10-Q 1 cac-063016x10q.htm 10-Q Document
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, 2016
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 2, 2016:  Common stock (no par value) 10,281,163 shares.



CAMDEN NATIONAL CORPORATION

 FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 2016
TABLE OF CONTENTS OF INFORMATION REQUIRED IN REPORT
 
 
PAGE
PART I.  FINANCIAL INFORMATION
 
 
 
ITEM 1.
FINANCIAL STATEMENTS
 
 
 
 
 
Consolidated Statements of Condition - June 30, 2016 and December 31, 2015
 
 
 
 
Consolidated Statements of Income - Three and Six Months Ended June 30, 2016 and 2015
 
 
 
 
Consolidated Statements of Comprehensive Income - Three and Six Months Ended June 30, 2016 and 2015
 
 
 
 
Consolidated Statements of Changes in Shareholders’ Equity - Six Months Ended June 30, 2016 and 2015
 
 
 
 
Consolidated Statements of Cash Flows - Six Months Ended June 30, 2016 and 2015
 
 
 
 
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
(unaudited)
(In Thousands, Except Number of Shares)
 
June 30,
 2016
 
December 31, 2015
ASSETS
 
 

 
 

Cash and due from banks
 
$
96,443

 
$
79,488

Securities:
 
 

 
 

Available-for-sale securities, at fair value
 
799,526

 
750,338

Held-to-maturity securities, at amortized cost
 
93,609

 
84,144

Federal Home Loan Bank and Federal Reserve Bank stock, at cost
 
28,854

 
21,513

Total securities
 
921,989

 
855,995

Loans held for sale
 
22,928

 
10,958

Loans
 
2,585,300

 
2,490,206

Less: allowance for loan losses
 
(23,717
)
 
(21,166
)
Net loans
 
2,561,583

 
2,469,040

Goodwill
 
94,697

 
95,657

Other intangible assets
 
7,715

 
8,667

Bank-owned life insurance
 
77,352

 
59,917

Premises and equipment, net
 
44,299

 
45,959

Deferred tax assets
 
34,559

 
39,716

Interest receivable
 
8,757

 
7,985

Other real estate owned
 
855

 
1,304

Other assets
 
39,209

 
34,658

Total assets
 
$
3,910,386

 
$
3,709,344

LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 

 
 

Liabilities
 
 

 
 

Deposits:
 
 

 
 

Demand
 
$
381,323

 
$
357,673

Interest checking
 
752,036

 
740,084

Savings and money market
 
940,577

 
912,668

Certificates of deposit
 
493,488

 
516,867

Brokered deposits
 
206,063

 
199,087

Total deposits
 
2,773,487

 
2,726,379

Federal Home Loan Bank advances
 
45,000

 
55,000

Other borrowed funds
 
586,799

 
458,763

Subordinated debentures
 
58,677

 
58,599

Accrued interest and other liabilities
 
61,567

 
47,413

Total liabilities
 
3,525,530

 
3,346,154

Commitments and Contingencies
 


 


Shareholders’ Equity
 
 

 
 

Common stock, no par value; authorized 20,000,000 shares, issued and outstanding 10,281,113 and 10,220,478 shares as of June 30, 2016 and December 31, 2015, respectively
 
154,574

 
153,083

Retained earnings
 
234,290

 
222,329

Accumulated other comprehensive loss:
 
 

 
 

Net unrealized gains (losses) on available-for-sale securities, net of tax
 
7,347

 
(3,801
)
Net unrealized losses on cash flow hedging derivative instruments, net of tax
 
(9,384
)
 
(6,374
)
Net unrecognized losses on postretirement plans, net of tax
 
(1,971
)
 
(2,047
)
Total accumulated other comprehensive loss
 
(4,008
)
 
(12,222
)
Total shareholders’ equity
 
384,856

 
363,190

Total liabilities and shareholders’ equity
 
$
3,910,386

 
$
3,709,344

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)
 
2016
 
2015
 
2016
 
2015
Interest Income
 
 

 
 

 
 
 
 
Interest and fees on loans
 
$
27,706

 
$
19,342

 
$
54,722

 
$
37,426

Interest on U.S. government and sponsored enterprise obligations
 
4,016

 
3,717

 
8,006

 
7,589

Interest on state and political subdivision obligations
 
711

 
493

 
1,425

 
880

Interest on federal funds sold and other investments
 
342

 
105

 
603

 
210

Total interest income
 
32,775

 
23,657

 
64,756

 
46,105

Interest Expense
 
 

 
 

 
 

 
 

Interest on deposits
 
2,109

 
1,544

 
4,151

 
3,073

Interest on borrowings
 
1,313

 
847

 
2,449

 
1,707

Interest on subordinated debentures
 
849

 
631

 
1,700

 
1,256

Total interest expense
 
4,271

 
3,022

 
8,300

 
6,036

Net interest income
 
28,504

 
20,635

 
56,456

 
40,069

Provision for credit losses
 
2,852

 
254

 
3,724

 
700

Net interest income after provision for credit losses
 
25,652

 
20,381

 
52,732

 
39,369

Non-Interest Income
 
 

 
 

 
 

 
 

Service charges on deposit accounts
 
1,833

 
1,593

 
3,557

 
3,080

Other service charges and fees
 
2,331

 
1,584

 
4,659

 
3,094

Mortgage banking income, net
 
1,706

 
346

 
2,514

 
585

Income from fiduciary services
 
1,342

 
1,328

 
2,511

 
2,548

Bank-owned life insurance
 
892

 
402

 
1,314

 
824

Brokerage and insurance commissions
 
517

 
502

 
975

 
951

Net gain on sale of securities
 
4

 

 
4

 

Other income
 
1,927

 
555

 
2,935

 
1,375

Total non-interest income
 
10,552

 
6,310

 
18,469

 
12,457

Non-Interest Expense
 
 

 
 

 
 

 
 

Salaries and employee benefits
 
11,999

 
8,484

 
23,590

 
16,859

Furniture, equipment and data processing
 
2,381

 
1,902

 
4,808

 
3,825

Net occupancy costs
 
1,790

 
1,239

 
3,667

 
2,711

Consulting and professional fees
 
982

 
673

 
1,867

 
1,264

Regulatory assessments
 
774

 
511

 
1,495

 
1,021

Other real estate owned and collection costs
 
496

 
449

 
1,152

 
1,011

Amortization of intangible assets
 
476

 
287

 
952

 
574

Merger and acquisition costs
 
177

 
128

 
821

 
863

Other expenses
 
3,255

 
2,484

 
6,887

 
4,830

Total non-interest expense
 
22,330

 
16,157

 
45,239

 
32,958

Income before income taxes
 
13,874

 
10,534

 
25,962

 
18,868

Income Taxes
 
4,258

 
3,341

 
7,700

 
6,064

Net Income
 
$
9,616

 
$
7,193

 
$
18,262

 
$
12,804

 
 
 
 
 
 
 
 
 
Per Share Data
 
 

 
 

 
 

 
 

Basic earnings per share
 
$
0.93

 
$
0.97

 
$
1.77

 
$
1.72

Diluted earnings per share
 
$
0.92

 
$
0.96

 
$
1.76

 
$
1.71

Weighted average number of common shares outstanding
 
10,276,876

 
7,446,156

 
10,268,440

 
7,438,626

Diluted weighted average number of common shares outstanding
 
10,327,374

 
7,467,365

 
10,315,245

 
7,459,464


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)
 
2016
 
2015
 
2016
 
2015
Net Income
 
$
9,616

 
$
7,193

 
$
18,262

 
$
12,804

Other comprehensive income:
 
 

 
 

 
 
 
 
Net change in unrealized gains (losses) on available-for-sale securities:
 
 

 
 

 
 
 
 
      Net change in unrealized gains (losses) on available-for-sale securities, net of tax of ($1,821), $2,138, ($6,004) and ($74), respectively
 
3,382

 
(3,970
)
 
11,151

 
138

Net reclassification adjustment for gains included in net income, net of tax of $1, $0, $1 and $0, respectively(1)
 
(3
)
 

 
(3
)
 

Net change in unrealized gains (losses) on available-for-sale securities, net of tax
 
3,379

 
(3,970
)
 
11,148

 
138

Net change in unrealized gains (losses) on cash flow hedging derivatives:
 
 
 
 
 
 
 
 
Net change in unrealized gains (losses) on cash flow hedging derivatives, net of tax of $705, ($857), $1,966, and ($106), respectively
 
(1,309
)
 
1,591

 
(3,652
)
 
196

Net reclassification adjustment for effective portion of cash flow hedges included in interest expense, net of tax of ($218), ($55), ($345) and ($175), respectively(2)
 
404

 
103

 
642

 
326

Net change in unrealized gains (losses) on cash flow hedging derivatives, net of tax
 
(905
)
 
1,694

 
(3,010
)
 
522

Reclassification of amortization of net unrecognized actuarial loss and prior service cost, net of tax of ($21), ($20), ($42) and ($41), respectively(3)
 
38

 
39

 
76

 
77

Other comprehensive income (loss)
 
2,512

 
(2,237
)
 
8,214

 
737

Comprehensive Income
 
$
12,128

 
$
4,956

 
$
26,476

 
$
13,541

(1) Reclassified into the consolidated statements of income in net gain on sale of securities.
(2) Reclassified into the consolidated statements of income in interest on subordinated debentures.
(3) 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, 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

 
 
 
 
 
 
 
 
 
 

Balance at December 31, 2015
 
10,220,478

 
$
153,083

 
$
222,329

 
$
(12,222
)
 
$
363,190

Cumulative effect adjustment (Note 14)
 

 
72

 
(72
)
 

 

Net income
 

 

 
18,262

 

 
18,262

Other comprehensive income, net of tax
 

 

 

 
8,214

 
8,214

Stock-based compensation expense
 

 
1,042

 

 

 
1,042

Exercise of stock options and issuance of vested share awards, net of repurchase for tax withholdings and tax benefit
 
60,635

 
377

 

 

 
377

Cash dividends declared ($0.60 per share)
 

 

 
(6,229
)
 

 
(6,229
)
Balance at June 30, 2016
 
10,281,113


$
154,574


$
234,290

 
$
(4,008
)
 
$
384,856

 
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)
 
2016
 
2015
Operating Activities
 
 

 
 

Net Income
 
$
18,262

 
$
12,804

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

 
 

Provision for credit losses
 
3,724

 
700

Depreciation expense
 
2,456

 
1,446

Purchase accounting accretion, net
 
(3,073
)
 
(182
)
Investment securities amortization, net
 
1,405

 
1,049

Stock-based compensation expense
 
1,042

 
410

Amortization of intangible assets
 
952

 
574

Net gain on sale of investment securities
 
(4
)
 

Net increase in other real estate owned valuation allowance and (gain) loss on disposition
 
(152
)
 
216

Originations of mortgage loans held for sale
 
(107,026
)
 
(13,949
)
Proceeds from the sale of mortgage loans
 
97,375

 
12,833

Gain on sale of mortgage loans
 
(2,166
)
 
(292
)
Decrease (increase) in other assets
 
6,509

 
(896
)
Decrease in other liabilities
 
(2,254
)
 
(57
)
Net cash provided by operating activities
 
17,050

 
14,656

Investing Activities
 
 

 
 

Proceeds from sales and maturities of available-for-sale securities
 
65,544

 
76,042

Purchase of available-for-sale securities
 
(98,728
)
 
(56,005
)
Purchase of held-to-maturity securities
 
(9,718
)
 
(36,334
)
Net increase in loans
 
(93,709
)
 
(36,747
)
Purchase of bank-owned life insurance, net of death benefit proceeds
 
(16,122
)
 

Purchase of Federal Home Loan Bank and Federal Reserve Bank stock
 
(7,341
)
 
(10
)
Proceeds from the sale of other real estate owned
 
633

 
2,268

Recoveries of previously charged-off loans
 
254

 
285

Purchase of premises and equipment
 
(866
)
 
(1,117
)
Proceeds from the sale of premises and equipment
 
90

 

Net cash used by investing activities
 
(159,963
)
 
(51,618
)
Financing Activities
 
 
 
 

Net increase in deposits
 
47,605

 
49,085

Repayments on Federal Home Loan Bank long-term advances
 
(10,000
)
 
(10,038
)
Net increase (decrease) in other borrowed funds
 
128,071

 
(2,883
)
Equity issuance costs
 

 
(421
)
Exercise of stock options and issuance of restricted stock, net of repurchase for tax withholdings and tax benefit
 
377

 
375

Cash dividends paid on common stock
 
(6,185
)
 
(4,474
)
Net cash provided by financing activities
 
159,868

 
31,644

Net increase (decrease) in cash and cash equivalents
 
16,955

 
(5,318
)
Cash and cash equivalents at beginning of period
 
79,488

 
60,813

Cash and cash equivalents at end of period
 
$
96,443

 
$
55,495

Supplemental information
 
 

 
 

Interest paid
 
$
7,800

 
$
3,040

Income taxes paid
 
103

 
4,350

Transfer from loans to other real estate owned
 
32

 
1,548

Held-to-maturity securities purchased but unsettled
 

 
3,888

Measurement-period adjustments
 
960

 

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

7


NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Dollar Amounts in Tables Expressed in Thousands, Except Per Share Data)



NOTE 1 – BASIS OF PRESENTATION
 
The accompanying unaudited consolidated interim 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, 2016 and December 31, 2015, the consolidated statements of income for the three and six months ended June 30, 2016 and 2015, the consolidated statements of comprehensive income for the three and six months ended June 30, 2016 and 2015, the consolidated statements of changes in shareholders' equity for the six months ended June 30, 2016 and 2015, and the consolidated statements of cash flows for the six months ended June 30, 2016 and 2015. 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, 2016 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, 2015 Annual Report on Form 10-K.


8



The defined terms, 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
 
IRS:
Internal Revenue Service
AFS:
Available-for-sale
 
LIBOR:
London Interbank Offered Rate
ALCO:
Asset/Liability Committee
 
LTIP:
Long-Term Performance Share Plan
ALL:
Allowance for loan losses
 
Management ALCO:
Management Asset/Liability Committee
AOCI:
Accumulated other comprehensive income (loss)
 
MBS:
Mortgage-backed security
ASC:
Accounting Standards Codification
 
Merger:
On October 16, 2015, the two-step merger of Camden National Corporation, SBM Financial, Inc. and Atlantic Acquisitions, LLC, a wholly-owned subsidiary of Camden National Corporation, was completed
ASU:
Accounting Standards Update
 
Merger Agreement:
Plan of Merger, dated as of March 29, 2015, by and among Camden National Corporation, SBM Financial, Inc. and Atlantic Acquisitions, LLC, a wholly-owned subsidiary of the Company
Bank:
Camden National Bank, a wholly-owned subsidiary of Camden National Corporation
 
MSHA:
Maine State Housing Authority
Board ALCO:
Board of Directors' Asset/Liability Committee
 
MSRs:
Mortgage servicing rights
BOLI:
Bank-owned life insurance
 
MSPP:
Management Stock Purchase Plan
BSA:
Bank Secrecy Act
 
OTTI:
Other-than-temporary impairment
CCTA:
Camden Capital Trust A, an unconsolidated entity formed by Camden National Corporation
 
NIM:
Net interest margin on a fully-taxable basis
CDARS:
Certificate of Deposit Account Registry System
 
N.M.:
Not meaningful
CDs:
Certificate of deposits
 
NRV:
Net realizable value
CMO:
Collateralized mortgage obligation
 
OCC:
Office of the Comptroller of the Currency
Company:
Camden National Corporation
 
OCI:
Other comprehensive income (loss)
CSV:
Cash surrender value
 
OFAC:
Office of Foreign Assets Control
DCRP:
Defined Contribution Retirement Plan
 
OREO:
Other real estate owned
EPS:
Earnings per share
 
SBM:
SBM Financial, Inc., the parent company of The Bank of Maine
FASB:
Financial Accounting Standards Board
 
SERP:
Supplemental executive retirement plans
FDIC:
Federal Deposit Insurance Corporation
 
TDR:
Troubled-debt restructured loan
FHLB:
Federal Home Loan Bank
 
UBCT:
Union Bankshares Capital Trust I, an unconsolidated entity formed by Union Bankshares Company that was subsequently acquired by Camden National Corporation
FHLBB:
Federal Home Loan Bank of Boston
 
U.S.:
United States of America
FRB:
Federal Reserve Bank
 
USD:
United States Dollar
Freddie Mac:
Federal Home Loan Mortgage Corporation
 
2003 Plan:
2003 Stock Option and Incentive Plan
GAAP:
Generally accepted accounting principles in the United States
 
2012 Plan:
2012 Equity and Incentive Plan
HPFC:
Healthcare Professional Funding Corporation, a wholly-owned subsidiary of Camden National Bank
 
2013 Repurchase Program:
2013 Common Stock Repurchase Program, approved by the Company's Board of Directors
HTM:
Held-to-maturity
 
 
 


9



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,
 
 
2016
 
2015
 
2016
 
2015
Net income
 
$
9,616

 
$
7,193

 
$
18,262

 
$
12,804

Dividends and undistributed earnings allocated to participating securities(1)
 
(49
)
 
(23
)
 
(81
)
 
(40
)
Net income available to common shareholders
 
$
9,567

 
$
7,170

 
$
18,181

 
$
12,764

Weighted-average common shares outstanding for basic EPS
 
10,276,876

 
7,446,156

 
10,268,440

 
7,438,626

Dilutive effect of stock-based awards(2)
 
50,498

 
21,209

 
46,805

 
20,838

Weighted-average common and potential common shares for diluted EPS
 
10,327,374

 
7,467,365

 
10,315,245

 
7,459,464

Earnings per common share:
 
 

 
 

 
 
 
 
Basic EPS
 
$
0.93

 
$
0.97

 
$
1.77

 
$
1.72

Diluted EPS
 
$
0.92

 
$
0.96

 
$
1.76

 
$
1.71

Awards excluded from the calculation of diluted EPS(3):
 
 
 
 
 
 
 
 
Stock options
 
12,250

 
15,250

 
12,250

 
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 and are considered anti-dilutive.

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 includes the number of additional common shares that would have been outstanding if potentially dilutive common shares were issued using the treasury stock method.

10



NOTE 3 – SECURITIES
 
The following tables summarize the amortized cost and estimated fair values of AFS and HTM securities, as of the dates indicated: 
 
Amortized
Cost
 
Unrealized
Gains
 
Unrealized
Losses
 
Fair
Value
June 30, 2016
 

 
 

 
 

 
 

AFS Securities:
 
 
 
 
 
 
 
Obligations of U.S. government-sponsored enterprises
$
4,975

 
$
156

 
$

 
$
5,131

Obligations of states and political subdivisions
9,765

 
279

 

 
10,044

Mortgage-backed securities issued or guaranteed by U.S. government-sponsored enterprises
461,493

 
9,117

 
(139
)
 
470,471

Collateralized mortgage obligations issued or guaranteed by U.S. government-sponsored enterprises
305,878

 
3,064

 
(1,330
)
 
307,612

Subordinated corporate bonds
5,481

 
142

 

 
5,623

Total AFS debt securities
787,592

 
12,758

 
(1,469
)
 
798,881

Equity securities
632

 
13

 

 
645

Total AFS securities
$
788,224

 
$
12,771

 
$
(1,469
)
 
$
799,526

HTM Securities:
 
 
 
 
 
 
 
Obligations of states and political subdivisions
$
93,609

 
$
4,086

 
$
(3
)
 
$
97,692

Total HTM securities
$
93,609

 
$
4,086

 
$
(3
)
 
$
97,692

December 31, 2015
 

 
 

 
 

 
 

AFS Securities:
 
 
 
 
 
 
 
Obligations of U.S. government-sponsored enterprises
$
4,971

 
$
69

 
$

 
$
5,040

Obligations of states and political subdivisions
17,355

 
339

 

 
17,694

Mortgage-backed securities issued or guaranteed by U.S. government-sponsored enterprises
419,429

 
3,474

 
(3,857
)
 
419,046

Collateralized mortgage obligations issued or guaranteed by U.S. government-sponsored enterprises
312,719

 
409

 
(6,271
)
 
306,857

Subordinated corporate bonds
1,000

 

 
(4
)
 
996

Total AFS debt securities
755,474

 
4,291

 
(10,132
)
 
749,633

Equity securities
712

 
2

 
(9
)
 
705

Total AFS securities
$
756,186

 
$
4,293

 
$
(10,141
)
 
$
750,338

HTM Securities:
 
 
 
 
 
 
 
Obligations of states and political subdivisions
$
84,144

 
$
1,564

 
$
(61
)
 
$
85,647

Total HTM securities
$
84,144

 
$
1,564

 
$
(61
)
 
$
85,647

 
Net unrealized gains on AFS securities at June 30, 2016 included in AOCI amounted to $7.3 million, net of a deferred tax liability of $4.0 million. Net unrealized losses on AFS securities at December 31, 2015 included in AOCI amounted to $3.8 million, net of a deferred tax benefit of $2.0 million.

During the first six months of 2016, the Company purchased investment securities totaling $108.4 million. The Company designated $98.7 million as AFS securities and $9.7 million as HTM securities.

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.


11



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, and 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 cost basis of the security is permanently reduced and a corresponding charge to earnings is recognized.
 
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, 2016 and December 31, 2015, 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, 2016
 

 
 

 
 

 
 

 
 

 
 

AFS Securities:
 
 
 
 
 
 
 
 
 
 
 
Mortgage-backed securities issued or guaranteed by U.S. government-sponsored enterprises
$
1

 
$

 
$
33,618

 
$
(139
)
 
$
33,619

 
$
(139
)
Collateralized mortgage obligations issued or guaranteed by U.S. government-sponsored enterprises
1,930

 
(8
)
 
94,005

 
(1,322
)
 
95,935

 
(1,330
)
Total AFS securities
$
1,931

 
$
(8
)
 
$
127,623

 
$
(1,461
)
 
$
129,554

 
$
(1,469
)
HTM Securities:
 
 
 
 
 
 
 
 
 
 
 
Obligations of states and political subdivisions
$
423

 
$
(3
)
 
$

 
$

 
$
423

 
$
(3
)
Total HTM securities
$
423

 
$
(3
)
 
$

 
$

 
$
423

 
$
(3
)
December 31, 2015
 

 
 

 
 

 
 

 
 

 
 

AFS Securities:
 
 
 
 
 
 
 
 
 
 
 
Mortgage-backed securities issued or guaranteed by U.S. government-sponsored enterprises
$
234,897

 
$
(2,351
)
 
$
45,629

 
$
(1,506
)
 
$
280,526

 
$
(3,857
)
Collateralized mortgage obligations issued or guaranteed by U.S. government-sponsored enterprises
111,143

 
(1,068
)
 
147,180

 
(5,203
)
 
258,323

 
(6,271
)
Subordinated corporate bonds
996

 
(4
)
 

 

 
996

 
(4
)
Equity Securities
615

 
(9
)
 

 

 
615

 
(9
)
Total AFS securities
$
347,651

 
$
(3,432
)
 
$
192,809

 
$
(6,709
)
 
$
540,460

 
$
(10,141
)
HTM Securities:
 
 
 
 
 
 
 
 
 
 
 
Obligations of states and political subdivisions
$
5,507

 
$
(61
)
 
$

 
$

 
$
5,507

 
$
(61
)
Total HTM securities
$
5,507

 
$
(61
)
 
$

 
$

 
$
5,507

 
$
(61
)

At June 30, 2016 and December 31, 2015, the Company held 20 and 110 investment securities with a fair value of $130.0 million and $546.1 million with unrealized losses totaling $1.5 million and $10.2 million, respectively, that were considered temporary. Of these, the Company had 19 MBS and CMO investments with a fair value of $129.6 million that were in an unrealized loss position totaling $1.5 million at June 30, 2016 and 28 MBS and CMO investments with a fair value of $192.8 million that were in an unrealized loss position totaling $6.7 million at December 31, 2015 for 12 months or more. The unrealized loss was reflective of current interest rates in excess of the yield received on investments and is not indicative of an overall change in credit quality or other factors with the Company's investment portfolio. At June 30, 2016 and December 31,

12



2015, gross unrealized losses on the Company's AFS and HTM securities were 0% and 2%, respectively, of the respective investment securities fair value.

The Company has the intent and ability to retain its investment securities in an unrealized loss position at June 30, 2016 until the decline in value has recovered.

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,
 
2016
 
2015
 
2016
 
2015
Proceeds from sales of securities
$
84

 
$

 
$
84

 
$

Gross realized gains
4

 

 
4

 

Gross realized losses

 

 

 

 
For the three and six months ended June 30, 2016, the Company sold certain AFS securities with a total carrying value of $84,000 and recorded net gains on the sale of AFS securities of $4,000 within non-interest income in the consolidated statements of income. The Company had not previously recorded any OTTI on these securities sold. The Company did not sell any securities during the three and six months ended June 30, 2015.

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

FHLBB and FRB Stock
As of June 30, 2016 and December 31, 2015, the Company's investment in FHLBB stock was $23.5 million and $20.6 million, respectively. As of June 30, 2016 and December 31, 2015, the Company's investment in FRB stock was $5.4 million and $908,000, respectively.

Securities Pledged
At June 30, 2016 and December 31, 2015, securities with an amortized cost of $549.3 million and $577.6 million and estimated fair values of $555.9 million and $570.9 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, 2016, 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
$
1,430

 
$
1,441

Due after one year through five years
107,452

 
109,501

Due after five years through ten years
101,018

 
104,203

Due after ten years
577,692

 
583,736

 
$
787,592

 
$
798,881

HTM Securities
 
 
 
Due after one year through five years
$
2,189

 
$
2,247

Due after five years through ten years
4,587

 
4,726

Due after ten years
86,833

 
90,719

 
$
93,609

 
$
97,692

 


13



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, 2016 and December 31, 2015 was as follows:   
 
June 30,
2016
 
December 31,
2015
Residential real estate(1)
$
801,965

 
$
821,074

Commercial real estate(1)
1,018,643

 
927,951

Commercial(1)
336,114

 
297,721

Home equity(1)
340,623

 
348,634

Consumer(1)
17,732

 
17,953

HPFC(1)
70,532

 
77,243

Deferred loan fees, net
(309
)
 
(370
)
Total loans
$
2,585,300

 
$
2,490,206

(1)
The loan balances are presented net of the unamortized fair value mark discount associated with the purchase accounting for acquired loans of $10.4 million and $13.1 million at June 30, 2016 and December 31, 2015, respectively.

The Bank’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 HPFC loan portfolio consists of niche commercial lending to the small business medical field, including dentists, optometrists and veterinarians across the U.S. The ability and willingness of borrowers to honor their repayment commitments is generally dependent on the success of the borrower's business. Unlike the Bank's loan portfolio, there is, generally, little to no indication of credit quality issues and/or concerns of borrowers honoring their commitments until a payment is delinquent. Generally, once a payment is delinquent, if the payment is not received shortly thereafter to bring the loan current, the loan is deemed impaired (typically within 45 days). Effective February 19, 2016, the Company closed HPFC's operations and is no longer originating loans.

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, 2016.

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 Credit Risk Administration 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

14



determining the ALL, the Company disaggregates its loans into portfolio segments, which include residential real estate, commercial real estate, commercial, home equity, consumer and HPFC. 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.

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.

HPFC. HPFC is a niche lender that provides commercial lending to dentists, optometrists and veterinarians, many of which are start-up companies. HPFC's loan portfolio consists of term loan obligations extended for the purpose of financing working capital and/or purchase of equipment. Collateral may consist of pledges of business assets including, but not limited to, accounts receivable, inventory, and/or equipment. These loans are primarily paid by the operating cash flow of the borrower and the terms range from seven to ten years.

15



The following tables present the activity in the ALL and select loan information by portfolio segment for the three and six months ended June 30, 2016 and 2015, and for the year ended December 31, 2015: 
 
Residential
Real Estate
 
Commercial
Real Estate
 
Commercial
 
Home
Equity
 
Consumer
 
HPFC
 
Unallocated
 
Total
For The Three and Six Months Ended June 30, 2016
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
ALL for the three months ended:
 

 
 

 
 

 
 

 
 

 
 
 
 

 
 

Beginning balance
$
4,516

 
$
10,380

 
$
3,298

 
$
2,622

 
$
182

 
$
341

 
$

 
$
21,339

Loans charged off
(19
)
 
(19
)
 
(203
)
 
(57
)
 
(26
)
 
(302
)
 

 
(626
)
Recoveries
31

 
34

 
82

 
1

 
2

 

 

 
150

Provision (credit)(1)
(97
)
 
1,164

 
1,381

 
380

 
35

 
(9
)
 

 
2,854

Ending balance
$
4,431

 
$
11,559

 
$
4,558

 
$
2,946

 
$
193

 
$
30

 
$

 
$
23,717

ALL for the six months ended:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Beginning balance
$
4,545

 
$
10,432

 
$
3,241

 
$
2,731

 
$
193

 
$
24

 
$

 
$
21,166

Loans charged off
(229
)
 
(241
)
 
(429
)
 
(185
)
 
(41
)
 
(302
)
 

 
(1,427
)
Recoveries
71

 
43

 
134

 
2

 
4

 

 

 
254

Provision(1)
44

 
1,325

 
1,612

 
398

 
37

 
308

 

 
3,724

Ending balance
$
4,431

 
$
11,559

 
$
4,558

 
$
2,946

 
$
193

 
$
30

 
$

 
$
23,717

ALL balance attributable to loans:
 

 
 

 
 

 
 

 
 

 
 
 
 

 
 

Individually evaluated for impairment
$
497

 
$
29

 
$
1,400

 
$
89

 
$

 
$

 
$

 
$
2,015

Collectively evaluated for impairment
3,934

 
11,530

 
3,158

 
2,857

 
193

 
30

 

 
21,702

Total ending ALL
$
4,431

 
$
11,559

 
$
4,558

 
$
2,946

 
$
193

 
$
30

 
$

 
$
23,717

Loans:
 

 
 

 
 

 
 

 
 

 
 
 
 

 
 

Individually evaluated for impairment
$
4,926

 
$
2,340

 
$
3,461

 
$
503

 
$
7

 
$

 
$

 
$
11,237

Collectively evaluated for impairment
795,630

 
1,015,437

 
333,056

 
341,478

 
17,811

 
70,651

 

 
2,574,063

Total ending loans balance
$
800,556

 
$
1,017,777

 
$
336,517

 
$
341,981

 
$
17,818

 
$
70,651

 
$

 
$
2,585,300

For The Three and Six Months Ended June 30, 2015
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
ALL for the three months ended:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Beginning balance
$
4,835

 
$
8,234

 
$
3,427

 
$
2,247

 
$
270

 
$

 
$
2,252

 
$
21,265

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

 

 
(474
)
Recoveries
17

 
54

 
78

 

 
3

 

 

 
152

Provision (credit)(1)
16

 
(80
)
 
(106
)
 
49

 
6

 

 
366

 
251

Ending balance
$
4,689

 
$
8,160

 
$
3,315

 
$
2,144

 
$
268

 
$

 
$
2,618

 
$
21,194

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

 
$
7,951

 
$
3,354

 
$
2,247

 
$
281

 
$

 
$
2,384

 
$
21,116

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

 

 
(898
)
Recoveries
20

 
64

 
182

 
5

 
14

 

 

 
285

Provision (credit)(1)
62

 
248

 
22

 
133

 
(8
)
 

 
234

 
691

Ending balance
$
4,689

 
$
8,160

 
$
3,315

 
$
2,144

 
$
268

 
$

 
$
2,618

 
$
21,194

ALL balance attributable to loans:
 

 
 

 
 

 
 

 
 

 
 
 
 

 
 

Individually evaluated for impairment
$
724

 
$
240

 
$
136

 
$
89

 
$
78

 
$

 
$

 
$
1,267

Collectively evaluated for impairment
3,965

 
7,920

 
3,179

 
2,055

 
190

 

 
2,618

 
19,927

Total ending ALL
$
4,689

 
$
8,160

 
$
3,315

 
$
2,144

 
$
268

 
$

 
$
2,618

 
$
21,194

Loans:
 

 
 

 
 

 
 

 
 

 
 
 
 

 
 

Individually evaluated for impairment
$
5,562

 
$
3,034

 
$
800

 
$
986

 
$
157

 
$

 
$

 
$
10,539

Collectively evaluated for impairment
581,682

 
657,101

 
261,387

 
280,071

 
16,227

 

 

 
1,796,468

Total ending loans balance
$
587,244

 
$
660,135

 
$
262,187

 
$
281,057

 
$
16,384

 
$

 
$

 
$
1,807,007


16



 
Residential 
Real Estate
 
Commercial 
Real Estate
 
Commercial
 
Home
Equity
 
Consumer
 
HPFC
 
Unallocated
 
Total
For The Year Ended December 31, 2015