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EX-23.1 - CAMDEN NATIONAL CORPv201155_ex23-1.htm
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EX-31.1 - CAMDEN NATIONAL CORPv201155_ex31-1.htm
EX-31.2 - CAMDEN NATIONAL CORPv201155_ex31-2.htm
UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended September 30, 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 November 1, 2010:  Common stock (no par value) 7,657,098 shares.

 
 

 

CAMDEN NATIONAL CORPORATION

FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 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 September 30, 2010 and December 31, 2009
 
4
       
 
Consolidated Statements of Income Three and Nine Months Ended September  30, 2010 and 2009
 
5
       
 
Consolidated Statements of Changes in Shareholders’ Equity Nine Months Ended September 30, 2010 and 2009
 
6
       
 
Consolidated Statements of Cash Flows Nine Months Ended September 30, 2010 and 2009
 
7
       
 
Notes to Consolidated Financial Statements Nine Months Ended September 30, 2010 and 2009
 
8-19
       
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
20-33
       
ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
 
34-35
       
ITEM 4.
CONTROLS AND PROCEDURES
 
36
       
PART II. OTHER INFORMATION
   
       
ITEM 1.
LEGAL PROCEEDINGS
 
37
       
ITEM 1A.
RISK FACTORS
 
37
       
ITEM 2.
UNREGISTERED SALES OF EQUITY SECURITIES AND  USE OF PROCEEDS
 
37
       
ITEM 3.
DEFAULTS UPON SENIOR SECURITIES
 
37
       
ITEM 4.
[REMOVED AND RESERVED]
 
37
       
ITEM 5.
OTHER INFORMATION
 
37
       
ITEM 6.
EXHIBITS
 
38
       
SIGNATURES
 
39
       
EXHIBIT INDEX
 
40
       
EXHIBITS
   
 
 
2

 
 
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 September 30, 2010, and for the three-month and nine-month periods ended September 30, 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
November 5, 2010

 
3

 

CAMDEN NATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CONDITION

  
  
September 30,
  
  
December 31,
  
   
2010
   
2009
 
(In Thousands, Except Number of Shares)
 
(unaudited)
       
ASSETS
           
Cash and due from banks
 
$
33,382
   
$
29,772
 
Securities
           
  
 
Securities available for sale, at fair value
   
541,235
     
479,708
 
Securities held to maturity, at amortized cost (fair value $39,901 and $39,639 at September 30, 2010 and December 31, 2009, respectively)
   
36,745
     
37,914
 
Federal Home Loan Bank and Federal Reserve Bank stock, at cost
   
21,962
     
21,965
 
Total securities
   
599,942
     
539,587
 
Trading account assets
   
2,173
     
1,725
 
Loans held for sale
   
2,456
     
 
Loans
   
1,536,077
     
1,526,758
 
Less allowance for loan losses
   
(22,336
)
   
(20,246
)   
Net loans
   
1,513,741
     
1,506,512
 
Goodwill and other intangible assets
   
45,966
     
46,398
 
Bank-owned life insurance
   
42,796
     
41,677
 
Premises and equipment, net
   
25,884
     
26,054
 
Deferred tax asset
   
11,317
     
10,317
 
Prepaid FDIC assessment
   
6,686
     
8,197
 
Interest receivable
   
7,337
     
7,236
 
Other real estate owned
   
2,630
     
5,479
 
Other assets
   
13,692
     
12,429
 
Total assets
 
$
2,308,002
   
$
2,235,383
 
LIABILITIES AND SHAREHOLDERS’ EQUITY
               
Liabilities
               
Deposits:
               
Demand
 
$
226,678
   
$
193,549
 
Interest checking, savings and money market
   
747,000
     
675,681
 
Retail certificates of deposit
   
492,397
     
545,789
 
Brokered deposits
   
116,173
     
80,788
 
Total deposits
   
1,582,248
     
1,495,807
 
Federal Home Loan Bank advances
   
164,397
     
209,710
 
Other borrowed funds
   
287,810
     
274,125
 
Junior subordinated debentures
   
43,589
     
43,512
 
Accrued interest and other liabilities
   
25,768
     
21,668
 
Total liabilities
   
2,103,812
     
2,044,822
 
             
  
 
Shareholders’ Equity
           
  
 
Common stock, no par value; authorized 20,000,000 shares, issued and outstanding 7,657,098 and 7,644,837 shares on September 30, 2010 and December 31, 2009, respectively
   
50,763
     
50,062
 
Retained earnings
   
146,179
     
133,634
 
Accumulated other comprehensive income
               
Net unrealized gains on securities available for sale, net of tax
   
10,817
     
7,083
   
Net unrealized (losses) gains on derivative instruments, at fair value, net of tax
   
(2,636
)
   
739
 
Net unrecognized losses on postretirement plans, net of tax
   
(933
)
   
(957
)   
Total accumulated other comprehensive income
   
7,248
     
6,865
   
Total shareholders’ equity
   
204,190
     
190,561
 
Total liabilities and shareholders’ equity
 
$
2,308,002
   
$
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 September 30,
   
Nine Months Ended September 30,
 
(In Thousands, Except Number of Shares and per Share Data)
 
2010
   
2009
   
2010
   
2009
 
Interest Income
                       
Interest and fees on loans
 
$
20,685
   
$
21,121
    $
61,725
   
$
64,012
 
Interest on U.S. government and sponsored enterprise obligations
   
5,037
     
6,229
     
15,366
     
20,229
 
Interest on state and political subdivision obligations
   
528
     
602
     
1,601
     
1,876
 
Interest on federal funds sold and other investments
   
28
     
28
     
84
     
99
 
Total interest income
   
26,278
     
27,980
     
78,776
     
86,216
 
Interest Expense
                               
Interest on deposits
   
3,734
     
5,413
     
11,812
     
17,743
 
Interest on borrowings
   
2,953
     
3,630
     
9,357
     
11,267
 
Interest on junior subordinated debentures
   
712
     
712
     
2,108
     
2,136
 
Total interest expense
   
7,399
     
9,755
     
23,277
     
31,146
 
Net interest income
   
18,879
     
18,225
     
55,499
     
55,070
 
Provision for credit losses
   
1,291
     
2,000
     
5,237
     
6,514
 
Net interest income after provision for credit losses
   
17,588
     
16,225
     
50,262
     
48,556
 
Non-Interest Income
                               
Income from fiduciary services
   
1,618
     
1,471
     
4,697
     
4,332
 
Service charges on deposit accounts
   
1,151
     
1,361
     
3,716
     
3,943
 
Other service charges and fees
   
945
     
777
     
2,507
     
2,202
 
Bank-owned life insurance
   
401
     
368
     
1,119
     
1,108
 
Brokerage and insurance commissions
   
419
     
378
     
1,065
     
1,021
 
Mortgage banking income
   
160
     
351
     
332
     
1,222
 
Net (loss) gain on sale of securities
   
(188
)
   
1
     
(188
)
   
1
 
Other income
   
2,331
     
437
     
2,765
     
913
 
Total non-interest income before other-than-temporary impairment of securities
   
6,837
     
   5,144
     
16,013
     
14,742
 
Other-than-temporary impairment of securities
   
(38
)
   
     
(217
)
   
 
Total non-interest income
   
6,799
     
5,144
     
15,796
     
14,742
 
Non-Interest Expenses
                               
Salaries and employee benefits
   
6,949
     
6,071
     
19,472
     
18,195
 
Furniture, equipment and data processing
   
1,150
     
1,045
     
3,396
     
3,078
 
Regulatory assessments
   
832
     
693
     
2,149
     
3,304
 
Net occupancy
   
899
     
874
     
2,830
     
2,954
 
Consulting and professional fees
   
589
     
566
     
1,926
     
1,750
 
Other real estate owned and collection costs
   
636
     
779
     
2,768
     
1,941
 
Amortization of intangible assets
   
144
     
144
     
432
     
433
 
Other expenses
   
2,260
     
1,975
     
6,265
     
6,199
 
Total non-interest expenses
   
13,459
     
12,147
     
39,238
     
37,854
 
Income before income taxes
   
10,928
     
9,222
     
26,820
     
25,444
 
Income Taxes
   
3,487
     
2,894
     
8,480
     
7,898
 
Net Income
 
$
7,441
   
$
6,328
    $
18,340
   
$
17,546
 
                                 
Per Share Data
                               
Basic earnings per share
 
$
0.97
   
$
0.83
    $
2.40
   
$
2.30
 
Diluted earnings per share
 
$
              0.97
   
$
0.83
    $
2.39
   
$
2.29
 
Weighted average number of common shares outstanding
   
7,657,098
     
7,644,829
     
7,655,097
     
7,641,705
 
Diluted weighted average number of common shares outstanding
   
7,663,051
     
7,654,175
     
7,660,919
     
7,645,824
 

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
   
     
17,546
     
     
     
     
17,546
 
Change in unrealized gains on securities available for sale, net of taxes of ($4,443)
   
     
     
8,252
     
     
     
8,252
 
Change in unrealized gains on derivative instruments at fair value, net of taxes of ($6)
   
     
     
     
11
     
     
11
 
Change in net unrecognized losses on postretirement plans, net of taxes of ($25)
   
     
     
     
     
47
     
47
 
Total comprehensive income
   
     
17,546
     
8,252
     
11
     
47
     
25,856
 
Stock-based compensation expense
   
295
     
     
     
     
     
295
 
Exercise of stock options and issuance of restricted stock (5,009 shares)
   
10
     
     
     
     
     
10
 
Common stock repurchased (1,690 shares)
   
     
(55
)
   
     
     
     
(55
)
Cash dividends declared ($0.75/share)
   
     
(5,735
)
   
     
     
     
(5,735
)
Balance at September 30, 2009
 
$
49,289
   
$
130,320
   
$
8,163
   
$
11
   
$
(1,012
)
 
$
186,771
 
                                                 
Balance at December 31, 2009
 
$
50,062
   
$
133,634
   
$
7,083
   
$
739
   
$
(957
)
 
$
190,561
 
                                                 
Net income
   
     
18,340
     
     
     
     
18,340
 
Change in unrealized gains on securities available for sale, net of taxes of ($2,010)
   
     
     
3,734
     
     
     
3,734
 
Change in unrealized losses on derivative instruments at fair value, net of taxes of $1,816
   
     
     
     
(3,375
   
     
(3,375
)
Change in net unrecognized losses on postretirement plans, net of taxes of ($13)
   
     
     
     
     
24
     
24
 
Total comprehensive income
   
     
18,340
     
3,734
     
(3,375
   
24
     
18,723
 
Stock-based compensation expense
   
623
     
     
     
     
     
623
 
Exercise of stock options and issuance of restricted stock (10,940 shares)
   
78
     
     
     
     
     
78
 
Common stock repurchased (1,385 shares)
   
     
(44
)
   
     
     
     
(44
)
Cash dividends declared ($0.75/share)
   
     
(5,751
)
   
     
     
     
(5,751
)
                                                 
Balance at September 30, 2010
 
$
50,763
   
$
146,179
   
$
10,817
   
$
(2,636
 
$
(933
)
 
$
204,190
 
 
  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)
 
   
Nine Months Ended September 30,
 
(In Thousands)
 
2010
   
2009
 
Operating Activities
           
Net income
  $ 18,340     $ 17,546  
Adjustments to reconcile net income to net cash provided (used) by operating activities:
               
Provision for credit losses
    5,237       6,514  
Depreciation and amortization
    2,560       2,028  
Stock-based compensation expense
    623       295  
(Increase) decrease in interest receivable
    (101 )     676  
Amortization of intangible assets
    432       433  
Net increase in trading assets
    (448 )     (363 )
Net investment securities losses (gains)
    188       (1 )
Other-than-temporary impairment of securities
    217        
Net increase in other real estate owned valuation allowance
    21       1,011  
Originations of mortgage loans held for sale
    (4,690 )     (72,529 )
Proceeds from the sale of mortgage loans
    2,234       71,231  
Gain on sale of mortgage loans
    (83 )     (102 )
Liquidation of defined benefit pension plan
          (735 )
Decrease in prepaid FDIC assessment
    1,511        
Increase in other assets
    (4,391 )     (4,407 )
(Decrease) increase in other liabilities
    (825 )     898  
Net cash provided by operating activities
    20,825       22,495  
Investing Activities
               
Proceeds from maturities of securities held to maturity
    1,130       2,606  
Proceeds from sales and maturities of securities available for sale
    121,929       138,200  
Purchase of securities available for sale
    (178,245 )     (45,616 )
Net increase in loans
    (13,205 )     (22,468 )
Proceeds from the sale of other real estate owned
    4,169       448  
Purchase of premises and equipment
    (1,736 )     (1,152 )
Net cash (used) provided by investing activities
    (65,958 )     72,018  
Financing Activities
               
Net increase in deposits
    86,432       23,794  
Proceeds from Federal Home Loan Bank long-term advances
    20,177       8,163  
Repayments on Federal Home Loan Bank long-term advances
    (65,489 )     (56,593 )
Net change in short-term Federal Home Loan Bank borrowings
    (24,335 )     (116,375 )
Net increase in other borrowed funds
    37,670       47,164  
Exercise of stock options and issuance of restricted stock
    78       10  
Common stock repurchased
    (44 )     (55 )
Cash dividends paid on common stock
    (5,746 )     (5,735 )
Net cash provided (used) by financing activities
    48,743       (99,627 )
Net increase (decrease) in cash and cash equivalents
    3,610       (5,114 )
Cash and cash equivalents at beginning of year
    29,772       35,195  
Cash and cash equivalents at end of period
  $ 33,382     $ 30,081  
                 
Supplemental information
               
Interest paid
  $ 23,777     $ 31,837  
Income taxes paid
    9,860       5,200  
Transfer from loans to loans held for sale
    4,690       1,298  
Transfer from loans to other real estate owned
    1,341       2,900  
 
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 September 30, 2010 and December 31, 2009, the consolidated statements of income for the three and nine months ended September 30, 2010 and 2009, the consolidated statements of changes in shareholders' equity for the nine months ended September 30, 2010 and 2009, and the consolidated statements of cash flows for the nine months ended September 30, 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 and nine-month periods ended September 30, 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 September 30,
   
Nine Months Ended September 30,
 
   
2010
   
2009
   
2010
   
2009
 
Net income, as reported
  $ 7,441     $ 6,328     $ 18,340     $ 17,546  
Weighted-average common shares outstanding – basic
    7,657,098       7,644,829       7,655,097       7,641,705  
Dilutive effect of stock-based compensation
    5,953       9,346       5,822       4,119  
Weighted-average common and potential common shares – diluted
    7,663,051       7,654,175       7,660,919       7,645,824  
Basic earnings per share – common stock
  $ 0.97     $ 0.83     $ 2.40     $ 2.30  
Basic earnings per share – unvested share-based payment awards
    0.97       0.83       2.40       2.30  
Diluted earnings per share – common stock
    0.97       0.83       2.39       2.29  
Diluted earnings per share – unvested share-based payment awards
    0.97       0.83       2.39       2.29  
 
For the three-month and nine-month periods ended September 30, 2010, options to purchase 92,050  and 87,750 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.  For the three-month and nine-month periods ended September 30, 2009, options to purchase 64,750 and 79,800 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
 
September 30, 2010
                       
Available for sale
                       
Obligations of U.S. Government sponsored enterprises
 
$
49,992
   
$
333
   
$
   
$
50,325
 
Obligations of states and political subdivisions
   
16,502
     
709
     
     
17,211
 
Mortgage-backed securities issued or guaranteed by U.S. government sponsored enterprises
   
428,210
     
18,484
     
(51
)
   
446,643
 
Private issue collateralized mortgage obligations
   
24,889
     
58
     
(2,389
)
   
22,558
 
Total debt securities
   
519,593
     
19,584
     
(2,440
)
   
536,737
 
Equity securities
   
5,000
     
     
(502
)
   
4,498
 
Total securities available for sale
 
$
524,593
   
$
19,584
   
$
(2,942
)
 
$
541,235
 
Held to maturity
                               
Obligations of states and political subdivisions
 
$
36,745
   
$
3,156
   
$
   
$
39,901
 
Total securities held to maturity
 
$
36,745
   
$
3,156
   
$
   
$
39,901
 
                                 
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
 

During the third quarter of 2010, the Company recorded proceeds of $4.2 million on the sale of an investment classified as available for sale, which resulted in gross realized losses of $188,000.  The investment sold had been downgraded to non-investment grade in 2009 and, although the Company’s tranche was comprised of high quality loans, credit support had declined noticeably over the past few months due to poor performance of other tranches.  The Company had not recorded any other-than-temporary impairment (“OTTI”) on this security; however, with the increased deterioration and an increase in market price, in a relatively illiquid market for the non-agency sector, management decided to sell the security during the quarter.  Unrealized gains on securities available for sale arising during the nine months ended September 30, 2010 and included in other comprehensive income amounted to $3.7 million, net of deferred taxes of $2.0 million.

At September 30, 2010, securities with an amortized cost of $378.2 million and an estimated fair value of $395.9 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.

 
9

 
 
The amortized cost and estimated fair values of debt securities by contractual maturity at September 30, 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
 
$
2,017
   
$
2,031
 
Due after one year through five years
   
75,395
     
76,691
 
Due after five years through ten years
   
66,604
     
69,786
 
Due after ten years
   
375,577
     
388,229
 
  
 
$
519,593
   
$
536,737
 
Held to maturity
               
Due in one year or less
 
$
165
   
$
166
 
Due after one year through five years
   
3,922
     
4,191
 
Due after five years through ten years
   
31,997
     
34,852
 
Due after ten years
   
661
     
692
 
  
 
$
36,745
   
$
39,901
 
 
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 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 September 30, 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
 
September 30, 2010
                                   
Mortgage-backed securities
  $ 20,547     $ (50 )   $ 74     $ (1 )   $ 20,621     $ (51 )
Private issue collateralized mortgage obligations
    495       (17 )     19,996       (2,372 )     20,491       (2,389 )
Equity securities
                4,498       (502 )     4,498       (502 )
Total
  $ 21,042     $ (67 )   $ 24,568     $ (2,875 )   $ 45,610     $ (2,942 )
                                                 
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 September 30, 2010, $45.6 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 $10.6 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 primarily 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 $24.6 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 securities in the portfolio using current statistical data to determine expected cash flows and forecast potential losses. The results of the stress tests at September 30, 2010 reflect potential future credit losses in the base case. Based on this analysis the Company recorded a $38,000 OTTI write-down in the third quarter of 2010, bringing the total OTTI write-down on three private issue CMOs during the first nine months of 2010 to $217,000.

 
10

 

At September 30, 2010, the Company held Duff & Phelps Select Income Fund Auction Preferred Stock with an amortized cost of $5.0 million which has failed at auction since 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.

NOTE 4 – LOANS AND ALLOWANCE FOR LOAN LOSSES
 
The composition of the Company’s loan portfolio, excluding residential loans held for sale, at September 30, 2010 and December 31, 2009 was as follows:

   
September 30,
     
December 31,
 
   
2010
   
2009
 
Residential real estate loans
 
$
614,176
   
$
627,979
 
Commercial real estate loans
   
449,672
     
434,783
 
Commercial loans
   
187,091
     
191,214
 
Consumer loans
   
285,424
     
273,106
 
Deferred loan fees net of costs
   
(286
)
   
(324
Total loans
 
$
1,536,077
   
$
1,526,758
 
 
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. 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 September 30, 2010 were $18.0 million, or 1.37% of total loans, compared to $17.9 million, or 1.29% of total loans, at December 31, 2009. Non-accrual loans at September 30, 2010 were comprised of $6.7 million in commercial real estate loans, $5.8 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 $1.1 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
     
Nine Months Ended
  
  
  
September 30, 2010
     
September 30, 2009
     
September 30, 2010
     
September 30, 2009
 
Balance at beginning of period
 
$
22,266
   
$
18,654
   
$
20,246
   
$
17,691
 
Loan charge-offs
   
(1,395
)
   
(1,356
)
   
(3,805
)
   
(5,354
)
Recoveries on loans previously charged off
   
173
     
137
     
653
     
584
 
Net charge-offs
   
(1,222
)
   
(1,219
)
   
(3,152
)
   
(4,770
)
Provision for loan losses
   
1,292
     
2,000
     
5,242
     
6,514
 
Balance at end of period
 
$
22,336
   
$
19,435
   
$
22,336
   
$
19,435
 
 
11

 
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 nine months ended September 30, 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 September 30, 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
   
     
(376
)
   
(376
)
Balance at September 30, 2010
 
$
14,444
   
$
(10,804
)
 
$
3,640
 
 
   
Trust Relationship Intangible
  
     
Total
     
Accumulated
Amortization
     
Net
 
Balance at December 31, 2009
 
$
753
   
$
            (151
)
 
$
602
 
2010 amortization
   
     
(56
)
   
(56
)
Balance at September 30, 2010
 
$
753
   
$
(207
)
 
$
546
 
 
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 September 30, 2010:

   
Trust 
Relationship
   
Core Deposit