10-Q 1 cac-09302013x10q.htm 10-Q CAC-09.30.2013-10Q

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION 
Washington, D.C. 20549
FORM 10-Q

x       QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2013
OR
¨       TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File No.      0-28190
CAMDEN NATIONAL CORPORATION
(Exact name of registrant as specified in its charter)
 
MAINE
01-0413282
(State or other jurisdiction of
(I.R.S. Employer
incorporation or organization)
Identification No.)
 
 
2 ELM STREET, CAMDEN, ME
04843
(Address of principal executive offices)
(Zip Code)
 
Registrant's telephone number, including area code:  (207) 236-8821
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter periods that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
 
Yes x          No ¨
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
 
Yes x          No ¨
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
 
Large accelerated filer ¨
Accelerated filer x
Non-accelerated filer ¨
Smaller reporting company ¨
(Do not check if a smaller reporting company)
 
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
 
Yes ¨          No x
 
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practical date:
Outstanding at November 4, 2013:  Common stock (no par value) 7,646,964 shares.



CAMDEN NATIONAL CORPORATION

 FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 2013
TABLE OF CONTENTS OF INFORMATION REQUIRED IN REPORT
 
 
PAGE
PART I.  FINANCIAL INFORMATION
 
 
 
ITEM 1.
FINANCIAL STATEMENTS
 
 
 
 
 
Report of Independent Registered Public Accounting Firm
 
 
 
 
Consolidated Statements of Condition - September 30, 2013 and December 31, 2012
 
 
 
 
Consolidated Statements of Income - Three and Nine Months Ended September 30, 2013 and 2012
 
 
 
 
Consolidated Statements of Comprehensive Income - Three and Nine Months Ended September 30, 2013 and 2012
 
 
 
 
Consolidated Statements of Changes in Shareholders’ Equity - Nine Months Ended September 30, 2013 and 2012
 
 
 
 
Consolidated Statements of Cash Flows - Nine Months Ended September 30, 2013 and 2012
 
 
 
 
Notes to Consolidated Financial Statements
 
 
 
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
 
 
ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
 
 
 
ITEM 4.
CONTROLS AND PROCEDURES
 
 
 
PART II. OTHER INFORMATION
 
 
 
 
ITEM 1.
LEGAL PROCEEDINGS
 
 
 
ITEM 1A.
RISK FACTORS
 
 
 
ITEM 2.
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
 
 
 
ITEM 3.
DEFAULTS UPON SENIOR SECURITIES
 
 
 
ITEM 4.
MINE SAFETY DISCLOSURES
 
 
 
ITEM 5.
OTHER INFORMATION
 
 
 
ITEM 6.
EXHIBITS
 
 
 
SIGNATURES
 
 
 
EXHIBIT INDEX
 
 
 
EXHIBITS
 

2



PART I. FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
The Shareholders and Board of Directors
Camden National Corporation
 
We have reviewed the accompanying interim consolidated financial information of Camden National Corporation (the “Company”) and Subsidiaries as of September 30, 2013, and for the three and nine-month periods ended September 30, 2013 and 2012. These financial statements are the responsibility of the Company's management.
 
We conducted our reviews in accordance with standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit in accordance with standards of the Public Company Accounting Oversight Board (United States), the objective of which is to express an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.
 
Based on our reviews, we are not aware of any material modifications that should be made to the accompanying financial statements for them to be in conformity with accounting principles generally accepted in the United States of America.
 
/s/ Berry Dunn McNeil & Parker, LLC
 
Berry Dunn McNeil & Parker, LLC
 
 
Bangor, Maine
November 8, 2013


3



CAMDEN NATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CONDITION
 
 
September 30,
2013
 
December 31,
2012
(In Thousands, Except Number of Shares)
 
(unaudited)
 
 
ASSETS
 
 

 
 

Cash and due from banks
 
$
57,086

 
$
58,290

Securities
 
 

 
 

Securities available-for-sale, at fair value
 
783,243

 
781,050

Federal Home Loan Bank and Federal Reserve Bank stock, at cost
 
19,724

 
21,034

Total securities
 
802,967

 
802,084

Trading account assets
 
2,309

 
2,300

Loans held for sale
 
1,313

 

Loans
 
1,589,946

 
1,563,866

Less allowance for loan losses
 
(22,661
)
 
(23,044
)
Net loans
 
1,567,285

 
1,540,822

Goodwill and other intangible assets
 
52,436

 
53,299

Bank-owned life insurance
 
46,039

 
45,053

Premises and equipment, net
 
26,751

 
28,059

Deferred tax asset
 
16,035

 
7,663

Interest receivable
 
5,678

 
6,215

Other real estate owned
 
1,802

 
1,313

Other assets
 
17,554

 
19,659

Total assets
 
$
2,597,255

 
$
2,564,757

LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 

 
 

Liabilities
 
 

 
 

Deposits
 
 

 
 

Demand
 
$
282,023

 
$
240,749

Interest checking, savings and money market
 
1,208,691

 
1,169,148

Retail certificates of deposit
 
379,281

 
418,442

Brokered deposits
 
103,369

 
101,130

Total deposits
 
1,973,364

 
1,929,469

Federal Home Loan Bank advances
 
96,130

 
56,404

Other borrowed funds
 
207,326

 
259,940

Junior subordinated debentures
 
43,896

 
43,819

Accrued interest and other liabilities
 
44,257

 
41,310

Total liabilities
 
2,364,973

 
2,330,942

Shareholders’ Equity
 
 

 
 

Common stock, no par value; authorized 20,000,000 shares, issued and outstanding 7,646,664 and 7,622,750 shares on September 30, 2013 and December 31, 2012, respectively
 
50,265

 
49,667

Retained earnings
 
193,304

 
181,151

Accumulated other comprehensive income (loss)
 
 

 
 

Net unrealized (losses) gains on securities available-for-sale, net of tax
 
(5,073
)
 
12,943

Net unrealized losses on derivative instruments, at fair value, net of tax
 
(3,614
)
 
(7,205
)
Net unrecognized losses on postretirement plans, net of tax
 
(2,600
)
 
(2,741
)
Total accumulated other comprehensive income (loss)
 
(11,287
)
 
2,997

Total shareholders’ equity
 
232,282

 
233,815

Total liabilities and shareholders’ equity
 
$
2,597,255

 
$
2,564,757


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

4



CAMDEN NATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
(In Thousands, Except Number of Shares and Per Share Data)
 
2013
 
2012
 
2013
 
2012
Interest Income
 
 

 
 

 
 
 
 
Interest and fees on loans
 
$
17,470

 
$
18,084

 
$
53,324

 
$
54,787

Interest on U.S. government and sponsored enterprise obligations
 
4,091

 
4,153

 
12,441

 
12,387

Interest on state and political subdivision obligations
 
292

 
344

 
889

 
1,064

Interest on federal funds sold and other investments
 
38

 
55

 
144

 
160

Total interest income
 
21,891

 
22,636

 
66,798

 
68,398

Interest Expense
 
 

 
 

 
 

 
 

Interest on deposits
 
1,780

 
2,218

 
5,427

 
7,146

Interest on borrowings
 
767

 
1,337

 
2,352

 
4,164

Interest on junior subordinated debentures
 
637

 
634

 
1,894

 
1,904

Total interest expense
 
3,184

 
4,189

 
9,673

 
13,214

Net interest income
 
18,707

 
18,447

 
57,125

 
55,184

Provision for credit losses
 
665

 
868

 
2,034

 
2,708

Net interest income after provision for credit losses
 
18,042

 
17,579

 
55,091

 
52,476

Non-Interest Income
 
 

 
 

 
 

 
 

Service charges on deposit accounts
 
1,750

 
1,386

 
5,189

 
3,857

Other service charges and fees
 
1,568

 
1,003

 
4,510

 
2,804

Income from fiduciary services
 
1,149

 
1,155

 
3,567

 
3,883

Mortgage banking income, net
 
93

 
8

 
1,251

 
476

Brokerage and insurance commissions
 
354

 
360

 
1,175

 
1,109

Bank-owned life insurance
 
334

 
353

 
986

 
1,034

Net gain on sale of securities and other-than-temporary impairment of securities
 
647

 
187

 
785

 
1,059

Other income
 
580

 
586

 
1,724

 
1,798

Total non-interest income
 
6,475

 
5,038

 
19,187

 
16,020

Non-Interest Expenses
 
 

 
 

 
 

 
 

Salaries and employee benefits
 
8,115

 
7,270

 
24,437

 
21,150

Furniture, equipment and data processing
 
1,668

 
1,131

 
5,203

 
3,555

Net occupancy
 
1,242

 
930

 
4,201

 
3,061

Other real estate owned and collection costs, net
 
489

 
571

 
1,355

 
1,694

Consulting and professional fees
 
504

 
408

 
1,636

 
1,351

Regulatory assessments
 
496

 
450

 
1,495

 
1,317

Amortization of intangible assets
 
289

 
144

 
863

 
433

Branch acquisition/divestiture costs
 
47

 
396

 
279

 
704

Other expenses
 
2,349

 
2,070

 
7,878

 
7,003

Total non-interest expenses
 
15,199

 
13,370

 
47,347

 
40,268

Income before income taxes
 
9,318

 
9,247

 
26,931

 
28,228

Income Taxes
 
2,952

 
2,992

 
8,572

 
8,978

Net Income
 
$
6,366

 
$
6,255

 
$
18,359

 
$
19,250

Per Share Data
 
 

 
 

 
 

 
 

Basic earnings per share
 
$
0.83

 
$
0.82

 
$
2.40

 
$
2.51

Diluted earnings per share
 
$
0.83

 
$
0.82

 
$
2.39

 
$
2.50

Weighted average number of common shares outstanding
 
7,643,720

 
7,619,411

 
7,636,352

 
7,655,619

Diluted weighted average number of common shares outstanding
 
7,666,305

 
7,639,434

 
7,651,870

 
7,669,763

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

5



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

 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
(In Thousands)
 
2013
 
2012
 
2013
 
2012
Net income
 
$
6,366

 
$
6,255

 
$
18,359

 
$
19,250

Other comprehensive income (loss), net of related tax effects:
 
 

 
 

 
 
 
 
Unrealized gains (losses) on securities available-for-sale:
 
 

 
 

 
 
 
 
Unrealized holding gains (losses) on securities available-for-sale arising during period, net of related tax effects of $1,111, ($2,343), $9,426 and ($3,162), respectively
 
(2,063
)
 
4,350

 
(17,506
)
 
5,871

Less: reclassification adjustment for gains included in net income, net of related tax effects of $227, $66, $275 and $371, respectively(1)
 
(420
)
 
(121
)
 
(510
)
 
(688
)
Net unrealized gains (losses) on securities available-for-sale
 
(2,483
)
 
4,229

 
(18,016
)
 
5,183

Unrealized gain (loss) on cash flow hedging derivatives, net of related tax effects of ($239), ($59), ($1,933) and $347, respectively
 
445

 
109

 
3,591

 
(645
)
Postretirement plans:
 
 

 
 

 
 
 
 
Net actuarial gain arising during period, net of related tax effects of ($22), ($14), ($64) and ($40), respectively
 
39

 
23

 
118

 
71

Plus: amortization of prior service cost included in net periodic cost, net of related tax effects of ($4), ($3) ($12) and ($6), respectively(2)
 
8

 
3

 
23

 
9

Net gain on postretirement plans
 
47

 
26

 
141

 
80

Other comprehensive income (loss)
 
(1,991
)
 
4,364

 
(14,284
)
 
4,618

Comprehensive income
 
$
4,375

 
$
10,619

 
$
4,075

 
$
23,868

 
(1) Reclassified into the consolidated statements of income in net gain on sale of securities and other-than-temporary impairment of securities.

(2) Reclassified into the consolidated statements of income in salaries and employee benefits.
 
See Report of Independent Registered Public Accounting Firm.
The accompanying notes are an integral part of these consolidated financial statements.

6




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

 
 
Common Stock
 
 
 
Accumulated
Other Comprehensive
Income (Loss)
 
Total Shareholders’
Equity
(In Thousands, Except Number of Shares and Per Share Data)
 
Shares
Outstanding
 
Amount
 
Retained
Earnings
 
 
Balance at December 31, 2011
 
7,664,975

 
$
51,438

 
$
165,377

 
$
2,061

 
$
218,876

Net income
 

 

 
19,250

 

 
19,250

Other comprehensive income (loss), net of tax:
 
 

 
 

 
 

 
 

 
 

Change in fair value of securities available-for-sale
 

 

 

 
5,183

 
5,183

Change in fair value of cash flow hedges
 

 

 

 
(645
)
 
(645
)
Change in net unrecognized gains on postretirement plans
 

 

 

 
80

 
80

Total comprehensive income
 

 

 
19,250

 
4,618

 
23,868

Stock-based compensation expense
 

 
355

 

 

 
355

Exercise of stock options and issuance of restricted stock, net of repurchase for tax withholdings and tax benefit
 
20,677

 
(241
)
 

 

 
(241
)
Common stock repurchased
 
(65,580
)
 
(2,097
)
 

 

 
(2,097
)
Cash dividends declared ($0.75 per share)
 

 

 
(5,783
)
 

 
(5,783
)
Balance at September 30, 2012
 
7,620,072

 
$
49,455

 
$
178,844

 
$
6,679

 
$
234,978

 
 
 
 
 
 
 
 
 
 

Balance at December 31, 2012
 
7,622,750

 
$
49,667

 
$
181,151

 
$
2,997

 
$
233,815

Net income
 

 

 
18,359

 

 
18,359

Other comprehensive income (loss), net of tax:
 
 

 
 

 
 

 
 

 
 

Change in fair value of securities available-for-sale
 

 

 

 
(18,016
)
 
(18,016
)
Change in fair value of cash flow hedges
 

 

 

 
3,591

 
3,591

Change in net unrecognized gains on postretirement plans
 

 

 

 
141

 
141

Total comprehensive income
 

 

 
18,359

 
(14,284
)
 
4,075

Stock-based compensation expense
 

 
340

 

 

 
340

Exercise of stock options and issuance of restricted stock, net of repurchase for tax withholdings and tax benefit
 
23,914

 
258

 

 

 
258

Cash dividends declared ($0.81 per share)
 

 

 
(6,206
)
 

 
(6,206
)
Balance at September 30, 2013
 
7,646,664

 
$
50,265

 
$
193,304

 
$
(11,287
)
 
$
232,282

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

7



CAMDEN NATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
 
 
Nine Months Ended September 30,
(In Thousands)
 
2013
 
2012
Operating Activities
 
 

 
 

Net income
 
$
18,359

 
$
19,250

Adjustments to reconcile net income to net cash provided by operating activities:
 
 

 
 

Provision for credit losses
 
2,034

 
2,708

Depreciation and amortization
 
2,300

 
1,849

Securities amortization and accretion
 
1,745

 
1,494

Stock-based compensation expense
 
340

 
355

Decrease in interest receivable
 
537

 
58

Amortization of intangible assets
 
863

 
433

Net investment securities gains and other-than-temporary impairment of securities
 
(785
)
 
(1,059
)
Increase in other real estate owned valuation allowance and loss on disposition
 
97

 
465

Originations of mortgage loans held for sale
 
(29,515
)
 
(12,775
)
Proceeds from the sale of mortgage loans
 
28,886

 
19,104

Gain on sale of mortgage loans
 
(684
)
 
(268
)
(Increase) decrease in other assets
 
(633
)
 
720

(Decrease) increase in other liabilities
 
(2,539
)
 
474

Net cash provided by operating activities
 
21,005

 
32,808

Investing Activities
 
 

 
 

Proceeds from sales and maturities of securities available-for-sale
 
121,793

 
154,708

Purchase of securities available-for-sale
 
(138,300
)
 
(267,533
)
Net increase in loans
 
(29,168
)
 
(30,544
)
Proceeds from sale of Federal Home Loan Bank stock
 
1,310

 
928

Proceeds from the sale of other real estate owned
 
530

 
1,665

Proceeds from previously charged-off loans
 
436

 
530

Cash settlement in branch acquisition
 
(3,278
)
 

Purchase of premises and equipment
 
(1,203
)
 
(2,662
)
Net cash used by investing activities
 
(47,880
)
 
(142,908
)
Financing Activities
 
 

 
 

Net increase in deposits
 
44,210

 
97,952

Repayments on Federal Home Loan Bank long-term advances
 
(271
)
 
(10,335
)
Net change in short-term Federal Home Loan Bank borrowings
 
40,000

 
45,000

Net decrease in other borrowed funds
 
(52,479
)
 
(4,815
)
Common stock repurchase
 

 
(2,097
)
Exercise of stock options and issuance of restricted stock, net of repurchase for tax withholdings and tax benefit
 
258

 
(241
)
Cash dividends paid on common stock
 
(6,047
)
 
(5,756
)
Net cash provided by financing activities
 
25,671

 
119,708

Net (decrease) increase in cash and cash equivalents
 
(1,204
)
 
9,608

Cash and cash equivalents at beginning of year
 
58,290

 
39,325

Cash and cash equivalents at end of period
 
$
57,086

 
$
48,933

 
 
 
 
 
Supplemental information
 
 

 
 

Interest paid
 
$
9,952

 
$
13,402

Income taxes paid
 
8,750

 
4,560

Securities purchased but unsettled
 
14,363

 
20,231

Transfer from loans and premises and equipment to other real estate owned
 
1,116

 
1,044

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

8


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


NOTE 1 - BASIS OF PRESENTATION
 
The accompanying unaudited consolidated financial statements were prepared in accordance with instructions for Form 10-Q and, therefore, do not include all disclosures required by accounting principles generally accepted in the United States of America (“GAAP”) for complete presentation of financial statements. In the opinion of management, the consolidated financial statements contain all adjustments (consisting only of normal recurring accruals) necessary to present fairly the consolidated statements of condition of Camden National Corporation (the “Company”) as of September 30, 2013 and December 31, 2012, the consolidated statements of income for the three and nine months ended September 30, 2013 and 2012, the consolidated statements of comprehensive income for the three and nine months ended September 30, 2013 and 2012, the consolidated statements of changes in shareholders' equity for the nine months ended September 30, 2013 and 2012, and the consolidated statements of cash flows for the nine months ended ended September 30, 2013 and 2012. All significant intercompany transactions and balances are eliminated in consolidation. Certain items from the prior year were reclassified to conform to the current year presentation. The income reported for the three and nine months period ended September 30, 2013 is not necessarily indicative of the results that may be expected for the full year. The information in this report should be read in conjunction with the consolidated financial statements and accompanying notes included in the Annual Report for the year ended December 31, 2012, Form 10-K.
 

NOTE 2 – EARNINGS PER SHARE
 
The following is an analysis of basic and diluted earnings per share (“EPS”), reflecting the application of the two-class method, as described below: 
 
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
 
2013
 
2012
 
2013
 
2012
Net income
 
$
6,366

 
$
6,255

 
$
18,359

 
$
19,250

Dividends and undistributed earnings allocated to participating securities (1)
 
(20
)
 
(18
)
 
(50
)
 
(48
)
Net income available to common shareholders
 
$
6,346

 
$
6,237

 
$
18,309

 
$
19,202

 
 
 
 
 
 
 
 
 
Weighted-average common shares outstanding for basic EPS
 
7,643,720

 
7,619,411

 
7,636,352

 
7,655,619

Dilutive effect of stock-based awards (2)
 
22,585

 
20,023

 
15,518

 
14,144

Weighted-average common and potential common shares for diluted EPS
 
7,666,305

 
7,639,434

 
7,651,870

 
7,669,763

Earnings per common share:
 
 

 
 

 
 
 
 
Basic EPS
 
$
0.83

 
$
0.82

 
$
2.40

 
$
2.51

Diluted EPS
 
$
0.83

 
$
0.82

 
$
2.39

 
$
2.50

(1)
Represents dividends paid and undistributed earnings allocated to nonvested restricted stock awards.
 
 
(2)
Represents the effect of the assumed exercise of stock options, vesting of restricted shares, and vesting of restricted stock units, based on the treasury stock method.

Nonvested stock-based payment awards that contain non-forfeitable rights to dividends are participating securities and are included in the computation of earnings per share pursuant to the two-class method.  The two-class method is an earnings allocation formula that determines earnings per share for each class of common stock and participating security according to dividends declared (or accumulated) and participation rights in undistributed earnings. Certain of the Company’s nonvested restricted stock awards qualify as participating securities. 
  

9



Net income is allocated between the common stock and participating securities pursuant to the two-class method.  Basic EPS is computed by dividing net income available to common shareholders by the weighted average number of common shares outstanding during the period, excluding participating nonvested restricted shares. 
 
Diluted EPS is computed in a similar manner, except that first the denominator is increased to include the number of additional common shares that would have been outstanding if potentially dilutive common shares were issued using the treasury stock method.

For the three and nine months ended September 30, 2013, options to purchase 14,250 and 31,000 shares, respectively, of common stock were not considered in the computation of potential common shares for purposes of diluted EPS, since the exercise prices of the options were greater than the average market price of the common stock for the respective periods. For the three and nine months ended September 30, 2012, options to purchase 18,250 and 49,500 shares, respectively, of common stock were not considered in the computation of potential common shares for purposes of diluted EPS, since the exercise prices of the options were greater than the average market price of the common stock for the respective periods.


NOTE 3 – SECURITIES
 
The following tables summarize the amortized costs and estimated fair values of securities available-for-sale (“AFS”), as of September 30, 2013 and December 31, 2012
 
Amortized
Cost
 
Unrealized
Gains
 
Unrealized
Losses
 
Fair
Value
September 30, 2013
 

 
 

 
 

 
 

Obligations of states and political subdivisions
$
27,848

 
$
1,352

 
$

 
$
29,200

Mortgage-backed securities issued or guaranteed by U.S. government sponsored enterprises
358,436

 
6,384

 
(4,612
)
 
360,208

Collateralized mortgage obligations issued or guaranteed by U.S. government sponsored enterprises
397,064

 
1,045

 
(11,763
)
 
386,346

Private issue collateralized mortgage obligations
7,700

 
31

 
(242
)
 
7,489

Total securities available-for-sale
$
791,048

 
$
8,812

 
$
(16,617
)
 
$
783,243

December 31, 2012
 

 
 

 
 

 
 

Obligations of states and political subdivisions
$
31,112

 
$
1,928

 
$

 
$
33,040

Mortgage-backed securities issued or guaranteed by U.S. government sponsored enterprises
345,528

 
12,699

 
(79
)
 
358,148

Collateralized mortgage obligations issued or guaranteed by U.S. government sponsored enterprises
375,627

 
6,181

 
(120
)
 
381,688

Private issue collateralized mortgage obligations
8,871

 

 
(697
)
 
8,174

Total securities available-for-sale
$
761,138

 
$
20,808

 
$
(896
)
 
$
781,050

 
Net unrealized gains (losses) on securities AFS at September 30, 2013 and December 31, 2012 and included in accumulated other comprehensive income (loss) amounted to $(5.1) million and $12.9 million, net of a deferred tax benefit of $2.7 million and liability of $7.0 million, respectively.
 
Impaired Securities
Management periodically reviews the Company’s investment portfolio to determine the cause, magnitude and duration of declines in the fair value of each security. Thorough evaluations of the causes of the unrealized losses are performed to determine whether the impairment is temporary or other-than-temporary in nature. Considerations such as the ability of the securities to meet cash flow requirements, levels of credit enhancements, risk of curtailment, recoverability of invested amount over a reasonable period of time and the length of time the security is in a loss position, for example, are applied in determining other-than-temporary impairment (“OTTI”). Once a decline in value is determined to be other-than-temporary, the value of the security is reduced to fair value and a corresponding charge to earnings is recognized.
 

10



The following table presents the estimated fair values and gross unrealized losses of investment securities that were in a continuous loss position at September 30, 2013 and December 31, 2012, by length of time that individual securities in each category have been in a continuous loss position:  
 
Less Than 12 Months
 
12 Months or More
 
Total
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
September 30, 2013
 

 
 

 
 

 
 

 
 

 
 

Mortgage-backed securities
$
149,819

 
$
(4,612
)
 
$
13

 
$

 
$
149,832

 
$
(4,612
)
Collateralized mortgage obligations
307,640

 
(11,763
)
 

 

 
307,640

 
(11,763
)
Private issue collateralized mortgage obligations
131

 
(2
)
 
5,357

 
(240
)
 
5,488

 
(242
)
Total
$
457,590

 
$
(16,377
)
 
$
5,370

 
$
(240
)
 
$
462,960

 
$
(16,617
)
December 31, 2012
 

 
 

 
 

 
 

 
 

 
 

Mortgage-backed securities
$
42,782

 
$
(79
)
 
$

 
$

 
$
42,782

 
$
(79
)
Collateralized mortgage obligations
73,098

 
(120
)
 

 

 
73,098

 
(120
)
Private issue collateralized mortgage obligations

 

 
8,174

 
(697
)
 
8,174

 
(697
)
Total
$
115,880

 
$
(199
)
 
$
8,174

 
$
(697
)
 
$
124,054

 
$
(896
)

At September 30, 2013, the Company held $463.0 million in investment securities with unrealized losses that are considered temporary. Included in the unrealized losses were non-agency private issue collateralized mortgage obligations (“non-agency”). At September 30, 2013, the Company held $7.5 million in non-agencies of which $5.4 million had unrealized losses for twelve months or longer. Management believes the unrealized losses for the non-agencies are the result of current market conditions and the underestimation of their value in the market. Management currently has the intent and ability to retain these investment securities with unrealized losses until the decline in value has been recovered. Stress tests are performed monthly on the non-agencies, which are higher risk bonds, within the investment portfolio using current statistical data to determine expected cash flows and forecast potential losses. The results of the stress tests during the first nine months of 2013 indicated expected future cash flows in excess of cost, and, as such the non-agencies are not considered to be OTTI.
 
Security Gains and Losses and Other-Than-Temporary Impairment of Securities
The following table details the Company’s sales of investment securities, the gross realized gains and losses, and impairment of securities: 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
Available-for-sale
2013
 
2012
 
2013
 
2012
Proceeds from sales of securities
$
12,738

 
$
7,337

 
$
17,613

 
$
38,701

Gross realized gains
647

 
198

 
785

 
1,302

Gross realized (losses)

 
(1
)
 

 
(204
)
Other-than-temporary impairment of securities

 
(10
)
 

 
(39
)
 
For the three and nine months ended September 30, 2013, the Company sold certain securities AFS with a total carrying value of $12.7 million and $17.6 million, respectively. For the three and nine months ended September 30, 2013, the Company recorded net gains of $647,000 and $785,000, respectively, in the consolidated statements of income in net gain on sale of securities and other-than-temporary impairment of securities.

For the three and nine months ended September 30, 2012, the Company sold certain securities AFS with a total carrying value of $7.3 million and $38.7 million, respectively. For the three and nine months ended September 30, 2012, the Company recorded net gains of $187,000 and $1.1 million, respectively, in the consolidated statements of income in net gain on sale of securities and other-than-temporary impairment of securities.

The cost basis of securities sold is measured on a specific identification basis.

11




Securities Pledged
At September 30, 2013 and December 31, 2012, securities with an amortized cost of $487.0 million and $465.0 million and a fair value of $484.9 million and $482.4 million, respectively, were pledged to secure Federal Home Loan Bank (“FHLB”) advances, public deposits, and securities sold under agreements to repurchase and for other purposes required or permitted by law.
 
Contractual Maturities
The amortized cost and estimated fair values of debt securities by contractual maturity at September 30, 2013, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. 
Available-for-sale
Amortized
Cost
 
Fair
Value
Due in one year or less
$
1,739

 
$
1,765

Due after one year through five years
24,679

 
25,403

Due after five years through ten years
150,623

 
152,200

Due after ten years
614,007

 
603,875

 
$
791,048

 
$
783,243

 


NOTE 4 – LOANS AND ALLOWANCE FOR LOAN LOSSES
 
The composition of the Company’s loan portfolio, excluding residential loans held for sale, at September 30, 2013 and December 31, 2012 was as follows:   
 
September 30,
2013
 
December 31,
2012
Residential real estate loans
$
564,933

 
$
572,768

Commercial real estate loans
522,610

 
506,231

Commercial loans
177,855

 
190,454

Home equity loans
306,303

 
278,375

Consumer loans
18,626

 
16,633

Deferred loan fees net of costs
(381
)
 
(595
)
Total loans
$
1,589,946

 
$
1,563,866


The Company’s lending activities are primarily conducted in Maine. The Company originates single family and multi-family residential loans, commercial real estate loans, business loans, municipal loans and a variety of consumer loans. In addition, the Company makes loans for the construction of residential homes, multi-family properties and commercial real estate properties. The ability and willingness of borrowers to honor their repayment commitments is generally dependent on the level of overall economic activity within the geographic area and the general economy. During the first nine months of 2013 and 2012, the Company sold $28.2 million and $18.8 million, respectively, of fixed-rate residential mortgage loans on the secondary market that resulted in net gains on the sale of loans of $684,000 and $268,000, respectively.

In connection with a branch acquisition in 2012, the Company acquired $6.0 million in performing commercial loans. The loans were recorded at fair value, which was determined by estimating the amount and timing of principal and interest cash flows expected to be collected on the loans and discounting those cash flows at a market rate of interest. As a result of this analysis, the Company recorded a fair value mark of $317,000, which will amortize over the estimated lives of the loans. Additionally, the acquired loans did not have any related allowance for loan losses (“ALL”) as they were recorded at fair value; however, an ALL will be established should the credit quality of these loans deteriorate subsequent to the acquisition. Based on the immateriality of the acquired loans and fair value mark, additional disclosures related to the acquired loans are not required.


12



The ALL is management’s best estimate of the inherent risk of loss in the Company’s loan portfolio as of the consolidated statement of condition date. Management makes various assumptions and judgments about the collectability of the loan portfolio and provides an allowance for potential losses based on a number of factors including historical losses. If those assumptions are incorrect, the ALL may not be sufficient to cover losses and may cause an increase in the allowance in the future. Among the factors that could affect the Company’s ability to collect loans and require an increase to the ALL in the future are: (i) general real estate and economic conditions; (ii) regional credit concentration; (iii) industry concentration, for example in the hospitality, tourism and recreation industries; and (iv) a requirement by federal and state regulators to increase the provision for loan losses or recognize additional charge-offs.

The board of directors monitors credit risk management through the Directors’ Loan Committee and the Corporate Risk Management group. The Directors’ Loan Committee reviews large exposure credit requests, monitors asset quality on a regular basis and has approval authority for credit granting policies. The Corporate Risk Management group oversees management’s systems and procedures to monitor the credit quality of the loan portfolio, conduct a loan review program, maintain the integrity of the loan rating system and determine the adequacy of the ALL. The Company’s practice is to identify credit problems early and take charge-offs as promptly as practicable. In addition, management continuously reassesses its underwriting standards in response to credit risk posed by changes in economic conditions. For purposes of determining the ALL, the Company disaggregates its portfolio loans into portfolio segments, which include residential real estate, commercial real estate, commercial, home equity, and consumer.

 
The following table presents activity in the ALL for the three months ended September 30, 2013:
 
Residential 
Real Estate
 
Commercial 
Real Estate
 
Commercial
 
Home
Equity
 
Consumer
 
Unallocated
 
Total
ALL:
 

 
 

 
 

 
 

 
 

 
 

 
 

Beginning balance
$
6,232

 
$
3,590

 
$
5,788

 
$
3,428

 
$
221

 
$
4,062

 
$
23,321

Loans charged off
(340
)
 
(591
)
 
(379
)
 
(86
)
 
(42
)
 

 
(1,438
)
Recoveries

 
14

 
77

 
8

 
12

 

 
111

Provision (reduction)
709

 
547

 
465

 
137

 
40

 
(1,231
)
 
667

Ending balance
$
6,601

 
$
3,560

 
$
5,951

 
$
3,487

 
$
231

 
$
2,831

 
$
22,661



The following table presents activity in the ALL for the nine months ended September 30, 2013
 
Residential 
Real Estate
 
Commercial 
Real Estate
 
Commercial
 
Home
Equity
 
Consumer
 
Unallocated
 
Total
ALL:
 

 
 

 
 

 
 

 
 

 
 

 
 

Beginning balance
$
6,996

 
$
4,549

 
$
5,933

 
$
2,520

 
$
184

 
$
2,862

 
$
23,044

Loans charged off
(687
)
 
(762
)
 
(823
)
 
(423
)
 
(175
)
 

 
(2,870
)
Recoveries
5

 
106

 
275

 
10

 
40

 

 
436

Provision (reduction)
287

 
(333
)
 
566

 
1,380

 
182

 
(31
)
 
2,051

Ending balance
$
6,601

 
$
3,560

 
$
5,951

 
$
3,487

 
$
231

 
$
2,831

 
$
22,661

ALL balance attributable to loans:
 

 
 

 
 

 
 

 
 

 
 

 
 

Individually evaluated for impairment
$
1,655

 
$
686

 
$
177

 
$
449

 
$
81

 
$

 
$
3,048

Collectively evaluated for impairment
4,946

 
2,874

 
5,774

 
3,038

 
150

 
2,831

 
19,613

Total ending ALL
$
6,601

 
$
3,560

 
$
5,951

 
$
3,487

 
$
231

 
$
2,831

 
$
22,661

Loans:
 

 
 

 
 

 
 

 
 

 
 

 
 

Individually evaluated for impairment
$
14,059

 
$
11,016

 
$
3,369

 
$
1,521

 
$
498

 
$

 
$
30,463

Collectively evaluated for impairment
550,493

 
511,594

 
174,486

 
304,782

 
18,128

 

 
1,559,483

Total ending loans balance
$
564,552

 
$
522,610

 
$
177,855

 
$
306,303

 
$
18,626

 
$

 
$
1,589,946

 

13



The following table presents activity in the ALL for the three months ended September 30, 2012:
 
Residential 
Real Estate
 
Commercial 
Real Estate
 
Commercial
 
Home
Equity
 
Consumer
 
Unallocated
 
Total
ALL:
 

 
 

 
 

 
 

 
 

 
 

 
 

Beginning balance
$
6,352

 
$
4,837

 
$
6,368

 
$
2,319

 
$
164

 
$
3,222

 
$
23,262

Loans charged off
(578
)
 

 
(730
)
 
(70
)
 
(38
)
 

 
(1,416
)
Recoveries
5

 
53

 
85

 
1

 
2

 

 
146

Provision (reduction)
860

 
(215
)
 
73

 
108

 
34

 
(1
)
 
859

Ending balance
$
6,639

 
$
4,675

 
$
5,796

 
$
2,358

 
$
162

 
$
3,221

 
$
22,851


The following table presents activity in the ALL for the nine months ended September 30, 2012
 
Residential
Real Estate
 
Commercial
Real Estate
 
Commercial
 
Home
Equity
 
Consumer
 
Unallocated
 
Total
ALL:
 

 
 

 
 

 
 

 
 

 
 

 
 

Beginning balance
$
6,398

 
$
5,702

 
$
4,846

 
$
2,704

 
$
420

 
$
2,941

 
$
23,011

Loans charged off
(1,024
)
 
(209
)
 
(1,146
)
 
(921
)
 
(66
)
 

 
(3,366
)
Recoveries
73

 
219

 
205

 
21

 
12

 

 
530

Provision (reduction)
1,192

 
(1,037
)
 
1,891

 
554

 
(204
)
 
280

 
2,676

Ending balance
$
6,639

 
$
4,675

 
$
5,796

 
$
2,358

 
$
162

 
$
3,221

 
$
22,851

ALL balance attributable to loans:
 

 
 

 
 

 
 

 
 

 
 

 
 

Individually evaluated for impairment
$
2,071

 
$
343

 
$
376

 
$
265

 
$
39

 
$

 
$
3,094

Collectively evaluated for impairment
4,568

 
4,332

 
5,420

 
2,093

 
123

 
3,221

 
19,757

Total ending ALL
$
6,639

 
$
4,675

 
$
5,796

 
$
2,358

 
$
162

 
$
3,221

 
$
22,851

Loans:
 

 
 

 
 

 
 

 
 

 
 

 
 

Individually evaluated for impairment
$
12,554

 
$
7,121

 
$
3,829

 
$
1,668

 
$
263

 
$

 
$
25,435

Collectively evaluated for impairment
558,739

 
494,162

 
174,454

 
272,508

 
15,302

 

 
1,515,165

Total ending loans balance
$
571,293

 
$
501,283

 
$
178,283

 
$
274,176

 
$
15,565

 
$

 
$
1,540,600


The following table presents the activity in the ALL for the year ended December 31, 2012
 
Residential
Real Estate
 
Commercial
Real Estate
 
Commercial
 
Home
Equity
 
Consumer
 
Unallocated
 
Total
ALL:
 

 
 

 
 

 
 

 
 

 
 

 
 

Beginning balance
$
6,398

 
$
5,702

 
$
4,846

 
$
2,704

 
$
420

 
$
2,941

 
$
23,011

Loans charged off
(1,197
)
 
(593
)
 
(1,393
)
 
(1,234
)
 
(85
)
 

 
(4,502
)
Recoveries
73

 
222

 
406

 
23

 
20

 

 
744

Provision (reduction)
1,722

 
(782
)
 
2,074

 
1,027

 
(171
)
 
(79
)
 
3,791

Ending balance
$
6,996

 
$
4,549

 
$
5,933

 
$
2,520

 
$
184

 
$
2,862

 
$
23,044

ALL balance attributable to loans:
 

 
 

 
 

 
 

 
 

 
 

 
 

Individually evaluated for impairment
$
2,255

 
$
265

 
$
286

 
$
261

 
$
39

 
$

 
$
3,106

Collectively evaluated for impairment
4,741

 
4,284

 
5,647

 
2,259

 
145

 
2,862

 
19,938

Total ending ALL
$
6,996

 
$
4,549

 
$
5,933

 
$
2,520

 
$
184

 
$
2,862

 
$
23,044

Loans:
 

 
 

 
 

 
 

 
 

 
 

 
 

Individually evaluated for impairment
$
13,805

 
$
7,968

 
$
3,610

 
$
1,515

 
$
259

 
$

 
$
27,157

Collectively evaluated for impairment
558,368

 
498,263

 
186,844

 
276,860

 
16,374

 

 
1,536,709

Total ending loans balance
$
572,173

 
$
506,231

 
$
190,454

 
$
278,375

 
$
16,633

 
$

 
$
1,563,866

 

14



The ALL for the Company’s portfolio segments is determined based on loan balances and the historical performance factor of each portfolio segment. The significant changes in the ALL at September 30, 2013 compared to December 31, 2012 were within the home equity and commercial real estate portfolio segments. The increase in the allocation of ALL for home equity was primarily due to the 10.0% increase in loan balances and its historical performance, while the decrease in commercial real estate allocation was due to the improvement in that segment's performance factor.
 
The Company focuses on maintaining a well-balanced and diversified loan portfolio. Despite such efforts, it is recognized that credit concentrations may occasionally emerge as a result of economic conditions, changes in local demand, natural loan growth and runoff. To ensure that credit concentrations can be effectively identified, all commercial and commercial real estate loans are assigned Standard Industrial Classification codes, North American Industry Classification System codes, and state and county codes. Shifts in portfolio concentrations are monitored by the Credit Risk Policy Committee. As of September 30, 2013, the two most significant industry exposures within the commercial real estate loan portfolio were 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 September 30, 2013, exposure to these two industries as a percentage of total commercial real estate loans was 29% and 27%, respectively.
 
To further identify loans with similar risk profiles, the Company categorizes each portfolio segment into classes by credit risk characteristic and applies a credit quality indicator to each portfolio segment. The indicators for commercial, commercial real estate and residential real estate loans are represented by Grades 1 through 10 as outlined below. In general, risk ratings are adjusted periodically throughout the year as updated analysis and review warrants. This process may include, but is not limited to, annual credit and loan reviews, periodic reviews of loan performance metrics, such as delinquency rates, and quarterly reviews of adversely risk rated loans. The Company uses the following definitions when assessing grades for the purpose of evaluating the risk and adequacy of the ALL:

Grade 1 through 6 — Grades 1 through 6 represent groups of loans that are not subject to adverse criticism as defined in regulatory guidance. Loans in these groups exhibit characteristics that represent low to moderate risks, which is measured using a variety of credit risk criteria, such as cash flow coverage, debt service coverage, balance sheet leverage, liquidity, management experience, industry position, prevailing economic conditions, support from secondary sources of repayment and other credit factors that may be relevant to a specific loan. In general, these loans are supported by properly margined collateral and guarantees of principal parties.
Grade 7 — Loans with potential weakness (Special Mention). Loans in this category are currently protected based on collateral and repayment capacity and do not constitute undesirable credit risk, but have potential weakness that may result in deterioration of the repayment process at some future date. This classification is used if a negative trend is evident in the obligor’s financial situation. Special mention loans do not sufficiently expose the Company such that they warrant adverse classification.
Grade 8 — Loans with definite weakness (Substandard). Loans classified as substandard are inadequately protected by the current sound worth and paying capacity of the obligor or by collateral pledged. This classification is used if borrowers experience difficulty in meeting debt repayment requirements. Deterioration is sufficient to cause the Company to look to the sale of collateral.
Grade 9 — Loans with potential loss (Doubtful). Loans classified as doubtful have all the weaknesses inherent in the substandard grade with the added characteristic that the weaknesses make collection or liquidation of the loan in full highly questionable and improbable. The possibility of some loss is extremely high, but because of specific pending factors that may work to the advantage and strengthening of the asset, its classification as an estimated loss is deferred until its more exact status may be determined.
Grade 10 — Loans with definite loss (Loss). Loans classified as loss are considered uncollectible. The loss classification does not mean that the asset has absolutely no recovery or salvage value, but rather that it is not practical or desirable to defer writing off the asset because recovery and collection time may be protracted.

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

15



The following table summarizes credit risk exposure indicators by portfolio segment as of the following dates:
 
Residential 
Real Estate
 
Commercial 
Real Estate
 
Commercial
 
Home
Equity
 
Consumer
September 30, 2013
 

 
 

 
 

 
 

 
 

Pass (Grades 1-6)
$
545,922

 
$
475,515

 
$
153,688

 
$

 
$

Performing

 

 

 
304,781

 
18,130

Special Mention (Grade 7)
3,073

 
8,050

 
10,511

 

 

Substandard (Grade 8)
15,557

 
39,045

 
13,656

 

 

Non-performing

 

 

 
1,522

 
496

Total
$
564,552

 
$
522,610

 
$
177,855

 
$
306,303

 
$
18,626

December 31, 2012
 

 
 

 
 

 
 

 
 

Pass (Grades 1-6)
$
555,444

 
$
440,610

 
$
165,460

 
$

 
$

Performing

 

 

 
276,742

 
16,376

Special Mention (Grade 7)
1,291

 
17,069

 
7,449

 

 

Substandard (Grade 8)