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EX-23.1 - CAMDEN NATIONAL CORPv221355_ex23-1.htm
EX-32.1 - CAMDEN NATIONAL CORPv221355_ex32-1.htm
EX-31.1 - CAMDEN NATIONAL CORPv221355_ex31-1.htm
EX-31.2 - CAMDEN NATIONAL CORPv221355_ex31-2.htm
EX-32.2 - CAMDEN NATIONAL CORPv221355_ex32-2.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 March 31, 2011

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 6, 2011:  Common stock (no par value) 7,677,693 shares.

 
 

 

CAMDEN NATIONAL CORPORATION

FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 2011
TABLE OF CONTENTS OF INFORMATION REQUIRED IN REPORT

   
PAGE
   
PART I.  FINANCIAL INFORMATION
 
   
ITEM 1.
FINANCIAL STATEMENTS
3
     
 
Report of Independent Registered Public Accounting Firm
3
     
 
Consolidated Statements of Condition March 31, 2011 and December 31, 2010
4
     
 
Consolidated Statements of Income Three Months Ended March 31, 2011 and 2010
5
     
 
Consolidated Statements of Changes in Shareholders’ Equity Three Months Ended March 31, 2011 and 2010
6
     
 
Consolidated Statements of Cash Flows Three Months Ended March 31, 2011 and 2010
7
     
 
Notes to Consolidated Financial Statements Three Months Ended March 31, 2011 and 2010
8-22
     
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
23-34
     
ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
35-36
     
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 March 31, 2011, and for the three-month periods ended March 31, 2011 and 2010. 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, LLC
 
Berry, Dunn, McNeil & Parker, LLC
 

Bangor, Maine
May 9, 2011

 
3

 

CAMDEN NATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CONDITION

   
March 31,
   
December 31,
 
   
2011
   
2010
 
(In Thousands, Except Number of Shares)
 
(unaudited)
       
ASSETS
           
Cash and due from banks
 
$
25,970
   
$
31,009
 
Securities
           
  
 
Securities available for sale, at fair value
   
621,958
     
553,579
 
Securities held to maturity, at amortized cost (fair value $38,037 at December 31, 2010)
   
     
36,102
 
Federal Home Loan Bank and Federal Reserve Bank stock, at cost
   
21,962
     
21,962
 
Total securities
   
643,920
     
611,643
 
Trading account assets
   
2,239
     
2,304
 
Loans held for sale
   
     
5,528
 
Loans
   
1,536,463
     
1,524,752
 
Less allowance for loan losses
   
(22,887
)
   
(22,293
)
Net loans
   
1,513,576
     
1,502,459
 
Goodwill and other intangible assets
   
45,677
     
45,821
 
Bank-owned life insurance
   
43,324
     
43,155
 
Premises and equipment, net
   
24,737
     
25,044
 
Deferred tax asset
   
11,660
     
12,281
 
Interest  receivable
   
7,355
     
6,875
 
Prepaid FDIC assessment
   
5,648
     
6,155
 
Other real estate owned
   
2,190
     
2,387
 
Other assets
   
12,021
     
11,346
 
Total assets
 
$
2,338,317
   
$
2,306,007
 
LIABILITIES AND SHAREHOLDERS’ EQUITY
               
Liabilities
           
  
 
Deposits
               
Demand
 
$
227,027
   
$
229,547
 
Interest checking, savings and money market
   
731,586
     
721,905
 
Retail certificates of deposit
   
453,724
     
464,662
 
Brokered deposits
   
132,344
     
99,697
 
Total deposits
   
1,544,681
     
1,515,811
 
Federal Home Loan Bank advances
   
167,134
     
214,236
 
Other borrowed funds
   
348,305
     
302,069
 
Junior subordinated debentures
   
43,640
     
43,614
 
Accrued interest and other liabilities
   
23,832
     
24,282
 
Total liabilities
   
2,127,592
     
2,100,012
 
             
  
 
Shareholders’ Equity
               
Common stock, no par value; authorized 20,000,000 shares, issued and outstanding 7,677,243 and 7,658,496 shares on March 31, 2011 and December 31, 2010, respectively
   
50,950
     
50,936
 
Retained earnings
   
155,149
     
150,730
 
Accumulated other comprehensive income
               
Net unrealized gains on securities available for sale, net of tax
   
6,364
     
6,229
 
Net unrealized  losses on derivative instruments, at fair value, net of tax
   
(562
)
   
(709
)
Net unrecognized losses on postretirement plans, net of tax
   
(1,176
)
   
(1,191
)
Total accumulated other comprehensive income
   
4,626
     
4,329
 
Total shareholders’ equity
   
210,725
     
205,995
 
Total liabilities and shareholders’ equity
 
$
2,338,317
   
$
2,306,007
 

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)
 
2011
   
2010
 
Interest Income
           
Interest and fees on loans
 
$
19,469
   
$
20,447
 
Interest on U.S. government and sponsored enterprise obligations
   
4,885
     
5,163
 
Interest on state and political subdivision obligations
   
466
     
539
 
Interest on federal funds sold and other investments
   
40
     
22
 
Total interest income
   
24,860
     
26,171
 
Interest Expense
               
Interest on deposits
   
3,015
     
4,118
 
Interest on borrowings
   
2,591
     
3,294
 
Interest on junior subordinated debentures
   
695
     
694
 
Total interest expense
   
6,301
     
8,106
 
Net interest income
   
18,559
     
18,065
 
Provision for credit losses
   
1,119
     
1,996
 
Net interest income after provision for credit losses
   
17,440
     
16,069
 
Non-Interest Income
               
Income from fiduciary services
   
1,547
     
1,567
 
Service charges on deposit accounts
   
1,231
     
1,280
 
Other service charges and fees
   
870
     
690
 
Bank-owned life insurance
   
539
     
371
 
Brokerage and insurance commissions
   
358
     
294
 
Mortgage banking income
   
80
     
89
 
Net losses on sale of securities
   
(33
)
   
 
Other income
   
526
     
329
 
Total non-interest income before other-than-temporary impairment of securities
   
5,118
     
4,620
 
Other-than-temporary impairment of securities
   
     
(48
)
Total non-interest income
   
5,118
     
4,572
 
Non-Interest Expenses
               
Salaries and employee benefits
   
6,851
     
6,225
 
Furniture, equipment and data processing
   
1,200
     
1,130
 
Net occupancy
   
1,060
     
1,034
 
Other real estate owned and collection costs
   
491
     
974
 
Regulatory assessments
   
703
     
715
 
Consulting and professional fees
   
674
     
788
 
Amortization of intangible assets
   
144
     
144
 
Other expenses
   
2,162
     
1,912
 
Total non-interest expenses
   
13,285
     
12,922
 
Income before income taxes
   
9,273
     
7,719
 
Income Taxes
   
2,934
     
2,406
 
Net Income
 
$
6,339
   
$
5,313
 
                 
Per Share Data
               
Basic earnings per share
 
$
0.83
   
$
0.69
 
Diluted earnings per share
 
0.83
   
$
0.69
 
Weighted average number of common shares outstanding
   
7,659,970
     
7,652,089
 
Diluted weighted average number of common shares outstanding
   
7,672,398
     
7,659,640
 

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)

    
Common Stock
         
Accumulated
Other
   
Total
 
(In Thousands, Except Number of Shares and per Share Data)
 
Shares
Outstanding
   
Amount
   
Retained
Earnings
   
Comprehensive
Income
   
Shareholders’
Equity
 
                                         
Balance at December 31, 2009
    7,644,837     $ 50,062     $ 133,634     $ 6,865     $ 190,561  
Net income
                5,313             5,313  
Other comprehensive income, net of tax:
                                       
Change in fair value of securities available for sale
                      1,320       1,320  
Change in fair value of cash flow hedges
                      (203 )     (203
Change in net unrecognized losses on postretirement plans
                      8       8  
Total comprehensive income
                5,313       1,125       6,438  
Stock-based compensation expense
          64                   64  
Exercise of stock options and issuance of restricted stock
    10,851       54                   54  
Common stock repurchased
    (1,385 )           (44 )           (44 )
Cash dividends declared ($0.25 per share)
                (1,916 )           (1,916 )
Balance at March 31, 2010
    7,654,303     $ 50,180     $ 136,987     $ 7,990     $ 195,157  
                                         
Balance at December 31, 2010
    7,658,496     $ 50,936     $ 150,730     $ 4,329     $ 205,995  
Net income
                6,339             6,339  
Other comprehensive income, net of tax:
                                       
Change in fair value of securities available for sale
                      136       136  
Change in fair value of cash flow hedges
                      148       148  
Change in net unrecognized losses on postretirement plans
                      13       13  
Total comprehensive income
                6,339       297       6,636  
Stock-based compensation expense
          138                   138  
Exercise of stock options and issuance of restricted stock
    26,782       145                   145  
Common stock repurchased
    (8,035 )     (269 )                 (269 )
Cash dividends declared ($0.25 per share)
                (1,920 )           (1,920 )
Balance at March 31, 2011
    7,677,243     $ 50,950     $ 155,149     $ 4,626     $ 210,725  

  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)
 
2011
   
2010
 
Operating Activities
           
Net income
 
$
6,339
   
$
5,313
 
Adjustments to reconcile net income to net cash provided by operating activities:
               
Provision for credit losses
   
1,119
     
1,996
 
Depreciation and amortization
   
960
     
707
 
Stock-based compensation expense
   
138
     
64
 
Increase in interest receivable
   
(480
)
   
(264
)
Amortization of intangible assets
   
144
     
144
 
Net decrease (increase) in trading assets
   
65
     
(69
)
Net investment securities losses
   
33
     
 
Other-than-temporary impairment of securities
   
     
48
 
Increase in other real estate owned valuation allowance
   
84
     
370
 
Originations of mortgage loans held for sale
   
(3,096
)
   
 
Proceeds from the sale of mortgage loans
   
8,618
     
 
Loss on sale of mortgage loans
   
6
     
 
Decrease in prepaid FDIC assessment
   
507
     
562
 
(Increase) decrease in other assets
   
(156
)
   
654
 
(Decrease) increase in other liabilities
   
(455
)
   
1,652
 
Net cash provided by operating activities
   
13,826
     
11,177
 
Investing Activities
               
Proceeds from maturities of securities held to maturity
   
251
     
 
Proceeds from sales and maturities of securities available for sale
   
39,147
     
40,784
 
Purchase of securities available for sale
   
(71,800
)
   
(19,887
)
Net increase in loans
   
(12,796
)
   
(3,961
)
Proceeds from the sale of other real estate owned
   
209
     
212
 
Proceeds from bank-owned life insurance
   
370
     
 
Purchase of premises and equipment
   
(288
)
   
(3,148
)
Net cash (used) provided by investing activities
   
(44,907
)
   
14,000
 
Financing Activities
               
Net increase in deposits
   
28,869
     
5,219
 
Proceeds from Federal Home Loan Bank long-term advances
   
80,000
     
11,200
 
Repayments on Federal Home Loan Bank long-term advances
   
(127,088
)
   
(41,302
)
Net change in short-term Federal Home Loan Bank borrowings
   
(37,275
)
   
4,385
 
Net increase (decrease) in other borrowed funds
   
83,577
     
(2,646
)
Common stock repurchase
   
(269
)
   
(44
)
Proceeds from exercise of stock options
   
145
     
54
 
Cash dividends paid on common stock
   
(1,917
)
   
(1,916
)
Net cash provided (used) by financing activities
   
26,042
     
(25,050
)
Net (decrease) increase in cash and cash equivalents
   
(5,039
)
   
127
 
Cash and cash equivalents at beginning of year
   
31,009
     
29,772
 
Cash and cash equivalents at end of period
 
$
25,970
   
$
29,899
 
Supplemental information
               
Interest paid
 
$
6,302
   
$
8,260
 
Income taxes paid
   
     
1,000
 
Transfer from loans to other real estate owned
   
96
     
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, 2011 and December 31, 2010, the consolidated statements of income for the three months ended March 31, 2011 and 2010, the consolidated statements of changes in shareholders' equity for the three months ended March 31, 2011 and 2010, and the consolidated statements of cash flows for the three months ended March 31, 2011 and 2010. 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, 2011 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, 2010 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,
 
   
2011
   
2010
 
Net income, as reported
 
$
6,339
   
$
5,313
 
Weighted-average common shares outstanding – basic
   
7,659,970
     
7,652,089
 
Dilutive effect of stock-based compensation
   
12,428
     
7,551
 
Weighted-average common and potential common shares – diluted
  
 
7,672,398
     
7,659,640
 
Basic earnings per share – common stock
 
$
0.83
   
$
0.69
 
Basic earnings per share – unvested share-based payment awards
   
0.83
     
0.69
 
Diluted earnings per share – common stock
   
0.83
     
0.69
 
Diluted earnings per share – unvested share-based payment awards
   
0.83
     
0.69
 

At March 31, 2011 and 2010, options to purchase 54,050 and 98,877 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, 2011
   
  
     
  
     
  
     
  
 
Available for sale
   
  
     
  
     
  
     
  
 
Obligations of U.S. government sponsored enterprises
 
$
79,868
   
$
162
   
$
(1,335
)
 
$
78,695
 
Obligations of states and political subdivisions
   
44,316
     
2,644
     
     
46,960
 
Mortgage-backed securities issued or guaranteed by U.S. government sponsored enterprises
   
460,763
     
15,015
     
(3,893
)
   
471,885
 
Private issue collateralized mortgage obligations
   
22,219
     
     
(2,368
)
   
19,851
 
Total debt securities
   
607,166
     
17,821
     
(7,596
)
   
617,391
 
Equity securities
   
5,000
     
     
(433
)
   
4,567
 
Total securities available for sale
 
$
612,166
   
$
17,821
   
$
(8,029
)
 
$
621,958
 
December 31, 2010
   
  
     
  
     
  
     
  
 
Available for sale
   
  
     
  
     
  
     
  
 
Obligations of U.S. government sponsored enterprises
 
$
49,870
   
$
237
   
$
(750
)   
 
$
49,357
 
Obligations of states and political subdivisions
   
13,777
     
443
     
     
14,220
 
Mortgage-backed securities issued or guaranteed by U.S. government sponsored enterprises
   
451,909
     
15,986
     
(3,053
)   
   
464,842
 
Private issue collateralized mortgage obligations
   
23,441
     
     
(2,719
)   
   
20,722
 
Total debt securities
   
538,997
     
16,666
     
(6,522
)   
   
549,141
 
Equity securities
   
5,000
     
     
(562
)   
   
4,438
 
Total securities available for sale
 
$
543,997
   
$
16,666
   
$
(7,084
)   
 
$
553,579
 
Held to maturity
   
  
     
  
     
  
     
  
 
Obligations of states and political subdivisions
 
$
36,102
   
$
1,935
   
$
   
$
38,037
 
Total securities held to maturity
 
$
36,102
   
$
1,935
   
$
   
$
38,037
 

During the first quarter of 2011, $36.1 million of municipal bonds that had been previously classified as held to maturity at purchase were moved to the available for sale category and the associated unrealized gains and temporary unrealized losses on these securities are now being reported on an after-tax basis in shareholders’ equity as accumulated other comprehensive income or loss.  This change reflects management’s decision during the first quarter of 2011 to more actively manage these investments in changing economic environments.
 
Impaired Securities
 
Management reviews the Company’s 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, 2011 and December 31, 2010, by length of time that individual securities in each category have been in a continuous loss position.

 
9

 

   
Less Than 12 Months
   
12 Months or More
   
Total
 
   
Fair
Value
   
Unrealized
Losses
   
Fair
Value
   
Unrealized
Losses
   
Fair
Value
   
Unrealized
Losses
 
March 31, 2011
                                   
U.S. government sponsored enterprises
 
$
58,538
   
$
(1,335
)
 
$
   
$
   
$
58,538
   
$
(1,335
)
Mortgage-backed securities
   
134,731
     
(3,893
)
   
77
     
     
134,808
     
(3,893
)
Private issue collateralized mortgage obligations
   
2,109
     
(2
)
   
17,741
     
(2,366
)
   
19,850
     
(2,368
)
Equity securities
   
     
     
4,567
     
(433
)
   
4,567
     
(433
)
Total
 
$
195,378
   
$
(5,230
)
 
$
22,385
   
$
(2,799
)
 
$
217,763
   
$
(8,029
)
December 31, 2010
   
  
     
  
     
  
     
  
     
  
     
  
 
U.S. government sponsored enterprises
 
$
29,145
   
$
(750
)
 
$
   
$
   
$
29,145
   
$
(750
)
Mortgage-backed securities
   
96,604
     
(3,053
)
   
85
     
     
96,689
     
(3,053
)
Private issue collateralized mortgage obligations
   
2,160
     
(79
)
   
18,562
     
(2,640
)   
   
20,722
     
(2,719
)
Equity securities
   
     
     
4,438
     
(562
)   
   
4,438
     
(562
)
Total
 
$
127,909
   
$
(3,882
)
 
$
23,085
   
$
(3,202
)
 
$
150,994
   
$
(7,084
)

At March 31, 2011, $217.8 million of the Company’s investment securities had unrealized losses that are primarily considered temporary. A portion of the unrealized loss was related to the private issue collateralized mortgage obligations (“CMOs”), which includes $8.8 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 $22.4 million in the investment 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 investment portfolio using current statistical data to determine expected cash flows and forecast potential losses. The results of the stress tests at March 31, 2011, reflect potential future credit losses in the base case; however, the analysis reflects improvements in potential losses for the private issue CMOs that the Company has recorded OTTI write-downs on in prior periods and, therefore, there were no OTTI write-downs during the first quarter of 2011.

At March 31, 2011, 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.
 
Security Gains and Losses
 
The following information details the Company’s sales of securities:

   
Three Months Ended March 31,
 
  
 
2011
   
2010
 
Available for sale
 
   
   
      
 
Proceeds from sales of securities
  $ 3,406     $  
Gross realized gains
    16        
Gross realized (losses)
    (49 )         
 
During the first quarter of 2011, the Company sold nine municipal bonds that the Company was monitoring that either had below “A” ratings, split ratings, withdrawn ratings, or negative outlooks or were revenue bonds.  The Company had not recorded any OTTI on these securities; however, due to increased pressures on state and local government revenues around the country as municipalities struggle with a weakened economy, management decided to sell these securities.

 
10

 
 
Securities Pledged
 
At March 31, 2011 and 2010, securities with an amortized cost of $478.8 million and $346.2 million and a fair value of $490.4 million and $363.5 million, respectively, were pledged to secure Federal Home Loan Bank (“FHLB”) advances, public deposits, and securities sold under agreements to repurchase and for other purposes required or permitted by law.
 
Contractual Maturities
 
The amortized cost and estimated fair values of debt securities by contractual maturity at March 31, 2011 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
 
$
2,142
   
$
2,160
 
Due after one year through five years
   
100,404
     
100,097
 
Due after five years through ten years
   
84,074
     
88,051
 
Due after ten years
   
420,546
     
427,083
 
  
 
$
607,166
   
$
617,391
 

NOTE 4 – LOANS AND ALLOWANCE FOR LOAN LOSSES
 
The composition of the Company’s loan portfolio, excluding residential loans held for sale, at March 31, 2011 and December 31, 2010 was as follows:

   
March 31,
2011
   
December 31,
2010
 
Residential real estate loans
  $ 595,548     $ 596,655  
Commercial real estate loans
    464,197       464,037  
Commercial loans
    198,148       180,592  
Home equity loans
    266,484       270,627  
Consumer loans
    12,449       13,188  
Deferred loan fees net of costs
    (363 )        (347 )  
Total loans
  $ 1,536,463     $ 1,524,752  

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.  During the first quarter of 2011, the Company sold $8.6 million of fixed-rate residential mortgage loans on the secondary market that resulted in a net loss on the sale of loans of $6,000.  For the year ended December 31, 2010, the Company sold $20.1 million of fixed-rate residential mortgage loans on the secondary market, which resulted in a net gain on the sale of loans of $106,000.

The allowance for loan losses (“ALL”) is management’s best estimate of the inherent risk of loss in the Company’s 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,
 
  
 
2011
   
2010
 
Balance at beginning of period
 
$
22,293
   
$
20,246
 
Loans charged off
   
(847
)
   
(1,253
)
Recoveries on loans previously charged off
   
324
     
386
 
Net charge-offs
   
(523
)
   
(867
)
Provision for loan losses
   
1,117
     
2,000
 
Balance at end of period
 
$
22,887
   
$
21,379
 
 
 
11

 
 
The following table presents the allowance for loan losses and select loan information for the quarter ended March 31, 2011:

   
Residential
Real Estate
   
Commercial
Real Estate
   
Commercial
   
Home 
Equity
   
Consumer
   
Unallocated
   
Total
 
Allowance for loan losses:
                
  
   
 
         
 
   
    
 
Beginning balance
  $ 3,273     $ 8,198     $ 5,633     $ 2,051     $ 202     $ 2,936     $ 22,293  
Loans charged off
    (172     (231 )     (391     (9     (44 )           (847 )
Recoveries
    50       9       80       164       21             324  
Provision (reduction)
    763       (278     115       (249     59       707       1,117  
Ending balance
  $ 3,914     $ 7,698     $ 5,437     $ 1,957     $ 238     $ 3,643     $ 22,887  
Ending Balance: Individually evaluated for impairment
  $ 930     $ 544     $ 427     $ 212     $ 9     $     $ 2,122  
Ending Balance: Collectively evaluated for impairment
  $ 2,984     $ 7,154     $ 5,010     $ 1,745     $ 229     $ 3,643     $ 20,765  
                                                         
Loans ending balance:
                                                       
Ending Balance: Individually evaluated for impairment
  $ 10,566     $ 6,551     $ 4,042     $ 1,276     $ 76     $     $ 22,511  
Ending Balance: Collectively evaluated for impairment
  $ 584,619     $ 457,646     $ 194,106     $ 265,208     $ 12,373     $     $ 1,513,952  
Loans ending balance
  $ 595,185     $ 464,197     $ 198,148     $ 266,484     $ 12,449     $     $ 1,536,463  
 
The following table presents the allowance for loan losses and select loan information for the year ended December 31, 2010:

    
Residential
Real Estate
   
Commercial
Real Estate
   
Commercial
   
Home 
Equity
   
Consumer
   
Unallocated
   
Total
 
Allowance for loan losses:
             
 
   
 
          
 
   
    
 
Beginning balance
  $ 2,693     $ 6,930     $ 5,015     $ 1,773     $ 184     $ 3,651     $ 20,246  
Loans charged off
    (1,262     (1,382 )     (1,502     (932     (469 )           (5,547 )
Recoveries
    225       232       553       123       136             1,269  
Provision (reduction)
    1,617       2,418       1,567       1,087       351       (715 )     6,325  
Ending balance
  $ 3,273     $ 8,198     $ 5,633     $ 2,051     $ 202     $ 2,936     $ 22,293  
Ending Balance: Individually evaluated for impairment
  $ 840     $ 660     $ 631     $ 316     $ 25     $     $ 2,472  
Ending Balance: Collectively evaluated for impairment
  $ 2,433     $ 7,538     $ 5,002     $ 1,735     $ 177     $ 2,936     $ 19,821  
                                                         
Loans ending balance:
                                                       
Ending Balance: Individually evaluated for impairment
  $ 9,330     $ 6,182     $ 4,486     $ 1,711     $ 25     $     $ 21,734  
Ending Balance: Collectively evaluated for impairment
  $ 586,978     $ 457,855     $ 176,106     $ 268,916     $ 13,163     $     $ 1,503,018  
Loans ending balance
  $ 596,308     $ 464,037     $ 180,592     $ 270,627     $ 13,188     $     $ 1,524,752  
 
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, state and county codes. Shifts in portfolio concentrations are continuously monitored by the Company’s Risk Management Group.

 
12

 
 
To further identify loans with similar risk profiles, the Company categorizes each loan category by credit risk exposure and applies a credit quality indicator to all commercial, commercial real estate and residential real estate loans. These indicators are represented by grades 1 through 10 from lowest to highest risk rating. The Company uses the following definitions when assessing grades for the purpose of evaluating the risk and adequacy of the ALL.
 
Grade 1 – Substantially risk free loans. Loans to borrowers of unquestioned financial strength with stable earnings, cash flows and sufficient primary and secondary sources of repayment. These loans have no known or suspected shortcomings or weaknesses. Most loans in this category are secured by properly margined liquid collateral. Loan to value and loan to cost parameters are most conservative.
 
Grade 2 – Loans with minimal risk. Include loans to borrowers with a solid financial condition and good liquidity, significant cash flows and interest coverage and well-defined repayment strength. Loan to value and loan to cost parameters are conservative.
 
Grade 3 – Loans with very modest risk. Borrowers in this category exhibit strong sources of repayment, consistent earnings and acceptable profitability growth. Working capital, debt to worth and coverage ratios are comparable with industry standards and there are no known negative trends. Collateral protection is adequate. Loan to value parameters do not exceed the maximum established by the Company’s loan policy.
 
Grade 4 – Loans with less than average risk. Loans to borrowers with adequate repayment source or a recently demonstrated ability to service debt with acceptable margins. Working capital, debt to worth and coverage ratios may be on the lower end of industry standards, but are not considered unsatisfactory. There may be minor negative trends but collateral position is adequate. Loan to value and debt coverage ratios meet the Company’s loan policy criteria.
 
Grade 5 – Average risk loans. Loans to borrowers with acceptable financial strength but possible vulnerability to changing economic conditions or inconsistent earnings history. Borrower evidences a reasonable ability to service debt in the normal course of business and has available and adequate secondary sources of repayment. Working capital, debt to worth and coverage ratios may be below industry standards, but are not considered unsatisfactory. Loan to value and debt coverage ratios meet the criteria outlined in the Company’s loan policy.
 
Grade 6 – Loans with maximum acceptable risk (Watch List). Loans in this grade exhibit the majority of the attributes associated with Grade 5, perform at that level, but have been recognized to possess characteristics or deficiencies that warrant monitoring.  These loans have potential weaknesses which may, if not checked or corrected, weaken the assets or inadequately protect the Company’s credit position at some future date.
 
A Grade 6-Watch rating is assigned to the loan when one or more of the following circumstances exist:
 
 
-
Lack of sufficient current information to properly assess the risk of the loan facility or value of pledged collateral.
 
-
Adverse economic, market or other external conditions which may directly affect the obligor’s financial condition.
 
-
Significant cost overruns occurred.
 
-
Market share may exhibit some volatility. Sales and profits may be tied to business, credit or product cycles.
 
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 are considered non-performing.

 
13

 
 
The following table summarizes credit risk exposure indicators by portfolio segment as of March 31, 2011:

   
Residential
Real Estate
   
Commercial
Real Estate
   
Commercial
   
Home 
Equity
   
Consumer
 
Pass (Grades 1-6)
  $ 580,232     $ 397,965     $ 165,765     $     $  
Performing
                      264,918       12,373  
Special Mention (Grade 7)
    895       14,900       12,773              
Substandard (Grade 8)
    14,058       51,327       19,610              
Non-performing
                      1,566       76  
Doubtful (Grade 9)
          5                    
Loss (Grade 10)
                             
Total
  $ 595,185     $ 464,197     $ 198,148     $ 266,484     $ 12,449  
 
The following table summarizes credit risk exposure indicators by portfolio segment as of December 31, 2010:

   
Residential
Real Estate
   
Commercial
Real Estate
   
Commercial
   
Home 
Equity
   
Consumer
 
Pass (Grades 1-6)
  $ 583,460     $ 390,488     $ 146,412     $     $  
Performing
                      268,873       13,163  
Special Mention (Grade 7)
          22,692       11,089              
Substandard (Grade 8)
    12,848       50,852       23,091              
Non-performing
                      1,754       25  
Doubtful (Grade 9)
          5                    
Loss (Grade 10)
                             
Total
  $ 596,308     $ 464,037     $ 180,592     $ 270,627     $ 13,188  
 
The Company closely monitors the performance of its loan portfolio. In situations 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, a loan is placed on non-accrual status. Exceptions may be made if the asset is well-secured by collateral sufficient to satisfy both the principal and accrued interest in full and collection is assured by a specific event such as the closing of a pending sale contract. 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 be returned 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 are not normally placed on non-accrual status, as 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 and loans past due over 90 days and accruing as of March 31, 2011:

   
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
 
Residential real estate
  $ 2,752     $ 1,518     $ 5,988     $ 10,258     $ 584,927     $ 595,185     $     $ 8,171  
Commercial real estate
    2,780       1,048       4,334       8,162       456,035       464,197             6,442  
Commercial
    1,633       305       2,925       4,863       193,285       198,148       124       3,977  
Home equity
    176       184       1,275       1,635       264,849       266,484       306       1,261  
Consumer
    46       3       76       125       12,324       12,449             76  
Total
  $ 7,387     $ 3,058     $ 14,598     $ 25,043     $ 1,511,420     $ 1,536,463     $ 430     $ 19,927  
 
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 and loans past due over 90 days and accruing as of December 31, 2010:

   
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
 
Residential real estate
  $ 1,488     $ 1,533     $ 5,616     $ 8,637     $ 587,671     $ 596,308     $ 424     $ 7,225  
Commercial real estate
    1,642       979       4,166       6,787       457,250       464,037       214       6,072  
Commercial
    911       883       2,888       4,682       175,910       180,592       15       4,421  
Home equity
    590       170       739       1,499       269,128       270,627       58       1,696  
Consumer
    164       28       25       217       12,971       13,188             25  
Total
  $ 4,795     $ 3,593     $ 13,434     $ 21,822     $ 1,502,930     $ 1,524,752     $ 711     $ 19,439  
 
 
14

 
 
The Company takes a conservative approach in credit risk management but remains focused on community lending and reinvesting. Credit administration works closely with borrowers experiencing credit problems to assist in loan repayment or term modifications. Restructured loans consist of loans that provide term modifications or a reduction of either interest or principal due to the borrower’s financial hardship. Once the obligation has been restructured due to credit problems, it will continue to remain in restructured status until paid in full. Loans restructured due to credit difficulties amounted to $2.6 and $2.3 million at March 31, 2011 and December 31, 2010, respectively. Both non-accrual and restructured loans are considered impaired. All impaired loans are allocated a portion of allowance to cover potential losses. At March 31, 2011 and December 31, 2010, there were no impaired loans without a related recorded allowance.
 
The following is a summary of impaired loan balances and associated allowance by portfolio segment as of March 31, 2011:
 

   
Recorded
Investment
   
Unpaid Principal
Balance
   
Related
Allowance
   
Average 
Recorded
Investment
   
Interest Income
Recognized
 
With an allowance recorded:
                             
Residential real estate
  $ 10,566     $ 10,856     $ 930     $ 10,541     $ 36  
Commercial real estate
    6,551       7,805       544       5,881       3  
Commercial
    4,042       4,475       427       4,198       45  
Home equity
    1,276       1,305       212       1,669        
Consumer
    76       236       9       59        
Ending Balance
  $ 22,511     $ 24,677     $ 2,122     $ 22,348     $ 84  
 
The following is a summary of impaired loan balances and associated allowance by portfolio segment as of December 31, 2010:

   
Recorded
Investment
   
Unpaid Principal
Balance
   
Related
Allowance
   
Average 
Recorded
Investment
   
Interest Income
Recognized
 
With an allowance recorded:
                             
Residential real estate
  $ 9,330     $ 9,750     $ 840     $ 7,739     $ 30  
Commercial real estate
    6,182       7,198       660       6,334       4  
Commercial
    4,486       4,708       631       4,499       1  
Home equity
    1,711       2,049       316       1,118       1  
Consumer
    25       185       25       113        
Ending Balance
  $ 21,734     $ 23,890     $ 2,472     $ 19,803     $ 36  

NOTE 5 – GOODWILL, CORE DEPOSIT AND TRUST RELATIONSHIP INTANGIBLES

The Company has recognized goodwill and certain identifiable intangible assets in connection with certain acquisitions of other businesses in prior years. The changes in core deposit intangible and trust relationship intangible for the three months ended March 31, 2011 are shown in the table below:
 
   
Core Deposit Intangible
 
   
Total
   
Accumulated
Amortization
   
Net
 
Balance at December 31, 2010
 
$
14,444
   
$
(10,930
)
 
$
3,514
 
2011 amortization
   
     
(125
)
   
(125
)
Balance at March 31, 2011
 
$
14,444
   
$
(11,055
)
 
$
3,389
 
 
   
Trust Relationship Intangible
 
   
Total
   
Accumulated
Amortization
   
Net
 
Balance at December 31, 2010
 
$
753
   
$
            (226
)
 
$
527
 
2011 amortization
   
     
(19
)
   
(19
)
Balance at March 31, 2011
 
$
753
   
$
(245
)