10-Q 1 v229031_10q.htm FORM 10-Q Unassociated Document

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 June 30, 2011

OR

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______to _______

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 period 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 August 3, 2011:  Common stock (no par value) 7,677,693 shares.
 
 
 

 
 
CAMDEN NATIONAL CORPORATION

FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 2011
TABLE OF CONTENTS OF INFORMATION REQUIRED IN REPORT

     
PAGE
     
PART I.  FINANCIAL INFORMATION
   
     
ITEM 1.
FINANCIAL STATEMENTS
   
       
 
Report of Independent Registered Public Accounting Firm
 
3
       
 
Consolidated Statements of Condition June 30, 2011 and December 31, 2010
 
4
       
 
Consolidated Statements of Income Three and Six Months Ended June 30, 2011 and 2010
 
5
       
 
Consolidated Statements of Changes in Shareholders’ Equity Six Months Ended June 30, 2011 and 2010
 
6
       
 
Consolidated Statements of Cash Flows Six Months Ended June 30, 2011 and 2010
 
7
       
 
Notes to Consolidated Financial Statements Six Months Ended June 30, 2011 and 2010
 
8-25
       
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
26-40
       
ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
40-41
       
ITEM 4.
CONTROLS AND PROCEDURES
 
41-42
       
PART II. OTHER INFORMATION
   
       
ITEM 1.
LEGAL PROCEEDINGS
 
42
       
ITEM 1A.
RISK FACTORS
 
42
       
ITEM 2.
UNREGISTERED SALES OF EQUITY SECURITIES AND  USE OF PROCEEDS
 
42
       
ITEM 3.
DEFAULTS UPON SENIOR SECURITIES
 
42
       
ITEM 4.
[REMOVED AND RESERVED]
 
42
       
ITEM 5.
OTHER INFORMATION
 
42
       
ITEM 6.
EXHIBITS
 
43
       
SIGNATURES
 
44
       
EXHIBIT INDEX
 
45
       
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 June 30, 2011, and for the three-month and six-month periods ended June 30, 2011 and 2010. These financial statements are the responsibility of the Company's management.

We conducted our reviews in accordance with standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit in accordance with standards of the Public Company Accounting Oversight Board (United States), the objective of which is to express an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

Based on our reviews, we are not aware of any material modifications that should be made to the accompanying financial statements for them to be in conformity with accounting principles generally accepted in the United States of America.
 
/s/ Berry Dunn McNeil & Parker, LLC
Berry Dunn McNeil & Parker, LLC

Bangor, Maine
August 8, 2011
 
 
3

 
 
CAMDEN NATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CONDITION

   
June 30,
   
December 31,
 
   
2011
   
2010
 
(In Thousands, Except Number of Shares)
 
(unaudited)
       
ASSETS
           
Cash and due from banks
 
$
29,685
   
$
31,009
 
Securities
           
  
 
Securities available for sale, at fair value
   
595,335
     
553,579
 
Securities held to maturity, at amortized cost (fair value $38,037 at December 31, 2010)
   
     
36,102
 
Federal Home Loan Bank and Federal Reserve Bank stock, at cost
   
21,962
     
21,962
 
Total securities
   
617,297
     
611,643
 
Trading account assets
   
2,270
     
2,304
 
Loans held for sale
   
1,855
     
5,528
 
Loans
   
1,551,456
     
1,524,752
 
Less allowance for loan losses
   
(22,989
)
   
(22,293
)
Net loans
   
1,528,467
     
1,502,459
 
Goodwill and other intangible assets
   
45,533
     
45,821
 
Bank-owned life insurance
   
43,659
     
43,155
 
Premises and equipment, net
   
24,294
     
25,044
 
Deferred tax asset
   
10,496
     
12,281
 
Interest receivable
   
7,063
     
6,875
 
Prepaid FDIC assessment
   
5,353
     
6,155
 
Other real estate owned
   
1,816
     
2,387
 
Other assets
   
13,226
     
11,346
 
Total assets
 
$
2,331,014
   
$
2,306,007
 
LIABILITIES AND SHAREHOLDERS’ EQUITY
               
Liabilities
           
  
 
Deposits
               
Demand
 
$
238,405
   
$
229,547
 
Interest checking, savings and money market
   
774,455
     
721,905
 
Retail certificates of deposit
   
428,104
     
464,662
 
Brokered deposits
   
104,587
     
99,697
 
Total deposits
   
1,545,551
     
1,515,811
 
Federal Home Loan Bank advances
   
157,044
     
214,236
 
Other borrowed funds
   
341,113
     
302,069
 
Junior subordinated debentures
   
43,666
     
43,614
 
Accrued interest and other liabilities
   
25,399
     
24,282
 
Total liabilities
   
2,112,773
     
2,100,012
 
             
  
 
Shareholders’ Equity
               
Common stock, no par value; authorized 20,000,000 shares, issued and outstanding 7,677,693 and 7,658,496 shares on June 30, 2011 and December 31, 2010, respectively
   
51,111
     
50,936
 
Retained earnings
   
160,297
     
150,730
 
Accumulated other comprehensive income (loss)
               
Net unrealized gains on securities available for sale, net of tax
   
9,787
     
6,229
 
Net unrealized  losses on derivative instruments, at fair value, net of tax
   
(1,791
)
   
(709
)
Net unrecognized losses on postretirement plans, net of tax
   
(1,163
)
   
(1,191
)
Total accumulated other comprehensive income
   
6,833
     
4,329
 
Total shareholders’ equity
   
218,241
     
205,995
 
Total liabilities and shareholders’ equity
 
$
2,331,014
   
$
2,306,007
 

See Report of Independent Registered Public Accounting Firm.
The accompanying notes are an integral part of these consolidated financial statements.
 
 
4

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

  
 
Three Months Ended 
June 30,
   
Six Months Ended 
June 30,
 
(In Thousands, Except Number of Shares and per Share Data)
 
2011
   
2010
   
2011
   
2010
 
Interest Income
                       
Interest and fees on loans
 
$
20,257
   
$
20,593
   
$
39,726
   
$
41,040
 
Interest on U.S. government and sponsored enterprise obligations
   
4,917
     
5,166
     
9,802
     
10,329
 
Interest on state and political subdivision obligations
   
431
     
534
     
897
     
1,073
 
Interest on federal funds sold and other investments
   
40
     
33
     
80
     
56
 
Total interest income
   
25,645
     
26,326
     
50,505
     
52,498
 
Interest Expense
                               
Interest on deposits
   
2,963
     
3,959
     
5,978
     
8,078
 
Interest on borrowings
   
2,463
     
3,110
     
5,054
     
6,404
 
Interest on junior subordinated debentures
   
656
     
702
     
1,351
     
1,396
 
Total interest expense
   
6,082
     
7,771
     
12,383
     
15,878
 
Net interest income
   
19,563
     
18,555
     
38,122
     
36,620
 
Provision for credit losses
   
970
     
1,950
     
2,089
     
3,946
 
Net interest income after provision for credit losses
   
18,593
     
16,605
     
36,033
     
32,674
 
Non-Interest Income
                               
Income from fiduciary services
   
1,439
     
1,512
     
2,986
     
3,079
 
Service charges on deposit accounts
   
1,352
     
1,285
     
2,583
     
2,565
 
Other service charges and fees
   
943
     
872
     
1,813
     
1,562
 
Bank-owned life insurance
   
335
     
347
     
874
     
718
 
Brokerage and insurance commissions
   
385
     
352
     
743
     
646
 
Mortgage banking income
   
52
     
83
     
132
     
172
 
Net gain on sale of securities
   
53
     
     
20
     
 
Other income
   
474
     
105
     
1,000
     
434
 
Total non-interest income before other-than-temporary
                               
     impairment of securities
   
5,033
     
4,556
     
10,151
     
9,176
 
Other-than-temporary impairment of securities
   
(27
   
(131
)
   
(27
   
(179
)
Total non-interest income
   
5,006
     
4,425
     
10,124
     
8,997
 
Non-Interest Expenses
                               
Salaries and employee benefits
   
7,114
     
6,298
     
13,965
     
12,523
 
Furniture, equipment and data processing
   
1,169
     
1,116
     
2,369
     
2,246
 
Net occupancy
   
956
     
897
     
2,016
     
1,931
 
Other real estate owned and collection costs
   
415
     
1,158
     
906
     
2,132
 
Regulatory assessments
   
402
     
602
     
1,105
     
1,317
 
Consulting and professional fees
   
868
     
550
     
1,542
     
1,338
 
Amortization of intangible assets
   
145
     
144
     
289
     
288
 
Other expenses
   
2,203
     
2,092
     
4,365
     
4,004
 
Total non-interest expenses
   
13,272
     
12,857
     
26,557
     
25,779
 
Income before income taxes
   
10,327
     
8,173
     
19,600
     
15,892
 
Income Taxes
   
3,257
     
2,587
     
6,191
     
4,993
 
Net Income
 
$
7,070
   
$
5,586
   
$
13,409
   
$
10,899
 
                                 
Per Share Data
                               
Basic earnings per share
 
$
0.92
   
$
0.73
   
$
1.75
   
$
1.42
 
Diluted earnings per share
 
$
0.92
   
$
0.73
   
$
1.75
   
$
1.42
 
Weighted average number of common shares outstanding
   
7,677,594
     
7,656,051
     
7,668,831
     
7,654,079
 
Diluted weighted average number of common shares outstanding
   
7,687,133
     
7,664,443
     
7,679,298
     
7,661,607
 

See Report of Independent Registered Public Accounting Firm.
The accompanying notes are an integral part of these consolidated financial statements.
 
 
5

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

   
 
Common Stock
         
Accumulated
Other
   
Total
 
(In Thousands, Except Number of Shares and per Share Data)
 
Shares
Outstanding
   
Amount
   
Retained
Earnings
   
Comprehensive
Income (Loss)
   
Shareholders’
Equity
 
                                         
Balance at December 31, 2009
   
7,644,837
   
$
50,062
   
$
133,634
   
$
6,865
   
$
190,561
 
Net income
   
     
     
10,899
     
     
10,899
 
Other comprehensive income (loss), net of tax:
                                       
Change in fair value of securities available for sale
   
     
     
     
3,983
     
3,983
 
Change in fair value of cash flow hedges
   
     
     
     
(2,181
)
   
(2,181
Change in net unrecognized losses on postretirement plans
   
     
     
     
16
     
16
 
Total comprehensive income
   
     
     
10,899
     
1,818
     
12,717
 
Stock-based compensation expense
   
     
236
     
     
     
236
 
Exercise of stock options and issuance of restricted stock
   
13,751
     
78
     
     
     
78
 
Common stock repurchased
   
(1,490
)
   
     
(44
)
   
     
(44
)
Cash dividends declared ($0.50 per share)
   
     
     
(3,833
)
   
     
(3,833
)
Balance at June 30, 2010
   
7,657,098
   
$
50,376
   
$
140,656
   
$
8,683
   
$
199,715
 
                                         
Balance at December 31, 2010
   
7,658,496
   
$
50,936
   
$
150,730
   
$
4,329
   
$
205,995
 
Net income
   
     
     
13,409
     
     
13,409
 
Other comprehensive income (loss), net of tax:
                                       
Change in fair value of securities available for sale
   
     
     
     
3,558
     
3,558
 
Change in fair value of cash flow hedges
   
     
     
     
(1,082
   
(1,082
Change in net unrecognized losses on postretirement plans
   
     
     
     
28
     
28
 
Total comprehensive income
   
     
     
13,409
     
2,504
     
15,913
 
Stock-based compensation expense
   
     
343
     
     
     
343
 
Exercise of stock options and issuance of restricted stock
   
27,332
     
104
     
     
     
104
 
Common stock repurchased
   
(8,135
)
   
(272
)
   
     
     
(272
)
Cash dividends declared ($0.50 per share)
   
     
     
(3,842
)
   
     
(3,842
)
Balance at June 30, 2011
   
7,677,693
   
$
51,111
   
$
160,297
   
$
6,833
   
$
218,241
 

  See Report of Independent Registered Public Accounting Firm.
The accompanying notes are an integral part of these consolidated financial statements.
 
 
6

 
 
CAMDEN NATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)

  
 
Six Months Ended June 30,
 
(In Thousands)
 
2011
   
2010
 
Operating Activities
           
Net income
 
$
13,409
   
$
10,899
 
Adjustments to reconcile net income to net cash provided by operating activities:
               
Provision for credit losses
   
2,089
     
3,946
 
Depreciation and amortization
   
1,754
     
1,687
 
Stock-based compensation expense
   
343
     
236
 
Increase in interest receivable
   
(188
)
   
(322
)
Amortization of intangible assets
   
289
     
288
 
Net decrease (increase) in trading assets
   
34
     
(288
)
Net gain on sale of securities
   
(20
   
 
Other-than-temporary impairment of securities
   
27
     
179
 
Increase in other real estate owned valuation allowance
   
106
     
1,050
 
Originations of mortgage loans held for sale
   
(5,764
)
   
 
Proceeds from the sale of mortgage loans
   
9,429
     
 
Loss on sale of mortgage loans
   
8
     
 
Decrease in prepaid FDIC assessment
   
802
     
1,010
 
Increase in other assets
   
(3,565
)
   
(2,317
Increase (decrease) in other liabilities
   
1,109
     
(1,486
Net cash provided by operating activities
   
19,862
     
14,882
 
Investing Activities
               
Proceeds from maturities of securities held-to-maturity
   
251
     
100
 
Proceeds from sales and maturities of securities available-for-sale
   
78,982
     
78,704
 
Purchase of securities available-for-sale
   
(79,880
)
   
(126,992
)
Net increase in loans
   
(29,055
)
   
(17,891
)
Recoveries on previously charged-off loans
   
630
     
480
 
Proceeds from the sale of other real estate owned
   
318
     
857
 
Proceeds from bank-owned life insurance
   
370
     
 
Purchase of premises and equipment
   
(476
)
   
(1,349
)
Net used by investing activities
   
(28,860
)
   
(66,091
)
Financing Activities
               
Net increase in deposits
   
29,742
     
52,862
 
Proceeds from Federal Home Loan Bank long-term advances
   
160,000
     
20,177
 
Repayments on Federal Home Loan Bank long-term advances
   
(217,176
)
   
(55,384
)
Net change in short-term Federal Home Loan Bank borrowings
   
(23,500
)
   
32,785
 
Net increase (decrease) in other borrowed funds
   
62,615
     
(972
)
Common stock repurchase
   
(272
)
   
(44
Proceeds from exercise of stock options
   
104
     
78
 
Cash dividends paid on common stock
   
(3,839
)
   
(3,829
)
Net cash provided by financing activities
   
7,674
     
45,673
 
Net decrease in cash and cash equivalents
   
(1,324
)
   
(5,536
Cash and cash equivalents at beginning of year
   
31,009
     
29,772
 
Cash and cash equivalents at end of period
 
$
29,685
   
$
24,236
 
Supplemental information
               
Interest paid
 
$
12,646
   
$
16,256
 
Income taxes paid
   
4,820
     
6,840
 
Transfer from loans to other real estate owned
   
1,034
     
584
 

See Report of Independent Registered Public Accounting Firm.
The accompanying notes are an integral part of these consolidated financial statements.
 
 
7

 

CAMDEN NATIONAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in Tables Expressed in Thousands, Except Number of Shares and per Share Data)
 
NOTE 1 - BASIS OF PRESENTATION

The accompanying unaudited consolidated financial statements were prepared in accordance with instructions for Form 10-Q and, therefore, do not include all disclosures required by accounting principles generally accepted in the United States of America (“GAAP”) for complete presentation of financial statements. In the opinion of management, the consolidated financial statements contain all adjustments (consisting only of normal recurring accruals) necessary to present fairly the consolidated statements of condition of Camden National Corporation (the “Company”) as of June 30, 2011 and December 31, 2010, the consolidated statements of income for the three and six months ended June 30, 2011 and 2010, the consolidated statements of changes in shareholders' equity for the six months ended June 30, 2011 and 2010, and the consolidated statements of cash flows for the six months ended June 30, 2011 and 2010. All significant intercompany transactions and balances are eliminated in consolidation. Certain items from the prior year were reclassified to conform to the current year presentation. The income reported for the three-month and six-month periods ended June 30, 2011 is not necessarily indicative of the results that may be expected for the full year. The information in this report should be read in conjunction with the consolidated financial statements and accompanying notes included in the December 31, 2010 Annual Report on Form 10-K.

NOTE 2 – EARNINGS PER SHARE
 
Basic earnings per common share (“EPS”) excludes dilution and is computed by dividing net income applicable to common stock by the weighted average number of common shares outstanding for the year. Diluted EPS reflects the potential dilution that could occur if certain securities or other contracts to issue common stock (such as stock options) were exercised or converted into additional common shares that would then share in the earnings of the Company. Diluted EPS is computed by dividing net income applicable to common stock by the weighted average number of common shares outstanding for the year, plus an incremental number of common-equivalent shares computed using the treasury stock method. The following table sets forth the computation of basic and diluted earnings per share under the two-class method, as unvested share-based payment awards include the nonforfeitable right to receive dividends and therefore are considered participating securities:

   
Three Months Ended June 30,
   
Six Months Ended June 30,
 
   
2011
   
2010
   
2011
   
2010
 
Net income, as reported
  $ 7,070     $ 5,586     $ 13,409     $ 10,899  
Weighted-average common shares outstanding – basic
    7,677,594       7,656,051       7,668,831       7,654,079  
Dilutive effect of stock-based compensation
    9,539       8,392       10,467       7,528  
Weighted-average common and potential common shares – diluted
    7,687,133       7,664,443       7,679,298       7,661,607  
Basic earnings per share – common stock
  $ 0.92     $ 0.73     $ 1.75     $ 1.42  
Basic earnings per share – unvested share-based payment awards
    0.88       0.70       1.64       1.37  
Diluted earnings per share – common stock
    0.92       0.73       1.75       1.42  
Diluted earnings per share– unvested share-based payment awards
    0.92       0.73       1.75       1.42  

For the three-month and six-month periods ended June 30, 2011, options to purchase 77,750 and 53,750 shares, respectively, of common stock were not considered in the computation of potential common shares for purposes of diluted EPS, because the exercise prices of the options were greater than the average market price of the common stock for the respective periods.  For both the three-month and six-month periods ended June 30, 2010, options to purchase 87,750 of common stock were not considered in the computation of potential common shares for purposes of diluted EPS, because the exercise prices of the options were greater than the average market price of the common stock for the respective periods.

 
8

 
 
NOTE 3 – SECURITIES

The following tables summarize the amortized costs and estimated fair values of securities available for sale and held to maturity, as of the dates indicated:

   
Amortized
Cost
   
Unrealized
Gains
   
Unrealized
Losses
   
Fair
Value
 
June 30, 2011
   
  
     
  
     
  
     
  
 
Available for sale
   
  
     
  
     
  
     
  
 
Obligations of U.S. government sponsored enterprises
 
$
69,898
   
$
231
   
$
(355
)
 
$
69,774
 
Obligations of states and political subdivisions
   
39,343
     
2,327
     
     
41,670
 
Mortgage-backed securities issued or guaranteed by U.S. government sponsored enterprises
   
445,084
     
17,368
     
(1,913
)
   
460,539
 
Private issue collateralized mortgage obligations
   
20,953
     
10
     
(2,027
)
   
18,936
 
Total debt securities
   
575,278
     
19,936
     
(4,295
)
   
590,919
 
Equity securities
   
5,000
     
     
(584
)
   
4,416
 
Total securities available for sale
 
$
580,278
   
$
19,936
   
$
(4,879
)
 
$
595,335
 
December 31, 2010
   
  
     
  
     
  
     
  
 
Available for sale
   
  
     
  
     
  
     
  
 
Obligations of U.S. government sponsored enterprises
 
$
49,870
   
$
237
   
$
(750
)   
 
$
49,357
 
Obligations of states and political subdivisions
   
13,777
     
443
     
     
14,220
 
Mortgage-backed securities issued or guaranteed by U.S. government sponsored enterprises
   
451,909
     
15,986
     
(3,053
)   
   
464,842
 
Private issue collateralized mortgage obligations
   
23,441
     
     
(2,719
)   
   
20,722
 
Total debt securities
   
538,997
     
16,666
     
(6,522
)   
   
549,141
 
Equity securities
   
5,000
     
     
(562
)   
   
4,438
 
Total securities available for sale
 
$
543,997
   
$
16,666
   
$
(7,084
)   
 
$
553,579
 
Held to maturity
   
  
     
  
     
  
     
  
 
Obligations of states and political subdivisions
 
$
36,102
   
$
1,935
   
$
   
$
38,037
 
Total securities held to maturity
 
$
36,102
   
$
1,935
   
$
   
$
38,037
 

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

Unrealized gains on securities available for sale at June 30, 2011 and December 31, 2010 and included in other comprehensive income amounted to $9.8 million and $6.2 million, net of deferred taxes of $5.3 million and $3.4 million, respectively.

Impaired Securities

Management reviews the Company’s investment portfolio on a periodic basis to determine the cause, magnitude and duration of declines in the fair value of each security. Thorough evaluations of the causes of the unrealized losses are performed to determine whether the impairment is temporary or other-than-temporary in nature. Considerations such as the ability of the securities to meet cash flow requirements, levels of credit enhancements, risk of curtailment, recoverability of invested amount over a reasonable period of time and the length of time the security is in a loss position, for example, are applied in determining other-than-temporary impairment (“OTTI”). Once a decline in value is determined to be other-than-temporary, the value of the security is reduced and a corresponding charge to earnings is recognized.

 
9

 
 
The following table shows the unrealized gross losses and estimated fair values of investment securities at June 30, 2011 and December 31, 2010, 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
 
June 30, 2011
                                   
U.S. government sponsored enterprises
 
$
19,618
   
$
(355
)
 
$
   
$
   
$
19,618
   
$
(355
)
Mortgage-backed securities
   
102,858
     
(1,912
)
   
86
     
(1
   
102,944
     
(1,913
)
Private issue collateralized mortgage obligations
   
     
     
16,878
     
(2,027
)
   
16,878
     
(2,027
)
Equity securities
   
     
     
4,416
     
(584
)
   
4,416
     
(584
)
Total
 
$
122,476
   
$
(2,267
)
 
$
21,380
   
$
(2,612
)
 
$
143,856
   
$
(4,879
)
December 31, 2010
   
  
     
  
     
  
     
  
     
  
     
  
 
U.S. government sponsored enterprises
 
$
29,145
   
$
(750
)
 
$
   
$
   
$
29,145
   
$
(750
)
Mortgage-backed securities
   
96,604
     
(3,053
)
   
85
     
     
96,689
     
(3,053
)
Private issue collateralized mortgage obligations
   
2,160
     
(79
)
   
18,562
     
(2,640
)
   
20,722
     
(2,719
)
Equity securities
   
     
     
4,438
     
(562
)   
   
4,438
     
(562
)
Total
 
$
127,909
   
$
(3,882
)
 
$
23,085
   
$
(3,202
)
 
$
150,994
   
$
(7,084
)

At June 30, 2011, $143.9 million of the Company’s investment securities had unrealized losses that are primarily considered temporary. A portion of the unrealized loss was related to the private issue collateralized mortgage obligations (“CMOs”), which includes $10.6 million that have been downgraded to non-investment grade. The Company’s share of these downgraded CMOs is in the senior tranches. Management believes the unrealized loss for the CMOs is the result of current market illiquidity and the underestimation of value in the market. Including the CMOs, there were 22 securities with a fair value of $21.4 million in the investment portfolio which had unrealized losses for twelve months or longer. Management currently has the intent and ability to retain these investment securities with unrealized losses until the decline in value has been recovered. Stress tests are performed regularly on the higher risk bonds in the investment portfolio using current statistical data to determine expected cash flows and forecast potential losses. The stress tests at June 30, 2011, indicated potential future credit losses in the base case scenario on two private issue CMOs.  Based on these results, the Company recorded a $27,000 OTTI write-down during the second quarter of 2011.

At June 30, 2011, the Company held Duff & Phelps Select Income Fund Auction Preferred Stock with an amortized cost of $5.0 million which failed at auction during 2008. The security is rated Triple-A by Moody’s and Standard and Poor’s. Management believes the failed auctions are a temporary liquidity event related to this asset class of securities. The Company is currently collecting all amounts due according to contractual terms and has the ability and intent to hold the securities until they clear auction, are called, or mature; therefore, the securities are not considered other-than-temporarily impaired.

Security Gains and Losses
 
The following information details the Company’s sales of securities:

   
Six Months Ended June 30,
 
  
 
2011
   
2010
 
Available for sale
 
 
   
 
 
Proceeds from sales of securities
 
$
7,842
   
$
250
 
Gross realized gains
   
93
     
 
Gross realized (losses)
   
(73
)   
   
 
 
 
10

 

During the first six months of 2011, the Company sold sixteen municipal bonds and one private issue CMO that the Company was monitoring that either had below “A” ratings, split ratings, withdrawn ratings, or negative outlooks or were revenue bonds.  The Company had not recorded any OTTI on these securities; however, due to increased pressures on state and local government revenues around the country as municipalities struggle with a weakened economy, management decided to sell these securities.

Securities Pledged
 
At June 30, 2011 and  2010, securities with an amortized cost of $515.8 million and $345.9 million and estimated fair value of  $532.2 million and $364.3 million, respectively, were pledged to secure Federal Home Loan Bank (“FHLB”) advances, public deposits, securities sold under agreements to repurchase and other purposes required or permitted by law.

Contractual Maturities
 
The amortized cost and estimated fair values of debt securities by contractual maturity at June 30, 2011 are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

   
Amortized
Cost
   
Fair
Value
 
Available for sale
           
Due in one year or less
 
$
1,747
   
$
1,752
 
Due after one year through five years
   
87,155
     
87,816
 
Due after five years through ten years
   
91,951
     
96,118
 
Due after ten years
   
394,425
     
405,233
 
  
 
$
575,278
   
$
590,919
 

NOTE 4 – LOANS AND ALLOWANCE FOR LOAN LOSSES
 
The composition of the Company’s loan portfolio, excluding residential loans held for sale, at June 30, 2011 and December 31, 2010 was as follows:

   
June 30,
2011
   
December 31,
2010
 
Residential real estate loans
 
$
590,458
   
$
596,655
 
Commercial real estate loans
   
465,248
     
464,037
 
Commercial loans
   
214,415
     
180,592
 
Home equity loans
   
269,263
     
270,627
 
Consumer loans
   
12,420
     
13,188
 
Deferred loan fees net of costs
   
(348
)   
   
(347
Total loans
 
$
1,551,456
   
$
1,524,752
 

The Company’s lending activities are primarily conducted in Maine. The Company makes single family and multi-family residential loans, commercial real estate loans, business loans, municipal loans and a variety of consumer loans. In addition, the Company makes loans for the construction of residential homes, multi-family properties and commercial real estate properties. The ability and willingness of borrowers to honor their repayment commitments is generally dependent on the level of overall economic activity within the geographic area and the general economy.  During the first six months of 2011, the Company sold $9.4 million of fixed-rate residential mortgage loans on the secondary market that resulted in a net loss on the sale of loans of $8,000.  For the year ended December 31, 2010, the Company sold $20.1 million of fixed-rate residential mortgage loans on the secondary market, which resulted in a net gain on the sale of loans of $106,000.

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

 
11

 
 
The Board of Directors monitors credit risk management through the Directors’ Loan Committee and Corporate Risk Management. The Directors’ Loan Committee reviews large exposure credit requests, monitors asset quality on a regular basis and has approval authority for credit granting policies. Corporate Risk Management oversees management’s systems and procedures to monitor the credit quality of the loan portfolio, conduct a loan review program, maintain the integrity of the loan rating system and determine the adequacy of the ALL. The Company's practice is to identify problem credits early and take charge-offs as promptly as practicable. In addition, management continuously reassesses its underwriting standards in response to credit risk posed by changes in economic conditions.

The following is a summary of activity in the ALL for the three and six months ended June 30, 2011 and 2010:

   
Three Months Ended June 30,
   
Six Months Ended June 30,
 
  
 
2011
   
2010
   
2011
   
2010
 
Balance at beginning of period
 
$
22,887
   
$
21,379
   
$
22,293
   
$
20,246
 
Loan charge-offs
   
(1,170
)
   
(1,157
)
   
(2,017
)
   
(2,410
)
Recoveries on loans previously charged off
   
306
     
94
     
630
     
480
 
Net charge-offs
   
(864
)
   
(1,063
)
   
(1,387
)
   
(1,930
)
Provision for loan losses
   
966
     
1,950
     
2,083
     
3,950
 
Balance at end of period
 
$
22,989
   
$
22,266
   
$
22,989
   
$
22,266
 

The following table presents the ALL for the three months ended June 30, 2011:

   
 
Residential
Real Estate
   
Commercial
Real Estate
   
Commercial
   
Home 
Equity
   
Consumer
   
Unallocated
   
Total
 
ALL:
                         
 
         
 
 
Beginning balance
 
$
3,914
   
$
7,698
   
$
5,437
   
$
1,957
   
$
238
   
$
3,643
   
$
22,887
 
Loans charged off
   
(625
   
(94
)
   
(333
   
(111
   
(7
   
     
(1,170
)
Recoveries
   
63
     
174
     
61
     
6
     
2
     
     
306
 
Provision (reduction)
   
2,757
     
(1,454
)
   
(692
   
626
     
220
     
(491
)
   
966
 
Ending balance
 
$
6,109
   
$
6,324
   
$
4,473
   
$
2,478
   
$
453
   
$
3,152
   
$
22,989
 

The following table presents the ALL and select loan information for the six months ended June 30, 2011:
 
    
Residential
Real Estate
   
Commercial
Real Estate
   
Commercial
   
Home 
Equity
   
Consumer
   
Unallocated
   
Total
 
ALL:
 
 
   
 
   
 
                     
 
 
Beginning balance
 
$
3,273
   
$
8,198
   
$
5,633
   
$
2,051
   
$
202
   
$
2,936
   
$
22,293
 
Loans charged off
   
(797
   
(325
)
   
(755
   
(120
   
(20
)
   
     
(2,017
)
Recoveries
   
113
     
183
     
156
     
170
     
8
     
     
630
 
Provision (reduction)
   
3,520
     
(1,732
   
(561
)
   
377
     
263
     
216
     
2,083
 
Ending balance
 
$
6,109
   
$
6,324
   
$
4,473
   
$
2,478
   
$
453
   
$
3,152
   
$
22,989
 
Ending Balance:   Individually evaluated for impairment
 
$
2,828
   
$
933
   
$
397
   
$
373
   
$
108
   
$
   
$
4,639
 
Ending Balance:   Collectively evaluated for impairment
 
$
3,281
   
$
5,391
   
$
4,076
   
$
2,105
   
$
345
   
$
3,152
   
$
18,350
 
                                                         
Loans ending balance:
                                                       
Ending Balance:   Individually evaluated for impairment
 
$
11,839
   
$
7,765
   
$
3,878
   
$
1,355
   
$
125
   
$
   
$
24,962
 
Ending Balance:   Collectively evaluated for impairment
 
$
578,271
   
$
457,483
   
$
210,537
   
$
267,908
   
$
12,295
   
$
   
$
1,526,494
 
Loans ending balance
 
$
590,110
   
$
465,248
   
$
214,415
   
$
269,263
   
$
12,420
   
$
   
$
1,551,456
 
 
 
12

 
 
The following table presents the ALL and select loan information for the year ended December 31, 2010:

   
 
Residential
Real Estate
   
Commercial
Real Estate
   
Commercial
   
Home 
Equity
   
Consumer
   
Unallocated
   
Total
 
ALL:
                         
 
         
 
 
Beginning balance
 
$
2,693
   
$
6,930
   
$
5,015
   
$
1,773
   
$
184
   
$
3,651
   
$
20,246
 
Loans charged off
   
(1,262
   
(1,382
)
   
(1,502
   
(932
   
(469
)
   
     
(5,547
)
Recoveries
   
225
     
232
     
553
     
123
     
136
     
     
1,269
 
Provision (reduction)
   
1,617
     
2,418
     
1,567
     
1,087
     
351
     
(715
)
   
6,325
 
Ending balance
 
$
3,273
   
$
8,198
   
$
5,633
   
$
2,051
   
$
202
   
$
2,936
   
$
22,293
 
Ending Balance:   Individually evaluated for impairment
 
$
840
   
$
660
   
$
631
   
$
316
   
$
25
   
$
   
$
2,472
 
Ending Balance:   Collectively evaluated for impairment
 
$
2,433
   
$
7,538
   
$
5,002
   
$
1,735
   
$
177
   
$
2,936
   
$
19,821
 
                                                         
Loans ending balance:
                                                       
Ending Balance:   Individually evaluated for impairment
 
$
9,330
   
$
6,182
   
$
4,486
   
$
1,711
   
$
25
   
$
   
$
21,734
 
Ending Balance:   Collectively evaluated for impairment
 
$
586,978
   
$
457,855
   
$
176,106
   
$
268,916
   
$
13,163
   
$
   
$
1,503,018
 
Loans ending balance
 
$
596,308
   
$
464,037
   
$
180,592
   
$
270,627
   
$
13,188
   
$
   
$
1,524,752
 
 
The Company focuses on maintaining a well-balanced and diversified loan portfolio. Despite such efforts, it is recognized that credit concentrations may occasionally emerge as a result of economic conditions, changes in local demand, natural loan growth and runoff. To ensure that credit concentrations can be effectively identified, all commercial and commercial real estate loans are assigned Standard Industrial Classification codes, North American Industry Classification System codes, state and county codes. Shifts in portfolio concentrations are continuously monitored by the Company’s Risk Management Group.
 
To further identify loans with similar risk profiles, the Company categorizes each loan category by credit risk exposure and applies a credit quality indicator to all commercial, commercial real estate and residential real estate loans. These indicators are represented by Grades 1 through 10 from lowest to highest risk rating. The Company uses the following definitions when assessing grades for the purpose of evaluating the risk and adequacy of the ALL:
 
Grade 1 – Substantially risk free loans. Loans to borrowers of unquestioned financial strength with stable earnings, cash flows and sufficient primary and secondary sources of repayment. These loans have no known or suspected shortcomings or weaknesses. Most loans in this category are secured by properly margined liquid collateral. Loan to value and loan to cost parameters are most conservative.
 
Grade 2 – Loans with minimal risk. Include loans to borrowers with a solid financial condition and good liquidity, significant cash flows and interest coverage and well-defined repayment strength. Loan to value and loan to cost parameters are conservative.
 
Grade 3 – Loans with very modest risk. Borrowers in this category exhibit strong sources of repayment, consistent earnings and acceptable profitability growth. Working capital, debt to worth and coverage ratios are comparable with industry standards and there are no known negative trends. Collateral protection is adequate. Loan to value parameters do not exceed the maximum established by the Company’s loan policy.
 
Grade 4 – Loans with less than average risk. Loans to borrowers with adequate repayment source or a recently demonstrated ability to service debt with acceptable margins. Working capital, debt to worth and coverage ratios may be on the lower end of industry standards, but are not considered unsatisfactory. There may be minor negative trends but collateral position is adequate. Loan to value and debt coverage ratios meet the Company’s loan policy criteria.
 
Grade 5 – Average risk loans. Loans to borrowers with acceptable financial strength but possible vulnerability to changing economic conditions or inconsistent earnings history. Borrower evidences a reasonable ability to service debt in the normal course of business and has available and adequate secondary sources of repayment. Working capital, debt to worth and coverage ratios may be below industry standards, but are not considered unsatisfactory. Loan to value and debt coverage ratios meet the criteria outlined in the Company’s loan policy.

 
13

 
 
Grade 6 – Loans with maximum acceptable risk (Watch List). Loans in this grade exhibit the majority of the attributes associated with Grade 5, perform at that level, but have been recognized to possess characteristics or deficiencies that warrant monitoring.  These loans have potential weaknesses which may, if not checked or corrected, weaken the assets or inadequately protect the Company’s credit position at some future date.

A Grade 6-Watch rating is assigned to a loan when one or more of the following circumstances exist:

 
-
Lack of sufficient current information to properly assess the risk of the loan facility or value of pledged collateral.
 
-
Adverse economic, market or other external conditions which may directly affect the obligor’s financial condition.
 
-
Significant cost overruns occurred.
 
-
Market share may exhibit some volatility. Sales and profits may be tied to business, credit or product cycles.
 
Grade 7 – Loans with potential weakness (Special Mention). Loans in this category are currently protected based on collateral and repayment capacity and do not constitute undesirable credit risk, but have potential weakness that may result in deterioration of the repayment process at some future date. This classification is used if a negative trend is evident in the obligor’s financial situation. Special mention loans do not sufficiently expose the Company to warrant adverse classification.
 
Grade 8 – Loans with definite weakness (Substandard). Loans classified as substandard are inadequately protected by the current sound worth and paying capacity of the obligor or by collateral pledged. Borrowers experience difficulty in meeting debt repayment requirements. Deterioration is sufficient to cause the Company to look to the sale of collateral.
 
Grade 9 – Loans with potential loss (Doubtful). Loans classified as doubtful have all the weaknesses inherent in the substandard grade with the added characteristic that the weaknesses make collection or liquidation of the loan in full highly questionable and improbable. The possibility of some loss is extremely high, but because of specific pending factors that may work to the advantage and strengthening of the asset, its classification as an estimated loss is deferred until its more exact status may be determined.
 
Grade 10 – Loans with definite loss (Loss). Loans classified as loss are considered uncollectible. The loss classification does not mean that the asset has absolutely no recovery or salvage value, but rather that it is not practical or desirable to defer writing off the asset because recovery and collection time may be protracted.
 
Asset quality indicators are periodically reassessed to appropriately reflect the risk composition of the Company’s loan portfolio. Home equity and consumer loans are not individually risk rated, but rather analyzed as groups taking into account delinquency rates and other economic conditions which may affect the ability of borrowers to meet debt service requirements, including interest rates and energy costs. Performing loans include loans that are current and loans that are past due less than 90 days. Loans that are past due over 90 days and non-accrual loans are considered non-performing.
  
The following table summarizes credit risk exposure indicators by portfolio segment as of June 30, 2011:

   
Residential
Real Estate
   
Commercial
Real Estate
   
Commercial
   
Home 
Equity
   
Consumer
 
Pass (Grades 1-6)
 
$
574,432
   
$
398,905
   
$
183,863
   
$
   
$
 
Performing
   
     
     
     
267,923
     
12,296
 
Special Mention (Grade 7)
   
891
     
14,067
     
12,769
     
     
 
Substandard (Grade 8)
   
14,787
     
52,271
     
17,783
     
     
 
Non-performing
   
     
     
     
1,340
     
124
 
Doubtful (Grade 9)
   
     
5
     
     
     
 
Total
 
$
590,110
   
$
465,248
   
$
214,415
   
$
269,263
   
$
12,420
 
 
 
14

 
 
The following table summarizes credit risk exposure indicators by portfolio segment as of December 31, 2010:

   
Residential
Real Estate
   
Commercial
Real Estate
   
Commercial
   
Home 
Equity
   
Consumer
 
Pass (Grades 1-6)
 
$
583,460
   
$
390,488
   
$
146,412
   
$
   
$
 
Performing
   
     
     
     
268,873
     
13,163
 
Special Mention (Grade 7)
   
     
22,692
     
11,089
     
     
 
Substandard (Grade 8)
   
12,848
     
50,852
     
23,091
     
     
 
Non-performing
   
     
     
     
1,754
     
25
 
Doubtful (Grade 9)
   
     
5
     
     
     
 
Total
 
$
596,308
   
$
464,037
   
$
180,592
   
$
270,627
   
$
13,188
 

The Company closely monitors the performance of its loan portfolio. In situations when the financial condition of the borrower is deteriorating, payment in full of both principal and interest is not expected as scheduled or principal or interest has been in default for 90 days or more, a loan is placed on non-accrual status. Exceptions may be made if the asset is well-secured by collateral sufficient to satisfy both the principal and accrued interest in full and collection is assured by a specific event such as the closing of a pending sale contract. When one loan to a borrower is placed on non-accrual status, all other loans to the borrower are re-evaluated to determine if they should also be placed on non-accrual status. All previously accrued and unpaid interest is reversed at this time. A loan may be returned to accrual status when collection of principal and interest is assured and the borrower has demonstrated timely payments of principal and interest for a reasonable period. Unsecured loans are not normally placed on non-accrual status, as they are charged-off once their collectability is in doubt.

A loan is classified as non-accrual generally when it becomes 90 days past due as to interest or principal payments. All previously accrued but unpaid interest on non-accrual loans is reversed from interest income in the current period. 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.

The following is a loan aging analysis by portfolio segment (including loans past due over 90 days and non-accrual loans) and a summary of non-accrual loans and loans past due over 90 days and accruing as of June 30, 2011:

   
30-
59 days
Past Due
   
60-
89 days
Past Due
   
Greater 
than
90 Days
   
Total
Past Due
   
Current
   
Total Loans
Outstanding
   
Loans > 90
Days Past
Due and
Accruing
   
Non-
Accrual
Loans
 
Residential real estate
  $  364     $ 341     $ 7,194     $ 7,899     $ 582,211     $ 590,110     $     $ 8,581  
Commercial real estate
    2,303       632       4,911       7,846       457,402       465,248             7,661  
Commercial
    916       204       2,748       3,868       210,547       214,415             3,809  
Home equity
    129       253       961       1,343       267,920       269,263             1,339  
Consumer
    60       13       125       198       12,222       12,420             125  
Total
  $  3,772     $ 1,443     $ 15,939     $ 21,154     $ 1,530,302