CAMDEN NATIONAL CORP - FORM 10-Q - November 9, 2015

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EX-31.1 - EXHIBIT 31.1 - CAMDEN NATIONAL CORPexhibit311q315.htm
EX-32.2 - EXHIBIT 32.2 - CAMDEN NATIONAL CORPexhibit322q315.htm
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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, 2015
OR
¨       TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File No.      0-28190
CAMDEN NATIONAL CORPORATION
(Exact name of registrant as specified in its charter)
 
MAINE
01-0413282
(State or other jurisdiction of
(I.R.S. Employer
incorporation or organization)
Identification No.)
 
 
2 ELM STREET, CAMDEN, ME
04843
(Address of principal executive offices)
(Zip Code)
 
Registrant's telephone number, including area code:  (207) 236-8821
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter periods that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
 
Yes x          No ¨
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
 
Yes x          No ¨
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
 
Large accelerated filer ¨
Accelerated filer x
Non-accelerated filer ¨
Smaller reporting company ¨
(Do not check if a smaller reporting company)
 
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
 
Yes ¨          No x
 
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practical date:
Outstanding at November 3, 2015:  Common stock (no par value) 10,204,101 shares.


CAMDEN NATIONAL CORPORATION

 FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 2015
TABLE OF CONTENTS OF INFORMATION REQUIRED IN REPORT
 
 
PAGE
PART I.  FINANCIAL INFORMATION
 
 
 
ITEM 1.
FINANCIAL STATEMENTS
 
 
 
 
 
Consolidated Statements of Condition - September 30, 2015 and December 31, 2014
 
 
 
 
Consolidated Statements of Income - Three and Nine Months Ended September 30, 2015 and 2014
 
 
 
 
Consolidated Statements of Comprehensive Income - Three and Nine Months Ended September 30, 2015 and 2014
 
 
 
 
Consolidated Statements of Changes in Shareholders’ Equity - Nine Months Ended September 30, 2015 and 2014
 
 
 
 
Consolidated Statements of Cash Flows - Nine Months Ended September 30, 2015 and 2014
 
 
 
 
Notes to Consolidated Financial Statements
 
 
 
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
 
 
ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
 
 
 
ITEM 4.
CONTROLS AND PROCEDURES
 
 
 
PART II. OTHER INFORMATION
 
 
 
 
ITEM 1.
LEGAL PROCEEDINGS
 
 
 
ITEM 1A.
RISK FACTORS
 
 
 
ITEM 2.
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
 
 
 
ITEM 3.
DEFAULTS UPON SENIOR SECURITIES
 
 
 
ITEM 4.
MINE SAFETY DISCLOSURES
 
 
 
ITEM 5.
OTHER INFORMATION
 
 
 
ITEM 6.
EXHIBITS
 
 
 
SIGNATURES
 
 
 
EXHIBITS
 

2


PART I. FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS

CONSOLIDATED STATEMENTS OF CONDITION
(unaudited)
(In Thousands, Except Number of Shares)
 
September 30, 2015
 
December 31, 2014
ASSETS
 
 

 
 

Cash and due from banks
 
$
66,644

 
$
60,813

Securities:
 
 

 
 

Available-for-sale securities, at fair value
 
724,237

 
763,063

Held-to-maturity securities, at amortized cost
 
75,368

 
20,179

Federal Home Loan Bank and Federal Reserve Bank stock, at cost
 
20,447

 
20,391

Total securities
 
820,052

 
803,633

Loans held for sale
 
890

 
—

Loans
 
1,830,143

 
1,772,610

Less: allowance for loan losses
 
(21,132
)
 
(21,116
)
Net loans
 
1,809,011

 
1,751,494

Bank-owned life insurance
 
59,090

 
57,800

Goodwill and other intangible assets
 
47,309

 
48,171

Premises and equipment, net
 
23,567

 
23,886

Deferred tax assets
 
12,875

 
14,434

Interest receivable
 
6,577

 
6,017

Other real estate owned
 
204

 
1,587

Other assets
 
25,579

 
22,018

Total assets
 
$
2,871,798

 
$
2,789,853

LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 

 
 

Liabilities
 
 

 
 

Deposits:
 
 

 
 

Demand
 
$
308,576

 
$
263,013

Interest checking
 
480,065

 
480,521

Savings and money market
 
650,701

 
653,708

Certificates of deposit
 
339,937

 
317,123

Brokered deposits
 
228,898

 
217,732

Total deposits
 
2,008,177

 
1,932,097

Federal Home Loan Bank advances
 
55,000

 
56,039

Other borrowed funds
 
464,804

 
476,939

Junior subordinated debentures
 
44,101

 
44,024

Accrued interest and other liabilities
 
40,313

 
35,645

Total liabilities
 
2,612,395

 
2,544,744

Commitments and Contingencies
 


 


Shareholders’ Equity
 
 

 
 

Common stock, no par value; authorized 20,000,000 shares, issued and outstanding 7,454,045 and 7,426,222 shares as of September 30, 2015 and December 31, 2014, respectively
 
42,072

 
41,555

Retained earnings
 
223,682

 
211,979

Accumulated other comprehensive loss:
 
 

 
 

Net unrealized gains (losses) on available-for-sale securities, net of tax
 
2,880

 
(319
)
Net unrealized losses on derivative instruments, net of tax
 
(7,184
)
 
(5,943
)
Net unrecognized losses on postretirement plans, net of tax
 
(2,047
)
 
(2,163
)
Total accumulated other comprehensive loss
 
(6,351
)
 
(8,425
)
Total shareholders’ equity
 
259,403

 
245,109

Total liabilities and shareholders’ equity
 
$
2,871,798

 
$
2,789,853

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)
 
2015
 
2014
 
2015
 
2014
Interest Income
 
 

 
 

 
 
 
 
Interest and fees on loans
 
$
18,651

 
$
18,112

 
$
56,077

 
$
52,649

Interest on U.S. government and sponsored enterprise obligations
 
3,598

 
3,896

 
11,187

 
12,250

Interest on state and political subdivision obligations
 
624

 
319

 
1,504

 
927

Interest on federal funds sold and other investments
 
183

 
90

 
393

 
266

Total interest income
 
23,056

 
22,417

 
69,161

 
66,092

Interest Expense
 
 

 
 

 
 

 
 

Interest on deposits
 
1,557

 
1,562

 
4,630

 
4,678

Interest on borrowings
 
849

 
848

 
2,556

 
2,500

Interest on junior subordinated debentures
 
638

 
638

 
1,894

 
1,894

Total interest expense
 
3,044

 
3,048

 
9,080

 
9,072

Net interest income
 
20,012

 
19,369

 
60,081

 
57,020

Provision for credit losses
 
279

 
539

 
979

 
1,675

Net interest income after provision for credit losses
 
19,733

 
18,830

 
59,102

 
55,345

Non-Interest Income
 
 

 
 

 
 

 
 

Service charges on deposit accounts
 
1,554

 
1,600

 
4,634

 
4,689

Other service charges and fees
 
1,682

 
1,646

 
4,776

 
4,584

Income from fiduciary services
 
1,177

 
1,212

 
3,725

 
3,745

Brokerage and insurance commissions
 
411

 
441

 
1,362

 
1,378

Bank-owned life insurance
 
443

 
377

 
1,267

 
975

Mortgage banking income, net
 
390

 
55

 
975

 
197

Net gain on sale of securities
 
4

 
—

 
4

 
451

Other income
 
900

 
623

 
2,275

 
2,131

Total non-interest income
 
6,561

 
5,954

 
19,018

 
18,150

Non-Interest Expense
 
 

 
 

 
 

 
 

Salaries and employee benefits
 
8,691

 
8,078

 
25,550

 
24,359

Furniture, equipment and data processing
 
1,705

 
1,704

 
5,530

 
5,236

Net occupancy
 
1,194

 
1,175

 
3,905

 
3,825

Consulting and professional fees
 
470

 
468

 
1,734

 
1,768

Other real estate owned and collection costs
 
543

 
637

 
1,554

 
1,665

Regulatory assessments
 
513

 
511

 
1,534

 
1,477

Amortization of intangible assets
 
288

 
287

 
862

 
861

Merger and acquisition costs
 
766

 
—

 
1,629

 
—

Other expenses
 
2,541

 
2,319

 
7,371

 
6,905

Total non-interest expense
 
16,711

 
15,179

 
49,669

 
46,096

Income before income taxes
 
9,583

 
9,605

 
28,451

 
27,399

Income Taxes
 
3,127

 
3,154

 
9,191

 
8,917

Net Income
 
$
6,456

 
$
6,451

 
$
19,260

 
$
18,482

 
 
 
 
 
 
 
 
 
Per Share Data
 
 

 
 

 
 

 
 

Basic earnings per share
 
$
0.86

 
$
0.87

 
$
2.58

 
$
2.47

Diluted earnings per share
 
$
0.86

 
$
0.86

 
$
2.57

 
$
2.46

Weighted average number of common shares outstanding
 
7,453,222

 
7,421,592

 
7,443,543

 
7,459,972

Diluted weighted average number of common shares outstanding
 
7,477,039

 
7,439,948

 
7,464,484

 
7,479,327


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)
 
2015
 
2014
 
2015
 
2014
Net Income
 
$
6,456

 
$
6,451

 
$
19,260

 
$
18,482

Other comprehensive income (loss):
 
 

 
 

 
 
 
 
Available-for-sale securities:
 
 

 
 

 
 
 
 
Net unrealized gains (losses) on available-for-sale securities arising during the period, net of tax of ($1,649), $1,189, ($1,723) and ($2,749), respectively
 
3,064

 
(2,208
)
 
3,202

 
5,106

Reclassification of gains included in net income, net of tax of $1, $0, $1, $158, respectively(1)
 
(3
)
 
—

 
(3
)
 
(293
)
Net change in unrealized gains (losses) on available-for-sale securities, net of tax
 
3,061

 
(2,208
)
 
3,199

 
4,813

Net change in unrealized losses on cash flow hedging derivatives, net of tax of $950, $50, $668, and $1,070, respectively
 
(1,763
)
 
(93
)
 
(1,241
)
 
(1,988
)
Reclassification of amortization of net unrecognized actuarial loss and prior service cost, net of tax of ($20), ($13), ($61) and ($40), respectively(2)
 
39

 
24

 
116

 
71

Other comprehensive income (loss)
 
1,337

 
(2,277
)
 
2,074

 
2,896

Comprehensive Income
 
$
7,793

 
$
4,174

 
$
21,334

 
$
21,378

(1) Reclassified into the consolidated statements of income in net gain on sale of securities.
(2) Reclassified into the consolidated statements of income in salaries and employee benefits.
 
The accompanying notes are an integral part of these consolidated financial statements.

5



CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
(unaudited)
 
 
Common Stock
 
 
 
Accumulated
Other Comprehensive
Loss
 
Total Shareholders’
Equity
(In Thousands, Except Number of Shares and Per Share Data)
 
Shares
Outstanding
 
Amount
 
Retained
Earnings
 
 
Balance at December 31, 2013
 
7,579,913

 
$
47,783

 
$
195,660

 
$
(12,347
)
 
$
231,096

Net income
 
—

 
—

 
18,482

 
—

 
18,482

Other comprehensive income, net of tax
 
—

 
—

 
—

 
2,896

 
2,896

Stock-based compensation expense
 
—

 
453

 
—

 
—

 
453

Exercise of stock options and issuance of vested share awards, net of repurchase for tax withholdings and tax benefit
 
23,037

 
157

 
—

 
—

 
157

Common stock repurchased
 
(181,355
)
 
(7,155
)
 
—

 
—

 
(7,155
)
Cash dividends declared ($0.81 per share)
 
—

 
—

 
(6,017
)
 
—

 
(6,017
)
Balance at September 30, 2014
 
7,421,595

 
$
41,238

 
$
208,125

 
$
(9,451
)
 
$
239,912

 
 
 
 
 
 
 
 
 
 

Balance at December 31, 2014
 
7,426,222

 
$
41,555

 
$
211,979

 
$
(8,425
)
 
$
245,109

Net income
 
—

 
—

 
19,260

 
—

 
19,260

Other comprehensive income, net of tax
 
—

 
—

 
—

 
2,074

 
2,074

Stock-based compensation expense
 
—

 
542

 
—

 
—

 
542

Exercise of stock options and issuance of vested share awards, net of repurchase for tax withholdings and tax benefit
 
27,823

 
512

 
—

 
—

 
512

Equity issuance costs
 
—

 
(537
)
 
—

 
—

 
(537
)
Cash dividends declared ($0.90 per share)
 
—

 
—

 
(7,557
)
 
—

 
(7,557
)
Balance at September 30, 2015
 
7,454,045

 
$
42,072

 
$
223,682

 
$
(6,351
)
 
$
259,403

 
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)
 
2015
 
2014
Operating Activities
 
 

 
 

Net Income
 
$
19,260

 
$
18,482

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

 
 

Provision for credit losses
 
979

 
1,675

Depreciation expense
 
2,130

 
2,199

Investment securities amortization and accretion, net
 
1,638

 
1,301

Stock-based compensation expense
 
542

 
453

Amortization of intangible assets
 
862

 
861

Net gain on sale of investment securities
 
(4
)
 
(451
)
Net increase in other real estate owned valuation allowance and loss on disposition
 
348

 
222

Originations of mortgage loans held for sale
 
(25,341
)
 
(399
)
Proceeds from the sale of mortgage loans
 
24,996

 
416

Gain on sale of mortgage loans
 
(541
)
 
(17
)
Increase in other assets
 
(3,107
)
 
(3,438
)
(Decrease) increase in other liabilities
 
(11
)
 
806

Net cash provided by operating activities
 
21,751

 
22,110

Investing Activities
 
 

 
 

Proceeds from sales and maturities of available-for-sale securities
 
123,650

 
105,818

Purchase of available-for-sale securities
 
(81,262
)
 
(62,494
)
Purchase of held-to-maturity securities
 
(55,462
)
 
(11,589
)
Net increase in loans
 
(60,601
)
 
(148,967
)
Purchase of bank-owned life insurance
 
—

 
(10,000
)
Purchase of Federal Home Loan Bank and Federal Reserve Bank stock
 
(56
)
 
(706
)
Proceeds from sale of Federal Reserve Bank stock
 
—

 
51

Proceeds from the sale of other real estate owned
 
2,760

 
1,591

Recoveries of previously charged-off loans
 
554

 
538

Purchase of premises and equipment
 
(1,797
)
 
(831
)
Net cash used by investing activities
 
(72,214
)
 
(126,589
)
Financing Activities
 
 
 
 

Net increase in deposits
 
76,155

 
114,850

Proceeds from Federal Home Loan Bank long-term advances
 
10,000

 
—

Repayments on Federal Home Loan Bank long-term advances
 
(11,039
)
 
(54
)
Net (decrease) increase in other borrowed funds
 
(12,081
)
 
11,171

Equity issuance costs
 
(537
)
 
—

Common stock repurchased
 
—

 
(7,475
)
Exercise of stock options and issuance of restricted stock, net of repurchase for tax withholdings and tax benefit
 
512

 
157

Cash dividends paid on common stock
 
(6,716
)
 
(6,075
)
Net cash provided by financing activities
 
56,294

 
112,574

Net increase in cash and cash equivalents
 
5,831

 
8,095

Cash and cash equivalents at beginning of period
 
60,813

 
51,355

Cash and cash equivalents at end of period
 
$
66,644

 
$
59,450

Supplemental information
 
 

 
 

Interest paid
 
$
9,104

 
$
9,129

Income taxes paid
 
8,345

 
10,147

Transfer from loans to other real estate owned
 
1,725

 
1,184

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

7

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in Tables Expressed in Thousands, Except Number of Shares and per Share Data)


NOTE 1 – BASIS OF PRESENTATION
 
The accompanying unaudited consolidated 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, 2015 and December 31, 2014, the consolidated statements of income for the three and nine months ended September 30, 2015 and 2014, the consolidated statements of comprehensive income for the three and nine months ended September 30, 2015 and 2014, the consolidated statements of changes in shareholders' equity for the nine months ended September 30, 2015 and 2014, and the consolidated statements of cash flows for the nine months ended September 30, 2015 and 2014. 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, 2015 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, 2014 Annual Report on Form 10-K.

The acronyms and abbreviations identified below are used throughout this Form 10-Q, including Part I. "Financial Information" and Part II. "Other Information." The following is provided to aid the reader and provide a reference page when reviewing this Form 10-Q.
Acadia Trust:
Acadia Trust, N.A., a wholly-owned subsidiary of Camden National Corporation
 
FASB:
Financial Accounting Standards Board
Act:
Medicare Prescription Drug, Improvement and Modernization Act
 
FDIC:
Federal Deposit Insurance Corporation
AFS:
Available-for-sale
 
FHLB:
Federal Home Loan Bank
ALCO:
Asset/Liability Committee
 
FHLBB:
Federal Home Loan Bank of Boston
ALL:
Allowance for loan losses
 
FRB:
Federal Reserve Bank
AOCI:
Accumulated other comprehensive income (loss)
 
Freddie Mac:
Federal Home Loan Mortgage Corporation
ASC:
Accounting Standards Codification
 
GAAP:
Generally accepted accounting principles in the United States
ASU:
Accounting Standards Update
 
HTM:
Held-to-maturity
Bank:
Camden National Bank, a wholly-owned subsidiary of Camden National Corporation
 
IRS:
Internal Revenue Service
BOLI:
Bank-owned life insurance
 
LIBOR:
London Interbank Offered Rate
Board ALCO:
Board of Directors' Asset/Liability Committee
 
LTIP:
Long-Term Performance Share Plan
BSA:
Bank Secrecy Act
 
Management ALCO:
Management Asset/Liability Committee
CCTA:
Camden Capital Trust A, an unconsolidated entity formed by Camden National Corporation
 
MBS:
Mortgage-backed security
CDARS:
Certificate of Deposit Account Registry System
 
Merger:
On October 16, 2015, the two-step merger of Camden National Corporation, SBM Financial, Inc. and Atlantic Acquisitions, LLC, a wholly-owned subsidiary of Camden National Corporation, was completed
CDs:
Certificate of deposits
 
Merger Agreement:
Plan of Merger, dated as of March 29, 2015, by and among Camden National Corporation, SBM Financial, Inc. and Atlantic Acquisitions, LLC, a wholly-owned subsidiary of the Company
Company:
Camden National Corporation
 
MSHA:
Maine State Housing Authority
CSV:
Cash surrender value
 
MSRs:
Mortgage servicing rights
CMO:
Collateralized mortgage obligation
 
MSPP:
Management Stock Purchase Plan
DCRP:
Defined Contribution Retirement Plan
 
OTTI:
Other-than-temporary impairment
EPS:
Earnings per share
 
NIM:
Net interest margin on a fully-taxable basis


8


N.M.:
Not meaningful
 
SERP:
Supplemental executive retirement plans
Non-Agency:
Non-agency private issue collateralized mortgage obligation
 
TDR:
Troubled-debt restructured loan
NRV:
Net realizable value
 
UBCT:
Union Bankshares Capital Trust I, an unconsolidated entity formed by Union Bankshares Company that was subsequently acquired by Camden National Corporation
OCC:
Office of the Comptroller of the Currency
 
U.S.:
United States of America
OCI:
Other comprehensive income (loss)
 
2003 Plan:
2003 Stock Option and Incentive Plan
OFAC:
Office of Foreign Assets Control
 
2012 Plan:
2012 Equity and Incentive Plan
OREO:
Other real estate owned
 
2013 Repurchase Program:
2013 Common Stock Repurchase Program, approved by the Company's Board of Directors
SBM:
SBM Financial, Inc., the parent company of The Bank of Maine
 
 
 

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,
 
 
2015
 
2014
 
2015
 
2014
Net income
 
$
6,456

 
$
6,451

 
$
19,260

 
$
18,482

Dividends and undistributed earnings allocated to participating securities(1)
 
(21
)
 
(20
)
 
(61
)
 
(57
)
Net income available to common shareholders
 
$
6,435

 
$
6,431

 
$
19,199

 
$
18,425

Weighted-average common shares outstanding for basic EPS
 
7,453,222

 
7,421,592

 
7,443,543

 
7,459,972

Dilutive effect of stock-based awards(2)
 
23,817

 
18,356

 
20,941

 
19,355

Weighted-average common and potential common shares for diluted EPS
 
7,477,039

 
7,439,948

 
7,464,484

 
7,479,327

Earnings per common share:
 
 

 
 

 
 
 
 
Basic EPS
 
$
0.86

 
$
0.87

 
$
2.58

 
$
2.47

Diluted EPS
 
$
0.86

 
$
0.86

 
$
2.57

 
$
2.46

Awards excluded from the calculation of diluted EPS(3):
 
 
 
 
 
 
 
 
Stock options
 
13,750

 
30,750

 
16,250

 
14,750

(1) Represents dividends paid and undistributed earnings allocated to nonvested stock-based awards that contain non-forfeitable rights to dividends.
(2) Represents the effect of the assumed exercise of stock options, vesting of restricted shares, vesting of restricted stock units, and vesting of LTIP awards that have met the performance criteria, as applicable, utilizing the treasury stock method.
(3) Represents stock-based awards not included in the computation of potential common shares for purposes of calculating diluted EPS as the exercise prices were greater than the average market price of the Company's common stock.

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. 
 

9


Diluted EPS is computed in a similar manner, except that the denominator is increased to include the number of additional common shares that would have been outstanding if potentially dilutive common shares were issued using the treasury stock method.

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, 2015
 

 
 

 
 

 
 

AFS Securities:
 
 
 
 
 
 
 
Obligations of U.S. government-sponsored enterprises
$
4,969

 
$
125

 
$
—

 
$
5,094

Obligations of states and political subdivisions
19,471

 
401

 
—

 
19,872

Mortgage-backed securities issued or guaranteed by U.S. government-sponsored enterprises
376,950

 
5,490

 
(1,391
)
 
381,049

Collateralized mortgage obligations issued or guaranteed by U.S. government-sponsored enterprises
318,417

 
2,512

 
(2,707
)
 
318,222

Total AFS securities
$
719,807

 
$
8,528

 
$
(4,098
)
 
$
724,237

HTM Securities:
 
 
 
 
 
 
 
Obligations of states and political subdivisions
$
75,368

 
$
1,311

 
$
(101
)
 
$
76,578

Total HTM securities
$
75,368

 
$
1,311

 
$
(101
)
 
$
76,578

December 31, 2014
 

 
 

 
 

 
 

AFS Securities:
 
 
 
 
 
 
 
Obligations of U.S. government-sponsored enterprises
$
4,962

 
$
65

 
$
—

 
$
5,027

Obligations of states and political subdivisions
26,080

 
697

 
—

 
26,777

Mortgage-backed securities issued or guaranteed by U.S. government-sponsored enterprises
377,657

 
5,656

 
(2,005
)
 
381,308

Collateralized mortgage obligations issued or guaranteed by U.S. government-sponsored enterprises
348,855

 
953

 
(5,911
)
 
343,897

Private issue collateralized mortgage obligations
5,999

 
63

 
(8
)
 
6,054

Total AFS securities
$
763,553

 
$
7,434

 
$
(7,924
)
 
$
763,063

HTM Securities:
 
 
 
 
 
 
 
Obligations of states and political subdivisions
$
20,179

 
$
265

 
$
(19
)
 
$
20,425

Total HTM securities
$
20,179

 
$
265

 
$
(19
)
 
$
20,425

 
Net unrealized gains on AFS securities at September 30, 2015 included in AOCI amounted to $2.9 million, net of a deferred tax of $1.6 million. Net unrealized losses on AFS securities at December 31, 2014 included in AOCI amounted to $319,000, net of a deferred tax benefit of $172,000.

During the first nine months of 2015, the Company purchased investment securities totaling $136.7 million. The Company designated $81.3 million as AFS securities and $55.4 million as HTM securities.
 
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, recoverability of invested amount over a reasonable period of time, and the length of time the security is in a loss position, for example, are applied in determining OTTI. Once a decline in value is determined to be other-than-temporary, the value of the security is permanently reduced and a corresponding charge to earnings is recognized.
 

10


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, 2015 and December 31, 2014, 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, 2015
 

 
 

 
 

 
 

 
 

 
 

AFS Securities:
 
 
 
 
 
 
 
 
 
 
 
Mortgage-backed securities issued or guaranteed by U.S. government-sponsored enterprises
$
53,164

 
$
(395
)
 
$
57,721

 
$
(996
)
 
$
110,885

 
$
(1,391
)
Collateralized mortgage obligations issued or guaranteed by U.S. government-sponsored enterprises
12,183

 
(188
)
 
145,289

 
(2,519
)
 
157,472

 
(2,707
)
Total AFS securities
$
65,347

 
$
(583
)
 
$
203,010

 
$
(3,515
)
 
$
268,357

 
$
(4,098
)
HTM Securities:
 
 
 
 
 
 
 
 
 
 
 
Obligations of states and political subdivisions
$
12,388

 
$
(101
)
 
$
—

 
$
—

 
$
12,388

 
$
(101
)
Total HTM securities
$
12,388

 
$
(101
)
 
$
—

 
$
—

 
$
12,388

 
$
(101
)
December 31, 2014
 

 
 

 
 

 
 

 
 

 
 

AFS Securities:
 
 
 
 
 
 
 
 
 
 
 
Mortgage-backed securities issued or guaranteed by U.S. government-sponsored enterprises
$
42,856

 
$
(171
)
 
$
125,439

 
$
(1,834
)
 
$
168,295

 
$
(2,005
)
Collateralized mortgage obligations issued or guaranteed by U.S. government-sponsored enterprises
75,723

 
(432
)
 
182,512

 
(5,479
)
 
258,235

 
(5,911
)
Private issue collateralized mortgage obligations
1,785

 
(8
)
 
—

 
—

 
1,785

 
(8
)
Total AFS securities
$
120,364

 
$
(611
)
 
$
307,951

 
$
(7,313
)
 
$
428,315

 
$
(7,924
)
HTM Securities:
 
 
 
 
 
 
 
 
 
 
 
Obligations of states and political subdivisions
$
5,756

 
$
(19
)
 
$
—

 
$
—

 
$
5,756

 
$
(19
)
Total HTM securities
$
5,756

 
$
(19
)
 
$
—

 
$
—

 
$
5,756

 
$
(19
)

At September 30, 2015, the Company held 73 investment securities with a fair value of $280.7 million with unrealized losses totaling $4.2 million that are considered temporary. Of these, the Company had 34 MBS and CMO investments with a fair value of $203.0 million that have been in an unrealized loss position for 12 months or more. The decline in the fair value of securities is reflective of current interest rates in excess of the yield received on investments and is not indicative of an overall credit deterioration or other factors with the Company's investment portfolio. At September 30, 2015, gross unrealized losses on the Company's AFS and HTM securities were 1% of amortized cost.

The Company has the intent and ability to retain its investment securities in an unrealized loss position at September 30, 2015 until the decline in value has recovered.
 

11


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,
 
2015
 
2014
 
2015
 
2014
Proceeds from sales of securities
$
12,426

 
$
—

 
$
12,426

 
$
25,695

Gross realized gains
221

 
—

 
221

 
451

Gross realized losses
(217
)
 
—

 
(217
)
 
—

 
For the three months ended September 30, 2015, the Company sold certain AFS securities with total carrying value of $12.4 million and recorded net gains on the sale of AFS securities of $4,000 within non-interest income in the consolidated statements of income. As part of the Company’s securities portfolio restructuring due to its pending merger with SBM as of September 30, 2015 (which subsequently was completed on October 16, 2015) it sold all of its Non-Agency investments in the quarter ended September 30, 2015, along with $7.3 million of MBS investments experiencing high prepayment speeds. The Company recorded a net gain of $4,000 from the sale of its Non-Agency and MBS investments. The Company had previously recorded OTTI on its Non-Agency investments of $204,000. For the three months ended September 30, 2014, the Company did not sell any investment securities.

For the nine months ended September 30, 2015, the Company sold certain AFS securities with total carrying value of $12.4 million and recorded net gains on sale of AFS securities of $4,000 within non-interest income in the consolidated statements of income. For the nine months ended September 30, 2014, the Company sold certain AFS securities with a total carrying value of $25.2 million and recorded net gains on the sale of AFS securities of $451,000 within non-interest income in the consolidated statements of income.

Securities Pledged
At September 30, 2015 and December 31, 2014, securities with an amortized cost of $508.9 million and $486.2 million, respectively, and estimated fair values of $510.3 million and $485.6 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, 2015, 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
$
3,594

 
$
3,634

Due after one year through five years
87,212

 
88,411

Due after five years through ten years
110,852

 
113,415

Due after ten years
518,149

 
518,777

 
$
719,807

 
$
724,237

HTM Securities
 
 
 
Due in one year or less
$
—

 
$
—

Due after one year through five years
2,234

 
2,290

Due after five years through ten years
1,134

 
1,143

Due after ten years
72,000

 
73,145

 
$
75,368

 
$
76,578

 


12


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, 2015 and December 31, 2014 was as follows:   
 
September 30,
2015
 
December 31,
2014
Residential real estate
$
583,424

 
$
585,996

Commercial real estate
690,935

 
640,661

Commercial
258,105

 
257,515

Home equity
281,492

 
271,709

Consumer
16,535

 
17,257

Net deferred fees
(348
)
 
(528
)
Total
$
1,830,143

 
$
1,772,610


The Company’s lending activities are primarily conducted in Maine, and its footprint continues to expand into other New England states, including New Hampshire and Massachusetts. The Company originates single family and multi-family residential loans, commercial real estate loans, business loans, municipal loans and a variety of consumer loans. In addition, the Company makes loans for the construction of residential homes, multi-family properties and commercial real estate properties. The ability and willingness of borrowers to honor their repayment commitments is generally dependent on the level of overall economic activity within the geographic area and the general economy.

The ALL is management’s best estimate of the inherent risk of loss in the Company’s loan portfolio as of the consolidated statement of condition date. Management makes various assumptions and judgments about the collectability of the loan portfolio and provides an allowance for potential losses based on a number of factors including historical losses. If those assumptions are incorrect, the ALL may not be sufficient to cover losses and may cause an increase in the allowance in the future. Among the factors that could affect the Company’s ability to collect loans and require an increase to the allowance in the future are: (i) financial condition of borrowers; (ii) real estate market changes; (iii) state, regional, and national economic conditions; and (iv) a requirement by federal and state regulators to increase the provision for loan losses or recognize additional charge-offs.

There were no significant changes in the Company's ALL methodology during the nine months ended September 30, 2015.

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 Corporate Risk Management Group 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, and consumer. 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.


13


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.

The following table presents the activity in the ALL and select loan information by portfolio segment for the three and nine months ended September 30, 2015 and 2014, and for the year ended December 31, 2014: 
 
Residential 
Real Estate
 
Commercial 
Real Estate
 
Commercial
 
Home
Equity
 
Consumer
 
Unallocated
 
Total
For The Three and Nine Months Ended
September 30, 2015
 
 
 
 
 
 
 
 
 
 
 
 
 
ALL for the three months ended:
 

 
 

 
 

 
 

 
 

 
 

 
 

Beginning balance
$
4,689

 
$
4,698

 
$
6,777

 
$
2,144

 
$
268

 
$
2,618

 
$
21,194

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

 
(612
)
Recoveries
15

 
4

 
115

 
132

 
3

 
—

 
269

Provision (credit)(1)
4

 
661

 
85

 
(6
)
 
13

 
(476
)
 
281

Ending balance
$
4,532

 
$
5,292

 
$
6,833

 
$
2,072

 
$
261

 
$
2,142

 
$
21,132

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

 
$
4,482

 
$
6,823

 
$
2,247

 
$
281

 
$
2,384

 
$
21,116

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

 
(1,510
)
Recoveries
35

 
68

 
297

 
137

 
17

 
—

 
554

Provision (credit)(1)
66

 
916

 
100

 
127

 
5

 
(242
)
 
972

Ending balance
$
4,532

 
$
5,292

 
$
6,833

 
$
2,072

 
$
261

 
$
2,142

 
$
21,132

ALL balance attributable to loans:
 

 
 

 
 

 
 

 
 

 
 

 
 

Individually evaluated for impairment
$
956

 
$
352

 
$
192

 
$
276

 
$
89

 
$
—

 
$
1,865

Collectively evaluated for impairment
3,576

 
4,940

 
6,641

 
1,796

 
172

 
2,142

 
19,267

Total ending ALL
$
4,532

 
$
5,292

 
$
6,833

 
$
2,072

 
$
261

 
$
2,142

 
$
21,132

Loans:
 

 
 

 
 

 
 

 
 

 
 

 
 

Individually evaluated for impairment
$
7,499

 
$
4,711

 
$
1,720

 
$
1,037

 
$
206

 
$
—

 
$
15,173

Collectively evaluated for impairment
575,577

 
686,224

 
256,385

 
280,455

 
16,329

 
—

 
1,814,970

Total ending loans balance
$
583,076

 
$
690,935

 
$
258,105

 
$
281,492

 
$
16,535

 
$
—

 
$
1,830,143


14


 
Residential 
Real Estate
 
Commercial 
Real Estate
 
Commercial
 
Home
Equity
 
Consumer
 
Unallocated
 
Total
For The Three and Nine Months Ended
September 30, 2014
 
 
 
 
 
 
 
 
 
 
 
 
 
ALL for the three months ended:
 
 
 
 
 
 
 
 
 
 
 
 
 
Beginning balance
$
5,141

 
$
4,361

 
$
6,484

 
$
2,752

 
$
318

 
$
2,849

 
$
21,905

Loans charged off
(9
)
 
(100
)
 
(675
)
 
(166
)
 
(59
)
 
—

 
(1,009
)
Recoveries
2

 
17

 
117

 
8

 
11

 
—

 
155

Provision (credit)(1)
122

 
82

 
35

 
(63
)
 
23

 
335

 
534

Ending balance
$
5,256

 
$
4,360

 
$
5,961

 
$
2,531

 
$
293

 
$
3,184

 
$
21,585

ALL for the nine months ended:
 
 
 
 
 
 
 
 
 
 
 
 
 
Beginning balance
$
5,603

 
$
4,374

 
$
6,220

 
$
2,403

 
$
319

 
$
2,671

 
$
21,590

Loans charged off
(370
)
 
(276
)
 
(1,201
)
 
(272
)
 
(99
)
 
—

 
(2,218
)
Recoveries
136

 
67

 
286

 
19

 
30

 
—

 
538

Provision (credit)(1)
(113
)
 
195

 
656

 
381

 
43

 
513

 
1,675

Ending balance
$
5,256

 
$
4,360

 
$
5,961

 
$
2,531

 
$
293

 
$
3,184

 
$
21,585

ALL balance attributable to loans:
 

 
 

 
 

 
 

 
 

 
 

 
 

Individually evaluated for impairment
$
1,420

 
$
222

 
$
121

 
$
573

 
$
111

 
$
—

 
$
2,447

Collectively evaluated for impairment
3,836

 
4,138

 
5,840

 
1,958

 
182

 
3,184

 
19,138

Total ending ALL
$
5,256

 
$
4,360

 
$
5,961

 
$
2,531

 
$
293

 
$
3,184

 
$
21,585

Loans:
 

 
 

 
 

 
 

 
 

 
 

 
 

Individually evaluated for impairment
$
10,964

 
$
6,710

 
$
3,380

 
$
1,860

 
$
309

 
$
—

 
$
23,223

Collectively evaluated for impairment
566,134

 
606,800

 
242,232

 
269,998

 
17,840

 
—

 
1,703,004

Total ending loans balance
$
577,098

 
$
613,510

 
$
245,612

 
$
271,858

 
$
18,149

 
$
—

 
$
1,726,227

For The Year Ended
December 31, 2014
 
 
 
 
 
 
 
 
 
 
 
 
 
ALL:
 

 
 

 
 

 
 

 
 

 
 

 
 

Beginning balance
$
5,603

 
$
4,374

 
$
6,220

 
$
2,403

 
$
319

 
$
2,671

 
$
21,590

Loans charged off
(785
)
 
(361
)
 
(1,544
)
 
(611
)
 
(143
)
 
—

 
(3,444
)
Recoveries
165

 
135

 
395

 
19

 
32

 
—

 
746

Provision (credit)(1)
(84
)
 
334

 
1,752

 
436

 
73

 
(287
)
 
2,224

Ending balance
$
4,899

 
$
4,482

 
$
6,823