Lake Sunapee Bank Group - FORM 10-Q

Attached files

file	filename
EX-32.2 - EX-32.2 - Lake Sunapee Bank Group	d258377dex322.htm
EX-32.1 - EX-32.1 - Lake Sunapee Bank Group	d258377dex321.htm
EX-31.2 - EX-31.2 - Lake Sunapee Bank Group	d258377dex312.htm
EX-31.1 - EX-31.1 - Lake Sunapee Bank Group	d258377dex311.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

QUARTERLY REPORT UNDER SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended: September 30, 2016

Commission File Number: 000-17859

Lake Sunapee Bank Group

(Exact Name of Registrant as Specified in Its Charter)


State of Delaware		02-0430695
(State or Other Jurisdiction of Incorporation or Organization)		(IRS Employer I.D. Number)

9 Main Street, P.O. Box 9, Newport, New Hampshire		03773
(Address of Principal Executive Offices)		(Zip Code)

(603) 863-0886

(Registrant’s Telephone Number, Including Area Code)

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

Indicate by check mark whether the registrant has submitted electronically 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 ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):


Large accelerated filer	☐	Accelerated filer	☒
Non-accelerated filer	☐ (Do not check if a smaller reporting company)	Smaller reporting company	☐

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

The number of shares outstanding of the issuer’s common stock, $.01 par value per share, as of November 1, 2016 was 8,388,079.

LAKE SUNAPEE BANK GROUP

INDEX


		Page
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS			i

PART I. FINANCIAL INFORMATION

Item 1.	Financial Statements:

	Condensed Consolidated Balance Sheets - September 30, 2016 (unaudited) and December 31, 2015		1

	Condensed Consolidated Statements of Income (unaudited) - For the Three Months and Nine Months Ended September 30, 2016 and 2015		2

	Condensed Consolidated Statements of Comprehensive Income (unaudited) - For the Three Months and Nine Months Ended September 30, 2016 and 2015		3

	Condensed Consolidated Statements of Changes in Stockholders’ Equity (unaudited) For the Nine Months Ended September 30, 2016 and 2015		4

	Condensed Consolidated Statements of Cash Flows (unaudited) - For the Nine Months Ended September 30, 2016 and 2015		5

	Notes to Condensed Consolidated Financial Statements (unaudited)		6

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		31

Item 3.	Quantitative and Qualitative Disclosures About Market Risk		46

Item 4.	Controls and Procedures		47

PART II. OTHER INFORMATION

Item 1.	Legal Proceedings		47

Item 1A.	Risk Factors		47

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		48

Item 3.	Defaults Upon Senior Securities		48

Item 4.	Mine Safety Disclosures		48

Item 5.	Other Information		49

Item 6.	Exhibits		49

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

We may, from time to time, make written or oral “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, including statements contained in our filings with the Securities and Exchange Commission (the “SEC”), our reports to stockholders and in other communications by us. This Quarterly Report on Form 10-Q contains “forward-looking statements,” which may be identified by the use of such words as “believe,” “expect,” “anticipate,” “should,” “would,” “plan,” “estimate,” “potential” and other similar expressions. Examples of forward-looking statements include, but are not limited to, estimates with respect to our financial condition, results of operations and business that are subject to various factors which could cause actual results to differ materially from these estimates. These factors include, but are not limited to:

•

local, regional, national and international economic conditions and the impact they may have on us and our customers and our assessment of that impact;

•

continued volatility and disruption in national and international financial markets;

•

changes in the level of non-performing assets and charge-offs;

•

changes in estimates of future reserve requirements based upon the periodic review thereof under relevant regulatory and accounting requirements;

•

adverse conditions in the securities markets that lead to impairment in the value of securities in our investment portfolio;

•

inflation, interest rate, securities market and monetary fluctuations;

•

the timely development and acceptance of new products and services and perceived overall value of these products and services by users;

•

changes in consumer spending, borrowings and savings habits;

•

technological changes;

•

the ability to increase market share and control expenses;

•

changes in the competitive environment among banks, financial holding companies and other financial service providers;

•

the effect of changes in laws and regulations (including laws and regulations concerning taxes, banking, securities and insurance) with which we must comply;

•

the effect of changes in accounting policies and practices, as may be adopted by the regulatory agencies, as well as the Public Company Accounting Oversight Board, the Financial Accounting Standards Board (“FASB”) and other accounting standard setters;

•

the costs and effects of legal and regulatory developments including the resolution of legal proceedings or regulatory or other governmental inquiries and the results of regulatory examinations or reviews;

•

difficulties related to the integration of any businesses we have or may acquire; and

•

other factors detailed from time to time in our SEC filings.

Forward-looking statements speak only as of the date on which such statements are made. We undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date on which such statement is made, or to reflect the occurrence of unanticipated events.

Throughout this report, the terms “Company,” “we,” “our” and “us” refer to the consolidated entity of Lake Sunapee Bank Group, its wholly owned subsidiary, Lake Sunapee Bank, fsb (the “Bank”), and the Bank’s subsidiaries, McCrillis & Eldredge Insurance, Inc., Lake Sunapee Group, Inc., Lake Sunapee Financial Services Corporation and Charter Holding Corp., which wholly owns Charter Trust Company.

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

LAKE SUNAPEE BANK GROUP AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS


	September 30,			December 31,
(Dollars in thousands, except per share data)	2016			2015
	(Unaudited)
ASSETS
Cash and due from banks	$	18,765		$	16,426
Interest-bearing deposit with the Federal Reserve Bank		17,320			26,140

Cash and cash equivalents		36,085			42,566
Securities available-for-sale		155,077			120,198
Federal Home Loan Bank stock		12,550			9,963
Loans held-for-sale		3,624			2,188
Loans receivable, net of allowance for loan losses of $9.0 million as of September 30, 2016 and $8.9 million as of December 31, 2015		1,236,733			1,217,461
Accrued interest receivable		2,537			2,431
Bank premises and equipment, net		24,255			24,421
Investments in real estate		3,294			3,392
Other real estate owned		321			904
Goodwill		44,576			44,576
Other intangible assets		6,804			7,822
Bank-owned life insurance		31,523			30,833
Due from broker		14,056			—
Other assets		12,647			11,019

Total assets	$	1,584,082		$	1,517,774

LIABILITIES AND STOCKHOLDERS’ EQUITY
LIABILITIES
Deposits:
Noninterest-bearing	$	137,067		$	127,428
Interest-bearing		1,004,643			1,029,924

Total deposits		1,141,710			1,157,352
Federal Home Loan Bank advances		202,174			150,000
Securities sold under agreements to repurchase		21,522			17,957
Subordinated debentures		36,928			36,873
Due to broker		15,234			—
Accrued expenses and other liabilities		24,125			18,884

Total liabilities		1,441,693			1,381,066

STOCKHOLDERS’ EQUITY
Common stock, $.01 par value per share: 30,000,000 shares authorized, 8,823,826 shares issued and 8,388,079 shares outstanding as of September 30, 2016, and 30,000,000 shares authorized, 8,811,170 shares issued and 8,376,841 shares outstanding as of December 31, 2015		88			88
Paid-in capital		80,438			80,252
Retained earnings		71,967			68,344
Unearned restricted stock awards		(1,025	)		(1,375	)
Accumulated other comprehensive loss		(2,304	)		(3,850	)
Treasury stock, 435,747 shares as of September 30, 2016 and 434,329 shares as of December 31, 2015, at cost		(6,775	)		(6,751	)

Total stockholders’ equity		142,389			136,708

Total liabilities and stockholders’ equity	$	1,584,082		$	1,517,774

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

LAKE SUNAPEE BANK GROUP AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)


	Three months ended						Nine months ended
	September 30,			September 30,			September 30,			September 30,
(In thousands, except share and per share data)	2016			2015			2016			2015
Interest and dividend income
Interest and fees on loans	$	11,755		$	11,599		$	35,153		$	34,670
Interest on debt securities:
Taxable		618			291			2,077			862
Tax-exempt		154			82			373			253
Dividends		122			89			311			184
Other		34			21			79			52

Total interest and dividend income		12,683			12,082			37,993			36,021

Interest expense
Interest on deposits		909			941			2,758			2,999
Interest on advances and other borrowed money		460			212			1,416			737
Interest on debentures		488			468			1,449			1,394
Interest on securities sold under agreements to repurchase		27			18			78			50

Total interest expense		1,884			1,639			5,701			5,180

Net interest and dividend income		10,799			10,443			32,292			30,841
Provision for loan losses		310			21			542			440

Net interest and dividend income after provision for loan losses		10,489			10,422			31,750			30,401

Noninterest income
Customer service fees		1,430			1,496			4,299			4,325
Gain on sales and calls of securities, net		342			—			1,543			373
Mortgage banking activities		567			196			915			1,008
Net loss on sales and writedowns of other real estate and property owned		(14	)		(66	)		(55	)		(69	)
Net loss on sales and disposals of premises and equipment		—			(6	)		—			(3	)
Rental income		185			176			522			513
Trust and investment management fee income		2,110			2,093			6,276			6,339
Insurance and brokerage service income		340			344			1,247			1,163
Bank-owned life insurance income		215			152			652			450
Other income		1			1			95			89

Total noninterest income		5,176			4,386			15,494			14,188

Noninterest expense
Salaries and employee benefits		6,350			6,123			18,686			18,133
Occupancy and equipment		1,432			1,485			4,400			4,700
Advertising and promotion		183			297			624			737
Depositors’ insurance		250			223			720			697
Outside services		648			702			1,976			1,885
Professional services		315			355			918			1,014
ATM processing fees		266			203			685			622
Supplies		160			149			457			422
Telephone		247			273			790			813
Merger related		510			—			1,264			—
Amortization of intangible assets		331			376			1,018			1,152
Other expenses		1,481			1,570			5,217			4,494

Total noninterest expense		12,173			11,756			36,755			34,669

Income before provision for income taxes		3,492			3,052			10,489			9,920
Provision for income taxes		1,185			905			3,345			3,052

Net income	$	2,307		$	2,147		$	7,144		$	6,868

Net income applicable to common stock	$	2,289		$	2,101		$	7,073		$	6,756

Earnings per common share, basic	$	0.28		$	0.25		$	0.85		$	0.82

Weighted average number of shares, basic		8,317,518			8,254,688			8,300,832			8,234,789
Earnings per common share, assuming dilution	$	0.28		$	0.25		$	0.85		$	0.82

Weighted average number of shares, assuming dilution		8,320,823			8,265,187			8,303,310			8,242,303
Dividends declared per common share	$	0.14		$	0.14		$	0.42		$	0.40

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

LAKE SUNAPEE BANK GROUP AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)


(Dollars in thousands)	Three months ended September 30,					Nine months ended September 30,
	2016			2015		2016		2015
Net income	$	2,307		$	2,147	$	7,144	$	6,868
Net change in unrealized (gain) loss on available-for-sale securities, net of tax effect		(175	)		263		1,546		195

Comprehensive income	$	2,132		$	2,410	$	8,690	$	7,063

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

LAKE SUNAPEE BANK GROUP AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(Unaudited)


	Preferred Stock				Common Stock					Paid-in			Retained			Unearned Restricted Stock			Accumulated Other Comprehensive			Treasury
(Dollars in thousands, except share data)	Shares		Amount		Shares			Amount		Capital			Earnings			Awards			Loss			Stock			Total
Balance at December 31, 2014		8,000	$	—		8,692,360		$	87	$	86,561		$	63,876		$	(598	)	$	(3,339	)	$	(6,751	)	$	139,836
Net income														6,868												6,868
Other comprehensive income																				195						195
Exercise of stock options (cashless exchanges shown net)						25,514					336															336
Dividend reinvestment plan						10,904					159															159
Dividends declared—preferred stock														(60	)											(60	)
Dividends paid—common stock ($0.40 per share)														(3,318	)											(3,318	)
Issuance of restricted stock awards						64,250			1		979						(980	)								—
Vesting of restricted stock awards																	157									157
Forfeiture of restricted stock awards						(2,500	)				(38	)					38									—

Balance at September 30, 2015		8,000	$	—		8,790,528		$	88	$	87,997		$	67,366		$	(1,383	)	$	(3,144	)	$	(6,751	)	$	144,173


Balance at December 31, 2015		—	$	—		8,811,170		$	88	$	80,252		$	68,344		$	(1,375	)	$	(3,850	)	$	(6,751	)	$	136,708
Net income														7,144												7,144
Other comprehensive income																				1,546						1,546
Dividend reinvestment plan						13,056					192															192
Dividends paid—common stock ($0.42 per share)														(3,521	)											(3,521	)
Restricted stock awards surrendered to treasury stock																							(24	)		(24	)
Vesting of restricted stock awards																	344									344
Forfeiture of restricted stock awards						(400	)				(6	)					6									—

Balance at September 30, 2016		—	$	—		8,823,826		$	88	$	80,438		$	71,967		$	(1,025	)	$	(2,304	)	$	(6,775	)	$	142,389

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

LAKE SUNAPEE BANK GROUP AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)


	For the nine months ended
	September 30,			September 30,
(Dollars in thousands)	2016			2015
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	7,144		$	6,868
Depreciation and amortization		1,938			1,877
Amortization of fair value adjustments, net		144			222
Amortization of deferred expenses related to issuance of capital securities and subordinated debt		55			55
Amortization of securities, net		421			215
Net decrease (increase) in mortgage servicing rights		198			(131	)
Loans originated for sale		(68,500	)		(73,051	)
Proceeds from loans sold		67,694			74,253
Increase in cash surrender value of life insurance		(690	)		(477	)
Amortization of intangible assets		1,018			1,152
Provision for loan losses		542			440
Increase in accrued interest receivable and other assets		(1,881	)		(1,302	)
Net loss on sales and disposals of premises, equipment, investment in real estate, other real estate owned and other assets		6			2
Write-down of other real estate owned		55			69
Net gain on sales and calls of securities		(1,543	)		(373	)
Net gain on sales of loans		(630	)		(584	)
Change in deferred loan origination fees and cost, net		(209	)		(111	)
Increase in accrued expenses and other liabilities		4,572			6,671

Net cash provided by operating activities		10,334			15,795

CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures – investments in real estate		(13	)		(4	)
Capital expenditures – software		(202	)		(88	)
Capital expenditures – premises and equipment		(1,516	)		(2,029	)
Maturities of interest-bearing time deposits with other banks		—			747
Proceeds from sales and calls of securities available-for-sale		67,026			41,088
Proceeds from maturities of securities available-for-sale		44,630			204,064
Purchases of securities available-for-sale		(141,676	)		(251,651	)
Redemption of Federal Home Loan Bank stock		1,163			—
Purchase of Federal Home Loan Bank stock		(3,750	)		—
Loan originations and principal collections, net		(20,197	)		8,726
Recoveries of loans previously charged off		413			771
Proceeds from sales of premises, equipment, investment in real estate, other real estate owned and other assets		528			169

Net cash (used in) provided by investing activities		(53,594	)		1,793

CASH FLOWS FROM FINANCING ACTIVITIES:
Net (decrease) increase in demand deposits, savings and NOW accounts		(4,051	)		22,437
Net decrease in time deposits		(11,556	)		(38,179	)
Net increase in securities sold under agreements to repurchase		3,565			2,817
Net increase (decrease) in short-term advances from Federal Home Loan Bank		16,000			(31,000	)
Principal advances from Federal Home Loan Bank		51,180			30,000
Repayment of advances from the Federal Home Loan Bank		(15,006	)		(10,000	)
Issuance of common stock from dividend reinvestment plan		55			45
Dividends paid on preferred stock		—			(60	)
Dividends paid on common stock		(3,384	)		(3,204	)
Surrender of stock awards to treasury		(24	)		—
Proceeds from exercise of stock options		—			336

Net cash provided by (used in) financing activities		36,779			(26,808	)

NET DECREASE IN CASH AND CASH EQUIVALENTS		(6,481	)		(9,220	)
CASH AND CASH EQUIVALENTS, beginning of period		42,566			51,120

CASH AND CASH EQUIVALENTS, end of period	$	36,085		$	41,900

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Interest paid	$	5,690		$	5,281

Income taxes paid	$	3,238		$	1,386

Loans transferred to other real estate owned	$	—		$	607

Due from broker	$	14,056		$	—

Due to broker	$	15,234		$	—

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

LAKE SUNAPEE BANK GROUP AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2016

(Unaudited)

Nature of Operations

Lake Sunapee Bank Group (the “Company”), a Delaware company organized on July 5, 1989, is the parent company of Lake Sunapee Bank, fsb (the “Bank”), a federally chartered savings bank organized in 1868. The Bank has four wholly owned subsidiaries: Lake Sunapee Financial Services Corporation (“LSFS”); Lake Sunapee Group, Inc., which owns and maintains all buildings and investment properties; McCrillis & Eldredge Insurance, Inc. (“M&E”), a full-line independent insurance agency, which offers a complete range of commercial insurance services and consumer products; and Charter Holding Corp. (“Charter Holding”), which through its subsidiaries, provides trust and wealth management services. The Company’s operations are managed along two reportable segments that represent its core businesses: Banking and Wealth Management. The Banking segment provides a wide array of lending and depository-related products and services to individuals, businesses and municipal enterprises. The Banking segment also provides commercial insurance and consumer products, including life, health, auto and homeowner insurance, through M&E and brokerage services through LSFS. The Wealth Management segment provides trust and investment services through Charter Holding and its subsidiaries, Charter Trust Company (“Charter Trust”) and Charter New England Agency. The Company, through its direct and indirect subsidiaries, currently operates 26 locations in New Hampshire in Grafton, Hillsborough, Merrimack and Sullivan counties as well as 14 locations in Vermont in Orange, Rutland and Windsor counties. The Bank is a member of the Federal Deposit Insurance Corporation (“FDIC”) and its deposits are insured by the FDIC. The Company is regulated by the Board of Governors of the Federal Reserve System (“FRB”), and the Bank is regulated by the Office of the Comptroller of the Currency (“OCC”).

Note A—Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information and the instructions to Form 10-Q and, accordingly, do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. The condensed balance sheet data at December 31, 2015 was derived from audited financial statements, but does not include all disclosures required by U.S. GAAP. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. Operating results for the nine months ended September 30, 2016 are not necessarily indicative of the results that may be expected for the year ending December 31, 2016.

In preparing consolidated financial statements in conformity with U.S. GAAP, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the consolidated balance sheet and reported amounts of revenues and expenses during the reported period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses, the evaluation of goodwill and other intangible assets for impairment, other-than-temporary impairment of securities and income taxes.

Note B—Accounting Policies

The condensed consolidated financial statements include the accounts of the Company and its subsidiary, the Bank, and the Bank’s subsidiaries, M&E, Lake Sunapee Group, Inc., LSFS and Charter Holding and its subsidiaries, Charter Trust and Charter New England Agency. All significant intercompany accounts and transactions have been eliminated in consolidation.

NHTB Capital Trust II and NHTB Capital Trust III, affiliates of the Company, were formed to sell capital securities to the public through a third-party trust pool. In accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 810-10, “Consolidation-Overall,” these affiliates have not been included in the condensed consolidated financial statements.

Effective as of March 31, 2016, the Company adopted the Financial Accounting Standards Board (“FASB”) Accounting Standards Update (“ASU”) 2015-03, “Interest – Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs.” The guidance requires the Company to report debt issuance costs, less amortization, net against the outstanding principal balance of the related debt. The guidance was adopted on a retrospective basis. Debt issuance costs which were reported in previous periods in other assets have been reclassified against subordinated debentures, reducing the reported outstanding principal.

Note C—Impact of New Accounting Standards

In May 2014 and August 2015, respectively, the FASB issued ASU 2014-09 and 2015-14, “Revenue from Contracts with Customers (Topic 606).” The objective of ASU 2014-09 is to clarify principles for recognizing revenue and to develop a common revenue standard for U.S. GAAP and International Financial Reporting Standards. The guidance in ASU 2014-09 affects any entity that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of nonfinancial assets unless those contracts are within the scope of other standards. The core principal of the guidance is that an entity should recognize revenue to depict 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 those goods or services. For public entities, the amendments in ASU 2015-14 defer the effective date of ASU 2014-09 to interim and annual reporting periods beginning after December 15, 2017. Early adoption is permitted, but not before the original effective date (i.e., interim and annual reporting periods beginning after December 15, 2016). The Company is currently reviewing ASUs 2014-09 and 2015-14 to determine if they will have an impact on its consolidated financial statements.

In January 2016, the FASB issued ASU 2016-01, “Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Liabilities.” The amendments in this update make targeted improvements to GAAP as follows:

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.

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.

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.

Require public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes.

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.

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.

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.

The standard is effective for interim and annual reporting periods beginning after December 15, 2017. Early adoption of item 5 above is permitted for financial statements of fiscal years or interim periods that have not yet been issued. Early adoption of other items above is not permitted. The Company anticipates that the adoption of this ASU will not have a material impact on its consolidated financial statements.

In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842).” This ASU was issued to increase transparency and comparability among organizations by requiring reporting entities to recognize all leases, including operating, as lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. The amendments in this ASU are effective for public entities for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The Company anticipates that the adoption of this ASU will not have a material impact on its consolidated financial statements.

In March 2016, the FASB issued ASU 2016-07, “Investments – Equity Method and Joint Ventures (Topic 323): Simplifying the Transition to the Equity Method of Accounting.” This ASU eliminates the requirement that when an investment qualifies for use of the equity method as a result of an increase in the level of ownership interest or degree of influence, an investor must adjust the investment, results of operations and related retained earnings retroactively on a step-by-step basis as if the equity method had been in effect during all previous periods that the investment had been held. The amendments in this ASU are effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016. The amendments should be applied prospectively upon their effective date to increases in the level of ownership interest or degree of influence that result in the adoption of the equity method. Earlier application is permitted. The Company anticipates that the adoption of this ASU will not have a material impact on its consolidated financial statements.

In March 2016, the FASB issued ASU 2016-09, “Compensation – Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting.” This ASU simplifies several areas of accounting for share-based compensation including accounting for income taxes, forfeitures and classification of excess tax benefits and employee taxes paid. The amendments in this ASU are effective for public business entities for fiscal years beginning after December 15, 2016, and interim periods within those annual periods. The Company anticipates that the adoption of this ASU will not have a material impact on its consolidated financial statements.

In June 2016, the FASB issued ASU 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” The amendments in this ASU replace the existing incurred loss impairment methodology in current U.S. GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. The ASU covers expected credit losses on financial instruments and other commitments. The amendments in this ASU are effective for SEC filing public business entities for fiscal years beginning after December 15, 2019, and interim periods within those annual periods. The Company is still determining the impact of the adoption of this ASU and the related impact on its consolidated financial statements.

In August 2016, the FASB issued ASU 2016-15, “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments.” The amendments in this ASU address eight specific cash flow issues including debt prepayment or debt extinguishment costs, settlement of zero-coupon or insignificant interest rate debts, contingent consideration payments made after a business combination, proceeds from the settlement of insurance claims, proceeds from bank-owned life insurance, distributions received from equity method investees, beneficial interest in securitization transactions and separately identifiable cash flow and application of the predominance principle. The amendments in this ASU are effective for public business entities for fiscal years beginning after December 15, 2017, and interim periods within those annual periods. The Company anticipates that the adoption of this ASU will not have a material impact on its consolidated financial statements.

Note D—Fair Value Measurements

In accordance with ASC 820-10, “Fair Value Measurement—Overall,” the Company groups its financial assets and financial liabilities measured at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value.

Level 1—Valuations for assets and liabilities traded in active exchange markets, such as The NASDAQ Stock Market. Level 1 also includes U.S. Treasury, other U.S. government and agency mortgage-backed securities that are traded by dealers or brokers in active markets. Valuations are obtained from readily available pricing sources for market transactions involving identical assets or liabilities.

Level 2—Valuations for assets and liabilities traded in less active dealer or broker markets. Valuations are obtained from third party pricing services for identical or comparable assets or liabilities.

Level 3—Valuations for assets and liabilities that are derived from other methodologies, including option pricing models, discounted cash flow models and similar techniques, are not based on market exchange, dealer or broker traded transactions. Level 3 valuations incorporate certain assumptions and projections in determining the fair value assigned to such assets and liabilities.

A financial instrument’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement.

A description of the valuation methodologies used for instruments measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy, is set forth below.

The Company’s equity securities are generally classified within Level 1 of the fair value hierarchy because they are valued using quoted market prices.

The Company’s investments in mortgage-backed securities, asset-backed securities, preferred stock with maturities and other debt securities available-for-sale are generally classified within Level 2 of the fair value hierarchy. For these securities, the Company obtains fair value measurements from independent pricing services. The fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, trading levels, market consensus prepayment speeds, credit information and the instrument’s terms and conditions.

Level 3 is for positions that are not traded in active markets or are subject to transfer restrictions, valuations are adjusted to reflect illiquidity and/or non-transferability, and such adjustments are generally based on available market evidence. In the absence of such evidence, management’s best estimate is used. Subsequent to inception, management only changes Level 3 inputs and assumptions when corroborated by evidence such as transactions in similar instruments, completed or pending third-party transactions in the underlying investment or comparable entities, subsequent rounds of financing, recapitalization and other transactions across the capital structure, offerings in the equity or debt markets, and changes in financial ratios or cash flows.

Assets and Liabilities Measured at Fair Value on a Recurring Basis

Securities Available-for-Sale. The fair value of the Company’s available-for-sale securities portfolio is estimated using Level 1 and Level 2 inputs. The Company obtains fair value measurements from an independent pricing service. For Levels 1 and 2, the fair value measurements consider (i) quoted prices in active markets for identical assets and (ii) observable data that may include dealer quotes, market spreads, cash flows, market consensus prepayment speeds, credit information, and a bond’s terms and conditions, among other factors, respectively.

Interest Rate Lock Commitments. The Company enters into interest rate lock commitments (“IRLCs”) for residential mortgage loans intended for sale, which commit the Company to lend funds to a potential borrower at a specific interest rate and within a specified period of time. The estimated fair value of commitments to originate residential mortgage loans for sale is based on quoted prices for similar loans in active markets. However, this value is adjusted by a factor which considers the likelihood that the loan in a lock position will ultimately close. The closing ratio is derived from the Company’s internal data and is adjusted using significant management judgment which is not observable. As such, interest rate lock commitments are classified as Level 3 measurements.

Forward Sale Commitments. The Company utilizes forward sale commitments as economic hedges against potential changes in the values of the interest rate lock commitments and loans held for sale. The fair values of the Company’s mandatory delivery loan sale commitments are determined similarly to the IRLCs using quoted prices in the market place that are observable and adjusted for inputs which are not observable, as discussed above. As such, best efforts and mandatory delivery forward sale commitments are classified as Level 3 measurements.

Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis

Impaired Loans. Certain impaired loans are reported at the fair value of the underlying collateral if repayment is expected solely from collateral. Collateral values are estimated using Level 2 inputs based on appraisals of similar properties obtained from a third party valuation service. Fair values are estimated using Level 3 inputs based on appraisals of similar properties obtained from a third party valuation service discounted by management based on historical losses for similar collateral.

Other Real Estate Owned. Other real estate owned (“OREO”) is reported at fair value less costs to sell. Values are estimated using Level 2 inputs based on appraisals of similar properties obtained from a third party valuation service. For Level 3 inputs, fair values are based on management estimates.

Mortgage Servicing Rights. The fair value of servicing rights is estimated using a present value cash flow model. Assumptions used in the valuation model are the anticipated rate of the loan prepayments and discount rates. Adjustments are only recorded when the discounted cash flows derived from the valuation model are less than the carrying value of the asset. Although some assumptions in determining fair value are based on standards used by market participants, some are based on unobservable inputs and therefore are classified in Level 3 of the valuation hierarchy.

The following summarizes assets and liabilities measured at fair value at September 30, 2016 and December 31, 2015.

Assets Measured at Fair Value on a Recurring Basis


	Fair Value Measurements at Reporting Date Using:
(Dollars in thousands)	September 30, 2016		Quoted Prices in Active Markets for Identical Assets Level 1		Significant Other Observable Inputs Level 2		Significant Unobservable Inputs Level 3
U.S. government-sponsored enterprise bonds	$	7,275		—	$	7,275		—
Mortgage-backed securities		108,733		—		108,733		—
Municipal bonds		28,219		—		28,219		—
Other bonds and debentures		10,543		—		10,543		—
Equity securities		307		307		—		—
Interest rate lock commitments		180		—		—		180

Totals	$	155,257	$	307	$	154,770	$	180


(Dollars in thousands)	December 31, 2015		Quoted Prices in Active Markets for Identical Assets Level 1		Significant Other Observable Inputs Level 2		Significant Unobservable Inputs Level 3
U.S. Treasury notes	$	34,939	$	—	$	34,939	$	—
U.S. government-sponsored enterprise bonds		7,211		—		7,211		—
Mortgage-backed securities		69,334		—		69,334		—
Municipal bonds		8,304		—		8,304		—
Other bonds and debentures		112		—		112		—
Equity securities		298		298		—		—
Interest rate lock commitments		32		—		—		32

Totals	$	120,230	$	298	$	119,900	$	32

Liabilities Measured at Fair Value on a Recurring Basis


	Fair Value Measurements at Reporting Date Using:
(Dollars in thousands)	September 30, 2016		Quoted Prices in Active Markets for Identical Assets Level 1		Significant Other Observable Inputs Level 2		Significant Unobservable Inputs Level 3
Forward loan sale commitments	$	69	$	—	$	—	$	69

	$	69	$	—	$	—	$	69


	Fair Value Measurements at Reporting Date Using:
(Dollars in thousands)	December 31, 2015		Quoted Prices in Active Markets for Identical Assets Level 1		Significant Other Observable Inputs Level 2		Significant Unobservable Inputs Level 3
Forward loan sale commitments	$	14	$	—	$	—	$	14

	$	14	$	—	$	—	$	14

The following tables present the changes in Level 3 assets and liabilities that were measured at fair value on a recurring basis for the periods indicated:


(Dollars in thousands)	Forward Loan Sale Commitments			Interest Rate Lock Commitments
Three months ended September 30, 2016
Balance as of June 30, 2016	$	(171	)	$	143
Realized gain recognized in noninterest income		102			180
Transfers to loans held-for-sale		—			(143	)

Balance as of September 30, 2016	$	(69	)	$	180


(Dollars in thousands)	Forward Loan Sale Commitments			Interest Rate Lock Commitments
Nine months ended September 30, 2016
Balance as of December 31, 2015	$	(14	)	$	32
Realized (loss) gain recognized in noninterest income		(55	)		427
Transfers to loans held-for-sale		—			(279	)

Balance as of September 30, 2016	$	(69	)	$	180


(Dollars in thousands)	Forward Loan Sale Commitments			Interest Rate Lock Commitments
Three months ended September 30, 2015
Balance as of June 30, 2015	$	40		$	90
Realized (loss) gain recognized in noninterest income		(122	)		92
Transfers to loans held-for-sale		—			(90	)

Balance as of September 30, 2015	$	(82	)	$	92


(Dollars in thousands)	Forward Loan Sale Commitments			Interest Rate Lock Commitments
Nine months ended September 30, 2015
Balance as of December 31, 2014	$	—		$	—
Realized (loss) gain recognized in noninterest income		(82	)		310
Transfers to loans held-for-sale		—			(218	)

Balance as of September 30, 2015	$	(82	)	$	92

Assets Measured at Fair Value on a Nonrecurring Basis


	Fair Value Measurements at Reporting Date Using:
(Dollars in thousands)	September 30, 2016		Quoted Prices in Active Markets for Identical Assets Level 1		Significant Other Observable Inputs Level 2		Significant Unobservable Inputs Level 3
Impaired loans	$	1,107	$	—	$	—	$	1,107
Mortgage servicing rights		2,244		—		—		2,244
Other real estate owned		321		—		—		321

	$	3,672	$	—	$	—	$	3,672


(Dollars in thousands)	December 31, 2015		Quoted Prices in Active Markets for Identical Assets Level 1		Significant Other Observable Inputs Level 2		Significant Unobservable Inputs Level 3
Impaired loans	$	5,905	$	—	$	—	$	5,905
Mortgage servicing rights		2,441		—		—		2,441
Other real estate owned		904		—		—		904

	$	9,250	$	—	$	—	$	9,250

There were no loans with a specific reserve measured for impairment using the fair value of the underlying collateral at September 30, 2016 and December 31, 2015. Collateral dependent loans are valued using third-party appraisals primarily using the sales comparison approach. The appraisals may be discounted between 25-40% to reflect realizable value based on historical losses, which represents an unobservable input. Impaired loans measured for impairment using the net present value of cash flows had a recorded investment of $1.2 million with a valuation allowance of $126 thousand at September 30, 2016. Loans valued using the net present value of cash flows are calculated using expected future cash flows with a discount rate equal to the effective yield of the loan. At December 31, 2015, impaired loans measured using the net present value of cash flows had a recorded investment of $6.3 million with a valuation allowance of $386 thousand.

The estimated fair values of the Company’s financial instruments at September 30, 2016 and December 31, 2015, all of which are held or issued for purposes other than trading, were as follows:


			Fair Value Measurements at Reporting Date Using:
(Dollars in thousands) September 30, 2016	Carrying Value		Quoted Prices in Active Markets for Identical Assets Level 1		Significant Other Observable Inputs Level 2		Significant Unobservable Inputs Level 3		Total Fair Value
Financial assets:
Cash and cash equivalents	$	36,085	$	36,085	$	—	$	—	$	36,085
Securities available-for-sale		155,077		307		154,770		—		155,077
Federal Home Loan Bank stock		12,550		12,550		—		—		12,550
Loans held-for-sale		3,624		—		3,657		—		3,657
Loans, net		1,236,733		—		—		1,249,048		1,249,048
Investment in unconsolidated subsidiaries		620		—		—		505		505
Accrued interest receivable		2,537		2,537		—		—		2,537
Interest rate lock commitments		180		—		—		180		180
Due from broker		14,056		—		14,056		—		14,056
Financial liabilities:
Deposits		1,141,710		—		1,142,807		—		1,142,807
Federal Home Loan Bank advances		202,174		—		203,149		—		203,149
Securities sold under agreements to repurchase		21,522		21,522		—		—		21,522
Subordinated debentures		36,928		—		—		33,891		33,891
Forward loan sale commitments		69		—		—		69		69
Due to broker		15,234		—		15,234		—		15,234

			Fair Value Measurements at Reporting Date Using:
(Dollars in thousands) December 31, 2015	Carrying Value		Quoted Prices in Active Markets for Identical Assets Level 1		Significant Other Observable Inputs Level 2		Significant Unobservable Inputs Level 3		Total Fair Value
Financial assets:
Cash and cash equivalents	$	42,566	$	42,566	$	—	$	—	$	42,566
Securities available-for-sale		120,198		298		119,900		—		120,198
Federal Home Loan Bank stock		9,963		9,963		—		—		9,963
Loans held-for-sale		2,188		—		2,202		—		2,202
Loans, net		1,217,461		—		—		1,215,166		1,215,166
Investment in unconsolidated subsidiaries		620		—		—		349		349
Accrued interest receivable		2,431		2,431		—		—		2,431
Interest rate lock commitments		32		—		—		32		32
Financial liabilities:
Deposits		1,157,352		—		1,157,080		—		1,157,080
Federal Home Loan Bank advances		150,000		—		150,312		—		150,312
Securities sold under agreements to repurchase		17,957		17,957		—		—		17,957
Subordinated debentures		36,873		—		—		27,983		27,983
Forward loan sale commitments		14		—		—		14		14

The carrying amounts of financial instruments shown in the above tables are included in the condensed consolidated balance sheets under the indicated captions, except for investment in unconsolidated subsidiaries which is included in other assets and interest rate lock commitments and forward sale commitments, which are included in other assets and other liabilities, respectively.

The Company did not have any significant transfers of assets or liabilities between Levels 1 and 2 of the fair value hierarchy during the nine months ended September 30, 2016 or during the 12-month period ended December 31, 2015.

Note E—Securities

Debt and equity securities have been classified in the consolidated balance sheets according to management’s intent.

The amortized cost basis of securities available-for-sale and their approximate fair values at September 30, 2016 and December 31, 2015 are summarized as follows:


(Dollars in thousands) September 30, 2016	Amortized Cost Basis		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
Bonds and notes
U.S. government-sponsored enterprise bonds	$	7,277	$	2	$	4	$	7,275
Mortgage-backed securities		108,135		696		98		108,733
Municipal bonds		28,089		237		107		28,219
Other bonds and debentures		10,101		442		—		10,543
Equity securities		258		56		7		307

Total available-for-sale	$	153,860	$	1,433	$	216	$	155,077


(Dollars in thousands) December 31, 2015	Amortized Cost Basis		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
Bonds and notes
U.S. Treasury notes	$	35,282	$	—	$	343	$	34,939
U.S. government-sponsored enterprise bonds		7,305		1		95		7,211
Mortgage-backed securities		70,169		14		849		69,334
Municipal bonds		8,418		34		148		8,304
Other bonds and debentures		108		4		—		112
Equity securities		258		49		9		298

Total available-for-sale	$	121,540	$	102	$	1,444	$	120,198

Maturities of debt securities, excluding mortgage-backed securities, classified as available-for-sale are as follows as of September 30, 2016:


(Dollars in thousands)	Fair Value
Other bonds and debentures	$	90

Total due in less than one year	$	90

U.S. government-sponsored enterprise bonds	$	7,000
Municipal bonds		6,070

Total due after one year through five years	$	13,070

U.S. government-sponsored enterprise bonds	$	124
Municipal bonds		20,891
Other bonds and debentures		10,437

Total due after five years through ten years	$	31,452

U.S. government-sponsored enterprise bonds	$	151
Municipal bonds		1,258
Other bonds and debentures		16

Total due after ten years	$	1,425

For the nine months ended September 30, 2016, the proceeds from sales of securities available-for-sale were $80.7 million which includes $14.1 million of unsettled transactions. Gross gains of $1.5 million were realized during the same period on these sales. The tax provision applicable to these net realized gains amounted to $613 thousand. For the nine months ended September 30, 2015, the proceeds from sales of securities available-for-sale were $40.2 million. Gross gains of $373 thousand were realized during the same period on these sales. The tax provision applicable to these net realized gains amounted to $148 thousand. Securities, carried at $117.1 million and $119.8 million, were pledged to secure public deposits, Federal Home Loan Bank (“FHLB”) advances, and securities sold under agreements to repurchase as of September 30, 2016 and December 31, 2015, respectively.

Note F—Impairment of Securities

The aggregate fair value and unrealized losses of securities that have been in a continuous unrealized loss position for less than 12 months and for 12 months or more, and are not other-than-temporarily impaired, are as follows as of the dates indicated:


	Less than 12 Months				12 Months or Longer				Total
(Dollars in thousands)	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
September 30, 2016:
Bonds and notes—
U.S. Government-sponsored enterprise bonds	$	—	$	—	$	151	$	4	$	151	$	4
Mortgage-backed securities		23,171		70		5,176		28		28,347		98
Municipal bonds		—		—		2,196		107		2,196		107
Equity securities		31		1		41		6		72		7

Total temporarily impaired securities	$	23,202	$	71	$	7,564	$	145	$	30,766	$	216

December 31, 2015:
Bonds and notes—
U.S. Treasury notes	$	24,817	$	199	$	10,122	$	144	$	34,939	$	343
U.S. Government-sponsored enterprise bonds		2,967		33		4,101		62		7,068		95
Mortgage-backed securities		56,351		592		11,681		257		68,032		849
Municipal bonds		1,420		38		2,208		110		3,628		148
Equity securities		53		9		—		—		53		9

Total temporarily impaired securities	$	85,608	$	871	$	28,112	$	573	$	113,720	$	1,444

The investments in the Company’s investment portfolio that were temporarily impaired as of September 30, 2016 consisted of one U.S. government-sponsored enterprise bond, sixteen mortgage-backed securities issued by U.S. government-sponsored enterprises, five municipal bonds and ten equity securities. The unrealized losses on debt securities are primarily attributable to changes in market interest rates and current market inefficiencies. The Company has the ability and intent to hold debt securities until maturity, and therefore, no declines are deemed to be other-than-temporary. We do not believe the unrealized losses on equity securities relate to credit quality of the issuers. We have the ability and intent to hold these investments until a recovery of cost basis.

Note G—Loan Portfolio

Loans receivable consisted of the following as of the dates indicated:


	September 30, 2016
(Dollars in thousands)	Originated			Acquired			Total
Real estate loans:
Conventional	$	625,179		$	37,545		$	662,724
Home equity		69,430			4,826			74,256
Commercial		275,109			54,651			329,760
Construction		22,256			1,194			23,450

		991,974			98,216			1,090,190
Commercial and municipal loans		137,957			7,728			145,685
Consumer loans		4,612			764			5,376

Total loans		1,134,543			106,708			1,241,251
Allowance for loan losses		(8,761	)		(224	)		(8,985	)
Deferred loan origination costs, net		4,467			—			4,467

Loans receivable, net	$	1,130,249		$	106,484		$	1,236,733


	December 31, 2015
(Dollars in thousands)	Originated			Acquired			Total
Real estate loans:
Conventional	$	600,763		$	41,895		$	642,658
Home equity		66,708			5,547			72,255
Commercial		259,834			63,434			323,268
Construction		33,663			1,255			34,918

		960,968			112,131			1,073,099
Commercial and municipal loans		133,596			8,925			142,521
Consumer loans		5,411			1,077			6,488

Total loans		1,099,975			122,133			1,222,108
Allowance for loan losses		(8,607	)		(298	)		(8,905	)
Deferred loan origination costs, net		4,258			—			4,258

Loans receivable, net	$	1,095,626		$	121,835		$	1,217,461

The following tables set forth information regarding the allowance for loan losses by portfolio segment as of and for the periods ending on the dates indicated:


	Real Estate
(Dollars in thousands) September 30, 2016	Conventional and Home Equity			Commercial			Construction			Commercial and Municipal			Consumer			Unallocated		Total
Allowance for loan losses:
Originated:
Beginning balance, December 31, 2015	$	4,197		$	2,884		$	197		$	1,199		$	68		$	62	$	8,607
Charge-offs		(225	)		(324	)		—			(45	)		(232	)		—		(826	)
Recoveries		52			139			—			56			122			—		369
Provision (benefit)		572			(306	)		38			(64	)		226			145		611

Ending balance, September 30, 2016	$	4,596		$	2,393		$	235		$	1,146		$	184		$	207	$	8,761

Acquired:
Beginning balance, December 31, 2015	$	63		$	190		$	21		$	24		$	—		$	—	$	298
Charge-offs		(48	)		—			—			—			(1	)		—		(49	)
Recoveries		34			—			—			4			6			—		44
Provision (benefit)		25			(52	)		(11	)		(26	)		(5	)		—		(69	)

Ending balance, September 30, 2016	$	74		$	138		$	10		$	2		$	—		$	—	$	224

Originated:
Individually evaluated for impairment	$	19		$	107		$	—		$	—		$	—		$	—	$	126
Collectively evaluated for impairment		4,577			2,286			235			1,146			184			207		8,635
Acquired loans (Discounts related to Credit Quality)		74			138			10			2			—			—		224

Total allowance for loan losses ending balance, September 30, 2016	$	4,670		$	2,531		$	245		$	1,148		$	184		$	207	$	8,985

Loans:
Originated:
Individually evaluated for impairment	$	5,008		$	4,027		$	429		$	157		$	—		$	—	$	9,621
Collectively evaluated for impairment		689,601			271,082			21,827			137,800			4,612			—		1,124,922
Acquired loans (Discounts related to Credit Quality)		42,371			54,651			1,194			7,728			764			—		106,708

Total loans ending balance, September 30, 2016	$	736,980		$	329,760		$	23,450		$	145,685		$	5,376		$	—	$	1,241,251


	Real Estate
(Dollars in thousands) September 30, 2015	Conventional and Home Equity			Commercial			Construction			Commercial and Municipal			Consumer			Unallocated		Total
Allowance for loan losses:
Originated:
Beginning balance, December 31, 2014	$	4,763		$	2,724		$	991		$	635		$	86		$	70	$	9,269
Charge-offs		(352	)		(770	)		—			(28	)		(161	)		—		(1,311	)
Recoveries		101			474			—			66			95			—		736
Provision (benefit)		(247	)		211			(488	)		30			60			347		(87	)

Ending balance, September 30, 2015	$	4,265		$	2,639		$	503		$	703		$	80		$	417	$	8,607

Acquired:
Beginning balance, December 31, 2014	$	—		$	—		$	—		$	—		$	—		$	—	$	—
Charge-offs		(200	)		(311	)		—			(31	)		(20	)		—		(562	)
Recoveries		8			—			—			18			9			—		35
Provision (benefit)		192			311			—			13			11			—		527

Ending balance, September 30, 2015	$	—		$	—		$	—		$	—		$	—		$	—	$	—

Originated:
Individually evaluated for impairment	$	230		$	77		$	21		$	7		$	—		$	—	$	335
Collectively evaluated for impairment		4,035			2,562			482			696			80			417		8,272
Acquired loans (Discounts related to Credit Quality)		—			—			—			—			—			—		—

Total allowance for loan losses ending balance, September 30, 2015	$	4,265		$	2,639		$	503		$	703		$	80		$	417	$	8,607

Loans:
Originated:
Individually evaluated for impairment	$	6,698		$	3,003		$	537		$	629		$	—		$	—	$	10,867
Collectively evaluated for impairment		653,940			239,123			38,661			122,845			6,463			—		1,061,032
Acquired loans (Discounts related to Credit Quality)		50,679			65,823			1,354			9,641			1,227			—		128,724

Total loans ending balance, September 30, 2015	$	711,317		$	307,949		$	40,552		$	133,115		$	7,690		$	—	$	1,200,623


	Real Estate
(Dollars in thousands) December 31, 2015	Conventional and Home Equity		Commercial		Construction		Commercial and Municipal		Consumer		Unallocated		Total
Allowance for loan losses:
Originated:
Individually evaluated for impairment	$	200	$	133	$	15	$	7	$	—	$	—	$	355
Collectively evaluated for impairment		3,997		2,751		182		1,192		68		62		8,252
Acquired loans (Discounts related to Credit Quality)		63		190		21		24		—		—		298

Total allowance for loan losses ending balance, December 31, 2015	$	4,260	$	3,074	$	218	$	1,223	$	68	$	62	$	8,905

Loans:
Originated:
Individually evaluated for impairment	$	6,707	$	5,078	$	442	$	732	$	—	$	—	$	12,959
Collectively evaluated for impairment		660,764		254,756		33,221		132,864		5,411		—		1,087,016
Acquired loans (Discounts related to Credit Quality)		47,442		63,434		1,255		8,925		1,077		—		122,133

Total loans ending balance, December 31, 2015	$	714,913	$	323,268	$	34,918	$	142,521	$	6,488	$	—	$	1,222,108

The following tables set forth information regarding nonaccrual loans and past-due loans as of the dates indicated:


	September 30, 2016
(Dollars in thousands)	30-59 Days		60-89 Days		90 Days or More		Total Past Due		Nonaccrual Loans
Originated:
Real estate:
Conventional	$	106	$	1,087	$	1,712	$	2,905	$	2,151
Home equity		476		—		114		590		114
Commercial		59		90		1,216		1,365		1,530
Construction		22		—		—		22		—
Commercial and municipal		—		25		—		25		73
Consumer (including credit card)		16		—		—		16		—

Total	$	679	$	1,202	$	3,042	$	4,923	$	3,868

Acquired:
Real estate:
Conventional	$	400	$	169	$	146	$	715	$	174
Home equity		—		—		—		—		—
Commercial		35		144		886		1,065		886
Construction		—		—		94		94		94
Commercial and municipal		—		—		—		—		—
Consumer (including credit card)		—		33		—		33		—

Total	$	435	$	346	$	1,126	$	1,907	$	1,154

Total:
Real estate:
Conventional	$	506	$	1,256	$	1,858	$	3,620	$	2,325
Home equity		476		—		114		590		114
Commercial		94		234		2,102		2,430		2,416
Construction		22		—		94		116		94
Commercial and municipal		—		25		—		25		73
Consumer (including credit card)		16		33		—		49		—

Total	$	1,114	$	1,548	$	4,168	$	6,830	$	5,022


	December 31, 2015
(Dollars in thousands)	30-59 Days		60-89 Days		90 Days or More		Total Past Due		Nonaccrual Loans
Originated:
Real estate:
Conventional	$	1,644	$	1,309	$	1,454	$	4,407	$	2,310
Home equity		180		—		166		346		166
Commercial		1,028		482		309		1,819		1,565
Construction		24		—		—		24		—
Commercial and municipal		89		50		584		723		584
Consumer (including credit card)		16		7		—		23		—

Total	$	2,981	$	1,848	$	2,513	$	7,342	$	4,625

Acquired:
Real estate:
Conventional	$	514	$	238	$	654	$	1,406	$	707
Home equity		12		—		17		29		17
Commercial		386		—		677		1,063		677
Construction		—		—		—		—		—
Commercial and municipal		5		—		—		5		—
Consumer (including credit card)		6		12		—		18		—

Total	$	923	$	250	$	1,348	$	2,521	$	1,401


	December 31, 2015
(Dollars in thousands)	30-59 Days		60-89 Days		90 Days or More		Total Past Due		Nonaccrual Loans
Total:
Real estate:
Conventional	$	2,158	$	1,547	$	2,108	$	5,813	$	3,017
Home equity		192		—		183		375		183
Commercial		1,414		482		986		2,882		2,242
Construction		24		—		—		24		—
Commercial and municipal		94		50		584		728		584
Consumer (including credit card)		22		19		—		41		—

Total	$	3,904	$	2,098	$	3,861	$	9,863	$	6,026

There were no loans past due 90 days or more and still accruing as of September 30, 2016 and December 31, 2015.

Troubled Debt Restructurings

The following tables present the recorded investment in troubled debt restructured (“TDR”) loans as of September 30, 2016 and December 31, 2015 based on payment performance status:


	September 30, 2016
	Real Estate
(Dollars in thousands)	Conventional		Commercial		Construction		Commercial		Total
Performing	$	3,266	$	2,391	$	429	$	85	$	6,171
Non-performing		914		99		—		—		1,013

Total	$	4,180	$	2,490	$	429	$	85	$	7,184


	December 31, 2015
	Real Estate
(Dollars in thousands)	Conventional		Commercial		Construction		Commercial		Total
Performing	$	3,506	$	2,836	$	442	$	149	$	6,933
Non-performing		1,160		285		—		—		1,445

Total	$	4,666	$	3,121	$	442	$	149	$	8,378

TDR loans are considered impaired and are included in the impaired loan disclosures in this footnote.

During the nine month period ended September 30, 2016, certain loan modifications were executed that constituted TDRs. All of these modifications included one or a combination of the following: (1) an extension of the maturity date; (2) reduction in the interest rate; or (3) change in scheduled payment amount.

The following table presents pre-modification balance information on how loans were modified as TDRs during the nine months ended September 30, 2016:


(Dollars in thousands)	Interest Rate		Combination of Interest Only Payments and Maturity		Combination of Interest Only, Reamortization and Maturity		Total
Real estate:
Home equity	$	—	$	—	$	150	$	150
Commercial		45		193		—		238

Total TDRs	$	45	$	193	$	150	$	388

The following table presents pre-modification balance information on how loans were modified as TDRs during the nine months ended September 30, 2015:


(Dollars in thousands)	Extended Maturity		Combination of Interest Only Payments, Rate Reduction And Extended Maturity		Combination of Interest Only Payments and Maturity		Interest Rate		Interest Rate and Maturity		Total
Real estate:
Conventional	$	80	$	267	$	423	$	—	$	51	$	821
Commercial and municipal		—		—		—		7		—		7

Total TDRs	$	80	$	267	$	423	$	7	$	51	$	828

The following table summarizes TDRs that occurred during the periods indicated:


(Dollars in thousands)	Number of Contracts		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment
Nine months ended September 30, 2016:
Troubled Debt Restructurings:
Real estate:
Home equity		1	$	150	$	150
Commercial		2		238		238

		3	$	388	$	388


(Dollars in thousands)	Number of Contracts		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment
Nine months ended September 30, 2015:
Troubled Debt Restructurings:
Real estate:
Conventional		6	$	821	$	821
Commercial and municipal		1		7		7

		7	$	828	$	828

At September 30, 2016, there were no specific loan loss reserves related to TDRs that occurred during the nine month period ended September 30, 2016. There were no new TDRs for which there was a payment default during the nine month period ended September 30, 2016, which occurred within 12 months following the date of the restructuring. Loans are considered to be in payment default once they are greater than 30 days contractually past due under the modified terms

At September 30, 2015, there were specific loan loss reserves of $94 thousand related to TDRs that occurred during the nine-month period ended September 30, 2015. There were three TDRs for which there was a payment default during the nine-month period ended September 30, 2015, which occurred within 12 months following the date of the loan debt restructuring. Loans are considered to be in payment default once they are greater than 30 days contractually past due under the modified terms.

Information about loans that meet the definition of an impaired loan in ASC 310-10-35, “Receivables-Overall-Subsequent Measurement,” is as follows as of September 30, 2016:


(Dollars in thousands)	Recorded Investment		Unpaid Principal Balance		Related Allowance For Credit Losses
With no related allowance recorded:
Real estate:
Conventional	$	4,406	$	4,952	$	—
Home equity		280		361		—
Commercial		3,116		3,664		—
Construction		429		463		—
Commercial and municipal		157		183		—

Total impaired with no related allowance		8,388		9,623		—

With an allowance recorded:
Real estate:
Conventional		322		332		19
Commercial		911		913		107

Total impaired with an allowance recorded		1,233		1,245		126

Total:
Real estate:
Conventional		4,728		5,284		19
Home equity		280		361		—
Commercial		4,027		4,577		107
Construction		429		463		—
Commercial and municipal		157		183		—

Total impaired loans	$	9,621	$	10,868	$	126

Information about loans that meet the definition of an impaired loan in ASC 310-10-35 is as follows as of December 31, 2015:


(Dollars in thousands)	Recorded Investment		Unpaid Principal Balance		Related Allowance for Credit Losses
With no related allowance recorded:
Real estate:
Conventional	$	3,175	$	3,895	$	—
Home equity		213		340		—
Commercial		2,589		3,028		—
Construction		—		—		—
Commercial and municipal		691		696		—

Total impaired with no related allowance		6,668		7,959		—

With an allowance recorded:
Real estate:
Conventional		3,319		3,548		231
Commercial		2,489		2,546		133
Construction		442		476		15
Commercial and municipal		41		42		7

Total impaired with an allowance recorded		6,291		6,612		386

Total:
Real estate:
Conventional		6,494		7,443		231
Home equity		213		340		—
Commercial		5,078		5,574		133
Construction		442		476		15
Commercial and municipal		732		738		7

Total impaired loans	$	12,959	$	14,571	$	386

The following is a summary of the average recorded investment and interest income recognized on impaired loans for the nine months ended September 30, 2016 and 2015:


	Nine months ended September 30, 2016				Nine months ended September 30, 2015
(Dollars in thousands)	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
With no related allowance recorded:
Real estate:
Conventional	$	4,419	$	129	$	4,324	$	107
Home equity		197		8		150		1
Commercial		3,546		111		3,342		59
Construction		434		14		372		3
Commercial and municipal		173		9		558		18

Total impaired with no related allowance		8,769		271		8,746		188

With an allowance recorded:
Real estate:
Conventional		682		10		2,020		103
Commercial		927		30		1,153		57
Construction		—		—		301		13
Commercial and municipal		19		—		31		2

Total impaired with an allowance recorded		1,628		40		3,505		175

Total:
Real estate:
Conventional		5,101		139		6,344		210
Home equity		197		8		150		1
Commercial		4,473		141		4,495		116
Construction		434		14		673		16
Commercial and municipal		192		9		589		20

Total impaired loans	$	10,397	$	311	$	12,251	$	363

The recorded investment of conventional real estate loans in the process of foreclosure was $571 thousand and $1.2 million at September 30, 2016 and December 31, 2015, respectively. OREO was $321 thousand, representing one residential property and one commercial property, at September 30, 2016, compared to $904 thousand, representing three residential properties and two commercial properties of OREO and property acquired in settlement of loans at December 31, 2015.

The carrying amount of acquired loans at September 30, 2016 totaled $106.5 million. A subset of these loans was determined to have evidence of credit deterioration at acquisition date, which is accounted for in accordance with ASC 310-30. These purchased credit-impaired loans presently maintain a carrying value of $1.6 million and an outstanding principal balance of $1.9 million at September 30, 2016. These loans are evaluated for impairment through the periodic reforecasting of expected cash flows.

The carrying amount of acquired loans at December 31, 2015 totaled $121.8 million. A subset of these loans was determined to have evidence of credit deterioration at acquisition date, which is accounted for in accordance with ASC 310-30. These purchased credit-impaired loans presently maintain a carrying value of $2.4 million and an outstanding principal balance of $3.1 million at December 31, 2015. These loans are evaluated for impairment through the periodic reforecasting of expected cash flows.

The following table presents the Company’s activity in the accretable yield for the purchased credit impaired loans for the periods indicated:


	Three months ended September 30,
(Dollars in thousands)	2016			2015
Accretable yield at the beginning of the period	$	1,284		$	1,802
Reclassification from nonaccretable difference for loans with improved cash flows		—			458
Accretion		(19	)		(116	)
Change in cash flows that do not affect nonaccretable difference		—			239

Accretable yield at the end of the period	$	1,265		$	2,383


	Nine months ended September 30,
(Dollars in thousands)	2016			2015
Accretable yield at the beginning of the period	$	2,213		$	2,125
Reclassification from nonaccretable difference for loans with improved cash flows		10			458
Accretion		(707	)		(200	)
Change in cash flows that do not affect nonaccretable difference		(251	)		—

Accretable yield at the end of the period	$	1,265		$	2,383

The following tables present the Company’s loans by risk ratings as of the dates indicated:


	September 30, 2016
	Real Estate
(Dollars in thousands)	Conventional and Home Equity		Commercial		Construction		Commercial and Municipal		Consumer		Total
Originated:
Grade:
Pass	$	—	$	241,241	$	6,615	$	117,342	$	—	$	365,198
Special mention		—		4,099		5		101		—		4,205
Substandard		3,816		10,035		460		865		—		15,176
Loans not formally rated		690,793		19,734		15,176		19,649		4,612		749,964

Total	$	694,609	$	275,109	$	22,256	$	137,957	$	4,612	$	1,134,543

Acquired:
Grade:
Pass	$	—	$	48,436	$	1,004	$	6,972	$	—	$	56,412
Special mention		—		584		—		—		—		584
Substandard		527		4,609		92		428		—		5,656
Loans not formally rated		41,844		1,022		98		328		764		44,056

Total	$	42,371	$	54,651	$	1,194	$	7,728	$	764	$	106,708

Total:
Grade:
Pass	$	—	$	289,677	$	7,619	$	124,314	$	—	$	421,610
Special mention		—		4,683		5		101		—		4,789
Substandard		4,343		14,644		552		1,293		—		20,832
Loans not formally rated		732,637		20,756		15,274		19,977		5,376		794,020

Total	$	736,980	$	329,760	$	23,450	$	145,685	$	5,376	$	1,241,251


	December 31, 2015
	Real Estate:
(Dollars in thousands)	Conventional and Home Equity		Commercial		Construction		Commercial and Municipal		Consumer		Total
Originated:
Grade:
Pass	$	—	$	222,466	$	19,208	$	111,653	$	—	$	353,327
Special mention		—		4,278		18		112		—		4,408
Substandard		5,272		7,670		567		416		—		13,925
Loans not formally rated		662,199		25,420		13,870		21,415		5,411		728,315

Total	$	667,471	$	259,834	$	33,663	$	133,596	$	5,411	$	1,099,975

Acquired:
Grade:
Pass	$	—	$	56,212	$	1,047	$	8,031	$	—	$	65,290
Special mention		—		1,643		—		—		—		1,643
Substandard		1,038		4,097		92		509		—		5,736
Loans not formally rated		46,404		1,482		116		385		1,077		49,464

Total	$	47,442	$	63,434	$	1,255	$	8,925	$	1,077	$	122,133

Total:
Grade:
Pass	$	—	$	278,678	$	20,255	$	119,684	$	—	$	418,617
Special mention		—		5,921		18		112		—		6,051
Substandard		6,310		11,767		659		925		—		19,661
Loans not formally rated		708,603		26,902		13,986		21,800		6,488		777,779

Total	$	714,913	$	323,268	$	34,918	$	142,521	$	6,488	$	1,222,108

Credit Quality Information

The Company utilizes a nine grade internal loan rating system for commercial real estate, construction and commercial loans as follows:

•

Loans rated 10-37: Loans in these categories are considered “pass” rated loans with low to average risk.

•

Loans rated 40: Loans in this category are considered “special mention.” These loans are starting to show signs of potential weakness and are being closely monitored by management.

•

Loans rated 50: Loans in this category are considered “substandard.” Generally, a loan is considered substandard if it is inadequately protected by the current net worth and paying capacity of the obligors and/or the collateral pledged. There is a distinct possibility that the Company will sustain some loss if the weakness is not corrected.

•

Loans rated 60: Loans in this category are considered “doubtful.” Loans classified as doubtful have all the weaknesses inherent in those classified substandard with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, highly questionable and improbable.

•

Loans rated 70: Loans in this category are considered uncollectible or a loss, and of such little value that their continuance as loans is not warranted.

On an annual basis, or more often if needed, the Company formally reviews the ratings on all commercial real estate, construction and commercial and municipal loans over $250 thousand. The assessment of those loans less than $250 thousand is based on the borrower’s ability to pay and not on overall risk. Additionally, the Company monitors the repayment activity for such loans less than $300 thousand and if a loan becomes delinquent over 60 days past due, it is reviewed for risk and is subsequently risk rated based on available information such as ability to repay based on current cash flow conditions and workout discussions with the borrower. For residential real estate, home equity and consumer loans, the Company initially assesses credit quality based upon the borrower’s ability to pay and subsequently monitors these loans based on the borrower’s payment capacity.

Loan Servicing

The Company recognizes as separate assets from their related loans the rights to service mortgage loans for others, either through acquisition of those rights or from the sale or securitization of loans with the servicing rights retained on those loans, based on their relative fair values. To determine the fair value of the servicing rights created, the Company uses the market prices under comparable servicing sale contracts, when available, or alternatively uses a valuation model that calculates the present value of future cash flows to determine the fair value of the servicing rights. In using this valuation method, the Company incorporates assumptions that market participants would use in estimating future net servicing income, which includes estimates of the cost of servicing loans, the discount rate, ancillary income, prepayment speeds and default rates. The amount of loans sold and participated out which are serviced by the Company is as follows for the periods indicated:


(Dollars in thousands)	September 30, 2016		December 31, 2015
Sold loans	$	467,119	$	445,855

Mortgage servicing rights are amortized in proportion to, and over the period of, estimated net servicing revenues. Refinance activities are considered in estimating the periodic impairment of net servicing revenues. Impairment of mortgage servicing rights is assessed based on the fair value of those rights. Fair values are estimated using discounted cash flows based on a current market interest rate. For purposes of measuring impairment, the rights are stratified based on the interest rate risk characteristics of the underlying loans. The amount of impairment recognized is the amount by which the capitalized mortgage servicing rights for a stratum exceed their fair value.

The balances of capitalized servicing rights, net of valuation allowances, included in other assets at September 30, 2016, and December 31, 2015 were $2.2 million and $2.4 million, respectively. The fair value of capitalized servicing rights was $3.4 million as of September 30, 2016 and $4.0 million as of December 31, 2015. Servicing rights of $658 thousand were capitalized during the nine months ended September 30, 2016, compared to $927 thousand for the same period in 2015. Amortization of capitalized servicing rights was $770 thousand for the nine months ended September 30, 2016, compared to $778 thousand for the same period in 2015. Servicing rights of $347 thousand were capitalized during the three months ended September 30, 2016, compared to $299 thousand for the same period in 2015. Amortization of capitalized servicing rights was $237 thousand for the three months ended September 30, 2016, compared to $264 thousand for the same period in 2015.

Following table is an analysis of the aggregate changes in the valuation allowance for capitalized servicing rights during the periods indicated:


	Three months ended September 30,						Nine months ended September 30,
(Dollars in thousands)	2016			2015			2016		2015
Balance, beginning of period	$	265		$	59		$	73	$	19
(Decrease) increase		(107	)		(23	)		85		17

Balance, end of period	$	158		$	36		$	158	$	36

Note H—Securities Sold Under Agreements to Repurchase

The securities sold under agreements to repurchase are securities sold on a short-term basis by the Company that have been accounted for not as sales but as borrowings. The securities consisted of debt securities issued by government-sponsored enterprises, mortgage-backed securities and municipal bonds. The securities were held in the Company’s safekeeping account at the Federal Home Loan Bank of Boston under the control of the Company and pledged to the purchasers of the securities. The purchasers have agreed to sell to the Company substantially identical securities at the maturity of the agreements.

The following table represents the Company’s short-term collateralized financing obtained through repurchase agreements and the related collateral pledged as of the periods indicated:


(Dollars in thousands)	September 30, 2016		December 31, 2015
Repurchase agreements collateral
U.S. Treasury notes	$	—	$	20,973
U.S. government-sponsored enterprise bonds		300		414
Mortgage-backed securities		24,108		2,896
Municipal bonds		740		729

Total	$	25,148	$	25,012

Repurchase agreements	$	21,522	$	17,957

Note I—Stock-Based Compensation

The Company’s 2014 Stock Incentive Plan, which was approved by the stockholders on May 8, 2014, had 349,150 shares remaining available for issuance at September 30, 2016. The Company accounts for the plan under ASC 718-10, “Compensation-Stock Compensation-Overall.” During the nine months ended September 30, 2016 and 2015, stock-based compensation expense of $257 thousand and $165 thousand, respectively, was recognized under the Company’s equity plan. During the three months ended September 30, 2016 and 2015, stock-based compensation expense of $86 thousand was recognized under the Company’s equity plan. As of September 30, 2016, there were no options and 69,400 non-vested restricted stock awards outstanding under the 2004 Plan.

The Company granted a total of 16,500 shares of restricted stock awards to directors of the Company effective May 1, 2014. The restricted stock was granted under the Company’s 2004 Stock Incentive Plan and awarded the directors shares of restricted common stock of the Company. Of the shares granted, 1,500 shares vested immediately on May 1, 2014 with the remaining 15,000 shares vesting ratably over a five-year period beginning on May 1, 2015.

The Company granted a total of 64,250 shares of restricted stock awards to officers of the Company effective June 11, 2015. The restricted stock was granted under the Company’s 2014 Stock Incentive Plan and awarded the officers shares of restricted common stock of the Company. The shares vest ratably over a five-year period beginning on June 11, 2016.

Note J—Pension Benefits

The following summarizes the net periodic pension cost for the periods indicated:


	Three months ended September 30,						Nine months ended September 30,
(Dollars in thousands)	2016			2015			2016			2015
Interest cost	$	93		$	93		$	278		$	280
Expected return on plan assets		(189	)		(160	)		(566	)		(481	)
Amortization of unrecognized net loss		96			89			288			266

Net periodic pension cost	$	—		$	22		$	—		$	65

Note K—Derivative Instruments and Hedging Activities

The Company’s mortgage banking activities include IRLCs and forward sales commitments that result in derivative instruments. IRLCs are provided on applications for residential mortgages intended for resale and are accounted for as non-hedging derivatives. The Company arranges offsetting forward sales commitments for these rate-locks, which are designated as economic hedges.

The IRLCs 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, the commitment period expires or the borrower decides not to contract for the loan.

The following table summarizes the fair values of derivative instruments in the consolidated balance sheet as of the periods indicated:


(Dollars in thousands)	September 30, 2016
	Notional Amount		Fair Value Asset/(Liability)
Interest rate lock commitments	$	20,419	$	180
Forward loan sale commitments	$	20,904	$	(69	)


(Dollars in thousands)	December 31, 2015
	Notional Amount		Fair Value Asset/(Liability)
Interest rate lock commitments	$	4,623	$	32
Forward loan sale commitments	$	5,135	$	(14	)

Note L—Earnings Per Share (“EPS”)

The Company computes earnings per share in accordance with FASB ASC 260-10. Under the guidance, unvested restricted stock awards that contain non-forfeitable rights to dividends or dividend equivalents are participating securities and, therefore, are included in computing basic EPS pursuant to the two-class method. The two-class method determines earnings per share for each class of common stock and participating securities according to dividends or dividend equivalents and their respective participation rights in undistributed earnings.

Basic EPS has been computed using the weighted average number of common shares outstanding during each period. Diluted EPS for the nine months ended September 30, 2016 and 2015 assumes, as of the beginning of the period, exercise of stock awards using the treasury stock method.

The following is a reconciliation of the numerators and denominators used in the calculation of Basic and Diluted EPS for the three and nine months ended September 30, 2016 and 2015:


(Dollars in thousands, except per share data)	For the three months ended September 30,						For the nine months ended September 30,
	2016			2015			2016			2015
Net income as reported	$	2,307		$	2,147		$	7,144		$	6,868
Cumulative preferred stock dividend earned		—			(20	)		—			(60	)
Dividends and undistributed earnings allocated to participating shares		(18	)		(26	)		(71	)		(52	)

Net income applicable to common stock	$	2,289		$	2,101		$	7,073		$	6,756

Weighted average common shares outstanding for basic EPS		8,317,518			8,254,688			8,300,832			8,234,789
Effect of dilutive equity-based awards		3,305			10,499			2,478			7,514

Weighted average common shares outstanding for dilutive EPS		8,320,823			8,265,187			8,303,310			8,242,303
Earnings per common share – basic	$	0.28		$	0.25		$	0.85		$	0.82

Earnings per common share – diluted	$	0.28		$	0.25		$	0.85		$	0.82

Note M—Accumulated Other Comprehensive Loss

Accumulated other comprehensive loss consists of the following:


	As of
(Dollars in thousands)	September 30, 2016			December 31, 2015
Net unrealized holding gain (loss) on available-for-sale securities, net of tax	$	736		$	(810	)
Unrecognized net actuarial loss, defined benefit pension plan, net of tax		(3,040	)		(3,040	)

Accumulated other comprehensive loss	$	(2,304	)	$	(3,850	)

Reclassification disclosures for the periods ended September 30, 2016 and 2015 follow:


	For the three months ended September 30,						For the nine months ended September 30,
(Dollars in thousands)	2016			2015			2016			2015
Net unrealized holding gains on available-for-sale securities	$	51		$	437		$	4,102		$	697
Reclassification adjustment for realized gains in net income (1)		(342	)		—			(1,543	)		(373	)

Other comprehensive (loss) income before income tax effect		(291	)		437			2,559			324
Income tax benefit (expense)		116			(174	)		(1,013	)		(129	)

Other comprehensive (loss) income, net of tax effect	$	(175	)	$	263		$	1,546		$	195

(1)

Reclassification adjustments are comprised of realized securities gains. The gains have been reclassified out of accumulated other comprehensive loss and have affected certain lines in the condensed consolidated statements of income as follows: the pre-tax amounts are included in gain on sales and calls of securities, net, the tax expense in the amount of $613 thousand and $148 thousand for nine months ended September 30, 2016 and 2015, respectively, and $136 thousand and zero for the three months ended September 30, 3016 and 2015, respectively, are included in provision for income taxes and the after tax amounts are included in net income.

Note N—Operating Segments

The Company has two reportable operating segments: Banking, which includes the activities of the Bank and its subsidiaries, excluding Charter Holding, and Wealth Management, which includes the activities of Charter Holding and its subsidiaries. Activities of the Company, which operates as the parent holding company of the Bank and its subsidiaries, and all financial activity between the Company and the Banking and Wealth Management segments are eliminated.

The accounting policies of each reportable segment are the same as those of the Company. Income tax expense for the individual segments is calculated based on the activity of the segments.

A summary of the Company’s operating segments is as follows:


(Dollars in thousands)	Banking		Wealth Management		Holding Company			Eliminations			Total Consolidated
Three Months Ended September 30, 2016
Net interest and dividend income (expense)	$	11,274	$	7	$	(482	)	$	—		$	10,799
Provision for loan losses		310		—		—			—			310
Noninterest income		3,092		2,131		3,293			(3,340	)		5,176
Noninterest expense		9,591		1,809		820			(47	)		12,173

Income before provision for income taxes		4,465		329		1,991			(3,293	)		3,492
Provision (benefit) for income taxes		1,380		121		(316	)		—			1,185

Net income	$	3,085	$	208	$	2,307		$	(3,293	)	$	2,307

Total Assets	$	1,582,184	$	25,158	$	179,665		$	(202,925	)	$	1,584,082


(Dollars in thousands)	Banking		Wealth Management		Holding Company			Eliminations			Total Consolidated
Three Months Ended September 30, 2015
Net interest and dividend income (expense)	$	10,900	$	5	$	(462	)	$	—		$	10,443
Provision for loan losses		21		—		—			—			21
Noninterest income		2,517		2,071		2,521			(2,723	)		4,386
Noninterest expense		9,861		1,750		145			—			11,756

Income before provision for income taxes		3,535		326		1,914			(2,723	)		3,052
Provision (benefit) for income taxes		1,014		124		(233	)		—			905

Net income	$	2,521	$	202	$	2,147		$	(2,723	)	$	2,147

Total Assets	$	1,488,823	$	22,655	$	170,586		$	(191,252	)	$	1,490,812

(Dollars in thousands)	Banking		Wealth Management		Holding Company			Eliminations			Total Consolidated
Nine Months Ended September 30, 2016
Net interest and dividend income (expense)	$	33,708	$	16	$	(1,432	)	$	—		$	32,292
Provision for loan losses		542		—		—			—			542
Noninterest income		9,291		6,337		9,735			(9,869	)		15,494
Noninterest expense		29,473		5,381		2,035			(134	)		36,755

Income before provision for income taxes		12,984		972		6,268			(9,735	)		10,489
Provision (benefit) for income taxes		3,862		359		(876	)		—			3,345

Net income	$	9,122	$	613	$	7,144		$	(9,735	)	$	7,144

Total Assets	$	1,582,184	$	25,158	$	179,665		$	(202,925	)	$	1,584,082

(Dollars in thousands)	Banking		Wealth Management		Holding Company			Eliminations			Total Consolidated
Nine Months Ended September 30, 2015
Net interest and dividend income (expense)	$	32,207	$	12	$	(1,378	)	$	—		$	30,841
Provision for loan losses		440		—		—			—			440
Noninterest income		8,567		6,301		8,161			(8,841	)		14,188
Noninterest expense		28,730		5,219		720			—			34,669

Income before provision for income taxes		11,604		1,094		6,063			(8,841	)		9,920
Provision (benefit) for income taxes		3,443		414		(805	)		—			3,052

Net income	$	8,161	$	680	$	6,868		$	(8,841	)	$	6,868

Total Assets	$	1,488,823	$	22,655	$	170,586		$	(191,252	)	$	1,490,812

Note O—Merger Agreement

On May 5, 2016, the Company announced the signing of a definitive merger agreement pursuant to which Bar Harbor Bankshares (“Bar Harbor”), the holding company for Bar Harbor Bank & Trust (the “Bar Harbor Bank”), will acquire the Company, whereby the Company will merge with and into Bar Harbor (the “Merger”). Thereafter, pursuant to the terms of the plan of bank merger to be entered into by the Bank and Bar Harbor Bank, the Bank will merge with and into Bar Harbor Bank, with Bar Harbor Bank surviving. Under the terms of the merger agreement, each outstanding share of the Company common stock will be converted into the right to receive 0.4970 shares of Bar Harbor common stock. The transaction is expected to close in the first quarter of 2017, subject to customary closing conditions, including receipt of regulatory approvals and the approvals of the shareholders of the Company and Bar Harbor. If the merger is not consummated under certain circumstances, the Company has agreed to pay Bar Harbor a termination fee of $5.5 million.

Note P—Subsequent Events

On October 13, 2016, the Company declared a regular quarterly cash dividend of $0.14 per common share payable October 31, 2016, to stockholders of record as of October 24, 2016.

On October 28 and October 31, 2016, respectively, there was a separation of service of two Charter Trust Company officers. The Officers’ employment agreements provide for payouts of three years and two years, respectively, of annual base compensation upon separation. The anticipated settlement of these contracts will result in non-recurring expenses during the fourth quarter of 2016. The final amount of the compensation payments is not yet known.

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

Highlights and Overview

Our profitability is derived from our two operating segments, Banking and Wealth Management. The following is a summary of key financial results for the nine months ended September 30, 2016:

Highlights of the nine months ended September 30, 2016 include:

•

Net income applicable to common stock increased 4.69% compared to the same period in 2015.

•

Return on average common stockholders’ equity of 6.78% and return on average assets of 0.60%.

•

Book value per common share increased 4.02% to $16.98 as of September 30, 2016.

•

Net loans increased $19.3 million, or 1.58%, to $1.2 billion as of September 30, 2016.

•

Loans totaling $282.0 million were originated.

•

Our loan servicing portfolio increased $21.3 million to $467.1 million.

•

Net loan charge-offs were $462 thousand, or 0.05% (annualized) of average loans, for the nine months ended September 30, 2016.

•

As a percentage of total loans, nonperforming loans were 0.40%.

•

Net interest margin was 3.02%.

•

Noninterest income increased 9.20% to $15.5 million compared to the same period in 2015.

The following discussion is intended to assist in understanding our financial condition and results of operations. This discussion should be read in conjunction with our unaudited condensed consolidated financial statements and accompanying notes contained elsewhere in this report.

Critical Accounting Policies

Our condensed consolidated financial statements are prepared in accordance with U.S. GAAP and practices within the banking industry. Application of these principles requires management to make estimates, assumptions and judgments that affect the amounts reported in our consolidated financial statements and accompanying notes. These estimates, assumptions and judgments are based on information available as of the date of the financial statements; accordingly, as this information changes, the financial statements could reflect different estimates, assumptions and judgments. Actual results could differ from those estimates.

Critical accounting estimates are necessary in the application of certain accounting policies and procedures, and are particularly susceptible to significant change. Critical accounting policies are defined as those that are reflective of significant judgments and uncertainties, and could potentially result in materially different results under different assumptions and conditions. There have been no material changes to our critical accounting policies during the nine months ended September 30, 2016. For additional information on our critical accounting policies, please refer to Note 1 of the consolidated financial statements included in our 2015 Annual Report on Form 10-K (“Annual Report”).

Operating Segments

Our operations are managed along two reportable segments that represent our core businesses: Banking and Wealth Management. The Banking segment provides a wide array of lending and depository-related products and services to individuals, businesses and municipal enterprises. The Banking segment also provides commercial insurance and consumer products, including life, health, auto and homeowner insurance, through M&E and brokerage services through LSFS. The Wealth Management segment provides trust and investment services through Charter Holding and Charter Trust. A summary of the financial results for each of our segments is included in Note N – Operating Segments in the notes to our unaudited condensed consolidated financial statements located elsewhere within this report.

Comparison of Financial Condition at September 30, 2016 (unaudited) and December 31, 2015

Assets. Total assets were $1.6 billion at September 30, 2016, compared to $1.5 billion at December 31, 2015, an increase of $66.3 million, or 4.37%.

Securities Portfolio. Securities available-for-sale increased $34.9 million, or 29.02%, to $155.1 million at September 30, 2016 from $120.2 million at December 31, 2015 as a result of $156.9 million in securities purchased during the period. Net unrealized gains on securities available-for-sale were $1.2 million at September 30, 2016 compared to net unrealized losses of $1.3 million at December 31, 2015. During the nine months ended September 30, 2016, we sold securities with a total book value of $79.2 million for a net gain on sales of $1.5 million and $362 thousand of municipal bonds were called. Our net unrealized gain (after tax) on our investment portfolio was $736 thousand at September 30, 2016 compared to a net unrealized loss (after tax) of $810 thousand at December 31, 2015. The investments in our investment portfolio that were temporarily impaired as of September 30, 2016 consisted of U.S. government-sponsored enterprise bonds, mortgage-backed securities issued by U.S. government-sponsored enterprises, municipal bonds and equity securities. The unrealized losses on debt securities are primarily attributable to changes in market interest rates. We have the ability and intent to hold debt securities until maturity, and therefore, no declines are deemed to be other-than-temporary. We do not believe the unrealized losses on equity securities relate to credit quality of the issuers. We have the ability and intent to hold these investments until a recovery of cost basis.

Loans. Net loans held in portfolio increased $19.3 million, or 1.58%, to $1.2 billion at September 30, 2016 from $1.2 billion at December 31, 2015. The increase of loans held in portfolio was primarily due to increases in conventional real estate loans of $20.1 million, home equity loans of $2.0 million, commercial real estate loans of $6.5 million and commercial and municipal loans of $3.2 million, offset in part by a decrease in land and construction loans of $11.5 million and consumer loans of $1.1 million. As a percentage of total loans, impaired loans decreased to 0.78% at September 30, 2016 from 1.06% at December 31, 2015. During the nine months ended September 30, 2016, we originated $282.0 million in loans, an increase of 6.25%, compared to $265.4 million during the same period in 2015. At September 30, 2016, our mortgage servicing loan portfolio was $467.1 million, compared to $445.9 million at December 31, 2015. We expect to continue to sell long-term fixed-rate loans with terms of more than 15 years into the secondary market in order to manage interest rate risk. Market risk exposure during the production cycle is managed through the use of secondary market forward commitments. At September 30, 2016, adjustable-rate mortgages comprised approximately 60.92% of our real estate mortgage loan portfolio, which represents a slightly higher percentage compared to the mix at December 31, 2015 of 60.67%.

Allowance and Provision for Loan Losses. We maintain an allowance for loan losses to absorb losses inherent in the loan portfolio. Adjustments to the allowance for loan losses are charged to income through the provision for loan losses. We test the adequacy of the allowance for loan losses at least quarterly by preparing an analysis applying loss factors to outstanding loans by type. This analysis stratifies the loan portfolio by loan type and assigns a loss factor to each type based on an assessment of the risk associated with each type. In determining the loss factors, we consider historical losses and market conditions. Loss factors may be adjusted for qualitative factors that, in management’s judgment, affect the collectability of the portfolio.

The allowance for loan losses incorporates the results of measuring impairment for specifically identified non-homogeneous problem loans in accordance with ASC 310-10-35, “Receivables-Overall-Subsequent Measurement.” In accordance with ASC 310-10-35, the specific allowance reduces the carrying amount of the impaired loans to their estimated fair value. A loan is recognized as impaired when it is probable that principal and/or interest is not collectible in accordance with the contractual terms of the loan. Measurement of impairment can be based on the present value of expected cash flows discounted at the loan’s effective interest rate, the market price of the loan, or the fair value of the collateral if the loan is collateral dependent. Measurement of impairment does not apply to large groups of smaller balance homogeneous loans such as residential mortgage, home equity or installment loans that are collectively evaluated for impairment.

Our commercial loan officers review the financial condition of commercial loan customers on a regular basis and perform visual inspections of facilities and inventories. We also have loan review, internal audit and compliance programs with results reported directly to the Audit Committee of the Board of Directors.

The allowance for loan losses at September 30, 2016 was $9.0 million compared to $8.9 million at December 31, 2015. The allowance for loan losses represents 0.72% of total loans held at September 30, 2016 compared to 0.73% at December 31, 2015. Total impaired loans at September 30, 2016 were $9.6 million, representing 107.08% of the allowance for loan losses. Modestly improving economic and market conditions and actual charge-off experience within the portfolio during the period resulted in us making $542 thousand in provisions to the allowance for loan losses during the nine months ended September 30, 2016, compared to $440 thousand in provisions made for the same period in 2015. Loan charge-offs were $875 thousand during the nine month period ended September 30, 2016, compared to $1.9 million for the same period in 2015. Recoveries were $413 thousand during the nine month period ended September 30, 2016, compared to $771 thousand for the same period in 2015. This activity resulted in net charge-offs of $462 thousand for the nine month period ended September 30, 2016, compared to $1.1 million for the same period in 2015. One-to-four family residential mortgages, commercial mortgages, commercial and municipal and consumer loans accounted for 31%, 37%, 5% and 27%, respectively, of the amounts charged-off during the nine month period ended September 30, 2016.

The effects of national economic issues that continue to be felt in our local communities and the national economic outlook as well as portfolio performance and charge-offs influenced our decision to maintain our allowance for loan losses at $9.0 million. The risk of loss inherent in the loan portfolio was affected by an increase in the originated loan portfolio, a reduction in impaired loans and modestly improving economic conditions. Management may make additional provisions during the remainder of 2016 to maintain the allowance at an adequate level.

Included in the allowance for loan losses is an allowance for losses from the fee for service overdraft program. Our policy is to maintain an allowance equal to 100% of the aggregate balance of negative balance accounts that have remained negative for 30 days or more. Negative balance accounts are charged-off when the balance has remained negative for 60 consecutive days. At September 30, 2016, the overdraft allowance was $31 thousand, compared to $16 thousand at December 31, 2015. There were provisions of $92 thousand for overdraft losses recorded during the nine month period ended September 30, 2016, compared to $40 thousand for the same period during 2015. Ongoing provisions are anticipated as overdraft charge-offs continue and we adhere to our policy to maintain an allowance for overdraft losses equal to 100% of the aggregate negative balance of accounts remaining negative for 30 days or more.

The following tables are a summary of activity in the allowance for loan losses account for the periods indicated:


(Dollars in thousands)	Nine months ended September 30, 2016
	Originated			Acquired			Total
Balance, beginning of year	$	8,607		$	298		$	8,905

Charge-offs:
Conventional		(225	)		(48	)		(273	)
Commercial real estate		(324	)		—			(324	)
Commercial and municipal loans		(45	)		—			(45	)
Consumer loans		(232	)		(1	)		(233	)

Total charged-off loans		(826	)		(49	)		(875	)

Recoveries:
Conventional		52			34			86
Commercial real estate		139			—			139
Commercial and municipal loans		56			4			60
Consumer loans		122			6			128

Total recoveries		369			44			413

Net charge-offs:		(457	)		(5	)		(462	)

Provision (benefit) for loan loss charged to income:
Conventional		572			25			597
Commercial real estate		(306	)		(52	)		(358	)
Construction		38			(11	)		27
Commercial and municipal loans		(64	)		(26	)		(90	)
Consumer loans		226			(5	)		221
Unallocated		145			—			145

Total provision (benefit)		611			(69	)		542

Ending balance	$	8,761		$	224		$	8,985


(Dollars in thousands)	Nine months ended September 30, 2015
	Originated			Acquired			Total
Balance, beginning of year	$	9,269		$	—		$	9,269

Charge-offs:
Conventional		(352	)		(200	)		(552	)
Commercial real estate		(770	)		(311	)		(1,081	)
Construction		—			—			—
Consumer loans		(161	)		(20	)		(181	)
Commercial and municipal loans		(28	)		(31	)		(59	)

Total charged-off loans		(1,311	)		(562	)		(1,873	)

Recoveries:
Conventional		101			8			109
Commercial real estate		474			—			474
Construction		—			—			—
Consumer loans		95			9			104
Commercial and municipal loans		66			18			84

Total recoveries		736			35			771

Net charge-offs:		(575	)		(527	)		(1,102	)

Provision (benefit) for loan loss charged to income:
Conventional		(247	)		192			(55	)
Commercial real estate		211			311			522
Construction		(488	)		—			(488	)
Consumer loans		60			11			71
Commercial and municipal loans		30			13			43
Unallocated		347			—			347

Total provision		(87	)		527			440

Ending balance	$	8,607		$	—		$	8,607

The following table sets forth the allocation of the allowance for loan losses, the percentage of allowance to the total allowance, and the percentage of loans in each category to total loans as of the dates indicated:


(Dollars in thousands)	September 30, 2016								December 31, 2015
			% of Allowance			% of Loans					% of Allowance			% of Loans
Real estate loans
Conventional, 1-4 family and home equity loans	$	4,577		51	%		55	%	$	3,997		45	%		54	%
Commercial		2,286		25	%		22	%		2,751		31	%		21	%
Land and construction		235		3	%		2	%		182		2	%		3	%
Commercial and municipal loans		1,146		13	%		11	%		1,192		13	%		11	%
Collateral and consumer loans		184		2	%		—			68		1	%		—
Unallocated		207		2	%		—			62		1	%		—
Acquired loans (discounts to related credit quality)		224		3	%		9	%		298		3	%		10	%
Impaired loans		126		1	%		1	%		355		4	%		1	%

Allowance	$	8,985		100	%		100	%	$	8,905		100	%		100	%

Allowance for originated loans as a percentage of originated loans				0.77	%							0.78	%
Non-performing loans as a percentage of allowance				55.89	%							67.67	%

The following table shows total allowances including overdraft allowances:


(Dollars in thousands)	September 30, 2016		December 31, 2015
Allowance for loan losses	$	8,954	$	8,889
Overdraft allowance		31		16

Total allowance	$	8,985	$	8,905

Asset Quality. Classified loans include non-performing loans and performing loans that have been adversely classified, net of specific reserves. Total classified loans net of specific reserves were $20.7 million at September 30, 2016, compared to $19.7 million at December 31, 2015. OREO was $321 thousand at September 30, 2016 compared to $904 thousand at December 31, 2015. Losses have occurred in the liquidation process and our loss experience suggests it is prudent for us to continue funding provisions to build the allowance for loan losses. While, for the most part, quantifiable loss amounts have not been identified with individual credits, we anticipate more charge-offs as loan issues are resolved. The impaired loans meet the criteria established under ASC 310-10-35. Four loans considered to be impaired loans at September 30, 2016 have specific allowances identified and assigned. The four loans are secured by real estate. At September 30, 2016, the allowance included $126 thousand allocated to impaired loans compared to $386 thousand at December 31, 2015.

At September 30, 2016, we had 51 loans totaling $7.2 million considered to be TDRs as defined in ASC 310-40, “Receivables-Troubled Debt Restructurings by Creditors,” included in impaired loans. At September 30, 2016, 43 of the TDRs were performing under contractual terms. Of the loans classified as TDRs, 8 were non-performing at September 30, 2016. The total balance of these past due loans was $1.0 million. At December 31, 2015, we had 56 loans totaling $8.4 million considered to be TDRs.

Loans over 90 days past due were $4.2 million at September 30, 2016, compared to $3.9 million at December 31, 2015. Loans 30 to 89 days past due totaled $2.7 million at September 30, 2016, compared to $6.0 million at December 31, 2015. As a percentage of assets, the recorded investment in non-performing loans decreased from 0.40% at December 31, 2015 to 0.32% at September 30, 2016 and, as a percentage of total loans, decreased from 0.49% at December 31, 2015 to 0.40% at September 30, 2016.

Loans classified for regulatory purposes as loss, doubtful, substandard or special mention do not reflect trends or uncertainties that we reasonably expect will materially impact future operating results, liquidity or capital resources. For the nine-month period ended September 30, 2016, all loans about which management possesses information regarding possible borrower credit problems and doubts as to borrowers’ ability to comply with present loan repayment terms or to repay a loan through liquidation of collateral are included in the tables below or discussed herein.

At September 30, 2016, there were no other loans excluded from the tables below or not discussed above where known information about possible credit problems of the borrowers caused management to have doubts as to the ability of the borrowers to comply with present loan repayment terms and which may result in disclosure of such loans in the future.

The following table shows the breakdown of the amount of non-performing assets and non-performing assets as a percentage of the total allowance and total assets as of the dates indicated:


	September 30, 2016								December 31, 2015
(Dollars in thousands)	Amount		Percentage of Total Allowance			Percentage of Total Assets			Amount		Percentage of Total Allowance			Percentage of Total Assets
Non-accrual loans	$	5,022		55.89	%		0.32	%	$	6,026		67.67	%		0.40	%
Other real estate owned and chattel		321		3.57	%		0.02	%		904		10.15	%		0.06	%

Total non-performing assets	$	5,343		59.46	%		0.34	%	$	6,930		77.82	%		0.46	%

The following table sets forth the recorded investment in nonaccrual loans by category as of the dates indicated:


(Dollars in thousands)	September 30, 2016		December 31, 2015
Real estate:
Conventional	$	2,325	$	3,017
Home equity		114		183
Commercial		2,416		2,242
Land and construction		94		—
Commercial and municipal		73		584

Total	$	5,022	$	6,026

We believe the allowance for loan losses is at a level sufficient to cover inherent losses, given the current level of risk in the loan portfolio. At the same time, we recognize that the determination of future loss potential is intrinsically uncertain. Future adjustments to the allowance may be necessary due to increases in the loan portfolio, or if economic, real estate and other conditions differ substantially from the current operating environment and result in increased levels of non-performing loans and substantial differences between estimated and actual losses. Adjustments to the allowance are charged to income through the provision for loan losses.

Goodwill. Goodwill was $44.6 million, or 2.81% of total assets, as of September 30, 2016, compared to $44.6 million, or 2.94% of total assets, as of December 31, 2015.

Other Intangible Assets. Other intangible assets were $6.8 million, or 0.43% of total assets, as of September 30, 2016, compared to $7.8 million, or 0.52% of total assets, as of December 31, 2015. The decrease was due to normal amortization of core deposit intangible and customer list assets.

Other Real Estate Owned. OREO was $321 thousand, representing one residential property and one commercial property, at September 30, 2016, compared to $904 thousand, representing three residential properties and two commercial properties at December 31, 2015. During the nine months ended September 30, 2016, three properties were sold while no additional properties were added.

Deposits. Total deposits decreased $15.6 million, or 1.35%, to $1.1 billion at September 30, 2016 compared to $1.2 billion at December 31, 2015. The decrease was primarily due to a decrease of $13.7 million in savings and money market accounts and a decrease of $11.6 million in time deposits, partially offset by increases of $9.6 million in checking accounts.

Borrowings. We had outstanding balances of $202.2 million in advances from the FHLB at September 30, 2016, representing an increase of $52.2 million in outstanding balances compared to December 31, 2015. In addition to advances, we had 10 letters of credit totaling $31.2 million with the FHLB to secure customer deposits under pledge agreements. These letters of credit are factored against borrowing capacity with the FHLB. Securities sold under agreements to repurchase increased $3.6 million, or 19.85%, to $21.5 million at September 30, 2016 from $18.0 million at December 31, 2015.

Comparison of the Operating Results for the Nine Months Ended September 30, 2016 and September 30, 2015 (unaudited)

Overview. Consolidated net income for the nine months ended September 30, 2016 was $7.1 million, or $0.85 per diluted common share, compared to $6.9 million, or $0.82 per diluted common share, for the same period in 2015, an increase of $276 thousand, or 4.02%. Our net interest margin increased to 3.02% for the nine months ended September 30, 2016 from 2.97% for the nine months ended September 30, 2015. Our return on average assets and average common stockholders’ equity for the nine months ended September 30, 2016 were 0.60% and 6.78%, respectively, compared to 0.61% and 6.80%, respectively, for the same period in 2015.

Net Interest and Dividend Income. Net interest and dividend income increased $1.5 million, or 4.70%, to $32.3 million for the nine-month period ended September 30, 2016, compared to $30.8 million for the nine-month period ended September 30, 2015, due to the additional income of $1.3 million primarily related to securities purchased in the first and second quarter of 2016 and a decrease in interest on deposits of $241 thousand, or 8.04%, offset in part by an increase in interest on advances and other borrowed money of $679 thousand, or 92.13%.

Interest and Dividend Income. For the nine months ended September 30, 2016, total interest and dividend income increased $2.0 million, or 5.47%, to $38.0 million, compared to $36.0 million for the same period in 2015. Interest and fees on loans increased $483 thousand, or 1.39%, to $35.2 million for the nine-month period ended September 30, 2016, compared to $34.7 million for the same period in 2015. Interest and dividends on investments and other interest increased $1.5 million, or 110.21%, for the nine-month period ended September 30, 2016 compared to the same period in 2015.

Interest Expense. For the nine months ended September 30, 2016, total interest expense increased $521 thousand, or 10.06%, to $5.7 million, compared to $5.2 million for the same period in 2015. Interest on deposits decreased $241 thousand, or 8.04%, to $2.8 million for the nine-month period ended September 30, 2016 compared to the same period in 2015 due in part to the migration from time deposits to lower cost deposit products. For the nine months ended September 30, 2016, interest on advances and other borrowed money increased $679 thousand, or 92.13%, to $1.4 million from $737 thousand for the same period in 2015 due in part to the increase in FHLB advances of $52.2 million during the nine months ended September 30, 2016.

The following table sets forth information concerning average interest-earning assets and interest-bearing liabilities and the average yields and rates thereon for the nine-month periods indicated.


	Nine month period ended September 30,
	2016							2015
(Dollars in thousands)	Average Balance⁽¹⁾		Interest		Yield/ Cost⁽⁴⁾			Average Balance⁽¹⁾		Interest		Yield/ Cost⁽⁴⁾
Assets:
Interest-earning assets:
Loans⁽²⁾	$	1,248,491	$	35,153		3.75	%	$	1,216,071	$	34,670		3.80	%
Investment securities and other ⁽⁵⁾		175,646		2,840		2.16	%		166,678		1,351		1.08	%

Total interest-earning assets		1,424,137		37,993		3.56	%		1,382,749		36,021		3.47	%

Noninterest-earning assets:
Cash		32,105							15,824
Other noninterest-earning assets⁽³⁾		127,083							97,463

Total noninterest-earning assets		159,188							113,287

Total	$	1,583,325						$	1,496,036

Interest-bearing liabilities:
Savings, NOW and MMAs	$	774,643	$	696		0.12	%	$	753,722	$	712		0.13	%
Time deposits		322,265		2,062		0.85	%		342,971		2,287		0.89	%
Repurchase agreements		19,197		78		0.54	%		16,686		50		0.40	%
Subordinated debentures and other borrowed funds		249,142		2,865		1.53	%		172,478		2,131		1.65	%

Total interest-bearing liabilities		1,365,247		5,701		0.56	%		1,285,857		5,180		0.54	%

Noninterest-bearing liabilities:
Demand deposits		55,408							52,418
Other		22,172							15,121

Total noninterest-bearing liabilities		77,570							67,539

Stockholders’ equity		140,498							142,640

Total	$	1,583,325						$	1,496,036

Net interest and dividend income/Net interest rate spread			$	32,292		3.00	%			$	30,841		2.93	%

Net interest margin						3.02	%						2.97	%

Percentage of interest-earning assets to interest-bearing liabilities						104.31	%						107.54	%

(1)	Monthly average balances have been used for all periods.

(2)	Loans include 90-day delinquent loans and other loans, which have been placed on a non-accruing status. Management does not believe that including the 90-day delinquent loans and other loans on non-accrual in loans caused any material difference in the information presented.

(3)	Other noninterest-earning assets include non-earning assets and OREO.

(4)	Yields and costs are annualized.

(5)	The yield on investment securities does not consider the impact of the tax effect on tax-exempt municipal bonds.

The following table sets forth the dollar volume of increase (decrease) in interest income and interest expense resulting from changes in the volume of earning assets and interest-bearing liabilities, and from changes in rates for the nine month periods indicated. Volume changes are computed by multiplying the volume difference by the prior period’s rate. Rate changes are computed by multiplying the rate difference by the prior period’s balance. The change in interest income and expense due to both rate and volume has been allocated proportionally between the volume and rate variances (in thousands).


	Nine Months Ended September 30, 2016 vs. 2015 Increase (Decrease) Due to
	Volume			Rate			Total
	(Dollars in thousands)
Interest income on loans	$	903		$	(420	)	$	483
Interest income on investments		76			1,413			1,489

Total interest income		979			993			1,972

Interest expense on savings, NOW and MMAs		21			(37	)		(16	)
Interest expense on time deposits		(135	)		(90	)		(225	)
Interest expense on repurchase agreements		8			20			28
Interest expense on subordinated debentures and other borrowed funds		869			(135	)		734

Total interest expense		763			(242	)		521

Net interest income	$	216		$	1,235		$	1,451

Provision for Loan Losses. The provision for loan losses (excluding overdraft losses) was $450 thousand for the nine months ended September 30, 2016, compared to $400 thousand of provisions during the same period in 2015. The amount of the provision is consistent with activity in the portfolio during the related periods and allowance adequacy models. We recorded $92 thousand in provisions for overdraft losses in the nine months ended September 30, 2016, compared to $40 thousand in provisions during the same period in 2015. For additional information on provisions and adequacy, please refer to the Allowance for Loan Losses section herein.

Noninterest Income and Expense. For the nine months ended September 30, 2016, total noninterest income increased $1.3 million, or 9.20%, to $15.5 million, compared to $14.2 million for the same period in 2015.

Customer service fees decreased $26 thousand, or 0.60%, to $4.3 million from $4.3 million for the nine months ended September 30, 2015. This decrease includes a decrease of $63 thousand in overdraft fees, offset in part by an increase in interchange income of $56 thousand.

Gain on sales and calls of securities increased $1.2 million, or 313.67%, to $1.5 million for the nine months ended September 30, 2016 from $373 thousand for the nine months ended September 30, 2015.

Mortgage banking activities decreased $93 thousand, or 9.23%, to $915 thousand from $1.0 million for the nine months ended September 30, 2015. The change represents a decrease of $268 thousand for capitalized mortgage servicing rights, which were partially offset by a decrease of $7 thousand for the amortization of mortgage servicing rights, a gain of $83 thousand related to fair market value adjustments to secondary market derivatives, an increase of $49 thousand in servicing fee income and $47 thousand increase in gains on the sale of loans. These changes reflect changes in pipelines, market rates and shifts in consumer demand for long-term fixed rate products.

Net losses on other real estate and property owned decreased $14 thousand to a net loss of $55 thousand for the nine months ended September 30, 2016 from a net loss of $69 thousand for the same period in 2015.

Trust and investment management fee income decreased $63 thousand, or 0.99%, to $6.3 million for the nine months ended September 30, 2016, compared to $6.3 million for the same period in 2015.

Insurance and brokerage service income increased $84 thousand, or 7.22% to $1.2 million for the nine months ended September 30, 2016 compared to $1.2 million for the same period in 2015.

Bank-owned life insurance income increased $202 thousand, or 44.89% to $652 thousand for the nine months ended September 30, 2016 compared to $450 thousand for the same period in 2015, primarily related to the addition of $10 million of bank-owned life insurance purchased during the fourth quarter of 2015.

Other income increased $6 thousand, or 6.74%, to $95 thousand for the nine months ended September 30, 2016 from $89 thousand for the same period in 2015.

Total noninterest expenses increased $2.1 million, or 6.02%, to $36.8 million for the nine months ended September 30, 2016, compared to $34.7 million for the same period in 2015, as discussed below.

Salaries and employee benefits increased $553 thousand, or 3.05%, to $18.7 million from $18.1 million for the nine months ended September 30, 2015. Salary expense increased $492 thousand, or 3.47%, to $14.7 million from $14.2 million for the same period in 2015, reflecting ordinary cost-of-living adjustments, staffing increases and promotional increases. The deferral of expenses in conjunction with the origination of loans increased $119 thousand, or 7.43%, to $1.7 million from $1.6 million for the same period in 2015.

Occupancy expenses decreased $300 thousand, or 6.38%, to $4.4 million from $4.7 million for the same period in 2015. The decrease relates primarily to decreases in snow removal and fuel expenses of $99 thousand and $60 thousand, respectively, due to mild weather during the first quarter of 2016 compared to the same period in 2015 as well as cost savings realized in 2016 due to closing two locations during the fourth quarter of 2015.

Advertising and promotion decreased $113 thousand, or 15.33% to $624 thousand from $737 thousand for the same period in 2015. Outside services increased $91 thousand, or 4.83%, to $2.0 million from $1.9 million for the same period in 2015. Professional services decreased $96 thousand, or 9.47%, to $918 thousand from $1.0 million for the same period in 2015.

Supplies expense increased $35 thousand, or 8.29%, to $457 thousand from $422 thousand for the same period in 2015. Telephone expense decreased $23 thousand, or 2.83%, to $790 thousand from $813 thousand for the same period in 2015.

Merger related expenses during the nine months ending September 30, 2016 were $1.3 million compared to none for the same period in 2015.

Amortization of intangible assets decreased $134 thousand, or 11.63%, to $1.0 million from $1.2 million for the same period in 2015 as our intangible assets are on the sum-of-the-years-digits declining amortization method, resulting in a reduction to year-over-year amortization.

Other expenses increased $723 thousand, or 16.09%, to $5.2 million from $4.5 million for the same period in 2015. This increase includes increases of $241 thousand in contributions, $74 thousand in insurance premium expense, $67 thousand of MSR impairment expense, $125 thousand in expenses related to ATM and debit card losses, $165 thousand in franchise taxes and $93 thousand related to vesting of stock awards.

Comparison of the Operating Results for the Three Months Ended September 30, 2016 and September 30, 2015 (unaudited)

Overview. Consolidated net income for the three months ended September 30, 2016 was $2.3 million, or $0.28 per diluted common share, compared to $2.1 million, or $0.25 per diluted common share, for the same period in 2015, an increase of $160 thousand, or 7.45%. Our net interest margin increased to 3.02% for the three months ended September 30, 2016 from 2.99% for the three months ended September 30, 2015. Our return on average assets and average common stockholders’ equity for the three months ended September 30, 2016 were 0.58% and 6.54%, respectively, compared to 0.57% and 6.32%, respectively, for the same period in 2015.

Net Interest and Dividend Income. Net interest and dividend income increased $356 thousand, or 3.41%, to $10.8 million for the three month period ended September 30, 2016, compared to $10.4 million for the three month period ended September 30, 2015, due to the additional income of $399 thousand primarily related to securities purchased in the first and second quarter of 2016 and a decrease in interest on deposits of $32 thousand, or 3.40%, offset in part by an increase in interest on advances and other borrowed money of $248 thousand, or 116.98%.

Interest and Dividend Income. For the three months ended September 30, 2016, total interest and dividend income increased $601 thousand, or 4.97%, to $12.7 million, compared to $12.1 million for the same period in 2015. Interest and fees on loans increased $156 thousand, or 1.34%, to $11.8 million for the three month period ended September 30, 2016, compared to $11.6 million for the same period in 2015. Interest and dividends on investments and other interest increased $445 thousand, or 92.13%, for the three month period ended September 30, 2016 compared to the same period in 2015.

Interest Expense. For the three months ended September 30, 2016, total interest expense increased $245 thousand, or 14.95%, to $1.9 million, compared to $1.6 million for the same period in 2015. Interest on deposits decreased $32 thousand, or 3.40%, to $909 thousand for the three month period ended September 30, 2016 compared to the same period in 2015 due in part to the migration from time deposits to lower cost deposit products. For the three months ended September 30, 2016, interest on advances and other borrowed money increased $248 thousand, or 116.98%, to $460 thousand from $212 thousand for the same period in 2015 due in part to the increase in FHLB advances during the period.

The following table sets forth information concerning average interest-earning assets and interest-bearing liabilities and the average yields and rates thereon for the three-month periods indicated.


	Three month period ended September 30,
	2016							2015
(Dollars in thousands)	Average Balance⁽¹⁾		Interest		Yield/ Cost⁽⁴⁾			Average Balance⁽¹⁾		Interest		Yield/ Cost⁽⁴⁾
Assets:
Interest-earning assets:
Loans⁽²⁾	$	1,258,557	$	11,755		3.74	%	$	1,215,447	$	11,599		3.82	%
Investment securities and other⁽⁵⁾		169,682		928		2.19	%		179,830		483		1.07	%

Total interest-earning assets		1,428,239		12,683		3.55	%		1,395,277		12,082		3.46	%

Noninterest-earning assets:
Cash		37,279							6,013
Other noninterest-earning assets⁽³⁾		128,368							108,654

Total noninterest-earning assets		165,647							114,667

Total	$	1,593,886						$	1,509,944

Interest-bearing liabilities:
Savings, NOW and MMAs	$	788,520	$	234		0.12	%	$	777,212	$	257		0.13	%
Time deposits		312,539		675		0.86	%		337,560		684		0.81	%
Repurchase agreements		20,367		27		0.53	%		17,874		18		0.40	%
Subordinated debentures and other borrowed funds		248,991		948		1.52	%		162,736		680		1.67	%

Total interest-bearing liabilities		1,370,417		1,884		0.55	%		1,295,382		1,639		0.51	%

Noninterest-bearing liabilities:
Demand deposits		59,469							55,930
Other		22,881							14,684

Total noninterest-bearing liabilities		82,350							70,614

Stockholders’ equity		141,119							143,948

Total	$	1,593,886						$	1,509,944

Net interest and dividend income/Net interest rate spread			$	10,799		3.00	%			$	10,443		2.95	%

Net interest margin						3.02	%						2.99	%

Percentage of interest-earning assets to interest-bearing liabilities						104.22	%						107.71	%

(1)	Monthly average balances have been used for all periods.

(2)	Loans include 90-day delinquent loans and other loans, which have been placed on a non-accruing status. Management does not believe that including the 90-day delinquent loans and other loans on non-accrual in loans caused any material difference in the information presented.

(3)	Other noninterest-earning assets include non-earning assets and OREO.

(4)	Yields and costs are annualized.

(5)	The yield on investment securities does not consider the impact of the tax effect on tax-exempt municipal bonds.

The following table sets forth the dollar volume of increase (decrease) in interest income and interest expense resulting from changes in the volume of earning assets and interest-bearing liabilities, and from changes in rates for the three month periods indicated. Volume changes are computed by multiplying the volume difference by the prior period’s rate. Rate changes are computed by multiplying the rate difference by the prior period’s balance. The change in interest income and expense due to both rate and volume has been allocated proportionally between the volume and rate variances (in thousands).


	Three Months Ended September 30, 2016 vs. 2015 Increase (Decrease) Due to
	Volume			Rate			Total
	(Dollars in thousands)
Interest income on loans	$	302		$	(146	)	$	156
Interest income on investments		(26	)		471			445

Total interest income		276			325			601

Interest expense on savings, NOW and MMAs		7			(30	)		(23	)
Interest expense on time deposits		(6	)		(3	)		(9	)
Interest expense on repurchase agreements		3			6			9
Interest expense on subordinated debentures and other borrowed funds		314			(46	)		268

Total interest expense		318			(73	)		245

Net interest income	$	(42	)	$	398		$	356

Provision for Loan Losses. The provision for loan losses (excluding overdraft losses) was $250 thousand for the three months ended September 30, 2016, compared to no provisions during the same period in 2015. The amount of the provision is consistent with activity in the portfolio during the related periods and allowance adequacy models. We recorded $60 thousand in provisions for overdraft losses in the three months ended September 30, 2016, compared to $21 thousand in provisions during the same period in 2015. For additional information on provisions and adequacy, please refer to the Allowance for Loan Losses section herein.

Noninterest Income and Expense. For the three months ended September 30, 2016, total noninterest income increased $790 thousand, or 18.01%, to $5.2 million, compared to $4.4 million for the same period in 2015.

Customer service fees decreased $66 thousand, or 4.41%, to $1.4 million from $1.5 million for the three months ended September 30, 2015.

Gain on sales and calls of securities increased $342 thousand from none for the three months ended September 30, 2015. This increase is due to the increased volume of sales of securities during the three months ended September 30, 2016, compared to the same period in 2015.

Mortgage banking activities increased $371 thousand, or 189.29%, to $567 thousand from $196 thousand for the three months ended September 30, 2015. The change represents an increase of $133 thousand in gains on sales of loans, an increase of $48 thousand for capitalized mortgage servicing rights, decrease of $4 thousand for the amortization of mortgage servicing rights and an increase in gains on the fair market value of secondary market derivatives of $259 thousand offset by decreases in deferred loan fees on loans sold of $85 thousand. These changes reflect changes in pipelines, market rates and shifts in consumer demand for long-term fixed rate products.

Net losses on other real estate and property owned were $14 thousand for the three months ended September 30, 2016 compared to a net loss of $66 thousand for the same period in 2015.

Trust and investment management fee income increased $17 thousand, or 0.81%, to $2.1 million for the three months ended September 30, 2016, compared to $2.1 million for the same period in 2015.

Insurance and brokerage service income decreased $4 thousand, or 1.16%, to $340 thousand for the three months ended September 30, 2016 compared to $344 thousand for the same period in 2015.

Bank-owned life insurance income increased $63 thousand, or 41.45%, to $215 thousand for the three months ended September 30, 2016 compared to $152 thousand for the same period in 2015, primarily related to the addition of $10 million of bank-owned life insurance purchased during the fourth quarter of 2015.

Total noninterest expenses increased $417 thousand, or 3.55%, to $12.2 million for the three months ended September 30, 2016, compared to $11.8 million for the same period in 2015, as discussed below.

Salaries and employee benefits increased $227 thousand, or 3.71%, to $6.4 million from $6.1 million for the three months ended September 30, 2015. Salary expense increased $119 thousand, or 2.45%, to $5.0 million from $4.9 million for the same period in 2015, reflecting ordinary cost-of-living adjustments, staffing increases and promotional increases. The deferral of expenses in conjunction with the origination of loans increased $89 thousand, or 15.42%, to $668 thousand from $579 thousand for the same period in 2015.

Occupancy expenses decreased $53 thousand, or 3.57%, to $1.4 million from $1.5 million for the same period in 2015. The decrease relates primarily to $44 thousand in repairs and maintenance expenses for equipment, software and other general maintenance.

Advertising and promotion decreased $114 thousand, or 38.38%, to $183 thousand from $297 thousand for the same period in 2015. Outside services decreased $54 thousand, or 7.69%, to $648 thousand from $702 thousand for the same period in 2015 primarily related to decreases in core data processing expenses. Professional services decreased $40 thousand, or 11.27%, to $315 thousand from $355 thousand for the same period in 2015.

Supplies expense increased $11 thousand, or 7.38%, to $160 thousand from $149 thousand for the same period in 2015. Telephone expense decreased $26 thousand, or 9.52%, to $247 thousand from $273 thousand for the same period in 2015.

Merger related expenses during the three months ending September 30, 2016 were $510 thousand compared to none for the same period in 2015.

Amortization of intangible assets decreased $45 thousand, or 11.97%, to $331 thousand from $376 thousand for the same period in 2015 as our intangible assets are on the sum-of-the-years-digits declining amortization method, resulting in a reduction to year-over-year amortization.

Other expenses decreased $89 thousand, or 5.67%, to $1.5 million from $1.6 million for the same period in 2015. This decrease includes decreases of $36 thousand in contributions, $66 thousand in postage expense, $84 thousand of MSR impairment expense, $51 thousand in expenses related to ATM and debit card losses and $57 thousand related to collection of delinquent and nonperforming loans, offset in part by an increase of $100 thousand in shareholder expenses and an increase of $94 thousand in franchise tax expense.

Contractual Obligations and Contingent Liabilities

During the nine months ended September 30, 2016, there were no material changes to our contractual obligations and commitments described in the section in our Annual Report titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Contractual Obligations and Contingent Liabilities.”

Liquidity and Capital Resources

Liquidity

The term “liquidity” refers to our ability to generate adequate amounts of cash to fund loan originations, loan purchases, deposit withdrawals and operating expenses. At September 30, 2016, our liquidity was sufficient to cover our anticipated needs for funding new loan commitments of approximately $65.9 million. Our source of funds is derived primarily from net deposit inflows, loan amortizations, principal pay downs from loans, sold loan proceeds, and advances from the FHLB. At September 30, 2016, we had approximately $159.7 million in additional borrowing capacity from the FHLB.

At September 30, 2016, stockholders’ equity totaled $142.4 million, compared to $136.7 million at December 31, 2015. This increase reflects net income of $7.1 million, the declaration of $3.5 million in common stock dividends, contributions and reinvestments in the dividend reinvestment program of $192 thousand and $1.5 million in other comprehensive income.

At September 30, 2016, we had unrestricted funds available in the amount of $2.1 million. As of September 30, 2016, our total cash needs for the remainder of 2016 are estimated to be approximately $2.0 million with $1.1 million projected to be used to pay cash dividends on our common stock, $287 thousand to pay interest on our subordinated debt, $180 thousand to pay interest on our capital securities and approximately $358 thousand for ordinary operating expenses. The Bank pays dividends to the Company as its sole stockholder, within guidelines set forth by the OCC and the FRB. Since the Bank is well-capitalized and has capital in excess of regulatory requirements, it is anticipated that funds will be available to cover the additional Company cash requirements for 2016, as needed, as long as earnings at the Bank are sufficient to maintain adequate Tier 1 Capital.

For the nine months ended September 30, 2016, net cash provided by operating activities decreased $5.5 million to $10.3 million, compared to cash provided of $15.8 million for the same period in 2015. Cash provided by loans sold decreased $6.6 million for the nine months ended September 30, 2016, compared to the same period in 2015. Net gain on sales of loans increased $46 thousand for the nine months ended September 30, 2016, compared to the same period in 2015. Net gain on sales and calls of securities increased $1.2 million for the nine months ended September 30, 2016, compared to the same period in 2015, as a result of $67.0 million of securities sold or called during the nine months ended September 30, 2016, compared to approximately $41.1 million of securities sold and called during the same period in 2015. The provision for loan losses increased $102 thousand for the nine months ended September 30, 2016, compared to the same period in 2015. The change in accrued interest receivable and other assets increased $579 thousand for the nine months ended September 30, 2016, compared to the same period in 2015. The change in accrued expenses and other liabilities decreased $2.1 million, compared to the same period in 2015.

Net cash used in investing activities was $53.6 million for the nine months ended September 30, 2016, compared to cash provided of $1.8 million for the same period in 2015, a change of $55.4 million. The cash used by net securities activities was $30.0 million for the nine months ended September 30, 2016, compared to cash used in net securities activities of $6.5 million for the same period in 2015. The cash used for purchases of securities decreased by $110.0 million for the nine months ended September 30, 2016, compared to the same period in 2015, and cash provided by maturities of securities decreased $159.4 million for the nine months ended September 30, 2016, compared to the same period in 2015. Cash used in loan originations and principal collections, net, was $20.2 million for the nine months ended September 30, 2016, a change of $28.9 million, compared to cash provided of $8.7 million for the same period in 2015.

For the nine months ended September 30, 2016, net cash flows provided by financing activities were $36.8 million compared to net cash used by financing activities of $26.8 million for the nine months ended September 30, 2015, an increase of $63.6 million. For the nine months ended September 30, 2016, we experienced a net decrease of $883 thousand in cash used by deposits and securities sold under agreements to repurchase comparing cash used of $12.0 million in 2016 to cash used of $12.9 million for the same period in 2015. For the nine months ended September 30, 2016, we had an increase of $63.2 million of cash provided by FHLB advances and other borrowings, comparing $52.2 million provided for the nine months ended September 30, 2016 to net cash used of $11.0 million for the same period in 2015.

Subordinated Notes

On October 29, 2014, we entered into a Subordinated Note Purchase Agreement with certain accredited investors pursuant to which we issued an aggregate of $17.0 million of subordinated notes to the accredited investors. The notes have a maturity date of November 1, 2024 and bear interest at a fixed rate of 6.75% per annum. We may, at our option, beginning with the interest payment date of November 1, 2019, and on any interest payment date thereafter, redeem the notes, in whole or in part, at par plus accrued and unpaid interest to the date of redemption. Any partial redemption will be made pro rata among all of the noteholders. The notes are not subject to repayment at the option of the noteholders. The notes are unsecured, subordinated obligations of the Company and rank junior in right of payment to our senior indebtedness and to our obligations to our general creditors. Total expenses associated with the offering of $621 thousand are deducted from the carrying value of the subordinated notes and are being amortized on a straight-line basis over the life of the subordinated note.

The notes are intended to qualify as Tier 2 capital for regulatory purposes. We used a portion of the net proceeds from the sale of the notes to redeem a portion of our Series B Preferred Stock and we plan to use the remainder of the net proceeds for general corporate purposes. The notes were offered and sold in reliance on the exemptions from registration provided by Section 4(a)(2) of the Securities Act of 1933, as amended, and Rule 506 of Regulation D thereunder.

Capital Ratios

The Company and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by the federal banking agencies that, if undertaken, could have a direct material effect on the Company’s and the Bank’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the Bank must meet specific capital guidelines that involve quantitative measures of assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. The Company’s and the Bank’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors.

Effective January 1, 2015 (with a phase-in period of two to four years for certain components), the Company and the Bank became subject to new capital regulations adopted by the FRB and the OCC, which implement the Basel III regulatory capital reforms and the changes required by the Dodd-Frank Act. The new regulations require a new common equity Tier 1 (“CET1”) capital ratio of 4.5%, increase the minimum Tier 1 capital to risk-weighted assets ratio to 6.0% from 4.0%, require a minimum total capital to risk-weighted assets ratio of 8.0% and require a minimum Tier 1 leverage ratio of 4.0%. CET1 generally consists of common stock and retained earnings, subject to applicable adjustments and deductions. Under new prompt corrective action regulations, in order to be considered “well capitalized,” the Bank must maintain a CET1 capital ratio of 6.5% (new) and a Tier 1 ratio of 8.0% (increased from 6.0%), a total risk based capital ratio of 10.0% (unchanged) and a Tier 1 leverage ratio of 5.0% (unchanged).

The new regulations implemented changes to what constitutes regulatory capital. Certain instruments will no longer constitute qualifying capital, subject to phase-out periods. In addition, Tier 2 capital is no longer limited to the amount of Tier 1 capital included in total capital. Mortgage servicing rights, certain deferred tax assets and investments in unconsolidated subsidiaries over designated percentages of CET1 will be deducted from capital. The Company and the Bank have elected to permanently opt out of the inclusion of accumulated other comprehensive income in capital calculations, as permitted by the regulations. This opt-out will reduce the impact of market volatility on our regulatory capital ratios.

The new regulations also changed the risk weights of certain assets, including an increase in the risk weight of certain high volatility commercial real estate acquisition, development and construction loans and non-residential mortgage loans that are 90 days past due or on non-accrual status to 150% from 100%, a credit conversion factor for the unused portion of commitments with maturities of less than one year that are not cancellable to 20% from 0%, an increase in the risk weight for mortgage servicing and deferred tax assets that are not deducted from capital to 250% from 100%, and an increase in the risk weight for equity exposures to 600% from 100%.

As of September 30, 2016 (unaudited), the Company and the Bank met each of their capital requirements and the most recent notification from the OCC categorized the Bank as “well capitalized”. There are no conditions or events since that notification that management believes have changed the Bank’s category.

The Company’s and the Bank’s actual capital amounts and ratios are presented in the table below as of September 30, 2016.


						For Capital					To Be Well Capitalized Under Prompt Corrective
	Actual					Adequacy Purposes					Action Provisions
(Dollars in thousands)	Amount		Ratio			Amount		Ratio			Amount		Ratio
Lake Sunapee Bank Group:
Tier 1 Leverage Capital	$	120,857		7.83	%	$	61,751		4.0	%		N/A		N/A
Tier 1 Risk-Based Capital		120,857		11.34			63,941		6.0			N/A		N/A
Total Risk-Based Capital		147,009		13.79			85,255		8.0			N/A		N/A
Common Equity Tier 1 Capital		100,857		9.46			47,956		4.5			N/A		N/A
Lake Sunapee Bank, fsb:
Tier 1 Leverage Capital	$	134,685		8.73	%	$	61,722		4.0	%	$	77,153		5.0	%
Tier 1 Risk-Based Capital		134,685		12.65			63,892		6.0			85,190		8.0
Total Risk-Based Capital		143,837		13.51			85,190		8.0			106,487		10.0
Common Equity Tier 1 Capital		134,685		12.65			47,919		4.5			69,217		6.5

Capital Conservation Buffer

The required minimum conservation buffer began to be phased in incrementally, starting at 0.625% on January 1, 2016 and will increase to 1.25% on January 1, 2017, 1.875% on January 1, 2018 and 2.5% on January 1, 2019. The final capital rules impose restrictions on capital distributions and certain discretionary cash bonus payments if the minimum capital conservation buffer is not met.

At September 30, 2016, the capital levels of both the Company and the Bank exceeded all regulatory capital requirements and the Bank’s regulatory capital ratios were above the minimum levels required to be considered well capitalized for regulatory purposes. The capital levels of both the Company and the Bank at September 30, 2016 also exceeded the minimum capital requirements including the currently applicable capital conservation buffer of 0.625%.

Tangible Book Value

Book value per common share was $16.98 at September 30, 2016, compared to $16.32 per common share at December 31, 2015. Tangible book value per common share was $11.51 at September 30, 2016, compared to $10.76 per common share at December 31, 2015. Tangible book value per common share is a non-U.S. GAAP financial measure calculated using U.S. GAAP amounts. Tangible book value per common share is calculated by dividing tangible common equity by the total number of common shares outstanding at a point in time. Tangible common equity is calculated by excluding the balance of goodwill, other intangible assets and preferred stock from the calculation of stockholders’ equity. We believe that tangible book value per common share provides information to investors that may be useful in understanding our financial condition. Because not all companies use the same calculation of tangible common equity and tangible book value per common share, this presentation may not be comparable to other similarly titled measures calculated by other companies.

A reconciliation of these non-U.S. GAAP financial measures is provided below:


(Dollars in thousands, except per share data)	September 30, 2016		December 31, 2015
Stockholders’ equity	$	142,389	$	136,708
Less goodwill ⁽¹⁾		40,847		40,847
Less other intangible assets⁽¹⁾		4,981		5,726

Tangible common equity	$	96,561	$	90,135

Ending common shares outstanding		8,388,079		8,376,841
Tangible book value per common share	$	11.51	$	10.76

(1)	Net of related deferred tax liability.

Capital Securities

On March 30, 2004, NHTB Capital Trust II (“Trust II”), a Connecticut statutory trust formed by the Company, completed the sale of $10.0 million of Floating Capital Securities, adjustable every three months at LIBOR plus 2.79% (“Capital Securities II”). Trust II also issued common securities to us and used the net proceeds from the offering to purchase a like amount of our Junior Subordinated Deferrable Interest Debentures (“Debentures II”). Debentures II are the sole assets of Trust II. Total expenses associated with the offering of $160 thousand are deducted from the carrying value of the debentures and are being amortized on a straight-line basis over the life of Debentures II.

Capital Securities II accrue and pay distributions quarterly based on the stated liquidation amount of $10 per floating capital security. We have fully and unconditionally guaranteed all of the obligations of Trust II. The guaranty covers the quarterly distributions and payments on liquidation or redemption of Capital Securities II, but only to the extent that Trust II has funds necessary to make these payments.

Capital Securities II are mandatorily redeemable upon the maturing of Debentures II on March 30, 2034 or upon earlier redemption as provided in the Indenture. We have the right to redeem Debentures II, in whole or in part, at the liquidation amount plus any accrued but unpaid interest to the redemption date.

On March 30, 2004, NHTB Capital Trust III (“Trust III”), a Connecticut statutory trust formed by the Company, completed the sale of $10.0 million of 6.06% 5 Year Fixed-Floating Capital Securities (“Capital Securities III”). Trust III also issued common securities to us and used the net proceeds from the offering to purchase a like amount of our 6.06% Junior Subordinated Deferrable Interest Debentures (“Debentures III”). Debentures III are the sole assets of Trust III. Total expenses associated with the offering of $160 thousand are deducted from the carrying value of the debentures and are being amortized on a straight-line basis over the life of Debentures III.

Capital Securities III accrue and pay distributions quarterly at an annual rate of 6.06% for the first five years of the stated liquidation amount of $10 per fixed-floating capital security. We have fully and unconditionally guaranteed all of the obligations of Trust III. The guaranty covers the quarterly distributions and payments on liquidation or redemption of Capital Securities III, but only to the extent that Trust III has funds necessary to make these payments.

Capital Securities III are mandatorily redeemable upon the maturing of Debentures III on March 30, 2034 or upon earlier redemption as provided in the Indenture. We have the right to redeem Debentures III, in whole or in part, at the liquidation amount plus any accrued but unpaid interest to the redemption date.

Stock Repurchase Plan

The Board of Directors determined that a share buyback is appropriate to enhance stockholder value because such repurchases generally increase earnings per common share, return on average assets and on average equity; three performance benchmarks against which bank and thrift holding companies are measured. On June 12, 2007, the Board of Directors reactivated a previously adopted but incomplete stock repurchase program to repurchase up to 253,776 shares of common stock. We buy stock in the open market whenever the price of the stock is deemed reasonable and we have funds available for the purchase. At September 30, 2016, there were 148,088 shares available to be repurchased under the repurchase plan previously approved by the Board of Directors. The Company did not repurchase any shares during the nine months ended September 30, 2016.

Off Balance Sheet Arrangements

We do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Asset-Liability Management

Market risk and interest rate risk management is governed by the Asset/Liability Committee (“ALCO”). The ALCO establishes exposure limits that define our tolerance for interest rate risk. The ALCO manages the composition of the balance sheet over a range of potential fluctuations in interest rates while responding, as appropriate, to market demand for loan and deposit products. Current exposures versus limits are reported to the Board of Directors at least quarterly. The policy limits and guidelines serve as benchmarks for measuring interest rate risk and for providing a framework for evaluation and interest rate risk management decision-making.

Market Risk

Market risk is the risk that the market value or estimated fair value of our assets, liabilities and derivative financial instruments will decline as a result of changes in interest rates or financial market volatility, or that our net income will be significantly reduced by interest rate changes.

Interest Rate Risk

The principal market risk facing us is interest rate risk, which may include repricing risk, yield-curve risk, basis risk and prepayment risk. Repricing risk exists when the change in the average yield of either interest-earning assets or interest-bearing liabilities is more sensitive than the other to changes in market interest rates. A change in sensitivity could reflect an imbalance in the repricing opportunities of our assets and liabilities. Yield curve risk reflects the possibility that the changes in the shape of the yield curve could have different effects on our assets and liabilities. Basis risk exists when different parts of the balance sheet are subject to varying base rates reflecting the possibility that the spread from those base rates will deviate. Prepayment risk is associated with financial instruments with an option to prepay before the stated maturity often at a time of disadvantage to the person selling the option; this risk is most often associated with the prepayment of loans, callable investments and callable borrowings.

Interest rate risk can be measured by analyzing the extent to which the repricing of assets and liabilities is mismatched to create an interest rate sensitivity gap. An asset or liability is said to be interest rate sensitive within a specific period if it will mature or reprice within that period. The interest rate sensitivity gap is defined as the difference between the amount of interest-earning assets maturing or repricing within a specific time period and the amount of interest-bearing liabilities maturing or repricing within that same time period. A gap is considered positive when the amount of interest rate-sensitive assets exceeds the amount of interest rate-sensitive liabilities. A gap is considered negative when the amount of interest rate-sensitive liabilities exceeds the amount of interest rate-sensitive assets. During a period of falling interest rates, therefore, a positive gap would tend to adversely affect net interest income. Conversely, during a period of rising interest rates, a positive gap position would tend to result in an increase in net interest income.

Income simulation is the primary tool for measuring the interest rate risk inherent in our balance sheet at a given point in time by showing the effect on net interest income, over a 12-month period, of a variety of interest rate shocks. These simulations take into account repricing, maturity and prepayment characteristics of individual products. The ALCO reviews simulation results to determine whether the exposure resulting from changes in market interest rates remains within established tolerance levels over a 12-month horizon, and develops appropriate strategies to manage this exposure.

Our one-year cumulative interest rate gap at September 30, 2016 was positive 4.74%, compared to the December 31, 2015 gap of positive 1.56%. With an asset sensitive positive gap, if rates were to rise, net interest margin would likely increase and if rates were to fall, the net interest margin would likely decrease. Over the next 12 months, $75.0 million more assets are subject to repricing than liabilities.

As another part of interest rate risk analysis, we use an interest rate sensitivity model, which generates estimates of the change in our economic value of equity (“EVE”) over a range of interest rate scenarios. EVE is the present value of expected cash flows from assets, liabilities and off-balance sheet contracts. The EVE ratio, under any rate scenario, is defined as the EVE in that scenario divided by the market value of assets in the same scenario. Modeling changes require making certain assumptions, which may or may not reflect the manner in which actual yields and costs respond to the changes in market interest rates. In this regard, the EVE model assumes that the composition of our interest sensitive assets and liabilities existing at the beginning of a period remain constant over the period being measured and that a particular change in interest rates is reflected uniformly across the yield curve. Accordingly, although the EVE measurements and net interest income models provide an indication of our interest rate risk exposure at a particular point in time, such measurements are not intended to and do not provide a precise forecast of the effect of changes in market rates on our net interest income and will likely differ from actual results.

The following table sets forth our EVE at September 30, 2016, as calculated by an independent third party agent:


(Dollars in thousands)	Book Value		-100 bp			0 bp			+100 bp			+200 bp			+300 bp			+400 bp
EVE:
Amount	$	172,690	$	120,938		$	135,213		$	129,633		$	119,713		$	108,162		$	98,584
Percent of change				-10.6	%					-4.1	%		-11.5	%		-20.0	%		-27.1	%
EVE Ratio:
Ratio				7.70	%		8.77	%		8.62	%		8.18	%		7.59	%		7.09	%
Change in basis points				-107						-15			-59			-118			-168

Management controls the Company’s interest rate exposure using several strategies, which include adjusting the maturities of securities in the Company’s investment portfolio, limiting or expanding the terms of loans originated, monitoring and limiting, as appropriate, long-term fixed rate deposits, and laddering maturities of FHLB advances. The Company limits this risk by monitoring and limiting, as appropriate, securities it invests in to those with limited average life changes under certain interest rate shock scenarios, or securities with embedded prepayment penalties. The Company also may use derivative instruments, principally interest rate swaps, to manage its interest rate risk. Information on derivative instruments is included in Note K – Derivative Instruments and Hedging Activities in the notes to our unaudited condensed consolidated financial statements located elsewhere within this report.

Item 4. Controls and Procedures

Evaluation of disclosure controls and procedures. Management, including our President and Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended, (the “Exchange Act”)) as of the end of the period covered by this report. Based upon that evaluation, our President and Chief Executive Officer and Chief Financial Officer concluded that the disclosure controls and procedures were effective, in all material respects, to ensure that information required to be disclosed in the reports we file and submit under the Exchange Act is (i) recorded, processed, summarized and reported as and when required and (ii) accumulated and communicated to our management, including our President and Chief Executive Officer and the Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

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

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

There is no material litigation pending to which we or any of our subsidiaries are a party or to which our property or the property of any of our subsidiaries is subject, other than ordinary routine litigation incidental to our business.

Item 1A. Risk Factors

In addition to the other information contained in this Quarterly Report on Form 10-Q, the following risk factors represent material updates and additions to the risk factors previously disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2015 as filed with the SEC.

There are other risks inherent to our business, which are disclosed within Part I, Item 1A, “Risk Factors” of our Annual Report. You should carefully consider the risk factors included in our Annual Report, together with all of the other information included in this Quarterly Report on Form 10-Q as well as our other publicly available filings with the SEC. To the extent that any of the information contained in this Quarterly Report on Form 10-Q constitutes forward-looking statements, the risk factor set forth below also is a cautionary statement identifying important factors that could cause our actual results to differ materially from those expressed in any forward-looking statements made by or on behalf of us.

If the merger with Bar Harbor is not completed, we will have incurred substantial expenses without our stockholders realizing the expected benefits.

On May 5, 2016, we entered into an Agreement and Plan of Merger with Bar Harbor pursuant to which we will merge with and into Bar Harbor, with Bar Harbor as the surviving corporation. We currently expect that the merger will be completed in the first quarter of 2017. It is possible, however, that factors outside of our control could require the parties to complete the merger at a later time, or not to complete the merger at all. In the event that the merger is not consummated for any reason, we will be subject to many risks, including the costs related to the merger, such as legal, accounting and advisory fees, which must be paid even if the merger is

not completed, and, potentially, the payment of a termination fee under certain circumstances. If the merger is not consummated, the market price of our common stock could decline. We also could be subject to litigation related to any failure to complete the merger or related to any enforcement proceeding commenced against us to perform our obligations under the merger agreement.

Our stockholders will receive a fixed ratio of 0.4970 shares of Bar Harbor common stock for each share of our common stock, regardless of any changes in the market value of our common stock or Bar Harbor common stock before the completion of the merger.

Upon completion of the merger, each share of the Company’s common stock will be converted into the right to receive 0.4970 shares of Bar Harbor common stock. There will be no adjustment to the exchange ratio for changes in the market price of either our common stock or Bar Harbor common stock, and we do not have a right to terminate the merger agreement based upon changes in the market price of Bar Harbor common stock, subject to the limited exception described below. Accordingly, the dollar value of Bar Harbor common stock that our stockholders will receive upon completion of the merger will depend upon the market value of Bar Harbor common stock at the time of completion of the merger, which may be lower or higher than the closing price of Bar Harbor common stock on the last full trading day preceding public announcement that Bar Harbor and we entered into the merger agreement, the last full trading day prior to the date of proxy statement delivered to our stockholders or the date of the stockholder meeting. The market values of Bar Harbor’s common stock and our common stock have varied since we entered into the merger agreement with Bar Harbor and will continue to vary in the future due to changes in the business, operations or prospects of Bar Harbor and us, market assessments of the merger, regulatory considerations, market and economic considerations, and other factors, most of which are beyond our control.

We may choose to terminate the merger if Bar Harbor’s stock price declines by 20% from $34.55 and by 20% compared to the SNL Bank Index, as determined and calculated under the terms of the merger agreement, subject to Bar Harbor’s option to increase the exchange ratio.

We will be subject to business uncertainties and contractual restrictions while the merger is pending.

Uncertainty about the effect of the merger on employees, suppliers and customers may have an adverse effect on us. These uncertainties may impair our ability to attract, retain and motivate key personnel until the merger is completed, and could cause customers, suppliers and others who deal with us to seek to change existing business relationships with us. Our employee retention and recruitment may be particularly challenging prior to the effective time of the merger, as employees and prospective employees may experience uncertainty about their future roles with the combined company.

The pursuit of the merger and the preparation for the integration may place a significant burden on management and internal resources. Any significant diversion of management attention away from ongoing business and any difficulties encountered in the transition and integration process could affect our financial results. In addition, the merger agreement requires that we operate in the usual, regular and ordinary course of business and restricts us from taking certain actions prior to the effective time of the merger or termination of the merger agreement without Bar Harbor’s consent in writing. These restrictions may prevent us from pursuing attractive business opportunities that may arise prior to the completion of the merger.

The termination fee and the restrictions on solicitation contained in the merger agreement may discourage other companies from trying to acquire us.

Until the completion of the merger, we are prohibited from soliciting, initiating, encouraging, or with some exceptions, considering any inquiries or proposals that may lead to a proposal or offer for a merger or other business combination transaction with any person other than Bar Harbor. In addition, we have agreed to pay a termination fee of $5.5 million following the termination of the merger agreement under certain circumstances. These provisions could discourage other companies from trying to acquire us even though those other companies might be willing to offer greater value to our stockholders than Bar Harbor has offered in the merger. The payment of the termination fee also could have a material adverse effect on our results of operations.

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

None.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

None.

Item 6. Exhibits

The exhibits required to be filed as part of this Quarterly Report on Form 10-Q are listed in the Exhibit Index attached hereto and are incorporated herein by reference.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized on November 9, 2016.

LAKE SUNAPEE BANK GROUP

(Registrant)

/s/ Stephen R. Theroux

Stephen R. Theroux

President and Chief Executive Officer

(Principal Executive Officer)

/s/ Laura Jacobi

Laura Jacobi

Executive Vice President, Chief Financial Officer and Chief Accounting Officer

(Principal Financial and Accounting Officer)

EXHIBIT INDEX


Exhibit No.		Description

2.1		Agreement and Plan of Merger, dated as of May 5, 2016, by and between Bar Harbor Bankshares and Lake Sunapee Bank Group (incorporated by reference to Exhibit 2.1 of the Form 8-K filed with the SEC on May 9, 2016).

3.1		Amended and Restated Certificate of Incorporation (incorporated by reference to Exhibit 4.1 to the Company’s Registration Statement on Form S-3 filed with the SEC on January 9, 2015).

3.2		Certificate of Amendment to the Amended and Restated Certificate of Incorporation (incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed with the SEC on May 20, 2015).

3.3		Certificate of Designations establishing the rights of the Company’s Fixed Rate Cumulative Perpetual Preferred Stock, Series A (incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed with the SEC on January 22, 2009).

3.4		Amended and Restated Certificate of Designations establishing the rights of the Company’s Non-Cumulative Perpetual Preferred Stock, Series B (incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed with the SEC on March 25, 2013).

3.5		Amended and Restated Bylaws (incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed with the SEC on December 16, 2014).

4.1		Stock Certificate (incorporated by reference to an exhibit to the Company’s Registration Statement on Form S-4 filed with the SEC on March 1, 1989).

4.2		Indenture by and between the Company, as Issuer, and U.S. Bank National Association, as Trustee, dated March 30, 2004, for Floating Rate Junior Subordinated Deferrable Interest Debentures (incorporated by reference to Exhibit 4.2 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2004 filed with the SEC on March 29, 2005).

4.3		Form of Floating Rate Junior Subordinated Deferrable Interest Debentures issued by the Company to U.S. Bank National Association, dated March 30, 2004 (incorporated by reference to Exhibit A to Exhibit 4.2 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2004 filed with the SEC on March 29, 2005).

4.4		Indenture by and between the Company, as Issuer, and U.S. Bank National Association, as Trustee, dated March 30, 2004, for Fixed/Floating Rate Junior Subordinated Deferrable Interest Debentures (incorporated by reference to Exhibit 4.4 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2004 filed with the SEC on March 29, 2005).

4.5		Form of Fixed/Floating Rate Junior Subordinated Deferrable Interest Debentures issued by the Company to U.S. Bank National Association, dated March 30, 2004 (incorporated by reference to Exhibit A to Exhibit 4.4 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2004 filed with the SEC on March 29, 2005).

4.6		Form of Subordinated Note issued by the Company to certain noteholders, dated October 24, 2014 (incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K filed with the SEC on October 29, 2014).

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

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

32.1 *		Section 1350 Certification of the Chief Executive Officer.

32.2 *		Section 1350 Certification of the Chief Financial Officer.

101		Financial statements from the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2016, formatted in XBRL (eXtensible Business Reporting Language): (i) the Condensed Consolidated Balance Sheets; (ii) the Condensed Consolidated Statements of Income; (iii) the Condensed Consolidated Statements of Comprehensive Income; (iv) the Condensed Consolidated Statements of Changes in Stockholders’ Equity and (v) the Condensed Consolidated Statements of Cash Flows; and (vi) Notes to Condensed Consolidated Financial Statements.

*	Furnished herewith and not deemed to be “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and shall not be deemed to be incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Exchange Act.

Lake Sunapee Bank Group - FORM 10-Q - November 9, 2016

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