10-Q 1 cac-093014x10q.htm 10-Q CAC-09.30.14-10Q

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 September 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 November 3, 2014:  Common stock (no par value) 7,421,472 shares.



CAMDEN NATIONAL CORPORATION

 FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 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 - September 30, 2014 and December 31, 2013
 
 
 
 
Consolidated Statements of Income - Three and Nine Months Ended September 30, 2014 and 2013
 
 
 
 
Consolidated Statements of Comprehensive Income - Three and Nine Months Ended September 30, 2014 and 2013
 
 
 
 
Consolidated Statements of Changes in Shareholders’ Equity - Nine Months Ended September 30, 2014 and 2013
 
 
 
 
Consolidated Statements of Cash Flows - Nine Months Ended September 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 September 30, 2014, and for the three and nine-month periods ended September 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
November 7, 2014


3



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

 
 

Cash and due from banks
 
$
59,450

 
$
51,355

Securities:
 
 

 
 

Available-for-sale securities, at fair value
 
771,806

 
808,477

Held-to-maturity securities, at amortized cost
 
11,490

 

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

 
19,724

Total securities
 
803,675

 
828,201

Trading account assets
 
2,418

 
2,488

Loans
 
1,726,227

 
1,580,402

Less: allowance for loan losses
 
(21,585
)
 
(21,590
)
Net loans
 
1,704,642

 
1,558,812

Bank-owned life insurance
 
57,338

 
46,363

Goodwill and other intangible assets
 
48,458

 
49,319

Premises and equipment, net
 
24,370

 
25,727

Deferred tax assets
 
14,987

 
16,047

Interest receivable
 
6,162

 
5,808

Other real estate owned
 
1,566

 
2,195

Other assets
 
18,923

 
17,514

Total assets
 
$
2,741,989

 
$
2,603,829

LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 

 
 

Liabilities
 
 

 
 

Deposits:
 
 

 
 

Demand
 
$
281,811

 
$
241,866

Interest checking
 
484,259

 
453,909

Savings and money market
 
661,803

 
675,679

Certificates of deposit
 
321,704

 
343,034

Brokered deposits
 
178,966

 
99,336

Total deposits
 
1,928,543

 
1,813,824

Federal Home Loan Bank advances
 
56,058

 
56,112

Other borrowed funds
 
441,171

 
430,058

Junior subordinated debentures
 
43,998

 
43,922

Accrued interest and other liabilities
 
32,307

 
28,817

Total liabilities
 
2,502,077

 
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 7,421,595 and 7,579,913 shares as of September 30, 2014 and December 31, 2013, respectively
 
41,238

 
47,783

Retained earnings
 
208,125

 
195,660

Accumulated other comprehensive loss:
 
 

 
 

Net unrealized losses on available-for-sale securities, net of tax
 
(3,151
)
 
(7,964
)
Net unrealized losses on derivative instruments, net of tax
 
(4,530
)
 
(2,542
)
Net unrecognized losses on postretirement plans, net of tax
 
(1,770
)
 
(1,841
)
Total accumulated other comprehensive loss
 
(9,451
)
 
(12,347
)
Total shareholders’ equity
 
239,912

 
231,096

Total liabilities and shareholders’ equity
 
$
2,741,989

 
$
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 
 September 30,
 
Nine Months Ended 
 September 30,
(In Thousands, Except Number of Shares and Per Share Data)
 
2014
 
2013
 
2014
 
2013
Interest Income
 
 

 
 

 
 
 
 
Interest and fees on loans
 
$
18,112

 
$
17,470

 
$
52,649

 
$
53,324

Interest on U.S. government and sponsored enterprise obligations
 
3,896

 
4,091

 
12,250

 
12,441

Interest on state and political subdivision obligations
 
319

 
292

 
927

 
889

Interest on federal funds sold and other investments
 
95

 
38

 
278

 
144

Total interest income
 
22,422

 
21,891

 
66,104

 
66,798

Interest Expense
 
 

 
 

 
 

 
 

Interest on deposits
 
1,562

 
1,780

 
4,678

 
5,427

Interest on borrowings
 
848

 
767

 
2,500

 
2,352

Interest on junior subordinated debentures
 
638

 
637

 
1,894

 
1,894

Total interest expense
 
3,048

 
3,184

 
9,072

 
9,673

Net interest income
 
19,374

 
18,707

 
57,032

 
57,125

Provision for credit losses
 
539

 
665

 
1,675

 
2,034

Net interest income after provision for credit losses
 
18,835

 
18,042

 
55,357

 
55,091

Non-Interest Income
 
 

 
 

 
 

 
 

Service charges on deposit accounts
 
1,600

 
1,750

 
4,689

 
5,189

Other service charges and fees
 
1,646

 
1,568

 
4,584

 
4,510

Income from fiduciary services
 
1,212

 
1,149

 
3,745

 
3,567

Brokerage and insurance commissions
 
441

 
354

 
1,378

 
1,175

Bank-owned life insurance
 
377

 
334

 
975

 
986

Net gain on sale of securities
 

 
647

 
451

 
785

Mortgage banking income, net
 
55

 
93

 
197

 
1,251

Other income
 
618

 
580

 
2,119

 
1,724

Total non-interest income
 
5,949

 
6,475

 
18,138

 
19,187

Non-Interest Expense
 
 

 
 

 
 

 
 

Salaries and employee benefits
 
8,078

 
8,115

 
24,359

 
24,437

Furniture, equipment and data processing
 
1,704

 
1,668

 
5,236

 
5,203

Net occupancy costs
 
1,175

 
1,242

 
3,825

 
4,201

Consulting and professional fees
 
468

 
504

 
1,768

 
1,636

Other real estate owned and collection costs
 
637

 
489

 
1,665

 
1,355

Regulatory assessments
 
511

 
496

 
1,477

 
1,495

Amortization of intangible assets
 
287

 
289

 
861

 
863

Branch Acquisition and Divestiture costs
 

 
47

 

 
279

Other expenses
 
2,319

 
2,349

 
6,905

 
7,878

Total non-interest expense
 
15,179

 
15,199

 
46,096

 
47,347

Income before income taxes
 
9,605

 
9,318

 
27,399

 
26,931

Income Taxes
 
3,154

 
2,952

 
8,917

 
8,572

Net Income
 
$
6,451

 
$
6,366

 
$
18,482

 
$
18,359

 
 
 
 
 
 
 
 
 
Per Share Data
 
 

 
 

 
 

 
 

Basic earnings per share
 
$
0.87

 
$
0.83

 
$
2.47

 
$
2.40

Diluted earnings per share
 
$
0.86

 
$
0.83

 
$
2.46

 
$
2.39

Weighted average number of common shares outstanding
 
7,421,592

 
7,643,720

 
7,459,972

 
7,636,352

Diluted weighted average number of common shares outstanding
 
7,439,948

 
7,666,305

 
7,479,327

 
7,651,870

 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
(unaudited)
 
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
(In Thousands)
 
2014
 
2013
 
2014
 
2013
Net income
 
$
6,451

 
$
6,366

 
$
18,482

 
$
18,359

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 $1,189, $1,111, ($2,749) and $9,426, respectively
 
(2,208
)
 
(2,063
)
 
5,106

 
(17,506
)
Reclassification of gains included in net income, net of tax of $0, $227, $158 and $275, respectively(1)
 

 
(420
)
 
(293
)
 
(510
)
Net change in unrealized gains (losses) on available-for-sale securities, net of tax
 
(2,208
)
 
(2,483
)
 
4,813

 
(18,016
)
Net change in unrealized (losses) gains on cash flow hedging derivatives, net of tax of $50, ($239), $1,070 and ($1,933), respectively
 
(93
)
 
445

 
(1,988
)
 
3,591

Reclassification of amortization of net unrecognized actuarial loss and prior service credit, net of tax of ($13), ($25), ($40) and ($75), respectively(2)
 
24

 
47

 
71

 
141

Other comprehensive income (loss)
 
(2,277
)
 
(1,991
)
 
2,896

 
(14,284
)
Comprehensive income
 
$
4,174

 
$
4,375

 
$
21,378

 
$
4,075

(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
 

 

 
18,359

 

 
18,359

Other comprehensive loss, net of tax
 

 

 

 
(14,284
)
 
(14,284
)
Stock-based compensation expense
 

 
340

 

 

 
340

Exercise of stock options and issuance of vested share awards, net of repurchase for tax withholdings and tax benefit
 
23,914

 
258

 

 

 
258

Cash dividends declared ($0.81 per share)
 

 

 
(6,206
)
 

 
(6,206
)
Balance at September 30, 2013
 
7,646,664

 
$
50,265

 
$
193,304

 
$
(11,287
)
 
$
232,282

 
 
 
 
 
 
 
 
 
 

Balance at December 31, 2013
 
7,579,913

 
$
47,783

 
$
195,660

 
$
(12,347
)
 
$
231,096

Net income
 

 

 
18,482

 

 
18,482

Other comprehensive income, net of tax
 

 

 

 
2,896

 
2,896

Stock-based compensation expense
 

 
453

 

 

 
453

Exercise of stock options and issuance of vested share awards, net of repurchase for tax withholdings and tax benefit
 
23,037

 
157

 

 

 
157

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

 

 
(7,155
)
Cash dividends declared ($0.81 per share)
 

 

 
(6,017
)
 

 
(6,017
)
Balance at September 30, 2014
 
7,421,595

 
$
41,238

 
$
208,125

 
$
(9,451
)
 
$
239,912

 
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)
 
 
Nine Months Ended
 September 30,
(In Thousands)
 
2014
 
2013
Operating Activities
 
 

 
 

Net income
 
$
18,482

 
$
18,359

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

 
 

Provision for credit losses
 
1,675

 
2,034

Depreciation and amortization expense
 
2,199

 
2,300

Investment securities amortization and accretion, net
 
1,301

 
1,745

Stock-based compensation expense
 
453

 
340

Amortization of intangible assets
 
861

 
863

Net gain on sale of investment securities
 
(451
)
 
(785
)
Net increase in other real estate owned valuation allowance and loss on disposition
 
222

 
97

Originations of mortgage loans held for sale
 
(399
)
 
(29,515
)
Proceeds from the sale of mortgage loans
 
416

 
28,886

Gain on sale of mortgage loans
 
(17
)
 
(684
)
Decrease (increase) in trading assets
 
70

 
(9
)
Increase in other assets
 
(3,508
)
 
(87
)
Increase (decrease) in other liabilities
 
806

 
(2,539
)
Net cash provided by operating activities
 
22,110

 
21,005

Investing Activities
 
 

 
 

Proceeds from sales and maturities of available-for-sale securities
 
105,818

 
121,793

Purchase of available-for-sale securities
 
(62,494
)
 
(138,300
)
Purchase of held-to-maturity securities
 
(11,589
)
 

Net increase in loans
 
(148,967
)
 
(29,168
)
Purchase of bank-owned life insurance
 
(10,000
)
 

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
 
1,591

 
530

Recoveries of previously charged-off loans
 
538

 
436

Cash settlement in Branch Acquisition
 

 
(3,278
)
Purchase of premises and equipment
 
(831
)
 
(1,203
)
Net cash used by investing activities
 
(126,589
)
 
(47,880
)
Financing Activities
 
 

 
 

Net increase in deposits
 
114,850

 
44,210

Repayments on Federal Home Loan Bank long-term advances
 
(54
)
 
(271
)
Net increase (decrease) in other borrowed funds
 
11,171

 
(12,479
)
Common stock repurchased
 
(7,475
)
 

Exercise of stock options and issuance of restricted stock, net of repurchase for tax withholdings and tax benefit
 
157

 
258

Cash dividends paid on common stock
 
(6,075
)
 
(6,047
)
Net cash provided by financing activities
 
112,574

 
25,671

Net increase (decrease) in cash and cash equivalents
 
8,095

 
(1,204
)
Cash and cash equivalents at beginning of year
 
51,355

 
58,290

Cash and cash equivalents at end of period
 
$
59,450

 
$
57,086

Supplemental information
 
 

 
 

Interest paid
 
$
9,129

 
$
9,952

Income taxes paid
 
10,147

 
8,750

Transfer from loans to other real estate owned
 
1,184

 
1,116

Securities purchased but unsettled
 

 
14,363

 
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 September 30, 2014 and December 31, 2013, the consolidated statements of income for the three and nine months ended September 30, 2014 and 2013, the consolidated statements of comprehensive income for the three and nine months ended September 30, 2014 and 2013, the consolidated statements of changes in shareholders' equity for the nine months ended September 30, 2014 and 2013, and the consolidated statements of cash flows for the nine months ended September 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 nine months ended September 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
 
DCRP:
Defined Contribution Retirement Plan
Act:
Medicare Prescription Drug, Improvement and Modernization Act
 
EPS:
Earnings per share
AFS:
Available-for-sale
 
FASB:
Financial Accounting Standards Board
ALCO:
Asset/Liability Committee
 
FDIC:
Federal Deposit Insurance Corporation
ALL:
Allowance for loan losses
 
FHLB:
Federal Home Loan Bank
AOCI:
Accumulated other comprehensive income (loss)
 
FHLBB:
Federal Home Loan Bank of Boston
ASC:
Accounting Standards Codification
 
FRB:
Federal Reserve Bank
ASU:
Accounting Standards Update
 
Freddie Mac:
Federal Home Loan Mortgage Corporation
Bank:
Camden National Bank, a wholly-owned subsidiary of Camden National Corporation
 
GAAP:
Generally accepted accounting principles in the United States
BOLI:
Bank-owned life insurance
 
HTM:
Held-to-maturity
Board ALCO:
Board of Directors' Asset/Liability Committee
 
IRS:
Internal Revenue Service
bp or bps:
Basis point(s)
 
LIBOR:
London Interbank Offered Rate
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
 
LTIP:
Long-Term Performance Share Plan
Branch Divestiture:
The divestiture of five Franklin County branches in 2013
 
MaineHousing:
Maine State Housing Authority
BSA:
Bank Secrecy Act
 
Management ALCO:
Management Asset/Liability Committee
CCTA:
Camden Capital Trust A, an unconsolidated entity formed by Camden National Corporation
 
MBS:
Mortgage-backed security
CSV:
Cash surrender value
 
MSPP:
Management Stock Purchase Plan
CMO:
Collateralized mortgage obligation
 
MSRs:
Mortgage servicing rights
Company:
Camden National Corporation
 
NIM:
Net interest margin on a fully-taxable basis


9



N/M:
Not meaningful
 
TDR:
Troubled-debt restructured loan
Non-Agency:
Non-agency private issue collateralized mortgage obligation
 
UBCT:
Union Bankshares Capital Trust I, an unconsolidated entity formed by Union Bankshares Company that was subsequently acquired by Camden National Corporation
OCC:
Office of the Comptroller of the Currency
 
U.S.:
United States of America
OCI:
Other comprehensive income (loss)
 
2003 Plan:
2003 Stock Option and Incentive Plan
OFAC:
Office of Foreign Assets Control
 
2012 Plan:
2012 Equity and Incentive Plan
OREO:
Other real estate owned
 
2012 Repurchase Program:
2012 Common Stock Repurchase Program, approved by the Company's Board of Directors
OTTI:
Other-than-temporary impairment
 
2013 Repurchase Program:
2013 Common Stock Repurchase Program, approved by the Company's Board of Directors
SERP:
Supplemental executive retirement plans
 
 
 

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 
 September 30,
 
Nine Months Ended 
 September 30,
 
 
2014
 
2013
 
2014
 
2013
Net income
 
$
6,451

 
$
6,366

 
$
18,482

 
$
18,359

Dividends and undistributed earnings allocated to participating securities(1)
 
(20
)
 
(20
)
 
(57
)
 
(50
)
Net income available to common shareholders
 
$
6,431

 
$
6,346

 
$
18,425

 
$
18,309

Weighted-average common shares outstanding for basic EPS
 
7,421,592

 
7,643,720

 
7,459,972

 
7,636,352

Dilutive effect of stock-based awards(2)
 
18,356

 
22,585

 
19,355

 
15,518

Weighted-average common and potential common shares for diluted EPS
 
7,439,948

 
7,666,305

 
7,479,327

 
7,651,870

Earnings per common share:
 
 

 
 

 
 
 
 
Basic EPS
 
$
0.87

 
$
0.83

 
$
2.47

 
$
2.40

Diluted EPS
 
$
0.86

 
$
0.83

 
$
2.46

 
$
2.39

Awards excluded from the calculation of diluted EPS(3):
 
 
 
 
 
 
 
 
Stock options
 
30,750

 
14,250

 
14,750

 
31,000

(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 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
September 30, 2014
 

 
 

 
 

 
 

AFS Securities:
 
 
 
 
 
 
 
Obligations of U.S. government-sponsored enterprises
$
4,960

 
$
22

 
$

 
$
4,982

Obligations of states and political subdivisions
27,240

 
806

 

 
28,046

Mortgage-backed securities issued or guaranteed by U.S. government-sponsored enterprises
377,375

 
5,108

 
(4,279
)
 
378,204

Collateralized mortgage obligations issued or guaranteed by U.S. government-sponsored enterprises
360,830

 
867

 
(7,384
)
 
354,313

Private issue collateralized mortgage obligations
6,249

 
76

 
(64
)
 
6,261

Total AFS securities
$
776,654

 
$
6,879

 
$
(11,727
)
 
$
771,806

HTM Securities:
 
 
 
 
 
 
 
Obligations of states and political subdivisions
$
11,490

 
$
210

 
$
(41
)
 
$
11,659

Total HTM securities
$
11,490

 
$
210

 
$
(41
)
 
$
11,659

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 September 30, 2014 and December 31, 2013 included in AOCI amounted to $3.2 million and $8.0 million, net of a deferred tax benefit of $1.7 million and $4.3 million, respectively.

During the first nine months of 2014, the Company purchased investment securities totaling $74.1 million. The Company designated $62.5 million as AFS securities and $11.6 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 September 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
September 30, 2014
 

 
 

 
 

 
 

 
 

 
 

AFS Securities:
 
 
 
 
 
 
 
 
 
 
 
Mortgage-backed securities issued or guaranteed by U.S. government-sponsored enterprises
$
61,223

 
$
(460
)
 
$
127,219

 
$
(3,819
)
 
$
188,442

 
$
(4,279
)
Collateralized mortgage obligations issued or guaranteed by U.S. government-sponsored enterprises
80,475

 
(393
)
 
195,373

 
(6,991
)
 
275,848

 
(7,384
)
Private issue collateralized mortgage obligations
4,719

 
(64
)
 

 

 
4,719

 
(64
)
Total AFS securities
$
146,417

 
$
(917
)
 
$
322,592

 
$
(10,810
)
 
$
469,009

 
$
(11,727
)
HTM Securities:
 
 
 
 
 
 
 
 
 
 
 
Obligations of states and political subdivisions
$
3,401

 
$
(41
)
 
$

 
$

 
$
3,401

 
$
(41
)
Total HTM securities
$
3,401

 
$
(41
)
 
$

 
$

 
$
3,401

 
$
(41
)
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 September 30, 2014, the Company held 83 investment securities with a fair value of $472.4 million with unrealized losses totaling $11.8 million that are considered temporary. Of these, the Company had 49 MBS and CMO investments with a fair value of $322.6 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 September 30, 2014, the Company had no Non-Agency investments in an unrealized loss position for 12 months or more.

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 nine 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 nine 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 September 30,
 
Nine Months Ended September 30,
 
2014
 
2013
 
2014
 
2013
Proceeds from sales of securities
$

 
$
12,738

 
$
25,695

 
$
17,613

Gross realized gains

 
647

 
451

 
785

Gross realized losses

 

 

 

 
For the three months ended September 30, 2014, the Company did not sell any securities. For the three months ended September 30, 2013, the Company sold certain AFS securities with a total carrying value of $12.1 million and recorded net gains on the sale of AFS securities of $647,000 within non-interest income in the consolidated statements of income. The Company had not previously recorded any OTTI on these securities sold.

For the nine months ended September 30, 2014 and 2013, the Company sold certain AFS securities with a total carrying value of $25.2 million and $16.8 million, respectively. For the nine months ended September 30, 2014 and 2013, the Company recorded net gains on the sale of AFS securities of $451,000 and $785,000, 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 September 30, 2014 and December 31, 2013, securities with an amortized cost of $480.5 million and $479.2 million and estimated fair values of $478.9 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 September 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
$
2,186

 
$
2,209

Due after one year through five years
82,230

 
82,383

Due after five years through ten years
112,277

 
113,046

Due after ten years
579,961

 
574,168

 
$
776,654

 
$
771,806

HTM Securities
 
 
 
Due in one year or less
$

 
$

Due after one year through five years

 

Due after five years through ten years
2,334

 
2,358

Due after ten years
9,156

 
9,301

 
$
11,490

 
$
11,659

 


13



NOTE 4 – LOANS AND ALLOWANCE FOR LOAN LOSSES
 
The composition of the Company’s loan portfolio at September 30, 2014 and December 31, 2013 was as follows:   
 
September 30,
2014
 
December 31,
2013
Residential real estate loans
$
577,515

 
$
570,391

Commercial real estate loans
613,510

 
541,099

Commercial loans
245,612

 
179,203

Home equity loans
271,858

 
272,630

Consumer loans
18,149

 
17,651

Deferred loan fees, net of costs
(417
)
 
(572
)
Total loans
$
1,726,227

 
$
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. The Company did not sell any loans during the three months ended September 30, 2014. For the three months ended September 30, 2013, the Company sold $7.3 million of fixed-rate residential mortgage loans on the secondary market that resulted in net gains on the sale of loans of $32,000. For the nine months ended September 30, 2014 and 2013, the Company sold $399,000 and $28.2 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 $684,000, 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 decrease of $165,000 in the unallocated portion of the ALL.


14



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.

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

 
 

 
 

 
 

 
 

 
 

 
 

Beginning balance
$
5,141

 
$
4,361

 
$
6,484

 
$
2,752

 
$
318

 
$
2,849

 
$
21,905

Loans charged off
(9
)
 
(100
)
 
(675
)
 
(166
)
 
(59
)
 

 
(1,009
)
Recoveries
2

 
17

 
117

 
8

 
11

 

 
155

Provision (reduction)
122

 
82

 
35

 
(63
)
 
23

 
335

 
534

Ending balance
$
5,256

 
$
4,360

 
$
5,961

 
$
2,531

 
$
293

 
$
3,184

 
$
21,585

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

 
$
4,374

 
$
6,220

 
$
2,403

 
$
319

 
$
2,671

 
$
21,590

Loans charged off
(370
)
 
(276
)
 
(1,201
)
 
(272
)
 
(99
)
 

 
(2,218
)
Recoveries
136

 
67

 
286

 
19

 
30

 

 
538

Provision (reduction)
(113
)
 
195

 
656

 
381

 
43

 
513

 
1,675

Ending balance
$
5,256

 
$
4,360

 
$
5,961

 
$
2,531

 
$
293

 
$
3,184

 
$
21,585

ALL balance attributable to loans:
 

 
 

 
 

 
 

 
 

 
 

 
 

Individually evaluated for impairment
$
1,420

 
$
222

 
$
121

 
$
573

 
$
111

 
$

 
$
2,447

Collectively evaluated for impairment
3,836

 
4,138

 
5,840

 
1,958

 
182

 
3,184

 
19,138

Total ending ALL
$
5,256

 
$
4,360

 
$
5,961

 
$
2,531

 
$
293

 
$
3,184

 
$
21,585

Loans:
 

 
 

 
 

 
 

 
 

 
 

 
 

Individually evaluated for impairment
$
10,964

 
$
6,710

 
$
3,380

 
$
1,860

 
$
309

 
$

 
$
23,223

Collectively evaluated for impairment
566,134

 
606,800

 
242,232

 
269,998

 
17,840

 

 
1,703,004

Total ending loans balance
$
577,098

 
$
613,510

 
$
245,612

 
$
271,858

 
$
18,149

 
$

 
$
1,726,227

 

15



The following table presents the activity in the ALL and select loan information by portfolio segment for the three and nine months ended September 30, 2013
 
Residential
Real Estate
 
Commercial
Real Estate
 
Commercial
 
Home
Equity
 
Consumer
 
Unallocated
 
Total
ALL for the three months ended:
 

 
 

 
 

 
 

 
 

 
 

 
 

Beginning balance
$
6,232

 
$
3,590

 
$
5,788

 
$
3,428

 
$
221

 
$
4,062

 
$
23,321

Loans charged off
(340
)
 
(591
)
 
(379
)
 
(86
)
 
(42
)
 

 
(1,438
)
Recoveries

 
14

 
77

 
8

 
12

 

 
111

Provision (reduction)
709

 
547

 
465

 
137

 
40

 
(1,231
)
 
667

Ending balance
$
6,601

 
$
3,560

 
$
5,951

 
$
3,487

 
$
231

 
$
2,831

 
$
22,661

ALL for the nine months ended:
 

 
 

 
 

 
 

 
 

 
 

 
 

Beginning balance
$
6,996

 
$
4,549

 
$
5,933

 
$
2,520

 
$
184

 
$
2,862

 
$
23,044

Loans charged off
(687
)
 
(762
)
 
(823
)
 
(423
)
 
(175
)
 

 
(2,870
)
Recoveries
5

 
106

 
275

 
10

 
40

 

 
436

Provision (reduction)
287

 
(333
)
 
566

 
1,380

 
182

 
(31
)
 
2,051

Ending balance
$
6,601

 
$
3,560

 
$
5,951

 
$
3,487

 
$
231

 
$
2,831

 
$
22,661

ALL balance attributable to loans:
 

 
 

 
 

 
 

 
 

 
 

 
 

Individually evaluated for impairment
$
1,655

 
$
686

 
$
177

 
$
449

 
$
81

 
$

 
$
3,048

Collectively evaluated for impairment
4,946

 
2,874

 
5,774

 
3,038

 
150

 
2,831

 
19,613

Total ending ALL
$
6,601

 
$
3,560

 
$
5,951

 
$
3,487

 
$
231

 
$
2,831

 
$
22,661

Loans:
 

 
 

 
 

 
 

 
 

 
 

 
 

Individually evaluated for impairment
$
14,059

 
$
11,016

 
$
3,369

 
$
1,521

 
$
498

 
$

 
$
30,463

Collectively evaluated for impairment
550,493

 
511,594

 
174,486

 
304,782

 
18,128

 

 
1,559,483

Total ending loans balance
$
564,552

 
$
522,610

 
$
177,855

 
$
306,303

 
$
18,626

 
$

 
$
1,589,946


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

 

16



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 September 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 26% and 25%.

 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.
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.
 

17