UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q


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

For the quarterly period ended: ~~September 30, 2022~~March 31, 2023


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

For the transition period from �� to

Commission File Number: 001-13349

BAR HARBOR BANKSHARES

(Exact name of registrant as specified in its charter)


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

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

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

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

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

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

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

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

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

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

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

The Registrant had ~~15,065,620~~15,143,558 shares of common stock, par value $2.00 per share, outstanding as of ~~November 2, 2022.~~May 4, 2023.

Table of Contents

BAR HARBOR BANKSHARES AND SUBSIDIARIES

FORM 10-Q

INDEX

						Page
PART I.	FINANCIAL INFORMATION

Item 1.	Consolidated Financial Statements (unaudited)

	Consolidated Balance Sheets as of ~~September 30, 2022~~March 31, 2023 and December 31, ~~2021~~2022					5

	Consolidated Statements of Income for the Three ~~and Nine~~ Months Ended ~~September 30,~~March 31, 2023 and 2022 ~~and 2021~~					7

	Consolidated Statements of Comprehensive Income for the Three ~~and Nine~~ Months Ended ~~September 30,~~March 31, 2023 and 2022 ~~and 2021~~					8

	Consolidated Statements of Changes in Shareholders’ Equity for the Three ~~and Nine~~ Months Ended ~~September 30,~~March 31, 2023 and 2022 ~~and 2021~~					9

	Consolidated Statements of Cash Flows for the ~~Nine~~Three Months Ended ~~September 30,~~March 31, 2023 and 2022 ~~and 2021~~					10

	Notes to Unaudited Consolidated Interim Financial Statements
			Note 1	Basis of Presentation		11
			Note 2	Securities Available for Sale		12
			Note 3	Loans and Allowance for Credit Losses		15
			Note 4	Borrowed Funds		2624
			Note 5	Deposits		2826
			Note 6	Capital Ratios and Shareholders' Equity		2927
			Note 7	Earnings per Share		3430
			Note 8	Derivative Financial Instruments and Hedging Activities		3531
			Note 9	Fair Value Measurements		4538
			Note 10	Revenue from Contracts with Customers		5244
					~~Note 11~~	~~Leases~~	54


Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations					5646
			Selected Financial Data			5852
			Consolidated Loan and Deposit Analysis			5953
			Average Balances and Average Yields/Rates			60
		~~Non-GAAP Financial Measures~~	6254
			Reconciliation of Non-GAAP Financial Measures			6355
			~~Performance Summary~~			65

Item 3.	Quantitative and Qualitative Disclosures about Market Risk					7057

Item 4.	Controls and Procedures					7259


PART II.	OTHER INFORMATION

Item 1.	Legal Proceedings					7259

Item 1A.	Risk Factors					7259

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds					7360

Item 6.	Exhibits					7461

Signatures						7562

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

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

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

●

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

●

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

●

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

●

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

●

competition from financial institutions and other financial service providers;

●

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

●

unanticipated weakness in loan demand or loan pricing;

●

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

●

the effects of new outbreaks of COVID-19, including actions taken by governmental officials to curb the spread of the virus, and the resulting impact on general economic and financial market conditions and on the Company’s and our customers' business, results of operations, asset quality and financial condition;

●

~~the efficacy of vaccines against the COVID-19 virus, including new variants;~~

●

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

●

inflation, interest rate, market, and monetary fluctuations;

●

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

●

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

●

our ability to effectively manage problem credits;

●

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

●

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

●

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

●

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

●

our ability to implement and to adapt to technological changes;

●

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

●

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

●

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

●

ongoing competition in the labor markets and increased employee turnover;

●

the potential impact of climate change;

●

the impact of pandemics, epidemics, or any other health-related crisis;

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●

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

●

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

●

governmental monetary and fiscal policies, including the policies of the Board of Governors of the Federal Reserve System (the “Federal Reserve”);

●

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

●

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

Other factors not identified above, including those described under the headings “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” in our Annual Report on Form 10-K for the fiscal year ended December 31, ~~2021,~~2022 (the “Form 10-K”), our quarterly reports on Form 10-Q, and current reports on Form 8-K filed with the Securities and Exchange Commission (the “SEC”) and available on the SEC’s website at http://www.sec.gov, may also cause actual results to differ materially from those described in our forward-looking statements. Most of these factors are difficult to anticipate and are generally beyond our control. You should consider these factors in connection with considering any forward-looking statements that may be made by us. We undertake no obligation to release publicly any revisions to any forward-looking statements, to report events or to report the occurrence of unanticipated events unless we are required to do so by law.

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PART I. FINANCIAL INFORMATION

ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS

BAR HARBOR BANKSHARES AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS (UNAUDITED)

(in thousands, except share data)

September 30, 2022

December 31, 2021
Assets




Cash and cash equivalents:

Cash and due from banks

$
50,760

$
33,508
Interest-earning deposits with other banks

31,305

216,881
Total cash and cash equivalents

82,065

250,389

Securities:

Securities available for sale

556,752

618,276
Federal Home Loan Bank stock

9,035

7,384
Total securities

565,787

625,660

Loans held for sale

982

5,523

Total loans

2,850,364

2,531,910
Less: Allowance for credit losses

(25,018)

(22,718)
Net loans

2,825,346

2,509,192

Premises and equipment, net

48,010

49,382
Goodwill

119,477

119,477
Other intangible assets

6,034

6,733
Cash surrender value of bank-owned life insurance

80,758

79,020
Deferred tax assets, net

25,288

5,547
Other assets

86,499

58,310
Total assets

$
3,840,246

$
3,709,233

Liabilities




Deposits:




Demand

$
700,218

$
664,420
NOW

918,822

940,631
Savings

669,317

628,670
Money market

513,075

389,291
Time

334,248

425,532
Total deposits

3,135,680

3,048,544

Borrowings:




Senior

188,757

118,400
Subordinated

60,248

60,124
Total borrowings

249,005

178,524

Other liabilities

75,596

58,018
Total liabilities

3,460,281

3,285,086


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

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

Loans held for sale		463		—

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

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

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

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

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

(continued)

Table of Contents

BAR HARBOR BANKSHARES AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS (UNAUDITED) (continued)


(in thousands, except share data)	September 30, 2022		December 31, 2021		March 31, 2023		December 31, 2022
Shareholders’ equity
Capital stock, par value $2.00; authorized 20,000,000 shares; issued 16,428,388 shares at September 30, 2022 and December 31, 2021		32,857		32,857
Capital stock, par value $2.00; authorized 20,000,000 shares; issued 16,428,388 shares; outstanding 15,124,451 shares and 15,001,329 shares at March 31, 2023 and December 31, 2022 respectively						32,857		32,857
Additional paid-in capital		191,438		190,876		192,261		191,922
Retained earnings		235,218		215,592		252,884		243,815
Accumulated other comprehensive (loss) income		(62,589)		2,303
Less: 1,362,768 and 1,427,059 shares of treasury stock at September 30, 2022 and December 31, 2021, respectively		(16,959)		(17,481)
Accumulated other comprehensive loss						(53,151)		(58,340)
Less: 1,303,937 and 1,345,700 shares of treasury stock, at cost, at March 31, 2023 and December 31, 2022, respectively						(16,441)		(16,804)
Total shareholders’ equity		379,965		424,147		408,410		393,450
Total liabilities and shareholders’ equity	$	3,840,246	$	3,709,233	$	3,928,478	$	3,909,803

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

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BAR HARBOR BANKSHARES AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)


	Three Months Ended				Nine Months Ended				Three Months Ended
	September 30,				September 30,				March 31,
(in thousands, except earnings per share data)	2022		2021		2022		2021		2023		2022
Interest and dividend income
Loans	$	27,940	$	25,094	$	75,192	$	72,490	$	34,560	$	22,671
Securities and other		5,145		3,821		13,178		11,792		5,791		3,826
Total interest and dividend income		33,085		28,915		88,370		84,282		40,351		26,497
Interest expense
Deposits		1,801		1,555		4,185		7,109		5,265		1,189
Borrowings		1,374		1,778		3,458		5,415		4,180		1,010
Total interest expense		3,175		3,333		7,643		12,524		9,445		2,199
Net interest income		29,910		25,582		80,727		71,758		30,906		24,298
Provision for credit losses		1,306		(174)		2,217		(1,428)		798		377
Net interest income after provision for credit losses		28,604		25,756		78,510		73,186		30,108		23,921

Non-interest income
Trust and investment management fee income		3,548		3,868		11,131		11,335		3,555		3,754
Customer service fees		3,836		3,515		11,108		9,742		3,677		3,616
Gain on sales of securities, net		44		1,930		53		1,980		34		9
Mortgage banking income		315		850		1,427		4,973		279		624
Bank-owned life insurance income		496		494		1,501		1,510		1,148		501
Customer derivative income		58		341		213		837		132		18
Other income		526		352		1,660		726		359		787
Total non-interest income		8,823		11,350		27,093		31,103		9,184		9,309

Non-interest expense
Salaries and employee benefits		12,242		11,743		35,757		35,275		12,771		12,147
Occupancy and equipment		4,458		4,029		13,254		12,251		4,414		4,423
Gain on sales of premises and equipment, net		—		(146)		(65)		(137)		(13)		(75)
Outside services		393		547		1,143		1,512		356		340
Professional services		421		491		1,122		1,200		426		173
Communication		204		188		617		707		162		225
Marketing		518		339		1,150		1,163		409		263
Amortization of intangible assets		233		233		699		707		233		233
Loss on debt extinguishment		—		1,768		—		1,768
Acquisition, conversion and other expenses		31		318		356		1,759		20		325
Provision for unfunded commitments										(175)		326
Other expenses		4,532		3,862		12,585		11,382		4,101		3,506
Total non-interest expense		23,032		23,372		66,618		67,587		22,704		21,886

Income before income taxes		14,395		13,734		38,985		36,702		16,588		11,344
Income tax expense		2,965		2,706		7,940		7,169		3,576		2,232
Net income	$	11,430	$	11,028	$	31,045	$	29,533	$	13,012	$	9,112

Earnings per share:
Basic	$	0.76	$	0.74	$	2.07	$	1.97	$	0.86	$	0.61
Diluted	$	0.76	$	0.73	$	2.06	$	1.96		0.86		0.60

Weighted average common shares outstanding:
Basic		15,058		14,983		15,029		14,961		15,110		15,011
Diluted		15,113		15,051		15,100		15,035		15,190		15,102

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

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BAR HARBOR BANKSHARES AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)


	Three Months Ended				Nine Months Ended				Three Months Ended
	September 30,				September 30,				March 31,
(in thousands)	2022		2021		2022		2021		2023		2022
Net income	$	11,430	$	11,028	$	31,045	$	29,533	$	13,012	$	9,112
Other comprehensive (loss) income, before tax:
Changes in unrealized loss on securities available for sale		(26,933)		(3,700)		(79,186)		(7,328)
Changes in unrealized (loss) gain on hedging derivatives		(1,568)		(203)		(5,446)		2,311
Other comprehensive income (loss), before tax:
Changes in unrealized gain (loss) on securities available for sale										6,006		(28,844)
Changes in unrealized gain (loss) on hedging derivatives										767		(1,881)
Changes in unrealized (loss) gain on pension										—		—

Income taxes related to other comprehensive income:
Changes in unrealized loss on securities available for sale		6,522		861		18,486		1,703
Changes in unrealized loss (gain) on hedging derivatives		361		48		1,254		(538)
Total other comprehensive loss		(21,618)		(2,994)		(64,892)		(3,852)
Total comprehensive (loss) income	$	(10,188)	$	8,034	$	(33,847)	$	25,681
Changes in unrealized (gain) loss on securities available for sale										(1,406)		6,634
Changes in unrealized (gain) loss on hedging derivatives										(178)		433
Changes in unrealized loss (gain) on pension										—		—
Total other comprehensive income (loss)										5,189		(23,658)
Total comprehensive income (loss)									$	18,201	$	(14,546)

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

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BAR HARBOR BANKSHARES AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (UNAUDITED)


							Accumulated												Accumulated
	Common		Additional				other						Common		Additional				other
	stock		paid-in		Retained		comprehensive		Treasury				stock		paid-in		Retained		comprehensive		Treasury
(in thousands, except per share data)	amount		capital		earnings		income (loss)		stock		Total		amount		capital		earnings		income (loss)		stock		Total
Balance at December 31, 2020	$	32,857	$	190,084	$	195,607	$	6,740	$	(18,223)	$	407,065
Allowance for credit losses cumulative-effect adjustment - ASU 2016-13		—		—		(5,242)		—		—		(5,242)
Balance at December 31, 2021													$	32,857	$	190,876	$	215,592	$	2,303	$	(17,481)	$	424,147

Net income		—		—		18,505		—		—		18,505		—		—		9,112		—		—		9,112
Other comprehensive loss		—		—		—		(858)		—		(858)		—		—		—		(23,658)		—		(23,658)
Cash dividends declared ($0.46 per share)		—		—		(6,876)		—		—		(6,876)
Net issuance (56,290 shares) to employee stock plans, including related tax effects		—		(280)		—		—		449		169
Cash dividends declared ($0.24 per share)														—		—		(3,603)		—		—		(3,603)
Net issuance (11,277 shares) to employee stock plans, including related tax effects														—		436		—		—		111		547
Recognition of stock based compensation		—		997		—		—		—		997		—		454		—		—		—		454
Balance at June 30, 2021	$	32,857	$	190,801	$	201,994	$	5,882	$	(17,774)	$	413,760
Balance at March 31, 2022													$	32,857	$	191,766	$	221,101	$	(21,355)	$	(17,370)	$	406,999

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

Net income		—		—		11,028		—		—		11,028		—		—		13,012		—		—		13,012
Other comprehensive income		—		—		—		(2,994)		—		(2,994)		—		—		—		5,189		—		5,189
Cash dividends declared ($0.24 per share)		—		—		(3,596)		—		—		(3,596)
Net issuance (14,412 shares) to employee stock plans, including related tax effects		—		(276)		—		—		146		(130)
Cash dividends declared ($0.26 per share)														—		—		(3,943)		—		—		(3,943)
Net issuance (41,763 shares) to employee stock plans, including related tax effects														—		40		—		—		363		403
Recognition of stock based compensation		—		367		—		—		—		367		—		299		—		—		—		299
Balance at September 30, 2021	$	32,857	$	190,892	$	209,426	$	2,888	$	(17,628)	$	418,435

Balance at December 31, 2021	$	32,857	$	190,876	$	215,592	$	2,303	$	(17,481)	$	424,147
Net income		—		—		19,615		—		—		19,615
Other comprehensive loss		—		—		—		(43,274)		—		(43,274)
Cash dividends declared ($0.50 per share)		—		—		(7,509)		—		—		(7,509)
Net issuance (24,768 shares) to employee stock plans, including related tax effects		—		376		—		—		148		524
Recognition of stock based compensation		—		94		—		—		—		94
Balance at June 30, 2022	$	32,857	$	191,346	$	227,698	$	(40,971)	$	(17,333)	$	393,597

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

Balance at March 31, 2023													$	32,857	$	192,261	$	252,884	$	(53,151)	$	(16,441)	$	408,410

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

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BAR HARBOR BANKSHARES AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)


	Nine Months Ended September 30,				Three Months Ended March 31,
(in thousands)	2022		2021		2023		2022
Cash flows from operating activities:
Net income	$	31,045	$	29,533	$	13,012	$	9,112
Adjustments to reconcile net income to net cash provided by operating activities:
Originations of loans held for sale		(33,919)		(149,948)
Proceeds from loan sales		38,184		153,832
Loss on sale of loans		281		3,621
Net change in loans held for sale						463		2,534
Provision for credit losses		2,217		(1,428)		798		377
Net amortization of securities		2,287		3,788		540		832
Change in unamortized net loan costs and premiums		353		(2,739)		216		(1,370)
Premises and equipment depreciation		3,186		3,466		1,048		1,067
Stock-based compensation expense		716		1,364		299		454
Accretion of purchase accounting entries, net		—		10
Amortization of other intangibles		699		704		233		233
Income from cash surrender value of bank-owned life insurance policies		(1,501)		(1,510)		(1,148)		(501)
Gain on sales of securities, net		(53)		(1,980)		(34)		(9)
Amortization of right-of-use lease assets		893		851
Decrease in lease liabilities		(851)		(786)
Gain on premises and equipment, net		(65)		(137)
Amortization (accretion) of right-of-use lease assets						298		296
(Decrease) increase in lease liabilities						(290)		(280)
Loss (gain) on premises and equipment, net						(13)		(75)
Net change in other assets and liabilities		(2,954)		(7,878)		1,931		(6,469)
Net cash provided by operating activities		40,518		30,763		17,353		6,201

Cash flows from investing activities:
Proceeds from sales of securities available for sale		19,591		54,388
Proceeds from maturities, calls and prepayments of securities available for sale		48,073		99,580
Proceeds from sales, maturities, calls and prepayments of securities available for sale						2,534		27,670
Purchases of securities available for sale		(99,294)		(123,335)		(1,000)		(47,721)
Net change in loans		(319,036)		47,360		(41,582)		(121,187)
Recoveries of previously charged off loans		312		159
Purchase of FHLB stock		(2,924)		(790)
Proceeds from sale of FHLB stock		1,273		4,634
Purchase of Federal Home Loan Bank stock						(5,030)		—
Proceeds from sale of Federal Home Loan Bank stock						4,205		—
Purchase of premises and equipment, net		(1,842)		(1,216)		(1,153)		(602)
Net investment in community limited partnerships		(1,430)		(1,112)
Proceeds from death benefit of bank-owned life insurance policy						3,909		—
Net cash (used in) provided by investing activities		(355,277)		79,668		(38,117)		(141,840)

Cash flows from financing activities:
Net change in deposits		87,136		101,050		10,383		(781)
Net change in short-term senior borrowings		92,250		9,324
Repayments of long-term senior borrowings		(21,014)		—
Net change in short-term other borrowings		(886)		(89,018)
Net change in short-term borrowings						4,290		141
Proceeds from long-term borrowings						—		—
Repayments of long-term borrowings						(3)		(5)
Net change subordinated debt issuance costs						41		—
Net issuance to employee stock plans		368		(6,073)		403		547
Cash dividends paid on common stock		(11,419)		(10,472)		(3,943)		(3,603)
Net cash provided by financing activities		146,435		4,811
Net cash provided by (used in) financing activities						11,171		(3,701)

Net change in cash and cash equivalents		(168,324)		115,242		(9,593)		(139,340)
Cash and cash equivalents at beginning of year		250,389		226,007		92,295		250,389
Cash and cash equivalents at end of period	$	82,065	$	341,249	$	82,702	$	111,049

Supplemental cash flow information:
Interest paid	$	7,028	$	13,052	$	9,417	$	1,717
Income taxes paid, net		6,781		7,755		5,219		1,073

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

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

The results for any interim period are not necessarily indicative of results for the full year. These consolidated financial statements should be read in conjunction with the audited financial statements and note disclosures in the ~~Annual Report on~~ Form 10-K ~~for the fiscal year ended December 31, 2021~~ previously filed with the Securities and Exchange Commission (the "SEC"). In management's opinion, all adjustments necessary for a fair statement are reflected in the interim periods presented.

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

Recent Accounting Pronouncements

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


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

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NOTE 2. SECURITIES AVAILABLE FOR SALE

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


			Gross		Gross						Gross		Gross
			Unrealized		Unrealized						Unrealized		Unrealized
(in thousands)	Amortized Cost		Gains		Losses		Fair Value		Amortized Cost		Gains		Losses		Fair Value
September 30, 2022
March 31, 2023
Mortgage-backed securities:
US Government-sponsored enterprises	$	252,369	$	4	$	(36,349)	$	216,024	$	245,482	$	41	$	(31,223)	$	214,300
US Government agency		93,643		11		(10,128)		83,526		91,092		43		(10,197)		80,938
Private label		72,484		34		(5,749)		66,769		62,101		34		(3,635)		58,500
Obligations of states and political subdivisions thereof		123,350		9,205		(27,903)		104,652		122,686		5,543		(17,064)		111,165
Corporate bonds		91,512		26		(5,757)		85,781		101,505		17		(9,385)		92,137
Total securities available for sale	$	633,358	$	9,280	$	(85,886)	$	556,752	$	622,866	$	5,678	$	(71,504)	$	557,040


			Gross		Gross						Gross		Gross
			Unrealized		Unrealized						Unrealized		Unrealized
(in thousands)	Amortized Cost		Gains		Losses		Fair Value		Amortized Cost		Gains		Losses		Fair Value
December 31, 2021
December 31, 2022
Mortgage-backed securities:
US Government-sponsored enterprises	$	237,283	$	2,289	$	(3,455)	$	236,117	$	249,838	$	14	$	(34,825)	$	215,027
US Government agency		79,143		1,016		(522)		79,637		93,010		21		(10,765)		82,266
Private label		68,691		142		(138)		68,695		64,056		34		(3,936)		60,154
Obligations of states and political subdivisions thereof		140,585		1,489		(298)		141,776		121,939		7,149		(21,351)		107,737
Corporate bonds		89,994		2,479		(422)		92,051		102,505		33		(8,206)		94,332
Total securities available for sale	$	615,696	$	7,415	$	(4,835)	$	618,276	$	631,348	$	7,251	$	(79,083)	$	559,516

Credit Quality Information

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

As of ~~September 30, 2022~~March 31, 2023 and December 31, ~~2021,~~2022, we carried no allowance on available for sale debt securities in accordance with ASU 2016-13, Measurement of Credit Losses on Financial Instruments.

The amortized cost and estimated fair value of available for sale securities segregated by contractual maturity at ~~September 30, 2022~~March 31, 2023 are presented below. Expected maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations. Mortgage-backed securities are shown in total, as their maturities are highly variable.


	Available for sale				Available for sale
(in thousands)	Amortized Cost		Fair Value		Amortized Cost		Fair Value
Within 1 year	$	195	$	196	$	195	$	196
Over 1 year to 5 years		30,292		28,426		37,278		34,483
Over 5 years to 10 years		49,666		55,025		57,610		57,009
Over 10 years		134,709		106,786		129,108		111,614
Total bonds and obligations		214,862		190,433		224,191		203,302
Mortgage-backed securities		418,496		366,319		398,675		353,738
Total securities available for sale	$	633,358	$	556,752	$	622,866	$	557,040

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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,				Three Months Ended March 31,
(in thousands)	2022		2021		2022		2021		2023		2022
Gross gains on sales of available for sale securities	$	142	$	1,980	$	151	$	2,030	$	34	$	9
Gross losses on sales of available for sale securities		(98)		(50)		(98)		(50)		—		—
Net gains on sale of available for sale securities	$	44	$	1,930	$	53	$	1,980	$	34	$	9

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


	Less Than Twelve Months				Over Twelve Months				Total				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
September 30, 2022
March 31, 2023
Mortgage-backed securities:
US Government-sponsored enterprises	$	18,262	$	139,219	$	18,087	$	76,291	$	36,349	$	215,510	$	1,324	$	35,076	$	29,899	$	174,319	$	31,223	$	209,395
US Government agency		6,591		64,575		3,537		17,021		10,128		81,596		834		22,846		9,363		53,711		10,197		76,557
Private label		3,466		35,740		2,283		30,994		5,749		66,734		5		94		3,630		58,372		3,635		58,466
Obligations of states and political subdivisions thereof		20,425		78,085		7,478		21,373		27,903		99,458		184		9,439		16,880		94,281		17,064		103,720
Corporate bonds		3,770		65,251		1,987		16,763		5,757		82,014		3,877		43,045		5,508		45,992		9,385		89,037
Total securities available for sale	$	52,514	$	382,870	$	33,372	$	162,442	$	85,886	$	545,312	$	6,224	$	110,500	$	65,280	$	426,675	$	71,504	$	537,175


	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
December 31, 2021
December 31, 2022
Mortgage-backed securities:
US Government-sponsored enterprises	$	1,589	$	127,780	$	1,866	$	39,717	$	3,455	$	167,497	$	7,005	$	82,483	$	27,820	$	127,745	$	34,825	$	210,228
US Government agency		381		32,628		141		4,548		522		37,176		2,902		42,865		7,863		34,988		10,765		77,853
Private label		133		44,372		5		16		138		44,388		841		15,694		3,095		44,396		3,936		60,090
Obligations of states and political subdivisions thereof		187		36,878		111		6,129		298		43,007		7,990		48,799		13,361		55,702		21,351		104,501
Corporate bonds		94		21,358		328		11,922		422		33,280		4,733		65,279		3,473		25,027		8,206		90,306
Total securities available for sale	$	2,384	$	263,016	$	2,451	$	62,332	$	4,835	$	325,348	$	23,471	$	255,120	$	55,612	$	287,858	$	79,083	$	542,978

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We expect to recover the amortized cost basis on all securities in our AFS portfolio. Furthermore, we do not intend to sell nor do we anticipate that we will be required to sell any securities in an unrealized loss position as of ~~September 30, 2022,~~March 31, 2023, prior to this recovery. Our ability and intent to hold these securities until recovery is supported by our capital and liquidity positions as well as historically low portfolio turnover.

The following summarizes, by investment security type, the impact of securities in an unrealized loss position ~~for greater than 12 months~~ at ~~September 30, 2022:~~March 31, 2023:

US Government-sponsored enterprises

~~489~~466 out of the total ~~521~~516 securities in our portfolios of AFS US Government-sponsored enterprises were in unrealized loss positions. Aggregate unrealized losses represented ~~14.55%~~12.98% of the amortized cost of securities in unrealized loss positions. The Federal National Mortgage Association and Federal Home Loan Mortgage Corporation guarantee the contractual cash flows of all of our US Government-sponsored enterprises. The securities are investment grade rated and there were no material underlying credit downgrades during the quarter.

US Government agency

139 out of the total ~~161~~160 securities in our portfolios of AFS US Government agency securities were in unrealized loss positions. Aggregate unrealized losses represented ~~11.04%~~11.75% of the amortized cost of securities in unrealized loss positions. The Government National Mortgage Association guarantees the contractual cash flows of all of our US Government agency securities. The securities are investment grade rated and there were no material underlying credit downgrades during the quarter.

Private label

3326 of the total 3528 securities in our portfolio of AFS private label mortgage-backed securities were in unrealized loss positions. Aggregate unrealized losses represented ~~7.93%~~5.85% of the amortized cost of securities in unrealized loss positions. We expect to receive all of the future contractual cash flows related to the amortized cost on these securities.

Obligations of states and political subdivisions thereof

6853 of the total 8376 securities in our portfolio of AFS municipal bonds and obligations were in unrealized loss positions. Aggregate unrealized losses represented ~~22.06%~~14.81% of the amortized cost of securities in unrealized loss positions. We continually monitor the municipal bond sector of the market carefully and periodically evaluate the appropriate level of exposure to the market. At this time, we ~~feel~~think the bonds in this portfolio carry minimal risk of default, and we are appropriately compensated for the risk. There were no material underlying credit downgrades during the quarter.

Corporate bonds

2630 out of the total 3133 securities in our portfolio of AFS corporate bonds were in an unrealized loss position. The aggregate unrealized loss represents ~~7.07%~~9.53% of the amortized cost of bonds in unrealized loss positions. We review the financial strength of all of these bonds, and we have concluded that the amortized cost remains supported by the expected future cash flows of these securities. The most recent review includes all bond issuers and their current credit ratings, financial performance and capitalization.

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NOTE 3. LOANS AND ALLOWANCE FOR CREDIT LOSSES

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


	September 30,		December 31,		March 31,		December 31,
(in thousands)	2022		2021		2023		2022
Commercial construction	$	97,156	$	56,263	$	132,960	$	117,577
Commercial real estate owner occupied		256,475		257,122		261,365		244,814
Commercial real estate non-owner occupied		1,081,924		887,092		1,149,030		1,146,674
Tax exempt		41,622		41,280		43,253		42,879
Commercial and industrial		319,645		307,112		298,384		297,112
Residential real estate		953,113		888,263		961,701		954,968
Home equity		92,296		86,657		89,777		90,865
Consumer other		8,133		8,121		7,535		7,801
Total loans		2,850,364		2,531,910		2,944,005		2,902,690
Allowance for credit losses		25,018		22,718		26,607		25,860
Net loans	$	2,825,346	$	2,509,192	$	2,917,398	$	2,876,830

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


	September 30,		December 31,		March 31,		December 31,
(in thousands)	2022		2021		2023		2022
Net unamortized loan origination costs	$	3,367	$	3,014	$	3,233	$	3,184
Net unamortized fair value discount on acquired loans		(3,898)		(4,758)		(3,339)		(3,506)
Total	$	(531)	$	(1,744)	$	(106)	$	(322)

We exclude accrued interest receivable from the amortized cost basis of loans disclosed throughout this footnote. As of ~~September 30, 2022~~March 31, 2023 and December 31, ~~2021,~~2022, accrued interest receivable for loans totaled ~~$8.8~~$11.2 million and ~~$6.3~~$10.7 million, respectively, and is included in the “other assets” line item on the consolidated balance sheets.

The Coronavirus Aid, Relief, and Economic Security Act (CARES Act) and subsequent legislation established the Payroll Protection Program (“PPP”) are administered directly by the Small Business Administration (“SBA”). As of September 30, 2022, we had no remaining PPP loans and as of December 31, 2021, we had 61 PPP loans outstanding, with an outstanding principal balance of $6.7 million. PPP loans are included in the commercial and industrial portfolio segment.

Characteristics of each loan portfolio segment are as follows:

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

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

~~Table of Contents~~

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

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

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

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

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

Allowance for Credit Losses

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

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

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The activity in the ~~allowance for credit losses~~ACL for the periods ended are as follows:


	At or for the Three Months Ended September 30, 2022										At or for the Three Months Ended March 31, 2023
	Balance at										Balance at
	Beginning of								Balance at		Beginning of								Balance at
(in thousands)	Period		Charge Offs		Recoveries		Provision		End of Period		Period		Charge Offs		Recoveries		Provision		End of Period
Commercial construction	$	1,010	$	—	$	—	$	213	$	1,223	$	2,579	$	—	$	—	$	455	$	3,034
Commercial real estate owner occupied		2,722		—		7		132		2,861		2,189		—		—		159		2,348
Commercial real estate non-owner occupied		7,361		—		—		610		7,971		9,341		—		—		3		9,344
Tax exempt		105		—		—		(11)		94		93		—		—		—		93
Commercial and industrial		4,820		(8)		20		290		5,122		3,493		(1)		6		117		3,615
Residential real estate		6,806		(11)		6		85		6,886		7,274		(4)		8		27		7,305
Home equity		865		—		2		(76)		791		811		—		2		(21)		792
Consumer other		67		(66)		6		63		70		80		(63)		1		58		76
Total	$	23,756	$	(85)	$	41	$	1,306	$	25,018	$	25,860	$	(68)	$	17	$	798	$	26,607


	At or for the Nine Months Ended September 30, 2022										At or for the Three Months Ended March 31, 2022
	Balance at										Balance at
	Beginning of								Balance at		Beginning of								Balance at
(in thousands)	Period		Charge Offs		Recoveries		Provision		End of Period		Period		Charge Offs		Recoveries		Provision		End of Period
Commercial construction	$	2,111	$	—	$	—	$	(888)	$	1,223	$	2,111	$	—	$	—	$	(1,110)	$	1,001
Commercial real estate owner occupied		2,751		—		120		(10)		2,861		2,751		—		54		(132)		2,673
Commercial real estate non-owner occupied		5,650		—		—		2,321		7,971		5,650		—		—		1,357		7,007
Tax exempt		86		—		—		8		94		86		—		—		(86)		—
Commercial and industrial		5,369		(14)		56		(289)		5,122		5,369		—		25		(655)		4,739
Residential real estate		5,862		(26)		103		947		6,886		5,862		(15)		91		940		6,878
Home equity		814		(6)		22		(39)		791		814		(2)		5		10		827
Consumer other		75		(181)		9		167		70		75		(66)		3		53		65
Total	$	22,718	$	(227)	$	310	$	2,217	$	25,018	$	22,718	$	(83)	$	178	$	377	$	23,190

Table of Contents

At or for the Three Months Ended September 30, 2021

Balance at

Beginning of

Balance at
(in thousands)

Period

Charge Offs

Recoveries

Provision

End of Period
Commercial construction

$
2,372

$
—

$
—

$
(286)

$
2,086
Commercial real estate owner occupied

2,552

(142)

72

237

2,719
Commercial real estate non-owner occupied

5,604

—

—

(22)

5,582
Tax exempt

91

—

—

(6)

85
Commercial and industrial

5,225

(24)

—

105

5,306
Residential real estate

6,069

(6)

19

(290)

5,792
Home equity

822

(49)

1

30

804
Consumer other

80

(65)

1

58

74
Total

$
22,815

$
(286)

$
93

$
(174)

$
22,448

At or for the Nine Months Ended September 30, 2021

Balance at

Beginning of

Impact of ASC

Balance at
(in thousands)

Period

326

Charge Offs

Recoveries

Provision

End of Period
Commercial construction

$
824

$
1,196

$
—

$
18

$
48

$
2,086
Commercial real estate owner occupied

1,783

708

(403)

72

559

2,719
Commercial real estate non-owner occupied

7,864

(2,008)

—

4

(278)

5,582
Tax exempt

58

40

—

—

(13)

85
Commercial and industrial

3,137

2,996

(44)

14

(797)

5,306
Residential real estate

5,010

1,732

(67)

141

(1,024)

5,792
Home equity

285

603

(108)

48

(24)

804
Consumer other

121

(39)

(119)

10

101

74
Total

$
19,082

$
5,228

$
(741)

$
307

$
(1,428)

$
22,448

~~Table of Contents~~

Unfunded Commitments

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



(in thousands)	Three Months Ended September 30, 2022		Nine Months Ended September 30, 2022		Three Months Ended March 31, 2023		Three Months Ended March 31, 2022
Beginning Balance	$	2,523	$	2,152	$	3,910	$	2,152
Provision for credit losses		(26)		345		(175)		30
Ending Balance	$	2,497	$	2,497	$	3,735	$	2,182

(in thousands)

Three Months Ended September 30, 2021

Nine Months Ended September 30, 2021
Beginning Balance

$
1,921

$
359
Impact of ASC 326

—

1,616
Provision for credit losses

280

226
Ending Balance

$
2,201

$
2,201

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

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

The following are the definitions of our credit quality indicators:

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

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

Substandard: Loans we consider as substandard are inadequately protected by the current net worth and paying capacity of the borrower or of the collateral pledged, if any. Substandard loans have a well-defined weakness that jeopardizes

~~Table of Contents~~

liquidation of the debt. Substandard loans include those loans where there is the distinct possibility of some loss of principal, if the deficiencies are not corrected.

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

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

2018

Table of Contents

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

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

The following table presents our loans by year of origination, loan segmentation and risk indicator as of ~~September 30, 2022:~~March 31, 2023:

(in thousands)

2022

2021

2020

2019

2018

Prior

Total
Commercial construction














Risk rating:














Pass

$
34,032

$
32,179

$
5,928

$
1,011

$
973

$
—

$
74,123
Special mention

—

—

23,033

—

—

—

23,033
Substandard

—

—

—

—

—

—

—
Total

$
34,032

$
32,179

$
28,961

$
1,011

$
973

$
—

$
97,156

Commercial real estate owner occupied














Risk rating:














Pass

$
20,248

$
12,973

$
23,785

$
31,795

$
47,090

$
110,306

$
246,197
Special mention

—

—

245

672

1,145

1,711

3,773
Substandard

—

—

—

—

931

5,276

6,207
Doubtful

—

—

—

—

151

147

298
Total

$
20,248

$
12,973

$
24,030

$
32,467

$
49,317

$
117,440

$
256,475

Commercial real estate non-owner occupied














Risk rating:














Pass

$
283,316

$
249,574

$
146,764

$
89,252

$
35,671

$
259,250

$
1,063,827
Special mention

—

—

—

139

918

14,665

15,722
Substandard

—

—

—

173

—

2,048

2,221
Doubtful

—

—

—

—

—

154

154
Total

$
283,316

$
249,574

$
146,764

$
89,564

$
36,589

$
276,117

$
1,081,924

Tax exempt














Risk rating:














Pass

$
6,944

$
1,044

$
256

$
778

$
13,276

$
19,324

$
41,622
Special mention

—

—

—

—

—

—

—
Substandard

—

—

—

—

—

—

—
Total

$
6,944

$
1,044

$
256

$
778

$
13,276

$
19,324

$
41,622

Commercial and industrial














Risk rating:














Pass

$
56,222

$
70,975

$
60,338

$
29,867

$
11,053

$
84,792

$
313,247
Special mention

1,497

—

155

1,083

516

2,432

5,683
Substandard

—

55

12

70

—

514

651
Doubtful

—

—

—

—

—

64

64
Total

$
57,719

$
71,030

$
60,505

$
31,020

$
11,569

$
87,802

$
319,645

Residential real estate














Performing

$
170,291

$
178,875

$
113,573

$
71,869

$
51,588

$
361,823

$
948,019
Nonperforming

—

48

—

50

643

4,353

5,094
Total

$
170,291

$
178,923

$
113,573

$
71,919

$
52,231

$
366,176

$
953,113

Home equity














Performing

$
11,839

$
12,152

$
8,965

$
7,796

$
7,326

$
43,173

$
91,251
Nonperforming

—

—

—

—

—

1,045

1,045
Total

$
11,839

$
12,152

$
8,965

$
7,796

$
7,326

$
44,218

$
92,296

Consumer other














Performing

$
3,833

$
1,596

$
1,029

$
362

$
328

$
980

$
8,128
Nonperforming

—

—

5

—

—

—

5
Total

$
3,833

$
1,596

$
1,034

$
362

$
328

$
980

$
8,133

Total Loans

$
588,222

$
559,471

$
384,088

$
234,917

$
171,609

$
912,057

$
2,850,364



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

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

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

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

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

2119

Table of Contents


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

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

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

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

The following table presents our loans by year of origination, loan segmentation and risk indicator as of December 31, ~~2021:~~2022:

(in thousands)

2021

2020

2019

2018

2017

Prior

Total
Commercial construction














Risk rating:














Pass

$
22,866

$
4,787

$
19,211

$
9,399

$
—

$
—

$
56,263
Special mention

—

—

—

—

—

—

—
Substandard

—

—

—

—

—

—

—
Total

$
22,866

$
4,787

$
19,211

$
9,399

$
—

$
—

$
56,263

Commercial real estate owner occupied














Risk rating:














Pass

$
12,940

$
25,240

$
34,782

$
49,136

$
19,292

$
103,144

$
244,534
Special mention

—

—

760

—

—

2,659

3,419
Substandard

—

—

1

853

247

7,737

8,838
Doubtful

—

—

—

167

—

164

331
Total

$
12,940

$
25,240

$
35,543

$
50,156

$
19,539

$
113,704

$
257,122

Commercial real estate non-owner occupied














Risk rating:














Pass

$
235,646

$
172,785

$
119,326

$
39,663

$
136,120

$
165,329

$
868,869
Special mention

—

—

174

—

—

14,789

14,963
Substandard

—

—

—

—

—

3,097

3,097
Doubtful

—

—

—

—

—

163

163
Total

$
235,646

$
172,785

$
119,500

$
39,663

$
136,120

$
183,378

$
887,092

Tax exempt














Risk rating:














Pass

$
1,249

$
299

$
968

$
14,408

$
5,329

$
19,027

$
41,280
Special mention

—

—

—

—

—

—

—
Substandard

—

—

—

—

—

—

—
Total

$
1,249

$
299

$
968

$
14,408

$
5,329

$
19,027

$
41,280

Commercial and industrial














Risk rating:














Pass

$
77,608

$
80,569

$
33,405

$
16,457

$
33,413

$
61,594

$
303,046
Special mention

—

—

584

468

172

1,396

2,620
Substandard

58

3

512

—

48

578

1,199
Doubtful

—

—

—

—

92

155

247
Total

$
77,666

$
80,572

$
34,501

$
16,925

$
33,725

$
63,723

$
307,112

Residential real estate














Performing

$
191,466

$
120,495

$
83,044

$
62,299

$
59,642

$
364,482

$
881,428
Nonperforming

—

—

—

286

178

6,371

6,835
Total

$
191,466

$
120,495

$
83,044

$
62,585

$
59,820

$
370,853

$
888,263

Home equity














Performing

$
12,770

$
10,461

$
9,005

$
7,855

$
6,474

$
38,823

$
85,388
Nonperforming

—

—

—

—

—

1,269

1,269
Total

$
12,770

$
10,461

$
9,005

$
7,855

$
6,474

$
40,092

$
86,657

Consumer other














Performing

$
2,525

$
1,659

$
792

$
669

$
92

$
2,379

$
8,116
Nonperforming

—

—

—

—

—

5

5
Total

$
2,525

$
1,659

$
792

$
669

$
92

$
2,384

$
8,121

Total Loans

$
557,128

$
416,298

$
302,564

$
201,660

$
261,099

$
793,161

$
2,531,910



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

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

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

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

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

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Table of Contents


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

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

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

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

Past Dues

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


	September 30, 2022												March 31, 2023
(in thousands)	30-59		60-89		90+		Total Past Due		Current		Total Loans		30-59		60-89		90+		Total Past Due		Current		Total Loans
Commercial construction	$	—	$	—	$	—	$	—	$	97,156	$	97,156	$	—	$	—	$	—	$	—	$	132,960	$	132,960
Commercial real estate owner occupied		84		—		—		84		256,391		256,475		197		227		308		732		260,633		261,365
Commercial real estate non-owner occupied		298		—		173		471		1,081,453		1,081,924		352		—		133		485		1,148,545		1,149,030
Tax exempt		—		—		—		—		41,622		41,622		—		—		—		—		43,253		43,253
Commercial and industrial		200		100		12		312		319,333		319,645		261		281		134		676		297,708		298,384
Residential real estate		565		928		1,882		3,375		949,738		953,113		5,325		393		1,728		7,446		954,255		961,701
Home equity		269		236		204		709		91,587		92,296		821		—		276		1,097		88,680		89,777
Consumer other		11		4		—		15		8,118		8,133		14		9		—		23		7,512		7,535
Total	$	1,427	$	1,268	$	2,271	$	4,966	$	2,845,398	$	2,850,364	$	6,970	$	910	$	2,579	$	10,459	$	2,933,546	$	2,944,005

December 31, 2021
(in thousands)

30-59

60-89

90+

Total Past Due

Current

Total Loans
Commercial construction

$
—

$
—

$
—

$
—

$
56,263

$
56,263
Commercial real estate owner occupied

1,190

7

1

1,198

255,924

257,122
Commercial real estate non-owner occupied

—

—

—

—

887,092

887,092
Tax exempt

—

—

—

—

41,280

41,280
Commercial and industrial

31

318

185

534

306,578

307,112
Residential real estate

5,010

1,238

1,416

7,664

880,599

888,263
Home equity

699

149

101

949

85,708

86,657
Consumer other

29

—

2

31

8,090

8,121
Total

$
6,959

$
1,712

$
1,705

$
10,376

$
2,521,534

$
2,531,910

~~Non-Accrual Loans~~

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

September 30, 2022

Nonaccrual With No

90+ Days Past
(in thousands)

Nonaccrual

Related Allowance

Due and Accruing
Commercial construction

$
—

$
—

$
—
Commercial real estate owner occupied

604

371

—
Commercial real estate non-owner occupied

747

430

—
Tax exempt

—

—

—
Commercial and industrial

279

187

2
Residential real estate

5,094

1,539

242
Home equity

1,044

70

15
Consumer other

5

—

—
Total

$
7,773

$
2,597

$
259


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

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December 31, 2021

Nonaccrual With No

90+ Days Past
(in thousands)

Nonaccrual

Related Allowance

Due and Accruing
Commercial construction

$
—

$
—

$
—
Commercial real estate owner occupied

783

424

—
Commercial real estate non-owner occupied

622

459

—
Tax exempt

—

—

—
Commercial and industrial

677

542

30
Residential real estate

6,835

2,537

41
Home equity

1,269

305

63
Consumer other

5

—

—
Total

$
10,191

$
4,267

$
134

Non-Accrual Loans

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


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


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

Collateral Dependent Loans

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

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


	September 30, 2022				December 31, 2021				March 31, 2023				December 31, 2022
(in thousands)	Real Estate		Other		Real Estate		Other		Real Estate		Other		Real Estate		Other
Commercial construction	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Commercial real estate owner occupied		604		—		783		—		432		—		439		—
Commercial real estate non-owner occupied		747		—		622		—		529		—		550		—
Tax exempt		—		—		—		—		—		—		—		—
Commercial and industrial		122		157		385		292		222		1,610		91		116
Residential real estate		5,094		—		6,835		—		4,066		—		4,385		—
Home equity		1,044		—		1,269		—		933		—		963		—
Consumer other		5		—		5		—		4		—		5		—
Total	$	7,616	$	157	$	9,899	$	292	$	6,186	$	1,610	$	6,433	$	116

Table of Contents

Loan Modifications to Borrowers Experiencing Financial Difficulty

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

~~Troubled Debt Restructuring Loans~~

The loan portfolio also includes certain loans that have been modified in a TDR, where economic concessions have been granted to borrowers who have experienced or are expected to experience financial difficulties. These ~~concessions~~modifications typically result from 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. There were no ~~modifications~~ qualifying ~~as TDR’s~~modifications for the three ~~and nine~~ months ended ~~September 30, 2022~~March 31, 2023 and ~~2021.~~2022.

Foreclosure

Residential mortgage loans collateralized by real estate that are in the process of foreclosure as of ~~September 30, 2022~~March 31, 2023 and December 31, ~~2021~~2022 totaled ~~$249~~$570 thousand and ~~$574~~$253 thousand, respectively.

Mortgage Banking

Loans held for sale ~~had~~ at ~~September 30, 2022 and December~~March 31, ~~2021~~2023 had an unpaid principal balance of ~~$987~~$463 thousand and ~~$5.4 million, respectively.~~there were no loans held for sale as of December 31, 2022. The interest rate exposure on loans held for sale ~~are~~is mitigated through forward delivery commitments with certain approved secondary market investors. ~~Forward~~We had no open forward delivery commitments ~~had a notional amount~~

~~Table of Contents~~

~~of $200 thousand, and $14.8 million~~ at ~~September 30, 2022~~March 31, 2023 and December 31, ~~2021,~~2022, respectively. ~~Refer to Note 8 for further discussion of forward delivery commitments.~~

For the three months ended ~~September 30,~~March 31, 2023 and 2022, ~~and 2021,~~ we sold ~~$5.2 million~~$691 thousand and ~~$28.5~~$22.2 million, respectively, of residential mortgage loans on the secondary market, which resulted in a net loss on sale of loans (net of costs, including direct and indirect origination costs) of ~~$52~~$8 thousand and a gain of ~~$682~~$182 thousand, respectively. For the nine months ended September 30, 2022 and 2021, we sold $38.2 million and $153.8 million, respectively, of residential mortgage loans on the secondary market, which resulted in a net gain on sale of loans (net of costs, including direct and indirect origination costs) of $281 thousand and $3.6 million, respectively.

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

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NOTE 4. BORROWED FUNDS

Borrowed funds at ~~September 30, 2022~~March 31, 2023 and December 31, ~~2021~~2022 are summarized, as follows:


	September 30, 2022				December 31, 2021				March 31, 2023				December 31, 2022
			Weighted				Weighted				Weighted				Weighted
(dollars in thousands)	Carrying Value		Average Rate		Carrying Value		Average Rate		Carrying Value		Average Rate		Carrying Value		Average Rate
Short-term borrowings
Advances from the FHLB	$	167,250	2.95	%	$	75,000	0.30	%	$	322,925	4.96	%	$	318,000	3.84	%
Other borrowings		18,916	0.14			19,802	0.17			12,734	0.13			13,369	0.13
Total short-term borrowings		186,166	1.27			94,802	0.21			335,659	2.86			331,369	2.20
Long-term borrowings
Advances from the FHLB		2,591	0.39			23,598	1.08			2,585	0.48			2,588	0.48
Subordinated borrowings		60,248	5.05			60,124	4.34			60,330	6.01			60,289	4.95
Total long-term borrowings		62,839	4.86			83,722	3.42			62,915	5.78			62,877	4.76
Total	$	249,005	1.74	%	$	178,524	0.91	%	$	398,574	3.15	%	$	394,246	2.45	%

Short-term debt includes Federal Home Loan Bank of Boston (“FHLB”) advances with a remaining maturity of less than one year. We also maintain a $1.0 million secured line of credit with the FHLB that bears a daily adjustable rate calculated by the FHLB. There was no outstanding balance on the FHLB line of credit for the periods ended ~~September 30, 2022~~March 31, 2023 and December 31, ~~2021.~~2022.

We have the capacity to borrow funds on a secured basis utilizing the Bank Term Funding Program, the Borrower in Custody program, and the Discount Window at the Federal Reserve Bank of Boston (the “FRB”). At ~~September 30, 2022,~~March 31, 2023, our available secured line of credit at the FRB was ~~$84.1~~$177.5 million. We have pledged certain loans and securities to the FRB to support this arrangement. There were no borrowings with the FRB for the periods ended March 31, 2023 and December 31, ~~2021.~~2022.

We maintain, with a correspondent bank, an unused unsecured federal funds line of credit that has an aggregate overnight borrowing capacity of $50.0 million as of ~~September 30, 2022~~March 31, 2023 and December 31, ~~2021.~~2022. There was no outstanding balance on the line of credit as of ~~September 30, 2022~~March 31, 2023 and December 31, ~~2021.~~2022.

Long-term FHLB advances consist of advances with a remaining maturity of more than one year. The advances outstanding at ~~September 30, 2022~~March 31, 2023 include no callable advances and amortizing advances of ~~$291~~$285 thousand. ~~The~~There were no callable advances outstanding and $288 thousand of amortizing advances at December 31, ~~2021 included $20.0 million of callable advances and $298 thousand of amortizing advances.~~2022. All FHLB borrowings, including the line of credit, are secured by a blanket security agreement on certain qualified collateral, principally all residential first mortgage loans and certain securities.

A summary of maturities of FHLB advances as of ~~September 30, 2022~~March 31, 2023 is, as follows:


			Weighted Average				Weighted Average
(in thousands, except rates)	Amount		Rate		Amount		Rate
2022	$	166,250	2.97	%
2023		1,000	—		$	322,925	4.96	%
2024		2,300	—			2,300	—
2025		—	—			—	—
2026		—	—			—	—
2027 and thereafter		291	3.45
2027						—	—
Thereafter						285	4.32
Total FHLB advances	$	169,841	2.92	%	$	325,510	4.93	%

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

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interest rate shall be reset quarterly to an interest rate per annum equal to the then current three-month Secured Overnight Financing Rate (SOFR) plus 3.27%. We have the option beginning with the interest payment date of December 1, 2024, and on any scheduled payment date thereafter, to redeem the Notes, in whole or in part upon prior approval of the Federal Reserve. The transaction included debt issuance costs of ~~$372~~$291 thousand as of ~~September 30, 2022~~March 31, 2023 and ~~$496~~$331 thousand net of amortization as of December 31, ~~2021,~~2022, that are netted against the subordinated debt.

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

Repurchase Agreements

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


(in thousands)	September 30, 2022		December 31, 2021		March 31, 2023		December 31, 2022
Customer Repurchase Agreements
US Government-sponsored enterprises	$	18,916	$	19,802	$	12,734	$	13,369
Total	$	18,916	$	19,802	$	12,734	$	13,369

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NOTE 5. DEPOSITS

A summary of time deposits is, as follows:


(in thousands)	September 30, 2022		December 31, 2021		March 31, 2023		December 31, 2022
Time less than $100,000	$	167,056	$	181,586	$	215,300	$	157,263
Time $100,000 through $250,000		113,168		169,645		126,907		118,655
Time $250,000 or more		54,024		74,301		62,039		47,521
Total	$	334,248	$	425,532	$	404,246	$	323,439

At ~~September 30, 2022~~March 31, 2023 and December 31, ~~2021,~~2022, the scheduled maturities by year for time deposits are, as follows:


(in thousands)	September 30, 2022		December 31, 2021		March 31, 2023		December 31, 2022
Within 1 year	$	262,787	$	318,692	$	342,053	$	262,338
Over 1 year to 2 years		46,867		71,247		41,116		37,937
Over 2 years to 3 years		12,626		18,201		11,416		12,936
Over 3 years to 4 years		5,971		8,498		4,880		5,410
Over 4 years to 5 years		5,302		6,751		4,381		4,319
Over 5 years		695		2,143		400		499
Total	$	334,248	$	425,532	$	404,246	$	323,439

Included in time deposits are brokered deposits of $68.2 million and $15.1 million ~~and $16.1 million~~ at ~~September 30, 2022~~March 31, 2023 and December 31, ~~2021,~~2022, respectively. Also included in time deposits are reciprocal deposits of ~~$12.7~~$25.3 million and ~~$17.3~~$27.4 million at ~~September 30, 2022~~March 31, 2023 and December 31, ~~2021,~~2022, respectively.

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NOTE 6. CAPITAL RATIOS AND SHAREHOLDERS’ EQUITY

The actual and required capital ratios are, as follows:

September 30, 2022

Minimum Regulatory

Actual

Capital Requirements

(in thousands, except ratios)

Amount

Ratio

Amount

Ratio

Company (consolidated)

Total capital to risk-weighted assets

$
404,804

13.42
%

$
241,314

8.00
%
Common equity tier 1 capital to risk-weighted assets

317,043

10.51

135,740

4.50

Tier 1 capital to risk-weighted assets

337,663

11.19

180,986

6.00

Tier 1 capital to average assets (leverage ratio)

337,663

9.13

147,908

4.00

Bank

Total capital to risk-weighted assets

$
398,292

13.22
%

$
241,079

8.00
%
Common equity tier 1 capital to risk-weighted assets

371,151

12.32

135,606

4.50

Tier 1 capital to risk-weighted assets

371,151

12.32

180,808

6.00

Tier 1 capital to average assets (leverage ratio)

371,151

10.05

147,791

4.00


	December 31, 2021								March 31, 2023
					Minimum Regulatory								Minimum Regulatory
	Actual				Capital Requirements				Actual				Capital Requirements
(in thousands, except ratios)	Amount		Ratio		Amount		Ratio		Amount		Ratio		Amount		Ratio
Company (consolidated)
Total capital to risk-weighted assets	$	380,690	14.31	%	$	212,798	8.00	%	$	427,290	13.65	%	$	250,436	8.00	%
Common equity tier 1 capital to risk-weighted assets		295,635	11.11			119,699	4.50			336,331	10.74			140,871	4.50
Tier 1 capital to risk-weighted assets		316,255	11.89			159,598	6.00			347,133	11.40			182,662	6.00
Tier 1 capital to average assets (leverage ratio)		316,255	8.66			146,029	4.00			347,133	9.33			148,896	4.00

Bank
Total capital to risk-weighted assets	$	375,435	14.13	%	$	220,425	8.00	%	$	419,780	13.50	%	$	248,747	8.00	%
Common equity tier 1 capital to risk-weighted assets		351,000	13.21			123,812	4.50			389,441	11.24			155,897	4.50
Tier 1 capital to risk-weighted assets		351,000	13.21			165,082	6.00			389,441	11.24			207,863	6.00
Tier 1 capital to average assets (leverage ratio)		351,000	9.62			151,082	4.00			389,441	10.57			147,326	4.00


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

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

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

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Accumulated other comprehensive (loss) income

Components of accumulated other comprehensive income is, as follows:


(in thousands)	September 30, 2022		December 31, 2021		March 31, 2023		December 31, 2022
Accumulated other comprehensive income, before tax:
Net unrealized (loss) gain on AFS securities	$	(76,606)	$	2,580
Net unrealized (loss) gain on hedging derivatives		(4,316)		1,130
Net unrealized loss on AFS securities					$	(65,826)	$	(71,832)
Net unrealized loss on hedging derivatives						(1,566)		(2,333)
Net unrealized loss on post-retirement plans		(718)		(718)		(1,675)		(1,691)

Income taxes related to items of accumulated other comprehensive income:
Net unrealized loss (gain) on AFS securities		17,891		(595)
Net unrealized loss (gain) on hedging derivatives		994		(260)
Net unrealized loss on AFS securities						15,180		16,586
Net unrealized loss on hedging derivatives						361		539
Net unrealized loss on post-retirement plans		166		166		375		391
Accumulated other comprehensive (loss) income	$	(62,589)	$	2,303
Accumulated other comprehensive loss					$	(53,151)	$	(58,340)

The following table presents the components of other comprehensive income (loss) for the three ~~and nine~~ months ended ~~September 30, 2022~~March 31, 2023 and ~~2021:~~2022:


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

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

Net unrealized loss on post-retirement plans:
Net unrealized loss arising during the period		—		—		—
Less: reclassification adjustment for gains (losses) realized in net income		—		—		—
Net unrealized loss on post-retirement plans		—		—		—
Other comprehensive loss	$	(28,501)	$	6,883	$	(21,618)

Three Months Ended September 30, 2021
Three Months Ended March 31, 2023
Net unrealized gain on AFS securities:
Net unrealized gain arising during the period	$	(1,770)	$	403	$	(1,367)	$	6,040	$	(1,414)	$	4,626
Less: reclassification adjustment for gains (losses) realized in net income		1,930		(458)		1,472		34		(8)		26
Net unrealized gain on AFS securities		(3,700)		861		(2,839)		6,006		(1,406)		4,600

Net unrealized gain on derivative hedgess:
Net unrealized loss on hedging derivatives:
Net unrealized gain arising during the period		(203)		48		(155)		767		(178)		589
Less: reclassification adjustment for gains (losses) realized in net income		—		—		—		—		—		—
Net unrealized gain on cash flow derivative hedges		(203)		48		(155)
Net unrealized gain on cash flow hedging derivatives								767		(178)		589

Net unrealized loss on post-retirement plans:
Other comprehensive income (loss)							$	6,773	$	(1,584)	$	5,189

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

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

Other comprehensive (loss) income	$	(3,903)	$	909	$	(2,994)	$	(30,725)	$	7,067	$	(23,658)

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(in thousands)

Before Tax

Tax Effect

Net of Tax
Nine Months Ended September 30, 2022






Net unrealized loss on AFS securities:






Net unrealized loss arising during the period

$
(79,133)

$
18,474

$
(60,659)
Less: reclassification adjustment for gains (losses) realized in net income

53

(12)

41
Net unrealized loss on AFS securities

(79,186)

18,486

(60,700)

Net unrealized loss on hedging derivatives:




Net unrealized loss arising during the period

(5,446)

1,254

(4,192)
Less: reclassification adjustment for gains (losses) realized in net income

—

—

—
Net unrealized gain on hedging derivatives

(5,446)

1,254

(4,192)

Net unrealized loss on post-retirement plans:






Net unrealized loss arising during the period

—

—

—
Less: reclassification adjustment for gains (losses) realized in net income

—

—

—
Net unrealized loss on post-retirement plans

—

—

—
Other comprehensive loss

$
(84,632)

$
19,740

$
(64,892)

Nine Months Ended September 30, 2021






Net unrealized loss on AFS securities:






Net unrealized loss arising during the period

$
(5,348)

$
1,234

$
(4,114)
Less: reclassification adjustment for gains realized in net income

1,980

(469)

1,511
Net unrealized loss on AFS securities

(7,328)

1,703

(5,625)

Net unrealized gain on hedging derivatives:






Net unrealized gain arising during the period

2,311

(538)

1,773
Less: reclassification adjustment for gains (losses) realized in net income

—

—

—
Net unrealized gain on cash flow hedging derivatives

2,311

(538)

1,773

Net unrealized loss on post-retirement plans:






Net unrealized loss arising during the period

—

—

—
Less: reclassification adjustment for gains (losses) realized in net income

—

—

—
Net unrealized loss on post-retirement plans

—

—

—
Other comprehensive (loss) income

$
(5,017)

$
1,165

$
(3,852)

~~Table of Contents~~

The following table presents the changes in each component of accumulated other comprehensive income (loss), net of tax impacts, for the three ~~and nine~~ months ended ~~September 30, 2022~~March 31, 2023 and ~~2021:~~2022:


	Net unrealized		Net gain (loss) on		Net unrealized				Net unrealized		Net gain (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 September 30, 2022
Three Months Ended March 31, 2023
Balance at beginning of period	$	(38,304)	$	(2,115)	$	(552)	$	(40,971)	$	(55,246)	$	(1,794)	$	(1,300)	$	(58,340)
Other comprehensive loss before reclassifications		(20,377)		(1,207)		—		(21,584)		4,626		589		—		5,215
Less: amounts reclassified from accumulated other comprehensive income		34		—		—		34		26		—		—		26
Total other comprehensive income		(20,411)		(1,207)		—		(21,618)		4,600		589		—		5,189
Balance at end of period	$	(58,715)	$	(3,322)	$	(552)	$	(62,589)	$	(50,646)	$	(1,205)	$	(1,300)	$	(53,151)

Three Months Ended September 30, 2021
Balance at beginning of period	$	7,237	$	63	$	(1,418)	$	5,882
Other comprehensive gain before reclassifications		(1,367)		(155)		—		(1,522)
Less: amounts reclassified from accumulated other comprehensive income		1,472		—		—		1,472
Total other comprehensive income		(2,839)		(155)		—		(2,994)
Balance at end of period	$	4,398	$	(92)	$	(1,418)	$	2,888

Nine Months Ended September 30, 2022
Three Months Ended March 31, 2022
Balance at beginning of period	$	1,985	$	870	$	(552)	$	2,303	$	1,985	$	870	$	(552)	$	2,303
Other comprehensive loss before reclassifications		(60,659)		(4,192)		—		(64,851)		(22,203)		(1,448)		—		(23,651)
Less: amounts reclassified from accumulated other comprehensive income		41		—		—		41		7		—		—		7
Total other comprehensive loss		(60,700)		(4,192)		—		(64,892)		(22,210)		(1,448)		—		(23,658)
Balance at end of period	$	(58,715)	$	(3,322)	$	(552)	$	(62,589)	$	(20,225)	$	(578)	$	(552)	$	(21,355)

Nine Months Ended September 30, 2021
Balance at beginning of period	$	10,023	$	(1,865)	$	(1,418)	$	6,740
Other comprehensive (loss) gain before reclassifications		(4,114)		1,773		—		(2,341)
Less: amounts reclassified from accumulated other comprehensive income		1,511		—		—		1,511
Total other comprehensive (loss) gain		(5,625)		1,773		—		(3,852)
Balance at end of period	$	4,398	$	(92)	$	(1,418)	$	2,888

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


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

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

(1)	Net realized gains before tax include $34 thousand realized gains for the three months ended March 31, 2023 and no gross realized losses. Net realized gains before tax include $9 thousand realized gains for the three months ended March 31, 2022 and no gross realized losses.

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~~The following tables presents the amounts reclassified out of each component of accumulated other comprehensive income for three and nine months ended September 30, 2022 and 2021:~~

Three Months Ended September 30,

Nine Months Ended September 30,
Affected Line Item where
(in thousands)

2022

2021

2022

2021
Net Income is Presented
Net realized gains on AFS securities:










Before tax⁽¹⁾

$
44

$
1,930

$
53

$
1,980
Non-interest income
Tax effect

(10)

(458)

(12)

(469)
Tax expense
Total reclassifications for the period

$
34

$
1,472

$
41

$
1,511

~~(1)~~

Net realized gains before tax include $141 thousand realized gains for the three months ended September 30, 2022 and $97 thousand of gross realized losses. Net realized gains before tax include $150 thousand realized gains for the nine months ended September 30, 2022 and $97 thousand of gross realized losses. Net realized gains before tax include $1.9 million realized gains for the three months ended September 30, 2021 and $97 thousand of gross realized losses. Net realized gains before tax include $2.0 million realized gains for the nine months ended September 30, 2021 and $50 thousand of gross realized losses.

~~Table of Contents~~

NOTE 7. EARNINGS PER SHARE

The following table presents the calculation of earnings per share:


	Three Months Ended				Nine Months Ended				Three Months Ended
	September 30,				September 30,				March 31,
(in thousands, except per share and share data)	2022		2021		2022		2021		2023		2022
Net income	$	11,430	$	11,028	$	31,045	$	29,533	$	13,012	$	9,112

Average number of basic common shares outstanding		15,057,598		14,982,766		15,028,963		14,960,753		15,109,847		15,010,834
Plus: dilutive effect of stock options and awards outstanding		55,757		67,990		71,317		73,829		80,242		90,951
Average number of diluted common shares outstanding⁽¹⁾		15,113,355		15,050,756		15,100,280		15,034,582		15,190,089		15,101,785

Earnings per share:
Basic	$	0.76	$	0.74	$	2.07	$	1.97	$	0.86	$	0.61
Diluted	$	0.76	$	0.73	$	2.06	$	1.96		0.86		0.60

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

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NOTE 8. DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGING ACTIVITIES

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

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

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

The following tables present information about derivative assets and liabilities at ~~September 30, 2022~~March 31, 2023 and December 31, ~~2021:~~2022:


	September 30, 2022							March 31, 2023
			Weighted							Weighted
	Notional		Average		Fair Value		Location Fair	Notional		Average		Fair Value		Location Fair
	Amount		Maturity		Asset (Liability)		Value Asset	Amount		Maturity		Asset (Liability)		Value Asset
	(in thousands)		(in years)		(in thousands)		(Liability)	(in thousands)		(in years)		(in thousands)		(Liability)
Cash flow hedges:
Interest rate swap on wholesale fundings	$	75,000		2.3	$	5,153	Other assets	$	75,000		1.8	$	4,184	Other assets
Interest rate swap on variable rate loans		50,000		3.5		(5,289)	Other liabilities		50,000		3.0		(4,170)	Other liabilities
Total cash flow hedges		125,000				(136)			125,000				14

Fair value hedges:
Interest rate swap on securities		37,190		6.8		5,017	Other assets		37,190		6.3		3,952	Other assets
Total fair value hedges		37,190				5,017			37,190				3,952

Economic hedges:
Forward sale commitments		200		—		8	Other assets
Customer Loan Swaps-MNA Counterparty		193,743		6.0		(21,795)	Other liabilities		192,269		5.5		(16,375)	Other liabilities
Customer Loan Swaps-RPA Counterparty		110,317		6.3		—	Other liabilities		112,836		5.7		(23)	Other liabilities
Customer Loan Swaps-Customer		304,060		6.1		21,795	Other assets		305,105		5.6		16,398	Other assets
Total economic hedges		608,320				8			610,210				—

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

Total	$	770,510			$	4,889		$	772,952			$	3,974

~~Table of Contents~~

December 31, 2021

Weighted

Notional

Average

Fair Value

Location Fair

Amount

Maturity

Asset (Liability)

Value Asset


(in thousands)

(in years)

(in thousands)

(Liability)
Cash flow hedges:







Interest rate swap on wholesale fundings

$
75,000

3.0

$
(121)

Other liabilities
Interest rate swap on variable rate loans

50,000

4.2

(756)

Other liabilities
Total cash flow hedges

125,000

(877)

Fair value hedges:

Interest rate swap on securities

37,190

7.6

(530)

Other liabilities
Total fair value hedges

37,190

(530)

Economic hedges:

Forward sale commitments

16,600

0.1

15

Other assets
Customer Loan Swaps-MNA Counterparty

260,102

6.2

(9,429)

Other liabilities
Customer Loan Swaps-RPA Counterparty

115,285

6.7

(4,421)

Other liabilities
Customer Loan Swaps-Customer

375,387

6.4

13,850

Other assets
Total economic hedges

767,374

15

Non-hedging derivatives:

Interest rate lock commitments

14,059

0.1

283

Other assets
Total non-hedging derivatives

14,059

283

Total

$
943,623

$
(1,109)

~~As of September 30, 2022 and December~~ 31 ~~2021, the following amounts were recorded on the balance sheet related to cumulative basis adjustments for fair value hedges:~~

Cumulative Amount of Fair

Location of Hedged Item on

Carrying Amount of Hedged

Value Hedging Adjustment in


Balance Sheet

Assets

Carrying Amount
September 30, 2022






Interest rate swap on securities

Securities Available for Sale

$
27,993

$
(9,197)

December 31, 2021






Interest rate swap on securities

Securities Available for Sale

$
39,726

$
2,536

Table of Contents


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

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

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

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

Total	$	774,019			$	4,811

~~Information about derivative assets and liabilities for the three and nine months eneded September 30, 2022 and 2021, follows:~~

Three Months Ended September 30, 2022


Amount of



Amount of




Gain (Loss)

Gain (Loss)

Recognized in

Reclassified

Location of

Amount of

Other

Location of Gain (Loss)

from Other

Gain (Loss)

Gain (Loss)

Comprehensive

Reclassified from Other

Comprehensive

Recognized in

Recognized
(in thousands)

Income

Comprehensive Income

Income

Income

in Income
Cash flow hedges:










Interest rate swap on wholesale funding

$
1,262

Interest expense

$
—

Interest expense

$
140
Interest rate swap on variable rate loans

(1,181)

Interest income

—

Interest income

(238)
Total cash flow hedges

81

—



(98)

Fair value hedges:










Interest rate swap on securities

(1,287)

Interest income

—

Interest income

155
Total fair value hedges

(1,287)

—



155

Economic hedges:










Forward commitments

—

Other income

—

Mortgage banking income

19
Total economic hedges

—

—



19

Non-hedging derivatives:










Interest rate lock commitments

—

Other expense

—

Mortgage banking income

(50)
Total non-hedging derivatives

—

—



(50)

Total

$
(1,206)

$
—



$
26

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


				Cumulative Amount of Fair
	Location of Hedged Item on	Carrying Amount of Hedged		Value Hedging Adjustment in
	Balance Sheet	Assets		Carrying Amount
March 31, 2023
Interest rate swap on securities	Securities Available for Sale	$	31,658	$	(5,532)

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

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Table of Contents

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


	Nine Months Ended September 30, 2022								Three Months Ended March 31, 2023
	Amount of			Amount of					Amount of			Amount of
	Gain (Loss)			Gain (Loss)					Gain (Loss)			Gain (Loss)
	Recognized in			Reclassified		Location of	Amount of		Recognized in			Reclassified		Location of	Amount of
	Other		Location of Gain (Loss)	from Other		Gain (Loss)	Gain (Loss)		Other		Location of Gain (Loss)	from Other		Gain (Loss)	Gain (Loss)
	Comprehensive		Reclassified from Other	Comprehensive		Recognized in	Recognized		Comprehensive		Reclassified from Other	Comprehensive		Recognized in	Recognized
(in thousands)	Income		Comprehensive Income	Income		Income	in Income		Income		Comprehensive Income	Income		Income	in Income
Cash flow hedges:
Interest rate swap on wholesale funding	$	4,058	Interest expense	$	—	Interest expense	$	(1)	$	(610)	Interest expense	$	—	Interest expense	$	664
Interest rate swap on variable rate loans		(3,489)	Interest income		—	Interest income		(239)		592	Interest income		—	Interest income		(466)
Total cash flow hedges		569			—			(240)		(18)			—			198

Fair value hedges:
Interest rate swap on securities		(4,761)	Interest income		—	Interest income		(48)		607	Interest income		—	Interest income		286
Total fair value hedges		(4,761)			—			(48)		607			—			286

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

Non-hedging derivatives:
Interest rate lock commitments		—	Other income		—	Mortgage banking income		(283)		—	Other expense		—	Mortgage banking income		8
Total non-hedging derivatives		—			—			(283)		—			—			8

Total	$	(4,192)		$	—		$	(578)	$	589		$	—		$	492

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Table of Contents

Three Months Ended September 30, 2021


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

$
167

Interest expense

$
—

Interest expense

$
(205)
Interest rate swap on variable rate loans

(101)

Interest income

Interest income

92
Total cash flow hedges

66

—

(113)

Fair value hedges:










Interest rate swap on securities

(221)

Interest income

—

Interest income

(144)
Total economic hedges

(221)

—



(144)

Economic hedges:










Forward commitments

—

Other income

—

Mortgage banking income

(96)
Total economic hedges

—

—



(96)

Non-hedging derivatives:










Interest rate lock commitments

—

Other income

—

Mortgage banking income

22
Total non-hedging derivatives

—

—



22

Total

$
(155)



$
—



$
(331)


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

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

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

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

Total	$	(1,448)		$	—		$	(334)

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Nine Months Ended September 30, 2021


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⁽¹⁾

Comprehensive Income

Income

Income

in Income
Cash flow hedges:










Interest rate swap on wholesale funding

$
1,148

Interest expense

$
—

Interest expense

$
(589)
Interest rate swap on variable rate loans

(93)

Interest income

Interest income

189
Total cash flow hedges

1,055

—

(400)

Fair value hedges:










Interest rate swap on securities

720

Interest income

—

Interest income

(421)
Total economic hedges

720

—



(421)

Economic hedges:










Forward commitments

—

Other income

—

Mortgage banking income

(45)
Total economic hedges

—

—



(45)

Non-hedging derivatives:










Interest rate lock commitments

—

Other income

—

Mortgage banking income

26
Total non-hedging derivatives

—

—



26

Total

$
1,775



$
—



$
(840)

~~Table of Contents~~

The effect of cash flow hedging and fair value accounting on the consolidated statements of income for the three ~~and nine~~ months ended ~~September 30, 2022~~March 31, 2023 and ~~2021:~~2022:


	Three Months Ended September 30, 2022										Three Months Ended March 31, 2023
	Interest and Dividend Income				Interest Expense						Interest and Dividend Income				Interest Expense
(in thousands)	Loans		Securities and other		Deposits		Borrowings		Non-interest Income		Loans		Securities and other		Deposits		Borrowings		Non-interest Income
Income and expense line items presented in the consolidated statements of income	$	27,940	$	5,145	$	1,801	$	1,374	$	8,823	$	34,560	$	5,791	$	5,265	$	4,180	$	9,184

The effects of cash flow and fair value hedging:

Gain (loss) on cash flow hedges:
Interest rate swap on wholesale funding		—		—		—		140		—		—		—		—		664		—
Interest rate swap on variable rate loans		(238)		—		—		—		—		(466)		—		—		—		—

Gain (loss) on fair value hedges:
Interest rate swap on securities		—		155		—		—		—		—		286		—		—		—

	Three Months Ended September 30, 2021										Three Months Ended March 31, 2022
	Interest and Dividend Income				Interest Expense						Interest and Dividend Income				Interest Expense
(in thousands)	Loans		Securities and other		Deposits		Borrowings		Non-interest Income		Loans		Securities and other		Deposits		Borrowings		Non-interest Income
Income and expense line items presented in the consolidated statements of income	$	25,094	$	3,821	$	1,555	$	1,778	$	11,350	$	22,671	$	3,826	$	1,189	$	1,010	$	9,309

The effects of cash flow and fair value hedging:

Gain (loss) on cash flow hedges:
Interest rate swap on wholesale funding		—		—		—		(205)		—		—		—		—		(113)		—
Interest rate swap on variable rate loans		92		—		—		—		—		16		—		—		—		—

Gain (loss) on fair value hedges:
Interest rate swap on securities		—		(144)		—		—		—		—		(135)		—		—		—

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

Nine Months Ended September 30, 2022

Interest and Dividend Income

Interest Expense

(in thousands)

Loans

Securities and other

Deposits

Borrowings

Non-interest Income
Income and expense line items presented in the consolidated statements of income

$
75,192

$
13,178

$
4,185

$
3,458

$
27,093






The effects of cash flow and fair value hedging:






Gain (loss) on cash flow hedges:

Interest rate swap on wholesale funding

—

—

—

(1)

—
Interest rate swap on variable rate loans

(239)

—

—

—

—






Gain (loss) on fair value hedges:




Interest rate swap on securities

—

(48)

—

—

—

Nine Months Ended September 30, 2021

Interest and Dividend Income

Interest Expense

(in thousands)

Loans

Securities and other

Deposits

Borrowings

Non-interest Income
Income and expense line items presented in the consolidated statements of income

$
72,490

11,792

$
7,109

5,415

$
31,103






The effects of cash flow and fair value hedging:






Gain (loss) on cash flow hedges:

Interest rate swap on wholesale funding

—

—

—

(589)

—
Interest rate swap on variable rate loans

189

—

—

—

—






Gain (loss) on fair value hedges:




Interest rate swap on securities

—

(421)

—

—

—


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

~~Table of Contents~~

Cash flow hedges

Interest rate swaps on wholesale funding

As of ~~September 30, 2022,~~March 31, 2023, we have two interest rate swaps on wholesale borrowings to limit our exposure to rising interest rates over a five-year term on 3-month FHLB borrowings or brokered certificates, or a combination thereof at each maturity date. The first of the two agreements was entered into in November 2019 with a $50.0 million notional amount and pays a fixed interest rate of 1.53%. A second agreement was entered into in April 2020 with a $25.0 million notional amount and pays a fixed rate of 0.59%. The financial institution counterparty pays us interest on the three-month LIBOR rate. We designated the swaps as cash flow hedges.

Interest rate swap on variable rate loans

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

Fair value hedges

Interest rate swap on securities

For derivative instruments that are designated and qualify as a fair value hedge, the gain or loss on the derivative instrument as well as the offsetting loss or gain on the hedged asset or liability attributable to the hedged risk are recognized in current earnings. We utilize interest rate swaps designated as fair value hedges to mitigate the effect of changing interest rates on the fair values of fixed rate callable securities available-for-sale. The hedging strategy on securities converts the fixed interest rates to LIBOR-based variable interest rates. These derivatives are designated as partial term hedges of selected cash flows covering specified periods of time prior to the call dates of the hedged securities. During 2019, we entered into eight swap transactions with a notional amount of $37.2 million designated as fair value hedges. These derivatives are intended to protect against the effects of changing interest rates on the fair values of fixed rate securities. The fixed rates on the transactions have a weighted average of 1.696%.

Economic hedges

Forward sale commitments

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

Customer loan derivatives

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

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


	Gross Amounts Offset in the Consolidated Balance Sheet								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 September 30, 2022
As of March 31, 2023
Customer Loan Derivatives:
MNA counterparty	$	(21,795)	$	21,795	$	—	$	—	$	(16,375)	$	16,375	$	—	$	—
RPA counterparty		—		—		—		—		(23)		23		—		—
Total	$	(21,795)	$	21,795	$	—	$	—	$	(16,398)	$	16,398	$	—	$	—


	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 December 31, 2021
As of December 31, 2022
Customer Loan Derivatives:
MNA counterparty	$	(9,429)	$	9,429	$	12,000	$	12,000	$	(20,287)	$	20,287	$	—	$	—
RPA counterparty		(4,421)		4,421		—		—		—		—		—		—
Total	$	(13,850)	$	13,850	$	12,000	$	12,000	$	(20,287)	$	20,287	$	—	$	—

Non-hedging derivatives

Interest rate lock commitments

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

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NOTE 9. FAIR VALUE MEASUREMENTS

Recurring Fair Value Measurements

The following table summarizes financial assets and financial liabilities measured at fair value on a recurring basis as of ~~September 30, 2022~~March 31, 2023 and December 31, ~~2021,~~2022, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value:


	September 30, 2022								March 31, 2023
	Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3		Total
(in thousands)	Inputs		Inputs		Inputs		Fair Value		Inputs		Inputs		Inputs		Fair Value
Available for sale securities:
Mortgage-backed securities:
US Government-sponsored enterprises	$	—	$	216,024	$	—	$	216,024	$	—	$	214,300	$	—	$	214,300
US Government agency		—		83,526		—		83,526		—		80,938		—		80,938
Private label		—		66,769		—		66,769		—		58,500		—		58,500
Obligations of states and political subdivisions thereof		—		104,652		—		104,652		—		111,165		—		111,165
Corporate bonds		—		85,781		—		85,781		—		92,137		—		92,137
Loans held for sale		—		982		—		982		—		463		—		463
Derivative assets		—		31,964		8		31,972		—		24,534		8		24,542
Derivative liabilities		—		(27,084)		—		(27,084)		—		(20,568)		—		(20,568)


	December 31, 2021								December 31, 2022
	Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3		Total
(in thousands)	Inputs		Inputs		Inputs		Fair Value		Inputs		Inputs		Inputs		Fair Value
Available for sale securities:
Mortgage-backed securities:
US Government-sponsored enterprises	$	—	$	236,117	$	—	$	236,117	$	—	$	215,027	$	—	$	215,027
US Government agency		—		79,637		—		79,637		—		82,266		—		82,266
Private label		—		68,695		—		68,695		—		60,154		—		60,154
Obligations of states and political subdivisions thereof		—		141,776		—		141,776		—		107,737		—		107,737
Corporate bonds		—		92,051		—		92,051		—		94,332		—		94,332
Loans held for sale		—		5,523		—		5,523		—		—		—		—
Derivative assets		—		13,850		298		14,148		—		30,039		—		30,039
Derivative liabilities		—		(15,257)		—		(15,257)		—		(25,228)		—		(25,228)

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

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

Derivative Assets and Liabilities

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

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

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

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

Although we have determined that the majority of the inputs used to value customer loan derivatives fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with derivatives utilize Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default by itself and counterparties. However, as of ~~September 30, 2022,~~March 31, 2023, we assessed the significance of the impact of the credit valuation adjustments on the overall valuation of our derivative positions and determined that the credit valuation adjustments are not significant to the overall valuation of our derivatives. As a result, we determined that the derivative valuations in their entirety are classified in Level 2 of the fair value hierarchy.

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


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

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

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~~The table below presents the changes in Level 3 assets and liabilities that were measured at fair value on a recurring basis for the three and nine months ended September 30, 2022 and 2021:~~

Assets (Liabilities)

Interest Rate Lock

Forward
(in thousands)

Commitments

Commitments
Three Months Ended September 30, 2022





Balance at beginning of period

$
50

$
(11)
Realized gain (loss) recognized in non-interest income

(50)

19
Balance at end of period

$
—

$
8

Three Months Ended September 30, 2021





Balance at beginning of period

$
25

$
(45)
Realized (loss) gain recognized in non-interest income

22

(95)
Balance at end of period

$
47

$
(140)

Nine Months Ended September 30, 2022




Balance at beginning of period

$
283

$
15
Realized loss recognized in non-interest income

(283)

(7)
Balance at end of period

$
—

$
8

Nine Months Ended September 30, 2021




Balance at beginning of period

$
22

$
(95)
Realized gain recognized in non-interest income

25

(45)
Balance at end of period

$
47

$
(140)

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

Fair Value

Significant

Fair Value

September 30,

Valuation

Unobservable

(in thousands, except ratios)

2022

Techniques

Inputs

Input Value

(in thousands,

March 31,

Valuation

Unobservable

except ratios)

2023

Techniques

Inputs

Input Value

Assets (Liabilities)

Interest Rate Lock Commitment

—

Pull-through Rate Analysis

Closing Ratio

—

Pull-through Rate Analysis

Closing Ratio

Pricing Model

Origination Costs, per loan

—

Pricing Model

Origination Costs, per loan

1.7

Discount Cash Flows

Mortgage Servicing Asset

—

Discount Cash Flows

Mortgage Servicing Asset

1.0

Forward Commitments

Quoted prices for similar loans in active markets

Freddie Mac pricing system

$97.2 to $101.4

Total

Fair Value

Significant

December 31,

Valuation

Unobservable

(in thousands, except ratios)

2021

Techniques

Inputs

Input Value

Assets (Liabilities)

Interest Rate Lock Commitment

283

Pull-through Rate Analysis

Closing Ratio

Pricing Model

Origination Costs, per loan

1.7

Discount Cash Flows

Mortgage Servicing Asset

1.0

Forward Commitments

Quoted prices for similar loans in active markets

Freddie Mac pricing system

$99.8 to $103.2

Total

298

~~Table of Contents~~

Non-Recurring Fair Value Measurements

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



	September 30, 2022		December 31, 2021		Three Months Ended September 30, 2022		Nine Months Ended September 30, 2022		Fair Value Measurement Date as of September 30, 2022	March 31, 2023		December 31, 2022		March 31, 2023		Fair Value Measurement Date as of March 31, 2023
	Level 3		Level 3		Total		Total		Level 3	Level 3		Level 3		Total		Level 3
(in thousands)	Inputs		Inputs		Gains (Losses)		Gains (Losses)		Inputs	Inputs		Inputs		Gains (Losses)		Inputs
Assets
Individually evaluated loans	$	15,388	$	17,932	$	1,778	$	(2,544)	September 2022	$	15,513	$	16,477	$	(964)	March 2023
Capitalized servicing rights		7,127		5,263		84		1,864	September 2022		6,570		6,845		(275)	March 2023
Premises held for sale		327		226		—		101	February 2022		252		252		—	March 2023
Total	$	22,842	$	23,421	$	1,862	$	(579)		$	22,335	$	23,574	$	(1,239)

There are no liabilities measured at fair value on a non-recurring basis in ~~2022~~2023 and ~~2021.~~2022.

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

(in thousands, except ratios)

Fair Value September 30, 2022

Valuation Techniques

Unobservable Inputs

Range (Weighted Average)^(a)

Fair Value March 31, 2023

Valuation Techniques

Unobservable Inputs

Range (Weighted Average)^(a)

Assets

Individually evaluated loans

10,903

Fair value of collateral-appraised value

Loss severity

10% to 70%

11,945

Fair value of collateral-appraised value

Loss severity

10% to 70%

Appraised value

$80 to $1,175

Appraised value

$80 to $2,941

Individually evaluated loans

4,485

Discount cash flow

Discount rate

2.88% to 6.45%

3,568

Discount cash flow

Discount rate

3.38% to 6.38%

Cash flows

$4 to $925

Cash flows

$3 to $707

Capitalized servicing rights

7,127

Discounted cash flow

Constant prepayment rate (CPR)

7.10%

6,570

Discounted cash flow

Constant prepayment rate

7.19%

Discount rate

9.54%

Discount rate

9.54%

Premises held for sale

327

Fair value of asset less selling costs

Appraised value

$347

252

Fair value of asset less selling costs

Appraised value

$267

Selling Costs

Total

22,842

22,335

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

(in thousands, except ratios)

Fair Value December 31, 2021

Valuation Techniques

Unobservable Inputs

Range (Weighted Average)^(a)

Fair Value December 31, 2022

Valuation Techniques

Unobservable Inputs

Range (Weighted Average)^(a)

Assets

Individually evaluated loans

12,127

Fair value of collateral-appraised value

Loss severity

10% to 70%

13,587

Fair value of collateral-appraised value

Loss severity

1% to 40%

Appraised value

$71 to $1,792

Appraised value

$80 to $3,859

Individually evaluated loans

5,805

Discount cash flow

Discount rate

2.88% to 9.50%

2,890

Discount cash flow

Discount rate

3.63% to 6.38%

Cash flows

$6 to $931

Cash flows

$100 to $539

Capitalized servicing rights

5,263

Discounted cash flow

Constant prepayment rate (CPR)

12.47%

6,845

Discounted cash flow

Constant prepayment rate

7.29%

Discount rate

9.53%

Discount rate

9.54%

Premises held for sale

226

Fair value of asset less selling costs

Appraised value

$240

252

Fair value of asset less selling costs

Appraised value

$267

Selling Costs

Total

23,421

23,574

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

There were no Level 1 or Level 2 non-recurring fair value measurements for the periods ended ~~September 30, 2022~~March 31, 2023 and December 31, ~~2021.~~2022.

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

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

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

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

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Summary of Estimated Fair Values of Financial Instruments

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


	September 30, 2022										March 31, 2023
	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	$	82,065	$	82,065	$	82,065	$	—	$	—	$	82,702	$	82,702	$	82,702	$	—	$	—
Securities available for sale		556,752		556,752		—		556,752		—		557,040		557,040		—		557,040		—
FHLB stock		9,035		9,035		—		9,035		—		15,718		15,718		—		15,718		—
Loans held for sale		987		982		—		982		—		463		463		—		463		—
Net loans		2,850,364		2,783,612		—		—		2,783,612		2,917,398		2,789,397		—		—		2,789,397
Accrued interest receivable		4,053		4,053		—		4,053		—		4,747		4,747		—		4,747		—
Cash surrender value of bank-owned life insurance policies		80,758		80,758		—		80,758		—		78,436		8,436		—		8,436		—
Derivative assets		31,973		31,973		—		31,973		8		24,542		24,542		—		24,534		8

Financial Liabilities
Non-maturity deposits	$	2,801,432	$	2,616,000	$	—	$	2,616,000	$	—	$	2,649,568	$	2,306,918	$	—	$	2,306,918	$	—
Time deposits		334,248		330,059		—		330,059		—		404,246		395,594		—		395,594		—
Securities sold under agreements to repurchase		18,916		18,916		—		18,916		—		12,733		12,733		—		12,733		—
FHLB advances		169,841		169,459		—		169,459		—		325,511		325,334		—		325,334		—
Subordinated borrowings		60,248		57,744		—		57,744		—		60,330		66,981		—		66,981		—
Derivative liabilities		27,084		27,084		—		27,084		—		20,568		20,568		—		20,568		—


	December 31, 2021										December 31, 2022
	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	$	250,389	$	250,389	$	250,389	$	—	$	—	$	92,295	$	92,295	$	92,295	$	—	$	—
Securities available for sale		618,276		618,276		—		618,276		—		559,516		559,516		—		559,516		—
FHLB stock		7,384		7,384		—		7,384		—		14,893		14,893		—		14,893		—
Loans held for sale		5,523		5,523		—		5,523		—		—		—		—		—		—
Net loans		2,509,192		2,442,741		—		—		2,442,741		2,902,690		2,774,863		—		—		2,774,863
Accrued interest receivable		2,712		2,712		—		2,712		—		4,257		4,257		—		4,257		—
Cash surrender value of bank-owned life insurance policies		79,020		79,020		—		79,020		—		81,197		81,197		—		81,197		—
Derivative assets		14,148		14,148		—		13,850		298		30,039		30,039		—		30,039		—

Financial Liabilities
Non-maturity deposits	$	2,623,012	$	2,853,000	$	—	$	2,853,000	$	—	$	2,719,992	$	2,309,555	$	—	$	2,309,555	$	—
Time deposits		425,532		424,000		—		424,000		—		323,439		315,180		—		315,180		—
Securities sold under agreements to repurchase		19,802		19,802		—		19,802		—		13,369		13,369		—		13,369		—
FHLB advances		98,598		98,439		—		98,439		—		320,588		320,244		—		320,244		—
Subordinated borrowings		60,124		61,884		—		61,884		—		60,289		66,846		—		66,846		—
Derivative liabilities		15,257		15,257		—		15,257		—		25,228		25,228		—		25,228		—

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NOTE 10. REVENUE FROM CONTRACTS WITH CUSTOMERS

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

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

Disaggregation of Revenue

The following ~~tables present disaggregation~~presents non-interest income, segregated by revenue streams in-scope and out-of-scope of ~~our non-interest revenue by major business line and timing of revenue recognition for the transfer of products or services:~~Topic 606:


	Three Months Ended September 30,				Nine Months Ended September 30,				Three Months Ended March 31,
(in thousands)	2022		2021		2022		2021		2023		2022
Major Products/Service Lines
Non-interest income within the scope of ASC 606:
Trust management fees	$	3,077	$	3,403	$	9,941	$	10,052	$	3,091	$	3,403
Financial services fees		471		465		1,190		1,283		464		351
Interchange fees		1,953		1,882		5,849		5,509		2,010		1,973
Customer deposit fees		1,578		1,363		4,418		3,542		1,429		1,372
Other customer service fees		305		270		841		691		238		271
Total	$	7,384	$	7,383	$	22,239	$	21,077
Total non-interest income within the scope of ASC 606										7,232		7,370
Total non-interest income not within the scope of ASC 606										1,952		1,939
Total non-interest income									$	9,184	$	9,309


	Three Months Ended September 30,				Nine Months Ended September 30,				Three Months Ended March 31,
(in thousands)	2022		2021		2022		2021		2023		2022
Timing of Revenue Recognition
Products and services transferred at a point in time	$	4,020	$	3,737	$	11,755	$	10,593	$	3,950	$	3,757
Products and services transferred over time		3,364		3,646		10,484		10,484		3,282		3,613
Total	$	7,384	$	7,383	$	22,239	$	21,077	$	7,232	$	7,370

Trust Management Fees

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

Financial Services Fees

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

Interchange Fees

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

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Customer Deposit Fees

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

Other Customer Service Fees

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

Contract Balances from Contracts with Customers

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



(in thousands)	September 30, 2022		December 31, 2021		March 31, 2023		December 31, 2022
Balances from contracts with customers only:
Other Assets	$	1,325	$	1,184	$	1,121	$	1,211
Other Liabilities		2,535		2,324		2,285		2,345

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

Costs to Obtain and Fulfill a Contract

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

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~~NOTE 11. 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. Most of our leases are for branches, ATM locations, and office space and have terms extending through 2040. All leases are classified as operating leases, and are recognized on the consolidated balance sheets as a right- of-use (“ROU”) asset with a corresponding lease liability.

~~The following table presents the consolidated statements of condition classification of the ROU assets and lease liabilities:~~

(in thousands)

Classification

September 30, 2022

December 31, 2021
Lease Right-of-Use Assets




Operating lease right-of-use assets

Other assets

$
8,381

$
9,274

Lease Liabilities






Operating lease liabilities

Other liabilities

8,791

9,643

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 lease agreements often include one or more options to renew at our discretion. If at lease inception, we consider the exercising of a renewal option to be reasonably certain, we will include the extended term in the calculation of the ROU asset and lease liability.

~~The following table presents the weighted average lease term and discount rate of the leases:~~

September 30, 2022

December 31, 2021
Weighted-average remaining lease term (in years)





Operating leases

7.42

8.03

Weighted-average discount rate





Operating leases

3.09
%

3.07
%

The following table represents lease costs and other lease information. As we have 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

Nine Months Ended
(in thousands)

September 30, 2022

September 30, 2021

September 30, 2022

September 30, 2021
Lease Costs








Operating lease cost

$
338

$
324

$
994

$
966
Variable lease cost

71

43

345

179
Total lease cost

$
409

$
367

$
1,339

$
1,145

~~Table of Contents~~

~~Future minimum payments for operating leases with initial or remaining terms of one year or more as of September 30, 2022 are, as follows:~~

(in thousands)

Payments
Twelve Months Ended:

September 30, 2023

$
1,343
September 30, 2024

1,344
September 30, 2025

1,129
September 30, 2026

1,032
September 30, 2027

889
Thereafter

3,411
Total future minimum lease payments

9,148
Amounts representing interest

(357)
Present value of net future minimum lease payments

$
8,791

~~Table of Contents~~

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

~~GENERAL~~

The following is management’s discussion and analysis of the major factors that influenced our results of operations and financial condition as of and for the three ~~and nine~~ months ended ~~September 30, 2022~~March 31, 2023 and should be read in conjunction with our unaudited consolidated financial statements and condensed notes thereto included elsewhere in this Form 10-Q as well as our audited consolidated financial statements and notes thereto included in our ~~Annual Report on~~ Form ~~10-K for the fiscal year ended December 31, 2021.~~10-K. The following discussion contains "forward-looking statements" that reflect our future plans, estimates, beliefs and expected performance. We caution that assumptions, expectations, projections, intentions or beliefs about future events may, and often do, vary from actual results and the differences can be material. Please ~~see~~refer to "Cautionary Statement Regarding Forward-Looking Statements" and "Part II, Item 1A. Risk Factors." All amounts, dollars and percentages presented in this Form 10-Q are rounded and therefore approximate.

GENERAL

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

~~Bar Harbor Bankshares~~NON-GAAP FINANCIAL MEASURES ~~(the “Company,~~

Our accounting and reporting policies conform to GAAP and the prevailing practices in the financial services industry. However, we also evaluate our performance by reference to certain additional financial measures discussed in this Form 10-Q that we identify as being “non-GAAP financial measures.” ~~“we,” “our”~~In accordance with SEC rules, we classify a financial measure as being a non-GAAP financial measure if that financial measure excludes or ~~“us”~~includes amounts, or ~~similar terms)~~ is subject to adjustments that have the ~~parent company~~effect 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 regional community bank~~excluding or including amounts, that ~~thinks differently about banking. The Bank provides the technology offerings and capabilities of larger banks, accompanied by access to local decision makers who~~ are ~~acutely focused on their local markets. Having recently celebrated the 135th anniversary of the Bank’s founding, we remain focused on helping our customers achieve their goals~~included or excluded, as the ~~key~~case may be, in the most directly comparable measure calculated and presented in accordance with GAAP as in effect from time to time in the United States in our statements of income, balance sheets or statements of cash flows. Non-GAAP financial measures do not include operating and other statistical measures or ratios or statistical measures calculated using exclusively either financial measures calculated in accordance with GAAP, operating measures or other measures that are not non-GAAP financial measures or both.

The non-GAAP financial measures that we discuss in this Form 10-Q should not be considered in isolation or as a substitute for the most directly comparable or other financial measures calculated in accordance with GAAP. Moreover, the manner in which we calculate the non-GAAP financial measures that we discuss in this Form 10-Q may differ from that of other companies reporting measures with similar names. You should understand how such other banking organizations calculate their financial measures similar or with names similar to the ~~Bank’s success. With over 500 dedicated professionals~~non-GAAP financial measures we have discussed in this Form 10-Q when comparing such non-GAAP financial measures.

Recent Banking Crisis

In light of recent events in the banking sector, including recent bank failures, continuing interest rate hikes and ~~more than 50 locations,~~recessionary concerns, we ~~are committed~~continue to ~~servicing~~position our balance sheet to mitigate the risks affecting the Company and ~~building enduring relationships by providing a higher standard of banking. We offer a variety of financial products and services designed around our customers~~the overall banking industry in order to serve ~~their banking~~our clients and financial needs. Through these efforts, we continue to be a relationship-focused community bank, maintaining our credit quality and serving businesses, entrepreneurs and individuals within our footprint. Our corporate goal is to be one of the top performing banks in New England, and our business model is centered on the following:communities.

●

~~Employee~~Liquidity remains strong, with cash and ~~customer experience is~~available for sale securities representing approximately 17% of total assets at March 31, 2023. We maintain the ~~foundation~~ability to access considerable sources of ~~superior performance, which leads~~contingent liquidity at the FHLB and the FRB. We consider the Company's current liquidity position to ~~significant financial benefit~~be adequate to ~~shareholders~~

●

~~Geography, heritage,~~meet both short-term and ~~performance are key while remaining true~~long-term liquidity needs. Refer to ~~a community-focused culture~~“

●

~~Commitment to risk management while balancing growth~~Liquidity and ~~earnings~~

●

Cash Flows”~~Service and sales driven culture with a focus on core business growth~~

●

~~Fee income is fundamental to our profitability through trust and treasury management services, customer derivatives, and secondary market mortgage sales~~

●

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

●

~~Expansion of our brand and business to deepen market presence~~

●

~~Opportunity and growth~~ for ~~existing employees while adding catalyst recruits across all levels~~additional information.

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●

Capital remains strong, with ratios of the Company and the Bank remained well-capitalized under regulatory guidelines at period end as further described in Note 6 – “Capital Ratios and Shareholders’ Equity” on the Consolidated Financial Statements.

●

Asset quality remains solid, with a non-performing asset ratio of 0.20% of total assets as of March 31, 2023 and net charge-offs of 0.01% annualized for the period, reflecting our disciplined underwriting and conservative lending philosophy which has supported the Company's strong credit performance during prior financial crises.

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

QUARTERLY PERFORMANCE SUMMARY

Earnings (first quarter of ~~September 30, 2022:~~2023, compared to the same period of 2022)

●

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

●

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

●

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

●

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

●

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

●

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

●

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

●

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

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

●

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

●

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

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~~SELECTED FINANCIAL DATA~~

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

Three Months Ended

Nine Months Ended

September 30,

September 30,


2022

2021


2022

2021

PER SHARE DATA

Net earnings, diluted

$
0.76

$
0.73

$
2.07

$
1.97

Adjusted earnings, diluted⁽¹⁾

0.76

0.73

2.07

2.04

Total book value

25.22

27.92

25.22

27.92

Tangible book value per share⁽¹⁾

16.89

19.48

16.89

19.48

Market price at period end

26.52

28.05

26.52

28.05

Dividends

0.26

0.24

0.76

0.70

PERFORMANCE RATIOS⁽²⁾

Return on assets

1.20
%

1.16
%

1.11
%

1.05
%
Adjusted return on assets⁽¹⁾

1.20

1.16

1.12

1.09

Pre-tax, pre-provision return on assets

1.65

1.43

1.48

1.26

Adjusted pre-tax, pre-provision return on assets ⁽¹⁾

1.65

1.43

1.49

1.31

Return on equity

11.55

10.38

10.32

9.54

Adjusted return on equity⁽¹⁾

11.54

10.39

10.38

9.98

Return on tangible equity

17.25

15.08

15.28

14.01

Adjusted return on tangible equity⁽¹⁾

17.24

15.09

15.37

14.50

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

3.47

3.02

3.21

2.88

Adjusted net interest margin⁽¹⁾

3.47

2.75

3.21

2.73

Efficiency ratio⁽¹⁾

57.67

59.18

59.66

61.48

FINANCIAL DATA (In millions)

Total assets

$
3,840

$
3,738

$
3,840

$
3,738

Total earning assets⁽⁴⁾

3,525

3,394

3,525

3,394

Total investments

566

556

566

556

Total loans

2,850

2,534

2,850

2,534

Allowance for credit losses

25

22

25

22

Total goodwill and intangible assets

126

126

126

126

Total deposits

3,136

3,007

3,136

3,007

Total shareholders' equity

380

418

380

418

Net income

11

11

31

30

Adjusted income⁽¹⁾

11

11

31

31

ASSET QUALITY AND CONDITION RATIOS

Net charge-offs (recoveries) (annualized)/average loans

0.01
%

0.03
%

—
%

(0.02)
%
Allowance for credit losses/total loans

0.88

0.89

0.88

0.89

Loans/deposits

91

84

91

84

Shareholders' equity to total assets

9.89

11.19

9.89

11.19

Tangible shareholders' equity to total tangible assets⁽¹⁾

6.85

8.08

6.85

8.08

~~(1)~~

●

~~Non-GAAP financial measure. Refer~~Securities were $572.8 million, or 15% of total assets, compared to ~~the Reconciliation~~$574.4 million, or 16% of ~~Non-GAAP Financial Measures section~~total assets. Net unrealized losses improved to $65.8 million from $71.8 million as prevailing market rates for similar duration securities decreased from year-end. Our securities portfolio is highly liquid and is comprised of ~~the~~ ~~“Management’s Discussion and Analysis of Financial Condition and Results of Operations,”~~ ~~in this Form 10-Q for additional information.~~

~~(2)~~

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

~~(3)~~

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

~~(4)~~

~~Earning assets includes non-accruing loans and securities are valued at amortized cost.~~shorter-term duration securities.

~~Table of Contents~~

●

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

~~CONSOLIDATED LOAN AND DEPOSIT ANALYSIS~~

●

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

~~The following tables present the quarterly trend in loan and deposit data and accompanying growth rates as of September 30, 2022 on an annualized basis:~~

●

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

~~LOAN ANALYSIS~~

●

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

Annualized

Growth %

Quarter

Year
(in thousands, except ratios)

Sep 30, 2022

Jun 30, 2022

Mar 31, 2022

Dec 31, 2021

Sep 30, 2021

to Date

to Date
Commercial real estate

$
1,421,962

$
1,331,860

$
1,289,968

$
1,210,580

$
1,170,372

27
%

23
%
Commercial and industrial

376,624

360,304

346,394

340,129

331,091

18

14

Paycheck Protection Program (PPP)

—

170

1,126

6,669

24,227

*

*

Total commercial loans

1,798,586

1,692,334

1,637,488

1,557,378

1,525,690

25

21

Total commercial loans, excluding PPP

1,798,586

1,692,164

1,636,362

1,550,709

1,501,463

25

21

Residential real estate

896,618

876,644

868,382

821,004

849,692

9

12

Consumer

100,822

100,816

96,876

98,949

100,933

—

3

Tax exempt and other

54,338

57,480

51,816

54,579

57,839

(22)

(1)

Total loans

$
2,850,364

$
2,727,274

$
2,654,562

$
2,531,910

$
2,534,154

18
%

17
%

*Indicates ratios of 100% or greater.

~~DEPOSIT ANALYSIS~~

Annualized

Growth %

Quarter

Year
(in thousands, except ratios)

Sep 30, 2022

Jun 30, 2022

Mar 31, 2022

Dec 31, 2021

Sep 30, 2021

to Date

to Date
Demand

$
700,218

$
670,268

$
653,471

$
664,420

$
664,395

18
%

7
%
NOW

918,822

883,239

918,768

940,631

888,021

16

(3)

Savings

669,317

663,676

658,834

628,670

605,977

3

9

Money market

513,075

499,456

424,750

389,291

379,651

11

42

Total non-maturity deposits

2,801,432

2,716,639

2,655,823

2,623,012

2,538,044

12

9

Total time deposits

334,248

361,906

391,940

425,532

469,221

(31)

(29)

Total deposits

$
3,135,680

$
3,078,545

$
3,047,763

$
3,048,544

$
3,007,265

7
%

4
%

~~Table of Contents~~

~~AVERAGE BALANCES AND AVERAGE YIELDS/RATES~~

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

Three Months Ended September 30,

2022

2021

Average

Average

(in thousands, except ratios)

Balance

Interest⁽³⁾

Yield/Rate⁽³⁾


Balance

Interest⁽³⁾

Yield/Rate⁽³⁾

Assets













Interest-earning deposits with other banks

$
59,556

$
320

2.13
%

$
284,429

$
110

0.15
%
Securities available for sale and FHLB stock⁽²⁾⁽³⁾

642,475

5,058

3.12

610,381

3,986

2.59

Loans:

Commercial real estate

1,351,599

14,510

4.26

1,153,813

10,269

3.53

Commercial and industrial

421,963

4,739

4.46

391,191

3,739

3.79

Paycheck protection program

94

—

—

45,835

2,690

23.28

Residential

882,158

7,676

3.45

824,686

7,574

3.64

Consumer

101,175

1,161

4.55

101,545

968

3.78

Total loans ⁽¹⁾

2,756,989

28,086

4.04

2,517,070

25,240

3.98

Total earning assets

3,459,020

33,464

3.84
%

3,411,880

29,336

3.41
%
Other assets

313,289



352,208



Total assets

$
3,772,309



$
3,764,088



Liabilities













NOW

$
905,668

$
366

0.16
%

$
860,206

$
272

0.13
%
Savings

668,255

143

0.08

591,440

124

0.08

Money market

491,683

808

0.65

381,755

115

0.12

Time deposits

349,787

485

0.55

471,934

1,044

0.88

Total interest bearing deposits

2,415,393

1,802

0.30

2,305,335

1,555

0.27

Borrowings

202,296

1,374

2.69

334,097

1,778

2.11

Total interest bearing liabilities

2,617,689

3,176

0.48
%

2,639,432

3,333

0.50
%
Non-interest bearing demand deposits

690,134





641,769



Other liabilities

71,934





61,436



Total liabilities

3,379,757





3,342,637



Total shareholders' equity

392,552





421,451



Total liabilities and shareholders' equity

$
3,772,309





$
3,764,088





Net interest spread





3.36
%





2.91
%
Net interest margin

3.47





3.02

Adjusted net interest margin⁽⁴⁾





3.47

2.75

~~(1)~~

●

~~The average balances~~Total book value per share was $27.00 compared to $26.09. Net income less dividends during the first quarter 2023 increased our book value per share by $0.60 and the improved valuation of ~~loans include non-accrual loans and unamortized deferred fees and costs.~~

~~(2)~~

~~The average balance for~~our securities ~~available for sale is based on amortized cost.~~

~~(3)~~

~~Fully taxable equivalent considers the impact of tax-advantaged securities and loans.~~

~~(4)~~

~~Adjusted net interest margin excludes PPP loans.~~portfolio contributed $0.30 per share.

~~Table~~We are honored and proud to be recognized by Forbes as one of ~~Contents~~

Nine Months Ended September 30,

2022

2021

Average

Interest

Yield/

Average

Interest

Yield/
(in millions, except ratios)

Balance

⁽³⁾

Rate⁽³⁾

Balance

⁽³⁾

Rate⁽³⁾
Assets

Interest-earning deposits with other banks

$
86,390

$
503

0.78
%

$
229,235

$
203

0.12
%
Securities available for sale and FHLB stock⁽²⁾⁽³⁾

630,679

13,297

2.82

617,373

12,424

2.69

Loans:

Commercial real estate

1,306,664

37,765

3.86

1,128,134

30,177

3.58

Commercial and industrial⁽³⁾

408,620

11,871

3.88

381,753

10,727

3.76

Paycheck protection program

4,676

223

6.39

62,562

5,058

10.81

Residential

865,259

22,801

3.52

861,629

24,145

3.75

Consumer

99,673

2,943

3.95

105,371

2,833

3.59

Total loans ⁽¹⁾

2,684,892

75,603

3.76

2,539,449

72,940

3.84

Total earning assets

3,401,961

89,403

3.51
%

3,386,057

85,567

3.38
%
Other assets

323,253



357,334



Total assets

$
3,725,214



$
3,743,391



Liabilities













NOW

$
909,793

$
984

0.14
%

$
801,292

$
760

0.13
%
Savings

655,727

418

0.09

568,726

431

0.10

Money market

455,645

1,139

0.33

376,775

354

0.13

Time deposits

376,496

1,645

0.58

583,529

5,565

1.28

Total interest bearing deposits

2,397,661

4,186

0.23

2,330,322

7,110

0.41

Borrowings

187,629

3,458

2.46

336,432

5,415

2.15

Total interest bearing liabilities

2,585,290

7,644

0.40
%

2,666,754

12,525

0.63
%
Non-interest bearing demand deposits

671,490





598,434





Other liabilities

66,298





64,360





Total liabilities

3,323,078





3,329,548





Total shareholders' equity

402,136





413,843





Total liabilities and shareholders' equity

$
3,725,214





$
3,743,391





Net interest spread

3.12
%

2.75
%
Net interest margin





3.21





2.88

Adjusted net interest margin⁽⁴⁾

3.21

2.73

~~(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.~~

~~(4)~~

~~Adjusted net interest margin excludes PPP loans.~~

~~Table~~the “World’s Best Banks” in the first quarter of ~~Contents~~

~~NON-GAAP FINANCIAL MEASURES~~2023, based largely on service and trust metrics. Of the 75 U.S.-based banks to make the list, Bar Harbor Bank & Trust is one of only three banks headquartered in Northern New England. We believe that this recognition is a reflection of our customers’ experience with us and their trust in Bar Harbor Bank & Trust.

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, or 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 our 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 our results for any particular quarter or year. Our non-GAAP adjusted earnings information set forth is not necessarily comparable to non-GAAP information that may be presented by other companies. Each non-GAAP measure used by us in this report as supplemental financial data should be considered in conjunction with our GAAP financial information. In addition, our non-GAAP financial measures may not be comparable to similarly titled measures of other companies because such measures may include or exclude other specified items.

We use the non-GAAP measure of adjusted earnings in evaluating operating trends, including components for adjusted revenue and expense. These measures exclude amounts that we view as unrelated to 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.

We also calculate adjusted earnings per share based on our measure of adjusted earnings. We view these amounts as important to understanding operating trends, particularly due to the impact of accounting standards related to acquisition activity. Analysts also rely on these measures in estimating and evaluating our performance. We believe that the computation of non-GAAP adjusted earnings and adjusted earnings per share may facilitate the comparison of us to other companies in the financial services industry. We also adjust certain equity related measures to exclude intangible assets due to the importance of these measures to the investment community.

~~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 September 30,

Nine Months Ended September 30,
(in thousands)

Calculations

2022

2021

2022

2021
Net income



$
11,430

$
11,028

$
31,045

$
29,533
Non-recurring items:

Gain on sale of securities, net



(44)

(1,930)

(53)

(1,980)
Gain on sale of premises and equipment, net



—

(146)

(65)

(137)
Gain on other real estate owned



—

—

—

(11)
Loss on debt extinguishment

—

1,768

—

1,768
Acquisition, conversion and other expenses



31

318

356

1,759
Income tax expense ⁽¹⁾



3

(2)

(55)

(332)
Total non-recurring items

(10)

8

183

1,067
Total adjusted income⁽²⁾

(A)

$
11,420

$
11,036

$
31,228

$
30,600

Net interest income

(B)

$
29,910

$
25,582

$
80,727

$
71,758
Plus: Non-interest income



8,823

11,350

27,093

31,103
Total Revenue



38,733

36,932

107,820

102,861
Gain on sale of securities, net



(44)

(1,930)

(53)

(1,980)
Total adjusted revenue⁽²⁾

(C)

$
38,689

$
35,002

$
107,767

$
100,881

Total non-interest expense



$
23,032

$
23,372

$
66,618

$
67,587
Non-recurring expenses:

Gain on sale of premises and equipment, net



—

146

65

137
Gain on other real estate owned



—

—

—

11
Loss on debt extinguishment

—

(1,768)

—

(1,768)
Acquisition, conversion and other expenses



(31)

(318)

(356)

(1,759)
Total non-recurring expenses

(31)

(1,940)

(291)

(3,379)
Adjusted non-interest expense⁽²⁾

(D)

$
23,001

$
21,432

$
66,327

$
64,208

Total revenue

38,733

36,932

107,820

102,861
Total non-interest expense

23,032

23,372

66,618

67,587
Pre-tax, pre-provision net revenue

$
15,701

$
13,560

$
41,202

$
35,274

Adjusted revenue⁽²⁾

38,689

35,002

107,767

100,881
Adjusted non-interest expense⁽²⁾

23,001

21,432

66,327

64,208
Adjusted pre-tax, pre-provision net revenue⁽²⁾

$
15,688

$
13,570

$
41,440

$
36,673

(in millions)










Average earning assets

(E)

$
3,459

$
3,412

$
3,402

$
3,386
Average paycheck protection program (PPP) loans

(R)

—

46

5

63
Average earning assets, excluding PPP loans

(S)

3,459

3,366

3,397

3,323
Average assets

(F)

3,772

3,764

3,725

3,743
Average shareholders' equity

(G)

393

421

402

414
Average tangible shareholders' equity⁽²⁾⁽³⁾

(H)

267

295

276

287
Tangible shareholders' equity, period-end⁽²⁾⁽³⁾

(I)

254

292

254

292
Tangible assets, period-end⁽²⁾⁽³⁾

(J)

3,715

3,612

3,715

3,612

~~Table of Contents~~

Three Months Ended September 30,

Nine Months Ended September 30,

Calculations

2022

2021

2022

2021
(in thousands)










Common shares outstanding, period-end

(K)

15,066

14,987

15,066

14,987
Average diluted shares outstanding

(L)

15,113

15,051

15,100

15,035

Adjusted earnings per share, diluted⁽²⁾

(A/L)

$
0.76

$
0.73

$
2.07

$
2.04
Tangible book value per share, period-end⁽²⁾

(I/K)

16.89

19.48

16.89

19.48
Securities adjustment, net of tax⁽¹⁾⁽⁴⁾

(M)

(58,715)

4,398

(58,715)

4,398
Tangible book value per share, excluding securities adjustment⁽²⁾⁽⁴⁾

(I+M)/K

20.79

19.19

20.79

19.19
Total tangible shareholders' equity/total tangible assets⁽²⁾

(I/J)

6.85

8.08

6.85

8.08

Performance ratios⁽⁵⁾

Return on assets



1.20
%

1.16

1.11
%

1.05
Adjusted return on assets⁽²⁾

(A/F)

1.20

1.16

1.12

1.09
Pre-tax, pre-provision return on assets

1.65

1.43

1.48

1.26
Adjusted pre-tax, pre-provision return on assets⁽²⁾

(U/F)

1.65

1.43

1.49

1.31
Return on equity



11.55

10.38

10.32

9.54
Adjusted return on equity⁽²⁾

(A/G)

11.54

10.39

10.38

9.98
Return on tangible equity

17.25

15.08

15.28

14.01
Adjusted return on tangible equity⁽¹⁾⁽²⁾

(A+Q)/H

17.24

15.09

15.37

14.50
Efficiency ratio⁽²⁾⁽⁶⁾

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

57.67

59.18

59.66

61.48
Net interest margin

(B+P)/E

3.47

3.02

3.21

2.88
Adjusted net interest margin⁽²⁾⁽⁷⁾

(B+P-T)/S

3.47

2.75

3.21

2.73

Supplementary data (in thousands)










Taxable equivalent adjustment for efficiency ratio

(N)

$
533

$
576

$
1,500

$
1,757
Franchise taxes included in non-interest expense

(O)

149

143

434

396
Tax equivalent adjustment for net interest margin

(P)

379

421

1,033

1,284
Intangible amortization

(Q)

233

233

699

707
Interest and fees on PPP loans

(T)

—

2,690

223

5,058

~~(1)~~

~~Assumes a marginal tax rate of 23.41% for 2022 and 23.71% for 2021.~~

~~(2)~~

~~Non-GAAP financial measure.~~

~~(3)~~

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

~~(4)~~

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

~~(5)~~

~~All performance ratios are based on average balance sheet amounts, where applicable.~~

~~(6)~~

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

~~(7)~~

~~Adjusted net interest margin excludes Paycheck Protection Program loans.~~

~~Table of Contents~~

~~QUARTERLY PERFORMANCE SUMMARY~~

~~Earnings~~ ~~(third quarter of 2022 compared to the same quarter of 2021)~~

●~~Net income was $11.4 million, an increase of 4%, or 27% on a non-GAAP basis when excluding the accretion from PPP loan fees in 2021.~~

●~~Diluted earnings per share was $0.76, an increase of $0.03 or 4%. Diluted earnings per share in the third quarter of 2021 included a $0.14 benefit from PPP loan fees.~~

●Return on assets increased to 1.20% from 1.16% or 0.95% on a non-GAAP basis when excluding PPP loan fees. Return on equity was 11.55% compared to 10.38%. Both ratios include the benefit of higher net income and lower average balances related to unrealized losses on securities as noted below under the Financial Position section.

●Net interest income was $29.9 million, an increase of 17%. Net interest margin (NIM) was 3.47% in the third quarter of 2022, an increase of 45 basis points from the same period in 2021. The increase is primarily due to the repricing of variable rate assets, continued loan growth and a lower percentage of wholesale borrowings to total debt.

●~~The provision for credit losses was an expense of $1.3 million mainly due to loan growth compared to a net benefit of $174 thousand reflecting improved economic forecasts.~~

●Non-interest income was $8.8 million, down $2.5 million. Customer service fee income was up 9%, trust and wealth management income was down 8%, and prior year included $1.9 million of net securities gains.

●~~Non-interest expense was $23.0 million versus $23.4 million. Prior year includes a $1.8 million loss on extinguishment of debt.~~

●~~Efficiency ratio improved to 58% from 59%, or 63% on a non-GAAP basis that excludes PPP loan fees.~~

~~Financial Position~~~~(As of September 30, 2022, compared to June 30, 2022)~~

●~~Total assets increased $124.5 million to $3.8 billion mainly due to loan growth supported by growth in total deposits.~~

●~~Cash and cash equivalents were $82.1 million, compared to $67.1 million. The increase is a principally a timing difference between loan activity and short-term borrowings at the end of the quarter.~~

●Securities were $565.8 million, or 15% of total assets, compared to $592.7 million, or 16% of total assets. Net unrealized losses were $76.6 million, or 12% of gross securities, compared with $49.7 million, or 8% of gross securities as fixed rate securities continued to price reflecting higher interest rates.

●Total loans grew 18% on annualized basis during the quarter as commercial loans and residential loans increased 25% and 9%, respectively. Loan growth was generated across all of our footprint and among many industry sectors and business lines. We believe that the economy in Northern New England continues to be strong despite pressures from the broader economy.

●The ratio of the allowance for credit losses to total loans was 0.88%, increasing from 0.87%, which reflects more conservative economic forecasting. Net charge-offs continue to be insignificant and each credit metric improved during the quarter.

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

~~Table of Contents~~

●Total book value per share was $25.22 compared to $26.19. Net unrealized security losses reduced book value per share by $3.90 compared to $2.55. Tangible book value per share excluding net unrealized security losses (non-GAAP) increased 8% on annualized basis on net income offset by dividends to shareholders.

COMPARISON OF FINANCIAL CONDITION AT ~~SEPTEMBER 30, 2022~~MARCH 31, 2023 AND DECEMBER 31, ~~2021~~2022

Cash and cash equivalents

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

Securities

~~Total securities decreased to $565.8~~Securities totaled $572.8 million ~~from $625.6~~at March 31, 2023 and were $574.4 million at year-end ~~2021. The $59.8~~2022. During the first quarter, security purchases totaled $1.0 million ~~decrease in total securities included $99.3 million of purchases, $19.5 million in sales, an $11.7 million cost reduction to municipal securities that are hedged,~~ and ~~$50.4~~were offset by $11.1 million of maturities, calls and pay-downs ~~and amortization.~~of amortizing securities. There were also $1.0 million of purchases of FHLB stock during the first quarter 2023. Fair value adjustments ~~reduced~~decreased the security portfolio by ~~$76.6~~$65.8 million at ~~the end~~quarter-end compared to a $71.8 million at year-end. The weighted average yield of the ~~September 30, 2022 quarter,~~securities portfolio was 3.62% at March 31, 2023 compared to 3.58% at year-end. As of quarter-end and year-end, our securities portfolio had an ~~increase~~average life of ~~$2.6 million at year-end 2021. Net unrealized losses in the~~ nine ~~months~~years with an effective duration of ~~2022 resulted from the Federal Reserve increasing the federal funds target interest rate 300 basis points in that period.~~five years. All securities remain classified as available for sale to provide flexibility in loan funding and management of our cost of funds. The weighted average yield of our securities portfolio was 3.43% at quarter-end and 2.63% at year-end. Securities held at quarter-end had an average life of 9.5 years and an effective duration of 5.1 years compared to 5.3 years and 4.2 years at year-end 2021, respectively.

Loans

~~Total loans~~Loans increased ~~by $318.5~~$41.3 million ~~from year-end 2021, or 17% annualized,~~ to $2.9 billion ~~at September 30, 2022. Commercial loans increased by $241.2 million with growth from existing customers and 491 new lending relationships. PPP loan balances were zero~~ at the end of the first quarter ~~compared to $6.7~~2023. The increase was primarily driven by commercial loans that grew by $35.3 million, ~~at year-end. Total residential~~of which $19.5 million was with new customers primarily in the finance and real estate and leasing industries. Residential loans ~~increased~~grew by ~~$75.6 million from 2021,~~annualized growth rate of 4% as we ~~placed~~believe it was more ~~originations~~profitable to put these higher yield loans on the balance sheet instead of selling ~~into~~them for small gains in the secondary market. ~~Residential loan origination volume in 2022 is significantly down as compared~~Consumer loans dropped by $2.2 million due to ~~respective periods 2021 on lower refinancing activity and increasing market rates.~~ run-off of balances associated with the repricing of home equity lines of credit to the higher interest rate environment.

Allowance for Credit Losses

The ACL ~~increased to $25.0~~was $26.6 million at ~~quarter-end as~~March 31, 2023 compared to ~~$22.7~~$25.9 million at ~~year-end 2021 principally~~year-end. The increase ACL balance is largely due to loan ~~growth. The~~growth during the first quarter, however, the ratio of ~~the allowance to loans decreased to 0.88% from 0.90% at year-end reflecting an improvement in economic forecasts used the~~ ACL ~~calculation. Non-accruing loans continue to trend downwards on a quarterly basis to $7.8 million from $10.2 million. The ratio of accruing past due loans~~ to total loans ~~improved~~increased to ~~0.10%~~0.90% from 0.89%

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at year-end due to more refined economic forecasting, especially in the national unemployment figures. Non-accruing loans in the quarter increased $1.3 million from $6.5 million at the end of the fourth quarter primarily due to one lending relationship that is expected to be collected in full. Past due accounts between 30 to 89 days as a percentage of total loans from 0.32%. Total delinquent and non-accruing loans as percentage of total improved to 0.37% from 0.72%. Net recoveries on previously charged-off loans for the first nine months of 2022 totaled $83 thousandwas 0.26% at March 31, 2023 compared to ~~net charge-offs~~0.08% at year-end. The increase is largely due to a group of ~~$434 thousand for~~customers that typically make payments about 30 days in arrears, which become overdue when the ~~same period~~31^st day lands on a business day. Accordingly, we do not believe the increase is an indication of ~~2021.~~ deteriorated credit quality.

Other Assets

~~Other~~Total other assets ~~were $366.1~~decreased $11.1 million ~~compared~~ to ~~$318.5~~$355.2 million ~~at year-end 2021.~~from $366.3 million as of year-end. The ~~increase includes $18.5~~decrease is primarily attributed to a $5.5 million decrease in the asset position of ~~deferred~~the derivative and hedging instruments. Deferred tax assets, ~~recorded~~net, decreased $1.6 million due to the improvement in ~~connection with~~ unrealized losses onfrom securities ~~$6.5 million of investments made in tax credits and community developments, a $7.9 million increase in~~available for sale portfolio during the ~~fair value of customer loan swaps, and a $10.2 million increase in the fair value of derivative instruments.~~ quarter.

Deposits and Borrowings

Total deposits increased ~~by $87.1~~$10.4 million ~~from year-end 2021~~ to $3.1 ~~billion. In~~billion at the ~~first nine months~~end quarter. Demand and other non-interest bearing deposits decreased $39.6 million driven by large institutional outflows mainly due to seasonality. While our deposit base does contain some larger institutional accounts, our community banking model caters to the high volume, lower average balance accounts, which generally are less rate sensitive and less likely to run-off. Time deposits increased $81.0 million due to a shift of ~~2022 over 2,300 net new~~interest-bearing deposits to higher interest-bearing accounts, and a $53.1 million increase in brokered deposits. Savings deposits decreased $35.7 million evenly throughout the quarter. Our deposit ~~accounts opened and over 2,900 were opened in the same period of 2021. The loan to deposit ratio increased to 91% from 83%~~composition at the end of ~~2021~~quarter was 49% commercial customers and 51% consumer customers, compared with 47% and 53%, respectively at year-end. Our uninsured or otherwise unsecured deposits represents 11% of our total deposits, which ranks us on the low end in risk for the industry, and, specifically, in comparison to others within our footprint. Total borrowings increased by $4.3 million during the quarter due to support loan ~~growth~~growth.

Derivative Financial Instruments and Other Liabilities

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

Equity

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

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

Net Interest Income

Net interest income was $30.1 million in the first quarter 2023 compared with $23.9 million in the prior year quarter. NIM increased to 3.54% in the first quarter 2023 compared to 2.95% in the prior year quarter. The increase was primarily driven by a yield expansion in existing variable rate loans as those repriced to current indexes, which was partially offset by a higher cost of funds. Interest-bearing cash balances reduced NIM by 3 basis points in ~~part by 4% annualized growth~~the first quarter 2023 compared to 12 basis points in ~~total deposits. Core~~the prior year quarter. The yield on loans was 4.82% in the first quarter 2023, up from 3.54% in the prior year quarter. Costs of interest-bearing liabilities increased to 1.39% in the first quarter 2023 from 0.35% in the first quarter 2022 as our cost of interest-bearing deposits ~~grew by $178.4 million, or 9% annualized, while~~continues to drift higher subsequent to the rate hikes. We also experienced a shift in deposit composition due to time deposits ~~decreased by $27.7 million, which includes $36.0 million of wholesale deposits that matured. Borrowings increased by $70.5 million from year-end 2021 to supplement~~as some customers with excess cash and deposit funding. FHLB borrowings totaled $169.8 million and $98.6 million with weighted average rates of 2.91% and 0.49% at the end of the third quarter of 2022 and year-end 2021, respectively. Wholesale borrowings as a percentage of total debt decreased to 5.8%are seeking higher rates. Additionally in the ~~third~~first quarter ~~from 6.0% at year-end 2021.~~ 2023, we had a heavier reliance on whole-sale borrowings, which have a cost that is almost 200 basis points higher than in the prior year quarter.

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~~Other Liabilities~~

Other liabilities were $75.6 million compared to $58.0 million at year-end 2021. The $17.6 million increase includes $7.0 million in remaining tax credit investment commitments, a $7.9 million increase related to the fair value of customer loan swaps, and a $4.5 million increase related to the fair value of derivative instruments.

~~Equity~~

Total equity at the end of the third quarter of 2022 was $380.0 million compared to $424.1 million at year-end 2021. The $44.1 million decrease in the first nine months of 2022 included net income totaling $31.0 million, $11.4 million of dividends to shareholders and $64.9 million of other comprehensive losses. Other comprehensive losses were primarily due to unrealized losses on securities, net of tax, totaling $60.7 million.

In June 2022, our Board of Directors authorized a stock repurchase plan for up to 5% of outstanding shares of common stock, which represents approximately 751,000 shares. As of September 30, 2022, no repurchases have been made, but we will continue examine buying opportunities considering market conditions, including interest rate volatility and potential loan and risk-weighted asset growth.

~~COMPARISON OF OPERATING RESULTS FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2022 AND 2021~~

~~Net Income~~

~~Net income in the third quarter of 2022 was $11.4 million, or $0.76 per diluted share, compared to $11.0 million, or $0.73 per diluted share, in the same quarter of 2021.~~

During the first nine months of 2022, net income was $31.0 million, or $2.06 per diluted share, compared to $29.5 million, or $1.96 per diluted share, in the same period of 2021. Non-recurring items reduced net income by $1.1 million, or $0.07 per diluted share, in 2021.

~~Net Interest Income~~

Net interest income was $29.9 million in the third quarter of 2022 compared with $25.6 million in the third quarter of 2021. NIM was 3.47% compared to 3.02% for the same periods, and was 3.50%% and 2.94%, respectively, on a non-GAAP basis when excluding the impact of PPP loan fees and interest-bearing excess cash. The increase in net interest income and net interest margin was due to higher interest on earning assets due to the Federal Reserve increasing their federal funds target rate. The yield on earning assets totaled 3.84% compared to 3.41% in the third quarter of 2021. The yield on loans was 4.04% in the third quarter of 2022, and 3.98% in the third quarter of 2021. The non-GAAP the yield on loans was 4.04% and 3.62% for the same periods when excluding PPP loan fees. Total cost of deposits was 0.30% in the third quarter of 2022 compared to 0.27% in the third quarter of 2021 reflecting a lower correlation to federal fund rate movements. Borrowing costs were 2.69% compared to 2.11% for the same periods due to the repricing of rolling short-term FHLB borrowings to market rates.

For the first nine months of 2022, net interest income was $80.7 million compared with $71.8 million in the same period of 2021. The comparison of NIM and earning asset yields were 3.21% and 2.88%, and 3.51% and 3.38% in 2022 and 2021, respectively. The explanations for improvement in those ratios are consistent with the three month comparison above.

Provision for Credit Losses

The provision for credit losses ~~for~~was $798 thousand in the first quarter 2023 compared to $687 thousand in the prior year quarter. The increase is primarily driven by loan growth and slightly higher provisioning given current market conditions. The ratio of net charge-offs to total loans was ~~$1.3 million,~~0.01% in the first quarter 2023 compared to a ~~recapture~~net recovery of ~~$174 thousand~~0.01% in the ~~third quarter of 2021.~~ prior year quarter. Net charge-offs have been at historic lows for the past five years, which we believe is due to our underwriting standard and conservative provisioning.

During the first nine months of 2022, the provision for credit losses was $2.2 million compared to a benefit of $1.4 million in the same period of 2021. The change in the provisions for credit losses and benefit are mostly attributable to loan growth in 2022, and improved economic forecasts in 2021 as compared to 2020, respectively.

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Non-Interest Income

Non-interestincomewas$9.2millionin the first quarter 2023 comparedto$9.3millionin the prior year quarter.Customerservice feesgrewto$3.7millioninthefirstquarter2023from$3.6millioninthesamequarterof2022onahighernumberoftransactionalaccounts.Wealthmanagement income inthe ~~third~~first quarter ~~of 2022~~2023 was ~~$8.8~~$3.6 million, compared to ~~$11.4~~ $3.8millionin ~~the same~~prior year quarter ~~of 2021. Customer service fees were $3.8 million in the third quarter of 2022, compared~~ due primarilyto $3.5 million in the same period of 2021. The increase reflects the net new accounts that were opened and a higher volume of customer activity and transactions. Wealth management income was $3.5 million in the third quarter of 2022, down from $3.9 million in the same quarter of 2021. Assetslower assets under management ~~(“AUM”) declined approximately 16.1% year~~ stemmingfromadeclineinmarketvaluations.Mortgagebankingincomewas$279thousandinthefirstquarterof2023,comparedto ~~date, as compared to~~ $624thousandinthe ~~blended decline~~ sameperiodof the S&P 500 of 24.1%. The smaller decline in AUM is a direct function of effective portfolio management and new business successes. Mortgage banking income was $315 thousand in the third quarter of 2022 ~~compared to $850 thousand in the same period of 2021~~ reflecting ~~higher~~ fewer sales andincreasedonbalance sheet activity ~~and lower residential loan originations.~~

related to higher

~~Non-interest~~interestrates. BOLI income ~~for~~included $622 thousand related to one-time death benefits during the first nine months of 2022 was $27.1 million compared to $31.1 million in the same period in 2021. Customer service fees increased $1.4 million while mortgage banking income decreased $3.5 million and in 2021 included a $2.0 million net gain on security sales. The reasons for these changes are the same as the quarterly comparison above.

current year quarter.

Non-Interest Expense

Non-interest expense ~~was $23.0~~increased to $22.7 million in the ~~third~~first quarter ~~of 2022, compared to $23.4~~2023 from $21.9 million in the ~~same~~prior year quarter ~~of 2021. The decrease is primarily the net result of a $499 thousand increase in~~principally due to higher salary and benefit ~~expense, a $429 thousand increase in occupancy and equipment expense, and non-recurring expenses totaling $2.1 million in 2021.~~expense. Salary and benefit expense increased by $624 thousand in the first quarter 2023 due to annual ~~cost~~salary adjustments that were effective at the end of ~~living adjustments~~the first quarter of 2022, and higher post-retirement expense in ~~the second quarter 2022 along~~2023 associated with higher pay-for-performance incentives. Occupancy and equipment expense increased on higher utility costs and software amortization in 2022. Non-recurring expenses (non-GAAP) in 2021, included a $1.8 million loss on debt extinguishment and $318 thousand of fees relatedchanges to ~~consolidating our Wealth Management businesses.~~discount rates.

~~For the first nine months of 2022, non-interest~~Income Tax Expense

Income tax expense was ~~$66.6 million compared to $67.6~~$3.6 million in the ~~same period of 2021. The reasons for the decrease~~first quarter 2023 compared with $2.2 million in the ~~nine month period is similar~~prior year quarter. The effective tax rate increased to the quarterly explanation above with higher salary and benefits expense and occupancy costs, and lower non-recurring expenses. Non-recurring expenses in 2022 totaled $291 thousand consisting of mostly contract renegotiation fees. In 2021, non-recurring expenses were $3.4 million consisting of $1.8 million of reduction in workforce costs and a $1.8 million loss on extinguishment of debt. The efficiency ratio was 59.66%21.6% in the first ~~nine months~~quarter 2023 from 19.7% in the prior year quarter due to having a higher level of ~~2022 compared to 61.48%~~non-taxed advantaged income in ~~same period 2021, which reflects managements disciplined approach to expense management as revenue continues to grow.~~

the current year quarter.

Liquidity and Cash Flows

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

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

~~During the third quarter 2022 we initiated pandemic-specific liquidity stress tests to analyze potential impacts from payment deferrals, unanticipated use~~As of ~~committed lines of credit, as well as the possibility of required servicer advances on sold loans. At September 30, 2022,~~March 31, 2023, available same-day liquidity totaled approximately ~~$1.0 billion,~~$566.4 million, including cash, borrowing capacity at FHLB and the Federal Reserve Discount Window and various lines of credit. Additional sources of liquidity include cash flows from operations, wholesale deposits, cash flow from our amortizing securities and loan portfolios. We had unused borrowing capacity at the FHLB of ~~$385~~$255.2 million, unused borrowing capacity at the Federal

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Reserve of ~~$84~~$177.5 million and unused lines of credit totaling $51.0 million, in addition to ~~over $82.1~~$82.7 million in ~~unencumbered, liquid investment portfolio assets.~~ cash.

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

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Capital Resources

Please ~~see the section titled~~refer to “Comparison of Financial Condition at ~~September 30, 2022~~March 31, 2023 and December 31, ~~2021--Equity”~~2022--Equity” for a discussion of shareholders’ equity together with Note 6 “Capital Ratios and Shareholders’ Equity” in the consolidated financial statements. Additional information about regulatory capital is contained in the notes to the consolidated financial statements and in our most recent ~~Annual Report on~~ Form 10-K.

~~Our~~We expect to continue our current practice of paying quarterly cash dividends with respect to our common stock subject to our Board of Directors’ discretion to modify or terminate this practice at any time and for any reason without prior notice. We believe our quarterly dividend rate per share as approved by our Board of Directors, enables us to balance our multiple objectives of managing our business and returning a portion of our earnings to our shareholders. Historically, and a practice we intend to continue, our principal cash ~~requirement~~expenditure is the payment of dividends on our common stock, if as and when declared by our Board of Directors. Dividends to shareholders in the aggregate amount of ~~$11.4~~$3.9 million and ~~$10.5~~$3.6 million for the ~~nine~~three months ended ~~September 30,~~March 31, 2023 and 2022, ~~and 2021,~~ respectively. All dividends declared and distributed by us will be in compliance with applicable state corporate law and regulatory requirements.

Off-Balance Sheet Arrangements

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

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

Our off-balance sheet arrangements have not changed materially since previously reported in our ~~Annual Report on~~ Form ~~10-K for~~10-K.

IMPACT OF NEW ACCOUNTING PRONOUNCEMENTS

Please refer to Note 1 – “Basis of Presentation—Recent Accounting Pronouncements” of the ~~fiscal year ended December 31, 2021.~~Consolidated Financial Statements in this Form 10-Q and Note 1—“Summary of Significant Accounting Policies” of the Consolidated Financial Statements to our Form 10-K.

CRITICAL ACCOUNTING POLICIES

Our Consolidated Financial Statements were prepared in accordance with GAAP and follow general practices within the industries in which we operate. The most significant accounting policies we follow are presented in Note 11—“Summary of Significant Accounting Policies” of the Consolidated Financial Statements to our ~~Annual Report on~~ Form ~~10-K for the fiscal year ended December 31, 2021.~~10-K. Application of these principles requires us to make estimates, assumptions, and judgments that affect the amounts reported in the Consolidated Financial Statements and accompanying notes. Most accounting policies are not considered by management to be critical accounting policies. Several factors are considered in determining whether or not a policy is critical in the preparation of the Consolidated Financial Statements. These factors include among other things, whether the policy requires management to make difficult, subjective, and complex judgments about matters that are inherently uncertain and because it is likely that materially different amounts would be reported under different conditions or using different assumptions. The accounting policies which we believe to be most critical in preparing our Consolidated Financial Statements are presented in the section titled “Management's Discussion and Analysis of Financial Condition and Results of Operations--Critical ~~Accouting~~Accounting Policies and Estimates” included in our ~~Annual Report on~~ Form ~~10-K for the fiscal year ended December 31, 2021.~~10-K. There have been no significant changes in our application of critical accounting policies since December 31, ~~2021.~~

2022. Refer to ~~“Note~~Note 1 ~~Basis~~– “Basis of Presentation--Recent Accounting Pronouncements” of the consolidated financial statements for discussion of accounting pronouncements issued but yet to be adopted and implemented.

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SELECTED FINANCIAL DATA

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

Three Months Ended

March 31,

2023

2022

PER SHARE DATA

Net earnings, diluted

$
0.86

$
0.60

Adjusted earnings, diluted⁽¹⁾

0.86

0.62

Total book value

27.00

27.11

Tangible book value per share⁽¹⁾

18.74

18.72

Market price at period end

26.45

28.62

Dividends

0.26

0.24

PERFORMANCE RATIOS⁽²⁾

Return on assets

1.36
%

1.00
%
Adjusted return on assets⁽¹⁾

1.36

1.02

Pre-tax, pre-provision return on assets

1.81

1.28

Adjusted pre-tax, pre-provision return on assets ⁽¹⁾

1.81

1.31

Return on equity

12.96

8.89

Adjusted return on equity⁽¹⁾

12.94

9.07

Return on tangible equity

18.97

13.01

Adjusted return on tangible equity⁽¹⁾

18.94

13.27

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

3.54

2.95

Adjusted net interest margin⁽¹⁾

3.54

2.93

Efficiency ratio⁽¹⁾

54.72

62.40

FINANCIAL DATA (In millions)

Total assets

$
3,928

$
3,692

Total earning assets⁽⁴⁾

3,628

3,367

Total investments

573

611

Total loans

2,944

2,655

Allowance for credit losses

27

23

Total goodwill and intangible assets

125

126

Total deposits

3,054

3,048

Total shareholders' equity

408

407

Net income

13

9

Adjusted income⁽¹⁾

13

9

ASSET QUALITY AND CONDITION RATIOS

Net charge-offs (recoveries) (annualized)/average loans

0.01
%

(0.01)
%
Allowance for credit losses/total loans

0.90

0.87

Loans/deposits

96

87

Shareholders' equity to total assets

10.40

11.02

Tangible shareholders' equity to total tangible assets⁽¹⁾

7.45

7.88

(1) Non-GAAP financial measure. Refer to the Reconciliation of Non-GAAP Financial Measures section of the “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” in this Form 10-Q for additional information.
(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 growth rates as of March 31, 2023 on an annualized basis:

LOAN ANALYSIS

Annualized

Growth %

Quarter

(in thousands, except ratios)

Mar 31, 2023

Dec 31, 2022

Sep 30, 2022

Jun 30, 2022

Mar 31, 2022

to Date

Commercial real estate

$
1,519,219

$
1,495,452

$
1,421,962

$
1,331,860

$
1,289,968

6
%

Commercial and industrial

364,315

352,735

376,624

360,304

346,394

13

Paycheck Protection Program (PPP)

—

—

—

170

1,126

—

Total commercial loans

1,883,534

1,848,187

1,798,586

1,692,334

1,637,488

8

Total commercial loans, excluding PPP

1,883,534

1,848,187

1,798,586

1,692,164

1,636,362

8

Residential real estate

906,059

898,192

896,618

876,644

868,382

4

Consumer

98,616

100,855

100,822

100,816

96,876

(9)

Tax exempt and other

55,796

55,456

54,338

57,480

51,816

2

Total loans

$
2,944,005

$
2,902,690

$
2,850,364

$
2,727,274

$
2,654,562

6
%

DEPOSIT ANALYSIS

Annualized

Growth %

Quarter

(in thousands, except ratios)

Mar 31, 2023

Dec 31, 2022

Sep 30, 2022

Jun 30, 2022

Mar 31, 2022

to Date

Demand

$
636,710

$
676,350

$
700,218

$
670,268

$
653,471

(23)
%

NOW

908,483

900,730

918,822

883,239

918,768

3

Savings

628,798

664,514

669,317

663,676

658,834

(21)

Money market

475,577

478,398

513,075

499,456

424,750

(2)

Total non-maturity deposits

2,649,568

2,719,992

2,801,432

2,716,639

2,655,823

(10)

Total time deposits

404,246

323,439

334,248

361,906

391,940

100

Total deposits

$
3,053,814

$
3,043,431

$
3,135,680

$
3,078,545

$
3,047,763

1
%

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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,

2023

2022

Average

Average

(in thousands, except ratios)

Balance

Interest⁽³⁾

Yield/Rate⁽³⁾


Balance

Interest⁽³⁾

Yield/Rate⁽³⁾

Assets













Interest-earning deposits with other banks

$
19,819

209

4.28

140,383

56

0.16
%
Securities available for sale and FHLB stock⁽²⁾⁽³⁾

643,523

5,807

3.66

629,811

3,963

2.55

Loans:

Commercial real estate

1,505,681

18,862

5.08

1,264,798

10,907

3.50

Commercial and industrial

413,921

6,009

5.89

393,759

3,361

3.46

Paycheck protection program

—

—

—

2,999

196

26.49

Residential

902,348

8,260

3.71

856,252

7,490

3.55

Consumer

100,124

1,572

6.37

97,594

844

3.51

Total loans ⁽¹⁾

2,922,074

34,703

4.82

2,615,402

22,798

3.54

Total earning assets

3,585,416

40,719

4.61

3,385,596

26,817

3.21
%
Other assets

299,516

326,422

Total assets

$
3,884,932

3,712,018

Liabilities

NOW

$
883,134

1,106

0.51

930,556

314

0.14
%
Savings

646,291

485

0.30

640,672

137

0.09

Money market

481,951

2,542

2.14

414,130

118

0.12

Time deposits

342,994

1,132

1.34

406,730

620

0.62

Total interest bearing deposits

2,354,370

5,265

0.91

2,392,088

1,189

0.20

Borrowings

398,837

4,180

4.25

178,958

1,010

2.29

Total interest bearing liabilities

2,753,207

9,445

1.39

2,571,046

2,199

0.35
%
Non-interest bearing demand deposits

651,885

660,717

Other liabilities

72,693

64,619

Total liabilities

3,477,785

3,296,382

Total shareholders' equity

407,147

415,636

Total liabilities and shareholders' equity

$
3,884,932

3,712,018

Net interest spread

3.22

2.86
%
Net interest margin

3.54

2.95

Adjusted net interest margin⁽⁴⁾

3.54

2.93

(1) The average balances of loans include non-accrual loans and unamortized deferred fees and costs.
(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.
(4) Adjusted net interest margin excludes PPP loans.

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RECONCILIATION OF NON-GAAP FINANCIAL MEASURES

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




Three Months Ended March 31,
(in thousands)

Calculations

2023


2022

Net income


$
13,012

$
9,112

Non-recurring items:

Gain on sale of securities, net



(34)

(9)

Gain on sale of premises and equipment, net



(13)

(75)

Acquisition, conversion and other expenses



20

325

Income tax expense ⁽¹⁾



6

(56)

Total non-recurring items

(21)

185

Total adjusted income⁽²⁾

(A)
$
12,991

$
9,297

Net interest income

(B)
$
30,906

$
24,298

Plus: Non-interest income



9,184

9,309

Total Revenue



40,090

33,607

Gain on sale of securities, net



(34)

(9)

Total adjusted revenue⁽²⁾

(C)
$
40,056

$
33,598

Total non-interest expense


$
22,704

$
21,886

Non-recurring expenses:

Gain on sale of premises and equipment, net



13

75

Acquisition, conversion and other expenses



(20)

(325)

Total non-recurring expenses

(7)

(250)

Adjusted non-interest expense⁽²⁾

(D)
$
22,697

$
21,636

Total revenue

40,090

33,607

Total non-interest expense

22,704

21,886

Pre-tax, pre-provision net revenue

$
17,386

$
11,721

Adjusted revenue⁽²⁾

40,056

33,598

Adjusted non-interest expense⁽²⁾

22,697

21,636

Adjusted pre-tax, pre-provision net revenue⁽²⁾

(U)
$
17,359

$
11,962

(in millions)







Average earning assets

(E)
$
3,585

$
3,386

Average paycheck protection program (PPP) loans

(R)

—

3

Average earning assets, excluding PPP loans

(S)

3,585

3,383

Average assets

(F)

3,885

3,712

Average shareholders' equity

(G)

407

416

Average tangible shareholders' equity⁽²⁾⁽³⁾

(H)

282

290

Tangible shareholders' equity, period-end⁽²⁾⁽³⁾

(I)

283

281

Tangible assets, period-end⁽²⁾⁽³⁾

(J)

3,803

3,566

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Three Months Ended March 31,

Calculations

2023


2022

(in thousands)



Common shares outstanding, period-end

(K)

15,124

15,013

Average diluted shares outstanding

(L)

15,190

15,012

Adjusted earnings per share, diluted⁽²⁾

(A/L)
$
0.86

$
0.62

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

(I/K)

18.74

18.72

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

(M)

(50,646)

(20,225)

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

(I+M)/K

22.08

20.07

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

(I/J)

7.45

7.88

Performance ratios⁽⁵⁾

Return on assets



1.36
%

1.00
%
Adjusted return on assets⁽²⁾

(A/F)

1.36

1.02

Pre-tax, pre-provision return on assets

1.81

1.28

Adjusted pre-tax, pre-provision return on assets⁽²⁾

(U/F)

1.81

1.31

Return on equity



12.96

8.89

Adjusted return on equity⁽²⁾

(A/G)

12.94

9.07

Return on tangible equity

18.97

13.01

Adjusted return on tangible equity⁽¹⁾⁽²⁾

(A+Q)/H

18.94

13.27

Efficiency ratio^(1)(2)(6)

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

54.72

62.40

Net interest margin

(B+P)/E

3.54

2.95

Adjusted net interest margin⁽²⁾⁽⁷⁾

(B+P-T)/S

3.54

2.93

Supplementary data (in thousands)







Taxable equivalent adjustment for efficiency ratio

(N)
$
727

$
476

Franchise taxes included in non-interest expense

(O)

148

141

Tax equivalent adjustment for net interest margin

(P)

368

320

Intangible amortization

(Q)

233

233

Interest and fees on PPP loans

(T)

—

196

(1) Assumes a marginal tax rate of 23.80% for 2023 and 23.41% for 2022.
(2) Non-GAAP financial measure.
(3) Tangible shareholders' equity is computed by taking total shareholders' equity less the intangible assets at period-end. Tangible assets is computed by taking total assets less the intangible assets at period-end.
(4) Securities adjustment, net of tax represents the total unrealized losses and gains on available-for-sale securities recorded on our consolidated balance sheets within total common shareholders' equity.
(5) All performance ratios are based on average balance sheet amounts, where applicable.
(6) Efficiency ratio is computed by dividing core non-interest expense net of franchise taxes and intangible amortization divided by core revenue on a fully taxable equivalent basis.
(7) Adjusted net interest margin excludes PPP loans.

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Market Risk
Market risk is the risk of loss in a financial instrument arising from adverse changes in market rates/prices, such as interest rates, foreign currency exchange rates, commodity prices and equity prices. The most significant market risk that affects us is interest rate risk. Other types of market risk do not arise in the normal course of our business activities.

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

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

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

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

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

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

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

Table of Contents

expectations. Our net interest income sensitivity analysis reflects changes to net interest income assuming no balance sheet

~~Table of Contents~~

growth and a parallel shift in interest rates. All rate changes were “ramped” over the first 12-month period and then maintained at those levels over the remainder of the simulation horizon. Changes in net interest income based upon these simulations are measured against the flat interest rate scenario.

As of ~~September 30, 2022,~~March 31, 2023, interest rate sensitivity modeling results indicate that the Bank’s balance sheet was asset sensitive over the one- and two-year horizons.

The following table presents the changes in sensitivities on net interest income for the periods ended ~~September 30, 2022~~March 31, 2023 and ~~2021:~~2022:


Change in Interest Rates-Basis Points (Rate Ramp)	1 - 12 Months				13 - 24 Months				1 - 12 Months			13 - 24 Months
(in thousands, except ratios)	$ Change		% Change		$ Change		% Change		$ Change		% Change	$ Change		% Change
At September 30, 2022
At March 31, 2023
-100	$	(3,414)	(2.4)	%	$	(10,292)	(6.9)	%		(2,593)	(1.9)		(7,028)	(4.8)
+100		1,956	1.4			6,544	4.4			1,000	0.7		4,618	3.2
+200		3,721	2.6			12,622	8.5			2,068	1.5		8,422	5.8
At September 30, 2021
At March 31, 2022
-100		(2,226)	(2.4)			(6,019)	(6.7)			(4,176)	(3.9)		(8,892)	(8.0)
+100		4,715	5.1			11,583	13.0			3,418	3.2		9,203	8.3
+200		9,548	10.3			21,878	24.5			7,101	6.6		18,216	16.4

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~~one-year horizon while deteriorating further from that level over the two-year horizon.

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

As compared to ~~September 30, 2021,~~March 31, 2022, sensitivity to both a down 100 basis point rate movement and an up 200 basis point rate movement has decreased.

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

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

7158

Table of Contents

ITEM 4.           CONTROLS AND PROCEDURES

(a) Disclosure controls and procedures.

Under the supervision and with the participation of our senior management, consisting of our principal executive officer and our principal financial officer, we conducted an evaluation of the effectiveness of the design and operation of its disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, as of the end of the period covered by this Form 10-Q. Based on this evaluation, our management, including our principal executive officer and principal financial officer, concluded that as of ~~September 30, 2022,~~March 31, 2023, our disclosure controls and procedures were effective to ensure that information required to be disclosed by the reports that we file under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms. Our disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by using our Exchange Act reports is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives, and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures.
(b) Changes in internal control over financial reporting.

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

PART II.           OTHER INFORMATION

ITEM 1.             LEGAL PROCEEDINGS

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

ITEM 1A.          RISK FACTORS

~~There~~Investing in the Company involves various risks which are particular to our Company, our industry and our market area. We believe there were no material changes to the risk factors discussed in Part I, Item 1A. of ~~the~~ our ~~Annual Report on~~ Form ~~10-K for the fiscal year ended December 31, 2021.~~10-K. In addition to the other information set forth in this Form 10-Q, you should carefully consider those risk factors, which could materially affect our business, financial condition and future operating results. Those risk factors are not the only risks facing our Company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may have a material adverse effect on our business, financial condition and operating results.

7259

Table of Contents

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

~~(c)~~No unregistered equity securities were sold by the Company during the quarter ended March 31, 2023.
On June 23, 2022, ~~our~~the Board of Directors approved a ~~twelve-month~~12-month plan to repurchase up to 5% of ~~our~~the Company’s outstanding shares of common stock, representing 751,000 shares.

~~The following table indicates that no~~ No shares were repurchased by usthe Company in the ~~third~~first quarter of ~~2022:~~2023 and the maximum number of shares that may yet be purchased under the plan is 751,000 shares.

~~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~~
~~July 1-31, 2022~~
—

$
—
—
~~751,000~~
~~August 1-31, 2022~~
—

—
—
~~751,000~~
~~September 1-30, 2022~~
—

—
—
~~751,000~~
~~Total~~
—

$
—
—
~~751,000~~

7360

Table of Contents

ITEM 6. EXHIBITS

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

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

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

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

101*
The following financial information from the Company’s Quarterly Report on Form 10-Q for the quarter ended ~~September 30, 2022~~March 31, 2023 is formatted in Inline Extensible Business Reporting Language (iXBRL): (i) Consolidated Condensed Statements of Income, (ii) the Condensed Consolidated Balance Sheets, (iii) the Condensed Consolidated Statements of Changes in Shareholders’ Equity, (iv) Consolidated Statements of Cash Flows and (v) Notes to the Consolidated Condensed Financial Statements

104

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

*Filed herewith
**Furnished herewith

7461

Table of Contents

SIGNATURES

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

BAR HARBOR BANKSHARES

Dated: ~~November 4, 2022~~May 8, 2023
By:
/s/ Curtis C. Simard

Curtis C. Simard

President & Chief Executive Officer
(Principal Executive Officer)

Dated: ~~November 4, 2022~~May 8, 2023

/s/ Josephine Iannelli

Josephine Iannelli

Executive Vice President & Chief Financial Officer
(Principal Financial and Accounting Officer)

7562


(in thousands)	Classification	September 30, 2022		December 31, 2021
Lease Right-of-Use Assets
Operating lease right-of-use assets	Other assets	$	8,381	$	9,274

Lease Liabilities
Operating lease liabilities	Other liabilities		8,791		9,643


	September 30, 2022		December 31, 2021
Weighted-average remaining lease term (in years)
Operating leases	7.42		8.03

Weighted-average discount rate
Operating leases	3.09	%	3.07	%


(in thousands)	Payments
Twelve Months Ended:
September 30, 2023	$	1,343
September 30, 2024		1,344
September 30, 2025		1,129
September 30, 2026		1,032
September 30, 2027		889
Thereafter		3,411
Total future minimum lease payments		9,148
Amounts representing interest		(357)
Present value of net future minimum lease payments	$	8,791


											Annualized
											Growth %
											Quarter		Year
(in thousands, except ratios)	Sep 30, 2022		Jun 30, 2022		Mar 31, 2022		Dec 31, 2021		Sep 30, 2021		to Date		to Date
Commercial real estate	$	1,421,962	$	1,331,860	$	1,289,968	$	1,210,580	$	1,170,372	27	%	23	%
Commercial and industrial		376,624		360,304		346,394		340,129		331,091	18		14
Paycheck Protection Program (PPP)		—		170		1,126		6,669		24,227	*		*
Total commercial loans		1,798,586		1,692,334		1,637,488		1,557,378		1,525,690	25		21
Total commercial loans, excluding PPP		1,798,586		1,692,164		1,636,362		1,550,709		1,501,463	25		21

Residential real estate		896,618		876,644		868,382		821,004		849,692	9		12
Consumer		100,822		100,816		96,876		98,949		100,933	—		3
Tax exempt and other		54,338		57,480		51,816		54,579		57,839	(22)		(1)
Total loans	$	2,850,364	$	2,727,274	$	2,654,562	$	2,531,910	$	2,534,154	18	%	17	%


		Three Months Ended September 30,					Nine Months Ended September 30,
	Calculations	2022			2021		2022			2021
(in thousands)
Common shares outstanding, period-end	(K)		15,066			14,987		15,066			14,987
Average diluted shares outstanding	(L)		15,113			15,051		15,100			15,035

Adjusted earnings per share, diluted⁽²⁾	(A/L)	$	0.76		$	0.73	$	2.07		$	2.04
Tangible book value per share, period-end⁽²⁾	(I/K)		16.89			19.48		16.89			19.48
Securities adjustment, net of tax⁽¹⁾⁽⁴⁾	(M)		(58,715)			4,398		(58,715)			4,398
Tangible book value per share, excluding securities adjustment⁽²⁾⁽⁴⁾	(I+M)/K		20.79			19.19		20.79			19.19
Total tangible shareholders' equity/total tangible assets⁽²⁾	(I/J)		6.85			8.08		6.85			8.08

Performance ratios⁽⁵⁾
Return on assets			1.20	%		1.16		1.11	%		1.05
Adjusted return on assets⁽²⁾	(A/F)		1.20			1.16		1.12			1.09
Pre-tax, pre-provision return on assets			1.65			1.43		1.48			1.26
Adjusted pre-tax, pre-provision return on assets⁽²⁾	(U/F)		1.65			1.43		1.49			1.31
Return on equity			11.55			10.38		10.32			9.54
Adjusted return on equity⁽²⁾	(A/G)		11.54			10.39		10.38			9.98
Return on tangible equity			17.25			15.08		15.28			14.01
Adjusted return on tangible equity⁽¹⁾⁽²⁾	(A+Q)/H		17.24			15.09		15.37			14.50
Efficiency ratio⁽²⁾⁽⁶⁾	(D-O-Q)/(C+N)		57.67			59.18		59.66			61.48
Net interest margin	(B+P)/E		3.47			3.02		3.21			2.88
Adjusted net interest margin⁽²⁾⁽⁷⁾	(B+P-T)/S		3.47			2.75		3.21			2.73

Supplementary data (in thousands)
Taxable equivalent adjustment for efficiency ratio	(N)	$	533		$	576	$	1,500		$	1,757
Franchise taxes included in non-interest expense	(O)		149			143		434			396
Tax equivalent adjustment for net interest margin	(P)		379			421		1,033			1,284
Intangible amortization	(Q)		233			233		699			707
Interest and fees on PPP loans	(T)		—			2,690		223			5,058


				~~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~~
~~July 1-31, 2022~~	—	$	—	—	~~751,000~~
~~August 1-31, 2022~~	—		—	—	~~751,000~~
~~September 1-30, 2022~~	—		—	—	~~751,000~~
~~Total~~	—	$	—	—	~~751,000~~


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

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

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

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

101*	The following financial information from the Company’s Quarterly Report on Form 10-Q for the quarter ended ~~September 30, 2022~~March 31, 2023 is formatted in Inline Extensible Business Reporting Language (iXBRL): (i) Consolidated Condensed Statements of Income, (ii) the Condensed Consolidated Balance Sheets, (iii) the Condensed Consolidated Statements of Changes in Shareholders’ Equity, (iv) Consolidated Statements of Cash Flows and (v) Notes to the Consolidated Condensed Financial Statements

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


	BAR HARBOR BANKSHARES


Dated: ~~November 4, 2022~~May 8, 2023	By:	/s/ Curtis C. Simard
		Curtis C. Simard
		President & Chief Executive Officer (Principal Executive Officer)


Dated: ~~November 4, 2022~~May 8, 2023		/s/ Josephine Iannelli
		Josephine Iannelli
		Executive Vice President & Chief Financial Officer (Principal Financial and Accounting Officer)