10-Q 1 bhb0930201710q.htm 10-Q Document

 
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, 2017
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
bhblogoa01.jpg
BAR HARBOR BANKSHARES
(Exact name of registrant as specified in its charter) 
Maine
 
01-0393663
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
 
 
 
PO Box 400
 
 
82 Main Street, Bar Harbor, ME
 
04609-0400
(Address of principal executive offices)
 
(Zip Code)
Registrant’s telephone number, including area code: (207) 288-3314
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes ý  No   
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post 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.  (Check one)
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 15,433,957 shares of common stock, par value $2.00 per share, outstanding as of November 3, 2017.
 



BAR HARBOR BANKSHARES AND SUBSIDIARIES
FORM 10-Q
 
INDEX 
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

2





3


PART I

ITEM 1.  CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

BAR HARBOR BANKSHARES AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
 
September 30,
2017
 
December 31,
2016
Assets
 
 

 
 

Cash and due from banks
 
$
31,223

 
$
8,219

Interest-bearing deposit with the Federal Reserve Bank
 
17,501

 
220

Total cash and cash equivalents
 
48,724

 
8,439

Securities available for sale, at fair value
 
718,459

 
528,856

Federal Home Loan Bank stock
 
37,107

 
25,331

Total securities
 
755,566

 
554,187

Commercial real estate
 
793,572

 
418,119

Commercial and industrial
 
357,072

 
151,240

Residential real estate
 
1,152,628

 
506,612

Consumer
 
125,590

 
53,093

Total loans
 
2,428,862

 
1,129,064

Less: Allowance for loan losses
 
(11,950
)
 
(10,419
)
Net loans
 
2,416,912

 
1,118,645

Premises and equipment, net
 
48,309

 
23,419

Other real estate owned
 
122

 
90

Goodwill
 
100,255

 
4,935

Other intangible assets
 
8,811

 
377

Cash surrender value of bank-owned life insurance
 
57,613

 
24,450

Deferred tax assets, net
 
13,052

 
5,990

Other assets
 
26,368

 
14,817

Total assets
 
$
3,475,732

 
$
1,755,349

 
 
 
 
 
Liabilities
 
 

 
 

Demand and other non-interest bearing deposits
 
$
357,398

 
$
98,856

NOW deposits
 
442,085

 
175,150

Savings deposits
 
373,118

 
77,623

Money market deposits
 
300,398

 
282,234

Time deposits
 
802,110

 
416,437

Total deposits
 
2,275,109

 
1,050,300

Senior borrowings
 
775,582

 
531,596

Subordinated borrowings
 
43,048

 
5,000

Total borrowings
 
818,630

 
536,596

Other liabilities
 
28,534

 
11,713

Total liabilities
 
3,122,273

 
1,598,609

Shareholders’ equity
 
 

 
 

Capital stock, par value $2.00; authorized 20,000,000 shares; issued 16,428,387 and 10,182,611 shares at September 30, 2017 and December 31, 2016, respectively
 
32,858

 
13,577

Additional paid-in capital
 
186,220

 
23,027

Retained earnings
 
141,251

 
130,489

Accumulated other comprehensive loss
 
(1,435
)
 
(4,326
)
Less: cost of 996,531 and 1,067,016 shares of treasury stock at September 30, 2017 and December 31, 2016, respectively
 
(5,435
)
 
(6,027
)
Total shareholders’ equity
 
353,459

 
156,740

Total liabilities and shareholders’ equity
 
$
3,475,732

 
$
1,755,349

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

4


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)
2017
 
2016
 
2017
 
2016
Interest and dividend income
 
 
 
 
 

 
 

Loans
$
24,661

 
$
10,295

 
$
70,081

 
$
30,627

Securities and other
5,402

 
3,828

 
15,832

 
12,014

Total interest and dividend income
30,063

 
14,123

 
85,913

 
42,641

Interest expense
 

 
 

 
 

 
 

Deposits
3,177

 
1,755

 
7,926

 
4,931

Borrowings
3,408

 
1,369

 
9,327

 
3,993

Total interest expense
6,585

 
3,124

 
17,253

 
8,924

Net interest income
23,478

 
10,999

 
68,660

 
33,717

Provision for loan losses
660

 
139

 
2,191

 
754

Net interest income after provision for loan losses
22,818

 
10,860

 
66,469

 
32,963

Non-interest income
 

 
 

 
 

 
 

Trust and investment management fee income
3,040

 
975

 
9,228

 
2,878

Insurance and brokerage service income
329

 

 
1,020

 

Customer service fees
2,638

 
706

 
5,990

 
1,999

Gain on sales of securities, net
19

 
1,354

 
19

 
4,489

Bank-owned life insurance income
380

 
197

 
1,165

 
540

Other income
554

 
140

 
2,043

 
408

Total non-interest income
6,960

 
3,372

 
19,465

 
10,314

Non-interest expense
 

 
 

 
 

 
 

Salaries and employee benefits
9,617

 
4,832

 
30,065

 
14,648

Occupancy and equipment
2,894

 
1,156

 
8,573

 
3,466

Loss on premises and equipment, net
(1
)
 
216

 
94

 
216

Outside services
907

 
181

 
2,220

 
430

Professional services
428

 
250

 
1,357

 
1,084

Communication
382

 
128

 
1,040

 
492

Amortization of intangible assets
189

 
1

 
534

 
25

Acquisition expenses
346

 
320

 
5,917

 
812

Other expenses
2,824

 
1,666

 
8,663

 
4,305

Total non-interest expense
17,586

 
8,750

 
58,463

 
25,478

 
 
 
 
 
 
 
 
Income before income taxes
12,192

 
5,482

 
27,471

 
17,799

Income tax expense
3,575

 
1,850

 
8,085

 
5,450

Net income
$
8,617

 
$
3,632

 
$
19,386

 
$
12,349

 
 
 
 
 
 
 
 
Earnings per share:
 

 
 

 
 

 
 

Basic
$
0.56

 
$
0.40

 
$
1.27

 
$
1.37

Diluted
$
0.56

 
$
0.40

 
$
1.27

 
$
1.35

 
 
 
 
 
 
 
 
Weighted average common shares outstanding:
 
 
 
 
 
 
 
Basic
15,420

 
9,064

 
15,098

 
9,037

Diluted
15,511

 
9,162

 
15,204

 
9,138

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

5


BAR HARBOR BANKSHARES AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
 
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
(In thousands)
 
2017
 
2016
 
2017
 
2016
Net income
 
$
8,617

 
$
3,632

 
$
19,386

 
$
12,349

Other comprehensive income (loss), before tax:
 
 

 
 

 
 

 
 

Changes in unrealized loss on securities available-for-sale
 
512

 
(5,577
)
 
5,119

 
3,041

Changes in unrealized loss on derivative hedges
 
(84
)
 
(92
)
 
(805
)
 
(1,309
)
Changes in unrealized loss on pension
 
5

 
8

 
45

 
86

Income taxes related to other comprehensive income (loss):
 
 

 
 

 
 
 
 

Changes in unrealized loss on securities available-for-sale
 
(192
)
 
1,952

 
(1,839
)
 
(1,064
)
Changes in unrealized loss on derivative hedges
 
31

 
32

 
373

 
458

Changes in unrealized loss on pension
 
(2
)
 
(3
)
 
(2
)
 
(30
)
Total other comprehensive income
 
270

 
(3,680
)
 
2,891

 
1,182

Total comprehensive income
 
$
8,887

 
$
(48
)
 
$
22,277

 
$
13,531

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


6


BAR HARBOR BANKSHARES AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

(In thousands)
 
Common stock amount
 
Additional paid-in capital
 
Retained earnings
 
Accumulated other comprehensive income
 
Treasury stock
 
Total
Balance at December 31, 2015
 
$
13,577

 
$
21,624

 
$
122,260

 
$
3,629

 
$
(6,938
)
 
$
154,152

 
 
 
 
 
 
 
 
 
 
 
 
 
Comprehensive income:
 
 
 
 
 
 
 
 
 
 
 
 
Net income
 

 

 
12,349

 

 

 
12,349

Other comprehensive loss
 

 

 

 
1,182

 

 
1,182

Total comprehensive income
 

 

 
12,349

 
1,182

 

 
13,531

Cash dividends declared ($0.54 per share)
 

 

 
(4,880
)
 

 

 
(4,880
)
Treasury stock purchased (23,072)
 

 

 

 

 
(497
)
 
(497
)
Net issuance (91,466) to employee stock plans, including related tax effects
 

 
35

 
(127
)
 

 
1,140

 
1,048

Recognition of stock based compensation
 

 
982

 

 

 
 
 
982

Balance at September 30, 2016
 
$
13,577

 
$
22,641

 
$
129,602

 
$
4,811

 
$
(6,295
)
 
$
164,336

 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2016
 
$
13,577

 
$
23,027

 
$
130,489

 
$
(4,326
)
 
$
(6,027
)
 
$
156,740

 
 
 
 
 
 
 
 
 
 
 
 
 
Comprehensive income:
 
 
 
 
 
 
 
 
 
 
 
 
Net income
 

 

 
19,386

 

 

 
19,386

Other comprehensive loss
 

 

 

 
2,891

 

 
2,891

Total comprehensive income
 

 

 
19,386

 
2,891

 

 
22,277

Cash dividends declared ($0.56 per share)
 

 

 
(8,624
)
 

 

 
(8,624
)
Acquisition of Lake Sunapee Bank Group
 
8,328

 
173,591

 

 

 

 
181,919

Treasury stock purchased (9,603 shares)
 

 

 

 

 
(282
)
 
(282
)
Net issuance (80,448 shares) to employee stock plans, including related tax effects
 

 
(265
)
 

 

 
874

 
609

Three-for-two stock split
 
10,953

 
(10,968
)
 

 

 

 
(15
)
Recognition of stock based compensation
 

 
835

 

 

 

 
835

Balance at September 30, 2017
 
$
32,858

 
$
186,220

 
$
141,251

 
$
(1,435
)
 
$
(5,435
)
 
$
353,459


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


7


BAR HARBOR BANKSHARES AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS 
 
 
Nine Months Ended September 30,
(In thousands)
 
2017
 
2016
Cash flows from operating activities:
 
 

 
 

Net income
 
$
19,386

 
$
12,349

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
 
Provision for loan losses
 
2,191

 
754

Net amortization of securities
 
4,006

 
2,293

Deferred tax benefit
 
(237
)
 

Change in unamortized net loan costs and premiums
 
(368
)
 

Premises and equipment depreciation and amortization expense
 
2,745

 
1,159

Stock-based compensation expense
 
835

 
982

Accretion of purchase accounting entries, net
 
(2,482
)
 

Amortization of other intangibles
 
542

 
69

Income from cash surrender value of bank-owned life insurance policies
 
(1,165
)
 
(540
)
Gain on sales of securities, net
 
(19
)
 
(4,489
)
Loss on premises and equipment, net
 
95

 

Net change in other
 
(2,387
)
 
(695
)
Net cash provided by operating activities
 
23,142

 
11,882

 
 
 
 
 
Cash flows from investing activities:
 
 

 
 

Proceeds from sales of securities available for sale
 
1,581

 
66,431

Proceeds from maturities, calls and prepayments of securities available for sale
 
92,817

 
78,190

Purchases of securities available for sale
 
(138,785
)
 
(171,702
)
Net change in loans
 
(71,669
)
 
(2,842
)
Purchase of loans
 
(18,621
)
 
(95,421
)
Purchase of Federal Home Loan Bank stock
 
(327
)
 
(2,233
)
Purchase of premises and equipment, net
 
(3,011
)
 
(3,567
)
Acquisitions, net of cash (paid) acquired
 
39,537

 

Proceeds from sale of other real estate
 
322

 

Net cash used in investing activities
 
(98,156
)
 
(131,144
)
 
 
 
 
 
Cash flows from financing activities:
 
 

 
 

Net decrease in deposits
 
74,725

 
90,738

Net change in short-term advances from the Federal Home Loan Bank
 
110,801

 
31,250

Net change in long term advances from the Federal Home Loan Bank
 
(62,531
)
 
8,238

Net change in securities sold repurchase agreements
 
672

 
(1,784
)
Exercise of stock options
 
451

 
1,048

Purchase of treasury stock
 
(196
)
 
(497
)
Common stock cash dividends paid
 
(8,623
)
 
(4,880
)
Net cash provided by financing activities
 
115,299

 
124,113

 
 
 
 
 
Net change in cash and cash equivalents
 
40,285

 
4,851

Cash and cash equivalents at beginning of year
 
8,439

 
9,720

Cash and cash equivalents at end of year
 
$
48,724

 
$
14,571

Supplemental cash flow information:
 
 

 
 

Interest paid
 
$
16,184

 
$
8,858

Income taxes paid, net
 
6,764

 
5,342

 
 
 
 
 
Acquisition of non-cash assets and liabilities:
 
 
 
 
Assets acquired
 
1,454,076

 

Liabilities assumed
 
1,406,672

 

 
 
 
 
 
Other non-cash changes:
 
 
 
 
Real estate owned acquired in settlement of loans
 
32

 

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


8


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 (“U.S. 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. In consolidation, all significant intercompany accounts and transactions are eliminated. 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 U.S. 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 U.S. 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, 2016 previously filed with the Securities and Exchange Commission.  In management's opinion, all adjustments necessary for a fair statement are reflected in the interim periods presented.

As a result of the Lake Sunapee Group acquisition, the Company has the following new significant and critical accounting policy regarding acquired loans:

Acquired Loans: Loans that the Company acquired in business combinations are initially recorded at fair value with no carryover of the related allowance for credit 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 will continue to evaluate reasonableness of expectations for the timing and the amount of cash to be collected. Subsequent decreases or increases 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.

Recently Adopted Accounting Principles
In March 2016, the FASB issued ASU No. 2016-09, “Improvements to Employee Share-Based Payment Accounting.” This ASU includes provisions intended to simplify various aspects related to how share-based payments are accounted for and presented in the financial statements. Some of the key provisions of this new ASU include: (1) companies will no longer record excess tax benefits and certain tax deficiencies in additional paid-in capital (“APIC”). Instead, they will record all excess tax benefits and tax deficiencies as income tax expense or benefit in the income statement, and APIC pools will be eliminated. The guidance also eliminates the requirement that excess tax benefits be realized before companies can recognize them. In addition, the guidance requires companies to present excess tax benefits as an operating activity on the statement of cash flows rather than as a financing activity; (2) increase the amount an employer can withhold to cover income taxes on awards and still qualify for the exception to liability classification for shares used to satisfy the employer’s statutory income tax withholding obligation. The new guidance will also require an employer to classify the cash paid to a tax authority when shares are withheld to satisfy its statutory income tax withholding obligation as a financing activity on its statement of cash flows (current guidance did not specify how these cash flows should be classified); and (3) permit companies to make an accounting policy election for the impact of forfeitures on the recognition of expense for share-based payment awards. Forfeitures can be estimated, as required

9


currently, or recognized when they occur. ASU No. 2016-09 is effective for interim and annual reporting periods beginning after December 15, 2016. The Company adopted ASU No. 2016-09 on January 1, 2017 and elected to recognize forfeitures as they occur. As allowed by the ASU, the Company’s adoption was prospective, therefore, prior periods have not been adjusted. The adoption of ASU No. 2016-09 could result in increased volatility to reported income tax expense related to excess tax benefits and tax deficiencies for employee share-based transactions, however, the actual amounts recognized in income tax expense will be dependent on the amount of employee share-based transactions and the stock price at the time of vesting or exercise. In 2017, the adoption of ASU No. 2016-09 resulted in an insignificant decrease to the provision for income taxes primarily due to the tax benefit from the exercise of stock options and the vesting of restricted stock.

In March 2017, the FASB issued ASU No. 2017-08, “Premium Amortization on Purchased Callable Debt Securities.” This ASU shortens the amortization period for the premium on certain purchased callable debt securities to the earliest call date. Today, entities generally amortize the premium over the contractual life of the security. The new guidance does not change the accounting for purchased callable debt securities held at a discount; the discount continues to be amortized to maturity. ASU No. 2017-08 is effective for interim and annual reporting periods beginning after December 15, 2018; early adoption is permitted. The guidance calls for a modified retrospective transition approach under which a cumulative-effect adjustment will be made to retained earnings as of the beginning of the first reporting period in which the guidance is adopted. The Company elected to adopt the provisions of ASU No. 2017-08 as of March 31, 2017, which had no impact on the Company’s Consolidated Financial Statements.

Future Application of Accounting Pronouncements
In May 2014, the FASB and the International Accounting Standards Board (the “IASB”) jointly issued a comprehensive new revenue recognition standard that will supersede nearly all existing revenue recognition guidance under U.S. GAAP and International Financial Reporting Standards (“IFRS”). Current revenue recognition guidance in U.S. GAAP consists of broad revenue recognition concepts together with numerous revenue requirements for particular industries or transactions, which sometimes resulted in different accounting for economically similar transactions. In contrast, IFRS provided limited revenue recognition guidance and, consequently, could be difficult to apply to complex transactions. Accordingly, the FASB and the IASB initiated a joint project to clarify the principles for recognizing revenue and to develop a common revenue standard for U.S. GAAP and IFRS that would: (1) remove inconsistencies and weaknesses in revenue requirements; (2) provide a more robust framework for addressing revenue issues; (3) improve comparability of revenue recognition practices across entities, industries, jurisdictions, and capital markets; (4) provide more useful information to users of financial statements through improved disclosure requirements; and (5) simplify the preparation of financial statements by reducing the number of requirements to which an entity must refer. To meet those objectives, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers.” The common revenue standard’s core principle is that a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. In doing so, companies generally will be required to use more judgment and make more estimates than under current guidance. These may include identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation. The standard was initially effective for public entities for interim and annual reporting periods beginning after December 15, 2016; early adoption was not permitted. However, in August 2015, the FASB issued ASU No. 2015-14, “Revenue from Contracts with Customers - Deferral of the Effective Date” which deferred the effective date by one year (i.e., interim and annual reporting periods beginning after December 15, 2017). For financial reporting purposes, the standard allows for either full retrospective adoption, meaning the standard is applied to all of the periods presented, or modified retrospective adoption, meaning the standard is applied only to the most current period presented in the financial statements with the cumulative effect of initially applying the standard recognized at the date of initial application. In addition, the FASB has begun to issue targeted updates to clarify specific implementation issues of ASU 2014-09. These updates include ASU No. 2016-08, “Principal versus Agent Considerations (Reporting Revenue Gross versus Net),” ASU No. 2016-10, “Identifying Performance Obligations and Licensing,” ASU No. 2016-12, “Narrow-Scope Improvements and Practical Expedients,” and ASU No. 2016-20 “Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers.” Since the guidance does not apply to revenue associated with financial instruments, including loans and securities that are accounted for under other U.S. GAAP, the Company does not expect the new guidance to have a material impact on revenue most

10


closely associated with financial instruments, including interest income. The Company is currently performing an overall assessment of revenue streams and reviewing contracts potentially affected by the ASU including trust and asset management fees, deposit related fees, interchange fees, and merchant income, to determine the potential impact the new guidance is expected to have on the Company’s Consolidated Financial Statements. In addition, the Company continues to follow certain implementation issues relevant to the banking industry which are still pending resolution. The Company plans to adopt ASU No. 2014-09 on January 1, 2018 utilizing the modified retrospective approach.

In January 2016, the FASB issued ASU No. 2016-01, “Recognition and Measurement of Financial Assets and Financial Liabilities.” This ASU addresses certain aspects of recognition, measurement, presentation, and disclosure of financial instruments by making targeted improvements to U.S. GAAP as follows: (1) require equity investments (except those accounted for under the equity method of accounting or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income. However, an entity may choose to measure equity investments that do not have readily determinable fair values at cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer; (2) simplify the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment. When a qualitative assessment indicates that impairment exists, an entity is required to measure the investment at fair value; (3) eliminate the requirement to disclose the fair value of financial instruments measured at amortized cost for entities that are not public business entities; (4) eliminate the requirement for public business entities to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet; (5) require public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes; (6) require an entity to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments; (7) require separate presentation of financial assets and financial liabilities by measurement category and form of financial asset (that is, securities or loans and receivables) on the balance sheet or the accompanying notes to the financial statements; and (8) clarify that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale securities in combination with the entity’s other deferred tax assets. ASU No. 2016-01 is effective for interim and annual reporting periods beginning after December 15, 2017. Early application is permitted as of the beginning of the fiscal year of adoption only for provisions (3) and (6) above. Early adoption of the other provisions mentioned above is not permitted. The Company has performed a preliminary evaluation of the provisions of ASU No. 2016-01. Based on this evaluation, the Company has determined that ASU No. 2016-01 is not expected to have a material impact on the Company’s Consolidated Financial Statements; however, the Company will continue to closely monitor developments and additional guidance.

In February 2016, the FASB issued ASU No. 2016-02, “Leases.” Under the new guidance, lessees will be required to recognize the following for all leases (with the exception of short-term leases): (1) a lease liability, which is the present value of a lessee’s obligation to make lease payments, and (2) a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. Lessor accounting under the new guidance remains largely unchanged as it is substantially equivalent to existing guidance for sales-type leases, direct financing leases, and operating leases. Leveraged leases have been eliminated, although lessors can continue to account for existing leveraged leases using the current accounting guidance. Other limited changes were made to align lessor accounting with the lessee accounting model and the new revenue recognition standard. All entities will classify leases to determine how to recognize lease-related revenue and expense. Quantitative and qualitative disclosures will be required by lessees and lessors to meet the objective of enabling users of financial statements to assess the amount, timing, and uncertainty of cash flows arising from leases. The intention is to require enough information to supplement the amounts recorded in the financial statements so that users can understand more about the nature of an entity’s leasing activities. ASU No. 2016-02 is effective for interim and annual reporting periods beginning after December 15, 2018; early adoption is permitted. All entities are required to use a modified retrospective approach for leases that exist or are entered into after the beginning of the earliest comparative period in the financial statements. They have the option to use certain relief; full retrospective application is prohibited. The Company has several lease agreements, such as branch locations, which are currently considered operating leases, and therefore, not recognized on the Company’s consolidated statements of condition. The Company expects the new guidance will require these lease

11


agreements to now be recognized on the consolidated statements of condition as a right-of-use asset and a corresponding lease liability. Therefore, the Company’s preliminary evaluation indicates the provisions of ASU No. 2016-02 are expected to impact the Company’s consolidated statements of condition. However, the Company continues to evaluate the extent of potential impact the new guidance will have on the Company’s Consolidated Financial Statements.

In June 2016, the FASB issued ASU No. 2016-13, “Measurement of Credit Losses on Financial Instruments.” This ASU significantly changes how entities will measure credit losses for most financial assets and certain other instruments that aren’t measured at fair value through net income. In issuing the standard, the FASB is responding to criticism that today’s guidance delays recognition of credit losses. The standard will replace today’s “incurred loss” approach with an “expected loss” model. The new model, referred to as the current expected credit loss (“CECL”) model, will apply to: (1) financial assets subject to credit losses and measured at amortized cost, and (2) certain off-balance sheet credit exposures. This includes, but is not limited to, loans, leases, held-to-maturity securities, loan commitments, and financial guarantees. The CECL model does not apply to available-for-sale (“AFS”) debt securities. For AFS debt securities with unrealized losses, entities will measure credit losses in a manner similar to what they do today, except that the losses will be recognized as allowances rather than reductions in the amortized cost of the securities. As a result, entities will recognize improvements to estimated credit losses immediately in earnings rather than as interest income over time, as they do today. The ASU also simplifies the accounting model for purchased credit-impaired debt securities and loans. ASU 2016-13 also expands the disclosure requirements regarding an entity’s assumptions, models, and methods for estimating the allowance for loan and lease losses. In addition, entities will need to disclose the amortized cost balance for each class of financial asset by credit quality indicator, disaggregated by the year of origination. ASU No. 2016-13 is effective for interim and annual reporting periods beginning after December 15, 2019; early adoption is permitted for interim and annual reporting periods beginning after December 15, 2018. Entities will apply the standard’s provisions as a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective (i.e., modified retrospective approach). The Company’s preliminary evaluation indicates the provisions of ASU No. 2016-13 are expected to impact the Company’s Consolidated Financial Statements, in particular the level of the reserve for credit losses. However, the Company continues to evaluate the extent of the potential impact.

In August 2016, the FASB issued ASU No. 2016-15, “Classification of Certain Cash Receipts and Cash Payments.” Current U.S. GAAP is unclear or does not include specific guidance on how to classify certain transactions in the statement of cash flows. This ASU is intended to reduce diversity in practice in how eight particular transactions are classified in the statement of cash flows. ASU No. 2016-15 is effective for interim and annual reporting periods beginning after December 15, 2017. Early adoption is permitted, provided that all of the amendments are adopted in the same period. Entities will be required to apply the guidance retrospectively. If it is impracticable to apply the guidance retrospectively for an issue, the amendments related to that issue would be applied prospectively. As this guidance only affects the classification within the statement of cash flows, ASU No. 2016-15 is not expected to have a material impact on the Company’s Consolidated Financial Statements.

In January 2017, the FASB issued ASU No. 2017-04, “Simplifying the Test for Goodwill Impairment.” The guidance removes Step 2 of the goodwill impairment test, which requires a hypothetical purchase price allocation. Goodwill impairment will now be the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. All other goodwill impairment guidance will remain largely unchanged. ASU No. 2017-04 is effective for interim and annual reporting periods beginning after December 15, 2019, applied prospectively. Early adoption is permitted for any impairment tests performed after January 1, 2017. The Company expects to early adopt upon the next goodwill impairment test in 2017. ASU No. 2017-04 is not expected to have a material impact on the Company’s Consolidated Financial Statements.

In March 2017, the FASB issued ASU No. 2017-07, “Improving the Presentation of Net Periodic Pension Cost and Net Periodic Post-retirement Benefit Cost.” Under the new guidance, employers will present the service cost component of the net periodic benefit cost in the same income statement line item as other employee compensation costs (e.g., Salaries and Benefits) arising from services rendered during the period. In addition, only the service cost component will be eligible for capitalization in assets. Employers will present the other components separately from the line item (e.g., Other Noninterest Expense) that includes the service cost. ASU No. 2017-07 is effective for interim and annual reporting periods beginning after December 15, 2017. Early adoption is permitted, however, the Company has decided

12


not to early adopt. Employers will apply the guidance on the presentation of the components of net periodic benefit cost in the income statement retrospectively. The guidance limiting the capitalization of net periodic benefit cost in assets to the service cost component will be applied prospectively. The Company expects to utilize the ASU’s practical expedient allowing entities to estimate amounts for comparative periods using the information previously disclosed in their pension and other post-retirement benefit plan footnote. ASU No. 2017-07 is not expected to have a material impact on the Company’s Consolidated Financial Statements.

In May 2017, the FASB issued ASU No. 2017-09, “Stock Compensation, Scope of Modification Accounting.” This ASU clarifies when changes to the terms of conditions of a share-based payment award must be accounted for as modifications. Companies will apply the modification accounting guidance if the value, vesting conditions or classification of the award changes. The new guidance should reduce diversity in practice and result in fewer changes to the terms of an award being accounted for as modifications, as the guidance will allow companies to make certain non-substantive changes to awards without accounting for them as modifications. It does not change the accounting for modifications. ASU No. 2017-09 is effective for interim and annual reporting periods beginning after December 15, 2017; early adoption is permitted. ASU No. 2017-09 is not expected to have a material impact on the Company’s Consolidated Financial Statements.

In August 2017, the FASB issued ASU No. 2017-12, “Targeted Improvements to Accounting for Hedging Activities.” This ASU’s objectives are 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. ASU No. 2017-12 is effective for interim and annual reporting periods beginning after December 15, 2018; early adoption is permitted. The Company’s interest rate cap agreements are derivative financial instruments that are designated as formal hedging relationships. The Company is currently evaluating this ASU to determine whether its provisions will enhance the Company’s ability to employ risk management strategies, while improving the transparency and understanding of those strategies for financial statement users.



NOTE 2.     ACQUISITION

Lake Sunapee Bank Group
On January 13, 2017, the Company completed its acquisition of Lake Sunapee Bank Group (“Lake Sunapee”). Lake Sunapee, as a holding company, had one banking subsidiary (“Lake Sunapee Bank”) that had 33 full service branches located throughout New Hampshire and Vermont. As a result of the transaction, Lake Sunapee Bank Group merged into Bar Harbor Bankshares, and Lake Sunapee Bank merged into Bar Harbor Bank. This business combination expanded the Company's geographic footprint and increased market share in its New England based franchise. The goodwill recognized results from the expected synergies and earnings accretion from this combination, including future cost savings related to the operations of Lake Sunapee Bank Group.

On the acquisition date, Lake Sunapee had 8.38 million common shares outstanding, which were exchanged for 4.16 million of the Company's common shares based on a 0.4970 exchange ratio as defined in the merger agreement. The merger qualified as a reorganization for federal income tax purposes, and as a result, Lake Sunapee common shares exchanged for the Company's common shares were transferred on a tax-free basis. Bar Harbor Bankshares common stock issued in this exchange was valued at $43.69 per share based on the closing price posted on January 13, 2017 resulting in a consideration value of $181.92 million. The Company also paid $27 thousand to Lake Sunapee shareholders in lieu of the issuance of fractional shares. Total consideration paid at closing reflected the increase in Bar Harbor Bankshare's stock price since the time of the announcement.

The results of Lake Sunapee's operations are included in the Company's Consolidated Statement of Income from the date of acquisition. The assets and liabilities in the Lake Sunapee acquisition were recorded at their fair value based on management’s best estimate using information available as of the date of acquisition.


13


Consideration paid, and fair values of Lake Sunapee’s assets acquired and liabilities assumed, along with the resulting goodwill, are summarized in the following tables:
(in thousands)
 
As Acquired
 
Fair Value Adjustments
 
 
 
As Recorded at Acquisition
Consideration paid:
 
 
 
 
 
 
 
 
Bar Harbor Bankshares common stock issued to Lake Sunapee Bank Group stockholders (4,163,853 shares)
 
 
 
 
 
 
 
$
181,919

Cash paid for fractional shares
 
 
 
 
 
 
 
27

Total consideration paid
 
 
 
 
 
 
 
181,946

Recognized amounts of identifiable assets acquired and liabilities assumed, at fair value:
 
 
 
 
 
 
 
 
Cash and short-term investments
 
$
40,970

 
$
(1,406
)
 
(a)
 
$
39,564

Investment securities
 
156,960

 
(1,381
)
 
(b)
 
155,579

Loans
 
1,217,927

 
(9,728
)
 
(c)
 
1,208,199

Premises and equipment
 
22,561

 
(351
)
 
(d)
 
22,210

Core deposit intangible
 

 
7,786

 
(e)
 
7,786

Other assets
 
102,298

 
(50,419
)
 
(f)
 
51,879

Deposits
 
(1,149,865
)
 
(746
)
 
(g)
 
(1,150,611
)
Borrowings
 
(232,261
)
 
(16
)
 
(h)
 
(232,277
)
Deferred taxes, net
 
(1,921
)
 
10,217

 
(i)
 
8,296

Other liabilities
 
(19,924
)
 
(4,087
)
 
(j)
 
(24,011
)
Total identifiable net assets
 
$
136,745

 
$
(50,131
)
 
 
 
$
86,614

 
 
 
 
 
 
 
 
 
Goodwill
 
 
 
 
 
 
 
$
95,332


Explanation of Certain Fair Value Adjustments
a.
Represents in-process payments that were made on the date of acquisition that were not recorded on Lake Sunapee's general ledger until after acquisition.
b.
Represents the write down of the book value of investments to their estimated fair value based on fair values on the date of acquisition.
c.
Represents the write down of the book value of loans to their estimated fair value based on current interest rates and expected cash flows, which includes an estimate of expected loan loss inherent in the portfolio. The adjustments also includes the reversal of Lake Sunapee Bank's historic allowance for loan losses. Loans that met the criteria and are being accounted for in accordance with ASC 310-30, Loans and Securities Acquired with Deteriorated Credit Quality, had a book value of $23.34 million and have a fair value $18.45 million. Non-impaired loans accounted for under ASC 310-10, Overall, had a book value of $1.20 billion and have a fair value of $1.188 billion. ASC 310-30 loans have a $1.09 million fair value adjustment discount that is accretable in earnings over the weighted average life of three years using the effective yield as determined on the date of acquisition. The effective yield is periodically adjusted for changes in expected flows. ASC 310-10 loans have a $11.40 million fair value adjustment discount that is amortized into expense over the remaining term of the loans using the effective interest method, or a straight-line method if the loan is a revolving credit facility.
d.
Represents the adjustment of the book value of buildings and equipment, to their estimated fair value based on appraisals and other methods. The adjustments will be depreciated over the estimated economic lives of the assets.
e.
Represents the value of the core deposit base assumed in the acquisition. The core deposit asset was recorded as an identifiable intangible asset and will be amortized using a straight-line method over the average life of the deposit base, which is estimated to be twelve years.
f.
Primarily represents the write-off of historical goodwill and unamortized intangibles recorded by Lake Sunapee from prior acquisitions that are not carried over to the Company's balance sheet.  These adjustments are not

14


accretable into earnings in the statement of income. Also represents the value of customer list intangibles which are accretable into earnings in the statement of income.
g.
Represents adjustments made to time deposits due to the weighted average contractual interest rates exceeding the cost of similar funding at the time of acquisition. The amount will be amortized using a straight-line method over the estimated useful life of one year.
h.
Represents the present value difference between cash flows of current debt instruments using contractual rates and those of similar borrowings on the date of acquisition. The adjustment will be amortized over the remaining four year weighted average contractual life.
i.
Represents net deferred tax assets resulting from the fair value adjustments related to the acquired assets and liabilities, identifiable intangibles, and other purchase accounting adjustments.
j.
Primarily represents the impact of change in control effects on post-retirement liabilities assumed by the Company, which are not accretable into earnings in the statement of income.

Except for collateral dependent loans with deteriorated credit quality, the fair values for loans acquired were estimated using cash flow projections based on the remaining maturity and repricing terms. Cash flows were adjusted by estimating future credit losses and the rate of prepayments. Projected monthly cash flows were then discounted to present value using a risk-adjusted market rate for similar loans. To estimate the fair value for collateral dependent loans with deteriorated credit quality, we analyzed the underlying collateral of the loans assuming the fair values of the loans were derived from the eventual sale of the collateral. Those values were 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. There was no carryover of the seller’s allowance for credit losses associated with the loans that were acquired in the acquisition as the loans were initially recorded at fair value.

Information about the acquired loan portfolio subject to ASC 310-30 as of January 13, 2017 is, as follows (in thousands):
 
ASC 310-30 Loans
Gross contractual receivable amounts at acquisition
$
23,338

Contractual cash flows not expected to be collected (nonaccretable discount)
(3,801
)
Expected cash flows at acquisition
19,537

Interest component of expected cash flows (accretable discount)
(1,089
)
Fair value of acquired loans
$
18,448


Direct acquisition and integration costs were expensed as incurred, and totaled $5.9 million during the nine months ending September 30, 2017 and were $812 thousand for the same period of 2016. For the three months ending September 30, 2017 direct acquisition and integration costs totaled $346 thousand and were $320 thousand for the same period of 2016.

Pro Forma Information (unaudited)
The following table presents selected unaudited pro forma financial information reflecting the acquisition of Lake Sunapee Bank Group assuming the acquisition was completed as of January 1, 2016. The unaudited pro forma financial information includes adjustments for scheduled amortization and accretion of fair value adjustments recorded at the acquisition. These adjustments would have been different if they had been recorded on January 1, 2016, and they do not include the impact of prepayments. The unaudited pro forma financial information is presented for illustrative purposes only and is not necessarily indicative of the combined financial results of the Company and Lake Sunapee had the transaction actually been completed at the beginning of the periods presented, nor does it indicate future results for any other interim or full-year period. Pro forma basic and diluted earnings per common share were calculated using the Company's actual weighted-average shares outstanding for the periods presented plus 4.16 million shares issued as a result of the acquisition. The unaudited pro forma information is based on the actual financial statements of the Company and Lake Sunapee for the periods shown until the date of acquisition, at which time Lake Sunapee operations became included in the Company's financial statements. The Company has determined it is impractical to report the amounts of revenue and earnings of the acquired entity since the acquisition date. Due to the integration of its operations with those of the organization, the Company does not record revenue and earnings separately for these operations.

15


 

The unaudited pro forma information, for the nine months ended September 30, 2017 and 2016, set forth below reflects adjustments related to amortization and accretion of purchase accounting fair value adjustments and an estimated tax rate of 37.57%. Direct acquisition expenses incurred by the Company during 2017, as noted above, are reversed for the purposes of this unaudited pro forma information. Furthermore, the unaudited pro forma information does not reflect management’s estimate of any revenue-enhancing or anticipated cost-savings that could occur as a result of the acquisition.

Information in the following table is shown in thousands, except earnings per share:
 
 
Pro Forma (unaudited)
Nine Months Ended September 30,
 
 
2017
 
2016
Net interest income
 
$
69,846

 
$
67,670

Non-interest income
 
20,883

 
25,808

Net income
 
26,133

 
21,371

 
 
 
 
 
Pro forma earnings per share:
 
 
 
 
Basic
 
$
1.69

 
$
1.40

Diluted
 
$
1.68

 
$
1.39



16


NOTE 3.    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, 2017
 
 

 
 

 
 

 
 

Securities available for sale
 
 

 
 

 
 

 
 

Debt securities:
 
 

 
 

 
 

 
 

Obligations of US Government sponsored enterprises
 
$
6,952

 
$
27

 
$

 
$
6,979

Mortgage-backed securities:
 
 
 
 
 
 
 


  US Government-sponsored enterprises
 
438,332

 
3,413

 
3,788

 
437,957

  US Government agency
 
102,044

 
695

 
601

 
102,138

  Private label
 
562

 
162

 
5

 
719

Obligations of states and political subdivisions thereof
 
140,475

 
2,818

 
1,311

 
141,982

Corporate bonds
 
28,245

 
441

 
2

 
28,684

Total securities available for sale
 
$
716,610

 
$
7,556

 
$
5,707

 
$
718,459

 
 
 
 
 
 
 
 
 
December 31, 2016
 
 

 
 

 
 

 
 

Securities available for sale
 
 

 
 

 
 

 
 

Debt securities:
 
 

 
 

 
 

 
 

Obligations of US Government sponsored enterprises
 
$

 
$

 
$

 
$

Mortgage-backed securities:
 
 
 
 
 
 
 
 
  US Government-sponsored enterprises
 
330,635

 
2,682

 
4,865

 
328,452

  US Government agency
 
76,722

 
797

 
613

 
76,906

  Private label
 
936

 
207

 
11

 
1,132

Obligations of states and political subdivisions thereof
 
123,832

 
1,941

 
3,407

 
122,366

Corporate bonds
 

 

 

 

Total securities available for sale
 
$
532,125

 
$
5,627

 
$
8,896

 
$
528,856


The amortized cost and estimated fair value of available for sale (“AFS”) securities segregated by contractual maturity at September 30, 2017 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
 
 
Amortized
 
Fair
(In thousands)
 
Cost
 
Value
Within 1 year
 
$
3,613

 
$
3,627

Over 1 year to 5 years
 
18,499

 
18,735

Over 5 years to 10 years
 
73,997

 
75,366

Over 10 years
 
620,501

 
620,731

Total securities available for sale
 
$
716,610

 
$
718,459



17


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, 2017
 
 

 
 

 
 

 
 

 
 

 
 

 
 
 
 
 
 
 
 
 
 
 
 
 
Securities available for sale
 
 

 
 

 
 

 
 

 
 

 
 

Debt securities:
 
 

 
 

 
 

 
 

 
 

 
 

Obligations of US Government sponsored enterprises
 
$

 
$

 
$

 
$

 
$

 
$

Mortgage-backed securities:
 
 
 
 
 
 
 
 
 
 
 


  US Government-sponsored enterprises
 
1,559

 
150,524

 
2,229

 
64,882

 
3,788

 
215,406

  US Government agency
 
345

 
48,529

 
256

 
11,880

 
601

 
60,409

  Private label
 

 
7

 
5

 
134

 
5

 
141

Obligations of states and political subdivisions thereof
 
89

 
8,838

 
1,222

 
31,570

 
1,311

 
40,408

Corporate bonds
 
2

 
3,038

 

 

 
2

 
3,038

Total securities available for sale
 
$
1,995

 
$
210,936

 
$
3,712

 
$
108,466

 
$
5,707

 
$
319,402

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2016
 
 

 
 

 
 

 
 

 
 

 
 

 
 
 
 
 
 
 
 
 
 
 
 
 
Securities available for sale
 
 

 
 

 
 

 
 

 
 

 
 

Debt securities:
 
 
 
 
 
 
 
 
 
 
 
 
Obligations of US Government sponsored enterprises
 
$

 
$

 
$

 
$

 
$

 
$

Mortgage-backed securities:
 
 
 
 
 
 
 
 
 
 
 
 
  US Government-sponsored enterprises
 
4,369

 
197,914

 
496

 
10,120

 
4,865

 
208,034

  US Government agency
 
472

 
36,941

 
141

 
4,263

 
613

 
41,204

  Private label
 

 
107

 
11

 
312

 
11

 
419

Obligations of states and political subdivisions thereof
 
3,252

 
76,803

 
155

 
3,916

 
3,407

 
80,719

Corporate bonds
 

 

 

 

 

 

Total securities available for sale
 
$
8,093

 
$
311,765

 
$
803

 
$
18,611

 
$
8,896

 
$
330,376



18


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, 2017 and 2016 the Company did not record any other-than-temporary impairment (“OTTI”) losses.
 
Three Months Ended September 30,
 
2017
 
2016
Estimated credit losses as of June 30,
$
1,697

 
$
1,697

Reductions for securities paid off during the period

 

Estimated credit losses at end of the period
$
1,697

 
$
1,697


 
Nine Months Ended September 30,
 
2017
 
2016
Estimated credit losses as of prior year-end,
$
1,697

 
$
3,180

Reductions for securities paid off during the period

 
1,483

Estimated credit losses at end of the period
$
1,697

 
$
1,697


Visa Class B Common Shares
The Company was a member of the Visa USA payment network and was issued Class B shares in connection with the Visa Reorganization and the Visa Inc. initial public offering in March 2008. The Visa Class B shares are transferable only under limited circumstances until they can be converted into shares of the publicly traded class of Visa stock. This conversion cannot happen until the settlement of certain litigation, which is indemnified by Visa members. Since its initial public offering, Visa has funded a litigation reserve based upon a change in the conversion ratio of Visa Class B shares into Visa Class A shares. At its discretion, Visa may continue to increase the conversion rate in connection with any settlements in excess of amounts then in escrow for that purpose and reduce the conversion rate to the extent that it adds any funds to the escrow in the future. Based on the existing transfer restriction and the uncertainty of the litigation, the Company has recorded its Visa Class B shares on its statements of condition at zero value for all reporting periods since 2008. At September 30, 2017, the Company owned 11,623 of Visa Class B shares with a then current conversion ratio to Visa Class A shares of 1.648 (or 19,158 Visa Class A shares). Upon termination of the existing transfer restriction and settlement of the litigation, and to the extent that the Company continues to own such Visa Class B shares in the future, the Company expects to record its Visa Class B shares at fair value.

For securities with unrealized losses, the following information was considered in determining that the impairments were not other-than-temporary:

Debt Securities
The Company expects to recover its amortized cost basis on all debt 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, 2017, 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.

The following summarizes, by investment security type, the basis for the conclusion that the debt securities in an unrealized loss position within the Company’s AFS were not other-than-temporarily impaired at September 30, 2017:

US Government-sponsored enterprises
At September 30, 2017, 275 out of the total 789 securities in the Company’s portfolios of AFS US Government sponsored enterprises were in unrealized loss positions. Aggregate unrealized losses represented 1.7% of the amortized cost of securities in unrealized loss positions.The Federal National Mortgage Association (“FNMA”) and Federal Home Loan Mortgage Corporation (“FHLMC”) guarantee the contractual cash flows of all of the Company’s US

19


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 agencies
At September 30, 2017, 62 out of the total 208 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
At September 30, 2017, 8 of the total 26 securities in the Company’s portfolio of AFS private-label mortgage-backed securities were in unrealized loss positions. Aggregate unrealized losses represented 3.3% of the amortized cost of securities in unrealized loss positions. Based upon the foregoing considerations, and 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
At September 30, 2017, 79 of the total 262 securities in the Company’s portfolio of AFS municipal bonds and obligations were in unrealized loss positions. Aggregate unrealized losses represented 3.1% 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 that risk. There were no material underlying credit downgrades during the quarter. All securities are performing.

Corporate bonds
At September 30, 2017, one out of 12 securities in the Company’s portfolio of AFS corporate bonds were in an unrealized loss position. The aggregate unrealized loss represents 0.1% 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.






20



NOTE 4.    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 includes single and multi-family, commercial construction and land, and other commercial real estate classes. Commercial and industrial loans includes loans to commercial businesses, agricultural and other loans to farmers, and tax exempt loans. Residential real estate loans consists of mortgages for 1 to 4 family housing. Consumer loans include home equity loans, indirect auto and other installment lending.

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 acquired from Lake Sunapee Bank Group. The following is a summary of total loans:
 
 
September 30, 2017
 
December 31, 2016
(In thousands)
 
Business
Activities  Loans
 
Acquired
Loans
 
Total
 
Business
Activities  Loans
 
Acquired
Loans
 
Total
Commercial Real Estate:
 
 

 
 

 
 

 
 

 
 

 
 

Construction and land development
 
$
33,692

 
$
15,593

 
$
49,285

 
$
14,695

 
$

 
$
14,695

Other commercial real estate
 
455,847

 
288,440

 
744,287

 
403,424

 

 
403,424

Total Commercial Real Estate:
 
489,539

 
304,033

 
793,572

 
418,119

 

 
418,119

 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial and Industrial:
 
 

 
 

 
 

 
 

 
 

 
 

Other Commercial
 
172,186

 
68,090

 
240,276

 
103,586

 

 
103,586

Agricultural and other loans to farmers
 
30,483

 

 
30,483

 
31,808

 

 
31,808

Tax exempt
 
40,776

 
45,537

 
86,313

 
15,846

 

 
15,846

Total Commercial and Industrial:
 
243,445

 
113,627

 
357,072

 
151,240

 

 
151,240

 
 
 
 
 
 
 
 
 
 
 
 
 
Total Commercial Loans:
 
732,984

 
417,660

 
1,150,644

 
569,359

 

 
569,359

 
 
 
 
 
 
 
 
 
 
 
 
 
Residential Real Estate:
 
 

 
 

 
 

 
 

 
 

 
 

Residential mortgages
 
568,277

 
584,351

 
1,152,628

 
506,612

 

 
506,612

Total Residential Real Estate:
 
568,277

 
584,351

 
1,152,628

 
506,612

 

 
506,612

 
 
 
 
 
 
 
 
 
 
 
 
 
Consumer:
 
 

 
 
 
 

 
 

 
 

 
 

Home equity
 
50,610

 
64,695

 
115,305

 
46,921

 

 
46,921

Other consumer
 
7,645

 
2,640

 
10,285

 
6,172

 

 
6,172

Total Consumer:
 
58,255

 
67,335

 
125,590

 
53,093

 

 
53,093

 
 
 
 
 
 
 
 
 
 
 
 
 
Total Loans:
 
$
1,359,516

 
$
1,069,346

 
$
2,428,862

 
$
1,129,064

 
$

 
$
1,129,064


The carrying amount of the acquired loans at September 30, 2017 totaled $1.069 billion. 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 $14.4 million (and a note balance of $19.5 million). These loans are evaluated for impairment through the periodic reforecasting of expected cash flows. Loans considered not impaired at acquisition date had a carrying amount of $1.055 billion.




21


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)
 
2017
 
2016
Balance at beginning of period
 
$
4,567

 
$

Acquisitions
 

 

Reclassification from nonaccretable difference for loans with improved cash flows
 
513

 

Accretion
 
(423
)
 

Balance at end of period
 
$
4,657

 
$


 
 
Nine Months Ended September 30,
(In thousands)
 
2017
 
2016
Balance at beginning of period
 
$

 
$

Acquisitions
 
3,398

 

Reclassification from nonaccretable difference for loans with improved cash flows
 
2,257

 

Accretion
 
(998
)
 

Balance at end of period
 
$
4,657

 
$




22


The following is a summary of past due loans at September 30, 2017 and December 31, 2016:

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, 2017
 
 

 
 

 
 

 
 

 
 

 
 

 
 

Commercial Real Estate:
 
 

 
 

 
 

 
 

 
 

 
 

 
 

Construction and land development
 
$

 
$

 
$
637

 
$
637

 
$
33,055

 
$
33,692

 
$

Other commercial real estate
 
407

 
121

 
702

 
1,230

 
454,617

 
455,847

 

Total Commercial Real Estate:
 
407

 
121

 
1,339

 
1,867

 
487,672

 
489,539

 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial and Industrial:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Other Commercial
 
401

 
150

 
159

 
710