10-Q 1 cac-063014x10q.htm 10-Q CAC-06.30.14-10Q

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

x       QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2014
OR
¨       TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File No.      0-28190
CAMDEN NATIONAL CORPORATION
(Exact name of registrant as specified in its charter)
 
MAINE
01-0413282
(State or other jurisdiction of
(I.R.S. Employer
incorporation or organization)
Identification No.)
 
 
2 ELM STREET, CAMDEN, ME
04843
(Address of principal executive offices)
(Zip Code)
 
Registrant's telephone number, including area code:  (207) 236-8821
 
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 periods that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
 
Yes x          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 x          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 x
Non-accelerated filer ¨
Smaller reporting company ¨
(Do not check if a 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 x
 
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practical date:
Outstanding at August 4, 2014:  Common stock (no par value) 7,421,595 shares.



CAMDEN NATIONAL CORPORATION

 FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 2014
TABLE OF CONTENTS OF INFORMATION REQUIRED IN REPORT
 
 
PAGE
PART I.  FINANCIAL INFORMATION
 
 
 
ITEM 1.
FINANCIAL STATEMENTS
 
 
 
 
 
Report of Independent Registered Public Accounting Firm
 
 
 
 
Consolidated Statements of Condition - June 30, 2014 and December 31, 2013
 
 
 
 
Consolidated Statements of Income - Three and Six Months Ended June 30, 2014 and 2013
 
 
 
 
Consolidated Statements of Comprehensive Income (Loss) - Three and Six Months Ended June 30, 2014 and 2013
 
 
 
 
Consolidated Statements of Changes in Shareholders’ Equity - Six Months Ended June 30, 2014 and 2013
 
 
 
 
Consolidated Statements of Cash Flows - Six Months Ended June 30, 2014 and 2013
 
 
 
 
Notes to Consolidated Financial Statements
 
 
 
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
 
 
ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
 
 
 
ITEM 4.
CONTROLS AND PROCEDURES
 
 
 
PART II. OTHER INFORMATION
 
 
 
 
ITEM 1.
LEGAL PROCEEDINGS
 
 
 
ITEM 1A.
RISK FACTORS
 
 
 
ITEM 2.
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
 
 
 
ITEM 3.
DEFAULTS UPON SENIOR SECURITIES
 
 
 
ITEM 4.
MINE SAFETY DISCLOSURES
 
 
 
ITEM 5.
OTHER INFORMATION
 
 
 
ITEM 6.
EXHIBITS
 
 
 
SIGNATURES
 
 
 
EXHIBIT INDEX
 
 
 
EXHIBITS
 

2



PART I. FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
The Shareholders and Board of Directors
Camden National Corporation
 
We have reviewed the accompanying interim consolidated financial information of Camden National Corporation and Subsidiaries as of June 30, 2014, and for the three and six-month periods ended June 30, 2014 and 2013. These financial statements are the responsibility of the Company's management.
 
We conducted our reviews in accordance with standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit in accordance with standards of the Public Company Accounting Oversight Board (United States), the objective of which is to express an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.
 
Based on our reviews, we are not aware of any material modifications that should be made to the accompanying financial statements for them to be in conformity with accounting principles generally accepted in the United States of America.
 
/s/ Berry Dunn McNeil & Parker, LLC
 
Berry Dunn McNeil & Parker, LLC
 
 
Portland, Maine
August 8, 2014


3



CONSOLIDATED STATEMENTS OF CONDITION
(In Thousands, Except Number of Shares)
 
June 30,
2014
(unaudited)
 
December 31, 2013
ASSETS
 
 

 
 

Cash and due from banks
 
$
51,465

 
$
51,355

Securities:
 
 

 
 

Available-for-sale securities, at fair value
 
772,467

 
808,477

Held-to-maturity securities, at amortized cost
 
9,798

 

Federal Home Loan Bank and Federal Reserve Bank stock, at cost
 
20,379

 
19,724

Total securities
 
802,644

 
828,201

Trading account assets
 
2,406

 
2,488

Loans
 
1,696,765

 
1,580,402

Less: allowance for loan losses
 
(21,905
)
 
(21,590
)
Net loans
 
1,674,860

 
1,558,812

Goodwill and other intangible assets
 
48,745

 
49,319

Bank-owned life insurance
 
46,961

 
46,363

Premises and equipment, net
 
24,696

 
25,727

Deferred tax assets
 
13,261

 
16,047

Interest receivable
 
5,953

 
5,808

Other real estate owned
 
2,217

 
2,195

Other assets
 
18,498

 
17,514

Total assets
 
$
2,691,706

 
$
2,603,829

LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 

 
 

Liabilities
 
 

 
 

Deposits:
 
 

 
 

Demand
 
$
242,422

 
$
241,866

Interest checking
 
440,443

 
453,909

Savings and money market
 
659,718

 
675,679

Certificates of deposit
 
330,575

 
343,034

Brokered deposits
 
184,304

 
99,336

Total deposits
 
1,857,462

 
1,813,824

Federal Home Loan Bank advances
 
56,076

 
56,112

Other borrowed funds
 
464,851

 
430,058

Junior subordinated debentures
 
43,973

 
43,922

Accrued interest and other liabilities
 
31,624

 
28,817

Total liabilities
 
2,453,986

 
2,372,733

Commitments and contingencies (Notes 6, 7, and 9)
 
 
 
 
Shareholders’ Equity
 
 

 
 

Common stock, no par value; authorized 20,000,000 shares, issued and outstanding 7,421,445 and 7,579,913 shares as of June 30, 2014 and December 31, 2013, respectively
 
41,211

 
47,783

Retained earnings
 
203,683

 
195,660

Accumulated other comprehensive loss:
 
 

 
 

Net unrealized losses on available-for-sale securities, net of tax
 
(943
)
 
(7,964
)
Net unrealized losses on derivative instruments, net of tax
 
(4,437
)
 
(2,542
)
Net unrecognized losses on postretirement plans, net of tax
 
(1,794
)
 
(1,841
)
Total accumulated other comprehensive loss
 
(7,174
)
 
(12,347
)
Total shareholders’ equity
 
237,720

 
231,096

Total liabilities and shareholders’ equity
 
$
2,691,706

 
$
2,603,829


See Report of Independent Registered Public Accounting Firm.
The accompanying notes are an integral part of these consolidated financial statements.

4



CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
 
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
(In Thousands, Except Number of Shares and Per Share Data)
 
2014
 
2013
 
2014
 
2013
Interest Income
 
 

 
 

 
 
 
 
Interest and fees on loans
 
$
17,757

 
$
18,059

 
$
34,537

 
$
35,854

Interest on U.S. government and sponsored enterprise obligations
 
4,124

 
4,074

 
8,354

 
8,350

Interest on state and political subdivision obligations
 
314

 
292

 
608

 
597

Interest on federal funds sold and other investments
 
94

 
56

 
183

 
106

Total interest income
 
22,289

 
22,481

 
43,682

 
44,907

Interest Expense
 
 

 
 

 
 

 
 

Interest on deposits
 
1,565

 
1,828

 
3,116

 
3,647

Interest on borrowings
 
845

 
767

 
1,652

 
1,585

Interest on junior subordinated debentures
 
631

 
636

 
1,256

 
1,257

Total interest expense
 
3,041

 
3,231

 
6,024

 
6,489

Net interest income
 
19,248

 
19,250

 
37,658

 
38,418

Provision for credit losses
 
643

 
695

 
1,136

 
1,369

Net interest income after provision for credit losses
 
18,605

 
18,555

 
36,522

 
37,049

Non-Interest Income
 
 

 
 

 
 

 
 

Service charges on deposit accounts
 
1,620

 
1,755

 
3,089

 
3,439

Other service charges and fees
 
1,543

 
1,513

 
2,938

 
2,942

Income from fiduciary services
 
1,349

 
1,275

 
2,533

 
2,418

Brokerage and insurance commissions
 
459

 
409

 
937

 
821

Bank-owned life insurance
 
292

 
314

 
598

 
652

Net gain on sale of securities
 
285

 

 
451

 
138

Mortgage banking income, net
 
70

 
584

 
142

 
1,158

Other income
 
886

 
526

 
1,501

 
1,144

Total non-interest income
 
6,504

 
6,376

 
12,189

 
12,712

Non-Interest Expense
 
 

 
 

 
 

 
 

Salaries and employee benefits
 
8,301

 
7,961

 
16,281

 
16,322

Furniture, equipment and data processing
 
1,743

 
1,931

 
3,532

 
3,535

Net occupancy costs
 
1,270

 
1,407

 
2,650

 
2,959

Consulting and professional fees
 
782

 
585

 
1,300

 
1,132

Other real estate owned and collection costs (recoveries)
 
515

 
(22
)
 
1,028

 
866

Regulatory assessments
 
485

 
500

 
966

 
999

Amortization of intangible assets
 
287

 
287

 
574

 
574

Branch Acquisition costs
 

 
71

 

 
232

Other expenses
 
2,409

 
2,928

 
4,586

 
5,529

Total non-interest expense
 
15,792

 
15,648

 
30,917

 
32,148

Income before income taxes
 
9,317

 
9,283

 
17,794

 
17,613

Income Taxes
 
3,001

 
2,952

 
5,763

 
5,620

Net Income
 
$
6,316

 
$
6,331

 
$
12,031

 
$
11,993

 
 
 
 
 
 
 
 
 
Per Share Data
 
 

 
 

 
 

 
 

Basic earnings per share
 
$
0.85

 
$
0.83

 
$
1.60

 
$
1.57

Diluted earnings per share
 
$
0.85

 
$
0.82

 
$
1.60

 
$
1.56

Weighted average number of common shares outstanding
 
7,430,709

 
7,637,433

 
7,479,461

 
7,632,586

Diluted weighted average number of common shares outstanding
 
7,450,639

 
7,652,199

 
7,500,318

 
7,646,742

 See Report of Independent Registered Public Accounting Firm.
The accompanying notes are an integral part of these consolidated financial statements.  

5



CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(unaudited)
 
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
(In Thousands)
 
2014
 
2013
 
2014
 
2013
Net income
 
$
6,316

 
$
6,331

 
$
12,031

 
$
11,993

Other comprehensive income (loss):
 
 

 
 

 
 
 
 
Available-for-sale securities:
 
 

 
 

 
 
 
 
Net unrealized gains (losses) on available-for-sale securities arising during the period, net of tax of ($2,897), $6,808, ($3,938) and $8,315, respectively
 
5,381

 
(12,644
)
 
7,314

 
(15,443
)
Reclassification of gains included in net income, net of tax of $100, $0, $158 and $48, respectively(1)
 
(185
)
 

 
(293
)
 
(90
)
Net change in unrealized gains (losses) on available-for-sale securities, net of tax
 
5,196

 
(12,644
)
 
7,021

 
(15,533
)
Net change in unrealized (losses) gains on cash flow hedging derivatives, net of tax of $437, ($1,236), $1,020 and ($1,694), respectively
 
(812
)
 
2,296

 
(1,895
)
 
3,146

Reclassification of amortization of net unrecognized actuarial loss and prior service credit, net of tax of ($12), ($25), ($27) and ($50), respectively(2)
 
20

 
47

 
47

 
94

Other comprehensive income (loss)
 
4,404

 
(10,301
)
 
5,173

 
(12,293
)
Comprehensive income (loss)
 
$
10,720

 
$
(3,970
)
 
$
17,204

 
$
(300
)
(1) Reclassified into the consolidated statements of income in net gain on sale of securities.
(2) Reclassified into the consolidated statements of income in salaries and employee benefits.
 
See Report of Independent Registered Public Accounting Firm.
The accompanying notes are an integral part of these consolidated financial statements.

6




CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
(unaudited)
 
 
Common Stock
 
 
 
Accumulated
Other Comprehensive
Income (Loss)
 
Total Shareholders’
Equity
(In Thousands, Except Number of Shares and Per Share Data)
 
Shares
Outstanding
 
Amount
 
Retained
Earnings
 
 
Balance at December 31, 2012
 
7,622,750

 
$
49,667

 
$
181,151

 
$
2,997

 
$
233,815

Net income
 

 

 
11,993

 

 
11,993

Other comprehensive loss, net of tax
 

 

 

 
(12,293
)
 
(12,293
)
Stock-based compensation expense
 

 
159

 

 

 
159

Exercise of stock options and issuance of vested share awards, net of repurchase for tax withholdings and tax benefit
 
17,962

 
83

 

 

 
83

Cash dividends declared ($0.54 per share)
 

 

 
(4,137
)
 

 
(4,137
)
Balance at June 30, 2013
 
7,640,712

 
$
49,909

 
$
189,007

 
$
(9,296
)
 
$
229,620

 
 
 
 
 
 
 
 
 
 

Balance at December 31, 2013
 
7,579,913

 
$
47,783

 
$
195,660

 
$
(12,347
)
 
$
231,096

Net income
 

 

 
12,031

 

 
12,031

Other comprehensive income, net of tax
 

 

 

 
5,173

 
5,173

Stock-based compensation expense
 

 
431

 

 

 
431

Exercise of stock options and issuance of vested share awards, net of repurchase for tax withholdings and tax benefit
 
22,887

 
152

 

 

 
152

Common stock repurchased
 
(181,355
)
 
(7,155
)
 

 

 
(7,155
)
Cash dividends declared ($0.54 per share)
 

 

 
(4,008
)
 

 
(4,008
)
Balance at June 30, 2014
 
7,421,445

 
$
41,211

 
$
203,683

 
$
(7,174
)
 
$
237,720

 
See Report of Independent Registered Public Accounting Firm.
The accompanying notes are an integral part of these consolidated financial statements.

7



CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
 
 
Six Months Ended
June 30,
(In Thousands)
 
2014
 
2013
Operating Activities
 
 

 
 

Net income
 
$
12,031

 
$
11,993

Adjustments to reconcile net income to net cash provided by operating activities:
 
 

 
 

Provision for credit losses
 
1,136

 
1,369

Depreciation and amortization expense
 
1,459

 
1,590

Investment securities amortization and accretion, net
 
831

 
1,209

Stock-based compensation expense
 
431

 
159

Amortization of intangible assets
 
574

 
574

Net gain on sale of investment securities
 
(451
)
 
(138
)
Net increase in other real estate owned valuation allowance and loss on disposition
 
43

 
31

Originations of mortgage loans held for sale
 
(399
)
 
(22,641
)
Proceeds from the sale of mortgage loans
 
416

 
20,467

Gain on sale of mortgage loans
 
(17
)
 
(652
)
Decrease in trading assets
 
82

 
19

(Increase) decrease in other assets
 
(1,840
)
 
2,939

Increase (decrease) in other liabilities
 
271

 
(3,456
)
Net cash provided by operating activities
 
14,567

 
13,463

Investing Activities
 
 

 
 

Proceeds from sales and maturities of available-for-sale securities
 
75,517

 
75,669

Purchase of available-for-sale securities
 
(29,036
)
 
(108,954
)
Purchase of held-to-maturity securities
 
(9,847
)
 

Net increase in loans
 
(118,348
)
 
(40,340
)
Purchase of Federal Home Loan Bank stock
 
(706
)
 

Proceeds from sale of Federal Home Loan Bank and Federal Reserve Bank stock
 
51

 
1,310

Proceeds from the sale of other real estate owned
 
890

 
103

Recoveries of previously charged-off loans
 
383

 
325

Cash settlement in Branch Acquisition
 

 
(3,278
)
Purchase of premises and equipment
 
(494
)
 
(586
)
Net cash used by investing activities
 
(81,590
)
 
(75,751
)
Financing Activities
 
 

 
 

Net increase (decrease) in deposits
 
43,725

 
(35,382
)
Repayments on Federal Home Loan Bank long-term advances
 
(36
)
 
(257
)
Net increase in other borrowed funds
 
34,832

 
88,428

Common stock repurchased
 
(7,475
)
 

Exercise of stock options and issuance of restricted stock, net of repurchase for tax withholdings and tax benefit
 
152

 
83

Cash dividends paid on common stock
 
(4,065
)
 
(3,978
)
Net cash provided by financing activities
 
67,133

 
48,894

Net increase (decrease) in cash and cash equivalents
 
110

 
(13,394
)
Cash and cash equivalents at beginning of year
 
51,355

 
58,290

Cash and cash equivalents at end of period
 
$
51,465

 
$
44,896

Supplemental information
 
 

 
 

Interest paid
 
$
6,075

 
$
6,765

Income taxes paid
 
3,720

 
5,400

Transfer from loans to other real estate owned
 
955

 
976

 
See Report of Independent Registered Public Accounting Firm.
The accompanying notes are an integral part of these consolidated financial statements.

8


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in Tables Expressed in Thousands, Except Number of Shares and per Share Data)


NOTE 1 - BASIS OF PRESENTATION
 
The accompanying unaudited consolidated financial statements were prepared in accordance with instructions for Form 10-Q and, therefore, do not include all disclosures required by accounting principles generally accepted in the United States of America for complete presentation of financial statements. In the opinion of management, the consolidated financial statements contain all adjustments (consisting only of normal recurring accruals) necessary to present fairly the consolidated statements of condition of Camden National Corporation as of June 30, 2014 and December 31, 2013, the consolidated statements of income for the three and six months ended June 30, 2014 and 2013, the consolidated statements of comprehensive income (loss) for the three and six months ended June 30, 2014 and 2013, the consolidated statements of changes in shareholders' equity for the six months ended June 30, 2014 and 2013, and the consolidated statements of cash flows for the six months ended June 30, 2014 and 2013. All significant intercompany transactions and balances are eliminated in consolidation. Certain items from the prior year were reclassified to conform to the current year presentation. The income reported for the three and six months ended June 30, 2014 is not necessarily indicative of the results that may be expected for the full year. The information in this report should be read in conjunction with the consolidated financial statements and accompanying notes included in the year ended December 31, 2013 Annual Report on Form 10-K.

The acronyms and abbreviations identified below are used throughout this Form 10-Q, including Part I. "Financial Information" and Part II. "Other Information". The following is provided to aid the reader and provide a reference page when reviewing this Form 10-Q.
Acadia Trust:
Acadia Trust, N.A., a wholly-owned subsidiary of Camden National Corporation
 
Freddie Mac:
Federal Home Loan Mortgage Corporation
Act:
Medicare Prescription Drug, Improvement and Modernization Act
 
GAAP:
Generally accepted accounting principles in the United States
AFS:
Available-for-sale
 
HTM:
Held-to-maturity
ALCO:
Asset/Liability Committee
 
IRS:
Internal Revenue Service
ALL:
Allowance for loan losses
 
LIBOR:
London Interbank Offered Rate
AOCI:
Accumulated other comprehensive income (loss)
 
LTIP:
Long-Term Performance Share Plan
ASC:
Accounting Standards Codification
 
MaineHousing:
Maine State Housing Authority
ASU:
Accounting Standards Update
 
Management ALCO:
Management Asset/Liability Committee
Bank:
Camden National Bank, a wholly-owned subsidiary of Camden National Corporation
 
MBS:
Mortgage-backed security
BOLI:
Bank-owned life insurance
 
MSPP:
Management Stock Purchase Plan
Board ALCO:
Board of Directors' Asset/Liability Committee
 
MSRs:
Mortgage servicing rights
bp or bps:
Basis point(s)
 
Non-Agency:
Non-agency private issue collateralized mortgage obligation
Branch Acquisition:
The acquisition of 14 branches from Bank of America, N.A. in 2012, after divesting of one branch as required by the Department of Justice
 
OCC:
Office of the Comptroller of the Currency
Branch Divestiture:
The divestiture of five Franklin County branches in 2013
 
OCI:
Other comprehensive income (loss)
BSA:
Bank Secrecy Act
 
OFAC:
Office of Foreign Assets Control
CCTA:
Camden Capital Trust A, an unconsolidated entity formed by Camden National Corporation
 
OREO:
Other real estate owned
CSV:
Cash surrender value
 
OTTI:
Other-than-temporary impairment
CMO:
Collateralized mortgage obligation
 
SERP:
Supplemental executive retirement plans
Company:
Camden National Corporation
 
TDR:
Troubled-debt restructured loan


9



DCRP:
Defined Contribution Retirement Plan
 
UBCT:
Union Bankshares Capital Trust I, an unconsolidated entity formed by Union Bankshares Company that was subsequently acquired by Camden National Corporation
EPS:
Earnings per share
 
U.S.:
United States of America
FASB:
Financial Accounting Standards Board
 
2003 Plan:
2003 Stock Option and Incentive Plan
FDIC:
Federal Deposit Insurance Corporation
 
2012 Plan:
2012 Equity and Incentive Plan
FHLB:
Federal Home Loan Bank
 
2012 Repurchase Program:
2012 Common Stock Repurchase Program, approved by the Company's Board of Directors
FHLBB:
Federal Home Loan Bank of Boston
 
2013 Repurchase Program:
2013 Common Stock Repurchase Program, approved by the Company's Board of Directors
FRB:
Federal Reserve Bank
 
 
 

NOTE 2 – EPS
 
The following is an analysis of basic and diluted EPS, reflecting the application of the two-class method, as described below: 
 
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
 
 
2014
 
2013
 
2014
 
2013
Net income
 
$
6,316

 
$
6,331

 
$
12,031

 
$
11,993

Dividends and undistributed earnings allocated to participating securities(1)
 
(19
)
 
(20
)
 
(37
)
 
(30
)
Net income available to common shareholders
 
$
6,297

 
$
6,311

 
$
11,994

 
$
11,963

Weighted-average common shares outstanding for basic EPS
 
7,430,709

 
7,637,433

 
7,479,461

 
7,632,586

Dilutive effect of stock-based awards(2)
 
19,930

 
14,766

 
20,857

 
14,156

Weighted-average common and potential common shares for diluted EPS
 
7,450,639

 
7,652,199

 
7,500,318

 
7,646,742

Earnings per common share:
 
 

 
 

 
 
 
 
Basic EPS
 
$
0.85

 
$
0.83

 
$
1.60

 
$
1.57

Diluted EPS
 
$
0.85

 
$
0.82

 
$
1.60

 
$
1.56

Awards excluded from the calculation of diluted EPS(3):
 
 
 
 
 
 
 
 
Stock options
 
14,750

 
48,000

 
14,750

 
48,000

(1) Represents dividends paid and undistributed earnings allocated to nonvested stock-based awards that contain non-forfeitable rights to dividends.
(2) Represents the effect of the assumed exercise of stock options, vesting of restricted shares, vesting of restricted stock units, and vesting of LTIP awards that have met the performance criteria, as applicable, utilizing the treasury stock method.
(3) Represents stock-based awards not included in the computation of potential common shares for purposes of calculating diluted EPS as the exercise prices were greater than the average market price of the Company's common stock.

Nonvested stock-based payment awards that contain non-forfeitable rights to dividends are participating securities and are included in the computation of EPS pursuant to the two-class method. The two-class method is an earnings allocation formula that determines EPS for each class of common stock and participating security according to dividends declared (or accumulated) and participation rights in undistributed earnings. Certain of the Company’s nonvested stock-based awards qualify as participating securities. 
  
Net income is allocated between the common stock and participating securities pursuant to the two-class method. Basic EPS is computed by dividing net income available to common shareholders by the weighted average number of common shares outstanding during the period, excluding participating nonvested stock-based awards. 
 
Diluted EPS is computed in a similar manner, except that first the denominator is increased to include the number of additional common shares that would have been outstanding if potentially dilutive common shares were issued using the treasury stock method.


10



NOTE 3 – SECURITIES
 
The following tables summarize the amortized cost and estimated fair values of AFS and HTM securities, as of the dates indicated: 
 
Amortized
Cost
 
Unrealized
Gains
 
Unrealized
Losses
 
Fair
Value
June 30, 2014
 

 
 

 
 

 
 

AFS Securities:
 
 
 
 
 
 
 
Obligations of U.S. government-sponsored enterprises
$
4,958

 
$
58

 
$

 
$
5,016

Obligations of states and political subdivisions
27,242

 
887

 

 
28,129

Mortgage-backed securities issued or guaranteed by U.S. government-sponsored enterprises
373,575

 
6,407

 
(2,809
)
 
377,173

Collateralized mortgage obligations issued or guaranteed by U.S. government-sponsored enterprises
361,617

 
1,160

 
(7,186
)
 
355,591

Private issue collateralized mortgage obligations
6,526

 
32

 

 
6,558

Total AFS securities
$
773,918

 
$
8,544

 
$
(9,995
)
 
$
772,467

HTM Securities:
 
 
 
 
 
 
 
Obligations of states and political subdivisions
$
9,798

 
$
121

 
$
(27
)
 
$
9,892

Total HTM securities
$
9,798

 
$
121

 
$
(27
)
 
$
9,892

December 31, 2013
 

 
 

 
 

 
 

AFS Securities:
 
 
 
 
 
 
 
Obligations of states and political subdivisions
$
30,143

 
$
1,075

 
$
(11
)
 
$
31,207

Mortgage-backed securities issued or guaranteed by U.S. government-sponsored enterprises
397,409

 
5,528

 
(7,034
)
 
395,903

Collateralized mortgage obligations issued or guaranteed by U.S. government-sponsored enterprises
385,847

 
912

 
(12,324
)
 
374,435

Private issue collateralized mortgage obligations
7,329

 
10

 
(407
)
 
6,932

Total AFS securities
$
820,728

 
$
7,525

 
$
(19,776
)
 
$
808,477

 
Net unrealized losses on AFS securities at June 30, 2014 and December 31, 2013 included in AOCI amounted to $943,000 and $8.0 million, net of a deferred tax benefit of $508,000 and $4.3 million, respectively.

During the first six months of 2014, the Company purchased investment securities totaling $38.9 million. The Company designated $29.1 million as AFS securities and $9.8 million as HTM securities. The Company did not carry any HTM securities at December 31, 2013.
 
Impaired Securities
Management periodically reviews the Company’s investment portfolio to determine the cause, magnitude and duration of declines in the fair value of each security. Thorough evaluations of the causes of the unrealized losses are performed to determine whether the impairment is temporary or other-than-temporary in nature. Considerations such as the ability of the securities to meet cash flow requirements, levels of credit enhancements, risk of curtailment, recoverability of invested amount over a reasonable period of time, and the length of time the security is in a loss position, for example, are applied in determining OTTI. Once a decline in value is determined to be other-than-temporary, the value of the security is permanently reduced and a corresponding charge to earnings is recognized.
 

11



The following table presents the estimated fair values and gross unrealized losses of investment securities that were in a continuous loss position at June 30, 2014 and December 31, 2013, by length of time that individual securities in each category have been in a continuous loss position:  
 
Less Than 12 Months
 
12 Months or More
 
Total
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
June 30, 2014
 

 
 

 
 

 
 

 
 

 
 

AFS Securities:
 
 
 
 
 
 
 
 
 
 
 
Mortgage-backed securities issued or guaranteed by U.S. government-sponsored enterprises
$
14,043

 
$
(11
)
 
$
132,457

 
$
(2,798
)
 
$
146,500

 
$
(2,809
)
Collateralized mortgage obligations issued or guaranteed by U.S. government-sponsored enterprises
4,984

 
(49
)
 
246,076

 
(7,137
)
 
251,060

 
(7,186
)
Total AFS securities
$
19,027

 
$
(60
)
 
$
378,533

 
$
(9,935
)
 
$
397,560

 
$
(9,995
)
HTM Securities:
 
 
 
 
 
 
 
 
 
 
 
Obligations of states and political subdivisions
$
3,664

 
$
(27
)
 
$

 
$

 
$
3,664

 
$
(27
)
Total HTM securities
$
3,664

 
$
(27
)
 
$

 
$

 
$
3,664

 
$
(27
)
December 31, 2013
 

 
 

 
 

 
 

 
 

 
 

AFS Securities:
 
 
 
 
 
 
 
 
 
 
 
Obligations of states and political subdivisions
$
2,143

 
$
(11
)
 
$

 
$

 
$
2,143

 
$
(11
)
Mortgage-backed securities issued or guaranteed by U.S. government-sponsored enterprises
145,424

 
(4,189
)
 
43,915

 
(2,845
)
 
189,339

 
(7,034
)
Collateralized mortgage obligations issued or guaranteed by U.S. government-sponsored enterprises
239,278

 
(7,738
)
 
73,376

 
(4,586
)
 
312,654

 
(12,324
)
Private issue collateralized mortgage obligations
122

 
(4
)
 
4,945

 
(403
)
 
5,067

 
(407
)
Total AFS securities
$
386,967

 
$
(11,942
)
 
$
122,236

 
$
(7,834
)
 
$
509,203

 
$
(19,776
)

At June 30, 2014, the Company held 64 investment securities with a fair value of $401.2 million with unrealized losses totaling $10.0 million that are considered temporary. Of these, the Company had 55 MBS and CMO investments with a fair value of $378.5 million that have been in an unrealized loss position for 12 months or more. The decline in the fair value of securities is reflective of current interest rates in excess of the yield received on investments and is not indicative of an overall credit deterioration or other factors with the Company's investment portfolio. At June 30, 2014, the Company had no Non-Agency investments in an unrealized loss position.

Stress tests are performed monthly on the Company's Non-Agency investments, which are higher risk bonds within the investment portfolio, using current statistical data to determine expected cash flows and forecast potential losses. The results of the stress tests during the first six months of 2014 indicated potential future credit losses that were lower than previously recorded OTTI and, as such, no additional OTTI was recorded during the first six months of 2014.
 

12



Sale of Securities
The following table details the Company’s sales of AFS securities for the period indicated below:
 
Three Months Ended
June 30,
 
Six Months Ended June 30,
 
2014
 
2013
 
2014
 
2013
Proceeds from sales of securities
$
16,258

 
$

 
$
25,695

 
$
4,875

Gross realized gains
285

 

 
451

 
138

Gross realized losses

 

 

 

 
For the three months ended June 30, 2014, the Company sold certain AFS securities with a total carrying value of $16.0 million. For the three months ended June 30, 2014, the Company recorded net gains on the sale of AFS securities of $285,000 within non-interest income in the consolidated statements of income. The Company had not previously recorded any OTTI on these securities sold. The Company did not sell any securities during the three months ended June 30, 2013.

For the six months ended June 30, 2014 and 2013, the Company sold certain AFS securities with a total carrying value of $25.2 million and $4.7 million, respectively. For the six months ended June 30, 2014 and 2013, the Company recorded net gains on the sale of AFS securities of $451,000 and $138,000, respectively, within non-interest income in the consolidated statements of income. The Company had not previously recorded any OTTI on these securities sold.

The cost basis of securities sold is measured on a specific identification basis.

Securities Pledged
At June 30, 2014 and December 31, 2013, securities with an amortized cost of $458.5 million and $479.2 million and estimated fair values of $458.4 million and $474.7 million, respectively, were pledged to secure FHLBB advances, public deposits, and securities sold under agreements to repurchase and for other purposes required or permitted by law.
 
Contractual Maturities
The amortized cost and estimated fair values of debt securities by contractual maturity at June 30, 2014, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. 
 
Amortized
Cost
 
Fair
Value
AFS Securities
 
 
 
Due in one year or less
$
961

 
$
983

Due after one year through five years
61,077

 
61,665

Due after five years through ten years
116,946

 
118,558

Due after ten years
594,934

 
591,261

 
$
773,918

 
$
772,467

HTM Securities
 
 
 
Due in one year or less
$

 
$

Due after one year through five years

 

Due after five years through ten years
1,179

 
1,187

Due after ten years
8,619

 
8,705

 
$
9,798

 
$
9,892

 


13



NOTE 4 – LOANS AND ALLOWANCE FOR LOAN LOSSES
 
The composition of the Company’s loan portfolio at June 30, 2014 and December 31, 2013 was as follows:   
 
June 30,
2014
 
December 31,
2013
Residential real estate loans
$
567,641

 
$
570,391

Commercial real estate loans
604,140

 
541,099

Commercial loans
233,859

 
179,203

Home equity loans
273,779

 
272,630

Consumer loans
17,828

 
17,651

Deferred loan fees, net of costs
(482
)
 
(572
)
Total loans
$
1,696,765

 
$
1,580,402


The Company’s lending activities are primarily conducted in Maine. The Company originates single family and multi-family residential loans, commercial real estate loans, business loans, municipal loans and a variety of consumer loans. In addition, the Company makes loans for the construction of residential homes, multi-family properties and commercial real estate properties. The ability and willingness of borrowers to honor their repayment commitments is generally dependent on the level of overall economic activity within the geographic area and the general economy. For the three months ended June 30, 2014 and 2013, the Company sold $399,000 and $10.4 million, respectively, of fixed-rate residential mortgage loans on the secondary market that resulted in net gains on the sale of loans of $17,000 and $345,000, respectively. For the six months ended June 30, 2014 and 2013, the Company sold $399,000 and $19.8 million, respectively, of fixed-rate residential mortgage loans on the secondary market that resulted in net gains on the sale of loans of $17,000 and $652,000, respectively.

The ALL is management’s best estimate of the inherent risk of loss in the Company’s loan portfolio as of the consolidated statement of condition date. Management makes various assumptions and judgments about the collectability of the loan portfolio and provides an allowance for potential losses based on a number of factors including historical losses. If those assumptions are incorrect, the ALL may not be sufficient to cover losses and may cause an increase in the allowance in the future. Among the factors that could affect the Company’s ability to collect loans and require an increase to the ALL in the future are: (i) financial condition of borrowers; (ii) real estate market changes; (iii) state, regional, and national economic conditions; and (iv) a requirement by federal and state regulators to increase the provision for loan losses or recognize additional charge-offs.

In the second quarter of 2014, the Company made one revision to its ALL methodology specific to the allowance allocation for overdrawn checking accounts. Historically, the allocation was determined using the previous four quarters gross charge-offs. The methodology was revised to calculate the allowance using the previous four quarters net charge-off information, which is now consistent with the Company's overall allowance methodology and approach. The change in methodology was reviewed and approved by the Company's Board of Directors prior to implementation. The change resulted in a transfer of $165,000 from the allocated portion of the ALL to the unallocated portion of the ALL.

The Company's Board of Directors monitors credit risk through the Directors' Loan Review Committee, which reviews large credit exposures, monitors the external loan review reports, reviews the lending authority for individual loan officers when required, and has approval authority and responsibility for all matters regarding the loan policy and other credit-related policies, including reviewing and monitoring asset quality trends, concentration levels, and the ALL methodology. The Corporate Risk Management Group and the Credit Risk Policy Committee oversee the Company's systems and procedures to monitor the credit quality of its loan portfolio, conduct a loan review program, maintain the integrity of the loan rating system, determine the adequacy of the ALL and support the oversight efforts of the Directors' Loan Review Committee and the Board of Directors. The Company's practice is to proactively manage the portfolio such that management can identify problem credits early, assess and implement effective work-out strategies, and take charge-offs as timely as practical. In addition, the Company continuously reassesses its underwriting standards in response to credit risk posed by changes in economic conditions. For purposes of determining the ALL, the Company disaggregates its loans into portfolio segments, which include residential real estate, commercial real estate, commercial, home equity, and consumer.

14



The following table presents the activity in the ALL and select loan information by portfolio segment for the three and six months ended June 30, 2014
 
Residential 
Real Estate
 
Commercial 
Real Estate
 
Commercial
 
Home
Equity
 
Consumer
 
Unallocated
 
Total
ALL for the three months ended:
 

 
 

 
 

 
 

 
 

 
 

 
 

Beginning balance
$
5,411

 
$
4,528

 
$
6,292

 
$
2,673

 
$
310

 
$
2,456

 
$
21,670

Loans charged off
(178
)
 
(5
)
 
(307
)
 
(44
)
 
(26
)
 

 
(560
)
Recoveries
42

 
11

 
73

 
8

 
12

 

 
146

Provision (reduction)
(134
)
 
(173
)
 
426

 
115

 
22

 
393

 
649

Ending balance
$
5,141

 
$
4,361

 
$
6,484

 
$
2,752

 
$
318

 
$
2,849

 
$
21,905

ALL for the six months ended:
 
 
 
 
 
 
 
 
 
 
 
 
 
Beginning balance
$
5,603

 
$
4,374

 
$
6,220

 
$
2,403

 
$
319

 
$
2,671

 
$
21,590

Loans charged off
(361
)
 
(176
)
 
(526
)
 
(106
)
 
(40
)
 

 
(1,209
)
Recoveries
134

 
50

 
169

 
11

 
19

 

 
383

Provision (reduction)
(235
)
 
113

 
621

 
444

 
20

 
178

 
1,141

Ending balance
$
5,141

 
$
4,361

 
$
6,484

 
$
2,752

 
$
318

 
$
2,849

 
$
21,905

ALL balance attributable to loans:
 

 
 

 
 

 
 

 
 

 
 

 
 

Individually evaluated for impairment
$
1,346

 
$
397

 
$
578

 
$
805

 
$
138

 
$

 
$
3,264

Collectively evaluated for impairment
3,795

 
3,964

 
5,906

 
1,947

 
180

 
2,849

 
18,641

Total ending ALL
$
5,141

 
$
4,361

 
$
6,484

 
$
2,752

 
$
318

 
$
2,849

 
$
21,905

Loans:
 

 
 

 
 

 
 

 
 

 
 

 
 

Individually evaluated for impairment
$
11,782

 
$
7,334

 
$
4,272

 
$
2,142

 
$
433

 
$

 
$
25,963

Collectively evaluated for impairment
555,377

 
596,806

 
229,587

 
271,637

 
17,395

 

 
1,670,802

Total ending loans balance
$
567,159

 
$
604,140

 
$
233,859

 
$
273,779

 
$
17,828

 
$

 
$
1,696,765

 
The following table presents the activity in the ALL and select loan information by portfolio segment for the three and six months ended June 30, 2013

 
Residential
Real Estate
 
Commercial
Real Estate
 
Commercial
 
Home
Equity
 
Consumer
 
Unallocated
 
Total
ALL for the three months ended:
 

 
 

 
 

 
 

 
 

 
 

 
 

Beginning balance
$
7,269

 
$
3,602

 
$
6,200

 
$
3,358

 
$
222

 
$
2,718

 
$
23,369

Loans charged off
(202
)
 
(91
)
 
(167
)
 
(309
)
 
(76
)
 

 
(845
)
Recoveries
2

 
17

 
69

 

 
9

 

 
97

Provision (reduction)
(837
)
 
62

 
(314
)
 
379

 
66

 
1,344

 
700

Ending balance
$
6,232

 
$
3,590

 
$
5,788

 
$
3,428

 
$
221

 
$
4,062

 
$
23,321

ALL for the six months ended:
 

 
 

 
 

 
 

 
 

 
 

 
 

Beginning balance
$
6,996

 
$
4,549

 
$
5,933

 
$
2,520

 
$
184

 
$
2,862

 
$
23,044

Loans charged off
(347
)
 
(171
)
 
(444
)
 
(337
)
 
(133
)
 

 
(1,432
)
Recoveries
5

 
92

 
198

 
2

 
28

 

 
325

Provision (reduction)
(422
)
 
(880
)
 
101

 
1,243

 
142

 
1,200

 
1,384

Ending balance
$
6,232

 
$
3,590

 
$
5,788

 
$
3,428

 
$
221

 
$
4,062

 
$
23,321

ALL balance attributable to loans:
 

 
 

 
 

 
 

 
 

 
 

 
 

Individually evaluated for impairment
$
1,487

 
$
296

 
$
386

 
$
442

 
$
71

 
$

 
$
2,682

Collectively evaluated for impairment
4,745

 
3,294

 
5,402

 
2,986

 
150

 
4,062

 
20,639

Total ending ALL
$
6,232

 
$
3,590

 
$
5,788

 
$
3,428

 
$
221

 
$
4,062

 
$
23,321

Loans:
 

 
 

 
 

 
 

 
 

 
 

 
 

Individually evaluated for impairment
$
12,099

 
$
8,479

 
$
3,612

 
$
1,526

 
$
421

 
$

 
$
26,137

Collectively evaluated for impairment
557,422

 
514,508

 
186,456

 
300,342

 
17,694

 

 
1,576,422

Total ending loans balance
$
569,521

 
$
522,987

 
$
190,068

 
$
301,868

 
$
18,115

 
$

 
$
1,602,559



15



The following table presents the activity in the ALL and select loan information by portfolio segment for the year ended December 31, 2013
 
Residential
Real Estate
 
Commercial
Real Estate
 
Commercial
 
Home
Equity
 
Consumer
 
Unallocated
 
Total
ALL:
 

 
 

 
 

 
 

 
 

 
 

 
 

Beginning balance
$
6,996

 
$
4,549

 
$
5,933

 
$
2,520

 
$
184

 
$
2,862

 
$
23,044

Loans charged off
(1,059
)
 
(952
)
 
(1,426
)
 
(647
)
 
(190
)
 

 
(4,274
)
Recoveries
35

 
121

 
495

 
56

 
61

 

 
768

Provision (reduction)
(369
)
 
656

 
1,218

 
474

 
264

 
(191
)
 
2,052

Ending balance
$
5,603

 
$
4,374

 
$
6,220

 
$
2,403

 
$
319

 
$
2,671

 
$
21,590

ALL balance attributable to loans:
 

 
 

 
 

 
 

 
 

 
 

 
 

Individually evaluated for impairment
$
1,750

 
$
526

 
$
132

 
$
433

 
$
140

 
$

 
$
2,981

Collectively evaluated for impairment
3,853

 
3,848

 
6,088

 
1,970

 
179

 
2,671

 
18,609

Total ending ALL
$
5,603

 
$
4,374

 
$
6,220

 
$
2,403

 
$
319

 
$
2,671

 
$
21,590

Loans:
 

 
 

 
 

 
 

 
 

 
 

 
 

Individually evaluated for impairment
$
14,435

 
$
8,864

 
$
2,635

 
$
1,571

 
$
442

 
$

 
$
27,947

Collectively evaluated for impairment
555,384

 
532,235

 
176,568

 
271,059

 
17,209

 

 
1,552,455

Total ending loans balance
$
569,819

 
$
541,099

 
$
179,203

 
$
272,630

 
$
17,651

 
$

 
$
1,580,402

 
The ALL at June 30, 2014 increased $315,000 since December 31, 2013. The increase is due to loan growth of $116.4 million driven by growth in the commercial real estate and commercial portfolios, partially offset by improvement in asset quality. At June 30, 2014, loans classified Grades 7 and 8, and non-performing decreased $14.2 million since December 31, 2013.
 
The Company focuses on maintaining a well-balanced and diversified loan portfolio. Despite such efforts, it is recognized that credit concentrations may occasionally emerge as a result of economic conditions, changes in local demand, natural loan growth and runoff. To ensure that credit concentrations can be effectively identified, all commercial and commercial real estate loans are assigned Standard Industrial Classification codes, North American Industry Classification System codes, and state and county codes. Shifts in portfolio concentrations are monitored by the Corporate Risk Management Group. As of June 30, 2014 and December 31, 2013, the two most significant industry exposures within the commercial real estate loan portfolio were non-residential building operators (operators of commercial and industrial buildings, retail establishments, theaters, banks and insurance buildings) at 26% and 28%, respectively, and lodging (inns, bed & breakfasts, ski lodges, tourist cabins, hotels and motels) at 25% for both June 30, 2014 and December 31, 2013.

 To further identify loans with similar risk profiles, the Company categorizes each portfolio segment into classes by credit risk characteristic and applies a credit quality indicator to each portfolio segment. The indicators for commercial, commercial real estate and residential real estate loans are represented by Grades 1 through 10 as outlined below. In general, risk ratings are adjusted periodically throughout the year as updated analysis and review warrants. This process may include, but is not limited to, annual credit and loan reviews, periodic reviews of loan performance metrics, such as delinquency rates, and quarterly reviews of adversely risk rated loans. The Company uses the following definitions when assessing grades for the purpose of evaluating the risk and adequacy of the ALL:

Grade 1 through 6 — Grades 1 through 6 represent groups of loans that are not subject to adverse criticism as defined in regulatory guidance. Loans in these groups exhibit characteristics that represent low to moderate risks, which is measured using a variety of credit risk criteria, such as cash flow coverage, debt service coverage, balance sheet leverage, liquidity, management experience, industry position, prevailing economic conditions, support from secondary sources of repayment and other credit factors that may be relevant to a specific loan. In general, these loans are supported by properly margined collateral and guarantees of principal parties.

16



Grade 7 — Loans with potential weakness (Special Mention). Loans in this category are currently protected based on collateral and repayment capacity and do not constitute undesirable credit risk, but have potential weakness that may result in deterioration of the repayment process at some future date. This classification is used if a negative trend is evident in the obligor’s financial situation. Special mention loans do not sufficiently expose the Company such that they warrant adverse classification.
Grade 8 — Loans with definite weakness (Substandard). Loans classified as substandard are inadequately protected by the current sound worth and paying capacity of the obligor or by collateral pledged. This classification is used if borrowers experience difficulty in meeting debt repayment requirements. Deterioration is sufficient to cause the Company to look to the sale of collateral.
Grade 9 — Loans with potential loss (Doubtful). Loans classified as doubtful have all the weaknesses inherent in the substandard grade with the added characteristic that the weaknesses make collection or liquidation of the loan in full highly questionable and improbable. The possibility of some loss is extremely high, but because of specific pending factors that may work to the advantage and strengthening of the asset, its classification as an estimated loss is deferred until its more exact status may be determined.
Grade 10 — Loans with definite loss (Loss). Loans classified as loss are considered uncollectible. The loss classification does not mean that the asset has absolutely no recovery or salvage value, but rather that it is not practical or desirable to defer writing off the asset because recovery and collection time may be protracted.

Asset quality indicators are periodically reassessed to appropriately reflect the risk composition of the Company’s loan portfolio. Home equity and consumer loans are not individually risk rated, but rather analyzed as groups taking into account delinquency rates and other economic conditions which may affect the ability of borrowers to meet debt service requirements, including interest rates and energy costs. Performing loans include loans that are current and loans that are past due less than 90 days. Loans that are past due over 90 days and non-accrual loans, including TDRs, are considered non-performing.
 
The following table summarizes credit risk exposure indicators by portfolio segment as of the following dates:
 
Residential 
Real Estate
 
Commercial 
Real Estate
 
Commercial
 
Home
Equity
 
Consumer
 
Total
June 30, 2014