BAR HARBOR BANKSHARES (Form: 10-Q, Received: 05/09/2019 16:15:07)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q



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

For the quarterly period ended: March 31, 2019



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

For the transition period from to

Commission File Number: 001-13349

BAR HARBOR BANKSHARES

(Exact name of registrant as specified in its charter)



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

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

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

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

Indicate by check mark whether the registrant has submitted electronically 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 ý No o

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

Large Accelerated Filer o Accelerated Filer ý Non-Accelerated Filer o Smaller Reporting Company o Emerging growth company o

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

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

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

The Registrant had 15,524,814 shares of common stock, par value $2.00 per share, outstanding as of May 3, 2019 .

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BAR HARBOR BANKSHARES AND SUBSIDIARIES

FORM 10-Q

INDEX



				Page
PART I.	FINANCIAL INFORMATION

Item 1.	Consolidated Financial Statements (unaudited)

	Consolidated Balance Sheets as of March 31, 2019 and December 31, 2018			4

	Consolidated Statements of Income for the Three Months Ended March 31, 2019 and 2018			5

	Consolidated Statements of Comprehensive Income for the Three Months Ended March 31, 2019 and 2018			6

	Consolidated Statements of Changes in Shareholders’ Equity for the Three Months Ended March 31, 2019 and 2018			7

	Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2019 and 2018			8

	Notes to Unaudited Consolidated Interim Financial Statements
		Note 1	Basis of Presentation	9
		Note 2	Securities Available for Sale	11
		Note 3	Loans	14
		Note 4	Allowance for Loan Losses	29
		Note 5	Borrowed Funds	35
		Note 6	Deposits	37
		Note 7	Capital Ratios and Shareholders' Equity	38
		Note 8	Earnings per Share	41
		Note 9	Derivative Financial Instruments and Hedging Activities	42
		Note 10	Fair Value Measurements	45
		Note 11	Non-Interest Income	51
		Note 12	Leases	53

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations			55

		Selected Financial Data		56
		Consolidated Loan and Deposit Analysis		58
		Average Balances and Average Yields/Rates		59
		Non-GAAP Financial Measures		60
		Reconciliation of Non-GAAP Financial Measures		61
		Financial Summary		63

Item 3.	Quantitative and Qualitative Disclosures about Market Risk			69

Item 4.	Controls and Procedures			72

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PART II.	OTHER INFORMATION

Item 1.	Legal Proceedings	72

Item 1A.	Risk Factors	72

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	72

Item 6.	Exhibits	73

Signatures		74

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

FORWARD-LOOKING STATEMENTS

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

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PART I. FINANCIAL INFORMATION

ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

BAR HARBOR BANKSHARES AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS



(in thousands, except share data)	March 31, 2019			December 31, 2018
Assets
Cash and due from banks	$	37,504		$	35,208
Interest-bearing deposit with the Federal Reserve Bank	16,599			63,546
Total cash and cash equivalents	54,103			98,754
Securities available for sale, at fair value	747,235			725,837
Federal Home Loan Bank stock	35,107			35,659
Total securities	782,342			761,496
Loans:
Commercial real estate	821,567			826,699
Commercial and industrial	409,937			404,870
Residential real estate	1,184,053			1,144,698
Consumer	111,402			113,960
Total loans	2,526,959			2,490,227
Less: Allowance for loan losses	(13,997		)	(13,866		)
Net loans	2,512,962			2,476,361
Premises and equipment, net	49,661			48,804
Other real estate owned	2,351			2,351
Goodwill	100,085			100,085
Other intangible assets	7,266			7,459
Cash surrender value of bank-owned life insurance	74,352			73,810
Deferred tax assets, net	7,632			9,514
Other assets	38,441			29,853
Total assets	$	3,629,195		$	3,608,487

Liabilities
Deposits:
Demand	$	342,030		$	370,889
NOW	470,277			484,717
Savings	346,813			358,888
Money market	349,833			335,951
Time	956,818			932,793
Total deposits	2,465,771			2,483,238
Borrowings:
Senior	703,283			680,823
Subordinated	42,958			42,973
Total borrowings	746,241			723,796
Other liabilities	36,160			30,874
Total liabilities	3,248,172			3,237,908
(continued)
(continued)
Shareholders’ equity
Capital stock, par value $2.00; authorized 20,000,000 shares; issued 16,428,388 and 16,428,388 shares at March 31, 2019 and December 31, 2018, respectively	32,857			32,857
Additional paid-in capital	187,743			187,653
Retained earnings	170,702			166,526
Accumulated other comprehensive loss	(5,628		)	(11,802		)
Less: 904,760 and 905,201 shares of treasury stock at March 31, 2019 and December 31, 2018, respectively	(4,651		)	(4,655		)
Total shareholders’ equity	381,023			370,579
Total liabilities and shareholders’ equity	$	3,629,195		$	3,608,487

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



	Three Months Ended March 31,
(in thousands, except per share data)	2019		2018
Interest and dividend income
Loans	$	26,864	$	25,126
Securities and other	6,363		5,651
Total interest and dividend income	33,227		30,777
Interest expense
Deposits	6,307		3,985
Borrowings	5,155		3,634
Total interest expense	11,462		7,619
Net interest income	21,765		23,158
Provision for loan losses	324		795
Net interest income after provision for loan losses	21,441		22,363
Non-interest income
Trust and investment management fee income	2,757		2,962
Customer service fees	2,165		2,224
Bank-owned life insurance income	542		446
Other income	703		606
Total non-interest income	6,167		6,238
Non-interest expense
Salaries and employee benefits	10,519		10,989
Occupancy and equipment	3,386		3,073
Outside services	411		560
Professional services	544		433
Communication	235		180
Amortization of intangible assets	207		207
Acquisition, conversion and other expenses	—		335
Other expenses	3,322		3,075
Total non-interest expense	18,624		18,852

Income before income taxes	8,984		9,749
Income tax expense	1,703		1,937
Net income	$	7,281	$	7,812

Earnings per share:
Basic	$	0.47	$	0.51
Diluted	$	0.47	$	0.50

Weighted average common shares outstanding:
Basic	15,523		15,448
Diluted	15,587		15,553

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



	Three Months Ended March 31,
(in thousands)	2019			2018
Net income	$	7,281		$	7,812
Other comprehensive income (loss), before tax:
Changes in unrealized loss on securities available-for-sale	8,900			(10,702		)
Changes in unrealized loss on cash flow hedging derivatives	(845		)	654
Changes in unrealized loss on pension	—			41
Income taxes related to other comprehensive income:
Changes in unrealized loss on securities available-for-sale	(2,079		)	2,550
Changes in unrealized loss on cash flow hedging derivatives	198			(155		)
Changes in unrealized loss on pension	—			(10		)
Total other comprehensive income (loss)	6,174			(7,622		)
Total comprehensive income	$	13,455		$	190

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



(in thousands, except per share data)	Common stock amount		Additional paid-in capital			Retained earnings			Accumulated other comprehensive income (loss)			Treasury stock			Total
Balance at December 31, 2017	$	32,857	$	186,702		$	144,977		$	(4,554	)	$	(5,341	)	$	354,641
Comprehensive income:
Net income	—		—			7,812			—			—			7,812
Other comprehensive loss	—		—			—			(7,622		)	—			(7,622		)
Total comprehensive income	—		—			7,812			(7,622		)	—			190
Cash dividends declared ($0.19 per share)	—		—			(2,884		)	—			—			(2,884		)
Net issuance (16,180 shares) to employee stock plans, including related tax effects	—		(112		)	—			—			127			15
Modified retrospective basis adoption of Revenue Recognition Accounting Codification Standard 606	—		—			(184		)	—			—			(184		)
Reclassification of the income tax effects of the Tax Cuts and Jobs Act from accumulated other comprehensive income for adoption of ASU 2018-02	—		—			980			(980		)	—			—
Recognition of stock based compensation	—		379			—			—			—			379
Balance at March 31, 2018	$	32,857	$	186,969		$	150,701		$	(13,156	)	$	(5,214	)	$	352,157

Balance at December 31, 2018	$	32,857	$	187,653		$	166,526		$	(11,802	)	$	(4,655	)	$	370,579
Comprehensive income:
Net income	—		—			7,281			—			—			7,281
Other comprehensive loss	—		—			—			6,174			—			6,174
Total comprehensive income	—		—			7,281			6,174			—			13,455
Cash dividends declared ($0.20 per share)	—		—			(3,105		)	—			—			(3,105		)
Net issuance (441 shares) to employee stock plans, including related tax effects	—		(173		)	—			—			4			(169		)
Recognition of stock based compensation	—		263			—			—			—			263
Balance at March 31, 2019	$	32,857	$	187,743		$	170,702		$	(5,628	)	$	(4,651	)	$	381,023

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



	Three Months Ended March 31,
(in thousands)	2019			2018
Cash flows from operating activities:
Net income	$	7,281		$	7,812
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses	324			795
Net amortization of securities	693			1,059
Change in unamortized net loan costs and premiums	(85		)	368
Premises and equipment depreciation	952			841
Stock-based compensation expense	90			379
Accretion of purchase accounting entries, net	(886		)	(704		)
Amortization of other intangibles	207			207
Income from cash surrender value of bank-owned life insurance policies	(542		)	(446		)
Net change in other assets and liabilities	(3,757		)	(1,444		)
Net cash provided by operating activities	4,277			8,867

Cash flows from investing activities:
Proceeds from maturities, calls and prepayments of securities available for sale	21,709			23,350
Purchases of securities available for sale	(35,290		)	(36,428		)
Net change in loans	(36,209		)	21,033
Purchase of Federal Home Loan Bank stock	(5,567		)	—
Proceeds from sale of Federal Home Loan Bank stock	6,119			—
Purchase of premises and equipment, net	(1,809		)	(1,595		)
Net cash (used in) provided by investing activities	(51,047		)	6,360

Cash flows from financing activities:
Net decrease in deposits	(17,260		)	(10,740		)
Net change in short-term advances from the Federal Home Loan Bank	43,951			(50,511		)
Net change in long-term advances from the Federal Home Loan Bank	(19,940		)	6,021
Net change in short-term other borrowings	(1,531		)	—
Proceeds from treasury stock	4			15
Cash dividends paid on common stock	(3,105		)	(2,884		)
Net cash provided by (used in) financing activities	2,119			(58,099		)

Net change in cash and cash equivalents	(44,651		)	(42,872		)
Cash and cash equivalents at beginning of year	98,754			90,685
Cash and cash equivalents at end of year	$	54,103		$	47,813

Supplemental cash flow information:
Interest paid	$	11,490		$	7,740
Income taxes paid, net	1,506			45

Other non-cash changes:
Real estate owned acquired in settlement of loans	—			94

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

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BAR HARBOR BANKSHARES AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

NOTE 1. BASIS OF PRESENTATION

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

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

The results for any interim period are not necessarily indicative of results for the full year. These consolidated financial statements should be read in conjunction with the audited financial statements and note disclosures for the Company's Annual Report on Form 10-K for the year ended December 31, 2018 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.

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Recent Accounting Pronouncements

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



Standard	Description	Required Date of Adoption	Effect on financial statements
Standards Adopted in 2019
ASU 2016-02, Leases	This ASU creates ASU Topic 842, Leases, and supersedes Topic 840, Leases. The new guidance requires lessees to record a right-of-use asset and a corresponding liability equal to the present value of future rental payments on their balance sheets for all leases with a term greater than one year. There are not significant changes to lessor accounting; however, there are certain improvements made to align lessor accounting with the lessee accounting model and Topic 606, Revenue from Contracts with Customers. This guidance expands both quantitative and qualitative required disclosures. This ASU is required to be adopted on a modified retrospective basis and allows for practical expedients and elections in conjunction with implementation. The Company may elect some of the expedients upon the adoption date, which may be applied prospectively or retrospectively.	January 1, 2019	The Company adopted this ASU as of January 1, 2019 including the election of the practical expedients, allowing for existing leases to be accounted for consistent with current guidance, with the exception of balance sheet recognition for lessees. A modified retrospective transition approach was utilized, applying the new standard to all leases existing at the date of initial application. At January 1, 2019 the Company recognized a right-of-use asset and corresponding lease liability of $9.0 million. This computation is based, primarily, on the present value of unpaid future minimum lease payments. Additionally, that amount is impacted by assumptions around renewals and/or extensions, and the interest rate used to discount those future lease obligations. Due to the limited size of the Company's leasing portfolio, many other items related to this standard don't apply, or had an immaterial impact on the Company's consolidated financial statements. For transitional disclosures see Note 12 - Leases.
ASU 2018-11 Practical Expedients to Topic 842, Leases
ASU 2018-20 Scope Improvements for Lessors
ASU 2019-01 Leases: Codification Improvements
ASU 2017-12, Targeted Improvements to Accounting for Hedging Activities	This ASU amends Accounting Standards Codification ("ASC") 815, Derivatives and Hedging to (1) improve the transparency and understandability of information conveyed to financial statement users about an entity's risk management activities by better aligning the entity's financial reporting for hedging relationships with those risk management activities and (2) reduce the complexity of and simplify the application of hedge accounting by preparers.	January 1, 2019	The Company adopted this ASU as of January 1, 2019, although it did not have a material impact on the Company's consolidated financial statements.
ASU 2018-16, Inclusion of Overnight Financing Rate or Overnight Swap Rate as a Benchmark for Hedge Accounting
ASU 2018-07, Share Based Payment Accounting	This ASU expands the scope of Topic 718, Compensation- Stock Compensation to include share-based payments issued to non-employees for goods or services. Consequently, the accounting for share-based payments to non-employees and employees will be substantially aligned. The ASU supersedes Subtopic 505-50, Equity-Based Payments to non-employees.	January 1, 2019	The Company adopted this ASU as of January 1, 2019, with no material impact on the Company's consolidated financial statements.

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Standard	Description	Required Date of Adoption	Effect on financial statements
Standards Not Yet Adopted
ASU 2016-13, Measurement of Credit Losses on Financial Instruments	This ASU amends Topic 326, Financial Instruments- Credit Losses to replace the current incurred loss accounting model with a current expected credit loss approach (CECL) for financial instruments measured at amortized cost and other commitments to extend credit. The amendments require entities to consider all available relevant information when estimating current expected credit losses, including details about past events, current conditions, and reasonable and supportable forecasts. The resulting allowance for credit losses is to reflect the portion of the amortized cost basis that the entity does not expect to collect. The amendments also eliminate the current accounting model for purchased credit impaired loans and certain off-balance sheet exposures. Additional quantitative and qualitative disclosures are required upon adoption.	January 1, 2020	Adoption of this ASU is expected to primarily change how the Company estimates credit losses on loans with the application of the expected credit loss model. Also, for acquired purchased impaired loans it requires the reclassification of the credit portion of the total remaining fair value adjustment directly to the allowance for loan losses. Fair value adjustments on purchased credit impaired loans related to interest rates and fair value adjustments on other acquired loans will continue to be accreted into income over time.
ASU 2018-19, Codification Improvements to ASU 2016-13
			In addition, the Company expects the ASU to change the presentation of credit losses for AFS debt securities through an allowance method rather than as a direct write-off and may allow for recovery of these amounts in the future.
	While the CECL model does not apply to available for sale debt securities, the ASU does require entities to record an allowance when recognizing credit losses for available for sale securities with unrealized losses, rather than reduce the amortized cost of the securities by direct write-offs. The guidances will require companies to recognize improvements to estimated credit losses immediately in earning rather than interest income over time.
			The Company is in the process of evaluating and implementing allowance loan loss estimation models to comply with the guidance under this ASU, which may result in a higher allowance for losses then currently recorded under the existing standard.
	The ASU should be adopted on a modified retrospective basis. Entities that have loans accounted for under ASC 310-30 at the time of adoption should prospectively apply the guidance in this amendment for purchase credit deteriorated assets.	Early adoption is permitted in 2019
ASU 2017-04, Simplifying the Test for Goodwill Impairment	This ASU amends Topic 350, Intangibles-Goodwill and Other, and eliminates Step 2 from the goodwill impairment test.	January 1, 2020	Adoption of this ASU is not expected to have a material impact on the Company's consolidated financial statements.
		Early adoption is permitted.
ASU 2018-13 Changes to Disclosure Requirements Fair Value Measurement, Topic 820	This ASU eliminates, adds and modifies certain disclosure requirements for fair value measurements. Among the changes, entities will no longer be required to disclose the amount and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, but will be required to disclose the range and weighted average used to develop significant unobservable inputs for Level 3 fair value measurements.	January 1, 2020	Adoption of this ASU is not expected to have a material impact on the Company's consolidated financial statements.
		Early adoption is permitted.
ASU 2018-14 Compensation- Disclosure Requirements for Defined Pension Plans Topic 715-20	This ASU makes minor changes to the disclosure requirements for employers that sponsor defined benefit pension and/or other post-retirement benefit plans.	January 1, 2021	Adoption of this ASU is not expected to have a material impact on the Company's consolidated financial statements.
		Early adoption is permitted.

NOTE 2. SECURITIES AVAILABLE FOR SALE

The following is a summary of securities available for sale:



(in thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
March 31, 2019
Securities available for sale
Debt securities:
Mortgage-backed securities:
US Government-sponsored enterprises	$	404,713	$	1,975	$	5,410	$	401,278
US Government agency	123,984		981		1,219		123,746
Private label	20,342		78		150		20,270
Obligations of states and political subdivisions thereof	128,666		2,106		824		129,948
Corporate bonds	71,934		441		382		71,993
Total securities available for sale	$	749,639	$	5,581	$	7,985	$	747,235

December 31, 2018
Securities available for sale
Debt securities:
Mortgage-backed securities:
US Government-sponsored enterprises	$	413,492	$	904	$	9,444	$	404,952
US Government agency	111,938		509		1,935		110,512
Private label	20,353		113		84		20,382
Obligations of states and political subdivisions thereof	133,260		1,081		2,076		132,265
Corporate bonds	58,098		264		636		57,726
Total securities available for sale	$	737,141	$	2,871	$	14,175	$	725,837

The amortized cost and estimated fair value of available for sale (“AFS”) securities segregated by contractual maturity at March 31, 2019 are presented below. Expected maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations. Mortgage-backed securities are shown in total, as their maturities are highly variable.



	Available for sale
(in thousands)	Amortized Cost		Fair Value
Within 1 year	$	420	$	421
Over 1 year to 5 years	34,117		34,365
Over 5 years to 10 years	65,026		65,440
Over 10 years	101,037		101,715
Total bonds and obligations	200,600		201,941
Mortgage-backed securities	549,039		545,294
Total securities available for sale	$	749,639	$	747,235

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



	Less Than Twelve Months				Over Twelve Months				Total
(In thousands)	Gross Unrealized Losses		Fair Value		Gross Unrealized Losses		Fair Value		Gross Unrealized Losses		Fair Value
March 31, 2019
Securities available for sale
Debt securities:
Mortgage-backed securities:
US Government-sponsored enterprises	$	15	$	5,958	$	5,395	$	259,984	$	5,410	$	265,942
US Government agency	17		6,784		1,202		60,359		1,219		67,143
Private label	145		19,905		5		45		150		19,950
Obligations of states and political subdivisions thereof	—		—		824		32,301		824		32,301
Corporate bonds	282		13,898		100		4,897		382		18,795
Total securities available for sale	$	459	$	46,545	$	7,526	$	357,586	$	7,985	$	404,131


December 31, 2018
Securities available for sale
Debt securities:
Mortgage-backed securities:
US Government-sponsored enterprises	$	155	$	19,367	$	9,289	$	297,569	$	9,444	$	316,936
US Government agency	16		2,570		1,919		68,266		1,935		70,836
Private label	79		10,393		5		47		84		10,440
Obligations of states and political subdivisions thereof	43		6,784		2,033		47,930		2,076		54,714
Corporate bonds	224		11,759		412		14,460		636		26,219
Total securities available for sale	$	517	$	50,873	$	13,658	$	428,272	$	14,175	$	479,145

Securities Impairment: As a part of the Company’s ongoing security monitoring process, the Company identifies securities in an unrealized loss position that could potentially be other-than-temporarily impaired. For the three months ended March 31, 2019 and 2018 the Company did not record any other-than-temporary impairment (“OTTI”) losses.



	Three Months Ended March 31,
	2019		2018
Estimated credit losses as of prior year-end	$	1,697	$	1,697
Reductions for securities paid off during the period	—		—
Estimated credit losses at end of the period	$	1,697	$	1,697

The Company expects to recover its amortized cost basis on all securities in its AFS portfolio. Furthermore, the Company does not intend to sell nor does it anticipate that it will be required to sell any of its securities in an unrealized loss position as of March 31, 2019 , prior to this recovery. The Company’s ability and intent to hold these securities until recovery is supported by the Company’s strong capital and liquidity positions as well as its historically low portfolio turnover.

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The following summarizes, by investment security type, the basis for the conclusion that securities in an unrealized loss position were not other-than-temporarily impaired at March 31, 2019 :

US Government-sponsored enterprises

378 out of the total 754 securities in the Company’s portfolios of AFS US Government-sponsored enterprises were in unrealized loss positions. Aggregate unrealized losses represented 2.0% of the amortized cost of securities in unrealized loss positions. The FNMA and FHLMC guarantee the contractual cash flows of all of the Company’s US Government-sponsored enterprises. The securities are investment grade rated and there were no material underlying credit downgrades during the quarter. All securities are performing.

US Government agency

96 out of the total 198 securities in the Company’s portfolios of AFS US Government agency securities were in unrealized loss positions. Aggregate unrealized losses represented 1.8% of the amortized cost of securities in unrealized loss positions. The Government National Mortgage Association (“GNMA”) guarantees the contractual cash flows of all of the Company’s US Government agency securities. The securities are investment grade rated and there were no material underlying credit downgrades during the quarter. All securities are performing.

Private label

Nine of the total 21 securities in the Company’s portfolio of AFS private label mortgage-backed securities were in unrealized loss positions. Aggregate unrealized losses represented 0.7% of the amortized cost of securities in unrealized loss positions. Based upon the expectation that the Company will receive all of the future contractual cash flows related to the amortized cost on these securities, the Company does not consider there to be any additional other-than-temporary impairment with respect to these securities.

Obligations of states and political subdivisions thereof

64 of the total 249 securities in the Company’s portfolio of AFS municipal bonds and obligations were in unrealized loss positions. Aggregate unrealized losses represented 2.5% of the amortized cost of securities in unrealized loss positions. The Company continually monitors the municipal bond sector of the market carefully and periodically evaluates the appropriate level of exposure to the market. At this time, the Company feels the bonds in this portfolio carry minimal risk of default and the Company is appropriately compensated for the risk. There were no material underlying credit downgrades during the quarter. All securities are performing.

Corporate bonds

Eight out of the total 26 securities in the Company’s portfolio of AFS corporate bonds were in an unrealized loss position. The aggregate unrealized loss represents 2.0% of the amortized cost of bonds in unrealized loss positions. The Company reviews the financial strength of all of these bonds and has concluded that the amortized cost remains supported by the expected future cash flows of these securities.

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NOTE 3. LOANS

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

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

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



	March 31, 2019						December 31, 2018
(in thousands)	Business Activities Loans		Acquired Loans		Total		Business Activities Loans		Acquired Loans		Total
Commercial real estate:
Construction and land development	$	34,782	$	2,851	$	37,633	$	23,754	$	2,890	$	26,644
Other commercial real estate	545,151		238,783		783,934		555,980		244,075		800,055
Total commercial real estate	579,933		241,634		821,567		579,734		246,965		826,699

Commercial and industrial:
Commercial	236,068		46,909		282,977		234,757		52,470		287,227
Agricultural	22,208		—		22,208		22,317		—		22,317
Tax exempt	66,727		38,025		104,752		56,588		38,738		95,326
Total commercial and industrial	325,003		84,934		409,937		313,662		91,208		404,870

Total commercial loans	904,936		326,568		1,231,504		893,396		338,173		1,231,569

Residential real estate:
Residential mortgages	723,425		460,628		1,184,053		670,189		474,509		1,144,698
Total residential real estate	723,425		460,628		1,184,053		670,189		474,509		1,144,698

Consumer:
Home equity	58,696		42,683		101,379		57,898		45,291		103,189
Other consumer	8,812		1,211		10,023		9,414		1,357		10,771
Total consumer	67,508		43,894		111,402		67,312		46,648		113,960

Total loans	$	1,695,869	$	831,090	$	2,526,959	$	1,630,897	$	859,330	$	2,490,227

The carrying amount of the acquired loans at March 31, 2019 totaled $831.1 million . A subset of these loans was determined to have evidence of credit deterioration at acquisition date, which is accounted for in accordance with ASC 310-30. These purchased credit-impaired loans presently maintain a carrying value of $10.0 million (and total note balances of $13.6 million ). These loans are evaluated for impairment through the periodic reforecasting of expected cash flows. Acquired loans considered not impaired at acquisition date had a carrying amount of $821.1 million as of March 31, 2019 .

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



	Three Months Ended March 31,
(in thousands)	2019			2018
Balance at beginning of period	$	4,377		$	3,509
Reclassification from non-accretable difference for loans with improved cash flows	222			199
Accretion	(449		)	(361		)
Balance at end of period	$	4,150		$	3,347

The following is a summary of past due loans at March 31, 2019 and December 31, 2018 :

Business Activities Loans



(in thousands)	30-59 Days Past Due		60-89 Days Past Due		90 Days or Greater Past Due		Total Past Due		Current		Total Loans		Past Due > 90 days and Accruing
March 31, 2019
Commercial real estate:
Construction and land development	$	1	$	73	$	—	$	74	$	34,708	$	34,782	$	—
Other commercial real estate	1,635		503		5,382		7,520		537,631		545,151		—
Total commercial real estate	1,636		576		5,382		7,594		572,339		579,933		—

Commercial and industrial:
Commercial	182		32		599		813		235,255		236,068		14
Agricultural	82		—		57		139		22,069		22,208		—
Tax exempt	—		—		—		—		66,727		66,727		—
Total commercial and industrial	264		32		656		952		324,051		325,003		14

Total commercial loans	1,900		608		6,038		8,546		896,390		904,936		14

Residential real estate:
Residential mortgages	1,234		167		1,357		2,758		720,667		723,425		—
Total residential real estate	1,234		167		1,357		2,758		720,667		723,425		—

Consumer:
Home equity	40		23		64		127		58,569		58,696		—
Other consumer	9		6		11		26		8,786		8,812		—
Total consumer	49		29		75		153		67,355		67,508		—

Total loans	$	3,183	$	804	$	7,470	$	11,457	$	1,684,412	$	1,695,869	$	14

Table of Contents

Business Activities Loans



(in thousands)	30-59 Days Past Due		60-89 Days Past Due		90 Days or Greater Past Due		Total Past Due		Current		Total Loans		Past Due > 90 days and Accruing
December 31, 2018
Commercial real estate:
Construction and land development	$	—	$	—	$	—	$	—	$	23,754	$	23,754	$	—
Other commercial real estate	1,146		—		6,725		7,871		548,109		555,980		—
Total commercial real estate	1,146		—		6,725		7,871		571,863		579,734		—

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

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

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

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

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

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Acquired Loans



(in thousands)	30-59 Days Past Due		60-89 Days Past Due		90 Days or Greater Past Due		Total Past Due		Acquired Credit Impaired		Total Loans		Past Due > 90 days and Accruing
March 31, 2019
Commercial real estate:
Construction and land development	$	—	$	13	$	—	$	13	$	173	$	2,851	$	—
Other commercial real estate	70		—		188		258		6,202		238,783		—
Total commercial real estate	70		13		188		271		6,375		241,634		—

Commercial and industrial:
Commercial	68		209		387		664		466		46,909		—
Agricultural	—		—		—		—		—		—		—
Tax exempt	—		—		—		—		—		38,025		—
Total commercial and industrial	68		209		387		664		466		84,934		—

Total commercial loans	138		222		575		935		6,841		326,568		—

Residential real estate:
Residential mortgages	1,777		119		1,156		3,052		3,112		460,628		—
Total residential real estate	1,777		119		1,156		3,052		3,112		460,628		—

Consumer:
Home equity	324		3		16		343		21		42,683		—
Other consumer	2		—		—		2		1		1,211		—
Total consumer	326		3		16		345		22		43,894		—

Total loans	$	2,241	$	344	$	1,747	$	4,332	$	9,975	$	831,090	$	—

Table of Contents

Acquired Loans



(in thousands)	30-59 Days Past Due		60-89 Days Past Due		90 Days or Greater Past Due		Total Past Due		Acquired Credit Impaired		Total Loans		Past Due > 90 days and Accruing
December 31, 2018
Commercial real estate:
Construction and land development	$	—	$	—	$	—	$	—	$	164	$	2,890	$	—
Other commercial real estate	631		99		211		941		6,143		244,075		—
Total commercial real estate	631		99		211		941		6,307		246,965		—

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

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

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

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

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

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Non-Accrual Loans

The following is summary information pertaining to non-accrual loans at March 31, 2019 and December 31, 2018 :



	March 31, 2019						December 31, 2018
(in thousands)	Business Activities Loans		Acquired Loans		Total		Business Activities Loans		Acquired Loans		Total
Commercial real estate:
Construction and land development	$	1	$	—	$	1	$	1	$	—	$	1
Other commercial real estate	7,235		280		7,515		7,873		282		8,155
Total commercial real estate	7,236		280		7,516		7,874		282		8,156

Commercial and industrial:
Commercial	1,336		605		1,941		1,423		643		2,066
Agricultural	251		—		251		265		—		265
Tax exempt	—		—		—		—		—		—
Total commercial and industrial	1,587		605		2,192		1,688		643		2,331

Total commercial loans	8,823		885		9,708		9,562		925		10,487

Residential real estate:
Residential mortgages	3,900		2,426		6,326		4,213		2,997		7,210
Total residential real estate	3,900		2,426		6,326		4,213		2,997		7,210

Consumer:
Home equity	279		198		477		246		201		447
Other consumer	87		1		88		90		1		91
Total consumer	366		199		565		336		202		538

Total loans	$	13,089	$	3,510	$	16,599	$	14,111	$	4,124	$	18,235

Loans evaluated for impairment as of March 31, 2019 and December 31, 2018 are, as follows:

Business Activities Loans



(in thousands)	Commercial real estate		Commercial and industrial		Residential real estate		Consumer		Total
March 31, 2019
Loans receivable:
Balance at end of period
Individually evaluated for impairment	$	9,204	$	1,361	$	2,695	$	13	$	13,273
Collectively evaluated	570,729		323,642		720,730		67,495		1,682,596
Total	$	579,933	$	325,003	$	723,425	$	67,508	$	1,695,869

Table of Contents

Business Activities Loans



(in thousands)	Commercial real estate		Commercial and industrial		Residential real estate		Consumer		Total
December 31, 2018
Loans receivable:
Balance at end of period
Individually evaluated for impairment	$	9,835	$	1,445	$	2,562	$	13	$	13,855
Collectively evaluated	569,899		312,217		667,627		67,299		1,617,042
Total	$	579,734	$	313,662	$	670,189	$	67,312	$	1,630,897

Acquired Loans



(in thousands)	Commercial real estate		Commercial and industrial		Residential real estate		Consumer		Total
March 31, 2019
Loans receivable:
Balance at end of period
Individually evaluated for impairment	$	188	$	405	$	729	$	—	$	1,322
Purchased credit impaired	6,375		466		3,112		22		9,975
Collectively evaluated	235,071		84,063		456,787		43,872		819,793
Total	$	241,634	$	84,934	$	460,628	$	43,894	$	831,090

Acquired Loans



(in thousands)	Commercial real estate		Commercial and industrial		Residential real estate		Consumer		Total
December 31, 2018
Loans receivable:
Balance at end of period
Individually evaluated for impairment	$	188	$	426	$	744	$	—	$	1,358
Purchased credit impaired	6,307		679		3,095		25		10,106
Collectively evaluated	240,470		90,103		470,670		46,623		847,866
Total	$	246,965	$	91,208	$	474,509	$	46,648	$	859,330

Table of Contents

The following is a summary of impaired loans at March 31, 2019 and December 31, 2018 :

Business Activities Loans



	March 31, 2019
(in thousands)	Recorded Investment		Unpaid Principal Balance		Related Allowance
With no related allowance:
Construction and land development	$	—	$	—	$	—
Other commercial real estate	8,222		8,346		—
Commercial	589		603		—
Agricultural	—		—		—
Tax exempt loans	—		—		—
Residential real estate	1,960		2,013		—
Home equity	—		—		—
Other consumer	—		—		—

With an allowance recorded:
Construction and land development	$	1	$	1	$	1
Other commercial real estate	981		1,000		395
Commercial	772		836		53
Agricultural	—		—		—
Tax exempt loans	—		—		—
Residential real estate	735		842		83
Home equity	13		13		1
Other consumer	—		—		—

Total
Commercial real estate	$	9,204	$	9,347	$	396
Commercial and industrial	1,361		1,439		53
Residential real estate	2,695		2,855		83
Consumer	13		13		1
Total impaired loans	$	13,273	$	13,654	$	533

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Acquired Loans



	March 31, 2019
(in thousands)	Recorded Investment		Unpaid Principal Balance		Related Allowance
With no related allowance:
Construction and land development	$	—	$	—	$	—
Other commercial real estate	90		90		—
Commercial	405		494		—
Agricultural	—		—		—
Tax exempt loans	—		—		—
Residential real estate	365		519		—
Home equity	—		—		—
Other consumer	—		—		—

With an allowance recorded:
Construction and land development	$	—	$	—	$	—
Other commercial real estate	98		97		16
Commercial	—		—		—
Agricultural	—		—		—
Tax exempt loans	—		—		—
Residential real estate	364		378		22
Home equity	—		—		—
Other consumer	—		—		—

Total
Commercial real estate	$	188	$	187	$	16
Commercial and industrial	405		494		—
Residential real estate	729		897		22
Consumer	—		—		—
Total impaired loans	$	1,322	$	1,578	$	38

Table of Contents

Business Activities Loans



	December 31, 2018
(in thousands)	Recorded Investment		Unpaid Principal Balance		Related Allowance
With no related allowance:
Construction and land development	$	—	$	—	$	—
Other commercial real estate	8,209		8,301		—
Commercial	649		669		—
Agricultural	—		—		—
Tax exempt loans	—		—		—
Residential real estate	1,671		1,709		—
Home equity	—		—		—
Other consumer	—		—		—

With an allowance recorded:
Construction and land development	$	1	$	1	$	1
Other commercial real estate	1,625		1,660		421
Commercial	796		855		78
Agricultural	—		—		—
Tax exempt loans	—		—		—
Residential real estate	891		916		111
Home equity	13		13		—
Other consumer	—		—		—

Total
Commercial real estate	$	9,835	$	9,962	$	422
Commercial and industrial	1,445		1,524		78
Residential real estate	2,562		2,625		111
Consumer	13		13		—
Total impaired loans	$	13,855	$	14,124	$	611

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Acquired Loans



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

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

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

Table of Contents

The following is a summary of the average recorded investment and interest income recognized on impaired loans as of March 31, 2019 and 2018 :

Business Activities Loans



	Three Months Ended March 31, 2019				Three Months Ended March 31, 2018
(in thousands)	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
With no related allowance:
Construction and land development	$	—	$	—	$	589	$	—
Other commercial real estate	7,773		26		5,937		77
Commercial	527		2		1,334		9
Agricultural	—		—		—		—
Tax exempt loans	—		—		—		—
Residential real estate	1,965		15		3,591		39
Home equity	—		—		444		—
Other consumer	—		—		—		—

With an allowance recorded:
Construction and land development	$	5	$	—	$	—	$	—
Other commercial real estate	1,203		—		1,144		—
Commercial	890		—		187		—
Agricultural	—		—		—		—
Tax exempt loans	—		—		—		—
Residential real estate	652		2		802		9
Home equity	13		—		—		1
Other consumer	—		—		—		—

Total
Commercial real estate	$	8,981	$	26	$	7,670	$	77
Commercial and industrial	1,417		2		1,521		9
Residential real estate	2,617		17		4,393		48
Consumer	13		—		444		1
Total impaired loans	$	13,028	$	45	$	14,028	$	135

Table of Contents

Acquired Loans



	Three Months Ended March 31, 2019				Three Months Ended March 31, 2018
(in thousands)	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
With no related allowance:
Construction and land development	$	—	$	—	$	—	$	—
Other commercial real estate	90		—		133		—
Commercial	479		—		161		1
Agricultural	—		—		—		—
Tax exempt loans	—		—		—		—
Residential real estate	436		—		508		—
Home equity	—		—		—		—
Other consumer	—		—		—		—

With an allowance recorded:
Construction and land development	$	—	$	—	$	—	$	—
Other commercial real estate	36		—		—		—
Commercial	—		—		434		—
Agricultural	—		—		—		—
Tax exempt loans	—		—		—		—
Residential real estate	367		—		—		—
Home equity	—		—		—		—
Other consumer	—		—		—		—

Total
Commercial real estate	$	126	$	—	$	133	$	—
Commercial and industrial	479		—		595		1
Residential real estate	803		—		508		—
Consumer	—		—		—		—
Total impaired loans	$	1,408	$	—	$	1,236	$	1

Troubled Debt Restructuring Loans

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

Table of Contents

The following tables include the recorded investment and number of modifications identified during the three months ended March 31, 2019 and 2018, respectively. The table includes the recorded investment in the loans prior to a modification and also the recorded investment in the loans after the loans were restructured. Modifications may include adjustments to interest rates, payment amounts, extensions of maturity, court ordered concessions or other actions intended to minimize economic loss and avoid foreclosure or repossession of collateral.



	Three Months Ended March 31, 2019
(in thousands, except modifications)	Number of Modifications	Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment
Troubled Debt Restructurings
Construction and land development	—	$	—	$	—
Other commercial real estate	3	113		113
Commercial	2	31		31
Agricultural	—	—		—
Tax exempt	—	—		—
Residential mortgages	6	530		527
Home equity	—	—		—
Other consumer	—	—		—
Total	11	$	674	$	671


	Three Months Ended March 31, 2018
(in thousands, except modifications)	Number of Modifications	Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment
Troubled Debt Restructurings
Construction and land development	—	$	—	$	—
Other commercial real estate	1	167		—
Commercial	2	452		448
Agricultural	1	2		2
Tax exempt	—	—		—
Residential mortgages	5	1,105		1,099
Home equity	—	—		—
Other Consumer	1	1		1
Total	10	$	1,727	$	1,550

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The following table summarizes the types of loan concessions made for the periods presented:



	Three Months Ended March 31,
	2019			2018
(in thousands, except modifications)	Number of Modifications	Post-Modification Outstanding Recorded Investment		Number of Modifications	Post-Modification Outstanding Recorded Investment
Interest only payments and maturity concession	2	12		—	—
Amortization and maturity concession	5	314		—	—
Amortization concession	1	156		—	—
Amortization, interest rate and maturity concession	1	77		—	—
Forbearance and interest only payments	2	112		3	51
Forbearance and maturity concession	—	—		5	559
Maturity concession	—	—		1	433
Other	—	—		1	507
Total	11	$	671	10	$	1,550

For the three months ended March 31, 2019 , there were no loans that were restructured that had subsequently defaulted during the period. The evaluation of certain loans individually for specific impairment includes loans that were previously classified as TDRs or continue to be classified as TDRs.

Foreclosure

As of March 31, 2019 and December 31, 2018, the Company maintained bank-owned residential real estate property with a fair value of $2.4 million . Additionally, residential mortgage loans collateralized by real estate property that are in the process of foreclosure as of March 31, 2019 and December 31, 2018 totaled $1.4 million and $1.5 million , respectively.

Mortgage Banking

Total residential loans included held for sale loans of $863 thousand and $168 thousand at March 31, 2019 and December 31, 2018 , respectively.

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NOTE 4. ALLOWANCE FOR LOAN LOSSES

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

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

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

Specific Reserve for Loans Individually Evaluated

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

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

Quantitative Reserve for Loans Collectively Evaluated

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

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Qualitative Reserve for Loans Collectively Evaluated

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

Loss Emergence Period for Loans Collectively Evaluated

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

Activity in the allowance for loan losses for the three months ended March 31, 2019 and 2018 are, as follows:



Business Activities Loans	At or for the Three Months Ended March 31, 2019
(in thousands)	Commercial real estate			Commercial and industrial		Residential real estate			Consumer			Total
Balance at beginning of period	$	6,811		$	2,380	$	3,982		$	408		$	13,581
Charged-off loans	(57		)	—		—			(53		)	(110		)
Recoveries on charged-off loans	16			1		18			3			38
(Releases) provision for loan losses	(195		)	397		(47		)	38			193
Balance at end of period	$	6,575		$	2,778	$	3,953		$	396		$	13,702
Individually evaluated for impairment	396			53		83			1			533
Collectively evaluated	6,179			2,725		3,870			395			13,169
Total	$	6,575		$	2,778	$	3,953		$	396		$	13,702



Business Activities Loans	At or for the Three Months Ended March 31, 2018
(in thousands)	Commercial real estate			Commercial and industrial			Residential real estate			Consumer			Total
Balance at beginning of period	$	6,037		$	2,373		$	3,357		$	386		$	12,153
Charged-off loans	—			(84		)	—			(170		)	(254		)
Recoveries on charged-off loans	15			2			1			2			20
(Releases) provision for loan losses	(54		)	321			(54		)	282			495
Balance at end of period	$	5,998		$	2,612		$	3,304		$	500		$	12,414
Individually evaluated for impairment	433			132			84			—			649
Collectively evaluated	5,565			2,480			3,220			500			11,765
Total	$	5,998		$	2,612		$	3,304		$	500		$	12,414

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Acquired Loans	At or for the Three Months Ended March 31, 2019
(in thousands)	Commercial real estate			Commercial and industrial			Residential real estate			Consumer			Total
Balance at beginning of period	$	173		$	35		$	77		$	—		$	285
Charged-off loans	—			(16		)	(104		)	(1		)	(121		)
Recoveries on charged-off loans	—			—			—			—			—
(Releases) provision for loan losses	(12		)	10			132			1			131
Balance at end of period	$	161		$	29		$	105		$	—		$	295
Individually evaluated for impairment	16			—			22			—			38
Collectively evaluated	145			29			83			—			257
Total	$	161		$	29		$	105		$	—		$	295



Acquired Loans	At or for the Three Months Ended March 31, 2018
(in thousands)	Commercial real estate			Commercial and industrial			Residential real estate			Consumer			Total
Balance at beginning of period	$	97		$	16		$	59		$	—		$	172
Charged-off loans	(54		)	(18		)	(31		)	(19		)	(122		)
Recoveries on charged-off loans	—			—			—			—			—
Provision for loan losses	40			126			30			19			215
Balance at end of period	$	83		$	124		$	58		$	—		$	265
Individually evaluated for impairment	—			121			—			—			121
Collectively evaluated	83			3			58			—			144
Total	$	83		$	124		$	58		$	—		$	265

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

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

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

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

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

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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 the Company to sufficient risks to warrant classification.

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

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

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

The following tables present the Company’s loans by risk rating at March 31, 2019 and December 31, 2018 :

Business Activities Loans

Commercial Real Estate

Credit Risk Profile by Creditworthiness Category



	Construction and land development				Commercial real estate other				Total commercial real estate
(in thousands)	Mar 31, 2019		Dec 31, 2018		Mar 31, 2019		Dec 31, 2018		Mar 31, 2019		Dec 31, 2018
Grade:
Pass	$	34,708	$	23,680	$	523,774	$	532,386	$	558,482	$	556,066
Special mention	73		73		6,943		8,319		7,016		8,392
Substandard	—		—		13,076		13,914		13,076		13,914
Doubtful	1		1		1,358		1,361		1,359		1,362
Total	$	34,782	$	23,754	$	545,151	$	555,980	$	579,933	$	579,734

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Commercial and Industrial

Credit Risk Profile by Creditworthiness Category



	Commercial				Agricultural				Tax exempt loans				Total commercial and industrial
(in thousands)	Mar 31, 2019		Dec 31, 2018		Mar 31, 2019		Dec 31, 2018		Mar 31, 2019		Dec 31, 2018		Mar 31, 2019		Dec 31, 2018
Grade:
Pass	$	228,384	$	226,353	$	21,625	$	21,680	$	66,727	$	56,588	$	316,736	$	304,621
Special mention	1,632		6,730		191		215		—		—		1,823		6,945
Substandard	5,326		924		392		422		—		—		5,718		1,346
Doubtful	726		750		—		—		—		—		726		750
Total	$	236,068	$	234,757	$	22,208	$	22,317	$	66,727	$	56,588	$	325,003	$	313,662

Residential Real Estate and Consumer Loans

Credit Risk Profile Based on Payment Activity



	Residential real estate				Home equity				Other consumer				Total residential real estate and consumer
(in thousands)	Mar 31, 2019		Dec 31, 2018		Mar 31, 2019		Dec 31, 2018		Mar 31, 2019		Dec 31, 2018		Mar 31, 2019		Dec 31, 2018
Performing	$	719,525	$	665,976	$	58,417	$	57,652	$	8,725	$	9,324	$	786,667	$	732,952
Nonperforming	3,900		4,213		279		246		87		90		4,266		4,549
Total	$	723,425	$	670,189	$	58,696	$	57,898	$	8,812	$	9,414	$	790,933	$	737,501

Acquired Loans

Commercial Real Estate

Credit Risk Profile by Creditworthiness Category



	Commercial construction and land development				Commercial real estate other				Total commercial real estate
(in thousands)	Mar 31, 2019		Dec 31, 2018		Mar 31, 2019		Dec 31, 2018		Mar 31, 2019		Dec 31, 2018
Grade:
Pass	$	2,580	$	2,626	$	230,746	$	236,393	$	233,326	$	239,019
Special mention	—		—		1,632		1,574		1,632		1,574
Substandard	271		264		6,405		6,009		6,676		6,273
Doubtful	—		—		—		99		—		99
Total	$	2,851	$	2,890	$	238,783	$	244,075	$	241,634	$	246,965

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Commercial and Industrial

Credit Risk Profile by Creditworthiness Category



	Commercial				Agricultural				Tax exempt loans				Total commercial and industrial
(in thousands)	Mar 31, 2019		Dec 31, 2018		Mar 31, 2019		Dec 31, 2018		Mar 31, 2019		Dec 31, 2018		Mar 31, 2019		Dec 31, 2018
Grade:
Pass	$	41,832	$	46,120	$	—	$	—	$	38,025	$	38,738	$	79,857	$	84,858
Special mention	3,570		4,825		—		—		—		—		3,570		4,825
Substandard	1,156		1,222		—		—		—		—		1,156		1,222
Doubtful	351		303		—		—		—		—		351		303
Total	$	46,909	$	52,470	$	—	$	—	$	38,025	$	38,738	$	84,934	$	91,208

Residential Real Estate and Consumer Loans

Credit Risk Profile Based on Payment Activity



	Residential real estate				Home equity				Other consumer				Total residential real estate and consumer
(in thousands)	Mar 31, 2019		Dec 31, 2018		Mar 31, 2019		Dec 31, 2018		Mar 31, 2019		Dec 31, 2018		Mar 31, 2019		Dec 31, 2018
Performing	$	457,195	$	470,497	$	42,485	$	45,090	$	1,210	$	1,356	$	500,890	$	516,943
Nonperforming	3,433		4,012		198		201		1		1		3,632		4,214
Total	$	460,628	$	474,509	$	42,683	$	45,291	$	1,211	$	1,357	$	504,522	$	521,157

The following table summarizes total classified and criticized loans as of March 31, 2019 and December 31, 2018 :



	March 31, 2019						December 31, 2018
(in thousands)	Business Activities Loans		Acquired Loans		Total		Business Activities Loans		Acquired Loans		Total
Non-accrual	$	13,089	$	3,510	$	16,599	$	14,111	$	4,124	$	18,235
Substandard accruing	12,056		8,305		20,361		7,810		7,987		15,797
Doubtful accruing	—		—		—		—		—		—
Total classified	25,145		11,815		36,960		21,921		12,111		34,032
Special mention	8,839		5,202		14,041		15,337		6,399		21,736
Total Criticized	$	33,984	$	17,017	$	51,001	$	37,258	$	18,510	$	55,768

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NOTE 5. BORROWED FUNDS

Borrowed funds at March 31, 2019 and December 31, 2018 are summarized, as follows:



	March 31, 2019				December 31, 2018
(dollars in thousands)	Carrying Value		Weighted Average Rate		Carrying Value		Weighted Average Rate
Short-term borrowings
Advances from the FHLB	$	655,629	2.51	%	$	611,683	2.47	%
Other borrowings	34,680		1.42		36,211		1.09
Total short-term borrowings	690,309		2.46		647,894		2.39
Long-term borrowings
Advances from the FHLB	12,974		1.75		32,929		1.86
Subordinated borrowings	37,958		5.96		37,973		5.58
Junior subordinated borrowings	5,000		6.18		5,000		5.96
Total long-term borrowings	55,932		5.01		75,902		3.99
Total	$	746,241	2.65	%	$	723,796	2.56	%

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

The Company also had capacity to borrow funds on a secured basis utilizing the Borrower in Custody program and the Discount Window at the Federal Reserve Bank of Boston (the “FRB”). At March 31, 2019 , the Company’s available secured line of credit at the FRB was $122.6 million . The Company has pledged certain loans and securities to the FRB to support this arrangement. There were no borrowings with the FRB for the periods ended March 31, 2019 and December 31, 2018 .

Long-term FHLB advances consist of advances with a maturity of more than one year. The advances outstanding at March 31, 2019 and December 31, 2018 include no callable advances and $330 thousand of amortizing advances. All FHLB borrowings, including the line of credit, are secured by a blanket security agreement on certain qualified collateral, principally all residential first mortgage loans and certain securities.

A summary of maturities of FHLB advances as of March 31, 2019 is, as follows:



	March 31, 2019
(in thousands, except rates)	Carrying Value		Weighted Average Rate
Fixed rate advances maturing:
2019	$	635,664	2.54	%
2020	29,965		1.78
2021	1,651		1.69
2022	—		—
2023	1,000		—
2024 and thereafter	323		1.78
Total FHLB advances	$	668,603	2.50	%

In April 2008, the Company issued fifteen year junior subordinated notes in the amount of $5.0 million . These debt securities qualify as Tier 2 capital for the Company and the Bank. The subordinated debt securities are callable by the Bank after five years without penalty. The interest rate is three-month LIBOR plus 3.45% . At March 31, 2019 and December 31, 2018 the interest rate was 6.06% and 6.24% , respectively.

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The Company has $17.0 million of subordinated debt issued on October 29, 2014, in connection with the execution of a Subordinated Note Purchase Agreement with an aggregate of $17.0 million of subordinated notes (the “Notes”) to the accredited investors. The Notes have a maturity date of November 1, 2024, and will bear interest at a fixed rate of 6.75% per annum. The Company may, at its option, beginning with the interest payment date of November 1, 2019, and on any interest payment date thereafter, redeem the Notes, in whole or in part, at par plus accrued and unpaid interest to the date of redemption. Any partial redemption will be made pro rata among all of the noteholders. The Notes are not subject to repayment at the option of the noteholders. The Notes are unsecured, subordinated obligations of the Company and rank junior in right of payment to the Company’s senior indebtedness and to the Company’s obligations to its general creditors.

The Company also has $20.6 million in floating Junior Subordinated Deferrable Interest Debentures ("Debentures") issued by NHTB Capital Trust II ("Trust II") and NHTB Capital Trust III ("Trust III"), which are both Connecticut statutory trusts. The Debentures were issued on March 30, 2014, carry a variable interest rate of 3-month LIBOR plus 2.79% , and mature in 2034. The debt is callable by the Company at the time when any interest payment is made. Trust II and Trust III are considered variable interest entities for which the Company is not the primary beneficiary. Accordingly, Trust II and Trust III are not consolidated into the Company’s financial statements.

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NOTE 6. DEPOSITS

A summary of time deposits is, as follows:



(in thousands)	March 31, 2019		December 31, 2018
Time less than $100,000	$	679,364	$	622,478
Time $100,000 through $250,000	185,804		193,535
Time $250,000 or more	91,650		116,780
Total time deposits	$	956,818	$	932,793

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



(in thousands)	March 31, 2019		December 31, 2018
Within 1 year	$	518,215	$	505,313
Over 1 year to 2 years	263,776		258,176
Over 2 years to 3 years	130,146		123,337
Over 3 years to 4 years	19,560		14,494
Over 4 years to 5 years	24,935		31,353
Over 5 years	186		120
Total	$	956,818	$	932,793

Included in time deposits are brokered deposits of $534.9 million and $466.9 million at March 31, 2019 and December 31, 2018 , respectively. Also included in time deposits are reciprocal deposits of $49.4 million and $52.4 million at March 31, 2019 and December 31, 2018 , respectively.

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NOTE 7. CAPITAL RATIOS AND SHAREHOLDERS’ EQUITY

The actual and required capital ratios are, as follows:



	March 31, 2019		Regulatory Minimum to be "Well Capitalized"		December 31, 2018		Regulatory Minimum to be "Well Capitalized"
Company (consolidated)
Total capital to risk-weighted assets	14.15	%	N/A		14.23	%	N/A
Common equity tier 1 capital to risk-weighted assets	11.76		N/A		11.80		N/A
Tier 1 capital to risk-weighted assets	12.63		N/A		12.68		N/A
Tier 1 capital to average assets	8.66		N/A		8.53		N/A

Bank
Total capital to risk-weighted assets	13.69	%	10.00	%	13.82	%	10.00	%
Common equity tier 1 capital to risk-weighted assets	12.88		6.50		12.99		6.50
Tier 1 capital to risk-weighted assets	12.88		8.00		12.99		8.00
Tier 1 capital to average assets	8.82		5.00		8.74		5.00

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

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

The final capital rules impose restrictions on capital distributions and certain discretionary cash bonus payments if the minimum capital conservation buffer is not met.

At March 31, 2019 , the capital levels of both the Company and the Bank exceeded all regulatory capital requirements and their regulatory capital ratios were above the minimum levels required to be considered "well-capitalized" for regulatory purposes.

Accumulated other comprehensive loss

Components of accumulated other comprehensive loss is, as follows:



(in thousands)	March 31, 2019			December 31, 2018
Other accumulated comprehensive loss, before tax:
Net unrealized loss on AFS securities	$	(2,404	)	$	(11,304	)
Net unrealized loss on effective cash flow hedging derivatives	(3,779		)	(2,934		)
Net unrealized loss on post-retirement plans	(1,162		)	(1,162		)

Income taxes related to items of accumulated other comprehensive loss:
Net unrealized loss on AFS securities	560			2,641
Net unrealized loss on effective cash flow hedging derivatives	883			685
Net unrealized loss on post-retirement plans	274			272
Accumulated other comprehensive loss	$	(5,628	)	$	(11,802	)

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The following table presents the components of other comprehensive income (loss) for the three months ended March 31, 2019 and 2018 :



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

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

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

Three Months Ended March 31, 2018
Net unrealized loss on AFS securities:
Net unrealized loss arising during the period	$	(10,702	)	$	2,550		$	(8,152	)
Less: reclassification adjustment for gains (losses) realized in net income	—			—			—
Net unrealized loss on AFS securities	(10,702		)	2,550			(8,152		)

Net unrealized gain on cash flow hedging derivatives:
Net unrealized gain arising during the period	654			(155		)	499
Less: reclassification adjustment for gains (losses) realized in net income	—			—			—
Net unrealized gain on cash flow hedging derivatives	654			(155		)	499

Net unrealized gain on post-retirement plans:
Net unrealized gain arising during the period	41			(10		)	31
Less: reclassification adjustment for gains (losses) realized in net income	—			—			—
Net unrealized gain on post-retirement plans	41			(10		)	31
Other comprehensive loss	$	(10,007	)	$	2,385		$	(7,622	)

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The following table presents the changes in each component of accumulated other comprehensive income (loss), for the three months ended March 31, 2019 and 2018 :



(in thousands)	Net unrealized holding (loss) gain on AFS Securities			Net loss on effective cash flow hedging derivatives			Net unrealized holding loss on pension plans			Total
Three Months Ended March 31, 2019
Balance at beginning of period	$	(8,665	)	$	(2,249	)	$	(888	)	$	(11,802	)
Other comprehensive gain (loss) before reclassifications	6,821			(647		)	—			6,174
Less: amounts reclassified from accumulated other comprehensive income	—			—			—			—
Total other comprehensive income (loss)	6,821			(647		)	—			6,174
Balance at end of period	$	(1,844	)	$	(2,896	)	$	(888	)	$	(5,628	)

Three Months Ended March 31, 2018
Balance at beginning of period	$	(1,713	)	$	(2,250	)	$	(591	)	$	(4,554	)
Other comprehensive (loss) gain before reclassifications	(8,152		)	499			31			(7,622		)
Less: amounts reclassified from accumulated other comprehensive income	—			—			—			—
Total other comprehensive (loss) income	(8,152		)	499			31			(7,622		)
Less: amounts reclassified from accumulated other comprehensive income for ASU 2018-02	(367		)	(485		)	(128		)	(980		)
Balance at end of period	$	(10,232	)	$	(2,236	)	$	(688	)	$	(13,156	)

The Company did not have any reclassifications from any component of accumulated other comprehensive income (loss) for the three months ended March 31, 2019 and 2018.

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NOTE 8. EARNINGS PER SHARE

The following table presents the calculation of earnings per share:



	Three Months Ended March 31,
(in thousands, except per share and share data)	2019		2018
Net income	$	7,281	$	7,812

Average number of basic common shares outstanding	15,523,423		15,448,338
Plus: dilutive effect of stock options and awards outstanding ⁽¹⁾	63,226		104,631
Average number of diluted common shares outstanding ⁽¹⁾	15,586,649		15,552,969

Anti-dilutive options excluded from earnings calculation	—		1,230

Earnings per share:
Basic	$	0.47	$	0.51
Diluted	$	0.47	$	0.50

_____________________________________

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

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NOTE 9. DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGING ACTIVITIES

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

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

Changes in fair value of derivative instruments that are highly effective and qualify as cash flow hedges are recorded in other comprehensive income or loss. The Company discontinues hedge accounting when it is determined the derivative is no longer effective in offsetting changes of the hedged risk on the hedged item, or management determines the designation of the derivative as a hedging instrument is no longer appropriate.

The following tables present information about derivative assets and liabilities at March 31, 2019 and December 31, 2018 :



	March 31, 2019
	Notional Amount		Weighted Average Maturity	Estimated Fair Value Asset (Liability)
	(in thousands)		(in years)	(in thousands)
Cash flow hedges:
Interest rate cap agreements	$	90,000	3.9	$	320
Interest rate swap on deposits	50,000		5.0	(525		)
Total cash flow hedges	140,000			(205		)

Economic hedges:
Forward sale commitments	3,257		0.1	(65		)
Total economic hedges	3,257			(65		)

Non-hedging derivatives:
Interest rate lock commitments	4,828		0.1	14
Customer loan derivative liability	58,684		10.8	(2,852		)
Customer loan derivative asset	58,684		10.8	2,852
Total non-hedging derivatives	122,196			14

Total	$	265,453		$	(256	)

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

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

Total	$	182,239		$	811

Information about derivative assets and liabilities for the three months ended March 31, 2019 and 2018 is, as follows:



	Three Months Ended March 31,
(in thousands)	2019			2018
Cash flow hedges:
Interest rate cap agreements
Realized gain (loss) in interest expense	$	163		$	(108	)

Economic hedges:
Forward commitments
Realized (loss) gain in other non-interest income	(65		)	170

Non-hedging derivatives:
Interest rate lock commitments
Realized gain in other non-interest income	6			8

Cash flow hedges

Interest rate cap agreements

In 2014, interest rate cap agreements were purchased to limit the Company’s exposure to rising interest rates on four rolling, three-month borrowings indexed to three-month LIBOR. Under the terms of the agreements, the Company paid total premiums of $4.6 million for the right to receive cash flow payments if three-month LIBOR rises above the caps of 3.00% , thus effectively ensuring interest expense on the borrowings at maximum rates of 3.00% for the duration of the agreements. The interest rate cap agreements were designated as cash flow hedges. The fair values of the interest rate cap agreements are included in other assets on the Company’s consolidated balance sheets. Changes in the fair value, representing unrealized gains or losses, are recorded in accumulated other comprehensive income, net of tax. The premiums paid on the interest rate cap agreements are being recognized as increases in interest expense over the duration of the agreements using the caplet method.

Interest rate swap on deposits

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

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liabilities on the Company's consolidated balance sheets. Changes in the fair value, representing unrealized gains or losses, are recorded in accumulated other comprehensive income, net of tax.

Economic hedges

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

Non-hedging derivatives

Interest rate lock commitments

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

Customer loan derivatives

The Company enters into customer loan derivatives to facilitate the risk management strategies for commercial banking customers. The Company mitigates this risk by entering into equal and offsetting loan swap agreements with highly rated third-party financial institutions. The loan swap agreements are free-standing derivatives and are recorded at fair value in the Company's consolidated balance sheet. The Company is party to master netting arrangements with its financial institutional counterparties; however, the Company does not offset assets and liabilities under these arrangements for financial statement presentation purposes. The master netting arrangements provide for a single net settlement of all loan swap agreements, as well as collateral or cash funds, in the event of default on, or termination of, any one contract. Collateral is provided by cash or securities received or posted by the counterparty with net liability positions, respectively, in accordance with contract thresholds. Currently, the Company has posted cash of $1.9 million with the counterparty.

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NOTE 10. FAIR VALUE MEASUREMENTS

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

Recurring Fair Value Measurements

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



	March 31, 2019
(in thousands)	Level 1 Inputs		Level 2 Inputs			Level 3 Inputs			Total Fair Value
Available for sale securities:
Mortgage-backed securities:
US Government-sponsored enterprises	$	—	$	401,278		$	—		$	401,278
US Government agency	—		123,746			—			123,746
Private label	—		20,270			—			20,270
Obligations of states and political subdivisions thereof	—		129,948			—			129,948
Corporate bonds	—		71,993			—			71,993
Derivative assets	—		3,172			14			3,186
Derivative liabilities	—		(3,377		)	(65		)	(3,442		)



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

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

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Derivative Assets and Liabilities

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

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

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

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

Although the Company has determined that the majority of the inputs used to value its customer loan derivatives fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with its derivatives utilize Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default by itself and its counterparties. However, as of March 31, 2019 , the Company assessed the significance of the impact of the credit valuation adjustments on the overall valuation of its derivative positions and determined that the credit valuation adjustments are not significant to the overall valuation of its derivatives. As a result, the Company determined that its derivative valuations in their entirety are classified in Level 2 of the fair value hierarchy.

The table below presents the changes in Level 3 assets and liabilities that were measured at fair value on a recurring basis for the three months ended March 31, 2019 :



	Assets (Liabilities)
(in thousands)	Interest Rate Lock Commitments		Forward Commitments
Three Months Ended March 31, 2019
Balance at beginning of period	$	8	$	—
Realized gain recognized in non-interest income	6		(65		)
March 31, 2019 Balance	$	14	$	(65	)

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



(in thousands, except ratios)	Fair Value March 31, 2019			Valuation Techniques	Unobservable Inputs	Unobservable Input Value
Assets (Liabilities)
Interest Rate Lock Commitment	$	14		Historical trend	Closing Ratio	90		%
				Pricing Model	Origination Costs, per loan	$	1.7

Forward Commitments	(65		)	Quoted prices for similar loans in active markets.	Freddie Mac pricing system	Pair-off contract price
Total	$	(51	)

Non-Recurring Fair Value Measurements

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



	March 31, 2019		December 31, 2018		Three Months Ended March 31, 2019		Fair Value Measurement Date as of March 31, 2019
(in thousands)	Level 3 Inputs		Level 3 Inputs		Total Gains (Losses)		Level 3 Inputs
Assets
Impaired loans	$	14,595	$	15,213	$	6,477	March 2019
Capitalized servicing rights	4,658		4,882		—		March 2019
Other real estate owned	2,351		2,351		—		June 2018
Total	$	21,604	$	22,446	$	6,477

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

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

Fair Value

Range

(in thousands, except ratios)

March 31, 2019

Valuation Techniques

Unobservable Inputs

(Weighted Average) ^(a)

Assets

Impaired loans

11,122

Fair value of collateral -appraised value

Loss severity

0% to 65%

Appraised value

$0 to $6,915

Impaired loans

3,473

Discount cash flow

Discount rate

2.88% to 9.50%

Cash flows

$22 to $1,071

Capitalized servicing rights

4,658

Discounted cash flow

Constant prepayment rate (CPR)

8.68

Discount rate

10.08

Other real estate owned

2,351

Fair value of collateral less selling costs

Appraised value

$2,700

Selling Costs

12.93

Total

21,604


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

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Fair Value

Range

(in thousands, except ratios)

December 31, 2018

Valuation Techniques

Unobservable Inputs

(Weighted Average) ^(a)

Assets

Impaired loans

11,676

Fair value of collateral -appraised value

Loss severity

0% to 55.00%

Appraised value

$0 to $6,915

Impaired loans

3,537

Discount cash flow

Discount rate

2.88% to 9.50%

Cash flows

$22 to $1,072

Capitalized servicing rights

4,882

Discounted cash flow

Constant prepayment rate (CPR)

8.19

Discount rate

10.08

Other real estate owned

2,351

Fair value of collateral less selling costs

Appraised value

$2,700

Selling Costs

12.93

Total

22,446


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

There were no Level 1 or Level 2 non-recurring fair value measurements for the periods ended March 31, 2019 and December 31, 2018 .

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

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

Other real estate owned (“OREO”). OREO results from the foreclosure process on residential or commercial loans issued by the Company. Upon assuming the real estate, the Company records the property at the fair value of the asset less the estimated sales costs. Thereafter, OREO properties are recorded at the lower of cost or fair value less the

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estimated sales costs. OREO fair values are primarily determined based on Level 3 data including sales comparables and appraisals.

Summary of Estimated Fair Values of Financial Instruments

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



	March 31, 2019
(in thousands)	Carrying Amount			Fair Value			Level 1		Level 2			Level 3
Financial Assets
Cash and cash equivalents	$	54,103		$	54,103		$	54,103	$	—		$	—
Securities available for sale	747,235			747,235			—		747,235			—
FHLB stock	35,107			35,107			—		35,107			—
Net loans	2,512,962			2,468,711			—		—			2,468,711
Accrued interest receivable	3,355			3,355			—		3,355			—
Cash surrender value of bank-owned life insurance policies	74,352			74,352			—		74,352			—
Derivative assets	3,186			3,186			—		3,172			14

Financial Liabilities
Total deposits	$	2,465,771		$	2,416,867		$	—	$	2,416,867		$	—
Securities sold under agreements to repurchase	34,680			34,679			—		34,679			—
FHLB advances	668,604			667,658			—		667,658			—
Subordinated borrowings	37,958			37,958			—		37,958			—
Junior subordinated borrowings	5,000			4,525			—		4,525			—
Derivative liabilities	(3,442		)	(3,442		)	—		(3,377		)	(65		)

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	December 31, 2018
(in thousands)	Carrying Amount			Fair Value			Level 1		Level 2		Level 3
Financial Assets
Cash and cash equivalents	$	98,754		$	98,754		$	98,754	$	—	$	—
Securities available for sale	725,837			725,837			—		725,837		—
FHLB stock	35,659			35,659			—		35,659		—
Net loans	2,476,361			2,415,863			—		—		2,415,863
Accrued interest receivable	3,533			3,533			—		3,533		—
Cash surrender value of bank-owned life insurance policies	73,810			73,810			—		73,810		—
Derivative assets	2,164			2,164			—		2,156		8

Financial Liabilities
Total deposits	$	2,483,238		$	2,404,250		$	—	$	2,404,250	$	—
Securities sold under agreements to repurchase	36,211			36,171			—		36,171		—
FHLB advances	644,611			643,065			—		643,065		—
Subordinated borrowings	37,973			37,973			—		37,973		—
Junior subordinated borrowings	5,000			3,923			—		3,923		—
Derivative liabilities	(1,353		)	(1,353		)	—		—		(1,353		)

Other than as discussed above, the following methods and assumptions were used by management to estimate the fair value of significant classes of financial instruments for which it is practicable to estimate that value.

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

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

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

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

Accrued interest receivable. Carrying value approximates fair value.

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

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

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

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

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NOTE 11. NON-INTEREST INCOME

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

Disaggregation of Revenue

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



	Three Months Ended March 31,
(in thousands)	2019		2018
Major Products/Service Lines
Trust management fees	$	2,525	$	2,741
Financial services fees	233		221
Interchange fees	1,031		1,024
Customer deposit fees	907		979
Other customer service fees	226		221
Total	$	4,922	$	5,186



	Three Months Ended March 31,
(in thousands)	2019		2018
Timing of Revenue Recognition
Products and services transferred at a point in time	$	2,267	$	2,351
Products and services transferred over time	2,655		2,835
Total	$	4,922	$	5,186

Trust Management Fees.

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

Financial Services Fees.

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

Interchange Fees.

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

Customer Deposit Fees.

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

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Other Customer Service Fees.

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

Contract Balances from Contracts with Customers

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



(in thousands)	Balance at March 31, 2019		Balance at December 31, 2018
Balances from contracts with customers only:
Other Assets	$	1,863	$	2,866
Other Liabilities	2,854		4,923

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

Costs to Obtain and Fulfill a Contract

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

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NOTE 12. LEASES

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

Lessee Accounting

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

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


•	Package of practical expedients:


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


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


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


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

The following table presents the consolidated statements of condition classification of the Company’s ROU assets and lease liabilities as of March 31, 2019:



(in thousands)		March 31, 2019
Lease Right-of-Use Assets	Classification
Operating lease right-of-use assets	Other assets	$	8,810

Lease Liabilities
Operating lease liabilities	Other liabilities	8,836

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



	March 31, 2019
Weighted-average remaining lease term
Operating leases	10 years

Weighted-average discount rate
Operating leases	3.37	%

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Future minimum payments for operating leases with initial or remaining terms of one year or more as of March 31, 2019 are, as follows:



(in thousands)	Operating Leases
Twelve Months Ended:
March 31, 2020	$	922
March 31, 2021	900
March 31, 2022	904
March 31, 2023	913
March 31, 2024	909
Thereafter	5,643
Total future minimum lease payments	10,191
Amounts representing interest	(1,355		)
Present value of net future minimum lease payments	$	8,836

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

GENERAL

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

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


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


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


•	Strong commitment to risk management while balancing growth and earnings


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


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


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


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


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

Shown below is a profile of the Company as of March 31, 2019 :

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SELECTED FINANCIAL DATA

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



	Three Months Ended March 31,
	2019			2018
PER SHARE DATA
Net earnings, diluted	$	0.47		$	0.50
Adjusted earnings, diluted ⁽¹⁾	0.47			0.52
Total book value	24.54			22.78
Tangible book value ⁽¹⁾	17.63			15.78
Market price at period end	25.87			27.72
Dividends	0.20			0.19

PERFORMANCE RATIOS ⁽²⁾
Return on assets	0.83		%	0.90		%
Adjusted return on assets ⁽¹⁾	0.83			0.93
Return on equity	7.83			9.01
Adjusted return on equity ⁽¹⁾	7.83			9.31
Adjusted return on tangible equity ⁽¹⁾	11.19			13.72
Net interest margin, fully taxable equivalent (FTE) ^{(1) (3)}	2.77			2.97
Net interest margin (FTE), excluding purchased loan accretion ⁽⁽³⁾	2.67			2.85
Efficiency ratio ⁽¹⁾	63.94			60.44

GROWTH (Year-to-date) ⁽¹⁾
Total commercial loans	(3.3		)%	2.2		%
Total loans	5.9			(3.4		)
Total deposits	(2.8		)	(1.8		)

FINANCIAL DATA (In millions)
Total assets	$	3,629		$	3,511
Total earning assets ⁽⁴⁾	3,312			3,235
Total investments	782			757
Total loans	2,527			2,464
Allowance for loan losses	14			13
Total goodwill and intangible assets	107			108
Total deposits	2,466			2,341
Total shareholders' equity	381			352
Net income	7			8
Adjusted income ⁽¹⁾	7			8

ASSET QUALITY AND CONDITION RATIOS
Net charge-offs (current quarter annualized)/average loans	0.03		%	0.07		%
Allowance for loan losses/total loans	0.55			0.51
Loans/deposits	102			105
Shareholders' equity to total assets	10.50			10.03
Tangible shareholders' equity to tangible assets ⁽¹⁾	7.77			7.17

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_________________________


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


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


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

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

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CONSOLIDATED LOAN AND DEPOSIT ANALYSIS

The following tables present the quarterly trend in loan and deposit data and accompanying quarterly and year-to-date growth rates as of March 31, 2019 on an annualized basis:



LOAN ANALYSIS

											Annualized Growth %
(in thousands, except ratios)	Mar 31, 2019		Dec 31, 2018		Sep 30, 2018		Jun 30, 2018		Mar 31, 2018		Mar 31, 2019
Commercial real estate	$	821,567	$	826,699	$	840,018	$	838,546	$	824,721	(2.5	)%
Commercial and industrial	305,185		309,544		303,984		313,680		301,811		(5.6	)
Total commercial loans	1,126,752		1,136,243		1,144,002		1,152,226		1,126,532		(3.3	)
Residential real estate	1,184,053		1,144,698		1,140,519		1,127,895		1,132,977		13.8
Consumer	111,402		113,960		117,239		118,332		119,516		(9.0	)
Tax exempt and other	104,752		95,326		81,830		86,613		85,394		39.6
Total loans	$	2,526,959	$	2,490,227	$	2,483,590	$	2,485,066	$	2,464,419	5.9	%



DEPOSIT ANALYSIS

											Annualized Growth %
(in thousands, except ratios)	Mar 31, 2019		Dec 31, 2018		Sep 30, 2018		Jun 30, 2018		Mar 31, 2018		Mar 31, 2019
Demand	$	342,030	$	370,889	$	372,358	$	341,773	$	342,192	(31.1	)%
NOW	470,277		484,717		471,326		449,715		448,992		(11.9	)
Savings	346,813		358,888		354,908		350,339		361,591		(13.5	)
Money market	349,833		335,951		254,142		260,642		303,777		16.5
Total non-maturity deposits	1,508,953		1,550,445		1,452,734		1,402,469		1,456,552		(10.7	)
Total time deposits	956,818		932,793		937,615		972,252		884,848		10.3
Total deposits	$	2,465,771	$	2,483,238	$	2,390,349	$	2,374,721	$	2,341,400	(2.8	)%

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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,
	2019						2018
(in thousands, except ratios)	Average Balance		Interest ⁽³⁾		Yield/Rate ₍₃₎		Average Balance		Interest ⁽³⁾		Yield/Rate ₍₃₎
Assets
Commercial real estate	$	825,596	$	9,721	4.78	%	$	819,531	$	8,910	4.41	%
Commercial and industrial	405,107		4,786		4.79		380,029		4,132		4.41
Residential	1,143,862		11,126		3.94		1,147,010		10,945		3.87
Consumer	113,060		1,464		5.25		121,467		1,338		4.47
Total loans ⁽¹⁾	2,487,625		27,097		4.42		2,468,037		25,325		4.16
Securities and other ⁽²⁾	777,458		6,645		3.47		765,328		5,955		3.16
Total earning assets	3,265,083		33,742		4.19	%	3,233,365		31,280		3.92	%
Other assets	295,957						278,436
Total assets	$	3,561,040					$	3,511,801

Liabilities
NOW	$	468,392	$	583	0.51	%	$	447,026	$	375	0.34	%
Savings	346,707		163		0.19		362,508		159		0.18
Money market	335,882		1,141		1.38		305,105		514		0.68
Time deposits	894,160		4,416		2.00		857,796		2,937		1.39
Total interest bearing deposits	2,045,141		6,303		1.25		1,972,435		3,985		0.82
Borrowings	761,885		5,155		2.74		819,576		3,634		1.80
Total interest bearing liabilities	2,807,026		11,458		1.66	%	2,792,011		7,619		1.11	%
Non-interest bearing demand deposits	351,362						339,349
Other liabilities	25,520						29,000
Total liabilities	3,183,908						3,160,360

Total shareholders' equity	377,132						351,441

Total liabilities and shareholders' equity	$	3,561,040					$	3,511,801

Net interest spread					2.53	%					2.81	%
Net interest margin					2.77						2.97

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


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


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

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NON-GAAP FINANCIAL MEASURES

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

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

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

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RECONCILIATION OF NON-GAAP FINANCIAL MEASURES

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



		At or for the Three Months Ended March 31,
(in thousands)		2019			2018
Net income		$	7,281		$	7,812
Adj: (Gain) loss on sale of securities, net		—			—
Adj: (Gain) loss on sale of premises and equipment, net		—			—
Adj: (Gain) loss on other real estate owned		—			—
Adj: Acquisition, conversion and other expenses		—			335
Adj: Income taxes ⁽¹⁾		—			(81		)
Total adjusted income ⁽²⁾	(A)	$	7,281		$	8,066

Net interest income	(B)	$	21,765		$	23,158
Plus: Non-interest income		6,167			6,238
Total Revenue ⁽²⁾		27,932			29,396
Adj: Gain on sale of securities, net		—			—
Total adjusted revenue ⁽²⁾	(C)	$	27,932		$	29,396

Total non-interest expense		$	18,624		$	18,852
Less: Gain (loss) on sale of premises and equipment, net		—			—
Less: Gain (loss) on other real estate owned		—			—
Less: Acquisition, conversion and other expenses		—			(335		)
Adjusted non-interest expense ⁽²⁾	(D)	$	18,624		$	18,517

(in millions)
Total average earning assets	(E)	$	3,265		$	3,233
Total average assets	(F)	3,561			3,512
Total average shareholders' equity	(G)	377			351
Total average tangible shareholders' equity ^{(2) (3)}	(H)	270			243
Total tangible shareholders' equity, period-end ^{(2) (3)}	(I)	274			244
Total tangible assets, period-end ^{(2) (3)}	(J)	3,522			3,403

(in thousands)
Total common shares outstanding, period-end	(K)	15,524			15,459
Average diluted shares outstanding	(L)	15,587			15,553

Adjusted earnings per share, diluted	(A/L)	$	0.47		$	0.52
Tangible book value per share, period-end ⁽²⁾	(I/K)	17.63			15.78
Securities adjustment, net of tax ⁽⁴⁾	(M)	(1,842		)	(10,237		)
Tangible book value per share, excluding securities adjustment ⁽⁴⁾	(I+M)/K	17.75			16.44
Total tangible shareholders' equity/total tangible assets ⁽²⁾	(I/J)	7.77			7.17

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		At or for the Three Months Ended March 31,
		2019			2018
Performance ratios
Return on assets		0.83		%	0.90		%
Adjusted return on assets ⁽²⁾	(A/F)	0.83			0.93
Return on equity		7.83			9.01
Adjusted return on equity ⁽²⁾	(A/G)	7.83			9.31
Adjusted return on tangible equity ^{(2) (5)}	(A+Q)/H	11.19			13.72
Efficiency ratio ^{(2) (6)}	(D-O-Q)/(C+N)	63.94			60.44
Net interest margin ⁽²⁾	(B+P)/E	2.77			2.97

Supplementary data (in thousands)
Taxable equivalent adjustment for efficiency ratio	(N)	$	684		$	645
Franchise taxes included in non-interest expense	(O)	120			152
Tax equivalent adjustment for net interest margin	(P)	515			503
Intangible amortization	(Q)	207			207

_____________________________________


(1)	Assumes a marginal tax rate of 23.78% in 2019 . A marginal tax rate of 24.15% was used in the first and second quarter of 2018 and 23.78% was used in the third and fourth quarter of 2018.


(2)	Non-GAAP financial measure.


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


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


(5)	Adjusted return on tangible equity is computed by dividing the total core income adjusted for the tax-effected amortization of intangible assets, assuming a marginal rate of 23.78% in 2019 , 24.15% in the first and second quarter of 2018 and 23.78% in the third and fourth quarter of 2018, by tangible equity.


(6)	Efficiency ratio is computed by dividing adjusted non-interest expense by the sum of net interest income on a fully taxable equivalent basis and adjusted non-interest income.

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FINANCIAL SUMMARY

The Company reported first quarter 2019 net income of $7.3 million or $0.47 diluted earnings per share. Earnings in the same quarter of 2018 totaled $7.8 million or $0.50 diluted earnings per share. Financial highlights for the first quarter 2019 include the following:


•	6% annualized growth in total loans


•	102% loan to deposit ratio


•	0.66% non-accruing loans to total loans


•	0.03% net charge-offs to average loans


•	11% annualized increase in book value per share

Results in the first quarter 2019 were in line with the Company’s expectations given the somewhat seasonal nature of its geographic markets and overall economic conditions. The financial performance in the first quarter includes yield expansion, active balance sheet management and continuous execution of the Company’s risk-centric operating model that balances growth with earnings. Yields from earnings assets increased across most categories partially offsetting the rising costs of funds from the December 2018 Federal Reserve rate hike. Additionally, the Company took advantage of the disparity within funding markets by swapping out short-term borrowings with longer-term fixed interest rates. The Company’s disciplined approach to credit quality and risk mitigation has continued to improve the ratios of non-accruing loans to total loans and net charge-offs to average loans on a quarter-over-quarter basis.

The Company’s targeted branch strategy remains on track as it continues to explore market opportunities that contribute to the near and long term growth potential within its footprint. In Manchester, New Hampshire, the Company’s newest branch has already started to capture significant market share since opening in late 2018. During the first quarter the Company announced the redesign of the Newport, New Hampshire branch, which has created a unique and fulfilling experience for customers, the community, and employees. The Newport branch has been an important cornerstone to the Company’s mortgage banking operations and is home to its consolidated call center.

With strong capital ratios and consistent organic growth in equity, the Company announced an increase in the quarterly cash dividend of 10%. The new dividend yield along with continuous double digit growth in book value per share and the previously announced 5% share buyback program is continued evidence of the Company’s commitment to building shareholder value.

COMPARISON OF FINANCIAL CONDITION AT MARCH 31,2019 AND DECEMBER 31, 2018

Summary

Total assets increased $20.7 million during the first quarter 2019 from year-end 2018. Asset quality metrics remain strong with an allowance for credit losses to total loans ratio of 0.55% with a coverage ratio to non-accruing loans at 84%, up from 76% as of year-end 2018. The loan to deposit ratio increased to 102% from 100% at year-end 2018 due to lower deposits in the first quarter. The Company’s book value per share increased 11%, on annualized basis, in the first quarter 2019 from year-end 2018.

Securities

Securities totaled $782.3 million in the first quarter 2019 and $761.5 million at year-end 2018 representing 22% and 21% of total assets, respectively. Those ratios are within the tolerance range of the Company’s investment policy. Securities purchased in the first quarter 2019 included $20.3 million of mortgage-backed securities guaranteed by US Government-sponsored enterprises, $15.0 million of corporate bonds, and a net $552 thousand decrease in FHLB stock. The purchases were offset by $22.8 million of maturities, calls and pay-downs of amortizing securities, and an $8.9 million increase in fair value. The increase in fair value was primarily caused by lower long-term interest rates at the end of the first quarter 2019 as compared to year-end 2018. The weighted average yield on the Company’s security profile as of March 31, 2019 was 3.47% for the quarter compared to 3.28% at year-end 2018. At the end of

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the first quarter 2019 securities held by the Company had an average life of 5.0 years and a duration of 3.6 years compared to 5.2 years and 3.9 years at the end of 2018, respectively.

Loans

Loan balances were $2.5 billion in the first quarter 2019, up $36.7 million or 5.9% on an annualized basis, from year-end 2018. The increase was primarily due to a 13.8% annualized increase in residential loan balances due to the Company’s expanded branch model and momentum of its sales driven culture. Average yields from loans expanded across all product lines for a total yield of 4.42%, up 0.11% from the fourth quarter 2018.

Asset Quality

Asset quality metrics remained favorable in the first quarter 2019 due to the Company’s risk management disciplines and commitment to credit quality. The allowance for loan losses increased to $14.0 million from $13.9 million at year-end 2018 due to loan growth offset by lower specific reserves on fewer non-accruing loans. The first quarter 2019 allowance for loan losses to total loans ratio remains strong at 0.55% and the ratio of non-accruing loans to average loans improved to 0.66% from 0.73% at year-end 2018.

Deposits and Borrowings

Total deposits decreased $17.5 million in the first quarter 2019, or 2.8% on an annualized basis, from year-end 2018. Non-maturity deposits (“core deposits”) are a lower cost of loan funding and remain the Company’s primary focus. However, the Company’s core deposit balances can sometimes fluctuate depending on the time of year. While the Company’s expanding branch model has helped to increase new accounts, core deposits decreased $41.5 million due to lower balances experienced in the winter months. New deposit accounts opened totaled 2,479 in the first quarter 2019 compared to 2,295 in the fourth quarter 2018. Time deposits increased $24.0 million, reflecting the Company’s strategy to target funding durations at lower rates. The average cost of deposits increased to 1.25% from 1.12% in the fourth quarter 2018 reflecting the Federal Reserve Bank rate hike in December 2018. Total borrowings increased by $22.4 million supporting loan growth since year-end 2018. Borrowing costs increased to 2.74% from 2.53% in the fourth 2018 as a direct result of the December rate hike.

Derivative Financial Instruments

The notional balance of derivative financial instruments increased to $265.4 million at the end of the first quarter 2019 from $182.2 million at year-end 2018. The increase includes a $50.0 million notional amount related to an interest rate swap on brokered certificate of deposits to limit the Company’s exposure to rising interest rates over a five year term. Additionally, the increase includes $13.0 million related to commercial loan interest rate swaps originated during the quarter and a similar increase in matching hedges with a national bank counterparty. The net fair value of total derivatives was a liability of $256 thousand at the end of the first quarter 2019 compared to asset of $811 thousand at year-end 2018.

Equity

Total equity was $381.0 million, compared with $370.6 million at year-end 2018. The Company’s book value per share increased $0.67 to $24.54 from year-end 2018. The increase was primarily due to a $6.8 million improvement in the Company’s securities fair value adjustment, net of tax, along with strong net income of $7.3 million offset by $3.1 million in dividends. Tangible book value per share (non-GAAP measure) increased to $17.63 per share up from $16.94 per share at year-end 2018. Additionally, the Company’s first quarter 2019 tangible book value per share excluding the impact of securities fair value adjustments (non-GAAP measure) increased to $17.75. The Company evaluates changes in tangible book value excluding securities adjustment, a non-GAAP financial measure, which is a commonly considered valuation metric used by the investment community and which parallels some regulatory capital measures. The Company and the Bank remained "well capitalized" under regulatory guidelines at period-end. The Company's risk-based capital ratio remains over 14% as tangible book value continues to grow into 2019.

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COMPARISON OF OPERATING RESULTS FOR THE THREE MONTHS ENDED MARCH 31, 2019 AND 2018

Summary

Net income in the first quarter 2019 was $7.3 million, or $0.47 per diluted share, compared with $7.8 million, or $0.50 per diluted share, in the same quarter 2018. Profitability improvements from a higher yield on earning assets and lower non-interest expense from operational efficiencies were offset by a higher cost of funds. The Company’s return on assets ratio was 0.83% during the first quarter of 2019 and 0.90% in the same quarter of 2018 and the return on equity ratio was 7.83% and 9.01% for the same respective periods.

Net Interest Income

First quarter 2019 interest income was $33.2 million, up 8% from the first quarter 2018 as average earning assets grew $31.7 million and yields improved to 4.19% from 3.92%. Net interest income was $21.8 million compared with $23.2 million in the same quarter of 2018 and net interest margin was 2.77% and 2.97% for the same respective periods. Purchase loan accretion contributed 0.10% to net interest margin in the first quarter 2019 compared to 0.12% in the first quarter 2018. The yield improvement from earning assets was offset by a 0.55% increase in interest paid on interest-bearing liabilities due to several short-term interest rate hikes in 2018 and flattening of the yield curve into 2019. In response to margin compression the Company has focused on balance sheet strategies including investment portfolio remixes, interest rate hedges, and extensions of maturities of interest-bearing liabilities.

Non-Interest Income

Non-interest income was $6.2 million in the first quarters of 2019 and 2018. Non-interest income in first quarter 2019 includes the full effect of $96 thousand associated with the Company’s $14.0 million bank owned life insurance policies investment made in the third quarter 2018.

Loan Loss Provision

The provision for loan losses in the first quarter 2019 was $324 thousand compared to $795 thousand for the same quarter in 2018. The decrease in provision reflects the Company’s favorable credit metrics and year-over-year improvement in net charge-offs to $193 thousand, down from $441 thousand in the first quarter of 2018. Net charge-offs, on an annualized basis, to average loans were a ratios of 0.03% in the first quarter 2019 compared with 0.07% with the same period of 2018. The provision for loan losses is a charge to earnings in an amount sufficient to maintain the allowance for loan losses at a level deemed adequate by the Company. The level of the allowance is a critical accounting estimate, which is subject to uncertainty.

Non-Interest Expense

Non-interest expense decreased to $18.6 million in the first quarter of 2019 compared to $18.9 million in the first quarter of 2018. The decrease is primarily due to a $470 thousand decrease in salary and benefit expense related to operational efficiencies, which was partially offset by a $228 thousand increase in occupancy expense associated with the newly announced locations in Portland, Maine and Manchester, New Hampshire. The efficiency ratio in the first quarter 2019 was 64% compared to 60% for the same period of 2018 due to previously noted increases in the Company’s cost of funds.

Income Tax Expense

The first quarter effective tax rate decreased to 19.0% in 2019 compared with 20.0% in the same quarter of 2018, reflecting a higher level of tax-advantaged income.

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Liquidity and Cash Flows

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

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

The Bank also had capacity to borrow funds on a secured basis utilizing the Borrower-in-Custody program and the Discount Window at the Federal Reserve Bank of Boston (the "FRB"). At March 31, 2019, the Bank’s available secured line of credit at the FRB stood at $122.6 million or 3.4% of the Bank’s total assets. The Bank also has access to the national brokered deposit market, and has used this funding source to bolster its on balance sheet liquidity position.

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

Off-Balance Sheet Arrangements

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

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

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

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

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

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

Allowance for Loan Losses: The allowance for loan losses represents probable credit losses that are inherent in the loan portfolio at the financial statement date and which may be estimated. Management uses historical information, as well as current economic data, to assess the adequacy of the allowance for loan losses as it is affected by changing economic conditions and various external factors, which may impact the portfolio in ways currently unforeseen. Although management believes that it uses appropriate available information to establish the allowance for loan losses, future additions to the allowance may be necessary if certain future events occur that may cause actual results to differ from the assumptions used in making the evaluation. Conditions in the local economy and real estate values could require the Company to increase provisions for loan losses, which would negatively impact earnings.

Acquired Loans: Loans that the Company acquired in business combinations are initially recorded at fair value with no carryover of the related allowance for loan losses. Determining the fair value of the loans involves estimating the amount and timing of principal and interest cash flows initially expected to be collected on the loans and discounting those cash flows at an appropriate market rate of interest. Going forward, the Company continues to evaluate reasonableness of expectations for the timing and the amount of cash to be collected. Subsequent decreases in expected cash flows may result in changes in the amortization or accretion of fair market value adjustments, and in some cases may result in the loan being considered impaired. For collateral dependent loans with deteriorated credit quality, the Company estimates the fair value of the underlying collateral of the loans. These values are discounted using market derived rates of return, with consideration given to the period of time and costs associated with the foreclosure and disposition of the collateral.

Income Taxes: Significant management judgment is required in determining income tax expense and deferred tax assets and liabilities. The Company uses the asset and liability method of accounting for income taxes in which deferred tax assets and liabilities are established for the temporary differences between the financial reporting basis and the tax basis of the Company's assets and liabilities. The realization of the net deferred tax asset generally depends upon future levels of taxable ordinary income, taxable capital gain income, and the existence of prior years' taxable income, to which carry back refund claims could be made. A valuation allowance would be established for deferred tax assets that management estimates are more likely than not to be unrealizable based on available evidence at the time the estimate is made.

Goodwill and Identifiable Intangible Assets: Goodwill and identifiable intangible assets are recorded as a result of business acquisitions and combinations. These assets are evaluated for impairment annually or whenever events or changes in circumstances indicate the carrying value of these assets may not be recoverable. When these assets are evaluated for impairment, if the carrying amount exceeds fair value, an impairment charge is recorded to income. The fair value is based on observable market prices, when practicable. Other valuation techniques may be used when market prices are unavailable, including estimated discounted cash flows and analysis of market pricing multiples. These types of analyses contain uncertainties because they require management to make assumptions and to apply judgment to

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estimate industry economic factors and the profitability of future business strategies. In the event of future changes in fair value, the Company may be exposed to an impairment charge that could be material.

Determination of Other-Than-Temporary Impairment of Securities: The Company evaluates debt and equity securities within the Company's available for sale for other-than-temporary impairment ("OTTI"), at least quarterly. If the fair value of a debt security is below the amortized cost basis of the security, OTTI is required to be recognized if any of the following are met: (1) the Company intends to sell the security; (2) it is more likely than not that the Company will be required to sell the security before recovery of its amortized cost basis; or (3) for debt securities, the present value of expected cash flows is not sufficient to recover the entire amortized cost basis. For all impaired debt securities that the Company intends to sell, or more likely than not will be required to sell, the full amount of the loss is recognized as OTTI through earnings. Credit-related OTTI for all other impaired debt securities is recognized through earnings. Noncredit related OTTI for such debt securities is recognized in other comprehensive income, net of applicable taxes. In evaluating its marketable equity securities portfolios for OTTI, the Company considers its intent and ability to hold an equity security to recovery of its cost basis in addition to various other factors, including the length of time and the extent to which the fair value has been less than cost and the financial condition and near term prospects of the issuer. Any OTTI on marketable equity securities is recognized immediately through earnings. Should actual factors and conditions differ materially from those expected by management, the actual realization of gains or losses on investment securities could differ materially from the amounts recorded in the financial statements.

Fair Value of Financial Instruments: The Company uses fair value measurements to record fair value adjustments to certain financial instruments and to determine fair value disclosures. Trading assets, securities available for sale, and derivative instruments are recorded at fair value on a recurring basis. Additionally, from time to time, the Company may be required to record at fair value other assets on a nonrecurring basis, or to establish a loss allowance or write-down based on the fair value of impaired assets. Further, the notes to financial statements include information about the extent to which fair value is used to measure assets and liabilities, the valuation methodologies used and its impact to earnings. For financial instruments not recorded at fair value, the notes to financial statements disclose the estimate of their fair value. Due to the judgments and uncertainties involved in the estimation process, the estimates could result in materially different results under different assumptions and conditions.

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Market Risk

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

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

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

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

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

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

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

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


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


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

•

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

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

As of March 31, 2019 interest rate sensitivity modeling results indicate that the Bank’s balance sheet was moderately liability sensitive over the one-year and two-year horizons (i.e., moderately exposed to rising interest rates).

Assuming short-term and long-term interest rates decline 200 basis points from current levels (i.e., a parallel yield curve shift) and the Bank’s balance sheet structure and size remain at current levels, management believes net interest income will improve over the one year horizon (+1.2% versus the base case) while deteriorating from that level over the two-year horizon (-1.0% versus the base case). Should the yield curve steepen as rates fall, the model suggests that accelerated earning asset prepayments will slow, resulting in a more stabilized level of net interest income. Management anticipates that moderate to strong earning asset growth will be needed to meaningfully increase the Bank’s current level of net interest income should both long-term and short-term interest rates decline in parallel.

Assuming the Bank’s balance sheet structure and size remain at current levels and the Federal Reserve increases short-term interest rates by 200 basis points with the balance of the yield curve shifting in parallel with these increases, management believes net interest income will decline moderately over the one and two-year horizons as increased funding costs outpace increases in earning asset yields (-2.02% and -3.27%, respectively). The interest rate sensitivity simulation model suggests that as interest rates rise, the Bank’s funding costs will initially re-price disproportionately with earning asset yields to a moderate degree. As funding costs begin to stabilize early in the third year of the simulation, the model suggests that the earning asset portfolios will continue to re-price at prevailing interest rate levels and cash flows from the Bank’s earning asset portfolios will be reinvested into higher yielding earning assets, resulting in a widening of spreads and a stabilization of net interest income over the three year horizon and beyond. Management believes moderate to strong earning asset growth will be necessary to meaningfully increase the current level of net interest income over the one-year and two-year horizons should short-term and long-term interest rates rise in parallel.

As compared to December 31, 2018, the year-one sensitivity in the down 100 basis points scenario was down slightly for the quarter (+1.7% prior, versus +.9% current). The year-two sensitivities in the down 100 basis points scenario changed going from +.7% to +2.8%. In the year-one up 200 basis points scenario, results declined going from -3.7% to -2.0%. Year-two, up 200 basis points declined (-8.3% prior, versus -3.3% current).

The Federal Reserve has continued to raise interest rates and while net interest income will be impacted by these changes in short-term rates, net interest income exposure is also significantly affected by the shape and level of the U.S. Government securities and interest rate swap yield curve, and changes in the size and composition of the Bank’s loan, investment and deposit portfolios.

The preceding sensitivity analysis does not represent a Company forecast and should not be relied upon as being indicative of expected operating results. These hypothetical estimates are based upon numerous assumptions including: the nature and timing of interest rate levels and yield curve shape, prepayment speeds on loans and securities, deposit

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rates, pricing decisions on loans and deposits, reinvestment or replacement of asset and liability cash flows, and renegotiated loan terms with borrowers. While assumptions are developed based upon current economic and local market conditions, the Company cannot make any assurances as to the predictive nature of these assumptions including how customer preferences or competitor influences might change.

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

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ITEM 4. CONTROLS AND PROCEDURES


(a)	Disclosure controls and procedures.


(b)

Under the supervision and with the participation of our senior management, consisting of the Company’s principal executive officer and our principal financial officer, the Company conducted an evaluation of the effectiveness of the design and operation of its disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (“the Exchange Act”) as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on this evaluation, the Company’s management, including it’s principal executive officer and principal financial officer, concluded that as of March 31, 2019 the Company’s disclosure controls and procedures were effective to ensure that information required to be disclosed by the Company in the reports that it files under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms. The Company’s disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by the Company in its Exchange Act reports is accumulated and communicated to the Company’s management, including its principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives, and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

(b) Changes in internal control over financial reporting.

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

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

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

ITEM 1A. RISK FACTORS

There have been no material changes to the risk factors discussed in Part I, Item 1A, “Risk Factors,” in our Annual Report on Form 10-K for the year ended December 31, 2018 . In addition to the other information set forth in this report, you should carefully consider 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.

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

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



Period	Total number of shares purchased	Average price paid per share		Total number of shares purchased as a part of publicly announced plans or programs	Maximum number of shares that may yet be purchased under the plans or programs ⁽¹⁾
January 1-31, 2019	—	$	—	—	—
February 1-28, 2019	—	—		—	—
March 1-31, 2019	—	—		—	776,000
Total	—	$	—	—	776,000

(1) On March 21, 2019 the Company's Board of Directors approved a twelve month plan to repurchase up to 5% of its outstanding common stock, representing 776,000 shares as of March 15, 2019. The stock repurchase plan expires on March 20, 2020.

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ITEM 6. EXHIBITS



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

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

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

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

101	The following financial information from the Company’s Annual Report on Form 10-Q for the quarter ended March 31, 2019 is formatted in XBRL (eXtensible Business Reporting Language): (i) Consolidated Condensed Statements of Income, (ii) the Condensed Consolidated Balance Sheets, (iii) the Condensed Consolidated Statements of Changes in Shareholders’ Equity, (iv) Consolidated Statements of Cash Flows and (v) Notes to the Consolidated Condensed Financial Statements

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SIGNATURES

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



	BAR HARBOR BANKSHARES


Dated: May 9, 2019	By:	/s/ Curtis C. Simard
		Curtis C. Simard
		President & Chief Executive Officer


Dated: May 9, 2019	By:	/s/ Josephine Iannelli
		Josephine Iannelli
		Executive Vice President & Chief Financial Officer

Exhibit 31.1

CERTIFICATION OF THE CHIEF EXECUTIVE OFFICER

PURSUANT TO RULES 13a-14 AND 15d-14 OF THE SECURITIES EXCHANGE ACT

OF 1934 AND SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Curtis C. Simard, certify that:


1.	I have reviewed this quarterly report on Form 10-Q of Bar Harbor Bankshares (the “Registrant”);


2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;


3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this report;


4.	The Registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Registrant and have:


(a)	Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;


(b)	Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;


(c)	Evaluated the effectiveness of the Registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and


(d)	Disclosed in this report any change in the Registrant’s internal control over financial reporting that occurred during the Registrant’s most recent fiscal quarter (the Registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the Registrant’s internal control over financial reporting; and


5.	The Registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Registrant’s auditors and the audit committee of Registrant’s board of directors (or persons performing the equivalent functions):


(a)	All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Registrant’s ability to record, process, summarize and report financial information; and


(b)	Any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant’s internal control over financial reporting.

Date: May 9, 2019 /s/ Curtis C. Simard

Name: Curtis C. Simard

Title: President and Chief Executive Officer

Exhibit 31.2

CERTIFICATION OF THE CHIEF FINANCIAL OFFICER

PURSUANT TO RULES 13a-14 AND 15d-14 OF THE SECURITIES EXCHANGE ACT

OF 1934 AND SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Josephine Iannelli, certify that:


1.	I have reviewed this quarterly report on Form 10-Q of Bar Harbor Bankshares (the “Registrant”);


2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;


3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this report;


4.	The Registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Registrant and have:


(a)	Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;


(b)	Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;


(c)	Evaluated the effectiveness of the Registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and


(d)	Disclosed in this report any change in the Registrant’s internal control over financial reporting that occurred during the Registrant’s most recent fiscal quarter (the Registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the Registrant’s internal control over financial reporting; and


5.	The Registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Registrant’s auditors and the audit committee of Registrant’s board of directors (or persons performing the equivalent functions):


(a)	All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Registrant’s ability to record, process, summarize and report financial information; and


(b)	Any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant’s internal control over financial reporting.

Date: May 9, 2019 /s/ Josephine Iannelli

Name: Josephine Iannelli

Title: Executive Vice President and Chief Financial Officer

Exhibit 32.1

CERTIFICATION OF CHIEF EXECUTIVE OFFICER

PURSUANT TO SECTION 906 OF THE

SARBANES-OXLEY ACT OF 2002 (18 U.S.C. Section 1350)

The undersigned executive officer of Bar Harbor Bankshares (the “Registrant”) hereby certifies that the Registrant’s Form 10-Q for the period ended March 31, 2019 , fully complies with the requirements of Section 13(a) or 15(d), as applicable of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) and that the information contained therein fairly presents, in all material respects, the financial condition and results of operations of the Registrant. This certification is provided pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, and Item 601(b)(32) of Regulation S-K (“Item 601(b)(32)”) promulgated under the Securities Act of 1933, as amended (the “Securities Act”) and the Exchange Act. In accordance with clause (ii) of Item 601(b)(32), this certification (a) shall not be deemed “filed” for purposes of Section 18 of the Exchange Act, or otherwise subject to liability under that section, and (b) shall not be deemed to be incorporated by reference into any filing under the Securities Act or the Exchange Act, except to the extent that the Registrant specifically incorporates it by reference.

Date: May 9, 2019 /s/ Curtis C. Simard

Name: Curtis C. Simard

Title: President and Chief Executive Officer

Exhibit 32.2

CERTIFICATION OF CHIEF FIANANCIAL OFFICER

PURSUANT TO SECTION 906 OF THE

SARBANES-OXLEY ACT OF 2002 (18 U.S.C. Section 1350)

Date: May 9, 2019 /s/ Josephine Iannelli

Name: Josephine Iannelli

Title: Executive Vice President and Chief Financial Officer