BHB US Equity☆

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion is management's analysis to assist in the understanding and evaluation of the consolidated financial condition and results of operations of the Company. It should be read in conjunction with the consolidated financial statements and footnotes and selected financial data presented elsewhere in this Annual Report. Within the tables presented, certain columns and rows may not sum due to the use of rounded numbers for disclosure purposes. The detailed financial discussion that follows focuses on 2023 results compared to 2022. For a discussion of 2022 results compared to 2021, see the Company's Annual Report on Form 10-K for the year ended December 31, 2022.

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GENERAL

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

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ANNUAL PERFORMANCE SUMMARY

Earnings (For year ended December 31, 2023 compared to the same period of 2022)

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Financial Position(For year ended December 31, 2023 compared to the same period of 2022)

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SELECTED FINANCIAL DATA

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​ ​ At or For the Years Ended December 31,

Financial Condition Data: ​ ​ ​ ​ ​ ​ ​ ​ ​

Allowance for credit losses ​ 28 ​ 26 ​ 23

Total goodwill and intangible assets ​ 124 ​ 125 ​ 126

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Operating Data: ​ ​ ​

Total interest and dividend income ​ $ 174 ​ $ 127 ​ $ 111

Total interest expense ​ 57 ​ 13 ​ 15

Non-interest income ​ 36 ​ 35 ​ 42

Provision for credit losses ​ 3 ​ 3 ​ (1)

Total non-interest expense ​ 93 ​ 91 ​ 91

Income tax expense ​ 12 ​ 11 ​ 9

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Ratios and Other Data: ​ ​ ​

Per Common Share Data ​ ​ ​

Common stock price: ​ ​ ​

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Weighted average common shares outstanding (in thousands): ​ ​ ​

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​ ​ ​ ​ ​ ​ ​ ​

​ ​ At or For the Years Ended December 31,

Performance Ratios:(4) ​ ​ ​ ​ ​ ​ ​

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Organic Growth Ratios: ​

Total commercial loans 6 % 19 % 7 %

Total loans 3 15 (1) ​

Total deposits 3 (0) 5 ​

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Asset Quality and Condition Ratios: ​

Non-accruing loans/total loans 0.18 % 0.23 % 0.40 %

Net (recoveries) charge-offs/average loans — (0.01) 0.01 ​

Allowance for credit losses/total loans 0.94 0.89 0.90 ​

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Capital Ratios: ​

Tier 1 capital to average assets - Company 9.70 % 9.21 % 8.66 %

Tier 1 capital to risk-weighted assets - Company 11.96 11.02 11.90 ​

(2) Net revenue is defined as net interest income plus non-interest income.

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AVERAGE BALANCES AND AVERAGE YIELDS/RATES

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The following table presents average balances and average rates and yields on a fully taxable equivalent basis for the periods included:

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​ ​ Year Ended December 31,

Assets ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Loans: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Cash and due from banks ​ ​ 34 ​ ​ ​ ​ ​ ​ ​ ​ 37 ​ ​ ​ ​ ​ ​ ​ ​ 35 ​ ​ ​ ​

Other assets ​ ​ 304 ​ ​ ​ ​ ​ ​ ​ ​ 308 ​ ​ ​ ​ ​ ​ ​ 333 ​ ​ ​ ​

Total assets ​ $ 3,934 ​ ​ ​ ​ ​ $ 3,747 ​ ​ ​ ​ ​ $ 3,718 ​ ​ ​ ​

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Liabilities ​ ​ ​ ​ ​ ​ ​ ​ ​

Non-interest bearing demand deposits ​ 619 ​ ​ ​ 679 ​ ​ ​ 668 ​ ​

Other liabilities ​ 67 ​ ​ ​ 69 ​ ​ ​ 68 ​ ​

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Total shareholders' equity ​ 412 ​ ​ ​ 399 ​ ​ ​ 414 ​ ​

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Net interest margin ​ ​ 3.29 ​ ​ ​ 3.36 ​ ​ ​ 2.88 ​

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

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RATE/VOLUME ANALYSIS

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The following table presents the effects of rate and volume changes on the fully taxable equivalent net interest income. Tax exempt interest revenue is shown on a tax-equivalent basis for proper comparison. For each category of interest- earning assets and interest-bearing liabilities, information is provided with respect to changes attributable to (1) changes in rate (change in rate multiplied by prior year volume), (2) changes in volume (change in volume multiplied by prior year rate), and (3) changes in volume/rate (change in rate multiplied by change in volume) have been allocated proportionately based on the absolute value of the change due to the rate and the change due to volume.

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​ ​ Increases (Decreases) due to ​ Increases (Decreases) due to

(in thousands) Rate Volume Net Rate Volume Net

Interest income: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Loans: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

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Interest expense: ​ ​ ​ ​ ​ ​

Deposits: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

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NON-GAAP FINANCIAL MEASURES

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Our accounting and reporting policies conform to accounting principles generally accepted in the United States of America ("GAAP") and the prevailing practices in the financial services industry. However, we also evaluate our performance by reference to certain additional financial measures discussed in this Annual Report that we identify as being “non-GAAP financial measures.” In accordance with SEC rules, we classify a financial measure as being a non-GAAP financial measure if that financial measure excludes or includes amounts, or is subject to adjustments that have the effect of excluding or including amounts, that are included or excluded, as the case may be, in the most directly comparable measure calculated and presented in accordance with GAAP as in effect from time to time in the United States in our statements of income, balance sheets or statements of cash flows. Non-GAAP financial measures do not include operating and other statistical measures or ratios or statistical measures calculated using exclusively either financial measures calculated in accordance with GAAP, operating measures or other measures that are not non-GAAP financial measures or both.

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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. Because non-GAAP financial measures presented in this Annual Report are not measurements determined in accordance with GAAP and are susceptible to varying calculations, these non-GAAP financial measures, as presented, may not be comparable to other similarly titled measures presented by other companies. A reconciliation of non-GAAP financial measures to GAAP measures is provided herein. In all cases, it should be understood that non-GAAP measures do not depict amounts that accrue directly to the benefit of shareholders. An item which management excludes when computing non-GAAP financial measures can be of substantial importance to the Company’s results for any particular quarter or year. Each non-GAAP measure used by the Company in this Annual Report as supplemental financial data should be considered in conjunction with the Company's GAAP financial information. The Company utilizes these non-GAAP financial measures for purposes of measuring our performance against our peer group and other financial institutions and analyzing our internal performance. We also believe these non-GAAP financial measures help investors better understand the Company’s operating performance and trends and allow for better performance comparisons to other banks. In addition, these non-GAAP financial measures remove the impact of unusual items that may obscure trends in the Company’s underlying performance.

The non-GAAP financial measures that we discuss in this Annual Report should not be considered in isolation or as a substitute for the most directly comparable or other financial measures calculated in accordance with GAAP. Moreover, the manner in which we calculate the non-GAAP financial measures that we discuss in this Annual Report may differ from that of other companies reporting measures with similar names. You should understand how such other banking organizations calculate their financial measures similar or with names similar to the non-GAAP financial measures we have discussed in this Annual Report when comparing such non-GAAP financial measures. The following reconciliation table provides a more detailed analysis of these, and reconciliation for, each of non-GAAP financial measures.

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RECONCILIATION OF NON-GAAP FINANCIAL MEASURES

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

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​ ​ ​ ​ Year Ended December 31,

Non-recurring items: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Gain on sale of securities, net ​ (34) ​ (53) ​ (2,870)

Gain on sale of premises and equipment, net ​ 182 ​ 10 ​ 378

Loss on debt extinguishment ​ ​ ​ ​ — ​ ​ — ​ ​ 2,851

Acquisition, conversion and other expenses ​ 283 ​ 266 ​ 1,667

Total non-recurring items ​ ​ ​ ​ 327 ​ ​ 172 ​ ​ 1,547

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Gain on sale of securities, net ​ (34) ​ (53) ​ (2,870)

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Non-recurring expenses: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Gain on sale of premises and equipment, net ​ (182) ​ (10) ​ (378)

Loss on debt extinguishment ​ ​ ​ ​ — ​ ​ — ​ ​ (2,851)

Acquisition, conversion and other expenses ​ (283) ​ (266) ​ (1,667)

Total non-recurring expenses ​ ​ ​ ​ (465) ​ ​ (276) ​ ​ (4,896)

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(in millions) ​ ​ ​

Average paycheck protection program (PPP) loans ​ (R) ​ ​ — ​ ​ 1 ​ ​ 51

Average earning assets, excluding PPP loans ​ (S) ​ ​ 3,623 ​ ​ 3,424 ​ ​ 3,103

Average shareholders' equity (G) ​ 412 ​ 399 ​ 414

Average tangible shareholders' equity(2)(3) (H) ​ 288 ​ 273 ​ 288

Tangible shareholders' equity, period-end(2)(3) (I) ​ 308 ​ 268 ​ 298

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​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

​ ​ ​ ​ Year Ended December 31, ​

(in thousands) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

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Adjusted earnings per share, diluted(2) (A/L) ​ $ 2.95 ​ $ 2.89 ​ $ 2.72 ​

Tangible book value per share, period-end(2) (I/K) ​ ​ 20.28 ​ 17.78 ​ 19.86 ​

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Performance ratios(5) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Return on assets ​ ​ ​ 1.14 % ​ 1.16 % ​ 1.06 %

Core return on assets(2) ​ (A/F) ​ ​ 1.15 ​ ​ 1.17 ​ ​ 1.10 ​

Pre-tax, pre-provision return on assets ​ ​ ​ ​ 1.53 ​ ​ 1.54 ​ ​ 1.27 ​

Core return on equity(2) ​ (A/G) ​ ​ 10.96 ​ ​ 10.96 ​ ​ 9.87 ​

Return on tangible equity ​ ​ ​ ​ 15.84 ​ ​ 16.20 ​ ​ 13.92 ​

Net interest margin ​ (B+P)/E ​ ​ 3.29 ​ ​ 3.36 ​ ​ 2.88 ​

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Supplementary data (in thousands) ​ ​ ​ ​ ​ ​ ​ ​

Franchise taxes included in non-interest expense ​ (O) ​ ​ 638 ​ ​ 583 ​ ​ 528 ​

Intangible amortization ​ (Q) ​ ​ 932 ​ ​ 932 ​ ​ 940 ​

Interest and fees on PPP loans ​ (T) ​ ​ — ​ ​ 223 ​ ​ 6,039 ​

2022 assumes a marginal tax rate of 23.53% for the fourth quarter and 23.41% for the first three quarters. 2021 assumes a marginal tax rate of 23.41% for the fourth quarter and 23.71% for the first three quarters.

(2) Non-GAAP financial measure.

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COMPARISON OF FINANCIAL CONDITION AT DECEMBER 31, 2023 AND 2022

Cash and cash equivalents

Total cash and cash equivalents at December 31, 2023 were $94.8 million, compared to $92.3 million at December 31, 2022. Interest-earning cash held with other banks totaled $52.6 million at year-end 2023 compared to $52.4 million at year-end 2022 carrying a yield of 5.33% in 2023 versus 1.07% in 2022.

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Securities

Securities totaled $547.4 million at year-end 2023 and $574.4 million at year-end 2022. During 2023, security purchases totaled $7.5 million and were offset $44.6 million of maturities, calls and pay-downs of amortizing securities. There were $18.4 million of purchases and $20.5 million in sales of FHLB stock during the year. Fair value adjustments decreased the security portfolio by $62.4 million in 2023 compared to a $71.8 million unrealized gain in 2022. Unrealized gains shifted to loss position in 2022 due to changes in the long-term treasury yield curve. The weighted average yield of the securities portfolio was 3.85% as of December 31, 2023 compared to 2.99% at year-end 2022. At the end of 2023, our securities portfolio had an average life of 8.7 years with an effective duration of 4.8 compared to an average life of 9.4 years with an effective duration of 5.0 years at the end of 2022. The extension of duration during 2022 was driven by the increase in rates. All securities remain classified as available for sale to provide flexibility in loan funding and management of our cost of funds.

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Loans

Loans increased by $96.4 million from year-end 2022 or 3%. The controlled growth was a function of the tight credit markets and the rising interest rate environment in 2023 that limited commercial loan refinancing activity. Total commercial loans were $2.0 billion, growing 6% in 2023 and 19% in 2022 which was driven mostly from new relationships primarily to commercial borrowers. Total residential loans decreased 2% or $14.6 million from year-end 2022, due to lower demand for prevailing mortgage rates and strategy to sell production to the secondary market. Home Equity lines decreased 4% or $3.2 million from year-end 2022 due to the run-off of balances associated with the repricing of home equity lines of credit.

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Allowance for Credit Losses

The ACL was $28.1 million at the end of 2023 compared to $25.9 million at year-end 2022. The increase was primarily due to more refined economic forecasting, especially in the national unemployment figuresand in commercial real estate prices, and loan portfolio growth. Non-accruing loans decreased $1 million to $5.5 million, or 0.18% of total loans at the end of 2023 from $6.5 million or 0.23% of total loans at year-end 2022. The ratio of accruing past due loans to total loans increased to 0.12% of total loans from 0.09%. Total delinquent and non-accruing loans as percentage of total loans improved to 0.30% from 0.32%. Net charge-offs increased to $626 thousand in 2023 compared to a net recovery of $238 thousand in 2022 primarily driven by the resolution of one non-accruing C&I loan.

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Other Assets

Total other assets decreased $10.6 million to $356 million at December 31, 2023 from $366 million as of December 31, 2022. The decrease is primarily attributed to a $5.1 million decrease in the asset position customer loan swaps and $2.2 million decrease in interest rate swaps on wholesale funding. Other intangible assets decreased $932 thousand from 2022 driven by amortization. Deferred tax assets, net, decreased $1.5 million as of December 31, 2023 compared to 2022 driven by the unrealized loss position in the securities available for sale portfolio. Cash surrender value of Bank Owned Life insurance decreased $1.2 million due to settlement of one-time death benefits that occurred in the first quarter of 2023.

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Deposits and Borrowings

Total deposits increased $97.8 million to $3.1 billion at the end of 2023 compared to $3.0 billion at the end of 2022. Non-maturity deposits decreased $279.1 million in 2023, or 10% due to consumer’s migration to brokerage accounts and higher yielding Time deposits. 4,638 non-maturity deposit accounts with new customers were opened in 2023. Time deposits increased $376.8 million to $700.3 million at year-end 2023 versus $323.4 million in 2022. Brokered deposits increased $204.5 million. Retail time deposits increased $172.4 million as customers moved funds from non-maturity deposits into higher yielding alternatives. Our deposit composition at year-end 2023 and 2022 was 47% commercial customers and 53% consumer customers. Total borrowings decreased $62.7 million to $271 million at December 31, 2023 compared to $334 million as of December 31, 2022 primarily due to excess cash available generated from operations.

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Derivative Financial Instruments and Other Liabilities

Other liabilities totaled $66.2 million at the end of 2023 compared to $78.7 million as of December 31, 2022. The $12.5 million decrease primarily reflects a $10.0 million decrease in capital commitments on limited partnership investments, a $5.2 million net decrease in customer loan swaps, and a $1.5 million variable rate loan hedge decrease offset by $3.5 million increase in brokered CD and a $581 thousand increase in CD interest payable. The net fair value of all derivatives was an asset of $3.2 million at the end of 2023 compared to a $4.8 million asset at year-end 2022. The decrease in net derivative fair values reflects the slowing of rising long-term interest rates. The reserve for unfunded commitments remained flat at the end of 2023 at $3.9 million, which are also recorded in other liabilities.

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Equity

Total equity was $432.1 million at year-end 2023, compared with $393.5 million at year-end 2022. Book value per share was $28.48 as of December 31, 2023 compared with $26.09 at December 31, 2022. Equity included securities adjustments, net of tax, totaling a $47.6 million loss at the end of 2023 compared to a $55.3 million loss at year-end 2022.

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During 2023 and 2022, the Company declared and distributed regular cash dividends on its common stock in the aggregate amounts of $16.6 million compared to $15.3 million, respectively. The Company’s 2023 dividend payout ratio amounted to 37%, compared with 35% in 2022. Total cash dividends paid in 2023 was $1.10 per share of common stock, compared with $1.02 per share of common stock in 2022.

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The Company and the Bank remained well-capitalized under regulatory guidelines at period end as further described in Note 12 – Shareholders’ Equity and Earnings Per Common Share on the Consolidated Financial Statements.

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COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED DECEMBER 31, 2023 AND 2022

Net Interest Income

Net interest income for 2023 was $117.7 million compared with $113.7 million in 2022. The net interest margin was 3.29% in 2023 compared to 3.35% in the prior year. Interest-earning cash balances, held mostly at the Federal Reserve Bank, reduced NIM by 2 basis points in the year and 5 basis points in 2022. The yield on earning assets totaled 4.85% compared to 3.73% in 2022. The yield on loans was 5.04% in 2023 and 3.98% in 2022. Costs of interest-bearing liabilities increased in 2023 to 1.99% from 0.49% in 2022 due to increased deposit rates. Interest expense on borrowings increased $12.8 million in 2023 compared to 2022 driven by a 79 basis point increase in the weighted average rate of borrowings to 3.24% from 2.45%, respectively, reflecting higher interest rates and increased average borrowings.

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Provision for Credit Losses

The provision for credit losses in both 2023 and 2022 was a $2.9 million expense. The expense in 2023 was primarily due to more refined economic forecasting, especially in the national unemployment figures and in commercial real estate prices, and loan portfolio growth. Overall credit quality remains strong and credit quality metrics improved with notable decreases in non-accruing loans.

Non-Interest Income

Non-interest income in 2023 was $35.8 million compared to $35.3 million in 2022. Trust management fees were $14.3 million in 2023 compared to $14.6 in 2022 due to lower market valuation of assets under management (“AUM”) throughout the year. AUM was $2.5 billion compared to $2.3 billion in 2022, the increase of $143 million primarily due to higher security valuations in the fourth quarter 2023. Customer service fees increased 3% to $15.2 million in 2023 due to higher transaction volumes associated with 1,000 net new core accounts that opened during the year. BOLI income increased $699 thousand in 2023 compared to 2022 related to one-time death benefits during the first quarter of 2023.

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Non-Interest Expense

Non-interest expense was $93.5 million in 2023 compared to $91.3 million in 2022. Salaries and benefits expense increased $3.9 million to $52.5 million in 2023 due to a $2.0 million increase in revaluation of post-retirement plan liabilities driven by rate environment, $711 thousand increase in stock compensation expense due to the revaluation of our

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long term incentive obligations and a $782 thousand decrease in deferred loan origination costs driven by lower residential loan volume.

Income Tax Expense

Income tax expense was $12.3 million for the year ended December 31, 2023, compared with $11.3 million for the year ended December 31, 2022. The effective tax rate increased to 21.5% in 2023 from 20.6% in 2022 due to a higher proportion of revenue from non-exempt sources.

LIQUIDITY AND CASH FLOWS

Liquidity is measured by the ability to meet short-term cash needs at a reasonable cost or minimal loss. Favorable sources of liabilities are sought 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 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 liquidity position is actively managed through target ratios established under our liquidity and funding policy. Continual monitoring of these ratios, by using historical data and through forecasts under multiple rate and stress scenarios, allows the ability to employ strategies necessary to maintain adequate liquidity. The policy is to maintain a liquidity position of at least 8% of total assets. A portion of the deposit base has been historically seasonal in nature, with balances typically declining in the winter months through late spring, during which period the liquidity position tightens.

A liquidity contingency plan is 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. Management believes that 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 liquidity position.

The existing cash and cash equivalents (including an interest-bearing deposit at the FRB Boston), securities available for sale and cash flows from operating activities will be sufficient to meet anticipated cash needs for at least the next 12 months. Future working capital needs will depend on many factors, including the rate of business and revenue growth. To the extent cash and cash equivalents, securities available for sale and cash flows from operating activities are insufficient to fund future activities, the need to raise additional funds through debt arrangements or public or private debt or equity financings may be utilized. The need to raise additional funds may be needed in the event it is determined in the future to effect one or more acquisitions of banks or businesses. If additional funding is required, we may not be able to obtain debt arrangements or to effect an equity or debt financing on terms acceptable or at all.

Capital Resources

Consistent with our long-term goal of operating a sound and profitable organization, at December 31, 2023, we continue to be a “well-capitalized” financial institution according to applicable regulatory standards. Management believes this to be vital in promoting depositor and investor confidence and providing a solid foundation for future growth.

At December 31, 2023, available same-day liquidity totaled approximately $1.2 billion, including cash, borrowing capacity at FHLB and the Federal Reserve Discount Window and various lines of credit. Additional sources of liquidity include cash flows from operations, wholesale deposits, cash flow from the Company's amortizing securities and loan portfolios. We have unused borrowing capacity at the FHLB of $381.4 million, unused borrowing capacity at the Federal Reserve of $126.6 million and unused lines of credit totaling $51.0 million, in addition to over $200 million in unencumbered, liquid investment portfolio assets.

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Purchase Obligations

In the normal course of conducting our banking and financial services business, and in connection with providing products and services to our customers, a variety of traditional third-party contracts for support services have been entered into. Examples of such contractual agreements include, but are not limited to: services providing core banking systems, ATM and debit card processing, trust services software, accounting software and the leasing of T-1 telecommunication lines and

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other technology infrastructure supporting our network. These types of purchase obligations that will come due during 2024 approximates $9.5 million as of December 31, 2023 which is expected to be funded by cash flows generated from our operations.

Impact of Inflation and Changing Prices

A banking organization’s assets and liabilities are primarily monetary. Changes in the rate of inflation do not have as great an impact on the financial condition of a bank as do changes in interest rates. Moreover, interest rates do not necessarily change at the same percentage as inflation. Accordingly, changes in inflation are not expected to have a material impact on the Company.

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The FOMC often applies contractionary monetary policies during times of high inflation, resulting in elevated interest rates. Elevated interest rates may lower the market value of existing balance sheet assets and often result in a significant unrealized loss position. These lower market values may negatively affect the Bank’s liquidity position as it results in a lower value of the Bank’s liquid assets.

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IMPACT OF NEW ACCOUNTING PRONOUNCEMENTS

Please refer to the notes on Recently Adopted Accounting Principles and Future Application of Accounting Pronouncements in Note 1 – Summary of Significant Accounting Policies of the Consolidated Financial Statements.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Note 1 – Summary of Significant Accounting Policies to our audited Consolidated Financial Statements for the year ended December 31, 2023 contains a summary of significant accounting policies. Various elements of these accounting policies, by their nature, are subject to estimation techniques, valuation assumptions and other subjective assessments. Certain assets are carried in the consolidated statements of financial condition at estimated fair value or the lower of cost or estimated fair value. Policies with respect to the methodology used to determine the allowance for credit losses is a critical accounting policy and estimate because of its importance to the presentation of our financial condition and results of operations. The critical accounting policy involves a higher degree of complexity and requires management to make difficult and subjective judgments which often require assumptions or estimates about highly uncertain matters. The use of different judgments, assumptions, and estimates could result in material differences in the results of operations or financial condition.

Allowance for credit losses on loans (the “allowance”)

The allowance is sensitive to a number of internal factors, such as modifications in the mix and level of loan balances outstanding, portfolio performance and assigned risk ratings. The allowance is also sensitive to external factors such as the general health of the economy, as evidenced by changes in unemployment rates, home pricing index, gross domestic product, retail sales and changes in commercial real estate values. We consider these variables and all other available information when establishing the final level of the allowance. These variables and others have the ability to result in actual loan losses that differ from the originally estimated amounts.

Changes in the factors used by management to determine the appropriateness of the allowance or the availability of new information could cause the allowance to be increased or decreased in future periods. Additionally, changes in circumstances related to individually large credits, or certain macroeconomic forecast assumptions may result in volatility.

It is difficult to estimate how potential changes in any one economic factor might affect the overall allowance because a wide variety of factors and inputs are considered in the allowance estimate. Changes in the factors and inputs may not occur at the same rate and may not be consistent across all product types. Additionally, changes in factors and inputs may be directionally inconsistent, such that improvement in one factor may offset deterioration in others. However, to consider the impact of a hypothetical stressed forecast, we estimated the allowance using forecast inputs that were severely unfavorable to the expected scenario for each macroeconomic variable. This unfavorable scenario resulted in an allowance that is approximately $8.0 million higher than the allowance using the expected scenario.

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ITEM 7A. 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 our business activities.

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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.

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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 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 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.

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The 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 Board of Directors.

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The 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.

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Interest Rate Sensitivity Modeling:

An interest rate risk model widely recognized in the financial industry is used 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.

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

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The simulation models a parallel and pro rata shift in rates over a 12-month period. Using this approach, we are able to produce simulation results that illustrate the effect that both a gradual “rate ramp” and a “rate shock” have on earnings expectations. Our net interest income sensitivity analysis reflects changes to net interest income assuming no balance sheet growth and a parallel shift in interest rates. All rate changes were “ramped” over the first 12-month period and then maintained at those levels over the remainder of the simulation horizon. Changes in net interest income based upon these simulations are measured against the flat interest rate scenario.

​

As of December 31, 2023, interest rate sensitivity modeling results indicate that the balance sheet was asset sensitive over the one- and two-year horizons.

​

The following table presents the changes in sensitivities on net interest income for the years ended December 31, 2023 and 2022:

​

​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

(in thousands, except ratios) ​ $ Change ​ % Change ​ ​ $ Change ​ % Change

At December 31, 2022 ​ ​ ​ ​ ​ ​

​

Assuming short-term and long-term interest rates decline 100 to 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 while deteriorating further from that level over the two-year horizon.

​

Assuming the Bank’s balance sheet structure and size remain at current levels and the Federal Reserve increases short-term interest rates by 100 to 200 basis points with the balance of the yield curve shifting in parallel with these increases, management believes net interest income will improve over both the one and two-year horizons.

​

As compared to December 31, 2022, sensitivity to rate movements has decreased as the bank has incrementally shifted to a less asset sensitive position.

​

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

​

As market conditions vary from those assumed in the sensitivity analysis, actual results may also differ due to: prepayment and refinancing levels deviating from those assumed; the impact of interest rate changes, caps or floors on adjustable rate assets; the potential effect of changing debt service levels on customers with adjustable rate loans; depositor early withdrawals and product preference changes; and other such variables. The sensitivity analysis also does not reflect additional actions that the Bank’s senior executive team 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 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Shareholders and the Board of Directors of Bar Harbor Bankshares and Subsidiaries

​

​

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of Bar Harbor Bankshares and Subsidiaries (the Company) as of December 31, 2023 and 2022, the related consolidated statements of income, comprehensive income, changes in shareholders' equity and cash flows for each of the three years in the period ended December 31, 2023, and the related notes to the consolidated financial statements (collectively, the financial statements). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2023 and 2022, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2023, in conformity with accounting principles generally accepted in the United States of America.

​

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2023, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013, and our report dated March 11, 2024, expressed an unqualified opinion on the effectiveness of the Company's internal control over financial reporting.

​

Basis for Opinion

These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

​

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

​

Critical Audit Matter

The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

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Allowance for Credit Losses on Loans

As described in Notes 1 and 3 to the consolidated financial statements, the allowance for credit losses on loans is established through a provision for credit losses and represents an amount which, in management’s judgment, will be adequate to absorb losses on existing loans. The Company’s consolidated allowance for credit losses on loan balances was $28.1 million at December 31, 2023. The allowance for credit losses on loans is comprised of reserves measured on a collective (pool) basis based on a lifetime loss-rate model when similar risk characteristics exist. Loans that do not share risk characteristics are evaluated on an individual basis, generally larger non-accruing commercial loans and troubled debt restructurings.

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The Company uses the discounted cash flow method to estimate expected credit losses for all loan portfolio segments measured on a pool basis wherein payment expectations are adjusted for estimated prepayment speeds, probability of default (PD), and loss given default (LGD). The Company uses regression analysis of historical internal and peer data to determine suitable loss drivers to utilize when modeling lifetime PD. This analysis also determines how expected PD and LGD will react to forecasted levels of the loss drivers. Management utilizes various economic indicators such as changes in unemployment rates, gross domestic product (GDP), property values, housing starts and other relevant factors as loss drivers and has determined that, due to historical volatility in economic data, two quarters currently represents a reasonable and supportable forecast period, followed by a six-period reversion to historical mean levels for each of the various economic indicators. The allowance evaluation also considers various qualitative factors, such as: (i) changes to lending policies, underwriting standards and/or management personnel performing such functions, (ii) delinquency and other credit quality trends, (iii) credit risk concentrations, if any, (iv) changes to the nature of the Company’s business impacting the loan portfolio, (v) and other external factors, that may include, but are not limited to, results of internal loan reviews, stress testing, examinations by bank regulatory agencies, or other events such as a natural disaster. The development of the loan loss allocation for pools of loans with similar risk characteristics requires a significant amount of judgment by management and the assumptions utilized are subject to changing economic conditions.

​

We identified the Company’s allowance for credit losses on loans as a critical audit matter, specifically the economic forecasts and qualitative factors, because they involved complex auditor judgment in the evaluation of the Company’s assumptions. Additionally, complex auditor judgment was required to examine the methodology that underpins the allowance for credit losses on pools of loans with similar risk characteristics. This includes modeling of PD, LGD, economic forecasts, and qualitative factors.

​

Our audit procedures related to this critical audit matter included the following, among others:

​

•We obtained an understanding of the relevant controls related to the allowance for credit losses on loans and tested such controls for design and operating effectiveness, including those over model approval, validation and approval of key data inputs such as economic forecasts and qualitative factors.

​

•We tested the completeness and accuracy of data used by management in determining inputs to the PD and LGD, by agreeing those inputs to internal or external information sources.

​

•We evaluated management’s judgments used in the identification of peer banks for PD and LGD calculations, by comparing peer banks to those used in prior periods and to external information sources.

​

•We evaluated management’s forecasts of future economic indicators for reasonableness, which included unemployment, housing price index, and national GDP growth, among others, by comparing these forecasts to external and internal information sources.

​

•We evaluated management’s judgments and assumptions used in the development of the qualitative factors for reasonableness, and tested the reliability of the underlying data on which these factors are based, by comparing information to source documents and external information sources.

​

​

/s/ RSM US LLP

​

We have served as the Company's auditor since 2015.

​

Hartford, Connecticut

March 11, 2024

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BAR HARBOR BANKSHARES AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

​ ​ ​ ​ ​ ​ ​

(in thousands, except share data) December 31, 2023 December 31, 2022

Assets ​ ​

Cash and cash equivalents: ​ ​ ​ ​ ​ ​

Interest-earning deposits with other banks ​ 52,621 ​ 52,362

​ ​ ​ ​ ​ ​ ​

Securities: ​ ​ ​ ​ ​ ​

​ ​ ​ ​ ​ ​ ​

Loans held for sale ​ ​ 2,189 ​ ​ —

​ ​ ​ ​ ​ ​ ​

Less: Allowance for credit losses ​ (28,142) ​ (25,860)

​ ​ ​ ​ ​ ​ ​

Other real estate owned ​ — ​ —

Cash surrender value of bank-owned life insurance ​ 80,037 ​ 81,197

​ ​ ​ ​ ​ ​ ​

Liabilities ​ ​

Deposits: ​ ​

​ ​ ​ ​ ​ ​ ​

Borrowings: ​ ​

​ ​ ​ ​ ​ ​ ​

​

​ ​ ​ ​ ​ ​ ​

Shareholders’ equity ​ ​ ​ ​

Accumulated other comprehensive loss ​ (49,862) ​ (58,340)

​

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

​ ​ ​ ​ ​ ​ ​ ​ ​ ​

​ ​ ​ ​ ​ ​

​ ​ Years Ended December 31,

(in thousands, except earnings per share data) 2023 2022 2021

Interest and dividend income ​ ​ ​ ​ ​ ​ ​ ​ ​

Interest expense ​ ​ ​

​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Non-interest income ​ ​ ​

Gain on sales of securities, net ​ 34 ​ 53 ​ 2,870

​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Non-interest expense ​ ​ ​

Loss on sales of premises and equipment, net ​ 182 ​ 10 ​ 378

Amortization of intangible assets ​ 932 ​ 932 ​ 940

Loss on debt extinguishment ​ ​ — ​ ​ — ​ ​ 2,851

Acquisition, conversion and other expenses ​ 283 ​ 266 ​ 1,667

Provision for unfunded commitments ​ ​ (85) ​ 1,758 ​ ​ 177

​ ​ ​ ​ ​ ​ ​ ​ ​ ​

​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Earnings per share: ​ ​ ​

​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Weighted average common shares outstanding: ​ ​ ​

​

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 (LOSS) INCOME

​ ​ ​ ​ ​ ​ ​ ​ ​ ​

​ ​ ​ ​

​ ​ Years Ended December 31,

Other comprehensive income (loss), before tax: ​ ​ ​

Changes in unrealized gain (loss) on pension ​ 135 ​ (973) ​ 1,132

​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Income taxes related to other comprehensive income (loss): ​ ​ ​ ​

Changes in unrealized (gain) loss on hedging derivatives ​ (227) ​ 799 ​ (827)

Changes in unrealized (gain) loss on pension ​ (38) ​ 225 ​ (266)

Total other comprehensive income (loss) ​ 8,478 ​ (60,643) ​ (4,437)

​

​

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

​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

​ ​ ​ ​ ​ ​ ​ ​ Accumulated ​ ​ ​ ​

​ ​ Common ​ Additional ​ ​ ​ ​ other ​ ​ ​ ​ ​ ​

​ ​ stock ​ paid-in ​ Retained ​ comprehensive ​ Treasury ​ ​ ​

​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Other comprehensive (loss) ​ ​ — ​ — ​ — ​ (4,437) ​ — ​ ​ (4,437)

Impact of ASC 326 adoption ​ ​ — ​ ​ — ​ ​ (5,242) ​ ​ — ​ ​ — ​ ​ (5,242)

Recognition of stock based compensation ​ — ​ 2,149 ​ — ​ — ​ — ​ 2,149

​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Other comprehensive loss ​ — ​ — ​ — ​ (60,643) ​ — ​ (60,643)

Cash dividends declared ($1.02 per share) ​ — ​ — ​ (15,334) ​ — ​ — ​ (15,334)

Recognition of stock based compensation ​ — ​ 1,938 ​ — ​ — ​ — ​ 1,938

​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Other comprehensive income ​ ​ — ​ — ​ — ​ 8,478 ​ — ​ ​ 8,478

Recognition of stock based compensation ​ — ​ 2,650 ​ — ​ — ​ — ​ 2,650

​

​

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

​ ​ ​ ​ ​ ​ ​ ​ ​ ​

​ ​ Year Ended December 31,

Cash flows from operating activities: ​ ​ ​ ​

Net change in loans held for sale ​ ​ (2,189) ​ ​ 5,523 ​ ​ 18,579

Deferred tax (benefit) expense ​ ​ (686) ​ ​ (707) ​ ​ 427

Change in unamortized net loan costs and premiums ​ (145) ​ 170 ​ (1,354)

Accretion of purchase accounting entries, net ​ — ​ — ​ (2,274)

Amortization of other intangibles ​ 932 ​ 932 ​ 940

Gain on sales of securities, net ​ (34) ​ (53) ​ (2,870)

Amortization of right-of-use lease assets ​ ​ 1,204 ​ ​ 1,196 ​ ​ 1,064

Decrease in lease liabilities ​ ​ (1,179) ​ ​ (1,142) ​ ​ (984)

Gain on premises and equipment, net ​ 182 ​ 10 ​ 378

Net change in other assets and liabilities ​ (4,999) ​ (3,531) ​ (1,772)

​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Cash flows from investing activities: ​ ​ ​

Purchase of Federal Home Loan Bank stock ​ (18,370) ​ (11,016) ​ (2,565)

Proceeds from sale of Federal Home Loan Bank stock ​ 20,473 ​ 3,507 ​ 9,217

Purchase of premises and equipment, net ​ (6,533) ​ (2,518) ​ (1,716)

Proceeds from sale of premises and equipment ​ ​ 413 ​ ​ — ​ ​ —

Proceeds from premises held for sale ​ ​ — ​ ​ — ​ ​ 288

​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Cash flows from financing activities: ​ ​ ​

Net issuance to employee stock plans ​ ​ (805) ​ ​ (215) ​ ​ (615)

​ ​ ​ ​ ​ ​ ​ ​ ​ ​

​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Supplemental cash flow information: ​ ​ ​

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

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BAR HARBOR BANKSHARES AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of presentation: The consolidated financial statements (the “financial statements”) of Bar Harbor Bankshares and its subsidiaries (the “Company,” or “we”) 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. 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.

Consolidation: The accompanying consolidated financial statements have been prepared in accordance with U.S. GAAP. The consolidated financial statements include the accounts of Bar Harbor Bankshares and its wholly-owned subsidiaries, Bar Harbor Bank & Trust, Bar Harbor Wealth Management, and Cottage Street Corporation. In 2022, Charter Trust Company and Bar Harbor Trust Services merged to become Bar Harbor Wealth Management. All significant inter-company balances and transactions have been eliminated in consolidation. Assets held in a fiduciary capacity are not assets of the Company, but assets of customers, and therefore, are not included in the consolidated balance sheet.

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.

Use of estimates: In preparing financial statements in conformity with U.S. GAAP, management is required to make estimates and assumptions that affect the reported amount of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to change in the near term relate to the allowance for credit losses (“ACL”), off-balance sheet credit exposures, available for sale securities, the accounting for business combinations including subsequent impairment analyses for goodwill and other intangible assets, accounting for income taxes, post-retirement benefits, and asset impairment assessments.

SubsequentEvents:Eventsandtransactionssubsequent toDecember31,2023 are evaluatedforpotentialrecognitionordisclosureasrequiredbyGAAP.

Cash and Cash Equivalents: Cash and cash equivalents include cash on hand and amounts due from banks, interest-bearing deposits with other banks, federal funds sold, and other short-term investments with maturities less than 90 days.

Securities: All securities held at December 31, 2023 and 2022 were classified as available-for-sale (“AFS”). Available for sale securities primarily consist of mortgage-backed securities, obligations of state and political subdivisions thereof, and corporate bonds and are carried at estimated fair value. Changes in estimated fair value of AFS securities, net of applicable income taxes, are reported in accumulated other comprehensive income (loss) as a separate component of shareholders’ equity unless deemed to have a credit loss as discussed below.

Premiums and discounts on securities are amortized and accreted over the term or to first call of the securities using the level yield method. Municipal security premiums are accreted over full term straight-line and discounts are amortized over the call term on a straight light basis. Gains and losses on the sale of securities are recognized at the trade date using the specific-identification method and are shown separately in the Consolidated Statements of Income.

Allowance for Credit Loss on AFS Debt Securities: Credit quality of AFS debt securities is monitored through credit ratings from various rating agencies and substantial price changes. Credit ratings express opinions about the credit quality of a security and are utilized by us to make informed decisions. Securities are triggered for further review in the quarter if the security has significant fluctuations in ratings, drops below investment grade, or significant pricing changes. For securities without credit ratings, we utilize other financial information indicating the financial health of the underlying

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municipality, agency, or organization associated with the underlying security. If this assessment indicates that a credit loss exists, the present value of cash flows expected to be collected from the security are compared to the amortized cost basis of the security. If the present value of cash flows expected to be collected is less than the amortized cost basis, a credit loss exists and an allowance on AFS debt securities is recorded for the credit loss, limited by the amount that the fair value is less than the amortized cost basis. When assessing an AFS debt security for credit loss, securities with identical CUSIPs are pooled together to assess for impairment using the average cost basis. Any impairment that has not been recorded through an allowance is recognized in other comprehensive income.

A change in the allowance on AFS debt securities may be in full or a portion thereof, is recorded as expense (credit) within provision for credit losses on the consolidated statements of income. Losses are charged against the allowance when management believes an AFS debt security is uncollectible based on the above described analysis. As of December 31, 2023 and December 31, 2022, there were no allowances carried on AFS debt securities. Refer to Note 2 – Securities Available for Sale of the consolidated financial statements for further discussion.

Federal Home Loan Bank Stock: Federal Home Loan Bank (“FHLB”) stock is a non-marketable equity security and therefore is reported at cost, which generally equals par value. Shares held in excess of the minimum required by the FHLB are generally redeemable at par value. Dividends from FHLB stock are reported in interest and dividend income.

FHLB stock is periodically evaluated for impairment based on the capital adequacy of the FHLB and its overall financial condition. Based on the capital adequacy, liquidity position and sustained profitability of the FHLB, there was no impairment related to the carrying amount of FHLB stock as of December 31, 2023 and 2022.

Loans Held for Sale: Residential loans originated with the intent to be sold in the secondary market are accounted for at fair value. Fair value is primarily determined based on quoted prices for similar loans in active markets. Residential loans held for sale are generally sold with servicing rights retained. The carrying value of loans sold is reduced by the amount allocated to the servicing right. Gains and losses on sales of residential loans (sales proceeds minus carrying value) are recorded in non-interest income. The loan portfolio is consistently evaluated in conjunction with asset/liability management practices, and certain residential mortgage loans may be sold to manage interest rate exposure and for other business purposes, including generating fee income through mortgage sale gains.

Loans:Loans held for investment are reported at amortized cost. Amortized cost is the principal balance outstanding net of the unamortized balance of any deferred fees or costs and the unamortized balance of any premiums or discounts on loans purchased or acquired through mergers.

​

For originated loans, loan fees and certain direct origination costs are deferred and amortized into interest income over the contractual term of the loan using the level-yield method over the estimated lives of the related loans. When a loan is paid off, the unamortized portion of deferred fees or costs are recognized in interest income. Interest income on originated loans is accrued based upon the daily principal amount outstanding except for loans on non-accrual status.

​

For acquired loans, interest income is accrued based upon the daily principal amount outstanding and is then further adjusted by the accretion of any discount or amortization of any premium associated with the loan that was recognized based on the acquisition date fair value. When a loan is paid off, the unamortized portion of any premiums or discounts on loans are recognized in interest income.

Purchase Credit Deteriorated (PCD) Loans: Loans acquired in acquisitions include some loans that have experienced more than insignificant credit deterioration since origination. The initial ACL is determined on a collective basis and allocated to the individual loans. The sum of the loan’s purchase price and acl becomes its initial amortized cost. The difference between the initial amortized cost and the par value of the loan is a discount or premium, which is amortized into interest income over the life of the loan. Subsequent changes to the allowance for credit losses are recorded through provision expense.

Non-performing loans: Residential real estate and home equity loans are generally placed on non-accrual status when reaching 90 days past due, are in process of foreclosure, or sooner if considered appropriate by management. Consumer other loans are generally placed on non-accrual when reaching 90 days or more past due, or sooner if considered

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appropriate by management. Secured consumer other loans are written down to net realizable value and unsecured consumer loans are charged-off upon reaching 120 days past due. Commercial real estate loans and commercial and industrial loans that are 90 days or more past due are generally placed on non-accrual status, unless secured by sufficient cash or other assets immediately convertible to cash, and the loan is in the process of collection. Commercial real estate and commercial and industrial loans may be placed on non-accrual status prior to the 90 days delinquency date if considered appropriate by management.

When a loan has been placed on non-accrual status, previously accrued and uncollected interest is reversed against interest on the loan. The interest on non-accrual loans is accounted for using the cash-basis or cost-recovery method depending on corresponding credit risk, until qualifying for return to accrual status. A loan can be returned to accrual status when collectability of principal is reasonably assured and the loan has performed for a period of time, a minimum of six months.

Acquired loans that meet the criteria for non-accrual of interest prior to an acquisition are considered non-performing acquired loans that meet the criteria for non-accrual consistent with originated loans.

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

​

Loans are considered to have been modified when, due to a borrower’s financial difficulties, certain concessions are made to the borrower that would not otherwise consider. Modifications may include interest rate reductions, principal or interest forgiveness, forbearance, and other actions intended to minimize economic loss and to avoid foreclosure or repossession of collateral. Generally, a non-accrual loan that has been modified to borrowers experiencing financial difficulty will remain on non-accrual status for a period of at least 6 months to demonstrate that the borrower is able to meet the terms of the modified loan before being considered a candidate to return to accrual status.

However, performance prior to the modification, or significant events that coincide with the modification, are included in assessing whether the borrower can meet the new terms and may result in the loan being returned to accrual status at the time of loan modification or after a shorter performance period. If the borrower’s ability to meet the revised payment schedule is uncertain, the loan remains on non-accrual status.

Allowance for Credit Losses: The allowance for credit losses (the “allowance”) is a significant accounting estimate used in the preparation of the Company’s consolidated financial statements. The allowance is comprised of the allowance for credit losses on loans and the allowance for off-balance sheet credit exposures, which is accounted for as a separate liability in other liabilities on the balance sheet. The level of the allowance represents management’s estimate of expected credit losses over the expected life of the loans at the balance sheet date.

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

​

The discounted cash flow (“DCF”) method is used to estimate expected credit losses for all loan portfolio segments measured on a collective (pool) basis. For each loan segment, cash flow projections are generated at the instrument level wherein payment expectations are adjusted for estimated prepayment speeds, probability of default, and loss given default. The modeling of prepayment speeds is based on historical internal data.

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Regression analysis of historical internal and peer data is used to determine suitable loss drivers to utilize when modeling lifetime probability of default. This analysis also determines how expected probability of default and loss given default will react to forecasted levels of the loss drivers. For all loan pools utilizing the DCF method, management utilizes various economic indicators such as changes in unemployment rates, gross domestic product, real estate values, and other relevant factors as loss drivers. For all DCF models, management has determined that due to historic volatility in economic data, two quarters currently represents a reasonable and supportable forecast period, followed by a six-period reversion to historical mean levels for each of the various economic indicators.

​

The combination of adjustments for credit expectations (default and loss) and timing expectations (prepayment, curtailment, and time to recovery) produces an expected cash flow stream at the instrument level. Specific instrument effective yields are calculated, net of the impacts of prepayment assumptions, and the instrument expected cash flows are then discounted at that effective yield to produce an instrument-level Net Present Value (“NPV”). An allowance is established for the difference between the instrument’s NPV and amortized cost basis.

​

The allowance evaluation also considers various qualitative factors, such as: (i) changes to lending policies, underwriting standards and/or management personnel performing such functions, (ii) delinquency and other credit quality trends, (iii) credit risk concentrations, if any, (iv) changes to the nature of the Company's business impacting the loan portfolio, and (v) other external factors, that may include, but are not limited to, results of internal loan reviews, stress testing, examinations by bank regulatory agencies, or other events such as a natural disaster.

​

Arriving at an appropriate level of allowance involves a high degree of judgment. The determination of the adequacy of the allowance and provisioning for estimated losses is evaluated regularly based on review of loans, with particular emphasis on non-performing and other loans that management believes warrant special consideration. While management uses available information to recognize losses on loans, changing economic conditions and the economic prospects of the borrowers may necessitate future additions or reductions to the allowance.

Individually Evaluated Loans: Loans that do not share risk characteristics with existing pools are evaluated on an individual basis. For loans that are individually evaluated and collateral dependent, financial loans where management has determined that foreclosure of the collateral is probable, or where the borrower is experiencing financial difficulty and management expects repayment of the financial asset to be provided substantially through the sale of the collateral, the ACL is measured based on the difference between the fair value of the collateral and the amortized cost basis of the asset as of the measurement date. When repayment is expected to be from the operation of the collateral or going concern, the specific credit loss reserve is calculated as the amount by which the amortized cost basis of the financial asset exceeds the NPV from the operation of the collateral. When repayment is expected to be from the sale of the collateral, the specific credit loss reserve is calculated as the amount by which the amortized costs basis of the financial asset exceeds the fair value of the underlying collateral less estimated cost to sell. The allowance may be zero if the fair value of the collateral at the measurement date exceeds the amortized cost basis of the financial asset.

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Accrued Interest. Accrued interest receivable balances are presented within other assets on the consolidated balance sheet. Accrued interest is excluded from the measurement of the allowance for credit losses, including investments and loans. Generally, accrued interest is reversed when a loan is placed on non-accrual or is written-off. Current year accrued interest is reversed through interest income while accrued interest from prior years is written-off through the ACL. Historically, we have not experienced uncollectible accrued interest receivable on investment debt securities.

Allowance for off-balance sheet credit exposures: The exposure is a component of other liabilities in the consolidated balance sheet and represents the estimate for probable credit losses inherent in unfunded commitments to extend credit. Unfunded commitments to extend credit include unused portions of lines of credit and standby and commercial letters of credit. The process used to determine the allowance for these exposures is consistent with the process for determining the allowance for loans, as adjusted for estimated funding probabilities or loan equivalency factors. A charge (credit) to provision for credit losses on the consolidated statements of income is made to account for the change in the allowance on off-balance sheet exposures between reporting periods.

Premises and Equipment: Land is carried at cost. Premises and equipment and related improvements are stated at cost less accumulated depreciation. Depreciation is computed on the straight-line method over the lesser of the lease term or

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estimated useful lives of related assets; generally five to 39 years for premises and three to eight years for furniture and equipment. Software costs are stated at cost less accumulated depreciation within other assets on the consolidated balance sheet. Amortization expense on software is calculated using the straight-line method over the estimated useful lives of the related assets.

Transfers of Financial Assets: Transfers of an entire financial asset, group of entire financial assets, or a participating interest in an entire financial asset are accounted for as sales when control over the assets has been surrendered. Control over transferred assets is deemed to be surrendered when (1) the assets have been isolated from total Company assets, (2) the transferee obtains the right to pledge or exchange the transferred assets, and (3) effective control is not maintained over the transferred assets.

Other Real Estate Owned: Other real estate owned consists of properties acquired through foreclosure proceedings or acceptance of a deed-in-lieu of foreclosure. These properties are recorded at fair value less estimated costs to sell the property. Initially at transfer if the recorded investment in the loan exceeds the property’s fair value at the time of acquisition, a charge-off is recorded against the allowance. If the fair value of the property initially at transfer exceeds the carrying amount of the loan, the excess is recorded either as a recovery to the allowance if a charge-off had previously been recorded, or as a gain on initial transfer in other non-interest income. Subsequent decreases in the property’s fair value and operating expenses of the property are recognized through charges to other non-interest expense. The fair value of the property acquired and ongoing valuation is based on third-party appraisals, broker price opinions, recent sales activity, or a combination thereof, subject to management judgment. Due to changing market conditions the amount ultimately realized on the other real estate owned may differ from the amounts reflected in the financial statements.

Goodwill: Goodwill represents the excess of the purchase price over the fair value of the net assets acquired in a business combination. Goodwill is assessed annually for impairment, and more frequently if events or changes in circumstances indicate that there may be an impairment. Adverse changes in the economic environment, declining operations, unanticipated competition, loss of key personnel, or other factors could result in a decline in the implied fair value of goodwill. Subsequent reversals of goodwill impairment are prohibited.

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Other Intangibles: Intangible assets are acquired assets that lack physical substance but can be distinguished from goodwill because of contractual or other legal rights or the asset is capable of being sold or exchanged either on its own or in combination with a related contract, asset or liability.

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The fair values of these assets are generally determined based on appraisals and are subsequently amortized on a straight-line basis or an accelerated basis over their estimated lives. Management assesses the recoverability of these intangible assets at least annually or whenever events or changes in circumstances indicate that their carrying value may not be recoverable. If the carrying amount exceeds fair value, an impairment charge is recorded to income.

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Bank-Owned Life Insurance: Bank-owned life insurance (“BOLI”) represents life insurance on the lives of certain current and retired employees who had provided positive consent allowing the Bank to be the beneficiary of such policies. Increases in the cash value of the policies, as well as insurance proceeds received in excess of the cash value, are recorded in other non-interest income, and are not subject to income taxes.

Capitalized Servicing Rights: Capitalized servicing rights are recognized as assets when residential loans are sold and the rights to service those loans are retained.

Capitalized servicing rights are initially recorded at fair value. Fair values are established by using a discounted cash flow model to calculate the present value of estimated future net servicing income. Changes in the fair value of capitalized servicing rights are primarily due to changes in valuation inputs, assumptions, and the collection and realization of expected cash flows. However, these capitalized servicing rights are amortized in proportion to and over the period of estimated net servicing income, which includes prepayment assumptions. An impairment analysis is prepared on a quarterly basis by estimating the fair value of the capitalized servicing rights and comparing that value to the carrying amount. A valuation allowance is established when the carrying amount of these capitalized servicing rights exceeds fair value. The capitalized servicing rights are included in other assets on the consolidated balance sheet.

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Derivative Financial Instruments: Derivative instruments are recognized on the consolidated balance sheet at fair value. On the inception date, management designates whether the derivative is part of a hedging relationship (i.e., cash flow or fair value hedge). Management formally documents relationships between hedging instruments and hedged items, as well as its risk management objective and strategy for undertaking hedge transactions. Both at the hedge’s inception and on an ongoing basis, management assesses whether the derivatives used in hedging transactions are highly effective in offsetting the changes in cash flows or fair values of hedged items. The fair value of the derivative is reflected on the Consolidated Balance Sheet in either other assets or liabilities.

Changes in the fair value of derivative instruments that are highly effective and qualify as cash flow hedge are recorded in other comprehensive income (loss). Any ineffective portion is recorded in earnings. For fair value hedges that are highly effective, the gain or loss on the derivative and the loss or gain on the hedged item attributable to the hedged risk are both recognized in earnings, with the differences (if any) representing hedge ineffectiveness. Management discontinues hedge accounting when it is determined that the derivative is no longer highly effective in offsetting changes of the hedged risk on the hedged item, or determines that the designation of the derivative as a hedging instrument is no longer appropriate.

Net cash settlements on derivatives that qualify for hedge accounting are recorded in interest income or interest expense based on the item being hedged. Net cash settlements on derivatives that do not quality for hedge accounting are reporting in non-interest income. Cash flows on hedges are classified in the cash flow statement the same as cash flows of the items being hedged.

Commitments to fund mortgage loans with borrowers (interest rate locks) and forward commitments for the future delivery of these mortgage loans for sale on the secondary market are classified as free standing derivatives. These derivatives are designed to hedge against inherent interest rate and pricing risk associated with selling loans. The commitments to lend generally terminate once the loan is funded, the lock period expires or the borrower decides not to contract for the loan. The forward commitments generally terminate once the loan is sold or the commitment period expires. These commitments are considered derivatives which are accounted for by recognizing their estimated fair value on the Consolidated Balance Sheet in either other assets or other liabilities.

Senior and Subordinated Borrowings: Senior borrowings include retail and wholesale repurchase agreements, FHLB overnight, FHLB short-term and long-term advances, federal funds purchased, credit facilities, and line of credit advances. Subordinated borrowings consist of subordinated notes issued to investors. At times, posting of collateral is required for which it, cash, loans and/or investment securities are used.

Off-Balance Sheet Financial Instruments: Off-balance sheet financial instruments consist of commitments to extend credit, and unused or unfunded loan funds and letters of credit. These financial instruments are recorded in the consolidated financial statements when they are funded or related fees are incurred or received.

Stock Based Compensation: Equity award plans include stock options, restricted stock awards restricted stock units and performance stock units, which are described more fully in Note 13 – Stock Based Compensation Plans of the Consolidated Financial Statements. Stock based compensation expenses are recognized for stock options and restricted awards based on the fair value of these awards as of the grant date. For restricted stock units and performance stock units the expense is recognized over the vesting periods of the grants. Treasury shares are used for issuing shares upon option exercises, restricted stock awards, restricted stock unit vesting and performance stock unit vesting.

Employee Stock Purchase Plan: Compensation expense is recognized based on the difference between the market price and the discounted price of shares issued from participant enrollment over each six month enrollment period.

Post-retirement Plans: Non-qualified supplemental retirement benefit payments are provided or promised to certain ex-employees and retired officers based on contractual agreements. This plan is described more fully in Note 8 – Employee Benefit Plans of the Consolidated Financial Statements. The plan agreements provide payments in installments over a period of years upon reaching a certain age, retirement or death. Benefit obligations are recognized as the net present value of payments associated with the agreements over the service periods of the participants. Compensation expense is recognized from interest costs and the impact of changes in mortality rates on the benefit obligations.

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Pension Plan: The pension plan is an inherited, frozen, noncontributory, qualified, defined benefit plan for certain employees who met age and service requirements. This plan is described more fully in Note 8 – Employee Benefit Plans of the Consolidated Financial Statements. In order to measure the expense associated with the Plans, various assumptions are made including the discount rate, expected return on plan assets, anticipated mortality rates, and expected future healthcare costs. The assumptions are based on historical experience as well as current facts and circumstances. As of the measurement date (December 31, 2023), plan assets are determined based on fair value, generally representing observable market prices. The projected benefit obligation is primarily determined based on the present value of projected benefit distributions at an assumed discount rate.

Net periodic pension benefit costs include interest costs based on an assumed discount rate, the expected return on plan assets based on actuarially derived market-related values, and the amortization of net actuarial losses. Differences between expected and actual results in each year are included in the net actuarial gain or loss amount, which is recognized in other comprehensive income. The net actuarial gain or loss in excess of a 10% corridor is amortized in net periodic benefit cost over the average remaining service period of active participants in the Plans. The prior service credit is amortized over the average remaining service period to full eligibility for participating employees expected to receive benefits.

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At the end of each year the Plans’ assets and obligations are examined to determine its funded status as of the end of the fiscal year and recognizes those changes in other comprehensive income, net of tax. The plans over or under funded status is recognized in the consolidated balance sheet as an asset or liability, respectively.

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401(k) Plan: The employer sponsored 401(k) plan to which participants may make contributions in the form of salary deferrals also provides participants with matching contributions in accordance with the terms of the plan. Contributions due under the terms of the defined contribution plans are accrued through compensation expense as earned by employees.

Income Taxes: The asset and liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. If current available information indicates that it is more likely than not that deferred tax assets will not be realized, a valuation allowance is established. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.

Treasury Stock: Shares of the Company’s common stock that are repurchased are recorded in treasury stock at cost. On the date of subsequent re-issuance, the treasury stock account is reduced by the cost of such stock on an average cost basis.

Earnings Per Share: Basic earnings per share excludes dilution and is computed by dividing income available to common shareholders by the weighted average number of common shares outstanding for the period. Diluted earnings per share reflect the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in earnings, such as dilutive stock options.

Revenue Recognition: Non-interest revenue is recognized in accordance with ASC 606, "Revenue from Contracts with Customers." ASC 606 requires a five step process: (1) identify the contract(s) with a customer, (2) identify the performance obligations in the contract, (3) determine the transaction price, (4) allocate the transaction price to the performance obligations in the contract, and (5) recognize revenue when (or as) a performance obligation is satisfied. Revenue recognition under ASC 606 depicts the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for the goods or service. See Note 15 – Revenue from Contracts with Customers of the Company’s Consolidated Financial Statements for additional information on revenue recognition.

Wealth Management:Wealth management assets held in a fiduciary or agent capacity are not included in the accompanying Consolidated Balance Sheets because the ownership is held by customers. Trust and investment management fees are primarily comprised of fees earned from investment management, trust administration, tax return preparation, and financial planning. The performance obligation for revenue recognition is generally satisfied over time

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and the resulting in monthly fee income, based on the daily accrual of the market value of the investment accounts and the applicable fee rate.

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Marketing Costs: Marketing costs are expensed as incurred.

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Segment Reporting: An operating segment is defined as a component of a business for which separate financial information is available that is evaluated regularly by the chief operating decision-maker in deciding how to allocate resources and evaluate performance. Operations of the Company are solely within community banking industry and include traditional community banking services, including lending activities, acceptance of demand, savings and time deposits, business services, investment management, trust and third-party brokerage services. These products and services have similar distribution methods, types of customers and regulatory responsibilities. Accordingly, segment information is not presented in the Consolidated Financial Statements.

Recent Accounting Pronouncements

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

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Standard Description Required Date of Adoption Effect on financial statements

Standards Adopted in 2023 ​ ​ ​

Standards Not Yet Adopted ​ ​ ​

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