10-Q 1 cac-063015x10q.htm 10-Q CAC-06.30.15-10Q
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 June 30, 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 August 4, 2015:  Common stock (no par value) 7,452,795 shares.



CAMDEN NATIONAL CORPORATION

 FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 2015
TABLE OF CONTENTS OF INFORMATION REQUIRED IN REPORT
 
 
PAGE
PART I.  FINANCIAL INFORMATION
 
 
 
ITEM 1.
FINANCIAL STATEMENTS
 
 
 
 
 
Consolidated Statements of Condition - June 30, 2015 and December 31, 2014
 
 
 
 
Consolidated Statements of Income - Three and Six Months Ended June 30, 2015 and 2014
 
 
 
 
Consolidated Statements of Comprehensive Income - Three and Six Months Ended June 30, 2015 and 2014
 
 
 
 
Consolidated Statements of Changes in Shareholders’ Equity - Six Months Ended June 30, 2015 and 2014
 
 
 
 
Consolidated Statements of Cash Flows - Six Months Ended June 30, 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)
 
June 30, 2015
(unaudited)
 
December 31, 2014
ASSETS
 
 

 
 

Cash and due from banks
 
$
55,495

 
$
60,813

Securities:
 
 

 
 

Available-for-sale securities, at fair value
 
742,356

 
763,063

Held-to-maturity securities, at amortized cost
 
60,234

 
20,179

Federal Home Loan Bank and Federal Reserve Bank stock, at cost
 
20,401

 
20,391

Total securities
 
822,991

 
803,633

Loans held for sale
 
1,426

 

Loans
 
1,807,007

 
1,772,610

Less: allowance for loan losses
 
(21,194
)
 
(21,116
)
Net loans
 
1,785,813

 
1,751,494

Bank-owned life insurance
 
58,624

 
57,800

Goodwill and other intangible assets
 
47,596

 
48,171

Premises and equipment, net
 
23,615

 
23,886

Deferred tax assets
 
13,682

 
14,434

Interest receivable
 
6,752

 
6,017

Other real estate owned
 
651

 
1,587

Other assets
 
21,276

 
22,018

Total assets
 
$
2,837,921

 
$
2,789,853

LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 

 
 

Liabilities
 
 

 
 

Deposits:
 
 

 
 

Demand
 
$
279,146

 
$
263,013

Interest checking
 
501,980

 
480,521

Savings and money market
 
643,658

 
653,708

Certificates of deposit
 
310,301

 
317,123

Brokered deposits
 
246,046

 
217,732

Total deposits
 
1,981,131

 
1,932,097

Federal Home Loan Bank advances
 
56,001

 
56,039

Other borrowed funds
 
464,021

 
476,939

Junior subordinated debentures
 
44,075

 
44,024

Accrued interest and other liabilities
 
38,153

 
35,645

Total liabilities
 
2,583,381

 
2,544,744

Commitments and Contingencies
 


 


Shareholders’ Equity
 
 

 
 

Common stock, no par value; authorized 20,000,000 shares, issued and outstanding 7,449,645 and 7,426,222 shares as of June 30, 2015 and December 31, 2014, respectively
 
41,919

 
41,555

Retained earnings
 
220,309

 
211,979

Accumulated other comprehensive loss:
 
 

 
 

Net unrealized losses on available-for-sale securities, net of tax
 
(181
)
 
(319
)
Net unrealized losses on derivative instruments, net of tax
 
(5,421
)
 
(5,943
)
Net unrecognized losses on postretirement plans, net of tax
 
(2,086
)
 
(2,163
)
Total accumulated other comprehensive loss
 
(7,688
)
 
(8,425
)
Total shareholders’ equity
 
254,540

 
245,109

Total liabilities and shareholders’ equity
 
$
2,837,921

 
$
2,789,853


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

3



CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
 
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
(In Thousands, Except Number of Shares and Per Share Data)
 
2015
 
2014
 
2015
 
2014
Interest Income
 
 

 
 

 
 
 
 
Interest and fees on loans
 
$
19,342

 
$
17,757

 
$
37,426

 
$
34,537

Interest on U.S. government and sponsored enterprise obligations
 
3,717

 
4,124

 
7,589

 
8,354

Interest on state and political subdivision obligations
 
493

 
314

 
880

 
608

Interest on federal funds sold and other investments
 
105

 
89

 
210

 
176

Total interest income
 
23,657

 
22,284

 
46,105

 
43,675

Interest Expense
 
 

 
 

 
 

 
 

Interest on deposits
 
1,544

 
1,565

 
3,073

 
3,116

Interest on borrowings
 
847

 
845

 
1,707

 
1,652

Interest on junior subordinated debentures
 
631

 
631

 
1,256

 
1,256

Total interest expense
 
3,022

 
3,041

 
6,036

 
6,024

Net interest income
 
20,635

 
19,243

 
40,069

 
37,651

Provision for credit losses
 
254

 
643

 
700

 
1,136

Net interest income after provision for credit losses
 
20,381

 
18,600

 
39,369

 
36,515

Non-Interest Income
 
 

 
 

 
 

 
 

Service charges on deposit accounts
 
1,593

 
1,620

 
3,080

 
3,089

Other service charges and fees
 
1,584

 
1,543

 
3,094

 
2,938

Income from fiduciary services
 
1,328

 
1,349

 
2,548

 
2,533

Brokerage and insurance commissions
 
502

 
459

 
951

 
937

Bank-owned life insurance
 
402

 
292

 
824

 
598

Mortgage banking income, net
 
346

 
70

 
585

 
142

Net gain on sale of securities
 

 
285

 

 
451

Other income
 
555

 
891

 
1,375

 
1,508

Total non-interest income
 
6,310

 
6,509

 
12,457

 
12,196

Non-Interest Expense
 
 

 
 

 
 

 
 

Salaries and employee benefits
 
8,484

 
8,301

 
16,859

 
16,281

Furniture, equipment and data processing
 
1,902

 
1,743

 
3,825

 
3,532

Net occupancy
 
1,239

 
1,270

 
2,711

 
2,650

Consulting and professional fees
 
673

 
782

 
1,264

 
1,300

Regulatory assessments
 
511

 
485

 
1,021

 
966

Other real estate owned and collection costs
 
449

 
515

 
1,011

 
1,028

Amortization of intangible assets
 
287

 
287

 
574

 
574

Merger and acquisition costs
 
128

 

 
863

 

Other expenses
 
2,484

 
2,409

 
4,830

 
4,586

Total non-interest expense
 
16,157

 
15,792

 
32,958

 
30,917

Income before income taxes
 
10,534

 
9,317

 
18,868

 
17,794

Income Taxes
 
3,341

 
3,001

 
6,064

 
5,763

Net Income
 
$
7,193

 
$
6,316

 
$
12,804

 
$
12,031

 
 
 
 
 
 
 
 
 
Per Share Data
 
 

 
 

 
 

 
 

Basic earnings per share
 
$
0.97

 
$
0.85

 
$
1.72

 
$
1.60

Diluted earnings per share
 
$
0.96

 
$
0.85

 
$
1.71

 
$
1.60

Weighted average number of common shares outstanding
 
7,446,156

 
7,430,709

 
7,438,626

 
7,479,461

Diluted weighted average number of common shares outstanding
 
7,467,365

 
7,450,639

 
7,459,464

 
7,500,318


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

4



CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(unaudited)
 
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
(In Thousands)
 
2015
 
2014
 
2015
 
2014
Net Income
 
$
7,193

 
$
6,316

 
$
12,804

 
$
12,031

Other comprehensive income (loss):
 
 

 
 

 
 
 
 
Available-for-sale securities:
 
 

 
 

 
 
 
 
Net unrealized gains (losses) on available-for-sale securities arising during the period, net of tax of $2,138, ($2,897), ($74) and ($3,938), respectively
 
(3,970
)
 
5,381

 
138

 
7,314

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

 
(185
)
 

 
(293
)
Net change in unrealized gains (losses) on available-for-sale securities, net of tax
 
(3,970
)
 
5,196

 
138

 
7,021

Net change in unrealized gains (losses) on cash flow hedging derivatives, net of tax of ($913), $437, ($282), and $1,020, respectively
 
1,694

 
(812
)
 
522

 
(1,895
)
Reclassification of amortization of net unrecognized actuarial loss and prior service cost, net of tax of ($20), ($12), ($41) and ($27), respectively(2)
 
39

 
20

 
77

 
47

Other comprehensive income (loss)
 
(2,237
)
 
4,404

 
737

 
5,173

Comprehensive Income
 
$
4,956

 
$
10,720

 
$
13,541

 
$
17,204

(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.

5




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
 

 

 
12,031

 

 
12,031

Other comprehensive income, net of tax
 

 

 

 
5,173

 
5,173

Stock-based compensation expense
 

 
431

 

 

 
431

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

 
152

 

 

 
152

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

 

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

 

 
(4,008
)
 

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

 
$
41,211

 
$
203,683

 
$
(7,174
)
 
$
237,720

 
 
 
 
 
 
 
 
 
 

Balance at December 31, 2014
 
7,426,222

 
$
41,555

 
$
211,979

 
$
(8,425
)
 
$
245,109

Net income
 

 

 
12,804

 

 
12,804

Other comprehensive income, net of tax
 

 

 

 
737

 
737

Stock-based compensation expense
 

 
410

 

 

 
410

Exercise of stock options and issuance of vested share awards, net of repurchase for tax withholdings and tax benefit
 
23,423

 
375

 

 

 
375

Equity issuance costs
 

 
(421
)
 

 

 
(421
)
Cash dividends declared ($0.60 per share)
 

 

 
(4,474
)
 

 
(4,474
)
Balance at June 30, 2015
 
7,449,645

 
$
41,919

 
$
220,309

 
$
(7,688
)
 
$
254,540

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

6



CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
 
 
Six Months Ended
 June 30,
(In Thousands)
 
2015
 
2014
Operating Activities
 
 

 
 

Net Income
 
$
12,804

 
$
12,031

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

 
 

Provision for credit losses
 
700

 
1,136

Depreciation expense
 
1,446

 
1,459

Investment securities amortization and accretion, net
 
1,049

 
831

Stock-based compensation expense
 
410

 
431

Amortization of intangible assets
 
574

 
574

Net gain on sale of investment securities
 

 
(451
)
Net increase in other real estate owned valuation allowance and loss on disposition
 
216

 
43

Originations of mortgage loans held for sale
 
(13,949
)
 
(399
)
Proceeds from the sale of mortgage loans
 
12,833

 
416

Gain on sale of mortgage loans
 
(292
)
 
(17
)
Increase in other assets
 
(992
)
 
(1,758
)
(Decrease) increase in other liabilities
 
(143
)
 
271

Net cash provided by operating activities
 
14,656

 
14,567

Investing Activities
 
 

 
 

Proceeds from sales and maturities of available-for-sale securities
 
76,042

 
75,517

Purchase of available-for-sale securities
 
(56,005
)
 
(29,036
)
Purchase of held-to-maturity securities
 
(36,334
)
 
(9,847
)
Net increase in loans
 
(36,747
)
 
(118,348
)
Purchase of Federal Home Loan Bank stock
 
(10
)
 
(706
)
Proceeds from sale of Federal Home Loan Bank and Federal Reserve Bank stock
 

 
51

Proceeds from the sale of other real estate owned
 
2,268

 
890

Recoveries of previously charged-off loans
 
285

 
383

Purchase of premises and equipment
 
(1,117
)
 
(494
)
Net cash used by investing activities
 
(51,618
)
 
(81,590
)
Financing Activities
 
 
 
 

Net increase in deposits
 
49,085

 
43,725

Proceeds from Federal Home Loan Bank long-term advances
 
10,000

 

Repayments on Federal Home Loan Bank long-term advances
 
(10,038
)
 
(36
)
Net (decrease) increase in other borrowed funds
 
(12,883
)
 
34,832

Registration statement costs
 
(421
)
 

Common stock repurchased
 

 
(7,475
)
Exercise of stock options and issuance of restricted stock, net of repurchase for tax withholdings and tax benefit
 
375

 
152

Cash dividends paid on common stock
 
(4,474
)
 
(4,065
)
Net cash provided by financing activities
 
31,644

 
67,133

Net (decrease) increase in cash and cash equivalents
 
(5,318
)
 
110

Cash and cash equivalents at beginning of period
 
60,813

 
51,355

Cash and cash equivalents at end of period
 
$
55,495

 
$
51,465

Supplemental information
 
 

 
 

Interest paid
 
$
3,040

 
$
6,075

Income taxes paid
 
4,350

 
3,720

Transfer from loans to other real estate owned
 
1,548

 
955

Held-to-maturity securities purchased but unsettled
 
3,888

 

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

7


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



NOTE 1 – BASIS OF PRESENTATION
 
The accompanying unaudited consolidated financial statements were prepared in accordance with instructions for Form 10-Q and, therefore, do not include all disclosures required by accounting principles generally accepted in the United States of America for complete presentation of financial statements. In the opinion of management, the consolidated financial statements contain all adjustments (consisting only of normal recurring accruals) necessary to present fairly the consolidated statements of condition of Camden National Corporation as of June 30, 2015 and December 31, 2014, the consolidated statements of income for the three and six months ended June 30, 2015 and 2014, the consolidated statements of comprehensive income for the three and six months ended June 30, 2015 and 2014, the consolidated statements of changes in shareholders' equity for the six months ended June 30, 2015 and 2014, and the consolidated statements of cash flows for the six months ended June 30, 2015 and 2014. All significant intercompany transactions and balances are eliminated in consolidation. Certain items from the prior period were reclassified to conform to the current period presentation. The income reported for the three and six months ended June 30, 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


8



NRV:
Net realizable value
 
TBM:
The Bank of Maine
OCC:
Office of the Comptroller of the Currency
 
TDR:
Troubled-debt restructured loan
OCI:
Other comprehensive income (loss)
 
UBCT:
Union Bankshares Capital Trust I, an unconsolidated entity formed by Union Bankshares Company that was subsequently acquired by Camden National Corporation
OFAC:
Office of Foreign Assets Control
 
U.S.:
United States of America
OREO:
Other real estate owned
 
2003 Plan:
2003 Stock Option and Incentive Plan
SBM:
SMB Financial, Inc., the parent company of The Bank of Maine
 
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 
 June 30,
 
Six Months Ended 
 June 30,
 
 
2015
 
2014
 
2015
 
2014
Net income
 
$
7,193

 
$
6,316

 
$
12,804

 
$
12,031

Dividends and undistributed earnings allocated to participating securities(1)
 
(23
)
 
(19
)
 
(40
)
 
(37
)
Net income available to common shareholders
 
$
7,170

 
$
6,297

 
$
12,764

 
$
11,994

Weighted-average common shares outstanding for basic EPS
 
7,446,156

 
7,430,709

 
7,438,626

 
7,479,461

Dilutive effect of stock-based awards(2)
 
21,209

 
19,930

 
20,838

 
20,857

Weighted-average common and potential common shares for diluted EPS
 
7,467,365

 
7,450,639

 
7,459,464

 
7,500,318

Earnings per common share:
 
 

 
 

 
 
 
 
Basic EPS
 
$
0.97

 
$
0.85

 
$
1.72

 
$
1.60

Diluted EPS
 
$
0.96

 
$
0.85

 
$
1.71

 
$
1.60

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

 
14,750

 
15,250

 
14,750

(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.

9



NOTE 3 – SECURITIES
 
The following tables summarize the amortized cost and estimated fair values of AFS and HTM securities, as of the dates indicated: 
 
Amortized
Cost
 
Unrealized
Gains
 
Unrealized
Losses
 
Fair
Value
June 30, 2015
 

 
 

 
 

 
 

AFS Securities:
 
 
 
 
 
 
 
Obligations of U.S. government-sponsored enterprises
$
4,967

 
$
84

 
$

 
$
5,051

Obligations of states and political subdivisions
21,192

 
481

 

 
21,673

Mortgage-backed securities issued or guaranteed by U.S. government-sponsored enterprises
381,403

 
5,083

 
(3,219
)
 
383,267

Collateralized mortgage obligations issued or guaranteed by U.S. government-sponsored enterprises
329,577

 
1,483

 
(4,187
)
 
326,873

Private issue collateralized mortgage obligations
5,495

 
73

 
(76
)
 
5,492

Total AFS securities
$
742,634

 
$
7,204

 
$
(7,482
)
 
$
742,356

HTM Securities:
 
 
 
 
 
 
 
Obligations of states and political subdivisions
$
60,234

 
$
277

 
$
(702
)
 
$
59,809

Total HTM securities
$
60,234

 
$
277

 
$
(702
)
 
$
59,809

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 losses on AFS securities at June 30, 2015 included in AOCI amounted to $181,000, net of a deferred tax benefit of $97,000. 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 six months of 2015, the Company purchased investment securities totaling $96.2 million. The Company designated $56.0 million as AFS securities and $40.2 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.
 

10



The following table presents the estimated fair values and gross unrealized losses of investment securities that were in a continuous loss position at June 30, 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
June 30, 2015
 

 
 

 
 

 
 

 
 

 
 

AFS Securities:
 
 
 
 
 
 
 
 
 
 
 
Mortgage-backed securities issued or guaranteed by U.S. government-sponsored enterprises
$
120,190

 
$
(1,360
)
 
$
58,881

 
$
(1,859
)
 
$
179,071

 
$
(3,219
)
Collateralized mortgage obligations issued or guaranteed by U.S. government-sponsored enterprises
34,272

 
(312
)
 
154,439

 
(3,875
)
 
188,711

 
(4,187
)
Private issue collateralized mortgage obligations
1,704

 
(76
)
 

 

 
1,704

 
(76
)
Total AFS securities
$
156,166

 
$
(1,748
)
 
$
213,320

 
$
(5,734
)
 
$
369,486

 
$
(7,482
)
HTM Securities:
 
 
 
 
 
 
 
 
 
 
 
Obligations of states and political subdivisions
$
40,243

 
$
(702
)
 
$

 
$

 
$
40,243

 
$
(702
)
Total HTM securities
$
40,243

 
$
(702
)
 
$

 
$

 
$
40,243

 
$
(702
)
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 June 30, 2015, the Company held 137 investment securities with a fair value of $409.7 million with unrealized losses totaling $8.2 million that are considered temporary. Of these, the Company had 36 MBS and CMO investments with a fair value of $213.3 million that have been in an unrealized loss position for 12 months or more. The decline in the fair value of securities is reflective of current interest rates in excess of the yield received on investments and is not indicative of an overall credit deterioration or other factors with the Company's investment portfolio. At June 30, 2015, the Company did not have any Non-Agency investments in an unrealized loss position for 12 months or more. At June 30, 2015, gross unrealized losses on the Company's AFS and HTM securities were 1% of amortized cost.

Stress tests are performed monthly on the Company's Non-Agency investments, which are higher risk bonds within the investment portfolio, using current statistical data to determine expected cash flows and forecast potential losses. The results of the stress tests during the first six months of 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 six months of 2015 or 2014.

The Company has the intent and ability to retain its investment securities in an unrealized loss position at June 30, 2015 until the decline in value has recovered.
 

11



Sale of Securities
The following table details the Company’s sales of AFS securities for the period indicated below:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2015
 
2014
 
2015
 
2014
Proceeds from sales of securities
$

 
$
16,258

 
$

 
$
25,695

Gross realized gains

 
285

 

 
451

Gross realized losses

 

 

 

 
For the three months ended June 30, 2015, the Company did not sell any investment securities. For the three months ended June 30, 2014, the Company sold certain AFS securities with a total carrying value of $16.0 million and recorded net gains on the sale of AFS securities of $285,000 within non-interest income in the consolidated statements of income. The Company had not previously recorded any OTTI on these securities sold.

For the six months ended June 30, 2015, the Company did not sell any investment securities. For the six months ended June 30, 2014, the Company sold certain AFS securities with a total carrying value of $25.2 million and recorded net gains on the sale of AFS securities of $451,000 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 June 30, 2015 and December 31, 2014, securities with an amortized cost of $479.6 million and $486.2 million and estimated fair values of $478.7 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 June 30, 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
$
3,131

 
$
3,188

Due after one year through five years
89,497

 
89,995

Due after five years through ten years
103,955

 
105,684

Due after ten years
546,051

 
543,489

 
$
742,634

 
$
742,356

HTM Securities
 
 
 
Due in one year or less
$

 
$

Due after one year through five years
2,250

 
2,284

Due after five years through ten years
1,143

 
1,146

Due after ten years
56,841

 
56,379

 
$
60,234

 
$
59,809

 


12



NOTE 4 – LOANS AND ALLOWANCE FOR LOAN LOSSES
 
The composition of the Company’s loan portfolio, excluding residential loans held for sale, at June 30, 2015 and December 31, 2014 was as follows:   
 
June 30,
2015
 
December 31,
2014
Residential real estate
$
587,720

 
$
585,996

Commercial real estate
660,135

 
640,661

Commercial
262,187

 
257,515

Home equity
281,057

 
271,709

Consumer
16,384

 
17,257

Net deferred fees
(476
)
 
(528
)
Total
$
1,807,007

 
$
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 six months ended June 30, 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.


13



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.

The following table presents the activity in the ALL and select loan information by portfolio segment for the three and six months ended June 30, 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 and Six Months Ended
June 30, 2015
 
 
 
 
 
 
 
 
 
 
 
 
 
ALL for the three months ended:
 

 
 

 
 

 
 

 
 

 
 

 
 

Beginning balance
$
4,835

 
$
4,761

 
$
6,900

 
$
2,247

 
$
270

 
$
2,252

 
$
21,265

Loans charged off
(179
)
 
(48
)
 
(84
)
 
(152
)
 
(11
)
 

 
(474
)
Recoveries
17

 
54

 
78

 

 
3

 

 
152

Provision (benefit)(1)
16

 
(69
)
 
(117
)
 
49

 
6

 
366

 
251

Ending balance
$
4,689

 
$
4,698

 
$
6,777

 
$
2,144

 
$
268

 
$
2,618

 
$
21,194

ALL for the six months ended:
 
 
 
 
 
 
 
 
 
 
 
 
 
Beginning balance
$
4,899

 
$
4,482

 
$
6,823

 
$
2,247

 
$
281

 
$
2,384

 
$
21,116

Loans charged off
(292
)
 
(103
)
 
(243
)
 
(241
)
 
(19
)
 

 
(898
)
Recoveries
20

 
64

 
182

 
5

 
14

 

 
285

Provision (benefit)(1)
62

 
255

 
15

 
133

 
(8
)
 
234

 
691

Ending balance
$
4,689

 
$
4,698

 
$
6,777

 
$
2,144

 
$
268

 
$
2,618

 
$
21,194

ALL balance attributable to loans:
 

 
 

 
 

 
 

 
 

 
 

 
 

Individually evaluated for impairment
$
1,044

 
$
336

 
$
262

 
$
343

 
$
99

 
$

 
$
2,084

Collectively evaluated for impairment
3,645

 
4,362

 
6,515

 
1,801

 
169

 
2,618

 
19,110

Total ending ALL
$
4,689

 
$
4,698

 
$
6,777

 
$
2,144

 
$
268

 
$
2,618

 
$
21,194

Loans:
 

 
 

 
 

 
 

 
 

 
 

 
 

Individually evaluated for impairment
$
7,937

 
$
4,344

 
$
1,768

 
$
1,706

 
$
251

 
$

 
$
16,006

Collectively evaluated for impairment
579,307

 
655,791

 
260,419

 
279,351

 
16,133

 

 
1,791,001

Total ending loans balance
$
587,244

 
$
660,135

 
$
262,187

 
$
281,057

 
$
16,384

 
$

 
$
1,807,007


14



 
Residential 
Real Estate
 
Commercial 
Real Estate
 
Commercial
 
Home
Equity
 
Consumer
 
Unallocated
 
Total
For The Three and Six Months Ended
June 30, 2014
 
 
 
 
 
 
 
 
 
 
 
 
 
ALL for the three months ended:
 
 
 
 
 
 
 
 
 
 
 
 
 
Beginning balance
$
5,411

 
$
4,528

 
$
6,292

 
$
2,673

 
$
310

 
$
2,456

 
$
21,670

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

 
(560
)
Recoveries
42

 
11

 
73

 
8

 
12

 

 
146

Provision (benefit)(1)
(134
)
 
(173
)
 
426

 
115

 
22

 
393

 
649

Ending balance
$
5,141

 
$
4,361

 
$
6,484

 
$
2,752

 
$
318

 
$
2,849

 
$
21,905

ALL for the six months ended:
 

 
 

 
 

 
 

 
 

 
 

 
 

Beginning balance
$
5,603

 
$
4,374

 
$
6,220

 
$
2,403

 
$
319

 
$
2,671

 
$
21,590

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

 
(1,209
)
Recoveries
134

 
50

 
169

 
11

 
19

 

 
383

Provision (benefit)(1)
(235
)
 
113

 
621

 
444

 
20

 
178

 
1,141

Ending balance
$
5,141

 
$
4,361

 
$
6,484

 
$
2,752

 
$
318

 
$
2,849

 
$
21,905

ALL balance attributable to loans:
 

 
 

 
 

 
 

 
 

 
 

 
 

Individually evaluated for impairment
$
1,346

 
$
397

 
$
578

 
$
805

 
$
138

 
$

 
$
3,264

Collectively evaluated for impairment
3,795

 
3,964

 
5,906

 
1,947

 
180

 
2,849

 
18,641

Total ending ALL
$
5,141

 
$
4,361

 
$
6,484

 
$
2,752

 
$
318

 
$
2,849

 
$
21,905

Loans:
 

 
 

 
 

 
 

 
 

 
 

 
 

Individually evaluated for impairment
$
11,782

 
$
7,334

 
$
4,272

 
$
2,142

 
$
433

 
$

 
$
25,963

Collectively evaluated for impairment
555,377

 
596,806

 
229,587

 
271,637

 
17,395

 

 
1,670,802

Total ending loans balance
$
567,159

 
$
604,140

 
$
233,859

 
$
273,779

 
$
17,828

 
$

 
$
1,696,765

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 (benefit)(1)
(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

 
$