10-Q
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, 2016
OR
¨       TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File No.      0-28190
CAMDEN NATIONAL CORPORATION
(Exact name of registrant as specified in its charter)
 
MAINE
01-0413282
(State or other jurisdiction of
(I.R.S. Employer
incorporation or organization)
Identification No.)
 
 
2 ELM STREET, CAMDEN, ME
04843
(Address of principal executive offices)
(Zip Code)
 
Registrant's telephone number, including area code:  (207) 236-8821
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter periods that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
 
Yes x          No ¨
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
 
Yes x          No ¨
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
 
Large accelerated filer ¨
Accelerated filer x
Non-accelerated filer ¨
Smaller reporting company ¨
(Do not check if a smaller reporting company)
 
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
 
Yes ¨          No x
 
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practical date:
Outstanding at May 3, 2016:  Common stock (no par value) 10,272,083 shares.


CAMDEN NATIONAL CORPORATION

 FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 2016
TABLE OF CONTENTS OF INFORMATION REQUIRED IN REPORT
 
 
PAGE
PART I.  FINANCIAL INFORMATION
 
 
 
ITEM 1.
FINANCIAL STATEMENTS
 
 
 
 
 
Consolidated Statements of Condition - March 31, 2016 and December 31, 2015
 
 
 
 
Consolidated Statements of Income - Three Months Ended March 31, 2016 and 2015
 
 
 
 
Consolidated Statements of Comprehensive Income - Three Months Ended March 31, 2016 and 2015
 
 
 
 
Consolidated Statements of Changes in Shareholders’ Equity - Three Months Ended March 31, 2016 and 2015
 
 
 
 
Consolidated Statements of Cash Flows - Three Months Ended March 31, 2016 and 2015
 
 
 
 
Notes to Consolidated Financial Statements
 
 
 
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
 
 
ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
 
 
 
ITEM 4.
CONTROLS AND PROCEDURES
 
 
 
PART II. OTHER INFORMATION
 
 
 
 
ITEM 1.
LEGAL PROCEEDINGS
 
 
 
ITEM 1A.
RISK FACTORS
 
 
 
ITEM 2.
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
 
 
 
ITEM 3.
DEFAULTS UPON SENIOR SECURITIES
 
 
 
ITEM 4.
MINE SAFETY DISCLOSURES
 
 
 
ITEM 5.
OTHER INFORMATION
 
 
 
ITEM 6.
EXHIBITS
 
 
 
SIGNATURES
 
 
 
EXHIBITS
 

2


PART I. FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS
CONSOLIDATED STATEMENTS OF CONDITION
(unaudited)
(In Thousands, Except Number of Shares)
 
March 31,
 2016
 
December 31, 2015
ASSETS
 
 

 
 

Cash and due from banks
 
$
72,201

 
$
79,488

Securities:
 
 

 
 

Available-for-sale securities, at fair value
 
800,029

 
750,338

Held-to-maturity securities, at amortized cost
 
87,950

 
84,144

Federal Home Loan Bank and Federal Reserve Bank stock, at cost
 
21,605

 
21,513

Total securities
 
909,584

 
855,995

Loans held for sale
 
16,632

 
10,958

Loans
 
2,492,634

 
2,490,206

Less: allowance for loan losses
 
(21,339
)
 
(21,166
)
Net loans
 
2,471,295

 
2,469,040

Goodwill
 
95,267

 
95,657

Other intangible assets
 
8,191

 
8,667

Bank-owned life insurance
 
60,338

 
59,917

Premises and equipment, net
 
44,973

 
45,959

Deferred tax assets
 
36,154

 
39,716

Interest receivable
 
8,785

 
7,985

Other real estate owned
 
1,228

 
1,304

Other assets
 
37,898

 
34,658

Total assets
 
$
3,762,546

 
$
3,709,344

LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 

 
 

Liabilities
 
 

 
 

Deposits:
 
 

 
 

Demand
 
$
349,586

 
$
357,673

Interest checking
 
686,517

 
740,084

Savings and money market
 
949,309

 
912,668

Certificates of deposit
 
482,821

 
516,867

Brokered deposits
 
206,599

 
199,087

Total deposits
 
2,674,832

 
2,726,379

Federal Home Loan Bank advances
 
55,000

 
55,000

Other borrowed funds
 
545,473

 
458,763

Subordinated debentures
 
58,638

 
58,599

Accrued interest and other liabilities
 
53,146

 
47,413

Total liabilities
 
3,387,089

 
3,346,154

Commitments and Contingencies
 


 


Shareholders’ Equity
 
 

 
 

Common stock, no par value; authorized 20,000,000 shares, issued and outstanding 10,271,083 and 10,220,478 shares as of March 31, 2016 and December 31, 2015, respectively
 
154,437

 
153,083

Retained earnings
 
227,540

 
222,329

Accumulated other comprehensive loss:
 
 

 
 

Net unrealized gains (losses) on available-for-sale securities, net of tax
 
3,968

 
(3,801
)
Net unrealized losses on cash flow hedging derivative instruments, net of tax
 
(8,479
)
 
(6,374
)
Net unrecognized losses on postretirement plans, net of tax
 
(2,009
)
 
(2,047
)
Total accumulated other comprehensive loss
 
(6,520
)
 
(12,222
)
Total shareholders’ equity
 
375,457

 
363,190

Total liabilities and shareholders’ equity
 
$
3,762,546

 
$
3,709,344

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)
 
2016
 
2015
Interest Income
 
 

 
 

Interest and fees on loans
 
$
27,016

 
$
18,084

Interest on U.S. government and sponsored enterprise obligations
 
3,990

 
3,872

Interest on state and political subdivision obligations
 
714

 
387

Interest on federal funds sold and other investments
 
261

 
105

Total interest income
 
31,981

 
22,448

Interest Expense
 
 

 
 

Interest on deposits
 
2,042

 
1,529

Interest on borrowings
 
1,136

 
860

Interest on subordinated debentures
 
851

 
625

Total interest expense
 
4,029

 
3,014

Net interest income
 
27,952

 
19,434

Provision for credit losses
 
872

 
446

Net interest income after provision for credit losses
 
27,080

 
18,988

Non-Interest Income
 
 

 
 

Service charges on deposit accounts
 
1,724

 
1,487

Other service charges and fees
 
2,328

 
1,510

Income from fiduciary services
 
1,169

 
1,220

Mortgage banking income, net
 
808

 
239

Brokerage and insurance commissions
 
458

 
449

Bank-owned life insurance
 
422

 
422

Other income
 
1,008

 
820

Total non-interest income
 
7,917

 
6,147

Non-Interest Expense
 
 

 
 

Salaries and employee benefits
 
11,610

 
8,375

Furniture, equipment and data processing
 
2,427

 
1,923

Net occupancy
 
1,877

 
1,472

Consulting and professional fees
 
885

 
591

Other real estate owned and collection costs
 
656

 
562

Regulatory assessments
 
721

 
510

Amortization of intangible assets
 
476

 
287

Merger and acquisition costs
 
644

 
735

Other expenses
 
3,632

 
2,346

Total non-interest expense
 
22,928

 
16,801

Income before income taxes
 
12,069

 
8,334

Income Taxes
 
3,735

 
2,723

Net Income
 
$
8,334

 
$
5,611

 
 
 
 
 
Per Share Data
 
 

 
 

Basic earnings per share
 
$
0.81

 
$
0.75

Diluted earnings per share
 
$
0.81

 
$
0.75

Weighted average number of common shares outstanding
 
10,259,995

 
7,431,065

Diluted weighted average number of common shares outstanding
 
10,298,171

 
7,453,875


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)
 
2016
 
2015
Net Income
 
$
8,334

 
$
5,611

Other comprehensive income:
 
 

 
 

Net change in unrealized gains on available-for-sale securities, net of tax of ($4,183), and ($2,212), respectively
 
7,769

 
4,108

Net change in unrealized losses on cash flow hedging derivatives:
 
 
 
 
Net change in unrealized loss on cash flow hedging derivatives, net of tax of $1,261, and $751, respectively
 
(2,342
)
 
(1,395
)
Net reclassification adjustment for effective portion of cash flow hedges included in interest expense, net of tax of ($128) and ($120), respectively(1)
 
237

 
223

Net change in unrealized losses on cash flow hedging derivatives, net of tax
 
(2,105
)
 
(1,172
)
Reclassification of amortization of net unrecognized actuarial loss and prior service cost, net of tax of ($21) and ($21), respectively(2)
 
38

 
38

Other comprehensive income
 
5,702

 
2,974

Comprehensive Income
 
$
14,036

 
$
8,585

(1) Reclassified into the consolidated statements of income in interest on subordinated debentures.
(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, 2014
 
7,426,222

 
$
41,555

 
$
211,979

 
$
(8,425
)
 
$
245,109

Net income
 
—

 
—

 
5,611

 
—

 
5,611

Other comprehensive income, net of tax
 
—

 
—

 
—

 
2,974

 
2,974

Stock-based compensation expense
 
—

 
198

 
—

 
—

 
198

Exercise of stock options and issuance of vested share awards, net of repurchase for tax withholdings and tax benefit
 
12,707

 
136

 
—

 
—

 
136

Cash dividends declared ($0.30 per share)
 
—

 
—

 
(2,229
)
 
—

 
(2,229
)
Balance at March 31, 2015
 
7,438,929

 
$
41,889

 
$
215,361

 
$
(5,451
)
 
$
251,799

 
 
 
 
 
 
 
 
 
 

Balance at December 31, 2015
 
10,220,478

 
$
153,083

 
$
222,329

 
$
(12,222
)
 
$
363,190

Net income
 
—

 
—

 
8,334

 
—

 
8,334

Other comprehensive income, net of tax
 
—

 
—

 
—

 
5,702

 
5,702

Stock-based compensation expense
 
—

 
337

 
—

 
—

 
337

Exercise of stock options and issuance of vested share awards, net of repurchase for tax withholdings and tax benefit
 
50,605

 
1,017

 
—

 
—

 
1,017

Cash dividends declared ($0.30 per share)
 
—

 
—

 
(3,123
)
 
—

 
(3,123
)
Balance at March 31, 2016
 
10,271,083

 
$
154,437

 
$
227,540

 
$
(6,520
)
 
$
375,457

 
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)
 
2016
 
2015
Operating Activities
 
 

 
 

Net Income
 
$
8,334

 
$
5,611

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

 
 

Provision for credit losses
 
872

 
446

Depreciation expense
 
1,427

 
764

Purchase accounting accretion, net
 
(1,055
)
 
(66
)
Investment securities amortization, net
 
652

 
509

Stock-based compensation expense
 
337

 
198

Amortization of intangible assets
 
476

 
287

Net increase in other real estate owned valuation allowance and loss on disposition
 
66

 
81

Originations of mortgage loans held for sale
 
(44,431
)
 
(5,425
)
Proceeds from the sale of mortgage loans
 
39,868

 
4,935

Gain on sale of mortgage loans
 
(972
)
 
(129
)
Increase in other assets
 
2,869

 
780

(Decrease) increase in other liabilities
 
(4,170
)
 
16

Net cash provided by operating activities
 
4,273

 
8,007

Investing Activities
 
 

 
 

Proceeds from maturities of available-for-sale securities
 
28,580

 
37,132

Purchase of available-for-sale securities
 
(66,849
)
 
(20,344
)
Purchase of held-to-maturity securities
 
(3,929
)
 
(16,076
)
Net increase in loans
 
(2,321
)
 
(20,293
)
Purchase of Federal Home Loan Bank and Federal Reserve Bank stock
 
(92
)
 
—

Proceeds from the sale of other real estate owned
 
42

 
1,564

Recoveries of previously charged-off loans
 
104

 
133

Purchase of premises and equipment
 
(464
)
 
(464
)
Net cash used by investing activities
 
(44,929
)
 
(18,348
)
Financing Activities
 
 
 
 

Net (decrease) increase in deposits
 
(51,286
)
 
34,112

Repayments on Federal Home Loan Bank long-term advances
 
—

 
(19
)
Net increase (decrease) in other borrowed funds
 
86,726

 
(29,392
)
Exercise of stock options and issuance of restricted stock, net of repurchase for tax withholdings and tax benefit
 
1,017

 
136

Cash dividends paid on common stock
 
(3,088
)
 
(2,235
)
Net cash provided by financing activities
 
33,369

 
2,602

Net decrease in cash and cash equivalents
 
(7,287
)
 
(7,739
)
Cash and cash equivalents at beginning of period
 
79,488

 
60,813

Cash and cash equivalents at end of period
 
$
72,201

 
$
53,074

Supplemental information
 
 

 
 

Interest paid
 
$
4,029

 
$
3,015

Income taxes paid
 
5

 
5

Transfer from loans to other real estate owned
 
32

 
1,439

Held-to-maturity securities purchased but unsettled
 
—

 
4,830

SBM acquisition measurement-period adjustments
 
390

 
—

 
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, 2016 and December 31, 2015, the consolidated statements of income for the three months ended March 31, 2016 and 2015, the consolidated statements of comprehensive income for the three months ended March 31, 2016 and 2015, the consolidated statements of changes in shareholders' equity for the three months ended March 31, 2016 and 2015, and the consolidated statements of cash flows for the three months ended March 31, 2016 and 2015. All significant intercompany transactions and balances are eliminated in consolidation. Certain items from the prior period were reclassified to conform to the current period presentation. The income reported for the three months ended March 31, 2016 is not necessarily indicative of the results that may be expected for the full year. The information in this report should be read in conjunction with the consolidated financial statements and accompanying notes included in the year ended December 31, 2015 Annual Report on Form 10-K.

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
AFS:
Available-for-sale
 
FDIC:
Federal Deposit Insurance Corporation
ALCO:
Asset/Liability Committee
 
FHLB:
Federal Home Loan Bank
ALL:
Allowance for loan losses
 
FHLBB:
Federal Home Loan Bank of Boston
AOCI:
Accumulated other comprehensive income (loss)
 
FRB:
Federal Reserve Bank
ASC:
Accounting Standards Codification
 
Freddie Mac:
Federal Home Loan Mortgage Corporation
ASU:
Accounting Standards Update
 
GAAP:
Generally accepted accounting principles in the United States
Bank:
Camden National Bank, a wholly-owned subsidiary of Camden National Corporation
 
HPFC:
Healthcare Professional Funding Corporation, a wholly-owned subsidiary of Camden National Bank
BOLI:
Bank-owned life insurance
 
HTM:
Held-to-maturity
Board ALCO:
Board of Directors' Asset/Liability Committee
 
IRS:
Internal Revenue Service
BSA:
Bank Secrecy Act
 
LIBOR:
London Interbank Offered Rate
CCTA:
Camden Capital Trust A, an unconsolidated entity formed by Camden National Corporation
 
LTIP:
Long-Term Performance Share Plan
CDARS:
Certificate of Deposit Account Registry System
 
Management ALCO:
Management Asset/Liability Committee
CDs:
Certificate of deposits
 
MBS:
Mortgage-backed security
Company:
Camden National Corporation
 
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
CSV:
Cash surrender value
 
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
CMO:
Collateralized mortgage obligation
 
MSHA:
Maine State Housing Authority
DCRP:
Defined Contribution Retirement Plan
 
MSRs:
Mortgage servicing rights
EPS:
Earnings per share
 
MSPP:
Management Stock Purchase Plan

8


OTTI:
Other-than-temporary impairment
 
SBM:
SBM Financial, Inc., the parent company of The Bank of Maine
NIM:
Net interest margin on a fully-taxable basis
 
SERP:
Supplemental executive retirement plans
N.M.:
Not meaningful
 
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

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 
 March 31,
 
 
2016
 
2015
Net income
 
$
8,334

 
$
5,611

Dividends and undistributed earnings allocated to participating securities(1)
 
(29
)
 
(17
)
Net income available to common shareholders
 
$
8,305

 
$
5,594

Weighted-average common shares outstanding for basic EPS
 
10,259,995

 
7,431,065

Dilutive effect of stock-based awards(2)
 
38,176

 
22,810

Weighted-average common and potential common shares for diluted EPS
 
10,298,171

 
7,453,875

Earnings per common share:
 
 

 
 

Basic EPS
 
$
0.81

 
$
0.75

Diluted EPS
 
$
0.81

 
$
0.75

Awards excluded from the calculation of diluted EPS(3):
 
 
 
 
Stock options
 
13,250

 
15,250

(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 and are considered anti-dilutive.

Nonvested stock-based payment awards that contain non-forfeitable rights to dividends are participating securities and are included in the computation of EPS pursuant to the two-class method. The two-class method is an earnings allocation formula that determines EPS for each class of common stock and participating security according to dividends declared (or accumulated) and participation rights in undistributed earnings. Certain of the Company’s nonvested stock-based awards qualify as participating securities. 
  
Net income is allocated between the common stock and participating securities pursuant to the two-class method. Basic EPS is computed by dividing net income available to common shareholders by the weighted average number of common shares outstanding during the period, excluding participating nonvested stock-based awards. 
 
Diluted EPS is computed in a similar manner, except that the denominator includes the number of additional common shares that would have been outstanding if potentially dilutive common shares were issued using the treasury stock method.


9


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
March 31, 2016
 

 
 

 
 

 
 

AFS Securities:
 
 
 
 
 
 
 
Obligations of U.S. government-sponsored enterprises
$
4,973

 
$
146

 
$
—

 
$
5,119

Obligations of states and political subdivisions
15,254

 
286

 
—

 
15,540

Mortgage-backed securities issued or guaranteed by U.S. government-sponsored enterprises
460,604

 
6,612

 
(617
)
 
466,599

Collateralized mortgage obligations issued or guaranteed by U.S. government-sponsored enterprises
308,902

 
2,126

 
(2,470
)
 
308,558

Subordinated corporate bonds
3,480

 
18

 
(37
)
 
3,461

Total AFS debt securities
793,213

 
9,188

 
(3,124
)
 
799,277

Equity securities
712

 
40

 
—

 
752

Total AFS securities
$
793,925

 
$
9,228

 
$
(3,124
)
 
$
800,029

HTM Securities:
 
 
 
 
 
 
 
Obligations of states and political subdivisions
$
87,950

 
$
2,816

 
$
(37
)
 
$
90,729

Total HTM securities
$
87,950

 
$
2,816

 
$
(37
)
 
$
90,729

December 31, 2015
 

 
 

 
 

 
 

AFS Securities:
 
 
 
 
 
 
 
Obligations of U.S. government-sponsored enterprises
$
4,971

 
$
69

 
$
—

 
$
5,040

Obligations of states and political subdivisions
17,355

 
339

 
—

 
17,694

Mortgage-backed securities issued or guaranteed by U.S. government-sponsored enterprises
419,429

 
3,474

 
(3,857
)
 
419,046

Collateralized mortgage obligations issued or guaranteed by U.S. government-sponsored enterprises
312,719

 
409

 
(6,271
)
 
306,857

Subordinated corporate bonds
1,000

 
—

 
(4
)
 
996

Total AFS debt securities
755,474

 
4,291

 
(10,132
)
 
749,633

Equity securities
712

 
2

 
(9
)
 
705

Total AFS securities
$
756,186

 
$
4,293

 
$
(10,141
)
 
$
750,338

HTM Securities:
 
 
 
 
 
 
 
Obligations of states and political subdivisions
$
84,144

 
$
1,564

 
$
(61
)
 
$
85,647

Total HTM securities
$
84,144

 
$
1,564

 
$
(61
)
 
$
85,647

 
Net unrealized gains on AFS securities at March 31, 2016 included in AOCI amounted to $4.0 million, net of a deferred tax liability of $2.1 million. Net unrealized losses on AFS securities at December 31, 2015 included in AOCI amounted to $3.8 million, net of a deferred tax benefit of $2.0 million.

During the first three months of 2016, the Company purchased investment securities totaling $70.8 million. The Company designated $66.9 million as AFS securities and $3.9 million as HTM securities.

During the first three months of 2015, the Company purchased investment securities totaling $36.4 million. The Company designated $20.3 million as AFS securities and $16.1 million as HTM securities.


10


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 cost basis of the security is permanently reduced and a corresponding charge to earnings is recognized.
 
The following table presents the estimated fair values and gross unrealized losses of investment securities that were in a continuous loss position at March 31, 2016 and December 31, 2015, by length of time that individual securities in each category have been in a continuous loss position:  
 
Less Than 12 Months
 
12 Months or More
 
Total
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
March 31, 2016
 

 
 

 
 

 
 

 
 

 
 

AFS Securities:
 
 
 
 
 
 
 
 
 
 
 
Mortgage-backed securities issued or guaranteed by U.S. government-sponsored enterprises
$
14,453

 
$
(82
)
 
$
49,596

 
$
(535
)
 
$
64,049

 
$
(617
)
Collateralized mortgage obligations issued or guaranteed by U.S. government-sponsored enterprises
8,240

 
(47
)
 
145,716

 
(2,423
)
 
153,956

 
(2,470
)
Subordinated corporate bonds
1,963

 
(37
)
 
—

 
—

 
1,963

 
(37
)
Total AFS securities
$
24,656

 
$
(166
)
 
$
195,312

 
$
(2,958
)
 
$
219,968

 
$
(3,124
)
HTM Securities:
 
 
 
 
 
 
 
 
 
 
 
Obligations of states and political subdivisions
$
2,181

 
$
(37
)
 
$
—

 
$
—

 
$
2,181

 
$
(37
)
Total HTM securities
$
2,181

 
$
(37
)
 
$
—

 
$
—

 
$
2,181

 
$
(37
)
December 31, 2015
 

 
 

 
 

 
 

 
 

 
 

AFS Securities:
 
 
 
 
 
 
 
 
 
 
 
Mortgage-backed securities issued or guaranteed by U.S. government-sponsored enterprises
$
234,897

 
$
(2,351
)
 
$
45,629

 
$
(1,506
)
 
$
280,526

 
$
(3,857
)
Collateralized mortgage obligations issued or guaranteed by U.S. government-sponsored enterprises
111,143

 
(1,068
)
 
147,180

 
(5,203
)
 
258,323

 
(6,271
)
Subordinated corporate bonds
996

 
(4
)
 
—

 
—

 
996

 
(4
)
Equity Securities
615

 
(9
)
 
—

 
—

 
615

 
(9
)
Total AFS securities
$
347,651

 
$
(3,432
)
 
$
192,809

 
$
(6,709
)
 
$
540,460

 
$
(10,141
)
HTM Securities:
 
 
 
 
 
 
 
 
 
 
 
Obligations of states and political subdivisions
$
5,507

 
$
(61
)
 
$
—

 
$
—

 
$
5,507

 
$
(61
)
Total HTM securities
$
5,507

 
$
(61
)
 
$
—

 
$
—

 
$
5,507

 
$
(61
)

At March 31, 2016 and December 31, 2015, the Company held 42 and 109 investment securities with a fair value of $222.1 million and $546.0 million with unrealized losses totaling $3.2 million and $10.2 million, respectively, that were considered temporary. Of these, the Company had 29 MBS and CMO investments with a fair value of $195.3 million that were in an unrealized loss position totaling $3.0 million at March 31, 2016 and 28 MBS and CMO investments with a fair value of $192.8 million that were in an unrealized loss position totaling $6.7 million at December 31, 2015 for 12 months or more. The 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 change in credit quality or other factors with the Company's investment portfolio. At March 31, 2016

11


and December 31, 2015, gross unrealized losses on the Company's AFS and HTM securities were 1% and 2%, respectively, of the respective investment securities fair value.

The Company has the intent and ability to retain its investment securities in an unrealized loss position at March 31, 2016 until the decline in value has recovered.

For the three months ended March 31, 2016 and 2015, the Company did not sell any investment securities.

FHLBB and FRB Stock
As of March 31, 2016 and December 31, 2015, the Company's investment in FHLBB stock was $20.7 million and $20.6 million, respectively. As of March 31, 2016 and December 31, 2015, the Company's investment in FRB stock was $908,000.

Securities Pledged
At March 31, 2016 and December 31, 2015, securities with an amortized cost of $557.1 million and $577.6 million, respectively, and estimated fair values of $559.6 million and $570.9 million, respectively, were pledged to secure FHLBB advances, public deposits, and securities sold under agreements to repurchase and for other purposes required or permitted by law.
 
Contractual Maturities
The amortized cost and estimated fair values of debt securities by contractual maturity at March 31, 2016, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. 
 
Amortized
Cost
 
Fair
Value
AFS Securities
 
 
 
Due in one year or less
$
1,002

 
$
1,016

Due after one year through five years
103,817

 
105,196

Due after five years through ten years
111,295

 
113,903

Due after ten years
577,099

 
579,162

 
$
793,213

 
$
799,277

HTM Securities
 
 
 
Due after one year through five years
$
2,204

 
$
2,260

Due after five years through ten years
2,494

 
2,538

Due after ten years
83,252

 
85,931

 
$
87,950

 
$
90,729

 


12


NOTE 4 – LOANS AND ALLOWANCE FOR LOAN LOSSES
 
The composition of the Company’s loan portfolio, excluding residential loans held for sale, at March 31, 2016 and December 31, 2015 was as follows:   
 
March 31,
2016
 
December 31,
2015
Residential real estate(1)
$
813,266

 
$
821,074

Commercial real estate(1)
953,220

 
927,951

Commercial(1)
291,684

 
297,721

Home equity(1)
343,137

 
348,634

Consumer(1)
17,096

 
17,953

HPFC(1)
74,304

 
77,243

Deferred loan fees, net
(73
)
 
(370
)
Total loans
$
2,492,634

 
$
2,490,206

(1)
The loan balances are presented net of the unamortized fair value mark discount associated with the purchase accounting for acquired loans of $12.1 million and $13.1 million at March 31, 2016 and December 31, 2015, respectively.

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

HPFC provides niche commercial lending to the small business medical field, including dentists, optometrists and veterinarians across the U.S. The ability and willingness of borrowers to honor their repayment commitments is generally dependent on the success of the borrower's business. Unlike the Bank's loan portfolio, there is, generally, little to no indication of credit quality issues and/or concerns of borrowers honoring their commitments until a payment is delinquent. Generally, once a payment is delinquent, if the payment is not received shortly thereafter to bring the loan current, the loan is deemed impaired (typically within 45 days). Effective February 19, 2016, the Company closed HPFC's operations and is no longer originating loans.

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

There were no significant changes in the Company's ALL methodology during the three months ended March 31, 2016.

The board of directors monitors credit risk through the Directors' Loan Review Committee, which reviews large credit exposures, monitors the external loan review reports, reviews the lending authority for individual loan officers when required, and has approval authority and responsibility for all matters regarding the loan policy and other credit-related policies, including reviewing and monitoring asset quality trends, concentration levels, and the ALL methodology. The Credit Risk Administration and the Credit Risk Policy Committee oversee the Company's systems and procedures to monitor the credit quality of its loan portfolio, conduct a loan review program, maintain the integrity of the loan rating system, determine the adequacy of the ALL and support the oversight efforts of the Directors' Loan Review Committee and the board of directors. The Company's practice is to proactively manage the portfolio such that management can identify problem credits early, assess and implement effective work-out strategies, and take charge-offs as promptly as practical. In addition, the Company continuously reassesses its underwriting standards in response to credit risk posed by changes in economic conditions. For purposes of

13


determining the ALL, the Company disaggregates its loans into portfolio segments, which include residential real estate, commercial real estate, commercial, home equity, consumer and HPFC. Each portfolio segment possesses unique risk characteristics that are considered when determining the appropriate level of allowance. These risk characteristics unique to each portfolio segment include:

Residential Real Estate. Residential real estate loans held in the Company's loan portfolio are made to borrowers who demonstrate the ability to make scheduled payments with full consideration to underwriting factors. Borrower qualifications include favorable credit history combined with supportive income requirements and combined loan-to-value ratios within established policy guidelines. Collateral consists of mortgage liens on one- to four-family residential properties.

Commercial Real Estate. Commercial real estate loans consist of mortgage loans to finance investments in real property such as multi-family residential, commercial/retail, office, industrial, hotels, educational, health care facilities and other specific use properties. Commercial real estate loans are typically written with amortizing payment structures. Collateral values are determined based upon appraisals and evaluations in accordance with established policy guidelines. Loan-to-value ratios at origination are governed by established policy and regulatory guidelines. Commercial real estate loans are primarily paid by the cash flow generated from the real property, such as operating leases, rents, or other operating cash flows from the borrower.

Commercial. Commercial loans consist of revolving and term loan obligations extended to business and corporate enterprises for the purpose of financing working capital and/or capital investment. Collateral generally consists of pledges of business assets including, but not limited to, accounts receivable, inventory, plant & equipment, or real estate, if applicable. Commercial loans are primarily paid by the operating cash flow of the borrower. Commercial loans may be secured or unsecured.

Home Equity. Home equity loans and lines are made to qualified individuals for legitimate purposes secured by senior or junior mortgage liens on owner-occupied one- to four-family homes, condominiums, or vacation homes. The home equity loan has a fixed rate and is billed as equal payments comprised of principal and interest. The home equity line of credit has a variable rate and is billed as interest-only payments during the draw period. At the end of the draw period, the home equity line of credit is billed as a percentage of the principal balance plus all accrued interest. Borrower qualifications include favorable credit history combined with supportive income requirements and combined loan-to-value ratios within established policy guidelines.

Consumer. Consumer loan products including personal lines of credit and amortizing loans made to qualified individuals for various purposes such as education, auto loans, debt consolidation, personal expenses or overdraft protection. Borrower qualifications include favorable credit history combined with supportive income and collateral requirements within established policy guidelines. Consumer loans may be secured or unsecured.

HPFC. HPFC is a niche lender that provides commercial lending to dentists, optometrists and veterinarians, many of which are start-up companies. HPFC's loan portfolio consists of term loan obligations extended for the purpose of financing working capital and/or purchase of equipment. Collateral may consist of pledges of business assets including, but not limited to, accounts receivable, inventory, and/or equipment. These loans are primarily paid by the operating cash flow of the borrower and the terms range from seven to ten years.

14


The following tables presents the activity in the ALL and select loan information by portfolio segment for the three months ended March 31, 2016 and 2015, and for the year ended December 31, 2015: 
 
Residential
Real Estate
 
Commercial
Real Estate
 
Commercial
 
Home
Equity
 
Consumer
 
HPFC
 
Unallocated
 
Total
For The Three Months Ended March 31, 2016
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
ALL for the three months ended:
 

 
 

 
 

 
 

 
 

 
 
 
 

 
 

Beginning balance
$
4,545

 
$
10,432

 
$
3,241

 
$
2,731

 
$
193

 
$
24

 
$
—

 
$
21,166

Loans charged off
(210
)
 
(222
)
 
(226
)
 
(128
)
 
(15
)
 
—

 
—

 
(801
)
Recoveries
40

 
9

 
52

 
1

 
2

 
—

 
—

 
104

Provision(1)
141

 
161

 
231

 
18

 
2

 
317

 
—

 
870

Ending balance
$
4,516

 
$
10,380

 
$
3,298

 
$
2,622

 
$
182

 
$
341

 
$
—

 
$
21,339

ALL balance attributable to loans:
 

 
 

 
 

 
 

 
 

 
 
 
 

 
 

Individually evaluated for impairment
$
512

 
$
158

 
$
214

 
$
89

 
$
—

 
$
307

 
$
—

 
$
1,280

Collectively evaluated for impairment
4,004

 
10,222

 
3,084

 
2,533

 
182

 
34

 
—

 
20,059

Total ending ALL
$
4,516

 
$
10,380

 
$
3,298

 
$
2,622

 
$
182

 
$
341

 
$
—

 
$
21,339

Loans:
 

 
 

 
 

 
 

 
 

 
 
 
 

 
 

Individually evaluated for impairment
$
6,033

 
$
3,130

 
$
3,862

 
$
492

 
$
7

 
$
357

 
$
—

 
$
13,881

Collectively evaluated for impairment
805,941

 
949,351

 
288,202

 
344,005

 
17,182

 
74,072

 
—

 
2,478,753

Total ending loans balance
$
811,974

 
$
952,481

 
$
292,064

 
$
344,497

 
$
17,189

 
$
74,429

 
$
—

 
$
2,492,634

For The Three Months Ended March 31, 2015
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
ALL for the three months ended:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Beginning balance
$
4,899

 
$
7,951

 
$
3,354

 
$
2,247

 
$
281

 
$
—

 
$
2,384

 
$
21,116

Loans charged off
(113
)
 
(55
)
 
(159
)
 
(89
)
 
(8
)
 
—

 
—

 
(424
)
Recoveries
3

 
10

 
104

 
5

 
11

 
—

 
—

 
133

Provision (credit)(1)
46

 
328

 
128

 
84

 
(14
)
 
—

 
(132
)
 
440

Ending balance
$
4,835

 
$
8,234

 
$
3,427

 
$
2,247

 
$
270

 
$
—

 
$
2,252

 
$
21,265

ALL balance attributable to loans:
 

 
 

 
 

 
 

 
 

 
 
 
 

 
 

Individually evaluated for impairment
$
743

 
$
132

 
$
139

 
$
—

 
$
78

 
$
—

 
$
—

 
$
1,092

Collectively evaluated for impairment
4,092

 
8,102

 
3,288

 
2,247

 
192

 
—

 
2,252

 
20,173

Total ending ALL
$
4,835

 
$
8,234

 
$
3,427

 
$
2,247

 
$
270

 
$
—

 
$
2,252

 
$
21,265

Loans:
 

 
 

 
 

 
 

 
 

 
 
 
 

 
 

Individually evaluated for impairment
$
6,107

 
$
2,696

 
$
823

 
$
302

 
$
156

 
$
—

 
$
—

 
$
10,084

Collectively evaluated for impairment
578,366

 
654,765

 
256,940

 
274,482

 
16,443

 
—

 
—

 
1,780,996

Total ending loans balance
$
584,473

 
$
657,461

 
$
257,763

 
$
274,784

 
$
16,599

 
$
—

 
$
—

 
$
1,791,080


15


 
Residential 
Real Estate
 
Commercial 
Real Estate
 
Commercial
 
Home
Equity
 
Consumer
 
HPFC
 
Unallocated
 
Total
For The Year Ended December 31, 2015
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
ALL:
 

 
 

 
 

 
 

 
 

 
 
 
 

 
 

Beginning balance
$
4,899

 
$
7,951

 
$
3,354

 
$
2,247

 
$
281

 
$
—

 
$
2,384

 
$
21,116

Loans charged off
(801
)
 
(481
)
 
(655
)
 
(525
)
 
(154
)
 
—

 
—

 
(2,616
)
Recoveries
55

 
74

 
389

 
188

 
22

 
—

 
—

 
728

Provision (credit)(1)
392

 
2,888

 
153

 
821

 
44

 
24

 
(2,384
)
 
1,938

Ending balance
$
4,545

 
$
10,432

 
$
3,241

 
$
2,731

 
$
193

 
$
24

 
$
—

 
$
21,166

ALL balance attributable to loans:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Individually evaluated for impairment
$
544

 
$
644

 
$
92

 
$
89

 
$
—

 
$
—

 
$
—

 
$
1,369

Collectively evaluated for impairment
4,001

 
9,788

 
3,149

 
2,642

 
193

 
24

 
—

 
19,797

Total ending ALL
$
4,545

 
$
10,432

 
$
3,241

 
$
2,731

 
$
193

 
$
24

 
$
—

 
$
21,166

Loans:
  

 
  

 
  

 
  

 
  

 
 
 
  

 
  

Individually evaluated for impairment
$
6,026

 
$
4,610

 
$
3,937

 
$
588

 
$
74

 
$
—

 
$
—

 
$
15,235

Collectively evaluated for impairment
814,591

 
923,341

 
293,784

 
348,046

 
17,879

 
77,330

 
—

 
2,474,971

Total ending loans balance
$
820,617

 
$
927,951

 
$
297,721

 
$
348,634

 
$
17,953

 
$
77,330

 
$
—

 
$
2,490,206

(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, 2016 and 2015, and December 31, 2015, the reserve for unfunded commitments was $24,000, $23,000 and $22,000, respectively.

The following table reconciles the three months ended March 31, 2016 and 2015, and year ended December 31, 2015 provision for loan losses to the provision for credit losses as presented on the consolidated statement of income:
 
 
Three Months Ended
March 31,
 
Year Ended December 31,
 
 
2016
 
2015
 
2015
Provision for loan losses
 
$
870

 
$
440

 
$
1,938

Change in reserve for unfunded commitments
 
2

 
6

 
(2
)
Provision for credit losses
 
$
872

 
$
446

 
$
1,936


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 Credit Risk Administration. As of March 31, 2016, the non-residential building operators industry exposure was 11% of the Company's total loan portfolio and 29% 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, 2016.


16


 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 and residential real estate 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.
 

17


The following table 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, 2016
 
 

 
 

 
 

 
 

 
 

 
 
 
 
Pass (Grades 1-6)
 
$
795,256

 
$
886,346

 
$
277,568

 
$
—

 
$
—

 
$
72,615

 
$
2,031,785

Performing
 
—

 
—

 
—

 
342,929

 
17,185

 
—

 
360,114

Special Mention (Grade 7)
 
3,043

 
32,330

 
7,778

 
—

 
—

 
301

 
43,452

Substandard (Grade 8)
 
13,675

 
33,805

 
6,718

 
—

 
—

 
1,513

 
55,711

Non-performing
 
—

 
—

 
—

 
1,568

 
4

 
—

 
1,572

Total
 
$
811,974

 
$
952,481

 
$
292,064

 
$
344,497

 
$
17,189

 
$
74,429

 
$
2,492,634

December 31, 2015
 
 

 
 

 
 

 
 

 
 

 
 
 
 
Pass (Grades 1-6)
 
$
802,873

 
$
868,664

 
$
281,553

 
$
—

 
$
—

 
$
70,173

 
$
2,023,263

Performing
 
—

 
—

 
—

 
346,701

 
17,835

 
—

 
364,536

Special Mention (Grade 7)
 
3,282

 
20,732

 
7,527

 
—

 
—

 
3,179

 
34,720

Substandard (Grade 8)
 
14,462

 
38,555

 
8,641

 
—

 
—

 
3,978

 
65,636

Non-performing
 
—

 
—

 
—

 
1,933

 
118

 
—

 
2,051

Total
 
$
820,617

 
$
927,951

 
$
297,721

 
$
348,634

 
$
17,953

 
$
77,330

 
$
2,490,206

 
The Company closely monitors the performance of its loan portfolio for both the Bank and HPFC. A loan is placed on non-accrual status when the financial condition of the borrower is deteriorating, payment in full of both principal and interest is not expected as scheduled or principal or interest has been in default for 90 days or more. Exceptions may be made if the asset is well-secured by collateral sufficient to satisfy both the principal and accrued interest in full and collection is reasonably assured. When one loan to a borrower is placed on non-accrual status, all other loans to the borrower are re-evaluated to determine if they should also be placed on non-accrual status. All previously accrued and unpaid interest is reversed at this time. A loan may return to accrual status when collection of principal and interest is assured and the borrower has demonstrated timely payments of principal and interest for a reasonable period. Unsecured loans, however, are not normally placed on non-accrual status because they are charged-off once their collectability is in doubt.

The following is a loan aging analysis by portfolio segment (including loans past due over 90 days and non-accrual loans) and a summary of non-accrual loans, which include TDRs, and loans past due over 90 days and accruing as of the following dates:
 
30-59 Days
Past Due
 
60-89 Days
Past Due
 
Greater
than
90 Days
 
Total
Past Due
 
Current
 
Total Loans
Outstanding
 
Loans > 90
Days Past
Due and
Accruing
 
Non-Accrual
Loans
March 31, 2016
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Residential real estate
$
965

 
$
719

 
$
4,764

 
$
6,448

 
$
805,526

 
$
811,974

 
$
—

 
$
6,275

Commercial real estate
3,077

 
1,357

 
2,369

 
6,803

 
945,678

 
952,481

 
—

 
3,044

Commercial
664

 
123

 
1,255

 
2,042

 
290,022

 
292,064

 
—

 
4,128

Home equity
568

 
221

 
1,325

 
2,114

 
342,383

 
344,497

 
—

 
1,568

Consumer
34

 
9

 
7

 
50

 
17,139

 
17,189

 
—

 
4

HPFC
624

 
320

 
—

 
944

 
73,485

 
74,429

 
—

 
357

Total
$
5,932

 
$
2,749

 
$
9,720

 
$
18,401

 
$
2,474,233

 
$
2,492,634

 
$
—

 
$
15,376

December 31, 2015
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Residential real estate
$
3,325

 
$
571

 
$
6,077

 
$
9,973

 
$
810,644

 
$
820,617

 
$
—

 
$
7,253

Commercial real estate
4,219

 
2,427

 
1,584

 
8,230

 
919,721

 
927,951

 
—

 
4,529

Commercial
267

 
550

 
1,002

 
1,819

 
295,902

 
297,721

 
—

 
4,489

Home equity
643

 
640

 
1,505

 
2,788

 
345,846

 
348,634

 
—

 
1,933

Consumer
112

 
7

 
118

 
237

 
17,716

 
17,953

 
—

 
118

HPFC
165

 
—

 
—

 
165

 
77,165

 
77,330

 
—

 
—

Total
$
8,731

 
$
4,195

 
$
10,286

 
$
23,212

 
$
2,466,994

 
$
2,490,206

 
$
—

 
$
18,322

 

18


Interest income that would have been recognized if loans on non-accrual status had been current in accordance with their original terms was $184,000 and $143,000 for the three months ended March 31, 2016 and 2015, respectively.

TDRs:

The Company takes a conservative approach with credit risk management and remains focused on community lending and reinvesting. The Company works closely with borrowers experiencing credit problems to assist in loan repayment or term modifications. TDR loans consist of loans where the Company, for economic or legal reasons related to the borrower’s financial difficulties, granted a concession to the borrower that it would not otherwise consider. TDRs, typically, involve term modifications or a reduction of either interest or principal. Once such an obligation has been restructured, it will remain a TDR until paid in full, or until the loan is again restructured at current market rates and no concessions are granted.

The specific reserve allowance was determined by discounting the total expected future cash flows from the borrower at the original loan interest rate, or if the loan is currently collateral-dependent, using the NRV, which was obtained through independent appraisals and internal evaluations. The following is a summary of TDRs, by portfolio segment, and the associated specific reserve included within the ALL as of the periods indicated:
 
 
Number of Contracts
 
Recorded Investment
 
Specific Reserve
 
 
March 31,
 2016
 
December 31, 2015
 
March 31,
2016
 
December 31, 2015
 
March 31,
2016
 
December 31, 2015
Residential real estate
 
22

 
22

 
$
3,343

 
$
3,398

 
$
336

 
$
544

Commercial real estate
 
4

 
6

 
1,109

 
1,459

 
—

 
48

Commercial
 
7

 
9

 
325

 
399

 
1

 
11

Home equity
 
1

 
1

 
20

 
21

 
—

 
—

Total
 
34

 
38

 
$
4,797

 
$
5,277

 
$
337

 
$
603


At March 31, 2016, the Company had performing and non-performing TDRs with a recorded investment balance of $4.6 million and $227,000, respectively. At December 31, 2015, the Company had performing and non-performing TDRs with a recorded investment balance of $4.8 million and $446,000, respectively. As of March 31, 2016 and December 31, 2015, the Company did not have any commitments to lend additional funds to borrowers with loans classified as TDRs.

There were no loan modifications that occurred during the three months ended March 31, 2016 or 2015 that qualify as TDRs.

For the three months ended March 31, 2016 and 2015, no loans were modified as TDRs within the previous 12 months for which the borrower subsequently defaulted.

19


Impaired Loans:

Impaired loans consist of non-accrual and TDR loans that are individually evaluated for impairment in accordance with the Company's policy. The following is a summary of impaired loan balances and the associated allowance by portfolio segment as of and for three months ended March 31, 2016 and 2015, and as of and for the year-ended December 31, 2015:
 
 
 
 
 
 
 
Three Months Ended
 
Recorded
Investment
 
Unpaid
Principal
Balance
 
Related
Allowance
 
Average
Recorded
Investment
 
Interest
Income
Recognized
March 31, 2016:
 
 
 
 
 
 
 
 
 
With an allowance recorded:
 

 
 

 
 

 
 

 
 

Residential real estate
$
3,137

 
$
3,137

 
$
512

 
$
3,156

 
$
27

Commercial real estate
540

 
538

 
158

 
1,256

 
—

Commercial
321

 
334

 
214

 
239

 
—

Home equity
303

 
303

 
89

 
303

 
—

Consumer
—

 
—

 
—

 
—

 
—

HPFC
357

 
383

 
307

 
230

 
—

Ending balance
4,658

 
4,695

 
1,280

 
5,184

 
27

Without an allowance recorded:
 

 
 

 
 

 
 

 
 

Residential real estate
2,896

 
3,832

 
—

 
2,954

 
2

Commercial real estate
2,590

 
3,327

 
—

 
2,643

 
11

Commercial
3,541

 
3,996

 
—

 
3,664

 
4

Home equity
189

 
452

 
—

 
218

 
—

Consumer
7

 
10

 
—

 
7

 
—

HPFC
—

 
—

 
—

 
—

 
—

Ending balance
9,223

 
11,617

 
—

 
9,486

 
17

Total impaired loans
$
13,881

 
$
16,312

 
$
1,280

 
$
14,670

 
$
44

March 31, 2015:
 
 
 
 
 
 
 
 
 
With an allowance recorded:
 

 
 

 
 

 
 

 
 

Residential real estate
$
4,342

 
$
4,341

 
$
743

 
$
4,409

 
$
29

Commercial real estate
256

 
266

 
132

 
86

 
—

Commercial
233

 
233

 
139

 
199

 
—

Home equity
—

 
—

 
—

 
—

 
—

Consumer
139

 
140

 
78

 
140

 
—

HPFC
—

 
—

 
—

 
—

 
—

Ending Balance
4,970

 
4,980

 
1,092

 
4,834

 
29

Without an allowance recorded:
 

 
 

 
 

 
 

 
 

Residential real estate
1,765

 
2,289

 
—

 
1,774

 
2

Commercial real estate
2,440

 
2,748

 
—

 
3,102

 
8

Commercial
590

 
754

 
—

 
503

 
4

Home equity
302

 
505

 
—

 
303

 
—

Consumer
17

 
37

 
—

 
17

 
—

HPFC
—

 
—

 
—

 
—

 
—

Ending Balance
5,114

 
6,333

 
—

 
5,699

 
14

Total impaired loans
$
10,084

 
$
11,313

 
$
1,092

 
$
10,533

 
$
43



20


 
 
 
 
 
 
 
Year Ended
 
Recorded
Investment
 
Unpaid
Principal
Balance
 
Related
Allowance
 
Average
Recorded
Investment
 
Interest
Income
Recognized
December 31, 2015:
 
 
 
 
 
 
 
 
 
With an allowance recorded:
 
 
 

 
 

 
 

 
 

Residential real estate
$
3,191

 
$
3,191

 
$
544

 
$
6,064

 
$
112

Commercial real estate
1,825

 
1,857

 
644

 
1,753

 
—

Commercial
156

 
156

 
92

 
945

 
2

Home equity
303

 
303

 
89

 
900

 
—

Consumer
—

 
—

 
—

 
195

 
—

HPFC
—

 
—

 
—

 
—

 
—

Ending Balance
5,475

 
5,507

 
1,369

 
9,857

 
114

Without an allowance recorded:
  

 
  

 
  

 
  

 
  

Residential real estate
2,835

 
4,353

 
—

 
2,175

 
8

Commercial real estate
2,785

 
3,426

 
—

 
2,719

 
65

Commercial
3,781

 
4,325

 
—

 
1,412

 
17

Home equity
285

 
688

 
—

 
369

 
—

Consumer
74

 
150

 
—

 
20

 
—

HPFC
—

 
—

 
—

 
—

 
—

Ending Balance
9,760

 
12,942

 
—

 
6,695

 
90

Total impaired loans
$
15,235

 
$
18,449

 
$
1,369

 
$
16,552

 
$
204


The impaired loan information presented above as of and for the three months ended March 31, 2015 and year ended December 31, 2015 was revised to disclose only those impaired loans that are individually evaluated for impairment in accordance with the Company's policy, which includes (i) loans with a principal balance greater than $250,000 or more and are classified as substandard or doubtful and are on non-accrual status and (ii) all TDRs. Previously, the Company's impaired loan disclosures included certain non-accrual loans which were collectively evaluated under ASC 450-20. The revision of prior period information had no impact on the Company's ALL, provision for loan losses, or its asset quality ratios as of and for the three months ended March 31, 2015 and year ended December 31, 2015.

Loan Sales:

For the three months ended March 31, 2016 and 2015, the Company sold $38.9 million and $4.8 million, respectively, of fixed rate residential mortgage loans on the secondary market that resulted in gains on the sale of loans (net of costs) of $819,000 and $129,000, respectively.

At March 31, 2016 and December 31, 2015, the Company had certain residential mortgage loans with a principal balance of $16.5 million and $10.8 million, respectively, designated as held for sale. The Company has elected the fair value option of accounting for its loans held for sale and at March 31, 2016 and December 31, 2015 recorded an unrealized gain of $139,000 and $133,000, respectively. For the three months ended March 31, 2016 and 2015, the Company recorded within non-interest income on its consolidated statements of income a change in unrealized gains of $6,000 for each period.

OREO:

The Company records its properties obtained through foreclosure or deed-in-lieu of foreclosure as OREO properties on the consolidated statements of condition at NRV. At March 31, 2016, the Company had four residential and five commercial real estate properties with a carrying value of $273,000 and $955,000, respectively, within OREO. At December 31, 2015, the Company had two residential real estate properties and seven commercial properties with a carrying value of $241,000 and $1.0 million, respectively, within OREO.


21


In-Process Foreclosure Proceedings:

At March 31, 2016 and December 31, 2015, the Company had $3.6 million and $2.9 million, respectively, of consumer mortgage loans secured by residential real estate properties for which foreclosure proceedings were in process, representing 43% and 32%, respectively, of non-accrual loans within the Company's residential, consumer and home equity portfolios. The Company continues to be focused on working these consumer mortgage loans through the foreclosure process to resolution; however, the foreclosure process, typically, will take 18 to 24 months due to the State of Maine foreclosure laws.

FHLB Advances:

FHLB advances are those borrowings from the FHLBB greater than 90 days. FHLB advances are collateralized by a blanket lien on qualified collateral consisting primarily of loans with first mortgages secured by one- to four-family properties, certain commercial real estate loans, certain pledged investment securities and other qualified assets. The carrying value of residential real estate and commercial loans pledged as collateral was $1.1 billion at March 31, 2016 and December 31, 2015.

Refer to Note 3 and 9 of the consolidated financial statements for discussion of securities pledged as collateral.

NOTE 5 – GOODWILL AND OTHER INTANGIBLE ASSETS
 
The Company has recognized goodwill and certain identifiable intangible assets in connection with certain business combinations in prior years.

Goodwill as of March 31, 2016 and December 31, 2015 for each reporting unit is shown in the table below:
 
Goodwill
 
Banking
 
Financial
Services
 
Total
December 31, 2015:


 


 


Goodwill, gross
$
91,753

 
$
7,474

 
$
99,227

Accumulated impairment losses
—

 
(3,570
)
 
(3,570
)
Reported goodwill at December 31, 2015
91,753

 
3,904

 
95,657

2016 measurement-period adjustments
(390
)
 
—

 
(390
)
Reported goodwill at March 31, 2016
$
91,363

 
$
3,904

 
$
95,267


On October 16, 2015, the Company completed its acquisition of SBM, as previously reported. In the first quarter of 2016, the Company made certain measurement-period adjustments to its initial purchase accounting that decreased goodwill by $390,000. These measurement-period adjustments increased the previously reported loan balance by $211,000, increased acquired interest receivable and other assets by $157,000, and increased acquired deferred tax assets $22,000. The measurement-period adjustments have no impact on current or future years' net income and were presented and disclosed prospectively as of March 31, 2016 in accordance with ASU No. 2015-16, Business Combinations (Topic 805): Simplifying the Accounting for Measurement-Period Adjustments.

At March 31, 2016, the Company's accounting for the acquired loans and deferred tax assets was not yet complete and balances disclosed and presented within its Annual Report on Form 10-K for the year ended December 31, 2015, as adjusted by the aforementioned measurement-period adjustments, are provisional amounts.
 

22


The changes in core deposit and trust relationship intangible assets for the three months ended March 31, 2016 are shown in the table below:
 
Core Deposit Intangible
 
Trust Relationship Intangible
 
Total
 
Accumulated Amortization
 
Net
 
Total
 
Accumulated Amortization
 
Net
Balance at December 31, 2015
$
23,908

 
$
(15,392
)
 
$
8,516

 
$
753

 
$
(602
)
 
$
151

2016 amortization
—

 
(457
)
 
(457
)
 
—

 
(19
)
 
(19
)
Balance at March 31, 2016
$
23,908

 
$
(15,849
)
 
$
8,059

 
$
753

 
$
(621
)
 
$
132

Total carrying value of other intangible assets at December 31, 2015
 
 
 
 
 
 
 
 
 
 
$
8,667

Total carrying value of other intangible assets at March 31, 2016
 
 
 
 
 
 
 
 
 
 
$
8,191

 
The following table reflects the expected amortization schedule for intangible assets over the period of estimated economic benefit (assuming no additional intangible assets are created or impaired):
 
Core Deposit
Intangible
 
Trust
Relationship
Intangible
 
Total
2016
$
1,371

 
$
56

 
$
1,427

2017
1,735

 
76

 
1,811

2018
725

 
—

 
725

2019
705

 
—

 
705

2020
682

 
—

 
682

Thereafter
2,841

 
—

 
2,841

Total
$
8,059

 
$
132

 
$
8,191

 
NOTE 6 – REGULATORY CAPITAL REQUIREMENTS
 
The Company and Bank are subject to various regulatory capital requirements administered by the FRB and the OCC. Failure to meet minimum capital requirements can result in mandatory and possible additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s consolidated financial statements.

The Company and the Bank are required to maintain certain levels of capital based on risk-adjusted assets. These capital requirements represent quantitative measures of their assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. The Company and Bank's capital classification is also subject to qualitative judgments by our regulators about components, risk weightings and other factors. The quantitative measures established to ensure capital adequacy require us to maintain minimum amounts and ratios of total, Tier I capital, and common equity Tier I to risk-weighted assets, and of Tier I capital to average assets, or leverage ratio. These guidelines apply to the Company on a consolidated basis. Under the current guidelines, banking organizations must have a minimum total risk-based capital ratio of 8.0%, a minimum Tier I risk-based capital ratio of 6.0%, a minimum common equity Tier I risk-based capital ratio of 4.5%, and a minimum leverage ratio of 4.0% in order to be "adequately capitalized." In addition to these requirements, banking organization must maintain a 2.5% capital conservation buffer consisting of common Tier I equity, subject to a transition schedule with a full phase-in by 2019. Effective January 1, 2016, the Company and the Bank were required to establish a capital conservation buffer of 0.625%, increasing the minimum required total risk-based capital, Tier I risk-based and common equity Tier I capital to risk-weighted assets they must maintain to avoid limits on capital distributions and certain bonus payments to executive officers and similar employees.


23


The Company and the Bank's risk-based capital ratios exceeded regulatory guidelines at March 31, 2016 and December 31, 2015. The following table presents the Company and Bank's regulatory capital ratios at the periods indicated:
 
 
March 31,
2016
 
Minimum Regulatory Capital Required for Capital Adequacy plus Capital Conservation Buffer
 
Minimum Regulatory Provision To Be "Well Capitalized" Under Prompt Corrective Action Provisions
 
December 31,
2015
 
Minimum Regulatory Capital Required for Capital Adequacy
 
Minimum Regulatory Provision To Be "Well Capitalized" Under Prompt Corrective Action Provisions
 
 
Amount
 
Ratio
 
 
 
Amount
 
Ratio
 
 
Camden National Corporation:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total risk-based capital ratio
 
$
341,422

 
13.08
%
 
8.63
%
 
N/A

 
$
335,740

 
12.98
%
 
8.00
%
 
N/A

Tier I risk-based capital ratio
 
305,058

 
11.69
%
 
6.63
%
 
N/A

 
299,552

 
11.58
%
 
6.00
%
 
N/A

Common equity Tier I risk-based capital ratio
 
270,792

 
10.37
%
 
5.13
%
 
N/A

 
269,350

 
10.42
%
 
4.50
%
 
N/A

Tier I leverage capital ratio
 
305,058

 
8.42
%
 
4.00
%
 
N/A

 
299,552

 
8.74
%
 
4.00
%
 
N/A

Camden National Bank:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total risk-based capital ratio
 
$
308,105

 
11.77
%
 
8.63
%
 
10.00
%
 
$
304,847

 
11.75
%
 
8.00
%
 
10.00
%
Tier I risk-based capital ratio
 
286,742

 
10.96
%
 
6.63
%
 
8.00
%
 
283,659

 
10.93
%
 
6.00
%
 
8.00
%
Common equity Tier I risk-based capital ratio
 
286,742

 
10.96
%
 
5.13
%
 
6.50
%
 
283,659

 
10.93
%
 
4.50
%
 
6.50
%
Tier I leverage capital ratio
 
286,742

 
7.97
%
 
4.00
%
 
5.00
%
 
283,659

 
8.33
%
 
4.00
%
 
5.00
%

In addition, the OCC requires a minimum level of $2.5 million of Tier I capital to be maintained at Acadia Trust. As of March 31, 2016 and December 31, 2015, Acadia Trust met all of its capital requirements.

Although the subordinated debentures are recorded as a liability on the Company's consolidated statements of condition, the Company is permitted, in accordance with regulatory guidelines, to include, subject to certain limits, the junior subordinated debentures in our calculation of risk-based capital. At March 31, 2016 and December 31, 2015, $43.0 million of the junior subordinated debentures were included in Tier I and total risk-based capital for the Company. Additionally, the Company's $15.0 million of subordinated debentures qualify as Tier II capital and were included in total risk-based capital for the Company at March 31, 2016 and December 31, 2015.


24


NOTE 7 – EMPLOYEE BENEFIT PLANS
 
The Company sponsors unfunded, non-qualified SERPs for certain officers and provides medical and life insurance to certain eligible retired employees. The components of net period benefit cost for the periods ended March 31, 2016 and 2015 were as follows:

Supplemental Executive Retirement Plan:
 
 
Three Months Ended 
 March 31,
Net periodic benefit cost
 
2016
 
2015
Service cost
 
$
77

 
$
77

Interest cost
 
108

 
106

Recognized net actuarial loss
 
55

 
54

Recognized prior service cost
 
2

 
5

Net period benefit cost(1)
 
$
242

 
$
242

(1) Presented within the consolidated statements of income within salaries and employee benefits.

Other Postretirement Benefit Plan:
 
 
Three Months Ended March 31,
Net periodic benefit cost
 
2016
 
2015
Service cost
 
$
15

 
$
15

Interest cost
 
38

 
29

Recognized net actuarial loss
 
8

 
6

Amortization of prior service credit
 
(6
)
 
(6
)
Net period benefit cost(1)
 
$
55

 
$
44

(1) Presented within the consolidated statements of income within salaries and employee benefits.

NOTE 8 – STOCK-BASED COMPENSATION PLANS 

For the three months ended March 31, 2016, the Company granted share-based awards, subject to certain terms and conditions, to certain officers, executive officers, and directors of the Company, Bank and Acadia Trust. All share-based awards granted were issued under the 2012 Plan. The following outlines the details, and terms and conditions of the material awards granted during the three months ended March 31, 2016:
•
5,793 restricted stock awards were granted to executive officers under the 2016-2018 LTIP, at a fair value of $43.30 per share, based on the closing market price of the Company's common stock on January 4, 2016. The restricted stock awards vest pro-rata over a three year period. The holders of the restricted stock awards participate fully in the rewards of stock ownership of the Company, including voting and dividend rights.
•
A total of 7,165 restricted stock awards and restricted stock units were granted at a fair value of $40.80 per share, based on the closing market price of the Company’s common stock on the March 17, 2016 grant date. The restricted stock awards vest pro-rata over a five-year period, while the restricted stock units vest pro-rata over a three-year period subject to the achievement of certain performance measures. The holders of the restricted stock awards participate fully in the rewards of stock ownership of the Company, including voting and dividend rights.
•
10,676 shares of the Company's common stock were purchased under the MSPP at a one-third discount, based on the closing market price of the Company's common stock on the February 23, 2016 grant date of $38.11 (6,954 shares) and the March 17, 2016 grant date of $40.80 (3,722 shares), in lieu of the officers and executive officers annual incentive bonus. The shares fully vest after two years of service from the grant date.

25


•
2,730 deferred stock awards were issued to certain executive officers under the DCRP. Of the 2,730 awards granted, 1,161 vested immediately on the grant date, the remainder will vest pro-rata until the recipient reaches age 65. The stock awards have been determined to have a fair value of $40.55 per unit, based on the closing market price of the Company's common stock on the March 15, 2016 grant date.

NOTE 9 – REPURCHASE AGREEMENTS

The Company can raise additional liquidity by entering into repurchase agreements at its discretion. In a security repurchase agreement transaction, the Company will generally sell a security, agreeing to repurchase either the same or substantially identical security on a specified later date, at a greater price than the original sales price. The difference between the sale price and purchase price is the cost of the proceeds, which is recorded as interest expense on the consolidated statement of income. The securities underlying the agreements are delivered to counterparties as security for the repurchase obligations. Since the securities are treated as collateral and the agreement does not qualify for a full transfer of effective control, the transactions does not meet the criteria to be classified as a sale, and is therefore considered a secured borrowing transaction for accounting purposes. Payments on such borrowings are interest only until the scheduled repurchase date. In a repurchase agreement, the Company is subject to the risk that the purchaser may default at maturity and not return the securities underlying the agreements. In order to minimize this potential risk, the Company either deals with established firms when entering into these transactions or with customers whose agreements stipulate that the securities underlying the agreement are not delivered to the customer and instead are held in segregated safekeeping accounts by the Company's safekeeping agents.


26


The table below sets forth information regarding the Company’s repurchase agreements accounted for as secured borrowings and types of collateral as of March 31, 2016 and December 31, 2015:
 
 
Remaining Contractual Maturity of the Agreements
 
 
Overnight and Continuous
 
Up to 30 Days
 
30 - 90 Days
 
Greater than 90 Days
 
Total
March 31, 2016:
 
 
 
 
 
 
 
 
 
 
Customer Repurchase Agreements:
 
 
 
 
 
 
 
 
 
 
Obligations of states and political subdivisions
 
$
538

 
$
—

 
$
—

 
$
—

 
$
538

Mortgage-backed securities issued or guaranteed by U.S. government-sponsored enterprises
 
107,589

 
—

 
—

 
—

 
107,589

Collateralized mortgage obligations issued or guaranteed by U.S. government-sponsored enterprises
 
101,299

 
—

 
—

 
—

 
101,299

Total Customer Repurchase Agreements
 
209,426

 
—

 
—

 
—

 
209,426

Wholesale Repurchase Agreements:
 
 
 
 
 
 
 
 
 
 
Mortgage-backed securities issued or guaranteed by U.S. government-sponsored enterprises
 
—

 
—

 
—

 
22,032

 
22,032

Collateralized mortgage obligations issued or guaranteed by U.S. government-sponsored enterprises
 
—

 
—

 
—

 
8,009

 
8,009

Total Wholesale Repurchase Agreements
 
—

 
—

 
—

 
30,041

 
30,041

Total Repurchase Agreements(1)
 
$
209,426

 
$
—

 
$
—

 
$
30,041

 
$
239,467

December 31, 2015:
 
 
 
 
 
 
 
 
 
 
Customer Repurchase Agreements:
 
 
 
 
 
 
 
 
 
 
Obligations of states and political subdivisions
 
$
556

 
$
—

 
$
—

 
$
—

 
$
556

Mortgage-backed securities issued or guaranteed by U.S. government-sponsored enterprises
 
95,967

 
—

 
—

 
—

 
95,967

Collateralized mortgage obligations issued or guaranteed by U.S. government-sponsored enterprises
 
88,466

 
—

 
—

 
—

 
88,466

Total Customer Repurchase Agreements
 
184,989

 
—

 
—

 
—

 
184,989

Wholesale Repurchase Agreements:
 
 
 
 
 
 
 
 
 
 
Mortgage-backed securities issued or guaranteed by U.S. government-sponsored enterprises
 
—

 
—

 
—

 
22,016

 
22,016

Collateralized mortgage obligations issued or guaranteed by U.S. government-sponsored enterprises
 
—

 
—

 
—

 
8,036

 
8,036

Total Wholesale Repurchase Agreements
 
—

 
—

 
—

 
30,052

 
30,052

Total Repurchase Agreements(1)
 
$
184,989

 
$
—

 
$
—

 
$
30,052

 
$
215,041

(1)
Total repurchase agreements are presented within other borrowed funds on the consolidated statements of condition.

Certain customers held CDs totaling $915,000 and $914,000 with the Bank at March 31, 2016 and December 31, 2015, respectively, that were collateralized by CMO and MBS securities that were overnight repurchase agreements.

Certain counterparties monitor collateral, and may request additional collateral to be posted from time to time.

27


NOTE 10 – FAIR VALUE MEASUREMENT AND DISCLOSURE
 
Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value is best determined using quoted market prices. However, in many instances, quoted market prices are not available. In such instances, fair values are determined using various valuation techniques. Various assumptions and observable inputs must be relied upon in applying these techniques. GAAP establishes a fair value hierarchy for valuation inputs that gives the highest priority to quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs.
 
GAAP permits an entity to choose to measure eligible financial instruments and other items at fair value. The Company has elected the fair value option for its loans held for sale. Electing the fair value option for loans held for sale enables the Company’s financial position to more clearly align with the economic value of the actively traded asset.

The fair value hierarchy for valuation of an asset or liability is as follows:
 
Level 1:   Valuation is based upon unadjusted quoted prices in active markets for identical assets and liabilities that the entity has the ability to access as of the measurement date.
 
Level 2:   Valuation is determined from quoted prices for similar assets or liabilities in active markets, from quoted prices for identical or similar instruments in markets that are not active or by model-based techniques in which all significant inputs are observable in the market.
 
Level 3:   Valuation is derived from model-based and other techniques in which at least one significant input is unobservable and which may be based on the Company’s own estimates about the assumptions that market participants would use to value the asset or liability.
 
In general, fair value is based upon quoted market prices, where available. If such quoted market prices are not available, fair value is based upon model-based techniques incorporating various assumptions including interest rates, prepayment speeds and credit losses. Assets and liabilities valued using model-based techniques are classified as either Level 2 or Level 3, depending on the lowest level classification of an input that is considered significant to the overall valuation. A description of the valuation methodologies used for instruments measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy, is set forth below.

Financial Instruments Recorded at Fair Value on a Recurring Basis
Loans Held For Sale: The fair value of loans held for sale is determined using quoted secondary market prices or executed sales agreements and is classified as Level 2.

AFS Securities:  The fair value of debt AFS securities is reported utilizing prices provided by an independent pricing service based on recent trading activity and other observable information including, but not limited to, dealer quotes, market spreads, cash flows, market interest rate curves, market consensus prepayment speeds, credit information, and the bond’s terms and conditions. The fair value of debt securities are classified as Level 2.

The fair value of equity AFS securities is reported utilizing market prices based on recent trading activity. The equity securities are traded on inactive markets and are classified as Level 2.

Derivatives:  The fair value of interest rate swaps is determined using inputs that are observable in the market place obtained from third parties including yield curves, publicly available volatilities, and floating indexes and, accordingly, are classified as Level 2 inputs. The credit value adjustments associated with derivatives utilize Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default by the Company and its counterparties. As of March 31, 2016 and December 31, 2015, the Company has assessed the significance of the impact of the credit valuation adjustments on the overall valuation of its derivative positions and has determined that the credit valuation adjustments are not significant to the overall valuation of its derivatives due to collateral postings.

The fair value of interest rate lock commitments is determined based on current market prices for similar assets in the secondary market and, therefore, classified as Level 2 within the fair value hierarchy.


28


The following table summarizes financial assets and financial liabilities measured at fair value on a recurring basis as of March 31, 2016 and December 31, 2015, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value:
 
Fair
Value
 
Readily
Available
Market
Prices
(Level 1)
 
Observable
Market
Data
(Level 2)
 
Company
Determined
Fair Value
(Level 3)
March 31, 2016
 
 
 

 
 

 
 

Financial assets:
 
 
 

 
 

 
 

Loans held for sale
$
16,632

 
$
—

 
$
16,632

 
$
—

AFS securities:
 
 
 

 
 
 
 

Obligations of U.S. government-sponsored enterprises
5,119

 
—

 
5,119

 
—

Obligations of states and political subdivisions
15,540

 
—

 
15,540

 
—

Mortgage-backed securities issued or guaranteed by U.S. government-sponsored enterprises
466,599

 
—

 
466,599

 
—

Collateralized mortgage obligations issued or guaranteed by U.S. government-sponsored enterprises
308,558

 
—

 
308,558

 
—

Subordinated corporate bonds
3,461

 
—

 
3,461

 
—

Equity securities
752

 
—

 
752

 
—

Customer loan swaps
9,426

 
—

 
9,426

 
—

Interest rate lock commitments
431

 
—

 
431

 
—

Financial liabilities:


 
 

 
 
 
 

Junior subordinated debt interest rate swaps
11,934

 
—

 
11,934

 
—

Forecasted interest rate swaps
1,110

 
—

 
1,110

 
—

Customer loan swaps
9,426

 
—

 
9,426

 
—

December 31, 2015
 
 
 

 
 

 
 

Financial assets:
 
 
 

 
 

 
 

Loans held for sale
$
10,958

 
$
—

 
$
10,958

 
$
—

AFS securities:
 
 
  

 
  

 
  

Obligations of U.S. government-sponsored enterprises
5,040

 
—

 
5,040

 
—

Obligations of states and political subdivisions
17,694

 
—

 
17,694

 
—

Mortgage-backed securities issued or guaranteed by U.S. government-sponsored enterprises
419,046

 
—

 
419,046

 
—

Collateralized mortgage obligations issued or guaranteed by U.S. government-sponsored enterprises
306,857

 
—

 
306,857

 
—

Subordinated corporate bonds
996

 
—

 
996

 
—

Equity securities
705

 
—

 
705

 
—

Customer loan swaps
3,166

 
—

 
3,166

 
—

Interest rate lock commitments
139

 
—

 
139

 
—

Financial liabilities:
 
 
  

 
 
 
  

Junior subordinated debt interest rate swaps
9,229

 
—

 
9,229

 
—

Forecasted interest rate swaps
576

 
—

 
576

 
—

Customer loan swaps
3,166

 
—

 
3,166

 
—

 
The Company did not have any transfers between Level 1 and Level 2 of the fair value hierarchy during the three months ended March 31, 2016. The Company’s policy for determining transfers between levels occurs at the end of the reporting period when circumstances in the underlying valuation criteria change and result in transfer between levels.

29


Financial Instruments Recorded at Fair Value on a Nonrecurring Basis 
The Company may be required, from time to time, to measure certain financial assets and financial liabilities at fair value on a nonrecurring basis in accordance with GAAP. These include assets that are measured at the lower of cost or market value that were recognized at fair value below cost at the end of the period.

Collateral-Dependent Impaired Loans:  Loans for which it is probable that payment of interest and principal will not be made in accordance with the contractual terms of the loan agreement are considered impaired. The Company's policy is to individually evaluate for impairment loans with a principal balance greater than $250,000 or more and are classified as substandard or doubtful and are on non-accrual status. Once the population of loans is identified for individual impairment assessment, the Company measures these loans for impairment by comparing NRV, which is the fair value of the collateral, less estimated costs to sell, to the carrying value of the loan. If the NRV of the loan is less than the carrying value of the loan, then a loss is recognized as part of the ALL to adjust the loan's carrying value to NRV. Accordingly, certain collateral-dependent impaired loans are subject to measurement at fair value on a non-recurring basis. Management has estimated the fair values of these assets using Level 2 inputs, such as the fair value of collateral based on independent third-party market approach appraisals for collateral-dependent loans, and Level 3 inputs where circumstances warrant an adjustment to the appraised value based on the age of the appraisal and/or comparable sales, condition of the collateral, and market conditions.

MSRs:  The Company accounts for mortgage servicing assets at cost, subject to impairment testing. When the carrying value of a tranche exceeds fair value, a valuation allowance is established to reduce the carrying cost to fair value. Fair value is based on a valuation model that calculates the present value of estimated net servicing income. The Company obtains a third-party valuation based upon loan level data including note rate, type and term of the underlying loans. The model utilizes a variety of observable inputs for its assumptions, the most significant of which are loan prepayment assumptions and the discount rate used to discount future cash flows. Other assumptions include delinquency rates, servicing cost inflation and annual unit loan cost. MSRs are classified within Level 2 of the fair value hierarchy.
 
Non-Financial Assets and Non-Financial Liabilities Recorded at Fair Value on a Non-Recurring Basis
The Company has no non-financial assets or non-financial liabilities measured at fair value on a recurring basis. Non-financial assets measured at fair value on a non-recurring basis consist of OREO and goodwill and other intangible assets. 

OREO: OREO properties acquired through foreclosure or deed in lieu of foreclosure are recorded at NRV, which is the fair value of the real estate, less estimated costs to sell. Any write-down of the recorded investment in the related loan is charged to the ALL upon transfer to OREO. Upon acquisition of a property, a current appraisal is used or an internal valuation is prepared to substantiate fair value of the property. After foreclosure, management periodically, but at least annually, obtains updated valuations of the OREO properties and, if additional impairments are deemed necessary, the subsequent write-downs for declines in value are recorded through a valuation allowance and a provision for losses charged to other non-interest expense within the consolidated statements of income. As management considers appropriate, adjustments are made to the appraisal obtained for the OREO property to account for recent sales activity of comparable properties, changes in the condition of the property, and changes in market conditions. These adjustments are not observable in an active market and are classified as Level 3.

Goodwill and Other Intangible Assets: Goodwill represents the excess cost of an acquisition over the fair value of the net assets acquired. The fair value of goodwill is estimated by utilizing several standard valuation techniques, including discounted cash flow analyses, bank merger multiples, and/or an estimation of the impact of business conditions and investor activities on the long-term value of the goodwill. Should an impairment of either reporting unit's goodwill occur, the associated goodwill is written-down to fair value and the impairment charge is recorded within non-interest expense in the consolidated statements of income. The Company conducts an annual impairment test of goodwill in the fourth quarter each year, or more frequently as necessary. There have been no indications or triggering events during for the three months ended March 31, 2016 for which management believes that it is more likely than not that goodwill is impaired.

The Company's core deposit intangible assets represent the estimated value of acquired customer relationships and are amortized on a straight-line basis over the estimated life of those relationships. Core deposit intangibles are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. If necessary, management will test the core deposit intangibles for impairment by comparing its carrying value to the expected undiscounted cash flows of the assets. If the undiscounted cash flows of the intangible assets exceed its carrying value then the intangible assets are deemed to be fully recoverable and not impaired. However, if the undiscounted cash flows of the intangible assets are less than its carrying value than an impairment charge is recorded to mark the carrying value of the intangible assets to fair value. There were no events or changes in circumstances occurred for the three months ended March 31, 2016 that indicated the carrying amount may not be recoverable.

30


The table below highlights financial and non-financial assets measured and recorded at fair value on a non-recurring basis as of March 31, 2016 and December 31, 2015.
 
Fair
Value
 
Readily
Available
Market
Prices
(Level 1)
 
Observable
Market
Data
(Level 2)
 
Company
Determined
Fair Value
(Level 3)
March 31, 2016
 
 
 

 
 

 
 

Financial assets:
 
 
 

 
 

 
 

Collateral-dependent impaired loans
$
1,091

 
$
—

 
$
—

 
$
1,091

MSRs(1)
1,523

 
—

 
1,523

 
—

Non-financial assets:
 
 
 
 
 
 
 
OREO
1,228

 
—

 
—

 
1,228

December 31, 2015
 
 
 

 
 

 
 

Financial assets:
 
 
 

 
 

 
 

Collateral-dependent impaired loans
$
1,971

 
$
—

 
$
—

 
$
1,971

MSRs(1)
440

 
—

 
440

 
—

Non-financial assets:
 
 


 


 


OREO
1,304

 
—

 
—

 
1,304

(1) Represents MSRs deemed to be impaired and a valuation allowance established to carry at fair value.

The following table presents the valuation methodology and unobservable inputs for Level 3 assets measured at fair value on a non-recurring basis at March 31, 2016 and December 31, 2015:
 
Fair Value
 
Valuation Methodology
 
Unobservable input
 
Discount Range
(Weighted-Average)
March 31, 2016
 
 
 
 
 
 
 
 
Collateral-dependent impaired loans:
 

 
 
 
 
 
 
 
Partially charged-off
$
131

 
Market approach appraisal of collateral
 
Management adjustment of appraisal
 
0%
(0%)
 
 
 
 
 
Estimated selling costs
 
0 - 10%
(9%)
Specifically reserved
960

 
Market approach appraisal of collateral
 
Management adjustment of appraisal
 
0 - 50%
(14%)
 
 
 
 
 
Estimated selling costs
 
0 - 10%
(7%)
OREO
1,228

 
Market approach appraisal of collateral
 
Management adjustment of appraisal
 
0 - 73%
(23%)
 
 
 
 
 
Estimated selling cost
 
10%
(10%)
December 31, 2015
 

 
 
 
 
 
 
 
Collateral-dependent impaired loans:
 

 
 
 
 
 
 
 
Partially charged-off
$
399

 
Market approach appraisal of collateral
 
Management adjustment
of appraisal
 
0%
(0%)
 
 
 
 
 
Estimated selling costs
 
0 - 10%
(7%)
Specifically reserved
1,572

 
Market approach appraisal of collateral
 
Management adjustment
of appraisal
 
0 - 57%
(45%)
 
 
 
 
 
Estimated selling costs
 
10%
(10%)
OREO
1,304

 
Market approach appraisal of collateral
 
Management adjustment
of appraisal
 
0 - 43%
(18%)
 
 
 
 
 
Estimated selling costs
 
10%
(10%)


31


GAAP requires disclosure of the fair value of financial assets and financial liabilities, including those financial assets and financial liabilities that are not measured and reported at fair value on a recurring basis or non-recurring basis. The methodologies for estimating the fair value of financial assets and financial liabilities that are measured at fair value on a recurring or non-recurring basis are discussed above. The following methods and assumptions were used by the Company in estimating the fair values of its other financial instruments.
 
Cash and Due from Banks:  The carrying amounts reported in the consolidated statements of condition approximate fair value.

HTM securities:  The fair value is estimated utilizing prices provided by an independent pricing service based on recent trading activity and other observable information including, but not limited to, dealer quotes, market spreads, cash flows, market interest rate curves, market consensus prepayment speeds, credit information, and the bond’s terms and conditions. The fair value is classified as Level 2.
 
Loans:  For variable rate loans that reprice frequently and have no significant change in credit risk, fair values are based on carrying values. The fair value of other loans is estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities.
 
Interest Receivable and Payable:  The carrying amounts reported in the consolidated statements of condition approximate fair value.
 
Deposits:  The fair value of demand, interest checking, savings and money market deposits is determined as the amount payable on demand at the reporting date. The fair value of time deposits is estimated by discounting the estimated future cash flows using market rates offered for deposits of similar remaining maturities.
 
Borrowings:  The carrying amounts of short-term borrowings from the FHLB, securities sold under repurchase agreements, notes payable and other short-term borrowings approximate fair value. The fair values of long-term borrowings and commercial repurchase agreements are based on the discounted cash flows using current rates for advances of similar remaining maturities.
 
Subordinated Debentures:  The fair values of are based on quoted prices from similar instruments in inactive markets.

32


The following table presents the carrying amounts and estimated fair value for financial instrument assets and liabilities measured at March 31, 2016: 
 
Carrying
Amount
 
Fair Value
 
Readily
Available
Market
Prices
(Level 1)
 
Observable
Market
Prices
(Level 2)
 
Company
Determined
Market
Prices
(Level 3)
Financial assets:
 

 
 

 
 

 
 

 
 

Cash and due from banks
$
72,201

 
$
72,201

 
$
72,201

 
$
—

 
$
—

AFS securities
800,029

 
800,029

 
—

 
800,029

 
—

HTM securities
87,950

 
90,729

 
—

 
90,729

 
—

Loans held for sale
16,632

 
16,632

 
—

 
16,632

 
—

Residential real estate loans(1)
807,458

 
827,116

 
—

 
—

 
827,116

Commercial real estate loans(1)
942,101

 
945,232

 
—

 
—

 
945,232

Commercial loans(1)(2)
362,854

 
366,453

 
—

 
—

 
366,453

Home equity loans(1)
341,875

 
345,834

 
—

 
—

 
345,834

Consumer loans(1)
17,007

 
18,136

 
—

 
—

 
18,136

MSRs(3)
1,574

 
2,050

 
—

 
2,050

 
—

Interest receivable
8,785

 
8,785

 
—

 
8,785

 
—

Customer loan swaps
9,426

 
9,426

 
—

 
9,426

 
—

Interest rate lock commitments
431

 
431

 
—

 
431

 
—

Financial liabilities:
 

 
 

 
 
 
 
 
 
Deposits
$
2,674,832

 
$
2,677,503

 
$
—

 
$
2,677,503

 
$
—

FHLB advances
55,000

 
56,097

 
—

 
56,097

 
—

Commercial repurchase agreements
30,041

 
30,920

 
—

 
30,920

 
—

Other borrowed funds
515,432

 
516,633

 


 
516,633

 
—

Subordinated debentures
58,638

 
40,800

 
—

 
40,800

 
—

Interest payable
641

 
641

 
—

 
641

 
—

Junior subordinated debt interest rate swaps
11,934

 
11,934

 
—

 
11,934

 
—

Forecasted interest rate swaps
1,110

 
1,110

 
—

 
1,110

 
—

Customer loan swaps
9,426

 
9,426

 
—

 
9,426

 
—

(1)
The presented carrying amount is net of the allocated ALL.
(2)
Includes the HPFC loan portfolio.
(3)
Reported fair value represents all MSRs currently being serviced by the Company, regardless of carrying amount.


33


The following table presents the carrying amounts and estimated fair value for financial instrument assets and liabilities measured at December 31, 2015:
 
Carrying
Amount
 
Fair Value
 
Readily
Available
Market
Prices
(Level 1)
 
Observable
Market
Prices
(Level 2)
 
Company
Determined
Market
Prices
(Level 3)
Financial assets:
 

 
 

 
 

 
 

 
 

Cash and due from banks
$
79,488

 
$
79,488

 
$
79,488

 
$
—

 
$
—

AFS securities
750,338

 
750,338

 
—

 
750,338

 
—

HTM securities
84,144

 
85,647

 
—

 
85,647

 
—

Loans held for sale
10,958

 
10,958

 
—

 
10,958

 
—

Residential real estate loans(1)
808,180

 
820,774

 
—

 
—

 
820,774

Commercial real estate loans(1)
922,257

 
911,316

 
—

 
—

 
911,316

Commercial loans(1)(2)
371,684

 
371,854

 
—

 
—

 
371,854

Home equity loans(1)
349,215

 
348,963

 
—

 
—

 
348,963

Consumer loans(1)
17,704

 
18,163

 
—

 
—

 
18,163

MSRs(3)
2,161

 
2,947

 
—

 
2,947

 
—

Interest receivable
7,985

 
7,985

 
—

 
7,985

 
—

Customer loan swaps
3,166

 
3,166

 
—

 
3,166

 
—

Interest rate lock commitments
139

 
139

 
—

 
139

 
—

Financial liabilities:
  

 
  

 
  

 
  

 


Deposits
$
2,726,379

 
$
2,726,300

 
$
—

 
$
2,726,300

 
$
—

FHLB advances
55,000

 
56,001

 
—

 
56,001

 
—

Commercial repurchase agreements
30,052

 
30,931

 
—

 
30,931

 
—

Other borrowed funds
428,711

 
428,778

 
—

 
428,778

 
—

Subordinated debentures
58,599

 
42,950

 
—

 
42,950

 
—

Interest payable
641

 
641

 
—

 
641

 
—

Junior subordinated debt interest rate swaps
9,229

 
9,229

 
—

 
9,229

 
—

Forecasted interest rate swaps
576

 
576

 
—

 
576

 
—

Customer loan swaps
3,166

 
3,166

 
—

 
3,166

 
—

(1)
The presented carrying amount is net of the allocated ALL.
(2)
Includes the HPFC loan portfolio.
(3)
Reported fair value represents all MSRs currently being serviced by the Company, regardless of carrying amount.

NOTE 11 – COMMITMENTS, CONTINGENCIES AND DERIVATIVES

Legal Contingencies 
In the normal course of business, the Company and its subsidiaries are subject to pending and threatened legal actions. Although the Company is not able to predict the outcome of such actions, after reviewing pending and threatened actions with counsel, management believes that based on the information currently available the outcome of such actions, individually or in the aggregate, will not have a material adverse effect on the Company’s consolidated financial position as a whole.
 
Reserves are established for legal claims only when losses associated with the claims are judged to be probable and the loss can be reasonably estimated. In many lawsuits and arbitrations, it is not possible to determine whether a liability has been incurred or to estimate the ultimate or minimum amount of that liability until the case is close to resolution, in which case a reserve will not be recognized until that time.
 
As of March 31, 2016 and December 31, 2015, the Company did not have any material loss contingencies for which accruals were provided for and/or disclosure was deemed necessary.


34


Financial Instruments
In the normal course of business, the Company is a party to both on and off-balance sheet financial instruments involving, to varying degrees, elements of credit risk and interest rate risk in addition to the amounts recognized in the consolidated statements of condition.

The following is a summary of the contractual and notional amounts of the Company’s financial instruments:
 
March 31,
2016
 
December 31,
2015
Lending-Related Instruments:
 

 
 

Loan origination commitments and unadvanced lines of credit:
 

 
 

Home equity
$
484,537

 
$
464,701

Commercial and commercial real estate
78,875

 
94,791

Residential
31,554

 
16,256

Letters of credit
4,218

 
4,468

Other commitments
534

 
433

Derivative Financial Instruments:
 
 
 

Customer loan swaps
$
319,630

 
$
285,888

Forecasted interest rate swaps
50,000

 
50,000

Junior subordinated debt interest rate swaps
43,000

 
43,000

Interest rate lock commitments
34,220

 
20,735


Lending-Related Instruments
The contractual amounts of the Company’s lending-related financial instruments do not necessarily represent future cash requirements since certain of these instruments may expire without being funded and others may not be fully drawn upon. These instruments are subject to the Company’s credit approval process, including an evaluation of the customer’s creditworthiness and related collateral requirements. Commitments generally have fixed expiration dates or other termination clauses.

Derivative Financial Instruments
The Company uses derivative financial instruments for risk management purposes (primarily interest rate risk) and not for trading or speculative purposes. The Company controls the credit risk of these instruments through collateral, credit approvals and monitoring procedures. Additionally, as part of Company's normal mortgage origination process, it provides the borrower with the option to lock their interest rate based on current market prices. During the period from commitment date to the loan closing date, the Company is subject to the risk of interest rate change. In an effort to mitigate such risk the Company may enter into forward delivery sales commitments, typically on a "best-efforts" basis, with certain approved investors.

Derivative instruments are carried at fair value in the Company’s financial statements. The accounting for changes in the fair value of a derivative instrument is dependent upon whether or not it qualifies and has been designated as a hedge for accounting purposes, and further, by the type of hedging relationship.

The Company has designated its interest rate swaps on its junior subordinated debentures and its interest rate swaps on forecasted 30-day FHLBB borrowings as cash flow hedges. The change in the fair value of the Company's cash flow hedges is accounted within OCI, net of tax. Quarterly, in conjunction with financial reporting, the Company assesses each cash flow hedge for ineffectiveness. To the extent any significant ineffectiveness is identified, this amount is recorded within the consolidated statements of income. Furthermore, the Company will reclassify the gain or loss on the effective portion of the cash flow hedge from OCI into interest within the consolidated statements of income in the period the hedged transaction affects earnings.

The change in fair value of the Company's other derivative instruments, not designated and qualifying as hedges, are accounted for within the consolidated statements of income.
  

35


Junior Subordinated Debt Interest Rate Swaps:
The Company, from time to time, will enter into an interest rate swap agreement with a counterparty to manage interest rate risk associated with its variable rate borrowings. The Company’s interest rate swap arrangements contain provisions that require the Company to post cash collateral with the counterparty for contracts that are in a net liability position based on their fair values and the Company’s credit rating. If the interest rate swaps are in a net asset position based on their fair value, the counterparty is required to post collateral to the Company. The collateral posted by the Company (or counterparty) is not readily available and has been presented within cash and due from banks on the consolidated statements of condition. At March 31, 2016 and December 31, 2015, the Company had a notional amount of $43.0 million in variable-for-fixed interest rate swap agreements on its junior subordinated debentures and $13.0 million of cash as collateral to the counterparty at March 31, 2016.

The details of the interest rate swap agreements are as follows: 

 

 

 
 
 
 
 
March 31, 2016
 
December 31, 2015
Notional
Amount
 
Trade
Date
 
Maturity Date
 
Variable Index
Received
 
Fixed Rate
Paid
 
Fair Value(1)
 
Fair Value(1)
$
10,000

 
3/18/2009
 
6/30/2021
 
3-Month USD LIBOR
 
5.09%
 
$
(1,299
)
 
$
(1,038
)
10,000

 
7/8/2009
 
6/30/2029
 
3-Month USD LIBOR
 
5.84%
 
(3,233
)
 
(2,537
)
10,000

 
5/6/2010
 
6/30/2030
 
3-Month USD LIBOR
 
5.71%
 
(3,218
)
 
(2,477
)
5,000

 
3/14/2011
 
3/30/2031
 
3-Month USD LIBOR
 
4.35%
 
(1,687
)
 
(1,301
)
8,000

 
5/4/2011
 
7/7/2031
 
3-Month USD LIBOR
 
4.14%
 
(2,497
)
 
(1,876
)
$
43,000

 
 
 
 
 
 
 
 
 
$
(11,934
)
 
$
(9,229
)
(1) Presented within accrued interest and other liabilities on the consolidated statements of condition.

For the three months ended March 31, 2016 or 2015, the Company did not record any ineffectiveness on these cash flow hedges within the consolidated statements of income.

Net payments to the counterparty for the three months ended March 31, 2016 and 2015 were $316,000 and $343,000 and have been classified as cash flows from operating activities in the consolidated statements of cash flows.

Forecasted Interest Rate Swaps:
In the first quarter of 2015, the Bank entered into two interest rate swap arrangements with a counterparty on two tranches of 30-day FHLBB advances with a total notional amount of $50.0 million. Each derivative arrangement commenced on February 25, 2016, with one contract set to expire on February 25, 2018 and the other on February 25, 2019. The Bank entered into these forward-starting interest rate swaps to mitigate its interest rate exposure on borrowings in a rising interest rate environment. The Bank has designated each arrangement as a cash flow hedge in accordance with GAAP, and, therefore, the change in unrealized gains or losses on the derivative instruments is recorded within AOCI, net of tax. Also, quarterly, in conjunction with financial reporting, the Company assesses each derivative instrument for ineffectiveness. To the extent any significant ineffectiveness is identified this amount would be recorded within the consolidated statements of income. For the three months ended March 31, 2016, the Company did not record any ineffectiveness within the consolidated statements of income.

The Bank's arrangement with the counterparty requires it to post cash collateral for contracts in a net liability position based on their fair values and the Bank's credit rating. If the interest rate swaps are in a net asset position based on their fair value, the counterparty is required to post collateral to the Company. The collateral posted by the Company (or counterparty) is not readily available and is presented within cash and due from banks on the consolidated statements of condition. At March 31, 2016, the Bank posted cash collateral with the counterparty of $1.3 million to the counterparty.


36


The details of the interest rate swap agreements are as follows:
 
 
 
 
 
 
 
 
 
 
March 31, 2016
 
December 31, 2015
Notional
Amount
 
Trade
Date
 
Maturity Date
 
Variable Index
Received
 
Fixed Rate
Paid
 
Fair Value(1)
 
Fair Value(1)
$
25,000

 
2/25/2015
 
2/25/2018
 
1-Month
USD LIBOR
 
1.54%
 
$
(413
)
 
$
(230
)
25,000

 
2/25/2015
 
2/25/2019
 
1-Month
USD LIBOR
 
1.74%
 
(697
)
 
(346
)
$
50,000

 
 
 
 
 
 
 
 
 
$
(1,110
)
 
$
(576
)
(1) Presented within accrued interest and other liabilities on the consolidated statements of condition.
 
 

Net payments to the counterparty for the three months ended March 31, 2016 were $49,000 and have been classified as cash flows from operating activities in the consolidated statements of cash flows.

Customer Loan Swaps:
The Company will enter into interest rate swaps with its commercial customers, from time to time, to provide them with a means to lock into a long-term fixed rate, while simultaneously the Company enters into an arrangement with a counterparty to swap the fixed rate to a variable rate to allow it to effectively manage its interest rate exposure.

The Company's customer loan level derivative program is not designated as a hedge for accounting purposes. As the interest rate swap agreements have substantially equivalent and offsetting terms, they do not materially change the Company’s interest rate risk or present any material exposure to the Company's consolidated statements of income. The Company records its customer loan swaps at fair value and presents such on a gross basis within other assets and accrued interest and other liabilities on the consolidated statements of condition.

The following table presents the total positions, notional and fair value of the Company's customer loans swaps with its commercial customers and the corresponding interest rate swap agreements with counterparty for the periods indicated:
 
 
March 31, 2016
 
December 31, 2015
 
 
Number of Positions
 
Notional
 
Fair Value
 
Number of Positions
 
Notional
 
Fair Value
Receive fixed, pay variable(1)
 
32

 
$
159,815

 
$
9,426

 
28

 
$
142,944

 
$
3,166

Pay fixed, received variable(2)
 
32

 
159,815

 
(9,426
)
 
28

 
142,944

 
(3,166
)
(1) Presented within other assets on the consolidated statements of condition.
(2) Presented within accrued interest and other liabilities on the consolidated statements of condition.

The Company seeks to mitigate its customer counterparty credit risk exposure through its loan policy and underwriting process, which includes credit approval limits, monitoring procedures, and obtaining collateral, where appropriate. The Company seeks to mitigate its institutional counterparty credit risk exposure by limiting the institutions for which it will enter into interest swap arrangements through an approved listing by the Company's board of directors. The Company's arrangement with an institutional counterparty requires it to post collateral for contracts in a net liability position based on their fair values and the Bank's credit rating or receive collateral for contracts in a net asset position. At March 31, 2016, the Company posted cash collateral with the counterparty of $10.8 million. The collateral posted by the Company (or counterparty) is not readily available and is presented within cash and due from banks on the consolidated statements of condition.
 

37


Interest Rate Locks Commitments:
As part of originating residential and commercial loans, the Company may enter into rate lock agreements with customers and may issue commitment letters to customers, which are considered interest rate lock commitments. At March 31, 2016 and December 31, 2015, our pipeline of mortgage loans with interest rate lock commitments were as follows:
 
 
March 31, 2016
 
December 31, 2015
 
 
Notional
 
Fair Value
 
Notional
 
Fair Value
Mortgage interest rate locks(1)
 
$
34,220

 
$
431

 
$
20,735

 
$
139

(1) Presented within other assets on the consolidated statements of condition.

For the three months ended March 31, 2016 and 2015 the unrealized gains from the change in fair value on the Company's mortgage interest rate locks reported within mortgage banking income, net, on consolidated statements of income was $292,000 and $2,000, respectively.

The table below presents the effect of the Company’s derivative financial instruments included in OCI and current earnings for the periods indicated:
 
 
For The
Three Months Ended
March 31,
 
 
2016
 
2015
Derivatives designated as cash flow hedges
 
 
 
 
Net change in unrealized losses on cash flow hedging derivatives, net of tax
 (effective portion)
 
$
(2,105
)
 
$
(1,172
)
Net reclassification adjustment for effective portion of cash flow hedges included in interest expense (effective portion), gross
 
$
(365
)
 
$
(343
)

The Company expects approximately $2.1 million (pre-tax) to be reclassified to interest expense from OCI, related to the Company’s cash flow hedges, in the next twelve months. This reclassification is due to anticipated payments that will be made and/or received on the swaps based upon the forward curve as of March 31, 2016.

NOTE 12 – RECENT ACCOUNTING PRONOUNCEMENTS
 
In August 2015, the FASB issued ASU No. 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date. The ASU was issued to defer the effective date of Update 2014-09, Revenue from Contracts with Customers (Topic 606), for all entities by one year. ASU 2014-09 was issued to clarify the principles for recognizing revenue and to develop a common revenue standard. ASU 2014-09 is now effective for annual reporting periods beginning after December 15, 2017, including interim reporting periods within that reporting period. The Company continues to evaluate the potential impact of ASU 2014-09, as updated by ASU 2015-14, but currently does not expect the ASU to have a material effect on its consolidated financial statements.

In January 2016, the FASB issued ASU No. 2016-01, Income Statement - Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Liabilities. The ASU was issued to enhance the reporting model for financial instruments to provide the users of financial statements with more useful information for decisions. The ASU is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Early adoption is permitted for only one of the six amendments, otherwise it is not permitted. The Company is evaluating the potential impact of the ASU on its consolidated financial statements.

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). The ASU was issued 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. The ASU is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, early application is permitted. The Company expects the ASU will have a material effect on its consolidated financial statements and is currently evaluating the impact.

38



In March 2016, the FASB issued ASU No. 2016-09, Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. The ASU was issued to simplify accounting for share-based payment transactions, including income tax consequences, classification of awards, and classification on the statement of cash flows. The ASU is effective for annual periods beginning after December 15, 2016 and interim periods within those annual periods, early adoption is permitted. The Company is evaluating the potential impact of the ASU on its consolidated financial statements.

39


ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(Dollar Amounts In Tables Expressed in Thousands, Except Per Share Data)

FORWARD-LOOKING STATEMENTS
 
The discussions set forth below and in the documents we incorporate by reference herein contain certain statements that may be considered forward-looking statements under the Private Securities Litigation Reform Act of 1995, including certain plans, exceptions, goals, projections, and statements, which are subject to numerous risks, assumptions, and uncertainties. Forward-looking statements can be identified by the use of the words “believe,” “expect,” “anticipate,” “intend,” “estimate,” “assume,” “plan,” “target,” or “goal” or future or conditional verbs such as “will,” “may,” “might,” “should,” “could” and other expressions which predict or indicate future events or trends and which do not relate to historical matters. Forward-looking statements should not be relied on, because they involve known and unknown risks, uncertainties and other factors, some of which are beyond the control of the Company. These risks, uncertainties and other factors may cause the actual results, performance or achievements of the Company to be materially different from the anticipated future results, performance or achievements expressed or implied by the forward-looking statements.
 
The following factors, among others, could cause the Company’s financial performance to differ materially from the Company’s goals, plans, objectives, intentions, expectations and other forward-looking statements:
 
•
weakness in the United States economy in general and the regional and local economies within the New England region and Maine, which could result in a deterioration of credit quality, an increase in the allowance for loan losses or a reduced demand for the Company’s credit or fee-based products and services;
•
changes in trade, monetary, and fiscal policies and laws, including interest rate policies of the Board of Governors of the Federal Reserve System;
•
inflation, interest rate, market, and monetary fluctuations;
•
competitive pressures, including continued industry consolidation and the increased financial services provided by non-banks;
•
volatility in the securities markets that could adversely affect the value or credit quality of the Company’s assets, impairment of goodwill, the availability and terms of funding necessary to meet the Company’s liquidity needs, and could lead to impairment in the value of securities in the Company's investment portfolio;
•
changes in information technology that require increased capital spending;
•
changes in consumer spending and savings habits;
•
changes in tax, banking, securities and insurance laws and regulations;
•
changes in accounting policies, practices and standards, as may be adopted by the regulatory agencies as well as the Financial Accounting Standards Board ("FASB"), and other accounting standard setters; and
•
the ability of the Company to achieve cost savings as a result of the merger or in achieving such cost savings within the projected timeframe.

You should carefully review all of these factors, and be aware that there may be other factors that could cause differences, including the risk factors listed in Part II, Item 1A. “Risk Factors” of this Form 10-Q and in our Annual Report on Form 10-K for the year ended December 31, 2015, as updated by the Company's quarterly reports on Form 10-Q, including this report, and other filings with the Securities and Exchange Commission. Readers should carefully review the risk factors described therein and should not place undue reliance on our forward-looking statements.
 
These forward-looking statements were based on information, plans and estimates at the date of this report, and we undertake no obligation to update any forward-looking statements to reflect changes in underlying assumptions or factors, new information, future events or other changes, except to the extent required by applicable law or regulation.

  

40


CRITICAL ACCOUNTING POLICIES

Critical accounting policies are those that are reflective of significant judgments and uncertainties, and could potentially result in materially different results under different assumptions and conditions. In preparing the Company’s consolidated financial statements, management is required to make significant estimates and assumptions that affect assets, liabilities, revenues and expenses reported. Actual results could materially differ from our current estimates as a result of changing conditions and future events. Several estimates are particularly critical and are susceptible to significant near-term change, including (i) the allowance for credit losses; (ii) accounting for acquisitions and the subsequent review of goodwill and other identifiable intangible assets generated in an acquisition for impairment; (iii) OTTI of investments; (iv) accounting for postretirement plans; and (v) income taxes. There have been no material changes to our critical accounting policies as disclosed within our Annual Report on Form 10-K for the year ended December 31, 2015. Refer to the Annual Report on Form 10-K for the year ended December 31, 2015 for discussion of the Company's critical accounting policies.

NON-GAAP FINANCIAL MEASURES AND RECONCILIATION TO GAAP

In addition to evaluating the Company’s results of operations in accordance with GAAP, management supplements this evaluation with an analysis of certain non-GAAP financial measures. We believe these non-GAAP financial measures help investors in understanding the Company’s operating performance and trends and allow for better performance comparisons to other banks. In addition, these non-GAAP financial measures remove the impact of unusual items that may obscure trends in the Company’s underlying performance. These disclosures should not be viewed as a substitute for GAAP financial results, nor are they necessarily comparable to non-GAAP financial measures that may be presented by other financial institutions.

Efficiency Ratio. The efficiency ratio, which represents an approximate measure of the cost required for the Company to generate a dollar of revenue, is the ratio of (i) total non-interest expense, excluding merger and acquisition costs (the numerator) to (ii) net interest income on a fully taxable equivalent basis (assumed 35% tax rate) plus total non-interest income (the denominator). 
 
 
Three Months Ended March 31,
 
 
2016
 
2015
Non-interest expense, as presented
 
$
22,928

 
$
16,801

Less: merger and acquisition costs
 
644

 
735

Core operating expenses
 
$
22,284

 
$
16,066

Net interest income, as presented
 
$
27,952

 
$
19,434

Add: effect of tax-exempt income
 
525

 
346

Non-interest income, as presented
 
7,917

 
6,147

Net interest income and non-interest income, adjusted
 
$
36,394

 
$
25,927

Non-GAAP efficiency ratio
 
61.23
%
 
61.97
%
GAAP efficiency ratio
 
63.92
%
 
65.68
%
  
Tax Equivalent Net Interest Income. Tax-equivalent net interest income is net interest income plus the taxes that would have been paid (assumed 35% tax rate) had tax-exempt securities been taxable. This number attempts to enhance the comparability of the performance of assets that have different tax implications.
 
 
Three Months Ended March 31,
 
 
2016
 
2015
Net interest income, as presented
 
$
27,952

 
$
19,434

Add: effect of tax-exempt income
 
525

 
346

Net interest income, tax equivalent
 
$
28,477

 
$
19,780

 

41


Tangible Book Value Per Share and Tangible Common Equity Ratio.  Tangible book value per share is the ratio of (i) shareholders’ equity less goodwill and other intangibles (the numerator) to (ii) total common shares outstanding at period end (the denominator). We believe this is a meaningful measure as it provides information to assess capital adequacy and is a common measure within our industry.

The tangible common equity ratio is the ratio of (i) shareholders' equity less goodwill and other intangibles (the numerator) to (ii) total assets less goodwill and other intangibles (the denominator). This ratio is a measure used within our industry to assess whether or not a company is highly leveraged. The following table provides a reconciliation between the tangible common equity ratio and shareholders' equity to assets.
 
 
March 31,
2016
 
December 31, 2015
Tangible Book Value Per Share
 
 
 
 
Shareholders’ equity
 
$
375,457

 
$
363,190

Less: goodwill and other intangibles
 
103,458

 
104,324

Tangible shareholders’ equity
 
$
271,999

 
$
258,866

Shares outstanding at period end
 
10,271,083

 
10,220,478

Tangible book value per share
 
$
26.48

 
$
25.33

Book value per share
 
$
36.55

 
$
35.54

Tangible Common Equity Ratio
 
 
 
 
Total assets
 
$
3,762,546

 
$
3,709,344

Less: goodwill and other intangibles
 
103,458

 
104,324

Tangible assets
 
$
3,659,088

 
$
3,605,020

Tangible common equity ratio
 
7.43
%
 
7.18
%
Shareholders' equity to assets
 
9.98
%
 
9.79
%

Core Return On Average Tangible Equity: Core return on average tangible equity is the ratio of (i) net income, adjusted for (a) tax effected amortization of intangible assets, net of tax, and (b) merger and acquisition costs, net of tax (the numerator) to (ii) average shareholders' equity, adjusted for average goodwill and other intangible assets. We believe this is a meaningful measure of our financial performance as it reflects our return on tangible equity in our business, excluding the financial impact of transactions that are not reflective of our core operating activities and the amortization of intangible assets.
 
 
Three Months Ended March 31,
 
 
2016
 
2015
Net income, as presented
 
$
8,334

 
$
5,611

Amortization of intangible assets, net of tax(1)
 
309

 
187

Merger and acquisition costs, net of tax(2)
 
419

 
653

Core tangible operating earnings
 
$
9,062

 
$
6,451

Average shareholders' equity
 
$
369,458

 
$
247,732

Less: average goodwill and other intangible assets
 
103,800

 
48,017

Average tangible equity
 
$
265,658

 
$
199,715

Core return on average tangible equity
 
13.72
%
 
13.10
%
Return on average equity
 
9.07
%
 
9.19
%
(1) Assumed 35.0% tax rate.
(2) Assumed 35.0% tax rate for deductible expenses.


42


Core Operating Earnings, Core Operating Expenses, Core Operating Expenses to Total Average Assets, Core Diluted EPS, Core Return on Average Assets, and Core Return on Average Equity: The following tables provide a reconciliation of GAAP net income, GAAP diluted EPS, GAAP return on average assets, GAAP return on average shareholders' equity, GAAP non-interest expense and GAAP non-interest expense to total average assets for the three months ended March 31, 2016 and 2015 to exclude the financial impact of certain transactions for which management does not believe are representative of its core operations. Management utilizes core operating earnings, core diluted EPS, core return on average assets and average tangible assets, core return on average shareholders' equity, core operating expenses and core operating expenses to total average assets to compare and assess financial results period-over-period.
 
 
Three Months Ended March 31,
 
 
2016
 
2015
Core Operating Earnings:
 
 
 
 
Net income, as presented
 
$
8,334

 
$
5,611

Merger and acquisition costs, net of tax(1)
 
419

 
653

Core operating earnings
 
$
8,753

 
$
6,264

Core Diluted EPS:
 
 
 
 
Diluted EPS, as presented
 
$
0.81

 
$
0.75

Non-core transactions impact
 
0.04

 
0.09

Core diluted EPS
 
$
0.85

 
$
0.84

Core Return on Average Assets:
 
 
 
 
Return on average assets, as presented
 
0.90
%
 
0.82
%
Non-core transactions impact
 
0.04
%
 
0.09
%
Core return on average assets
 
0.94
%
 
0.91
%
Core Return on Average Equity:
 
 
 
 
Return on average equity, as presented
 
9.07
%
 
9.19
%
Non-core transactions impact
 
0.46
%
 
1.06
%
Core return on average equity
 
9.53
%
 
10.25
%
Core Operating Expense and Core Operating Expenses to Total Average Assets:
 
 
 
 
Non-interest expense, as presented
 
$
22,928

 
$
16,801

Less: merger and acquisition costs
 
644

 
735

Core operating expenses
 
$
22,284

 
$
16,066

Total average assets
 
$
3,742,445

 
$
2,784,558

Core operating expense to total average assets (annualized)
 
2.38
%
 
2.31
%
Non-interest expense to total average assets (annualized)
 
2.45
%
 
2.41
%
(1) Assumed 35.0% tax rate for deductible expenses.


43


EXECUTIVE OVERVIEW
 
GAAP net income and diluted EPS for the three months ended March 31, 2016 was $8.3 million and $0.81 per share, respectively, representing an increase of 49% and 8%, respectively, over the same period a year ago. The growth in net income reflects our increased earnings capacity as a larger and combined organization since our completion of the acquisition of SBM on October 16, 2015. Core operating earnings(1) and core diluted EPS(1) continue to be financial measures we monitor and measure ourselves against internally as it excludes the impact of non-recurring costs, primarily SBM acquisition-related costs. Core operating earnings for the three months ended March 31, 2016 were $8.8 million, representing an increase of 40% over the same period a year ago, while core diluted EPS increased 1% to $0.85 per share over the same period a year ago. The modest increase in core diluted EPS over the first quarter of 2015 reflects an increase in weighted-average shares outstanding of 2.8 million shares, or 38%, primarily due to the issuance of 2.7 million shares in the fourth quarter of 2015 associated with the SBM acquisition.

For the first quarter of 2016, our focus was largely on executing our remaining integration initiatives to achieve the operational efficiencies we had set out to complete by the end of the second quarter of 2016 to allow us to meet our $11.4 million cost saves target by year-end as a combined organization. In the first quarter of 2016, we closed HPFC's operations, which included terminating its Boston, Massachusetts, office lease agreement and employees, closing the acquired operations center located in Gardiner, Maine, and consolidating two banking centers into one in Portland, Maine.

With the acquisition of SBM, our mortgage banking platform has become an important revenue stream with loan production now in Southern Maine, New Hampshire and Massachusetts. In the first quarter of 2016, we sold $38.9 million of mortgages that resulted in net gains of $819,000 compared to $4.8 million of mortgage sales and net gains of $129,000 for the first quarter of 2015.

Tangible book value per share grew 5% to $26.48 at March 31, 2016 since year-end. The Company's board of directors approved a $0.30 dividend per common share, reflecting a 37% payout ratio, for payment on April 29, 2016.

The financial metrics below for the three months ended March 31, 2016 and 2015 further highlight the favorable trends within our key operating ratios:
 
 
At or For The
Three Months Ended
March 31,
 
Change
 
 
2016
 
2015
 
Core return on average assets (annualized)(1)
 
0.94
%
 
0.91
%
 
0.03
 %
Core return on average tangible equity (annualized)(1)
 
13.72
%
 
13.10
%
 
0.62
 %
Efficiency ratio(1)
 
61.23
%
 
61.97
%
 
(0.74
)%
Tangible common equity ratio(1)
 
7.43
%
 
7.38
%
 
0.05
 %
Tangible book value per share(1)
 
$
26.48

 
$
27.41

 
$
(0.93
)

RESULTS OF OPERATIONS
 
Net Interest Income
Net interest income is the interest earned on loans, securities, and other interest-earning assets, plus net loan fees, origination costs, and accretion or amortization of fair value marks on loans and/or CDs created in purchase accounting, less the interest paid on interest-bearing deposits and borrowings. Net interest income, which is our largest source of revenue and accounts for 78% and 76% of total revenues (net interest income and non-interest income) for the three months ended March 31, 2016 and 2015, respectively, is affected by factors including, but not limited to, changes in interest rates, loan and deposit pricing strategies and competitive conditions, the volume and mix of interest-earning assets and liabilities, and the level of non-performing assets.





_____________________________________________________________________________________________________
1 This is a non-GAAP measure. Refer to "—Non-GAAP Financial Measures and Reconciliation to GAAP" for further details.

44


Net Interest Income - Three Months Ended March 31, 2016 and 2015. Net interest income was $28.5 million on a fully-taxable equivalent basis for the first quarter of 2016 compared to $19.8 million the same period a year ago, representing an increase of $8.7 million, or 44%. The increase was driven by higher average interest-earning assets of $807.2 million, or 31%, due to the acquisition of $615.2 million of loans in the fourth quarter of 2015 as part of the acquisition of SBM as well as strong organic loan growth period-over-period. Our average loan balance for the first quarter of 2016 totaled $2.5 billion, representing an increase of $720.2 million, or 40%, over the first quarter of 2015. Our NIM (fully-taxable equivalent) for the first quarter of 2016 was 3.35% compared to 3.07% for the first quarter of 2015. Our NIM (fully-taxable equivalent) improved period-over-period as our average yield on earning assets for the first quarter of 2016 increased 28 basis points to 3.82% compared to the first quarter of 2015. Our first quarter 2016 NIM (fully-taxable equivalent) benefited from HPFC's higher yielding commercial loans, as well as from certain non-recurring and non-core income transactions, including (i) collections totaling $370,000 of previously charged-off acquired SBM loans, and (ii) accretion of the loan and CD fair value marks created in purchase accounting totaling $1.1 million for the first quarter of 2016. Excluding these transactions, our loan yield and NIM on a fully-taxable equivalent basis for the first quarter of 2016 was 4.13% and 3.18%, respectively.

For the three months ended March 31, 2016, our interest expense associated with deposits and borrowings totaled $4.0 million compared to $3.0 million for the same period of 2015, representing an increase of $1.0 million, or 34%. Our average funding balance increased 33% primarily due to $687.0 million of deposits acquired as part of the SBM acquisition in the fourth quarter of 2015.

The SBM acquisition in the fourth quarter of 2015 improved our interest rate risk position in a rising rate environment due to the level of floating rate loans within the acquired loan portfolio as well as total deposits acquired of $687.0 million. Additionally, we continue to utilize customer loans swaps within our commercial real estate loan portfolio to improve our interest rate risk position in a rising rate environment by swapping fixed rate for variable rate. At March 31, 2016, our total notional on customer loan swaps with our borrowers totaled $159.8 million compared to $142.9 million at December 31, 2015 and $45.8 million at March 31, 2015 (we have matching notional agreements with a counterparty).

The following table presents average balances, interest income, interest expense, and the corresponding average yields earned and cost of funds, as well as net interest income, net interest rate spread and NIM (fully-taxable equivalent) for the three months ended March 31, 2016 and 2015:

45


Quarterly Average Balance, Interest and Yield/Rate Analysis
 
 
For The Three Months Ended
 
 
March 31, 2016
 
March 31, 2015
 
 
Average Balance
 
Interest
 
Yield/Rate
 
Average Balance
 
Interest
 
Yield/Rate
Assets
 
 
 
 
 
 
 
 
 
 
 
 
Interest-earning assets:
 
 
 
 
 
 
 
 
 
 
 
 
Securities - taxable
 
$
781,525

 
$
4,251

 
2.18
%
 
$
745,518

 
$
3,978

 
2.13
%
Securities - nontaxable(1)
 
102,057

 
1,099

 
4.31
%
 
51,099

 
595

 
4.66
%
Loans(2)(3):
 
 
 
 
 
 
 
 
 
 
 
 
Residential real estate
 
825,022

 
8,351

 
4.05
%
 
585,581

 
6,014

 
4.11
%
Commercial real estate
 
946,938

 
10,573

 
4.42
%
 
652,770

 
6,958

 
4.26
%
Commercial(1)
 
277,038

 
2,789

 
3.98
%
 
243,068

 
2,364

 
3.89
%
Municipal(1)
 
13,409

 
119

 
3.58
%
 
10,551

 
100

 
3.85
%
Consumer
 
362,636

 
3,751

 
4.16
%
 
289,301

 
2,785

 
3.91
%
HPFC
 
76,432

 
1,573

 
8.14
%
 
—

 
—

 
—
%
Total loans 
 
2,501,475

 
27,156

 
4.32
%
 
1,781,271

 
18,221

 
4.10
%
Total interest-earning assets
 
3,385,057

 
32,506

 
3.82
%
 
2,577,888

 
22,794

 
3.54
%
Cash and due from banks
 
79,606

 
 
 
 
 
46,974

 
 
 
 
Other assets
 
299,067

 
 
 
 
 
180,924

 
 
 
 
Less: ALL
 
(21,285
)
 
 
 
 
 
(21,228
)
 
 
 
 
Total assets
 
$
3,742,445

 
 
 
 
 
$
2,784,558

 
 
 
 
Liabilities & Shareholders' Equity
 
 
 
 
 
 
 
 
 
 
 
 
Deposits:
 
 
 
 
 
 
 
 
 
 
 
 
Demand
 
$
345,173

 
$
—

 
—

 
$
257,161

 
$
—

 
—

Interest checking
 
716,941

 
165

 
0.09
%
 
480,580

 
85

 
0.07
%
Savings
 
450,574

 
67

 
0.06
%
 
266,032

 
38

 
0.06
%
Money market
 
477,190

 
468

 
0.39
%
 
390,568

 
289

 
0.30
%
Certificates of deposit(3)
 
508,223

 
930

 
0.74
%
 
313,518

 
721

 
0.93
%
Total deposits
 
2,498,101

 
1,630

 
0.26
%
 
1,707,859

 
1,133

 
0.27
%
Borrowings:
 
 
 
 
 
 
 
 
 
 
 
 
Brokered deposits
 
202,163

 
412

 
0.82
%
 
225,635

 
396

 
0.71
%
Subordinated debentures
 
58,780

 
851

 
5.82
%
 
44,037

 
625

 
5.75
%
Other borrowings
 
562,228

 
1,136

 
0.81
%
 
522,109

 
860

 
0.67
%
Total borrowings
 
823,171

 
2,399

 
1.17
%
 
791,781

 
1,881

 
0.96
%
Total funding liabilities
 
3,321,272

 
4,029

 
0.49
%
 
2,499,640

 
3,014

 
0.49
%
Other liabilities
 
51,715

 
 
 
 
 
37,186

 
 
 
 
Shareholders' equity
 
369,458

 
 
 
 
 
247,732

 
 
 
 
Total liabilities & shareholders' equity
 
$
3,742,445

 
 
 
 
 
$
2,784,558

 
 
 
 
Net interest income (fully-taxable equivalent)
 
 
 
28,477

 
 
 
 
 
19,780

 
 
Less:  fully-taxable equivalent adjustment
 
 
 
(525
)
 
 
 
 
 
(346
)
 
 
Net interest income
 
 
 
$
27,952

 
 
 
 
 
$
19,434

 
 
Net interest rate spread (fully-taxable equivalent)
 
 
 
 
 
3.33
%
 
 
 
 
 
3.05
%
Net interest margin (fully-taxable equivalent)(3)
 
 
 
 
 
3.35
%
 
 
 
 
 
3.07
%
 
 
 
 
 
 
 
 
 
 
 
 
 
(1)  Reported on tax-equivalent basis calculated using a tax rate of 35%, including certain commercial loans.
(2)  Non-accrual loans and loans held for sale are included in total average loans.
(3) Net interest margin for the first quarter of 2016 was 3.18% excluding the impact of the fair value mark accretion on loans and certificate of deposits generated in purchase accounting and collection of previously charged-off acquired loans totaling $1.5 million for the first quarter of 2016.


46




Provision for Credit Losses
The provision for credit losses is made up of our provision for loan losses and the provision for unfunded commitments.

The provision for loan losses, which makes up the vast majority of the provision for credit losses, is a recorded expense determined by management that adjusts the ALL to a level that, in management’s best estimate, is necessary to absorb probable losses within the existing loan portfolio. The provision for loan losses reflects loan quality trends, including, among other factors, the levels of and trends related to non-accrual loans, past due loans, potential problem loans, criticized loans, net charge-offs or recoveries and growth in the loan portfolio. Accordingly, the amount of the provision for loan losses reflects both the necessary increases in the ALL related to newly identified criticized loans, as well as the actions taken related to other loans including, among other things, any necessary increases or decreases in required allowances for specific loans or loan pools.

The provision for unfunded commitments represents management's estimate of the amount required to reflect the probable inherent losses on outstanding letters and unused lines of credit. The reserve for unfunded commitments is presented within accrued interest and other liabilities on the consolidated statement of condition.

The following table outlines the components making up the provision for credit losses as recorded on consolidated statements of income for the three months ended March 31, 2016 and 2015:
 
 
Three Months Ended
March 31,
 
 
2016
 
2015
Provision for loan losses
 
$
870

 
$
440

Change in reserve for unfunded commitments
 
2

 
6

Provision for credit losses
 
$
872

 
$
446


Please refer to “—Financial Condition—Asset Quality” below for additional discussion regarding the ALL and overall asset quality.

Non-Interest Income
The following table presents the components of non-interest income for the three months ended March 31, 2016 and 2015:
 
 
Three Months Ended 
 March 31,
 
Change
 
 
2016
 
2015
 
$
 
%
Service charges on deposit accounts
 
$
1,724

 
$
1,487

 
$
237

 
16
 %
Other service charges and fees
 
2,328

 
1,510

 
818

 
54
 %
Income from fiduciary services
 
1,169

 
1,220

 
(51
)
 
(4
)%
Mortgage banking income, net
 
808

 
239

 
569

 
238
 %
Brokerage and insurance commissions
 
458

 
449

 
9

 
2
 %
Bank-owned life insurance
 
422

 
422

 
—

 
—
 %
Other income
 
1,008

 
820

 
188

 
23
 %
Total non-interest income
 
$
7,917

 
$
6,147

 
$
1,770

 
29
 %
Non-interest income as a percentage of total revenues(1)
 
22
%
 
24
%
 
 
 
 
(1) Revenue is defined as the sum of net interest income and non-interest income.
Non-Interest Income - Three Months Ended March 31, 2016 and 2015. The significant changes in non-interest income for the three months ended March 31, 2016 compared to the three months March 31, 2015 are primarily due to the SBM acquisition completed in the fourth quarter of 2015 and include:
•
An increase in service charges on deposit accounts of $237,000 was primary due to the SBM acquisition and the addition of approximately 30,000 customer checking accounts driving higher overdraft fees.

47


•
An increase in other service charges and fees of $818,000 was primarily due to the SBM acquisition and the addition of approximately 30,000 new customer checking accounts driving an increase in debit card income of $720,000 and 29 ATMs driving higher ATM fees of $57,000.
•
An increase in mortgage banking income of $569,000 was driven by: (i) sale of $38.9 million of mortgages in the first quarter of 2016, which generated net gains on sale of $819,000, compared to $4.8 million of mortgage sales and net gains of $129,000 for the first quarter of 2015; and (ii) higher unrealized gains recorded on interest rate lock commitments of $290,000 due to a significant increase in our loan pipeline at March 31, 2016 compared to March 31, 2015 through the expansion of our mortgage banking business over the past year; partially offset by lower mortgage servicing income of $411,000 driven by higher prepayment activity and higher prepayment speed assumptions resulting in higher MSR amortization and a valuation adjustment. At March 31, 2016, our MSRs of $1.6 million were 0.43% of the respective serviced loan portfolio compared to 0.35% at March 31, 2015.
•
An increase in other income of $188,000 was primarily driven by higher other fees earned due to a larger customer-base from the SBM acquisition, as well as higher income on our customer loan swap program of $34,000 and higher early withdrawal penalties on CDs of $29,000.

Non-Interest Expense
The following table presents the components of non-interest expense for the three months ended March 31, 2016 and 2015:
 
 
Three Months Ended 
 March 31,
 
Change
 
 
2016
 
2015
 
$
 
%
Salaries and employee benefits
 
$
11,610

 
$
8,375

 
$
3,235

 
39
 %
Furniture, equipment and data processing
 
2,427

 
1,923

 
504

 
26
 %
Net occupancy
 
1,877

 
1,472

 
405

 
28
 %
Consulting and professional fees
 
885

 
591

 
294

 
50
 %
Other real estate owned and collection costs
 
656

 
562

 
94

 
17
 %
Regulatory assessments
 
721

 
510

 
211

 
41
 %
Amortization of intangible assets
 
476

 
287

 
189

 
66
 %
Other expenses
 
3,632

 
2,346

 
1,286

 
55
 %
Core operating expenses
 
22,284

 
16,066

 
6,218

 
39
 %
Merger and acquisition costs
 
644

 
735

 
(91
)
 
(12
)%
Total non-interest expense
 
$
22,928

 
$
16,801

 
$
6,127

 
36
 %
Efficiency ratio(1)
 
61.23
%
 
61.97
%
 
 
 
 
Core operating expense to total average assets (annualized)(1)
 
2.38
%
 
2.31
%
 
 
 
 
(1)
This is a non-GAAP measure. Refer to "—Non-GAAP Financial Measures and Reconciliation to GAAP" for further details.

Non-Interest Expense - Three Months Ended March 31, 2016 and 2015. The significant changes in non-interest expense for the three months ended March 31, 2016 compared to the three months ended March 31, 2015 are primarily due to the SBM acquisition completed in the fourth quarter of 2015 and include:

•
An increase in salaries and employee benefits of $3.2 million was driven by an increase of approximately 160 full-time employees due to the SBM acquisition, along with normal merit increases.
•
An increase in furniture, equipment and data processing of $504,000 was driven by higher data processing charges across our key systems totaling $347,000 as our number of customer accounts increased due to the SBM acquisition, as well as higher depreciation expense of $51,000 due to the SBM acquisition.
•
An increase in net occupancy of $405,000 was due to the addition of 24 banking centers due to the SBM acquisition.
•
An increase in other expenses of $1.3 million was driven by incremental costs associated with operating as a larger organization due to the SBM acquisition. These incremental costs included: (i) higher customer mailing costs, ATM surcharge rebates, telephone and communication costs, and travel and entertainment costs of $644,000 due an increase in customers, locations and employees; (ii) higher debit card costs of $303,000 due to an increase in number of transactions; (iii) higher marketing and donation costs of $127,000; and (iv) $90,000 of expense associated with our cash back rewards program that begun in the fourth quarter of 2015 in conjunction with the SBM acquisition.

48


FINANCIAL CONDITION
 
Overview
Total assets at March 31, 2016 were $3.8 billion compared to $3.7 billion at December 31, 2015, representing an increase of $53.2 million. The increase in assets was primarily driven by an increase in our investment portfolio of $53.6 million. At March 31, 2016, our investment portfolio represented 24% of total assets compared to 23% at December 31, 2015. Loans (excluding loans held for sale) at March 31, 2016 totaled $2.5 billion, an increase of $2.4 million since December 31, 2015.

Total deposits at March 31, 2016 were $2.7 billion, representing a decrease of $51.5 million since year-end. Core deposits (demand, interest checking, savings and money market) at March 31, 2016 totaled $2.0 billion, representing a decrease of 1% since year-end, which was consistent with the same period a year ago, due to the seasonality and cyclical nature of core deposit flows within our market. Certificates of deposit decreased $34.0 million since year-end, primarily due to the maturity and non-renewal of one significant government account totaling $30.0 million. Total borrowings at March 31, 2016 totaled $659.1 million, representing an increase of $86.7 million since year-end.

Our asset quality at March 31, 2016 remains strong with non-performing loans as a percentage of total loans of 0.80%, representing a decrease of 0.13% since year-end. At March 31, 2016, the ratio of loans 30-89 days past due to total loans was 0.30%, representing a decrease of 0.10% since year-end.

The Company and its wholly-owned subsidiary Camden National Bank continue to maintain risk-based capital ratios in excess of the regulatory levels required for an institution to be considered “well capitalized.” At March 31, 2016, the Company’s total risk-based capital ratio, Tier I risk-based capital ratio, common equity Tier I risk-based capital ratio, and Tier I leverage capital ratio were 13.08%, 11.69%, 10.37%, and 8.42%, respectively.

Total shareholders’ equity at March 31, 2016 was $375.5 million, an increase of $12.3 million, or 14% annualized, since year-end.

Investment Securities
We purchase and hold investment securities including municipal bonds, MBS (pass through securities and CMOs), subordinated corporate bonds and FHLB and FRB stock to diversify our revenues, interest rate and credit risk, and to provide for liquidity and funding needs. At March 31, 2016, our total holdings in investment securities were $909.6 million, an increase of $53.6 million since December 31, 2015. For the three months ended March 31, 2016, we purchased $70.8 million of debt securities and received proceeds from the maturity of debt securities totaling $28.6 million.

During the three months ended March 31, 2016, we classified all municipal bonds purchased as HTM securities. In total, we purchased $3.9 million of municipal bonds year-to-date. We have the intent and ability, evidenced by our strong capital and liquidity ratios, to hold these investments to maturity. The remaining $66.9 million of securities purchased were a combination of MBS, CMO and subordinated corporate debt securities. All of these investments have been categorized as AFS securities and are carried at fair value on the consolidated statements of condition with the associated unrealized gains or losses recorded in AOCI, net of tax. At March 31, 2016, we had a $4.0 million net unrealized gain on our AFS securities, net of tax, compared to a $3.8 million net unrealized loss, net of tax, at December 31, 2015. The fluctuation in the fair value of our MBS and CMO investment securities is highly dependent on interest rates as of the end of the reporting period and is not reflective of an overall credit deterioration within our portfolio.

We started purchasing subordinated corporate bonds in December 2015 and continued through the first quarter of 2016, adding $2.5 million to the portfolio. Subordinated corporate bonds are subordinated notes issued by U.S. banks and bank holding companies that meet certain underwriting criteria with coupons ranging from 5.00% to 6.25% and 10 year maturities with call options that can be exercised by the issuer after five years. At March 31, 2016 and December 31, 2015, the fair value of our subordinated corporate bonds was $3.5 million and $996,000, respectively. We have designated our subordinated corporate bond investments as AFS.

The duration of our investment securities portfolio decreased slightly to 3.9 years at March 31, 2016 from 4.0 years at December 31, 2015. This decrease was due to a higher mix of MBS investments purchased in the first quarter of 2016, making up 91% of our total investment purchases. MBS investments have a shorter weighted-average life than the municipal bonds, and, in 2015, a less significant portion of the mix of investment securities purchased were MBS securities. We generally purchase MBS and CMO investments with an average life of no longer than six years to limit prepayment risk compared to fifteen years for a municipal bond.


49


We completed our quarterly OTTI assessment for our investment portfolio as of March 31, 2016 and concluded that no OTTI existed across our investment portfolio. Our process and methodology for analyzing our investments portfolio for OTTI has not changed since last disclosed within our Annual Report on Form 10-K for the year ended December 31, 2015. Refer to the Annual Report on Form 10-K for the year ended December 31, 2015 for further discussion of the Company's process and methodology.

Loans
We provide loans primarily to customers located within our geographic market area. Our primary market continues to be in Maine, making up 89% of our loan portfolio at March 31, 2016; however, our loan production outside of Maine and through New England has increased with our expanded presence in Southern Maine and New Hampshire. The commercial loan portfolio increased $16.0 million, or 5% annualized, since December 31, 2015, while the retail loan portfolio decreased $13.6 million over the same period. With the ramp-up of our mortgage banking platform over the past year, we continue to sell a significant portion of our residential mortgage production. In the first quarter of 2016, the Company sold $38.9 million of residential mortgage loans and recognized net gains of $819,000, compared to $4.8 million and net gains of $129,000 in the first quarter of 2015. At March 31, 2016, loans held for sale totaled $16.6 million, representing an increase of $5.7 million since December 31, 2015.

The following table sets forth the composition of our loan portfolio as of the dates indicated:
 
 
March 31,
2016
 
December 31,
2015
 
Change
 
 
 
 
($)
 
(%)
Residential real estate
 
$
811,974

 
$
820,617

 
$
(8,643
)
 
(1
)%
Commercial real estate
 
952,481

 
927,951

 
24,530

 
3
 %
Commercial
 
292,064

 
297,721

 
(5,657
)
 
(2
)%
Consumer and home equity
 
361,686

 
366,587

 
(4,901
)
 
(1
)%
HPFC
 
74,429

 
77,330

 
(2,901
)
 
(4
)%
Total loans
 
$
2,492,634

 
$
2,490,206

 
$
2,428

 
1
 %
Commercial Loan Portfolio
 
$
1,318,974

 
$
1,303,002

 
$
15,972

 
1
 %
Retail Loan Portfolio
 
$
1,173,660

 
$
1,187,204

 
$
(13,544
)
 
(1
)%
Commercial Portfolio Mix
 
53
%
 
52
%
 
 
 
 
Retail Portfolio Mix
 
47
%
 
48
%
 
 
 
 


50


Asset Quality

Non-Performing Assets.  Non-performing assets include non-accrual loans, accruing loans 90 days or more past due, accruing TDRs, and property acquired through foreclosure or repossession. The following table sets forth the make-up and amount of our non-performing assets as of the dates indicated: 
 
 
March 31,
 2016
 
December 31, 2015
Non-accrual loans(1):
 
 

 
 

Residential real estate
 
$
6,275

 
$
7,253

Commercial real estate
 
3,044

 
4,529

Commercial
 
4,128

 
4,489

Consumer and home equity loans
 
1,572

 
2,051

HPFC
 
357

 
—

Total non-accrual loans
 
15,376

 
18,322

Accruing loans past due 90 days
 
—

 
—

Accruing TDRs not included above
 
4,594

 
4,861

Total non-performing loans
 
19,970

 
23,183

Other real estate owned
 
1,228

 
1,304

Total non-performing assets
 
$
21,198

 
$
24,487

Non-accrual loans to total loans
 
0.62
%
 
0.74
%
Non-performing loans to total loans
 
0.80
%
 
0.93
%
ALL to non-performing loans
 
106.86
%
 
91.30
%
Non-performing assets to total assets
 
0.56
%
 
0.66
%
ALL to non-performing assets
 
100.67
%
 
86.44
%
(1)
Non-accrual loan balances are presented net of the unamortized fair value mark discount associated with the purchase accounting for acquired loans.
 
Our non-performing assets to total assets ratio at March 31, 2016 was 0.56%, representing a decrease of 10 basis points since year-end. The decrease in non-performing assets period-over-period was driven by the decrease in non-accrual loans. At March 31, 2016, non-accrual loans totaled $15.4 million, representing a decrease of $2.9 million since year-end. The decrease in non-accrual loans in the first quarter of 2016 was primarily driven by liquidation and auction activity.

Potential Problem Loans.  Potential problem loans consist of classified accruing commercial and commercial real estate loans that were between 30 and 89 days past due. Such loans are characterized by weaknesses in the financial condition of borrowers or collateral deficiencies. Based on historical experience, the credit quality of some of these loans may improve due to changes in collateral values or the financial condition of the borrowers, while the credit quality of other loans may deteriorate, resulting in a loss. These loans are not included in the above analysis of non-accrual loans. At March 31, 2016, potential problem loans amounted to $3.8 million, or 0.15% of total loans, compared to $649,000, or 0.03% of total loans, at December 31, 2015.


51


Past Due Loans.  Past due loans consist of accruing loans that were between 30 and 89 days past due. The following table sets forth information concerning the past due loans at the date indicated:
 
 
March 31, 2016
 
December 31, 2015
Accruing loans 30-89 days past due:
 
 

 
 

Residential real estate
 
$
1,109

 
$
3,590

Commercial real estate
 
4,201

 
4,295

Commercial
 
667

 
637

Consumer and home equity loans
 
808

 
1,255

HPFC
 
624

 
165

Total accruing loans 30-89 days past due
 
$
7,409

 
$
9,942

Accruing loans 30-89 days past due to total loans
 
0.30
%
 
0.40
%

Allowance for Loan Losses.  We use a methodology to systematically measure the amount of estimated loan loss exposure inherent in the loan portfolio for purposes of establishing a sufficient ALL. The ALL is management’s best estimate of the probable loan losses as of the balance sheet date. The allowance is increased by provisions charged to earnings and by recoveries of amounts previously charged-off, and is reduced by charge-offs on loans.


52


The following table sets forth information concerning the activity in our ALL during the periods indicated. 
 
 
At or For The
Three Months Ended
March 31,
 
At or For The
Year Ended
December 31,
 
 
2016
 
2015
 
2015
ALL at the beginning of the period
 
$
21,166

 
$
21,116

 
$
21,116

Provision for loan losses
 
870

 
440

 
1,938

Charge-offs:
 
 
 
 
 
  

Residential real estate loans
 
210

 
113

 
801

Commercial real estate
 
222

 
55

 
481

Commercial loans
 
226

 
159

 
655

Consumer and home equity loans
 
143

 
97

 
679

HPFC
 
—

 
—

 
—

Total loan charge-offs
 
801

 
424

 
2,616

Recoveries:
 
 
 
 
 
  

Residential real estate loans
 
40

 
3

 
55

Commercial real estate loans
 
9

 
10

 
74

Commercial loans
 
52

 
104

 
389

Consumer and home equity loans
 
3

 
16

 
210

HPFC
 
—

 
—

 
—

Total loan recoveries
 
104

 
133

 
728

Net charge-offs
 
697

 
291

 
1,888

ALL at the end of the period
 
$
21,339

 
$
21,265

 
$
21,166

Components of allowance for credit losses:
 
 
 
 
 
  

Allowance for loan losses
 
$
21,339

 
$
21,265

 
$
21,166

Liability for unfunded credit commitments
 
24

 
23

 
22

Balance of allowance for credit losses at end of the period
 
$
21,363

 
$
21,288

 
$
21,188

Total loans, excluding loans held for sale
 
$
2,492,634

 
$
1,769,815

 
$
2,490,206

Average loans
 
$
2,501,475

 
$
1,781,271

 
$
1,948,621

Net charge-offs (annualized) to average loans
 
0.11
%
 
0.07
%
 
0.10
%
Provision for loan losses (annualized) to average loans
 
0.14
%
 
0.10
%
 
0.10
%
ALL to total loans
 
0.86
%
 
1.20
%
 
0.85
%
ALL to net charge-offs (annualized)
 
765.39
%
 
1,826.89
%
 
1,122.25
%

The determination of an appropriate level of ALL, and subsequent provision for loan losses which affects earnings, is based on our analysis of various economic factors and review of the loan portfolio. During our analysis and review, many factors are considered including, but not limited to, loan growth, payoffs of lower quality loans, recoveries on previously charged-off loans, improvement in the financial condition of the borrowers, risk rating downgrades/upgrades and charge-offs. We utilize a comprehensive approach toward determining the ALL, which includes an expanded risk rating system to assist us in identifying the risks being undertaken.

For the three months ended March 31, 2016, we provided $870,000 of provision expense to the ALL compared to $440,000 for the same period for 2015, respectively. The increase in the provision for loan losses was driven by: (i) elevated net charge-offs in the first quarter of 2016 compared to the first quarter of 2015 of $406,000, which drove an increase in our net charge-offs (annualized) to average loans ratio of four basis points period-over-period; and (ii) the migration of performing loans to classified in the first quarter of 2016. At March 31, 2016, loans classified as special mention (risk rated 7) totaled $43.5 million, representing an increase of $8.7 million since year-end.

We believe the ALL of $21.3 million, or 0.86% of total loans and 106.86% of total non-performing loans, at March 31, 2016 was appropriate given the current economic conditions in our service area and the condition of the loan portfolio. However, if conditions deteriorate the provision will likely increase.

53



Liabilities and Shareholders’ Equity
Deposits and Borrowings. Total deposits at March 31, 2016 were $2.7 billion, representing a decrease of $51.5 million, or 2%, since year-end. Core deposits (demand, interest checking, savings and money market) at March 31, 2016 totaled $2.0 billion, representing a decrease of 1% since year-end, which was consistent with the same period a year ago, due to the seasonality and cyclical nature of core deposit flows within our market. CDs decreased $34.0 million, or 7%, since year-end, primarily due to the maturity and non-renewal of one significant government account totaling $30.0 million.

Total borrowings at March 31, 2016 were $659.1 million, representing an increase of $86.7 million, or 15%, since December 31, 2015. The increase in borrowings was due to an increase in FHLBB overnight and short-term advances of $62.3 million due to the aforementioned decrease in deposits.

Shareholders' Equity. Total shareholders' equity at March 31, 2016 was $375.5 million, representing an increase of $12.3 million, or 3%, since December 31, 2015. The increase was largely due to net income of $8.3 million for the first quarter of 2016 and an increase in unrealized gains on AFS securities of $7.8 million due to change in interest rates for the three months ended March 31, 2016, partially offset by dividends declared in the first quarter of 2016 of $3.1 million.

The following table presents certain information regarding shareholders’ equity as of or for the periods indicated:
 
Three Months Ended 
 March 31,
 
Year Ended
December 31, 2015
 
2016
 
2015
 
Return on average assets
0.90
%
 
0.82
%
 
0.70
%
Return on average equity
9.07
%
 
9.19
%
 
7.54
%
Average equity to average assets
9.87
%
 
8.90
%
 
9.26
%
Dividend payout ratio
37.07
%
 
39.73
%
 
50.60
%
Book value per share
$
36.55

 
$
33.85

 
$
35.54

Tangible book value per share(1)
$
26.48

 
$
27.41

 
$
25.33

Dividends declared per share
$
0.30

 
$
0.30

 
$
1.20

(1) This is a non-GAAP measure. Refer to "—Non-GAAP Financial Measures and Reconciliation to GAAP" for further details.

Refer to "Capital Resources" and Note 6 of the consolidated financial statements further discussion of the Company and Bank's capital resources and regulatory capital requirements.


54


LIQUIDITY
 
Our liquidity needs require the availability of cash to meet the withdrawal demands of depositors and credit commitments to borrowers. Liquidity is defined as our ability to maintain availability of funds to meet customer needs, as well as to support our asset base. The primary objective of liquidity management is to maintain a balance between sources and uses of funds to meet our cash flow needs in the most economical and expedient manner. Due to the potential for unexpected fluctuations in both deposits and loans, active management of liquidity is necessary. We maintain various sources of funding and levels of liquid assets in excess of regulatory guidelines in order to satisfy their varied liquidity demands. We monitor liquidity in accordance with internal guidelines and all applicable regulatory requirements. As of March 31, 2016 and December 31, 2015, our level of liquidity exceeded target levels. We believe that we currently have appropriate liquidity available to respond to liquidity demands. Sources of funds that we utilize consist of deposits; borrowings from the FHLBB and other sources; cash flows from operations; prepayments and maturities of outstanding loans; investments and mortgage-backed securities, of which the fair value at March 31, 2016 of investment securities designated as AFS, were in an unrealized gain position and were not pledged as collateral totaled $231.5 million; and the sale of mortgage loans.

Deposits continue to represent our primary source of funds. For the three months ended March 31, 2016, average deposits (excluding brokered deposits) of $2.5 billion increased $790.2 million, or 46%, compared to the first quarter of 2015. Average core deposits of $1.9 billion for the three months ended March 31, 2016 increased $595.5 million, or 43%, compared to the first quarter of 2015 was due to organic growth, as well as the acquired deposits (excluding brokered deposits) and core deposits in connection with the SBM acquisition of $687.0 million and $497.4 million, respectively, on October 16, 2015. Included within our money market deposit category are deposits from our wealth management subsidiary, Acadia Trust, which represent client funds. The deposits in the Acadia Trust client accounts, totaled $70.0 million at March 31, 2016. These deposits fluctuate with changes in the portfolios of the clients of Acadia Trust.
 
Borrowings are used to supplement deposits as a source of liquidity. In addition to borrowings and advances from the FHLBB, we utilize brokered deposits, purchase federal funds, and sell securities under agreements to repurchase. For the three months ended March 31, 2016 average total borrowings (including brokered deposits) increased $31.4 million to $823.2 million compared to the first quarter of 2015. We secure borrowings from the FHLBB, whose advances remain the largest non-deposit-related funding source, with qualified residential real estate loans, certain investment securities and certain other assets available to be pledged. Through the Bank, we have available lines of credit with the FHLBB of $9.9 million, with PNC Bank of $50.0 million, and with the FRB Discount Window of $65.6 million as of March 31, 2016. We had no outstanding balances on these lines of credit at March 31, 2016. Long-term borrowings represent securities sold under repurchase agreements with major brokerage firms. Both wholesale and customer repurchase agreements are secured by mortgage-backed securities and government-sponsored enterprises. The Company also has a $10.0 million line of credit with a maturity date of December 20, 2016. We had no outstanding balance on these lines of credit at March 31, 2016.

We believe the investment portfolio and residential loan portfolio provide a significant amount of contingent liquidity that could be accessed in a reasonable time period through sales of those portfolios. We also believe that we have additional untapped access to the brokered deposit market, wholesale reverse repurchase transaction market and the FRB discount window. These sources are considered as liquidity alternatives in our contingent liquidity plan. We believe that the level of liquidity is sufficient to meet current and future funding requirements; however, changes in economic conditions, including consumer saving habits and the availability or access to the national brokered deposit and wholesale repurchase markets, could significantly impact our liquidity position. 


55


CAPITAL RESOURCES

As part of our goal to operate a safe, sound and profitable financial organization, we are committed to maintaining a strong capital base. Shareholders’ equity totaled $375.5 million, $363.2 million and $251.8 million at March 31, 2016, December 31, 2015 and March 31, 2015, respectively, which amounted to 10%, 10% and 9%, respectively, of total assets as of the respective dates. Refer to "— Financial Condition — Liabilities and Shareholders' Equity" for discussion regarding changes in shareholders' equity since December 31, 2015.

Our principal cash requirement is the payment of dividends on our common stock, as and when declared by the Board of Directors. We declared dividends to shareholders in the aggregate amount of $3.1 million and $2.2 million for the three months ended March 31, 2016 and 2015, respectively. The increase in dividends declared in the first quarter of 2016 of $894,000 compared to the first quarter of 2015 was due to the increase in common shares outstanding in connection with the SBM acquisition for which 2.7 million shares were issued. Our Board of Directors approves cash dividends on a quarterly basis after careful analysis and consideration of various factors, including the following: (i) capital position relative to total assets, (ii) risk-based assets, (iii) total classified assets, (iv) economic conditions, (v) growth rates for total assets and total liabilities, (vi) earnings performance and projections and (vii) strategic initiatives and related capital requirements. All dividends declared and distributed by the Company will be in compliance with applicable state corporate law and regulatory requirements.
 
We are primarily dependent upon the payment of cash dividends by our subsidiaries to service our commitments. We, as the sole shareholder of our subsidiaries, are entitled to dividends, when and as declared by each subsidiary’s Board of Directors from legally available funds. The Bank declared dividends in the aggregate amount of $4.8 million and $3.2 million for the three months ended March 31, 2016 and 2015, respectively. Under regulations prescribed by the OCC, without prior OCC approval, the Bank may not declare dividends in any year in excess of the Bank’s (i) net income for the current year, (ii) plus its retained net income for the prior two years. If we are required to use dividends from the Bank to service unforeseen commitments in the future, we may be required to reduce the dividends paid to our shareholders going forward.

Please refer to Note 6 of the consolidated financial statements for discussion and details of the Company and Bank's capital regulatory requirements. At March 31, 2016 and December 31, 2015, the Company and Bank met all regulatory capital requirements and the Bank continues to be classified as "well capitalized" under the prompt correction action provisions.

CONTRACTUAL OBLIGATIONS AND COMMITMENTS
 
In the normal course of business, we are a party to credit related financial instruments with off-balance sheet risk, which are not reflected in the consolidated statements of condition. These financial instruments include lending commitments and letters of credit. Those instruments involve varying degrees of credit risk in excess of the amount recognized in the consolidated statements of condition. We follow the same credit policies in making commitments to extend credit and conditional obligations as we do for on-balance sheet instruments, including requiring similar collateral or other security to support financial instruments with credit risk. Our exposure to credit loss in the event of nonperformance by the customer is represented by the contractual amount of those instruments. Since many of the commitments are expected to expire without being drawn upon, the total amount does not necessarily represent future cash requirements. At March 31, 2016, we had the following levels of commitments to extend credit:
 
 
Total Amount
 
Commitment Expires in:
(Dollars in Thousands)
 
Committed
 
<1 Year
 
1 – 3 Years
 
4 – 5 Years
 
>5 Years
Letters of credit
 
$
4,218

 
$
4,218

 
$
—

 
$
—

 
$
—

Commercial commitment letters
 
78,875

 
78,875

 
—

 
—

 
—

Residential loan origination
 
31,554

 
31,554

 
—

 
—

 
—

Home equity line of credit commitments
 
484,537

 
196,614

 
29,573

 
25,016

 
233,334

Other commitments to extend credit
 
534

 
534

 
—

 
—

 
—

Total
 
$
599,718

 
$
311,795

 
$
29,573

 
$
25,016

 
$
233,334


56



We are a party to several on- and off-balance sheet contractual obligations through various borrowing agreements and lease agreements on a number of branch facilities. We have an obligation and commitment to make future payments under these contracts. At March 31, 2016, we had the following levels of contractual obligations: 
 
 
Total Amount
 
Payments Due per Period
(Dollars in Thousands)
 
of Obligations
 
<1 Year
 
1 – 3 Years
 
4 – 5 Years
 
>5 Years
Operating leases
 
$
7,653

 
$
1,573

 
$
2,450

 
$
1,525

 
$
2,105

Capital leases
 
1,285

 
126

 
253

 
253

 
653

FHLBB borrowings - overnight
 
30,600

 
30,600

 
—

 
—

 
—

FHLBB borrowings - advances
 
329,500

 
299,500

 
20,000

 
10,000

 
—

Retail repurchase agreements
 
209,426

 
209,426

 
—

 
—

 
—

Commercial repurchase agreements
 
30,041

 
30,041

 
—

 
—

 


Subordinated debentures
 
58,638

 
—

 
—

 
—

 
58,638

Other contractual obligations
 
2,190

 
2,190

 
—

 
—

 
—

Total
 
$
669,333

 
$
573,456

 
$
22,703

 
$
11,778

 
$
61,396


Borrowings from the FHLBB consist of short- and long-term fixed- and variable-rate borrowings and are collateralized by all stock in the FHLBB and a blanket lien on qualified collateral consisting primarily of loans with first mortgages secured by one- to four-family properties, certain pledged investment securities and other qualified assets. We have an obligation and commitment to repay all borrowings and debentures. These commitments, borrowings, subordinated debentures and the related payments are made during the normal course of business.

Derivatives
 
Hedge Instruments: From time to time, we may enter into derivative instruments as partial hedges against large fluctuations in interest rates. We may also enter into fixed-rate interest rate swaps and floor instruments to partially hedge against potentially lower yields on the variable prime rate loan category in a declining rate environment. If interest rates were to decline, resulting in reduced income on the adjustable rate loans, there would be an increased income flow from the interest rate swap and floor instrument. We may also enter into variable rate interest rate swaps and cap instruments to partially hedge against increases in short-term borrowing rates. If interest rates were to rise, resulting in an increased interest cost, there would be an increased income flow from the interest rate swaps and cap instruments. These financial instruments are factored into our overall interest rate risk position. We regularly review the credit quality of the counterparty from which the instruments have been purchased.

At March 31, 2016 and December 31, 2015, we had $43.0 million of notional in interest rate swaps on our junior subordinated debentures. The arrangement allowed us to fix our floating rate debentures and mitigate our interest exposure in a rising rate environment. At March 31, 2016 and December 31, 2015, the interest rate swaps were in a loss position of $11.9 million and $9.2 million, respectively, and were recorded as a liability within our consolidated statements of condition.

At March 31, 2016 and December 31, 2015, we had $50.0 million of notional on two tranches of forecasted 30-day FHLBB advances. Each derivative arrangement commenced on February 25, 2016, with one contract set to expire on February 25, 2018 and the other on February 25, 2019. We entered into these forecasted interest rate swaps to mitigate our interest rate exposure on borrowings in a rising interest rate environment. At March 31, 2016 and December 31, 2015, the forecasted interest rate swaps were in a loss position of $1.1 million and $576,000 and were recorded as a liability within our consolidated statements of condition.

Refer to Note 11 of the consolidated financial statements for further details.


57


Customer Loan Swaps: In our normal course lending with commercial real estate customers, we will enter into interest rate swaps with qualifying commercial customers, from time to time, to provide them with a means to lock into a long-term fixed rate, while simultaneously entering into an arrangement with a counterparty to swap the long-term fixed rate loan to variable rate to allow us to effectively manage our interest rate exposure. Unlike the aforementioned cash flow hedges above, these arrangements are not designated as hedges and provide little risk to us as the interest rate swap agreements have substantially equivalent and offsetting terms. We mitigate our commercial customer counterparty credit risk exposure through our loan policy and underwriting process, which includes credit approval limits, monitoring procedures, and obtaining collateral, where appropriate. We mitigate our institutional counterparty credit risk exposure by limiting the institutions for which we will enter into interest swap arrangements through an approved listing by the Company's board of directors.

At March 31, 2016 and December 31, 2015, we had a notional amount of $159.8 million and $142.9 million, respectively, in interest rate swap agreements with commercial customers and an equal notional amount with a dealer bank related to our commercial loan swap program. At March 31, 2016 and December 31, 2015, the fair value of these arrangements were $9.4 million and $3.2 million, respectively, and were recorded gross on our consolidated statements of condition as assets and liabilities. As the interest rate swap agreements have substantially equivalent and offsetting terms, they do not materially change our interest rate risk or present any material exposure to our consolidated statements of income.

Refer to Note 11 of the consolidated financial statements for further details.

Interest Rate Locks: As part of our normal mortgage origination process, we provide potential borrowers with the option to lock their interest rate based on current market prices. During the period from commitment date to the loan closing date, we are subject to interest rate risk as market rates fluctuate. In an effort to mitigate such risk, we may enter into forward delivery sales commitments, typically on a "best-efforts" basis, with certain approved investors.

At March 31, 2016 and December 31, 2015, we had a notional amount of $34.2 million and $20.7 million, respectively, of interest rate lock commitments on mortgages within our loan pipeline. At March 31, 2016 and December 31, 2015, the fair value of our interest rate locks was $431,000 and $139,000, respectively, and was recorded as assets on our consolidated statements of condition. For the three months ended March 31, 2016 and 2015, we recorded unrealized gains on these interest rate lock commitments of $292,000 and $2,000, respectively, within mortgage banking income (net) on the consolidated statements of income.

Refer to Note 11 of the consolidated financial statements for further details.







58


ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
 
MARKET RISK

Market risk is the risk of loss to earnings, capital and the economic values of certain assets and liabilities arising from adverse changes to interest rates, foreign currency exchange rates, and equity prices. Our only significant market risk exposure is changes in interest rates. The ongoing monitoring and management of this risk is an important component of our asset/liability management process, which is governed by policies established by the Bank’s board of directors, and are reviewed and approved annually. The Board ALCO delegates responsibility for carrying out the asset/liability management policies to Management ALCO. In this capacity, Management ALCO develops guidelines and strategies impacting our asset/liability management-related activities based upon estimated interest rate risk sensitivity, policy limits and overall market interest rate levels/trends. Management ALCO and Board ALCO jointly meet on a quarterly basis to review strategies, policies, economic conditions and various activities as part of the management of these risks. Management ALCO manages interest rate risk by using two risk measurement techniques: (i) simulation of net interest income and (ii) simulation of economic value of equity. These measures are complementary and provide for both short and long-term risk profiles of the Company.

Interest Rate Risk
Interest rate risk represents the sensitivity of earnings to changes in market interest rates. As interest rates change, the interest income and expense streams associated with our financial instruments also change, thereby impacting net interest income, the primary component of our earnings. Board ALCO and Management ALCO utilize the results of a detailed and dynamic simulation model to quantify the estimated exposure of net interest income to sustained interest rate changes. Board ALCO and Management ALCO routinely monitor simulated net interest income sensitivity over a rolling five-year horizon.

The simulation model captures the impact of changing interest rates, interest rate indices and spreads, rate caps and floors on the interest income received and interest expense paid on all interest-earning assets and interest-bearing liabilities reflected on our consolidated statements of condition, as well as for derivative financial instruments, if any. The simulation of net interest income also requires a number of key assumptions such as: (i) no balance sheet growth, (ii) the future balance sheet mix, including prepayment assumptions for loans and securities projected under each rate scenario, (iii) new business loan rates that are based on recent origination experience, (iv) deposit pricing beta assumptions, and (v) non-maturity decay rate estimates. These assumptions can be inherently uncertain, and, as a result, actual results may differ from the simulation forecasts due to the timing, magnitude and frequency of rate changes, future business conditions and unanticipated changes in management strategies. This sensitivity analysis is compared to ALCO policy limits, which specify a maximum tolerance level for net interest income exposure over a one- and two-year horizon given a 200 basis point upward and downward shift in interest rates. Although our policy specifies a downward shift of 200 basis points, this would results in negative rates as many deposit and funding rates are now below 2.00%. Our current downward shift is 100 basis points. A parallel and pro rata shift in rates over a 12-month period is assumed. Using this approach, we are able to produce simulation results that illustrate the effect that both a gradual change of rates have on earnings expectations. In the down 100 basis points scenario, Federal Funds and Treasury yields are floored at 0.01% while Prime is floored at 3.00%. All other market rates are floored at 0.25%.

As of March 31, 2016 and 2015, our net interest income sensitivity analysis reflected the following changes to net interest income. All rate changes were “ramped” over the first 12-month period and then maintained at those levels over the remainder of the ALCO simulation horizon.
 
 
Estimated Changes In 
Net Interest Income
Rate Change from Year 1 — Base
 
March 31,
2016
 
March 31,
2015
Year 1
 
 

 
 

+200 basis points
 
(2.58
)%
 
(5.73
)%
-100 basis points
 
(1.48
)%
 
(0.88
)%
Year 2
 
 
 
 
+200 basis points
 
0.54
 %
 
(6.12
)%
-100 basis points
 
(7.86
)%
 
(6.21
)%
 

59


The most significant factors affecting the changes in market risk exposure at March 31, 2016 compared to March 31, 2015 were the acquisition of SBM, which increased the mix of variable rate loans and increased core deposits, and an increase in back-to-back loan swaps. If rates remain at or near current levels, net interest income is projected to be virtually flat as loan rates have repriced to current rates and the cost of funds remains unchanged. Beyond the first year, net interest income increases slightly. If rates decrease 100 basis points, net interest income is projected to decrease slightly as changes in loan and funding costs almost offset in the first year. In the second year, net interest income is projected to continue to decrease as loans and investment cash flow reprice into lower yields as prepayments increase while the cost of funds remains flat. If rates increase 200 basis points, net interest income is projected to decrease in the first year due to the repricing of short-term funding. Then in the second year, net interest income is projected to increase as loans and investments continue to reprice/reset into higher yields while the cost of funds lag. At this point, the Company's balance sheet becomes asset sensitive. In years three to five, the loan and investment cash flows continue to reprice as the cost of funds lags increasing net interest income above our base.

The economic value of equity at risk simulation is conducted in tandem with the net interest income simulations, to determine a longer term view of the Company’s interest rate risk position by capturing longer-term re-pricing risk and option-risk embedded in the balance sheet. It measures the sensitivity of economic value of equity to changes in interest rates. The economic value of equity at risk simulation values only the current balance sheet. As with net interest income modeling, this simulation captures product characteristics such as loan resets, re-pricing terms, maturity dates, rate caps and floors. Key assumptions include loan prepayment speeds, deposit pricing betas and non-maturity deposit decay rates. These assumptions can have significant impacts on valuation results as the assumptions remain in effect for the entire life of each asset and liability. All key assumptions are subject to a periodic review.

Our base case economic value of equity at risk is calculated by estimating the net present value of all future cash flows from existing assets and liabilities using current interest rates. The base case scenario assumes that future interest rates remain unchanged.
 
 
Economic Value of Equity
 
 
March 31,
2016
 
March 31,
2015
+200 basis points
 
9.23
%
 
8.47
%
+100 basis points
 
9.50
%
 
9.01
%
Base
 
9.56
%
 
9.44
%
-100 basis points
 
8.42
%
 
9.49
%

Periodically, if deemed appropriate, we use interest rate swaps, floors and caps, which are common derivative financial instruments, to hedge our interest rate risk position. The Company’s Board of Directors has approved hedging policy statements governing the use of these instruments. At March 31, 2016, we had $43.0 million notional principal amount of interest rate swap agreements related to our junior subordinated debentures, $50.0 million notional principal amount of forward-starting interest rate swap agreements related to our short-term funding and $159.8 million notional principal amount of interest rate swap agreements related to the Company’s commercial loan level derivative program. The Board ALCO and Management ALCO monitor derivative activities relative to their expectations and our hedging policies.


60


ITEM 4.  CONTROLS AND PROCEDURES
 
As required by Rule 13a-15 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), the Company’s management conducted an evaluation with the participation of the Company’s Chief Executive Officer and Chief Financial Officer (Principal Financial & Accounting Officer), regarding the effectiveness of the Company’s disclosure controls and procedures, as of the end of the last fiscal quarter covered by this report.  In designing and evaluating the Company’s disclosure controls and procedures, the Company and its management recognize that any controls and procedures, no matter how well designed and operated, can provide only a reasonable assurance of achieving the desired control objectives, and management necessarily was required to apply its judgment in evaluating and implementing possible controls and procedures.  Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer (Principal Financial & Accounting Officer) concluded that they believe the Company’s disclosure controls and procedures are effective to ensure that information required to be disclosed by the Company in the reports it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms.
 
There was no change in the internal control over financial reporting that occurred during the period covered by this Quarterly Report on Form 10-Q that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting. 


61


PART II.  OTHER INFORMATION

ITEM 1.  LEGAL PROCEEDINGS
 In the normal course of business, the Company and its subsidiaries are subject to pending and threatened legal actions. Although the Company is not able to predict the outcome of such actions, after reviewing pending and threatened actions with counsel, management believes that based on the information currently available the outcome of such actions, individually or in the aggregate, will not have a material adverse effect on the Company’s consolidated financial position as a whole.

ITEM 1A.  RISK FACTORS
There have been no material changes to the Company's Risk Factors described in Item 1A. of the Company’s Annual Report on Form 10-K for the year ended December 31, 2015.

ITEM 2.   UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
(a) None.
(b) None.
(c) None.

ITEM 3.  DEFAULTS UPON SENIOR SECURITIES
 None.

ITEM 4.  MINE SAFETY DISCLOSURES
Not applicable.

ITEM 5.  OTHER INFORMATION
None.


62


ITEM 6.  EXHIBITS
Exhibit No.
 
Definition
3.1
 
Articles of Incorporation of Camden National Corporation, as amended (incorporated herein by reference to Exhibit 3.i.1 to the Company's Form 10-K filed with the Commission on March 2, 2011).
3.2
 
Amended and Restated Bylaws of Camden National Corporation (incorporated herein by reference to Exhibit 3.2 to the Company's Form 10-K filed with the Commission on March 12, 2014).
10.1+
 
Amended and Restated Long-Term Performance Share Plan (incorporated herein by reference to Exhibit 10.26 to the Company's Form 8-K filed with the Commission on March 29, 2016).
31.1*
 
Certification of Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934.
31.2*
 
Certification of Chief Financial Officer, Principal Financial & Accounting Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934.
32.1**
 
Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2**
 
Certification of Chief Financial Officer, Principal Financial & Accounting Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101
 
XBRL (Extensible Business Reporting Language)

The following materials from Camden National Corporation’s Quarterly Report on Form 10-Q for the period ended March 31, 2016, formatted in XBRL: (i) Consolidated Statements of Condition - March 31, 2016 and December 31, 2015; (ii) Consolidated Statements of Income - Three Months Ended March 31, 2016 and 2015; (iii) Consolidated Statements of Comprehensive Income - Three Months Ended March 31, 2016 and 2015; (iv) Consolidated Statements of Changes in Shareholders’ Equity - Three Months Ended March 31, 2016 and 2015; (v) Consolidated Statements of Cash Flows - Three Months Ended March 31, 2016 and 2015; and (vi) Notes to Consolidated Financial Statements.
*
 
Filed herewith
**
 
Furnished herewith
+
 
Management contract or a compensatory plan or arrangement.


63


SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
CAMDEN NATIONAL CORPORATION
(Registrant)
 
/s/ Gregory A. Dufour
 
May 6, 2016
Gregory A. Dufour
 
Date
President and Chief Executive Officer
(Principal Executive Office)
 
 
 
 
 
/s/ Deborah A. Jordan
 
May 6, 2016
Deborah A. Jordan
 
Date
Chief Operating Officer, Chief Financial Officer and
 
 
Principal Financial & Accounting Officer
 
 

64