10-Q 1 cac-033114x10q.htm 10-Q CAC-03.31.14-10Q

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 March 31, 2014
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 April 28, 2014:  Common stock (no par value) 7,419,314 shares.



CAMDEN NATIONAL CORPORATION

 FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 2014
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 - March 31, 2014 and December 31, 2013
 
 
 
 
Consolidated Statements of Income - Three Months Ended March 31, 2014 and 2013
 
 
 
 
Consolidated Statements of Comprehensive Income - Three Months Ended March 31, 2014 and 2013
 
 
 
 
Consolidated Statements of Changes in Shareholders’ Equity - Three Months Ended March 31, 2014 and 2013
 
 
 
 
Consolidated Statements of Cash Flows - Three Months Ended March 31, 2014 and 2013
 
 
 
 
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 and Subsidiaries as of March 31, 2014, and for the three-month periods ended March 31, 2014 and 2013. 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
 
 
Portland, Maine
May 2, 2014


3



CONSOLIDATED STATEMENTS OF CONDITION
(In Thousands, Except Number of Shares)
 
March 31,
2014
(unaudited)
 
December 31, 2013
ASSETS
 
 

 
 

Cash and due from banks
 
$
51,877

 
$
51,355

Securities:
 
 

 
 

Available-for-sale securities, at fair value
 
797,242

 
808,477

Held-to-maturity securities, at amortized cost
 
6,973

 

Federal Home Loan Bank and Federal Reserve Bank stock, at cost
 
20,417

 
19,724

Total securities
 
824,632

 
828,201

Trading account assets
 
2,308

 
2,488

Loans
 
1,620,186

 
1,580,402

Less: allowance for loan losses
 
(21,670
)
 
(21,590
)
Net loans
 
1,598,516

 
1,558,812

Goodwill and other intangible assets
 
49,032

 
49,319

Bank-owned life insurance
 
46,669

 
46,363

Premises and equipment, net
 
25,177

 
25,727

Deferred tax assets
 
15,632

 
16,047

Interest receivable
 
6,061

 
5,808

Other real estate owned
 
2,712

 
2,195

Other assets
 
18,050

 
17,514

Total assets
 
$
2,640,666

 
$
2,603,829

LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 

 
 

Liabilities
 
 

 
 

Deposits:
 
 

 
 

Demand
 
$
228,689

 
$
241,866

Interest checking
 
457,301

 
453,909

Savings and money market
 
685,381

 
675,679

Retail certificates of deposit
 
334,081

 
343,034

Brokered deposits
 
131,227

 
99,336

Total deposits
 
1,836,679

 
1,813,824

Federal Home Loan Bank advances
 
56,094

 
56,112

Other borrowed funds
 
441,349

 
430,058

Junior subordinated debentures
 
43,947

 
43,922

Accrued interest and other liabilities
 
31,128

 
28,817

Total liabilities
 
2,409,197

 
2,372,733

Commitments and contingencies (Notes 6, 7, and 9)
 
 
 
 
Shareholders’ Equity
 
 

 
 

Common stock, no par value; authorized 20,000,000 shares, issued and outstanding 7,484,560 and 7,579,913 shares as of March 31, 2014 and December 31, 2013, respectively
 
43,684

 
47,783

Retained earnings
 
199,363

 
195,660

Accumulated other comprehensive loss:
 
 

 
 

Net unrealized losses on available-for-sale securities, net of tax
 
(6,139
)
 
(7,964
)
Net unrealized losses on derivative instruments, net of tax
 
(3,625
)
 
(2,542
)
Net unrecognized losses on postretirement plans, net of tax
 
(1,814
)
 
(1,841
)
Total accumulated other comprehensive loss
 
(11,578
)
 
(12,347
)
Total shareholders’ equity
 
231,469

 
231,096

Total liabilities and shareholders’ equity
 
$
2,640,666

 
$
2,603,829


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

4



CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
 
 
Three Months Ended
March 31,
(In Thousands, Except Number of Shares and Per Share Data)
 
2014
 
2013
Interest Income
 
 

 
 

Interest and fees on loans
 
$
16,780

 
$
17,795

Interest on U.S. government and sponsored enterprise obligations
 
4,230

 
4,276

Interest on state and political subdivision obligations
 
294

 
305

Interest on federal funds sold and other investments
 
89

 
50

Total interest income
 
21,393

 
22,426

Interest Expense
 
 

 
 

Interest on deposits
 
1,551

 
1,819

Interest on borrowings
 
807

 
818

Interest on junior subordinated debentures
 
625

 
621

Total interest expense
 
2,983

 
3,258

Net interest income
 
18,410

 
19,168

Provision for credit losses
 
493

 
674

Net interest income after provision for credit losses
 
17,917

 
18,494

Non-Interest Income
 
 

 
 

Service charges on deposit accounts
 
1,469

 
1,684

Other service charges and fees
 
1,395

 
1,429

Income from fiduciary services
 
1,184

 
1,143

Brokerage and insurance commissions
 
478

 
412

Bank-owned life insurance
 
306

 
338

Mortgage banking income, net
 
72

 
574

Net gain on sale of securities
 
166

 
138

Other income
 
615

 
618

Total non-interest income
 
5,685

 
6,336

Non-Interest Expense
 
 

 
 

Salaries and employee benefits
 
7,980

 
8,361

Furniture, equipment and data processing
 
1,789

 
1,604

Net occupancy
 
1,380

 
1,552

Consulting and professional fees
 
518

 
547

Other real estate owned and collection costs
 
513

 
888

Regulatory assessments
 
481

 
499

Amortization of intangible assets
 
287

 
288

Branch Acquisition costs
 

 
161

Other expenses
 
2,177

 
2,600

Total non-interest expense
 
15,125

 
16,500

Income before income taxes
 
8,477

 
8,330

Income Taxes
 
2,762

 
2,668

Net Income
 
$
5,715

 
$
5,662

 
 
 
 
 
Per Share Data
 
 

 
 

Basic earnings per share
 
$
0.76

 
$
0.74

Diluted earnings per share
 
$
0.75

 
$
0.74

Weighted average number of common shares outstanding
 
7,528,751

 
7,627,691

Diluted weighted average number of common shares outstanding
 
7,551,785

 
7,643,267

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

5



CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(unaudited)
 
 
Three Months Ended
March 31,
(In Thousands)
 
2014
 
2013
Net income
 
$
5,715

 
$
5,662

Other comprehensive income (loss):
 
 

 
 

Available-for-sale securities:
 
 

 
 

Net unrealized gains (losses) on available-for-sale securities arising during the period, net of tax of ($1,041) and $1,507, respectively
 
1,933

 
(2,799
)
Reclassification of gains included in net income, net of tax of $58 and $48, respectively(1)
 
(108
)
 
(90
)
Net change in unrealized gains (losses) on available-for-sale securities, net of tax
 
1,825

 
(2,889
)
Net change in unrealized (losses) gains on cash flow hedging derivatives, net of tax of $583 and ($458), respectively
 
(1,083
)
 
850

Reclassification of amortization of net unrecognized actuarial loss and prior service cost, net of tax of ($15) and ($25), respectively(2)
 
27

 
47

Other comprehensive income (loss)
 
769

 
(1,992
)
Comprehensive income
 
$
6,484

 
$
3,670

(1) Reclassified into the consolidated statements of income in net gain on sale 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




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, 2012
 
7,622,750

 
$
49,667

 
$
181,151

 
$
2,997

 
$
233,815

Net income
 

 

 
5,662

 

 
5,662

Other comprehensive loss, net of tax
 

 

 

 
(1,992
)
 
(1,992
)
Stock-based compensation expense
 

 
173

 

 

 
173

Exercise of stock options and issuance of restricted stock, net of repurchase for tax withholdings and tax benefit
 
13,207

 
(19
)
 

 

 
(19
)
Cash dividends declared ($0.27 per share)
 

 

 
(2,064
)
 

 
(2,064
)
Balance at March 31, 2013
 
7,635,957

 
$
49,821

 
$
184,749

 
$
1,005

 
$
235,575

 
 
 
 
 
 
 
 
 
 

Balance at December 31, 2013
 
7,579,913

 
$
47,783

 
$
195,660

 
$
(12,347
)
 
$
231,096

Net income
 

 

 
5,715

 

 
5,715

Other comprehensive income, net of tax
 

 

 

 
769

 
769

Stock-based compensation expense
 

 
176

 

 

 
176

Exercise of stock options and issuance of restricted stock, net of repurchase for tax withholdings and tax benefit
 
18,174

 
118

 

 

 
118

Common stock repurchased
 
(113,527
)
 
(4,393
)
 

 

 
(4,393
)
Cash dividends declared ($0.27 per share)
 

 

 
(2,012
)
 

 
(2,012
)
Balance at March 31, 2014
 
7,484,560

 
$
43,684

 
$
199,363

 
$
(11,578
)
 
$
231,469

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

7



CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
 
 
Three Months Ended
March 31,
(In Thousands)
 
2014
 
2013
Operating Activities
 
 

 
 

Net income
 
$
5,715

 
$
5,662

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

 
 

Provision for credit losses
 
493

 
674

Depreciation and amortization expense
 
944

 
737

Investment securities amortization and accretion, net
 
411

 
623

Stock-based compensation expense
 
176

 
173

Amortization of intangible assets
 
287

 
288

Net gain on sale of investment securities
 
(166
)
 
(138
)
Net increase in other real estate owned valuation allowance and loss on disposition
 
15

 
7

Originations of mortgage loans held for sale
 

 
(10,988
)
Proceeds from the sale of mortgage loans
 

 
9,687

Gain on sale of mortgage loans
 

 
(307
)
Decrease in trading assets
 
180

 
56

(Increase) decrease in other assets
 
(1,278
)
 
559

Decrease in other liabilities
 
(366
)
 
(33
)
Net cash provided by operating activities
 
6,411

 
7,000

Investing Activities
 
 

 
 

Proceeds from sales and maturities of available-for-sale securities
 
33,205

 
41,365

Purchase of available-for-sale securities
 
(19,395
)
 
(68,864
)
Purchase of held-to-maturity securities
 
(5,976
)
 

Net increase in loans
 
(40,892
)
 
(15,302
)
Purchase of Federal Home Loan Bank Stock
 
(693
)
 

Proceeds from sale of Federal Home Loan Bank stock
 

 
1,310

Proceeds from the sale of other real estate owned
 

 
43

Recoveries of previously charged-off loans
 
237

 
228

Cash settlement in Branch Acquisition
 

 
(3,288
)
Purchase of premises and equipment
 
(283
)
 
(359
)
Net cash used by investing activities
 
(33,797
)
 
(44,867
)
Financing Activities
 
 

 
 

Net increase in deposits
 
22,899

 
22,316

Repayments on Federal Home Loan Bank long-term advances
 
(18
)
 
(122
)
Net change in short-term Federal Home Loan Bank borrowings
 
44,000

 
52,800

Net decrease in other borrowed funds
 
(32,691
)
 
(46,621
)
Common stock repurchased
 
(4,355
)
 

Exercise of stock options and issuance of restricted stock, net of repurchase for tax withholdings and tax benefit
 
118

 
(19
)
Cash dividends paid on common stock
 
(2,045
)
 
(1,909
)
Net cash provided by financing activities
 
27,908

 
26,445

Net increase (decrease) in cash and cash equivalents
 
522

 
(11,422
)
Cash and cash equivalents at beginning of year
 
51,355

 
58,290

Cash and cash equivalents at end of period
 
$
51,877

 
$
46,868

Supplemental information
 
 

 
 

Interest paid
 
$
3,019

 
$
3,481

Income taxes paid
 
1,500

 
300

Transfer from loans to other real estate owned
 
532

 
650

Common stock repurchased but unsettled
 
358

 

Held-to-maturity securities purchased but unsettled
 
1,008

 

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

8


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 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 as of March 31, 2014 and December 31, 2013, the consolidated statements of income for the three months ended March 31, 2014 and 2013, the consolidated statements of comprehensive income for the three months ended March 31, 2014 and 2013, the consolidated statements of changes in shareholders' equity for the three months ended March 31, 2014 and 2013, and the consolidated statements of cash flows for the three months ended March 31, 2014 and 2013. 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 months ended March 31, 2014 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 year ended December 31, 2013 Annual Report on Form 10-K.

The acronyms and abbreviations identified below are used throughout this Form 10-Q, including Part I. "Financial Information" and Part II. "Other Information". The following is provided to aid the reader and provide a reference page when reviewing this Form 10-Q.
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
 
HTM:
Held-to-maturity
ALCO:
Asset/Liability Committee
 
IRS:
Internal Revenue Service
ALL:
Allowance for loan losses
 
LIBOR:
London Interbank Offered Rate
AOCI:
Accumulated other comprehensive income (loss)
 
LTIP:
Long-Term Performance Share Plan
ASC:
Accounting Standards Codification
 
MaineHousing:
Maine State Housing Authority
ASU:
Accounting Standards Update
 
Management ALCO:
Management Asset/Liability Committee
Bank:
Camden National Bank, a wholly-owned subsidiary of Camden National Corporation
 
MBS:
Mortgage-backed security
BOLI:
Bank-owned life insurance
 
MSPP:
Management Stock Purchase Plan
Board ALCO:
Board of Directors' Asset/Liability Committee
 
MSRs:
Mortgage servicing rights
bp or bps:
Basis point(s)
 
Non-Agency:
Non-agency private issue collateralized mortgage obligation
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
 
OCC:
Office of the Comptroller of the Currency
Branch Divestiture:
The divestiture of five Franklin County branches in 2013
 
OCI:
Other comprehensive income (loss)
BSA:
Bank Secrecy Act
 
OFAC:
Office of Foreign Assets Control
CCTA:
Camden Capital Trust A, an unconsolidated entity formed by Camden National Corporation
 
OREO:
Other real estate owned
CSV:
Cash surrender value
 
OTTI:
Other-than-temporary impairment
CMO:
Collateralized mortgage obligation
 
SERP:
Supplemental executive retirement plans
Company:
Camden National Corporation
 
TDR:
Troubled-debt restructuring


9



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
 
2012 Repurchase Program:
2012 Common Stock Repurchase Program, approved by the Company's Board of Directors
FHLBB:
Federal Home Loan Bank of Boston
 
2013 Repurchase Program:
2013 Common Stock Repurchase Program, approved by the Company's Board of Directors
FRB:
Federal Reserve Bank
 
 
 

NOTE 2 – EPS
 
The following is an analysis of basic and diluted EPS, reflecting the application of the two-class method, as described below: 
 
 
Three Months Ended 
 March 31,
 
 
2014
 
2013
Net income
 
$
5,715

 
$
5,662

Dividends and undistributed earnings allocated to participating securities(1)
 
(17
)
 
(10
)
Net income available to common shareholders
 
$
5,698

 
$
5,652

Weighted-average common shares outstanding for basic EPS
 
7,528,751

 
7,627,691

Dilutive effect of stock-based awards(2)
 
23,034

 
15,576

Weighted-average common and potential common shares for diluted EPS
 
7,551,785

 
7,643,267

Earnings per common share:
 
 

 
 

Basic EPS
 
$
0.76

 
$
0.74

Diluted EPS
 
$
0.75

 
$
0.74

(1) Represents dividends paid and undistributed earnings allocated to nonvested stock-based awards that contain non-forfeitable rights to dividends.
(2) Represents the effect of the assumed exercise of stock options, vesting of restricted shares, vesting of restricted stock units, and vesting of LTIP awards that have met the performance criteria, as applicable, utilizing 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 EPS pursuant to the two-class method. The two-class method is an earnings allocation formula that determines EPS 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 stock-based awards qualify as participating securities. 
  
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 stock-based awards. 
 
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 months ended March 31, 2014 and 2013, options to purchase 15,250 and 53,500 shares, respectively, of common stock were not considered in the computation of potential common shares for purposes of diluted EPS, as the exercise prices of these options were greater than the average market price of the common stock for the respective periods.

10



NOTE 3 – SECURITIES
 
The following tables summarize the amortized cost and estimated fair values of AFS and HTM securities, as of the dates indicated: 
 
Amortized
Cost
 
Unrealized
Gains
 
Unrealized
Losses
 
Fair
Value
March 31, 2014
 

 
 

 
 

 
 

AFS Securities:
 
 
 
 
 
 
 
Obligations of U.S. government-sponsored enterprises
$
4,956

 
$
6

 
$

 
$
4,962

Obligations of states and political subdivisions
28,681

 
995

 
(2
)
 
29,674

Mortgage-backed securities issued or guaranteed by U.S. government-sponsored enterprises
394,010

 
5,793

 
(5,040
)
 
394,763

Collateralized mortgage obligations issued or guaranteed by U.S. government-sponsored enterprises
372,200

 
752

 
(11,613
)
 
361,339

Private issue collateralized mortgage obligations
6,838

 
40

 
(374
)
 
6,504

Total AFS securities
$
806,685

 
$
7,586

 
$
(17,029
)
 
$
797,242

HTM Securities:
 
 
 
 
 
 
 
Obligations of states and political subdivisions
$
6,973

 
$
29

 
$
(35
)
 
$
6,967

Total HTM securities
$
6,973

 
$
29

 
$
(35
)
 
$
6,967

December 31, 2013
 

 
 

 
 

 
 

AFS Securities:
 
 
 
 
 
 
 
Obligations of states and political subdivisions
$
30,143

 
$
1,075

 
$
(11
)
 
$
31,207

Mortgage-backed securities issued or guaranteed by U.S. government-sponsored enterprises
397,409

 
5,528

 
(7,034
)
 
395,903

Collateralized mortgage obligations issued or guaranteed by U.S. government-sponsored enterprises
385,847

 
912

 
(12,324
)
 
374,435

Private issue collateralized mortgage obligations
7,329

 
10

 
(407
)
 
6,932

Total AFS securities
$
820,728

 
$
7,525

 
$
(19,776
)
 
$
808,477

 
Net unrealized losses on AFS securities at March 31, 2014 and December 31, 2013 included in AOCI amounted to $6.1 million and $8.0 million, net of a deferred tax benefit of $3.3 million and $4.3 million, respectively.

During the first quarter of 2014, the Company purchased investments securities totaling $26.4 million. The Company designated $19.4 million as AFS securities and $7.0 million as HTM securities. The Company did not carry any HTM securities at December 31, 2013.
 
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 OTTI. Once a decline in value is determined to be other-than-temporary, the value of the security is permanently reduced and a corresponding charge to earnings is recognized.
 

11



The following table presents the estimated fair values and gross unrealized losses of investment securities that were in a continuous loss position at March 31, 2014 and December 31, 2013, by length of time that individual securities in each category have been in a continuous loss position:  
 
Less Than 12 Months
 
12 Months or More
 
Total
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
March 31, 2014
 

 
 

 
 

 
 

 
 

 
 

AFS Securities:
 
 
 
 
 
 
 
 
 
 
 
Obligations of states and political subdivisions
$
631

 
$
(2
)
 
$

 
$

 
$
631

 
$
(2
)
Mortgage-backed securities issued or guaranteed by U.S. government-sponsored enterprises
131,887

 
(2,760
)
 
43,244

 
(2,280
)
 
175,131

 
(5,040
)
Collateralized mortgage obligations issued or guaranteed by U.S. government-sponsored enterprises
202,801

 
(5,901
)
 
98,773

 
(5,712
)
 
301,574

 
(11,613
)
Private issue collateralized mortgage obligations
467

 
(1
)
 
4,566

 
(373
)
 
5,033

 
(374
)
Total AFS securities
$
335,786

 
$
(8,664
)
 
$
146,583

 
$
(8,365
)
 
$
482,369

 
$
(17,029
)
HTM Securities:
 
 
 
 
 
 
 
 
 
 
 
Obligations of states and political subdivisions
$
3,183

 
$
(35
)
 
$

 
$

 
$
3,183

 
$
(35
)
Total HTM securities
$
3,183

 
$
(35
)
 
$

 
$

 
$
3,183

 
$
(35
)
December 31, 2013
 

 
 

 
 

 
 

 
 

 
 

AFS Securities:
 
 
 
 
 
 
 
 
 
 
 
Obligations of states and political subdivisions
$
2,143

 
$
(11
)
 
$

 
$

 
$
2,143

 
$
(11
)
Mortgage-backed securities issued or guaranteed by U.S. government-sponsored enterprises
145,424

 
(4,189
)
 
43,915

 
(2,845
)
 
189,339

 
(7,034
)
Collateralized mortgage obligations issued or guaranteed by U.S. government-sponsored enterprises
239,278

 
(7,738
)
 
73,376

 
(4,586
)
 
312,654

 
(12,324
)
Private issue collateralized mortgage obligations
122

 
(4
)
 
4,945

 
(403
)
 
5,067

 
(407
)
Total AFS securities
$
386,967

 
$
(11,942
)
 
$
122,236

 
$
(7,834
)
 
$
509,203

 
$
(19,776
)

At March 31, 2014, the Company held 92 investment securities with a fair value of $485.6 million with unrealized losses totaling $17.0 million that are considered temporary. Of these, the Company had 22 MBS and CMO investments with a fair value of $142.0 million that have been in an unrealized loss position for 12 months or more. The decline in the fair value of securities is reflective of current interest rates in excess of the yield received on investments and is not indicative of an overall credit deterioration or other factors with the Company's investment portfolio. Also, the Company held five Non-Agency investments with a fair value of $4.6 million that were in an unrealized loss position totaling $373,000 for 12 months or more. The Company's management believes the unrealized losses for the Non-Agency securities are the result of current market illiquidity and the underestimation of value in the market. Stress tests are performed regularly on the Non-Agency securities using current statistical data to determine expected cash flows and forecast potential losses. As of March 31, 2014, the results of the stress tests indicated that no OTTI write-downs were necessary on the Non-Agency securities. The Company currently has the intent and ability to retain its investment securities in an unrealized loss position until the decline in value has recovered.


12



Sale of Securities
The following table details the Company’s sales of AFS securities for the period indicated below:
 
Three Months Ended
March 31,
 
2014
 
2013
Proceeds from sales of securities
$
9,437

 
$
4,875

Gross realized gains
166

 
138

Gross realized losses

 

 
For the three months ended March 31, 2014 and 2013, the Company sold certain AFS securities with a total carrying value of $9.3 million and $4.7 million, respectively. For the three months ended March 31, 2014 and 2013, the Company recorded net gains on the sale of AFS securities of $166,000 and $138,000, respectively, within non-interest income in the consolidated statements of income. The Company had not previously recorded any OTTI on these securities sold.

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

Securities Pledged
At March 31, 2014 and December 31, 2013, securities with an amortized cost of $468.6 million and $479.2 million and estimated fair values of $464.4 million and $474.7 million, respectively, were pledged to secure FHLBB advances, public deposits, and securities sold under agreements to repurchase and for other purposes required or permitted by law.
 
Contractual Maturities
The amortized cost and estimated fair values of debt securities by contractual maturity at March 31, 2014, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. 
 
Amortized
Cost
 
Fair
Value
AFS Securities
 
 
 
Due in one year or less
$
875

 
$
891

Due after one year through five years
30,121

 
30,671

Due after five years through ten years
159,389

 
160,327

Due after ten years
616,300

 
605,353

 
$
806,685

 
$
797,242

HTM Securities
 
 
 
Due in one year or less
$

 
$

Due after one year through five years

 

Due after five years through ten years
1,188

 
1,177

Due after ten years
5,785

 
5,790

 
$
6,973

 
$
6,967

 


13



NOTE 4 – LOANS AND ALLOWANCE FOR LOAN LOSSES
 
The composition of the Company’s loan portfolio, excluding residential loans held for sale, at March 31, 2014 and December 31, 2013 was as follows:   
 
March 31,
2014
 
December 31,
2013
Residential real estate loans
$
568,348

 
$
570,391

Commercial real estate loans
574,695

 
541,099

Commercial loans
191,071

 
179,203

Home equity loans
269,911

 
272,630

Consumer loans
16,766

 
17,651

Deferred loan fees, net of costs
(605
)
 
(572
)
Total loans
$
1,620,186

 
$
1,580,402


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. For the three months ended March 31, 2014, the Company did not sell any loans on the secondary market. For the three months ended March 31, 2013, the Company sold $9.4 million, of fixed-rate residential mortgage loans on the secondary market that resulted in net gains on the sale of loans of $307,000.

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) financial condition of borrowers; (ii) real estate market changes; (iii) state, regional, and national economic conditions; and (iv) a requirement by federal and state regulators to increase the provision for loan losses or recognize additional charge-offs. There were no significant changes in the Company's ALL methodology during the first quarter of 2014.

The Company's Board of Directors monitors credit risk through the Directors' Loan Review Committee, which reviews large credit exposures, monitors the external loan review reports, reviews the lending authority for individual loan officers when required, and has approval authority and responsibility for all matters regarding the loan policy and other credit-related policies, including reviewing and monitoring asset quality trends, concentration levels, and the ALL methodology. The Corporate Risk Management Group and the Credit Risk Policy Committee oversee the Company's systems and procedures to monitor the credit quality of its loan portfolio, conduct a loan review program, maintain the integrity of the loan rating system, determine the adequacy of the ALL and support the oversight efforts of the Directors' Loan Review Committee and the Board of Directors. The Company's practice is to proactively manage the portfolio such that management can identify problem credits early, assess and implement effective work-out strategies, and take charge-offs as timely as practical. In addition, the Company 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 loans into portfolio segments, which include residential real estate, commercial real estate, commercial, home equity, and consumer.


14



The following table presents the activity in the ALL and select loan information by portfolio segment for the three months ended March 31, 2014
 
Residential 
Real Estate
 
Commercial 
Real Estate
 
Commercial
 
Home
Equity
 
Consumer
 
Unallocated
 
Total
ALL:
 

 
 

 
 

 
 

 
 

 
 

 
 

Beginning balance
$
5,603

 
$
4,374

 
$
6,220

 
$
2,403

 
$
319

 
$
2,671

 
$
21,590

Loans charged off
(183
)
 
(171
)
 
(219
)
 
(62
)
 
(14
)
 

 
(649
)
Recoveries
92

 
39

 
96

 
3

 
7

 

 
237

Provision (reduction)
(101
)
 
286

 
195

 
329

 
(2
)
 
(215
)
 
492

Ending balance
$
5,411

 
$
4,528

 
$
6,292

 
$
2,673

 
$
310

 
$
2,456

 
$
21,670

ALL balance attributable to loans:
 

 
 

 
 

 
 

 
 

 
 

 
 

Individually evaluated for impairment
$
1,628

 
$
557

 
$
177

 
$
754

 
$
141

 
$

 
$
3,257

Collectively evaluated for impairment
3,783

 
3,971

 
6,115

 
1,919

 
169

 
2,456

 
18,413

Total ending ALL
$
5,411

 
$
4,528

 
$
6,292

 
$
2,673

 
$
310

 
$
2,456

 
$
21,670

Loans:
 

 
 

 
 

 
 

 
 

 
 

 
 

Individually evaluated for impairment
$
13,041

 
$
9,339

 
$
2,372

 
$
2,011

 
$
446

 
$

 
$
27,209

Collectively evaluated for impairment
554,702

 
565,356

 
188,699

 
267,900

 
16,320

 

 
1,592,977

Total ending loans balance
$
567,743

 
$
574,695

 
$
191,071

 
$
269,911

 
$
16,766

 
$

 
$
1,620,186

 
The following table presents the activity in the ALL and select loan information by portfolio segment for the three months ended March 31, 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
(145
)
 
(80
)
 
(277
)
 
(28
)
 
(57
)
 

 
(587
)
Recoveries
3

 
75

 
129

 
2

 
19

 

 
228

Provision (reduction)
415

 
(942
)
 
415

 
864

 
76

 
(144
)
 
684

Ending balance
$
7,269

 
$
3,602

 
$
6,200

 
$
3,358

 
$
222

 
$
2,718

 
$
23,369

ALL balance attributable to loans:
 

 
 

 
 

 
 

 
 

 
 

 
 

Individually evaluated for impairment
$
2,468

 
$
197

 
$
325

 
$
469

 
$
82

 
$

 
$
3,541

Collectively evaluated for impairment
4,801

 
3,405

 
5,875

 
2,889

 
140

 
2,718

 
19,828

Total ending ALL
$
7,269

 
$
3,602

 
$
6,200

 
$
3,358

 
$
222

 
$
2,718

 
$
23,369

Loans:
 

 
 

 
 

 
 

 
 

 
 

 
 

Individually evaluated for impairment
$
13,754

 
$
7,633

 
$
3,329

 
$
1,855

 
$
488

 
$

 
$
27,059

Collectively evaluated for impairment
558,180

 
498,359

 
187,963

 
289,835

 
16,771

 

 
1,551,108

Total ending loans balance
$
571,934

 
$
505,992

 
$
191,292

 
$
291,690

 
$
17,259

 
$

 
$
1,578,167



15



The following table presents the activity in the ALL and select loan information by portfolio segment for the year ended December 31, 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
(1,059
)
 
(952
)
 
(1,426
)
 
(647
)
 
(190
)
 

 
(4,274
)
Recoveries
35

 
121

 
495

 
56

 
61

 

 
768

Provision (reduction)
(369
)
 
656

 
1,218

 
474

 
264

 
(191
)
 
2,052

Ending balance
$
5,603

 
$
4,374

 
$
6,220

 
$
2,403

 
$
319

 
$
2,671

 
$
21,590

ALL balance attributable to loans:
 

 
 

 
 

 
 

 
 

 
 

 
 

Individually evaluated for impairment
$
1,750

 
$
526

 
$
132

 
$
433

 
$
140

 
$

 
$
2,981

Collectively evaluated for impairment
3,853

 
3,848

 
6,088

 
1,970

 
179

 
2,671

 
18,609

Total ending ALL
$
5,603

 
$
4,374

 
$
6,220

 
$
2,403

 
$
319

 
$
2,671

 
$
21,590

Loans:
 

 
 

 
 

 
 

 
 

 
 

 
 

Individually evaluated for impairment
$
14,435

 
$
8,864

 
$
2,635

 
$
1,571

 
$
442

 
$

 
$
27,947

Collectively evaluated for impairment
555,384

 
532,235

 
176,568

 
271,059

 
17,209

 

 
1,552,455

Total ending loans balance
$
569,819

 
$
541,099

 
$
179,203

 
$
272,630

 
$
17,651

 
$

 
$
1,580,402

 
The ALL at March 31, 2014 increased $80,000 since December 31, 2013, primarily due to loan growth of $39.8 million driven by the commercial real estate and commercial portfolios.
 
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 Corporate Risk Management Group. As of March 31, 2014 and December 31, 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) at 27% and 28%, respectively, and lodging (inns, bed & breakfasts, ski lodges, tourist cabins, hotels and motels) at 24% and 25%, 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.


16



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, including TDRs, are considered non-performing.
 
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
 
Total
March 31, 2014
 

 
 

 
 

 
 

 
 

 
 
Pass (Grades 1-6)
$
550,645

 
$
531,874

 
$
170,595

 
$

 
$

 
$
1,253,114

Performing

 

 

 
267,900

 
16,320

 
284,220

Special Mention (Grade 7)
3,171

 
6,471

 
11,585

 

 

 
21,227

Substandard (Grade 8)
13,927

 
36,350

 
8,891

 

 

 
59,168

Non-performing

 

 

 
2,011

 
446

 
2,457

Total
$
567,743

 
$
574,695

 
$
191,071

 
$
269,911

 
$
16,766

 
$
1,620,186

December 31, 2013
 

 
 

 
 

 
 

 
 

 
 
Pass (Grades 1-6)
$
551,035

 
$
496,257

 
$
155,851

 
$

 
$

 
$
1,203,143

Performing

 

 

 
271,059

 
17,210

 
288,269

Special Mention (Grade 7)
3,196

 
7,749

 
11,315

 

 

 
22,260

Substandard (Grade 8)
15,588

 
37,093

 
12,037

 

 

 
64,718

Non-performing

 

 

 
1,571

 
441

 
2,012

Total
$
569,819

 
$
541,099

 
$
179,203

 
$
272,630

 
$
17,651

 
$
1,580,402

 
The Company closely monitors the performance of its loan portfolio. Loans past due 30 days or more are considered delinquent. In general, consumer loans will be charged off if the loan is delinquent for 90 consecutive days. Commercial and real estate loans are charged off in part or in full if they appear uncollectible. A loan is placed on non-accrual status when the financial condition of the borrower is deteriorating, payment in full of both principal and interest is not expected as scheduled, or principal or interest has been in default for 90 days or more. Exceptions may be made if the asset is well-secured by collateral sufficient to satisfy both the principal and accrued interest in full and collection is assured by a specific event, such as the closing of a pending sale contract. When one loan to a borrower is placed on non-accrual status, generally all other loans to the borrower are re-evaluated to determine if they should also be placed on non-accrual status. All previously accrued and unpaid interest is reversed at this time. Interest payments received on non-accrual loans (including impaired loans) are applied as a reduction of principal. A loan remains on non-accrual status until all principal and interest amounts contractually due are brought current and future payments are reasonably assured. A loan may be returned to accrual status when collection of principal and interest is assured and the borrower has demonstrated timely payments of principal and interest for a reasonable period. Unsecured loans, however, are not normally placed on non-accrual status because they are charged-off once their collectability is in doubt. 


17



The following is a loan aging analysis by portfolio segment (including loans past due over 90 days and non-accrual loans) and a summary of non-accrual loans, which include TDRs, and loans past due over 90 days and accruing as of the following dates:
 
30-59 Days
Past Due
 
60-89 Days
Past Due
 
Greater
than
90 Days
 
Total
Past Due
 
Current
 
Total Loans
Outstanding
 
Loans > 90
Days Past
Due and
Accruing
 
Non-Accrual
Loans
March 31, 2014
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Residential real estate
$
2,352

 
$
532

 
$
6,426

 
$
9,310

 
$
558,433

 
$
567,743

 
$

 
$
9,125

Commercial real estate
1,413

 
643

 
6,108

 
8,164

 
566,531

 
574,695

 

 
8,278

Commercial
916

 
256

 
1,620

 
2,792

 
188,279

 
191,071

 
50

 
1,935

Home equity
635

 
206

 
1,529

 
2,370

 
267,541

 
269,911

 

 
2,011

Consumer
31

 
8

 
425

 
464

 
16,302

 
16,766

 

 
446

Total
$
5,347

 
$
1,645

 
$
16,108

 
$
23,100

 
$
1,597,086

 
$
1,620,186

 
$
50

 
$
21,795

December 31, 2013
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Residential real estate
$
3,218

 
$
684

 
$
7,269

 
$
11,171

 
$
558,648

 
$
569,819

 
$

 
$
10,520

Commercial real estate
926

 
2,036

 
3,301

 
6,263

 
534,836

 
541,099

 
257

 
7,799

Commercial
159

 
237

 
1,980

 
2,376

 
176,827

 
179,203

 
198

 
2,146

Home equity
1,395

 
388

 
1,007

 
2,790

 
269,840

 
272,630

 

 
1,571

Consumer
63

 
21

 
418

 
502

 
17,149

 
17,651

 

 
441

Total
$
5,761

 
$
3,366

 
$
13,975

 
$
23,102

 
$
1,557,300

 
$
1,580,402

 
$
455

 
$
22,477

 
Interest income that would have been recognized if loans on non-accrual status had been current in accordance with their original terms was approximately $230,000 and $252,000 for the three months ended March 31, 2014 and 2013, respectively.

The Company takes a conservative approach in credit risk management and remains focused on community lending and reinvesting. The Company works closely with borrowers experiencing credit problems to assist in loan repayment or term modifications. TDR loans consist of loans where the Company, for economic or legal reasons related to the borrower’s financial difficulties, granted a concession to the borrower that it would not otherwise consider. TDRs involve term modifications or a reduction of either interest or principal. Once such an obligation has been restructured, it will continue to remain in a restructured status until paid in full.

At March 31, 2014 and December 31, 2013, the allowance related to TDRs was $707,000 and $656,000, respectively. The specific reserve component was determined by discounting the total expected future cash flows from the borrower, or if the loan is currently collateral-dependent, using the fair value of the underlying collateral, which was obtained through independent appraisals and internal evaluations. At March 31, 2014, the Company did not have any commitments to lend additional funds to borrowers with loans classified as TDRs.
 
During the first three months of 2014, the Company modified one loan qualifying as a TDR, which had a current balance of $149,000 at March 31, 2014. During the first three months of 2013, the Company modified four loans qualifying as TDRs with current balances of $638,000 at March 31, 2013. The modification of these loans as TDRs did not have a material financial effect on the Company. Loans restructured due to credit difficulties that are now performing were $5.4 million at March 31, 2014 and $5.5 million at March 31, 2013.
 

18



The following is a summary of accruing and non-accruing TDR loans by portfolio segment as of the following dates:
 
 
Number of Contracts
 
Pre-Modification
Outstanding Recorded
Investment
 
Post-Modification
Outstanding Recorded
Investment
 
Current Balance
 
 
March 31, 2014
 
December 31, 2013
 
March 31, 2014
 
December 31, 2013
 
March 31, 2014
 
December 31, 2013
 
March 31, 2014
 
December 31, 2013
Residential
real estate
 
27

 
26

 
$
4,276

 
$
4,140

 
$
4,461

 
$
4,311

 
4,186

 
$
4,089

Commercial
real estate
 
9

 
10

 
2,471

 
3,031

 
2,509

 
3,074

 
1,999

 
2,558

Commercial
 
7

 
7

 
504

 
504

 
504

 
504

 
483

 
488

Consumer and
home equity
 
1

 
1

 
3

 
3

 
3

 
3

 

 
1

Total
 
44

 
44

 
$
7,254

 
$
7,678

 
$
7,477

 
$
7,892

 
$
6,668

 
$
7,136


The following is a summary of loans by portfolio segment that were modified as a TDR within the previous 12 months and for which the borrower subsequently defaulted during the periods indicated:
 
Three Months Ended
March 31,
 
2014
 
2013
 
Number of Contracts
 
Recorded Investment
 
Number of Contracts
 
Recorded Investment
Commercial
1

 
$
46

 

 
$

Total
1

 
$
46

 

 
$


Impaired loans consist of non-accrual loans and TDR loans. The following is a summary of impaired loan balances and associated allowance by portfolio segment as of and for the three months ended March 31, 2014:
 
 
 
 
 
 
 
Three Months Ended
 
Recorded
Investment
 
Unpaid
Principal
Balance
 
Related
Allowance
 
Average
Recorded
Investment
 
Interest
Income
Recognized
With an allowance recorded:
 

 
 

 
 

 
 

 
 

Residential real estate
$
10,091

 
$
10,091

 
$
1,628

 
$
10,894

 
$
29

Commercial real estate
7,845

 
7,844

 
557

 
7,252

 
5

Commercial
1,980

 
1,980

 
177

 
1,963

 
5

Home equity
1,593

 
1,593

 
754

 
1,557

 

Consumer
429

 
430

 
141

 
427

 

Ending Balance
$
21,938

 
$
21,938

 
$
3,257

 
$
22,093

 
$
39

Without allowance recorded:
 

 
 

 
 

 
 

 
 

Residential real estate
$
2,950

 
$
3,371

 
$

 
$
2,345

 
$
5

Commercial real estate
1,494

 
2,088

 

 
1,735

 
10

Commercial
392

 
484

 

 
569

 
1

Home equity
418

 
594

 

 
418

 

Consumer
17

 
37

 

 
17

 

Ending Balance
$
5,271

 
$
6,574

 
$

 
$
5,084

 
$
16

Total impaired loans
$
27,209

 
$
28,512

 
$
3,257

 
$
27,177

 
$
55



19



The following is a summary of impaired loan balances and associated allowance by portfolio segment as of and for the three months ended March 31, 2013:
 
 
 
 
 
 
 
Three Months Ended
 
Recorded
Investment
 
Unpaid
Principal
Balance
 
Related
Allowance
 
Average
Recorded
Investment
 
Interest
Income
Recognized
With an allowance recorded:
 

 
 

 
 

 
 

 
 

Residential real estate
$
10,904

 
$
10,904

 
$
2,468

 
$
8,689

 
$
29

Commercial real estate
3,680

 
3,680

 
197

 
4,343

 
3

Commercial
3,002

 
3,002

 
325

 
2,788

 
2

Home equity
1,319

 
1,319

 
469

 
1,528

 

Consumer
486

 
486

 
82

 
457

 

Ending Balance
$
19,391

 
$
19,391

 
$
3,541

 
$
17,805

 
$
34

Without allowance recorded:
 

 
 

 
 

 
 

 
 

Residential real estate
$
2,850

 
$
3,672

 
$

 
$
5,028

 
$
7

Commercial real estate
3,953

 
4,217

 

 
3,516

 
22

Commercial
327

 
421

 

 
558

 
1

Home equity
536

 
807

 

 
364

 

Consumer
2

 
2

 

 
2

 

Ending Balance
$
7,668

 
$
9,119

 
$

 
$
9,468

 
$
30

Total impaired loans
$
27,059

 
$
28,510

 
$
3,541

 
$
27,273

 
$
64


The following is a summary of impaired loan balances and associated allowance by portfolio segment as of and for the year ended December 31, 2013:
 
 
 
 
 
 
 
Year Ended
 
Recorded
Investment
 
Unpaid
Principal
Balance
 
Related
Allowance
 
Average
Recorded
Investment
 
Interest
Income
Recognized
With an allowance recorded:
 
 
 

 
 

 
 

 
 

Residential real estate
$
11,902

 
$
11,902

 
$
1,750

 
$
10,411

 
$
118

Commercial real estate
6,805

 
6,805

 
526

 
5,517

 
20

Commercial
1,876

 
1,876

 
132

 
2,543

 
10

Home equity
1,228

 
1,228

 
433

 
1,291

 

Consumer
425

 
425

 
140

 
460

 

Ending Balance
$
22,236

 
$
22,236

 
$
2,981

 
$
20,222

 
$
148

Without allowance recorded:
 

 
 

 
 

 
 

 
 

Residential real estate
$
2,533

 
$
3,846

 
$

 
$
2,925

 
$
28

Commercial real estate
2,059

 
2,782

 

 
3,362

 
55

Commercial
759

 
871

 

 
765

 
8

Home equity
343

 
479

 

 
334

 

Consumer
17

 
37

 

 
11

 

Ending Balance
$
5,711

 
$
8,015

 
$

 
$
7,397

 
$
91

Total impaired loans
$
27,947

 
$
30,251

 
$
2,981

 
$
27,619

 
$
239



20



The Company records its properties obtained through foreclosure or deed-in-lieu of foreclosure as OREO properties on the consolidated statements of condition at fair value of the real estate, less the estimated cost to sell (i.e. net realizable value). If a write-down of the recorded investment at the time of transfer to OREO is necessary, the write-down is charged to the ALL. If a subsequent write-down of the property is necessary due to a further decline in the fair value of the property then the write-down is recorded through a valuation allowance on the OREO property and charged to other non-interest expense in the consolidated statements of income. At March 31, 2014, the Company had 10 residential real estate properties and 8 commercial properties with a carrying value of $1.0 million and $1.7 million, respectively, within OREO. At December 31, 2013, the Company had 10 residential real estate properties and 6 commercial properties with a carrying value of $1.0 million and $1.2 million, respectively, within OREO.

At March 31, 2014 and December 31, 2013, the Company had $5.9 million and $4.4 million, respectively, of consumer mortgage loans secured by residential real estate properties for which foreclosure proceedings are in process.

NOTE 5 – GOODWILL AND OTHER INTANGIBLE ASSETS
 
The Company has recognized goodwill and certain identifiable intangible assets in connection with certain business acquisitions in prior years.

Goodwill as of March 31, 2014 and December 31, 2013 are shown in the table below:
 
Goodwill
 
Banking
 
Financial
Services
 
Total
March 31, 2014 and December 31, 2013:


 


 


Goodwill, gross
$
40,902

 
$
7,474

 
$
48,376

Accumulated impairment losses

 
(3,570
)
 
(3,570
)
Reported goodwill at March 31, 2014 and December 31, 2013
$
40,902

 
$
3,904

 
$
44,806

 
The changes in core deposit and trust relationship intangible assets for the three months ended March 31, 2014 are shown in the table below:
 
Core Deposit Intangible
 
Trust Relationship Intangible
 
Total
 
Accumulated Amortization
 
Net
 
Total
 
Accumulated Amortization
 
Net
Balance at December 31, 2013
$
17,300

 
$
(13,088
)
 
$
4,212

 
$
753

 
$
(452
)
 
$
301

2014 amortization

 
(268
)
 
(268
)
 

 
(19
)
 
(19
)
Balance at March 31, 2014
$
17,300

 
$
(13,356
)
 
$
3,944

 
$
753

 
$
(471
)
 
$
282

 
It is estimated that core deposit and trust relationship intangible assets will be fully amortized as of December 31, 2017. The following table reflects the expected amortization of core deposit and trust relationship intangible assets over their respective estimated remaining useful lives as of March 31, 2014:
 
Core Deposit
Intangible
 
Trust
Relationship
Intangible
2014
$
805

 
$
56

2015
1,073

 
75

2016
1,073

 
75

2017
993

 
76

Total
$
3,944

 
$
282

 

21



NOTE 6 – EMPLOYEE BENEFIT PLANS
 
The Company sponsors unfunded, non-qualified SERPs for certain officers and provides medical and life insurance to certain eligible retired employees. The components of net period benefit cost for the periods ended March 31, 2014 and 2013 were as follows:

Supplemental Executive Retirement Plan:
 
 
Three Months Ended 
 March 31,
Net period benefit cost
 
2014
 
2013
Service cost
 
$
67

 
$
82

Interest cost
 
114

 
94

Recognized net actuarial loss
 
35

 
56

Recognized prior service cost
 
5

 
5

Net period benefit cost(1)
 
$
221

 
$
237

(1) Presented within the consolidated statements of income within salaries and employee benefits.

Other Postretirement Benefit Plan:
 
 
Three Months Ended 
 March 31,
Net period benefit cost
 
2014
 
2013
Service cost
 
$
11

 
$
19

Interest cost
 
33

 
35

Recognized net actuarial loss
 
2

 
11

Net period benefit cost (1)
 
$
46

 
$
65

(1) Presented within the consolidated statements of income within salaries and employee benefits.

In the first quarter of 2014, the Company amended its terms of the postretirement plan impacting the eligibility of employees. The amendment to the plan does not have a material effect on the Company's consolidated financial statements.

NOTE 7 – STOCK-BASED COMPENSATION PLANS 

On February 25, 2014, 7,181 shares vested upon the achievement of certain revenue and expense goals under the 2011 — 2013 LTIP, and 4,881 shares, net of taxes, were issued to participants.

On March 7, 2014, the Company granted 5,400 restricted stock awards to certain officers of the Company and its subsidiaries under the 2012 Plan. The holders of these awards participate fully in the rewards of stock ownership of the Company, including voting and dividend rights. The restricted stock awards have been determined to have a fair value of $39.57 per unit, based on the closing market price of the Company’s common stock on the grant date. The restricted stock awards vest pro-rata over a three-year period.
  
On March 7, 2014, 5,055 shares were purchased by certain officers of the Company and its subsidiaries at a one-third discount, based on the closing market price of the Company's common stock on the date of grant of $39.57, in lieu of the employees' annual incentive bonus under the MSPP. The shares fully-vest after two-years of service from the grant date.

On March 17, 2014, the Company granted 2,020 deferred stock awards under the DCRP to certain executive officers. The stock awards have been determined to have a fair value of $40.00 per unit, based on the closing market price of the Company's common stock on the grant date.
 

22



On March 25, 2014, the Company approved the Amended and Restated Long-Term Performance Share Plan for the 2014 – 2016 performance period. Pursuant to the 2014 – 2016 LTIP, certain executive officers of the Company are eligible to receive equity compensation based on the attainment of certain performance goals set forth in the 2014 – 2016 LTIP. Performance goals under the 2014 – 2016 LTIP include specific revenue growth and efficiency ratio goals for threshold, target and superior levels of performance, and a minimum level of performance for the Company’s non-performing assets to total assets ratio at December 31, 2016 and a minimum level of net income growth for the three-year period ending December 31, 2016. 

NOTE 8 – FAIR VALUE MEASUREMENT AND DISCLOSURE
 
Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value is best determined using quoted market prices. However, in many instances, quoted market prices are not available. In such instances, fair values are determined using various valuation techniques. Various assumptions and observable inputs must be relied upon in applying these techniques. GAAP establishes a fair value hierarchy for valuation inputs that gives the highest priority to quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs.
 
GAAP permits an entity to choose to measure eligible financial instruments and other items at fair value. The Company has elected the fair value option for its loans held for sale. Electing the fair value option for loans held for sale enables the Company’s financial position to more clearly align with the economic value of the actively traded asset. The Company did not have any loans held for sale at March 31, 2014 or December 31, 2013.

The fair value hierarchy for valuation of an asset or liability is as follows:
 
Level 1:   Valuation is based upon unadjusted quoted prices in active markets for identical assets and liabilities that the entity has the ability to access as of the measurement date.
 
Level 2:   Valuation is determined from quoted prices for similar assets or liabilities in active markets, from quoted prices for identical or similar instruments in markets that are not active or by model-based techniques in which all significant inputs are observable in the market.
 
Level 3:   Valuation is derived from model-based and other techniques in which at least one significant input is unobservable and which may be based on the Company’s own estimates about the assumptions that market participants would use to value the asset or liability.
 
In general, fair value is based upon quoted market prices, where available. If such quoted market prices are not available, fair value is based upon model-based techniques incorporating various assumptions including interest rates, prepayment speeds and credit losses. Assets and liabilities valued using model-based techniques are classified as either Level 2 or Level 3, depending on the lowest level classification of an input that is considered significant to the overall valuation. A description of the valuation methodologies used for instruments measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy, is set forth below.

Financial Instruments Recorded at Fair Value on a Recurring Basis
AFS securities:  The fair value is reported utilizing prices provided by an independent pricing service based on recent trading activity and other observable information including, but not limited to, dealer quotes, market spreads, cash flows, market interest rate curves, market consensus prepayment speeds, credit information, and the bond’s terms and conditions. The fair value of debt securities is classified as Level 2.
 
Trading Account Assets:  Trading account assets are invested in mutual funds and classified as Level 1 based upon quoted prices.


23



Derivatives:  The fair value of interest rate swaps is determined using inputs that are observable in the market place obtained from third parties including yield curves, publicly available volatilities, and floating indexes and, accordingly, are classified as Level 2 inputs. The credit value adjustments associated with derivatives utilize Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default by the Company and its counterparties. As of March 31, 2014 and December 31, 2013, the Company has assessed the significance of the impact of the credit valuation adjustments on the overall valuation of its derivative positions and has determined that the credit valuation adjustments are not significant to the overall valuation of its derivatives due to collateral postings.
 
The following table summarizes financial assets and financial liabilities measured at fair value on a recurring basis as of March 31, 2014 and December 31, 2013, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value:
 
Fair
Value
 
Readily
Available
Market
Prices
(Level 1)
 
Observable
Market
Data
(Level 2)
 
Company
Determined
Fair Value
(Level 3)
March 31, 2014
 
 
 

 
 

 
 

Financial Assets:
 
 
 

 
 

 
 

AFS securities:
 
 
 

 
 

 
 

Obligations of U.S. government sponsored enterprises
$
4,962

 
$

 
$
4,962

 
$

Obligations of states and political subdivisions
29,674

 

 
29,674

 

Mortgage-backed securities issued or guaranteed by U.S. government sponsored enterprises
394,763

 

 
394,763

 

Collateralized mortgage obligations issued or guaranteed by U.S. government sponsored enterprises
361,339

 

 
361,339

 

Private issue collateralized mortgage obligations
6,504

 

 
6,504

 

Trading account assets
2,308

 
2,308

 

 

Customer interest rate swap agreements
142

 

 
142

 

Financial Liabilities:


 
 

 
 
 
 

Interest rate swap agreements
5,577

 

 
5,577

 

Customer interest rate swap agreements
142

 

 
142

 

December 31, 2013
 
 
 

 
 

 
 

Financial Assets:
 
 
 

 
 

 
 

Available-for-sale debt securities:
 
 
 

 
 

 
 

Obligations of states and political subdivisions
$
31,207

 
$

 
$
31,207

 
$

Mortgage-backed securities issued or guaranteed by U.S. government sponsored enterprises
395,903

 

 
395,903

 

Collateralized mortgage obligations issued or guaranteed by U.S. government sponsored enterprises
374,435

 

 
374,435

 

Private issue collateralized mortgage obligations
6,932

 

 
6,932

 

Trading account assets
2,488

 
2,488

 

 

Customer interest rate swap agreements
114

 

 
114

 

Financial Liabilities:
 
 
 

 
 
 
 

Interest rate swap agreements
3,911

 

 
3,911

 

Customer interest rate swap agreements
114

 

 
114

 

 
The Company did not have any transfers between Level 1 and Level 2 of the fair value hierarchy during the three months ended March 31, 2014. The Company’s policy for determining transfers between levels occurs at the end of the reporting period when circumstances in the underlying valuation criteria change and result in transfer between levels.
 

24



Financial Instruments Recorded at Fair Value on a Nonrecurring Basis 
The Company may be required, from time to time, to measure certain financial assets and financial liabilities at fair value on a nonrecurring basis in accordance with GAAP. These include assets that are measured at the lower of cost or market value that were recognized at fair value below cost at the end of the period.
 
Collateral-Dependent Impaired Loans:  Loans for which it is probable that payment of interest and principal will not be made in accordance with the contractual terms of the loan agreement are considered impaired. The Company's policy is to individually evaluate for impairment loans with a principal balance greater than $250,000 and are risk rate 8 or higher or are on non-accrual status. Once the population of loans is identified for individual impairment assessment, the Company measures these loans for impairment by comparing the estimated fair value of the collateral, less the estimated costs to sell (i.e. net realizable value), to the carrying value of the loan. If the estimated net realizable value of the loan is less than the carrying value of the loan, then a loss is recognized as part of the ALL to adjust the loan's carrying value to the estimate net realizable value. Accordingly, certain collateral-dependent impaired loans are subject to measurement at fair value (or net realizable value) on a non-recurring basis. Management has estimated the fair values of these assets using Level 2 inputs, such as the fair value of collateral based on independent third-party market approach appraisals for collateral-dependent loans, and Level 3 inputs where circumstances warrant an adjustment to the appraised value based on the age of the appraisal and/or comparable sales, condition of the collateral, and market conditions.

MSRs:  The Company accounts for mortgage servicing assets at cost, subject to impairment testing. When the carrying value exceeds fair value, a valuation allowance is established to reduce the carrying cost to fair value. Fair value is based on a valuation model that calculates the present value of estimated net servicing income. The Company obtains a third-party valuation based upon loan level data including note rate, type and term of the underlying loans. The model utilizes a variety of observable inputs for its assumptions, the most significant of which are loan prepayment assumptions and the discount rate used to discount future cash flows. Other assumptions include delinquency rates, servicing cost inflation and annual unit loan cost. MSRs are classified within Level 2 of the fair value hierarchy.
 
Non-Financial Assets and Non-Financial Liabilities Recorded at Fair Value
The Company has no non-financial assets or non-financial liabilities measured at fair value on a recurring basis. Furthermore, the Company does not have any non-financial liabilities measured at fair value on a non-recurring basis. Non-financial assets measured at fair value on a non-recurring basis consist of OREO and goodwill. 

OREO: OREO properties acquired through foreclosure or deed in lieu of foreclosure are recorded at the fair value of the real estate, less costs to sell (i.e. net realizable value). Any write-down of the recorded investment in the related loan is charged to the ALL upon transfer to OREO. Upon acquisition of a property, a current appraisal or a broker’s opinion is used to substantiate fair value of the property. After foreclosure, management periodically, but at least annually, obtains updated valuations of the OREO properties and, if additional impairments are deemed necessary, the subsequent write-downs for declines in value are recorded through a valuation allowance and a provision for losses charged to other non-interest expense within the consolidated statements of income. As management considers appropriate, adjustments are made to the appraisal obtained for the OREO property to account for recent sales activity of comparable properties, changes in the condition of the property, and changes in market conditions. These adjustments are not observable in an active market and classified as Level 3.

Goodwill: Goodwill represents the excess cost of an acquisition over the fair value of the net assets acquired. The fair value of goodwill is estimated by utilizing several standard valuation techniques, including discounted cash flow analyses, bank merger multiples, and/or an estimation of the impact of business conditions and investor activities on the long-term value of the goodwill. Should an impairment of either reporting units' goodwill occur the associated goodwill is written-down to fair value and the impairment charge is recorded within non-interest expense in the consolidated statements of income.

As of and for the three months ended March 31, 2014, there have been no indications or triggering events for which management believes that it is more-likely-than-not that goodwill is impaired. In the fourth quarter of 2013, the Company recorded a goodwill impairment of $2.8 million to write-down the financial services reporting unit to fair value of $3.9 million. As such, goodwill for the financial services reporting unit at December 31, 2013 is recorded at fair value. The banking reporting unit was not deemed impaired.

The table below highlights financial and non-financial assets measured and recorded at fair value on a non-recurring basis as of March 31, 2014 and December 31, 2013. Not included in the table below because they are not recorded at fair value are: (i) impaired loans of $21.1 million and $19.4 million at March 31, 2014 and December 31, 2013, respectively; (ii) MSRs reported of $376,000 and $322,000 at March 31, 2014 and December 31, 2013, respectively; and (iii) OREO properties of $613,000 and $612,000 at March 31, 2014 and December 31, 2013, respectively.

25



 
Fair
Value
 
Readily
Available
Market
Prices
(Level 1)
 
Observable
Market
Data
(Level 2)
 
Company
Determined
Fair Value
(Level 3)
March 31, 2014
 
 
 

 
 

 
 

Financial assets:
 
 
 

 
 

 
 

Collateral-dependent impaired loans
$
5,994

 
$

 
$

 
$
5,994

MSRs(1)
288

 

 
288

 

Non-financial assets:
 
 
 
 
 
 
 
OREO
2,099

 

 

 
2,099

December 31, 2013
 
 
 

 
 

 
 

Financial assets:
 
 
 

 
 

 
 

Collateral-dependent impaired loans
$
8,557

 
$

 
$

 
$
8,557

MSRs(1)
404

 

 
404

 

Non-financial assets:
 
 


 


 


OREO
1,583

 

 

 
1,583

Goodwill - financial services reporting unit
3,904

 

 

 
3,904

(1) Represents MSRs deemed to be impaired and a valuation allowance established to carry at fair value.


26



The following table presents the valuation methodology and unobservable inputs for Level 3 assets measured at fair value on a non-recurring basis at March 31, 2014 and December 31, 2013:
 
Fair Value
 
Valuation Methodology
 
Unobservable input
 
Discount Range
(Weighted-Average)
March 31, 2014
 
 
 
 
 
 
 
 
Collateral-dependent impaired loans:
 

 
 
 
 
 
 
 
Partially charged-off
$
837

 
Market approach appraisal of collateral
 
Management adjustment of appraisal
 
0 - 89%
(30%)
Specifically reserved(1)
5,157

 
Market approach appraisal of collateral
 
Management adjustment of appraisal
 
0 - 100%
(27%)
OREO
2,099

 
Market approach appraisal of collateral
 
Management adjustment of appraisal
 
0 - 41%
(17%)
 
 
 
 
Estimated selling cost
 
6 - 10%
(9%)
December 31, 2013
 

 
 
 
 
 
 
 
Collateral-dependent impaired loans:
 

 
 
 
 
 
 
 
Partially charged-off
$
1,874

 
Market approach appraisal of collateral
 
Management adjustment of appraisal
 
0 - 85%
(14%)
Specifically reserved(1)
6,683

 
Market approach appraisal of collateral
 
Management adjustment of appraisal
 
7 - 90%
(22%)
OREO
1,583

 
Market approach appraisal of collateral
 
Management adjustment of appraisal
 
0 - 41%
(16%)
 
 
 
 
Estimated selling cost
 
6 - 10%
(10%)
Goodwill
3,904

 
Discounted cash flow
 
Revenue growth rate
 
5.0%
 
 
 
 
 
Margin percentage
 
8.3%
 
 
 
 
 
Discount rate
 
16.5%
 
 
 
 
 
Fair value weighting
 
50.0%
 
 
 
Market approach
 
Fair value weighting
 
50.0%
(1) The specific reserve for collateral-dependent impaired loans is determined by any loan-to-value ratio in excess of 80% for consumer loans and any loan-to-value ratio in excess of 75% for commercial loans. Appraisals are received on impaired loans in accordance with the Company's internal policy. As such, adjustments to the appraised fair value are made, as necessary, should the appraisal not be current. Adjustments are made to the appraised fair value to reflect changes in known factors, including, but not limited to, property condition, property location, and costs to sell the collateral.

GAAP requires disclosure of the fair value of financial assets and financial liabilities, including those financial assets and financial liabilities that are not measured and reported at fair value on a recurring basis or non-recurring basis. The methodologies for estimating the fair value of financial assets and financial liabilities that are measured at fair value on a recurring or non-recurring basis are discussed above. The following methods and assumptions were used by the Company in estimating the fair values of its other financial instruments.
 
Cash and Due from Banks:  The carrying amounts reported in the consolidated statements of condition approximate fair value.

HTM securities:  The fair value is estimated utilizing prices provided by an independent pricing service based on recent trading activity and other observable information including, but not limited to, dealer quotes, market spreads, cash flows, market interest rate curves, market consensus prepayment speeds, credit information, and the bond’s terms and conditions. The fair value is classified as Level 2.
 
FHLB and FRB and Investments in CCTA and UBCT:  The carrying amounts reported in the consolidated statements of condition approximate fair value.
 
Loans:  For variable rate loans that reprice frequently and have no significant change in credit risk, fair values are based on carrying values. The fair value of other loans is estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities.
 

27



Interest Receivable and Payable:  The carrying amounts reported in the consolidated statements of condition approximate fair value.
 
Deposits:  The fair value of deposits with no stated maturity is equal to the carrying amount. The fair value of certificates of deposit is estimated using a discounted cash flow calculation that applies interest rates and remaining maturities for currently offered certificates of deposit.
 
Borrowings:  The carrying amounts of short-term borrowings from the FHLB, securities sold under repurchase agreements, notes payable and other short-term borrowings approximate fair value. The fair values of long-term borrowings and commercial repurchase agreements are based on the discounted cash flows using current rates for advances of similar remaining maturities.
 
Junior Subordinated Debentures:  The carrying amounts reported in the consolidated statements of condition approximate fair value.

The following table presents the carrying amounts and estimated fair value for financial instrument assets and liabilities measured at March 31, 2014
 
Carrying
Amount
 
Fair Value
 
Readily
Available
Market
Prices
(Level 1)
 
Observable
Market
Prices
(Level 2)
 
Company
Determined
Market
Prices
(Level 3)
Financial assets:
 

 
 

 
 

 
 

 
 

Cash and due from banks
$
51,877

 
$
51,877

 
$
51,877

 
$

 
$

AFS securities
797,242

 
797,242

 

 
797,242

 

HTM securities
6,973

 
6,967

 

 
6,967

 

FHLB and FRB stock
20,417

 
20,417

 
20,417

 

 

Trading account assets
2,308

 
2,308

 
2,308

 

 

Residential real estate loans
561,639

 
574,105

 

 

 
574,105

Commercial real estate loans
569,588

 
569,543

 

 

 
569,543

Commercial loans
183,976

 
182,310

 

 

 
182,310

Home equity loans
266,896

 
268,161

 

 

 
268,161

Consumer loans
16,417

 
16,773

 

 

 
16,773

MSRs(1)
664

 
1,617

 

 
1,617

 

Interest receivable
6,061

 
6,061

 

 
6,061

 

Investments in CCTA and UBCT
1,331

 
1,331

 

 

 
1,331

Customer interest rate swap agreements
142

 
142

 

 
142

 

Financial liabilities:
 

 
 

 
 
 
 
 
 
Deposits
$
1,836,679

 
$
1,839,630

 
$
1,315,062

 
$
524,568

 
$

FHLB advances
56,094

 
59,000

 

 
59,000

 

Commercial repurchase agreements
30,131

 
31,990

 

 
31,990

 

Other borrowed funds
411,218

 
411,282

 
411,282

 

 

Junior subordinated debentures
43,947

 
43,947

 

 
43,947

 

Interest payable
531

 
531

 
531

 

 

Interest rate swap agreements
5,577

 
5,577

 

 
5,577

 

Customer interest rate swap agreements
142

 
142

 

 
142

 

(1) Reported fair value represents all MSRs currently being serviced by the Company, regardless of carrying amount.

28



The following table presents the carrying amounts and estimated fair value for financial instrument assets and liabilities measured at December 31, 2013:
 
Carrying
Amount
 
Fair Value
 
Readily
Available
Market
Prices
(Level 1)
 
Observable
Market
Prices
(Level 2)
 
Company
Determined
Market
Prices
(Level 3)
Financial assets:
 

 
 

 
 

 
 

 
 

Cash and due from banks
$
51,355

 
$
51,355

 
$
51,355

 
$

 
$

AFS securities
808,477

 
808,477

 

 
808,477

 

FHLB and FRB stock
19,724

 
19,724

 
19,724

 

 

Trading account assets
2,488

 
2,488

 
2,488

 

 

Residential real estate loans
563,425

 
577,153

 

 

 
577,153

Commercial real estate loans
536,107

 
535,961

 

 

 
535,961

Commercial loans
172,105

 
171,432

 

 

 
171,432

Home equity loans
269,888

 
271,041

 

 

 
271,041

Consumer loans
17,287

 
17,662

 

 

 
17,662

MSRs(1)
726

 
1,494

 

 
1,494

 

Interest receivable
5,808

 
5,808

 

 
5,808

 

Investments in CCTA and UBCT
1,331

 
1,331

 

 

 
1,331

Customer interest rate swap agreements
114

 
114

 

 
114

 

Financial liabilities:
 

 
 

 
 
 
 

 
 

Deposits
$
1,813,824

 
$
1,817,199

 
$
1,324,221

 
$
492,978

 
$

FHLB advances
56,112

 
59,118

 

 
59,118

 

Commercial repurchase agreements
30,142

 
32,038

 

 
32,038

 

Other borrowed funds
399,916

 
400,144

 
400,144

 

 

Junior subordinated debentures
43,922

 
43,922

 

 
43,922

 

Interest payable
567

 
567

 
567

 

 

Interest rate swap agreements
3,911

 
3,911

 

 
3,911

 

Customer interest rate swap agreements
114

 
114

 

 
114

 

(1) Reported fair value represents all MSRs currently being serviced by the Company, regardless of carrying amount.

NOTE 9 – COMMITMENTS AND CONTINGENCIES 

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.
 
As of March 31, 2014, the Company did not have any loss contingencies that were both probable and reasonably estimable and, therefore, has not accrued for any legal contingencies within the consolidated statements of condition.
 

29



Financial Instruments
In the normal course of business, the Company is a party to both on-balance sheet and off-balance sheet financial instruments involving, to varying degrees, elements of credit risk and interest rate risk in addition to the amounts recognized in the consolidated statements of condition.

A summary of the contractual and notional amounts of the Company’s financial instruments follows:
 
March 31,
2014
 
December 31,
2013
Lending-Related Instruments:
 

 
 

Loan origination commitments and unadvanced lines of credit:
 

 
 

Home equity
$
275,625

 
$
276,671

Commercial and commercial real estate
47,070

 
26,688

Residential
3,999

 
6,408

Letters of credit
2,046

 
1,789

Other commitments
117

 
437

Derivative Financial Instruments:
 
 
 

Interest rate swaps
43,000

 
43,000

Customer loan swaps
15,602

 
15,702


Lending-Related Instruments
The contractual amounts of the Company’s lending-related financial instruments do not necessarily represent future cash requirements since certain of these instruments may expire without being funded and others may not be fully drawn upon. These instruments are subject to the Company’s credit approval process, including an evaluation of the customer’s creditworthiness and related collateral requirements. Commitments generally have fixed expiration dates or other termination clauses.
 
Derivative Financial Instruments
The Company uses derivative financial instruments for risk management purposes (primarily interest rate risk) and not for trading or speculative purposes. The Company controls the credit risk of these instruments through collateral, credit approvals and monitoring procedures.
  
Interest Rate Swaps:
The Company’s interest rate swap arrangements contain provisions that require the Company to post cash collateral with the counterparty for contracts that are in a net liability position based on their fair values and the Company’s credit rating. The Company had a notional amount of $43.0 million in variable- for fixed-interest rate swap agreements on its junior subordinated debentures and $6.2 million in cash held as collateral. The terms of the interest rate swap agreements are as follows: 
Notional Amount
 
Fixed-Rate
 
Maturity Date
$
10,000

 
5.09%
 
June 30, 2021
10,000

 
5.84%
 
June 30, 2029
10,000

 
5.71%
 
June 30, 2030
5,000

 
4.35%
 
March 30, 2031
8,000

 
4.14%
 
July 7, 2031


30



The fair value of the swap agreements on the junior subordinated debentures at March 31, 2014 was a liability of $5.6 million. As each instrument qualifies as a highly effective cash flow hedge, the change in the fair value of the interest rate swaps for the three months ended March 31, 2014 of $(1.1) million, net of tax, was recorded in OCI. Net payments have been classified as cash flows from operating activities in the consolidated statements of cash flows. The Company would reclassify unrealized gains or losses accounted for within AOCI into earnings if the interest rate swaps were to become ineffective or the arrangements were to terminate. In the next 12 months, the Company does not believe it will reclassify any related unrealized gains or losses accounted for within AOCI into earnings.

Customer Loan Swaps:
The Company has a notional amount of $7.8 million in interest rate swap agreements with commercial customers and interest rate swap agreements of equal notional amounts with a dealer bank related to the Company’s commercial loan level derivative program. As the swap agreements have substantially equivalent and offsetting terms, they do not materially change the Company’s interest rate risk or have a net impact on the Company's net income.
 
Interest Rate Locks and Mortgage Loan Commitments:
As part of originating residential mortgage and commercial loans, the Company may enter into rate lock agreements with customers, and may issue commitment letters to customers, which are considered interest rate lock or forward commitments. At March 31, 2014 and December 31, 2013, based upon the pipeline of mortgage loans with rate lock commitments and commercial loans with commitment letters, and the change in fair value of those commitments due to changes in market interest rates, the Company determined the impact on the consolidated financial statements was not material.


NOTE 10 – RECENT ACCOUNTING PRONOUNCEMENTS
 
In January 2014, the FASB issued ASU No. 2014-01, Investments - Equity Method and Joint Ventures (Topic 323): Accounting for Investments in Qualified Affordable Housing Projects. The ASU amends current guidance to permit reporting entities to make an accounting policy election to account for their investments in qualified affordable housing projects using the proportional amortization method if certain conditions are met. The amendments in this ASU are to be applied retrospectively to all periods presented. A reporting entity that uses the effective yield method to account for its investments in qualified affordable housing projects before the date of adoption may continue to apply such method to those preexisting investments. The ASU is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2014. The ASU does not have a material effect on the Company's consolidated financial statements.

In January 2014, the FASB issued ASU No. 2014-04, Receivables - Troubled Debt Restructurings by Creditors (Subtopic 310-40): Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure. The ASU was issued to clarify that if an in substance repossession or foreclosure occurs, and a creditor is considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan, upon either (1) the creditor obtaining legal title to the residential real estate property upon completion of a foreclosure or (2) the borrower conveying all interest in the residential real estate property to the creditor to satisfy that loan through completion of a deed in lieu of foreclosure or through a similar legal agreement. Additionally, the ASU amendments require interim and annual disclosure of both (i) the amount of foreclosed residential real estate property held by the creditor and (ii) the recorded investment in consumer mortgage loans collateralized by residential real estate property that are in the process of foreclosure according to local requirements of the applicable jurisdiction. The ASU is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2014, and the ASU is to be adopted using either a modified retrospective transition method or a prospective transition method. The Company has provided for the required disclosures within its consolidated financial statements and the other changes within the ASU do not have a material effect on the Company's consolidated financial statements.



31



ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS

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,” or “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;
changes in trade, monetary, and fiscal policies and laws, including 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;
changes in tax, banking, securities and insurance laws and regulations; and
changes in accounting policies, practices and standards, as may be adopted by the regulatory agencies as well as the FASB, and other accounting standard 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 II, Item 1A. “Risk Factors” of this Form 10-Q and in our Annual Report on Form 10-K for the year ended December 31, 2013. 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.

  

32



CRITICAL ACCOUNTING POLICIES

Critical accounting policies are 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 OREO; OTTI of investments; effectiveness of hedging derivatives; and accounting for postretirement plans, stock-based compensation, and income taxes. There have been no material changes to our critical accounting policies as disclosed within our Annual Report on Form 10-K for the year ended December 31, 2013. Refer to the Annual Report on Form 10-K for the year ended December 31, 2013 for discussion of the Company's critical accounting policies.

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 Branch Acquisition costs (the numerator) to (ii) net interest income on a fully taxable equivalent basis (assumed 35% tax rate) plus total non-interest income, excluding the net gain on sale of securities (the denominator). 
 
 
Three Months Ended 
 March 31,
(Dollars in Thousands)
 
2014
 
2013
Non-interest expense, as presented
 
$
15,125

 
$
16,500

Less: Branch Acquisition costs
 

 
161

Non-interest expense, adjusted
 
$
15,125

 
$
16,339

Net interest income, as presented
 
$
18,410

 
$
19,168

Add: effect of tax-exempt income
 
198

 
210

Non-interest income, as presented
 
5,685

 
6,336

Less: net gain on sale of securities
 
166

 
138

Net interest income and non-interest income, adjusted
 
$
24,127

 
$
25,576

Non-GAAP efficiency ratio
 
62.69
%
 
63.88
%
GAAP efficiency ratio
 
62.77
%
 
64.70
%
  
Tax Equivalent Net Interest Income. Tax-equivalent net interest income is net interest income plus the taxes that would have been paid had 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.
 
 
Three Months Ended 
 March 31,
(Dollars in Thousands)
 
2014
 
2013
Net interest income, as presented
 
$
18,410

 
$
19,168

Add: effect of tax-exempt income
 
198

 
210

Net interest income, tax equivalent
 
$
18,608

 
$
19,378

 

33



Return on Average Tangible Shareholders' Equity. Return on average tangible shareholders' equity is the ratio of (i) net income, adjusted for tax-effected amortization of intangible assets (the numerator) to (ii) average shareholders’ equity, adjusted for average goodwill and other intangibles (the denominator). 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. The following table reconciles return on average tangible shareholders' equity to return on average shareholders' equity. 
 
 
Three Months Ended 
 March 31,
(Dollars in Thousands)
 
2014
 
2013
Net income, as presented
 
$
5,715

 
$
5,662

Add: tax-effected amortization of intangible assets
 
187

 
187

Net income, adjusted
 
5,902

 
5,849

Average shareholders’ equity
 
232,539

 
234,176

Less average goodwill and other intangibles
 
49,168

 
53,157

Average tangible shareholders’ equity
 
$
183,371

 
$
181,019

Return on average tangible shareholders' equity (annualized)
 
13.05
%
 
13.10
%
Return on average shareholders' equity (annualized)
 
9.97
%
 
9.81
%
  
Tangible Book Value per Share.  Tangible book value per share is the ratio of (i) shareholders’ equity less goodwill and other intangibles (the numerator) to (ii) total common shares outstanding at period end (the denominator). We believe this is a meaningful measure as it provides information to assess capital adequacy and is a common measure within our industry. The following table reconciles tangible book value per share to book value per share.
(In Thousands, Except per Share Data)
 
March 31, 
2014
 
December 31, 
2013
 
March 31, 
2013
Shareholders’ equity
 
$
231,469

 
231,096

 
$
235,575

Less: goodwill and other intangibles
 
49,032

 
49,319

 
53,011

Tangible shareholders’ equity
 
$
182,437

 
$
181,777

 
$
182,564

Shares outstanding at period end
 
7,484,560

 
7,579,913

 
7,635,957

Tangible book value per share
 
$
24.38

 
$
23.98

 
$
23.91

Book value per share
 
$
30.93

 
$
30.49

 
$
30.85



34




EXECUTIVE OVERVIEW
 
Net income for the first quarter of 2014 was $5.7 million, representing a $53,000, or 1%, increase compared to the first quarter of 2013. The increase was led by a decrease in operating costs and provision for credit losses of $1.6 million, offsetting the decrease in revenues of $1.4 million. These financial results exclude the earnings contribution of the Branch Divestiture, which included the sale of $46.0 million of loans and $85.9 million of deposits and borrowings, in October 2013. For the first quarter of 2013, the five Franklin County branches contributed approximately $146,000 to net income. Return on average shareholders' equity for the first quarter of 2014 increased 16 bps to 9.97% compared to the first quarter of 2013, while our return on average assets remained relatively stable at 0.89%, decreasing 1 bp compared to a year ago.

Total assets at March 31, 2014 increased $36.8 million, or 1%, to $2.6 billion since December 31, 2013. This increase was driven by strong loan growth of $39.8 million, a 10% annualized growth rate since year-end. Loan growth was centered in our commercial real estate and commercial portfolios with increases of $33.6 million and $11.9 million, respectively. Growth within these portfolios was offset by a decrease in our retail portfolio, including residential real estate, home equity and consumer, of $5.7 million. Retail activity has been impacted by higher interest rates as well as a prolonged winter throughout Maine.

Total liabilities at March 31, 2014 increased $36.5 million, or 2%, since December 31, 2013. The increase was primarily attributable to growth in brokered deposits of $31.9 million used to fund loan growth and supplement the decrease in certificates of deposits of $9.0 million. Core deposits (demand, interest checking, savings, and money market) remained consistent compared to year-end balances, which we are pleased with as core deposits typically decline in the first quarter in the calendar year due to the seasonality and cyclical nature of deposit flows within our market.

Shareholders' equity at March 31, 2014 was $231.5 million, representing an increase of $373,000 since December 31, 2013. The primary factors attributable to the net increase are:

Net income of $5.7 million for the three months ended March 31, 2014;
OCI increased $769,000 for the three months ended March 31, 2014;
Partially offset by repurchases of 113,527 shares of the Company's common stock totaling $4.4 million; and
Dividends declared of $0.27 per share totaling $2.0 million.

RESULTS OF OPERATIONS
 
Net Interest Income
Net interest income is the interest earned on loans, securities, and other 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 and accounts for approximately 76% of total revenues (net interest income and non-interest income), 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 liabilities, and the level of non-performing assets.


35



Net interest income earned for the first quarter of 2014 was $18.4 million, representing a decrease of $758,000, or 4%, compared to the same period in 2013. The decrease is due to both the Branch Divestiture, which included the sale of $46.0 million of loans and $85.9 million of deposits and borrowings in October 2013, and continued net interest margin compression as the yield on interest-earning assets declines due to the prolonged low-interest rate environment. The Company's yield on interest-earning assets for the three months ended March 31, 2014 decreased 25 bps to 3.57% compared to the same period in 2013. The Company has been able to partially offset the impact of a decreasing yield on net interest income through:

An increase in average loans of $22.2 million compared to the first quarter of 2013, even with loan sales of $46.0 million in the fourth quarter of 2013;
An increase in average investments of $25.0 million compared to the first quarter of 2013; and
A 6 bps decrease in our cost of funds to 0.52% compared to the first quarter of 2013, even with core deposit sales of $80.4 million in the fourth quarter of 2013.

The following table presents average balances, interest income, interest expense, and the corresponding average yields earned and cost of funds, as well as net interest income, net interest rate spread and net interest margin for the three months ended March 31, 2014 and 2013:

36




Quarterly Average Balance, Interest and Yield/Rate Analysis (unaudited)
 
 
At or for the Three Months Ended
 
At or for the Three Months Ended
 
 
March 31, 2014
 
March 31, 2013
(Dollars In Thousands)
 
Average Balance
 
Interest
 
Yield/Rate
 
Average Balance
 
Interest
 
Yield/Rate
Assets
 
 
 
 
 
 
 
 
 
 
 
 
Interest-earning assets:
 
 
 
 
 
 
 
 
 
 
 
 
Securities - taxable
 
$
793,696

 
$
4,318

 
2.18
%
 
$
769,995

 
$
4,314

 
2.24
%
Securities - nontaxable(1)
 
32,709

 
452

 
5.52
%
 
31,681

 
470

 
5.93
%
Trading account assets
 
2,486

 
2

 
0.26
%
 
2,237

 
12

 
2.11
%
Loans(2):
 
 
 
 
 
 
 
 
 
 
 
 
Residential real estate
 
568,205

 
5,965

 
4.20
%
 
575,154

 
6,576

 
4.57
%
Commercial real estate
 
553,472

 
6,282

 
4.54
%
 
503,799

 
6,074

 
4.82
%
Commercial
 
170,146

 
1,690

 
3.98
%
 
176,536

 
1,970

 
4.46
%
Municipal(1)
 
10,900

 
114

 
4.23
%
 
11,579

 
132

 
4.61
%
Consumer
 
288,725

 
2,768

 
3.89
%
 
302,131

 
3,088

 
4.15
%
Total loans 
 
1,591,448

 
16,819

 
4.24
%
 
1,569,199

 
17,840

 
4.56
%
Total interest-earning assets
 
2,420,339

 
21,591

 
3.57
%
 
2,373,112

 
22,636

 
3.82
%
Cash and due from banks
 
41,502

 
 
 
 
 
44,744

 
 
 
 
Other assets
 
165,762

 
 
 
 
 
166,704

 
 
 
 
Less: ALL
 
(21,604
)
 
 
 
 
 
(23,267
)
 
 
 
 
Total assets
 
$
2,605,999

 
 
 
 
 
$
2,561,293

 
 
 
 
Liabilities & Shareholders' Equity
 
 
 
 
 
 
 
 
 
 
 
 
Deposits:
 
 
 
 
 
 
 
 
 
 
 
 
Demand
 
$
227,426

 
$

 
$

 
$
221,796

 
$

 
$

Interest checking
 
461,544

 
77

 
0.07
%
 
478,944

 
67

 
0.06
%
Savings
 
244,460

 
33

 
0.06
%
 
230,128

 
32

 
0.06
%
Money market
 
421,607

 
306

 
0.29
%
 
456,333

 
373

 
0.33
%
Certificates of deposit
 
338,211

 
803

 
0.96
%
 
415,034

 
987

 
0.96
%
Total deposits
 
1,693,248

 
1,219

 
0.29
%
 
1,802,235

 
1,459

 
0.33
%
Borrowings:
 
 
 
 
 
 
 
 
 
 
 
 
Brokered deposits
 
103,246

 
332

 
1.30
%
 
126,078

 
360

 
1.16
%
Junior subordinated debentures
 
43,935

 
625

 
5.77
%
 
43,832

 
621

 
5.75
%
Other borrowings
 
504,024

 
807

 
0.65
%
 
318,198

 
818

 
1.04
%
Total borrowings
 
651,205

 
1,764

 
1.10
%
 
488,108

 
1,799

 
1.50
%
Total funding liabilities
 
2,344,453

 
2,983

 
0.52
%
 
2,290,343

 
3,258

 
0.58
%
Other liabilities
 
29,007

 
 
 
 
 
36,774

 
 
 
 
Shareholders' equity
 
232,539

 
 
 
 
 
234,176

 
 
 
 
Total liabilities & shareholders' equity
 
$
2,605,999

 
 
 
 
 
$
2,561,293

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net interest income (fully-taxable equivalent)
 
 
 
18,608

 
 
 
 
 
19,378

 
 
Less:  fully-taxable equivalent adjustment
 
 
 
(198
)
 
 
 
 
 
(210
)
 
 
Net interest income
 
 
 
$
18,410

 
 
 
 
 
$
19,168

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net interest rate spread (fully-taxable equivalent)
 
 
 
 
 
3.05
%
 
 
 
 
 
3.24
%
Net interest margin (fully-taxable equivalent)
 
 
 
 
 
3.08
%
 
 
 
 
 
3.27
%
 
 
 
 
 
 
 
 
 
 
 
 
 
(1)  Reported on tax-equivalent basis calculated using a tax rate of 35%.
 
 
 
 
 
 
(2)  Non-accrual loans and loans held for sale are included in total average loans.
 
 
 
 

37




Provision and Allowance for Loan Losses
The provision for loan losses is a recorded expense determined by management that adjusts the ALL to a level that, 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 ALL 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 the three months ended March 31, 2014 and 2013 was $493,000 and $674,000, respectively. Please see “— Financial Condition — Asset Quality” below for additional discussion regarding the ALL and overall asset quality.

Non-Interest Income
The following table presents the components of non-interest income for the three months ended March 31, 2014 and 2013:
 
 
Three Months Ended 
 March 31,
 
Change
(Dollars in thousands)
 
2014
 
2013
 
$
 
%
Service charges on deposit accounts
 
$
1,469

 
$
1,684

 
$
(215
)
 
(13
)%
Other service charges and fees
 
1,395

 
1,429

 
(34
)
 
(2
)%
Income from fiduciary services
 
1,184

 
1,143

 
41

 
4
 %
Brokerage and insurance commissions
 
478

 
412

 
66

 
16
 %
Bank-owned life insurance
 
306

 
338

 
(32
)
 
(9
)%
Mortgage banking income, net
 
72

 
574

 
(502
)
 
(87
)%
Net gain on sale of securities
 
166

 
138

 
28

 
20
 %
Other income
 
615

 
618

 
(3
)
 
 %
Total non-interest income
 
$
5,685

 
$
6,336

 
$
(651
)
 
(10
)%
Non-interest income as a percentage of total revenues(1)
 
24
%
 
25
%
 
 
 
 
(1) Revenue is defined as net interest income plus non-interest income.
 
Non-interest income for the three months ended March 31, 2014 was $5.7 million, representing a decrease of $651,000, or 10%, compared to the three months ended March 31, 2013. The significant changes in non-interest income for the three months ended March 31, 2014 compared to the same period for 2013 include:
A decrease in mortgage banking income of $502,000 as there were no mortgage sales in the first quarter of 2014; and
A decrease in deposit-related service fees and other service charges and fees totaling $249,000, primarily driven by the Branch Divestiture in the fourth quarter of 2013, which accounted for $173,000 of the decrease. The remaining decrease was largely attributable to a decrease in service charge income related to lower overdraft and debit card transaction volume.

38



Non-Interest Expense
The following table presents the components of non-interest expense for the three months ended March 31, 2014 and 2013:
 
 
Three Months Ended 
 March 31,
 
Change
(Dollars in thousands)
 
2014
 
2013
 
$
 
%
Salaries and employee benefits
 
$
7,980

 
$
8,361

 
$
(381
)
 
(5
)%
Furniture, equipment and data processing
 
1,789

 
1,604

 
185

 
12
 %
Net occupancy
 
1,380

 
1,552

 
(172
)
 
(11
)%
Consulting and professional fees
 
518

 
547

 
(29
)
 
(5
)%
Other real estate owned and collection costs
 
513

 
888

 
(375
)
 
(42
)%
Regulatory assessments
 
481

 
499

 
(18
)
 
(4
)%
Amortization of intangible assets
 
287

 
288

 
(1
)
 
 %
Branch Acquisition costs
 

 
161

 
(161
)
 
(100
)%
Other expenses
 
2,177

 
2,600

 
(423
)
 
(16
)%
Total non-interest expense
 
$
15,125

 
$
16,500

 
$
(1,375
)
 
(8
)%
Efficiency ratio (non-GAAP)
 
62.69
%
 
63.88
%
 
 
 
 
 
Non-interest expense for the three months ended March 31, 2014 was $15.1 million, representing a decrease of $1.4 million, or 8%, compared to the three months ended March 31, 2013. The significant changes in non-interest expense for the three months ended March 31, 2014, compared to the same period for 2013 include:
  
A decrease in salaries and employee benefits of $381,000, or 5%, due to a reduction in headcount at the Company, primarily related to the positions associated with the Branch Divestiture in the fourth quarter of 2013;
A decrease in OREO and collection costs of $375,000, or 42%, due to the establishment of a reserve on a servicing-related claim in the first quarter of 2013 of $215,000 that did not recur in the first quarter of 2014 and a decrease in foreclosure- and collection-related costs;
An increase in furniture, equipment and data processing of $185,000, or 12%, as the Company continues to focus its strategic efforts on technology and innovation to enhance the customer experience. Through our initiatives and as customers continue to transition to more on-line banking activity, general data processing and on-line banking costs have increased $183,000, representing the majority of the change compared to the same period last year;
A decrease in net occupancy of $172,000, or 11%, due to a reduction in branch occupancy costs as we divested the five Franklin County branches in the fourth quarter of 2013 accounting for $67,000 of the decrease and the remainder being primarily due to a decrease in general maintenance and utility costs;
A decrease in non-recurring Branch Acquisition costs of $161,000 incurred in the first quarter of 2013; and
A decrease of $423,000, or 16%, in other expenses as non-routine general operating costs, including general operating costs and supplies, was incurred in the first quarter of 2013 related to the continued on-boarding of our 14 new branches acquired in the fourth quarter of 2012.

FINANCIAL CONDITION
 
Overview
Total assets at March 31, 2014 were $2.6 billion, an increase of $36.8 million, or 1%, from December 31, 2013. The growth in total assets was primarily due to an increase in total loans of $39.8 million, a 10% annualized growth rate since year-end. Total liabilities increased $36.5 million, or 2%, since December 31, 2013 driven by growth in total deposits and borrowings of $22.9 million and $11.3 million, respectively. Total shareholders’ equity increased $373,000 since December 31, 2013.
 

39



Investment Securities
We purchase and hold investment securities such as U.S. bonds, U.S. government sponsored enterprises, states and political subdivisions, mortgage-backed securities, FHLBB and FRB stock, investment grade corporate bonds and equities to diversify our revenues, to provide interest rate and credit risk diversification and to provide for liquidity and funding needs. At March 31, 2014, our total holdings in investment securities were $824.6 million, a decrease of $3.6 million, from December 31, 2013. During the first three months of 2014, we purchased $26.4 million of debt securities and sold MBS securities receiving proceeds of $9.4 million and recognized a gain on the sale of securities of $166,000. Also during the first quarter of 2014, we received proceeds on the maturity of debt securities totaling $23.8 million.
 
Of the debt securities purchased during the first quarter of 2014, we classified $7.0 million as HTM securities and, as such, carry these at amortized cost. These debt securities that were classified as HTM are categorized as "obligations of states and political subdivisions" (i.e. municipal bonds). We have the positive intent and ability, evidenced by our strong capital and liquidity ratios, to hold these investments to maturity. The remaining $19.4 million of debt securities purchased during the quarter were categorized as AFS securities and are carried at fair value on the consolidated statements of condition with the associated unrealized gains or losses recorded in AOCI, net of tax. At March 31, 2014, we had $6.1 million of unrealized losses on AFS securities, net of tax, compared to $8.0 million of unrealized loss, net of taxes, at December 31, 2013. The fair value of the AFS securities at March 31, 2014 improved modestly since December 31, 2013 primarily due to the decrease in long-term Treasury rates period-over-period. We continue to have the intent and ability to hold these securities until recovery.

Within our AFS portfolio, we held senior tranches of Non-Agency securities, which were rated Triple-A by Moody’s, Standard and Poor’s, and/or Fitch at the time of purchase. At March 31, 2014, our Non-Agency securities had a total fair value of $6.5 million and are in a net unrealized loss position of $334,000. Non-Agency securities with a fair value of $5.0 million were in a gross unrealized loss position of $374,000 at March 31, 2014, of which $373,000 of the gross unrealized loss has been in a continuous loss position for 12 months or more. We continue to evaluate and analyze the Non-Agency securities regularly for indications that the losses are the result of credit deterioration, and while we estimate that a portion of the loss is other-than-temporary and attributable to credit losses, we have previously taken OTTI on these investments in excess of the estimated credit loss on these securities. As such, we have concluded that no additional OTTI on the Non-Agency securities existed as of March 31, 2014. We continue to have the intent and ability to hold these securities until recovery, and we will continue to evaluate the unrealized losses within our portfolio each quarter to determine if any OTTI exists and a write-down of our Non-Agency securities is necessary.

Our process and methodology for analyzing the Non-Agency securities for OTTI has not significantly changed since last disclosed within our Annual Report on Form 10-K for the year ended December 31, 2013. Refer to the Annual Report on Form 10-K for the year ended December 31, 2013 for further discussion of the Company's process and methodology.
 
FHLBB Stock
We are required to maintain a level of investment in FHLBB stock based on the level of our FHLBB advances. As of March 31, 2014 and December 31, 2013, our investment in FHLBB stock totaled $19.5 million and $18.8 million, respectively. In the first quarter of 2014, the Company purchased $693,000 of additional FHLBB stock to support our current levels of FHLBB advances. No market exists for shares of the FHLBB. FHLBB stock may be redeemed at par value five years following termination of FHLBB membership, subject to limitations or restrictions that may be imposed by the FHLBB or its regulator, the Federal Housing Finance Agency, to maintain capital adequacy of the FHLBB. While we currently have no intention to terminate our FHLBB membership, the ability to redeem our investment in FHLBB stock would be subject to the conditions imposed by the FHLBB.

Loans
We provide loans primarily to customers located within our geographic market area. At March 31, 2014, total loans of $1.6 billion increased $39.8 million, representing a 10% annualized growth rate since December 31, 2013. Loan growth was centered in our commercial real estate and commercial portfolios, which grew $33.6 million and $11.9 million, respectively. Since December 31, 2013, our residential real estate, home equity and consumer portfolios have decreased $2.1 million, $2.7 million, and $885,000, respectively. Retail loan growth continues to be hampered by higher interest rates and less consumer demand.

 

40



Asset Quality
Non-Performing Assets.  Non-performing assets include non-accrual loans, accruing loans 90 days or more past due, renegotiated loans, and property acquired through foreclosure or repossession.
 
The following table sets forth the amount of our non-performing assets as of the dates indicated: 
(Dollars in Thousands)
 
March 31, 2014
 
December 31, 2013
Non-accrual loans:
 
 

 
 

Residential real estate
 
$
9,125

 
$
10,520

Commercial real estate
 
8,278

 
7,799

Commercial
 
1,935

 
2,146

Consumer and home equity loans
 
2,457

 
2,012

Total non-accrual loans
 
21,795

 
22,477

Accruing loans past due 90 days
 
50

 
455

Accruing renegotiated loans not included above
 
5,413

 
5,468

Total non-performing loans
 
27,258

 
28,400

Other real estate owned
 
2,712

 
2,195

Total non-performing assets
 
$
29,970

 
$
30,595

Non-performing loans to total loans
 
1.68
%
 
1.80
%
Allowance for credit losses to non-performing loans
 
79.58
%
 
76.09
%
Non-performing assets to total assets
 
1.13
%
 
1.18
%
Allowance for credit losses to non-performing assets
 
72.38
%
 
70.63
%
 
Potential Problem Loans.  Potential problem loans consist of classified accruing commercial and commercial real estate loans that were between 30 and 89 days past due. Such loans are characterized by weaknesses in the financial condition of borrowers or collateral deficiencies. Based on historical experience, the credit quality of some of these loans may improve due to changes in collateral values or the financial condition of the borrowers, while the credit quality of other loans may deteriorate, resulting in some amount of loss. These loans are not included in the above analysis of non-accrual loans. At March 31, 2014, potential problem loans amounted to approximately $698,000 as compared to $2.3 million at December 31, 2013. The decrease was largely attributable to one commercial real estate relationship totaling $1.4 million moving to non-performing status in the first quarter of 2014.
 
Past Due Loans.  Past due loans consist of accruing loans that were between 30 and 89 days past due. The following table sets forth information concerning the past due loans at the date indicated:
(Dollars in Thousands)
 
March 31, 2014
 
December 31, 2013
Loans 30-89 days past due:
 
 

 
 

Residential real estate
 
$
1,349

 
$
1,551

Commercial real estate
 
1,716

 
2,595

Commercial
 
1,007

 
313

Consumer and home equity loans
 
632

 
1,571

Total loans 30-89 days past due
 
$
4,704

 
$
6,030

Loans 30-89 days past due to total loans
 
0.29
%
 
0.38
%
 
Allowance for Loan Losses.  We use a methodology to systematically measure the amount of estimated loan loss exposure inherent in the loan portfolio for purposes of establishing a sufficient ALL. The ALL is management’s best estimate of the probable loan losses as of the balance sheet date. The allowance is increased by provisions charged to earnings and by recoveries of amounts previously charged-off, and is reduced by charge-offs on loans. During the first three months of 2014, there were no significant changes to the ALL assessment methodology.

41




The following table sets forth information concerning the activity in our ALL during the periods indicated. 
 
 
Three Months Ended 
 March 31,
 
Year Ended December 31,
(Dollars in Thousands)
 
2014
 
2013
 
2013
ALL at the beginning of the period
 
$
21,590

 
$
23,044

 
$
23,044

Provision for loan losses
 
492

 
684

 
2,052

Charge-offs:
 
 
 
 
 
 
Residential real estate loans
 
183

 
145

 
1,059

Commercial real estate
 
171

 
80

 
952

Commercial loans
 
219

 
277

 
1,426

Consumer and home equity loans
 
76

 
85

 
837

Total loan charge-offs
 
649

 
587

 
4,274

Recoveries:
 
 
 
 
 
 
Residential real estate loans
 
92

 
3

 
35

Commercial real estate loans
 
39

 
75

 
121

Commercial loans
 
96

 
129

 
495

Consumer and home equity loans
 
10

 
21

 
117

Total loan recoveries
 
237

 
228

 
768

Net charge-offs
 
412

 
359

 
3,506

ALL at the end of the period
 
$
21,670

 
$
23,369

 
$
21,590

Components of allowance for credit losses:
 
 
 
 
 
 
Allowance for loan losses
 
$
21,670

 
$
23,369

 
$
21,590

Liability for unfunded credit commitments
 
22

 
35

 
21

Balance of allowance for credit losses at end of the period
 
$
21,692

 
$
23,404

 
$
21,611

Average loans
 
$
1,591,448

 
$
1,569,199

 
$
1,580,859

Net charge-offs (annualized) to average loans
 
0.10
%
 
0.09
%
 
0.22
%
Provision for credit losses (annualized) to average loans
 
0.12
%
 
0.17
%
 
0.13
%
ALL to total loans
 
1.34
%
 
1.48
%
 
1.37
%
Allowance for credit losses to net charge-offs (annualized)
 
1,314.61
%
 
1,628.34
%
 
616.57
%
ALL to non-performing loans
 
79.50
%
 
86.21
%
 
76.02
%
 
The determination of an appropriate level of ALL, and subsequent provision for loan losses which affects earnings, is based on our analysis of various economic factors and review of the loan portfolio. During our analysis and review, many factors are considered including, but not limited to, loan growth, payoffs of lower quality loans, recoveries on previously charged-off loans, improvement in the financial condition of the borrowers, risk rating downgrades/upgrades and charge-offs. We utilize a comprehensive approach toward determining the ALL, which includes an expanded risk rating system to assist us in identifying the risks being undertaken. During the first three months of 2014, the Company provided $492,000 of expense to the ALL compared to $684,000 for the same period of 2013. The decrease in the provision for loan losses was primarily attributable to improvement in the general economic condition of our borrowers supported by a decrease in loans 30 - 89 days past due to total loans at March 31, 2014 of 0.29% compared to 0.39% at March 31, 2013. Furthermore, we have seen modest improvement in our asset quality metrics due to the aforementioned general economic improvement of our borrowers, but also due to the resolution of foreclosure properties in the fourth quarter of 2013 and first quarter of 2014.

Overall, economic conditions in Maine experienced minimal change during the first quarter of 2014, with modest gains in the unemployment rate and real estate values. Weaknesses in the real estate markets persist, particularly in the residential real estate market, where consumers face employment uncertainty and increasing interest rates compared to 2012 and the first half of 2013. Economic forecasts for Maine continue to push the state’s recovery out past 2015, lagging the national recovery by one to two years. As updated financial statements are being collected and analyzed, indications are of slightly improved general financial condition among commercial borrowers. Auction activity on foreclosed properties has increased, resulting in more sales than transfers into OREO. We believe the ALL of $21.7 million, or 1.34% of total loans and 79.50% of total non-

42



performing loans at March 31, 2014, was appropriate given the current economic conditions in our service area and the condition of the loan portfolio. If conditions deteriorate, however, the provision will likely be increased. The ALL was 1.37% and 1.48% of total loans outstanding and 76.02% and 86.21% of total non-performing loans at December 31, 2013 and March 31, 2013, respectively.
 
Liabilities and Shareholders’ Equity
Total liabilities increased $36.5 million, or 2%, since December 31, 2013 to $2.4 billion at March 31, 2014. Total deposits, including brokered deposits, increased $22.9 million, or 1%, since December 31, 2013. Low-cost core deposits (demand, interest checking, savings, and money market) decreased slightly by $83,000 since December 31, 2013, while brokered deposits increased $31.9 million and certificates of deposit decreased $9.0 million for the same period. Other borrowings, including FHLB advances and junior subordinated debt, increased $11.3 million, or 2%, since December 31, 2013, which was primarily driven by increases in retail repurchase agreements of $6.1 million and short-term FHLB borrowings of $5.2 million.

Total shareholders’ equity at March 31, 2014 was $231.5 million, representing an increase of $373,000 since December 31, 2013. The primary factors attributable to the increase are:

Net income of $5.7 million for the three months ended March 31, 2014;
OCI increased $769,000 for the three months ended March 31, 2014 due to a change in net unrealized gains on AFS investments of $1.8 million, net of tax, offset by net unrealized losses on interest rate swaps of $1.1 million, net of tax;
Partially offset by repurchases of 113,527 shares of the Company's common stock totaling $4.4 million; and
Dividends declared of $0.27 per share totaling $2.0 million.
 
The following table presents certain information regarding shareholders’ equity as of or for the periods indicated:
 
March 31,
2014
 
March 31,
2013
 
December 31,
2013
Return on average shareholders' equity (annualized)
9.97
%
 
9.81
%
 
9.74
%
Average shareholders' equity to average assets
8.92
%
 
9.14
%
 
9.09
%
Dividend payout ratio
35.21
%
 
36.45
%
 
36.30
%
Dividends declared per share
$
0.27

 
$
0.27

 
$
1.08

Book value per share
$
30.93

 
$
30.85

 
$
30.49

 
LIQUIDITY
 
Our liquidity needs require the availability of cash to meet the withdrawal demands of depositors and credit commitments to borrowers. Liquidity is defined as our ability to maintain availability of funds to meet customer needs, as well as to support our asset base. The primary objective of liquidity management is to maintain a balance between sources and uses of funds to meet our cash flow needs in the most economical and expedient manner. Due to the potential for unexpected fluctuations in both deposits and loans, active management of liquidity is necessary. We maintain various sources of funding and levels of liquid assets in excess of regulatory guidelines in order to satisfy their varied liquidity demands. We monitor liquidity in accordance with internal guidelines and all applicable regulatory requirements. As of March 31, 2014 and 2013, our level of liquidity exceeded target levels. We believe that we currently have appropriate liquidity available to respond to liquidity demands. Sources of funds that we utilize consist of deposits, borrowings from the FHLBB and other sources, cash flows from operations, prepayments and maturities of outstanding loans, investments and mortgage-backed securities and the sales of mortgage loans.

Deposits continue to represent our primary source of funds. For the first three months of 2014, average deposits (excluding brokered deposits) of $1.7 billion decreased $109.0 million, compared to the same period in 2013, primarily due to the Branch Divestiture that occurred in the fourth quarter of 2013, which included $80.4 million of deposits sold, and decreases in average money market and average certificates of deposit. Included in the money market and interest checking deposit categories are deposits from our wealth management subsidiary, Acadia Trust, which represent client funds. The deposits in the Acadia Trust client accounts, which totaled $103.6 million at March 31, 2014, fluctuate with changes in the portfolios of the clients of Acadia Trust.
 

43



Borrowings are used to supplement deposits as a source of liquidity. In addition to borrowings from the FHLBB, we purchase federal funds and sell securities under agreements to repurchase. Our average total borrowings, which include long-term debt, totaled $651.2 million for the first three months of 2014, an increase of $163.1 million, or 33%, from the same period in 2013, primarily due to the increase in average short-term FHLBB borrowings of $202.1 million, partially offset by a decrease in average repurchase agreements totaling $18.9 million and a decrease in average brokered deposits of $22.8 million. The increase in our average borrowings compared to the same period in 2013 is the result of strong loan growth, investment purchases, and the reduction in deposit balances. We secure borrowings from the FHLBB, whose advances remain the largest non-deposit-related funding source, with qualified residential real estate loans, certain investment securities and certain other assets available to be pledged. The carrying value of loans pledged as collateral at the FHLBB was $738.7 million and $677.0 million at March 31, 2014 and 2013, respectively. The carrying value of securities pledged as collateral at the FHLBB was $3.4 million and $4.3 million at March 31, 2014 and 2013, respectively. Through the Bank, we had an available line of credit with the FHLBB of $9.9 million at March 31, 2014. We had no outstanding balance on the line of credit with the FHLBB at March 31, 2014. The Company also has a $10.0 million line of credit with a maturity date of December 20, 2014. We had no outstanding balance on this line of credit at March 31, 2014. Long-term borrowings represent securities sold under repurchase agreements with major brokerage firms. Both wholesale and retail repurchase agreements are secured by MBS and CMO securities.

We believe the investment portfolio and residential loan portfolio provide a significant amount of contingent liquidity that could be accessed in a reasonable time period through sales of those portfolios. We also believe that we have additional untapped access to the brokered deposit market, commercial reverse repurchase transaction market and the FRB discount window. These sources are considered as liquidity alternatives in our contingent liquidity plan. We believe that the level of liquidity is sufficient to meet current and future funding requirements; however, changes in economic conditions, including consumer saving habits and the availability or access to the national brokered deposit and commercial repurchase markets, could significantly impact our liquidity position. 

CAPITAL RESOURCES
 
Under FRB guidelines, we are required to maintain capital based on risk-adjusted assets. These capital requirements represent quantitative measures of our assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. Our capital classification is also subject to qualitative judgments by our regulators about components, risk weightings and other factors. Quantitative measures established by regulation to ensure capital adequacy require us to maintain minimum amounts and ratios of total and Tier I capital (as defined in the applicable regulations) to risk-weighted assets (as defined in the applicable regulations), and of Tier I capital to average assets (as defined in the applicable regulations). These guidelines apply to us on a consolidated basis. Under the current guidelines, banking organizations must maintain a risk-based capital ratio of 8.0%, of which at least 4.0% must be in the form of core capital (as defined in the applicable regulations). In addition to risk-based capital requirements, the FRB requires bank holding companies to maintain a minimum leverage capital ratio of core capital to total assets of 4.0%. Total assets for this purpose do not include goodwill and any other intangible assets and investments that the FRB determines should be deducted. Our risk-based ratios, and those of the Bank, exceeded regulatory guidelines at March 31, 2014, December 31, 2013 and March 31, 2013. The following table presents the Company's regulatory capital ratios at the periods indicated:
 
March 31,
2014
 
December 31,
2013
 
March 31,
2013
 
Minimum Regulatory Capital Required
 
Minimum Regulatory Provision To Be "Well Capitalized"
Total risk-based capital
15.89
%
 
16.45
%
 
15.60
%
 
8.00
%
 
10.00
%
Tier I capital
14.64
%
 
15.20
%
 
14.34
%
 
4.00
%
 
6.00
%
Tier I leverage capital ratio
9.27
%
 
9.43
%
 
8.95
%
 
4.00
%
 
5.00
%

Although the junior subordinated debentures are recorded as a liability on our consolidated statements of condition, we are permitted, in accordance with regulatory guidelines, to include, subject to certain limits, the trust preferred securities in our calculation of risk-based capital. At March 31, 2014, $43.0 million of the trust preferred securities were included in Tier 1 and total risk-based capital.
 

44



As part of our goal to operate a safe, sound and profitable financial organization, we are committed to maintaining a strong capital base. Shareholders’ equity totaled $231.5 million, $231.1 million and $235.6 million at March 31, 2014, December 31, 2013 and March 31, 2013, respectively, which amounted to 9% of total assets as of the respective dates. Refer to "— Financial Condition — Liabilities and Shareholders' Equity" for discussion regarding changes in shareholders' equity since December 31, 2013.

Our principal cash requirement is the payment of dividends on our common stock, as and when declared by the Board of Directors. We paid dividends to shareholders in the aggregate amount of $2.0 million and $2.1 million for the three-month period ended March 31, 2014 and 2013, respectively. Our Board of Directors approves cash dividends on a quarterly basis after careful analysis and consideration of various factors, including the following: (i) capital position relative to total assets, (ii) risk-based assets, (iii) total classified assets, (iv) economic conditions, (v) growth rates for total assets and total liabilities, (vi) earnings performance and projections and (vii) strategic initiatives and related capital requirements. All dividends declared and distributed by the Company will be in compliance with applicable state corporate law and regulatory requirements.
 
We are primarily dependent upon the payment of cash dividends by our subsidiaries to service our commitments. We, as the sole shareholder of our subsidiaries, are entitled to dividends, when and as declared by each subsidiary’s Board of Directors from legally available funds. The Bank declared dividends in the aggregate amount of $3.0 million for the first three months of 2014 and 2013, respectively. Under regulations prescribed by the OCC, without prior OCC approval, the Bank may not declare dividends in any year in excess of the Bank’s (i) net income for the current year, (ii) plus its retained net income for the prior two years. If we are required to use dividends from the Bank to service unforeseen commitments in the future, we may be required to reduce the dividends paid to our shareholders going forward.
 
CONTRACTUAL OBLIGATIONS AND COMMITMENTS
 
In the normal course of business, we are a party to credit related financial instruments with off-balance sheet risk, which are not reflected in the consolidated statements of condition. These financial instruments include lending commitments and letters of credit. Those instruments involve varying degrees of credit risk in excess of the amount recognized in the consolidated statements of condition. We follow the same credit policies in making commitments to extend credit and conditional obligations as we do for on-balance sheet instruments, including requiring similar collateral or other security to support financial instruments with credit risk. Our exposure to credit loss in the event of nonperformance by the customer is represented by the contractual amount of those instruments. Since many of the commitments are expected to expire without being drawn upon, the total amount does not necessarily represent future cash requirements. At March 31, 2014, we had the following levels of commitments to extend credit:
 
 
Total Amount
 
Commitment Expires in:
(Dollars in Thousands)
 
Committed
 
<1 Year
 
1 – 3 Years
 
4 – 5 Years
 
>5 Years
Letters of Credit
 
$
2,046

 
$
2,046

 
$

 
$

 
$

Commercial Commitment Letters
 
47,070

 
47,070

 

 

 

Residential Loan Origination
 
3,999

 
3,999

 

 

 

Home Equity Line of Credit Commitments
 
275,625

 
81,695

 
5,728

 
6,638

 
181,564

Other Commitments to Extend Credit
 
117

 
117

 

 

 

Total
 
$
328,857

 
$
134,927

 
$
5,728

 
$
6,638

 
$
181,564


45




We are a party to several off-balance sheet contractual obligations through lease agreements on a number of branch facilities. We have an obligation and commitment to make future payments under these contracts. At March 31, 2014, we had the following levels of contractual obligations: 
 
 
Total Amount
 
Payments Due per Period
(Dollars in Thousands)
 
of Obligations
 
<1 Year
 
1 – 3 Years
 
4 – 5 Years
 
>5 Years
Operating Leases
 
$
5,233

 
$
1,073

 
$
1,596

 
$
1,106

 
$
1,458

Capital Leases(1)
 
1,543

 
129

 
255

 
253

 
906

FHLBB Borrowings – Overnight
 
274,000

 
274,000

 

 

 

FHLBB Borrowings – Advances
 
56,094

 

 
36,094

 
20,000

 

Commercial Repurchase Agreements
 
30,131

 

 
30,131

 

 

Other Borrowed Funds
 
136,174

 
136,174

 

 

 

Junior Subordinated Debentures
 
43,947

 

 

 

 
43,947

Note Payable
 
15

 
15

 

 

 

Other Contractual Obligations
 
432

 
432

 

 

 

Total
 
$
547,569

 
$
411,823

 
$
68,076

 
$
21,359

 
$
46,311

(1) Includes contingent rentals, which are based on the Consumer Price Index and reset every five years. Total contingent rentals for year one through year five are $14,000.

Borrowings from the FHLBB consist of short- and long-term fixed- and variable-rate borrowings and are collateralized by all stock in the FHLBB and a blanket lien on qualified collateral consisting primarily of loans with first mortgages secured by one- to four-family properties, certain pledged investment securities and other qualified assets. Other borrowed funds include federal funds purchased and securities sold under repurchase agreements. We have an obligation and commitment to repay all borrowings and debentures. These commitments, borrowings, junior subordinated debentures and the related payments are made during the normal course of business.
 
We may enter into derivative instruments as partial hedges against large fluctuations in interest rates. We may also enter into fixed-rate interest rate swaps and floor instruments to partially hedge against potentially lower yields on the variable prime rate loan category in a declining rate environment. If interest rates were to decline, resulting in reduced income on the adjustable rate loans, there would be an increased income flow from the interest rate swap and floor instrument. We may also enter into variable rate interest rate swaps and cap instruments to partially hedge against increases in short-term borrowing rates. If interest rates were to rise, resulting in an increased interest cost, there would be an increased income flow from the interest rate swaps and cap instruments. These financial instruments are factored into our overall interest rate risk position. We regularly review the credit quality of the counterparty from which the instruments have been purchased. At March 31, 2014, we had the following variable- for fixed-interest rate swaps on the junior subordinated debentures: 
Notional Amount
 
Fixed-Rate
 
Maturity Date
$
10,000

 
5.09%
 
June 30, 2021
10,000

 
5.84%
 
June 30, 2029
10,000

 
5.71%
 
June 30, 2030
5,000

 
4.35%
 
March 30, 2031
8,000

 
4.14%
 
July 7, 2031
 
At March 31, 2014, we had a notional amount of $7.8 million in interest rate swap agreements with commercial customers and an equal notional amount with a dealer bank related to our commercial loan level derivative program. This program allows us to retain variable-rate commercial loans while allowing the customer to synthetically fix the loan rate by entering into a variable- for fixed- interest rate swap. It is anticipated that, over time, customer interest rate derivatives will reduce the interest rate risk inherent in the longer-term, fixed-rate commercial business.



46



ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURE
ABOUT MARKET RISK
 
MARKET RISK

Market risk is the risk of loss in a financial instrument arising from adverse changes in market rates/prices, such as interest rates, foreign currency exchange rates, commodity prices and equity prices. Our primary market risk exposure is interest rate risk. The ongoing monitoring and management of this risk is an important component of our asset/liability management process, which is governed by policies established by the Bank’s Board of Directors, and are reviewed and approved annually. The Board ALCO delegates responsibility for carrying out the asset/liability management policies to Management ALCO. In this capacity, Management ALCO develops guidelines and strategies impacting our asset/liability management-related activities based upon estimated market risk sensitivity, policy limits and overall market interest rate levels/trends. Management ALCO and Board ALCO jointly meet on a quarterly basis to review strategies, policies, economic conditions and various activities as part of the management of these risks.
 
Interest Rate Risk
Interest rate risk represents the sensitivity of earnings to changes in market interest rates. As interest rates change, the interest income and expense streams associated with our financial instruments also change, thereby impacting net interest income, the primary component of our earnings. Board ALCO and Management ALCO utilize the results of a detailed and dynamic simulation model to quantify the estimated exposure of net interest income to sustained interest rate changes. While Board ALCO and Management ALCO routinely monitor simulated net interest income sensitivity over a rolling two-year horizon, they also utilize additional tools to monitor potential longer-term interest rate risk.
 
The simulation model captures the impact of changing interest rates on the interest income received and interest expense paid on all interest-earning assets and interest-bearing liabilities reflected on our consolidated statements of condition, as well as for derivative financial instruments, if any. None of the assets used in the simulation were held for trading purposes. This sensitivity analysis is compared to ALCO policy limits, which specify a maximum tolerance level for net interest income exposure over a one-year horizon, assuming no balance sheet growth, given a 200 bp upward and 200 bp downward shift in interest rates. Although our policy specifies a downward shift of 200 bp, this could result in negative rates as many benchmark rates are currently below 2.00%. A parallel and pro rata shift in rates over a 12-month period is assumed. Using this approach, we are able to produce reports that illustrate the effect that both a gradual change of rates (Year 1) and a “rate shock” (Year 2 and beyond) have on margin expectations. In the down 100 bp scenario, Federal Funds and Treasury yields are floored at 0.01% while Prime is floored at 3.00%. All other market rates are floored at 0.25%.

During the first three months of 2014 and 2013, our net interest income sensitivity analysis reflected the following changes to net interest income assuming no balance sheet growth and a parallel shift in interest rates over a one-year horizon. All rate changes were “ramped” over the first 12-month period (24-months period for the 400 bp upward shift in interest rates) and then maintained at those levels over the remainder of the ALCO simulation horizon. 
 
 
Estimated Changes In 
Net Interest Income
Rate Change from Year 1 - Base
 
March 31,
2014
 
March 31,
2013
Year 1
 
 

 
 

+400 bp
 
(5.41
)%
 
(3.00
)%
+200 bp
 
(5.49
)%
 
(3.03
)%
-100 bp
 
(0.51
)%
 
(0.78
)%
Year 2
 
 
 
 

+400 bp
 
(10.32
)%
 
(8.36
)%
+200 bp
 
(5.39
)%
 
(5.23
)%
-100 bp
 
(4.58
)%
 
(8.36
)%
 

47



The preceding sensitivity analysis does not represent a forecast and should not be relied upon as being indicative of expected operating results. These hypothetical estimates are based upon numerous assumptions including, among others, the nature and timing of interest rate levels, yield curve shape, prepayments on loans and securities, deposit decay rates, pricing decisions on loans and deposits and reinvestment/replacement of asset and liability cash flows. While assumptions are developed based upon current economic and local market conditions, we cannot make any assurances as to the predictive nature of these assumptions, including how customer preferences or competitor influences might change.

The most significant factors affecting the changes in market risk exposure during the first three months of 2014 were the accumulation of longer term assets funded primarily with shorter-term borrowings plus the continued repricing/replacement of cash flows of our assets at today’s lower rate levels at a faster pace than the decrease in overall funding costs. If rates remain at or near current levels, a gradual downward trend is projected in the near term as a result of the ongoing repricing and replacement of loan and investment cash flows at today's lower rate levels while the current cost of funds remain relatively unchanged. Beyond the first year, net interest income levels off as asset and funding cost rollovers are nearly offsetting. If rates decrease further, net interest income is projected to decrease as assets reprice into lower-interest products (driven by prepayments on mortgage-related assets), while there is limited ability to reduce cost of funds. In a rising interest rate environment, net interest income is projected to decrease initially, due to the repricing of short-term funding positions, but will improve as assets reprice into higher-interest products. As funding maturities slow and asset cash flows continue to reset upwards, net interest income improves and trends higher over the remainder of the five year simulation.

Periodically, if deemed appropriate, we use interest rate swaps, floors and caps, which are common derivative financial instruments, to hedge our interest rate risk position. The Company’s Board of Directors has approved hedging policy statements governing the use of these instruments. At March 31, 2014, we had a notional principal amount of $43.0 million in interest rate swap agreements related to the junior subordinated debentures, and $15.6 million interest rate swaps related to the Company’s commercial loan level derivative program. The Board ALCO and Management ALCO monitor derivative activities relative to their expectations and our hedging policies.


ITEM 4.  CONTROLS AND PROCEDURES
 
As required by Rule 13a-15 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), the Company’s management conducted an evaluation with the participation of the Company’s Chief Executive Officer and Chief Financial Officer (Principal Financial & Accounting Officer), regarding the effectiveness of the Company’s disclosure controls and procedures, as of the end of the last fiscal quarter covered by this report.  In designing and evaluating the Company’s disclosure controls and procedures, the Company and its management recognize that any controls and procedures, no matter how well designed and operated, can provide only a reasonable assurance of achieving the desired control objectives, and management necessarily was required to apply its judgment in evaluating and implementing possible controls and procedures.  Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer (Principal Financial & Accounting Officer) concluded that they believe the Company’s disclosure controls and procedures are effective to ensure that information required to be disclosed by the Company in the reports it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms.
 
There was no change in the internal control over financial reporting that occurred during the period covered by this Quarterly Report on Form 10-Q that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting. 


48



PART II.  OTHER INFORMATION

ITEM 1.  LEGAL PROCEEDINGS
 
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.

ITEM 1A.  RISK FACTORS
 
There have been no material changes to the Company's Risk Factors described in Item 1A. of its Annual Report on Form 10-K for the year ended December 31, 2013.

ITEM 2.   UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
 
(a) None.
(b) None.
(c) On September 24, 2013, the Board of Directors authorized the 2013 Repurchase Program. The 2013 Repurchase Program 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 terminates the program. There is no specified expiration date of the 2013 Repurchase Program. As of March 31, 2014, the Company has repurchased 181,672 shares (including 68,145 purchased in 2013) at an average price of $39.49, or 73% of the 2013 Repurchase Program's total allotment and 2% of total outstanding shares.

The table below highlights the Company's repurchase activity under the 2013 Repurchase Program for the three months ended March 31, 2014:
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
1/1/2014 to 1/31/2014
 
32,260

 
$
40.63

 
32,260

 
149,595

2/1/2014 to 2/28/2014
 
46,595

 
35.94

 
46,595

 
103,000

3/1/2014 to 3/31/2014
 
34,672

 
40.60

 
34,672

 
68,328

Total
 
113,527

 
$
38.70

 
113,527

 
68,328

 
ITEM 3.  DEFAULTS UPON SENIOR SECURITIES
 
None.

ITEM 4.  MINE SAFETY DISCLOSURES
 
Not applicable.


49



ITEM 5.  OTHER INFORMATION

None.

ITEM 6.  EXHIBITS
Exhibit No.
 
Definition
3.1
 
Articles of Incorporation of Camden National Corporation, as amended (incorporated herein by reference to Exhibit 3.i.1 to the Company's Form 10-K filed with the Commission on March 2, 2011).
 
 
 
3.2
 
Amended and Restated Bylaws of Camden National Corporation, as amended (incorporated herein by reference to Exhibit 3.1 to the Company's Form 10-K filed with the Commission on March 12, 2014).
 
 
 
10.24+
 
Camden National Corporation Amended and Restated Long-Term Performance Share Plan for the 2014 – 2016 performance period (incorporated herein by reference to Exhibit 10.24 to the Company's Form 8-K filed with the Commission on March 25, 2014).
 
 
 
23.1*
 
Consent of Berry Dunn McNeil & Parker, LLC relating to the financial statements of Camden National Corporation
 
 
 
31.1*
 
Certification of Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934
 
 
 
31.2*
 
Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
 
 
 
32.1**
 
Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
 
 
 
32.2**
 
Certification Chief Financial Officer, Principal Financial & Accounting Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
 
 
 
101***
 
XBRL (Extensible Business Reporting Language)
 
 
 
 
 
The following materials from Camden National Corporation’s Quarterly Report on Form 10-Q for the period ended March 31, 2014, formatted in XBRL: (i) Consolidated Statements of Condition - March 31, 2014 and December 31, 2013; (ii) Consolidated Statements of Income - Three Months Ended March 31, 2014 and 2013; (iii) Consolidated Statements of Comprehensive Income - Three Months Ended March 31, 2014 and 2013; (iv) Consolidated Statements of Changes in Shareholders’ Equity - Three Months Ended March 31, 2014 and 2013; (v) Consolidated Statements of Cash Flows - Three Months Ended March 31, 2014 and 2013; and (vi) Notes to Consolidated Financial Statements.
 
 
 
*
 
Filed herewith
 
 
 
**
 
Furnished herewith
 
 
 
***
 
Pursuant to Rule 406T of Regulation S-T, the XBRL related information in Exhibit 101 to this Quarterly Report on Form 10-Q is furnished and not filed for purposes of Sections 11 and 12 of the Securities Act of 1933, as amended, and Section 18 of the Securities Exchange Act of 1934, as amended.
 
 
 
+
 
Management contract or a compensatory plan or arrangement.


50



SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
CAMDEN NATIONAL CORPORATION
(Registrant)
 
/s/ Gregory A. Dufour
 
May 2, 2014
Gregory A. Dufour
 
Date
President and Chief Executive Officer
(Principal Executive Office)
 
 
 
 
 
/s/ Deborah A. Jordan
 
May 2, 2014
Deborah A. Jordan
 
Date
Chief Financial Officer
 
 
(Principal Financial & Accounting Officer)
 
 

51



Exhibit Index
Exhibit No.
 
Definition
3.1
 
Articles of Incorporation of Camden National Corporation, as amended (incorporated herein by reference to Exhibit 3.i.1 to the Company's Form 10-K filed with the Commission on March 2, 2011).
 
 
 
3.2
 
Amended and Restated Bylaws of Camden National Corporation, as amended (incorporated herein by reference to Exhibit 3.1 to the Company's Form 10-K filed with the Commission on March 12, 2014).
 
 
 
10.24+
 
Camden National Corporation Amended and Restated Long-Term Performance Share Plan for the 2014 – 2016 performance period (incorporated herein by reference to Exhibit 10.24 to the Company's Form 8-K filed with the Commission on March 25, 2014).
 
 
 
23.1*
 
Consent of Berry Dunn McNeil & Parker, LLC relating to the financial statements of Camden National Corporation
 
 
 
31.1*
 
Certification of Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934
 
 
 
31.2*
 
Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
 
 
 
32.1**
 
Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
 
 
 
32.2**
 
Certification Chief Financial Officer, Principal Financial & Accounting Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
 
 
 
101***
 
XBRL (Extensible Business Reporting Language)
 
 
 
 
 
The following materials from Camden National Corporation’s Quarterly Report on Form 10-Q for the period ended March 31, 2014, formatted in XBRL: (i) Consolidated Statements of Condition - March 31, 2014 and December 31, 2013; (ii) Consolidated Statements of Income - Three Months Ended March 31, 2014 and 2013; (iii) Consolidated Statements of Comprehensive Income - Three Months Ended March 31, 2014 and 2013; (iv) Consolidated Statements of Changes in Shareholders’ Equity - Three Months Ended March 31, 2014 and 2013; (v) Consolidated Statements of Cash Flows - Three Months Ended March 31, 2014 and 2013; and (vi) Notes to Consolidated Financial Statements.
 
 
 
*
 
Filed herewith
 
 
 
**
 
Furnished herewith
 
 
 
***
 
Pursuant to Rule 406T of Regulation S-T, the XBRL related information in Exhibit 101 to this Quarterly Report on Form 10-Q is furnished and not filed for purposes of Sections 11 and 12 of the Securities Act of 1933, as amended, and Section 18 of the Securities Exchange Act of 1934, as amended.
 
 
 
+
 
Management contract or a compensatory plan or arrangement.



52