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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, 2010

OR

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934

Commission File No.      0-28190

CAMDEN NATIONAL CORPORATION
(Exact name of registrant as specified in its charter)

MAINE
01-0413282
(State or other jurisdiction of
(I.R.S. Employer
incorporation or organization)
Identification No.)
   
2 ELM STREET, CAMDEN, ME
04843
(Address of principal executive offices)
(Zip Code)

Registrant's telephone number, including area code:  (207) 236-8821

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter periods that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes x          No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).                

Yes ¨          No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer ¨
Accelerated filer x
Non-accelerated filer ¨
Smaller reporting company   ¨
( Do not check if a smaller reporting company)
 

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

Yes ¨          No x

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practical date:
Outstanding at May 7, 2010:  Common stock (no par value) 7,656,653 shares.
 


CAMDEN NATIONAL CORPORATION

FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 2010
TABLE OF CONTENTS OF INFORMATION REQUIRED IN REPORT

   
PAGE
   
PART I.  FINANCIAL INFORMATION
 
   
ITEM 1.
FINANCIAL STATEMENTS
 
     
 
Report of Independent Registered Public Accounting Firm
3
     
 
Consolidated Statements of Condition
March 31, 2010 and December 31, 2009
4
     
 
Consolidated Statements of Income
Three Months Ended March 31, 2010 and 2009
5
     
 
Consolidated Statements of Changes in Shareholders’ Equity
Three Months Ended March 31, 2010 and 2009
6
     
 
Consolidated Statements of Cash Flows
Three Months Ended March 31, 2010 and 2009
7
     
 
Notes to Consolidated Financial Statements
Three Months Ended March 31, 2010 and 2009
8-18
     
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
19-31
     
ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
32-33
     
ITEM 4.
CONTROLS AND PROCEDURES
34
     
PART II. OTHER INFORMATION
 
     
ITEM 1.
LEGAL PROCEEDINGS
35
     
ITEM 1A.
RISK FACTORS
35
     
ITEM 2.
UNREGISTERED SALES OF EQUITY SECURITIES AND  USE OF PROCEEDS
35
     
ITEM 3.
DEFAULTS UPON SENIOR SECURITIES
35
     
ITEM 4.
[RESERVED]
35
     
ITEM 5.
OTHER INFORMATION
35
     
ITEM 6.
EXHIBITS
36
     
SIGNATURES
37
     
EXHIBIT INDEX
38
     
EXHIBITS
39-42
 

 
PART I. FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Shareholders and Board of Directors
Camden National Corporation

We have reviewed the accompanying interim consolidated financial information of Camden National Corporation and Subsidiaries as of March 31, 2010, and for the three-month periods ended March 31, 2010 and 2009. These financial statements are the responsibility of the Company's management.

We conducted our reviews in accordance with standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit in accordance with standards of the Public Company Accounting Oversight Board (United States), the objective of which is to express an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

Based on our reviews, we are not aware of any material modifications that should be made to the accompanying financial statements for them to be in conformity with accounting principles generally accepted in the United States of America.
 
/s/ Berry, Dunn, McNeil & Parker
Berry, Dunn, McNeil & Parker

Bangor, Maine
May 7, 2010

3

CAMDEN NATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CONDITION

   
March 31,
   
December 31,
 
   
2010
   
2009
 
(In Thousands, Except Number of Shares)
 
(unaudited)
       
ASSETS
           
Cash and due from banks
 
$
29,899
   
$
29,772
 
Securities
           
  
 
Securities available for sale, at fair value
   
460,702
     
479,708
 
Securities held to maturity, at amortized cost (fair value $39,462 and $39,639 at March 31, 2010 and December 31, 2009, respectively)
   
37,900
     
37,914
 
Federal Home Loan Bank and Federal Reserve Bank stock, at cost
   
21,965
     
21,965
 
Total securities
   
520,567
     
539,587
 
Trading account assets
   
1,794
     
1,725
 
Loans
   
1,530,067
     
1,526,758
 
Less allowance for loan losses
   
(21,379
)   
   
(20,246
)   
Net loans
   
1,508,688
     
1,506,512
 
Goodwill and other intangible assets
   
46,254
     
46,398
 
Bank-owned life insurance
   
42,049
     
41,677
 
Premises and equipment, net
   
26,563
     
26,054
 
Deferred tax asset
   
10,268
     
10,317
 
Prepaid FDIC assessment
   
7,635
     
8,197
 
Interest receivable
   
7,500
     
7,236
 
Other real estate owned
   
5,201
     
5,479
 
Other assets
   
12,138
     
12,429
 
Total assets
 
$
2,218,556
   
$
2,235,383
 
LIABILITIES AND SHAREHOLDERS’ EQUITY
               
Liabilities
               
Deposits:
               
Demand
 
$
184,449
   
$
193,549
 
Interest checking, savings and money market
   
691,186
     
675,681
 
Retail certificates of deposit
   
538,832
     
545,789
 
Brokered deposits
   
86,563
     
80,788
 
Total deposits
   
1,501,030
     
1,495,807
 
Federal Home Loan Bank advances
   
179,607
     
209,710
 
Other borrowed funds
   
275,978
     
274,125
 
Junior subordinated debentures
   
43,538
     
43,512
 
Accrued interest and other liabilities
   
23,246
     
21,668
 
Total liabilities
   
2,023,399
     
2,044,822
 
             
  
 
Shareholders’ Equity
           
  
 
Common stock, no par value; authorized 20,000,000 shares, issued and outstanding 7,654,303 and 7,644,837 shares on March 31, 2010 and December 31, 2009, respectively
   
50,180
     
50,062
 
Retained earnings
   
136,987
     
133,634
 
Accumulated other comprehensive income
               
Net unrealized gains on securities available for sale, net of tax
   
8,403
     
7,083
   
Net unrealized gains on derivative instruments, at fair value, net of tax
   
536
     
739
 
Net unrecognized losses on postretirement plans, net of tax
   
(949
)
   
(957
)   
Total accumulated other comprehensive income
   
7,990
     
6,865
   
Total shareholders’ equity
   
195,157
     
190,561
 
Total liabilities and shareholders’ equity
 
$
2,218,556
   
$
2,235,383
 

See Report of Independent Registered Public Accounting Firm.
The accompanying notes are an integral part of these consolidated financial statements.
 
4

 
CAMDEN NATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(unaudited)

  
 
Three Months Ended March 31,
 
(In Thousands, Except Number of Shares and per Share Data)
 
2010
   
2009
 
Interest Income
           
Interest and fees on loans
 
$
20,447
   
$
21,621
 
Interest on U.S. government and sponsored enterprise obligations
   
5,163
     
7,235
 
Interest on state and political subdivision obligations
   
539
     
645
 
Interest on federal funds sold and other investments
   
25
     
49
 
Total interest income
   
26,174
     
29,550
 
Interest Expense
               
Interest on deposits
   
4,121
     
6,402
 
Interest on borrowings
   
3,294
     
3,934
 
Interest on junior subordinated debentures
   
694
     
713
 
Total interest expense
   
8,109
     
11,049
 
Net interest income
   
18,065
     
18,501
 
Provision for credit losses
   
1,996
     
1,730
 
Net interest income after provision for credit losses
   
16,069
     
16,771
 
Non-Interest Income
               
Income from fiduciary services
   
1,567
     
1,354
 
Service charges on deposit accounts
   
1,280
     
1,233
 
Other service charges and fees
   
690
     
613
 
Bank-owned life insurance
   
371
     
395
 
Brokerage and insurance commissions
   
294
     
358
 
Mortgage banking income
   
89
     
455
 
Other-than-temporary impairment of securities
   
(48
   
 
Other income
   
329
     
146
 
Total non-interest income
   
4,572
     
4,554
 
Non-Interest Expenses
               
Salaries and employee benefits
   
6,225
     
5,678
 
Furniture, equipment and data processing
   
1,068
     
963
 
Regulatory assessments
   
715
     
872
 
Net occupancy
   
1,034
     
1,118
 
Consulting and professional fees
   
808
     
572
 
Other real estate owned and collection costs
   
974
     
880
 
Amortization of intangible assets
   
144
     
144
 
Other expenses
   
1,954
     
2,064
 
Total non-interest expenses
   
12,922
     
12,291
 
Income before income taxes
   
7,719
     
9,034
 
Income Taxes
   
2,406
     
2,820
 
Net Income
 
$
5,313
   
$
6,214
 
                 
Per Share Data
               
Basic earnings per share
 
$
0.69
   
$
0.81
 
Diluted earnings per share
 
0.69
   
$
0.81
 
Weighted average number of common shares outstanding
   
7,652,089
     
7,639,169
 
Diluted weighted average number of common shares outstanding
   
7,659,640
     
7,642,705
 

See Report of Independent Registered Public Accounting Firm.
The accompanying notes are an integral part of these consolidated financial statements.
 
5

CAMDEN NATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
(unaudited)

(In Thousands, Except Number of
Shares and per Share Data)
 
Common
Stock
   
Retained
Earnings
   
Net
Unrealized
Gains
(Losses) on
Securities
Available
for Sale
   
Net
Unrealized
Gains
(Losses) on
Derivative
Instruments
   
Net
Unrecognized
Losses on
Postretirement
Plans
   
Total
Shareholders’
Equity
 
Balance at December 31, 2008
 
$
48,984
   
$
118,564
   
$
(89
)
 
$
   
$
(1,059
)
 
$
166,400
 
                                                 
Net income
   
     
6,214
     
     
     
     
6,214
 
Change in unrealized losses on securities available for sale, net of taxes of ($713)
   
     
     
1,325
     
     
     
1,325
 
Change in unrealized losses on derivative instruments at fair value, net of taxes of $89
   
     
     
     
(165
 
   
     
(165
 
)
Change in net unrecognized losses on post-retirement plans, net of taxes of ($8)
   
     
     
     
     
16
     
16
 
Total comprehensive income
   
     
6,214
     
1,325
     
(165
   
16
     
7,390
 
Stock-based compensation expense
   
122
     
     
     
     
     
122
 
Cash dividends declared   ($0.25/share)
   
     
(1,916
)
   
     
     
     
(1,916
)
Balance at March 31, 2009
 
$
49,106
   
$
122,862
   
$
1,236
   
$
(165
 
$
(1,043
)
 
$
171,996
 
                                                 
Balance at December 31, 2009
 
$
50,062
   
$
133,634
   
$
7,083
   
$
739
   
$
(957
)
 
$
190,561
 
                                                 
Net income
   
     
5,313
     
     
     
     
5,313
 
Change in unrealized gains on securities available for sale, net of taxes of ($711)
   
     
     
1,320
     
     
     
1,320
 
Change in unrealized gains on derivative instruments at fair value, net of taxes of $109
   
     
     
     
(203
   
     
(203
)
Change in net unrecognized losses on postretirement plans, net of taxes of ($4)
   
     
     
     
     
8
     
8
 
Total comprehensive income
   
     
5,313
     
1,320
     
(203
   
8
     
6,438
 
Stock-based compensation expense
   
118
     
     
     
     
     
118
 
Common stock repurchased (1,385 shares)
   
     
(44
)
   
     
     
     
(44
)
Cash dividends declared ($0.25/share)
   
     
(1,916
)
   
     
     
     
(1,916
)
Balance at March 31, 2010
 
$
50,180
   
$
136,987
   
$
8,403
   
$
536
   
$
(949
)
 
$
195,157
 
 
  See Report of Independent Registered Public Accounting Firm.
The accompanying notes are an integral part of these consolidated financial statements.

6

CAMDEN NATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
 
  
 
Three Months Ended March 31,
 
(In Thousands)
 
2010
   
2009
 
Operating Activities
           
Net income
 
$
5,313
   
$
6,214
 
Adjustments to reconcile net income to net cash provided by operating activities:
               
Provision for credit losses
   
1,996
     
1,730
 
Depreciation and amortization
   
707
     
667
 
Stock-based compensation expense
   
118
     
122
 
Increase in interest receivable
   
(264
)
   
(60
)
Amortization of intangible assets
   
144
     
144
 
Net increase in trading assets
   
(69
)
   
 
Other-than-temporary impairment of securities
   
48
     
 
Increase in other real estate owned valuation allowance
   
370
     
666
 
Originations of mortgage loans held for sale
   
     
(29,119
)
Proceeds from the sale of mortgage loans
   
     
20,155
 
Gain on sale of mortgage loans
   
     
(112
)
Liquidation of defined benefit pension plan
   
     
(735
)
Decrease in prepaid FDIC assessment
   
562
     
 
Decrease in other assets
   
654
     
1,649
 
Increase in other liabilities
   
1,652
     
388
 
Net cash provided by operating activities
   
11,231
     
1,709
 
Investing Activities
               
Proceeds from maturities of securities held to maturity
   
     
500
 
Proceeds from sales and maturities of securities available for sale
   
40,784
     
47,830
 
Purchase of securities available for sale
   
(19,887
)
   
(30,469
)
Net (increase) decrease in loans
   
(3,961
)
   
30,074
 
Proceeds from the sale of other real estate owned
   
212
     
175
 
Purchase of premises and equipment
   
(3,148
)
   
(194
)
Net cash provided by investing activities
   
14,000
     
47,916
 
Financing Activities
               
Net increase (decrease) in deposits
   
5,219
     
(8,336
)
Proceeds from Federal Home Loan Bank long-term advances
   
11,200
     
 
Repayments on Federal Home Loan Bank long-term advances
   
(41,302
)
   
(42,445
)
Net change in short-term Federal Home Loan Bank borrowings
   
4,385
     
(31,185
)
Net (decrease) increase in other borrowed funds
   
(2,646
)
   
27,823
 
Common stock repurchase
   
(44
)
   
 
Cash dividends paid on common stock
   
(1,916
)
   
(1,912
)
Net cash used by financing activities
   
(25,104
)
   
(56,055
)
Net increase (decrease) in cash and cash equivalents
   
127
     
(6,430
)
Cash and cash equivalents at beginning of year
   
29,772
     
35,195
 
Cash and cash equivalents at end of period
 
$
29,899
   
$
28,765
 
Supplemental information
               
Interest paid
 
$
8,260
   
$
11,341
 
Income taxes paid
   
1,000
     
 
Transfer from loans to other real estate owned
   
304
     
 
 
See Report of Independent Registered Public Accounting Firm.
The accompanying notes are an integral part of these consolidated financial statements.
 
7


CAMDEN NATIONAL CORPORATION AND SUBSIDIARIES

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

NOTE 1 - BASIS OF PRESENTATION

The accompanying unaudited consolidated financial statements were prepared in accordance with instructions for Form 10-Q and, therefore, do not include all disclosures required by accounting principles generally accepted in the United States of America (“GAAP”) 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, 2010 and December 31, 2009, the consolidated statements of income for the three months ended March 31, 2010 and 2009, the consolidated statements of changes in shareholders' equity for the three months ended March 31, 2010 and 2009, and the consolidated statements of cash flows for the three months ended March 31, 2010 and 2009. All significant intercompany transactions and balances are eliminated in consolidation. Certain items from the prior year were reclassified to conform to the current year presentation. The income reported for the three-month period ended March 31, 2010 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 December 31, 2009 Annual Report on Form 10-K.

NOTE 2 – EARNINGS PER SHARE
 
Basic earnings per common share (“EPS”) excludes dilution and is computed by dividing net income applicable to common stock by the weighted average number of common shares outstanding for the year. Diluted EPS reflects the potential dilution that could occur if certain securities or other contracts to issue common stock (such as stock options) were exercised or converted into additional common shares that would then share in the earnings of the Company. Diluted EPS is computed by dividing net income applicable to common stock by the weighted average number of common shares outstanding for the year, plus an incremental number of common-equivalent shares computed using the treasury stock method. The following table sets forth the computation of basic and diluted earnings per share under the two-class method, as unvested share-based payment awards include the nonforfeitable right to receive dividends and therefore are considered participating securities:

   
Three Months Ended March 31,
 
   
2010
   
2009
 
Net income, as reported
 
$
5,313
   
$
6,214
 
Weighted-average common shares outstanding – basic
   
7,652,089
     
7,639,169
 
Dilutive effect of stock-based compensation
   
7,551
     
3,536
 
Weighted-average common and potential common shares – diluted
  
 
7,659,640
     
7,642,705
 
Basic earnings per share – common stock
 
$
0.69
   
$
0.81
 
Basic earnings per share – unvested share-based payment awards
   
0.69
     
0.81
 
Diluted earnings per share – common stock
   
0.69
     
0.81
 
Diluted earnings per share – unvested share-based payment awards
   
0.69
     
0.81
 

At March 31, 2010 and 2009, options to purchase 98,877 and 134,800 shares, respectively, of common stock were not considered in the computation of potential common shares for purposes of diluted EPS, since the exercise prices of the options were greater than the average market price of the common stock for the respective periods.

8


NOTE 3 – SECURITIES

The following tables summarize the amortized costs and estimated fair values of securities available for sale and held to maturity, as of the dates indicated:
 
   
Amortized
Cost
   
Unrealized
Gains
   
Unrealized
Losses
   
Fair
Value
 
March 31, 2010
                       
Available for sale
                       
Obligations of U.S. Government sponsored enterprises
 
$
10,000
   
$
   
$
(40
)
 
$
9,960
 
Obligations of states and political subdivisions
   
16,875
     
411
     
     
17,286
 
Mortgage-backed securities issued or guaranteed by U.S. government sponsored enterprises
   
383,209
     
17,757
     
     
400,966
 
Private issue collateralized mortgage obligations
   
32,748
     
10
     
(4,689
)
   
28,069
 
Total debt securities
   
442,832
     
18,178
     
(4,729
)
   
456,281
 
Equity securities
   
5,000
     
     
(579
)
   
4,421
 
Total securities available for sale
 
$
447,832
   
$
18,178
   
$
(5,308
)
 
$
460,702
 
Held to maturity
                               
Obligations of states and political subdivisions
 
$
37,900
   
$
1,562
   
$
   
$
39,462
 
Total securities held to maturity
 
$
37,900
   
$
1,562
   
$
   
$
39,462
 
                                 
December 31, 2009
                               
Available for sale
                               
Obligations of states and political subdivisions
 
$
17,587
   
$
473
   
$
   
$
18,060
 
Mortgage-backed securities issued or guaranteed by U.S. government sponsored enterprises
   
412,113
     
16,608
     
(365
)
   
428,356
 
Private issue collateralized mortgage obligations
   
34,121
     
12
     
(5,261
)
   
28,872
 
Total debt securities
   
463,821
     
17,093
     
(5,626
)
   
475,288
 
Equity securities
   
5,000
     
     
(580
)
   
4,420
 
Total securities available for sale
 
$
468,821
   
$
17,093
   
$
(6,206
)
 
$
479,708
 
Held to maturity
           
  
     
  
     
  
 
Obligations of states and political subdivisions
 
$
37,914
   
$
1,725
   
$
   
$
39,639
 
Total securities held to maturity
 
$
37,914
   
$
1,725
   
$
   
$
39,639
 

Unrealized gains on securities available for sale arising during the first quarter of 2010 and included in other comprehensive income amounted to $1.3 million, net of deferred taxes of $711,000.
 
At March 31, 2010, securities with an amortized cost of $346.2 million and an estimated fair value of $363.5 million were pledged to secure Federal Home Loan Bank (“FHLB”) advances, public deposits, securities sold under agreements to repurchase and other purposes required or permitted by law.
 
The amortized cost and estimated fair values of debt securities by contractual maturity at March 31, 2010 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
 
Available for sale
 
 
   
 
 
Due in one year or less
  $ 2,934     $ 2,961  
Due after one year through five years
    37,057       38,094  
Due after five years through ten years
    59,186       61,384  
Due after ten years
    343,655       353,842  
  
  $ 442,832     $ 456,281  
Held to maturity
               
Due in one year or less
  $ 297     $ 301  
Due after one year through five years
    3,669       3,809  
Due after five years through ten years
    32,043       33,387  
Due after ten years
    1,891       1,965  
  
  $ 37,900     $ 39,462  
 
9

 
Management reviews the investment portfolio on a periodic basis to determine the cause, magnitude and duration of declines in the fair value of each security. Thorough evaluations of the causes of the unrealized losses are performed to determine whether the impairment is temporary or other than temporary in nature. Considerations such as the ability of the securities to meet cash flow requirements, levels of credit enhancements, risk of curtailment, recoverability of invested amount over a reasonable period of time and the length of time the security is in a loss position, for example, are applied in determining other than temporary impairment (“OTTI”). Once a decline in value is determined to be other-than-temporary, the value of the security is reduced and a corresponding charge to earnings is recognized.
 
The following table shows the unrealized gross losses and estimated fair values of investment securities at March 31, 2010 and December 31 2009, by length of time that individual securities in each category have been in a continuous loss position.

   
Less Than 12 Months
   
12 Months or More
   
Total
 
  
 
Fair
Value
   
Unrealized
Losses
   
Fair
Value
   
Unrealized
Losses
   
Fair
Value
   
Unrealized
Losses
 
March 31, 2010
                                   
Obligations of U.S. Government sponsored enterprises
 
$
9,960
   
$
(40
)
 
$
   
$
   
$
9,960
   
$
(40
)
Private issue collateralized mortgage obligations
   
     
     
27,256
     
(4,689
)
   
27,256
     
(4,689
)
Equity securities
   
     
     
4,421
     
(579
)
   
4,421
     
(579
)
Total
 
$
9,960
   
$
(40
)
 
$
31,677
   
$
(5,268
)
 
$
41,637
   
$
(5,308
)
                                                 
December 31, 2009
                                               
Mortgage-backed securities
 
$
25,003
   
(364
)
 
$
57
   
$
(1
)
 
$
25,060
   
$
(365
)
Private issue collateralized mortgage obligations
   
     
     
27,910
     
(5,261
)
   
27,910
     
(5,261
)
Equity securities
   
     
     
4,420
     
(580
   
4,420
     
(580
)
Total
 
$
25,003
   
$
(364
)
 
$
32,387
   
$
(5,842
)
 
$
57,390
   
$
(6,206
)
 
At March 31, 2010, $41.6 million of the Company’s investment securities had unrealized losses that are primarily considered temporary. A large portion of the unrealized loss was related to the private issue collateralized mortgage obligations (“CMOs”), which includes $9.0 million that have been downgraded to non-investment grade. The Company’s share of these downgraded CMOs is in the senior tranches. Management believes the unrealized loss for the CMOs is the result of current market illiquidity and the underestimation of value in the market. Including the CMOs, there were 22 securities with a fair value of $31.7 million in the portfolio which had unrealized losses for twelve months or longer. Management currently has the intent and ability to retain these investment securities with unrealized losses until the decline in value has been recovered. Stress tests are performed regularly on the higher risk bonds in the portfolio using current statistical data to determine expected cash flows and forecast potential losses. The results of the stress tests at March 31, 2010, reflect no current credit loss in the base case, but did reflect potential future losses. Based on this analysis the Company recorded a $48,000 OTTI write-down on two private issue CMOs during the first quarter of 2010.
 
At March 31, 2010, the Company held Duff & Phelps Select Income Fund Auction Preferred Stock with an amortized cost of $5.0 million which failed at auction during 2008. The security is rated Triple-A by Moody’s and Standard and Poor’s. Management believes the failed auctions are a temporary liquidity event related to this asset class of securities. The Company is currently collecting all amounts due according to contractual terms and has the ability and intent to hold the securities until they clear auction, are called, or mature; therefore, the securities are not considered other-than-temporarily impaired.


The composition of the Company’s loan portfolio, including residential loans held for sale, at March 31, 2010 and December 31, 2009 was as follows:
 
   
March 31,
   
December 31,
 
   
2010
   
2009
 
Residential real estate loans
 
$
625,994
   
$
627,979
 
Commercial real estate loans
   
437,294
     
434,783
 
Commercial loans
   
192,087
     
191,214
 
Consumer loans
   
275,025
     
273,106
 
Deferred loan fees net of costs
   
(333
)
   
(324
Total loans
 
$
1,530,067
   
$
1,526,758
 

10

 
The Company’s lending activities are primarily conducted in Maine. The Company makes 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. For the year ended December 31, 2009, the Company sold $72.5 million of fixed-rate residential mortgage loans on the secondary market, which resulted in a net gain on the sale of loans of $86,000. The Company did not sell mortgage loans during the first quarter of 2010. 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.

Non-accrual loans at March 31, 2010 were $18.0 million, or 1.18% of total loans, compared to $17.9 million, or 1.18% of total loans, at December 31, 2009. Non-accrual loans at March 31, 2010 were comprised of $6.2 million in commercial real estate loans, $6.2 million in residential real estate loans, $4.3 million in commercial loans, and $1.2 million in consumer loans. Non-accrual loans at December 31, 2009 consisted of $6.5 million in commercial real estate loans, $6.2 million in residential real estate loans, $4.1 million in commercial loans, and $1.2 million in consumer loans.

The allowance for loan losses (“ALL”) is management’s best estimate of inherent risk of loss in the loan portfolio as of the 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. If the assumptions are wrong, 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: general real estate and economic conditions; regional credit concentration; industry concentration, for example in the hospitality, tourism and recreation industries; and a requirement by Federal and state regulators to increase the provision for loan losses or recognize additional charge-offs.

 The following is a summary of activity in the allowance for loan losses:

   
Three Months Ended March 31,
 
  
 
2010
   
2009
 
Balance at beginning of period
 
$
20,246
   
$
17,691
 
Loans charged off
   
(1,253
)
   
(1,827
Recoveries on loans previously charged off
   
386
     
97
 
Net charge-offs
   
(867
)
   
(1,730
Provision for loan losses
   
2,000
     
1,730
 
Balance at end of period
 
$
21,379
   
$
17,691
 

NOTE 5 – GOODWILL, CORE DEPOSIT AND TRUST RELATIONSHIP INTANGIBLES

In 2008, the Company acquired $37.9 million of goodwill, $5.0 million of core deposit intangible and $753,000 of trust relationship intangible related to the acquisition of Union Bankshares Company (“Union Bankshares”). The changes in goodwill, core deposit intangible and trust relationship intangible for the three months ended March 31, 2010 are shown in the table below:

   
Goodwill
 
   
Banking
   
Financial
Services
   
Total
 
Balance at December 31, 2009
 
$
34,720
   
$
7,060
   
$
41,780
 
2010 activity
   
     
     
 
Balance at March 31, 2010
 
$
34,720
   
$
7,060
   
$
41,780
 
 
   
Core Deposit Intangible
 
   
Total
   
Accumulated
Amortization
   
Net
 
Balance at December 31, 2009
  $ 14,444     $ (10,428 )   $ 4,016  
2010 amortization
          (126 )     (126 )
Balance at March 31, 2010
  $ 14,444     $ (10,554 )   $ 3,890  
 
11

 
   
Trust Relationship Intangible
 
   
Total
   
Accumulated
Amortization
   
Net
 
Balance at December 31, 2009
 
$
753
   
$
            (151
)
 
$
602
 
2010 amortization
   
     
(18
)
   
(18
)
Balance at March 31, 2010
 
$
753
   
$
(169
)
 
$
584
 

During the fourth quarter of 2009, the Company completed its annual impairment evaluation of goodwill and did not identify any impairment.

The following table reflects the expected amortization schedule for intangible assets at March 31, 2010:

   
Trust 
Relationship
   
Core Deposit
 
   
Intangible
   
Intangible
 
2010
 
$
57
   
$
376
 
2011
   
75
     
502
 
2012
   
75
     
502
 
2013
   
75
     
502
 
2014
   
75
     
502
 
Thereafter
   
227
     
1,506
 
Total unamortized intangible
 
$
584
   
$
3,890
 
 
NOTE 6 – OTHER REAL ESTATE OWNED

Other real estate owned (“OREO”) properties acquired through foreclosure or deed-in-lieu of foreclosure are recorded at the fair value of the real estate, less costs to sell.  Any write-down of the recorded investment in the related loan is charged to the allowance for loan losses upon transfer to OREO.  Subsequent write-downs required for declines in value are recorded through a valuation allowance and a provision for losses charged to other non-interest expense.

Activity in other real estate owned was as follows:
 
   
Three Months Ended
March 31,
 
  
 
2010
   
2009
 
Balance at beginning of year
 
$
5,479
   
$
4,024
 
Additions
   
304
     
 
Increase in OREO valuation allowance
   
(370
)
   
(666
)
Properties sold
   
(212
)
   
(175
)
Balance at end of period
 
$
5,201
   
$
3,183
 
 

Supplemental Executive Retirement Plan
The Company maintains an unfunded, non-qualified supplemental executive retirement plan for certain officers.  The components of net period benefit cost for the periods ended March 31, 2010 and 2009 were as follows:
 
  
 
Three Months Ended
March 31,
 
  
 
2010
   
2009
 
Net period benefit cost
           
Service cost
 
$
45
   
$
51
 
Interest cost
   
107
     
104
 
Recognized net actuarial loss
   
8
     
19
 
Recognized prior service cost
   
5
     
5
 
Net period benefit cost
 
$
165
   
$
179
 
 
12

 
Other Postretirement Benefit Plan
The Company provides medical and life insurance to certain eligible retired employees.  The components of net period benefit cost for the periods ended March 31, 2010 and 2009 were as follows:
 
  
 
Three Months Ended
March 31,
 
  
 
2010
   
2009
 
Net period benefit cost
           
Service cost
 
$
17
   
$
16
 
Interest cost
   
36
     
34
 
Recognized net actuarial loss
   
0
     
1
 
Net period benefit cost
 
$
53
   
$
51
 


On March 11, 2010 the Company granted 7,500 restricted stock awards to certain executive officers of the Company and/or Bank, from the 2003 Stock Option and Incentive Plan. The holders of these awards participate fully in the rewards of stock ownership of the Company, including voting and dividend rights. The restricted stock awards have been determined to have a fair value of $32.49, based on the market price of the Company’s common stock on the date of grant. The restricted stock awards vest over a three year period.

On March 15, 2010 the Company awarded options to purchase 30,750 shares of common stock from the Stock Option and Incentive Plan to certain officers of the Company and/or the Bank. The expected volatility, expected life, expected dividend yield, and expected risk free interest rate for this grant used to determine the fair value of the shares as determined on March 15, 2010 were 50%, 5 years, 3.08%, and 2.36%, respectively. The options have been determined to have a fair value of $11.74 per share. The options vest over a five year period and have a contractual life of ten years from date of grant.

Under the Management Stock Purchase Plan, 1,677 shares were granted in lieu of management employees’ annual incentive bonus during the first three months of 2010.  During the first quarter of 2010, the Company granted 1,565 Deferred Stock Awards under the Defined Contribution Retirement Plan.
NOTE 9 – FAIR VALUE
 
GAAP permits an entity to choose to measure eligible financial instruments and other items at fair value. The Company has not made any fair value elections as of March 31, 2010.
 
Pursuant to GAAP, fair value is defined as 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. A three-level hierarchy exists in GAAP for fair value measurements based upon the inputs to the valuation of an asset or liability.
 
Level 1:   Valuation is based on quoted prices in active markets for identical assets and liabilities.
 
Level 2:   Valuation is determined from quoted prices for similar assets or liabilities in active markets, 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.
 
When available, the Company attempts to use quoted market prices in active markets to determine fair value and classifies such items as Level 1 or Level 2. If quoted market prices in active markets are not available, fair value is often determined using 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. The following is a description of the valuation methodologies used for the Company’s assets and liabilities that are measured on a recurring basis at estimated fair value.
 
13

 
The following table summarizes assets and liabilities measured at estimated fair value on a recurring basis.
 
   
 
 
Level 1
   
 
 
Level 2
   
 
 
Level 3
   
Fair Value
Measurements at
March 31,
2010
 
Assets:
                       
Securities available for sale:
                       
Obligations of U.S. government sponsored enterprises
  $     $ 9,960     $     $ 9,960  
Obligations of states and political subdivisions
          17,286             17,286  
Mortgage-backed securities issued or guaranteed by US government sponsored enterprises
          400,966             400,966  
Private issue collateralized mortgage obligations
          28,069             28,069  
Equity securities
          4,421             4,421  
Trading account assets
    1,794                   1,794  
Derivatives instruments
          825             825  
 
   
 
 
 
Level 1
   
 
 
 
Level 2
   
 
 
 
Level 3
   
Fair Value
Measurements at
December 31,
2009
 
Assets:
                       
Securities available for sale:
                       
Obligations of states and political subdivisions
  $     $ 18,060     $     $ 18,060  
Mortgage-backed securities issued or guaranteed by US government sponsored enterprises
          428,356             428,356  
Private issue collateralized mortgage obligations
          28,872             28,872  
Equity securities
          4,420             4,420  
Trading account assets
    1,725                   1,725  
Derivatives instruments
          1,136             1,136  
 
The following table summarizes assets and liabilities measured at fair value on a non-recurring basis:
 
   
 
 
Level 1
 
 
 
Level 2
 
 
 
Level 3
 
Fair Value
Measurements at
March 31,
2010
Assets:
   
  
     
  
     
  
     
  
 
Impaired loans
 
$
   
$
1,385
   
$
   
$
1,385
 
Other real estate owned
   
     
     
5,201
     
5,201
 
Mortgage servicing rights
   
     
945
     
     
945