10-Q 1 cac-033118x10qdoc.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 March 31, 2018
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 April 27, 2018:  Common stock (no par value) 15,566,603 shares.



CAMDEN NATIONAL CORPORATION

 FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 2018
TABLE OF CONTENTS OF INFORMATION REQUIRED IN REPORT
 
 
PAGE
PART I.  FINANCIAL INFORMATION
 
 
 
ITEM 1.
FINANCIAL STATEMENTS
 
 
 
 
 
Consolidated Statements of Condition - March 31, 2018 and December 31, 2017
 
 
 
 
Consolidated Statements of Income - Three Months Ended March 31, 2018 and 2017
 
 
 
 
Consolidated Statements of Comprehensive Income - Three Months Ended March 31, 2018 and 2017
 
 
 
 
Consolidated Statements of Changes in Shareholders’ Equity - Three Months Ended March 31, 2018 and 2017
 
 
 
 
Consolidated Statements of Cash Flows - Three Months Ended March 31, 2018 and 2017
 
 
 
 
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)
 
March 31,
 2018
 
December 31,
 2017
ASSETS
 
 

 
 

Cash and due from banks
 
$
48,159

 
$
44,057

Interest-bearing deposits in other banks
 
76,950

 
58,914

Total cash, cash equivalents and restricted cash
 
125,109

 
102,971

Investments:
 
 

 
 

Available-for-sale securities, at fair value
 
796,687

 
789,899

Held-to-maturity securities, at amortized cost (fair value of $91.9 million and $94.9 million, respectively)
 
93,192

 
94,073

Other investments
 
23,774

 
23,670

Total investments
 
913,653

 
907,642

Loans held for sale, at fair value
 
9,548

 
8,103

Loans
 
2,789,148

 
2,782,439

Less: allowance for loan losses
 
(22,990
)
 
(24,171
)
Net loans
 
2,766,158

 
2,758,268

Goodwill
 
94,697

 
94,697

Other intangible assets
 
4,774

 
4,955

Bank-owned life insurance
 
88,097

 
87,489

Premises and equipment, net
 
41,545

 
41,891

Deferred tax assets
 
23,181

 
22,776

Other assets
 
46,423

 
36,606

Total assets
 
$
4,113,185

 
$
4,065,398

LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 

 
 

Liabilities
 
 

 
 

Deposits:
 
 

 
 

Demand
 
$
463,496

 
$
478,643

Interest checking
 
840,054

 
855,570

Savings and money market
 
1,005,329

 
985,508

Certificates of deposit
 
471,155

 
475,010

Brokered deposits
 
245,546

 
205,760

Total deposits
 
3,025,580

 
3,000,491

Short-term borrowings
 
552,624

 
541,796

Long-term borrowings
 
10,773

 
10,791

Subordinated debentures
 
58,950

 
58,911

Accrued interest and other liabilities
 
61,203

 
49,996

Total liabilities
 
3,709,130

 
3,661,985

Commitments and Contingencies
 


 


Shareholders’ Equity
 
 

 
 

Common stock, no par value: authorized 40,000,000 shares, issued and outstanding 15,565,868 and 15,524,704 on March 31, 2018 and December 31, 2017, respectively
 
156,860

 
156,904

Retained earnings
 
275,841

 
266,723

Accumulated other comprehensive loss:
 
 

 
 

Net unrealized losses on available-for-sale debt securities, net of tax
 
(20,227
)
 
(10,300
)
Net unrealized losses on cash flow hedging derivative instruments, net of tax
 
(4,547
)
 
(5,926
)
Net unrecognized losses on postretirement plans, net of tax
 
(3,872
)
 
(3,988
)
Total accumulated other comprehensive loss
 
(28,646
)
 
(20,214
)
Total shareholders’ equity
 
404,055

 
403,413

Total liabilities and shareholders’ equity
 
$
4,113,185

 
$
4,065,398

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

3



CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
 
 
Three Months Ended 
 March 31,
(In thousands, except number of shares and per share data)
 
2018
 
2017
Interest Income
 
 

 
 

Interest and fees on loans
 
$
29,834

 
$
27,062

Interest on U.S. government and sponsored enterprise obligations (taxable)
 
4,225

 
4,256

Interest on state and political subdivision obligations (nontaxable)
 
672

 
702

Interest on deposits in other banks and other investments
 
547

 
394

Total interest income
 
35,278

 
32,414

Interest Expense
 
 

 
 

Interest on deposits
 
3,749

 
2,554

Interest on borrowings
 
1,780

 
1,161

Interest on subordinated debentures
 
847

 
844

Total interest expense
 
6,376

 
4,559

Net interest income
 
28,902

 
27,855

(Credit) provision for credit losses
 
(497
)
 
579

Net interest income after (credit) provision for credit losses
 
29,399

 
27,276

Non-Interest Income
 
 

 
 

Debit card income
 
1,929

 
1,834

Service charges on deposit accounts
 
1,836

 
1,823

Mortgage banking income, net
 
1,391

 
1,553

Income from fiduciary services
 
1,283

 
1,247

Brokerage and insurance commissions
 
650

 
453

Bank-owned life insurance
 
608

 
577

Other service charges and fees
 
462

 
468

Other income
 
645

 
617

Total non-interest income
 
8,804

 
8,572

Non-Interest Expense
 
 

 
 

Salaries and employee benefits
 
12,562

 
11,933

Furniture, equipment and data processing
 
2,586

 
2,325

Net occupancy costs
 
1,873

 
1,946

Consulting and professional fees
 
804

 
845

Debit card expense
 
730

 
660

Regulatory assessments
 
499

 
545

Amortization of intangible assets
 
181

 
472

Other real estate owned and collection costs (recoveries), net
 
75

 
(44
)
Other expenses
 
2,994

 
2,746

Total non-interest expense
 
22,304

 
21,428

Income before income tax expense
 
15,899

 
14,420

Income tax expense
 
3,079

 
4,344

Net Income
 
$
12,820

 
$
10,076

Per Share Data
 
 

 
 

Basic earnings per share
 
$
0.82

 
$
0.65

Diluted earnings per share
 
$
0.82

 
$
0.64

Weighted average number of common shares outstanding
 
15,541,975

 
15,488,848

Diluted weighted average number of common shares outstanding
 
15,603,380

 
15,568,639

Cash dividends declared per share
 
$
0.25

 
$
0.23


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

4



CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(unaudited)
 
 
Three Months Ended 
 March 31,
(In thousands)
 
2018
 
2017
Net Income
 
$
12,820

 
$
10,076

Other comprehensive loss:
 
 
 
 

Net change in unrealized losses on available-for-sale securities, net of tax of $2,666 and $247, respectively
 
(9,729
)
 
(458
)
Net change in unrealized losses on cash flow hedging derivatives:
 
 
 
 
Net change in unrealized losses on cash flow hedging derivatives, net of tax of ($355) and ($48) respectively
 
1,328

 
90

Net reclassification adjustment for effective portion of cash flow hedges, net of tax of ($13) and ($159), respectively(1)
 
51

 
296

Net change in unrealized losses on cash flow hedging derivatives, net of tax
 
1,379


386

Reclassification of amortization of net unrecognized actuarial loss and prior service cost, net of tax of ($31) and ($23), respectively(2)
 
116

 
43

Other comprehensive loss
 
(8,234
)
 
(29
)
Comprehensive Income
 
$
4,586

 
$
10,047

(1)
Reclassified into the consolidated statements of income within interest on borrowings and subordinated debentures.
(2)
Reclassified into the consolidated statements of income within salaries and employee benefits and other expenses.
 
The accompanying notes are an integral part of these consolidated financial statements.

5




CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
(unaudited)
 
 
Common Stock
 
 
 
Accumulated
Other Comprehensive
Loss
 
Total Shareholders’
Equity
(In thousands, except number of shares and per share data)
 
Shares
Outstanding
 
Amount
 
Retained
Earnings
 
 
Balance at December 31, 2016
 
15,476,379

 
$
156,041

 
$
249,415

 
$
(13,909
)
 
$
391,547

Net income
 

 

 
10,076

 

 
10,076

Other comprehensive income, net of tax
 

 

 

 
(29
)
 
(29
)
Stock-based compensation expense
 

 
366

 

 

 
366

Exercise of stock options and issuance of vested share awards, net of repurchase for tax withholdings
 
31,646

 
(552
)
 

 

 
(552
)
Cash dividends declared ($0.23 per share)
 

 

 
(3,581
)
 

 
(3,581
)
Balance at March 31, 2017
 
15,508,025

 
$
155,855

 
$
255,910

 
$
(13,938
)
 
$
397,827

 
 
 
 
 
 
 
 
 
 

Balance at December 31, 2017
 
15,524,704

 
$
156,904

 
$
266,723

 
$
(20,214
)
 
$
403,413

Cumulative-effect adjustment (Note 2)
 

 

 
198

 
(198
)
 

Net income
 

 

 
12,820

 

 
12,820

Other comprehensive income, net of tax
 

 

 

 
(8,234
)
 
(8,234
)
Stock-based compensation expense
 

 
431

 

 

 
431

Exercise of stock options and issuance of vested share awards, net of repurchase for tax withholdings
 
41,164

 
(475
)
 

 

 
(475
)
Cash dividends declared ($0.25 per share)
 

 

 
(3,900
)
 

 
(3,900
)
Balance at March 31, 2018
 
15,565,868


$
156,860


$
275,841

 
$
(28,646
)
 
$
404,055


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

6



CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
 
 
Three Months Ended 
 March 31,
(In thousands)
 
2018
 
2017
Operating Activities
 
 

 
 

Net Income
 
$
12,820

 
$
10,076

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

 
 

(Credit) provision for credit losses
 
(497
)
 
579

Depreciation and amortization expense
 
940

 
916

Purchase accounting accretion, net
 
(514
)
 
(748
)
Investment securities amortization and accretion, net
 
763

 
786

Stock-based compensation expense
 
431

 
366

Amortization of intangible assets
 
181

 
472

Net increase in other real estate owned valuation allowance and gain on disposition
 

 
(27
)
Originations of mortgage loans held for sale
 
(46,641
)
 
(33,629
)
Proceeds from the sale of mortgage loans
 
46,426

 
44,320

Gain on sale of mortgage loans, net of origination costs
 
(1,220
)
 
(1,280
)
(Increase) decrease in other assets
 
(2,850
)
 
3,283

Increase (decrease) in other liabilities
 
7,218

 
(20
)
Net cash provided by operating activities
 
17,057

 
25,094

Investing Activities
 
 

 
 

Proceeds from maturities of held-to-maturity securities
 
750

 

Proceeds from the sale and maturity of available-for-sale securities
 
29,531

 
32,557

Purchase of available-for-sale securities
 
(50,152
)
 
(77,286
)
Net increase in loans
 
(7,008
)
 
(50,049
)
Purchase of Federal Home Loan Bank stock
 
(2,815
)
 
(2,143
)
Proceeds from sale of Federal Home Loan Bank stock
 
3,472

 

Proceeds from the sale of other real estate owned
 

 
329

Recoveries of previously charged-off loans
 
122

 
183

Proceeds from the liquidation of equity investment
 
205

 

Purchase of premises and equipment
 
(595
)
 
(264
)
Proceeds from the sale of premises and equipment
 

 
137

Net cash used by investing activities
 
(26,490
)
 
(96,536
)
Financing Activities
 
 
 
 

Net increase in deposits
 
25,126

 
108,736

Net proceeds from (repayments of ) borrowings less than 90 days
 
10,816

 
(37,779
)
Repayments of wholesale repurchase agreements
 

 
(5,000
)
Exercise of stock options and issuance of restricted stock, net of repurchase for tax withholdings
 
(475
)
 
(552
)
Cash dividends paid on common stock
 
(3,896
)
 
(3,575
)
Net cash provided by financing activities
 
31,571

 
61,830

Net increase (decrease) in cash, cash equivalents and restricted cash
 
22,138

 
(9,612
)
Cash, cash equivalents, and restricted cash at beginning of period
 
102,971

 
87,707

Cash, cash equivalents and restricted cash at end of period
 
$
125,109

 
$
78,095

Supplemental information
 
 

 
 

Interest paid
 
$
6,384

 
$
4,549

Income taxes paid
 
69

 
57


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 March 31, 2018 and December 31, 2017, the consolidated statements of income for the three months ended March 31, 2018 and 2017, the consolidated statements of comprehensive income for the three months ended March 31, 2018 and 2017, the consolidated statements of changes in shareholders' equity for the three months ended March 31, 2018 and 2017, and the consolidated statements of cash flows for the three months ended March 31, 2018 and 2017. 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 months ended March 31, 2018 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, 2017 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
BOLI:
Bank-owned life insurance
 
MSPP:
Management Stock Purchase Plan
Board ALCO:
Board of Directors' Asset/Liability Committee
 
N.M.:
Not meaningful
CCTA:
Camden Capital Trust A, an unconsolidated entity formed by Camden National Corporation
 
OCC:
Office of the Comptroller of the Currency
CDs:
Certificate of deposits
 
OCI:
Other comprehensive income (loss)
Company:
Camden National Corporation
 
OREO:
Other real estate owned
CMO:
Collateralized mortgage obligation
 
OTTI:
Other-than-temporary impairment
DCRP:
Defined Contribution Retirement Plan
 
SBM:
SBM Financial, Inc., the parent company of The Bank of Maine
EPS:
Earnings per share
 
SERP:
Supplemental executive retirement plans
FASB:
Financial Accounting Standards Board
 
Tax Act:
Tax Cuts and Jobs Act of 2017, enacted on December 22, 2017
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 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
GAAP:
Generally accepted accounting principles in the United States
 
 
 

9




NOTE 2 – RECENT ACCOUNTING PRONOUNCEMENTS


Accounting Standards Adopted

The Company adopted the following new accounting standards in the first quarter of 2018 and such standards have been accounted for and presented within the accompanying consolidated financial statements for the three months ended March 31, 2018 as follows:

ASU 2014-09, Revenue from Contracts with Customers (Topic 606) ("ASU 2014-09") and ASU No. 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date ("ASU 2015-14"): In May 2014, the FASB issued ASU 2014-09 followed by the issuance of ASU 2015-14 in August 2015, to defer the effective date of ASU 2014-09 by one year. ASU 2014-09 was issued to clarify the principles for recognizing revenue and to develop a common revenue standard. Effective January 1, 2018, the Company adopted ASU 2014-09 using the modified-retrospective transition method. As part of its assessment, the Company concluded that the following material revenue streams were within the scope of ASU 2014-09: (i) service charges on deposit accounts; (ii) debit card interchange income; (iii) income from fiduciary services and (iv) investment program income. Through the Company's assessment, it was determined that there will be no cumulative-effect adjustment to beginning shareholders' equity under the modified-retrospective transition method within the consolidated financial statements as there was no change in revenue recognition upon adoption of ASU 2014-09.

The details of the revenue streams within the scope of ASU 2014-09 are as follows:

Service charges on deposit accounts: Deposit-related fees, include, but are not limited to, overdraft income, service charge income, and other fees generated by the depositor relationship with the Bank. For each depositor relationship, an agreement and related disclosures outline the terms of the contract between the depositor and the Bank, including the assessment of fees and fee structure for its various products. The contract is day-to-day and can be closed by the customer or the Bank at any time. As such, the Company recognizes revenue at the time of the transaction as the performance obligation has been met.

The Company presents its revenues earned on service charges on deposit accounts within (i) service charges on deposit accounts and (ii) other service charges and fees on the consolidated statements of income.

Debit card interchange income: The Bank has separate contracts with intermediaries and earns interchange revenue and incurs related expenses on debit card transactions of its deposit customers. Income earned and expenses incurred by the Bank are dependent on its depositors' debit card usage, including depositor spend, transaction type and merchant. The rates earned are determined by the intermediaries. The Company determined that while the contract for which revenues are directly earned is with the intermediary rather than the depositor, that the underlying contract with each depositor is required for the generation of debit card interchange income and it is the depositors' debit card usage that drives the revenues earned and related expenses incurred. The contract with the depositor is day-to-day and can be closed by the customer or the Bank at any time. As such, the Company recognized revenue at the time of the transaction as the performance obligation has been met.

The Company's debit card interchange revenue and related expenses are presented on a gross basis in accordance with ASU 2014-09 as clarified by ASU No. 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations ("ASU 2016-08"), as it has control of the specified service prior to transfer to the depositor through the extension of credit.

The Bank pays to certain depositors cash rewards for debit card usage to promote usage and increase interchange revenue. As the consideration paid to its depositors is not for any separate or distinct service these costs are accounted for and presented as a reduction of debit card income upon adoption for periods beginning on January 1, 2018. The Company did not revise prior period presentation on its consolidated statements of income as the modified-retrospective transition method was used.

The Company presents its revenues earned on debit card income within debit card income and related expenses on debit card transactions within debit card expense on the consolidated statements of income.


10



Fiduciary services income: The Company, through the Bank's wealth management and trust services department, doing business as Camden National Wealth Management, earns fees for its investment management and related services for its clients. Fees earned for its services are largely dependent on assets under management as of the last day of the month and do not contain performance clauses. Should the contract be terminated by either party, fees for services are earned up to the effective date of contract termination. As such, fiduciary services income is earned and recognized daily.

The Company presents its revenues earned on fiduciary services within income from fiduciary services on the consolidated statements of income.

Investment program income: Under an investment program offered by the Bank, doing business as Camden Financial Consultant (“Program”), its clients are provided access to brokerage, advisory and insurance products offered through an unaffiliated third party, LPL Financial LLC1 ("LPL Financial"). Certain Bank employees are registered securities representatives and/or registered investment advisor representatives of LPL Financial who operate in such capacity under Camden Financial Consultants to provide clients with brokerage, investment advisory and insurance related services. The Bank receives a portion of the commissions and fees received by LPL Financial from the sale of investment products and investment advisory services in accordance with the terms of the contract between the two parties.

The revenues earned by the Bank are net of administrative expenses and the portion retained by LPL Financial. The Bank does not have control of the specified services provided to its clients under the Program by LPL Financial. Revenues earned from Program-related services are presented on the consolidated statements of income on a net basis in accordance with ASU 2014-09 as clarified by ASU 2016-08.

The Company presents its revenues earned from Program-related services within brokerage and insurance commissions on the consolidated statements of income.

ASU No. 2016-01, Income Statement - Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Liabilities ("ASU 2016-01"): In January 2016, the FASB issued ASU 2016-01 to enhance the reporting model for financial instruments to provide the users of financial statements with more useful information for decisions. Effective January 1, 2018, the Company adopted ASU 2016-01 and applied the provisions of the standard within its consolidated financial statements for the three months ended March 31, 2018, which included:
The Company's equity investments are no longer designated and accounted for as AFS securities, with the change in fair value recognized within AOCI, net of tax. Instead, the change in fair value of equity investments with a readily determinable fair value are to be recognized within net income. For the three months ended March 31, 2018, the Company recognized an unrealized loss of $35,000 for the change in fair value of its equity investments within other income on the Company's consolidated statements of income. The recognition for the change in fair value within net income was applied prospectively, and the Company recorded a cumulative-effect adjustment as of January 1, 2018 for its equity investments to reclassify the unrealized gain, net of tax, of $198,000 previously recognized within AOCI to retained earnings.
The Company used the "exit price" notion when measuring the fair value of financial instruments for disclosure purposes only. The Company previously used the "entry price" notion for purposes of measuring its loans held for investment for disclosure purposes only. The change in valuation methodology has been applied prospectively as it does not have a material effect on the comparability of the disclosure.
The Company no longer discloses the method or significant assumptions used to estimate the fair value for its financial instruments measured at amortized cost on its consolidated statements of condition for which fair value is provided for disclosure purposes only.

______________________________________________________________________________________________________
1
Securities are offered through LPL Financial, Member FINRA/SIPC. Camden Financial Consultants and the Bank are not registered broker/dealers and are not affiliated with LPL Financial. The investment products sold through LPL Financial are not insured by Bank deposits and are not insured by the Federal Deposit Insurance Corporation ("FDIC"). These products are not obligations of the Bank and are not endorsed, recommended or guaranteed by the Bank or any government agency. The value of the investment may fluctuate, the return on the investment is not guaranteed, and loss of principal is possible.

11



ASU No. 2017-07, Compensation-Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost ("ASU 2017-07"): In March 2017, the FASB issued ASU 2017-07 to improve the presentation of net periodic pension cost and net periodic postretirement by companies to disaggregate the service cost component from the other components of net benefit cost, as well as provide other guidance to improve consistency, transparency and usefulness. Prior to adoption, the Company presented all components of net periodic benefit costs within the salaries and employee benefits on the Company's consolidated statements of income. Upon adoption, the Company now presents the service cost component of net periodic benefit cost in the salaries and employee benefits line and all other components of net periodic cost within other expenses on its consolidated statements of income. The change in presentation has been applied retrospectively to prior periods represented on the Company's consolidated statements of income using the amounts previously disclosed within its prior year financial statements as a practical expedient.

ASU No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments ("ASU 2016-15"): In August 2016, the FASB issued ASU 2016-15 to address eight specific cash flow presentation matters within the statement of cash flows and reduce diversity of presentation across companies. Of the eight specific cash flow presentation matters addressed by the standard, it is noted that one matter addressed is of relevance to the Company based on its current and past operations: proceeds from the settlement of corporate-owned life insurance policies, including bank-owned life insurance policies. The standard states that cash proceeds received from the settlement of corporate-owned life insurance policies, including bank-owned life insurance policies, should be classified as cash inflows from investing activities within statement of cash flows.

The Company adopted the standard for financial reporting periods beginning after December 15, 2017 and it has been applied within the accompanying consolidated statement of cash flows using a retrospective transition method.

ASU No. 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash ("ASU 2016-18"): In November 2017, the FASB issued ASU 2016-18 to reduce the diversity in practice for the classification and presentation of changes in restricted cash on the statement of cash flows. The standard requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents and amounts generally described as restricted cash or restricted cash equivalents. As such, the statement of cash flows should consider the changes in amounts generally described as restricted cash or restricted cash equivalents when reconciling beginning-of-period and end-of-period total amounts shown in the statements of cash flows.

The Company adopted the standard for financial reporting periods beginning after December 15, 2017 and it has been applied within the accompanying consolidated statement of cash flows using a retrospective transition method.

Accounting Standards Issued

The following are recently issued accounting pronouncements that have yet to be adopted by the Company:

ASU No. 2016-02, Leases (Topic 842) ("ASU 2016-02"): In February 2016, the FASB issued ASU 2016-02 to increase transparency and comparability among organizations by recognizing lease assets and liabilities (including operating leases) on the balance sheet and disclosing key information about leasing arrangements. Current lease accounting does not require the inclusion of operating leases in the balance sheet. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, early application is permitted. The Company will adopt under a modified-retrospective approach.

Upon adoption, ASU 2016-02 will increase the Company's total assets and liabilities on its consolidated statements of condition as its operating leases will be accounted for as a right-of-use asset and a lease liability; however, the Company does not anticipate that upon adoption the ASU will have a material effect on its consolidated financial statements. The Company continues to evaluate the impact of adoption of this standard.


12



ASU No. 2017-08, Receivables - Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities ("ASU 2017-08"): In March 2017, the FASB issued ASU 2017-08 to shorten the amortization period for certain callable debt securities purchased and carried at a premium, by requiring the premium to be amortized to the earliest call date of the debt security. ASU 2017-08 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. Early adoption is permitted, including adoption in an interim period. The Company will adopt on a modified retrospective basis with any necessary adjustments to retained earnings as a cumulative-effect adjustment. While the Company continues to assess the impact of ASU 2017-08, it does not expect the ASU will have a material impact to its financial statements upon adoption.

ASU No. 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities ("ASU 2017-12"): In August 2017, the FASB issued ASU 2017-12 to make certain specific improvements to hedge accounting to better align hedge accounting with risk management activities, eliminate the separate measurement and recording of hedge ineffectiveness, improve presentation and disclosure, and other simplifications. ASU 2017-12 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. Early adoption is permitted, including adoption in an interim period. All transition requirements and elections are to be applied to existing hedging relationships upon adoption. While the Company continues to assess the impact of ASU 2017-12, it does not believe it will have a material impact on the Company's consolidated financial statements upon adoption.

ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments ("ASU 2016-13"): In June 2016, the FASB issued ASU 2016-13 to require timelier recording of credit losses on loans and other financial instruments held by financial institutions and other organizations. ASU 2016-13 is effective for annual periods beginning after December 15, 2019, including interim periods within those fiscal years, for public companies. Early adoption is permitted for annual periods beginning after December 15, 2018, including interim periods within that fiscal year. The Company will adopt the guidance under a modified-retrospective approach, whereby a cumulative-effect adjustment will be made to retained earnings upon adoption. The Company will use a prospective transition approach for debt securities for which an OTTI had been recognized before the effective date, as applicable.

While the Company continues to prepare for the adoption of ASU 2016-13 on January 1, 2020, it recognizes the changes to its consolidated financial statements upon adoption are imminent as the ASU requires:
A change in the Company's assessment of its ALL and allowance on unused commitments as it will transition from an incurred loss model to an expected loss model, which may result in an increase in the ALL upon adoption and may negatively impact the Company and Bank's regulatory capital ratios.
May reduce the carrying value of the Company's HTM investment securities as it will require an allowance on the expected losses over the life of these securities to be recorded upon adoption.
Changes to the considerations when assessing AFS debt securities for OTTI, including (i) no longer considering the amount of time a security has been in an unrealized loss position and (ii) no longer considering the historical and implied volatility of a security and recoveries or declines in the fair value after the balance sheet date, as well as the presentation of OTTI as an allowance rather than a permanent write-down of the debt security.
Changes to the disclosure requirements to reflect the transition from an incurred loss methodology to an expected credit loss methodology, as well as certain disclosures of credit quality indicators in relation to the amortized cost of financing receivables disaggregated by year of origination (or vintage).

The Company continues to assess the overall impact to its financial statements, and, at this time, it does not have an estimated impact to its financial statements.

Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment ("ASU 2017-04"): In January 2017, the FASB issued ASU 2017-04 to reduce the cost and complexity of the goodwill impairment test. To simplify the subsequent measurement of goodwill, step two of the goodwill impairment test was eliminated. Instead, in accordance with ASU 2017-04, a Company will recognize an impairment of goodwill should the carrying value of a reporting unit exceed its fair value (i.e. step one). ASU 2017-04 will be effective for the Company on January 1, 2020 and will be applied prospectively.


13



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 
 March 31,
 
 
2018
 
2017
Net income
 
$
12,820

 
$
10,076

Dividends and undistributed earnings allocated to participating securities(1)
 
(40
)
 
(45
)
Net income available to common shareholders
 
$
12,780

 
$
10,031

Weighted-average common shares outstanding for basic EPS
 
15,541,975

 
15,488,848

Dilutive effect of stock-based awards(2)
 
61,405

 
79,791

Weighted-average common and potential common shares for diluted EPS
 
15,603,380

 
15,568,639

Earnings per common share(1):
 
 

 
 

Basic EPS
 
$
0.82

 
$
0.65

Diluted EPS
 
$
0.82

 
$
0.64

(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.

For the three months ended March 31, 2018 and 2017, there are no anti-dilutive stock based awards that have been excluded from the computation of potential common shares for purposes of calculating diluted EPS as the average market price of the Company's common stock is greater than the exercise prices.

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.





14



NOTE 4 – INVESTMENTS

AFS and HTM Investments

The following table summarizes 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
March 31, 2018
 

 
 

 
 

 
 

AFS Investments (carried at fair value):
 
 
 
 
 
 
 
Obligations of states and political subdivisions
$
5,776

 
$
55

 
$
(4
)
 
$
5,827

Mortgage-backed securities issued or guaranteed by U.S. government-sponsored enterprises
517,823

 
490

 
(15,317
)
 
502,996

Collateralized mortgage obligations issued or guaranteed by U.S. government-sponsored enterprises
293,371

 
6

 
(11,098
)
 
282,279

Subordinated corporate bonds
5,485

 
119

 
(19
)
 
5,585

Total AFS investments
$
822,455

 
$
670

 
$
(26,438
)
 
$
796,687

HTM Investments (carried at amortized cost):
 
 
 
 
 
 
 
Obligations of states and political subdivisions
$
93,192

 
$
130

 
$
(1,448
)
 
$
91,874

Total HTM investments
$
93,192

 
$
130

 
$
(1,448
)
 
$
91,874

December 31, 2017
 

 
 

 
 

 
 

AFS Investments (carried at fair value):
 
 
 
 
 
 
 
Obligations of states and political subdivisions
$
7,232

 
$
103

 
$

 
$
7,335

Mortgage-backed securities issued or guaranteed by U.S. government-sponsored enterprises
510,176

 
597

 
(7,471
)
 
503,302

Collateralized mortgage obligations issued or guaranteed by U.S. government-sponsored enterprises
279,575

 
14

 
(6,790
)
 
272,799

Subordinated corporate bonds
5,484

 
173

 

 
5,657

Equity investments(1)
554

 
252

 

 
806

Total AFS investments
$
803,021

 
$
1,139

 
$
(14,261
)
 
$
789,899

HTM Investments (carried at amortized cost):
 
 
 
 
 
 
 
Obligations of states and political subdivisions
$
94,073

 
$
1,077

 
$
(237
)
 
$
94,913

Total HTM investments
$
94,073

 
$
1,077

 
$
(237
)
 
$
94,913

(1)
As of December 31, 2017, equity investments were classified as AFS investments. Effective January 1, 2018, these investments were reclassified to other investments on the consolidated statements of condition as they are no longer eligible to be classified as AFS upon adoption of ASU 2016-01. Refer to Note 2 for further details.

Net unrealized losses on AFS investments at March 31, 2018 included in AOCI amounted to $20.2 million, net of a deferred tax benefit of $5.5 million. Net unrealized losses on AFS investments at December 31, 2017 included in AOCI amounted to $10.3 million, net of a deferred tax benefit of $2.8 million.

For the three months ended March 31, 2018 and 2017, the Company purchased debt investments of $50.1 million and $77.3 million, respectively, all of which were designated as AFS debt investments.

Impaired AFS and HTM Investments:
Management periodically reviews the Company’s AFS and HTM investments 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

15



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 on AFS and HTM investments that were in a continuous loss position at March 31, 2018 and December 31, 2017, by length of time that an individual security in each category has 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
March 31, 2018
 

 
 

 
 

 
 

 
 

 
 

AFS Investments:
 
 
 
 
 
 
 
 
 
 
 
Obligations of states and political subdivisions
$
1,516

 
$
(4
)
 
$

 
$

 
$
1,516

 
$
(4
)
Mortgage-backed securities issued or guaranteed by U.S. government-sponsored enterprises
236,851

 
(5,661
)
 
233,957

 
(9,656
)
 
470,808

 
(15,317
)
Collateralized mortgage obligations issued or guaranteed by U.S. government-sponsored enterprises
122,669

 
(2,308
)
 
154,622

 
(8,790
)
 
277,291

 
(11,098
)
Subordinated corporate bonds
965

 
(19
)
 

 

 
965

 
(19
)
Total AFS investments
$
362,001

 
$
(7,992
)
 
$
388,579

 
$
(18,446
)
 
$
750,580

 
$
(26,438
)
HTM Investments:
 
 
 
 
 
 
 
 
 
 
 
Obligations of states and political subdivisions
$
62,815

 
$
(958
)
 
$
10,225

 
$
(490
)
 
$
73,040

 
$
(1,448
)
Total HTM investments
$
62,815

 
$
(958
)
 
$
10,225

 
$
(490
)
 
$
73,040

 
$
(1,448
)
December 31, 2017
 

 
 

 
 

 
 

 
 

 
 

AFS Investments:
 
 
 
 
 
 
 
 
 
 
 
Mortgage-backed securities issued or guaranteed by U.S. government-sponsored enterprises
$
221,466

 
$
(2,393
)
 
$
233,971

 
$
(5,078
)
 
$
455,437

 
$
(7,471
)
Collateralized mortgage obligations issued or guaranteed by U.S. government-sponsored enterprises
102,612

 
(696
)
 
164,389

 
(6,094
)
 
267,001

 
(6,790
)
Total AFS investments
$
324,078

 
$
(3,089
)
 
$
398,360

 
$
(11,172
)
 
$
722,438

 
$
(14,261
)
HTM Investments:
 
 
 
 
 
 
 
 
 
 
 
Obligations of states and political subdivisions
$
9,317

 
$
(57
)
 
$
9,436

 
$
(180
)
 
$
18,753

 
$
(237
)
Total HTM investments
$
9,317

 
$
(57
)
 
$
9,436

 
$
(180
)
 
$
18,753

 
$
(237
)

At March 31, 2018 and December 31, 2017, the Company held 328 and 209 debt investments classified as AFS and HTM with a fair value of $823.6 million and $741.2 million that were in an unrealized loss position totaling $27.9 million and $14.5 million, respectively, that were considered temporary. Of these, MBS and CMOs with a fair value of $388.6 million and $398.4 million were in an unrealized loss position, and have been in an unrealized loss position for 12 months or more, totaling $18.4 million and $11.2 million at March 31, 2018 and December 31, 2017, respectively. The unrealized loss was reflective of current interest rates in excess of the yield received on debt investments and is not indicative of an overall change in credit quality or other factors with the Company's AFS and HTM investment portfolio. At March 31, 2018 and December 31, 2017, gross unrealized losses on the Company's AFS and HTM investments were 3.0% and 2.0%, respectively, of its respective fair value.

The Company has the intent and ability to retain its debt investments in an unrealized loss position at March 31, 2018 until the decline in value has recovered.


16



Sale of AFS Investments:
For the three months ended March 31, 2018 and 2017, the Company did not sell any AFS investments.

AFS and HTM Investments Pledged:
At March 31, 2018 and December 31, 2017, AFS and HTM investments with an amortized cost of $684.3 million and $702.5 million and estimated fair values of $661.9 million and $691.2 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 the Company's AFS and HTM investments by contractual maturity at March 31, 2018, 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 Investments
 
 
 
Due in one year or less
$
5,307

 
$
5,302

Due after one year through five years
112,412

 
110,253

Due after five years through ten years
213,112

 
206,368

Due after ten years
491,624

 
474,764

 
$
822,455

 
$
796,687

HTM Investments
 
 
 
Due in one year or less
$
1,418

 
$
1,418

Due after one year through five years
3,783

 
3,796

Due after five years through ten years
13,035

 
12,954

Due after ten years
74,956

 
73,706

 
$
93,192

 
$
91,874

 

Other Investments

The following table summarizes the cost and estimated fair values of the Company's investment in equity securities, FHLBB stock and FRBB stock as presented within other investments on the consolidated statements of condition, as of the dates indicated: 
 
Cost
 
Unrealized
Gains
 
Unrealized
Losses
 
Fair
Value
March 31, 2018
 

 
 

 
 

 
 

Equity securities - bank stock (carried at fair value)(1)
$
544

 
$
217

 
$

 
$
761

FHLBB (carried at cost)
17,639

 

 

 
17,639

FRB (carried at cost)
5,374

 

 

 
5,374

Total other investments
$
23,557

 
$
217

 
$

 
$
23,774

December 31, 2017
 

 
 

 
 

 
 

FHLBB (carried at cost)
$
18,296

 
$

 
$

 
$
18,296

FRB (carried at cost)
5,374

 

 

 
5,374

Total other investments
$
23,670

 
$

 
$

 
$
23,670

(1)
Effective January 1, 2018, these investments were reclassified to other investments on the consolidated statements of condition as they are no longer eligible for AFS classification upon adoption of ASU 2016-01. Refer to Note 2 for further details.


17



For the three months ended March 31, 2018, the Company recognized an unrealized loss of $35,000 due to the change in fair value of its bank stock equity securities, and has been presented within other income on the consolidated statements of income. In addition, the Company's investment in a reinsurance program liquidated during the three months ended March 31, 2018, and a gain of $195,000 was recognized within other income on the Company's consolidated statements of income.

The Bank is a member of the FHLBB and FRBB, and as a member, the Bank is required to hold a certain amount of FHLBB and FRB common stock. This stock is a non-marketable equity security and is reported at cost. The Company evaluates its FHLBB and FRB common stock for impairment based on the ultimate recoverability of the par value rather than by recognizing temporary declines in value. For the three months ended March 31, 2018 and 2017, the Company did not record any other-than-temporary impairment on its FHLBB and FRB stock.

NOTE 5 – LOANS AND ALLOWANCE FOR LOAN LOSSES
 
The composition of the Company’s loan portfolio, excluding residential loans held for sale, at March 31, 2018 and December 31, 2017 was as follows:   
 
March 31,
2018
 
December 31,
2017
Residential real estate
$
860,533

 
$
858,369

Commercial real estate
1,169,533

 
1,164,023

Commercial
378,015

 
373,400

Home equity
320,642

 
323,378

Consumer
18,011

 
18,149

HPFC
42,414

 
45,120

Total loans
$
2,789,148

 
$
2,782,439


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:
 
March 31,
2018
 
December 31,
2017
Net unamortized fair value mark discount on acquired loans
$
5,703

 
$
6,207

Net unamortized loan origination costs
(958
)
 
(963
)
Total
$
4,745

 
$
5,244


The Bank’s lending activities are primarily conducted in Maine, but also include a mortgage loan production office in Massachusetts and two commercial loan production offices 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. In 2016, the Company closed HPFC's operations and is no longer originating loans.


18



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 three months ended March 31, 2018.

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. Credit Risk Administration and the Credit Risk Policy Committee oversee the Company's systems and procedures to monitor the credit quality of its loan portfolio, conduct a loan review program, maintain the integrity of the loan rating system, determine the adequacy of the ALL and support the oversight efforts of the Directors' Loan Review Committee and the Board of Directors. The Company's practice is to proactively manage the portfolio such that management can identify problem credits early, assess and implement effective work-out strategies, and take charge-offs as promptly as practical. In addition, the Company continuously reassesses its underwriting standards in response to credit risk posed by changes in economic conditions.

For purposes of 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.


19



HPFC. Prior to the Company's closing of HPFC's operations in 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.

20



The following presents the activity in the ALL and select loan information by portfolio segment for the three months ended March 31, 2018 and 2017, and for the year ended December 31, 2017
 
 
Residential
Real Estate
 
Commercial
Real Estate
 
Commercial
 
Home
Equity
 
Consumer
 
HPFC
 
Total
For The Three Months Ended March 31, 2018
 
 
 
 
 
 
 
 
 
 
 
 
 
 
ALL for the three months ended:
 
 

 
 

 
 

 
 

 
 

 
 
 
 

Beginning balance
 
$
5,086

 
$
11,863

 
$
4,171

 
$
2,367

 
$
233

 
$
451

 
$
24,171

Loans charged off
 
(31
)
 
(426
)
 
(171
)
 
(149
)
 
(26
)
 

 
(803
)
Recoveries
 

 
13

 
63

 
43

 
3

 

 
122

Provision (credit)(1)
 
442

 
(1,164
)
 
63

 
166

 
20

 
(27
)
 
(500
)
Ending balance
 
$
5,497

 
$
10,286

 
$
4,126

 
$
2,427

 
$
230

 
$
424

 
$
22,990

ALL balance attributable to loans:
 
 

 
 

 
 

 
 

 
 

 
 
 
 

Individually evaluated for impairment
 
$
553

 
$
368

 
$

 
$
112

 
$

 
$

 
$
1,033

Collectively evaluated for impairment
 
4,944

 
9,918

 
4,126

 
2,315

 
230

 
424

 
21,957

Total ending ALL
 
$
5,497

 
$
10,286

 
$
4,126

 
$
2,427

 
$
230

 
$
424

 
$
22,990

Loans:
 
 

 
 

 
 

 
 

 
 

 
 
 
 

Individually evaluated for impairment
 
$
5,059

 
$
3,961

 
$
1,714

 
$
491

 
$

 
$

 
$
11,225

Collectively evaluated for impairment
 
855,474

 
1,165,572

 
376,301

 
320,151

 
18,011

 
42,414

 
2,777,923

Total ending loans balance
 
$
860,533

 
$
1,169,533

 
$
378,015

 
$
320,642

 
$
18,011

 
$
42,414

 
$
2,789,148

For The Three Months Ended March 31, 2017
 
 
 
 
 
 
 
 
 
 
 
 
 
 
ALL for the three months ended:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Beginning balance
 
$
4,160

 
$
12,154

 
$
3,755

 
$
2,194

 
$
181

 
$
672

 
$
23,116

Loans charged off
 
(5
)
 
(3
)
 
(136
)
 
(1
)
 
(14
)
 

 
(159
)
Recoveries
 

 
103

 
77

 
1

 
2

 

 
183

Provision (credit)(1)
 
116

 
472

 
119

 
(87
)
 
6

 
(45
)
 
581

Ending balance
 
$
4,271

 
$
12,726

 
$
3,815

 
$
2,107

 
$
175

 
$
627

 
$
23,721

ALL balance attributable to loans:
 
 

 
 

 
 

 
 

 
 

 
 
 
 

Individually evaluated for impairment
 
$
485

 
$
1,100

 
$

 
$
83

 
$

 
$
66

 
$
1,734

Collectively evaluated for impairment
 
3,786

 
11,626

 
3,815

 
2,024

 
175

 
561

 
21,987

Total ending ALL
 
$
4,271

 
$
12,726

 
$
3,815

 
$
2,107

 
$
175

 
$
627

 
$
23,721

Loans:
 
 

 
 

 
 

 
 

 
 

 
 
 
 

Individually evaluated for impairment
 
$
4,408

 
$
13,191

 
$
1,994

 
$
430

 
$
7

 
$
98

 
$
20,128

Collectively evaluated for impairment
 
815,231

 
1,083,284

 
331,613

 
322,396

 
16,662

 
55,825

 
$
2,625,011

Total ending loans balance
 
$
819,639

 
$
1,096,475

 
$
333,607

 
$
322,826

 
$
16,669

 
$
55,923

 
$
2,645,139


21



 
 
Residential
Real Estate
 
Commercial
Real Estate
 
Commercial
 
Home
Equity
 
Consumer
 
HPFC
 
Total
For The Year Ended December 31, 2017
 
 
 
 
 
 
 
 
 
 
 
 
 
 
ALL:
 
 

 
 

 
 

 
 

 
 

 
 
 
 

Beginning balance
 
$
4,160

 
$
12,154

 
$
3,755

 
$
2,194

 
$
181

 
$
672

 
$
23,116

Loans charged off
 
(482
)
 
(124
)
 
(1,014
)
 
(434
)
 
(124
)
 
(290
)
 
(2,468
)
Recoveries
 
30

 
141

 
301

 
2

 
17

 
6

 
497

Provision (credit)(1)
 
1,378

 
(308
)
 
1,129

 
605

 
159

 
63

 
3,026

Ending balance
 
$
5,086

 
$
11,863

 
$
4,171

 
$
2,367

 
$
233

 
$
451

 
$
24,171

ALL balance attributable to loans:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Individually evaluated for impairment
 
$
568

 
$
1,441

 
$

 
$

 
$

 
$

 
$
2,009

Collectively evaluated for impairment
 
4,518

 
10,422

 
4,171

 
2,367

 
233

 
451

 
22,162

Total ending ALL
 
$
5,086

 
$
11,863

 
$
4,171

 
$
2,367

 
$
233

 
$
451

 
$
24,171

Loans:
 
  

 
  

 
  

 
  

 
  

 
 
 
  

Individually evaluated for impairment
 
$
5,171

 
$
6,199

 
$
1,791

 
$
429

 
$

 
$

 
$
13,590

Collectively evaluated for impairment
 
853,198

 
1,157,824

 
371,609

 
322,949

 
18,149

 
45,120

 
2,768,849

Total ending loans balance
 
$
858,369

 
$
1,164,023

 
$
373,400

 
$
323,378

 
$
18,149

 
$
45,120

 
$
2,782,439

(1)
The provision (credit) for loan losses excludes any impact for the change in the reserve for unfunded commitments, which represents management's estimate of the amount required to reflect the probable inherent losses on outstanding letters of credit and unused lines of credit. The reserve for unfunded commitments is presented within accrued interest and other liabilities on the consolidated statements of condition. At March 31, 2018 and 2017, and December 31, 2017, the reserve for unfunded commitments was $23,000, $9,000 and $20,000, respectively.

The following reconciles the three months ended March 31, 2018 and 2017, and year ended December 31, 2017 (credit) provision for loan losses to the (credit) provision for credit losses as presented on the consolidated statement of income:
 
 
Three Months Ended 
 March 31,
 
Year Ended December 31,
2017
 
 
2018
 
2017
 
(Credit) provision for loan losses
 
$
(500
)
 
$
581

 
$
3,026

Change in reserve for unfunded commitments
 
3

 
(2
)
 
9

(Credit) provision for credit losses
 
$
(497
)
 
$
579

 
$
3,035


The Company focuses on maintaining a well-balanced and diversified loan portfolio. Despite such efforts, it is recognized that credit concentrations may occasionally emerge as a result of economic conditions, changes in local demand, natural loan growth and runoff. To ensure that credit concentrations can be effectively identified, all commercial and commercial real estate loans are assigned Standard Industrial Classification codes, North American Industry Classification System codes, and state and county codes. Shifts in portfolio concentrations are monitored by the Company's Credit Risk Administration. As of March 31, 2018, the non-residential building operators' industry exposure was 11% of the Company's total loan portfolio and 26% of the total commercial real estate portfolio. There were no other industry exposures exceeding 10% of the Company's total loan portfolio as of March 31, 2018.


22



To further identify loans with similar risk profiles, the Company categorizes each portfolio segment into classes by credit risk characteristic and applies a credit quality indicator to each portfolio segment. The indicators for commercial, commercial real estate, residential real estate, and HPFC loans are represented by Grades 1 through 10 as outlined below. In general, risk ratings are adjusted periodically throughout the year as updated analysis and review warrants. This process may include, but is not limited to, annual credit and loan reviews, periodic reviews of loan performance metrics, such as delinquency rates, and quarterly reviews of adversely risk rated loans. The Company uses the following definitions when assessing grades for the purpose of evaluating the risk and adequacy of the ALL:

Grade 1 through 6 — Grades 1 through 6 represent groups of loans that are not subject to adverse criticism as defined in regulatory guidance. Loans in these groups exhibit characteristics that represent low to moderate risks, which is measured using a variety of credit risk criteria, such as cash flow coverage, debt service coverage, balance sheet leverage, liquidity, management experience, industry position, prevailing economic conditions, support from secondary sources of repayment and other credit factors that may be relevant to a specific loan. In general, these loans are supported by properly margined collateral and guarantees of principal parties.
Grade 7 — Loans with potential weakness (Special Mention). Loans in this category are currently protected based on collateral and repayment capacity and do not constitute undesirable credit risk, but have potential weakness that may result in deterioration of the repayment process at some future date. This classification is used if a negative trend is evident in the obligor’s financial situation. Special mention loans do not sufficiently expose the Company to warrant adverse classification.
Grade 8 — Loans with definite weakness (Substandard). Loans classified as substandard are inadequately protected by the current sound worth and paying capacity of the obligor or by collateral pledged. Borrowers experience difficulty in meeting debt repayment requirements. Deterioration is sufficient to cause the Company to look to the sale of collateral.
Grade 9 — Loans with potential loss (Doubtful). Loans classified as doubtful have all the weaknesses inherent in the substandard grade with the added characteristic that the weaknesses make collection or liquidation of the loan in full highly questionable and improbable. The possibility of some loss is extremely high, but because of specific pending factors that may work to the advantage and strengthening of the asset, its classification as an estimated loss is deferred until its more exact status may be determined.
Grade 10 — Loans with definite loss (Loss). Loans classified as loss are considered uncollectible. The loss classification does not mean that the asset has absolutely no recovery or salvage value, but rather that it is not practical or desirable to defer writing off the asset because recovery and collection time may be protracted.

Asset quality indicators are periodically reassessed to appropriately reflect the risk composition of the Company’s loan portfolio. Home equity and consumer loans are not individually risk rated, but rather analyzed as groups taking into account delinquency rates and other economic conditions which may affect the ability of borrowers to meet debt service requirements, including interest rates and energy costs. Performing loans include loans that are current and loans that are past due less than 90 days. Loans that are past due over 90 days and non-accrual loans, including TDRs, are considered non-performing.


23



The following summarizes credit risk exposure indicators by portfolio segment as of the following dates:
 
 
Residential 
Real Estate
 
Commercial 
Real Estate
 
Commercial
 
Home
Equity
 
Consumer
 
HPFC
 
Total
March 31, 2018
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Pass (Grades 1-6)
 
$
847,822

 
$
1,146,947

 
$
361,377

 
$

 
$

 
$
40,768

 
$
2,396,914

Performing
 

 

 

 
319,178

 
18,011

 

 
337,189

Special Mention (Grade 7)
 
662

 
8,510

 
12,437

 

 

 
174

 
21,783

Substandard (Grade 8)
 
12,049

 
14,076

 
4,201

 

 

 
1,472

 
31,798

Non-performing
 

 

 

 
1,464

 

 

 
1,464

Total
 
$
860,533

 
$
1,169,533

 
$
378,015

 
$
320,642

 
$
18,011

 
$
42,414

 
$
2,789,148

December 31, 2017
 
 

 
 

 
 

 
 

 
 

 
 
 
 
Pass (Grades 1-6)
 
$
846,394

 
$
1,130,235