10-Q 1 bhb093019.htm 10-Q
Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q

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

For the quarterly period ended: September 30, 2019

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

For the transition period from to
Commission File Number: 001-13349
BAR HARBOR BANKSHARES
(Exact name of registrant as specified in its charter)

Maine |  | 01-0393663
(State or other jurisdiction of incorporation or organization) |  | (I.R.S. Employer Identification No.)
PO Box 400 |  |
82 Main Street, Bar Harbor, ME |  | 04609-0400
(Address of principal executive offices) |  | (Zip Code)

Registrant’s telephone number, including area code: (207) 288-3314
Securities registered pursuant to Section 12(b) of the Act:

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No o
Indicate by check mark whether the registrant has submitted electronically 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
The Registrant had 15,552,297 shares of common stock, par value $2.00 per share, outstanding as of October 31, 2019.

Table of Contents
BAR HARBOR BANKSHARES AND SUBSIDIARIES
FORM 10-Q
INDEX

|  | Page
PART I. | FINANCIAL INFORMATION |
Item 1. | Consolidated Financial Statements (unaudited) |
| Consolidated Balance Sheets as of September 30, 2019 and December 31, 2018 | 4
| Consolidated Statements of Income for the Three and Nine Months Ended September 30, 2019 and 2018 | 5
| Consolidated Statements of Comprehensive Income for the Three and Nine Months Ended September 30, 2019 and 2018 | 6
| Consolidated Statements of Changes in Shareholders’ Equity for the Three and Nine Months Ended September 30, 2019 and 2018 | 7
| Consolidated Statements of Cash Flows for the Three and Nine Months Ended September 30, 2019 and 2018 | 8
| Notes to Unaudited Consolidated Interim Financial Statements |
|  | Note 1 | Basis of Presentation | 9
|  | Note 2 | Securities Available for Sale | 12
|  | Note 3 | Loans | 15
|  | Note 4 | Allowance for Loan Losses | 33
|  | Note 5 | Borrowed Funds | 40
|  | Note 6 | Deposits | 42
|  | Note 7 | Capital Ratios and Shareholders' Equity | 43
|  | Note 8 | Earnings per Share | 47
|  | Note 9 | Derivative Financial Instruments and Hedging Activities | 48
|  | Note 10 | Fair Value Measurements | 51
|  | Note 11 | Non-Interest Income | 57
|  | Note 12 | Leases | 59
|  | Note 13 | Subsequent Events | 61
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 62
|  | Selected Financial Data | 63
|  | Consolidated Loan and Deposit Analysis | 65
|  | Average Balances and Average Yields/Rates | 66
|  | Non-GAAP Financial Measures | 68
|  | Reconciliation of Non-GAAP Financial Measures | 69
|  | Financial Summary | 71
Item 3. | Quantitative and Qualitative Disclosures about Market Risk | 78
Item 4. | Controls and Procedures | 80

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PART II. | OTHER INFORMATION |
Item 1. | Legal Proceedings | 80
Item 1A. | Risk Factors | 80
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds | 81
Item 6. | Exhibits | 82
Signatures |  |  |  | 83

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) |  | September 30, 2019 |  | December 31, 2018
| Assets |  |  |  |  |  |
| Cash and due from banks |  | $ | 50,032 |  |  | $ | 35,208 |
| Interest-bearing deposit with the Federal Reserve Bank |  | 21,561 |  |  | 63,546 |
| Total cash and cash equivalents |  | 71,593 |  |  | 98,754 |
| Securities available for sale, at fair value |  | 675,675 |  |  | 725,837 |
| Federal Home Loan Bank stock |  | 27,469 |  |  | 35,659 |
| Total securities |  | 703,144 |  |  | 761,496 |
| Loans: |  |  |  |
| Commercial real estate |  | 923,773 |  |  | 826,699 |
| Commercial and industrial |  | 402,706 |  |  | 404,870 |
| Residential real estate |  | 1,143,452 |  |  | 1,144,698 |
| Consumer |  | 107,375 |  |  | 113,960 |
| Total loans |  | 2,577,306 |  |  | 2,490,227 |
| Less: Allowance for loan losses |  | (15,353 | ) |  | (13,866 | )
| Net loans |  | 2,561,953 |  |  | 2,476,361 |
| Premises and equipment, net |  | 47,644 |  |  | 48,804 |
| Other real estate owned |  | 2,455 |  |  | 2,351 |
| Goodwill |  | 100,085 |  |  | 100,085 |
| Other intangible assets |  | 6,879 |  |  | 7,459 |
| Cash surrender value of bank-owned life insurance |  | 75,368 |  |  | 73,810 |
| Deferred tax assets, net |  | 4,988 |  |  | 9,514 |
| Other assets |  | 38,365 |  |  | 29,853 |
| Total assets |  | $ | 3,612,474 |  |  | $ | 3,608,487 |
| Liabilities |  |  |  |  |  |
| Deposits: |  |  |  |
| Demand |  | $ | 380,707 |  |  | $ | 370,889 |
| NOW |  | 490,315 |  |  | 484,717 |
| Savings |  | 360,570 |  |  | 358,888 |
| Money market |  | 359,328 |  |  | 335,951 |
| Time |  | 902,665 |  |  | 932,793 |
| Total deposits |  | 2,493,585 |  |  | 2,483,238 |
| Borrowings: |  |  |  |
| Senior |  | 641,819 |  |  | 680,823 |
| Subordinated |  | 42,928 |  |  | 42,973 |
| Total borrowings |  | 684,747 |  |  | 723,796 |
| Other liabilities |  | 39,683 |  |  | 30,874 |
| Total liabilities |  | 3,218,015 |  |  | 3,237,908 |
| (continued)
| Shareholders’ equity |  |  |  |  |  |
| Capital stock, par value $2.00; authorized 20,000,000 shares; issued 16,428,388 and 16,428,388 shares at September 30, 2019 and December 31, 2018, respectively |  | 32,857 |  |  | 32,857 |
| Additional paid-in capital |  | 188,283 |  |  | 187,653 |
| Retained earnings |  | 174,994 |  |  | 166,526 |
| Accumulated other comprehensive income (loss) |  | 3,045 |  |  | (11,802 | )
| Less: 879,785 and 905,201 shares of treasury stock at September 30, 2019 and December 31, 2018, respectively |  | (4,720 | ) |  | (4,655 | )
| Total shareholders’ equity |  | 394,459 |  |  | 370,579 |
| Total liabilities and shareholders’ equity |  | $ | 3,612,474 |  |  | $ | 3,608,487 |

The accompanying notes are an integral part of these consolidated financial statements.
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BAR HARBOR BANKSHARES AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME

|  | Three Months Ended September 30, |  | Nine Months Ended September 30,
(in thousands, except per share data) |  | 2019 |  | 2018 |  | 2019 |  | 2018
Interest and dividend income |  |  |  |  |  |  |  |  |  |
Loans |  | $ | 28,157 |  |  | $ | 26,212 |  |  | $ | 82,681 |  |  | $ | 77,272 |
Securities and other |  | 6,105 |  |  | 5,972 |  |  | 18,593 |  |  | 17,407 |
Total interest and dividend income |  | 34,262 |  |  | 32,184 |  |  | 101,274 |  |  | 94,679 |
Interest expense |  |  |  |  |  |  |  |  |  |  |  |
Deposits |  | 7,143 |  |  | 5,478 |  |  | 20,336 |  |  | 13,868 |
Borrowings |  | 4,674 |  |  | 4,237 |  |  | 15,232 |  |  | 12,192 |
Total interest expense |  | 11,817 |  |  | 9,715 |  |  | 35,568 |  |  | 26,060 |
Net interest income |  | 22,445 |  |  | 22,469 |  |  | 65,706 |  |  | 68,619 |
Provision for loan losses |  | 893 |  |  | 643 |  |  | 1,779 |  |  | 2,208 |
Net interest income after provision for loan losses |  | 21,552 |  |  | 21,826 |  |  | 63,927 |  |  | 66,411 |
Non-interest income |  |  |  |  |  |  |  |  |  |  |  |
Trust and investment management fee income |  | 3,013 |  |  | 2,952 |  |  | 8,836 |  |  | 9,036 |
Customer service fees |  | 2,553 |  |  | 2,490 |  |  | 7,336 |  |  | 7,061 |
Gain on sales of securities, net |  | 157 |  |  | — |  |  | 157 |  |  | — |
Bank-owned life insurance income |  | 497 |  |  | 505 |  |  | 1,558 |  |  | 1,328 |
Customer derivative income |  | 828 |  |  | — |  |  | 1,553 |  |  | 545 |
Other income |  | 595 |  |  | 1,179 |  |  | 1,823 |  |  | 2,515 |
Total non-interest income |  | 7,643 |  |  | 7,126 |  |  | 21,263 |  |  | 20,485 |
Non-interest expense |  |  |  |  |  |  |  |  |  |  |  |
Salaries and employee benefits |  | 11,364 |  |  | 10,331 |  |  | 33,568 |  |  | 31,695 |
Occupancy and equipment |  | 3,415 |  |  | 3,366 |  |  | 10,101 |  |  | 9,364 |
Loss on premises and equipment, net |  | — |  |  | — |  |  | 21 |  |  | — |
Outside services |  | 424 |  |  | 456 |  |  | 1,278 |  |  | 1,597 |
Professional services |  | 707 |  |  | 223 |  |  | 1,821 |  |  | 1,016 |
Communication |  | 189 |  |  | 217 |  |  | 707 |  |  | 701 |
Marketing |  | 613 |  |  | 293 |  |  | 1,419 |  |  | 1,207 |
Amortization of intangible assets |  | 207 |  |  | 207 |  |  | 621 |  |  | 621 |
Acquisition, restructuring and other expenses |  | 3,039 |  |  | 70 |  |  | 3,319 |  |  | 619 |
Other expenses |  | 3,442 |  |  | 2,743 |  |  | 10,075 |  |  | 8,623 |
Total non-interest expense |  | 23,400 |  |  | 17,906 |  |  | 62,930 |  |  | 55,443 |
Income before income taxes |  | 5,795 |  |  | 11,046 |  |  | 22,260 |  |  | 31,453 |
Income tax expense |  | 780 |  |  | 2,076 |  |  | 3,847 |  |  | 6,136 |
Net income |  | $ | 5,015 |  |  | $ | 8,970 |  |  | $ | 18,413 |  |  | $ | 25,317 |
Earnings per share: |  |  |  |  |  |  |  |  |  |  |  |
Basic |  | $ | 0.32 |  |  | $ | 0.58 |  |  | $ | 1.19 |  |  | $ | 1.64 |
Diluted |  | $ | 0.32 |  |  | $ | 0.58 |  |  | $ | 1.18 |  |  | $ | 1.63 |
Weighted average common shares outstanding: |  |  |  |  |  |  |  |
Basic |  | 15,547 |  |  | 15,503 |  |  | 15,536 |  |  | 15,478 |
Diluted |  | 15,581 |  |  | 15,580 |  |  | 15,582 |  |  | 15,564 |

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

The accompanying notes are an integral part of these consolidated financial statements.
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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 |
Net income |  | — |  |  | — |  |  | 16,347 |  |  | — |  |  | — |  |  | 16,347 |
Other comprehensive loss |  | — |  |  | — |  |  | — |  |  | (9,813 | ) |  | — |  |  | (9,813 | )
Cash dividends declared ($0.39 per share) |  | — |  |  | — |  |  | (5,981 | ) |  | — |  |  | — |  |  | (5,981 | )
Treasury stock purchased (9,294 shares) |  | — |  |  | — |  |  | — |  |  | — |  |  | (278 | ) |  | (278 | )
Net issuance (62,782 shares) to employee stock plans, including related tax effects |  | — |  |  | (131 | ) |  | — |  |  | — |  |  | 735 |  |  | 604 |
Modified retrospective basis adoption of Revenue Recognition Accounting Codification Standard 606 |  | — |  |  | — |  |  | (184 | ) |  | — |  |  | — |  |  | (184 | )
Reclassification of the income tax effects of the Tax Cuts and Jobs Act from accumulated other comprehensive income for adoption of ASU 2018-02 |  | — |  |  | — |  |  | 980 |  |  | (980 | ) |  | — |  |  | — |
Recognition of stock based compensation |  | — |  |  | 627 |  |  | — |  |  | — |  |  | — |  |  | 627 |
Balance at June 30, 2018 |  | 32,857 |  |  | 187,198 |  |  | 156,139 |  |  | (15,347 | ) |  | (4,884 | ) |  | 355,963 |
Net income |  | — |  |  | — |  |  | 8,970 |  |  | — |  |  | — |  |  | 8,970 |
Other comprehensive loss |  | — |  |  | — |  |  | — |  |  | (4,341 | ) |  | — |  |  | (4,341 | )
Cash dividends declared ($0.20 per share) |  | — |  |  | — |  |  | (3,101 | ) |  | — |  |  | — |  |  | (3,101 | )
Treasury stock purchased (1,605 shares) |  | — |  |  | — |  |  | — |  |  | — |  |  | (46 | ) |  | (46 | )
Net issuance (11,869 shares) to employee stock plans, including related tax effects |  | — |  |  | (123 | ) |  | — |  |  | — |  |  | 154 |  |  | 31 |
Recognition of stock based compensation |  | — |  |  | 209 |  |  | — |  |  | — |  |  | — |  |  | 209 |
Balance at September 30, 2018 |  | $ | 32,857 |  |  | $ | 187,284 |  |  | $ | 162,008 |  |  | $ | (19,688 | ) |  | $ | (4,776 | ) |  | $ | 357,685 |
Balance at December 31, 2018 |  | $ | 32,857 |  |  | $ | 187,653 |  |  | $ | 166,526 |  |  | $ | (11,802 | ) |  | $ | (4,655 | ) |  | $ | 370,579 |
Net income |  | — |  |  | — |  |  | 13,398 |  |  | — |  |  | — |  |  | 13,398 |
Other comprehensive income |  | — |  |  | — |  |  | — |  |  | 12,679 |  |  | — |  |  | 12,679 |
Cash dividends declared ($0.42 per share) |  | — |  |  | — |  |  | (6,524 | ) |  | — |  |  | — |  |  | (6,524 | )
Treasury stock purchased (8,010 shares) |  | — |  |  | — |  |  | — |  |  | — |  |  | (210 | ) |  | (210 | )
Net issuance (21,119 shares) to employee stock plans, including related tax effects |  | — |  |  | (69 | ) |  | — |  |  | — |  |  | 149 |  |  | 80 |
Recognition of stock based compensation |  | — |  |  | 560 |  |  | — |  |  | — |  |  | — |  |  | 560 |
Balance at June 30, 2019 |  | 32,857 |  |  | 188,144 |  |  | 173,400 |  |  | 877 |  |  | (4,716 | ) |  | 390,562 |
Net income |  | — |  |  | — |  |  | 5,015 |  |  | — |  |  | — |  |  | 5,015 |
Other comprehensive income |  | — |  |  | — |  |  | — |  |  | 2,168 |  |  | — |  |  | 2,168 |
Cash dividends declared ($0.22 per share) |  | — |  |  | — |  |  | (3,421 | ) |  | — |  |  | — |  |  | (3,421 | )
Treasury stock purchased (5,482 shares) |  | — |  |  | — |  |  | — |  |  | — |  |  | (136 | ) |  | (136 | )
Net issuance (4,297 shares) to employee stock plans, including related tax effects |  | — |  |  | (17 | ) |  | — |  |  | — |  |  | 132 |  |  | 115 |
Recognition of stock based compensation |  | — |  |  | 156 |  |  | — |  |  | — |  |  | — |  |  | 156 |
Balance at September 30, 2019 |  | $ | 32,857 |  |  | $ | 188,283 |  |  | $ | 174,994 |  |  | $ | 3,045 |  |  | $ | (4,720 | ) |  | $ | 394,459 |

The accompanying notes are an integral part of these consolidated financial statements.
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BAR HARBOR BANKSHARES AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS

|  | Nine Months Ended September 30,
(in thousands) |  | 2019 |  | 2018
Cash flows from operating activities: |  |  |  |  |  |
Net income |  | $ | 18,413 |  |  | $ | 25,317 |
Adjustments to reconcile net income to net cash provided by operating activities: |  |  |  |
Provision for loan losses |  | 1,779 |  |  | 2,208 |
Net amortization of securities |  | 2,535 |  |  | 3,066 |
Change in unamortized net loan costs and premiums |  | (278 | ) |  | 46 |
Premises and equipment depreciation |  | 2,942 |  |  | 2,821 |
Stock-based compensation expense |  | 716 |  |  | 836 |
Accretion of purchase accounting entries, net |  | (2,613 | ) |  | (2,780 | )
Amortization of other intangibles |  | 621 |  |  | 621 |
Income from cash surrender value of bank-owned life insurance policies |  | (1,558 | ) |  | (1,328 | )
Gain on sales of securities, net |  | (157 | ) |  | — |
Loss on other real estate owned |  | 146 |  |  | — |
Loss on premises and equipment, net |  | 21 |  |  | — |
Net change in other assets and liabilities |  | (1,722 | ) |  | (3,644 | )
Net cash provided by operating activities |  | 20,845 |  |  | 27,163 |
Cash flows from investing activities: |  |  |  |  |  |
Proceeds from sales of securities available for sale |  | 67,983 |  |  | — |
Proceeds from maturities, calls and prepayments of securities available for sale |  | 77,812 |  |  | 72,278 |
Purchases of securities available for sale |  | (76,620 | ) |  | (90,399 | )
Net change in loans |  | (85,483 | ) |  | 2,852 |
Purchase of Federal Home Loan Bank stock |  | (10,471 | ) |  | (1,172 | )
Proceeds from sale of Federal Home Loan Bank stock |  | 18,661 |  |  | 5,123 |
Purchase of premises and equipment, net |  | (1,803 | ) |  | (2,675 | )
Purchase of bank-owned life insurance |  | — |  |  | (14,000 | )
Proceeds from sale of other real estate owned |  | — |  |  | 69 |
Net cash used in investing activities |  | (9,921 | ) |  | (27,924 | )
Cash flows from financing activities: |  |  |  |
Net increase in deposits |  | 10,968 |  |  | 38,885 |
Proceeds from advances from the Federal Home Loan Bank |  | 9,722,907 |  |  | 7,276,306 |
Repayments of advances from the Federal Home Loan Bank |  | (9,766,912 | ) |  | (7,320,515 | )
Net change in short-term other borrowings |  | 5,048 |  |  | (3,255 | )
Exercise of stock options |  | 195 |  |  | 635 |
Treasury stock purchased |  | (346 | ) |  | (324 | )
Cash dividends paid on common stock |  | (9,945 | ) |  | (9,082 | )
Net cash used in financing activities |  | (38,085 | ) |  | (17,350 | )
Net change in cash and cash equivalents |  | (27,161 | ) |  | (18,111 | )
Cash and cash equivalents at beginning of year |  | 98,754 |  |  | 90,685 |
Cash and cash equivalents at end of year |  | $ | 71,593 |  |  | $ | 72,574 |
Supplemental cash flow information: |  |  |  |  |  |
Interest paid |  | $ | 34,394 |  |  | $ | 25,537 |
Income taxes paid, net |  | 2,479 |  |  | 9,927 |
Other non-cash changes: |  |  |  |
Real estate owned acquired in settlement of loans |  | 250 |  |  | 30 |

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.
Reclassifications: Whenever necessary, amounts in the prior years’ financial statements are reclassified to conform to current presentation. The reclassifications had no impact on net income in the Company’s consolidated income statement.
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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 guidance will require companies to recognize improvements to estimated credit losses immediately in earnings rather than interest income over time.
| The Company is in the process of evaluating and implementing allowance loan loss estimation models to comply with the guidance under this ASU, which may result in a higher allowance for losses then currently recorded under the existing standard.
| The ASU should be adopted on a modified retrospective basis. Entities that have loans accounted for under ASC 310-30 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.

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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
September 30, 2019 |  |  |  |  |  |  |  |  |  |  |  |
Debt securities: |  |  |  |  |  |  |  |  |  |  |  |
Mortgage-backed securities: |  |  |  |  |  |  |  |  |
US Government-sponsored enterprises |  | $ | 344,547 |  |  | $ | 5,924 |  |  | $ | 1,328 |  |  | $ | 349,143 |
US Government agency |  | 116,912 |  |  | 2,130 |  |  | 217 |  |  | 118,825 |
Private label |  | 20,268 |  |  | 75 |  |  | 389 |  |  | 19,954 |
Obligations of states and political subdivisions thereof |  | 107,854 |  |  | 3,519 |  |  | 147 |  |  | 111,226 |
Corporate bonds |  | 75,652 |  |  | 1,554 |  |  | 679 |  |  | 76,527 |
Total securities available for sale |  | $ | 665,233 |  |  | $ | 13,202 |  |  | $ | 2,760 |  |  | $ | 675,675 |
December 31, 2018 |  |  |  |  |  |  |  |  |  |  |  |
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 September 30, 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 |  | $ | 190 |  |  | $ | 191 |
Over 1 year to 5 years |  | 33,984 |  |  | 34,856 |
Over 5 years to 10 years |  | 56,882 |  |  | 57,482 |
Over 10 years |  | 92,451 |  |  | 95,224 |
Total bonds and obligations |  | 183,507 |  |  | 187,753 |
Mortgage-backed securities |  | 481,726 |  |  | 487,922 |
Total securities available for sale |  | $ | 665,233 |  |  | $ | 675,675 |

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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
September 30, 2019 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Debt securities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Mortgage-backed securities: |  |  |  |  |  |  |  |  |  |  |  |  |
US Government-sponsored enterprises |  | $ | 140 |  |  | $ | 30,711 |  |  | $ | 1,188 |  |  | $ | 60,174 |  |  | $ | 1,328 |  |  | $ | 90,885 |
US Government agency |  | 117 |  |  | 10,691 |  |  | 100 |  |  | 9,767 |  |  | 217 |  |  | 20,458 |
Private label |  | 385 |  |  | 19,573 |  |  | 4 |  |  | 39 |  |  | 389 |  |  | 19,612 |
Obligations of states and political subdivisions thereof |  | 20 |  |  | 4,138 |  |  | 127 |  |  | 1,692 |  |  | 147 |  |  | 5,830 |
Corporate bonds |  | 493 |  |  | 14,506 |  |  | 186 |  |  | 7,186 |  |  | 679 |  |  | 21,692 |
Total securities available for sale |  | $ | 1,155 |  |  | $ | 79,619 |  |  | $ | 1,605 |  |  | $ | 78,858 |  |  | $ | 2,760 |  |  | $ | 158,477 |
December 31, 2018 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
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 and nine months ended September 30, 2019 and 2018 the Company did not record any other-than-temporary impairment (“OTTI”) losses.

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

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 September 30, 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 September 30, 2019:
US Government-sponsored enterprises
172 out of the total 702 securities in the Company’s portfolios of AFS US Government-sponsored enterprises were in unrealized loss positions. Aggregate unrealized losses represented 1.4% 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
46 out of the total 190 securities in the Company’s portfolios of AFS US Government agency securities were in unrealized loss positions. Aggregate unrealized losses represented 1.0% of the amortized cost of securities in unrealized loss positions. The Government National Mortgage Association (“GNMA”) guarantees the contractual cash flows of all of the Company’s US Government 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 20 securities in the Company’s portfolio of AFS private label mortgage-backed securities were in unrealized loss positions. Aggregate unrealized losses represented 1.9% 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
Nine of the total 219 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
Seven 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 3.0% of the amortized cost of bonds in unrealized loss positions. The Company reviews the financial strength of all of these bonds and has concluded that the amortized cost remains supported by the expected future cash flows of these securities.
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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:

|  | September 30, 2019 |  | December 31, 2018
(in thousands) |  | Business Activities Loans |  | Acquired Loans |  | Total |  | Business Activities Loans |  | Acquired Loans |  | Total
Commercial real estate: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Construction and land development |  | $ | 28,802 |  |  | $ | 2,064 |  |  | $ | 30,866 |  |  | $ | 23,754 |  |  | $ | 2,890 |  |  | $ | 26,644 |
Other commercial real estate |  | 672,885 |  |  | 220,022 |  |  | 892,907 |  |  | 555,980 |  |  | 244,075 |  |  | 800,055 |
Total commercial real estate |  | 701,687 |  |  | 222,086 |  |  | 923,773 |  |  | 579,734 |  |  | 246,965 |  |  | 826,699 |
Commercial and industrial: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Commercial |  | 239,894 |  |  | 40,490 |  |  | 280,384 |  |  | 234,757 |  |  | 52,470 |  |  | 287,227 |
Agricultural |  | 21,206 |  |  | — |  |  | 21,206 |  |  | 22,317 |  |  | — |  |  | 22,317 |
Tax exempt |  | 66,043 |  |  | 35,073 |  |  | 101,116 |  |  | 56,588 |  |  | 38,738 |  |  | 95,326 |
Total commercial and industrial |  | 327,143 |  |  | 75,563 |  |  | 402,706 |  |  | 313,662 |  |  | 91,208 |  |  | 404,870 |
Total commercial loans |  | 1,028,830 |  |  | 297,649 |  |  | 1,326,479 |  |  | 893,396 |  |  | 338,173 |  |  | 1,231,569 |
Residential real estate: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Residential mortgages |  | 730,516 |  |  | 412,936 |  |  | 1,143,452 |  |  | 670,189 |  |  | 474,509 |  |  | 1,144,698 |
Total residential real estate |  | 730,516 |  |  | 412,936 |  |  | 1,143,452 |  |  | 670,189 |  |  | 474,509 |  |  | 1,144,698 |
Consumer: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Home equity |  | 58,556 |  |  | 37,600 |  |  | 96,156 |  |  | 57,898 |  |  | 45,291 |  |  | 103,189 |
Other consumer |  | 10,234 |  |  | 985 |  |  | 11,219 |  |  | 9,414 |  |  | 1,357 |  |  | 10,771 |
Total consumer |  | 68,790 |  |  | 38,585 |  |  | 107,375 |  |  | 67,312 |  |  | 46,648 |  |  | 113,960 |
Total loans |  | $ | 1,828,136 |  |  | $ | 749,170 |  |  | $ | 2,577,306 |  |  | $ | 1,630,897 |  |  | $ | 859,330 |  |  | $ | 2,490,227 |

The carrying amount of the acquired loans at September 30, 2019 totaled $749.2 million. A subset of these loans was determined to have evidence of credit deterioration at acquisition date, which is accounted for in accordance with ASC 310-30. These purchased credit-impaired loans presently maintain a carrying value of $8.4 million (and total note balances of $11.5 million). These loans are evaluated for impairment through the periodic reforecasting of expected cash flows. Acquired loans considered not impaired at the acquisition date had a carrying amount of $740.8 million as of September 30, 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 September 30,
(in thousands) |  | 2019 |  | 2018
Balance at beginning of period |  | $ | 4,195 |  |  | $ | 2,807 |
Reclassification from non-accretable difference for loans with (decreased) improved cash flows |  | (126 | ) |  | 1,985 |
Accretion |  | (581 | ) |  | (315 | )
Balance at end of period |  | $ | 3,488 |  |  | $ | 4,477 |
|  | Nine Months Ended September 30,
(in thousands) |  | 2019 |  | 2018
Balance at beginning of period |  | $ | 4,377 |  |  | $ | 3,509 |
Reclassification from non-accretable difference for loans with improved cash flows |  | 498 |  |  | 2,031 |
Accretion |  | (1,387 | ) |  | (1,063 | )
Balance at end of period |  | $ | 3,488 |  |  | $ | 4,477 |

The following is a summary of past due loans at September 30, 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
September 30, 2019 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Commercial real estate: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Construction and land development |  | $ | — |  |  | $ | — |  |  | $ | 73 |  |  | $ | 73 |  |  | $ | 28,729 |  |  | $ | 28,802 |  |  | $ | 73 |
Other commercial real estate |  | 985 |  |  | 56 |  |  | 6,773 |  |  | 7,814 |  |  | 665,071 |  |  | 672,885 |  |  | — |
Total commercial real estate |  | 985 |  |  | 56 |  |  | 6,846 |  |  | 7,887 |  |  | 693,800 |  |  | 701,687 |  |  | 73 |
Commercial and industrial: |  |  |  |  |  |  |  |  |  |  |  |  |  |
Commercial |  | 772 |  |  | 64 |  |  | 1,145 |  |  | 1,981 |  |  | 237,913 |  |  | 239,894 |  |  | — |
Agricultural |  | 121 |  |  | 72 |  |  | 25 |  |  | 218 |  |  | 20,988 |  |  | 21,206 |  |  | — |
Tax exempt |  | — |  |  | — |  |  | — |  |  | — |  |  | 66,043 |  |  | 66,043 |  |  | — |
Total commercial and industrial |  | 893 |  |  | 136 |  |  | 1,170 |  |  | 2,199 |  |  | 324,944 |  |  | 327,143 |  |  | — |
Total commercial loans |  | 1,878 |  |  | 192 |  |  | 8,016 |  |  | 10,086 |  |  | 1,018,744 |  |  | 1,028,830 |  |  | 73 |
Residential real estate: |  |  |  |  |  |  |  |  |  |  |  |  |  |
Residential mortgages |  | 399 |  |  | 345 |  |  | 871 |  |  | 1,615 |  |  | 728,901 |  |  | 730,516 |  |  | 71 |
Total residential real estate |  | 399 |  |  | 345 |  |  | 871 |  |  | 1,615 |  |  | 728,901 |  |  | 730,516 |  |  | 71 |
Consumer: |  |  |  |  |  |  |  |  |  |  |  |  |  |
Home equity |  | 131 |  |  | 65 |  |  | 315 |  |  | 511 |  |  | 58,045 |  |  | 58,556 |  |  | — |
Other consumer |  | 2 |  |  | 7 |  |  | — |  |  | 9 |  |  | 10,225 |  |  | 10,234 |  |  | — |
Total consumer |  | 133 |  |  | 72 |  |  | 315 |  |  | 520 |  |  | 68,270 |  |  | 68,790 |  |  | — |
Total loans |  | $ | 2,410 |  |  | $ | 609 |  |  | $ | 9,202 |  |  | $ | 12,221 |  |  | $ | 1,815,915 |  |  | $ | 1,828,136 |  |  | $ | 144 |

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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
September 30, 2019 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Commercial real estate: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Construction and land development |  | $ | 12 |  |  | $ | — |  |  | $ | — |  |  | $ | 12 |  |  | $ | 190 |  |  | $ | 2,064 |  |  | $ | — |
Other commercial real estate |  | 434 |  |  | — |  |  | 240 |  |  | 674 |  |  | 4,859 |  |  | 220,022 |  |  | 72 |
Total commercial real estate |  | 446 |  |  | — |  |  | 240 |  |  | 686 |  |  | 5,049 |  |  | 222,086 |  |  | 72 |
Commercial and industrial: |  |  |  |  |  |  |  |  |  |  |  |  |  |
Commercial |  | — |  |  | 41 |  |  | 750 |  |  | 791 |  |  | 249 |  |  | 40,490 |  |  | 387 |
Agricultural |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |
Tax exempt |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | 35,073 |  |  | — |
Total commercial and industrial |  | — |  |  | 41 |  |  | 750 |  |  | 791 |  |  | 249 |  |  | 75,563 |  |  | 387 |
Total commercial loans |  | 446 |  |  | 41 |  |  | 990 |  |  | 1,477 |  |  | 5,298 |  |  | 297,649 |  |  | 459 |
Residential real estate: |  |  |  |  |  |  |  |  |  |  |  |  |  |
Residential mortgages |  | 245 |  |  | 519 |  |  | 874 |  |  | 1,638 |  |  | 3,093 |  |  | 412,936 |  |  | 47 |
Total residential real estate |  | 245 |  |  | 519 |  |  | 874 |  |  | 1,638 |  |  | 3,093 |  |  | 412,936 |  |  | 47 |
Consumer: |  |  |  |  |  |  |  |  |  |  |  |  |  |
Home equity |  | 356 |  |  | 133 |  |  | 180 |  |  | 669 |  |  | 19 |  |  | 37,600 |  |  | 37 |
Other consumer |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | 985 |  |  | — |
Total consumer |  | 356 |  |  | 133 |  |  | 180 |  |  | 669 |  |  | 19 |  |  | 38,585 |  |  | 37 |
Total loans |  | $ | 1,047 |  |  | $ | 693 |  |  | $ | 2,044 |  |  | $ | 3,784 |  |  | $ | 8,410 |  |  | $ | 749,170 |  |  | $ | 543 |

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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
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 September 30, 2019 and December 31, 2018:

|  | September 30, 2019 |  | December 31, 2018
(in thousands) |  | Business Activities Loans |  | Acquired Loans |  | Total |  | Business Activities Loans |  | Acquired Loans |  | Total
Commercial real estate: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Construction and land development |  | $ | 1 |  |  | $ | — |  |  | $ | 1 |  |  | $ | 1 |  |  | $ | — |  |  | $ | 1 |
Other commercial real estate |  | 8,172 |  |  | 346 |  |  | 8,518 |  |  | 7,873 |  |  | 282 |  |  | 8,155 |
Total commercial real estate |  | 8,173 |  |  | 346 |  |  | 8,519 |  |  | 7,874 |  |  | 282 |  |  | 8,156 |
Commercial and industrial: |  |  |  |  |  |  |  |  |  |  |  |
Commercial |  | 1,268 |  |  | 575 |  |  | 1,843 |  |  | 1,423 |  |  | 643 |  |  | 2,066 |
Agricultural |  | 234 |  |  | — |  |  | 234 |  |  | 265 |  |  | — |  |  | 265 |
Tax exempt |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |
Total commercial and industrial |  | 1,502 |  |  | 575 |  |  | 2,077 |  |  | 1,688 |  |  | 643 |  |  | 2,331 |
Total commercial loans |  | 9,675 |  |  | 921 |  |  | 10,596 |  |  | 9,562 |  |  | 925 |  |  | 10,487 |
Residential real estate: |  |  |  |  |  |  |  |  |  |  |  |
Residential mortgages |  | 3,277 |  |  | 2,063 |  |  | 5,340 |  |  | 4,213 |  |  | 2,997 |  |  | 7,210 |
Total residential real estate |  | 3,277 |  |  | 2,063 |  |  | 5,340 |  |  | 4,213 |  |  | 2,997 |  |  | 7,210 |
Consumer: |  |  |  |  |  |  |  |  |  |  |  |
Home equity |  | 564 |  |  | 154 |  |  | 718 |  |  | 246 |  |  | 201 |  |  | 447 |
Other consumer |  | 25 |  |  | — |  |  | 25 |  |  | 90 |  |  | 1 |  |  | 91 |
Total consumer |  | 589 |  |  | 154 |  |  | 743 |  |  | 336 |  |  | 202 |  |  | 538 |
Total loans |  | $ | 13,541 |  |  | $ | 3,138 |  |  | $ | 16,679 |  |  | $ | 14,111 |  |  | $ | 4,124 |  |  | $ | 18,235 |

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Loans evaluated for impairment as of September 30, 2019 and December 31, 2018 are, as follows:
Business Activities Loans

(in thousands) |  | Commercial real estate |  | Commercial and industrial |  | Residential real estate |  | Consumer |  | Total
September 30, 2019 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Balance at end of period |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Individually evaluated for impairment |  | $ | 8,759 |  |  | $ | 1,323 |  |  | $ | 2,643 |  |  | $ | 13 |  |  | $ | 12,738 |
Collectively evaluated |  | 692,928 |  |  | 325,820 |  |  | 727,873 |  |  | 68,777 |  |  | 1,815,398 |
Total |  | $ | 701,687 |  |  | $ | 327,143 |  |  | $ | 730,516 |  |  | $ | 68,790 |  |  | $ | 1,828,136 |

Acquired Loans

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

Business Activities Loans

(in thousands) |  | Commercial real estate |  | Commercial and industrial |  | Residential real estate |  | Consumer |  | Total
December 31, 2018 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
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
December 31, 2018 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
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 |

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The following is a summary of impaired loans at September 30, 2019 and December 31, 2018:
Business Activities Loans

|  | September 30, 2019
(in thousands) |  | Recorded Investment |  | Unpaid Principal Balance |  | Related Allowance
With no related allowance: |  |  |  |  |  |  |  |  |
Construction and land development |  | $ | — |  |  | $ | — |  |  | $ | — |
Other commercial real estate |  | 5,634 |  |  | 5,675 |  |  | — |
Commercial |  | 657 |  |  | 713 |  |  | — |
Agricultural |  | — |  |  | — |  |  | — |
Tax exempt loans |  | — |  |  | — |  |  | — |
Residential real estate |  | 2,082 |  |  | 2,236 |  |  | — |
Home equity |  | — |  |  | — |  |  | — |
Other consumer |  | — |  |  | — |  |  | — |
With an allowance recorded: |  |  |  |  |  |
Construction and land development |  | $ | 1 |  |  | $ | 1 |  |  | $ | 1 |
Other commercial real estate |  | 3,124 |  |  | 3,262 |  |  | 989 |
Commercial |  | 666 |  |  | 694 |  |  | 240 |
Agricultural |  | — |  |  | — |  |  | — |
Tax exempt loans |  | — |  |  | — |  |  | — |
Residential real estate |  | 561 |  |  | 594 |  |  | 66 |
Home equity |  | 13 |  |  | 13 |  |  | 1 |
Other consumer |  | — |  |  | — |  |  | — |
Total |  |  |  |  |  |
Commercial real estate |  | $ | 8,759 |  |  | $ | 8,938 |  |  | $ | 990 |
Commercial and industrial |  | 1,323 |  |  | 1,407 |  |  | 240 |
Residential real estate |  | 2,643 |  |  | 2,830 |  |  | 66 |
Consumer |  | 13 |  |  | 13 |  |  | 1 |
Total impaired loans |  | $ | 12,738 |  |  | $ | 13,188 |  |  | $ | 1,297 |

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Acquired Loans

|  | September 30, 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 |  | 414 |  |  | 508 |  |  | — |
Agricultural |  | — |  |  | — |  |  | — |
Tax exempt loans |  | — |  |  | — |  |  | — |
Residential real estate |  | 616 |  |  | 852 |  |  | — |
Home equity |  | — |  |  | — |  |  | — |
Other consumer |  | — |  |  | — |  |  | — |
With an allowance recorded: |  |  |  |  |  |
Construction and land development |  | $ | — |  |  | $ | — |  |  | $ | — |
Other commercial real estate |  | 167 |  |  | 168 |  |  | 12 |
Commercial |  | — |  |  | — |  |  | — |
Agricultural |  | — |  |  | — |  |  | — |
Tax exempt loans |  | — |  |  | — |  |  | — |
Residential real estate |  | 357 |  |  | 376 |  |  | 32 |
Home equity |  | — |  |  | — |  |  | — |
Other consumer |  | — |  |  | — |  |  | — |
Total |  |  |  |  |  |
Commercial real estate |  | $ | 257 |  |  | $ | 258 |  |  | $ | 12 |
Commercial and industrial |  | 414 |  |  | 508 |  |  | — |
Residential real estate |  | 973 |  |  | 1,228 |  |  | 32 |
Consumer |  | — |  |  | — |  |  | — |
Total impaired loans |  | $ | 1,644 |  |  | $ | 1,994 |  |  | $ | 44 |

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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 |

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

|  | Three Months Ended September 30, 2019 |  | Three Months Ended September 30, 2018
(in thousands) |  | Average Recorded Investment |  | Interest Income Recognized |  | Average Recorded Investment |  | Interest Income Recognized
With no related allowance: |  |  |  |  |  |  |  |  |  |  |  |
Construction and land development |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |
Other commercial real estate |  | 5,528 |  |  | 52 |  |  | 6,639 |  |  | 31 |
Commercial |  | 747 |  |  | 4 |  |  | 625 |  |  | 2 |
Agricultural |  | — |  |  | — |  |  | — |  |  | — |
Tax exempt loans |  | — |  |  | — |  |  | — |  |  | — |
Residential real estate |  | 2,041 |  |  | 16 |  |  | 3,955 |  |  | 9 |
Home equity |  | — |  |  | — |  |  | 158 |  |  | — |
Other consumer |  | — |  |  | — |  |  | — |  |  | — |
With an allowance recorded: |  |  |  |  |  |  |  |
Construction and land development |  | $ | 1 |  |  | $ | — |  |  | $ | 1 |  |  | $ | — |
Other commercial real estate |  | 3,217 |  |  | — |  |  | 2,214 |  |  | — |
Commercial |  | 654 |  |  | — |  |  | 788 |  |  | — |
Agricultural |  | — |  |  | — |  |  | — |  |  | — |
Tax exempt loans |  | — |  |  | — |  |  | — |  |  | — |
Residential real estate |  | 551 |  |  | 2 |  |  | 888 |  |  | 3 |
Home equity |  | 12 |  |  | — |  |  | 13 |  |  | — |
Other consumer |  | — |  |  | — |  |  | — |  |  | — |
Total |  |  |  |  |  |  |  |
Commercial real estate |  | $ | 8,746 |  |  | $ | 52 |  |  | $ | 8,854 |  |  | $ | 31 |
Commercial and industrial |  | 1,401 |  |  | 4 |  |  | 1,413 |  |  | 2 |
Residential real estate |  | 2,592 |  |  | 18 |  |  | 4,843 |  |  | 12 |
Consumer |  | 12 |  |  | — |  |  | 171 |  |  | — |
Total impaired loans |  | $ | 12,751 |  |  | $ | 74 |  |  | $ | 15,281 |  |  | $ | 45 |

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|  | Nine Months Ended September 30, 2019 |  | Nine Months Ended September 30, 2018
(in thousands) |  | Average Recorded Investment |  | Interest Income Recognized |  | Average Recorded Investment |  | Interest Income Recognized
With no related allowance: |  |  |  |  |  |  |  |  |  |  |  |
Construction and land development |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |
Other commercial real estate |  | 5,466 |  |  | 56 |  |  | 6,204 |  |  | 46 |
Commercial |  | 792 |  |  | 7 |  |  | 628 |  |  | 7 |
Agricultural |  | — |  |  | — |  |  | — |  |  | — |
Tax exempt loans |  | — |  |  | — |  |  | — |  |  | — |
Residential real estate |  | 2,089 |  |  | 47 |  |  | 4,027 |  |  | 28 |
Home equity |  | — |  |  | — |  |  | 236 |  |  | — |
Other consumer |  | — |  |  | — |  |  | — |  |  | — |
With an allowance recorded: |  |  |  |  |  |  |  |
Construction and land development |  | $ | 2 |  |  | $ | — |  |  | $ | 1 |  |  | $ | — |
Other commercial real estate |  | 2,972 |  |  | 29 |  |  | 1,600 |  |  | 6 |
Commercial |  | 497 |  |  | — |  |  | 716 |  |  | — |
Agricultural |  | — |  |  | — |  |  | — |  |  | — |
Tax exempt loans |  | — |  |  | — |  |  | — |  |  | — |
Residential real estate |  | 540 |  |  | 7 |  |  | 800 |  |  | 7 |
Home equity |  | 13 |  |  | — |  |  | 13 |  |  | — |
Other consumer |  | — |  |  | — |  |  | — |  |  | — |
Total |  |  |  |  |  |  |  |
Commercial real estate |  | $ | 8,440 |  |  | $ | 85 |  |  | $ | 7,805 |  |  | $ | 52 |
Commercial and industrial |  | 1,289 |  |  | 7 |  |  | 1,344 |  |  | 7 |
Residential real estate |  | 2,629 |  |  | 54 |  |  | 4,827 |  |  | 35 |
Consumer |  | 13 |  |  | — |  |  | 249 |  |  | — |
Total impaired loans |  | $ | 12,371 |  |  | $ | 146 |  |  | $ | 14,225 |  |  | $ | 94 |

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Acquired Loans

|  | Three Months Ended September 30, 2019 |  | Three Months Ended September 30, 2018
(in thousands) |  | Average Recorded Investment |  | Interest Income Recognized |  | Average Recorded Investment |  | Interest Income Recognized
With no related allowance: |  |  |  |  |  |  |  |  |  |  |  |
Construction and land development |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |
Other commercial real estate |  | 88 |  |  | — |  |  | 95 |  |  | — |
Commercial |  | 395 |  |  | — |  |  | 469 |  |  | — |
Agricultural |  | — |  |  | — |  |  | — |  |  | — |
Tax exempt loans |  | — |  |  | — |  |  | — |  |  | — |
Residential real estate |  | 702 |  |  | — |  |  | 276 |  |  | — |
Home equity |  | — |  |  | — |  |  | — |  |  | — |
Other consumer |  | — |  |  | — |  |  | — |  |  | — |
With an allowance recorded: |  |  |  |  |  |  |  |
Construction and land development |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |
Other commercial real estate |  | 165 |  |  | — |  |  | — |  |  | — |
Commercial |  | — |  |  | — |  |  | — |  |  | — |
Agricultural |  | — |  |  | — |  |  | — |  |  | — |
Tax exempt loans |  | — |  |  | — |  |  | — |  |  | — |
Residential real estate |  | 352 |  |  | — |  |  | 181 |  |  | — |
Home equity |  | — |  |  | — |  |  | — |  |  | — |
Other consumer |  | — |  |  | — |  |  | — |  |  | — |
Total |  |  |  |  |  |  |  |
Commercial real estate |  | $ | 253 |  |  | $ | — |  |  | $ | 95 |  |  | $ | — |
Commercial and industrial |  | 395 |  |  | — |  |  | 469 |  |  | — |
Residential real estate |  | 1,054 |  |  | — |  |  | 457 |  |  | — |
Consumer |  | — |  |  | — |  |  | — |  |  | — |
Total impaired loans |  | $ | 1,702 |  |  | $ | — |  |  | $ | 1,021 |  |  | $ | — |

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|  | Nine Months Ended September 30, 2019 |  | Nine Months Ended September 30, 2018
(in thousands) |  | Average Recorded Investment |  | Interest Income Recognized |  | Average Recorded Investment |  | Interest Income Recognized
With no related allowance: |  |  |  |  |  |  |  |  |  |  |  |
Construction and land development |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |
Other commercial real estate |  | 89 |  |  | — |  |  | 97 |  |  | 1 |
Commercial |  | 429 |  |  | — |  |  | 445 |  |  | 1 |
Agricultural |  | — |  |  | — |  |  | — |  |  | — |
Tax exempt loans |  | — |  |  | — |  |  | — |  |  | — |
Residential real estate |  | 593 |  |  | — |  |  | 124 |  |  | — |
Home equity |  | — |  |  | — |  |  | — |  |  | — |
Other consumer |  | — |  |  | — |  |  | — |  |  | — |
With an allowance recorded: |  |  |  |  |  |  |  |
Construction and land development |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |
Other commercial real estate |  | 123 |  |  | — |  |  | — |  |  | — |
Commercial |  | — |  |  | — |  |  | — |  |  | — |
Agricultural |  | — |  |  | — |  |  | — |  |  | — |
Tax exempt loans |  | — |  |  | — |  |  | — |  |  | — |
Residential real estate |  | 361 |  |  | — |  |  | 186 |  |  | — |
Home equity |  | — |  |  | — |  |  | — |  |  | — |
Other consumer |  | — |  |  | — |  |  | — |  |  | — |
Total |  |  |  |  |  |  |  |
Commercial real estate |  | $ | 212 |  |  | $ | — |  |  | $ | 97 |  |  | $ | 1 |
Commercial and industrial |  | 429 |  |  | — |  |  | 445 |  |  | 1 |
Residential real estate |  | 954 |  |  | — |  |  | 310 |  |  | — |
Consumer |  | — |  |  | — |  |  | — |  |  | — |
Total impaired loans |  | $ | 1,595 |  |  | $ | — |  |  | $ | 852 |  |  | $ | 2 |

Troubled Debt Restructuring Loans
The Company’s loan portfolio also includes certain loans that have been modified in a Troubled Debt Restructuring ("TDR"), where economic concessions have been granted to borrowers who have experienced or are expected to experience financial difficulties. These concessions typically result from the Company’s loss mitigation activities and could include reductions in the interest rate, payment extensions, forgiveness of principal, forbearance, or other actions. Certain TDRs are classified as 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.
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The following tables include the recorded investment and number of modifications identified during the three and nine months ended September 30, 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 September 30, 2019
(in thousands, except modifications) |  | Number of Modifications |  | Pre-Modification Outstanding Recorded Investment |  | Post-Modification Outstanding Recorded Investment
Troubled Debt Restructurings |  |  |  |  |  |  |  |  |
Other commercial real estate |  | 4 |  |  | $ | 268 |  |  | $ | 267 |
Agricultural |  | 1 |  |  | 141 |  |  | 141 |
Residential mortgages |  | 2 |  |  | 399 |  |  | 342 |
Total |  | 7 |  |  | $ | 808 |  |  | $ | 750 |
|  | Three Months Ended September 30, 2018
(in thousands, except modifications) |  | Number of Modifications |  | Pre-Modification Outstanding Recorded Investment |  | Post-Modification Outstanding Recorded Investment
Troubled Debt Restructurings |  |  |  |  |  |  |  |  |
Construction and land development |  | 1 |  |  | $ | 2 |  |  | $ | 1 |
Other commercial real estate |  | 1 |  |  | 72 |  |  | 72 |
Commercial |  | 5 |  |  | 104 |  |  | 60 |
Residential mortgages |  | 2 |  |  | 228 |  |  | 225 |
Total |  | 9 |  |  | $ | 406 |  |  | $ | 358 |
|  | Nine Months Ended September 30, 2019
(in thousands) |  | Number of Modifications |  | Pre-Modification Outstanding Recorded Investment |  | Post-Modification Outstanding Recorded Investment
Troubled Debt Restructurings |  |  |  |  |  |  |  |  |
Other commercial real estate |  | 9 |  |  | $ | 543 |  |  | $ | 529 |
Other commercial |  | 4 |  |  | 168 |  |  | 91 |
Agricultural |  | 1 |  |  | 141 |  |  | 141 |
Residential mortgages |  | 11 |  |  | 1,133 |  |  | 1,034 |
Total |  | 25 |  |  | $ | 1,985 |  |  | $ | 1,795 |

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

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

|  | Three Months Ended September 30,
|  | 2019 |  | 2018
(in thousands, except modifications) |  | Number of Modifications |  | Post-Modification Outstanding Recorded Investment |  | Number of Modifications |  | Post-Modification Outstanding Recorded Investment
Interest only payments |  | 2 |  |  | $ | 90 |  |  | — |  |  | $ | — |
Forbearance |  | 1 |  |  | 141 |  |  | 1 |  |  | 115 |
Forbearance and interest only payments |  | 2 |  |  | 176 |  |  | 3 |  |  | 72 |
Forbearance and maturity concession |  | — |  |  | — |  |  | 4 |  |  | 143 |
Forbearance, amortization and maturity concession |  | 2 |  |  | 343 |  |  | — |  |  | — |
Maturity concession |  | — |  |  | — |  |  | 1 |  |  | 28 |
Total |  | 7 |  |  | $ | 750 |  |  | 9 |  |  | $ | 358 |
|  | Nine Months Ended September 30,
|  | 2019 |  | 2018
(in thousands, except modifications) |  | Number of Modifications |  | Post-Modification Outstanding Recorded Investment |  | Number of Modifications |  | Post-Modification Outstanding Recorded Investment
Interest rate and maturity concession |  | — |  |  | $ | — |  |  | 1 |  |  | $ | 16 |
Interest only payments |  | 2 |  |  | 90 |  |  | — |  |  | — |
Interest only payments and maturity concession |  | 2 |  |  | 73 |  |  | — |  |  | — |
Amortization and maturity concession |  | 4 |  |  | 273 |  |  | — |  |  | — |
Amortization, interest rate and maturity concession |  | 1 |  |  | 77 |  |  | — |  |  | — |
Forbearance |  | 3 |  |  | 253 |  |  | 3 |  |  | 271 |
Forbearance and interest only payments |  | 5 |  |  | 331 |  |  | 6 |  |  | 121 |
Forbearance and maturity concession |  | — |  |  | — |  |  | 17 |  |  | 1,774 |
Forbearance, amortization and maturity concession |  | 7 |  |  | 640 |  |  | — |  |  | — |
Maturity concession |  | — |  |  | — |  |  | 2 |  |  | 440 |
Restructure with maturity concession |  | — |  |  | — |  |  | 5 |  |  | 1,419 |
Other |  | 1 |  |  | 58 |  |  | 2 |  |  | 282 |
Total |  | 25 |  |  | $ | 1,795 |  |  | 36 |  |  | $ | 4,323 |

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For the three and nine months ended September 30, 2019, there were no loans that were restructured that had subsequently defaulted during the period. The evaluation of certain loans individually for specific impairment includes loans that were previously classified as TDRs or continue to be classified as TDRs.
Foreclosure
As of September 30, 2019 and December 31, 2018, the Company maintained bank-owned residential real estate property with a fair value of $2.5 million. Additionally, residential mortgage loans collateralized by real estate property that are in the process of foreclosure as of September 30, 2019 and December 31, 2018 totaled $931 thousand and $1.5 million, respectively.
Mortgage Banking
Total residential loans included held for sale loans of $4.0 million and $168 thousand at September 30, 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 and nine months ended September 30, 2019 and 2018 are, as follows:

Business Activities Loans |  | At or for the Three Months Ended September 30, 2019
(in thousands) |  | Commercial real estate |  | Commercial and industrial |  | Residential real estate |  | Consumer |  | Total
Balance at beginning of period |  | $ | 7,206 |  |  | $ | 2,748 |  |  | $ | 3,942 |  |  | $ | 394 |  |  | $ | 14,290 |
Charged-off loans |  | — |  |  | — |  |  | (108 | ) |  | (55 | ) |  | (163 | )
Recoveries on charged-off loans |  | 1 |  |  | 62 |  |  | 36 |  |  | 1 |  |  | 100 |
(Releases) provision for loan losses |  | 956 |  |  | 63 |  |  | (111 | ) |  | (94 | ) |  | 814 |
Balance at end of period |  | $ | 8,163 |  |  | $ | 2,873 |  |  | $ | 3,759 |  |  | $ | 246 |  |  | $ | 15,041 |
Individually evaluated for impairment |  | 990 |  |  | 240 |  |  | 66 |  |  | 1 |  |  | 1,297 |
Collectively evaluated |  | 7,173 |  |  | 2,633 |  |  | 3,693 |  |  | 245 |  |  | 13,744 |
Total |  | $ | 8,163 |  |  | $ | 2,873 |  |  | $ | 3,759 |  |  | $ | 246 |  |  | $ | 15,041 |
Acquired Loans |  | At or for the Three Months Ended September 30, 2019
(in thousands) |  | Commercial real estate |  | Commercial and industrial |  | Residential real estate |  | Consumer |  | Total
Balance at beginning of period |  | $ | 159 |  |  | $ | 22 |  |  | $ | 101 |  |  | $ | — |  |  | $ | 282 |
Charged-off loans |  | — |  |  | — |  |  | (52 | ) |  | — |  |  | (52 | )
Recoveries on charged-off loans |  | — |  |  | — |  |  | — |  |  | 3 |  |  | 3 |
(Releases) provision for loan losses |  | (2 | ) |  | (15 | ) |  | 99 |  |  | (3 | ) |  | 79 |
Balance at end of period |  | $ | 157 |  |  | $ | 7 |  |  | $ | 148 |  |  | $ | — |  |  | $ | 312 |
Individually evaluated for impairment |  | 12 |  |  | — |  |  | 32 |  |  | — |  |  | 44 |
Collectively evaluated |  | 145 |  |  | 7 |  |  | 116 |  |  | — |  |  | 268 |
Total |  | $ | 157 |  |  | $ | 7 |  |  | $ | 148 |  |  | $ | — |  |  | $ | 312 |

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Business Activities Loans |  | At or for the Nine Months Ended September 30, 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 | ) |  | (13 | ) |  | (110 | ) |  | (129 | ) |  | (309 | )
Recoveries on charged-off loans |  | 131 |  |  | 62 |  |  | 55 |  |  | 8 |  |  | 256 |
(Releases) provision for loan losses |  | 1,278 |  |  | 444 |  |  | (168 | ) |  | (41 | ) |  | 1,513 |
Balance at end of period |  | $ | 8,163 |  |  | $ | 2,873 |  |  | $ | 3,759 |  |  | $ | 246 |  |  | $ | 15,041 |
Individually evaluated for impairment |  | 990 |  |  | 240 |  |  | 66 |  |  | 1 |  |  | 1,297 |
Collectively evaluated |  | 7,173 |  |  | 2,633 |  |  | 3,693 |  |  | 245 |  |  | 13,744 |
Total |  | $ | 8,163 |  |  | $ | 2,873 |  |  | $ | 3,759 |  |  | $ | 246 |  |  | $ | 15,041 |

Acquired Loans |  | At or for the Nine Months Ended September 30, 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 |  | — |  |  | (15 | ) |  | (222 | ) |  | (5 | ) |  | (242 | )
Recoveries on charged-off loans |  | — |  |  | — |  |  | — |  |  | 3 |  |  | 3 |
(Releases) provision for loan losses |  | (16 | ) |  | (13 | ) |  | 293 |  |  | 2 |  |  | 266 |
Balance at end of period |  | $ | 157 |  |  | $ | 7 |  |  | $ | 148 |  |  | $ | — |  |  | $ | 312 |
Individually evaluated for impairment |  | 12 |  |  | — |  |  | 32 |  |  | — |  |  | 44 |
Collectively evaluated |  | 145 |  |  | 7 |  |  | 116 |  |  | — |  |  | 268 |
Total |  | $ | 157 |  |  | $ | 7 |  |  | $ | 148 |  |  | $ | — |  |  | $ | 312 |

Business Activities Loans |  | At or for the Three Months Ended September 30, 2018
(in thousands) |  | Commercial real estate |  | Commercial and industrial |  | Residential real estate |  | Consumer |  | Total
Balance at beginning of period |  | $ | 6,367 |  |  | $ | 2,509 |  |  | $ | 3,454 |  |  | $ | 393 |  |  | $ | 12,723 |
Charged-off loans |  | (29 | ) |  | — |  |  | (61 | ) |  | (40 | ) |  | (130 | )
Recoveries on charged-off loans |  | 7 |  |  | 18 |  |  | — |  |  | 2 |  |  | 27 |
Provision (releases) for loan losses |  | 291 |  |  | (31 | ) |  | 258 |  |  | 66 |  |  | 584 |
Balance at end of period |  | $ | 6,636 |  |  | $ | 2,496 |  |  | $ | 3,651 |  |  | $ | 421 |  |  | $ | 13,204 |
Individually evaluated for impairment |  | 688 |  |  | 62 |  |  | 92 |  |  | — |  |  | 842 |
Collectively evaluated |  | 5,948 |  |  | 2,434 |  |  | 3,559 |  |  | 421 |  |  | 12,362 |
Total |  | $ | 6,636 |  |  | $ | 2,496 |  |  | $ | 3,651 |  |  | $ | 421 |  |  | $ | 13,204 |
Acquired Loans |  | At or for the Three Months Ended September 30, 2018
(in thousands) |  | Commercial real estate |  | Commercial and industrial |  | Residential real estate |  | Consumer |  | Total
Balance at beginning of period |  | $ | 200 |  |  | $ | 82 |  |  | $ | 85 |  |  | $ | — |  |  | $ | 367 |
Charged-off loans |  | (30 | ) |  | (71 | ) |  | (62 | ) |  | (5 | ) |  | (168 | )
Recoveries on charged-off loans |  | 25 |  |  | — |  |  | — |  |  | — |  |  | 25 |
Provision (releases) for loan losses |  | (23 | ) |  | 33 |  |  | 44 |  |  | 5 |  |  | 59 |
Balance at end of period |  | $ | 172 |  |  | $ | 44 |  |  | $ | 67 |  |  | $ | — |  |  | $ | 283 |
Individually evaluated for impairment |  | — |  |  | — |  |  | 20 |  |  | — |  |  | 20 |
Collectively evaluated |  | 172 |  |  | 44 |  |  | 47 |  |  | — |  |  | 263 |
Total |  | $ | 172 |  |  | $ | 44 |  |  | $ | 67 |  |  | $ | — |  |  | $ | 283 |

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

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

Loan Origination/Risk Management: The 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 September 30, 2019 and December 31, 2018:
Business Activities Loans
Commercial Real Estate

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

Acquired Loans
Commercial Real Estate

|  | Commercial construction and land development |  | Commercial real estate other |  | Total commercial real estate
(in thousands) |  | Sep 30, 2019 |  | Dec 31, 2018 |  | Sep 30, 2019 |  | Dec 31, 2018 |  | Sep 30, 2019 |  | Dec 31, 2018
Grade: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Pass |  | $ | 1,765 |  |  | $ | 2,626 |  |  | $ | 212,859 |  |  | $ | 236,393 |  |  | $ | 214,624 |  |  | $ | 239,019 |
Special mention |  | 12 |  |  | — |  |  | 1,962 |  |  | 1,574 |  |  | 1,974 |  |  | 1,574 |
Substandard |  | 287 |  |  | 264 |  |  | 5,033 |  |  | 6,009 |  |  | 5,320 |  |  | 6,273 |
Doubtful |  | — |  |  | — |  |  | 168 |  |  | 99 |  |  | 168 |  |  | 99 |
Total |  | $ | 2,064 |  |  | $ | 2,890 |  |  | $ | 220,022 |  |  | $ | 244,075 |  |  | $ | 222,086 |  |  | $ | 246,965 |

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Business Activities Loans
Commercial and Industrial

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

Acquired Loans
Commercial and Industrial

|  | Commercial |  | Agricultural |  | Tax exempt loans |  | Total commercial and industrial
(in thousands) |  | Sep 30, 2019 |  | Dec 31, 2018 |  | Sep 30, 2019 |  | Dec 31, 2018 |  | Sep 30, 2019 |  | Dec 31, 2018 |  | Sep 30, 2019 |  | Dec 31, 2018
Grade: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Pass |  | $ | 37,111 |  |  | $ | 46,120 |  |  | $ | — |  |  | $ | — |  |  | $ | 35,073 |  |  | $ | 38,738 |  |  | $ | 72,184 |  |  | $ | 84,858 |
Special mention |  | 2,511 |  |  | 4,825 |  |  | — |  |  | — |  |  | — |  |  | — |  |  | 2,511 |  |  | 4,825 |
Substandard |  | 527 |  |  | 1,222 |  |  | — |  |  | — |  |  | — |  |  | — |  |  | 527 |  |  | 1,222 |
Doubtful |  | 341 |  |  | 303 |  |  | — |  |  | — |  |  | — |  |  | — |  |  | 341 |  |  | 303 |
Total |  | $ | 40,490 |  |  | $ | 52,470 |  |  | $ | — |  |  | $ | — |  |  | $ | 35,073 |  |  | $ | 38,738 |  |  | $ | 75,563 |  |  | $ | 91,208 |

Business Activities Loans
Residential Real Estate and Consumer Loans

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

Acquired Loans
Residential Real Estate and Consumer Loans

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

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The following table summarizes total classified and criticized loans as of September 30, 2019 and December 31, 2018:

|  | September 30, 2019 |  | December 31, 2018
(in thousands) |  | Business Activities Loans |  | Acquired Loans |  | Total |  | Business Activities Loans |  | Acquired Loans |  | Total
Non-accrual |  | $ | 13,541 |  |  | $ | 3,138 |  |  | $ | 16,679 |  |  | $ | 14,111 |  |  | $ | 4,124 |  |  | $ | 18,235 |
Substandard accruing |  | 10,114 |  |  | 6,478 |  |  | 16,592 |  |  | 7,810 |  |  | 7,987 |  |  | 15,797 |
Doubtful accruing |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |
Total classified |  | 23,655 |  |  | 9,616 |  |  | 33,271 |  |  | 21,921 |  |  | 12,111 |  |  | 34,032 |
Special mention |  | 26,820 |  |  | 4,485 |  |  | 31,305 |  |  | 15,337 |  |  | 6,399 |  |  | 21,736 |
Total Criticized |  | $ | 50,475 |  |  | $ | 14,101 |  |  | $ | 64,576 |  |  | $ | 37,258 |  |  | $ | 18,510 |  |  | $ | 55,768 |

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NOTE 5. BORROWED FUNDS
Borrowed funds at September 30, 2019 and December 31, 2018 are summarized, as follows:

|  | September 30, 2019 |  | December 31, 2018
(dollars in thousands) |  | Carrying Value |  | Weighted Average Rate |  | Carrying Value |  | Weighted Average Rate
Short-term borrowings |  |  |  |  |  |  |  |  |  |  |  |
Advances from the FHLB |  | $ | 422,583 |  |  | 2.24 | % |  | $ | 611,683 |  |  | 2.47 | %
Other borrowings |  | 41,259 |  |  | 1.24 |  |  | 36,211 |  |  | 1.09 |
Total short-term borrowings |  | 463,842 |  |  | 2.15 |  |  | 647,894 |  |  | 2.39 |
Long-term borrowings |  |  |  |  |  |  |  |
Advances from the FHLB |  | 177,977 |  |  | 2.25 |  |  | 32,929 |  |  | 1.86 |
Subordinated borrowings |  | 37,928 |  |  | 5.69 |  |  | 37,973 |  |  | 5.58 |
Junior subordinated borrowings |  | 5,000 |  |  | 6.15 |  |  | 5,000 |  |  | 5.96 |
Total long-term borrowings |  | 220,905 |  |  | 2.93 |  |  | 75,902 |  |  | 3.99 |
Total |  | $ | 684,747 |  |  | 2.40 | % |  | $ | 723,796 |  |  | 2.56 | %

Short-term debt includes Federal Home Loan Bank of Boston (“FHLB”) advances with a maturity of less than one year. The Company also maintains a $1.0 million secured line of credit with the FHLB that bears a daily adjustable rate calculated by the FHLB. There was no outstanding balance on the FHLB line of credit for the periods ended September 30, 2019 and December 31, 2018.
The Company has the capacity to borrow funds on a secured basis utilizing the Borrower in Custody program and the Discount Window at the Federal Reserve Bank of Boston (the “FRB”). At September 30, 2019, the Company’s available secured line of credit at the FRB was $107.7 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 September 30, 2019 and December 31, 2018.
The Company maintains, with a correspondent bank, an unused unsecured federal funds line of credit that has an aggregate overnight borrowing capacity of $50 million as of September 30, 2019 and December 31, 2018. There was no outstanding balance on the line of credit as of September 30, 2019 and December 31, 2018.
Long-term FHLB advances consist of advances with a maturity of more than one year. The advances outstanding at September 30, 2019 and December 31, 2018 include no callable advances and $319 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 September 30, 2019 is, as follows:

|  | September 30, 2019
(in thousands, except rates) |  | Carrying Value |  | Weighted Average Rate
Fixed rate advances maturing: |  |  |  |  |  |
2019 |  | $ | 393,601 |  |  | 2.27 | %
2020 |  | 54,982 |  |  | 2.14 |
2021 |  | 11,658 |  |  | 2.19 |
2022 |  | 134,000 |  |  | 2.25 |
2023 |  | 1,000 |  |  | — |
2024 and thereafter |  | 5,319 |  |  | 1.79 |
Total FHLB advances |  | $ | 600,560 |  |  | 2.24 | %

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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 next date on which the securities can be redeemed is December 15, 2019. The interest rate is three-month LIBOR plus 3.45%. At September 30, 2019 and December 31, 2018 the interest rate was 5.57% and 6.24%, respectively.
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) |  | September 30, 2019 |  | December 31, 2018
Time less than $100,000 |  | $ | 659,610 |  |  | $ | 622,478 |
Time $100,000 through $250,000 |  | 151,995 |  |  | 193,535 |
Time $250,000 or more |  | 91,060 |  |  | 116,780 |
Total time deposits |  | $ | 902,665 |  |  | $ | 932,793 |

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

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

Included in time deposits are brokered deposits of $554.3 million and $466.9 million at September 30, 2019 and December 31, 2018, respectively. Also included in time deposits are reciprocal deposits of $69.7 million and $52.4 million at September 30, 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:

|  | September 30, 2019 |  | Regulatory Minimum to be "Well Capitalized" |  | December 31, 2018 |  | Regulatory Minimum to be "Well Capitalized"
Company (consolidated) |  |  |  |  |  |  |  |  |  |  |  |
Total capital to risk-weighted assets |  | 14.01 | % |  | N/A |  |  | 14.23 | % |  | N/A |
Common equity tier 1 capital to risk-weighted assets |  | 11.63 |  |  | N/A |  |  | 11.80 |  |  | N/A |
Tier 1 capital to risk-weighted assets |  | 12.47 |  |  | N/A |  |  | 12.68 |  |  | N/A |
Tier 1 capital to average assets |  | 8.65 |  |  | N/A |  |  | 8.53 |  |  | N/A |
Bank |  |  |  |  |  |  |  |
Total capital to risk-weighted assets |  | 13.45 | % |  | 10.00 | % |  | 13.82 | % |  | 10.00 | %
Common equity tier 1 capital to risk-weighted assets |  | 12.60 |  |  | 6.50 |  |  | 12.99 |  |  | 6.50 |
Tier 1 capital to risk-weighted assets |  | 12.60 |  |  | 8.00 |  |  | 12.99 |  |  | 8.00 |
Tier 1 capital to average assets |  | 8.74 |  |  | 5.00 |  |  | 8.74 |  |  | 5.00 |

At each date shown, the Company and the Bank met the conditions to be classified as “well-capitalized” 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 September 30, 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 income (loss)
Components of accumulated other comprehensive income (loss) is, as follows:

(in thousands) |  | September 30, 2019 |  | December 31, 2018
Other accumulated comprehensive income (loss), before tax: |  |  |  |  |  |
Net unrealized gain (loss) on AFS securities |  | $ | 10,442 |  |  | $ | (11,304 | )
Net unrealized loss on effective cash flow hedging derivatives |  | (5,306 | ) |  | (2,934 | )
Net unrealized loss on post-retirement plans |  | (1,162 | ) |  | (1,162 | )
Income taxes related to items of accumulated other comprehensive (income) loss: |  |  |  |
Net unrealized (gain) loss on AFS securities |  | (2,440 | ) |  | 2,641 |
Net unrealized loss on effective cash flow hedging derivatives |  | 1,239 |  |  | 685 |
Net unrealized loss on post-retirement plans |  | 272 |  |  | 272 |
Accumulated other comprehensive income (loss) |  | $ | 3,045 |  |  | $ | (11,802 | )

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

(in thousands) |  | Before Tax |  | Tax Effect |  | Net of Tax
Three Months Ended September 30, 2019 |  |  |  |  |  |  |  |  |
Net unrealized gain on AFS securities: |  |  |  |  |  |  |
Net unrealized gain arising during the period |  | $ | 3,357 |  |  | $ | (784 | ) |  | $ | 2,573 |
Less: reclassification adjustment for gains (losses) realized in net income |  | 157 |  |  | (37 | ) |  | 120 |
Net unrealized gain on AFS securities |  | 3,200 |  |  | (747 | ) |  | 2,453 |
Net unrealized loss on cash flow hedging derivatives: |  |  |  |  |  |
Net unrealized loss arising during the period |  | (370 | ) |  | 85 |  |  | (285 | )
Less: reclassification adjustment for gains (losses) realized in net income |  | — |  |  | — |  |  | — |
Net unrealized loss on cash flow hedging derivatives |  | (370 | ) |  | 85 |  |  | (285 | )
Net unrealized gain on post-retirement plans: |  |  |  |  |  |
Net unrealized gain arising during the period |  | — |  |  | — |  |  | — |
Less: reclassification adjustment for gains (losses) realized in net income |  | — |  |  | — |  |  | — |
Net unrealized gain on post-retirement plans |  | — |  |  | — |  |  | — |
Other comprehensive income |  | $ | 2,830 |  |  | $ | (662 | ) |  | $ | 2,168 |
Three Months Ended September 30, 2018 |  |  |  |  |  |  |  |  |
Net unrealized loss on AFS securities: |  |  |  |  |  |  |  |
Net unrealized loss arising during the period |  | $ | (5,850 | ) |  | $ | 1,291 |  |  | $ | (4,559 | )
Less: reclassification adjustment for gains (losses) realized in net income |  | — |  |  | — |  |  | — |
Net unrealized loss on AFS securities |  | (5,850 | ) |  | 1,291 |  |  | (4,559 | )
Net unrealized gain on cash flow hedging derivatives: |  |  |  |  |  |  |  |
Net unrealized gain arising during the period |  | 299 |  |  | (81 | ) |  | 218 |
Less: reclassification adjustment for gains (losses) realized in net income |  | — |  |  | — |  |  | — |
Net unrealized gain on cash flow hedging derivatives |  | 299 |  |  | (81 | ) |  | 218 |
Net unrealized gain on post-retirement plans: |  |  |  |  |  |  |  |  |
Net unrealized gain arising during the period |  | — |  |  | — |  |  | — |
Less: reclassification adjustment for gains (losses) realized in net income |  | — |  |  | — |  |  | — |
Net unrealized gain on post-retirement plans |  | — |  |  | — |  |  | — |
Other comprehensive loss |  | $ | (5,551 | ) |  | $ | 1,210 |  |  | $ | (4,341 | )

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(in thousands) |  | Before Tax |  | Tax Effect |  | Net of Tax
Nine Months Ended September 30, 2019 |  |  |  |  |  |  |  |  |
Net unrealized gain on AFS securities: |  |  |  |  |  |  |
Net unrealized gain arising during the period |  | $ | 21,903 |  |  | $ | (5,118 | ) |  | $ | 16,785 |
Less: reclassification adjustment for gains (losses) realized in net income |  | 157 |  |  | (37 | ) |  | 120 |
Net unrealized gain on AFS securities |  | 21,746 |  |  | (5,081 | ) |  | 16,665 |
Net unrealized loss on derivative hedges: |  |  |  |  |  |  |  |  |
Net unrealized loss arising during the period |  | (2,372 | ) |  | 554 |  |  | (1,818 | )
Less: reclassification adjustment for gains (losses) realized in net income |  | — |  |  | — |  |  | — |
Net unrealized loss on derivative hedges |  | (2,372 | ) |  | 554 |  |  | (1,818 | )
Net unrealized gain on post-retirement plans: |  |  |  |  |  |  |  |  |
Net unrealized gain arising during the period |  | — |  |  | — |  |  | — |
Less: reclassification adjustment for gains (losses) realized in net income |  | — |  |  | — |  |  | — |
Net unrealized gain on post-retirement plans |  | — |  |  | — |  |  | — |
Other comprehensive income |  | $ | 19,374 |  |  | $ | (4,527 | ) |  | $ | 14,847 |
Nine Months Ended September 30, 2018 |  |  |  |  |  |  |  |  |
Net unrealized loss on AFS securities: |  |  |  |  |  |  |  |
Net unrealized loss arising during the period |  | $ | (19,639 | ) |  | $ | 4,565 |  |  | $ | (15,074 | )
Less: reclassification adjustment for gains (losses) realized in net income |  | — |  |  | — |  |  | — |
Net unrealized loss on AFS securities |  | (19,639 | ) |  | 4,565 |  |  | (15,074 | )
Net unrealized gain on cash flow hedging derivatives: |  |  |  |  |  |  |  |
Net unrealized gain arising during the period |  | 1,179 |  |  | (290 | ) |  | 889 |
Less: reclassification adjustment for gains (losses) realized in net income |  | — |  |  | — |  |  | — |
Net unrealized gain on cash flow hedging derivatives |  | 1,179 |  |  | (290 | ) |  | 889 |
Net unrealized gain on post-retirement plans: |  |  |  |  |  |  |  |  |
Net unrealized gain arising during the period |  | 41 |  |  | (10 | ) |  | 31 |
Less: reclassification adjustment for gains (losses) realized in net income |  | — |  |  | — |  |  | — |
Net unrealized gain on post-retirement plans |  | 41 |  |  | (10 | ) |  | 31 |
Other comprehensive loss |  | $ | (18,419 | ) |  | $ | 4,265 |  |  | $ | (14,154 | )

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

(in thousands) |  | Net unrealized (loss) gain on AFS Securities |  | Net loss on effective cash flow hedging derivatives |  | Net unrealized loss on pension plans |  | Total
Three Months Ended September 30, 2019 |  |  |  |  |  |  |  |  |  |  |  |
Balance at beginning of period |  | $ | 5,547 |  |  | $ | (3,782 | ) |  | $ | (888 | ) |  | $ | 877 |
Other comprehensive gain (loss) before reclassifications |  | 2,573 |  |  | (285 | ) |  | — |  |  | 2,288 |
Less: amounts reclassified from accumulated other comprehensive income |  | 120 |  |  | — |  |  | — |  |  | 120 |
Total other comprehensive income (loss) |  | 2,453 |  |  | (285 | ) |  | — |  |  | 2,168 |
Balance at end of period |  | $ | 8,000 |  |  | $ | (4,067 | ) |  | $ | (888 | ) |  | $ | 3,045 |
Three Months Ended September 30, 2018 |  |  |  |  |  |  |  |
Balance at beginning of period |  | $ | (12,595 | ) |  | $ | (2,064 | ) |  | $ | (688 | ) |  | $ | (15,347 | )
Other comprehensive (loss) gain before reclassifications |  | (4,559 | ) |  | 218 |  |  | — |  |  | (4,341 | )
Less: amounts reclassified from accumulated other comprehensive income |  | — |  |  | — |  |  | — |  |  | — |
Total other comprehensive (loss) income |  | (4,559 | ) |  | 218 |  |  | — |  |  | (4,341 | )
Balance at end of period |  | $ | (17,154 | ) |  | $ | (1,846 | ) |  | $ | (688 | ) |  | $ | (19,688 | )
Nine Months Ended September 30, 2019 |  |  |  |  |  |  |  |
Balance at beginning of period |  | $ | (8,665 | ) |  | $ | (2,249 | ) |  | $ | (888 | ) |  | $ | (11,802 | )
Other comprehensive gain (loss) before reclassifications |  | 16,785 |  |  | (1,818 | ) |  | — |  |  | 14,967 |
Less: amounts reclassified from accumulated other comprehensive income |  | 120 |  |  | — |  |  | — |  |  | 120 |
Total other comprehensive income (loss) |  | 16,665 |  |  | (1,818 | ) |  | — |  |  | 14,847 |
Balance at end of period |  | $ | 8,000 |  |  | $ | (4,067 | ) |  | $ | (888 | ) |  | $ | 3,045 |
Nine Months Ended September 30, 2018 |  |  |  |  |  |  |  |  |  |  |  |
Balance at beginning of period |  | $ | (1,713 | ) |  | $ | (2,250 | ) |  | $ | (591 | ) |  | $ | (4,554 | )
Other comprehensive (loss) gain before reclassifications |  | (15,074 | ) |  | 889 |  |  | 31 |  |  | (14,154 | )
Less: amounts reclassified from accumulated other comprehensive income |  | — |  |  | — |  |  | — |  |  | — |
Total other comprehensive (loss) income |  | (15,074 | ) |  | 889 |  |  | 31 |  |  | (14,154 | )
Less: amounts reclassified from accumulated other comprehensive income for ASU 2018-02 |  | (367 | ) |  | (485 | ) |  | (128 | ) |  | (980 | )
Balance at end of period |  | $ | (17,154 | ) |  | $ | (1,846 | ) |  | $ | (688 | ) |  | $ | (19,688 | )

The following tables presents the amounts reclassified out of each component of accumulated other comprehensive income (loss) for the three and nine months ended September 30, 2019 and 2018:

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

(1) Net realized gains before tax include gross realized gains $716 thousand and realized losses of $559 thousand.
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NOTE 8. EARNINGS PER SHARE
The following table presents the calculation of earnings per share:

|  | Three Months Ended September 30, |  | Nine Months Ended September 30,
(in thousands, except per share and share data) |  | 2019 |  | 2018 |  | 2019 |  | 2018
Net income |  | $ | 5,015 |  |  | $ | 8,970 |  |  | $ | 18,413 |  |  | $ | 25,317 |
Average number of basic common shares outstanding |  | 15,547,276 |  |  | 15,503,488 |  |  | 15,536,414 |  |  | 15,478,207 |
Plus: dilutive effect of stock options and awards outstanding (1) |  | 34,027 |  |  | 76,575 |  |  | 45,282 |  |  | 85,559 |
Average number of diluted common shares outstanding (1) |  | 15,581,303 |  |  | 15,580,063 |  |  | 15,581,696 |  |  | 15,563,766 |
Anti-dilutive options excluded from earnings calculation |  | — |  |  | — |  |  | — |  |  | 14,394 |
Earnings per share: |  |  |  |  |  |  |  |
Basic |  | $ | 0.32 |  |  | $ | 0.58 |  |  | $ | 1.19 |  |  | $ | 1.64 |
Diluted |  | $ | 0.32 |  |  | $ | 0.58 |  |  | $ | 1.18 |  |  | $ | 1.63 |

_____________________________________
(1) Average diluted shares outstanding are 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 September 30, 2019 and December 31, 2018:

|  | September 30, 2019
|  | Notional Amount |  | Weighted Average Maturity |  | Estimated Fair Value Asset (Liability)
|  | (in thousands) |  | (in years) |  | (in thousands)
Cash flow hedges: |  |  |  |  |  |  |  |
Interest rate cap agreements |  | $ | 90,000 |  |  | 3.4 |  | $ | 89 |
Interest rate swap on deposits |  | 50,000 |  |  | 4.5 |  | (2,179 | )
Total cash flow hedges |  | 140,000 |  |  |  |  | (2,090 | )
Economic hedges: |  |  |  |  |  |  |  |
Forward sale commitments |  | 7,762 |  |  | 0.1 |  | (61 | )
Total economic hedges |  | 7,762 |  |  |  |  | (61 | )
Non-hedging derivatives: |  |  |  |  |  |  |  |
Interest rate lock commitments |  | 12,242 |  |  | 0.1 |  | 78 |
Customer loan derivative liability |  | 169,569 |  |  | 9.8 |  | (10,923 | )
Customer loan derivative asset |  | 169,569 |  |  | 9.8 |  | 10,923 |
Total non-hedging derivatives |  | 351,380 |  |  |  |  | 78 |
Total |  | $ | 499,142 |  |  |  |  | $ | (2,073 | )

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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 |  |  |  |  | 803 |
Non-hedging derivatives: |  |  |  |  |  |  |  |
Interest rate lock commitments |  | 957 |  |  | 0.1 |  | 8 |
Customer loan derivative liability |  | 45,641 |  |  | 9.9 |  | (1,353 | )
Customer loan derivative asset |  | 45,641 |  |  | 9.9 |  | 1,353 |
Total non-hedging derivatives |  | 92,239 |  |  |  |  | 8 |
Total |  | $ | 182,239 |  |  |  |  | $ | 811 |

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

|  | Three Months Ended September 30, |  | Nine Months Ended September 30,
(in thousands) |  | 2019 |  | 2018 |  | 2019 |  | 2018
Cash flow hedges: |  |  |  |  |  |  |  |
Interest rate cap agreements |  |  |  |  |  |  |  |
Realized loss in interest expense |  | $ | (183 | ) |  | $ | (137 | ) |  | $ | (521 | ) |  | $ | (367 | )
Interest rate swap on deposits |  |  |  |  |  |  |  |
Realized gain in interest expense |  | 17 |  |  | — |  |  | 17 |  |  | — |
Economic hedges: |  |  |  |  |  |  |  |  |  |
Forward commitments |  |  |  |  |  |  |  |  |  |
Realized (loss) gain in other non-interest income |  | (31 | ) |  | 43 |  |  | (61 | ) |  | 190 |
Non-hedging derivatives: |  |  |  |  |  |  |  |  |  |
Interest rate lock commitments |  |  |  |  |  |  |  |  |  |
Realized gain in other non-interest income |  | 7 |  |  | — |  |  | 70 |  |  | 9 |

Cash flow hedges
Interest rate cap agreements
In 2014, interest rate cap agreements were purchased to limit the 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.
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Interest rate swap on deposits
In March 2019, the Company entered into an interest rate swap on brokered deposits (the "SWAP") to limit its exposure to rising interest rates over a five year term. Under the terms of the agreement, the Company pays a fixed rate of 2.461% for a notional amount of $50.0 million, and the financial institution counterparty pays interest on the three-month LIBOR rate. The Company designated the SWAP as a cash flow hedge and the fair value is included in other liabilities on the Company's consolidated balance sheets. Changes in the fair value, representing unrealized gains or losses, are recorded in accumulated other comprehensive income, net of tax.
Economic hedges
The Company utilizes forward sale commitments to hedge interest rate risk and the associated effects on the fair value of interest rate lock commitments and loans originated for sale. The forward sale commitments are accounted for as derivatives with changes in fair value recorded in current period earnings. The Company typically uses mandatory delivery contracts, which are loan sale agreements where the Company commits to deliver a certain principal amount of mortgage loans to an investor at a specified price on or before a specified date. Generally, the Company may enter into mandatory delivery contracts shortly after the loan closes with a customer.
Non-hedging derivatives
Interest rate lock commitments
The Company enters into interest rate lock commitments (“IRLCs”) for residential mortgage loans, which commit the Company to lend funds to a potential borrower at a specific interest rate and within a specified period of time. IRLCs 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 $10.7 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 September 30, 2019 and December 31, 2018, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value:

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

|  | 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 September 30, 2019, the Company assessed the significance of the impact of the credit valuation adjustments on the overall valuation of its derivative positions and determined that the credit valuation adjustments are not significant to the overall valuation of its derivatives. As a result, the Company determined that its derivative valuations in their entirety are classified in Level 2 of the fair value hierarchy.
The table below presents the changes in Level 3 assets and liabilities that were measured at fair value on a recurring basis for the three and nine months ended September 30, 2019:

|  | Assets (Liabilities)
(in thousands) |  | Interest Rate Lock Commitments |  | Forward Commitments
Three Months Ended September 30, 2019 |  |  |  |  |  |
Balance at beginning of period |  | $ | 71 |  |  | $ | (30 | )
Realized gain recognized in non-interest income |  | 7 |  |  | (31 | )
Balance at end of period |  | $ | 78 |  |  | $ | (61 | )
Nine Months Ended September 30, 2019 |  |  |  |  |  |
Balance at beginning of period |  | $ | 8 |  |  | $ | — |
Realized gain (loss) recognized in non-interest income |  | 70 |  |  | (61 | )
Balance at end of period |  | $ | 78 |  |  | $ | (61 | )

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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 September 30, 2019 |  | Valuation Techniques |  | Unobservable Inputs |  | Unobservable Input Value
Assets (Liabilities) |  |  |  |  |  |  |  |  |  |
Interest Rate Lock Commitment |  | $ | 78 |  |  | Historical trend |  | Closing Ratio |  | 90 | %
|  |  |  | Pricing Model |  | Origination Costs, per loan |  | $ | 1.7 |
Forward Commitments |  | (61 | ) |  | Quoted prices for similar loans in active markets. |  | Freddie Mac pricing system |  | Pair-off contract price
Total |  | $ | 17 |  |  |  |  |  |  |  |

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

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

There are no liabilities measured at fair value on a non-recurring basis.
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Quantitative information about the significant unobservable inputs within Level 3 non-recurring assets is, as follows:

|  | Fair Value |  |  |  |  |  | Range
(in thousands, except ratios) |  | September 30, 2019 |  | Valuation Techniques |  | Unobservable Inputs |  | (Weighted Average)(a)
Assets |  |  |  |  |  |  |  |  |  |
Impaired loans |  | $ | 11,419 |  |  | Fair value of collateral -appraised value |  | Loss severity |  | 0% to 61% |
|  |  |  |  |  | Appraised value |  | $0 to $6,915 |
Impaired loans |  | 2,963 |  |  | Discount cash flow |  | Discount rate |  | 2.88% to 9.50% |
|  |  |  |  |  | Cash flows |  | $22 to $1,019 |
Capitalized servicing rights |  | 4,108 |  |  | Discounted cash flow |  | Constant prepayment rate (CPR) |  | 10.21 | %
|  |  |  |  |  | Discount rate |  | 10.08 | %
Other real estate owned |  | 2,455 |  |  | Fair value of collateral less selling costs |  | Appraised value |  |  | $2,695 |
|  |  |  |  |  | Selling Costs |  | 6% to 10% |
Assets held for sale(b) |  | 1,901 |  |  | Fair value of asset less selling costs |  | Appraised value |  | $136 to $527 |
|  |  |  |  |  | Selling Costs |  | 6 | %
Total |  | $ | 22,846 |  |  |  |  |  |  |

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

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

|  | Fair Value |  |  |  |  |  | Range
(in thousands, 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.

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There were no Level 1 or Level 2 non-recurring fair value measurements for the periods ended September 30, 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 estimated sales costs. OREO fair values are primarily determined based on Level 3 data including sales comparables and appraisals.
Assets held for sale. Assets held for sale, identified as part of the Company’s strategic review and branch optimization exercise, were transferred from premises and equipment at the lower of amortized cost or fair value less the estimated sales costs. Assets held for sale fair values are primarily determined based on Level 3 data including sales comparables and appraisals.
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Summary of Estimated Fair Values of Financial Instruments
The estimated fair values, and related carrying amounts, of the Company’s financial instruments are included in the table below. Certain financial instruments and all non-financial instruments are excluded from disclosure requirements. Accordingly, the aggregate fair value amounts presented herein may not necessarily represent the underlying fair value of the Company.

|  | September 30, 2019
(in thousands) |  | Carrying Amount |  | Fair Value |  | Level 1 |  | Level 2 |  | Level 3
Financial Assets |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Cash and cash equivalents |  | $ | 71,593 |  |  | $ | 71,593 |  |  | $ | 71,593 |  |  | $ | — |  |  | $ | — |
Securities available for sale |  | 675,675 |  |  | 675,675 |  |  | — |  |  | 675,675 |  |  | — |
FHLB stock |  | 27,469 |  |  | 27,469 |  |  | — |  |  | 27,469 |  |  | — |
Net loans |  | 2,561,953 |  |  | 2,567,331 |  |  | — |  |  | — |  |  | 2,567,331 |
Accrued interest receivable |  | 3,218 |  |  | 3,218 |  |  | — |  |  | 3,218 |  |  | — |
Cash surrender value of bank-owned life insurance policies |  | 75,368 |  |  | 75,368 |  |  | — |  |  | 75,368 |  |  | — |
Derivative assets |  | 11,090 |  |  | 11,090 |  |  | — |  |  | 11,012 |  |  | 78 |
Financial Liabilities |  |  |  |  |  |  |  |  |  |
Total deposits |  | $ | 2,493,585 |  |  | $ | 2,491,023 |  |  | $ | — |  |  | $ | 2,491,023 |  |  | $ | — |
Short-term other borrowings |  | 41,259 |  |  | 41,258 |  |  | — |  |  | 41,258 |  |  | — |
FHLB advances |  | 600,559 |  |  | 601,377 |  |  | — |  |  | 601,377 |  |  | — |
Subordinated borrowings |  | 37,928 |  |  | 37,928 |  |  | — |  |  | 37,928 |  |  | — |
Junior subordinated borrowings |  | 5,000 |  |  | 4,556 |  |  | — |  |  | 4,556 |  |  | — |
Derivative liabilities |  | (13,163 | ) |  | (13,163 | ) |  | — |  |  | (13,102 | ) |  | (61 | )

|  | 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 |  |  | $ | — |
Short-term other borrowings |  | 36,211 |  |  | 36,171 |  |  | — |  |  | 36,171 |  |  | — |
FHLB advances |  | 644,611 |  |  | 643,065 |  |  | — |  |  | 643,065 |  |  | — |
Subordinated borrowings |  | 37,973 |  |  | 37,973 |  |  | — |  |  | 37,973 |  |  | — |
Junior subordinated borrowings |  | 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.
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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.
NOTE 11. NON-INTEREST INCOME
The Company has accounted for the various non-interest revenue streams and related contracts under ASC 606.
Disaggregation of Revenue
The following tables present disaggregation of the Company’s non-interest revenue by major business line and timing of revenue recognition for the transfer of products or services:

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

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

Trust Management Fees.
The trust management business generates revenue through a range of fiduciary services including trust and estate administration, wealth advisory, and investment management to individuals, businesses, not-for-profit organizations, and municipalities. Revenue from these services are generally recognized over time and is typically based on a time elapsed measure of progress. Certain fees, such as bill paying fees, distribution fees, real estate sale fees, and supplemental tax service fees, are recorded as revenue at a point in time upon the completion of the service.
Financial Services Fees.
Bar Harbor Financial Services is a branch office of Infinex, an independent registered broker dealer offering securities and insurance products not affiliated with the Company or its subsidiaries. The Company has a revenue sharing agreement with Infinex for any financial service fee income generated. Financial services fees are recognized at a point in time upon the completion of monthly service requirements.
Interchange Fees.
The Company earns interchange fees from transaction fees that merchants pay whenever a customer uses a debit card to make a purchase from their store. The fees are paid to the card-issuing bank to cover handling costs, fraud, bad debt costs and the risk involved in approving the payment. Interchange fees are generally recognized as revenue at a point in time upon the completion of a debit card transaction.
Customer Deposit Fees.
The Customer Deposit business offers a variety of deposit accounts with a range of interest rates, fee schedules and other terms, which are designed to meet the customer's financial needs. Additional depositor-related services provided to customers include ATM, bank-by-phone, internet banking, internet bill pay, mobile banking, and other cash management services which include remote deposit capture, ACH origination, and wire transfers. These customer deposit fees are generally recognized by the Company at a point in time upon the completion of the service.
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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 September 30, 2019 |  | Balance at December 31, 2018
Balances from contracts with customers only: |  |  |  |
Other Assets |  | $ | 1,898 |  |  | $ | 2,866 |
Other Liabilities |  | 3,179 |  |  | 4,923 |

The timing of revenue recognition, billings and cash collections results in contract assets or receivables and contract liabilities or deferred revenue on the consolidated balance sheets. For most customer contracts, fees are deducted directly from customer accounts and, therefore, there is no associated impact on the accounts receivable balance. For certain types of service contracts, the Company has an unconditional right to consideration under the service contract and an accounts receivable balance is recorded for services completed. When consideration is received, or such consideration is unconditionally due, from a customer prior to transferring goods or services to the customer under the terms of a contract, a contract liability is recorded. Contract liabilities are recognized as revenue after control of the products or services is transferred to the customer and all revenue recognition criteria have been met.
Costs to Obtain and Fulfill a Contract
The Company currently expenses contract costs for processing and administrative fees for debit card transactions. The Company also expenses custody fees and transactional costs associated with securities transactions as well as third party tax preparation fees. The Company has elected the practical expedient in ASC 340-40-25-4, whereby the Company recognizes the incremental costs of obtaining contracts as an expense when incurred if the amortization period of the assets the Company otherwise would have recognized is one year or less.
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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 balance sheets. With the adoption of ASC 842, operating lease agreements are required to be recognized on the consolidated balance sheets as a right-of-use (“ROU”) asset with a corresponding lease liability using the modified retrospective approach. The total of ROU assets and lease liabilities were $9.0 million as of January 1, 2019.
The Company has elected the following practical expedients in conjunction with implementation of ASC 842 as follows:

• | Package of practical expedients:

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

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

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

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

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

(in thousands) |  |  |  | September 30, 2019
Lease Right-of-Use Assets |  | Classification |  |
Operating lease right-of-use assets |  | Other assets |  | $ | 8,447 |
Lease Liabilities |  |  |  |
Operating lease liabilities |  | Other liabilities |  | 8,524 |

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

|  | September 30, 2019
Weighted-average remaining lease term |  |
Operating leases |  | 9.18 |
Weighted-average discount rate |  |
Operating leases |  | 3.37 | %

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

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

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

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

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NOTE 13. SUBSEQUENT EVENTS
On July 8, 2019, the Company entered into a definitive agreement to acquire eight branches located in central Maine with approximately $287.0 million of deposits, $111.0 million of loans and $284.0 million of assets under management (as of March 31, 2019) from People’s United Bank, National Association. The transaction closed on October 25, 2019 and the Company received initial proceeds of $134.0 million that were net of a 6.3% premium on average total deposits plus a premium of 1.2 times annualized wealth management revenue and approximately $4.4 million for the premises. The Company used the proceeds to pay-down Federal Home Loan Bank advances. The Company is currently in the process of determining the final purchase price and allocation between the assets acquired and liabilities assumed.
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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”), which is the only community bank headquartered in Northern New England with branches in Maine, New Hampshire and Vermont. The Bank is a true community bank providing exceptional commercial, retail, and wealth management banking services from over 50 locations. The Company’s corporate goal is to be among the most profitable banks in New England, and its business model is centered on the following:

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

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

• | Strong commitment to risk management while balancing growth and earnings

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

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

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

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

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

Shown below is a profile of the Company as of September 30, 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 September 30, |  | Nine Months Ended September 30,
|  | 2019 |  | 2018 |  | 2019 |  | 2018
PER SHARE DATA |  |  |  |  |  |  |  |
Net earnings, diluted |  | $ | 0.32 |  |  | $ | 0.58 |  |  | $ | 1.18 |  |  | $ | 1.63 |
Adjusted earnings, diluted(1) |  | 0.47 |  |  | 0.58 |  |  | 1.35 |  |  | 1.66 |
Total book value |  | 25.37 |  |  | 23.06 |  |  | 25.37 |  |  | 23.06 |
Tangible book value(1) |  | 18.49 |  |  | 16.11 |  |  | 18.49 |  |  | 16.11 |
Market price at period end |  | 24.93 |  |  | 28.72 |  |  | 24.93 |  |  | 28.72 |
Dividends |  | 0.22 |  |  | 0.20 |  |  | 0.64 |  |  | 0.59 |
PERFORMANCE RATIOS(2) |  |  |  |  |  |  |  |
Return on assets |  | 0.55 | % |  | 1.01 | % |  | 0.68 | % |  | 0.96 | %
Adjusted return on assets(1) |  | 0.80 |  |  | 1.01 |  |  | 0.77 |  |  | 0.98 |
Return on equity |  | 5.04 |  |  | 9.92 |  |  | 6.37 |  |  | 9.54 |
Adjusted return on equity(1) |  | 7.36 |  |  | 9.98 |  |  | 7.25 |  |  | 9.72 |
Adjusted return on tangible equity(1) |  | 10.31 |  |  | 14.52 |  |  | 10.25 |  |  | 14.23 |
Net interest margin, fully taxable equivalent (FTE)(1) (3) |  | 2.75 |  |  | 2.81 |  |  | 2.72 |  |  | 2.90 |
Net interest margin (FTE), excluding purchased loan accretion((3) | 2.65 |  |  | 2.71 |  |  | 2.63 |  |  | 2.79 |
Efficiency ratio(1) |  | 65.02 |  |  | 57.88 |  |  | 65.83 |  |  | 59.05 |
GROWTH (Year-to-date)(1) |  |  |  |  |  |  |  |
Total commercial loans |  | 10.5 | % |  | 2.8 | % |  | 10.5 | % |  | 2.8 | %
Total loans |  | 4.7 |  |  | (0.1 | ) |  | 4.7 |  |  | (0.1 | )
Total deposits |  | 0.6 |  |  | 2.2 |  |  | 0.6 |  |  | 2.2 |
FINANCIAL DATA (In millions) |  |  |  |  |  |  |  |
Total assets |  | $ | 3,612 |  |  | $ | 3,561 |  |  | $ | 3,612 |  |  | $ | 3,561 |
Total earning assets(4) |  | 3,270 |  |  | 3,253 |  |  | 3,270 |  |  | 3,253 |
Total investments |  | 703 |  |  | 747 |  |  | 703 |  |  | 747 |
Total loans |  | 2,577 |  |  | 2,484 |  |  | 2,577 |  |  | 2,484 |
Allowance for loan losses |  | 15 |  |  | 13 |  |  | 15 |  |  | 13 |
Total goodwill and intangible assets |  | 107 |  |  | 108 |  |  | 107 |  |  | 108 |
Total deposits |  | 2,494 |  |  | 2,390 |  |  | 2,494 |  |  | 2,390 |
Total shareholders' equity |  | 394 |  |  | 358 |  |  | 394 |  |  | 358 |
Net income |  | 5 |  |  | 9 |  |  | 18 |  |  | 25 |
Adjusted income(1) |  | 7 |  |  | 9 |  |  | 21 |  |  | 26 |
ASSET QUALITY AND CONDITION RATIOS |  |  |  |  |  |  |  |
Net charge-offs (current quarter annualized)/average loans |  | 0.02 | % |  | 0.04 | % |  | 0.02 | % |  | 0.06 | %
Allowance for loan losses/total loans |  | 0.60 |  |  | 0.54 |  |  | 0.60 |  |  | 0.54 |
Loans/deposits |  | 103 |  |  | 104 |  |  | 103 |  |  | 104 |
Shareholders' equity to total assets |  | 10.92 |  |  | 10.04 |  |  | 10.92 |  |  | 10.04 |
Tangible shareholders' equity to tangible assets(1) |  | 8.20 |  |  | 7.24 |  |  | 8.20 |  |  | 7.24 |

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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 September 30, 2019 on an annualized basis:

LOAN ANALYSIS
|  |  |  |  |  |  |  |  |  |  |  | September 30, 2019 Annualized Growth %
(in thousands, except ratios) |  | Sep 30, 2019 |  | Jun 30, 2019 |  | Mar 31, 2019 |  | Dec 31, 2018 |  | Sep 30, 2018 |  | Quarter End |  | Year to Date
Commercial real estate |  | $ | 923,773 |  |  | $ | 881,479 |  |  | $ | 821,567 |  |  | $ | 826,699 |  |  | $ | 840,018 |  |  | 19.2 | % |  | 15.7 | %
Commercial and industrial |  | 301,590 |  |  | 312,029 |  |  | 305,185 |  |  | 309,544 |  |  | 303,984 |  |  | (13.4 | ) |  | (3.4 | )
Total commercial loans |  | 1,225,363 |  |  | 1,193,508 |  |  | 1,126,752 |  |  | 1,136,243 |  |  | 1,144,002 |  |  | 10.7 |  |  | 10.5 |
Residential real estate |  | 1,143,452 |  |  | 1,167,759 |  |  | 1,184,053 |  |  | 1,144,698 |  |  | 1,140,519 |  |  | (8.3 | ) |  | (0.1 | )
Consumer |  | 107,375 |  |  | 112,275 |  |  | 111,402 |  |  | 113,960 |  |  | 117,239 |  |  | (17.5 | ) |  | (7.7 | )
Tax exempt and other |  | 101,116 |  |  | 104,696 |  |  | 104,752 |  |  | 95,326 |  |  | 81,830 |  |  | (13.7 | ) |  | 8.1 |
Total loans |  | $ | 2,577,306 |  |  | $ | 2,578,238 |  |  | $ | 2,526,959 |  |  | $ | 2,490,227 |  |  | $ | 2,483,590 |  |  | (0.1 | )% |  | 4.7 | %

DEPOSIT ANALYSIS
|  |  |  |  |  |  |  |  |  |  |  | September 30, 2019 Annualized Growth %
(in thousands, except ratios) |  | Sep 30, 2019 |  | Jun 30, 2019 |  | Mar 31, 2019 |  | Dec 31, 2018 |  | Sep 30, 2018 |  | Quarter End |  | Year to Date
Demand |  | $ | 380,707 |  |  | $ | 354,125 |  |  | $ | 342,030 |  |  | $ | 370,889 |  |  | $ | 372,358 |  |  | 30.0 | % |  | 3.5 | %
NOW |  | 490,315 |  |  | 472,576 |  |  | 470,277 |  |  | 484,717 |  |  | 471,326 |  |  | 15.0 |  |  | 1.5 |
Savings |  | 360,570 |  |  | 352,657 |  |  | 346,813 |  |  | 358,888 |  |  | 354,908 |  |  | 9.0 |  |  | 0.6 |
Money market |  | 359,328 |  |  | 305,506 |  |  | 349,833 |  |  | 335,951 |  |  | 254,142 |  |  | 70.5 |  |  | 9.3 |
Total non-maturity deposits |  | 1,590,920 |  |  | 1,484,864 |  |  | 1,508,953 |  |  | 1,550,445 |  |  | 1,452,734 |  |  | 28.6 |  |  | 3.5 |
Total time deposits |  | 902,665 |  |  | 996,512 |  |  | 956,818 |  |  | 932,793 |  |  | 937,615 |  |  | (37.7 | ) |  | (4.3 | )
Total deposits |  | $ | 2,493,585 |  |  | $ | 2,481,376 |  |  | $ | 2,465,771 |  |  | $ | 2,483,238 |  |  | $ | 2,390,349 |  |  | 2.0 | % |  | 0.6 | %

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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 September 30,
|  | 2019 |  | 2018
(in thousands, except ratios) |  | Average Balance |  | Interest (3) |  | Yield/Rate (3) |  | Average Balance |  | Interest (3) |  | Yield/Rate (3)
Assets |  |  |  |  |  |  |  |  |  |  |  |
Commercial real estate |  | $ | 900,568 |  |  | $ | 10,750 |  |  | 4.74 | % |  | $ | 837,058 |  |  | $ | 9,646 |  |  | 4.57 | %
Commercial and industrial |  | 410,453 |  |  | 4,947 |  |  | 4.78 |  |  | 388,831 |  |  | 4,497 |  |  | 4.59 |
Residential |  | 1,154,552 |  |  | 11,293 |  |  | 3.88 |  |  | 1,120,336 |  |  | 10,828 |  |  | 3.83 |
Consumer |  | 109,562 |  |  | 1,418 |  |  | 5.13 |  |  | 117,735 |  |  | 1,438 |  |  | 4.85 |
Total loans (1) |  | 2,575,135 |  |  | 28,408 |  |  | 4.38 |  |  | 2,463,960 |  |  | 26,409 |  |  | 4.25 |
Securities and other (2) |  | 732,925 |  |  | 6,356 |  |  | 3.44 |  |  | 773,562 |  |  | 6,267 |  |  | 3.21 |
Total earning assets |  | 3,308,060 |  |  | 34,764 |  |  | 4.17 | % |  | 3,237,522 |  |  | 32,676 |  |  | 4.00 | %
Other assets |  | 333,896 |  |  |  |  |  |  | 295,162 |  |  |  |  |
Total assets |  | $ | 3,641,956 |  |  |  |  |  |  | $ | 3,532,684 |  |  |  |  |
Liabilities |  |  |  |  |  |  |  |  |  |  |  |
NOW |  | $ | 487,506 |  |  | $ | 621 |  |  | 0.51 | % |  | $ | 461,875 |  |  | $ | 501 |  |  | 0.43 | %
Savings |  | 359,242 |  |  | 193 |  |  | 0.21 |  |  | 356,834 |  |  | 151 |  |  | 0.17 |
Money market |  | 338,013 |  |  | 1,168 |  |  | 1.37 |  |  | 259,738 |  |  | 500 |  |  | 0.76 |
Time deposits |  | 947,949 |  |  | 5,161 |  |  | 2.16 |  |  | 964,108 |  |  | 4,325 |  |  | 1.78 |
Total interest bearing deposits |  | 2,132,710 |  |  | 7,143 |  |  | 1.33 |  |  | 2,042,555 |  |  | 5,477 |  |  | 1.06 |
Borrowings |  | 708,222 |  |  | 4,674 |  |  | 2.62 |  |  | 744,632 |  |  | 4,237 |  |  | 2.26 |
Total interest bearing liabilities |  | 2,840,932 |  |  | 11,817 |  |  | 1.65 | % |  | 2,787,187 |  |  | 9,714 |  |  | 1.38 | %
Non-interest bearing demand deposits |  | 368,100 |  |  |  |  |  |  | 357,856 |  |  |  |  |
Other liabilities |  | 37,975 |  |  |  |  |  |  | 28,943 |  |  |  |  |
Total liabilities |  | 3,247,007 |  |  |  |  |  |  | 3,173,986 |  |  |  |  |
Total shareholders' equity |  | 394,949 |  |  |  |  |  |  | 358,698 |  |  |  |  |
Total liabilities and shareholders' equity |  | $ | 3,641,956 |  |  |  |  |  |  | $ | 3,532,684 |  |  |  |  |
Net interest spread |  |  |  |  |  | 2.52 | % |  |  |  |  |  | 2.62 | %
Net interest margin |  |  |  |  |  | 2.75 |  |  |  |  |  |  | 2.81 |

_____________________________________

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

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

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

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|  | Nine Months Ended September 30,
|  | 2019 |  | 2018
(in thousands, except ratios) |  | Average Balance |  | Interest (3) |  | Yield/Rate (3) |  | Average Balance |  | Interest (3) |  | Yield/Rate (3)
Assets |  |  |  |  |  |  |  |  |  |  |  |
Commercial real estate |  | $ | 859,613 |  |  | $ | 30,480 |  |  | 4.74 | % |  | $ | 827,499 |  |  | $ | 27,772 |  |  | 4.49 | %
Commercial and industrial |  | 410,350 |  |  | 14,662 |  |  | 4.78 |  |  | 388,627 |  |  | 13,268 |  |  | 4.56 |
Residential |  | 1,157,923 |  |  | 33,941 |  |  | 3.92 |  |  | 1,131,509 |  |  | 32,669 |  |  | 3.86 |
Consumer |  | 111,274 |  |  | 4,333 |  |  | 5.21 |  |  | 119,504 |  |  | 4,163 |  |  | 4.66 |
Total loans (1) |  | 2,539,160 |  |  | 83,416 |  |  | 4.39 |  |  | 2,467,139 |  |  | 77,872 |  |  | 4.22 |
Securities and other (2) |  | 761,234 |  |  | 19,389 |  |  | 3.41 |  |  | 768,812 |  |  | 18,304 |  |  | 3.18 |
Total earning assets |  | 3,300,394 |  |  | 102,805 |  |  | 4.16 | % |  | 3,235,951 |  |  | 96,176 |  |  | 3.97 | %
Other assets |  | 335,883 |  |  |  |  |  |  | 279,192 |  |  |  |  |
Total assets |  | $ | 3,636,277 |  |  |  |  |  |  | $ | 3,515,143 |  |  |  |  |
Liabilities |  |  |  |  |  |  |  |  |  |  |  |
NOW |  | $ | 472,542 |  |  | $ | 1,764 |  |  | 0.50 | % |  | $ | 451,178 |  |  | $ | 1,285 |  |  | 0.38 | %
Savings |  | 353,117 |  |  | 545 |  |  | 0.21 |  |  | 356,859 |  |  | 456 |  |  | 0.17 |
Money market |  | 337,822 |  |  | 3,521 |  |  | 1.39 |  |  | 283,356 |  |  | 1,580 |  |  | 0.75 |
Time deposits |  | 925,508 |  |  | 14,505 |  |  | 2.10 |  |  | 900,315 |  |  | 10,545 |  |  | 1.57 |
Total interest bearing deposits |  | 2,088,989 |  |  | 20,335 |  |  | 1.30 |  |  | 1,991,708 |  |  | 13,866 |  |  | 0.93 |
Borrowings |  | 751,016 |  |  | 15,232 |  |  | 2.71 |  |  | 797,913 |  |  | 12,192 |  |  | 2.04 |
Total interest bearing liabilities |  | 2,840,005 |  |  | 35,567 |  |  | 1.67 | % |  | 2,789,621 |  |  | 26,058 |  |  | 1.25 | %
Non-interest bearing demand deposits |  | 377,014 |  |  |  |  |  |  | 341,656 |  |  |  |  |
Other liabilities |  | 32,676 |  |  |  |  |  |  | 28,926 |  |  |  |  |
Total liabilities |  | 3,249,695 |  |  |  |  |  |  | 3,160,203 |  |  |  |  |
Total shareholders' equity |  | 386,582 |  |  |  |  |  |  | 354,940 |  |  |  |  |
Total liabilities and shareholders' equity |  | $ | 3,636,277 |  |  |  |  |  |  | $ | 3,515,143 |  |  |  |  |
Net interest spread |  |  |  |  |  | 2.49 | % |  |  |  |  |  | 2.72 | %
Net interest margin |  |  |  |  |  | 2.72 |  |  |  |  |  |  | 2.90 |

_____________________________________

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

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

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

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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 that management excludes when computing non-GAAP adjusted earnings can be of substantial importance to the Company's results for any particular quarter or year. The Company's non-GAAP adjusted earnings information set forth is not necessarily comparable to non- GAAP information that may be presented by other companies. Each non-GAAP measure used by the Company in this report as supplemental financial data should be considered in conjunction with the Company's GAAP financial information.
The Company utilizes the non-GAAP measure of adjusted earnings in evaluating operating trends, including components for adjusted revenue and expense. These measures exclude amounts that the Company views as unrelated to its normalized operations, including gains/losses on securities, premises, equipment and other real estate owned, acquisition costs, restructuring costs, legal settlements, and systems conversion costs. Non-GAAP adjustments are presented net of an adjustment for income tax expense.
The Company also calculates adjusted earnings per share based on its measure of adjusted earnings. The Company views these amounts as important to understanding its operating trends, particularly due to the impact of accounting standards related to acquisition activity. Analysts also rely on these measures in estimating and evaluating the Company's performance. Management also believes that the computation of non-GAAP adjusted earnings and adjusted earnings per share may facilitate the comparison of the Company to other companies in the financial services industry. The Company also adjusts certain equity related measures to exclude intangible assets due to the importance of these measures to the investment community.
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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 September 30, |  | At or for the Nine Months Ended September 30,
(in thousands) |  |  | 2019 |  | 2018 |  | 2019 |  | 2018
GAAP net income |  |  | $ | 5,015 |  |  | $ | 8,970 |  |  | $ | 18,413 |  |  | $ | 25,317 |
Plus (less): |  |  |  |  |  |  |  |  |
Gain on sale of securities, net |  |  | (157 | ) |  | — |  |  | (157 | ) |  | — |
Loss on sale of premises and equipment, net |  |  | — |  |  | — |  |  | 21 |  |  | — |
Loss on other real estate owned |  |  | 146 |  |  | (8 | ) |  | 146 |  |  | 15 |
Acquisition, restructuring and other expenses |  |  | 3,039 |  |  | 70 |  |  | 3,319 |  |  | 619 |
Income tax (expense) benefit(1) |  |  | (720 | ) |  | (12 | ) |  | (792 | ) |  | (150 | )
Total adjusted income(2) | (A) |  | $ | 7,323 |  |  | $ | 9,020 |  |  | $ | 20,950 |  |  | $ | 25,801 |
GAAP net interest income | (B) |  | $ | 22,445 |  |  | $ | 22,469 |  |  | $ | 65,706 |  |  | $ | 68,619 |
Plus: Non-interest income |  |  | 7,643 |  |  | 7,126 |  |  | 21,263 |  |  | 20,485 |
Total Revenue(2) |  |  | 30,088 |  |  | 29,595 |  |  | 86,969 |  |  | 89,104 |
Less: Gain on sale of securities, net |  |  | (157 | ) |  | — |  |  | (157 | ) |  | — |
Total adjusted revenue(2) | (C) |  | $ | 29,931 |  |  | $ | 29,595 |  |  | $ | 86,812 |  |  | $ | 89,104 |
GAAP total non-interest expense |  |  | $ | 23,400 |  |  | $ | 17,906 |  |  | $ | 62,930 |  |  | $ | 55,443 |
Less: Loss on sale of premises and equipment, net |  |  | — |  |  | — |  |  | (21 | ) |  | — |
Less: Loss on other real estate owned |  |  | (146 | ) |  | 8 |  |  | (146 | ) |  | (15 | )
Less: Acquisition, restructuring and other expenses |  |  | (3,039 | ) |  | (70 | ) |  | (3,319 | ) |  | (619 | )
Adjusted non-interest expense(2) | (D) |  | $ | 20,215 |  |  | $ | 17,844 |  |  | $ | 59,444 |  |  | $ | 54,809 |
(in millions) |  |  |  |  |  |  |  |  |  |  |
Total average earning assets | (E) |  | $ | 3,308 |  |  | $ | 3,238 |  |  | $ | 3,300 |  |  | $ | 3,236 |
Total average assets | (F) |  | 3,642 |  |  | 3,533 |  |  | 3,636 |  |  | 3,515 |
Total average shareholders' equity | (G) |  | 395 |  |  | 359 |  |  | 387 |  |  | 355 |
Total average tangible shareholders' equity(2)(3) | (H) |  | 288 |  |  | 251 |  |  | 279 |  |  | 247 |
Total tangible shareholders' equity, period-end(2)(3) | (I) |  | 287 |  |  | 250 |  |  | 287 |  |  | 250 |
Total tangible assets, period-end(2)(3) | (J) |  | 3,506 |  |  | 3,453 |  |  | 3,506 |  |  | 3,453 |
(in thousands) |  |  |  |  |  |  |  |  |
Total common shares outstanding, period-end | (K) |  | 15,549 |  |  | 15,509 |  |  | 15,549 |  |  | 15,509 |
Average diluted shares outstanding | (L) |  | 15,581 |  |  | 15,580 |  |  | 15,582 |  |  | 15,564 |
Adjusted earnings per share, diluted | (A/L) |  | $ | 0.47 |  |  | $ | 0.58 |  |  | $ | 1.35 |  |  | $ | 1.66 |
Tangible book value per share, period-end(2) | (I/K) |  | 18.49 |  |  | 16.11 |  |  | 18.49 |  |  | 16.11 |
Securities adjustment, net of tax(4) | (M) |  | 8,002 |  |  | (17,152 | ) |  | 8,002 |  |  | (17,152 | )
Tangible book value per share, excluding securities adjustment(4) | (I+M)/K |  | 17.98 |  |  | 17.22 |  |  | 17.98 |  |  | 17.22 |
Total tangible shareholders' equity/total tangible assets(2) | (I/J) |  | 8.20 |  |  | 7.24 |  |  | 8.20 |  |  | 7.24 |

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|  |  | At or for the Three Months Ended September 30, |  | At or for the Nine Months Ended September 30,
|  |  | 2019 |  | 2018 |  | 2019 |  | 2018
Performance ratios(5) |  |  |  |  |  |  |  |  |  |  |
Return on assets |  |  | 0.55 | % |  | 1.01 | % |  | 0.68 | % |  | 0.96 | %
Adjusted return on assets(2) | (A/F) |  | 0.80 |  |  | 1.01 |  |  | 0.77 |  |  | 0.98 |
Return on equity |  |  | 5.04 |  |  | 9.92 |  |  | 6.37 |  |  | 9.54 |
Adjusted return on equity(2) | (A/G) |  | 7.36 |  |  | 9.98 |  |  | 7.25 |  |  | 9.72 |
Adjusted return on tangible equity(2)(6) | (A+Q)/H |  | 10.31 |  |  | 14.52 |  |  | 10.25 |  |  | 14.23 |
Efficiency ratio(2)(7) | (D-O-Q)/(C+N) |  | 65.02 |  |  | 57.88 |  |  | 65.83 |  |  | 59.05 |
Net interest margin(2) | (B+P)/E |  | 2.75 |  |  | 2.81 |  |  | 2.72 |  |  | 2.90 |
Supplementary data (in thousands) |  |  |  |  |  |  |  |  |
Taxable equivalent adjustment for efficiency ratio | (N) |  | $ | 658 |  |  | $ | 654 |  |  | $ | 2,018 |  |  | $ | 1,921 |
Franchise taxes included in non-interest expense | (O) |  | 119 |  |  | 129 |  |  | 350 |  |  | 440 |
Tax equivalent adjustment for net interest margin | (P) |  | 503 |  |  | 493 |  |  | 1,532 |  |  | 1,498 |
Intangible amortization | (Q) |  | 207 |  |  | 207 |  |  | 621 |  |  | 621 |

_____________________________________

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

(2) | Non-GAAP financial measure.

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

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

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

(6) | Adjusted return on tangible equity is computed by 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.

(7) | 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 third quarter 2019 net income of $5.0 million or $0.32 diluted earnings per share. Net income in the same quarter of 2018 totaled $9.0 million, or $0.58 diluted earnings per share. Adjusted earnings (non-GAAP measure) in the third quarter 2019 totaled $7.3 million, or $0.47 diluted earnings per share, a 15% increase from the prior quarter of $6.3 million or $0.41 diluted earnings per share. Financial highlights for the third quarter 2019 include the following:

• | 11% annualized growth in commercial loans

• | 29% annualized growth in non-maturity deposits

• | 10 basis point expansion in net interest margin

• | 3% increase in non-interest income

• | 0.53% non-performing assets to total assets

The Company’s performance metrics improved in the third quarter 2019 as its teams focused on profitability of operations and initiatives to enhance revenue and create expense efficiencies. The Company continued to actively manage the balance sheet focusing on operations and taking advantage of the interest rate environment as a planned deleveraging strategy was executed resulting in decreasing the securities portfolio by nearly $73.0 million and using the proceeds to pay off higher cost borrowings. This resulted in yields from securities expanding 15 basis points and borrowings costs decreasing 12 basis points compared to the prior quarter. The commercial team delivered another quarter of strong double digit growth across the Company’s three state footprint including its loan production office in Portland, Maine, which also contributed to significant customer derivative income. Loan quality continues to be strong with net charge-offs close to zero, indicative of a disciplined approach to credit quality, risk mitigation, and an effort focused on proven operators with appropriate loan structures. Growth in non-maturity deposits was up during the quarter, 29% on an annualized basis. That improvement is the direct result of the sales culture, which the Company has been cultivating over the past year under new leadership. All of these efforts in the quarter resulted in a 6% annualized increase to tangible book value per share.
The Company completed the strategic review in the third quarter that was announced in the second quarter. This review positions the Company for improved profitability and judicious deployment of capital, while balancing liquidity and core deposit growth. The results of this strategic review included a branch optimization exercise that evaluated fixed assets, staffing models, and business and operational processes. Towards the end of September the Company announced the intent to close five branches by year-end and identified other non-branch properties to consolidate across the footprint. Additionally, the Company continues to consolidate processes within wealth management businesses to increase efficiency while improving customer service. These strategic decisions along with the elimination of other redundancies and implemented efficiencies are expected to be accretive to earnings in the first quarter of 2020 thereby allowing a platform for profitable growth with positive operating leverage.
In October 2019, the Company completed its previously announced acquisition of eight bank branches. Experienced teams from both sides have been working together to ensure a smooth transition of customer accounts and systems. The Company welcomes its new customers and colleagues while building out its central Maine franchise. The acquisition is expected to be immediately accretive to adjusted income during the fourth quarter 2019.
COMPARISON OF FINANCIAL CONDITION AT SEPTEMBER 30, 2019 AND DECEMBER 31, 2018
Summary
Total assets increased $4.0 million to $3.6 billion at the end of the third quarter 2019 compared with year-end 2018. Loans increased to $2.6 billion from $2.5 billion at year-end 2018 on growth from commercial loans offset in part by lower residential loans primarily due to higher secondary market sales. Securities decreased $58.4 to $703.1 million at the end of the third quarter from year-end 2018 which includes the impact of the executed deleveraging strategy in the third quarter. Asset quality metrics remain strong with an allowance for loan losses to total loans ratio of 0.60% with a coverage ratio to non-accruing loans at 92%, up from 76% as of year-end 2018. The loan to deposit ratio
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increased to 103% from 100% at year-end 2018 given robust loan growth net of deposit growth. The Company’s book value per share increased 8%, on annualized basis, in the first nine months of 2019 from year-end 2018.
Securities
Securities totaled $703.1 million in the third quarter 2019 and $761.5 million at year-end 2018 representing 19% and 21% of total assets, respectfully. Those ratios are within the tolerance range of the Company’s investment policy and the decrease is the result of the balance sheet deleveraging strategy with opportunistic sales and natural run-off. Securities purchased in 2019 included $52.6 million of mortgage-backed securities guaranteed by US Government-sponsored enterprises, $24.0 million of corporate bonds, and a net $8.2 million decrease in FHLB stock. The purchases were offset by sales of $68.0 million, maturities, calls and pay-downs of amortizing securities of $80.5 million, and a $21.7 million increase in fair value. The increase in fair value was primarily caused by lower long-term interest rates at the end of the third quarter 2019 as compared to year-end 2018. The weighted average yield on the Company’s security profile as of September 30, 2019 was 3.44% for the quarter compared to 3.28% at year-end 2018. At the end of the third quarter 2019, securities held by the Company had a weighted average life of 4.3 years and a duration of 2.9 years compared to a weighted average life of 5.2 years and a duration of 3.9 years at the end of 2018, respectively.
Loans
Total loans at September 30, 2019 were $2.6 billion, an increase of $87.1 million or 4.7% on an annualized basis, from year-end 2018. Commercial real estate grew significantly during 2019 at a rate of 15.7% due to execution of the Company’s growing pipeline across New Hampshire, Vermont, and Maine and loan production office centered in Portland, Maine. Residential loans were flat in the first nine months of 2019 primarily due to higher sales in the secondary market given the overall rate environment and initiatives around profit as fee income is central to the Company’s strategic focus. Yields also increased among all product lines as variable rate loans repriced to higher levels benefiting from the Federal Reserve Bank (“FRB”) rate hikes in 2018.
Asset Quality
Asset quality metrics remained favorable in the first nine months of 2019. The allowance for loan losses increased to $15.4 million from $13.9 million at year-end 2018 due to loan growth offset by lower specific reserves on fewer non-accruing loans. Non-accruing loans decreased $1.6 million in 2019 as the Company benefited from favorable settlements of several credit relationships that approximated the carrying values of the loans. These improvements decreased the ratio of non-accruing loans to total loans to 0.65% from 0.73% at the end of 2018 and decreased the ratio of non-performing assets to total assets to 0.53% from 0.57% at the end of 2018.
Deposits and Borrowings
Total deposits increased $10.3 million to $2.5 billion from year-end 2018. Non-maturity deposits increased $40.5 million from new accounts and seasonally high balances. New non-maturity deposit accounts opened totaled 3,457 in the third quarter 2019 compared to 2,295 in the fourth quarter 2018. Time deposits decreased $30.1 million, reflecting the shift between time deposits to money market accounts as the interest rate environment changed in 2019. The average cost of deposits increased to 1.33% from 1.12% in the fourth quarter 2018 reflecting the FRB rate hike in December 2018. Total borrowings decreased by $39.0 as a result of the balance sheet deleveraging strategy. Borrowing costs are 2.62% in 2019 up from 2.53% in the fourth quarter 2018 as a result of the previously mentioned rate hike offset by the third quarter deleveraging strategy.
Derivative Financial Instruments
The notional balance of derivative financial instruments increased to $499.1 million at the end of the third quarter 2019 from $182.2 million at year-end 2018. The increase includes a $50.0 million notional amount related to an interest rate swap on brokered certificate of deposits to limit the Company’s exposure to rising interest rates over a five-year term. Additionally, as a result of commercial loan growth, the Company increased customer loan derivatives by $247.9 million with matching hedges using a national bank counterparty. The net fair value of total derivatives was a liability of $2.1 million at the end of the third quarter 2019 compared to asset of $811 thousand at year-end 2018.
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Equity
Total equity was $394.5 million, compared with $370.6 million at year-end 2018. The Company’s book value per share increased $1.50 to $25.37 from year-end 2018. The increase was primarily due to a $14.9 million improvement in the Company’s securities fair value adjustment, net of tax, along with strong net income of $18.4 million offset by $9.9 million in dividends. Tangible book value per share (non-GAAP measure) increased to $18.49 per share up from $16.94 per share at year-end 2018. Additionally, tangible book value per share excluding the impact of securities fair value adjustments (non-GAAP measure) increased to $17.98, up from $17.50 at year-end 2018. The Company evaluates changes in tangible book value excluding securities adjustment, a non-GAAP financial measure, which is a commonly considered valuation metric used by the investment community and which parallels some regulatory capital measures. The Company and the Bank remained "well capitalized" under regulatory guidelines at period-end.
COMPARISON OF OPERATING RESULTS FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2019 AND 2018
Summary
Third quarter 2019 net income was $5.0 million, or $0.32 per share, compared to $9.0 million, or $0.58 per share, in the same quarter of 2018. Net income in the third quarter 2019 included acquisition, restructuring, and other expense activity totaling $3.0 million. The non-GAAP measure of adjusted earnings in the third quarter 2019 totaled $7.3 million or $0.47 diluted earnings per share and $9.0 million or $0.58 diluted earnings per share in the same period of 2018. Both net income and adjusted earnings in the third quarter 2019 benefited from higher yields on earning assets and non-interest income growth, offset by a higher cost of funds.
The Company reported year to date net income of $18.4 million or $1.18 per share, compared with $25.3 million or $1.63 per share in the same period of 2018. Adjusted earnings decreased to $20.9 million, or $1.35 per share compared with $25.8 million, or $1.66 per share, for these respective periods. These changes largely reflect the same factors and trends discussed above that drove quarterly net income. The return on assets ratio during the first nine months of 2019 was 0.68% compared to 0.96% in the prior year due to lower net income and a higher average asset base. Adjusted return on assets (non-GAAP measure) was 0.77% for the first nine months of 2019 compared to 0.98% in the prior year. Return on equity in the first nine months of 2019 decreased to 6.37% from 9.54% in the prior year due to lower net income and growth in the average equity balance. Correspondingly, adjusted return on equity (non-GAAP measure) was 7.25% for the first nine months of 2019 compared to 9.72% in the prior year.
Net Interest Income
Third quarter net interest income was $22.4 million compared with $22.5 million in the same quarter of 2018. Interest income was $34.3 million, up 6% from $32.2 million in the third quarter of 2018 as average earning assets grew $70.5 million net. The net interest margin for the three months ended decreased 6 basis points over third quarter 2018 to 2.75%. Yields expanded across all loan categories as variable rate products repriced to higher rates driven by the 2018 short-term hikes. The yield on securities improved 23 basis points while the cost of interest bearing liabilities increased 27 basis points. The year over year increase in interest bearing liabilities was primarily due to higher short-term interest rates and the flattening of the yield curve in 2019. However, net interest margin in the third quarter 2019 included the benefit of the deleveraging strategy to remove $72.9 million of securities yielding an average of 2.1% and pay-off of wholesale borrowings with an average cost of 2.4%.
For the first nine months of 2019 net interest income decreased to $65.7 million from $68.6 million in the same period of 2018. Interest income from earning assets increased to $101.3 million with a yield of 4.16% compared to $94.7 million with a yield of 3.97% in the same period of 2018. The net interest margin was 2.72% compared to 2.90% in the prior year. The yield on total loans for the nine months ended expanded 17 basis points, driven by the yield on commercial real estate loans expanding 25 basis points and the yield on commercial and industrial loans expanding 22 basis points. Improvement in interest income was offset by interest expense increasing to $35.6 million in the first nine months of 2019 from $26.1 million in the same period of 2018. The year-to-date effect, and management’s response, on net interest margin from interest-bearing liabilities is the same as the quarterly discussion.
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Non-Interest Income
Third quarter non-interest income grew 7% to $7.6 million from $7.1 million same quarter in 2018. The increase was driven by $828 thousand of customer derivative income associated with commercial loan growth and $157 thousand net gain on sales of securities associated with the balance sheet deleverage strategy. Non-interest income in the third quarter 2018 included a $685 thousand gain associated with the sale of Visa B shares.
Non-interest income for the first nine months of 2019 increased year over year by 4% to $21.3 million compared to $20.5 million for the same period of 2018. The increase in non-interest income for the nine-month period is driven by the same reasons as the quarterly period.
Loan Loss Provision
The third quarter 2019 provision for loan losses increased to $893 thousand from $643 thousand in the same quarter 2018, which is reflective of the increased commercial loan growth. On a year-to-date basis, the provision for loan losses decreased to $1.8 million in 2019 compared to $2.2 million in 2018, which is reflective of the decrease in non-accruing loans of $5.1 million or 23%. The provision for loan losses is a charge to earnings in an amount sufficient to maintain the allowance for loan losses at a level deemed adequate by the Company. The level of the allowance is a critical accounting estimate, which is subject to uncertainty. The net charged-off loans to average loans ratio remained low at 0.02% annualized rate for the third quarter of 2019 compared to 0.04% in the same quarter 2018. Asset quality remains strong with non-accruing loans to total loans at 0.65% in the third quarter 2019, down from 0.88% in the same quarter of 2018.
Non-Interest Expense
Non-interest expense increased to $23.4 million in the third quarter 2019 compared to $17.9 million in the same quarter of 2018. The increase in part is a result of higher salaries and benefits attributable to previously announced strategic hires and an increase in professional service fees. Third quarter acquisition, restructuring and other expenses totaled $3.0 million in 2019 related to the branch acquisition and restructuring expenses associated with our previously announced strategic review.
Non-interest expense increased to $62.9 million in first nine months of 2019 from $55.4 million in the same period of 2018. The increase in non-interest expense for the nine-month period is driven by the same reasons as the quarterly period.
Income Tax Expense
The third quarter effective tax rate decreased to 13.5% in 2019 compared with 18.8% in the same quarter of 2018, and the rate for the nine months 2019 and 2018 was 17.3% and 19.5%, respectively. The decrease in the quarterly and year-to-date rates is due to lower pre-tax income in the respective periods of 2019 as compared to 2018.
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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 FRB. At September 30, 2019, the Bank’s available secured line of credit at the FRB stood at $107.7 million or 2.98% of the Bank’s total assets. The Bank also has access to the national brokered deposit market, and has used this funding source to bolster its on balance sheet liquidity position.
The Bank maintains a liquidity contingency plan approved by the Bank’s Board of Directors. This plan addresses the steps that would be taken in the event of a liquidity crisis, and identifies other sources of liquidity available to the Company. Company management believes the level of liquidity is sufficient to meet current and future funding requirements. However, changes in economic conditions, including consumer savings habits and availability or access to the brokered deposit market could potentially have a significant impact on the Company’s liquidity position.
Off-Balance Sheet Arrangements
The Company is, from time to time, a party to certain off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on the Company's financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources, that may be material to investors.
The Company’s off-balance sheet arrangements are limited to standby letters of credit whereby the Bank guarantees the obligations or performance of certain customers. These letters of credit are sometimes issued in support of third-party debt. The risk involved in issuing standby letters of credit is essentially the same as the credit risk involved in extending loan facilities to customers, and they are subject to the same origination, portfolio maintenance and management procedures in effect to monitor other credit products. The amount of collateral obtained, if deemed necessary by the Bank upon issuance of a standby letter of credit, is based upon management's credit evaluation of the customer.
The Company’s off-balance sheet arrangements have not changed materially since previously reported in our Annual Report on Form 10-K for the year ended December 31, 2018 or our Quarterly Report on Form 10-Q for the quarter ended June 30, 2019.
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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:

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

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

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

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

Changes in net interest income based upon the foregoing simulations are measured against the flat interest rate scenario and actions are taken to maintain the balance sheet interest rate risk within established policy guidelines.
As of September 30, 2019 interest rate sensitivity modeling results indicate that the Bank’s balance sheet in year 1 was slightly liability sensitive and in year 2 was asset sensitive.
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 deteriorate over the one year horizon (-0.8% versus the base case) while deteriorating further from that level over the two-year horizon (-7.3% versus the base case).
Assuming the Bank’s balance sheet structure and size remain at current levels and the Federal Reserve increases short-term interest rates by 200 basis points with the balance of the yield curve shifting in parallel with these increases, management believes net interest income will remain relatively unchanged over the one and two-year horizons (-1.1% and -0.6%, respectively).
As compared to December 31, 2018, the year-one sensitivity in the down 100 basis points scenario was down slightly for the nine months ended September 30, 2019 (+1.7% prior, versus -.1% current). The year-two sensitivities in the down 100 basis points scenario changed going from +0.7% to -3.0%. In the year-one up 200 basis points scenario, results declined going from -3.7% to -1.1%. Year-two, up 200 basis points declined (-8.3% prior, versus -.6% current).
The preceding sensitivity analysis does not represent a Company forecast and should not be relied upon as being indicative of expected operating results. These hypothetical estimates are based upon numerous assumptions including: the nature and timing of interest rate levels and yield curve shape, prepayment speeds on loans and securities, deposit rates, pricing decisions on loans and deposits, reinvestment or replacement of asset and liability cash flows, and renegotiated loan terms with borrowers. While assumptions are developed based upon current economic and local market conditions, the Company cannot make any assurances as to the predictive nature of these assumptions including how customer preferences or competitor influences might change.
As market conditions vary from those assumed in the sensitivity analysis, actual results may also differ due to: prepayment and refinancing levels deviating from those assumed; the impact of interest rate changes, caps or floors on adjustable rate assets; the potential effect of changing debt service levels on customers with adjustable rate loans; depositor early withdrawals and product preference changes; and other such variables. The sensitivity analysis also does not reflect additional actions that the Bank’s Senior Executive Team and Board of Directors might take in responding to or anticipating changes in interest rates, and the anticipated impact on the Bank’s net interest income.
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ITEM 4. CONTROLS AND PROCEDURES

(a) | Disclosure controls and procedures.

Under the supervision and with the participation of our senior management, consisting of the Company’s principal executive officer and our principal financial officer, the Company conducted an evaluation of the effectiveness of the design and operation of its disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on this evaluation, the Company’s management, including its principal executive officer and principal financial officer, concluded that as of September 30, 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.
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ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
(c) The following table provides certain information with regard to shares repurchased by the Company in the third 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)
July 1-31, 2019 |  | — |  |  | $ | — |  |  | — |  |  | 767,990 |
August 1-30, 2019 |  | 1,185 |  |  | 24.52 |  |  | 1,185 |  |  | 766,805 |
September 1-30, 2019 |  | — |  |  | — |  |  | — |  |  | 766,805 |
Total |  | 1,185 |  |  | $ | 24.52 |  |  | 1,185 |  |  | 766,805 |

(1) 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

10.1 |  | Purchase and Assumption Agreement, dated July 8, 2019, by and between People’s United Bank, National Association, and Bar Harbor Bank & Trust
31.1 |  | Certification of Chief Executive Officer under Rule 13a-14(a)/15d-14(a) | Filed herewith
31.2 |  | Certification of Chief Financial Officer under Rule 13a-14(a)/15d-14(a) | Filed herewith
32.1 |  | Certification of Chief Executive Officer under 18 U.S.C. Sec. 1350. | Furnished herewith
32.2 |  | Certification of Chief Financial Officer under 18 U.S.C. Sec. 1350. | Furnished herewith
101 |  | The following financial information from the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2019 is formatted in XBRL (eXtensible Business Reporting Language): (i) Consolidated Condensed Statements of Income, (ii) the Condensed Consolidated Balance Sheets, (iii) the Condensed Consolidated Statements of Changes in Shareholders’ Equity, (iv) Consolidated Statements of Cash Flows and (v) Notes to the Consolidated Condensed Financial Statements

*Schedules (or similar attachments) have been omitted pursuant to Item 601(a)(5) of Regulation S-K. The Company hereby undertakes to furnish copies of any of the omitted schedules upon request by the Securities and Exchange Commission; provided, however, that the Company may request confidential treatment pursuant to Rule 24b-2 of the Exchange Act for any schedules so furnished.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

| BAR HARBOR BANKSHARES
Dated: November 4, 2019 | By: | /s/ Curtis C. Simard
|  | Curtis C. Simard
|  | President & Chief Executive Officer
Dated: November 4, 2019 | By: | /s/ Josephine Iannelli
|  | Josephine Iannelli
|  | Executive Vice President & Chief Financial Officer

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