10-Q 1 cac-063017x10qdoc.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, 2017
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)
Emerging growth company ¨

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
 
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 July 28, 2017:  Common stock (no par value) 15,512,914 shares.



CAMDEN NATIONAL CORPORATION

 FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 2017
TABLE OF CONTENTS OF INFORMATION REQUIRED IN REPORT
 
 
PAGE
PART I.  FINANCIAL INFORMATION
 
 
 
ITEM 1.
FINANCIAL STATEMENTS
 
 
 
 
 
Consolidated Statements of Condition - June 30, 2017 and December 31, 2016
 
 
 
 
Consolidated Statements of Income - Three and Six Months Ended June 30, 2017 and 2016
 
 
 
 
Consolidated Statements of Comprehensive Income - Three and Six Months Ended June 30, 2017 and 2016
 
 
 
 
Consolidated Statements of Changes in Shareholders’ Equity - Six Months Ended June 30, 2017 and 2016
 
 
 
 
Consolidated Statements of Cash Flows - Six Months Ended June 30, 2017 and 2016
 
 
 
 
Notes to the Unaudited 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

2



PART I. FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS
CONSOLIDATED STATEMENTS OF CONDITION
(unaudited)
(In thousands, except number of shares)
 
June 30,
 2017
 
December 31,
 2016
ASSETS
 
 

 
 

Cash and due from banks
 
$
93,033

 
$
87,707

Investments:
 
 

 
 

Available-for-sale securities, at fair value
 
810,858

 
779,867

Held-to-maturity securities, at amortized cost
 
94,340

 
94,609

Federal Home Loan Bank and Federal Reserve Bank stock, at cost
 
27,140

 
23,203

Total investments
 
932,338

 
897,679

Loans held for sale, at fair value
 
10,784

 
14,836

Loans
 
2,736,269

 
2,594,564

Less: allowance for loan losses
 
(24,394
)
 
(23,116
)
Net loans
 
2,711,875

 
2,571,448

Goodwill
 
94,697

 
94,697

Other intangible assets
 
5,820

 
6,764

Bank-owned life insurance
 
79,266

 
78,119

Premises and equipment, net
 
42,362

 
42,873

Deferred tax assets
 
36,532

 
39,263

Other assets
 
29,660

 
30,844

Total assets
 
$
4,036,367

 
$
3,864,230

LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 

 
 

Liabilities
 
 

 
 

Deposits:
 
 

 
 

Demand
 
$
424,174

 
$
406,934

Interest checking
 
737,532

 
701,494

Savings and money market
 
971,156

 
979,263

Certificates of deposit
 
456,227

 
468,203

Brokered deposits
 
351,777

 
272,635

Total deposits
 
2,940,866

 
2,828,529

Short-term borrowings
 
572,073

 
530,129

Long-term borrowings
 
10,756

 
10,791

Subordinated debentures
 
58,833

 
58,755

Accrued interest and other liabilities
 
46,879

 
44,479

Total liabilities
 
3,629,407

 
3,472,683

Commitments and Contingencies
 


 


Shareholders’ Equity
 
 

 
 

Common stock, no par value: authorized 40,000,000 shares, issued and outstanding 15,512,914 and 15,476,379 on June 30, 2017 and December 31, 2016, respectively
 
156,312

 
156,041

Retained earnings
 
262,559

 
249,415

Accumulated other comprehensive loss:
 
 

 
 

Net unrealized losses on available-for-sale securities, net of tax
 
(4,365
)
 
(6,085
)
Net unrealized losses on cash flow hedging derivative instruments, net of tax
 
(5,502
)
 
(5,694
)
Net unrecognized losses on postretirement plans, net of tax
 
(2,044
)
 
(2,130
)
Total accumulated other comprehensive loss
 
(11,911
)
 
(13,909
)
Total shareholders’ equity
 
406,960

 
391,547

Total liabilities and shareholders’ equity
 
$
4,036,367

 
$
3,864,230

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)
 
2017
 
2016
 
2017
 
2016
Interest Income
 
 

 
 

 
 
 
 
Interest and fees on loans
 
$
28,423

 
$
27,706

 
$
55,485

 
$
54,722

Interest on U.S. government and sponsored enterprise obligations
 
4,355

 
4,016

 
8,611

 
8,006

Interest on state and political subdivision obligations
 
691

 
711

 
1,393

 
1,425

Interest on federal funds sold and other investments
 
471

 
342

 
865

 
603

Total interest income
 
33,940

 
32,775

 
66,354

 
64,756

Interest Expense
 
 

 
 

 
 

 
 

Interest on deposits
 
2,987

 
2,109

 
5,541

 
4,151

Interest on borrowings
 
1,476

 
1,313

 
2,637

 
2,449

Interest on subordinated debentures
 
851

 
849

 
1,695

 
1,700

Total interest expense
 
5,314

 
4,271

 
9,873

 
8,300

Net interest income
 
28,626

 
28,504

 
56,481

 
56,456

Provision for credit losses
 
1,401

 
2,852

 
1,980

 
3,724

Net interest income after provision for credit losses
 
27,225

 
25,652

 
54,501

 
52,732

Non-Interest Income
 
 

 
 

 
 

 
 

Debit card income
 
1,992

 
1,854

 
3,826

 
3,756

Service charges on deposit accounts
 
1,957

 
1,833

 
3,780

 
3,557

Mortgage banking income, net
 
1,937

 
1,706

 
3,490

 
2,514

Income from fiduciary services
 
1,355

 
1,342

 
2,602

 
2,511

Bank-owned life insurance
 
570

 
892

 
1,147

 
1,314

Brokerage and insurance commissions
 
548

 
517

 
1,001

 
975

Other service charges and fees
 
501

 
477

 
969

 
903

Net gain on sale of securities
 

 
4

 

 
4

Other income
 
1,028

 
1,927

 
1,645

 
2,935

Total non-interest income
 
9,888

 
10,552

 
18,460

 
18,469

Non-Interest Expense
 
 

 
 

 
 

 
 

Salaries and employee benefits
 
12,376

 
11,999

 
24,523

 
23,590

Furniture, equipment and data processing
 
2,450

 
2,381

 
4,775

 
4,808

Net occupancy costs
 
1,689

 
1,790

 
3,635

 
3,667

Consulting and professional fees
 
853

 
982

 
1,698

 
1,867

Debit card expense
 
712

 
718

 
1,372

 
1,438

Regulatory assessments
 
488

 
774

 
1,033

 
1,495

Amortization of intangible assets
 
472

 
476

 
944

 
952

Other real estate owned and collection costs, net
 
344

 
496

 
300

 
1,152

Merger and acquisition costs
 

 
177

 

 
821

Other expenses
 
2,774

 
2,537

 
5,306

 
5,449

Total non-interest expense
 
22,158

 
22,330

 
43,586

 
45,239

Income before income tax expense
 
14,955

 
13,874

 
29,375

 
25,962

Income tax expense
 
4,721

 
4,258

 
9,065

 
7,700

Net Income
 
$
10,234

 
$
9,616

 
$
20,310

 
$
18,262

 
 
 
 
 
 
 
 
 
Per Share Data
 
 

 
 

 
 

 
 

Basic earnings per share
 
$
0.66

 
$
0.62

 
$
1.31

 
$
1.18

Diluted earnings per share
 
$
0.66

 
$
0.62

 
$
1.30

 
$
1.18

Weighted average number of common shares outstanding
 
15,512,761

 
15,415,308

 
15,500,862

 
15,402,629

Diluted weighted average number of common shares outstanding
 
15,586,571

 
15,491,010

 
15,576,711

 
15,472,798


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)
 
2017
 
2016
 
2017
 
2016
Net Income
 
$
10,234

 
$
9,616

 
$
20,310

 
$
18,262

Other comprehensive income:
 
 
 
 

 
 
 
 
Net change in unrealized gains on available-for-sale securities, net of tax of ($1,173), ($1,821), ($926) and ($6,004), respectively
 
2,178

 
3,382

 
1,720

 
11,151

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

 
(3
)
 

 
(3
)
Net change in unrealized gains on available-for-sale securities, net of tax
 
2,178


3,379


1,720


11,148

Net change in unrealized (losses) gains on cash flow hedging derivatives:
 
 
 
 
 
 
 
 
Net change in unrealized losses on cash flow hedging derivatives, net of tax of $249, $705, $200 and $1,966, respectively
 
(462
)
 
(1,309
)
 
(372
)
 
(3,652
)
Net reclassification adjustment for effective portion of cash flow hedges included in interest expense, net of tax of ($145), ($218), ($304) and ($345), respectively(2)
 
268

 
404

 
564

 
642

Net change in unrealized (losses) gains on cash flow hedging derivatives, net of tax
 
(194
)

(905
)

192


(3,010
)
Reclassification of amortization of net unrecognized actuarial loss and prior service cost, net of tax of ($23), ($21), ($46) and ($42), respectively(3)
 
43

 
38

 
86

 
76

Other comprehensive income
 
2,027

 
2,512

 
1,998

 
8,214

Comprehensive Income
 
$
12,261

 
$
12,128

 
$
22,308

 
$
26,476

(1) Reclassified into the consolidated statements of income in net gain on sale of securities.
(2)
Reclassified into the consolidated statements of income within interest expense.
(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, 2015
 
15,330,717

 
$
153,083

 
$
222,329

 
$
(12,222
)
 
$
363,190

Cumulative effect adjustment(2)
 

 
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
 
90,934

 
377

 

 

 
377

Cash dividends declared ($0.40 per share)(1)
 

 

 
(6,229
)
 

 
(6,229
)
Balance at June 30, 2016
 
15,421,651

 
$
154,574

 
$
234,290

 
$
(4,008
)
 
$
384,856

 
 
 
 
 
 
 
 
 
 

Balance at December 31, 2016
 
15,476,379

 
$
156,041

 
$
249,415

 
$
(13,909
)
 
$
391,547

Net income
 

 

 
20,310

 

 
20,310

Other comprehensive income, net of tax
 

 

 

 
1,998

 
1,998

Stock-based compensation expense
 

 
816

 

 

 
816

Exercise of stock options and issuance of vested share awards, net of repurchase for tax withholdings
 
36,535

 
(545
)
 

 

 
(545
)
Cash dividends declared ($0.46 per share)
 

 

 
(7,166
)
 

 
(7,166
)
Balance at June 30, 2017
 
15,512,914


$
156,312


$
262,559

 
$
(11,911
)
 
$
406,960

(1)
Share and per share amounts as of December 31, 2015 and as of and for the six months ended June 30, 2016 have been adjusted to reflect the three-for-two stock split effective September 30, 2016.
(2)
In the second quarter of 2016, the Company adopted ASU 2016-09, effective January 1, 2016. The Company made a policy election to not estimate the forfeiture rate in the accounting for share-based compensation on its unvested share-based awards. The change in policy was accounted for on a modified-retrospective basis and represents the cumulative effect adjustment to shareholders' equity.
 
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)
 
2017
 
2016
Operating Activities
 
 

 
 

Net Income
 
$
20,310

 
$
18,262

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

 
 

Provision for credit losses
 
1,980

 
3,724

Depreciation and amortization expense
 
1,844

 
2,456

Purchase accounting accretion, net
 
(1,487
)
 
(3,073
)
Investment securities amortization and accretion, net
 
1,551

 
1,405

Stock-based compensation expense
 
816

 
1,042

Amortization of intangible assets
 
944

 
952

Net gain on sale of investment securities
 

 
(4
)
Net increase in other real estate owned valuation allowance and gain on disposition
 
(60
)
 
(152
)
Originations of mortgage loans held for sale
 
(86,658
)
 
(107,026
)
Proceeds from the sale of mortgage loans
 
93,557

 
97,375

Gain on sale of mortgage loans, net of origination costs
 
(2,656
)
 
(2,166
)
Decrease in other assets
 
2,561

 
6,509

Increase (decrease) in other liabilities
 
1,167

 
(2,254
)
Net cash provided by operating activities
 
33,869

 
17,050

Investing Activities
 
 

 
 

Proceeds from maturities of available-for-sale securities
 
67,650

 
65,544

Purchase of available-for-sale securities
 
(97,278
)
 
(98,728
)
Purchase of held-to-maturity securities
 

 
(9,718
)
Net increase in loans
 
(141,360
)
 
(93,709
)
Purchase of bank-owned life insurance, net of death benefit proceeds
 

 
(16,122
)
Purchase of Federal Home Loan Bank and Federal Reserve Bank stock
 
(7,058
)
 
(7,341
)
Proceeds from sale of Federal Home Loan Bank stock
 
3,121

 

Proceeds from the sale of other real estate owned
 
641

 
633

Recoveries of previously charged-off loans
 
317

 
254

Purchase of premises and equipment
 
(1,440
)
 
(866
)
Proceeds from the sale of premises and equipment
 
137

 
90

Net cash used by investing activities
 
(175,270
)
 
(159,963
)
Financing Activities
 
 
 
 

Net increase in deposits
 
112,501

 
47,605

Net proceeds from borrowings less than 90 days
 
46,929

 
128,071

Repayments on Federal Home Loan Bank long-term advances
 

 
(10,000
)
Repayments of wholesale repurchase agreements
 
(5,000
)
 

Exercise of stock options and issuance of restricted stock, net of repurchase for tax withholdings
 
(545
)
 
377

Cash dividends paid on common stock
 
(7,158
)
 
(6,185
)
Net cash provided by financing activities
 
146,727

 
159,868

Net increase in cash and cash equivalents
 
5,326

 
16,955

Cash and cash equivalents at beginning of period
 
87,707

 
79,488

Cash and cash equivalents at end of period
 
$
93,033

 
$
96,443

Supplemental information
 
 

 
 

Interest paid
 
$
9,740

 
$
7,800

Income taxes paid
 
4,927

 
103

Transfer from loans to other real estate owned
 

 
32

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, 2017 and December 31, 2016, the consolidated statements of income for the three and six months ended June 30, 2017 and 2016, the consolidated statements of comprehensive income for the three and six months ended June 30, 2017 and 2016, the consolidated statements of changes in shareholders' equity for the six months ended June 30, 2017 and 2016, and the consolidated statements of cash flows for the six months ended June 30, 2017 and 2016. 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, 2017 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, 2016 Annual Report on Form 10-K.


8



The acronyms and abbreviations identified below are used throughout this Form 10-Q, including Part I. "Financial Information." The following was provided to aid the reader and provide a reference page when reviewing this section of the Form 10-Q.
AFS:
Available-for-sale
 
HPFC:
Healthcare Professional Funding Corporation, a wholly-owned subsidiary of Camden National Bank
ALCO:
Asset/Liability Committee
 
HTM:
Held-to-maturity
ALL:
Allowance for loan losses
 
IRS:
Internal Revenue Service
AOCI:
Accumulated other comprehensive income (loss)
 
LIBOR:
London Interbank Offered Rate
ASC:
Accounting Standards Codification
 
LTIP:
Long-Term Performance Share Plan
ASU:
Accounting Standards Update
 
Management ALCO:
Management Asset/Liability Committee
Bank:
Camden National Bank, a wholly-owned subsidiary of Camden National Corporation
 
MBS:
Mortgage-backed security
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
 
OCC:
Office of the Comptroller of the Currency
CMO:
Collateralized mortgage obligation
 
OCI:
Other comprehensive income (loss)
Company:
Camden National Corporation
 
OFAC:
Office of Foreign Assets Control
DCRP:
Defined Contribution Retirement Plan
 
OREO:
Other real estate owned
EPS:
Earnings per share
 
SERP:
Supplemental executive retirement plans
FASB:
Financial Accounting Standards Board
 
TDR:
Troubled-debt restructured loan
FDIC:
Federal Deposit Insurance Corporation
 
UBCT:
Union Bankshares Capital Trust I, an unconsolidated entity formed by Union Bankshares Company that was subsequently acquired by Camden National Corporation
FHLB:
Federal Home Loan Bank
 
U.S.:
United States of America
FHLBB:
Federal Home Loan Bank of Boston
 
USD:
United States Dollar
FRB:
Federal Reserve System Board of Governors
 
2003 Plan:
2003 Stock Option and Incentive Plan
FRBB:
Federal Reserve Bank of Boston
 
2012 Plan:
2012 Equity and Incentive Plan
Freddie Mac:
Federal Home Loan Mortgage Corporation
 
2013 Repurchase Program:
2013 Common Stock Repurchase Program, approved by the Company's Board of Directors
GAAP:
Generally accepted accounting principles in the United States
 
 
 


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,
 
 
2017
 
2016(4)
 
2017
 
2016(4)
Net income
 
$
10,234

 
$
9,616

 
$
20,310

 
$
18,262

Dividends and undistributed earnings allocated to participating securities(1)
 
(43
)
 
(49
)
 
(88
)
 
(81
)
Net income available to common shareholders
 
$
10,191

 
$
9,567

 
$
20,222

 
$
18,181

Weighted-average common shares outstanding for basic EPS
 
15,512,761

 
15,415,308

 
15,500,862

 
15,402,629

Dilutive effect of stock-based awards(2)
 
73,810

 
75,702

 
75,849

 
70,169

Weighted-average common and potential common shares for diluted EPS
 
15,586,571

 
15,491,010

 
15,576,711

 
15,472,798

Earnings per common share(1):
 
 

 
 

 
 
 
 
Basic EPS
 
$
0.66

 
$
0.62

 
$
1.31

 
$
1.18

Diluted EPS
 
$
0.66

 
$
0.62

 
$
1.30

 
$
1.18

Awards excluded from the calculation of diluted EPS(3):
 
 
 
 
 
 
 
 
Stock options
 
585

 
18,375

 
585

 
18,375

(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 and vesting of restricted stock units utilizing the treasury stock method. Not included are the unvested LTIP awards as they have not met the performance criteria for the periods presented.
(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.
(4) Share and per share amounts for the three and six months ended June 30, 2016 have been adjusted to reflect the three-for-two stock split effective September 30, 2016.

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, 2017
 

 
 

 
 

 
 

AFS Securities:
 
 
 
 
 
 
 
Obligations of states and political subdivisions
$
7,235

 
$
157

 
$

 
$
7,392

Mortgage-backed securities issued or guaranteed by U.S. government-sponsored enterprises
524,635

 
2,280

 
(5,239
)
 
521,676

Collateralized mortgage obligations issued or guaranteed by U.S. government-sponsored enterprises
279,588

 
268

 
(4,984
)
 
274,872

Subordinated corporate bonds
5,483

 
193

 

 
5,676

Total AFS debt securities
816,941

 
2,898

 
(10,223
)
 
809,616

Equity securities
632

 
610

 

 
1,242

Total AFS securities
$
817,573

 
$
3,508

 
$
(10,223
)
 
$
810,858

HTM Securities:
 
 
 
 
 
 
 
Obligations of states and political subdivisions
$
94,340

 
$
1,037

 
$
(369
)
 
$
95,008

Total HTM securities
$
94,340

 
$
1,037

 
$
(369
)
 
$
95,008

December 31, 2016
 

 
 

 
 

 
 

AFS Securities:
 
 
 
 
 
 
 
Obligations of states and political subdivisions
$
8,848

 
$
153

 
$

 
$
9,001

Mortgage-backed securities issued or guaranteed by U.S. government-sponsored enterprises
485,222

 
2,515

 
(7,115
)
 
480,622

Collateralized mortgage obligations issued or guaranteed by U.S. government-sponsored enterprises
289,046

 
265

 
(5,421
)
 
283,890

Subordinated corporate bonds
5,481

 
132

 

 
5,613

Total AFS debt securities
788,597

 
3,065

 
(12,536
)
 
779,126

Equity securities
632

 
109

 

 
741

Total AFS securities
$
789,229

 
$
3,174

 
$
(12,536
)
 
$
779,867

HTM Securities:
 
 
 
 
 
 
 
Obligations of states and political subdivisions
$
94,609

 
$
618

 
$
(631
)
 
$
94,596

Total HTM securities
$
94,609

 
$
618

 
$
(631
)
 
$
94,596

 
Net unrealized losses on AFS securities at June 30, 2017 included in AOCI amounted to $4.4 million, net of a deferred tax benefit of $2.3 million. Net unrealized losses on AFS securities at December 31, 2016 included in AOCI amounted to $6.1 million, net of a deferred tax benefit of $3.3 million.

During the first six months of 2017, the Company purchased investment securities totaling $97.3 million, all of which were designated as AFS securities.

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.


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, 2017 and December 31, 2016, 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, 2017
 

 
 

 
 

 
 

 
 

 
 

AFS Securities:
 
 
 
 
 
 
 
 
 
 
 
Mortgage-backed securities issued or guaranteed by U.S. government-sponsored enterprises
$
364,378

 
$
(4,139
)
 
$
29,988

 
$
(1,100
)
 
$
394,366

 
$
(5,239
)
Collateralized mortgage obligations issued or guaranteed by U.S. government-sponsored enterprises
116,495

 
(1,561
)
 
91,652

 
(3,423
)
 
208,147

 
(4,984
)
Total AFS securities
$
480,873

 
$
(5,700
)
 
$
121,640

 
$
(4,523
)
 
$
602,513

 
$
(10,223
)
HTM Securities:
 
 
 
 
 
 
 
 
 
 
 
Obligations of states and political subdivisions
$
20,686

 
$
(369
)
 
$

 
$

 
$
20,686

 
$
(369
)
Total HTM securities
$
20,686

 
$
(369
)
 
$

 
$

 
$
20,686

 
$
(369
)
December 31, 2016
 

 
 

 
 

 
 

 
 

 
 

AFS Securities:
 
 
 
 
 
 
 
 
 
 
 
Mortgage-backed securities issued or guaranteed by U.S. government-sponsored enterprises
$
348,579

 
$
(5,780
)
 
$
29,496

 
$
(1,335
)
 
$
378,075

 
$
(7,115
)
Collateralized mortgage obligations issued or guaranteed by U.S. government-sponsored enterprises
163,412

 
(2,906
)
 
74,212

 
(2,515
)
 
237,624

 
(5,421
)
Total AFS securities
$
511,991

 
$
(8,686
)
 
$
103,708

 
$
(3,850
)
 
$
615,699

 
$
(12,536
)
HTM Securities:
 
 
 
 
 
 
 
 
 
 
 
Obligations of states and political subdivisions
$
42,805

 
$
(631
)
 
$

 
$

 
$
42,805

 
$
(631
)
Total HTM securities
$
42,805

 
$
(631
)
 
$

 
$

 
$
42,805

 
$
(631
)

At June 30, 2017 and December 31, 2016, the Company held 187 and 209 investment securities with a fair value of $623.2 million and $658.5 million that were in an unrealized loss position totaling $10.6 million and $13.2 million, respectively, that were considered temporary. Of these, MBS and CMOs with a fair value of $121.6 million and $103.7 million were in an unrealized loss position, and have been in an unrealized loss position for 12 months or more, totaling $4.5 million and $3.9 million at June 30, 2017 and December 31, 2016, respectively. 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, 2017 and December 31, 2016, gross unrealized losses on the Company's AFS and HTM securities were 2% 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, 2017 until the decline in value has recovered.

12




Sale of Securities
The following table details the Company's sales of AFS securities for the period indicated below:
 
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
 
2017
 
2016
 
2017
 
2016
Proceeds from sales of securities
 
$

 
$
84

 
$

 
$
84

Gross realized gains
 

 
4

 

 
4

Gross realized losses
 

 

 

 


The Company did not sell any securities during the three and six months ended June 30, 2017. For the three and six months ended June 30, 2016, the Company sold certain AFS securities with a total carrying value of $80,000 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 cost basis of securities sold is measured on a specific identification basis.

FHLBB and FRB Stock
As of June 30, 2017 and December 31, 2016, the Company's investment in FHLBB stock was $21.8 million and $17.8 million, respectively. As of June 30, 2017 and December 31, 2016, the Company's investment in FRB stock was $5.4 million.

Securities Pledged
At June 30, 2017 and December 31, 2016, securities with an amortized cost of $606.8 million and $597.3 million and estimated fair values of $600.5 million and $589.7 million, respectively, were pledged to secure FHLBB advances, public deposits, and securities sold under agreements to repurchase and for other purposes required or permitted by law.
 
Contractual Maturities
The amortized cost and estimated fair values of debt securities by contractual maturity at June 30, 2017, 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
$
1,631

 
$
1,639

Due after one year through five years
103,620

 
103,833

Due after five years through ten years
162,740

 
162,857

Due after ten years
548,950

 
541,287

 
$
816,941

 
$
809,616

HTM Securities
 
 
 
Due in one year or less
$
758

 
$
762

Due after one year through five years
4,769

 
4,835

Due after five years through ten years
5,043

 
5,140

Due after ten years
83,770

 
84,271

 
$
94,340

 
$
95,008

 


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, 2017 and December 31, 2016 was as follows:   
 
June 30,
2017
 
December 31,
2016
Residential real estate
$
831,577

 
$
802,494

Commercial real estate
1,138,756

 
1,050,780

Commercial
370,701

 
333,639

Home equity
327,083

 
329,907

Consumer
17,035

 
17,332

HPFC
51,117

 
60,412

Total loans
$
2,736,269

 
$
2,594,564


The loan balances for each portfolio segment presented above are net of their respective unamortized fair value mark discount on acquired loans and net of unamortized loan origination (costs) fees totaling:
 
June 30,
2017
 
December 31,
2016
Net unamortized fair value mark discount on acquired loans
$
7,442

 
$
8,810

Net unamortized loan origination (costs) fees
(526
)
 
(66
)
Total
$
6,916

 
$
8,744


The Bank’s lending activities are primarily conducted in Maine, but also include a mortgage loan production office in Massachusetts and a commercial loan production office in New Hampshire. 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. 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.

Effective January 1, 2017, the Company's internal policy for assessing individual loans for impairment was changed to increase the principal balance threshold for a loan from $250,000 to $500,000. The qualitative factors for assessing a loan individually for impairment in accordance with the Company's internal policy were unchanged, and continue to require the loan to be classified as substandard or doubtful and on non-accrual status. There were no other significant changes in the Company's ALL methodology during the six months ended June 30, 2017.

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 Company's Credit Risk Administration and the Credit Risk Policy Committee oversee the systems and procedures to monitor the credit

14



quality of its loan portfolio, conduct a loan review program, maintain the integrity of the loan rating system, determine the adequacy of the ALL and support the oversight efforts of the Directors' Loan Review Committee and the Board of Directors. The Company's practice is to proactively manage the portfolio such that management can identify problem credits early, assess and implement effective work-out strategies, and take charge-offs as promptly as practical. In addition, the Company continuously reassesses its underwriting standards in response to credit risk posed by changes in economic conditions. For purposes of determining the ALL, the Company disaggregates its loans into portfolio segments, which include residential real estate, commercial real estate, commercial, home equity, 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. Prior to the Company's closing of HPFC's operations, effective February 19, 2016, it provided commercial lending to dentists, optometrists and veterinarians, many of which were 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 consists 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 presents the activity in the ALL and select loan information by portfolio segment for the three and six months ended June 30, 2017 and 2016, and for the year ended December 31, 2016
 
 
Residential
Real Estate
 
Commercial
Real Estate
 
Commercial
 
Home
Equity
 
Consumer
 
HPFC
 
Total
For The Three and Six Months Ended June 30, 2017
 
 
 
 
 
 
 
 
 
 
 
 
 
 
ALL for the three months ended:
 
 

 
 

 
 

 
 

 
 

 
 
 
 

Beginning balance
 
$
4,271

 
$
12,726

 
$
3,815

 
$
2,107

 
$
175

 
$
627

 
$
23,721

Loans charged off
 
(190
)
 
(9
)
 
(145
)
 
(391
)
 
(48
)
 
(81
)
 
(864
)
Recoveries
 
4

 
10

 
118

 

 
2

 

 
134

Provision (credit)(1)
 
396

 
121

 
487

 
378

 
53

 
(32
)
 
1,403

Ending balance
 
$
4,481

 
$
12,848

 
$
4,275

 
$
2,094

 
$
182

 
$
514

 
$
24,394

ALL for the six months ended:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Beginning balance
 
$
4,160

 
$
12,154

 
$
3,755

 
$
2,194

 
$
181

 
$
672

 
$
23,116

Loans charged off
 
(195
)
 
(12
)
 
(281
)
 
(392
)
 
(62
)
 
(81
)
 
(1,023
)
Recoveries
 
4

 
113

 
195

 
1

 
4

 

 
317

Provision (credit)(1)
 
512

 
593

 
606

 
291

 
59

 
(77
)
 
1,984

Ending balance
 
$
4,481

 
$
12,848

 
$
4,275

 
$
2,094

 
$
182

 
$
514

 
$
24,394

ALL balance attributable to loans:
 
 

 
 

 
 

 
 

 
 

 
 
 
 

Individually evaluated for impairment
 
$
468

 
$
1,116

 
$
120

 
$

 
$

 
$

 
$
1,704

Collectively evaluated for impairment
 
4,013

 
11,732

 
4,155

 
2,094

 
182

 
514

 
22,690

Total ending ALL
 
$
4,481

 
$
12,848

 
$
4,275

 
$
2,094

 
$
182

 
$
514

 
$
24,394

Loans:
 
 

 
 

 
 

 
 

 
 

 
 
 
 

Individually evaluated for impairment
 
$
4,451

 
$
13,116

 
$
2,067

 
$
446

 
$

 
$

 
$
20,080

Collectively evaluated for impairment
 
827,126

 
1,125,640

 
368,634

 
326,637

 
17,035

 
51,117

 
2,716,189

Total ending loans balance
 
$
831,577

 
$
1,138,756

 
$
370,701

 
$
327,083

 
$
17,035

 
$
51,117

 
$
2,736,269

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


16



 
 
Residential
Real Estate
 
Commercial
Real Estate
 
Commercial
 
Home
Equity
 
Consumer
 
HPFC
 
Total
For The Year Ended December 31, 2016
 
 
 
 
 
 
 
 
 
 
 
 
 
 
ALL:
 
 

 
 

 
 

 
 

 
 

 
 
 
 

Beginning balance
 
$
4,545

 
$
10,432

 
$
3,241

 
$
2,731

 
$
193

 
$
24

 
$
21,166

Loans charged off
 
(356
)
 
(315
)
 
(2,218
)
 
(308
)
 
(101
)
 
(507
)
 
(3,805
)
Recoveries
 
95

 
50

 
332

 
2

 
7

 

 
486

Provision (credit)(1)
 
(124
)
 
1,987

 
2,400

 
(231
)
 
82

 
1,155

 
5,269

Ending balance
 
$
4,160

 
$