10-Q 1 cac-093017x10qdoc.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, 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 October 27, 2017:  Common stock (no par value) 15,516,049 shares.



CAMDEN NATIONAL CORPORATION

 FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 2017
TABLE OF CONTENTS OF INFORMATION REQUIRED IN REPORT
 
 
PAGE
PART I.  FINANCIAL INFORMATION
 
 
 
ITEM 1.
FINANCIAL STATEMENTS
 
 
 
 
 
Consolidated Statements of Condition - September 30, 2017 and December 31, 2016
 
 
 
 
Consolidated Statements of Income - Three and Nine Months Ended September 30, 2017 and 2016
 
 
 
 
Consolidated Statements of Comprehensive Income - Three and Nine Months Ended September 30, 2017 and 2016
 
 
 
 
Consolidated Statements of Changes in Shareholders’ Equity - Nine Months Ended September 30, 2017 and 2016
 
 
 
 
Consolidated Statements of Cash Flows - Nine Months Ended September 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)
 
September 30,
 2017
 
December 31,
 2016
ASSETS
 
 

 
 

Cash and due from banks
 
$
89,435

 
$
87,707

Investments:
 
 

 
 

Available-for-sale securities, at fair value
 
797,251

 
779,867

Held-to-maturity securities, at amortized cost
 
94,207

 
94,609

Federal Home Loan Bank and Federal Reserve Bank stock, at cost
 
24,560

 
23,203

Total investments
 
916,018

 
897,679

Loans held for sale, at fair value
 
12,997

 
14,836

Loans
 
2,748,290

 
2,594,564

Less: allowance for loan losses
 
(24,413
)
 
(23,116
)
Net loans
 
2,723,877

 
2,571,448

Goodwill
 
94,697

 
94,697

Other intangible assets
 
5,347

 
6,764

Bank-owned life insurance
 
86,869

 
78,119

Premises and equipment, net
 
42,422

 
42,873

Deferred tax assets
 
36,344

 
39,263

Other assets
 
31,937

 
30,844

Total assets
 
$
4,039,943

 
$
3,864,230

LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 

 
 

Liabilities
 
 

 
 

Deposits:
 
 

 
 

Demand
 
$
476,386

 
$
406,934

Interest checking
 
758,568

 
701,494

Savings and money market
 
976,246

 
979,263

Certificates of deposit
 
498,965

 
468,203

Brokered deposits
 
246,248

 
272,635

Total deposits
 
2,956,413

 
2,828,529

Short-term borrowings
 
538,997

 
530,129

Long-term borrowings
 
10,738

 
10,791

Subordinated debentures
 
58,872

 
58,755

Accrued interest and other liabilities
 
60,557

 
44,479

Total liabilities
 
3,625,577

 
3,472,683

Commitments and Contingencies
 


 


Shareholders’ Equity
 
 

 
 

Common stock, no par value: authorized 40,000,000 shares, issued and outstanding 15,515,577 and 15,476,379 on September 30, 2017 and December 31, 2016, respectively
 
156,561

 
156,041

Retained earnings
 
270,316

 
249,415

Accumulated other comprehensive loss:
 
 

 
 

Net unrealized losses on available-for-sale securities, net of tax
 
(5,165
)
 
(6,085
)
Net unrealized losses on cash flow hedging derivative instruments, net of tax
 
(5,344
)
 
(5,694
)
Net unrecognized losses on postretirement plans, net of tax
 
(2,002
)
 
(2,130
)
Total accumulated other comprehensive loss
 
(12,511
)
 
(13,909
)
Total shareholders’ equity
 
414,366

 
391,547

Total liabilities and shareholders’ equity
 
$
4,039,943

 
$
3,864,230

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)
 
2017
 
2016
 
2017
 
2016
Interest Income
 
 

 
 

 
 
 
 
Interest and fees on loans
 
$
29,350

 
$
27,395

 
$
84,835

 
$
82,117

Interest on U.S. government and sponsored enterprise obligations
 
4,177

 
4,049

 
12,788

 
12,055

Interest on state and political subdivision obligations
 
686

 
702

 
2,079

 
2,127

Interest on federal funds sold and other investments
 
497

 
448

 
1,362

 
1,051

Total interest income
 
34,710

 
32,594

 
101,064

 
97,350

Interest Expense
 
 

 
 

 
 

 
 

Interest on deposits
 
3,027

 
2,204

 
8,568

 
6,355

Interest on borrowings
 
1,665

 
1,161

 
4,302

 
3,610

Interest on subordinated debentures
 
858

 
857

 
2,553

 
2,557

Total interest expense
 
5,550

 
4,222

 
15,423

 
12,522

Net interest income
 
29,160

 
28,372

 
85,641

 
84,828

Provision for credit losses
 
817

 
1,279

 
2,797

 
5,003

Net interest income after provision for credit losses
 
28,343

 
27,093

 
82,844

 
79,825

Non-Interest Income
 
 

 
 

 
 

 
 

Debit card income
 
2,061

 
1,894

 
5,887

 
5,650

Service charges on deposit accounts
 
1,852

 
1,799

 
5,632

 
5,356

Mortgage banking income, net
 
2,076

 
2,407

 
5,566

 
4,921

Income from fiduciary services
 
1,229

 
1,225

 
3,831

 
3,736

Bank-owned life insurance
 
603

 
585

 
1,750

 
1,899

Brokerage and insurance commissions
 
600

 
594

 
1,601

 
1,569

Other service charges and fees
 
589

 
591

 
1,558

 
1,494

Net gain on sale of securities
 
827

 

 
827

 
4

Other income
 
462

 
1,906

 
2,107

 
4,841

Total non-interest income
 
10,299

 
11,001

 
28,759

 
29,470

Non-Interest Expense
 
 

 
 

 
 

 
 

Salaries and employee benefits
 
12,359

 
12,044

 
36,882

 
35,634

Furniture, equipment and data processing
 
2,429

 
2,349

 
7,204

 
7,157

Net occupancy costs
 
1,599

 
1,685

 
5,234

 
5,352

Consulting and professional fees
 
714

 
742

 
2,412

 
2,609

Debit card expense
 
662

 
669

 
2,034

 
2,107

Regulatory assessments
 
574

 
667

 
1,607

 
2,162

Amortization of intangible assets
 
473

 
475

 
1,417

 
1,427

Other real estate owned and collection costs, net
 
258

 
877

 
558

 
2,029

Merger and acquisition costs
 

 
45

 

 
866

Other expenses
 
2,757

 
2,596

 
8,063

 
8,045

Total non-interest expense
 
21,825

 
22,149

 
65,411

 
67,388

Income before income tax expense
 
16,817

 
15,945

 
46,192

 
41,907

Income tax expense
 
5,478

 
5,042

 
14,543

 
12,742

Net Income
 
$
11,339

 
$
10,903

 
$
31,649

 
$
29,165

 
 
 
 
 
 
 
 
 
Per Share Data
 
 

 
 

 
 

 
 

Basic earnings per share
 
$
0.72

 
$
0.70

 
$
2.03

 
$
1.88

Diluted earnings per share
 
$
0.72

 
$
0.70

 
$
2.02

 
$
1.88

Weighted average number of common shares outstanding
 
15,515,189

 
15,425,452

 
15,505,698

 
15,410,310

Diluted weighted average number of common shares outstanding
 
15,589,008

 
15,507,561

 
15,580,072

 
15,483,320


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)
 
2017
 
2016
 
2017
 
2016
Net Income
 
$
11,339

 
$
10,903

 
$
31,649

 
$
29,165

Other comprehensive income (loss):
 
 
 
 

 
 
 
 
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 $142, $405, ($784) and ($5,599), respectively
 
(262
)
 
(752
)
 
1,458

 
10,399

Net reclassification adjustment for net gains included in net income, net of tax of $289, $0, $289 and $1, respectively(1)
 
(538
)
 

 
(538
)
 
(3
)
Net change in unrealized gains (losses) on available-for-sale securities, net of tax
 
(800
)

(752
)

920


10,396

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 $43, ($107), $243 and $1,859, respectively
 
(80
)
 
199

 
(452
)
 
(3,453
)
Net reclassification adjustment for effective portion of cash flow hedges, net of tax of ($128), ($187), ($432) and ($532), respectively(2)
 
238

 
347

 
802

 
989

Net change in unrealized gains (losses) on cash flow hedging derivatives, net of tax
 
158


546


350


(2,464
)
Reclassification of amortization of net unrecognized actuarial loss and prior service cost, net of tax of ($23), ($20), ($69) and ($62), respectively(3)
 
42

 
39

 
128

 
115

Other comprehensive income (loss)
 
(600
)
 
(167
)
 
1,398

 
8,047

Comprehensive Income
 
$
10,739

 
$
10,736

 
$
33,047

 
$
37,212

(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
Outstanding(1)
 
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
)
 

 

Cash in-lieu, stock split(3)
 
(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
 
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

 
 
 
 
 
 
 
 
 
 

Balance at December 31, 2016
 
15,476,379

 
$
156,041

 
$
249,415

 
$
(13,909
)
 
$
391,547

Net income
 

 

 
31,649

 

 
31,649

Other comprehensive income, net of tax
 

 

 

 
1,398

 
1,398

Stock-based compensation expense
 

 
1,135

 

 

 
1,135

Exercise of stock options and issuance of vested share awards, net of repurchase for tax withholdings
 
39,198

 
(615
)
 

 

 
(615
)
Cash dividends declared ($0.69 per share)
 

 

 
(10,748
)
 

 
(10,748
)
Balance at September 30, 2017
 
15,515,577


$
156,561


$
270,316

 
$
(12,511
)
 
$
414,366

(1)
Share and per share amounts as of December 31, 2015 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.
(3)
In the third quarter of 2016, the Company paid shareholders cash in-lieu of fractional shares of common stock in connection with the three-for-two stock split effective September 30, 2016.
 
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)
 
2017
 
2016
Operating Activities
 
 

 
 

Net Income
 
$
31,649

 
$
29,165

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

 
 

Provision for credit losses
 
2,797

 
5,003

Depreciation and amortization expense
 
2,789

 
3,498

Purchase accounting accretion, net
 
(2,204
)
 
(3,792
)
Investment securities amortization and accretion, net
 
2,350

 
2,234

Stock-based compensation expense
 
1,135

 
1,521

Amortization of intangible assets
 
1,417

 
1,427

Net gain on sale of investment securities
 
(827
)
 
(4
)
Net increase in other real estate owned valuation allowance and gain on disposition
 
(60
)
 
(147
)
Originations of mortgage loans held for sale
 
(148,661
)
 
(180,182
)
Proceeds from the sale of mortgage loans
 
155,086

 
170,765

Gain on sale of mortgage loans, net of origination costs
 
(4,323
)
 
(4,171
)
(Increase) decrease in other assets
 
(82
)
 
7,533

Increase in other liabilities
 
1,325

 
154

Net cash provided by operating activities
 
42,391

 
33,004

Investing Activities
 
 

 
 

Proceeds from the sale and maturity of available-for-sale securities
 
124,548

 
105,863

Purchase of available-for-sale securities
 
(127,684
)
 
(130,254
)
Purchase of held-to-maturity securities
 

 
(10,448
)
Net increase in loans
 
(153,629
)
 
(101,732
)
Purchase of bank-owned life insurance, net of death benefit proceeds
 
(7,000
)
 
(16,122
)
Purchase of Federal Home Loan Bank and Federal Reserve Bank stock
 
(8,304
)
 
(7,341
)
Proceeds from sale of Federal Home Loan Bank stock
 
6,947

 
5,652

Proceeds from the sale of other real estate owned
 
641

 
672

Recoveries of previously charged-off loans
 
442

 
381

Purchase of premises and equipment
 
(2,378
)
 
(1,507
)
Proceeds from the sale of premises and equipment
 
137

 
90

Net cash used by investing activities
 
(166,280
)
 
(154,746
)
Financing Activities
 
 
 
 

Net increase in deposits
 
128,131

 
163,563

Net proceeds from borrowings less than 90 days
 
33,841

 
36,846

Repayments on Federal Home Loan Bank long-term advances
 
(20,000
)
 
(25,000
)
Repayments of wholesale repurchase agreements
 
(5,000
)
 
(25,000
)
Exercise of stock options and issuance of restricted stock, net of repurchase for tax withholdings
 
(615
)
 
593

Cash dividends paid on common stock
 
(10,740
)
 
(9,290
)
Net cash provided by financing activities
 
125,617

 
141,712

Net increase in cash and cash equivalents
 
1,728

 
19,970

Cash and cash equivalents at beginning of period
 
87,707

 
79,488

Cash and cash equivalents at end of period
 
$
89,435

 
$
99,458

Supplemental information
 
 

 
 

Interest paid
 
$
15,383

 
$
12,673

Unsettled purchases of investment securities
 
13,954

 

Income taxes paid
 
11,559

 
4,844

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 September 30, 2017 and December 31, 2016, the consolidated statements of income for the three and nine months ended September 30, 2017 and 2016, the consolidated statements of comprehensive income for the three and nine months ended September 30, 2017 and 2016, the consolidated statements of changes in shareholders' equity for the nine months ended September 30, 2017 and 2016, and the consolidated statements of cash flows for the nine months ended September 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 nine months ended September 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
 
GAAP:
Generally accepted accounting principles in the United States
ALCO:
Asset/Liability Committee
 
HPFC:
Healthcare Professional Funding Corporation, a wholly-owned subsidiary of Camden National Bank
ALL:
Allowance for loan losses
 
HTM:
Held-to-maturity
AOCI:
Accumulated other comprehensive income (loss)
 
IRS:
Internal Revenue Service
ASC:
Accounting Standards Codification
 
LIBOR:
London Interbank Offered Rate
ASU:
Accounting Standards Update
 
LTIP:
Long-Term Performance Share Plan
Bank:
Camden National Bank, a wholly-owned subsidiary of Camden National Corporation
 
Management ALCO:
Management Asset/Liability Committee
Board ALCO:
Board of Directors' Asset/Liability Committee
 
MBS:
Mortgage-backed security
BOLI:
Bank-owned life insurance
 
MSRs:
Mortgage servicing rights
BSA:
Bank Secrecy Act
 
MSPP:
Management Stock Purchase Plan
CCTA:
Camden Capital Trust A, an unconsolidated entity formed by Camden National Corporation
 
OTTI:
Other-than-temporary impairment
CDARS:
Certificate of Deposit Account Registry System
 
NIM:
Net interest margin on a fully-taxable basis
CDs:
Certificate of deposits
 
N.M.:
Not meaningful
CMO:
Collateralized mortgage obligation
 
OCC:
Office of the Comptroller of the Currency
CNWM:
Camden National Wealth Management, a division of Camden National Bank
 
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:
Board of Governors of the Federal Reserve System
 
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


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 
 September 30,
 
Nine Months Ended 
 September 30,
 
 
2017
 
2016
 
2017
 
2016
Net income
 
$
11,339

 
$
10,903

 
$
31,649

 
$
29,165

Dividends and undistributed earnings allocated to participating securities(1)
 
(46
)
 
(54
)
 
(134
)
 
(134
)
Net income available to common shareholders
 
$
11,293

 
$
10,849

 
$
31,515

 
$
29,031

Weighted-average common shares outstanding for basic EPS
 
15,515,189

 
15,425,452

 
15,505,698

 
15,410,310

Dilutive effect of stock-based awards(2)
 
73,819

 
82,109

 
74,374

 
73,010

Weighted-average common and potential common shares for diluted EPS
 
15,589,008

 
15,507,561

 
15,580,072

 
15,483,320

Earnings per common share(1):
 
 

 
 

 
 
 
 
Basic EPS
 
$
0.72

 
$
0.70

 
$
2.03

 
$
1.88

Diluted EPS
 
$
0.72

 
$
0.70

 
$
2.02

 
$
1.88

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

 

 

 
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.

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
September 30, 2017
 

 
 

 
 

 
 

AFS Securities:
 
 
 
 
 
 
 
Obligations of states and political subdivisions
$
7,233

 
$
132

 
$

 
$
7,365

Mortgage-backed securities issued or guaranteed by U.S. government-sponsored enterprises
524,763

 
961

 
(4,620
)
 
521,104

Collateralized mortgage obligations issued or guaranteed by U.S. government-sponsored enterprises
267,096

 
131

 
(4,837
)
 
262,390

Subordinated corporate bonds
5,483

 
168

 

 
5,651

Total AFS debt securities
804,575

 
1,392

 
(9,457
)
 
796,510

Equity securities
623

 
118

 

 
741

Total AFS securities
$
805,198

 
$
1,510

 
$
(9,457
)
 
$
797,251

HTM Securities:
 
 
 
 
 
 
 
Obligations of states and political subdivisions
$
94,207

 
$
1,169

 
$
(282
)
 
$
95,094

Total HTM securities
$
94,207

 
$
1,169

 
$
(282
)
 
$
95,094

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 September 30, 2017 included in AOCI amounted to $5.2 million, net of a deferred tax benefit of $2.7 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 nine months of 2017, the Company purchased investment securities totaling $141.6 million, all of which were designated as AFS securities.

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.

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

11



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, 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
September 30, 2017
 

 
 

 
 

 
 

 
 

 
 

AFS Securities:
 
 
 
 
 
 
 
 
 
 
 
Mortgage-backed securities issued or guaranteed by U.S. government-sponsored enterprises
$
345,629

 
$
(3,127
)
 
$
47,553

 
$
(1,493
)
 
$
393,182

 
$
(4,620
)
Collateralized mortgage obligations issued or guaranteed by U.S. government-sponsored enterprises
134,761

 
(1,579
)
 
88,177

 
(3,258
)
 
222,938

 
(4,837
)
Total AFS securities
$
480,390

 
$
(4,706
)
 
$
135,730

 
$
(4,751
)
 
$
616,120

 
$
(9,457
)
HTM Securities:
 
 
 
 
 
 
 
 
 
 
 
Obligations of states and political subdivisions
$
15,234

 
$
(193
)
 
$
2,361

 
$
(89
)
 
$
17,595

 
$
(282
)
Total HTM securities
$
15,234

 
$
(193
)
 
$
2,361

 
$
(89
)
 
$
17,595

 
$
(282
)
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 September 30, 2017 and December 31, 2016, the Company held 177 and 209 investment securities with a fair value of $633.7 million and $658.5 million that were in an unrealized loss position totaling $9.7 million and $13.2 million, respectively, that were considered temporary. Of these, MBS and CMOs with a fair value of $135.7 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 $4.8 million and $3.9 million at September 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 September 30, 2017 and December 31, 2016, gross unrealized losses on the Company's AFS and HTM securities were 1.5% and 2.0%, 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, 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 September 30,
 
Nine Months Ended September 30,
 
 
2017
 
2016
 
2017
 
2016
Proceeds from sales of securities
 
$
20,269

 
$

 
$
20,269

 
$
84

Gross realized gains
 
841

 

 
841

 
4

Gross realized losses
 
(14
)
 

 
(14
)
 


For the three and nine months ended September 30, 2017, the Company sold certain AFS securities with a total amortized cost of $19.4 million and recorded net gains on the sale of AFS securities of $827,000 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, 2016, the Company sold certain AFS securities with a total amortized cost 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 September 30, 2017 and December 31, 2016, the Company's investment in FHLBB stock was $19.2 million and $17.8 million, respectively. As of September 30, 2017 and December 31, 2016, the Company's investment in FRB stock was $5.4 million.

Securities Pledged
At September 30, 2017 and December 31, 2016, securities with an amortized cost of $714.0 million and $597.3 million and estimated fair values of $707.2 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 September 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
$
1,581

 
$
1,585

Due after one year through five years
100,951

 
100,901

Due after five years through ten years
176,090

 
175,368

Due after ten years
525,953

 
518,656

 
$
804,575

 
$
796,510

HTM Securities
 
 
 
Due in one year or less
$
754

 
$
757

Due after one year through five years
4,737

 
4,798

Due after five years through ten years
7,011

 
7,121

Due after ten years
81,705

 
82,418

 
$
94,207

 
$
95,094

 


13



NOTE 4 – LOANS AND ALLOWANCE FOR LOAN LOSSES
 
The composition of the Company’s loan portfolio, excluding residential loans held for sale, at September 30, 2017 and December 31, 2016 was as follows:   
 
September 30,
2017
 
December 31,
2016
Residential real estate
$
852,851

 
$
802,494

Commercial real estate
1,131,883

 
1,050,780

Commercial
369,155

 
333,639

Home equity
328,328

 
329,907

Consumer
18,123

 
17,332

HPFC
47,950

 
60,412

Total loans
$
2,748,290

 
$
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 totaling:
 
September 30,
2017
 
December 31,
2016
Net unamortized fair value mark discount on acquired loans
$
6,782

 
$
8,810

Net unamortized loan origination costs
(612
)
 
(66
)
Total
$
6,170

 
$
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 nine months ended September 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 nine months ended September 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 Nine Months Ended September 30, 2017
 
 
 
 
 
 
 
 
 
 
 
 
 
 
ALL for the three months ended:
 
 

 
 

 
 

 
 

 
 

 
 
 
 

Beginning balance
 
$
4,481

 
$
12,848

 
$
4,275

 
$
2,094

 
$
182

 
$
514

 
$
24,394

Loans charged off
 
(238
)
 
(69
)
 
(369
)
 
(11
)
 
(28
)
 
(193
)
 
(908
)
Recoveries
 
26

 
25

 
59

 
1

 
9

 
5

 
125

Provision (credit)(1)
 
273

 
(8
)
 
256

 
93

 
32

 
156

 
802

Ending balance
 
$
4,542

 
$
12,796

 
$
4,221

 
$
2,177

 
$
195

 
$
482

 
$
24,413

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

 
$
12,154

 
$
3,755

 
$
2,194

 
$
181

 
$
672

 
$
23,116

Loans charged off
 
(433
)
 
(81
)
 
(650
)
 
(403
)
 
(90
)
 
(274
)
 
(1,931
)
Recoveries
 
30

 
138

 
254

 
2

 
13

 
5

 
442

Provision(1)
 
785

 
585

 
862

 
384

 
91

 
79

 
2,786

Ending balance
 
$
4,542

 
$
12,796

 
$
4,221

 
$
2,177

 
$
195

 
$
482

 
$
24,413

ALL balance attributable to loans:
 
 

 
 

 
 

 
 

 
 

 
 
 
 

Individually evaluated for impairment
 
$
464

 
$
1,470

 
$

 
$

 
$

 
$

 
$
1,934

Collectively evaluated for impairment
 
4,078

 
11,326

 
4,221

 
2,177

 
195

 
482

 
22,479

Total ending ALL
 
$
4,542

 
$
12,796

 
$
4,221

 
$
2,177

 
$
195

 
$
482

 
$
24,413

Loans:
 
 

 
 

 
 

 
 

 
 

 
 
 
 

Individually evaluated for impairment
 
$
4,792

 
$
6,373

 
$
1,842

 
$
423

 
$

 
$

 
$
13,430

Collectively evaluated for impairment
 
848,059

 
1,125,510

 
367,313

 
327,905

 
18,123

 
47,950

 
2,734,860

Total ending loans balance
 
$
852,851

 
$
1,131,883

 
$
369,155

 
$
328,328

 
$
18,123

 
$
47,950

 
$
2,748,290

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


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