10-Q 1 cac-093016x10q.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 September 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 November 1, 2016:  Common stock (no par value) 15,440,981 shares.



CAMDEN NATIONAL CORPORATION

 FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 2016
TABLE OF CONTENTS OF INFORMATION REQUIRED IN REPORT
 
 
PAGE
PART I.  FINANCIAL INFORMATION
 
 
 
ITEM 1.
FINANCIAL STATEMENTS
 
 
 
 
 
Consolidated Statements of Condition - September 30, 2016 and December 31, 2015
 
 
 
 
Consolidated Statements of Income - Three and Nine Months Ended September 30, 2016 and 2015
 
 
 
 
Consolidated Statements of Comprehensive Income - Three and Nine Months Ended September 30, 2016 and 2015
 
 
 
 
Consolidated Statements of Changes in Shareholders’ Equity - Nine Months Ended September 30, 2016 and 2015
 
 
 
 
Consolidated Statements of Cash Flows - Nine Months Ended September 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)
 
September 30,
 2016
 
December 31, 2015
ASSETS
 
 

 
 

Cash and due from banks
 
$
99,458

 
$
79,488

Securities:
 
 

 
 

Available-for-sale securities, at fair value
 
788,880

 
750,338

Held-to-maturity securities, at amortized cost
 
94,205

 
84,144

Federal Home Loan Bank and Federal Reserve Bank stock, at cost
 
23,201

 
21,513

Total securities
 
906,286

 
855,995

Loans held for sale
 
24,644

 
10,958

Loans
 
2,592,009

 
2,490,206

Less: allowance for loan losses
 
(23,290
)
 
(21,166
)
Net loans
 
2,568,719

 
2,469,040

Goodwill
 
94,697

 
95,657

Other intangible assets
 
7,240

 
8,667

Bank-owned life insurance
 
77,937

 
59,917

Premises and equipment, net
 
43,934

 
45,959

Deferred tax assets
 
34,632

 
39,716

Interest receivable
 
8,364

 
7,985

Other real estate owned
 
811

 
1,304

Other assets
 
37,244

 
34,658

Total assets
 
$
3,903,966

 
$
3,709,344

LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 

 
 

Liabilities
 
 

 
 

Deposits:
 
 

 
 

Demand
 
$
427,349

 
$
357,673

Interest checking
 
763,710

 
740,084

Savings and money market
 
979,085

 
912,668

Certificates of deposit
 
489,856

 
516,867

Brokered deposits
 
229,225

 
199,087

Total deposits
 
2,889,225

 
2,726,379

Short-term borrowings
 
489,749

 
477,852

Long-term borrowings
 
10,808

 
35,911

Subordinated debentures
 
58,716

 
58,599

Accrued interest and other liabilities
 
62,287

 
47,413

Total liabilities
 
3,510,785

 
3,346,154

Commitments and Contingencies
 


 


Shareholders’ Equity
 
 

 
 

Common stock, no par value; authorized 20,000,000 shares, issued and outstanding 15,434,856 and 15,330,717 shares as of September 30, 2016 and December 31, 2015, respectively
 
155,264

 
153,083

Retained earnings
 
242,092

 
222,329

Accumulated other comprehensive loss:
 
 

 
 

Net unrealized gains (losses) on available-for-sale securities, net of tax
 
6,595

 
(3,801
)
Net unrealized losses on cash flow hedging derivative instruments, net of tax
 
(8,838
)
 
(6,374
)
Net unrecognized losses on postretirement plans, net of tax
 
(1,932
)
 
(2,047
)
Total accumulated other comprehensive loss
 
(4,175
)
 
(12,222
)
Total shareholders’ equity
 
393,181

 
363,190

Total liabilities and shareholders’ equity
 
$
3,903,966

 
$
3,709,344

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

3



CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
 
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
(In Thousands, Except Number of Shares and Per Share Data)
 
2016
 
2015
 
2016
 
2015
Interest Income
 
 

 
 

 
 
 
 
Interest and fees on loans
 
$
27,395

 
$
18,651

 
$
82,117

 
$
56,077

Interest on U.S. government and sponsored enterprise obligations
 
4,049

 
3,598

 
12,055

 
11,187

Interest on state and political subdivision obligations
 
702

 
624

 
2,127

 
1,504

Interest on federal funds sold and other investments
 
448

 
183

 
1,051

 
393

Total interest income
 
32,594

 
23,056

 
97,350

 
69,161

Interest Expense
 
 

 
 

 
 

 
 

Interest on deposits
 
2,204

 
1,557

 
6,355

 
4,630

Interest on borrowings
 
1,161

 
849

 
3,610

 
2,556

Interest on subordinated debentures
 
857

 
638

 
2,557

 
1,894

Total interest expense
 
4,222

 
3,044

 
12,522

 
9,080

Net interest income
 
28,372

 
20,012

 
84,828

 
60,081

Provision for credit losses
 
1,279

 
279

 
5,003

 
979

Net interest income after provision for credit losses
 
27,093

 
19,733

 
79,825

 
59,102

Non-Interest Income
 
 

 
 

 
 

 
 

Debit card income
 
1,894

 
1,266

 
5,650

 
3,652

Service charges on deposit accounts
 
1,799

 
1,554

 
5,356

 
4,634

Other service charges and fees
 
591

 
416

 
1,494

 
1,124

Mortgage banking income, net
 
2,407

 
390

 
4,921

 
975

Income from fiduciary services
 
1,225

 
1,177

 
3,736

 
3,725

Bank-owned life insurance
 
585

 
443

 
1,899

 
1,267

Brokerage and insurance commissions
 
594

 
411

 
1,569

 
1,362

Net gain on sale of securities
 

 
4

 
4

 
4

Other income
 
1,906

 
900

 
4,841

 
2,275

Total non-interest income
 
11,001

 
6,561

 
29,470

 
19,018

Non-Interest Expense
 
 

 
 

 
 

 
 

Salaries and employee benefits
 
12,044

 
8,691

 
35,634

 
25,550

Furniture, equipment and data processing
 
2,349

 
1,705

 
7,157

 
5,530

Net occupancy costs
 
1,685

 
1,194

 
5,352

 
3,905

Consulting and professional fees
 
742

 
470

 
2,609

 
1,734

Regulatory assessments
 
667

 
513

 
2,162

 
1,534

Debit card expense
 
669

 
431

 
2,107

 
1,299

Other real estate owned and collection costs
 
877

 
543

 
2,029

 
1,554

Amortization of intangible assets
 
475

 
288

 
1,427

 
862

Merger and acquisition costs
 
45

 
766

 
866

 
1,629

Other expenses
 
2,596

 
2,110

 
8,045

 
6,072

Total non-interest expense
 
22,149

 
16,711

 
67,388

 
49,669

Income before income taxes
 
15,945

 
9,583

 
41,907

 
28,451

Income Taxes
 
5,042

 
3,127

 
12,742

 
9,191

Net Income
 
$
10,903

 
$
6,456

 
$
29,165

 
$
19,260

 
 
 
 
 
 
 
 
 
Per Share Data
 
 

 
 

 
 

 
 

Basic earnings per share
 
$
0.70

 
$
0.58

 
$
1.88

 
$
1.72

Diluted earnings per share
 
$
0.70

 
$
0.57

 
$
1.88

 
$
1.71

Weighted average number of common shares outstanding
 
15,425,452

 
11,179,821

 
15,410,310

 
11,165,297

Diluted weighted average number of common shares outstanding
 
15,507,561

 
11,215,844

 
15,483,320

 
11,196,749


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

4



CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(unaudited)
 
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
(In Thousands)
 
2016
 
2015
 
2016
 
2015
Net Income
 
$
10,903

 
$
6,456

 
$
29,165

 
$
19,260

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 $405, ($1,649), ($5,599) and ($1,723), respectively
 
(752
)
 
3,064

 
10,399

 
3,202

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

 
(3
)
 
(3
)
 
(3
)
Net change in unrealized gains (losses) on available-for-sale securities, net of tax
 
(752
)
 
3,061

 
10,396

 
3,199

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 ($107), $1,221, $1,859, and $1,115, respectively
 
199

 
(2,267
)
 
(3,453
)
 
(2,070
)
Net reclassification adjustment for effective portion of cash flow hedges included in interest expense, net of tax of ($187), ($271), ($532) and ($447), respectively(2)
 
347

 
504

 
989

 
829

Net change in unrealized gains (losses) on cash flow hedging derivatives, net of tax
 
546

 
(1,763
)
 
(2,464
)
 
(1,241
)
Reclassification of amortization of net unrecognized actuarial loss and prior service cost, net of tax of ($20), ($20), ($62) and ($61), respectively(3)
 
39

 
39

 
115

 
116

Other comprehensive income (loss)
 
(167
)
 
1,337

 
8,047

 
2,074

Comprehensive Income
 
$
10,736

 
$
7,793

 
$
37,212

 
$
21,334

(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
Outstanding1
 
Amount
 
Retained
Earnings
 
 
Balance at December 31, 2014
 
11,139,333

 
$
41,555

 
$
211,979

 
$
(8,425
)
 
$
245,109

Net income
 

 

 
19,260

 

 
19,260

Other comprehensive income, net of tax
 

 

 

 
2,074

 
2,074

Stock-based compensation expense
 

 
542

 

 

 
542

Exercise of stock options and issuance of vested share awards, net of repurchase for tax withholdings and tax benefit
 
41,734

 
512

 

 

 
512

Equity issuance costs
 

 
(537
)
 

 

 
(537
)
Cash dividends declared ($0.60 per share)(1)
 

 

 
(7,557
)
 

 
(7,557
)
Balance at September 30, 2015
 
11,181,067

 
$
42,072

 
$
223,682

 
$
(6,351
)
 
$
259,403

 
 
 
 
 
 
 
 
 
 

Balance at December 31, 2015
 
15,330,717

 
$
153,083

 
$
222,329

 
$
(12,222
)
 
$
363,190

Cumulative effect adjustment (Note 16)
 

 
72

 
(72
)
 

 

Cash in-lieu, stock split (Note 2)
 
(173
)
 
(5
)
 

 

 
(5
)
Net income
 

 

 
29,165

 

 
29,165

Other comprehensive income, net of tax
 

 

 

 
8,047

 
8,047

Stock-based compensation expense
 

 
1,521

 

 

 
1,521

Exercise of stock options and issuance of vested share awards, net of repurchase for tax withholdings and tax benefit
 
104,312

 
593

 

 

 
593

Cash dividends declared ($0.60 per share)(1)
 

 

 
(9,330
)
 

 
(9,330
)
Balance at September 30, 2016
 
15,434,856


$
155,264


$
242,092

 
$
(4,175
)
 
$
393,181

(1) Share and per share amounts have been adjusted to reflect the three-for-two stock split effective September 30, 2016, for all periods presented. Refer to Note 2.
 
The accompanying notes are an integral part of these consolidated financial statements.

6



CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
 
 
Nine Months Ended 
 September 30,
(In Thousands)
 
2016
 
2015
Operating Activities
 
 

 
 

Net Income
 
$
29,165

 
$
19,260

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

 
 

Provision for credit losses
 
5,003

 
979

Depreciation expense
 
3,498

 
2,130

Purchase accounting accretion, net
 
(3,792
)
 
(295
)
Investment securities amortization, net
 
2,234

 
1,638

Stock-based compensation expense
 
1,521

 
542

Amortization of intangible assets
 
1,427

 
862

Net (decrease) increase in other real estate owned valuation allowance and (gain) loss on disposition
 
(147
)
 
348

Originations of mortgage loans held for sale
 
(180,182
)
 
(25,341
)
Proceeds from the sale of mortgage loans
 
170,765

 
24,985

Gain on sale of mortgage loans
 
(4,171
)
 
(530
)
Decrease (increase) in other assets
 
7,529

 
(2,944
)
Increase in other liabilities
 
154

 
117

Net cash provided by operating activities
 
33,004

 
21,751

Investing Activities
 
 

 
 

Proceeds from sales and maturities of available-for-sale securities
 
105,863

 
123,650

Purchase of available-for-sale securities
 
(130,254
)
 
(81,262
)
Purchase of held-to-maturity securities
 
(10,448
)
 
(55,462
)
Net increase in loans
 
(101,732
)
 
(60,601
)
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
)
 
(56
)
Proceeds from sale of Federal Home Loan Bank stock
 
5,652

 

Proceeds from the sale of other real estate owned
 
672

 
2,760

Recoveries of previously charged-off loans
 
381

 
554

Purchase of premises and equipment
 
(1,507
)
 
(1,797
)
Proceeds from the sale of premises and equipment
 
90

 

Net cash used by investing activities
 
(154,746
)
 
(72,214
)
Financing Activities
 
 
 
 

Net increase in deposits
 
163,563

 
76,155

Net proceeds from (repayments of) borrowings less than 90 days
 
36,846

 
(12,081
)
Proceeds from Federal Home Loan Bank advances
 

 
10,000

Repayments of Federal Home Loan Bank advances
 
(25,000
)
 
(11,039
)
Repayments of wholesale repurchase agreements
 
(25,000
)
 

Equity issuance costs
 

 
(537
)
Exercise of stock options and issuance of restricted stock, net of repurchase for tax withholdings and tax benefit
 
593

 
512

Cash dividends paid on common stock and cash in-lieu paid for fractional shares due to stock split
 
(9,290
)
 
(6,716
)
Net cash provided by financing activities
 
141,712

 
56,294

Net increase in cash and cash equivalents
 
19,970

 
5,831

Cash and cash equivalents at beginning of period
 
79,488

 
60,813

Cash and cash equivalents at end of period
 
$
99,458

 
$
66,644

Supplemental information
 
 

 
 

Interest paid
 
$
12,673

 
$
9,104

Income taxes paid
 
4,844

 
8,345

Transfer from loans to other real estate owned
 
32

 
1,725

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 September 30, 2016 and December 31, 2015, the consolidated statements of income for the three and nine months ended September 30, 2016 and 2015, the consolidated statements of comprehensive income for the three and nine months ended September 30, 2016 and 2015, the consolidated statements of changes in shareholders' equity for the nine months ended September 30, 2016 and 2015, and the consolidated statements of cash flows for the nine months ended September 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 nine months ended September 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 (non-GAAP)
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 - COMMON STOCK SPLIT

On August 30, 2016, the Company's board of directors declared a three-for-two stock split, effected in the form of a stock dividend, on the Company's common stock. Each shareholder of record on September 15, 2016, received one additional share of common stock for every two shares of common stock owned. The stock was issued September 30, 2016. All references in the financial statements to the number of shares outstanding, dividends declared and per share amounts of the Company's common stock have been restated to reflect the effect of the stock split for all periods presented.

The Company paid shareholders cash in-lieu of fractional shares of common stock in connection with the split, at a price of $31.75 per share, the closing price of the Company’s common stock on September 14, 2016. The total cash in-lieu paid out for fractional shares was $5,000, and was accounted for as a reduction of capital stock.

NOTE 3 – EPS
 
The following is an analysis of basic and diluted EPS, reflecting the application of the two-class method, as described below:
 
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
 
2016
 
2015
 
2016
 
2015
Net income
 
$
10,903

 
$
6,456

 
$
29,165

 
$
19,260

Dividends and undistributed earnings allocated to participating securities(1)
 
(54
)
 
(21
)
 
(134
)
 
(61
)
Net income available to common shareholders
 
$
10,849

 
$
6,435

 
$
29,031

 
$
19,199

Weighted-average common shares outstanding for basic EPS(2)
 
15,425,452

 
11,179,821

 
15,410,310

 
11,165,297

Dilutive effect of stock-based awards(2)(3)
 
82,109

 
36,023

 
73,010

 
31,452

Weighted-average common and potential common shares for diluted EPS(2)
 
15,507,561

 
11,215,844

 
15,483,320

 
11,196,749

Earnings per common share(2):
 
 

 
 

 
 
 
 
Basic EPS
 
$
0.70

 
$
0.58

 
$
1.88

 
$
1.72

Diluted EPS
 
$
0.70

 
$
0.57

 
$
1.88

 
$
1.71

Awards excluded from the calculation of diluted EPS(2)(4):
 
 
 
 
 
 
 
 
Stock options
 

 
20,625

 
18,375

 
24,375

(1) Represents dividends paid and undistributed earnings allocated to nonvested stock-based awards that contain non-forfeitable rights to dividends.
(2) Share and per share amounts have been adjusted to reflect the three-for-two stock split effective September 30, 2016, for all periods presented. Refer to Note 2.
(3) 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.
(4) 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 4 – SECURITIES
 
The following tables summarize the amortized cost and estimated fair values of AFS and HTM securities, as of the dates indicated: 
 
Amortized
Cost
 
Unrealized
Gains
 
Unrealized
Losses
 
Fair
Value
September 30, 2016
 

 
 

 
 

 
 

AFS Securities:
 
 
 
 
 
 
 
Obligations of U.S. government-sponsored enterprises
$
15,721

 
$
134

 
$

 
$
15,855

Obligations of states and political subdivisions
9,763

 
238

 

 
10,001

Mortgage-backed securities issued or guaranteed by U.S. government-sponsored enterprises
442,099

 
8,366

 
(157
)
 
450,308

Collateralized mortgage obligations issued or guaranteed by U.S. government-sponsored enterprises
305,039

 
2,222

 
(899
)
 
306,362

Subordinated corporate bonds
5,481

 
223

 

 
5,704

Total AFS debt securities
778,103

 
11,183

 
(1,056
)
 
788,230

Equity securities
632

 
18

 

 
650

Total AFS securities
$
778,735

 
$
11,201

 
$
(1,056
)
 
$
788,880

HTM Securities:
 
 
 
 
 
 
 
Obligations of states and political subdivisions
$
94,205

 
$
3,898

 
$
(7
)
 
$
98,096

Total HTM securities
$
94,205

 
$
3,898

 
$
(7
)
 
$
98,096

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 September 30, 2016 included in AOCI amounted to $6.6 million, net of a deferred tax liability of $3.6 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 nine months of 2016, the Company purchased investment securities totaling $140.7 million. The Company designated $130.3 million as AFS securities and $10.4 million as HTM securities.

During the first nine months of 2015, the Company purchased investment securities totaling $136.7 million. The Company designated $81.3 million as AFS securities and $55.4 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 September 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
September 30, 2016
 

 
 

 
 

 
 

 
 

 
 

AFS Securities:
 
 
 
 
 
 
 
 
 
 
 
Mortgage-backed securities issued or guaranteed by U.S. government-sponsored enterprises
$
3,071

 
$
(5
)
 
$
32,128

 
$
(152
)
 
$
35,199

 
$
(157
)
Collateralized mortgage obligations issued or guaranteed by U.S. government-sponsored enterprises
33,636

 
(85
)
 
79,213

 
(814
)
 
112,849

 
(899
)
Total AFS securities
$
36,707

 
$
(90
)
 
$
111,341

 
$
(966
)
 
$
148,048

 
$
(1,056
)
HTM Securities:
 
 
 
 
 
 
 
 
 
 
 
Obligations of states and political subdivisions
$
1,382

 
$
(7
)
 
$

 
$

 
$
1,382

 
$
(7
)
Total HTM securities
$
1,382

 
$
(7
)
 
$

 
$

 
$
1,382

 
$
(7
)
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 September 30, 2016 and December 31, 2015, the Company held 32 and 109 investment securities with a fair value of $149.4 million and $546.0 million with unrealized losses totaling $1.1 million and $10.2 million, respectively, that were considered temporary. Of these, the Company had 30 MBS and CMO investments with a fair value of $111.3 million that were in an unrealized loss position totaling $966,000 at September 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 September 30, 2016 and

12



December 31, 2015, gross unrealized losses on the Company's AFS and HTM securities were 1% 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 September 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 
 September 30,
 
Nine Months Ended 
 September 30,
 
2016
 
2015
 
2016
 
2015
Proceeds from sales of securities
$

 
$
12,426

 
$
84

 
$
12,426

Gross realized gains

 
221

 
4

 
221

Gross realized losses

 
(217
)
 

 
(217
)
 
For the three months ended September 30, 2016, the Company did not sell any securities. For the three months ended September 30, 2015, the Company sold certain AFS securities with total carrying value of $12.4 million and recorded net gains on the sale of AFS securities of $4,000 within non-interest income in the consolidated statements of income. As part of the Company’s securities portfolio restructuring due to its pending merger with SBM as of September 30, 2015 (which subsequently was completed on October 16, 2015) it sold all of its Non-Agency guaranteed CMO investments in the quarter ended September 30, 2015, along with $7.3 million of MBS investments experiencing high prepayment speeds. The Company recorded a net gain of $4,000 from the sale of its Non-Agency guaranteed CMO and MBS investments. The Company had previously recorded OTTI on its Non-Agency guaranteed CMO investments of $204,000.

For the nine months ended September 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. For the nine months ended September 30, 2015, the Company sold certain AFS securities with total carrying value of $12.4 million and recorded net gains on sale of AFS securities of $4,000 within non-interest income in the consolidated statements of income.
  
The cost basis of securities sold is measured on a specific identification basis.

FHLBB and FRB Stock
As of September 30, 2016 and December 31, 2015, the Company's investment in FHLBB stock was $17.8 million and $20.6 million, respectively. As of September 30, 2016 and December 31, 2015, the Company's investment in FRB stock was $5.4 million and $908,000, respectively.

Securities Pledged
At September 30, 2016 and December 31, 2015, securities with an amortized cost of $594.9 million and $577.6 million and estimated fair values of $602.2 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.
 

13



Contractual Maturities
The amortized cost and estimated fair values of debt securities by contractual maturity at September 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
$
1,440

 
$
1,442

Due after one year through five years
105,688

 
107,064

Due after five years through ten years
101,074

 
104,023

Due after ten years
569,901

 
575,701

 
$
778,103

 
$
788,230

HTM Securities
 
 
 
Due after one year through five years
$
2,943

 
$
3,002

Due after five years through ten years
5,435

 
5,624

Due after ten years
85,827

 
89,470

 
$
94,205

 
$
98,096

 


14



NOTE 5 – LOANS AND ALLOWANCE FOR LOAN LOSSES
 
The composition of the Company’s loan portfolio, excluding residential loans held for sale, at September 30, 2016 and December 31, 2015 was as follows:   
 
September 30,
2016
 
December 31,
2015
Residential real estate(1)
$
798,306

 
$
821,074

Commercial real estate(1)
1,055,043

 
927,951

Commercial(1)
324,322

 
297,721

Home equity(1)
331,728

 
348,634

Consumer(1)
17,333

 
17,953

HPFC(1)
65,619

 
77,243

Deferred loan fees, net
(342
)
 
(370
)
Total loans
$
2,592,009

 
$
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 $9.6 million and $13.1 million at September 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 nine months ended September 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

15



purposes of 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.

16



The following tables present the activity in the ALL and select loan information by portfolio segment for the three and nine months ended September 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 Nine Months Ended September 30, 2016
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
ALL for the three months ended:
 

 
 

 
 

 
 

 
 

 
 
 
 

 
 

Beginning balance
$
4,431

 
$
11,559

 
$
4,558

 
$
2,946

 
$
193

 
$
30

 
$

 
$
23,717

Loans charged off

 
(32
)
 
(1,541
)
 
(44
)
 
(19
)
 
(205
)
 

 
(1,841
)
Recoveries
1

 
7

 
118

 

 
1

 

 

 
127

Provision (credit)(1)
163

 
1,046

 
148

 
(335
)
 
(13
)
 
278

 

 
1,287

Ending balance
$
4,595

 
$
12,580

 
$
3,283

 
$
2,567

 
$
162

 
$
103

 
$

 
$
23,290

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

 
$
10,432

 
$
3,241

 
$
2,731

 
$
193

 
$
24

 
$

 
$
21,166

Loans charged off
(229
)
 
(273
)
 
(1,970
)
 
(229
)
 
(60
)
 
(507
)
 

 
(3,268
)
Recoveries
72

 
50

 
252

 
2

 
5

 

 

 
381

Provision(1)
207

 
2,371

 
1,760

 
63

 
24

 
586

 

 
5,011

Ending balance
$
4,595

 
$
12,580

 
$
3,283

 
$
2,567

 
$
162

 
$
103

 
$

 
$
23,290

ALL balance attributable to loans:
 

 
 

 
 

 
 

 
 

 
 
 
 

 
 

Individually evaluated for impairment
$
511

 
$
1,284

 
$

 
$
88

 
$

 
$
74

 
$

 
$
1,957

Collectively evaluated for impairment
4,084

 
11,296

 
3,283

 
2,479

 
162

 
29

 

 
21,333

Total ending ALL
$
4,595

 
$
12,580

 
$
3,283

 
$
2,567

 
$
162

 
$
103

 
$

 
$
23,290

Loans:
 

 
 

 
 

 
 

 
 

 
 
 
 

 
 

Individually evaluated for impairment
$
4,551

 
$
13,286

 
$
2,243

 
$
489

 
$
7

 
$
106

 
$

 
$
20,682

Collectively evaluated for impairment
792,485

 
1,041,021

 
322,179

 
332,606

 
17,409

 
65,627

 

 
2,571,327

Total ending loans balance
$
797,036

 
$
1,054,307

 
$
324,422

 
$
333,095

 
$
17,416

 
$
65,733

 
$

 
$
2,592,009

For The Three and Nine Months Ended September 30, 2015
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
ALL for the three months ended:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Beginning balance
$
4,689

 
$
8,160

 
$
3,315

 
$
2,144

 
$
268

 
$

 
$
2,618

 
$
21,194

Loans charged off
(176
)
 
(71
)
 
(144
)
 
(198
)
 
(23
)
 

 

 
(612
)
Recoveries
15

 
4

 
115

 
132

 
3

 

 

 
269

Provision (credit)(1)
4

 
884

 
(138
)
 
(6
)
 
13

 

 
(476
)
 
281

Ending balance
$
4,532

 
$
8,977

 
$
3,148

 
$
2,072

 
$
261

 
$

 
$
2,142

 
$
21,132

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

 
$
7,951

 
$
3,354

 
$
2,247

 
$
281

 
$

 
$
2,384

 
$
21,116

Loans charged off
(468
)
 
(174
)
 
(387
)
 
(439
)
 
(42
)
 

 

 
(1,510
)
Recoveries
35

 
68

 
297

 
137

 
17

 

 

 
554

Provision (credit)(1)
66

 
1,132

 
(116
)
 
127

 
5

 

 
(242
)
 
972

Ending balance
$
4,532

 
$
8,977

 
$
3,148

 
$
2,072

 
$
261

 
$

 
$
2,142

 
$
21,132

ALL balance attributable to loans:
 

 
 

 
 

 
 

 
 

 
 
 
 

 
 

Individually evaluated for impairment
$
645

 
$
280

 
$
92

 
$
89

 
$
78

 
$

 
$

 
$
1,184

Collectively evaluated for impairment
3,887

 
8,697

 
3,056

 
1,983

 
183

 

 
2,142

 
19,948

Total ending ALL
$
4,532

 
$
8,977

 
$
3,148

 
$
2,072

 
$
261

 
$

 
$
2,142

 
$
21,132

Loans:
 

 
 

 
 

 
 

 
 

 
 
 
 

 
 

Individually evaluated for impairment
$
5,200

 
$
3,737

 
$
950

 
$
506

 
$
157

 
$

 
$

 
$
10,550

Collectively evaluated for impairment
577,876

 
687,198

 
257,155