Our Consolidated Financial Statements were prepared in accordance with GAAP and follow general practices within the industries in which we operate. The most significant accounting policies we follow are presented in Note 1—“Summary of Significant Accounting Policies” of the Consolidated Financial Statements to our Form 10-K. Application of these

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

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SELECTED FINANCIAL DATA

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


	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2023			2022			2023			2022
PER SHARE DATA
Net earnings, diluted	$	0.73		$	0.76		$	2.30		$	2.06
Adjusted earnings, diluted⁽¹⁾		0.73			0.76			2.29			2.07
Total book value		26.67			25.22			26.67			25.22
Tangible book value per share⁽¹⁾		18.45			16.89			18.45			16.89
Market price at period end		23.63			26.52			23.63			26.52
Dividends		0.28			0.26			0.82			0.76

PERFORMANCE RATIOS⁽²⁾
Return on assets		1.11	%		1.20	%		1.19	%		1.11	%
Adjusted return on assets⁽¹⁾		1.11			1.20			1.18			1.12
Pre-tax, pre-provision return on assets		1.49			1.65			1.59			1.48
Adjusted pre-tax, pre-provision return on assets ⁽¹⁾		1.49			1.65			1.58			1.49
Return on equity		10.72			11.55			11.38			10.32
Adjusted return on equity⁽¹⁾		10.72			11.54			11.35			10.38
Return on tangible equity		15.65			17.25			16.61			15.28
Adjusted return on tangible equity⁽¹⁾		15.65			17.24			16.57			15.37
Net interest margin, fully taxable equivalent^{(1) (3)}		3.18			3.47			3.32			3.21
Efficiency ratio⁽¹⁾		58.59			57.67			57.79			59.66

FINANCIAL DATA (In millions)
Total assets	$	3,984		$	3,840		$	3,984		$	3,840
Total earning assets⁽⁴⁾		3,687			3,525			3,687			3,525
Total investments		524			566			524			566
Total loans		2,993			2,850			2,993			2,850
Allowance for credit losses		28			25			28			25
Total goodwill and intangible assets		125			126			125			126
Total deposits		3,140			3,136			3,140			3,136
Total shareholders' equity		404			380			404			380
Net income		11			11			35			31
Adjusted income⁽¹⁾		11			11			35			31

ASSET QUALITY AND CONDITION RATIOS
Net charge-offs (recoveries) (annualized)/average loans		—	%		0.01	%		—	%		—	%
Allowance for credit losses/total loans		0.94			0.88			0.94			0.88
Loans/deposits		95			91			95			91
Shareholders' equity to total assets		10.15			9.89			10.15			9.89
Tangible shareholders' equity to total tangible assets⁽¹⁾		7.25			6.85			7.25			6.85

(1)	Non-GAAP financial measure. Refer to the Reconciliation of Non-GAAP Financial Measures section of the “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” in this Form 10-Q for additional information.

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

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

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

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CONSOLIDATED LOAN AND DEPOSIT ANALYSIS (UNAUDITED)

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

LOAN ANALYSIS


											Annualized
											Growth %
											Quarter		Year
(in thousands, except ratios)	Sep 30, 2023		Jun 30, 2023		Mar 31, 2023		Dec 31, 2022		Sep 30, 2022		to Date		to Date
Commercial real estate	$	1,548,835	$	1,551,748	$	1,519,219	$	1,495,452	$	1,421,962	(1)	%	5	%
Commercial and industrial		391,347		388,430		364,315		352,735		376,624	3		15
Total commercial loans		1,940,182		1,940,178		1,883,534		1,848,187		1,798,586	—		7

Residential real estate		896,757		907,741		906,059		898,192		896,618	(5)		—
Consumer		95,160		96,947		98,616		100,855		100,822	(7)		(8)
Tax exempt and other		60,692		62,614		55,796		55,456		54,338	(12)		13
Total loans	$	2,992,791	$	3,007,480	$	2,944,005	$	2,902,690	$	2,850,364	(2)	%	4	%

DEPOSIT ANALYSIS


											Annualized
											Growth %
											Quarter		Year
(in thousands, except ratios)	Sep 30, 2023		Jun 30, 2023		Mar 31, 2023		Dec 31, 2022		Sep 30, 2022		to Date		to Date
Demand	$	618,421	$	602,667	$	636,710	$	676,350	$	700,218	10	%	(11)	%
NOW		929,481		911,488		908,483		900,730		918,822	8		4
Savings		572,271		588,769		628,798		664,514		669,317	(11)		(19)
Money market		361,839		351,762		475,577		478,398		513,075	11		(33)
Total non-maturity deposits		2,482,012		2,454,686		2,649,568		2,719,992		2,801,432	4		(12)
Total time deposits		658,482		635,559		404,246		323,439		334,248	14		*
Total deposits	$	3,140,494	$	3,090,245	$	3,053,814	$	3,043,431	$	3,135,680	7	%	4	%

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AVERAGE BALANCES AND AVERAGE YIELDS/RATES (UNAUDITED)

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


	Three Months Ended September 30,
	2023						2022
	Average				Yield/		Average				Yield/
(in thousands, except ratios)	Balance		Interest⁽³⁾		Rate⁽³⁾		Balance		Interest⁽³⁾		Rate⁽³⁾
Assets
Interest-earning deposits with other banks	$	70,499	$	892	5.02	%	$	59,556	$	320	2.13	%
Securities available for sale and FHLB stock⁽²⁾⁽³⁾		620,851		6,051	3.87			642,475		5,058	3.12
Loans:
Commercial real estate		1,550,188		20,856	5.34			1,351,599		14,510	4.26
Commercial and industrial		439,915		7,270	6.56			421,963		4,739	4.46
Paycheck protection program		—		—	—			94		—	—
Residential		909,296		8,801	3.84			882,158		7,676	3.45
Consumer		96,362		1,670	6.88			101,175		1,161	4.55
Total loans ⁽¹⁾		2,995,761		38,597	5.11			2,756,989		28,086	4.04
Total earning assets		3,687,111		45,540	4.90	%		3,459,020		33,464	3.84	%
Other assets		296,967						313,289
Total assets	$	3,984,078					$	3,772,309

Liabilities
NOW	$	915,072	$	2,567	1.11	%	$	905,668	$	366	0.16	%
Savings		579,090		616	0.42			668,255		143	0.08
Money market		358,742		2,302	2.55			491,683		808	0.65
Time deposits		645,285		5,930	3.65			349,787		485	0.55
Total interest bearing deposits		2,498,189		11,415	1.81			2,415,393		1,802	0.30
Borrowings		391,976		4,534	4.59			202,296		1,374	2.69
Total interest bearing liabilities		2,890,165		15,949	1.81	%		2,617,689		3,176	0.48	%
Non-interest bearing demand deposits		610,644						690,134
Other liabilities		72,409						71,934
Total liabilities		3,573,218						3,379,757

Total shareholders' equity		410,860						392,552

Total liabilities and shareholders' equity	$	3,984,078					$	3,772,309

Net interest spread					2.71	%					3.36	%
Net interest margin					3.18						3.47

(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.

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	Nine Months Ended September 30,
	2023						2022
	Average		Interest		Yield/		Average		Interest		Yield/
(in millions, except ratios)	Balance		⁽³⁾		Rate⁽³⁾		Balance		⁽³⁾		Rate⁽³⁾
Assets
Interest-earning deposits with other banks	$	39,174	$	1,400	4.78	%	$	86,390	$	503	0.78	%
Securities available for sale and FHLB stock⁽²⁾⁽³⁾		616,220		17,746	3.85			630,679		13,297	2.82
Loans:
Commercial real estate		1,531,413		59,679	5.21			1,306,664		37,765	3.86
Commercial and industrial⁽³⁾		430,602		20,237	6.28			408,620		11,871	3.88
Paycheck protection program		—		—	—			4,676		223	6.39
Residential		907,051		25,598	3.77			865,259		22,801	3.52
Consumer		97,981		4,863	6.64			99,673		2,943	3.95
Total loans ⁽¹⁾		2,967,047		110,377	4.97			2,684,892		75,603	3.76
Total earning assets		3,622,441		129,523	4.78	%		3,401,961		89,403	3.51	%

Other assets		312,223						323,253

Total assets	$	3,934,664					$	3,725,214

Liabilities
NOW	$	895,596	$	5,754	0.86	%	$	909,793	$	984	0.14	%
Savings		607,880		1,660	0.37			655,727		418	0.09
Money market		419,030		7,500	2.39			455,645		1,139	0.33
Time deposits		492,117		10,355	2.81			376,496		1,645	0.58
Total interest bearing deposits		2,414,623		25,269	1.40			2,397,661		4,186	0.23
Borrowings		417,392		14,215	4.55			187,629		3,458	2.46
Total interest bearing liabilities		2,832,015		39,484	1.86	%		2,585,290		7,644	0.40	%
Non-interest bearing demand deposits		623,368						671,490
Other liabilities		69,026						66,298
Total liabilities		3,524,409						3,323,078

Total shareholders' equity		410,255						402,136

Total liabilities and shareholders' equity	$	3,934,664					$	3,725,214


Net interest spread					2.92	%					3.12	%
Net interest margin					3.32						3.21

(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.

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RECONCILIATION OF NON-GAAP FINANCIAL MEASURES (UNAUDITED)

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




		Three Months Ended September 30,				Nine Months Ended September 30,
(in thousands)	Calculations		2023		2022		2023		2022
Net income		$	11,104	$	11,430	$	34,907	$	31,045
Non-recurring items:
Gain on sale of securities, net			—		(44)		(34)		(53)
Gain on sale of premises and equipment, net			—		—		(99)		(65)
Acquisition, conversion and other expenses			—		31		20		356
Income tax expense ⁽¹⁾			—		3		28		(55)
Total non-recurring items			—		(10)		(85)		183
Total adjusted income⁽²⁾	(A)	$	11,104	$	11,420	$	34,822	$	31,228

Net interest income	(B)	$	29,186	$	29,910	$	88,882	$	80,727
Plus: Non-interest income			8,815		8,823		26,979		27,093
Total Revenue			38,001		38,733		115,861		107,820
Gain on sale of securities, net			—		(44)		(34)		(53)
Total adjusted revenue⁽²⁾	(C)	$	38,001	$	38,689	$	115,827	$	107,767

Total non-interest expense		$	23,016	$	23,032	$	69,112	$	66,618
Non-recurring expenses:
Gain on sale of premises and equipment, net			—		—		99		65
Acquisition, conversion and other expenses			—		(31)		(20)		(356)
Total non-recurring expenses			—		(31)		79		(291)
Adjusted non-interest expense⁽²⁾	(D)	$	23,016	$	23,001	$	69,191	$	66,327

Total revenue			38,001		38,733		115,861		107,820
Total non-interest expense			23,016		23,032		69,112		66,618
Pre-tax, pre-provision net revenue		$	14,985	$	15,701	$	46,749	$	41,202

Adjusted revenue⁽²⁾			38,001		38,689		115,827		107,767
Adjusted non-interest expense⁽²⁾			23,016		23,001		69,191		66,327
Adjusted pre-tax, pre-provision net revenue⁽²⁾	(U)	$	14,985	$	15,688	$	46,636	$	41,440

(in millions)
Average earning assets	(E)	$	3,687	$	3,459	$	3,622	$	3,402
Average paycheck protection program (PPP) loans	(R)		—		—		—		5
Average earning assets, excluding PPP loans	(S)		3,687		3,459		3,622		3,397
Average assets	(F)		3,984		3,772		3,934		3,725
Average shareholders' equity	(G)		411		393		410		402
Average tangible shareholders' equity⁽²⁾⁽³⁾	(H)		286		267		285		276
Tangible shareholders' equity, period-end⁽²⁾⁽³⁾	(I)		280		254		280		254
Tangible assets, period-end⁽²⁾⁽³⁾	(J)		3,859		3,715		3,859		3,715

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		Three Months Ended September 30,						Nine Months Ended September 30,
	Calculations		2023			2022			2023			2022
(in thousands)
Common shares outstanding, period-end	(K)		15,156			15,066			15,156			15,066
Average diluted shares outstanding	(L)		15,196			15,113			15,189			15,100

Adjusted earnings per share, diluted⁽²⁾	(A/L)	$	0.73		$	0.76		$	2.29		$	2.07
Tangible book value per share, period-end⁽²⁾	(I/K)		18.45			16.89			18.45			16.89
Securities adjustment, net of tax⁽¹⁾⁽⁴⁾	(M)		(66,530)			(58,715)			(66,530)			(58,715)
Tangible book value per share, excluding securities adjustment⁽²⁾⁽⁴⁾	(I+M)/K		22.84			20.79			22.84			20.79
Total tangible shareholders' equity/total tangible assets⁽²⁾	(I/J)		7.25			6.85			7.25			6.85

Performance ratios⁽⁵⁾
Return on assets			1.11	%		1.20	%		1.19	%		1.11	%
Core return on assets⁽²⁾	(A/F)		1.11			1.20			1.18			1.12
Pre-tax, pre-provision return on assets			1.49			1.65			1.59			1.48
Adjusted pre-tax, pre-provision return on assets⁽²⁾	(U/F)		1.49			1.65			1.58			1.49
Return on equity			10.72			11.55			11.38			10.32
Core return on equity⁽²⁾	(A/G)		10.72			11.54			11.35			10.38
Return on tangible equity			15.65			17.25			16.61			15.28
Adjusted return on tangible equity⁽¹⁾⁽²⁾	(A+Q)/H		15.65			17.24			16.57			15.37
Efficiency ratio^(1)(2)(6)	(D-O-Q)/(C+N)		58.59			57.67			57.79			59.66
Net interest margin	(B+P)/E		3.18			3.47			3.32			3.21

Supplementary data (in thousands)
Taxable equivalent adjustment for efficiency ratio	(N)	$	565		$	533		$	1,831		$	1,500
Franchise taxes included in non-interest expense	(O)		186			149			497			434
Tax equivalent adjustment for net interest margin	(P)		405			379			1,155			1,033
Intangible amortization	(Q)		233			233			699			699
Interest and fees on PPP loans	(T)		—			—			—			223

(1)	Assumes a marginal tax rate of 23.80% for 2023 and 23.41% for 2022.

(2)	Non-GAAP financial measure.

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

(4)	Securities adjustment, net of tax represents the total unrealized losses and gains on available-for-sale securities recorded on our consolidated balance sheets within total common shareholders' equity.

(5)	All performance ratios are based on average balance sheet amounts, where applicable.

(6)	Efficiency ratio is computed by dividing core non-interest expense net of franchise taxes and intangible amortization divided by core revenue on a fully taxable equivalent basis.

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Market Risk

Market risk is the risk of loss in a financial instrument arising from adverse changes in market rates/prices, such as interest rates, foreign currency exchange rates, commodity prices and equity prices. The most significant market risk that affects us is interest rate risk.

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

Interest Rate Risk

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

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

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

Interest Rate Sensitivity Modeling:

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

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

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

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

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

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


Change in Interest Rates-Basis Points (Rate Ramp)	1 - 12 Months				13 - 24 Months
(in thousands, except ratios)	$ Change		% Change		$ Change		% Change
At September 30, 2023
-200	$	(4,125)	(3.2)	%	$	(10,532)	(7.6)	%
-100		(1,359)	(1.1)			(4,201)	(3.0)
+100		1,247	1.0			2,660	1.9
+200		2,314	1.8			4,575	3.3
At September 30, 2022
-200	$	(7,639)	(5.4)	%	$	(23,178)	(15.5)	%
-100		(3,414)	(2.4)			(10,292)	(6.9)
+100		1,956	1.4			6,544	4.4
+200		3,721	2.6			12,622	8.5

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

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

As compared to September 30, 2022, sensitivity to both a down 100 basis point rate movement and an up 200 basis point rate movement has decreased.

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

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

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ITEM 4. CONTROLS AND PROCEDURES

(a)	Disclosure controls and procedures.

Under the supervision and with the participation of our senior management, consisting of our principal executive officer and our principal financial officer, we conducted an evaluation of the effectiveness of the design and operation of its disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, as of the end of the period covered by this Form 10-Q. Based on this evaluation, our management, including our principal executive officer and principal financial officer, concluded that as of September 30, 2023, our disclosure controls and procedures were effective to ensure that information required to be disclosed by the reports that we file under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms. Our disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by using our Exchange Act reports is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives, and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

(b)	Changes in internal control over financial reporting.

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

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

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

ITEM 1A. RISK FACTORS

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

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

No unregistered equity securities were sold by the Company during the quarter ended September 30, 2023.

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

ITEM 5. OTHER INFORMATION

During the quarter ended September 30, 2023, no director or officer (as defined in Rule 16a-1(f) under the Exchange Act) of the Company adopted or terminated any "Rule 10b5-1 trading arrangement" or "non-Rule 10b5-1 trading arrangement" as such terms are defined in Item 408(a) of Regulation S-K.

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ITEM 6. EXHIBITS


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

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

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

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

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

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

*Filed herewith

**Furnished herewith

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SIGNATURES

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


	BAR HARBOR BANKSHARES


Dated: November 7, 2023	By:	/s/ Curtis C. Simard
		Curtis C. Simard
		President & Chief Executive Officer (Principal Executive Officer)


Dated: November 7, 2023		/s/ Josephine Iannelli
		Josephine Iannelli
		Executive Vice President & Chief Financial Officer (Principal Financial and Accounting Officer)

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(in thousands)

September 30, 2023

December 31, 2022

Balances from contracts with customers only:

Other Assets

Other Liabilities