10-Q 1 cac-033115x10q.htm 10-Q CAC-03.31.15-10Q
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 March 31, 2015
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 May 5, 2015:  Common stock (no par value) 7,442,559 shares.



CAMDEN NATIONAL CORPORATION

 FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 2015
TABLE OF CONTENTS OF INFORMATION REQUIRED IN REPORT
 
 
PAGE
PART I.  FINANCIAL INFORMATION
 
 
 
ITEM 1.
FINANCIAL STATEMENTS
 
 
 
 
 
Consolidated Statements of Condition - March 31, 2015 and December 31, 2014
 
 
 
 
Consolidated Statements of Income - Three Months Ended March 31, 2015 and 2014
 
 
 
 
Consolidated Statements of Comprehensive Income - Three Months Ended March 31, 2015 and 2014
 
 
 
 
Consolidated Statements of Changes in Shareholders’ Equity - Three Months Ended March 31, 2015 and 2014
 
 
 
 
Consolidated Statements of Cash Flows - Three Months Ended March 31, 2015 and 2014
 
 
 
 
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
 
 
 
EXHIBITS
 

2



PART I. FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS

CONSOLIDATED STATEMENTS OF CONDITION
(In Thousands, Except Number of Shares)
 
March 31, 2015
(unaudited)
 
December 31, 2014
ASSETS
 
 

 
 

Cash and due from banks
 
$
53,074

 
$
60,813

Securities:
 
 

 
 

Available-for-sale securities, at fair value
 
752,164

 
763,063

Held-to-maturity securities, at amortized cost
 
41,010

 
20,179

Federal Home Loan Bank and Federal Reserve Bank stock, at cost
 
20,391

 
20,391

Total securities
 
813,565

 
803,633

Trading account assets
 
2,308

 
2,457

Loans held for sale
 
625

 

Loans
 
1,791,080

 
1,772,610

Less: allowance for loan losses
 
(21,265
)
 
(21,116
)
Net loans
 
1,769,815

 
1,751,494

Bank-owned life insurance
 
58,222

 
57,800

Goodwill and other intangible assets
 
47,884

 
48,171

Premises and equipment, net
 
23,606

 
23,886

Deferred tax assets
 
14,118

 
14,434

Interest receivable
 
6,458

 
6,017

Other real estate owned
 
1,381

 
1,587

Other assets
 
20,148

 
19,561

Total assets
 
$
2,811,204

 
$
2,789,853

LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 

 
 

Liabilities
 
 

 
 

Deposits:
 
 

 
 

Demand
 
$
255,574

 
$
263,013

Interest checking
 
480,528

 
480,521

Savings and money market
 
653,834

 
653,708

Certificates of deposit
 
314,532

 
317,123

Brokered deposits
 
261,706

 
217,732

Total deposits
 
1,966,174

 
1,932,097

Federal Home Loan Bank advances
 
56,020

 
56,039

Other borrowed funds
 
447,530

 
476,939

Junior subordinated debentures
 
44,050

 
44,024

Accrued interest and other liabilities
 
45,631

 
35,645

Total liabilities
 
2,559,405

 
2,544,744

Commitments and contingencies (Notes 6, 7, and 9)
 


 



3



CONSOLIDATED STATEMENTS OF CONDITION
(CONTINUED)
(In Thousands, Except Number of Shares)
 
March 31, 2015
(unaudited)
 
December 31, 2014
Shareholders’ Equity
 
 

 
 

Common stock, no par value; authorized 20,000,000 shares, issued and outstanding 7,438,929 and 7,426,222 shares as of March 31, 2015 and December 31, 2014, respectively
 
41,889

 
41,555

Retained earnings
 
215,361

 
211,979

Accumulated other comprehensive income (loss):
 
 

 
 

Net unrealized gains (losses) on available-for-sale securities, net of tax
 
3,789

 
(319
)
Net unrealized losses on derivative instruments, net of tax
 
(7,115
)
 
(5,943
)
Net unrecognized losses on postretirement plans, net of tax
 
(2,125
)
 
(2,163
)
Total accumulated other comprehensive loss
 
(5,451
)
 
(8,425
)
Total shareholders’ equity
 
251,799

 
245,109

Total liabilities and shareholders’ equity
 
$
2,811,204

 
$
2,789,853


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

4



CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
 
 
Three Months Ended 
 March 31,
(In Thousands, Except Number of Shares and Per Share Data)
 
2015
 
2014
Interest Income
 
 

 
 

Interest and fees on loans
 
$
18,084

 
$
16,780

Interest on U.S. government and sponsored enterprise obligations
 
3,872

 
4,230

Interest on state and political subdivision obligations
 
387

 
294

Interest on federal funds sold and other investments
 
108

 
89

Total interest income
 
22,451

 
21,393

Interest Expense
 
 

 
 

Interest on deposits
 
1,529

 
1,551

Interest on borrowings
 
860

 
807

Interest on junior subordinated debentures
 
625

 
625

Total interest expense
 
3,014

 
2,983

Net interest income
 
19,437

 
18,410

Provision for credit losses
 
446

 
493

Net interest income after provision for credit losses
 
18,991

 
17,917

Non-Interest Income
 
 

 
 

Service charges on deposit accounts
 
1,487

 
1,469

Other service charges and fees
 
1,510

 
1,395

Income from fiduciary services
 
1,220

 
1,184

Brokerage and insurance commissions
 
449

 
478

Bank-owned life insurance
 
422

 
306

Mortgage banking income, net
 
239

 
72

Net gain on sale of securities
 

 
166

Other income
 
817

 
615

Total non-interest income
 
6,144

 
5,685

Non-Interest Expense
 
 

 
 

Salaries and employee benefits
 
8,375

 
7,980

Furniture, equipment and data processing
 
1,923

 
1,789

Net occupancy
 
1,472

 
1,380

Consulting and professional fees
 
591

 
518

Other real estate owned and collection costs
 
562

 
513

Regulatory assessments
 
510

 
481

Amortization of intangible assets
 
287

 
287

Merger and acquisition costs
 
735

 

Other expenses
 
2,346

 
2,177

Total non-interest expense
 
16,801

 
15,125

Income before income taxes
 
8,334

 
8,477

Income Taxes
 
2,723

 
2,762

Net Income
 
$
5,611

 
$
5,715

 
 
 
 
 
Per Share Data
 
 

 
 

Basic earnings per share
 
$
0.75

 
$
0.76

Diluted earnings per share
 
$
0.75

 
$
0.75

Weighted average number of common shares outstanding
 
7,431,065

 
7,528,751

Diluted weighted average number of common shares outstanding
 
7,453,875

 
7,551,785


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

5



CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(unaudited)
 
 
Three Months Ended 
 March 31,
(In Thousands)
 
2015
 
2014
Net income
 
$
5,611

 
$
5,715

Other comprehensive income:
 
 

 
 

Available-for-sale securities:
 
 

 
 

Net unrealized gains on available-for-sale securities arising during the period, net of tax of ($2,212) and ($1,041), respectively
 
4,108

 
1,933

Reclassification of gains included in net income, net of tax of $0 and $58, respectively(1)
 

 
(108
)
Net change in unrealized gains on available-for-sale securities, net of tax
 
4,108

 
1,825

Net change in unrealized losses on cash flow hedging derivatives, net of tax of $631, and $583, respectively
 
(1,172
)
 
(1,083
)
Reclassification of amortization of net unrecognized actuarial loss and prior service cost, net of tax of ($21) and ($15), respectively(2)
 
38

 
27

Other comprehensive income
 
2,974

 
769

Comprehensive Income
 
$
8,585

 
$
6,484

(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.
 
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
Loss
 
Total Shareholders’
Equity
(In Thousands, Except Number of Shares and Per Share Data)
 
Shares
Outstanding
 
Amount
 
Retained
Earnings
 
 
Balance at December 31, 2013
 
7,579,913

 
$
47,783

 
$
195,660

 
$
(12,347
)
 
$
231,096

Net income
 

 

 
5,715

 

 
5,715

Other comprehensive income, net of tax
 

 

 

 
769

 
769

Stock-based compensation expense
 

 
176

 

 

 
176

Exercise of stock options and issuance of vested share awards, net of repurchase for tax withholdings and tax benefit
 
18,174

 
118

 

 

 
118

Common stock repurchased
 
(113,527
)
 
(4,393
)
 

 

 
(4,393
)
Cash dividends declared ($0.27 per share)
 

 

 
(2,012
)
 

 
(2,012
)
Balance at March 31, 2014
 
7,484,560

 
$
43,684

 
$
199,363

 
$
(11,578
)
 
$
231,469

 
 
 
 
 
 
 
 
 
 

Balance at December 31, 2014
 
7,426,222

 
$
41,555

 
$
211,979

 
$
(8,425
)
 
$
245,109

Net income
 

 

 
5,611

 

 
5,611

Other comprehensive income, net of tax
 

 

 

 
2,974

 
2,974

Stock-based compensation expense
 

 
198

 

 

 
198

Exercise of stock options and issuance of vested share awards, net of repurchase for tax withholdings and tax benefit
 
12,707

 
136

 

 

 
136

Cash dividends declared ($0.30 per share)
 

 

 
(2,229
)
 

 
(2,229
)
Balance at March 31, 2015
 
7,438,929

 
$
41,889

 
$
215,361

 
$
(5,451
)
 
$
251,799

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

7



CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
 
 
Three Months Ended
 March 31,
(In Thousands)
 
2015
 
2014
Operating Activities
 
 

 
 

Net income
 
$
5,611

 
$
5,715

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

 
 

Provision for credit losses
 
446

 
493

Depreciation expense
 
764

 
944

Investment securities amortization and accretion, net
 
509

 
411

Stock-based compensation expense
 
198

 
176

Amortization of intangible assets
 
287

 
287

Net gain on sale of investment securities
 

 
(166
)
Net increase in other real estate owned valuation allowance and loss on disposition
 
81

 
15

Originations of mortgage loans held for sale
 
(5,425
)
 

Proceeds from the sale of mortgage loans
 
4,935

 

Gain on sale of mortgage loans
 
(129
)
 

Decrease in trading assets
 
149

 
180

Decrease (increase) in other assets
 
169

 
(1,278
)
Increase (decrease) in other liabilities
 
412

 
(366
)
Net cash provided by operating activities
 
8,007

 
6,411

Investing Activities
 
 

 
 

Proceeds from sales and maturities of available-for-sale securities
 
37,132

 
33,205

Purchase of available-for-sale securities
 
(20,344
)
 
(19,395
)
Purchase of held-to-maturity securities
 
(16,076
)
 
(5,976
)
Net increase in loans
 
(20,293
)
 
(40,892
)
Purchase of Federal Home Loan Bank stock
 

 
(693
)
Proceeds from the sale of other real estate owned
 
1,564

 

Recoveries of previously charged-off loans
 
133

 
237

Purchase of premises and equipment
 
(464
)
 
(283
)
Net cash used by investing activities
 
(18,348
)
 
(33,797
)
Financing Activities
 
 
 
 

Net increase in deposits
 
34,112

 
22,899

Repayments on Federal Home Loan Bank long-term advances
 
(19
)
 
(18
)
Net (decrease) increase in other borrowed funds
 
(29,392
)
 
11,309

Common stock repurchased
 

 
(4,355
)
Exercise of stock options and issuance of restricted stock, net of repurchase for tax withholdings and tax benefit
 
136

 
118

Cash dividends paid on common stock
 
(2,235
)
 
(2,045
)
Net cash provided by financing activities
 
2,602

 
27,908

Net (decrease) increase in cash and cash equivalents
 
(7,739
)
 
522

Cash and cash equivalents at beginning of year
 
60,813

 
51,355

Cash and cash equivalents at end of period
 
$
53,074

 
$
51,877

Supplemental information
 
 

 
 

Interest paid
 
$
3,015

 
$
3,019

Income taxes paid
 
5

 
1,500

Transfer from loans to other real estate owned
 
1,439

 
532

Held-to-maturity securities purchased but unsettled
 
4,830

 
1,008

Common stock repurchased but unsettled
 

 
358

 
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 March 31, 2015 and December 31, 2014, the consolidated statements of income for the three months ended March 31, 2015 and 2014, the consolidated statements of comprehensive income for the three months ended March 31, 2015 and 2014, the consolidated statements of changes in shareholders' equity for the three months ended March 31, 2015 and 2014, and the consolidated statements of cash flows for the three months ended March 31, 2015 and 2014. All significant intercompany transactions and balances are eliminated in consolidation. The income reported for the three months ended March 31, 2015 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, 2014 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
 
FASB:
Financial Accounting Standards Board
Act:
Medicare Prescription Drug, Improvement and Modernization Act
 
FDIC:
Federal Deposit Insurance Corporation
AFS:
Available-for-sale
 
FHLB:
Federal Home Loan Bank
ALCO:
Asset/Liability Committee
 
FHLBB:
Federal Home Loan Bank of Boston
ALL:
Allowance for loan losses
 
FRB:
Federal Reserve Bank
AOCI:
Accumulated other comprehensive income (loss)
 
Freddie Mac:
Federal Home Loan Mortgage Corporation
ASC:
Accounting Standards Codification
 
GAAP:
Generally accepted accounting principles in the United States
ASU:
Accounting Standards Update
 
HTM:
Held-to-maturity
Bank:
Camden National Bank, a wholly-owned subsidiary of Camden National Corporation
 
IRS:
Internal Revenue Service
BOLI:
Bank-owned life insurance
 
LIBOR:
London Interbank Offered Rate
Board ALCO:
Board of Directors' Asset/Liability Committee
 
LTIP:
Long-Term Performance Share Plan
BSA:
Bank Secrecy Act
 
MaineHousing:
Maine State Housing Authority
CCTA:
Camden Capital Trust A, an unconsolidated entity formed by Camden National Corporation
 
Management ALCO:
Management Asset/Liability Committee
CDARS:
Certificate of Deposit Account Registry System
 
MBS:
Mortgage-backed security
CDs:
Certificate of deposits
 
MSRs:
Mortgage servicing rights
Company:
Camden National Corporation
 
MSPP:
Management Stock Purchase Plan
CSV:
Cash surrender value
 
OTTI:
Other-than-temporary impairment
CMO:
Collateralized mortgage obligation
 
NIM:
Net interest margin on a fully-taxable basis
DCRP:
Defined Contribution Retirement Plan
 
N.M.:
Not meaningful
EPS:
Earnings per share
 
Non-Agency:
Non-agency private issue collateralized mortgage obligation


9



NRV:
Net realizable value
 
TDR:
Troubled-debt restructured loan
OCC:
Office of the Comptroller of the Currency
 
UBCT:
Union Bankshares Capital Trust I, an unconsolidated entity formed by Union Bankshares Company that was subsequently acquired by Camden National Corporation
OCI:
Other comprehensive income (loss)
 
U.S.:
United States of America
OFAC:
Office of Foreign Assets Control
 
2003 Plan:
2003 Stock Option and Incentive Plan
OREO:
Other real estate owned
 
2012 Plan:
2012 Equity and Incentive Plan
SERP:
Supplemental executive retirement plans
 
2013 Repurchase Program:
2013 Common Stock Repurchase Program, approved by the Company's Board of Directors

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 
 March 31,
 
 
2015
 
2014
Net income
 
$
5,611

 
$
5,715

Dividends and undistributed earnings allocated to participating securities(1)
 
(17
)
 
(17
)
Net income available to common shareholders
 
$
5,594

 
$
5,698

Weighted-average common shares outstanding for basic EPS
 
7,431,065

 
7,528,751

Dilutive effect of stock-based awards(2)
 
22,810

 
23,034

Weighted-average common and potential common shares for diluted EPS
 
7,453,875

 
7,551,785

Earnings per common share:
 
 

 
 

Basic EPS
 
$
0.75

 
$
0.76

Diluted EPS
 
$
0.75

 
$
0.75

Awards excluded from the calculation of diluted EPS(3):
 
 
 
 
Stock options
 
15,250

 
15,250

(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
March 31, 2015
 

 
 

 
 

 
 

AFS Securities:
 
 
 
 
 
 
 
Obligations of U.S. government-sponsored enterprises
$
4,964

 
$
121

 
$

 
$
5,085

Obligations of states and political subdivisions
22,574

 
593

 

 
23,167

Mortgage-backed securities issued or guaranteed by U.S. government-sponsored enterprises
378,675

 
6,977

 
(930
)
 
384,722

Collateralized mortgage obligations issued or guaranteed by U.S. government-sponsored enterprises
334,364

 
2,150

 
(3,133
)
 
333,381

Private issue collateralized mortgage obligations
5,757

 
85

 
(33
)
 
5,809

Total AFS securities
$
746,334

 
$
9,926

 
$
(4,096
)
 
$
752,164

HTM Securities:
 
 
 
 
 
 
 
Obligations of states and political subdivisions
$
41,010

 
$
529

 
$
(40
)
 
$
41,499

Total HTM securities
$
41,010

 
$
529

 
$
(40
)
 
$
41,499

December 31, 2014
 

 
 

 
 

 
 

AFS Securities:
 
 
 
 
 
 
 
Obligations of U.S. government-sponsored enterprises
$
4,962

 
$
65

 
$

 
$
5,027

Obligations of states and political subdivisions
26,080

 
697

 

 
26,777

Mortgage-backed securities issued or guaranteed by U.S. government-sponsored enterprises
377,657

 
5,656

 
(2,005
)
 
381,308

Collateralized mortgage obligations issued or guaranteed by U.S. government-sponsored enterprises
348,855

 
953

 
(5,911
)
 
343,897

Private issue collateralized mortgage obligations
5,999

 
63

 
(8
)
 
6,054

Total AFS securities
$
763,553

 
$
7,434

 
$
(7,924
)
 
$
763,063

HTM Securities:
 
 
 
 
 
 
 
Obligations of states and political subdivisions
$
20,179

 
$
265

 
$
(19
)
 
$
20,425

Total HTM securities
$
20,179

 
$
265

 
$
(19
)
 
$
20,425

 
Net unrealized gains on AFS securities at March 31, 2015 included in AOCI amounted to $3.8 million, net of a deferred tax liability of $2.0 million. Net unrealized losses on AFS securities at December 31, 2014 included in AOCI amounted to $319,000, net of a deferred tax benefit of $172,000.

During the first three months of 2015, the Company purchased investment securities totaling $36.4 million. The Company designated $20.3 million as AFS securities and $16.1 million as HTM securities.
 
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 March 31, 2015 and December 31, 2014, 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
March 31, 2015
 

 
 

 
 

 
 

 
 

 
 

AFS Securities:
 
 
 
 
 
 
 
 
 
 
 
Mortgage-backed securities issued or guaranteed by U.S. government-sponsored enterprises
$
10,308

 
$
(26
)
 
$
73,476

 
$
(904
)
 
$
83,784

 
$
(930
)
Collateralized mortgage obligations issued or guaranteed by U.S. government-sponsored enterprises
9,308

 
(171
)
 
161,546

 
(2,962
)
 
170,854

 
(3,133
)
Private issue collateralized mortgage obligations
1,818

 
(33
)
 

 

 
1,818

 
(33
)
Total AFS securities
$
21,434

 
$
(230
)
 
$
235,022

 
$
(3,866
)
 
$
256,456

 
$
(4,096
)
HTM Securities:
 
 
 
 
 
 
 
 
 
 
 
Obligations of states and political subdivisions
$
6,160

 
$
(40
)
 
$

 
$

 
$
6,160

 
$
(40
)
Total HTM securities
$
6,160

 
$
(40
)
 
$

 
$

 
$
6,160

 
$
(40
)
December 31, 2014
 

 
 

 
 

 
 

 
 

 
 

AFS Securities:
 
 
 
 
 
 
 
 
 
 
 
Mortgage-backed securities issued or guaranteed by U.S. government-sponsored enterprises
$
42,856

 
$
(171
)
 
$
125,439

 
$
(1,834
)
 
$
168,295

 
$
(2,005
)
Collateralized mortgage obligations issued or guaranteed by U.S. government-sponsored enterprises
75,723

 
(432
)
 
182,512

 
(5,479
)
 
258,235

 
(5,911
)
Private issue collateralized mortgage obligations
1,785

 
(8
)
 

 

 
1,785

 
(8
)
Total AFS securities
$
120,364

 
$
(611
)
 
$
307,951

 
$
(7,313
)
 
$
428,315

 
$
(7,924
)
HTM Securities:
 
 
 
 
 
 
 
 
 
 
 
Obligations of states and political subdivisions
$
5,756

 
$
(19
)
 
$

 
$

 
$
5,756

 
$
(19
)
Total HTM securities
$
5,756

 
$
(19
)
 
$

 
$

 
$
5,756

 
$
(19
)

At March 31, 2015, the Company held 60 investment securities with a fair value of $262.6 million with unrealized losses totaling $4.1 million that are considered temporary. Of these, the Company had 38 MBS and CMO investments with a fair value of $235.0 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 March 31, 2015, 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 three months of 2015 and 2014 indicated potential future credit losses that were lower than previously recorded OTTI and, as such, no additional OTTI was recorded during the first three months of 2015 or 2014.

The Company has the intent and ability to retain its investment securities in an unrealized loss position at March 31, 2015 until the decline in value has recovered.
 

12



Sale of Securities
The following table details the Company’s sales of AFS securities for the period indicated below:
 
Three Months Ended March 31,
 
2015
 
2014
Proceeds from sales of securities
$

 
$
9,437

Gross realized gains

 
166

Gross realized losses

 

 
For the three months ended March 31, 2015, the Company did not sell any investment securities. For the three months ended March 31, 2014, the Company sold certain AFS securities with a total carrying value of $9.3 million and recorded net gains on the sale of AFS securities of $166,000 within non-interest income in the consolidated statements of income. The Company had not previously recorded any OTTI on these securities sold.

Securities Pledged
At March 31, 2015 and December 31, 2014, securities with an amortized cost of $476.0 million and $486.2 million and estimated fair values of $479.4 million and $485.6 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 March 31, 2015, 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
$
2,535

 
$
2,588

Due after one year through five years
89,461

 
90,309

Due after five years through ten years
96,423

 
98,530

Due after ten years
557,915

 
560,737

 
$
746,334

 
$
752,164

HTM Securities
 
 
 
Due in one year or less
$

 
$

Due after one year through five years
1,118

 
1,159

Due after five years through ten years
2,299

 
2,316

Due after ten years
37,593

 
38,024

 
$
41,010

 
$
41,499

 


13



NOTE 4 – LOANS AND ALLOWANCE FOR LOAN LOSSES
 
The composition of the Company’s loan portfolio, excluding residential loans held for sale, at March 31, 2015 and December 31, 2014 was as follows:   
 
March 31,
2015
 
December 31,
2014
Residential real estate
$
585,008

 
$
585,996

Commercial real estate
657,461

 
640,661

Commercial
257,763

 
257,515

Home equity
274,784

 
271,709

Consumer
16,599

 
17,257

Deferred fees, net of costs
(535
)
 
(528
)
Total
$
1,791,080

 
$
1,772,610


The Company’s lending activities are primarily conducted in Maine, and its footprint continues to expand into other New England states, including New Hampshire and Massachusetts. 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 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 allowance 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.

There were no significant changes in the Company's ALL methodology during the first quarter of 2015.

The 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 promptly 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.

Each portfolio segment possesses unique risk characteristics that are considered when determining the appropriate level of allowance. These risk characteristics unique to each portfolio segment include:

Residential Real Estate. Residential real estate loans held in the Company's loan portfolio are made to borrowers who demonstrate the ability to make scheduled payments with full consideration to underwriting factors. Borrower qualifications include favorable credit history combined with supportive income requirements and combined loan-to-value ratios within established policy guidelines. Collateral consists of mortgage liens on one- to four-family residential properties.


14



Commercial Real Estate. Commercial real estate loans consist of mortgage loans to finance investments in real property such as multi-family residential, commercial/retail, office, industrial, hotels, educational, health care facilities and other specific use properties. Commercial real estate loans are typically written with amortizing payment structures. Collateral values are determined based upon appraisals and evaluations in accordance with established policy guidelines. Loan-to-value ratios at origination are governed by established policy and regulatory guidelines. Commercial real estate loans are primarily paid by the cash flow generated from the real property, such as operating leases, rents, or other operating cash flows from the borrower.

Commercial. Commercial loans consist of revolving and term loan obligations extended to business and corporate enterprises for the purpose of financing working capital and/or capital investment. Collateral generally consists of pledges of business assets including, but not limited to, accounts receivable, inventory, plant & equipment, or real estate, if applicable. Commercial loans are primarily paid by the operating cash flow of the borrower. Commercial loans may be secured or unsecured.

Home Equity. Home equity loans and lines are made to qualified individuals for legitimate purposes secured by senior or junior mortgage liens on owner-occupied one- to four-family homes, condominiums, or vacation homes. The home equity loan has a fixed rate and is billed as equal payments comprised of principal and interest. The home equity line of credit has a variable rate and is billed as interest-only payments during the draw period. At the end of the draw period, the home equity line of credit is billed as a percentage of the principal balance plus all accrued interest. Borrower qualifications include favorable credit history combined with supportive income requirements and combined loan-to-value ratios within established policy guidelines.

Consumer. Consumer loan products including personal lines of credit and amortizing loans made to qualified individuals for various purposes such as education, auto loans, debt consolidation, personal expenses or overdraft protection. Borrower qualifications include favorable credit history combined with supportive income and collateral requirements within established policy guidelines. Consumer loans may be secured or unsecured.


15



The following table presents the activity in the ALL and select loan information by portfolio segment for the three months ended March 31, 2015 and 2014, and for the year ended December 31, 2014: 
 
Residential 
Real Estate
 
Commercial 
Real Estate
 
Commercial
 
Home
Equity
 
Consumer
 
Unallocated
 
Total
For The Three Months Ended
March 31, 2015
 
 
 
 
 
 
 
 
 
 
 
 
 
ALL:
 

 
 

 
 

 
 

 
 

 
 

 
 

Beginning balance
$
4,899

 
$
4,482

 
$
6,823

 
$
2,247

 
$
281

 
$
2,384

 
$
21,116

Loans charged off
(113
)
 
(55
)
 
(159
)
 
(89
)
 
(8
)
 

 
(424
)
Recoveries
3

 
10

 
104

 
5

 
11

 

 
133

Provision (reduction)
46

 
324

 
132

 
84

 
(14
)
 
(132
)
 
440

Ending balance
$
4,835

 
$
4,761

 
$
6,900

 
$
2,247

 
$
270

 
$
2,252

 
$
21,265

ALL balance attributable to loans:
 

 
 

 
 

 
 

 
 

 
 

 
 

Individually evaluated for impairment
$
1,103

 
$
278

 
$
264

 
$
488

 
$
100

 
$

 
$
2,233

Collectively evaluated for impairment
3,732

 
4,483

 
6,636

 
1,759

 
170

 
2,252

 
19,032

Total ending ALL
$
4,835

 
$
4,761

 
$
6,900

 
$
2,247

 
$
270

 
$
2,252

 
$
21,265

Loans:
 

 
 

 
 

 
 

 
 

 
 

 
 

Individually evaluated for impairment
$
9,103

 
$
4,696

 
$
1,790

 
$
1,689

 
$
253

 
$

 
$
17,531

Collectively evaluated for impairment
575,370

 
652,765

 
255,973

 
273,095

 
16,346

 

 
1,773,549

Total ending loans balance
$
584,473

 
$
657,461

 
$
257,763

 
$
274,784

 
$
16,599

 
$

 
$
1,791,080

For The Three Months Ended
March 31, 2014
 
 
 
 
 
 
 
 
 
 
 
 
 
ALL:
 

 
 

 
 

 
 

 
 

 
 

 
 

Beginning balance
$
5,603

 
$
4,374

 
$
6,220

 
$
2,403

 
$
319

 
$
2,671

 
$
21,590

Loans charged off
(183
)
 
(171
)
 
(219
)
 
(62
)
 
(14
)
 

 
(649
)
Recoveries
92

 
39

 
96

 
3

 
7

 

 
237

Provision (reduction)
(101
)
 
286

 
195

 
329

 
(2
)
 
(215
)
 
492

Ending balance
$
5,411

 
$
4,528

 
$
6,292

 
$
2,673

 
$
310

 
$
2,456

 
$
21,670

ALL balance attributable to loans:
 

 
 

 
 

 
 

 
 

 
 

 
 

Individually evaluated for impairment
$
1,628

 
$
557

 
$
177

 
$
754

 
$
141

 
$

 
$
3,257

Collectively evaluated for impairment
3,783

 
3,971

 
6,115

 
1,919

 
169

 
2,456

 
18,413

Total ending ALL
$
5,411

 
$
4,528

 
$
6,292

 
$
2,673

 
$
310

 
$
2,456

 
$
21,670

Loans:
 

 
 

 
 

 
 

 
 

 
 

 
 

Individually evaluated for impairment
$
13,041

 
$
9,339

 
$
2,372

 
$
2,011

 
$
446

 
$

 
$
27,209

Collectively evaluated for impairment
554,702

 
565,356

 
188,699

 
267,900

 
16,320

 

 
1,592,977

Total ending loans balance
$
567,743

 
$
574,695

 
$
191,071

 
$
269,911

 
$
16,766

 
$

 
$
1,620,186

For The Year Ended
December 31, 2014
 
 
 
 
 
 
 
 
 
 
 
 
 
ALL:
 

 
 

 
 

 
 

 
 

 
 

 
 

Beginning balance
$
5,603

 
$
4,374

 
$
6,220

 
$
2,403

 
$
319

 
$
2,671

 
$
21,590

Loans charged off
(785
)
 
(361
)
 
(1,544
)
 
(611
)
 
(143
)
 

 
(3,444
)
Recoveries
165

 
135

 
395

 
19

 
32

 

 
746

Provision (reduction)
(84
)
 
334

 
1,752

 
436

 
73

 
(287
)
 
2,224

Ending balance
$
4,899

 
$
4,482

 
$
6,823

 
$
2,247

 
$
281

 
$
2,384

 
$
21,116

ALL balance attributable to loans:
 

 
 

 
 

 
 

 
 

 
 

 
 

Individually evaluated for impairment
$
1,220

 
$
251

 
$
168

 
$
496

 
$
104

 
$

 
$
2,239

Collectively evaluated for impairment
3,679

 
4,231

 
6,655

 
1,751

 
177

 
2,384

 
18,877

Total ending ALL
$
4,899

 
$
4,482

 
$
6,823

 
$
2,247

 
$
281

 
$
2,384

 
$
21,116

Loans:
 

 
 

 
 

 
 

 
 

 
 

 
 

Individually evaluated for impairment
$
9,656

 
$
7,658

 
$
1,853

 
$
1,741

 
$
271

 
$

 
$
21,179

Collectively evaluated for impairment
575,812

 
633,003

 
255,662

 
269,968

 
16,986

 

 
1,751,431

Total ending loans balance
$
585,468

 
$
640,661

 
$
257,515

 
$
271,709

 
$
17,257

 
$

 
$
1,772,610

 

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 March 31, 2015, the Company did not have any industry exposures exceeding 10% of the Company's total loan portfolio. At March 31, 2015, the two most significant industry exposures within the commercial real estate loan portfolio were: (i) non-residential building operators (operators of commercial and industrial buildings, retail establishments, theaters, banks and insurance buildings) at 26%; and (ii) lodging (inns, bed & breakfasts, ski lodges, tourist cabins, hotels and motels) at 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 to 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. 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



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
March 31, 2015
 

 
 

 
 

 
 

 
 

 
 
Pass (Grades 1-6)
$
572,006

 
$
621,799

 
$
245,990

 
$

 
$

 
$
1,439,795

Performing

 

 

 
273,095

 
16,346

 
289,441

Special Mention (Grade 7)
3,416

 
8,022

 
5,588

 

 

 
17,026

Substandard (Grade 8)
9,051

 
27,640

 
6,185

 

 

 
42,876

Non-performing

 

 

 
1,689

 
253

 
1,942

Total
$
584,473

 
$
657,461

 
$
257,763

 
$
274,784

 
$
16,599

 
$
1,791,080

December 31, 2014
 

 
 

 
 

 
 

 
 

 
 
Pass (Grades 1-6)
$
572,589

 
$
606,387

 
$
244,930

 
$

 
$

 
$
1,423,906

Performing

 

 

 
269,968

 
16,986

 
286,954

Special Mention (Grade 7)
3,579

 
4,690

 
6,023

 

 

 
14,292

Substandard (Grade 8)
9,300

 
29,584

 
6,562

 

 

 
45,446

Non-performing

 

 

 
1,741

 
271

 
2,012

Total
$
585,468

 
$
640,661

 
$
257,515

 
$
271,709

 
$
17,257

 
$
1,772,610

 
The Company closely monitors the performance of its loan portfolio. A loan is placed on non-accrual status when the financial condition of the borrower is deteriorating, payment in full of both principal and interest is not expected as scheduled or principal or interest has been in default for 90 days or more. Exceptions may be made if the asset is well-secured by collateral sufficient to satisfy both the principal and accrued interest in full and collection is reasonably assured by a specific event such as the closing of a pending sale contract. When one loan to a borrower is placed on non-accrual status, all other loans to the borrower are re-evaluated to determine if they should also be placed on non-accrual status. All previously accrued and unpaid interest is reversed at this time. A loan may be returned to accrual status when collection of principal and interest is assured and the borrower has demonstrated timely payments of principal and interest for a reasonable period. Unsecured loans, however, are not normally placed on non-accrual status because they are charged-off once their collectability is in doubt. 

The following is a loan aging analysis by portfolio segment (including loans past due over 90 days and non-accrual loans) and a summary of non-accrual loans, which include TDRs, and loans past due over 90 days and accruing as of the following dates:
 
30-59 Days
Past Due
 
60-89 Days
Past Due
 
Greater
than
90 Days
 
Total
Past Due
 
Current
 
Total Loans
Outstanding
 
Loans > 90
Days Past
Due and
Accruing
 
Non-Accrual
Loans
March 31, 2015
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Residential real estate
$
934

 
$
288

 
$
4,197

 
$
5,419

 
$
579,054

 
$
584,473

 
$

 
$
5,630

Commercial real estate
1,133

 
784

 
1,633

 
3,550

 
653,911

 
657,461

 

 
4,083

Commercial
142

 
2

 
1,253

 
1,397

 
256,366

 
257,763

 

 
1,442

Home equity
684

 
354

 
1,052

 
2,090

 
272,694

 
274,784

 

 
1,689

Consumer
54

 
2

 
251

 
307

 
16,292

 
16,599

 

 
253

Total
$
2,947

 
$
1,430

 
$
8,386

 
$
12,763

 
$
1,778,317

 
$
1,791,080

 
$

 
$
13,097

December 31, 2014
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Residential real estate
$
1,206

 
$
426

 
$
4,531

 
$
6,163

 
$
579,305

 
$
585,468

 
$

 
$
6,056

Commercial real estate
1,696

 

 
3,791

 
5,487

 
635,174

 
640,661

 

 
7,043

Commercial
456

 
269

 
1,139

 
1,864

 
255,651

 
257,515

 

 
1,529

Home equity
889

 
88

 
1,129

 
2,106

 
269,603

 
271,709

 

 
1,741

Consumer
28

 

 
254

 
282

 
16,975

 
17,257

 

 
271

Total
$
4,275