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.
 

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