10-K 1 cac-20131231x10k.htm 10-K CAC-2013.12.31-10K
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 

FORM 10-K

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

For the Fiscal Year Ended December 31, 2013

o
 
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
Incorporation or Organization)
 
(I.R.S. Employer
Identification No.)
2 Elm Street, Camden, ME
 
04843
(Address of Principal Executive Offices)
 
(Zip Code)
Registrant’s Telephone Number, Including Area Code: (207) 236-8821

 
 
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
 
Name of Exchange on Which Registered
Common Stock, without par value
 
The NASDAQ Stock Market LLC
Securities registered pursuant to Section 12(g) of the Act: None
 
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No x

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 o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o

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 definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer o
 
Accelerated filer x
 
Non-accelerated filer o
 
Smaller reporting company o
  
 
  
 
(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 o No x

The aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the Registrant’s most recently completed second fiscal quarter: $235,031,598. Shares of the Registrant’s common stock held by each executive officer, director and person who beneficially owns 5% or more of the Registrant’s outstanding common stock have been excluded, in that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes.

The number of shares outstanding of each of the registrant’s classes of common stock, as of March 3, 2014, is 7,509,789.

Certain information required in response to Items 10, 11, 12, 13 and 14 of Part III of this Form 10-K is incorporated by reference from Camden National Corporation’s Definitive Proxy Statement for the 2014 Annual Meeting of Shareholders pursuant to Regulation 14A of the General Rules and Regulations of the Commission.




CAMDEN NATIONAL CORPORATION
2013 FORM 10-K ANNUAL REPORT

TABLE OF CONTENTS

 
Page
PART I
PART II
PART III
PART IV
 


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FORWARD-LOOKING STATEMENTS

The discussions set forth below and in the documents we incorporate by reference herein contain certain statements that may be considered forward-looking statements under the Private Securities Litigation Reform Act of 1995, including certain plans, exceptions, goals, projections, and statements, which are subject to numerous risks, assumptions, and uncertainties. Forward-looking statements can be identified by the use of the words “believe,” “expect,” “anticipate,” “intend,” “estimate,” “assume,” “plan,” “target,” “goal” or future or conditional verbs such as “will,” “may,” “might,” “should,” “could” and other expressions which predict or indicate future events or trends and which do not relate to historical matters. Forward-looking statements should not be relied on, because they involve known and unknown risks, uncertainties and other factors, some of which are beyond the control of the Company. These risks, uncertainties and other factors may cause the actual results, performance or achievements of the Company to be materially different from the anticipated future results, performance or achievements expressed or implied by the forward-looking statements.

The following factors, among others, could cause the Company’s financial performance to differ materially from the Company’s goals, plans, objectives, intentions, expectations and other forward-looking statements:

continued weakness in the United States economy in general and the regional and local economies within the New England region and Maine, which could result in a deterioration of credit quality, an increase in the allowance for loan losses, or a reduced demand for the Company’s credit or fee-based products and services;
adverse changes in the local real estate market could result in a deterioration of credit quality and an increase in the allowance for loan loss, as most of the Company’s loans are concentrated in Maine, and a substantial portion of these loans have real estate as collateral;
changes in trade, monetary and fiscal policies and laws, including the interest rate policies of the Board of Governors of the Federal Reserve System;
inflation, interest rate, market and monetary fluctuations;
competitive pressures, including continued industry consolidation and the increased financial services provided by non-banks;
volatility in the securities markets that could adversely affect the value or credit quality of the Company’s assets, impairment of goodwill, the availability and terms of funding necessary to meet the Company’s liquidity needs, and could lead to impairment in the value of securities in the Company's investment portfolio;
changes in information technology that require increased capital spending;
changes in consumer spending and savings habits;
new laws and regulations regarding the financial services industry including but not limited to, the implementation of the Dodd-Frank Wall Street Reform & Consumer Protection Act and Basel III capital rules;
changes in laws and regulations including laws and regulations concerning taxes, banking, securities and insurance; and
changes in accounting policies, practices and standards, as may be adopted by the regulatory agencies as well as the Financial Accounting Standards Board ("FASB") and other accounting standards setters.

You should carefully review all of these factors, and be aware that there may be other factors that could cause differences, including the risk factors listed in Part I, Item 1A, “Risk Factors,” beginning on page 11. Readers should carefully review the risk factors described therein and should not place undue reliance on our forward-looking statements.

These forward-looking statements were based on information, plans and estimates at the date of this report, and we do not promise to update any forward-looking statements to reflect changes in underlying assumptions or factors, new information, future events or other changes.

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PART I

Item 1. Business

Overview.  Camden National Corporation (hereafter referred to as “we,” “our,” “us,” or the “Company”) is a publicly-held bank holding company, with $2.6 billion in assets and 44 branches at December 31, 2013, incorporated under the laws of the State of Maine and headquartered in Camden, Maine. The Company, as a diversified financial services provider, pursues the objective of achieving long-term sustainable growth by balancing growth opportunities against profit, while mitigating risks inherent in the financial services industry. The primary business of the Company and its subsidiaries is to attract deposits from, and to extend loans to, consumer, institutional, municipal, non-profit and commercial customers. The Company offers commercial and consumer banking products and services through its subsidiary, Camden National Bank (the “Bank”), and brokerage and insurance services through Camden Financial Consultants (“Camden Financial”), a division of the Bank. The Company also offers investment management and fiduciary services through its subsidiary, Acadia Trust, N.A. (“Acadia Trust”), a federally-regulated, non-depository trust company headquartered in Portland, Maine. In addition to serving as a holding company, the Company provides managerial, operational, human resource, marketing, financial management, risk management and technology services to its subsidiaries. The consolidated financial statements of the Company accompanying this Form 10-K include the accounts of the Company, the Bank and its divisions, and Acadia Trust. All inter-company accounts and transactions have been eliminated in consolidation.

The Company is committed to the philosophy of serving the financial needs of customers in local communities, as described in its core purpose: Through each interaction, we will enrich the lives of people, help businesses succeed and vitalize communities.

The Company has achieved a five-year compounded annual asset growth rate of 2%, resulting in $2.6 billion in total assets at December 31, 2013. The primary factors contributing to our net asset growth are: (i) the acquisition of 14 branches, including $287.6 million in deposits and $5.7 million in small business loans, from Bank of America, National Association, in October 2012, partially offset by (ii) the divestiture of our five Franklin County branches, including $46.0 million in loans and $85.9 million in deposits and borrowings, in October 2013. The financial services industry continues to experience consolidations through mergers that could create opportunities for the Company to promote its value proposition to customers. The Company evaluates the possibility of expansion into new markets through both de novo expansion and acquisitions. In addition, the Company is focused on maximizing the potential for growth in existing markets, especially in markets where the Company has less of a presence. Further information on the Company's financial information can be found within the consolidated financial statements found within Item 8 of this report.

Camden National Bank.  The Bank is a national banking association chartered under the laws of the United States headquartered in Camden, Maine. Originally founded in 1875, the Bank became a direct, wholly-owned subsidiary of the Company as a result of a corporate reorganization in 1985. The Bank offers its products and services in the Maine counties of Androscoggin, Cumberland, Hancock, Kennebec, Knox, Lincoln, Penobscot, Piscataquis, Somerset, Waldo, Washington, and York, and focuses primarily on attracting deposits from the general public through its branches, and then using such deposits to originate residential mortgage loans, commercial business loans, commercial real estate loans and a variety of consumer loans. Customers may also access the Bank’s products and services using other channels, including the Bank’s website located at www.camdennational.com.

Camden Financial Consultants, located at Camden National Bank.  Camden Financial is a full-service brokerage and insurance division of the Bank in the business of helping clients meet all of their financial needs by using a total wealth management approach. Its financial offerings include college, retirement, and estate planning, mutual funds, strategic asset management accounts, and variable and fixed annuities.

Acadia Trust, N.A.  Acadia Trust is a limited purpose national banking association chartered under the laws of the United States headquartered in Portland, Maine. Acadia Trust provides a broad range of trust, trust-related, investment and wealth management services to both individual and institutional clients. The financial services provided by Acadia Trust complement the services provided by the Bank by offering customers investment management services. Acadia Trust’s website is located at www.acadiatrust.com.


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The Company’s Investor Relations information can be obtained through the Bank’s internet address, www.camdennational.com. The Company makes available on or through its Investor Relations page, without charge, its annual reports on Form 10-K, quarterly reports on Form 10-Q, and current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, as soon as reasonably practicable after such reports are electronically filed with, or furnished to, the SEC. The Company’s reports filed with, or furnished to, the SEC are also available at the SEC’s website at www.sec.gov. In addition, the Company makes available, free of charge, its press releases and Code of Ethics through the Company’s Investor Relations page. Information on our website is not incorporated by reference into this document and should not be considered part of this Report.

Competition.  Through the Bank and its division, Camden Financial, the Company competes throughout Maine, and considers its primary market area to be in Knox, Hancock, Waldo, Penobscot, Androscoggin, Kennebec, Somerset, and Piscataquis counties, with a growing presence in Cumberland, Kennebec, Lincoln and York counties. The combined population of Knox and Waldo counties is approximately 79,000 people and their economies are based primarily on tourism, healthcare, and marine related industries and supported by a substantial population of retirees. The counties with the highest population levels within our primary market area are Penobscot County with approximately 154,000 people, Kennebec County with approximately 122,000 people, and Androscoggin County with approximately 108,000 people. The Bank operates throughout various Maine markets that are characterized as rural areas. Major competitors in the Company’s primary market area include local branches of large regional bank affiliates and brokerage houses, as well as local independent banks, financial advisors, thrift institutions and credit unions. Other competitors for deposits and loans within the Bank’s primary market area include insurance companies, money market funds, consumer finance companies and financing affiliates of consumer durable goods manufacturers.

The Company and the Bank generally have effectively competed with other financial institutions by emphasizing customer service, which is branded as the Camden National Experience, highlighted by local decision-making, establishing long-term customer relationships, building customer loyalty and providing products and services designed to meet the needs of customers. The Company, through its non-bank subsidiary, Acadia Trust, competes for trust, trust-related, investment management, retirement and pension plan management services with local banks and non-banks, which may now, or in the future, offer a similar range of services, as well as with a number of brokerage firms and investment advisors with offices in the Company’s market area. In addition, most of these services are widely available to the Company’s customers by telephone and over the internet through firms located outside the Company’s market area.

Employees.  The Company employs 481 people on a full- or part-time basis as of December 31, 2013.

Supervision and Regulation

The following discussion addresses elements of the regulatory framework applicable to bank holding companies and their subsidiaries. This regulatory framework is intended primarily for the protection of the safety and soundness of depository institutions, the federal deposit insurance system, and depositors, rather than the protection of shareholders of a bank holding company such as the Company.

As a bank holding company, the Company is subject to regulation, supervision and examination by the Board of Governors of the Federal Reserve System (the “FRB”) under the Bank Holding Company Act of 1956, as amended (the “BHCA”). The Bank is subject to regulation, supervision and examination by the Office of the Comptroller of the Currency (the “OCC”). Acadia Trust is subject to regulation, supervision and examination by the OCC. As a limited purpose national bank, Acadia Trust does not take deposits or make loans.

The following is a summary of certain aspects of various statutes and regulations applicable to the Company and its subsidiaries. This summary is not a comprehensive analysis of all applicable law, however, and you should refer to the applicable statutes and regulations for more information.


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The Dodd-Frank Act.  The Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd- Frank Act”), enacted on July 21, 2010, comprehensively reformed the regulation of financial institutions, products and services. Among other things, the Dodd-Frank Act:
granted the FRB increased supervisory authority and codified the source of strength doctrine, as discussed in more detail in “— Regulation of the Company — Source of Strength” below;
provided for new capital standards applicable to the Company, as discussed in more detail in “— Capital Adequacy and Safety and Soundness — Regulatory Capital Requirements” below;
modified the scope and costs associated with deposit insurance coverage, as discussed in “— Regulation of the Bank — Deposit Insurance” below;
permitted well capitalized and well managed banks to acquire other banks in any state, subject to certain deposit concentration limits and other conditions, as discussed in “— Regulation of the Bank — Acquisitions and Branching” below;
permitted the payment of interest on business demand deposit accounts;
established the Bureau of Consumer Financial Protection (the “CFPB”);
established new minimum mortgage underwriting standards for residential mortgages, as discussed in “— Consumer Protection Regulation — Mortgage Reform” below;
barred banking organizations, such as the Company, from engaging in proprietary trading and from sponsoring and investing in hedge funds and private equity funds, except as permitted under certain circumstances, as discussed in “— Regulation of Other Activities — Volcker Rule Restrictions on Proprietary Trading and Sponsorship of Hedge Funds and Private Equity Funds” below; and
established the Financial Stability Oversight Council to designate certain activities as posing a risk to the United States ("U.S.") financial system and recommended new or heightened standards and safeguards for financial institutions engaging in such activities.

Regulation of the Company

The Company is subject to regulation, supervision and examination by the FRB, which has the authority, among other things, to order bank holding companies to cease and desist from unsafe or unsound banking practices; to assess civil money penalties; and to order termination of non-banking activities or termination of ownership and control of a non-banking subsidiary by a bank holding company.

Source of Strength.  Under the BHCA and the Dodd-Frank Act, the Company is required to serve as a source of financial strength for the Bank. This support may be required at times when the bank holding company may not have the resources to provide support to the Bank. In the event of a bank holding company’s bankruptcy, any commitment by the bank holding company to a federal bank regulatory agency to maintain the capital of a bank subsidiary will be assumed by the bankruptcy trustee and entitled to a priority of payment. In addition, any loans by a bank holding company to any of its bank subsidiaries are subordinate to the payment of deposits and to certain other indebtedness.

Acquisitions and Activities.  The BHCA prohibits a bank holding company from acquiring substantially all the assets of a bank or acquiring direct or indirect ownership or control of more than 5% of the voting shares of any bank or bank holding company without prior approval of the FRB. The BHCA also prohibits a bank holding company from engaging directly or indirectly in activities other than those of banking, managing or controlling banks or furnishing services to its subsidiary banks. However, a bank holding company may engage in and may own shares of companies engaged in certain activities that the FRB determines to be so closely related to banking or managing and controlling banks so as to be a proper incident thereto.

Limitations on Acquisitions of Company Common Stock.  The Change in Bank Control Act prohibits a person or group of persons from acquiring “control” of a bank holding company unless the FRB has been notified and has not objected to the transaction. Under a rebuttable presumption established by the FRB, the acquisition of 10% or more of a class of voting securities of a bank holding company with a class of securities registered under Section 12 of the Exchange Act would, under the circumstances set forth in the presumption, constitute acquisition of control of the BHC. In addition, a company is required to obtain the approval of the FRB under the BHCA before acquiring 25% (5% in the case of an acquirer that is a bank holding company) or more, or otherwise obtaining control or a “controlling influence,” over that bank holding company. In 2008, the FRB released guidance on minority investments in banks that relaxed the presumption of control for investments of greater than 10% of a class of outstanding voting securities of a bank holding company in certain instances.

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Regulation of the Bank

The Bank is subject to regulation, supervision, and examination by the OCC. Additionally, the Federal Deposit Insurance Corporation (the “FDIC”) has secondary supervisory authority as the insurer of the Bank’s deposits. Pursuant to the Dodd-Frank Act, the FRB may directly examine the subsidiaries of the Company, including the Bank. The enforcement powers available to the federal banking regulators include, among other things, the ability to issue cease and desist or removal orders to terminate insurance of deposits; to assess civil money penalties; to issue directives to increase capital; to place the Bank into receivership; and to initiate injunctive actions against banking organizations and institution-affiliated parties.

Deposit Insurance.  Substantially all of the deposits of the Bank are insured up to applicable limits by the FDIC's Deposit Insurance Fund ("DIF") and are subject to deposit insurance assessment to maintain the DIF. The Federal Deposit Insurance Act ("FDIA"), as amended by the Federal Deposit Insurance Reform Act and the Dodd-Frank Act, requires the FDIC to set a ratio of deposit insurance reserves to estimated insured deposits of 1.35%. The FDIC utilizes a risk-based assessment system that imposes insurance premiums based upon a risk matrix that takes into account a bank's capital level and supervisory rating ("CAMELS rating"). CAMELS ratings reflect the applicable bank regulatory agency’s evaluation of the financial institution’s capital, asset quality, management, earnings, liquidity and sensitivity to risk. Assessment rates may also vary for certain institutions based on long-term debt issuer ratings, or secured or brokered deposits. Pursuant to the Dodd-Frank Act, deposit premiums are based on assets rather than insurable deposits. To determine its actual deposit insurance premiums, the Bank computes the base amount on its average consolidated assets less its average tangible equity (defined as the amount of Tier I capital) and the applicable assessment rate. The FDIC has the power to adjust deposit insurance assessment rates at any time. For 2013, the aggregate FDIC insurance expense for the Bank was $1.5 million.

The Dodd-Frank Act permanently increased the FDIC deposit insurance limit to $250,000 per depositor. On December 31, 2012, the temporary unlimited deposit insurance coverage for noninterest-bearing transactions accounts under the Dodd-Frank Act expired.

Under the FDIA, the FDIC may terminate deposit insurance upon a finding that the institution has engaged in unsafe and unsound practices, is in an unsafe or unsound condition to continue operations, or has violated any applicable law, regulation, rule, order or condition imposed by the FDIC.

Acquisitions and Branching.  The Bank must seek prior regulatory approval from the OCC to acquire another bank or establish a new branch office. Well capitalized and well managed banks may acquire other banks in any state, subject to certain deposit concentration limits and other conditions, pursuant to the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 and the Dodd-Frank Act. In addition, the Dodd-Frank Act authorizes a state-chartered bank to establish new branches on an interstate basis to the same extent a bank chartered by the host state may establish branches.

Activities and Investments of National Banking Associations.  National banking associations must comply with the National Bank Act and the regulations promulgated thereunder by the OCC, which limit the activities of national banking associations to those that are deemed to be part of, or incidental to, the “business of banking.” Activities that are part of, or incidental to, the business of banking include taking deposits, borrowing and lending money and discounting or negotiating promissory notes, drafts, bills of exchange, and other evidences of debt. Subsidiaries of national banking associations generally may only engage in activities permissible for the parent national bank. The Dodd-Frank Act bars the Bank from engaging in proprietary trading and from sponsoring and investing in hedge funds and private equity funds, except as permitted under certain limited circumstances.

Lending Restrictions.  Federal law limits a bank’s authority to extend credit to its directors, executive officers and 10% shareholders, as well as to entities controlled by such persons. Among other things, extensions of credit to insiders are required to be made on terms that are substantially the same as, and follow credit underwriting procedures that are not less stringent than, those prevailing for comparable transactions with unaffiliated persons. Also, the terms of such extensions of credit may not involve more than the normal risk of repayment or present other unfavorable features and may not exceed certain limitations on the amount of credit extended to such persons, individually and in the aggregate, which limits are based, in part, on the amount of the bank’s capital. The Dodd-Frank Act explicitly provides that an extension of credit to an insider includes credit exposure arising from a derivatives transaction, repurchase agreement, reverse repurchase agreement, securities lending transaction or securities borrowing transaction. Additionally, the Dodd-Frank Act requires that asset sale transactions with insiders must be on market terms, and if the transaction represents more than 10% of the capital and surplus of the Bank, be approved by a majority of the disinterested directors of the Bank.


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Brokered Deposits.  Section 29 of the FDIA and FDIC regulations generally limit the ability of an insured depository institution to accept, renew or roll over any brokered deposit unless the institution’s capital category is “well capitalized” or, with the FDIC’s approval, “adequately capitalized.” Depository institutions, other than those in the lowest risk category, that have brokered deposits in excess of 10% of total deposits will be subject to increased FDIC deposit insurance premium assessments. Additionally, depository institutions considered “adequately capitalized” that need FDIC approval to accept, renew or roll over any brokered deposits are subject to additional restrictions on the interest rate they may pay on deposits.

Community Reinvestment Act.  The Community Reinvestment Act (“CRA”) requires the OCC to evaluate the Bank’s performance in helping to meet the credit needs of the entire communities it serves, including low and moderate income neighborhoods, consistent with its safe and sound banking operations, and to take this record into consideration when evaluating certain applications. The FDIC’s CRA regulations are generally based upon objective criteria of the performance of institutions under three key assessment tests: (i) a lending test, to evaluate the institution’s record of making loans in its service areas; (ii) an investment test, to evaluate the institution’s record of investing in community development projects, affordable housing, and programs benefiting low or moderate income individuals and businesses; and (iii) a service test, to evaluate the institution’s delivery of services through its branches, ATMs, and other offices. The Bank currently has an “outstanding” CRA rating.

Capital Adequacy and Safety and Soundness

Regulatory Capital Requirements. The FRB and the OCC have issued substantially similar risk-based and leverage capital guidelines applicable to United States banking organizations. These guidelines are intended to reflect the relationship between the banking organization's capital and the degree of risk associated with its operations based on transactions recorded on-balance sheet as well as off-balance sheet items. In addition, these regulatory agencies may from time to time require that a banking organization maintain capital above the minimum levels, whether because of its financial condition or actual or anticipated growth.

Current FRB capital adequacy guidelines define a three-tier capital framework. Tier I capital for bank holding companies generally consists of the sum of common shareholders’ equity, perpetual preferred stock and trust preferred securities (both subject to certain limitations and, in the case of the latter, to specific limitations on the kind and amount of such securities that may be included as Tier I capital and certain additional restrictions described below), and minority interests in the equity accounts of consolidated subsidiaries, less goodwill and other non-qualifying intangible assets. Pursuant to the Dodd-Frank Act, trust preferred securities issued after May 19, 2010, will not count as Tier I capital. The Company's currently outstanding trust preferred securities were grandfathered for Tier I eligibility, subject to a limit of 25% of Tier I capital, under the Final Capital Rule discussed below. Tier II capital generally consists of hybrid capital instruments, perpetual debt and mandatory convertible debt securities, perpetual preferred stock and trust preferred securities (to the extent not eligible to be included as Tier I capital), term subordinated debt and intermediate-term preferred stock, and, subject to limitations, general allowances for loan losses. The sum of Tier I and Tier II capital less certain required deductions, such as investments in unconsolidated banking or finance subsidiaries, represents qualifying total capital. Risk-based capital ratios are calculated by dividing Tier I and total capital, respectively, by risk-weighted assets. Assets and off-balance sheet credit equivalents are assigned to one of four categories of risk-weights, based primarily on relative credit risk. The minimum Tier I risk-based capital ratio is 4% and the minimum total risk-based capital ratio is 8%. As of December 31, 2013, the Company's Tier I risk-based capital ratio was 15.20%, and its total risk-based capital ratio was 16.45%. The Company is currently considered "well capitalized" under all regulatory definitions.

In addition to the risk-based capital requirements, the FRB requires top-rated bank holding companies to maintain a minimum leverage capital ratio of Tier I capital (defined by reference to the risk-based capital guidelines) to its average total consolidated assets of at least 3.0%. For most other bank holding companies (including the Company), the minimum leverage capital ratio is 4.0%. Bank holding companies with supervisory, financial, operational or managerial weaknesses, as well as bank holding companies that are anticipating or experiencing significant growth, are expected to maintain capital ratios well above the minimum levels. The Company's leverage capital ratio as of December 31, 2013 was 9.43%.

The OCC has promulgated regulations to implement the system of prompt corrective action established by Section 38 of the FDIA. Under the regulations, a bank is “well capitalized” if it has: (1) a total risk-based capital ratio of 10.0% or greater; (2) a Tier I risk-based capital ratio of 6.0% or greater; (3) a leverage ratio of 5.0% or greater; and (4) is not subject to any written agreement, order, capital directive or prompt corrective action directive to meet and maintain a specific capital level for any capital measure. A bank is “adequately capitalized” if it has: (1) a total risk-based capital ratio of 8.0% or greater; (2) a Tier I risk-based capital ratio of 4.0% or greater; and (3) a leverage ratio of 4.0% or greater (3.0% under certain circumstances) and does not meet the definition of a “well capitalized bank.” The OCC also must take into consideration: (1) concentrations of credit risk; (2) interest rate risk; and (3) risks from non-traditional activities, as well as an institution’s ability to manage those

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risks, when determining the adequacy of an institution’s capital. This evaluation will be made as a part of the institution’s regular safety and soundness examination.

At December 31, 2013, the Bank was deemed to be a “well capitalized” institution for the above purposes. Information concerning the Company and the Bank with respect to capital requirements is incorporated by reference from Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations, in the section entitled “Capital Resources,” and Item 8. Financial Statements and Supplementary Data, in the section entitled “Note 19, Regulatory Capital Requirements.”

Generally, a bank, upon receiving notice that it is “undercapitalized”, becomes subject to the prompt corrective action provisions of Section 38 of the FDIA that, for example, (i) restrict payment of capital distributions and management fees, (ii) require that the OCC monitor the condition of the institution and its efforts to restore its capital, (iii) require submission of a capital restoration plan, (iv) restrict the growth of the institution’s assets and (v) require prior regulatory approval of certain expansion proposals. A bank that is required to submit a capital restoration plan must concurrently submit a performance guarantee by each company that controls the bank. A bank that is “critically undercapitalized” has a ratio of tangible equity to total assets that is equal to or less than 2.0%, will be subject to further restrictions, and generally will be placed in conservatorship or receivership within 90 days.

The Basel Committee on Banking Supervision has also released new capital requirements, known as Basel III, setting forth higher capital requirements, enhanced risk coverage, a global leverage ratio, provisions for counter-cyclical capital, and liquidity standards. On July 2, 2013, the FRB, along with the other federal banking agencies, issued a final rule (the “Final Capital Rule”) implementing the Basel III capital standards and establishing the minimum capital requirements for banks and bank holding companies required under the Dodd-Frank Act. The majority of the provisions of the Final Capital Rule apply to bank holding companies and banks with consolidated assets of $500 million or more, such as the Company and the Bank. The Final Capital Rule establishes a new capital risk-based capital ratio, a minimum common equity Tier I capital ratio of 6.5% of risk-weighted assets to be a “well capitalized” institution, and increase the minimum total Tier I capital ratio to be a “well capitalized" institution from 6.0% to 8.0%. The Final Capital Rule also requires that an institution establish a capital conservation buffer of common equity Tier I capital in an amount above the minimum risk-based capital requirements for “adequately capitalized” institutions equal to 2.5% of total risk weight assets, or face restrictions on capital distributions and executive bonuses. The Final Capital Rule increases the required capital for certain categories of assets, including higher-risk construction real estate loans and certain exposures related to securitizations. Under the Final Capital Rule, the Company may make a one-time, permanent election to continue to exclude accumulated other comprehensive income from capital. If the Company does not make this election, unrealized gains and losses will be included in the calculation of its regulatory capital.

The Company must comply with the Final Capital Rule beginning on January 1, 2015.

Safety and Soundness Standards. The FDIA requires the federal bank regulatory agencies to prescribe standards, by regulations or guidelines, relating to internal controls, information systems and internal audit systems, risk management, loan documentation, credit underwriting, interest rate risk exposure, asset growth, asset quality, earnings, stock valuation and compensation, fees and benefits, and such other operational and managerial standards as the agencies deem appropriate. Guidelines adopted by the federal bank regulatory agencies establish general standards relating to internal controls and information systems, internal audit systems, loan documentation, credit underwriting, interest rate exposure, asset growth and compensation, fees and benefits. In general, these guidelines require, among other things, appropriate systems and practices to identify and manage the risk and exposures specified in the guidelines. The guidelines prohibit excessive compensation as an unsafe and unsound practice and describe compensation as excessive when the amounts paid are unreasonable or disproportionate to the services performed by an executive officer, employee, director or principal stockholder. In addition, the federal banking agencies adopted regulations that authorize, but do not require, an agency to order an institution that has been given notice by an agency that it is not satisfying any of such safety and soundness standards to submit a compliance plan. If, after being so notified, an institution fails to submit an acceptable compliance plan or fails in any material respect to implement an acceptable compliance plan, the agency must issue an order directing action to correct the deficiency and may issue an order directing other actions of the types to which an undercapitalized institution is subject under the “prompt corrective action” provisions of the FDIA. See “— Regulatory Capital Requirements” above. If an institution fails to comply with such an order, the agency may seek to enforce such order in judicial proceedings and to impose civil money penalties.
 

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Dividend Restrictions

The Company is a legal entity separate and distinct from its subsidiaries. The revenue of the Company (on a parent-only basis) is derived primarily from interest and dividends paid to it by the Bank. The right of the Company, and consequently the right of shareholders of the Company, to participate in any distribution of the assets or earnings of the Bank through the payment of such dividends or otherwise is necessarily subject to the prior claims of creditors of the Bank (including depositors), except to the extent that certain claims of the Company in a creditor capacity may be recognized.

Restrictions on Bank Holding Company Dividends. The FRB has the authority to prohibit bank holding companies from paying dividends if such payment is deemed to be an unsafe or unsound practice. The FRB has indicated generally that it may be an unsafe or unsound practice for bank holding companies to pay dividends unless the bank holding company’s net income over the preceding year is sufficient to fund the dividends and the expected rate of earnings retention is consistent with the organization’s capital needs, asset quality and overall financial condition. Further, when the Final Capital Rule comes into effect, the Company’s ability to pay dividends would be restricted if it does not maintain a capital conservation buffer. See “— Capital Adequacy and Safety and Soundness — Regulatory Capital Requirements” above.

Under Maine law, a corporation’s board of directors may declare, and the corporation may pay, dividends on its outstanding shares, in cash or other property, generally only out of the corporation’s unreserved and unrestricted earned surplus, or out of the unreserved and unrestricted net earnings of the current fiscal year and the next preceding fiscal year taken as a single period, except under certain circumstances, including when the corporation is insolvent, or when the payment of the dividend would render the corporation insolvent or when the declaration would be contrary to the corporation’s charter.

Restrictions on Bank Dividends. National banks generally may not declare a dividend in excess of the bank’s undivided profits and, absent OCC approval, if the total amount of dividends declared by the national bank in any calendar year exceeds the total of the national bank’s retained net income of that year to date combined with its retained net income for the preceding two years. National banks also are prohibited from declaring or paying any dividend if, after making the dividend, the national bank would be considered “undercapitalized” (as defined by reference to other OCC regulations). The OCC has the authority to use its enforcement powers to prohibit a national bank, such as the Bank, from paying dividends if, in its opinion, the payment of dividends would constitute an unsafe or unsound practice.

Certain Transactions by Bank Holding Companies with their Affiliates

There are various statutory restrictions on the extent to which bank holding companies and their non-bank subsidiaries may borrow, obtain credit from or otherwise engage in “covered transactions” with their insured depository institution subsidiaries. The Dodd-Frank Act amended the definition of affiliate to include an investment fund for which the depository institution or one of its affiliates is an investment adviser. An insured depository institution (and its subsidiaries) may not lend money to, or engage in covered transactions with, its non-depository institution affiliates if the aggregate amount of covered transactions outstanding involving the bank, plus the proposed transaction exceeds the following limits: (i) in the case of any one such affiliate, the aggregate amount of covered transactions of the insured depository institution and its subsidiaries cannot exceed 10% of the capital stock and surplus of the insured depository institution; and (ii) in the case of all affiliates, the aggregate amount of covered transactions of the insured depository institution and its subsidiaries cannot exceed 20% of the capital stock and surplus of the insured depository institution. For this purpose, “covered transactions” are defined by statute to include a loan or extension of credit to an affiliate, a purchase of or investment in securities issued by an affiliate, a purchase of assets from an affiliate unless exempted by the Federal Reserve, the acceptance of securities issued by an affiliate as collateral for a loan or extension of credit to any person or company, the issuance of a guarantee, acceptance or letter of credit on behalf of an affiliate, securities borrowing or lending transactions with an affiliate that creates a credit exposure to such affiliate, or a derivatives transaction with an affiliate that creates a credit exposure to such affiliate. Covered transactions are also subject to certain collateral security requirements. Covered transactions as well as other types of transactions between a bank and a bank holding company must be on market terms and not otherwise unduly favorable to the holding company or an affiliate of the holding company. Moreover, Section 106 of the BHCA provides that, to further competition, a bank holding company and its subsidiaries are prohibited from engaging in certain tying arrangements in connection with any extension of credit, lease or sale of property of any kind, or furnishing of any service.


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Consumer Protection Regulation

The Company and the Bank are subject to federal and state laws designed to protect consumers and prohibit unfair or deceptive business practices. These laws include the Equal Credit Opportunity Act, the Fair Housing Act, the Home Ownership Protection Act, the Fair Credit Reporting Act, as amended by the Fair and Accurate Credit Transactions Act of 2003 (the “FACT Act”), the Gramm-Leach-Bliley Act of 1999 (the “GLBA”), Truth in Lending Act, the CRA, the Home Mortgage Disclosure Act, Real Estate Settlement Procedures Act, National Flood Insurance Act and various state law counterparts. These laws and regulations mandate certain disclosure requirements and regulate the manner in which financial institutions must interact with customers when taking deposits, making loans, collecting loans and providing other services. Further, the Dodd-Frank Act established the CFPB, which has the responsibility for making rules and regulations under the federal consumer protection laws relating to financial products and services. The CFPB also has a broad mandate to prohibit unfair or deceptive acts and practices and is specifically empowered to require certain disclosures to consumers and draft model disclosure forms. Failure to comply with consumer protection laws and regulations can subject financial institutions to enforcement actions, fines and other penalties. The OCC examines the Bank for compliance with CFPB rules and will enforce CFPB rules with respect to the Bank.

Mortgage Reform. The Dodd-Frank Act prescribes certain standards that mortgage lenders must consider before making a residential mortgage loan, including verifying a borrower’s ability to repay such mortgage loan, and allows borrowers to assert violations of certain provisions of the Truth-in-Lending Act as a defense to foreclosure proceedings. Under the Dodd-Frank Act, prepayment penalties are prohibited for certain mortgage transactions and creditors are prohibited from financing insurance policies in connection with a residential mortgage loan or home equity line of credit. In addition, the Dodd-Frank Act prohibits mortgage originators from receiving compensation based on the terms of residential mortgage loans and generally limits the ability of a mortgage originator to be compensated by others if compensation is received from a consumer. The Dodd-Frank Act requires mortgage lenders to make additional disclosures prior to the extension of credit, in each billing statement and for negative amortization loans and hybrid adjustable rate mortgages.

Privacy and Customer Information Security. The GLBA requires financial institutions to implement policies and procedures regarding the disclosure of nonpublic personal information about consumers to nonaffiliated third parties. In general, the Bank must provide its customers with an annual disclosure that explains its policies and procedures regarding the disclosure of such nonpublic personal information, and, except as otherwise required or permitted by law, the Bank is prohibited from disclosing such information except as provided in such policies and procedures. The GLBA also requires that the Bank develop, implement and maintain a comprehensive written information security program designed to ensure the security and confidentiality of customer information (as defined under GLBA), to protect against anticipated threats or hazards to the security or integrity of such information; and to protect against unauthorized access to or use of such information that could result in substantial harm or inconvenience to any customer. The Bank is also required to send a notice to customers whose “sensitive information” has been compromised if unauthorized use of this information is “reasonably possible.” A majority of states have enacted legislation concerning breaches of data security and Congress is considering federal legislation that would require consumer notice of data security breaches. Pursuant to the FACT Act, the Bank must also develop and implement a written identity theft prevention program to detect, prevent, and mitigate identity theft in connection with the opening of certain accounts or certain existing accounts. Additionally, the FACT Act amends the Fair Credit Reporting Act to generally prohibit a person from using information received from an affiliate to make a solicitation for marketing purposes to a consumer, unless the consumer is given notice and a reasonable opportunity and a reasonable and simple method to opt out of the making of such solicitations.

Anti-Money Laundering

The Bank Secrecy Act. Under the Bank Secrecy Act (“BSA”), a financial institution, is required to have systems in place to detect certain transactions, based on the size and nature of the transaction. Financial institutions are generally required to report to the United States Treasury any cash transactions involving more than $10,000. In addition, financial institutions are required to file suspicious activity reports for transactions that involve more than $5,000 and which the financial institution knows, suspects or has reason to suspect involves illegal funds, is designed to evade the requirements of the BSA or has no lawful purpose. The Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (the “USA PATRIOT Act”), which amended the BSA, is designed to deny terrorists and others the ability to obtain anonymous access to the U.S. financial system. The USA PATRIOT Act has significant implications for financial institutions and businesses of other types involved in the transfer of money. The USA PATRIOT Act, together with the implementing regulations of various federal regulatory agencies, has caused financial institutions, such as the Bank, to adopt and implement additional policies or amend existing policies and procedures with respect to, among other things, anti-money laundering compliance, suspicious activity, currency transaction reporting, customer identity verification and customer risk analysis. In

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evaluating an application under Section 3 of the BHCA to acquire a bank or an application under the Bank Merger Act to merge banks or affect a purchase of assets and assumption of deposits and other liabilities, the applicable federal banking regulator must consider the anti-money laundering compliance record of both the applicant and the target. In addition, under the USA PATRIOT Act financial institutions are required to take steps to monitor their correspondent banking and private banking relationships as well as, if applicable, their relationships with “shell banks.”

Office of Foreign Assets Control (“OFAC”). The United States has imposed economic sanctions that affect transactions with designated foreign countries, nationals and others. These sanctions, which are administered by OFAC, take many different forms. Generally, however, they contain one or more of the following elements: (i) restrictions on trade with or investment in a sanctioned country, including prohibitions against direct or indirect imports from and exports to a sanctioned country and prohibitions on “U.S. persons” engaging in financial transactions relating to making investments in, or providing investment-related advice or assistance to, a sanctioned country; and (ii) a blocking of assets in which the government or specially designated nationals of the sanctioned country have an interest, by prohibiting transfers of property subject to U.S. jurisdiction (including property in the possession or control of U.S. persons). Blocked assets (for example, property and bank deposits) cannot be paid out, withdrawn, set off or transferred in any manner without a license from OFAC. Failure to comply with these sanctions could have serious legal and reputational consequences for the Company.

Regulation of Other Activities

Volcker Rule Restrictions on Proprietary Trading and Sponsorship of Hedge Funds and Private Equity Funds. The Dodd-Frank Act bars banking organizations, such as the Company and the Bank, from engaging in proprietary trading and from sponsoring and investing in hedge funds and private equity funds, except as permitted under certain circumstances, in a provision commonly referred to as the “Volcker Rule.” Under the Dodd-Frank Act, proprietary trading generally means trading by a banking entity or its affiliate for its own account. Hedge funds and private equity funds are described by the Dodd-Frank Act as funds that would be registered under the 1940 Act but for certain enumerated exemptions. The Volcker Rule restrictions apply to the Company, the Bank and all of their subsidiaries and affiliates.

Legal Contingencies

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

Reserves are established for legal claims only when losses associated with the claims are judged to be probable, and the loss can be reasonably estimated. In many lawsuits and arbitrations, it is not possible to determine whether a liability has been incurred or to estimate the ultimate or minimum amount of that liability until the case is close to resolution, in which case a reserve will not be recognized until that time.



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Item 1A. Risk Factors

If our allowance for loan losses is not adequate to cover actual loan losses, our earnings could decrease.

We make various assumptions and judgments about the collectability of our loan portfolio and provide an allowance for probable loan losses based on a number of factors. On a monthly basis, management reviews the allowance for loan losses to assess recent asset quality trends and impact on the Company's financial condition. On a quarterly basis, the allowance for loan losses is brought before the Bank's board of directors for discussion, review, and approval. If the assumptions are incorrect, the allowance for loan losses may not be sufficient to cover the losses we could experience, which would have an adverse effect on operating results, and may also cause us to increase the allowance for loan losses in the future. In addition, bank regulators periodically review our allowance for loan losses and may require us to increase our provisions for credit losses or recognize further loan charge-offs. Any increase in our allowance for loan losses or loan charge-offs as required by regulatory authorities could have a material adverse effect on our consolidated results of operations and financial condition. If additional amounts are provided to the allowance for loan losses, our earnings could decrease.

Our loans are concentrated in certain areas of Maine and adverse conditions in those markets could adversely affect our operations.

We are exposed to real estate and economic factors throughout Maine, as virtually the entire loan portfolio is concentrated among borrowers in Maine, with higher concentrations of exposure in Cumberland, Hancock, Knox and Waldo counties. Further, because a substantial portion of the loan portfolio is secured by real estate in this area, the value of the associated collateral is also subject to regional real estate market conditions. Adverse economic, political or business developments or natural hazards may affect these areas and the ability of property owners in these areas to make payments of principal and interest on the underlying mortgages. If these regions experience adverse economic, political or business conditions, we would likely experience higher rates of loss and delinquency on these loans than if the loans were more geographically diverse.

We experience strong competition within our markets, which may impact our profitability.

Competition in the banking and financial services industry is strong. In our market areas, we compete for loans, deposits and other financial products and services with local independent banks, thrift institutions, savings institutions, mortgage brokerage firms, credit unions, finance companies, mutual funds, insurance companies and brokerage and investment banking firms operating locally as well as nationally. Many of these competitors have substantially greater resources and lending limits than those of our subsidiaries and may offer services that our subsidiaries do not or cannot provide. There is also increased competition by out-of-market competitors through the internet. Our long-term success depends on the ability of our subsidiaries to compete successfully with other financial institutions in their service areas. Because we maintain a smaller staff and have fewer financial and other resources than larger institutions with which we compete, we may be limited in our ability to attract customers. If we are unable to attract and retain customers, we may be unable to achieve growth in the loan and core deposit portfolios, and our results of operations and financial condition may be negatively impacted.

Interest rate volatility may reduce our profitability.

Our profitability depends to a large extent upon our net interest income, which is the difference between interest income on interest-earning assets, such as loans and investments, and interest expense related to interest-bearing liabilities, such as deposits and borrowed funds. Net interest income can be affected significantly by changes in market interest rates. In particular, changes in relative interest rates may reduce our net interest income as the difference between interest income and interest expense decreases. As a result, we have adopted asset and liability management policies to minimize the potential adverse effects of changes in interest rates on net interest income, primarily by altering the mix and maturity of loans, investments and funding sources. However, there can be no assurance that a change in interest rates will not negatively impact our results of operations or financial condition. Because market interest rates may change by differing magnitudes and at different times, significant changes in interest rates over an extended period of time could reduce overall net interest income. An increase in interest rates could also have a negative impact on our results of operations by reducing the ability of borrowers to repay their current loan obligations, which could not only result in increased loan defaults, foreclosures and write-offs, but also necessitate further increases to our allowance for loan losses.


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Our cost of funds for banking operations may increase as a result of general economic conditions, interest rates and competitive pressures.

The Bank has traditionally obtained funds principally through deposits and borrowings. As a general matter, deposits are a less costly source of funds than borrowings because interest rates paid for deposits are typically less than interest rates charged for borrowings. If, as a result of general economic conditions, market interest rates, competitive pressures or otherwise, total deposits at the Bank decrease relative to our overall banking operations, we may have to rely more heavily on borrowings as a source of funds in the future.

We are subject to liquidity risk.

Liquidity risk is the risk of potential loss if we are unable to meet our funding requirements at a reasonable cost. Our liquidity could be impaired by an inability to access the capital markets or by unforeseen outflows of cash. This situation may arise due to circumstances that we may be unable to control, such as a general market disruption or an operational problem that affects third parties or us.

Prepayments of loans may negatively impact our business.

Generally, our customers may prepay the principal amount of their outstanding loans at any time. The speeds at which such prepayments occur, as well as the size of such prepayments, are within our customers’ discretion. If customers prepay the principal amount of their loans, and we are unable to lend those funds to other borrowers or invest the funds at the same or higher interest rates, our interest income will be reduced. A significant reduction in interest income could have a negative impact on our results of operations and financial condition.

Our banking business is highly regulated, and we may be adversely affected by changes in law and regulation.

We are subject to regulation and supervision by the FRB, and the Bank is subject to regulation and supervision by the OCC and the FDIC. Federal laws and regulations govern numerous matters affecting us, including changes in the ownership or control of banks and bank holding companies, maintenance of adequate capital and the financial condition of a financial institution, permissible types, amounts and terms of extensions of credit and investments, permissible nonbanking activities, the level of reserves against deposits and restrictions on dividend payments. The OCC possesses the power to issue cease and desist orders to prevent or remedy unsafe or unsound practices or violations of law by banks subject to their regulation, and the FRB possesses similar powers with respect to bank holding companies. These and other restrictions limit the manner in which we may conduct business and obtain financing.

Our banking business is also affected by the monetary policies of the FRB. Changes in monetary or legislative policies may affect the interest rates the Bank must offer to attract deposits and the interest rates it must charge on loans, as well as the manner in which it offers deposits and makes loans. These monetary policies have had, and are expected to continue to have, significant effects on the operating results of depository institutions generally, including the Bank.

Our business is highly regulated and the laws, rules, regulations, and supervisory guidance and policies applicable to us are subject to regular modification and change. It is impossible to predict the competitive impact that any such changes would have on the banking and financial services industry in general or on our business in particular. Such changes may, among other things, increase the cost of doing business, limit permissible activities, or affect the competitive balance between banks and other financial institutions. The Dodd-Frank Act instituted major changes to the banking and financial institutions regulatory regimes in light of the performance of and government intervention in the financial services sector. Other changes to statutes, regulations, or regulatory policies, including changes in interpretation or implementation of statutes, regulations, or policies, could affect us in substantial and unpredictable ways. Such changes could subject us to additional costs, limit the types of financial services and products we may offer, and/or increase the ability of non-banks to offer competing financial services and products, among other things. Failure to comply with laws, regulations, or policies could result in sanctions by regulatory agencies, civil money penalties, and/or reputation damage, which could have a material adverse effect on our business, financial condition, and results of operations. See Item 1. “Business — Supervision and Regulation.”


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Additional requirements imposed by the Dodd-Frank Act could adversely affect us.

The Dodd-Frank Act comprehensively reformed the regulation of financial institutions, products and services. Because many aspects of the Dodd-Frank Act are subject to rulemaking that will take effect over several years, it is difficult to forecast the full impact that such rulemaking will have on us, our customers or the financial industry. Among other things, the Dodd-Frank Act established the CFPB as an independent bureau of the FRB. The CFPB has the authority to prescribe rules for all depository institutions governing the provision of consumer financial products and services, which may result in rules and regulations that reduce the profitability of such products and services or impose greater costs and restrictions on us and our subsidiaries. The Dodd-Frank Act also established new minimum mortgage underwriting standards for residential mortgages and the regulatory agencies have focused on the examination and supervision of mortgage lending and servicing activities.

Effective December 10, 2013, pursuant to the Dodd-Frank Act, federal banking and securities regulators issued final rules to implement Section 619 of the Dodd-Frank Act, also known as the “Volcker Rule.” Generally, the Volcker Rule restricts banking organizations and their affiliated companies from engaging in proprietary trading and from sponsoring and investing in hedge funds and private equity funds, except as permitted under certain limited circumstances. After the transition period, the Volcker Rule restrictions will apply to the Company, the Bank and all of our subsidiaries and affiliates, unless an exception applies. We are analyzing the impact of the Volcker Rule on our investment portfolio, and may make changes to our investment strategies that could negatively affect our earnings.

Current and future legal and regulatory requirements, restrictions, and regulations, including those imposed under the Dodd-Frank Act, may adversely impact our profitability and may have a material and adverse effect on our business, financial condition, and results of operations; may require us to invest significant management attention and resources to evaluate and make any changes required by the legislation and related regulations; and may make it more difficult for us to attract and retain qualified executive officers and employees.

We will become subject to more stringent capital requirements.

The Dodd-Frank Act required the federal banking agencies to establish minimum leverage and risk-based capital requirements for insured banks and their holding companies. The federal banking agencies issued a joint final rule (the “Final Capital Rule”) that implements the Basel III capital standards and establishes the minimum capital levels required under the Dodd-Frank Act. We must comply with the Final Capital Rule by January 1, 2015. The Final Capital Rule establishes a minimum common equity Tier I capital ratio of 6.5% of risk-weighted assets for a “well capitalized” institution and increases the minimum Tier I capital ratio for a “well capitalized” institution from 6.0% to 8.0%. Additionally, the Final Capital Rule requires an institution to maintain a 2.5% common equity Tier I capital conservation buffer over the 6.5% minimum risk-based capital requirement for "adequately capitalized" institutions, or face restrictions on the ability to pay dividends, discretionary bonuses, and engage in share repurchases. The Final Capital Rule permanently grandfathers trust preferred securities issued before May 19, 2010, subject to a limit of 25% of Tier I capital. The Final Capital Rule increases the required capital for certain categories of assets, including high-volatility construction real estate loans and certain exposures related to securitizations; however, the Final Capital Rule retains the current capital treatment of residential mortgages. Under the Final Capital Rule, we may make a one-time, permanent election to continue to exclude accumulated other comprehensive income from capital. If we do not make this election, unrealized gains and losses will be included in the calculation of our regulatory capital. Implementation of these standards, or any other new regulations, may adversely affect our ability to pay dividends, or require us to reduce business levels or raise capital, including in ways that may adversely affect our results of operations or financial condition.

We face significant legal risks, both from regulatory investigations and proceedings and from private actions brought against us.

From time to time, we are named as a defendant or are otherwise involved in various legal proceedings, including class actions and other litigation or disputes with third parties. There is no assurance that litigation with private parties will not increase in the future. Future actions against us may result in judgments, settlements, fines, penalties or other results adverse to us, which could materially adversely affect our business, financial condition or results of operations, or cause serious reputational harm to us. As a participant in the financial services industry, we are exposed to a high level of potential litigation related to our businesses and operations. Although we maintain insurance, the scope of this coverage may not provide us with full, or even partial, coverage in any particular case. As a result, a judgment against us in any such litigation could have a material adverse effect on our financial condition and results of operation.

Our businesses and operations are also subject to increasing regulatory oversight and scrutiny, which may lead to additional regulatory investigations or enforcement actions. These and other initiatives from federal and state officials may

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subject us to further judgments, settlements, fines or penalties, or cause us to be required to restructure our operations and activities, all of which could lead to reputational issues, or higher operational costs, thereby reducing our revenue.

We may incur fines, penalties and other negative consequences from regulatory violations, possibly even inadvertent or unintentional violations.

We maintain systems and procedures designed to ensure that we comply with applicable laws and regulations. However, some legal/regulatory frameworks provide for the imposition of fines or penalties for noncompliance even though the noncompliance was inadvertent or unintentional and even though there was in place at the time systems and procedures designed to ensure compliance. For example, we are subject to regulations issued by the Office of Foreign Assets Control, or “OFAC,” that prohibit financial institutions from participating in the transfer of property belonging to the governments of certain foreign countries and designated nationals of those countries. OFAC may impose penalties for inadvertent or unintentional violations even if reasonable processes are in place to prevent the violations. There may be other negative consequences resulting from a finding of noncompliance, including restrictions on certain activities. Such a finding may also damage our reputation as described below and could restrict the ability of institutional investment managers to invest in our securities.

Our loan portfolio includes commercial real estate and commercial loans, which are generally riskier than other types of loans.

At December 31, 2013, our commercial real estate and commercial loan portfolios comprised 46% of total loans. Commercial loans generally carry larger loan balances and involve a higher risk of nonpayment or late payment than residential mortgage loans. These loans may lack standardized terms and may include a balloon payment feature. The ability of a borrower to make or refinance a balloon payment may be affected by a number of factors, including the financial condition of the borrower, prevailing economic conditions and prevailing interest rates. Repayment of these loans is generally more dependent on the economy and the successful operation of a business. Because of the risks associated with commercial loans, we may experience higher rates of default than if the portfolio were more heavily weighted toward residential mortgage loans. Higher rates of default could have an adverse effect on our financial condition and results of operations.

The two most significant industry exposures within our commercial real estate loan portfolio are non-residential building operators (operators of commercial and industrial buildings, retail establishments, theaters, banks and insurance buildings) and lodging (inns, bed & breakfasts, ski lodges, tourist cabins, hotels, and motels). At December 31, 2013, exposure to these two industries, as a percentage of total commercial real estate loans was 28% and 25%, respectively.

We may incur significant losses as a result of ineffective risk management processes and strategies.

We seek to monitor and control our risk exposure through a risk and control framework encompassing a variety of separate but complementary financial, credit, operational, compliance and legal reporting systems, internal controls, management review processes and other mechanisms. While we employ a broad and diversified set of risk monitoring and risk mitigation techniques, those techniques and the judgments that accompany their application may not be effective and may not anticipate every economic and financial outcome in all market environments or the specifics and timing of such outcomes. Market conditions over the last several years have involved unprecedented dislocations and highlight the limitations inherent in using historical data to manage risk.

We may be unable to attract and retain key personnel.

Our success depends, in large part, on our ability to attract and retain key personnel. Competition for qualified personnel in the financial services industry can be intense and we may not be able to hire or retain the key personnel that we depend upon for success. The unexpected loss of services of one or more of our key personnel could have a material adverse impact on our business because of their skills, knowledge of the markets in which we operate, years of industry experience and the difficulty of promptly finding qualified replacement personnel.


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We have credit and counterparty risk inherent in our securities portfolio and the soundness of other financial institutions that could adversely affect us.

Our ability to engage in routine funding transactions could be adversely affected by the actions and commercial soundness of other financial institutions.  Financial services institutions are interrelated as a result of trading, clearing, counterparty and other relationships. We maintain a diversified securities portfolio and have exposure to many different counterparties, and we routinely execute transactions with counterparties in the financial industry, including brokers and dealers, other commercial banks, investment banks, mutual and hedge funds, and other financial institutions. As a result, defaults by, or even rumors or questions about, one or more financial services institutions, or the financial services industry generally, could lead to market-wide liquidity problems and losses or defaults by us or by other institutions and organizations. Many of these transactions expose us to credit risk in the event of default of our counterparty or client. In addition, the current economic environment and volatility of financial markets increase the difficulty of assessing investment securities impairment and the same influences tend to increase the risk of potential impairment of these assets. Furthermore, our credit risk may be exacerbated when the collateral held by us cannot be liquidated or is liquidated at prices not sufficient to recover the full amount of the financial instrument exposure due to us. There is no assurance that any such losses would not materially and adversely affect our results of operations.

The current economic environment and volatility of financial markets increase the difficulty of assessing investment securities impairment and the same influences tend to increase the risk of potential impairment of these assets. For the years ended December 31, 2012 and 2011, we recorded charges for other-than-temporary impairment of securities of $39,000 and $109,000, respectively. We did not record any charges for other-than-temporary impairment of securities in 2013. We believe that we have adequately reviewed our investment securities for impairment and that our investment securities are carried at fair value. However, over time, the economic and market environment may provide additional insight regarding the fair value of certain securities, which could change our judgment regarding impairment. In addition, if the counter-party should default, become insolvent, declare bankruptcy, or otherwise cease to exist, the value of our investment may be impaired. This could result in realized losses relating to other-than-temporary declines being charged against future income. Given the volatility in market conditions and the significant judgments involved, there is continuing risk that further declines in fair value may occur and additional material other-than-temporary impairments may be charged to income in future periods, resulting in realized losses.

We could be held responsible for environmental liabilities of properties we acquired through foreclosure.

In the course of business, we may acquire, through foreclosure, properties securing loans originated or purchased that are in default. Particularly in commercial real estate lending, there is a risk that material environmental violations could be discovered on these properties. In this event, we might be required to remedy these violations at the affected properties at our sole cost and expense. The cost of remedial action could substantially exceed the value of affected properties. We may not have adequate remedies against the prior owner or other responsible parties and could find it difficult or impossible to sell the affected properties. These events could have an adverse effect on our financial condition and results of operations.

We are subject to reputational risk.

We are dependent on our reputation within our market area, as a trusted and responsible financial company, for all aspects of our relationships with customers, employees, vendors, third-party service providers, and others, with whom we conduct business or potential future business. Our actual or perceived failure to (a) identify and address potential conflicts of interest, ethical issues, money-laundering, or privacy issues; (b) meet legal and regulatory requirements applicable to the Bank and to the Company; (c) maintain the privacy of customer and accompanying personal information; (d) maintain adequate record keeping; (e) engage in proper sales and trading practices; and (f) identify the legal, reputational, credit, liquidity and market risks inherent in our products could give rise to reputational risk that could cause harm to the Bank and our business prospects. If we fail to address any of these issues in an appropriate manner, we could be subject to additional legal risks, which, in turn, could increase the size and number of litigation claims and damages asserted or subject us to enforcement actions, fines and penalties and cause us to incur related costs and expenses. Our ability to attract and retain customers and employees could be adversely affected to the extent our reputation is damaged.


15


To the extent that we acquire other companies, our business may be negatively impacted by certain risks inherent with such acquisitions.

We have acquired and will continue to consider the acquisition of other financial services companies. To the extent that we acquire other companies in the future, our business may be negatively impacted by certain risks inherent with such acquisitions. Some of these risks include the following:
the risk that the acquired business will not perform in accordance with management’s expectations;
the risk that difficulties will arise in connection with the integration of the operations of the acquired business with the operations of our business;
the risk that management will divert its attention from other aspects of our business;
the risk that we will lose key employees of the combined business; and
the risks associated with entering into geographic and product markets in which we have limited or no direct prior experience.

We may be required to write down goodwill and other identifiable intangible assets.

When we acquire a business, a portion of the purchase price of the acquisition may be allocated to goodwill and other identifiable intangible assets. The excess of the purchase price over the fair value of the net identifiable tangible and intangible assets acquired determines the amount of the purchase price that is allocated to goodwill acquired. At December 31, 2013, our goodwill and other identifiable intangible assets were approximately $49.3 million. Under current accounting standards, if we determine goodwill or intangible assets are impaired, we would be required to write down the value of these assets. We conduct an annual review, or more frequently if events or circumstances warrant such, to determine whether goodwill and other identifiable intangible assets are impaired. We recently completed such an impairment analysis and recorded a goodwill write-down of $2.8 million related to our financial services reporting unit. We concluded that no such write-down was necessary for our banking reporting unit. We cannot provide assurance that we will not be required to take an additional impairment charge in the future. Any impairment charge would have a negative effect on our shareholders’ equity and financial results and may cause a decline in our stock price.

Systems failures, interruptions or breaches of security could have an adverse effect on our financial condition and results of operations.

We are subject to certain operational risks, including, but not limited to, data processing system failures and errors, inadequate or failed internal processes, customer or employee fraud and catastrophic failures resulting from terrorist acts or natural disasters.  We depend upon data processing, software, communication, and information exchange on a variety of computing platforms and networks and over the Internet, and we rely on the services of a variety of vendors to meet our data processing and communication needs.  Despite instituted safeguards, we cannot be certain that all of our systems are entirely free from vulnerability to attack or other technological difficulties or failures. Information security risks have increased significantly due to the use of online, telephone and mobile banking channels by clients and the increased sophistication and activities of organized crime, hackers, terrorists and other external parties. Our technologies, systems, networks and our clients’ devices may be the target of, cyber-attacks, computer viruses, malicious code, phishing attacks or information security breaches that could result in the unauthorized release, gathering, monitoring, misuse, loss or destruction of our or our clients’ confidential, proprietary and other information, the theft of client assets through fraudulent transactions or disruption of our or our clients’ or other third parties’ business operations. If information security is breached or other technology difficulties or failures occur, information may be lost or misappropriated, services and operations may be interrupted and we could be exposed to claims from customers. While we maintain a system of internal controls and procedures, any of these results could have a material adverse effect on our business, financial condition, results of operations or liquidity.


16


We must adapt to information technology changes in the financial services industry, which could present operational issues, require significant capital spending, or impact our reputation.

The financial services industry is constantly undergoing technological changes, with frequent introductions of new technology-driven products and services. The effective use of technology increases efficiency and enables financial institutions to better serve customers and reduce costs. Our future success will depend, in part, upon our ability to address the needs of our customers by using technology to provide products and services that will satisfy customer demands for convenience, as well as to create additional efficiencies in our operations. We may not be able to effectively implement new technology-driven products and services or be successful in marketing these products and services to our customers.

We rely on other companies to provide key components of our business infrastructure.

Third party vendors provide key components of our business infrastructure such as internet connections, network access and core application processing. While we have selected these third party vendors carefully, we do not control their actions. Any problems caused by these third parties, including as a result of their not providing us their services for any reason or their performing their services poorly, could adversely affect our ability to deliver products and services to our customers or otherwise conduct our business efficiently and effectively. Replacing these third party vendors could also entail significant delay and expense.

The market value of wealth management assets under administration may be negatively affected by changes in economic and market conditions.

A substantial portion of income from fiduciary services is dependent on the market value of wealth management assets under administration, which are primarily marketable securities. Changes in domestic and foreign economic conditions, volatility in financial markets, and general trends in business and finance, all of which are beyond our control, could adversely impact the market value of these assets and the fee revenues derived from the management of these assets.

We may not be able to attract and retain wealth management clients at current levels.

Due to strong competition, our wealth management division may not be able to attract and retain clients at current levels. Competition is strong as there are numerous well-established and successful investment management and wealth advisory firms including commercial banks and trust companies, investment advisory firms, mutual fund companies, stock brokerage firms, and other financial companies. Our ability to attract and retain wealth management clients is dependent upon our ability to compete with competitors’ investment products, level of investment performance, client services, marketing and distribution capabilities. If we are not successful, our results of operations and financial condition may be negatively impacted.

If we do not maintain net income growth, the market price of our common stock could be adversely affected.

Our return on shareholders’ equity and other measures of profitability, which affect the market price of our common stock, depend in part on our continued growth and expansion. Our growth strategy has two principal components: internal growth and external growth. Our ability to generate internal growth is affected by the competitive factors described below as well as by the primarily rural characteristics and related demographic features of the markets we serve. Our ability to continue to identify and invest in suitable acquisition candidates on acceptable terms is an important component of our external growth strategy. In pursuing acquisition opportunities, we may be in competition with other companies having similar growth strategies. As a result, we may not be able to identify or acquire promising acquisition candidates on acceptable terms. Competition for these acquisitions could result in increased acquisition prices and a diminished pool of acquisition opportunities. An inability to find suitable acquisition candidates at reasonable prices could slow our growth rate and have a negative effect on the market price of our common stock.

We are a holding company and dependent upon our subsidiaries for dividends, distributions and other payments.

We are a legal entity separate and distinct from our subsidiaries. Our revenue (on a parent-only basis) is derived primarily from interest and dividends paid to us by the Bank. Our right, and consequently the right of our shareholders, to participate in any distribution of the assets or earnings of the Bank through the payment of such dividends or otherwise is necessarily subject to the prior claims of creditors of the Bank (including depositors), except to the extent that certain claims of us in a creditor capacity may be recognized.


17


Holders of our common stock are entitled to receive dividends only when, and if declared by our board of directors. Although we have historically declared cash dividends on our common stock, we are not required to do so and our board of directors may reduce or eliminate our common stock dividend in the future. The FRB has authority to prohibit bank holding companies from paying dividends if such payment is deemed to be an unsafe or unsound practice. Additionally, the OCC has the authority to use its enforcement powers to prohibit a bank from paying dividends if, in its opinion, the payment of dividends would constitute an unsafe or unsound practice. Further, when the Final Capital Rule comes into effect, our ability to pay dividends would be restricted if we do not maintain a capital conservation buffer. A reduction or elimination of dividends could adversely affect the market price of our common stock. See Part I, Item 1, “Business — Supervision and Regulation — Dividend Restrictions” and “Business — Supervision and Regulation — Regulatory Capital Requirements.”

Changes in accounting standards can be difficult to predict and can materially impact how we record and report our financial condition and results of operations.

Our accounting policies and methods are fundamental to how we record and report our financial condition and results of operations. From time to time, the Financial Accounting Standards Board (“FASB”) changes the financial accounting and reporting standards that govern the preparation of our financial statements. These changes can be hard to anticipate and implement and can materially impact how we record and report our financial condition and results of operations. For example, the FASB’s current financial instruments project could, among other things, significantly change the way loan loss provisions are determined from an incurred loss model to an expected loss model.

Our financial statements are based in part on assumptions and estimates, which, if wrong, could cause unexpected losses in the future.

Pursuant to U.S. generally accepted accounting principles, we are required to use certain assumptions and estimates in preparing our financial statements, including in determining credit loss reserves, reserves related to litigation and the fair value of certain assets and liabilities, among other items. If assumptions or estimates underlying our financial statements are incorrect, we may experience material losses. For additional information, see Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Critical Accounting Policies.”

Our financial condition and results of operations have been adversely affected, and may continue to be adversely affected, by the U.S. and international financial market and economic conditions.

We have been and continue to be impacted by general business and economic conditions in the United States and, to a lesser extent, abroad. These conditions include short-term and long-term interest rates, inflation, money supply, political issues, legislative and regulatory changes, fluctuations in both debt and equity capital markets, broad trends in industry and finance, unemployment and the strength of the U.S. economy and the local economies in which the Company operates, all of which are beyond the Company’s control. Deterioration in any of these conditions could result in an increase in loan delinquencies, and non-performing assets, decreases in loan collateral values and a decrease in demand for the Company’s products and services. While there are indications that the U.S. economy is stabilizing, there remains significant uncertainty regarding the sustainability of the economic recovery.

Continued market volatility may impact our business and the value of our common stock.

Our business performance and the trading price of shares of our common stock may be affected by many factors affecting financial institutions, including volatility in the credit, mortgage and housing markets, the markets for securities relating to mortgages or housing, and the value of debt and mortgage-backed and other securities that we hold in our investment portfolio. Government action and legislation may also impact us and the value of our common stock. We cannot predict what impact, if any, volatility will have on our business or share price and for these and other reasons our shares of common stock may trade at a price lower than that at which they were purchased.


18


Item 1B. Unresolved Staff Comments

None.

Item 2. Properties

At December 31, 2013, the Company owns or leases a total of 45 facilities. All facilities are fully utilized and considered suitable and adequate for the purposes intended. The Company owns 26 of its facilities, none of which are subject to a mortgage, and the remaining branches and two parking lots are leased by the Company. Related rent expense appears in Note 6 of the consolidated financial statements. The Company has a 44 branch network located in 12 counties throughout Maine. The following table presents our materially important properties as of December 31, 2013.

Facility Name
 
Location
 
General
Character of the Physical Property
 
Primary Business Segment
 
Property
Status
 
Property
Square Feet
Main Office
 
Camden, Maine
 
3 story building
 
Principal executive office
 
Owned
 
15,500

 
Hanley Center
 
Rockport, Maine
 
2 story building
 
Service center
 
Owned
 
32,360

 
Bangor
 
Bangor, Maine
 
1 floor
 
Branch
 
Leased
 
17,432

(1) 
Acadia Trust
 
Portland, Maine
 
1 floor
 
Main office
 
Leased
 
4,212

(1) 
Rockland
 
Rockland, Maine
 
3 story building
 
Branch
 
Owned
 
21,600

 
Ellsworth
 
Ellsworth, Maine
 
3 story building
 
Branch
 
Owned
 
44,000

(2) 
Waterville
 
Waterville, Maine
 
3 story building
 
Branch
 
Owned
 
17,099

 
Auburn
 
Auburn, Maine
 
2 floors
 
Branch
 
Leased
 
8,824

(1) 
(1) Property square feet represents the square footage occupied by the Company.
(2) Includes space leased to third parties.

Item 3. Legal Proceedings

Various legal claims arise from time to time in the normal course of the Company’s business, which in our opinion, are not expected to have a material effect on our consolidated financial statements.

Item 4. Mine Safety Disclosures

Not applicable.

19


PART II

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

The Company’s common stock is currently traded on the NASDAQ Global Market (“NASDAQ”) under the ticker symbol “CAC.” The Company has paid quarterly dividends since its foundation in 1984. The high and low closing sales prices (as quoted by NASDAQ for 2013 and 2012) and cash dividends declared per share of the Company’s common stock, by calendar quarter for the past two years, were as follows:

 
2013
 
2012
  
Market Price
 
Dividends Declared per Share
 
Market Price
 
Dividends Declared per Share
  
High
 
Low
 
 
High
 
Low
 
First Quarter
$
36.81

 
$
33.08

 
$
0.27

 
$
37.25

 
$
31.90

 
$
0.25

Second Quarter
$
37.99

 
$
31.91

 
$
0.27

 
$
36.62

 
$
30.83

 
$
0.25

Third Quarter
$
41.13

 
$
35.50

 
$
0.27

 
$
39.73

 
$
33.87

 
$
0.25

Fourth Quarter
$
43.54

 
$
38.79

 
$
0.27

 
$
38.09

 
$
31.10

 
$
0.25


As of March 3, 2014, there were 7,509,789 shares of the Company’s common stock outstanding held of record by approximately 1,200 shareholders, as obtained through our transfer agent. Such number of record holders does not reflect the number of persons or entities holding stock in nominee name through banks, brokerage firms and other nominees, which is estimated to be 3,400 shareholders.

Although the Company has historically paid quarterly dividends on its common stock, the Company’s ability to pay such dividends depends on a number of factors, including restrictions under federal laws and regulations on the Company’s ability to pay dividends, and as a result, there can be no assurance that dividends will be paid in the future. For further information on dividend restrictions, refer to Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Capital Resources".

The following graph illustrates the annual percentage change in the cumulative total shareholder return of the Company’s common stock for the period December 31, 2008 through December 31, 2013. For purposes of comparison, the graph illustrates comparable shareholder returns of the SNL $1B – $5B Bank Index and the Russell 2000 Stock Index. The graph assumes a $100 investment on December 31, 2008 in each case and measures the amount by which the market value, assuming reinvestment of dividends, has changed as of December 31, 2013.


20


On September 24, 2013, the board of directors authorized a common stock repurchase program (the "2013 Repurchase Plan"). The 2013 Repurchase Plan allows for the repurchase of up to 250,000 shares of the Company’s outstanding common stock. This program is expected to continue until the authorized number of shares is repurchased, or the Company’s board of directors terminate the program. There is no specified expiration date of the 2013 Repurchase Plan. As of December 31, 2013, the Company repurchased 68,145 shares at an average price of $40.78, or 27% of the program’s total allotment and 1% of total outstanding shares. The Company did not repurchase any shares of Company common stock during the first, second, or third quarter of 2013.

On September 25, 2012, the board of directors authorized a common stock repurchase program (the "2012 Repurchase Plan"). The 2012 Repurchase Plan authorized management to repurchase up to 500,000 shares of the Company's outstanding common stock over a one-year term which expired on October 1, 2013. The Company did not repurchase any shares under the 2012 Repurchase Plan.

Issuer's Purchases of Equity Securities
Period
 
Total
number of
shares (or units)
purchased
 
Average
price paid
per share (or unit)
 
Total number of
shares (or units) purchased
as part of publicly
announced plans or programs
 
Maximum number (or appropriate dollar value) of shares (or units) that may yet be purchased under the plans or programs
10/1/2013 to 10/31/2013
 

 
$

 

 
250,000

11/1/2013 to 11/30/2013
 
22,000

 
39.16

 
22,000

 
228,000

12/1/2013 to 12/31/2013
 
46,145

 
41.55

 
46,145

 
181,855

Total
 
68,145

 
$
40.78

 
68,145

 
181,855


Other information required by this item is incorporated by reference to Item 12. “Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.”

21


Item 6. Selected Financial Data

The selected consolidated financial and other data of the Company set forth below does not purport to be complete and should be read in conjunction with, and is qualified in its entirety by, the more detailed information, including the consolidated financial statements and related notes, appearing elsewhere herein.

 
 
At or for the Year Ended December 31,
(In Thousands, Except per Share Data)
 
2013(1)
 
2012(2)
 
2011
 
2010
 
2009
Financial Condition Data
 
  

 
  

 
  

 
  

 
  

Investments
 
$
828,201

 
$
802,084

 
$
611,998

 
$
611,643

 
$
539,587

Loans and loans held for sale
 
1,580,402

 
1,563,866

 
1,520,089

 
1,530,280

 
1,526,758

Allowance for loan losses
 
21,590

 
23,044

 
23,011

 
22,293

 
20,246

Total assets
 
2,603,829

 
2,564,757

 
2,302,720

 
2,306,007

 
2,235,383

Deposits
 
1,813,824

 
1,929,469

 
1,591,366

 
1,515,811

 
1,495,807

Borrowings
 
530,092

 
360,163

 
456,233

 
559,919

 
527,347

Shareholders’ equity
 
231,096

 
233,815

 
218,876

 
205,995

 
190,561

Operating Data
 
 
 
  

 
  

 
  

 
  

Interest income
 
$
88,217

 
$
90,947

 
$
98,372

 
$
104,507

 
$
113,331

Interest expense
 
12,742

 
17,202

 
23,153

 
30,217

 
40,320

Net interest income
 
75,475

 
73,745

 
75,219

 
74,290

 
73,011

Provision for credit losses
 
2,028

 
3,816

 
4,735

 
6,299

 
8,213

Net interest income after provision for credit losses
 
73,447

 
69,929

 
70,484

 
67,991

 
64,798

Non-interest income
 
27,801

 
23,412

 
23,053

 
20,825

 
19,423

Non-interest expense
 
66,333

 
59,031

 
55,579

 
52,937

 
51,005

Income before income taxes
 
34,915

 
34,310

 
37,958

 
35,879

 
33,216

Income taxes
 
12,132

 
10,882

 
11,781

 
11,113

 
10,443

Net income
 
$
22,783

 
$
23,428

 
$
26,177

 
$
24,766

 
$
22,773

Ratios
 
  

 
  

 
  

 
  

 
  

Return on average assets
 
0.88
%
 
0.98
%
 
1.13
%
 
1.09
%
 
1.00
%
Return on average shareholders' equity
 
9.74
%
 
10.31
%
 
12.16
%
 
12.42
%
 
12.81
%
Return on average tangible shareholders' equity (Non-GAAP)(3)
 
14.55
%
 
13.19
%
 
15.67
%
 
16.40
%
 
17.67
%
Net interest margin
 
3.20
%
 
3.36
%
 
3.57
%
 
3.60
%
 
3.53
%
Efficiency ratio (Non-GAAP)(3)
 
62.78
%
 
57.45
%
 
54.63
%
 
55.74
%
 
54.26
%
Tier I leverage capital ratio
 
9.43
%
 
8.94
%
 
9.59
%
 
8.77
%
 
8.17
%
Tier I risk-based capital ratio
 
15.20
%
 
14.31
%
 
14.69
%
 
13.80
%
 
12.24
%
Total risk-based capital ratio
 
16.45
%
 
15.56
%
 
15.95
%
 
15.05
%
 
13.49
%
Allowance for credit losses to total loans
 
1.37
%
 
1.48
%
 
1.52
%
 
1.46
%
 
1.33
%
Net charge-offs to average loans
 
0.22
%
 
0.24
%
 
0.26
%
 
0.28
%
 
0.37
%
Non-performing loans to total loans
 
1.80
%
 
1.78
%
 
1.82
%
 
1.47
%
 
1.29
%
Non-performing assets to total assets
 
1.18
%
 
1.13
%
 
1.27
%
 
1.08
%
 
1.13
%
Per common share data
 
 
 
  

 
  

 
  

 
  

Basic earnings per share
 
$
2.98

 
$
3.06

 
$
3.41

 
$
3.23

 
$
2.98

Diluted earnings per share
 
2.97

 
3.05

 
3.40

 
3.23

 
2.97

Dividends declared per share
 
1.08

 
1.00

 
1.50

 
1.00

 
1.00

Book value per share
 
30.49

 
30.67

 
28.56

 
26.90

 
24.93

Tangible book value per share (Non-GAAP)(3)
 
23.98

 
23.68

 
22.66

 
20.91

 
18.86

Dividend payout ratio
 
36.30
%
 
32.73
%
 
44.05
%
 
30.95
%
 
33.56
%
(1) The 2013 data reflects the divestiture of five Franklin County branches. Please see Note 2 of the consolidated financial statements within Item 8. "Financial Statement and Supplemental Data" for discussion.
(2) The 2012 data includes the acquisition of 14 branches from Bank of America, National Association. Please see Note 2 of the consolidated financial statements within Item 8. "Financial Statement and Supplemental Data" for discussion.
(3) Please see Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations — Non-GAAP Financial Measures and Reconciliation to GAAP" for discussion and reconciliations of non-GAAP measures.

22


Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The discussion below focuses on the factors affecting our consolidated results of operations for the years ended December 31, 2013, 2012 and 2011 and financial condition at December 31, 2013 and 2012 and, where appropriate, factors that may affect our future financial performance, unless stated otherwise. The information within the tables is presented in thousands, except for number of shares and per share data. This discussion should be read in conjunction with the consolidated financial statements, notes to the consolidated financial statements and selected consolidated financial data.

The acronyms and abbreviations identified below are used in the "Management's Discussion and Analysis of Financial Condition and Results of Operations" as well as in Item 8. "Financial Statements and Supplementary Data". The following is provided to aid the reader and provide a reference page when reviewing the consolidated financial statements.

Acadia Trust:
Acadia Trust, N.A., a wholly-owned subsidiary of Camden National Corporation
 
Freddie Mac:
Federal Home Loan Mortgage Corporation
Act:
Medicare Prescription Drug, Improvement and Modernization Act
 
GAAP:
Generally accepted accounting principles in the United States
AFS:
Available-for-sale
 
IRS:
Internal Revenue Service
ALCO:
Asset/Liability Committee
 
LIBOR:
London Interbank Offered Rate
ALL:
Allowance for loan losses
 
LTIP:
Long-Term Performance Share Plan
AOCI:
Accumulated other comprehensive income (loss)
 
MaineHousing:
Maine State Housing Authority
ASC:
Accounting Standards Codification
 
Management ALCO:
Management Asset/Liability Committee
ASU:
Accounting Standards Update
 
MSPP:
Management Stock Purchase Plan
Bank:
Camden National Bank, a wholly-owned subsidiary of Camden National Corporation
 
MSRs:
Mortgage servicing rights
BOLI:
Bank-owned life insurance
 
Non-Agency or Non-Agencies:
Non-agency private issue collateralized mortgage obligation(s)
Board ALCO:
Board of directors' Asset/Liability Committee
 
OCC:
Office of the Comptroller of the Currency
Branch Acquisition:
The acquisition of 14 branches from Bank of America, N.A. in 2012, after divesting of one branch as required by the Department of Justice
 
OCI:
Other comprehensive income (loss)
Branch Divestiture:
The divestiture of five Franklin County branches in 2013
 
OFAC:
Office of Foreign Assets Control
BSA:
Bank Secrecy Act
 
OREO:
Other real estate owned
CCTA:
Camden Capital Trust A, an unconsolidated entity formed by Camden National Corporation
 
OTTI:
Other-than-temporary impairment
CSV:
Cash surrender value
 
SERP:
Supplemental executive retirement plans
Company:
Camden National Corporation
 
TDR:
Troubled-debt restructuring
DCRP:
Defined Contribution Retirement Plan
 
UBCT:
Union Bankshares Capital Trust I, an unconsolidated entity formed by Union Bankshares Company that was subsequently acquired by Camden National Corporation
EPS:
Earnings per share
 
U.S.:
United States of America
FASB:
Financial Accounting Standards Board
 
2003 Plan
2003 Stock Option and Incentive Plan
FDIC:
Federal Deposit Insurance Corporation
 
2012 Plan
2012 Equity and Incentive Plan
FHLB:
Federal Home Loan Bank
 
2013 Repurchase Plan:
2013 Common Stock Repurchase Program, approved by the Company's board of directors
FHLBB:
Federal Home Loan Bank of Boston
 
2012 Repurchase Plan:
2012 Common Stock Repurchase Program, approved by the Company's board of directors
FRB:
Federal Reserve Bank
 
 
 




23


Executive Overview

The Company reported net income for the year ended December 31, 2013 of $22.8 million and diluted earnings per share of $2.97 for 2013 compared to net income and diluted earnings per share of $23.4 million and $3.05, respectively, for 2012. Return on average assets and return on average shareholders' equity for 2013 were 0.88% and 9.74%, respectively, compared to a return on average assets and return on average shareholders' equity for 2012 of 0.98% and 10.31%, respectively.

The fourth quarter of 2013 was the mark of two major milestones for the Company: (i) October was the one-year anniversary of the acquisition of 15 branches from Bank of America, National Association; and (ii) in October the Company divested its five Franklin County branches. The Branch Acquisition provided the Company with an instant increase in market present and customer-base within some of Maine's major markets. The Branch Acquisition provided over 25,000 new customers and approximately $287.6 million in low-cost deposits. The Company saw the benefit of these additional customers and low-cost deposits in 2013 as non-interest income increased and average cost of funds decreased 26 basis points to 0.55% compared to 2012. In addition, non-interest expense increased in 2013 due to recognition of a full year of associated costs with operating and maintaining the new branches and increased customer activity. The Branch Divestiture included the sale of $46.0 million of loans, $85.9 million in total deposits and borrowings, and a pre-tax gain of $2.7 million. Company management recognizes that these transactions have an immediate impact on short-term earnings; however, their focus continues to be on driving long-term shareholder value through strategic repositioning.

Net income and diluted earnings per share for 2013 decreased $645,000 and $0.08 per share, respectively, compared to 2012. The decrease in net income was largely due to non-recurring transactions that are not representative of the Company's core operations. In the fourth quarter of 2013, a goodwill impairment charge of $2.8 million was recorded related to the Company's financial services reporting unit. This goodwill write-down decreased 2013 net income by $2.8 million as the write-down does not provide for any tax benefit. This loss was partially offset by a $1.5 million after-tax gain recognized from the Branch Divestiture, including related divestiture costs.

Total assets grew 2% during the year to $2.6 billion at December 31, 2013. The largest contributors to this growth were loans and investments, with organic loan growth of $62.6 million, or 4%, after adjusting for the Branch Divestiture, and an increase in the investment portfolio of $26.1 million, or 3%. Total deposits were $1.8 billion at December 31, 2013, reflecting the sale of $80.4 million of deposits as part of the Branch Divestiture. Core deposits (demand, interest checking, savings and money market) continue to represent the majority of total deposits.

The Company declared dividends payable of $1.08 per share during 2013, representing an increase of $0.08 per share, or 8%, compared to 2012.

Critical Accounting Policies

Critical accounting policies are defined as those that are reflective of significant judgments and uncertainties, and could potentially result in materially different results under different assumptions and conditions. In preparing the Company’s consolidated financial statements, management is required to make significant estimates and assumptions that affect assets, liabilities, revenues, and expenses reported. Actual results could materially differ from our current estimates, as a result of changing conditions and future events. Several estimates are particularly critical and are susceptible to significant near-term change, including the allowance for credit losses, accounting for acquisitions and the review of goodwill and other identifiable intangible assets for impairment, valuation of other real estate owned, other-than-temporary impairment of investments, effectiveness of hedging derivatives, accounting for postretirement plans, stock-based compensation, and income taxes. Our significant accounting policies and critical estimates are summarized in Note 1 to the consolidated financial statements included in Item 8. “Financial Statements and Supplementary Data”.

Allowance for Credit Losses.  Management is committed to maintaining an allowance for loan losses (“ALL”) that is appropriate to absorb likely loss exposure in the loan portfolio. Evaluating the appropriateness of the ALL is a key management function, one that requires the most significant amount of management estimates and assumptions. The ALL, which is established through a charge to the provision for credit losses, consists of two components: (i) a reduction to total gross loans in the asset section of the balance sheet, and (ii) the reserve for unfunded commitments included in other liabilities on the balance sheet. We regularly evaluate the ALL for adequacy by taking into consideration, among other factors, historical trends in charge-offs and delinquencies, overall risk characteristics and size of the portfolios, ongoing review of significant individual loans, trends in levels of watched or criticized assets, business and economic conditions, local industry trends, evaluation of results of examinations by regulatory authorities and other third parties, and other relevant factors.


24


In determining the appropriate level of ALL, we use a methodology to systematically measure the amount of estimated loan loss exposure inherent in the loan portfolio. The methodology focuses on four key elements: (i) identification of loss allocations for specific loans, (ii) loss allocation factors for certain loan types based on credit grade and loss experience, (iii) general loss allocations for other environmental factors, and (iv) the unallocated portion of the allowance.

In accordance with GAAP, a loan is impaired when it is probable we will be unable to collect all contractual payments as scheduled. We have concluded that loans that meet this definition are risk rated as substandard or doubtful. As such, quarterly we review individual loans with a carrying value greater than $250,000 and that are risk rated as substandard or doubtful or are on non-accrual status for impairment. If deemed impaired, an allowance is established for these loans to reduce the net carrying value of the loan to fair value. The fair value of an impaired loan is determined by one of three methods in accordance with GAAP: (i) the present value of expected future cash flows, (ii) the observable market price, or (iii), if the loan is collateral-dependent, the fair value of the collateral, less the estimated costs to sell the collateral.

We use a risk rating system to determine the credit quality of our loans and apply the related loss allocation factors. In assessing the risk rating of a particular loan, we consider, among other factors, the obligor’s debt capacity, financial condition, the level of the obligor’s earnings, the amount and sources of repayment, the performance with respect to loan terms, the adequacy of collateral, the level and nature of contingent liabilities, management strength, and the industry in which the obligor operates. These factors are based on an evaluation of historical information, as well as a subjective assessment and interpretation of current conditions. Emphasizing one factor over another, or considering additional factors that may be relevant in determining the risk rating of a particular loan but which are not currently an explicit part of our methodology, could impact the risk rating assigned to that loan.

Three times annually, management conducts a thorough review of adversely risk rated commercial and commercial real estate exposures exceeding certain thresholds to re-evaluate the risk rating and identify impaired loans. This extensive review takes into account the obligor’s repayment history and financial condition, collateral value, guarantor support, local economic and industry trends, and other factors relevant to the particular loan relationship.

We periodically reassess and revise the loss allocation factors used in the assignment of loss exposure to appropriately reflect our analysis of loss experience. Portfolios of more homogenous populations of loans including home equity and consumer loans are 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. An additional allocation is determined based on a judgmental process whereby management considers qualitative and quantitative assessments of other environmental factors. Finally, an unallocated portion of the total allowance is maintained to allow for measurement imprecision attributable to uncertainty in the economic environment.

Because the methodology is based upon historical experience and trends as well as management’s judgment, factors may arise that result in different estimations. Significant factors that could give rise to changes in these estimates may include, but are not limited to, changes in economic conditions in our market area, concentration of risk, declines in local property values, and the results of regulatory examinations. While management’s evaluation of the ALL as of December 31, 2013 determined the allowance to be appropriate, under adversely different conditions or assumptions, we may need to increase the allowance. Monthly, management reviews the ALL to assess recent asset quality trends and impact on the Company's financial condition. Quarterly, the ALL is brought before the Bank's board of directors for discussion, review, and approval. Refer to Item 7. "Management's Discussion and Analysis — Financial Condition — Asset Quality" for further discussion of our ALL process.

The adequacy of the reserve for unfunded commitments is determined in a similar manner as the ALL, with the exception that management must also estimate the likelihood of these commitments being funded and becoming loans. This is accomplished by evaluating the historical utilization of each type of unfunded commitment and estimating the likelihood that the historical utilization rates could change in the future.

Branch Purchase Price Allocation and Impairment of Goodwill and Identifiable Intangible Assets.  We record all assets and liabilities acquired in purchase acquisitions at fair value, which is an estimate determined by the use of internal and other valuation techniques. We utilize third-party services for the valuation of real estate and core deposit intangibles. These valuation estimates result in goodwill and other intangible assets, which are subject to ongoing periodic impairment tests using various fair value techniques. Goodwill impairment evaluations are required to be performed annually and may be required more frequently if certain conditions indicating potential impairment exist. Our policy is to perform the goodwill impairment analysis as of November 30 of each year, or more frequently as warranted, at the reporting unit level - (i) banking and (ii) financial services. The banking reporting unit is representative of our core banking business line, while the financial services reporting unit is representative of our wealth management, trust and services business line. Identifiable intangible assets are amortized over their estimated useful lives and are subject to impairment tests if events or circumstances indicate a possible

25


inability to realize the carrying amount. Goodwill is evaluated for impairment using several standard valuation techniques including discounted cash flow analyses, as well as an estimation of the impact of business conditions. The use of different estimates or assumptions could produce different estimates of carrying value.

In 2013, goodwill impairment of $2.8 million was recorded related to the financial services reporting unit. This impairment was 42% of the December 31, 2012 goodwill balance attributable to the financial service reporting unit. We also performed the annual goodwill impairment analysis for the banking reporting unit and determined it was not impaired.

Valuation of OREO.  Periodically, we acquire property in connection with foreclosures or in satisfaction of debt previously contracted. The valuation of this property is accounted for individually based on its fair value on the date of acquisition. At the acquisition date, if the fair value of the property, less the costs to sell is less than the book value of the loan, a charge or reduction in the ALL is recorded. If the value of the property becomes permanently impaired, as determined by an appraisal or an evaluation in accordance with our appraisal policy, we will record the decline by charging against current earnings. Upon acquisition of a property, we use a current appraisal or broker’s opinion to substantiate fair value for the property.

OTTI of Investments.  We record an investment impairment charge at the point we believe an investment has experienced a decline in value that is other-than-temporary. In determining whether an OTTI has occurred, we review information about the underlying investment that is publicly available, analysts’ reports, applicable industry data and other pertinent information, and assess our ability to hold the securities for the foreseeable future. The investment is written down to its current market value at the time the impairment is deemed to have occurred. Future adverse changes in market conditions, continued poor operating results of underlying investments or other factors could result in further losses that may not be reflected in an investment’s current carrying value, possibly requiring an additional impairment charge in the future.

Effectiveness of Hedging Derivatives.  The Company maintains an overall interest rate risk management strategy that incorporates the use of interest rate contracts, which are generally non-leveraged generic interest rate and basis swaps, to minimize significant fluctuations in earnings that are caused by interest rate volatility. Interest rate contracts are used by the Company in the management of its interest rate risk position. The Company’s goal is to manage interest rate sensitivity so that movements in interest rates do not significantly adversely affect earnings and cash flows. When interest rates fluctuate, hedged assets and liabilities appreciate or depreciate in fair value or cash flows. Gains or losses on the derivative instruments that are linked to the hedged assets and liabilities are expected to substantially offset this unrealized appreciation or depreciation or changes in cash flows. The Company utilizes a third-party service to evaluate the effectiveness of its cash flow hedges on a quarterly basis. The effective portion of a gain or loss on a cash flow hedge is recorded in other comprehensive income, net of tax, and other assets or other liabilities on the consolidated statements of condition. The ineffective portions of cash flow hedging transactions are included in “other income” in the consolidated statements of income, if material.

Accounting for Postretirement Plans.  We use a December 31 measurement date to determine the expenses for our postretirement plans and related financial disclosure information. Postretirement plan expense is sensitive to changes in the number of eligible employees (and their related demographics) and to changes in the discount rate and other expected rates, such as medical cost trends rates. As with the computations on plan expense, cash contribution requirements are also sensitive to such changes.

Stock-Based Compensation.  The fair value of restricted stock and stock options is determined on the date of grant and amortized to compensation expense, with a corresponding increase in common stock, over the longer of the service period or performance period, but in no event beyond an employee’s retirement date. For performance-based restricted stock, we estimate the degree to which performance conditions will be met to determine the number of shares that will vest and the related compensation expense. Compensation expense is adjusted in the period such estimates change. Non-forfeitable dividends, if any, paid on shares of restricted stock are recorded to retained earnings for shares that are expected to vest and to compensation expense for shares that are not expected to vest.

Income Taxes.  We account for income taxes by deferring income taxes based on the estimated future tax effects of differences between the book and tax bases of assets and liabilities considering the provisions of enacted tax laws. These differences result in deferred tax assets and liabilities, which are included in the consolidated statements of condition. We must also assess the likelihood that any deferred tax assets will be recovered from future taxable income and establish a valuation allowance for those assets determined not likely to be recoverable. Judgment is required in determining the amount and timing of recognition of the resulting deferred tax assets and liabilities, including projections of future taxable income. Although we have determined a valuation allowance is not required for all deferred tax assets, there is no guarantee that these assets will be realized. Although not currently under review, income tax returns for the years ended December 31, 2010 through 2012 are open to audit by federal and Maine authorities. If we, as a result of an audit, were assessed interest and penalties, the amounts would be recorded through other non-interest expense on the consolidated statements of income.

26



Non-GAAP Financial Measures and Reconciliation to GAAP

In addition to evaluating the Company’s results of operations in accordance with GAAP, management supplements this evaluation with an analysis of certain non-GAAP financial measures, such as the efficiency ratio, tax equivalent net interest income, return on average tangible shareholders' equity, and tangible book value per share. We believe these non-GAAP financial measures help investors in understanding the Company’s operating performance and trends and allow for better performance comparisons to other banks. In addition, these non-GAAP financial measures remove the impact of unusual items that may obscure trends in the Company’s underlying performance. These disclosures should not be viewed as a substitute for GAAP operating results, nor are they necessarily comparable to non-GAAP performance measures that may be presented by other financial institutions.

Efficiency Ratio.  The efficiency ratio, which represents an approximate measure of the cost required for the Company to generate a dollar of revenue, is the ratio of (i) total non-interest expense excluding (a) Branch Acquisition and Divestiture costs, (b) prepayment penalties on borrowings, and (c) goodwill impairment (the numerator) to (ii) net interest income on a fully taxable equivalent basis (assumed 35% tax rate) plus total non-interest income excluding (a) net gains or losses on sale of securities, net of OTTI, (b) gain on the Branch Divestiture, (c) gain on sale of branch facility, and (d) proceeds from a 2010 legal settlement (the denominator).

 
 
At or for the Year Ended December 31,
(In Thousands)
 
2013
 
2012
 
2011
 
2010
 
2009
Non-interest expense, as presented
 
$
66,333

 
$
59,031

 
$
55,579

 
$
52,937

 
$
51,005

Less: Branch Acquisition and Divestiture costs
 
374

 
2,324

 

 

 

Less: prepayment penalties on borrowings
 

 
2,030

 
2,318

 

 

Less: goodwill impairment
 
2,830

 

 
50

 

 

Adjusted non-interest expense
 
$
63,129

 
$
54,677

 
$
53,211

 
$
52,937

 
$
51,005

Net interest income, as presented
 
$
75,475

 
$
73,745

 
$
75,219

 
$
74,290

 
$
73,011

Effect of tax-exempt income
 
808

 
988

 
1,212

 
1,452

 
1,628

Non-interest income
 
27,801

 
23,412

 
23,053

 
20,825

 
19,423

Less: net gains or (losses) on sale of securities, net of OTTI
 
785

 
2,498

 
2,076

 
(409
)
 
41

Less: gain on Branch Divestiture
 
2,742

 

 

 

 

Less: gain on sale of branch facility
 

 
479

 

 

 

Less: legal settlement proceeds
 

 

 

 
2,000

 

Adjusted net interest income plus
non-interest income
 
$
100,557

 
$
95,168

 
$
97,408

 
$
94,976

 
$
94,021

Non-GAAP efficiency ratio
 
62.78
%
 
57.45
%
 
54.63
%
 
55.74
%
 
54.26
%
GAAP efficiency ratio
 
64.23
%
 
60.76
%
 
56.49
%
 
55.53
%
 
55.17
%

Tax Equivalent Net Interest Income.  Tax-equivalent net interest income is net interest income plus the taxes that would have been paid had tax-exempt securities been taxable. This number attempts to enhance the comparability of the performance of assets that have different tax liabilities. The following table provides a reconciliation of tax equivalent net interest income to GAAP net interest income using a 35% tax rate.

 
 
At or for the Year Ended December 31,
(In Thousands)
 
2013
 
2012
 
2011
 
2010
 
2009
Net interest income, as presented
 
$
75,475

 
$
73,745

 
$
75,219

 
$
74,290

 
$
73,011

Effect of tax-exempt income
 
808

 
988

 
1,212

 
1,452

 
1,628

Net interest income, tax equivalent
 
$
76,283

 
$
74,733

 
$
76,431

 
$
75,742

 
$
74,639



27


Return on Average Tangible Shareholders' Equity. Return on average tangible shareholders' equity is the ratio of (i) net income, adjusted for (a) tax effected amortization of intangible assets and (b) goodwill impairment (the numerator) to (ii) average shareholders' equity, adjusted for goodwill and other intangible assets. We believe this is a meaningful measure of our financial performance as it reflects the return on the equity deployed in our business and is a common measure within our industry.

 
 
At or for the Year Ended December 31,
(In Thousands)
 
2013
 
2012
 
2011
 
2010
 
2009
Net income, as presented
 
$
22,873

 
$
23,428

 
$
26,177

 
$
24,766

 
$
22,773

Tax effected amortization of intangible assets
 
747

 
427

 
375

 
375

 
376

Goodwill impairment
 
2,830

 

 
50

 

 

Net income, adjusted
 
$
26,450

 
$
23,855

 
$
26,602

 
$
25,141

 
$
23,149

Average shareholders' equity
 
$
233,888

 
$
227,129

 
$
215,311

 
$
199,428

 
$
177,730

Less: average goodwill and other intangible assets
 
52,708

 
46,253

 
45,533

 
46,115

 
46,688

Average tangible shareholders' equity
 
$
181,180

 
$
180,876

 
$
169,778

 
$
153,313

 
$
131,042

Return on average tangible shareholders' equity
 
14.55
%
 
13.19
%
 
15.67
%
 
16.40
%
 
17.67
%
Return on average shareholders' equity
 
9.74
%
 
10.31
%
 
12.16
%
 
12.42
%
 
12.81
%

Tangible Book Value per Share.  Tangible book value per share is the ratio of (i) shareholders’ equity less goodwill, premium on deposits and other acquisition-related intangibles (the numerator) to (ii) total common shares outstanding at period end. The following table reconciles tangible book value per share to book value per share. We believe this is a meaningful measure as it provides information to assess capital adequacy and is a common measure within our industry.

 
 
At or for the Year Ended December 31,
(In Thousands, Except per Share Data)
 
2013
 
2012
 
2011
 
2010
 
2009
Shareholders’ equity
 
$
231,096

 
$
233,815

 
$
218,876

 
$
205,995

 
$
190,561

Less: goodwill and other intangibles
 
49,319

 
53,299

 
45,194

 
45,821

 
46,379

Tangible shareholders’ equity
 
$
181,777

 
$
180,516

 
$
173,682

 
$
160,174

 
$
144,182

Shares outstanding at period end
 
7,579,913

 
7,622,750

 
7,664,975

 
7,658,496

 
7,644,837

Tangible book value per share
 
$
23.98

 
$
23.68

 
$
22.66

 
$
20.91

 
$
18.86

Book value per share
 
$
30.49

 
$
30.67

 
$
28.56

 
$
26.90

 
$
24.93


Results of Operations

For the year ended December 31, 2013, we reported net income of $22.8 million compared to $23.4 million for the year ended December 31, 2012, and $26.2 million for the year ended December 31, 2011. Diluted earnings per share for each of these years were $2.97, $3.05, and $3.40, respectively. The major components of these results, which include net interest income, provision for credit losses, non-interest income, non-interest expense, and income taxes, are discussed below.

Net Interest Income

Net interest income is interest earned on loans, securities, and other interest-earning assets, plus loan fees, less the interest paid on interest-bearing deposits and borrowings. Net interest income, which is our largest source of revenue accounting for approximately 73% of total revenues, is affected by factors including, but not limited to: changes in interest rates, loan and deposit pricing strategies and competitive conditions, the volume and mix of interest-earning assets and interest-bearing liabilities, and the level of non-performing assets. Net interest margin is calculated as net interest income on a fully taxable equivalent basis as a percentage of average interest-earning assets. Net interest margin for 2013, 2012 and 2011 of 3.20%, 3.36%, and 3.57%, respectively, has declined reflecting the challenging interest rate environment over the past three years. The historically low interest rate environment adversely affected our net interest income as (i) new loan volumes and investments earn the current market interest rates, and (ii) acceleration of borrower repayment of loans and investment cash flows are reinvested at lower interest rates.


28


Net interest income was $76.3 million on a fully-taxable equivalent basis for 2013, compared to $74.7 million for 2012, an increase of $1.6 million, or 2%. The increase in net interest income is reflective of 7% growth in average interest-earning assets during 2013 partially offset by a 16 basis point decline in our net interest margin to 3.20% in 2013 from 3.36% in 2012. In the fourth quarter of 2012, the Company completed the Branch Acquisition that resulted in $287.6 million of deposits. The Company’s long-term strategy is to leverage these deposits by funding loan growth in the new branch locations over a five-year period. In the short-term, the Company reduced borrowings, lowered interest rates on our deposit base and purchased investment securities. As a result of the acquired deposits and strategies to deploy these funds, average investment balances for 2013 increased $124.9 million, or 18%, average loan balances increased $45.2 million, or 3%, and average deposits increased $230.5 million, or 15%. The yield on our average earning assets decreased 41 basis points during 2013 compared to a 26 basis point decrease on our average cost of funding. Yield on our earning assets averaged 3.73% in 2013 compared to 4.14% in 2012 as both the investment and loan portfolio yields continue to be impacted by the current low interest rate environment. The cost of funds averaged 0.55% in 2013, compared to 0.81% in 2012 due to a shift in the funding mix to low cost deposits combined with the repricing of certificates of deposit and borrowings to lower interest rates.

Net interest income was $74.7 million on a fully-taxable equivalent basis for 2012, compared to $76.4 million for 2011, a decrease of $1.7 million, or 2%. The decrease in net interest income is due to the 21 basis point decline in our net interest margin to 3.36% in 2012 from 3.57% in 2011. The yield on our average earning assets decreased 51 basis points during 2012 compared to a 31 basis point decrease in our average cost of funding. Yield on our earning assets averaged 4.14% in 2012 compared to 4.65% in 2011, as amortization and prepayments on loans and investments were reinvested at lower rates, particularly in the investment portfolio. The average investment balances for 2012 increased $69.4 million, or 11%, as the Company actively redeployed investment cash flows and pre-invested a portion of the liquidity expected from the Branch Acquisition. The cost of funds averaged 0.81% in 2012, compared to 1.12% in 2011. The decrease in the cost of funds was reflective of disciplined deposit pricing, whereby interest rates on various deposit products were lowered throughout 2012 in response to market conditions. Additionally, customer deposits held in higher costing time deposits continued to decline as customers continue to shift to more liquid deposit instruments given the current low interest rate environment. Average balance sheet growth was funded primarily by growth in average core deposits (demand deposits, interest checking, savings and money market accounts) of $148.1 million, or 15%. Average deposits in 2012 were $102.0 million higher than 2011 due to the Branch Acquisition in the fourth quarter of 2012. Average borrowings (including brokered deposits) decreased $38.7 million in 2012 as compared to the prior year.

The following table presents, for the years noted, average balances, interest income, interest expense, and the corresponding average yields earned and rates paid, as well as net interest income, net interest rate spread and net interest margin:


29


 
 
Average Balance, Interest and Yield/Rate Analysis
 
 
December 31,
  
 
2013
 
2012
 
2011
(Dollars in Thousands)
 
Average Balance
 
Interest
 
Yield/Rate
 
Average Balance
 
Interest
 
Yield/Rate
 
Average Balance
 
Interest
 
Yield/Rate
ASSETS
 
  

 
  

 
  

 
  

 
  

 
  

 
  

 
  

 
  

Interest-earning assets:
 
  

 
  

 
  

 
  

 
  

 
  

 
  

 
  

 
  

Securities – taxable
 
$
772,095

 
$
16,751

 
2.17
%
 
$
640,779

 
$
16,646

 
2.60
%
 
$
564,418

 
$
18,497

 
3.28
%
Securities – nontaxable(1)
 
30,672

 
1,799

 
5.87
%
 
37,163

 
2,130

 
5.73
%
 
44,112

 
2,556

 
5.79
%
Trading account assets
 
2,295

 
34

 
1.48
%
 
2,214

 
43

 
1.94
%
 
2,245

 
39

 
1.74
%
Federal funds sold
 

 

 

 
5,601

 
14

 
0.25
%
 

 

 

Loans(2):
 
 
 
 
 
 
 
  

 
  

 
  

 
  

 
  

 
  

Residential real estate
 
571,291

 
25,209

 
4.41
%
 
573,227

 
27,210

 
4.75
%
 
590,238

 
30,184

 
5.11
%
Commercial real estate
 
515,501

 
24,764

 
4.80
%
 
491,732

 
24,572

 
5.00
%
 
463,581

 
25,381

 
5.47
%
Commercial
 
173,933

 
7,591

 
4.36
%
 
169,043

 
7,961

 
4.71
%
 
175,760

 
9,007

 
5.12
%
Municipal(1)
 
11,799

 
508

 
4.31
%
 
14,473

 
694

 
4.80
%
 
19,465

 
910

 
4.68
%
Consumer
 
308,335

 
12,369

 
4.01
%
 
287,173

 
12,665

 
4.41
%
 
281,596

 
13,010

 
4.62
%
Total loans
 
1,580,859

 
70,441

 
4.46
%
 
1,535,648

 
73,102

 
4.76
%
 
1,530,640

 
78,492

 
5.13
%
Total interest-earning assets
 
2,385,921

 
89,025

 
3.73
%
 
2,221,405

 
91,935

 
4.14
%
 
2,141,415

 
99,584

 
4.65
%
Cash and due from banks
 
43,879

 
  

 
  

 
42,165

 
  

 
  

 
36,168

 
  

 
  

Other assets
 
167,557

 
  

 
  

 
154,970

 
  

 
  

 
154,550

 
  

 
  

Less: ALL
 
(22,968
)
 
 
 
 
 
(23,050
)
 
 
 
 
 
(22,850
)
 
 
 
 
Total assets
 
$
2,574,389

 
 
 
 
 
$
2,395,490

 
 
 
 
 
$
2,309,283

 
 
 
 
LIABILITIES & SHAREHOLDERS’ EQUITY
 
  

 
  

 
  

 
  

 
  

 
  

 
  

 
  

 
  

Deposits:
 
  

 
  

 
  

 
  

 
  

 
  

 
  

 
  

 
  

Non-interest bearing demand deposits
 
$
246,637

 
$

 

 
$
240,369

 
$

 

 
$
246,995

 
$

 

Interest checking accounts
 
471,331

 
324

 
0.07
%
 
351,232

 
336

 
0.10
%
 
258,322

 
509

 
0.20
%
Savings accounts
 
237,110

 
133

 
0.06
%
 
195,800

 
285

 
0.15
%
 
171,840

 
426

 
0.25
%
Money market accounts
 
442,908

 
1,346

 
0.30
%
 
382,274

 
2,019

 
0.53
%
 
344,369

 
2,369

 
0.69
%
Certificates of deposit
 
387,816

 
3,856

 
0.99
%
 
385,666

 
4,998

 
1.30
%
 
431,850

 
6,322

 
1.46
%
Total deposits
 
1,785,802

 
5,659

 
0.32
%
 
1,555,341

 
7,638

 
0.49
%
 
1,453,376

 
9,626

 
0.66
%
Borrowings:
 
  

 
  

 
  

 
  

 
  

 
  

 
  

 
  

 
  

Brokered deposits
 
118,423

 
1,414

 
1.19
%
 
117,815

 
1,655

 
1.40
%
 
120,143

 
1,965

 
1.64
%
Junior subordinated debentures
 
43,871

 
2,532

 
5.77
%
 
43,769

 
2,546

 
5.82
%
 
43,666

 
2,614

 
5.99
%
Other borrowings
 
360,948

 
3,137

 
0.87
%
 
414,566

 
5,363

 
1.29
%
 
451,034

 
8,948

 
1.98
%
Total borrowings
 
523,242

 
7,083

 
1.35
%
 
576,150

 
9,564

 
1.66
%
 
614,843

 
13,527

 
2.20
%
Total funding liabilities
 
2,309,044

 
12,742

 
0.55
%
 
2,131,491

 
17,202

 
0.81
%
 
2,068,219

 
23,153

 
1.12
%
Other liabilities
 
31,457

 
  

 
  

 
36,870

 
  

 
  

 
25,753

 
  

 
  

Shareholders’ equity
 
233,888

 
 
 
 
 
227,129

 
 
 
 
 
215,311

 
 
 
 
Total liabilities and shareholders’ equity
 
$
2,574,389

 
 
 
 

$
2,395,490

 
 
 
 
 
$
2,309,283

 
 
 
 
Net interest income (fully-taxable equivalent)
 
  

 
76,283

 
  

 
  

 
74,733

 
  

 
  

 
76,431

 
  

Less: fully-taxable equivalent adjustment
 
 
 
(808
)
 
 
 
 
 
(988
)
 
 
 
 
 
(1,212
)
 
 
  Net interest income
 
 
 
$
75,475

 
 
 
 
 
$
73,745

 
 
 
 
 
$
75,219

 
 
Net interest rate spread (fully-taxable equivalent)
 
 
 
 
 
3.18
%
 
 
 
 
 
3.33
%
 
 
 
 
 
3.53
%
Net interest margin (fully-taxable equivalent)
 
 
 
 
 
3.20
%
 
 
 
 
 
3.36
%
 
 
 
 
 
3.57
%
(1) Reported on tax-equivalent basis calculated using a rate of 35%.
(2) Non-accrual loans are included in total average loans.


30


The following table presents certain information on a fully-taxable equivalent basis regarding changes in interest income and interest expense for the periods indicated. For each category of interest-earning assets and interest-bearing liabilities, information is provided with respect to changes attributable to rate and volume.

 
 
December 31, 2013 vs. 2012
Increase (Decrease) Due to:
 
December 31, 2012 vs. 2011
Increase (Decrease) Due to:
(Dollars in Thousands)
 
Volume
 
Rate
 
Total
 
Volume
 
Rate
 
Total
Interest-earning assets:
 
  

 
  

 
  

 
  

 
  

 
  

Securities – taxable
 
$
3,414

 
$
(3,309
)
 
$
105

 
$
2,505

 
$
(4,356
)
 
$
(1,851
)
Securities – nontaxable
 
(372
)
 
41

 
(331
)
 
(402
)
 
(24
)
 
(426
)
Trading account assets
 
2

 
(11
)
 
(9
)
 
(1
)
 
5

 
4

Federal funds sold
 
(14
)
 

 
(14
)
 
14

 

 
14

Residential real estate
 
(92
)
 
(1,909
)
 
(2,001
)
 
(869
)
 
(2,105
)
 
(2,974
)
Commercial real estate
 
1,188

 
(996
)
 
192

 
1,540

 
(2,349
)
 
(809
)
Commercial
 
230

 
(600
)
 
(370
)
 
(344
)
 
(702
)
 
(1,046
)
Municipal
 
(128
)
 
(58
)
 
(186
)
 
(234
)
 
18

 
(216
)
Consumer
 
933

 
(1,229
)
 
(296
)
 
258

 
(603
)
 
(345
)
Total interest income
 
5,161

 
(8,071
)
 
(2,910
)
 
2,467

 
(10,116
)
 
(7,649
)
Interest-bearing liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
Interest checking accounts
 
120

 
(132
)
 
(12
)
 
186

 
(359
)
 
(173
)
Savings accounts
 
62

 
(214
)
 
(152
)
 
60

 
(201
)
 
(141
)
Money market accounts
 
321

 
(994
)
 
(673
)
 
262

 
(612
)
 
(350
)
Certificates of deposit
 
28

 
(1,170
)
 
(1,142
)
 
(674
)
 
(650
)
 
(1,324
)
Brokered deposits
 
9

 
(250
)
 
(241
)
 
(38
)
 
(272
)
 
(310
)
Junior subordinated debentures
 
6

 
(20
)
 
(14
)
 
6

 
(74
)
 
(68
)
Borrowings
 
(692
)
 
(1,534
)
 
(2,226
)
 
(722
)
 
(2,863
)
 
(3,585
)
Total interest expense
 
(146
)
 
(4,314
)
 
(4,460
)
 
(920
)
 
(5,031
)
 
(5,951
)
Net interest income (fully-taxable equivalent)
 
$
5,307

 
$
(3,757
)
 
$
1,550

 
$
3,387

 
$
(5,085
)
 
$
(1,698
)

Provision and Allowance for Loan Losses

The provision for loan losses is a recorded expense determined by management that adjusts the allowance for loan losses to a level, which, in management’s best estimate, is necessary to absorb probable losses within the existing loan portfolio. The provision for loan losses reflects loan quality trends, including, among other factors, the levels of and trends related to non-accrual loans, past due loans, potential problem loans, criticized loans, net charge-offs or recoveries and growth in the loan portfolio. Accordingly, the amount of the provision reflects both the necessary increases in the allowance for loan losses related to newly identified criticized loans, as well as the actions taken related to other loans including, among other things, any necessary increases or decreases in required allowances for specific loans or loan pools. The provision for credit losses for 2013 totaled $2.0 million, or 0.13% of average loans, compared to $3.8 million, or 0.25% of average loans, for 2012 and $4.7 million, or 0.31% of average loans, for 2011. Please see “— Financial Condition — Asset Quality” for additional discussion regarding the allowance for loan losses.


31


Non-Interest Income

The following table presents the components of non-interest income for the years ended December 31, 2013, 2012, and 2011:

 
 
Year Ended December 31,
 
 
2013
 
2012
 
Change from
 
2011
 
Change from
 
 
 
 
2013 to 2012
 
 
2012 to 2011
(Dollars in Thousands)
 
 
 
$
 
%
 
 
$
 
%
Service charges on deposit accounts
 
$
6,740

 
$
5,557

 
$
1,183

 
21
 %
 
$
5,134

 
$
423

 
8
 %
Other service charges and fees
 
5,971

 
4,061

 
1,910

 
47
 %
 
3,577

 
484

 
14
 %
Income from fiduciary services
 
4,751

 
5,038

 
(287
)
 
(6
)%
 
6,027

 
(989
)
 
(16
)%
Brokerage and insurance commissions