Document

10-Q 1 cac-033119x10q.htm 10-Q Document

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2019

¨ 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

Securities registered pursuant to Section 12(b) of the Act:



Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, without par value	CAC	The NASDAQ Stock Market LLC

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 every Interactive Data File required to be submitted 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 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 ¨
	Emerging growth company ¨

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes ¨ No x

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practical date:

Outstanding at May 1, 2019: Common stock (no par value) 15,521,703 shares.

CAMDEN NATIONAL CORPORATION

FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 2019

TABLE OF CONTENTS OF INFORMATION REQUIRED IN REPORT



		PAGE
PART I. FINANCIAL INFORMATION

ITEM 1.	FINANCIAL STATEMENTS

	Consolidated Statements of Condition (unaudited) - March 31, 2019 and December 31, 2018	3

	Consolidated Statements of Income (unaudited) - Three Months Ended March 31, 2019 and 2018	4

	Consolidated Statements of Comprehensive Income (unaudited) - Three Months Ended March 31, 2019 and 2018	5

	Consolidated Statements of Changes in Shareholders’ Equity (unaudited) - Three Months Ended March 31, 2019 and 2018	6

	Consolidated Statements of Cash Flows (unaudited) - Three Months Ended March 31, 2019 and 2018	7

	Notes to the Unaudited Consolidated Financial Statements	8

ITEM 2.	MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	43

ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK	61

ITEM 4.	CONTROLS AND PROCEDURES	62

PART II. OTHER INFORMATION

ITEM 1.	LEGAL PROCEEDINGS	63

ITEM 1A.	RISK FACTORS	63

ITEM 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	63

ITEM 3.	DEFAULTS UPON SENIOR SECURITIES	63

ITEM 4.	MINE SAFETY DISCLOSURES	63

ITEM 5.	OTHER INFORMATION	63

ITEM 6.	EXHIBITS	63

SIGNATURES		64

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

CONSOLIDATED STATEMENTS OF CONDITION (unaudited)

(In thousands, except number of shares)	March 31, 2019			December 31, 2018
ASSETS
Cash and due from banks	$	43,722		$	52,240
Interest-bearing deposits in other banks (including restricted cash)	95,846			14,759
Total cash, cash equivalents and restricted cash	139,568			66,999
Investments:
Available-for-sale securities, at fair value (book value of $933,135 and $933,399, respectively)	924,311			910,692
Held-to-maturity securities, at amortized cost (fair value of $1,324 and $1,291, respectively)	1,306			1,307
Other investments	11,242			14,679
Total investments	936,859			926,678
Loans held for sale, at fair value (book value of $8,711 and $4,314, respectively)	8,795			4,403
Loans	3,042,442			3,026,222
Less: allowance for loan losses	(25,201		)	(24,712		)
Net loans	3,017,241			3,001,510
Goodwill	94,697			94,697
Other intangible assets	4,054			4,230
Bank-owned life insurance	90,513			89,919
Premises and equipment, net	42,033			42,495
Deferred tax assets	18,854			23,053
Other assets	68,575			43,451
Total assets	$	4,421,189		$	4,297,435
LIABILITIES AND SHAREHOLDERS’ EQUITY
Liabilities
Deposits:
Non-interest checking	$	492,306		$	496,729
Interest checking	1,163,678			1,023,373
Savings and money market	1,059,897			1,137,356
Certificates of deposit	428,487			443,912
Brokered deposits	433,829			363,104
Total deposits	3,578,197			3,464,474
Short-term borrowings	256,181			270,868
Long-term borrowings	10,000			11,580
Subordinated debentures	58,978			59,067
Accrued interest and other liabilities	64,115			55,621
Total liabilities	3,967,471			3,861,610
Commitments and Contingencies
Shareholders’ Equity
Common stock, no par value: authorized 40,000,000 shares, issued and outstanding 15,560,565 and 15,591,914 on March 31, 2019 and December 31, 2018, respectively	156,152			158,215
Retained earnings	311,870			302,030
Accumulated other comprehensive loss:
Net unrealized losses on available-for-sale debt securities, net of tax	(6,927		)	(17,826		)
Net unrealized losses on cash flow hedging derivative instruments, net of tax	(5,268		)	(4,437		)
Net unrecognized losses on postretirement plans, net of tax	(2,109		)	(2,157		)
Total accumulated other comprehensive loss	(14,304		)	(24,420		)
Total shareholders’ equity	453,718			435,825
Total liabilities and shareholders’ equity	$	4,421,189		$	4,297,435

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

CONSOLIDATED STATEMENTS OF INCOME (unaudited)

	Three Months Ended March 31,
(In thousands, except number of shares and per share data)	2019			2018
Interest Income
Interest and fees on loans	$	35,721		$	29,834
Taxable interest on investments	4,994			4,225
Nontaxable interest on investments	644			672
Dividend income	230			286
Other interest income	420			261
Total interest income	42,009			35,278
Interest Expense
Interest on deposits	8,423			3,749
Interest on borrowings	974			1,780
Interest on subordinated debentures	717			847
Total interest expense	10,114			6,376
Net interest income	31,895			28,902
Provision (credit) for credit losses	744			(497		)
Net interest income after provision (credit) for credit losses	31,151			29,399
Non-Interest Income
Service charges on deposit accounts	2,023			1,967
Debit card income	2,010			1,929
Income from fiduciary services	1,392			1,283
Mortgage banking income, net	1,252			1,391
Bank-owned life insurance	594			608
Brokerage and insurance commissions	585			650
Customer loan swap fees	525			87
Other income	1,008			889
Total non-interest income	9,389			8,804
Non-Interest Expense
Salaries and employee benefits	12,978			12,562
Furniture, equipment and data processing	2,680			2,586
Net occupancy costs	1,914			1,873
Debit card expense	823			730
Consulting and professional fees	813			804
Regulatory assessments	472			499
Amortization of intangible assets	176			181
Other real estate owned and collection (recoveries) costs, net	(307		)	75
Other expenses	3,234			2,994
Total non-interest expense	22,783			22,304
Income before income tax expense	17,757			15,899
Income tax expense	3,484			3,079
Net Income	$	14,273		$	12,820
Per Share Data
Basic earnings per share	$	0.91		$	0.82
Diluted earnings per share	$	0.91		$	0.82
Weighted average number of common shares outstanding	15,592,141			15,541,975
Diluted weighted average number of common shares outstanding	15,634,126			15,603,380
Cash dividends declared per share	$	0.30		$	0.25

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

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (unaudited)

	Three Months Ended March 31,
(In thousands)	2019			2018
Net Income	$	14,273		$	12,820
Other comprehensive income (loss):
Net change in unrealized losses on available-for-sale securities, net of tax of ($2,985) and $3,124, respectively	10,899			(11,402		)
Net change in unrealized losses on cash flow hedging derivatives:
Net change in unrealized losses on cash flow hedging derivatives, net of tax of $253 and ($355), respectively	(925		)	1,328
Net reclassification adjustment for effective portion of cash flow hedges, net of tax of ($25) and ($13), respectively⁽¹⁾	94			51
Net change in unrealized losses on cash flow hedging derivatives, net of tax	(831		)	1,379
Reclassification of amortization of net unrecognized actuarial loss and prior service cost, net of tax of ($13) and ($31), respectively⁽²⁾	48			116
Other comprehensive income (loss)	10,116			(9,907		)
Comprehensive Income	$	24,389		$	2,913


(1)	Reclassified into the consolidated statements of income within interest on borrowings and subordinated debentures.


(2)	Reclassified into the consolidated statements of income within salaries and employee benefits and other expenses.

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

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			Accumulated Other Comprehensive Loss			Total Shareholders’ Equity
Balance at December 31, 2017	15,524,704		$	156,904		$	266,723		$	(20,214	)	$	403,413
Cumulative-effect adjustment upon adoption of ASU 2016-01⁽¹⁾	—		—			198			(198		)	—
Cumulative-effect adjustment upon adoption of ASU 2017-12⁽²⁾	—		—			—			665			665
Net income	—		—			12,820			—			12,820
Other comprehensive loss, net of tax⁽²⁾	—		—			—			(9,907		)	(9,907		)
Stock-based compensation expense	—		431			—			—			431
Exercise of stock options and issuance of vested share awards, net of repurchase for tax withholdings	41,164		(475		)	—			—			(475		)
Cash dividends declared ($0.25 per share)	—		—			(3,900		)	—			(3,900		)
Balance at March 31, 2018	15,565,868		$	156,860		$	275,841		$	(29,654	)	$	403,047

Balance at December 31, 2018	15,591,914		$	158,215		$	302,030		$	(24,420	)	$	435,825
Cumulative-effect adjustment upon adoption of ASU 2016-02⁽³⁾	—		—			254			—			254
Net income	—		—			14,273			—			14,273
Other comprehensive income, net of tax	—		—			—			10,116			10,116
Stock-based compensation expense	—		458			—			—			458
Exercise of stock options and issuance of vested share awards, net of repurchase for tax withholdings	24,208		(215		)	—			—			(215		)
Common stock repurchased	(55,557	)	(2,306		)	—			—			(2,306		)
Cash dividends declared ($0.30 per share)	—		—			(4,687		)	—			(4,687		)
Balance at March 31, 2019	15,560,565		$	156,152		$	311,870		$	(14,304	)	$	453,718


(1)	Effective January 1, 2018, the Company adopted ASU 2016-01, Income Statement - Financial Instruments. As a result of the adoption, the Company reclassified its unrealized gain on equity investments from accumulated other comprehensive loss to retained earnings.


(2)	Effective January 1, 2018, the Company adopted ASU 2017-12, Derivatives and Hedging. In conjunction with the adoption, the Company made the transition election to reclassify qualifying securities designated as held-to-maturity to available-for-sale.


(3)	Effective January 1, 2019, the Company adopted ASU 2016-02, Leases, on a modified-retrospective basis. Refer to Note 2 for further details.

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

CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)

	Three Months Ended March 31,
(In thousands)	2019			2018
Operating Activities
Net Income	$	14,273		$	12,820
Adjustments to reconcile net income to net cash (used by) provided by operating activities:
Originations of mortgage loans held for sale	(32,405		)	(46,641		)
Proceeds from the sale of mortgage loans	28,834			46,426
Gain on sale of mortgage loans, net of origination costs	(826		)	(1,220		)
Depreciation and amortization expense	922			940
Investment securities amortization and accretion, net	660			763
Purchase accounting accretion, net	(477		)	(514		)
Stock-based compensation expense	458			431
Provision (credit) for credit losses	744			(497		)
Amortization of intangible assets	176			181
Increase in other assets	(10,710		)	(2,850		)
(Decrease) increase in other liabilities	(6,291		)	7,218
Net cash (used by) provided by operating activities	(4,642		)	17,057
Investing Activities
Proceeds from sales and maturities of available-for-sale securities	26,355			29,531
Purchase of available-for-sale securities	(26,749		)	(50,152		)
Proceeds from maturities of held-to-maturity securities	—			750
Net increase in loans	(16,734		)	(7,008		)
Purchase of Federal Home Loan Bank stock	(2,012		)	(2,815		)
Proceeds from sale of Federal Home Loan Bank stock	5,691			3,472
Purchase of premises and equipment	(1,583		)	(595		)
Proceeds from other investments	—			205
Recoveries of previously charged-off loans	75			122
Net cash used by investing activities	(14,957		)	(26,490		)
Financing Activities
Net increase in deposits	113,740			25,126
Net (repayments of) proceeds from borrowings less than 90 days	(14,687		)	10,816
Common stock repurchase	(1,957		)	—
Exercise of stock options and issuance of restricted stock, net of repurchase for tax withholdings	(215		)	(475		)
Cash dividends paid on common stock	(4,687		)	(3,896		)
Finance lease payments	(26		)	—
Net cash provided by financing activities	92,168			31,571
Net increase in cash, cash equivalents and restricted cash	72,569			22,138
Cash, cash equivalents, and restricted cash at beginning of period	66,999			102,971
Cash, cash equivalents and restricted cash at end of period	$	139,568		$	125,109
Supplemental information
Interest paid	$	9,738		$	6,384
Unsettled common stock repurchase	349			—
Income taxes paid	91			69
Transfer from loans to other real estate owned	543			—

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

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 (the "Company") as of March 31, 2019 and December 31, 2018, the consolidated statements of income for the three months ended March 31, 2019 and 2018, the consolidated statements of comprehensive income for the three months ended March 31, 2019 and 2018, the consolidated statements of changes in shareholders' equity for the three months ended March 31, 2019 and 2018, and the consolidated statements of cash flows for the three months ended March 31, 2019 and 2018. The consolidated financial statements include the accounts of the Company and Camden National Bank (the "Bank"), a wholly-owned subsidiary of the Company (which includes the consolidated accounts of Healthcare Professional Funding Corporation ("HPFC"), Property A, Inc. and Property P, Inc.). All intercompany accounts and transactions have been eliminated in consolidation. Assets held by the Bank in fiduciary capacity, through Camden National Wealth Management, are not assets of the Company and, therefore, are not included in the consolidated statements of condition. The Company also owns 100% of the common stock of Camden Capital Trust A and Union Bankshares Capital Trust I, these entities are unconsolidated subsidiaries of the Company. Certain reclassifications have been made to prior period amounts to conform to the current period presentation. Such reclassifications did not impact net income or shareholders' equity as previously reported. Net income reported for the three months ended March 31, 2019, 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 Company's Annual Report on Form 10-K for the year ended December 31, 2018.

The acronyms, abbreviations and definitions identified below are used throughout this Form 10-Q, including Part I. "Financial Information" and Part II. "Management's Discussion and Analysis of Financial Condition and Results of Operations." The following is provided to aid the reader and provide a reference page when reviewing these sections of the Form 10-Q.



AFS:	Available-for-sale	GAAP:	Generally accepted accounting principles in the United States
ALCO:	Asset/Liability Committee	HPFC:	Healthcare Professional Funding Corporation, a wholly-owned subsidiary of Camden National Bank
ALL:	Allowance for loan losses	HTM:	Held-to-maturity
AOCI:	Accumulated other comprehensive income (loss)	IRS:	Internal Revenue Service
ASC:	Accounting Standards Codification	LIBOR:	London Interbank Offered Rate
ASU:	Accounting Standards Update	LTIP:	Long-Term Performance Share Plan
Bank:	Camden National Bank, a wholly-owned subsidiary of Camden National Corporation	Management ALCO:	Management Asset/Liability Committee
BOLI:	Bank-owned life insurance	MBS:	Mortgage-backed security
Board ALCO:	Board of Directors' Asset/Liability Committee	MSPP:	Management Stock Purchase Plan
CCTA:	Camden Capital Trust A, an unconsolidated entity formed by Camden National Corporation	N.M.:	Not meaningful
CDs:	Certificate of deposits	OCC:	Office of the Comptroller of the Currency
Company:	Camden National Corporation	OCI:	Other comprehensive income (loss)
CMO:	Collateralized mortgage obligation	OREO:	Other real estate owned
DCRP:	Defined Contribution Retirement Plan	OTTI:	Other-than-temporary impairment
EPS:	Earnings per share	SERP:	Supplemental executive retirement plans
FASB:	Financial Accounting Standards Board	Tax Act:	Tax Cuts and Jobs Act of 2017, enacted on December 22, 2017
FDIC:	Federal Deposit Insurance Corporation	TDR:	Troubled-debt restructured loan
FHLB:	Federal Home Loan Bank	UBCT:	Union Bankshares Capital Trust I, an unconsolidated entity formed by Union Bankshares Company that was subsequently acquired by Camden National Corporation
FHLBB:	Federal Home Loan Bank of Boston	U.S.:	United States of America
FRB:	Federal Reserve System Board of Governors	2003 Plan:	2003 Stock Option and Incentive Plan
FRBB:	Federal Reserve Bank of Boston	2012 Plan:	2012 Equity and Incentive Plan

NOTE 2 – RECENT ACCOUNTING PRONOUNCEMENTS

Accounting Standards Adopted

The Company adopted the following accounting standards in 2019, and such standards have been accounted for and presented within the accompanying consolidated financial statements for the three months ended March 31, 2019 as follows:

ASU No. 2016-02, Leases (Topic 842) ("ASU 2016-02"): In February 2016, the FASB issued ASU 2016-02 to increase transparency and comparability among organizations by recognizing lease assets and liabilities (including operating leases) on the balance sheet and disclosing key information about leasing arrangements. Prior lease accounting did not require the inclusion of operating leases in the balance sheet.

Effective January 1, 2019, the Company adopted ASU 2016-02, using the following practical expedients for transitional relief provided for within the subsequent issuance of ASU No. 2018-11, Leases (Topic 842): Targeted Improvements ("ASU 2018-11"):


•	An entity need not reassess whether any expired or existing contract is or contains leases.


•	An entity need not reassess the lease classification for any expired or existing leases.


•	An entity need not reassess initial direct costs for any existing leases.


•	An entity may elect to apply hindsight to leases that existed during the period from the beginning of the earliest period presented in the financial statements until the effective date.


•	Modified retrospective transition method, which allows companies to apply ASU 2016-02 at the date of adoption and recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption.

In conjunction with the adoption of Topic 842, the Company made the following accounting policy elections:


•	For leases with a term of 12 months or less, a right-of-use asset or lease liability will not be recognized on the consolidated statements of condition.


•	For non-real estate leased assets with individual undiscounted contractual cash flows of less than $500,000 over the reasonably certain term of the lease, a right-of-use asset or lease liability will not be recognized on the consolidated statements of condition as the lease is considered immaterial to the Company's financial statements.

The Company has completed its assessment and implementation process for ASU 2016-02 and recorded operating and finance lease right-of-use assets of $12.1 million and lease liabilities of $12.3 million on the consolidated statements of condition within other assets and other liabilities, respectively, on January 1, 2019. Because the modified-retrospective transition method was used, the Company did not revise prior period presentation on its consolidated statements of income. The adoption of the ASU did not have a material effect on the consolidated financial statements, which included a cumulative-effect adjustment of $254,000 to retained earnings on January 1, 2019. Refer to Note 5 for further details.

Accounting Standards Issued

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

ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments ("ASU 2016-13"), updated by ASU No. 2018-19 - Codification improvements to Topic 326, Financial Instruments- Credit Losses: In June 2016, the FASB issued ASU 2016-13 to require timelier recording of credit losses on loans and other financial instruments held by financial institutions and other organizations. ASU 2016-13 is effective for annual periods beginning after December 15, 2019, including interim periods within those fiscal years, for public companies. Early adoption is permitted for annual periods beginning after December 15, 2018, including interim periods within that fiscal year. The Company will adopt the guidance under a modified-retrospective approach, whereby a cumulative-effect adjustment will be made to retained earnings upon adoption. The Company will use a prospective transition approach for debt securities for which an OTTI had been recognized before the effective date, as applicable.

While the Company continues to prepare for the adoption of ASU 2016-13 on January 1, 2020, it recognizes that changes to the consolidated financial statements upon adoption are imminent as the ASU requires:


•	A change in the Company's assessment of its ALL and allowance on unused commitments as it will transition from an incurred loss model to an expected loss model, which may result in an increase in the ALL upon adoption and may negatively impact the Company and Bank's regulatory capital ratios.


•	An allowance on the expected losses over the life of the Company's HTM investment securities to be recorded upon adoption, which may reduce the carrying value of these securities.

•

Changes to the considerations when assessing AFS debt securities for OTTI, including (i) no longer considering the amount of time a security has been in an unrealized loss position and (ii) no longer considering the historical and implied volatility of a security and recoveries or declines in the fair value after the balance sheet date, as well as the presentation of OTTI as an allowance rather than a permanent write-down of the debt security.


•	Changes to the disclosure requirements to reflect the transition from an incurred loss methodology to an expected credit loss methodology, as well as certain disclosures of credit quality indicators in relation to the amortized cost of financing receivables disaggregated by year of origination (or vintage).

In 2015, the Company began its preparation for ASU 2016-13, understanding the significance of the standard and its potential impact to its consolidated financial statements and the financial industry. While the Company continues to review, validate and refine its loss methodologies in accordance with ASU 2016-13, it has completed certain critical tasks and components as it prepares for adoption on January 1, 2020, such as the assessment and validation of critical data points. At this time, the Company does not have an estimated financial impact of adoption to its consolidated financial statements, but anticipates it will have an estimate of the financial impact in the second half of 2019. Any disclosure of an estimated financial impact made by the Company will be subject to various factors that may cause actual results to differ materially from the Company's estimates. These factors include, but are not limited to, (i) the economic outlook over the reasonable and supportable forecast period; (ii) changes in the make-up of the Company’s loan portfolio; and/or (iii) changes in the credit quality of individual loans or pools of loans within its portfolio upon adoption.

ASU No. 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment ("ASU 2017-04"): In January 2017, the FASB issued ASU No. 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment ("ASU 2017-04"). ASU 2017-04 was issued to reduce the cost and complexity of the goodwill impairment test. To simplify the subsequent measurement of goodwill, step two of the goodwill impairment test was eliminated. Instead, in accordance with ASU 2017-04, a Company will recognize an impairment of goodwill should the carrying value of a reporting unit exceed its fair value (i.e. step one). ASU 2017-04 will be effective for the Company on January 1, 2020 and will be applied prospectively. The Company does not expect the ASU to have a material impact on the consolidated financial statements upon adoption.

NOTE 3 – INVESTMENTS

AFS and HTM Investments

The following table summarizes the amortized cost and estimated fair values of AFS and HTM securities, as of the dates indicated:



	Amortized Cost		Unrealized Gains		Unrealized Losses			Fair Value
March 31, 2019
AFS Investments (carried at fair value):
Obligations of states and political subdivisions	$	92,030	$	1,095	$	(105	)	$	93,020
Mortgage-backed securities issued or guaranteed by U.S. government-sponsored enterprises	453,980		1,290		(6,449		)	448,821
Collateralized mortgage obligations issued or guaranteed by U.S. government-sponsored enterprises	366,727		1,888		(7,215		)	361,400
Subordinated corporate bonds	20,398		672		—			21,070
Total AFS investments	$	933,135	$	4,945	$	(13,769	)	$	924,311
HTM Investments (carried at amortized cost):
Obligations of states and political subdivisions	$	1,306	$	21	$	(3	)	$	1,324
Total HTM investments	$	1,306	$	21	$	(3	)	$	1,324
December 31, 2018
AFS Investments (carried at fair value):
Obligations of states and political subdivisions	$	94,430	$	216	$	(894	)	$	93,752
Mortgage-backed securities issued or guaranteed by U.S. government-sponsored enterprises	466,613		583		(13,524		)	453,672
Collateralized mortgage obligations issued or guaranteed by U.S. government-sponsored enterprises	351,958		1,007		(10,071		)	342,894
Subordinated corporate bonds	20,398		23		(47		)	20,374
Total AFS investments	$	933,399	$	1,829	$	(24,536	)	$	910,692
HTM Investments (carried at amortized cost):
Obligations of states and political subdivisions	$	1,307	$	8	$	(24	)	$	1,291
Total HTM investments	$	1,307	$	8	$	(24	)	$	1,291

Net unrealized losses on AFS investments at March 31, 2019 included in AOCI amounted to $6.9 million, net of a deferred tax benefit of $1.9 million. Net unrealized losses on AFS investments at December 31, 2018 included in AOCI amounted to $17.8 million, net of a deferred tax benefit of $4.9 million.

For the three months ended March 31, 2019 and 2018, the Company purchased debt investments of $26.7 million and $50.1 million, respectively, all of which were designated as AFS investments.

Impaired AFS and HTM Investments:

Management periodically reviews the Company’s AFS and HTM investments to determine the cause, magnitude and duration of declines in the fair value of each security. Thorough evaluations of the causes of the unrealized losses are performed to determine whether the impairment is temporary or other-than-temporary in nature. Considerations such as the ability of the securities to meet cash flow requirements, levels of credit enhancements, risk of curtailment, and recoverability of invested amount over a reasonable period of time, and the length of time the security is in a loss position, for example, are applied in determining OTTI. Once a decline in value is determined to be other-than-temporary, the cost basis of the security is permanently reduced and a corresponding charge to earnings is recognized.

The following table presents the estimated fair values and gross unrealized losses on AFS and HTM investments that were in a continuous loss position at March 31, 2019 and December 31, 2018, by length of time that an individual security in each category has been in a continuous loss position:



	Less Than 12 Months					12 Months or More					Total
	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
March 31, 2019
AFS Investments:
Obligations of states and political subdivisions	$	2,017	$	—		$	9,941	$	(105	)	$	11,958	$	(105	)
Mortgage-backed securities issued or guaranteed by U.S. government-sponsored enterprises	8,859		(46		)	347,541		(6,403		)	356,400		(6,449		)
Collateralized mortgage obligations issued or guaranteed by U.S. government-sponsored enterprises	—		—			224,959		(7,215		)	224,959		(7,215		)
Total AFS investments	$	10,876	$	(46	)	$	582,441	$	(13,723	)	$	593,317	$	(13,769	)
HTM Investments:
Obligations of states and political subdivisions	$	—	$	—		$	426	$	(3	)	$	426	$	(3	)
Total HTM investments	$	—	$	—		$	426	$	(3	)	$	426	$	(3	)
December 31, 2018
AFS Investments:
Obligations of states and political subdivisions	$	36,218	$	(281	)	$	28,437	$	(613	)	$	64,655	$	(894	)
Mortgage-backed securities issued or guaranteed by U.S. government-sponsored enterprises	46,459		(252		)	364,430		(13,272		)	410,889		(13,524		)
Collateralized mortgage obligations issued or guaranteed by U.S. government-sponsored enterprises	5,956		(40		)	227,461		(10,031		)	233,417		(10,071		)
Subordinated corporate bonds	11,378		(26		)	966		(21		)	12,344		(47		)
Total AFS investments	$	100,011	$	(599	)	$	621,294	$	(23,937	)	$	721,305	$	(24,536	)
HTM Investments:
Obligations of states and political subdivisions	$	509	$	(5	)	$	411	$	(19	)	$	920	$	(24	)
Total HTM investments	$	509	$	(5	)	$	411	$	(19	)	$	920	$	(24	)

At March 31, 2019 and December 31, 2018, the Company held 192 and 302 debt investments classified as AFS and HTM with a fair value of $593.7 million and $722.2 million that were in an unrealized loss position totaling $13.8 million and $24.6 million, respectively, that were considered temporary. Of these, MBS and CMOs with a fair value of $572.5 million and $591.9 million were in an unrealized loss position, and have been in an unrealized loss position for 12 months or more, totaling $13.6 million and $23.3 million at March 31, 2019 and December 31, 2018, respectively. The unrealized loss was reflective of current

interest rates in excess of the yield received on debt investments and is not indicative of an overall change in credit quality or other factors with the Company's AFS and HTM investment portfolio. At March 31, 2019 and December 31, 2018, gross unrealized losses on the Company's AFS and HTM investments were 2.3% and 3.4%, respectively, of their respective fair values.

The Company has the intent and ability to retain its debt investments in an unrealized loss position at March 31, 2019 until the decline in value has recovered.

Sale of AFS Investments:

For the three months ended March 31, 2019 and 2018, the Company did not sell any AFS investments.

AFS and HTM Investments Pledged:

At March 31, 2019 and December 31, 2018, AFS and HTM investments with an amortized cost of $679.0 million and $734.1 million and estimated fair values of $671.6 million and $714.4 million, respectively, were pledged to secure FHLBB advances, public deposits, and securities sold under agreements to repurchase and for other purposes required or permitted by law.

Contractual Maturities:

The amortized cost and estimated fair values of the Company's AFS and HTM investments by contractual maturity at March 31, 2019, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.



	Amortized Cost		Fair Value
AFS Investments
Due in one year or less	$	14,702	$	14,669
Due after one year through five years	68,822		67,998
Due after five years through ten years	241,455		240,454
Due after ten years	608,156		601,190
	$	933,135	$	924,311
HTM Investments
Due in one year or less	$	—	$	—
Due after one year through five years	—		—
Due after five years through ten years	1,306		1,324
Due after ten years	—		—
	$	1,306	$	1,324

Other Investments

The following table summarizes the cost and estimated fair values of the Company's investment in equity securities, FHLBB stock and FRBB stock as presented within other investments on the consolidated statements of condition, as of the dates indicated:



	Cost		Unrealized Gains		Unrealized Losses		Fair Value / Carrying Value
March 31, 2019
Equity securities - bank stock (carried at fair value)	$	544	$	444	$	—	$	988
FHLBB (carried at cost)	4,880		—		—		4,880
FRB (carried at cost)	5,374		—		—		5,374
Total other investments	$	10,798	$	444	$	—	$	11,242
December 31, 2018
Equity securities - bank stock (carried at fair value)	$	544	$	202	$	—	$	746
FHLBB (carried at cost)	8,559		—		—		8,559
FRB (carried at cost)	5,374		—		—		5,374
Total other investments	$	14,477	$	202	$	—	$	14,679

For the three months ended March 31, 2019 and 2018, the Company recognized an unrealized gain (loss) of $242,000 and ($35,000), respectively, due to the change in fair value of its bank stock equity securities, which were presented within other income on the consolidated statements of income. For the three months ended March 31, 2018, a gain of $195,000 was recognized within other income on the consolidated statements of income upon sale of an investment.

The Company did not record any OTTI on its FHLBB and FRB stock for the three months ended March 31, 2019 and 2018. For the three months ended March 31, 2019 and 2018 the Company recorded dividend income from its investment in FHLBB and FRB stock of $230,000 and $286,000, respectively.

NOTE 4 – LOANS AND ALLOWANCE FOR LOAN LOSSES

The composition of the Company’s loan portfolio, excluding residential loans held for sale, was as follows for the dates indicated:



	March 31, 2019		December 31, 2018
Residential real estate	$	1,017,442	$	992,866
Commercial real estate	1,258,474		1,269,533
Commercial	390,982		381,780
Home equity	323,969		327,763
Consumer	20,733		20,624
HPFC	30,842		33,656
Total loans	$	3,042,442	$	3,026,222

The loan balances for each portfolio segment presented above are net of their respective unamortized fair value mark discount on acquired loans and net of unamortized loan origination costs for the dates indicated:



	March 31, 2019			December 31, 2018
Net unamortized fair value mark discount on acquired loans	$	3,571		$	3,936
Net unamortized loan origination costs	(2,157		)	(1,865		)
Total	$	1,414		$	2,071

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

In the normal course of business, the Bank has made loans to certain officers, directors and their associated companies, under terms that are consistent with the Company's lending policies and regulatory requirements. At March 31, 2019 and 2018, outstanding loans to certain officers, directors and their associated companies was less than 5% of the Company's shareholders' equity.

The HPFC loan portfolio consists of niche commercial lending to the small business medical field, including dentists, optometrists and veterinarians across the U.S. The ability and willingness of borrowers to honor their repayment commitments is generally dependent on the success of the borrower's business. In 2016, the Company closed HPFC's operations and is no longer originating HPFC 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, 2019.

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

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

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

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

HPFC. Prior to the Company's closing of HPFC's operations in 2016, it provided commercial lending to dentists, optometrists and veterinarians, many of which were start-up companies. HPFC's loan portfolio consists of term loan obligations extended for the purpose of financing working capital and/or purchase of equipment. Collateral consists of pledges of business assets including, but not limited to, accounts receivable, inventory, and/or equipment. These loans are primarily paid by the operating cash flow of the borrower and the original terms range from seven to ten years.

The following presents the activity in the ALL and select loan information by portfolio segment for the periods indicated:



	Residential Real Estate			Commercial Real Estate			Commercial			Home Equity			Consumer			HPFC			Total
For The Three Months Ended March 31, 2019
ALL for the three months ended:
Beginning balance	$	6,071		$	11,654		$	3,620		$	2,796		$	234		$	337		$	24,712
Loans charged off	(11		)	(65		)	(236		)	(10		)	(14		)	—			(336		)
Recoveries	2			4			62			—			7			—			75
Provision (credit)⁽¹⁾	91			245			170			241			32			(29		)	750
Ending balance	$	6,153		$	11,838		$	3,616		$	3,027		$	259		$	308		$	25,201
ALL balance attributable to loans:
Individually evaluated for impairment	$	553		$	27		$	—		$	347		$	—		$	—		$	927
Collectively evaluated for impairment	5,600			11,811			3,616			2,680			259			308			24,274
Total ending ALL	$	6,153		$	11,838		$	3,616		$	3,027		$	259		$	308		$	25,201
Loans:
Individually evaluated for impairment	$	4,736		$	410		$	223		$	895		$	—		$	—		$	6,264
Collectively evaluated for impairment	1,012,706			1,258,064			390,759			323,074			20,733			30,842			3,036,178
Total ending loans balance	$	1,017,442		$	1,258,474		$	390,982		$	323,969		$	20,733		$	30,842		$	3,042,442
For The Three Months Ended March 31, 2018
ALL for the three months ended:
Beginning balance	$	5,086		$	11,863		$	4,171		$	2,367		$	233		$	451		$	24,171
Loans charged off	(31		)	(426		)	(171		)	(149		)	(26		)	—			(803		)
Recoveries	—			13			63			43			3			—			122
Provision (credit)⁽¹⁾	442			(1,164		)	63			166			20			(27		)	(500		)
Ending balance	$	5,497		$	10,286		$	4,126		$	2,427		$	230		$	424		$	22,990
ALL balance attributable to loans:
Individually evaluated for impairment	$	553		$	368		$	—		$	112		$	—		$	—		$	1,033
Collectively evaluated for impairment	4,944			9,918			4,126			2,315			230			424			21,957
Total ending ALL	$	5,497		$	10,286		$	4,126		$	2,427		$	230		$	424		$	22,990
Loans:
Individually evaluated for impairment	$	5,059		$	3,961		$	1,714		$	491		$	—		$	—		$	11,225
Collectively evaluated for impairment	855,474			1,165,572			376,301			320,151			18,011			42,414			2,777,923
Total ending loans balance	$	860,533		$	1,169,533		$	378,015		$	320,642		$	18,011		$	42,414		$	2,789,148



	Residential Real Estate			Commercial Real Estate			Commercial			Home Equity			Consumer			HPFC			Total
For The Year Ended December 31, 2018
ALL:
Beginning balance	$	5,086		$	11,863		$	4,171		$	2,367		$	233		$	451		$	24,171
Loans charged off	(173		)	(512		)	(736		)	(476		)	(96		)	(255		)	(2,248		)
Recoveries	90			28			1,770			44			11			1			1,944
Provision (credit)⁽¹⁾	1,068			275			(1,585		)	861			86			140			845
Ending balance	$	6,071		$	11,654		$	3,620		$	2,796		$	234		$	337		$	24,712
ALL balance attributable to loans:
Individually evaluated for impairment	$	586		$	23		$	53		$	162		$	—		$	—		$	824
Collectively evaluated for impairment	5,485			11,631			3,567			2,634			234			337			23,888
Total ending ALL	$	6,071		$	11,654		$	3,620		$	2,796		$	234		$	337		$	24,712
Loans:
Individually evaluated for impairment	$	4,762		$	930		$	786		$	442		$	6		$	—		$	6,926
Collectively evaluated for impairment	988,104			1,268,603			380,994			327,321			20,618			33,656			3,019,296
Total ending loans balance	$	992,866		$	1,269,533		$	381,780		$	327,763		$	20,624		$	33,656		$	3,026,222

(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, 2019 and 2018, and December 31, 2018, the reserve for unfunded commitments was $16,000, $23,000 and $22,000, respectively.

The following reconciles the provision for loan losses to the provision for credit losses as presented on the consolidated statements of income for the periods indicated:



	Three Months Ended March 31,						Year Ended December 31, 2018
	2019			2018			Year Ended December 31, 2018
Provision (credit) for loan losses	$	750		$	(500	)	$	845
Change in reserve for unfunded commitments	(6		)	3			2
Provision (credit) for credit losses	$	744		$	(497	)	$	847

The Company focuses on maintaining a well-balanced and diversified loan portfolio. Despite such efforts, it is recognized that credit concentrations may occasionally emerge as a result of economic conditions, changes in local demand, natural loan growth and runoff. To ensure that credit concentrations can be effectively identified, all commercial and commercial real estate loans are assigned Standard Industrial Classification codes, North American Industry Classification System codes, and state and county codes. Shifts in portfolio concentrations are monitored by the Company's Credit Risk Administration. As of March 31, 2019, the Company's total exposure to the lessors of nonresidential buildings' industry was 12% of total loans and 28% of total commercial real estate loans. There were no other industry exposures exceeding 10% of the Company's total loan portfolio as of March 31, 2019.

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

•

Grade 1 through 6 — Grades 1 through 6 represent groups of loans that are not subject to adverse criticism as defined in regulatory guidance. Loans in these groups exhibit characteristics that represent low to moderate risks, which is measured using a variety of credit risk criteria, such as cash flow coverage, debt service coverage, balance sheet leverage, liquidity, management experience, industry position, prevailing economic conditions, support from secondary sources of repayment and other credit factors that may be relevant to a specific loan. In general, these loans are supported by properly margined collateral and guarantees of principal parties.

•

Grade 7 — Loans with potential weakness (Special Mention). Loans in this category are currently protected based on collateral and repayment capacity and do not constitute undesirable credit risk, but have potential weakness that may result in deterioration of the repayment process at some future date. This classification is used if a negative trend is evident in the obligor’s financial situation. Special mention loans do not sufficiently expose the Company to warrant adverse classification.


•	Grade 8 — Loans with definite weakness (Substandard). Loans classified as substandard are inadequately protected by the current sound worth and paying capacity of the obligor or by collateral pledged. Borrowers experience difficulty in meeting debt repayment requirements. Deterioration is sufficient to cause the Company to look to the sale of collateral.

•

Grade 9 — Loans with potential loss (Doubtful). Loans classified as doubtful have all the weaknesses inherent in the substandard grade with the added characteristic that the weaknesses make collection or liquidation of the loan in full highly questionable and improbable. The possibility of some loss is extremely high, but because of specific pending factors that may work to the advantage and strengthening of the asset, its classification as an estimated loss is deferred until its more exact status may be determined.


•	Grade 10 — Loans with definite loss (Loss). Loans classified as loss are considered uncollectible. The loss classification does not mean that the asset has absolutely no recovery or salvage value, but rather that it is not practical or desirable to defer writing off the asset because recovery and collection time may be protracted.

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

The following summarizes credit risk exposure indicators by portfolio segment as of the following dates:



	Residential Real Estate		Commercial Real Estate		Commercial		Home Equity		Consumer		HPFC		Total
March 31, 2019
Pass (Grades 1-6)	$	1,007,775	$	1,237,494	$	385,081	$	—	$	—	$	29,519	$	2,659,869
Performing	—		—		—		321,505		20,710		—		342,215
Special Mention (Grade 7)	878		5,114		2,146		—		—		110		8,248
Substandard (Grade 8)	8,789		15,866		3,755		—		—		1,213		29,623
Non-performing	—		—		—		2,464		23		—		2,487
Total	$	1,017,442	$	1,258,474	$	390,982	$	323,969	$	20,733	$	30,842	$	3,042,442
December 31, 2018
Pass (Grades 1-6)	$	983,086	$	1,247,190	$	374,429	$	—	$	—	$	32,261	$	2,636,966
Performing	—		—		—		325,917		20,595		—		346,512
Special Mention (Grade 7)	887		7,921		3,688		—		—		123		12,619
Substandard (Grade 8)	8,893		14,422		3,663		—		—		1,272		28,250
Non-performing	—		—		—		1,846		29		—		1,875
Total	$	992,866	$	1,269,533	$	381,780	$	327,763	$	20,624	$	33,656	$	3,026,222

The Company closely monitors the performance of its loan portfolio. 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 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, 2019
Residential real estate	$	2,135	$	491	$	4,269	$	6,895	$	1,010,547	$	1,017,442	$	—	$	5,415
Commercial real estate	1,387		1,885		397		3,669		1,254,805		1,258,474		—		975
Commercial	1,196		470		324		1,990		388,992		390,982		—		802
Home equity	1,017		192		1,788		2,997		320,972		323,969		—		2,467
Consumer	43		362		23		428		20,305		20,733		14		9
HPFC	5		182		396		583		30,259		30,842		—		485
Total	$	5,783	$	3,582	$	7,197	$	16,562	$	3,025,880	$	3,042,442	$	14	$	10,153
December 31, 2018
Residential real estate	$	3,300	$	2,046	$	4,520	$	9,866	$	983,000	$	992,866	$	—	$	5,492
Commercial real estate	1,794		369		1,108		3,271		1,266,262		1,269,533		—		1,380
Commercial	150		19		799		968		380,812		381,780		—		1,279
Home equity	907		607		1,476		2,990		324,773		327,763		—		1,846
Consumer	67		15		29		111		20,513		20,624		14		15
HPFC	—		183		423		606		33,050		33,656		—		518
Total	$	6,218	$	3,239	$	8,355	$	17,812	$	3,008,410	$	3,026,222	$	14	$	10,530

Interest income that would have been recognized if loans on non-accrual status had been current in accordance with their original terms was $109,000 and $162,000 for the three months ended March 31, 2019 and 2018, 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. TDRs 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 net realizable value, 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, 2019	December 31, 2018	March 31, 2019		December 31, 2018		March 31, 2019		December 31, 2018
Residential real estate	25	25	$	3,594	$	3,614	$	410	$	443
Commercial real estate	2	2	347		347		27		23
Commercial	2	2	138		141		—		—
Home equity	2	2	301		304		162		162
Total	31	31	$	4,380	$	4,406	$	599	$	628

At March 31, 2019, the Company had performing and non-performing TDRs with a recorded investment balance of $3.8 million and $608,000, respectively. At December 31, 2018, the Company had performing and non-performing TDRs with a recorded investment balance of $3.9 million and $513,000, respectively.

There were no loan modifications that qualify as TDRs that occurred for the three months ended March 31, 2019 and 2018.

For the three months ended March 31, 2019 and 2018, no loans were modified as TDRs within the previous 12 months for which the borrower subsequently defaulted.

Impaired Loans:

Impaired loans consist of non-accrual loans and TDRs 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 the periods indicated:



							For the Three Months Ended
	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized
March 31, 2019:
With an allowance recorded:
Residential real estate	$	3,454	$	3,454	$	553	$	3,462	$	30
Commercial real estate	131		131		27		131		1
Commercial	—		—		—		278		—
Home equity	828		828		347		573		—
Consumer	—		—		—		—		—
HPFC	—		—		—		—		—
Ending balance	4,413		4,413		927		4,444		31
Without an allowance recorded:
Residential real estate	1,282		1,406		—		1,286		10
Commercial real estate	279		455		—		539		3
Commercial	223		286		—		226		2
Home equity	67		265		—		96		—
Consumer	—		—		—		—		—
HPFC	—		—		—		—		—
Ending balance	1,851		2,412		—		2,147		15
Total impaired loans	$	6,264	$	6,825	$	927	$	6,591	$	46
March 31, 2018:
With an allowance recorded:
Residential real estate	$	3,544	$	3,544	$	553	$	3,745	$	30
Commercial real estate	3,591		3,591		368		4,275		1
Commercial	—		—		—		—		—
Home equity	147		147		112		49		—
Consumer	—		—		—		—		—
HPFC	—		—		—		—		—
Ending Balance	7,282		7,282		1,033		8,069		31
Without an allowance recorded:
Residential real estate	1,515		1,791		—		1,350		7
Commercial real estate	370		677		—		637		3
Commercial	1,714		2,923		—		1,740		2
Home equity	344		468		—		396		2
Consumer	—		—		—		—		—
HPFC	—		—		—		—		—
Ending Balance	3,943		5,859		—		4,123		14
Total impaired loans	$	11,225	$	13,141	$	1,033	$	12,192	$	45



							For the Year Ended
	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized
December 31, 2018:
With an allowance recorded:
Residential real estate	$	3,471	$	3,471	$	586	$	3,591	$	127
Commercial real estate	131		131		23		1,969		11
Commercial	556		556		53		111		—
Home equity	318		318		162		250		—
Consumer	—		—		—		—		—
HPFC	—		—		—		—		—
Ending Balance	4,476		4,476		824		5,921		138
Without an allowance recorded:
Residential real estate	1,291		1,415		—		1,524		34
Commercial real estate	799		975		—		2,269		13
Commercial	230		293		—		1,379		8
Home equity	124		305		—		195		—
Consumer	6		13		—		1		—
HPFC	—		—		—		—		—
Ending Balance	2,450		3,001		—		5,368		55
Total impaired loans	$	6,926	$	7,477	$	824	$	11,289	$	193

Loan Sales:

For the three months ended March 31, 2019 and 2018, the Company sold $28.0 million and $45.2 million, respectively, of fixed rate residential mortgage loans on the secondary market, which resulted in gains on the sale of loans (net of costs) of $826,000 and $1.2 million, respectively.

At March 31, 2019 and December 31, 2018, the Company had certain residential mortgage loans with a principal balance of $8.7 million and $4.3 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, 2019 and December 31, 2018, recorded an unrealized gain of $84,000 and $89,000, respectively. For the three months ended March 31, 2019 and 2018, the net change in unrealized gains on loans held for sale recorded within mortgage banking income, net, on its consolidated statements of income, was ($4,000) and $9,000, respectively.

The Company has forward delivery commitments with a secondary market investor on each of its loans held for sale at March 31, 2019 and December 31, 2018. The fair value of its forward delivery commitments at March 31, 2019 and December 31, 2018 was $98,000 and $15,000, respectively. For the three months ended March 31, 2019 and 2018, the net unrealized gain from the change in fair value on the Company's forward delivery commitments reported within mortgage banking income, net on the consolidated statements of income were $83,000 and $19,000, respectively. Refer to Note 8 for further discussion of the Company's forward delivery commitments.

In-Process Foreclosure Proceedings:

At March 31, 2019 and December 31, 2018, the Company had $2.7 million and $2.3 million, respectively, of consumer mortgage loans secured by residential real estate properties for which foreclosure proceedings were in process. 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 $1.3 billion and $1.1 billion at March 31, 2019 and December 31, 2018, respectively.

Refer to Notes 3 and 7 of the consolidated financial statements for discussion of securities pledged as collateral.

NOTE 5 – LEASES

Effective January 1, 2019, the Company adopted the new lease accounting standard, ASU 2016-02, using the modified- retrospective method. As such, for reporting periods beginning on or after January 1, 2019, leases are recognized, presented and disclosed in accordance with ASU 2016-02, while periods prior to the adoption date were not adjusted and are reported in accordance with ASC 840, Leases ("ASC 840"). Refer to Note 2 for further details.

The Company enters into noncancellable lease arrangements primarily for its office buildings and branches. Certain lease arrangements contain clauses requiring increasing rental payments over the lease term, which may be linked to an index (commonly the Consumer Price Index) or contractually stipulated. Many of these lease arrangements provide the Company with the option to renew the lease arrangement after the initial lease term. These options are included in determining the lease term used to establish the right-of-use assets and lease liabilities, when it is reasonably certain the Company will exercise its renewal option. As most of the Company's leases do not have a readily determinable implicit rate, the incremental borrowing rate is primarily used to determine the discount rate for purposes of measuring the right-of-use assets and lease liabilities. The Company's lease agreements do not contain any material residual value guarantees or material restrictive covenants.

In connection with an acquisition, the Company assumed a lease arrangement between the acquiree and two of its employees. The lease is for a period of five years with an expiration date of December 1, 2019 with two consecutive five-year extension periods available at the option of the Company. The lease arrangement contains certain termination clauses whereby the Company has the right to terminate the lease arrangement should the employees be terminated and/or certain mortgage loan production metrics not be met over a consecutive 12 month period.

The following right-of-use assets and lease liabilities have been reported within other assets and other liabilities on the consolidated statements of condition for the period indicated:



		March 31, 2019
	Balance Sheet Line Item	Operating Leases		Finance Leases		Total
Right-of-use assets	Other Assets	$	11,599	$	1,584	$	13,183
Lease liabilities	Other Liabilities	11,615		1,745		13,360

The components of lease expense for the period indicated was as follows:



	For the Three Months Ended March 31, 2019
Lease Cost:
Operating lease cost ⁽¹⁾	$	348
Finance lease cost:
Amortization of right-of-use assets	28
Interest on lease liabilities⁽²⁾	17
Total finance lease cost	45
Total Lease Cost	$	393

(1) Includes immaterial short-term and variable lease costs, but excludes common area maintenance costs.

(2) Includes immaterial variable lease costs.

In accordance with ASC 840, rent expense, excluding common area maintenance expense, for the three months ended March 31, 2018 was $344,000.

Supplemental cash flow information and non-cash activity related to leases was as follows for the period indicated:



	For the Three Months Ended March 31, 2019
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases	$	309
Operating cash flows from finance leases	17
Financing cash flows from finance leases	26
Right-of-use assets obtained in exchange for lease obligations:
Operating leases⁽¹⁾	$	11,885
Finance leases⁽¹⁾	1,612


(1)	Represents right-of-use assets recorded for the period indicated, including $10.5 million of operating leases and $1.6 million of finance leases recorded upon adoption of ASU 2016-02, as of January 1, 2019.

Supplemental balance sheet information related to leases was as follows for the period indicated:



	For the Three Months Ended March 31, 2019
Weighted average remaining lease term (years):
Operating leases	15.5 years
Finance leases	22.7 years
Weighted average discount rate:
Operating leases	3.69	%
Finance leases	3.94	%

The following summarizes the remaining scheduled future minimum lease payments for operating and finance leases as of March 31, 2019:



	Operating Leases		Finance Leases
2019	$	1,003	$	131
2020	1,257		174
2021	1,174		174
2022	1,162		174
2023	1,124		174
Thereafter	9,837		2,095
Total minimum lease payments	15,557		2,922
Less: amount representing interest⁽¹⁾	3,942		1,177
Present value of net minimum lease payments⁽²⁾	$	11,615	$	1,745


(1)	Amount necessary to reduce net minimum lease payments to present value calculated at the Company's incremental borrowing rate.


(2)	Reflects the liability reported within other liabilities on the consolidated statements of condition.

As of March 31, 2019, the Company does not have any significant additional operating or finance leases that have not yet commenced.

The following summarizes expected future minimum lease payments, in accordance with ASC 840, as of December 31, 2018:



	Operating		Capital
2019	$	1,420	$	179
2020	941		179
2021	726		182
2022	539		184
2023	434		184
Thereafter	1,268		1,592
Total minimum lease payments	$	5,328	2,500
Less: amount representing interest⁽¹⁾			920
Present value of net minimum lease payments⁽²⁾			$	1,580


(1)	Amount necessary to reduce net minimum lease payments to present value calculated at the Company's incremental borrowing rate at lease inception.


(2)	Reflects the liability reported within long-term borrowings on the consolidated statements of condition at December 31, 2018.

NOTE 6 – BORROWINGS

The following summarizes the Company's short-term and long-term borrowed funds as presented on the consolidated statements of condition at:



	March 31, 2019		December 31, 2018
Short-Term Borrowings:
Customer repurchase agreements	$	256,181	$	245,868
FHLBB borrowings	—		25,000
Total short-term borrowings	$	256,181	$	270,868
Long-Term Borrowings:
FHLBB borrowings	$	10,000	$	10,000
Capital lease obligation⁽¹⁾	—		1,580
Total long-term borrowings	$	10,000	$	11,580


(1)	Upon adoption of ASU 2016-02, effective January 1, 2019, lease liabilities are presented within other liabilities on the consolidated statements of condition. Refer to Notes 2 and 5 for further information.

NOTE 7 – 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 a 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. Because the securities are treated as collateral and the agreement does not qualify for a full transfer of effective control, the transaction 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.

The table below sets forth information regarding the Company’s repurchase agreements accounted for as secured borrowings and types of collateral for the periods indicated:



	March 31, 2019		December 31, 2018
Customer Repurchase Agreements⁽¹⁾⁽²⁾:
Obligations of states and political subdivisions	$	1,409	$	1,455
Mortgage-backed securities issued or guaranteed by U.S. government-sponsored enterprises	126,267		125,590
Collateralized mortgage obligations issued or guaranteed by U.S. government-sponsored enterprises	128,505		118,823
Total	$	256,181	$	245,868


(1)	Presented within short-term borrowings on the consolidated statements of condition.


(2)	All customer repurchase agreements mature continuously or overnight for the dates indicated.

Certain customers held CDs totaling $1.0 million and $923,000 at March 31, 2019 and December 31, 2018, 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.

NOTE 8 – 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, and based on the information currently available, management believes that the outcome of such actions, individually or in the aggregate, will not have a material adverse effect on the Company’s consolidated financial statements.

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, 2019 and December 31, 2018, the Company did not have any material loss contingencies for which accruals were provided for and/or that were required to be disclosed.

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 off-balance sheet financial instruments:



	March 31, 2019		December 31, 2018
Lending-Related Instruments:
Commitments to extend credit	$	669,193	$	654,575
Standby letters of credit	5,938		3,063
Derivative Financial Instruments:
Customer loan swaps	$	802,580	$	833,030
Junior subordinated debt interest rate swaps	43,000		43,000
Fixed-rate mortgage interest rate lock commitments	22,840		12,077
Forward delivery commitments	8,711		4,315
FHLBB advance interest rate swaps	—		25,000

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. Of the total commitments to extend credit, $274.5 million and $270.8 million are/were unconditionally cancellable by the Company at March 31, 2019 and December 31, 2018, respectively. Standby letters of credit are conditional commitments issued to guarantee the performance of a borrower to a third party. In the event of nonperformance by the borrower, the Company would be required to fund the commitment and would be entitled to underlying collateral, if applicable, which generally consists of pledges of business assets including, but not limited to, accounts receivable, inventory, plant and equipment, and/or real estate. The maximum potential future payments are limited to the contractual amount of the commitment.

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 effort" basis, with certain approved investors. The Company accounts for its interest rate lock commitments on loans that will be held for sale as derivative instruments. Furthermore, the Company records a derivative for its "best effort" forward delivery commitments upon origination of a loan identified as held for sale. Should the Company enter into a forward delivery commitment on a mandatory delivery arrangement with an investor, it accounts for the forward delivery commitment as a derivative upon execution of the mandatory delivery contract.

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 designated its interest rate swaps on its junior subordinated debentures as cash flow hedges. The change in the fair value for cash flow hedges is accounted for within AOCI, net of tax. Quarterly, in conjunction with financial reporting, each cash flow hedge is assessed for ineffectiveness. To the extent any significant ineffectiveness is identified, this amount is recorded within the consolidated statements of income. The gain or loss on the effective portion of the cash flow hedge is reclassified from AOCI into interest within the consolidated statements of income in the period the hedged transaction affects earnings.

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

Customer Loan Swaps:

The Bank will enter into interest rate swaps with its commercial customers to provide them with a means to lock into a long-term fixed rate, while the Bank simultaneously enters into an arrangement with a counterparty to swap the fixed rate to a variable rate to manage its interest rate exposure effectively.

The Bank'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 Bank'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 them 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, 2019						December 31, 2018
	Presentation on Consolidated Statements of Condition	Number of Positions	Notional Amount		Fair Value			Number of Positions	Notional Amount		Fair Value
Receive fixed, pay variable	Accrued interest and other liabilities	36	$	149,813	$	(3,320	)	57	$	297,624	$	(7,841	)
Receive fixed, pay variable	Other assets	46	251,477		7,722			25	118,891		3,467
Pay fixed, receive variable	(Accrued interest and other liabilities)/other assets	82	401,290		(4,402		)	82	416,515		4,374
Total		164	$	802,580	$	—		164	$	833,030	$	—

The Bank 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 Bank 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 has entered into a master netting arrangement with its counterparty and settles payments with the counterparty as necessary. The Bank's arrangement with its institutional counterparty requires it to post cash or other assets as collateral for its customer loan swap contracts in a net liability position based on their fair values and the Bank's credit rating or receive cash collateral for contracts in a net asset position as requested. At March 31, 2019, the Bank posted to the counterparty $6.2 million of cash as collateral on its customer loan swap contracts which was presented within other assets on the consolidated statements of condition. Refer to Note 9 for further discussion of master netting arrangements and presentation within the Company's consolidated financial statements.

Junior Subordinated Debt Interest Rate Swaps:

The Company will enter into an interest rate swap agreement with a counterparty to manage interest rate risk associated with the Company's variable rate borrowings. The Company has entered into a master netting arrangement with its counterparty and settles payments with the counterparty quarterly on a net basis. The interest rate swap arrangements contain provisions that require the Company to post cash or other assets as 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 will post collateral to the Company as requested. At March 31, 2019, the Company posted $7.1 million of cash as collateral to the counterparty and was presented within other assets on the consolidated statements of financial condition. Refer to Note 9 for further discussion of master netting arrangements and presentation within the Company's consolidated financial statements.

The details of the junior subordinated debt interest rate swaps for the periods indicated were as follows:



					March 31, 2019					December 31, 2018
Trade Date	Maturity Date	Variable Index Received	Fixed Rate Paid	Presentation on Consolidated Statements of Condition	Notional Amount		Fair Value			Notional Amount		Fair Value
3/18/2009	6/30/2021	3-Month USD LIBOR	5.09%	Accrued interest and other liabilities	$	10,000	$	(303	)	$	10,000	$	(272	)
7/8/2009	6/30/2029	3-Month USD LIBOR	5.84%	Accrued interest and other liabilities	10,000		(1,932		)	10,000		(1,655		)
5/6/2010	6/30/2030	3-Month USD LIBOR	5.71%	Accrued interest and other liabilities	10,000		(1,938		)	10,000		(1,636		)
3/14/2011	3/30/2031	3-Month USD LIBOR	4.35%	Accrued interest and other liabilities	5,000		(1,036		)	5,000		(877		)
5/4/2011	7/7/2031	3-Month USD LIBOR	4.14%	Accrued interest and other liabilities	8,000		(1,502		)	8,000		(1,242		)
					$	43,000	$	(6,711	)	$	43,000	$	(5,682	)

For the three months ended March 31, 2019 and 2018, 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, 2019 and 2018 were $152,000 and $275,000, respectively, and were classified as cash flows from operating activities in the Company's consolidated statements of cash flows.

Fixed-Rate Mortgage Interest Rate Lock Commitments:

As part of the origination process of a residential loan, the Company may enter into rate lock agreements with its borrower, which is considered an interest rate lock commitment. If the Company has the intention to sell the loan upon origination, it will account for the interest rate lock commitment as a derivative. The Company's pipeline of mortgage loans with fixed-rate interest rate lock commitments for which it intends to sell the loan upon origination were as follows for the dates indicated:



		March 31, 2019					December 31, 2018
	Presentation on Consolidated Statements of Condition	Notional Amount		Fair Value			Notional Amount		Fair Value
Fixed-rate mortgage interest rate locks	Other assets	$	18,465	$	293		$	8,239	$	95
Fixed-rate mortgage interest rate locks	Accrued interest and other liabilities	4,375		(45		)	3,838		(28		)
Total		$	22,840	$	248		$	12,077	$	67

For the three months ended March 31, 2019 and 2018, the net unrealized gain from the change in fair value on the Company's fixed-rate mortgage rate locks reported within mortgage banking income, net, on the consolidated statements of income was $181,000 and $12,000, respectively.

Forward Delivery Commitments:

The Company typically enters into a forward delivery commitment with a secondary market investor, which has been approved by the Company within its normal governance process, at the onset of the loan origination process. The Company may enter into these arrangements with the secondary market investors on a "best effort" or "mandatory delivery" basis. The Company's normal practice is typically to enter into these arrangements on a "best effort" basis. The Company enters into these arrangements with the secondary market investors to manage its interest rate exposure. The Company accounts for the forward delivery commitment as a derivative (but does not designate as a hedge) upon origination of a loan for which it intends to sell.

The Company's forward delivery commitments on loans held for sale was as follows for the periods indicated:



		March 31, 2019					December 31, 2018
	Balance Sheet Location	Notional		Fair Value			Notional		Fair Value
Forward delivery commitments ("best effort")	Other Assets	$	5,811	$	129		$	2,593	$	32
Forward delivery commitments ("best effort")	Accrued interest and other liabilities	2,900		(31		)	1,722		(17		)
Total		$	8,711	$	98		$	4,315	$	15

For the three months ended March 31, 2019 and 2018, the net unrealized gain from the change in fair value on the Company's forward delivery commitments reported within mortgage banking income, net, on the consolidated statements of income was $83,000 and $19,000, respectively.

FHLBB Advance Interest Rate Swaps:

On February 25, 2015, the Bank entered into two $25.0 million one-year forward-starting interest rate swap arrangements with a counterparty to mitigate short-term interest rate risk. On February 25, 2019, the last $25.0 million tranche matured. The Bank previously designated each arrangement as a cash flow hedge in accordance with GAAP. For the three months ended March 31, 2019 and 2018, the Company did not record any ineffectiveness within the consolidated statements of income.

The details of the Company's FHLBB advance interest rate swaps for the periods indicated were as follows:

March 31, 2019

December 31, 2018

Trade
Date

Maturity Date

Variable Index
Received

Fixed Rate
Paid

Presentation on Consolidated Statements of Condition

Notional
Amount

Fair

Value

Notional
Amount

Fair

Value

2/25/2015

2/25/2019

1-Month

USD LIBOR

1.74%

Other assets

—

25,000

Net payments received from (paid to) the counterparty for the three months ended March 31, 2019 and 2018 were $32,000 and ($9,000), respectively, and were classified as cash flows from operating activities in the consolidated statements of cash flows.

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,
	2019			2018
Derivatives designated as cash flow hedges:
Effective portion of unrealized (losses) gains recognized within OCI during the period, net of tax	$	(925	)	$	1,328
Net reclassification adjustment for effective portion of cash flow hedges included in interest expense, gross	$	119		$	64

The Company expects approximately $715,000 (pre-tax) to be reclassified to interest expense from AOCI, related to the Company’s cash flow hedges, in the next twelve months. This reclassification is due to anticipated payments that will be made on the swaps based upon the forward curve as of March 31, 2019.

NOTE 9 – BALANCE SHEET OFSETTING

The Company does not offset the carrying value for derivative instruments or repurchase agreements on the consolidated statements of condition. The Company and Bank does net the amount recognized for the right to reclaim cash collateral against the obligation to return cash collateral arising from instruments executed with the same counterparty under a master netting arrangement. Collateral legally required to be pledged or received is monitored and adjusted as necessary. Refer to Note 7 for further discussion of repurchase agreements and Note 8 for further discussion of derivative instruments.

The following table presents the Company's derivative positions and repurchase agreements, and the potential effect of netting arrangements on its financial position, as of the dates indicated:



							Gross Amount Not Offset in the Consolidated Statements of Condition
	Gross Amount Recognized in the Consolidated Statements of Condition		Gross Amount Offset in the Consolidated Statements of Condition		Net Amount Presented in the Consolidated Statements of Condition		Financial Instruments Pledged (Received)⁽¹⁾		Cash Collateral Pledged (Received)⁽¹⁾			Net Amount
March 31, 2019
Derivative assets:
Customer loan swaps - commercial customer	$	7,722	$	—	$	7,722	$	—	$	—		$	7,722
Total	$	7,722	$	—	$	7,722	$	—	$	—		$	7,722
Derivative liabilities:
Junior subordinated debt interest rate swaps	$	6,711	$	—	$	6,711	$	—	$	6,711		$	—
Customer loan swaps - dealer bank	4,402		—		4,402		—		4,402			—
Customer loan swaps - commercial customer	3,320		—		3,320		—		—			3,320
Total	$	14,433	$	—	$	14,433	$	—	$	11,113		$	3,320
Customer repurchase agreements	$	256,181	$	—	$	256,181	$	256,181	$	—		$	—
December 31, 2018
Derivative assets:
Customer loan swaps - dealer bank	$	4,374	$	—	$	4,374	$	—	$	(4,374	)	$	—
Customer loan swaps - commercial customer	3,467		—		3,467		—		—			3,467
FHLBB advance interest rate swaps	30		—		30		—		(30		)	—
Total	$	7,871	$	—	$	7,871	$	—	$	(4,404	)	$	3,467
Derivative liabilities:
Junior subordinated debt interest rate swaps	$	5,682	$	—	$	5,682	$	—	$	5,682		$	—
Customer loan swaps - commercial customer	7,841		—		7,841		—		—			7,841
Total	$	13,523	$	—	$	13,523	$	—	$	5,682		$	7,841
Customer repurchase agreements	$	245,868	$	—	$	245,868	$	245,868	$	—		$	—


(1)	The amount presented was the lesser of the amount pledged (received) or the net amount presented in the consolidated statements of condition.

NOTE 10 – 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 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 the Company and Bank to maintain minimum amounts and ratios of total capital, Tier I capital, and common equity Tier I capital to risk-weighted assets, and of Tier I capital to average assets, or the 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

organizations must maintain a capital conservation buffer consisting of common Tier I equity, subject to a transition schedule that was fully phased in on January 1, 2019. Effective January 1, 2019, the Company and the Bank were required to establish a capital conservation buffer of 2.50%, 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.

The Company and Bank's risk-based capital ratios exceeded regulatory guidelines at March 31, 2019 and December 31, 2018, and, specifically, the Bank met the requirements to be considered "well capitalized" under prompt corrective action provisions for each period. There were no new conditions or events that occurred subsequent to March 31, 2019, that would change the Company or Bank's regulatory capital categorization. The following table presents the Company and Bank's regulatory capital ratios at the periods indicated:



	March 31, 2019				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, 2018				Minimum Regulatory Capital Required for Capital Adequacy plus Capital Conservation Buffer		Minimum Regulatory Provision To Be "Well Capitalized" Under Prompt Corrective Action Provisions
	Amount		Ratio						Amount		Ratio
Camden National Corporation:
Total risk-based capital ratio	$	442,960	14.46	%	10.50	%	N/A		$	434,331	14.36	%	9.875	%	N/A
Tier I risk-based capital ratio	402,743		13.14	%	8.50	%	N/A		394,597		13.04	%	7.875	%	N/A
Common equity Tier I risk-based capital ratio	359,743		11.74	%	7.00	%	N/A		351,597		11.62	%	6.375	%	N/A
Tier I leverage capital ratio	402,743		9.47	%	4.00	%	N/A		394,597		9.53	%	4.00	%	N/A
Camden National Bank:
Total risk-based capital ratio	$	407,658	13.31	%	10.50	%	10.00	%	$	398,773	13.18	%	9.875	%	10.00	%
Tier I risk-based capital ratio	382,441		12.49	%	8.50	%	8.00	%	374,039		12.36	%	7.875	%	8.00	%
Common equity Tier I risk-based capital ratio	382,441		12.49	%	7.00	%	6.50	%	374,039		12.36	%	6.375	%	6.50	%
Tier I leverage capital ratio	382,441		9.02	%	4.00	%	5.00	%	374,039		9.06	%	4.00	%	5.00	%

In 2015, the Company issued $15.0 million of subordinated debentures, and in 2006 and 2008, it issued $43.0 million of junior subordinated debentures in connection with the issuance of trust preferred securities. Although the subordinated debentures and the junior subordinated debentures are recorded as liabilities on the Company's consolidated statements of condition, the Company is permitted, in accordance with regulatory guidelines, to include, subject to certain limits, each within its calculation of risk-based capital. At March 31, 2019 and December 31, 2018, $15.0 million of subordinated debentures were included as Tier II capital and were included in the calculation of the Company's total risk-based capital, and, at March 31, 2019 and December 31, 2018, $43.0 million of the junior subordinated debentures were included in Tier I and total risk-based capital for the Company.

The Company and Bank's regulatory capital and risk-weighted assets fluctuate due to normal business, including profits and losses generated by the Company and Bank as well as changes to their asset mix. Of particular significance are changes within the Company and Bank's loan portfolio mix due to the differences in regulatory risk-weighting between retail and commercial loans. Furthermore, the Company and Bank's regulatory capital and risk-weighted assets are subject to change due to changes in GAAP and regulatory capital standards. The Company and Bank proactively monitor their regulatory capital and risk-weighted assets, and the impact of changes to their asset mix, and impact of proposed and pending changes as a result of new and/or amended GAAP standards and regulatory changes.

NOTE 11 – 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 periodic benefit cost for the periods ended March 31, 2019 and 2018, were as follows:

Supplemental Executive Retirement Plan:



		Three Months Ended March 31,
Net periodic pension cost	Income Statement Presentation	2019		2018
Service cost	Salaries and employee benefits	$	99	$	112
Interest cost	Other expenses	131		122
Recognized net actuarial loss	Other expenses	61		140
Total		$	291	$	374

Other Postretirement Benefit Plan:



		Three Months Ended March 31,
Net periodic postretirement benefit cost	Income Statement Presentation	2019			2018
Service cost	Salaries and employee benefits	$	12		$	12
Interest cost	Other expenses	37			33
Recognized net actuarial loss	Other expenses	6			13
Amortization of prior service credit	Other expenses	(6		)	(6		)
Total		$	49		$	52

NOTE 12 – 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,
	2019			2018
Net income	$	14,273		$	12,820
Dividends and undistributed earnings allocated to participating securities⁽¹⁾	(28		)	(40		)
Net income available to common shareholders	$	14,245		$	12,780
Weighted-average common shares outstanding for basic EPS	15,592,141			15,541,975
Dilutive effect of stock-based awards⁽²⁾	41,985			61,405
Weighted-average common and potential common shares for diluted EPS	15,634,126			15,603,380
Earnings per common share:
Basic EPS	$	0.91		$	0.82
Diluted EPS	$	0.91		$	0.82
Awards excluded from the calculation of diluted EPS⁽³⁾:
Stock options	1,000			—


(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 and vesting of restricted shares and restricted stock units utilizing the treasury stock method. Not included are the unvested LTIP awards, which are the Company's performance-based awards.


(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, therefore, 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.

NOTE 13 – 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.

Debt Securities: The fair value of investments in debt 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 is classified as Level 2.

Equity Securities: The fair value of investments in equity securities is reported utilizing market prices based on recent trading activity and dealer quotes. These equity securities are traded on inactive markets and are classified as Level 2.

Derivatives: The fair value of the Company's interest rate swaps, including its junior subordinated debt interest rate swaps, FHLBB advance interest rate swaps and customer loan swaps, are 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, 2019 and December 31, 2018, 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 the Company's fixed-rate interest rate lock commitments were determined using secondary market pricing for loans with similar structures, including term, rate and borrower credit quality, adjusted for the Company's pull-through rate estimate (i.e. estimate of loans within its pipeline that will ultimately complete the origination process and be funded). The Company has classified its fixed-rate interest rate lock commitments as Level 2, as the quoted secondary market prices are the more significant input, and although the Company's internal pull-through rate estimate is a Level 3 estimate, it is less significant to the ultimate valuation.

The fair value of the Company's forward delivery commitments are determined using secondary market pricing for loans with similar structures, including term, rate and borrower credit quality, and the locked and agreed to price with the secondary market investor. The Company has classified its fixed-rate interest rate lock commitments as Level 2.

The following table summarizes financial assets and financial liabilities measured at fair value on a recurring basis as of March 31, 2019 and December 31, 2018, 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, 2019
Financial assets:
Loans held for sale	$	8,795	$	—	$	8,795	$	—
AFS investments:
Obligations of states and political subdivisions	93,020		—		93,020		—
Mortgage-backed securities issued or guaranteed by U.S. government-sponsored enterprises	448,821		—		448,821		—
Collateralized mortgage obligations issued or guaranteed by U.S. government-sponsored enterprises	361,400		—		361,400		—
Subordinated corporate bonds	21,070		—		21,070		—
Equity securities - bank stock	988		—		988		—
Customer loan swaps	7,722		—		7,722		—
Fixed-rate mortgage interest rate lock commitments	293		—		293		—
Forward delivery commitments	129		—		129		—
Financial liabilities:
Junior subordinated debt interest rate swaps	6,711		—		6,711		—
Customer loan swaps	7,722		—		7,722		—
Fixed-rate mortgage interest rate lock commitments	45		—		45		—
Forward delivery commitments	31		—		31		—
December 31, 2018
Financial assets:
Loans held for sale	$	4,403	$	—	$	4,403	$	—
AFS investments:
Obligations of states and political subdivisions	93,752		—		93,752		—
Mortgage-backed securities issued or guaranteed by U.S. government-sponsored enterprises	453,672		—		453,672		—
Collateralized mortgage obligations issued or guaranteed by U.S. government-sponsored enterprises	342,894		—		342,894		—
Subordinated corporate bonds	20,374		—		20,374		—
Equity securities - bank stock	746		—		746		—
Customer loan swaps	7,841		—		7,841		—
Fixed-rate mortgage interest rate lock commitments	95		—		95		—
Forward delivery commitments	32		—		32		—
FHLBB advance interest rate swaps	30		—		30		—
Financial liabilities:
Junior subordinated debt interest rate swaps	5,682		—		5,682		—
Customer loan swaps	7,841		—		7,841		—
Fixed-rate mortgage interest rate lock commitments	28		—		28		—
Forward delivery commitments	17		—		17		—

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, 2019. 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.

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 evaluate individually for impairment loans with a principal balance greater than $500,000 or more, that 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 net realizable value, which is the fair value of the collateral, less estimated costs to sell, to the carrying value of the loan. If the net realizable value 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 net realizable value. 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.

Servicing Assets: 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 two significant unobservable inputs, namely loan prepayment assumptions and the discount rate used, to calculate the fair value of each tranche, and, as such, the Company has classified the model within Level 3 of the fair value hierarchy. At March 31, 2019 and December 31, 2018, the mortgage servicing assets were not carried at fair value.

Non-Financial Instruments 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 net realizable value, 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 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 the three months ended March 31, 2019, 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, then 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 for the three months ended March 31, 2019, that indicated the carrying amount may not be recoverable.

The table below highlights financial and non-financial assets measured and recorded at fair value on a non-recurring basis as of March 31, 2019 and December 31, 2018:



	Fair Value		Readily Available Market Prices (Level 1)		Observable Market Data (Level 2)		Company Determined Fair Value (Level 3)
March 31, 2019
Financial assets:
Collateral-dependent impaired loans	$	925	$	—	$	—	$	925
Non-financial assets:
OREO	130		—		—		130
December 31, 2018
Financial assets:
Collateral-dependent impaired loans	$	522	$	—	$	—	$	522
Non-financial assets:
OREO	130		—		—		130

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, 2019 and December 31, 2018:



	Fair Value		Valuation Methodology	Unobservable input	Discount Range (Weighted-Average)
March 31, 2019
Collateral-dependent impaired loans:
Partially charged-off	$	44	Market approach appraisal of collateral	Management adjustment of appraisal	0%	(0%)
				Estimated selling costs	10%	(10%)
Specifically reserved	$	881	Market approach appraisal of collateral	Management adjustment of appraisal	0-39%	(16%)
				Estimated selling costs	10-13%	(11%)
OREO	$	130	Market approach appraisal of collateral	Management adjustment of appraisal	19%	(19%)
				Estimated selling cost	10%	(10%)
December 31, 2018
Collateral-dependent impaired loans:
Partially charged-off	$	50	Market approach appraisal of collateral	Management adjustment of appraisal	0%	(0%)
				Estimated selling costs	10%	(10%)
Specifically reserved	$	472	Market approach appraisal of collateral	Management adjustment of appraisal	0%	(0%)
				Estimated selling costs	10%	(10%)
OREO	$	130	Market approach appraisal of collateral	Management adjustment of appraisal	19%	(19%)
				Estimated selling cost	10%	(10%)

The estimated fair values and related carrying amounts for assets and liabilities for which fair value is only disclosed are shown below as of the periods indicated:



	Carrying Amount		Fair Value		Readily Available Market Prices (Level 1)		Observable Market Prices (Level 2)		Company Determined Market Prices (Level 3)
March 31, 2019
Financial assets:
HTM securities	$	1,306	$	1,324	$	—	$	1,324	$	—
Residential real estate loans⁽¹⁾	1,011,289		990,279		—		—		990,279
Commercial real estate loans⁽¹⁾	1,246,636		1,226,222		—		—		1,226,222
Commercial loans⁽¹⁾⁽²⁾	417,900		411,935		—		—		411,935
Home equity loans⁽¹⁾	320,942		314,250		—		—		314,250
Consumer loans⁽¹⁾	20,474		18,918		—		—		18,918
Servicing assets	772		1,540		—		—		1,540
Financial liabilities:
Time deposits	$	695,856	$	691,689	$	—	$	691,689	$	—
Short-term borrowings	256,181		255,899		—		255,899		—
Long-term borrowings	10,000		9,926		—		9,926		—
Subordinated debentures	58,978		49,578		—		49,578		—
December 31, 2018
Financial assets:
HTM securities	$	1,307	$	1,291	$	—	$	1,291	$	—
Residential real estate loans⁽¹⁾	986,795		957,957		—		—		957,957
Commercial real estate loans⁽¹⁾	1,257,879		1,218,436		—		—		1,218,436
Commercial loans⁽¹⁾⁽²⁾	411,479		404,805		—		—		404,805
Home equity loans⁽¹⁾	324,967		317,359		—		—		317,359
Consumer loans⁽¹⁾	20,390		18,969		—		—		18,969
Servicing assets	831		1,677		—		—		1,677
Financial liabilities:
Time deposits	$	661,281	$	654,954	$	—	$	654,954	$	—
Short-term borrowings	270,868		270,598		—		270,598		—
Long-term borrowings	11,580		11,573		—		11,573		—
Subordinated debentures	59,067		49,060		—		49,060		—


(1)	The presented carrying amount is net of the allocated ALL.


(2)	Includes the HPFC loan portfolio.

Excluded from the summary were financial instruments measured at fair value on a recurring and nonrecurring basis, as previously described.

The Company considers its financial instruments' current use to be the highest and best use of the instruments.

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, as amended, 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 which could lead to impairment in the value of securities in the Company's investment portfolio;


•	changes in information technology and other operational risks, including cybersecurity, that require increased capital spending;


•	changes in consumer spending and savings habits;


•	changes in tax, banking, securities and insurance laws and regulations; and


•	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.

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 our Annual Report on Form 10-K for the year ended December 31, 2018, 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.

GENERAL OVERVIEW

Camden National Corporation (hereafter referred to as “we,” “our,” “us,” or the “Company”) is a publicly-held bank holding company, with $4.4 billion in assets at March 31, 2019, incorporated under the laws of the State of Maine and headquartered in Camden, Maine. Camden National Bank (the "Bank"), a wholly-owned subsidiary of the Company, was founded in 1875. The Company was founded in 1984, went public in 1997 and is now registered with NASDAQ Global Market (“NASDAQ”) under the ticker symbol "CAC."

The primary business of the Company and the Bank is to attract deposits from, and to extend loans to, consumer, institutional, municipal, non-profit and commercial customers. The Company, through the Bank, provides a broad array of banking and other financial services, including wealth management and trust services, brokerage, investment advisory and insurance services, to consumer, business, non-profit and municipal customers.

The Company competes throughout Maine, and select areas of New Hampshire and Massachusetts. We operate in 13 of Maine's 16 counties, with our primary markets and presence being throughout coastal and central Maine. Many of these markets are characterized as rural areas. The Company and the Bank generally have effectively competed with other financial institutions by emphasizing customer service, highlighted by local decision-making, establishing long-term customer relationships, building customer loyalty and providing products and services designed to meet the needs of customers.

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, such as the return on average tangible equity, efficiency ratio; tax equivalent net interest income; tangible book value per share; and tangible common equity ratio. These non-GAAP financial measures are utilized for purposes of measuring performance against the Company's peer group and other financial institutions, as well as for analyzing its internal performance. The Company also believes these non-GAAP financial measures help investors better understand the Company's operating performance and trends and allows 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 operating results, nor are they necessarily comparable to non-GAAP performance measures that may be presented by other financial institutions.

Return on Average Tangible Equity: Return on average tangible equity is the ratio of (i) net income, adjusted for tax effected amortization of intangible assets and goodwill impairment (the numerator) to (ii) average shareholders' equity, adjusted for average goodwill and other intangible assets. This adjusted financial ratio reflects a shareholders' return on tangible capital deployed in our business and is a common measure within the financial services industry.



	Three Months Ended March 31,
	2019			2018
Net income, as presented	$	14,273		$	12,820
Add: amortization of intangible assets, net of tax⁽¹⁾	139			143
Net income, adjusted for amortization of intangible assets	$	14,412		$	12,963
Average equity, as presented	$	441,027		$	402,626
Less: average goodwill and other intangible assets	(98,838		)	(99,568		)
Average tangible equity	$	342,189		$	303,058
Return on average equity	13.13		%	12.91		%
Return on average tangible equity	17.08		%	17.35		%


(1)	Assumed a 21% tax rate.

Efficiency Ratio. The efficiency ratio represents an approximate measure of the cost required for the Company to generate a dollar of revenue. This is a common measure within the financial services industry and is a key ratio for evaluating Company performance. The efficiency ratio is calculated as the ratio of (i) total non-interest expense, adjusted for certain operating expenses, as necessary to (ii) net interest income on a tax equivalent basis plus total non-interest income, adjusted for certain other income items, as necessary.



	Three Months Ended March 31,
	2019			2018
Non-interest expense, as presented	$	22,783		$	22,304
Net interest income, as presented	$	31,895		$	28,902
Add: effect of tax-exempt income⁽¹⁾	244			254
Non-interest income, as presented	9,389			8,804
Adjusted net interest income plus non-interest income	$	41,528		$	37,960
GAAP efficiency ratio	55.19		%	59.15		%
Non-GAAP efficiency ratio	54.86		%	58.76		%


(1)	Assumed a 21% tax rate.

Tax Equivalent Net Interest Income. Tax-equivalent net interest income is net interest income plus the taxes that would have been paid had tax-exempt securities been taxable. This number attempts to enhance the comparability of the performance of assets that have different tax liabilities.



	Three Months Ended March 31,
	2019		2018
Net interest income, as presented	$	31,895	$	28,902
Add: effect of tax-exempt income⁽¹⁾	244		254
Net interest income, tax equivalent	$	32,139	$	29,156


(1)	Assumed a 21% tax rate.

Tangible Book Value per Share. 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 following table reconciles tangible book value per share to book value per share. Tangible book value per share is a common measure within the financial services industry to assess the value of a company, as it removes goodwill and other intangible assets generated within purchase accounting upon a business combination.

Tangible Common Equity Ratio. Tangible common equity is the ratio of (i) shareholders’ equity less goodwill and other intangible assets (the numerator) to (ii) total assets less goodwill and other intangible assets. This ratio is a measure used within the financial services industry to assess whether or not a company is highly leveraged.



	March 31, 2019			December 31, 2018
Tangible Book Value Per Share:
Shareholders’ equity, as presented	$	453,718		$	435,825
Less: goodwill and other intangibles	(98,751		)	(98,927		)
Tangible shareholders’ equity	$	354,967		$	336,898
Shares outstanding at period end	15,560,565			15,591,914
Tangible book value per share	$	22.81		$	21.61
Book value per share	$	29.16		$	27.95
Tangible Common Equity Ratio:
Total assets	$	4,421,189		$	4,297,435
Less: goodwill and other intangibles	(98,751		)	(98,927		)
Tangible assets	$	4,322,438		$	4,198,508
Common equity ratio	10.26		%	10.14		%
Tangible common equity ratio	8.21		%	8.02		%

CRITICAL ACCOUNTING POLICIES

Critical accounting policies are defined as 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 the Company's 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 loan losses; (ii) accounting for acquisitions and the subsequent review of goodwill and core deposit intangible assets generated in an acquisition for impairment; (iii) OTTI of investments; and (iv) income taxes.

There have been no material changes to the Company's critical accounting policies as disclosed within its Annual Report on Form 10-K for the year ended December 31, 2018. Refer to the Annual Report on Form 10-K for the year ended December 31, 2018, for discussion of the Company's critical accounting policies.

Refer to Note 2 of the consolidated financial statements for discussion of accounting pronouncements adopted during the three months ended March 31, 2019, and the impact to the consolidated financial statements, as well as the status of issued accounting pronouncements yet to be adopted and implemented.

EXECUTIVE OVERVIEW

Strong operating results for the first quarter of 2019 resulted in improved financial performance metrics, compared to the same period last year. Net income for the first quarter of 2019 was $14.3 million and diluted EPS was $0.91, representing an increase over the first quarter of last year of $1.5 million and $0.09 per share, respectively. For the first quarter of 2019, return on average assets increased to 1.33%, up from 1.28% for the same period last year, and return on average equity increased to 13.13%, up from 12.91% for the same period last year.

First quarter 2019 net income and diluted EPS increased 11% over the first quarter last year as revenue grew $3.6 million, or 9%, which includes net interest income and non-interest income. Net interest income for the first quarter of 2019 increased 10% over the same period of 2018. Net interest income growth was driven by strong average loan and deposit growth of 10%

and 13%, respectively. Net interest margin on fully-taxable basis expanded by 8 basis points over the first quarter of 2018 to 3.18% for the first quarter of 2019. Our ability to fund asset growth through core deposit growth, which includes checking, savings and money market deposits, has directly resulted in the improvement of our net interest margin on a fully-taxable basis between periods. Non-interest income over the same period increased 7%.

The provision for credit losses for the first quarter of 2019 increased $1.2 million over the first quarter of 2018. The increase in provision for credit losses between periods was largely due to the favorable resolution of a large commercial real estate loan in the first quarter of 2018 which resulted in the release of almost $1.0 million of provision expense. The provision for credit losses for the first quarter of 2019, on an annualized basis, was 10 basis points of average loans.

Non-interest expense for the first quarter of 2019 increased 2% over the first quarter of 2018. Compensation-related costs increased 3% over this period, primarily due to normal merit increases and rising health care premiums, while a one-time recovery of previously incurred collection-related costs drove a net recovery for the first quarter of 2019 of $307,000, compared to OREO and collection costs of $75,000 for the first quarter of 2018.

For the first quarter of 2019, the Company declared a dividend of $0.30 per share, representing an increase of $0.05 per share, or 20%, over the first quarter of 2018, and an annualized dividend yield of 2.88% as of March 29, 2019 (the last business day of the first quarter). During the first quarter of 2019, we repurchased 55,557 shares of the Company's common stock at a weighted-average price of $41.51 per share under the Company's plan to repurchase up to 775,000 shares of the Company's stock, representing approximately 5.0% of our issued and outstanding shares as of December 31, 2018, as authorized by the Company's Board of Directors on January 22, 2019. We continue to be active in the market and prudently repurchase shares based on the Company's market price.

RESULTS OF OPERATIONS

Net Interest Income and Net Interest Margin

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 is our largest source of revenue and accounted for 77% of total revenues for the first quarter of 2019 and 2018. Net interest income is affected by several 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.

Net interest margin is calculated as net interest income, on a fully-taxable equivalent basis, as a percentage of average interest-earning assets. Net interest margin on a fully-taxable equivalent basis for the first quarter of 2019 was 3.18%, compared to 3.10% for the first quarter last year.

Net interest income on a fully-taxable equivalent basis for the first quarter of 2019 was $32.1 million, representing an increase of $3.0 million, or 10%, over the first quarter last year. The increase was driven by expanding assets yields of 42 basis points over the first quarter last year to 4.20% for the first quarter of 2019, while funding costs increased 35 basis points over the same period to 1.07% for the first quarter of 2019. As a result, net interest margin on a fully-taxable equivalent basis expanded 8 basis points over this period largely due to our ability to fund loan growth with deposits, which is a more efficient source of funding. Average deposits grew 13% in the first quarter of 2019 over the same period last year, led by average checking growth of $289.6 million, or 23%, and money market growth of $95.0 million, or 19%. Over this same period, average loans grew $269.7 million, or 10%.

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 net interest margin on a fully-taxable basis for the three months ended March 31, 2019 and 2018:

Quarterly Average Balance, Interest and Yield/Rate Analysis

	For The Three Months Ended
	March 31, 2019								March 31, 2018
(In thousands)	Average Balance			Interest			Yield/Rate		Average Balance			Interest			Yield/Rate
Assets
Interest-earning assets:
Interest-bearing deposits in other banks	$	29,985		$	197		2.63	%	$	52,510		$	184		1.40	%
Investments - taxable	851,516			5,447			2.56	%	826,529			4,588			2.22	%
Investments - nontaxable⁽¹⁾	94,710			815			3.44	%	99,560			851			3.42	%
Loans⁽²⁾:
Residential real estate	1,008,285			10,838			4.30	%	860,783			8,859			4.12	%
Commercial real estate	1,281,501			15,169			4.73	%	1,171,598			12,297			4.20	%
Commercial⁽¹⁾	369,832			4,344			4.70	%	349,963			3,737			4.27	%
Municipal⁽¹⁾	15,333			136			3.60	%	17,277			142			3.33	%
Consumer and home equity	347,052			4,671			5.46	%	341,078			4,000			4.76	%
HPFC	32,171			636			7.91	%	43,757			874			7.99	%
Total loans	3,054,174			35,794			4.70	%	2,784,456			29,909			4.30	%
Total interest-earning assets	4,030,385			42,253			4.20	%	3,763,055			35,532			3.78	%
Cash and due from banks	40,362								41,935
Other assets	292,482								274,582
Less: ALL	(24,780		)						(24,205		)
Total assets	$	4,338,449							$	4,055,367
Liabilities & Shareholders' Equity
Deposits:
Non-interest checking	$	490,382		$	—		—	%	$	452,629		$	—		—	%
Interest checking	1,085,301			2,622			0.98	%	833,410			775			0.38	%
Savings	485,646			95			0.08	%	493,660			77			0.06	%
Money market	582,685			1,740			1.21	%	487,685			790			0.66	%
Certificates of deposit	443,107			1,465			1.34	%	472,213			1,169			1.00	%
Total deposits	3,087,121			5,922			0.78	%	2,739,597			2,811			0.42	%
Borrowings:
Brokered deposits	405,837			2,501			2.50	%	238,870			938			1.59	%
Customer repurchase agreements	238,499			729			1.24	%	237,056			424			0.72	%
Subordinated debentures	59,007			717			4.93	%	58,930			847			5.83	%
Other borrowings	44,711			245			2.22	%	328,141			1,356			1.68	%
Total borrowings	748,054			4,192			2.27	%	862,997			3,565			1.68	%
Total funding liabilities	3,835,175			10,114			1.07	%	3,602,594			6,376			0.72	%
Other liabilities	62,247								50,147
Shareholders' equity	441,027								402,626
Total liabilities & shareholders' equity	$	4,338,449							$	4,055,367
Net interest income (fully-taxable equivalent)				32,139								29,156
Less: fully-taxable equivalent adjustment				(244		)						(254		)
Net interest income				$	31,895							$	28,902
Net interest rate spread (fully-taxable equivalent)							3.13	%							3.06	%
Net interest margin (fully-taxable equivalent)							3.18	%							3.10	%
Net interest margin (fully-taxable equivalent), excluding fair value mark accretion and collection of previously charged-off acquired loans⁽³⁾							3.14	%							3.04	%


(1)	Reported on tax-equivalent basis calculated using a tax rate of 21%, including certain commercial loans.


(2)	Non-accrual loans and loans held for sale are included in total average loans.


(3)	Excludes the impact of the fair value mark accretion on loans and CDs generated in purchase accounting and collection of previously charged-off acquired loans for the three months ended March 31, 2019 and 2018, totaling $390,000 and $558,000, respectively.

The following table presents certain information on a fully-taxable equivalent basis regarding changes in interest income and interest expense for the periods indicated. For each category of interest-earning assets and interest-bearing liabilities, information is provided with respect to changes attributable to rate and volume. The (a) changes in volume (change in volume multiplied by prior period's rate), (b) changes in rates (change in rate multiplied prior period's volume), and (c) changes in rate/volume (change in rate multiplied by the change in volume), which is allocated to the change due to rate column.



	For The Three Months Ended March 31, 2019 vs. March 31, 2018
	Increase (Decrease) Due to:						Net Increase (Decrease)
	Volume			Rate⁽¹⁾			Net Increase (Decrease)
Interest-earning assets:
Interest-bearing deposits in other banks	$	92		$	(79	)	$	13
Investments – taxable	720			139			859
Investments – nontaxable	5			(41		)	(36		)
Commercial real estate	1,718			1,154			2,872
Residential real estate	460			1,519			1,979
Commercial	395			212			607
Municipal	10			(16		)	(6		)
Consumer and home equity	601			70			671
HPFC	(7		)	(231		)	(238		)
Total interest income	3,994			2,727			6,721
Interest-bearing liabilities:
Interest checking	1,611			236			1,847
Savings	19			(1		)	18
Money market	795			155			950
Certificates of deposit	368			(72		)	296
Brokered deposits	908			655			1,563
Customer repurchase agreements	302			3			305
Subordinated debentures	(131		)	1			(130		)
Other borrowings	63			(1,174		)	(1,111		)
Total interest expense	3,935			(197		)	3,738
Net interest income (fully-taxable equivalent)	$	59		$	2,924		$	2,983


(1)	Presented within increase (decrease) due to rate for the three months ended March 31, 2019 compared to the three months ended March 31, 2018 was a decrease in net interest income on a fully-taxable equivalent basis of $167,000 due to a decrease in fair value mark accretion on loans and CDs generated in purchase accounting and collection of previously charged-off acquired loans.

Provision for Credit Losses

The provision for credit losses is primarily made up of our provision for loan losses, but also includes the provision for unfunded commitments.

The provision (credit) for loan losses is a recorded expense (credit) 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, 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 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 (credit) for loan losses for the first quarter of 2019 was $750,000, compared to ($500,000) for the first quarter last year. In the first quarter of 2018, a large commercial real estate loan that was on non-accrual favorably resolved and led to the release of the loan loss allowance previously provided for and the reversal of provision expense of $968,000.

The provision (credit) 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 statements of condition. Refer to Note 4 of the consolidated financial statements for further discussion.

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, 2019 and 2018:



	Three Months Ended March 31,						Change
	2019			2018			$			%
Service charges on deposit accounts	$	2,023		$	1,967		$	56		3	%
Debit card income	2,010			1,929			81			4	%
Income from fiduciary services	1,392			1,283			109			8	%
Mortgage banking income, net	1,252			1,391			(139		)	(10	)%
Bank-owned life insurance	594			608			(14		)	(2	)%
Brokerage and insurance commissions	585			650			(65		)	(10	)%
Customer loan swap fees⁽¹⁾	525			87			438			503	%
Other income	1,008			889			119			13	%
Total non-interest income	$	9,389		$	8,804		$	585		7	%
Non-interest income as a percentage of total revenues⁽²⁾	23		%	23		%


(1)	The increase in customer loan swap fees was driven by strong commercial real estate loan originations in the first quarter of 2019, of which $40.8 million of commercial real estate loan originations participated in the back-to-back loan swap program, compared to $8.7 million for the same period last year.


(2)	Revenue is defined as the sum of net interest income and non-interest income.

Non-Interest Expense

The following table presents the components of non-interest expense for the three months ended March 31, 2019 and 2018:



	Three Months Ended March 31,						Change
	2019			2018			$			%
Salaries and employee benefits	$	12,978		$	12,562		$	416		3	%
Furniture, equipment and data processing	2,680			2,586			94			4	%
Net occupancy costs	1,914			1,873			41			2	%
Debit card expense	823			730			93			13	%
Consulting and professional fees	813			804			9			1	%
Regulatory assessments	472			499			(27		)	(5	)%
Amortization of intangible assets	176			181			(5		)	(3	)%
Other real estate owned and collection (recoveries) costs, net⁽¹⁾	(307		)	75			(382		)	(509	)%
Other expenses	3,234			2,994			240			8	%
Total non-interest expense	$	22,783		$	22,304		$	479		2	%
GAAP efficiency ratio	55.19		%	59.15		%
Non-GAAP efficiency ratio	54.86		%	58.76		%


(1)	The decrease in other real estate owned and collection costs was primarily due to the receipt of $378,000 in the first quarter of 2019 for reimbursement of legal costs incurred in the fourth quarter of 2018.

FINANCIAL CONDITION

Investments

The Company utilizes the investment portfolio to manage liquidity, interest rate risk, and regulatory capital, as well as to take advantage of market conditions to generate a favorable return on investments without undue risk. The Company’s investment portfolio consists of debt securities available for sale, debt securities which management intends to hold until maturity and common stock of the FHLBB, FRB and certain banks. Investments increased $10.2 million, or 1%, at March 31, 2019 as compared to December 31, 2018. The increase was attributable to periodic purchases throughout the quarter totaling $28.8 million, partially offset by paydowns and calls of $32.0 million and a $14.1 million increase in the fair value of certain securities based on changes in market interest rates.

Our investments in FHLBB and FRB common stock are carried at cost. These investments are presented within other investments on the consolidated statements of condition. We are required to maintain a level of investment in FHLBB stock based on our level of FHLBB advances, and maintain a level of investment in FRB common stock based on the Bank's capital levels. As of March 31, 2019 and December 31, 2018, our investment in FHLBB stock totaled $4.9 million and $8.6 million, respectively, and our investment in FRB stock was $5.4 million.

The Company monitors its investment securities for the presence of OTTI. For debt securities, which made up 99% of our investment portfolio at March 31, 2019, the primary consideration in determining whether impairment is OTTI is whether or not the Bank expects to collect all contractual cash flows.

We continuously monitor and evaluate our investment securities portfolio to identify and assess risks within our portfolio, including, but not limited to, the impact of the current rate environment and the related prepayment risk, and review credit ratings. The overall mix of debt securities at March 31, 2019 compared to December 31, 2018 remains relatively unchanged and well positioned to provide a stable source of cash flow. At March 31, 2019, the duration of our debt investment securities portfolio, adjusting for calls when appropriate and consensus prepayment speeds was 3.7 years, compared to 4.1 years at December 31, 2018. We continue to invest in debt securities with a short period until maturity or call option to limit prepayment risk.

Loans

We provide loans primarily to customers located within our geographic market area. Our primary market continues to be in Maine, making up 76% and 77% of the loan portfolio as of March 31, 2019 and December 31, 2018, respectively. Massachusetts and New Hampshire are our second and third largest markets that we serve, making up 11% and 7%, respectively, of our total loan portfolio as of March 31, 2019, compared to 10% and 7%, respectively, as of December 31, 2018.

The following table sets forth the composition of our loan portfolio as of the dates indicated:



	March 31, 2019			December 31, 2018			Change
	March 31, 2019			December 31, 2018			($)			(%)
Residential real estate	$	1,017,442		$	992,866		$	24,576		2	%
Commercial real estate	1,258,474			1,269,533			(11,059		)	(1	)%
Commercial	390,982			381,780			9,202			2	%
Consumer and home equity	344,702			348,387			(3,685		)	(1	)%
HPFC	30,842			33,656			(2,814		)	(8	)%
Total loans	$	3,042,442		$	3,026,222		$	16,220		1	%
Commercial Loan Portfolio	$	1,680,298		$	1,684,969		$	(4,671	)	—	%
Retail Loan Portfolio	$	1,362,144		$	1,341,253		$	20,891		2	%
Commercial Portfolio Mix	55		%	56		%
Retail Portfolio Mix	45		%	44		%

For the three months ended March 31, 2019, we originated $83.6 million of residential mortgages and sold 41% of the production (including loans designated as held for sale at March 31, 2019), compared to residential mortgage originations of $85.5 million for the three months ended March 31, 2018, and 55% of the production sold during this period (including loans designated as held for sale at March 31, 2019). As we expand our residential mortgage lending teams in Southern Maine and

Massachusetts, we are originating more jumbo 1-4 family residential mortgages, including investor-owned 1- 4 family residential properties in a first lien position, which are generally held within our loan portfolio.

At March 31, 2019, the principal balance of loans held for sale totaled $8.7 million, for which an unrealized gain of $84,000 was reported and carried at fair value on our consolidated statements of condition. At December 31, 2018, the principal balance of loans held for sale totaled $4.3 million, for which an unrealized gain of $89,000 was reported and carried at fair value on our consolidated statements of condition. At March 31, 2019 and December 31, 2018, none of the loans designated as held for sale were delinquent on their payments.

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, 2019			December 31, 2018
Non-accrual loans:
Residential real estate	$	5,415		$	5,492
Commercial real estate	975			1,380
Commercial	802			1,279
Consumer and home equity	2,476			1,861
HPFC	485			518
Total non-accrual loans	10,153			10,530
Accruing loans past due 90 days	14			14
Accruing TDRs not included above	3,771			3,893
Total non-performing loans	13,938			14,437
Other real estate owned	673			130
Total non-performing assets	$	14,611		$	14,567
Non-accrual loans to total loans	0.33		%	0.35		%
Non-performing loans to total loans	0.46		%	0.48		%
ALL to non-performing loans	180.81		%	171.17		%
Non-performing assets to total assets	0.33		%	0.34		%
ALL to non-performing assets	172.48		%	169.64		%

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, 2019, potential problem loans amounted to $2.4 million, or 0.08% of total loans.

Past Due Loans. Past due loans consist of accruing loans that were between 30 and 89 days past due. The following table presents the recorded investment of past due loans at the date indicated:



	March 31, 2019			December 31, 2018
Accruing loans 30-89 days past due:
Residential real estate	$	2,265		$	4,833
Commercial real estate	2,947			2,130
Commercial	1,205			169
Consumer and home equity	1,430			1,467
HPFC	187			183
Total	$	8,034		$	8,782
Accruing loans 30-89 days past due to total loans	0.26		%	0.29		%

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 ALL is increased by provisions charged to earnings and by recoveries of amounts previously charged-off, and is reduced by charge-offs on loans.

The following table sets forth information concerning the activity in the ALL for the periods indicated:



	At or For The Three Months Ended March 31,						At or For The Year Ended December 31, 2018
	2019			2018			At or For The Year Ended December 31, 2018
ALL at the beginning of the period	$	24,712		$	24,171		$	24,171
Provision (credit) for loan losses	750			(500		)	845
Charge-offs:
Residential real estate	11			31			173
Commercial real estate	65			426			512
Commercial	236			171			736
Consumer and home equity	24			175			572
HPFC	—			—			255
Total charge-offs	336			803			2,248
Recoveries:
Residential real estate	2			—			90
Commercial real estate	4			13			28
Commercial	62			63			1,770
Consumer and home equity	7			46			55
HPFC	—			—			1
Total recoveries	75			122			1,944
Net charge-offs	261			681			304
ALL at the end of the period	$	25,201		$	22,990		$	24,712
Components of allowance for credit losses:
Allowance for loan losses	$	25,201		$	22,990		$	24,712
Liability for unfunded credit commitments	16			23			22
Balance of allowance for credit losses at end of the period	$	25,217		$	23,013		$	24,734
Net charge-offs (annualized) to average loans	0.03		%	0.10		%	0.01		%
Provision for loan losses (annualized) to average loans	0.10		%	N.M.			0.03		%
ALL to total loans	0.83		%	0.82		%	0.82		%
ALL to net charge-offs (annualized)	2,413.89		%	843.98		%	8,128.95		%

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.

We believe the ALL of $25.2 million, or 0.83% of total loans and 180.81% of total non-performing loans, at March 31, 2019 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.

Liabilities and Shareholders’ Equity

Deposits and Borrowings. Total deposits at March 31, 2019 increased $113.7 million to $3.6 billion since December 31, 2018, primarily due to net checking account growth of $135.9 million, or 9%, and brokered deposits growth of $70.7 million, or 19%. This growth was partially offset by a decrease in savings in money market account balances in the first quarter of 2019 of $77.5 million, or 7%.

Our core deposit growth in the first quarter of 2019 of $58.4 million, or 2%, which includes interest and non-interest checking, savings and money market accounts, was primarily driven by an increase in balances from our larger commercial deposit relationships. These deposit relationships are subject to more variability in balances due to dependence on business-specific cash flow needs, interest rates and pricing, and other factors.

Total borrowings decreased $16.4 million, or 5%, in the first quarter of 2019 to $325.2 million at March 31, 2019. The decrease was due to strong core deposit growth and the utilization of brokered deposits to replace short-term borrowings over this same period. At March 31, 2019, we did not have outstanding any FHLBB short-term borrowings, representing a decrease of $25.0 million since December 31, 2018.

Our loan-to-deposit ratio at March 31, 2019 and December 31, 2018, was 85% and 87%, respectively.

Shareholders' Equity. Total shareholders' equity at March 31, 2019 increased $17.9 million to $453.7 million since December 31, 2018. The increase was primarily due to net income for the three months ended March 31, 2019, of $14.3 million, partially offset by (i) a $10.1 million decrease in AOCI driven by a decrease in our unrealized losses, net of tax, on our AFS debt securities due to the interest rate environment and (ii) dividends declared of $4.7 million, or $0.30 per share for the three months ended March 31, 2019.

On January 22, 2019, the Company's Board of Directors authorized the purchase of up to 775,000 shares of our common stock, representing approximately 5.0% of our issued and outstanding shares as of December 31, 2018. As of March 31, 2019, 55,557 shares of Company common stock were repurchased at an average price of $41.51 per share.

The following table presents certain information regarding shareholders’ equity as of or for the periods indicated:



	At or For The Three Months Ended March 31,						At or For The Year Ended December 31, 2018
	2019			2018			At or For The Year Ended December 31, 2018
Return on average assets	1.33		%	1.28		%	1.28		%
Return on average equity	13.13		%	12.91		%	12.92		%
Average equity to average assets	10.17		%	9.93		%	9.93		%
Dividend payout ratio	32.97		%	30.40		%	33.85		%
Book value per share	$	29.16		$	25.89		$	27.95
Dividends declared per share	$	0.30		$	0.25		$	1.15

Refer to "Capital Resources" and Note 10 of the consolidated financial statements for further discussion of the Company and Bank's capital resources and regulatory capital requirements.

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, 2019 and December 31, 2018, 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 and the sale of mortgage loans.

Deposits continue to represent our primary source of funds. For the three months ended March 31, 2019, average deposits (excluding brokered deposits) of $3.1 billion increased $347.5 million, or 13%, compared to the same period last year. Average core deposits (non-interest checking, interest checking, savings and money market) of $2.6 billion for the three months ended March 31, 2019 increased $376.7 million, or 17%, compared to the same period a year ago. Included within our money market

deposits at March 31, 2019, were $69.2 million of deposits from the Bank's wealth management department, which represent client funds. These deposits fluctuate with changes in the portfolios of the clients of Camden National Wealth Management.

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, 2019, average total borrowings (including brokered deposits) decreased $114.9 million, or 13%, to $748.1 million compared to the same period last year. We secure borrowings from the FHLBB with qualified residential real estate loans, certain investment securities and certain other assets available to be pledged. Customer repurchase agreements are secured by mortgage-backed securities and government-sponsored enterprises. Through the Bank, we have available lines of credit with the FHLBB of $9.9 million, with a correspondent bank of $50.0 million, and with the FRB Discount Window of $114.8 million as of March 31, 2019. The Company also has a $10.0 million line of credit with a correspondent bank that matures on December 20, 2019.

We believe our 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, the 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.

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 $453.7 million and $435.8 million at March 31, 2019 and December 31, 2018, respectively, which amounted to 10% of total assets as of the respective dates. Refer to "— Financial Condition — Liabilities and Shareholders' Equity" for discussion regarding changes in shareholders' equity for the three months ended March 31, 2019.

Our principal cash requirement is the payment of dividends on our common stock, as and when declared by the Company's Board of Directors. We declared dividends to shareholders in the aggregate amount of $4.7 million and $3.9 million for the three months ended March 31, 2019 and 2018, respectively. The Company's 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 have been and will be in compliance with applicable state corporate law and regulatory requirements.

We are primarily dependent upon the payment of cash dividends by the Bank, our wholly-owned subsidiary, to service our commitments. We, as the sole shareholder of the Bank, are entitled to dividends, when and as declared by the Bank's Board of Directors from legally available funds. For the three months ended March 31, 2019 and 2018, the Bank declared dividends payable to the Company in the amount of $7.0 million and $6.0 million, respectively. Under regulations prescribed by the OCC, the Bank may not declare dividends in excess of the Bank’s net income for the current year plus its retained net income for the prior two years without prior approval from the OCC. 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 10 of the consolidated financial statements for discussion and details of the Company and Bank's regulatory capital requirements. At March 31, 2019 and December 31, 2018, the Company and Bank exceeded all regulatory capital requirements, and the Bank continues to meet the capital requirements to be classified as "well capitalized" under applicable prompt corrective action provisions.

CONTRACTUAL OBLIGATIONS AND OFF-BALANCE SHEET COMMITMENTS

Off-Balance Sheet Financial Instruments

Credit Commitments and Standby Letters of Credit. 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 commitments to extend credit and standby 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 borrower 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. In the event of nonperformance by the borrower, we are entitled to underlying collateral, as applicable, which generally consists of pledges of business assets including, but not limited to, accounts receivable, inventory, plant and equipment, and/or real estate.

Derivatives. We use derivative financial instruments for risk management purposes (primarily interest rate risk) and not for trading or speculative purposes. We control the credit risk of these instruments through collateral, credit approvals and monitoring procedures. Additionally, as part of our normal mortgage origination process, we provide 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, we are subject to the risk of interest rate change. 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. We account for interest rate lock commitments on loans that will be held for sale as derivative instruments. Furthermore, we record a derivative for our best-effort forward delivery commitments upon origination of a loan identified as held for sale. Should we enter into a forward delivery commitment on a mandatory delivery arrangement with an investor, we account for the forward delivery commitment as a derivative upon execution of the mandatory delivery contract.

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.

Refer to Note 8 of the consolidated financial statements for additional details.

At March 31, 2019, we had the following levels of off-balance sheet financial instruments:



	Total Amount		Commitment Expires in:
Off-Balance Sheet Financial Instruments	Committed		<1 Year		1 – 3 Years		3 – 5 Years		>5 Years
Commitments to extend credit	$	669,193	$	272,815	$	53,799	$	13,955	$	328,624
Standby letters of credit	5,938		4,809		165		—		964
Customer loan swaps - notional value	802,580		11,588		7,026		73,832		710,134
Junior subordinated debt interest rate swaps - notional value	43,000		—		10,000		—		33,000
Fixed-rate mortgage interest rate lock commitments - notional value	22,840		22,840		—		—		—
Forward delivery commitments - notional value	8,711		8,711		—		—		—
Total	$	1,552,262	$	320,763	$	70,990	$	87,787	$	1,072,722

Contractual Obligations and Commitments

We are a party to several contractual obligations through lease agreements on a number of branches. Effective January 1, 2019, we adopted ASU 2016-02, Leases. In conjunction with the adoption of the new lease accounting standard, renewal options within the various lease contracts, as applicable, were considered to determine the lease term and estimate the contractual obligation and commitment for the Company's operating and finance leases. Furthermore, certain lease contracts of the Company contain language that subject its rent payment to variability, such as those tied to an index or change in an index. As a result, the future contractual obligation and commitment may materially differ from that estimated and disclosed within the table below. Upon adoption of the new lease accounting standard, the Company's estimated lease liability for its various operating and finance leases was reported within other liabilities on our consolidated statements of condition. Please refer to Notes 2 and 5 of the consolidated financial statements for discussion and details of our leases.

We enter into agreements routinely as part of our normal business to manage deposits and borrowings.

At March 31, 2019, we had an obligation and commitment to make future payments under each of these contracts as follows:



	Total Amount		Payments Due per Period
Contractual obligations and commitments	Committed		<1 Year		1 – 3 Years		3 – 5 Years		>5 Years
Operating leases	$	15,557	$	1,334	$	2,395	$	2,267	$	9,561
Finance leases	2,922		174		348		348		2,052
FHLBB advances - other	10,000		—		10,000		—		—
Retail repurchase agreements	256,181		256,181		—		—		—
Junior subordinated debentures	44,331		—		—		—		44,331
Subordinated debentures	14,647		—		—		—		14,647
Other contractual obligations	1,938		1,938		—		—		—
Total	$	345,576	$	259,627	$	12,743	$	2,615	$	70,591

Borrowings from the FHLBB consist of short- and long-term fixed and variable rate borrowings that 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 short- and long-term borrowings. These commitments and borrowings and the related payments are made during the normal course of business.

RISK MANAGEMENT

The Company’s Board of Directors and management have identified significant risk categories which affect the Company. The risk categories include: credit; liquidity; market; interest rate; capital; operational and technology, including cybersecurity; vendor and third party; people and compensation; compliance and legal; and strategic alignment and reputation. The Board of Directors has approved an Enterprise Risk Management ("ERM") Policy that addresses each category of risk. The direct oversight and responsibility for the Company's risk management program has been delegated to the Company's Executive Vice President of Risk Management, who is a member of the Executive Committee and reports directly to the Chief Executive Officer.

For the three months ended March 31, 2019, there have been no material changes to the Company's risk categories and risk management policies as described in Item 7 of the Company's Annual Report on Form 10-K for the year ended December 31, 2018.

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. While

Board ALCO and Management ALCO routinely monitor simulated net interest income sensitivity over a rolling two-year horizon, they also utilize additional tools to monitor potential longer-term interest rate risk.

The simulation model captures the impact of changing interest rates 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. 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, assuming no balance sheet growth, 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 result in negative rates as many deposit and funding rates are below 2.00%. During the last few years, our downward shift has been 100 basis points. Starting in the third quarter of 2018, we resumed running a downward shift of 200 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 and a “rate shock” have on earnings expectations. In the down 100 and 200 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, 2019 and 2018, our net interest income sensitivity analysis reflected the following changes to net interest income assuming no balance sheet growth and a parallel shift in interest rates. 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, 2019		March 31, 2018
Year 1
+200 basis points	0.47	%	0.23	%
-100 basis points	(0.83	)%	(2.16	)%
-200 basis points⁽¹⁾	(2.00	)%	Not measured
Year 2
+200 basis points	6.87	%	8.85	%
-100 basis points	(2.26	)%	(5.43	)%
-200 basis points⁽¹⁾	(11.77	)%	Not measured


(1)	The down 200 basis point scenario was not performed as part of the Company's March 31, 2018 net interest income sensitivity analysis given market interest rates at that time.

The preceding sensitivity analysis does not represent a forecast and should not be relied upon as being indicative of expected operating results. These hypothetical estimates are based upon numerous assumptions including, among others, the nature and timing of interest rate levels, yield curve shape, prepayments on loans and securities, deposit decay rates, pricing decisions on loans and deposits and reinvestment/replacement of asset and liability cash flows. While assumptions are developed based upon current economic and local market conditions, we cannot make any assurances as to the predictive nature of these assumptions, including how customer preferences or competitor influences might change.

If rates remain at or near current levels, net interest income is projected to increase slightly as assets continue to settle into higher yields while funding costs remain relatively unchanged. Beyond the first year, net interest income increases slightly. If rates decrease 200 basis points, net interest income is projected to decrease as loans reprice into lower yields and funding costs have limited capacity to reduce the cost of funds 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 reduction in the cost of funds becomes limited. If rates increase 200 basis points, net interest income is projected to increase slightly in the first year due to the repricing of assets outpacing that of liabilities. In the second year, net interest income is projected to continue to increase as loan and investment yields continue to reprice/reset into higher yields and the cost of funds lags.

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 Board of Directors has approved hedging policy statements governing the use of these instruments. As of March 31, 2019, we had $43.0 million notional principal amount of interest rate swap agreements related to the junior subordinated debentures and $401.3 million of notional interest rate swap agreements related to our commercial loan level derivative program with both our commercial customers and a corresponding swap dealer. The Board and Management ALCO monitor derivative activities relative to their expectations and our hedging policies.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

Information required by this Item 3 is included in Item 2. "Management's Discussion and Analysis of Financial Condition and Results of Operations - Risk Management."

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.

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, 2018.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

(a) None.

(b) None.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5. OTHER INFORMATION

None.

ITEM 6. EXHIBITS



Exhibit No.		Definition
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, 2019, formatted in XBRL: (i) Consolidated Statements of Condition - March 31, 2019 and December 31, 2018; (ii) Consolidated Statements of Income - Three Months Ended March 31, 2019 and 2018; (iii) Consolidated Statements of Comprehensive Income - Three Months Ended March 31, 2019 and 2018; (iv) Consolidated Statements of Changes in Shareholders’ Equity - Three Months Ended March 31, 2019 and 2018; (v) Consolidated Statements of Cash Flows - Three Months Ended March 31, 2019 and 2018; and (vi) Notes to the Unaudited Consolidated Financial Statements.
*		Filed herewith.
**		Furnished herewith.

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 9, 2019
Gregory A. Dufour		Date
President and Chief Executive Officer (Principal Executive Officer)

/s/ Deborah A. Jordan		May 9, 2019
Deborah A. Jordan		Date
Chief Operating Officer, Chief Financial Officer and Principal Financial & Accounting Officer