~~0000743367us-gaap:ConsumerPortfolioSegmentMemberbhb:OtherConsumerLoansMember2019-12-31~~0000743367bhb:LoansFromBusinessActivitiesMemberbhb:CommercialAndIndustrialLoansPortfolioSegmentMemberus-gaap:FinancingReceivables30To59DaysPastDueMember2019-12-31

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q



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

For the quarterly period ended: ~~March 31,~~September 30, 2020



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

For the transition period from to

Commission File Number: 001-13349

BAR HARBOR BANKSHARES

(Exact name of registrant as specified in its charter)


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

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

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

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

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

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

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

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

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

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

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

The Registrant had ~~15,533,659~~14,928,565 shares of common stock, par value $2.00 per share, outstanding as of ~~April~~October 30, 2020.

Table of Contents

BAR HARBOR BANKSHARES AND SUBSIDIARIES

FORM 10-Q

INDEX

				Page
PART I.	FINANCIAL INFORMATION

Item 1.	Consolidated Financial Statements (unaudited)

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

	Consolidated Statements of Income for the Three and Nine Months Ended ~~March 31,~~September 30, 2020 and 2019			6

	Consolidated Statements of Comprehensive Income for the Three and Nine Months Ended ~~March 31,~~September 30, 2020 and 2019			7

	Consolidated Statements of Changes in Shareholders’ Equity for the Three and Nine Months Ended ~~March 31,~~September 30, 2020 and 2019			8

	Consolidated Statements of Cash Flows for the ~~Three~~Nine Months Ended ~~March 31,~~September 30, 2020 and 2019			9

	Notes to Unaudited Consolidated Interim Financial Statements
		Note 1	Basis of Presentation	11
		Note 2	Securities Available for Sale	15
		Note 3	Loans	18
		Note 4	Allowance for Loan Losses	3136
		Note 5	Borrowed Funds	3642
		Note 6	Deposits	3844
		Note 7	Capital Ratios and Shareholders' Equity	3945
		Note 8	Earnings per Share	4249
		Note 9	Derivative Financial Instruments and Hedging Activities	4350
		Note 10	Fair Value Measurements	4856
		Note 11	Revenue from Contracts with Customers	5462
		Note 12	Leases	5664
		~~Note 13~~	~~Subsequent Events~~	58

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations			5966
		Selected Financial Data		6067
		Consolidated Loan and Deposit Analysis		6168
		Average Balances and Average Yields/Rates		6269
		Non-GAAP Financial Measures		6371
		Reconciliation of Non-GAAP Financial Measures		6472
		Financial Summary		6674

Item 3.	Quantitative and Qualitative Disclosures about Market Risk			7180

Item 4.	Controls and Procedures			7382

PART II.	OTHER INFORMATION

Item 1.	Legal Proceedings			7382

Item 1A.	Risk Factors			7382

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds			7483

Item 6.	Exhibits			7584

Signatures				7685

Table of Contents

Bar Harbor Bankshares conducts business operations principally through Bar Harbor Bank & Trust, which may be referred to as ~~the Bank~~“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," ~~"we"~~ and similar terms refer to Bar Harbor Bankshares and its subsidiaries, including the Bank, collectively.

FORWARD-LOOKING STATEMENTS

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

Table of Contents

PART I. FINANCIAL INFORMATION

ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

BAR HARBOR BANKSHARES AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(in thousands, except share data)

March 31, 2020

December 31, 2019
Assets




Cash and due from banks

$
68,481

$
37,261
Interest-bearing deposit with the Federal Reserve Bank

17,174

19,649
Total cash and cash equivalents

85,655

56,910

Securities:

Securities available for sale, at fair value

626,341

663,230
Federal Home Loan Bank stock

19,897

20,679
Total securities

646,238

683,909

Loans:




Commercial real estate

948,178

930,661
Commercial and industrial

426,357

423,291
Residential real estate

1,132,328

1,151,857
Consumer

128,120

135,283
Total loans

2,634,983

2,641,092
Less: Allowance for loan losses

(15,297)

(15,353)
Net loans

2,619,686

2,625,739

Premises and equipment, net

49,978

51,205
Other real estate owned

2,205

2,236
Goodwill

119,477

118,649
Other intangible assets

8,398

8,641
Cash surrender value of bank-owned life insurance

76,400

75,863
Deferred tax assets, net

3,166

3,865
Other assets

66,139

42,111
Total assets

$
3,677,342

$
3,669,128

Liabilities




Deposits:




Demand

$
400,410

$
414,534
NOW

578,320

575,809
Savings

423,345

388,683
Money market

404,385

384,090
Time

844,097

932,635
Total deposits

2,650,557

2,695,751

Borrowings:




Senior

497,580

471,396
Subordinated

59,849

59,920
Total borrowings

557,429

531,316

Other liabilities

65,601

45,654
Total liabilities

3,273,587

3,272,721


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

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

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

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

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

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

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

~~The accompanying notes are an integral part of these consolidated financial statements.~~(continued)

Table of Contents

BAR HARBOR BANKSHARES AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS (continued)


(in thousands, except share data)	March 31, 2020		December 31, 2019		September 30, 2020		December 31, 2019
Shareholders’ equity
Capital stock, par value $2.00; authorized 20,000,000 shares; issued 16,428,388 shares at March 31, 2020 and December 31, 2019		32,857		32,857
Capital stock, par value $2.00; authorized 20,000,000 shares; issued 16,428,388 shares at September 30, 2020 and December 31, 2019						32,857		32,857
Additional paid-in capital		189,314		188,536		189,606		188,536
Retained earnings		180,072		175,780		190,249		175,780
Accumulated other comprehensive income		6,190		3,911		9,405		3,911
Less: 841,029 and 870,257 shares of treasury stock at March 31, 2020 and December 31, 2019, respectively		(4,678)		(4,677)
Less: 1,499,823 and 870,257 shares of treasury stock at September 30, 2020 and December 31, 2019, respectively						(17,672)		(4,677)
Total shareholders’ equity		403,755		396,407		404,445		396,407
Total liabilities and shareholders’ equity	$	3,677,342	$	3,669,128	$	3,859,710	$	3,669,128

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

Table of Contents

BAR HARBOR BANKSHARES AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

Three Months Ended

March 31,

(in thousands, except earnings per share data)

2020

2019

Interest and dividend income

Loans

$
27,987

$
26,864

Securities and other

5,507

6,363

Total interest and dividend income

33,494

33,227

Interest expense





Deposits

6,020

6,307

Borrowings

2,911

5,155

Total interest expense

8,931

11,462

Net interest income

24,563

21,765

Provision for loan losses

1,111

324

Net interest income after provision for loan losses

23,452

21,441

Non-interest income





Trust and investment management fee income

3,369

2,757

Customer service fees

3,112

2,165

Gain on sales of securities, net

135

—

Bank-owned life insurance income

537

542

Customer derivative income

588

—

Other income

680

703

Total non-interest income

8,421

6,167

Non-interest expense





Salaries and employee benefits

11,884

10,519

Occupancy and equipment

4,420

3,386

Loss on premises and equipment, net

92

—

Outside services

534

411

Professional services

672

544

Communication

289

235

Marketing

388

295

Amortization of intangible assets

256

207

Acquisition, restructuring and other expenses

103

—

Other expenses

3,721

3,027

Total non-interest expense

22,359

18,624

Income before income taxes

9,514

8,984

Income tax expense

1,793

1,703

Net income

$
7,721

$
7,281

Earnings per share:





Basic

$
0.50

$
0.47

Diluted

$
0.50

$
0.47

Weighted average common shares outstanding:





Basic

15,558

15,523

Diluted

15,593

15,587


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

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

Non-interest expense
Salaries and employee benefits		11,809		11,364		35,602		33,568
Occupancy and equipment		4,279		3,415		12,559		10,101
Loss on premises and equipment, net		—		—		90		21
Outside services		438		424		1,414		1,278
Professional services		479		707		1,488		1,821
Communication		215		189		698		707
Marketing		300		613		970		1,419
Amortization of intangible assets		256		207		768		621
Loss on debt extinguishment		—		—		1,351		0
Acquisition, conversion and other expenses		691		3,039		952		3,319
Other expenses		3,952		3,442		11,152		10,075
Total non-interest expense		22,419		23,400		67,044		62,930

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

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

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

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

Table of Contents

BAR HARBOR BANKSHARES AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

Three Months Ended


March 31,

(in thousands)

2020

2019

Net income

$
7,721

$
7,281

Other comprehensive income, before tax:





Changes in unrealized gain on securities available-for-sale

5,357

8,900

Changes in unrealized loss on hedging derivatives

(2,382)

(845)

Changes in unrealized loss on pension

—

—

Income taxes related to other comprehensive income:





Changes in unrealized gain on securities available-for-sale

(1,346)

(2,079)

Changes in unrealized loss on hedging derivatives

650

198

Changes in unrealized loss on pension

—

—

Total other comprehensive income

2,279

6,174

Total comprehensive income

$
10,000

$
13,455


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
(in thousands)	2020		2019		2020		2019
Net income	$	8,402	$	5,015	$	24,604	$	18,413
Other comprehensive income, before tax:
Changes in unrealized gain on securities available for sale		351		3,200		7,922		21,746
Changes in unrealized gain (loss) on hedging derivatives		805		(370)		(833)		(2,372)
Changes in unrealized loss on pension		0		0		0		0

Income taxes related to other comprehensive income:
Changes in unrealized gain on securities available for sale		(82)		(747)		(1,791)		(5,081)
Changes in unrealized (gain) loss on hedging derivatives		(190)		85		196		554
Changes in unrealized loss on pension		0		0		0		0
Total other comprehensive income		884		2,168		5,494		14,847
Total comprehensive income	$	9,286	$	7,183	$	30,098	$	33,260

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

Table of Contents

BAR HARBOR BANKSHARES AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

Accumulated




Common

Additional

other

stock

paid-in

Retained

comprehensive

Treasury

(in thousands, except per share data)

amount

capital

earnings

income (loss)

stock

Total
Balance at December 31, 2018

$
32,857

$
187,653

$
166,526

$
(11,802)

$
(4,655)

$
370,579

Net income

—

—

7,281

—

—

7,281
Other comprehensive income

—

—

—

6,174

—

6,174
Cash dividends declared ($0.20 per share)

—

—

(3,105)

—

—

(3,105)
Net issuance (441 shares) to employee stock plans, including related tax effects

—

(173)

—

—

4

(169)
Recognition of stock based compensation

—

263

—

—

—

263
Balance at March 31, 2019

32,857

187,743

170,702

(5,628)

(4,651)

381,023

Balance at December 31, 2019

$
32,857

$
188,536

$
175,780

$
3,911

$
(4,677)

$
396,407

Net income

—

—

7,721

—

—

7,721
Other comprehensive income

—

—

—

2,279

—

2,279
Cash dividends declared ($0.22 per share)

—

—

(3,429)

—

—

(3,429)
Treasury stock purchased (5,586 shares)

—

—

—

—

(130)

(130)
Net issuance (23,010 shares) to employee stock plans, including related tax effects

—

660

—

—

129

789
Recognition of stock based compensation

—

118

—

—

—

118
Balance at March 31, 2020

$
32,857

$
189,314

$
180,072

$
6,190

$
(4,678)

$
403,755


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

Net income		0		0		13,398		0		0		13,398
Other comprehensive income		0		0		0		12,679		0		12,679
Cash dividends declared ($0.42 per share)		0		0		(6,524)		0		0		(6,524)
Common stock purchased (8,010 shares)		0		0		0		0		(210)		(210)
Net issuance (21,119 shares) to employee stock plans, including related tax effects		0		(69)		0		0		149		80
Recognition of stock based compensation		0		560		0		0		0		560
Balance at June 30, 2019		32,857		188,144		173,400		877		(4,716)		390,562

Net income		0		0		5,015		0		0		5,015
Other comprehensive income		0		0		0		2,168		0		2,168
Cash dividends declared ($0.22 per share)		0		0		(3,421)		0		0		(3,421)
Common stock purchased (5,482 shares)		0		0		0		0		(136)		(136)
Net issuance (4,297 shares) to employee stock plans, including related tax effects		0		(17)		0		0		132		115
Recognition of stock based compensation		0		156		0		0		0		156
Balance at September 30, 2019	$	32,857	$	188,283	$	174,994	$	3,045	$	(4,720)	$	394,459

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

Net income		0		0		16,202		0		0		16,202
Other comprehensive income		0		0		0		4,610		0		4,610
Cash dividends declared ($0.44 per share)		0		0		(6,819)		0		0		(6,819)
Common stock purchased (405,208 shares)		0		0		0		0		(7,467)		(7,467)
Net issuance (61,025 shares) to employee stock plans, including related tax effects		0		406		0		0		251		657
Recognition of stock based compensation		0		584		0		0		0		584
Balance at June 30, 2020		32,857		189,526		185,163		8,521		(11,893)		404,174

Net income		0		0		8,402		0		0		8,402
Other comprehensive income		0		0		0		884		0		884
Cash dividends declared ($0.22 per share)		0		0		(3,316)		0		0		(3,316)
Common stock purchased (297,658 shares)		0		0		0		0		(6,003)		(6,003)
Net issuance (12,275 shares) to employee stock plans, including related tax effects		0		(199)		0		0		224		25
Recognition of stock based compensation		0		279		0		0		0		279
Balance at September 30, 2020	$	32,857	$	189,606	$	190,249	$	9,405	$	(17,672)	$	404,445

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

Table of Contents

BAR HARBOR BANKSHARES AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

Three Months Ended March 31,
(in thousands)

2020

2019
Cash flows from operating activities:




Net income

$
7,721

$
7,281
Adjustments to reconcile net income to net cash provided by operating activities:




Provision for loan losses

1,111

324
Net amortization of securities

686

693
Change in unamortized net loan costs and premiums

(132)

(85)
Premises and equipment depreciation

1,182

952
Stock-based compensation expense

118

90
Accretion of purchase accounting entries, net

(1,489)

(886)
Amortization of other intangibles

256

207
Income from cash surrender value of bank-owned life insurance policies

(537)

(542)
Gain on sales of securities, net

(135)

—
Loss on other real estate owned

31

—
Loss on premises and equipment, net

92

—
Net change in other assets and liabilities

(5,900)

(3,757)
Net cash provided by operating activities

3,004

4,277

Cash flows from investing activities:




Proceeds from sales of securities available for sale

32,017

—
Proceeds from maturities, calls and prepayments of securities available for sale

24,899

21,709
Purchases of securities available for sale

(15,739)

(35,290)
Net change in loans

6,300

(36,209)
Purchase of FHLB stock

(3,161)

(5,567)
Proceeds from sale of FHLB stock

3,943

6,119
Purchase of premises and equipment, net

(628)

(1,809)
Acquisitions, net of cash acquired

(340)

—
Proceeds from sale of other real estate owned

51

—
Net cash provided by (used in) investing activities

47,342

(51,047)

Cash flows from financing activities:




Net decrease in deposits

(44,959)

(17,260)
Net change in short-term FHLB borrowings

(160,970)

59,716
Net change in short-term FRB borrowings

62,000

—
Proceeds from long-term borrowings from the FHLB

139,000

—
Repayments of long-term borrowings from the FHLB

—

(35,705)
Net change in short-term other borrowings

(13,831)

(1,531)
Repayments of subordinated debt

(32)

—
Payment of subordinated debt issuance costs

(39)

—
Net issuance to employee stock plans

789

4
Purchase of treasury stock

(130)

—
Cash dividends paid on common stock

(3,429)

(3,105)
Net cash (used in) provided by financing activities

(21,601)

2,119

Net change in cash and cash equivalents

28,745

(44,651)
Cash and cash equivalents at beginning of year

56,910

98,754
Cash and cash equivalents at end of year

$
85,655

$
54,103


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

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

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

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

~~The accompanying notes are an integral part of these consolidated financial statements.~~(continued)

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BAR HARBOR BANKSHARES AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)

Three Months Ended March 31,
(in thousands)

2020

2019
Supplemental cash flow information:




Interest paid

$
8,455

$
11,490
Income taxes paid, net

1,205

1,506

Acquisition of non-cash assets and liabilities:

Assets acquired

1,171

—
Liabilities acquired

(343)

—


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

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

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

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

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BAR HARBOR BANKSHARES AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

NOTE 1. BASIS OF PRESENTATION

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

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

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

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

Summary of Significant Accounting Policies

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

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

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

●

•

Accounting for Loan Modifications - The CARES Act provides that a financial institution may elect to suspend (1) the requirements under GAAP for certain loan modifications that ~~would~~may otherwise be categorized as a ~~TDR~~troubled debt restructuring (“TDR”) and (2) any determination that such loan modifications would be considered a TDR, including the related impairment for accounting purposes.

• ●	Paycheck Protection Program - The CARES Act established the Paycheck Protection Program (“PPP”), an expansion of the Small Business Administration’s 7(a) loan program and the Economic Injury Disaster Loan Program, ~~(“EIDL”),~~ administered directly by the SBA.

•

●

Mortgage Forbearance - Under the CARES Act, through the earlier of December 31, 2020, or the termination date of the COVID-19 national emergency, a borrower with a federally backed mortgage loan that is experiencing financial hardship due to COVID-19 may request a forbearance. A multifamily borrower with a federally backed multifamily mortgage loan that was current as of February 1, 2020, and is experiencing financial hardship due to COVID-19 may request forbearance on the loan for up to 30 days, with up to two additional 30-day periods at the borrower’s request.

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Also in response to the COVID-19 pandemic, the Board of Governors of the Federal Reserve ~~System~~Board (“FRB”), the Federal Deposit Insurance Corporation (“FDIC”), the National Credit Union Administration, ~~(“NCUA”),~~ the Office of the Comptroller of the Currency, ~~(“OCC”),~~ and the Consumer Financial Protection Bureau, ~~(“CFPB”),~~ in consultation with the state financial regulators (collectively, the “agencies”) issued a joint interagency statement (issued March 22, 2020; revised statement issued April 7, 2020). Some of the provisions applicable to the Company include, but are not limited to:

●

•

Accounting for Loan Modifications - Loan modifications that do not meet the conditions of the CARES Act may still qualify as a modification that does not need to be accounted for as a TDR. The agencies confirmed with FASB staff that short-term modifications made on a good faith basis in response to COVID-19 to borrowers who were current prior to any relief are not TDRs. This includes short-term (e.g., six months) modifications such as payment deferrals, fee waivers, extensions of repayment terms, or insignificant delays in payment.

•

●

Past Due Reporting - With regard to loans not otherwise reportable as past due, financial institutions are not expected to designate loans with deferrals granted due to COVID-19 as past due because of the deferral. A loan’s payment date is governed by the due date stipulated in the legal agreement. If a financial institution agrees to a payment deferral, these loans would not be considered past due during the period of the deferral.

• ●	Nonaccrual Status and Risk Rating - ~~During~~ For short-term COVID-19 modifications, these loans generally should not be reported as nonaccrual or as having a classified risk rating.

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Recent Accounting Pronouncements

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


Standard			Description			Required Date of Adoption		Effect on financial statements
Standards Adopted in 2020
ASU 2017-04, Simplifying the Test for Goodwill Impairment		This ASU amends Topic 350, Intangibles-Goodwill and Other, and eliminates Step 2 from the goodwill impairment test. The Company still has the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary			January 1, 2020 Early adoption is permitted.		The Company has adopted ASU 2017-04 effective January 1, 2020, as required, and the ASU did not have a material impact on its financial statements. ~~Goodwill~~Annual goodwill testing ~~is normally scheduled to be~~was completed ~~during the fourth quarter, but was evaluated in the first quarter in light~~as of ~~the economic impacts of COVID-19.~~September 30, 2020. The Company recognized no impairments to goodwill in the ~~first~~third quarter of 2020. See management’s discussion and analysis for further details.
	~~Early adoption is permitted~~
ASU 2018-13 Changes to Disclosure Requirements Fair Value Measurement, Topic 820	This ASU eliminates, adds and modifies certain disclosure requirements for fair value measurements. Among the changes, entities will no longer be required to disclose the amount and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, but will be required to disclose the range and weighted average used to develop significant unobservable inputs for Level 3 fair value measurements.			January 1, 2020 Early adoption is permitted.		The Company has adopted ASU 2018-13, as of January 1, 2020, as required, and the ASU did not have a material impact to the disclosures as a result of the adoption.

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

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Standard		Description		Required Date of Adoption		Effect on financial statements
Standards Not Yet Adopted (continued)
ASU 2020-04 Facilitation of the Effects of Reference Rate Reform, Topic 848	This ASU provides temporary optional expedients and exceptions to GAAP guidance on contract modifications and hedge accounting to ease the financial reporting burdens of the expected market transition from ~~LIBOR~~the London Interbank Offered Rate ("LIBOR") and other interbank offered rates to alternative reference rates, such as ~~SOFR.~~the Secured Overnight Financing Rate ("SOFR"). For instance, companies can (1) elect not to apply certain modification accounting requirements to contracts affected by reference rate reform, if certain criteria are met. A company that makes this election would not have to re-measure the contracts at the modification date or reassess a previous accounting determination. Companies can also (2) elect various optional expedients that would allow them to continue applying hedge accounting for hedging relationships affected by reference rate reform, if certain criteria are met. Finally, companies can (3) make a one-time election to sell and/or reclassify held-to-maturity debt securities that reference an interest rate affected by reference rate reform.		May be elected ~~between March 12, 2020~~ through December 31, 2022.		The Company is currently evaluating all of its contracts, hedging relationships and other transactions that will be effected by reference rates that are being discontinued and determining which elections ~~that~~ need to be made.

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NOTE 2. SECURITIES AVAILABLE FOR SALE

The following is a summary of securities available for sale:


			Gross		Gross						Gross		Gross
			Unrealized		Unrealized						Unrealized		Unrealized
(in thousands)	Amortized Cost		Gains		Losses		Fair Value		Amortized Cost		Gains		Losses		Fair Value
March 31, 2020
September 30, 2020
Debt securities:
Mortgage-backed securities:
US Government-sponsored enterprises	$	284,925	$	11,349	$	(617)	$	295,657	$	226,930	$	8,683	$	(441)	$	235,172
US Government agency		98,059		3,801		(191)		101,669		92,517		3,413		(145)		95,785
Private label		20,209		62		(1,772)		18,499		20,142		40		(579)		19,603
Obligations of states and political subdivisions thereof		134,258		3,636		(315)		137,579		149,890		4,267		—		154,157
Corporate bonds		76,191		1,497		(4,751)		72,937		99,786		1,713		(1,687)		99,812
Total securities available for sale	$	613,642	$	20,345	$	(7,646)	$	626,341	$	589,265	$	18,116	$	(2,852)	$	604,529


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

The amortized cost and estimated fair value of available for sale (“AFS”) securities segregated by contractual maturity at ~~March 31,~~September 30, 2020 are presented below. Expected maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations. Mortgage-backed securities are shown in total, as their maturities are highly variable.


	Available for sale				Available for sale
(in thousands)	Amortized Cost		Fair Value		Amortized Cost		Fair Value
Within 1 year	$	—	$	—	$	—	$	—
Over 1 year to 5 years		30,554		31,547		25,596		25,849
Over 5 years to 10 years		56,401		52,656		81,687		79,979
Over 10 years		123,494		126,313		142,393		148,141
Total bonds and obligations		210,449		210,516		249,676		253,969
Mortgage-backed securities		403,193		415,825		339,589		350,560
Total securities available for sale	$	613,642	$	626,341	$	589,265	$	604,529

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


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

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


	Less Than Twelve Months				Over Twelve Months				Total				Less Than Twelve Months					Over Twelve Months				Total
	Gross				Gross				Gross				Gross					Gross				Gross
	Unrealized		Fair		Unrealized		Fair		Unrealized		Fair		Unrealized		Fair			Unrealized		Fair		Unrealized		Fair
(In thousands)	Losses		Value		Losses		Value		Losses		Value		Losses		Value			Losses		Value		Losses		Value
March 31, 2020
September 30, 2020
Debt securities:
Mortgage-backed securities:
US Government-sponsored enterprises	$	165	$	9,548	$	452	$	6,608	$	617	$	16,156	$	193	$	35,087		$	248	$	4,027	$	441	$	39,114
US Government agency		180		11,899		11		4,122		191		16,021		68		8,671			77		3,458		145		12,129
Private label		10		124		1,762		18,234		1,772		18,358		1		108			578		19,398		579		19,506
Obligations of states and political subdivisions thereof		315		17,862		—		—		315		17,862		—		247			—		—		—		247
Corporate bonds		3,831		29,977		920		5,330		4,751		35,307		1,687		41,260			—		—		1,687		41,260
Total securities available for sale	$	4,501	$	69,410	$	3,145	$	34,294	$	7,646	$	103,704	$	1,949	$	85,373	��	$	903	$	26,883	$	2,852	$	112,256


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

Securities Impairment: As a part of the Company’s ongoing security monitoring process, the Company identifies securities in an unrealized loss position that could potentially be other-than-temporarily impaired. For the three and nine months ended ~~March 31,~~September 30, 2020 and 2019 the Company did not record any other-than-temporary impairment (“OTTI”) losses.

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


	Three Months Ended				Three Months Ended				Nine Months Ended
	March 31,				September 30,				September 30,
	2020		2019		2020		2019		2020		2019
Estimated credit losses as of prior year-end	$	1,697	$	1,697	$	1,697	$	1,697	$	1,697	$	1,697
Reductions for securities paid off during the period		—		—		—		—		0		0
Estimated credit losses at end of the period	$	1,697	$	1,697	$	1,697	$	1,697	$	1,697	$	1,697

The Company expects to recover its amortized cost basis on all securities in its AFS portfolio. Furthermore, the Company does not intend to sell nor does it anticipate that it will be required to sell any of its securities in an unrealized loss position as of ~~March 31,~~September 30, 2020, prior to this recovery. The Company’s ability and intent to hold these securities until recovery is supported by the Company’s strong capital and liquidity positions as well as its historically low portfolio turnover.

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The following summarizes, by investment security type, the basis for the conclusion that securities in an unrealized loss position were not ~~other-than-temporarily impaired~~OTTI at ~~March 31,~~September 30, 2020:

US Government-sponsored enterprises

4336 out of the total ~~675~~611 securities in the Company’s portfolios of AFS US Government-sponsored enterprises were in unrealized loss positions. Aggregate unrealized losses represented ~~3.83%~~1.12% of the amortized cost of securities in unrealized loss positions. The ~~FNMA~~Federal National Mortgage Association and ~~FHLMC~~Federal Home Loan Mortgage Corporation guarantee the contractual cash flows of all of the Company’s US Government-sponsored enterprises. The securities are investment grade rated and there were no material underlying credit downgrades during the quarter. All securities are performing.

US Government agency

2214 out of the total ~~179~~166 securities in the Company’s portfolios of AFS US Government agency securities were in unrealized loss positions. Aggregate unrealized losses represented 1.18% of the amortized cost of securities in unrealized loss positions. The Government National Mortgage Association ~~(“GNMA”)~~ guarantees the contractual cash flows of all of the Company’s US Government agency securities. The securities are investment grade rated and there were no material underlying credit downgrades during the quarter. All securities are performing.

Private label

1211 of the total 1916 securities in the Company’s portfolio of AFS private label mortgage-backed securities were in unrealized loss positions. Aggregate unrealized losses represented ~~8.80%~~2.88% of the amortized cost of securities in unrealized loss positions. Based upon the expectation that the Company will receive all of the future contractual cash flows related to the amortized cost on these securities, the Company does not consider there to be any additional other-than-temporary impairment with respect to these securities.

Obligations of states and political subdivisions thereof

101 of the total ~~210~~177 securities in the Company’s portfolio of AFS municipal bonds and obligations were in unrealized loss positions. Aggregate unrealized losses represented ~~0.91%~~0.08% of the amortized cost of securities in unrealized loss positions. The Company continually monitors the municipal bond sector of the market carefully and periodically evaluates the appropriate level of exposure to the market. At this time, the Company feels the bonds in this portfolio carry minimal risk of default and the Company is appropriately compensated for the risk. There were no material underlying credit downgrades during the quarter. All securities are performing.

Corporate bonds

1213 out of the total 2734 securities in the Company’s portfolio of AFS corporate bonds were in an unrealized loss position. The aggregate unrealized loss represents ~~12.13%~~3.97% of the amortized cost of bonds in unrealized loss positions. The Company reviews the financial strength of all of these bonds and has concluded that the amortized cost remains supported by the expected future cash flows of these securities. The most recent review includes all bond issuers and their current credit ratings, financial performance and capitalization.

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NOTE 3. LOANS

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

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

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


	March 31, 2020						December 31, 2019						September 30, 2020						December 31, 2019
	Business						Business						Business						Business
	Activities		Acquired				Activities		Acquired				Activities		Acquired				Activities		Acquired
(in thousands)	Loans		Loans		Total		Loans		Loans		Total		Loans		Loans		Total		Loans		Loans		Total
Commercial real estate:
Construction and land development	$	49,157	$	2,422	$	51,579	$	31,387	$	2,903	$	34,290	$	86,927	$	2,191	$	89,118	$	31,387	$	2,903	$	34,290
Other commercial real estate		680,578		216,021		896,599		666,051		230,320		896,371		765,471		191,046		956,517		666,051		230,320		896,371
Total commercial real estate		729,735		218,443		948,178		697,438		233,223		930,661		852,398		193,237		1,045,635		697,438		233,223		930,661

Commercial and industrial:
Commercial		288,082		52,713		340,795		239,692		59,072		298,764		381,512		56,858		438,370		239,692		59,072		298,764
Agricultural		18,597		200		18,797		20,018		206		20,224		17,658		156		17,814		20,018		206		20,224
Tax exempt		55,694		11,071		66,765		66,860		37,443		104,303		41,951		24,375		66,326		66,860		37,443		104,303
Total commercial and industrial		362,373		63,984		426,357		326,570		96,721		423,291		441,121		81,389		522,510		326,570		96,721		423,291

Total commercial loans		1,092,108		282,427		1,374,535		1,024,008		329,944		1,353,952		1,293,519		274,626		1,568,145		1,024,008		329,944		1,353,952

Residential real estate:
Residential mortgages		742,710		389,618		1,132,328		740,687		411,170		1,151,857		695,766		325,440		1,021,206		740,687		411,170		1,151,857
Total residential real estate		742,710		389,618		1,132,328		740,687		411,170		1,151,857		695,766		325,440		1,021,206		740,687		411,170		1,151,857

Consumer:
Home equity		64,514		53,030		117,544		59,368		63,033		122,401		58,344		50,530		108,874		59,368		63,033		122,401
Other consumer		9,226		1,350		10,576		11,167		1,715		12,882		9,217		1,249		10,466		11,167		1,715		12,882
Total consumer		73,740		54,380		128,120		70,535		64,748		135,283		67,561		51,779		119,340		70,535		64,748		135,283

Total loans	$	1,908,558	$	726,425	$	2,634,983	$	1,835,230	$	805,862	$	2,641,092	$	2,056,846	$	651,845	$	2,708,691	$	1,835,230	$	805,862	$	2,641,092

The carrying amount of the acquired loans at ~~March 31,~~September 30, 2020 totaled ~~$726.4~~$651.8 million. A subset of these loans was determined to have evidence of credit deterioration at acquisition date, which is accounted for in accordance with ASC 310-30, Accounting for Certain Loans or Debt Securities Acquired in a Transfer. These purchased credit-impaired loans presently maintain a carrying value of ~~$15.2~~$14.2 million (and total note balances of ~~$19.3~~$18.1 million). These loans are evaluated for impairment through the periodic reforecasting of expected cash flows. Acquired loans considered not impaired at the acquisition date had a carrying amount of ~~$711.2~~$637.6 million as of ~~March 31,~~September 30, 2020.

Table of Contents

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


	Three Months Ended March 31,				Three Months Ended September 30,
(in thousands)	2020		2019		2020		2019
Balance at beginning of period	$	7,367	$	3,509	$	6,227	$	4,195
Reclassification from nonaccretable difference for loans with improved cash flows		—		2,031
Net reclassifications from (to) nonaccretable difference						53		(126)
Accretion		(528)		(1,063)		(455)		(581)
Balance at end of period	$	6,839	$	4,477	$	5,825	$	3,488


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

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

Business Activities Loans


					90 Days or								Past Due >						90 Days or								Past Due >
	30-59 Days		60-89 Days		Greater		Total Past						90 days and		30-59 Days		60-89 Days		Greater		Total Past						90 days and
(in thousands)	Past Due		Past Due		Past Due		Due		Current		Total Loans		Accruing		Past Due		Past Due		Past Due		Due		Current		Total Loans		Accruing
March 31, 2020
September 30, 2020
Commercial real estate:
Construction and land development	$	142	$	—	$	276	$	418	$	48,739	$	49,157	$	—	$	0	$	0	$	212	$	212	$	86,715	$	86,927	$	0
Other commercial real estate		1,521		533		1,010		3,064		677,514		680,578		—		200		1,119		725		2,044		763,427		765,471		0
Total commercial real estate		1,663		533		1,286		3,482		726,253		729,735		—		200		1,119		937		2,256		850,142		852,398		0

Commercial and industrial:
Commercial		1,108		1,515		1,251		3,874		284,208		288,082		381		92		310		2,193		2,595		378,917		381,512		1,932
Agricultural		38		—		169		207		18,390		18,597		51		122		0		109		231		17,427		17,658		0
Tax exempt		—		—		—		—		55,694		55,694		—		0		0		0		0		41,951		41,951		0
Total commercial and industrial		1,146		1,515		1,420		4,081		358,292		362,373		432		214		310		2,302		2,826		438,295		441,121		1,932

Total commercial loans		2,809		2,048		2,706		7,563		1,084,545		1,092,108		432		414		1,429		3,239		5,082		1,288,437		1,293,519		1,932

Residential real estate:
Residential mortgages		8,824		69		1,207		10,100		732,610		742,710		293		217		112		1,369		1,698		694,068		695,766		0
Total residential real estate		8,824		69		1,207		10,100		732,610		742,710		293		217		112		1,369		1,698		694,068		695,766		0

Consumer:
Home equity		471		20		412		903		63,611		64,514		221		39		36		171		246		58,098		58,344		0
Other consumer		19		5		2		26		9,200		9,226		—		12		0		2		14		9,203		9,217		0
Total consumer		490		25		414		929		72,811		73,740		221		51		36		173		260		67,301		67,561		0

Total loans	$	12,123	$	2,142	$	4,327	$	18,592	$	1,889,966	$	1,908,558	$	946	$	682	$	1,577	$	4,781	$	7,040	$	2,049,806	$	2,056,846	$	1,932

Table of Contents

Acquired Loans


					90 Days or				Acquired				Past Due >						90 Days or				Acquired				Past Due >
	30-59 Days		60-89 Days		Greater		Total Past		Credit				90 days and		30-59 Days		60-89 Days		Greater		Total Past		Credit				90 days and
(in thousands)	Past Due		Past Due		Past Due		Due		Impaired		Total Loans		Accruing		Past Due		Past Due		Past Due		Due		Impaired		Total Loans		Accruing
March 31, 2020
September 30, 2020
Commercial real estate:
Construction and land development	$	—	$	—	$	—	$	—	$	245	$	2,422	$	—	$	—	$	—	$	—	$	—	$	221	$	2,191	$	—
Other commercial real estate		1,843		256		1,024		3,123		7,275		216,021		737		169		156		678		1,003		7,227		191,046		—
Total commercial real estate		1,843		256		1,024		3,123		7,520		218,443		737		169		156		678		1,003		7,448		193,237		—

Commercial and industrial:
Commercial		97		—		—		97		1,752		52,713		—		450		65		18		533		1,182		56,858		—
Agricultural		—		—		—		—		200		200		—		—		—		—		—		156		156		—
Tax exempt		—		—		—		—		—		11,071		—		—		—		—		—		—		24,375		—
Total commercial and industrial		97		—		—		97		1,952		63,984		—		450		65		18		533		1,338		81,389		—

Total commercial loans		1,940		256		1,024		3,220		9,472		282,427		737		619		221		696		1,536		8,786		274,626		—

Residential real estate:
Residential mortgages		5,043		99		834		5,976		4,856		389,618		401		291		441		2,006		2,738		4,657		325,440		215
Total residential real estate		5,043		99		834		5,976		4,856		389,618		401		291		441		2,006		2,738		4,657		325,440		215

Consumer:
Home equity		626		—		199		825		789		53,030		43		291		133		170		594		711		50,530		69
Other consumer		1		—		—		1		58		1,350		—		—		—		—		—		44		1,249		—
Total consumer		627		—		199		826		847		54,380		43		291		133		170		594		755		51,779		69

Total loans	$	7,610	$	355	$	2,057	$	10,022	$	15,175	$	726,425	$	1,181	$	1,201	$	795	$	2,872	$	4,868	$	14,198	$	651,845	$	284

Table of Contents

Business Activities Loans


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

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

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

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

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

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

Table of Contents

Acquired Loans


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

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

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

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

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

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

Table of Contents

Non-Accrual Loans

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


	March 31, 2020						December 31, 2019						September 30, 2020						December 31, 2019
	Business						Business						Business						Business
	Activities		Acquired				Activities		Acquired				Activities		Acquired				Activities		Acquired
(in thousands)	Loans		Loans		Total		Loans		Loans		Total		Loans		Loans		Total		Loans		Loans		Total
Commercial real estate:
Construction and land development	$	276	$	—	$	276	$	258	$	—	$	258	$	212	$	0	$	212	$	258	$	0	$	258
Other commercial real estate		1,664		287		1,951		2,888		343		3,231		1,818		2,684		4,502		2,888		343		3,231
Total commercial real estate		1,940		287		2,227		3,146		343		3,489		2,030		2,684		4,714		3,146		343		3,489

Commercial and industrial:
Commercial		1,282		89		1,371		932		626		1,558		918		416		1,334		932		626		1,558
Agricultural		625		—		625		278		—		278		486		0		486		278		0		278
Tax exempt		—		—		—		—		—		—		0		0		0		0		0		0
Total commercial and industrial		1,907		89		1,996		1,210		626		1,836		1,404		416		1,820		1,210		626		1,836

Total commercial loans		3,847		376		4,223		4,356		969		5,325		3,434		3,100		6,534		4,356		969		5,325

Residential real estate:
Residential mortgages		4,077		1,012		5,089		3,362		1,973		5,335		3,864		3,290		7,154		3,362		1,973		5,335
Total residential real estate		4,077		1,012		5,089		3,362		1,973		5,335		3,864		3,290		7,154		3,362		1,973		5,335

Consumer:
Home equity		440		284		724		615		254		869		450		255		705		615		254		869
Other consumer		20		—		20		21		—		21		15		0		15		21		0		21
Total consumer		460		284		744		636		254		890		465		255		720		636		254		890

Total loans	$	8,384	$	1,672	$	10,056	$	8,354	$	3,196	$	11,550	$	7,763	$	6,645	$	14,408	$	8,354	$	3,196	$	11,550

~~Loans evaluated for impairment as of March 31, 2020 and December 31, 2019 are, as follows:~~

~~Business Activities Loans~~

Commercial

Commercial

Residential

(in thousands)

real estate

and industrial

real estate

Consumer

Total
March 31, 2020










Balance at end of period










Individually evaluated for impairment

$
2,638

$
1,733

$
3,586

$
13

$
7,970
Collectively evaluated

727,097

360,640

739,124

73,727

1,900,588
Total

$
729,735

$
362,373

$
742,710

$
73,740

$
1,908,558

~~Acquired Loans~~

Commercial

Commercial

Residential




(in thousands)

real estate

and industrial

real estate

Consumer

Total
March 31, 2020










Balance at end of period










Individually evaluated for impairment

$
70

$
—

$
296

$
—

$
366
Purchased credit impaired

7,520

1,952

4,856

847

15,175
Collectively evaluated

210,853

62,032

384,466

53,533

710,884
Total

$
218,443

$
63,984

$
389,618

$
54,380

$
726,425

Table of Contents

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

Business Activities Loans


	Commercial		Commercial		Residential						Commercial		Commercial		Residential
(in thousands)	real estate		and industrial		real estate		Consumer		Total		real estate		and industrial		real estate		Consumer		Total
December 31, 2019
September 30, 2020
Balance at end of period
Individually evaluated for impairment	$	3,964	$	1,353	$	2,620	$	13	$	7,950	$	2,586	$	1,274	$	2,233	$	12	$	6,105
Collectively evaluated		693,474		325,217		738,067		70,522		1,827,280		849,812		439,847		693,533		67,549		2,050,741
Total	$	697,438	$	326,570	$	740,687	$	70,535	$	1,835,230	$	852,398	$	441,121	$	695,766	$	67,561	$	2,056,846

Acquired Loans


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

Business Activities Loans


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

Acquired Loans


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

~~The following is a summary of impaired loans at March 31, 2020 and December 31, 2019:~~

~~Business Activities Loans~~

March 31, 2020


Recorded

Unpaid Principal

Related
(in thousands)

Investment

Balance

Allowance
With no related allowance:






Construction and land development

$
—

$
—

$
—
Other commercial real estate

1,341

2,060

—
Commercial

1,075

1,242

—
Agricultural

67

68

—
Tax exempt loans

—

—

—
Residential real estate

2,603

2,794

—
Home equity

—

—

—
Other consumer

—

—

—

With an allowance recorded:






Construction and land development

265

266

213
Other commercial real estate

1,032

1,082

462
Commercial

230

236

47
Agricultural

361

361

91
Tax exempt loans

—

—

—
Residential real estate

983

1,111

126
Home equity

13

13

—
Other consumer

—

—

—

Total






Commercial real estate

2,638

3,408

675
Commercial and industrial

1,733

1,907

138
Residential real estate

3,586

3,905

126
Consumer

13

13

—
Total impaired loans

$
7,970

$
9,233

$
939

Table of Contents

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

~~Acquired~~Business Activities Loans


	March 31, 2020						September 30, 2020
	Recorded		Unpaid Principal		Related		Recorded		Unpaid Principal		Related
(in thousands)	Investment		Balance		Allowance		Investment		Balance		Allowance
With no related allowance:
Construction and land development	$	—	$	—	$	—	$	0	$	0	$	0
Other commercial real estate		—		—		—		1,941		2,020		0
Commercial		—		—		—		678		773		0
Agricultural		—		—		—		155		158		0
Tax exempt loans		—		—		—		0		0		0
Residential real estate		134		308		—		1,555		1,649		0
Home equity		—		—		—		0		0		0
Other consumer		—		—		—		0		0		0

With an allowance recorded:
Construction and land development		—		—		—		210		210		158
Other commercial real estate		70		71		13		435		503		185
Commercial		—		—		—		216		216		18
Agricultural		—		—		—		225		361		225
Tax exempt loans		—		—		—		0		0		0
Residential real estate		162		185		14		678		725		45
Home equity		—		—		—		12		12		1
Other consumer		—		—		—		0		0		0

Total
Commercial real estate		70		71		13		2,586		2,733		343
Commercial and industrial		—		—		—		1,274		1,508		243
Residential real estate		296		493		14		2,233		2,374		45
Consumer		—		—		—		12		12		1
Total impaired loans	$	366	$	564	$	27	$	6,105	$	6,627	$	632

Table of Contents

~~Business Activities~~Acquired Loans

December 31, 2019


Recorded

Unpaid Principal

Related
(in thousands)

Investment

Balance

Allowance
With no related allowance:






Construction and land development

$
—

$
—

$
—
Other commercial real estate

1,911

1,957

—
Commercial

710

773

—
Agricultural

361

261

—
Tax exempt loans

—

—

—
Residential real estate

2,067

2,227

—
Home equity

—

—

—
Other consumer

—

—

—

With an allowance recorded:






Construction and land development

258

258

205
Other commercial real estate

1,795

1,940

1,026
Commercial

282

289

164
Agricultural

—

—

—
Tax exempt loans

—

—

—
Residential real estate

553

590

57
Home equity

13

13

—
Other consumer

—

—

—

Total






Commercial real estate

3,964

4,155

1,231
Commercial and industrial

1,353

1,423

164
Residential real estate

2,620

2,817

57
Consumer

13

13

—
Total impaired loans

$
7,950

$
8,408

$
1,452


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

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

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

Table of Contents

~~Acquired~~Business Activities Loans

December 31, 2019


Recorded

Unpaid Principal

Related
(in thousands)

Investment

Balance

Allowance
With no related allowance:






Construction and land development

$
—

$
—

$
—
Other commercial real estate

90

90

—
Commercial

385

481

—
Agricultural

—

—

—
Tax exempt

—

—

—
Residential mortgages

678

938

—
Home equity

—

—

—
Other consumer

—

—

—

With an allowance recorded:






Construction and land development

—

—

—
Other commercial real estate

168

168

12
Commercial

—

—

—
Agricultural

—

—

—
Tax exempt

—

—

—
Residential mortgages

354

376

49
Home equity

—

—

—
Other consumer

—

—

—

��

Total






Commercial real estate

258

258

12
Commercial and industrial

385

481

—
Residential real estate

1,032

1,314

49
Consumer

—

—

—
Total impaired loans

$
1,675

$
2,053

$
61


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

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

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

Table of Contents

~~The following is a summary of the average recorded investment and interest income recognized on impaired loans for the three months ended March 31, 2020 and 2019:~~

~~Business Activities~~Acquired Loans


	Three Months Ended March 31, 2020				Three Months Ended March 31, 2019				December 31, 2019
	Average Recorded		Interest		Average Recorded		Interest		Recorded		Unpaid Principal		Related
(in thousands)	Investment		Income Recognized		Investment		Income Recognized		Investment		Balance		Allowance
With no related allowance:
Construction and land development	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Other commercial real estate		1,728		3		7,773		26		90		90		—
Commercial		1,071		1		527		2		385		481		—
Agricultural		—		—		—		—		—		—		—
Tax exempt loans		—		—		—		—
Residential real estate		2,589		17		1,965		15
Tax exempt										—		—		—
Residential mortgages										678		938		—
Home equity		—		—		—		—		—		—		—
Other consumer		—		—		—		—		—		—		—

With an allowance recorded:
Construction and land development		261		1		5		—		—		—		—
Other commercial real estate		1,021		—		1,203		—		168		168		12
Commercial		233		—		890		—		—		—		—
Agricultural		—		—		—		—		—		—		—
Tax exempt loans		—		—		—		—
Residential real estate		979		2		652		2
Tax exempt										—		—		—
Residential mortgages										354		376		49
Home equity		12		—		13		—		—		—		—
Other consumer		—		—		—		—		—		—		—

Total
Commercial real estate		3,010		4		8,981		26		258		258		12
Commercial and industrial		1,304		1		1,417		2		385		481		—
Residential real estate		3,568		19		2,617		17		1,032		1,314		49
Consumer		12		—		13		—		—		—		—
Total impaired loans	$	7,894	$	24	$	13,028	$	45	$	1,675	$	2,053	$	61

Table of Contents

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

Business Activities Loans


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

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

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

Table of Contents

Business Activities Loans


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

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

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

Table of Contents

Acquired Loans


	Three Months Ended March 31, 2020				Three Months Ended March 31, 2019				Three Months Ended September 30, 2020				Three Months Ended September 30, 2019
	Average Recorded		Interest		Average Recorded		Interest		Average Recorded		Interest		Average Recorded		Interest
(in thousands)	Investment		Income Recognized		Investment		Income Recognized		Investment		Income Recognized		Investment		Income Recognized
With no related allowance:
Construction and land development	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Other commercial real estate		—		—		90		—		1,566		—		88		—
Commercial		—		—		479		—		264		—		395		—
Agricultural		—		—		—		—		—		—		—		—
Tax exempt loans		—		—		—		—		—		—		—		—
Residential real estate		195		—		436		—		519		—		702		—
Home equity		—		—		—		—		—		—		—		—
Other consumer		—		—		—		—		—		—		—		—

With an allowance recorded:
Construction and land development		—		—		—		—		—		—		—		—
Other commercial real estate		70		—		36		—		782		3		165		—
Commercial		—		—		—		—		67		—		—		—
Agricultural		—		—		—		—		—		—		—		—
Tax exempt loans		—		—		—		—		—		—		—		—
Residential real estate		163		—		367		—		420		—		352		—
Home equity		—		—		—		—		—		—		—		—
Other consumer		—		—		—		—		—		—		—		—

Total
Commercial real estate		70		—		126		—		2,348		3		253		—
Commercial and industrial		—		—		479		—		331		—		395		—
Residential real estate		358		—		803		—		939		—		1,054		—
Consumer		—		—		—		—		—		—		—		—
Total impaired loans	$	428	$	—	$	1,408	$	—	$	3,618	$	3	$	1,702	$	—

Table of Contents

Acquired Loans


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

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

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

Table of Contents

Troubled Debt Restructuring Loans

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

The following tables include the recorded investment and number of modifications identified during the three and nine months ended ~~March 31,~~September 30, 2020 and 2019, respectively. The table includes the recorded investment in the loans prior to a modification and also the recorded investment in the loans after the loans were restructured. Modifications may include adjustments to interest rates, payment amounts, extensions of maturity, court ordered concessions or other actions intended to minimize economic loss and avoid foreclosure or repossession of collateral.


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


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


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


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

2933

Table of Contents

Three Months Ended March 31, 2020

Pre-Modification

Post-Modification

Number of

Outstanding Recorded

Outstanding Recorded
(in thousands)

Modifications

Investment

Investment
Troubled Debt Restructurings






Other commercial real estate

1

$
54

$
259
Other commercial

3

41

208
Home equity

1

26

25
Other consumer

1

9

9
Total

6

$
130

$
501

Three Months Ended March 31, 2019

Pre-Modification

Post-Modification

Number of

Outstanding Recorded

Outstanding Recorded
(in thousands)

Modifications

Investment

Investment
Troubled Debt Restructurings






Other commercial real estate

3

$
113

$
113
Other commercial

2

31

31
Residential mortgages

6

530

527
Total

11

$
674

$
671

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


	Three Months Ended March 31,						Three Months Ended September 30,
	2020			2019			2020			2019
		Post-Modification			Post-Modification			Post-Modification			Post-Modification
		Outstanding			outstanding			Outstanding			Outstanding
	Number of	Recorded		Number of	Recorded		Number of	Recorded		Number of	Recorded
(in thousands, except modifications)	Modifications	Investment		Modifications	Investment		Modifications	Investment		Modifications	Investment
Troubled Debt Restructurings
Interest rate and maturity concession	—	$	—	2	$	12
Interest rate, forbearance and maturity concession	4		467	—		—
Amortization and maturity concession	—		—	5		314
Amortization concession	—		—	1		156
Amortization, interest rate and maturity concession	—		—	1		77
Interest only payments							—	$	—	2	$	90
Forbearance							—		—	1		141
Forbearance and interest only payments	1		25	2		112	—		—	2		176
Forbearance, amortization and maturity concession							—		—	2		343
Maturity concession	1		9	—		—	1		86	—		—
Total	6	$	501	11	$	671	1	$	86	7	$	750


	Nine Months Ended September 30,
	2020			2019
		Post-Modification			Post-Modification
		Outstanding			outstanding
	Number of	Recorded		Number of	Recorded
(in thousands, except modifications)	Modifications	Investment		Modifications	Investment
Troubled Debt Restructurings
Interest only payments	0	$	0	2	$	90
Interest only payments and maturity concession	0		0	2		73
Interest rate, forbearance and maturity concession	4		409	0		0
Amortization and maturity concession	0		0	4		273
Amortization, interest rate and maturity concession	0		0	1		77
Forbearance	0		0	3		253
Forbearance and interest only payments	1		24	5		331
Forbearance, amortization and maturity concession	0		0	7		640
Maturity concession	2		95	0		0
Other	0		0	1		58
Total	7	$	528	25	$	1,795

For the three and nine months ended ~~March 31,~~September 30, 2020, there were 0 loans that were restructured that had subsequently defaulted during the period. The evaluation of certain loans individually for specific impairment includes loans that were previously classified as TDRs or continue to be classified as TDRs.

Modifications in response to COVID-19

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

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

Foreclosure

As of ~~March 31,~~September 30, 2020 and December 31, 2019, the Company maintained bank-owned residential real estate with a fair value of ~~$2.2~~$1.9 million. Additionally, residential mortgage loans collateralized by real estate that are in the process of foreclosure as of ~~March 31,~~September 30, 2020 and December 31, 2019 totaled ~~$931~~$917 thousand and $810 thousand, respectively.

Table of Contents

Mortgage Banking

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

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


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

Total residential loans included held for sale loans of ~~$11.7~~$23.7 million and $6.5 million at ~~March 31,~~September 30, 2020 and December 31, 2019, respectively.

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Table of Contents

NOTE 4. ALLOWANCE FOR LOAN LOSSES

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

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

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

Specific Reserve for Loans Individually Evaluated

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

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

Quantitative Reserve for Loans Collectively Evaluated

Second, the Company stratifies the loan portfolio into 2 general business loan pools: substandard (7 risk-rated) and pass-rated (0 to 6 risk-rated) by loan type. Substandard rated loans are subject to higher credit loss rates in the allowance for loan loss calculation. The Company utilizes historical loss rates for commercial real estate and commercial and industrial loans assessed by internal risk rating. Historical loss rates on residential real estate and consumer loans are not risk graded. Residential real estate and consumer loans are considered as part of the pass-rated portfolio unless removed due to specific reserve evaluation based on past due status and/or other indications of credit deterioration. Quantitative reserves relative to each loan pool are established as follows: for all loan segments an allocation equaling 100% of the respective pool's average 3-year historical net loan charge-off rate (determined based upon the most recent 12 quarters) is applied to the aggregate recorded investment in the pool of loans. Purchased performing loans are collectively evaluated as their own separate category within each loan pool.

3136

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Qualitative Reserve for Loans Collectively Evaluated

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

~~��~~

Loss Emergence Period for Loans Collectively Evaluated

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

Activity in the allowance for loan losses for the three and nine months ended ~~March 31,~~September 30, 2020 and 2019 are, as follows:


Business Activities Loans	At or for the Three Months Ended March 31, 2020										At or for the Three Months Ended September 30, 2020
	Commercial		Commercial		Residential						Commercial		Commercial		Residential
(in thousands)	real estate		and industrial		real estate		Consumer		Total		real estate		and industrial		real estate		Consumer		Total
Balance at beginning of period	$	7,668	$	3,608	$	3,402	$	379	$	15,057	$	8,416	$	3,241	$	3,945	$	376	$	15,978
Charged-off loans		(770)		(150)		—		(148)		(1,068)		(266)		(4)		—		(146)		(416)
Recoveries on charged-off loans		25		1		—		3		29		12		14		—		6		32
Provision for loan losses		738		84		111		150		1,083		1,265		269		104		143		1,781
Balance at end of period	$	7,661	$	3,543	$	3,513	$	384	$	15,101	$	9,427	$	3,520	$	4,049	$	379	$	17,375
Individually evaluated for impairment		675		138		126		—		939		343		243		45		1		632
Collectively evaluated		6,986		3,405		3,387		384		14,162		9,084		3,277		4,004		378		16,743
Total	$	7,661	$	3,543	$	3,513	$	384	$	15,101	$	9,427	$	3,520	$	4,049	$	379	$	17,375


Acquired Loans	At or for the Three Months Ended March 31, 2020
Business Activities Loans											At or for the Nine Months Ended September 30, 2020
	Commercial		Commercial		Residential						Commercial		Commercial		Residential
(in thousands)	real estate		and industrial		real estate		Consumer		Total		real estate		and industrial		real estate		Consumer		Total
Balance at beginning of period	$	147	$	6	$	143	$	—	$	296	$	7,668	$	3,608	$	3,402	$	379	$	15,057
Charged-off loans		(101)		(29)		(8)		(5)		(143)		(1,036)		(307)		(21)		(335)		(1,699)
Recoveries on charged-off loans		—		9		6		—		15		90		16		—		5		111
(Releases) provision for loan losses		18		17		(12)		5		28
Provision for loan losses												2,705		203		668		330		3,906
Balance at end of period	$	64	$	3	$	129	$	—	$	196	$	9,427	$	3,520	$	4,049	$	379	$	17,375
Individually evaluated for impairment		13		—		14		—		27		343		243		45		1		632
Collectively evaluated		51		3		115		—		169		9,084		3,277		4,004		378		16,743
Total	$	64	$	3	$	129	$	—	$	196	$	9,427	$	3,520	$	4,049	$	379	$	17,375


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

3237

Table of Contents

Business Activities Loans

At or for the Three Months Ended March 31, 2019


Commercial

Commercial

Residential




(in thousands)

real estate

and industrial

real estate

Consumer

Total
Balance at beginning of period

$
6,811

$
2,380

$
3,982

$
408

$
13,581
Charged-off loans

(57)

—

—

(53)

(110)
Recoveries on charged-off loans

16

1

18

3

38
(Releases) provision for loan losses

(195)

397

(47)

38

193
Balance at end of period

$
6,575

$
2,778

$
3,953

$
396

$
13,702
Individually evaluated for impairment

396

53

83

1

533
Collectively evaluated

6,179

2,725

3,870

395

13,169
Total

$
6,575

$
2,778

$
3,953

$
396

$
13,702


Acquired Loans	At or for the Three Months Ended March 31, 2019										At or for the Nine Months Ended September 30, 2020
	Commercial		Commercial		Residential						Commercial		Commercial		Residential
(in thousands)	real estate		and industrial		real estate		Consumer		Total		real estate		and industrial		real estate		Consumer		Total
Balance at beginning of period	$	173	$	35	$	77	$	—	$	285	$	147	$	6	$	143	$	—	$	296
Charged-off loans		—		(16)		(104)		(1)		(121)		(101)		(53)		(11)		(6)		(171)
Recoveries on charged-off loans		—		—		—		—		—		19		9		12		8		48
Provision (releases) for loan losses		(12)		10		132		1		131
Provision (release) for loan losses												335		50		(24)		(2)		359
Balance at end of period	$	161	$	29	$	105	$	—	$	295	$	400	$	12	$	120	$	—	$	532
Individually evaluated for impairment		16		—		22		—		38		297		7		52		—		356
Collectively evaluated		145		29		83		—		257		103		5		68		—		176
Total	$	161	$	29	$	105	$	—	$	295	$	400	$	12	$	120	$	—	$	532


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


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


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

Table of Contents


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

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

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

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

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

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

~~Table of Contents~~

where the liquidation is jeopardized may be included in this classification. Special mention loans are not adversely classified and do not expose the Company to sufficient risks to warrant classification.

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

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

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

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

~~Business Activities Loans~~

~~Commercial Real Estate~~

Commercial construction

and land development

Commercial real estate other

Total commercial real estate
(in thousands)

Mar 31, 2020

Dec 31, 2019

Mar 31, 2020

Dec 31, 2019

Mar 31, 2020

Dec 31, 2019
Grade:













Pass

$
48,881

$
31,057

$
659,494

$
646,886

$
708,375

$
677,943
Special mention

—

—

8,133

5,483

8,133

5,483
Substandard

11

330

11,824

11,974

11,835

12,304
Doubtful

265

—

1,127

1,708

1,392

1,708
Total

$
49,157

$
31,387

$
680,578

$
666,051

$
729,735

$
697,438

~~Acquired Loans~~

~~Commercial Real Estate~~

Commercial construction

and land development

Commercial real estate other

Total commercial real estate
(in thousands)

Mar 31, 2020

Dec 31, 2019

Mar 31, 2020

Dec 31, 2019

Mar 31, 2020

Dec 31, 2019
Grade:













Pass

$
2,083

$
2,412

$
205,309

$
218,491

$
207,392

$
220,903
Special mention

—

12

1,742

2,261

1,742

2,273
Substandard

339

479

8,900

9,400

9,239

9,879
Doubtful

—

—

70

168

70

168
Total

$
2,422

$
2,903

$
216,021

$
230,320

$
218,443

$
233,223

3439

Table of Contents

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

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

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

Business Activities Loans

Commercial Real Estate


	Commercial construction
	and land development				Commercial real estate other				Total commercial real estate
(in thousands)	Sep 30, 2020		Dec 31, 2019		Sep 30, 2020		Dec 31, 2019		Sep 30, 2020		Dec 31, 2019
Grade:
Pass	$	86,716	$	31,057	$	742,214	$	646,886	$	828,930	$	677,943
Special mention		0		0		6,722		5,483		6,722		5,483
Substandard		—		330		15,981		11,974		15,981		12,304
Doubtful		211		0		554		1,708		765		1,708
Total	$	86,927	$	31,387	$	765,471	$	666,051	$	852,398	$	697,438

Acquired Loans

Commercial Real Estate


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

Business Activities Loans

Commercial and Industrial

Commercial

Agricultural

Tax exempt loans

Total commercial
and industrial
(in thousands)

Mar 31, 2020

Dec 31, 2019

Mar 31, 2020

Dec 31, 2019

Mar 31, 2020

Dec 31, 2019

Mar 31, 2020

Dec 31, 2019
Grade:

















Pass

$
268,287

$
221,329

$
17,559

$
18,940

$
55,694

$
66,860

$
341,540

$
307,129
Special mention

3,641

2,744

221

298

—

—

3,862

3,042
Substandard

15,195

14,866

456

780

—

—

15,651

15,646
Doubtful

959

753

361

—

—

—

1,320

753
Total

$
288,082

$
239,692

$
18,597

$
20,018

$
55,694

$
66,860

$
362,373

$
326,570

~~Acquired Loans~~

~~Commercial and Industrial~~

Commercial

Agricultural

Tax exempt loans

Total commercial
and industrial
(in thousands)

Mar 31, 2020

Dec 31, 2019

Mar 31, 2020

Dec 31, 2019

Mar 31, 2020

Dec 31, 2019

Mar 31, 2020

Dec 31, 2019
Grade:

















Pass

$
50,663

$
51,184

$
200

$
58

$
11,071

$
37,407

$
61,934

$
88,649
Special mention

882

5,432

—

—

—

—

882

5,432
Substandard

944

2,115

—

148

—

36

944

2,299
Doubtful

224

341

—

—

—

—

224

341
Total

$
52,713

$
59,072

$
200

$
206

$
11,071

$
37,443

$
63,984

$
96,721

~~Business Activities Loans~~

~~Residential Real Estate and Consumer Loans~~

Residential real estate

Home equity

Other consumer

Total residential real estate and consumer
(in thousands)

Mar 31, 2020

Dec 31, 2019

Mar 31, 2020

Dec 31, 2019

Mar 31, 2020

Dec 31, 2019

Mar 31, 2020

Dec 31, 2019
Performing

$
738,633

$
737,325

$
64,074

$
58,753

$
9,206

$
11,146

$
811,913

$
807,224
Nonperforming

4,077

3,362

440

615

20

21

4,537

3,998
Total

$
742,710

$
740,687

$
64,514

$
59,368

$
9,226

$
11,167

$
816,450

$
811,222

~~Acquired Loans~~

~~Residential Real Estate and Consumer Loans~~

Residential real estate

Home equity

Other consumer

Total residential real estate and consumer
(in thousands)

Mar 31, 2020

Dec 31, 2019

Mar 31, 2020

Dec 31, 2019

Mar 31, 2020

Dec 31, 2019

Mar 31, 2020

Dec 31, 2019
Performing

$
387,304

$
407,811

$
52,619

$
62,504

$
1,343

$
1,707

$
441,266

$
472,022
Nonperforming

2,314

3,359

411

529

7

8

2,732

3,896
Total

$
389,618

$
411,170

$
53,030

$
63,033

$
1,350

$
1,715

$
443,998

$
475,918

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

March 31, 2020

December 31, 2019

Business

Business

(in thousands)

Activities Loans

Acquired Loans

Total

Activities Loans

Acquired Loans

Total
Non-accrual

$
8,384

$
1,672

$
10,056

$
8,354

$
3,196

$
11,550
Substandard accruing

26,351

11,537

37,888

26,055

13,387

39,442
Total classified

34,735

13,209

47,944

34,409

16,583

50,992
Special mention

11,995

2,624

14,619

8,525

7,705

16,230
Total Criticized

$
46,730

$
15,833

$
62,563

$
42,934

$
24,288

$
67,222


	Commercial				Agricultural				Tax exempt loans				Total commercial and industrial
(in thousands)	Sep 30, 2020		Dec 31, 2019		Sep 30, 2020		Dec 31, 2019		Sep 30, 2020		Dec 31, 2019		Sep 30, 2020		Dec 31, 2019
Grade:
Pass	$	362,351	$	221,329	$	16,744	$	18,940	$	41,951	$	66,860	$	421,046	$	307,129
Special mention		4,066		2,744		200		298		0		0		4,266		3,042
Substandard		14,430		14,866		489		780		0		0		14,919		15,646
Doubtful		665		753		225		0		0		0		890		753
Total	$	381,512	$	239,692	$	17,658	$	20,018	$	41,951	$	66,860	$	441,121	$	326,570

3540

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Acquired Loans

Commercial and Industrial


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

Business Activities Loans

Residential Real Estate and Consumer Loans


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

Acquired Loans

Residential Real Estate and Consumer Loans


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

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


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

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NOTE 5. BORROWED FUNDS

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


									September 30, 2020				December 31, 2019
	March 31, 2020				December 31, 2019						Weighted				Weighted
(dollars in thousands)	Carrying Value		Weighted Average Rate		Carrying Value		Weighted Average Rate		Carrying Value		Average Rate		Carrying Value		Average Rate
Short-term borrowings
Advances from the FHLB	$	172,643	1.27	%	$	303,286	1.83	%	$	41,672	1.69	%	$	303,286	1.83	%
Advances from the FRB		62,000	0.25			—	—
Other borrowings		31,001	1.21			44,832	0.99			30,048	0.60			44,832	0.99
Total short-term borrowings		265,644	1.03			348,118	1.73			71,720	1.20			348,118	1.73
Long-term borrowings
Advances from the FHLB		231,936	1.80			123,278	1.93			182,609	1.73			123,278	1.93
Advances from the FRB PPPLF										131,143	0.35			—	—
Subordinated borrowings		59,849	4.97			59,920	5.53			59,920	4.48			59,920	5.53
Total long-term borrowings		291,785	2.45			183,198	2.87			373,672	1.69			183,198	2.87
Total	$	557,429	1.77	%	$	531,316	2.11	%	$	445,392	1.60	%	$	531,316	2.11	%

Short-term debt includes Federal Home Loan Bank of Boston (“FHLB”) advances with a maturity of less than one year. The Company also maintains a $1.0 million secured line of credit with the FHLB that bears a daily adjustable rate calculated by the FHLB. There was 0 outstanding balance on the FHLB line of credit for the periods ended ~~March 31,~~September 30, 2020 and December 31, 2019.

The Company has the capacity to borrow funds on a secured basis utilizing the Borrower in Custody program and the Discount Window at the Federal Reserve Bank of Boston (the “FRB”). At ~~March 31,~~September 30, 2020, the Company’s available secured line of credit at the FRB was ~~$142.1~~$81.1 million. The Company has pledged certain loans and securities to the FRB to support this arrangement. There were ~~$62.0 million of~~0 outstanding advances with the FRB for the ~~period~~periods ended ~~March~~September 30, 2020 December 31, 2019.

On April 15, 2020, ~~and 0 borrowings with~~ the FRB provided a Paycheck Protection Program Lending Facility (“PPPLF”) that the Company used to fund most of its PPP loans totaling $131.1 million as of ~~December 31, 2019.~~September 30, 2020.

The Company maintains, with a correspondent bank, an unused unsecured federal funds line of credit that has an aggregate overnight borrowing capacity of $50.0 million as of ~~March 31,~~September 30, 2020 and December 31, 2019. There was 0 outstanding balance on the line of credit as of ~~March 31,~~September 30, 2020 and December 31, 2019.

Long-term FHLB advances consist of advances with a maturity of more than one year. ~~The~~Callable advances ~~outstanding at March~~as of September 30, 2020 were $2.0 million, as of December 31, 2019 there were 0 callable advances. As of September 30, 2020 and December 31, 2019 ~~include 0 callable advances~~there were $309 thousand and ~~$314~~$316 thousand of amortizing ~~advances.~~advances, respectively. All FHLB borrowings, including the line of credit, are secured by a blanket security agreement on certain qualified collateral, principally all residential first mortgage loans and certain securities.

A summary of maturities of FHLB advances as of ~~March 31,~~September 30, 2020 is, as follows:

March 31, 2020




Weighted Average

(in thousands, except rates)

Carrying Value

Rate

Fixed rate advances maturing:





2020

$
142,300

1.19
%
2021

50,665

1.77

2022

104,000

1.97

2023

80,000

1.77

2024

7,300

1.16

2025 and thereafter

20,314

1.22

Total FHLB advances

$
404,579

1.58
%


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

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On November 26, 2019, the Company executed a Subordinated Note Purchase Agreement with an aggregate of $40.0 million of subordinated notes (the "Notes") to accredited investors. The Notes have a maturity date of December 1, 2029 and bear a fixed interest rate of 4.625% through December 1, 2024 payable semi-annually in arrears. From December 1, 2024 and thereafter the interest rate shall be reset quarterly to an interest rate per annum equal to the then current three-month SOFR plus 3.27%. The Company has the option beginning with the interest payment date of December 1, 2024, and on any scheduled payment date thereafter, to redeem the Notes, in whole or in part upon prior approval of the Federal Reserve. Netted with subordinated borrowings is amortized subordinated debt issuance costs of ~~$739 thousand.~~$700 thousand as of September 30, 2020.

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

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NOTE 6. DEPOSITS

A summary of time deposits is, as follows:


(in thousands)	March 31, 2020		December 31, 2019		September 30, 2020		December 31, 2019
Time less than $100,000	$	559,255	$	600,747	$	497,403	$	600,747
Time $100,000 through $250,000		173,305		225,505		192,243		225,505
Time $250,000 or more		111,537		106,383		123,863		106,383
Total time deposits	$	844,097	$	932,635	$	813,509	$	932,635

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


(in thousands)	March 31, 2020		December 31, 2019		September 30, 2020		December 31, 2019
Within 1 year	$	479,983	$	555,074	$	635,798	$	555,074
Over 1 year to 2 years		295,939		287,934		111,500		287,934
Over 2 years to 3 years		31,909		51,444		29,392		51,444
Over 3 years to 4 years		27,811		31,262		27,598		31,262
Over 4 years to 5 years		8,438		6,883		9,216		6,883
Over 5 years		17		38		5		38
Total	$	844,097	$	932,635	$	813,509	$	932,635

Included in time deposits are brokered deposits of ~~$378.7~~$327.2 million and $526.9 million at ~~March 31,~~September 30, 2020 and December 31, 2019, respectively. Also included in time deposits are reciprocal deposits of ~~$79.3~~$127.4 million and $64.1 million at ~~March 31,~~September 30, 2020 and December 31, 2019, respectively.

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NOTE 7. CAPITAL RATIOS AND SHAREHOLDERS’ EQUITY

The actual and required capital ratios are, as follows:


			Regulatory				Regulatory				Regulatory				Regulatory
	March 31,		Minimum to be		December 31,		Minimum to be		September 30,		Minimum to be		December 31,		Minimum to be
	2020		"Well Capitalized"		2019		"Well Capitalized"		2020		"Well-Capitalized"		2019		"Well-Capitalized"
Company (consolidated)
Total capital to risk-weighted assets	13.61	%	10.50	%	13.61	%	10.50	%	13.32	%	10.50	%	13.61	%	10.50	%
Common equity tier 1 capital to risk-weighted assets	10.61		7.00		10.57		7.00		10.29		7.00		10.57		7.00
Tier 1 capital to risk-weighted assets	11.42		8.50		11.39		8.50		11.08		8.50		11.39		8.50
Tier 1 capital to average assets	8.25		5.00		8.13		5.00		8.14		5.00		8.13		5.00

Bank
Total capital to risk-weighted assets	12.58	%	10.50	%	12.42	%	10.50	%	13.03	%	10.50	%	12.42	%	10.50	%
Common equity tier 1 capital to risk-weighted assets	11.96		7.00		11.79		7.00		12.33		7.00		11.79		7.00
Tier 1 capital to risk-weighted assets	11.96		8.50		11.79		8.50		12.33		8.50		11.79		8.50
Tier 1 capital to average assets	8.64		5.00		8.39		5.00		9.06		5.00		8.39		5.00

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

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

At March 31, 2020, the capital levels of both the Company and the Bank exceeded all regulatory capital requirements and their regulatory capital ratios were above the minimum levels required to be considered "well-capitalized" for regulatory purposes.

Accumulated other comprehensive income (loss)

Components of accumulated other comprehensive income is, as follows:


(in thousands)	March 31, 2020		December 31, 2019		September 30, 2020		December 31, 2019
Other accumulated comprehensive income, before tax:
Net unrealized gain on AFS securities	$	12,699	$	7,342	$	15,264	$	7,342
Net unrealized loss on hedging derivatives		(3,099)		(718)		(1,461)		(718)
Net unrealized loss on post-retirement plans		(1,512)		(1,512)		(1,512)		(1,512)

Income taxes related to items of accumulated other comprehensive income:
Net unrealized gain on AFS securities		(3,139)		(1,793)		(3,583)		(1,793)
Net unrealized loss on hedging derivatives		886		237		342		237
Net unrealized loss on post-retirement plans		355		355		355		355
Accumulated other comprehensive income	$	6,190	$	3,911	$	9,405	$	3,911

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The following table presents the components of other comprehensive income (loss) for the three and nine months ended ~~March 31,~~September 30, 2020 and 2019:


(in thousands)	Before Tax		Tax Effect		Net of Tax		Before Tax		Tax Effect		Net of Tax
Three Months Ended March 31, 2020
Three Months Ended September 30, 2020
Net unrealized gain on AFS securities:
Net unrealized gain arising during the period	$	5,492	$	(1,378)	$	4,114	$	351	$	(82)	$	269
Less: reclassification adjustment for gains (losses) realized in net income		135		(32)		103		—		—		—
Net unrealized gain on AFS securities		5,357		(1,346)		4,011		351		(82)		269

Net unrealized loss on derivative hedges:
Net unrealized loss arising during the period		(2,382)		650		(1,732)
Less: reclassification adjustment for gains (losses) realized in net income		—		—		—
Net unrealized loss on derivative hedges		(2,382)		650		(1,732)

Net unrealized gain on post-retirement plans:
Net unrealized gain on cash flow hedging derivatives:
Net unrealized gain arising during the period		—		—		—		805		(190)		615
Less: reclassification adjustment for gains (losses) realized in net income		—		—		—
Net unrealized gain on post-retirement plans		—		—		—
Other comprehensive income	$	2,975	$	(696)	$	2,279

Three Months Ended March 31, 2019
Net unrealized gain on AFS securities:
Net unrealized gain arising during the period	$	8,900	$	(2,079)	$	6,821
Less: reclassification adjustment for gains realized in net income		—		—		—
Net unrealized gain on AFS securities		8,900		(2,079)		6,821

Net unrealized loss on cash flow hedging derivatives:
Net unrealized loss arising during the period		(845)		198		(647)
Less: reclassification adjustment for gains (losses) realized in net income		—		—		—		—		—		—
Net unrealized gain on cash flow hedging derivatives		(845)		198		(647)		805		(190)		615

Net unrealized gain on post-retirement plans:
Net unrealized gain arising during the period		—		—		—		—		—		—
Less: reclassification adjustment for gains (losses) realized in net income		—		—		—		—		—		—
Net unrealized gain on post-retirement plans		—		—		—		—		—		—
Other comprehensive income	$	8,055	$	(1,881)	$	6,174	$	1,156	$	(272)	$	884

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

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

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

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

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

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

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

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

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

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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 ~~March 31,~~September 30, 2020 and 2019:


	Net unrealized		Net loss on		Net unrealized				Net unrealized		Net loss on		Net unrealized
	gain (loss)		effective cash		loss				gain (loss)		effective cash		loss
	on AFS		flow hedging		on pension				on AFS		flow hedging		on pension
(in thousands)	Securities		derivatives		plans		Total		Securities		derivatives		plans		Total
Three Months Ended March 31, 2020
Three Months Ended September 30, 2020
Balance at beginning of period									$	11,412	$	(1,734)	$	(1,157)	$	8,521
Other comprehensive gain before reclassifications										269		615		0		884
Less: amounts reclassified from accumulated other comprehensive income										0		0		0		0
Total other comprehensive income										269		615		0		884
Balance at end of period									$	11,681	$	(1,119)	$	(1,157)	$	9,405

Three Months Ended September 30, 2019
Balance at beginning of period	$	5,549	$	(481)	$	(1,157)	$	3,911	$	5,547	$	(3,782)	$	(888)	$	(5,628)
Other comprehensive gain (loss) before reclassifications		4,114		(1,732)		—		2,382		2,573		(285)		0		2,288
Less: amounts reclassified from accumulated other comprehensive income		103		—		—		103		120		0		0		120
Total other comprehensive income (loss)		4,011		(1,732)		—		2,279		2,453		(285)		0		2,168
Balance at end of period	$	9,560	$	(2,213)	$	(1,157)	$	6,190	$	8,000	$	(4,067)	$	(888)	$	3,045

Three Months Ended March 31, 2019
Nine Months Ended September 30, 2020
Balance at beginning of period	$	(8,665)	$	(2,249)	$	(888)	$	(11,802)	$	5,550	$	(482)	$	(1,157)	$	3,911
Other comprehensive gain (loss) before reclassifications		6,821		(647)		—		6,174		7,262		(637)		0		6,625
Less: amounts reclassified from accumulated other comprehensive income		—		—		—		—		1,131		0		0		1,131
Total other comprehensive income (loss)		6,821		(647)		—		6,174		6,131		(637)		0		5,494
Balance at end of period	$	(1,844)	$	(2,896)	$	(888)	$	(5,628)	$	11,681	$	(1,119)	$	(1,157)	$	9,405

Nine Months Ended September 30, 2019
Balance at beginning of period									$	(8,665)	$	(2,249)	$	(888)	$	(11,802)
Other comprehensive gain (loss) before reclassifications										16,785		(1,818)		0		14,967
Less: amounts reclassified from accumulated other comprehensive income										120		0		0		120
Total other comprehensive income (loss)										16,665		(1,818)		0		14,847
Balance at end of period									$	8,000	$	(4,067)	$	(888)	$	3,045

The following tables presents the amounts reclassified out of each component of accumulated other comprehensive income for ~~the~~ three and nine months ended ~~March 31,~~September 30, 2020 and 2019:


	Three Months Ended March 31,				Affected Line Item where	Three Months Ended September 30,				Nine Months Ended September 30,				Affected Line Item where
(in thousands)	2020		2019		Net Income is Presented	2020		2019		2020		2019		Net Income is Presented
Net realized gains on AFS securities:
Before tax⁽¹⁾	$	135	$	—	Non-interest income	$	—	$	157	$	1,486	$	157	Non-interest income
Tax effect		(32)		—	Tax expense		—		(37)		(355)		(37)	Tax expense
Total reclassifications for the period	$	103	$	—	Net of tax	$	—	$	120	$	1,131	$	120	Net of tax

(1)

Net realized gains before tax include gross realized gains ~~$146~~$1.5 million and realized losses of $22 thousand for the nine months ended September 30, 2020 and gross realized gains of $716 thousand and realized losses of ~~$11 thousand.~~$559 thousand for the three and nine months ended September 30, 2019.

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NOTE 8. EARNINGS PER SHARE

The following table presents the calculation of earnings per share:


	Three Months Ended				Three Months Ended				Nine Months Ended
	March 31,				September 30,				September 30,
(in thousands, except per share and share data)	2020		2019		2020		2019		2020		2019
Net income	$	7,721	$	7,281	$	8,402	$	5,015	$	24,604	$	18,413

Average number of basic common shares outstanding		15,558,132		15,523,423		15,079,413		15,547,276		15,358,803		15,536,414
Plus: dilutive effect of stock options and awards outstanding ⁽¹⁾		34,463		63,226		23,421		34,027		23,063		45,282
Average number of diluted common shares outstanding ⁽¹⁾		15,592,595		15,586,649		15,102,834		15,581,303		15,381,866		15,581,696

Anti-dilutive options excluded from earnings calculation		—		—

Earnings per share:
Basic	$	0.50	$	0.47	$	0.56	$	0.32	$	1.60	$	1.19
Diluted	$	0.50	$	0.47	$	0.56	$	0.32	$	1.60	$	1.18

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

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NOTE 9. DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGING ACTIVITIES

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

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

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

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

March 31, 2020

Weighted

Location Fair

Notional

Average

Fair Value

Value Asset

Amount

Maturity

Asset (Liability)

(Liability)


(in thousands)

(in years)

(in thousands)

Cash flow hedges:

Interest rate swap on wholesale funding

$
100,000

4.3

$
(6,467)

Other liabilities
Total cash flow hedges

100,000

4.3

(6,467)

Fair value hedges:

Interest rate swap on securities

37,190

9.3

3,368

Other liabilities
Total fair value hedges

37,190

3,368

Economic hedges:

Forward sale commitments

53,751

0.2

(73)

Other liabilities
Customer Loan Swaps-MNA Counterparty

150,490

7.8

(15,463)

Other liabilities (1)
Customer Loan Swaps-RPA Counterparty

78,505

8.7

(9,470)

Other liabilities (1)
Customer Loan Swaps-Customer

228,995

8.1

24,933

Other liabilities (1)
Total economic hedges

511,741

(73)

Non-hedging derivatives:

Interest rate lock commitments

23,146

0.1

93

Other assets
Total non-hedging derivatives

23,146

93

Total

$
672,077

$
(3,079)

~~(1)~~

~~Customerloanderivativesaresubject~~to~~MNA~~or~~RPAarrangementswithfinancialinstitutioncounterparties.~~


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

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

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

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

Total	$	822,929			$	(3,453)

~~Table of Contents~~

December 31, 2019

Weighted

Location Fair

Notional

Average

Fair Value

Value Asset

Amount

Maturity

Asset (Liability)

(Liability)


(in thousands)

(in years)

(in thousands)

Cash flow hedges:







Interest rate swap on wholesale funding

$
100,000

4.6

$
(1,311)

Other liabilities
Total cash flow hedges

100,000

(1,311)

Fair value hedges:

Interest rate swap on securities

37,190

9.6

593

Other liabilities
Total fair value hedges

37,190

593

Economic hedges:

Forward sale commitments

11,228

0.1

(84)

Other liabilities
Customer Loan Swaps-MNA Counterparty

135,598

7.5

(4,669)

(1)
Customer Loan Swaps-RPA Counterparty

69,505

8.8

(3,377)

(1)
Customer Loan Swaps-Customer

205,103

8.1

8,046

(1)
Total economic hedges

421,434

(84)

Non-hedging derivatives:







Interest rate lock commitments

21,748

0.1

59

Other assets
Total non-hedging derivatives

21,748

59

Total

$
580,372

$
(743)

~~(1)~~

~~Customer loan derivatives are subject to MNA or~~ ~~RPA~~ ~~arrangements with financial institution counterparties, thus assets and liabilities with the counterparty are netted for financial statement presentation.~~

Asof ~~March 31, 2020 and~~ ~~December31,2019,thefollowingamountswererecorded~~on~~thebalancesheetrelated~~to~~cumulative basis adjustments for fair valuehedges:~~

Cumulative Amount of Fair

Location of Hedged Item on

Carrying Amount of Hedged

Value Hedging Adjustment in


Balance Sheet

Assets (Liabilities)

Carrying Amount
March 31, 2020






Fair value hedges:






Interest rate swap on securities

Securities Available for Sale

$
38,710

$
207

December 31, 2019






Fair value hedges:






Interest rate swap on securities

Securities Available for Sale

$
39,026

$
523

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

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

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

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

Total	$	580,372			$	(743)

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

Asof September 30, 2020 and December 31, 2019,thefollowingamountswererecordedonthebalancesheetrelatedtocumulative basis adjustments for fair valuehedges:


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

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

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Information about derivative assets and liabilities for ~~March 31,~~September 30, 2020 and December 31, 2019, follows:

Three Months Ended March 31, 2020


Amount of



Amount of




Gain (Loss)

Gain (Loss)

Recognized in

Reclassified

Location of

Amount of

Other

Location of Gain (Loss)

from Other

Gain (Loss)

Gain (Loss)

Comprehensive

Reclassified from Other

Comprehensive

Recognized in

Recognized
(in thousands)

Income

Comprehensive Income

Income⁽¹⁾

Income

in Income
Cash flow hedges:










Interest rate swap on wholesale funding

$
4,949

Other income

$
—

Interest expense

$
1
Total cash flow hedges

4,949

—



1

Fair value hedges:










Interest rate swap on securities

(2,736)

Interest income

—

Interest income

13
Total fair value hedges

(2,736)

—



13

Economic hedges:










Forward commitments

—

Other income

—

Other income

11
Total economic hedges

—

—



11

Non-hedging derivatives:










Interest rate lock commitments

—

Other Income

—

Other Income

34
Total non-hedging derivatives

—

—



34

Total

$
2,213

$
—



$
59

~~(1)~~

~~As of March 31, 2020 the Company does not expect any gains or losses from accumulated other comprehensive income into earnings within the next 12 months.~~


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

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

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

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

Total	$	(1,118)		$	—		$	(825)

Three Months Ended March 31, 2019


Amount of



Amount of




Gain (Loss)

Gain (Loss)

Amount of

Recognized in

Reclassified

Location of

Gain (Loss)

Other

Location of Gain (Loss)

from Other

Gain (Loss)

Recognized

Comprehensive

Reclassified from Other

Comprehensive

Recognized in

Recognized
(in thousands)

Income

Comprehensive Income

Income⁽¹⁾

Income

in Income
Cash flow hedges:










Interest rate swap on wholesale funding

$
402

Other income

$
—

Interest expense

$
—
Interest rate cap agreements

2,494

Acquisition, restructuring, and other expenses

Interest expense

163
Total cash flow hedges

2,896

—

—

Economic hedges:










Forward commitments

—

Other income

—

Other income

(65)
Total economic hedges

—

—



—

Non-hedging derivatives:










Interest rate lock commitments

—

Other income

—

Other Income

6
Total non-hedging derivatives

—

—



6

Total

$
2,896



$
—



$
6

~~(1)~~

~~As of March 31, 2019 the Company does not expect any gains or losses from accumulated other comprehensive income into earnings within the next 12 months.~~

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

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

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

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

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

Cash flow hedges

Interest rate swaps on wholesale funding

In March and November 2019 and April 2020, the Company entered into interest rate swaps on wholesale borrowings (the "SWAPS") to limit its exposure to rising interest rates over a five year term on 3-month FHLB borrowings or brokered certificates, or a combination thereof at each maturity date. Under the terms of the agreement, the Company has 2 swaps each with a $50.0 million notional amount and pays a fixed interest rate of 2.46% and 1.53% respectively and 1 swap with a $25.0 million notional amount and pays a fixed rate of 0.59%. The financial institution counterparty pays the Company interest on the three-month LIBOR rate. The Company designated the swap as a cash flow hedge.

Interest rate cap agreements

In 2014, interest rate cap agreements were purchased to limit the Company’s exposure to rising interest rates on 4 rolling, three-month borrowings indexed to three-month LIBOR. Under the terms of the agreements, the Company paid total premiums of $4.6 million for the right to receive cash flow payments if three-month LIBOR rises above the caps of 3.00%, thus effectively ensuring interest expense on the borrowings at maximum rates of 3.00% for the duration of the agreements. The interest rate cap agreements were designated as cash flow ~~hedges,~~hedges; however, the caps were terminated in the fourth quarter of 2019 ~~with~~and the unamortized premium totaling $3.2 million was recognized in acquisition, restructuring and other expenses. ~~The caps were terminated because it was probable that the original forecasted transaction would not occur by the end of the original specified period.~~

Fair value hedges

Interest rate swap on ~~deposits~~securities

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

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converts the fixed interest rates to LIBOR-based variable interest rates. These derivatives are designated as partial term hedges of selected cash flows covering specified periods of time prior to the call dates of the hedged securities. During 2019, the Company entered into ~~interest rate swaps on brokered deposits (the "SWAPS")~~8 swap transactions with a notional amount of $37.2 million designated as fair value hedges. These derivatives are intended to ~~limit its exposure to rising~~protect against the effects of changing interest rates over a five year term. Under the terms of the agreement, the Company has 2 swaps each with a $50.0 million notional amount and pays a fixed interest rate of 2.46% and 1.55% respectively, and the financial institution counterparty pays the Company interest on the ~~three-month LIBOR rate.~~fair values of fixed rate securities. The ~~Company designated~~fixed rates on the ~~swap as~~transactions have a ~~cash flow hedge.~~weighted average of 1.696%.

Economic hedges

Forward sale commitments

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

Customer loan derivatives

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

The master netting arrangements provide for a single net settlement of all loan swap agreements, as well as collateral or cash funds, in the event of default on, or termination of, any one contract. Collateral is provided by cash or securities received or posted by the counterparty with net liability positions, respectively, in accordance with contract thresholds. Currently, the Company has posted cash of ~~$26.2~~$30.5 million with counterparties.


	Gross Amounts Offset in the Consolidated Balance Sheet								Gross Amounts Offset in the Consolidated Balance Sheet
	Derivative				Cash Collateral				Derivative				Cash Collateral
(in thousands)	Liabilities		Derivative Assets		Pledged		Net Amount		Liabilities		Derivative Assets		Pledged		Net Amount
As of March 31, 2020
As of September 30, 2020
Customer Loan Derivatives:
MNA counterparty	$	(15,463)	$	15,463	$	26,200	$	—	$	(16,965)	$	16,965	$	30,450	$	—
RPA counterparty		(9,470)		9,470		—		—		(11,071)		11,071		—		—
Total	$	(24,933)	$	24,933	$	26,200	$	—	$	(28,036)	$	28,036	$	30,450	$	—


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

4654

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Gross Amounts Offset in the Consolidated Balance Sheet

Derivative

Cash Collateral

(in thousands)

Liabilities

Derivative Assets

Pledged

Net Amount
As of December 31, 2019









Customer Loan Derivatives:








MNA counterparty

$
(4,669)

$
4,669

$
10,700

$
—
RPA counterparty

(3,377)

3,377

—

—
Total

$
(8,046)

$
8,046

$
10,700

$
—

Non-hedging derivatives

Interest rate lock commitments

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

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NOTE 10. FAIR VALUE MEASUREMENTS

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

Recurring Fair Value Measurements

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

March 31, 2020


Level 1

Level 2

Level 3

Total
(in thousands)

Inputs

Inputs

Inputs

Fair Value
Available for sale securities:







Mortgage-backed securities:








US Government-sponsored enterprises

$
—

$
295,657

$
—

$
295,657
US Government agency

—

101,669

—

101,669
Private label

—

18,499

—

18,499
Obligations of states and political subdivisions thereof

—

137,579

—

137,579
Corporate bonds

—

72,937

—

72,937
Derivative assets

—

24,933

93

25,026
Derivative liabilities

—

(28,032)

(73)

(28,105)


	September 30, 2020
	Level 1		Level 2		Level 3		Total
(in thousands)	Inputs		Inputs		Inputs		Fair Value
Available for sale securities:
Mortgage-backed securities:
US Government-sponsored enterprises	$	0	$	235,172	$	0	$	235,172
US Government agency		0		95,785		0		95,785
Private label		0		19,603		0		19,603
Obligations of states and political subdivisions thereof		0		154,157		0		154,157
Corporate bonds		0		99,812		0		99,812
Derivative assets		0		31,481		24		31,505
Derivative liabilities		0		(34,871)		(87)		(34,958)


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

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

Derivative Assets and Liabilities

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

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Interest Rate Lock Commitments. The Company enters into IRLCs for residential mortgage loans, which commit the Company to lend funds to a potential borrower at a specific interest rate and within a specified period of time. The estimated

~~Table of Contents~~

fair value of commitments to originate residential mortgage loans for sale is based on quoted prices for similar loans in active markets. However, this value is adjusted by a factor which considers the likelihood of a loan in a lock position will ultimately close. The closing ratio is derived from the Company’s internal data and is adjusted using significant management judgment. As such, IRLCs are classified as Level 3 measurements.

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

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

Although the Company has determined that the majority of the inputs used to value its customer loan derivatives fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with its derivatives utilize Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default by itself and its counterparties. However, as of ~~March 31,~~September 30, 2020, the Company assessed the significance of the impact of the credit valuation adjustments on the overall valuation of its derivative positions and determined that the credit valuation adjustments are not significant to the overall valuation of its derivatives. As a result, the Company determined that its derivative valuations in their entirety are classified in Level 2 of the fair value hierarchy.

The table below presents the changes in Level 3 assets and liabilities that were measured at fair value on a recurring basis for the three and nine months ended ~~March 31,~~September 30, 2020:


	Assets (Liabilities)				Assets (Liabilities)
	Interest Rate Lock		Forward		Interest Rate Lock		Forward
(in thousands)	Commitments		Commitments		Commitments		Commitments
Three Months Ended March 31, 2020
Three Months Ended September 30, 2020
Balance at beginning of period	$	59	$	(84)	$	63	$	(126)
Realized gain recognized in non-interest income		34		11
Realized (loss) gain recognized in non-interest income						(39)		39
Balance at end of period	$	93	$	(73)	$	24	$	(87)

Three Months Ended March 31, 2019
Nine Months Ended September 30, 2020
Balance at beginning of period	$	8	$	—	$	59	$	(84)
Realized gain recognized in non-interest income		6		(65)
Realized loss recognized in non-interest income						(35)		(3)
Balance at end of period	$	14	$	(65)	$	24	$	(87)

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

Fair Value

(in thousands,

September 30,

December 31,

Valuation

Unobservable

except ratios)

2020

2019

Techniques

Inputs

Input Value

Assets (Liabilities)

Interest Rate Lock Commitment

Historical trend

Closing Ratio

Pricing Model

Origination Costs, per loan

1.7

Forward Commitments

(87)

(84)

Quoted prices for similar loans in active markets.

Freddie Mac pricing system

Pair-off contract price

Total

(63)

(25)

Non-Recurring Fair Value Measurements

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


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

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

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

Fair Value

Fair Value

March 31,

December 31,

Valuation

Unobservable

Unobservable

(in thousands, except ratios)

2020

2019

Techniques

Inputs

Input Value

Assets (Liabilities)











Interest Rate Lock Commitment

$
93

$
59

Historical trend

Closing Ratio

90
%

Pricing Model

Origination Costs, per loan

$
1.7

Forward Commitments

(73)

(84)

Quoted prices for similar loans in active markets.

Freddie Mac pricing system

Pair-off contract price

Total

$
20

$
(25)

~~Non-Recurring Fair Value Measurements~~

Fair Value

Three Months Ended

Measurement Date as of

March 31, 2020

December 31, 2019

March 31, 2020

March 31, 2020

Level 3

Level 3

Total

Level 3
(in thousands)

Inputs

Inputs

Gains (Losses)

Inputs
Assets








Impaired loans

$
8,335

$
9,625

$
1,290

March 2020
Capitalized servicing rights

3,897

4,301

—

March 2020
Other real estate owned

2,205

2,236

(31)

August 2019
Premises held for sale

1,764

1,764

—

September 2019
Total

$
16,201

$
17,926

$
1,259

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

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

Fair Value

Range

(in thousands, except ratios)

March 31, 2020

Valuation Techniques

Unobservable Inputs

(Weighted Average)^(a)

(in thousands,

Fair Value

Range

except ratios)

Sep 30, 2020

Valuation Techniques

Unobservable Inputs

(Weighted Average)^(a)

Assets

Impaired loans

4,947

Fair value of collateral -appraised value

Loss severity

0% to 70%

7,071

Fair value of collateral-appraised value

Loss severity

0% to 53%

Appraised value

$0 to $975

Appraised value

$0 to $1,730

Impaired loans

3,388

Discount cash flow

Discount rate

3.50% to 9.50%

2,546

Discount cash flow

Discount rate

3.50% to 9.50%

Cash flows

$21 to $1,002

Cash flows

$21 to $1,002

Capitalized servicing rights

3,897

Discounted cash flow

Constant prepayment rate (CPR)

11.91

3,234

Discounted cash flow

Constant prepayment rate (CPR)

16.73%

Discount rate

11.33

Discount rate

10.05%

Other real estate owned

2,205

Fair value of collateral less selling costs

Appraised value

2,695

1,983

Fair value of collateral less selling costs

Appraised value

$2,000

Selling Costs

6% to 10%

Selling Costs

Premises held for sale^(b)

1,764

Fair value of asset less selling costs

Appraised value

$136 to $527

1,764

Fair value of asset less selling costs

Appraised value

$136 to $527

Selling Costs

Total

16,201

16,598

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

~~Table of Contents~~

(b)	The carrying value of premises held for sale was $1.8 million as of ~~March 31,~~September 30, 2020.

Fair Value

Range

(in thousands, except ratios)

December 31, 2019

Valuation Techniques

Unobservable Inputs

(Weighted Average)^(a)

Assets

Impaired loans

$
6,137

Fair value of collateral -appraised value

Loss severity

0% to 55.00%

Appraised value

$0 to $6,915

Impaired loans

3,488

Discount cash flow

Discount rate

2.88% to 9.50%

Cash flows

$22 to $1,002

Capitalized servicing rights

4,301

Discounted cash flow

Constant prepayment rate (CPR)

9.95
%

Discount rate

10.07
%

Other real estate owned

2,236

Fair value of collateral less selling costs

Appraised value

$
2,695

Selling Costs

10% to 20%

Premises held for sale^(b)

1,764

Fair value of asset less selling costs

Appraised value

$
$136 to $527

Selling Costs

6.00
%
Total

$
17,926


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

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

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

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

Premises held for sale^(b)		1,764	Fair value of asset less selling costs	Appraised value		$136 to $527
				Selling Costs		6%
Total	$	17,926

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

(b)	The carrying value of premises held for sale was $1.8 million as of December 31, 2019.

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

Table of Contents

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

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

Other real estate owned (“OREO”). OREO results from the foreclosure process on residential or commercial loans issued by the Company. Upon assuming the real estate, the Company records the property at the fair value of the asset less the

~~Table of Contents~~

estimated sales costs. Thereafter, OREO properties are recorded at the lower of cost or fair value less the estimated sales costs. OREO fair values are primarily determined based on Level 3 data including sales comparables and appraisals.

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

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Summary of Estimated Fair Values of Financial Instruments

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


	March 31, 2020										September 30, 2020
	Carrying		Fair								Carrying		Fair
(in thousands)	Amount		Value		Level 1		Level 2		Level 3		Amount		Value		Level 1		Level 2		Level 3
Financial Assets
Cash and cash equivalents	$	85,655	$	85,655	$	85,655	$	—	$	—	$	215,657	$	215,657	$	215,657	$	0	$	0
Securities available for sale		626,341		626,341		—		626,341		—		604,529		604,529		0		604,529		0
FHLB stock		19,897		19,897		—		19,897		—		13,975		13,975		0		13,975		0
Net loans		2,619,686		2,604,406		—		—		2,604,406		2,690,784		2,672,882		0		0		2,672,882
Accrued interest receivable		3,268		3,268		—		3,268		—		3,171		3,171		0		3,171		0
Cash surrender value of bank-owned life insurance policies		76,400		76,400		—		76,400		—		77,388		77,388		0		77,388		0
Derivative assets		25,026		25,026		—		24,933		93		31,505		31,505		0		31,481		24

Financial Liabilities
Non-maturity deposits	$	1,806,460	$	1,861,960	$	—	$	1,861,960	$	—	$	2,121,406	$	2,037,099	$	0	$	2,037,099	$	0
Time deposits		844,097		852,346		—		852,346		—		813,509		805,783		0		805,783		0
Short-term other borrowings		31,001		31,000		—		31,000		—
Securities sold under agreements to repurchase												30,048		30,048		0		30,048		0
FHLB advances		404,579		410,065		—		410,065		—		224,282		229,413		0		229,413		0
FRB advances		62,000		62,000		—		62,000		—
FRB PPPLF												131,236		131,141		0		131,141		0
Subordinated borrowings		59,849		59,849		—		59,849		—		59,920		59,920		0		59,920		0
Derivative liabilities		28,105		28,105		—		28,032		73		34,958		34,958		0		34,871		87


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

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

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December 31, 2019

Carrying

Fair

(in thousands)

Amount

Value

Level 1

Level 2

Level 3
Financial Assets










Cash and cash equivalents

$
56,910

$
56,910

$
56,910

$
—

$
—
Securities available for sale

663,230

663,230

—

663,230

—
FHLB stock

20,679

20,679

—

20,679

—
Net loans

2,625,739

2,634,147

—

—

2,634,147
Accrued interest receivable

3,294

3,294

—

3,294

—
Cash surrender value of bank-owned life insurance policies

75,863

75,863

—

75,863

—
Derivative assets

6,850

6,850

—

6,791

59

Financial Liabilities










Non-maturity deposits

$
1,763,116

$
1,751,481

$
—

$
1,751,481

$
—
Time deposits

932,635

932,886

—

932,886

—
Short-term other borrowings

44,832

44,831

—

44,831

—
FHLB advances

426,564

425,989

—

425,989

—
Subordinated borrowings

59,920

59,920

—

59,920

—
Derivative liabilities

8,186

8,186

—

8,102

84

Other than as discussed above, the following methods and assumptions were used by management to estimate the fair value of significant classes of financial instruments for which the estimate of fair value goes beyond the carrying value approximating fair value.

~~Loans, net.~~ The fair value of loans are calculated on an individual basis with consideration given to the loans' underlying characteristics, including account types, remaining terms, annual interest rates or coupons, interest types, timing of principal and interest payments, current market rates, risk ratings, credit ratings and remaining balances. A discounted cash flow model is used to estimate the fair value of the loans using assumptions for the coupon rates, remaining maturities, prepayment speeds, liquidity premiums, projected default probabilities, loss given defaults, and estimates of prevailing discount rates.

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

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

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

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

~~Table of Contents~~

NOTE 11. REVENUE FROM CONTRACTS WITH CUSTOMER

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

Disaggregation of Revenue

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


	Three Months Ended				Three Months Ended				Nine Months Ended
	March 31,				September 30,				September 30,
(in thousands)	2020		2019		2020		2019		2020		2019
Major Products/Service Lines
Trust management fees	$	3,046	$	2,525	$	3,256	$	2,737	$	9,194	$	8,055
Financial services fees		323		233		276		276		867		781
Interchange fees		1,738		1,031		1,709		1,323		4,910		3,567
Customer deposit fees		1,110		907		937		1,112		2,836		3,046
Other customer service fees		264		226		240		118		691		723
Total	$	6,481	$	4,922	$	6,418	$	5,566	$	18,497	$	16,172


	Three Months Ended				Three Months Ended				Nine Months Ended
	March 31,				September 30,				September 30,
(in thousands)	2020		2019		2020		2019		2020		2019
Timing of Revenue Recognition
Products and services transferred at a point in time	$	3,273	$	2,267	$	3,133	$	2,839	$	9,026	$	7,874
Products and services transferred over time		3,208		2,655		3,285		2,727		9,471		8,298
Total	$	6,481	$	4,922	$	6,418	$	5,566	$	18,497	$	16,172

Trust Management ~~Fees.~~Fees

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

Financial Services ~~Fees.~~Fees

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

Interchange ~~Fees.~~Fees

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

Customer Deposit ~~Fees.~~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

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~~customers include ATM, bank-by-phone, internet banking, internet bill pay, mobile banking, and other cash management~~ services which include remote deposit capture, ACH origination, and wire transfers. These customer deposit fees are generally recognized by the Company at a point in time upon the completion of the service.

Other Customer Service ~~Fees.~~Fees

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

Contract Balances from Contracts with Customers

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


	Balance at		Balance at		Balance at		Balance at
(in thousands)	March 31, 2020		December 31, 2019		September 30, 2020		December 31, 2019
Balances from contracts with customers only:
Other Assets	$	1,336	$	1,703	$	1,311	$	1,236
Other Liabilities		3,014		3,114		2,918		3,114

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

Costs to Obtain and Fulfill a Contract

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

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NOTE 12. LEASES

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

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

●	Package of practical ~~expedients~~:expedients:

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

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

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

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

The following table presents the consolidated statements of condition classification of the Company’s ROU assets and lease liabilities as of ~~March 31,~~September 30, 2020:


(in thousands)			March 31, 2020		December 31, 2019			September 30, 2020		December 31, 2019
Lease Right-of-Use Assets	Classification	��					Classification
Operating lease right-of-use assets	Other assets		$	10,129	$	9,623	Other assets	$	10,617	$	9,623

Lease Liabilities
Operating lease liabilities	Other liabilities			10,205		9,651	Other liabilities		10,881		9,651

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

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

March 31, 2020

December 31, 2019
Weighted-average remaining lease term (in years)





Operating leases

9.52

8.96

Weighted-average discount rate





Operating leases

3.30
%

3.27
%


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

Weighted-average discount rate
Operating leases	3.15	%	3.27	%

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


	Three Months Ended		Three Months Ended		Three Months Ended		Nine Months Ended
(in thousands)	March 31, 2020		March 31, 2019		September 30, 2020		September 30, 2020
Lease Costs
Operating lease cost	$	234	$	231	$	344	$	988
Variable lease cost		144		124		59		177
Total lease cost	$	378	$	355	$	403	$	1,165

Future minimum payments for operating leases with initial or remaining terms of one year or more as of ~~March 31,~~September 30, 2020 are, as follows:


(in thousands)	Operating Leases		Operating Leases
Twelve Months Ended:
March 31, 2021	$	1,285
March 31, 2022		1,300
March 31, 2023		1,319
March 31, 2024		1,323
March 31, 2025		1,240
September 30, 2021			$	1,375
September 30, 2022				1,404
September 30, 2023				1,410
September 30, 2024				1,413
September 30, 2025				1,221
Thereafter		6,495		7,444
Total future minimum lease payments		12,962		14,267
Amounts representing interest		(2,757)		(3,386)
Present value of net future minimum lease payments	$	10,205	$	10,881

~~Table of Contents~~

~~NOTE 13. SUBSEQUENT EVENTS~~

~~There were no significant subsequent events between March 31, 2020 and through the date the financial statements are available to be issued.~~

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

GENERAL

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

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

●

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

●

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

●

Strong commitment to risk management while balancing growth and earnings

●

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

●

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

●

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

●

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

●

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

Shown below is a profile of the Company as of ~~March 31,~~September 30, 2020:

5966

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SELECTED FINANCIAL DATA

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

Three Months Ended

March 31,

2020

2019

PER SHARE DATA

Net earnings, diluted

$
0.50

$
0.47

Adjusted earnings, diluted⁽¹⁾

0.50

0.47

Total book value

25.90

24.54

Tangible book value⁽¹⁾

17.70

17.63

Market price at period end

17.28

25.87

Dividends

0.22

0.20

PERFORMANCE RATIOS⁽²⁾

Return on assets

0.85
%

0.83
%
Adjusted return on assets⁽¹⁾

0.86

0.83

Return on equity

7.64

7.83

Adjusted return on equity⁽¹⁾

7.71

7.83

Adjusted return on tangible equity⁽¹⁾

11.54

11.19

Net interest margin, fully taxable equivalent (FTE)^{(1) (3)}

3.06

2.77

Net interest margin (FTE), excluding purchased loan accretion⁽³⁾

2.99

2.67

Efficiency ratio⁽¹⁾

64.82

63.94

GROWTH (Year-to-date)⁽¹⁾

Total commercial loans

6.4
%

(3.3)
%
Total loans

(0.9)

5.9

Total deposits

(6.7)

(2.8)

FINANCIAL DATA (In millions)

Total assets

$
3,677

$
3,629

Total earning assets⁽⁴⁾

3,269

3,312

Total investments

646

782

Total loans

2,635

2,527

Allowance for loan losses

15

14

Total goodwill and intangible assets

129

107

Total deposits

2,651

2,466

Total shareholders' equity

404

381

Net income

8

7

Adjusted income⁽¹⁾

8

7

ASSET QUALITY AND CONDITION RATIOS

Net charge-offs (current quarter annualized)/average loans

0.18
%

0.03
%
Allowance for loan losses/total loans

0.58

0.55

Loans/deposits

99

102

Shareholders' equity to total assets

10.98

10.50

Tangible shareholders' equity to tangible assets⁽¹⁾

7.77

7.77


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

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

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

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

ASSET QUALITY AND CONDITION RATIOS
Net charge-offs (annualized)/average loans		0.06	%		0.02	%		0.08	%		0.02	%
Allowance for loan losses/total loans		0.66			0.60			0.66			0.60
Loans/deposits		92			103			92			103
Shareholders' equity to total assets		10.48			10.92			10.48			10.92
Tangible shareholders' equity to tangible assets⁽¹⁾		7.42			8.20			7.42			8.20

(1)	Non-GAAP financial measure. Refer to the Reconciliation of Non-GAAP Financial Measures section of Management's Discussion and Analysis for additional information.

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

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

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

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CONSOLIDATED LOAN AND DEPOSIT ANALYSIS

The following tables present the quarterly trend in loan and deposit data and accompanying quarterly growth rates as of ~~March 31,~~September 30, 2020 on an annualized basis:

LOAN ANALYSIS

Annualized

Growth %

March 31,

December 31,

September 30,

June 30,

March 31,

March 31,
(in thousands, except ratios)

2020

2019

2019

2019

2019

2020
Commercial real estate

$
948,178

$
930,661

$
923,773

$
881,479

$
821,567

7.5
%
Commercial and industrial

321,605

318,988

301,590

312,029

305,185

3.3

Total commercial loans

1,269,783

1,249,649

1,225,363

1,193,508

1,126,752

6.4

Residential real estate

1,132,328

1,151,857

1,143,452

1,167,759

1,184,053

(6.8)

Consumer

128,120

135,283

107,375

112,275

111,402

(21.2)

Tax exempt and other

104,752

104,303

101,116

104,696

104,752

1.7

Total loans

$
2,634,983

$
2,641,092

$
2,577,306

$
2,578,238

$
2,526,959

(0.9)
%


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

DEPOSIT ANALYSIS

Annualized

Growth %

March 31,

December 31,

September 30,

June 30,

March 31,

March 31,
(in thousands, except ratios)

2020

2019

2019

2019

2019

2020
Demand

$
400,410

$
414,534

$
380,707

$
354,125

$
342,030

(13.6)
%
NOW

578,320

575,809

490,315

472,576

470,277

1.7

Savings

423,345

388,683

360,570

352,657

346,813

35.7

Money market

404,385

384,090

359,328

305,506

349,833

21.1

Total non-maturity deposits

1,806,460

1,763,116

1,590,920

1,484,864

1,508,953

9.8

Total time deposits

844,097

932,635

902,665

996,512

956,818

(38.0)

Total deposits

$
2,650,557

$
2,695,751

$
2,493,585

$
2,481,376

$
2,465,771

(6.7)
%


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

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AVERAGE BALANCES AND AVERAGE YIELDS/RATES

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

Three Months Ended March 31,

2020

2019

Average

Average

(in thousands, except ratios)

Balance

Interest⁽³⁾

Yield/Rate⁽³⁾

Balance

Interest⁽³⁾

Yield/Rate⁽³⁾

Assets













Commercial real estate

$
945,851

$
10,484

4.46
%
$
825,596

$
9,721

4.78
%
Commercial and industrial

423,393

5,151

4.89

405,107

4,786

4.79

Residential

1,141,908

10,909

3.84

1,143,862

11,126

3.94

Consumer

130,471

1,688

5.20

113,060

1,464

5.25

Total loans ⁽¹⁾

2,641,623

28,232

4.30

2,487,625

27,097

4.42

Securities and other ⁽²⁾

661,848

5,813

3.53

777,458

6,645

3.47

Total earning assets

3,303,471

34,045

4.14
%

3,265,083

33,742

4.19
%
Other assets

358,288



295,957





Total assets

$
3,661,759



$
3,561,040





Liabilities













NOW

$
570,127

$
565

0.40
%
$
468,392

$
583

0.51
%
Savings

410,931

258

0.25

346,707

163

0.19

Money market

373,650

934

1.01

335,882

1,141

1.38

Time deposits

892,654

4,263

1.92

894,160

4,416

2.00

Total interest bearing deposits

2,247,362

6,020

1.08

2,045,141

6,303

1.25

Borrowings

556,824

2,911

2.10

761,885

5,155

2.74

Total interest bearing liabilities

2,804,186

8,931

1.28
%

2,807,026

11,458

1.66
%
Non-interest bearing demand deposits

406,951





351,362





Other liabilities

44,343





25,520





Total liabilities

3,255,480





3,183,908





Total shareholders' equity

406,279





377,132





Total liabilities and shareholders' equity

$
3,661,759





$
3,561,040





Net interest spread





2.86
%





2.53
%
Net interest margin





3.06





2.77


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

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

Total shareholders' equity		406,818						394,949

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

Net interest spread					2.85	%					2.52	%
Net interest margin					2.98						2.75

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

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

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

Table of Contents


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

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

Total shareholders' equity		406,314						386,582

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

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

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

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

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

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Table of Contents

NON-GAAP FINANCIAL MEASURES

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

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

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

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Table of Contents

RECONCILIATION OF NON-GAAP FINANCIAL MEASURES

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

Three Months Ended March 31,
(in thousands)


2020


2019

GAAP net income



$
7,721

$
7,281

Plus (less):







Gain on sale of securities, net



(135)

—

Loss on sale of premises and equipment, net



92

—

Loss on other real estate owned



31

—

Acquisition, restructuring and other expenses



103

—

Income tax expense⁽¹⁾



(22)

—

Total adjusted income⁽²⁾

(A)

$
7,790

$
7,281

GAAP net interest income

(B)

$
24,563

$
21,765

Plus: Non-interest income



8,421

6,167

Total Revenue



32,984

27,932

Less: Gain on sale of securities, net



(135)

—

Total adjusted revenue⁽²⁾

(C)

$
32,849

$
27,932

GAAP total non-interest expense



$
22,359

$
18,624

Less: Loss on sale of premises and equipment, net



(92)

—

Less: Loss on other real estate owned



(31)

—

Less: Acquisition, restructuring and other expenses



(103)

—

Adjusted non-interest expense⁽²⁾

(D)

$
22,133

$
18,624

(in millions)







Total average earning assets

(E)

$
3,306

$
3,265

Total average assets

(F)

3,662

3,561

Total average shareholders' equity

(G)

406

377

Total average tangible shareholders' equity⁽²⁾⁽³⁾

(H)

278

270

Total tangible shareholders' equity, period-end⁽²⁾⁽³⁾

(I)

276

274

Total tangible assets, period-end⁽²⁾⁽³⁾

(J)

3,549

3,522

(in thousands)







Total common shares outstanding, period-end

(K)

15,587

15,524

Average diluted shares outstanding

(L)

15,593

15,587

Adjusted earnings per share, diluted

(A/L)

$
0.50

$
0.47

Tangible book value per share, period-end⁽²⁾

(I/K)

17.70

17.63

Securities adjustment, net of tax⁽¹⁾⁽⁴⁾

(M)

9,560

(1,842)

Tangible book value per share, excluding securities adjustment⁽²⁾⁽⁴⁾

(I+M)/K

17.09

17.75

Total tangible shareholders' equity/total tangible assets⁽²⁾

(I/J)

7.77

7.77


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

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

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

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

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

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

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Three Months Ended March 31,
Performance ratios⁽⁵⁾



2020


2019

Return on assets


%

0.85
%

0.83
%
Adjusted return on assets⁽²⁾

(A/F)

0.86

0.83

Return on equity



7.64

7.83

Adjusted return on equity⁽²⁾

(A/G)

7.71

7.83

Adjusted return on tangible equity⁽²⁾⁽⁶⁾

(A+Q)/H

11.54

11.19

Efficiency ratio⁽²⁾⁽⁷⁾

(D-O-Q)/(C+N)

64.82

63.94

Net interest margin⁽²⁾

(B+P)/E

3.06

2.77

Supplementary data (in thousands)







Taxable equivalent adjustment for efficiency ratio

(N)

$
719

$
684

Franchise taxes included in non-interest expense

(O)

119

120

Tax equivalent adjustment for net interest margin

(P)

551

515

Intangible amortization

(Q)

256

207


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

Supplementary data (in thousands)
Taxable equivalent adjustment for efficiency ratio	(N)	$	570		$	658		$	1,935		$	2,018
Franchise taxes included in non-interest expense	(O)		121			119			360			350
Tax equivalent adjustment for net interest margin	(P)		416			503			1,457			1,532
Intangible amortization	(Q)		256			207			768			621

(1)	Assumes a marginal tax rate of 23.87% in 2020. A marginal tax rate of 23.78% was used in 2019.

(2)	Non-GAAP financial measure.

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

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

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

(6)

Adjusted return on tangible equity is computed by taking adjusted earnings divided by shareholders’ equity less the tax-effected amortization of intangible assets, assuming a marginal tax rate of 23.87% ~~for the first quarter of~~in 2020 and ~~the fourth quarter of 2019, and~~ 23.78% in ~~the first three quarters of~~ 2019.

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

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FINANCIAL SUMMARY

The Company reported ~~first~~third quarter 2020 net income of ~~$7.7~~$8.4 million or ~~$0.50~~$0.56 per share ~~a 6% increase~~compared to $5.0 million or $0.32 per share in ~~net income over~~ the same quarter of ~~2019 of~~2019. Adjusted earnings (non-GAAP measure) increased 30% to $9.2 million, or $0.61 per share in the third quarter 2020 compared to $7.3 million or $0.47 per ~~share.~~ share in the third quarter of 2019.

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

●

6%13% annualized growth in total commercial loans

●

~~10% annualized growth in non-maturity deposits~~92% loan to deposit ratio

●

~~99% loan~~2.98% net interest margin compared to ~~deposit ratio, improved from 102%~~2.75%

●

~~3.06% net interest margin compared to 2.77%~~

●

~~37%~~32% increase in non-interest income

●

~~0.38%~~0.56% non-accruing loans to total loans, excluding Paycheck Protection Program (PPP) loans

●

0.88% return on assets compared to ~~0.66%~~0.55%; 0.96% core return on assets compared to 0.80% (non-GAAP)

●

59.5% efficiency ratio compared to 65.0%

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

The Company’s ~~financial performance~~wealth management business continues to be a significant contributor to fee income, as well as a keystone for deepening customer relationships with $2.1 billion in assets under management. Recently, the ~~first quarter 2020~~leadership and operations of the wealth management businesses was ~~strong while quickly shifting efforts~~combined onto a common platform, which led to ~~address COVID-19 developments.~~unified policies and best practices. The Company is ~~fully dedicated~~now working with regulators to ~~supporting customers and employees during these difficult times and is confident in the strength~~bring both of its ~~operating model.~~ wealth management companies and brokerage teams under one name Bar Harbor Wealth Management. Bringing this business together under one brand was the logical next step as talent, engagement and culture is aligned.

~~While focusing on the challenges posed by the health crisis~~The Company’s allowance for loan losses is well established to absorb any inherent losses in the ~~first~~portfolio and increased during the quarter on higher commercial loan growth. Steady allowance levels coupled with an extensive stress testing process reflects the Company remains committed to its cornerstone of business operations: Risk management, ranging from underwriting practices to what is now at the forefront, crisis management and business continuity planning. From the onset of the crisis, the Company has maintained open communication with customers and employees alike, and transitioned to a mostly remote working environment. This transition was smooth given the readinessquality of the Company’s ~~information technology~~credit culture as net charge-offs and ~~operations departments.~~past due accounts remain low. Third quarter stress testing resulted in no significant risk-rating downgrades or changes to reserves. While the hotel industry is a large credit exposure for the Company there has been minimal degradation as those borrowers are strong, proven operators with an average loan to value ratio of less than 60% for the segment. In addition, any individual hotel exposure with a loan to value ratio greater than 65% was specifically included in the stress testing. The Company ~~modified its branch model providing safety to customers and employees while balancing~~had a ~~personalized touch to meet~~significant decrease in loans under COVID-related forbearance during the ~~needs~~third quarter. As of ~~its customers. These modifications include transitioning to mostly drive-up and walk-up windows along with in person meetings by appointment when necessary. The investments~~September 30, 2020 total outstanding deferrals were $78.7 million or 3% of total loans, which primarily consist of interest only forbearance. Outstanding deferrals of residential loans totaled $4.6 million or less than ½ of a percent of the ~~Company has made in the past few years in online and mobile banking platforms have been essential with the current environment while helping to accelerate adoption rates.~~total residential portfolio.

The Company ~~recognizes~~has supported its customers during the ~~importance of liquidity, especially in~~COVID-19 pandemic by originating approximately 1,900 PPP loans totaling $131.5 million. Net unearned fees remaining on PPP loans at the ~~current economic environment. Therefore, the Company has opportunistically and appropriately utilized many~~end of the ~~various federal programs in an effort to insulate from potential risk~~third quarter was $3.8 million and uncertainty. Further supporting capital levels and the balance sheet the Company recently refinanced and upsized its subordinated debt in the fourth quarter 2019. Loan volumes were significant this quarter as originations offset elevated payoff levels as typically seen with the lower rate environment. Growth in commercial loans offset the decrease in the residential portfolioaccretion will accelerate as the ~~Company strategically moved most of production to the secondary market. The Company also successfully rolled out~~loans are reimbursed by the Small Business Administration ~~(SBA) Paycheck Protection Program (PPP) in an effort to help its business partners and communities. As of April 30, 2020,~~(“SBA”). Despite the ~~Company has over 1,500 PPP loans approved~~significant challenges posed by the ~~SBA with a total balance of $127 million. In addition,~~pandemic and related market conditions, the Company has modified close to 500 existing loans, representing $271 million in balances. The loans modified under these deferment plans are still accruing interest and all contractual principal and interest is expected to be collected.

The Company’s loan portfolio remains diverse with over 80 different industries and several geographies limiting concentration risk, which is further mitigated by the specific type and strength of the borrowers. These credit relationships are proven successful operators in their industry and have weathered difficult economic times in the past. The Company continues to ~~carefully review opportunities with proven borrowers while also stress testing the portfolio regularly.~~

~~Given the recently passed CARES Act, the Company has elected to defer the new accounting for the allowance for loan losses known as “CECL” to prioritize resources around customers~~maintain high levels of capital and ~~communities. At the same time, the Company increased the allowance for loan losses during the quarter due to elevated qualitative economic factors at quarter end. Overall, the Company’s~~ liquidity, ~~capital ratios~~diversified revenue streams, strong credit performance and overall balance sheet position are strong. Additionally, the Company’s reliance on wholesale borrowing is further declining and the ability to access such funding sources at fair pricing is significant.

The Company continues to execute strategies that will benefit long-term profitability while being mindful of the short-term challenges and operating environment. Lower interest rates and the divergence in FHLB borrowings and brokeredan exceptional core deposit base.

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deposit spreads has provided the Company with an opportunity to lock into favorable rates with longer maturities. The benefits of these activities, along with the balance sheet strategies executed last year, are unveiled as the Company’s net interest margin expanded nearly 30 basis points during the quarter. Non-interest income has also improved for the quarter as the Company continues to provide hedging transactions to help meet customers’ needs. While trust and investment management fee income is up significantly over prior year, it is also sensitive to market conditions and could vary as market dynamics persist with the pandemic. In summary, the Company is focused on activities that create value for long-term shareholders as it continues to build tangible book value at a quarterly annualized rate of close to 10%.

COMPARISON OF FINANCIAL CONDITION AT ~~MARCH 31,~~SEPTEMBER 30, 2020 AND DECEMBER 31, 2019

~~Summary~~

Total assets were ~~$3.7~~$3.9 billion at the end of the ~~first~~third quarter 2020 ~~and~~compared to $3.7 billion at year-end 2019. Asset quality metrics remain strong with an allowance for ~~credit~~loan losses to total loans ratio of ~~0.58% with a coverage ratio~~0.66% compared to ~~non-accruing loans at 152%, up from 133%~~0.58% as of year-end 2019. The loan to deposit ratio was ~~99%~~92% in the third quarter compared to 98% at year-end ~~2019 due to lower deposits in the first quarter.~~2019. The Company's tangible book value per share increased 9%10%, on an annualized basis, in the first ~~quarter 2020.~~nine months of 2020 from year-end 2019.

Securities

Securities totaled ~~$646.2~~$618.5 million in the ~~first~~third quarter 2020 and $683.9 million at year-end 2019 representing ~~18%~~16% and 19% of total assets, respectively. The decrease in security holdings reflects the ~~first quarter is consistent with the Company~~Company’s deleveraging strategy to ~~de-lever~~reduce borrowings and ~~remix~~allow for the ~~investment portfolio resulting in a higher year-over-year yield along with lower borrowing levels.~~natural run-off of amortizing and maturing fixed rate investments. Securities purchased in the first ~~quarter~~nine months of 2020 included ~~$13.2~~$66.0 million of mortgage-backed securities guaranteed by US Government-sponsored enterprises, ~~$2.5~~$31.2 million of tax exempt municipal bonds, $32.0 million of corporate bonds and $1.9 million in community investments, in addition to a net ~~$782 thousand~~$6.7 million decrease in FHLB stock. The purchases were offset by ~~$58.0~~$199.3 million of sales, maturities, calls and pay-downs of amortizing securities. Fair value adjustments increased the security portfolio by ~~$12.7~~$11.7 million at the end of the ~~first~~third quarter 2020 and ~~$7.3~~$5.5 million at year-end 2019. The improvement in ~~the~~ fair value continues to be the result of lower long-term interest rates. The weighted average yield on the Company's securities ~~profile~~portfolio as of ~~March 31,~~September 30, 2020 was ~~3.20% for the quarter~~3.05% compared to 3.42% at year-end 2019. At the end of the ~~first~~third quarter 2020, securities held by the Company had an average life of ~~5.1~~4.0 years and a duration of ~~2.7~~2.9 years compared to 5.0 years and 3.6 years at the end of 2019, respectively.

Loans

Loan balances in the ~~first~~third quarter 2020 were $2.7 billion compared to $2.6 billion ~~flat with~~ year-end 2019. ~~Total commercial loans grew at an annualized rate of 6% led by~~The increase is primarily due to commercial real estate ~~with an annualized~~ growth ~~rate of 8% as the Company executed on an expanded pipeline. Residential real estate loans were relatively flat with the fourth quarter as~~and PPP originations ~~maintained, but were~~ offset by secondary market sales and ~~payoff activity. Payoff~~prepayments of residential mortgages. In the first nine months of 2020, commercial real estate increased $115.0 million during at an annualized rate of 16% and commercial and industrial (“C&I”) loans increased $9.5 million or 4% on an annualized basis excluding PPP loans. The increase in C&I was tempered by one customer with loans totaling $39.8 million that were refinanced to a lower principal of $25.0 million along with an open line of credit with no current advances. Mortgage loan originations totaled $86.5 million from new and refinancing activity ~~was experienced across all products lines as seasoned borrowers refinanced~~ given the lower interest rate environment. ~~Although the commercial portfolio grows each quarter, the product mix of total commercial loans remains diversified among 80 industries throughout many geographic regions. Average yields from loans~~Most residential originations were ~~4.30%~~sold in the ~~first quarter 2020 as variable rate loans repriced compared with 4.33% in the fourth quarter 2019.~~secondary market to generate fee income.

Asset Quality

The allowance for loan losses totaled ~~$15.3~~$17.9 million at the end of the ~~first~~third quarter 2020 and ~~$14.4~~$15.4 million at year-end 2019. InThe $2.6 million increase reflects a provision for loan loss of $4.3 million offset by net charge offs of $1.7 million. Excluding PPP loans the allowance for loan losses to total loans ratio for the third quarter was 0.69% from 0.58% at year-end 2019. Delinquent and non-accrual loans as a percentage of total loans decreased to 0.77% from 1.19% at the end of 2019. Commercial non-accrual loans in the first ~~quarter~~nine months increased $1.2 million primarily due to two commercial loan relationships totaling $1.4 million, one was written down by $349 thousand and the other has subsequently settled at its carrying value.

In March 2020, the Company elected to defer implementation of CECL as allowed under the CARES Act. As result, the Company continues to operate its incurred loss ~~model, which has been adjusted higher~~model. While the impact of COVID-19 and other market conditions remain uncertain, the Company believes the existing allowance for loan losses is sufficient to ~~reflect~~absorb inherent losses based on a disciplined credit approach, experienced losses and methodology, and current ~~economic conditions. Increases~~and ongoing stress testing reviews of the portfolio. The Allowance for Loan Loss calculated under the CECL method is estimated to ~~the allowance associated with those adjustments were offset by improvements~~be in ~~other credit quality factors including several specifically reserved loans that were settled at approximate book value. Past due accounts between~~a range of $23.0 million to $26.0 million as of September 30, ~~to 89 days as a percentage of total loans was 0.84% for the first quarter~~2020, compared to ~~0.74% at year-end 2019. The majority~~$20.0 million to $23.0 million on the effective date of ~~the customers in that range have a history of making payments on a cycle that is about 30 days overdue and is not likely an indication of deteriorated credit quality.~~January 1, 2020.

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

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Goodwill

~~Given current events and the economic situation associated with COVID-19 along with the variation of the Company’s stock price, the fair value of the Company’s business and test for~~The Company completed its 2020 annual goodwill impairment ~~is required under accounting standards.~~test using balance sheet and market data as of September 30, 2020. The Company’s models suggest that the fair value of the business is greater than the book value or market

~~Table of Contents~~

capitalization based on the price at which the stock is currently trading. While the Company concluded there is no goodwill impairment, ~~in the first quarter 2020,~~ it will continue to evaluate its position as economic conditions change.

Deposits and Borrowings

Total deposits were ~~$2.7~~$2.9 billion at the end of the ~~first~~third quarter 2020 and $2.7 billion at year-end 2019. Non-maturity deposits increased ~~to $1.8 billion, 10%~~by 27%, on an annualized basis ~~during the first quarter 2020.~~due to growth from new accounts and an overall decrease in customer spending given current market conditions. The Company's expanding branch model has helped to increase new accounts, which totaled ~~3,071~~3,744 in the ~~first~~third quarter 2020 compared to 2,918 in the fourth quarter ~~2019 excluding acquired balances. Time deposits~~2019. Total borrowings decreased ~~$88.6~~by $85.9 million ~~due to the Company's strategy to target lower rate~~ and ~~longer duration funding sources. The average cost~~brokered certificate of deposits decreased ~~to 1.08% from 1.19% in the fourth quarter 2019 reflecting the Federal Reserve Bank short-term rate cuts in current and prior quarters. Total borrowings increased~~ by ~~$26.1~~$325.7 million as ~~the Company took advantage of lower FRB and FHLB rates opposed~~excess liquidity primarily from higher deposit balances was used to ~~other funding sources. Borrowing costs improved to 2.10% from 2.30% in the fourth 2019 as a result of cuts in short-term interest rates.~~pay down wholesale borrowings.

Derivative Financial Instruments

The notional balance of derivative financial instruments increased to ~~$672.1~~$822.9 million at the end of the ~~first~~third quarter 2020 from $580.4 million at year-end 2019. The increase is principally due to a ~~$47.8~~$175.0 million increase in customer loan derivatives sold on commercial loans with matching hedges using national bank counterparties and a ~~$42.5~~$36.5 million increase in forward commitments to sell mortgages in the secondary market. The net fair value of all derivatives was a liability of ~~$3.1~~$3.5 million at the end of the ~~first~~third quarter 2020 compared to $743 thousand at year-end 2019. The increase in the net derivative liability primarily reflects the valuation of the Company’s interest rate swaps on wholesale funding and securities based on lower market rates at the end of the ~~first~~third quarter 2020.

Equity

Total equity was ~~$403.8~~$404.4 million, compared with $396.4 million at year-end 2019. The ~~Company's book value per share increased to $25.90 at the end of the first quarter 2020 from $25.48 at year-end 2019. The~~ increase includes a ~~$4.0~~$6.1 million improvement in fair value of securities, net of tax, along with strong net income of ~~$7.7~~$24.6 million offset by ~~$3.4~~$10.1 million in ~~dividends.~~dividends and common stock repurchases of $13.3 million. Stock repurchases totaled 297 thousand shares during the third quarter 2020 and 689 thousand shares on a year-to-date basis. An additional 92 thousand shares are available to be repurchased before the end of March in 2021. The ~~Company evaluates changes in tangible~~Company's book value ~~a non-GAAP financial measure that is a commonly used valuation metric in~~per share increased to $27.09 at the ~~investment community, which parallels some regulatory capital measures.~~end of the third quarter 2020 from $25.48 at year-end 2019. Tangible book value per share (non-GAAP measure) increased to ~~$17.70~~$18.56 per share at ~~year-end 2019~~September 30, 2020 up from $17.30 per share at year-end ~~2019;~~2019, an increase of 9%10% on an annualized basis.

COMPARISON OF OPERATING RESULTS FOR THE THREE AND NINE MONTHS ENDED ~~MARCH 31,~~SEPTEMBER 30, 2020 AND 2019

Summary

Net income in the ~~first~~third quarter 2020 was ~~$7.7~~$8.4 million, or ~~$0.50~~$0.56 per ~~diluted~~ share, compared with ~~$7.3~~$5.0 million, or ~~$0.47~~$0.32 per ~~diluted~~ share, in the same quarter 2019. ~~Noteworthy improvements~~The non-GAAP measure of adjusted earnings in the third quarter 2020 totaled $9.2 million, or $0.61 per share, compared to $7.3 million or $0.47 per share, in the same quarter of 2019. The improvement in net income ~~include a lower cost of funds~~is driven by expanded net interest margin and ~~increased~~higher non-interest ~~income offset in part by higher operational expenses.~~income. The Company's return on assets ratio was ~~0.85%~~0.88% during the ~~first~~third quarter of 2020 and ~~0.83%~~0.55% in the same quarter of ~~2019 and the~~2019. The ratio for adjusted return on ~~equity ratio was 7.64% and 7.83% for~~assets increased to 0.96% from 0.88% in third quarter of 2019 on higher net income.

The Company reported year to date net income of $24.6 million or $1.60 per share, compared with $18.4 million or $1.18 per share in the same period of 2019. Adjusted earnings increased to $25.6 million, or $1.66 per share comparedwith$21.0million,or$1.35pershare,fortherespectiveperiods.

Thesechangeslargelyreflectthesame factors and trends discussed above that drove third quarter net income.

Net Interest Income

Net interest income was ~~$24.6~~$24.7 million in the third quarter 2020 compared with ~~$21.8~~$22.4 million in the same quarter of ~~2019 and net~~2019. Net interest margin ~~was 3.06% and 2.77% for~~in the third quarter 2020 increased to 2.98% from 2.75% in the same ~~respective periods. The increase is primarily driven by lower borrowing levels as the average balance decreased to $557 million in the first quarter 2020 from $762 million in the first quarter~~period of 2019 primarily due to ~~deleveraging strategies executed in late 2019 and~~ a lower cost of funds. ~~The balance sheet strategies executed during~~Costs of funds decreased to 0.82% compared to 1.65% in the ~~second half~~third quarter 2019 due to a shift in funding sources from borrowings to non-maturity deposits. Cost of ~~last year along with~~deposits and borrowings also benefited from the

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Federal Reserve rate cuts ~~experienced~~in 2020 and other key indexes in response to COVID-19. Costs of interest-bearing deposits decreased to 0.66% compared to 1.33% in the ~~first~~third quarter 2019 and cost of borrowings improved to 1.60% from 2.62% in same quarter of 2019. Additionally, excess liquidity was used to pay off $239.4 million of borrowings since the third quarter of 2019 in connection with deleveraging strategies that further reduced borrowing rates to 2.10% from 2.74% and interest-bearing deposits rates to 1.08% from 1.25% in the first quarter 2019. The Company continues to optimize its funding sources to take advantage of this lower rate environment through a mixture of various debt and derivative instruments.interest expense. Yields from earning assets ~~declined~~were 3.67% compared to ~~4.14% from 4.19%~~4.17% in the ~~first~~third quarter 2019 reflecting loan originations and repricing of variable rate products in a lower interest rate environment. ~~Purchase~~Purchased loan accretion contributed ~~0.08%~~0.06% to net interest margin in the ~~first~~third quarter 2020 compared to 0.10% in the ~~first~~third quarter 2019. Excluding the effects of PPP loans, the third quarter yield on total earning assets was 3.72%.

For the first nine months of the year, net interest income was $69.6 million compared with $63.9 million in the same months of 2019 and net interest margin was 3.01% from 2.72% for the same respective periods. The ~~loan~~increase is primarily driven by reduced borrowing levels and higher non-maturity deposits. The average borrowing levels decreased to ~~deposit ratio was 99%~~$481.7 million in the first ~~quarter~~nine months of 2020 asfrom $708.2 million in the ~~Company maintained its fourth quarter~~same period of 2019 ~~deposit levels, which is due~~and borrowing costs were 1.74% from 2.71% for the same respective periods. Costs of interest-bearing deposits also decreased in the first nine months of 2020 to ~~strong customer relationships within its branch model.~~

~~Table~~0.85% compared to 1.30% in the same period of ~~Contents~~2019. Yields from earning assets were 3.87% in the first nine months of 2020 compared to 4.16% in the first nine months of 2019.Theyear-to-dateeffect onnetinterestmarginfromearning assets and interest bearing liabilitiesisthesameasthequarterlydiscussion.

Loan Loss Provision

The ~~first~~third quarter 2020 provision for loan losses increased to ~~$1.1~~$1.8 million from ~~$324~~$893 thousand in the same quarter of 2019. While overall credit quality in the loan portfolio remains strong, the increase in the reserve is indicative of the continued commercial loan growth and higher economic adjustments reflecting elevated risk from COVID-19. As previously noted, ~~above,~~ the Company ~~is maintaining~~has maintained its incurred loss model for calculating the allowance for loan losses. The year-over-year increase in the provision for loan losses is due to qualitative adjustments made to reflect a downward economic trend in the first quarter 2020. Those downward adjustments were offset in part by improvements in other credit quality factors such as charge-off history and underwriting practices. While the impact of the health crisis is uncertain, we believe the existing allowance for loan losses is sufficient to absorb inherent losses based on a disciplined credit approach, experienced losses and methodology, and current review of the portfolio.

Non-Interest Income

Non-interest income in the ~~first~~third quarter 2020 ~~increased 37%~~was $10.1 million compared to ~~$8.4 million from $6.2~~$7.6 million in the same quarter of 2019. The increase is primarily due to a $2.2 million increase in ~~2019. Trust~~mortgage banking income ~~was $3.4~~associated with secondary market sales of $86.2 million compared to $20.7 million in the ~~first quarter 2020, up 22% from the~~ same ~~quarter~~period of ~~2019 based on higher assets under management within an expanded footprint given the branch acquisition which closed in October~~ 2019. Customer service fees ~~also~~ increased ~~significantly to $3.1~~13% and trust and investment management fees increased 17% as the result of expanded operations into Central Maine partially offset by lower activity stemming from COVID-19.

Non-interest income for the first nine months of 2020 was $28.2 million compared to ~~$2.2~~$21.3 million ~~from~~in the same ~~quarter of 2019 due to transaction growth from a higher customer base. Customer loan derivative income also contributed $588 thousand to~~period in 2019. The increase in non-interest income for the nine-month period is driven by the same reasons as the quarterly period, but also includes a $1.5 million gain on sales of securities recorded in ~~the first quarter 2020 as demand for these products remains strong within the commercial loan pipeline.~~connection with balance sheet remixing and deleveraging strategies.

Non-Interest Expense

Non-interest expense was $22.4 million in the ~~first~~third quarter 2020 compared to ~~$18.6~~$23.4 million in the same quarter of 2019. The ~~increase~~decrease is ~~primarily~~principally due to ~~higher salary~~lower acquisition, conversion and other expenses, which totaled $691 thousand in 2020 compared to $3.0 million in 2019. Salary and benefit expense and occupancy ~~and equipment~~ costs were higher during the third quarter 2020 to support the Company’s expanded branch model and wealth management business. Total operating expenses remained controlled as demonstrated by the drop in the efficiency ratio to 59.5% compared to 65.0% for third quarter of 2019.

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

Income Tax Expense

The ~~first~~third quarter effective tax rate ~~decreased~~increased to ~~18.8%~~20.3% in 2020 compared with ~~19.0%~~13.5% in the same quarter of 2019, reflecting athe higher level of ~~tax-advantaged income.~~taxable income and lower level of non-tax advantaged income in 2020.

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Liquidity and Cash Flows

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

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

The Company’s liquidity position remains strong. During the quarter we initiated pandemic-specific liquidity stress tests to analyze potential impacts from payment deferrals, unanticipated use of committed lines of credit, as well as the possibility of required servicer advances on sold loans. At ~~March 31,~~September 30, 2020, ~~same day~~ available same-day liquidity totaled approximately ~~$1.2~~$1.5 billion, including cash, borrowing capacity at ~~the Federal Home Loan Bank of Boston (“FHLB”)~~FHLB and the Federal Reserve Discount Window and various lines of credit. Additional sources of liquidity include cash flows from operations, wholesale deposits, cash flow from the ~~Bank's~~Company's amortizing securities and loan portfolios. ~~At March 31, 2020, the~~The Company had unused borrowing capacity at the FHLB of ~~$539.0~~$634.0 million, unused borrowing capacity at the Federal Reserve of ~~$27.0~~$81.1 million and unused lines of credit totaling $51.0 ~~million.~~million, in addition to over $200.0 million in unencumbered, liquid investment portfolio assets. The Company has also utilized the Federal Reserve's Paycheck Protection Program Liquidity Facility to provide liquidity to fund PPP loans.

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

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Off-Balance Sheet Arrangements

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

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

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

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

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

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

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

•

Allowance for Loan Losses

•

Acquired Loans

•

Income Taxes

•

Goodwill and Identifiable Intangible Assets

•

Determination of Other-Than-Temporary Impairment of Securities

•

Fair Value of Financial Instruments

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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. Interest rate risk is the most significant market risk affecting the Company. Other types of market risk do not arise in the normal course of the Company’s business activities.

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

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

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

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

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

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

●

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

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●

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

●

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

●

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

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

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

As of ~~March 31,~~September 30, 2020 interest rate sensitivity modeling results indicate that the Bank’s balance sheet in years 1 and 2 were ~~slightly~~modestly asset sensitive.

Assuming short-term and long-term interest rates decline 100 basis points from current levels (i.e., a parallel yield curve shift) and the Bank’s balance sheet structure and size remain at current levels, management believes net interest income will deteriorate over the one year horizon ~~(-2.2%~~(-0.4% versus the base case) while deteriorating further from that level over the two-year horizon ~~(-6.4%~~(-9.0% versus the base case).

Assuming the Bank’s balance sheet structure and size remain at current levels and the Federal Reserve increases short-term interest rates by 200 basis points with the balance of the yield curve shifting in parallel with these increases, management believes net interest income will improve slightly over the one and two-year horizons ~~(1.2%~~(1.8% and ~~3.6%~~5.1%, respectively).

As compared to December 31, 2019, the year-one sensitivity in the down 100 basis points scenario was ~~down~~up slightly for the ~~three~~nine months ended ~~March 31,~~September 30, 2020 (-1.0% prior, versus ~~-2.2%~~-0.4% current). The year-two sensitivities in the down 100 basis points scenario changed going from -3.7% to ~~-6.4%~~-9.0%. In the year-one up 200 basis points scenario, results improved going from ~~.7%~~0.7% to ~~1.2%~~1.8%. Year-two, up 200 basis points was ~~flat~~up (3.3% prior, versus ~~3.6%~~5.1% current).

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

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

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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 the Company’s principal executive officer and our principal financial officer, the Company conducted an evaluation of the effectiveness of the design and operation of its disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on this evaluation, the Company’s management, including its principal executive officer and principal financial officer, concluded that as of ~~March 31,~~September 30, 2020 the Company’s disclosure controls and procedures were effective to ensure that information required to be disclosed by the Company in the reports that it files under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms. The Company’s disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by the Company in its Exchange Act reports is accumulated and communicated to the Company’s management, including its principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives, and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

(b)	Changes in internal control over financial reporting.

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

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

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

ITEM 1A. RISK FACTORS

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

The COVID-19 pandemic may adversely impact our business and financial results, and the ultimate impact will depend on future developments, which are highly uncertain and cannot be predicted, including the scope and duration of the pandemic and actions taken by governmental authorities in response to the pandemic.

The COVID-19 pandemic is creating extensive disruptions to the economy and to the lives of individuals. Governments, businesses, and the public are taking unprecedented actions to contain the spread of COVID-19 and to mitigate its effects, including quarantines, travel bans, shelter-in-place orders, closures of businesses and schools, fiscal stimulus, and legislation designed to deliver monetary aid and other relief. While the scope, duration, and full effects of COVID-19 are rapidly evolving and not fully known, the pandemic and related efforts to contain it have disrupted economic activity, adversely affected the functioning of financial markets, impacted interest rates, increased economic and market uncertainty, and disrupted trade and supply chains. If these effects continue for a prolonged period or result in sustained economic stress or recession, many of the risk factors identified in our Form 10-K could be exacerbated and such effects could have an adverse impact on us in a number of ways related to credit quality, collateral values, customer demand, funding, operations, interest rate risk, and human capital.

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

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

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


				~~Total number of shares~~	~~Maximum number of~~
				~~purchased as a part of~~	~~shares that may yet be~~
	~~Total number of~~	~~Average price~~		~~publicly announced~~	~~purchased under~~
~~Period~~	~~shares purchased~~	~~paid per share~~		~~plans or programs~~	~~the plans or programs~~⁽¹⁾
~~January 1-31, 2020~~	—	$	—	—	~~776,000~~
~~February 1-29, 2020~~	—		—	—	~~776,000~~
~~March 1-31, 2020~~	—		—	—	~~781,000~~
~~Total~~	—	$	—	—	~~781,000~~


				Total number of shares	Maximum number of
				purchased as a part of	shares that may yet be
	Total number of	Average price		publicly announced	purchased under
Period	shares purchased	paid per share		plans or programs	the plans or programs⁽¹⁾
July 1-31, 2020	108,178	$	20.38	500,501	280,499
August 1-31, 2020	77,767		20.35	578,268	202,732
September 1-30, 2020	111,074		19.83	689,342	91,658
Total	297,019	$	20.19	689,342	91,658

(1)	On ~~March 12, 2019 and~~ March 12, 2020, the Company's Board of Directors approved a twelve-month plan to repurchase up to 5% of its outstanding common stock, representing ~~776,000 and~~ 781,000 shares ~~respectively. The current stock repurchase plan~~and expires on March 20, 2021.

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ITEM 6. EXHIBITS


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

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

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

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

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

101	The following financial information from the Company’s Quarterly Report on Form 10-Q for the quarter ended ~~March 31,~~September 30, 2020 is formatted in Inline Extensible Business Reporting Language (iXBRL): (i) Consolidated Condensed Statements of Income, (ii) the Condensed Consolidated Balance Sheets, (iii) the Condensed Consolidated Statements of Changes in Shareholders’ Equity, (iv) Consolidated Statements of Cash Flows and (v) Notes to the Consolidated Condensed Financial Statements

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

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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: ~~May 8,~~November 5, 2020	By:	/s/ Curtis C. Simard
		Curtis C. Simard
		President & Chief Executive Officer


Dated: ~~May 8,~~November 5, 2020	By:	/s/ Josephine Iannelli
		Josephine Iannelli
		Executive Vice President & Chief Financial Officer

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											Annualized
											Growth %
	March 31,		December 31,		September 30,		June 30,		March 31,		March 31,
(in thousands, except ratios)	2020		2019		2019		2019		2019		2020
Commercial real estate	$	948,178	$	930,661	$	923,773	$	881,479	$	821,567	7.5	%
Commercial and industrial		321,605		318,988		301,590		312,029		305,185	3.3
Total commercial loans		1,269,783		1,249,649		1,225,363		1,193,508		1,126,752	6.4
Residential real estate		1,132,328		1,151,857		1,143,452		1,167,759		1,184,053	(6.8)
Consumer		128,120		135,283		107,375		112,275		111,402	(21.2)
Tax exempt and other		104,752		104,303		101,116		104,696		104,752	1.7
Total loans	$	2,634,983	$	2,641,092	$	2,577,306	$	2,578,238	$	2,526,959	(0.9)	%